-----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, GTJu+gytk/z9jp1Qho8UatDo8V65Rpr0ROSsNlCAZqkDD1gqiMmaVb2Z+uY+AwOR hk+70H9NPzqDcIofrcXL7w== 0000950144-98-001389.txt : 19980218 0000950144-98-001389.hdr.sgml : 19980218 ACCESSION NUMBER: 0000950144-98-001389 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 13 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980213 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: PROFIT RECOVERY GROUP INTERNATIONAL INC CENTRAL INDEX KEY: 0001007330 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-ENGINEERING, ACCOUNTING, RESEARCH, MANAGEMENT [8700] IRS NUMBER: 582213805 STATE OF INCORPORATION: GA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-28000 FILM NUMBER: 98536331 BUSINESS ADDRESS: STREET 1: 2300 WINDY RIDGE PKWY STREET 2: STE 100 N CITY: ATLANTA STATE: GA ZIP: 30339-8426 BUSINESS PHONE: 7709553815 MAIL ADDRESS: STREET 1: 2300 WINDY RIDGE PKWY STREET 2: STE 100 NORTH CITY: ATLANTA STATE: GA ZIP: 30339-8426 10-K 1 PROFIT RECOVERY GROUP 1 ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 --------------------- FORM 10-K (MARK ONE) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ____________ TO ____________ COMMISSION FILE NUMBER 0-28000
THE PROFIT RECOVERY GROUP INTERNATIONAL, INC. (Exact name of registrant as specified in its charter) GEORGIA 58-2213805 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 2300 WINDY RIDGE PARKWAY 30339-8426 SUITE 100 NORTH (Zip Code) ATLANTA, GEORGIA (Address of principal executive offices)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (770) 955-3815 SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: COMMON STOCK, NO PAR VALUE Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] Common shares of the registrant outstanding at January 30, 1998 were 19,226,024. The aggregate market value, as of January 30, 1998, of such common shares held by non-affiliates of the registrant was approximately $111,423,000 based upon the last sales price reported that date on The Nasdaq Stock Market of $15.813 per share. (Aggregate market value estimated solely for the purposes of this report. This shall not be construed as an admission for the purposes of determining affiliate status.) DOCUMENTS INCORPORATED BY REFERENCE Part III: Portions of Registrant's Proxy Statement relating to the Annual Meeting of Shareholders to be held on May 14, 1998. ================================================================================ 2 THE PROFIT RECOVERY GROUP INTERNATIONAL, INC. FORM 10-K DECEMBER 31, 1997
PAGE ---- Part I Item 1. Business.................................................... 1 Item 2. Properties.................................................. 10 Item 3. Legal Proceedings........................................... 10 Item 4. Submission of Matters to a Vote of Security Holders......... 10 Part II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters....................................... 11 Item 6. Selected Consolidated Financial Data........................ 12 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations................................. 13 Item 7A. Quantitative and Qualitative Disclosures About Market Risk...................................................... 20 Item 8. Financial Statements and Supplementary Data................. 21 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.................................. 43 Part III Item 10. Directors and Executive Officers of the Registrant.......... 43 Item 11. Executive Compensation...................................... 43 Item 12. Security Ownership of Certain Beneficial Owners and Management................................................ 43 Item 13. Certain Relationships and Related Transactions.............. 43 Part IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K....................................................... 43 Signatures............................................................... 47
3 PART I ITEM 1. BUSINESS The Company is a leading provider of accounts payable and other recovery audit services to large retailers, wholesale distributors, healthcare providers, technology companies and other large transaction-intensive companies, as well as to certain governmental agencies. In businesses with large purchase volumes and continuously fluctuating prices, some small percentage of erroneous overpayments to vendors is inevitable. In addition, the complexity of various tax laws results in overpayments to governmental agencies. Moreover, services such as telecommunications, utilities and freight provided to businesses under complex pricing arrangements can result in overpayments. All of these overpayments result in "lost profits." The Company identifies and documents overpayments by using sophisticated proprietary technology and advanced audit techniques and methodologies, and by employing highly trained, experienced recovery audit specialists. The Company continuously updates and refines its proprietary databases that serve as a central repository reflecting its auditors' experiences, vendor practices and knowledge of regional and national pricing information, including seasonal allowances, discounts and rebates, but excluding confidential client data. The earliest of the Company's predecessors was formed in November 1990, and in early 1991 the predecessors acquired the operating assets of Roy Greene Associates, Inc. and Bottom Line Associates, Inc. which were formed in 1971 and 1985, respectively. In January 1995, the Company's predecessors acquired the operating assets of Fial & Associates, Inc., a direct competitor. The predecessor business entities that comprised the Company generally were either Subchapter S corporations or partnerships, all under common ownership and control. In April 1995, the Company's predecessors reorganized and its international entities became C corporations. Additionally, prior to the Company's March 1996 initial public offering, all domestic entities became C corporations. Subsequent to the Company's initial public offering, the Company has conducted its operations through its various wholly-owned domestic and international subsidiaries. In January 1997, the Company acquired the net operating assets of Shaps Group, Inc., a California-based company providing recovery audit services to manufacturers, and high technology companies. In February 1997, the Company acquired all of the common stock of Accounts Payable Recovery Services, Inc., a Texas-based company providing recovery audit services to healthcare entities and energy companies. In May 1997, the Company acquired all of the common stock of The Hale Group, a California-based company providing recovery audit services to healthcare entities. In October 1997, the Company acquired 98.4% of Financiere Alma, S.A. and subsidiaries, a Paris-based company providing tax recovery audit services within France. In November 1997, the Company acquired the net operating assets of TradeCheck, LLC, a Washington-based recovery audit firm specializing in ocean freight shipments. The Company intends to continue pursuing domestic and international strategic acquisitions, including direct competitors and complementary businesses. The Company has operations outside the United States in Australia, Belgium, Canada, France, Germany, Mexico, The Netherlands, New Zealand, the United Kingdom and portions of Asia, including Hong Kong, Indonesia, Malaysia, Singapore, Taiwan and Thailand. See Note 11 of Notes to Consolidated Financial Statements for international segment data concerning revenues, operating income (loss) and indentifiable assets. THE RECOVERY AUDIT INDUSTRY Businesses with substantial volumes of payment transactions involving multiple vendors, numerous discounts and allowances, fluctuating prices and complex tax and pricing arrangements find it difficult to detect all payment errors. These businesses include retailers, such as discount, department, specialty, grocery and drug stores, wholesale distributors, manufacturers and distributors of technology products and certain governmental agencies and healthcare providers. Although these businesses process the vast majority of payment transactions correctly, a small number of errors occur principally because of communication failures between purchasing and payables departments, complex pricing arrangements, personnel turnover and changes in information and accounting systems. These errors include vendor pricing errors, missed or 1 4 inaccurate discounts, allowances and rebates, incorrect freight charges and duplicate payments. In the aggregate, these transaction errors can represent meaningful lost profits that can be particularly significant for businesses with relatively narrow profit margins. Although internal recovery audit departments identify some payment errors, independent recovery audit firms often are retained by businesses to identify additional overpayments. In the U.S., large retailers routinely engage independent recovery audit firms as standard business practice and other businesses increasingly are using independent recovery audit firms. Outside the U.S., the Company believes that large retailers and certain other businesses also increasingly are engaging independent recovery audit firms. The U.S. retailing industry represented approximately $2.5 trillion in revenues in 1996. The top 100 retailers worldwide had aggregate revenues of approximately $1.4 trillion in 1996. The Company believes that a typical U.S. retailer makes payment errors that are not discovered internally, which in the aggregate can range from several hundred thousand dollars to more than $1.0 million per billion dollars of revenues. In addition, the Company believes that businesses in all industries also make accounts payable errors. Increasingly, businesses use technology to manage complex accounts payable systems and realize greater operating efficiencies. Many businesses worldwide communicate with vendors electronically to exchange inventory and sales data, transmit purchase orders, submit invoices, forward shipping and receiving information and remit payments. These paperless transactions are widely referred to as "EDI" (Electronic Data Interchange), and implementation of this technology is accelerating. EDI streamlines processing large numbers of transactions, but does not eliminate payment errors because operator input errors may be replicated automatically in thousands of transactions. EDI systems typically generate significantly more individual transaction details in electronic form, making these transactions easier to audit than traditional paper-based accounts payable systems. Recovery audit firms, however, require sophisticated technology in order to audit EDI accounts payable processes effectively. Many businesses historically have maintained internal recovery audit departments that review transactions before engaging independent recovery audit firms. The Company believes that these businesses increasingly are outsourcing internal recovery functions to independent recovery audit firms. Factors contributing to this trend include (i) a need for significant investments in technology, especially in an EDI environment, which the Company believes are greater than even large businesses often can justify, (ii) an inability to duplicate the breadth of industry and auditing expertise of independent recovery audit firms, (iii) a desire to focus limited resources on core competencies, and (iv) a desire for larger and more timely recoveries. The domestic and international recovery audit industry is characterized by several large and many small, local and regional firms. Many local and regional recovery audit firms lack the centralized resources or broad client base to support technology investments required to provide comprehensive recovery audit services for large, complex accounts payable systems. These firms are even less equipped to audit large EDI accounts payable systems. In addition, because of limited resources, most of these firms subcontract work to third parties and may lack experience and the knowledge of national promotions, seasonal allowances and current recovery audit practices. As a result, the Company believes significant opportunities exist for recovery audit firms with a national and international presence, well-trained and experienced professionals and the advanced technology required to audit increasingly complex accounts payable systems. THE PROFIT RECOVERY GROUP SOLUTION The Company provides its domestic and international clients with comprehensive recovery audit services by using sophisticated proprietary technology and advanced audit techniques and methodologies, and by employing highly trained, experienced recovery audit specialists. As a result, the Company believes it is able to identify significantly more payment errors in both traditional paper-based and EDI accounts payable systems. By leveraging its technology investment across a large client base, the Company is able to continue developing proprietary software tools and expand its technology leadership in the recovery audit industry. The Company is a leader in developing and utilizing sophisticated software audit tools and techniques that enhance the identification and recovery of payment errors. In EDI accounts payable systems, the 2 5 Company's proprietary software audit tools and data processing capabilities enable auditors to sort, filter and evaluate transactions in greater line-item detail. The Company has developed and continuously updates and refines its proprietary databases that serve as a central repository reflecting its auditors' experiences, vendor practices and knowledge of regional and national pricing information, including seasonal allowances, discounts and rebates. These proprietary databases do not include confidential client information. The Company's technology provides a uniform platform for its auditors to offer consistent and proven audit techniques and methodologies regardless of the client's size, industry or geographic scope of operations. The Company also is a leader in establishing new recovery audit practices to reflect evolving industry trends. The Company's auditors are highly trained and many have joined the Company from finance-related management positions in the retailing industry. To support its auditors, the Company provides data processing, marketing, training and administrative services. THE PROFIT RECOVERY GROUP STRATEGY The Company's objective is to become the leading worldwide provider of recovery audit services. The Company believes that it will have to significantly increase its revenues to achieve this objective. Its strategy consists of the following elements: - Expand International Presence. The Company believes international markets represent significant business opportunities and intends to continue expanding its international presence. For example, based on 1996 sales, 63 of the top 100 retailers worldwide were headquartered outside the U.S. Through sales and marketing efforts, the Company targets countries having a concentration of transaction-intensive businesses. The Company also enters new international markets by supporting its U.S. clients' international operations. With the recent acquisition of 98.4% of Financiere Alma, S.A. and its subsidiaries (collectively, "Alma"), the Company has significantly increased its presence in France and the Company intends to offer Alma's services to businesses in other European countries. In the next twelve months, the Company anticipates that it will commence operations in South Africa, Argentina and Brazil. - Expand Client Base. The Company seeks to increase its worldwide retail client base and expand its recovery audit services to other industries. The Company recently has expanded its recovery audit services to the healthcare and technology industries and intends to expand into other industries, such as financial services, transportation and lodging and gaming. The Company believes that its proprietary technology and audit techniques and methodologies also can be applied to these industries. The Company believes that its typical fee arrangement enhances its ability to attract new clients because clients pay a contractually negotiated percentage of overpayments identified by the Company and recovered for the clients. The Company intends to leverage existing client relationships into new audit engagements for clients' other operating units. Based on 1996 sales, 28 of the top 100 retailers worldwide, each of which had sales of at least $3.9 billion, were clients of the Company in 1997. The Company principally targets large businesses having at least $500 million in annual revenues, although smaller businesses may be attractive clients. Retailers continue to constitute the substantial majority of the Company's client and revenue base, and the Company's current marketing efforts are primarily directed toward that industry. - Pursue Strategic Acquisitions. The Company intends to continue pursuing the acquisition of domestic and international businesses including both direct competitors and businesses providing complementary recovery audit services. As examples, in January 1995, the Company successfully completed the acquisition of Fial & Associates, Inc., a direct competitor; in January 1997, the Company acquired Shaps Group, Inc., a firm providing recovery audit services to manufacturers and distributors of technology products; in February 1997, the Company acquired Accounts Payable Recovery Services, Inc., a firm providing recovery audit services to healthcare entities and energy companies; in May 1997, the Company acquired The Hale Group, a firm that provides recovery audit services primarily to healthcare entities; in October 1997, the Company acquired Alma, a firm that provides tax recovery 3 6 audit services in France; and in November 1997, the Company acquired TradeCheck, LLC, a firm that provides ocean freight recovery audit services. - Expand Recovery Audit Services. The Company seeks to expand its recovery audit service offerings beyond its traditional accounts payable recovery audit business. For example, the Company recently began offering tax recovery and ocean freight audit services following its acquisitions of Alma and TradeCheck. In addition, the Company intends to expand into or establish its capabilities in other recovery audit services, including telecommunications, utilities, freight and sales and property tax. - Maintain High Client Retention Rates. The Company intends to maintain and improve its high client retention rate by providing comprehensive recovery audit services, utilizing highly trained auditors, and continuing to refine its advanced audit technology. Of the Company's accounts payable audit clients in 1996 that had claims exceeding $100,000 in that year, more than 90% continued to utilize the Company's services in 1997. - Maintain Technology Leadership. The Company believes its proprietary technology provides a significant competitive advantage, especially in audits of EDI accounts payable systems. The Company intends to continue making substantial investments in technology to maintain its leadership position and systems capabilities. - Promote Outsourcing Arrangements. The Company seeks to capitalize on the growing trend of businesses to outsource internal recovery audit efforts. The Company believes that its outsourcing clients benefit significantly from these arrangements because their recoveries generally are larger and completed more quickly. The Company further believes that as clients convert their systems to EDI, outsourcing arrangements involving recovery audit work will become increasingly prevalent due in part to the absence of traditional "audit trail" documents. THE PROFIT RECOVERY GROUP SERVICES The Company provides comprehensive accounts payable, tax and other ancillary recovery audit services. In 1997, accounts payable recovery audit services represented approximately 91.0% of the Company's revenues. Assuming the Alma transaction had occurred on January 1, 1997, accounts payable recovery audit services and tax recovery audit services would have represented on a pro forma basis approximately 80.3% and 17.0%, respectively, of the Company's revenues for 1997. Accounts Payable Recovery Audit Services Using its proprietary technology, audit techniques and methodologies, the Company conducts either primary or secondary accounts payable audits. In primary audits, the Company is the first independent recovery audit firm engaged. In secondary audits, the Company audits behind another independent recovery audit firm. A substantial majority of the accounts payable audits conducted by the Company are primary audits. Primary Audits. Although the Company is flexible in structuring recovery audit programs to meet the individual needs of its clients, there are two basic types of primary accounts payable audits conducted by the Company: (i) periodic audits, which are usually performed nine to 18 months after a client's fiscal year-end; and (ii) continuous audits, marketed as RecoverNow, which are performed more closely following transaction dates. In most periodic audits, which constitute the vast majority of the Company's present audit engagements, the client's internal recovery audit department conducts a preliminary review of accounts payable records to identify payment errors. Upon completion of the client's internal recovery audit review process, which may be as long as nine to 18 months after the client's fiscal year-end, the Company begins its independent recovery audit. Under the Company's RecoverNow program, clients provide the Company with accounts payable data on a regular basis, often within 90 days following the payment transaction. The Company believes its RecoverNow 4 7 program generates larger client recoveries for several reasons, including: (i) transaction data, especially paper-based records, are more complete and accessible; (ii) the impact of vendor bankruptcies is minimized because claims are made more timely and continuously throughout the year; (iii) certain recoveries are facilitated when claims are made prior to the expiration of seasonal or other special pricing promotions; and (iv) vendor relationships are improved because of on-going communications regarding billing and payment practices. In some cases, the Company's clients outsource all or a portion of their internal recovery audit functions to the Company. In these cases, the client does not conduct an internal review prior to the Company's audit. In its outsourcing engagements, the Company also may use client staff in the review process. The Company believes that more businesses will outsource their recovery audit functions in an effort to control personnel and technology costs, focus resources on their core business functions, and increase recoveries. Secondary Audits. In secondary audits, the Company conducts an accounts payable audit after another independent recovery audit firm has completed its audit. The Company usually receives a higher percentage recovery fee than received from primary audits because it generally is more difficult to detect payment errors in secondary audits. In most cases, the Company is able to identify significant payment errors not previously detected by a client's primary independent recovery audit firm. The Company utilizes secondary audits as a marketing strategy to obtain new, primary audit clients and believes it has been successful in implementing this strategy. Of the 28 secondary audits performed in 1995 which individually provided revenues to the Company exceeding $100,000, nine were converted to primary audit clients prior to December 31, 1997. Tax Recovery Audit Services With the recent acquisition of Alma, the Company now offers tax recovery audit services in France. These services include the identification and recovery of tax overpayments (other than income taxes), including business and personal property taxes (referred to in France as "fiscal" taxes), workers compensation taxes (referred to in France as "social" taxes), real property taxes (referred to in France as "foncier" taxes), and value added taxes (referred to in France as "TVA" taxes). Using highly trained, experienced personnel together with proprietary audit techniques and methodologies, Alma assists businesses in identifying and recovering tax overpayments and reducing future tax obligations. Alma, with assistance from professionals such as tax attorneys, physicians and surveyors, applies its thorough understanding of the numerous complex French tax laws and audits the factual information which underlies the tax in question. For example, certain fiscal taxes are based upon a client's number of employees, payroll and fixed assets. Certain social taxes are based upon industry segment and prior years' claim history. Foncier or real property taxes are based on the size, use and valuation of building improvements. Alma is constantly researching new and expanded tax audit opportunities. The time necessary to conduct a French tax audit and obtain governmental approval of a claim can vary significantly based upon the type of audit. A typical social tax audit, for example, is performed in six to nine months and governmental approval can take an additional six to 12 months. In certain cases when the tax authority denies a client's claim, litigation is necessary to seek recovery. Like the Company's standard accounts payable recovery audits, the Company receives a contractually negotiated percentage of the taxes recovered. Ancillary Audit Services In addition to accounts payable and tax recovery audit services, the Company also offers ancillary recovery audit services. These ancillary services may be offered individually or in conjunction with accounts payable and tax recovery audit services. - Freight Audits. The Company provides domestic freight audits using FreightPro, the Company's proprietary freight recovery audit software, and provides ocean freight audits. The Company also maintains centralized domestic freight and shipping databases and has auditors who specialize in freight audits. Freight audits are usually conducted in conjunction with accounts payable recovery audits. 5 8 - Lease Compliance Audits. Real estate lease and landlord compliance audits involve an examination of all aspects of a client's facility lease arrangements to assist the client in identifying lease overpayments or expenses incurred through landlord noncompliance with lease terms. - Telecommunications Audits. This program assists clients in reducing their overall telecommunications costs. For example, overpayments often can result from the incorrect application of rates and tariffs. Auditors also review clients' equipment, usage and systems configuration needs and make recommendations on how to reduce future telecommunications costs. - Utility Audits. Auditors also review clients' electrical and natural gas requirements and analyze alternative rates and billing plans to verify that the billing was proper and that the proper tariff rate was applied. - Expense Reduction Audits. With the recent acquisition of Alma, the Company assists clients in reducing their costs for building and security services. CLIENT CONTRACTS The Company's standard accounts payable client contract provides that the Company is entitled to a contractual percentage of overpayments recovered for clients. Clients generally recover claims by taking credits against outstanding payables or future purchases from the involved vendors. In many cases, the Company's auditors work on site with client personnel and continually monitor credits taken. In other situations, Company auditors schedule periodic reconciliations with clients to determine which claims have been processed for credit. The Company's standard accounts payable client contract imposes a duty on the client to process promptly all claims against vendors. In the interest of maintaining good vendor relations, however, many clients modify the standard client contract with the Company to provide that they retain discretion on whether to pursue collection of a claim. In the Company's experience, it is extremely unusual for a client to forego the collection of a large, valid claim. In some cases, a vendor may dispute a claim by providing additional documentation or information supporting its position. Consequently, many clients revise the Company's standard client contract to clarify that the Company is not entitled to payment of its fee until the client recovers the claim from its vendor. In addition to the client contracts, most accounts payable clients establish specific procedural guidelines that the Company must satisfy prior to submitting claims for client approval. These guidelines are unique to each client and impose specific requirements on the Company prior to submitting claims. With respect to accounts payable recovery audits for retailers, wholesale distributors and governmental agencies, the Company recognizes revenues at the time overpayment claims are presented to and approved by its clients, as adjusted for estimated uncollectible claims. Estimated uncollectible claims initially are established, and subsequently adjusted, for each individual client based on a number of factors including historical experience. With respect to accounts payable and other recovery audits for most entities other than retailers, wholesale distributors and governmental agencies, the Company recognizes revenues when it invoices clients for its portion of amounts recovered. The Company's standard tax recovery client contract provides that the Company is entitled to a contractual percentage of the taxes recovered and anticipated savings for a specified period following the audit. The Company recognizes revenue from its fiscal, social and foncier tax recovery audit services when it receives notification that the applicable governmental agency has approved a claim, the client is entitled to a recovery, and an invoice is submitted to the client requesting payment. For TVA recovery audit services, the Company recognizes revenues when all documentation is filed with the appropriate government agency. TECHNOLOGY The Company believes that its proprietary software audit tools and proprietary databases, together with its centralized data processing capabilities, provide it a competitive advantage over smaller local and regional firms, especially when auditing complex EDI accounts payable systems. The Company has devoted more than six years and has made substantial financial investments in developing its proprietary technology. At 6 9 January 31, 1998, the Company's information services department in the United States had 64 employees, 10 of whom were dedicated to software development activities, including updating and modifying the Company's existing proprietary software. In addition, Alma's information services department had four employees as of January 31, 1998. Centralized Data Preparation and Verification At the beginning of a typical accounts payable audit, magnetic media containing accounts payable transaction data are delivered to the Company's central data processing facility. Experienced programmers in the Company's information services department write specialized conversion programs that permit this data to be reformatted into standardized and proprietary formats using IBM ES 9000 mainframe and IBM AS 400 midrange computers and Windows NT and OS/2 Warp Connect servers. Statistical reports are then prepared to verify the completeness and accuracy of the data. Generally, it is not necessary to rewrite conversion programs for clients for each successive audit. This reformatted data is compressed onto CD-ROM media and delivered to the Company's auditors who, using the Company's proprietary field audit software, sort, filter and search the data for overpayments. Standard reports and client-specific statistical data also are produced for auditors. PC-Based Software Modules The Company has developed PC-based proprietary software modules for use primarily in the field by its accounts payable auditors. These software modules include the following: - AuditPro is used in non-EDI systems to facilitate auditor-defined searches of reformatted client accounts payable records for patterns indicative of potential overpayments. In addition to using the standard analytical reports produced by AuditPro, auditors may design sophisticated custom inquiries to sort, filter and print client records. - EDI Inquiry is a comprehensive module used to sort, filter and print purchasing, receiving and payment records at the line-item level for clients operating in an EDI environment. By utilizing line-item detail, this module facilitates the search of a significantly greater number of transaction records and improves auditor productivity. - AuditPro 97 is a newly released module which will eventually replace both AuditPro and EDI Inquiry. It can be utilized in both EDI and non-EDI environments and includes considerably greater audit functionality than the modules it replaces. - Claims Management System enables the auditor to compile, print and report on claims information by individual audit. This module also is used to summarize audit findings for management reports that are typically provided to clients at the conclusion of each engagement. - FreightPro is used to audit and produce claims from electronic freight records. Client freight billing data is compared with vendor routing guide instructions to isolate potential overcharges. - ReportPro is a specialized report generator designed to create and display customized reports in conjunction with the Company's other proprietary software modules. Proprietary Databases The Company has developed and continuously updates and refines its proprietary accounts payable and other non-tax recovery audit databases that serve as a central repository reflecting its auditors' experiences, vendor practices and knowledge of regional and national pricing information, including seasonal allowances, discounts and rebates. These proprietary databases do not include confidential client information. Auditors use these databases to identify discounts, allowances and other pricing information not previously detected. 7 10 AUDITOR HIRING AND TRAINING Many of the Company's auditors formerly held finance-related management positions in the retailing industry. These experienced auditors provide important insights into certain aspects of the retailing industry. The Company also has relied on its auditors to assist in creating its auditor training programs and techniques and in developing its proprietary audit software. To meet its growing need for additional auditors, the Company has begun hiring recent college graduates, particularly those with multi-lingual capabilities. While the Company has been able to hire a sufficient number of new auditors to support its growth, there can be no assurance that the Company will be able to continue hiring sufficient numbers of qualified auditors to meet its future needs. The Company provides intensive in-house training for auditors utilizing many self-paced media including specialized computer-based training modules. The Company utilizes experienced auditors as full-time field trainers to assess each trainee's progress as he or she completes the training program. The in-house training program is continuously upgraded based on feedback from auditors and on changing industry protocols. Additional on-the-job training by experienced auditors enhances the in-house training and enables newly hired auditors to refine their skills. Because auditor compensation is based on team performance results as well as nine different categories of individual competency composed of job-based skills and personal success factors, the Company believes senior auditors are motivated to continue training new auditors to maximize client recoveries and audit team compensation. As the Company hires new auditors, there can be no assurance that it will be able to continue providing the same in-depth training or have sufficient numbers of experienced auditors to continue its on-the-job training program. CLIENT BASE The Company provides its services principally to large transaction-intensive businesses that include retailers, such as discount, department, specialty, grocery and drug stores, wholesale distributors, manufacturers and distributors of technology products, certain governmental agencies and healthcare providers. Based on 1996 sales, 28 of the top 100 retailers worldwide, each having sales in excess of $3.9 billion, were clients of the Company in 1997. Although the Company targets clients principally with $500 million or more in annual revenues, smaller businesses may be attractive clients. Retailers continue to constitute the substantial majority of the Company's client and revenue base, and the Company's current marketing efforts are primarily directed toward that industry. For the years ended December 31, 1997, 1996 and 1995, the Company derived 33.8%, 34.6% and 30.1%, respectively, of its revenues form its five largest clients. Wal-Mart Stores, Inc. and its affiliates (collectively "Wal-Mart"), historically the Company's largest client, represented 10.4%, 14.4% and 12.7% of revenues during 1997, 1996 and 1995, respectively. In 1997, Kmart Corporation was the Company's largest client representing 12.3% of the revenues during the period, due in large part to a nonrecurring situation involving concurrent audits of multiple years. There can be no assurance that the Company's client base will increase or that the Company's largest clients will continue to utilize the Company's services at the same level. For example, one of the Company's five largest accounts representing 4.6% of all of the Company's domestic revenues for 1996 changed the Company's status from primary recovery auditor in 1996 to secondary recovery auditor in 1997. This change resulted in significantly lower revenues from that client in 1997. In addition, should one or more of the Company's large clients file for bankruptcy or otherwise cease to do business with the Company, or should one or more of the Company's large client's vendors file for bankruptcy, the Company's business, financial condition and results of operations could be materially and adversely affected. SEASONALITY The Company has experienced and expects to continue to experience significant seasonality in its business. The Company typically realizes higher revenues and operating income in the last two quarters of its fiscal year. Should this trend not continue, the Company's profitability for any affected quarter and the entire year could be materially and adversely impacted due to ongoing selling, general and administrative expenses that are largely fixed over the short term. 8 11 SALES AND MARKETING The Company markets its services primarily through one-on-one meetings with executives of targeted clients. The decision to engage a recovery audit firm is similar to the decision to engage most professional service firms and usually involves a lengthy period of familiarization, investigation and evaluation by the prospective client. The sales cycle often exceeds one year in both domestic and international markets. In the U.S. and Canada, where the use of recovery audit services is a generally accepted business practice among retailers, the Company generally must displace a competing firm in order to expand market share. In many other countries, recovery auditing is a new business service that requires an initial educational process in order to gain acceptance. At January 31, 1998, the Company's marketing staff consisted of 12 persons in the United States headed by a senior officer and 36 persons in Europe. The Company plans to expand its marketing staff in the U.S. and internationally as its business grows and it enters new markets. PROPRIETARY RIGHTS The Company continuously develops new recovery audit software and enhances existing proprietary software. The Company regards its proprietary software as protected by trade secret and copyright laws of general applicability. In addition, the Company attempts to safeguard its software through employee and third-party nondisclosure agreements and other methods of protection. Despite these precautions, it may be possible for unauthorized third parties to copy, obtain or reverse engineer certain portions of the Company's software or otherwise to obtain or use other information the Company regards as proprietary. While the Company's competitive position may be affected by its ability to protect its software and other proprietary information, the Company believes that the protection afforded by trade secret and copyright laws is less significant to the Company's success than the continued pursuit and implementation of its operating strategies and other factors such as the knowledge, ability and experience of its personnel. The Company has registered its copyrights for AuditPro, EDI Inquiry, Claims Management System, FreightPro and RecoverNow with the U.S. copyright office. Third parties with functionally similar software could assert claims under the Copyright Act of 1986, as amended, the federal patent law or state trade secret laws that the Company's proprietary recovery audit software application products infringe or may infringe the proprietary rights of such entities. These third parties may seek damages from the Company as a result of such alleged infringement, demand that the Company license certain proprietary rights from them or otherwise demand that the Company cease and desist from its use or license the allegedly infringing software. Such action may result in protracted and costly litigation or royalty arrangements or otherwise have a material adverse effect on the Company's business, financial condition or results of operations. Although the Company believes that its recovery audit software does not infringe on the intellectual property rights of others and the Company knows of no such pending or other extended claims of infringement, there can be no assurance that such a claim will not be asserted against the Company in the future. The Company's trademarks include "Profit Recovery Group International," "PRG," "AuditPro," "AuditPro 97," "EDI Inquiry," "Claims Management System," "FreightPro," "ReportPro" and "RecoverNow." The Company has registered "Profit Recovery Group International," "PRG," "AuditPro," "RecoverNow" and the Company's logo as federal trademarks with the U.S. Patent and Trademark Office. There can be no assurance, however, that the Company will be successful in its attempt to register such trademarks or that it otherwise will be able to continue to use any of the foregoing trademarks. The Company has filed applications for protection of certain of its trademarks outside of the U.S. in the various countries where the Company conducts business, and such protection is available. There can be no assurance, however, that the Company will be successful in its attempt to register or continue to use such trademarks outside of the U.S. 9 12 COMPETITION The recovery audit business is highly competitive. The competitive factors affecting the market for the Company's recovery audit services include: establishing and maintaining client relationships, quality and quantity of claims identified, experience and professionalism of audit staff, rates for services, technology and geographic scope of operations. The Company's principal competitors for accounts payable recovery audit services include local and regional firms and one firm, Howard Schultz & Associates, with a network of affiliate organizations in the U.S. and abroad. The Company believes that Howard Schultz & Associates has been in operation longer than the Company and may have achieved greater revenues than the Company in 1997. The Company's competitors for tax recovery audit services in France include major international accounting firms, tax attorneys and several smaller tax recovery audit firms. There can be no assurance that the Company will continue competing successfully with such competitors. The Company believes that as large, transaction-intensive businesses expand internationally and implement EDI accounts payable systems, smaller recovery audit firms will lack the technology and infrastructure necessary to remain competitive unless they make substantial investments to upgrade and expand their skills, technologies and geographic scope of operations. EMPLOYEES At January 31, 1998, the Company had 1,174 employees, 709 of whom were located in the U.S., with 575 persons in the audit function, 12 persons in sales and marketing, 64 persons in information services and the remainder in corporate, finance and administrative functions. In addition to its 465 employees located outside the U.S., internationally the Company engaged 26 independent contractors at January 31, 1998. The Company believes its employee relations are good. ITEM 2. PROPERTIES The Company's principal executive office is located in approximately 55,000 square feet of office space in Atlanta, Georgia. The Company subleases this space through December 30, 2002 and has an option to renew the lease for five years contingent upon the prime lease being renewed. The Company leases 25,000 square feet of office and warehouse space in Bentonville, Arkansas. This lease has an initial five-year term that commenced on April 19, 1996, with an option to renew for an additional five-year period. The Company leases 27,500 square feet of office space in Levallois-Perret, France. This lease has a nine-year term that commenced on January 1, 1997, with the Company having the right to terminate the lease without penalty after the fourth and sixth years. In addition, the Company maintains 45 other offices in close proximity to certain of its larger clients. The leases for these offices vary in term and range from 1,000 to 10,000 square feet. The Company is negotiating a five-year lease for an additional 15,000 square feet of space in Phoenix, Arizona. The Company anticipates that additional space will be required as business expands and believes that it will be able to obtain suitable space as needed. See Note 4 of Notes to Consolidated Financial Statements of the Company. ITEM 3. LEGAL PROCEEDINGS The Company is not a party to any legal proceedings, individually or in the aggregate, that it believes could have a material adverse effect on its business, financial condition or results of operations. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS During the fiscal fourth quarter covered by this report, no matter was submitted to a vote of security holders of the Company. 10 13 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Company's common stock is traded under the symbol "PRGX" on The Nasdaq Stock Market (Nasdaq). During 1995 and the first quarter of 1996, the Company's predecessors paid dividends and distributions to then-current equity owners totalling $10.7 million and $4.9 million, respectively. The Company has not paid cash dividends since its March 26, 1996 initial public offering and does not intend to pay cash dividends in the foreseeable future. Moreover, restrictive covenants included in the Company's bank credit facility specifically prohibit payment of cash dividends. At January 31, 1998, there were approximately 1,200 beneficial holders of the Company's common stock and 123 holders of record. The following table sets forth, for the quarters indicated, the range of high and low prices for the Company's common stock as reported by Nasdaq since the Company's initial public offering.
1997 CALENDAR QUARTER HIGH LOW - --------------------- ------- ------- 1st Quarter................................................. $18 1/4 $11 1/16 2nd Quarter................................................. 16 1/8 11 3/4 3rd Quarter................................................. 20 1/8 13 5/8 4th Quarter................................................. 19 1/2 13 7/8
1996 CALENDAR QUARTER - --------------------- 1st Quarter (From March 26, 1996 through March 31, 1996).... $16 1/2 $11 (1) 2nd Quarter................................................. 22 1/2 15 1/4 3rd Quarter................................................. 24 1/4 11 1/2 4th Quarter................................................. 21 1/2 11 1/4
- --------------- (1) Initial public offering price. 11 14 ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA The following table sets forth selected consolidated financial data for the Company as of and for the five years ended December 31, 1997. Such historical consolidated financial data as of and for the five years ended December 31, 1997 have been derived from the Company's Consolidated Financial Statements and Notes thereto, which Consolidated Financial Statements have been audited by KPMG Peat Marwick LLP, independent auditors. The audited Consolidated Balance Sheets as of December 31, 1997 and 1996 and the related Consolidated Statements of Earnings, Shareholders' Equity (Deficit) and Cash Flows for each of the years in the three-year period ended December 31, 1997 and the report thereon, which in 1997 is based partially upon the report of other auditors, are included elsewhere herein. The selected pro forma Statements of Earnings data for the four years ended December 31, 1996 are unaudited. The data presented below should be read in conjunction with the Consolidated Financial Statements and Notes thereto and other financial information appearing elsewhere in this Form 10-K including Management's Discussion and Analysis of Financial Condition and Results of Operations.
