Exhibit 99
THE PROFIT RECOVERY GROUP INTERNATIONAL, INC. AND SUBSIDIARIES
PRO FORMA COMBINED FINANCIAL STATEMENTS (Unaudited)
On August 3, 2001, PRG signed a definitive agreement with HSA-Texas to
acquire for up to approximately 16.0 million shares of its common stock
substantially all of the assets of HSA-Texas and substantially all of the
outstanding stock of HSA-Singapore, an affiliated operating company of HSA-Texas
and all of the outstanding stock of HSA-Asia, HSA-Australia and HSA-Canada, each
an affiliated foreign operating company of HSA-Texas, pursuant to an agreement
and plan of reorganization in connection with the asset acquisition and an
agreement and plan of reorganization in connection with the stock acquisition.
Unless context otherwise requires, references to HSA-Texas in this pro forma
section also include the affiliated entities of HSA-Texas that are included in
the proposed acquisitions.
The following unaudited pro forma combined financial statements present
financial information giving effect to the completion of the proposed
acquisitions under purchase accounting. The unaudited pro forma combined balance
sheet as of September 30, 2001 is presented as if the proposed acquisitions had
been completed as of that date. The unaudited pro forma combined statements of
operations for the nine month period ended September 30, 2001 and the year ended
December 31, 2000 are presented as if the proposed acquisitions had been
completed as of January 1, 2000.
The unaudited pro forma combined financial statements reflect certain
assumptions deemed probable by PRG management regarding the purchase. The total
estimated purchase cost of the proposed acquisitions was allocated on a
preliminary basis to assets based upon management's best estimates of their fair
value with the excess cost over the net assets acquired allocated to goodwill.
The adjustments to the unaudited pro forma combined financial information are
subject to change pending a final analysis of the total purchase cost and the
fair value of the assets assumed. The impact of these changes could be material.
The pro forma combined financial statements should be read in conjunction
with PRG's consolidated financial statements and notes thereto and HSA-Texas'
consolidated financial statements and notes thereto. The pro forma adjustments
are based upon preliminary estimates, available information and certain
assumptions that management deems appropriate and are not necessarily indicative
of what PRG's results of operations or financial position would have been had
the transactions been in effect as of and for the periods presented, nor is such
information necessarily indicative of PRG's results of operations or financial
position for any future period or date.
While we believe that the proposed acquisitions are probable, the pro forma
and other information regarding HSA-Texas and the proposed acquisitions should
be evaluated in light of the possibility that the proposed acquisitions might
not be consummated.
4
THE PROFIT RECOVERY GROUP INTERNATIONAL, INC.
PRO FORMA COMBINED BALANCE SHEET (Unaudited)
(Amounts in Thousands)
As of September 30, 2001
Pro Forma Pro Forma
PRG HSA-Texas Adjustment Combined
--------------- ---------- ---------------- ------------
ASSETS
Current assets:
Cash and cash equivalents $ 15,396 $ 6,071 $ (16,350)(A) $ 5,657
Receivables:
Contract receivables 62,186 15,233 -- 77,419
Employee advances and miscellaneous receivables 4,907 1,491 -- 6,398
--------------- ---------- ---------------- ------------
Total receivables 67,093 16,724 -- 83,817
Prepaid expenses and other current assets 3,268 1,930 -- 5,198
Deferred income taxes 12,565 -- -- 12,565
Net assets of discontinued operations 58,552 -- -- 58,552
--------------- ---------- ---------------- ------------
Total current assets 157,414 24,725 (16,350) 165,789
--------------- ---------- ---------------- ------------
Property and equipment:
Computer and other equipment 45,390 14,067 (4,525)(B) 54,932
Furniture and fixtures 3,540 1,546 (455)(B) 4,631
