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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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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, 1999
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) 779-3900
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 February 16, 2000 were
49,441,671. The aggregate market value, as of February 16, 2000, of such common
shares held by non-affiliates of the registrant was approximately $1.25 billion
based upon the last sales price reported that date on The Nasdaq Stock Market of
$28.625 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 or about June 8, 2000.
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THE PROFIT RECOVERY GROUP INTERNATIONAL, INC.
FORM 10-K
DECEMBER 31, 1999
PAGE
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Part I
Item 1. Business.................................................... 1
Item 2. Properties.................................................. 13
Item 3. Legal Proceedings........................................... 14
Item 4. Submission of Matters to a Vote of Security Holders......... 14
Part II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters....................................... 14
Item 6. Selected Consolidated Financial Data........................ 15
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 17
Item 7A. Quantitative and Qualitative Disclosures About Market
Risk...................................................... 26
Item 8. Financial Statements and Supplementary Data................. 27
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................. 54
Part III
Item 10. Directors and Executive Officers of the Registrant.......... 54
Item 11. Executive Compensation...................................... 54
Item 12. Security Ownership of Certain Beneficial Owners and
Management................................................ 54
Item 13. Certain Relationships and Related Transactions.............. 54
Part IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form
8-K....................................................... 54
Signatures............................................................... 59
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PART I
ITEM 1. BUSINESS
The Profit Recovery Group International, Inc. and subsidiaries (the
"Company") is a leading provider of accounts payable and other recovery audit
services to large and mid-size businesses and certain governmental agencies
having numerous payment transactions with many vendors. These businesses
include, but are not limited to, the following:
- retailers such as discount, department, specialty, grocery and drug
stores;
- manufacturers of pharmaceuticals, consumer electronics, chemicals and
aerospace and medical products;
- wholesale distributors of computer components, food products and
pharmaceuticals;
- technology companies that engage in telecommunications, computer
equipment assembly and software development; and
- healthcare providers such as hospitals and health maintenance
organizations.
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. Services such as freight,
telecommunications and utilities provided to businesses under complex pricing
arrangements also can result in overpayments. All of these overpayments result
in "lost profits." The Company's trained, experienced audit specialists use
sophisticated proprietary technology and advanced audit techniques and
methodologies to identify overpayments to vendors and tax authorities. The
Company receives a contractual percentage of overpayments it identifies and its
clients recover.
The Company currently conducts business in 29 countries and services
approximately 12,000 clients in over 40 different countries. The Company has
four distinct operating segments consisting of Accounts Payable Services,
Freight Services, Tax Services and Facilities Services. Each segment represents
a strategic business unit that offers a different type of recovery audit
service. See Note (11) of Notes to Consolidated Financial Statements for the
worldwide operating segment disclosures.
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. 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 accounts payable departments,
complex pricing arrangements, personnel turnover and changes in information and
accounting systems. These errors include vendor pricing errors, missed or
inaccurate discounts, allowances and rebates, incorrect freight charges and
duplicate payments. In the aggregate, these transaction errors can represent
meaningful lost profits that can be particularly significant for businesses with
relatively narrow profit margins. For example, 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 to recovery opportunities due to payment errors, businesses
often have the potential to minimize future payments of various types of taxes
and, in some instances, obtain refunds of taxes previously paid. Opportunities
also exist to prospectively reduce operating costs such as telecommunications
expenses through the application of highly specialized assessment techniques and
awareness of cost effective alternatives.
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Although some businesses routinely maintain internal recovery audit
departments assigned to recover selected types of payment errors and identify
opportunities to reduce costs, independent recovery audit firms are often
retained as well due to their specialized knowledge and focused technologies.
In the U.S. and Canada, large retailers routinely engage independent
recovery audit firms as standard business practice, and businesses in other
industries are increasingly using independent recovery audit firms. Outside the
U.S. and Canada, the Company believes that large retailers and many other types
of businesses are also increasingly engaging independent recovery audit firms.
Businesses are increasing the use of 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 Electronic Data Interchange, or "EDI", 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.
The Company believes that current global business-to-business e-commerce
initiatives involving the internet will ultimately provide the
technologically-advanced independent recovery audit firms with recovery
opportunities that may exceed those existing when EDI is employed as a data
communications medium. Factors contributing to the Company's belief include the
following:
- Extensible Markup Language ("XML"), a set of rules for defining and
sharing document types over the internet, provides a communications
framework, but until data type definitions are established for each
industry, errors due to inconsistent data treatments may be prevalent. We
believe the establishment of industry-specific data type definitions is
not at advanced stages for most industries.
- EDI use has primarily been confined to large business entities and their
suppliers. XML may eventually be utilized by businesses both large and
small, thus facilitating electronic data bases of individual procurement
transactions which may then be audited electronically. Presently, many
small and mid-size businesses still procure large portions of their goods
and services using paper-based documents which are not as cost effective
to audit as those in an electronic format.
The Company believes that many businesses are increasingly outsourcing
internal recovery functions to independent recovery audit firms. Factors
contributing to this trend include the following:
- a need for significant investments in technology, especially in an EDI
environment, which the Company believes are greater than even large
businesses can often justify;
- an inability to duplicate the breadth of industry and auditing expertise
of independent recovery audit firms;
- a desire to focus limited resources on core competencies; and
- 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.
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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 than many of
its competitors. The Company's technology provides uniform platforms for its
auditors to offer consistent and proven audit techniques and methodologies based
on a client's size, industry or geographic scope of operations. 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.
The Company is also 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 industries the Company serves. 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 be the leading worldwide provider of recovery
audit services. Its strategy to achieve this objective consists of the following
elements:
- Provide Additional Services to Existing Clients. Most worldwide clients
of the Company currently utilize only one of the Company's service
offerings such as, for example, accounts payable recovery audit services.
Commencing later in 2000, the Company will devote significant sales and
marketing resources to encourage existing clients to avail themselves of
other service offerings. For example, freight recovery auditing services
could be marketed to an existing client that currently utilizes only
accounts payable services.
- Expand International Operations. Through a combination of opening new
offices, expanding revenues within existing offices and acquiring other
international audit firms, the Company has grown its non-United States
revenues from negligible amounts in the early 1990s to 31% of consolidated
worldwide revenues in 1999. During 2000, the Company intends to emphasize
the expansion of its client base and the provision of additional services
to existing clients within the geographic reach of its existing
international offices.
- Maintain High Client Retention Rates. The Company has historically
maintained very high rates of client retention. The Company intends to
maintain and improve its high client retention rates by providing
comprehensive recovery audit services, utilizing highly trained auditors,
and continuing to refine its advanced audit technology.
- Maintain Technology Leadership. The Company believes its proprietary
technology provides a significant competitive advantage, especially in
audits involving the more sophisticated accounts payable systems. The
Company intends to continue making substantial investments in technology,
including ongoing e-commerce initiatives, 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 clients benefit significantly from these
outsourcing arrangements because the Company generally completes its
audits more quickly and identifies larger claims than internal recovery
audit departments. The Company further believes that as clients continue
to upgrade their systems, outsourcing arrangements involving recovery
audit work will become increasingly prevalent due in part to the absence
of traditional "audit trail" documents.
- Pursue Strategic Acquisitions. The Company intends to pursue making a
limited number of strategic acquisitions in 2000 to broaden the service
offerings of certain operational segments.
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THE PROFIT RECOVERY GROUP SERVICES
The Company currently conducts its operations through four operational
segments as follows:
RELATIVE PERCENTAGE OF CONSOLIDATED
OPERATIONAL SEGMENT WORLDWIDE REVENUES DURING 1999
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Accounts Payable....................................... 71.9%
Taxation............................................... 20.0
Freight................................................ 5.7
Facilities............................................. 2.4
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100.0%
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Accounts Payable
Through the use of proprietary technology, audit techniques and
methodologies, the Company's trained and experienced auditors examine
merchandise procurement records to identify overpayments resulting from
duplicate payments, missed discounts, allowances, rebates and other forms of
pricing concessions offered by vendors.
The Accounts Payable segment is comprised of two divisions.
The retail/wholesale/governmental division is the Company's largest
worldwide operating unit and is heavily dominated by services provided to
clients in the retailing industry. These services typically recur annually and
are largely predictable in terms of estimating the dollar volume of client
overpayments which will be ultimately recovered. For most clients served by this
unit, the Company typically identifies a larger volume of recoveries each year
when compared to recoveries realized in the immediate preceding year. This
growth generally results from factors such as increasing sophistication of the
Company's auditors and software, and continuing client migration toward
electronic merchandise procurements which the Company can more thoroughly audit.
The retail/wholesale/governmental division currently serves clients on six
continents.
The commercial division examines merchandise procurements and other
payments made by business entities such as manufacturers, distributors and
healthcare providers. Services to these types of clients tend to be more
rotational in nature with different divisions of a given client often audited in
pre-arranged annual sequences. Accordingly, revenues derived from a given client
may change markedly from year to year depending on factors such as the size and
nature of the client division under audit. The commercial division was formed
primarily from the combined operations of Loder, Drew & Associates, Inc.
(acquired August 1998) and PRS International, Ltd. (acquired August 1999). The
commercial division currently derives the substantial majority of its revenues
from serving clients in the United States, although rapid international
expansion is planned.
Taxation
The Company began offering tax recovery audit services in France with the
October 1997 acquisition of Financiere Alma S.A. and subsidiaries ("Alma").
These services include the identification and recovery of tax overpayments
involving business and personal property, workers compensation and real
property.
In October 1999, the Company acquired AP SA and its subsidiaries
(collectively, "Groupe AP") which provides services similar to Alma's in France.
Groupe AP along with Novexel S.A. (acquired July 1998) and IP Strategies, SA
(acquired November 1998), which assist clients in securing available European
grants and subsidies, are operated under the auspices of Alma.
In August 1999, the Company acquired Meridian VAT Corporation Limited
("Meridian"). Meridian is based in Ireland and specializes in the recovery of
value-added taxes ("VAT") paid on business expenses for corporate clients
located throughout the world.
While services provided to clients by Meridian are typically recurring in
nature, the services provided by other units within the Taxation division tend
to be based upon discrete projects.
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Freight
Assembled through a series of six business acquisitions in 1997-1999, the
Company's Freight operations now maintain the capability to audit freight
shipment transactions involving air, express, ocean, rail, surface, routing
compliance and payment services. The Company currently utilizes specialized
personnel and sophisticated audit software for each separate freight
transportation mode. Identified overpayments relate to such items as duplicate
payments, refunds due for late deliveries and application of incorrect tariff
rates. Preliminary planning efforts are underway to consolidate each client's
freight purchase data into a composite database which would then be examined by
Company audit personnel using multi-modal proprietary software.
Freight audit services are typically recurring in nature since freight
payments are usually examined on an ongoing basis once a new client is signed.
Facilities
The Facilities division currently consists of the telecommunications audit
unit which was formed by the Company's June 1999 acquisition of Invoice and
Tariff Management Group, LLC ("ITMG"). ITMG applies its specialized expertise to
historical client telecommunications records to identify and recover refunds of
any previous overpayments. ITMG also analyzes its clients' current
telecommunications routing patterns and usage volumes and renegotiates tariff
rates on its clients' behalf.
CLIENT CONTRACTS
The Company's typical client contract provides that the Company is entitled
to a contractual percentage of overpayments recovered for clients. Clients
generally recover claims by either (a) taking credits against outstanding
payables or future purchases from the involved vendors, or (b) receiving refund
checks directly from those vendors. The method of effecting a recovery is often
dictated by industry practice.
In addition to client contracts, many clients establish specific procedural
guidelines that the Company must satisfy prior to submitting claims for client
approval. These guidelines are unique to each client.
With respect to the Company's present and future operations to secure
refunds pursuant to statute or regulation of amounts paid by clients to
governmental entities, the Company recognizes revenues at the time refund claims
containing all required documentation are filed with appropriate governmental
agencies in those instances where historical refund disallowance rates can be
accurately estimated. The Company records its fee participation in these refunds
at estimated net realizable value without reserves. Accordingly, adjustments to
uncollectible fee estimates are charged or credited to earnings, as appropriate.
TECHNOLOGY
The Company employs a variety of proprietary audit tools, proprietary
databases and Company-owned data processing facilities in its business. Each of
the Company's four operating segments employs discrete technology.
