-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, QDGIAaywGx75JRSw90T+wNT/qSCyeRfnlwODx5Cr49uqHGa8V+QLuvHiWaeGt0hh klxL8JhTzKA5GOcVQy8QcA== 0000914062-98-000086.txt : 19980317 0000914062-98-000086.hdr.sgml : 19980317 ACCESSION NUMBER: 0000914062-98-000086 CONFORMED SUBMISSION TYPE: 10-K/A PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980316 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: PROFIT RECOVERY GROUP INTERNATIONAL INC CENTRAL INDEX KEY: 0001007330 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-ENGINEERING, ACCOUNTING, RESEARCH, MANAGEMENT [8700] IRS NUMBER: 582213805 STATE OF INCORPORATION: GA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K/A SEC ACT: SEC FILE NUMBER: 000-28000 FILM NUMBER: 98565814 BUSINESS ADDRESS: STREET 1: 2300 WINDY RIDGE PKWY STREET 2: STE 100 N CITY: ATLANTA STATE: GA ZIP: 30339-8426 BUSINESS PHONE: 7709553815 MAIL ADDRESS: STREET 1: 2300 WINDY RIDGE PKWY STREET 2: STE 100 NORTH CITY: ATLANTA STATE: GA ZIP: 30339-8426 10-K/A 1 AMENDMENT NO.1 TO FORM 10-K UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 --------------------- FORM 10-K/A AMENDMENT NO. 1 (MARK ONE) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _____________ TO ___________ COMMISSION FILE NUMBER 0-28000 THE PROFIT RECOVERY GROUP INTERNATIONAL, INC. (Exact name of registrant as specified in its charter) GEORGIA 58-2213805 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 2300 WINDY RIDGE PARKWAY 30339-8426 SUITE 100 NORTH (Zip Code) ATLANTA, GEORGIA (Address of principal executive offices) REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (770) 955-3815 SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: COMMON STOCK, NO PAR VALUE Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes |X| No |_| Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. |_| Common shares of the registrant outstanding at January 30, 1998 were 19,226,024. The aggregate market value, as of January 30, 1998, of such common shares held by non-affiliates of the registrant was approximately $111,423,000 based upon the last sales price reported that date on The Nasdaq Stock Market of $15.813 per share. (Aggregate market value estimated solely for the purposes of this report. This shall not be construed as an admission for the purposes of determining affiliate status.) DOCUMENTS INCORPORATED BY REFERENCE Part III: Portions of Registrant's Proxy Statement relating to the Annual Meeting of Shareholders to be held during 1998. The Registrant is hereby filing Amendment No. 1 to Form 10-K for the fiscal year ended December 31, 1997 for the purpose of filing Exhibits 10.38 and 10.39, and amending Item 1. and Exhibit 21.1. PART I ITEM 1. 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 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. and Bottom Line Associates, Inc. which were formed in 1971 and 1985, respectively. In January 1995, the Company's predecessors acquired the operating assets of Fial & Associates, Inc., a direct competitor. The predecessor business entities that comprised the Company generally were either Subchapter S corporations or partnerships, all under common ownership and control. In April 1995, the Company's predecessors reorganized and its international entities became C corporations. Additionally, prior to the Company's March 1996 initial public offering, all domestic entities became C corporations. Subsequent to the Company's initial public offering, the Company has conducted its operations through its various wholly-owned domestic and international subsidiaries. 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 high technology companies. 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. In May 1997, the Company acquired all of the common stock of The Hale Group, a California-based company providing recovery audit services to healthcare entities. In October 1997, the Company acquired 98.4% of Financiere Alma, S.A. and subsidiaries, a Paris-based company providing tax recovery audit services within France. In November 1997, the Company acquired the net operating assets of TradeCheck, LLC, 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. The Company has operations 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. See Note 11 of Notes to Consolidated Financial Statements for international segment data concerning revenues, operating income (loss) and indentifiable assets. 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 contributing 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. 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 -2- 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 significantly increase 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 98.4% of Financiere Alma, S.A. and its subsidiaries (collectively, "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 twelve months, the Company anticipates that it will commence operations in South Africa, Argentina and Brazil. - 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 & Associates, Inc., a direct competitor; in January 1997, the Company acquired Shaps Group, Inc., a firm providing recovery audit services to manufacturers and distributors of technology products; in February 1997, the Company acquired Accounts Payable Recovery Services, Inc., a firm providing recovery audit services to healthcare entities and energy companies; in May 1997, the Company acquired The Hale Group, a firm that provides recovery audit services primarily to healthcare entities; in October 1997, the Company acquired Alma, a firm that provides tax recovery -3- audit services in France; and in November 1997, the Company acquired TradeCheck, LLC, 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 existance due to such clients' bankruptcies or 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 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 the 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 4 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 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. 5 - 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 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. 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 submitted to the client requesting payment. For TVA recovery audit services, the Company recognizes revenues when all documentation is filed with the appropriate government agency. 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 6 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. - 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. 7 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. For the years ended December 31, 1997, 1996 and 1995, the Company derived 33.8%, 34.6% and 30.1%, respectively, of its revenues form its five largest clients. Wal-Mart Stores, Inc. and its affiliates (collectively "Wal-Mart"), historically the Company's largest client, represented 10.4%, 14.4% and 12.7% of revenues during 1997, 1996 and 1995, respectively. In 1997, Kmart Corporation was the Company's largest client 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. 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. 8 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 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. 9 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. 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. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) Consolidated Financial Statements. For the following consolidated financial information included herein, see Index on Page 21: Independent Auditors' Reports Consolidated Statements of Earnings for the Years ended December 31, 1997, 1996 and 1995 Consolidated Balance Sheets as of December 31, 1997 and 1996 Consolidated Statements of Shareholders' Equity (Deficit) for the Years ended December 31, 1997, 1996 and 1995 Consolidated Statements of Cash Flows for the Years ended December 31, 1997, 1996 and 1995 Notes to Consolidated Financial Statements (b) All financial statement schedules are omitted for the reason that they are either not applicable or not required or because the information is contained in the consolidated financial statements or notes thereto. (c) Reports on Form 8-K. On October 22, 1997, Registrant filed Form 8-K regarding Registrant's October 7, 1997 acquisition of 98.4% of Financiere Alma, S.A. and its subsidiaries (collectively, "Alma"). On November 21, 1997, Registrant filed Form 8-K/A to provide required audited and pro forma financial statements regarding Alma. (d) Exhibits +2.1-- Agreement and Plan of Reorganization dated January 4, 1995, among The Profit Recovery Group, Inc., Fial & Associates, Inc. and T. Charles Fial. The following is a list of omitted schedules and exhibits which the Registrant agrees to furnish supplementally to the Commission upon request: Exhibits: A--List of Purchasers, with Principal Amount of Each Purchaser's Note; B--Form of Note; C-1 and C- 2--Form of Amended and Restated Partnership Agreement; D-1 and D-2--Form of Amended and Restated Certificate of Limited Partnership; E--Form of Registration Rights Agreement; Schedules; 2F--List of Shareholders and Proportionate Obligation to Purchase; 2L--Earnings Test; 3C--List of Limited Partners and Their Respective Units; 3D--List of Stockholders of General Partner and Their Respective Ownership Interests; 3F--Balance Sheet; and 3P--Transactions with Affiliates. +2.2-- Note Purchase Agreement dated April 27, 1995, among The Profit Recovery Group International, L.P. (the "Partnership"), The Profit Recovery Group International I, Inc., T. Charles Fial and certain limited partners and purchasers named therein. The following is a list of omitted schedules and exhibits which the Registrant agrees to furnish supplementally to the Commission upon request: Schedules: 1.1(c)--Contracts and Agreements; 1.1(f)--Fixed Assets; 3.6--Company Trade Area; 3.7--Affiliated Companies; 4.8--Employee Plans; 4.13--Seller's Tax Returns; 4.14--Employee Bonuses; 4.15--Accounts Receivable; 4.16--Independent Contractors; 5.1-A--Articles of Incorporation of Purchaser; 5.1-B--List of agreements among shareholders of Purchaser; 5.7--Certain Liabilities of Purchaser; 5.8--Subsequent Events; Exhibits: 1.3(a)--Bill of Sale; 1.3(b)--Assignment and Assumption Agreement; 3.2--Consulting Agreement; 3.3--Form of Noncompetition Agreement with Stockholder; 3.9--Stockholders' Agreement; 7.1(a)(vi)--Form of Opinion of Counsel to Seller and Stockholder; and 7.1(b)(ix)--Form of Opinion of Counsel to Purchaser. -10- +3.1-- Articles of Incorporation of the Registrant. +3.2-- Amended and Restated Bylaws of the Registrant. +4.1-- Specimen Common Stock Certificate. +4.2-- See Articles of Incorporation and Bylaws of the Registrant, filed as Exhibits 3.1 and 3.2, respectively. *+10.1-- Letter Agreement dated May 25, 1995 between Wal-Mart Stores, Inc. and Registrant. +10.2-- 1996 Stock Option Plan dated as of January 25, 1996, together with Forms of Non-qualified Stock Option Agreement. +10.3-- The Profit Recovery Group International I, Inc. 401(k) Plan. +10.4-- Form of Employment Agreement, dated March 20, 1996, between the Registrant and John M. Cook. +10.5-- Form of Employment Agreement, dated March 20, 1996, between the Registrant and John M. Toma. +10.6-- Form of Employment Agreement, dated March 20, 1996, between the Registrant and Paul J. Dinkins. +10.7-- Form of Employment Agreement, dated March 20, 1996, between the Registrant and Brian M. O'Toole. +10.8-- Form of Employment Agreement, dated March 20, 1996, between the Registrant and Donald E. Ellis, Jr. +10.9-- Form of Consulting Agreement, dated January 1, 1996, between The Profit Recovery Group International , Inc. and SBC Financial Corporation, Jonathan Golden, P.C. and Berkshire Partners. +10.10-- Form of Identification Agreement between the Registrant and the Directors and certain officers of the Registrant. +10.11-- First Amendment to Amended and Restated Loan and Security Agreement dated January 3, 1996 among NationsBank of Georgia, N.A. ("NationsBank"), the Partnership and certain guarantors named therein. +10.12-- Amended and Restated Loan and Security Agreement dated April 27, 1995 among NationsBank, the Partnership and certain guarantors named therein. The following is a list of omitted schedules and exhibits which the Registrant agrees to furnish supplementally to the Commission upon request: Exhibits: A-1--Amended and Restated Promissory Note, A-2--Amended and Restated Promissory Note, B-1--Borrower's Business Locations, B-2--Other Business Locations, C-1--Borrower's Corporate Names, C-2--Other Corporate Names, D--Litigation, E--Form of Compliance Certificate, F--Berkshire Lenders, G--Other Liens, H--Indebtedness. +10.13-- First Amendment to Loan and Security Agreement dated January 4, 1995 among NationsBank, The Profit Recovery Group, Inc., PRG International, Inc., the Partnership and the Foreign Companies. +10.14-- Loan and Security Agreement dated March 24, 1994 among NationsBank, The Profit Recovery Group, Inc., PRG International, Inc., the Partnership and the Foreign Companies. The following is a list of omitted schedules and exhibits which the Registrant agrees to furnish supplementally to the Commission upon request; Exhibits: A-1--Promissory Note, A-2--Promissory Note, B-1--Borrower's Business Locations, B-2--Other Business Locations, C-1--Borrower's Corporate Names, C-2--Other Corporate Names, D--Litigation, E--Form of Compliance Certificate, F--Collateral Assignment of Policy, G--Other Liens, H--Indebtedness. +10.15-- Sublease dated October 29, 1993, between The Profit Recovery Group International I, Inc. and International Business Machines Corporation. +10.16-- Lease dated January 19, 1996 between the Partnership and "J" Street Development Inc. +10.17-- Agreement dated January 19, 1996 between the Partnership and May Construction Company, Inc. The following is a list of omitted schedules and exhibits which Registrant agrees to furnish supplementally to the Commission upon request: Exhibit A--General Conditions of the Contract for Construction. +10.18-- Second Amendment to Amended and Restated Loan and Security Agreement dated February 8, 1996 among NationsBank, the Partnership, The Profit Recovery Group International I, Inc., PRG International Holding Co. and the Foreign Companies. +10.19-- First Sublease Amendment dated February 12, 1996 among International Business Machines Corporation, the Partnership and The Profit Recovery Group International I, Inc. +10.20-- Promissory Note dated February 8, 1996, in the amount of $1,600,000 by the Partnership to CT Investments, L.L.C. **10.21-- Loan and Security Agreement by and among NationsBank, N.A. (South) as Lender, and The Profit Recovery Group International, Inc. as Borrower, and Certain Affiliates of Borrower, as Guarantors, dated September 27, 1996. -11- ***10.22-- First Amendment dated March 7, 1997 to Employment Agreement between the Registrant and John M. Cook. ****10.23-- The Profit Recovery Group International, Inc. Employee Stock Purchase Plan. *****10.24-- Contract for the Mandate of the President of the Directorate, dated October 7, 1997, between Alma Intervention and Marc Eisenberg. *****10.25-- Consulting Agreement, dated October 7, 1997, between the Registrant and Lieb Finance S.A. *****10.26-- Second Amendment to Employment Agreement, dated September 17, 1997, between The Profit Recovery Group International I, Inc. and John M. Cook. *****10.27-- Employment Agreement, dated October 17, 1997, between The Profit Recovery Group International I, Inc. and Michael A. Lustig. *****10.28-- Compensation Agreement, dated October 17, 1997, between The Profit Recovery Group International I, Inc. and Michael A. Lustig. *****10.29-- First Amendment to Loan and Security Agreement, dated October 3, 1997, between NationsBank, N.A. and the Registrant and its subsidiaries. ++++10.30-- Lease Agreement dated January 30, 1998 between Wildwood Associates and The Profit Recovery Group International I, Inc. ++10.31-- Services Agreement dated April 7, 1993 between Registrant and Kmart Corporation as amended by Addendum dated January 28, 1997. ++++10.32-- Employment Agreement dated August 26, 1996 between Registrant and Tony G. Mills; Compensation Agreement dated August 26, 1996 between Registrant and Mr. Mills; and description of 1998 compensation arrangement between Registrant and Mr. Mills. ++++10.33-- Employment Agreement dated August 23, 1996 between Registrant and David A. Brookmire; Compensation Agreement dated August 23, 1996 between Registrant and Mr. Brookmire; and description of 1998 compensation arrangement between Registrant and Mr. Brookmire. ++++10.34-- Description of 1998-2002 compensation arrangement between Registrant and John M. Cook. ++++10.35-- Description of 1998 compensation arrangement between Registrant and John M. Toma. ++++10.36-- Description of 1998 compensation arrangement between Registrant and Michael A. Lustig. ++++10.37-- Description of 1998 compensation arrangement between Registrant and Donald E. Ellis, Jr. +++10.38-- Employment Agreement between Registrant and Robert G. Kramer; Compensation Agreement between Registrant and Mr. Kramer; and description of 1998 compensation arrangement between Registrant and Mr. Kramer. +++10.39-- Employment Agreement between Registrant and Clinton McKellar, Jr.; Compensation Arrangement between Registrant and Mr. McKellar; and description of 1998 compensation arrangement between Registrant and Mr. McKellar. ++++21.1-- Subsidiaries of the Registrant. ++++23.1-- Consent of KPMG Peat Marwick LLP. ++++23.2-- Consent of ERNST & YOUNG Entrepreneurs. ++++27.1-- Financial Data Schedule (for SEC use only). - ----------------------- + Incorporated