Land and buildings -- 4,716 (4,716)(A) --
Leasehold improvements 5,786 1,648 (1,454)(A)(B) 5,980
--------------- ---------- ---------------- ------------
54,716 21,977 (11,150) 65,543
Less accumulated depreciation and amortization 32,013 9,334 (7,234)(B) 34,113
--------------- ---------- ---------------- ------------
Property and equipment, net 22,703 12,643 (3,916) 31,430
Noncompete agreements 315 -- -- 315
Deferred loan costs 2,139 -- -- 2,139
Goodwill 224,011 31,511 150,207 (B) 405,729
Intangible assets -- -- 32,480 (B) 32,480
Deferred income taxes 6,252 -- -- 6,252
Other assets 5,415 1,014 (4,541)(B) 1,888
--------------- ---------- ---------------- ------------
Total assets $ 418,249 $ 69,893 $ 157,880 $ 646,022
=============== ========== ================ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current installments of long-term debt $ 52,457 $ 8,461 $ (111)(A) $ 60,807
Capital lease obligations -- current -- 682 -- 682
Accounts payable and accrued expenses 16,540 7,478 10,896 (B) 34,914
Accrued payroll and related expenses 28,310 7,993 7,000 (B) 43,303
Deferred tax recovery audit revenue 772 -- -- 772
Other current liabilities -- 63 -- 63
-- --------- ----------- -----------
Total current liabilities 98,079 24,677 17,785 140,541
Long-term debt, excluding current installments 100,639 33,763 (13,596)(A) 120,806
Capital lease obligations, excluding current -- 971 -- 971
installments
Deferred compensation 4,296 -- -- 4,296
Other long-term liabilities 1,713 -- -- 1,713
--------------- ---------- ---------------- ------------
Total liabilities 204,727 59,411 4,189 268,327
Common stock put options -- 3,086 (3,086)(B) --
Shareholders' equity:
Common stock 51 701 (686)(B) 66
Additional paid-in capital 320,238 6,773 157,385 (B) 484,396
Accumulated deficit (67,949) (688) 688 (B) (67,949)
Accumulated other comprehensive loss (16,542) 610 (610)(B) (16,542)
Less treasury stock at cost (21,024) -- -- (B) (21,024)
Unearned portion of restricted stock (1,252) -- -- (1,252)
--------------- ---------- ---------------- ------------
Total shareholders' equity 213,522 7,396 156,777 377,695
--------------- ---------- ---------------- ------------
Total liabilities and shareholders' equity $ 418,249 $ 69,893 $ 157,880 $ 646,022
=============== ========== ================ ============
See Accompanying Notes to Unaudited Pro Forma Combined Financial Statements.
5
THE PROFIT RECOVERY GROUP INTERNATIONAL, INC.
PRO FORMA COMBINED STATEMENT OF OPERATIONS (Unaudited)
(Amounts in thousands, except per share data)
For the Nine Months Ended September 30, 2001
Pro Forma Pro Forma
PRG HSA-Texas Adjustment Combined
----------- --------- ---------------- -----------
Revenues $ 213,870 $ 100,761 $ -- $ 314,631
Cost of revenues 112,429 65,651 -- 178,080
Selling, general and administrative expenses 90,298 35,564 1,296 (C)(D) 127,158
----------- --------- ---------------- -----------
Operating income (loss) 11,143 (454) (1,296) 9,393
Interest income (expense), net (6,000) (2,277) 519 (E) (7,758)
Settlement of litigation -- 3,650 -- 3,650
Other income (expense), net -- 10 (10)(G) --
----------- --------- ---------------- -----------
Earnings from continuing operations
before income taxes 5,143 929 (787) 5,285
Income tax expense 2,057 (512) 569 (F) 2,114
----------- --------- ---------------- -----------
Earnings from continuing operations $ 3,086 $ 1,441 $ (1,356) $ 3,171
=========== ========= ================ ===========
Basic earnings per share-- earnings from
continuing operations $ 0.06 $ 0.05
=========== ===========
Diluted earnings per share-- earnings from
continuing operations $ 0.06 $ 0.05
=========== ===========
Denominator:
Denominator for basic earnings per
share-- weighted-average shares
outstanding 48,182 15,109(H) 63,291
Effect of dilutive securities:
Employee stock options 496 847 1,343
----------- ---------------- -----------
Denominator for diluted earnings 48,678 15,956 64,634
=========== ================ ===========
See Accompanying Notes to Unaudited Pro Forma Combined Financial Statements.
