<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 16, 1998
REGISTRATION NO. 333-46225
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
AMENDMENT NO. 1
TO
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------------
THE PROFIT RECOVERY GROUP INTERNATIONAL, INC.
(Exact name of Registrant as specified in its charter)
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GEORGIA 58-2213805
(State or other jurisdiction of (I.R.S. Employer
(incorporation or organization) Identification No.)
</TABLE>
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2300 WINDY RIDGE PARKWAY
SUITE 100 NORTH
ATLANTA, GEORGIA 30339-8426
(770) 955-3815
(Address, including zip code, and telephone number, including area code, of
Registrant's principal executive offices)
CLINTON MCKELLAR, JR., ESQ.
THE PROFIT RECOVERY GROUP INTERNATIONAL, INC.
2300 WINDY RIDGE PARKWAY
SUITE 100 NORTH
ATLANTA, GEORGIA 30339-8426
(770) 955-3815
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
---------------------
The Commission is requested to mail copies of all orders, notices and
communications to:
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LEONARD A. SILVERSTEIN, ESQ. J. VAUGHAN CURTIS, ESQ.
LONG ALDRIDGE & NORMAN LLP ALSTON & BIRD LLP
5300 ONE PEACHTREE CENTER ONE ATLANTIC CENTER
303 PEACHTREE STREET 1201 W. PEACHTREE STREET
ATLANTA, GEORGIA 30308-3201 ATLANTA, GEORGIA 30309-3424
(404) 527-4000 (404) 881-7000
</TABLE>
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon
as practicable after the effective date of this Registration Statement.
If only securities being registered on this Form are being offered pursuant
to dividend or interest reinvestment plans, please check the following box. [ ]
If any of the securities registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the Prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
---------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
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<PAGE> 2
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS
OF ANY SUCH STATE.
SUBJECT TO COMPLETION DATED MARCH 16, 1998
PROFIT RECOVERY LOGO
4,400,000 SHARES
COMMON STOCK
Of the 4,400,000 shares offered hereby, 2,000,000 shares are being sold by
The Profit Recovery Group International, Inc. (the "Company") and 2,400,000
shares are being sold by certain shareholders of the Company (the "Selling
Shareholders"). See "Principal and Selling Shareholders." The Company will not
receive any proceeds from the sale of shares of Common Stock by the Selling
Shareholders. The Common Stock of the Company is listed for trading on The
Nasdaq Stock Market under the symbol "PRGX." On March 12, 1998, the last sale
price for the Common Stock as reported on The Nasdaq Stock Market was $20.50 per
share.
---------------------
THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" BEGINNING ON PAGE 7.
---------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE COMMISSION OR
ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
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======================================================================================================================
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO PROCEEDS TO SELLING
PUBLIC COMMISSIONS COMPANY(1) SHAREHOLDERS(2)
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per Share................ $ $ $ $
- ----------------------------------------------------------------------------------------------------------------------
Total(2)................. $ $ $ $
======================================================================================================================
</TABLE>
(1) Before deducting expenses payable by the Company estimated at $750,000.
(2) Certain Selling Shareholders have granted the Underwriters a 30-day option
to purchase up to 660,000 additional shares of Common Stock solely to cover
over-allotments, if any. To the extent that the option is exercised, the
Underwriters will offer the additional shares at the Price to Public shown
above. If such option is exercised in full, the total Price to Public,
Underwriting Discounts and Commissions, Proceeds to Company and Proceeds to
Selling Shareholders will be $ , $ , $ and
$ , respectively. See "Underwriting."
--------------------------
The Common Stock is offered by the Underwriters as stated herein, subject
to receipt and acceptance by them and subject to their right to reject any order
in whole or in part. It is expected that delivery of such shares will be made
through the offices of BancAmerica Robertson Stephens, San Francisco,
California, on or about , 1998.
BANCAMERICA ROBERTSON STEPHENS
HAMBRECHT & QUIST
THE ROBINSON-HUMPHREY COMPANY
THE DATE OF THIS PROSPECTUS IS MARCH , 1998.
<PAGE> 3
NO DEALER, SALES REPRESENTATIVE OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO
GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THIS
OFFERING OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE,
SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY, ANY SELLING SHAREHOLDER OR ANY UNDERWRITER. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER
TO BUY, ANY SECURITIES OTHER THAN THE REGISTERED SECURITIES TO WHICH IT RELATES
OR AN OFFER TO, OR SOLICITATION OF, ANY PERSON IN ANY JURISDICTION WHERE SUCH AN
OFFER OR SOLICITATION WOULD BE UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS
NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY
IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE
THE DATE HEREOF OR THAT INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME
SUBSEQUENT TO THE DATE HEREOF.
---------------------
TABLE OF CONTENTS
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PAGE
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Prospectus Summary.......................................... 3
Risk Factors................................................ 7
Recent Developments......................................... 12
Use of Proceeds............................................. 12
Dividend Policy............................................. 13
Price Range of Common Stock................................. 13
Capitalization.............................................. 14
Selected Consolidated Financial Data........................ 15
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 17
Business.................................................... 24
Management.................................................. 34
Principal and Selling Shareholders.......................... 42
Description of Capital Stock................................ 44
Shares Eligible for Future Sale............................. 46
Underwriting................................................ 49
Legal Matters............................................... 50
Experts..................................................... 50
Additional Information...................................... 50
Incorporation of Certain Documents by Reference............. 51
Index to Financial Statements............................... F-1
</TABLE>
AuditPro(R), AuditPro 97(TM), EDI Inquiry(TM), Claims Management
System(TM), FreightPro(TM), Profit Recovery Group International(R), PRG(R),
RecoverNow(R) and ReportPro(TM) are trademarks of the Company. All other
trademarks and trade names referred to in this Prospectus are the property of
their respective owners.
The Company's principal executive offices are located at 2300 Windy Ridge
Parkway, Suite 100 North, Atlanta, Georgia 30339-8426, and its telephone number
is (770) 955-3815.
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK OF
THE COMPANY, INCLUDING STABILIZING BIDS, SYNDICATE COVERING TRANSACTIONS AND THE
IMPOSITION OF PENALTY BIDS. FOR A DISCUSSION OF THESE ACTIVITIES, SEE
"UNDERWRITING."
IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS MAY ENGAGE IN
PASSIVE MARKET MAKING TRANSACTIONS IN THE COMMON STOCK ON THE NASDAQ NATIONAL
MARKET IN ACCORDANCE WITH RULE 103 OF REGULATION M UNDER THE SECURITIES EXCHANGE
ACT OF 1934, AS AMENDED. SEE "UNDERWRITING."
2
<PAGE> 4
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial statements and notes thereto appearing elsewhere in
this Prospectus, including the information under "Risk Factors." Unless
otherwise indicated, all information in this Prospectus assumes no exercise of
the Underwriters' over-allotment option.
THE COMPANY
The Profit Recovery Group International, Inc. (the "Company") is a leading
provider of accounts payable and other recovery audit services to large
retailers, wholesale distributors, healthcare providers, technology companies
and other large transaction-intensive companies, as well as to certain
governmental agencies. In businesses with large purchase volumes and
continuously fluctuating prices, some small percentage of erroneous overpayments
to vendors is inevitable. In addition, the complexity of various tax laws
results in overpayments to governmental agencies. Moreover, services such as
telecommunications, utilities and freight provided to businesses under complex
pricing arrangements can result in overpayments. All of these overpayments
result in "lost profits." The Company identifies and documents overpayments by
using sophisticated proprietary technology and advanced audit techniques and
methodologies, and by employing highly trained, experienced recovery audit
specialists. The Company continuously updates and refines its proprietary
databases that serve as a central repository reflecting its auditors'
experiences, vendor practices and knowledge of regional and national pricing
information, including seasonal allowances, discounts and rebates, but excluding
confidential client data.
Retail businesses, such as discount, department, specialty, grocery and
drug stores, as well as wholesale distributors, certain governmental agencies,
healthcare providers and technology companies process large numbers of payment
transactions. Although the vast majority of payment transactions are processed
correctly, a small number of errors occur principally because of communication
failures between purchasing and payables departments, complex pricing
arrangements, personnel turnover and changes in information and accounting
systems. In the aggregate, vendor pricing errors, missed discounts, allowances
and rebates, incorrect freight charges and duplicate payments can represent
meaningful lost profits that can be particularly significant for businesses with
relatively narrow profit margins. Although internal recovery audit departments
identify some payment errors, independent recovery audit firms often are
retained by businesses to identify additional overpayments.
The Company principally targets large businesses having at least $500
million in annual revenues, although smaller businesses may be attractive
clients. Retailers continue to constitute the substantial majority of the
Company's client and revenue base, and the Company's current marketing efforts
are largely directed toward that industry. The top 100 retailers worldwide had
aggregate revenues of approximately $1.4 trillion in 1996, and over 1,600
retailers worldwide each had annual revenues in excess of $500 million. The U.S.
retailing industry represented approximately $2.5 trillion in revenues in 1996.
The Company believes that a typical U.S. retailer makes payment errors that are
not discovered internally, which in the aggregate can range from several hundred
thousand dollars to more than $1.0 million per billion dollars of revenues.
The domestic and international recovery audit industry is fragmented and
characterized by several large and many small, local and regional firms. Many
local and regional firms lack the centralized resources or broad client base to
support the technology investment required to provide comprehensive recovery
audit services. Businesses increasingly have implemented technology referred to
as electronic data interchange ("EDI") to communicate electronically with
vendors to exchange inventory and sales data, transmit purchase orders, submit
invoices, forward shipping and receiving information and remit payments.
Although EDI streamlines the processing of large numbers of transactions, it can
magnify errors because the errors may be replicated automatically in thousands
of transactions. Recovery audit firms, therefore, require sophisticated
technology in order to audit EDI accounts payable processes effectively.
The Company's objective is to become the leading worldwide provider of
recovery audit services. The Company believes that it will have to increase
significantly its revenues to achieve this objective. The Company's strategy is
to continue expanding its international presence and increasing its retail
client base, while diversifying into other transaction-intensive industries,
such as financial services, transportation and
3
<PAGE> 5
lodging and gaming. The Company recently expanded its recovery audit services to
the healthcare and technology industries as the result of three acquisitions in
the first half of 1997 and entered the tax recovery and ocean freight auditing
fields through two acquisitions in the fourth quarter of 1997. The Company also
seeks to maintain its high client retention rate and intends to promote client
outsourcing arrangements, maintain technology leadership, including its EDI
capabilities, and pursue strategic acquisitions of domestic and international
businesses providing complementary recovery audit services. Of the Company's
accounts payable audit clients in 1996 that had claims exceeding $100,000 in
that year (excluding clients no longer in existence due to such clients'
bankruptcies or acquisitions), more than 90% continued to utilize the Company's
services in 1997. The Company's revenues have increased 61.5%, 38.0% and 45.3%
for the years ended December 31, 1995, 1996 and 1997, respectively, due to the
Company's high client retention rate, increasing client base, expansion into
international markets and strategic acquisitions.
RECENT DEVELOPMENTS
In January 1997, the Company acquired the net operating assets of Shaps
Group, Inc., a California-based company providing recovery audit services to
manufacturers and distributors of technology products for a total purchase price
of $5.4 million, all of which was paid in Common Stock. In February 1997, the
Company acquired all of the common stock of Accounts Payable Recovery Services,
Inc., a Texas-based company providing recovery audit services to healthcare
entities and energy companies, for a total purchase price of $4.0 million, $2.0
million of which was paid in cash with the balance paid in Common Stock. In May
1997, the Company acquired all of the common stock of The Hale Group, a
California-based company that also provides recovery audit services primarily to
healthcare entities, for a total purchase price of $2.1 million, $1.1 million of
which was paid in cash with the balance paid in Common Stock.
In October 1997, the Company acquired 98.4% of Financiere Alma, S.A. and
its subsidiaries (collectively, "Alma"), a privately held recovery audit firm
based in Paris, France, for $24.6 million in cash and approximately 859,000
unregistered shares of Common Stock with the obligation to acquire the remaining
interest in Alma by January 1999. Founded in 1986, Alma specializes in
identifying and recovering various types of French tax overpayments by
corporations. Alma operates exclusively in France where it currently serves
approximately 2,000 clients, including many of France's 50 largest corporations.
Alma's revenues were $21.3 million and $21.7 million for the years ended
December 31, 1996 and 1997, respectively. The acquisition of Alma provides the
Company an entry into the tax recovery auditing field, and strengthens the
Company's management and operations in Europe. As a result of emerging
developments such as the Alma transaction, the Company restructured and
realigned certain facets of its European management structure in the fourth
quarter of 1997 and incurred a pre-tax charge to earnings of $1.2 million. In
November 1997, the Company acquired the net operating assets of TradeCheck, LLC,
a Washington-based company that provides ocean freight recovery audit services.
See "Recent Developments" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
THE OFFERING
Common Stock offered by the Company.... 2,000,000 shares
Common Stock offered by the Selling
Shareholders........................... 2,400,000 shares
Common Stock to be outstanding after
the offering........................... 21,264,124 shares(1)
Use of proceeds by the Company......... For repayment of outstanding
indebtedness incurred in the Alma
transaction, continued international
expansion, potential future
acquisitions, and general corporate
purposes, including working capital.
See "Use of Proceeds."
The Nasdaq Stock Market symbol......... PRGX
- ---------------
(1) Based on the number of shares outstanding at March 11, 1998. Excludes
2,531,293 shares of Common Stock issuable upon the exercise of stock options
outstanding at March 11, 1998 at a weighted average exercise price of $12.91
per share. See "Management -- 1996 Stock Option Plan."
4
<PAGE> 6
SUMMARY CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------
1994 1995(1) 1996(2) 1997(3)(4)
------- ------- ------- ----------
<S> <C> <C> <C> <C>
STATEMENTS OF EARNINGS DATA:
Revenues................................................ $34,690 $56,031 $77,330 $112,363
Operating income........................................ 4,184 6,442 11,039 16,175
Net earnings............................................ 3,640 4,507 3,150 9,623
Pro forma net earnings(5)............................... 2,220 2,935 6,668
Earnings (pro forma for 1995 and 1996) per share:
Basic................................................. .24 .41 .52
Diluted............................................... .21 .39 .51
Weighted average common and dilutive shares outstanding:
Basic................................................. 12,000 16,268 18,415
Diluted(6)............................................ 14,948 17,457 18,909
</TABLE>
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DECEMBER 31, 1997
---------------------------
HISTORICAL AS ADJUSTED(7)
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BALANCE SHEET DATA:
Cash and cash equivalents................................... $19,386 $ 32,674
Working capital............................................. 34,563 71,364
Total assets................................................ 133,885 147,173
Long-term debt, excluding current installments.............. 24,365 852
Total shareholders' equity.................................. 63,072 101,272
</TABLE>
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(1) Effective January 1, 1995, the Company acquired Fial & Associates, Inc. See
Note 8 of Notes to Consolidated Financial Statements of the Company.
(2) Includes a $3.7 million net deferred tax charge to expense for the year
ended December 31, 1996 resulting from termination of the Company's
predecessors' Subchapter S and partnership status. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
and Note 5 of Notes to Consolidated Financial Statements of the Company.
(3) Effective October 1, 1997, the Company acquired 98.4% of Alma. See Note 8 of
Notes to Consolidated Financial Statements of the Company.
(4) Includes a $1.2 million charge to restructure and realign certain facets of
the European management structure in recognition of emerging developments
such as the Alma acquisition. See Note 14 of Notes to Consolidated Financial
Statements of the Company.
(5) The Company's predecessor entities prior to its initial public offering on
March 26, 1996 generally were either corporations electing to be taxed as
Subchapter S corporations or partnerships. As a result, any income tax
liabilities were the responsibilities of the respective shareholders and
partners. Pro forma net earnings reflect, where applicable, a provision for
income taxes to include the additional tax expense as if the Company had
been subject to federal and state income taxes for all periods presented
rather than the individual shareholders and partners.
(6) Includes all common dilutive shares issued in 1995 as exercised and
outstanding, using the treasury stock method, as applicable, for 1995 and
the first quarter of 1996. See Note 1(k) of Notes to Consolidated Financial
Statements of the Company.
(7) Adjusted to give effect to the application of the net proceeds from the sale
of 2,000,000 shares of Common Stock offered by the Company hereby at an
assumed public offering price of $20.50 per share. See "Use of Proceeds."
5
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FORWARD-LOOKING STATEMENTS
This Prospectus contains certain "forward-looking statements" within the
meaning of Section 27A of the Securities Act of 1933, as amended (the
"Securities Act"), which represent the Company's expectations or beliefs,
including, but not limited to, statements concerning sales of the Company's
services and operating income. When used in this Prospectus, the words "may,"
"could," "should," "would," "believe," "anticipate," "estimate," "intend,"
"plan" and similar expressions are intended to identify forward-looking
statements. These statements by their nature involve substantial risks and
uncertainties, certain of which are beyond the Company's control. The Company
cautions that various factors, including, without limitation, the ability of the
Company to successfully implement its operating and acquisition strategies, the
Company's ability to manage rapid domestic and international expansion, changes
in economic cycles, competition, changes in laws and governmental regulations
applicable to the Company and the factors described under the captions "Risk
Factors" and "Management's Discussion and Analysis of Financial Condition and
Results of Operations" could cause actual results or outcomes to differ
materially from those expressed in any forward-looking statements of the Company
made by or on behalf of the Company. Any forward-looking statement speaks only
as of the date on which such statement is made, and the Company undertakes no
obligation to update any forward-looking statement or statements to reflect
events or circumstances after the date on which such statement is made or to
reflect the occurrence of an unanticipated event. New factors emerge from time
to time, and it is not possible for management to predict all of such factors.
Further, management cannot assess the impact of each such factor on the business
or the extent to which any factor, or combination of factors, may cause actual
results to differ materially from those contained in any forward-looking
statements.
6
<PAGE> 8
RISK FACTORS
In addition to the other information in this Prospectus, the following risk
factors should be considered carefully in evaluating an investment in the Common
Stock offered hereby. This Prospectus contains forward-looking statements which
involve risks and uncertainties. The Company's actual results may differ
materially from the results discussed in the forward-looking statements. Factors
that might cause such a difference include, but are not limited to, those
discussed in "Risk Factors" and elsewhere in this Prospectus.
DEPENDENCE ON KEY CLIENTS
For the years ended December 31, 1995, 1996 and 1997, the Company derived
30.1%, 34.6% and 33.8%, respectively, of its revenues from its five largest
clients. Wal-Mart Stores, Inc., including its affiliates (collectively,
"Wal-Mart"), in the aggregate was the Company's largest client during 1995 and
1996, representing 12.7% and 14.4% of revenues during such years, respectively,
and was the Company's second largest client in 1997, representing 10.4% of
revenues for such year. Kmart Corporation ("Kmart") was the Company's largest
client in 1997, representing 12.3% of revenues during the period, due in large
part to a nonrecurring situation involving concurrent audits of multiple years.
There can be no assurance that the Company's reliance on any single client or
its largest clients will decrease over time or that the Company's largest
clients will continue to utilize the Company's services at the same level. For
example, one of the Company's five largest accounts representing 4.6% of the
Company's domestic revenues for 1996 changed the Company's status from primary
recovery auditor in 1996 to secondary recovery auditor in 1997. This change
resulted in significantly lower revenues from that client in 1997. In addition,
should one or more of the Company's large clients file for bankruptcy or
otherwise cease to do business with the Company, or should one or more of the
Company's large clients' vendors file for bankruptcy, the Company's business,
financial condition and results of operations could be materially and adversely
affected. See "Business -- Client Base."
UNCERTAINTY OF REVENUE RECOGNITION ESTIMATES AND COLLECTION OF CONTRACT
RECEIVABLES
The Company recognizes revenues from accounts payable recovery audit
services to retailers, wholesale distributors and governmental agencies at the
time overpayment claims are presented to and approved by clients, as adjusted
for estimated uncollectible claims. The revenues from these clients constitute a
substantial portion of the Company's revenues. Submitted claims that are not
approved by clients for whatever reason are not considered when recognizing
revenues. Estimated uncollectible claims initially are established, and
subsequently adjusted, for each individual client based on historical collection
rates, types of claims identified, current industry conditions and other factors
which, in the opinion of management, deserve recognition. There can be no
assurance that these estimates of uncollectible claims will be adequate and, if
underestimated, the Company's financial condition and results of operations
could be materially and adversely affected. See Note 1(c) of Notes to
Consolidated Financial Statements of the Company.
Claims subsequently are processed by clients and generally taken as credits
against outstanding payables or future purchases from the involved vendors. Once
credits are taken, the Company invoices its clients for its contractually
stipulated percentage of the amounts recovered. The Company's contract
receivables as of any balance sheet date are largely unbilled because the
Company does not control the timing or extent of client claims processing, and
because the timing of a client's payments for future purchases from the involved
vendors are outside the Company's control. Consequently, there can be no
assurance that the Company will collect its contract receivables because it is
dependent on its clients pursuing such claims. This lengthy revenue and cash
receipts cycle also subjects the Company to increased risk that contract
receivables will not be collected because (i) the client or the involved vendors
may file for bankruptcy protection, or (ii) the client may cease to do business
with the involved vendors, thus eliminating the ability to take a credit against
current and future purchases.
ACQUISITION RISKS
During 1997, the Company acquired Shaps Group, Inc. ("Shaps"), Accounts
Payable Recovery Services, Inc. ("APRSI"), The Hale Group ("Hale"), Alma and
TradeCheck, LLC ("TradeCheck"). The
7
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Company intends to continue pursuing possible future acquisitions. While the
Company is not currently a party to any agreements or understandings with
respect to any material acquisitions, management frequently evaluates strategic
opportunities, and the Company is pursuing, and intends to continue pursuing,
the acquisition of domestic and international businesses, including both direct
competitors and businesses providing other types of recovery audit services.
Future acquisitions may include larger businesses than those acquired to date
and may include businesses that charge for some or all of their services on a
fee basis rather than as a contractually negotiated percentage of amounts
recovered. There can be no assurance, however, that the Company will be
successful in consummating future acquisitions because of factors such as
receptivity of potential acquisition candidates and valuation issues.
Additionally, there can be no assurance that acquired companies can be
successfully integrated into the Company. Future acquisitions by the Company may
result in the diversion of management's attention from day-to-day operations,
and such acquisitions may include numerous other risks, including difficulties
integrating the operations, technology and personnel of the acquired companies.
The Company may continue to enter new foreign markets or new lines of
business by acquisition, such as the Company's recent acquisition of Alma in
France and the other 1997 acquisitions of Shaps, APRSI, Hale and TradeCheck.
Acquisitions of companies typically will be time consuming for management, and
the acquired companies may be difficult to integrate with the Company's other
operations because of differences in the respective companies' policies and
procedures and cultures. Moreover, future acquisitions by the Company may result
in dilutive issuances of equity securities, the incurrence of additional debt
and amortization expense related to goodwill and other intangible assets that
may materially and adversely affect the Company's business, financial condition
and results of operations. There can be no assurance that acquisition
opportunities will continue to exist, that the Company will be able to acquire
business operations or companies that satisfy the Company's acquisition
criteria, or that any such acquisitions will be on terms favorable to the
Company. See "Recent Developments."
INTERNATIONAL OPERATIONS
The Company derived 27.3% of its revenues from international operations in
1997 and is relying heavily on international expansion to achieve its long-term
growth objectives. For example, the Company recently acquired Alma, which had
revenues of $21.3 million and $21.7 million for the years ended December 31,
1996 and 1997, respectively, and which would have increased revenues from
international operations to 36.4% and 35.9% of the Company's consolidated
revenues on a pro forma basis for the respective years. The Company currently
operates outside the United States in Australia, Belgium, Canada, France,
Germany, Mexico, The Netherlands, New Zealand, the United Kingdom and portions
of Asia, including Hong Kong, Indonesia, Malaysia, Singapore, Taiwan and
Thailand, and anticipates commencing operations in South Africa, Argentina and
Brazil in the next 12 months. Although the Company's recovery audit services
constitute a generally accepted business practice among retailers in the U.S.
and in certain other countries, the services offered by the Company have not yet
become widely utilized in many international markets. There can be no assurance
that the Company's services will be accepted by prospective clients, vendors or
other involved parties in such foreign markets. The failure of such parties to
accept and utilize the services offered by the Company could have a material
adverse effect on the Company's results of operations and growth.
International operations are subject to inherent risks, including political
and economic instability, difficulties in staffing and managing foreign
operations and in collecting accounts receivable, fluctuating currency exchange
rates, costs associated with localizing service offerings in foreign countries,
unexpected changes in regulatory requirements and laws, difficulties in the
repatriation of earnings and burdens of complying with a wide variety of foreign
laws and labor practices, which may vary from country to country. For example,
certain tax recovery audit practices could be subject to regulation as the
unauthorized practice of law in some countries. The Company has encountered, and
expects to continue to encounter, significant expense and delays in expanding
its international operations because of language and cultural differences, and
staffing, communications and related issues.
In the Company's experience, entry into new international markets requires
significant management time as well as start-up expenses for market development,
hiring and establishing office facilities before any
8
<PAGE> 10
significant revenues are generated. As a result, initial operations in a new
market typically operate at low margins or may be unprofitable. The Company's
international expansion strategy will require substantial financial resources
and may result in the Company incurring additional indebtedness and dilutive
issuances of equity securities. There can be no assurance that such financing
will be available to the Company on terms and conditions acceptable to the
Company. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Liquidity and Capital Resources" and "Business -- The
Profit Recovery Group Strategy."
MANAGEMENT OF GROWTH
The Company recently has experienced a period of growth that has placed
significant additional responsibilities on its operational, managerial and other
resources. There can be no assurance that the Company will be able to hire and
retain a sufficient number of qualified auditors to meet its anticipated growth
or, if hired, that the Company will be able to provide the depth of training it
is currently providing, or that a sufficient number of qualified non-auditor
personnel can be hired to support the activities of such additional auditors. In
particular, as the Company expands internationally, it will need to hire, train
and retain qualified personnel in countries where language, cultural or
regulatory impediments may exist. The Company's ability to manage its growth
successfully will require continued improvement in its operational, managerial
and financial systems controls. If the Company's management is unable to manage
growth effectively, the Company's business, financial condition and results of
operations could be adversely affected.
SEASONALITY; FLUCTUATIONS IN QUARTERLY OPERATING RESULTS
The Company has experienced and expects to continue to experience
significant seasonality in its business. The Company typically realizes higher
revenues and operating income in the last two quarters of its fiscal year. This
trend is expected to continue and reflects the inherent purchasing and
operational cycles of the retailing industry, which is the principal industry
served by the Company. The Company's October 1997 acquisition of Alma is not
expected to affect this trend because Alma historically has experienced similar
seasonality in its revenues and operating income. Should the Company not
continue to realize increased revenues in future third and fourth quarter
periods, profitability for any affected quarter and the entire year could be
materially and adversely affected due to ongoing selling, general and
administrative expenses that are largely fixed over the short term. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Quarterly Results" and "Business -- Seasonality."
OFFERING BENEFITS TO AFFILIATES
Certain parties affiliated with the Company will receive immediate and
substantial financial benefits as a result of this offering. The net proceeds
from the sale of shares of Common Stock in this offering, based on an assumed
public offering price of $20.50 per share and after deducting underwriting
discounts and commissions, to certain of the Selling Shareholders are
approximately as follows: John M. Cook and affiliates, $18.8 million; John M.
Toma, $2.9 million; Stanley B. Cohen, $4.9 million; Jonathan Golden, $3.9
million; and Garth H. Greimann and Berkshire Fund III, A Limited Partnership
("Berkshire Fund III"), $9.8 million. If the Underwriters' over-allotment option
is exercised in full, the aggregate net proceeds will be as follows: John M.
Cook and affiliates, $29.2 million; John M. Toma and affiliates, $3.3 million;
and Garth H. Greimann and Berkshire Fund III, $11.7 million. See "Principal and
Selling Shareholders."
DEPENDENCE ON PROPRIETARY TECHNOLOGY; INTELLECTUAL PROPERTY RIGHTS
The Company's operations could be materially and adversely affected if it
were not able to adequately protect its proprietary software, audit techniques
and methodologies and other proprietary intellectual property rights. The
Company relies upon a combination of the trade secret laws, nondisclosure and
other contractual arrangements and technical measures to protect its proprietary
rights. Although the Company presently holds U.S. and foreign registered
trademarks and U.S. registered copyrights on certain of its proprietary
technology, there can be no assurance that the Company will be able to obtain
similar protection on its other intellectual property or that, in the case of
foreign registered trademarks, they will receive the same enforcement protection
as in the U.S. The Company generally enters into confidentiality agreements with
its employees, consultants, clients and potential clients and limits access to,
and distribution of, its proprietary information.
9
<PAGE> 11
There can be no assurance, however, that the steps taken by the Company in this
regard will be adequate to deter misappropriation of its proprietary information
or that the Company will be able to detect unauthorized use and take appropriate
steps to enforce its intellectual property rights. Further, the Company's
competitors may independently develop technologies that are substantially
equivalent or superior to the Company's technology. Although the Company
believes that its services and products do not infringe on the intellectual
property rights of others, there can be no assurance that such a claim will not
be asserted against the Company in the future. See "Business -- Proprietary
Rights."
COMPETITION
The recovery audit business is highly competitive. The competitive factors
affecting the market for the Company's recovery audit services include:
establishment and maintenance of client relationships, quality and quantity of
claims identified, experience and professionalism of audit staff, rates for
services, technology and geographic scope of operations. The Company's principal
competitors for accounts payable recovery audit services include local and
regional firms and one firm, Howard Schultz & Associates, with a network of
affiliate organizations in the U.S. and abroad. Management believes this
affiliated network has been in operation longer than the Company and may have
achieved greater revenues than the Company in 1997. The Company's competitors
for tax recovery audit services in France include major international accounting
firms, tax attorneys and several smaller tax recovery audit firms. There can be
no assurance that the Company will continue to be able to compete successfully
with such competitors. In addition, competitive pricing pressures could
adversely affect the Company's margins and may have a material adverse effect on
the Company's business, financial condition and results of operations. See
"Business -- Competition."
DEPENDENCE ON KEY PERSONNEL
The development of the Company's business and its operations have been
materially dependent upon the active participation of John M. Cook, Michael A.
Lustig and its other executive officers and key employees. In addition, the
Company's success with tax recovery audit services in France has been, and will
be, dependent upon the active participation of Marc Eisenberg and Eric
Eisenberg. The loss of the services of one or more of these persons could have a
material adverse effect on the business, financial condition and results of
operations of the Company. The Company has entered into employment agreements
with Messrs. Cook, Lustig, Marc Eisenberg and Eric Eisenberg and other members
of management. The Company also maintains key man life insurance policies in the
aggregate amounts of $13.2 million on the life of Mr. Cook; $5.0 million on the
life of Mr. Lustig; and $5.0 million on the life of Marc Eisenberg.
SIGNIFICANT INFLUENCE BY MANAGEMENT
After giving effect to the sale of the shares of Common Stock offered
hereby, executive officers and directors of the Company collectively will
beneficially own 45.8% of the outstanding Common Stock (42.7% if the
Underwriters' over-allotment option is exercised in full), of which John M. Cook
will beneficially own 21.4% (18.9% if the Underwriters' over-allotment option is
exercised in full). As a result, members of management collectively have
significant influence over the election of the Board of Directors, the approval
or disapproval of any other matters requiring shareholder approval and the
affairs and policies of the Company. See "Management" and "Principal and Selling
Shareholders."
CERTAIN ANTI-TAKEOVER PROVISIONS
The Company's Articles of Incorporation and Bylaws and Georgia law contain
provisions that may have the effect of delaying, deferring or inhibiting a
future acquisition of the Company not approved by the Board of Directors in
which the shareholders otherwise might receive an attractive value for their
shares or that a substantial number or even a majority of the Company's
shareholders might believe to be in their best interest. These provisions are
intended to encourage any person interested in acquiring the Company to
negotiate with and obtain the approval of the Board of Directors of the Company
in connection with the transaction. These provisions include a staggered Board
of Directors, special meeting call restrictions and the ability of the Board of
Directors to consider the interests of various constituencies, including
employees, clients and creditors of
10
<PAGE> 12
the Company and the local community. In addition, the Company's Articles of
Incorporation authorize the Company to issue shares of preferred stock with such
designations, powers, preferences and rights as may be fixed by the Board of
Directors, without any further vote or action by the shareholders. Such
provisions also could discourage bids for the shares of Common Stock at a
premium, as well as create a depressive effect on the market price of the shares
of Common Stock. See "Description of Capital Stock -- Certain Articles and Bylaw
Provisions."
LIMITATION ON LIABILITY AND INDEMNIFICATION
The Company's Articles of Incorporation and Bylaws limit the liability of
its directors to the fullest extent permitted under the laws of the State of
Georgia. The Company's Bylaws provide that the Company shall indemnify its
directors and officers and that the Company has the power to indemnify its
employees and other agents to the maximum extent possible and in a manner
permitted by Georgia law. In addition, the Company's shareholders have approved,
and the Company has entered into, individual agreements to indemnify its
directors and certain officers. See "Description of Capital Stock -- Certain
Articles and Bylaw Provisions."
AUDITOR COMPENSATION
The Company has developed a revised compensation program for its
non-management domestic field auditors that it believes will more equitably
compensate these individuals for their unique experience, skills and
contributions in meeting Company objectives. The revised program was implemented
in May 1997 and is based on nine different categories of competency composed of
job-based skills and personal success factors. The Company designed the revised
program so that future aggregate domestic auditor compensation expense will be
unchanged from the aggregate amount that otherwise would have been paid under
the previous program. Although the Company and certain of its domestic auditors
have expended considerable time and resources to design the revised program,
there can be no assurance that it will meet its design objectives. If the design
objectives of the revised compensation program are not achieved, the Company's
domestic costs and revenues could be materially and adversely affected.
CLIENT BANKRUPTCIES
The Company currently derives a substantial portion of its revenues from
clients in the retailing industry. The retailing industry is an intensely
competitive environment, and retailer bankruptcy filings are not uncommon.
During 1995, 1996 and 1997, certain of the Company's domestic retailing clients
filed for bankruptcy protection resulting in aggregate net charges to operations
of $468,000, $398,000 and $180,000, respectively. Future bankruptcy filings by
the Company's clients or their vendors, particularly any of the Company's key
clients, could have a material adverse effect on the Company's business,
financial condition and results of operations.
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering, the Company will have 21,264,124 shares
of Common Stock outstanding. Substantially all of these shares will be
transferable without restriction or registration under the Securities Act or
pursuant to the volume and other limitations of Rule 144 promulgated under the
Securities Act.
Approximately 8,941,049 shares of Common Stock (the "Lock-up Shares") are
subject to lock-up agreements between the holders thereof and the
representatives of the Underwriters, pursuant to which the holders of the
Lock-up Shares have agreed not to offer, sell, contract to sell or grant any
option to purchase or otherwise dispose of Common Stock until 90 days after the
date of this Prospectus (the "Lock-up Period"), subject to limited exceptions.
See "Underwriting." Following the expiration of the Lock-up Period,
substantially all of the Lock-up Shares will become available for immediate
resale in the public market subject to the volume and other limitations of Rule
144. In connection with the APRSI, Hale, Alma and TradeCheck transactions, an
additional 714,737 shares are subject to contractual lock-up provisions with the
Company that
11
<PAGE> 13
will expire beyond the Lock-up Period. See "Management -- 1996 Stock Option
Plan," "Description of Capital Stock" and "Shares Eligible for Future Sale."
POSSIBLE VOLATILITY OF STOCK PRICE
The Common Stock is traded on The Nasdaq Stock Market. Future announcements
concerning the Company or its key clients or competitors, technological
innovations, government regulations, litigation or changes in earnings estimates
by analysts may cause the market price of the Common Stock to fluctuate
substantially. Furthermore, stock prices for many companies fluctuate widely for
reasons that may be unrelated to their operating results. These fluctuations, as
well as general economic, political and market conditions, such as recessions or
international currency fluctuations, may adversely affect the market price of
the Common Stock. See "Price Range of Common Stock" and "Underwriting."
RECENT DEVELOPMENTS
In January 1997, the Company acquired the net operating assets of Shaps, a
California-based company providing recovery audit services to manufacturers and
distributors of technology products, for a total purchase price of $5.4 million,
all of which was paid in Common Stock. In February 1997, the Company acquired
all of the common stock of APRSI, a Texas-based company providing recovery audit
services to healthcare entities and energy companies, for a total purchase price
of $4.0 million, $2.0 million of which was paid in cash with the balance paid in
Common Stock. In May 1997, the Company acquired all of the common stock of Hale,
a California-based company that also provides recovery audit services primarily
to healthcare entities, for a total purchase price of $2.1 million, $1.1 million
of which was paid in cash with the balance paid in Common Stock.
In October 1997, the Company acquired 98.4% of Alma, a privately held
recovery audit firm based in Paris, France for $24.6 million in cash and
approximately 859,000 unregistered shares of Common Stock with the obligation to
acquire the remaining interest in Alma by January 1999 for $398,000 in cash and
13,900 unregistered shares of Common Stock. Founded in 1986, Alma specializes in
identifying and recovering various types of French tax overpayments by
corporations. Alma also provides general expense reduction services in various
areas including building and security services, assists clients in obtaining
grants and subsidies and operates a buying club for small businesses. Alma
operates exclusively in France where it currently serves approximately 2,000
clients, including many of France's 50 largest corporations. Alma's revenues
were $21.3 million and $21.7 million for the years ended December 31, 1996 and
1997, respectively. The acquisition of Alma provides the Company an entry into
the tax recovery auditing field and strengthens the Company's management and
operations in Europe. As a result of emerging developments such as the Alma
transaction, the Company restructured and realigned certain facets of its
European management structure in the fourth quarter of 1997 and incurred a
pre-tax charge to earnings of $1.2 million. In November 1997, the Company
acquired the net operating assets of TradeCheck, a Washington-based company that
provides ocean freight recovery audit services. See "Risk Factors -- Acquisition
Risks" and "-- International Operations" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 2,000,000 shares of
Common Stock offered by the Company hereby, at an assumed public offering price
of $20.50 per share and after deducting estimated underwriting discounts and
commissions and expenses payable by the Company, are estimated to be $38.2
million. The Company anticipates that the net proceeds will be used to repay all
outstanding indebtedness under its $30.0 million credit facility with
NationsBank N.A., all of which was incurred pursuant to a term note in
connection with the Alma transaction. At January 31, 1998, $24.9 million in
principal and accrued and unpaid interest were outstanding under such credit
facility at an interest rate of LIBOR plus 1.75% per annum (7.4% as of January
31, 1998). Such borrowings under this term note are repayable in varying amounts
with a final payment due October 2001. The balance of the proceeds will be used
for continued international expansion, potential future acquisitions and general
corporate purposes, including working capital. The Company is not currently a
party to any agreements or understandings with respect to any material
12
<PAGE> 14
acquisitions and no assurance can be given that any such future acquisitions
will be consummated. The Company will not receive any proceeds from the sale of
shares of Common Stock by the Selling Shareholders.
Pending application of the net proceeds as described above, the Company
intends to invest the net proceeds in short-term, investment grade securities,
certificates of deposit or direct or guaranteed obligations of the U.S.
government.
DIVIDEND POLICY
The Company has not paid cash dividends since its March 26, 1996 initial
public offering and does not intend to pay cash dividends in the foreseeable
future. Moreover, restrictive covenants included in the Credit Facility
specifically prohibit payments of cash dividends without the written consent of
the Company's lender. See Note 3 of Notes to Consolidated Financial Statements
of the Company. The Company's predecessors paid Subchapter S shareholder
dividends of approximately $860,000 and $10.3 million and paid partnership
distributions of approximately $215,000 and $382,000 in 1994 and 1995,
respectively. Immediately prior to the Company's initial public offering, the
Company's predecessors also paid a Subchapter S shareholder distribution of
approximately $4.7 million and a partnership distribution of approximately
$178,000.
PRICE RANGE OF COMMON STOCK
The following table sets forth the range of high and low sale prices per
share for the Common Stock as reported on The Nasdaq Stock Market, where the
stock trades under the symbol "PRGX," for the periods indicated.
<TABLE>
<CAPTION>
HIGH LOW
---- ---
<S> <C> <C>
FISCAL 1998
First Quarter (through March 12, 1998)...................... $20 7/8 $15 1/2
FISCAL 1997
First Quarter............................................... $18 1/4 $11 1/16
Second Quarter.............................................. 16 1/8 11 3/4
Third Quarter............................................... 20 1/8 13 5/8
Fourth Quarter.............................................. 19 1/2 13 7/8
FISCAL 1996
First Quarter (from March 26, 1996 through March 31,
1996)..................................................... $16 1/2 $11 (1)
Second Quarter.............................................. 22 1/2 15 1/4
Third Quarter............................................... 24 1/4 11 1/2
Fourth Quarter.............................................. 21 1/2 11 1/4
</TABLE>
- ---------------
(1) Initial public offering price.
On March 12, 1998, the last sale price of the Common Stock as reported on
The Nasdaq Stock Market was $20.50 per share. As of March 11, 1998, there were
146 holders of record of the Common Stock. Management of the Company believes
that there are in excess of 400 beneficial holders of the Common Stock.
13
<PAGE> 15
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
December 31, 1997, as adjusted to reflect the sale by the Company of 2,000,000
shares of Common Stock offered hereby at an assumed public offering price of
$20.50 per share (based upon the last sale price per share on March 12, 1998 as
reported on The Nasdaq Stock Market) and the application of estimated net
proceeds therefrom as described in "Use of Proceeds." This table should be read
in conjunction with the Consolidated Financial Statements of the Company and
Notes thereto appearing elsewhere in this Prospectus:
<TABLE>
<CAPTION>
DECEMBER 31, 1997
-------------------------
HISTORICAL AS ADJUSTED
---------- -----------
(IN THOUSANDS, EXCEPT
SHARE AND PER SHARE DATA)
<S> <C> <C>
Current liabilities:
Notes payable to bank..................................... $ 81 $ 81
Current installments of long-term debt.................... 1,428 191
------- --------
$ 1,509 $ 272
======= ========
Long-term debt, excluding current installments.............. $24,365 $ 852
Shareholders' equity:
Preferred stock, no par value. Authorized 1,000,000
shares; no shares issued or outstanding in 1997........ -- --
Common stock, no par value; stated value $.001 per share.
Authorized 60,000,000 shares; 19,193,676 shares issued
and outstanding historical; and 21,193,676 shares
issued and outstanding, as adjusted.................... 19 21
Additional paid-in capital................................ 48,195 86,393
Cumulative translation adjustments........................ (1,149) (1,149)
Retained earnings......................................... 16,007 16,007
------- --------
Total shareholders' equity........................ 63,072 101,272
------- --------
Total capitalization......................... $87,437 $102,124
======= ========
</TABLE>
14
<PAGE> 16
SELECTED CONSOLIDATED FINANCIAL DATA
The following table sets forth selected consolidated historical financial
data for the Company as of and for the five years ended December 31, 1997. Such
historical consolidated financial data as of and for the five years ended
December 31, 1997 have been derived from the Company's Consolidated Financial
Statements and Notes thereto, which Consolidated Financial Statements have been
audited by KPMG Peat Marwick LLP, independent auditors. The audited Consolidated
Balance Sheets as of December 31, 1996 and 1997 and the related Consolidated
Statements of Earnings, Shareholders' Equity (Deficit) and Cash Flows for each
of the years in the three-year period ended December 31, 1997 and the report
thereon, which in 1997 is based partially upon the report of other auditors, are
included elsewhere herein. The selected pro forma Statements of Earnings data
for the four years ended December 31, 1996 are unaudited. The data presented
below should be read in conjunction with the Consolidated Financial Statements
and Notes thereto and other financial information appearing elsewhere in this
Prospectus. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------------------
1993 1994 1995(1) 1996 1997(2)
------- ------- ------- ------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENTS OF EARNINGS DATA:
HISTORICAL
Revenues.................................................... $25,262 $34,690 $56,031 $77,330 $112,363
Cost of revenues............................................ 13,299 18,163 30,554 40,330 57,726
Selling, general and administrative expenses................ 8,899 12,343 19,035 25,961 37,254
Restructuring costs(3)...................................... -- -- -- -- 1,208
------- ------- ------- ------- --------
Operating income.......................................... 3,064 4,184 6,442 11,039 16,175
Interest (expense), net..................................... (874) (544) (1,630) (100) (403)
Debt refinancing expenses................................... 414 -- -- -- --
------- ------- ------- ------- --------
Earnings before income taxes.............................. 1,776 3,640 4,812 10,939 15,772
Income taxes(4)............................................. -- -- 305 7,789 6,149
------- ------- ------- ------- --------
Net earnings.............................................. $ 1,776 $ 3,640 $ 4,507 $ 3,150 $ 9,623
======= ======= ======= ======= ========
Cash dividends per share.................................... $ -- $ .10 $ .93 $ .28 $ --
======= ======= ======= ======= ========
PRO FORMA(5)
Historical net earnings before income taxes................. $ 1,776 $ 3,640 $ 4,812 $10,939
Pro forma income taxes...................................... 692 1,420 1,877 4,271
------- ------- ------- -------
Pro forma net earnings.................................... $ 1,084 $ 2,220 $ 2,935 $ 6,668
======= ======= ======= =======
Earnings (pro forma earnings for 1995 and 1996) per share:
Basic..................................................... $ .24 $ .41 $ .52
======= ======= ========
Diluted................................................... $ .21 $ .39 $ .51
======= ======= ========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------------------
1993 1994 1995 1996(6) 1997(2)
------- ------- ------- ------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................................... $ 98 $ 1,284 $ 642 $16,891 $ 19,386
Working capital............................................. 2,068 4,889 6,738 30,004 34,563
Total assets................................................ 11,045 13,779 30,268 68,318 133,885
Long-term debt, excluding current installments.............. 4,256 2,741 17,629 692 24,365
Loans from shareholders..................................... 208 1,075 1,075 -- --
Total shareholders' equity (deficit)........................ (167) 2,356 (3,402) 40,559 63,072
</TABLE>
- ---------------
(1) Effective January 1, 1995, the Company acquired Fial & Associates, Inc. See
Note 8 of Notes to Consolidated Financial Statements of the Company.
(2) During 1997, the Company completed five acquisitions including Shaps
(January), APRSI (February), Hale (May), Alma (October) and TradeCheck
(November). See Note 8 of Notes to Consolidated Financial Statements.
15
<PAGE> 17
(3) Includes a $1.2 million charge to restructure and realign certain facets of
the European management structure in recognition of emerging developments
such as the Alma acquisition. See Note 14 of the Notes to Consolidated
Financial Statements of the Company.
(4) In April 1995, the Company's predecessors reorganized and its international
entities became C corporations. Additionally, in connection with the
Company's March 1996 initial public offering, all domestic entities became C
corporations. As a result of these conversions to C corporations, the
Company incurred charges to operations of $305,000 in 1995 and $3.7 million
in 1996 for cumulative deferred income taxes. The Company's 1996 provision
for income taxes of $7.8 million consists of the above-mentioned $3.7
million charge for cumulative deferred income taxes combined with $4.1
million in tax provisions at a 39.0% composite effective rate for the three
quarters subsequent to the March 26, 1996 initial public offering.
(5) The Company's predecessor entities prior to its initial public offering on
March 26, 1996 generally were either corporations electing to be taxed as
Subchapter S corporations or partnerships. As a result, any income tax
liabilities were the responsibilities of the respective shareholders and
partners. Pro forma net earnings reflect, where applicable, a provision for
income taxes to include the additional tax expense as if the Company had
been subject to federal and state income taxes for all periods presented
rather than the individual shareholders and partners.
(6) Balance Sheet Data as of December 31, 1996 reflect the receipt of net
proceeds from the Company's March 26, 1996 initial public offering together
with the partial use of such proceeds to repay substantially all debt
obligations other than certain convertible debentures which were converted
to shareholders' equity immediately prior to the offering. See Note 7 of
Notes to Consolidated Financial Statements of the Company.
16
<PAGE> 18
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
The Company is a leading provider of accounts payable and other recovery
audit services to large retailers, wholesale distributors, healthcare providers,
technology companies and other large transaction-intensive companies, as well as
to certain governmental agencies. In businesses with large purchase volumes and
continuously fluctuating prices, some small percentage of erroneous overpayments
to vendors is inevitable. In addition, the complexity of various tax laws
results in overpayments to governmental agencies. Moreover, services such as
telecommunications, utilities and freight provided to businesses under complex
pricing arrangements can result in overpayments. All of these overpayments
result in "lost profits." The Company identifies and documents overpayments by
using sophisticated proprietary technology and advanced audit techniques and
methodologies, and by employing highly trained, experienced recovery audit
specialists. The Company receives a contractually negotiated percentage of
amounts recovered.
The earliest of the Company's predecessors was formed in November 1990, and
in early 1991 the predecessors acquired the operating assets of Roy Greene
Associates, Inc. ("Roy Greene Associates") and Bottom Line Associates, Inc.,
which were formed in 1971 and 1985, respectively. In January 1995, the Company
purchased certain assets of Fial & Associates, Inc. ("Fial"), a direct U.S.
competitor. In January 1997, the Company acquired the net operating assets of
Shaps, a California-based company providing recovery audit services to
manufacturers and distributors of technology products. In February 1997, the
Company acquired all of the common stock of APRSI, a Texas-based company
providing recovery audit services to healthcare entities and energy companies.
In May 1997, the Company acquired all of the common stock of Hale, a
California-based company that also provides recovery audit services to
healthcare entities. In October 1997, the Company acquired 98.4% of Alma, a
Paris-based recovery audit firm specializing in identifying and recovering
various types of French corporate tax overpayments. In November 1997, the
Company acquired the net operating assets of TradeCheck, a Washington-based
recovery audit firm specializing in ocean freight shipments. The Company intends
to continue pursuing domestic and international strategic acquisitions,
including direct competitors and complementary businesses.
