-----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, B30VF6QpbUCTWHvpPsK/pdjV4B6u8LaDvfHA/u6DJXUp8Z5sgjNLY2ZWgM49PYDV xPU22DHYr3zxhIhDSBVljw== 0000914062-02-000279.txt : 20020416 0000914062-02-000279.hdr.sgml : 20020416 ACCESSION NUMBER: 0000914062-02-000279 CONFORMED SUBMISSION TYPE: DEF 14A PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20020515 FILED AS OF DATE: 20020415 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PRG SCHULTZ 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: DEF 14A SEC ACT: 1934 Act SEC FILE NUMBER: 000-28000 FILM NUMBER: 02611454 BUSINESS ADDRESS: STREET 1: 2300 WINDY RIDGE PKWY STREET 2: STE 100 N CITY: ATLANTA STATE: GA ZIP: 30339-8426 BUSINESS PHONE: 7707793900 MAIL ADDRESS: STREET 1: 2300 WINDY RIDGE PKWY STREET 2: STE 100 NORTH CITY: ATLANTA STATE: GA ZIP: 30339-8426 FORMER COMPANY: FORMER CONFORMED NAME: PROFIT RECOVERY GROUP INTERNATIONAL INC DATE OF NAME CHANGE: 19960207 DEF 14A 1 prgdefproxy402.txt SCHEDULE 14A INFORMATION Proxy Statement Pursuant to Section 14(a) of the Securities Exchange Act of 1934 (Amendment No. ) Filed by the Registrant [X] Filed by a Party other than the Registrant [ ] Check the appropriate box: [ ] Preliminary Proxy Statement [ ] Confidential, for Use of the [X] Definitive Proxy Statement Commission Only (as permitted by [ ] Definitive Additional Materials Rule 14a-6(e)(2)) [ ] Soliciting Material Pursuant to ss.240.14a-12 PRG-SCHULTZ INTERNATIONAL, INC. (Name of Registrant as Specified In Its Charter) N/A ---------------------------------------- (Name of Person(s) Filing Proxy Statement if other than the Registrant) Payment of Filing Fee (Check the appropriate box): [X] No fee required. [ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11. 1) Title of each class of securities to which transaction applies: 2) Aggregate number of securities to which transaction applies: 3) Per unit price or other underlying value of transaction computed pursuant to Exchange Act Rule 0-11 (set forth the amount on which the filing fee is calculated and state how it was determined): 4) Proposed maximum aggregate value of transaction: 5) Total fee paid: [ ] Fee paid previously with preliminary materials. [ ] Check box if any part of the fee is offset as provided by Exchange Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid previously. Identify the previous filing by registration statement number, or the Form or Schedule and the date of its filing. 1) Amount Previously Paid: 2) Form, Schedule or Registration Statement No.: 3) Filing Party: 4) Date Filed: 1457308 [GRAPHIC OMITTED] PRG-SCHULTZ INTERNATIONAL, INC. 2300 WINDY RIDGE PARKWAY SUITE 100 NORTH ATLANTA, GA 30339-8426 --------------- NOTICE OF ANNUAL MEETING OF SHAREHOLDERS TO BE HELD MAY 15, 2002 --------------- TO THE SHAREHOLDERS OF PRG-SCHULTZ INTERNATIONAL, INC.: NOTICE IS HEREBY GIVEN that the Annual Meeting of Shareholders of PRG-SCHULTZ INTERNATIONAL, INC. ("PRG-Schultz" or the "Company") will be held at the Company's offices, 2300 Windy Ridge Parkway, Atlanta, Georgia 30339-8426, on May 15, 2002 at 9:00 a.m., for the following purposes: 1. To elect four (4) Class III directors to serve until the Annual Meeting of Shareholders held in 2005 or until their successors are elected and qualified. 2. To consider an amendment to the Company's Articles of Incorporation to provide that shareholders may only remove directors for cause. 3. To consider and act upon a shareholder proposal concerning the Company's Shareholder Protection Rights Agreement. 4. To consider an amendment to the Company's Stock Incentive Plan that increases by 1,750,000 shares the number of shares of the Company's common stock that may be granted under the Stock Incentive Plan pursuant to stock options, stock appreciation rights, and other stock awards. 5. To consider an amendment to the Company's Employee Stock Purchase Plan that increases by 1,500,000 shares the number of shares of the Company's common stock that may be purchased under the Employee Stock Purchase Plan. 6. To transact such other business as may properly come before the meeting or any adjournments thereof. The proxy statement dated April 16, 2002 is attached. Only record holders of the Company's common stock at the close of business on March 29, 2002 will be eligible to vote at the meeting. If you are not able to attend the meeting, please execute, complete, date and return the proxy in the enclosed envelope. If you attend the meeting, you may revoke the proxy and vote in person. By Order of the Board of Directors: JOHN M. COOK /s/ John M. Cook President and Chief Executive Officer Date: April 16, 2002 A copy of the Annual Report to Shareholders for the year ended December 31, 2001 is enclosed with this proxy statement. [GRAPHIC OMITTED] PRG-SCHULTZ INTERNATIONAL, INC. 2300 WINDY RIDGE PARKWAY SUITE 100 NORTH ATLANTA, GA 30339-8426 --------------- PROXY STATEMENT FOR ANNUAL MEETING OF SHAREHOLDERS APRIL 16, 2002 --------------- GENERAL INFORMATION This proxy statement is furnished in connection with the solicitation by the Board of Directors of PRG-Schultz International, Inc. ("PRG-Schultz" or the "Company") of proxies for use at the Annual Meeting of Shareholders to be held on May 15, 2002, at 9:00 a.m., at the Company's offices, 2300 Windy Ridge Parkway, Atlanta, Georgia 30339-8426. This proxy statement and the accompanying form of proxy are first being mailed to shareholders on or about April 16, 2002. The shareholder giving the proxy may revoke it at any time before it is exercised at the meeting by: (i) delivering to the Secretary of the Company a written instrument of revocation bearing a date later than the date of the proxy; (ii) duly executing and delivering to the Secretary a subsequent proxy relating to the same shares; or (iii) attending the meeting and voting in person; however, attendance at the meeting will not in and of itself constitute revocation of a proxy. Any proxy that is not revoked will be voted at the annual meeting in accordance with the shareholder's instructions. If a shareholder returns a properly signed and dated proxy card but does not mark any choices on one or more items, his or her shares will be voted in accordance with the recommendations of the Board of Directors as to such items. The proxy card gives authority to the proxies to vote shares in their discretion on any other matter properly presented at the annual meeting. The Company will pay all expenses in connection with the solicitation of proxies, including postage, printing and handling and the expenses incurred by brokers, custodians, nominees and fiduciaries in forwarding proxy material to beneficial owners. In addition to solicitation by mail, solicitation of proxies may be made personally or by telephone, facsimile or other means by directors, officers and employees of the Company and its subsidiaries. Directors, officers and employees of the Company will receive no additional compensation for any such further solicitation. The Company has retained Innisfree M&A Incorporated to assist in such solicitation. The fee to be paid such firm is not expected to exceed $10,000, plus reasonable out-of-pocket costs and expenses. Only shareholders of record of the Company's common stock at the close of business on March 29, 2002 (the "Record Date") are entitled to notice of, and to vote at, the annual meeting. On the Record Date, the Company had outstanding a total of 63,777,181 shares of common stock. Each share will be entitled to one vote, non-cumulative, on each matter to be considered at the annual meeting. A majority of the outstanding shares of common stock, present in person or represented by proxy at the annual meeting, will constitute a quorum for the transaction of business at the annual meeting. Abstentions and broker non-votes are counted for purposes of determining the presence or absence of a quorum for the transaction of business. Votes cast by proxy or in person at the annual meeting will be counted by the person or persons appointed by the Company to act as inspector(s) of election for the meeting. Prior to the meeting, the inspector(s) will sign an oath to perform their duties in an impartial manner and to the best of their abilities. The inspector(s) will ascertain the number of shares outstanding and the voting power of each of such shares, determine the shares represented at the meeting and the validity of proxies and ballots, count all votes and ballots and perform certain other duties as required by law. Nominees for election as directors will be elected by a plurality of the votes cast by the holders of shares entitled to vote in the election. Accordingly, the four nominees in Class III receiving the highest vote totals will be elected as directors of the Company at the annual meeting. It is expected that shares beneficially owned by current executive officers and directors of the Company, which in the aggregate represent approximately 25 percent of the outstanding shares of common stock, will be voted in favor of management's nominees for director, for the amendment to the Company's Articles of Incorporation, against the shareholder proposal concerning the Company's Shareholder Protection Rights Agreement (the "Shareholder Proposal"), for the amendment to the Company's Stock Incentive Plan, and for the amendment to the Company's Employee Stock Purchase Plan (the "ESPP"). With respect to election of directors, abstentions, votes "withheld" and broker non-votes will be disregarded and will have no effect on the outcome of the vote. Abstentions, votes "withheld" and broker non-votes will have the effect of a vote against the proposal to amend the Company's Articles of Incorporation. With respect to the Shareholder Proposal and with respect to the proposals to approve the amendments to the Stock Incentive Plan and ESPP, abstentions and broker non-votes will be disregarded and will have no effect on the outcome of the vote. There are no rights of appraisal or similar dissenters' rights with respect to any matter to be acted upon pursuant to this proxy statement. Assuming a quorum is present, any proposal properly presented at the meeting will be approved if the votes cast in favor of it exceed the votes cast against it, except in the case of the proposal to amend the Articles of Incorporation, which requires the affirmative vote of a majority of the Company's outstanding shares of common stock. RECOMMENDATION OF THE BOARD OF DIRECTORS The Board of Directors of the Company recommends a vote FOR the election of each of the nominees named below for election as director, FOR the proposal to amend the Company's Articles of Incorporation, AGAINST the Shareholder Proposal, FOR the proposal to approve the amendment to the Stock Incentive Plan, and FOR the proposal to approve the amendment to the ESPP. ELECTION OF DIRECTORS The Company currently has 13 directors. The Board is divided into three classes of directors, designated as Class I, Class II and Class III. The classes serve staggered three-year terms. Shareholders annually elect directors to serve for the three-year term applicable to the class for which such directors are nominated or until their successors are elected and qualified. At the annual meeting, shareholders will be voting to elect four directors to serve as Class III directors. The terms of Arthur N. Budge, Jr., Thomas S. Robertson and Jackie M. Ward, currently serving as Class III directors, will expire at the annual meeting, and they are nominees for election as directors at the annual meeting. The Board has also nominated N. Colin Lind to serve as a Class III director. Fred W.I. Lachotzki currently serves as a Class III director but is not standing for reelection at the annual meeting. The proxy holders intend to vote FOR election of all the nominees named below as directors of the Company, unless otherwise specified in the proxy. Those directors of the Company elected at the annual meeting to be held on May 15, 2002 to serve as Class III directors will serve a three-year term or until their successors are elected and qualified. Each of the nominees has consented to serve on the Board of Directors if elected. Should any nominee for the office of director become unable to accept nomination or election, which is not anticipated, it is the intention of the persons named in the proxy, unless otherwise specifically instructed in the proxy, to vote for the election of such other person as the Board of Directors may nominate. Set forth below are the name, age and director class of each director nominee and director continuing in office following the annual meeting and the period during which each has served as a director. Class III Director Nominees NAME OF NOMINEE AGE CLASS OF DIRECTOR SERVICE AS DIRECTOR - --------------- --- ----------------- ------------------- Arthur N. Budge, Jr.(2).... 47 Class III Since January 2002 N. Colin Lind.............. 45 Class III -- Thomas S. Robertson(3)(4).. 59 Class III Since May 1999 Jackie M. Ward(3).......... 62 Class III Since May 1999 2 Directors Continuing in Office
NAME OF DIRECTOR AGE CLASS OF DIRECTOR TERM EXPIRES SERVICE AS DIRECTOR - ---------------- --- ----------------- ------------ ------------------- John M. Cook(1)...................... 59 Class I 2003 Since November 1990 John M. Toma(1)...................... 56 Class I 2003 Since November 1990 Jonathan Golden(1)(3)(4)............. 64 Class I 2003 Since November 1990 Nathan A. Levine(3).................. 65 Class I 2003 Since January 2002 Howard Schultz....................... 74 Class II 2004 Since January 2002 Stanley B. Cohen(1)(2)............... 58 Class II 2004 Since November 1990 Garth H. Greimann(2)................. 47 Class II 2004 Since April 1995 E. James Lowrey(2)................... 74 Class II 2004 Since December 1995 Andrew Schultz....................... 35 Class II 2004 Since January 2002 - ---------- (1) Member of the Executive Committee. (2) Member of the Audit Committee. (3) Member of the Compensation Committee. (4) Member of the Nominating Committee
Arthur N. Budge, Jr. has served as President and Chief Executive Officer of Five States Energy Company, an owner of a portfolio of oil and gas investments, since 1998, and as Chief Financial Officer since 1986. Since 1985, Mr. Budge has also served as President of Budge Financial, Inc., a company that provides clients with planning, forecasting and investment analysis services and asset management. In addition, Mr. Budge serves as a principal in several Blockbuster Video franchise limited partnerships and serves as a director of several private companies in which Mr. Budge and his clients have investments. Stanley B. Cohen is the President and sole director/shareholder of SBC Financial Corporation ("SBC") and until March 31, 1999, was the President and sole director/shareholder of Advisory Services, Ltd. ("ASL"). These companies provided certain financial consulting and investment services to the Company and certain of its executive officers until December 31, 1999. In addition, until December 31, 1998, Mr. Cohen was President of Capital Advisory Corporation, a financial advisory company. John M. Cook is President and Chief Executive Officer of the Company. Mr. Cook served as the Company's President from November 1990 through January 1998 and resumed this role in October 2000. Mr. Cook also served as Chairman of the Board from the founding of the Company in November 1990 until January 24, 2002. Mr. Cook serves as a director of CryoLife, Inc., a company engaged in cryopreservation of transplantable human tissue and development of complementary implantable products and technologies. Jonathan Golden, through his professional corporation, Jonathan Golden, P.C., a wholly owned professional corporation ("JGPC"), is a partner in the Atlanta, Georgia law firm of Arnall Golden Gregory LLP, which provides legal services to the Company. Mr. Golden's professional corporation provides the Company consulting services as well. Mr. Golden also serves as a director of SYSCO Corporation, a distributor of food and related products. Garth H. Greimann has served since 1989 in two management positions, most recently as Managing Director, with Berkshire Partners LLC, a private equity investment firm that manages six investment funds. Berkshire Partners LLC makes private equity and equity-related investments in established middle market companies. Nathan A. Levine serves as Chief Executive Officer of ETAN Industries, which he founded in 1977. ETAN owns Cable Management Associates, a multiple cable system operator serving over 55,000 subscribers, and Credit Protection Association, a company specializing in bad debt recovery for the cable television and video industry. N. Colin Lind has been with Blum Capital Partners L.P. ("Blum"), a strategic equity investment firm, since 1986. He is a Managing Partner for the firm responsible for $2.7 billion in assets under management. Mr. Lind serves as director of Haemonetics Corp., a manufacturer and marketer of automated blood processing systems; Kinetic Concepts, which manufactures and markets therapeutic products such as hospital beds, mattress overlays and medical devices; and Smarte Carte, a privately held company (where he is also Chairman). Blum and its affiliates beneficially own approximately 13.71 percent of the Company's common stock. E. James Lowrey served as Executive Vice President -- Finance and Administration of SYSCO Corporation from 1978 until his retirement in 1993 and was a director of SYSCO Corporation from 1981 to 1993. He currently serves as a director of Riviana Foods, Inc., a processor and distributor of rice and other food products. 3 Thomas S. Robertson is the Dean of the Goizueta Business School at Emory University, a position he assumed in July 1998. Prior to taking this position, he was a member of the faculty of the London Business School beginning in 1994, with his most recent position being Deputy Dean. Andrew Schultz served as Executive Vice President and a member of the Board of Directors of Howard Schultz & Associates International, Inc. ("HSA-Texas") from January 2000 until the Company acquired the business of HSA-Texas and certain of its affiliates in January 2002. At that time, he became an Executive Vice President and a director of the Company. Mr. Schultz held several positions at HSA-Texas during the period from 1990 to 1999, including the position of Senior Vice President and Chief Financial Officer beginning in March 1999 and the position of Vice President - Special Projects from 1996 to 1999. Howard Schultz was the founder of HSA-Texas and served as its Chairman from 1970 until the Company acquired the business of HSA-Texas in January 2002. At that time, he became the Chairman of the Board of the Company. John M. Toma was elected Vice Chairman of the Company in January 1997. Prior to that he was the Company's Executive Vice President -- Administration and had served in such capacity since 1992. Mr. Toma served as Senior Vice President -- Administration from 1990 to 1992. Jackie M. Ward is the Managing Director for Intec USA, a telecommunications systems company, and has held this position since January 2001. Prior to assuming her current position, Ms. Ward was the President and Chief Executive Officer of Computer Generation Incorporated, a provider of turn-key telecommunications systems products and data processing services that she co-founded in 1968. She serves as a director of BankAmerica Corporation, a banking and financial services company; Equifax, Inc., a provider of credit and payment information services; Flowers Foods, Inc., a producer of baked foods; Matria Healthcare, Inc., a provider of specialized home healthcare services; PTEK Holdings, Inc., a provider of enhanced communications and data services; Sanmina-SCI Corporation, a diversified electronics manufacturer; Trigon Healthcare, Inc., a managed healthcare company; and SYSCO Corporation, a distributor of food and related products. Fred W.I. Lachotzki, a director of the Company in 2001, will not stand for reelection at the annual meeting. Howard Schultz is the father of Andrew Schultz. No other family relationship exists among any of the directors and executive officers of the Company. Messrs. Howard Schultz, Andrew Schultz, Budge and Levine were first elected to the board as a condition to the closing of the acquisition of the business of HSA-Texas. This condition was contained in the asset acquisition agreement entered into with respect to the transaction. INFORMATION ABOUT THE BOARD OF DIRECTORS AND COMMITTEES OF THE BOARD MEETINGS OF THE BOARD OF DIRECTORS During 2001, there were eight meetings of the Board of Directors. Each incumbent director who was a director during 2001 attended more than 75 percent of the aggregate of all meetings of the Board of Directors and any committees on which that director served. DIRECTOR COMPENSATION The Company compensates its non-employee directors $20,000 per year for their service on the Board and any committee thereof. Directors are reimbursed for all out-of-pocket expenses, if any, incurred in attending Board and committee meetings. The Board of Directors has approved an automatic annual grant of options under the Company's Stock Incentive Plan to directors not employed by the Company to purchase from 2,500 to 7,500 shares of common stock; provided, however, that no grants will be made in any year unless the Company's fully diluted earnings per share (before business acquisitions and restructuring expenses) for such year shall have increased by at least 25 percent over the previous year. A 25 percent increase in the adjusted earnings per share will result in a grant of options to purchase 2,500 shares of common stock while each additional one percent increase in adjusted earnings per share will result in a grant of options to purchase an additional 200 shares of common stock, up to a maximum annual grant of options to purchase 7,500 shares of common stock. The per share option exercise price will be the closing price of the Company's common stock on The Nasdaq National Market on December 31 of the year of grant, 4 or if no sale of the common stock was made on that date, on the next preceding date on which there was such a sale. Automatic grants currently vest at 20 percent per annum, although any future grants are expected to vest at 25 percent per annum. Since the Company did not attain the minimum 25 percent increase in adjusted earnings per share in 2001 over 2000, no automatic grant of stock options was made to the non-employee directors for 2001. To offer additional compensation that is tied to future appreciation in the Company's common stock to nine outside directors, on January 24, 2002, the Company granted 10,000 options that were immediately vested to each of Ms. Ward and Messrs. Budge, Cohen, Golden, Greimann, Lachotzki, Levine, Lowrey and Robertson. The per share exercise price was the closing price as of the date of grant. Jonathan Golden, a director of the Company, provides consulting services to the Company through JGPC. Mr. Golden is the sole shareholder of JGPC. During 2001, the Company paid JGPC aggregate consulting fees of approximately $72,000. The Company currently pays JGPC a consulting fee of $6,000 per month. The consulting agreement may be terminated by either party for any reason upon not less than 30 days prior notice. Concurrently with the acquisition of the business of HSA-Texas on January 24, 2002, Howard Schultz became Chairman of the Board. The Company also entered into an employment agreement with Mr. Schultz that expires on January 24, 2004. Pursuant to his employment agreement, Mr. Schultz receives an annual base salary of $400,000, but is not eligible for a bonus. In addition, he received options to purchase 250,000 shares of the Company's common stock at an exercise price per share of $9.28, which was equal to the closing price of the Company's common stock on the closing date. These options vest over a four-year period at 25 percent per year. Mr. Schultz also is eligible to participate in the Company's employee benefit plans and other benefits pursuant to his employment agreement. Concurrently with the acquisition of the business of HSA-Texas on January 24, 2002, Andrew Schultz became an Executive Vice President of the Company. The Company also entered into an employment agreement with Mr. Schultz that expires on January 24, 2004. Pursuant to his employment agreement, Mr. Schultz receives an annual base salary of $240,000 and is eligible to receive a maximum bonus of up to 70 percent of his annual base salary. Mr. Schultz also is eligible to participate in the Company's employee benefit plans and other benefits pursuant to his employment agreement. Blum and its affiliates, who currently beneficially own approximately 13.71 percent of the Company's outstanding common stock, including stock obtainable upon conversion of convertible notes, purchased $40 million of the $125 million of notes issued in the Company's convertible notes offering in November and December 2001. These notes are currently convertible into 5,167,960 shares of common stock. Blum, in accordance with its contractual rights, has designated an observer to attend the Company's board meetings. Mr. Lind, a Managing Partner of Blum, is a nominee for election as a Class III director at the annual meeting. See "Ownership of Directors, Principal Shareholders and Certain Executive Officers" for additional stock ownership information. Following the termination of Mr. Lachotzki's term as a director, the Company expects to enter into an employment agreement with him. The agreement is expected to have a term of 18 months and to provide for aggregate compensation of $75,000 over its term. AUDIT COMMITTEE The Company's Audit Committee consists of four outside directors: Messrs. Budge, Cohen, Greimann and Lowrey. The Audit Committee met four times in 2001. The Audit Committee reviews the general scope of the Company's annual audit and the nature of services to be performed for the Company in connection therewith, acting as liaison between the Board of Directors and the Company's independent auditors. The Audit Committee also formulates and reviews various Company policies, including those relating to accounting practices and the internal control structure of the Company. In addition, the Audit Committee is responsible for recommending, reviewing and monitoring the performance of the Company's independent auditors. See "Report of the Audit Committee." 