6
THE PROFIT RECOVERY GROUP INTERNATIONAL, INC.
PRO FORMA COMBINED STATEMENT OF OPERATIONS (Unaudited)
(Amounts in thousands, except per share data)
For the Year Ended December 31, 2000
Pro Forma Pro Forma
PRG HSA-Texas Adjustments Combined
------------ ------------ ---------------- ------------
Revenues $ 297,089 $ 138,708 $ -- $ 435,797
Cost of revenues 156,408 91,222 -- 247,630
Selling, general and administrative
expenses 119,779 48,324 4,162 (C)(D) 172,265
------------ ------------ ---------------- ------------
Operating income (loss) 20,902 (838) (4,162) 15,902
Interest income (expense), net (8,253) (2,938) 244 (E) (10,947)
Other income (expense), net -- 47 (47)(G) --
------------ ------------ ---------------- ------------
Earnings (loss) from continuing
operations before income
taxes 12,649 (3,729) (3,965) 4,955
Income tax expense 5,313 -- (3,232)(F) 2,081
------------ ------------ ---------------- ------------
Earnings (loss) from continuing
operations $ 7,336 $ (3,729) $ (733) $ 2,874
============ ============ ================ ============
Basic earnings per share-- earnings from
continuing operations $ 0.15 $ 0.04
============ ============
Diluted earnings per share-- earnings from
continuing operations $ 0.15 $ 0.04
============ ============
Denominator for basic earnings per
share-- weighted-average shares
outstanding 48,871 15,109 (H) 63,980
Effect of dilutive securities:
Shares issuable for Groupe AP earnout 201 -- 201
Employee stock options 737 847 1,584
============ ================ ============
Denominator for diluted earnings 49,809 15,956 65,765
============ ================ ============
See Accompanying Notes to Unaudited Pro Forma Combined Financial Statements.
7
THE PROFIT RECOVERY GROUP INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
Note 1. Unaudited Pro Forma Combined Balance Sheet
The unaudited pro forma combined balance sheet gives effect to the proposed
acquisition as if it had occurred on September 30, 2001.
On August 3, 2001, PRG signed a definitive agreement with HSA-Texas to
acquire for up to 16.0 million shares of its common stock substantially all of
the assets of HSA-Texas and substantially all of the outstanding stock of
HSA-Singapore and all of the outstanding stock of HSA-Asia, HSA-Australia, and
HSA-Canada, each an affiliated foreign operating company. This business
combination will be accounted for under the purchase method of accounting.
The following adjustments were reflected in the unaudited pro forma
combined balance sheet:
(A) To eliminate HSA-Texas assets not acquired and HSA-Texas
liabilities not assumed and cash to be paid at closing, or within an
estimated 45 days upon finalization of estimated HSA-Texas obligations owed
to independent contractors to be incurred prior to closing.
(B) To record common stock and options issued to HSA-Texas and the
application of purchase accounting. The total purchase price consists of
approximately 15.1 million shares of PRG common stock (assumes that the
acquisitions of Tamebond Ltd. and J&G Associates Ltd. will be completed
prior to the closing of the HSA-Texas acquisition and that an additional
2.3 million shares will be issued to HSA-Texas at the closing and will not
be placed in escrow) with an estimated fair value of approximately $158.4
million, 1.7 million fully vested options to purchase our common stock with
an estimated fair value of approximately $5.8 million, and estimated direct
transaction costs of approximately $15.0 million. The fair value of PRG's
common stock was determined as the average closing price per share from
July 24, 2001 to July 28, 2001, which was $10.482. PRG announced the
proposed transaction on July 26, 2001. The fair value of PRG's fully vested
options was determined using the Black Scholes pricing model.