by reference to Exhibit of same number of the Registrant's Registration Statement on Form S-1 (Registration No. 333-1086). * Confidential treatment pursuant to 17 CFR ss.ss. 200.80 and 230.406 has been granted regarding certain portions of the indicated Exhibit, which portions have been filed separately with the Commission. +++ Filed herewith. ++ Confidential treatment pursuant to 17 CFR ss.ss. 200.80 and 240.24b-2 has been granted regarding certain portions of the indicated Exhibit, which portions have been filed separately with the Commission. ** Incorporated by reference to Exhibit 10.1 of Registrant's Form 10-Q for the quarterly period ended September 30, 1996. *** Incorporated by reference to Exhibit of same number of the Registrant's Form 10-K for the year ended December 31, 1996. -12- **** Incorporated by reference to Exhibit "A" to Registrant's proxy statement dated April 15, 1997, which was issued in connection with Registrant's 1997 Annual Meeting of Shareholders. ***** Incorporated by reference to Exhibits 10.1-10.6 of Registrant's Form 10-Q for the quarterly period ended September 30, 1997. ++++ Previously filed. -13- SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. THE PROFIT RECOVERY GROUP INTERNATIONAL, INC. March 13, 1998 By: /s/ JOHN M. COOK ---------------- John M. Cook Chairman of the Board and Chief Executive Officer -14- EX-10.38 2 EMPLOYMENT AGREEMENT EMPLOYMENT AGREEMENT THIS EMPLOYMENT AGREEMENT ("Agreement"), is made as of this 12th day of February, 1998, effective as of October 13, 1997 (the "Effective Date") by and between THE PROFIT RECOVERY GROUP INTERNATIONAL I, INC., a Georgia corporation (the "Company") and ROBERT G. KRAMER, a resident of the State of Florida (the "Employee"). W I T N E S S E T H: WHEREAS, the Company desires to retain Employee to provide services to the Company and its Affiliates (as defined in Section 23 below), and Employee desires to provide his services to the Company pursuant to the terms and conditions that follow; NOW, THEREFORE, in consideration of the mutual promises and covenants hereinafter contained and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties do hereby agree as follows: 1. Employment. Employee shall serve as Executive Vice President and Chief Information Officer of the Company. Employee agrees to apply Employee's full time and efforts to the position and to perform Employee's work at all times to the best of Employee's ability and at the direction of the Vice-Chairman of the Company. Employee will render to the Company, at regular intervals set by the Company, reports and accounting of the status and progress of any work Employee is performing. 2. Term. The initial term of this Agreement shall commence on October 13, 1997, and shall continue until December 31, 1997 unless sooner terminated as hereinafter provided. Unless otherwise terminated pursuant to Section 14 hereof, this Agreement shall automatically renew on a year-to-year basis at the end of the initial term and each subsequent renewal term unless either party gives written notice of non-renewal to the other on or before September 30 of any calendar year for the immediately succeeding calendar year. The initial term of this Agreement and any subsequent one-year renewal period shall be deemed a "Term Year." 3. Scope of the Company's and Employee's Activities. Employee acknowledges and agrees that the Company and its Affiliates conduct the following business in the following areas and that Employee has been assigned to perform Employee's duties in accordance therewith: (a) Scope of the Company's Business. The Company and its Affiliates are engaged in the business of auditing accounts payable, paid bill files, promotional and demonstrator agreements, personal property, real estate, sales and use tax and other taxes, common area maintenance charges, telephone and other utilities, sales promotion, advertising and cosmetic wage/commission agreements, freight and shipping invoices, capital expenditures and other transactions of the Company's and its Affiliates' clients ("Clients"), in order to identify and document for subsequent charge back or credit over-payments and/or under deductions 527591.1 mhs\prg\KRAMER5.wpd\3-11-98 (collectively, the "Audit Activities"), and rendering management counseling services associated with the Audit Activities (collectively, the "Business of the Company"). (b) Location of the Company's Business. The Company and its Affiliates actively conduct business with their Clients throughout the United States and in other countries throughout the world, including without limitation, countries in Europe, Latin America, Asia and the Pacific. Employee shall provide substantially all of his services on behalf of the Company at the Company's principal office located at 2300 Windy Ridge Parkway, Suite 100 North, Atlanta, Cobb County, Georgia 30339-8426. 4. Compensation. For services rendered by Employee under this Agreement during the term hereof, Employee shall be entitled to receive the compensation and benefits set forth in Sections 10, 11 and 12 hereof and in that certain Compensation Agreement by and between Employee and the Company of even date herewith (the "Compensation Agreement"). 5. Stock Options. Employee and The Profit Recovery Group International, Inc., a Georgia corporation ("PRGX") are party to one or more separate stock option agreements in accordance with which Employee has been granted non-qualified options to purchase shares of PRGX Common Stock under the 1996 Stock Option Plan (the "Plan"). 6. Specific Acknowledgments. Employee acknowledges that the Company and its Affiliates have expended and will continue to expend substantial time, money, effort and other resources to develop its goodwill, clients, business sources and relationships, the Company and its Affiliates have a legitimate business interest in protecting same, in connection with Employee's employment by the Company as herein provided, the Company and its Affiliates will introduce Employee to their Clients, business sources and relationships and will expend considerable time, effort and capital to train Employee in the Business of the Company, the knowledge and experience that Employee will acquire while an employee of the Company and Employee's services to be rendered to the Company and its Affiliates are of special, unique and extraordinary character, by virtue of Employee's employment with the Company, Employee will be in a position of substantial responsibility and authority and will have frequent and substantial contact with certain of the Company's and the Affiliates' Clients and business sources and relationships, in Employee's capacity, Employee will be privy to certain confidential information, Company secrets and proprietary information not generally known or available to the Company's or its Affiliates competitors or the general public, the nature and periods of the restrictions imposed by the covenants contained in this Section 6 are fair, reasonable, and necessary to protect and preserve for the Company and its Affiliates the benefits of Employee's employment hereunder and such restrictions will not prevent Employee from earning a livelihood, and (viii) the Company and its Affiliates would sustain great and irreparable loss and damage if Employee were in any manner to breach any of such covenants. (a) Agreement Not to Compete - Competing Businesses. While employed by the Company or its Affiliates and for eighteen (18) months after termination of all such employment, without the prior written consent of the Company signed by the President of the Company, Employee will not directly or indirectly provide or perform Services in the Territory 527591.1 mhs\prg\KRAMER5.wpd\3-11-98 2 (as such capitalized terms are defined in subsection "f" below), whether as an employee, officer, director, shareholder, partner, proprietor, agent, consultant, independent contractor, lender or otherwise, for any business which is in competition with the Business of the Company (as defined in subsection 3(a) above). (b) Agreement Not to Solicit Clients. While employed by the Company or its Affiliates and for eighteen (18) months after termination of all such employment, without the prior written consent of the Company signed by the President of the Company, Employee will not directly or indirectly solicit or call upon any Client or prospective Client (or any employee or independent contractor of any Client or prospective Client) of the Company or any of its Affiliates for purposes of selling or providing any product, equipment or service, competitive or potentially competitive with any product, equipment or service sold, leased, offered for sale or lease or under development by, the Company or any of its Affiliates during the twenty-four (24) month period immediately preceding termination of all of Employee's employment with the Company and its Affiliates, provided that the restrictions set forth in this Section 6(b) shall apply only to Clients or prospective Clients with whom Employee had Material Contact (as defined below) during such twenty-four (24) month period (or such shorter period if Employee is employed by the Company and its Affiliates for less than twenty-four (24) months). (c) Agreement Not to Solicit Employees or Contractors. While employed by the Company or its Affiliates and for eighteen (18) months after termination of all such employment, without the prior written consent of the Company signed by the President of the Company, Employee will not directly or indirectly (1) solicit, entice, persuade or induce, or attempt to solicit, entice, persuade or induce any person who is employed by, or performing services as an independent contractor or as an employee of an independent contractor for, the Company or any of its Affiliates, either to terminate such person's employment with the Company or its Affiliates, or to cease performing such services for the Company or any of its Affiliates or (2) authorize any person to engage in or assist any person in any of the activities described in clause (1) of this subsection. (b) Proprietary Information. All Proprietary Information (as defined below) and all physical embodiments thereof received or developed by Employee or disclosed to Employee while employed by the Company is confidential to and is and will remain the sole and exclusive property of the Company. While Employee is in the Company's employ and for a period ending five (5) years after the date of Employee's termination of employment with the Company for any reason, Employee will hold such Proprietary Information in trust and in the strictest confidence, and will not use, reproduce, distribute, disclose or otherwise disseminate the Proprietary Information or any physical embodiments thereof except to the extent necessary to perform the duties assigned to Employee by the Company. In no event shall Employee take any action causing or fail to take the action necessary in order to prevent any Proprietary Information disclosed to or developed by Employee to lose its character or cease to qualify as Proprietary Information. 527591.1 mhs\prg\KRAMER5.wpd\3-11-98 3 Notwithstanding anything contained herein to the contrary, this Section 6(d) shall not limit in any manner the protection of the Company's trade secrets otherwise afforded by law. Upon request by the Company, and in any event upon termination of Employee's employment with the Company for any reason, Employee will promptly deliver to the Company all property belonging to the Company, including without limitation all Proprietary Information (and all physical embodiments thereof) then in Employee's custody, control, or possession. (e) Contracts or Other Agreements with Former Employer or Business. Employee agrees that Employee has provided to the Company, prior to the execution of this Agreement, a copy of the pertinent portions of any employment agreement or similar document executed by Employee with a former employer or any other business. Employee warrants and represents that the execution and delivery of this Agreement by Employee and the performance of the obligations, covenants and agreements contained herein, do not and will not conflict with or result in any breach or violation of any of the terms and provisions of any agreement, judgment, order, statute or other instrument or restriction of any kind with respect to which Employee is bound, and Employee is not subject to any restrictive covenant agreement, covenant not to compete, nonsolicitation agreement or other agreement that would prohibit Employee from fully carrying out Employee's duties hereunder. (f) Definitions. - "Material Contact" means contact between Employee and each Client or prospective Client (A) with whom the Employee dealt; (B) whose dealings with the Company were coordinated or supervised by Employee; (C) about whom Employee obtained Proprietary Information in the ordinary course of business as a result of Employee's association with the Company; or (D) who receives services provided by the Company, the sale or provision of which results or resulted in compensation, commissions or earnings for Employee, in each of cases (A) through (D) within two years prior to the date of Employee's termination. - "person" means and includes any individual, partnership, association, corporation, limited liability company, trust, unincorporated organization, or any other business entity or enterprise. - "Proprietary Information" means information (in any form or media) including but not limited to technical and nontechnical data, lists, training manuals, training systems, computer based training modules, formulas, patterns, compilations, programs, devices, methods, techniques, drawings, processes and plans regarding the Company's or its Affiliates' Clients, prospective Clients, methods of operation, billing rates, billing procedures, suppliers, business methods, finances, management, or any other business information relating to the Company or its Affiliates (whether constituting a trade secret or proprietary or otherwise) which has value to the Company or its Affiliates and is treated by the Company or its Affiliates as being confidential; provided, however, that Proprietary Information shall not include any information that has been voluntarily disclosed to the public by the Company or its Affiliates (except where such public disclosure has been made by Employee without authorization) or that has been independently developed and disclosed by others, or that otherwise enters the public domain 527591.1 mhs\prg\KRAMER5.wpd\3-11-98 4 through lawful means. Proprietary Information also includes information which has been disclosed to the Company or its Affiliates by a third party and which the Company or its Affiliates are obligated to treat as confidential. Proprietary Information may or may not be marked by the Company or its Affiliates as "proprietary" or "secret" or with other words or markings of similar meaning, and the failure of the Company to make such notations upon the physical embodiments of any Proprietary Information shall not affect the status of such information as Proprietary Information. - "prospective Client" means any person to whom the Company has sent or delivered a written sales or servicing proposal or contract in connection with the Business of the Company. - "Services" means directing, implementing, managing, coordinating, and supervising all information services relating to the Company and its Affiliates and any other services substantially similar to those services provided by Employee to the Company at any time during the twenty-four (24) month period immediately preceding Employee's termination of employment with the Company (or such shorter period if Employee is employed by the Company for less than twenty-four (24) months). - "Territory" means that geographical area represented by a circle having a radius of thirty (30) miles from the centerline of Windy Hill Road and Powers Ferry Road in Cobb County, Georgia, the closest major intersection to the Company's offices located at 2300 Windy Ridge Parkway, Atlanta, Georgia 30339. - Capitalized terms used but not defined herein shall have the meanings ascribed to them in the Compensation Agreement. (g) Consideration to the Company. The Company acknowledges and agrees that its agreements, including, without limitation, its agreement to disclose confidential information to Employee, are made in consideration of the services to be provided by Employee, Employee's agreement to refrain from competing with the Company for eighteen (18) months following the termination of Employee's employment hereunder, Employee's agreement to refrain from disclosing confidential information, and the other mutual covenants and agreements set out in this Agreement. 7. Ownership by Company. All software, computer diskettes, CDs, DVDs, video tapes, literature, training manuals, training systems, computer based training modules, Client documents, cassettes, photographs, prints, slides, records, notes, files, memoranda, reports, audit reports, price lists, client lists, documents, and all copies thereof, equipment, and apparatus and like items relating to the business of the Company, Proprietary Information or trade secrets which shall be prepared by Employee or which shall be disclosed to or which shall come into Employee's possession, shall be and remain the sole and exclusive property of the Company. Employee agrees that, upon the termination of employment with the Company for any reason whatsoever, or at any other time upon request, Employee will promptly deliver to the Company the originals and all 527591.1 mhs\prg\KRAMER5.wpd\3-11-98 5 copies of any of the foregoing that are in Employee's possession, custody or control, and any other property belonging to the Company. 