YEARS ENDED DECEMBER 31, ------------------------------------------------ 1997(1) 1996 1995(2) 1994 1993 -------- ------- ------- ------- ------- (IN THOUSANDS, EXCEPT PER SHARE DATA) STATEMENTS OF EARNINGS DATA: HISTORICAL Revenues................................... $112,363 $77,330 $56,031 $34,690 $25,262 Cost of revenues........................... 57,726 40,330 30,554 18,163 13,299 Selling, general and administrative expenses................................. 37,254 25,961 19,035 12,343 8,899 Restructuring costs(3)..................... 1,208 -- -- -- -- -------- ------- ------- ------- ------- Operating income...................... 16,175 11,039 6,442 4,184 3,064 Interest (expense), net.................... (403) (100) (1,630) (544) (874) Debt refinancing expenses.................. -- -- -- -- 414 -------- ------- ------- ------- ------- Earnings before income taxes.......... 15,772 10,939 4,812 3,640 1,776 Income taxes(4)............................ 6,149 7,789 305 -- -- -------- ------- ------- ------- ------- Net earnings.......................... $ 9,623 $ 3,150 $ 4,507 $ 3,640 $ 1,776 ======== ======= ======= ======= ======= Cash dividends per share................... $ -- $ .28 $ .93 $ .10 $ -- ======== ======= ======= ======= ======= PRO FORMA(5) Historical earnings before income taxes.... $10,939 $ 4,812 $ 3,640 $ 1,776 Pro forma income taxes..................... 4,271 1,877 1,420 692 ------- ------- ------- ------- Pro forma net earnings................ $ 6,668 $ 2,935 $ 2,220 $ 1,084 ======= ======= ======= ======= PER SHARE Earnings (pro forma earnings for 1996 and 1995) per share -- basic................. $ .52 $ .41 $ .24 ======== ======= ======= Earnings (pro forma earnings for 1996 and 1995) per share -- diluted............... $ .51 $ .39 $ .21 ======== ======= =======
DECEMBER 31, ------------------------------------------------- 1997(1) 1996(6) 1995 1994 1993 --------- ------- ------- ------- ------- (IN THOUSANDS) BALANCE SHEET DATA: Cash and cash equivalents.................. $ 19,386 $16,891 $ 642 $ 1,284 $ 98 Working capital............................ 34,563 30,004 6,738 4,889 2,068 Total assets............................... 133,885 68,318 30,268 13,779 11,045 Long-term debt, excluding current installments............................. 24,365 692 17,629 2,741 4,256 Loans from shareholders.................... -- -- 1,075 1,075 208 Total shareholders' equity (deficit)....... 63,072 40,559 (3,402) 2,356 (167)
- --------------- (1) During 1997, the Company completed five acquisitions including Shaps Group, Inc. (January), Accounts Payable Recovery Services, Inc. (February), The Hale Group (May), 98.4% of Financiere Alma, S.A. 12 15 and its subsidiaries (October) and TradeCheck, LLC (November). See Note 8 of Notes to Consolidated Financial Statements. (2) Effective January 1, 1995, the Company acquired Fial & Associates, Inc. See Note 8 of Notes to Consolidated Financial Statements. (3) Includes a $1.2 million charge to restructure and realign certain facets of the European management structure in recognition of emerging developments such as the Alma acquisition. See Note 14 of the Notes to Consolidated Financial Statements of the Company. (4) In April 1995, the Company's predecessors reorganized and its international entities became C corporations. Additionally, in connection with the Company's March 1996 initial public offering, all domestic entities became C corporations. As a result of these conversions to C corporations, the Company incurred charges to operations of $305,000 in 1995 and $3.7 million in 1996 for cumulative deferred income taxes. The Company's 1996 provision for income taxes of $7.8 million consists of the above-mentioned $3.7 million charge for cumulative deferred income taxes combined with $4.1 million in tax provisions at a 39.0% composite effective rate for the three quarters subsequent to the March 26, 1996 initial public offering. (5) The Company's predecessor entities prior to its initial public offering on March 26, 1996 generally were either corporations electing to be taxed as Subchapter S corporations or partnerships. As a result, any income tax liabilities were the responsibilities of the respective shareholders and partners. Pro forma net earnings reflect, where applicable, a provision for income taxes to include the additional tax expense as if the Company had been subject to federal and state income taxes for all periods presented rather than the individual shareholders and partners. (6) Balance Sheet Data as of December 31, 1996 reflect the receipt of net proceeds from the Company's March 26, 1996 initial public offering together with the partial use of such proceeds to repay substantially all debt obligations other than certain convertible debentures which were converted to equity immediately prior to the offering. See Note 7 of Notes to Consolidated Financial Statements. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW The Company is a leading provider of accounts payable and other recovery audit services to large retailers, wholesale distributors, healthcare providers, technology companies and other large transaction-intensive companies, as well as to certain governmental agencies. In businesses with large purchase volumes and continuously fluctuating prices, some small percentage of erroneous overpayments to vendors is inevitable. In addition, the complexity of various tax laws results in overpayments to governmental agencies. Moreover, services such as telecommunications, utilities and freight provided to businesses under complex pricing arrangements can result in overpayments. All of these overpayments result in "lost profits." The Company identifies and documents overpayments by using sophisticated proprietary technology and advanced audit techniques and methodologies, and by employing highly trained, experienced recovery audit specialists. The Company receives a contractually negotiated percentage of amounts recovered. The earliest of the Company's predecessors was formed in November 1990, and in early 1991 acquired the operating assets of Roy Greene Associates, Inc. and Bottom Line Associates, Inc., which were formed in 1971 and 1985, respectively. In January 1995, the Company purchased certain assets of Fial & Associates, Inc., a direct U.S. competitor. In January 1997, the Company acquired the net operating assets of Shaps Group, Inc., a California-based company providing recovery audit services to manufacturers and distributors of technology products. In February 1997, the Company acquired all of the common stock of Accounts Payable Recovery Services, Inc., a Texas-based company providing recovery audit services to healthcare entities and energy companies. In May 1997, the Company acquired all of the common stock of The Hale Group, a California-based company that also provides recovery audit services to healthcare entities. In October 1997, the Company acquired 98.4% of Alma, a Paris-based recovery audit firm specializing in identifying and recovering various types of French corporate tax overpayments. In November 1997, the Company acquired the net operating assets of TradeCheck, LLC, a Washington-based recovery audit firm 13 16 specializing in ocean freight shipments. The Company intends to continue pursuing domestic and international strategic acquisitions, including direct competitors and complementary businesses. RESULTS OF OPERATIONS The following table sets forth the percentage of revenues represented by certain items in the Company's Consolidated Statements of Earnings for the periods indicated:
YEARS ENDED DECEMBER 31, -------------------------- 1997 1996 1995 ------ ------ ------ HISTORICAL Revenues................................................ 100.0% 100.0% 100.0% Cost of revenues........................................ 51.4 52.1 54.5 Selling, general and administrative expenses............ 33.2 33.6 34.0 Restructuring costs..................................... 1.0 -- -- ----- ----- ----- Operating income................................ 14.4 14.3 11.5 Interest (expense), net................................. 0.4 0.2 2.9 ----- ----- ----- Earnings before income taxes.................... 14.0 14.1 8.6 Income taxes............................................ 5.4 10.0 0.6 ----- ----- ----- Net earnings.................................... 8.6% 4.1% 8.0% ===== ===== ===== PRO FORMA Historical earnings before income taxes................. 14.1% 8.6% Pro forma income taxes.................................. 5.5 3.3 ----- ----- Pro forma net earnings.......................... 8.6% 5.3% ===== =====
1997 COMPARED WITH 1996 Revenues. The Company's revenues consist principally of contractual percentages of overpayments recovered for clients that are primarily in the retailing industry. Revenues increased 45.3% to $112.4 million for 1997, up from $77.3 million in 1996. Domestic revenues increased 30.2% to $81.7 million in 1997, up from $62.7 million in 1996. Of this 30.2% increase (i) 9.0% was contributed by existing clients served in both the 1996 and 1997 periods; (ii) 13.3% was contributed by the four recovery audit firms acquired in 1997; and (iii) 7.9% resulted from provision of services to new clients (net of the effect of revenues in 1996 from clients not served in 1997). The Company considers international operations to be all operations located outside of the United States. International revenues increased 109.9% to $30.7 million in 1997, up from $14.6 million in 1996. Of this 109.9% increase (i) 45.3% was contributed by operations of Alma subsequent to this October 1997 acquisition and (ii) 64.6% resulted from existing operations, primarily from services provided to new clients. The Company continues to believe that the rate of growth for its international operations will significantly exceed its rate of domestic revenue growth for the foreseeable future if the revenue effect of acquired businesses is excluded. Cost of Revenues. Cost of revenues consists principally of commissions paid or payable to the Company's auditors based primarily upon the level of overpayment recoveries, and salaries and bonuses paid or payable to divisional and regional managers. Also included in cost of revenues are other direct costs incurred by these personnel including rental of field offices, travel and entertainment, telephone, utilities, maintenance and supplies, and clerical assistance. Cost of revenues as a percentage of revenues decreased to 51.4% in 1997 from 52.1% in 1996. Domestically, cost of revenues as a percentage of revenues increased slightly to 53.1% in 1997 from 52.7% in 1996. This increase related primarily to cost of revenues associated with revenues subsequently recognized on claims in process acquired as part of the Company's May 1997 acquisition of The Hale Group. These 14 17 claims carried higher auditor compensation rates than those customarily paid by the Company. The remainder of these claims in progress is expected to be resolved in 1998. Internationally, cost of revenues as a percentage of revenues decreased to 46.8% in 1997, from 49.7% in 1996. This reduction was due in part to the operations of Alma during the fourth quarter of 1997 which were conducted at a cost of revenue percentage of 44.2%. Excluding Alma's revenues and cost of revenues from the Company's 1997 international operations, international cost of revenues as a percentage of revenues would have been 47.5%, or a 2.2% reduction from 1996. This improvement resulted primarily from gross margin expansions during 1997 in the Company's more established international locations. Selling, General and Administrative Expenses. Selling, general and administrative expenses include the expenses of sales and marketing activities, information technology services and the corporate data center, human resources, legal and accounting, administration, headquarters-related depreciation of property and equipment and amortization of intangibles. Selling, general and administrative expenses as a percentage of revenues decreased to 33.2% in 1997, from 33.6% in 1996. Domestic selling, general and administrative expenses as a percentage of revenues increased to 30.6% in 1997, up from 30.2% in 1996. The Company's 1997 domestic selling, general and administrative expense percentage is higher than the comparable percentage in 1996 due to increased expenditures for various 1997 initiatives such as significantly expanded training programs and period costs associated with intensified mergers and acquisition efforts. Internationally, selling, general and administrative expenses as a percentage of revenues decreased to 40.0% in 1997, down significantly from 47.9% in 1996. This reduction was due in part to the operations of Alma during the fourth quarter of 1997 which were conducted at a selling, general and administrative percentage of 26.9%. Excluding Alma's revenues and selling, general and administrative expenses from the Company's 1997 international operations, international selling, general and administrative expenses as a percentage of revenues would have been 43.6%, or a 4.3% reduction from 1996. This improvement resulted primarily from various components of fixed costs being spread over a rapidly growing revenue base. In connection with acquired businesses, the Company has recorded intangible assets including goodwill and deferred non-compete costs. Amortization of these intangible assets totaled $1.9 million in 1997 and $1.2 million in 1996. Restructuring Costs. In recognition of emerging developments such as the Alma acquisition, the Company restructured and realigned certain facets of its European management structure in the fourth quarter of 1997 and incurred a pre-tax charge to earnings of $1.2 million. This charge consisted of employment termination costs directly applicable to four of the Company's senior European executives and residual contract costs due to an independent European advisor for services no longer required by the Company. Of the $1.2 million charge, $683,000 had been paid through December 31, 1997, and the remaining $525,000 is currently estimated to be paid by June 30, 1998. Operating Income. Operating income increased 46.5% to $16.2 million in 1997, up from $11.0 million in 1996. As a percentage of total revenues, operating income increased to 14.4% of revenues in 1997, up slightly from 14.3% in 1996. Excluding the effect of the $1.2 million nonrecurring pre-tax restructuring charge on 1997 operations, operating income would have been $17.4 million or 15.5% of total revenues. Interest Expense, Net. Interest expense, net, increased to $403,000 in 1997, up from $100,000 in 1996. Interest expense, net, for 1997 consisted of (i) interest expense of $730,000, comprised primarily of interest on $24.8 million of bank borrowings outstanding since October 1997 which were used to finance a portion of the Alma acquisition, net of (ii) $327,000 of interest income derived primarily from overnight investments. Earnings Before Income Taxes. Earnings before income taxes increased 44.2% to $15.8 million, up from $10.9 million in 1996. As a percentage of total revenues, earnings before income taxes were 14.0% in 1997, down slightly from 14.1% in 1996. Excluding the effect of the $1.2 million nonrecurring pre-tax restructuring on 1997 operations, earnings before income taxes as a percentage on total revenues would have been 15.1%. 15 18 Income Taxes. The Company's predecessor entities prior to its initial public offering on March 26, 1996 generally were either corporations electing to be taxed as Subchapter S corporations or partnerships. As a result, any income tax liabilities were the responsibilities of the respective shareholders and partners. In connection with the initial public offering, all domestic entities became C corporations. As a result of these conversions to C corporations, the Company incurred a charge to operations of $3.7 million in the first quarter of 1996 for cumulative deferred income taxes. The provisions for income taxes for all periods subsequent to March 31, 1996 consist of federal, state and foreign income taxes at the Company's composite effective rate of 39.0%. The Company's 1996 provision for income taxes of $7.8 million consists of the above-mentioned $3.7 million charge for cumulative deferred income taxes combined with $4.1 million in tax provisions at a 39.0% composite effective rate for the three quarters subsequent to the March 26, 1996 initial public offering. Pro Forma Income Taxes. The results of operations for 1996 have been adjusted on a pro forma basis to reflect federal, state and foreign income taxes at a composite effective rate of 39.0% as if the Company's predecessors had been C corporations throughout the year. 1996 COMPARED WITH 1995 Revenues. Revenues increased 38.0% to $77.3 million for 1996, up from $56.0 million in 1995. Of this $21.3 million increase, $13.7 million, or 64.3%, related to existing and new domestic accounts and $7.6 million, or 35.7%, related to revenue growth from international operations. Domestic revenue growth in 1996 of $13.7 million consisted of $5.7 million related to 35 new client accounts and $8.0 million related to provision of additional services to existing accounts. International revenues grew 108.1% to $14.6 million for 1996, up from $7.0 million for 1995. International revenues grew from 12.5% of total revenues in 1995 to 18.9% during 1996. Cost of Revenues. Cost of revenues decreased to 52.1% of revenues in 1996, down from 54.5% for 1995. Domestically, the Company's cost of revenues as a percentage of revenues decreased to 52.7% of revenues in 1996, down from 55.6% for 1995 due primarily to Fial & Associates contracts-in-progress acquired in January 1995. These auditor contracts, substantially all of which were concluded by December 31, 1995, carried higher auditor compensation rates than those customarily paid by the Company. Excluding the effect of this temporary $1.9 million rate-related differential, domestic cost of revenues as a percentage of domestic revenues would have been 51.7% in 1995. Internationally, cost of revenues increased to 49.7% of international revenues in 1996, up from 47.2% during 1995. This increase resulted from an increase in initial auditor compensation guarantees resulting from various new markets entered by the Company in 1996. Selling, General and Administrative Expenses. Selling, general and administrative expenses as a percentage of revenues decreased to 33.6% in 1996 from 34.0% in 1995. Domestic selling, general and administrative expenses as a percentage of domestic revenues were relatively flat at 30.2% in 1996 and 30.4% in 1995. The Company's domestic selling, general and administrative expenses grew during 1996 at a rate approximately commensurate with its domestic revenue growth due primarily to space, equipment and personnel additions at its corporate headquarters facility in Atlanta, Georgia. International selling, general and administrative expenses decreased to 47.9% of international revenues in 1996, down from 58.7% during 1995 due principally to the 108.1% growth in international revenues in 1996 without a proportionate increase in selling, general and administrative expenses. Amortization of intangible assets totaled $1.2 million in both 1996 and 1995. Operating Income. Operating income increased 71.4% to $11.0 million in 1996, up from $6.4 million in 1995. Operating income was 14.3% and 11.5% of revenues for 1996 and 1995, respectively. Excluding the effect of the temporary $1.9 million auditor compensation rate differential relating to contracts-in-progress 16 19 acquired in January 1995 from Fial & Associates, operating income for 1995 would have been $8.3 million, or 15.0% of revenues. Interest Expense, Net. Interest expense, net, decreased to $100,000 in 1996, down from $1.6 million in 1995. Interest expense, net, for 1996 consisted of $495,000 of net interest expense incurred in the first quarter prior to the Company's March 26, 1996 initial public offering, less $395,000 of net interest income derived primarily from the net initial public offering proceeds during the remaining three quarters of the year. Earnings Before Income Taxes. Earnings before income taxes increased 127.3% to $10.9 million, up from $4.8 million in 1995. As a percentage of total revenues, earnings before income taxes were 14.1% in 1996 and 8.6% in 1995. Excluding the effect of the temporary $1.9 million auditor compensation rate differential relating to contracts-in-progress acquired in January 1995 from Fial & Associates, earnings before income taxes for 1995 would have been $6.7 million, or 12.1% of revenues. Income Taxes. The predecessor business entities that comprised the Company generally were either Subchapter S corporations or partnerships. As a result, income tax liabilities were the responsibilities of the respective shareholders and partners. In April 1995, the Company's predecessors reorganized and its international entities became C corporations. Additionally, in connection with the Company's March 1996 initial public offering, all domestic entities became C corporations. As a result of these conversions to C corporations, the Company incurred charges to operations of $305,000 in 1995 and $3.7 million in 1996 for cumulative deferred income taxes. The Company's 1996 provision for income taxes of $7.8 million consists of the above-mentioned $3.7 million charge for cumulative deferred income taxes combined with $4.1 million in tax provisions at a 39.0% composite effective rate for the three quarters subsequent to the March 26, 1996 initial public offering. Pro Forma Income Taxes. The results of operations for 1996 and 1995 have been adjusted on a pro forma basis to reflect federal, state and foreign income taxes at a composite effective rate of 39.0% as if the Company's predecessors had been C corporations throughout such periods. QUARTERLY RESULTS The following tables set forth certain unaudited quarterly financial data for each of the Company's last eight quarters and such data expressed as a percentage of the Company's revenues for the respective quarters. The information has been derived from unaudited consolidated financial statements that, in the opinion of management, reflect all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation of such quarterly information. The operating results for any quarter are not necessarily indicative of the results to be expected for any future period.
1997 QUARTER ENDED 1996 QUARTER ENDED -------------------------------------- -------------------------------------- MAR. 31 JUNE 30 SEPT. 30 DEC. 31 MAR. 31 JUNE 30 SEPT. 30 DEC. 31 ------- ------- -------- ------- ------- ------- -------- ------- (IN THOUSANDS) Revenues.......................... $20,960 $25,858 $29,627 $35,918 $15,615 $17,963 $21,964 $21,788 Cost of revenues.................. 11,529 13,331 14,693 18,173 8,623 9,480 11,002 11,225 Selling, general and administrative expenses......... 8,196 8,723 8,790 11,545 6,031 6,040 6,623 7,267 Restructuring costs............... -- -- -- 1,208 -- -- -- -- ------- ------- ------- ------- ------- ------- ------- ------- Operating income......... 1,235 3,804 6,144 4,992 961 2,443 4,339 3,296 Interest income (expense), net.... 63 55 14 (535) (495) 106 162 127 ------- ------- ------- ------- ------- ------- ------- ------- Earnings before income taxes.................. 1,298 3,859 6,158 4,457 466 2,549 4,501 3,423 Income taxes...................... 506 1,491 2,400 1,752 3,700 994 1,759 1,336 ------- ------- ------- ------- ------- ------- ------- ------- Net earnings (loss)...... $ 792 $ 2,368 $ 3,758 $ 2,705 $(3,234) $ 1,555 $ 2,742 $ 2,087 ======= ======= ======= ======= ======= ======= ======= ======= PRO FORMA Historical earnings before income taxes.................. $ 466 Pro forma income taxes.......... 182 ------- Pro forma net earnings... $ 284 =======
17 20
1997 QUARTER ENDED 1996 QUARTER ENDED -------------------------------------- -------------------------------------- MAR. 31 JUNE 30 SEPT. 30 DEC. 31 MAR. 31 JUNE 30 SEPT. 30 DEC. 31 ------- ------- -------- ------- ------- ------- -------- ------- Revenues.................................... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% Cost of revenues............................ 55.0 51.6 49.6 50.6 55.2 52.8 50.1 51.5 Selling, general and administrative expenses.................................. 39.1 33.7 29.7 32.1 38.6 33.6 30.1 33.4 Restructuring costs......................... -- -- -- 3.4 -- -- -- -- ----- ----- ----- ----- ----- ----- ----- ----- Operating income................... 5.9 14.7 20.7 13.9 6.2 13.6 19.8 15.1 Interest income (expense), net.............. 0.3 0.2 0.1 (1.5) (3.2) 0.6 0.7 0.6 ----- ----- ----- ----- ----- ----- ----- ----- Earnings before income taxes....... 6.2 14.9 20.8 12.4 3.0 14.2 20.5 15.7 Income taxes................................ 2.4 5.8 8.1 4.9 23.7 5.5 8.0 6.1 ----- ----- ----- ----- ----- ----- ----- ----- Net earnings (loss)................ 3.8% 9.1% 12.7% 7.5% (20.7)% 8.7% 12.5% 9.6% ===== ===== ===== ===== ===== ===== ===== ===== PRO FORMA Historical earnings before income taxes... 3.0% Pro forma income taxes.................... 1.2 ----- Pro forma net earnings............. 1.8% =====
The Company has experienced and expects to continue to experience significant seasonality in its business. The Company typically realizes higher revenues and operating income in the last two quarters of its fiscal year. This trend is expected to continue and reflects the inherent purchasing and operational cycles of the retailing industry, which is the principal industry served by the Company. The Company's October 1997 acquisition of Alma is not expected to affect this trend because Alma historically has experienced similar seasonality in its revenues and operating income. Should the Company not continue to realize increased revenues in future third and fourth quarter periods, profitability for any affected quarter and the entire year could be materially and adversely affected due to ongoing selling, general and administrative expenses that are largely fixed over the short term. LIQUIDITY AND CAPITAL RESOURCES Through December 31, 1996, the Company's predecessors had acquired and assimilated three operating companies and financed these acquisitions primarily through a combination of bank and seller financing. Ongoing Company operations and capital requirements prior to the Company's initial public offering were met primarily with cash flows provided by operating activities and, to a lesser extent, with the proceeds from bank and shareholder loans. On April 1, 1996, the Company received its $34.8 million portion of the proceeds (net of underwriting discounts and commissions) from its initial public offering. Of these proceeds, approximately $1.1 million was subsequently utilized to pay expenses of the offering, approximately $4.9 million was used to pay previously declared and unpaid Subchapter S shareholder distributions and partnership distributions, and approximately $14.6 million was used to pay principal and accrued interest on substantially all outstanding interest-bearing debt (other than that portion of certain convertible debt that was converted to Common Stock concurrent with the initial public offering). All of the residual $14.2 million of net proceeds were subsequently used to expand international operations, to acquire complementary businesses and for general corporate purposes. During October 1997, the Company increased its credit facility with NationsBank, N.A. from $20.0 million to $30.0 million. The credit facility permits the Company to borrow up to $30.0 million on a term loan basis to finance mergers and acquisitions. Alternatively, the Company, at its option, may utilize up to $10.0 million as a revolving line of credit for working capital and utilize the remaining $20.0 million for mergers and acquisitions. Borrowings under the credit facility can be made through September 1999. As of January 31, 1998, the Company had outstanding principal borrowings of $24.8 million under the credit facility which accrue interest at LIBOR plus 1.75% per annum. Such borrowings were made in October 1997 in connection with the financing of the Alma acquisition. Net cash provided by operating activities was $8.2 million, $1.9 million and $2.5 million for 1997, 1996 and 1995, respectively. 18 21 Net cash used in investing activities was $30.8 million, $5.1 million and $2.6 million for 1997, 1996 and 1995, respectively. During 1997, the Company spent $26.1 million (net of cash acquired) as the cash portion of consideration paid for four recovery audit firms. Net cash provided by financing activities was $25.0 million in 1997 and $19.4 million in 1996. Net cash used in financing activities was $586,000 in 1995. Net cash provided by financing activities in 1997 consists primarily of $24.8 million borrowed from NationsBank, N.A. in October 1997 to finance a portion of the Alma acquisition. Net cash provided by financing activities in 1996 reflects proceeds from the Company's initial public offering, net of repayments of debt and other obligations paid from those proceeds. During 1997, the Company acquired five recovery audit firms. The Company is pursuing, and intends to continue to pursue, the acquisition of domestic and international businesses including both direct competitors and businesses providing other types of recovery services. Future acquisitions may include much larger businesses than those acquired to date. There can be no assurance, however, that the Company will be successful in consummating further acquisitions due to factors such as receptivity of potential acquisition candidates and valuation issues. Additionally, there can be no assurance that future acquisitions, if consummated, can be successfully assimilated into the Company. See "Forward-Looking Statements." The Company is currently contemplating a public offering of approximately 2,000,000 shares of common stock. The Company anticipates that the proceeds from this offering will be used to repay all outstanding indebtedness under its credit facility with NationsBank, N.A., for international expansion, potential future acquisitions and general corporate purposes, including working capital. Even if the public offering is not consummated, the Company nevertheless believes that its current working capital, its existing line of credit and cash flow generated from future operations will be sufficient to meet the Company's working capital and capital expenditure requirements through December 31, 1998 unless one or more acquisitions are consummated which require the Company to seek additional debt or equity financing. NEW ACCOUNTING STANDARDS Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income," establishes standards for reporting and display of comprehensive income and its components (revenues, expenses, gains and losses) in a full set of general purpose financial statements. This Statement requires that all items that are required to be recognized under accounting standards as components of comprehensive income be reported in a financial statement that is displayed with the same prominence as other financial statements. The Company believes that its components of comprehensive income will consist principally of traditionally-determined net income and foreign currency translation adjustments. This Statement is effective for fiscal years beginning after December 15, 1997. Reclassification of financial statements for earlier periods provided for comparative purposes is required. Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information" establishes revised standards for the manner in which public business enterprises report information about operating segments. The Company does not believe that this Statement will significantly alter the segment disclosures it currently provides. This Statement is effective for fiscal years beginning after December 15, 1997. YEAR 2000 ISSUE Many existing computer programs use only two digits to identify a year in the date field. These programs were designed and developed without considering the impact of the upcoming change in the century. If not corrected, many computer applications could fail or create erroneous results by or at the year 2000. The Company believes that its principal year 2000 exposure is confined to one accounting subsystem which is currently under intense review by outside consultants. The Company believes that this subsystem will be revised or replaced within the next 12 months. Consulting costs to revise or replace this subsystem have not been estimated, but are not anticipated to be material to the Company's business, operations or financial condition. 19 22 FORWARD-LOOKING STATEMENTS Statements made in this 1997 Form 10-K that state the Company's or management's intentions, hopes, beliefs, expectations or predictions of the future are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. It is important to note that the Company's actual results could differ materially from those contained in such forward-looking statements. Additional information concerning factors that could cause actual results to differ materially from those in forward-looking statements is contained from time to time in the Company's SEC filings, including the Risk Factors section of the Company's Prospectus dated July 29, 1997, included in its registration statement on Form S-3 (file number 333-31805). ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company has not conducted transactions, established commitments or entered into relationships requiring disclosures beyond those provided elsewhere in this Form 10-K. 20 23 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE NUMBER ------ Independent Auditors' Reports............................... 22 Consolidated Statements of Earnings for the Years ended December 31, 1997, 1996 and 1995.......................... 24 Consolidated Balance Sheets as of December 31, 1997 and 1996...................................................... 25 Consolidated Statements of Shareholders' Equity (Deficit) for the Years ended December 31, 1997, 1996 and 1995...... 26 Consolidated Statements of Cash Flows for the Years ended December 31, 1997, 1996 and 1995.......................... 27 Notes to Consolidated Financial Statements.................. 28
21 24 INDEPENDENT AUDITORS' REPORT The Board of Directors and Shareholders The Profit Recovery Group International, Inc.: We have audited the accompanying Consolidated Balance Sheets of The Profit Recovery Group International, Inc. and subsidiaries as of December 31, 1997 and 1996, and the related Consolidated Statements of Earnings, Shareholders' Equity (Deficit), and Cash Flows for each of the years in the three-year period ended December 31, 1997. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We did not audit the consolidated financial statements of Financiere Alma, S.A. and subsidiaries, which financial statements reflect total assets constituting 12% and total revenues constituting 6% in 1997 of the related consolidated totals. Those financial statements where audited by other auditors whose report has been furnished to us, and our opinion, insofar as it relates to the amounts included for Financiere Alma, S.A. and subsidiaries, is based solely on the report of the other auditors. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits and the report of the other auditors provide a reasonable basis for our opinion. In our opinion, based on our audits and the report of the other auditors, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of The Profit Recovery Group International, Inc. and subsidiaries as of December 31, 1997 and 1996, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1997 in conformity with generally accepted accounting principles. KPMG Peat Marwick LLP Atlanta, Georgia January 31, 1998 22 25 INDEPENDENT AUDITORS' REPORT The Directors and Shareholders of Financiere Alma, S.A. We have audited the accompanying consolidated balance sheet of Financiere Alma, S.A. and subsidiaries as of December 31, 1997 and the related consolidated statements of earnings, shareholders' equity and cash flows for the three months ended December 31, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Financiere Alma, S.A. and subsidiaries as of December 31, 1997, and the results of their operations and their cash flows for the three months ended December 31, 1997 in conformity with accounting principles generally accepted in the United States. ERNST & YOUNG Entrepreneurs Department d'E&Y Audit Any Antola Paris, France January 31, 1998 23 26 THE PROFIT RECOVERY GROUP INTERNATIONAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF EARNINGS
YEARS ENDED DECEMBER 31, ------------------------------ 1997 1996 1995 -------- ------- ------- (IN THOUSANDS, EXCEPT PER SHARE DATA) HISTORICAL Revenues.................................................... $112,363 $77,330 $56,031 Cost of revenues............................................ 57,726 40,330 30,554 Selling, general, and administrative expenses (Note 2)...... 37,254 25,961 19,035 Restructuring costs (Note 14)............................... 1,208 -- -- -------- ------- ------- Operating income.................................. 16,175 11,039 6,442 Interest (expense), net (Note 2)............................ (403) (100) (1,630) -------- ------- ------- Earnings before income taxes...................... 15,772 10,939 4,812 Income taxes (Note 5)....................................... 6,149 7,789 305 -------- ------- ------- Net earnings...................................... $ 9,623 $ 3,150 $ 4,507 ======== ======= ======= PRO FORMA Historical earnings before income taxes..................... $10,939 $ 4,812 Pro forma income taxes (Note 5)............................. 4,271 1,877 ------- ------- Pro forma net earnings............................ $ 6,668 $ 2,935 ======= ======= PER SHARE (NOTE 13) Earnings (pro forma earnings for 1996 and 1995) per share -- basic............................................ $ .52 $ .41 $ .24 ======== ======= ======= Earnings (pro forma earnings for 1996 and 1995) per share -- diluted.......................................... $ .51 $ .39 $ .21 ======== ======= =======
See accompanying Notes to Consolidated Financial Statements. 24 27 THE PROFIT RECOVERY GROUP INTERNATIONAL, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
DECEMBER 31, ---------------------- 1997 1996 ---------- --------- (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) ASSETS Current assets: Cash and cash equivalents................................. $ 19,386 $16,891 Receivables: Billed contract receivables............................. 12,100 3,864 Unbilled contract receivables........................... 41,771 30,734 Employee advances....................................... 2,299 1,363 -------- ------- Total receivables.................................. 56,170 35,961 -------- ------- Refundable income taxes................................... -- 2,049 Prepaid expenses and other current assets................. 2,430 528 -------- ------- Total current assets............................... 77,986 55,429 -------- ------- Property and equipment: Computer and other equipment.............................. 10,658 5,753 Furniture and fixtures.................................... 2,111 1,569 Leasehold improvements.................................... 1,760 1,183 -------- ------- 14,529 8,505 Less accumulated depreciation and amortization............ 5,760 2,272 -------- ------- 8,769 6,233 -------- ------- Noncompete agreements, less accumulated amortization of $3,797 in 1997 and $2,759 in 1996......................... 3,471 4,509 Deferred loan costs, less accumulated amortization of $40 in 1997 and $8 in 1996....................................... 24 56 Goodwill, less accumulated amortization of $986 in 1997 and $157 in 1996.............................................. 39,591 393 Deferred income taxes (Note 5).............................. 3,585 1,174 Other assets................................................ 459 524 -------- ------- $133,885 $68,318 ======== ======= LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Notes payable to bank..................................... $ 81 $ -- Current installments of long-term debt (Note 3)........... 1,428 79 Accounts payable and accrued expenses..................... 4,835 1,383 Accrued payroll and related expenses...................... 26,075 16,356 Deferred income taxes (Note 5)............................ 9,917 7,607 Deferred revenue.......................................... 1,087 -- -------- ------- Total current liabilities.......................... 43,423 25,425 Long-term debt, excluding current installments (Note 3)..... 24,365 692 Deferred compensation (Note 6).............................. 2,563 1,642 Other long-term liabilities................................. 462 -- -------- ------- Total liabilities.................................. 70,813 27,759 -------- ------- Shareholders' equity (Notes 3 and 9): Preferred stock, no par value. Authorized 1,000,000 shares; none issued or outstanding in 1997 and 1996..... -- -- Common stock, no par value; $.001 stated value per share. Authorized 60,000,000 shares; issued and outstanding 19,193,676 shares in 1997 and 17,649,152 shares in 1996.................................................... 19 18 Additional paid-in capital................................ 48,195 34,188 Cumulative translation adjustments........................ (1,149) (31) Retained earnings......................................... 16,007 6,384 -------- ------- Total shareholders' equity......................... 63,072 40,559 Commitments (Notes 2, 3, 4 and 8) -------- ------- $133,885 $68,318 ======== =======
See accompanying Notes to Consolidated Financial Statements. 25 28 THE PROFIT RECOVERY GROUP INTERNATIONAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT) YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
RETAINED TOTAL ADDITIONAL CUMULATIVE EARNINGS SHAREHOLDERS' COMMON PAID-IN SUBSCRIPTIONS TRANSLATION (ACCUMULATED EQUITY STOCK CAPITAL RECEIVABLE ADJUSTMENTS DEFICIT) (DEFICIT) ------ ---------- ------------- ----------- ------------ ------------- (IN THOUSANDS) BALANCE AT DECEMBER 31, 1994....................... $ 57 $ -- $(3) $ (56) $ 2,358 $ 2,356 Net earnings................. -- -- -- -- 4,507 4,507 Proceeds from subscription receivable................. -- -- 3 -- -- 3 Effect of reorganization (Note 1(a))................ -- (1,550) -- -- 1,550 -- Distributions................ -- -- -- -- (10,716) (10,716) Cumulative translation adjustments................ -- -- -- 5 -- 5 Issuance of common stock in acquisition of Fial & Associates, Inc............ 1 442 -- -- -- 443 ---- -------- --- ------- ------- ------- BALANCE AT DECEMBER 31, 1995....................... 58 (1,108) -- (51) (2,301) (3,402) Net earnings................. -- -- -- -- 3,150 3,150 Effect of stock split........ (57) 57 -- -- -- -- Issuance of shares under employee stock option plans...................... -- 132 -- -- -- 132 Tax effect of issuance of option shares to employees.................. -- 115 -- -- -- 115 Effect of reorganization, including termination of Subchapter S and partnership status (Note 1(a))...................... 2 (10,464) -- 51 10,411 -- Distributions................ -- -- -- -- (4,876) (4,876) Cumulative translation adjustments................ -- -- -- (31) -- (31) Issuance of common stock..... 4 34,008 -- -- -- 34,012 Conversion of 5% convertible debentures................. 11 11,448 -- -- -- 11,459 ---- -------- --- ------- ------- ------- BALANCE AT DECEMBER 31, 1996....................... 18 34,188 -- (31) 6,384 40,559 Net earnings................. -- -- -- -- 9,623 9,623 Issuance of shares under employee stock option plans...................... -- 366 -- -- -- 366 Tax effect of issuance of option shares to employees.................. -- 263 -- -- -- 263 Cumulative translation adjustments................ -- -- -- (1,118) -- (1,118) Issuance of common stock in acquisitions of businesses................. 1 13,378 -- -- -- 13,379 ---- -------- --- ------- ------- ------- BALANCE AT DECEMBER 31, 1997....................... $ 19 $ 48,195 $-- $(1,149) $16,007 $63,072 ==== ======== === ======= ======= =======
See accompanying Notes to Consolidated Financial Statements. 26 29 THE PROFIT RECOVERY GROUP INTERNATIONAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, ----------------------------- 1997 1996 1995 -------- -------- ------- (IN THOUSANDS) Cash flows from operating activities: Net earnings.............................................. $ 9,623 $ 3,150 $ 4,507 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation and amortization........................... 4,755 2,460 1,810 Loss on sale of property and equipment.................. 26 -- 79 Deferred compensation expense........................... 920 606 474 Deferred income taxes................................... 1,703 6,823 305 Foreign translation adjustments......................... (1,118) (31) 5 Changes in assets and liabilities, net of effect of acquisition: Receivables........................................... (12,388) (16,237) (6,755) Refundable income taxes............................... 1,325 (2,049) -- Prepaid expenses and other current assets............. (929) (226) (237) Other assets.......................................... 20 (316) (132) Accounts payable and accrued expenses................. (452) (816) 957 Accrued payroll and related expenses.................. 4,644 8,520 1,518 Deferred revenue...................................... 103 -- -- Other long-term liabilities........................... (16) -- -- -------- -------- ------- Net cash provided by operating activities.......... 8,216 1,884 2,531 -------- -------- ------- Cash flows from investing activities: Purchases of property and equipment....................... (4,655) (5,076) (2,048) Acquisition of businesses................................. (26,096) -- (550) Net decrease in notes receivable from affiliates.......... -- -- 11 -------- -------- ------- Net cash used in investing activities.............. (30,751) (5,076) (2,587) -------- -------- ------- Cash flows from financing activities: Net increase in (repayments of) note payable to bank...... (66) (1,763) 1,763 Proceeds from issuance of long-term debt.................. 24,750 -- 12,800 Proceeds from loans from shareholders..................... -- 2,600 -- Repayments of long-term debt.............................. (20) (7,104) (2,853) Payments of deferred loan costs........................... -- -- (1,000) Repayments of loans from shareholders..................... -- (3,675) (580) Net proceeds from common stock............................ 366 34,259 1 Distributions............................................. -- (4,876) (10,717) -------- -------- ------- Net cash provided by (used in) financing activities....................................... 25,030 19,441 (586) -------- -------- ------- Net change in cash and cash equivalents............ 2,495 16,249 (642) Cash and cash equivalents at beginning of year.............. 16,891 642 1,284 -------- -------- ------- Cash and cash equivalents at end of year.................... $ 19,386 $ 16,891 $ 642 ======== ======== ======= Supplemental disclosure of cash flow information: Cash paid during the year for interest.................... $ 592 $ 1,091 $ 1,207 ======== ======== ======= Cash paid during the year for income taxes, net of refunds received................................................ $ 3,266 $ 3,585 $ -- ======== ======== ======= Supplemental disclosure of noncash investing and financing activities: In 1997 the Company purchased all the outstanding stock of four companies and the majority of the outstanding stock of a foreign company. In conjunction with the acquisitions, the Company assumed liabilities as follows: Fair value of assets acquired........................... $ 50,619 Cash paid for the acquisitions.......................... (26,096) Fair value of Shares issued for acquisitions............ (13,379) -------- Liabilities assumed................................ $ 11,144 ========