The amounts and components of the estimated purchase price are presented
below:
(In thousands)
Common stock................................. $ 15
Additional paid-in capital................... 164,158
Transaction costs............................ 15,000
----------
Total purchase price............... $ 179,173
==========
The allocation of the $179,173 estimated purchase price is as follows:
(In thousands)
Assets acquired.............................. $ 28,396
Liabilities assumed.......................... (63,421)
--------
Net liabilities assumed................ (35,025)
Allocation of purchase price to:
Intangible assets...................... 32,480
Goodwill............................... 181,718
-------
Total purchase price............... $ 179,173
===========
8
THE PROFIT RECOVERY GROUP INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS - (Continued)
The identified tangible and intangible assets likely to be recognized are
as follows (in thousands):
Tangible assets:
Total receivables............................ $15,233
Property and equipment....................... 8,727
Other ....................................... 4,436
------
Total tangible assets ................... $28,396
-------
Estimated
Value Useful Life
Intangible assets: ----------- -----------
Customer relationships....................... $21,000 20 years
Trade names ................................. 9,000 Indefinite
Unrecognized customer revenue ............... 2,000 2 months
Employee agreements.......................... 400 2 years
Option to purchase HSA-Germany .............. 80 4 months
-----------
Total intangible assets ................. $32,480
-----------
Option to purchase HSA-Germany: Howard Schultz & Associates Europe, N.V.
entered into a license agreement with Howard Schultz &Partner (Deutschland) GmbH
("Licensee") originally dated on April 16, 1988 and amended on February 4, 1999.
HSA-Texas has the option to purchase this German operation.
PRG expects to amortize intangible assets with definite useful lives over
their respective estimated useful lives to their estimated residual values, and
review them for impairment in accordance with Statement of Financial Accounting
Standards ("SFAS") No.121, "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to Be Disposed Of." PRG expects to amortize tangible
assets over their estimated useful lives as estimated above.
The adjustments to computer and other equipment, leasehold improvements and
accumulated depreciation noted in adjustment B to the unaudited pro forma
combined balance sheet are to record the fixed assets purchased at their
estimated fair value (determined as the net book value at the date of the
purchase).
The adjustments to liabilities include an estimate of severance costs to be
incurred for employees of HSA-Texas or of the affiliated foreign operating
companies who are not retained by the combined organization and a provision for
lease payments for duplicate HSA-facilities that will be closed. Additionally,
adjustments to liabilities include an estimate of costs to be incurred to
complete the acquisition.
In addition, we will assume certain other obligations of HSA-Texas
including obligations owed to HSA-Texas independent contractors to be incurred
prior to closing. Presently, we have estimated this liability at $9.0 million.
As a result, this adjustment has been reflected in the pro forma combined
balance sheet adjustments.
The number of shares to be issued was calculated assuming an average price
per share of PRG common stock of $6.974. The number of shares to be issued in
the proposed acquisitions will vary according to the average price per share of
PRG common stock, which in turn will affect the stated purchase price as
follows:
9
THE PROFIT RECOVERY GROUP INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS - (Continued)
Stated Purchase Price
---------------------
(in thousands)
$4.00.................................... $181,739
$5.00.................................... $181,739
$6.00.................................... $181,477
$7.00.................................... $179,113
$8.00.................................... $177,117
$9.00.................................... $175,564
$10.00................................... $174,321
$11.00................................... $173,305
$12.00................................... $172,458
$13.00................................... $171,741
$14.00................................... $171,126
$15.00................................... $170,594
$16.00................................... $170,128
The stated purchase price will increase as the average market price
decreases because the number of shares to be issued in connection with the
option portion of the purchase price decreases. Pursuant to EITF No. 99-12, the
transaction will be valued at a per share amount of $10.482, the average closing
price per share of PRG common stock from July 24, 2001 to July 28, 2001. This
purchase price for accounting purposes may not reflect the actual market value
to the HSA-Texas shareholders.
Unrecognized customer revenue has an estimated life of two months' time
until revenue is realized.