8. Inventions. Employee agrees that, during the term of this Agreement, Employee has a continuing duty to disclose to the Company any invention, improvement, discovery, process, formula, code, program, system or method (collectively, "Inventions") developed or being developed by Employee any time during the term of Employee's employment, either solely by Employee or jointly with others, whether or not such Inventions are assignable to the Company as set forth below. Any Invention which Employee has conceived or made or may conceive or make at any time while employed by the Company, either solely by Employee or jointly with others, which relate in any way to the actual Business of the Company, or which relate in any way to the actual or anticipated research or development of the Company, or which are suggested by or result from any task assigned to Employee on behalf of the Company, shall be the sole and exclusive property of the Company, and Employee hereby assigns to the Company any right, title or interest Employee may have to such Invention. Furthermore, any such Invention shall constitute Proprietary Information as set forth above. At the request and expense of the Company, Employee will execute and deliver all documents and will do such other acts as may be in the Company's opinion necessary or desirable to secure to the Company or its nominee all right, title and interest in and to any such Invention. 9. Copyrights. Employee understands that any original works of authorship fixed in tangible form, including, without limitation, computer software and manuals, advertising material, and training material, prepared by Employee, either solely or jointly with others, within the scope of Employee's employment by the Company, constitute works made for hire as provided by law, so that such works are owned by the Company. If, for any reason, a work of authorship by Employee created during the term of Employee's employment by the Company and related to the Business of the Company is considered other than a work for hire, then Employee hereby assigns all Employee's right, title and interest in copyrights to such works of authorship to the Company. 10. Insurance and Benefits. (a) Employee shall be provided a one-time relocation allowance of Sixty Thousand and No/100 ($60,000.00) Dollars; provided, however, that if Employee's employment is terminated prior to October 12, 1998 as a result of Employee's resignation or termination by the Company for cause, Employee shall promptly reimburse the Company an amount equal to One Hundred Sixty-Four and 38/100 ($164.38) Dollars multiplied by the number of days remaining between the effective date of Employee's termination of employment and October 12, 1998. (b) Subject to Employee being insurable at standard rates as of the commencement of employment (or when coverage is applied for, as applicable) and to the availability of such coverage from the Company's customary insurance providers, the Company shall obtain on Employee's behalf life, disability, hospitalization and medical insurance coverage in accordance with the Company's standard group coverage. 527591.1 mhs\prg\KRAMER5.wpd\3-11-98 6 (c) For each full month of each Term Year, Employee shall be provided an automobile allowance equal to one-twelfth (1/12) of Fourteen Thousand Six Hundred and No/100 ($14,600.00) Dollars, payable in accordance with the Company's customary procedures, which amount shall be reviewed annually and may be modified in writing prior to the commencement of any Term Year. (d) Upon satisfaction of any applicable eligibility requirements, Employee shall be entitled to participate in any 401(k) plan of the Company generally available to other employees of the Company, except as may be limited by applicable law or regulation. (e) The Company shall pay Employee's reasonable travel and business expenses, subject to Employee's submission of receipts therefor in accordance with the Company's normal practices and procedures. (f) Any amounts the Company pays for insurance coverage or fringe benefits that are supplemental or in addition to the Company's standard insurance coverage or benefits shall be compensation in addition to Base Salary (but not included within the definition of Base Salary) and shall be reflected on Employee's W-2. 11. Payment of Compensation Upon Termination. In addition to any deferred compensation to which Employee might be entitled pursuant to Section 12 hereof, Employee shall receive the following compensation upon the termination of Employee's employment hereunder: (a) In the event Employee's employment hereunder is terminated for cause or if Employee voluntarily resigns other than due to Retirement (as defined in Section 12(b)(ii) hereof), Employee shall be entitled to receive Employee's Base Salary prorated through the date of termination, payable in accordance with the Company's normal payroll procedure, and Employee shall not be entitled to receive any Bonus or any other amount in respect of the Term Year in which termination occurs or in respect of any subsequent years. (b) In the event Employee's employment hereunder is terminated by the Company without cause, Employee shall be entitled to receive Base Salary and Bonus for the Term Year in which such termination occurs prorated through the date of such termination, plus a severance payment equal to six (6) months of Adjusted Base Salary at the rate then in effect, and the Company shall pay the continuation premiums for Employee's health and medical insurance coverage for the three (3) month period following termination of Employee's employment. Except as provided in the immediately preceding sentence, Employee shall not be entitled to receive any other amount in respect of the Term Year in which termination occurs or in respect of any subsequent years. The prorated Base Salary shall be payable in accordance with the Company's normal payroll procedure and the prorated Bonus shall be payable in a lump sum within ninety (90) days after the end of the Term Year to which it relates, and the severance payment shall be payable in six (6) equal monthly installments commencing on the last day of the first month following termination. If the Company gives Employee notice of non-renewal pursuant to Section 527591.1 mhs\prg\KRAMER5.wpd\3-11-98 7 2 of this Agreement, it shall be deemed to be a termination of Employee's employment without cause and Employee shall be entitled to compensation pursuant to this Section 11(b). (c) In the event Employee's employment hereunder is terminated by Employee's death or Retirement, Employee (or Employee's legal representative in the case of death) shall be entitled to receive Base Salary and Bonus for the Term Year in which such termination occurs prorated through the date of such termination and, in the case of termination due to Employee's death, any other payments specifically provided for herein in respect of the death of Employee, and shall not be entitled to receive any other amount in respect of the Term Year in which termination occurs or in respect of any subsequent years. The prorated Base Salary shall be payable in accordance with the Company's normal payroll procedure and the prorated Bonus shall be payable in a lump sum within ninety (90) days after the end of the Term Year to which it relates. (d) In the event Employee's employment hereunder is terminated for Disability (as defined below), Employee or Employee's legal representative shall be entitled to receive (i) all unpaid Base Salary and Bonus for the term year in which such termination occurs prorated through the date of termination with such prorated Base Salary payable in accordance with the Company's normal payroll procedure and the prorated Bonus payable in a lump sum within ninety (90) days after the end of the Term Year to which it relates, and (ii) Adjusted Base Salary for a period of ninety (90) days following termination of employment due to Disability at the rates in effect upon the date of such termination payable in accordance with the Company's normal payroll procedure, reduced (but not below zero) by the sum of (x) all amounts paid by the Company to Employee as Base Salary prior to termination of employment for the times that Employee was unable to perform the services required of the Employee under this Agreement due to illness, accident or any other physical or mental incapacity which resulted in Employee's Disability and (y) all amounts that Employee is eligible to receive under any of the Company's standard short-term group disability insurance coverage provided pursuant to Section 10(a) hereof as a result of such illness, accident or any other physical or mental incapacity. To the extent that the Company has not reduced its payments to Employee to reflect such amount that Employee is eligible to receive under such short-term group disability coverage, Employee shall immediately remit to the Company such amount upon Employee's receipt thereof. Employee shall not be entitled to receive any other amount in respect of the Term Year in which termination occurs or in respect of any subsequent years. In lieu of terminating Employee pursuant to this Section 11(d), the Company may elect to put Employee on unpaid leave of absence for a period determined in the sole discretion of the Company, but in no event to exceed one year. If put on unpaid leave of absence, Employee shall be entitled to the same compensation to which Employee is entitled if Employee is terminated as set forth above and shall not be entitled to any further compensation except that Employee shall continue to maintain Employee's eligibility in all Company benefit plans (but only to the extent such continued eligibility is not prohibited pursuant to the terms of any such plan) provided that the Company shall have no responsibility to pay any premiums or other amounts on behalf of Employee with respect to any such plans. Notwithstanding anything contained herein to the contrary, if the Company elects to place Employee on unpaid leave of absence in lieu of terminating Employee pursuant to this Section 11(d), (i) the Company shall be entitled to subsequently terminate Employee's employment with the Company on the expiration of such leave 527591.1 mhs\prg\KRAMER5.wpd\3-11-98 8 of absence without any further monetary obligations to Employee and (ii) the Company shall have no obligation to reinstate Employee to active status unless the Company determines in its sole discretion that such reinstatement is in the best interests of both the Company and Employee. (e) In the event this Agreement is not renewed due to the Company giving Employee notice of non-renewal pursuant to Section 2 hereof, Employee shall be entitled to receive such severance payment or any other amount with respect to the Company's non-renewal of this Agreement as if such non-renewal were termination without cause hereunder. Non-renewal by Employee shall give rise to no right to receive any severance payment hereunder. (f) If Employee's employment hereunder terminates for any reason during a Term Year, Employee will be paid within sixty (60) days of termination for the value of all unused vacation time which accrued during the calendar year in which such termination occurs up to the date of termination in accordance with the Company's policies. (g) If Employee fails to observe or perform any of Employee's duties and obligations under Sections 6(a), 6(b), 6(c), 6(d), 8 or 9 of this Agreement, Employee shall forfeit any right to payment under Section 11 of any amounts other than Base Salary prorated through the date of termination and upon the Company's demand for same, shall repay to the Company any amounts paid pursuant to Section 11 to Employee after the date of termination of Employee's employment with the Company (other than such Base Salary). 12. Deferred Compensation. (a) Annual Deferred Compensation Credit. An account ("Employee's Account") will be maintained on the books and records of the Company for the purposes hereinafter provided. Subject to the exceptions set forth below, Employee's Account shall be increased each Term Year by an amount equal to the sum of the Salary Deferred Compensation Credit (as defined in the Compensation Agreement) for such Term Year, and Twenty-Five Thousand and No/100 ($25,000.00) Dollars (the "Company Deferred Compensation Credit"); provided that for the initial Term Year the Salary Deferred Compensation Credit and the Company Deferred Compensation Credit shall each be prorated based on the ratio of the number of days in the initial Term Year commencing on the Effective Date to the number of days in the calendar year in which the Effective Date falls. In the event of the termination of Employee's employment hereunder prior to the end of any Term Year for any reason other than due to (a) termination by the Company without cause as a result of Employee's position with the Company being eliminated, or (b) Employee's death, Disability or Retirement (as defined below), no credits shall be made to Employee's Account with respect to a Company Deferred Compensation Credit for such Term Year. In the event of termination of Employee's employment hereunder during any Term Year due to (a) termination by the Company without cause as a result of Employee's position with the Company being eliminated, or (b) Employee's death, Disability or Retirement, a partial credit shall be made to Employee's Account with respect to a Company Deferred Compensation Credit for such Term Year prorated based on the ratio of the number of days in such Term Year that Employee was an employee of the Company to the number of days in the calendar year in which such termination due to death, Disability or Retirement occurs. Employee's Account shall also 527591.1 mhs\prg\KRAMER5.wpd\3-11-98 9 be credited from and after the date hereof with an amount computed like interest on the credit balance of Employee's Account at the Prime Rate (as hereinafter defined). For these purposes, the Salary Deferred Compensation Credit and all interest so accrued on the credit balance of Employee's Account shall be deemed to be credited to Employee's Account as of the end of each month of each Term Year, and the Company Deferred Compensation Credit shall be deemed to be credited to Employee's Account as of December 31 of each Term Year unless Employee's employment hereunder terminates due to (a) termination by the Company without cause as a result of Employee's position with the Company being eliminated, or (b) Employee's death, Disability or Retirement, in which case the Company Deferred Compensation Credit for Employee's final year of employment shall be deemed to be credited to Employee's Account as of the last day of the month within which Employee's employment with the Company is terminated. The Company shall in all events determine (in its sole and absolute discretion) whether Employee's employment hereunder has been terminated as a result of Employee's position with the Company being eliminated. As used in this Agreement, the term "Prime Rate" means the rate publicly announced from time to time by NationsBank, N.A. (South), Atlanta, Georgia, as its "prime rate." (b) Vesting. The provisions of this Section 12(b) shall determine the portion of Employee's Account which is vested and eligible for payment in accordance with Section 12(c) hereof. (i) General Vesting Rule. Employee shall be immediately vested in the portion of Employee's Account attributable to all Salary Deferred Compensation Credits (as defined in the Compensation Agreement) and, subject to Section 12(b)(iii), interest credited with respect thereto (as determined pursuant to Section 12(a) hereof). Subject to the other provisions of this Section 12, Employee's right to the portion of Employee's Account attributable to each Company Deferred Compensation Credit and all interest credited with respect thereto (as determined pursuant to Section 12(a) hereof) will vest as follows: Date: Total Amount Vested: As of December 31, 1997 0% As of December 31, 1998 10% As of December 31, 1999 20% As of December 31, 2000 30% As of December 31, 2001 40% As of December 31, 2002 50% As of December 31, 2003 60% As of December 31, 2004 70% As of December 31, 2005 80% As of December 31, 2006 90% As of December 31, 2007 100% (ii) Termination Due to Death, Disability or Retirement. In the event of termination of Employee's employment hereunder due to death, Disability or Retirement (as defined below), then notwithstanding anything to the contrary in Section 12(b)(i) hereof, 527591.1 mhs\prg\KRAMER5.wpd\3-11-98 10 Employee, in the event of Disability or Retirement, or Employee's Beneficiary, in the event of Employee's death, shall be vested in the entire balance of Employee's Account [including any Company Deferred Compensation Credit credited to Employee's account as of the last day of the month within which Employee's employment with the Company is terminated, as provided in Section 12(a)]. For purposes hereof, Retirement shall mean Employee's resignation of employment with the Company on or after Employee's sixtieth (60th) birthday and following at least ten (10) years of full time employment with the Company. (iii) Termination for Cause. Upon the termination of Employee's employment hereunder for Cause (as defined in Section 14(a) hereof), notwithstanding anything to the contrary in Section 12(b)(i) hereof, Employee shall be vested in the Salary Deferred Compensation Credit in Employee's Account as of the end of the month preceding