See accompanying Notes to Consolidated Financial Statements. 27 30 THE PROFIT RECOVERY GROUP INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1997, 1996 AND 1995 (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (a) Description of Business and Basis of Presentation Description of Business The principal business of The Profit Recovery Group International, Inc. and subsidiaries (the "Company") is providing accounts payable and other recovery audit services to large retailers, wholesale distributors, healthcare providers, technology companies and other large transaction-intensive companies, as well as to certain governmental agencies. The Company provides its services throughout North America, Western Europe, and Southeast Asia. On March 26, 1996, the Company completed the initial public offering of its common stock. Basis of Presentation Prior to a reorganization in April 1995, the Company was a combination of the following eight entities with common control: The Profit Recovery Group, Inc. ("PRG"); The Profit Recovery Group International, L.P. ("PRG L.P."); PRG International Inc.; The Profit Recovery Group Asia, Inc. ("Asia"); The Profit Recovery Group Canada, Inc. ("Canada"); The Profit Recovery Group France, Inc. ("France"); The Profit Recovery Group Mexico, Inc. ("Mexico"); and The Profit Recovery Group U.K., Inc. ("UK"). The April 1995 reorganization principally included the contribution of the capital stock in Asia, Canada, France, Mexico, and the UK (collectively referred to as the "Foreign Operating Companies") to a newly formed subsidiary of PRG L.P., PRG International Holding Co. ("PRG Holdco"). Subsequent to this reorganization, the Company was a combination of the following three entities with common ownership: The Profit Recovery Group International I, Inc. ("PRGI" -- formerly PRG), PRG L.P., and PRG Holdco and its five wholly owned subsidiaries, which are the Foreign Operating Companies. All reorganization transactions were between parties under common control and, accordingly, were accounted for in a manner similar to that in a pooling-of-interests. In connection with the Company's March 1996 initial public offering of its common stock, a further reorganization was effected. Immediately subsequent to this reorganization, the Company consisted of The Profit Recovery Group International, Inc. as the publicly traded parent company and seven wholly owned subsidiaries: PRGI, Asia, Canada, France, Mexico, UK, and The Profit Recovery Group Belgium, Inc. ("Belgium"). All reorganization transactions were between parties under common control and, accordingly, were accounted for in a manner similar to that in a pooling-of-interests. Upon completion of the March 1996 reorganization, United States operations were conducted through PRGI and the international operations through the other six subsidiaries. Various additional operating entities, both domestic and international, have been acquired or established subsequent to the March 1996 reorganization. (b) Principles of Consolidation The consolidated financial statements of the Company in 1997 and 1996, and the combined financial statements of the Company for 1995 include the financial statements of the aforementioned entities. All significant intercompany balances and transactions have been eliminated in consolidation or combination. Management of the Company has made a number of estimates and assumptions relating to the reporting of assets and liabilities and the disclosure of contingent assets and liabilities to prepare these financial statements in conformity with generally accepted accounting principles. Actual results could differ from those estimates. A material estimate that is particularly susceptible to change is the estimation of uncollectible claims (see (c) Revenue Recognition). 28 31 THE PROFIT RECOVERY GROUP INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (c) Revenue Recognition The Company's revenues are based on specific contracts with its clients. Such contracts generally specify (a) time periods covered by the audit, (b) nature and extent of audit services to be provided by the Company, (c) client's duties in assisting and cooperating with the Company, and (d) fee payable to the Company expressed as a specified percentage of the amounts recovered by the client resulting from liability overpayment claims identified. In addition to contractual provisions, most clients also establish specific procedural guidelines which the Company must satisfy prior to submitting claims for client approval. These guidelines are unique to each client and impose specific requirements on the Company such as adherence to vendor interaction protocols, provision of advance written notification to vendors of forthcoming claims, securing written claim validity concurrence from designated client personnel and, in limited cases, securing written claim validity concurrence from the involved vendors. The Company defers revenue recognition until client guidelines, of whatever nature, have been satisfied. Accepted claims basis of revenue recognition With respect to accounts payable and ancillary audit services for retailers, wholesale distributors and governmental agencies (the Company's historical client base), the Company recognizes revenues at the time overpayment claims are presented to and approved by its clients, as adjusted for estimated uncollectible claims. For accounts payable and ancillary audit services provided to retailers, wholesale distributors and governmental agencies, the Company believes that it has completed substantially all contractual obligations to its client at the time an identified and documented claim which satisfies all client-imposed guidelines is presented to, and approved by, appropriate client personnel. The Company further believes that at the time a claim is submitted and accepted by its client, such claim represents a valid overpayment due to the client from its vendor. Accordingly, the Company believes that it is entitled to its fee upon acceptance of such claim by its client, subject to (a) customary and routine claim disallowance adjustments by the vendor resulting primarily from the receipt of previously unknown information, and (b) applicable laws. Disallowances of client-approved claims are susceptible to experience-based estimation. The Company's standard client contract for accounts payable and ancillary audit services provided to retailers, wholesale distributors and governmental agencies imposes a duty on the client to process promptly all claims against vendors. In the interest of vendor relations, however, many clients modify the standard client contract with the Company to provide that they retain discretion whether to pursue collection of a claim. In the Company's experience, it is extremely unusual for a client to forego the collection of a large, valid claim. In some cases, a vendor may dispute a claim by providing additional documentation or information supporting its position. Consequently, many clients revise the Company's standard client contract to clarify that the Company is not entitled to payment of its fee until the client recovers the claim from its vendor. Submitted claims for accounts payable and ancillary audit services provided to retailers, wholesale distributors and governmental agencies that are not approved by clients for whatever reason are not considered when recognizing revenues. Estimated uncollectible claims are initially established, and subsequently adjusted, for each individual client based on historical collection rates, types of claims identified, current industry conditions, and other factors which, in the opinion of management, deserve recognition. The Company records revenues for accounts payable and ancillary audit services provided to retailers, wholesale distributors and governmental agencies at estimated net realizable value without reserves. Accordingly, adjustments to uncollectible claim estimates are directly charged or credited to earnings, as appropriate. Approved claims for accounts payable and ancillary audit services provided to retailers, wholesale distributors and governmental agencies are processed by clients and generally taken as credits against outstanding payables or future purchases from the vendors involved. Once credits are taken, the Company 29 32 THE PROFIT RECOVERY GROUP INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) invoices its clients for a contractually stipulated percentage of the amounts recovered. The Company's contract receivables for accounts payable and ancillary audit services provided to retailers, wholesale distributors and governmental agencies are largely unbilled because it does not control (a) the timing of a client's claims processing activities, or (b) the timing of a client's payments for current and future purchases. In the Company's experience, material receivables are expected to be collected within one year after such receivables are recorded. During 1997, 1996 and 1995, revenues derived from accounts payable and ancillary services provided to retailers, wholesale distributors and governmental agencies represented 86.7%, 100.0% and 100.0%, respectively, of total revenues for such years. Invoice basis of revenue recognition With regard to accounts payable and other recovery audit services provided to most entities other than retailers, wholesale distributors and governmental agencies, the Company recognizes revenues primarily when it invoices clients for its portion of amounts already recovered. This deferral of revenue recognition for these types of clients results principally from the Company's lack of a historical experience base to accurately estimate uncollectible claims. Revenues recognized in 1997 on the invoice basis represented 13.3% of total revenues for the year. The Company did not serve entities other than retailers, wholesale distributors and governmental agencies (the Company's historical client base) in either 1996 or 1995. (d) Cash Equivalents Cash equivalents at December 31, 1997 and 1996 consisted of $2.5 million and $11.9 million, respectively, of reverse repurchase agreements with NationsBank, N.A. (South) which were fully collateralized by United States of America Treasury Notes in the possession of such bank. The reverse repurchase agreement in effect on December 31, 1997, matured and was settled on January 2, 1998. In addition, certain of the Company's French subsidiaries at December 31, 1997 had cash equivalents of $4.7 million in temporary investments held at a French bank. The Company does not intend to take possession of collateral securities on future reverse repurchase agreement transactions conducted with banking institutions of national standing. The Company does insist, however, that all such agreements provide for full collateralization using obligations of the United States of America having a current market value equivalent to or exceeding the reverse repurchase agreement amount. (e) Property and Equipment Property and equipment are stated at cost. Depreciation is provided using the straight-line method over the estimated useful lives of the assets. Leasehold improvements are amortized using the straight-line method over the shorter of the lease term or estimated life of the asset. (f) Direct Expenses Direct expenses incurred during the course of the accounts payable audits and other recovery audit services are expensed as incurred. Non-management auditor compensation expense for substantially all of the Company's domestic auditors and certain of its international auditors is recorded at the time of related revenue recognition and subsequently paid as such revenue is collected. Previously established auditor compensation accruals are subsequently adjusted on a monthly basis to correspond with adjustments to uncollectible claim estimates. In certain of the Company's international locations fixed salaries are paid to non-management auditors. All non-auditor Company employees are compensated on the basis of salary and in certain cases, bonuses, which are charged to operations as incurred. 30 33 THE PROFIT RECOVERY GROUP INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (g) Software Development Costs Software development costs related to the development of the Company's proprietary audit software are expensed as incurred. (h) Intangibles Goodwill. Goodwill represents the excess of the purchase price over the estimated fair market value of net assets of acquired businesses. The Company evaluates the unique relevant aspects of each individual acquisition when establishing an appropriate goodwill amortization period, and amortizes all goodwill amounts on a straight-line basis. Goodwill recorded as of December 31, 1997 is being amortized over periods ranging from seven to 20 years. The Company assesses the recoverability of this intangible asset by determining whether the amortization of the goodwill balance over its remaining life can be recovered through undiscounted future operating cash flows of the acquired operation. The amount of goodwill impairment, if any, is measured based on projected discounted future operating cash flows using a discount rate reflecting the Company's average cost of funds. The assessment of the recoverability of goodwill will be impacted if estimated future operating cash flows are not achieved. Noncompete Agreements. Noncompete agreements are recorded at cost and are amortized on a straight-line basis over the terms of the respective agreements. Deferred Loan Costs. Deferred loan costs are recorded at cost and are amortized on a straight-line basis over the terms of the respective loan agreements. (i) Income Taxes The Company's predecessors (prior to April 24, 1995 for international entities and March 28, 1996 for domestic entities) consisted of Subchapter S corporations and a partnership. As such, the Federal and state income taxes with regard to these entities historically have been the responsibility of the respective shareholders and partners. The results of operations for all periods presented which include operations prior to April 1, 1996 have been adjusted on a pro forma basis to reflect Federal and state income taxes at a composite rate of 39% as if the Company's predecessors had been C corporations throughout such periods. In the second quarter of 1995, the Company's predecessors reorganized and its international entities became C corporations. Additionally, in connection with the Company's March 1996 initial public offering, all domestic entities became C corporations. As a result of these conversions to C corporations, the Company incurred charges to operations of $305,000 in the second quarter of 1995 and $3.7 million in the first quarter of 1996 for cumulative deferred income taxes. Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. (j) Foreign Currency Translation The local currency has been used as the functional currency in the countries in which the Company conducts business outside of the United States. The assets and liabilities denominated in foreign currency are translated into U.S. dollars at the current rate of exchange at the balance sheet date and revenues and expenses are translated at the average monthly exchange rates. The translation gains and losses are included as 31 34 THE PROFIT RECOVERY GROUP INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) a separate component of shareholders' equity. Transaction gains and losses included in results of operations are not material. (k) Earnings (Pro Forma Earnings) Per Share Effective December 31, 1997, the Company adopted Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings per Share." This pronouncement required the restatement of all prior-period earnings per share data presented to conform to its provisions. Basic earnings (pro forma earnings) per share is computed by dividing net earnings (pro forma earnings) by the weighted average number of shares of common stock outstanding during the year. Diluted earnings (pro forma earnings) per share is computed by dividing net earnings (pro forma earnings) by the sum of (1) the weighted average number of shares of common stock outstanding during the period (2) the dilutive effect of the assumed exercise of stock options using the treasury stock method and (3) dilutive effect of other potentially dilutive securities. For all periods prior to April 1, 1996, diluted pro forma earnings per share has been computed by dividing the pro forma net earnings, which gives effect to pro forma income taxes, by the weighted average number of common and potential common shares outstanding during the period, after giving effect to the reorganization enacted at the time of the Company's March 1996 initial public offering. For purposes of determining the weighted average number of common and potential common shares for all periods prior to April 1, 1996, the Company has followed required supplementary guidance contained in Securities and Exchange Commission Staff Accounting Bulletin Topic 4D and has treated all common shares, warrants, options, and convertible debentures issued within one year prior to its initial public offering as exercised and outstanding, using the treasury stock method, regardless if the effect was antidilutive. In addition, the aforementioned computation includes the equivalent number of common shares derived from dividing the $4.9 million in 1996 dividends and distributions by $11.00 per share. (l) Employee Stock Options Prior to January 1, 1996, the Company accounted for its stock option plan in accordance with the provisions of Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations. As such, compensation expense would be recorded on the date of grant only if the current market price of the underlying stock exceeded the exercise price. On January 1, 1996, the Company adopted SFAS No. 123, "Accounting for Stock-Based Compensation", which permits entities to recognize as expense over the vesting period the fair value of all stock-based awards on the date of grant. Alternatively, SFAS No. 123 also allows entities to continue to apply the provisions of APB Opinion No. 25 and provide pro forma net income and pro forma earnings per share disclosures for employee stock option grants made in 1995 and future years as if the fair-value-based method defined in SFAS No. 123 had been applied. The Company has elected to continue to apply the provisions of APB Opinion No. 25 and provide the pro forma disclosures of SFAS No. 123. (2) RELATED PARTY TRANSACTIONS Prior to the Company's March 1996 initial public offering, the Company periodically borrowed funds from its principal shareholders. These loans were evidenced by promissory notes bearing interest at market rates. All loans from shareholders were repaid in full immediately subsequent to the Company's initial public offering. Interest expense on loans from shareholders for the years ended December 31, 1996 and 1995 was approximately $38,000 and $140,000, respectively. Financial advisory and management services historically have been provided to the Company by two directors who are also shareholders of the Company. In addition, a director elected in 1995 provided 32 35 THE PROFIT RECOVERY GROUP INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) management advisory services to the Company from July 1995 through December 1996, but no longer provided such services effective January 1, 1997. Such services by directors aggregated $165,000 in 1997, $293,000 in 1996, and $406,000 in 1995. The Company has agreed to pay the above-mentioned two directors a minimum of $140,000 in 1998 for financial advisory and management services. (3) LONG-TERM DEBT Long-term debt at December 31, 1997 and 1996 is summarized as follows:
1997 1996 ------- ---- (IN THOUSANDS) Term bank loan with interest at LIBOR plus 1.75% (7.69% at December 31, 1997), interest only payments through September 1998, and monthly principal payments of $412,500 plus interest due commencing October 1998 and continuing through September 2001; remaining unpaid balance due September 2001............................................ $24,750 $ -- 5.05% promissory note, principal and interest payable in annual installments of $100,000 beginning December 1998 and continuing through December 2009...................... 790 771 Term loan with interest of PIBOR plus 1.25% (3.7% at December 31, 1997) requiring quarterly payments of 44,704 French Francs, or $7,465 at December 31, 1997, including interest, with final payment due April 2000............... 198 -- Other....................................................... 55 -- ------- ---- 25,793 771 Less current installments................................... 1,428 79 ------- ---- Long-term debt, excluding current installments.... $24,365 $692 ======= ====
During October 1997, the Company increased its credit facility with NationsBank, N.A. from $20.0 million to $30.0 million. The credit facility permits the Company to borrow up to $30.0 million on a term loan basis to finance mergers and acquisitions. Alternatively, the Company, at its option, may utilize up to $10.0 million as a revolving line of credit for working capital and utilize the remaining $20.0 million for mergers and acquisitions. Borrowings under the credit facility can be made through September 1999 although repayment of individual term loan borrowings made before or during September 1999 are repayable over 48 months. As of December 31, 1997, the Company had outstanding principal borrowings of $24.8 million under the credit facility. Such borrowings were made in October 1997 in connection with the financing of the Financiere Alma, S.A. and subsidiaries acquisition (see note 8). The credit facility is secured by substantially all assets of the Company and interest on borrowings can be tied to either prime or LIBOR at the Company's discretion. The Company is required to repay all amounts outstanding under the revolving line of credit portion of the aggregate credit facility and to refrain from borrowing any amounts under such line of credit portion for at least a 30-consecutive-day period each year. The credit facility requires an annual commitment fee of 1/4 of 1% and contains customary covenants, including financial ratios and the prohibition of cash dividend payments to shareholders. At December 31, 1997, the Company was in compliance with all such covenants. Approximate future minimum annual principal payments for long-term debt for each of the five years subsequent to December 31, 1997 are as follows (in thousands): 1998........................................................ $ 1,428 1999........................................................ 5,108 2000........................................................ 5,046 2001........................................................ 13,673 2002........................................................ 64
33 36 THE PROFIT RECOVERY GROUP INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) In December 1995, the Company extinguished a noncompete agreement obligation. Such extinguishment resulted in a loss which was not material. (4) LEASE COMMITMENTS The Company is committed under noncancelable operating lease arrangements for facilities and equipment. Rent expense for 1997, 1996, and 1995 was $3.0 million, $2.5 million, and $1.0 million, respectively. The future minimum annual lease payments under these leases by year are summarized as follows (in thousands):
YEAR ENDING DECEMBER 31, - ------------------------ 1998........................................................ $ 3,697 1999........................................................ 2,799 2000........................................................ 1,980 2001........................................................ 1,535 2002........................................................ 800 Thereafter.................................................. 3,932 ------- $14,743 =======
(5) INCOME TAXES HISTORICAL Prior to the April 1995 reorganization, the historical income taxes were the responsibility of the shareholders and partners (see Note 1(i) Income Taxes). In connection with the April 1995 reorganization, the Company established a net deferred tax liability of approximately $305,000 as a charge to the 1995 Consolidated Statement of Earnings related to the five Foreign Operating Companies' termination of the Subchapter S corporation status. The results of operations for the five Foreign Operating Companies from May 1995 to December 1995 represented a taxable loss which was fully offset by a deferred income tax valuation allowance. Such amounts and related deferred income tax temporary differences were not significant. In connection with the Company's March 1996 initial public offering, a further reorganization occurred and the Subchapter S corporation status or partnership status of all then remaining entities that comprised the Company was terminated. These terminations resulted in the establishment of an additional deferred tax liability of approximately $3.7 million and a corresponding charge to the 1996 Consolidated Statement of Earnings. 34 37 THE PROFIT RECOVERY GROUP INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The provision for income taxes for the years ended December 31, 1997 and 1996 consists of the following (in thousands):
1997 1996 ------ ------ Current: Federal................................................... $1,171 $ 413 State..................................................... 375 153 Foreign................................................... 2,900 400 ------ ------ 4,446 966 ------ ------ Deferred: Federal................................................... 921 5,997 State..................................................... 184 826 Foreign................................................... 598 -- ------ ------ 1,703 6,823 ------ ------ Total............................................. $6,149 $7,789 ====== ======
A reconciliation of income tax expense at the Federal statutory rates of 35% and 34% to actual tax expense for the years ended December 31, 1997 and 1996, respectively, follows (in thousands):
1997 1996 ------ ------ Income taxes at Federal statutory rate...................... $5,520 $3,719 Establishment of deferred tax liability due to termination of Subchapter S corporation status and partnership status.................................................... -- 3,700 State income taxes, net of Federal income tax benefit....... 363 646 Pro forma income taxes that were the responsibility of the shareholders and partners................................. -- (158) Other, net.................................................. 266 (118) ------ ------ $6,149 $7,789 ====== ======
35 38 THE PROFIT RECOVERY GROUP INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) A summary of the components of deferred tax liabilities and assets as of December 31, 1997 and 1996 follows (in thousands):
1997 1996 ------- ------- Deferred tax liabilities: Contract receivables...................................... $16,974 $11,987 Accelerated depreciation for tax purposes................. 532 234 Goodwill.................................................. 177 154 ------- ------- Gross deferred tax liabilities.................... 17,683 12,375 ------- ------- Deferred tax assets: Cash to accrual conversion from termination of Subchapter S and partnership status............................... 309 419 Accounts payable and accrued expenses..................... 438 -- Accrued payroll and related expenses...................... 5,912 3,961 Deferred compensation..................................... 961 875 Noncompete agreements..................................... 848 410 Deferred revenues......................................... 577 -- Deferred loan costs....................................... 182 277 Net operating loss carryforward of foreign subsidiary..... 385 -- Foreign tax credit carryforwards.......................... 1,554 -- Other..................................................... 185 -- ------- ------- Gross deferred tax assets......................... 11,351 5,942 ------- ------- Net deferred tax liabilities...................... $ 6,332 $ 6,433 ======= =======
In assessing the realizability of deferred tax assets, the Company's management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. No valuation allowances were deemed necessary since all deductible temporary differences are expected to be utilized primarily against reversals of taxable temporary differences, and net operating loss carryforwards and foreign tax credit carryforwards are expected to be utilized through related future taxable and foreign source earnings. The Company has no undistributed earnings of foreign subsidiaries, but does have a net operating loss carryforward of $1.1 million which can be utilized indefinitely against future taxable earnings of a foreign subsidiary, to the extent there is no significant change in the ownership of the foreign subsidiary. The Company's management believes the net operating loss carryforward will be fully utilized against the forecasted future taxable earnings of the foreign subsidiary. The Company has foreign income tax credit carryforwards amounting to $1.6 million, of which $400,000 will expire in 2001 and $1.2 million will expire in 2002. The Company expects to generate sufficient foreign-sourced income by implementing reasonable tax planning strategies to fully utilize the foreign income tax credit carryforwards. (UNAUDITED) PRO FORMA The pro forma provision for income taxes reflects the income taxes as if the Company were subject to all Federal and state income taxes for all periods presented that include operations prior to April 1, 1996, rather than primarily by the individual shareholders and partners. All pro forma income taxes have been calculated using a 39% composite effective rate. (6) EMPLOYEE BENEFIT PLANS The Company maintains a 401(k) Plan in accordance with Section 401(k) of the Internal Revenue Code, which allows eligible participating employees to defer receipt of a portion of their compensation up to 36 39 THE PROFIT RECOVERY GROUP INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 15% and contribute such amount to one or more investment funds. Employee contributions are matched by the Company in a discretionary amount to be determined by the Company each plan year up to $450 per participant. The Company may also make discretionary contributions to the Plan as determined by the Company each plan year. Company matching funds and discretionary contributions vest at the rate of 20% each year beginning after the participants' first year of service. Company contributions were approximately $130,000 in 1997, $114,000 in 1996 and $33,000 in 1995. The Company also maintains deferred compensation arrangements for certain key officers and executives. Total expense related to these deferred compensation arrangements was approximately $920,000, $606,000, and $340,000 in 1997, 1996, and 1995, respectively. Effective May 15, 1997, the Company established an employee stock purchase plan pursuant to Section 423 of the Internal Revenue Code of 1986, as amended. The plan covers 750,000 shares of the Company's common stock which may be authorized but unissued shares, reacquired shares or shares bought on the open market. The initial purchase period began on July 1, 1997 and ended on December 31, 1997. On January 19, 1998, share certificates for 32,348 shares were issued to employees who were initial purchase period participants. The Company is not required to recognize compensation expense related to this plan. (7) COMMON STOCK The following presents the common stock at December 31, 1995 for each combined entity: Common stock: The Profit Recovery Group International I, Inc. (formerly The Profit Recovery Group, Inc.) authorized 10,000,000 shares with $.01 par value; issued and outstanding 5,740,000 shares at December 31, 1995 and 5,380,000 shares at December 31, 1994............................ $57,400 PRG International Holding Co. -- authorized 1,000 shares with $1.00 par value; issued and outstanding 1,000 shares at December 31, 1995............................ 1,000 ------- $58,400 =======
In connection with the April 1995 reorganization, the Company issued an additional 480,000 shares of common stock in PRGI to the existing shareholders, formed PRG Holdco with 1,000 shares of common stock, and consolidated the five Foreign Operating Companies into PRG Holdco. Subsequent to the Company's March 1996 initial public offering of its common stock, all entities that comprise the Company are wholly owned subsidiaries of the publicly traded parent company, The Profit Recovery Group International, Inc., whose common stock is reflected in shareholders' equity on the accompanying December 31, 1997 and 1996 Consolidated Balance Sheets. Concurrent with the Company's initial public offering, The Profit Recovery Group International, Inc. declared a two-for-one stock split effected in the form of a stock dividend. All share and pro forma per share information has been adjusted to reflect the effect of the stock split. Immediately prior to the Company's March 26, 1996 initial public offering of its common stock, holders of the $12.7 million in convertible debentures elected to convert $12.3 million into equity of the Company. The remaining debentures together with accrued interest on the entire $12.7 million were paid in April 1996 with a portion of the initial public offering proceeds. Additionally, $817,000 in deferred loan costs directly related to the debentures was reclassified as a reduction in shareholders' equity concurrent with the conversion of the debentures. In connection with the debentures origination, an investment banking firm received a warrant to purchase 63,530 shares of PRGI's common stock for $5.89 per share. This warrant was exercised in full immediately prior to the Company's initial public offering. 37 40 THE PROFIT RECOVERY GROUP INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The Company's initial public offering of its common stock was declared effective by the United States Securities and Exchange Commission on March 26, 1996, and public trading in the registered shares commenced March 27, 1996. The initial public offering consisted of 4.6 million shares priced at $11 per share with the Company selling 3.4 million newly issued shares and certain shareholders selling 1.2 million existing shares. The Company received $34.8 million as its portion of the proceeds (net of underwriting discounts and commissions, but prior to offering expenses). On April 18, 1996, the Company received notification from its initial public offering underwriting syndicate that the syndicate had exercised its full over-allotment option to purchase an additional 690,000 shares of Company common stock. All of these shares were then sold to the underwriting syndicate by certain selling shareholders. The Company received no proceeds from the sale of such shares. Although the Company has issued no preferred stock through December 31, 1997, and has no present intentions to issue any preferred stock, such stock may be issued at any time or from time to time in one or more series with such designations, powers, preferences, rights, qualifications, limitations and restrictions (including dividend, conversion and voting rights) as may be determined by the Company's Board of Directors, without any further vote or action by the shareholders. (8) ACQUISITIONS Effective January 1, 1995, PRGI acquired certain assets of Fial & Associates, Inc., primarily consisting of contract receivables, net of related commissions liabilities, with an estimated fair value of approximately $444,000, and entered into a noncompete agreement for seven years with the former owner of Fial, with an estimated fair value of $6.0 million. In exchange for the assets and the noncompete agreement, PRGI issued 240,000 shares of PRGI's common stock, paid $1.6 million in cash, and incurred an obligation of approximately $5.0 million. In the opinion of the Company's management, the common stock had an estimated fair value of $1.85 per share. The acquisition was accounted for under the purchase method of accounting and resulted in goodwill of $550,000 which is being amortized over seven years using the straight-line method. Fial's principal business was similar to PRGI's business. Fial provided its services throughout the United States. On January 2, 1997, the Company acquired the net operating assets of Shaps Group, Inc., a California-based company providing recovery audit services to manufacturers, and distributors of high technology products. The Company issued 375,000 shares of its common stock in the transaction which was accounted for as a pooling-of-interests. Since prior years' financial positions and results of operations of Shaps Group, Inc. are not material in relation to the Company's historical financial statements, the Company did not restate its prior years' consolidated financial statements. On February 11, 1997, the Company acquired all of the common stock of Accounts Payable Recovery Services, Inc., a Texas-based company providing recovery audit services to healthcare entities and energy companies. This transaction was accounted for as a purchase with consideration of $2.0 million in cash and 130,599 shares of the Company's common stock valued at $15.25 per share. This acquisition resulted in goodwill of $3.9 million which is being amortized over 15 years using the straight-line method. On May 23, 1997, the Company acquired all of the common stock of The Hale Group, a California-based company providing recovery audit services to healthcare entities. This transaction was accounted for as a purchase with consideration of $1.1 million in cash and 74,998 shares of the Company's common stock valued at $13.38 per share. This acquisition resulted in goodwill of $2.1 million which is being amortized over 15 years using the straight-line method. On October 7, 1997, the Company acquired 98.4% of Financiere Alma, S.A. and subsidiaries ("Alma"), a privately held recovery audit firm based in Paris, France. This transaction was accounted for as a purchase with consideration of $24.6 million in cash and approximately 859,000 restricted, unregistered shares of the Company's common stock with an aggregate estimated fair value of $10.0 million, based on an independent external valuation. The Company has an obligation to acquire the remaining interest in Alma by January 1999 38 41 THE PROFIT RECOVERY GROUP INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) for $398,000 in cash and 13,900 unregistered shares of the Company's common stock. This acquisition resulted in goodwill of $33.0 million which is being amortized over 20 years using the straight-line method. On November 21, 1997, the Company acquired the net operating assets of TradeCheck, LLC, a Washington-based recovery audit firm specializing in ocean freight shipments. This transaction was accounted for as a purchase with consideration of $700,000 in cash and 40,000 shares of the Company's common stock valued at $14.375 per share. This acquisition resulted in goodwill of $1.1 million which is being amortized over 15 years using the straight-line method. Results of operations for all 1997 acquisitions accounted for under the purchase method of accounting have been included in the 1997 Consolidated Statement of Earnings from their respective dates of acquisition with the exception of the October 7, 1997 acquisition of Alma, which was included effective October 1, 1997. The following represents the summary (unaudited) pro forma results of operations as if the Alma acquisition had occurred at the beginning of 1996. The pro forma results are not necessarily indicative of the results that will occur in the future.
YEARS ENDED DECEMBER 31, ------------------- 1997 1996 -------- ------- Revenues.................................................... $127,409 $98,586 ======== ======= Net earnings................................................ $ 9,432 $ 2,500 ======== ======= Pro forma net earnings...................................... $ 9,432 $ 6,018 ======== ======= Earnings (pro forma net earnings for 1996) per share: Basic..................................................... $ .49 $ .36 ======== ======= Diluted................................................... $ .48 $ .33 ======== =======
All businesses acquired by the Company during 1997, other than Alma, previously maintained their respective accounting records using the cash basis of accounting. Accordingly, it is not practicable to provide accrual basis pro forma results of operations which include these entities. The Company believes, however, that pro forma accrual basis results of operations for these entities, if determined, would not be significant, either individually or in the aggregate. (9) STOCK OPTION PLAN The Company's 1996 Stock Option Plan ("Plan") has authorized the grant of options to purchase 3,500,000 shares of the Company's common stock to key employees and directors. All options granted through December 31, 1997 have 10-year terms and vest and become fully exercisable on a ratable basis over four or five years of continued employment. Pro forma information regarding net earnings and earnings per share is required by SFAS No. 123, and has been determined as if the Company had accounted for its employee stock options under the fair value method of that Statement. The fair value for these options was estimated at the date of grant using a Black-Scholes option pricing model with the following weighted-average assumptions for 1997, 1996 and 1995:
1997 1996 1995 ------- ------- ------- Risk-free interest rates.................................... 6.17% 6.26% 6.06% Dividend yields............................................. -- -- -- Volatility factor of expected market price.................. .537 .396 .396 Weighted-average expected life of option.................... 6 years 6 years 6 years
39 42 THE PROFIT RECOVERY GROUP INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions, including the expected stock price volatility. Because the Company's employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options. For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options' vesting period. The Company's pro forma information for the years ended December 31, 1997, 1996 and 1995 follows (in thousands, except for pro forma earnings per share information):
1997 1996 1995 ------- ------- ------- Historical earnings before income taxes................... $15,772 $10,939 $ 4,812 Income taxes (pro forma income taxes for 1996 and 1995)... 6,149 4,271 1,877 ------- ------- ------- Net earnings (pro forma net earnings for 1996 and 1995) before pro forma effect of compensation expense recognition provisions of SFAS No. 123.................. 9,623 6,668 2,935 Pro forma effect of compensation expense recognition provisions of SFAS No. 123.............................. 1,382 504 111 ------- ------- ------- Pro forma net earnings.................................... $ 8,241 $ 6,164 $ 2,824 ======= ======= ======= Pro forma net earnings per share: Basic................................................... $ .45 $ .38 $ .24 ======= ======= ======= Diluted................................................. $ .44 $ .36 $ .21 ======= ======= =======
A summary of the Company's stock option activity and related information for the years ended December 31 follows:
1997 1996 1995 --------------------- --------------------- ------------------- WEIGHTED- WEIGHTED- WEIGHTED- AVERAGE AVERAGE AVERAGE EXERCISE EXERCISE EXERCISE OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE --------- --------- --------- --------- ------- --------- Outstanding -- beginning of year...................... 1,258,030 $ 9.60 633,000 $ 5.53 -- $ -- Granted..................... 1,030,263 15.47 677,030 13.16 633,000 5.53 Exercised................... (65,100) 5.36 (28,000) 5.30 -- -- Forfeited................... (15,300) 13.60 (24,000) 5.94 -- -- --------- --------- ------- Outstanding -- end of year...................... 2,207,893 $12.44 1,258,030 $ 9.60 633,000 $5.53 ========= ========= ======= Exercisable at end of year...................... 287,946 $ 9.12 94,400 $ 5.30 -- $ -- Weighted average fair value of options granted during year...................... $ 8.96 $ 6.44 $ 2.67
Exercise prices for options outstanding as of December 31, 1997 ranged from $5.30 to $19.88 per share. The weighted average remaining contract life of those options was 8.6 years. Of the 2,207,893 options outstanding at December 31, 1997, 527,600 were granted at prices below the Company's initial public offering price of $11.00 per share and 1,680,293 were granted at prices equal to or greater than $11.00. The 527,600 options outstanding at December 31, 1997 which were priced below $11.00 per share carried a weighted-average exercise price of $5.60 per share and had a weighted-average remaining contract life of 7.5 years. They included 135,040 exercisable options at a price of $5.30 per share. 40 43 THE PROFIT RECOVERY GROUP INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The 1,680,293 options outstanding at December 31, 1997 which were priced at or above $11.00 per share carried a weighted-average exercise price of $14.59 per share and had a weighted-average remaining contract life of 9.0 years. They included 131,706 options that were exercisable at a weighted-average price of $13.21 per share. (10) MAJOR CLIENTS The Company had two major clients during 1997, each of which provided revenues in excess of 10% of total revenues. Both major clients are mass merchandisers operating in the retail industry. During the years ended December 31, 1997, 1996, and 1995, the Company derived 10.4%, 14.4% and 12.7%, respectively, of its total revenues from its historically largest client. Additionally, during 1997 the Company derived 12.3% of its total revenues from another client due in large part to a nonrecurring situation involving concurrent audits of multiple years. (11) INTERNATIONAL SEGMENTS The Company has operations outside the United States. The following is a summary of geographic area information, as measured by the area of revenue-producing operations, for the years ended December 31, 1997, 1996, and 1995 (in thousands):
1997 1996 1995 -------- ------- ------- Revenues: United States (U.S.)................................... $ 81,653 $62,701 $49,002 North America, excluding U.S........................... 10,907 7,811 3,778 Western Europe......................................... 17,233 4,422 2,422 Asia-Pacific........................................... 2,570 2,396 829 -------- ------- ------- Total.......................................... $112,363 $77,330 $56,031 ======== ======= ======= Operating income (loss): United States (U.S.)................................... $ 12,109 $10,680 $ 6,854 North America, excluding U.S........................... 2,971 899 30 Western Europe......................................... 3,541 (238) (137) Asia-Pacific........................................... (2,446) (302) (305) -------- ------- ------- Total.......................................... $ 16,175 $11,039 $ 6,442 ======== ======= ======= Identifiable assets: United States (U.S.)................................... $ 74,876 $59,237 $27,244 North America, excluding U.S........................... 5,362 4,593 1,541 Western Europe......................................... 50,942 2,155 851 Asia-Pacific........................................... 2,705 2,333 632 -------- ------- ------- Total.......................................... $133,885 $68,318 $30,268 ======== ======= =======
(12) FAIR VALUE OF FINANCIAL INSTRUMENTS The carrying amounts for cash and cash equivalents, receivables, note payable to bank, accounts payable and accrued expenses, accrued payroll and related expenses, and deferred revenue approximate fair value because of the short maturity of these instruments. The fair values of each of the Company's long-term debt instruments are based on the amount of future cash flows associated with each instrument discounted using the Company's current borrowing rate for similar debt instruments of comparable maturity. The estimated fair value of the Company's long-term debt 41 44 THE PROFIT RECOVERY GROUP INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) instruments at December 31, 1997 and 1996 was $25.9 million and $675,000, respectively, and the carrying value of the Company's long-term debt at December 31, 1997 and 1996 was $25.8 million and $771,000, respectively. Fair value estimates are made at a specific point in time, based on relevant market information about the financial instrument. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates. (13) EARNINGS PER SHARE The following table sets forth the computations of basic and diluted earnings per share for the years ended December 31, 1997, 1996 and 1995 (in thousands except for earnings per share information):
1997 1996 1995 ------- ------- ------- Numerator: Numerator for basic earnings (pro forma earnings for 1996 and 1995) per share.................................... $ 9,623 $ 6,668 $ 2,935 Interest accrued on convertible debt, net of income taxes.................................................. -- 97 258 ------- ------- ------- Numerator for diluted earnings (pro forma earnings for 1996 and 1995) per share.............................. $ 9,623 $ 6,765 $ 3,193 ======= ======= ======= Denominator: Denominator for basic earnings (pro forma earnings for 1996 and 1995) per share -- weighted-average shares outstanding........................................... 18,415 16,268 12,000 Effect of dilutive securities: Employee stock options............................... 494 545 348 Convertible debt..................................... -- 539 2,157 Common equivalent shares from the distribution payable ($4,875,576) divided by the initial public offering price of $11 per share (and weighted since the initial public offering)........................ -- 105 443 ------- ------- ------- Denominator for diluted earnings (pro forma earnings for 1996 and 1995) per share........... 18,909 17,457 14,948 ======= ======= ======= Earnings (pro forma earnings for 1996 and 1995) per share -- basic............................................ $ .52 $ .41 $ .24 ======= ======= ======= Earnings (pro forma earnings for 1996 and 1995) per share -- diluted.......................................... $ .51 $ .39 $ .21 ======= ======= =======
Options to purchase 473,000 shares of common stock, at prices ranging from $16.00 to $19.88 per share, were outstanding during 1997 but were excluded from the computation of diluted earnings per share because the options' exercise price was greater than the average market price of the common shares and, therefore, the effect would be antidilutive. (14) RESTRUCTURING COSTS In recognition of emerging developments such as the Alma acquisition, the Company restructured and realigned certain facets of its European management structure in the fourth quarter of 1997 and incurred a pre-tax charge to earnings of $1.2 million. This charge consisted of employment termination costs directly applicable to four of the Company's senior European executives and residual contract costs due to an independent European advisor for services no longer required by the Company. Of the $1.2 million charge, $683,000 had been paid through December 31, 1997, and the remaining $525,000 is currently estimated to be paid by June 30, 1998. 42 45 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable. PART III Pursuant to Instruction G(3) to Form 10-K, the information required in Items 10 through 13 is incorporated by reference from the Company's definitive proxy statement, which is expected to be filed pursuant to Regulation 14A on or before April 10, 1998. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) Consolidated Financial Statements. For the following consolidated financial information included herein, see Index on Page 21: Independent Auditors' Reports Consolidated Statements of Earnings for the Years ended December 31, 1997, 1996 and 1995 Consolidated Balance Sheets as of December 31, 1997 and 1996 Consolidated Statements of Shareholders' Equity (Deficit) for the Years ended December 31, 1997, 1996 and 1995 Consolidated Statements of Cash Flows for the Years ended December 31, 1997, 1996 and 1995 Notes to Consolidated Financial Statements (b) All financial statement schedules are omitted for the reason that they are either not applicable or not required or because the information is contained in the consolidated financial statements or notes thereto. (c) Reports on Form 8-K On October 22, 1997, Registrant filed Form 8-K regarding Registrant's October 7, 1997 acquisition of 98.4% of Financiere Alma, S.A. and its subsidiaries (collectively, "Alma"). On November 21, 1997, Registrant filed Form 8-K/A to provide required audited and pro forma financial statements regarding Alma. (d) Exhibits +2.1 -- Agreement and Plan of Reorganization dated January 4, 1995, among The Profit Recovery Group, Inc., Fial & Associates, Inc. and T. Charles Fial. The following is a list of omitted schedules and exhibits which the Registrant agrees to furnish supplementally to the Commission upon request: Exhibits: A -- List of Purchasers, with Principal Amount of Each Purchaser's Note; B -- Form of Note; C-1 and C-2 -- Form of Amended and Restated Partnership Agreement; D-1 and D-2 -- Form of Amended and Restated Certificate of Limited Partnership; E -- Form of Registration Rights Agreement; Schedules; 2F -- List of Shareholders and Proportionate Obligation to Purchase; 2L -- Earnings Test; 3C -- List of Limited Partners and Their Respective Units; 3D -- List of Stockholders of General Partner and Their Respective Ownership Interests; 3F -- Balance Sheet; and 3P -- Transactions with Affiliates.
43 46 +2.2 -- Note Purchase Agreement dated April 27, 1995, among The Profit Recovery Group International, L.P. (the "Partnership"), The Profit Recovery Group International I, Inc., T. Charles Fial and certain limited partners and purchasers named therein. The following is a list of omitted schedules and exhibits which the Registrant agrees to furnish supplementally to the Commission upon request: Schedules: 1.1(c) -- Contracts and Agreements; 1.1(f) -- Fixed Assets; 3.6 -- Company Trade Area; 3.7 -- Affiliated Companies; 4.8 -- Employee Plans; 4.13 -- Seller's Tax Returns; 4.14 -- Employee Bonuses; 4.15 -- Accounts Receivable; 4.16 -- Independent Contractors; 5.1-A -- Articles of Incorporation of Purchaser; 5.1-B -- List of agreements among shareholders of Purchaser; 5.7 -- Certain Liabilities of Purchaser; 5.8 -- Subsequent Events; Exhibits: 1.3(a) -- Bill of Sale; 1.3(b) -- Assignment and Assumption Agreement; 3.2 -- Consulting Agreement; 3.3 -- Form of Noncompetition Agreement with Stockholder; 3.9 -- Stockholders' Agreement; 7.1(a)(vi) -- Form of Opinion of Counsel to Seller and Stockholder; and 7.1(b)(ix) -- Form of Opinion of Counsel to Purchaser. +3.1 -- Articles of Incorporation of the Registrant. +3.2 -- Amended and Restated Bylaws of the Registrant. +4.1 -- Specimen Common Stock Certificate. +4.2 -- See Articles of Incorporation and Bylaws of the Registrant, filed as Exhibits 3.1 and 3.2, respectively. *+10.1 -- Letter Agreement dated May 25, 1995 between Wal-Mart Stores, Inc. and Registrant. +10.2 -- 1996 Stock Option Plan dated as of January 25, 1996, together with Forms of Non-qualified Stock Option Agreement. +10.3 -- The Profit Recovery Group International I, Inc. 401(k) Plan. +10.4 -- Form of Employment Agreement, dated March 20, 1996, between the Registrant and John M. Cook. +10.5 -- Form of Employment Agreement, dated March 20, 1996, between the Registrant and John M. Toma. +10.6 -- Form of Employment Agreement, dated March 20, 1996, between the Registrant and Paul J. Dinkins. +10.7 -- Form of Employment Agreement, dated March 20, 1996, between the Registrant and Brian M. O'Toole. +10.8 -- Form of Employment Agreement, dated March 20, 1996, between the Registrant and Donald E. Ellis, Jr. +10.9 -- Form of Consulting Agreement, dated January 1, 1996, between The Profit Recovery Group International I, Inc. and SBC Financial Corporation, Jonathan Golden, P.C. and Berkshire Partners. +10.10 -- Form of Indemnification Agreement between the Registrant and the Directors and certain officers of the Registrant. +10.11 -- First Amendment to Amended and Restated Loan and Security Agreement dated January 3, 1996 among NationsBank of Georgia, N.A. ("NationsBank"), the Partnership and certain guarantors named therein. +10.12 -- Amended and Restated Loan and Security Agreement dated April 27, 1995 among NationsBank, the Partnership and certain guarantors named therein. The following is a list of omitted schedules and exhibits which the Registrant agrees to furnish supplementally to the Commission upon request: Exhibits: A-1 -- Amended and Restated Promissory Note, A-2 -- Amended and Restated Promissory Note, B-1 -- Borrower's Business Locations, B-2 -- Other Business Locations, C-1 -- Borrower's Corporate Names, C-2 -- Other Corporate Names, D -- Litigation, E -- Form of Compliance Certificate, F -- Berkshire Lenders, G -- Other Liens, H -- Indebtedness. +10.13 -- First Amendment to Loan and Security Agreement dated January 4, 1995 among NationsBank, The Profit Recovery Group, Inc., PRG International, Inc., the Partnership and the Foreign Companies. 44 47 +10.14 -- Loan and Security Agreement dated March 24, 1994 among NationsBank, The Profit Recovery Group, Inc., PRG International Inc., the Partnership and the Foreign Companies. The following is a list of omitted schedules and exhibits which the Registrant agrees to furnish supplementally to the Commission upon request: Exhibits: A-1 -- Promissory Note, A-2 -- Promissory Note, B-1 -- Borrower's Business Locations, B-2 -- Other Business Locations, C-1 -- Borrower's Corporate Names, C-2 -- Other Corporate Names, D -- Litigation, E -- Form of Compliance Certificate, F -- Collateral Assignment of Policy, G -- Other Liens, H -- Indebtedness. +10.15 -- Sublease dated October 29, 1993, between The Profit Recovery Group International I, Inc. and International Business Machines Corporation. +10.16 -- Lease dated January 19, 1996 between the Partnership and "J" Street Development Inc. +10.17 -- Agreement dated January 19, 1996 between the Partnership and May Construction Company, Inc. The following is a list of omitted schedules and exhibits which Registrant agrees to furnish supplementally to the Commission upon request: Exhibit A -- General Conditions of the Contract for Construction. +10.18 -- Second Amendment to Amended and Restated Loan and Security Agreement dated February 8, 1996 among NationsBank, the Partnership, The Profit Recovery Group International I, Inc., PRG International Holding Co. and the Foreign Companies. +10.19 -- First Sublease Amendment dated February 12, 1996 among International Business Machines Corporation, the Partnership and The Profit Recovery Group International I, Inc. +10.20 -- Promissory Note dated February 8, 1996, in the amount of $1,600,000 by the Partnership to CT Investments, L.L.C. **10.21 -- Loan and Security Agreement by and among NationsBank, N.A. (South) as Lender, and The Profit Recovery Group International, Inc. as Borrower, and Certain Affiliates of Borrower, as Guarantors, dated September 27, 1996. ***10.22 -- First Amendment dated March 7, 1997 to Employment Agreement between the Registrant and John M. Cook. ****10.23 -- The Profit Recovery Group International, Inc. Employee Stock Purchase Plan. *****10.24 -- Contract for the Mandate of the President of the Directorate, dated October 7, 1997, between Alma Intervention and Marc Eisenberg. *****10.25 -- Consulting Agreement, dated October 7, 1997, between the Registrant and Lieb Finance S.A. *****10.26 -- Second Amendment to Employment Agreement, dated September 17, 1997, between The Profit Recovery Group International I, Inc. and John M. Cook. *****10.27 -- Employment Agreement, dated October 17, 1997, between The Profit Recovery Group International I, Inc. and Michael A. Lustig. *****10.28 -- Compensation Agreement, dated October 17, 1997, between The Profit Recovery Group International I, Inc. and Michael A. Lustig. *****10.29 -- First Amendment to Loan and Security Agreement, dated October 3, 1997, between NationsBank, N.A. and the Registrant and its subsidiaries. 10.30 -- Lease Agreement dated January 30, 1998 between Wildwood Associates and The Profit Recovery Group International I, Inc. +++10.31 -- Services Agreement dated April 7, 1993 between Registrant and Kmart Corporation as amended by Addendum dated January 28, 1997. 10.32 -- Employment Agreement dated August 26, 1996 between Registrant and Tony G. Mills; Compensation Agreement dated August 26, 1996 between Registrant and Mr. Mills; and description of 1998 compensation arrangement between Registrant and Mr. Mills. 10.33 -- Employment Agreement dated August 23 between Registrant and David A. Brookmire; Compensation Agreement dated August 23, 1996 between Registrant and Mr. Brookmire; and description of 1998 compensation arrangement between Registrant and Mr. Brookmire. 10.34 -- Description of 1998-2002 compensation arrangement between Registrant and John M. Cook. 10.35 -- Description of 1998 compensation arrangement between Registrant and John M. Toma. 10.36 -- Description of 1998 compensation arrangement between Registrant and Michael A. Lustig. 45 48 10.37 -- Description of 1998 compensation arrangement between Registrant and Donald E. Ellis, Jr. ++10.38 -- Employment Agreement between Registrant and Robert G. Kramer; Compensation Agreement between Registrant and Mr. Kramer; description of 1998 compensation arrangement between Registrant and Mr. Kramer. ++10.39 -- Employment Arrangement between Registrant and Clinton McKellar, Jr.; Compensation Arrangement between Registrant and Mr. McKellar; description of 1998 compensation arrangement between Registrant and Mr. McKellar. 21.1 -- Subsidiaries of the Registrant. 23.1 -- Consent of KPMG Peat Marwick LLP. 23.2 -- Consent of ERNST & YOUNG Entrepreneurs. 27.1 -- Financial Data Schedule (for SEC use only).
- --------------- + Incorporated by reference to Exhibit of same number of the Registrant's Registration Statement on Form S-1 (Registration No. 333-1086). *Confidential treatment pursuant to 17 CFR sec.sec. 200.80 and 230.406 has been granted regarding certain portions of the indicated Exhibit, which portions have been filed separately with the Commission. ++ To be filed by amendment. +++ Confidential treatment pursuant to 17 CFR sec.sec. 200.80 and 240.24b-2 has been requested regarding certain portions of the indicated Exhibit, which portions have been filed separately with the Commission. ** Incorporated by reference to Exhibit 10.1 of Registrant's Form 10-Q for the quarterly period ended September 30, 1996. *** Incorporated by reference to Exhibit of same number of the Registrant's Form 10-K for the year ended December 31, 1996. **** Incorporated by reference to Exhibit "A" to Registrant's proxy statement dated April 15, 1997, which was issued in connection with Registrant's 1997 Annual Meeting of Shareholders. ***** Incorporated by reference to Exhibits 10.1-10.6 of Registrant's Form 10-Q for the quarterly period ended September 30, 1997. 46 49 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. THE PROFIT RECOVERY GROUP INTERNATIONAL, INC. February 13, 1998 By: /s/ JOHN M. COOK ------------------------------------ John M. Cook Chairman of the Board and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the date indicated.