Under purchase accounting, the total purchase price will be allocated to
the acquired assets based upon their fair values. Allocations are subject to
valuations as of the date of the completion of the purchase. PRG expects to
allocate the total purchase price to goodwill and other identifiable intangible
and tangible assets. In accordance with the SFAS No.142, "Goodwill and Other
Intangible Assets," goodwill as well as intangible assets with indefinite useful
lives will no longer be amortized but instead these assets must be tested for
impairment at least annually. PRG expects to amortize intangible assets with
definite useful lives over their respective estimated useful lives to their
estimated residual values, and review them for impairment in accordance with
SFAS No.121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of." PRG expects to amortize tangible assets
over their estimated useful lives.
Note 2. Unaudited Pro Forma Combined Statements of Operations
The unaudited pro forma combined statements of operations give effect to
the purchase as if it had occurred at the beginning of the period presented. The
following adjustments have been reflected in the unaudited pro forma combined
statements of operations.
(C) Adjustment to remove the depreciation and amortization expense in
order to reflect only the ongoing impact of assets acquired.
(D) To record the application of purchase accounting, the amortization
of identifiable intangible and tangible assets. The pro forma adjustments
assume that the purchase price of $179.2 million will be allocated to
goodwill and other identifiable intangible and tangible assets. Goodwill,
as well as intangible assets, with indefinite useful lives will not be
amortized but instead these assets must be tested for impairment at least
annually. Intangible assets with definite useful lives will be amortized
over their respective estimated useful lives to their estimated residual
values, and reviewed for impairment in accordance with SFAS No. 121.
Tangible assets will be amortized over their estimated useful lives. The
ultimate lives assigned will be determined at the date of closing based on
the facts and circumstances existing at that date.
10
THE PROFIT RECOVERY GROUP INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS - (Continued)
Pro forma adjustments C and D are as follows (in thousands):
Nine Months Ended Year Ended
September 30, December 31,
2001 2000
-------------------------- -----------------
Adjustment C:
Depreciation on building and leasehold improvements not acquired $ (275) $ (376)
Adjustment D:
Amortization of intangible assets with estimated useful lives 625 3,330
Other
Howard Schultz's payroll expense 300 400
Net adjustment to rental income for building not acquired and
leased back 656 855
Reclassification for HSA financials to conform with PRG
presentation format (10) (47)
-------------------------- -----------------
Total pro forma adjustments $ 1,296 $ 4,162
-------------------------- -----------------
(E) To eliminate interest expense related to the loans that will not
be assumed by PRG as a result of the transaction.
(F) To adjust income tax expense to the statutory rate in effect
during the periods for which the pro forma statements of operations are
presented.
(G) To reflect reclassification of HSA-Texas' other income (expense)
to selling, general and administrative expenses to conform with PRG's
financial presentation.
(H) Assumes that the acquisition of Tamebond Ltd. and J&G Associates
Ltd. will be completed prior to the closing of the HSA-Texas acquisition
and that an additional 2.3 million shares will be issued to HSA-Texas at
closing and will not be placed in escrow.
11
HOWARD SCHULTZ & ASSOCIATES INTERNATIONAL, INC.
COMBINED BALANCE SHEETS
September 30, December 31,
2001 2000
----------------- -----------------
(Unaudited)
(in thousands)
ASSETS
Current Assets:
Cash and cash equivalents $ 6,071 $ 2,179
Accounts receivable, net 15,233 15,644
Commission advances, net 1,491 2,058
Principal associate advance ___ 550
Prepaids and other current assets 1,930 1,512
----------------- -----------------
Total current assets 24,725 21,943
Property and equipment, net 12,643 11,781
Other assets:
Goodwill, net 31,511 25,226
Other assets 1,014 768
----------------- -----------------
Total assets $ 69,893 $ 59,718
================= =================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 922 $ 3,529
Accrued compensation 879 1,868
Accrued commissions and royalties 7,114 9,543
Other accrued expenses 6,556 3,506
Notes payable, current portion 8,461 6,422
Capital lease obligations, current portion 682 620
Other current liabilities 63 124
----------------- -----------------
Total current liabilities 24,677 25,612
Notes payable, net of current portion 33,763 30,074
Capital lease obligations, net of current portion 971 1,388
----------------- -----------------
Total liabilities 59,411 57,074
----------------- -----------------
Common stock put options 3,086 2,458
Stockholders' equity (Notes 3 and 5):
Common stock 7,474 2,102
Accumulated deficit (688) (2,129)
Accumulated other comprehensive income 610 213
----------------- -----------------
Total stockholders' equity 7,396 186
----------------- -----------------
Commitments and contingencies (Note 7)
Total liabilities and stockholders' equity $ 69,893 $ 59,718
================= =================
See accompanying notes to unaudited combined financial statements.