RESULTS OF OPERATIONS
The following table sets forth the percentage of revenues represented by
certain items in the Company's Consolidated Statements of Earnings for the
periods indicated:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------
1995 1996 1997
------ ------ ------
<S> <C> <C> <C>
HISTORICAL
Revenues................................................ 100.0% 100.0% 100.0%
Cost of revenues........................................ 54.5 52.1 51.4
Selling, general and administrative expenses............ 34.0 33.6 33.2
Restructuring costs..................................... -- -- 1.0
----- ----- -----
Operating income................................ 11.5 14.3 14.4
Interest expense, net................................... 2.9 0.2 0.4
----- ----- -----
Earnings before income taxes.................... 8.6 14.1 14.0
Income taxes............................................ 0.6 10.0 5.4
----- ----- -----
Net earnings.................................... 8.0% 4.1% 8.6%
===== ===== =====
PRO FORMA
Historical earnings before income taxes................. 8.6% 14.1%
Pro forma income taxes.................................. 3.3 5.5
----- -----
Pro forma net earnings.......................... 5.3% 8.6%
===== =====
</TABLE>
17
<PAGE> 19
1997 COMPARED WITH 1996
Revenues. The Company's revenues consist principally of contractual
percentages of overpayments recovered for clients that are primarily in the
retailing industry. Revenues increased 45.3% to $112.4 million for 1997, up from
$77.3 million in 1996.
Domestic revenues increased 30.2% to $81.7 million in 1997, up from $62.7
million in 1996. Of this 30.2% increase (i) 9.0% was contributed by existing
clients served in both the 1996 and 1997 periods; (ii) 13.3% was contributed by
the four recovery audit firms acquired in 1997; and (iii) 7.9% resulted from
provision of services to new clients (net of the effect of revenues in 1996 from
clients not served in 1997).
The Company considers international operations to be all operations located
outside of the United States. International revenues increased 109.9% to $30.7
million in 1997, up from $14.6 million in 1996. Of this 109.9% increase (i)
45.3% was contributed by operations of Alma subsequent to this October 1997
acquisition and (ii) 64.6% resulted from existing operations, primarily from
services provided to new clients. The Company continues to believe that the rate
of growth for its international operations will significantly exceed its rate of
domestic revenue growth for the foreseeable future if the revenue effect of
acquired businesses is excluded.
Cost of Revenues. Cost of revenues consists principally of commissions
paid or payable to the Company's auditors based primarily upon the level of
overpayment recoveries, and salaries and bonuses paid or payable to divisional
and regional managers. Also included in cost of revenues are other direct costs
incurred by these personnel including rental of field offices, travel and
entertainment, telephone, utilities, maintenance and supplies, and clerical
assistance. Cost of revenues as a percentage of revenues decreased to 51.4% in
1997 from 52.1% in 1996.
Domestically, cost of revenues as a percentage of revenues increased
slightly to 53.1% in 1997 from 52.7% in 1996. This increase related primarily to
cost of revenues associated with revenues subsequently recognized on claims in
process acquired as part of the Company's May 1997 acquisition of Hale. These
claims carried higher auditor compensation rates than those customarily paid by
the Company. The remainder of these claims in progress is expected to be
resolved in 1998.
Internationally, cost of revenues as a percentage of revenues decreased to
46.8% in 1997, from 49.7% in 1996. This reduction was due in part to the
operations of Alma during the fourth quarter of 1997 which were conducted at a
cost of revenue percentage of 44.2%. Excluding Alma's revenues and cost of
revenues from the Company's 1997 international operations, international cost of
revenues as a percentage of revenues would have been 47.5%, or a 2.2% reduction
from 1996. This improvement resulted primarily from gross margin expansions
during 1997 in the Company's more established international locations.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses include the expenses of sales and marketing activities,
information technology services and the corporate data center, human resources,
legal and accounting, administration, headquarters-related depreciation of
property and equipment and amortization of intangibles. Selling, general and
administrative expenses as a percentage of revenues decreased to 33.2% in 1997,
from 33.6% in 1996.
Domestic selling, general and administrative expenses as a percentage of
revenues increased to 30.6% in 1997, up from 30.2% in 1996. The Company's 1997
domestic selling, general and administrative expense percentage is higher than
the comparable percentage in 1996 due to increased expenditures for various 1997
initiatives such as significantly expanded training programs and period costs
associated with intensified mergers and acquisition efforts.
Internationally, selling, general and administrative expenses as a
percentage of revenues decreased to 40.0% in 1997, down significantly from 47.9%
in 1996. This reduction was due in part to the operations of Alma during the
fourth quarter of 1997 which were conducted at a selling, general and
administrative percentage of 26.9%. Excluding Alma's revenues and selling,
general and administrative expenses from the Company's 1997 international
operations, international selling, general and administrative expenses as a
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<PAGE> 20
percentage of revenues would have been 43.6%, or a 4.3% reduction from 1996.
This improvement resulted primarily from various components of fixed costs being
spread over a rapidly growing revenue base.
In connection with acquired businesses, the Company has recorded intangible
assets including goodwill and deferred non-compete costs. Amortization of these
intangible assets totaled $1.9 million in 1997 and $1.2 million in 1996.
Restructuring Costs. In recognition of emerging developments such as the
Alma acquisition, the Company restructured and realigned certain facets of its
European management structure in the fourth quarter of 1997 and incurred a
pre-tax charge to earnings of $1.2 million. This charge consisted of employment
termination costs directly applicable to four of the Company's senior European
executives and residual contract costs due to an independent European advisor
for services no longer required by the Company. Of the $1.2 million charge,
$683,000 had been paid through December 31, 1997, and the remaining $525,000 is
currently estimated to be paid by June 30, 1998.
Operating Income. Operating income increased 46.5% to $16.2 million in
1997, up from $11.0 million in 1996. As a percentage of total revenues,
operating income increased to 14.4% of revenues in 1997, up slightly from 14.3%
in 1996. Excluding the effect of the $1.2 million nonrecurring pre-tax
restructuring charge on 1997 operations, operating income would have been $17.4
million or 15.5% of total revenues.
Interest Expense, Net. Interest expense, net, increased to $403,000 in
1997, up from $100,000 in 1996. Interest expense, net, for 1997 consisted of (i)
interest expense of $730,000, comprised primarily of interest on $24.8 million
of bank borrowings outstanding since October 1997 which were used to finance a
portion of the Alma acquisition, net of (ii) $327,000 of interest income derived
primarily from overnight investments.
Earnings Before Income Taxes. Earnings before income taxes increased 44.2%
to $15.8 million, up from $10.9 million in 1996. As a percentage of total
revenues, earnings before income taxes were 14.0% in 1997, down slightly from
14.1% in 1996. Excluding the effect of the $1.2 million nonrecurring pre-tax
restructuring on 1997 operations, earnings before income taxes as a percentage
on total revenues would have been 15.1%.
Income Taxes. The Company's predecessor entities prior to its initial
public offering on March 26, 1996 generally were either corporations electing to
be taxed as Subchapter S corporations or partnerships. As a result, any income
tax liabilities were the responsibilities of the respective shareholders and
partners. In connection with the initial public offering, all domestic entities
became C corporations. As a result of these conversions to C corporations, the
Company incurred a charge to operations of $3.7 million in the first quarter of
1996 for cumulative deferred income taxes.
The provisions for income taxes for all periods subsequent to March 31,
1996 consist of federal, state and foreign income taxes at the Company's
composite effective rate of 39.0%. The Company's 1996 provision for income taxes
of $7.8 million consists of the above-mentioned $3.7 million charge for
cumulative deferred income taxes combined with $4.1 million in tax provisions at
a 39.0% composite effective rate for the three quarters subsequent to the March
26, 1996 initial public offering.
Pro Forma Income Taxes. The results of operations for 1996 have been
adjusted on a pro forma basis to reflect federal, state and foreign income taxes
at a composite effective rate of 39.0% as if the Company's predecessors had been
C corporations throughout the year.
1996 COMPARED WITH 1995
Revenues. Revenues increased 38.0% to $77.3 million for 1996, up from
$56.0 million in 1995. Of this $21.3 million increase, $13.7 million, or 64.3%,
related to existing and new domestic accounts and $7.6 million, or 35.7%,
related to revenue growth from international operations. Domestic revenue growth
in 1996 of $13.7 million consisted of $5.7 million related to 35 new client
accounts and $8.0 million related to provision of additional services to
existing accounts.
International revenues grew 108.1% to $14.6 million for 1996, up from $7.0
million for 1995. International revenues grew from 12.5% of total revenues in
1995 to 18.9% during 1996.
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<PAGE> 21
Cost of Revenues. Cost of revenues decreased to 52.1% of revenues in 1996,
down from 54.5% for 1995.
Domestically, the Company's cost of revenues as a percentage of revenues
decreased to 52.7% of revenues in 1996, down from 55.6% for 1995 due primarily
to Fial contracts-in-progress acquired in January 1995. These auditor contracts,
substantially all of which were concluded by December 31, 1995, carried higher
auditor compensation rates than those customarily paid by the Company. Excluding
the effect of this temporary $1.9 million rate-related differential, domestic
cost of revenues as a percentage of domestic revenues would have been 51.7% in
1995.
Internationally, cost of revenues increased to 49.7% of international
revenues in 1996, up from 47.2% during 1995. This increase resulted from an
increase in initial auditor compensation guarantees resulting from various new
markets entered by the Company in 1996.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses as a percentage of revenues decreased to 33.6% in 1996
from 34.0% in 1995.
Domestic selling, general and administrative expenses as a percentage of
domestic revenues were relatively flat at 30.2% in 1996 and 30.4% in 1995. The
Company's domestic selling, general and administrative expenses grew during 1996
at a rate approximately commensurate with its domestic revenue growth due
primarily to space, equipment and personnel additions at its corporate
headquarters facility in Atlanta, Georgia.
International selling, general and administrative expenses decreased to
47.9% of international revenues in 1996, down from 58.7% during 1995 due
principally to the 108.1% growth in international revenues in 1996 without a
proportionate increase in selling, general and administrative expenses.
Amortization of intangible assets totaled $1.2 million in both 1996 and
1995.
Operating Income. Operating income increased 71.4% to $11.0 million in
1996, up from $6.4 million in 1995. Operating income was 14.3% and 11.5% of
revenues for 1996 and 1995, respectively. Excluding the effect of the temporary
$1.9 million auditor compensation rate differential relating to
contracts-in-progress acquired in January 1995 from Fial, operating income for
1995 would have been $8.3 million, or 15.0% of revenues.
Interest Expense, Net. Interest expense, net, decreased to $100,000 in
1996, down from $1.6 million in 1995. Interest expense, net, for 1996 consisted
of $495,000 of net interest expense incurred in the first quarter prior to the
Company's March 26, 1996 initial public offering, less $395,000 of net interest
income derived primarily from the net initial public offering proceeds during
the remaining three quarters of the year.
Earnings Before Income Taxes. Earnings before income taxes increased
127.3% to $10.9 million, up from $4.8 million in 1995. As a percentage of total
revenues, earnings before income taxes were 14.1% in 1996 and 8.6% in 1995.
Excluding the effect of the temporary $1.9 million auditor compensation rate
differential relating to contracts-in-progress acquired in January 1995 from
Fial, earnings before income taxes for 1995 would have been $6.7 million, or
12.1% of revenues.
Income Taxes. The predecessor business entities that comprised the Company
generally were either Subchapter S corporations or partnerships. As a result,
income tax liabilities were the responsibilities of the respective shareholders
and partners. In April 1995, the Company's predecessors reorganized and its
international entities became C corporations. Additionally, in connection with
the Company's March 1996 initial public offering, all domestic entities became C
corporations. As a result of these conversions to C corporations, the Company
incurred charges to operations of $305,000 in 1995 and $3.7 million in 1996 for
cumulative deferred income taxes. The Company's 1996 provision for income taxes
of $7.8 million consists of the above-mentioned $3.7 million charge for
cumulative deferred income taxes combined with $4.1 million in tax provisions at
a 39.0% composite effective rate for the three quarters subsequent to the March
26, 1996 initial public offering.
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<PAGE> 22
Pro Forma Income Taxes. The results of operations for 1996 and 1995 have
been adjusted on a pro forma basis to reflect federal, state and foreign income
taxes at a composite effective rate of 39.0% as if the Company's predecessors
had been C corporations throughout such periods.
QUARTERLY RESULTS
The following tables set forth certain unaudited quarterly financial data
for each of the Company's last eight quarters and such data expressed as a
percentage of the Company's revenues for the respective quarters. The
information has been derived from unaudited consolidated financial statements
that, in the opinion of management, reflect all adjustments (consisting only of
normal recurring adjustments) necessary for a fair presentation of such
quarterly information. The operating results for any quarter are not necessarily
indicative of the results to be expected for any future period.
<TABLE>
<CAPTION>
1996 QUARTER ENDED 1997 QUARTER ENDED
-------------------------------------- --------------------------------------
MAR. 31 JUNE 30 SEPT. 30 DEC. 31 MAR. 31 JUNE 30 SEPT. 30 DEC. 31
------- ------- -------- ------- ------- ------- -------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues.......................... $15,615 $17,963 $21,964 $21,788 $20,960 $25,858 $29,627 $35,918
Cost of revenues.................. 8,623 9,480 11,002 11,225 11,529 13,331 14,693 18,173
Selling, general and
administrative expenses......... 6,031 6,040 6,623 7,267 8,196 8,723 8,790 11,545
Restructuring costs............... -- -- -- -- -- -- -- 1,208
------- ------- ------- ------- ------- ------- ------- -------
Operating income......... 961 2,443 4,339 3,296 1,235 3,804 6,144 4,992
Interest income (expense), net.... (495) 106 162 127 63 55 14 (535)
------- ------- ------- ------- ------- ------- ------- -------
Earnings before income
taxes.................. 466 2,549 4,501 3,423 1,298 3,859 6,158 4,457
Income taxes...................... 3,700 994 1,759 1,336 506 1,491 2,400 1,752
------- ------- ------- ------- ------- ------- ------- -------
Net earnings (loss)...... $(3,234) $ 1,555 $ 2,742 $ 2,087 $ 792 $ 2,368 $ 3,758 $ 2,705
======= ======= ======= ======= ======= ======= ======= =======
PRO FORMA
Historical earnings before
income taxes.................. $ 466
Pro forma income taxes.......... 182
-------
Pro forma net earnings... $ 284
=======
</TABLE>
<TABLE>
<CAPTION>
1996 QUARTER ENDED 1997 QUARTER ENDED
-------------------------------------- --------------------------------------
MAR. 31 JUNE 30 SEPT. 30 DEC. 31 MAR. 31 JUNE 30 SEPT. 30 DEC. 31
------- ------- -------- ------- ------- ------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues.......................... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of revenues.................. 55.2 52.8 50.1 51.5 55.0 51.6 49.6 50.6
Selling, general and
administrative expenses......... 38.6 33.6 30.1 33.4 39.1 33.7 29.7 32.1
Restructuring costs............... -- -- -- -- -- -- -- 3.4
------- ------- ------- ------- ------- ------- ------- -------
Operating income......... 6.2 13.6 19.8 15.1 5.9 14.7 20.7 13.9
Interest income (expense), net.... (3.2) 0.6 0.7 0.6 0.3 0.2 0.1 (1.5)
------- ------- ------- ------- ------- ------- ------- -------
Earnings before income
taxes.................. 3.0 14.2 20.5 15.7 6.2 14.9 20.8 12.4
Income taxes...................... 23.7 5.5 8.0 6.1 2.4 5.8 8.1 4.9
------- ------- ------- ------- ------- ------- ------- -------
Net earnings (loss)...... (20.7)% 8.7% 12.5% 9.6% 3.8% 9.1% 12.7% 7.5%
======= ======= ======= ======= ======= ======= ======= =======
PRO FORMA
Historical earnings before
income taxes.................. 3.0%
Pro forma income taxes.......... 1.2
-------
Pro forma net earnings... 1.8%
=======
</TABLE>
The Company has experienced and expects to continue to experience
significant seasonality in its business. The Company typically realizes higher
revenues and operating income in the last two quarters of its fiscal year. This
trend is expected to continue and reflects the inherent purchasing and
operational cycles of the retailing industry, which is the principal industry
served by the Company. The Company's October 1997 acquisition of Alma is not
expected to affect this trend because Alma historically has experienced similar
seasonality in its revenues and operating income. Should the Company not
continue to realize increased
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<PAGE> 23
revenues in future third and fourth quarter periods, profitability for any
affected quarter and the entire year could be materially and adversely affected
due to ongoing selling, general and administrative expenses that are largely
fixed over the short term.
LIQUIDITY AND CAPITAL RESOURCES
Through December 31, 1996, the Company's predecessors had acquired and
assimilated three operating companies and financed these acquisitions primarily
through a combination of bank and seller financing. Ongoing Company operations
and capital requirements prior to the Company's initial public offering were met
primarily with cash flows provided by operating activities and, to a lesser
extent, with the proceeds from bank and shareholder loans. On April 1, 1996, the
Company received its $34.8 million portion of the proceeds (net of underwriting
discounts and commissions) from its initial public offering. Of these proceeds,
approximately $1.1 million was subsequently utilized to pay expenses of the
offering, approximately $4.9 million was used to pay previously declared and
unpaid Subchapter S shareholder distributions and partnership distributions, and
approximately $14.6 million was used to pay principal and accrued interest on
substantially all outstanding interest-bearing debt (other than that portion of
certain convertible debt that was converted to Common Stock concurrent with the
initial public offering). All of the residual $14.2 million of net proceeds were
subsequently used to expand international operations, to acquire complementary
businesses and for general corporate purposes.
During October 1997, the Company increased its credit facility with
NationsBank, N.A. from $20.0 million to $30.0 million. The credit facility
permits the Company to borrow up to $30.0 million on a term loan basis to
finance mergers and acquisitions. Alternatively, the Company, at its option, may
utilize up to $10.0 million as a revolving line of credit for working capital
and utilize the remaining $20.0 million for mergers and acquisitions. Borrowings
under the credit facility can be made through September 1999. As of January 31,
1998, the Company had outstanding principal borrowings of $24.8 million under
the credit facility which accrue interest at LIBOR plus 1.75% per annum. Such
borrowings were made in October 1997 in connection with the financing of the
Alma acquisition.
Net cash provided by operating activities was $2.5 million, $1.9 million
and $8.2 million for 1995, 1996 and 1997, respectively.
Net cash used in investing activities was $2.6 million, $5.1 million and
$30.8 million for 1995, 1996 and 1997, respectively. During 1997, the Company
spent $26.1 million (net of cash acquired) as the cash portion of consideration
paid for four recovery audit firms.
Net cash used in financing activities was $586,000 in 1995. Net cash
provided by financing activities was $19.4 million in 1996 and $25.0 million in
1997. Net cash provided by financing activities in 1997 consists primarily of
$24.8 million borrowed from NationsBank, N.A. in October 1997 to finance a
portion of the Alma acquisition. Net cash provided by financing activities in
1996 reflects proceeds from the Company's initial public offering, net of
repayments of debt and other obligations paid from those proceeds.
During 1997, the Company acquired five recovery audit firms. The Company is
pursuing, and intends to continue to pursue, the acquisition of domestic and
international businesses including both direct competitors and businesses
providing other types of recovery services. Future acquisitions may include much
larger businesses than those acquired to date. There can be no assurance,
however, that the Company will be successful in consummating further
acquisitions due to factors such as receptivity of potential acquisition
candidates and valuation issues. Additionally, there can be no assurance that
future acquisitions, if consummated, can be successfully assimilated into the
Company. See "Forward-Looking Statements".
If this public offering is not consummated, the Company nevertheless
believes that its current working capital, existing line of credit and cash flow
generated from future operations will be sufficient to meet the Company's
working capital and capital expenditure requirements through December 31, 1998
unless one or more acquisitions are consummated which require the Company to
seek additional debt or equity financing.
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<PAGE> 24
NEW ACCOUNTING STANDARDS
Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income," establishes standards for reporting and display of
comprehensive income and its components (revenues, expenses, gains and losses)
in a full set of general purpose financial statements. This Statement requires
that all items that are required to be recognized under accounting standards as
components of comprehensive income be reported in a financial statement that is
displayed with the same prominence as other financial statements. The Company
believes that its components of comprehensive income will consist principally of
traditionally-determined net income and foreign currency translation
adjustments. This Statement is effective for fiscal years beginning after
December 15, 1997. Reclassification of financial statements for earlier periods
provided for comparative purposes is required.
Statement of Financial Accounting Standards No. 131, "Disclosures about
Segments of an Enterprise and Related Information" establishes revised standards
for the manner in which public business enterprises report information about
operating segments. The Company does not believe that this Statement will
significantly alter the segment disclosures it currently provides. This
Statement is effective for fiscal years beginning after December 15, 1997.
YEAR 2000 ISSUE
Many existing computer programs use only two digits to identify a year in
the date field. These programs were designed and developed without considering
the impact of the upcoming change in the century. If not corrected, many
computer applications could fail or create erroneous results by or at the year
2000.
The Company believes that its principal year 2000 exposure is confined to
one accounting subsystem which is currently under intense review by outside
consultants. The Company believes that this subsystem will be revised or
replaced within the next 12 months. Consulting costs to revise or replace this
subsystem have not been estimated, but are not anticipated to be material to the
Company's business, operations or financial condition.
23
<PAGE> 25
BUSINESS
The Company is a leading provider of accounts payable and other recovery
audit services to large retailers, wholesale distributors, healthcare providers,
technology companies and other large transaction-intensive companies, as well as
to certain governmental agencies. In businesses with large purchase volumes and
continuously fluctuating prices, some small percentage of erroneous overpayments
to vendors is inevitable. In addition, the complexity of various tax laws
results in overpayments to governmental agencies. Moreover, services such as
telecommunications, utilities and freight provided to businesses under complex
pricing arrangements can result in overpayments. All of these overpayments
result in "lost profits." The Company identifies and documents overpayments by
using sophisticated proprietary technology and advanced audit techniques and
methodologies, and by employing highly trained, experienced recovery audit
specialists. The Company continuously updates and refines its proprietary
databases that serve as a central repository reflecting its auditors'
experiences, vendor practices and knowledge of regional and national pricing
information, including seasonal allowances, discounts and rebates, but excluding
confidential client data.
THE RECOVERY AUDIT INDUSTRY
Businesses with substantial volumes of payment transactions involving
multiple vendors, numerous discounts and allowances, fluctuating prices and
complex tax and pricing arrangements find it difficult to detect all payment
errors. These businesses include retailers, such as discount, department,
specialty, grocery and drug stores, wholesale distributors, manufacturers and
distributors of technology products and certain governmental agencies and
healthcare providers. Although these businesses process the vast majority of
payment transactions correctly, a small number of errors occur principally
because of communication failures between purchasing and payables departments,
complex pricing arrangements, personnel turnover and changes in information and
accounting systems. These errors include vendor pricing errors, missed or
inaccurate discounts, allowances and rebates, incorrect freight charges and
duplicate payments. In the aggregate, these transaction errors can represent
meaningful lost profits that can be particularly significant for businesses with
relatively narrow profit margins. Although internal recovery audit departments
identify some payment errors, independent recovery audit firms often are
retained by businesses to identify additional overpayments.
In the U.S., large retailers routinely engage independent recovery audit
firms as standard business practice and other businesses increasingly are using
independent recovery audit firms. Outside the U.S., the Company believes that
large retailers and certain other businesses also increasingly are engaging
independent recovery audit firms. The U.S. retailing industry represented
approximately $2.5 trillion in revenues in 1996. The top 100 retailers worldwide
had aggregate revenues of approximately $1.4 trillion in 1996. The Company
believes that a typical U.S. retailer makes payment errors that are not
discovered internally, which in the aggregate can range from several hundred
thousand dollars to more than $1.0 million per billion dollars of revenues. In
addition, the Company believes that businesses in all industries also make
accounts payable errors.
Increasingly, businesses use technology to manage complex accounts payable
systems and realize greater operating efficiencies. Many businesses worldwide
communicate with vendors electronically to exchange inventory and sales data,
transmit purchase orders, submit invoices, forward shipping and receiving
information and remit payments. These paperless transactions are widely referred
to as "EDI" (Electronic Data Interchange), and implementation of this technology
is accelerating. EDI streamlines processing large numbers of transactions, but
does not eliminate payment errors because operator input errors may be
replicated automatically in thousands of transactions. EDI systems typically
generate significantly more individual transaction details in electronic form,
making these transactions easier to audit than traditional paper-based accounts
payable systems. Recovery audit firms, however, require sophisticated technology
in order to audit EDI accounts payable processes effectively.
Many businesses historically have maintained internal recovery audit
departments that review transactions before engaging independent recovery audit
firms. The Company believes that these businesses increasingly are outsourcing
internal recovery functions to independent recovery audit firms. Factors
contribut-
24
<PAGE> 26
ing to this trend include (i) a need for significant investments in technology,
especially in an EDI environment, which the Company believes are greater than
even large businesses often can justify, (ii) an inability to duplicate the
breadth of industry and auditing expertise of independent recovery audit firms,
(iii) a desire to focus limited resources on core competencies, and (iv) a
desire for larger and more timely recoveries.
The domestic and international recovery audit industry is characterized by
several large and many small, local and regional firms. Many local and regional
recovery audit firms lack the centralized resources or broad client base to
support technology investments required to provide comprehensive recovery audit
services for large, complex accounts payable systems. These firms are even less
equipped to audit large EDI accounts payable systems. In addition, because of
limited resources, most of these firms subcontract work to third parties and may
lack experience and the knowledge of national promotions, seasonal allowances
and current recovery audit practices. As a result, the Company believes
significant opportunities exist for recovery audit firms with a national and
international presence, well-trained and experienced professionals and the
advanced technology required to audit increasingly complex accounts payable
systems. See "-- Competition."
THE PROFIT RECOVERY GROUP SOLUTION
The Company provides its domestic and international clients with
comprehensive recovery audit services by using sophisticated proprietary
technology and advanced audit techniques and methodologies, and by employing
highly trained, experienced recovery audit specialists. As a result, the Company
believes it is able to identify significantly more payment errors in both
traditional paper-based and EDI accounts payable systems. By leveraging its
technology investment across a large client base, the Company is able to
continue developing proprietary software tools and expand its technology
leadership in the recovery audit industry.
The Company is a leader in developing and utilizing sophisticated software
audit tools and techniques that enhance the identification and recovery of
payment errors. In EDI accounts payable systems, the Company's proprietary
software audit tools and data processing capabilities enable auditors to sort,
filter and evaluate transactions in greater line-item detail. The Company has
developed and continuously updates and refines its proprietary databases that
serve as a central repository reflecting its auditors' experiences, vendor
practices and knowledge of regional and national pricing information, including
seasonal allowances, discounts and rebates. These proprietary databases do not
include confidential client information. The Company's technology provides a
uniform platform for its auditors to offer consistent and proven audit
techniques and methodologies regardless of the client's size, industry or
geographic scope of operations.
The Company also is a leader in establishing new recovery audit practices
to reflect evolving industry trends. The Company's auditors are highly trained
and many have joined the Company from finance-related management positions in
the retailing industry. To support its auditors, the Company provides data
processing, marketing, training and administrative services.
THE PROFIT RECOVERY GROUP STRATEGY
The Company's objective is to become the leading worldwide provider of
recovery audit services. The Company believes that it will have to increase
significantly its revenues to achieve this objective. Its strategy consists of
the following elements:
- Expand International Presence. The Company believes international
markets represent significant business opportunities and intends to
continue expanding its international presence. For example, based on 1996
sales, 63 of the top 100 retailers worldwide were headquartered outside
the U.S. Through sales and marketing efforts, the Company targets
countries having a concentration of transaction-intensive businesses. The
Company also enters new international markets by supporting its U.S.
clients' international operations. With the recent acquisition of Alma,
the Company has significantly increased its presence in France and the
Company intends to offer Alma's services to businesses in other European
countries. In the next 12 months, the Company anticipates that it will
commence operations in South Africa, Argentina and Brazil.
25
<PAGE> 27
- Expand Client Base. The Company seeks to increase its worldwide retail
client base and expand its recovery audit services to other industries.
The Company recently has expanded its recovery audit services to the
healthcare and technology industries and intends to expand into other
industries, such as financial services, transportation and lodging and
gaming. The Company believes that its proprietary technology and audit
techniques and methodologies also can be applied to these industries. The
Company believes that its typical fee arrangement enhances its ability to
attract new clients because clients pay a contractually negotiated
percentage of overpayments identified by the Company and recovered for
the clients. The Company intends to leverage existing client
relationships into new audit engagements for clients' other operating
units. Based on 1996 sales, 28 of the top 100 retailers worldwide, each
of which had sales of at least $3.9 billion, were clients of the Company
in 1997. The Company principally targets large businesses having at least
$500 million in annual revenues, although smaller businesses may be
attractive clients. Retailers continue to constitute the substantial
majority of the Company's client and revenue base, and the Company's
current marketing efforts are primarily directed toward that industry.
- Pursue Strategic Acquisitions. The Company intends to continue pursuing
the acquisition of domestic and international businesses including both
direct competitors and businesses providing complementary recovery audit
services. As examples, in January 1995, the Company successfully
completed the acquisition of Fial, a direct competitor; in January 1997,
the Company acquired Shaps, a firm providing recovery audit services to
manufacturers and distributors of technology products; in February 1997,
the Company acquired APRSI, a firm providing recovery audit services to
healthcare entities and energy companies; in May 1997, the Company
acquired Hale, a firm that provides recovery audit services primarily to
healthcare entities; in October 1997, the Company acquired Alma, a firm
that provides tax recovery audit services in France; and in November
1997, the Company acquired TradeCheck, a firm that provides ocean freight
recovery audit services.
- Expand Recovery Audit Services. The Company seeks to expand its recovery
audit service offerings beyond its traditional accounts payable recovery
audit business. For example, the Company recently began offering tax
recovery and ocean freight audit services following its acquisitions of
Alma and TradeCheck. In addition, the Company intends to expand into or
establish its capabilities in other recovery audit services, including
telecommunications, utilities, freight and sales and property tax.
- Maintain High Client Retention Rates. The Company intends to maintain
and improve its high client retention rate by providing comprehensive
recovery audit services, utilizing highly trained auditors, and
continuing to refine its advanced audit technology. Of the Company's
accounts payable audit clients in 1996 that had claims exceeding $100,000
in that year (excluding clients no longer in existence due to such
clients' bankruptcies and acquisitions), more than 90% continued to
utilize the Company's services in 1997.
- Maintain Technology Leadership. The Company believes its proprietary
technology provides a significant competitive advantage, especially in
audits of EDI accounts payable systems. The Company intends to continue
making substantial investments in technology to maintain its leadership
position and systems capabilities.
- Promote Outsourcing Arrangements. The Company seeks to capitalize on the
growing trend of businesses to outsource internal recovery audit efforts.
The Company believes that its outsourcing clients benefit significantly
from these arrangements because their recoveries generally are larger and
completed more quickly. The Company further believes that as clients
convert their systems to EDI, outsourcing arrangements involving recovery
audit work will become increasingly prevalent due in part to the absence
of traditional "audit trail" documents.
THE PROFIT RECOVERY GROUP SERVICES
The Company provides comprehensive accounts payable, tax and other
ancillary recovery audit services. In 1997, accounts payable recovery audit
services represented approximately 91.0% of the Company's revenues. Assuming the
Alma transaction had occurred on January 1, 1997, accounts payable recovery
audit
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services and tax recovery audit services would have represented on a pro forma
basis approximately 80.3% and 17.0%, respectively, of the Company's revenues for
1997.
Accounts Payable Recovery Audit Services
Using its proprietary technology, audit techniques and methodologies, the
Company conducts either primary or secondary accounts payable audits. In primary
audits, the Company is the first independent recovery audit firm engaged. In
secondary audits, the Company audits behind another independent recovery audit
firm. A substantial majority of accounts payable audits conducted by the Company
are primary audits.
Primary Audits. Although the Company is flexible in structuring recovery
audit programs to meet the individual needs of its clients, there are two basic
types of primary accounts payable audits conducted by the Company: (i) periodic
audits, which are usually performed nine to 18 months after a client's fiscal
year end; and (ii) continuous audits, marketed as RecoverNow, which are
performed more closely following transaction dates.
In most periodic audits, which constitute the vast majority of the
Company's present audit engagements, the client's internal recovery audit
department conducts a preliminary review of accounts payable records to identify
payment errors. Upon completion of the client's internal recovery audit review
process, which may be as long as nine to 18 months after the client's fiscal
year end, the Company begins its independent recovery audit.
Under the Company's RecoverNow program, clients provide the Company with
accounts payable data on a regular basis, often within 90 days following the
payment transaction. The Company believes its RecoverNow program generates
larger client recoveries for several reasons, including: (i) transaction data,
especially paper-based records, are more complete and accessible; (ii) the
impact of vendor bankruptcies is minimized because claims are made more timely
and continuously throughout the year; (iii) certain recoveries are facilitated
when claims are made prior to the expiration of seasonal or other special
pricing promotions; and (iv) vendor relationships are improved because of
on-going communications regarding billing and payment practices.
In some cases, the Company's clients outsource all or a portion of their
internal recovery audit functions to the Company. In these cases, the client
does not conduct an internal review prior to the Company's audit. In its
outsourcing engagements, the Company also may use client staff in the review
process. The Company believes that more businesses will outsource their recovery
audit functions in an effort to control personnel and technology costs, focus
resources on their core business functions, and increase recoveries.
Secondary Audits. In secondary audits, the Company conducts an accounts
payable audit after another independent recovery audit firm has completed its
audit. The Company usually receives a higher percentage recovery fee than
received from primary audits because it generally is more difficult to detect
payment errors in secondary audits. In most cases, the Company is able to
identify significant payment errors not previously detected by a client's
primary independent recovery audit firm. The Company utilizes secondary audits
as a marketing strategy to obtain new, primary audit clients and believes it has
been successful in implementing this strategy. Of the 28 secondary audits
performed in 1995 which individually provided revenues to the Company exceeding
$100,000, nine were converted to primary audit clients prior to December 31,
1997.
Tax Recovery Audit Services
With the recent acquisition of Alma, the Company now offers tax recovery
audit services in France. These services include the identification and recovery
of tax overpayments (other than income taxes), including business and personal
property taxes (referred to in France as "fiscal" taxes), workers compensation
taxes (referred to in France as "social" taxes), real property taxes (referred
to in France as "foncier" taxes), and value added taxes (referred to in France
as "TVA" taxes).
Using highly trained, experienced personnel together with proprietary audit
techniques and methodologies, Alma assists businesses in identifying and
recovering tax overpayments and reducing future tax obligations. Alma, with
assistance from professionals such as tax attorneys, physicians and surveyors,
applies its thorough understanding of the numerous complex French tax laws and
audits the factual information which
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<PAGE> 29
underlies the tax in question. For example, certain fiscal taxes are based upon
a client's number of employees, payroll and fixed assets. Certain social taxes
are based upon industry segment and prior years' claim history. Foncier or real
property taxes are based on the size, use and valuation of building
improvements. Alma is constantly researching new and expanded tax audit
opportunities.
The time necessary to conduct a French tax audit and obtain governmental
approval of a claim can vary significantly based upon the type of audit. A
typical social tax audit, for example, is performed in six to nine months and
governmental approval can take an additional six to 12 months. In certain cases
when the tax authority denies a client's claim, litigation is necessary to seek
recovery. Like the Company's standard accounts payable recovery audits, the
Company receives a contractually negotiated percentage of the taxes recovered.
Ancillary Audit Services
In addition to accounts payable and tax recovery audit services, the
Company also offers ancillary recovery audit services. These ancillary services
may be offered individually or in conjunction with accounts payable and tax
recovery audit services.
- Freight Audits. The Company provides domestic freight audits using
FreightPro, the Company's proprietary freight recovery audit software, and
provides ocean freight audits. The Company also maintains centralized
domestic freight and shipping databases and has auditors who specialize in
freight audits. Freight audits are usually conducted in conjunction with
accounts payable recovery audits.
- Lease Compliance Audits. Real estate lease and landlord compliance
audits involve an examination of all aspects of a client's facility lease
arrangements to assist the client in identifying lease overpayments or
expenses incurred through landlord noncompliance with lease terms.
- Telecommunications Audits. This program assists clients in reducing
their overall telecommunications costs. For example, overpayments often
can result from the incorrect application of rates and tariffs. Auditors
also review clients' equipment, usage and systems configuration needs and
make recommendations on how to reduce future telecommunications costs.
- Utility Audits. Auditors also review clients' electrical and natural gas
requirements and analyze alternative rates and billing plans to verify
that the billing was proper and that the proper tariff rate was applied.
- Expense Reduction Audits. With the recent acquisition of Alma, the
Company assists clients in reducing their costs for building and security
services.
CLIENT CONTRACTS
The Company's standard accounts payable client contract provides that the
Company is entitled to a contractual percentage of overpayments recovered for
clients. Clients generally recover claims by taking credits against outstanding
payables or future purchases from the involved vendors. In many cases, the
Company's auditors work on site with client personnel and continually monitor
credits taken. In other situations, Company auditors schedule periodic
reconciliations with clients to determine which claims have been processed for
credit. The Company's standard accounts payable client contract imposes a duty
on the client to process promptly all claims against vendors. In the interest of
maintaining good vendor relations, however, many clients modify the standard
client contract with the Company to provide that they retain discretion on
whether to pursue collection of a claim. In the Company's experience, it is
extremely unusual for a client to forego the collection of a large, valid claim.
In some cases, a vendor may dispute a claim by providing additional
documentation or information supporting its position. Consequently, many clients
revise the Company's standard client contract to clarify that the Company is not
entitled to payment of its fee until the client recovers the claim from its
vendor.
In addition to the client contracts, most accounts payable clients
establish specific procedural guidelines that the Company must satisfy prior to
submitting claims for client approval. These guidelines are unique to
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each client and impose specific requirements on the Company prior to submitting
claims. With respect to accounts payable recovery audits for retailers,
wholesale distributors and governmental agencies, the Company recognizes
revenues at the time overpayment claims are presented to and approved by its
clients, as adjusted for estimated uncollectible claims. Estimated uncollectible
claims initially are established, and subsequently adjusted, for each individual
client based on a number of factors including historical experience. With
respect to accounts payable and other recovery audits for most entities other
than retailers, wholesale distributors and governmental agencies, the Company
recognizes revenues when it invoices clients for its portion of amounts
recovered. See "Risk Factors -- Uncertainty of Revenue Recognition Estimates and
Collection of Contract Receivables" and Note 1(c) to Notes to Consolidated
Financial Statements of the Company.
The Company's standard tax recovery client contract provides that the
Company is entitled to a contractual percentage of the taxes recovered and
anticipated savings for a specified period following the audit. The Company
recognizes revenue from its fiscal, social and foncier tax recovery audit
services when it receives notification that the applicable governmental agency
has approved a claim, the client is entitled to a recovery, and an invoice is
sent to the client requesting payment. For TVA recovery audit services, the
Company recognizes revenues when all documentation is filed with the appropriate
government agency. See Note 1.D. of Notes to Consolidated Financial Statements
of Alma.
TECHNOLOGY
The Company believes that its proprietary software audit tools and
proprietary databases, together with its centralized data processing
capabilities, provide it a competitive advantage over smaller local and regional
firms, especially when auditing complex EDI accounts payable systems. The
Company has devoted more than six years and has made substantial financial
investments in developing its proprietary technology. At January 31, 1998, the
Company's information services department in the United States had 64 employees,
10 of whom were dedicated to software development activities, including updating
and modifying the Company's existing proprietary software. In addition, Alma's
information services department had four employees as of January 31, 1998.
Centralized Data Preparation and Verification
At the beginning of a typical accounts payable audit, magnetic media
containing accounts payable transaction data are delivered to the Company's
central data processing facility. Experienced programmers in the Company's
information services department write specialized conversion programs that
permit this data to be reformatted into standardized and proprietary formats
using IBM ES 9000 mainframe and IBM AS 400 midrange computers and Windows NT and
OS/2 Warp Connect servers. Statistical reports are then prepared to verify the
completeness and accuracy of the data. Generally, it is not necessary to rewrite
conversion programs for clients for each successive audit. This reformatted data
is compressed onto CD-ROM media and delivered to the Company's auditors who,
using the Company's proprietary field audit software, sort, filter and search
the data for overpayments. Standard reports and client-specific statistical data
also are produced for auditors.
PC-Based Software Modules
The Company has developed PC-based proprietary software modules for use
primarily in the field by its accounts payable auditors. These software modules
include the following:
- AuditPro is used in non-EDI systems to facilitate auditor-defined
searches of reformatted client accounts payable records for patterns
indicative of potential overpayments. In addition to using the standard
analytical reports produced by AuditPro, auditors may design sophisticated
custom inquiries to sort, filter and print client records.
- EDI Inquiry is a comprehensive module used to sort, filter and print
purchasing, receiving and payment records at the line-item level for
clients operating in an EDI environment. By utilizing line-item detail,
this module facilitates the search of a significantly greater number of
transaction records and improves auditor productivity.
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- AuditPro 97 is a newly released module which will eventually replace both
AuditPro and EDI Inquiry. It can be utilized in both EDI and non-EDI
environments and includes considerably greater audit functionality than
the modules it replaces.
- Claims Management System enables the auditor to compile, print and report
on claims information by individual audit. This module also is used to
summarize audit findings for management reports that are typically
provided to clients at the conclusion of each engagement.
- FreightPro is used to audit and produce claims from electronic freight
records. Client freight billing data is compared with vendor routing guide
instructions to isolate potential overcharges.
- ReportPro is a specialized report generator designed to create and
display customized reports in conjunction with the Company's other
proprietary software modules.
Proprietary Databases
The Company has developed and continuously updates and refines its
proprietary accounts payable and other non-tax recovery audit databases that
serve as a central repository reflecting its auditors' experiences, vendor
practices and knowledge of regional and national pricing information, including
seasonal allowances, discounts and rebates. These proprietary databases do not
include confidential client information. Auditors use these databases to
identify discounts, allowances and other pricing information not previously
detected.
AUDITOR HIRING AND TRAINING
Many of the Company's auditors formerly held finance-related management
positions in the retailing industry. These experienced auditors provide
important insights into certain aspects of the retailing industry. The Company
also has relied on its auditors to assist in creating its auditor training
programs and techniques and in developing its proprietary audit software. To
meet its growing need for additional auditors, the Company has begun hiring
recent college graduates, particularly those with multi-lingual capabilities.
While the Company has been able to hire a sufficient number of new auditors to
support its growth, there can be no assurance that the Company will be able to
continue hiring sufficient numbers of qualified auditors to meet its future
needs.
The Company provides intensive in-house training for auditors utilizing
many self-paced media including specialized computer-based training modules. The
Company utilizes experienced auditors as full-time field trainers to assess each
trainee's progress as he or she completes the training program. The in-house
training program is continuously upgraded based on feedback from auditors and on
changing industry protocols. Additional on-the-job training by experienced
auditors enhances the in-house training and enables newly hired auditors to
refine their skills. Because auditor compensation is based on team performance
results as well as nine different categories of individual competency composed
of job-based skills and personal success factors, the Company believes senior
auditors are motivated to continue training new auditors to maximize client
recoveries and audit team compensation. As the Company hires new auditors, there
can be no assurance that it will be able to continue providing the same in-depth
training or have sufficient numbers of experienced auditors to continue its
on-the-job training program.
CLIENT BASE
The Company provides its services principally to large
transaction-intensive businesses that include retailers, such as discount,
department, specialty, grocery and drug stores, wholesale distributors,
manufacturers and distributors of technology products, certain governmental
agencies and healthcare providers. Based on 1996 sales, 28 of the top 100
retailers worldwide, each having sales in excess of $3.9 billion, were clients
of the Company in 1997. Although the Company targets clients principally with
$500 million or more in annual revenues, smaller businesses may be attractive
clients. Retailers continue to constitute the substantial majority of the
Company's client and revenue base, and the Company's current marketing efforts
are primarily directed toward that industry.
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For the years ended December 31, 1995, 1996 and 1997, the Company derived
30.1%, 34.6% and 33.8%, respectively, of its revenues from its five largest
clients. Wal-Mart was the Company's largest client during 1995 and 1996,
representing 12.7% and 14.4% of the revenues during such years, respectively,
and was the Company's second largest client in 1997, representing 10.4% of
revenues for such year. Kmart was the Company's largest client in 1997,
representing 12.3% of the revenues during the period, due in large part to a
nonrecurring situation involving concurrent audits of multiple years. There can
be no assurance that the Company's client base will increase or that the
Company's largest clients will continue to utilize the Company's services at the
same level. For example, one of the Company's five largest accounts representing
4.6% of all of the Company's domestic revenues for 1996 changed the Company's
status from primary recovery auditor in 1996 to secondary recovery auditor in
1997. This change resulted in significantly lower revenues from that client in
1997. In addition, should one or more of the Company's large clients file for
bankruptcy or otherwise cease to do business with the Company, or should one or
more of the Company's large client's vendors file for bankruptcy, the Company's
business, financial condition and results of operations could be materially and
adversely affected. See "Risk Factors -- Dependence on Key Clients" and
"-- Client Bankruptcies."
SEASONALITY
The Company has experienced and expects to continue to experience
significant seasonality in its business. The Company typically realizes higher
revenues and operating income in the last two quarters of its fiscal year.
Should this trend not continue, the Company's profitability for any affected
quarter and the entire year could be materially and adversely impacted due to
ongoing selling, general and administrative expenses that are largely fixed over
the short term. See "Risk Factors -- Seasonality; Fluctuations in Quarterly
Operating Results" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Quarterly Results."
SALES AND MARKETING
The Company markets its services primarily through one-on-one meetings with
executives of targeted clients. The decision to engage a recovery audit firm is
similar to the decision to engage most professional service firms and usually
involves a lengthy period of familiarization, investigation and evaluation by
the prospective client. The sales cycle often exceeds one year in both domestic
and international markets. In the U.S. and Canada, where the use of recovery
audit services is a generally accepted business practice among retailers, the
Company generally must displace a competing firm in order to expand market
share. In many other countries, recovery auditing is a new business service that
requires an initial educational process in order to gain acceptance.
At January 31, 1998, the Company's marketing staff consisted of 12 persons
in the United States headed by a senior officer and 36 persons in Europe. The
Company plans to expand its marketing staff in the U.S. and internationally as
its business grows and it enters new markets.
PROPRIETARY RIGHTS
The Company continuously develops new recovery audit software and enhances
existing proprietary software. The Company regards its proprietary software as
protected by trade secret and copyright laws of general applicability. In
addition, the Company attempts to safeguard its software through employee and
third-party nondisclosure agreements and other methods of protection. Despite
these precautions, it may be possible for unauthorized third parties to copy,
obtain or reverse engineer certain portions of the Company's software or
otherwise to obtain or use other information the Company regards as proprietary.
While the Company's competitive position may be affected by its ability to
protect its software and other proprietary information, the Company believes
that the protection afforded by trade secret and copyright laws is less
significant to the Company's success than the continued pursuit and
implementation of its operating strategies and other factors such as the
knowledge, ability and experience of its personnel.
The Company has registered its copyrights for AuditPro, EDI Inquiry, Claims
Management System, FreightPro and RecoverNow with the U.S. copyright office.
Third parties with functionally similar software could assert claims under the
Copyright Act of 1986, as amended, the federal patent law or state trade secret
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laws that the Company's proprietary recovery audit software application products
infringe or may infringe the proprietary rights of such entities. These third
parties may seek damages from the Company as a result of such alleged
infringement, demand that the Company license certain proprietary rights from
them or otherwise demand that the Company cease and desist from its use or
license the allegedly infringing software. Such action may result in protracted
and costly litigation or royalty arrangements or otherwise have a material
adverse effect on the Company's business, financial condition or results of
operations. Although the Company believes that its recovery audit software does
not infringe on the intellectual property rights of others and the Company knows
of no such pending or other extended claims of infringement, there can be no
assurance that such a claim will not be asserted against the Company in the
future.
The Company's trademarks include "Profit Recovery Group International,"
"PRG," "AuditPro," "AuditPro 97," "EDI Inquiry," "Claims Management System,"
"FreightPro," "ReportPro" and "RecoverNow." The Company has registered "Profit
Recovery Group International," "PRG," "AuditPro," "RecoverNow" and the Company's
logo as federal trademarks with the U.S. Patent and Trademark Office. There can
be no assurance, however, that the Company will be successful in its attempt to
register such trademarks or that it otherwise will be able to continue to use
any of the foregoing trademarks.
The Company has filed applications for protection of certain of its
trademarks outside of the U.S. in the various countries where the Company
conducts business, and such protection is available. There can be no assurance,
however, that the Company will be successful in its attempt to register or
continue to use such trademarks outside of the U.S.
COMPETITION
The recovery audit business is highly competitive. The competitive factors
affecting the market for the Company's recovery audit services include:
establishing and maintaining client relationships, quality and quantity of
claims identified, experience and professionalism of audit staff, rates for
services, technology and geographic scope of operations. The Company's principal
competitors for accounts payable recovery audit services include local and
regional firms and one firm, Howard Schultz & Associates, with a network of
affiliate organizations in the U.S. and abroad. The Company believes that Howard
Schultz & Associates has been in operation longer than the Company and may have
achieved greater revenues than the Company in 1997. The Company's competitors
for tax recovery audit services in France include major international accounting
firms, tax attorneys and several smaller tax recovery audit firms. There can be
no assurance that the Company will continue competing successfully with such
competitors.
The Company believes that as large, transaction-intensive businesses expand
internationally and implement EDI accounts payable systems, smaller recovery
audit firms will lack the technology and infrastructure necessary to remain
competitive unless they make substantial investments to upgrade and expand their
skills, technologies and geographic scope of operations. See "Risk
Factors -- Competition."