SIGNATURE TITLE DATE --------- ----- ---- /s/ JOHN M. COOK Chairman of the Board and February 13, 1998 - ----------------------------------------------------- Chief Executive Officer John M. Cook (Principal Executive Officer) /s/ DONALD E. ELLIS, JR. Senior Vice President -- February 13, 1998 - ----------------------------------------------------- Finance, Treasurer and Donald E. Ellis, Jr. Chief Financial Officer (Principal Financial Officer) /s/ MICHAEL R. MELTON Vice President -- Finance February 13, 1998 - ----------------------------------------------------- (Principal Accounting Michael R. Melton Officer) /s/ STANLEY B. COHEN Director February 13, 1998 - ----------------------------------------------------- Stanley B. Cohen /s/ MARC EISENBERG Director February 13, 1998 - ----------------------------------------------------- Marc Eisenberg /s/ JONATHAN GOLDEN Director February 13, 1998 - ----------------------------------------------------- Jonathan Golden /s/ GARTH H. GREIMANN Director February 13, 1998 - ----------------------------------------------------- Garth H. Greimann /s/ FRED W.I. LACHOTZKI Director February 13, 1998 - ----------------------------------------------------- Fred W.I. Lachotzki /s/ E. JAMES LOWREY Director February 13, 1998 - ----------------------------------------------------- E. James Lowrey
47 50
SIGNATURE TITLE DATE --------- ----- ---- /s/ MICHAEL A. LUSTIG Director February 13, 1998 - ----------------------------------------------------- Michael A. Lustig /s/ JOHN M. TOMA Vice Chairman and February 13, 1998 - ----------------------------------------------------- Director John M. Toma
48 EX-10.30 2 LEASE AGREEMENT 1 EXHIBIT 10.30 LEASE AGREEMENT by and between WILDWOOD ASSOCIATES ("Landlord") and THE PROFIT RECOVERY GROUP INTERNATIONAL I, INC. ("Tenant") dated January 30, 1998 for Suite Number 140 containing 9,615 square feet of Rentable Floor Area Term: Ending December 30, 2002 2300 Windy Ridge Parkway Atlanta, Georgia 30339 2 TABLE OF CONTENTS
Page ---- 1. Certain Definitions..........................................................................1 2. Lease of Premises............................................................................2 3. Term.........................................................................................2 4. Possession...................................................................................3 5. Rental Payments..............................................................................3 6. Base Rental..................................................................................4 7. Rent Escalation..............................................................................4 8. Additional Rental............................................................................5 9. Operating Expenses...........................................................................7 10. Tenant Taxes; Rent Taxes...................................................................11 11. Payments...................................................................................12 12. Late Charges...............................................................................12 13. Use Rules..................................................................................12 14. Alterations................................................................................13 15. Repairs....................................................................................13 16. Landlord's Right of Entry..................................................................14 17. Insurance..................................................................................14 18. Waiver of Subrogation......................................................................16 19. Default....................................................................................16 20. Waiver of Breach...........................................................................19 21. Assignment and Subletting..................................................................19 22. Destruction................................................................................20 24. Services by Landlord.......................................................................21 25. Attorneys' Fees and Homestead..............................................................22 26. Time.......................................................................................22 27. Subordination and Attornment...............................................................22 28. Estoppel Certificates......................................................................23 29. No Estate..................................................................................24 30. Cumulative Rights..........................................................................24 31. Holding Over...............................................................................24 32. Surrender of Premises......................................................................24 33. Notices....................................................................................25 34. Damage or Theft of Personal Property.......................................................25 35. Eminent Domain.............................................................................25 36. Parties....................................................................................27 37. Liability of Tenant........................................................................27 39. Force Majeure..............................................................................28 40. Landlord's Liability.......................................................................28 41. Landlord's Covenant of Quiet Enjoyment.....................................................28 42. Security Deposit...........................................................................29
i 3 43. Hazardous Substances.......................................................................29 44. Submission of Lease........................................................................30 45. Severability...............................................................................30 46. Entire Agreement...........................................................................30 47. Headings...................................................................................30 48. Broker.....................................................................................30 49. Governing Law..............................................................................31 50. Special Stipulations.......................................................................31 51. Authority..................................................................................31 52. Financial Statements.......................................................................31 54. ERISA Compliance...........................................................................32
Rules and Regulations Exhibit "A" - Legal Description of Land Exhibit "B" - Floor Plan Exhibit "C" - Supplemental Notice Exhibit "D" - Landlord's Construction Exhibit "E" - Building Standard Services Exhibit "F" - Guaranty - Intentionally Omitted Exhibit "G" - Special Stipulations ii 4 \ LEASE AGREEMENT THIS LEASE AGREEMENT ("Lease"), is made and entered into this 30th day of January, 1998, by and between Landlord and Tenant. W I T N E S S E T H: 1. Certain Definitions. For purposes of this Lease, the following terms shall have the meanings hereinafter ascribed thereto: (a) Landlord: WILDWOOD ASSOCIATES, a Georgia general partnership (b) Landlord's Address: Wildwood Associates 2500 Windy Ridge Parkway Suite 1600 Atlanta, Georgia 30339-5683 Attn: Corporate Secretary (c) Tenant: THE PROFIT RECOVERY GROUP INTERNATIONAL I, INC. (d) Tenant's Address: 2300 Windy Ridge Parkway Suite 300 - North Atlanta, Georgia 30339-5683 (e) Building Address: 2300 Windy Ridge Parkway Atlanta, Georgia 30339 (f) Suite Number: 140 - South Tower (g) Rentable Floor Area of Demised Premises: 9,615 square feet, consisting of 8,414 square feet on the 1st floor of the Building, and 1,201 square feet on the 2nd floor of the Building. (h) Rentable Floor Area of Building: 618,540 square feet. 5 (i) Lease Term: From the Rental Commencement Date (hereinafter defined) and expiring on December 30, 2002. (j) Base Rental Rate: $15.80 per square foot of Rentable Floor Area of Demised Premises per year, subject to adjustments as set forth in Article 7 below. (k) Rental Commencement Date: The earlier of (x) April 1, 1998, or (y) the date upon which Tenant takes possession and occupies the Demised Premises; provided that if the Demised Premises are not ready for occupancy on the date set forth in (x) above due to delays not caused by Tenant or its employees, agents or contractors, then the date set forth in (x) above shall be postponed to the date on which the Demised Premises are ready for occupancy. (l) Rent Deposit: $17,867.88 (Article 5[c]) (m) Construction Allowance: $21.00 per square foot of Rentable Floor Area. (n) Security Deposit: Intentionally Deleted. (o) Broker(s): Cousins Properties Incorporated ("CPI") and Carter & Associates 2. Lease of Premises. Landlord, in consideration of the covenants and agreements to be performed by Tenant, and upon the terms and conditions hereinafter stated, does hereby rent and lease unto Tenant, and Tenant does hereby rent and lease from Landlord, certain premises (the "Demised Premises") in the building (hereinafter referred to as "Building") located on that certain tract of land (the "Land") more particularly described on Exhibit "A" attached hereto and by this reference made a part hereof, which Demised Premises are outlined in red or crosshatched on the floor plan attached hereto as Exhibit "B" and by this reference made a part hereof, with no easement for light, view or air included in the Demised Premises or being granted hereunder. The "Project" is comprised of the Building, the Land, the Building's parking facilities, any walkways, covered walkways, tunnels or other means of access to the Building and the Building's parking facilities, all common areas, including any lobbies or plazas, and any other improvements or landscaping on the Land. The Project is located in the development known as "Wildwood Office Park". 3. Term. The term of this Lease ("Lease Term") shall commence on the date first hereinabove set forth, and, unless sooner terminated as provided in this Lease, shall end on the expiration of the period designated in Article 1(i) above, which period shall commence on the Rental Commencement Date, unless the Rental Commencement Date shall be other than the first day of a calendar month, in which event such period shall commence on the first day of the calendar month following the month in which the Rental Commencement Date occurs. Promptly after the Rental Commencement Date Landlord shall send to Tenant a Supplemental Notice in 2 6 the form of Exhibit "C" attached hereto and by this reference made a part hereof, specifying the Rental Commencement Date, the date of expiration of the Lease Term in accordance with Article 1(i) above and certain other matters as therein set forth. 4. Possession. The obligations of Landlord and Tenant with respect to the initial leasehold improvements to the Demised Premises are set forth in Exhibit "D" attached hereto and by this reference made a part hereof. Taking of possession by Tenant shall be deemed conclusively to establish that Landlord's construction obligations with respect to the Demised Premises have been completed in accordance with the plans and specifications approved by Landlord and Tenant and that the Demised Premises, to the extent of Landlord's construction obligations with respect thereto, are in good and satisfactory condition, subject to completion of any incomplete or corrective items specified in a "punch list" approved by Landlord and Tenant. 5. Rental Payments. (a) Commencing on the Rental Commencement Date, and continuing thereafter throughout the Lease Term, Tenant hereby agrees to pay all Rent due and payable under this Lease. As used in this Lease, the term "Rent" shall mean the Base Rental, Tenant's Forecast Additional Rental, Tenant's Additional Rental, and any other amounts that Tenant assumes or agrees to pay under the provisions of this Lease that are owed to Landlord, including without limitation any and all other sums that may become due by reason of any default of Tenant or failure on Tenant's part to comply with the agreements, terms, covenants and conditions of this Lease to be performed by Tenant. Base Rental together with Tenant's Forecast Additional Rental shall be due and payable in twelve (12) equal installments on the first day of each calendar month, commencing on the Rental Commencement Date and continuing thereafter throughout the Lease Term and any extensions or renewals thereof, and Tenant hereby agrees to pay such Rent to Landlord at Landlord's address as provided herein (or such other address as may be designated in writing by Landlord from time to time) monthly in advance. Tenant shall pay all Rent and other sums of money as shall become due from and payable by Tenant to Landlord under this Lease at the times and in the manner provided in this Lease, without demand, set-off or counterclaim. (b) If the Rental Commencement Date is other than the first day of a calendar month or if this Lease terminates on other than the last day of a calendar month, then the installments of Base Rental and Tenant's Forecast Additional Rental for such month or months shall be prorated on a daily basis and the installment or installments so prorated shall be paid in advance. Also, if the Rental Commencement Date occurs on other than the first day of a calendar year, or if this Lease expires or is terminated on other than the last day of a calendar year, Tenant's Additional Rental shall be prorated for such commencement or termination year, as the case may be, by multiplying such Tenant's Additional Rental by a fraction, the numerator of which shall be the number of days of the Lease Term (from and after the Rental Commencement Date) during the commencement or expiration or termination year, as the case may be, and the 3 7 denominator of which shall be 365, and the calculation described in Article 8 hereof shall be made as soon as possible after the expiration or termination of this Lease, Landlord and Tenant hereby agreeing that the provisions relating to said calculation shall survive the expiration or termination of this Lease. (c) As security for Tenant's obligations to take possession of the Demised Premises in accordance with the terms of this Lease and to comply with all of Tenant's covenants, warranties and agreements hereunder, Tenant has deposited with Landlord the sum set forth in Article 1(l) above. Such amount shall be applied by Landlord to the first monthly installment(s) of Base Rental as they become due hereunder. In the event Tenant fails to take possession of the Demised Premises as aforesaid or otherwise fails to comply with any of Tenant's covenants, warranties or agreements hereunder, said sum shall be retained by Landlord for application in reduction, but not in satisfaction, of damages suffered by Landlord as a result of such breach by Tenant. Landlord shall not be required to keep such deposit separate from its general accounts. 6. Base Rental. Subject to adjustments in accordance with Article 7 below, from and after the Rental Commencement Date Tenant shall pay to Landlord a base annual rental (herein called "Base Rental") equal to the Base Rental Rate set forth in Article 1(j) above multiplied by the Rentable Floor Area of Demised Premises set forth in Article 1(g) above. 7. Rent Escalation. (a) As used in this Article 7, the term "Lease Year" shall mean the twelve month period commencing on the Rental Commencement Date, or, if the Rental Commencement Date is not on the first day of a calendar month, commencing on the first day of the first calendar month following the Rental Commencement Date, and each successive twelve month period thereafter during the Lease Term. The term "Subsequent Year" shall mean each Lease Year of the Lease Term following the first Lease Year. The term "Prior Year" shall mean the Lease Year prior to each Subsequent Year. The term "Index" shall mean the Consumer Price Index for all Urban Consumers (U.S. City Average; Base 1982-84=100), published by the Bureau of Labor Statistics of the United States Department of Labor. The term "Base Month" shall mean the calendar month which is two (2) months prior to the month during which this Lease is fully executed by Landlord and Tenant. The term "Comparison Month" shall mean the calendar month which is two (2) months prior to the first full month of each Subsequent Year in question. (b) On the first day of each Subsequent Year, the Base Rental Rate shall be increased to an amount equal to the Base Rental Rate for the first Lease Year ($15.80) as set forth in Article 1(j) above, plus an amount equal to the product of ten (10) times the percentage increase in the Index for the Comparison Month as compared to the Index for the Base Month, multiplied by the Base Rental Rate for the first Lease Year ($15.80); provided, however, in no event shall the Base Rental Rate for a Subsequent Year be less than the Base Rental Rate applicable to the Prior Year and in no event shall the Base 4 8 Rental Rate for the Subsequent Year be greater than the following amounts for the Lease Years shown: Second Lease Year $16.27 Third Lease Year $16.76 Fourth Lease Year $17.27 Fifth Lease Year $17.78
(c) If the Bureau of Labor Statistics should discontinue the publication of the Index, or publish the same less frequently, or alter the same in some manner, then Landlord shall adopt a substitute Index or substitute procedure which reasonably reflects and monitors consumer prices. 8. Additional Rental. (a) For purposes of this Lease, "Tenant's Forecast Additional Rental" shall mean Landlord's reasonable estimate of Tenant's Additional Rental for the coming calendar year or portion thereof. If at any time it appears to Landlord, in Landlord's reasonable judgment, that Tenant's Additional Rental for the current calendar year will vary from Landlord's estimate by more than five percent (5%), Landlord shall have the right to revise, by written notice to Tenant, its estimate for such year, and subsequent payments by Tenant for such year shall be based upon such revised estimate of Tenant's Additional Rental. Failure to make a revision contemplated by the immediately preceding sentence shall not prejudice Landlord's right to collect the full amount of Tenant's Additional Rental. Prior to the Rental Commencement Date and thereafter prior to the beginning of each calendar year during the Lease Term, including any extensions thereof, Landlord shall present to Tenant a statement of Tenant's Forecast Additional Rental for such calendar year; provided, however, that if such statement is not given prior to the beginning of any calendar year as aforesaid, Tenant shall continue to pay during the next ensuing calendar year on the basis of the amount of Tenant's Forecast Additional Rental payable during the calendar year just ended until the month after such statement is delivered to Tenant. (b) For purposes of this Lease, "Tenant's Additional Rental" shall mean for each calendar year (or portion thereof) the Operating Expense Amount (defined below) multiplied by the number of square feet of Rentable Floor Area of Demised Premises. As used herein, "Operating Expense Amount" shall mean an amount equal to (x) plus (y), where: (x) equals the amount of Operating Expenses (as defined below) for such calendar year divided by the greater of (i) 95% of the number of square feet of Rentable Floor Area of the Building, or (ii) the total number of square feet of Rentable Floor Area occupied in the Building for such calendar year on an average annualized basis; provided, however, if the Operating Expenses actually 5 9 incurred by Landlord are lower than would be incurred if at least 95% of the Building were occupied or if Landlord shall not furnish any particular item(s) of work or services (the cost of which would otherwise be included within Operating Expenses) to portions of the Building because (A) such portions are not occupied, (B) such item of work or services is not required or desired by the tenant of such portion, (C) such tenant is itself obtaining such item of work or services, or (D) of any other reason, then appropriate adjustments shall be made to determine Operating Expenses for such calendar year as though the Building were actually occupied to the extent of the greater of (i) or (ii) above and as though Landlord had furnished such item of work or services to the greater of (i) or (ii) above; and (y) equals a management fee contribution equal to three percent (3%) of Tenant's Base Rental (on a per square foot basis) plus three percent (3%) of the per square foot amount described in (x). (c)(i) Within one hundred fifty (150) days after the end of the calendar year in which the Rental Commencement Date occurs and of each calendar year thereafter during the Lease Term, or as soon thereafter as practicable, Landlord shall provide Tenant an itemized statement showing the Operating Expenses for said calendar year, as prepared by a certified public accounting firm designated by Landlord, and a statement prepared by Landlord comparing Tenant's Forecast Additional Rental with Tenant's Additional Rental. In the event Tenant's Forecast Additional Rental exceeds Tenant's Additional Rental for said calendar year, Landlord shall credit such amount against Rent next due hereunder or, if the Lease Term has expired or is about to expire, refund such excess to Tenant within thirty (30) days if Tenant is not in default under this Lease (in the instance of a default such excess shall be held as additional security for Tenant's performance, may be applied by Landlord to cure any such default, and shall not be refunded until any such default is cured). In the event that the Tenant's Additional Rental exceeds Tenant's Forecast Additional Rental for said calendar year, Tenant shall pay Landlord, within thirty (30) days of receipt of the statement, an amount equal to such difference. The provisions of this Lease concerning the payment or refund of Tenant's Additional Rental shall survive the expiration or earlier termination of this Lease. (ii) If Tenant has not received a Statement of Operating Expenses by the end of the calendar year following the calendar year in which said statement is due from Landlord, it shall be conclusively presumed that Landlord has waived its claim against Tenant for Tenant's share of any additional Operating Expenses that would have been set forth in such statement, except for any Operating Expenses which are adjusted or billed to Landlord by a third-party after such period would have otherwise expired, which Operating Expenses may be billed by Landlord within eighteen (18) months of the receipt of such bill or adjustment by Landlord. 6 10 (d) For so long as Tenant is not in default under this Lease, Landlord's books and records pertaining to the calculation of Operating Expenses for any calendar year within the Lease Term may be audited by an authorized representative of Tenant at Tenant's expense, at any time within twelve (12) months after the end of each such calendar year; provided that Tenant shall give Landlord not less than twenty (20) days' prior written notice of any such audit. For purposes hereof, an authorized representative of Tenant shall mean a bona fide employee of Tenant, any of the "big six" accounting firms, or any other party reasonably approved in writing by Landlord. In no event shall an authorized representative of Tenant include the owner of any office building in the metropolitan Atlanta, Georgia area or any affiliate of such owner. Prior to the commencement of such audit, Tenant shall cause its authorized representative to agree in writing for the benefit of Landlord that such representative will keep the results of the audit confidential and that such representative will not disclose or divulge the results of such audit except to Tenant and Landlord and except in connection with any dispute between Landlord and Tenant relating to Operating Expenses. Such audit shall be conducted during reasonable business hours at Landlord's office where Landlord's books and records are maintained. If Tenant causes a written audit report to be prepared by its authorized representative following any such audit, Tenant shall provide Landlord with a copy of such report promptly after receipt thereof by Tenant. If Landlord's calculation of Tenant's Additional Rental for the audited calendar year was incorrect, then Tenant shall be entitled to a prompt refund of any overpayment or Tenant shall promptly pay to Landlord the amount of any underpayment, as the case may be. If Landlord's books and records show an over-billing by Landlord of five percent (5%) or more to Tenant, Landlord shall pay all reasonable costs incurred by Tenant in performing such inspection and/or audit, up to, but not in excess of, Five Hundred and No/100 Dollars ($500.00). 9. Operating Expenses. (a) For the purposes of this Lease, "Operating Expenses" shall mean all expenses, costs and disbursements (but not specific costs billed to specific tenants of the Building) of every kind and nature, computed on the accrual basis, relating to or incurred or paid in connection with the ownership, management, operation, repair and maintenance of the Project, including but not limited to, the following: (1) wages, salaries and other costs of all on-site and off-site employees engaged either full or part-time in the operation, management, maintenance or access control of the Project, including taxes, insurance and benefits relating to such employees, allocated based upon the time such employees are engaged directly in providing such services; (2) the cost of all supplies, tools, equipment and materials used in the operation, management, maintenance and access control of the Project; 7 11 (3) the cost of all utilities for the Project, including but not limited to the cost of electricity, gas, water, sewer services and power for heating, lighting, air conditioning and ventilating; (4) the cost of all maintenance and service agreements for the Project and the equipment therein, including but not limited to security service, garage operators, window cleaning, elevator maintenance, HVAC maintenance, janitorial service, waste recycling service, landscaping maintenance and customary landscaping replacement; (5) the cost of repairs and general maintenance of the Project; (6) amortization (together with reasonable financing charges, whether or not actually incurred) of the cost of acquisition and/or installation of capital investment items (including security and energy management equipment), amortized over their respective useful lives, which are installed for the purpose of reducing operating expenses, promoting safety, complying with governmental requirements, or maintaining the first-class nature of the Project; (7) the cost of casualty, rental loss, liability and other insurance applicable to the Project and Landlord's personal property used in connection therewith; (8) the cost of trash and garbage removal, air quality audits, vermin extermination, and snow, ice and debris removal; (9) the cost of legal and accounting services incurred by Landlord in connection with the management, maintenance, operation and repair of the Project, excluding the owner's or Landlord's general accounting, such as partnership statements and tax returns, and excluding services described in Article 9(b)(14) below; (10) all taxes, assessments and governmental charges, whether or not directly paid by Landlord, whether federal, state, county or municipal and whether they be by taxing districts or authorities presently taxing the Project or by others subsequently created or otherwise, and any other taxes and assessments attributable to the Project or its operation (and the costs of contesting any of the same), including business license taxes and fees, excluding, however, taxes and assessments imposed on the personal property of the tenants of the Project, federal and state taxes on income, death taxes, franchise taxes, and any taxes (other than business license taxes and fees) imposed or measured on or by the income of Landlord from the operation of the Project; and it is agreed that Tenant will be responsible for ad valorem taxes on its personal property and on the value of the leasehold improvements in the Demised Premises to the extent that the same exceed Building Standard allowances, if said taxes are based upon an assessment which includes the cost of such leasehold improvements in excess of Building Standard allowances (and if the taxing authorities do not separately assess Tenant's leasehold improvements, 8 12 Landlord may make an appropriate allocation of the ad valorem taxes allocated to the Project to give effect to this sentence); (11) the cost of operating the management office for the Project and an equitable portion of the cost of operating the management office for Wildwood Office Park, including in each case the cost of office supplies, bulletins or newsletters distributed to tenants, postage, telephone expenses, maintenance and repair of office equipment, non-capital investment equipment, amortization (together with reasonable financing charges) of the cost of capital investment equipment, and rent; and (12) the pro rata share applicable to the Project of the sum of (i) the actual costs of operation, maintenance, repair and replacement of the landscaping and irrigation systems now or hereafter located along Windy Ridge Parkway, Windy Hill Road, Wildwood Parkway, Wildwood Plaza, the right-of-way areas of Powers Ferry Road adjoining Wildwood Office Park, and all future roadways, whether public or private, constructed in Wildwood Office Park, together with the landscaped median strips and shoulders of such roadways (but not including the landscaping and irrigation system located on the shoulder of any roadway contiguous to a site upon which construction of improvements has commenced) and any and all light systems located on or in any rights-of-way for private roads within the Wildwood Office Park; (ii) ad valorem taxes on any private roadways now or hereafter located within Wildwood Office Park and on any medians adjacent to public roads if such medians are not included in public road rights-of-way; (iii) the actual costs of ownership, operation, maintenance, repair and replacement of office park signage for Wildwood Office Park and any underground sanitary sewer lines, storm water drainage lines, electric lines, gas lines, water lines, telephone lines and communication lines serving the Wildwood Office Park which are located across, through and under any public or private roadways now or hereafter located within Wildwood Office Park, except for any such utility facilities serving solely another project within Wildwood Office Park; (iv) the actual costs of ownership, operation, maintenance, repair and replacement of any private transportation system and equipment from time to time provided or made available to the developed portions of Wildwood Office Park, including but not limited to ad valorem taxes on personal property or equipment, electricity, fuel, painting and cleaning costs; (v) the actual costs and expenses of ownership and operation of any security patrols or services, if any, from time to time provided to Wildwood Office Park in general, but excluding any such security patrols or services provided solely to another project within Wildwood Office Park; and (vi) such other reasonable, actual costs and expenses incurred by Landlord as "Owner" of the Project under and pursuant to that certain Master Declaration of Covenants and Cross-Easements for Wildwood Office Park dated as of January 23, 1991, recorded in Deed Book 5992, page 430, Cobb County, Georgia records, as modified, amended or supplemented from time to time (the "Master Declaration"). The share of the foregoing costs which are applicable to the Project shall be determined in accordance with the Master Declaration. 9 13 Landlord shall not employ or contract with any affiliated entity in the performance of any work or services which are included in Operating Expenses unless the cost of same is no greater than the reasonable cost of same if such work or services were provided by a non-affiliated entity of the same or similar quality and reputation as the entity affiliated with Landlord. For the purposes of this provision, an "affiliated entity" shall include (i) an entity owned by Landlord or any principal of Landlord, or (ii) any person or entity having common ownership or control with Landlord or any principal of Landlord. Notwithstanding anything to the contrary provided in this Lease, (i) all capital investment items which fall within the definition of "Operating Expenses" shall be amortized with reasonable financing rates over the useful life of the item and included in Operating Expenses in installments based on amortization; and (ii) any maintenance or repair or operating service or work procured by Landlord for the Project shall be provided at competitive rates. Operating Expenses shall be "net" only, and for that purpose shall be reduced by the amounts of any reimbursement, refund or credit actually received by Landlord with respect to any item of cost that is included in Operating Expenses, including, but not limited to, heating, ventilating, air conditioning and electricity. If any such reimbursement, refund or credit is actually received or receivable by Landlord in a later year, it shall be applied against the Operating Expenses for such later year; provided, however, that, if the Term of this Lease has expired, Tenant's share of such item shall be refunded by Landlord to Tenant within thirty (30) days after receipt by Landlord. (b) For purposes of this Lease, and notwithstanding anything in any other provision of this Lease to the contrary, "Operating Expenses" shall not include the following: (1) the cost of any special work or service performed for any tenant (including Tenant) at such tenant's cost; (2) the cost of installing, operating and maintaining any specialty service, such as an observatory, broadcasting facility, luncheon club, restaurant, cafeteria, retail store, sundry shop, newsstand, or concession, but only to the extent such costs exceed those which would normally be expected to be incurred had such space been general office space; (3) the cost of correcting defects in construction; (4) compensation paid to officers and executives of Landlord (but it is understood that the office park manager, the on-site building manager and other on-site employees below the grade of building manager may carry a title such as vice president and the salaries and related benefits of these officers/employees of Landlord would be allowable Operating Expenses under Article 9[a][1] above); 10 14 (5) the cost of any items for which Landlord is reimbursed by insurance, condemnation or otherwise, except for costs reimbursed pursuant to provisions similar to Articles 8 and 9 hereof; (6) the cost of any additions, changes, replacements and other items which are made in order to prepare for a new tenant's occupancy; (7) the cost of repairs incurred by reason of fire or other casualty reimbursed by insurance proceeds under policies maintained by Landlord; (8) insurance premiums to the extent Landlord may be directly reimbursed therefor, except for premiums reimbursed pursuant to provisions similar to Articles 8 and 9 hereof; (9) interest on debt or amortization payments on any mortgage or deed to secure debt (except to the extent specifically permitted by Article 9[a]) and rental under any ground lease or other underlying lease; (10) any real estate brokerage commissions or other costs incurred in procuring tenants or any fee in lieu of such commission; (11) any advertising expenses incurred in connection with the marketing of any rentable space; (12) rental payments for base building equipment such as HVAC equipment and elevators; (13) any expenses for repairs or maintenance which are covered by warranties and service contracts, to the extent such maintenance and repairs are made at no cost to Landlord; (14) legal expenses arising out of the construction of the improvements on the Land or the enforcement of the provisions of any lease affecting the Land or Building, including without limitation this Lease; and (15) management fees (Tenant's obligation for a management fee contribution is set forth in Article 8[b][y] above). 10. Tenant Taxes; Rent Taxes. Tenant shall pay promptly when due all taxes directly or indirectly imposed or assessed upon Tenant's gross sales, business operations, machinery, equipment, trade fixtures and other personal property or assets, whether such taxes are assessed against Tenant, Landlord or the Building. In the event that such taxes are imposed or assessed against Landlord or the Building Landlord, within thirty (30) days after receipt, shall furnish 11 15 Tenant with all applicable tax bills, public charges and other assessments or impositions and Tenant shall forthwith pay the same directly to the taxing authority, with reasonable evidence of such payment provided to Landlord. In addition, in the event there is imposed at any time a tax upon and/or measured by the rental payable by Tenant under this Lease, whether by way of a sales or use tax or otherwise, Tenant shall be responsible for the payment of such tax and shall pay the same on or prior to the due date thereof; provided, however, that the foregoing shall not include any inheritance, estate, succession, transfer, gift or income tax imposed on or payable by Landlord. 11. Payments. All payments of Rent and other payments to be made to Landlord shall be made on a timely basis and shall be payable to Landlord or as Landlord may otherwise designate in writing. All such payments shall be mailed or delivered to Landlord's Address designated in Article 1(b) above or at such other place as Landlord may designate from time to time in writing. If mailed, all payments shall be mailed in sufficient time and with adequate postage thereon to be received in Landlord's account by no later than the due date for such payment. Tenant agrees to pay to Landlord Fifty Dollars ($50.00) for each check presented to Landlord in payment of any obligation of Tenant which is not paid by the bank on which it is drawn, together with interest from and after the due date for such payment at the rate of twelve percent (12%) per annum on the amount due. 12. Late Charges. Any Rent or other amounts payable to Landlord under this Lease, if not paid by the fifth day of the month for which such Rent is due, or by the due date specified on any invoices from Landlord for any other amounts payable hereunder, shall incur a late charge of Fifty Dollars ($50.00) for Landlord's administrative expense in processing such delinquent payment and in addition thereto shall bear interest at the rate of twelve percent (12%) per annum from and after the due date for such payment. In no event shall the rate of interest payable on any late payment exceed the legal limits for such interest enforceable under applicable law. 13. Use Rules. The Demised Premises shall be used for any lawful use, but subject to and in accordance with all applicable laws, ordinances, rules and regulations of governmental authorities, any limitations or restrictions imposed by other tenants or users of the Building from time, and the Rules and Regulations attached hereto and made a part hereof. The occupancy rate of the Demised Premises shall in no event be more than one (1) person per 200 square feet of Rentable Floor Area within the Demised Premises. Tenant covenants and agrees to abide by the Rules and Regulations in all respects as now set forth and attached hereto or as hereafter promulgated by Landlord; provided, however, that Landlord shall provide Tenant with at least thirty (30) days prior written notice of any such new Rule and Regulation, and no such new Rule and Regulation shall materially and adversely affect Tenant's rights hereunder. Landlord shall have the right at all times during the Lease Term to publish and promulgate and thereafter enforce such reasonable, uniform and non-discriminatory rules and regulations or changes in the existing Rules and Regulations as it may reasonably deem necessary in its sole discretion to protect the tenantability, safety, operation, and welfare of the Demised Premises, the Project and Wildwood Office Park. 12 16 14. Alterations. Except for any initial improvement of the Demised Premises pursuant to Exhibit "D", which shall be governed by the provisions of said Exhibit "D", Tenant shall not make, suffer or permit to be made any alterations, additions or improvements to or of the Demised Premises or any part thereof, or attach any fixtures or equipment thereto, without first obtaining Landlord's written consent, which consent shall not be unreasonably withheld, conditioned or delayed. Any such alterations, additions or improvements to the Demised Premises consented to by Landlord shall be made by either (i) a contractor selected by Tenant and consented to by Landlord (which consent shall not be unreasonably withheld, conditioned or delayed by Landlord), or (ii) by Landlord or under Landlord's supervision for Tenant's account, and Tenant shall reimburse Landlord for all costs thereof (including a reasonable charge for Landlord's overhead), as Rent, within ten (10) days after receipt of a statement. All such alterations, additions and improvements shall become Landlord's property at the expiration or earlier termination of the Lease Term and shall remain on the Demised Premises without compensation to Tenant unless Landlord elects by notice to Tenant to have Tenant remove such alterations, additions and improvements, in which event, notwithstanding any contrary provisions respecting such alterations, additions and improvements contained in Article 32 hereof, Tenant shall promptly restore, at its sole cost and expense, the Demised Premises to its condition prior to the installation of such alterations, additions and improvements, normal wear and tear excepted. Notwithstanding the above, Tenant shall be entitled to make non-structural alterations which do not affect the Building systems, so long as such alterations do not exceed Ten Thousand and No/100 Dollars ($10,000.00) in cost with notice to, but without the need for the prior consent of, Landlord. In such event, Tenant shall provide Landlord with the as-built plans of such alterations, if any are prepared. 15. Repairs. (a) Landlord shall maintain in good order and repair (as compared to other first-class properties of similar quality in the area of the Building), subject to normal wear and tear and subject to casualty and condemnation, the Building (excluding the Demised Premises and other portions of the Building leased to other tenants), the Building parking facilities, the public areas and the landscaped areas. Notwithstanding the foregoing obligation, the cost of any repairs or maintenance to the foregoing necessitated by the intentional acts or gross negligence of Tenant or its agents, contractors, employees, invitees, licensees, tenants or assigns, shall be borne solely by Tenant and shall be deemed Rent hereunder and shall be reimbursed by Tenant to Landlord within thirty (30) days of written demand. Landlord shall not be required to make any repairs or improvements to the Demised Premises except structural repairs necessary for safety and tenantability. Landlord shall keep in good order and repair the roof, floor slab, gutters, downspouts, drains and leaders, load bearing structures and exterior walls of the Premises, all utility lines and systems up to their point of entry into the Premises, and all lines and systems within the Premises that do not exclusively serve the Premises. (b) Tenant covenants and agrees that it will take good care of the Demised Premises and all alterations, additions and improvements thereto and will keep and 13 17 maintain the same in good condition and repair, except for normal wear and tear. Tenant shall as soon as reasonably practical report, in writing, to Landlord any defective or dangerous condition known to Tenant. To the fullest extent permitted by law, Tenant hereby waives all rights to make repairs at the expense of Landlord as may be provided by any law, statute or ordinance now or hereafter in effect. Landlord has no obligation and has made no promise to alter, remodel, improve, repair, decorate or paint the Demised Premises or any part thereof, except as specifically and expressly herein set forth. (c) Notwithstanding anything to the contrary provided in this Lease, Landlord shall make all necessary repairs and replacements to the fire protection sprinklers and systems serving the Demised Premises, all utility lines and systems up to their point of entry into the Demised Premises and all pipes, conduits, wires and other lines running through the Demised Premises which do not exclusively serve the Demised Premises, with the cost thereof bring an Operating Expense, to the extent and as chargeable under Article 9 herein. 16. Landlord's Right of Entry. Landlord shall retain duplicate keys to all doors of the Demised Premises and Landlord and its agents, employees and independent contractors shall have the right to enter the Demised Premises at reasonable hours and upon reasonable prior notice (except in an emergency, for which no prior notice is required) to inspect and examine same, to make repairs, additions, alterations, and improvements, to exhibit the Demised Premises to mortgagees, prospective mortgagees, purchasers or tenants, and to inspect the Demised Premises to ascertain that Tenant is complying with all of its covenants and obligations hereunder, all without being liable to Tenant in any manner whatsoever for any damages arising therefrom; provided, however, that Landlord shall, except in case of emergency, afford Tenant such prior notification of an entry into the Demised Premises as shall be reasonably practicable under the circumstances. Landlord shall use its reasonable efforts not to unreasonably disrupt or disturb Tenant's use of the Demised Premises during such entry or inspections. Landlord shall be allowed to take into and through the Demised Premises any and all materials that may be required to make such repairs, additions, alterations or improvements. During such time as such work is being carried on in or about the Demised Premises, the Rent provided herein shall not abate, and Tenant waives any claim or cause of action against Landlord for damages by reason of interruption of Tenant's business or loss of profits therefrom because of the prosecution of any such work or any part thereof. 17. Insurance. Tenant shall procure at its expense and maintain throughout the Lease Term a policy or policies of special form/all-risk insurance insuring the full replacement cost of its furniture, equipment, supplies, and other property owned, leased, held or possessed by it and contained in the Demised Premises, together with the excess value of the improvements to the Demised Premises over the Construction Allowance, and worker's compensation insurance as required by applicable law. Tenant shall also procure at its expense and maintain throughout the Lease Term a policy or policies of commercial general liability insurance, insuring Tenant, Landlord and any other person reasonably designated by Landlord, against any and all liability 14 18 for injury to or death of a person or persons and for damage to property occasioned by or arising out of any construction work being done on the Demised Premises, or arising out of the condition, use, or occupancy of the Demised Premises, or in any way occasioned by or arising out of the activities of Tenant, its agents, contractors, employees, guests, or licensees in the Demised Premises, or other portions of the Building, the Project or Wildwood Office Park, the limits of such policy or policies to be in combined single limits for both damage to property and personal injury and in amounts not less than Three Million Dollars ($3,000,000) for each occurrence. Such insurance shall, in addition, extend to any liability of Tenant arising out of the indemnities provided for in this Lease. Tenant shall also carry such other types of insurance in form and amount which Landlord shall reasonably deem to be prudent for Tenant to carry, should the circumstances or conditions so merit Tenant carrying such type of insurance. All insurance policies procured and maintained by Tenant pursuant to this Article 17 shall name Landlord and any additional parties reasonably designated by Landlord as additional insured, shall be carried with companies licensed to do business in the State of Georgia having a rating from Best's Insurance Reports of not less than A-/X, and shall be non-cancelable and not subject to material change except after thirty (30) days' written notice to Landlord. Such policies or duly executed certificates of insurance with respect thereto, accompanied by proof of payment of the premium therefor, shall be delivered to Landlord prior to the Rental Commencement Date, and renewals of such policies shall be delivered to Landlord at least thirty (30) days prior to the expiration of each respective policy term. Landlord shall procure and maintain at its expense (but with the expense to be included in Operating Expenses) throughout the Lease Term a policy or policies of special form/all-risk (including rent loss coverage) real and personal property insurance covering the Project (including the leasehold improvements in the Demised Premises up to the amount of the Construction Allowance, but excluding Tenant's personal property and equipment), in an amount equal to the full insurable replacement cost thereof as such may increase from time to time (but such insurance may provide for a commercially reasonable deductible), and in an amount sufficient to comply with any co-insurance requirements in such policy, and a policy of workers' compensation insurance, if any, as required by applicable law. In addition, Landlord shall procure and maintain at its expense (but with the expense to be included in Operating Expenses) and shall thereafter maintain throughout the Lease Term, a commercial general liability insurance policy covering the Project with combined single limits for both damage to property and personal injury of not less than Three Million Dollars ($3,000,000) per occurrence, subject to annual aggregate limits of not less than Five Million Dollars ($5,000,000). Landlord may also carry such other types of insurance in form and amounts which Landlord shall determine to be appropriate from time to time, and the cost thereof shall be included in Operating Expenses. All such policies procured and maintained by Landlord pursuant to this Article 17 shall be carried with companies licensed to do business in the State of Georgia. Any insurance required to be carried by Landlord hereunder may be carried under blanket policies covering other properties of Landlord and/or its partners and/or their respective related or affiliated corporations so long as such blanket policies provide insurance at all times for the Project as required by this Lease. 15 19 18. Waiver of Subrogation. Landlord and Tenant shall each have included in all policies of fire, extended coverage, business interruption and loss of rents insurance respectively obtained by them covering the Demised Premises, the Building and contents therein, a waiver by the insurer of all right of subrogation against the other in connection with any loss or damage thereby insured against. Any additional premium for such waiver shall be paid by the primary insured. To the full extent permitted by law, Landlord and Tenant each waives all right of recovery against the other for, and agrees to release the other from liability for, loss or damage to the extent such loss or damage (a) is covered by valid and collectible insurance in effect at the time of such loss or damage (or required to be in effect at the time of such loss or damage), or (b) would be covered by the insurance required to be maintained under this Lease by the party seeking recovery. 