5 COMPENSATION COMMITTEE The Company's Compensation Committee consists of four directors: Messrs. Golden, Levine and Robertson and Ms. Ward. The Compensation Committee met four times in 2001. The Compensation Committee is responsible for reviewing and establishing the annual compensation for all executive officers, including the salary and the compensation package of each such officer, including incentive awards. The Compensation Committee also administers the Company's benefit plans, including the Stock Incentive Plan, the Executive Incentive Plan, the Management and Professional Incentive Plan and the ESPP; provided, however, that the Board of Directors has delegated all rights to determine awards of stock-based compensation to individuals who file reports pursuant to Section 16 of the Securities Exchange Act of 1934 (the "Exchange Act") to a subcommittee of the Compensation Committee consisting of Messrs. Levine and Robertson and Ms. Ward, each of whom is a "non-employee" director, as such term is defined in Rule 16b-3 promulgated pursuant to the Exchange Act and is an "outside" director, as such term is defined in the regulations promulgated pursuant to Section 162(m) of the Internal Revenue Code of 1986 (the "Code"). See "Report of the Compensation Committee on Executive Compensation." NOMINATING COMMITTEE The Company has a standing Nominating Committee of the Board of Directors consisting of three directors: Messrs. Golden, Lachotzki and Robertson. Mr. Lachotzki will not be standing for reelection at the annual meeting. The Nominating Committee did not meet in 2001. The Nominating Committee has the responsibility to consider and recommend nominees for the Board of Directors and to assess the performance of the Board. The Nominating Committee will consider nominees recommended by security holders to the extent that such security holders comply with the Company's advance notice Bylaw provisions. Notwithstanding anything to the contrary that is or may be set forth in any of the Company's filings under the Securities Act of 1933 or the Securities Exchange Act of 1934 that might incorporate Company filings, including this proxy statement, in whole or in part, the following Report of the Audit Committee and the Performance Graph shall not be incorporated by reference into any such filings. REPORT OF THE AUDIT COMMITTEE The Board of Directors maintains an Audit Committee comprised of four of the Company's outside directors. The Board of Directors and the Audit Committee believe that the Audit Committee's current member composition satisfies the rule of the National Association of Securities Dealers, Inc. ("NASD") that governs audit committee composition, including the requirement that audit committee members all be "independent directors" as that term is defined by NASD Rule 4200(a)(15). Mr. Budge was appointed to the Audit Committee on February 26, 2002, subsequent to the actions described in this report. The Audit Committee oversees the Company's financial process on behalf of the Board of Directors. Management has the primary responsibility for the financial statements and the reporting process, including the systems of internal controls. In fulfilling its oversight responsibilities, the Audit Committee reviewed and discussed the audited financial statements in the Company's 2001 Annual Report with management including a discussion of the quality, not just the acceptability, of the accounting principles, the reasonableness of significant judgments and the clarity of disclosures in the financial statements. The Board has adopted a written Audit Committee Charter. The Audit Committee reviewed and discussed with the Company's independent auditors, KPMG LLP, who are responsible for expressing an opinion on the conformity of the 2001 audited financial statements with accounting principles generally accepted in the United States of America, their judgments as to the quality, not just the acceptability, of the Company's accounting principles and such other matters as are required to be discussed with the Audit Committee under auditing standards generally accepted in the United States of America, including Statement on Auditing Standards No. 61. In addition, the Audit Committee has discussed with the independent auditors the auditors' independence from management and the Company, including the matters in the written disclosures and the letter from the independent auditors required by the Independence Standards Board, Standard No. 1. The Audit Committee discussed with the Company's independent auditors the overall scope and plans for their 2001 audit. The Audit Committee met with the independent auditors to discuss the results of their audit, their evaluation of the Company's internal controls and the overall quality of the Company's financial reporting. 6 In reliance on the reviews and discussions referred to above, the Audit Committee recommended to the Board of Directors (and the Board has approved) that the audited financial statements be included in the Company's Annual Report on Form 10-K for the year ended December 31, 2001 for filing with the Securities and Exchange Commission. The Audit Committee and the Board have also approved the selection of the Company's independent auditors. FEES PAID TO THE COMPANY'S INDEPENDENT AUDITORS FOR 2001 The Company incurred the following fees for services performed by KPMG LLP for 2001: Audit Fees Fees for the year 2001 audit and the review of Forms 10-Q in 2001 were approximately $435,000. Financial Information Systems Design and Implementation Fees KPMG LLP did not render any services or receive any payment from the Company related to financial information systems design and implementation for the year ended December 31, 2001. All Other Fees Aggregate fees billed for all other services rendered by KPMG LLP for the year ended December 31, 2001 were approximately $670,000, of which other audit related fees amounted to $334,000 and other services amounted to $336,000, consisting of $289,000 for international audit and tax services and $47,000 for other non-audit professional services. The Audit Committee has determined that the payments made to its independent accountants for non-audit services for 2001 are compatible with maintaining such auditors' independence. Management is responsible for planning the Company's financial reporting process and compliance of the consolidated financial statements with generally accepted accounting principles. The Company's independent auditors are responsible for auditing those financial statements. The Audit Committee necessarily must rely, without independent verification, on (a) management's representation that the financial statements have been prepared with integrity and objectivity and in conformity with accounting principles generally accepted in the United States of America, and (b) on the representations of the independent auditors included in their report on the Company's financial statements. AUDIT COMMITTEE E. James Lowrey, Chairman Arthur N. Budge, Jr. Stanley B. Cohen Garth H. Greimann REPORT OF THE COMPENSATION COMMITTEE ON EXECUTIVE COMPENSATION The Compensation Committee is composed entirely of directors who are not employed by the Company. The Committee considers and establishes compensation policies and approves benefit plans as well as specifically setting salary, annual incentive levels, and long-term incentive levels for the Chief Executive Officer and other members of executive management. Mr. Levine was appointed to the Compensation Committee on February 26, 2002, subsequent to the actions described in this report. 7 COMPENSATION PHILOSOPHY The Compensation Committee continually reviews and refines the Company's executive compensation programs. A high emphasis is placed on performance-based incentives. The Compensation Committee believes that having greater levels of each executive's compensation determined by performance-based incentives, and enhancing the incentives for exceptional performance, serves to greater align the executive's interests with those of the Company's shareholders. The following objectives were used by the Compensation Committee in designing the Company's 2001 executive compensation program. The compensation program must: o Attract, motivate and retain key executives; o Align key management and shareholder interests; and o Provide incentives that reward executive management performance only if the Company's performance meets planned results, and provide an enhanced incentive if performance exceeds such planned results, as part of the Company's pay for performance philosophy. EXECUTIVE COMPENSATION PROGRAM The 2001 executive compensation program consisted of base salary, annual incentives and long-term remuneration in the form of deferred compensation arrangements and non-qualified stock options. Base Salary In determining the appropriate base salary levels for 2001, the Compensation Committee considered several factors, including current industry practices, external market surveys of similarly sized companies and a review of peer group compensation. For 2001, base salaries were set by the Compensation Committee for members of executive management with the following factors in mind: (i) the fact that rapidly growing responsibilities and complexities are inherent in key positions, (ii) the need to retain key executives with industry knowledge within the Company, and (iii) the need to attract new talent. All of these factors were considered subjectively with no particular emphasis or weight given to any one factor. Annual Incentive Compensation The 2001 annual incentives for executive management pursuant to the Company's Management and Professional Incentive Plan included several performance criteria: Company pro forma earnings per share, Company revenues, Company operating income, functional expense control, cash collections and specific business or personal performance objectives. The Management and Professional Incentive Plan was designed to align pay more directly to financial results, with increases and decreases in incentive pay from year to year tied to financial targets achieved and missed, respectively. Components of the executive officers' annual incentive compensation were established by the Compensation Committee. The 2001 annual incentive compensation for all executive officers was based on Company pro forma earnings per share attainment and Company revenue. The 2001 annual incentives for each executive officer contained targets for each incentive component to ensure that no annual incentive compensation would be earned for substandard performance. Additionally, maximum limits were in effect for each incentive component pertaining to each executive officer. No incentive bonuses were awarded to any of the Named Executive Officers for 2001. Deferred Compensation The Company historically has provided, and continues to provide, non-qualified deferred compensation arrangements for certain executive officers. The purpose of these arrangements is to assist in the retention of these executives by allowing a portion of their total compensation to be deferred along with a full or partial matching obligation by the Company. In most instances, the matching obligation vests over a series of years of continuing employment with the Company. Each executive officer negotiated the deferred compensation component of his compensation package when he entered into his employment agreement with the Company. Mr. Cook does not have a deferred compensation element in his employment agreement. Since deferred compensation is accrued and paid in accordance with provisions of the related employment agreements, no additional determinations with respect to this compensation component are made by the Compensation Committee. 8 Other Long-Term Incentive Compensation The Company's shareholders approved an additional long-term incentive program through the adoption of the Company's Stock Incentive Plan. All executive officers have received option grants under the Stock Incentive Plan. The use of stock options is meant to align the interests of key executives and shareholders. All options granted to executive officers under the Stock Incentive Plan through the date of this proxy statement have been at fair market value on the date of the grant. Generally, option grants made before 2001 vest ratably over five years of continuous employment with the Company. Option grants made beginning in 2001 generally will vest ratably over four years of continuous employment with the Company. In 2001, the Compensation Committee elected to vest all options in the event of a change in control. The Compensation Committee grants options to key employees of the Company, based upon the following subjective factors: current position, level of performance, potential for future responsibilities and the number of vested and unvested options already held. The size of the grant is intended to create meaningful opportunities for stock ownership for the executive officers. All decisions with respect to stock compensation to executive officers are made by the Compensation Subcommittee, the members of which in 2001 were Mr. Robertson and Ms. Ward. In August 2000, Messrs. Cook, Toma and Perlberg agreed to the cancellation of options to purchase 480,000, 100,000 and 232,500 shares of common stock, respectively. They received no consideration for the cancellation, and the Company had no obligation to issue any options to them in the future. In March 2001, the Compensation Committee determined to make additional grants of options to Messrs. Cook, Toma and Perlberg to purchase 200,000, 135,000 and 150,000 shares, respectively. These additional grants were made in consideration of a number of factors, including the relative performance and duties of each individual, and taking into consideration their remaining option holdings subsequent to the cancellation. All options were granted at the closing price of the common stock on the Nasdaq National Market on the date of grant of $6.56. Compliance with Code Section 162(m) The maximum amount that an employer may claim as a compensation deduction with respect to certain employees in a given fiscal year, pursuant to Section 162(m) of the Code is $1.0 million, unless an exemption for performance-based compensation is met. The Compensation Committee believes it is unlikely that any executive officers of the Company will, in the near future, receive in excess of $1.0 million in aggregate compensation, other than those individuals with respect to whom the performance-based compensation exemption has been satisfied or severance payments are made. Compensation of Chief Executive Officer On March 20, 1996, Mr. Cook signed a revised employment agreement with the Company. This agreement currently expires in the year 2005, but provides for automatic one-year renewals upon expiration of each year of employment, such that it always has a five-year term, subject to prior notice of non-renewal by the Board of Directors. The Compensation Committee has approved an amendment to Mr. Cook's employment agreement that would reduce its term to three years. Under Mr. Cook's employment agreement, the Compensation Committee fixed the 2001 salary of Mr. Cook at $500,000. An annual incentive compensation arrangement pursuant to the Management and Professional Incentive Plan was established for Mr. Cook pursuant to which he was eligible to earn an annual cash incentive of up to 200 percent of his annual base salary if the Company achieved certain pro forma earnings per share goals for 2001. The target goal for 2001 was not met, and Mr. Cook did not earn a bonus for 2001. Mr. Cook's incentive option program under his employment agreement provided that option grants would be made under the Stock Incentive Plan if 2001 adjusted earnings per share exceeded the level achieved in 2000 by 30 percent or more. Since the Company's adjusted earnings per share did not exceed the level achieved in 2000, no stock options were granted to Mr. Cook for 2001 under Mr. Cook's incentive option program. The amendments that have been approved to Mr. Cook's employment agreement delete the provisions regarding the incentive option program. As a result, any future option grants to Mr. Cook will be made at the discretion of the Compensation Subcommittee. However, as discussed above, to offer Mr. Cook compensation that is tied to future appreciation in the Company's common stock, on March 26, 2001, the Company granted 200,000 non-qualified stock options to Mr. Cook at an 9 exercise price of $6.56 per share, 50 percent of which were immediately vested, with the remainder vesting 50 percent on each of the first two anniversaries of the grant. The per share exercise price was the closing price as of the date of grant. COMPENSATION COMMITTEE SUBCOMMITTEE Jonathan Golden, Chairman Thomas S. Robertson Thomas S. Robertson Jackie M. Ward Jackie M. Ward EXECUTIVE COMPENSATION The following table sets forth the compensation paid or accrued by the Company to the Chief Executive Officer and the other four most highly paid executive officers of the Company in 2001 who were executive officers at December 31, 2001 (the "Named Executive Officers"). The information presented is for the years ended December 31, 2001, 2000 and 1999. SUMMARY COMPENSATION TABLE
LONG-TERM COMPENSATION ANNUAL COMPENSATION (1) -------------------------- ---------------------------------------------- RESTRICTED SECURITIES SALARY BONUS OTHER ANNUAL STOCK UNDERLYING ALL OTHER NAME AND POSITION YEAR ($)(2)(3) ($)(3)(4) COMPENSATION($) AWARDS($)(5) OPTIONS(#)(6) COMPENSATION($)(7) - ----------------- ------ ------------- ------------- ------------------ ---------------------------- ------------------ John M. Cook.............. 2001 $ 500,000 $ -- $ -- $ -- 200,000 $ 9,974 President 2000 484,617 -- -- -- -- 9,724 and Chief Executive Officer 1999 405,782 452,300 -- -- 300,000 900 John M. Toma.............. 2001 400,000 -- -- -- 150,000 66,750 Vice Chairman 2000 388,461 -- -- -- -- 66,500 1999 333,840 147,672 -- -- 150,000 55,900 Mark C. Perlberg (8)...... 2001 350,962 98,313 -- -- 210,000 25,000 Executive Vice President 2000 293,846 -- -- 336,875 100,000 25,000 and Chief Operating Officer Donald E. Ellis, Jr. (9).. 2001 300,000 -- -- -- 1,467 Executive Vice President- 2000 158,077 213,166 -- -- 250,000 105,634 Finance, Chief Financial 1999 216,058 129,250 -- -- 30,000 26,446 Officer and Treasurer Robert G. Kramer.......... 2001 262,692 -- -- -- 25,000 25,000 Executive Vice President 2000 247,692 -- -- 48,125 15,000 25,000 and Chief Information 1999 216,154 90,179 -- -- 30,000 25,000 Officer
- ---------------- (1) The compensation described in this table does not include medical, group life insurance or other benefits received by the Named Executive Officers that are available generally to all salaried employees of the Company, and certain perquisites and other personal benefits, securities or property received by the Named Executive Officers that do not exceed the lesser of $50,000 or 10 percent of any such officer's salary and bonus disclosed in this table. (2) Includes contributions made by the Named Executive Officers to the Company's 401(k) Plan during the years presented. (3) Includes amounts that the Named Executive Officers have elected to defer under their respective deferred compensation programs. (4) Includes $59,000 retention bonus, $145,833 sign-on bonus and $8,333 prorated minimum bonus for Mr. Ellis for 2000 and payment of a sign-on bonus paid to Mr. Perlberg in 2001 as of the first anniversary of his employment with the Company. Mr. Ellis waived his right to a $50,000 minimum bonus for 2001. He received no consideration for the waiver; however, the Company made a $35,000 donation to a charitable entity designated by Mr. Ellis. (5) Messrs. Perlberg and Kramer received awards of 35,000 shares and 5,000 shares, respectively, of restricted stock on August 14, 2000. The shares awarded to Mr. Perlberg vest ratably over five years of continued employment with the Company. The shares awarded to Mr. Kramer vest 100 percent August 14, 2005. The restricted shares awarded to Messrs. Perlberg and Kramer were the only shares of restricted stock held by any of the Named Executive Officers on December 31, 2001. At December 31, 2001, 10 the unvested shares of restricted stock held by Messrs. Perlberg and Kramer were valued at, $228,200 and $40,750, respectively. Messrs. Perlberg and Kramer are entitled to receive any dividends on the restricted shares. (6) Does not include non-qualified stock options granted under the Stock Incentive Plan on January 24, 2002 to Messrs. Cook (options to purchase 200,000 shares), Toma (options to purchase 100,000 shares), Perlberg (options to purchase 100,000 shares) and Kramer (options to purchase 10,000 shares). Each option grant has a five-year term. The grants to Messrs. Toma and Kramer vested 100 percent on the date of grant. The grants to Messrs. Cook and Perlberg will vest 25 percent on each of the first four anniversaries of such grant. The exercise price of all grants is equal to the fair market value of the common stock on the date of grant. (7) Consists of: (a) Premiums for supplemental term life insurance paid by the Company on behalf of Mr. Cook -- $8,224 in 2001 and 2000; Mr. Ellis -- $1,467 in 2001, $1,468 in 2000 and $1,446 in 1999. (b) Annual contributions by the Company to the deferred compensation programs for the Named Executive Officers: DEFERRED COMPENSATION 2001 2000 1999 -------- -------- --------- John M. Cook............... $ -- $ -- $ -- John M. Toma............... 65,000 65,000 55,000 Mark C. Perlberg........... 25,000 25,000 -- Donald E. Ellis, Jr........ -- -- 25,000 Robert G. Kramer........... 25,000 25,000 25,000 (c) Annual matching contributions to the Company's 401(k) Plan made by the Company on behalf of Messrs. Cook and Toma in 2001 -- $1,750 each, in 2000 -- $1,500 each and in 1999 -- $900 each. (d) Severance payments to Mr. Ellis for 2000 of $104,166. See "--Employment Agreements." (8) Mr. Perlberg joined the Company in 2000. (9) Mr. Ellis served as Senior Vice President, Chief Financial Officer and Treasurer of the Company from January through July 19, 1999. Mr. Ellis subsequently rejoined the Company as its Executive Vice President, Chief Financial Officer and Treasurer as of October 26, 2000. OPTION GRANTS TABLE The following table sets forth certain information regarding options granted to the Named Executive Officers during the year ended December 31, 2001. No separate stock appreciation rights were granted during 2001. STOCK OPTION GRANTS IN LAST FISCAL YEAR
POTENTIAL REALIZABLE NUMBER OF PERCENT OF VALUE AT ASSUMED SECURITIES TOTAL ANNUAL RATES OF STOCK UNDERLYING OPTIONS EXERCISE PRICE APPRECIATION FOR OPTIONS GRANTED TO OR BASE OPTION TERM GRANTED EMPLOYEES PRICE EXPIRATION ----------------------- NAME (#)(1) IN 2001 ($/SH) DATE 5%($) 10%($) ---- ---------- ---------- -------- ---------- ----------- ---------- John M. Cook (2)................ 200,000 13.9% $ 6.56 3/26/06 $362,481 $800,989 John M. Toma (2)................ 150,000 10.4% 6.56 3/26/06 271,861 600,742 Mark C. Perlberg (2)............ 135,000 9.4% 6.56 3/26/06 244,675 540,668 Mark C. Perlberg................ 75,000 5.2% 11.46 6/29/06 237,464 524,733 Donald E. Ellis, Jr. ........... -- -- -- -- -- -- Robert G. Kramer................ 25,000 1.7% 6.98 5/14/06 48,211 106,534
- ---------- (1) Unless otherwise footnoted, options are non-qualified options granted under the Stock Incentive Plan. All options have five-year terms with 25 percent of the options vesting and becoming exercisable on each of the first four anniversaries of the date of grant; provided, however, that all options granted under the Stock Incentive Plan will vest automatically upon the occurrence of certain events of change of control. (2) These options vest as follows: 50 percent of the options became exercisable on the grant date; the remaining shares vest ratably on each of the first and second anniversaries of the date of grant. 11 OPTION EXERCISES AND YEAR-END VALUE TABLE None of the Named Executive Officers exercised stock options or held or exercised SARs during 2001. The following table sets forth certain information regarding unexercised options held at year-end by each of the Named Executive Officers.