EMPLOYEES
At January 31, 1998, the Company had 1,174 employees, 709 of whom were
located in the U.S., with 575 persons in the audit function, 12 persons in sales
and marketing, 64 persons in information services and the remainder in
corporate, finance and administrative functions. In addition to its 465
employees located outside the U.S., internationally the Company engaged 26
independent contractors at January 31, 1998. The Company believes its employee
relations are good.
FACILITIES
The Company's principal executive office is located in approximately 55,000
square feet of office space in Atlanta, Georgia. The Company subleases this
space through December 30, 2002 and has an option to renew the lease for five
years contingent upon the prime lease being renewed. The Company leases 25,000
square feet of office and warehouse space in Bentonville, Arkansas. This lease
has an initial five-year term that commenced on April 19, 1996, with an option
to renew for an additional five-year period. The Company leases 27,500 square
feet of office space in Levallois-Perret, France. This lease has a nine-year
term that commenced
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on January 1, 1997, with the Company having the right to terminate the lease
without penalty after the fourth and sixth years. In addition, the Company
maintains 45 other offices in close proximity to certain of its larger clients.
The leases for these offices vary in term and range from 1,000 to 10,000 square
feet. The Company is negotiating a five-year lease for an additional 15,000
square feet of space in Phoenix, Arizona. The Company anticipates that
additional space will be required as business expands and believes that it will
be able to obtain suitable space as needed. See Note 4 of Notes to Consolidated
Financial Statements of the Company.
LEGAL PROCEEDINGS
The Company is not a party to any legal proceedings that it believes could
have a material adverse effect on its business, financial condition or results
of operations.
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information concerning the directors
and executive officers of the Company:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
John M. Cook(1)...................... 55 Chairman of the Board, Chief Executive Officer and
Director
John M. Toma(1)...................... 52 Vice Chairman, Assistant Secretary and Director
Michael A. Lustig.................... 42 President and Director
Marc S. Eisenberg.................... 42 President of the Directorate of Alma and Director
Robert G. Kramer..................... 54 Executive Vice President and Chief Information Officer
Donald E. Ellis, Jr.................. 46 Senior Vice President -- Finance, Treasurer and Chief
Financial Officer
Clinton McKellar, Jr................. 51 Senior Vice President, General Counsel and Secretary
Tony G. Mills........................ 41 Senior Vice President -- Corporate Development and
Assistant Secretary
David A. Brookmire................... 45 Senior Vice President -- Human Resources
Stanley B. Cohen(1)(2)............... 54 Director
Jonathan Golden(1)(3)................ 60 Director
Garth H. Greimann(2)(3).............. 42 Director
Fred W.I. Lachotzki.................. 51 Director
E. James Lowrey(2)(3)................ 70 Director
</TABLE>
- ---------------
(1) Member of the Executive Committee.
(2) Member of the Audit Committee.
(3) Member of the Compensation Committee.
John M. Cook is Chairman of the Board, Chief Executive Officer and a
Director of the Company and has served in such capacities since founding the
Company in November 1990. Mr. Cook served as President of the Company from
November 1990 through January 1998. Prior to forming the Company, Mr. Cook
served as President and Chief Operating Officer of Roy Greene Associates from
1989 to 1990. From 1987 to 1989, Mr. Cook served as Senior Vice President of
Caldor Stores, Inc., a division of May Department Stores Co. ("May"). From 1982
to 1987, Mr. Cook served in a similar capacity for Kaufmann's Department Stores,
Inc., also a division of May.
John M. Toma was elected Vice Chairman of the Company in January 1997.
Prior to that, he was Executive Vice President -- Administration of the Company
and had served in such capacity since 1992. Mr. Toma has served as a Director of
the Company since its founding in November 1990 and as Senior Vice
President -- Administration of the Company from 1990 to 1992. Prior to forming
the Company, Mr. Toma served as Senior Vice President -- Administration of Roy
Greene Associates from 1989 to 1990. Prior to joining Roy Greene Associates, Mr.
Toma served as Operating Vice President of Caldor Stores, Inc., a division of
May.
Michael A. Lustig joined the Company in 1995 as Senior Vice
President -- Operations. Mr. Lustig was promoted to Executive Vice President in
July 1996, and to President -- PRG Worldwide Accounts Payable Audit Operations
in January 1997. In January 1998, Mr. Lustig was elected President of the
Company and elected as a Director of the Company. Prior to joining the Company,
Mr. Lustig worked for The Actava Group, Inc. (formerly Fuqua Industries, Inc.)
from 1980 to 1995 where he held various officer positions, most recently as
Senior Vice President of Corporate Development.
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Marc S. Eisenberg has served as President of the Directorate of Alma since
the closing of the Alma transaction on October 7, 1997 and a Director of the
Company since October 15, 1997. Prior to October 1997, Mr. Eisenberg served as
President of Alma since its founding in 1986.
Robert G. Kramer joined the Company in October 1997 as Executive Vice
President and Chief Information Officer. Prior to joining the Company, Mr.
Kramer had worked for Home Shopping Network, Inc. since 1996 as Executive Vice
President and Chief Information Officer. From 1994 to 1996, Mr. Kramer served as
Executive Vice President and Chief Information Officer with Hanover Direct,
Inc., a direct specialty retailer.
Donald E. Ellis, Jr. joined the Company in 1995 as Senior Vice President,
Treasurer and Chief Financial Officer. From 1993 to 1995, Mr. Ellis served as
Vice President -- Finance, Treasurer and Chief Financial Officer of Information
America, Inc., a provider of on-line computer information services, and from
1991 to 1993, he was an independent financial consultant. From 1987 to 1991, Mr.
Ellis served in various positions with KnowledgeWare, Inc., a supplier of
application software, most recently as Senior Vice President, Chief Financial
Officer, Secretary and Treasurer. Mr. Ellis is a certified public accountant.
Clinton McKellar, Jr. joined the Company in June 1997 as Senior Vice
President, General Counsel and Secretary. Prior to joining the Company, from
1989 to May 1997, Mr. McKellar served as Vice President, General Counsel and
Secretary of Engraph, Inc., a manufacturer of consumer product packaging.
Tony G. Mills was elected Senior Vice President -- Corporate Development
and Assistant Secretary in June 1997. Prior to that, he was Senior Vice
President -- Legal Affairs, General Counsel and Secretary and had served in that
capacity since joining the Company in October 1995. For 11 years prior to
joining the Company, Mr. Mills was a shareholder in the Atlanta, Georgia law
firm of Silfen, Segal, Fryer & Shuster, P.C. ("SSFS") and provided legal
services to the Company through that firm since 1990. Mr. Mills remained as Of
Counsel to SSFS through January 1996.
David A. Brookmire joined the Company in 1995 as Senior Vice
President -- Human Resources. From 1987 to 1995, Mr. Brookmire held various
positions with Digital Communications Associates, Inc. (now Attachmate Corp.),
most recently as Vice President -- Human Resources.
Stanley B. Cohen has served as a Director of the Company since its founding
in 1990. Mr. Cohen is the Chairman of the Board, Chief Executive Officer and
President of both Advisory Services, Ltd. ("ASL") and SBC Financial Corporation
("SBC"). These companies provide certain financial consulting and investment
services to the Company and certain of its executive officers. In addition, Mr.
Cohen is President of Capital Advisory Corporation, a financial advisory
company.
Jonathan Golden has served as a Director of the Company since its founding
in 1990 and provides consulting services to the Company through Jonathan Golden,
P.C., a wholly owned professional corporation ("JGPC"). Mr. Golden also serves
through JGPC as a partner in the Atlanta, Georgia law firm of Arnall, Golden &
Gregory, LLP which provides legal services to the Company. Mr. Golden also
serves as a director for SYSCO Corporation ("SYSCO"), a distributor of food and
related products.
Garth H. Greimann has served as a Director of the Company since April 1995.
Mr. Greimann joined Berkshire Partners, a general partnership, in 1989 and
served as a general partner from 1994 until February 1996, when Berkshire
Partners was succeeded by Berkshire Partners LLC (Berkshire Partners, a general
partnership, and Berkshire Partners LLC are collectively referred to as
"Berkshire Partners"). Mr. Greimann has served as a member of Berkshire Partners
LLC since February 1996, and as a general partner of Third Berkshire Associates,
A Limited Partnership ("Third Berkshire Associates"), the general partner of
Berkshire Fund III, since 1994. From 1982 to 1989, Mr. Greimann held various
positions with The First National Bank of Boston (the "Bank"), most recently as
Vice President of the Bank's Acquisition Finance Division, and served in the
Bank's offices in Korea and Taiwan. Mr. Greimann also serves as a director of
Trico Marine Services, Inc., an operator of marine vessels active in offshore
energy exploration and production activities, and of Crown Castle International
Corporation, a provider of infrastructure and related support services to the
wireless communications industry.
35
<PAGE> 37
Fred W.I. Lachotzki has served as a Director of the Company since January
1996. Since 1989, Mr. Lachotzki has served as a Professor of Business Policy at
Nijenrode University, The Netherlands Business School, in The Netherlands. Mr.
Lachotzki also serves as a director of Virgin Blockbuster NV, a chain of music
superstores, NVS Salland Verzekeringen, an insurance company specializing in
healthcare, and Merison Holding NV, a supplier of non-food products to
supermarket chains and owner of a franchised chain of electronics retail stores.
E. James Lowrey has served as a Director of the Company since December
1995. Mr. Lowrey served as Executive Vice President -- Finance and
Administration of SYSCO from 1978 until his retirement in 1993 and was a
director of SYSCO from 1981 to 1993. He currently serves as a director of
Riviana Foods, Inc., a processor and distributor of rice and other food
products, and of Hi-Lo Automotive, Inc., an automotive parts retailer.
No family relationship exists among any of the directors and executive
officers of the Company.
The Board of Directors has an Executive Committee, Audit Committee and
Compensation Committee. The Executive Committee is empowered to exercise all of
the authority of the Board of Directors of the Company, except as limited by the
Georgia Business Corporation Code (the "GBCC"). Under the GBCC, a committee of
the board of directors of a company, among other things, may not approve or
recommend to shareholders actions required to be approved by shareholders, fill
vacancies on the board of directors, amend or repeal the bylaws or approve a
plan of merger not requiring shareholder approval. The functions of the Audit
Committee include recommending to the Board the retention of independent
auditors, reviewing the scope of the annual audit undertaken by the Company's
independent auditors and the progress and results of their work, and reviewing
the financial statements of the Company and its internal accounting and auditing
procedures. The functions of the Compensation Committee include reviewing and
approving executive compensation policies and practices, reviewing salaries and
bonuses for certain officers of the Company, administering The Profit Recovery
Group International, Inc. 1996 Stock Option Plan (the "1996 Plan") and
considering such other matters as may from time to time be referred to the
Compensation Committee by the Board.
The Company compensates its non-employee directors $20,000 per year for
their service on the Board and any committee thereof. Non-employee directors
will be reimbursed for all out-of-pocket expenses, if any, incurred in attending
Board and committee meetings. The Board of Directors has approved an automatic
annual grant to Directors not employed by the Company of options to purchase
from 2,500 to 7,500 shares of Common Stock. Beginning in 1998, grants will be
made as of December 31 of each year; provided, however, that no grants will be
made in any year unless the Company's earnings per share for such year shall
have increased by at least 25% over the previous year. A 25% increase in
earnings per share will result in a grant of options to purchase 2,500 shares of
Common Stock while each additional one percent increase in earnings per share
will result in a grant of options to purchase an additional 200 shares of Common
Stock, up to a maximum annual grant of options to purchase 7,500 shares of
Common Stock. The per share option exercise price will be the closing price of
the Company's Common Stock on The Nasdaq Stock Market on December 31 of the year
of grant, or if no sale of the Common Stock was made on that date, on the next
preceding date on which there was such a sale. Options will vest in 20%
increments over a period of 5 years.
Stanley B. Cohen, a director of the Company, provides financial and
investment advisory services to the Company and certain of its executive
officers through ASL and provides financial advisory services to the Company
through SBC. Mr. Cohen is the Chairman, President, Chief Executive Officer and
sole shareholder of ASL and SBC. During 1997, the Company paid SBC aggregate
consulting fees of approximately $70,000. The Company paid ASL consulting fees
of approximately $25,000 in 1997 for providing financial advisory services to
the Company and to certain of the Company's executive officers and expects to
continue utilizing the services of ASL and SBC in the future. The Company
currently pays SBC a consulting fee of $5,800 per month. The consulting
agreement may be terminated by either party for any reason upon not less than 30
days prior notice. The Company also pays the expenses of preparing certain
annual income tax returns for Mr. Cohen. The amount paid by the Company in 1997
for these services was approximately $7,900.
36
<PAGE> 38
Jonathan Golden, a director of the Company, provides consulting services to
the Company through JGPC. Mr. Golden is the sole shareholder of JGPC. During
1997, the Company paid JGPC aggregate consulting fees of approximately $70,000.
The Company currently pays JGPC a consulting fee of $5,800 per month. The
consulting agreement may be terminated by either party for any reason upon not
less than 30 days prior notice. In addition, the Company has paid the law firm
of Arnall, Golden & Gregory, LLP, of which JGPC serves as a partner,
compensation for legal services rendered since 1991 and expects to continue
utilizing this firm's services in the future. The Company also pays the expenses
of preparing certain annual income tax returns for Mr. Golden. The amount paid
by the Company in 1997 for these services was approximately $10,000.
The Company has also entered into a consulting agreement with Lieb Finance
S.A., a Luxembourg company of which Marc S. Eisenberg is the sole owner and
employee, to assist on strategic and long-term planning matters for the Company
and its affiliates in certain portions of Europe. The term of the consulting
agreement is for five years ending October 7, 2002. Under the consulting
agreement, Lieb Finance S.A. will receive an annual consulting fee of 325,000
French Francs (the current approximate equivalent of $53,000 as of February 11,
1998).
EXECUTIVE COMPENSATION
The following table sets forth the compensation paid or accrued by the
Company to the Chief Executive Officer, the other four most highly paid
executive officers of the Company in 1997 (the "Named Executive Officers"). The
information presented is for the years ended December 31, 1995, 1996 and 1997.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
-------------
ANNUAL COMPENSATION(1) SECURITIES
-------------------------------------- UNDERLYING
OTHER ANNUAL OPTIONS ALL OTHER
NAME AND POSITION YEAR SALARY(2) BONUS COMPENSATION(3) (# OF SHARES) COMPENSATION(1)(4)
- ----------------- ---- --------- -------- --------------- ------------- ------------------
<S> <C> <C> <C> <C> <C> <C>
John M. Cook............ 1997 $350,012 $350,000 $ -- 86,663 $ 18,402
Chairman of the Board 1996 356,731 262,500 -- 223,530 15,475
and Chief Executive 1995 695,000 -- -- -- 115,000
Officer
John M. Toma............ 1997 305,994 114,750 -- -- 57,180
Vice Chairman and 1996 307,609 122,400 -- 100,000 67,050
Assistant Secretary 1995 374,000 -- -- -- 4,000
Michael A. Lustig....... 1997 264,596 90,100 -- 135,000 20,000
President(5) 1996 211,269 67,302 -- 27,500 20,000
Donald E. Ellis, Jr..... 1997 172,115 64,922 -- -- 26,446
Senior Vice President, 1996 160,000 56,000 -- 10,000 26,446
Treasurer and Chief 1995 131,000 13,000 22,000 120,000 26,000
Financial Officer(6)
Tony G. Mills........... 1997 156,461 56,281 -- -- 1,784
Senior Vice
President -- Corporate
Development and
Assistant Secretary(5)
</TABLE>
- ---------------
(1) The compensation described in this table does not include medical, group
life insurance or other benefits received by the Named Executive Officers
which are available generally to all salaried employees of the Company and
certain perquisites and other personal benefits, securities or property
received by the Named Executive Officers which do not exceed the lesser of
$50,000 or 10% of any such officer's salary and bonus disclosed in this
table.
37
<PAGE> 39
(2) Includes contributions made to the Company's 401(k) Plan during the years
presented.
(3) Consisted of $12,500 for car allowance and $9,500 for financial advisory
services received by Mr. Ellis.
(4) Consists of:
(a) Premiums for supplemental term life insurance paid by the Company in
the approximate amounts set forth below:
<TABLE>
<CAPTION>
1995 1996 1997
-------- -------- --------
<S> <C> <C> <C>
Mr. Cook....................................... $102,000 $ -- $ --
Mr. Toma....................................... 4,000 -- --
Mr. Lustig..................................... -- -- --
Mr. Ellis...................................... 1,000 1,446 1,446
Mr. Mills...................................... -- -- 1,784
</TABLE>
(b) Deferred compensation accrued in the consolidated financial statements
of the Company on behalf of Messrs. Toma, Lustig and Ellis in the
amounts of $55,000, $20,000 and $25,000, respectively, in 1997 and
1996; and Mr. Ellis in the amount of $25,000 for 1995.
(c) Legal expenses paid by the Company in 1995 on behalf of Mr. Cook in the
amount of $13,000.
(d) Tax preparation expenses paid by the Company in 1996 on behalf of
Messrs. Cook and Toma in the amount of $15,475 and $12,050,
respectively; and in 1997 on behalf of Messrs. Cook and Toma in the
amount of $18,402 and $2,180, respectively.
(5) Mr. Lustig's 1995 and Mr. Mills' 1995 and 1996 compensation have not
previously been disclosed and are therefore not required to be disclosed
herein.
(6) Amounts shown for 1995 reflect compensation from March 1, 1995, when Mr.
Ellis began employment with the Company.
OPTION GRANTS TABLE
The following table sets forth certain information regarding options
granted to the Named Executive Officers during the year ended December 31, 1997.
No separate stock appreciation rights ("SARs") were granted during 1997.
STOCK OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
PERCENT OF POTENTIAL REALIZABLE
TOTAL VALUE AT ASSUMED
NUMBER OF OPTIONS ANNUAL RATES OF STOCK
SECURITIES GRANTED EXERCISE PRICE APPRECIATION FOR
UNDERLYING TO OR BASE OPTION TERM
OPTIONS EMPLOYEES PRICE EXPIRATION -----------------------
NAME GRANTED IN 1997 ($/SH) DATE 5% 10%
- ---- ---------- ---------- -------- ---------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
John M. Cook....................... 86,663(1) 8.7% $17.75 12/31/07 $967,409 $2,451,603
John M. Toma....................... -- -- -- -- -- --
Michael A. Lustig.................. 60,000(1) 6.0 14.75 01/03/07 556,572 1,410,462
75,000(2) 7.5 17.75 12/31/07 837,216 2,121,670
Donald E. Ellis, Jr................ -- -- -- -- -- --
Tony G. Mills...................... -- -- -- -- -- --
</TABLE>
- ---------------
(1) Options are non-qualified options granted under the 1996 Plan. All options
have ten year terms and vest as follows: 20% becomes exercisable on the
anniversary of grant and an additional 20% becomes exercisable on each grant
date anniversary thereafter; provided, however, that Mr. Cook's options will
vest automatically upon the occurrence of certain events. See "-- Employment
Agreements."
(2) Options are non-qualified options granted under the 1996 Plan. All options
have ten year terms and vest as follows: 25% becomes exercisable on the
anniversary of grant and an additional 25% becomes exercisable on each grant
date anniversary thereafter.
38
<PAGE> 40
OPTIONS EXERCISES AND YEAR-END VALUE TABLE
None of the Named Executive Officers has held or exercised separate SARs.
The following table sets forth certain information regarding options exercised
during the year ended December 31, 1997, and unexercised options held at
year-end, by each of the Named Executive Officers.
OPTION VALUES AT DECEMBER 31, 1997
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
SHARES UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
ACQUIRED OPTIONS AT IN-THE-MONEY OPTIONS AT
ON VALUE FISCAL YEAR-END (#) FISCAL YEAR-END($)(1)
EXERCISE REALIZED --------------------------- ---------------------------
NAME (#) ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- -------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
John M. Cook......................... -- $ -- 44,706 265,487 $228,236 $912,942
John M. Toma......................... -- -- 20,000 80,000 135,000 540,000
Michael A. Lustig.................... -- -- 15,100 171,400 93,600 320,400
Donald E. Ellis, Jr.................. 24,000 280,800 2,000 80,000 13,500 950,400
Tony G. Mills........................ -- -- 20,000 60,000 180,600 473,400
</TABLE>
- ---------------
(1) Calculated based on a fair market value of $17.75 per share of Common Stock
at December 31, 1997, less the applicable exercise prices.
EMPLOYMENT AGREEMENTS
The Company has entered into an employment agreement, as amended, with John
M. Cook that currently expires December 31, 2002. The employment agreement
provides for automatic one-year renewals upon the expiration of each year of
employment (such that it always has a five-year term), subject to prior notice
of non-renewal by the Board of Directors. Pursuant to Mr. Cook's employment
agreement, for 1998 through 2002, Mr. Cook will receive an annual base salary of
$350,000 and an annual bonus of up to 150% of his base salary based upon the
Company's performance for the respective year. For 1998, the Compensation
Committee has determined that Mr. Cook also is eligible to receive options up to
a maximum of 150,000 shares of Common Stock if 1998 earnings per share are 150%
or more of 1997 earnings per share. Should 1998 earnings per share be at least
125% of 1997 earnings per share, Mr. Cook will be entitled to receive options to
purchase an additional 75,000 shares of Common Stock, and a prorated additional
amount if 1998 earnings per share are between 126% and 149% of 1997 earnings per
share. Any options so granted to Mr. Cook shall be granted at fair market value
as of the end of 1998 and will vest over a five-year period at 20% per year. If
Mr. Cook is terminated other than for cause or if Mr. Cook resigns for "Good
Reason," he is eligible to receive a severance payment up to a maximum amount
not to be deemed an "excess parachute payment" under the Internal Revenue Code
of 1986, as amended (the "Code"), and all outstanding options immediately become
vested. For purposes of Mr. Cook's employment agreement "Good Reason" means,
unless Mr. Cook consents thereto, (i) the assignment of duties or a position or
title inconsistent with or lower than the duties, position or title provided in
Mr. Cook's employment agreement; (ii) the principal place where Mr. Cook is
required to perform a substantial portion of his duties is outside of Atlanta,
Georgia; (iii) the reduction of Mr. Cook's compensation unless the Board (or the
Compensation Committee) has authorized a general compensation decrease for all
executive employees of the Company; (iv) there is a merger, consolidation or
reorganization of the Company or any other transaction resulting in Mr. Cook
(together with his immediate family or trusts or limited partnerships
established for the benefit of Mr. Cook and/or such persons) owning in the
aggregate less than 20% of the voting control of the Company; or (v) there is a
sale or agreement to sell or a grant of an option to purchase all or
substantially all of the assets of the Company. Mr. Cook also is entitled to
receive certain supplemental insurance coverage and other personal benefits
under his employment agreement. Mr. Cook has agreed not to compete with the
Company or to solicit any of the Company's clients or employees for a period of
18 months following termination of employment.
The Company has also entered into employment agreements with John M. Toma,
Michael A. Lustig, Donald E. Ellis, Jr. and Tony G. Mills, each of which will
expire December 31, 1998 and provides for automatic one-year renewals upon the
expiration of each year of employment, subject to prior notice of
39
<PAGE> 41
nonrenewal by the Board of Directors. Messrs. Toma, Lustig, Ellis and Mills have
agreed not to compete with the Company or to solicit any clients or employees of
the Company for a period of 18 months following termination of their respective
employments.
Pursuant to Mr. Toma's employment agreement, for 1998, he will continue to
receive a base salary of $306,000, and the Compensation Committee increased Mr.
Toma's maximum potential bonus from 50% of his base salary to 60% of his base
salary based upon the Company's performance for 1998. On January 27, 1998, the
Compensation Committee granted Mr. Toma options to purchase 25,000 shares of
Common Stock at a purchase price of $15.75 per share, vesting over a five-year
period at 20% per year. For 1998, the Compensation Committee has determined that
Mr. Toma also is eligible to receive additional options up to a maximum of
75,000 shares of Common Stock if 1998 earnings per share are 150% or more of
1997 earnings per share. Should 1998 earnings per share be at least 125% of 1997
earnings per share, Mr. Toma will be entitled to receive options to purchase an
additional 25,000 shares of Common Stock, and a prorated additional amount if
1998 earnings per share are between 126% and 149% of 1997 earnings per share.
Any options so granted to Mr. Toma shall be granted at fair market value as of
the end of 1998 and will vest over a five-year period at 20% per year. In
addition, the Company has agreed to make annual contributions in the amount of
$55,000 per year to a deferred compensation program for Mr. Toma, which amounts
will vest 50% immediately and the remainder over a ten-year period at 10% per
year. Mr. Toma will be entitled to receive his deferred compensation upon
termination of his employment for any reason, other than for cause or for "Good
Reason (as such term is similarly defined in Mr. Cook's employment agreement),
including death or disability. The Company has also agreed to provide Mr. Toma
with certain other personal benefits. Upon termination, other than for cause or
by voluntary resignation, Mr. Toma will receive severance payments equal to one
year's base salary and other personal benefits. Mr. Toma will also receive
severance payments equal to one year's base salary if he resigns for "Good
Reason."
In January 1998, Mr. Lustig was elected as President of the Company and was
elected to the Board of Directors of the Company. For 1998, the Compensation
Committee increased Mr. Lustig's annual base salary to $300,000 and increased
his maximum potential bonus from 50% to 75% of his base salary based upon the
Company's performance for 1998. The Compensation Committee has determined that
Mr. Lustig also is eligible to receive additional options up to a maximum of
125,000 shares of Common Stock if 1998 earnings per share are 150% or more of
1997 earnings per share. Should 1998 earnings per share be at least 125% of 1997
earnings per share, Mr. Lustig will be entitled to receive options to purchase
an additional 37,500 shares of Common Stock, and a prorated additional amount if
1998 earnings per share are between 126% and 149% of 1997 earnings per share.
Any options so granted to Mr. Lustig shall be granted at fair market value as of
the end of 1998, and will vest over a four-year period at 25% per year.
Beginning in 1998, Mr. Lustig has elected to reduce his annual base salary by
$40,000 and to contribute such amount to a deferred compensation program for his
benefit, which amount vests immediately. In addition, the Company has agreed to
make annual matching contributions in the amount of $40,000 per year to such
deferred compensation program, which amounts will vest over a ten-year period at
10% per year. Mr. Lustig will be entitled to receive his deferred compensation
upon termination of his employment for any reason, other than for cause,
including death or disability. The Company has also agreed to provide Mr. Lustig
with certain other personal benefits. Upon termination, other than for cause or
by voluntary resignation, Mr. Lustig will receive severance payments equal to
six months' base salary.
Pursuant to Mr. Ellis' employment agreement, for 1998, he will continue to
receive an annual base salary of $175,000 and a bonus of up to 50% of his base
salary based in part upon the Company's performance for 1998. On January 27,
1998, the Compensation Committee granted Mr. Ellis options to purchase 15,000
shares of Common Stock at a purchase price of $15.75 per share, vesting over a
five-year period at 20% per year. Mr. Ellis has elected to reduce his annual
bonus by up to $25,000 and to contribute such amount to a deferred compensation
program for Mr. Ellis, which amount vests immediately. In addition, the Company
has agreed to make annual matching contributions in the amount of $25,000 per
year to such deferred compensation program, which amounts will vest over a
ten-year period at 10% per year. Mr. Ellis will be entitled to receive his
deferred compensation upon termination of his employment for any reason, other
than for cause or for "Good Reason" (as such term is similarly defined in Mr.
Cook's employment agreement), including death or
40
<PAGE> 42
disability. The Company has also agreed to provide Mr. Ellis with certain other
personal benefits. Upon termination, other than for cause or by voluntary
resignation, Mr. Ellis will receive severance payments equal to one years' base
salary. Mr. Ellis will also receive severance payments equal to one year's base
salary if he resigns for "Good Reason."
For 1998, the Compensation Committee increased Mr. Mills' annual base
salary to $170,000 (effective March 1, 1998). Pursuant to Mr. Mills' employment
agreement, for 1998, he will receive a bonus of up to 50% of his base salary
based in part upon the Company's performance for 1998. On January 27, 1998, the
Compensation Committee granted Mr. Mills options to purchase 15,000 shares of
Common Stock at a purchase price of $15.75 per share, vesting over a five-year
period at 20% per year. Beginning in 1998, the Compensation Committee has
determined that the Company will make annual contributions in the amount of
$10,000 per year to a deferred compensation program for Mr. Mills, which amounts
will vest over a ten-year period at 10% per year. Mr. Mills will be entitled to
receive his deferred compensation upon termination of his employment for any
reason, other than for cause, including death or disability. The Company has
also agreed to provide Mr. Mills with certain other personal benefits. Upon
termination, other than for cause or by voluntary resignation, Mr. Mills will
receive severance payments equal to nine months' base salary and certain other
personal benefits.
1996 STOCK OPTION PLAN
In January 1996, the Company, with the approval of its shareholders,
adopted the 1996 Plan. The 1996 Plan provides for the grant of options to
acquire a maximum of 3,500,000 shares of Common Stock, subject to certain
adjustments. In January 1998, the Board approved, subject to shareholder
approval, an additional 1,000,000 shares of Common Stock to be reserved for
issuance under the 1996 Plan. As of March 11, 1998, options for 2,531,293 shares
were outstanding (after adjustment for forfeitures) and 131,200 had been
exercised. Options may be granted under the 1996 Plan to key employees, officers
or directors of, and consultants and advisors to, the Company and its
subsidiaries. The Company estimates that, as of January 31, 1998, approximately
770 employees (including officers) and five non-officer directors of the Company
are eligible to participate in the 1996 Plan. Unless sooner terminated by the
Board, the 1996 Plan terminates in January 2006.
EMPLOYEE STOCK PURCHASE PLAN
In May 1997, the Company's shareholders approved the adoption of The Profit
Recovery Group International, Inc. Employee Stock Purchase Plan (the "Stock
Purchase Plan"). The Stock Purchase Plan is intended to be an "employee stock
purchase plan" as defined in Code Section 423. Under the Stock Purchase Plan,
eligible employees may authorize payroll deductions at the end of a semi-annual
purchase period of from one to ten percent of their compensation (as defined in
the Stock Purchase Plan), with a minimum deduction of ten dollars per payday and
a maximum aggregate deduction of $10,625 during each semi-annual purchase
period, to purchase Common Stock at a price of 85% of the fair market value
thereof as of the first Trading Day (as defined in the Stock Purchase Plan) of
the offering period. The aggregate number of shares of Common Stock which may be
purchased by all participants under the Stock Purchase Plan may not exceed
750,000, subject to certain adjustments. The Company estimates that, as of
January 31, 1998, approximately 880 employees of the Company and its
subsidiaries are eligible to participate in the Stock Purchase Plan. The Stock
Purchase Plan will terminate at the option of the Company's Compensation
Committee or, if not earlier, at the time purchase rights have been exercised
for all shares of Common Stock reserved for purchase under the Stock Purchase
Plan.
THE COMPANY'S 401(K) PLAN
The Company assumed, effective immediately prior to completion of its
initial public offering, the Code Section 401(k) plan (the "401(k) Plan")
sponsored by a predecessor of the Company. The 401(k) Plan is intended to be a
tax-qualified retirement plan. Under the 401(k) Plan, eligible employees of the
Company and employees of its participating subsidiaries may elect to make
pre-tax saving deferrals of from one percent to 15% of their compensation each
year, subject to annual limits on such deferrals (e.g., $10,000 in 1998)
41
<PAGE> 43
imposed by the Code. The Company may also in its discretion, on an annual basis,
make a matching contribution with respect to such participants' elective
deferrals and/or additional Company contributions. The only form of benefit
payment under the 401(k) Plan is a single lump-sum payment equal to the balance
in the participant's account. Under the 401(k) Plan, the vested portion of a
participant's accrued benefit is payable upon such employee's termination of
employment, attainment of age 59 1/2 (with respect to 100% vested accounts
only), retirement, total and permanent disability or death.
PRINCIPAL AND SELLING SHAREHOLDERS
The table below sets forth certain information regarding the beneficial
ownership of the Common Stock at March 11, 1998, as adjusted to reflect the sale
of the Common Stock offered hereby, of (i) each person known by the Company to
own beneficially five percent or more of the Common Stock, (ii) each director of
the Company who beneficially owns shares of Common Stock, (iii) each Named
Executive Officer who beneficially owns shares of Common Stock, (iv) the Selling
Shareholders and (v) all directors and executive officers as a group. Except as
otherwise indicated, the persons or entities listed below have sole voting and
investment power with respect to all shares beneficially owned by them.
<TABLE>
<CAPTION>
BENEFICIAL
OWNERSHIP
PRIOR TO BENEFICIAL OWNERSHIP
OFFERING(1) NUMBER OF AFTER OFFERING(1)
------------------- SHARES --------------------
NAME NUMBER PERCENT OFFERED(2) NUMBER PERCENT
- ---------------------------------------------- --------- ------- --------- ---------- -------
<S> <C> <C> <C> <C> <C>
John M. Cook(3)(4)............................ 5,531,398 28.6% -- 4,564,793 21.4%
Cook Family Limited Partnership(3)............ 1,732,684 9.0 500,000 1,232,684 5.8
John M. Cook 1998 Revocable Trust(3).......... 1,000,000 5.2 466,605 533,395 2.5
John M. Toma(5)............................... 761,951 4.0 150,000 611,951 2.9
Donald E. Ellis, Jr.(6)....................... 2,000 * -- 2,000 *
Michael A. Lustig(7).......................... 28,130 * -- 28,130 *
Marc S. Eisenberg(8).......................... -- -- -- -- --
Tony G. Mills(9).............................. 1,798,007 9.3 -- 1,798,007 8.4
Stanley B. Cohen(10).......................... 900,000 4.7 250,000 650,000 3.1
Jonathan Golden(3)(11)........................ 1,082,928 5.6 200,000 882,928 4.2
Fred W. I. Lachotzki(12)...................... 14,000 * -- 14,000 *
E. James Lowrey(12)........................... 4,000 * -- 4,000 *
Berkshire Fund III(13)........................ 1,766,288 9.2 502,125 1,264,163 5.9
Bradley M. Bloom(13)(14)...................... 1,780,229 9.3 4,321 1,100,827 5.2
Jane Brock-Wilson(13)(14)..................... 1,773,949 9.2 2,374 1,096,236 5.2
Kevin T. Callaghan(13)(14).................... 1,773,949 9.2 2,374 1,096,494 5.2
J. Christopher Clifford(13)(14)(15)........... 1,792,129 9.3 3,687 1,113,361 5.2
Russell L. Epker(13)(14)...................... 1,778,185 9.3 3,687 1,099,417 5.2
Carl Ferenbach(13)(14)........................ 1,780,229 9.3 4,321 1,100,827 5.2
Garth H. Greimann(13)(14)..................... 1,773,949 9.3 -- 1,098,868 5.2
Ross M. Jones................................. 744 * 230 514 *
Ian K. Loring................................. 744 * 230 514 *
Richard K. Lubin Daughters' Trust dtd 8/18/91
fbo Emily(15)............................... 6,972 * 2,161 4,811 *
Richard K. Lubin Daughters' Trust dtd 8/18/91
fbo Kate(15)................................ 6,972 * 2,161 4,811 *
Robert J. Small............................... 2,554 * 791 1,763 *
Sally Shaps Trust............................. 134,375 * 62,500 71,875 *
Charles C. Kraft(16).......................... 126,540 * 58,770 67,770 *
Richard and Carol Leavitt Family Trust........ 18,750 * 9,375 9,375 *
Richard and Carol Leavitt Joint Tenants....... 2,750 * 2,750 -- --
Epargne Capitalisation Intermediare........... 114,359 * 114,359 -- --
Epargne Developpement......................... 57,179 * 57,179 -- --
All executive officers and directors as a
group (14 Persons)(17)...................... 11,889,881 61.1 2,068,730 9,821,151 45.8
</TABLE>
- ------------------------
* Less than one percent.
(1) Applicable percentage of ownership at March 11, 1998 is based upon
19,264,124 shares of Common Stock outstanding. Beneficial ownership is
determined in accordance with the rules of the Securities and Exchange
Commission and includes voting and investment power with respect to the
shares shown as beneficially owned. Shares of Common Stock subject to
options currently exercisable or exercisable
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<PAGE> 44
within 60 days are deemed outstanding for computing the percentage
ownership of the person holding such options, but are not deemed
outstanding for computing the percentage ownership of any other persons.
(2) Amounts indicated reflect actual number of shares offered and assumes no
exercise of the Underwriters' over-allotment option. In the event such
option is exercised in full, Mr. Cook will sell, through the John M. Cook
1998 Revocable Trust, an additional 533,395 shares and will beneficially
own 4,031,398 shares, or 18.9%, of the Common Stock outstanding after this
offering. Assuming the Underwriters' over-allotment option is exercised in
full, Berkshire Fund III will sell an additional 99,767 shares and will
beneficially own 1,164,396 shares, or 5.8%, of the Common Stock outstanding
after this offering. Assuming the Underwriters' over-allotment option is
exercised in full, Mr. Toma will sell, through the Toma Family Limited
Partnership, an additional 21,605 shares and will beneficially own 590,346
shares, or 2.8% of the Common Stock outstanding after this offering.
(3) The business address for the named individual or entity is 2300 Windy Ridge
Parkway, Suite 100 North, Atlanta, Georgia 30339-8426.
(4) Does not include shares held for the benefit of John M. Cook or M. Lucy
Cook for which Tony G. Mills is the trustee and has the sole investment and
voting power with respect to such shares. Includes 1,732,684 shares held by
the Cook Family Limited Partnership, for which Mr. Cook serves as the
general partner and 67,867 shares held by his spouse. Also includes
1,000,000 shares held by the John M. Cook 1998 Revocable Trust, for which
Mr. Cook is the trustee. Also includes 134,000 shares owned by Cook Family
Foundation, Inc., of which Mr. Cook, his spouse and members of his
immediate family are the directors and 74,706 shares subject to options
which either are currently exercisable or will become exercisable within 60
days from the date of this Prospectus.
(5) Includes 38,233 shares held for the benefit of Mr. Toma for which Tony G.
Mills and Mr. Toma's wife serve as co-trustees and the trustees share
investment and voting power with respect to such shares. Includes 218,870
shares held by the Toma Family Limited Partnership, for which Mr. Toma
serves as the general partner. Also includes 50,000 shares held by Mr.
Toma's wife, 3,901 shares held by the Mary Caitlin Cook Trust, of which Mr.
Toma is the trustee, and 40,000 shares subject to options which either are
exercisable or will become exercisable within 60 days from the date of this
Prospectus. Does not include shares held for the benefit of Mr. Toma's
children in the Michael Toma Family Trust and the Michelle Toma Family
Trust.
(6) The shares indicated represent options which are either currently
exercisable or exercisable within 60 days from the date of this Prospectus.
(7) Includes 27,100 shares subject to options which are either currently
exercisable or will become exercisable within 60 days from the date of this
Prospectus.
(8) Excludes 421,138 shares in which Mr. Eisenberg has a pecuniary interest,
but as to which Mr. Eisenberg disclaims beneficial ownership. Such shares
are held pursuant to commercial relationship with the record owner. Mr.
Eisenberg has informed the Company that he neither has nor shares voting or
investment power with respect to such shares and that he does not have the
right either to acquire such voting or investment power within 60 days or
to terminate the commercial relationship with the record holder within 60
days.
(9) Includes shares held by trusts containing 1,697,774 shares for the benefit
of Mr. Cook and his spouse of which Mr. Mills is the sole trustee and by
trusts containing 78,233 shares for the benefit of Mr. Toma and certain
members of his immediate family of which Mr. Mills is a co-trustee. Also
includes 22,000 shares subject to options which are either currently
exercisable or will become exercisable within 60 days from the date of this
Prospectus.
(10) Includes 188,472 shares held for the benefit of Mr. Cohen for which Shirley
L. Cohen, Mr. Cohen's spouse, is the trustee and has sole voting and
investment power with respect to such shares.
(11) Includes 129,935 shares held for the benefit of Mr. Golden for which
Roberta P. Golden is the trustee and has sole voting and investment power
with respect to such shares.
(12) Includes 4,000 shares subject to options which are either currently
exercisable or will become exercisable within 60 days from the date of this
Prospectus.
(13) The business address for the named individual or entity is Suite 3300, One
Boston Place, Boston, Massachusetts 02108-4401.
(14) Includes 1,766,288 shares held by Berkshire Fund III for which the general
partner is Third Berkshire Associates. Ms. Brock-Wilson and Messrs. Bloom,
Callaghan, Clifford, Epker, Ferenbach and Greimann serve as general
partners of Third Berkshire Associates. These individuals each disclaim
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<PAGE> 45
beneficial ownership of the shares owned by Berkshire Fund III, except to
the extent of their respective pecuniary interests therein.
(15) Includes shares held by Richard K. Lubin Daughters' Trust dtd 8/18/91 fbo
Emily and Richard K. Lubin Daughters' Trust dtd 8/18/91 fbo Kate, for which
Mr. Clifford serves as co-trustee and shares voting and investment power
with respect to such shares.
(16) Includes 9,000 shares subject to options which are either exercisable or
will become exercisable within 60 days from the date of this Prospectus.
(17) Includes options to purchase an aggregate of 193,806 shares which are
either currently exercisable or will become exercisable within 60 days from
the date of this Prospectus.
DESCRIPTION OF CAPITAL STOCK
The Company's authorized capital stock consists of 60,000,000 shares of
Common Stock, no par value, and 1,000,000 shares of Preferred Stock, no par
value ("Preferred Stock").
COMMON STOCK
At March 11, 1998, there were 19,264,124 shares of Common Stock outstanding
held of record by 146 shareholders. Immediately following the offering,
21,264,124 shares of Common Stock will be outstanding. Holders of Common Stock
are entitled to one vote for each share held of record on all matters submitted
to a vote of the shareholders. Holders of Common Stock do not have cumulative
voting rights; consequently, a holder of more than 50% of the shares of Common
Stock would be able to elect all of the Company's directors eligible for
election in a given year.
Subject to the preferences that may be applicable to any then outstanding
Preferred Stock, holders of Common Stock are entitled to receive ratably such
dividends, if any, as may be declared from time to time by the Board out of
funds legally available therefor. Upon any liquidation, dissolution or winding
up, whether voluntary or involuntary, of the Company, holders of Common Stock
are entitled to receive pro rata all assets available for distribution to
shareholders after payment or provision for payment of the debts and other
liabilities of the Company and the liquidation preferences of any then
outstanding Preferred Stock. There are no preemptive or other subscription
rights, conversion rights, or redemption or sinking fund provisions with respect
to shares of Common Stock. All outstanding shares of Common Stock are, and all
shares of Common Stock to be outstanding upon consummation of the offering will
be, fully paid and nonassessable. For a description of a provision eliminating
certain personal liability of directors, see "-- Certain Articles and Bylaw
Provisions."
PREFERRED STOCK
The Company is authorized to issue up to 1,000,000 shares of Preferred
Stock. Currently, no shares of Preferred Stock are issued or outstanding. The
Preferred Stock may be issued at any time or from time to time in one or more
series with such designations, powers, preferences, rights, qualifications,
limitations and restrictions (including dividend, conversion and voting rights)
as may be fixed by the Board, without any further vote or action by the
shareholders. Although the Company has no present plans to issue any Preferred
Stock, the ownership and control of the Company by the holders of the Common
Stock would be diluted if the Company were to issue Preferred Stock that had
voting rights or that was convertible into Common Stock. In addition, the
holders of Preferred Stock issued by the Company would be entitled by law to
vote on certain transactions such as a merger or consolidation, and thus the
issuance of Preferred Stock could dilute the voting rights of the holders of the
Common Stock on such issues. The issuance of Preferred Stock also could have the
effect of delaying, deferring or preventing a change in control of the Company.
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<PAGE> 46
CERTAIN ARTICLES AND BYLAW PROVISIONS
Shareholders' rights and related matters are governed by the Georgia
Business Corporation Code and the Company's Articles of Incorporation and
Bylaws. Certain provisions of the Articles of Incorporation and Bylaws of the
Company, which are summarized below, could either alone or in combination with
each other, have the effect of preventing a change in control of the Company or
making changes in management more difficult.
Corporate Takeover Provisions. The Company's Bylaws make applicable to the
Company provisions authorized by the Georgia Business Corporation Code relating
to business combinations with interested shareholders ("Corporate Takeover
Provisions"). The Corporate Takeover Provisions are designed to encourage any
person, before acquiring 10% of the Company's voting shares, to negotiate with
and seek approval of the Board of Directors for the terms of any contemplated
business combination. The Corporate Takeover Provisions will prevent for five
years certain business combinations with an "interested shareholder" (as defined
in the Corporate Takeover Provisions) unless (i) prior to the time such
shareholder became an interested shareholder, the Board of Directors approved
either the business combination or the transaction that resulted in the
shareholder becoming an interested shareholder, (ii) in the transaction that
resulted in the shareholder becoming an interested shareholder, the interested
shareholder became the beneficial owner of at least 90% of the outstanding
voting shares of the Company excluding, however, shares owned by the Company's
officers, directors, affiliates, subsidiaries and certain employee stock plans,
or (iii) subsequent to becoming an interested shareholder, such shareholder
acquired additional shares resulting in the interested shareholder becoming the
owner of at least 90% of the Company's outstanding voting shares and the
business combination being approved by the holders of a majority of the
Company's voting shares, excluding from the vote the stock owned by the
interested shareholder or by the Company's officers, directors, affiliates,
subsidiaries and certain employee stock plans. The Corporate Takeover Provisions
may be repealed only by the affirmative vote of (i) two-thirds of all directors
who are unaffiliated with an interested shareholder and (ii) a majority of all
outstanding shares, excluding those held by affiliates of an interested
shareholder. Shareholders of the Company who became interested shareholders
prior to the time of the adoption of the Corporate Takeover Provisions are not
subject to such provisions.
Issuance of Preferred Stock. The Company's Articles of Incorporation
permit the Board of Directors to issue shares of preferred stock of the Company
without shareholder approval, with the rights and privileges of such preferred
stock determined by the Board of Directors. Through the issuance of such
preferred stock, the Board could confer rights upon existing shareholders that
may make a takeover of the Company less desirable.
Classified Board of Directors. The Company's Board of Directors is divided
into three classes of directors serving staggered terms of three years each. As
a result, it will be more difficult to change the composition of the Company's
Board of Directors, which may discourage or make more difficult an attempt by a
person or group of persons to obtain control of the Company.
Transactions with Interested Shareholders. The Company's Bylaws provide
that the Company will be subject to the fair price provisions of the Georgia
Business Corporation Code (the "Fair Price Provisions"). The Fair Price
Provisions require that certain business combinations between the Company and
shareholders who beneficially own ten percent or more of the Company's
outstanding stock must satisfy certain conditions unless the business
combination is (i) unanimously approved by members of the Board of Directors who
are not affiliated with the interested shareholder, or (ii) recommended by
two-thirds of such unaffiliated directors and approved by a majority of
outstanding shares, excluding those held by affiliates of the interested
shareholder. The conditions to be satisfied require (a) that the aggregate of
the cash and "fair market value," as defined in the Georgia Business Corporation
Code, of property exchanged for shares equal to the highest of (i) the highest
per share price paid by the interested shareholder within certain periods, (ii)
the fair market value of the shares on the day the interested transaction is
announced or (iii) the highest preferential amount to which holders of such
shares would be entitled upon liquidation or dissolution of the Company; (b) the
interested shareholder acquires the shares using the same form of consideration
as used in any prior acquisition of the shares; and (c) there have not been
certain changes in the Company's dividend policy or practice since the
interested shareholder became an interested shareholder.
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<PAGE> 47
Special Meeting Call Restrictions. Under the Company's Articles of
Incorporation, special meetings of the shareholders may only be called by the
Chairman of the Board, the President, a majority of the Board of Directors or
upon the written demand of the holders of 35% of the outstanding shares of
Common Stock entitled to vote at any such meeting, provided that the Company has
more than 100 shareholders. If the Company has 100 or fewer shareholders, 25% of
the holders of the outstanding shares of Common Stock entitled to vote at a
meeting may submit written demand for such meeting. This provision may make it
more difficult to shareholders to require the Company to call a special meeting
of shareholders to consider any proposed corporate action, including any sale of
the Company, which may be favored by the shareholders.
Number of Directors, Removal, Filling Vacancies. Under the Company's
Bylaws, the Board of Directors determines the number of directors on the Board
and fills any newly created directorships or director vacancies, although
directors elected by the Board to fill vacancies may serve only until the next
annual meeting of shareholders at which directors are elected by the
shareholders to fill such vacancies.
Constituency Considerations. The Company's Articles of Incorporation
provide the Board of Directors the right to consider the interests of various
constituencies, including employees, clients and creditors of the Company, as
well as the communities in which the Company is located, in addition to the
interest of the Company and its shareholders, in discharging their duties in
determining what is in the Company's best interests.
Limitation of Directors' Liability. The Company's Articles of
Incorporation eliminate, subject to certain exceptions, the personal liability
of directors to the Company or its shareholders for monetary damages for
breaches of such directors' duty of care or other duties as a director. The
Articles do not provide for the elimination of or any limitation on the personal
liability of a director for (i) any appropriation, in violation of the
director's duties, of any business opportunity of the Company, (ii) acts or
omissions that involve intentional misconduct or a knowing violation of law,
(iii) unlawful corporate distributions, or (iv) any transaction from which the
director received an improper benefit. In addition, the Company's Bylaws provide
broad indemnification rights to directors and officers so long as the director
or officer acted in a manner believed in good faith to be in or not opposed to
the best interests of the Company, and with respect to criminal proceedings, if
the director had no reasonable cause to believe his or her conduct was unlawful.