Accounts Payable Audit Technology
At the beginning of a typical accounts payable recovery audit engagement,
the Company obtains transaction data from its client for the time period under
audit. The Company receives this data typically by magnetic media, which is then
reformatted into standardized and proprietary layouts at one of the Company's
data processing facilities using the following:
- IBM AS 400 midrange computers;
- Windows NT and OS/2 Warp Connect servers; and
- other PC-based platforms.
The Company's experienced programmers then prepare statistical reports to
verify the completeness and accuracy of the data. The Company delivers this
reformatted data to its auditors who, using the Company's proprietary PC-based
field audit software, sort, filter and search the data for overpayments. The
Company also
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produces client-specific standard reports and statistical data for its auditors.
These reports and data often reveal patterns of activity or unusual
relationships suggestive of potential overpayment situations.
The Company has developed and continuously updates and refines its
proprietary accounts payable databases to assist it in providing recovery audit
services to its domestic retail clients. These databases 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, however, do not include
confidential client information. Auditors use these databases to identify
discounts, allowances and other pricing information not previously detected.
Taxation Audit Technology
The Company's France-based corporate tax recovery and grant procurement
operations employ a variety of sophisticated proprietary processes, databases
and PC-based software. Specialists continually review and analyze tax
developments and grant availabilities to identify opportunities. Once
identified, these opportunities are matched by computer to appropriate database
attributes of both clients and non-clients to identify those who might benefit.
Additional proprietary software and processes are subsequently used to develop,
file and track tax claims and grant applications.
Freight Audit Technology
The Company's freight audit activities and clients are currently
concentrated in the United States. Discrete sub-units of specialized personnel
and systems are dedicated to specific transportation modes such as ocean,
overnight air, truck and rail freight. The Company is currently in the planning
process to integrate all client freight payments into a composite database which
would then be audited for overpayments regardless of transportation mode.
Facilities Audit Technology
Although various proprietary processes and databases are used to conduct
telecommunications audits, this segment relies most heavily upon the industry
and vendor knowledge possessed by its audit personnel.
AUDITOR HIRING AND TRAINING
Many of the Company's auditors formerly held finance-related management
positions in the industries the Company serves. To meet its growing need for
additional auditors, the Company also hires 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 can continue hiring sufficient numbers of
qualified auditors to meet its future needs.
The Company provides intensive training for auditors utilizing both
classroom-type training and self-paced media such as specialized computer-based
training modules. All training programs are continuously upgraded based on
feedback from auditors and changing industry protocols. Additional on-the-job
training provided by experienced auditors enhances the structured training
programs and enables newly hired auditors to refine their skills.
CLIENT BASE
The Company provides its services principally to large and mid-sized
businesses and certain governmental agencies having numerous payment
transactions with many vendors. Retailers continue to constitute an important
part of the Company's client and revenue base. None of the Company's clients
individually represented 10% or greater of the Company's consolidated revenues
for the year ended December 31, 1999.
SEASONALITY
The Company has experienced and expects to continue to experience
significant seasonality in its business. The Company typically realizes
substantially higher revenues and operating income in the last two quarters of
its fiscal year. Recent business acquisitions are not expected to affect this
trend.
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SALES AND MARKETING
Each of the Company's current four operating segments maintains a
relatively autonomous sales and marketing function, although comprehensive
analyses are now underway to assess the continued appropriateness of the current
approach. Due to the highly confidential and proprietary nature of a business'
purchasing patterns and procurement prices combined with the typical desire to
maximize the amount of funds recovered, most prospective clients conduct an
extensive investigation prior to selecting a specific recovery audit firm. This
type of investigation may include an on-site inspection of the Company's service
facilities. The Company has typically found that its service offerings which are
the most annuity-like in nature (e.g., freight services) require the longest
sales cycle and highest levels of direct person-to-person contact. Conversely,
service offerings that are short-term discrete events such as certain taxation
projects are susceptible to more cost effective sales and marketing delivery
approaches such as telemarketing.
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. 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 owns or has rights to various copyrights, trademarks and trade
names used in the Company's business. These include AuditPro(R), AuditPro
97(TM), CLM Processing System(TM), Claims Management System(TM), eassurance,
EAudit, EDI Inquiry(TM), DATAMAP(TM), FreightPro(TM), ImagePro, Meridian VAT
Reclaim(R), PayTech(R), Profit Recovery Group International(R), PRG(R), PRS(R),
RBAdvantage(TM), Recap Express(R), RecoverNow(R), ReportPro(TM), ScanSearch(TM),
Sentinel(TM) and THORANT(TM).
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, Inc., with operations in the U.S. and abroad. The Company's
competitors for tax recovery audit services in Europe include major
international accounting firms, tax attorneys and several smaller tax recovery
audit firms. Competing recovery audit activities in the freight and facilities
segments are currently conducted by a sizable number of small companies, most of
which have a highly focused niche specialty.
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The Company believes that as businesses continue to expand internationally
and implement more sophisticated electronic 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 December 31, 1999, the Company had approximately 2,856 employees, 1,700
of whom were located in the U.S. The majority of the Company's employees are
involved in the audit function. The Company believes its employee relations are
good.
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RISK FACTORS
OUR RATE OF REVENUE GROWTH WILL BE ADVERSELY AFFECTED IF WE ARE UNABLE TO MAKE
FUTURE ACQUISITIONS
If we are unable to make acquisitions, we may not meet our revenue growth
expectations and our business, financial condition and results of operations
could be materially and adversely affected. From January 1, 1997 through March
24, 2000, we completed 21 acquisitions. While we are not currently a party to
any agreements or understandings for any material acquisitions, we expect to
continue to acquire both domestic and foreign companies as part of our growth
strategy. However, we may be unable to continue to identify suitable acquisition
candidates. We compete with other companies to acquire recovery audit firms and
other businesses. We expect this competition to continue to increase, making it
more difficult to acquire suitable companies on favorable terms.
IF WE CANNOT INTEGRATE ACQUIRED COMPANIES WITH OUR BUSINESS, OUR PROFITABILITY
MAY BE ADVERSELY AFFECTED
Even though we may acquire additional companies in the future, we may be
unable to successfully integrate the acquired businesses and realize anticipated
economic, operational and other benefits in a timely manner. Integration of an
acquired business is especially difficult when we acquire a business in a market
in which we have limited or no expertise, or with a corporate culture different
from ours. If we are unable to successfully integrate acquired businesses, we
may incur substantial costs and delays or other operational, technical or
financial problems. In addition, the failure to successfully integrate
acquisitions may divert management's attention from our existing business and
may damage our relationships with our key clients and employees.
ACQUISITIONS MAY DECREASE OUR SHAREHOLDERS' PERCENTAGE OWNERSHIP IN PRG AND
REQUIRE US TO INCUR ADDITIONAL DEBT
We may issue equity securities in future acquisitions that could be
dilutive to our shareholders. We also may incur additional debt and amortization
expense related to goodwill and other intangible assets in future acquisitions.
This additional debt and amortization expense may reduce significantly our
profitability and materially and adversely affect our business, financial
condition and results of operations.
STRIKES OR OTHER EMPLOYMENT DISRUPTIONS BY OR ON THE PART OF EMPLOYEES OF
FOREIGN GOVERNMENTS WITH WHOM THE COMPANY'S TAXATION DIVISION TRANSACTS BUSINESS
COULD HAVE A MATERIAL ADVERSE EFFECT ON THE REVENUES GENERATED BY THE COMPANY'S
TAXATION DIVISION
Any strike or other disruption of employment by or on the part of the
employees of the foreign governments with whom the Company's Taxation division
transacts business could significantly delay the recognition of revenue by the
Taxation division and cause the Company to fail to achieve its revenue and
earnings estimates for one or more quarters or perhaps for an entire fiscal
year. During a substantial portion of March 2000 certain employees of the French
Tax Administration were on strike. Although we believe the strike is coming to a
close, substantial work backlogs have developed. As a result of the strike, the
revenues of the Company's French tax recovery operations for the first quarter
of 2000 have been materially negatively impacted, and we expect that revenues
from these operations for the second quarter of 2000 will also be adversely
impacted. We therefore believe that our total revenues and results of operations
for the first two quarters of 2000 will be lower than we had originally
anticipated. Furthermore, we are unable to predict how quickly we will be able
to recognize the delayed revenues and we may be unable to recover all delayed
revenues by December 31, 2000.
WE MAY NOT BE ABLE TO CONTINUE TO IDENTIFY A LARGER VOLUME OF RECOVERIES EACH
YEAR FOR THE CLIENTS SERVED BY OUR RETAIL/WHOLESALE/GOVERNMENTAL DIVISION
For most clients served by our retail/wholesale/governmental division, we
typically identify a larger volume of recoveries each year when compared to
recoveries realized in the immediately preceding year.
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There is no guaranty, however, that these larger recoveries will continue. If
such recovery increases do not continue, the Company's revenues and operating
results would be materially adversely affected. Factors that could prevent
recovery from increasing include, but are not limited to, unexpected advances in
technology which significantly reduce the levels of client overpayments and the
unexpected reversal of current trends toward the outsourcing of non-core
competencies such as recovery audit services.
CLIENT AND VENDOR BANKRUPTCIES COULD REDUCE OUR EARNINGS
The Company's clients generally operate in intensely competitive
environments and bankruptcy filings are not uncommon. Future bankruptcy filings
by one or more of our larger clients could have a material adverse effect on our
business, financial condition and results of operations.
WE DEPEND ON CERTAIN CLIENTS FOR SIGNIFICANT REVENUES
With the Company's considerable growth and diversification of services
since its March 1996 initial public offering, dependence on any one client or
group of clients for revenue and profits has been reduced. Nevertheless, the
Company's largest revenue generating clients continue to be retailers, and the
Company's revenues and profitability would be materially adversely affected if
one or more of its largest retail clients filed for bankruptcy or otherwise
ceased to do business with us.
WE RELY ON INTERNATIONAL OPERATIONS FOR SIGNIFICANT REVENUES
We derived 31% of our revenues from international operations in 1999.
International operations are subject to risks, including:
- fluctuations in political and economic instability;
- difficulties in staffing and managing foreign operations and in
collecting accounts receivable;
- fluctuations in currency exchange rates;
- costs associated with adapting our services to our foreign clients'
needs;
- unexpected changes in regulatory requirements and laws;
- difficulties in transferring earnings from our foreign subsidiaries to
us; and
- burdens of complying with a wide variety of foreign laws and labor
practices, including laws that could subject certain tax recovery audit
practices to regulation as the unauthorized practice of law.
Because a significant portion of our revenues come from international
operations, the occurrence of any of the above events may materially and
adversely affect our business, financial condition and results of operations.
RECOVERY AUDIT SERVICES ARE NOT WIDELY USED IN INTERNATIONAL MARKETS
We rely heavily on international expansion to achieve our long-term growth
objectives. Although our recovery audit services constitute a generally accepted
business practice among retailers in the U.S. and Canada, our services have not
yet become widely used in many international markets. Prospective clients,
vendors or other involved parties in foreign markets may not accept our
services. The failure of these parties to accept and use our services could have
a material adverse effect on our business, financial condition and results of
operations.
WE REQUIRE SIGNIFICANT MANAGEMENT AND FINANCIAL RESOURCES TO OPERATE AND EXPAND
OUR RECOVERY AUDIT SERVICES INTERNATIONALLY
In our experience, entry into new international markets requires
considerable management time as well as start-up expenses for market
development, hiring and establishing office facilities. In addition, we have
encountered, and expect to continue to encounter, significant expense and delays
in expanding our interna-
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tional operations because of language and cultural differences, and staffing,
communications and related issues. We generally incur the costs associated with
international expansion before any significant revenues are generated. As a
result, initial operations in a new market typically operate at low margins or
may be unprofitable. Because our international expansion strategy will require
substantial financial resources, we may incur additional indebtedness or issue
additional equity securities which could be dilutive to our shareholders. In
addition, financing for international expansion may not be available to us on
acceptable terms and conditions.