AGGREGATED OPTION EXERCISES IN 2001 AND OPTION VALUES AT DECEMBER 31, 2001 NUMBER OF SECURITIES VALUE OF UNEXERCISED SHARES UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS AT ACQUIRED OPTIONS AT FISCAL YEAR-END FISCAL YEAR-END ON VALUE (#) ($)(1) EXERCISE REALIZED ---------------------------- --------------------------- NAME (#) ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE ---- --------- --------- ------------- ------------- ------------ -------------- John M. Cook............................ -- $ -- 539,291 125,999 $342,507 $ 158,750 John M. Toma............................ -- -- 225,000 75,000 241,567 119,062 Mark C. Perlberg........................ -- -- 67,500 142,500 107,156 107,156 Donald E. Ellis, Jr..................... -- -- 158,333 91,667 607,603 351,772 Robert G. Kramer........................ -- -- 75,000 52,500 0 29,250 - ----------
(1) Calculated based on a fair market value of $8.15 per share of common stock at December 31, 2001, less the applicable exercise prices. TEN-YEAR OPTION REPRICINGS (This table heading and the column headings below use the terms "repricing" or "repriced" as required by applicable regulation. However, as described in footnote (1) below and in the Compensation Committee Report, the cancellations and subsequent option issuances were not traditional repricings, and the Company does not consider them to be repricings since the cancellations and subsequent issuances were in no way linked. These transactions are not required to be accounted for as repricings.)
Length of original Securities option term underlying Market Price remaining number of of stock at date of options at time of Exercise price at repricing or repriced or repricing or time of repricing New exercise amendment Name Date (1) amended (#)(1)(2) amendment ($) or amendment ($) price ($)(2) (in months) - ------------------------- ----------- ----------------- -------------- ---------------- ----------- ------------- John M. Cook.......... 3/26/01 180,000 $6.56 $24.96 --- 92 John M. Cook.......... 3/26/01 300,000 $6.56 $26.56 --- 104 John M. Toma.......... 3/26/01 82,500 $6.56 $24.96 --- 92 John M. Toma.......... 3/26/01 150,000 $6.56 $26.56 --- 104 Mark C. Perlberg...... 3/26/01 100,000 $6.56 $28.77 --- 106.5 James L. Dinkins(3)... 3/26/01 150,000 $6.56 $29.01 --- 100 - ----------
(1) In August of 2000, Messrs. Cook, Toma, Perlberg and Dinkins surrendered options to the Company for cancellation. They received no consideration for the cancellation, and the Company had no obligation to issue them replacement grants. In March 2002, more than six months after the cancellation, the Company chose to issue new options to them in order to provide them with additional incentives. The date disclosed is the date of issuance of the new options. (2) The number of shares shown in the table is the number of shares subject to options that were surrendered by the optionees in August 2000. The number of shares subject to new options issued in March 2001 to such optionees were as follows: Mr. Cook - 200,000 shares, Mr. Toma - 150,000 shares, Mr. Perlberg - 135,000 shares and Mr. Dinkins - 135,000 shares. All new options had an exercise price of $6.56 per share. (3) Mr. Dinkins left the Company in August 2001. EMPLOYMENT AGREEMENTS The Company has entered into an employment agreement, as amended, with Mr. Cook that currently expires December 31, 2005. The following description reflects changes in Mr. Cook's employment agreement that have been approved by the Compensation Committee, although definitive agreements have not been executed. The employment agreement provides for automatic one-year 12 renewals upon the expiration of each year of employment (such that it always has a three-year term), subject to prior notice of non-renewal by the Board of Directors. Pursuant to Mr. Cook's employment agreement, Mr. Cook receives an annual base salary of $500,000, and an annual maximum bonus of up to 200 percent of his annual base salary based upon the Company's performance for the respective year. For the year 2002, any additional grant of options to Mr. Cook will be at the sole discretion of the Compensation Committee. If Mr. Cook is terminated for cause he will receive base salary through the date of termination. Mr. Cook also receives a car allowance of $30,000 per year. If Mr. Cook is terminated without cause, the Company elects not to renew his employment agreement, or if Mr. Cook voluntarily resigns or resigns for "Good Reason," he is eligible to receive severance payments equal to three years of base salary and bonus, up to a maximum amount not to be deemed an "excess parachute payment" under the Code, and all outstanding options immediately become vested. "Good Reason" means any of the following occurring without Mr. Cook's consent: o the assignment of duties or a position or title inconsistent with or lower than the duties, position or title provided in Mr. Cook's employment agreement; o a requirement that Mr. Cook perform a substantial portion of his duties outside Atlanta, Georgia; o a reduction of Mr. Cook's compensation unless the Board or an appropriate committee of the Board has authorized a general compensation decrease for all executive officers of the Company; o Mr. Cook is removed by the Company as CEO without cause; o the acquisition by any person, entity or group of 50 percent or more of the combined voting power of the then outstanding securities of the Company; o certain events of merger, consolidation, or transfer of assets of the Company ("Change in Control") resulting in a minority ownership by Company shareholders in the successor company following the Change in Control; o the existing directors of the Company prior to a Change in Control constitute less than a majority of the directors of the successor company following the Change in Control; or o there shall have occurred any other transaction or event that the Board of Directors of the Company in its discretion identifies as a Change in Control for this purpose. Mr. Cook also is entitled to receive certain supplemental insurance coverage and other personal benefits under his employment agreement, including Company-paid health insurance coverage for Mr. Cook and his wife (not to exceed $25,000 per year, plus cost-of-living adjustments) following his retirement, and until age 80. Mr. Cook has agreed not to compete with the Company or to solicit specified categories of the Company's clients or employees for a period of 18 months following termination of employment. The Company also has entered into employment agreements with Messrs. Toma, Perlberg, Ellis and Kramer. The agreements with Messrs. Toma and Kramer automatically renewed on December 31, 2001 and provide for automatic one-year renewals upon the expiration of each year of employment, subject to prior notice of non-renewal by the Board of Directors. Mr. Perlberg's agreement is terminable upon 30 days' notice. Mr. Ellis' agreement terminates in October 2003. Messrs. Toma, Perlberg, Ellis and Kramer have agreed not to compete with the Company nor to solicit specified categories of clients or employees of the Company for a period of 18 months following termination of their respective employment. The following discussion reflects changes in Mr. Toma's employment agreement that have been approved by the Compensation Committee, although definitive agreements have not been executed. Mr. Toma receives an annual base salary of $400,000 with a maximum bonus of up to 100 percent of his annual base salary based upon the Company's annual performance. For the year 2002, any additional award of options to Mr. Toma will be at the sole discretion of the Compensation Committee. In addition, the Company has agreed to make annual contributions in the amount of $65,000 per year to a deferred compensation program for Mr. Toma, which amounts will vest 50 percent immediately and the remainder over a ten-year period. If Mr. Toma is terminated other than for cause or if Mr. Toma resigns for "Good Reason" (defined to be substantially equivalent to the definition of "Good Cause" contained in Mr. Cook's employment arrangement, with the additional qualifying event of Mr. Cook's removal without cause as Chief Executive Officer of the Company), he is eligible to receive a severance benefit consisting of (1) two years of base salary, target bonus and auto allowance, (2) a contribution of two years of the annual deferred compensation credit to a rabbi trust established for deferred 13 compensation, and (3) payment of employee COBRA premiums, plus a full state and federal tax gross-up sufficient to pay any applicable excise taxes on items (1) through (3). The Company also has agreed to provide Mr. Toma and his wife with certain other personal benefits, including Company-paid health insurance coverage (not to exceed $20,000 per year, plus cost-of-living adjustments) following his retirement, and until age 80. As of January 25, 2002, Mr. Perlberg receives a base salary of $400,000 per annum with a maximum bonus of up to 80 percent of his base salary. The Company also makes matching contributions in the aggregate amount of $25,000 per year to Mr. Perlberg's deferred compensation program, which amounts vest over a ten year period. In February 2001, pursuant to his employment agreement, Mr. Perlberg received a sign-on bonus equal to 33 percent of his base salary paid in 2000. Upon termination without cause, a change in control, or a resignation for Good Reason (defined to be substantially equivalent to the definition of "Good Cause" contained in Mr. Cook's employment agreement, with the additional qualifying event of Mr. Cook no longer serving as Chief Executive Officer and an individual other than Mr. Perlberg being appointed as Chief Executive Officer of the Company, so long as Mr. Perlberg remains for a transition period), Mr. Perlberg will receive severance payments equal to 24 months of base salary, bonus at target level, and car allowance, paid monthly, and all outstanding stock options, restricted stock awards and deferred compensation contributions held by him or made for his benefit shall immediately vest. Mr. Ellis receives a base salary of $300,000 per annum with a maximum bonus of up to 70 percent of his base salary and a minimum bonus of $50,000 per annum. For 2001, Mr. Ellis waived his minimum bonus. He received no consideration for the waiver; however, the Company made a $35,000 donation to a charitable entity designated by Mr. Ellis. Upon termination without cause or a resignation for Good Reason (defined to be substantially equivalent to the definition of "Good Reason" contained in Mr. Cook's employment agreement, with the additional qualifying event of Mr. Cook no longer serving as Chief Executive Officer, or the liquidation or dissolution of the Company), any then unvested portion of Mr. Ellis' 250,000 share option grant made upon rejoining the Company will immediately vest and Mr. Ellis will receive a severance payment equal to 24 months of base salary and car allowance, plus a bonus of $100,000, and a full state and federal tax gross-up sufficient to pay any applicable excise taxes on such amounts. Mr. Kramer receives an annual base salary of $265,000 with a maximum bonus of up to 70 percent of his annual base salary. Mr. Kramer elected to defer payment of $25,000 of his base salary pursuant to a deferred compensation plan. In addition, the Company has agreed to make annual matching contributions in the aggregate amount of $25,000 per year to Mr. Kramer's deferred compensation program, which amounts vest over a ten year period. Upon termination, other than for cause or by voluntary resignation, Mr. Kramer will receive severance payments equal to six months of base salary. STOCK INCENTIVE PLAN On June 15, 1998, the Company, with the approval of its shareholders, amended its Stock Incentive Plan, which currently, as amended, provides for the grant of options to acquire a maximum of 10,875,000 shares of common stock, subject to certain adjustments. As of March 29, 2002, options for 7,713,172 shares were outstanding (after adjustment for forfeitures) and options for 1,656,103 shares had been exercised. Options may be granted under the Stock Incentive Plan to employees, officers or directors of and consultants and advisors to, the Company and its subsidiaries. The Company estimates that, as of March 29, 2002, approximately 1,400 employees (including officers) and nine non-employee directors of the Company were eligible to participate in the Stock Incentive Plan. Unless sooner terminated by the Board or pursuant to its terms, no additional grants may be made under the Plan subsequent to June 2008. The Board has approved an amendment to the Stock Incentive Plan that would, among other things, increase by 1,750,000 shares the number of shares eligible for issuance thereunder. See "Proposal to Approve Increase in Authorized Shares Under the PRG-Schultz International, Inc. Stock Incentive Plan." EMPLOYEE STOCK PURCHASE PLAN In May 1997, the Company's shareholders approved the adoption of the ESPP. The ESPP is intended to be an "Employee Stock Purchase Plan" as defined in Code Section 423. Under the ESPP, eligible employees may authorize payroll deductions at the end of a semi-annual purchase period of from 1 percent to 10 percent of their compensation (as defined in the ESPP), with a minimum deduction of $10 per pay period and a maximum aggregate deduction of $10,625 during each semi-annual purchase period, to purchase common stock at a price of 85 percent of the fair market value thereof as of the first Trading Day (as defined in the ESPP) of the offering period. The aggregate number of shares of common stock that may be purchased by all participants under the ESPP may not exceed 1,125,000, subject to certain adjustments. As of December 31, 2001, 473,955 shares had been issued under the ESPP. The Company estimates that, as of December 31, 2001, approximately 1,900 employees of the Company and its subsidiaries were eligible to participate in the ESPP. The ESPP will terminate December 31, 2007 or upon 14 the earlier decision of the Company's Compensation Committee or the earlier exercise of aggregate purchase rights of all shares of common stock reserved for purchase under the ESPP. The Board has approved an amendment to the ESPP that would increase by 1,500,000 shares the number of shares eligible for issuance thereunder. See "Proposal to Approve Increase in Authorized Shares Under the PRG-Schultz International, Inc. Employee Stock Purchase Plan." THE COMPANY'S 401(K) PLAN The Company assumed, effective immediately prior to completion of its initial public offering, the 401(k) plan sponsored by a predecessor of the Company. This plan (the "401(k) Plan") is a tax-qualified retirement plan designed to meet the requirements of Sections 401(a) and 401(k) of the Code. Under the 401(k) Plan, participants may elect to make pre-tax savings deferrals of from 1 percent to 15 percent of their compensation each year, subject to annual limits on such deferrals (e.g., $10,500 in 2001) imposed by the Code. The Company may also in its discretion, on an annual basis, make a matching contribution with respect to a participant's elective deferrals and/or may make additional Company contributions. The only form of benefit payment under the 401(k) Plan is a single lump-sum payment equal to the balance in the participant's account. Under the 401(k) Plan, the vested portion of a participant's accrued benefit is payable upon such employee's termination of employment, attainment of age 59 1/2 (with respect to 100 percent vested accounts only), retirement, total and permanent disability or death. CERTAIN TRANSACTIONS The following members of Mr. Cook's immediate family are employed by the Company and received compensation in 2001 in the approximate amounts set forth beside their names: David H. Cook, brother -- $185,923, Harriette L. Cook, sister-in-law -- $90,000, Pamela M. Cook, sister -- $115,000, and Allen R. Sluiter, brother-in-law -- $197,800. Mr. Toma's sister-in-law, Maria A. Neff, is employed with the Company as Senior Vice President of Human Resources. For 2001, the Company paid Ms. Neff compensation, including amounts deferred, of approximately $209,000. On January 24, 2002, the Company acquired the business of HSA-Texas and certain of its affiliates (the "Schultz acquisition") for 14,759,970 unregistered shares of the Company's common stock and the assumption of certain HSA-Texas liabilities, including aggregate net debt of approximately $65.7 million, a portion of which was repaid at closing. In addition, options to purchase approximately 1.1 million shares of the Company's common stock were issued in exchange for outstanding HSA-Texas options. Immediately following these transactions, Howard Schultz, now a director of the Company, and Andrew Schultz, now a director and Executive Vice President of the Company, collectively beneficially owned 4,512,366 shares and 5,522,758 shares, respectively, of the Company's common stock. In addition, the Company assumed approximately $7.4 million of the amount owing to Howard Schultz for loans to HSA-Texas. The Company, Howard Schultz, Andrew Schultz, certain trusts affiliated with the Schultz family, Mr. Cook, and Mr. Toma are party to a shareholder agreement entered into in connection with the Schultz acquisition. The agreement terminates January 24, 2004, provided that it may terminate sooner upon any of the following events: certain loan defaults by the Company, certain business combinations valued in excess of $50.0 million between the Company and another entity, certain registered offerings of Company common stock in excess of $50.0 million, or certain amendments to the Company's articles of incorporation or changes in the number of the Company's directors. The agreement prohibits the parties from transferring more than $20.0 million of Company stock in any six-month period without written consent by all parties, except: to certain family members or affiliates, pursuant to a board-approved tender offer or exchange offer, as part of a public sale in a "brokers' transaction" (as defined in Securities Act Rule 144), in certain registered offerings contemplated by the registration rights agreement described below; or pursuant to certain charitable or gratuitous transfers not exceeding, in the aggregate, $10.0 million in any given twelve-month period. In addition, the parties must cause any shares of the Company's common stock they beneficially own to be voted as recommended by a majority of the Company's Board of Directors consisting of at least 9 out of 13 directors (or, if the size of the board should change, an equal proportion). This requirement does not apply if the board withdraws its recommendation before the vote. The parties are generally prohibited from causing a vote, or voting, in favor of a sale of the Company unless the board has recommended it. They also may not participate in or encourage the solicitation of proxies in opposition to the Company's board; form or participate in a group for the purpose of acquiring, holding, voting or effecting the transfer of any of the Company's common stock; or take any action that might require the Company to publicly announce a sale of the Company, unless the board has recommended the sale. The Company also entered into a registration rights agreement under which the Company became obligated to file a registration statement on Form S-3 on or before the closing of the Schultz acquisition to register up to $10.0 million of the Company's common 15 stock as directed by Howard and Andrew Schultz. Although this Form S-3 was filed, the shares to be registered were sold in a private transaction, and the Company was authorized to withdraw the Form S-3, with no obligation to refile it. The agreement also requires the Company, upon written request, to register the shares of common stock issued in the Schultz acquisition for resale pursuant to a firm commitment underwritten public offering, subject to certain exceptions. However, the Company is not required to file more than one registration statement or file a registration statement covering less than $5.0 million of common stock. The Company is required to pay all registration expenses except under certain circumstances, including when the registration request is subsequently withdrawn, unless the selling shareholders agree that the request will count as the demand registration under the registration rights agreement. The registration rights agreement also provides for indemnification by the Company of each holder of registrable securities, indemnification of the Company by each holder of registrable securities participating in any registration, and indemnification of any underwriters by each of the Company and all sellers of registrable securities with respect to claims arising from such registration. The Company expects to enter into a five-year sublease of approximately 2500 square feet of its new Atlanta, Georgia headquarters office space with CT Investments, LLC, a limited liability company that is owned 90 percent by Mr. Cook and 10 percent by Mr. Toma. The sublease is expected to provide for the same rental rate as is paid by the Company under the master lease, with aggregate rental payments estimated at approximately $258,800 over the entire five-year term. The sublease is expected to be terminable by CT Investments should Mr. Cook at any time cease his affiliation with the Company. The Company has also entered into an agreement to lease office space located in Dallas, Texas from Howard Schultz and Andrew Schultz. The term of the lease extends for a period of approximately three years at an annual rate of $83,100. The Company also entered into a lease for additional Dallas, Texas office space from Howard and Andrew Schultz on a month to month basis in February 2002. This lease will terminate on April 30, 2002, and an aggregate of approximately $90,600 of rental is expected to have been paid by the Company thereunder. The Company also assumed options held by Arthur Budge, Jr., a director-nominee of the Company, to purchase 167,631 shares of HSA-Texas common stock, in connection with the Schultz acquisition. The HSA-Texas options, with an exercise price of $9.06 per share, converted into options to purchase 248,295 shares of the Company's common stock at an exercise price of $6.12 per share (reflecting an option conversion ratio of 1.4812). See "Director Compensation" for a discussion of certain additional transactions. SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE Section 16(a) of the Exchange Act requires the Company's executive officers and directors and persons who beneficially own more than 10 percent of the Company's stock to file initial reports of ownership and reports of changes in ownership with the Securities and Exchange Commission. Executive officers, directors and greater than 10 percent beneficial owners are required by SEC regulations to furnish the Company with copies of all Section 16(a) forms they file. Based solely on its review of copies of forms received by it pursuant to Section 16(a) of the Securities Exchange Act of 1934, as amended, or written representations from certain reporting persons, the Company believes that with respect to 2001, all Section 16(a) filing requirements applicable to its executive officers, directors and greater than 10 percent beneficial owners were timely satisfied. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION The Company's Compensation Committee consists of Messrs. Golden, Levine and Robertson and Ms. Ward. The Company has paid the law firm of Arnall Golden Gregory LLP, of which Mr. Golden's personal corporation, JGPC, serves as a partner, compensation for legal services rendered since 1991 and expects to continue utilizing this firm's services in the future. See "Director Compensation" for payments made to JGPC for certain consulting services. 