such termination or resignation but shall not be vested in any portion of the Company Deferred Compensation Credit, regardless of whether or not previously vested, or in any interest accrued on either the Salary Deferred Compensation Credit or the Company Deferred Compensation Credit. (iv) Termination by the Company Without Cause. If Employee's employment hereunder is terminated by the Company without cause, then notwithstanding anything to the contrary in Section 12(b)(i) hereof, Employee's right to each Company Deferred Compensation Credit and all interest credited with respect thereto (as determined pursuant to Section 12(a) hereof) will vest for the Term Year within which such termination occurs by an additional percentage equal to ten percent (10%) multiplied by a fraction, the numerator of which is the number of days in such Term Year that Employee was an employee of the Company and the denominator of which is the number of days in the calendar year in which Employee's employment hereunder is terminated by the Company. For example, if Employee's employment is terminated by the Company without cause effective as of July 2, 1999 (the 182nd day of the year), Employee would be entitled to fifteen percent (15%) of each Company Deferred Compensation Credit and all interest credited with respect thereto (calculated by adding 10% for 1998 and 182/365 of 10% for 1999). (v) No Further Credits. Except as otherwise expressly provided for above, upon Employee's termination of employment hereunder, no further increase in the vested balance shall be made to Employee's Account. (c) Payments Following Termination of Employment. (i) Termination. In the event of termination of Employee's employment hereunder for any reason, Employee (or, in the event of Employee's death, Employee's Beneficiary) shall receive a payment equal to the portion of the Credit Balance of Employee's Account which is vested in accordance with Section 12(b) hereof within sixty (60) days after the earlier to occur of Employee's death, or such termination of Employee's employment. (ii) Forfeiture of Balance of Employee's Account. The portion of Employee's Account which is not vested in accordance with Section 12(b) hereof following 527591.1 mhs\prg\KRAMER5.wpd\3-11-98 11 termination of Employee's employment hereunder shall be forfeited and Employee shall not be entitled to any payment with respect thereto. (d) Beneficiary. Employee shall have the right to designate a beneficiary ("Beneficiary") under this Agreement who shall succeed to Employee's right to receive payments with respect to this Section 12 hereof in the event of Employee's death. In the event Employee fails to designate a Beneficiary or a Beneficiary dies without Employee's designation of a successor Beneficiary, then for all purposes hereunder the Beneficiary shall be Employee's estate. No designation of Beneficiary shall be valid unless in writing signed by Employee, dated and delivered to the Company. Beneficiaries may be changed by Employee without the consent of any prior Beneficiary. (e) Rights Unsecured; Unfunded Plan; ERISA. (i) The Company's obligations arising under this Section 12 hereof to pay benefits to Employee or Employee's Beneficiary constitute a mere promise by the Company to make payments in the future in accordance with the terms hereof and Employee and Employee's Beneficiary have the status of a general unsecured creditor of the Company. Neither Employee nor Employee's Beneficiary shall have any rights in or against any specific assets of the Company. (ii) It is the intention of the Company and Employee that the Company's obligations under this Section 12 hereof be unfunded for income tax purposes and for purposes of Title I of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"). (iii) The Company and Employee shall treat its obligations under this Section 12 hereof as maintained for a select group of management or highly compensated employees exempt from Parts 2, 3 and 4 of Title I of ERISA. The Company shall comply with the reporting and disclosure requirements of Part 1 of Title I of ERISA in accordance with U.S. Department of Labor Regulation ss.2520.104-23. (f) Nonassignability. The rights Employee and Employee's Beneficiary to payments pursuant to this Section 12 hereof are not subject in any manner to anticipation, alienation, sale, transfer, assignment, pledge, encumbrance attachment, or garnishment by creditors of Employee or Employee's Beneficiary. 13. Remedies. (a) Employee acknowledges and agrees that, by virtue of the duties and responsibilities attendant to Employee's employment by the Company and the special knowledge of the Company's and its Affiliates' affairs, business, clients and operations that Employee has and will have as a consequence of such employment, irreparable loss and damage will be suffered by the Company and its Affiliates if Employee should breach or violate any of the covenants and agreements contained in Sections 6, 7, 8, or 9 hereof; and Employee further acknowledges and agrees that each of such covenants is reasonably necessary to protect and preserve the Company and its Affiliates. Employee, therefore, agrees and consents that, in addition to any other remedies 527591.1 mhs\prg\KRAMER5.wpd\3-11-98 12 available to it, the Company shall be entitled to specific performance by temporary as well as permanent injunction to prevent a breach or contemplated breach by Employee of any of the covenants or agreements contained in such Sections. (b) The existence of any claim, demand, action or cause of action that Employee may have against the Company, whether predicated upon this Agreement or otherwise, shall not constitute a defense to the enforcement by the Company of any of the covenants contained in Sections 6, 7, 8, or 9 hereof. (c) Nothing contained in this Agreement shall limit, abridge or modify the rights of the parties under applicable trade secret, trademark, copyright or patent law or under the laws of unfair competition. (d) In the event a court of competent jurisdiction determines that Employee has breached any of the foregoing covenants contained in Sections 6, 7, 8, or 9 hereof, Employee shall pay all costs of enforcement of the foregoing covenants, including, but not limited to, court costs and reasonable attorney's fees. 14. Termination. (a) This Agreement may be terminated by the Company for "cause" upon delivery of notice of termination to Employee. As used herein, "cause" shall mean (i) fraud, dishonesty, gross negligence, willful misconduct, commission of a felony or an act of moral turpitude, or (ii) engaging in activities prohibited by Sections 6, 7, 8, or 9 hereof, or any other material breach of this Agreement. (b) Employee may, without cause, terminate this Agreement by giving to the Company thirty (30) days' written notice in the manner specified in Section 18 hereof and such termination shall be effective on the thirtieth (30th) day following the date of such notice or such earlier date as the Company shall specify. The Company may, without cause, terminate this Agreement by giving to Employee thirty (30) days' written notice in the manner specified in Section 18 hereof and such termination shall be effective on the thirtieth (30th) day following the date of such notice. At the option of the Company, Employee shall cease performing Employee's duties hereunder on such earlier date as the Company may specify in its notice of termination. (c) In the event of Employee's Disability, physical or mental, the Company shall have the right, subject to all applicable laws, including without limitation, the Americans with Disabilities Act ("ADA"), to terminate Employee's employment immediately. For purposes of this Agreement, the term "Disability" shall mean Employee's inability or expected inability (or a combination of both) to perform the services required of Employee hereunder due to illness, accident or any other physical or mental incapacity for an aggregate of ninety (90) days within any period of one hundred eighty (180) consecutive days during which this Agreement is in effect, as agreed by the parties or as determined pursuant to the next sentence. If there is a dispute between the Company and Employee or Employee's legal representative as to whether a Disability exists, then such issue shall be decided by a medical doctor selected by the Company and a medical 527591.1 mhs\prg\KRAMER5.wpd\3-11-98 13 doctor selected by Employee or Employee's legal representative (or, in the event that such doctors fail to agree, then in the majority opinion of such doctors and a third medical doctor chosen by such doctors). Each party shall pay all costs associated with engaging the medical doctor selected by such party and the parties shall each pay one-half (1/2) of the costs associated with engaging any third medical doctor. (d) In the event this Agreement is terminated, all provisions hereof relating to any actions, including those of payment or compliance with covenants, subsequent to termination shall survive such termination. 15. Successors and Assigns. This Agreement may not be assigned by Employee. This Agreement may be assigned by the Company to any Affiliate without the consent of Employee. The provisions of this Agreement shall be binding upon Employee's heirs and legal representatives. 16. Severability. In the event that one or more of the words, phrases, sentences, clauses, sections, subdivisions or subparagraphs contained herein shall be held invalid, this Agreement shall be construed as if such invalid portion had not been inserted, and if such invalidity shall be caused by the length of any period of time, the number or location of Clients, the size of any area, or the description of the duties of Employee set forth in any part hereof, such period of time, number or location of Clients, area, or description of duties, or any combination thereof, shall be considered to be reduced to a period, number, location, area or description which would cure such invalidity. 17. Submission to Jurisdiction. Except as otherwise expressly provided herein, this Agreement shall be governed by and construed under the laws of the State of Georgia. Employee hereby agrees to submit to the jurisdiction of the courts of the State of Georgia and the federal courts within the State of Georgia and hereby appoints the Secretary of State of the State of Georgia as agent for the purpose of receiving service of process in respect of any proceeding in connection herewith. The parties agree that notwithstanding anything contained herein to the contrary, the Company shall have the right to bring suit against Employee for any breach or threatened breach of Sections 6, 7, 8 or 9 of this Agreement and the enforcement of Section 6 (and the related remedies provisions set forth in Section 13 of this Agreement) shall be governed by and construed under the law of the state in which such suit is brought by the Company, and Employee hereby agrees to submit to the jurisdiction of the courts of the State of Georgia and of any state within which Employee resides or is alleged to be breaching any of Sections 6 through 9 of this Agreement and the federal courts within such states, provided, however, that in any suit brought in any state for purposes of enforcing any of Employee's covenants contained in Sections 6 through 9 of this Agreement, the substantive law of the State of Georgia shall govern all provisions hereof other than Sections 6, 13 and 17 of this Agreement. 18. Notices. Any notice to be given under this Agreement shall be given in writing and may be effected by personal delivery or by placing such in the United States certified mail, return receipt requested and addressed as set forth below, or as otherwise addressed as specified by the parties by notice given in like manner: 527591.1 mhs\prg\KRAMER5.wpd\3-11-98 14 If to Company: The Profit Recovery Group International I, Inc. 2300 Windy Ridge Parkway Suite 100 North Atlanta, Georgia 30339-8426 Attention: President If to Employee: At the address specified below Employee's signature. 19. Required Deductions or Withholdings. All amounts payable to Employee pursuant to the Employment Agreement and Compensation Agreement shall have deducted or withheld therefrom by the Company such amount or amounts as may be required to be so deducted or withheld pursuant to applicable federal, state or local laws. 20. Entire Agreement and Amendment. The Employment Agreement, the Compensation Agreement, the Plan and such other documents as may be referenced by such documents (the "Referenced Documents"), constitute the entire agreement of the parties hereto with respect to the subject matter hereof and, except as specifically provided herein or in the Compensation Agreement, the Plan and the Referenced Documents, supersedes all prior discussions, understandings and agreements among the parties hereto. Any such prior agreements shall, from and after the Effective Date, be null and void. This Agreement may not be changed orally, but only by an agreement in writing signed by the party against whom enforcement of any waiver, change, modification, extension or discharge is sought. Time is of the essence of this Agreement and each and every Section and subsection hereof. 21. Waiver. The waiver by one party of a breach of any provision of this Agreement by the other party shall not operate or be construed as a waiver of any subsequent breach of the same or any other provision by the other party. 22. Authorization. The Company represents and warrants to Employee that this Agreement has been authorized and approved by all necessary corporate actions. 23. Affiliates. As used herein, "Affiliates" shall mean PRGX, and all entities, whether now or hereafter existing, 51% or more of the outstanding capital stock of which is owned by any combination of the Company and/or any Affiliate and which are engaged in substantially the same business as the Business of the Company regardless of the industry segment of its Clients and/or which provide services or employees to the Company or any Affiliate in connection with the operations thereof. 24. Counterparts. This Agreement may be executed in one or more counterparts, each of which shall be deemed an original and together which shall constitute one and the same instrument. 25. Pronouns. All personal pronouns in this Agreement and the Compensation Agreement, whether used in the masculine, feminine or neuter gender shall include all other genders, and the singular shall include the plural and the plural shall include the singular. 527591.1 mhs\prg\KRAMER5.wpd\3-11-98 15 IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first written above. COMPANY: THE PROFIT RECOVERY GROUP INTERNATIONAL I, INC. By S/ ------------------------------------ David A. Brookmire, Senior Vice President- Human Resources EMPLOYEE: S/ ---------------------------------------- (SEAL) Robert G. Kramer 527591.1 mhs\prg\KRAMER5.wpd\3-11-98 16 COMPENSATION AGREEMENT THIS COMPENSATION AGREEMENT ("Agreement") is made this 12th day of February, 1998 effective as of October 13, 1997 (the "Effective Date"), by and between THE PROFIT RECOVERY GROUP INTERNATIONAL I, INC., a Georgia corporation (the "Company") and ROBERT G. KRAMER, a resident of the State of Florida (the "Employee"). W I T N E S S E T H: WHEREAS, the parties hereto are party to that certain Employment Agreement, dated the date hereof and effective as of the Effective Date (the "Employment Agreement") whereby the Company employs Employee as Executive Vice President and Chief Information Officer of the Company and Employee accepts such employment in accordance with the terms thereof; and WHEREAS, the Employment Agreement provides that the compensation payable to Employee shall be as set forth herein (any terms capitalized but not otherwise defined herein shall have the meanings given to them in the Employment Agreement). NOW, THEREFORE, in consideration of the foregoing and of the mutual promises and covenants contained herein and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties agree as follows: 1. Compensation. For services rendered by Employee under the Employment Agreement during the term thereof, Employee shall be entitled to receive the following compensation, subject to the terms hereof, provided that Base Salary (as defined below) may be reviewed annually and modified by the Company in writing prior to the commencement of any Term Year and the Bonus (as defined below) may be modified in accordance with the terms hereof: (a) Base Salary. Two Hundred Thousand and No/100 ($200,000.00) Dollars on an annual basis ("Base Salary") shall be payable in accordance with the Company's customary payroll procedures. For purposes of this Agreement, the term "Adjusted Base Salary" shall mean and refer to the sum of Employee's Base Salary and Twenty-Five Thousand and No/100 ($25,000.00) Dollars (such Twenty-Five Thousand and No/100 ($25,000.00) Dollars, together with interest accrued thereon as hereinafter provided, is hereinafter referred to as the "Salary Deferred Compensation Credit"). Employee's Salary Deferred Compensation Credit shall not be paid to Employee but such amount shall instead be deferred and credited to Employee's Account (as defined in Section 12(a) of the Employment Agreement) as deferred compensation in accordance with Section 12 of the Employment Agreement. In the event of termination of Employee's employment under the Employment Agreement during any Term Year due to (a) termination by the Company without cause as a result of Employee's position being eliminated, or (b) Employee's death, Disability or Retirement (as such terms are defined in the Employment