OUR REVENUE MAY BE ADVERSELY AFFECTED IF WE DO NOT CORRECTLY ESTIMATE OUR
UNCOLLECTIBLE ACCOUNTS RECEIVABLE
We estimate uncollectible levels of accounts receivable on an aggregate
basis and reduce earnings, quarterly by the amounts of these estimates. Despite
our experience in providing accounts payable recovery audit services, our
estimates of uncollectible accounts receivable may not be adequate. If we
overestimate the amount of accounts receivable we expect to collect, then our
future earnings will be reduced, and, as a result, our stock price could
decline.
THE LEVEL OF OUR PROFITABILITY IS DETERMINED BY OUR THIRD AND FOURTH QUARTER
OPERATING RESULTS
The purchasing and operational cycles of our clients typically cause us to
realize higher revenues and operating income in the last two quarters of our
fiscal year. If we do not continue to realize increased revenues in future third
and fourth quarter periods, our profitability for any affected quarter and the
entire year could be materially and adversely affected because ongoing selling,
general and administrative expenses are largely fixed over the short term.
WE MAY BE UNABLE TO PROTECT AND MAINTAIN THE COMPETITIVE ADVANTAGE OF OUR
PROPRIETARY TECHNOLOGY AND INTELLECTUAL PROPERTY RIGHTS
Our operations could be materially and adversely affected if we are not
adequately able to protect our proprietary software, audit techniques and
methodologies, and other proprietary intellectual property rights. We rely on a
combination of trade secret laws, nondisclosure and other contractual
arrangements and technical measures to protect our proprietary rights. Although
we presently hold U.S. and foreign registered trademarks and U.S. registered
copyrights on certain of our proprietary technology, we may be unable to obtain
similar protection on our other intellectual property. In addition, in the case
of foreign registered trademarks, we may not receive the same enforcement
protection on our intellectual property as in the U.S. We generally enter into
confidentiality agreements with our employees, consultants, clients and
potential clients and limit access to, and distribution of, our proprietary
information. Nevertheless, we may be unable to deter misappropriation of our
proprietary information, detect unauthorized use and take appropriate steps to
enforce our intellectual property rights. Our competitors also may independently
develop technologies that are substantially equivalent or superior to our
technology. Although we believe that our services and products do not infringe
on the intellectual property rights of others, we can not prevent someone else
from asserting a claim against us in the future for violating their technology
rights.
OUR NEED TO RETAIN THE SERVICES OF MESSRS. COOK AND LUSTIG
Our success depends largely on the efforts and skills of our executive
officers and key employees, particularly John M. Cook and Michael A. Lustig in
the United States. The loss of the services of one or both of these persons
could materially adversely affect our business, financial condition and results
of operations. We have entered into employment agreements with Messrs. Cook and
Lustig and other members of management. We also maintain key man life insurance
policies in the aggregate amounts of $13.3 million on the life of Mr. Cook and
$5.0 million on the life of Mr. Lustig.
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WE MAY NOT BE ABLE TO CONTINUE TO COMPETE SUCCESSFULLY WITH OTHER RECOVERY AUDIT
FIRMS
The recovery audit business is highly competitive. Our principal
competitors for accounts payable recovery audit services include local and
regional firms and Howard Schultz & Associates, Inc. with operations in the U.S.
and abroad. Our competitors for tax recovery audit services in France include
major international accounting firms, tax attorneys and several smaller tax
recovery audit firms. We are uncertain whether we can continue to compete
successfully with our competitors. In addition, our profit margins could decline
because of competitive pricing pressures that may have a material adverse effect
on our business, financial condition and results of operations.
OUR ARTICLES OF INCORPORATION AND BYLAWS AND GEORGIA LAW MAY INHIBIT A TAKEOVER
OF PRG
Our Articles of Incorporation and Bylaws and Georgia law contain provisions
that may delay, deter or inhibit a future acquisition of us not approved by our
Board of Directors. This could occur even if our shareholders are offered an
attractive value for their shares or if a substantial number or even a majority
of our shareholders believe the takeover is in their best interest. These
provisions are intended to encourage any person interested in acquiring us to
negotiate with and obtain the approval of our Board of Directors in connection
with the transaction. Provisions that could delay, deter or inhibit a future
acquisition include the following:
- a staggered Board of Directors;
- special meeting call restrictions; and
- the ability of the Board of Directors to consider the interests of
various constituencies, including our employees, clients and creditors
and the local community.
In addition, our Articles of Incorporation permit the Board of Directors to
issue shares of preferred stock with such designations, powers, preferences and
rights as it determines, without any further vote or action by our shareholders.
These provisions also could discourage bids for your shares of common stock at a
premium and have a material adverse effect on the market price of your shares.
THE PRICE OF OUR STOCK HAS BEEN VOLATILE AND COULD CONTINUE TO FLUCTUATE
SUBSTANTIALLY
Our common stock is traded on the Nasdaq National Market. The market price
of our common stock has been volatile, has fluctuated substantially and could
continue to do so, based on a variety of factors, including the following:
- future announcements concerning us or our key clients or competitors;
- technological innovations;
- government regulations;
- litigation; or
- changes in earnings estimates by analysts or the publication of negative
reports by analysts about us.
Furthermore, stock prices for many companies fluctuate widely for reasons
that may be unrelated to their operating results. These fluctuations and general
economic, political and market conditions, such as recessions or international
currency fluctuations and demand for our services, may adversely affect the
market price of our common stock.
WE INTEND TO EXPAND FURTHER INTO ELECTRONIC COMMERCE AUDITING STRATEGIES AND
PROCESSES
The Company anticipates a growing need for recovery auditing services among
current clients migrating to internet-based procurement, as well as potential
clients already engaged in electronic commerce transactions. The Company
possesses a number of core competencies, including Electronic Data Interchange
("EDI") expertise, that can be leveraged toward the development of new
electronic commerce audit services. The Company's E-Commerce unit, International
Systems Consultants ("ISC"), is a custom application
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development, consulting and systems integration firm specializing primarily in
providing 3-tier client server software on a project basis as well as managing
projects requiring secure internet-based transaction processing. In response to
future demand for the Company's recovery auditing expertise, the Company intends
to further expand into internet technology areas in the near future and may make
substantial financial investments to do so. The profitability of these
investments can not be assured nor can the demand for these services be fully
anticipated.
FORWARD LOOKING STATEMENTS
Some of the information in this Form 10-K contains forward-looking
statements that involve substantial risks and uncertainties. You can identify
these statements by forward-looking words such as "may," "will," "expect,"
"anticipate," "believe," "estimate" and "continue" or similar words. You should
read statements that contain these words carefully. Such forward-looking
statements include the following:
- the impact on the Company's revenues and results of operations of the
March 2000 strike by certain employees of the French Tax Administration;
- the Company's belief that current business-to-business e-commerce
initiatives involving the internet may provide recovery opportunities
that exceed those existing when EDI is used;
- the Company's ability to cross-sell additional services to existing
clients;
- the Company's ability to make a limited number of strategic acquisitions
in 2000;
- the Company's ability to identify each year a larger volume of recoveries
for most of its retail/ wholesale/governmental clients;
- the ability of Meridian to generate recurring revenues;
- the ability of the freight division to generate recurring revenues;
- ultimate success of the current initiative to integrate all client
freight payments into a composite database;
- the ability of smaller recovery audit firms to compete in the future
without making substantial capital investments;
- the belief that the rate of future revenue growth for international
operations will significantly exceed that for domestic operations; and
- statements that contain projections of our future results of operations
or of our financial condition.
There may be events in the future, however, that we are not accurately able
to predict or over which we have no control. The risk factors listed in this
section, as well as any cautionary language in this Form 10-K, provide examples
of risks, uncertainties and events that may cause our actual results to differ
materially from the expectations we describe in our forward-looking statements.
You should be aware that the occurrence of any of the events denoted as risk
factors above and elsewhere in this Form 10-K could have a material adverse
effect on our business, financial condition and results of operations.
ITEM 2. PROPERTIES
The Company's principal executive office is located in approximately 95,000
square feet of office space in Atlanta, Georgia. The Company leases this space
under various agreements with primary terms expiring from December 2002 through
February 2005. The Company's various operating units lease numerous other
parcels of operating space in the various countries in which the Company
currently conducts its business. Most of the Company's real property leases are
individually less than 5 years in duration. Certain recently acquired operations
in France are conducted from facilities owned by the Company. The Company
anticipates that additional space will be required as its business continues to
expand, 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.
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ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to any legal proceedings that it believes could
have a material adverse effect on its business, financial condition or results
of operations.
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.
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). 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.
Shareholder distributions reflected in the Company's Consolidated Statements of
Shareholders' Equity for the years ended December 31, 1999, 1998 and 1997 relate
to the pre-acquisition operations of PRS International, Ltd. which the Company
acquired in August 1999 and accounted for under the pooling-of-interests method.
As of February 16, 2000, there were approximately 6,000 beneficial holders of
the Company's common stock and 262 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 during 1999 and 1998 and which have
been retroactively adjusted, where appropriate, to reflect the Company's 3-for-2
stock split (effected in the form of a stock dividend) paid on August 17, 1999:
1999 CALENDAR QUARTER HIGH LOW
- --------------------- ------ ------
1st Quarter................................................. $26.67 $18.75
2nd Quarter................................................. 32.25 22.42
3rd Quarter................................................. 45.50 24.83
4th Quarter................................................. 47.50 23.00
1998 CALENDAR QUARTER
- --------------------------------------------------------------------
1st Quarter................................................. $15.33 $10.33
2nd Quarter................................................. 19.67 14.25
3rd Quarter................................................. 22.67 12.58
4th Quarter................................................. 26.08 13.42
On November 15, 1999, in connection with the acquisition of the shares of
AP SA and its subsidiaries (collectively, "Groupe AP"), the Company issued
356,718 restricted, unregistered shares of its common stock to certain former
shareholders of Groupe AP. The shares were issued pursuant to the exemption from
registration provided by Regulation S promulgated pursuant to the Securities Act
of 1933, as amended.
On December 3, 1999, in connection with the acquisition of all outstanding
shares of Freight Rate Services, Inc. ("FRS") the Company issued 60,223
restricted, unregistered shares of its common stock to FRS. The shares were
issued pursuant to the exemption from registration provided by Section 4(2) of
the Securities Act of 1933, as amended.
On December 16, 1999, in connection with the acquisition of substantially
all net assets of Integrated Systems Consultants, Inc. ("ISC"), the Company
issued 77,569 restricted, unregistered shares of its common stock to ISC. The
shares were issued pursuant to the exemption from registration provided by
Section 4(2) of the Securities Act of 1933, as amended.
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On December 28, 1999, in connection with the acquisition of the remaining
minority ownership interests in certain of the Company's consolidated
subsidiaries acquired in connection with the acquisition of Meridian VAT
Corporation Limited, the Company issued 158,178 restricted, unregistered shares
of its common stock to the minority owners of those subsidiaries. The shares
were issued pursuant to the exemption from registration provided by Section 4(2)
of the Securities Act of 1933, as amended.
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, 1999. Such historical
consolidated financial data as of and for the five years ended December 31, 1999
have been derived from the Company's Consolidated Financial Statements and Notes
thereto, which Consolidated Financial Statements for the three years ended
December 31, 1999 have been audited by KPMG LLP, independent auditors. The
audited Consolidated Balance Sheets as of December 31, 1999 and 1998, and the
related Consolidated Statements of Operations, Shareholders' Equity and Cash
Flows for each of the years in the three-year period ended December 31, 1999 and
the report thereon, which in each such year is based partially upon the report
of other auditors and refers to a change in accounting for revenue recognition
in 1999, are included elsewhere herein. The selected Statements of Earnings data
for the two years ended December 31, 1996 and the selected Balance Sheet data as
of December 31, 1997, 1996 and 1995 are unaudited. Selected consolidated
financial data for the Company as of and for the four years ended December 31,
1998, as previously reported, have been retroactively restated, as required
under generally accepted accounting principles, to include the accounts of
Meridian VAT Corporation Limited and PRS International, Ltd. which were each
acquired in August 1999 and accounted for under the pooling-of-interests method.