16 PROPOSAL TO AMEND THE ARTICLES OF INCORPORATION TO PROVIDE THAT DIRECTORS MAY ONLY BE REMOVED BY SHAREHOLDERS FOR CAUSE THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" THIS PROPOSAL. The Company's Bylaws provide that the shareholders may remove one or more directors from office, with or without cause, by action of a majority of the votes entitled to be cast. Based on the recommendation of a special committee of the Board, the Board has approved an amendment to the Company's Articles of Incorporation, subject to approval by the shareholders, that provides that directors may only be removed for cause, by a majority of the votes entitled to be cast. If approved, this amendment will supersede the Bylaws, and an amendment to the Company's Shareholder Protection Rights Agreement (the "Rights Plan") removing the "continuing director" provisions will become effective, as described below. HISTORY AND RECOMMENDATION. At the annual meeting of shareholders held on May 25, 2001, the holders of the Company's common stock approved a shareholder proposal that recommended that the Company redeem the poison pill created under the Rights Plan because it contained a "continuing director" provision, unless approved by the affirmative vote of a majority of shares of the Company entitled to vote at a meeting of shareholders held as soon as practicable. In the proxy materials provided to the shareholders for the annual meeting held May 25, 2001, the Board of Directors recommended that the shareholder proposal not be approved, and noted: The "continuing directors" provisions of the Rights Plan require approval by a majority of the continuing directors to redeem the Rights Plan, amend the Rights Plan, or exclude a person or group who acquires beneficial ownership of more than 15 percent of the outstanding Company common stock from being considered an Acquiring Person under the Rights Plan. Continuing directors are those directors who were in office at the time of adoption of the Rights Plan or whose nominations were approved by directors then in office. Your Board believes that the continuing directors provisions are an appropriate means to manage serious conflicts of interest. At a meeting of the Board of Directors of the Company on July 24, 2001, the Board appointed a special committee, consisting of Messrs. Golden, Greimann and Lowrey, to review the Rights Plan and to report their recommendations for further Company action on the Rights Plan to the Board. On March 12, 2002, the special committee recommended that the Board of Directors not redeem the Rights, but did recommend that the Rights Plan be amended to remove the "continuing director" provisions, effective upon shareholder approval of this proposed amendment to the Company's Articles of Incorporation. On that date, the Board amended the Rights Plan to remove the "continuing director" provisions, effective upon shareholder approval of this proposal. If this proposal is approved, the amendment to the Rights Plan will take effect immediately. If this proposal is not approved, however, the amendment to the Rights Plan will not become effective and the "continuing director" provision will remain in the Rights Plan. The Company's Board of Directors presently consists of three classes, each elected for a three-year term. The Board of Directors believes this "staggered board," which only replaces one-third of the Board each year, provides important continuity and encourages the Board of Directors to manage the Company with a view to the long term. If the "continuing director" provision of the Rights Plan is eliminated, but the articles are not amended, then all directors can be removed without cause at any time, denying shareholders the benefits of the staggered board. Georgia law provides that the directors of a corporation that has a staggered board may only be removed for cause unless a Bylaw or article amendment approved by the corporation's shareholders states otherwise. The Company's Bylaws were submitted to its shareholders for approval immediately prior to the Company's initial public offering. Since the Bylaws provided for removal of Directors without cause, the shareholders unknowingly eliminated one of the principal benefits of a staggered board. This unintended effect led the Company to adopt the Rights Plan with "continuing director" provisions. The Company wishes to comply with the shareholders' request that the "continuing director" provisions be removed from the Rights Plan, but does not believe that such action would be in the shareholders' best interest unless this proposed amendment to the Company's Articles of Incorporation is approved. Further, the Board believes that shareholders will not be deprived of any significant rights if the proposal is approved since the shareholders' ability to remove directors for cause encompasses a broad power allowing them to remove directors in most instances in which such removal would be in the best interests of the Company and its shareholders. Accordingly, the Board of Directors, at the recommendation of the special committee, has recommended that the shareholders approve the proposal to amend the Company's Articles of Incorporation to provide that directors may only be removed for cause. 17 SHAREHOLDER PROPOSAL The following proposal and supporting statement was submitted by College Retirement Equities Fund ("CREF"), 730 Third Avenue, New York, New York 10017, in November 2001 for inclusion in this proxy statement and on the Company's form of proxy, and for presentation at the annual meeting. At the time of making the proposal, CREF represented that it held 231,637 shares of common stock of the Company. CREF has indicated that a representative will be present at the annual meeting to support the resolution. RESOLUTION WHEREAS, the Company's Board of Directors, without shareholder approval, has adopted a plan, commonly known as a "poison pill," with a "dead-hand" provision that permits only the Board members who adopted the poison pill, or their hand-picked successors, to redeem the pill; WHEREAS, this type of poison pill, unlike most, not only allows the current Board to effectively thwart acquisition offers that may be favored by a majority of shareholders, but also can deny shareholders the right to replace this Board with new directors empowered to redeem the poison pill and permit such offers to go forward, unless the new directors have been recommended or approved by the continuing directors; WHEREAS, we believe that a "dead-hand" poison pill has a coercive effect on the shareholders' basic right to freely elect a new Board with normal decision-making authority in this important area; WHEREAS, we believe that such a "dead-hand" poison pill interferes with good corporate governance and can reduce the value of the Company's shares to the detriment of shareholders. WHEREAS, in 2001, holders of a large majority of shares (64 percent of shares voted for or against) supported this shareholder resolution at Profit Recovery Group International; RESOLVED, that the shareholders request the Board of Directors to redeem the "dead-hand" poison pill, unless approved by the affirmative vote of a majority of shares of the Company entitled to vote at a meeting of shareholders held as soon as practicable. SUPPORTING STATEMENT By adopting the poison pill without shareholder approval, the current Board unilaterally deprived shareholders of the traditional right to sell their shares to potential bidders. By adding the "dead-hand" feature, we believe this Board also denies appropriate decision-making authority to a new Board, elected by shareholders, to decide what is in the best interests of shareholders on this important subject. Traditional poison pills have been defended with the argument that directors generally can be trusted to act in the shareholders' interest, and if they do not, they can be replaced by the shareholders with other directors. Adoption of a "dead-hand" poison pill, however, is different. We believe it has the effect of "entrenching" the current Board by coercing shareholders to vote for incumbent directors to preserve the possibility of redemption of the pill, and is intended to preclude proxy contests for corporate control. We believe that the right of shareholders freely to elect a board of directors with full power to represent the shareholders' interests is the foundation-stone of good corporate governance. By supporting this resolution, shareholders can send a message that we value our right to elect a Board that is prepared and able to represent shareholder interests on all proper matters; and that we will not support unilateral actions by the Board that restrict our ability to meaningfully exercise our voting rights. 18 BOARD OF DIRECTORS' RECOMMENDATION Based on the review of the issue conducted by its special committee, which resulted in the proposed amendment to the Company's Articles of Incorporation and related contingent elimination of the "continuing director" provision of the Rights Plan, your Board believes that redemption of the Rights Plan would not be in the best interests of the Company and its shareholders, unless the proposed amendment to the Articles of Incorporation is approved. The Board recommends a vote AGAINST the Shareholder Proposal for the reasons explained below. THE RIGHTS PLAN WAS ADOPTED IN THE BEST INTERESTS OF ALL SHAREHOLDERS. The Board adopted the Rights Plan in 2000 with the aim of protecting the interests of all shareholders and maximizing the value of each shareholder's investment in the Company. The Board believes that the Rights Plan is an important tool to protect shareholder interests. The Rights Plan will not prevent takeover proposals, but rather is designed to encourage potential acquirers to negotiate directly with the Board and to enhance the Board's ability to defend against inadequate and coercive takeover attempts and achieve the best possible value for all of the Company's shareholders. Shareholder rights plans have been adopted by approximately 2,000 other U.S. corporations. Virtually all of these plans were adopted without shareholder approval. According to a March 6, 2000 report by the Investor Responsibility Research Center, nearly 60 percent of S&P 500 companies have rights plans. The Rights Plan enhances the negotiating position of the Board and deters abusive takeover tactics such as a bid for some but not all of the shares. In addition to fair and equal treatment, the Rights Plan provides the Board with the necessary time and flexibility once a takeover offer is received to respond appropriately and, if desirable, to negotiate the highest possible price with a potential acquirer. The Board believes that redemption of the Rights Plan at this time would remove a critical incentive for a potential acquirer to negotiate with the Board and eliminate a tool designed to maximize shareholder value and ensure that all shareholders are treated fairly and equally. The Board is aware of the concerns that some shareholders have expressed about the possible abuse of shareholders rights plans by other companies. The true test of the benefits of the Rights Plan is how your Board uses it. Therefore, the real issue posed by CREF'S proposal is whether the shareholders can rely on the Board to perform its fiduciary obligations and utilize this tool properly if and when the need arises to protect the interests of our shareholders. In this regard, you should know that the interests of the Board are perfectly aligned with the interests of their fellow shareholders. Members of and nominees to your Board, together with their families and related interests, own approximately 32 percent of the Company's outstanding shares. THE "CONTINUING DIRECTOR" PROVISIONS ARE A CRITICAL ELEMENT OF THE RIGHTS PLAN. The "continuing director" provisions of the Rights Plan require approval by a majority of the continuing directors to redeem the Rights Plan, amend the Rights Plan, or exclude a person or group who acquires beneficial ownership of more than 15 percent of the outstanding Company common stock from being considered an Acquiring Person under the Rights Plan. Continuing directors are those directors who were in office at the time of adoption of the Rights Plan or whose nominations were approved by directors then in office. Your Board believes that the "continuing director" provisions are an appropriate means to manage serious conflicts of interest. A potential acquirer, acting together with other market players or through the solicitation of proxies, could gain control of sufficient voting power to replace the Board with "interested" directors who would then amend or redeem the Rights Plan and approve the acquirer's proposal to acquire the Company. While this may be in the best interests of the acquirer, it may not be in the best interests of other shareholders. The "continuing director" provisions do not limit the right of shareholders, including any potential acquirer, to elect directors. Rather, they merely require that any transaction between a potential acquirer and the Company be approved by directors who are not affiliated with the acquirer or otherwise interested in the transaction. The Board believes this procedure reinforces the fundamental purpose of the Rights Plan to protect the interests of shareholders. The "continuing director" provisions are neither unique nor an unlawful affront to traditional concepts of good corporate governance. To the contrary, Georgia corporate law, under which the Company is incorporated, contains continuing directors concepts to deal with similar conflict of interest transactions with interested shareholders. In fact, the one court to consider the issue 19 in the context of Georgia law has specifically ruled that "continuing director" provisions substantially the same as those in our Rights Plan are consistent with Georgia corporate law and held them to be enforceable. As noted above at "Proposal to Amend the Articles of Incorporation to Provide That Directors May Only Be Removed by Shareholders for Cause," a special committee of the Board has considered the resolution approved by the shareholders at the Company's May 25, 2001 annual meeting, which was the same as the current proposal. After due consideration, that committee recommended to the Board that the Rights Plan be amended to eliminate the "continuing director" provision, effective upon approval by the shareholders of the amendment to the Company's Articles of Incorporation to provide that directors may only be removed for cause. On March 12, 2002, the Board approved this amendment, effective upon approval of the proposal to amend the Articles of Incorporation. FOR THE ABOVE REASONS, THE BOARD OF DIRECTORS RECOMMENDS THAT SHAREHOLDERS VOTE "AGAINST" THE SHAREHOLDER PROPOSAL. PROPOSAL TO APPROVE AN INCREASE IN AUTHORIZED SHARES UNDER THE PRG-SCHULTZ INTERNATIONAL, INC. STOCK INCENTIVE PLAN THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" THIS PROPOSAL. In June 1998, the Board and the Company's shareholders approved the Stock Incentive Plan. The Plan was subsequently amended to increase the number of shares available for issuance thereunder, bringing to 10,875,000 the total number of shares that may be issued under the Plan. As of March 29, 2002, options to purchase 7,713,172 shares and 119,000 shares of restricted stock were outstanding under the Stock Incentive Plan (after adjustment for forfeitures) and options to purchase 1,656,103 shares of common stock had been exercised. No stock appreciation rights are outstanding under the Stock Incentive Plan. Unless sooner terminated by the Board, the Stock Incentive Plan terminates in June 2008. As of March 29, 2002, an additional 1,374,225 shares remained available under the Stock Incentive Plan for issuance in connection with future awards thereunder. Subject to shareholder approval, the Board has approved an amendment to the Stock Incentive Plan that provides for a 1,750,000 share increase in the number of shares of Company common stock that may be granted thereunder. In addition, the Board has approved an amendment to limit the term of future options granted under the Stock Incentive Plan to no more than seven years and an amendment to limit the maximum number of shares that may be covered by future stock awards (as differentiated from options or stock appreciation rights) under the Stock Incentive Plan to 300,000 shares. The material provisions of the Stock Incentive Plan are summarized below. ELIGIBILITY FOR PARTICIPATION UNDER THE STOCK INCENTIVE PLAN Options, including incentive stock options ("ISOs") and non-qualified stock options ("NSOs"), stock appreciation rights ("SARs") and stock awards ("Stock Awards") may be granted under the Stock Incentive Plan to key employees, officers or directors of, and consultants and advisors to, the Company and its subsidiaries. The Company estimates that, as of the date of this Proxy Statement, approximately 1,400 employees (including officers) and nine non-employee directors of the Company are eligible to participate in the Stock Incentive Plan. Nothing contained in the Stock Incentive Plan or in any agreement entered into pursuant thereto may confer upon any person any right to continue as a director, officer or employee of the Company or its subsidiaries or as a consultant or advisor, or limit in any way any right of shareholders or of the Board, as applicable, to remove such person. SHARES RESERVED UNDER THE STOCK INCENTIVE PLAN; INDIVIDUAL GRANT LIMITS The Stock Incentive Plan currently provides for the grant of awards to acquire a maximum of 10,875,000 shares of common stock (including options for shares subject to previous grants under the Company's 1996 Stock Option Plan), subject to adjustment in the event of stock dividends, stock splits, combination of shares, recapitalizations, or other changes in the outstanding common stock. Shares issued under the Stock Incentive Plan may consist, in whole or in part, of authorized and unissued shares, treasury shares or shares purchased on the open market. The maximum number of SARs and shares subject to options that may be granted to any one individual during any consecutive 12-month period under the Stock Incentive Plan is 500,000. The maximum number of shares that may be granted pursuant to future Stock Awards under the Stock Incentive Plan is 300,000 shares. 20 PURPOSE OF THE STOCK INCENTIVE PLAN The Company desires to attract and retain persons of skill and experience and to encourage their highest levels of performance on behalf of the Company and its subsidiaries. The Stock Incentive Plan affords eligible persons the opportunity to acquire equity ownership in the Company. A portion of the options issued pursuant to the Stock Incentive Plan may constitute ISOs within the meaning of Section 422 of the Code or any succeeding provisions. The Stock Incentive Plan is not qualified under Section 401(a) of the Code and is not subject to the provisions of the Employee Retirement Income Security Act of 1974. DURATION OF THE STOCK INCENTIVE PLAN Awards may be granted pursuant to the Stock Incentive Plan from time to time prior to the earlier of (1) June 14, 2008; or (2) the date on which all shares available for issuance under the Stock Incentive Plan have been issued. ADMINISTRATION OF THE STOCK INCENTIVE PLAN The Stock Incentive Plan is administered by the Compensation Committee. Subject to the terms of the Stock Incentive Plan, in administering the Stock Incentive Plan and the awards granted under the Stock Incentive Plan, the Compensation Committee has authority to determine: o the employees of the Company and its subsidiaries to whom ISOs may be granted; o the directors, officers and employees of the Company and its subsidiaries and the consultants and advisors to whom NSOs, SARs and Stock Awards may be granted; o the time or times at which awards may be granted; o the number of shares subject to each award and, for options and SARs, the exercise price thereof; o whether each option granted shall be an ISO or a NSO; o the time or times when each option and SAR shall become exercisable and the duration of the exercise period, including any acceleration thereof, o whether restrictions are to be imposed on shares subject to options and the nature of such restrictions; o whether and under what circumstances cash payments shall be made upon the termination of options or SARs, and whether and under what circumstances stock acquired pursuant to the exercise of an option or SAR shall be repurchased by the Company; and o the terms of any Stock Awards. The Compensation Committee also interprets the Stock Incentive Plan and prescribes and rescinds rules and regulations relating to and consistent with the Stock Incentive Plan. The Board of Directors has delegated all rights to determine awards of stock-based compensation to individuals who file reports pursuant to Section 16 of the Exchange Act to a subcommittee of the Compensation Committee (the "Subcommittee") consisting of at least two directors, each of whom is a "non-employee" director, as such term is defined in Rule 16b-3 promulgated pursuant to the Exchange Act and is an "outside" director, as defined in the regulations promulgated pursuant to Section 162(m) of the Code. The current Compensation Committee members are Mr. Golden, Chairman, Messrs. Levine and Robertson, and Ms. Ward. Messrs. Levine and Robertson and Ms. Ward comprise the Subcommittee. Under the Stock Incentive Plan, acts by a majority of the Compensation Committee, or acts reduced to or approved in writing by a majority of the members of the Compensation Committee, shall be the valid acts of the Compensation Committee. 21 No members of the Board of Directors or the Compensation Committee shall be liable for any action or determination made in good faith with respect to the Stock Incentive Plan or any stock options or other awards made under such plan. No member of the Board or the Compensation Committee shall be liable for any act or omission of any other member of the Board or the Compensation Committee or for any act or omission on his own part, including but not limited to the exercise of any power or discretion given to him under the Stock Incentive Plan, except those resulting from that member's own gross negligence or willful misconduct. In addition to rights of indemnification as a member of the Board or Compensation Committee, each member of the Board and the Compensation Committee shall be entitled to indemnification by the Company with respect to administration of the Stock Incentive Plan and the granting of rights and benefits under it. AMENDMENT OF THE STOCK INCENTIVE PLAN The Stock Incentive Plan may be terminated or amended by the Board of Directors at any time, except that the following actions may not be taken without shareholder approval: o materially altering the number of shares that may be issued under the Stock Incentive Plan (except by certain adjustments under the Stock Incentive Plan); o materially modifying the persons or classes of persons eligible to participate in the Stock Incentive Plan; o materially increasing the benefits accruing to participants under the Stock Incentive Plan; o modifying the exercise price at which options and SARs may be offered (except by adjustment pursuant to the Stock Incentive Plan); and o extending the maximum option period under, or the term of, the Stock Incentive Plan. Awards may not be granted under the Stock Incentive Plan after the date of termination of the Stock Incentive Plan, but options and SARs granted prior to that date remain exercisable according to their terms. PLAN BENEFITS During 2001, and from January 1, 2002 through March 29, 2002, the number and exercise price of options granted to executive officers as a group, non-executive directors and non-executive employees pursuant to the Company's Stock Incentive Plan were as set forth below. See "Summary Compensation Table" and "Stock Option Grants in Last Fiscal Year" table above for discussion of the number of securities underlying options granted to the Named Executive Officers. For a discussion of potential future grants to the Non-Executive Director Group, see "Director Compensation."