19. Default. (a) The following events shall be deemed to be events of default by Tenant under this Lease: (i) Tenant shall fail to pay any installment of Rent or any other charge or assessment against Tenant pursuant to the terms hereof within five (5) days after the date notice of such late payment is received by Tenant; provided, however, if more than two (2) payments due of Tenant hereunder in any one (1) calendar year are not made until after notice of such late payment is received by Tenant, then it shall be an event of default hereunder by Tenant if any subsequent payment due of Tenant hereunder in the same calendar year is not made within ten (10) days of the date when due; (ii) Tenant shall fail to comply with any term, provision, covenant or warranty made under this Lease by Tenant, other than the payment of the Rent or any other charge or assessment payable by Tenant, and shall not cure such failure within fifteen (15) days after notice thereof to Tenant, or such longer period as is necessary to cure such default, provided Tenant is diligently pursuing same, and such cure is effectuated in any event within sixty (60) days after notice thereof is given to Tenant; (iii) Tenant or any guarantor of this Lease shall make a general assignment for the benefit of creditors, or shall admit in writing its inability to pay its debts as they become due, or shall file a petition in bankruptcy, or shall be adjudicated as bankrupt or insolvent, or shall file a petition in any proceeding seeking any reorganization, arrangement, composition, readjustment, liquidation, dissolution or similar relief under any present or future statute, law or regulation, or shall file an answer admitting or fail timely to contest the material allegations of a petition filed against it in any such proceeding; (iv) a proceeding is commenced against Tenant or any guarantor of this Lease seeking any reorganization, arrangement, composition, readjustment, liquidation, dissolution or similar relief under any present or future statute, law or regulation, and such proceeding shall not have been dismissed within ninety (90) days after the commencement thereof; (v) a receiver or trustee shall be appointed for all or substantially all of the assets of Tenant or of any guarantor of this Lease; (vi) Tenant shall fail to take possession of the Demised Premises as provided in this Lease; (vii) Tenant shall do or permit to be done anything which creates a lien upon the Demised Premises or the Project and such lien is not removed or discharged within fifteen (15) days after Tenant is provided notice of the filing thereof; (viii) Tenant shall fail to return a properly 16 20 executed instrument to Landlord in accordance with the provisions of Article 27 hereof within the time period provided for such return following Landlord's request for same as provided in Article 27 and such failure continues for ten (10) days after notice of such failure is provided to Tenant; or (ix) Tenant shall fail to return a properly executed estoppel certificate to Landlord in accordance with the provisions of Article 28 hereof within the time period provided for such return following Landlord's request for same as provided in Article 28 and such failure continues for ten (10) days after notice of such failure is provided to Tenant. (b) Upon the occurrence of any of the aforesaid events of default, Landlord shall have the option to pursue any one or more of the following remedies without any further notice or demand whatsoever: (i) terminate this Lease, in which event Tenant shall immediately surrender the Demised Premises to Landlord and if Tenant fails to do so, Landlord may without prejudice to any other remedy which it may have for possession or arrearages in Rent, enter upon and take possession of the Demised Premises and expel or remove Tenant and any other person who may be occupying said Demised Premises or any part thereof without being liable for prosecution or any claim of damages therefor; Tenant hereby agreeing to pay to Landlord on demand the amount of all loss and damage which Landlord may suffer by reason of such termination, whether through inability to relet the Demised Premises on satisfactory terms or otherwise; (ii) terminate Tenant's right of possession (but not this Lease) and enter upon and take possession of the Demised Premises and expel or remove Tenant and any other person who may be occupying said Demised Premises or any part thereof, by entry, dispossessory suit or otherwise, without thereby releasing Tenant from any liability hereunder, without terminating this Lease, and without being liable for prosecution or any claim of damages therefor and, if Landlord so elects, make such alterations, redecorations and repairs as, in Landlord's judgment, may be necessary to relet the Demised Premises, and Landlord may, but shall be under no obligation to do so, relet the Demised Premises or any portion thereof in Landlord's or Tenant's name, but for the account of Tenant, for such term or terms (which may be for a term extending beyond the Lease Term) and at such rental or rentals and upon such other terms as Landlord may deem advisable, with or without advertisement, and by private negotiations, and receive the rent therefor, Tenant hereby agreeing to pay to Landlord the deficiency, if any, between all Rent reserved hereunder and the total rental applicable to the Lease Term hereof obtained by Landlord re-letting, and Tenant shall be liable for Landlord's expenses in redecorating and restoring the Demised Premises and all costs incident to such re-letting, including broker's commissions and lease assumptions, and in no event shall Tenant be entitled to any rentals received by Landlord in excess of the amounts due by Tenant hereunder; or (iii) enter upon the Demised Premises without being liable for prosecution or any claim of damages therefor, and do whatever Tenant is obligated to do under the terms of this Lease; and Tenant agrees to reimburse Landlord on demand for any expenses including, without limitation, reasonable attorneys' fees which Landlord may incur in thus effecting compliance with Tenant's obligations under this Lease and Tenant further agrees that Landlord shall not be liable for any damages resulting to Tenant from such action, except 17 21 to the extent expressly arising under Article 37 herein. If this Lease is terminated by Landlord as a result of the occurrence of an event of default, Landlord may declare to be due and payable immediately, the present value (calculated with a discount factor of eight percent [8%] per annum) of the difference between (x) the entire amount of Rent and other charges and assessments which in Landlord's reasonable determination would become due and payable during the remainder of the Lease Term determined as though this Lease had not been terminated (including, but not limited to, increases in Rent pursuant to Article 7 hereof), and (y) the then fair market rental value of the Demised Premises for the remainder of the Lease Term. Upon the acceleration of such amounts, Tenant agrees to pay the same at once, together with all Rent and other charges and assessments theretofore due, at Landlord's address as provided herein, it being agreed that such payment shall not constitute a penalty or forfeiture but shall constitute liquidated damages for Tenant's failure to comply with the terms and provisions of this Lease (Landlord and Tenant agreeing that Landlord's actual damages in such event are impossible to ascertain and that the amount set forth above is a reasonable estimate thereof). (c) Pursuit of any of the foregoing remedies shall not preclude pursuit of any other remedy herein provided or any other remedy provided by law or at equity, nor shall pursuit of any remedy herein provided constitute an election of remedies thereby excluding the later election of an alternate remedy, or a forfeiture or waiver of any Rent or other charges and assessments payable by Tenant and due to Landlord hereunder or of any damages accruing to Landlord by reason of violation of any of the terms, covenants, warranties and provisions herein contained. No reentry or taking possession of the Demised Premises by Landlord or any other action taken by or on behalf of Landlord shall be construed to be an acceptance of a surrender of this Lease or an election by Landlord to terminate this Lease unless written notice of such intention is given to Tenant. Forbearance by Landlord to enforce one or more of the remedies herein provided upon an event of default shall not be deemed or construed to constitute a waiver of such default. In determining the amount of loss or damage which Landlord may suffer by reason of termination of this Lease or the deficiency arising by reason of any reletting of the Demised Premises by Landlord as above provided, allowance shall be made for the expense of repossession. Tenant agrees to pay to Landlord all reasonable, actual costs and expenses incurred by Landlord in the enforcement of this Lease, including, without limitation, the fees of Landlord's attorneys as provided in Article 25 hereof. (d) The abandonment or vacation of the Demised Premises shall not be an event of default by Tenant under this Lease, but in the event Tenant shall abandon or vacate the Demised Premises, unless due to a casualty, condemnation or remodeling (which remodeling is being diligently prosecuted), Landlord may, at any time while such abandonment or vacation of the Demised Premises is continuing, notify Tenant of Landlord's election to terminate this Lease, in which event this Lease shall terminate on the date so selected by Landlord in Landlord's written election to terminate this Lease, and on the date so set forth in Landlord's written election, this Lease shall terminate and 18 22 come to an end as though the date selected by Landlord were the last day of the natural expiration of the Lease Term; provided, however, that no such termination shall affect or limit any obligations or liabilities of Tenant arising or accruing under this Lease prior to the effective date of any such termination; and provided further that Tenant may rescind Landlord's election by (i) notifying Landlord in writing, within ten (10) days after receipt of Landlord's written election to terminate this Lease, that Tenant will reoccupy the Demised Premises for business purposes and (ii) in fact, so reoccupying the Demised Premises for business purposes within sixty (60) days thereafter, or such other reasonably practical time period, if longer, but not to exceed one hundred twenty (120) days. 20. Waiver of Breach. No waiver of any breach of the covenants, warranties, agreements, provisions, or conditions contained in this Lease shall be construed as a waiver of said covenant, warranty, provision, agreement or condition or of any subsequent breach thereof, and if any breach shall occur and afterwards be compromised, settled or adjusted, this Lease shall continue in full force and effect as if no breach had occurred. 21. Assignment and Subletting. (a) Tenant shall not, without the prior written consent of Landlord, which consent shall not be unreasonably withheld, conditioned or delayed, assign this Lease or any interest herein or in the Demised Premises, or mortgage, pledge, encumber, hypothecate or otherwise transfer or sublet the Demised Premises or any part thereof or permit the use of the Demised Premises by any party other than Tenant. Consent to one or more such transfers or subleases shall not destroy or waive this provision, and all subsequent transfers and subleases shall likewise be made only upon obtaining the prior written consent of Landlord, which consent shall not be unreasonably withheld, conditioned or delayed. Without limiting the foregoing prohibition, in no event shall Tenant assign this Lease or any interest herein, whether directly, indirectly or by operating of law, or sublet the Demised Premises or any part thereof or permit the use of the Demised Premises or any part thereof by any party (i) if the proposed assignee or subtenant is a party who would (or whose use would) detract from the character of the Building as a first-class building, such as, without limitation, a dental, medical or chiropractic office or a governmental office, (ii) if the proposed use of the Demised Premises shall involve an occupancy rate of more than one (1) person per 200 square feet of Rentable Floor Area within the Demised Premises, (iii) if the proposed assignment or subletting shall be to a governmental subdivision or agency or any person or entity who enjoys diplomatic or sovereign immunity, (iv) if such proposed assignee or subtenant is an existing tenant of the Building, or (v) if such proposed assignment, subletting or use would contravene any restrictive covenant (including any exclusive use) granted to any other tenant of the Building. Sublessees or transferees of the Demised Premises for the balance of the Lease Term shall become directly liable to Landlord for all obligations of Tenant hereunder, without relieving Tenant (or any guarantor of Tenant's obligations hereunder) of any liability therefor, and Tenant shall remain obligated for all liability to Landlord arising under this Lease during the entire remaining Lease Term. Landlord may, as a prior condition to considering any request for consent to an assignment or sublease, require Tenant to obtain and submit current financial statements of any proposed subtenant or assignee. In the event Landlord consents to an assignment or sublease, Tenant shall pay to Landlord a fee to cover Landlord's accounting costs plus any legal fees actually incurred by Landlord as a result 19 23 of the assignment or sublease, such legal fees charged to Tenant not to exceed Five Hundred and No/100 Dollars ($500.00) per occurrence or request. Landlord may require an additional security deposit from the assignee or subtenant as a condition of its consent. Fifty percent (50%) of any net costs of subletting (including alteration or modification of the Demised Premises) consideration, in excess of the Rent and other charges and sums due and payable by Tenant under this Lease, paid to Tenant by any assignee of this Lease for its assignment, or by any sublessee under or in connection with its sublease, or otherwise paid to Tenant by another party for use and occupancy of the Demised Premises or any portion thereof, shall be promptly remitted by Tenant to Landlord as additional rent hereunder and Tenant shall have no right or claim thereto as against Landlord. No assignment of this Lease consented to by Landlord shall be effective unless and until Landlord shall receive an original assignment and assumption agreement, in form and substance reasonably satisfactory to Landlord, signed by Tenant and Tenant's proposed assignee, whereby the assignee assumes due performance of this Lease to be done and performed for the balance of the then remaining Lease Term of this Lease. No subletting of the Demised Premises, or any part thereof, shall be effective unless and until there shall have been delivered to Landlord an agreement, in form and substance satisfactory to Landlord, signed by Tenant and the proposed sublessee, whereby the sublessee acknowledges the right of Landlord to continue or terminate any sublease, in Landlord's sole discretion, upon termination of this Lease, and such sublessee agrees to recognize and attorn to Landlord in the event that Landlord elects under such circumstances to continue such sublease. (b) Tenant shall have the right to assign the Lease or sublet the Demised Premises, or any part thereof, without Landlord's consent, but subject to Landlord's rights to notice and prohibition contained herein, to any parent, subsidiary, affiliate or controlled corporation or to corporation which Tenant may be converted or which it may merge. Tenant shall have the obligation to notify Landlord of its intent of any such arrangement, and if Landlord reasonably determines that the proposed assignee or sublessee is engaged in a business which would materially interfere with the operation of the Building or that permitting the assignment or subletting would cause a violation by Landlord of its obligations under any lease covering a portion of the Building, Landlord shall have the right to prohibit such arrangement based upon the issue of the business of the proposed assignee or sublessee or the compatibility of the proposed assignee or sublessee with the businesses in the Building. 22. Destruction. (a) If the Demised Premises are damaged by fire or other casualty, the same shall be repaired or rebuilt as speedily as practical under the circumstances at the expense of the Landlord (subject to subparagraph [c] below), unless this Lease is terminated as provided in this Article 22, and during the period required for restoration, a just and proportionate part of Base Rental shall be abated until the Demised Premises are repaired or rebuilt substantially to the condition which existed immediately prior to such casualty. (b) If the Demised Premises are (i) damaged to such an extent that repairs cannot, in Landlord's judgment, be completed within one (1) year after the date of the 20 24 casualty or (ii) damaged or destroyed as a result of a risk which is not insured under standard special form/all-risk insurance policies, or (iii) damaged or destroyed during the last eighteen (18) months of the Lease Term, or if the Building is damaged in whole or in part (whether or not the Demised Premises are damaged), to such an extent that the Building cannot, in Landlord's judgment, be operated economically as an integral unit, then and in any such event Landlord may at its option terminate this Lease by notice in writing to the Tenant within sixty (60) days after the date of such occurrence. If the Demised Premises are damaged to such an extent that repairs cannot, in Landlord's judgment, be completed within one (1) year after the date of the casualty or if the Demised Premises are substantially damaged during the last eighteen (18) months of the Lease Term, then in either such event Tenant may elect to terminate this Lease by notice in writing to Landlord within fifteen (15) days after the date of such occurrence. Unless Landlord or Tenant elects to terminate this Lease as hereinabove provided, this Lease will remain in full force and effect and Landlord shall repair such damage at its expense to the extent required in this Article as expeditiously as possible under the circumstances. (c) If Landlord should elect or be obligated pursuant to subparagraph (a) above to repair or rebuild because of any damage or destruction, Landlord's obligation shall be limited to the original Building and the leasehold improvements in the Demised Premises (to the extent such leasehold improvements can be restored for the amount of the Construction Allowance applicable thereto) and shall not extend to any furniture, equipment, supplies or other personal property owned or leased by Tenant, its employees, contractors, invitees or licensees. If the cost of performing such repairs and restoration exceeds the actual proceeds of insurance paid or payable to Landlord on account of such casualty, or if Landlord's mortgagee or the lessor under a ground or underlying lease shall require that any insurance proceeds from a casualty loss be paid to it, Landlord may terminate this Lease unless Tenant, within fifteen (15) days after demand therefor, deposits with Landlord a sum of money sufficient to pay the difference between the cost of repair and the proceeds of the insurance available to Landlord for such purpose. (d) In no event shall Landlord be liable for any loss or damage sustained by Tenant by reason of casualties mentioned hereinabove or any other accidental casualty. 23. Landlord's Lien. INTENTIONALLY DELETED 24. Services by Landlord. Landlord shall provide the Building Standard Services described on Exhibit "E" attached hereto and by reference made a part hereof. So long as no event of default on the part of Tenant exists hereunder and the Lease is in full force and effect, Landlord shall provide at no additional out-of-pocket expense to Tenant, three (3) reserved parking spaces, in the area designated for reserved parking by Landlord, as such area may be changed by Landlord from time to time. 25. Attorneys' Fees and Homestead. If any Rent or other debt owing by Tenant to Landlord hereunder is collected by or through an outside attorney-at-law, Tenant agrees to pay an 21 25 additional amount equal to Landlord's reasonable attorney's fees actually incurred. If Landlord uses the services of any outside attorney in order to secure compliance with any other provisions of this Lease, to recover damages for any breach or default of any other provisions of this Lease, or to terminate this Lease or evict Tenant, Tenant shall reimburse Landlord upon demand for any and all reasonable, actual attorney's fees and expenses so incurred by Landlord. Tenant waives all homestead rights and exemptions which it may have under any law as against any obligation owing under this Lease, and assigns to Landlord its homestead and exemptions to the extent necessary to secure payment and performance of its covenants and agreements hereunder. If any action or proceeding is commenced by Tenant to enforce the terms of the Lease, and Tenant prevails in any such action, Landlord shall pay Tenant's reasonable attorney's fees actually incurred, in connection with such action or proceeding. 26. Time. Time is of the essence of this Lease and whenever a certain day is stated for payment or performance of any obligation of Tenant or Landlord, the same enters into and becomes a part of the consideration hereof. 27. Subordination and Attornment. (a) Tenant agrees that this Lease and all rights of Tenant hereunder are and shall be subject and subordinate to any ground or underlying lease which may now or hereafter be in effect regarding the Project or any component thereof, to any mortgage now or hereafter encumbering the Demised Premises or the Project or any component thereof, to all advances made or hereafter to be made upon the security of such mortgage, to all amendments, modifications, renewals, consolidations, extensions, and restatements of such mortgage, and to any replacements and substitutions for such mortgage. The terms of this provision shall be self-operative and no further instrument of subordination shall be required. Tenant, however, upon written request of any party in interest, shall execute within fifteen (15) days of notice of such request such instrument or certificates as may be reasonably required to carry out the intent hereof, whether said requirement is that of Landlord or any other party in interest, including, without limitation, any mortgagee. (b) If any mortgagee or lessee under a ground or underlying lease elects to have this Lease superior to its mortgage or lease and signifies its election in the instrument creating its lien or lease or by separate recorded instrument, then this Lease shall be superior to such mortgage or lease, as the case may be. The term "mortgage", as used in this Lease, includes any deed to secure debt, deed of trust or security deed and any other instrument creating a lien in connection with any other method of financing or refinancing. The term "mortgagee", as used in this Lease, refers to the holder(s) of the indebtedness secured by a mortgage. (c) In the event any proceedings are brought for the foreclosure of, or in the event of exercise of the power of sale under, any mortgage covering the Demised Premises or the Project, or in the event the interests of Landlord under this Lease shall be 22 26 transferred by reason of deed in lieu of foreclosure or other legal proceedings, or in the event of termination of any lease under which Landlord may hold title, Tenant shall, at the option of the transferee or purchaser at foreclosure or under power of sale, or the lessor of the Landlord upon such lease termination, as the case may be (sometimes hereinafter called "such person"), attorn to such person and shall recognize and be bound and obligated hereunder to such person as the Landlord under this Lease; provided, however, that no such person shall be (i) bound by any payment of Rent for more than one (1) month in advance, except prepayments in the nature of security for the performance by Tenant of its obligations under this Lease (and then only if such prepayments have been deposited with and are under the control of such person); (ii) bound by any amendment or modification of this Lease made without the express written consent of the mortgagee or lessor of the Landlord, as the case may be; (iii) obligated to cure any defaults under this Lease of any prior landlord (including Landlord); (iv) liable for any act or omission of any prior landlord (including Landlord); (v) subject to any offsets or defenses which Tenant might have against any prior landlord (including Landlord); or (vi) bound by any warranty or representation of any prior landlord (including Landlord) relating to work performed by any prior landlord (including Landlord) under this Lease. Tenant agrees to execute any reasonable attornment agreement not in conflict herewith requested by Landlord, the mortgagee or such person. Tenant's obligation to attorn to such person shall survive the exercise of any such power of sale, foreclosure or other proceeding. Tenant agrees that the institution of any suit, action or other proceeding by any mortgagee to realize on Landlord's interest in the Demised Premises or the Building pursuant to the powers granted to a mortgagee under its mortgage, shall not, by operation of law or otherwise, result in the cancellation or termination of the obligations of the Tenant hereunder. Landlord and Tenant agree that notwithstanding that this Lease is expressly subject and subordinate to any mortgages, any mortgagee, its successors and assigns, or other holder of a mortgage or of a note secured thereby, may sell the Demised Premises or the Building, in the manner provided in the mortgage and may, at the option of such mortgagee, its successors and assigns, or other holder of the mortgage or note secured thereby, make such sale of the Demised Premises or Building subject to this Lease. 28. Estoppel Certificates. Within fifteen (15) days after written request therefor by Landlord, Tenant agrees to execute and deliver to Landlord in recordable form an estoppel certificate, in a reasonable form, addressed to Landlord, any mortgagee or assignee of Landlord's interest in, or purchaser of, the Demised Premises or the Building or any part thereof, certifying (if such be the case) that this Lease is unmodified and is in full force and effect (and if there have been modifications, that the same is in full force and effect as modified and stating said modifications); that there are no defenses or offsets against the enforcement thereof or stating those claimed by Tenant; and stating the date to which Rent and other charges have been paid. Such certificate shall also include such other information as may reasonably be required by such mortgagee, proposed mortgagee, assignee, purchaser or Landlord. Any such certificate may be relied upon by Landlord, any mortgagee, proposed mortgagee, assignee, purchaser and any other party to whom such certificate is addressed. 23 27 29. No Estate. This Lease shall create the relationship of landlord and tenant only between Landlord and Tenant and no estate shall pass out of Landlord. Tenant shall have only an usufruct, not subject to levy and sale and not assignable in whole or in part by Tenant except as herein provided. 30. Cumulative Rights. All rights, powers and privileges conferred hereunder upon the parties hereto shall be cumulative to, but not restrictive of, or in lieu of those conferred by law. 31. Holding Over. If Tenant remains in possession after expiration or termination of the Lease Term with or without Landlord's written consent, Tenant shall become a tenant-at-sufferance, and there shall be no renewal of this Lease by operation of law. During the period of any such holding over, all provisions of this Lease shall be and remain in effect except that the monthly rental shall be one hundred fifty percent (150%) of the amount of Rent (including any adjustments as provided herein) payable for the last full calendar month of the Lease Term including renewals or extensions, for the first three (3) months of any such holdover, and then double the amount of such Rent thereafter. The inclusion of the preceding sentence in this Lease shall not be construed as Landlord's consent for Tenant to hold over. 32. Surrender of Premises. Except as provided in Article 14 herein, upon the expiration or other termination of this Lease, Tenant shall quit and surrender to Landlord the Demised Premises and every part thereof and all alterations, additions and improvements thereto, broom clean and in good condition and state of repair, reasonable wear and tear only excepted. If Tenant is not then in default, Tenant shall remove all personalty and equipment not attached to the Demised Premises which it has placed upon the Demised Premises, and Tenant shall restore the Demised Premises to the condition immediately preceding the time of placement thereof, less reasonable wear and tear. If Tenant shall fail or refuse to remove all of Tenant's effects, personalty and equipment from the Demised Premises upon the expiration or termination of this Lease for any cause whatsoever or upon the Tenant being dispossessed by process of law or otherwise, such effects, personalty and equipment shall be deemed conclusively to be abandoned and may be appropriated, sold, stored, destroyed or otherwise disposed of by Landlord without written notice to Tenant or any other party and without obligation to account for them. Tenant shall pay Landlord on demand any and all reasonable expenses incurred by Landlord in the removal of such property, including, without limitation, the cost of repairing any damage to the Building or Project caused by the removal of such property and storage charges (if Landlord elects to store such property), less any amounts actually received by Landlord in connection with the disposition of such property, which Landlord may dispose of in Landlord's sole and absolute discretion. The covenants and conditions of this Article 32 shall survive any expiration or termination of this Lease. 33. Notices. All notices required or permitted to be given hereunder shall be in writing and may be delivered in person to either party or may be sent by courier or by United States Mail, certified, return receipt requested, postage prepaid. Any such notice shall be deemed 24 28 received by the party to whom it was sent (i) in the case of personal delivery or courier delivery, on the date of delivery to such party, and (ii) in the case or certified mail, the date receipt is acknowledged on the return receipt for such notice or, if delivery is rejected or refused or the U.S. Postal Service is unable to deliver same because of changed address of which no notice was given pursuant hereto, the first date of such rejection, refusal or inability to deliver. All such notices shall be addressed to Landlord or Tenant at their respective address set forth hereinabove or at such other address as either party shall have theretofore given to the other by notice as herein provided. Tenant hereby designates and appoints as its agent to receive notice of all distraint proceedings and all other notices required under this Lease, to Charles I. Pollack, Esq., Silfen, Segal, Fryer & Shuster, P.C., 1050 Crown Pointe Parkway, Suite 410, Atlanta, GA 30338. 34. Damage or Theft of Personal Property. All personal property brought into Demised Premises by Tenant, or Tenant's employees or business visitors, shall be at the risk of Tenant only, and Landlord shall not be liable for theft thereof or any damage thereto occasioned by any act of co-tenants, occupants, invitees or other users of the Building or any other person. Landlord shall not at any time be liable for damage to any property in or upon the Demised Premises, which results from power surges or other deviations from the constancy of electrical service or from gas, smoke, water, rain, ice or snow which issues or leaks from or forms upon any part of the Building or from the pipes or plumbing work of the same, or from any other place whatsoever, except to the extent such liability would arise under Article 37 herein. 35. Eminent Domain. (a) If all or part of the Demised Premises shall be taken for any public or quasi-public use by virtue of the exercise of the power of eminent domain or by private purchase in lieu thereof, this Lease shall terminate as to the part so taken as of the date of taking, and, in the case of a partial taking, either Landlord or Tenant shall have the right to terminate this Lease as to the balance of the Demised Premises by written notice to the other within thirty (30) days after such date; provided, however, that a condition to the exercise by Tenant of such right to terminate shall be that the portion of the Demised Premises taken shall be of such extent and nature as substantially to handicap, impede or impair Tenant's use of the balance of the Demised Premises, as reasonably determined by Tenant. If title to so much of the Building is taken that a reasonable amount of reconstruction thereof will not in Landlord's sole discretion result in the Building being a practical improvement and reasonably suitable for use for the purpose for which it is designed, then this Lease shall terminate on the date that the condemning authority actually takes possession of the part so condemned or purchased. (b) If this Lease is terminated under the provisions of this Article 35, Rent shall be apportioned and adjusted as of the date of termination. Tenant shall have no claim against Landlord or against the condemning authority for the value of any leasehold estate or for the value of the unexpired Lease Term provided that the foregoing shall not preclude any claim that Tenant may have against the condemning authority for the 25 29 unamortized cost of leasehold improvements, to the extent the same were installed at Tenant's expense (and not with the proceeds of the Construction Allowance), or for loss of business, moving expenses or other consequential damages, in accordance with subparagraph (d) below. (c) If there is a partial taking of the Building and this Lease is not thereupon terminated under the provisions of this Article 35, then this Lease shall remain in full force and effect, and Landlord shall, within a reasonable time thereafter, repair or reconstruct the remaining portion of the Building to the extent necessary to make the same a complete architectural unit; provided that in complying with its obligations hereunder Landlord shall not be required to expend more than the net proceeds of the condemnation award which are paid to Landlord. Rent shall equitably abate during the period of reconstruction with respect to any portion of the Demised Premises which are rendered unsuitable for Tenant's business, as reasonably determined by Tenant. However, if all or any portion of the Building or the Project shall be taken, and such taking shall, in Tenant's reasonable judgment, substantially handicap, impede or impair Tenant's use of the Demised Premises, Tenant shall have the right to terminate this Lease by written notice to Landlord within thirty (30) days after the date of such taking or purchase. (d) All compensation awarded or paid to Landlord upon a total or partial taking of the Demised Premises or the Building shall belong to and be the property of Landlord without any participation by Tenant; provided, however, that should Landlord receive a lump award which expressly includes compensation for (i) Tenant's loss of business, (ii) damage to, and the cost of removal of, trade fixtures, furniture and other personal property belonging to Tenant, or (iii) the cost of any leasehold improvements installed at Tenant's expense, Landlord shall promptly deliver to Tenant the portion of the award which represents compensation for such items. Nothing herein shall be construed to preclude Tenant from prosecuting any claim directly against the condemning authority for loss of business, for damage to, and cost of removal of, trade fixtures, furniture and other personal property belonging to Tenant, and for the unamortized cost of leasehold improvements to the extent same were installed at Tenant's expense (and not with the proceeds of the Construction Allowance), provided, however, that no such claim shall diminish or adversely affect Landlord's award. In no event shall Tenant have or assert a claim for the value of any unexpired term of this Lease. Subject to the foregoing provisions of this subparagraph (d), Tenant hereby assigns to Landlord any and all of its right, title and interest in or to any compensation awarded or paid as a result of any such taking. (e) Notwithstanding anything to the contrary contained in this Article 35, if, during the Lease Term, the use or occupancy of any part of the Building or the Demised Premises shall be taken or appropriated temporarily for any public or quasi-public use under any governmental law, ordinance, or regulations, or by right of eminent domain, this Lease shall be and remain unaffected by such taking or appropriation and Tenant 26 30 shall continue to pay in full all Rent payable hereunder by Tenant during the Lease Term. In the event of any such temporary appropriation or taking, Tenant shall be entitled to receive that portion of any award which represents compensation for the loss of use or occupancy of the Demised Premises during the Lease Term, and Landlord shall be entitled to receive that portion of any award which represents the cost of restoration and compensation for the loss of use or occupancy of the Demised Premises after the end of the Lease Term. 36. Parties. The term "Landlord", as used in this Lease, shall include Landlord and its assigns and successors. It is hereby covenanted and agreed by Tenant that should Landlord's interest in the Demised Premises cease to exist for any reason during the Lease Term, then notwithstanding the happening of such event, this Lease nevertheless shall remain in full force and effect, and Tenant hereby agrees to attorn to the then owner of the Demised Premises. The term "Tenant" shall include Tenant and its heirs, legal representatives and successors, and shall also include Tenant's assignees and sublessees, if this Lease shall be validly assigned or the Demised Premises sublet for the balance of the Lease Term or any renewals or extensions thereof. In addition, Landlord and Tenant covenant and agree that Landlord's right to transfer or assign Landlord's interest in and to the Demised Premises, or any part or parts thereof, shall be unrestricted, and that in the event of any such transfer or assignment by Landlord which includes the Demised Premises, Landlord's obligations to Tenant hereunder shall cease and terminate, and Tenant shall look only and solely to Landlord's assignee or transferee for performance thereof. Notwithstanding the foregoing, Landlord shall not be released from such liability under any of its covenants and obligations contained in or derived from this Lease arising out of any acts, occurrences or omissions occurring after the consummation of such transfer or assignment unless the transferee or assignee of the Demised Premises shall assume obligations of Landlord under this Lease. Furthermore, in no event shall Landlord be released from any obligations or liabilities accruing prior to the date of such transfer or assignment. 37. Liability. Except to the extent covered by and actually funded under any of the insurance provided or to be provided under the provisions of Articles 17 and 18 hereof, Tenant hereby indemnifies Landlord from and agrees to hold Landlord harmless against, any and all liability, loss, cost, damage or expense, including, without limitation, court costs and reasonable attorneys' fees actually incurred, imposed on Landlord by any person whomsoever, caused by the gross negligence or willful misconduct of Tenant, or any of its partners, employees, contractors, servants, agents, subtenants, or legal representatives, acting within the scope of their authority. Except to the extent covered by and actually funded under any of the insurance provided or to be provided under the provisions of Articles 17 and 18 hereof, Landlord hereby indemnifies Tenant from, and agrees to hold Tenant harmless against, any and all liability, loss, cost, damage or expense, including without limitation, court costs and reasonable attorneys' fees, imposed on Tenant by any person whomsoever, caused by the gross negligence or willful misconduct of Landlord, or any of its partners, employees, contractors, servants, agents or legal representatives, acting within the scope of their authority. Notwithstanding any provision of this Lease to the contrary, in no event shall Landlord or Tenant have any liability to the other party for lost profits. The provisions of this Article 37 shall survive the expiration or any termination of this Lease. 27 31 38. Relocation of the Premises. INTENTIONALLY DELETED. 39. Force Majeure. In the event of strike, lockout, labor trouble, civil commotion, Act of God, or any other cause beyond a party's control (collectively "force majeure") resulting in the Landlord's inability to supply the services or perform the other obligations required of Landlord hereunder, this Lease shall not terminate and Tenant's obligation to pay Rent and all other charges and sums due and payable by Tenant shall not be affected or excused and Landlord shall not be considered to be in default under this Lease. If, as a result of force majeure, Tenant is delayed in performing any of its obligations under this Lease, and to pay Rent and all other charges and sums payable by Tenant hereunder, Tenant's performance shall be excused for a period equal to such delay and Tenant shall not during such period be considered to be in default under this Lease with respect to the obligation, performance of which has thus been delayed. 40. Landlord's Liability. Landlord shall have no personal liability with respect to any of the provisions of this Lease. If Landlord is in default with respect to its obligations under this Lease, Tenant shall look solely to the equity of Landlord in and to the Building and the Land described in Exhibit "A" hereto for satisfaction of Tenant's remedies, if any. It is expressly understood and agreed that Landlord's liability under the terms of this Lease shall in no event exceed the amount of its interest in and to said Land and Building. In no event shall any partner of Landlord nor any joint venturer in Landlord, nor any officer, director or shareholder of Landlord or any such partner or joint venturer of Landlord be personally liable with respect to any of the provisions of this Lease. 41. Landlord's Covenant of Quiet Enjoyment. Provided Tenant performs the terms, conditions and covenants of this Lease, and subject to the terms and provisions hereof, Landlord covenants and agrees to take all necessary steps to secure and to maintain for the benefit of Tenant the quiet and peaceful possession of the Demised Premises, for the Lease Term, without hindrance, claim or molestation by Landlord or any other person lawfully claiming under Landlord. 42. Security Deposit. INTENTIONALLY DELETED. 43. Hazardous Substances. Tenant hereby covenants and agrees that Tenant shall not cause or permit any "Hazardous Substances" (as hereinafter defined) to be generated, placed, held, stored, used, located or disposed of at the Project or any part thereof, except for Hazardous Substances as are commonly and legally used or stored as a consequence of using the Demised Premises for general office and administrative purposes, but only so long as the quantities thereof do not pose a threat to public health or to the environment or would necessitate a "response action", as that term is defined in CERCLA (as hereinafter defined), and so long as Tenant strictly complies or causes compliance with all applicable governmental rules and regulations concerning the use, storage, production, transportation and disposal of such Hazardous Substances. Promptly upon receipt of Landlord's request, Tenant shall submit to Landlord true and correct copies of any reports filed by Tenant with any governmental or quasi-governmental 28 32 authority regarding the generation, placement, storage, use, treatment or disposal of Hazardous Substances on or about the Demised Premises. For purposes of this Article 43, "Hazardous Substances" shall mean and include those elements or compounds which are contained in the list of Hazardous Substances adopted by the United States Environmental Protection Agency (EPA) or in any list of toxic pollutants designated by Congress or the EPA or which are defined as hazardous, toxic, pollutant, infectious or radioactive by any other federal, state or local statute, law, ordinance, code, rule, regulation, order or decree regulating, relating to or imposing liability (including, without limitation, strict liability) or standards of conduct concerning, any hazardous, toxic or dangerous waste, substance or material, as now or at any time hereinafter in effect (collectively "Environmental Laws"). Tenant hereby agrees to indemnify Landlord and hold Landlord harmless from and against any and all losses, liabilities, including strict liability, damages, injuries, expenses, including reasonable attorneys' fees, costs of settlement or judgment and claims of any and every kind whatsoever paid, incurred or suffered by, or asserted against, Landlord by any person, entity or governmental agency for, with respect to, or as a direct or indirect result of, the presence in, or the escape, leakage, spillage, discharge, emission or release from, the Demised Premises of any Hazardous Substances (including, without limitation, any losses, liabilities, including strict liability, damages, injuries, expenses, including reasonable attorneys' fees, costs of any settlement or judgment or claims asserted or arising under the Comprehensive Environmental Response, Compensation and Liability Act ["CERCLA"], any so-called federal, state or local "Superfund" or "Superlien" laws or any other Environmental Law); provided, however, that the foregoing indemnity is limited to matters arising solely from Tenant's violation of the covenant contained in this Article. The obligations of Tenant under this Article shall survive any expiration or termination of this Lease. 44. Submission of Lease. The submission of this Lease for examination does not constitute an offer to lease and this Lease shall be effective only upon execution hereof by Landlord and Tenant. 45. Severability. If any clause or provision of this Lease is illegal, invalid or unenforceable under present or future laws, the remainder of this Lease shall not be affected thereby, and in lieu of each clause or provision of this Lease which is illegal, invalid or unenforceable, there shall be added as a part of this Lease a clause or provision as nearly identical to the said clause or provision as may be legal, valid and enforceable. 46. Entire Agreement. This Lease contains the entire agreement of the parties and no representations, inducements, promises or agreements, oral or otherwise, between the parties not embodied herein shall be of any force or effect. No failure of Landlord to exercise any power given Landlord hereunder, or to insist upon strict compliance by Tenant with any obligation of Tenant hereunder, and no custom or practice of the parties at variance with the terms hereof, shall constitute a waiver of Landlord's right to demand exact compliance with the terms hereof. This Lease may not be altered, waived, amended or extended except by an instrument in writing signed by Landlord and Tenant. This Lease is not in recordable form, and Tenant agrees not to record or cause to be recorded this Lease or any short form or memorandum thereof. 29 33 47. Headings. The use of headings herein is solely for the convenience of indexing the various paragraphs hereof and shall in no event be considered in construing or interpreting any provision of this Lease. 48. Broker. CPI HAS REPRESENTED LANDLORD IN THIS TRANSACTION, AND CARTER & ASSOCIATES HAS REPRESENTED TENANT IN THIS TRANSACTION. BROKER(S) (AS DEFINED IN ARTICLE 1[O]) IS (ARE) ENTITLED TO A LEASING COMMISSION FROM LANDLORD BY VIRTUE OF THIS LEASE, WHICH LEASING COMMISSION SHALL BE PAID BY LANDLORD TO BROKER(S) IN ACCORDANCE WITH THE TERMS OF A SEPARATE AGREEMENT BETWEEN LANDLORD AND BROKER(S). Tenant hereby authorizes Broker(s) and Landlord to identify Tenant as a tenant of the Building and to state the amount of space leased by Tenant in advertisements and promotional materials relating to the Building. Tenant represents and warrants to Landlord that (except with respect to any Broker[s] identified in Article 1[o] hereinabove) no broker, agent, commission salesperson, or other person has represented Tenant in the negotiations for and procurement of this Lease and of the Demised Premises and that (except with respect to any Broker[s] identified in Article 1[o] hereinabove) no commissions, fees, or compensation of any kind are due and payable in connection herewith to any broker, agent, commission salesperson, or other person as a result of any act or agreement of Tenant. Tenant agrees to indemnify and hold Landlord harmless from all loss, liability, damage, claim, judgment, cost or expense (including reasonable attorneys' fees and court costs) suffered or incurred by Landlord as a result of a breach by Tenant of the representation and warranty contained in the immediately preceding sentence or as a result of Tenant's failure to pay commissions, fees, or compensation due to any broker who represented Tenant, whether or not disclosed, or as a result of any claim for any fee, commission or similar compensation with respect to this Lease made by any broker, agent or finder (other than the Broker[s] identified in Article 1[o] hereinabove) claiming to have dealt with Tenant, whether or not such claim is meritorious. Tenant shall cause any agent or broker representing Tenant to execute a lien waiver to and for the benefit of Landlord, waiving any and all lien rights with respect to the Building and Land which such agent or broker has or might have under Georgia law. 49. Governing Law. The laws of the State of Georgia shall govern the validity, performance and enforcement of this Lease. 50. Special Stipulations. The special stipulations attached hereto as Exhibit "G" are hereby incorporated herein by this reference as though fully set forth (if none, so state). 51. Authority. If Tenant executes this Lease as a corporation, each of the persons executing this Lease on behalf of Tenant does hereby personally represent and warrant that Tenant is a duly incorporated or a duly qualified (if a foreign corporation) corporation and is fully authorized and qualified to do business in the State in which the Demised Premises are located, that the corporation has full right and authority to enter into this Lease, and that each person signing on behalf of the corporation is an officer of the corporation and is authorized to sign on behalf of the corporation. If Tenant signs as a partnership, joint venture, or sole 30 34 proprietorship or other business entity (each being herein called "Entity"), each of the persons executing on behalf of Tenant does hereby covenant and warrant that Tenant is a duly authorized and existing Entity, that Tenant has full right and authority to enter into this Lease, that all persons executing this Lease on behalf of the Entity are authorized to do so on behalf of the Entity, and that such execution is fully binding upon the Entity and its partners, joint venturers, or principal, as the case may be. Upon the request of Landlord, Tenant shall deliver to Landlord reasonable documentation satisfactory to Landlord evidencing Tenant's compliance with this Article, and Tenant agrees to promptly execute all necessary and reasonable applications or documents as reasonably requested by Landlord, required by the jurisdiction in which the Demised Premises is located, to permit the issuance of necessary permits and certificates for Tenant's use and occupancy of the Demised Premises. 52. Financial Statements. Upon Landlord's written request therefor, but not more often than once per year, Tenant shall promptly furnish to Landlord a financial statement with respect to Tenant for its most recent fiscal year prepared in accordance with generally accepted accounting principles and certified to be true and correct by Tenant, which statement Landlord agrees to keep confidential and not use except in connection with proposed sale or loan transactions. 53. Joint and Several Liability. INTENTIONALLY DELETED. 54. ERISA Compliance. Tenant represents to Landlord that Tenant is not an "employee benefit plan", a "plan" or a "governmental plan" as defined below or an entity whose assets constitute "plan assets" as defined below. The term "employee benefit plan" means an "employee benefit plan" as defined in Section 3(3) of the Employment Retirement Income Security Act of 1974, as amended ("ERISA"), which is subject to Title I of ERISA. The term "plan" means a "plan" as defined in Section 4975(e)(i) of the Internal Revenue Code of 1986, as amended. The term "governmental plan" means a "governmental plan" within the meaning of Section 3(32) of ERISA. The term "plan assets" means "plan assets" of one or more plans within the meaning of 2a C.F.R. 2510.3-101. IN WITNESS WHEREOF, the parties have hereunto set their hands and seals as of the day, month and year first above written. "LANDLORD": WILDWOOD ASSOCIATES, a Georgia general partnership By: Cousins Properties Incorporated, Managing General Partner By: /s/ ----------------------------- 31 35 Its: Vice President (CORPORATE SEAL) "TENANT": THE PROFIT RECOVERY GROUP INTERNATIONAL I, INC. By: /s/ -------------------------------------- Its: Senior Vice President and Chief Financial Officer Attest: /s/ -------------------------------------- Its: Secretary (CORPORATE SEAL) 32 36 RULES AND REGULATIONS 1. No sign, picture, advertisement or notice visible from the exterior of the Demised Premises shall be installed, affixed, inscribed, painted or otherwise displayed by Tenant on any part of the Demised Premises or the Building unless the same is first approved by Landlord. Any such sign, picture, advertisement or notice approved by Landlord shall be painted or installed for Tenant at Tenant's cost by Landlord or by a party approved by Landlord, which approval shall not be unreasonably withheld, conditioned or delayed. No awnings, curtains, blinds, shades or screens shall be attached to or hung in, or used in connection with any window or door of the Demised Premises without the prior consent of the Landlord, which approval shall not be unreasonably withheld, conditioned or delayed, including approval by the Landlord of the quality, type, design, color and manner of attachment. In the event of any breach of the foregoing, Landlord may remove the applicable item, and Tenant agrees to pay the cost and expense of such removal. 2. Tenant agrees that its use of electrical current shall never exceed the capacity of existing feeders, risers or wiring installation. 3. The Demised Premises shall not be used for storage of merchandise held for sale to the general public. Tenant shall not do or permit to be done in or about the Demised Premises or Building anything which shall increase the rate of insurance on said Building or obstruct or interfere with the rights of other lessees of Landlord or annoy them in any way, including, but not limited to, using any musical instrument, making loud or unseemly noises, or singing, etc. The Demised Premises shall not be used for sleeping or lodging. No cooking or related activities shall be done or permitted by Tenant in the Demised Premises except with permission of Landlord. Tenant will be permitted to use for its own employees within the Demised Premises a small microwave oven and Underwriters' Laboratory approved equipment for brewing coffee, tea, hot chocolate and similar beverages, provided that such use is in accordance with all applicable federal, state, county and city laws, codes, ordinances, rules and regulations, and provided that such use shall not result in the emission of odors from the Demised Premises into the common area of the Building. No vending machines of any kind will be installed, permitted or used on any part of the Demised Premises without the prior consent of Landlord, which approval shall not be unreasonably withheld, conditioned or delayed. No part of said Building or Demised Premises shall be used for gambling, immoral or other unlawful purposes. No intoxicating beverage shall be sold in said Building or Demised Premises without prior written consent of the Landlord. No area outside of the Demised Premises shall be used for storage purposes at any time. 4. No birds or animals of any kind shall be brought into the Building (other than trained assist dogs required to be used by the visually impaired). No bicycles, motorcycles or other motorized vehicles shall be brought into the Building. 37 5. The sidewalks, entrances, passages, corridors, halls, elevators, and stairways in the Building shall not be obstructed by Tenant or used for any purposes other than those for which same were intended as ingress and egress. No windows, floors or skylights that reflect or admit light into the Building shall be covered or obstructed by Tenant, and no articles shall be placed on the window sills of the Building. Toilets, wash basins and sinks shall not be used for any purpose other than those for which they were constructed, and no sweeping, rubbish, or other obstructing or improper substances shall be thrown therein. Any damage resulting to them, or to heating apparatus, from misuse by Tenant or its employees, shall be borne by Tenant. 6. Only one key for each office in the Demised Premises will be furnished Tenant without charge. Landlord may make a reasonable charge for any additional keys. No additional lock, latch or bolt of any kind shall be placed upon any door nor shall any changes be made in existing locks without written consent of Landlord and Tenant shall in each such case furnish Landlord with a key for any such lock. Notwithstanding anything to the contrary contained herein, Landlord's use of any keys or electronic access pass to the Demised Premises shall be coordinated with Tenant (except in the case of emergency), and Landlord shall use reasonable efforts to secure such keys or other access devices to prevent unauthorized use of same. At the termination of the Lease, Tenant shall return to Landlord all keys furnished to Tenant by Landlord, or otherwise procured by Tenant, and in the event of loss of any keys so furnished, Tenant shall pay to Landlord the cost thereof. 7. Landlord shall have the right to prescribe the weight, position and manner of installation of heavy articles such as safes, machines and other equipment brought into the Building. Tenant shall not allow the building structure within the Demised Premises, nor shall Tenant cause the elevators of the Building, to be loaded beyond rated capacities. No safes, furniture, boxes, large parcels or other kind of freight shall be taken to or from the Demised Premises or allowed in any elevator, hall or corridor except at times allowed by Landlord. Tenant shall make prior arrangements with Landlord for use of freight elevator for the purpose of transporting such articles and such articles may be taken in or out of said Building only between or during such hours as may be arranged with and designated by Landlord. The persons employed to move the same must be approved by Landlord, which approval shall not be unreasonably withheld, conditioned or delayed. Landlord reserves the right to inspect and, where deemed appropriate by Landlord, to open all freight coming into the Building and to exclude from entering the Building all freight which is in violation of any of these Rules and Regulations and all freight as to which inspection is not permitted. No hand trucks shall be used in passenger elevators. All hand trucks used by Tenant or its service providers for the delivery or receipt of any freight shall be equipped with rubber tires. 8. Tenant shall not cause or permit any gases, liquids or odors to be produced upon or permeate from the Demised Premises, and no flammable, combustible or explosive fluid, 2 38 chemical or substance shall be brought into the Building. Smoking shall not be permitted in any common areas of the Building or the Project or in any premises within the Building; provided, however, smoking shall be permitted in any premises of the Building where the tenant of such premises makes arrangements with Landlord for the installation at such tenant's cost of filtration or other equipment which in Landlord's judgment is adequate to prevent smoke from leaving such premises and entering the common areas or other premises of the Building. Until such approved equipment is installed, smoking shall not be permitted in a tenant's premises. If Tenant shall assert that the air quality in the Demised Premises is unsatisfactory or if Tenant shall request any air quality testing within the Demised Premises, Landlord may elect to cause its consultant to test the air quality within the Demised Premises and to issue a report regarding same. If the report from such tests indicates that the air quality within the Demised Premises is comparable to the air quality of other first-class office buildings in the market area of the Building, or if the report from such tests indicates that the air quality does not meet such standard as a result of the activities caused or permitted by Tenant in the Demised Premises, Tenant shall reimburse Landlord for all costs of the applicable tests and report. Additionally, in the event Tenant shall cause or permit any activity which shall adversely affect the air quality in the Demised Premises, in the common area of the Building or in any premises within the Building, Tenant shall be responsible for all costs of remedying same. 9. Every person, including Tenant, its employees and visitors, entering and leaving the Building may be questioned by a watchman as to that person's business therein and may be required to sign such person's name on a form provided by Landlord for registering such person; provided that, except for emergencies or other extraordinary circumstances, such procedures shall not be required between the hours of 7:00 a.m. and 7:00 p.m., on all days except Saturdays, Sundays and Holidays. Landlord may also implement a card access security system to control access to the Building during such other times. Landlord shall not be liable for excluding any person from the Building during such other times, or for admission of any person to the Building at any time, or for damages or loss for theft resulting therefrom to any person, including Tenant. 