Further, the Company made the decision in the second quarter of 1999 to
recognize revenue on all of its then existing operations when it invoices
clients for its fee retroactive to January 1, 1999. The Company had previously
recognized revenue from services provided to its historical client base
(consisting primarily of retailers, wholesale distributors and governmental
entities) at the time overpayment claims were presented to and approved by its
clients. In accordance with the applicable requirements of generally accepted
accounting principles, financial statements for periods prior to 1999 have not
been restated. AS A RESULT, CERTAIN FINANCIAL STATEMENT AMOUNTS FOR 1999 WILL
NOT BE DIRECTLY COMPARABLE TO CORRESPONDING AMOUNTS FOR 1998 AND PRIOR YEARS.
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,
-------------------------------------------------------------
1999(2)(11) 1998(1)(3) 1997(1)(4) 1996(1) 1995(1)(5)
----------- ---------- ---------- -------- ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENTS OF EARNINGS DATA:
Revenues............................ $349,647 $242,145 $146,467 $102,981 $77,823
Cost of revenues.................... 180,637 126,230 79,126 57,017 50,538
Selling, general and administrative
expenses.......................... 102,281 79,324 46,174 32,855 26,512
-------- -------- -------- -------- -------
Operating income before
business acquisition and
restructuring expenses....... 66,729 36,591 21,167 13,109 773
Business acquisition and
restructuring expenses(6)......... 13,341 3,818 2,433 366 --
-------- -------- -------- -------- -------
Operating income............... 53,388 32,773 18,734 12,743 773
Interest (expense), net............. (5,529) (5,851) (2,586) (741) (2,696)
-------- -------- -------- -------- -------
Earnings (loss) before income
taxes, minority interest and
cumulative effect of
accounting change............ 47,859 26,922 16,148 12,002 (1,923)
Income tax expense (benefit)(7)..... 20,066 11,828 6,373 7,878 (205)
-------- -------- -------- -------- -------
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YEARS ENDED DECEMBER 31,
-------------------------------------------------------------
1999(2)(11) 1998(1)(3) 1997(1)(4) 1996(1) 1995(1)(5)
----------- ---------- ---------- -------- ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Earnings (loss) before minority
interest and cumulative
effect of accounting
change....................... 27,793 15,094 9,775 4,124 (1,718)
Minority interest in (earnings) loss
of consolidated subsidiaries...... (357) (460) (411) (281) 903
-------- -------- -------- -------- -------
Earnings (loss) before
cumulative effect of
accounting change............ 27,436 14,634 9,364 3,843 (815)
Cumulative effect of accounting
change............................ (29,195) -- -- -- --
-------- -------- -------- -------- -------
Net earnings (loss)............ $ (1,759) $ 14,634 $ 9,364 $ 3,843 $ (815)
======== ======== ======== ======== =======
Cash dividends per share(12)........... $ 0.01 $ 0.01 $ 0.01 $ 0.16 $ 0.44
======== ======== ======== ======== =======
Basic earnings (loss) per share:
Earnings (loss) before cumulative
effect of accounting change....... $ 0.57 $ 0.37 $ 0.28 $ 0.13 $ (0.03)
Cumulative effect of accounting
change............................ (0.61) -- -- -- --
-------- -------- -------- -------- -------
Net earnings (loss)................. $ (0.04) $ 0.37 $ 0.28 $ 0.13 $ (0.03)
======== ======== ======== ======== =======
Diluted earnings (loss) per share:
Earnings (loss) before cumulative
effect of accounting change....... $ 0.55 $ 0.36 $ 0.27 $ 0.12 $ (0.03)
Cumulative effect of accounting
change............................ (0.59) -- -- -- --
-------- -------- -------- -------- -------
Net earnings (loss)................. $ (0.04) $ 0.36 $ 0.27 $ 0.12 $ (0.03)
======== ======== ======== ======== =======
DECEMBER 31,
----------------------------------------------------------------
1999(2)(8) 1998(1)(3)(9) 1997(1)(4) 1996(1)(10) 1995(1)
---------- ------------- ---------- ----------- --------
(IN THOUSANDS)
BALANCE SHEET DATA:
Cash and cash equivalents......... $ 39,260 $ 30,266 $ 20,495 $17,656 $ 1,171
Working capital................... 22,740 30,941 39,018 32,223 4,564
Total assets...................... 529,160 419,663 164,884 89,326 45,753
Long-term debt, excluding current
installments and loans from
shareholders.................... 95,294 112,886 24,382 716 17,629
Loans from shareholders........... -- 27,477 24,101 22,729 19,597
Total shareholders' equity
(deficit)....................... 292,500 144,105 45,515 23,570 (20,192)
- ---------------
(1) Selected consolidated financial data for the Company as of and for the four
years December 31, 1998, as previously reported, have been retroactively
restated, as required under generally accepted accounting principles, to
include the accounts of Meridian VAT Corporation Limited and PRS
International, Ltd. which were each acquired in August 1999 and accounted
for under the pooling-of-interests method.
(2) During 1999, the Company completed six acquisitions accounted for as
purchases consisting of Payment Technologies, Inc. (April), Invoice and
Tariff Management Group, LLC (June), AP SA (October), Freight Rate
Services, Inc. (December), Integrated Systems Consultants, Inc. (December)
and minority interests in three Japanese subsidiaries of Meridian VAT
Corporation Limited (December). See Note 8 of Notes to Consolidated
Financial Statements.
(3) During 1998, the Company completed eight acquisitions accounted for as
purchases consisting of Precision Data Link (March), The Medallion Group
(June), Novexel S.A. (July), Loder, Drew & Associates, Inc. (August), Cost
Recovery Professionals Pty Ltd (September), Robert Beck &
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Associates, Inc. and related businesses (October), IP Strategies SA
(November) and Industrial Traffic Consultants, Inc. (December). See Note 8
of Notes to Consolidated Financial Statements.
(4) During 1997, the Company completed four acquisitions accounted for as
purchases consisting of Accounts Payable Recovery Services, Inc.
(February), The Hale Group (May), 98.4% of Financiere Alma, S.A. and its
subsidiaries (October) and TradeCheck, LLC (November), and one acquisition
accounted for as a pooling of interests, Shaps Group, Inc. (January). See
Note 8 of Notes to Consolidated Financial Statements.
(5) Effective January 1, 1995, the Company acquired Fial & Associates, Inc.
(6) Consists of merger-related charges relating to businesses acquired under
the pooling-of-interests accounting method and certain restructuring
charges. See Note 14 of Notes to Consolidated Financial Statements.
(7) 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 $7.9 million consists of the above-mentioned $3.7
million charge for cumulative deferred income taxes combined with $4.2
million in tax provisions for the three quarters subsequent to the March
26, 1996 initial public offering.
(8) Balance Sheet Data as of December 31, 1999 reflect the receipt of net
proceeds from the Company's January 1999 follow-on public offering. See
Note 7 of Notes to Consolidated Financial Statements.
(9) Balance Sheet Data as of December 31, 1998 reflect the receipt of net
proceeds from the Company's March 1998 follow-on public offering. See Note
7 of Notes to Consolidated Financial Statements.
(10) Balance Sheet Data as of December 31, 1996 reflect the receipt of net
proceeds from the Company's March 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.
(11) In 1999, the Company changed its method of accounting for revenue
recognition. See Note 1(c) of Notes to Consolidated Financial Statements.
(12) Cash dividends per share represent distributions to shareholders of the
Company prior to the Company's initial public offering and distributions to
the shareholders of PRS International, Ltd.
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 and mid-size businesses and certain governmental
agencies having numerous payment transactions with many vendors. These
businesses include, but are not limited to, retailers, manufacturers, wholesale
distributors, technology companies and healthcare providers.
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. Services such as freight and
telecommunications provided to businesses under complex pricing arrangements
also can result in overpayments. All of these overpayments result in "lost
profits." The Company's trained, experienced audit specialists use sophisticated
proprietary technology and advanced audit techniques and methodologies to
identify overpayments to vendors and tax authorities. The Company receives a
contractual percentage of overpayments it identifies and its clients recover.
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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,
--------------------------
1999 1998 1997
------ ------ ------
STATEMENTS OF EARNINGS DATA:
Revenues................................................ 100.0% 100.0% 100.0%
Cost of revenues........................................ 51.7 52.1 54.0
Selling, general and administrative expenses............ 29.3 32.8 31.5
----- ----- -----
Operating income before business acquisition and
restructuring expenses........................ 19.0 15.1 14.5
Business acquisition and restructuring expenses......... 3.8 1.6 1.7
----- ----- -----
Operating income................................ 15.2 13.5 12.8
Interest (expense), net................................. (1.6) (2.4) (1.8)
----- ----- -----
Earnings before income taxes, minority interest
and cumulative effect of accounting change.... 13.6 11.1 11.0
Income taxes............................................ 5.7 4.9 4.3
----- ----- -----
Earnings before minority interest and cumulative
effect of accounting change................... 7.9 6.2 6.7
Minority interest in (earnings) of consolidated
subsidiaries......................................... (.1) (.2) (.3)
----- ----- -----
Earnings before cumulative effect of accounting
change........................................ 7.8 6.0 6.4
Cumulative effect of accounting change.................. (8.3) -- --
----- ----- -----
Net earnings (loss)............................. (.5)% 6.0% 6.4%
===== ===== =====
1999 COMPARED WITH 1998
As indicated in Note 1(c) of Notes to Consolidated Financial Statements,
the Company chose during its quarter ended June 30, 1999, retroactive to January
1, 1999, to recognize revenue for the substantial majority of its operations
when it invoices clients for its fee. In accordance with the applicable
requirements of generally accepted accounting principles, the consolidated
financial statements for periods prior to 1999 have not been restated. AS A
RESULT, CERTAIN FINANCIAL STATEMENT ACCOUNTS FOR 1999 WILL NOT BE DIRECTLY
COMPARABLE TO CORRESPONDING AMOUNTS FOR 1998 AND PRIOR YEARS.
As further indicated in Note 1(c) and elsewhere in the Notes to
Consolidated Financial Statements, during August 1999, the Company acquired
Meridian VAT Corporation Limited ("Meridian") and PRS International, Ltd.
("PRS"). Both of these acquisitions were accounted for as poolings-of-interests.
Accordingly, the Company's previously reported consolidated financial statements
for all prior periods have been retroactively restated, as required under
generally accepted accounting principles, to include the operations of Meridian
and PRS.
Revenues. The Company's revenues consist principally of contractual
percentages of overpayments recovered for clients. The Company's services and
operations are currently grouped into four distinct operating segments: Accounts
Payable; Freight; Taxation; and Facilities (see Note 11 of Notes to Consolidated
Financial Statements).
Revenues increased 44.4% to $349.6 million in 1999, up from $242.1 million
in 1998. Domestic revenues increased 46.9% to $240.3 million in 1999, up from
$163.6 million in 1998. International revenues, which the Company considers to
be revenues derived from all operations outside of the United States, increased
39.4% to $109.4 million, up from $78.5 million in 1998.
Domestic revenue growth in 1999 was broad-based with Accounts Payable
revenues up 37.5%, Freight revenues up 151.1%, Facilities revenues up 781.0% and
Taxation revenues up 24.0% in 1999 as compared to 1998. Domestic revenue growth
in 1999 was driven by a combination of revenues from companies acquired during
1999 and 1998 under the purchase method of accounting (see Note 8 of Notes to
Consolidated
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Financial Statements) and strong internal growth resulting from both new clients
and additional services provided to existing clients.
International revenue growth in 1999 was also broad-based with Accounts
Payable revenues up 38.0% and Taxation revenues up 40.2% as compared to 1998.
The Company's Freight and Facilities segments do not currently conduct
international operations. International revenue growth in 1999 was driven
primarily by the same factors as set forth above for domestic revenue growth.
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 compensation paid to various types of hourly workers
and salaried operational managers. Also, included in cost of revenues are other
direct costs incurred by these personnel including rental of non-headquarters
offices, travel and entertainment, telephone, utilities, maintenance and
supplies, and clerical assistance. Cost of revenues decreased to 51.7% in 1999,
down from 52.1% in 1998.
Domestically, cost of revenues as a percentage of revenues decreased to
52.2% in 1999, down from 52.8% in 1998. Internationally, cost of revenues as a
percentage of revenues also decreased slightly to 50.5% in 1999, down from 50.6%
in 1998. Percentage improvements worldwide related principally to fixed cost
elements being spread over rapidly growing revenue bases.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses include the expenses of sales and marketing activities,
information technology services and various corporate data centers, human
resources, legal and accounting, corporate development, administration,
headquarters-related depreciation of property and equipment and amortization of
intangibles. Selling, general and administrative expenses as a percentage of
revenues decreased to 29.3% of revenues in 1999, down from 32.8% in 1998.