FROM JANUARY 1, 2002 2001 THROUGH MARCH 29, 2002 --------------------------------- ------------------------------------- EXERCISE PRICE EXERCISE PRICE OR RANGE OF OR RANGE OF NUMBER OF EXERCISE NUMBER OF EXERCISE GROUP OPTIONS PRICES OPTIONS PRICES - ----- ------- ------ ------- ------ Executive Officer Group (5 persons).................... 585,000 $6.56 - $11.46 660,000 $9.28 Non-Executive Director Group........................... 70,000 $6.56 90,000 $9.28 All Employees excluding Executive Officer Group........ 785,000 $6.37 - $11.46 1,449,000 $9.28 - $9.79
GRANT OF STOCK OPTIONS AND SARS The Compensation Committee may grant stock options and SARs to eligible persons in such amounts and on such terms not inconsistent with the Stock Incentive Plan as it may deem appropriate up to the number of shares remaining subject to the Stock Incentive Plan. The Company and each eligible person shall execute an agreement providing for the grant of stock options or SARs in accordance with the pertinent provisions of the Stock Incentive Plan. 22 OPTION AND SAR EXERCISE PRICE The exercise price per share for the shares subject to ISOs, NSOs and SARs may not be less than the fair market value of Company common stock on the date of grant, provided, however, that in the case of an ISO to be granted to an employee owning more than 10 percent of the total combined voting power of all classes of stock of the Company, the exercise price per share shall be not less than 110 percent of the fair market value per share of common stock on the grant date. The "fair market value" shall be the closing price of the common stock on the Nasdaq National Market on the day of grant or if no sale of the common stock has been made on such date, on the next preceding day on which there was such a sale. On April 11, the closing price of the Company's common stock on the Nasdaq National Market was $13.65. VESTING OF OPTIONS Unless otherwise provided by the Compensation Committee, options granted under the Stock Incentive Plan after January 2001 generally vest at the rate of 25 percent per annum over a four-year period so that all options are vested after four years. Prior to February 2001, options granted under the Stock Incentive Plan generally vested at a rate of 20 percent per year. The Compensation Committee has the authority to accelerate or waive the vesting period for any option granted under the Stock Incentive Plan upon the attainment of performance goals established by the Compensation Committee for the grantee(s). Pursuant to its authority under the Stock Incentive Plan, the Compensation Committee provided in January 2001 that upon a change in control of the Company, all unvested stock options would be fully vested. ADJUSTMENTS TO EXERCISE PRICE AND NUMBER OF SHARES If the shares of common stock are subdivided or combined, or a stock dividend is declared and paid, the number of shares of common stock subject to the Stock Incentive Plan and to the individual limits thereunder deliverable upon the exercise of Stock Options or SARs and subject to Stock Awards shall be increased or decreased proportionately, and the purchase price per share of options and SARs shall be adjusted to reflect such subdivision, combination or stock dividend. If, while unexercised options or SARs remain outstanding under the Stock Incentive Plan, the Company proposes to merge or consolidate with another corporation, whether or not the Company is to be the surviving corporation, or if the Company proposes to liquidate or sell or otherwise dispose of substantially all of its assets, or substantially all of the outstanding shares of stock of the Company are to be sold, then the Compensation Committee may, in its sole discretion, either: o make appropriate provision for the protection of any such outstanding options and SARs by the substitution on an equitable basis of appropriate stock of the surviving corporation or its parent in the merger or consolidation or other reorganized corporation that will be issuable in respect to the shares of common stock of the Company subject to such options and SARs, provided that, with respect to ISOs, such provision shall satisfy the requirement that no additional benefits shall be conferred upon optionees as a result of such substitution within the meaning of Section 424(a) of the Code, and that the excess of the aggregate fair market value of the shares subject to the options immediately after such substitution over the purchase price thereof is not more than the excess of the aggregate fair market value of the shares subject to such options immediately before such substitution over the purchase price thereof; or o upon written notice to the grantees, provide that all unexercised options and SARs must be exercised within a specified number of days of the date of such notice or they will be terminated. In no event shall the Compensation Committee be obligated to take any action as a result of any such transaction, it being acknowledged that it is in the Compensation Committee's sole discretion to determine if, and to what extent, any such action shall be taken. DURATION AND TERMINATION OF OPTIONS AND SARS Each option and SAR expires on the date specified by the Compensation Committee, but not more than seven years from the grant date in the case of NSOs, SARs and most ISO's granted after January 2002, and five years from the grant date in the case of ISOs granted to an employee owning more than 10 percent of the total combined voting power of all classes of stock of the Company; provided, however, that if approved by the Compensation Committee, after request by the grantee, ISOs may be converted into NSOs and the term of such option may be extended. Options granted prior to February 2002 generally expired either five or ten years from the date of grant. 23 MEANS OF EXERCISE OF OPTIONS AND SARS Options and SARs are exercised by giving written notice to the Company at its principal office address, accompanied, in the case of an option, by full payment of the purchase price therefor and the applicable withholding tax, either (i) in United States dollars in cash or by check, or (ii) if permitted by the Compensation Committee, the delivery of shares of common stock having a fair market value equal as of the date of the exercise to the cash exercise price of the option; provided, however, that such shares must have been held for at least six months. NON-TRANSFERABILITY OF OPTIONS, SARS AND STOCK AWARDS No option, SAR or Stock Award is transferable except by will or by the laws of descent and distribution, and all options and SARs are exercisable, during the lifetime of the grantee, only by the grantee or the grantee's guardian or legal representative. Shares subject to options, SARs or Stock Awards granted under the Stock Incentive Plan that have lapsed or terminated may again be subject to awards thereunder. RESTRICTIONS ON STOCK AWARDS Each Stock Award shall be subject to such conditions, restrictions and contingencies as the Compensation Committee shall determine. These may include continuous service and/or the achievement of specified performance measures. The performance measures that may be used by the Compensation Committee for such Stock Awards shall be measured by revenues, income, or such other criteria as the Committee may specify. If vesting is conditioned solely upon continuous service, the vesting schedule for Stock Awards shall cover a period of not less than three years (subject to acceleration of vesting in the event of a change in control of the Company and, to the extent permitted by the Compensation Committee, in the event of the participant's death, disability, or involuntary termination). No more than 300,000 shares may be granted in the future as Stock Awards. TAX TREATMENT The following discussion addresses certain anticipated U.S. federal income tax consequences associated with awards made under the Stock Incentive Plan. It is based on the Code and interpretations thereof as in effect on the date of this Proxy Statement. This summary is not intended to be exhaustive and, among other things, does not describe state, local or foreign tax consequences. A company, such as the Company, for which an individual is performing services will generally be allowed to claim as a deduction for federal income tax purposes amounts that are includable in the income of such individual as compensation income in the Company's taxable year in which the employee's taxable year of inclusion ends, provided that such amounts qualify as reasonable compensation for the services rendered. This general rule will apply to the deductibility of a participant's compensation income resulting from participation in the Stock Incentive Plan. The timing and amount of the federal income tax deduction available to the Company will, therefore, depend upon the timing and amount of compensation income recognized by a participant as a result of participation in the Stock Incentive Plan. The following discusses the timing and amount of compensation income recognized by participants and the accompanying federal income tax deduction that may be available to the Company. Incentive Stock Options. A participant to whom an ISO which qualifies under Section 422 of the Code is granted generally will not recognize compensation income (and the Company will not be entitled to a federal income tax deduction) upon the grant or the exercise of the option. To obtain nonrecognition treatment from the exercise of an ISO, however, the participant must be an employee of the Company or a subsidiary continuously from the date of grant of the option until three months prior to the exercise of the option. If termination of employment is due to disability of the participant, ISO treatment will be available if the option is exercised within one year of termination. If an option originally designated as an ISO is exercised after these periods, the option will be treated as a NSO for income tax purposes and compensation income will be recognized by the participant (and a federal income tax deduction generally will be available to the Company) in accordance with the rules discussed below concerning NSOs. The Code provides that ISO treatment will not be available to the extent that the fair market value of shares subject to ISOs (determined as of the date of grant of the ISOs) that become exercisable for the first time during any calendar year exceeds $100,000. If the $100,000 limitation is exceeded, the options in excess of the limitation are treated as NSOs when exercised. While a participant may not recognize compensation income upon exercise of an ISO, the excess of the fair market value of the shares of common stock received over the exercise price for the option is an adjustment for alternative minimum tax purposes and can affect the optionee's alternative minimum tax liability under applicable provisions of the Code. The increase, if any, in an 24 optionee's alternative minimum tax liability resulting from exercise of an ISO will not, however, create a deductible compensation expense for the Company. When a participant sells shares of common stock received upon exercise of an ISO more than one year after the exercise of the option and more than two years after the grant of the option, the participant will normally not recognize any compensation income, but will instead recognize capital gain or loss from the sale in an amount equal to the difference between the sales price for the shares of common stock and the option exercise price. If, however, a participant sells the shares of common stock within one year after exercising the ISO or within two years after the grant of the ISO, the participant will recognize compensation income (and the Company generally will be entitled to a federal income tax deduction) in an amount equal to the lesser of (i) the excess, if any, of the fair market value of the shares of common stock on the date of exercise of the option over the option exercise price, and (ii) the excess, if any, of the sales price for the shares over the option exercise price. Any other gain or loss on such sale (in addition to the compensation income mentioned previously) will normally be capital gain or loss. Nonqualified Stock Options. A participant to whom a NSO is granted will not normally recognize income at the time of grant of the option. When a participant exercises a NSO, the participant will generally recognize compensation income (and the Company generally will be entitled to a federal income tax deduction) in an amount equal to the excess, if any, of the fair market value of the shares of common stock when acquired over the option exercise price. The amount of gain or loss recognized by a participant from a subsequent sale of shares of common stock acquired from the exercise of a NSO will be equal to the difference between the sales price for the shares of common stock and the sum of the exercise price of the option plus the amount of compensation income recognized by the participant upon exercise of the option. SARs. The recipient of an SAR generally will not recognize any compensation income upon grant of the SAR. At the time of exercise of an SAR, however, the recipient should recognize compensation income (and the Company generally will be entitled to a federal income tax deduction) in an amount equal to the amount of cash, or the fair market value of the shares, received. Restricted Stock Awards. If stock received pursuant to a Stock Award made through the Stock Incentive Plan is subject to a substantial restriction on continued ownership that is dependent upon the recipient continuing to perform services for the Company or its affiliated companies (a "substantial risk of forfeiture"), the participant should not recognize compensation income upon receipt of the shares of common stock unless he/she makes a so-called "83(b) election" as discussed below. Instead, the participant will recognize compensation income (and the Company generally will be entitled to a federal income tax deduction) when the shares of common stock are no longer subject to a substantial risk of forfeiture, in an amount equal to the fair market value of the stock at that time. Absent a participant making an 83(b) election, dividends paid with respect to shares of common stock that are subject to a substantial risk of forfeiture will be treated as compensation income for the participant (and a compensation deduction generally will be available to the Company for the dividend) until the shares of common stock are no longer subject to a substantial risk of forfeiture. Different tax rules will apply to a participant who receives shares of common stock subject to a risk of forfeiture if the participant files an 83(b) election. If, within 30 days of receipt of the shares of common stock, a participant files an 83(b) election with the Internal Revenue Service and the Company, then, notwithstanding that the shares of common stock are subject to a risk of forfeiture, the participant will recognize compensation income upon receipt of the shares of common stock (and the Company generally will be entitled to a federal income tax deduction) in an amount equal to the fair market value of the stock at the time of the award. If the 83(b) election is made, any dividends paid with respect to the shares of common stock will not result in compensation income for the participant (and will not entitle the Company to a federal income tax deduction). Rather, the dividends paid will be treated as any other dividends paid with respect to common stock, as ordinary income which is not compensation. TAX WITHHOLDING Whenever the Company proposes, or is required, to distribute shares of common stock under the Stock Incentive Plan, the Company may require the recipient to satisfy any federal, state and local tax withholding requirements prior to the delivery of any certificate for such shares or, in the discretion of the Committee, the Company may withhold from the shares to be delivered shares sufficient to satisfy all or a portion of such tax withholding requirements. 25 UNFUNDED STATUS OF THE STOCK INCENTIVE PLAN The Stock Incentive Plan is intended to constitute an "unfunded" plan for incentive and deferred compensation. With respect to any payments not yet made to a participant by the Company, nothing contained in the Stock Incentive Plan shall give any such participant or optionee any rights that are greater than those of a general creditor of the Company. PROPOSAL TO APPROVE INCREASE IN AUTHORIZED SHARES UNDER PRG-SCHULTZ INTERNATIONAL, INC. EMPLOYEE STOCK PURCHASE PLAN THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" THIS PROPOSAL. In January 1997, the board and the Company's shareholders approved the ESPP. As of December 31, 2001, 473,955 shares had been purchased under the ESPP, and an additional 651,045 shares remained available for purchase in accordance with the terms of the ESPP. Unless sooner terminated by the Board, the ESPP terminates in December 2007. Subject to shareholder approval, the Board has approved an amendment to the ESPP, which provides for a 1,500,000 share increase in the number of shares of Company common stock that may be purchased thereunder. The ESPP provides eligible employees (defined below) with an opportunity to purchase the Company's common stock through payroll deductions. The ESPP is intended to assist eligible employees in acquiring a stock ownership interest in the Company pursuant to a plan that is intended to qualify as an "ESPP" under Section 423 of the Code, to help eligible employees provide for their future security and to encourage them to remain in the employment of the Company and participating subsidiaries. The material provisions of the ESPP are summarized below. SHARES RESERVED UNDER THE PLAN The ESPP currently provides for the purchase of a maximum of 1,125,000 shares of common stock, subject to adjustment in the event of stock dividends, stock splits, combination of shares, recapitalizations, or other changes in the outstanding common stock. Shares issued under the ESPP may consist, in whole or in part, of authorized and unissued shares, treasury shares or shares purchased on the open market. ELIGIBLE PARTICIPANTS All employees of the Company, or of certain other corporations, the majority of the voting stock of which is owned by the Company (a "Subsidiary"), whose customary employment is at least 20 hours per week and five months per year will be eligible to participate in the ESPP. Currently, PRG-Schultz USA, Inc., PRG-Schultz Canada, Inc., The Profit Recovery Group Servicios (Mexico), S. de R.L. de C.V., PRG-Schultz UK Ltd., Meridian VAT Reclaim, Inc., Meridian VAT Reclaim (Canada) Ltd., and Meridian VAT Reclaim Operations Ltd. and its three direct subsidiaries are the only Subsidiaries whose employees are eligible to participate in the Plan. Additional Subsidiaries may be added by the Committee in the future. As of March 29, 2002, approximately 1,300 employees were eligible to participate in the ESPP. CERTAIN MATERIAL FEATURES OF THE PLAN The ESPP provides for two purchase periods ("Plan Periods") of six months each beginning on January 1 and July 1 of each year. On the last day of each Plan Period, each eligible employee shall be entitled to purchase shares of common stock at a purchase price equal to 85 percent of the closing sale price of a share of common stock on the Nasdaq National Market on the first trading day of the Plan Period. Payment for shares of common stock purchased under the ESPP will be made by authorized payroll deductions from an eligible employee's "Base Pay." "Base Pay" means an eligible employee's total regular straight-time and overtime earnings received from the Company or a Subsidiary during a Plan Period, including payments for incentive compensation, but excluding other special payments. Eligible employees who elect to participate in the ESPP will designate a stated whole percentage equaling at least 1 percent, but no more than 10 percent, of Base Pay, to be deposited into a separate account, subject to a maximum aggregate deduction of $10,625 in each Plan Period. On the date of exercise, the entire periodic deposit account of each participant in the ESPP is used to purchase whole shares of common stock. No fractional shares will be purchased, and the amount remaining in the employee's account after 26 such application will be held for the purchase of common stock in the next purchase period. No interest will be paid on any amounts deducted and credited to a participant's account. Participants will be entitled to receive, as soon as practicable after the end of a purchase period, a stock certificate for the number of purchased shares. No participant in the ESPP is permitted to purchase common stock under the ESPP at a rate that exceeds $25,000 in fair market value of common stock for each calendar year. If the number of shares for which purchase rights are exercised exceeds the number of shares available in any Plan Period under the ESPP, the shares available for sale will be allocated pro rata among the participants in such Plan Period in proportion to the relative amounts in their accounts. All funds received by the Company from the sale of common stock under the ESPP may be used for any corporate purpose. PLAN BENEFITS To date (without taking into account the proposed amendment to the ESPP), the Company has issued and sold an aggregate of 473,955 shares of common stock pursuant to the ESPP and 651,045 shares of common stock are available for future issuance thereunder. Based on the number of employees that have elected to participate in the current offering period, the majority of the remaining shares under the ESPP will be used during the next few Plan Periods. Accordingly, unless the stockholders approve the amendment to the ESPP, the Company will have insufficient shares available after the next Plan Periods. Participation in the ESPP is voluntary and is dependent on each eligible employee's election to participate and his or her determination as to the level of payroll deductions. Accordingly, future purchases under the ESPP are not determinable. Non-employee directors are not eligible to participate in the ESPP. The following table sets forth certain information regarding shares purchased under the ESPP during the Company's last fiscal year by all current executive officers as a group and all employees (excluding the executive officers) as a group:
PLAN BENEFITS EMPLOYEE STOCK PURCHASE PLAN NAME OF INDIVIDUAL OR NUMBER OF SHARES IDENTITY OF GROUP AND POSITION DOLLAR VALUE($)(1) PURCHASED(#)(2) - ------------------------------ ------------------ ---------------- John M. Cook (3) $ - - John M. Toma (3) $ - - Mark C. Perlberg $ 10,864 948 Donald E. Ellis, Jr. (3) $ - - Robert G. Kramer $ 4,974 434 Current Executive Officer Group (6 persons) $ 15,838 1,382 Employees Excluding Executive Officers Group $ 2,564,370 223,767