12
HOWARD SCHULTZ & ASSOCIATES INTERNATIONAL, INC.
UNAUDITED COMBINED STATEMENTS OF OPERATIONS
Nine Months Ended September 30,
----------------------------------------
2001 2000
----------------- ----------------
(in thousands)
Revenues, net $ 100,761 $ 102,542
Cost of revenues 65,651 67,364
Selling, general and administrative expenses 35,564 34,396
----------------- ----------------
Operating income (loss) (454) 782
----------------- ----------------
Interest income 185 295
Interest expense (2,462) (2,535)
Settlement of litigation (Note 7) 3,650 --
Other income (expense), net 10 (72)
----------------- ----------------
Interest and other income (expense), net 1,383 (2,312)
----------------- ----------------
Income (loss) before income taxes 929 (1,530)
----------------- ----------------
Foreign tax benefit (Note 6) 512 --
----------------- ----------------
Net income (loss) $ 1,441 $ (1,530)
================== ================
See accompanying notes to unaudited combined financial statements.
13
HOWARD SCHULTZ & ASSOCIATES INTERNATIONAL, INC.
UNAUDITED COMBINED STATEMENTS OF CASH FLOWS
Nine Months Ended
September 30,
---------------------------------
2001 2000
----------------- ---------------
(in thousands)
Cash flows from operating activities:
Net income (loss) $ 1,441 $ (1,530)
Adjustments to reconcile net income (loss) to net cash provided by operating
activities:
Depreciation and amortization 6,700 5,605
Non-cash interest expense 394 478
Non-cash stock compensation expense 628 837
Changes in assets and liabilities, net of working capital from
acquisitions:
Accounts receivable, net 561 (2,610)
Prepaid expenses and other current assets 423 (1,857)
Principal associate advances (1,498) --
Commission advances, net 1,044 256
Other assets 235 965
Accounts payable and other accrued expenses 563 3,315
Accrued commissions and royalties (2,429) 999
Accrued compensations (1,049) 389
Other current liabilities (61) (155)
-------------- ---------------
Net cash provided by operating activities 6,952 6,692
Cash flows used in investing activities -
purchase of property and equipment (2,097) (4,474)
-------------- ---------------
Cash flows from financing activities:
Proceeds from issuance of common stock 16 --
Proceeds from issuance of notes payable, net 5,548 2,268
Principal payments on notes payable (5,414) (3,741)
Principal payments on capital lease obligations (355) (280)
Distributions to stockholders -- (1,470)
Net loans provided to stockholders (758) (263)
-------------- ---------------
Net cash used in financing activities (963) (3,486)
-------------- ---------------
Net increase (decrease) in cash and cash equivalents 3,892 (1,268)
Cash and cash equivalents at beginning of the period 2,179 3,910
-------------- ---------------
Cash and cash equivalents at the end of the period $ 6,071 $ 2,642
============== ===============
Supplemental disclosures of non-cash investing and financing activities:
In conjunction with the acquisition of businesses:
Fair value of assets acquired $ 12,604 $ 8,203
Forgiveness of advances $ 2,048 $ --
Notes payable to seller $ 5,200 $ 8,203
Common stock issued to seller $ 5,356 $ --
Cash paid for:
Interest $ 1,851 $ 1,277
============== ===============
See accompanying notes to unaudited combined financial statements.