Agreement), a prorated portion of the Salary Deferred Compensation Credit shall be credited to 527593.1 mhs\prg\KRAMCOM5.wpd\3-9-98 Employee's Account in respect of the month in which such termination occurs based upon the ratio of the number of days in such month that Employee was an Employee of the Company to the total number of calendar days in such month and no further credit shall be made for any subsequent period. In the event of termination of Employee's employment under the Employment Agreement for any reason other than as set forth in the immediately preceding sentence, no portion of the Salary Deferred Compensation Credit shall be credited to Employee's Account in respect of the month in which such termination occurs or any subsequent period and the amount that would have otherwise been credited to Employee's Account pursuant to the immediately preceding sentence in respect of the month in which such termination occurs will instead be paid to Employee as additional Base Salary. (b) Bonus. An annual bonus ("Bonus") in an amount determined and payable as provided herein for each Term Year during the term of the Employment Agreement; provided, however, that Employee shall be entitled to a Bonus if certain Performance Goal Attainment Measures (as set forth in Exhibit 1 hereto) are achieved by Employee and the Company. The amount of any Bonus will depend on which Performance Goal Payout Level (as defined in Exhibit 1 hereto) Employee and the Company have attained. On the date hereof, the Performance Goal Attainment Measures and related provisions applicable to Employee hereunder are set forth in the "Incentive Summary" attached as Exhibit 1 hereto, which may be superseded by the terms of any subsequent Incentive Summary which may be prepared and delivered to Employee by the Company. Said Exhibit 1, together with the Company records referenced therein, are hereby incorporated herein by reference and any such subsequent Incentive Summary shall automatically be incorporated herein in lieu thereof upon its delivery to Employee. Notwithstanding anything contained herein to the contrary, the payment level for Employee's annual bonus for 1998 shall not be less than Employee's 1998 Threshold Percentage multiplied by Employee's Adjusted Base Salary, prorated if Employee's employment terminates prior to December 31, 1998 for any reason other than for cause. If terminated for cause during 1998, Employee shall receive no Bonus for 1998. In the event the Effective Date is a date other than January 1, then Employee's Base Salary, Adjusted Base Salary, Salary Deferred Compensation Credit and Bonus for the initial Term Year shall be prorated based on the ratio of the number of days in the initial Term Year commencing on the Effective Date to the number of days in the calendar year in which the Effective Date falls. (c) Automobile Allowance. For each full month of each Term Year, Employee shall be provided an automobile allowance equal to one-twelfth (1/12) of Fourteen Thousand Six Hundred and No/100 ($14,600.00) Dollars, payable in accordance with the Company's customary procedures, which amount shall be reviewed annually and may be modified in writing prior to the commencement of any Term Year. 2. Termination. This Agreement shall terminate effective upon termination of the Employment Agreement; provided, however, that all provisions hereof relating to any actions, including those of payment, subsequent to termination shall survive such termination. 527593.1 mhs\prg\KRAMCOM5.wpd\3-9-98 -2- 3. Incorporation by Reference. The provisions of the Employment Agreement are hereby incorporated herein by reference. 4. Successors and Assigns. This Agreement may not be assigned by Employee. In the event that the Employment Agreement is assigned by the Company, this Agreement shall also be assigned to the assignee thereof. 5. Counterparts. This Agreement may be executed in one or more counterparts, each of which shall be deemed an original and together which shall constitute one and the same instrument. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first written above. COMPANY: THE PROFIT RECOVERY GROUP INTERNATIONAL I, INC. By: S/ ------------------------------------------ David A. Brookmire, Senior Vice President- Human Resources EMPLOYEE: S/ ------------------------- (SEAL) Robert G. Kramer 527593.1 mhs\prg\KRAMCOM5.wpd\3-9-98 -3- Exhibit 1 1997 PRG Executive Incentive Plan Summary Annual Payout Objective o To motivate and reward outstanding performance, and to reinforce and support PRG's strategic plans and financial goals. o Attract and retain highly talented associates by offering a competitive total compensation package. Plan Payouts o Incentive awards under the plan will be based upon year-to-date adjusted base salary earnings for the period January 1, 1997 - December 31, 1997. o Incentive plan measurements/goals and levels of payout are shown on the attached incentive summary. Also attached are definitions for each of the measurement categories. o One-fifth of the payout is attributable to meeting each of the four quarters' goals in each category of measurement, and one-fifth is attributable to meeting the annual goals for each category of measurement. o Incentive payments will be paid within 60 days following the end of the fiscal year. Participants must be actively employed in order to receive awards. Exceptions may be made in terminations due to retirement, disability, or death. o Participants must have satisfactory performance at the time payments are made to be eligible. Participants on performance plans are not eligible to receive payments. Part-Year Participation o If an associate becomes eligible for the PRG Executive Incentive Plan after January 1, 1997, he/she may be eligible for a prorated payout based on the date of entry into the Plan. o Prorated payouts will be based on year-to-date base salary earnings from the date of entry into the Plan. 527593.1 mhs\prg\KRAMCOM5.wpd\3-9-98 -4- Management of the Plan o The plan is effective from January 1, 1997 through December 31, 1997. o Overall responsibility for the plan resides with the Chairman and Chief Executive Officer, Chief Financial Officer, and Senior Vice President Human Resources, and payments are subject to Board of Directors' approval. o Management reserves the right to amend the plan, with regard to participation, procedures, awards and any other provisions. This includes revision of financial targets in the event of business or organizational change deemed to warrant such action. 527593.1 mhs\prg\KRAMCOM5.wpd\3-9-98 -5- 1997 Incentive Plan Measures - Executive Definitions of Categories A) EPS - Earnings per share of PRGX as recorded in quarterly/annual consolidated financial statements reported in the Company's quarterly 10Q and annual 10K. Measurements will be quarterly based upon threshold, target, and stretch quarterly goals, however, payouts on EPS will only be annual. B) Function Expenses - In order to control expenses, this ties to cost center budgets. Target achievement is measured on a quarterly basis, however, year end will have threshold, target, and stretch achievement levels. If expenses are at/under budget each quarter, 20% of target bonus is paid. At the end of the year, if at/under budget for: 2 quarters Threshold level is met 3 quarters Target level is met 4 quarters Stretch level is met All bonus payments relating to Function Expenses will be made annually. 527593.1 mhs\prg\KRAMCOM5.wpd\3-9-98 -6- Attachment A Robert G. Kramer 1997 Incentive Summary: Payout Levels (expressed as a percentage of Adjusted Base Salary) Threshold 10% Target 25% Stretch 40% Goal Attainment Measures Qtrly EPS 75% Qtrly Function Expenses 25% (Information Services) 527593.1 mhs\prg\KRAMCOM5.wpd\3-9-98 -7- DESCRIPTION OF 1998 COMPENSATION ARRANGEMENT BETWEEN MR. ROBERT G. KRAMER AND REGISTRANT The following describes certain compensation arrangements between the Registrant and Mr. Kramer for calendar year 1998. The Company has entered into an employment agreement with Mr. Kramer that currently expires October 12, 1998. The employment agreement provides for automatic one-year renewals upon the expiration of each year of employment, subject to prior notice of nonrenewal by the Board of Directors. For 1998, the Compensation Committee of the Board of Directors (the "Compensation Committee") maintained Mr. Kramer's annual base salary at $225,000. Pursuant to Mr. Kramer's employment agreement, for 1998, he will receive a bonus of up to 40% of his base salary based in part upon the Company's performance for 1998. Beginning in 1998, the Compensation Committee has determined that the Company will make annual contributions in the amount of $25,000 per year to a deferred compensation program for Mr. Kramer, which amounts will vest over a ten-year period at 10% per year. Mr. Kramer 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. Kramer with certain other personal benefits. Upon termination, other than for cause or by voluntary resignation, Mr. Kramer will receive severance payments equal to 6 months' base salary and certain other personal benefits. Mr. Kramer has 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 his employment. EX-10.39 3 EMPLOYMENT AGREEMENT EMPLOYMENT AGREEMENT THIS EMPLOYMENT AGREEMENT ("Agreement"), is made as of this 12th day of February, 1998, effective as of June 16, 1997 (the "Effective Date") by and between THE PROFIT RECOVERY GROUP INTERNATIONAL I, INC., a Georgia corporation (the "Company") and CLINTON McKELLAR, JR., a resident of the State of Georgia (the "Employee"). W I T N E S S E T H: WHEREAS, the Company desires to retain Employee to provide services to the Company and its Affiliates (as defined in Section 23 below), and Employee desires to provide his services to the Company pursuant to the terms and conditions that follow; NOW, THEREFORE, in consideration of the mutual promises and covenants hereinafter contained and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties do hereby agree as follows: 1. Employment. Employee shall serve as Senior Vice President, General Counsel and Secretary of the Company. Employee agrees to apply Employee's full time and efforts to the position and to perform Employee's work at all times to the best of Employee's ability and at the direction of the Vice-Chairman of the Company. Employee will render to the Company, at regular intervals set by the Company, reports and accounting of the status and progress of any work Employee is performing. 2. Term. The initial term of this Agreement shall commence on June 16, 1997, and shall continue until December 31, 1997 unless sooner terminated as hereinafter provided. Unless otherwise terminated pursuant to Section 14 hereof, this Agreement shall automatically renew on a year-to-year basis at the end of the initial term and each subsequent renewal term unless either party gives written notice of non-renewal to the other on or before September 30 of any calendar year for the immediately succeeding calendar year. The initial term of this Agreement and any subsequent one-year renewal period shall be deemed a "Term Year." 3. Scope of the Company's and Employee's Activities. Employee acknowledges and agrees that the Company and its Affiliates conduct the following business in the following areas and that Employee has been assigned to perform Employee's duties in accordance therewith: (a) Scope of the Company's Business. The Company and its Affiliates are engaged in the business of auditing accounts payable, paid bill files, promotional and demonstrator agreements, personal property, real estate, sales and use tax and other taxes, common area maintenance charges, telephone and other utilities, sales promotion, advertising and cosmetic wage/commission agreements, freight and shipping invoices, capital expenditures and other transactions of the Company's and its Affiliates' clients ("Clients"), in order to identify and document for subsequent charge back or credit over-payments and/or under deductions 527590.1 mhs\prg\mckell6.wpd\3-11-98 (collectively, the "Audit Activities"), and rendering management counseling services associated with the Audit Activities (collectively, the "Business of the Company"). (b) Location of the Company's Business. The Company and its Affiliates actively conduct business with their Clients throughout the United States and in other countries throughout the world, including without limitation, countries in Europe, Latin America, Asia and the Pacific. Employee shall provide substantially all of his services on behalf of the Company at the Company's principal office located at 2300 Windy Ridge Parkway, Suite 100 North, Atlanta, Cobb County, Georgia 30339-8426. 4. Compensation. For services rendered by Employee under this Agreement during the term hereof, Employee shall be entitled to receive the compensation and benefits set forth in Sections 10, 11 and 12 hereof and in that certain Compensation Agreement by and between Employee and the Company of even date herewith (the "Compensation Agreement"). 5. Stock Options. Employee and The Profit Recovery Group International, Inc., a Georgia corporation ("PRGX") are party to one or more separate stock option agreements in accordance with which Employee has been granted non-qualified options to purchase shares of PRGX Common Stock under the 1996 Stock Option Plan (the "Plan"). 6. Specific Acknowledgments. Employee acknowledges that the Company and its Affiliates have expended and will continue to expend substantial time, money, effort and other resources to develop its goodwill, clients, business sources and relationships, the Company and its Affiliates have a legitimate business interest in protecting same, in connection with Employee's employment by the Company as herein provided, the Company and its Affiliates will introduce Employee to their Clients, business sources and relationships and will expend considerable time, effort and capital to train Employee in the Business of the Company, the knowledge and experience that Employee will acquire while an employee of the Company and Employee's services to be rendered to the Company and its Affiliates are of special, unique and extraordinary character, by virtue of Employee's employment with the Company, Employee will be in a position of substantial responsibility and authority and will have frequent and substantial contact with certain of the Company's and the Affiliates' Clients and business sources and relationships, in Employee's capacity, Employee will be privy to certain confidential information, Company secrets and proprietary information not generally known or available to the Company's or its Affiliates competitors or the general public, the nature and periods of the restrictions imposed by the covenants contained in this Section 6 are fair, reasonable, and necessary to protect and preserve for the Company and its Affiliates the benefits of Employee's employment hereunder and such restrictions will not prevent Employee from earning a livelihood, and (viii) the Company and its Affiliates would sustain great and irreparable loss and damage if Employee were in any manner to breach any of such covenants. (a) Agreement Not to Compete - Competing Businesses. While employed by the Company or its Affiliates and for eighteen (18) months after termination of all such employment, without the prior written consent of the Company signed by the President of the Company, Employee will not directly or indirectly provide or perform Services in the Territory 527590.1 mhs\prg\mckell6.wpd\3-11-98 2 (as such capitalized terms are defined in subsection "f" below), whether as an employee, officer, director, shareholder, partner, proprietor, agent, consultant, independent contractor, lender or otherwise, for any business which is in competition with the Business of the Company (as defined in subsection 3(a) above). (b) Agreement Not to Solicit Clients. While employed by the Company or its Affiliates and for eighteen (18) months after termination of all such employment, without the prior written consent of the Company signed by the President of the Company, Employee will not directly or indirectly solicit or call upon any Client or prospective Client (or any employee or independent contractor of any Client or prospective Client) of the Company or any of its Affiliates for purposes of selling or providing any product, equipment or service, competitive or potentially competitive with any product, equipment or service sold, leased, offered for sale or lease or under development by, the Company or any of its Affiliates during the twenty-four (24) month period immediately preceding termination of all of Employee's employment with the Company and its Affiliates, provided that the restrictions set forth in this Section 6(b) shall apply only to Clients or prospective Clients with whom Employee had Material Contact (as defined below) during such twenty-four (24) month period (or such shorter period if Employee is employed by the Company and its Affiliates for less than twenty-four (24) months). (c) Agreement Not to Solicit Employees or Contractors. While employed by the Company or its Affiliates and for eighteen (18) months after termination of all such employment, without the prior written consent of the Company signed by the President of the Company, Employee will not directly or indirectly (1) solicit, entice, persuade or induce, or attempt to solicit, entice, persuade or induce any person who is employed by, or performing services as an independent contractor or as an employee of an independent contractor for, the Company or any of its Affiliates, either to terminate such person's employment with the Company or its Affiliates, or to cease performing such services for the Company or any of its Affiliates or (2) authorize any person to engage in or assist any person in any of the activities described in clause (1) of this subsection. (d) Proprietary Information. All Proprietary Information (as defined below) and all physical embodiments thereof received or developed by Employee or disclosed to Employee while employed by the Company is confidential to and is and will remain the sole and exclusive property of the Company. While Employee is in the Company's employ and for a period ending five (5) years after the date of Employee's termination of employment with the Company for any reason, Employee will hold such Proprietary Information in trust and in the strictest confidence, and will not use, reproduce, distribute, disclose or otherwise disseminate the Proprietary Information or any physical embodiments thereof except to the extent necessary to perform the duties assigned to Employee by the Company. In no event shall Employee take any action causing or fail to take the action necessary in order to prevent any Proprietary Information disclosed to or developed by Employee to lose its character or cease to qualify as Proprietary Information. 