---------- (1) Represents the market value of the shares on the date of purchase. The purchase price paid by each participant in the ESPP is 15 percent below the market value on the first day of the applicable Plan Period. (2) Includes shares purchased for the six-month Plan Period ended June 30, 2001. There were no shares purchased for the Plan Period ended December 31, 2001. (3) Did not elect to participate in the ESPP for Plan Periods ended June 30, 2001 and December 31, 2001. TAX TREATMENT The following discussion addresses certain anticipated U.S. federal income tax consequences associated with awards made under the ESPP. It is based on the Code and interpretations thereof as in effect on the date of this Proxy Statement. This summary is not intended to be exhaustive and, among other things, does not describe state, local or foreign tax consequences. 27 The ESPP is intended to qualify as an employee stock purchase plan within the meaning of Section 423 of the Code. Under the Code, an employee who elects to participate in an offering under the ESPP will not recognize income at the time the offering commences or at the time the shares purchased under the ESPP are transferred to him or her. If an employee disposes of such shares after two years from the date the offering of such shares is deemed to have been made for federal income tax purposes - generally the first day of each Plan Period - (the "Grant Date") and after one year from the date of the transfer of such shares to him or her, or if the employee holds such shares until his or her death, the employee will be required to include in income, as ordinary income for the year in which such disposition or death occurs, an amount equal to the excess of (i) the lesser of (x) the fair market value of such shares at the time of disposition or death or (y) the fair market value of such shares as of the Grant Date, over (ii) the purchase price. The employee's basis in the shares disposed of will be increased by the amount of ordinary income so includable in income as a result of such disposition, and any gain or loss computed with reference to such adjusted basis which is recognized at the time of the disposition will be long-term capital gain or loss. In such event, the Company (or the subsidiary by which the employee is employed) will not be entitled to any deduction for federal income tax purposes. If an employee disposes of the shares purchased under the ESPP within two years of the Grant Date or one year of the date of the transfer of the shares, the employee will be required to include in income, as ordinary income for the year in which such disposition occurs, an amount equal to the excess of (i) the fair market value of such shares on the date of purchase over (ii) the purchase price. The employee's basis in such shares disposed of will be increased by the amount of ordinary income includable in income as a result of such disposition, and any gain or loss computed with reference to such adjusted basis that is recognized at the time of disposition will be a capital gain or loss, either short-term or long-term, depending on the holding period for such shares. In the event of a disposition within such two-year or one-year period, the Company (or the subsidiary by which the employee is employed) will be entitled to a deduction for federal income tax purposes in an amount equal to the amount the employee is required to include in income as ordinary income as a result of such disposition. Plan Administration and Termination The ESPP is administered by the Company's Compensation Committee. The Committee may adopt rules and procedures not inconsistent with the provisions of the ESPP for its administration. The Committee's interpretation and construction of the ESPP is final and conclusive. The Committee may at any time, or from time to time, alter or amend the ESPP in any respect, except that, without approval of the shareholders of the Company, no amendment may change the number of shares reserved for purchase under the ESPP or adversely affect the rights of any participant with respect to amounts previously credited to his or her ESPP account. The Committee shall have the right to terminate the ESPP or any offering thereunder at any time for any reason. Unless terminated earlier, the ESPP shall terminate at the time purchase rights have been exercised with respect to all shares of common stock reserved for grant under the ESPP. Upon expiration or termination of the ESPP, any amount not applied toward the purchase of common stock will be refunded. 28 OWNERSHIP OF DIRECTORS, PRINCIPAL SHAREHOLDERS AND CERTAIN EXECUTIVE OFFICERS The following table sets forth certain information regarding the beneficial ownership of the Company's common stock as of March 29, 2002, by: (i) each person (or group of affiliated persons) known by the Company to be the beneficial owner of more than 5 percent of the outstanding common stock; (ii) the Named Executive Officers; (iii) each director and director nominee of the Company; and (iv) all of the Company's executive officers and directors as a group. Except as otherwise indicated in the footnotes to this table, the Company believes that the persons named in this table have sole investment and voting power with respect to all the shares of common stock indicated. BENEFICIAL OWNERSHIP AS OF MARCH 29, 2002(1) ----------------------- BENEFICIAL OWNER SHARES PERCENTAGE ---------------- ------ ---------- Blum Capital Partners, L.P (2) 9,453,803 13.71 John M. Cook (3)(4) 4,579,004 7.11 Andrew Schultz (3)(5) 6,252,856 9.80 Arthur N. Budge, Jr. (6) 258,295 * Stanley B. Cohen (7) 816,750 1.28 Jonathan Golden (8) 1,219,955 1.91 Garth H. Greimann (9) 51,241 * Fred W. I. Lachotzki (10) 77,750 * Nathan A. Levine (11) 36,200 * E. James Lowrey (12) 67,750 * Thomas S. Robertson (13) 36,200 * Howard Schultz (3), (14) 4,512,366 7.08 John M. Toma (15) 1,163,649 1.81 Jackie M. Ward (13) 46,535 * Mark C. Perlberg (16) 139,198 * Donald E. Ellis, Jr. (17) 204,166 * Robert G. Kramer (18) 103,667 * N. Colin Lind (19) 9,453,803 13.71 All executive officers, directors and director nominees as a group (16 persons) (20) 29,017,386 44.17 - ---------- * Represents holdings of less than one percent. (1) Applicable percentage of ownership at March 29, 2002 is based upon 63,777,181 shares of common stock outstanding. Beneficial ownership is determined in accordance with the rules of the Securities and Exchange Commission and includes investment and voting power with respect to the shares shown as beneficially owned. Shares of common stock subject to options currently exercisable or that will become exercisable within 60 days of the date of this proxy statement are deemed outstanding for computing the percentage ownership of the person holding such options, but are not deemed outstanding for computing the percentage ownership of any other persons. (2) Includes 3,229,975 shares the Blum Reporting Persons, as defined below, have the right to acquire upon conversion of convertible notes acquired on November 26, 2001. Includes an additional 1,937,985 shares the Blum Reporting Persons have the right to acquire upon conversion of convertible notes acquired on December 3, 2001. Blum Capital Partners, L.P., a California limited partnership ("Blum L.P."); Richard C. Blum & Associates, Inc., a California corporation ("RCBA Inc."); Blum Strategic GP, L.L.C., a Delaware limited liability company ("Blum GP"); Blum Strategic GP II, L.L.C., a Delaware limited liability company ("Blum GP II"); Blum Strategic Partners II, L.P., a Delaware limited partnership; and Richard C. Blum, the Chairman and a substantial shareholder of RCBA Inc. and a managing member of Blum GP and Blum GP II, are referred to herein as the "Blum Reporting Persons." Blum L.P. is a California limited partnership whose principal business is acting as a general partner for investment partnerships and providing investment advisory services. Blum L.P. is an investment advisor registered with the Securities and Exchange Commission. The sole general partner of Blum L.P. is RCBA Inc. Each of the Blum Reporting Persons reports that it has shared voting and dispositive power over the shares reported above. The principal office for each of the Blum Reporting Persons is 909 Montgomery Street, Suite 400, San Francisco, California 94133. (3) The business address for Messrs. Cook, Howard Schultz and Andrew Schultz is 2300 Windy Ridge Parkway, Suite 100 North, Atlanta, Georgia 30339-8426. 29 (4) Includes 440,002 shares held by the Cook Family Limited Partnership, of which Mr. Cook is the general partner, 86,159 shares and 60,000 shares held by the Cook Family 1999 Grantor Retained Annuity Trust and the M. Lucy Cook Family 2001 Grantor Retained Annuity Trust, respectively, of which Mr. Cook is trustee and has sole investment and voting power with respect to such shares, 90,000 shares held by the John M. Cook Family 2001 Grantor Retained Annuity Trust, of which M. Lucy Cook, Mr. Cook's spouse, is trustee and has sole investment and voting power with respect to such shares, and 695,139 shares held by M. Lucy Cook. Also includes 589,291 shares subject to options that are currently exercisable. Does not include 958,832 shares held for the benefit of Mr. Cook pursuant to a Grantor Retained Annuity Trust of which James R. Cook is trustee and has sole investment and voting power with respect to such shares, 220,704 shares held by the John and Lucy Cook Charitable Remainder Annuity Trust of which M. Christine Cook is trustee and has sole investment and voting power with respect to such shares, and 958,832 shares held for the benefit of M. Lucy Cook pursuant to a Grantor Retained Annuity Trust of which M. Christine Cook and M. Thomas Cook are co-trustees and have sole investment and voting power with respect to such shares. (5) Includes 3,670,002 shares held by the Andrew H. Schultz Irrevocable Trust of which Mr. A. Schultz is trustee and beneficiary. Includes 634,819 shares held by The HHS Charitable Lead Annuity Trust and 634,819 shares held by The LVS Charitable Lead Annuity Trust, as to each of which Mr. A. Schultz is a co-trustee. Includes 6,901 shares held by The Andrew Harold Schultz LVS (2001) GST Trust and 6,901 shares held by The Andrew Harold Schultz HHS (2001) GST Trust, as to each of which Mr. A. Schultz is the sole trustee. (6) Includes 258,295 shares subject to options that are currently exercisable. (7) Includes 196,910 shares held for the benefit of Mr. Cohen pursuant to a trust, of which Shirley L. Cohen, Mr. Cohen's spouse, is the trustee and has sole investment and voting power, includes 22,000 shares held by a partnership of which Mr. Cohen is the general partner and includes 29,750 shares subject to options that are currently exercisable. (8) Includes 29,750 shares subject to options that are currently exercisable. (9) Includes 39,750 shares subject to options that are currently exercisable. (10) Includes 54,750 shares subject to options that are currently exercisable. (11) Includes 10,000 shares subject to options that are currently exercisable. (12) Includes 42,750 shares subject to options that are currently exercisable. (13) Includes 33,000 shares subject to options that are currently exercisable. (14) Includes 753 shares held by Leslie Schultz, Mr. H. Schultz's spouse. Also includes 20,387 shares held by the Zachary Herman Schultz Trust, 20,387 shares held by the Gabriella Schultz Trust and 20,387 shares held by the Samuel Joel Schultz Trust, of which Mr. H. Schultz is a trustee. (15) Includes 48,034 shares held for the benefit of Mr. Toma pursuant to a trust, of which Dorothy M. Toma, Mr. Toma's spouse, is trustee and has sole investment and voting power with respect to such shares. Includes 275,886 shares held by the Toma Family Limited Partnership, of which Mr. Toma serves as the general partner and 5,556 shares held by Toma Family Foundation, Inc., of which Mr. Toma is President. Also, includes 73,190 shares held by Dorothy M. Toma, 19,203 shares held by the Mary Caitlin Cook Trust, of which Mr. Toma is the trustee, 17,480 shares held by the Adam Cook Trust, of which Mr. Toma is the trustee, and 392,500 shares subject to options that are currently exercisable. (16) Includes 28,000 shares of stock currently subject to certain restrictions and risk of forfeiture and 101,250 shares subject to options that are currently exercisable. (17) Includes 170,833 shares subject to options that are currently exercisable and 8,333 shares subject to options that will become exercisable within 60 days of the date of this proxy statement. (18) Includes 989 shares held by Mr. Kramer's spouse, 5,000 shares of stock currently subject to certain restrictions and risk of forfeiture, 87,000 shares subject to options that are currently exercisable and 6,250 shares subject to options that will become exercisable within 60 days of the date of this proxy statement. (19) Mr. Lind is a Managing Partner of Blum Capital Partners, L.P. He disclaims beneficial ownership of the shares beneficially owned by Blum Capital Partners, L.P., except to the extent of any pecuniary interest therein. See note (2) above. (20) Includes 33,000 shares of stock currently subject to certain restrictions and risk of forfeiture. Also includes options to purchase 1,886,502 shares that are either currently exercisable or will become exercisable within 60 days of the date of this proxy statement. 30 EXECUTIVE OFFICERS Each of the executive officers of the Company was elected by the Board of Directors to serve until the Board of Directors' meeting immediately following the next annual meeting of the shareholders or until his earlier removal by the Board or his resignation. The following table lists the executive officers of the Company and their ages and offices with the Company. NAME AGE OFFICE WITH REGISTRANT - ---- --- ---------------------- Howard Schultz...... 74 Chairman of the Board John M. Cook........ 59 President and Chief Executive Officer and Director John M. Toma........ 56 Vice Chairman and Director Mark C. Perlberg.... 46 Executive Vice President and Chief Operating Officer Andrew Schultz...... 35 Executive Vice President Donald E. Ellis, Jr. 50 Executive Vice President - Finance, Chief Financial Officer and Treasurer Robert G. Kramer.... 58 Executive Vice President and Chief Information Officer The employment histories of those executive officers who are not also directors are set forth below: Mark C. Perlberg joined the Company in February 2000 as President of the Accounts Payable Group. Effective January 24, 2002, Mr. Perlberg was elected Executive Vice President and Chief Operating Officer. Prior to joining the Company, Mr. Perlberg had worked for John H. Harland Company, a check printing company, since February 1996, most recently serving as Vice President and General Manager of the North Region. Donald E. Ellis, Jr. rejoined the Company in October 2000 as Executive Vice President - Finance, Chief Financial Officer and Treasurer. Mr. Ellis had previously served the Company as Special Assistant to the Chairman from July 19, 1999 to May 31, 2000 and as its Senior Vice President, Chief Financial Officer and Treasurer from March 1995 to July 1999. Mr. Ellis is a certified public accountant. Robert G. Kramer joined the Company in October 1997 as Executive Vice President and Chief Information Officer. Prior to joining the Company, Mr. Kramer had worked for Home Shopping Network, Inc. since 1996 as Executive Vice President and Chief Information Officer. 31 PERFORMANCE GRAPH Set forth below is a line graph presentation comparing the cumulative shareholder return on the Company's common stock (Nasdaq: PRGX), on an indexed basis, against cumulative total returns of the Nasdaq Stock Market (U.S. Companies) Index and the JP Morgan H&Q Technology Index. The graph assumes that the value of the investment in the common stock in each index was $100 on December 31, 1996. The Performance Graph shows total return on investment for the period beginning December 31, 1996 through December 31, 2001. [GRAPH OMITTED] VALUE OF $100 INVESTED ON DECEMBER 31, 1996 IN:
12/31/96 12/31/97 12/31/98 12/31/99 12/31/00 12/31/01 --------- --------- -------- --------- --------- --------- PRG-SCHULTZ INTERNATIONAL, INC. $ 100.00 $ 110.94 $ 233.98 $ 249.03 $ 59.77 $ 76.41 NASDAQ STOCK MARKET (U.S.) $ 100.00 $ 122.48 $ 172.68 $ 320.89 $ 193.01 $ 153.15 JP MORGAN H&Q TECHNOLOGY $ 100.00 $ 117.24 $ 182.36 $ 407.27 $ 263.28 $ 181.99
Total return assumes reinvestment of any dividends. 32 INDEPENDENT AUDITORS The accounting firm of KPMG LLP are the independent auditors of the Company. Approval or selection of the independent auditors of the Company is not submitted for a vote at the annual meeting. The Board of Directors of the Company has historically selected the independent auditors of the Company, with the advice of the Audit Committee, and the Board believes that it would be to the detriment of the Company and its shareholders for there to be any impediment to the Board's exercising its judgment to remove the Company's independent auditors if, in its opinion, such removal is in the best interest of the Company and its shareholders. It is anticipated that a representative from the accounting firm of KPMG LLP will be present at the annual meeting to answer appropriate questions and make a statement if the representative desires to do so. SHAREHOLDER PROPOSALS Appropriate proposals of shareholders intended to be presented at the Company's 2003 Annual Meeting of Shareholders pursuant to Rule 14a-8 promulgated under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), must be received by the Company by December 17, 2002 for inclusion in its Proxy Statement and form of proxy relating to that meeting. In addition, all shareholder proposals submitted outside of the shareholder proposal rules promulgated pursuant to Rule 14a-8 under the Exchange Act must be received by the Company by January 16, 2003 in order to be considered timely. If such shareholder proposals are not timely received, proxy holders will have discretionary voting authority with regard to any such shareholder proposals that may come before the 2003 Annual Meeting. With regard to such shareholder proposals, if the date of the 2003 Annual Meeting is subsequently advanced or delayed by more than 30 days from the date of the 2002 Annual Meeting, the Company shall, in a timely manner, inform shareholders of the change and the date by which proposals must be received. IT IS IMPORTANT THAT PROXIES BE RETURNED PROMPTLY. SHAREHOLDERS WHO DO NOT EXPECT TO ATTEND THE MEETING IN PERSON ARE URGED TO SIGN, COMPLETE, DATE AND RETURN THE PROXY CARD IN THE ENCLOSED ENVELOPE, TO WHICH NO POSTAGE NEED BE AFFIXED IF MAILED IN THE UNITED STATES. By Order of the Board of Directors: /s/ JOHN M. COOK JOHN M. COOK Chairman of the Board and Chief Executive Officer Dated: April 16, 2002 33 1455613 APPENDIX PRG-SCHULTZ INTERNATIONAL, INC. PROXY SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS FOR USE AT THE ANNUAL MEETING ON MAY 15, 2002 The undersigned shareholder hereby appoints John M. Cook, Donald E. Ellis, Jr., Clinton McKellar, Jr. or any of them, with full power of substitution, to act as proxy for, and to vote the stock of, the undersigned at the Annual Meeting of Shareholders of PRG-Schultz International, Inc. (the "Company") to be held on May 15, 2002, and any adjournments or postponements thereof. The undersigned acknowledges receipt of this Notice of Annual Meeting of Shareholders and Proxy Statement, each dated April 16, 2002, and grants authority to said proxies, or their substitutes, and ratifies and confirms all that said proxies may lawfully do in the undersigned's name, place and stead. The undersigned instructs said proxies to vote as indicated hereon. THE PROXIES SHALL VOTE AS DIRECTED ON THIS PROXY CARD, OR IF NO DIRECTION IS MADE, THIS PROXY WILL BE VOTED "FOR" EACH OF THE LISTED NOMINEES, "FOR" THE AMENDMENT TO THE COMPANY'S ARTICLES OF INCORPORATION, "AGAINST" THE SHAREHOLDER PROPOSAL TO REDEEM THE COMPANY'S SHAREHOLDER PROTECTION RIGHTS AGREEMENT, "FOR" THE AMENDMENT TO THE STOCK INCENTIVE PLAN, AND "FOR" THE AMENDMENT TO THE EMPLOYEE STOCK PURCHASE PLAN. Please Vote, Sign, Date And Return This Proxy Card Promptly Using The Enclosed Envelope. 1. Election of Class III Directors
|_| FOR the nominees listed below |_| FOR the nominees listed |_| WITHHOLD AUTHORITY to vote for below except as marked to all nominees listed below the contrary
(Instruction: TO WITHHOLD AUTHORITY TO VOTE FOR ANY INDIVIDUAL NOMINEE, strike a line through that nominee's name in the list below)
CLASS III DIRECTOR NOMINEES: Arthur N. Budge, Jr. N. Colin Lind Thomas S. Robertson Jackie M. Ward
(Continued on the Reverse Side) 2. Proposal to approve an amendment to the Company's Articles of Incorporation to provide that shareholders may only remove directors for cause. FOR |_| AGAINST |_| ABSTAIN |_| 3. Shareholder proposal to redeem the Company's Shareholder Protection Rights Agreement. The Board of Directors recommends a vote "AGAINST" Proposal 3. FOR |_| AGAINST |_| ABSTAIN |_| 4. Proposal to approve an increase in the number of shares available for issuance under the Company's Stock Incentive Plan by 1,750,000 shares. FOR |_| AGAINST |_| ABSTAIN |_| 5. Proposal to approve an increase in the number of shares available for issuance under the Company's Employee Stock Purchase Plan by 1,500,000 shares. FOR |_| AGAINST |_| ABSTAIN |_| 6. In the discretion of the proxies, upon such other matters as may properly come before the meeting or any adjournment thereof. Dated: ___________________, 2002 __________________________________________ Signature __________________________________________ Signature (if held jointly) __________________________________________ Title(s) (Shareholders should sign exactly as name appears on stock. Where there is more than one owner, each should sign. Executors, Administrators, Trustees and others signing in a representative capacity should so indicate.) ANNEX A THE PRG-SCHULTZ INTERNATIONAL, INC. STOCK INCENTIVE PLAN SECTION 1. PURPOSE. The purpose of The Profit Recovery Group International, Inc. Stock Incentive Plan (the "Plan") is to enable The Profit Recovery Group International, Inc. (the "Company") to attract, retain and reward directors, officers and other employees of, and consultants and advisors to, the Company, and any Subsidiaries, Parent or Affiliates thereof, and strengthen the mutuality of interests between such persons and the Company's shareholders, by offering such persons performance based stock incentives and/or other equity interests or equity-based incentives in the Company. SECTION 2. DEFINITIONS. For purposes of the Plan, the following terms shall be defined as set forth below: (a) "Affiliate" means any corporation, partnership or other entity controlled by, or under common control with, the Company. For these purposes, control shall consist of the ownership, either directly or indirectly, of more than 50% of the ownership interests of an entity. (b) "Board" means the Board of Directors of the Company. (c) "Code" means the Internal Revenue Code of 1986, as amended from time to time, and any successor thereto. (d) "Committee" means the Committee referred to in Section 3 of the Plan. If at any time no Committee shall be in office, then the functions of the Committee specified in the Plan may be exercised by the Board, as set forth in Section 3 hereof. (e) "Company" means The Profit Recovery Group International, Inc., a corporation organized under the laws of the State of Georgia, or any successor corporation. (f) "Fair Market Value" means, for purposes of determining the exercise price for a Stock Option or SAR granted hereunder, as of any given date: (i) if the Stock is listed on an established stock exchange or exchanges, or traded on the Nasdaq National Market System ("Nasdaq/NMS") the closing price of the Stock as listed thereon on the applicable day, or if no sale of Stock has been made on any exchange on that date, on the next preceding day on which there was a sale of Stock; (ii) if the Stock is not listed on an established stock exchange or Nasdaq/NMS but is instead traded over-the-counter, the mean of the dealer "bid" and "ask" prices of the Stock in the over-the-counter market on the applicable day, as reported by the National Association of Securities Dealers, Inc.; (iii) if the Stock is not listed on any exchange or traded over-the-counter, the value as determined in good faith by the Committee; (g) "Incentive Stock Option" means any Stock Option intended to be and designated as an "Incentive Stock Option" within the meaning of Section 422 of the Code. (h) "Non-Qualified Stock Option" means any Stock Option that is not an Incentive Stock Option. (i) "Optionee" means any person holding an Option in accordance with the terms of this Plan. (j) "Parent" means any corporation (other than the Company) and any successor corporation in an unbroken chain of corporations ending with the Company if each of the corporations other than the Company owns stock possessing 50% or more of the total combined voting power of all classes of stock in one of the other corporations in the chain. (k) "Plan" is defined in Section 1 hereof and includes the Plan as hereinafter amended from time to time. (l) "Plan Participant" means any person granted an Option SAR or Stock Award pursuant to the Plan. (m) "SAR" means a stock appreciation right which entitles a Plan Participant to receive, in cash or Stock (as determined in accordance with Section 6(g)) value equal to all or a portion of the excess of: (a) the Fair Market Value of a specified number of shares of Stock at