Domestically, selling, general and administrative expenses as a percentage
of revenues decreased to 28.8% in 1999, down from 29.8% in 1998.
Internationally, selling, general and administrative expenses as a percentage of
revenues also decreased to 30.3% in 1999, down from 38.9% in 1998. As with cost
of revenues, percentage improvements worldwide related principally to fixed cost
elements being spread over rapidly growing revenue bases.
In connection with acquired businesses, the Company has recorded intangible
assets including goodwill and deferred non-compete costs. Amortization of these
intangible assets totalled $11.6 million in 1999 and $6.3 million in 1998.
Business Acquisition and Restructuring Expenses. Business acquisition and
restructuring expenses consisted of the following components (in thousands):
YEAR ENDED
DECEMBER 31,
----------------
1999 1998
------- ------
Acquisition-related expenses incurred by all parties in
connection with the August 1999 acquisitions of Meridian
and PRS................................................... $ 9,291 $ --
Expenses incurred by Meridian with respect to phantom stock
plan...................................................... 2,991 3,818
Restructuring charge incurred in the fourth quarter of 1999
in connection with combining the operations of PRS with
those of the Company's existing Accounts Payable
Commercial unit........................................... 1,059 --
------- ------
$13,341 $3,818
======= ======
The Company effected separate acquisitions of Meridian and PRS which were
each completed in August 1999 and each accounted for as a pooling-of-interests.
As required under generally accepted accounting principles governing
pooling-of-interests accounting, acquisition-related expenses incurred by the
Company,
19
22
Meridian, PRS and the respective shareholders of Meridian and PRS have been
aggregated and charged to current operations in 1999. These expenses principally
included investment banking fees and legal and accounting fees.
Meridian established a phantom stock plan in 1996 whereby participants were
entitled to receive the subsequent appreciation in the value of Meridian's
shares in direct proportion to the number of phantom shares assigned to each
individual. No actual shares of Meridian stock were granted or issued to
participants. Subsequent appreciation in value of the phantom shares was charged
to operations as incurred, and was payable in cash upon the occurrence of
certain specified events such as a sale of Merdian. The phantom stock plan was
terminated upon the Company's acquisition of Meridian, and participants were
paid a portion of their respective proceeds during the fourth quarter of 1999
and will receive future periodic payments concluding with a final payment
scheduled for January 2001.
The Company combined the operations of PRS with its existing Accounts
Payable Commercial Division in the fourth quarter of 1999 and incurred a charge
to operations of $1.1 million to provide for certain employee severance payments
and the costs of closing duplicative or unnecessary office facilities.
Operating Income. Operating income increased 62.9% from to $53.4 million
in 1999, up from $32.8 million in 1998. As a percentage of revenues, operating
income increased to 15.2% in 1999, up from 13.5% in 1998. Excluding the effect
of business acquisition and restructuring expenses, operating income as a
percentage of revenues would have been 19.1% in 1999 and 15.1% in 1998.
Interest Expense (Net). Interest expense (net) for 1999 was $5.5 million,
down slightly from $5.9 million in 1998. Most of the Company's interest expense
pertains to its $200.0 million senior credit facility with a banking syndicate.
The Company makes periodic borrowings under its credit facility primarily to
finance the cash portion of consideration paid for businesses it acquires (see
Note 8 of Notes to Consolidated Financial Statements). Without these
acquisitions, the Company's need for bank borrowings would have been minimal.
Earnings Before Income Taxes, Minority Interest and Cumulative Effect of
Accounting Change. Earnings before income taxes, minority interest and
cumulative effect of accounting change increased 77.8% to $47.9 million in 1999,
up from $26.9 million in 1998. As a percentage of total revenues, earnings
before income taxes, minority interest and cumulative effect of accounting
charge were 13.6% in 1999 and 11.1% in 1998. Excluding the effect of business
acquisition and restructuring expenses, earnings before income taxes, minority
interest and cumulative effect of accounting change as a percentage of revenues
would have been 17.5% in 1999 and 12.7% in 1998.
Income Taxes. The provisions for income taxes for 1999 and 1998 consist of
federal, state and foreign income taxes at the Company's effective tax rate
which approximated 42% in 1999 and 44% in 1998. Effective tax rates are higher
than previous years' rates as a result of nondeductible business acquisition
costs in pooling of interests transactions.
Minority Interest in (Earnings) of Consolidated Subsidiaries. Minority
interest in (earnings) of consolidated subsidiaries relates to the 49% minority
ownership interests in two Meridian operating subsidiaries that were not
acquired by the Company as part of the Meridian pooling-of-interests acquisition
in August 1999. These minority interests were subsequently acquired by the
Company in December 1999.
Weighted-Average Shares Outstanding -- Basic. The Company's
weighted-average shares outstanding for purposes of calculating basic earnings
per share increased to 47.5 million for 1999, up from 39.2 million for 1998.
This increase related primarily to 4.1 million common shares issued in a public
offering in January 1999 and common shares issued in connection with
acquisitions of various companies (see Notes 7 and 8 of Notes to Consolidated
Financial Statements).
1998 COMPARED WITH 1997
As further indicated in Note 1(c) and elsewhere in the Notes to
Consolidated Financial Statements, during August 1999, the Company acquired
Meridian and PRS. Each of these acquisitions was accounted for
20
23
as a pooling-of-interests. Accordingly, the Company's previously reported
consolidated financial statements for the years ended December 31, 1998 and 1997
have been retroactively restated, as required under generally accepted
accounting principles, to include the operations of Meridian and PRS.
Revenues. Revenues increased 65.3% to $242.1 million in 1998, up from
$146.5 million in 1997. Domestic revenues increased 66.4% to $163.6 million in
1998, up from $98.3 million in 1997. International revenues increased 62.9% to
$78.5 million in 1998, up from $48.2 million in 1997.
Domestic revenue growth in 1998 was significant with Accounts Payable
revenues up 59.3%, Freight revenues up over 9400% on a small initial 1997 base
and Taxation revenue up 24.6% only achieved a significant level of domestic
Facilities segment operations with the June 1999 acquisition of Invoice and
Tariff Management Group, LLC, a firm specializing in telecommunications recovery
auditing. Domestic revenue growth for 1998 was driven by a combination of
revenues from companies acquired during 1998 and 1997 under the purchase method
of accounting (see Note 8 of Notes to Consolidated Financial Statements) and
strong internal growth resulting from both new clients and additional services
provided to existing clients.
International revenue growth for 1998 was also significant with Accounts
Payable revenues up 35.5% and Taxation revenues up 92.0%. Both segments
benefited from strong internal growth resulting from new clients and additional
services provided to existing clients. Additionally, the Tax segment benefited
from the Company's October 1997 acquisition of Financiere Alma, S.A. and
subsidiaries (collectively, "Alma"). (See Note 8 of Notes to Consolidated
Financial Statements).
Cost of Revenues. Cost of revenues as a percentage of revenues decreased
to 52.1% in 1998, down from 54.0% in 1997.
Domestically, cost of revenues as a percentage of revenues decreased to
52.8% in 1998, down from 55.0% in 1997. Internationally, cost of revenues as a
percentage of revenues also decreased to 50.6% in 1998, down from 52.0% in 1997.
Percentage improvements worldwide related principally to fixed cost elements
being spread over rapidly growing revenue bases.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses as a percentage of revenues increased to 32.8% of
revenues in 1998, up from 31.5% in 1997.
Domestically, selling, general and administrative expenses as a percentage
of revenues decreased slightly to 29.8% in 1998, down from 30.7% in 1997.
Internationally, selling, general and administrative expenses as a percentage of
revenues rose to 38.9% in 1998, up from 33.1% in 1997 due primarily to increased
European infrastructure costs.
In connection with the acquisition of businesses, the Company has recorded
intangible assets including goodwill and deferred non-compete costs.
Amortization of these intangible assets totalled $6.3 million in 1998 and $1.9
million in 1997.
Business Acquisition and Restructuring Expenses. Business acquisition and
restructuring expenses consisted of the following components:
YEAR ENDED
DECEMBER 31,
----------------
1998 1997
------ ------
Expenses incurred by Meridian with respect to phantom stock
plan...................................................... $3,818 $1,225
Restructuring charge incurred in the fourth quarter of 1997
in connection European management structure............... -- 1,208
------ ------
$3,818 $2,433
====== ======
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. This charge consisted of employment
termination costs directly applicable to four of the Company's senior European
21
24
executives and residual contract costs due to an independent European advisor
for services no longer required by the Company. Substantially all amounts
accrued were subsequently paid.
Operating Income. Operating income increased 74.9% to $32.8 million in
1998, up from $18.7 million in 1997. As a percentage of revenues, operating
income increased to 13.5% in 1998, up from 12.8% in 1997. Excluding the effect
of business acquisition and restructuring expenses, operating income as a
percentage of revenues would have been 15.1% in 1998 and 14.5% in 1997.
Interest Expense (Net). Interest expense (net) for 1998 was $5.9 million,
up from slightly from $2.6 million in 1997. Most of the Company's interest
expense pertains to its $200.0 million senior credit facility with a banking
syndicate. The Company makes periodic borrowings under its credit facility
primarily to finance the cash portion of consideration paid for businesses it
acquires (see Note 8 of Notes to Consolidated Financial Statements). Without
these acquisitions, the Company believes that its need for bank borrowings would
have been minimal.
Earnings Before Income Taxes and Minority Interest. Earnings before income
taxes and minority interest increased 83.0% to $49.3 million in 1999, up from
$26.9 million in 1998. As a percentage of total revenues, earnings before income
taxes and minority interest were 14.0% in 1999 and 11.1% in 1998. Excluding the
effect of business acquisition and restructuring expenses, earnings before
income taxes and minority interest as a percentage of revenues would have been
12.7% in 1998 and 12.7% in 1997.
Income Taxes. The provisions for income taxes for 1998 and 1997 consist of
federal, state and foreign income taxes at the Company's effective tax rate
which approximated 44% in 1998 and 39% in 1997.
Minority Interest in (Earnings) of Consolidated Subsidiaries. Minority
interest in (earnings) of consolidated subsidiaries relates to the 49% minority
ownership interests in two Meridian operating subsidiaries that were not
acquired by the Company as part of the Meridian pooling-of-interests acquisition
in August 1999. These minority interests were subsequently acquired by the
Company in December 1999.
Weighted-Average Shares Outstanding -- Basic. The Company's
weighted-average shares outstanding for purposes of calculating basic earnings
per share increased to 39.2 million for 1998, up from 33.8 million for 1997.
This increase related primarily to 3.0 million common shares issued in a public
offering in March 1998 and common shares issued in connection with acquisitions
of various companies (see Notes 7 and 8 of Notes to Consolidated Financial
Statements).
22
25
QUARTERLY RESULTS
The following tables set forth certain unaudited quarterly financial data
for each of the Company's last eight 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 information for all quarters ended prior to September 30, 1999 has been
retroactively restated and differs from amounts originally reported due to the
inclusion of the accounts of Meridian and PRS which were each acquired in August
1999 and accounted for under the pooling-of-interests method. The operating
results for any quarter are not necessarily indicative of the results to be
expected for any future period.