The personal liability of directors for monetary damages for violations of
federal securities laws is not affected by these provisions. These provisions of
the Articles and Bylaws will limit the remedies available to a shareholder who
is dissatisfied with a Board decision protected by these provisions, and such
shareholder's only remedy in that circumstance may be to bring a suit to prevent
the Board's action. In many situations, this remedy may not be effective, as,
for example, when shareholders have no prior awareness of the Board's
consideration of the particular transaction or event.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Company's Common Stock is First
Union National Bank.
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering, the Company will have 21,264,124 shares
of Common Stock outstanding. Substantially all of these shares will be
transferable without restriction or registration under the Securities Act or
pursuant to the volume and other limitations of Rule 144 promulgated under the
Securities Act as described below.
SALES OF RESTRICTED SHARES
Approximately 8,941,049 Lock-up Shares are subject to lock-up agreements
between the holders thereof and the representatives of the Underwriters,
pursuant to which the holders of the Lock-up Shares have agreed not to offer,
sell, contract to sell or grant any option to purchase or otherwise dispose of
Common Stock until after the 90 day Lock-up Period, subject to limited
exceptions. See "Underwriting." Following the expiration
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<PAGE> 48
of the Lock-up Period, substantially all of the Lock-up Shares will become
available for immediate resale in the public market subject to the volume and
other limitations of Rule 144. In connection with the APRSI, Hale, Alma and
TradeCheck transactions, an additional 714,737 shares of Common Stock are
subject to contractual lock-up provisions with the Company that will expire
beyond the Lock-up Period.
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated) who has beneficially owned Restricted Shares for at
least one year, including a person who may be deemed an Affiliate of the
Company, is entitled to sell, within any three-month period, a number of shares
of Common Stock that does not exceed the greater of one percent of the
then-outstanding shares of Common Stock of the Company (approximately 212,641
shares after giving effect to this offering) and the average weekly reported
trading volume of the Company's Common Stock during the four calendar weeks
preceding such sale. Sales under Rule 144 are subject to certain restrictions
relating to manner of sale, notice and availability of current public
information about the Company. In addition, under Rule 144(k), a person who is
not an Affiliate and has not been an Affiliate at any time during the 90 days
preceding a sale, and who has beneficially owned shares for at least two years,
would be entitled to sell such shares immediately following this offering
without regard to the volume limitations, manner of sale provisions or notice or
other requirements of Rule 144 of the Securities Act. The transfer agent,
however, may require an opinion of counsel that a proposed sale of shares comes
within the terms of Rule 144 of the Securities Act prior to effecting a transfer
of such shares. Such opinion would be provided by and at the cost of the
transferor.
OPTIONS
At March 11, 1998, options to purchase a total of 2,531,293 shares of
Common Stock pursuant to the 1996 Plan were outstanding, of which 348,746 were
exercisable. Of the shares subject to options, 597,193 are subject to lock-up
agreements. Upon completion of this offering, an additional 837,507 shares of
Common Stock will be available for future option grants under the 1996 Plan. In
January 1998, the Board approved, subject to shareholder approval, an additional
1,000,000 shares of Common Stock to be reserved for issuance under the 1996
Plan. See "Management -- Option Grants Table" and "-- 1996 Stock Option Plan."
STOCK PURCHASE PLAN
In May 1997, the Company adopted the Stock Purchase Plan. The aggregate
number of shares of Common Stock that may be purchased by all participants under
the Stock Purchase Plan may not exceed 750,000, subject to certain adjustments.
At March 11, 1998, 32,348 shares of Common Stock had been purchased under the
Stock Purchase Plan. See "Management -- Employee Stock Purchase Plan."
REGISTRATION RIGHTS
Pursuant to agreements with certain shareholders entered into in connection
with the reorganization of the Company before its initial public offering,
holders of 1,865,633 shares of Common Stock (the "Registrable Securities") have
certain rights with respect to the registration of such shares under the
Securities Act. If, at any time, the Company proposes to register any of its
securities under the Securities Act (with certain limited exceptions), such
persons will be entitled to notice of such registration and to include their
shares of Common Stock in such registration. The underwriters of any offering
have the right to limit the number of shares to be included in such registration
by such persons if the underwriters state in writing that they are unwilling to
include any or all of such securities in the proposed underwriting because such
inclusion will materially interfere with the orderly sale and distribution of
the securities being offered by the Company. Generally, the Company is required
to bear the expenses of all such registrations, except that holders of
Registrable Securities will be required to bear their pro rata share of the
underwriters' discounts and filing fees related to the inclusion of such
Registrable Securities in such registration statement.
In addition, the holders of the Registrable Securities have the right to
require the Company on one occasion to file a registration statement under the
Securities Act with respect to Registrable Securities owned by them provided the
net proceeds in such offering shall exceed a minimum stated amount. Following
notice by the Company to the other holders of Registrable Securities that
certain of such holders have exercised their demand registration rights, such
other holders will have the option of including their Registrable Securities in
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<PAGE> 49
such registration statement upon approval of a majority of the holders so
requesting registration. The Company will be required to use its best efforts to
effect such registration, subject to certain conditions and limitations. The
holders of the Registrable Securities also are entitled to demand on three
occasions that the Company register their shares of Common Stock on a Form S-3
or "short-form" registration statement. These holders are entitled to request no
more often than once every 12 months that their Registrable Securities be
registered for resale on a Form S-3. All demand registration rights of these
holders expire on March 26, 1999. Generally, the Company is required to bear the
expenses of all requested registration statements, except that holders of
Registrable Securities will be required to bear their pro rata share of the
underwriters' discounts and filing fees attributable to the inclusion of such
Registrable Securities in such registration statement.
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<PAGE> 50
UNDERWRITING
The Underwriters named below (the "Underwriters"), acting through their
representatives, BancAmerica Robertson Stephens, Hambrecht & Quist LLC and The
Robinson-Humphrey Company, LLC (the "Representatives"), have severally agreed
with the Company and the Selling Shareholders, subject to the terms and
conditions of the Underwriting Agreement, to purchase from the Company and the
Selling Shareholders the respective number of shares of Common Stock set forth
opposite their names below. The Underwriters are committed to purchase and pay
for all shares if any are purchased.
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SHARES
- ----------- ---------
<S> <C>
BancAmerica Robertson Stephens..............................
Hambrecht & Quist LLC.......................................
The Robinson-Humphrey Company, LLC..........................
---------
Total............................................. 4,400,000
=========
</TABLE>
The nature of the Underwriters' obligation under the Underwriting Agreement
is such that all shares of Common Stock being offered, excluding shares covered
by the over-allotment option granted to the Underwriters, must be purchased if
any shares of Common Stock are purchased.
The Company and the Selling Shareholders have been advised by the
Representatives that the Underwriters initially propose to offer the shares of
Common Stock to the public at the public offering price set forth on the cover
page of this Prospectus and to certain dealers at such price less a concession
of not more than $ per share, of which $ may be reallowed to
other dealers. After the public offering, the public offering price, concession
and reallowance to dealers may be reduced by the Representatives. No such
reduction shall change the amount of proceeds to be received by the Company or
the Selling Shareholders as set forth on the cover page of this Prospectus.
Certain Selling Shareholders have granted to the Underwriters an option,
exercisable during the 30-day period after the date of this Prospectus, to
purchase up to 660,000 additional shares of Common Stock to cover
over-allotments, if any, at the same price per share as the Company and the
Selling Shareholders will receive for the 4,400,000 shares that the Underwriters
have agreed to purchase. To the extent that the Underwriters exercise such
option, each of the Underwriters will have made a firm commitment to purchase
approximately the same percentage of such additional shares that the number of
shares of Common Stock to be purchased by it shown in the above table represents
as a percentage of the 4,400,000 offered hereby. If purchased, such additional
shares will be sold by the Underwriters on the same terms as those on which the
4,400,000 shares are being sold.
The Underwriting Agreement contains covenants of indemnity among the
Underwriters, the Company and the Selling Shareholders against certain civil
liabilities, including liabilities under the Securities Act and liabilities
arising from breaches of representations and warranties contained in the
Underwriting Agreement.
The Company, its directors, executive officers and certain shareholders
have agreed that, subject to certain limited exceptions, they will not, for a
period of 90 days after the date of this Prospectus, sell, offer to sell,
contract to sell or otherwise dispose of any of their shares of Common Stock
(except for sales described in or contemplated by this Prospectus) or other
securities of the Company without the prior written consent of BancAmerica
Robertson Stephens.
The Underwriters do not intend to confirm sales to accounts over which they
exercise discretionary authority.
The Representatives of the Underwriters have advised the Company that,
pursuant to Regulation M under the Securities Act, certain persons participating
in the offering may engage in transactions, including stabilizing bids,
syndicate covering transactions or the imposition of penalty bids, which may
have the effect of stabilizing or maintaining the market price of the Common
Stock at a level above that which might otherwise prevail in the open market. A
"stabilizing bid" is a bid for or the purchase of the Common Stock on behalf of
the Underwriters for the purpose of fixing or maintaining the price of the
Common Stock. A "syndicate
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<PAGE> 51
covering transaction" is the bid for or the purchase of the Common Stock on
behalf of the Underwriters to reduce a short position incurred by the
Underwriters in connection with the offering. A "penalty bid" is an arrangement
permitting the Representatives to reclaim the selling commission otherwise
accruing to an Underwriter or syndicate member in connection with the offering
if the Common Stock originally sold by such Underwriter or syndicate member is
purchased by the Representatives in a syndicate covering transaction and has
therefore not been effectively placed by such Underwriter or syndicate member.
The Representatives have advised the Company that such transactions may be
effected on The Nasdaq Stock Market or otherwise and, if commenced, may be
discontinued at any time.
As permitted by Rule 103 under the Exchange Act, Underwriters or
prospective Underwriters that are market makers ("passive market makers") in the
Common Stock may make bids for or purchases of Common Stock on The Nasdaq Stock
Market until such time, if any, when a stabilizing bid for such securities has
been made. Rule 103 generally provides that: (i) a passive market maker's net
daily purchases of the Common Stock may not exceed 30% of its average daily
trading volume in such securities for the two full consecutive calendar months
(or any 60 consecutive days ending within the ten days) immediately preceding
the filing date of the registration statement of which this Prospectus forms a
part; (ii) a passive market maker may not effect transactions or display bids
for the Common Stock at a price that exceeds the highest independent bid for the
Common Stock by persons who are not passive market makers; and (iii) bids made
by passive market makers must be identified as such.
LEGAL MATTERS
Certain legal matters with respect to the validity of the shares of Common
Stock will be passed upon for the Company and the Selling Shareholders by Long
Aldridge & Norman LLP, Atlanta, Georgia. Certain legal matters related to the
offering will be passed upon for the Underwriters by Alston & Bird LLP, Atlanta,
Georgia.
EXPERTS
The Consolidated Financial Statements of the Company as of December 31,
1996 and 1997, and for each of the years in the three-year period ended December
31, 1997, have been included herein or incorporated by reference and in the
Registration Statement in reliance upon the reports of KPMG Peat Marwick LLP,
independent auditors, appearing elsewhere herein or incorporated by reference,
and upon the authority of said firm as experts in accounting and auditing.
The Consolidated Financial Statements of Financiere Alma, S.A. and
subsidiaries as of December 31, 1995 and 1996 and June 30, 1997, and for each of
the years in the two-year period ended December 31, 1996 and the six months
ended June 30, 1997, have been included herein and in the Registration Statement
in reliance upon the report of ERNST & YOUNG Entrepreneurs, appearing elsewhere
herein, and upon the authority of said firm as experts in accounting and
auditing.
The Consolidated Financial Statements of Financiere Alma, S.A. and
subsidiaries as of December 31, 1997 and for the three months ended December 31,
1997 (not presented separately herein) have been incorporated herein and in the
Registration Statement in reliance upon the report of ERNST & YOUNG
Entrepreneurs, appearing elsewhere herein or incorporated by reference, and upon
the authority of said firm as experts in accounting and auditing.
ADDITIONAL INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files reports, proxy statements and other information with the
Securities and Exchange Commission (the "Commission"). Such reports, proxy
statements and other information filed by the Company may be inspected and
copied at prescribed rates at the public reference facilities maintained by the
Commission at Room 1024, Judiciary Plaza, 450 Fifth
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<PAGE> 52
Street, N.W., Washington, DC 20549, and should also be available for inspection
and copying at the following regional offices of the Commission: Seven World
Trade Center, 13th Floor, New York, New York 10048; and Northwestern Atrium
Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661-2511. Such
material also may be accessed electronically by means of the Commission's home
page on the Internet at http://www.sec.gov. Quotations relating to the Common
Stock appear on The Nasdaq Stock Market's National Market. Such reports, proxy
statements and other information concerning the Company also can be inspected at
the offices of the Nasdaq National Market, 1735 K Street, N.W., Washington, DC
20006.
The Company has filed with the Commission a Registration Statement on Form
S-3 (the "Registration Statement") under the Securities Act with respect to the
shares of Common Stock offered hereby. This Prospectus, which is a part of the
Registration Statement, omits certain of the information set forth in, or
annexed as exhibits to, the Registration Statement, certain portions of which
have been omitted pursuant to the rules and regulations of the Commission. For
further information with respect to the Company and the shares of Common Stock
offered hereby, reference is hereby made to the Registration Statement and the
related exhibits thereto. Copies of the Registration Statement, including
exhibits, may be obtained from the aforementioned public reference facilities of
the Commission upon payment of the prescribed fees, or may be examined without
charge at such facilities. Statements contained herein concerning any document
filed as an exhibit are necessarily summaries, and in each such instance
reference is made to the copy of such document filed as an exhibit to the
Registration Statement. Each such statement is qualified in its entirety by such
reference.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents filed by the Company with the Commission under the
Exchange Act are incorporated by reference in and made a part of this
Prospectus:
(a) The Company's Annual Report on Form 10-K for the year ended
December 31, 1997, as amended; and
(b) The description of the Common Stock contained in the Company's
Registration Statement on Form 8-A dated March 26, 1996 (Commission File
No. 0-28000).
All documents filed by the Company pursuant to Section 13(a), 13(c), 14 or
15(d) of the Exchange Act subsequent to the date hereof and prior to the
termination of this Offering shall be deemed to be incorporated by reference
herein and to be a part hereof from the date of filing of such documents. Any
statement contained in a document incorporated or deemed to be incorporated by
reference herein shall be deemed to be modified or superseded for purposes of
this Prospectus to the extent that a statement contained herein, or any other
subsequently filed document, which also is incorporated or deemed to be
incorporated by reference herein, modifies or supersedes such statement. Any
such statement so modified or superseded shall not be deemed, except as so
modified or superseded, to constitute a part of this Prospectus.
This Prospectus incorporates documents by reference which are not presented
herein or delivered herewith. The Company hereby undertakes to provide, without
charge, to each person, including any beneficial owner, to whom a copy of this
Prospectus is delivered, on the written or oral request of such person, a copy
of any or all of the information incorporated herein by reference. Exhibits to
any of such documents, however, will not be provided unless such exhibits are
specifically incorporated by reference into such documents. The request should
be addressed to the Company's principal executive offices, attention: Secretary,
2300 Windy Ridge Parkway, Suite 100 North, Atlanta, Georgia 30339-8426,
telephone number (770) 955-3815.
51
<PAGE> 53
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
NUMBER
------
<S> <C>
THE PROFIT RECOVERY GROUP INTERNATIONAL, INC. AND
SUBSIDIARIES HISTORICAL:
Independent Auditors' Reports............................... F-2
Consolidated Statements of Earnings for the years ended
December 31, 1995, 1996 and 1997.......................... F-4
Consolidated Balance Sheets as of December 31, 1996 and
1997...................................................... F-5
Consolidated Statements of Shareholders' Equity (Deficit)
for the years ended December 31, 1995, 1996 and 1997...... F-6
Consolidated Statements of Cash Flows for the years ended
December 31, 1995, 1996 and 1997.......................... F-7
Notes to Consolidated Financial Statements.................. F-8
PRO FORMA:
Unaudited Pro Forma Consolidated Financial Information...... F-23
Unaudited Pro Forma Consolidated Statement of Earnings for
year ended December 31, 1996.............................. F-24
Unaudited Pro Forma Consolidated Statement of Earnings for
nine months ended September 30, 1997...................... F-25
Notes to Unaudited Pro Forma Consolidated Statements of
Earnings.................................................. F-26
Unaudited Pro Forma Condensed Consolidated Balance Sheet as
of September 30, 1997..................................... F-27
Notes to Unaudited Pro Forma Condensed Consolidated Balance
Sheet..................................................... F-28
FINANCIERE ALMA, S.A. AND SUBSIDIARIES
Independent Auditors' Report................................ F-29
Consolidated Statements of Earnings for the years ended
December 31, 1995 and 1996, the six months ended June 30,
1997 and the nine months ended September 30, 1996 and
1997...................................................... F-30
Consolidated Balance Sheets as of December 31, 1995 and
1996, June 30, 1997 and September 30, 1997................ F-31
Consolidated Statements of Shareholders' Equity for years
ended December 31, 1995 and 1996, six months ended June
30, 1997 and nine months ended September 30, 1997......... F-32
Consolidated Statements of Cash Flows for the years ended
December 31, 1995 and 1996, six months ended June 30, 1997
and nine months ended September 30, 1996 and 1997......... F-33
Notes to Consolidated Financial Statements.................. F-34
</TABLE>
F-1
<PAGE> 54
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
The Profit Recovery Group International, Inc.:
We have audited the accompanying Consolidated Balance Sheets of The Profit
Recovery Group International, Inc. and subsidiaries as of December 31, 1996 and
1997, and the related Consolidated Statements of Earnings, Shareholders' Equity
(Deficit), and Cash Flows for each of the years in the three-year period ended
December 31, 1997. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits. We did
not audit the consolidated financial statements of Financiere Alma, S.A. and
subsidiaries, which financial statements reflect total assets constituting 12%
and total revenues constituting 6% in 1997 of the related consolidated totals.
Those financial statements where audited by other auditors whose report has been
furnished to us, and our opinion, insofar as it relates to the amounts included
for Financiere Alma, S.A. and subsidiaries, is based solely on the report of the
other auditors.
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 and the report of the other auditors provide a
reasonable basis for our opinion.
In our opinion, based on our audits and the report of the other auditors,
the consolidated financial statements referred to above present fairly, in all
material respects, the financial position of The Profit Recovery Group
International, Inc. and subsidiaries as of December 31, 1996 and 1997, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1997 in conformity with generally accepted
accounting principles.
KPMG Peat Marwick LLP
Atlanta, Georgia
January 31, 1998
F-2
<PAGE> 55
INDEPENDENT AUDITORS' REPORT
The Directors and Shareholders of
Financiere Alma, S.A.
We have audited the accompanying consolidated balance sheet of Financiere
Alma, S.A. and subsidiaries as of December 31, 1997 and the related consolidated
statements of earnings, shareholders' equity and cash flows for the three months
ended December 31, 1997. 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 audit.
We conducted our audit in accordance with auditing standards generally
accepted in the United States. 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 audit provides a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Financiere
Alma, S.A. and subsidiaries as of December 31, 1997, and the results of their
operations and their cash flows for the three months ended December 31, 1997 in
conformity with accounting principles generally accepted in the United States.
ERNST & YOUNG Entrepreneurs
Departement d'E&Y Audit
Any Antola
Paris, France
January 31, 1998
F-3
<PAGE> 56
THE PROFIT RECOVERY GROUP INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------
1995 1996 1997
------- ------- --------
(IN THOUSANDS, EXCEPT PER
SHARE DATA)
<S> <C> <C> <C>
HISTORICAL
Revenues.................................................... $56,031 $77,330 $112,363
Cost of revenues............................................ 30,554 40,330 57,726
Selling, general, and administrative expenses (Note 2)...... 19,035 25,961 37,254
Restructuring costs (Note 14)............................... -- -- 1,208
------- ------- --------
Operating income.................................. 6,442 11,039 16,175
Interest (expense), net (Note 2)............................ (1,630) (100) (403)
------- ------- --------
Earnings before income taxes...................... 4,812 10,939 15,772
Income taxes (Note 5)....................................... 305 7,789 6,149
------- ------- --------
Net earnings...................................... $ 4,507 $ 3,150 $ 9,623
======= ======= ========
PRO FORMA
Historical earnings before income taxes..................... $ 4,812 $10,939
Pro forma income taxes (Note 5)............................. 1,877 4,271
------- -------
Pro forma net earnings............................ $ 2,935 $ 6,668
======= =======
PER SHARE (Note 13)
Earnings (pro forma earnings for 1995 and 1996) per
share -- basic............................................ $ .24 $ .41 $ .52
======= ======= ========
Earnings (pro forma earnings for 1995 and 1996) per
share -- diluted.......................................... $ .21 $ .39 $ .51
======= ======= ========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
F-4
<PAGE> 57
THE PROFIT RECOVERY GROUP INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1996 1997
-------- --------
(IN THOUSANDS,
EXCEPT
SHARE AND PER SHARE
DATA)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 16,891 $ 19,386
Receivables:
Billed contract receivables............................. 3,864 12,100
Unbilled contract receivables........................... 30,734 41,771
Employee advances....................................... 1,363 2,299
-------- --------
Total receivables.................................. 35,961 56,170
-------- --------
Refundable income taxes................................... 2,049 --
Prepaid expenses and other current assets................. 528 2,430
-------- --------
Total current assets............................... 55,429 77,986
-------- --------
Property and equipment:
Computer and other equipment.............................. 5,753 10,658
Furniture and fixtures.................................... 1,569 2,111
Leasehold improvements.................................... 1,183 1,760
-------- --------
8,505 14,529
Less accumulated depreciation and amortization............ 2,272 5,760
-------- --------
6,233 8,769
-------- --------
Noncompete agreements, less accumulated amortization of
$2,759 in 1996 and $3,797 in 1997......................... 4,509 3,471
Deferred loan costs, less accumulated amortization of $8 in
1996 and $40 in 1997...................................... 56 24
Goodwill, less accumulated amortization of $157 in 1996 and
$986 in 1997.............................................. 393 39,591
Deferred income taxes (Note 5).............................. 1,174 3,585
Other assets................................................ 524 459
-------- --------
$ 68,318 $133,885
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Notes payable to bank..................................... $ -- $ 81
Current installments of long-term debt (Note 3)........... 79 1,428
Accounts payable and accrued expenses..................... 1,383 4,835
Accrued payroll and related expenses...................... 16,356 26,075
Deferred income taxes (Note 5)............................ 7,607 9,917
Deferred revenue.......................................... -- 1,087
-------- --------
Total current liabilities.......................... 25,425 43,423
Long-term debt, excluding current installments (Note 3)..... 692 24,365
Deferred compensation (Note 6).............................. 1,642 2,563
Other long-term liabilities................................. -- 462
-------- --------
Total liabilities.................................. 27,759 70,813
-------- --------
Shareholders' equity (Notes 3 and 9):
Preferred stock, no par value. Authorized 1,000,000
shares; none issued or outstanding in 1996 and 1997..... -- --
Common stock, no par value; $.001 stated value per share.
Authorized 60,000,000 shares; issued and outstanding
17,649,152 shares in 1996 and 19,193,676 shares in
1997.................................................... 18 19
Additional paid-in capital................................ 34,188 48,195
Cumulative translation adjustments........................ (31) (1,149)
Retained earnings......................................... 6,384 16,007
-------- --------
Total shareholders' equity......................... 40,559 63,072
Commitments (Notes 2, 3, 4 and 8)
-------- --------
$ 68,318 $133,885
======== ========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
F-5
<PAGE> 58
THE PROFIT RECOVERY GROUP INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
<TABLE>
<CAPTION>
RETAINED TOTAL
ADDITIONAL CUMULATIVE EARNINGS SHAREHOLDERS'
COMMON PAID-IN SUBSCRIPTIONS TRANSLATION (ACCUMULATED EQUITY
STOCK CAPITAL RECEIVABLE ADJUSTMENTS DEFICIT) (DEFICIT)
------ ---------- ------------- ----------- ------------ -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31,
1994....................... $ 57 $ -- $(3) $ (56) $ 2,358 $ 2,356
Net earnings................. -- -- -- -- 4,507 4,507
Proceeds from subscription
receivable................. -- -- 3 -- -- 3
Effect of reorganization
(Note 1(a))................ -- (1,550) -- -- 1,550 --
Distributions................ -- -- -- -- (10,716) (10,716)
Cumulative translation
adjustments................ -- -- -- 5 -- 5
Issuance of common stock in
acquisition of Fial &
Associates, Inc............ 1 442 -- -- -- 443
---- -------- --- ------- ------- -------
BALANCE AT DECEMBER 31,
1995....................... 58 (1,108) -- (51) (2,301) (3,402)
Net earnings................. -- -- -- -- 3,150 3,150
Effect of stock split........ (57) 57 -- -- -- --
Issuance of shares under
employee stock option
plans...................... -- 132 -- -- -- 132
Tax effect of issuance of
option shares to
employees.................. -- 115 -- -- -- 115
Effect of reorganization,
including termination of
Subchapter S and
partnership status (Note
1(a))...................... 2 (10,464) -- 51 10,411 --
Distributions................ -- -- -- -- (4,876) (4,876)
Cumulative translation
adjustments................ -- -- -- (31) -- (31)
Issuance of common stock..... 4 34,008 -- -- -- 34,012
Conversion of 5% convertible
debentures................. 11 11,448 -- -- -- 11,459
---- -------- --- ------- ------- -------
BALANCE AT DECEMBER 31,
1996....................... 18 34,188 -- (31) 6,384 40,559
Net earnings................. -- -- -- -- 9,623 9,623
Issuance of shares under
employee stock option
plans...................... -- 366 -- -- -- 366
Tax effect of issuance of
option shares to
employees.................. -- 263 -- -- -- 263
Cumulative translation
adjustments................ -- -- -- (1,118) -- (1,118)
Issuance of common stock in
acquisitions of
businesses................. 1 13,378 -- -- -- 13,379
---- -------- --- ------- ------- -------
BALANCE AT DECEMBER 31,
1997....................... $ 19 $ 48,195 $-- $(1,149) $16,007 $63,072
==== ======== === ======= ======= =======
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
F-6
<PAGE> 59
THE PROFIT RECOVERY GROUP INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------
1995 1996 1997
-------- -------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings.............................................. $ 4,507 $ 3,150 $ 9,623
Adjustments to reconcile net earnings to net cash provided
by operating activities:
Depreciation and amortization.......................... 1,810 2,460 4,755
Loss on sale of property and equipment................. 79 -- 26
Deferred compensation expense.......................... 474 606 920
Deferred income taxes.................................. 305 6,823 1,703
Foreign translation adjustments........................ 5 (31) (1,118)
Changes in assets and liabilities, net of effect of
acquisition:
Receivables.......................................... (6,755) (16,237) (12,388)
Refundable income taxes.............................. -- (2,049) 1,325
Prepaid expenses and other current assets............ (237) (226) (929)
Other assets......................................... (132) (316) 20
Accounts payable and accrued expenses................ 957 (816) (452)
Accrued payroll and related expenses................. 1,518 8,520 4,644
Deferred revenue..................................... -- -- 103
Other long-term liabilities.......................... -- -- (16)
-------- -------- -------
Net cash provided by operating activities......... 2,531 1,884 8,216
-------- -------- -------
Cash flows from investing activities:
Purchases of property and equipment....................... (2,048) (5,076) (4,655)
Acquisition of businesses................................. (550) -- (26,096)
Net decrease in notes receivable from affiliates.......... 11 -- --
-------- -------- -------
Net cash used in investing activities............. (2,587) (5,076) (30,751)
-------- -------- -------
Cash flows from financing activities:
Net increase in (repayments of) note payable to bank...... 1,763 (1,763) (66)
Proceeds from issuance of long-term debt.................. 12,800 -- 24,750
Proceeds from loans from shareholders..................... -- 2,600 --
Repayments of long-term debt.............................. (2,853) (7,104) (20)
Payments of deferred loan costs........................... (1,000) -- --
Repayments of loans from shareholders..................... (580) (3,675) --
Net proceeds from common stock............................ 1 34,259 366
Distributions............................................. (10,717) (4,876) --
-------- -------- -------
Net cash provided by (used in) financing
activities...................................... (586) 19,441 25,030
-------- -------- -------
Net change in cash and cash equivalents........... (642) 16,249 2,495
Cash and cash equivalents at beginning of year.............. 1,284 642 16,891
-------- -------- -------
Cash and cash equivalents at end of year.................... $ 642 $ 16,891 $19,386
======== ======== =======
Supplemental disclosure of cash flow information:
Cash paid during the year for interest.................... $ 1,207 $ 1,091 $ 592
======== ======== =======
Cash paid during the year for income taxes, net of refunds
received............................................... $ -- $ 3,585 $ 3,266
======== ======== =======
Supplemental disclosure of noncash investing and financing
activities:
In 1997, the Company purchased all the outstanding stock
of four companies and the majority of the outstanding
stock of a foreign company. In conjunction with the
acquisitions, the Company assumed liabilities as
follows:
Fair value of assets acquired............................................... $50,619
Cash paid for the acquisitions.............................................. (26,096)
Fair value of shares issued for acquisitions................................ (13,379)
-------
Liabilities assumed.................................................... $11,144
=======
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
F-7
<PAGE> 60
THE PROFIT RECOVERY GROUP INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1996 AND 1997
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Description of Business and Basis of Presentation
Description of Business
The principal business of The Profit Recovery Group International, Inc. and
subsidiaries (the "Company") is providing accounts payable and other recovery
audit services to large retailers, wholesale distributors, healthcare providers,
technology companies and other large transaction-intensive companies, as well as
to certain governmental agencies. The Company provides its services throughout
North America, Western Europe, and Southeast Asia.
On March 26, 1996, the Company completed the initial public offering of its
common stock.
Basis of Presentation
Prior to a reorganization in April 1995, the Company was a combination of
the following eight entities with common control: The Profit Recovery Group,
Inc. ("PRG"); The Profit Recovery Group International, L.P. ("PRG L.P."); PRG
International Inc.; The Profit Recovery Group Asia, Inc. ("Asia"); The Profit
Recovery Group Canada, Inc. ("Canada"); The Profit Recovery Group France, Inc.
("France"); The Profit Recovery Group Mexico, Inc. ("Mexico"); and The Profit
Recovery Group U.K., Inc. ("UK").
The April 1995 reorganization principally included the contribution of the
capital stock in Asia, Canada, France, Mexico, and the UK (collectively referred
to as the "Foreign Operating Companies") to a newly formed subsidiary of PRG
L.P., PRG International Holding Co. ("PRG Holdco"). Subsequent to this
reorganization, the Company was a combination of the following three entities
with common ownership: The Profit Recovery Group International I, Inc.
("PRGI" -- formerly PRG), PRG L.P., and PRG Holdco and its five wholly owned
subsidiaries, which are the Foreign Operating Companies. All reorganization
transactions were between parties under common control and, accordingly, were
accounted for in a manner similar to that in a pooling-of-interests.
In connection with the Company's March 1996 initial public offering of its
common stock, a further reorganization was effected. Immediately subsequent to
this reorganization, the Company consisted of The Profit Recovery Group
International, Inc. as the publicly traded parent company and seven wholly owned
subsidiaries: PRGI, Asia, Canada, France, Mexico, UK, and The Profit Recovery
Group Belgium, Inc. ("Belgium"). All reorganization transactions were between
parties under common control and, accordingly, were accounted for in a manner
similar to that in a pooling-of-interests. Upon completion of the March 1996
reorganization, United States operations were conducted through PRGI and the
international operations through the other six subsidiaries. Various additional
operating entities, both domestic and international, have been acquired or
established subsequent to the March 1996 reorganization.
(b) Principles of Consolidation
The consolidated financial statements of the Company in 1996 and 1997, and
the combined financial statements of the Company for 1995 include the financial
statements of the aforementioned entities. All significant intercompany balances
and transactions have been eliminated in consolidation or combination.
Management of the Company has made a number of estimates and assumptions
relating to the reporting of assets and liabilities and the disclosure of
contingent assets and liabilities to prepare these financial statements in
conformity with generally accepted accounting principles. Actual results could
differ from those estimates. A material estimate that is particularly
susceptible to change is the estimation of uncollectible claims (see (c) Revenue
Recognition).
F-8
<PAGE> 61
THE PROFIT RECOVERY GROUP INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(c) 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's
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. These guidelines are unique to each client and impose specific
requirements on the Company such as adherence to vendor interaction protocols,
provision of advance written notification to vendors of forthcoming claims,
securing written claim validity concurrence from designated client personnel
and, in limited cases, securing written claim validity concurrence from the
involved vendors. The Company defers revenue recognition until client
guidelines, of whatever nature, have been satisfied.
Accepted claims basis of revenue recognition
With respect to accounts payable and ancillary audit services for
retailers, wholesale distributors and governmental agencies (the Company's
historical client base), the Company recognizes revenues at the time overpayment
claims are presented to and approved by its clients, as adjusted for estimated
uncollectible claims.
For accounts payable and ancillary audit services provided to retailers,
wholesale distributors and governmental agencies, the Company believes that it
has completed substantially all contractual obligations to its client at the
time an identified and documented claim which satisfies all client-imposed
guidelines is presented to, and approved by, appropriate client personnel. The
Company further believes that at the time a claim is submitted and accepted by
its client, such claim represents a valid overpayment due to the client from its
vendor. Accordingly, the Company believes that it is entitled to its fee upon
acceptance of such claim by its client, subject to (a) customary and routine
claim disallowance adjustments by the vendor resulting primarily from the
receipt of previously unknown information, and (b) applicable laws.
Disallowances of client-approved claims are susceptible to experience-based
estimation.
The Company's standard client contract for accounts payable and ancillary
audit services provided to retailers, wholesale distributors and governmental
agencies imposes a duty on the client to process promptly all claims against
vendors. In the interest of vendor relations, however, many clients modify the
standard client contract with the Company to provide that they retain discretion
whether to pursue collection of a claim. In the Company's experience, it is
extremely unusual for a client to forego the collection of a large, valid claim.
In some cases, a vendor may dispute a claim by providing additional
documentation or information supporting its position. Consequently, many clients
revise the Company's standard client contract to clarify that the Company is not
entitled to payment of its fee until the client recovers the claim from its
vendor.
Submitted claims for accounts payable and ancillary audit services provided
to retailers, wholesale distributors and governmental agencies that are not
approved by clients for whatever reason are not considered when recognizing
revenues. Estimated uncollectible claims are initially established, and
subsequently adjusted, for each individual client based on historical collection
rates, types of claims identified, current industry conditions, and other
factors which, in the opinion of management, deserve recognition. The Company
records revenues for accounts payable and ancillary audit services provided to
retailers, wholesale distributors and governmental agencies at estimated net
realizable value without reserves. Accordingly, adjustments to uncollectible
claim estimates are directly charged or credited to earnings, as appropriate.
Approved claims for accounts payable and ancillary audit services provided
to retailers, wholesale distributors and governmental agencies are processed by
clients and generally taken as credits against outstanding payables or future
purchases from the vendors involved. Once credits are taken, the Company
F-9
<PAGE> 62
THE PROFIT RECOVERY GROUP INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
invoices its clients for a contractually stipulated percentage of the amounts
recovered. The Company's contract receivables for accounts payable and ancillary
audit services provided to retailers, wholesale distributors and governmental
agencies are largely unbilled because it does not control (a) the timing of a
client's claims processing activities, or (b) the timing of a client's payments
for current and future purchases. In the Company's experience, material
receivables are expected to be collected within one year after such receivables
are recorded.
During 1995, 1996 and 1997, revenues derived from accounts payable and
ancillary services provided to retailers, wholesale distributors and
governmental agencies represented 100.0%, 100.0% and 86.7%, respectively, of
total revenues for such years.
Invoice basis of revenue recognition
With regard to accounts payable and other recovery audit services provided
to most entities other than retailers, wholesale distributors and governmental
agencies, the Company recognizes revenues primarily when it invoices clients for
its portion of amounts already recovered. This deferral of revenue recognition
for these types of clients results principally from the Company's lack of a
historical experience base to accurately estimate uncollectible claims. Revenues
recognized in 1997 on the invoice basis represented 13.3% of total revenues for
the year. The Company did not serve entities other than retailers, wholesale
distributors and governmental agencies (the Company's historical client base) in
either 1995 or 1996.
(d) Cash Equivalents
Cash equivalents at December 31, 1996 and 1997 consisted of $11.9 million
and $2.5 million, respectively, of reverse repurchase agreements with
NationsBank, N.A. (South) which were fully collateralized by United States of
America Treasury Notes in the possession of such bank. The reverse repurchase
agreement in effect on December 31, 1997, matured and was settled on January 2,
1998. In addition, certain of the Company's French subsidiaries at December 31,
1997 had cash equivalents of $4.7 million in temporary investments held at a
French bank.
The Company does not intend to take possession of collateral securities on
future reverse repurchase agreement transactions conducted with banking
institutions of national standing. The Company does insist, however, that all
such agreements provide for full collateralization using obligations of the
United States of America having a current market value equivalent to or
exceeding the reverse repurchase agreement amount.
(e) Property and Equipment
Property and equipment are stated at cost. Depreciation is provided using
the straight-line method over the estimated useful lives of the assets.
Leasehold improvements are amortized using the straight-line method over the
shorter of the lease term or estimated life of the asset.
(f) Direct Expenses
Direct expenses incurred during the course of the accounts payable audits
and other recovery audit services are expensed as incurred.
Non-management auditor compensation expense for substantially all of the
Company's domestic auditors and certain of its international auditors is
recorded at the time of related revenue recognition and subsequently paid as
such revenue is collected. Previously established auditor compensation accruals
are subsequently adjusted on a monthly basis to correspond with adjustments to
uncollectible claim estimates. In certain of the Company's international
locations fixed salaries are paid to non-management auditors. All non-auditor
Company employees are compensated on the basis of salary and in certain cases,
bonuses, which are charged to operations as incurred.
F-10
<PAGE> 63
THE PROFIT RECOVERY GROUP INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(g) Software Development Costs
Software development costs related to the development of the Company's
proprietary audit software are expensed as incurred.
(h) Intangibles
Goodwill. Goodwill represents the excess of the purchase price over the
estimated fair market value of net assets of acquired businesses. The Company
evaluates the unique relevant aspects of each individual acquisition when
establishing an appropriate goodwill amortization period, and amortizes all
goodwill amounts on a straight-line basis. Goodwill recorded as of December 31,
1997 is being amortized over periods ranging from seven to 20 years. The Company
assesses the recoverability of this intangible asset by determining whether the
amortization of the goodwill balance over its remaining life can be recovered
through undiscounted future operating cash flows of the acquired operation. The
amount of goodwill impairment, if any, is measured based on projected discounted
future operating cash flows using a discount rate reflecting the Company's
average cost of funds. The assessment of the recoverability of goodwill will be
impacted if estimated future operating cash flows are not achieved.
Noncompete Agreements. Noncompete agreements are recorded at cost and are
amortized on a straight-line basis over the terms of the respective agreements.
Deferred Loan Costs. Deferred loan costs are recorded at cost and are
amortized on a straight-line basis over the terms of the respective loan
agreements.
(i) Income Taxes
The Company's predecessors (prior to April 24, 1995 for international
entities and March 28, 1996 for domestic entities) consisted of Subchapter S
corporations and a partnership. As such, the Federal and state income taxes with
regard to these entities historically have been the responsibility of the
respective shareholders and partners. The results of operations for all periods
presented which include operations prior to April 1, 1996 have been adjusted on
a pro forma basis to reflect Federal and state income taxes at a composite rate
of 39% as if the Company's predecessors had been C corporations throughout such
periods.
In the second quarter of 1995, the Company's predecessors reorganized and
its international entities became C corporations. Additionally, in connection
with the Company's March 1996 initial public offering, all domestic entities
became C corporations. As a result of these conversions to C corporations, the
Company incurred charges to operations of $305,000 in the second quarter of 1995
and $3.7 million in the first quarter of 1996 for cumulative deferred income
taxes.
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.
(j) Foreign Currency Translation
The local currency has been used as the functional currency in the
countries in which the Company conducts business outside of the United States.
The assets and liabilities denominated in foreign currency are translated into
U.S. dollars at the current rate of exchange at the balance sheet date and
revenues and expenses are translated at the average monthly exchange rates. The
translation gains and losses are included as
F-11
<PAGE> 64
THE PROFIT RECOVERY GROUP INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
a separate component of shareholders' equity. Transaction gains and losses
included in results of operations are not material.
(k) Earnings (Pro Forma Earnings) Per Share
Effective December 31, 1997, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 128, "Earnings per Share." This pronouncement
required the restatement of all prior-period earnings per share data presented
to conform to its provisions. Basic earnings (pro forma earnings) per share is
computed by dividing net earnings (pro forma earnings) by the weighted average
number of shares of common stock outstanding during the year. Diluted earnings
(pro forma earnings) per share is computed by dividing net earnings (pro forma
earnings) by the sum of (1) the weighted average number of shares of common
stock outstanding during the period (2) the dilutive effect of the assumed
exercise of stock options using the treasury stock method and (3) dilutive
effect of other potentially dilutive securities.
For all periods prior to April 1, 1996, diluted pro forma earnings per
share has been computed by dividing the pro forma net earnings, which gives
effect to pro forma income taxes, by the weighted average number of common and
potential common shares outstanding during the period, after giving effect to
the reorganization enacted at the time of the Company's March 1996 initial
public offering. For purposes of determining the weighted average number of
common and potential common shares for all periods prior to April 1, 1996, the
Company has followed required supplementary guidance contained in Securities and
Exchange Commission Staff Accounting Bulletin Topic 4D and has treated all
common shares, warrants, options, and convertible debentures issued within one
year prior to its initial public offering as exercised and outstanding, using
the treasury stock method, regardless if the effect was antidilutive. In
addition, the aforementioned computation includes the equivalent number of
common shares derived from dividing the $4.9 million in 1996 dividends and
distributions by $11.00 per share.
(l) Employee Stock Options
Prior to January 1, 1996, the Company accounted for its stock option plan
in accordance with the provisions of Accounting Principles Board ("APB") Opinion
No. 25, "Accounting for Stock Issued to Employees," and related interpretations.
As such, compensation expense would be recorded on the date of grant only if the
current market price of the underlying stock exceeded the exercise price. On
January 1, 1996, the Company adopted SFAS No. 123, "Accounting for Stock-Based
Compensation", which permits entities to recognize as expense over the vesting
period 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 and pro forma
earnings per share 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 disclosures of SFAS No. 123.
(2) RELATED PARTY TRANSACTIONS
Prior to the Company's March 1996 initial public offering, the Company
periodically borrowed funds from its principal shareholders. These loans were
evidenced by promissory notes bearing interest at market rates. All loans from
shareholders were repaid in full immediately subsequent to the Company's initial
public offering.
Interest expense on loans from shareholders for the years ended December
31, 1995 and 1996 was approximately $140,000 and $38,000, respectively.
Financial advisory and management services historically have been provided
to the Company by two directors who are also shareholders of the Company. In
addition, a director elected in 1995 provided
F-12
<PAGE> 65
THE PROFIT RECOVERY GROUP INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
management advisory services to the Company from July 1995 through December
1996, but no longer provided such services effective January 1, 1997. Such
services by directors aggregated $406,000 in 1995, $293,000 in 1996, and
$165,000 in 1997. The Company has agreed to pay the above-mentioned two
directors a minimum of $140,000 in 1998 for financial advisory and management
services.
(3) LONG-TERM DEBT
Long-term debt at December 31, 1996 and 1997 is summarized as follows:
<TABLE>
<CAPTION>
1996 1997
---- -------
(IN THOUSANDS)
<S> <C> <C>
Term bank loan with interest at LIBOR plus 1.75% (7.69% at
December 31, 1997), interest only payments through
September 1998, and monthly principal payments of $412,500
plus interest due commencing October 1998 and continuing
through September 2001; remaining unpaid balance due
September 2001............................................ $ -- $24,750
5.05% promissory note, principal and interest payable in
annual installments of $100,000 beginning December 1998
and continuing through December 2009...................... 771 790
Term loan with interest of PIBOR plus 1.25% (3.7% at
December 31, 1997) requiring quarterly payments of 44,704
French Francs, or $7,465 at December 31, 1997, including
interest, with final payment due April 2000............... -- 198
Other....................................................... -- 55
---- -------
771 25,793
Less current installments................................... 79 1,428
---- -------
Long-term debt, excluding current installments.... $692 $24,365
==== =======
</TABLE>
During October 1997, the Company increased its credit facility with
NationsBank, N.A. from $20.0 million to $30.0 million. The credit facility
permits the Company to borrow up to $30.0 million on a term loan basis to
finance mergers and acquisitions. Alternatively, the Company, at its option, may
utilize up to $10.0 million as a revolving line of credit for working capital
and utilize the remaining $20.0 million for mergers and acquisitions. Borrowings
under the credit facility can be made through September 1999 although repayment
of individual term loan borrowings made before or during September 1999 are
repayable over 48 months. As of December 31, 1997, the Company had outstanding
principal borrowings of $24.8 million under the credit facility. Such borrowings
were made in October 1997 in connection with the financing of the Financiere
Alma, S.A. and subsidiaries acquisition (see Note 8). The credit facility is
secured by substantially all assets of the Company and interest on borrowings
can be tied to either prime or LIBOR at the Company's discretion. The Company is
required to repay all amounts outstanding under the revolving line of credit
portion of the aggregate credit facility and to refrain from borrowing any
amounts under such line of credit portion for at least a 30-consecutive-day
period each year. The credit facility requires an annual commitment fee of 1/4
of 1% and contains customary covenants, including financial ratios and the
prohibition of cash dividend payments to shareholders. At December 31, 1997, the
Company was in compliance with all such covenants.
Approximate future minimum annual principal payments for long-term debt for
each of the five years subsequent to December 31, 1997 are as follows (in
thousands):
<TABLE>
<S> <C>
1998........................................................ $ 1,428
1999........................................................ 5,108
2000........................................................ 5,046
2001........................................................ 13,673
2002........................................................ 64
</TABLE>
In December 1995, the Company extinguished a noncompete agreement
obligation. Such extinguishment resulted in a loss which was not material.
F-13
<PAGE> 66
THE PROFIT RECOVERY GROUP INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(4) LEASE COMMITMENTS
The Company is committed under noncancelable operating lease arrangements
for facilities and equipment. Rent expense for 1995, 1996, and 1997 was $1.0
million, $2.5 million, and $3.0 million, respectively. The future minimum annual
lease payments under these leases by year are summarized as follows (in
thousands):
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31,
- ------------------------
<S> <C>
1998........................................................ $ 3,697
1999........................................................ 2,799
2000........................................................ 1,980
2001........................................................ 1,535
2002........................................................ 800
Thereafter.................................................. 3,932
-------
$14,743
=======
</TABLE>
(5) INCOME TAXES
HISTORICAL
Prior to the April 1995 reorganization, the historical income taxes were
the responsibility of the shareholders and partners (see Note 1(i) Income
Taxes). In connection with the April 1995 reorganization, the Company
established a net deferred tax liability of approximately $305,000 as a charge
to the 1995 Consolidated Statement of Earnings related to the five Foreign
Operating Companies' termination of the Subchapter S corporation status. The
results of operations for the five Foreign Operating Companies from May 1995 to
December 1995 represented a taxable loss which was fully offset by a deferred
income tax valuation allowance. Such amounts and related deferred income tax
temporary differences were not significant.
In connection with the Company's March 1996 initial public offering, a
further reorganization occurred and the Subchapter S corporation status or
partnership status of all then remaining entities that comprised the Company was
terminated. These terminations resulted in the establishment of an additional
deferred tax liability of approximately $3.7 million and a corresponding charge
to the 1996 Consolidated Statement of Earnings.
The provision for income taxes for the years ended December 31, 1996 and
1997 consists of the following (in thousands):
<TABLE>
<CAPTION>
1996 1997
------ ------
<S> <C> <C>
Current:
Federal................................................... $ 413 $1,171
State..................................................... 153 375
Foreign................................................... 400 2,900
------ ------
966 4,446
------ ------
Deferred:
Federal................................................... 5,997 921
State..................................................... 826 184
Foreign................................................... -- 598
------ ------
6,823 1,703
------ ------
Total............................................. $7,789 $6,149
====== ======
</TABLE>
F-14
<PAGE> 67
THE PROFIT RECOVERY GROUP INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A reconciliation of income tax expense at the Federal statutory rates of
34% and 35% to actual tax expense for the years ended December 31, 1996 and
1997, respectively, follows (in thousands):
<TABLE>
<CAPTION>
1996 1997
------ ------
<S> <C> <C>
Income taxes at Federal statutory rate...................... $3,719 $5,520
Establishment of deferred tax liability due to termination
of Subchapter S corporation status and partnership
status.................................................... 3,700 --
State income taxes, net of Federal income tax benefit....... 646 363
Pro forma income taxes that were the responsibility of the
shareholders and partners................................. (158) --
Other, net.................................................. (118) 266
------ ------
$7,789 $6,149
====== ======
</TABLE>
A summary of the components of deferred tax liabilities and assets as of
December 31, 1996 and 1997 follows (in thousands):
<TABLE>
<CAPTION>
1996 1997
------- -------
<S> <C> <C>
Deferred tax liabilities:
Contract receivables...................................... $11,987 $16,974
Accelerated depreciation for tax purposes................. 234 532
Goodwill.................................................. 154 177
------- -------
Gross deferred tax liabilities.................... 12,375 17,683
------- -------
Deferred tax assets:
Cash to accrual conversion from termination of Subchapter
S and partnership status............................... 419 309
Accounts payable and accrued expenses..................... -- 438
Accrued payroll and related expenses...................... 3,961 5,912
Deferred compensation..................................... 875 961
Noncompete agreements..................................... 410 848
Deferred revenues......................................... -- 577
Deferred loan costs....................................... 277 182
Net operating loss carryforward of foreign subsidiary..... -- 385
Foreign tax credit carryforwards.......................... -- 1,554
Other..................................................... -- 185
------- -------
Gross deferred tax assets......................... 5,942 11,351
------- -------
Net deferred tax liabilities...................... $ 6,433 $ 6,332
======= =======
</TABLE>
In assessing the realizability of deferred tax assets, the Company's
management considers whether it is more likely than not that some portion or all
of the deferred tax assets will not be realized. No valuation allowances were
deemed necessary since all deductible temporary differences are expected to be
utilized primarily against reversals of taxable temporary differences, and net
operating loss carryforwards and foreign tax credit carryforwards are expected
to be utilized through related future taxable and foreign source earnings. The
Company has no undistributed earnings of foreign subsidiaries, but does have a
net operating loss carryforward of $1.1 million which can be utilized
indefinitely against future taxable earnings of a foreign subsidiary, to the
extent there is no significant change in the ownership of the foreign
subsidiary. The Company's management believes the net operating loss
carryforward will be fully utilized against the forecasted future taxable
earnings of the foreign subsidiary. The Company has foreign income tax credit
carryforwards amounting to $1.6 million, of which $400,000 will expire in 2001
and $1.2 million will expire in
F-15
<PAGE> 68
THE PROFIT RECOVERY GROUP INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2002. The Company expects to generate sufficient foreign-sourced income by
implementing reasonable tax planning strategies to fully utilize the foreign
income tax credit carryforwards.