the time of exercise, over (b) an exercise price established by the Committee. (n) "Stock" means the common stock of the Company. (o) "Stock Award" means a grant of shares of Stock or of a right to receive shares of Stock (or their cash equivalent or a combination of both) in the future. (p) "Stock Option" or "Option" means any option to purchase shares of Stock granted pursuant to the Plan. (q) "Subsidiary" means any corporation (other than the Company) and any successor corporation in an unbroken chain of corporations beginning with the Company if each of the corporations (other than the last corporation in the unbroken chain) owns stock possessing 50% or more of the total combined voting 2 power of all classes of stock in one of the other corporations in the chain. SECTION 3. ADMINISTRATION. (a) By Committee. The Plan shall be administered by a Committee of not less than two Directors who are not employees of the Company, who shall be members of the Board and who shall serve at the pleasure of the Board. The functions of the Committee specified in the Plan may be exercised by the Board, if and to the extent that no Committee exists which has the authority to so administer the Plan. (b) Authority of Committee The Committee shall have full authority to grant, pursuant to the terms of the Plan, Stock Options, SARs and Stock Awards to directors, officers and other key employees, consultants and advisors eligible to be Plan Participants under Section 5 hereof. The Committee shall have the authority to adopt, alter and repeal such rules, guidelines and practices governing the Plan as it shall, from time to time, deem advisable; to interpret the terms and provisions of the Plan and any award under the Plan (and any agreements relating thereto); and to otherwise supervise the administration of the Plan. Without limiting the generality of the foregoing, the Committee shall have the authority: (i) to select the directors, officers and other key employees of, and consultants and advisors to, the Company and any Subsidiaries, Parent and Affiliate to whom Stock Options, SARs and other Stock Awards may from time to time be granted hereunder; (ii) to determine whether and to what extent Incentive Stock Options, Non-Qualified Stock Options, SARS and other Stock Awards or any combination thereof are to be granted hereunder to one or more eligible persons; (iii) to determine the number of shares subject to each such Option, SAR and other Stock Award granted hereunder; (iv) to determine the terms and conditions, not inconsistent with the terms of the Plan, of any Option, SAR or other Stock Award granted hereunder including, but not limited to, the exercise price, or any vesting, acceleration, or forfeiture restrictions regarding any Option, SAR or other Stock Award and/or the shares of Stock relating thereto, or any other restrictions and to waive any such terms or conditions in each case on such factors as the Committee shall determine, in its sole discretion; and (v) to determine whether and under what circumstances cash payments shall be made upon the termination of a Stock Option, SAR or other Stock Award, and whether and under what circumstances Stock acquired pursuant to the exercise of a Stock Option or SAR or pursuant 3 to the grant of a Stock Award shall be repurchased by the Company. (c) Committee Decisions Final and Binding. All decisions made by the Committee pursuant to the provisions of the Plan shall be made in the Committee's sole discretion and shall be final and binding on all persons, including the Company and Plan Participants. (d) Indemnification. In addition to such other rights of indemnification that they may have as directors of the Company or as members of the Committee, the members of the Committee shall be indemnified by the Company against the reasonable expenses, including attorneys' fees actually and necessarily incurred in connection with the defense of any action, suit or proceeding, or in connection with any appeal therein, to which they or any of them may be a party by reason of any action taken or failure to act under or in connection with the Plan or any option granted thereunder, and against all amounts paid by them in settlement thereof (provided such settlement is approved by independent legal counsel selected by the Company) or paid by them in satisfaction of a judgment in any such action, suit or proceeding, except in relation to matters as to which it shall be adjudged in such action, suit or proceeding that such Committee member is liable for negligence or misconduct in the performance of his or her duties. SECTION 4. STOCK SUBJECT TO PLAN. The total number of shares of Stock reserved and available for distribution under the Plan shall be 12,625,000 shares (including shares subject to previous grants under the Company's 1996 Stock Option Plan), subject to adjustment as set forth herein, increased from time to time by action of the Board of Directors and the Stockholders of the Company. Such shares may consist, in whole or in part, of authorized and unissued shares or treasury shares. If any outstanding Option, SAR or other Stock Award under the Plan expires or is terminated, the shares allocated to the unexercised portion of such Option, SAR or other Stock Award shall again be available for future Stock Option grants. Notwithstanding the foregoing, (i) The maximum number of shares that may be covered by awards granted to any one individual pursuant to Section 6 (relating to Options and SARs) shall be 500,000 shares during any consecutive 12 month period. (ii) On or before March 12, 2002, the maximum number of shares that may be covered by Stock Awards granted to any one individual pursuant to Section 7 shall be 500,000 shares during any consecutive 12 month period. After March 12, 2002, the maximum number of shares that may be covered by Stock Awards granted to any one individual pursuant to Section 7 shall be 300,000 shares during any consecutive 12 month period. The maximum number of shares covered by Stock Awards that may be granted after March 4 12, 2002 pursuant to Section 7 shall be, in the aggregate, 300,000 shares. In the event of any transaction described in Section 8(d) hereof, such substitution or adjustment shall be made in the aggregate number of shares reserved for issuance under the Plan, in the individual maximums set forth above, in the number and option price of shares subject to outstanding Options and SARs and in the number of shares subject to outstanding Stock Awards such that each Plan Participant will continue to hold the same economic equivalent he had immediately prior to such transaction and such that all maximums will be increased or decreased in accordance with such transaction, provided that the number of shares subject to any such award shall always be a whole number. SECTION 5. ELIGIBILITY. Directors, officers and key employees of, and consultants and advisors to, the Company and any Subsidiaries, Parent and Affiliate thereof who are responsible for or contribute to the management, growth and/or profitability of the business of the Company and/or any Subsidiaries, Parent and Affiliate thereof are eligible to be Plan Participants and to receive awards under the Plan. SECTION 6. TERMS AND CONDITIONS OF OPTIONS AND SARS. Stock Options granted under the Plan may be of two types: (i) Incentive Stock Options, and (ii) Non-Qualified Stock Options. The Committee shall have the authority to grant to any eligible person Incentive Stock Options, Non-Qualified Stock Options, or both types of Stock Options; provided, however, that no person who is not an employee of the Company, its Parent or its Subsidiaries shall be eligible to be granted Incentive Stock Options. Options and SARs granted under the Plan shall be subject to the following terms and conditions and shall contain such additional terms and conditions, not inconsistent with the terms of the Plan, as the Committee shall deem desirable: (a) Option Designation. Each Option granted under the Plan shall be clearly identified at the time of grant as an Incentive Stock Option or a Non-Qualified Stock Option. An Incentive Stock Option may not be granted in tandem stock option arrangements under the Plan (i.e., where an Incentive Stock Option is issued together with a Non-Qualified Stock Option and the exercise of either type of Option affects the right to exercise the other type of Option). (b) Written Agreement. Each Option and SAR granted under the Plan shall be evidenced by a written agreement in such form as the Committee shall from time to time approve. All such agreements shall comply with and be subject to the terms of the Plan. (c) Exercise Price. The "Exercise Price" of each Option and SAR granted under this Section 6 shall be established by the Committee or shall be 5 determined by a method established by the Committee at the time the Option or SAR is granted; except that the Exercise Price shall not be less than the greater of 100% of the Fair Market Value or the par value of a share of Stock as of the Pricing Date, as defined below. However, if the Plan Participant owns more than 10% of the total combined voting power of all classes of capital stock of the Company or any Subsidiary or Parent, the Exercise Price of an Incentive Stock Option granted to such Plan Participant shall not be less than 110% of the Fair Market Value of a share of Stock as of the Pricing Date. For purposes of the preceding sentence, the "Pricing Date" shall be the date on which the Option or SAR is granted, except that the Committee may provide that: (i) the Pricing Date is the date on which the recipient is hired or promoted (or similar event), if the grant of the Option or SAR occurs not more than 90 days after the date of such hiring, promotion or other event; and (ii) if an Option or SAR is granted in tandem with, or in substitution for, an outstanding award, the Pricing Date is the date of grant of such outstanding award. (d) Term. The term of each Stock Option and SAR shall be fixed by the Committee, but no Stock Option granted on or before March 12, 2002 shall be exercised more than ten years (or, in the case of an Incentive Stock Option granted to an employee who owns stock possessing more than 10% of the total combined voting power of all classes of stock of the Company or any Subsidiary or Parent, more than five years) after the date the Option is granted. Stock Options and SARs granted after March 12, 2002 shall not be exercised more than seven years after the date the Option is granted. (e) Exercisability. Stock Options and SARs shall be exercised at such time or times and subject to such terms and conditions as shall be determined by the Committee at or after grant. If the Committee provides, in its sole discretion, that any Stock Option or SAR is exercisable only in installments, the Committee may waive such installment exercise provisions at any time at or after grant in whole or in part, based on such factors as the Committee shall determine, in its sole discretion. (f) Method of Exercise. Subject to whatever installment exercise provisions apply pursuant to Section 6(e) hereof, Options and SARs may be exercised in whole or in part at any time during the term thereof, by giving written notice of exercise to the Company specifying the number of shares to be purchased or the amount of the SAR to be exercised. Such notice shall be accompanied by payment in full of the purchase price in the case of an Option, either by cash, check, note or such other instrument as the Committee may accept. As determined by the Committee, in its sole discretion, at or after grant, payment in full or in part may also be made in the form of Stock already owned by the Optionee based, in each case, on the fair market value of the Stock on the date the Option is exercised, as determined for this purpose by the Committee in its sole discretion; provided, however, that in no event shall payment in full or in part for the exercise of an Option be made with any Stock which, as of the date of exercise of the Option, has been owned by the Optionee less than six (6) months. If the Committee permits such payment in the form of Stock, the certificate or certificates representing the shares of 6 Stock to be delivered shall be duly executed in blank by the Optionee or shall be accompanied by a stock power duly executed in blank suitable for purposes of transferring such shares to the Company. Fractional shares of Stock will not be accepted in payment of the purchase price of shares acquired upon exercise of the Option. No shares of Stock shall be issued until full payment therefor has been made. (g) Settlement of Award. Distribution following exercise of an Option or SAR, and shares of Stock distributed pursuant to such exercise, shall be subject to such conditions, restrictions and contingencies as the Committee may establish. Settlement of SARs may be made in shares of Stock (valued at their Fair Market Value at the time of exercise), in cash, or in a combination thereof, as determined in the discretion of the Committee. The Committee, in its discretion, may impose such conditions, restrictions and contingencies and may waive any such conditions, restrictions and contingencies, at or after grant, or otherwise accelerate the vesting of any Option or SAR, at any time, in its discretion with respect to shares of Stock acquired pursuant to the exercise of an Option or an SAR as the Committee determines to be desirable. SECTION 7. STOCK AWARDS. Each Stock Award shall be subject to such conditions, restrictions and contingencies as the Committee shall determine. These may include continuous service and/or the achievement of performance measures. The performance measures that may be used by the Committee for such Awards shall be measured by revenues, income, or such other criteria as the Committee may specify. The Committee may designate a single goal criterion or multiple goal criteria for performance measurement purposes, with the measurement based on absolute Company or business unit performance and/or on performance as compared with that of other publicly-traded companies. If the right to become vested in a Stock Award granted under this Section 7 is conditioned on the completion of a specified period of service with the Company or any Subsidiary or Parent without achievement of performance measures or other objectives being required as a condition of vesting, then the required period of service for vesting shall be not less than three years (subject to acceleration of vesting, to the extent permitted by the Committee, in the event of the Participant's death, disability, change in control or involuntary termination). SECTION 8. MISCELLANEOUS. (a) Non-Transferability of Options, SARs and Stock Awards. No Option, SAR or Stock Award shall be transferable by a Plan Participant otherwise than by will or by the laws of descent and distribution, and all Options and SARs shall be exercisable, during the Plan Participant's lifetime, only by the Plan Participant. (b) Investment Representations. The Company may require any grantee, as a condition of exercising an Option or SAR, to give written assurances in substance and form satisfactory to the Company to the effect that such person is acquiring the Stock subject to the Option or SAR for his own account for 7 investment and not with any present intention of selling or otherwise distributing the same, and to such other effect as the Company deems necessary or appropriate in order to comply with federal and applicable state securities laws. (c) Compliance with Securities Laws. Each Option and SAR shall be subject to the requirement that, if at any time counsel to the Company shall determine that the listing, registration, or qualification of the shares subject to such Option and SAR upon any securities exchange or under any state or federal law, or the consent or approval of any governmental or regulatory body, is necessary as a condition of, or in connection with, the issuance or purchase of shares thereunder, such Option or SAR may not be exercised in whole or in part unless such listing, registration, qualification, consent, or approval shall have been effected or obtained on conditions acceptable to the Committee. Nothing herein shall be deemed to require the Company to apply for or to obtain such listing, registration, or qualification. (d) Recapitalization. If the outstanding shares of Stock are changed into or exchanged for a different number or kind of shares or other securities of the Company by reason of any recapitalization, reclassification, stock split, stock dividend, combination, subdivision or similar transaction, then, subject to any required action by the stockholders of the Company, the number and kind of shares of Stock subject to outstanding Options, SARs or Stock Awards and available under the Plan and price per share of Stock for any outstanding Options and SARs shall be proportionately adjusted; provided, however, that no fractional shares shall be issued or made subject to an Option, SAR or Stock Award in making the foregoing adjustments. All adjustments made by the Committee under this Section shall be final, conclusive and binding upon the holders of Options, SARs and Stock Awards. (e) Reorganization. If, while unexercised Options and/or SARs remain outstanding under the Plan, the Company proposes to merge or consolidate with another corporation, whether or not the Company is to be the surviving corporation, or if the Company proposes to liquidate or sell or otherwise dispose of substantially all of its assets or substantially all of the outstanding shares of Stock of the Company are to be sold, then the Committee may, in its sole discretion, either (i) make appropriate provision for the protection of any such outstanding Options and SARs by the substitution on an equitable basis of appropriate stock of the surviving corporation or its parent in the merger or consolidation, or other reorganized corporation that will be issuable in respect to the shares of Stock of the Company subject to such Options and SARs, provided that, with respect to Incentive Stock Options, such provision shall satisfy the requirement that no additional benefits shall be conferred upon Optionees as a result of such substitution within the meaning of Section 424(a) of the Code, and that the excess of the aggregate fair market value of the shares subject to the Options immediately after such substitution over the purchase price thereof is not more than the excess of the aggregate fair market value of the shares subject to such Options immediately before such substitution over the purchase price thereof, or (ii) upon written notice to the Plan Participants, provide that all unexercised Options and SARs must be exercised within a specified number of days of the date of such notice or they will be terminated. In any such case, the Committee may, in its discretion, accelerate the date on which outstanding Options and SARs become exercisable. In 8 no event, however, shall the Committee be obligated to take any action as a result of any transaction described in this Section 8(e), it being acknowledged that it is in the Committee's sole discretion to determine if, and to what extent, the action authorized by this Section 8(e) shall be taken. (f) Rights as a Shareholder. A Plan Participant shall have no rights as a shareholder with respect to any shares subject to an Option or SAR until the date of issue of a stock certificate to him or her for such shares and only after such shares are fully paid. No adjustment shall be made for dividends or other rights for which the record date is prior to the date such stock certificate is issued. (g) Annual Limitation For Incentive Stock Options. To the extent that the Fair Market Value (determined as of the date of grant of an Option) of shares of Stock with respect to which an Incentive Stock Option first becomes exercisable by an Optionee during any calendar year exceeds $100,000, such excess portion of the Stock Option shall thereafter be treated as a Non-Qualified Stock Option. SECTION 9. NO SPECIAL EMPLOYMENT RIGHTS. Nothing contained in the Plan or in any agreement pursuant to which an Option, SAR or Stock Award is granted under the Plan shall confer upon any Plan Participant any right with respect to the continuation of his employment or other engagement by the Company or any Subsidiary, Parent or Affiliate or interfere in any way with the ability of the Company or any Subsidiary, Parent or Affiliate at any time to terminate such employment or other engagement or to increase or decrease the compensation of the Plan Participant from the rate in existence at the time of the grant of an award. SECTION 10. OTHER EMPLOYEE BENEFITS. The amount of any compensation deemed to be received by an Plan Participant as a result of the exercise of an Option or the sale of shares received upon such exercise will not constitute "earnings" with respect to which any other benefits of such Plan Participant are determined, including, without limitation, benefits under any pension, profit sharing, life insurance, or salary continuation plan. SECTION 11. WITHHOLDING. The Company's obligation to deliver shares upon the exercise of any Option or SAR granted under the Plan or to make any payments required by any option agreement shall be subject to the grantee's satisfaction of any applicable federal, state, and local income and employment tax and withholding requirements in a manner and form satisfactory to the Company. 9 SECTION 12. GOVERNING LAW. The Plan, all awards granted under the Plan and actions taken thereunder shall be governed by and construed in accordance with the laws of the State of Georgia. SECTION 13. AMENDMENT OF THE PLAN. The Board may at any time and from time to time amend, suspend, alter, or discontinue the Plan in any respect, except that the Board may not, without the approval of the Company's shareholders: (a) except as expressly provided in Section 8(d) hereof, alter the total number of shares reserved for issuance pursuant to the Plan; (b) change the price at which Options and SARs may be granted pursuant to Section 6(c) hereof; (c) change the persons or class of persons eligible to participate in the Plan; (d) extend the maximum Option period under Section 6(d) hereof or the term of the Plan described in Section 14(b) hereof; or (e) materially increase the benefits accruing to Plan Participants. The Committee may amend the terms of any award, prospectively or retroactively, but, subject to Section 3 hereof, no such amendment shall impair the rights of any holder without the holder's consent. SECTION 14. EFFECTIVE DATE AND DURATION OF THE PLAN. (a) Effective Date. The Plan shall become effective when approved by the Company's shareholders. (b) Termination. Unless the Plan is sooner terminated in accordance with the terms herein, no further grants of awards may be made under the Plan after the earlier of (i) the close of business on the day next preceding the tenth anniversary of the date of its adoption by the shareholders and (ii) the date on which all shares available for issuance under the Plan shall have been issued pursuant to Stock Awards or the exercise of Options or SARs. Notwithstanding the foregoing, Options granted prior to the date specified in (i) above may extend beyond that date. 10 ANNEX B PRG-SCHULTZ INTERNATIONAL, INC. EMPLOYEE STOCK PURCHASE PLAN 1. PURPOSE The Profit Recovery Group International, Inc. Employee Stock Purchase Plan (the "Plan") is intended to encourage employee stock ownership by offering employees of The Profit Recovery Group International, Inc. and certain of its subsidiaries Purchase Rights (as such term is defined in Section 2 hereof) to purchase shares of Common Stock. The Plan is intended to be an "employee stock purchase plan" as defined in Section 423 of the Internal Revenue Code of 1986, as amended (the "Code"). The provisions of the Plan shall, accordingly, be construed in a manner consistent with the requirements of Section 423 of the Code. 2. CERTAIN DEFINITIONS "Base Pay" means regular straight-time and overtime earnings and commissions received from the Company, including payments for incentive compensation, but excluding other special payments. "Board" means the Board of Directors of the Company. "Committee" means the Compensation Committee of the Board. "Common Stock" means the Common Stock, no par value per share, of the Company. "Company" means The Profit Recovery Group International, Inc. and each Subsidiary (as defined in this Section 2). "Custodian" means [TO BE DESIGNATED], whose address is [TO BE DESIGNATED], or such other person as the Committee shall designate from time to time. "Exercise Date" means the last day of a Purchase Period (as such term is defined in Section 4(b) hereof), on which date all Participants' outstanding Purchase Rights will automatically be exercised. "Fair Market Value" means the closing sale price of a share of Common Stock reported in the table entitled "Nasdaq National Market Issues" or any successor table in The Wall Street Journal for such date or, if no shares of Common Stock were traded on that date, on the next preceding day on which there was such a trade. "Nasdaq" means the National Association of Securities Dealers Automated Quotation System. "Participant" means an employee of the Company who has enrolled in the Plan by filing a Participation Form (as such term is defined in Section 5 hereof) with the Plan Administrator. "Plan Administrator" means the [TO BE DESIGNATED] of the Company, or any such other person so designated by the Committee. "Purchase Right" means a Participant's option to purchase shares of Common Stock that is deemed to be outstanding during a Purchase Period. A Purchase Right represents an "option" as such term is used under Section 423 of the Code. "Subsidiaries" means subsidiaries of The Profit Recovery Group International, Inc. of which it owns the majority of the outstanding voting shares and which have been designated by the Committee as Subsidiaries; provided, however, that prior to any such designation by the Committee, each of The Profit Recovery Group International I, Inc., The Profit Recovery Group Canada, Inc., The ShapsGroup, Inc. and Accounts Payable Recovery Services, Inc. shall be deemed a Subsidiary. "Trading Day" refers to a day during which the Nasdaq National Market System is available for trading shares of Common Stock. 