1999 QUARTER ENDED 1998 QUARTER ENDED
---------------------------------------- --------------------------------------
MAR. 31 JUNE 30 SEPT. 30 DEC. 31 MAR. 31 JUNE 30 SEPT. 30 DEC. 31
-------- ------- -------- -------- ------- ------- -------- -------
(IN THOUSANDS)
Revenues....................... $ 64,437 $90,443 $91,259 $103,508 $38,853 $55,361 $67,982 $79,949
Cost of revenues............... 38,038 47,441 43,411 51,747 23,038 27,355 35,318 40,519
Selling, general and
administrative expenses...... 22,873 24,660 27,540 27,208 14,959 16,517 22,410 25,438
-------- ------- ------- -------- ------- ------- ------- -------
Operating income (loss) before
business acquisition and
restructuring expenses....... 3,526 18,342 20,308 24,553 857 11,489 10,254 13,992
Business acquisition and
restructuring expenses....... 1,495 1,496 10,380 (30) 955 954 955 954
-------- ------- ------- -------- ------- ------- ------- -------
Operating income
(loss).............. 2,031 16,846 9,928 24,583 (99) 10,535 9,299 13,038
Interest (expense), net........ (1,414) (1,560) (1,304) (1,251) (880) (519) (1,935) (2,517)
-------- ------- ------- -------- ------- ------- ------- -------
Earnings (loss) before
income taxes,
minority interest
and cumulative
effect of accounting
change.............. 617 15,286 8,624 23,332 (979) 10,016 7,364 10,521
Income taxes................... 1,386 4,718 5,495 8,467 763 1,934 4,367 4,764
-------- ------- ------- -------- ------- ------- ------- -------
Earnings (loss) before
minority interest
and cumulative
effect of accounting
change.............. (769) 10,568 3,129 14,865 (1,742) 8,082 2,997 5,757
Minority interest in (earnings)
loss of consolidated
subsidiaries................. (77) (312) (48) 80 (122) (122) 128 (344)
-------- ------- ------- -------- ------- ------- ------- -------
Earnings (loss) before
cumulative effect of
accounting change... (846) 10,256 3,081 14,945 (1,864) 7,960 3,125 5,413
Cumulative effect of accounting
change....................... (29,195) -- -- -- -- -- -- --
-------- ------- ------- -------- ------- ------- ------- -------
Net earnings (loss)... $(30,041) $10,256 $ 3,081 $ 14,945 $(1,864) $ 7,960 $ 3,125 $ 5,413
======== ======= ======= ======== ======= ======= ======= =======
23
26
The information for the six quarters ended June 30, 1999, as originally
reported prior to the retroactive restatements to include the accounts of
Meridian and PRS, were as follows:
1999 QUARTER ENDED 1998 QUARTER ENDED
------------------ --------------------------------------
MAR. 31 JUNE 30 MAR. 31 JUNE 30 SEPT. 30 DEC. 31
-------- ------- ------- ------- -------- -------
Revenues......................................... $ 56,615 $71,728 $33,144 $38,934 $61,803 $68,946
Cost of revenues................................. 31,720 35,913 17,956 20,326 30,078 33,571
Selling, general and administrative expenses..... 20,569 23,102 13,029 13,991 19,312 21,194
Business acquisition and restructuring
expenses....................................... -- -- -- -- -- --
-------- ------- ------- ------- ------- -------
Operating income........................ 4,326 12,713 2,159 4,617 12,413 14,181
Interest income (expense), net................... (844) (978) (324) 186 (1,451) (1,920)
-------- ------- ------- ------- ------- -------
Earnings before income taxes, minority
interest and cumulative effect of
accounting change..................... 3,482 11,735 1,835 4,803 10,962 12,261
Income taxes..................................... 1,371 4,609 715 1,884 4,297 4,819
-------- ------- ------- ------- ------- -------
Earnings before minority interest and
cumulative effect of accounting
change................................ 2,111 7,126 1,120 2,919 6,665 7,442
Minority interest in (earnings) loss of
consolidated subsidiaries...................... -- -- -- -- -- --
-------- ------- ------- ------- ------- -------
Earnings before cumulative effect of
accounting change..................... 2,111 7,126 1,120 2,919 6,665 7,442
Cumulative effect of accounting change........... (29,195) -- -- -- -- --
-------- ------- ------- ------- ------- -------
Net earnings (loss)..................... $(27,084) $ 7,126 $ 1,120 $ 2,919 $ 6,665 $ 7,442
======== ======= ======= ======= ======= =======
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 reflects the inherent purchasing and operational cycles of the Company's
clients. The Company's larger acquisitions during 1999 and 1998 are not expected
to affect this trend because these entities have historically experienced
similar seasonality in their 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
On July 29, 1998, the Company replaced its existing $30.0 million senior
bank credit facility with a five-year, $150.0 million senior bank credit
facility. Subject to adherence to standard loan covenants, borrowings under the
new credit facility are available for working capital, acquisitions of other
companies in the recovery audit industry, capital expenditures and general
corporate purposes. The Company transferred $5.4 million in outstanding
borrowings to the new credit facility on July 29, 1998. On September 18, 1998,
the Company increased its credit facility from $150.0 million to $200.0 million
and the facility was syndicated between ten banking institutions led by
NationsBank, N.A. (now Bank of America) as agent for the group. As of March 24,
2000, the Company had $145.0 million in outstanding principal borrowings under
its credit facility.
Net cash provided by operating activities was $23.4 million in 1999, $13.4
million in 1998 and $10.4 million in 1997. The 1999 improvement related in part
to increased managerial emphasis on client billings and cash collections.
Operating cash flow, defined by the Company as cash provided by operating
activities excluding the impact of business acquisition expenses/restructuring
charges, increased to approximately $32 million in 1999, up from approximately
$14 million in 1998.
Net cash used in investing activities was $95.4 million in 1999, $132.4
million in 1998 and $31.9 million in 1997. During 1999 and 1998, the Company
spent $75.8 million and $113.3 million, respectively, as the cash portion of
consideration paid to acquire various recovery audit firms.
Net cash provided by financing activities was $81.1 million in 1999, $128.8
million in 1998 and $24.3 million in 1997. As discussed in Note 7 of the Notes
to Consolidated Financial Statements, the Company completed underwritten
follow-on stock offerings in January 1999 and March 1998.
24
27
As discussed in Note 8 of Notes to Consolidated Financial Statements, at
December 31, 1999 the Company recorded $45.0 million as accrued business
acquisition consideration on its Consolidated Balance Sheet in connection with
two acquired recovery audit firms. $43.0 million was borrowed under the
Company's credit facility in March 2000 and simultaneously paid to the prior
owners of these two firms. The remainder is expected to be paid during 2000
pursuant to additional borrowing under the Company's credit facility.
The Company will pay $5.1 million to the former participants in the
Meridian phantom stock plan periodic payments through January 2001. These
payments are expected to be funded with cash generated from the sale of certain
Meridian receivables.
Through March 24, 2000, the Company acquired 21 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. 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.
The Company from time to time issues restricted, unregistered common stock
in partial consideration for the business entities it acquires. The timing and
quantity of any future securities issuances are not susceptible to estimation.
Additionally, if the Company is successful in arranging for future acquisitions
which individually or collectively are large relative to the Company's size, it
may need to secure additional debt or equity financing. There are no current
plans to seek such financing.
The Company believes that its current working capital, availability
remaining under its $200.0 million credit facility and cash flow generated from
future operations will be sufficient to meet the Company's working capital and
capital expenditure requirements through December 31, 2000 unless one or more
acquisitions are consummated which require the Company to seek additional debt
or equity financing.
NEW ACCOUNTING STANDARD
Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities" establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities. This
pronouncement, as amended by Statement of Financial Accounting Standards No.
137, is effective for all fiscal quarters of fiscal years beginning after June
15, 2000 although earlier application is encouraged. The Company has chosen to
adopt this pronouncement effective with its fiscal year which begins January 1,
2001 and does not believe that it will materially affect its reported results of
operations or financial condition upon adoption.
YEAR 2000 ISSUE
As a result of the Company's planning, remediation and testing efforts in
1999, no significant disruptions in mission critical information technology
systems and non-information technology systems were experienced in the first 75
days of 2000. The Company believes that these systems have successfully
responded to the Year 2000 date change. The Company is not aware of any material
problems resulting from Year 2000 issues, either with our services, our internal
systems, or the products and services of our third party suppliers. The Company
will continue to monitor our mission critical computer applications and those of
our suppliers throughout the Year 2000 to ensure that any latent Year 2000
matters that may arise are addressed promptly.
25
28
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
On August 19, 1999, the Company acquired Meridian VAT Corporation Limited
("Meridian"). Meridian is based in Dublin, Ireland and specializes in the
recovery of value-added taxes paid on business expenses by corporate clients.
Meridian periodically utilizes derivative financial instruments to hedge against
adverse currency fluctuations since it must transact business using a variety of
European and Asian currencies. Meridian's derivative financial instruments
outstanding at December 31, 1999 were not material, and all such instruments
were settled in January 2000 without significantly affecting either the
consolidated financial position or results of operations of the Company. None of
the Company's operating units other than Meridian have historically utilized
derivative financial instruments although future use of these types of
instruments is presently under consideration.
26
29
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
NUMBER
----------
Independent Auditors' Reports............................... 28, 29, 30
Consolidated Statements of Operations for the Years ended
December 31, 1999, 1998 and 1997.......................... 31
Consolidated Balance Sheets as of December 31, 1999 and
1998...................................................... 32
Consolidated Statements of Shareholders' Equity for the
Years ended December 31, 1999, 1998 and 1997.............. 33
Consolidated Statements of Cash Flows for the Years ended
December 31, 1999, 1998 and 1997.......................... 34
Notes to Consolidated Financial Statements.................. 35
27
30
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, 1999 and
1998, and the related Consolidated Statements of Operations, Shareholders'
Equity, and Cash Flows for each of the years in the three-year period ended
December 31, 1999. 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 PRG France, S.A. and
subsidiaries, which financial statements reflect total assets constituting 18%
and 14% as of December 31, 1999 and 1998, respectively, and total revenues
constituting 9% and 10% in 1999 and 1998, respectively, of the related
consolidated totals. We did not audit the consolidated financial statements of
Financiere Alma, S.A. and subsidiaries, which financial statements reflect total
revenues constituting 5% in 1997 of the related consolidated totals. Those
financial statements were audited by other auditors whose reports have been
furnished to us, and our opinion, insofar as it relates to the amounts included
for PRG France, S.A. and subsidiaries and Financiere Alma, S.A. and
subsidiaries, are based solely on the reports 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 report and the reports of the other auditors provide a
reasonable basis for our opinion.
In our opinion, based on our audits and the reports 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, 1999 and 1998, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1999 in conformity with generally accepted
accounting principles.
As discussed in Note 1(c) to the consolidated financial statements, the
Company changed its method of revenue recognition in 1999.
KPMG LLP
Atlanta, Georgia
February 15, 2000
28
31
INDEPENDENT AUDITORS' REPORT
The Directors and Shareholders of
PRG France, S.A.
We have audited the consolidated balance sheets of PRG France, S.A. and
subsidiaries as of December 31, 1999 and 1998, and the related consolidated
statements of earnings, shareholders' equity and cash flows for the years ended
December 31, 1999 and 1998. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of PRG France,
S.A. and subsidiaries as of December 31, 1999 and 1998, and the results of their
operations and their cash flows for the years ended December 31, 1999 and 1998,
in conformity with accounting principles generally accepted in the United
States.
ERNST & YOUNG Entrepreneurs
Division of E&Y Audit
Any Antola
Paris, France
February 1, 2000
29
32
INDEPENDENT AUDITORS' REPORT
The Directors and Shareholders of
Financiere Alma, S.A.
We have audited the consolidated statements of earnings and cash flows of
Financiere Alma, S.A. and subsidiaries 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 results of operations and cash
flows of Financiere Alma, S.A. and subsidiaries 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
30
33
THE PROFIT RECOVERY GROUP INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31,
--------------------------------------
1999 1998 1997
---------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Revenues................................................... $349,647 $242,145 $146,467
Cost of revenues........................................... 180,637 126,230 79,126
Selling, general and administrative expenses............... 102,281 79,324 46,174
Business acquisition and restructuring expenses (Note
14)...................................................... 13,341 3,818 2,433
-------- -------- --------
Operating income................................. 53,388 32,773 18,734
Interest (expense), net.................................... (5,529) (5,851) (2,586)
-------- -------- --------
Earnings before income taxes, minority interest
and cumulative effect of accounting change..... 47,859 26,922 16,148
Income taxes (Note 5)...................................... 20,066 11,828 6,373
-------- -------- --------
Earnings before minority interest and cumulative
effect of accounting change.................... 27,793 15,094 9,775
Minority interest in (earnings) of consolidated
subsidiaries............................................. (357) (460) (411)
-------- -------- --------
Earnings before cumulative effect of accounting
change......................................... 27,436 14,634 9,364
Cumulative effect of accounting change (Note 1(c))......... (29,195) -- --
-------- -------- --------
Net earnings (loss).............................. $ (1,759) $ 14,634 $ 9,364
======== ======== ========
Basic earnings (loss) per share (Note 13):
Earnings before cumulative effect of accounting
change......................................... $ 0.57 $ 0.37 $ 0.28
Cumulative effect of accounting change........... (0.61) -- --
-------- -------- --------
Net earnings (loss).............................. $ (0.04) $ 0.37 $ 0.28
======== ======== ========
Diluted earnings (loss) per share (Note 13):
Earnings before cumulative effect of accounting
change......................................... $ 0.55 $ 0.36 $ 0.27
Cumulative effect of accounting change........... (0.59) -- --
-------- -------- --------
Net earnings (loss).............................. $ (0.04) $ 0.36 $ 0.27
======== ======== ========
Pro forma amounts, assuming the new accounting method is
applied retroactively (Note 1(c)):
Net earnings..................................... $ 27,436 $ 2,992 $ 4,718
======== ======== ========
Basic earnings per share......................... $ 0.57 $ 0.08 $ 0.14
======== ======== ========
Diluted earnings per share....................... $ 0.55 $ 0.07 $ 0.14
======== ======== ========
See accompanying Notes to Consolidated Financial Statements.