(UNAUDITED) PRO FORMA
The pro forma provision for income taxes reflects the income taxes as if
the Company were subject to all Federal and state income taxes for all periods
presented that include operations prior to April 1, 1996, rather than primarily
by the individual shareholders and partners. All pro forma income taxes have
been calculated using a 39% composite effective rate.
(6) EMPLOYEE BENEFIT PLANS
The Company maintains a 401(k) Plan in accordance with Section 401(k) of
the Internal Revenue Code, which allows eligible participating employees to
defer receipt of a portion of their compensation up to 15% and contribute such
amount to one or more investment funds. Employee contributions are matched by
the Company in a discretionary amount to be determined by the Company each plan
year up to $450 per participant. The Company may also make discretionary
contributions to the Plan as determined by the Company each plan year. Company
matching funds and discretionary contributions vest at the rate of 20% each year
beginning after the participants' first year of service. Company contributions
were approximately $33,000 in 1995, $114,000 in 1996 and $130,000 in 1997.
The Company also maintains deferred compensation arrangements for certain
key officers and executives. Total expense related to these deferred
compensation arrangements was approximately $340,000, $606,000, and $920,000 in
1995, 1996, and 1997, respectively.
Effective May 15, 1997, the Company established an employee stock purchase
plan pursuant to Section 423 of the Internal Revenue Code of 1986, as amended.
The plan covers 750,000 shares of the Company's common stock which may be
authorized but unissued shares, reacquired shares or shares bought on the open
market. The initial purchase period began on July 1, 1997 and ended on December
31, 1997. On January 19, 1998, share certificates for 32,348 shares were issued
to employees who were initial purchase period participants. The Company is not
required to recognize compensation expense related to this plan.
(7) COMMON STOCK
The following presents the common stock at December 31, 1995 for each
combined entity:
<TABLE>
<S> <C>
Common stock:
The Profit Recovery Group International I, Inc. (formerly
The Profit Recovery Group, Inc.) authorized 10,000,000
shares with $.01 par value; issued and outstanding
5,740,000 shares....................................... $57,400
PRG International Holding Co. -- authorized 1,000 shares
with $1.00 par value; issued and outstanding 1,000
shares at December 31, 1995............................ 1,000
-------
$58,400
=======
</TABLE>
In connection with the April 1995 reorganization, the Company issued an
additional 480,000 shares of common stock in PRGI to the existing shareholders,
formed PRG Holdco with 1,000 shares of common stock, and consolidated the five
Foreign Operating Companies into PRG Holdco.
Subsequent to the Company's March 1996 initial public offering of its
common stock, all entities that comprise the Company are wholly owned
subsidiaries of the publicly traded parent company, The Profit Recovery Group
International, Inc., whose common stock is reflected in shareholders' equity on
the accompanying December 31, 1996 and 1997 Consolidated Balance Sheets.
Concurrent with the Company's
F-16
<PAGE> 69
THE PROFIT RECOVERY GROUP INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
initial public offering, The Profit Recovery Group International, Inc. declared
a two-for-one stock split effected in the form of a stock dividend. All share
and pro forma per share information has been adjusted to reflect the effect of
the stock split.
Immediately prior to the Company's March 26, 1996 initial public offering
of its common stock, holders of the $12.7 million in convertible debentures
elected to convert $12.3 million into equity of the Company. The remaining
debentures together with accrued interest of the entire $12.7 million were paid
in April 1996 with a portion of the initial public offering proceeds.
Additionally, $817,000 in deferred loan costs directly related to the debentures
was reclassified as a reduction in shareholders' equity concurrent with the
conversion of the debentures. In connection with the debentures origination, an
investment banking firm received a warrant to purchase 63,530 shares of PRGI's
common stock for $5.89 per share. This warrant was exercised in full immediately
prior to the Company's initial public offering.
The Company's initial public offering of its common stock was declared
effective by the United States Securities and Exchange Commission on March 26,
1996, and public trading in the registered shares commenced March 27, 1996. The
initial public offering consisted of 4.6 million shares priced at $11 per share
with the Company selling 3.4 million newly issued shares and certain
shareholders selling 1.2 million existing shares. The Company received $34.8
million as its portion of the proceeds (net of underwriting discounts and
commissions, but prior to offering expenses). On April 18, 1996, the Company
received notification from its initial public offering underwriting syndicate
that the syndicate had exercised its full over-allotment option to purchase an
additional 690,000 shares of Company common stock. All of these shares were then
sold to the underwriting syndicate by certain selling shareholders. The Company
received no proceeds from the sale of such shares.
Although the Company has issued no preferred stock through December 31,
1997, and has no present intentions to issue any preferred stock, such stock may
be issued at any time or from time to time in one or more series with such
designations, powers, preferences, rights, qualifications, limitations and
restrictions (including dividend, conversion and voting rights) as may be
determined by the Company's Board of Directors, without any further vote or
action by the shareholders.
(8) ACQUISITIONS
Effective January 1, 1995, PRGI acquired certain assets of Fial &
Associates, Inc., primarily consisting of contract receivables, net of related
commissions liabilities, with an estimated fair value of approximately $444,000,
and entered into a noncompete agreement for seven years with the former owner of
Fial, with an estimated fair value of $6.0 million. In exchange for the assets
and the noncompete agreement, PRGI issued 240,000 shares of PRGI's common stock,
paid $1.6 million in cash, and incurred an obligation of approximately $5.0
million. In the opinion of the Company's management, the common stock had an
estimated fair value of $1.85 per share. The acquisition was accounted for under
the purchase method of accounting and resulted in goodwill of $550,000 which is
being amortized over seven years using the straight-line method. Fial's
principal business was similar to PRGI's business. Fial provided its services
throughout the United States.
On January 2, 1997, the Company acquired the net operating assets of Shaps
Group, Inc., a California-based company providing recovery audit services to
manufacturers, and distributors of high technology products. The Company issued
375,000 shares of its common stock in the transaction which was accounted for as
a pooling-of-interests. Since prior years' financial positions and results of
operations of Shaps Group, Inc. are not material in relation to the Company's
historical financial statements, the Company did not restate its prior years'
consolidated financial statements.
On February 11, 1997, the Company acquired all of the common stock of
Accounts Payable Recovery Services, Inc., a Texas-based company providing
recovery audit services to healthcare entities and energy companies. This
transaction was accounted for as a purchase with consideration of $2.0 million
in cash and
F-17
<PAGE> 70
THE PROFIT RECOVERY GROUP INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
130,599 shares of the Company's common stock valued at $15.25 per share. This
acquisition resulted in goodwill of $3.9 million which is being amortized over
15 years using the straight-line method.
On May 23, 1997, the Company acquired all of the common stock of The Hale
Group, a California-based company providing recovery audit services to
healthcare entities. This transaction was accounted for as a purchase with
consideration of $1.1 million in cash and 74,998 shares of the Company's common
stock valued at $13.38 per share. This acquisition resulted in goodwill of $2.1
million which is being amortized over 15 years using the straight-line method.
On October 7, 1997, the Company acquired 98.4% of Financiere Alma, S.A. and
subsidiaries ("Alma"), a privately held recovery audit firm based in Paris,
France. This transaction was accounted for as a purchase with consideration of
$24.6 million in cash and approximately 859,000 restricted, unregistered shares
of the Company's common stock with an aggregate estimated fair value of $10.0
million, based on an independent external valuation. The Company has an
obligation to acquire the remaining interest in Alma by January 1999 for
$398,000 in cash and 13,900 unregistered shares of the Company's common stock.
This acquisition resulted in goodwill of $33.0 million which is being amortized
over 20 years using the straight-line method.
On November 21, 1997, the Company acquired the net operating assets of
TradeCheck, LLC, a Washington-based recovery audit firm specializing in ocean
freight shipments. This transaction was accounted for as a purchase with
consideration of $700,000 in cash and 40,000 shares of the Company's common
stock valued at $14.375 per share. This acquisition resulted in goodwill of $1.1
million which is being amortized over 15 years using the straight-line method.
Results of operations for all 1997 acquisitions accounted for under the
purchase method of accounting have been included in the 1997 Consolidated
Statement of Earnings from their respective dates of acquisition with the
exception of the October 7, 1997 acquisition of Alma, which was included
effective October 1, 1997.
The following represents the summary (unaudited) pro forma results of
operations as if the Alma acquisition had occurred at the beginning of 1996. The
pro forma results are not necessarily indicative of the results that will occur
in the future.
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
-------------------
1996 1997
------- --------
<S> <C> <C>
Revenues.................................................... $98,586 $127,409
Net earnings................................................ 2,500 9,432
Pro forma net earnings...................................... 6,018 9,432
Earnings (pro forma net earnings for 1996) per share:
Basic..................................................... .36 .49
Diluted................................................... .33 .48
</TABLE>
All businesses acquired by the Company during 1997, other than Alma,
previously maintained their respective accounting records using the cash basis
of accounting. Accordingly, it is not practicable to provide accrual basis pro
forma results of operations which include these entities. The Company believes,
however, that pro forma accrual basis results of operations for these entities,
if determined, would not be significant, either individually or in the
aggregate.
(9) STOCK OPTION PLAN
The Company's 1996 Stock Option Plan ("Plan") has authorized the grant of
options to purchase 3,500,000 shares of the Company's common stock to key
employees and directors. All options granted through December 31, 1997 have
10-year terms and vest and become fully exercisable on a ratable basis over four
or five years of continued employment.
F-18
<PAGE> 71
THE PROFIT RECOVERY GROUP INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Pro forma information regarding net earnings and earnings per share is
required by SFAS No. 123, and has been determined as if the Company had
accounted for its employee stock options under the fair value method of that
Statement. The fair value for these options was estimated at the date of grant
using a Black-Scholes option pricing model with the following weighted-average
assumptions for 1995, 1996 and 1997:
<TABLE>
<CAPTION>
1995 1996 1997
------- ------- -------
<S> <C> <C> <C>
Risk-free interest rates.................................... 6.06% 6.26% 6.17%
Dividend yields............................................. -- -- --
Volatility factor of expected market price.................. .396 .396 .537
Weighted-average expected life of option.................... 6 years 6 years 6 years
</TABLE>
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions, including the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The Company's
pro forma information for the years ended December 31, 1995, 1996 and 1997
follows (in thousands, except for pro forma earnings per share information):
<TABLE>
<CAPTION>
1995 1996 1997
------- ------- -------
<S> <C> <C> <C>
Historical earnings before income taxes................... $ 4,812 $10,939 $15,772
Income taxes (pro forma income taxes for 1995 and 1996)... 1,877 4,271 6,149
------- ------- -------
Net earnings (pro forma net earnings for 1995 and 1996)
before pro forma effect of compensation expense
recognition provisions of SFAS No. 123.................. 2,935 6,668 9,623
Pro forma effect of compensation expense recognition
provisions of SFAS No. 123.............................. 111 504 1,382
------- ------- -------
Pro forma net earnings.................................... $ 2,824 $ 6,164 $ 8,241
======= ======= =======
Pro forma net earnings per share:
Basic................................................... $ .24 $ .38 $ .45
======= ======= =======
Diluted................................................. $ .21 $ .36 $ .44
======= ======= =======
</TABLE>
A summary of the Company's stock option activity and related information
for the years ended December 31 follows:
<TABLE>
<CAPTION>
1995 1996 1997
------------------- --------------------- ---------------------
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Outstanding -- beginning of
year...................... -- $ -- 633,000 $ 5.53 1,258,030 $ 9.60
Granted..................... 633,000 5.53 677,030 13.16 1,030,263 15.47
Exercised................... -- -- (28,000) 5.30 (65,100) 5.36
Forfeited................... -- -- (24,000) 5.94 (15,300) 13.60
------- --------- ---------
Outstanding -- end of
year...................... 633,000 $5.53 1,258,030 $ 9.60 2,207,893 $12.44
======= ========= =========
Exercisable at end of
year...................... -- $ -- 94,400 $ 5.30 287,946 $ 9.12
Weighted average fair value
of options granted during
year...................... $ 2.67 $ 6.44 $ 8.96
</TABLE>
F-19
<PAGE> 72
THE PROFIT RECOVERY GROUP INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Exercise prices for options outstanding as of December 31, 1997 ranged from
$5.30 to $19.88 per share. The weighted average remaining contract life of those
options was 8.6 years. Of the 2,207,893 options outstanding at December 31,
1997, 527,600 were granted at prices below the Company's initial public offering
price of $11.00 per share and 1,680,293 were granted at prices equal to or
greater than $11.00.
The 527,600 options outstanding at December 31, 1997 which were priced
below $11.00 per share carried a weighted-average exercise price of $5.60 per
share and had a weighted-average remaining contract life of 7.5 years. They
included 135,040 exercisable options at a price of $5.30 per share.
The 1,680,293 options outstanding at December 31, 1997 which were priced at
or above $11.00 per share carried a weighted-average exercise price of $14.59
per share and had a weighted-average remaining contract life of 9.0 years. They
included 131,706 options that were exercisable at a weighted-average price of
$13.21 per share.
(10) MAJOR CLIENTS
The Company had two major clients during 1997, each of which provided
revenues in excess of 10% of total revenues. Both major clients are mass
merchandisers operating in the retail industry.
During the years ended December 31, 1995, 1996, and 1997, the Company
derived 12.7%, 14.4% and 10.4%, respectively, of its total revenues from its
historically largest client. Additionally, during 1997 the Company derived 12.3%
of its total revenues from another client due in large part to a nonrecurring
situation involving concurrent audits of multiple years.
(11) INTERNATIONAL SEGMENTS
The Company has operations outside the United States. The following is a
summary of geographic area information, as measured by the area of
revenue-producing operations, for the years ended December 31, 1995, 1996, and
1997 (in thousands):
<TABLE>
<CAPTION>
1995 1996 1997
------- ------- --------
<S> <C> <C> <C>
Revenues:
United States (U.S.)................................... $49,002 $62,701 $ 81,653
North America, excluding U.S........................... 3,778 7,811 10,907
Western Europe......................................... 2,422 4,422 17,233
Asia-Pacific........................................... 829 2,396 2,570
------- ------- --------
Total.......................................... $56,031 $77,330 $112,363
======= ======= ========
Operating income (loss):
United States (U.S.)................................... $ 6,854 $10,680 $ 12,109
North America, excluding U.S........................... 30 899 2,971
Western Europe......................................... (137) (238) 3,541
Asia-Pacific........................................... (305) (302) (2,446)
------- ------- --------
Total.......................................... $ 6,442 $11,039 $ 16,175
======= ======= ========
Identifiable assets:
United States (U.S.)................................... $27,244 $59,237 $ 74,876
North America, excluding U.S........................... 1,541 4,593 5,362
Western Europe......................................... 851 2,155 50,942
Asia-Pacific........................................... 632 2,333 2,705
------- ------- --------
Total.......................................... $30,268 $68,318 $133,885
======= ======= ========
</TABLE>
F-20
<PAGE> 73
THE PROFIT RECOVERY GROUP INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(12) FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts for cash and cash equivalents, receivables, note
payable to bank, accounts payable and accrued expenses, accrued payroll and
related expenses, and deferred revenue approximate fair value because of the
short maturity of these instruments.
The fair values of each of the Company's long-term debt instruments are
based on the amount of future cash flows associated with each instrument
discounted using the Company's current borrowing rate for similar debt
instruments of comparable maturity. The estimated fair value of the Company's
long-term debt instruments at December 31, 1996 and 1997 was $675,000 and $25.9
million, respectively, and the carrying value of the Company's long-term debt at
December 31, 1996 and 1997 was $771,000 and $25.8 million, respectively.
Fair value estimates are made at a specific point in time, based on
relevant market information about the financial instrument. These estimates are
subjective in nature and involve uncertainties and matters of significant
judgment and therefore cannot be determined with precision. Changes in
assumptions could significantly affect the estimates.
(13) EARNINGS PER SHARE
The following table sets forth the computations of basic and diluted
earnings per share for the years ended December 31, 1995, 1996 and 1997 (in
thousands, except for earnings per share information):
<TABLE>
<CAPTION>
1995 1996 1997
------- ------- -------
<S> <C> <C> <C>
Numerator:
Numerator for basic earnings (pro forma earnings for 1995
and 1996) per share.................................... $ 2,935 $ 6,668 $ 9,623
Interest accrued on convertible debt, net of income
taxes.................................................. 258 97 --
------- ------- -------
Numerator for diluted earnings (pro forma earnings for
1995 and 1996) per share............................... $ 3,193 $ 6,765 $ 9,623
======= ======= =======
Denominator:
Denominator for basic earnings (pro forma earnings for
1995 and 1996) per share -- weighted-average shares
outstanding............................................ 12,000 16,268 18,415
Effect of dilutive securities:
Employee stock options................................. 348 545 494
Convertible debt....................................... 2,157 539 --
Common equivalent shares from the distribution payable
($4,875,576) divided by the initial public offering
price of $11 per share (and weighted since the initial
public offering)...................................... 443 105 --
------- ------- -------
Denominator for diluted earnings (pro forma earnings
for 1995 and 1996) per share........................ 14,948 17,457 18,909
======= ======= =======
Earnings (pro forma for 1995 and 1996) per share -- basic... $ .24 $ .41 $ .52
======= ======= =======
Earnings (pro forma for 1995 and 1996) per
share -- diluted.......................................... $ .21 $ .39 $ .51
======= ======= =======
</TABLE>
Options to purchase 473,000 shares of common stock, at prices ranging from
$16.00 to $19.88 per share, were outstanding during 1997 but were excluded from
the computation of diluted earnings per share because the options' exercise
price was greater than the average market price of the common shares and,
therefore, the effect would be antidilutive.
F-21
<PAGE> 74
THE PROFIT RECOVERY GROUP INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(14) RESTRUCTURING COSTS
In recognition of emerging developments such as the Alma acquisition, the
Company restructured and realigned certain facets of its European management
structure in the fourth quarter of 1997 and incurred a pre-tax charge to
earnings of $1.2 million. This charge consisted of employment termination costs
directly applicable to four of the Company's senior European executives and
residual contract costs due to an independent European advisor for services no
longer required by the Company. Of the $1.2 million charge, $683,000 had been
paid through December 31, 1997, and the remaining $525,000 is currently
estimated to be paid by June 30, 1998.
F-22
<PAGE> 75
THE PROFIT RECOVERY GROUP INTERNATIONAL, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
On October 7, 1997, The Profit Recovery Group International, Inc. (the
"Company") acquired 98.4% of Financiere Alma, S.A. and subsidiaries ("Alma"), a
French company providing primarily corporate tax recovery services in France.
The transaction was accounted for as a purchase, effective as of October 1,
1997, with consideration of $24,602,000 in cash and 859,000 unregistered shares
of the Company's common stock. Approximately $1,700,000 in direct
acquisition-related costs were also incurred and capitalized as part of this
transaction. The Company has an obligation to purchase the remaining 1.6% of
Alma by January 1999 for $398,000 in cash and 13,900 unregistered shares of the
Company's common stock.
The Company incurred debt to pay the cash consideration and a minor portion
of the direct acquisition-related expenses incurred in connection with the
acquisition of Alma.
The following unaudited pro forma consolidated statements of earnings for
the year ended December 31, 1996 and the nine months ended September 30, 1997
present the consolidated historical accounts of the Company, adjusted to give
effect to the acquisition of Alma as of the beginning of the periods presented.
The following unaudited pro forma condensed consolidated balance sheet as of
September 30, 1997 presents the consolidated historical accounts of the Company
as of that date, adjusted to give effect to the acquisition of Alma as if the
transaction had occurred on September 30, 1997.
The unaudited pro forma financial data and accompanying notes should be
read in conjunction with the consolidated financial statements of the Company
and related notes, as well as the consolidated financial statements and related
notes of Alma, all of which are included elsewhere in this Prospectus. The
Company believes that the assumptions set forth in the notes on pages F-26 and
F-28 provide a reasonable basis on which to present the pro forma financial
data, 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 data is not intended to
project the Company's financial condition on any future date or results of
operations for any future period.
F-23
<PAGE> 76
THE PROFIT RECOVERY GROUP INTERNATIONAL, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF EARNINGS
YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
THE PROFIT
RECOVERY
GROUP
INTERNATIONAL, PRO FORMA
INC. ALMA ADJUSTMENTS PRO FORMA
-------------- ------- ----------- -----------
(AMOUNTS IN THOUSANDS OF US DOLLARS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Revenues.................................. $77,330 $21,256 $ -- $98,586
Cost of revenues.......................... 40,330 10,597 -- 50,927
Selling, general and administrative
expenses................................ 25,961 8,085 1,669(A) 35,715
------- ------- ------- -------
Operating income........................ 11,039 2,574 (1,669) 11,944
Interest income (expense), net............ (100) 41 (2,104)(B) (2,163)
------- ------- ------- -------
Earnings before income taxes and
minority interest.................... 10,939 2,615 (3,773) 9,781
Income taxes.............................. 7,789 974 (1,471)(C) 7,292
------- ------- ------- -------
Earnings before minority interest....... 3,150 1,641 (2,302) 2,489
Minority interest......................... -- 498 (509)(D) (11)
------- ------- ------- -------
Net earnings............................ $ 3,150 $ 1,143 $(1,793) $ 2,500
======= ======= ======= =======
Pro forma information:
Historical earnings before income taxes
and minority interest................ $10,939 $ 2,615 $(3,773) $ 9,781
Pro forma income taxes.................. 4,271 974 (1,471) 3,774
Minority interest....................... -- 498 (509) (11)
------- ------- ------- -------
Pro forma net earnings.................. $ 6,668 $ 1,143 $(1,793) $ 6,018
======= ======= ======= =======
Pro forma earnings per share:
Basic................................ $ .41 $ .36
======= =======
Diluted.............................. $ .39 $ .33
======= =======
Weighted average common and dilutive
shares outstanding:
Basic................................ 16,268 859(E) 17,127
======= ======= =======
Diluted.............................. 17,457 859(E) 18,316
======= ======= =======
</TABLE>
See accompanying notes to unaudited pro forma consolidated statements of
earnings.
F-24
<PAGE> 77
THE PROFIT RECOVERY GROUP INTERNATIONAL, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF EARNINGS
NINE MONTHS ENDED SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
THE PROFIT
RECOVERY GROUP PRO FORMA
INTERNATIONAL, INC. ALMA ADJUSTMENTS PRO FORMA
-------------------- -------- ------------ ------------
(AMOUNTS IN THOUSANDS OF US DOLLARS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Revenues................................ $76,445 $15,046 $ -- $91,491
Cost of revenues........................ 39,553 7,706 -- 47,259
Selling, general and administrative
expenses.............................. 25,709 5,174 1,252(A) 32,135
------- ------- ------- -------
Operating income...................... 11,183 2,166 (1,252) 12,097
Interest income (expense), net.......... 132 76 (1,578)(B) (1,370)
------- ------- ------- -------
Earnings before income taxes and
minority interest.................. 11,315 2,242 (2,830) 10,727
Income taxes............................ 4,397 820 (1,104)(C) 4,113
------- ------- ------- -------
Earnings before minority interest..... 6,918 1,422 (1,726) 6,614
Minority interest....................... -- 431 (436)(D) (5)
------- ------- ------- -------
Net earnings.................. $ 6,918 $ 991 $(1,290) $ 6,619
======= ======= ======= =======
Earnings per share:
Basic................................. $ .38 $ .35
======= =======
Diluted............................... $ .37 $ .34
======= =======
Weighted average common and dilutive
shares outstanding:
Basic................................. 18,185 859(E) 19,044
======= ======= =======
Diluted............................... 18,720 859(E) 19,579
======= ======= =======
</TABLE>
See accompanying notes to unaudited pro forma consolidated statements of
earnings.
F-25
<PAGE> 78
THE PROFIT RECOVERY GROUP INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF EARNINGS
YEAR ENDED DECEMBER 31, 1996 AND NINE MONTHS ENDED SEPTEMBER 30, 1997
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 Alma (see "Use of Proceeds").
(A) Adjustment relates to amortization of the goodwill amounting to
$33,379,000 over a 20-year period.
(B) Adjustment relates to the $24,750,000 of indebtedness, at an interest
rate of 8.5%, incurred in connection with the Alma acquisition.
(C) 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%.
(D) Adjustment to reduce minority interest to reflect minority interest
ownership of 1.6% of Alma.
(E) Adjustment reflects the issuance of 859,000 shares in connection with
the Alma acquisition.
(F) The pro forma adjustments do not reflect the $1.2 million pre-tax
charge to operations in the fourth quarter of 1997 to restructure and realign
certain facets of the Company's European management structure in recognition of
emerging developments such as the Alma acquisition. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations"
F-26
<PAGE> 79
THE PROFIT RECOVERY GROUP INTERNATIONAL, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
THE PROFIT
RECOVERY
GROUP
INTERNATIONAL, PRO FORMA
INC. ALMA ADJUSTMENTS PRO FORMA
-------------- ------- ----------- ---------
(AMOUNTS IN THOUSANDS OF US DOLLARS)
<S> <C> <C> <C> <C>
Current assets:
Cash and cash equivalents....................... $12,231 $ 3,528 $ -- $ 15,759
Contract receivables............................ 45,301 7,239 -- 52,540
Other receivables............................... 2,160 47 -- 2,207
Prepaid expenses and other current assets....... 1,292 973 -- 2,265
Deferred income taxes........................... -- 1,058 -- 1,058
------- ------- ------- --------
Total current assets.................... 60,984 12,845 -- 73,829
Property and equipment, net....................... 8,581 458 -- 9,039
Noncompete agreements, net........................ 3,734 -- -- 3,734
Deferred loan costs, net.......................... 32 -- -- 32
Goodwill, net..................................... 6,204 -- 33,379(A) 39,583
Deferred income taxes............................. 1,174 -- -- 1,174
Other assets...................................... 537 44 -- 581
------- ------- ------- --------
$81,246 $13,347 $33,379 $127,972
======= ======= ======= ========
Current liabilities:
Bank overdraft.................................. $ -- $ 147 $ -- $ 147
Due to shareholders and affiliates.............. -- 116 -- 116
Current installments of long term-debt.......... 83 124 -- 207
Accounts payable and accrued expenses........... 1,719 1,627 1,552(B) 4,898
Accrued payroll and related expenses............ 17,788 4,709 -- 22,497
VAT payable..................................... -- 2,065 -- 2,065
Deferred revenues............................... -- 984 -- 984
Deferred income taxes........................... 7,607 -- -- 7,607
------- ------- ------- --------
Total current liabilities............... 27,197 9,772 1,552 38,521
Long-term debt, excluding current installments.... 707 167 24,750(B) 25,624
Deferred compensation............................. 2,263 -- -- 2,263
Other long-term liabilities....................... -- 478 -- 478
------- ------- ------- --------
Total liabilities....................... 30,167 10,417 26,302 66,886
Minority interest................................. -- 476 (428)(C) 48
Shareholders' equity:
Common stock.................................... 18 69 (68)(D) 19
Additional paid-in capital...................... 37,815 12 9,946(D) 47,773
Cumulative translation adjustments.............. (56) (104) 104(D) (56)
Retained earnings............................... 13,302 2,477 (2,477)(D) 13,302
------- ------- ------- --------
Total shareholders' equity.............. 51,079 2,454 7,505 61,038
------- ------- ------- --------
$81,246 $13,347 $33,379 $127,972
======= ======= ======= ========
</TABLE>
See accompanying notes to unaudited pro forma condensed consolidated balance
sheet.
F-27
<PAGE> 80
THE PROFIT RECOVERY GROUP INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 1997
The following explanations describe the assumptions used in determining the
unaudited pro forma adjustments necessary to present the historical financial
position, giving effect to the acquisition of Alma (see "Use of Proceeds").
(A) 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 (amounts in thousands of US dollars):
<TABLE>
<S> <C>
Purchase price:
Cash paid................................................. $24,602
Fair value of unregistered shares issued.................. 9,959
-------
34,561
Estimated direct acquisition-related costs.................. 1,700
Less net book value of Alma, which approximates fair value,
and minority interest..................................... (2,930)
Plus minority interest for 1.6% of Alma not purchased....... 48
-------
Goodwill............................................... $33,379
=======
</TABLE>
(B) The Company has incurred indebtedness of $24,750,000 to fund the cash
paid and a minor portion of direct acquisition-related costs incurred in
connection with the acquisition of Alma, and accrued an additional $1,552,000 to
pay the remaining unpaid direct acquisition-related costs incurred.
(C) Adjustment is a reduction of minority interest to reflect minority
interest ownership of 1.6% of Alma.
(D) The changes in components of shareholders' equity are a result of (a)
the elimination of the equity of Alma, (b) the reclassification of the portion
of the minority interest purchased and (c) the issuance of common shares of the
Company in connection with the Alma acquisition.
F-28
<PAGE> 81
INDEPENDENT AUDITORS' REPORT
The Directors and Shareholders of
Financiere Alma, S.A.
We have audited the accompanying consolidated balance sheets of Financiere
Alma, S.A. and subsidiaries as of December 31, 1995 and 1996 and June 30, 1997,
and the related consolidated statements of earnings, shareholders' equity and
cash flows for each of the years in the two-year period ended December 31, 1996,
and for the six months ended June 30, 1997. 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 auditing standards generally
accepted in the United States. 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 consolidated statements referred to above present
fairly, in all material respects, the financial position of Financiere Alma,
S.A. and subsidiaries as of December 31, 1995 and 1996 and June 30, 1997, and
the results of their operations and their cash flows for each of the years in
the two-year period ended December 31, 1996, and for the six months ended June
30, 1997 in conformity with accounting principles generally accepted in the
United States.
ERNST & YOUNG Entrepreneurs
Departement d'E&Y Audit
Any Antola
Paris, France, September 30, 1997, except
for note 12 which is as
of October 7, 1997
F-29
<PAGE> 82
FINANCIERE ALMA, S.A. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
<TABLE>
<CAPTION>
YEARS ENDED SIX MONTHS NINE MONTHS ENDED
DECEMBER 31, ENDED SEPTEMBER 30,
----------------- JUNE 30, -----------------
1995 1996 1997 1996 1997
------- ------- ---------- ------- -------
(AMOUNTS IN THOUSANDS OF US DOLLARS)
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues........................................ $20,858 $21,256 $9,557 $14,241 $15,046
Cost of revenues................................ 8,265 10,597 4,875 7,539 7,706
Selling, general and administrative expenses.... 7,536 8,085 3,650 5,461 5,174
------- ------- ------ ------- -------
Operating income.............................. 5,057 2,574 1,032 1,241 2,166
Interest income, net............................ 224 41 61 105 76
------- ------- ------ ------- -------
Earnings before income taxes and minority
interest................................... 5,281 2,615 1,093 1,346 2,242
Income taxes.................................... 1,862 974 425 511 820
------- ------- ------ ------- -------
Earnings before minority interest............. 3,419 1,641 668 835 1,422
Minority interest............................... 1,547 498 119 182 431
------- ------- ------ ------- -------
Net earnings.................................. $ 1,872 $ 1,143 $ 549 $ 653 $ 991
======= ======= ====== ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-30
<PAGE> 83
FINANCIERE ALMA, S.A. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
----------------- JUNE 30, SEPTEMBER 30,
1995 1996 1997 1997
------- ------- -------- -------------
(AMOUNTS IN THOUSANDS OF US DOLLARS,
EXCEPT PER SHARE DATA)
(UNAUDITED)
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents (note 3)..................... $ 5,783 $ 7,389 $ 3,254 $ 3,528
Accounts receivable, less allowance of $1,706, $2,245
and $2,271 at December 31, 1995 and 1996 and June 30,
1997, respectively................................... 7,876 5,600 5,502 7,239
Due from affiliates (note 2)........................... 564 2,052 1,698 47
Prepaid expenses and other current assets.............. 565 1,120 919 973
Deferred income taxes (note 7)......................... 957 1,058 1,037 1,058
------- ------- ------- -------
Total current assets............................ 15,745 17,219 12,410 12,845
------- ------- ------- -------
Property and equipment:
Computer and other equipment........................... 630 710 677 732
Furniture and fixtures................................. 189 203 163 205
Leasehold improvements................................. 510 157 417 413
------- ------- ------- -------
1,329 1,070 1,257 1,350
Less accumulated depreciation and amortization......... 672 737 738 892
------- ------- ------- -------
657 333 519 458
Other assets............................................. 248 138 49 44
------- ------- ------- -------
$16,650 $17,690 $12,978 $13,347
======= ======= ======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Bank overdrafts........................................ $ 141 $ 1,023 $ 113 $ 147
Due to shareholders (note 2)........................... 179 1,460 780 29
Due to affiliates (note 2)............................. 196 180 161 87
Current installments of long-term debt (note 4)........ 88 410 435 124
Accounts payable and accrued expenses.................. 3,050 3,644 1,383 1,627
Accrued payroll and related expenses................... 4,303 4,495 3,379 4,709
Dividends and distributions payable.................... 1,734 -- 414 --
VAT payable............................................ 1,933 1,813 1,758 2,065
Deferred revenues...................................... 1,106 851 756 984
------- ------- ------- -------
Total current liabilities....................... 12,730 13,876 9,179 9,772
Other long-term liabilities.............................. 569 540 482 167
Long-term debt, excluding current installments (note
4)..................................................... 156 1,065 1,087 478
------- ------- ------- -------
Total liabilities............................... 13,455 15,481 10,748 10,417
Minority interest (note 11).............................. 1,274 539 184 476
Shareholders' equity:
Common stock, FRF 100 ($18) par value, 3,884 authorized
issued and outstanding shares at December 31, 1995
and 1996, June 30, 1997 and September 30, 1997....... 69 69 69 69
Additional paid-in capital............................. 12 12 12 12
Cumulative translation adjustment...................... 222 103 (70) (104)
Retained earnings...................................... 1,618 1,486 2,035 2,477
------- ------- ------- -------
Total shareholders' equity...................... 1,921 1,670 2,046 2,454
Commitments and contingencies (notes 6 and 9)............
------- ------- ------- -------
$16,650 $17,690 $12,978 $13,347
======= ======= ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-31
<PAGE> 84
FINANCIERE ALMA, S.A. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1995 AND 1996 AND
SIX MONTHS ENDED JUNE 30, 1997 AND NINE
MONTHS ENDED SEPTEMBER 30, 1997 (UNAUDITED)
<TABLE>
<CAPTION>
CUMULATIVE TOTAL
COMMON ADDITIONAL TRANSLATION RETAINED SHAREHOLDERS'
STOCK PAID-IN CAPITAL ADJUSTMENT EARNINGS EQUITY
------ --------------- ----------- -------- -------------
(AMOUNTS IN THOUSANDS OF US DOLLARS)
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1994.............. $57 $-- $ -- $ 1,208 $ 1,265
Net earnings.............................. -- -- -- 1,872 1,872
Dividends................................. -- -- -- (1,751) (1,751)
Contribution of minority interest (note
11)..................................... 12 12 -- 289 313
Cumulative translation adjustment......... -- -- 222 -- 222
--- --- ----- ------- -------
Balance at December 31, 1995............ 69 12 222 1,618 1,921
Net earnings.............................. -- -- -- 1,143 1,143
Dividends................................. -- -- -- (1,275) (1,275)
Cumulative translation adjustment......... -- -- (119) -- (119)
--- --- ----- ------- -------
Balance at December 31, 1996............ 69 12 103 1,486 1,670
Net earnings.............................. -- -- -- 549 549
Cumulative translation adjustment......... -- -- (173) -- (173)
--- --- ----- ------- -------
Balance at June 30, 1997................ 69 12 (70) 2,035 2,046
Net earnings.............................. -- -- -- 442 442
Cumulative translation adjustment......... -- -- (34) -- (34)
--- --- ----- ------- -------
Balance at September 30, 1997
(unaudited).......................... $69 $12 $(104) $ 2,477 $ 2,454
=== === ===== ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-32
<PAGE> 85
FINANCIERE ALMA, S.A. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED NINE MONTHS ENDED
DECEMBER 31, SIX MONTHS ENDED SEPTEMBER 30,
----------------- JUNE 30, -----------------
1995 1996 1997 1996 1997
------- ------- ----------------- ------- -------
(AMOUNTS IN THOUSANDS OF US DOLLARS)
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net earnings....................................... $ 1,872 $ 1,143 $ 549 $ 653 $ 991
Adjustments to reconcile net earnings to net cash
provided by (used in) operating activities:
Depreciation and amortization.................... 195 243 176 179 347
Loss from sale of property and equipment......... -- 178 -- -- --
Minority interest expense........................ 1,547 498 119 182 431
Deferred income taxes............................ (88) (165) (70) 99 (125)
Changes in assets and liabilities:
Accounts receivable............................ (3,223) 1,811 (516) 2,325 (2,320)
Prepaid expenses and other current assets...... (345) (606) 79 (993) 16
Other assets................................... (152) 111 64 58 79
VAT payable.................................... 427 4 144 (655) 469
Accounts payable and accrued expenses.......... 1,581 810 (1,881) 195 (1,601)
Accrued payroll and related expenses........... 362 480 (631) 139 739
Deferred revenues.............................. (236) (188) (2) (81) 235
Other long-term liabilities.................... 485 8 2 4 2
------- ------- ------- ------- -------
Net cash provided by (used in) operating
activities.............................. 2,425 4,327 (1,967) 2,105 (737)
------- ------- ------- ------- -------
Cash flows from investing activities:
Purchases of property and equipment.............. (266) (149) (443) (137) (552)
Proceeds from sale of property and equipment..... 14 17 21 16 37
Net change in due from affiliates................ 16 (1,561) 132 (969) 1,787
------- ------- ------- ------- -------
Net cash provided by (used in) investing
activities.............................. (236) (1,693) (290) (1,090) 1,272
------- ------- ------- ------- -------
Cash flows from financing activities:
Bank overdraft changes, net...................... 133 913 (805) (29) (765)
Proceeds from issuance of long-term debt......... -- 1,369 257 1,344 223
(Repayments) proceeds from loans to (from)
shareholders, net.............................. (7) 1,324 (525) (2) (1,275)
(Repayments) proceeds from loans from affiliates,
net............................................ -- (4) -- 1 (73)
Repayments of long-term debt..................... (80) (88) (34) (76) (1,246)
Dividends and distributions...................... (3,144) (4,101) -- (2,779) (415)
------- ------- ------- ------- -------
Net cash used in financing activities..... (3,098) (587) (1,107) (1,541) (3,551)
------- ------- ------- ------- -------
Effect of foreign exchange rate changes on cash and
cash equivalents................................. 428 (441) (771) (303) (845)
------- ------- ------- ------- -------
Net change in cash and cash equivalents... (481) 1,606 (4,135) (829) (3,861)
Cash and cash equivalents at beginning of period... 6,264 5,783 7,389 5,783 7,389
------- ------- ------- ------- -------
Cash and cash equivalents at end of
period.................................. $ 5,783 $ 7,389 $ 3,254 $ 4,954 $ 3,528
======= ======= ======= ======= =======
Supplemental disclosure of cash flow information:
Cash paid during the period for interest......... $ 25 $ 66 $ 47 $ 58 $ 61
======= ======= ======= ======= =======
Cash paid during the period for income taxes..... $ 2,355 $ 1,117 $ 422 $ 756 $ 626
======= ======= ======= ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-33
<PAGE> 86
FINANCIERE ALMA, S.A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995 AND 1996 AND JUNE 30, 1997
(AMOUNTS IN US DOLLARS)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A. BASIS OF PRESENTATION
The consolidated financial statements consist of Financiere Alma and,
except for NAAC, its majority owned subsidiaries Alma Intervention, S.A., Club
Affairs Alma, S.A.R.L., Meridian VAT Reclaim France, S.A.R.L., B&F Associes,
S.A.R.L., and STEP, S.A. (collectively referred to as "Alma"). A majority owned
subsidiary, NAAC, has been excluded from the consolidation as certain of Alma's
shareholders have agreed to acquire the investment at its carrying value (see
note 2). Alma acquired B&F Associes, S.A.R.L. in March 1996 and Meridian VAT
Reclaim France, S.A.R.L. in January 1996 for amounts equivalent to their net
tangible assets. The results of operations include these two companies from
their respective acquisition dates. Pro forma and other acquisition related
information is not material.
The separate legal entities are all registered in France and prepare their
financial statements in French francs and in accordance with accounting
principles generally accepted in France. For the purpose of the proposed
acquisition of Alma by the US corporation, The Profit Recovery Group
International, Inc., the financial statements of Alma have been restated to
comply with US generally accepted accounting principles and are presented in US
dollars. The principal differences between French and US generally accepted
accounting principles relate to the timing of the recognition of revenues, the
carrying values of work-in-progress and the recognition of deferred income
taxes.
For the purpose of the translation of French franc amounts into US dollars,
the closing exchange rate has been applied for the consolidated balance sheets
and the average exchange rate has been applied for the consolidated statements
of earnings. Translation differences are recorded in shareholders' equity under
"cumulative translation adjustment." Average exchange rates of French francs to
US dollars for the years ended December 31, 1995 and 1996 and the six month
period ended June 30, 1997 were 4.9917, 5.1148 and 5.8296, respectively. The
closing exchange rate of French francs to US dollars as of December 31, 1995 and
1996 and June 30, 1997 were 4.9000, 5.2370 and 5.8777, respectively.
The accompanying unaudited condensed consolidated financial statements of
Alma as of September 30, 1997 and for the nine months ended September 30, 1996
and 1997 have been prepared in accordance with generally accepted accounting
principles for interim financial information and with the instructions to
Article 10 of Regulation S-X. 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 nine months ended
September 30, 1997 are not necessarily indicative of the results that may be
expected for the year ending December 31, 1997.
B. DESCRIPTION OF BUSINESS
Alma is headquartered in Paris, France. Founded in 1986, Alma provides its
services exclusively within France. Alma is a recovery audit firm which
primarily assists businesses in the identification and recovery of tax
overpayments, including business and personal property taxes (referred to in
France as "fiscal"), workers compensation taxes (referred to in France as
"social"), real property taxes (referred to in France as "foncier") and value
added taxes ("VAT" referred to in France as "TVA").
Alma also provides certain consulting services. Club Affairs Alma, S.A.R.L.
is a "buying" club that assists small companies in obtaining volume discounts
primarily for office supplies and equipment. Alma Intervention, S.A. also
assists French companies obtain grants and subsidies and negotiate contracts for
security and cleaning services.
F-34
<PAGE> 87
FINANCIERE ALMA, S.A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
C. PRINCIPLES OF CONSOLIDATION
The consolidated financial statements have been prepared in accordance with
US generally accepted accounting principles. In preparing these consolidated
financial statements, management is required to make a number of estimates and
assumptions relating to the reporting of assets and liabilities and the
disclosure of contingent assets and liabilities. Actual results could differ
from those estimates.
The consolidated financial statements of Alma include the financial
statements of the aforementioned entities. All significant intercompany balances
and transactions have been eliminated in consolidation.
The 1996 acquisitions of B&F Associes, S.A.R.L. and Meridian VAT Reclaim
France, S.A.R.L., as mentioned above, do not have a significant impact on cash.
As such, the cash flows related to these transactions are not presented
separately in the consolidated statement of cash flows.
D. REVENUE RECOGNITION
Alma's tax recovery audit services revenues are based on specific contracts
with its clients. Such contracts generally specify:
- time periods covered by the audit;
- nature and extent of the audit services to be provided;
- client duties in assisting and cooperating with Alma; and
- fee payable to Alma expressed as a specified percentage of the amounts
recovered by the client resulting from liability overpayments claims
identified.
Liability overpayment claims identified for fiscal, social and foncier tax
services are presented to the respective government agency for review and
approval. Claims for VAT services are filed directly with the respective
government agency.
For the fiscal, social and foncier services, Alma recognizes revenues when
(a) it receives notification of the government agency approval and (b) its
clients are entitled to the recovery. For VAT services, Alma recognizes revenues
when all documentation is filed with the appropriate government agency. Alma
generally invoices its clients concurrently with the point of revenue
recognition. Amounts received before meeting both criteria above are classified
as deferred revenue on the accompanying consolidated balance sheets.
Alma recognizes revenues for its other services as they are provided to its
clients.
E. PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is provided using
the straight-line method over the estimated useful lives of 3 years for computer
and other equipment, and 5 years for furniture and fixtures. Leasehold
improvements are amortized using the straight-line method over the term of the
lease, including extension options.
F. DIRECT AND COMPENSATION EXPENSE
Direct expenses incurred during the course of the recovery audit services
are expensed as incurred.
Non-management auditors have an element of their compensation which is
commission based and the compensation expense is recorded at the time of the
related revenue recognition, and subsequently paid as such revenue is collected.
Previously established auditor compensation accruals are subsequently adjusted
to correspond with adjustments for doubtful accounts. The salary portion of the
non-management auditors'
F-35
<PAGE> 88
FINANCIERE ALMA, S.A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
compensation is charged to operations as incurred. All other Alma employees are
compensated on the basis of salary and, in certain cases, bonuses, which are
charged to operations as incurred.
G. CASH EQUIVALENTS
Alma considers all highly liquid debt instruments with original maturities
of three months or less to be cash equivalents. Cash equivalents consist
primarily of temporary cash investments with original maturity of 90 days or
less.
H. CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject Alma to concentrations of
credit risk consist principally of cash and cash equivalents and trade
receivables.
Alma has cash investment policies that limit investments to short-term low
risk instruments. Alma's cash is held principally in French francs and
concentrated in several major French banks.
Alma sells its products to customers in a variety of industries in France.
Alma performs ongoing credit evaluations of its customers and maintains
allowances for potential credit losses. To date, such losses have been within
management's expectations. Alma generally requires no collateral.
I. INCOME TAXES
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.
2. RELATED PARTY TRANSACTIONS
Alma leases vehicles and posters from a company owned by the Chairman of
the Board of Directors of Alma. In addition, Alma leases office space from a
relative of the Chairman. Total rent expense for the posters, vehicles and
office for the years ended December 31, 1995 and 1996 and the six months ended
June 30, 1997 were $269,000, $306,000 and $123,000, respectively.
Alma also contributes 40 percent of the rental payment for an apartment in
Paris, France for the Chairman. Total rent expense for the apartment for the
years ended December 31, 1995 and 1996 and the six months ended June 30, 1997
was approximately $26,000, $25,000, and $22,000, respectively.
Alma subleases a portion of its corporate headquarters to certain
affiliates. Rental income recorded on these subleases for the year ended
December 31, 1995 and 1996 and the six months ended June 30, 1997 were
approximately $27,000, $35,000 and $20,000, respectively.
Consulting services have been provided to Alma by a major shareholder who
is also a director of Alma. Consulting fees for the years ended December 31,
1995 and 1996 and the six months ended June 30, 1997 were $194,000, $227,000 and
$100,000, respectively.
The amounts contained in "Due from affiliates" represent mainly a loan to
and the net book value of NACC. In September 1997, Alma's interest in NACC was
sold to certain of Alma's shareholders at book value for cash.
F-36
<PAGE> 89
FINANCIERE ALMA, S.A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The amounts in "Due to shareholders" and "Due to affiliates" represent
interest free advances by the Chairman to Alma for operating purposes and
expenses paid on behalf of Alma by affiliated companies, respectively.
Prior to 1994, Alma had guaranteed one half of a FF10,000,000 loan held by
NACC. The amount of the guarantee was approximately $851,000 at June 30, 1997.
This guarantee was secured by a pledge of the shares in Alma Intervention, S.A.
Subsequent to June 30, 1997, the guarantee given and security pledged by Alma
has been released.
During 1995, Financiere Alma loaned approximately $292,000 to a shareholder
who was also an employee of Alma. The full amount of the loan was repaid prior
to December 31, 1995.
3. CASH AND CASH EQUIVALENTS
Cash and cash equivalents include:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------- JUNE 30,
1995 1996 1997
------ ------ --------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C>
Cash held at bank........................................... $2,420 $1,485 $ 676
Cash equivalents............................................ 3,363 5,904 2,578
------ ------ ------
$5,783 $7,389 $3,254
====== ====== ======
</TABLE>
The fair value of cash equivalents, all classified as available-for-sale,
approximate book value at December 31, 1995 and 1996 and at June 30, 1997.