527590.1 mhs\prg\mckell6.wpd\3-11-98 3 Notwithstanding anything contained herein to the contrary, this Section 6(d) shall not limit in any manner the protection of the Company's trade secrets otherwise afforded by law. Upon request by the Company, and in any event upon termination of Employee's employment with the Company for any reason, Employee will promptly deliver to the Company all property belonging to the Company, including without limitation all Proprietary Information (and all physical embodiments thereof) then in Employee's custody, control, or possession. (e) Contracts or Other Agreements with Former Employer or Business. Employee agrees that Employee has provided to the Company, prior to the execution of this Agreement, a copy of the pertinent portions of any employment agreement or similar document executed by Employee with a former employer or any other business. Employee warrants and represents that the execution and delivery of this Agreement by Employee and the performance of the obligations, covenants and agreements contained herein, do not and will not conflict with or result in any breach or violation of any of the terms and provisions of any agreement, judgment, order, statute or other instrument or restriction of any kind with respect to which Employee is bound, and Employee is not subject to any restrictive covenant agreement, covenant not to compete, nonsolicitation agreement or other agreement that would prohibit Employee from fully carrying out Employee's duties hereunder. (f) Definitions. - "Material Contact" means contact between Employee and each Client or prospective Client (A) with whom the Employee dealt; (B) whose dealings with the Company were coordinated or supervised by Employee; (C) about whom Employee obtained Proprietary Information in the ordinary course of business as a result of Employee's association with the Company; or (D) who receives services provided by the Company, the sale or provision of which results or resulted in compensation, commissions or earnings for Employee, in each of cases (A) through (D) within two years prior to the date of Employee's termination. - "person" means and includes any individual, partnership, association, corporation, limited liability company, trust, unincorporated organization, or any other business entity or enterprise. - "Proprietary Information" means information (in any form or media) including but not limited to technical and nontechnical data, lists, training manuals, training systems, computer based training modules, formulas, patterns, compilations, programs, devices, methods, techniques, drawings, processes and plans regarding the Company's or its Affiliates' Clients, prospective Clients, methods of operation, billing rates, billing procedures, suppliers, business methods, finances, management, or any other business information relating to the Company or its Affiliates (whether constituting a trade secret or proprietary or otherwise) which has value to the Company or its Affiliates and is treated by the Company or its Affiliates as being confidential; provided, however, that Proprietary Information shall not include any information that has been voluntarily disclosed to the public by the Company or its Affiliates (except where such public disclosure has been made by Employee without authorization) or that has been independently developed and disclosed by others, or that otherwise enters the public domain 527590.1 mhs\prg\mckell6.wpd\3-11-98 4 through lawful means. Proprietary Information also includes information which has been disclosed to the Company or its Affiliates by a third party and which the Company or its Affiliates are obligated to treat as confidential. Proprietary Information may or may not be marked by the Company or its Affiliates as "proprietary" or "secret" or with other words or markings of similar meaning, and the failure of the Company to make such notations upon the physical embodiments of any Proprietary Information shall not affect the status of such information as Proprietary Information. - "prospective Client" means any person to whom the Company has sent or delivered a written sales or servicing proposal or contract in connection with the Business of the Company. - "Services" means directing, implementing, managing, coordinating, and supervising all legal matters relating to the Company and its Affiliates and any other services substantially similar to those services provided by Employee to the Company at any time during the twenty-four (24) month period immediately preceding Employee's termination of employment with the Company (or such shorter period if Employee is employed by the Company for less than twenty-four (24) months). - "Territory" means that geographical area represented by a circle having a radius of thirty (30) miles from the centerline of Windy Hill Road and Powers Ferry Road in Cobb County, Georgia, the closest major intersection to the Company's offices located at 2300 Windy Ridge Parkway, Atlanta, Georgia 30339. - Capitalized terms used but not defined herein shall have the meanings ascribed to them in the Compensation Agreement. (g) Consideration to the Company. The Company acknowledges and agrees that its agreements, including, without limitation, its agreement to disclose confidential information to Employee, are made in consideration of the services to be provided by Employee, Employee's agreement to refrain from competing with the Company for eighteen (18) months following the termination of Employee's employment hereunder, Employee's agreement to refrain from disclosing confidential information, and the other mutual covenants and agreements set out in this Agreement. 7. Ownership by Company. All software, computer diskettes, CDs, DVDs, video tapes, literature, training manuals, training systems, computer based training modules, Client documents, cassettes, photographs, prints, slides, records, notes, files, memoranda, reports, audit reports, price lists, client lists, documents, and all copies thereof, equipment, and apparatus and like items relating to the business of the Company, Proprietary Information or trade secrets which shall be prepared by Employee or which shall be disclosed to or which shall come into Employee's possession, shall be and remain the sole and exclusive property of the Company. Employee agrees that, upon the termination of employment with the Company for any reason whatsoever, or at any other time upon request, Employee will promptly deliver to the Company the originals and all 527590.1 mhs\prg\mckell6.wpd\3-11-98 5 copies of any of the foregoing that are in Employee's possession, custody or control, and any other property belonging to the Company. 8. Inventions. Employee agrees that, during the term of this Agreement, Employee has a continuing duty to disclose to the Company any invention, improvement, discovery, process, formula, code, program, system or method (collectively, "Inventions") developed or being developed by Employee any time during the term of Employee's employment, either solely by Employee or jointly with others, whether or not such Inventions are assignable to the Company as set forth below. Any Invention which Employee has conceived or made or may conceive or make at any time while employed by the Company, either solely by Employee or jointly with others, which relate in any way to the actual Business of the Company, or which relate in any way to the actual or anticipated research or development of the Company, or which are suggested by or result from any task assigned to Employee on behalf of the Company, shall be the sole and exclusive property of the Company, and Employee hereby assigns to the Company any right, title or interest Employee may have to such Invention. Furthermore, any such Invention shall constitute Proprietary Information as set forth above. At the request and expense of the Company, Employee will execute and deliver all documents and will do such other acts as may be in the Company's opinion necessary or desirable to secure to the Company or its nominee all right, title and interest in and to any such Invention. 9. Copyrights. Employee understands that any original works of authorship fixed in tangible form, including, without limitation, computer software and manuals, advertising material, and training material, prepared by Employee, either solely or jointly with others, within the scope of Employee's employment by the Company, constitute works made for hire as provided by law, so that such works are owned by the Company. If, for any reason, a work of authorship by Employee created during the term of Employee's employment by the Company and related to the Business of the Company is considered other than a work for hire, then Employee hereby assigns all Employee's right, title and interest in copyrights to such works of authorship to the Company. 10. Insurance and Benefits. (a) Subject to Employee being insurable at standard rates as of the commencement of employment (or when coverage is applied for, as applicable) and to the availability of such coverage from the Company's customary insurance providers, the Company shall (i) obtain on Employee's behalf life, disability, hospitalization and medical insurance coverage in accordance with the Company's standard group coverage, and (ii) pay the premiums, or reimburse Employee for premiums paid, to obtain basic term life insurance policy at the best available rates for a fifteen (15) year level term type product, but not higher than standard nonsmoker rates, in an amount of coverage equal to One Million ($1,000,000) Dollars, in addition to the Company's standard group coverage in accordance with the Company's standard policies and procedures. (b) For each full month of each Term Year, Employee shall be provided an automobile allowance equal to one-twelfth (1/12) of Ten Thousand and No/100 ($10,000.00) Dollars, payable in accordance with the Company's customary procedures, which amount shall 527590.1 mhs\prg\mckell6.wpd\3-11-98 6 be reviewed annually and may be modified in writing prior to the commencement of any Term Year. (c) Upon satisfaction of any applicable eligibility requirements, Employee shall be entitled to participate in any 401(k) plan of the Company generally available to other employees of the Company, except as may be limited by applicable law or regulation. (d) The Company shall pay Employee's reasonable travel and business expenses (including overseas air travel at business class rates and all other air travel at coach rates), subject to Employee's submission of receipts therefor in accordance with the Company's normal practices and procedures. (e) Any amounts the Company pays for insurance coverage or fringe benefits that are supplemental or in addition to the Company's standard insurance coverage or benefits shall be compensation in addition to Base Salary (but not included within the definition of Base Salary) and shall be reflected on Employee's W-2. 11. Payment of Compensation Upon Termination. In addition to any deferred compensation to which Employee might be entitled pursuant to Section 12 hereof, Employee shall receive the following compensation upon the termination of Employee's employment hereunder: (a) In the event Employee's employment hereunder is terminated for cause or if Employee voluntarily resigns other than due to Retirement (as defined in Section 12(b)(ii) hereof), Employee shall be entitled to receive Employee's Base Salary prorated through the date of termination, payable in accordance with the Company's normal payroll procedure, and Employee shall not be entitled to receive any Bonus or any other amount in respect of the Term Year in which termination occurs or in respect of any subsequent years. (b) In the event Employee's employment hereunder is terminated by the Company without cause, Employee shall be entitled to receive Base Salary and Bonus for the Term Year in which such termination occurs prorated through the date of such termination, plus a severance payment equal to six (6) months of Adjusted Base Salary at the rate then in effect and shall not be entitled to receive any other amount in respect of the Term Year in which termination occurs or in respect of any subsequent years. The prorated Base Salary shall be payable in accordance with the Company's normal payroll procedure and the prorated Bonus shall be payable in a lump sum within ninety (90) days after the end of the Term Year to which it relates, and the severance payment shall be payable in six (6) equal monthly installments commencing on the last day of the first month following termination. If the Company gives Employee notice of non-renewal pursuant to Section 2 of this Agreement, it shall be deemed to be a termination of Employee's employment without cause and Employee shall be entitled to compensation pursuant to this Section 11(b). 527590.1 mhs\prg\mckell6.wpd\3-11-98 7 (c) In the event Employee's employment hereunder is terminated by Employee's death or Retirement, Employee (or Employee's legal representative in the case of death) shall be entitled to receive Base Salary and Bonus for the Term Year in which such termination occurs prorated through the date of such termination and, in the case of termination due to Employee's death, any other payments specifically provided for herein in respect of the death of Employee, and shall not be entitled to receive any other amount in respect of the Term Year in which termination occurs or in respect of any subsequent years. The prorated Base Salary shall be payable in accordance with the Company's normal payroll procedure and the prorated Bonus shall be payable in a lump sum within ninety (90) days after the end of the Term Year to which it relates. (d) In the event Employee's employment hereunder is terminated for Disability (as defined below), Employee or Employee's legal representative shall be entitled to receive (i) all unpaid Base Salary and Bonus for the term year in which such termination occurs prorated through the date of termination with such prorated Base Salary payable in accordance with the Company's normal payroll procedure and the prorated Bonus payable in a lump sum within ninety (90) days after the end of the Term Year to which it relates, and (ii) Adjusted Base Salary for a period of ninety (90) days following termination of employment due to Disability at the rates in effect upon the date of such termination payable in accordance with the Company's normal payroll procedure, reduced (but not below zero) by the sum of (x) all amounts paid by the Company to Employee as Base Salary prior to termination of employment for the times that Employee was unable to perform the services required of the Employee under this Agreement due to illness, accident or any other physical or mental incapacity which resulted in Employee's Disability and (y) all amounts that Employee is eligible to receive under any of the Company's standard short-term group disability insurance coverage provided pursuant to Section 10(a) hereof as a result of such illness, accident or any other physical or mental incapacity. To the extent that the Company has not reduced its payments to Employee to reflect such amount that Employee is eligible to receive under such short-term group disability coverage, Employee shall immediately remit to the Company such amount upon Employee's receipt thereof. Employee shall not be entitled to receive any other amount in respect of the Term Year in which termination occurs or in respect of any subsequent years. In lieu of terminating Employee pursuant to this Section 11(d), the Company may elect to put Employee on unpaid leave of absence for a period determined in the sole discretion of the Company, but in no event to exceed one year. If put on unpaid leave of absence, Employee shall be entitled to the same compensation to which Employee is entitled if Employee is terminated as set forth above and shall not be entitled to any further compensation except that Employee shall continue to maintain Employee's eligibility in all Company benefit plans (but only to the extent such continued eligibility is not prohibited pursuant to the terms of any such plan) provided that the Company shall have no responsibility to pay any premiums or other amounts on behalf of Employee with respect to any such plans. Notwithstanding anything contained herein to the contrary, if the Company elects to place Employee on unpaid leave of absence in lieu of terminating Employee pursuant to this Section 11(d), (i) the Company shall be entitled to subsequently terminate Employee's employment with the Company on the expiration of such leave of absence without any further monetary obligations to Employee and (ii) the Company shall have no obligation to reinstate Employee to active status unless the Company determines in its sole discretion that such reinstatement is in the best interests of both the Company and Employee. 