31
34
THE PROFIT RECOVERY GROUP INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
--------------------
1999 1998
-------- --------
(IN THOUSANDS,
EXCEPT SHARE AND
PER SHARE DATA)
ASSETS
Current assets:
Cash and cash equivalents................................. $ 39,260 $ 30,266
Receivables:
Contract receivables, less allowance for doubtful
accounts of $4,219 in 1999 and $3,858 in 1998.......... 70,038 109,760
Employee advances....................................... 9,035 8,277
-------- --------
Total receivables................................... 79,073 118,037
-------- --------
Funds held for payment of client payables................. 16,901 8,724
Retained interest in receivables sold..................... 3,304 --
Prepaid expenses and other current assets................. 6,039 4,006
Deferred income taxes (Note 5)............................ 5,940 --
-------- --------
Total current assets................................ 150,517 161,033
-------- --------
Property and equipment:
Computer and other equipment.............................. 48,958 31,414
Furniture and fixtures.................................... 5,584 4,307
Land and buildings........................................ 1,412 --
Leasehold improvements.................................... 6,016 5,224
-------- --------
61,970 40,945
Less accumulated depreciation and amortization............ 26,652 16,236
-------- --------
Property and equipment, net......................... 35,318 24,709
-------- --------
Noncompete agreements, less accumulated amortization of
$5,796 in 1999 and $4,793 in 1998......................... 1,711 2,475
Deferred loan costs, less accumulated amortization of $795
in 1999 and $236 in 1998.................................. 1,492 1,802
Goodwill, less accumulated amortization of $15,698 in 1999
and $5,967 in 1998........................................ 327,386 223,912
Deferred income taxes (Note 5).............................. 11,863 3,773
Other assets................................................ 873 1,959
-------- --------
$529,160 $419,663
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Notes payable to bank..................................... $ 3,326 $ 5,983
Current installments of long-term debt (Note 3)........... 1,014 630
Obligation for client payables............................ 16,901 8,724
Accounts payable and accrued expenses..................... 17,617 19,003
Accrued business acquisition consideration (Note 8)....... 45,000 30,000
Accrued payroll and related expenses...................... 42,049 50,722
Deferred income taxes (Note 5)............................ 126 13,310
Deferred tax recovery audit revenue....................... 1,744 1,720
-------- --------
Total current liabilities........................... 127,777 130,092
Long-term debt, excluding current installments (Note 3)..... 95,294 112,886
Loans from shareholders (Note 2)............................ -- 27,477
Deferred compensation (Note 6).............................. 4,656 3,453
Deferred income taxes (Note 5).............................. 6,112 --
Other long-term liabilities................................. 2,821 1,650
-------- --------
Total liabilities................................... 236,660 275,558
-------- --------
Shareholders' equity (Notes 2, 3, 6, 7, 8 and 9):
Preferred stock, no par value. Authorized 1,000,000
shares; none issued or outstanding in 1999 and 1998..... -- --
Common stock, no par value; $.001 stated value per share.
Authorized 200,000,000 shares; issued and outstanding
49,363,044 shares in 1999 and 42,247,686 shares in
1998.................................................... 49 42
Additional paid-in capital................................ 302,455 143,157
Retained earnings (accumulated deficit)................... (907) 3,231
Accumulated other comprehensive loss...................... (9,097) (2,325)
-------- --------
Total shareholders' equity.......................... 292,500 144,105
-------- --------
Commitments and contingencies (Notes 2, 3, 4 and 8)
$529,160 $419,663
======== ========
See accompanying Notes to Consolidated Financial Statements.
32
35
THE PROFIT RECOVERY GROUP INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
ACCUMULATED
OTHER
COMPREHENSIVE
INCOME (LOSS)-
RETAINED FOREIGN
ADDITIONAL EARNINGS CURRENCY TOTAL
COMMON PAID-IN (ACCUMULATED TRANSLATION COMPREHENSIVE SHAREHOLDERS'
STOCK CAPITAL DEFICIT) ADJUSTMENTS INCOME (LOSS) EQUITY
------ ---------- ------------ -------------- --------------- --------------
(IN THOUSANDS)
BALANCE AT DECEMBER 31, 1996............. $ 34 $ 43,622 $(20,077) $ 12 $ -- $ 23,591
Comprehensive income:
Net earnings............................ -- -- 9,364 -- 9,364 9,364
Other comprehensive loss - foreign
currency translation adjustments (no
tax effect)........................... -- -- -- (1,161) (1,161) (1,161)
Comprehensive income.................. -- -- -- -- 8,203 --
Issuances of common stock:
Issuances under employee stock option
plans (including tax benefits of
$263)................................. -- 629 -- -- -- 629
Other common stock issuances............ 1 13,378 -- -- -- 13,379
Distributions to former Sub S
shareholders............................ -- -- (251) -- -- (251)
---- -------- -------- ------- ------- --------
BALANCE AT DECEMBER 31, 1997............. 35 57,629 (10,964) (1,149) -- 45,551
Comprehensive income:
Net earnings............................ -- -- 14,634 -- 14,634 14,634
Other comprehensive loss - foreign
currency translation adjustments (no
tax effect)........................... -- -- -- (1,176) (1,176) (1,176)
Comprehensive income.................. -- -- -- -- 13,458 --
Issuances of common stock:
Issuances under employee stock option
plans (including tax benefits of
$1,096)............................... -- 4,365 -- -- -- 4,365
Other common stock issuances............ 7 81,163 -- -- -- 81,170
Distributions to former Sub S
shareholders............................ -- -- (439) -- -- (439)
---- -------- -------- ------- ------- --------
BALANCE AT DECEMBER 31, 1998............. 42 143,157 3,231 (2,325) -- 144,105
Reclassification of S Corporation
earnings of PRS......................... -- 1,766 (1,766) -- -- --
Comprehensive loss:
Net loss................................ -- -- (1,759) -- (1,759) (1,759)
Other comprehensive loss - foreign
currency translation adjustments (no
tax effect)........................... -- -- -- (6,772) (6,772) (6,772)
Comprehensive loss.................... -- -- -- -- (8,531) --
Issuances of common stock:
Issuances under employee stock option
plans (including tax benefits of
$3,551)............................... -- -- -- -- 7,599 7,599
Other common stock issuances............ 7 118,504 -- -- -- 118,511
Distributions to former Sub S
shareholders............................ -- -- (613) -- -- (613)
Conversion of shareholder loans.......... -- 30,391 -- -- -- 30,391
Transaction costs paid directly by
shareholders............................ -- 1,070 -- -- -- 1,070
Fractional shares paid in cash........... -- (32) -- -- -- (32)
---- -------- -------- ------- ------- --------
BALANCE AT DECEMBER 31, 1999............. $ 49 $302,455 $ (907) $(9,097) $ -- $292,500
==== ======== ======== ======= ======= ========
See accompanying Notes to Consolidated Financial Statements.
33
36
THE PROFIT RECOVERY GROUP INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31,
-------------------------------
1999 1998 1997
-------- --------- --------
(IN THOUSANDS)
Cash flows from operating activities:
Net earnings (loss)....................................... $ (1,759) $ 14,634 $ 9,364
Adjustments to reconcile net earnings (loss) to net cash
provided by operating activities:
Cumulative effect of accounting change.................. 29,195 -- --
Depreciation and amortization........................... 22,117 12,133 5,490
Loss on sale of property and equipment.................. 47 142 26
Minority interest in earnings of consolidated
subsidiaries.......................................... 357 460 411
Interest accrued on shareholder loans................... 860 1,980 1,382
Deferred compensation expense........................... 783 890 920
Deferred income taxes, net of cumulative effect of
accounting change..................................... (1,550) 3,794 1,753
Changes in assets and liabilities, net of effects of
acquisitions:
Receivables........................................... (27,854) (41,392) (15,471)
Refundable income taxes............................... -- -- 1,325
Prepaid expenses and other current assets............. (5,207) 460 (599)
Other assets.......................................... 907 (425) (38)
Accounts payable and accrued expenses................. (7,226) 4,345 (373)
Accrued payroll and related expenses.................. 14,082 15,920 5,810
Deferred tax recovery audit revenue................... (218) 38 436
Other long-term liabilities........................... (1,163) 424 3
-------- --------- --------
Net cash provided by operating activities.......... 23,371 13,403 10,439
-------- --------- --------
Cash flows from investing activities:
Purchases of property and equipment....................... (19,615) (19,058) (5,840)
Acquisitions of businesses (net of cash acquired)......... (75,821) (113,340) (26,096)
-------- --------- --------
Net cash used in investing activities.............. (95,436) (132,398) (31,936)
-------- --------- --------
Cash flows from financing activities:
Net repayments of notes payable to bank................... (2,657) (1,183) (485)
Proceeds from issuance of long-term debt.................. 75,399 112,640 24,750
Proceeds from loans from shareholders..................... 2,061 1,431 --
Acquisition costs paid directly by former Meridian and PRS
shareholders............................................ 1,070 -- --
Repayments of long-term debt.............................. (96,527) (24,917) (44)
Payments for deferred loan costs.......................... (249) (1,797) --
Net proceeds from common stock issuances.................. 102,575 43,031 366
Distributions to former Sub S shareholders................ (613) (439) (251)
-------- --------- --------
Net cash provided by financing activities.......... 81,059 128,766 24,336
-------- --------- --------
Net change in cash and cash equivalents............ 8,994 9,771 2,839
Cash and cash equivalents at beginning of year.............. 30,266 20,495 17,656
-------- --------- --------
Cash and cash equivalents at end of year.................... $ 39,260 $ 30,266 $ 20,495
======== ========= ========
Supplemental disclosure of cash flow information:
Cash paid during the year for interest.................... $ 4,652 $ 2,996 $ 1,001
======== ========= ========
Cash paid during the year for income taxes, net of refunds
received................................................ $ 15,612 $ 6,700 $ 3,336
======== ========= ========
Supplemental disclosure of noncash investing and financing
activities:
In conjunction with acquisitions of businesses, the
Company assumed liabilities as follows:
Fair value of assets acquired........................... $112,479 $ 199,034 $ 50,619
Cash paid for the acquisitions.......................... (75,821) (113,340) (26,096)
Fair value of shares issued for acquisitions............ (23,267) (42,504) (13,379)
-------- --------- --------
Liabilities assumed................................ $ 13,391 $ 43,190 $ 11,144
======== ========= ========
Shareholder loans contributed to capital by former equity
shareholders of Meridian................................ $ 30,391 $ -- $ --
======== ========= ========
See accompanying Notes to Consolidated Financial Statements.
34
37
THE PROFIT RECOVERY GROUP INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Description of Business and Basis of Presentation
Description of Business
The principal business of The Profit Recovery Group International, Inc. and
subsidiaries (the "Company") is providing accounts payable and other recovery
audit services to large and mid-size businesses and certain governmental
agencies having numerous payment transactions with many vendors. These
businesses include, but are not limited to, retailers, manufacturers, wholesale
distributors, technology companies, and healthcare providers. The Company
provides its services throughout the United States and in 28 other countries.