4. LONG-TERM DEBT
Long-term debt is summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------- JUNE 30,
1995 1996 1997
---- ------ --------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C>
Term loan with interest rate of PIBOR plus 2% (5.39% at June
30, 1997) with final payment due December 1999(a)......... $ -- $1,336 $1,190
Term loan with interest rate of 7.5% requiring quarterly
payments of FF 75,000, or $12,864 at June 30, 1997, plus
interest with final payment due February 1998............. 146 72 39
Term loan with interest rate of PIBOR plus 1.25% (4.64% at
June 30, 1997) requiring quarterly payments of FF 44,704
or $7,668 at June 30, 1997, plus interest with final
payment due April 2000.................................... -- -- 245
Other....................................................... 98 67 48
---- ------ ------
244 1,475 1,522
Less current installments................................... 88 410 435
---- ------ ------
Long-term debt, excluding current installments.... $156 $1,065 $1,087
==== ====== ======
</TABLE>
- ---------------
(a) This loan is secured by a pledge of 6,307 shares of Alma Intervention, S.A.
Alma would be liable to a 2% per year indemnity in case of early repayment.
A merger, transfer of assets, change in ownership constitutes an event
default which could cause early repayment (see note 12).
F-37
<PAGE> 90
FINANCIERE ALMA, S.A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Future minimum annual principal payments for long-term debt for each of the
years subsequent to December 31, 1996 are as follows:
<TABLE>
<CAPTION>
(AMOUNTS IN THOUSANDS)
<S> <C>
YEARS ENDING DECEMBER 31,
1997........................................................ $ 410
1998........................................................ 501
1999........................................................ 553
2000........................................................ 11
------
Total............................................. $1,475
======
</TABLE>
5. SHAREHOLDERS' EQUITY
In September 1995, Alma increased its ownership interest in Alma
Intervention, S.A. from 50.7% to 60.6% by the issuance of 561 ordinary shares.
The Alma Intervention, S.A. shares were purchased from the Chairman, and valued
for an amount which was considerably lower than the fair value of the interest
acquired. As this transaction involved entities under common control, the excess
of fair value over book value has been accounted for as a contribution by
minority interests to retained earnings.
6. LEASES
Alma is committed under non-cancelable operating lease arrangements for
facilities, vehicles and artwork, including related party leases (see note 2).
Rent expense for the years ended December 31, 1995 and 1996 and the six months
ended June 30, 1997 was $694,000, $803,000 and $242,000, respectively. The
future minimum lease payments under these leases, net of related party subleases
(see note 2), are summarized as follows:
<TABLE>
<CAPTION>
RELATED OTHER
PARTIES LEASES TOTAL
------- ------ ------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C>
YEARS ENDING DECEMBER 31,
1997........................................................ $ 83 $ 267 $ 350
1998........................................................ 214 462 676
1999........................................................ 104 517 621
2000........................................................ 4 -- 4
---- ------ ------
Total............................................. $405 $1,246 $1,651
==== ====== ======
</TABLE>
7. INCOME TAXES
The provision for income taxes for the years ended December 31, 1995 and
1996 and the six months ended June 30, 1997 consists of the following:
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
--------------- JUNE 30,
1995 1996 1997
------ ------ --------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C>
Current..................................................... $1,950 $1,139 $495
Deferred.................................................... (88) (165) (70)
------ ------ ----
Total............................................. $1,862 $ 974 $425
====== ====== ====
</TABLE>
F-38
<PAGE> 91
FINANCIERE ALMA, S.A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A reconciliation of income taxes computed at the French statutory rate
(36.66% in 1995, 1996 and 1997) to income tax expense is as follows:
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
------------- JUNE 30,
1995 1996 1997
------ ---- --------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C>
Income tax expense computed at the French statutory rate.... $1,935 $960 $417
Other....................................................... (73) 14 8
------ ---- ----
Total............................................. $1,862 $974 $425
====== ==== ====
</TABLE>
Deferred taxes reflect the net tax effects of temporary differences between
the carrying amounts of assets and liabilities for financial reporting purposes
and the amounts used for income tax purposes. Significant components of the
Company's deferred taxes consist of the following:
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
--------------- JUNE 30,
1995 1996 1997
------ ------ --------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C>
Deferred tax liabilities:
Accrued payroll and related expenses...................... $ 46 $ 68 $ 60
Accumulated depreciation.................................. 2 -- --
------ ------ ------
Total deferred tax liabilities.................... 48 68 60
------ ------ ------
Deferred tax assets:
Deferred revenues......................................... 702 824 759
Accounts payable and accrued expenses..................... 260 236 239
Other..................................................... 43 66 99
------ ------ ------
Total deferred tax assets.............................. 1,005 1,126 1,097
------ ------ ------
Net deferred tax assets................................ $ 957 $1,058 $1,037
====== ====== ======
</TABLE>
A proposal to increase the statutory tax rate from 36.7% to 41.6% effective
January 1, 1997 will be the subject of a vote by the members of the French
National Assembly. If approved, income tax expense for the six months ended June
30, 1997 would increase by $64,000 and the net deferred tax asset would increase
by $156,000.
No valuation allowances were deemed necessary since all deductible
temporary differences could be carried back to recover income taxes previously
paid.
8. EMPLOYEE BENEFIT PLANS
Alma contributes to pensions for personnel in France in accordance with
French law, by contributions based on salaries to the relevant state-sponsored
organizations. Alma has no further liability in connection with these plans.
French law also requires payment of a lump sum retirement indemnity to
employees, based upon years of service and compensation at retirement. Benefits
do not vest prior to retirement. Alma's estimated obligations at December 31,
1995 and 1996 and June 30, 1997 were determined using actuarial methods. Expense
related to this plan for the years ended December 31, 1995 and 1996 and six
months ended June 30, 1997 were $4,000, $4,000 and $2,000, respectively.
In March 1992, Alma Intervention, S.A. implemented a profit sharing
agreement as required under French corporate law. This agreement was
subsequently renewed in December, 1996 and extended to
F-39
<PAGE> 92
FINANCIERE ALMA, S.A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
employees of all companies except B&F Associes, S.A.R.L. The agreement allows
all qualified employees with at least six months of service to receive a benefit
equal to a percentage of Alma's taxable income, based on the employee's length
of service and amount of salary. The benefit is deposited in a venture capital
fund and cannot be used by the employee for a five year period, except under
circumstances defined by the plan, such as death or resignation. B&F Associes,
S.A.R.L. adopted a similar benefit plan for its employees on November 13, 1995,
which terminates on November 12, 1998, with the option to renew. Expense related
to this plan for the years ended December 31, 1995 and 1996 and six months ended
June 30, 1997 were $424,000, $384,000 and $185,000, respectively.
In October 1993, Alma entered into an employee savings agreement which
entitles employees with at least six months of service to contribute, either
directly in cash or by transferring part or all of the sums deposited in the
venture capital fund referred to above, to a fund that purchases either
short-term investments or acquires shares in Alma Intervention, S.A. The shares
purchased cannot be transferred by the employees for a five year period, except
under circumstances defined by the plan such as death, retirement or
resignation. Employees have the right to purchase shares under this plan at
their estimated fair value only during periods designated by Alma. Since the
inception of the plan, only one sale was offered to employees, on October 1993,
resulting in 341 shares of Alma Intervention, S.A. being purchased.
In June 1994, a bonus incentive agreement was adopted by Alma Intervention,
S.A. for a three year period for all employees having at least six months
service. The agreement allows all qualified employees to receive a benefit as a
result of achieving certain corporate goals. The amount of the benefit and
specific corporate goals are generally established at the beginning of each
fiscal year. By adopting this plan, Alma receives tax benefits such as lower
social taxes on employee wages. The agreement was renewed for three years in
June 1997. Expense related to this plan for the years ended December 31, 1995
and 1996 and six months ended June 30, 1997 were $444,000, $480,000 and
$218,000, respectively.
9. COMMITMENTS AND CONTINGENCIES
Alma guarantees the validity of the claims identified by providing a
commitment to refund fees earned on successful claims which are later determined
to be unsuccessful. Since Alma's fees are a percentage of the recovery received
by its clients, the refunds for unsuccessful claims arise if the favorable
ruling during a tax audit for fiscal, social and foncier tax claims is
subsequently overturned or a VAT tax claim is denied (see note 1.A). Alma
secures certain guarantees with a bank guarantee in favor of its client. The
terms of these bank guarantees generally correspond with the remaining statutory
period for tax audits of the related claim identified. Bank guarantees
outstanding at June 30, 1997 totaled $799,000. Historically, Alma has rarely
been required to refund its fees. Management believes that any future
reimbursement of fees received will not be material.
Alma is subject to legal proceedings and claims which arise in the ordinary
course of its business. While these actions are being contested, management
believes that any liability resulting from these matters, after taking into
consideration insurance coverage and amounts already accrued, should not have a
material adverse effect on the consolidated financial position or results of
operations.
During December 1995, Alma entered into an agreement with Lasseri, Durand
et Associes ("LDA") to provide legal, audit and research services at
pre-established invoicing rates, based on Alma's request. The contract
stipulates that Alma's yearly demand of LDA's services is not to fall below 25%
of the highest annual fees paid to LDA during the previous three years ("the
standard fee level"). Failure on the part of Alma to fulfill this level of
request for services from LDA will result in a penalty to be paid to LDA in the
amount of the decrease in the demand of services from the standard fee level. If
Alma terminates the contract prior to expiration, Alma will be required to pay
to LDA an amount equal to the highest annual fees invoiced by LDA during the
last three years. The agreement covers a period of five years ending December
2000. Fees paid to
F-40
<PAGE> 93
FINANCIERE ALMA, S.A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
LDA for the years ended December 31, 1995 and 1996 and the six months ended June
30, 1997 were $366,000, $410,000 and $101,000, respectively.
10. FAIR VALUE OF FINANCIAL INSTRUMENTS
At December 31, 1995 and 1996, and June 30, 1997, the carrying values of
financial instruments such as cash and cash equivalents, accounts receivable,
due from affiliates and current liabilities approximated their market values,
based on the short-term maturities of these instruments. The fair value of
Alma's long-term debt instruments are based on the amount of future cash flows
associated with each instrument discounted using Alma's current borrowing rate
for similar debt instruments of comparable maturity. The estimated fair value of
the Company's long-term debt instruments, excluding current installments of
long-term debt (see note 4), at December 31, 1995 and 1996 and June 30, 1997 was
$198,000, $1,298,000 and $1,126,000, respectively.
11. MINORITY INTEREST
As of June 30, 1997, Financiere Alma owned either directly or indirectly
through Alma Intervention, S.A., 61% of Alma Intervention, S.A., 90% of Step,
S.A., 99% of B&F Associes, S.A.R.L., 85% of Club Affaires Alma, S.A.R.L., and
90% of Meridian VAT Reclaim France, S.A.R.L. Minority interest distributions
during the years ended December 31, 1995 and 1996, and the six months ended June
30, 1997 were $1,456,000, $1,163,000 and $414,000, respectively. During
September 1995, approximately $289,000 was transferred from minority interest to
retained earnings (see note 5).
In September 1997, Alma Intervention, S.A. purchased the minority ownership
in Club Affairs Alma, S.A.R.L., Meridian VAT Reclaim France, S.A.R.L., B&F
Associes, S.A.R.L. and Step, S.A. for amounts that approximated the net book
value of the minority interest. The net book value approximates the fair value.
12. SUBSEQUENT EVENT
On October 7, 1997, The Profit Recovery Group International, Inc. ("PRG")
acquired substantially all ownership interests of Alma for a consideration of
approximately $24,602,000 in cash and 859,000 unregistered shares of PRG's
common stock. PRG has the obligation to purchase the remaining ownership
(approximately 1.6%) of Alma by January 1999 for terms similar to the October
1997 transaction.
F-41
<PAGE> 94
[PRG LOGO]
<PAGE> 95
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
Estimated expenses of the offering, other than underwriting discounts and
commissions, are:
<TABLE>
<S> <C>
Securities and Exchange Commission registration fee......... $ 28,548
NASD filing fee............................................. 10,177
Nasdaq/NMS listing fee...................................... 17,500
Blue sky fees and expenses.................................. 7,500
Printing and engraving expenses............................. 150,000
Legal fees and expenses..................................... 350,000
Accounting fees and expenses................................ 125,000
Transfer Agent and registrar fees........................... 10,000
Miscellaneous expenses...................................... 51,275
--------
Total............................................. $750,000
========
</TABLE>
All amounts except the Securities and Exchange Commission registration fee,
the NASD filing fee and The Nasdaq Stock Market's National Market listing fee
are estimated. The Company intends to pay all expenses of registration with
respect to shares being sold by the Selling Shareholders hereunder, with the
exception of underwriting discounts and commissions.
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Article 8 of the Company's Articles of Incorporation and Article VII of the
Company's Bylaws set forth the extent to which the Company's directors and
officers may be indemnified against liabilities they may incur while serving in
such capacities. Such indemnification will be provided to the fullest extent
allowed by the Georgia Business Corporation Code, as amended from time to time.
Under these indemnification provisions, the Company is required to indemnify any
of its directors and officers against any reasonable expenses (including
attorneys' fees) incurred by such party in the defense of any action, suit or
proceeding, whether civil, criminal, administrative or investigative, to which
such person was made a party, or in defense to any claim, issue or matter
therein, by reason of the fact that such person is or was a director or officer
of the Company or who, while a director or officer of the Company, is or was
serving at the Company's request as a director, officer, partner, trustee,
employee or agent of another corporation, partnership, joint venture, trust,
employee benefit plan or other enterprise to the extent that such director or
officer has been successful, on the merits or otherwise, in such defense. The
Company also is required to indemnify any of its directors or officers against
any liability incurred in connection with any threatened, pending or completed
action, suit or proceeding, whether civil, criminal, administrative or
investigative (other than an action by or in the name of the Company, in which
event, additional determinations must be made before indemnification is
provided) by reason of the fact that he or she is or was a director or officer
of the Company who, while a director or officer of the Company, is or was
serving at the Company's request as a director, officer, partner, trustee,
employee or agent of another corporation, partnership, joint venture, trust,
employee benefit plan or other enterprise, if such director or officer acted in
a manner he or she believed in good faith to be in, or not opposed to, the best
interests of the Company, and with respect to any criminal proceeding, had no
reasonable cause to believe his or her conduct was unlawful. The Company may
also provide advances of expenses incurred by a director or officer in defending
such action, suit or proceeding upon receipt of a written affirmation of such
officer or director that he or she has met certain standards of conduct and an
undertaking by or on behalf of such officer or director to repay such advances
unless it is ultimately determined that he or she is entitled to indemnification
by the Company.
II-1
<PAGE> 96
The Company's Articles of Incorporation contain a provision which
eliminates, to the fullest extent permitted by law, director liability for
monetary damages for breaches of the fiduciary duty of care or any other duty as
a director.
The Company has entered into indemnification agreements (the
"Indemnification Agreements") with each of its directors and certain executive
officers. The Indemnification Agreements set forth certain procedural matters
relating to indemnification, including the manner in which an indemnified party
may make a claim and the right of an indemnified party to court adjudication of
his or her claim if indemnification is denied by the Company.
The Company has obtained an insurance policy insuring the directors and
officers of the Company against certain liabilities, including liabilities under
the Securities Act of 1933, as amended (the "Securities Act").
Pursuant to the Underwriting Agreement entered into by the Company in
connection with its initial public offering of Common Stock and the Underwriting
Agreement entered into in connection with the offering of Common Stock by this
registration statement and the accompanying Prospectus, the Underwriters
thereunder have agreed to indemnify the directors and officers of the Registrant
and certain other persons against certain civil liabilities.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits. The following exhibits are filed as part of this
Registration Statement:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <C> <S>
1.1 -- Form of Underwriting Agreement among the Registrant,
BancAmerica Robertson Stephens, Hambrecht & Quist LLC and
The Robinson-Humphrey Company, LLC.
2.1+ -- Agreement and Plan of Reorganization, dated January 4, 1995,
among The Profit Recovery Group, Inc., Fial & Associates,
Inc. and T. Charles Fial (incorporated by reference to the
Exhibit of the same number contained in the Registrant's
Registration Statement on Form S-1 (Registration No.
333-1086)).
2.2+ -- Note Purchase Agreement, dated April 27, 1995, among The
Profit Recovery Group, International, L.P., The Profit
Recovery Group International I, Inc., T. Charles Fial and
certain limited partners and purchasers named therein
(incorporated by reference to the Exhibit of the same number
contained in the Registrant's Registration Statement on Form
S-1 (Registration No. 333-1086)).
2.3+ -- Share Purchase Agreement dated as of October 7, 1997 among
the Company, PRG France and certain individual Stockholders
of Alma Intervention S.A. (incorporated by reference to
Exhibit 2.1(a) of the Registrant's Form 8-K filed with the
Commission on October 22, 1997).
2.4+ -- Share Purchase Agreement dated as of October 7, 1997 among
the Company, PRG France and certain individual Stockholders
of Alma Intervention S.A. (incorporated by reference to
Exhibit 2.1(b) of the Registrant's Form 8-K filed with the
Commission on October 22, 1997).
2.5+ -- Share Purchase Agreement dated as of October 7, 1997 among
the Company, PRG France and Epargne Capitalisation
Intermediare and Epargne Developpement (incorporated by
reference to Exhibit 2.2 of the Registrant's Form 8-K filed
with the Commission on October 22, 1997).
2.6+ -- Share Purchase Agreement dated as of October 7, 1997 among
the Company, PRG France and Sophie Davet (incorporated by
reference to Exhibit 2.3 of the Registrant's Form 8-K filed
with the Commission on October 22, 1997).
</TABLE>
II-2
<PAGE> 97
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <C> <S>
2.7+ -- Share Purchase Agreement dated as of October 7, 1997 among
the Company, PRG France and Marc Eisenberg and Eric
Eisenberg (incorporated by reference to Exhibit 2.4 of the
Registrant's Form 8-K filed with the Commission on October
22, 1997).
2.8+ -- Share Purchase Agreement dated as of October 7, 1997 among
the Company, PRG France and Banque Internationale a
Luxembourg S.A. for share capital of Financiere Alma S.A.
and Alma Intervention S.A. (incorporated by reference to
Exhibit 2.5 of the Registrant's Form 8-K filed with the
Commission on October 22, 1997).
2.9+ -- Share Purchase Agreement dated as of October 7, 1997 among
the Company, PRG France and Banque Internationale a
Luxembourg S.A for share capital of Alma Intervention S.A.
(incorporated by reference to Exhibit 2.6 of the
Registrant's Form 8-K filed with the Commission on October
22, 1997).
2.10+ -- Warranty Agreement dated as of October 7, 1997 among the
Company, PRG France, Marc Eisenberg and Eric Eisenberg
(incorporated by reference to Exhibit 2.7 of the
Registrant's Form 8-K filed with the Commission on October
22, 1997).
2.11+ -- Indemnity Escrow and Stock Pledge Agreement dated as of
October 7, 1997 among the Company, PRG France, Marc
Eisenberg, Eric Eisenberg, Banque Internationale a
Luxembourg S.A. and Arnall Golden & Gregory, LLP
(incorporated by reference to Exhibit 2.8 of the
Registrant's Form 8-K filed with the Commission on October
22, 1997).
4.1* -- Specimen Common Stock Certificate (incorporated by reference
to the Exhibit of the same number contained in the
Registrant's Registration Statement on Form S-1
(Registration No. 333-1086)).
4.2* -- Applicable provisions of the Articles of Incorporation and
Bylaws of the Registrant (incorporated by reference to
Exhibits 3.1 and 3.2 of the Registrant's Registration
Statement on Form S-1 (Registration No. 333-1086)).
5.1 -- Opinion of Long Aldridge & Norman LLP.
23.1 -- Consent of Long Aldridge & Norman LLP (included in its
opinion to be filed as Exhibit 5.1).
23.2* -- Consent of KPMG Peat Marwick LLP.
23.3* -- Consent of ERNST & YOUNG Entrepreneurs.
24.1* -- Powers of Attorney (see signature pages to this Registration
Statement).
</TABLE>
- ---------------
* Previously filed.
+ In accordance with Item 601(b)(2) of the Regulation S-K, the Schedules have
been omitted and a list briefly describing the schedules is contained at the
end of the Exhibit. The Company will furnish supplementally a copy of any
omitted schedule to the Commission upon request.
(b) Financial Statement Schedules.
All schedules for which provision is made in the applicable regulations of
the Securities and Exchange Commission are not required under the related
instructions or are inapplicable and therefore have been omitted.
ITEM 17. UNDERTAKINGS
(a) The undersigned Registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
Registrant's annual report pursuant to Section 13(a) or 15(d) of the Securities
Exchange Act of 1934 (and, where applicable, each filing of an employee benefit
plan's annual report pursuant to Section 15(d) of the Securities Exchange Act of
1934) that is incorporated by reference in the registration statement shall be
deemed to be a new registration statement relating to the securities offered
therein and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
II-3
<PAGE> 98
(b) Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that, in the opinion of the Securities and Exchange Commission,
such indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the Registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
(c) The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities
Act, the information omitted from the form of prospectus filed as part of
this Registration Statement in reliance upon Rule 430A and contained in the
form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new Registration Statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed the initial bona fide offering thereof.
II-4
<PAGE> 99
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended (the
"Act"), the Registrant certifies that it has reasonable grounds to believe that
it meets all of the requirements for filing on Form S-3 and has duly caused this
Amendment to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Atlanta, State of Georgia, on March 13, 1998.
THE PROFIT RECOVERY GROUP
INTERNATIONAL, INC. (REGISTRANT)
By: /s/ JOHN M. COOK
-----------------------------------
John M. Cook
Chairman of the Board and Chief
Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this Amendment
has been signed by the following persons in the capacities and on the date
indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ JOHN M. COOK Chairman of the Board, Chief March 13, 1998
- ----------------------------------------------------- Executive Officer and
John M. Cook Director (principal executive
officer)
/s/ DONALD E. ELLIS, JR. Senior Vice March 13, 1998
- ----------------------------------------------------- President -- Finance,
Donald E. Ellis, Jr. Treasurer and Chief Financial
Officer (principal financial
officer)
/s/ MICHAEL R. MELTON Vice President -- Finance March 13, 1998
- ----------------------------------------------------- (principal accounting
Michael R. Melton officer)
* Director March 13, 1998
- -----------------------------------------------------
Stanley B. Cohen
* Director March 13, 1998
- -----------------------------------------------------
Marc Eisenberg
* Director March 13, 1998
- -----------------------------------------------------
Jonathan Golden
* Director March 13, 1998
- -----------------------------------------------------
Garth H. Greimann
* Director March 13, 1998
- -----------------------------------------------------
Fred W. I. Lachotzki
(Signatures continued on following page)
</TABLE>
II-5
<PAGE> 100
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
* Director March 13, 1998
- -----------------------------------------------------
E. James Lowrey
* Director March 13, 1998
- -----------------------------------------------------
Michael A. Lustig
* Vice Chairman and Director March 13, 1998
- -----------------------------------------------------
John M. Toma
*By: /s/ JOHN M. COOK
-------------------------------------------------
John M. Cook,
Attorney-in-Fact
</TABLE>
II-6
<PAGE> 1
EXHIBIT 1.1
4,400,000 SHARES1
THE PROFIT RECOVERY GROUP INTERNATIONAL, INC.
COMMON STOCK
UNDERWRITING AGREEMENT
______________, 1998
BANCAMERICA ROBERTSON STEPHENS
HAMBRECHT & QUIST LLC
THE ROBINSON-HUMPHREY COMPANY, LLC
As Representatives of the several Underwriters
c/o BancAmerica Robertson Stephens
555 California Street
Suite 2600
San Francisco, California 94104
Ladies/Gentlemen:
The Profit Recovery Group International, Inc., a Georgia corporation
(the "Company"), and certain shareholders of the Company named in Schedule B
hereto (hereafter called the "Selling Shareholders") address you as the
Representatives of each of the persons, firms and corporations listed in
Schedule A hereto (herein collectively called the "Underwriters") and hereby
confirm their respective agreements with the several Underwriters as follows:
1. Description of Shares. The Company proposes to issue and sell
2,000,000 shares of its authorized and unissued Common Stock, no par value per
share, to the several Underwriters. The Selling Shareholders, acting severally
and not jointly, propose to sell an aggregate of 2,400,000 shares of the
Company's authorized and outstanding Common Stock, no par value per share, to
the several Underwriters. The 2,000,000 shares of Common Stock, no par value per
share, of the Company to be sold by the Company are hereinafter called the
"Company Shares" and the 2,400,000 shares of Common Stock, no par value per
share, to be sold by the Selling Shareholders are hereinafter called the
"Selling Shareholder Shares." The Company Shares and the Selling Shareholder
Shares are hereinafter collectively referred to as the "Firm Shares." Certain
Selling Shareholders also propose to grant, severally and not jointly, to the
Underwriters an option to purchase up to 660,000 additional shares of the
Company's Common Stock, no par value per share, (the "Option Shares"), as
provided in Section 7 hereof. As used in this Agreement, the term "Shares" shall
include the Firm Shares and the Option Shares. All shares of Common Stock, no
par value per share, of the Company to be outstanding after giving effect to the
sales contemplated hereby, including the Shares, are hereinafter referred to as
"Common Stock."
- --------
1 Plus an option to purchase up to 660,000 additional shares from certain
shareholders of the Company to cover over-allotments.
<PAGE> 2
2. Representations, Warranties and Agreements of the Company and the
Shareholders.
I. Each of the Company, John M. Cook and John M. Toma (John M. Cook and
John M. Toma are collectively referred to as the "Shareholders"), jointly and
severally, represent and warrant to and agrees with each Underwriter that:
(a) A registration statement on Form S-3 (File No. 333-46225)
with respect to the Shares, including a prospectus subject to completion, has
been prepared by the Company in conformity with the requirements of the
Securities Act of 1933, as amended (the "Act"), and the applicable rules and
regulations (the "Rules and Regulations") of the Securities and Exchange
Commission (the "Commission") under the Act and has been filed with the
Commission; such amendments to such registration statement, such amended
prospectuses subject to completion and such abbreviated registration statements
pursuant to Rule 462(b) of the Rules and Regulations as may have been required
prior to the date hereof have been similarly prepared and filed with the
Commission; and the Company will file such additional amendments to such
registration statement, such amended prospectuses subject to completion and such
abbreviated registration statements as may hereafter be required. Copies of such
registration statement and amendments, of each related prospectus subject to
completion (the "Preliminary Prospectuses") and of any abbreviated registration
statement pursuant to Rule 462(b) of the Rules and Regulations have been
delivered to you. The Company and the transactions contemplated by this
Agreement meet the requirements for using Form S-3 under the Act.
If the registration statement relating to the Shares has been
declared effective under the Act by the Commission, the Company will prepare and
promptly file with the Commission the information omitted from the registration
statement pursuant to Rule 430A(a) or, if BancAmerica Robertson Stephens, on
behalf of the several Underwriters, shall agree to the utilization of Rule 434
of the Rules and Regulations, the information required to be included in any
term sheet filed pursuant to Rule 434(b) or (c), as applicable, of the Rules and
Regulations pursuant to subparagraph (1), (4) or (7) of Rule 424(b) of the Rules
and Regulations or as part of a post-effective amendment to the registration
statement (including a final form of prospectus). If the registration statement
relating to the Shares has not been declared effective under the Act by the
Commission, the Company will prepare and promptly file an amendment to the
registration statement, including a final form of prospectus, or, if BancAmerica
Robertson Stephens, on behalf of the several Underwriters, shall agree to the
utilization of Rule 434 of the Rules and Regulations, the information required
to be included in any term sheet filed pursuant to Rule 434(b) or (c), as
applicable, of the Rules and Regulations. The term "Registration Statement" as
used in this Agreement shall mean such registration statement, including
financial statements, schedules and exhibits, in the form in which it became or
becomes, as the case may be, effective (including, if the Company omitted
information from the registration statement pursuant to Rule 430A(a) or files a
term sheet pursuant to Rule 434 of the Rules and Regulations, the information
deemed to be a part of the registration statement at the time it became
effective pursuant to Rule 430A(b) or Rule 434(d) of the Rules and Regulations)
and, in the event of any amendment thereto or the filing of any abbreviated
registration statement pursuant to Rule 462(b) of the Rules and Regulations
relating thereto after the effective date of such registration statement, shall
also mean (from and after the effectiveness of such amendment or the filing of
such abbreviated registration statement) such registration statement as so
amended, together with any such abbreviated registration statement. The term
"Prospectus" as used in this Agreement shall mean the prospectus relating to the
Shares as included in such Registration Statement at the time it becomes
effective (including, if the Company omitted information from the Registration
Statement pursuant to Rule 430A(a) of the Rules and Regulations, the information
deemed to be a part of the Registration Statement at the time it became
effective pursuant to Rule 430A(b) of the Rules and Regulations); provided,
however, that if in reliance on Rule 434 of the Rules and Regulations and with
the consent of BancAmerica Robertson Stephens, on behalf of the several
Underwriters, the Company shall have provided to the Underwriters a term sheet
pursuant to Rule 434(b) or (c), as applicable, prior to the time that a
confirmation is sent or given for purposes of Section 2(10)(a) of the Act, the
term "Prospectus" shall mean the "prospectus subject to completion" (as defined
in Rule 434(g) of the Rules and Regulations) last provided to the Underwriters
by the Company and circulated by the Underwriters to all prospective
-2-
<PAGE> 3
purchasers of the Shares (including the information deemed to be a part of the
Registration Statement at the time it became effective pursuant to Rule 434(d)
of the Rules and Regulations). Notwithstanding the foregoing, if any revised
prospectus shall be provided to the Underwriters by the Company for use in
connection with the offering of the Shares that differs from the prospectus
referred to in the immediately preceding sentence (whether or not such revised
prospectus is required to be filed with the Commission pursuant to Rule 424(b)
of the Rules and Regulations), the term "Prospectus" shall refer to such revised
prospectus from and after the time it is first provided to the Underwriters for
such use. If in reliance on Rule 434 of the Rules and Regulations and with the
consent of BancAmerica Robertson Stephens, on behalf of the several
Underwriters, the Company shall have provided to the Underwriters a term sheet
pursuant to Rule 434(b) or (c), as applicable, prior to the time that a
confirmation is sent or given for purposes of Section 2(10)(a) of the Act, the
Prospectus and the term sheet, together, will not be materially different from
the prospectus in the Registration Statement. Any reference to the Registration
Statement or the Prospectus shall be deemed to refer to and include the
documents incorporated by reference therein pursuant to Item 12 of Form S-3
under the Act, as of the date of the Registration Statement or the Prospectus,
as the case may be, and any reference to any amendment or supplement to the
Registration Statement or the Prospectus shall be deemed to refer to and include
any documents filed after such date under the Securities Exchange Act of 1934,
as amended (the "Exchange Act"), which, upon filing, are incorporated by
reference therein, as required by paragraph (b) of Item 12 of Form S-3. As used
in this Agreement, the term "Incorporated Documents" means the documents which
at the time are incorporated by reference in the Registration Statement, the
Prospectus or any amendment or supplement thereto.
(b) The Commission has not issued any order preventing or suspending
the use of any Preliminary Prospectus or instituted proceedings for that
purpose, and each such Preliminary Prospectus has conformed in all material
respects to the requirements of the Act and the Rules and Regulations and, as of
its date, has not included any untrue statement of a material fact or omitted to
state a material fact necessary to make the statements therein, in the light of
the circumstances under which they were made, not misleading; and at the time
the Registration Statement became or becomes, as the case may be, effective and
at all times subsequent thereto up to and on the Closing Date (hereinafter
defined) and on any later date on which Option Shares are to be purchased, (i)
the Registration Statement and the Prospectus, and any amendments or supplements
thereto, contained and will contain all material information required to be
included therein by the Act and the Rules and Regulations and will in all
material respects conform to the requirements of the Act and the Rules and
Regulations, (ii) the Registration Statement, and any amendments or supplements
thereto, did not and will not include any untrue statement of a material fact or
omit to state a material fact required to be stated therein or necessary to make
the statements therein not misleading, and (iii) the Prospectus, and any
amendments or supplements thereto, did not and will not include any untrue
statement of a material fact or omit to state a material fact required to be
stated therein or necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading; provided, however,
that none of the representations and warranties contained in this subparagraph
(b) shall apply to information contained in or omitted from the Registration
Statement or the Prospectus, or any amendment or supplement thereto, in reliance
upon, and in conformity with, written information relating to any Underwriter
furnished to the Company by such Underwriter specifically for use in the
preparation thereof.
The Incorporated Documents heretofore filed, when they were filed
(or, if any amendment with respect to any such document was filed, when such
amendment was filed), conformed in all material respects with the requirements
of the Exchange Act and the rules and regulations of the Commission thereunder;
any further Incorporated Documents so filed will, when they are filed, conform
in all material respects with the requirements of the Exchange Act and the rules
and regulations of the Commission thereunder; no such document when it was filed
(or, if an amendment with respect to any such document was filed, when such
amendment was filed), contained any untrue statement of a material fact or
omitted to state a material fact required to be stated therein or necessary to
make the statements therein, in light of the circumstances under which they were
made, not misleading; and no such further amendment will contain any untrue
statement of a material fact or omit to state a material fact required to
-3-
<PAGE> 4
be stated therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading.
(c) Each of the Company and its Subsidiaries (as defined below) has
been duly incorporated and is validly existing as a corporation in good standing
under the laws of the jurisdiction of its incorporation with full corporate
power and authority to own, lease and operate its properties and conduct its
business as described in the Prospectus; at the Closing Date, the Company will
directly or indirectly own all of the outstanding capital stock of its
Subsidiaries free and clear of any pledge, lien, security interest, encumbrance,
claim or equitable interest, except as disclosed in the Prospectus; each of the
Company and its Subsidiaries is duly qualified to do business as a foreign
corporation and is in good standing in each jurisdiction in which the ownership
or leasing of its properties or the conduct of its business requires such
qualification, except where the failure to be so qualified or be in good
standing would not have a material adverse effect on the condition (financial or
otherwise), earnings, operations, business or business prospects of the Company
and its Subsidiaries considered as one enterprise; no proceeding has been
instituted in any such jurisdiction, revoking, limiting or curtailing, or
seeking to revoke, limit or curtail, such power and authority or qualification,
except any such proceeding which would not have a material adverse effect on the
condition (financial or otherwise), earnings, operations, business or business
prospects of the Company and its Subsidiaries considered as one enterprise;
neither the Company nor any of its Subsidiaries is in violation of its
respective charter or bylaws or in default in the performance or observance of
any material obligation, agreement, covenant or condition contained in any
material bond, debenture, note or other evidence of indebtedness which has not
otherwise been waived, or in any material lease, contract, indenture, mortgage,
deed of trust, loan agreement, joint venture or other agreement or instrument to
which the Company or any of its Subsidiaries is a party or by which it or any of
its Subsidiaries or their respective properties may be bound which has not
otherwise been waived; and neither the Company nor any of its Subsidiaries is in
material violation of any law, order, rule, regulation, writ, injunction,
judgment or decree of any court, government or governmental agency or body,
domestic or foreign, having jurisdiction over the Company or any of its
Subsidiaries or over their respective properties of which it or they have
knowledge. At the Closing Date, the Company will not own or control, directly or
indirectly, any corporation, association or other entity or have any equity
interest in any other entity other than those entities identified on Schedule C
hereto. For purposes of this Agreement, the term "Subsidiary" shall mean the
"U.S. Subsidiaries" and the "Foreign Subsidiaries," collectively; the term "U.S.
Subsidiaries" shall mean any corporation, partnership or other entity in which
the Company or any Subsidiary has a controlling interest and which is organized
under the laws of any State or political subdivision of the U.S. and which
conducts its principal business activities in the U.S.; and, the term "Foreign
Subsidiaries" shall mean any corporation, partnership or other entity in which
the Company or any Subsidiary has a controlling interest and which is organized
under the laws of any country other than the U.S. or under the laws of any State
or political subdivision of the U.S., but which conducts its principal business
activities outside of the U.S.
(d) The Company has full legal right, power and authority to enter
into this Agreement and perform the transactions contemplated hereby. This
Agreement has been duly authorized, executed and delivered by the Company and is
a valid and binding agreement on the part of the Company, enforceable in
accordance with its terms, except as rights to indemnification hereunder may be
limited by applicable law and except as the enforcement hereof may be limited by
applicable bankruptcy, insolvency, reorganization, moratorium or other similar
laws relating to or affecting creditors' rights generally or by general
equitable principles; the performance of this Agreement and the consummation of
the transactions herein contemplated will not result in a material breach or
violation of any of the terms and provisions of, or constitute a default under,
(i) any material bond, debenture, note or other evidence of indebtedness, or
under any lease, contract, indenture, mortgage, deed of trust, loan agreement,
joint venture or other agreement or instrument to which the Company or any of
its Subsidiaries is a party or by which it or any of its Subsidiaries or their
respective properties may be bound, (ii) the charter or bylaws of the Company or
any of its Subsidiaries, or (iii) any law, order, rule, regulation, writ,
injunction, judgment or decree of any court, government or governmental agency
or body, domestic or foreign, having jurisdiction over the
-4-
<PAGE> 5
Company or any of its Subsidiaries or over their respective properties. No
consent, approval, authorization or order of or qualification with any court,
government or governmental agency or body, domestic or foreign, having
jurisdiction over the Company or any of its Subsidiaries or over their
respective properties is required for the execution and delivery of this
Agreement and the consummation by the Company or any of its Subsidiaries of the
transactions herein contemplated, except such as may be required under the Act,
the Exchange Act, or under state or other securities or Blue Sky laws, all of
which requirements have been satisfied in all material respects, and except for
any such foreign consents, approvals or authorizations the failure of which to
obtain would not have a material adverse effect on the condition (financial or
otherwise), earnings, operations, business or business prospects of the Company
and its Subsidiaries considered as one enterprise.
(e) There is not any pending or, to the best of the Company's
knowledge, threatened action, suit, claim or proceeding against the Company, any
of its Subsidiaries or any of their respective officers or any of their
respective properties, assets or rights before any court, government or
governmental agency or body, domestic or foreign, having jurisdiction over the
Company or any of its Subsidiaries or over their respective officers or
properties or otherwise which (i) might result in any material adverse change in
the condition (financial or otherwise), earnings, operations, business or
business prospects of the Company and its Subsidiaries considered as one
enterprise or might materially and adversely affect their properties, assets or
rights, (ii) might prevent consummation of the transactions contemplated hereby
or (iii) is required to be disclosed in the Registration Statement or the
Prospectus and is not so disclosed; and there are no agreements, contracts,
leases or documents of the Company or any of its Subsidiaries of a character
required to be described or referred to in the Registration Statement or the
Prospectus or any Incorporated Document or to be filed as an exhibit to the
Registration Statement or any Incorporated Document by the Act or the Rules and
Regulations or by the Exchange Act or the rules and regulations of the
Commission thereunder which have not been accurately described in all material
respects in the Registration Statement or the Prospectus or any Incorporated
Document or filed as exhibits to the Registration Statement or any Incorporated
Document.
(f) At the Closing Date, all outstanding shares of capital stock of
the Company (including the Selling Shareholder Shares) will have been duly
authorized and validly issued and fully paid and nonassessable, will have been
issued in compliance with all federal and state securities laws, will not have
been issued in violation of or subject to any preemptive rights or other rights
to subscribe for or purchase securities, and the authorized and outstanding
capital stock of the Company is as set forth in the Prospectus under the caption
"Capitalization" and conforms in all material respects to the statements
relating thereto contained in the Registration Statement and the Prospectus and
any Incorporated Document (and such statements correctly state the substance of
the instruments defining the capitalization of the Company); the Firm Shares and
the Option Shares have been duly authorized for issuance and sale to the
Underwriters pursuant to this Agreement and, when issued and delivered by the
Company against payment therefor in accordance with the terms of this Agreement,
will be duly and validly issued and fully paid and nonassessable, and will be
sold free and clear of any pledge, lien, security interest, encumbrance, claim
or equitable interest; and no preemptive right, co-sale right, registration
right, right of first refusal or other similar right of shareholders exists with
respect to any of the Firm Shares or Option Shares or the issuance and sale
thereof other than those that have been expressly waived prior to the date
hereof and those that will automatically expire upon and will not apply to the
consummation of the transactions contemplated on the Closing Date. No further
approval or authorization of any shareholder, the Board of Directors of the
Company or others is required for the issuance and sale or transfer of the
Shares except as may be required under the Act, the Exchange Act or under state
or other securities or Blue Sky laws. At the Closing Date, all issued and
outstanding shares of capital stock of each Subsidiary of the Company will have
been duly authorized and validly issued and fully paid and nonassessable, and
will not have been issued in violation of or subject to any preemptive right, or
other rights to subscribe for or purchase shares and will be directly or
indirectly owned by the Company free and clear of any pledge, lien, security
interest, encumbrance, claim or equitable interest, except as disclosed in the
Prospectus. Except as disclosed in or contemplated by the Prospectus and the
financial statements of the Company, and the related notes thereto, included in
the Prospectus, neither the Company nor any Subsidiary has outstanding
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<PAGE> 6
any options to purchase, or any preemptive rights or other rights to subscribe
for or to purchase, any securities or obligations convertible into, or any
contracts or commitments to issue or sell, shares of its capital stock or any
such options, rights, convertible securities or obligations. The description of
the Company's stock option, stock bonus and other stock plans or arrangements,
and the options or other rights granted and exercised thereunder, set forth in
the Prospectus accurately and fairly presents the information required to be
shown with respect to such plans, arrangements, options and rights.
(g) KPMG Peat Marwick LLP, which has audited the consolidated
financial statements of the Company, together with the related notes, as of
December 31, 1996 and 1997 and for each of the years in the three (3) years
ended December 31, 1997 filed with the Commission as a part of the Registration
Statement, which are included in the Prospectus, are independent accountants
within the meaning of the Act and the Rules and Regulations; the audited
consolidated financial statements of the Company, together with the related
schedules and notes, and the unaudited consolidated financial information,
forming part of the Registration Statement and the Prospectus, fairly present in
all material respects the financial position and the results of operations of
the Company and its Subsidiaries and combined companies at the respective dates
and for the respective periods to which they apply; and all audited consolidated
financial statements of the Company, together with the related schedules and
notes, and the unaudited consolidated financial information, filed with the
Commission as part of the Registration Statement, have been prepared in
accordance with generally accepted accounting principles consistently applied
throughout the periods involved except as may be otherwise stated therein. The
selected and summary financial and statistical data included in the Registration
Statement present fairly in all material respects the information shown therein
and have been compiled on a basis consistent with the audited consolidated
financial statements presented therein. Except for the financial statements of
Financiere Alma, S.A. and its subsidiaries for the years ended December 31, 1995
and 1996, the six months ended June 30, 1997 and the nine months ended September
30, 1997, which are included in the Registration Statement, no other financial
statements or schedules are required to be included in the Registration
Statement.
(h) Subsequent to the respective dates as of which information is
given in the Registration Statement and the Prospectus and except as disclosed
or contemplated in the Prospectus, there has not been (i) any material adverse
change in the condition (financial or otherwise), earnings, operations, business
or business prospects of the Company and its Subsidiaries considered as one
enterprise, (ii) any transaction that is material to the Company and its
Subsidiaries considered as one enterprise, except transactions entered into in
the ordinary course of business, (iii) any obligation, direct or contingent,
that is material to the Company and its Subsidiaries considered as one
enterprise, incurred by the Company or its Subsidiaries, except obligations
incurred in the ordinary course of business, (iv) any change in the capital
stock or outstanding indebtedness of the Company or any of its Subsidiaries that
is material to the Company and its Subsidiaries considered as one enterprise,
(v) any dividend or distribution of any kind declared, paid or made on the
capital stock of the Company or any of its Subsidiaries or (vi) any loss or
damage (whether or not insured) to the property of the Company or any of its
Subsidiaries that has been sustained or will have been sustained which has a
material adverse effect on the condition (financial or otherwise), earnings,
operations, business or business prospects of the Company and its Subsidiaries
considered as one enterprise.
(i) Except as set forth in the Registration Statement and the
Prospectus and any Incorporated Document, (i) each of the Company and its
Subsidiaries has good and marketable title to all properties and assets
described in the Registration Statement and the Prospectus and any Incorporated
Document as owned by it, free and clear of any pledge, lien, security interest,
encumbrance, claim or equitable interest, other than such as would not have a
material adverse effect on the condition (financial or otherwise), earnings,
operations, business or business prospects of the Company and its Subsidiaries
considered as one enterprise, (ii) the agreements to which the Company or any of
its Subsidiaries is a party described in the Registration Statement and the
Prospectus and any Incorporated Document are valid agreements, enforceable by
the Company and its Subsidiaries (as applicable), except as the enforcement
thereof may be limited by applicable bankruptcy, insolvency, reorganization,
moratorium or
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<PAGE> 7
other similar laws relating to or affecting creditors' rights generally or by
general equitable principles and, to the best of the Company's knowledge, the
other contracting party or parties thereto are not in material breach or
material default under any of such agreements, and (iii) each of the Company and
its Subsidiaries has valid and enforceable leases for all properties described
in the Registration Statement and the Prospectus and any Incorporated Document
as leased by it, except as the enforcement thereof may be limited by applicable
bankruptcy, insolvency, reorganization, moratorium or other similar laws
relating to or affecting creditors' rights generally or by general equitable
principles. Except as set forth in the Registration Statement and the Prospectus
and any Incorporated Document, the Company owns or leases all such properties as
are necessary to its operations as now conducted or as proposed to be conducted.
(j) The Company and its Subsidiaries have filed all necessary
federal, state and foreign income and franchise tax returns (other than
franchise tax returns which the failure to file would not have a material
adverse effect on the condition (financial or otherwise), earnings, operations,
business or business prospects of the Company and its Subsidiaries considered as
one enterprise) and have paid all taxes and penalties shown thereon as due, and
there is no tax deficiency that has been or, to the best of the Company's or the
Shareholders' knowledge, might be asserted against the Company or any of its
Subsidiaries that might have a material adverse effect on the condition
(financial or otherwise), earnings, operations, business or business prospects
of the Company and its Subsidiaries considered as one enterprise; and all tax
liabilities are adequately provided for on the books of the Company and its
Subsidiaries.
(k) The Company and its Subsidiaries maintain insurance with
insurers of recognized financial responsibility of the types and in the amounts
generally deemed adequate for their respective businesses and consistent with
insurance coverage maintained by similar companies in similar businesses,
including, but not limited to, insurance covering real and personal property
owned or leased by the Company or its Subsidiaries against theft, damage,
destruction, acts of vandalism and all other risks customarily insured against,
all of which insurance is in full force and effect; neither the Company nor any
such Subsidiary has been refused any insurance coverage sought or applied for;
and neither the Company nor any such Subsidiary has any reason to believe that
it will not be able to renew its existing insurance coverage as and when such
coverage expires or to obtain similar coverage from similar insurers as may be
necessary to continue its business at a cost that would not materially and
adversely affect the condition (financial or otherwise), earnings, operations,
business or business prospects of the Company and its Subsidiaries considered as
one enterprise.
(l) To the best of Company's or the Shareholders' knowledge,
no labor disturbance by the employees of the Company or any of its Subsidiaries
exists or is imminent; and the Company is not aware of any existing or imminent
labor disturbance by the employees of any of its principal suppliers that might
be expected to result in a material adverse change in the condition (financial
or otherwise), earnings, operations, business or business prospects of the
Company and its Subsidiaries considered as one enterprise. No collective
bargaining agreement exists with any of the Company's employees and, to the best
of the Company's and the Shareholders' knowledge, no such agreement is imminent.
(m) Each of the Company and its Subsidiaries owns or possesses
adequate rights to use all patents, patent rights, inventions, trade secrets,
know-how, trademarks, service marks, trade names and copyrights which are
necessary to conduct its businesses as now conducted and as proposed to be
conducted as described in the Registration Statement and the Prospectus in the
U.S. and, to the Company's knowledge, outside the U.S.; the expiration of any
patents, patent rights, trade secrets, trademarks, service marks, trade names or
copyrights would not have a material adverse effect on the condition (financial
or otherwise), earnings, operations, business or business prospects of the
Company and its Subsidiaries considered as one enterprise; the Company has not
received any notice of, and has no knowledge of, any infringement of or conflict
with asserted rights of the Company by others with respect to any patent, patent
rights, inventions, trade secrets, know-how, trademarks, service marks, trade
names or copyrights; and the Company has not received any notice of, and has no
knowledge of, any infringement of or conflict with asserted rights of others
with respect to any patent, patent rights, inventions, trade secrets, know-
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<PAGE> 8
how, trademarks, service marks, trade names or copyrights which, singly or in
the aggregate, if the subject of an unfavorable decision, ruling or finding,
might have a material adverse effect on the condition (financial or otherwise),
earnings, operations, business or business prospects of the Company and its
Subsidiaries considered as one enterprise.
(n) Except as described in the Registration Statement and the
Prospectus, each of the Company and its Subsidiaries have operated and currently
operate its business in conformity with all applicable laws, rules and
regulations of each jurisdiction in which it is conducting business, except
where the failure to be so in compliance would not have a material adverse
effect on the condition (financial or otherwise), earnings, operations, business
or business prospects of the Company and its Subsidiaries considered as one
enterprise. The Company and its Subsidiaries have all licenses, certificates,
authorizations, approvals, permits, franchises, orders and consents from all
state, federal and other governmental or regulatory authorities (including
foreign jurisdictions) which are necessary to the conduct of their businesses,
except where the failure to be so in compliance would not have a material
adverse effect on the condition (financial or otherwise), earnings, operations,
business or business prospects of the Company and its Subsidiaries considered as
one enterprise. All of such licenses, certificates, authorizations, approvals,
permits, franchises, orders and consents are valid and in full force and effect.