527590.1 mhs\prg\mckell6.wpd\3-11-98 8 (e) In the event this Agreement is not renewed due to the Company giving Employee notice of non-renewal pursuant to Section 2 hereof, Employee shall be entitled to receive such severance payment or any other amount with respect to the Company's non-renewal of this Agreement as if such non-renewal were termination without cause hereunder. Non-renewal by Employee shall give rise to no right to receive any severance payment hereunder. (f) If Employee's employment hereunder terminates for any reason during a Term Year, Employee will be paid within sixty (60) days of termination for the value of all unused vacation time which accrued during the calendar year in which such termination occurs up to the date of termination in accordance with the Company's policies. (g) If Employee fails to observe or perform any of Employee's duties and obligations under Sections 6(a), 6(b), 6(c), 6(d), 8 or 9 of this Agreement, Employee shall forfeit any right to payment under Section 11 of any amounts other than Base Salary prorated through the date of termination and upon the Company's demand for same, shall repay to the Company any amounts paid pursuant to Section 11 to Employee after the date of termination of Employee's employment with the Company (other than such Base Salary). 12. Deferred Compensation. (a) Annual Deferred Compensation Credit. An account ("Employee's Account") will be maintained on the books and records of the Company for the purposes hereinafter provided. Subject to the exceptions set forth below, Employee's Account shall be increased each Term Year by an amount equal to the sum of the Salary Deferred Compensation Credit (as defined in the Compensation Agreement) for such Term Year, and Ten Thousand and No/100 ($10,000.00) Dollars (the "Company Deferred Compensation Credit"); provided that for the initial Term Year the Salary Deferred Compensation Credit and the Company Deferred Compensation Credit shall each be prorated based on the ratio of the number of days in the initial Term Year commencing on the Effective Date to the number of days in the calendar year in which the Effective Date falls. Employee's Account shall also be credited from and after the date hereof with an amount computed like interest on the credit balance of Employee's Account at the Prime Rate (as hereinafter defined). For these purposes, the Salary Deferred Compensation Credit and all interest so accrued on the credit balance of Employee's Account shall be credited to Employee's Account as of the end of each month of each Term Year. In the event of the termination of Employee's employment hereunder prior to the end of any Term Year for any reason other than due to (a) termination by the Company without cause as a result of Employee's position with the Company being eliminated or combined with another position, or (b) Employee's death, Disability or Retirement (as defined below), no credits shall be made to Employee's Account with respect to a Company Deferred Compensation Credit for such Term Year. In the event of termination of Employee's employment hereunder during any Term Year due to (a) termination by the Company without cause as a result of Employee's position with the Company being eliminated or combined with another position, or (b) Employee's death, Disability or Retirement, a partial credit shall be made to Employee's Account with respect to a Company Deferred Compensation Credit for such Term Year prorated based on the ratio of the number of days in such Term Year that Employee was an employee of the Company to the number of days 527590.1 mhs\prg\mckell6.wpd\3-11-98 9 in the calendar year in which such termination due to death, Disability or Retirement occurs. The Company Deferred Compensation Credit shall be credited to Employee's Account as of December 31 of each Term Year unless Employee's employment hereunder terminates due to (a) termination by the Company without cause as a result of Employee's position with the Company being eliminated or combined with another position, or (b) Employee's death, Disability or Retirement, in which case the Company Deferred Compensation Credit for Employee's final year of employment shall be credited to Employee's Account as of the last day of the month within which Employee's employment with the Company is terminated. The Company shall in all events determine (in its sole and absolute discretion) whether Employee's employment hereunder has been terminated as a result of Employee's position with the Company being eliminated or combined with another position. As used in this Agreement, the term "Prime Rate" means the rate publicly announced from time to time by NationsBank, N.A. (South), Atlanta, Georgia, as its "prime rate." (b) Vesting. The provisions of this Section 12(b) shall determine the portion of Employee's Account which is vested and eligible for payment in accordance with Section 12(c) hereof. (i) General Vesting Rule. Employee shall be immediately vested in the portion of Employee's Account attributable to all Salary Deferred Compensation Credits (as defined in the Compensation Agreement) and, subject to Section 12(b)(iii), interest credited with respect thereto (as determined pursuant to Section 12(a) hereof). Subject to the other provisions of this Section 12, Employee's right to the portion of Employee's Account attributable to each Company Deferred Compensation Credit and all interest credited with respect thereto (as determined pursuant to Section 12(a) hereof) will vest as follows: Date: Total Amount Vested: As of December 31, 1997 10% As of December 31, 1998 20% As of December 31, 1999 30% As of December 31, 2000 40% As of December 31, 2001 50% As of December 31, 2002 60% As of December 31, 2003 70% As of December 31, 2004 80% As of December 31, 2005 90% As of December 31, 2006 100% (ii) Termination Due to Death, Disability or Retirement. In the event of termination of Employee's employment hereunder due to death, Disability or Retirement (as defined below), then notwithstanding anything to the contrary in Section 12(b)(i) hereof, Employee, in the event of Disability or Retirement, or Employee's Beneficiary, in the event of Employee's death, shall be vested in the entire balance of Employee's Account (including any Company Deferred Compensation Credit credited to Employee's account as of the last day of the 527590.1 mhs\prg\mckell6.wpd\3-11-98 10 month within which Employee's employment with the Company is terminated, as provided in Section 12(a)). For purposes hereof, Retirement shall mean Employee's resignation of employment with the Company on or after Employee's sixtieth (60th) birthday and following at least ten (10) years of full time employment with the Company. (iii) Termination for Cause. Upon the termination of Employee's employment hereunder for Cause (as defined in Section 14(a) hereof), notwithstanding anything to the contrary in Section 12(b)(i) hereof, Employee shall be vested in the Salary Deferred Compensation Credit in Employee's Account as of the end of the month preceding such termination or resignation but shall not be vested in any portion of the Company Deferred Compensation Credit, regardless of whether or not previously vested, or in any interest accrued on either the Salary Deferred Compensation Credit or the Company Deferred Compensation Credit. (iv) Termination by the Company Without Cause. If Employee's employment hereunder is terminated by the Company without cause, then notwithstanding anything to the contrary in Section 12(b)(i) hereof, Employee's right to each Company Deferred Compensation Credit and all interest credited with respect thereto (as determined pursuant to Section 12(a) hereof) will vest for the Term Year within which such termination occurs by an additional percentage equal to ten percent (10%) multiplied by a fraction, the numerator of which is the number of days in such Term Year that Employee was an employee of the Company and the denominator of which is the number of days in the calendar year in which Employee's employment hereunder is terminated by the Company. (v) No Further Credits. Except as otherwise expressly provided for above, upon Employee's termination of employment hereunder, no further increase in the vested balance shall be made to Employee's Account. (c) Payments Following Termination of Employment. (i) Termination. In the event of termination of Employee's employment hereunder for any reason, Employee (or, in the event of Employee's death, Employee's Beneficiary) shall receive a payment equal to the portion of the Credit Balance of Employee's Account which is vested in accordance with Section 12(b) hereof within sixty (60) days after the earlier to occur of Employee's death, or such termination of Employee's employment. (ii) Forfeiture of Balance of Employee's Account. The portion of Employee's Account which is not vested in accordance with Section 12(b) hereof following termination of Employee's employment hereunder shall be forfeited and Employee shall not be entitled to any payment with respect thereto. (d) Beneficiary. Employee shall have the right to designate a beneficiary ("Beneficiary") under this Agreement who shall succeed to Employee's right to receive payments with respect to this Section 12 hereof in the event of Employee's death. In the event Employee fails to designate a Beneficiary or a Beneficiary dies without Employee's designation of a 527590.1 mhs\prg\mckell6.wpd\3-11-98 11 successor Beneficiary, then for all purposes hereunder the Beneficiary shall be Employee's estate. No designation of Beneficiary shall be valid unless in writing signed by Employee, dated and delivered to the Company. Beneficiaries may be changed by Employee without the consent of any prior Beneficiary. (e) Rights Unsecured; Unfunded Plan; ERISA. (i) The Company's obligations arising under this Section 12 hereof to pay benefits to Employee or Employee's Beneficiary constitute a mere promise by the Company to make payments in the future in accordance with the terms hereof and Employee and Employee's Beneficiary have the status of a general unsecured creditor of the Company. Neither Employee nor Employee's Beneficiary shall have any rights in or against any specific assets of the Company. (ii) It is the intention of the Company and Employee that the Company's obligations under this Section 12 hereof be unfunded for income tax purposes and for purposes of Title I of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"). (iii) The Company and Employee shall treat its obligations under this Section 12 hereof as maintained for a select group of management or highly compensated employees exempt from Parts 2, 3 and 4 of Title I of ERISA. The Company shall comply with the reporting and disclosure requirements of Part 1 of Title I of ERISA in accordance with U.S. Department of Labor Regulation ss.2520.104-23. (f) Nonassignability. The rights Employee and Employee's Beneficiary to payments pursuant to this Section 12 hereof are not subject in any manner to anticipation, alienation, sale, transfer, assignment, pledge, encumbrance attachment, or garnishment by creditors of Employee or Employee's Beneficiary. 13. Remedies. (a) Employee acknowledges and agrees that, by virtue of the duties and responsibilities attendant to Employee's employment by the Company and the special knowledge of the Company's and its Affiliates' affairs, business, clients and operations that Employee has and will have as a consequence of such employment, irreparable loss and damage will be suffered by the Company and its Affiliates if Employee should breach or violate any of the covenants and agreements contained in Sections 6, 7, 8, or 9 hereof; and Employee further acknowledges and agrees that each of such covenants is reasonably necessary to protect and preserve the Company and its Affiliates. Employee, therefore, agrees and consents that, in addition to any other remedies available to it, the Company shall be entitled to specific performance by temporary as well as permanent injunction to prevent a breach or contemplated breach by Employee of any of the covenants or agreements contained in such Sections. (b) The existence of any claim, demand, action or cause of action that Employee may have against the Company, whether predicated upon this Agreement or otherwise, shall not 527590.1 mhs\prg\mckell6.wpd\3-11-98 12 constitute a defense to the enforcement by the Company of any of the covenants contained in Sections 6, 7, 8, or 9 hereof. (c) Nothing contained in this Agreement shall limit, abridge or modify the rights of the parties under applicable trade secret, trademark, copyright or patent law or under the laws of unfair competition. (d) In the event a court of competent jurisdiction determines that Employee has breached any of the foregoing covenants contained in Sections 6, 7, 8, or 9 hereof, Employee shall pay all costs of enforcement of the foregoing covenants, including, but not limited to, court costs and reasonable attorney's fees. 14. Termination. (a) This Agreement may be terminated by the Company for "cause" upon delivery of notice of termination to Employee. As used herein, "cause" shall mean (i) fraud, dishonesty, gross negligence, willful misconduct, commission of a felony or an act of moral turpitude, or (ii) engaging in activities prohibited by Sections 6, 7, 8, or 9 hereof, or any other material breach of this Agreement. (b) Employee may, without cause, terminate this Agreement by giving to the Company thirty (30) days' written notice in the manner specified in Section 18 hereof and such termination shall be effective on the thirtieth (30th) day following the date of such notice or such earlier date as the Company shall specify. The Company may, without cause, terminate this Agreement by giving to Employee thirty (30) days' written notice in the manner specified in Section 18 hereof and such termination shall be effective on the thirtieth (30th) day following the date of such notice. At the option of the Company, Employee shall cease performing Employee's duties hereunder on such earlier date as the Company may specify in its notice of termination. (c) In the event of Employee's Disability, physical or mental, the Company shall have the right, subject to all applicable laws, including without limitation, the Americans with Disabilities Act ("ADA"), to terminate Employee's employment immediately. For purposes of this Agreement, the term "Disability" shall mean Employee's inability or expected inability (or a combination of both) to perform the services required of Employee hereunder due to illness, accident or any other physical or mental incapacity for an aggregate of ninety (90) days within any period of one hundred eighty (180) consecutive days during which this Agreement is in effect, as agreed by the parties or as determined pursuant to the next sentence. If there is a dispute between the Company and Employee or Employee's legal representative as to whether a Disability exists, then such issue shall be decided by a medical doctor selected by the Company and a medical doctor selected by Employee or Employee's legal representative (or, in the event that such doctors fail to agree, then in the majority opinion of such doctors and a third medical doctor chosen by such doctors). Each party shall pay all costs associated with engaging the medical doctor selected by such party and the parties shall each pay one-half (1/2) of the costs associated with engaging any third medical doctor. 527590.1 mhs\prg\mckell6.wpd\3-11-98 13 (d) In the event this Agreement is terminated, all provisions hereof relating to any actions, including those of payment or compliance with covenants, subsequent to termination shall survive such termination. 15. Successors and Assigns. This Agreement may not be assigned by Employee. This Agreement may be assigned by the Company to any Affiliate without the consent of Employee. The provisions of this Agreement shall be binding upon Employee's heirs and legal representatives. 16. Severability. In the event that one or more of the words, phrases, sentences, clauses, sections, subdivisions or subparagraphs contained herein shall be held invalid, this Agreement shall be construed as if such invalid portion had not been inserted, and if such invalidity shall be caused by the length of any period of time, the number or location of Clients, the size of any area, or the description of the duties of Employee set forth in any part hereof, such period of time, number or location of Clients, area, or description of duties, or any combination thereof, shall be considered to be reduced to a period, number, location, area or description which would cure such invalidity. 