3. ELIGIBILITY (a) Participation in the Plan is voluntary. All employees of the Company, including officers and directors, whose customary employment is at least 20 hours per week and 5 months per year who have been employed since the fifth day of the first month of the preceding Purchase Period (January 5, 1997 for the Purchase Period beginning July 1, 1997) are eligible to participate in the Plan. (b) Notwithstanding any provision of the Plan to the contrary, no employee may participate in the Plan: (i) if following a grant of Purchase Rights under the Plan, the employee would own, directly or by attribution pursuant to Section 424(d) of the Code, stock, Purchase Rights or other stock options to purchase stock representing 5% or more of the total combined voting power or value of all classes of the Company's stock; or (ii) to the extent a grant of Purchase Rights under the Plan would permit the employee's rights to purchase stock under all the Company's Code Section 423 employee stock purchase plans to accrue at a rate exceeding $25,000.00, based on the Fair Market Value of the stock (at the time of grant), for each calendar year in which such Purchase Right is outstanding. 4. SECURITIES SUBJECT TO THE PLAN AND PURCHASE PERIODS (a) The Plan covers an aggregate of 2,625,000 shares of Common Stock (subject to adjustment as provided in Section 15 hereof), which may be authorized but unissued shares, reacquired shares or shares bought on the open market. If any Purchase Right that shall have been granted shall expire or terminate for any reason without having been exercised in full, the unpurchased shares of Common Stock shall again become available for purposes of the Plan, unless the Plan shall have been terminated. (b) Except as discussed below for the first year the Plan is in effect, there will be two purchase periods (each a "Purchase Period") each calendar year. There will be only one Purchase Period in calendar 1997, which will begin on July 1, 1997 and end on December 31, 1997. Thereafter, in each year that the Plan is in effect, the first Purchase Period will begin on January 1 and end on June 30 of each year that the Plan is in effect. The second Purchase Period will begin on July 1 and end on December 31 of each year the Plan is in effect. 5. PARTICIPATION Eligible employees become Participants in the Plan by authorizing payroll deductions for that purpose through a form (the "Participation/Withdrawal Form") filed with the Plan Administrator no later than fifteen (15) days prior to the start date of a Purchase Period. 6. PAYROLL DEDUCTIONS (a) In order to purchase Common Stock an employee must indicate on the Participation/Withdrawal Form the contribution percentage he or she wishes to authorize the Company to deduct at regular payroll intervals, in integral percentage amounts ranging from 1% to 10% of such Participant's Base Pay for the applicable payroll period, with a minimum deduction of $10.00 per payday and a maximum aggregate deduction of $10,625.00 during each Purchase Period. The Committee has the power, exercisable at any time prior to the start of a Purchase Period, to increase or decrease the $10,625.00 maximum for that Purchase Period. The maximum, as thus adjusted, will continue in effect from Purchase Period to Purchase Period until the Committee once again exercises its power to adjust the maximum. The Participation/Withdrawal Form will include authorization for the Company to make payroll deductions from the Participant's Base Pay. (b) In order to comply with the Federal tax laws, a Participant may not be granted Purchase Rights under the Plan and any other Code Section 423 employee stock purchase plan of the Company with respect to more than $25,000.00 worth of Common Stock for any calendar year such Purchase Rights to purchase Common Stock are outstanding pursuant to the terms of such plans. The $25,000.00 limit is determined 2 according to the Fair Market Value of the Common Stock on the first day (grant date) of the Purchase Period. Participants will be notified if these limitations become applicable to them. (c) The amounts deducted shall be credited to the Participant's account under the Plan, but no actual separate account will be established by the Company to hold such amounts. There shall be no interest paid on the balance outstanding in a Participant's account. The deducted amounts may be commingled with the general assets of the Company and may be used for its general corporate purposes. (d) Payroll deductions begin on the first payday of each Purchase Period, and end on the last payday of each Purchase Period. Eligible employees may participate in the Plan and purchase shares only by means of payroll deductions, except as set forth in the following sentence. A Participant may not make any separate cash payment into his or her account, except that employees on an approved leave of absence may continue participating in the Plan, at the sole discretion of the Plan Administrator, by making cash payments to the Company on a normal payday equal to the amount of the normal payroll deduction had a leave of absence not occurred. The right of a Participant on an approved leave of absence to continue participating in the Plan shall terminate if such leave of absence exceeds 90 days, unless and so long as the Participant's right to re- employment by the Company after a longer leave is guaranteed by statute or contract. (e) So long as a Participant remains an employee of the Company, payroll deductions will continue in effect from Purchase Period to Purchase Period, unless at least fifteen (15) days prior to the first day of the next succeeding Purchase Period the Participant: (i) elects a different rate by filing a new Participation/Withdrawal Form with the Plan Administrator; or (ii) withdraws from the Plan in accordance with Section 9 hereof. (f) Unless a Participant files with the Plan Administrator a new Participation/Withdrawal Form electing to withdraw prior to 15 days before the beginning of the affected Purchase Period as permitted under the Plan, such Participant's payroll deductions will continue throughout such Purchase Period and his or her Purchase Right to purchase Common Stock will be deemed to be fully and automatically exercised on the last day of such Purchase Period with respect to payroll deductions made during that period. 7. PURCHASE PRICE (a) On the first day of each Purchase Period, a Participant is deemed to have been granted a Purchase Right to purchase on the last day of the Purchase Period as many full shares of Common Stock as such Participant will be able to purchase with the payroll deductions credited to such Participant's account during such period. (b) The price at which each Purchase Right to purchase Common Stock may be exercised is 85% of the Fair Market Value of the Common Stock on the Nasdaq National Market System on the first Trading Day of a Purchase Period. (c) The number of shares purchasable by each Participant per Purchase Period will be the number of whole shares obtained by dividing the amount collected from the Participant (through payroll deductions during that Purchase Period) by the purchase price in effect for that Purchase Period. Any amount remaining in the Participant's account after such application will be held for the purchase of Common Stock in the next Purchase Period. 8. EXERCISE OF PURCHASE RIGHT (a) Each outstanding Purchase Right will be exercised automatically on the Exercise Date. The exercise of the Purchase Right is to be effected by applying the amount credited to each Participant's account as of the Exercise Date to the purchase on the Exercise Date of whole shares of Common Stock at the purchase price in effect for the Purchase Period. 3 (b) Fractional shares will not be issued under the Plan, and any amount remaining in the Participant's account after such application will be held for the purchase of Common Stock in the next Purchase Period. (c) If the number of shares for which Purchase Rights are exercised exceeds the number of shares available in any Purchase Period under the Plan, the shares available for sale will be allocated by the Plan Administrator pro rata among the Participants in such Purchase Period in proportion to the relative amounts in their accounts. Any amounts not thereby applied to the purchase of Common Stock under the Plan will be refunded to the Participants after the end of the Purchase Period. 9. WITHDRAWAL AND TERMINATION OF PURCHASE RIGHTS (a) A Participant may withdraw from the Plan by providing written notice to the Plan Administrator at any time prior to 15 days before the end of the current Purchase Period. Such notice shall be on the Participation/Withdrawal Form. The Participation/Withdrawal Form will permit such a Participant to make the following election: (i) The Participant may elect to immediately terminate his or her outstanding Purchase Rights, and such withdrawal will become effective by the tenth day following the Plan Administrator's receipt of the Participant's Participation/Withdrawal Form, at which time all outstanding Purchase Rights will be terminated and all accumulated payroll deductions will be refunded without penalty; or (ii) The Participant may elect to continue his or her participation in the Plan through the end of the current Purchase Period, and thus exercise such Participant's outstanding Purchase Rights on the following Exercise Date, but terminate his or her participation in the Plan for subsequent Purchase Periods. Payroll deductions for such a Participant will continue until the end of the current Purchase Period. After the applicable Exercise Date, no further Purchase Rights will be granted to the Participant, and no further payroll deductions will be made. (b) Except as otherwise provided by applicable law, any Participant who withdraws from the Plan pursuant to Section 9(a) will not be eligible to rejoin the Plan for the Purchase Period underway at the time of withdrawal, and will have to re-enroll in the Plan by completing and filing a new Participation/Withdrawal Form should such individual wish to resume participation in a subsequent Purchase Period. (c) If a Participant ceases to be an employee of the Company for any reason during a Purchase Period, his or her outstanding Purchase Right will immediately terminate, and all sums previously collected from such Participant during such Purchase Period under the terminated Purchase Right will be refunded. (d) The Committee may, at its option, treat any attempt to borrow by an employee on the security of his or her accumulated payroll deductions as an election under Section 9(a)(i) hereof to withdraw such deductions. 10. RIGHTS AS SHAREHOLDER (a) A Participant is not a shareholder until the Participant exercises his or her Purchase Right. Thus, a Participant will not have a right to any dividend or distribution made prior to the Exercise Date. Following the Exercise Date, however, the Participant shall have all of the rights of a shareholder with respect to the shares purchased. (b) Participants will be entitled to receive, as soon as practicable after the Exercise Date, a stock certificate for the number of purchased shares upon a written request made to the Custodian. The Custodian may impose upon, or pass through to, the Participant a reasonable fee for withdrawal of shares of Common Stock in the form of stock certificates. It is the responsibility of each Participant to keep his or her address current with the Company through the Plan Administrator and with the Custodian. 11. SALE OF COMMON STOCK ACQUIRED UNDER THE PLAN (a) In general, participants who are not officers or directors of the Company may sell the shares of Common Stock they acquire under the Plan at any time without restriction. Officers and directors of the 4 Company should consult with legal counsel prior to attempting to sell or otherwise dispose of any shares of Common Stock acquired under the Plan. (b) A Participant shall immediately provide information to the Plan Administrator if the Participant transfers any shares purchased through the Plan within two (2) years from the date of grant of the related Purchase Right. Such transfer shall include disposition by sale, gift or other manner. The Participant may be requested to disclose the manner of the transfer, the date of the transfer, the number of shares involved and the transfer price. By executing the Participation/Withdrawal Form, each Participant obligates himself or herself to provide such information to the Plan Administrator. (c) The Company is authorized to withhold from any payment to be made to a Participant, including any payroll and other payments not related to the Plan, amounts of withholding and other taxes due in connection with any transaction under the Plan, and a Participant's enrollment in the Plan will be deemed to constitute his or her consent to such withholding. 12. PLAN ADMINISTRATION (a) The Plan shall be administered by the Committee. (b) The Committee shall have the plenary power, subject to and within the limits of the express provisions of the Plan: (i) to determine the commencement and termination date of the offering of Common Stock under the Plan; and (ii) to interpret the terms of the Plan, establish and revoke rules for the administration of the Plan and correct or reconcile any defect or inconsistency in the Plan. (c) The Committee may delegate all or part of its authority to administer the Plan to the Plan Administrator, who may in turn delegate the day-to-day operations of the Plan to the Custodian. The Custodian will establish and maintain, as agent for the Participants, accounts for the purposes of holding shares of Common Stock and/or cash contributions as may be necessary or desirable for the administration of the Plan. (d) The Board may waive or modify any requirement that a notice or election be made or filed under the Plan a specified period in advance in an individual case or by adoption of a rule or regulation under the Plan, without the necessity of an amendment to the Plan. 13. TRANSFERABILITY (a) Any account maintained by the Custodian for the benefit of a Participant with respect to shares acquired pursuant to the Plan may only be in the name of the Participant; provided, however, that the Participant may elect to maintain such account with right of joint ownership with such Participant's spouse. Such election may only be made on a form (the "Joint Account Form") provided by the Company. (b) Neither payroll deductions credited to a Participant's account nor any Purchase Rights of or other rights to acquire Common Stock under the Plan may be assigned, transferred, pledged or otherwise disposed of by Participants other than by will or the laws of descent and distribution, and during the lifetime of a Participant, Purchase Rights may be exercised only by the Participant. 14. MERGER OR LIQUIDATION OF THE COMPANY In the event the Company merges with another corporation and the Company is not the surviving entity, or in the event all or substantially all of the stock or assets of the Company are acquired by another company, or in the event of certain other similar transactions, the Committee may, in connection with any such transaction, cancel each outstanding Purchase Right and refund all sums previously collected from Participants under the canceled Purchase Rights, or, in its discretion, cause each Participant with outstanding Purchase Rights to have his or her outstanding Purchase Right exercised immediately prior to such 5 transaction and thereby have the balance of his or her account applied to the purchase of whole shares of Common Stock at the purchase price in effect for the Purchase Period, which would be treated as ending with the effective date of such transaction. The balance of the account not so applied will be refunded to the Participant. 15. ADJUSTMENT FOR CHANGES IN CAPITALIZATION To prevent dilution or enlargement of the rights of Participants under the Plan, appropriate adjustments may be made in the event any change is made to the Company's outstanding Common Stock by reason of any stock dividend, stock split, combination of shares, exchange of shares or other change in the Common Stock effected without the Company's receipt of consideration. Adjustments may be made to the maximum number and class of securities issuable under the Plan, the maximum number and class of securities purchasable per outstanding Purchase Right and the number and class of securities and price per share in effect under each outstanding Purchase Right. Any such adjustments will be made by the Committee in its sole discretion. 16. AMENDMENT AND TERMINATION The Committee may terminate or amend the Plan at any time; provided, however, such termination or amendment may not affect or change Purchase Rights previously granted under the Plan without the consent of the affected Participant, and any amendment that effects any change in the aggregate number of shares which may be issued under the Plan or changes the type of corporation whose employees may receive options under the Plan shall be subject to shareholder approval. If not sooner terminated by the Committee, the Plan shall terminate at the time Purchase Rights have been exercised with respect to all shares of Common Stock reserved for grant under the Plan. 17. SHAREHOLDER APPROVAL The Plan is subject to the approval of shareholders of the Company in accordance with the provisions of Georgia law. 18. NO EMPLOYMENT RIGHTS Participation in the Plan will not impose any obligations upon the Company to continue the employment of the Participant for any specific period and will not affect the right of the Company to terminate such person's employment at any time, with or without cause. 19. STOCK LEGEND All shares of Common Stock issued pursuant to the Plan shall contain the following legend: "The shares of Common Stock represented by this Certificate have been issued on __________ pursuant to PRG-Schultz International, Inc. Employee Stock Purchase Plan." 20. COSTS Except as set forth in Section 10(b), costs and expenses incurred in the administration of the Plan and the maintenance of accounts with the Custodian will be paid by the Company, to the extent provided in this Section 20. Any brokerage fees and commissions for the purchase of Common Stock under the Plan (including shares of Common Stock purchased upon reinvestment of dividends and distributions) will be paid by the Company, but any brokerage fees and commissions for the sale of shares of Common Stock under the Plan by a Participant will be borne by such Participant. 21. REPORTS After the close of each Purchase Period, each Participant in the Plan will receive a report from the Custodian indicating the amount of the Participant's contributions to the Plan during the Purchase Period, the amount of the contributions applied to the purchase of Common Stock for the Purchase Period, the purchase 6 price per share in effect for the Purchase Period and the amount of the contributions (if any) carried over to the next Purchase Period. 22. GOVERNING LAW The validity, construction and effect of the Plan and any rules and regulations relating to the Plan will be determined in accordance with laws of the State of Georgia, without giving effect to principles of conflicts of laws, and applicable Federal law. 23. COMPLIANCE WITH LEGAL AND OTHER REQUIREMENTS The Plan, the granting and exercising of Purchase Rights hereunder, and the other obligations of the Company, the Plan Administrator and the Custodian under the Plan will be subject to all applicable federal, state or international laws, rules, and regulations, and to such approvals by or registrations with any regulatory or governmental agency as may be required. The Company may, in its discretion, postpone the issuance or delivery of shares of Common Stock upon exercise of Purchase Rights until completion of such registration or qualification of such shares of Common Stock or other required action under any federal or state law, rule, or regulation, listing or other required action with respect to any automated quotation system or stock exchange upon which the shares of Common Stock or other Company securities are designated or listed, or compliance with any other contractual obligation of the Company, as the Company may consider appropriate in connection with the issuance or delivery of shares of Common Stock in compliance with applicable laws, rules, and regulations, designation or listing requirements, or other contractual obligations. 24. WITHHOLDING OF TAXES By electing to participate in the Plan, each Participant acknowledges that the Company and its participating Subsidiaries are required to withhold taxes with respect to the amounts deducted from the Participant's Base Pay and accumulated for the benefit of the Participant under the Plan, and each Participant agrees that the Company and its participating Subsidiaries may deduct additional amounts from the Participant's Base Pay when amounts are added to the Participant's account, used to purchase common stock or refunded, in order to satisfy such withholding obligations. If the Participant makes a disposition, within the meaning of Section 424(c) of the Code and the regulations promulgated thereunder, of any share or shares issued to such Participant pursuant to such Participant's exercise of an option, and such disposition occurs within the two-year period commencing on the day after the option is being treated as granted for purposes of Section 423 of the Code or within the one-year period commencing on the day after the Exercise Date, such Participant shall, within ten (10) days of such disposition, notify the Company thereof and thereafter immediately deliver to the Company any amount of federal, state or local income taxes and other amounts which the Company informs the Participant the Company is required to withhold. The Company may also satisfy any applicable withholding amounts by deducting the necessary amounts of withholding from the Participant's wages and, in the Committee's sole discretion, any other amounts owed to or held for the account of the Participant. 7 -----END PRIVACY-ENHANCED MESSAGE-----