Except as described in the Registration Statement and the Prospectus, the
Company and its Subsidiaries have fulfilled and performed, and will fulfill and
perform, all of their obligations with respect to, and are operating in
compliance with, all such licenses, certificates, authorizations, approvals,
permits, franchises, orders and consents and no event has occurred which allows,
or after notice or lapse of time would allow, revocation or termination thereof
or result in any impairment of the rights of the holder thereof, except to the
extent that any such revocation, termination or impairment would not have a
material adverse effect on the condition (financial or otherwise), results of
operations, business or business prospects of the Company and its Subsidiaries
considered as one enterprise. Except as set forth in the Registration Statement
and the Prospectus, no such licenses, certificates, authorizations, approvals,
permits, franchises, orders or consents contain any restrictions that have or
may have a material adverse effect on the condition (financial or otherwise),
results of operations, business or business prospects of the Company and its
Subsidiaries considered as one enterprise. The Company and its Subsidiaries are
not aware of any existing or imminent matter the occurrence of which would have
a material adverse effect on the condition (financial or otherwise), earnings,
operations, business or business prospects of the Company and its Subsidiaries
considered as one enterprise other than as disclosed in the Registration
Statement and the Prospectus.
(o) The Common Stock is registered pursuant to Section 12(g)
of the Exchange Act and is listed on The Nasdaq Stock Market, Inc. National
Market (the "Nasdaq National Market"), and the Company has taken no action
designed to, or likely to have the effect of, terminating the registration of
the Common Stock under the Exchange Act or delisting the Common Stock from the
Nasdaq National Market, nor has the Company received any notification that the
Commission or the National Association of Securities Dealers, Inc. ("NASD") is
contemplating terminating such registration or listing. The Company has filed in
a timely manner all reports and other information required to be filed with the
Commission pursuant to the Exchange Act during the twelve calendar months and
any portion of a month immediately preceding the filing of the Registration
Statement.
(p) The Company has been advised concerning the Investment
Company Act of 1940, as amended (the "1940 Act"), and the rules and regulations
thereunder, and has in the past conducted, and intends in the future to conduct,
its affairs in such a manner as to ensure that it will not become an "investment
company" or a company "controlled" by an "investment company" within the meaning
of the 1940 Act and such rules and regulations.
(q) The Company has not distributed and will not distribute
prior to the later of (i) the Closing Date, or any date on which Option Shares
are to be purchased, as the case may be, and (ii) completion of the distribution
of the Shares, any offering material in connection with the offering and
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<PAGE> 9
sale of the Shares other than any Preliminary Prospectuses, the Prospectus, the
Registration Statement and other materials, if any, permitted by the Act.
(r) Neither the Company nor any of its Subsidiaries has at any
time during the last five (5) years (i) made any unlawful contribution to any
candidate for foreign office or failed to disclose fully any contribution in
violation of law, or (ii) made any payment to any federal or state governmental
officer or official, or other person charged with similar public or quasi-public
duties, other than payments required or permitted by the laws of the United
States or any jurisdiction thereof.
(s) The Company has not taken and will not take, directly or
indirectly, any action designed to or that might reasonably be expected to cause
or result in stabilization or manipulation of the price of the Common Stock to
facilitate the sale or resale of the Shares.
(t) Each director of the Company, each Selling Shareholder and
any other person or entity shown on Schedule D hereto has agreed in writing that
such person will not, for a period of 90 days from the date that the
Registration Statement is declared effective by the Commission (the "Lock-up
Period"), offer to sell, contract to sell, or otherwise sell, dispose of, loan,
pledge or grant any rights with respect to (collectively, a "Disposition") any
shares of Common Stock, any options or warrants to purchase any shares of Common
Stock or any securities convertible into or exchangeable for shares of Common
Stock (collectively, "Securities") now owned or hereafter acquired directly by
such person or with respect to which such person has or hereafter acquires the
power of disposition, otherwise than (i) as a bona fide gift or gifts, provided
the donee or donees thereof agree in writing to be bound by this restriction,
(ii) as a distribution to limited partners, shareholders or beneficiaries of
such person, provided that the distributees thereof agree in writing to be bound
by the terms of this restriction, or (iii) if such person is an individual, to a
member or members of his or her immediate family or to a trust the beneficiaries
of which are exclusively such person and/or a member or members of his or her
immediate family, provided that each transferee thereof agrees in writing to be
bound by the terms of this restriction, or (iv) with the prior written consent
of BancAmerica Robertson Stephens. The foregoing restriction has been expressly
agreed to preclude the holder of the Securities from engaging in any hedging or
other transaction which is designed to or reasonably expected to lead to or
result in a Disposition of Securities during the Lock-up Period, even if such
Securities would be disposed of by someone other than such holder. Such
prohibited hedging or other transactions would include, without limitation, any
short sale (whether or not against the box) or any purchase, sale or grant of
any right (including, without limitation, any put or call option) with respect
to any Securities or with respect to any security (other than a broad-based
market basket or index) that includes, relates to or derives any significant
part of its value from Securities. Furthermore, each such person has also agreed
and consented to the entry of stop transfer instructions with the Company's
transfer agent against the transfer of the Securities held by such person except
in compliance with the foregoing restrictions. The Company has provided to
counsel for the Underwriters a complete and accurate list of all securityholders
of the Company and the number and type of securities held by each
securityholder. The Company has provided to counsel for the Underwriters true,
accurate and complete copies of all of the agreements pursuant to which its
directors and shareholders have agreed to such or similar restrictions (the
"Lock-up Agreements") presently in effect or effected hereby. The Company hereby
represents and warrants that it will not release any of its directors or other
shareholders from any Lock-up Agreements currently existing or hereafter
effected without the prior written consent of BancAmerica Robertson Stephens.
(u) Except as set forth in the Registration Statement and the
Prospectus, (i) the Company is in compliance with all rules, laws and
regulations relating to the use, treatment, storage and disposal of toxic
substances and protection of health or the environment ("Environmental Laws")
which are applicable to its business which, singly or in the aggregate, if the
subject of an unfavorable decision, ruling or finding, would have a material
adverse effect on the condition (financial or otherwise), earnings, operations,
business or business prospects of the Company and its Subsidiaries considered as
one enterprise, (ii) the Company has received no notice from any governmental
authority or third party of an asserted claim under Environmental Laws, which
claim is required to be disclosed in the Registration
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<PAGE> 10
Statement and the Prospectus, (iii) the Company will not, to its knowledge, be
required to make future material capital expenditures to comply with
Environmental Laws and (iv) to the Company's knowledge, no property which is
owned, leased or occupied by the Company has been designated as a Superfund site
pursuant to the Comprehensive Response, Compensation, and Liability Act of 1980,
as amended (42 U.S.C. ss. 9601, et seq.), or otherwise designated as a
contaminated site under applicable state or local law.
(v) The Company and each of its Subsidiaries maintain a system
of internal accounting controls sufficient to provide reasonable assurances that
(i) transactions are executed in accordance with management's general or
specific authorizations, (ii) transactions are recorded as necessary to permit
preparation of financial statements in conformity with generally accepted
accounting principles and to maintain accountability for assets, (iii) access to
assets is permitted only in accordance with management's general or specific
authorization, and (iv) the recorded accountability for assets is compared with
existing assets at reasonable intervals and appropriate action is taken with
respect to any differences.
(w) There are no outstanding loans, advances (except normal
advances for business expenses in the ordinary course of business) or guarantees
of indebtedness by the Company to or for the benefit of any of the officers or
directors of the Company or any of the members of the families of any of them,
except as required to be disclosed and disclosed in the Registration Statement
and the Prospectus or incorporated by reference in any Incorporated Document.
(x) The Company has complied with all provisions of Section
517.075, Florida Statutes relating to doing business with the Government of Cuba
or with any person or affiliate located in Cuba.
(y) No Subsidiary of the Company is prohibited, directly or
indirectly, from paying any dividends, from making any other distributions on
such Subsidiary's capital stock, from repaying to the Company any loans or
advances to such Subsidiary or from transferring any of such Subsidiary's
property or assets to the Company or any other Subsidiary of the Company, except
as disclosed in the Registration Statement and the Prospectus and except for
such limitations that may be contained in the corporate code of the jurisdiction
under which such Subsidiary is incorporated.
(z) To the best of the Company's and the Shareholders'
knowledge, no officer, director or five percent (5%) securityholder of the
Company has an "association" or "affiliation" with any member of the NASD within
the meaning of Rule 2710 of the NASD's Conduct Rules. The Company does not have
an "association" or "affiliation" with any member of the NASD, within the
meaning of Rule 2710 of the NASD's Conduct Rules.
II. Each Selling Shareholder, severally and not jointly,
represents and warrants to and agrees with respect solely to himself or itself
with each Underwriter and the Company that:
(a) Such Selling Shareholder now has and on the Closing Date,
and on any later date on which Option Shares are purchased, will have valid
marketable title to the Shares to be sold by such Selling Shareholder, free and
clear of any pledge, lien, security interest, encumbrance, claim or equitable
interest other than pursuant to this Agreement; and upon delivery of such Shares
hereunder and payment of the purchase price as herein contemplated, each of the
Underwriters will obtain valid marketable title to the Shares purchased by it
from such Selling Shareholder, free and clear of any pledge, lien, security
interest pertaining to such Selling Shareholder or such Selling Shareholder's
property, encumbrance, claim or equitable interest, including any liability for
estate or inheritance taxes, or any liability to or claims of any creditor,
devisee, legatee or beneficiary of such Selling Shareholder.
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<PAGE> 11
(b) Such Selling Shareholder has duly authorized (if
applicable), executed and delivered, in the form heretofore furnished to the
Representatives, an irrevocable Power of Attorney (the "Power of Attorney")
appointing John M. Cook and John M. Toma as attorneys-in-fact (collectively, the
"Attorneys" and individually, an "Attorney") and a Custody Agreement (the
"Custody Agreement") with First Union National Bank of North Carolina, as
custodian (the "Custodian"); each of the Power of Attorney and the Custody
Agreement constitutes a valid and binding agreement on the part of such Selling
Shareholder, enforceable in accordance with its terms, except as the enforcement
thereof may be limited by applicable bankruptcy, insolvency, reorganization,
moratorium or other similar laws relating to or affecting creditors' rights
generally or by general equitable principles; and each of such Selling
Shareholder's Attorneys, acting alone, is authorized to execute and deliver this
Agreement and the certificate referred to in Section 6(i) hereof on behalf of
such Selling Shareholder, to determine the purchase price to be paid by the
several Underwriters to such Selling Shareholder as provided in Section 3
hereof, to authorize the delivery of the Selling Shareholder Shares and the
Option Shares to be sold by such Selling Shareholder under this Agreement and to
duly endorse (in blank or otherwise) the certificate or certificates
representing such Shares or a stock power or powers with respect thereto, to
accept payment therefor, and otherwise to act on behalf of such Selling
Shareholder in connection with this Agreement.
(c) All consents, approvals, authorizations and orders
required for the execution and delivery by such Selling Shareholder of the Power
of Attorney and the Custody Agreement, the execution and delivery by or on
behalf of such Selling Shareholder of this Agreement and the sale and delivery
of the Selling Shareholder Shares and the Option Shares to be sold by such
Selling Shareholder under this Agreement (other than, at the time of the
execution hereof (if the Registration Statement has not yet been declared
effective by the Commission), the issuance of the order of the Commission
declaring the Registration Statement effective and such consents, approvals,
authorizations or orders as may be necessary under state or other securities or
Blue Sky laws) have been obtained and are in full force and effect; such Selling
Shareholder, if other than a natural person, has been duly organized and is
validly existing in good standing under the laws of the jurisdiction of its
organization as the type of entity that it purports to be; and such Selling
Shareholder has full legal right, power and authority to enter into and perform
its obligations under this Agreement and such Power of Attorney and Custody
Agreement, and to sell, assign, transfer and deliver the Shares to be sold by
such Selling Shareholder under this Agreement.
(d) Such Selling Shareholder will not, during the Lock-up
Period, effect the Disposition of any Securities now owned or hereafter acquired
directly by such Selling Shareholder or with respect to which such Selling
Shareholder has or hereafter acquires the power of disposition, otherwise than
(i) as a bona fide gift or gifts, provided the donee or donees thereof agree in
writing to be bound by this restriction, (ii) as a distribution to limited
partners, shareholders or beneficiaries of such Selling Shareholder, provided
that the distributees thereof agree in writing to be bound by the terms of this
restriction, or (iii) if such person is an individual, to a member or members of
his or her immediate family or to a trust the beneficiaries of which are
exclusively such person and/or a member or members of his or her immediate
family, provided that each transferee thereof agrees in writing to be bound by
the terms of this restriction, or (iv) with the prior written consent of
BancAmerica Robertson Stephens. The foregoing restriction is expressly agreed to
preclude the holder of the Securities from engaging in any hedging or other
transaction which is designed to or reasonably expected to lead to or result in
a Disposition of Securities during the Lock-up Period, even if such Securities
would be disposed of by someone other than the Selling Shareholder. Such
prohibited hedging or other transactions would include, without limitation, any
short sale (whether or not against the box) or any purchase, sale or grant of
any right (including, without limitation, any put or call option) with respect
to any Securities or with respect to any security (other than a broad-based
market basket or index) that includes, relates to or derives any significant
part of its value from Securities. Such Selling Shareholder also agrees and
consents to the entry of stop transfer instructions with the Company's transfer
agent against the transfer of the securities held by such Selling Shareholder
except in compliance with the foregoing restrictions.
(e) Certificates in negotiable form representing all Shares to
be sold by such Selling Shareholder under this Agreement, together with a stock
power or powers duly endorsed in blank
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<PAGE> 12
by such Selling Shareholder, have been placed in custody with the Custodian for
the purpose of effecting delivery hereunder.
(f) This Agreement has been duly authorized by each such
Selling Shareholder that is not a natural person and has been duly executed and
delivered by or on behalf of such Selling Shareholder and is a valid and binding
agreement of such Selling Shareholder, enforceable in accordance with its terms,
except as rights to indemnification hereunder may be limited by applicable law
and except as the enforcement hereof may be limited by bankruptcy, insolvency,
reorganization, moratorium or other similar laws relating to or affecting
creditors' rights generally or by general equitable principles; and the
performance of this Agreement and the consummation of the transactions herein
contemplated will not result in a material breach or violation of any of the
terms and provisions of or constitute a default under any material bond,
debenture, note or other evidence of indebtedness, or under any material lease,
contract, indenture, mortgage, deed of trust, loan agreement, joint venture or
other agreement or instrument to which such Selling Shareholder is a party or by
which such Selling Shareholder, or any Selling Shareholder Shares or any Option
Shares to be sold by such Selling Shareholder hereunder, may be bound or, to the
best of such Selling Shareholder's knowledge, result in any violation of any
law, order, rule, regulation, writ, injunction, judgment or decree of any court,
government or governmental agency or body, domestic or foreign, having
jurisdiction over such Selling Shareholder or over the properties of such
Selling Shareholder, or, if such Selling Shareholder is other than a natural
person, result in any violation of any provisions of the charter, bylaws or
other organizational documents of such Selling Shareholder.
(g) Such Selling Shareholder has not taken and will not take,
directly or indirectly, any action designed to or that might reasonably be
expected to cause or result in stabilization or manipulation of the price of the
Common Stock to facilitate the sale or resale of the Shares.
(h) Such Selling Shareholder has not distributed and will not
distribute any prospectus or other offering material in connection with the
offering and sale of the Shares other than in his capacity as an executive
officer or director of the Company.
(i) All information furnished by or on behalf of such Selling
Shareholder relating to such Selling Shareholder and the Selling Shareholder
Shares that is contained in the representations and warranties of such Selling
Shareholder in such Selling Shareholder's Power of Attorney or set forth in the
Registration Statement or the Prospectus is, and at the time the Registration
Statement became or becomes, as the case may be, effective and at all times
subsequent thereto up to and on the Closing Date, and on any later date on which
Option Shares are to be purchased, was or will be, true, correct and complete in
all material respects, and does not, and at the time the Registration Statement
became or becomes, as the case may be, effective and at all times subsequent
thereto up to and on the Closing Date (hereinafter defined) ,and on any later
date on which Option Shares are to be purchased, will not, contain any untrue
statement of a material fact or omit to state a material fact required to be
stated therein or necessary to make such information, in light of the
circumstances under which they were made, not misleading.
(j) Such Selling Shareholder will review the Prospectus and
will comply with all agreements and satisfy all conditions on its part to be
complied with or satisfied pursuant to this Agreement on or prior to the Closing
Date, or any later date on which Option Shares are to be purchased, as the case
may be, and will advise one of its Attorneys and BancAmerica Robertson Stephens
prior to the Closing Date or such later date on which Option Shares are to be
purchased, as the case may be, if any statement to be made on behalf of such
Selling Shareholder in the certificate contemplated by Section 6(i) would be
inaccurate if made as of the Closing Date or such later date on which Option
Shares are to be purchased, as the case may be.
(k) Such Selling Shareholder does not have, or has waived
prior to the date hereof, any preemptive right, co-sale right or right of first
refusal or other similar right to purchase any of the Shares that are to be sold
by the Company or any of the other Selling Shareholders to the Underwriters
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<PAGE> 13
pursuant to this Agreement; such Selling Shareholder does not have, or has
waived prior to the date hereof, any registration right or other similar right
to participate in the offering made by the Prospectus, other than such rights of
participation as have been satisfied by the participation of such Selling
Shareholder in the transactions to which this Agreement relates in accordance
with the terms of this Agreement; and such Selling Shareholder does not own any
warrants, options or similar rights to acquire, and does not have any right or
arrangement to acquire, any capital stock, rights, warrants, options or other
securities from the Company, other than those described in the Registration
Statement and the Prospectus.
(l) Such Selling Shareholder is not aware that any of the
representations and warranties of the Company set forth in Section 2.I. above is
untrue or inaccurate in any material respect.
3. Purchase, Sale and Delivery of Shares. On the basis of the
representations, warranties and agreements herein contained, but subject to the
terms and conditions herein set forth, the Company and the Selling Shareholders
agree, severally and not jointly, to sell to the Underwriters, and each
Underwriter agrees, severally and not jointly, to purchase from the Company and
the Selling Shareholders, respectively, at a purchase price of $_____ per share,
the respective number of Company Shares as hereinafter set forth and Selling
Shareholder Shares set forth opposite the names of the Company and the Selling
Shareholders in Schedule B hereto. The obligation of each Underwriter to the
Company and to each Selling Shareholder shall be to purchase from the Company or
such Selling Shareholder that number of Company Shares or Selling Shareholder
Shares, as the case may be, which (as nearly as practicable, as determined by
you) is in the same proportion to the number of Company Shares or Selling
Shareholder Shares, as the case may be, set forth opposite the name of the
Company or such Selling Shareholder in Schedule B hereto as the number of Firm
Shares which is set forth opposite the name of such Underwriter in Schedule A
hereto (subject to adjustment as provided in Section 10) is to the total number
of Firm Shares to be purchased by all the Underwriters under this Agreement.
The certificates in negotiable form for the Selling Shareholder
Shares have been placed in custody (for delivery under this Agreement) under the
Custody Agreement. Each Selling Shareholder agrees that the certificates for the
Selling Shareholder Shares of such Selling Shareholder so held in custody are
subject to the interests of the Underwriters hereunder, that the arrangements
made by such Selling Shareholder for such custody, including the Power of
Attorney is to that extent irrevocable and that the obligations of such Selling
Shareholder hereunder shall not be terminated by the act of such Selling
Shareholder or by operation of law, whether by the death or incapacity of such
Selling Shareholder or the occurrence of any other event, except as specifically
provided herein or in the Custody Agreement. If any Selling Shareholder should
die or be incapacitated, or if any other such event should occur, before the
delivery of the certificates for the Selling Shareholder Shares hereunder, the
Selling Shareholder Shares to be sold by such Selling Shareholder shall, except
as specifically provided herein or in the Custody Agreement, be delivered by the
Custodian in accordance with the terms and conditions of this Agreement as if
such death, incapacity or other event had not occurred, regardless of whether
the Custodian shall have received notice of such death or other event.
Delivery of definitive certificates for the Firm Shares to be
purchased by the Underwriters pursuant to this Section 3 shall be made against
payment of the purchase price therefor by the several Underwriters by wire
transfer of same-day funds, payable to the order of the Company with regard to
the Shares being purchased from the Company, and to the order of the Custodian
for the respective accounts of the Selling Shareholders with regard to the
Shares being purchased from such Selling Shareholders at the offices of Long
Aldridge & Norman LLP, 303 Peachtree Street, N.E., Suite 5300, Atlanta, Georgia
30308 (or at such other place as may be agreed upon among the Representatives
and the Company), at 7:00 A.M., San Francisco time (a) on the third (3rd) full
business day following the first day that Shares are traded, (b) if this
Agreement is executed and delivered after 1:30 P.M., San Francisco time, the
fourth (4th) full business day following the day that this Agreement is executed
and delivered or (c) at such other time and date not later than seven (7) full
business days following the first day that Shares are traded as the
Representatives and the Company may determine (or at such time and date to which
payment and delivery shall have been postponed pursuant to Section 10 hereof),
such time
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<PAGE> 14
and date of payment and delivery being herein called the "Closing Date;"
provided, however, that if the Company has not made available to the
Representatives copies of the Prospectus within the time provided in Section
4(d) hereof, the Representatives may, in their sole discretion, postpone the
Closing Date until no later than two (2) full business days following delivery
of copies of the Prospectus to the Representatives. The certificates for the
Firm Shares to be so delivered will be made available to you at such office or
such other location including, without limitation, in New York City, as you may
reasonably request for checking at least one (1) full business day prior to the
Closing Date and will be in such names and denominations as you may request,
such request to be made at least two (2) full business days prior to the Closing
Date. If the Representatives so elect, delivery of the Firm Shares may be made
by credit through full fast transfer to the accounts at The Depository Trust
Company designated by the Representatives.
It is understood that you, individually, and not as the
Representatives of the several Underwriters, may (but shall not be obligated to)
make payment of the purchase price on behalf of any Underwriter or Underwriters
whose check or checks shall not have been received by you prior to the Closing
Date for the Firm Shares to be purchased by such Underwriter or Underwriters.
Any such payment by you shall not relieve any such Underwriter or Underwriters
of any of its or their obligations hereunder.
After the Registration Statement becomes effective, the
several Underwriters intend to make an initial public offering (as such term is
described in Section 11 hereof) of the Firm Shares at an initial public offering
price of $_____ per share. After the initial public offering, the several
Underwriters may, in their discretion, vary the public offering price.
The information set forth in the last paragraph on the front
cover page (insofar as such information relates to the Underwriters), on the
inside front cover concerning stabilization and over-allotment by the
Underwriters, and under the first, third, seventh, eighth and ninth paragraphs
under the caption "Underwriting" in any Preliminary Prospectus and in the
Prospectus constitutes the only information furnished by the Underwriters to the
Company for inclusion in any Preliminary Prospectus, the Prospectus or the
Registration Statement, and you, on behalf of the respective Underwriters,
represent and warrant to the Company and the Selling Shareholders that the
statements made therein do not include any untrue statement of a material fact
or omit to state a material fact required to be stated therein or necessary to
make the statements therein, in the light of the circumstances under which they
were made, not misleading.
4. Further Agreements of the Company. The Company agrees with the
several Underwriters that:
(a) The Company will use its best efforts to cause the
Registration Statement and any amendment thereof, if not effective at the time
and date that this Agreement is executed and delivered by the parties hereto, to
become effective as promptly as possible; the Company will use its best efforts
to cause any abbreviated registration statement pursuant to Rule 462(b) of the
Rules and Regulations as may be required subsequent to the date the Registration
Statement is declared effective to become effective as promptly as possible; the
Company will notify you, promptly after it shall receive notice thereof, of the
time when the Registration Statement, any subsequent amendment to the
Registration Statement or any abbreviated registration statement has become
effective or any supplement to the Prospectus has been filed; if the Company
omitted information from the Registration Statement at the time it was
originally declared effective in reliance upon Rule 430A(a) of the Rules and
Regulations, the Company will provide evidence satisfactory to you that the
Prospectus contains such information and has been filed, within the time period
prescribed, with the Commission pursuant to subparagraph (1) or (4) of Rule
424(b) of the Rules and Regulations or as part of a post-effective amendment to
such Registration Statement as originally declared effective which is declared
effective by the Commission; if the Company files a term sheet pursuant to Rule
434 of the Rules and Regulations, the Company will provide evidence satisfactory
to you that the Prospectus and term sheet meeting the requirements of Rule
434(b) or (c), as applicable, of
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<PAGE> 15
the Rules and Regulations, have been filed, within the time period prescribed,
with the Commission pursuant to subparagraph (7) of Rule 424(b) of the Rules and
Regulations; if for any reason the filing of the final form of Prospectus is
required under Rule 424(b)(3) of the Rules and Regulations, it will provide
evidence satisfactory to you that the Prospectus contains such information and
has been filed with the Commission within the time period prescribed; it will
notify you promptly of any request by the Commission for the amending or
supplementing of the Registration Statement or the Prospectus or for additional
information; promptly upon your request, it will prepare and file with the
Commission any amendments or supplements to the Registration Statement or
Prospectus which, in the reasonable opinion of counsel for the several
Underwriters ("Underwriters' Counsel"), may be necessary or advisable in
connection with the distribution of the Shares by the Underwriters; it will
promptly prepare and file with the Commission, and promptly notify you of the
filing of, any amendments or supplements to the Registration Statement or
Prospectus which may be necessary to correct any statements or omissions, if, at
any time when a prospectus relating to the Shares is required to be delivered
under the Act, any event shall have occurred as a result of which the Prospectus
or any other prospectus relating to the Shares as then in effect would include
any untrue statement of a material fact or omit to state a material fact
necessary to make the statements therein, in the light of the circumstances
under which they were made, not misleading; in case any Underwriter is required
to deliver a prospectus nine (9) months or more after the effective date of the
Registration Statement in connection with the sale of the Shares, it will
prepare promptly upon request, but at the expense of such Underwriter, such
amendment or amendments to the Registration Statement and such prospectus or
prospectuses as may be necessary to permit compliance with the requirements of
Section 10(a)(3) of the Act; and it will file no amendment or supplement to the
Registration Statement or Prospectus or the Incorporated Documents, or, prior to
the end of the period of time in which a prospectus relating to the Shares is
required to be delivered under the Act, file any document which upon filing
becomes an Incorporated Document, which shall not previously have been submitted
to you a reasonable time prior to the proposed filing thereof or to which you
shall reasonably object in writing, subject, however, to compliance with the Act
and the Rules and Regulations, the Exchange Act and the rules and regulations of
the Commission thereunder and the provisions of this Agreement.
(b) The Company will advise you, promptly after it shall
receive notice or obtain knowledge, of the issuance of any stop order by the
Commission suspending the effectiveness of the Registration Statement or of the
initiation or threat of any proceeding for that purpose; and it will promptly
use its best efforts to prevent the issuance of any stop order or to obtain its
withdrawal at the earliest possible moment if such stop order should be issued.
(c) The Company will use its best efforts to qualify the
Shares for offering and sale under the securities laws of such jurisdictions as
you may designate and to continue such qualifications in effect for so long as
may be required for purposes of the distribution of the Shares, except that the
Company shall not be required in connection therewith or as a condition thereof
to qualify as a foreign corporation or to execute a general consent to service
of process in any jurisdiction in which it is not otherwise required to be so
qualified or to so execute a general consent to service of process. In each
jurisdiction in which the Shares shall have been qualified as above provided,
the Company will make and file such statements and reports in each year as are
or may be required by the laws of such jurisdiction.
(d) The Company will furnish to you, as soon as available,
and, in the case of the Prospectus and any term sheet or abbreviated term sheet
under Rule 434, in no event later than the first (1st) full business day
following the first day that Shares are traded, copies of the Registration
Statement (three of which will be signed and which will include all exhibits),
each Preliminary Prospectus and the Prospectus and any amendments or supplements
to such documents, including any prospectus prepared to permit compliance with
Section 10(a)(3) of the Act, and the Incorporated Documents (three of which will
include all exhibits,) all in such quantities as you may from time to time
reasonably request. Notwithstanding the foregoing, if BancAmerica Robertson
Stephens, on behalf of the several Underwriters, shall agree to the utilization
of Rule 434 of the Rules and Regulations, the Company shall
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<PAGE> 16
provide to you copies of a Preliminary Prospectus updated in all respects
through the date specified by you in such quantities as you may from time to
time reasonably request.
(e) The Company will make generally available to its
securityholders as soon as practicable, but in any event not later than the
ninetieth (90th) day following the end of the fiscal quarter first occurring
after the first anniversary of the effective date of the Registration Statement,
an earnings statement (which will be in reasonable detail but need not be
audited) complying with the provisions of Section 11(a) of the Act and covering
a twelve (12) month period beginning after the effective date of the
Registration Statement.
(f) During a period of five (5) years after the date hereof or
such earlier date that the Company is acquired or is a party to a merger where
the Company is not the surviving entity and where all of the shareholders of the
Company cease to be shareholders, the Company will furnish to its shareholders
as soon as practicable after the end of each respective period, annual reports
(including financial statements audited by independent certified public
accountants) and will furnish to you and the other several Underwriters
hereunder, upon request (i) concurrently with furnishing to its shareholders, a
balance sheet of the Company as of the end of such fiscal year, together with
statements of operations, of shareholders' equity, and of cash flows of the
Company for such fiscal year, accompanied by a copy of the certificate or report
thereon of independent certified public accountants, (ii) as soon as they are
available, copies of all reports (financial or other) mailed to shareholders,
(iii) as soon as they are available, copies of all reports and financial
statements furnished to or filed with the Commission, any securities exchange or
the NASD, (iv) every material press release and every material news item or
article in respect of the Company or its affairs which was released to
shareholders or prepared by the Company or any of its Subsidiaries, and (v) any
additional information of a public nature concerning the Company or its
Subsidiaries, or its business which you may reasonably request. During such five
(5) year period, if the Company shall have active Subsidiaries, the foregoing
financial statements shall be on a consolidated basis to the extent that the
accounts of the Company and its Subsidiaries are consolidated, and shall be
accompanied by similar financial statements for any significant Subsidiary which
is not so consolidated.
(g) The Company will apply the net proceeds from the sale of
the Shares being sold by it in the manner set forth under the caption "Use of
Proceeds" in the Prospectus.
(h) The Company will maintain a transfer agent and, if
necessary under the jurisdiction of incorporation of the Company, a registrar
(which may be the same entity as the transfer agent) for its Common Stock.
(i) If the transactions contemplated hereby are not
consummated by reason of any failure, refusal or inability on the part of the
Company or any Selling Shareholder to perform any agreement on their respective
parts to be performed hereunder or to fulfill any condition of the Underwriters'
obligations hereunder, or if the Company shall terminate this Agreement pursuant
to Section 11 (a) hereof, or if the Underwriters shall terminate this Agreement
pursuant to Section 11 (b)(i), the Company will reimburse the several
Underwriters for all out-of-pocket expenses (including fees and disbursements of
Underwriters' Counsel and Underwriters' Canadian counsel) incurred by the
Underwriters in investigating or preparing to market or marketing the Shares.
(j) If at any time during the ninety (90) day period after the
Registration Statement becomes effective, any rumor, publication or event
relating to or affecting the Company shall occur as a result of which in your
opinion the market price of the Common Stock has been or is likely to be
materially affected (regardless of whether such rumor, publication or event
necessitates a supplement to or amendment of the Prospectus), the Company will,
after written notice from you advising the Company to the effect set forth
above, forthwith prepare, consult with you concerning the substance of and
disseminate a press release or other public statement, reasonably satisfactory
to you, responding to or commenting on such rumor, publication or event.
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<PAGE> 17
(k) During the Lock-up Period, the Company will not, without
the prior written consent of BancAmerica Robertson Stephens, effect the
Disposition of, directly or indirectly, any Securities other than the sale of
the Firm Shares and the Option Shares hereunder, the sales of shares of Common
Stock pursuant to the exercise of options granted or to be granted under the
Company's stock option plan (the "Option Plan"), the issuance of options under
the Option Plan, and the issuance of unregistered stock in connection with an
acquisition provided that such unregistered stock shall not be freely tradeable
within the Lock-up Period.
(l) For so long as there are more than one hundred (100)
shareholders of record of the Common Stock, the Company shall use its best
efforts to maintain the listing of the Common Stock on the Nasdaq National
Market for a period of at least five (5) years after the effective date of the
Registration Statement.
(m) The Company and the Selling Shareholders shall use their
best efforts to do and perform all things required or necessary to be done and
performed under this Agreement by the Company or the Selling Shareholders prior
to the Closing Date or any later date on which Option Shares are to be
purchased, as the case may be, and to satisfy all conditions precedent to the
delivery of the Shares.
(n) The Company agrees to enforce (at its expense), for the
benefit of the Underwriters and at the request of BancAmerica Robertson
Stephens, the Lock-Up Agreements and not to waive any condition of any such
agreement without the prior written consent of BancAmerica Robertson Stephens.
5. Expenses.
(a) The Company and the Selling Shareholders agree with each
Underwriter that:
(i) The Company will pay and bear all costs and expenses
in connection with the preparation, printing and filing of the Registration
Statement (including financial statements, schedules and exhibits), Preliminary
Prospectuses, the Prospectus and the Incorporated Documents, and any amendments
or supplements thereto; the printing of this Agreement, the Agreement Among
Underwriters, the Selected Dealer Agreement, the Preliminary Blue Sky Survey and
any Supplemental Blue Sky Survey, the Underwriters' Questionnaire and Power of
Attorney, and any instruments related to any of the foregoing; the issuance and
delivery of the Shares hereunder to the several Underwriters, including transfer
taxes, if any, the cost of all certificates representing the Shares and transfer
agents' and registrars' fees; the fees and disbursements of counsel for the
Company; all fees and other charges of the Company's independent certified
public accountants; the cost of furnishing to the several Underwriters copies of
the Registration Statement (including appropriate exhibits), Preliminary
Prospectus, the Prospectus, the Incorporated Documents and any amendments or
supplements to any of the foregoing; NASD filing fees and the cost of qualifying
the Shares under the laws of such jurisdictions as you may designate (including
filing fees and fees and disbursements of Underwriters' Counsel and Canadian
counsel in connection with such NASD filings, Blue Sky qualifications and
compliance with Canadian securities laws); and all other expenses directly
incurred by the Company in connection with the performance of their obligations
hereunder. Any additional expenses incurred as a result of the sale of the
Shares by the Selling Shareholders will be borne collectively by the Company and
the Selling Shareholders as may be agreed between such parties. The provisions
of this Section 5(a)(i) are intended to relieve the Underwriters from the
payment of the expenses and costs which the Selling Shareholders and the Company
hereby agree to pay, but shall not affect any agreement which the Selling
Shareholders and the Company may make, or may have made, for the sharing of any
of such expenses and costs. Such agreements shall not impair the obligations of
the Company and the Selling Shareholders hereunder to the several Underwriters.
(ii) In addition to its other obligations under Section
8(a) hereof, the Company agrees that, as an interim measure during the pendency
of any claim, action, investigation,
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<PAGE> 18
inquiry or other proceeding described in Section 8(a) hereof, it will reimburse
the Underwriters on a monthly basis for all reasonable legal or other expenses
actually incurred in connection with investigating or defending any such claim,
action, investigation, inquiry or other proceeding, notwithstanding the absence
of a judicial determination as to the propriety and enforceability of the
Company's obligation to reimburse the Underwriters for such expenses and the
possibility that such payments might later be held to have been improper by a
court of competent jurisdiction. To the extent that any such interim
reimbursement payment is so held to have been improper, the Underwriters shall
promptly return such payment to the Company together with interest, compounded
daily, determined on the basis of the prime rate listed from time to time in The
Wall Street Journal which represents the base rate on corporate loans posted by
a substantial majority of the nation's thirty (30) largest banks (the "Prime
Rate"). Any such interim reimbursement payments which are not made to the
Underwriters within thirty (30) days of a request for reimbursement shall bear
interest at the Prime Rate from the date of such request.
(iii) In addition to their other obligations under
Section 8(b) hereof, each Selling Shareholder agrees that, as an interim measure
during the pendency of any claim, action, investigation, inquiry or other
proceeding described in Section 8(b) hereof relating to such Selling
Shareholder, it will reimburse the Underwriters on a monthly basis for all
reasonable legal or other expenses actually incurred in connection with
investigating or defending any such claim, action, investigation, inquiry or
other proceeding, notwithstanding the absence of a judicial determination as to
the propriety and enforceability of such Selling Shareholder's obligation to
reimburse the Underwriters for such expenses and the possibility that such
payments might later be held to have been improper by a court of competent
jurisdiction. To the extent that any such interim reimbursement payment is so
held to have been improper, the Underwriters shall promptly return such payment
to the Selling Shareholders, together with interest, compounded daily,
determined on the basis of the Prime Rate. Any such interim reimbursement
payments which are not made to the Underwriters within thirty (30) days of a
request for reimbursement shall bear interest at the Prime Rate from the date of
such request.
(b) In addition to their other obligations under Section 8(c)
hereof, the Underwriters severally and not jointly agree that, as an interim
measure during the pendency of any claim, action, investigation, inquiry or
other proceeding described in Section 8(c) hereof, they will reimburse the
Company and each Selling Shareholder on a monthly basis for all reasonable legal
or other expenses actually incurred in connection with investigating or
defending any such claim, action, investigation, inquiry or other proceeding,
notwithstanding the absence of a judicial determination as to the propriety and
enforceability of the Underwriters' obligation to reimburse the Company and each
such Selling Shareholder for such expenses and the possibility that such
payments might later be held to have been improper by a court of competent
jurisdiction. To the extent that any such interim reimbursement payment is so
held to have been improper, the Company and each such Selling Shareholder shall
promptly return such payment to the Underwriters together with interest,
compounded daily, determined on the basis of the Prime Rate. Any such interim
reimbursement payments which are not made to the Company and each such Selling
Shareholder within thirty (30) days of a request for reimbursement shall bear
interest at the Prime Rate from the date of such request.
(c) It is agreed that any controversy arising out of the
operation of the interim reimbursement arrangements set forth in Sections
5(a)(ii), 5(a)(iii) and 5(b) hereof, including the amounts of any requested
reimbursement payments, the method of determining such amounts and the basis on
which such amounts shall be apportioned among the reimbursing parties, shall be
settled by arbitration conducted under the provisions of the Constitution and
Rules of the Board of Governors of the New York Stock Exchange, Inc. or pursuant
to the Code of Arbitration Procedure of the NASD. Any such arbitration must be
commenced by service of a written demand for arbitration or a written notice of
intention to arbitrate, therein electing the arbitration tribunal. In the event
the party demanding arbitration does not make such designation of an arbitration
tribunal in such demand or notice, then the party responding to said demand or
notice is authorized to do so. Any such arbitration will be limited to the
operation of the interim reimbursement provisions contained in Sections
5(a)(ii), 5(a)(iii) and 5(b) hereof and will not resolve the ultimate propriety
or enforceability of the obligation to indemnify for
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<PAGE> 19
expenses which is created by the provisions of Sections 8(a), 8(b) and 8(c)
hereof or the obligation to contribute to expenses which is created by the
provisions of Section 8(c) hereof.
6. Conditions of Underwriters' Obligations. The obligations of the
several Underwriters to purchase and pay for the Shares as provided herein shall
be subject to the accuracy, as of the date hereof and the Closing Date and any
later date on which Option Shares are to be purchased, as the case may be, of
the representations and warranties of the Company and the Selling Shareholders
herein, to the performance by the Company and the Selling Shareholders of their
respective obligations hereunder and to the following additional conditions:
(a) The Registration Statement shall have become effective not later
than 2:00 P.M., San Francisco time, on the date following the date of this
Agreement, or such later date as shall be consented to in writing by you; and no
stop order suspending the effectiveness thereof shall have been issued and no
proceedings for that purpose shall have been initiated or, to the knowledge of
the Company, any Selling Shareholder or any Underwriter, threatened by the
Commission, and any request of the Commission for additional information (to be
included in the Registration Statement or the Prospectus or any Incorporated
Document or otherwise) shall have been complied with to the satisfaction of
Underwriters' Counsel.
(b) All corporate proceedings and other legal matters in connection
with this Agreement, the form of Registration Statement and the Prospectus, and
the registration, authorization, issue, sale and delivery of the Shares, shall
have been reasonably satisfactory to Underwriters' Counsel, and such counsel
shall have been furnished with such papers and information as they may
reasonably have requested to enable them to pass upon the matters referred to in
this Section.
(c) Subsequent to the execution and delivery of this Agreement and
prior to the Closing Date, or any later date on which Option Shares are to be
purchased, as the case may be, there shall not have been any change in the
condition (financial or otherwise), earnings, operations, business or business
prospects of the Company and its Subsidiaries considered as one enterprise from
that set forth in the Registration Statement or Prospectus, which, in your sole
judgment, is material and adverse and that makes it, in your sole judgment,
impracticable or inadvisable to proceed with the public offering of the Shares
as contemplated by the Prospectus.
(d) You shall have received on the Closing Date and on any later
date on which Option Shares are to be purchased, as the case may be, the
following opinion of Long Aldridge & Norman LLP, special counsel for the Company
and the Selling Shareholders, dated the Closing Date or such later date on which
Option Shares are to be purchased, as the case may be, addressed to the
Underwriters and with reproduced copies or signed counterparts thereof for each
of the Underwriters, to the effect that:
(i) The Company and each U.S. Subsidiary and each Foreign
Subsidiary incorporated under the laws of any state of the U.S.
(collectively the "U.S. Incorporated Subsidiaries"), is a
corporation validly existing and in good standing under the laws of
the jurisdiction of its incorporation;
(ii) The Company and each U.S. Incorporated Subsidiary has the
corporate power and authority to own, lease and operate its
properties and the Company and each U.S. Subsidiary has the
corporate power and authority to conduct its business as described
in the Prospectus;
(iii) The Company and each U.S. Subsidiary is duly qualified to
do business as a foreign corporation in each State or jurisdiction
in the U.S. and is in good standing in each jurisdiction in the
U.S., if any, in which the ownership or leasing of its properties or
the conduct of its business requires such qualification, except
where the failure to be so qualified or be in good standing would
not have a material adverse effect
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<PAGE> 20
on the condition (financial or otherwise), earnings,
operations or business of the Company and its Subsidiaries
considered as one enterprise. To such counsel's knowledge, the
Company does not own or control, directly or indirectly, any
corporation, association or other entity other than those
entities disclosed on Schedule C hereto;
(iv) The authorized, issued and outstanding capital
stock of the Company is as set forth in the Prospectus under
the caption "Capitalization" as of the dates stated therein,
the issued and outstanding shares of capital stock of the
Company (including the Selling Shareholder Shares) have been
duly and validly issued and are fully paid and nonassessable,
and, to such counsel's knowledge, will not have been issued in
violation of or subject to any preemptive right, co-sale
right, registration right, right of first refusal or other
similar right;
(v) All issued and outstanding shares of capital
stock of each U.S. Incorporated Subsidiary have been duly
authorized and validly issued and are fully paid and
nonassessable, and, to such counsel's knowledge, have not been
issued in violation of or subject to any preemptive right,
co-sale right, registration right, right of first refusal or
other similar right and are owned by the Company free and
clear of any pledge, lien, security interest, encumbrance,
claim or equitable interest;
(vi) The Firm Shares to be issued by the Company
pursuant to the terms of this Agreement have been duly
authorized and, upon issuance and delivery against payment
therefor in accordance with the terms hereof, will be duly and
validly issued and fully paid and nonassessable, and will not
have been issued in violation of or subject to any preemptive
right, co-sale right, registration right, right of first
refusal or other similar right. The Option Shares have been
duly authorized, validly issued and are non-assessable.
(vii) The Company has the corporate power and
authority to enter into this Agreement and to issue, sell and
deliver to the Underwriters the Shares to be issued and sold
by it hereunder;
(viii) This Agreement has been duly authorized by all
necessary corporate action on the part of the Company and has
been duly executed and delivered by the Company and, assuming
due authorization, execution and delivery by you, is a valid
and binding agreement of the Company, enforceable in
accordance with its terms, except insofar as indemnification
provisions may be limited by applicable law and except as
enforceability may be limited by bankruptcy, insolvency,
reorganization, moratorium or similar laws relating to or
affecting creditors' rights generally, public policy or by
general equitable principles;
(ix) The Registration Statement has become
effective under the Act and, to such counsel's knowledge, no
stop order suspending the effectiveness of the Registration
Statement has been issued and no proceedings for that purpose
have been instituted or are pending or threatened under the
Act;
(x) The Registration Statement and the Prospectus,
and each amendment or supplement thereto (other than the
financial statements (including supporting schedules) and
financial data derived therefrom as to which such counsel need
express no opinion), as of the effective date of the
Registration Statement, complied as to form in all material
respects with the requirements of the Act and the applicable
Rules and Regulations; and each of the Incorporated Documents
(other than the financial statements (including supporting
schedules) and the financial data derived therefrom as
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to which such counsel need express no opinion) complied when
filed (or, if any amendment with respect to any such document
was filed, when such amendment was filed) pursuant to the
Exchange Act as to form in all material respects with the
requirements of the Act and the Rules and Regulations or the
Exchange Act and the applicable rules and regulations of the
Commission thereunder, as the case may be;
(xi) The statements under the caption "Description
of Capital Stock" in the Prospectus, insofar as such
statements constitute a summary of documents referred to
therein or matters of law, when read in conjunction with other
information contained in the Registration Statement, fairly
summarize in all material respects the information called for
with respect to such documents and matters; provided, however,
that such counsel may rely on representations of officers of
the Company with respect to the factual matters contained in
such statements. The form of certificate evidencing the Common
Stock and filed as an exhibit to the Registration Statement
complies with Georgia law in all material respects;
(xii) To such counsel's knowledge, there are no
agreements, contracts, leases or documents to which the
Company is a party of a character required to be described or
referred to in the Registration Statement or Prospectus or any
Incorporated Document or to be filed as an exhibit to the
Registration Statement or any Incorporated Document which are
not described or referred to therein or filed as required;
(xiii) The performance of this Agreement and the
consummation of the transactions herein contemplated (other
than performance of the Company's and Selling Shareholders'
indemnification obligations hereunder, concerning which no
opinion need be expressed) will not (a) result in any
violation of the Company's charter or bylaws or (b) to such
counsel's knowledge, result in a material breach or violation
of any of the terms and provisions of, or constitute a
material default under, any material bond, debenture, note or
other evidence of indebtedness, or any lease, contract,
indenture, mortgage, deed of trust, loan agreement, joint
venture or other agreement or instrument known to such counsel
to which the Company is a party or by which its properties are
bound, or any applicable U.S. statute, rule or regulation
known to such counsel (other than the financial statements
(including supporting schedules) and financial data derived
therefrom as to which such counsel need express no opinion)
or, to such counsel's knowledge, any order, writ or decree of
any court, government or governmental agency or body in the
U.S. having jurisdiction over the Company or any of its
Subsidiaries , or over any of their respective properties or
operations;
(xiv) No consent, approval, authorization or order
of or qualification with any court, government or governmental
agency or body in the U.S. having jurisdiction over the
Company or any of its Subsidiaries, or over any of their
properties or operations is necessary in connection with the
consummation by the Company of the transactions herein
contemplated, except such as have been obtained under the Act,
the Exchange Act or such as may be required under State or
other securities or Blue Sky laws in connection with the
purchase and the distribution of the Shares by the
Underwriters;
(xv) To such counsel's knowledge, there are no
legal or governmental proceedings pending or threatened
against the Company or any of its Subsidiaries of a character
required to be disclosed in the Registration Statement or the
Prospectus or any Incorporated Document by the Act or the
Rules and Regulations or by the Exchange Act or the applicable
rules and regulations of the Commission thereunder, other than
those described therein;
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<PAGE> 22
(xvi) To such counsel's knowledge, neither the
Company nor any of its U.S. Incorporated Subsidiaries is
presently in material violation of its respective charter or
bylaws, and, to such counsel's knowledge, neither the Company
nor any of its Subsidiaries is presently in material breach of
any applicable U.S. statute, rule or regulation known to such
counsel or, to such counsel's knowledge, any order, writ or
decree of any court or governmental agency or body in the U.S.
having jurisdiction over the Company or any of its
Subsidiaries, or over any of their respective properties or
operations;
(xvii) To such counsel's knowledge, except as set
forth in the Registration Statement and Prospectus, no holders
of Common Stock or other securities of the Company have
registration rights with respect to securities of the Company
and, except as set forth in the Registration Statement and
Prospectus, all holders of securities of the Company having
rights known to such counsel to registration of such shares of
Common Stock or other securities, because of the filing of the
Registration Statement by the Company have, with respect to
the offering contemplated thereby, waived such rights or such
rights have expired by reason of lapse of time following
notification of the Company's intent to file the Registration
Statement or have included securities in the Registration
Statement pursuant to the exercise of and in full satisfaction
of such rights;
(xviii) Each Selling Shareholder which is not a
natural person has full right, power and authority to enter
into and to perform its obligations under the Power of
Attorney and Custody Agreement to be executed and delivered by
it in connection with the transactions contemplated herein;
the Power of Attorney and Custody Agreement of each Selling
Shareholder that is not a natural person has been duly
authorized by such Selling Shareholder; the Power of Attorney
and Custody Agreement of each Selling Shareholder has been
duly executed and delivered by or on behalf of such Selling
Shareholder; and the Power of Attorney and Custody Agreement
of each Selling Shareholder constitutes the valid and binding
agreement of such Selling Shareholder, enforceable in
accordance with its terms, except as the enforcement thereof
may be limited by bankruptcy, insolvency, reorganization,
moratorium or other similar laws relating to or affecting
creditors' rights generally or by general equitable
principles;
(xix) Each of the Selling Shareholders has full
right, power and authority to enter into and to perform its
obligations under this Agreement and to sell, transfer, assign
and deliver the Shares to be sold by such Selling Shareholder
hereunder (it being acknowledged that no such opinion shall be
required as to the capacity of any individual Selling
Shareholder);
(xx) This Agreement has been duly authorized by
each Selling Shareholder that is not a natural person and has
been duly executed and delivered by or on behalf of each
Selling Shareholder;
(xxi) Upon the delivery of and payment for the
Shares as contemplated in this Agreement, each of the
Underwriters will receive valid marketable title to the Shares
purchased by it from such Selling Shareholder, free and clear
of any pledge, lien, security interest, encumbrance, claim or
equitable interest. In rendering such opinion, such counsel
may assume that the Underwriters purchased such shares in good
faith and are without notice of any defect in the title of the
Shares being purchased from the Selling Shareholders and may
assume (if counsel has no actual knowledge to the contrary)
the validity and completeness of the representations and
warranties of the Selling Shareholders contained in their
respective Custody Agreements and Powers of Attorney;
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<PAGE> 23
(xxii) Neither the Company nor any of its U.S.