10. Unless agreed to in writing by Landlord, Tenant shall not employ any person other than Landlord's contractors for the purpose of cleaning and taking care of the Demised Premises, excluding those vendors used by Tenant for security purposes. Cleaning service will not be furnished on nights when rooms are occupied after 6:30 p.m., unless, by agreement in writing, service is extended to a later hour for specifically designated rooms. Landlord shall not be responsible for any loss, theft, mysterious disappearance of or damage to, any property, however occurring. Only persons authorized by the Landlord may furnish ice, drinking water, towels, and other similar services within the Building and only at hours and under regulations fixed by Landlord. 11. No connection shall be made to the electric wires or gas or electric fixtures, without the consent in writing on each occasion of Landlord. All glass, locks and trimmings in or upon the doors and windows of the Demised Premises shall be kept whole and in good 3 39 repair. Tenant shall not injure, overload or deface the Building, the woodwork or the walls of the Demised Premises, nor permit upon the Demised Premises any noisome, noxious, noisy or offensive business. 12. If Tenant requires wiring for a bell or buzzer system, such wiring shall be done by the electrician of the Landlord only, and no outside wiring men shall be allowed to do work of this kind unless by the written permission of Landlord or its representatives, which permission shall not be unreasonably withheld, conditioned or delayed. If telegraph or telephonic service is desired, the wiring for same shall be approved by Landlord, and no boring or cutting for wiring shall be done unless approved by Landlord or its representatives, as stated. The electric current shall not be used for power or heating unless written permission to do so shall first have been obtained from Landlord or its representatives in writing, and at an agreed cost to Tenant. 13. Tenant and its employees and invitees shall observe and obey all parking and traffic regulations as imposed by Landlord. All vehicles shall be parked only in areas designated therefor by Landlord. 14. Canvassing, peddling, soliciting and distribution of handbills or any other written materials in the Building are prohibited, and Tenant shall cooperate to prevent the same. 15. Tenant agrees to participate in the waste recycling programs implemented by Landlord for the Building, including any programs and procedures for recycling writing paper, computer paper, shipping paper, boxes, newspapers and magazines and aluminum cans; provided, however, Tenant shall not be obligated to participate in any such program which, in Tenant's reasonable judgment, compromises its internal security, or is necessary to prevent disclosure of its trade secrets or other proprietary information. If Landlord elects to provide collection receptacles for recyclable paper and/or recyclable aluminum cans in the Demised Premises, Tenant shall designate an appropriate place within the Demised Premises for placement thereof, and Tenant shall cause its employees to place their recyclable papers and/or cans into the applicable such receptacles on a daily basis. 16. Any special work or services requested by Tenant to be provided by Landlord shall be provided by Landlord only upon request received at the Project management office. Building personnel shall not perform any work or provide any services outside of their regular duties unless special instructions have been issued from Landlord or its managing agent. 17. Landlord shall have the right to change the name of the Building and to change the street address of the Building, provided that in the case of a change in the street address, Landlord shall give Tenant not less than 180 days' prior notice of the change, unless the change is required by governmental authority. 4 40 18. The directory of the Building will be provided for the display of the name and location of the tenants. Any additional name which Tenant shall desire to place upon said directory must first be approved by Landlord, and if so approved, a reasonable charge will be made therefor. 19. Landlord may waive any one or more of these Rules and Regulations for the benefit of any particular lessee, but no such waiver by Landlord shall be construed as a waiver of such Rules and Regulations in favor of any other lessee, nor prevent Landlord from thereafter enforcing any such Rules and Regulations against any or all of the other lessees of the Building. 20. These Rules and Regulations are supplemental to, and shall not be construed to in any way modify or amend, in whole or in part, the terms, covenants, agreements and conditions of any lease of any premises in the Building. 21. Landlord reserves the right to make such other and reasonable uniform, non-discriminatory Rules and Regulations as in its judgment may from time to time be needed for the safety, care and cleanliness of the Building, the Land and Wildwood Office Park, and for the preservation of good order therein. 5 41 EXHIBIT "A" Legal Description of Land The following is a description of a tract of land lying and being in Land Lots 941, 985 and 986, 17th district, 2nd Section, Cobb County, Georgia, and being more particularly described as follows: To find the TRUE POINT OF BEGINNING, begin at the corner common to Land Lots 941, 940, 987, and 986 of the 17th District, 2nd Section, Cobb County, Georgia, and running thence along the north land lot line of said Land Lot 941, (being the south land lot line of said Land Lot 940) North 89 degrees 36 minutes West, a distance of 527.94 feet to a point on said common land lot line; thence leaving said common land lot line dividing said Land Lots 941 and 940 and running South 11 degrees 36 minutes East, a distance of 730.0 feet to a point located on the northwesterly right-of-way line of Windy Hill Road; thence South 07 degrees 01 minutes 30 seconds East, a distance of 119.65 feet to a point on the southwesterly right-of-way line of said Windy Hill Road; thence, continuing along said right-of-way South 88 degrees 33 minutes 25 seconds East, a distance of 86.59 feet to a point; thence along an arc of curve to the left (which has a radius of 525.00 feet and a chord distance of 305.17 feet along a chord bearing of North 74 degrees 32 minutes 48 seconds East), an arc distance of 309.64 feet to a point, said point being THE TRUE POINT OF BEGINNING. Thence, continuing along said Windy Hill Road right-of-way (having a variable right-of-way width) along an arc of curve to the left (which has a radius of 525.00 feet and a chord distance of 218.51 feet along a chord bearing of North 45 degrees 38 minutes 22 seconds East), an arc distance of 220.11 feet to a point; thence, North 33 degrees 37 minutes 44 seconds East, a distance of 152.45 feet to a point; thence, North 50 degrees 57 minutes East, a distance of 134.42 feet to a point; thence, leaving said right-of-way of Windy Hill Road South 62 degrees 57 minutes East, a distance of 735.00 feet to a point; thence, South 44 degrees 03 minutes West, a distance of 295.00 feet to a point; thence, South 09 degrees 03 minutes West, a distance of 395.00 feet to a point; thence, South 53 degrees 57 minutes East, a distance of 210.00 feet to a point; thence, South 42 degrees 28 minutes East, a distance of 100.00 feet to a point; thence, South 03 degrees 11 minutes 06 seconds West, a distance of 101.72 feet to a point on the north right-of-way of Windy Ridge Parkway (having a variable right-of-way width); thence, continuing along said right-of-way along an arc of curve to the right (which curve has a radius of 301.00 feet and a chord distance of 92.15 feet along a chord bearing of North 70 degrees 52 minutes 19 seconds West) an arc distance of 92.52 feet to a point; thence, North 62 degrees 04 minutes West, a distance of 92.52 feet to a point; thence, North 62 degrees 04 minutes West, a distance of 74.71 feet to a point on the intersection of said right-of-way with the northeast right-of-way of Windy Ridge Parkway extension (having a varying right-of-way width); thence, continuing along said right-of-way along an arc of curve to the right (which has a radius of 200.00 feet and a chord distance of 158.69 feet along a chord bearing of North 38 degrees 41 minutes 37 seconds West), an arc distance of 163.17 feet to a point; thence, North 15 degrees 19 minutes 15 seconds West, a distance of 67.75 feet to a point; thence, along an arc of curve to the left (which has a radius of 290.00 feet and a chord distance of 266.21 feet along a chord bearing of North 42 degrees 38 minutes 33 second West), an arc distance of 276.58 feet to a point; thence North 69 degrees 57 42 minutes 51 seconds West, a distance of 261.61 feet to a point; thence, along an arc of curve to the right (which has a radius of 425.00 feet and a chord distance of 331.65 feet along a chord bearing of North 46 degrees 59 minutes 56 seconds West), an arc distance of 340.70 feet to a point; thence North 24 degrees 02 minutes West, a distance of 83.26 feet to a point; thence, North 16 degrees 48 minutes 29 seconds East, a distance of 30.08 feet to a point on the southwesterly right-of-way of Windy Hill Road, and THE TRUE POINT OF BEGINNING. Said tract containing 536.631 square feet or 12.319 acres more or less. 2 43 EXHIBIT "B" Floor Plan 44 EXHIBIT "C" SUPPLEMENTAL NOTICE Re: Lease dated as of _____, 1998, by and between WILDWOOD ASSOCIATES, as Landlord, and THE PROFIT RECOVERY GROUP INTERNATIONAL I, INC., as Tenant. Dear Sirs: Pursuant to Article 3 of the captioned Lease, please be advised as follows: 1. The Rental Commencement Date is the ____ day of _______, 199__, and the expiration date of the Lease Term is the _____ day of ________, ____, subject however to the terms and provisions of the Lease. 2. Terms denoted herein by initial capitalization shall have the meanings ascribed thereto in the Lease. "LANDLORD": WILDWOOD ASSOCIATES, a Georgia general partnership By: Cousins Properties Incorporated, Managing General Partner By: _______________________________ Its: _______________________________ (CORPORATE SEAL) 45 EXHIBIT "D" LANDLORD'S CONSTRUCTION 1. Landlord and Tenant, at Tenant's sole cost and expense, shall cause to be prepared by Tenant's architect and/or designer and/or engineer the following: (a) Schematic partition plans and layout based on Tenant's requirements. (b) Complete, finished, detailed architectural drawings and specifications for Tenant's partition layout, reflected ceiling and other installations for the work to be done by Landlord under Paragraphs 2 and 3 hereof, which shall be prepared by Tenant's designer or architect. (c) Complete mechanical and electrical plans and specifications where necessary for installation of air conditioning system and ductwork, heating, electrical, plumbing and other mechanical plans for the work to be done by Landlord under Paragraphs 2 and 3 hereof, which shall be prepared by Tenant's architect and/or designer. (d) Any subsequent modifications to the drawings and specifications requested by Tenant. All such plans and specifications are expressly subject to Landlord's approval and shall comply with all applicable laws, rules and regulations. Tenant covenants and agrees to cause said plans and specifications to be delivered to Landlord on or before January 30, 1998, and, upon approval by Landlord, Landlord will cause said plans to be filed at Tenant's sole cost and expense with the appropriate governmental agencies in such form (building notice, alteration or other form) as Landlord may direct. The Demised Premises shall be deemed "ready for occupancy" (as that term is used in Article 1[k] of this Lease) when Landlord's construction, as provided in Paragraphs 2 and 3 hereof, is substantially completed. In any dispute as to when construction has been substantially completed, the determination of Landlord's architect or designer shall be final and binding upon the parties. 2. Landlord agrees, at its sole expense and without charge to Tenant, to supply and/or install the following work in the Demised Premises (the following describes the scope of the "building standard" work which will be provided by Landlord at its expense in accordance with the specifications for the Building): 46 (a) Air conditioning An air conditioning system, including diffusers and returns, capable of maintaining 78 degrees F when outside temperature is 92 degrees F (summer) and 72 degrees F when outside temperature is 17 degrees F (winter). Air conditioning design basis is 3.25 watts per usable square foot lighting and power load, based upon an occupancy rate of one (1) person per 100 rentable square feet and venetian blinds drawn with slats tilted against the sun at not less than 45 degrees from horizontal. Landlord will provide the building standard number of thermostats, which number varies depending on the location of the Demised Premises on the applicable floor of the Building. (b) Electrical (1) One (1) recessed (or surface mounted if required by building conditions) 3 tube fluorescent parabolic light fixture 2' x 4' (or 2' x 2' if required by building conditions) for each 90 square feet of rentable area, stacked on the floor. All fixtures must conform in layout and spacing to the ceiling modules and shall run in the same direction. (2) An electrical distribution system above the ceiling for power (120/208 volts) at a capacity of 1.54 watts per square foot of rentable space circuited at 8 outlets per 15 AMP circuit. (c) Ceiling (1) Acoustical ceiling tile stacked on the floor. (2) A mechanically suspended ceiling support system designed to utilize 2' x 2' lay-in acoustical tile throughout the office area. (d) Sprinkler system A complete sprinkler system including chrome semi-recessed sprinkler heads at a rate of approximately one (1) sprinkler head per 225 square feet of rentable area installed in accordance with Landlord's standard grid pattern. (e) The inside of the Building's perimeter walls which shall be sheetrocked, taped and bedded only, and the corridor side of the walls of any corridors which are used in common by Tenant and other tenants and occupants of the Building. (f) Venetian blinds on all exterior windows in accordance with Landlord's standard specifications. 2 47 (g) Incorporation of Tenant's name into the main building directory. (h) Install an exterior fire door from the portion of the Demised Premises located on the first floor, together with such exterior stairways as are necessitated thereby. 3. Tenant shall, in conformance with working drawings and specifications, prepared by Tenant's planners and approved by Landlord, which approval shall not be unreasonably withheld, conditioned or delayed, provide and install the following work: (a) Air conditioning. Any modifications to or deviations from building standard air conditioning system including but not limited to capacity beyond design standards, provisions for supplying air conditioning beyond Building Operating Hours as stated in this Lease and/or providing nonstandard equipment such as acoustical dampers, special diffusers and returns, direct equipment connections or special thermostats. (b) Electrical. (1) All light switches. (2) All electrical outlets. (3) All telephone outlets. (4) All nonstandard light fixtures and any increase to the number of building standard light fixtures and related circuitry, panel boards, etc. (5) Any provision for supplying power to the Demised Premises beyond the watts per rentable square foot specified in the Building Standard Services or circuiting at less than 8 outlets per 15 AMP circuit, including necessary metering to measure excess electrical usage. (6) All exit light fixtures and exit signs. (c) Ceiling construction. Installation of ceiling tiles and any modification to or deviation from the building standard ceiling construction. (d) Sprinkler system. Any modification to or deviation from the building standard sprinkler system including relocations of or additions to the number of sprinkler heads provided or the provision of a non-standard sprinkler head. (e) All plumbing work for facilities such as toilets and sinks in the Demised Premises. 3 48 (f) All partitions including finish, the tenant side of the common corridor walls which are within the Demised Premises, including the finish thereof, and the finish to the inside of the Building's perimeter walls. (g) All doors and frames. (h) All hardware. (i) All floor finish including base. (j) Any special construction as shown on the drawings and specifications approved by Landlord. (k) Tenant's identification sign conforming to Landlord's standards, at entrances to Demised Premises. (l) All fire alarm devices, including speakers, required within the Demised Premises by applicable building code. 4. Tenant shall pay to a tenant coordinator designated by Landlord, a fee for construction coordination in an amount equal to 1% of the cost of the work described in Paragraphs 1 and 3 hereof. The failure to pay such fee promptly after being billed therefor shall constitute a default under this Lease. 5. Tenant shall not make any alterations, additions or improvements in or to the Demised Premises without Landlord's prior written consent, which consent shall not be unreasonably withheld. Except for construction as provided in Paragraphs 2 and 3 hereof, the Demised Premises are delivered to Tenant "as is" without any warranty or representation whatsoever, except for those warranties provided by the contractor performing the work or the manufacturer supplying any goods or materials used in the work. Any alterations, additions or improvements requested by Tenant and approved by Landlord shall be performed (i) by Landlord's contractor or another contractor approved by Landlord, which approval shall not be unreasonably withheld, conditioned or delayed, (ii) in a good and workmanlike manner, and (iii) in accordance with all applicable codes, laws, ordinances, rules and regulations of governmental authorities having jurisdiction over the Demised Premises. 6. Any approval by Landlord of or consent by Landlord to any plans, specifications or other items to be submitted to and/or reviewed by Landlord pursuant to this Lease shall be deemed to be strictly limited to an acknowledgement of approval or consent by Landlord thereto and, whether or not the work is performed by Landlord or by Tenant's contractor, such approval or consent shall not constitute the assumption by Landlord of any responsibility for the accuracy, sufficiency or feasibility of any plans, specifications or other such items and shall not imply any acknowledgement, representation or warranty by 4 49 Landlord that the design is safe, feasible, structurally sound or will comply with any legal or governmental requirements, and Tenant shall be responsible for all of the same. 7. The Construction Allowance shall be funded in accordance with the terms of Attachment "1" to this Exhibit "D". 8. Landlord will require a high grade, first-class operation to be conducted in the Demised Premises. Tenant's work shall be performed in a first-class manner, using new and first-class, quality materials. Tenant's work shall be constructed and installed in accordance with all applicable laws, ordinances, codes and rules and regulations of governmental authorities. Tenant shall promptly correct any of Tenant's work which is not in conformance therewith. 9. Tenant's contract parties and subcontractors shall be subject to administrative supervisions by Landlord in their use of the Building and their relationship with Contractor, or contractors of other tenants in the Building. The entry by Tenant and/or its contract parties into the Demised Premises for the performance of Tenant's work shall be subject to all of the terms and conditions of the Lease except the payment of Rent. 10. Tenant's work shall be coordinated and conducted to maintain harmonious labor relations and not (a) to interfere unreasonably with or to delay the completion of any work being performed by any other tenant in the Building; or (b) to interfere with or disrupt the use and peaceful enjoyment of other retail or office tenants in the Building. 11. Tenant and Tenant's contract parties shall perform their work, including any storage for construction purposes, within the Demised Premises only. Tenant shall be responsible for removal, as needed, from the Demised Premises and the Building of all trash, rubbish, and surplus materials resulting from any work being performed in the Demised Premises. Tenant shall exercise extreme care and diligence in removing such trash, rubbish, or surplus materials from the Demised Premises to avoid littering, marring, or damaging any portion of the Building. If any such trash, rubbish, or surplus materials are not promptly removed from the Building in accordance with the provisions hereof or if any portion of the Building is littered, marred, or damaged, Landlord may cause same to be removed or repaired, as the case may be, at Tenant's cost and expense. If Landlord incurs any costs or expenses in performing the above, Tenant shall pay Landlord the amount of any such cost and expenses promptly upon demand therefor. 12. Tenant shall provide or cause to be provided with respect to all such work to be performed by Tenant with respect to the Demised Premises the following types of insurance: (i) At all times during the period between the commencement of such work and the date such work is completed and Tenant commences occupancy of the Demised Premises, Tenant shall maintain or cause to be maintained, casualty insurance in "Builders Risk" form, covering Landlord, Landlord's agents, architects, and Tenant and Tenant's contractors and subcontractors, 5 50 as their interest may appear, against loss or damage by fire, vandalism, and malicious mischief and other such risks as are customarily covered by the so-called "broad form extended coverage endorsement" upon all the work in place and all materials stored at the Demised Premises and all materials, equipment and supplies of all kinds incident to the work and builder's machinery, tools and equipment while on the Demised Premises, or when adjacent thereto, all on a completed value basis to the full insurable value at all times. Said Builder's Risk insurance shall contain an express waiver of any right of subrogation by the insurer against Landlord, its agents, employees and contractors; (ii) Liability insurance as required by the Lease; and (iii) Statutory Workers' Compensation as required by the State of Georgia or the local municipality having jurisdiction. All insurance policies procured and maintained pursuant to this Paragraph shall name Landlord as additional insured, shall be carried with companies licensed to do business in the State of Georgia reasonably satisfactory to Landlord and shall be non-cancelable except after twenty (20) days written notice to Landlord. Such policies or duly executed certificates of insurance with respect thereto shall be delivered to Landlord before the commencement of the work, and renewals thereof as required shall be delivered to Landlord at least thirty (30) days prior to the expiration of each respective policy term. 13. Tenant shall indemnify and hold harmless Landlord, and any of Landlord's contractors, agents and employees from and against any and all losses, damages, costs (including costs of suits and attorneys' fees), liabilities, or causes of action arising out of or relating to the performance of the work to be performed by Tenant with respect to the Demised Premises, including but not limited to mechanics', materialmen's or other liens or claims (and all costs or expenses associated therewith) asserted, filed or arising out of any such work. All materialmen, contractors, artisans, mechanics, laborers and other parties hereafter contracting with Tenant or Tenant's contractor for the furnishing of any labor, services, materials, suppliers or equipment with respect to the work are hereby charged with notice that they must look solely to Tenant for payment of same. Without limiting the generality of the foregoing, Tenant shall repair or cause to he repaired at its expense all damage caused by Tenant's contractor, its subcontractors or their employees acting within the scope of their employment or agency. Tenant shall promptly pay to Landlord, upon notice thereof from Landlord, any costs incurred by Landlord to repair any such damage caused by Tenant's contractor or any costs incurred by Landlord in requiring the Tenant's contractor's compliance with any Building rules. In connection with any and all claims against Landlord or any of its agents, contractors or employees by any employee of Tenant's contractor, any subcontractor, anyone directly or indirectly employed by any of them, or anyone for whose acts Tenant's contractor or any subcontractor may he liable, the indemnification obligations of Tenant's contractor and any subcontractor under the agreements hereinabove referred to in this subparagraph shall not he limited in any way by any limitation on the amount or type of damages, compensation or benefits payable by or 6 51 for Tenant's contractor or subcontractor under worker's compensation acts, disability benefit acts, or other employee benefit acts. 14. At the request of Landlord, Tenant shall, at Tenant's sole cost and expense, provide evidence in form and content approved by Landlord, which approval shall not be unreasonably withheld or delayed (including, but not limited to, certificates and affidavits of Tenant, Tenant's contractor or such other persons as Landlord may reasonably require) showing: (a) That all outstanding claims for labor, materials and fixtures have been paid; (b) That there are no liens outstanding against the Demised Premises arising out of or in connection with the work; and (c) That all construction prior to the date thereof has been done substantially in accordance with the plans and specifications approved by Landlord ("Architect's Certificate of Completion"). 15. Any approval by Landlord of or consent by Landlord to any plans, specifications or other items to be submitted to and/or reviewed by Landlord pursuant to this Lease shall be deemed to be strictly limited to an acknowledgment of approval or consent by Landlord thereto and, whether or not the work is performed by Landlord or by Tenant's contractor, such approval or consent shall not constitute the assumption by Landlord of any responsibility for the accuracy, sufficiency or feasibility of any plans, specifications or other such items and shall not imply any acknowledgment, representation or warranty by Landlord that the design is safe, feasible, structurally sound or will comply with any legal or governmental requirements, and Tenant shall be responsible for all of the same. 16. Landlord shall pay the Construction Allowance owed to Tenant within thirty (30) days of receipt of all of the following: 1) lien waivers, 2) Architects Certificate of Completion, and 3) Certificate of Occupancy. 7 52 ATTACHMENT 1 TENANT BUILDING STANDARDS Tenant Entry Doors: 3' x 8'-10" 5 ply plain-sliced cherry veneer flush solid core door in 2" hollow metal frame. (These are not pre-stocked). Interior Doors: No Building Standard, however subject to Cousin's review and approval. Whenever possible, we prefer the doors to match the tenant entry doors. Hardware: Lever and Lock sets: Passage set: Corbin/Russwin ML2210 CSA US26D (Satin Chrome) Lock set: Corbin/Russwin ML2251 CSA US26D Ceiling System: 24" x 24", 15/16" wide acoustical grid with Armstrong Tegular Cirrus, Travertone #589 (grid in place/tiles stacked on the floor) Light Fixtures: 24" x 48" fluorescent light fixture with (18) cell parabolic lens and electronic ballasts (stacked on the floor) Standard Demising and Corridor Partitions: One hour fire rated partition: 3-5/8" metal studs with 5/8" fire code gypsum wallboard each side. (Walls shall be installed tight to curtain wall/mullions utilizing foam or double adhesive tape; screws are unacceptable). Multi-Tenant Elevator Lobbies: Base building granite floor border specification: Rosa Sardo, Flame Finish Base Building scored gypsum wallboard pilaster and ceiling details. (Lobby carpet and wall paint/wallcovering may be selected by full floor tenants) Blinds: Base building horizontal mini blinds in color to match base building curtain wall system.
53 ATTACHMENT 1 REQUIRED PROCEDURES FOR TENANTS WHO CONTRACT THEIR OWN CONSTRUCTION WORK - -------------------------------------------------------------------------------- The following information must be submitted to and approved by Cousins prior to construction commencement: - - Two (2) sets of complete architectural and engineering construction drawings. Cousins requests the retention of the preferred building consulting engineer, Barrett, Woodyard & Associates, Inc. - - Name of proposed General Contractor (or bidding General Contractors and their project contacts) - - Name of proposed subcontractors and project contacts. (Please note that Cousins maintains a restricted bid list for Mechanical, Electrical, Fire Protection and Fire Alarm subcontractors in order to maintain continuity and integrity in the critical base building systems. Tenants may not contract outside these lists. The list of subcontractors shall be issued upon request.) - - Proposed project schedule - - Confirmation that the Contractor is in receipt of, and has read, the Rules of the Site for Tenant Contractor's Work. The following information must be submitted at project completion and prior to Cousins' release of tenant allowance funds: - - Two (2) sets of as-built mechanical, electrical, plumbing and structural (if applicable) as-built drawings - - Test and Balance Reports - - Operations and maintenance manuals for all special equipment - - Copy of Certificate of Occupancy - - Final Lien Waivers - - Other requested information as listed in the Rules and Regulations - - Letter certifying that the fire alarm as well as any fail safe security systems (if applicable) have been tested. 54 EXHIBIT "E" BUILDING STANDARD SERVICES Landlord shall furnish the following services to Tenant during the Lease Term (the "Building Standard Services"): (a) Common-use restrooms (with cold and tempered domestic water) and toilets at locations provided for general use and as reasonably deemed by Landlord to be in keeping with the first-class standards of the Building. (b) Subject to curtailment as required by governmental laws, rules or mandatory regulations and subject to the design conditions set forth in paragraph 2(a) of Exhibit "D" attached hereto, central heat and air conditioning in season, at such temperatures and in such amounts as are reasonably deemed by Landlord to be in keeping with the first-class standards of the Building. Such heating and air conditioning shall be furnished between 8:00 a.m. and 6:00 p.m. on weekdays (from Monday through Friday, inclusive) and between 8:00 a.m. and 1:00 p.m. on Saturdays, all exclusive of Holidays, as defined below (the "Building Operating Hours"). (c) Electric lighting service for all public areas and special service areas of the Building in the manner and to the extent reasonably deemed by Landlord to be in keeping with the first-class standards of the Building. (d) Janitor service shall be provided five (5) days per week, exclusive of Holidays (as hereinbelow defined), in a manner that Landlord reasonably deems to be consistent with the first-class standards of the Building. (e) Security services for the Building comparable as to coverage, control and responsiveness (but not necessarily as to means for accomplishing same) to other similarly sized first-class, multi-tenant office buildings in suburban Atlanta, Georgia; provided, however, Landlord shall have no responsibility to prevent, and shall not be liable to Tenant for, any liability or loss to Tenant, its agents, employees and visitors arising out of losses due to theft, burglary, or damage or injury to persons or property caused by persons gaining access to the Building and/or the Demised Premises, and Tenant hereby releases Landlord from all liability for such losses, damages or injury. (f) Sufficient electrical capacity at the building core electrical panels to operate (i) incandescent lights, typewriters, calculating machines, photocopying machines and other machines of the same low voltage electrical consumption (120/208 volts), provided that the total rated electrical design load for said lighting and machines of low electrical voltage shall not exceed 1.54 watts per square foot of rentable area; and (ii) lighting (277/480 volts), provided that the total rated electrical design load for said lighting shall not exceed 2.0 watts per square foot of 55 rentable area (each such rated electrical design load to be hereinafter referred to as the "Building Standard Rated Electrical Design Load"). Should Tenant's total rated electrical design load exceed the Building Standard Rated Electrical Design Load for either low or high voltage electrical consumption, or if Tenant's electrical design requires low voltage or high voltage circuits in excess of Tenant's share of the Building Standard circuits, Landlord will (at Tenant's expense) install such additional circuits and associated high voltage panels and/or additional low voltage panels with associated transformers (which additional circuits, panels and transformers shall be hereinafter referred to as the "Additional Electrical Equipment"). If the Additional Electrical Equipment is installed because Tenant's low or high voltage rated electrical design load exceeds the applicable Building Standard Rated Electrical Design Load, then a meter shall also be added (at Tenant's expense) to measure the electricity used through the Additional Electrical Equipment. The design and installation of any Additional Electrical Equipment (or any related meter) required by Tenant shall be subject to the prior approval of Landlord (which approval shall not be unreasonably withheld). All expenses incurred by Landlord in connection with the review and approval of any Additional Electrical Equipment shall also be reimbursed to Landlord by Tenant. Tenant shall also pay on demand the actual metered cost of electricity consumed through the Additional Electrical Equipment (if applicable), plus any actual accounting expenses incurred by Landlord in connection with the metering thereof. Tenant agrees that if Tenant uses data processing or other electronic equipment which incorporates the use of switched mode power supplies or any other type device causing harmonic distortion on Landlord's power distribution system, Tenant shall install filters at Tenant's cost to eliminate the harmonic distortion. In addition, any damage to Landlord's equipment resulting from harmonic distortion caused by Tenant's electronic equipment shall be repaired at Tenant's expense. Total harmonic distortion shall not exceed thirteen percent (13%). If any of Tenant's electrical equipment requires conditioned air in excess of Building Standard air conditioning, the same shall be installed by Landlord (on Tenant's behalf), and Tenant shall pay all design, installation, metering and operating costs relating thereto. If Tenant requires that certain areas within Tenant's Demised Premises must operate in excess of the normal Building Operating Hours (as hereinabove defined), the electrical service to such areas shall be separately circuited and metered (at Tenant's expense) such that Tenant shall be billed the costs associated with electricity consumed during hours other than Building Operating Hours. (g) All Building Standard fluorescent bulb replacement in all areas and all incandescent bulb replacement in public areas, toilet and restroom areas, and stairwells. (h) Non-exclusive multiple cab passenger service to the floor(s) of the Demised Premises during Building Operating Hours (as hereinabove defined) and at least one (1) cab 2 56 passenger service to the floor(s) on which the Demised Premises are located twenty-four (24) hours per day and non-exclusive freight elevator service during Building Operating Hours (all subject to temporary cessation for ordinary repair and maintenance and during times when life safety systems override normal building operating systems) with such freight elevator service available at other times upon reasonable prior notice and the payment by Tenant to Landlord of any additional expense actually incurred by Landlord in connection therewith. To the extent the services described above require electricity and water supplied by public utilities, Landlord's covenants thereunder shall only impose on Landlord the obligation to use its reasonable efforts to cause the applicable public utilities to furnish same. Except for deliberate and willful acts of Landlord, failure by Landlord to furnish the services described herein, or any cessation thereof, shall not render Landlord liable for damages to either person or property, nor be construed as an eviction of Tenant, nor work an abatement of rent, nor relieve Tenant from fulfillment of any covenant or agreement hereof. In addition to the foregoing, should any of the equipment or machinery, for any cause, fail to operate, or function properly, Tenant shall have no claim for rebate of rent or damages on account of an interruption in service occasioned thereby or resulting therefrom; provided, however, Landlord agrees to use reasonable efforts to promptly repair said equipment or machinery and to restore said services during normal business hours. The following dates shall constitute "Holidays" as that term is used in this Lease: New Year's Day, Memorial Day, Independence Day, Labor Day, Thanksgiving Day, Christmas, and any other holiday generally recognized as such by landlords of office space in the metropolitan Atlanta office market, as determined by Landlord in good faith. If in the case of any specific holiday mentioned in the preceding sentence, a different day shall be observed than the respective day mentioned, then that day which constitutes the day observed by national banks in Atlanta, Georgia on account of said holiday shall constitute the Holiday under this Lease. 3 57 EXHIBIT "F" GUARANTY INTENTIONALLY OMITTED 58 EXHIBIT "G" Special Stipulations EX-10.31 3 SERVICES AGREEMENT 1 * REGISTRANT SEEKS CONFIDENTIAL TREATMENT OF THE MARKED OMITTED INFORMATION PURSUANT TO RULE 24b-2 UNDER THE SECURITIES AND EXCHANGE ACT OF 1934, AS AMENDED, AND 17 C.F.R. SECTION 200.80 (b)(4). UNREDACTED COPIES OF THIS EXHIBIT HAVE BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. EXHIBIT 10.31 SERVICES AGREEMENT Agreement entered into this 7th day of April, 1993 by and between Kmart Corporation, having its address at 3100 W. Big Beaver Troy, MI (hereinafter referred to as "Kmart") and The Profit Recovery Group, Inc./Roy Greene Associates, having its address at 1250 Powers Ferry Road, Marietta, GA 30067 (hereinafter referred to as "Contractor") WHEREAS, the Contractor is engaged in the business of providing audit services regarding utility and telecommunications expenses and desires to audit Kmart's and any of Kmart's subsidiaries' and/or affiliates' utility and telecommunications expenses, as requested by Kmart; and WHEREAS, Kmart desires to designate certain of such expenses for the Contractor to audit pursuant to this Agreement; NOW THEREFORE, in consideration of the premises and mutual promises and conditions herein contained, the parties agree as follows: The Contractor will perform services set forth in this Agreement as requested by Kmart on behalf of Kmart or any of its subsidiaries and/or affiliates which Kmart so designates upon notice to the Contractor. If Kmart designates that any of its subsidiaries and/or affiliates participate in this Agreement references to "Kmart" hereafter in this Agreement shall refer to Kmart or any such applicable subsidiaries and/or affiliates for which the Contractor performs services, as applicable. The Contractor understands and agrees, however, that each entity for which the Contractor performs services is solely liable for its own performance under this Agreement. 1. Reasonable Care The services, products, material and/or equipment described herein will be provided by the Contractor at the above premises of Kmart at the times and in the manner set forth herein. Reasonable care and its best efforts shall be utilized by the Contractor in the performance of this Agreement. 2. Term/Termination The term of this Agreement shall be for a period of one (1) year from the date indicated above. If the Contractor performs services pursuant hereto at Kmart's request beyond such one (1) year period, this Agreement shall renew on a month to month basis. Notwithstanding the foregoing, each party reserves the right to terminate this Agreement upon notice to the party in the event the other party breaches or fails to perform any of its obligations in any material respect, attempts to assign or otherwise transfer it rights, obligations or duties under this agreement, or in the event the other party becomes insolvent or proceedings are instituted by or against such party under any provision of any federal or state bankruptcy or insolvency laws. In addition, either party may terminate this Agreement at any time without cause upon seven (7) days notice to the other party. Upon termination, there shall be nothing due from Kmart to the Contractor beyond any fees due for services 2 performed at the date of termination. The Contractor shall remove all of its equipment and material from the above premises within three (3) days of the date of termination. 3. Compliance with all Laws The Contractor shall be responsible for and does represent that it shall comply with all federal, state and local laws, rules and regulations applicable to this Agreement or the performance thereof. 4. Indemnification/Insurance The Contractor shall reimburse, indemnify, defend and hold Kmart harmless from and against any damage, loss expense or penalty, or any claim or action therefor, by or on behalf of any person, arising out of the performance or failure of performance of this Agreement or due to any acts or omissions by the Contractor or its employees including but not limited to, the Contractor's employees' payroll claims (wage claims, claims for taxes required to be withheld from wages, social security, etc.) unemployment compensation claims injury or death claims and all similar claims, even if alleged to have occurred by an act of negligence or wilful misconduct of Kmart. The Contractor in addition agrees to obtain and keep in force property damage and bodily injury liability insurance, naming Kmart as an Insured, and employee fidelity insurance and shall also maintain Worker's Compensation Insurance as required by all applicable federal, state or other laws including Employer's liability insurance. Contractor shall provide evidence of all insurance listed above at the request of Kmart. 5. Contractor's Forms Any provisions of Contractor's proposals, contracts, invoices, billing statement, acknowledgment forms or any other documents which are inconsistent with the provisions of this Agreement shall be of no force or effect. 6. Independent Contractor The Contractor is and at all times shall be an independent contractor in performance of this Agreement. The Contractor will exercise control over its employees and shall be solely responsible for the verification of identity and employment eligibility, for the payment of any wages, salaries or other remuneration of its employees and for the payment of any payroll taxes, contributions for unemployment insurance, social security, pensions or annuities which are imposed and a result of the employment of its employees. 7. No Modification No modification, alteration or amendment of this Agreement shall be binding on Kmart unless in writing and sent by a duly authorized representative of Kmart. 2 3 8. No Assignment The Contractor may not assign or otherwise transfer its rights, obligations or duties under this Agreement. 9. Entire Agreement This Agreement shall be the entire agreement between Kmart and the Contractor with regard to the subject matter hereof. This Agreement shall supersede all prior understandings, agreements contracts or arrangements between the parties. 10. Costs and Expenses All costs, charges and expenses incurred in connection with the Contractor's performance of this Agreement shall be borne by the Contractor. 11. Description of Services Description of services to be supplied by the Contractor, along with the times and manner of Contractor's performance, are: a. Utility Expense Audit At Kmart's request, Contractor shall audit utility expenses, including billings for electricity, water, sewerage, natural gas and fuels, as specified by Kmart. Services Provided. Contractor shall provide the following services in accordance with the Utility Proposal attached hereto as Exhibit A and which is incorporated herein by this reference: 1. Examination of monthly utility charges for services to determine compliance or possible overpayments, underpayments and assurance of exact billing for services of respective utilities. Contractor shall work directly with the utilities to obtain lower rates; 2. An initial examination of Kmart's previous twelve (12) months utility bills. Where overcharges are identified, Contractor shall audit prior fiscal and/or calendar years for possible refunds. Contractor shall copy, box, and ship all documents at its expense; 3. A continuing analysis of Kmart's future utility bills for the next eighteen (18) months to ensure that savings realized continue through the duration of the payment calculation; 4. Contractor will present to Kmart a final report of recommendations with a thorough break down by utility, location and a detailed listing of the total available savings. Any recommendations submitted are 3 4 subject to Kmart's approval, and once implemented shall be deemed accepted. 5. Contractor's services will be carried out at such location(s) as Kmart will designate. 6. Contractor's audit practices limit any disturbances to Kmart's operation except to answer occasional questions relating to Kmart's utility services and operations. This agreement may include any present facilities and any additional locations Kmart acquires, as specified by Kmart. b. Telecommunications Expense Audit At Kmart's request, contractor shall audit billings and inventory for telecommunications expenses, as specified by Kmart. Services Provided. Contractor shall provide the following services in accordance with the Utility Proposal attached hereto as Exhibit B and which is incorporated herein by this reference: 1. Contractor shall examine monthly telephone charges to determine possible overpayments or credits due for discontinued services, and to assure exact billing for installed services. 2. Contractor shall negotiate with the telephone companies, other communications carriers, and service organizations to have the overcharges removed from service billings and to recover refunds/credits for past overcharges. 3. Contractor shall review Kmart's present billings to determine if any changes can be made to the service type or configuration to enable Kmart to achieve cost reductions in the future. Formal recommendations will be presented for any such changes and action will be taken only with Kmart's express approval. 4. Contractor shall provide Kmart without cost, information about potential areas of expense control, where it appears that such information would benefit Kmart's operation. 5. Contractor shall present to Kmart a final Management Summary of the audit results, which provides a detailed listing by vendor, type of service, telephone account number and location. 6. Contractor's services shall be carried out at such location(s) as Kmart may designate. 4 5 12. Payment Kmart agrees to pay Contractor the fee for the services described in item 11 above, after being invoiced in accordance with the provisions of item 13 below. Payments shall be made as follows: a. Utility Expense Audit Contractor's fee for these services will be paid from the recoveries and reduced future costs. There are two levels to the fee structure, these are: 1. Credits & Refunds Contractor shall document all claims for the specific amounts as they are received by Kmart. Contractor's compensation for credits and refunds will be thirty percent (30%) of all collected claims. Contractor shall invoice for claims once claims are collected by Kmart and Kmart shall pay within sixty (60) days of receipt of invoice. 2. Cost Reductions Contractor shall compute and document Kmart's calendar 1992 Average Monthly Cost for Utilities, broken down into summer and winter rates, as applicable, and taking into account seasonal rate changes and high energy fluctuations that occur monthly (the "1992 Average Monthly Cost"). Based on Kmart's 1992 usage, Contractor shall prepare documents and all claims for reduction or elimination of future costs associated with a rate change. The Monthly "Utility Cost Reduction" is defined as any savings realized by Kmart on or before December 31, 1994, based on Kmart's 1992 usage and rates. Contractor's Fee shall be thirty percent (30%) of the Monthly Utility Cost Reduction multiplied by eighteen (18) months. Contractor shall issue an invoice to Kmart for Contractor's Fee. Payment of invoices are due within sixty (60) days from Kmart's receipt of Contractor's invoice accompanied by complete documentation satisfactory to Kmart establishing the Monthly Utility Cost Reduction provided that Contractor continues to perform all services set forth under Section II herein and Kmart continues to realize the Monthly Cost Reduction for the full eighteen (18) months. Kmart reserves the right to deduct from any future payments due Contractor any savings that do not continue through the full eighteen (18) month period. Kmart shall not be liable to Contractor for any costs or fees associated with savings which are first realized after December 31, 1994. 5 6 b. Telecommunications Expense Audit Contractor's fee for these services will be invoiced as follows: Where action is taken by Contractor which results in refunds or credits for past overcharges, Contractor's fee shall be thirty percent 30% of recovered monies. An invoice will be rendered after the credit or refunds are received and Kmart shall pay within sixty (60) days of receipt of such invoice. Refunds or credits may include the following: * Overbillings * Telephone company errors (incorrect tariff applications, mileage calculations, taxes, existing discount applications) Where a recommendation is made by Contractor which results within twelve (12) months after the recommendation is made in the monthly reduction of on-going cost and such recommendations is approved in writing by Kmart and implemented by Contractor ("Monthly Telecommunication Cost Reduction"), Contractor's Fee for the agreed upon savings will be thirty percent (30%) of the Monthly Telecommunication Cost Reduction multiplied by eighteen (18) months. Recommendations may include but are not limited to the following: * Reductions in facilities and/or in the monthly costs of facilities and services (on a per location basis, as requested by Kmart) * Removal of unused facilities * Maximizing volume discounts * Reduction in local usage cost * Maintenance agreement optimization Contractor shall issue an invoice to Kmart for Contractor's Fee with documentation acceptable to Kmart proving the Monthly Telecommunication Cost Reduction. Payment of Contractor's invoices are due within sixty (60) days from date of Kmart's receipt of invoice provided that Contractor continues to perform all services set forth under Section II herein and Kmart continues to realize the Monthly Telecommunication Cost Reduction. c. Contractors Fees for both Utility and Telecommunications The aforestated fees shall remain fixed for the full duration of this Agreement unless the parties mutually agree in writing to another fee. The fee for Contractor's services hereunder is contingent and is only due to the extent that Kmart continues to realize such Monthly Cost Reductions for the full eighteen (18) months after the Contractor's recommendation. Contractor shall refund to Kmart, or, at Kmart's option, Kmart shall deduct from any amounts due Contractor, any portion of Contractor's Fee paid by Kmart which 6 7 represents any savings which are not actually realized by Kmart throughout the full eighteen (18) month period. 13. Invoicing All invoices presented to Kmart shall set forth the following information: Name and address of the Contractor; Duns number (if the Contractor has been assigned a Duns number): Invoice number; Date and dollar amount of fee due as well as any supporting documentation as required by Kmart. 14. Confidentiality Contractor agrees not to disclose to any third party any information whatsoever acquired in the process in examining documents and records under this Agreement or otherwise acquired in the performance of this Agreement except with the prior written consent of Kmart which may be withheld for any reason. 15. Nonexclusive The Contractor understands and agrees that this is a nonexclusive agreement and that Kmart is not guaranteeing to the Contractor any level of business. Kmart may, in its sole discretion, offer to the Contractor for audit whatever expenses it chooses to refer. 16. Contractor understands and agrees that all information, documentation and other materials which Contractor obtains from Kmart and/or the utility and or telecommunications service provider pursuant to this Agreement belongs to Kmart. Contractor shall deliver all such information, documentation and other materials to Kmart when Contractor has completed each audit hereunder or upon termination of this Agreement, whichever occurs first. ATTEST KMART CORPORATION By: /s/ - ---------------------------------- ---------------------------------- Profit Recovery Group, Inc. - ---------------------------------- ------------------------------------- (Contractor) By: /s/ ---------------------------------- 7 8 ADDENDUM TO SERVICES AGREEMENT DATED APRIL 7, 1993 BY AND BETWEEN KMART CORPORATION ("KMART") AND THE PROFIT RECOVERY GROUP INTERNATIONAL, INC. ("CONTRACTOR") The parties hereto hereby agree that the agreement described above ("Agreement") is amended as follows to include Contractor's performance of Primary Audit Services of various accounts payable media, including advertising, transportation, expense, utilities, allowances, deals, etc. (not meant to be a complete listing for review), for the fiscal years 1996, 1997, and 1998, all of which Kmart shall determine in its sole discretion. 