14
HOWARD SCHULTZ & ASSOCIATES INTERNATIONAL, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
September 30, 2001 and 2000
(Unaudited)
1. Summary of Significant Accounting Policies
Description of Business and Basis of Presentation
The accompanying unaudited combined financial statements of Howard Schultz
& Associates International, Inc. include the accounts of Howard Schultz &
Associates International, Inc. ("HSA-Texas"), its majority-owned subsidiaries,
Howard Schultz & Associates Europe N.V., Howard Schultz & Associates de Mexico,
S.A. de C.V., Howard Schultz & Associates International (Thailand) Limited, HS&A
Imaging, Inc. ("HS&A Imaging") and companies which were under majority common
control and ownership by the controlling stockholders/family members of
HSA-Texas, which are Howard Schultz, Andrew H. Schultz and the Andrew H. Schultz
Irrevocable Trust (the "Schultz Trust"). These entities include Howard Schultz &
Associates (Canada) Inc. ("HSA-Canada"), Howard Schultz & Associates (Australia)
Inc. ("HSA- Australia"), Howard Schultz & Associates (Asia) Limited ("HSA-
Asia"), and HS&A International Pte Ltd. ("HSA-Singapore"). All entities included
in the combined financial statements are collectively referred to herein as the
"Company". All significant intercompany balances and transactions have been
eliminated in combination.
The accompanying unaudited combined financial statements of the Company for
the nine months ended September 30, 2001 and 2000 have been prepared in
accordance with accounting principles generally accepted in the United States of
America. Significant accounting policies followed by the Company were disclosed
in the notes to the combined financial statements for the year ended December
31, 2000. Operating results for interim periods are not necessarily indicative
of the results that may be expected for the full year. The accompanying
financial statements are for interim periods and should be read in conjunction
with the 2000 audited combined financial statements of the Company.
2. Related Party Transaction
As of September 30, 2001 and December 31, 2000, the Company owed
$10,350,000 and $5,050,000, respectively, to Howard Schultz. The Company paid
Mr. Schultz interest in the amount of $306,000 during the nine-moth period ended
September 30, 2001.
3. Stockholders' Equity
During the nine-month period ended September 30, 2001, the Company granted
options to employees and non-employees to purchase 331,754 shares and 37,638
shares, net of cancellations, of the common stock of HSA-Texas, respectively, at
an exercise price of $9.06. Additionally, the Company awarded stock grants
totaling 23,179 shares to certain employees, and granted 64,569 stock
appreciation rights, at a grant price of $9.06 per stock appreciation right, to
certain employees in international markets.
4. Segment and Related Information
The Company has one reportable operating segment consisting of accounts
payable services. Accounts payable services consist of the review of client
accounts payable disbursements to identify and recover overpayments. This
operating segment includes accounts payable services provided to retailers,
wholesale distributors and various other types of business entities. The Company
performs these accounts payable services in the United States, Canada, Mexico,
Australia, and throughout Europe and Asia, including France, Spain and Hong
Kong.
15
HOWARD SCHULTZ & ASSOCIATES INTERNATIONAL, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS - (Continued)
Geographical information for the nine months ended September 30, 2001 and
2000 is as follows:
September 30, 2001 September 30, 2000
------------------- ------------------
(in thousands)
United States $ 91,762 $ 96,055
Europe 4,102 3,065
Mexico 662 299
Australia 1,317 1,054
Canada 2,161 1,595
Asia 757 474
------------------- --------------------
Revenues, net $ 100,761 $ 102,542
=================== ====================
Geographical information as of September 30, 2001 and 2000 is as follows:
September 30, 2001 September 30, 2000
------------------- -------------------
(in thousands)
United States $ 13,000 $ 11,154
Europe 219 114
Mexico 105 90
Australia 42 76
Canada 101 119
Asia 190 236
-------------------- --------------------
Total long-lived
assets $ 13,657 $ 11,789
==================== ====================
For purposes of the geographical information above, revenues are
attributable to the individual countries based on the location of the customer.
Long-lived assets are attributed to the individual countries based on the
physical location of the assets. Long-lived assets are primarily property and
equipment.
5. Mergers and Acquisitions
On August 3, 2001, the Company entered into a definitive agreement to be
acquired by The Profit Recovery Group International, Inc. ("PRG") in an
all-stock transaction, which is expected to close in the fourth quarter of 2001.