Incorporated Subsidiaries is, nor will the Company or any of
its U.S. Incorporated Subsidiaries become upon the sale of the
Shares and the application of the proceeds therefrom as
described in the Prospectus under the caption "Use of
Proceeds," an "investment company" or a person controlled by
an "investment company" within the meaning of the 1940 Act;
In addition, such counsel shall state that such counsel has
participated in conferences with officials and other representatives of the
Company, the Representatives, Underwriters' Counsel and the independent
certified public accountants of the Company, at which such conferences the
contents of the Registration Statement and Prospectus and related matters were
discussed, and although they have not independently investigated or verified and
do not assume responsibility for the accuracy, completeness or fairness of the
statements contained in the Registration Statement or the Prospectus, nothing
has come to the attention of such counsel which leads them to believe that, (i)
the Registration Statement, when such document became effective (but after
giving effect to any modification incorporated therein pursuant to Rule 430A
under the Act) and as of the Closing Date or the Option Closing Date as the case
may be (other than the financial statements including supporting schedules and
other financial and statistical information derived therefrom, as to which such
counsel need express no comment) contained any untrue statement of a material
fact or omitted to state a material fact required to be stated therein or
necessary to make the statements therein not misleading in light of the
circumstances under which they were made, (ii) the Prospectus, or any supplement
thereto, at the date it bears and as of the Closing Date or the Option Closing
Date, as the case may be, (other than the financial statements including
supporting schedules and other financial and statistical information derived
therefrom, as to which such counsel need express no comment) contained any
untrue statement of a material fact or omitted to state a material fact required
to be stated therein or necessary to make the statements therein not misleading
in light of the circumstances under which they were made or (iii) any
Incorporated Document when such document was filed (or, if any amendment with
respect to such document was filed, when such amendment was filed) (other than
the financial statements including supporting schedules and other financial and
statistical information derived therefrom, as to which such counsel need express
no comment) contained any untrue statement of a material fact or omitted to
state a material fact required to be stated therein or necessary to make the
statements therein not misleading in light of the circumstances under which they
were made. Such counsel shall also state that the conditions for the use of Form
S-3 set forth in the General Instructions thereto have been satisfied.
Counsel rendering the foregoing opinion may rely as to
questions of law not involving the laws of the United States or the State of
Georgia upon opinions of local counsel, and as to questions of fact upon
representations or certificates of officers of the Company, the Selling
Shareholders or officers of the Selling Shareholders (when the Selling
Shareholder is not a natural person), and of government officials, in which case
their opinion is to state that they are so relying and that they have no
knowledge of any material misstatement or inaccuracy in any such opinion,
representation or certificate. Copies of any opinion, representation or
certificate so relied upon shall be delivered to you, as Representatives of the
Underwriters, and to Underwriters' Counsel. Counsel may deliver its opinion in
accordance with the January 1, 1992 edition of the Interpretive Standards
applicable to Legal Opinion to Third Parties in Corporate Transactions adopted
by the Legal Opinion Committee of the Corporate and Banking Law Section of the
State Bar of Georgia. Notwithstanding anything to the contrary herein contained,
such counsel need express no opinion as requested in clauses (xviii), (xix),
(xx) and (xxi) to the extent such opinions relate to Epargne Capitalization
Intermediare and Epargne Developpement.
(e) You shall have received on the Closing Date and on any
later date on which Option Shares are to be purchased, as the case may be,
opinions in form and substance reasonably satisfactory to the Underwriters and
to Underwriters' counsel from special counsel for the Company and for the
certain Foreign Subsidiaries located or operating in Canada, France, Mexico and
the United Kingdom, dated the Closing Date or such later date on which Option
Shares are to be purchased, as the case may be, addressed to the Underwriters
and with reproduced copies or signed counterparts thereof for each of the
Underwriters.
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<PAGE> 24
(f) You shall have received on the Closing Date and on any
later date on which Option Shares are to be purchased, as the case may be, an
opinion of Alston & Bird, in form and substance satisfactory to you, with
respect to the sufficiency of all such corporate proceedings and other legal
matters relating to this Agreement and the transactions contemplated hereby as
you may reasonably require, and the Company shall have furnished to such counsel
such documents as they may have requested for the purpose of enabling them to
pass upon such matters.
(g) You shall have received on the Closing Date and on any
later date on which Option Shares are to be purchased, as the case may be, a
letter from KPMG Peat Marwick LLP addressed to the Board of Directors of the
Company and to the Underwriters, dated the Closing Date or such later date on
which Option Shares are to be purchased, as the case may be, confirming that
they are independent certified public accountants with respect to the Company
within the meaning of the Act and the applicable published Rules and Regulations
and based upon the procedures described in such letter delivered to you
concurrently with the execution of this Agreement (herein called the "Original
Letter"), but carried out to a date not more than five (5) business days prior
to the Closing Date or such later date on which Option Shares are to be
purchased, as the case may be, (i) confirming, to the extent true, that the
statements and conclusions set forth in the Original Letter are accurate as of
the Closing Date or such later date on which Option Shares are to be purchased,
as the case may be, and (ii) setting forth any revisions and additions to the
statements and conclusions set forth in the Original Letter which are necessary
to reflect any changes in the facts described in the Original Letter since the
date of such letter, or to reflect the availability of more recent financial
statements, data or information. The letter shall not disclose any change in the
condition (financial or otherwise), earnings, operations, business or business
prospects of the Company and its Subsidiaries considered as one enterprise from
that set forth in the Registration Statement or Prospectus, which, in your sole
judgment, is material and adverse and that makes it, in your sole judgment,
impracticable or inadvisable to proceed with the public offering of the Shares
as contemplated by the Prospectus. The Original Letter from KPMG Peat Marwick
LLP shall be addressed to or for the use of the Board of Directors of the
Company and the Underwriters in form and substance satisfactory to the
Underwriters and shall (i) represent, to the extent true, that they are
independent certified public accountants with respect to the Company within the
meaning of the Act and the applicable published Rules and Regulations, (ii) set
forth their opinion with respect to their audit of the consolidated balance
sheets of the Company as of December 31, 1996 and 1997 and related consolidated
statements of earnings, shareholders' equity, and cash flows for the years ended
December 31, 1995, 1996 and 1997, and (iii) address other matters agreed upon by
KPMG Peat Marwick LLP and you. In addition, you shall have received from KPMG
Peat Marwick LLP a letter addressed to the Company and made available to you for
the use of the Underwriters stating that their review of the Company's system of
controls, to the extent they deemed necessary in establishing the scope of their
audit of the Company's consolidated financial statements as of December 31,
1997, did not disclose any weaknesses in internal controls that they considered
to be material weaknesses.
(h) You shall have received on the Closing Date and on any
later date on which Option Shares are to be purchased, as the case may be, a
certificate of the Company, dated the Closing Date or such later date on which
Option Shares are to be purchased, as the case may be, signed by the Chief
Executive Officer and Chief Financial Officer of the Company, to the effect
that, and you shall be satisfied that:
(i) The representations and warranties of the Company in
this Agreement are true and correct in all material respects,
as if made on and as of the Closing Date or any later date on
which Option Shares are to be purchased, as the case may be,
and the Company has complied with all the agreements and
satisfied all the conditions on its part to be performed or
satisfied at or prior to the Closing Date or any later date on
which Option Shares are to be purchased, as the case may be;
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<PAGE> 25
(ii) No stop order suspending the effectiveness of the
Registration Statement has been issued and no proceedings for
that purpose have been instituted or are pending or threatened
under the Act;
(iii) When the Registration Statement became effective and
at all times subsequent thereto up to the delivery of such
certificate, the Registration Statement and the Prospectus,
and any amendments or supplements thereto, and the
Incorporated Documents, when such Incorporated Documents
became effective or were filed with the Commission or, if
amended, as of the date of such amendment thereto, contained
all material information required to be included therein by
the Act and the Rules and Regulations or the Exchange Act and
the applicable rules and regulations of the Commission
thereunder, as the case may be, and in all material respects
conformed to the requirements of the Act and the Rules and
Regulations or the Exchange Act and the applicable rules and
regulations of the Commission thereunder, as the case may be,
the Registration Statement, and any amendment or supplement
thereto, did not and does not include any untrue statement of
a material fact or omit to state a material fact required to
be stated therein or necessary to make the statements therein
not misleading, the Prospectus, and any amendment or
supplement thereto, did not and does not include any untrue
statement of a material fact or omit to state a material fact
necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading, and,
since the effective date of the Registration Statement, there
has occurred no event required to be set forth in an amended
or supplemented Prospectus which has not been so set forth;
and
(iv) Each Preliminary Prospectus, when filed with the
Commission and at all time subsequent thereto up to the
delivery of such certificate, conformed in all material
respects to the requirements of the Act and the Rules and
Regulations as of its date, has not included any untrue
statement of material fact or omitted to state a material fact
necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading;
provided, however, if any such material misstatement or
material omission were made, it was corrected in a subsequent
Preliminary Prospectus which was publicly distributed to
prospective purchasers;
(v) Subsequent to the respective dates as of which
information is given in the Registration Statement and
Prospectus, and except as disclosed or contemplated in the
Prospectus, there has not been (a) any material adverse change
in the condition (financial or otherwise), earnings,
operations, business or business prospects of the Company and
its Subsidiaries considered as one enterprise, (b) any
transaction that is material to the Company and its
Subsidiaries considered as one enterprise, except transactions
entered into in the ordinary course of business, (c) any
obligation, direct or contingent, that is material to the
Company and its Subsidiaries considered as one enterprise,
incurred by the Company or its Subsidiaries, except
obligations incurred in the ordinary course of business, (d)
any change in the capital stock or outstanding indebtedness of
the Company or any of its Subsidiaries that is material to the
Company and its Subsidiaries considered as one enterprise, (e)
any dividend or distribution of any kind declared, paid or
made on the capital stock of the Company or any of its
Subsidiaries, or (f) any loss or damage (whether or not
insured) to the property of the Company or any of its
Subsidiaries which has been sustained or will have been
sustained which has a material adverse effect on the condition
(financial or otherwise), earnings, operations, business or
business prospects of the Company and its Subsidiaries
considered as one enterprise.
(vi) The Common Stock is registered pursuant to Section
12(g) of the Exchange Act and is listed on Nasdaq National
Market, and the Company has taken no
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<PAGE> 26
action designed to, or likely to have the effect of,
terminating the registration of the Common Stock under the
Exchange Act or delisting the Common Stock from the Nasdaq
National Market, nor has the Company received any notification
that the Commission or the NASD is contemplating terminating
such registration or listing. The Company has filed in a
timely manner all reports and other information required to be
filed with the Commission pursuant to the Exchange Act during
the 12 calendar months and any portion of a month immediately
preceding the filing of the Registration Statement (or during
such shorter period of time that the Company has been subject
to the reporting requirements of the Exchange Act).
(i) You shall be satisfied that, and you shall have
received a certificate, dated the Closing Date, or any later date on which
Option Shares are to be purchased, as the case may be, from the Attorneys for
each Selling Shareholder to the effect that, as of the Closing Date, or any
later date on which Option Shares are to be purchased, as the case may be, they
have not been informed that:
(i) The representations and warranties made by such
Selling Shareholder herein are not true or correct in any
material respect on the Closing Date or on any later date on
which Option Shares are to be purchased, as the case may be;
or
(ii) Such Selling Shareholder has not complied with
any obligation or satisfied any condition which is required to
be performed or satisfied on the part of such Selling
Shareholder at or prior to the Closing Date or any later date
on which Option Shares are to be purchased, as the case may
be.
(j) The Company shall have obtained and delivered to you
an agreement from each director of the Company and each other person listed on
Schedule D hereto that such person will not, during the Lock-up Period, effect
the Disposition of any Securities now owned or hereafter acquired directly by
such person or with respect to which such person has or hereafter acquires the
power of disposition, otherwise than (i) as a bona fide gift or gifts, provided
the donee or donees thereof agree in writing to be bound by this restriction,
(ii) as a distribution to limited partners, shareholders or beneficiaries of
such person, provided that the distributees thereof agree in writing to be bound
by the terms of this restriction, or (iii) if such person is an individual, to a
member or members of his or her immediate family or to a trust the beneficiaries
of which are exclusively such person and/or a member or members of his or her
immediate family, provided that each transferee thereof agrees in writing to be
bound by the terms of this restriction, or (iv) with the prior written consent
of BancAmerica Robertson Stephens.
The foregoing restriction shall have been expressly agreed to
preclude the holder of the Securities from engaging in any hedging or other
transaction which is designed to or reasonably expected to lead to or result in
a Disposition of Securities during the Lock-up Period, even if such Securities
would be disposed of by someone other than the such holder. Such prohibited
hedging or other transactions would include, without limitation, any short sale
(whether or not against the box) or any purchase, sale or grant of any right
(including, without limitation, any put or call option) with respect to any
Securities or with respect to any security (other than a broad-based market
basket or index) that includes, relates to or derives any significant part of
its value from Securities. Furthermore, such person will have also agreed and
consented to the entry of stop transfer instructions with the Company's transfer
agent against the transfer of the Securities held by such person except in
compliance with this restriction.
(k) The Company and the Selling Shareholders shall have
furnished to you such further certificates and documents as you shall reasonably
request (including certificates of officers of the Company, the Selling
Shareholders or officers of the Selling Shareholders (when the Selling
Shareholder is not a natural person) as to the accuracy of the representations
and warranties of the Company and the Selling Shareholders herein, as to the
performance by the Company and the Selling Shareholders of their
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<PAGE> 27
respective obligations hereunder and as to the other conditions concurrent and
precedent to the obligations of the Underwriters hereunder.
All such opinions, certificates, letters and documents will be
in compliance with the provisions hereof only if they are reasonably
satisfactory to Underwriters' Counsel. The Company and the Selling Shareholders
will furnish you with such number of conformed copies of such opinions,
certificates, letters and documents as you shall reasonably request.
7. Option Shares.
(a) On the basis of the representations, warranties and
agreements herein contained, but subject to the terms and conditions herein set
forth, certain Selling Shareholders hereby grant to the several Underwriters,
severally and not jointly, for the purpose of covering over-allotments in
connection with the distribution and sale of the Firm Shares only, a
nontransferable option to purchase up to an aggregate of 660,000 Option Shares
as set forth on Schedule B hereto at the purchase price per share for the Firm
Shares set forth in Section 3 hereof. Such option may be exercised by the
Representatives on behalf of the several Underwriters on one (1) or more
occasions in whole or in part during the period of thirty (30) days after the
date on which the Firm Shares are initially offered to the public, by giving
written notice to the Company. The number of Option Shares to be purchased by
each Underwriter upon the exercise of such option shall be the same proportion
of the total number of Option Shares to be purchased by the several Underwriters
pursuant to the exercise of such option as the number of Firm Shares purchased
by such Underwriter (set forth in Schedule A hereto) bears to the total number
of Firm Shares purchased by the several Underwriters (set forth in Schedule A
hereto), adjusted by the Representatives in such manner as to avoid fractional
shares.
Delivery of definitive certificates for the Option Shares to
be purchased by the several Underwriters pursuant to the exercise of the option
granted by this Section 7 shall be made against payment of the purchase price
therefor by the several Underwriters by wire transfer of same-day funds, payable
to the order of the Selling Shareholders. Such delivery and payment shall take
place at the offices of Long Aldridge & Norman LLP, 303 Peachtree Street, Suite
5300, Atlanta, Georgia 30308 or at such other place as may be agreed upon among
the Representatives and the Selling Shareholders (i) on the Closing Date, if
written notice of the exercise of such option is received by the Selling
Shareholders at least two (2) full business days prior to the Closing Date, or
(ii) on a date which shall not be later than the third (3rd) full business day
following the date the Selling Shareholders receives written notice of the
exercise of such option, if such notice is received by the Selling Shareholders
less than two (2) full business days prior to the Closing Date.
The certificates for the Option Shares to be so delivered will
be made available to you at such office or such other location including,
without limitation, in New York City, as you may reasonably request for checking
at least one (1) full business day prior to the date of payment and delivery and
will be in such names and denominations as you may request, such request to be
made at least two (2) full business days prior to such date of payment and
delivery. If the Representatives so elect, delivery of the Option Shares may be
made by credit through full fast transfer to the accounts at The Depository
Trust Company designated by the Representatives.
It is understood that you, individually, and not as the
Representatives of the several Underwriters, may (but shall not be obligated to)
make payment of the purchase price on behalf of any Underwriter or Underwriters
whose check or checks shall not have been received by you prior to the date of
payment and delivery for the Option Shares to be purchased by such Underwriter
or Underwriters. Any such payment by you shall not relieve any such Underwriter
or Underwriters of any of its or their obligations hereunder.
(b) Upon exercise of any option provided for in Section 7(a)
hereof, the obligations of the several Underwriters to purchase such Option
Shares will be subject (as of the date hereof and as of
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<PAGE> 28
the date of payment and delivery for such Option Shares) to the accuracy of and
compliance with the representations, warranties and agreements of the Company
and the Selling Shareholders herein, to the accuracy of the statements of the
Company, the Selling Shareholders and officers of the Company made pursuant to
the provisions hereof, to the performance by the Company and the Selling
Shareholders of their respective obligations hereunder, to the conditions set
forth in Section 6 hereof, and to the condition that all proceedings taken at or
prior to the payment date in connection with the sale and transfer of such
Option Shares shall be reasonably satisfactory in form and substance to you and
to Underwriters' Counsel, and you shall have been furnished with all such
documents, certificates and opinions as you may request in order to evidence the
accuracy and completeness of any of the representations, warranties or
statements, the performance of any of the covenants or agreements of the Company
and the Selling Shareholders or the satisfaction of any of the conditions herein
contained.
8. Indemnification and Contribution.
(a) The Company agrees to indemnify and hold harmless each
Underwriter against any losses, claims, damages or liabilities, joint or
several, to which such Underwriter may become subject (including, without
limitation, in its capacity as an Underwriter or as a "qualified independent
underwriter" within the meaning of Schedule E of the Bylaws of the NASD), under
the Act, the Exchange Act or otherwise, specifically including, but not limited
to, losses, claims, damages or liabilities in so far as such losses, claims,
damages or liabilities (or actions in respect thereof) arise out of or are based
upon (i) any breach of any representation, warranty, agreement or covenant of
the Company herein contained, (ii) any untrue statement or alleged untrue
statement of any material fact contained in the Registration Statement or any
amendment or supplement thereto, including any Incorporated Document or, if
amended, any Incorporated Document as so amended, or the omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, or (iii) any untrue
statement or alleged untrue statement of any material fact contained in any
Preliminary Prospectus or the Prospectus or any amendment or supplement thereto,
or the omission or alleged omission to state therein a material fact required to
be stated therein or necessary to make the statements therein, in the light of
the circumstances under which they were made, not misleading; provided, however,
that the Company shall not be liable in any such case to the extent that any
such loss, claim, damage, liability or action arises out of or is based upon an
untrue statement or alleged untrue statement or omission or alleged omission
made in the Registration Statement, such Preliminary Prospectus, or the
Prospectus, or any such amendment or supplement thereto, in reliance upon, and
in conformity with, written information relating to any Underwriter furnished to
the Company by such Underwriter, directly or through you, specifically for use
in the preparation thereof and, provided further, that the indemnity agreement
provided in this Section 8(a) with respect to any Preliminary Prospectus shall
not inure to the benefit of any Underwriter from whom the person asserting any
losses, claims, damages, liabilities or actions based upon any untrue statement
or alleged untrue statement of material fact or omission or alleged omission to
state therein a material fact purchased Shares, if a copy of the Prospectus in
which such untrue statement or alleged untrue statement or omission or alleged
omission was corrected had not been sent or given to such person within the time
required by the Act and the Rules and Regulations, unless such failure is the
result of noncompliance by the Company with Section 4(d) hereof.
The indemnity agreement in this Section 8(a) shall extend upon
the same terms and conditions to, and shall inure to the benefit of, each
person, if any, who controls any Underwriter within the meaning of the Act or
the Exchange Act. This indemnity agreement shall be in addition to any
liabilities which the Company may otherwise have.
(b) Each Selling Shareholder, severally and not jointly,
agrees to indemnify and hold harmless each Underwriter against any losses,
claims, damages or liabilities, joint or several, to which such Underwriter may
become subject (including, without limitation, in its capacity as an Underwriter
or as a "qualified independent underwriter" within the meaning of Schedule E or
the Bylaws of the NASD) under the Act, the Exchange Act or otherwise,
specifically including, but not limited to, losses, claims, damages or
liabilities in so far as such losses, claims, damages or liabilities (or actions
in
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<PAGE> 29
respect thereof) arise out of or are based upon (i) any breach of any
representation, warranty, agreement or covenant of such Selling Shareholder
herein contained, (ii) any untrue statement or alleged untrue statement of any
material fact contained in the Registration Statement or any amendment or
supplement thereto, including any Incorporated Document or, if amended, any
Incorporated Document as so amended, or the omission or alleged omission to
state therein a material fact required to be stated therein or necessary to make
the statements therein not misleading, or (iii) any untrue statement or alleged
untrue statement of any material fact contained in any Preliminary Prospectus or
the Prospectus or any amendment or supplement thereto, or the omission or
alleged omission to state therein a material fact necessary to make the
statements therein, in the light of the circumstances under which they were
made, not misleading, in the case of subparagraphs (ii) and (iii) of this
Section 8(b) to the extent, but only to the extent, that such untrue statement
or alleged untrue statement or omission or alleged omission was made in reliance
upon and in conformity with written information furnished to the Company or such
Underwriter by such Selling Shareholder, directly or through such Selling
Shareholder's representatives, specifically for use in the preparation thereof,
and agrees to reimburse each Underwriter for any legal or other expenses
reasonably incurred by it in connection with investigating or defending any such
loss, claim, damage, liability or action; provided, however that the indemnity
agreement provided in this Section 8(b) with respect to any Preliminary
Prospectus shall not inure to the benefit of any Underwriter from whom the
person asserting any losses, claims, damages, liabilities or actions based upon
any untrue statement or alleged untrue statement of a material fact or omission
or alleged omission to state therein a material fact purchased Shares, if a copy
of the Prospectus in which such untrue statement or alleged untrue statement or
omission or alleged omission was corrected had not been sent or given to such
person within the time required by the Act and the Rules and Regulations, unless
such failure is the result of noncompliance by the Company with Section 4(d)
hereof.
The indemnity agreement in this Section 8(b) shall extend upon
the same terms and conditions to, and shall inure to the benefit of, each
person, if any, who controls any Underwriter within the meaning of the Act or
the Exchange Act. This indemnity agreement shall be in addition to any
liabilities which such Selling Shareholder may otherwise have.
(c) Each Underwriter, severally and not jointly, agrees to
indemnify and hold harmless the Company and each Selling Shareholder against any
losses, claims, damages or liabilities, joint or several, to which the Company
or such Selling Shareholder may become subject under the Act or otherwise,
specifically including, but not limited to, losses, claims, damages or
liabilities in so far as such losses, claims, damages or liabilities (or actions
in respect thereof) arise out of or are based upon (i) any breach of any
representation, warranty, agreement or covenant of such Underwriter herein
contained, (ii) any untrue statement or alleged untrue statement of any material
fact contained in the Registration Statement or any amendment or supplement
thereto, including any Incorporated Document or, if amended, any Incorporated
Document as so amended, or the omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the statements
therein not misleading, and (iii) any untrue statement or alleged untrue
statement of any material fact contained in any Preliminary Prospectus or the
Prospectus or any amendment or supplement thereto, or the omission or alleged
omission to state therein a material fact necessary to make the statements
therein, in the light of the circumstances under which they were made, not
misleading, in the case of subparagraphs (ii) and (iii) of this Section 8(c) to
the extent, but only to the extent, that such untrue statement or alleged untrue
statement or omission or alleged omission was made in reliance upon and in
conformity with written information furnished to the Company by such
Underwriter, directly or through you, specifically for use in the preparation
thereof, and agrees to reimburse the Company and each such Selling Shareholder
for any legal or other expenses reasonably incurred by the Company and each such
Selling Shareholder in connection with investigating or defending any such loss,
claim, damage, liability or action.
The indemnity agreement in this Section 8(c) shall extend upon
the same terms and conditions to, and shall inure to the benefit of, each
officer of the Company who signed the Registration Statement and each director
of the Company, each Selling Shareholder and each person, if any, who controls
the Company or any Selling Shareholder within the meaning of the Act or the
Exchange Act.
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<PAGE> 30
This indemnity agreement shall be in addition to any liabilities which each
Underwriter may otherwise have.
(d) Promptly after receipt by an indemnified party under this
Section 8 of notice of the commencement of any action, such indemnified party
shall, if a claim in respect thereof is to be made against any indemnifying
party under this Section 8, notify the indemnifying party in writing of the
commencement thereof but the omission so to notify the indemnifying party will
not relieve it from any liability which it may have to any indemnified party
otherwise than under this Section 8. In case any such action is brought against
any indemnified party, and it notified the indemnifying party of the
commencement thereof, the indemnifying party will be entitled to participate
therein and, to the extent that it shall elect by written notice delivered to
the indemnified party promptly after receiving the aforesaid notice from such
indemnified party, to assume the defense thereof, with counsel reasonably
satisfactory to such indemnified party; provided, however, that if the
defendants in any such action include both the indemnified party and the
indemnifying party and the indemnified party shall have received an opinion of
counsel that there may be legal defenses available to it and/or other
indemnified parties which are different from or additional to those available to
the indemnifying party, the indemnified party or parties shall have the right to
select separate counsel to assume such legal defenses and to otherwise
participate in the defense of such action on behalf of such indemnified party or
parties. Upon receipt of notice from the indemnifying party to such indemnified
party of the indemnifying party's election so to assume the defense of such
action and approval by the indemnified party of counsel, the indemnifying party
will not be liable to such indemnified party under this Section 8 for any legal
or other expenses subsequently incurred by such indemnified party in connection
with the defense thereof unless (i) the indemnified party shall have employed
separate counsel in accordance with the proviso to the next preceding sentence
(it being understood, however, that the indemnifying party shall not be liable
for the expenses of more than one separate counsel (together with the reasonable
fees of appropriate local counsel) approved by the indemnifying party
representing all the indemnified parties under Section 8(a), 8(b) or 8(c) hereof
who are parties to such action), (ii) the indemnifying party shall not have
employed counsel satisfactory to the indemnified party to represent the
indemnified party within a reasonable time after notice of commencement of the
action or (iii) the indemnifying party has authorized the employment of counsel
for the indemnified party at the expense of the indemnifying party. In no event
shall any indemnifying party be liable in respect of any amounts paid in
settlement of any action unless the indemnifying party shall have approved the
terms of such settlement; provided that such consent shall not be unreasonably
withheld. No indemnifying party shall, without the prior written consent of the
indemnified party, effect any settlement of any pending or threatened proceeding
in respect of which any indemnified party is or could have been a party and
indemnification could have been sought hereunder by such indemnified party,
unless such settlement includes an unconditional release of such indemnified
party from all liability on all claims that are the subject matter of such
proceeding.
(e) In order to provide for just and equitable contribution in
any action in which a claim for indemnification is made pursuant to this Section
8 but it is judicially determined (by the entry of a final judgment or decree by
a court of competent jurisdiction and the expiration of time to appeal or the
denial of the last right of appeal) that such indemnification may not be
enforced in such case notwithstanding the fact that this Section 8 provides for
indemnification in such case, all the parties hereto shall contribute to the
aggregate losses, claims, damages or liabilities to which they may be subject
(after contribution from others) in such proportion so that except as set forth
in Section 8(f) hereof, the Underwriters severally and not jointly are
responsible pro rata for the portion represented by the percentage that the
underwriting discount bears to the initial public offering price, and the
Company and the Selling Shareholders are responsible for the remaining portion,
provided, however that (i) no Underwriter shall be required to contribute any
amount in excess of the amount by which the underwriting discount applicable to
the Shares purchased by such Underwriter exceeds the amount of damages which
such Underwriter has otherwise required to pay and (ii) no person guilty of a
fraudulent misrepresentation (within the meaning of Section 11(f) of the Act)
shall be entitled to contribution from any person who is not guilty of such
fraudulent misrepresentation. The contribution agreement in this Section 8(e)
shall extend upon the same terms and conditions to, and shall inure to the
benefit of, each person, if any, who
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<PAGE> 31
controls any Underwriter, the Company or any Selling Shareholder within the
meaning of the Act or the Exchange Act and each officer of the Company who
signed the Registration Statement and each director of the Company.
(f) The liability of each Selling Shareholder under the
representations, warranties and agreements contained herein and under the
indemnity agreements contained in the provisions of this Section 8 shall be
limited to an amount equal to the sum of (i) the initial public offering price
of the Selling Shareholder Shares and Option Shares sold by such Selling
Shareholder to the Underwriters minus the amount of the underwriting discount
paid thereon to the Underwriters by such Selling Shareholder, and (ii) all
amounts received by such Selling Shareholders, in addition to amounts received
for Selling Shareholder Shares and Option Shares as provided in (i) above,
described under the captions "Risk Factors - Offering Benefits to Affiliates"
and "Use of Proceeds" contained in the Prospectus. The Company and such Selling
Shareholders may agree, as among themselves and without limiting the rights of
the Underwriters under this Agreement, as to the respective amounts of such
liability for which they each shall be responsible. For purposes of this
paragraph, the term "Selling Shareholders" includes the "Shareholders."
(g) The parties to this Agreement hereby acknowledge that they
are sophisticated business persons who were represented by counsel during the
negotiations regarding the provisions hereof including, without limitation, the
provisions of this Section 8, and are fully informed regarding said provisions.
They further acknowledge that the provisions of this Section 8 fairly allocate
the risks in light of the ability of the parties to investigate the Company and
its business in order to assure that adequate disclosure is made in the
Registration Statement and Prospectus as required by the Act and the Exchange
Act.
9. Representations, Warranties, Covenants and Agreements to
Survive Delivery. All representations, warranties, covenants and agreements of
the Company, the Selling Shareholders and the Underwriters herein or in
certificates delivered pursuant hereto, and the indemnity and contribution
agreements contained in Section 8 hereof shall remain operative and in full
force and effect regardless of any investigation made by or on behalf of any
Underwriter or any person controlling any Underwriter within the meaning of the
Act or the Exchange Act, or by or on behalf of the Company or any Selling
Shareholder, or any of their officers, directors or controlling persons within
the meaning of the Act or the Exchange Act, and shall survive the delivery of
the Shares to the several Underwriters hereunder or termination of this
Agreement.
10. Substitution of Underwriters. If any Underwriter or
Underwriters shall fail to take up and pay for the number of Firm Shares agreed
by such Underwriter or Underwriters to be purchased hereunder upon tender of
such Firm Shares in accordance with the terms hereof, and if the aggregate
number of Firm Shares which such defaulting Underwriter or Underwriters so
agreed but failed to purchase does not exceed 10% of the Firm Shares, the
remaining Underwriters shall be obligated, severally in proportion to their
respective commitments hereunder, to take up and pay for the Firm Shares of such
defaulting Underwriter or Underwriters.
If any Underwriter or Underwriters so defaults and the
aggregate number of Firm Shares which such defaulting Underwriter or
Underwriters agreed but failed to take up and pay for exceeds 10% of the Firm
Shares, the remaining Underwriters shall have the right, but shall not be
obligated, to take up and pay for (in such proportions as may be agreed upon
among them) the Firm Shares which the defaulting Underwriter or Underwriters so
agreed but failed to purchase. If such remaining Underwriters do not, at the
Closing Date, take up and pay for the Firm Shares which the defaulting
Underwriter or Underwriters so agreed but failed to purchase, the Closing Date
shall be postponed for twenty-four (24) hours to allow the several Underwriters
the privilege of substituting within twenty-four (24) hours (including
non-business hours) another underwriter or underwriters (which may include any
nondefaulting Underwriter) satisfactory to the Company. If no such underwriter
or underwriters shall have been substituted as aforesaid by such postponed
Closing Date, the Closing Date may, at the option of
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<PAGE> 32
the Company, be postponed for a further twenty-four (24) hours, if necessary, to
allow the Company the privilege of finding another underwriter or underwriters,
satisfactory to you, to purchase the Firm Shares which the defaulting
Underwriter or Underwriters so agreed but failed to purchase. If it shall be
arranged for the remaining Underwriters or substituted underwriter or
underwriters to take up the Firm Shares of the defaulting Underwriter or
Underwriters as provided in this Section 10, (i) the Company shall have the
right to postpone the time of delivery for a period of not more than seven (7)
full business days, in order to effect whatever changes may thereby be made
necessary in the Registration Statement or the Prospectus, or in any other
documents or arrangements, and the Company agrees promptly to file any
amendments to the Registration Statement, supplements to the Prospectus or other
such documents which may thereby be made necessary, and (ii) the respective
number of Firm Shares to be purchased by the remaining Underwriters and
substituted underwriter or underwriters shall be taken as the basis of their
underwriting obligation. If the remaining Underwriters shall not take up and pay
for all such Firm Shares so agreed to be purchased by the defaulting Underwriter
or Underwriters or substitute another underwriter or underwriters as aforesaid
and the Company shall not find or shall not elect to seek another underwriter or
underwriters for such Firm Shares as aforesaid, then this Agreement shall
terminate.
In the event of any termination of this Agreement pursuant to
the preceding paragraph of this Section 10, neither the Company nor any Selling
Shareholder shall be liable to any Underwriter (except as provided in Sections 5
and 8 hereof) nor shall any Underwriter (other than an Underwriter who shall
have failed, otherwise than for some reason permitted under this Agreement, to
purchase the number of Firm Shares agreed by such Underwriter to be purchased
hereunder, which Underwriter shall remain liable to the Company, the Selling
Shareholders and the other Underwriters for damages, if any, resulting from such
default) be liable to the Company or any Selling Shareholder (except to, the
extent provided in Sections 5 and 8 hereof).
The term "Underwriter" in this Agreement shall include any
person substituted for an Underwriter under this Section 10.
11. Effective Date of this Agreement and Termination.
(a) This Agreement shall become effective at the earlier of
(i) 6:30 A.M., San Francisco time, on the first (lst) full business day
following the effective date of the Registration Statement, or (ii) the time of
the initial public offering of any of the Shares by the Underwriters after the
Registration Statement becomes effective. The time of the initial public
offering shall mean the time of the release by you, for publication, of the
first newspaper advertisement relating to the Shares, or the time at which the
Shares are first generally offered by the Underwriters to the public by letter,
telephone, telegram or telecopy, whichever shall first occur. By giving notice
as set forth in Section 12 before the time this Agreement becomes effective,
you, as Representatives of the several Underwriters, or the Company, may prevent
this Agreement from becoming effective without liability of any party to any
other party, except as provided in Sections 4(i), 5 and 8 hereof.
(b) You, as Representatives of the several Underwriters, shall
have the right to terminate this Agreement by giving notice as hereinafter
specified at any time on or prior to the Closing Date or on or prior to any
later date on which Option Shares are to be purchased, as the case may be, (i)
if the Company or any Selling Shareholder shall have failed, refused or been
unable to perform any agreement on its part to be performed, or because any
other condition of the Underwriters' obligations hereunder required to be
fulfilled is not fulfilled, including, without limitation, any change in the
condition (financial or otherwise), earnings, operations, business or business
prospects of the Company and its Subsidiaries considered as one enterprise from
that set forth in the Registration Statement or the Prospectus, which, in your
sole judgment, is material and adverse, or (ii) if additional material
governmental restrictions, not in force and effect on the date hereof, shall
have been imposed upon trading in securities generally or minimum or maximum
prices shall have been generally established on the New York Stock Exchange or
on the American Stock Exchange or in the over
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<PAGE> 33
the counter market by the NASD, or trading in securities generally shall have
been suspended on either such exchange or in the over the counter market by the
NASD, or if a banking moratorium shall have been declared by federal, New York
or California authorities, or (iii) if the Company shall have sustained a loss
by strike, fire, flood, earthquake, accident or other calamity of such character
as to interfere materially with the conduct of the business and operations of
the Company regardless of whether or not such loss shall have been insured, or
(iv) if there shall have been a material adverse change in the general political
or economic conditions or financial markets as in your reasonable judgment makes
it inadvisable or impracticable to proceed with the offering, sale and delivery
of the Shares, or (v) if there shall have been an outbreak or escalation of
hostilities or of any other insurrection or armed conflict or the declaration by
the United States of a national emergency which, in the reasonable opinion of
the Representatives, makes it impracticable or inadvisable to proceed with the
public offering of the Shares as contemplated by the Prospectus. In the event of
termination pursuant to subparagraph (i) above, the Company shall remain
obligated to pay costs and expenses pursuant to Sections 4(j), 5 and 8 hereof.
Any termination pursuant to any of subparagraphs (ii) through (v) above shall be
without liability of any party to any other party except as provided in Sections
5 and 8 hereof.
If you elect to prevent this Agreement from becoming effective
or to terminate this Agreement as provided in this Section 11, you shall
promptly notify the Company by telephone, telecopy or telegram, in each case
confirmed by letter. If the Company shall elect to prevent this Agreement from
becoming effective, the Company shall promptly notify you by telephone, telecopy
or telegram, in each case, confirmed by letter.
12. Notices. All notices or communications hereunder, except as
herein otherwise specifically provided, shall be in writing and if sent to you
shall be mailed, delivered, telegraphed (and confirmed by letter) or telecopied
(and confirmed by letter) to you c/o BancAmerica Robertson Stephens, 555
California Street, Suite 2600, San Francisco, California 94104, telecopier
number (415) 781-0278, Attention: General Counsel; if sent to the Company, such
notice shall be mailed, delivered, telegraphed (and confirmed by letter) or
telecopied (and confirmed by letter) to The Profit Recovery Group International,
Inc., 2300 Windy Ridge Parkway, Suite 100 North, Atlanta, Georgia 30339-8426,
telecopier number (770) 989-2933, Attention: John M. Cook, Chief Executive
Officer; if sent to one or more of the Selling Shareholders, such notice shall
be sent mailed, delivered, telegraphed (and confirmed by letter) or telecopied
(and confirmed by letter) to John M. Cook and John M. Toma, as Attorney-in-Fact
for the Selling Shareholders, at The Profit Recovery Group International, Inc.,
2300 Windy Ridge Parkway, Suite 100 North, Atlanta, Georgia 30339-8426,
telecopier number (770) 989-2933, with a copy to Leonard A. Silverstein, at Long
Aldridge & Norman LLP, 303 Peachtree Street, N.E., Suite 5300, Atlanta, Georgia
30308, telecopier number (404) 527-4198.
13. Parties. This Agreement shall inure to the benefit of and be
binding upon the several Underwriters and the Company and the Selling
Shareholders and their respective executors, administrators, successors and
assigns. Nothing expressed or mentioned in this Agreement is intended or shall
be construed to give any person or entity, other than the parties hereto and
their respective executors, administrators, successors and assigns, and the
controlling persons within the meaning of the Act or the Exchange Act, officers
and directors referred to in Section 8 hereof, any legal or equitable right,
remedy or claim in respect of this Agreement or any provisions herein contained,
this Agreement and all conditions and provisions hereof being intended to be and
being for the sole and exclusive benefit of the parties hereto and their
respective executors, administrators, successors and assigns and said
controlling persons and said officers and directors, and for the benefit of no
other person or entity. No purchaser of any of the Shares from any Underwriter
shall be construed a successor or assign by reason merely of such purchase.
In all dealings with the Company and the Selling Shareholders
under this Agreement, you shall act on behalf of each of the several
Underwriters, and the Company and the Selling Shareholders shall be entitled to
act and rely upon any statement, request, notice or agreement made or given by
you jointly or by BancAmerica Robertson Stephens on behalf of you.
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<PAGE> 34
14. Applicable Law. This Agreement shall be governed by, and construed
in accordance with, the laws of the State of California.
15. Counterparts. This Agreement may be signed in several counterparts,
each of which will constitute an original.
If the foregoing correctly sets forth the understanding among the
Company, the Selling Shareholders and the several Underwriters, please so
indicate in the space provided below for that purpose, whereupon this letter
shall constitute a binding agreement among the Company, the Selling Shareholders
and the several Underwriters.
Very truly yours,
THE PROFIT RECOVERY GROUP
INTERNATIONAL, INC.
By:
-----------------------------------------
Name:
----------------------------------
Title:
---------------------------------
SELLING SHAREHOLDERS
By:
---------------------------------------------
Attorney-in-Fact for the Selling Shareholders
named in Schedule B hereto
Accepted as of the date first above written:
BANCAMERICA ROBERTSON STEPHENS
HAMBRECHT & QUIST LLC
THE ROBINSON-HUMPHREY COMPANY, LLC
On their behalf and on behalf of each of the several Underwriters named in
Schedule A hereto.
By: BANCAMERICA ROBERTSON STEPHENS
By:
-----------------------------------
Authorized Signatory
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<PAGE> 35
SCHEDULE A
<TABLE>
<CAPTION>
Number of
Firm Shares
To Be
Underwriters Purchased
------------ ---------
<S> <C>
BancAmerica Robertson Stephens
Hambrecht & Quist LLC
The Robinson-Humphrey Company, LLC
Total 4,400,000
=========
</TABLE>
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<PAGE> 36
SCHEDULE B
<TABLE>
<CAPTION>
Number of
Company
Shares To
Company Be Sold
------- -------
<S> <C>
The Profit Recovery Group International, Inc.
Total
Number of Selling
Shareholder Shares
Name of Selling Shareholder To Be Sold
--------------------------- ----------
Firm Shares Option Shares
Total 2,400,000 660,000
========= =======
</TABLE>
-36-
<PAGE> 37
SCHEDULE C
Subsidiaries
The Profit Recovery Group International I, Inc.
The Profit Recovery Group Asia, Inc.
The Profit Recovery Group Australia, Inc.
The Profit Recovery Group Belgium, Inc.
The Profit Recovery Group Canada, Inc.
The Profit Recovery Group France, Inc.
The Profit Recovery Group Germany, Inc.
The Profit Recovery Group Mexico, Inc.
The Profit Recovery Group Netherlands, Inc.
The Profit Recovery Group New Zealand, Inc.
The Profit Recovery Group Singapore PTE LTD.
The Profit Recovery Group South Africa, Inc.
The Profit Recovery Group U.K., Inc.
PRG International Holding Company, Inc.
PRG France, S.A.
Financiere Alma, S.A.
Alma Intervention, S.A.
B&F Associates, S.A.R.L.
Club Affairs Alma, S.A.R.L.
Meridian VAT Reclaim France, S.A.R.L.
Step, S.A.
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<PAGE> 38
SCHEDULE D
Lock-up List
John M. Cook
Cook Family Limited Partnership
Cook Family Foundation, Inc.
John M. Cook Grantor Retained Annuity Trust
M. Lucy Cook Grantor Retained Annuity Trust
John M. Toma
Toma Family Limited Partnership
John M. Toma Grantor Retained Annuity Trust
Michael Toma Family Trust
Michelle Toma Family Trust
Stanley B. Cohen
Stanley B. Cohen Grantor Retained Annuity Trust
Marc Eisenberg
Jonathan Golden
Jonathan Golden Grantor Retained Annuity Trust
Garth H. Greimann
Garth H. Greimann for Ross M. Jones
Garth H. Greimann for Berkshire Fund III, L.P.
Garth H. Greimann for Bradley M. Bloom
Garth H. Greimann for Jane Brock-Wilson
Garth H. Greimann for Kevin T. Callaghan
Garth H. Greimann for Christopher Clifford
Garth H. Greimann for Russell L. Epker
Garth H. Greimann for Carl Ferenbach
Garth H. Greimann for Ian K. Loring
Garth H. Greimann for Richard K. Lubin Daughters' Trust FBO Emily
Garth H. Greimann for Robert J. Small
Garth H. Greimann for Richard K. Lubin Daughters' Trust FBO Kate
Fred W.I. Lachotzki
E. James Lowrey
Mary Caitlin Cook Trust
David H. Cook
M. Lucy Cook
Gerald T. Simpson
Dorothy M. Toma
Patricia Sluiter
Sharon Abmeyer
Pam Cook
Martha Simpson
Epargne Capitalisation Intermediare
Epargne Developpement
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<PAGE> 1
EXHIBIT 5.1
Long Aldridge & Norman LLP
One Peachtree Center
303 Peachtree Street, N.E.
Suite 5300
Atlanta, Georgia 30308
March 13, 1998
Board of Directors
The Profit Recovery Group International, Inc.
2300 Windy Ridge Parkway
Suite 100, North
Atlanta, Georgia 30339-8426
Re: The Profit Recovery Group International, Inc.
Registration Statement on Form S-3
Ladies and Gentlemen:
We have acted as counsel to The Profit Recovery Group International, Inc.,
a Georgia corporation (the "Company"), and certain shareholders of the Company
(the "Selling Shareholders") in connection with the proposed offering by the
Company and the Selling Shareholders of up to 5,060,000 shares (the "Shares") of
common stock, no par value per share (the "Common Stock"), of the Company,
including assistance in the preparation of a Registration Statement on Form S-3
(Registration No. 333-46225) (the "Registration Statement") and the filing
thereof with the Securities and Exchange Commission (the "Commission"). Of the
Shares being offered, up to 2,000,000 Shares are being issued and sold by the
Company and up to 3,060,000 Shares are being sold by the Selling Shareholders
(including up to 660,000 Shares subject to a 30-day over-allotment option (the
"Over-Allotment Option") to be granted by certain of the Selling Shareholders to
BancAmerica Robertson Stephens, Hambrecht & Quist L.L.C. and The
Robinson-Humphrey Company, L.L.C., as underwriters (the "Underwriters").
The opinion hereinafter set forth is given to the Company pursuant to Item
16 of Form S-3 and Item 601(b)(5) of Regulation S-K. The only opinion rendered
by this firm consists of the matters set forth in numbered paragraphs (1) and
(2) below (our "Opinion"), and no other opinion is implied or to be inferred
beyond such matter. Additionally, our Opinion is based upon and subject to the
qualifications, limitations and exceptions set forth in this letter.
Our Opinion is furnished for the benefit of the Company solely with regard
to the Registration Statement, may be relied upon by the Company only in
connection with the
<PAGE> 2
The Profit recovery Group International, Inc.
March 13, 1998
Page 2
Registration Statement and may not otherwise be relied upon, used, quoted or
referred to by or filed with any other person or entity without our prior
written permission.
In rendering our Opinion, we have examined such agreements, documents,
instruments and records as we deemed necessary or appropriate under the
circumstances for us to express our Opinion, including, without limitation, the
Amended and Restated Articles of Incorporation of the Company; the Amended and
restated Bylaws of the Company; minutes and consent actions of proceedings of
the Board of Directors and the shareholders of the Company; the form of
underwriting agreement to be entered into among the Company and the Underwriters
(the "Underwriting Agreement") and minutes of proceedings of the Board of
Directors of the Company, dated October 15, 1997, and an Action by Consent duly
adopted by the Board of Directors of the Company on March 7, 1998, authorizing,
approving and ratifying the preparation and filing of the Registration Statement
and the sale of the Shares. In making all of our examinations, we have assumed
the genuineness of all signatures, the authenticity of all documents submitted
to us as originals, the conformity to the original documents of all documents
submitted to us as copies, and the due execution and delivery of all documents
by any persons or entities other than the Company and the Selling Shareholders
where due execution and delivery by such persons or entities is a prerequisite
to the effectiveness of such documents.
As to various factual matters that are material to our Opinion, we have
relied upon the factual statements set forth in a certificate of officers of
the Company and certificates of public officials. We have not independently
verified or investigated, nor do we assume any responsibility for, the factual
accuracy or completeness of such factual statements.
Members of this firm are admitted to the Bar of the State of Georgia and
are duly qualified to practice law in that state. Because the Company is
organized under, and the subject of our Opinion therefore is governed by, the
Business Corporation Code of the State of Georgia (the "Georgia Code"), we do
not herein express any opinion concerning any matter respecting or affected by
any laws other than laws set forth in the Georgia Code that are now in effect
and that, in the exercise of reasonable professional judgment, are normally
considered in transactions such as the offering and sale of the Shares. The
Opinion hereinafter set forth is based upon pertinent laws and facts in
existence as of the date hereof, and we expressly disclaim any obligation to
advise you of changes to such pertinent laws or facts that hereafter may come
to our attention.
Based upon and subject to the foregoing, we are of the Opinion that:
<PAGE> 3
The Profit Group International, Inc.
March 13, 1998
Page 3
(1) the 2,000,000 Shares to be issued and sold by the Company, when
issued, sold and delivered in accordance with the Underwriting
Agreement against payment in full of the purchase price therefor,
will be validly issued, fully paid and nonassessable; and
(2) the 3,060,000 Shares to be sold (including up to 660,000 Shares to
be sold by certain of the Selling Shareholders pursuant to the
Over-Allotment Option) are duly authorized, validly issued, fully
paid and nonassessable.
We hereby consent to the filing of this Opinion as an exhibit to the
Registration Statement and to the reference to this firm under the heading
"Legal Matters" in the Prospectus forming a part of the Registration
Statement.
Very truly yours.
/s/ Long Aldridge & Norman LLP
LONG ALDRIDGE & NORMAN LLP