1.) Paragraphs 11 and 12 of the Agreement are deleted in their entireties and are replaced with the following paragraphs: "Additional Services Provided. Contractor shall provide the following services: a) Examination of Kmart's Accounts Payable operation at Contractor's own expense to determine whether or not and to what extent overpayments and/or under deductions have been made. Contractor agrees to reimburse Kmart for any supply and/or data gathering costs associated with these audits. All significant expenses to be pre-approved by Profit Recovery Group; b) Writing chargebacks and submitting them with supporting data to Kmart's Accounts Payable Manager (or whomever else Kmart designates) within the guidelines to be established by Kmart for verification and processing; c) Semi-annually, Contractor shall provide a computer analysis of audit results with a breakdown by vendor, type of deduction, department, and a summary of the audit results by type (Management Summary). Contractor shall review with Kmart any control and operational weaknesses observed, and make practical recommendations for correcting them; d) Contractor shall comply with all monthly reporting requirements as set forth on page 2 in the September 19, 1996 "Request for Proposal" as well as with all modifications to such requirements requested by Kmart; e) Provide Kmart, without cost, information about customs of the trade and especially commendable practices or systems where it appears that such information would benefit Kmart. Contractor shall also provide Kmart any other information of like nature which Kmart may desire that does not infringe upon Profit Recovery Group/Client confidentiality agreements; Page 1 9 f) Contractor is responsible for the safekeeping of Kmart documents and data files and shall return any or all documents to Kmart upon request within 10 days of receipt of request; g) The operation of Kmart's Accounts Payable Department shall not be disturbed except to answer an occasional question relating to systems, practices and filing. Chargebacks and supporting data shall be prepared by Contractor for processing by Kmart through its customary procedures; h) Contractor's services shall be carried out at such location(s) as Kmart may designate and shall comply with reasonable site modifications as requested by Kmart; i) Choice of Law. The formation, construction and performance of this agreement shall be construed in accordance with the laws of the State of Michigan, and Contractor agrees to exercise any right or remedy hereunder in the State of Michigan courts of Oakland County, Michigan or the United States District Court in Detroit, Michigan; j) This Agreement shall be the entire agreement between Kmart and the Contractor with regard to the subject matter hereof. This Agreement shall supersede all prior understandings, agreements, contracts or arrangements between the parties. Any provisions of Contractor's proposals, contracts, invoices, billing statements, acknowledgment forms or any other documents which are not consistent with the provisions of the Agreement and this Addendum shall be of no force or effect. "Duties. a) Kmart agrees to furnish to Contractor, as available, all records which Kmart determines are necessary to perform a full service audit, including hard copy, microfilm, microfiche and electronic records, invoices, and other documentation, including buyers files. Contractor shall determine whether payments made on behalf of Kmart to vendors exceeded amounts that were properly invoiced to Kmart. Contractor shall refer all suspected overpayment/under-deduction claims to Kmart. All claims against vendors for reimbursement of or credits for excess payments shall be processed by Kmart as set forth in paragraph (b) above. b) Contractor shall follow the audit time table (Audit Schedule) to be established by Kmart at Kmart's sole discretion. Kmart agrees that its self audit program shall be completed for the time periods released for Contractor review per the Audit Schedule, with the exception that the Statement Audit shall require additional review with Kmart to avoid duplicate deductions for various potentially deferred Kmart deductions. Page 2 10 Fees: The sole and exclusive fee arrangement between Contractor and Kmart for any and all services of any type performed by Contractor is as follows: Contractor's fee for these services shall be [*] percent ([*]%) of recovered moneys up to $[*], [*] percent ([*]%) of recovered moneys from $[*] to $[*] and [*] percent ([*]%) of recovered moneys in excess of $[*]. Contractors fee shall be invoiced monthly and shall be calculated on claims collected less paybacks and adjustments. Payment terms for fee billings are thirty (30) days from the date of Kmart's receipt of invoice. This fee shall remain fixed for the full duration of this Agreement including any extensions or renewals thereto unless the parties mutually agree in writing to another fee. Contractor shall not be entitled to a fee based on deductions until such deduction is collected by Kmart or invoices identified by Contractor which are actually deferred deductions to be later processed by Kmart. The fee for Contractor's services hereunder is contingent and is only due to the extent that Contractor identifies and prepares deduction vouchers which are deducted from the applicable vendor account. If for any reason a deduction, claim or invoice, as applicable, is later reversed, charged back to or be paid back by Kmart, Contractor shall immediately refund to Kmart, or at Kmart's option, Kmart shall deduct from amounts due Contractor, any fee Contractor has received in connection with such deduction, claim or invoice, upon receipt of Kmart's notice thereof. Contractor will in all events be entitled to the fees set forth above with respect to all monies collected (or credits received) following the termination of this Agreement with respect to Contractor's efforts while this Agreement is in effect. Reserves: As a protection against claim reversals, all invoices must reflect a 20% reserve holdback of claims balance to be invoiced. These amounts shall be released subsequent to the completion of the audit year involved pending a review period (not to exceed 3 months) for any vendor chargebacks for invalid claims." 2.) The following paragraphs are also added to the Agreement: "Contractor agrees not to disclose to any third party any information whatsoever acquired in the process in examining documents and records under this Agreement or otherwise acquired in the performance of this Agreement except with the prior written consent of Kmart which may be withheld for any reason." "Kmart's trademarks, trade names, service marks, label designs, product identifications, art work and other symbols and devices associated with Kmart (the "Kmart Marks") are and shall remain Kmart's property. Contractor acknowledges Kmart's ownership and exclusive right to use the Kmart Marks. Contractor shall not use the Kmart Marks in any way, shape, manner or form, except as provided in the Agreement." * Confidential treatment requested. Page 3 11 "During the term of this Agreement only, Contractor is authorized to use the forms furnished by Customer (the "Kmart Forms") for the specific purpose of this Agreement and for no other purpose, whatsoever. Upon termination of this Agreement, Contractor shall immediately return all copies of and halt all use of the Kmart Forms. Contractor shall not permit any Kmart Forms to be used except by Contractor's own employees for the specific purpose of this Agreement." "Contractor acknowledges and agrees that serious and irreparable harm may be inflicted on Kmart by any unauthorized use of the Kmart Marks or Kmart Forms, and acknowledges that such injury cannot be compensated by payment of money damages alone. Contractor, therefore, consents to immediate entry of a restraining order of injunction in any court of competent jurisdiction to prohibit and halt any unauthorized use of the Kmart Marks and/or Kmart Forms by Contractor or any use by Contractor which is not in accordance with the terms of this Agreement." "Contractor understands and agrees that: (1) Kmart may, within its sole and absolute discretion, choose not to pursue any claim, deduction, chargeback or invoice submitted and/or suggested by Contractor, and shall not owe anything to Contractor as a result thereof; and (2) Kmart may use any number of other parties to perform secondary audits following the completion by Contractor of its primary audit, without giving rise to any claim or obligation to Contractor." "Contractor agrees that any and all information in any form that is provided to Contractor or any Contractor representative by Kmart as part of this Agreement is provided and received in confidence, and Contractor shall at all times preserve and protect the confidentiality of such information, and of any other proprietary or non-public information of or relating to Kmart or its related companies of which Contractor or any Contractor representative becomes aware or acquires during the performance of this Agreement. Contractor also agrees that it shall take all necessary steps to ensure that such confidential information shall not be, except as required by law, disclosed to, or used by any person, association or entity, except Contractor's own employees, and then only to the extent necessary to perform this Agreement; provided, however, that Contractor may use any information obtained in connection with performing its audit to update Contractor's databases, including its National Deal Pricing Information Database. Further, Contractor and Kmart each agree to keep the financial terms of this Agreement strictly confidential. The confidentiality and non-disclosure obligations contained herein shall survive and continue after termination of this Agreement or any related Agreements the parties may execute, and shall bind Contractor's and Kmart's legal representatives, successors and assigns." Page 4 12 This Addendum is in addition to the Agreement and shall not alter or amend the Agreement except to add the additional services set forth herein (the "Additional Services"). All of the terms and conditions of the Agreement except sections 11 and 12 are incorporated into and shall apply to this Addendum to Services Agreement. Agreed to this 28 day of January, 1997 Kmart Corporation Contractor The Profit Recovery Group International, Inc. By: /s/ By: /s/ ---------------------------- ----------------------------------------- Title: V.P. Controller Title: Executive Vice President ------------------------- -------------------------------------- Attest Attest - -------------------------------- --------------------------------------------- Page 5 EX-10.32 4 EMPLOYMENT & COMPENSATION AGREEMENT- MILLS 1 EXHIBIT 10.32 EMPLOYMENT AGREEMENT THIS EMPLOYMENT AGREEMENT ("Agreement"), is made this 26th day of August, 1996, effective as of January 1, 1996 (the "Effective Date"), by and between THE PROFIT RECOVERY GROUP INTERNATIONAL I, INC., a Georgia corporation (the "Company") and TONY G. MILLS, a resident of the State of Georgia (the "Employee"). W I T N E S S E T H: WHEREAS, the Company desires to retain Employee to provide services to the Company and its Affiliates (as defined in Section 23 below), and Employee desires to provide his services to the Company pursuant to the terms and conditions that follow; NOW, THEREFORE, in consideration of the mutual promises and covenants hereinafter contained and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties do hereby agree as follows: 1. EMPLOYMENT. Employee shall serve as Senior Vice President -- Legal Affairs of the Company. Employee agrees to apply Employee's full time efforts to the position and to perform Employee's work at all times to the best of Employee's ability and at the direction of the Chief Executive Officer of the Company. Employee will render to the Company at regular intervals set by the Company, reports and accounting of the status and progress of any work Employee is performing. The services Employee will provide for the Company are more particularly described on Exhibit A attached hereto. 2. TERM. The initial term of this Agreement shall commence on January 1, 1996, and shall continue until December 31, 1996, unless sooner terminated as hereinafter provided. Unless otherwise terminated pursuant to Section 14 hereof, this Agreement shall automatically renew on a year-to-year basis at the end of the initial term and each subsequent renewal term unless either party gives written notice of non-renewal to the other at least ninety (90) days prior to the end of the initial term or a renewal term. The initial term of this Agreement and any subsequent one-year renewal period shall be deemed a "Term Year." 3. SCOPE OF THE COMPANY'S ACTIVITIES. Employee acknowledges and agrees that the Company conducts the following business in the following territories: (a) Scope of the Company's Business. The Company is engaged in the business of auditing accounts payable, paid bill files, promotional and demonstrator agreements, personal property, real estate, sales and use tax and other taxes, common area maintenance charges, telephone and other utilities, sales promotion, advertising and cosmetic wage/commission agreements of its Clients, as hereinafter defined, to identify and document for subsequent charge back or credit over-payments and/or under deductions (collectively, the "Audit Activities") and rendering management counseling services associated with the Audit Activities (collectively, the "Business of the Company"). (b) Location of the Company's Business. The Company actively conducts business with its clients (herein referred to as "Clients") throughout the United States, Australia, Belgium, Canada, France, Germany, Great Britain, Hong Kong, Indonesia, Malaysia, Mexico, the Netherlands, New Zealand, Singapore, Taiwan, and Thailand. The address of the Company's principal office in Atlanta, Georgia where Employee provides substantially all of his services on behalf of the Company is 2300 Windy Ridge Parkway, Suite 100, North, Atlanta, Cobb County, Georgia 30339-8426 (the "Principal Office"). 4. COMPENSATION. For services rendered by Employee under this Agreement during the term hereof, Employee shall be entitled to receive the compensation and benefits set forth in Sections 10, 11 or 12 hereof and in that certain Compensation Agreement by and between Employee and the Company (the "Compensation Agreement") which provides in part that as of the Effective Date Employee's Base Salary (as defined therein) is One Hundred Fifty Thousand and No/100 ($150,000.00) Dollars, subject to any future amendment of the Compensation Agreement. 2 5. STOCK OPTION. Employee and The Profit Recovery Group International, Inc., a Georgia corporation ("PRGX") are party to one or more separate stock option agreements in accordance with which Employee has been granted non-qualified options to purchase Eighty Thousand (80,000) shares of PRGX Common Stock under the 1996 Stock Option Plan (the "Plan"). 6. SPECIFIC ACKNOWLEDGMENTS. Employee acknowledges that the Company has expended and will continue to expend substantial time, money, effort and other resources to develop its goodwill, clients, business sources and relationships and that the Company has a legitimate business interest in protecting same. In connection with Employee's employment by the Company as herein provided, the Company will introduce Employee to its Clients, business sources and relationships and will expend considerable time, effort and capital to train Employee in the business of the Company. Employee further acknowledges that, by virtue of Employee's employment with the Company, Employee will be in a position of substantial responsibility and authority and will have frequent and substantial contact with certain of the Company's Clients and business sources and relationships. Employee further acknowledges that in Employee's capacity, Employee will be privy to certain confidential information, Company secrets and proprietary information not generally known or available to the Company's competitors or the general public. (a) Agreement Not to Compete -- Competing Businesses. Employee covenants and agrees that during Employee's employment by the Company and for a period of eighteen (18) months after the termination of Employee's employment for any reason whatsoever, of such employment, he will not, without the prior written consent of the Company signed by the President of the Company, directly or indirectly, (i) for himself or (ii) as a consultant, management, supervisory or executive employee or owner of a Competing Business, as hereinafter defined, or (iii) as an independent contractor for a Competing Business, engage in any business, within a radius of thirty (30) miles of the Principal Office, for which Employee provides services which are the same or substantially similar to his duties as Employee as herein described. (b) Agreement Not to Solicit Clients. Employee covenants and agrees that during Employee's employment by the Company and for a period of eighteen (18) months after termination of Employee's employment for any reason whatsoever, Employee will not, without the prior written consent of the Company signed by the President of the Company, directly or indirectly, on Employee's behalf or on behalf of a Competing Business, as hereinafter defined, solicit, divert or appropriate, or attempt to solicit, divert or appropriate any of the Company's Clients for whom Employee performed services or otherwise had direct contact, influence and/or responsibility during the twenty-four (24) month period immediately preceding the termination of Employee's employment with the Company (or such shorter period if Employee is employed for less than 24 months) for the purpose of providing services of the type identified in Section 3 (a) hereof. Employee's covenants pursuant to this subsection (b) shall also apply to prospective customers of the Company with respect to which Employee participated in soliciting on behalf of the Company during the twenty-four (24) month period immediately preceding the termination of Employee's employment with the Company (or such shorter period if Employee is employed for less than 24 months). (c) Agreement Not to Solicit Employees or Contractors. Employee covenants and agrees that during Employee's employment by the Company and for a period of eighteen (18) months after termination of Employee's employment for any reason whatsoever, Employee will not, without the prior written consent of the Company signed by the President of the Company, directly or indirectly, on Employee's behalf or on behalf of others, solicit, entice, persuade or induce, or attempt to solicit, entice, persuade or induce any person who is actively employed by, or is performing services as an independent contractor for, the Company and (i) who was employed by, or was performing services as an independent contractor for, the Company at any time during which Employee was employed by the Company and (ii) who reported to Employee or was within Employee's chain of responsibility, or (iii) who had regular contact with Employee, to terminate his or her employment or contractual arrangement with the Company or to become employed or engaged by any person, firm or entity other than the Company, or approach any such person for any of the foregoing purposes or authorize or assist in the taking of any such action by any third party. (d) Proprietary Information. All Proprietary Information, as hereinafter defined, and all physical embodiments thereof received or developed by Employee or disclosed to Employee while employed by the 2 3 Company is confidential to and is and will remain the sole and exclusive property of the Company. Except to the extent necessary to perform the duties assigned to Employee by the Company, Employee will hold such Proprietary Information in trust and in the strictest confidence, and will not use, reproduce, distribute, disclose or otherwise disseminate the Proprietary Information or any physical embodiments thereof and may in no event take any action causing or fail to take the action necessary in order to prevent any Proprietary Information disclosed to or developed by Employee to lose its character or cease to qualify as Proprietary Information. The confidentiality requirements and use restrictions contained in this subsection shall survive any termination of Employee's employment with the Company but shall not apply (i) to any information that falls into the public domain through no fault of Employee, or (ii) to Proprietary Information which is not Trade Secrets, as hereinafter defined, when a period of five (5) years has expired following the termination of Employee's employment with Company. Upon request by the Company, and in any event upon termination of Employee's employment with the Company for any reason, Employee will promptly deliver to the Company all property belonging to the Company, including without limitation all Proprietary Information (and all physical embodiments thereof) then in Employee's custody, control, or possession. (e) Contracts or Other Agreements with Former Employer or Business. Employee agrees that Employee will provide to the Company, upon the execution of this Agreement, a copy of the pertinent portions of any employment agreement or similar document executed by Employee with a former employer or any other business. Employee warrants and represents that (i) the execution and delivery of this Agreement by Employee and the performance of the obligations, covenants and agreements contained herein, do not and will not conflict with or result in any breach or violation of any of the terms and provisions of any agreement, judgment, order, statute or other instrument or restriction of any kind with respect to which Employee is bound, and (ii) Employee is not subject to any restrictive covenant agreement, covenant not to compete, nonsolicitation agreement or other agreement that would prohibit Employee from carrying out Employee's duties hereunder. (f) Definitions. - "Competing Business" means any business organization of whatever form engaged, either directly or indirectly, in any business or enterprise which is the same as, or substantially the same as, the Business of the Company, as defined in Section 2(a) hereof. - "Proprietary Information" means information related to the Company or its Affiliates or clients (i) which derives economic value, actual or potential, from not being generally known to or readily ascertainable by other persons who can obtain economic value from its disclosure or use; and (ii) which is the subject of efforts that are reasonable under the circumstances to maintain its secrecy. Such Proprietary Information shall include information in any form or media and shall not necessarily be in writing. Proprietary Information also includes information which has been disclosed to the Company or its Affiliates by a third party and which the Company or its Affiliates are obligated to treat as confidential. Trade Secrets means Proprietary Information which meets the foregoing criteria and which is also deemed to be a "Trade Secret" as that term is defined in the Georgia Trade Secrets Act of 1990, O.C.G.A. sec. 10-1-760, et. seq., including but not limited to technical and nontechnical data, formulas, patterns, compilations, programs, devices, methods, techniques, drawings, processes, financial data, financial plans, product plans, and lists of actual or potential customers and suppliers. Proprietary Information may or may not be marked by the Company or its Affiliates as "proprietary" or "secret" or with other words or markings of similar meaning, and the failure of the Company to make such notations upon the physical embodiments of any Proprietary Information shall not affect the status of such information as Proprietary Information. 7. OWNERSHIP BY COMPANY. All software, computer diskettes, CDs, video tapes, literature, cassettes, photographs, prints, slides, records, notes, files, memoranda, reports, audit reports, price lists, client lists, documents, and all copies thereof, equipment, and apparatus and like items relating to the business of the Company, Proprietary Information or Trade Secrets which shall be prepared by Employee or which shall be disclosed to or which shall come into Employee's possession shall be and remain the sole and exclusive property of the Company. Employee agrees that, upon the termination of employment with the Company for any reason whatsoever, or at any other time upon request, Employee will promptly deliver to the Company the originals and all copies of any of the foregoing that are in Employee's possession, custody or control, and any other property belonging to the Company. 3 4 8. INVENTIONS. Employee agrees that, during the term of this Agreement, Employee has a continuing duty to disclose to the Company any invention, improvement, discovery, process, formula, code, program, system or method (collectively, "Inventions") developed or being developed by Employee any time during the term of Employee's employment, either solely by Employee or jointly with others, whether or not such Inventions are assignable to the Company as set forth below. Any Invention which Employee has conceived or made or may conceive or make at any time while employed by the Company, either solely by Employee or jointly with others, (a) which relate in any way to the actual Business of the Company, or (b) which relate in any way to the actual or anticipated research or development of the Company, or (c) which are suggested by or result from any task assigned to Employee on behalf of the Company, shall be the sole and exclusive property of the Company, and Employee hereby assigns to the Company any right, title or interest Employee may have to such Invention. Furthermore, any such Invention shall constitute Proprietary Information as set forth above. At the request and expense of the Company, Employee will execute and deliver all documents and will do such other acts as may be in the Company's opinion necessary or desirable to secure to the Company or its nominee all right, title and interest in and to any such Invention. The provisions of this Section shall be binding upon Employee's heirs, legal representatives, successors and assigns. 9. COPYRIGHTS. Employee understands that any original works of authorship fixed in tangible form, including, without limitation, computer software and manuals, advertising material, and training material, prepared by Employee, either solely or jointly with others, within the scope of Employee's employment by the Company, constitute works made for hire as provided by law, so that such works are owned by the Company. If, for any reason, a work of authorship by Employee created during the term of Employee's employment by the Company and related to the Business of the Company is considered other than a work for hire, then Employee hereby assigns all Employee's right, title and interest in copyrights to such works of authorship to the Company. 10. INSURANCE AND BENEFITS. (a) Subject to Employee being insurable at standard rates as of the commencement of employment (or when coverage is applied for, as applicable) and to the availability of such coverage from the Company's customary insurance providers, the Company shall (i) obtain on Employee's behalf life, disability, hospitalization and medical insurance coverage in accordance with the Company's standard group coverage, (ii) pay the premiums, or reimburse Employee for premiums paid, to obtain coverage as described below in addition to the Company's standard group coverage in accordance with the Company's standard policies and procedures: (A) basic term life insurance policy at the best available rates for a fifteen (5) year level term type product, but not higher than standard nonsmoker rates, in an amount of coverage equal to One Million ($1,000,000) Dollars, and (B) disability income insurance coverage, which, when added to the standard group coverages, will provide a monthly benefit of sixty (60%) of the sum of (x) Employee's current Base Salary, (y) any amount of Bonus (as defined in the Compensation Agreement) payable to Employee, without adjustment or deduction for any Bonus amount the payment of which was deferred pursuant to this Agreement, for the Term Year preceding the Term Year in which the disability occurs and (z) any amount of salary for the Term Year in which the disability occurs the payment of which is deferred pursuant to this Agreement, and (iii) share the cost of Employee's health insurance premiums in accordance with the Company's standard employee policies and procedures. The Company will reimburse Employee for any amount incurred in connection with an annual physical examination not covered by insurance. (b) Employee shall be provided an annual automobile allowance of Thirteen Thousand and No/100 ($13,000.00) Dollars (the "Auto Allowance"), payable in accordance with the Company's customary procedures, which amount shall be reviewed annually and may be modified in writing prior to the commencement of any Term Year beginning on or after January 1, 1997. (c) Employee shall be entitled to participate in any 401(k) Plan of the Company generally available to other employees of the Company, except as may be limited by applicable law or regulation. (d) The Company shall pay Employee's reasonable travel and business expenses (including air travel at coach rate), subject to Employee's submission of receipts therefor in accordance with the Company's normal 4 5 practices and procedures. The Company shall also pay or reimburse Employee for reasonable cellular phone usage for business purposes in such amounts as Employee and the Company mutually agree. (e) Any amounts the Company pays for insurance coverage or fringe benefits that are supplemental or in addition to the Company's standard insurance coverage or benefits shall be compensation in addition to Base Salary (but not included within the definition of Base Salary) and shall be reflected on Employee's W-2. (f) The Company shall pay or reimburse Employee for all licenses, dues and fees to professional organizations, including but not limited to the State Bar of Georgia, the American Bar Association and special sections of the foregoing, subject to Employee's submission of receipts therefor. The Company shall also pay or reimburse Employee for books and subscriptions to professional journals, and all costs and expenses in connection with professional seminars, meetings and continuing legal education, including but not limited to tuition and registration fees, subject to Employee's submission of receipts therefor; provided, however, that the Company shall only be responsible for the costs of air travel, lodging and food for professional seminars, meetings and continuing legal education held outside of the metropolitan Atlanta area upon obtaining the prior approval of the Company. 11. PAYMENT OF COMPENSATION UPON TERMINATION. Employee shall receive the following compensation upon the termination of Employee's employment hereunder: (a) In the event Employee's employment hereunder is terminated for cause or if Employee voluntarily resigns, Employee shall be entitled to receive Employee's Base Salary prorated through the date of termination, payable within sixty (60) days after termination and Employee shall not be entitled to receive any Bonus or any other amount in respect of the Term Year in which termination occurs or in respect of any subsequent years, provided, however, that if Employee voluntarily resigns (including giving notice of non-renewal to the Company pursuant to Section 2 hereof at anytime after (i) John M. Cook ("Cook") ceases to serve as President and the chief executive officer of the Company, or (ii) Cook (either directly or together with his spouse and children) no longer owns a majority of all of the issued and outstanding shares of stock in PRGX, in addition to Employee's prorated Base Salary, Employee shall be entitled to receive a Bonus for the Term Year in which such termination occurs prorated through the effective date of such termination. The prorated Base Salary shall be payable in a lump sum within 60 days after termination and the prorated Bonus shall be payable in a lump sum within 90 days after the end of the Term Year to which it relates. (b) In the event Employee's employment hereunder is terminated by the Company without cause, Employee shall be entitled to receive Base Salary and Bonus for the Term Year in which such termination occurs prorated through the date of such termination, plus a severance payment equal to twelve (12) months of Base Salary at the rate then in effect if such termination occurs on or before December 31, 1996, and nine (9) months of Base Salary at the rate then in effect if such termination occurs after December 31, 1996, and shall not be entitled to receive any other amount in respect of the Term Year in which termination occurs or in respect of any subsequent years. The prorated Base Salary shall be payable in a lump sum within sixty (60) days after termination, the prorated Bonus shall be payable in a lump sum within ninety (90) days after the end of the Term Year to which it relates, and the severance payment shall be payable in nine (9) or twelve (12), as appropriate equal monthly installments commencing on the last day of the first month following termination. If the Company gives Employee notice of non-renewal pursuant to Section 2 hereof, it shall be deemed to be termination of Employee's employment by the Company without cause and you shall be entitled to compensation and benefits pursuant to this Section 11(b). (c) In the event Employee's employment hereunder is terminated by Employee's death, Employee's legal representative shall be entitled to receive Base Salary and Bonus for the Term Year in which such termination occurs prorated through the date of such termination and any other payments specifically provided for herein in respect of death and shall not be entitled to receive any other amount in respect of the Term Year in which termination occurs or in respect of any subsequent years. The prorated Base Salary shall be payable in a lump sum within sixty (60) days after termination and the prorated 5 6 Bonus shall be payable in a lump sum within ninety (90) days after the end of the Term Year to which it relates. (d) In the event Employee's employment hereunder is terminated for Disability, Employee or Employee's legal representative shall be entitled to receive (A) Base Salary and Bonus for the Term Year in which such termination occurs prorated through the date of such termination, with the prorated Base Salary and payable in a lump sum within sixty (60) days after termination and the prorated Bonus payable in a lump sum within ninety (90) days after the end of the Term Year to which it relates; and (B) Base Salary at the rates in effect upon the date of such termination payable in accordance with the Company's normal payroll procedure until the disability payments provided for under any of the Company's standard group disability insurance coverage provided pursuant to Section 10(a) hereof are scheduled to commence (but in no event longer than ninety (90) days after the date of Employee's termination) and shall not be entitled to receive any other amount in respect of the Term Year in which termination occurs or in respect of any subsequent years. (e) Upon expiration or sooner termination of this Agreement for any reason other than termination by the Company for cause the Company shall continue to pay Employee's Auto Allowance in accordance with Section 2(b) hereof and shall pay the premiums for COBRA coverage under the Company's group health and major medical policy for the same period in which Employee is entitled to receive severance payment hereunder. (f) If Employee's employment hereunder terminates for any reason during a Term Year, Employee will be paid within sixty (60) days of termination for all unused vacation time accrued up to the date of termination. 12. REMEDIES. (a) Employee acknowledges and agrees that, by virtue of the duties and responsibilities attendant to Employee's employment by the Company and the special knowledge of the Company's affairs, business, clients and operations that Employee has and will have as a consequence of such employment, irreparable loss and damage will be suffered by the Company if Employee should breach or violate any of the covenants and agreements contained in Sections 6, 7, 8, or 9 hereof; and Employee further acknowledges and agrees that each of such covenants is reasonably necessary to protect and preserve the Company. Employee, therefore, agrees and consents that, in addition to any other remedies available to it, the Company shall be entitled to specific performance by temporary as well as permanent injunction to prevent a breach or contemplated breach by Employee of any of the covenants or agreements contained in such Sections. (b) The existence of any claim, demand, action or cause of action that Employee may have against the Company, whether predicated upon this Agreement or otherwise, shall not constitute a defense to the enforcement by the Company of any of the covenants contained in Sections 6, 7, 8, or 9 hereof. (c) Nothing contained in this Agreement shall limit, abridge or modify the rights of the parties under applicable trade secret, trademark, copyright or patent law or under the laws of unfair competition. (d) In the event a court of competent jurisdiction determines that Employee has breached any of the foregoing covenants contained in Sections 6, 7, 8, or 9 hereof, Employee shall pay all costs of enforcement of the foregoing covenants, including, but not limited to, court costs and reasonable attorney's fees. 13. TERMINATION. (a) This Agreement may be terminated by the Company for "cause" upon delivery of notice of termination to Employee. As used herein, "cause" shall mean fraud, dishonesty, gross negligence, willful misconduct, conviction of a felony or an act of moral turpitude (e.g., theft, embezzlement and the like) or engaging in activities prohibited by Sections 6, 7, 8, or 9 hereof, or any other material breach of this Agreement. Notwithstanding anything to the contrary contained in the immediately foregoing sentence, if the Company asserts that Employee has committed a material breach of this Agreement which by its nature is capable of being remedied, the Company shall not be entitled to terminate Employee's employment for "cause" if Employee cures such breach within 30 days after receipt of written notice from the Company specifying in reasonable detail the events or circumstances which constitute Employee's failure to perform or other material breach and the steps deemed necessary by the Company to cure same; provided, however, if the nature of the events or circumstances which constitute such failure to perform or other material breach are 6 7 such that they cannot reasonably be cured within said 30 day period, the Company shall not be entitled to terminate this Agreement for "cause" if Employee commences to cure such events or circumstances within the aforesaid 30 day period and diligently and continuously pursues same to completion but in any event no later than 90 days after receipt of the written notice from the Company. (b) This Agreement may be terminated by the Company or Employee without cause by giving the other party sixty (60) days prior written notice and such termination shall be effective on the sixtieth (60th) day following receipt of such notice or such earlier date as the parties shall mutually agree. (c) In the event of Employee's Disability, physical or mental, the Company shall have the right, subject to all applicable laws, including without limitation, the Americans with Disabilities Act ("ADA"), to terminate Employee's employment immediately. For purposes of this Agreement, the term "Disability" shall mean Employee's inability, in the judgment in accordance with the ADA, of both a medical doctor selected by the Company and a medical doctor selected by Employee or Employee's legal representative (or, in the event that such doctors fail to agree, then in the majority opinion of such doctors and a third medical doctor chosen by such doctors) due to illness, accident or any other physical or mental incapacity to perform the services required of Employee hereunder for an aggregate of ninety (90) days within any period of one hundred eighty (180) consecutive days during which this Agreement is in effect. 14. SUCCESSORS AND ASSIGNS. This Agreement may not be assigned by Employee. This Agreement may be assigned by the Company. 15. SEVERABILITY. In the event that one or more of the words, phrases, sentences, clauses, sections, subdivisions or subparagraphs contained herein shall be held invalid, this Agreement shall be construed as if such invalid portion had not been inserted, and if such invalidity shall be caused by the length of any period of time, the number or location of Clients, the size of any area, or the description of the duties of Employee set forth in any part hereof, such period of time, number or location of Clients, area, or description of duties, or any combination thereof, shall be considered to be reduced to a period, number, location, area or description which would cure such invalidity. 16. SUBMISSION TO JURISDICTION. This Agreement shall be governed by and construed under the laws of the State of Georgia. Employee hereby agrees to submit to the jurisdiction of the courts of the State of Georgia or the federal courts within the State of Georgia and hereby appoints the Secretary of State of the State of Georgia as agent for the purpose of receiving service of process in respect of any proceeding in connection herewith. Time is of the essence of this Agreement and each and every Section and subsection hereof. 17. NOTICES. Any notice to be given under this Agreement shall be given in writing and may be effected by personal delivery or by placing such in the United States certified mail, return receipt requested and addressed as set forth below: If to Company: The Profit Recovery Group International I, Inc. 2300 Windy Ridge Parkway Suite 100, North Atlanta, Georgia 30339-8426 Attention: President If to Employee: At the address specified below Employee's signature. 18. REQUIRED DEDUCTIONS OR WITHHOLDINGS. All amounts payable to Employee pursuant to the Employment Agreement or the Compensation Agreement shall have deducted or withheld therefrom by the Company such amount or amounts as may be required to be so deducted or withheld pursuant to applicable federal, state or local laws. 19. ENTIRE AGREEMENT AND AMENDMENT. The Employment Agreement, the Compensation Agreement and the Plan constitute the entire agreement of the parties hereto with respect to the subject matter hereof and supersedes all prior discussions, understandings and agreements among the parties hereto. Any such prior agreements other than the Plan shall, from and after the effective date hereof, be null and void. This 7 8 Agreement may not be changed orally, but only by an agreement in writing signed by the party against whom enforcement of any waiver, change, modification, extension or discharge is sought. 20. WAIVER. The waiver by one party of a breach of any provision of this Agreement by the other party shall not operate or be construed as a waiver of any subsequent breach of the same or any other provision by the other party. 21. AUTHORIZATION. The Company represents and warrants to Employee that this Agreement has been authorized and approved by all necessary corporate actions. 22. AFFILIATES. As used herein, "Affiliates" shall mean PRGX, The Profit Recovery Group Asia, Inc., The Profit Recovery Group Australia, Inc., The Profit Recovery Group Belgium, Inc., The Profit Recovery Group Canada, Inc., The Profit Recovery Group France, Inc., The Profit Recovery Group, Germany, Inc., The Profit Recovery Group Mexico, Inc., The Profit Recovery Group Netherlands, Inc., The Profit Recovery Group New Zealand, Inc., The Profit Recovery Group U.K., Inc., and all other entities, whether now or hereafter existing, fifty-one (51%) percent or more of the outstanding capital stock of which is owned by any combination of the Company and/or any of the foregoing entities and which are engaged in substantially the same business as the Business of the Company and/or which provide services or employees to the Company or any Affiliate in connection with the operations thereof. 23. COUNTERPARTS. This Agreement may be executed in one or more counterparts, each of which shall be deemed an original and together which shall constitute one and the same instrument. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first written above. COMPANY: THE PROFIT RECOVERY GROUP INTERNATIONAL I, INC. By: /s/ JOHN M. COOK ------------------------------------ John M. Cook, Chief Executive Officer EMPLOYEE: /s/ TONY G. MILLS (SEAL) -------------------------------------- Tony G. Mills 598 Ward-Meade Drive Marietta, Georgia 30067 8 9 COMPENSATION AGREEMENT THIS COMPENSATION AGREEMENT ("Agreement") is made this 26th day of August, 1996 effective as of January 1, 1996 (the "Effective Date"), by and between THE PROFIT RECOVERY GROUP INTERNATIONAL I, INC., a Georgia corporation (the "Company") and TONY G. MILLS, a resident of the State of Georgia (the "Employee"). W I T N E S S E T H: WHEREAS, the parties hereto are party to that certain Employment Agreement, dated August 26th, 1996 and effective as of the Effective Date (the "Employment Agreement") whereby the Company employs Employee as Senior Vice President-Legal Affairs and Employee accepts such employment in accordance with the terms thereof; and WHEREAS, the Employment Agreement provides that the compensation payable to Employee shall be as set forth herein (any terms capitalized but not otherwise defined herein shall have the meanings ascribed to them in the Employment Agreement). NOW, THEREFORE, in consideration of the foregoing and of the mutual promises and covenants contained herein and other good and valuable consideration the receipt and sufficiency of which are hereby acknowledged, the parties hereto hereby agree as follows: 1. COMPENSATION. For services rendered by Employee under the Employment Agreement during the term thereof, Employee shall be entitled to receive the following compensation (subject to following sections), provided that such compensation and Performance Goals (as defined below) may be reviewed annually and modified by the Compensation Committee of the Board of Directors of the Company (the "Committee") in writing prior to the commencement of any Term Year. (a) Base Salary. One Hundred Fifty Thousand and No/100 ($150,000.00) Dollars on an annual basis ("Base Salary") shall be payable in accordance with the Company's customary payroll procedures. (b) Bonus. An annual bonus ("Bonus") in an amount determined as provided herein for each Term Year during the term of the Employment Agreement, payable in a lump sum within ninety (90) days following the end of each Term Year. The maximum potential Bonus shall be established from time to time by mutual consent of the parties hereto, but, assuming no decrease in Base Salary, shall not be less than Seventy-Five Thousand and No/100 ($75,000.00) Dollars per Term Year without Employee's consent, provided, however, that 10 Employee shall be entitled to a Bonus if and only if certain objective and subjective Performance Goals (as hereinafter defined) are met by Employee and the Company. The amount of any Bonus will depend on which level of Performance Goals Employee and the Company have met. Schedule 1 attached hereto contains the Performance Goals agreed to between the Company and Employee and an illustration of how a Bonus may be achieved based on the Performance Goals. (i) The "Performance Goals" shall consist of the following: A) "Earnings Per Share Goals" - based on the earnings per share of the Company and its Affiliates as of the end of each calendar year as determined by KPMG Peat Marwick, or the independent accounting firm then serving the Company, in accordance with generally accepted accounting principles; such calculation for the year ending December 31, 1996 shall be determined before giving effect to any net deferred tax liability resulting from termination of the Subchapter S and partnership status of the Company and its Affiliates in connection with the reorganization which preceded the initial public offering of PRGX. B) "Individual Performance Goals" - based on factors to be agreed upon by Employee and the Committee. (ii) The levels of the Performance Goals are as follows: A) "Threshold" - the minimum Performance Goal to be achieved to receive any Bonus (15% of Base Salary for each Term Year); B) "Target" - the Performance Goal that Employee and the Company agree is realistically attainable (35% of Base Salary for each Term Year); and C) "Stretch" - the Performance Goal that will provide the maximum Bonus (50% of Base Salary for each Term Year). (iii) Whether or not the Individual Performance Goals have been achieved shall be solely in the judgment of the Committee. The relative weight given to each Performance Goal in calculating the Bonus shall be reflected on Schedule 1 attached hereto or as otherwise mutually agreed to in writing by Employee and the Committee. -2- 11 2. TERMINATION. This Agreement shall terminate effect upon the termination of the Employment Agreement; provided, however, that all provisions hereof relating to any actions, including payment, subsequent to termination shall survive such termination. 3. INCORPORATION BY REFERENCE. The provisions of the Employment Agreement are hereby incorporated herein by reference. 4. SUCCESSORS AND ASSIGNS. This Agreement may not be assigned by Employee. In the event that the Employment Agreement is assigned this Agreement shall be assigned to the assignee thereof. 5. COUNTERPARTS. This Agreement may be executed in one or more counterparts, each of which shall be deemed an original and together which shall constitute one and the same instrument. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first written above. COMPANY: THE PROFIT RECOVERY GROUP INTERNATIONAL I, INC. By: /s/ John M. Cook ------------------------------------- John M. Cook, Chief Executive Officer EMPLOYEE: /s/ Tony G. Mills (SEAL) --------------------------------- Tony G. Mills -3- 12 SCHEDULE 1 -4- 13 1996 INCENTIVE PLAN - TONY MILLS
Total Corporate Incentive Earnings Per Share MBO (80% of Incentive) (20% of Incentive) Performance Cumulative Target Payout Target Payout $ Level Percent A1 B1 Threshold 15.0% $18,000 $ 4,500 $22,500 A2 B2 Target 35.0% $42,000 $10,500 $52,500 A3 B3 Maximum 50.0% $60,000 $15,000 $75,000
EPS A1=$.28/SHARE A2=$.37/SHARE A3=$.45/SHARE MBO B1=TBD B2=TBD B3=TBD 14 DESCRIPTION OF 1998 COMPENSATION ARRANGEMENT BETWEEN MR. TONY G. MILLS AND REGISTRANT The following describes certain compensation arrangements between the Registrant and Mr. Mills for calendar year 1998 which supplements the Employment Agreement dated August 26, 1996 between Registrant and Mr. Mills and the Compensation Agreement dated August 26, 1996 between Registrant and Mr. Mills. The Company has entered into an employment agreement with Mr. Mills that currently expires December 31, 1998. The employment agreement provides for automatic one-year renewals upon the expiration of each year of employment, subject to prior notice of nonrenewal by the Board of Directors. For 1998, the Compensation Committee of the Board of Directors (the "Compensation Committee") increased Mr. Mills' annual base salary to $170,000 (effective March 1, 1998). Pursuant to Mr. Mills' employment agreement, for 1998, he will receive a bonus of up to 50% of his base salary based in part upon the Company's performance for 1998. On January 27, 1998, the Compensation Committee granted Mr. Mills options to purchase 15,000 shares of Common Stock at a purchase price of $15.75 per share, vesting over a five-year period at 20% per year. Beginning in 1998, the Compensation Committee has determined that the Company will make annual contributions in the amount of $10,000 per year to a deferred compensation program for Mr. Mills, which amounts will vest over a ten-year period at 10% per year. Mr. Mills will be entitled to receive his deferred compensation upon termination of his employment for any reason, other than for cause, including death or disability. The Company has also agreed to provide Mr. Mills with certain other personal benefits. Upon termination, other than for cause or by voluntary resignation, Mr. Mills will receive severance payments equal to nine months' base salary and certain other personal benefits. Mr. Mills has agreed not to compete with the Company or to solicit any clients or employees of the Company for a period of 18 months following termination of his employment. EX-10.33 5 EMPLOYMENT & COMPENSATION AGREEMENT- BROOKMIRE 1 EXHIBIT 10.33 EMPLOYMENT AGREEMENT THIS EMPLOYMENT AGREEMENT ("Agreement"), is made this 23rd day of August, 1996, effective as of January 1, 1996 (the "Effective Date"), by and between THE PROFIT RECOVERY GROUP INTERNATIONAL I, INC., a Georgia corporation (the "Company") and DAVID A. BROOKMIRE, a resident of the State of Georgia (the "Employee"). WITNESSETH: WHEREAS, the Company desires to retain Employee to provide services to the Company and its Affiliates (as defined in Section 23 below), and Employee desires to provide his services to the Company pursuant to the terms and conditions that follow; NOW, THEREFORE, in consideration of the mutual promises and covenants hereinafter contained and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties do hereby agree as follows: 1. EMPLOYMENT. Employee shall serve as Senior Vice President -- Human Resources of the Company. Employee agrees to apply Employee's full time efforts to the position and to perform Employee's work at all times to the best of Employee's ability and at the direction of the Chief Executive Officer of the Company. Employee will render to the Company at regular intervals set by the Company, reports and accounting of the status and progress of any work Employee is performing. 2. TERM. The initial term of this Agreement shall commence on January 1, 1996, and shall continue until December 31, 1996, unless sooner terminated as hereinafter provided. Unless otherwise terminated pursuant to Section 11 hereof, this Agreement shall automatically renew on a year-to-year basis at the end of the initial term and each subsequent renewal term unless either party gives written notice of non-renewal to the other at least ninety (90) days prior to the end of the initial term or a renewal term. The initial term of this Agreement and any subsequent one-year renewal period shall be deemed a "Term Year." 3. SCOPE OF THE COMPANY'S ACTIVITIES. Employee acknowledges and agrees that the Company conducts the following business in the following territories: (a) Scope of the Company's Business. The Company is engaged in the business of auditing accounts payable, paid bill files, promotional and demonstrator agreements, personal property, real estate, sales and use tax and other taxes, common area maintenance charges, telephone and other utilities, sales promotion, advertising and cosmetic wage/commission agreements of its Clients, as hereinafter defined, to identify and document for subsequent charge back or credit over-payments and/or under deductions (collectively, the "Audit Activities"), and rendering management counseling services associated with the Audit Activities (collectively, the "Business of the Company"). (b) Location of the Company's Business. The Company actively conducts business with its clients (herein referred to as "Clients") throughout the United States, Australia, Belgium, Canada, France, Germany, Great Britain, Hong Kong, Indonesia, Malaysia, Mexico, Netherlands, New Zealand, Singapore, Taiwan, and Thailand. The address of the Company's principal office in Atlanta, Georgia where Employee provides substantially all of his services on behalf of the Company is 2300 Windy Ridge Parkway, Suite 100, North, Atlanta, Cobb County, Georgia 30339-8426 (the "Principal Office"). 4. COMPENSATION. For services rendered by Employee under this Agreement during the term hereof, Employee shall be entitled to receive the compensation and benefits set forth in Sections 10, 11 and 12 hereof and in that certain Compensation Agreement by and between Employee and the Company (the "Compensation Agreement"), which provides in part that as of the Effective Date Employee's Base Salary (as defined therein) is One Hundred Twenty Thousand and No/100 ($120,000.00) Dollars exclusive of Ten Thousand and No/100 ($10,000.00) Dollars of salary to be deferred in accordance therewith, subject to any future amendment of the Compensation Agreement. 2 5. STOCK OPTION. Employee and The Profit Recovery Group International, Inc., a Georgia corporation ("PRGX"), are party to one or more separate stock option agreements in accordance with which Employee has been granted non-qualified options to purchase PRGX Common Stock under the 1996 Stock Option Plan (the "Plan"). 