17. Submission to Jurisdiction. Except as otherwise expressly provided herein, this Agreement shall be governed by and construed under the laws of the State of Georgia. Employee hereby agrees to submit to the jurisdiction of the courts of the State of Georgia and the federal courts within the State of Georgia and hereby appoints the Secretary of State of the State of Georgia as agent for the purpose of receiving service of process in respect of any proceeding in connection herewith. The parties agree that notwithstanding anything contained herein to the contrary, the Company shall have the right to bring suit against Employee for any breach or threatened breach of Sections 6, 7, 8 or 9 of this Agreement and the enforcement of Section 6 (and the related remedies provisions set forth in Section 13 of this Agreement) shall be governed by and construed under the law of the state in which such suit is brought by the Company, and Employee hereby agrees to submit to the jurisdiction of the courts of the State of Georgia and of any state within which Employee resides or is alleged to be breaching any of Sections 6 through 9 of this Agreement and the federal courts within such states, provided, however, that in any suit brought in any state for purposes of enforcing any of Employee's covenants contained in Sections 6 through 9 of this Agreement, the substantive law of the State of Georgia shall govern all provisions hereof other than Sections 6, 13 and 17 of this Agreement. 18. Notices. Any notice to be given under this Agreement shall be given in writing and may be effected by personal delivery or by placing such in the United States certified mail, return receipt requested and addressed as set forth below, or as otherwise addressed as specified by the parties by notice given in like manner: 527590.1 mhs\prg\mckell6.wpd\3-11-98 14 If to Company: The Profit Recovery Group International I, Inc. 2300 Windy Ridge Parkway Suite 100 North Atlanta, Georgia 30339-8426 Attention: President If to Employee: At the address specified below Employee's signature. 19. Required Deductions or Withholdings. All amounts payable to Employee pursuant to the Employment Agreement and Compensation Agreement shall have deducted or withheld therefrom by the Company such amount or amounts as may be required to be so deducted or withheld pursuant to applicable federal, state or local laws. 20. Entire Agreement and Amendment. The Employment Agreement, the Compensation Agreement, the Plan and such other documents as may be referenced by such documents (the "Referenced Documents"), constitute the entire agreement of the parties hereto with respect to the subject matter hereof and, except as specifically provided herein or in the Compensation Agreement, the Plan and the Referenced Documents, supersedes all prior discussions, understandings and agreements among the parties hereto. Any such prior agreements shall, from and after the Effective Date, be null and void. This Agreement may not be changed orally, but only by an agreement in writing signed by the party against whom enforcement of any waiver, change, modification, extension or discharge is sought. Time is of the essence of this Agreement and each and every Section and subsection hereof. 21. Waiver. The waiver by one party of a breach of any provision of this Agreement by the other party shall not operate or be construed as a waiver of any subsequent breach of the same or any other provision by the other party. 22. Authorization. The Company represents and warrants to Employee that this Agreement has been authorized and approved by all necessary corporate actions. 23. Affiliates. As used herein, "Affiliates" shall mean PRGX, and all entities, whether now or hereafter existing, 51% or more of the outstanding capital stock of which is owned by any combination of the Company and/or any Affiliate and which are engaged in substantially the same business as the Business of the Company regardless of the industry segment of its Clients and/or which provide services or employees to the Company or any Affiliate in connection with the operations thereof. 24. Counterparts. This Agreement may be executed in one or more counterparts, each of which shall be deemed an original and together which shall constitute one and the same instrument. 25. Pronouns. All personal pronouns in this Agreement and the Compensation Agreement, whether used in the masculine, feminine or neuter gender shall include all other genders, and the singular shall include the plural and the plural shall include the singular. 527590.1 mhs\prg\mckell6.wpd\3-11-98 15 IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first written above. COMPANY: THE PROFIT RECOVERY GROUP INTERNATIONAL I, INC. By: S/ ------------------------------------------ David A. Brookmire, Senior Vice President- Human Resources EMPLOYEE: S/ --------------------------------------- (SEAL) Clinton McKellar, Jr. 2672 Birchwood Drive, N.E. Atlanta, GA 30305 527590.1 mhs\prg\mckell6.wpd\3-11-98 16 COMPENSATION AGREEMENT THIS COMPENSATION AGREEMENT ("Agreement") is made this 12th day of February, 1998 effective as of June 16, 1997 (the "Effective Date"), by and between THE PROFIT RECOVERY GROUP INTERNATIONAL I, INC., a Georgia corporation (the "Company") and CLINTON McKELLAR, JR., a resident of the State of Georgia (the "Employee"). W I T N E S S E T H: WHEREAS, the parties hereto are party to that certain Employment Agreement, dated the date hereof and effective as of the Effective Date (the "Employment Agreement") whereby the Company employs Employee as Senior Vice President, General Counsel and Secretary of the Company and Employee accepts such employment in accordance with the terms thereof; and WHEREAS, the Employment Agreement provides that the compensation payable to Employee shall be as set forth herein (any terms capitalized but not otherwise defined herein shall have the meanings given to them in the Employment Agreement). NOW, THEREFORE, in consideration of the foregoing and of the mutual promises and covenants contained herein and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties agree as follows: 1. Compensation. For services rendered by Employee under the Employment Agreement during the term thereof, Employee shall be entitled to receive the following compensation, subject to the terms hereof, provided that Base Salary (as defined below) may be reviewed annually and modified by the Company in writing prior to the commencement of any Term Year and the Bonus (as defined below) may be modified in accordance with the terms hereof: (a) Base Salary. One Hundred Fifteen Thousand and No/100 ($115,000.00) Dollars on an annual basis ("Base Salary") shall be payable in accordance with the Company's customary payroll procedures. For purposes of this Agreement, the term "Adjusted Base Salary" shall mean and refer to the sum of Employee's Base Salary and Ten Thousand and No/100 ($10,000.00) Dollars (such Ten Thousand and No/100 ($10,000.00) Dollars, together with interest accrued thereon as hereinafter provided, is hereinafter referred to as the "Salary Deferred Compensation Credit"). Employee's Salary Deferred Compensation Credit shall not be paid to Employee but such amount shall instead be deferred and credited to Employee's Account (as defined in Section 12(a) of the Employment Agreement) as deferred compensation in accordance with Section 12 of the Employment Agreement. In the event of termination of Employee's employment under the Employment Agreement during any Term Year due to (a) termination by the Company without cause as a result of Employee's position being eliminated or combined with another position (as determined by the Company in its sole discretion), or (b) Employee's death, Disability or Retirement (as such terms are defined in the Employment Agreement), a prorated 527587.1 mhs\prg\McKellC5.wpd\3-11-98 portion of the Salary Deferred Compensation Credit shall be credited to Employee's Account in respect of the month in which such termination occurs based upon the ratio of the number of days in such month that Employee was an Employee of the Company to the total number of calendar days in such month and no further credit shall be made for any subsequent period. In the event of termination of Employee's employment under the Employment Agreement for any reason other than as set forth in the immediately preceding sentence, no portion of the Salary Deferred Compensation Credit shall be credited to Employee's Account in respect of the month in which such termination occurs or any subsequent period, and the amount that would have otherwise been credited to Employee's Account pursuant to the immediately preceding sentence in respect of the month in which such termination occurs will instead be paid to Employee as additional Base Salary. (b) Bonus. An annual bonus ("Bonus") in an amount determined and payable as provided herein for each Term Year during the term of the Employment Agreement; provided, however, that Employee shall be entitled to a Bonus if certain Performance Goal Attainment Measures (as set forth in Exhibit 1 hereto) are achieved by Employee and the Company. The amount of any Bonus will depend on which Performance Goal Payout Level (as defined in Exhibit 1 hereto) Employee and the Company have attained. On the date hereof, the Performance Goal Attainment Measures and related provisions applicable to Employee hereunder are set forth in the "Incentive Summary" attached as Exhibit 1 hereto, which may be superseded by the terms of any subsequent Incentive Summary which may be prepared and delivered to Employee by the Company. Said Exhibit 1, together with the Company records referenced therein, are hereby incorporated herein by reference and any such subsequent Incentive Summary shall automatically be incorporated herein in lieu thereof upon its delivery to Employee. In the event the Effective Date is a date other than January 1, then Employee's Base Salary, Adjusted Base Salary, Salary Deferred Compensation Credit and Bonus for the initial Term Year shall be prorated based on the ratio of the number of days in the initial Term Year commencing on the Effective Date to the number of days in the calendar year in which the Effective Date falls. (c) Automobile Allowance. For each full month of each Term Year, Employee shall be provided an automobile allowance equal to one-twelfth (1/12) of Ten Thousand and No/100 ($10,000.00) Dollars, payable in accordance with the Company's customary procedures, which amount shall be reviewed annually and may be modified in writing prior to the commencement of any Term Year. 2. Termination. This Agreement shall terminate effective upon termination of the Employment Agreement; provided, however, that all provisions hereof relating to any actions, including those of payment, subsequent to termination shall survive such termination. 3. Incorporation by Reference. The provisions of the Employment Agreement are hereby incorporated herein by reference. 527587.1 mhs\prg\McKellC5.wpd\3-11-98 -2- 4. Successors and Assigns. This Agreement may not be assigned by Employee. In the event that the Employment Agreement is assigned by the Company, this Agreement shall also be assigned to the assignee thereof. 5. Counterparts. This Agreement may be executed in one or more counterparts, each of which shall be deemed an original and together which shall constitute one and the same instrument. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first written above. COMPANY: THE PROFIT RECOVERY GROUP INTERNATIONAL I, INC. By: S/ ------------------------------------------- David A. Brookmire, Senior Vice President - Human Resources EMPLOYEE: S/ ---------------------------------- (SEAL) Clinton McKellar, Jr. 527587.1 mhs\prg\McKellC5.wpd\3-11-98 -3- Exhibit 1 1997 PRG Executive Incentive Plan Summary Annual Payout Objective o To motivate and reward outstanding performance, and to reinforce and support PRG's strategic plans and financial goals. o Attract and retain highly talented associates by offering a competitive total compensation package. Plan Payouts o Incentive awards under the plan will be based upon year-to-date base salary earnings for the period January 1, 1997 - December 31, 1997. o Incentive plan measurements/goals and levels of payout are shown on the attached incentive summary. Also attached are definitions for each of the measurement categories. o One-fifth of the payout is attributable to meeting each of the four quarters' goals in each category of measurement, and one-fifth is attributable to meeting the annual goals for each category of measurement. o Incentive payments will be paid within 60 days following the end of the fiscal year. Participants must be actively employed in order to receive awards. Exceptions may be made in terminations due to retirement, disability, or death. o Participants must have satisfactory performance at the time payments are made to be eligible. Participants on performance plans are not eligible to receive payments. Part-Year Participation o If an associate becomes eligible for the PRG Executive Incentive Plan after January 1, 1997, he/she may be eligible for a prorated payout based on the date of entry into the Plan. o Prorated payouts will be based on year-to-date Adjusted Base Salary from the date of entry into the Plan. Entry into the Plan must be prior to October 1, 1997 for participation in the Plan during 1997. 527587.1 mhs\prg\McKellC5.wpd\3-11-98 -4- Management of the Plan o The plan is effective from January 1, 1997 through December 31, 1997. o Overall responsibility for the plan resides with the Chairman and Chief Executive Officer, Chief Financial Officer, and Senior Vice President Human Resources, and payments are subject to Board of Directors' approval. o Management reserves the right to amend the plan, with regard to participation, procedures, awards and any other provisions. This includes revision of financial targets in the event of business or organizational change deemed to warrant such action. 527587.1 mhs\prg\McKellC5.wpd\3-11-98 -5- 1997 Incentive Plan Measures - Executive Definitions of Categories A) EPS - Earnings per share of PRGX as recorded in quarterly/annual consolidated financial statements reported in the Company's quarterly 10Q and annual 10K. Measurements will be quarterly based upon threshold, target, and stretch quarterly goals, however, payouts on EPS will only be annual. B) Function Expenses - In order to control expenses, this ties to cost center budgets. Target achievement is measured on a quarterly basis, however, year end will have threshold, target, and stretch achievement levels. If expenses are at/under budget each quarter, 20% of target bonus is paid. At the end of the year, if at/under budget for: 2 quarters Threshold level is met 3 quarters Target level is met 4 quarters Stretch level is met All bonus payments relating to Function Expenses will be made annually. 527587.1 mhs\prg\McKellC5.wpd\3-11-98 -6- Attachment A Clinton McKellar, Jr. 1997 Incentive Summary Payout Levels (expressed as a percentage of Adjusted Base Salary) Threshold 15% Target 35% Stretch 50% Goal Attainment Measures Qtrly EPS 75% Qtrly Function Expenses (Legal) 25% 527587.1 mhs\prg\McKellC5.wpd\3-11-98 -7- DESCRIPTION OF 1998 COMPENSATION ARRANGEMENT BETWEEN MR. CLINTON MCKELLAR, JR. AND REGISTRANT The following describes certain compensation arrangements between the Registrant and Mr. McKellar for calendar year 1998. The Company has entered into an employment agreement with Mr. McKellar that currently expires June 15, 1998. The employment agreement provides for automatic one-year renewals upon the expiration of each year of employment, subject to prior notice of nonrenewal by the Board of Directors. For 1998, the Compensation Committee of the Board of Directors (the "Compensation Committee") set Mr. McKellar's annual base salary at $132,000 (effective March 1, 1998). Pursuant to Mr. McKellar's 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. McKellar options to purchase 10,000 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. McKellar, which amounts will vest over a ten-year period at 10% per year. Mr. McKellar 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. McKellar with certain other personal benefits. Upon termination, other than for cause or by voluntary resignation, Mr. McKellar will receive severance payments equal to 6 months' base salary and certain other personal benefits. Mr. McKellar has 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 his employment. EX-21.1 4 SUBSIDIARIES OF REGISTRANT SUBSIDIARIES OF REGISTRANT EXHIBIT 21.1 NAME OF SUBSIDIARY STATE OF INCORPORATION The Profit Recovery Group International I, Inc............ Georgia The Profit Recovery Group Asia, Inc....................... Georgia The Profit Recovery Group Canada, Inc..................... Georgia The Profit Recovery Group France, Inc..................... Georgia The Profit Recovery Group Mexico, Inc..................... Georgia The Profit Recovery Group U.K., Inc....................... Georgia The Profit Recovery Group Belgium, Inc.................... Georgia The Profit Recovery Group Australia, Inc.................. Georgia The Profit Recovery Group New Zealand, Inc................ Georgia The Profit Recovery Group Netherlands, Inc................ Georgia The Profit Recovery Group Germany, Inc. .................. Georgia The Profit Recovery Group South Africa, Inc............... Georgia PRG International Holding Company, Inc. .................. Georgia The Profit Recovery Group Singapore PTE Ltd............... (1) PRG France S.A. .......................................... (2) Financiere Alma S.A....................................... (2) Alma Intervention, S.A.................................... (2) B&F Associes, S.A.R.L..................................... (2) Club Affairs Alma, S.A.R.L................................ (2) ______________ (1) A Singapore private limited company and a wholly-owned subsidiary of The Profit Recovery Group Asia, Inc. (2) A French corporation -----END PRIVACY-ENHANCED MESSAGE-----