The combination is subject to approval of both companies' shareholders, approval
from PRG's bank syndicate, and customary regulatory approvals.
In connection with the announced acquisition by PRG, the board of directors
of the Company terminated the Company's Management Incentive Plan. On August 22,
2001, the board of directors approved the issuance of options to purchase 79,000
shares of the common stock of HSA-Texas, at an exercise price of $9.06, to the
participants in the Management Incentive Plan.
Also, in July 2001, the Company acquired substantially all of the assets
and certain, specified related liabilities, of an independent contractor of the
Company that performed recovery audit and information technology services for
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HOWARD SCHULTZ & ASSOCIATES INTERNATIONAL, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS - (Continued)
the Company, in a tax-free reorganization in exchange for 307,482 newly-issued
shares of the Company's no par value, voting common stock, assumption and
payment of $1,000,000 in debt (repaid upon assumption) and forgiveness of
$2,048,000 of advances to the independent contractor outstanding as of the
acquisition date.
On September 1, 2001, the Company acquired substantially all of the assets
and certain specified, related liabilities of an independent contractor that
performed recovery audit services for the Company in exchange for a $3.0 million
note payable in six equal quarterly installments beginning January 1, 2002 with
simple interest at the rate of 7.0% per annum.
On September 17, 2001, the Company acquired substantially all of the assets
and certain specified liabilities of an independent contractor that performed
recovery audit services for the Company in exchange for a $1.2 million note
payable in six equal quarterly installments beginning January 1, 2002 with
simple interest at a rate of 7.0% per annum.
The above acquisitions were accounted for using the purchase method of
accounting and, accordingly, results of operations of the acquired entities have
been included in the accompanying combined financial statements from the dates
of acquisition. The purchase prices were allocated to tangible assets acquired
and intangible assets based on the estimated fair values at the respective dates
of acquisition. The Company incurred no significant direct costs of acquisition.
A summary of the total purchase price and purchase price allocation for
acquisitions made in July and September 2001 is as follows (in thousands):
Net tangible assets $ 2,168
Goodwill 10,436
------------
Total purchase price $ 12,604
============
Unaudited pro forma operating results as though the acquisitions made in
July and September, 2001 had occurred on January 1, 2000, with adjustments
primarily to give effect to interest expense related to the promissory notes,
are as follows (in thousands):
Nine Months Ended
September 30,
----------------------------------
2001 2000
-------------- ----------------
Revenues $ 100,761 $ 102,542
Operating income (loss) (890) 640
Net income (loss) $ 808 (1,946)
6. Foreign Tax Benefit
During the third quarter of 2001, the Company collected $512,000 in taxes
paid on its behalf to the Inland Revenue taxing authority by its licensee in the
United Kingdom. The refund was a result of inquires made by the Company, which
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HOWARD SCHULTZ & ASSOCIATES INTERNATIONAL, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS - (Continued)
caused Inland Revenue to reverse its position on the taxability of royalties
remitted by the licensee. The Company had not recorded a receivable in prior
periods, due to the uncertainty of collection.
7. Commitments and Contingencies
In May 2001, the Company entered into a settlement agreement with respect
to litigation pending at December 31, 2000, involving a group of independent
contractors formerly associated with the Company. Pursuant to the agreement, the
Company was relieved of certain obligations to pay accrued commissions to those
contractors, which amounted to $3.7 million at the date of settlement. The
Company has no further obligations with respect to those contractors at
September 30, 2001.
The Company has contingent liabilities resulting from litigation, claims
and commitments incidental to the ordinary course of business. Management
believes, based on the advice of counsel, that the ultimate resolution of such
contingencies will not have a materially adverse effect on the financial
position, results of operations or liquidity of the Company.
The Company also has contingent liabilities in connection with two Letters
of Credit relating to a loan agreement and a leasing agreement for Howard
Schultz & Associates Europe, N.V. These letters of credit are partially
collateralized by a certificate of deposit of the Company and personal funds of
a shareholder. The unsecured amounts of these contingent liabilities of the
Company were $686,000 and $1,279,000 at September 30, 2001, and December 31,
2000, respectively.
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