6. SPECIFIC ACKNOWLEDGMENTS. Employee acknowledges that the Company has expended and will continue to expend substantial time, money, effort and other resources to develop its goodwill, clients, business sources and relationships and that the Company has a legitimate business interest in protecting same. In connection with Employee's employment by the Company as herein provided, the Company will introduce Employee to its Clients, business sources and relationships and will expend considerable time, effort and capital to train Employee in the business of the Company. Employee further acknowledges that, by virtue of Employee's employment with the Company, Employee will be in a position of substantial responsibility and authority and will have frequent and substantial contact with certain of the Company's Clients and business sources and relationships. Employee further acknowledges that in Employee's capacity, Employee will be privy to certain confidential information, Company secrets and proprietary information not generally known or available to the Company's competitors or the general public. (a) Agreement Not to Compete -- Competing Businesses. Employee covenants and agrees that during Employee's employment by the Company and for a period of eighteen (18) months after the termination of Employee's employment for any reason whatsoever, of such employment, he will not, without the prior written consent of the Company signed by the President of the Company, directly or indirectly, (i) for himself or (ii) as a consultant, management, supervisory or executive employee or owner of a Competing Business, as hereinafter defined, or (iii) as an independent contractor for a Competing Business, engage in any business, within a radius of thirty (30) miles of the Principal Office, for which Employee provides services which are the same or substantially similar to his duties as Employee as herein described. (b) Agreement Not to Solicit Clients. Employee covenants and agrees that during Employee's employment by the Company and for a period of eighteen (18) months after termination of Employee's employment for any reason whatsoever, Employee will not, without the prior written consent of the Company signed by the President of the Company, directly or indirectly, on Employee's behalf or on behalf of a Competing Business, as hereinafter defined, solicit, divert or appropriate, or attempt to solicit, divert or appropriate any of the Company's Clients for whom Employee performed services or otherwise had direct contact, influence and/or responsibility during the twenty-four (24) month period immediately preceding the termination of Employee's employment with the Company (or such shorter period if Employee is employed for less than 24 months) for the purpose of providing services of the type identified in Section 3(a) hereof. Employee's covenants pursuant to this subsection (b) shall also apply to prospective customers of the Company with respect to which Employee participated in soliciting on behalf of the Company during the twenty-four (24) month period immediately preceding the termination of Employee's employment with the Company (or such shorter period if Employee is employed for less than 24 months). (c) Agreement Not to Solicit Employees or Contractors. Employee covenants and agrees that during Employee's employment by the Company and for a period of eighteen (18) months after termination of Employee's employment for any reason whatsoever, Employee will not, without the prior written consent of the Company signed by the President of the Company, directly or indirectly, on Employee's behalf or on behalf of others, solicit, entice, persuade or induce, or attempt to solicit, entice, persuade or induce any person who is actively employed by, or is performing services as an independent contractor for, the Company and (i) who was employed by, or was performing services as an independent contractor for, the Company at any time during which Employee was employed by the Company and (ii) who reported to Employee or was within Employee's chain of responsibility, or (iii) who had regular contact with Employee, to terminate his or her employment or contractual arrangement with the Company or to become employed or engaged by any person, firm or entity other than the Company, or approach any such person for any of the foregoing purposes or authorize or assist in the taking of any such action by any third party. (d) Proprietary Information. All Proprietary Information, as hereinafter defined, and all physical embodiments thereof received or developed by Employee or disclosed to Employee while employed by the 2 3 Company is confidential to and is and will remain the sole and exclusive property of the Company. Except to the extent necessary to perform the duties assigned to Employee by the Company, Employee will hold such Proprietary Information in trust and in the strictest confidence, and will not use, reproduce, distribute, disclose or otherwise disseminate the Proprietary Information or any physical embodiments thereof and may in no event take any action causing or fail to take the action necessary in order to prevent any Proprietary Information disclosed to or developed by Employee to lose its character or cease to qualify as Proprietary Information. The confidentiality requirements and use restrictions contained in this subsection shall survive any termination of Employee's employment with the Company but shall not apply (i) to any information that falls into the public domain through no fault of Employee, or (ii) to Proprietary Information which is not Trade Secrets, as hereinafter defined, when a period of five (5) years has expired following the termination of Employee's employment with Company. Upon request by the Company, and in any event upon termination of Employee's employment with the Company for any reason, Employee will promptly deliver to the Company all property belonging to the Company, including without limitation all Proprietary Information (and all physical embodiments thereof) then in Employee's custody, control, or possession. (e) Contracts or Other Agreements with Former Employer or Business. Employee agrees that Employee will provide to the Company, upon the execution of this Agreement, a copy of the pertinent portions of any employment agreement or similar document executed by Employee with a former employer or any other business. Employee warrants and represents that (i) the execution and delivery of this Agreement by Employee and the performance of the obligations, covenants and agreements contained herein, do not and will not conflict with or result in any breach or violation of any of the terms and provisions of any agreement, judgment, order, statute or other instrument or restriction of any kind with respect to which Employee is bound, and (ii) Employee is not subject to any restrictive covenant agreement, covenant not to compete, nonsolicitation agreement or other agreement that would prohibit Employee from carrying out Employee's duties hereunder. (f) Definitions. - "Competing Business" means any business organization of whatever form engaged, either directly or indirectly, in any business or enterprise which is the same as, or substantially the same as, the Business of the Company, as defined in Section 2(a) hereof. - "Proprietary Information" means information related to the Company or its Affiliates or clients (i) which derives economic value, actual or potential, from not being generally known to or readily ascertainable by other persons who can obtain economic value from its disclosure or use; and (ii) which is the subject of efforts that are reasonable under the circumstances to maintain its secrecy. Such Proprietary Information shall include information in any form or media and shall not necessarily be in writing. Proprietary Information also includes information which has been disclosed to the Company or its Affiliates by a third party and which the Company or its Affiliates are obligated to treat as confidential. Trade Secrets means Proprietary Information which meets the foregoing criteria and which is also deemed to be a "Trade Secret" as that term is defined in the Georgia Trade Secrets Act of 1990, O.C.G.A. sec. 10-1-760, et. seq., including but not limited to technical and nontechnical data, formulas, patterns, compilations, programs, devices, methods, techniques, drawings, processes, financial data, financial plans, product plans, and lists of actual or potential customers and suppliers. Proprietary Information may or may not be marked by the Company or its Affiliates as "proprietary" or "secret" or with other words or markings of similar meaning, and the failure of the Company to make such notations upon the physical embodiments of any Proprietary Information shall not affect the status of such information as Proprietary Information. 7. OWNERSHIP BY COMPANY. All software, computer diskettes, CDs, video tapes, literature, cassettes, photographs, prints, slides, records, notes, files, memoranda, reports, audit reports, price lists, client lists, documents, and all copies thereof, equipment, and apparatus and like items relating to the business of the Company, Proprietary Information or Trade Secrets which shall be prepared by Employee or which shall be disclosed to or which shall come into Employee's possession shall be and remain the sole and exclusive property of the Company. Employee agrees that, upon the termination of employment with the Company for any reason whatsoever, or at any other time upon request, Employee will promptly deliver to the Company the originals and all copies of any of the foregoing that are in Employee's possession, custody or control, and any other property belonging to the Company. 3 4 8. INVENTIONS. Employee agrees that, during the term of this Agreement, Employee has a continuing duty to disclose to the Company any invention, improvement, discovery, process, formula, code, program, system or method (collectively, "Inventions") developed or being developed by Employee any time during the term of Employee's employment, either solely by Employee or jointly with others, whether or not such Inventions are assignable to the Company as set forth below. Any Invention which Employee has conceived or made or may conceive or make at any time while employed by the Company, either solely by Employee or jointly with others, (a) which relate in any way to the actual Business of the Company, or (b) which relate in any way to the actual or anticipated research or development of the Company, or (c) which are suggested by or result from any task assigned to Employee on behalf of the Company, shall be the sole and exclusive property of the Company, and Employee hereby assigns to the Company any right, title or interest Employee may have to such Invention. Furthermore, any such Invention shall constitute Proprietary Information as set forth above. At the request and expense of the Company, Employee will execute and deliver all documents and will do such other acts as may be in the Company's opinion necessary or desirable to secure to the Company or its nominee all right, title and interest in and to any such Invention. The provisions of this Section shall be binding upon Employee's heirs, legal representatives, successors and assigns. 9. COPYRIGHTS. Employee understands that any original works of authorship fixed in tangible form, including, without limitation, computer software and manuals, advertising material, and training material, prepared by Employee, either solely or jointly with others, within the scope of Employee's employment by the Company, constitute works made for hire as provided by law, so that such works are owned by the Company. If, for any reason, a work of authorship by Employee created during the term of Employee's employment by the Company and related to the Business of the Company is considered other than a work for hire, then Employee hereby assigns all Employee's right, title and interest in copyrights to such works of authorship to the Company. 10. INSURANCE AND BENEFITS. (a) Subject to Employee being insurable at standard rates as of the commencement of employment (or when coverage is applied for, as applicable) and to the availability of such coverage from the Company's customary insurance providers, the Company shall (i) obtain on Employee's behalf life, disability, hospitalization and medical insurance coverage in accordance with the Company's standard group coverage, (ii) pay the premiums, or reimburse Employee for premiums paid, to obtain, coverage as described below in addition to the Company's standard group coverage in accordance with the Company's standard policies and procedures: (A) basic term life insurance policy at the best available rates for a fifteen (5) year level term type product, but not higher than standard nonsmoker rates, in an amount of coverage equal to One Million ($1,000,000) Dollars, and (B) disability income insurance coverage, which, when added to the standard group coverages, will provide a monthly benefit of sixty (60%) percent of the sum of (x) Employee's current Base Salary, (y) any amount of Bonus (as defined in the Compensation Agreement) payable to Employee, without adjustment or deduction for any Bonus amount the payment of which was deferred pursuant to this Agreement for the Term Year preceding the Term Year in which the disability occurs, and (z) any amount of salary for the Term Year in which the disability occurs, the payment of which was deferred pursuant to this Agreement, and (iii) share the cost of Employee's health insurance premiums in accordance with the Company's standard employee policies and procedures. The Company will reimburse Employee for any amount incurred in connection with an annual physical examination not covered by insurance. (b) Employee shall be provided an annual automobile allowance of Eight Thousand and No/100 ($8,000.00) Dollars, payable in accordance with the Company's customary procedures, which amount shall be reviewed annually and may be modified in writing prior to the commencement of any Term Year. (c) The Company will pay for an executive financial program for Employee as provided by Advisory Services, Ltd. (d) Employee shall be entitled to participate in any 401(k) Plan of the Company generally available to other employees of the Company, except as may be limited by applicable law or regulation. 4 5 (e) The Company shall pay Employee's reasonable travel and business expenses (including air travel at coach rate), subject to Employee's submission of receipts therefor in accordance with the Company's normal practices and procedures. (f) Any amounts the Company pays for insurance coverage or fringe benefits that are supplemental or in addition to the Company's standard insurance coverage or benefits shall be compensation in addition to Base Salary (but not included within the definition of Base Salary) and shall be reflected on Employee's W-2. 11. PAYMENT OF COMPENSATION UPON TERMINATION. In addition to any deferred compensation to which Employee might be entitled pursuant to Section 12 hereof following Employee's termination of employment, Employee shall receive the following compensation upon the termination of Employee's employment hereunder: (a) In the event Employee's employment hereunder is terminated for cause or if Employee voluntarily resigns, Employee shall be entitled to receive Employee's Base Salary prorated through the date of termination, payable within sixty (60) days after termination and Employee shall not be entitled to receive any Bonus, or any other amount in respect of the Term Year in which termination occurs or in respect of any subsequent years. (b) In the event Employee's employment hereunder is terminated by the Company without cause, Employee shall be entitled to receive Base Salary and Bonus for the Term Year in which such termination occurs prorated through the date of such termination, plus a severance payment equal to six (6) months of Base Salary at the rate then in effect and shall not be entitled to receive any other amount in respect of the Term Year in which termination occurs or in respect of any subsequent years. The prorated Base Salary shall be payable in a lump sum within sixty (60) days after termination, the prorated Bonus shall be payable in a lump sum within ninety (90) days after the end of the Term Year to which it relates, and the severance payment shall be payable in six (6) equal monthly installments commencing on the last day of the first month following termination. (c) In the event Employee's employment hereunder is terminated by Employee's death, Employee's legal representative shall be entitled to receive Base Salary and Bonus for the Term Year in which such termination occurs prorated through the date of such termination and any other payments specifically provided for herein in respect of death and shall not be entitled to receive any other amount in respect of the Term Year in which termination occurs or in respect of any subsequent years. The prorated Base Salary shall be payable in a lump sum within sixty (60) days after termination and the prorated Bonus shall be payable in a lump sum within ninety (90) days after the end of the Term Year to which it relates. (d) In the event Employee's employment hereunder is terminated for Disability, Employee or Employee's legal representative shall be entitled to receive (A) Base Salary and Bonus for the Term Year in which such termination occurs prorated through the date of such termination, with the prorated Base Salary payable to Employee payable in a lump sum within sixty (60) days after termination and the prorated Bonus payable in a lump sum within ninety (90) days after the end of the Term Year to which it relates; and (B) Base Salary at the rates in effect upon the date of such termination payable in accordance with the Company's normal payroll procedure until the disability payments provided for under any of the Company's standard group disability insurance coverage provided pursuant to Section 10(a) hereof are scheduled to commence (but in no event longer than ninety (90) days after the date of Employee's termination) and shall not be entitled to receive any other amount in respect of the Term Year in which termination occurs or in respect of any subsequent years. (e) In the event the Employment Agreement is not renewed due to the Company giving Employee notice of non-renewal pursuant to Section 2 hereof, Employee shall be entitled to receive such severance payment or any other amount with respect to the Company's non-renewal of this Agreement as if such non-renewal were termination without cause hereunder. Non-Renewal by Employee shall give rise to no right to receive any severance payment hereunder. 5 6 (f) If Employee's employment hereunder terminates for any reason during a Term Year, Employee will be paid within sixty (60) days of termination for all unused vacation time accrued up to the date of termination. 12. DEFERRED COMPENSATION. (a) Annual Deferred Compensation Credit. An account ("Employee's Account") shall be maintained on the books and records of the Company for the purposes hereinafter provided. As of March 31, 1996, the amount credited to Employee's Account, whether vested or unvested (the "Credit Balance"), equals $2,534.73 (including $17.31 in accrued interest). As of the end of each Term Year beginning with the Term Year ending December 31, 1996, the Credit Balance of Employee's Account shall be increased by an amount equal to the sum of (i) the Salary Deferred Compensation Credit (as defined in the Compensation Agreement) for such Term Year, and (ii) Ten Thousand and No/100 ($10,000.00) Dollars (the "Company Deferred Compensation Credit"). In the event of the termination of Employee's employment hereunder for any reason prior to the end of any Term Year, however, no credits shall be made to Employee's Account with respect to a Company Deferred Compensation Credit for such Term Year. Employee's Account shall also be credited from and after the date hereof with an amount computed like interest on the credit balance of Employee's Account at the Prime Rate (as hereinafter defined). For these purposes, the Salary Deferred Compensation Credit and all interest so accrued on the credit balance of Employee's Account shall be deemed to be credited to Employee's Account as of the end of each month of each Term Year, and the Company Deferred Compensation Credit shall be deemed to be credited to Employee's Account as of December 31 of each Term Year, as provided in Section 12(b) hereof. As used in this Agreement, the term "Prime Rate" means the rate publicly announced from time to time by NationsBank, N.A. (South), Atlanta, Georgia, as its "prime rate." (b) Vesting. The provisions of this Section 12(b) shall determine the portion of Employee's Account which is vested and eligible for payment in accordance with Section 4(c) hereof. (i) General Vesting Rule. Subject to the other provisions of this Section 12(b), Employee shall in all events be immediately vested in the portion of Employee's Account attributable to all Salary Deferred Compensation Credits and interest credited with respect thereto (as determined pursuant to Section 4(a) hereof. Subject to the other provisions of this Section 12(b), Employee's right to the portion of Employee's Account attributable to each Company Deferred Compensation Credit and all interest credited with respect thereto (as determined pursuant to Section 12(a) hereof) will vest as follows: (A) Employee's rights shall be immediately vested as of the end of the Term Year for which such amount is credited with respect to that portion of the Company Deferred Compensation Credit equal to the product of ten (10%) percent of the Company Deferred Compensation Credit multiplied by the number of calendar years elapsed from the end of the calendar year in respect of which any funds were first credited to Employee's Account to the Term Year for which such amount is credited (except in the case of termination of Employee's employment hereunder without cause, in which case vesting of the product described in this sentence in respect to the Term Year in which termination without cause occurs will be prorated through the date of termination), and (B) thereafter, Employee's rights to the remainder of each Term Year's Company Deferred Compensation Credit shall vest based on ten (10%) percent of the Balance for each subsequent year until Employee is one hundred (100%) percent vested in such Company Deferred Compensation Credit. As a result of clause (A) and clause (B) above, all contributions shall be fully vested at the end of ten (10) Term Years. (ii) Termination Due to Death or Disability. In the event of termination of Employee's employment hereunder due to death or Disability, then notwithstanding anything to the contrary in Section 12(b)(i) hereof, Employee, in the event of Disability, or Employee's Beneficiary, in the event of Employee's death, shall be vested in the Credit Balance of Employee's Account. (iii) Termination for Gross Cause. Upon the termination of Employee's employment hereunder for Gross Cause, notwithstanding anything to the contrary in Section 12(b)(i), Employee shall be vested in the Salary Deferred Compensation Credit in Employee's Account as of the end of the month preceding such termination or resignation but shall not be vested in any portion of the Company Deferred Compensation Credit, regardless of whether or not previously vested, or any interest accrued thereon. 6 7 (iv) No Further Credits. Upon Employee's termination of employment under the Employment Agreement for any reason, no further increase in the Credit Balance shall be made to Employee's Account. (c) Payments Following Termination of Employment. (i) Termination. In the event of termination of Employee's employment hereunder for any reason, Employee (or, in the event of Employee's death, Employee's Beneficiary) shall receive a payment equal to the portion of the Credit Balance of Employee's Account which is vested in accordance with Section 12(b) hereof within sixty (60) days after the earlier to occur of (A) Employee's death, or (B) such termination of Employee's employment. (ii) Forfeiture of Balance of Employee's Account. The portion of the Credit Balance of Employee's Account which is not vested in accordance with Section 12(b) hereof following termination of Employee's employment hereunder shall be forfeited and Employee shall not be entitled to any payment with respect thereto. (d) Beneficiary. Employee shall have the right to designate a beneficiary ("Beneficiary") under this Agreement who shall succeed to Employee's right to receive payments with respect to this Section 12 hereof in the event of Employee's death. In the event Employee fails to designate a Beneficiary or a Beneficiary dies without Employee's designation of a successor Beneficiary, then for all purposes hereunder the Beneficiary shall be Employee's estate. No designation of Beneficiary shall be valid unless in writing signed by Employee, dated and delivered to the Company. Beneficiaries may be changed by Employee without the consent of any prior Beneficiary. (e) Rights Unsecured; Unfunded Plan; ERISA. (i) The Company's obligations arising under this Section 12 hereof to pay benefits to Employee or Employee's Beneficiary constitute a mere promise by the Company to make payments in the future in accordance with the terms hereof and Employee and Employee's Beneficiary have the status of a general unsecured creditor of the Company. Neither Employee nor Employee's Beneficiary shall have any rights in or against any specific assets of the Company. (ii) It is the intention of the Company and Employee that the Company's obligations under this Section 12 hereof be unfunded for income tax purposes and for purposes of Title I of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"). (iii) The Company and Employee shall treat its obligations under this Section 12 hereof as maintained for a select group of management or highly compensated employees exempt from Parts 2, 3 and 4 of Title I of ERISA. The Company shall comply with the reporting and disclosure requirements of Part 1 of Title I of ERISA in accordance with U.S. Department of Labor Regulation sec.2520.104-23. (f) Nonassignability. The rights Employee and Employee's Beneficiary to payments pursuant to this Section 12 hereof are not subject in any manner to anticipation, alienation, sale, transfer, assignment, pledge, encumbrance attachment, or garnishment by creditors of Employee or Employee's Beneficiary. 13. REMEDIES. (a) Employee acknowledges and agrees that, by virtue of the duties and responsibilities attendant to Employee's employment by the Company and the special knowledge of the Company's affairs, business, clients and operations that Employee has and will have as a consequence of such employment, irreparable loss and damage will be suffered by the Company if Employee should breach or violate any of the covenants and agreements contained in Sections 6, 7, 8, or 9 hereof; and Employee further acknowledges and agrees that each of such covenants is reasonably necessary to protect and preserve the Company. Employee, therefore, agrees and consents that, in addition to any other remedies available to it, the Company shall be entitled to specific performance by temporary as well as permanent injunction to prevent a breach or contemplated breach by Employee of any of the covenants or agreements contained in such Sections. (b) The existence of any claim, demand, action or cause of action that Employee may have against the Company, whether predicated upon this Agreement or otherwise, shall not constitute a defense to the enforcement by the Company of any of the covenants contained in Sections 6, 7, 8, or 9 hereof. (c) Nothing contained in this Agreement shall limit, abridge or modify the rights of the parties under applicable trade secret, trademark, copyright or patent law or under the laws of unfair competition. 7 8 (d) In the event a court of competent jurisdiction determines that Employee has breached any of the foregoing covenants contained in Sections 6, 7, 8, or 9 hereof, Employee shall pay all costs of enforcement of the foregoing covenants, including, but not limited to, court costs and reasonable attorney's fees. 14. TERMINATION. (a) This Agreement may be terminated by the Company for "cause" upon delivery of notice of termination to Employee. As used herein, "cause" shall mean (i) fraud, dishonesty, gross negligence, willful misconduct, commission of a felony or act of moral turpitude (e.g. theft, embezzlement and the like), or (ii) engaging in activities prohibited by Sections 6, 7, 8, or 9 hereof, or any other material breach of this Agreement, and "Gross Cause" shall refer to any item or items listed in subclause 14(a)(i) immediately above. (b) This Agreement may be terminated by the Company or Employee without cause by giving the other party thirty (30) days prior written notice and such termination shall be effective on the thirtieth (30th) day following receipt of such notice or such earlier date as the parties shall mutually agree. (c) In the event of Employee's Disability, physical or mental, the Company shall have the right, subject to all applicable laws, including without limitation, the Americans with Disabilities Act ("ADA"), to terminate Employee's employment immediately. For purposes of this Agreement, the term "Disability" shall mean Employee's inability, in the judgment in accordance with the ADA, of both a medical doctor selected by the Company and a medical doctor selected by Employee or Employee's legal representative (or, in the event that such doctors fail to agree, then in the majority opinion of such doctors and a third medical doctor chosen by such doctors) due to illness, accident or any other physical or mental incapacity to perform the services required of Employee hereunder for an aggregate of ninety (90) days within any period of one hundred eighty (180) consecutive days during which this Agreement is in effect. 15. SUCCESSORS AND ASSIGNS. This Agreement may not be assigned by Employee. This Agreement may be assigned by the Company. 16. SEVERABILITY. In the event that one or more of the words, phrases, sentences, clauses, sections, subdivisions or subparagraphs contained herein shall be held invalid, this Agreement shall be construed as if such invalid portion had not been inserted, and if such invalidity shall be caused by the length of any period of time, the number or location of Clients, the size of any area, or the description of the duties of Employee set forth in any part hereof, such period of time, number or location of Clients, area, or description of duties, or any combination thereof, shall be considered to be reduced to a period, number, location, area or description which would cure such invalidity. 17. SUBMISSION TO JURISDICTION. This Agreement shall be governed by and construed under the laws of the State of Georgia. Employee hereby agrees to submit to the jurisdiction of the courts of the State of Georgia or the federal courts within the State of Georgia and hereby appoints the Secretary of State of the State of Georgia as agent for the purpose of receiving service of process in respect of any proceeding in connection herewith. Time is of the essence of this Agreement and each and every Section and subsection hereof. 18. NOTICES. Any notice to be given under this Agreement shall be given in writing and may be effected by personal delivery or by placing such in the United States certified mail, return receipt requested and addressed as set forth below: If to Company: The Profit Recovery Group International I, Inc. 2300 Windy Ridge Parkway Suite 100, North Atlanta, Georgia 30339-8426 Attention: President If to Employee: At the address specified below Employee's signature. 19. REQUIRED DEDUCTIONS OR WITHHOLDINGS. All amounts payable to Employee pursuant to the Employment Agreement or the Compensation Agreement shall have deducted or withheld therefrom by the Company 8 9 such amount or amounts as may be required to be so deducted or withheld pursuant to applicable federal, state or local laws. 20. ENTIRE AGREEMENT AND AMENDMENT. The Employment Agreement, the Compensation Agreement and the Plan constitute the entire agreement of the parties hereto with respect to the subject matter hereof and supersedes all prior discussions, understandings and agreements among the parties hereto. Any such prior agreements other than the Plan shall, from and after the effective date hereof, be null and void. This Agreement may not be changed orally, but only by an agreement in writing signed by the party against whom enforcement of any waiver, change, modification, extension or discharge is sought. 21. WAIVER. The waiver by one party of a breach of any provision of this Agreement by the other party shall not operate or be construed as a waiver of any subsequent breach of the same or any other provision by the other party. 22. AUTHORIZATION. The Company represents and warrants to Employee that this Agreement has been authorized and approved by all necessary corporate actions. 23. AFFILIATES. As used herein, "Affiliates" shall mean PRGX, The Profit Recovery Group Asia, Inc., The Profit Recovery Group Australia, Inc., The Profit Recovery Group Belgium, Inc., The Profit Recovery Group Canada, Inc., The Profit Recovery Group France, Inc., The Profit Recovery Group Germany, Inc., The Profit Recovery Group Mexico, Inc., The Profit Recovery Group Netherlands, Inc., The Profit Recovery Group New Zealand, Inc., The Profit Recovery Group U.K., Inc., and all other entities, whether now or hereafter existing, fifty-one percent (51%) or more of the outstanding capital stock of which is owned by any combination of the Company and/or any of the foregoing entities and which are engaged in substantially the same business as the Business of the Company and/or which provide services or employees to the Company or any Affiliate in connection with the operations thereof. 24. COUNTERPARTS. This Agreement may be executed in one or more counterparts, each of which shall be deemed an original and together which shall constitute one and the same instrument. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first written above. COMPANY: THE PROFIT RECOVERY GROUP INTERNATIONAL I, INC. By: /s/ JOHN M. COOK ------------------------------------ John M. Cook Chief Executive Officer EMPLOYEE: /s/ DAVID A. BROOKMIRE (SEAL) -------------------------------------- David A. Brookmire 4155 Westchester Crossing Roswell, GA 30075 9 10 COMPENSATION AGREEMENT THIS COMPENSATION AGREEMENT ("Agreement") is made this 23rd day of August, 1996 effective as of January 1, 1996 (the "Effective Date"), by and between THE PROFIT RECOVERY GROUP INTERNATIONAL I, INC., a Georgia corporation (the "Company") and DAVID A. BROOKMIRE, a resident of the State of Georgia (the "Employee"). W I T N E S S E T H: WHEREAS, the parties hereto are party to that certain Employment Agreement, dated August __, 1996 and effective as of the Effective Date (the "Employment Agreement") whereby the Company employs Employee as Senior Vice President-Human Resources and Employee accepts such employment in accordance with the terms thereof; and WHEREAS, the Employment Agreement provides that the compensation payable to Employee shall be as set forth herein (any terms capitalized but not otherwise defined herein shall have the meanings ascribed to them in the Employment Agreement). NOW, THEREFORE, in consideration of the foregoing and of the mutual promises and covenants contained herein and other good and valuable consideration the receipt and sufficiency of which are hereby acknowledged, the parties hereto hereby agree as follows: 1. COMPENSATION. For services rendered by Employee under the Employment Agreement during the term thereof, Employee shall be entitled to receive the following compensation (subject to following sections), provided that such compensation and Performance Goals (as defined below) may be reviewed annually and modified by the Compensation Committee of the Board of Directors of the Company (the "Committee") in writing prior to the commencement of any Term Year. (a) Base Salary. One Hundred Twenty Thousand and No/100 ($120,000.00) Dollars on an annual basis ("Base Salary") shall be payable in accordance with the Company's customary payroll procedures. For purposes of this Agreement, the term "Adjusted Base Salary" shall mean and refer to the sum of Employee's Base Salary and Ten Thousand and No/100 ($10,000.00) Dollars (such Ten Thousand and No/100 ($10,000.00) Dollars, together with interest accrued thereon as hereinafter provided, is hereinafter referred to as the "Salary Deferred Compensation Credit"). Employee's Salary Deferred Compensation Credit shall not be paid to Employee but such amount shall instead be deferred and credited to Employee's Account (as defined in Section 12(a) of the Employment Agreement) as deferred compensation in accordance with Section 12(a) of the Employment Agreement. In the event of termination of Employee's employment under the Employment Agreement for any reason during any Term Year, no portion of the Salary Deferred Compensation Credit shall be credited to Employee's Account in respect of the month in which such termination occurs or any subsequent period. 11 (b) Bonus. An annual bonus ("Bonus") in an amount determined as provided herein for each Term Year during the term of the Employment Agreement, payable in a lump sum within ninety (90) days following the end of each Term Year. The maximum potential Bonus shall be established from time to time by mutual consent of the parties hereto, but, assuming no decrease in Base Salary, shall not be less than Sixty-Five Thousand and No/100 ($65,000.00) Dollars per Term Year without Employee's consent, provided, however, that Employee shall be entitled to a Bonus if and only if certain objective and subjective Performance Goals (as hereinafter defined) are met by Employee and the Company. The amount of any Bonus will depend on which level of Performance Goals Employee and the Company have met. Schedule 1 attached hereto contains the Performance Goals agreed to between the Company and Employee and an illustration of how a Bonus may be achieved based on the Performance Goals. (i) The "Performance Goals" shall consist of the following: A) "Company Profit Goals" - based on the achievement of operating profit thresholds of the Company and its Affiliates (before interest, taxes and amortization of intangible assets) for the applicable Term Year agreed upon by Employee and the Committee; and B) "Company Accrued Revenue" - based on accrued annual revenues of the Company and its Affiliates for the applicable Term Year; and C) "Individual Performance Goals" - based on factors to be agreed upon by Employee and the Committee. (ii) The levels of the Performance Goals are as follows: A) "Threshold" - the minimum Performance Goal to be achieved to receive any Bonus (15% of Adjusted Base Salary for each Term Year); B) "Target" - the Performance Goal that Employee and the Committee agree is realistically attainable (35% of Adjusted Base Salary for each Term Year); and C) "Stretch" - the Performance Goal that will provide the maximum Bonus (50% of Adjusted Base Salary for each Term Year). (iii) Whether or not the Individual Performance Goals have been achieved shall be solely in the judgment of the Committee. The relative weight given to each Performance Goal in calculating the Bonus shall be reflected on Schedule 1 attached hereto or as -2- 12 otherwise mutually agreed to in writing by Employee and the Committee. (iv) Compliance with the Performance Goals described in subsection (i) above and Schedule 1 attached hereto for any Term Year shall be determined without regard to the financial contribution of any merger or acquisition which may be consummated by the Company or its Affiliates subsequent to the date of this Agreement; provided, however, that if any such merger or acquisition should materially increase Employee's duties or responsibilities, Employee and the Committee shall in good faith consider an appropriate modification to the Performance Goals to equitably reflect Employee's additional duties or responsibilities; provided further, however, that the terms of this Agreement shall continue to govern and control unless and until the parties hereto execute and deliver an amendment to this Agreement. 2. TERMINATION. This Agreement shall terminate effect upon the termination of the Employment Agreement; provided, however, that all provisions hereof relating to any actions, including payment, subsequent to termination shall survive such termination. 3. INCORPORATION BY REFERENCE. The provisions of the Employment Agreement are hereby incorporated herein by reference. 4. SUCCESSORS AND ASSIGNS. This Agreement may not be assigned by Employee. In the event that the Employment Agreement is assigned this Agreement shall be assigned to the assignee thereof. 5. COUNTERPARTS. This Agreement may be executed in one or more counter parts, each of which shall be deemed an original and together which shall constitute one and the same instrument. -3- 13 IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first written above. COMPANY: THE PROFIT RECOVERY GROUP INTERNATIONAL I, INC. By: /s/ John M. Cook -------------------------------------- John M. Cook, Chief Executive Officer EMPLOYEE: /s/ David A. Brookmire (SEAL) ---------------------------------------- David A. Brookmire -4- 14 SCHEDULE 1 -5- 15 1996 INCENTIVE PLAN - David Brookmire
Total Corporate Corporate Incentive Accrued Revenue Operating Profit MBO (33.33% of Incentive) (33.33% of Incentive) (33.33% of Incentive) Performance Cumulative Target Payout Target Payout Target Payout $ Level Percent A1 B1 C1 Threshold 15.0% $6,500 $6,500 $6,500 $19,500 A2 B2 C2 Target 35.0% $15,166 $15,166 $15,168 $45,500 A3 B3 C3 Maximum 50.0% $21,666 $21,666 $21,668 $65,000
Revenue Operating Profit MBO ------- ---------------- --- A1=$65.4mm B1=15.6% C1=TBD A2=$72.6mm B2=17.7% C2=TBD A3=$79.3mm B3=19.2% C3=TBD
16 DESCRIPTION OF 1998 COMPENSATION ARRANGEMENT BETWEEN MR. DAVID A. BROOKMIRE AND REGISTRANT The following describes certain compensation arrangements between the Registrant and Mr. Brookmire for calendar year 1998 which supplements the Employment Agreement dated August 23, 1996 between Registrant and Mr. Brookmire and the Compensation Agreement dated August 23, 1996 between Registrant and Mr. Brookmire. The Company has entered into an employment agreement with Mr. Brookmire that currently expires December 31, 1998. The employment agreement provides for automatic one-year renewals upon the expiration of each year of employment, subject to prior notice of nonrenewal by the Board of Directors. For 1998, the Compensation Committee of the Board of Directors (the "Compensation Committee") increased Mr. Brookmire's annual base salary to $152,000 (effective March 1, 1998). Pursuant to Mr. Brookmire's employment agreement, for 1998, he will receive a bonus of up to 50% of his base salary based in part upon the Company's performance for 1998. On January 27, 1998, the Compensation Committee granted Mr. Brookmire's options to purchase 15,000 shares of Common Stock at a purchase price of $15.75 per share, vesting over a five-year period at 20% per year. Mr. Brookmire has elected to reduce his annual base salary by $10,000 per year and to contribute such amount to a deferred contribution program for him, which amount vests immediately. In addition, the Company will make annual matching contributions in the amount of $10,000 per year to a such deferred compensation program, which amounts will vest over a ten-year period at 10% per year. Mr. Brookmire will be entitled to receive his deferred compensation upon termination of his employment for any reason, other than for cause, including death or disability. The Company has also agreed to provide Mr. Brookmire with certain other personal benefits. Upon termination, other than for cause or by voluntary resignation, Mr. Brookmire will receive severance payments equal to six months' base salary. Mr. Brookmire has agreed not to compete with the Company or to solicit any clients or employees of the Company for a period of 18 months following termination of his employment. EX-10.34 6 COMPENSATION AGREEMENT- JOHN COOK 1 EXHIBIT 10.34 DESCRIPTION OF 1998-2002 COMPENSATION ARRANGEMENT BETWEEN MR. JOHN M. COOK AND REGISTRANT The following describes certain compensation arrangements between the Registrant and Mr. Cook for calendar year 1998 which supplements the Employment Agreement dated March 20, 1996 between Registrant and Mr. Cook. The Company has entered into an employment agreement, as amended, with Mr. Cook that currently expires December 31, 2002. The employment agreement provides for automatic one-year renewals upon the expiration of each year of employment (such that it always has a five-year term), subject to prior notice of non-renewal by the Board of Directors. Pursuant to Mr. Cook's employment agreement, for 1998 through 2002, Mr. Cook will receive an annual base salary of $350,000 and an annual bonus of up to 150% of his base salary based upon the Company's performance for the respective year. For 1998, the Compensation Committee of the Board of Directors (the "Compensation Committee") has determined that Mr. Cook also is eligible to receive options up to a maximum of 150,000 shares of Common Stock if 1998 earnings per share are 150% or more of 1997 earnings per share. Should 1998 earnings per share be at least 125% of 1997 earnings per share, Mr. Cook will be entitled to receive options to purchase an additional 75,000 shares of Common Stock, and a prorated additional amount if 1998 earnings per share are between 126% and 149% of 1997 earnings per share. Any options so granted to Mr. Cook shall be granted at fair market value as of the end of 1998 and will vest over a five-year period at 20% per year. If Mr. Cook is terminated other than for cause or if Mr. Cook resigns for "Good Reason," he is eligible to receive a severance payment up to a maximum amount not to be deemed an "excess parachute payment" under the Internal Revenue Code of 1986, as amended, and all outstanding options immediately become vested. For purposes of Mr. Cook's employment agreement "Good Reason" means, unless Mr. Cook consents thereto, (i) the assignment of duties or a position or title inconsistent with or lower than the duties, position or title provided in Mr. Cook's employment agreement; (ii) the principal place where Mr. Cook is required to perform a substantial portion of his duties is outside of Atlanta, Georgia; (iii) the reduction of Mr. Cook's compensation unless the Board (or the Compensation Committee) has authorized a general compensation decrease for all executive employees of the Company; (iv) there is a merger, consolidation or reorganization of the Company or any other transaction resulting in Mr. Cook (together with his immediate family or trusts or limited partnerships established for the benefit of Mr. Cook and/or such persons) owning in the aggregate less than 20% of the voting control of the Company; or (v) there is a sale or agreement to sell or a grant of an option to purchase all or substantially all of the assets of the Company. Mr. Cook also is entitled to receive certain supplemental insurance coverage and other personal benefits under his employment agreement. Mr. Cook has agreed not to compete with the Company or to solicit any of the Company's clients or employees for a period of 18 months following termination of employment. EX-10.35 7 COMPENSATION AGREEMENT- JOHN TOMA 1 EXHIBIT 10.35 DESCRIPTION OF 1998 COMPENSATION ARRANGEMENT BETWEEN MR. JOHN M. TOMA AND REGISTRANT The following describes certain compensation arrangements between the Registrant and Mr. Toma for calendar year 1998 which supplements the Employment Agreement dated March 20, 1996 between Registrant and Mr. Toma and the Compensation Agreement dated March 20, 1996 between Registrant and Mr. Toma. The Company has entered into an employment agreement with Mr. Toma that currently expires December 31, 1998. The employment agreement provides for automatic one-year renewals upon the expiration of each year of employment, subject to prior notice of nonrenewal by the Board of Directors. Pursuant to Mr. Toma's employment agreement, for 1998, he will continue to receive a base salary of $306,000, and the Compensation Committee of the Board of Directors (the "Compensation Committee") increased Mr. Toma's maximum potential bonus from 50% of his base salary to 60% of his base salary based upon the Company's performance for 1998. On January 27, 1998, the Compensation Committee granted Mr. Toma options to purchase 25,000 shares of Common Stock at a purchase price of $15.75 per share, vesting over a five-year period at 20% per year. For 1998, the Compensation Committee has determined that Mr. Toma also is eligible to receive additional options up to a maximum of 75,000 shares of Common Stock if 1998 earnings per share are 150% or more than 1997 earnings per share. Should 1998 earnings per share be at least 125% of 1997 earnings per share, Mr. Toma will be entitled to receive options to purchase an additional 25,000 shares of Common Stock, and a prorated additional amount if 1998 earnings per share are between 126% and 149% of 1997 earnings per share. Any options so granted to Mr. Toma shall be granted at fair market value as of the end of 1998, and will vest over a five-year period at 20% per year. In addition, the Company has agreed to make annual contributions in the amount of $55,000 per year to a deferred compensation program for Mr. Toma, which amounts will vest 50% immediately and the remainder over a ten-year period at 10% per year. Mr. Toma will be entitled to receive his deferred compensation upon termination of his employment for any reason, other than for cause or for "Good Reason", including death or disability. For purposes of Mr. Toma's employment agreement "Good Reason" means, unless Mr. Toma consents thereto, (i) the assignment of duties or a position or title inconsistent with or lower than the duties, position or title provided in Mr. Toma's employment agreement; (ii) the principal place where Mr. Toma is required to perform a substantial portion of his duties is outside of Atlanta, Georgia; (iii) the reduction of Mr. Toma's compensation unless the Board (or the Compensation Committee) has authorized a general compensation decrease for all executive employees of the Company; (iv) there is a merger, consolidation or reorganization of the Company or any other transaction resulting in Mr. Toma (together with his immediate family or trusts or limited partnerships established for the benefit of Mr. Toma and/or such persons) owning in the aggregate less than 20% of the voting control of the Company; or (v) there is a sale or agreement to sell or a grant of an option to purchase all or substantially all of the assets of the Company. The Company has also agreed to provide Mr. Toma with certain other personal benefits. Upon termination, other than for cause or by voluntary resignation, Mr. Toma will receive severance payments equal to one year's base salary and other personal benefits. Mr. Toma will also receive severance payments equal to one year's base salary if he resigns for "Good Reason." Mr. Toma has agreed not to compete with the Company or to solicit any clients or employees of the Company for a period of 18 months following termination of his employment. EX-10.36 8 COMPENSATION AGREEMENT- MICHAEL LUSTIG 1 EXHIBIT 10.36 DESCRIPTION OF 1998 COMPENSATION ARRANGEMENT BETWEEN MR. MICHAEL A. LUSTIG AND REGISTRANT The following describes certain compensation arrangements between the Registrant and Mr. Lustig for calendar year 1998 which supplements the Employment Agreement dated October 17, 1997 between Registrant and Mr. Lustig and the Compensation Agreement dated October 17, 1997 between Registrant and Mr. Lustig. The Company has entered into an employment agreement with Mr. Lustig that currently expires December 31, 1998. The employment agreement provides for automatic one-year renewals upon the expiration of each year of employment, subject to prior notice of nonrenewal by the Board of Directors. For 1998, the Compensation Committee of the Board of Directors (the "Compensation Committee") increased Mr. Lustig's annual base salary to $300,000 and increased his maximum potential bonus from 50% to 75% of his base salary based upon the Company's performance for 1998. The Compensation Committee has determined that Mr. Lustig also is eligible to receive additional options up to a maximum of 125,000 shares of Common Stock if 1998 earnings per share are 150% or more of 1997 earnings per share. Should 1998 earnings per share be at least 125% of 1997 earnings per share, Mr. Lustig will be entitled to receive options to purchase an additional 37,500 shares of Common Stock, and a prorated additional amount if 1998 earnings per share are between 126% and 149% of 1997 earnings per share. Any options so granted to Mr. Lustig shall be granted at fair market value as of the end of 1998, and will vest over a four-year period at 25% per year. Beginning in 1998, Mr. Lustig has elected to reduce his annual base salary by $40,000 and to contribute such amount to a deferred compensation program for his benefit, which amount vests immediately. In addition, the Company has agreed to make annual matching contributions in the amount of $40,000 per year to such deferred compensation program, which amounts will vest over a ten-year period at 10% per year. Mr. Lustig will be entitled to receive his deferred compensation upon termination of his employment for any reason, other than for cause, including death or disability. The Company has also agreed to provide Mr. Lustig with certain other personal benefits. Upon termination, other than for cause or by voluntary resignation, Mr. Lustig will receive severance payments equal to six months' base salary. Mr. Lustig has agreed not to compete with the Company or to solicit any clients or employees of the Company for a period of 18 months following termination of his employment. EX-10.37 9 COMPENSATION AGREEMENT- DONALD ELLIS 1 EXHIBIT 10.37 DESCRIPTION OF 1998 COMPENSATION ARRANGEMENT BETWEEN MR. DONALD E. ELLIS, JR. AND REGISTRANT The following describes certain compensation arrangements between the Registrant and Mr. Ellis for calendar year 1998 which supplements the Employment Agreement dated March 20, 1996 between Registrant and Mr. Ellis. The Company has entered into an employment agreement with Mr. Ellis that currently expires December 31, 1998. The employment agreement provides for automatic one-year renewals upon the expiration of each year of employment, subject to prior notice of nonrenewal by the Board of Directors. Pursuant to Mr. Ellis' employment agreement, for 1998, he will continue to receive an annual base salary of $175,000 and a bonus of up to 50% of his base salary based in part upon the Company's performance for 1998. On January 27, 1998, the Compensation Committee of the Board of Directors (the "Compensation Committee") granted Mr. Ellis options to purchase 15,000 shares of Common Stock at a purchase price of $15.75 per share, vesting over a five-year period at 20% per year. Mr. Ellis has elected to reduce his annual bonus by up to $25,000 and to contribute such amount to a deferred compensation program for Mr. Ellis, which amount vests immediately. In addition, the Company has agreed to make annual matching contributions in the amount of $25,000 per year to such deferred compensation program, which amounts will vest over a ten-year period at 10% per year. Mr. Ellis will be entitled to receive his deferred compensation upon termination of his employment for any reason, other than for cause or for "Good Reason", including death or disability. For purposes of Mr. Ellis' employment agreement "Good Reason" means, unless Mr. Ellis consents thereto, (i) the assignment of duties or a position or title inconsistent with or lower than the duties, position or title provided in Mr. Ellis' employment agreement; (ii) the principal place where Mr. Ellis is required to perform a substantial portion of his duties is outside of Atlanta, Georgia; (iii) the reduction of Mr. Ellis' compensation unless the Board (or the Compensation Committee) has authorized a general compensation decrease for all executive employees of the Company; (iv) there is a merger, consolidation or reorganization of the Company or any other transaction resulting in Mr. Ellis (together with his immediate family or trusts or limited partnerships established for the benefit of Mr. Ellis and/or such persons) owning in the aggregate less than 20% of the voting control of the Company; or (v) there is a sale or agreement to sell or a grant of an option to purchase all or substantially all of the assets of the Company. The Company has also agreed to provide Mr. Ellis with certain other personal benefits. Upon termination, other than for cause or by voluntary resignation, Mr. Ellis will receive severance payments equal to one years' base salary. Mr. Ellis will also receive severance payments equal to one year's base salary if he resigns for "Good Reason." Mr. Ellis has agreed not to compete with the Company or to solicit any clients or employees of the Company for a period of 18 months following termination of his employment. EX-21.1 10 LIST OF SUBSIDIARIES 1 SUBSIDIARIES OF REGISTRANT EXHIBIT 21.1
NAME OF SUBSIDIARY STATE OF INCORPORATION - ------------------ ---------------------- The Profit Recovery Group International I, Inc. ......... Georgia The Profit Recovery Group Asia, Inc. .................... Georgia The Profit Recovery Group Canada, Inc. .................. Georgia The Profit Recovery Group France, Inc. .................. Georgia The Profit Recovery Group Mexico, Inc. .................. Georgia The Profit Recovery Group U.K., Inc. .................... Georgia The Profit Recovery Group Belgium, Inc. ................. Georgia The Profit Recovery Group Australia, Inc. ............... Georgia The Profit Recovery Group New Zealand, Inc. ............. Georgia The Profit Recovery Group Netherlands, Inc. ............. Georgia The Profit Recovery Group Germany, Inc. ................. Georgia Accounts Payable Recovery Services, Inc. ................ Georgia The Profit Recovery Group South Africa, Inc. ............ Georgia PRG International Holding Company, Inc. ................. Georgia The Profit Recovery Group Singapore PTE LTD. ............ (1) PRG France S.A. ......................................... (2) Financiere Alma S.A. .................................... (2) Alma Intervention, S.A. ................................. (2) B&F Associes, S.A.R.L. .................................. (2) Club Affairs Alma, S.A.R.L. ............................. (2) Meridian VAT Reclaim France S.A.R.L. .................... (2) Step S.A. ............................................... (2)
- ----------- (1) A Singapore private limited company and a wholly-owned subsidiary of The Profit Recovery Group Asia, Inc. (2) A French corporation EX-23.1 11 CONSENT OF KPMG PEAT MARWICK 1 EXHIBIT 23.1 INDEPENDENT AUDITORS' CONSENT The Board of Directors The Profit Recovery Group International, Inc.: We consent to incorporation by reference in the registration statements (Nos. 333-30885 and 333-08707) on Form S-8 of The Profit Recovery Group International, Inc. of our report dated January 31, 1998, relating to the consolidated balance sheets of The Profit Recovery Group International, Inc. and subsidiaries as of December 31, 1997 and 1996, and the related consolidated statements of earnings, shareholders' equity (deficit), and cash flows for each of the years in the three-year period ended December 31, 1997, which report appears in the December 31, 1997 annual report on Form 10-K of The Profit Recovery Group International, Inc. KPMG Peat Marwick LLP Atlanta, Georgia February 12, 1998 EX-23.2 12 CONSENT OF ERNST & YOUNG 1 EXHIBIT 23.2 INDEPENDENT AUDITORS' CONSENT The Board of Directors The Profit Recovery Group International, Inc.: We consent to incorporation by reference in the registration statements (Nos. 333-30885 and 333-08707) on Form S-8 of the Profit Recovery Group International, Inc. of our report dated January 31, 1998 relating to the consolidated balance sheet of Financiere Alma, S.A. and subsidiaries as of December 31, 1997, and the related consolidated statements of earnings, shareholders' equity, and cash flows for the three months ended December 31, 1997, which report appears in the December 31, 1997 annual report on Form 10-K of The Profit Recovery Group International, Inc. ERNST & YOUNG ENTREPRENEURS Department d'E&Y Audit Paris, France February 12, 1998 Any Antola EX-27.1 13 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FINANCIAL STATEMENTS OF THE PROFIT RECOVERY GROUP INTERNATIONAL, INC. FOR THE YEAR ENDED DECEMBER 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1000 YEAR DEC-31-1997 JAN-01-1997 DEC-31-1997 19,386 0 56,170 0 0 77,986 14,529 5,760 133,885 43,423 24,365 0 0 19 63,053 133,885 0 112,363 0 57,726 38,462 0 403 15,772 6,149 9,623 0 0 0 9,623 .52 .51
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