Basis of Presentation
As indicated in Note(1)(c), the Company made the decision in the second
quarter of 1999, to recognize revenue on all of its then existing operations
when it invoices clients for its fee, retroactive to January 1, 1999. In
accordance with the applicable requirements of generally accepted accounting
principles, financial statements for periods prior to 1999 have not been
restated. AS A RESULT, CERTAIN FINANCIAL STATEMENT AMOUNTS FOR 1999 WILL NOT BE
DIRECTLY COMPARABLE TO CORRESPONDING AMOUNTS FOR 1998 AND PRIOR YEARS.
As indicated in Note 8, the Company acquired Meridian VAT Corporation
Limited ("Meridian") and PRS International, Ltd. ("PRS") in August 1999. Both of
these acquisitions were accounted for as poolings-of-interests. Accordingly, the
Company's previously reported consolidated financial statements for all prior
periods have been retroactively restated, as required under generally accepted
accounting principles, to include the accounts of Meridian and PRS.
On July 20, 1999, the Company declared a 3-for-2 stock split effected in
the form of a stock dividend for shareholders of record on August 2, 1999,
payable on August 17, 1999. All share and per share amounts have been
retroactively restated to give effect to the aforementioned stock split.
(b) Principles of Consolidation
The consolidated financial statements include the financial statements of
the Company and its wholly and majority owned subsidiaries. All significant
intercompany balances and transactions have been eliminated in consolidation.
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 when the
submitted claims basis of revenue recognition is used (see (c) Revenue
Recognition).
(c) Revenue Recognition
Due to the Company's continuing and substantial expansion beyond its
historical client base and original service offerings, as well as the
administrative desirability of standardizing revenue recognition practices, the
Company made the decision at the conclusion of the second quarter of 1999 to
recognize revenue on all of its then existing operations when it invoices
clients for its fee. Generally accepted accounting principles required that this
change be implemented retroactively to January 1, 1999. The Company had
previously recognized revenue from services provided to its historical client
base (consisting of retailers, wholesale distributors and governmental agencies)
at the time overpayment claims were presented to and approved by its clients. In
effecting this change, the Company has reported, as of January 1, 1999, a
non-cash, after-tax change of $29.2
35
38
THE PROFIT RECOVERY GROUP INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
million as the cumulative effect of a change in an accounting principle. The
cumulative effect of the accounting change was derived as follows(in thousands):
Unbilled contract receivables at December 31, 1998, as
adjusted.................................................. $ 69,432
Less: auditor payroll accrual at December 31, 1998
associated with unbilled contract receivables............. (21,564)
--------
Subtotal.................................................. 47,868
Less: related income tax effect at 39.0%.................... (18,673)
--------
Cumulative effect of accounting change.................... $ 29,195
========
During years ended December 31, 1998 and prior, the Company recognized
revenues on services provided to its historical client base at the time
overpayment claims were presented to and approved by its clients, as adjusted
for estimated uncollectible claims. Estimated uncollectible claims were
initially established, and subsequently adjusted, for each individual client
based upon historical collection rates, types of claims identified, current
industry conditions, and other factors which, in the opinion of management,
deserved recognition. Under this submitted claims basis of revenue recognition,
as applied to the Company's historical client base, the Company recorded
revenues at estimated net realizable value without reserves. Accordingly,
adjustments to uncollectible claim estimates were directly charged or credited
to earnings, as appropriate.
The Company's revenue recognition policy has been revised, effective
January 1, 1999, as follows:
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) fees payable to
the Company generally expressed as a specified percentage of the amounts
recovered by the client resulting from liability overpayment claims identified.
In the case of prospective facilities audits such as telecommunications tariff
negotiations conducted by the Company on behalf of its clients, contracts
typically provide for a percentage-of-savings fee which is calculated and fixed
at the time the new tariff agreement is executed, and is payable to the Company
on a current basis.
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. Approved claims are processed by clients and
generally taken as credits against outstanding payables or future purchases from
the vendors involved. The Company then invoices its clients for a contractually
stipulated percentage of amounts recovered.
Invoice basis of revenue recognition
For all recovery audit operations except those that secure refunds from
governmental entities under narrowly defined circumstances, the Company
recognizes revenues when it invoices clients for its fee.
Submitted claims basis of revenue recognition
With respect to the Company's present and future operations to secure
refunds pursuant to statute or regulation of amounts paid by clients to
governmental entities, the Company recognizes revenues at the time refund claims
containing all required documentation are filed with appropriate governmental
agencies in those instances where historical refund disallowance rates can be
accurately estimated. The Company records its fee participation in these refunds
at estimated net realizable value without reserves. Accordingly, adjustments to
uncollectible fee estimates are charged or credited to earnings, as appropriate.
36
39
THE PROFIT RECOVERY GROUP INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
As of December 31, 1999, the only unit of the Company utilizing the
submitted claims method of revenue recognition was Meridian, which was acquired
on August 19, 1999 and accounted for as a pooling-of-interests (see Note 8).
(d) Cash Equivalents
Cash equivalents at December 31, 1998 included $6.3 million of reverse
repurchase agreements with Bank of America (formerly NationsBank, N.A.) which
were fully collateralized by United States of America Treasury Notes in the
possession of such bank. These reverse repurchase agreements were settled on
January 4, 1999 and there were no similar financial instruments of December 31,
1999. In addition, certain of the Company's French subsidiaries at December 31,
1999 and 1998 had cash equivalents of $5.1 million and $7.1 million,
respectively, 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) Funds Held for Payment of Client Payables
The Company functions as a fiduciary custodian in connection with certain
cash balances belonging to its clients.
Certain of the Company's freight services units pay freight invoices on
behalf of clients post audit. In this regard, the Company is often in possession
of funds advanced by its clients, but not yet processed for payment to the
respective freight providers.
In connection with the Company's Meridian unit which assists clients in
obtaining refunds of value added taxes ("VAT"), the Company is often in
possession of amounts refunded by the various VAT authorities, but not yet
processed for further payment to the clients involved.
The Company reports these restricted cash balances on its Consolidated
Balance Sheets as a separate current asset and corresponding current liability.
(f) 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 (3 years
for computer and other equipment and 5 years for furniture and fixtures).
Leasehold improvements are amortized using the straight-line method over the
shorter of the lease term or estimated life of the asset. Internally developed
software is amortized over expected useful lives ranging from 3 to 7 years.
(g) Direct Expenses
Direct expenses incurred during the course of accounts payable audits and
other recovery audit services are expensed as incurred.
(h) Internal Use Computer Software
Statement of Position 98-1, "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use" provides guidance on a variety of issues
relating to costs of internal use software including which of these costs should
be capitalized and which should be expensed as incurred. This pronouncement
became effective for fiscal years beginning after December 15, 1998 although
earlier application was encouraged. The Company chose to early adopt this
pronouncement effective January 1, 1998 since it provides definitive
37
40
THE PROFIT RECOVERY GROUP INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
accounting guidance on a large-scale information systems development project
initiated by the Company during the first quarter of 1998.
(i) 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,
1999 is being amortized over periods ranging from seven to 30 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.
(j) 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.
(k) 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 a separate component of
shareholders' equity. Transaction gains and losses included in results of
operations are not material.
(l) Earnings Per Share
The Company applies the provisions of Statement of Financial Accounting
Standards ("SFAS") No. 128, "Earnings per Share." Basic earnings per share is
computed by dividing net earnings by the weighted average number of shares of
common stock outstanding during the year. Diluted earnings per share is computed
by dividing net 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.
38
41
THE PROFIT RECOVERY GROUP INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(m) Employee Stock Options
The Company accounts 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 measured on the date of grant only if the current
market price of the underlying stock exceeded the exercise price. The Company
has elected to continue to apply the provisions of APB Opinion No. 25 and
provide pro forma net earnings 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, "Accounting for Stock-Based
Compensation," had been applied.
(n) Comprehensive Income
Effective January 1, 1998, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income." This statement establishes rules for the reporting of
comprehensive income and its components. Comprehensive income for the Company
consists of net earnings and foreign currency translation adjustments, and is
presented in the accompanying Consolidated Statements of Shareholders' Equity.
The adoption of SFAS No. 130 had no impact on total shareholders' equity. Prior
year financial statements have been reclassified to conform to the SFAS No. 130
requirements.
(2) RELATED PARTY TRANSACTIONS
Financial advisory and management services historically have been provided
to the Company by two directors who are also shareholders of the Company. Such
services by directors aggregated $64,000 in 1999, $140,000 in 1998, and $165,000
in 1997. The Company will continue to utilize the services provided by one
director, and, as such, has agreed to pay that director a minimum of $36,000 in
2000 for financial advisory and management services.
As indicated in Note 8, the Company acquired Meridian in August 1999 in a
transaction accounted for as a pooling-of-interests. Accordingly, the Company's
previously reported consolidated financial statements for all periods presented
have been retroactively restated, as required under generally accepted
accounting principles, to include the accounts of Meridian. As of December 31,
1998, Meridian's balance sheet included $27.5 million in long-term loans due to
its two principal shareholders. These loans plus additional borrowings in 1999
were converted into equity at their estimated fair value during August 1999
concurrent with completion of the merger.
(3) LONG-TERM DEBT
Long-term debt at December 31, 1999 and 1998 is summarized as follows:
1999 1998
------- --------
(IN THOUSANDS)
Principal outstanding under $200.0 million senior bank
credit facility (with weighted average interest rate of
7.24% and 6.98% at December 31, 1999 and 1998,
respectively). Principal due on July 29, 2003 at credit
facility maturity......................................... $92,811 $112,300
Other....................................................... 3,497 1,216
------- --------
96,308 113,516
Less current installments................................... 1,014 630
------- --------
Long-term debt, excluding current installments.... $95,294 $112,886
======= ========
On July 29, 1998, the Company replaced its then existing $30.0 million
senior bank credit facility with a five-year, $150.0 million senior bank credit
facility. Subject to adherence to standard loan covenants,
39
42
THE PROFIT RECOVERY GROUP INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
borrowings under the new credit facility are available for working capital,
acquisitions of other companies in the recovery audit industry, capital
expenditures and general corporate purposes. The Company transferred $5.4
million in outstanding borrowings to the new credit facility on July 29, 1998.
On September 18, 1998, the Company increased its credit facility from $150.0
million to $200.0 million and the facility was syndicated between ten banking
institutions led by NationsBank, N.A. (now Bank of America) as agent for the
group. The Company is not required to make principal payments under the credit
facility until its maturity on July 29, 2003 unless the Company violates its
debt covenants. 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 credit facility requires a fee for committed but
unused credit capacity which can range between .20% and .45% per annum depending
upon the Company's leverage ratio. As of December 31, 1999, the applicable rate
for unused credit capacity was .20%. The credit facility contains customary
covenants, including financial ratios and the prohibition of cash dividend
payments to shareholders. At December 31, 1999, 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, 1999 are as follows (in
thousands):
2000........................................................ $ 1,014
2001........................................................ 1,262
2002........................................................ 615
2003........................................................ 93,154
2004........................................................ 263
-------
$96,308
=======
(4) LEASE COMMITMENTS
The Company is committed under noncancelable operating lease arrangements
for facilities and equipment. Rent expense for 1999, 1998, and 1997 was $7.5
million, $5.5 million, and $4.7 million, respectively. The future minimum annual
lease payments under these leases by year are summarized as follows (in
thousands):
YEAR ENDING DECEMBER 31,
- ------------------------
2000........................................................ $ 6,764
2001........................................................ 4,996
2002........................................................ 4,160
2003........................................................ 2,453
2004........................................................ 491
Thereafter.................................................. 602
-------
$19,466
=======
(5) INCOME TAXES
Income taxes have been provided in accordance with SFAS No. 109,
"Accounting for Income Taxes". Earnings before income taxes, minority interest
and cumulative effect of accounting change for the years ended December 31,
1999, 1998 and 1997 was earned in the following jurisdictions (in thousands):
1999 1998 1997
------- ------- -------
United States............................................. $37,912 $20,864 $12,503
Foreign................................................... 9,947 6,058 3,645
------- ------- -------
$47,859 $26,922 $16,148
======= ======= =======
40
43
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, 1999, 1998
and 1997 consists of the following (in thousands):
1999 1998 1997
------- ------- ------
Current:
Federal.................................................. $14,294 $ 2,512 $1,171
State.................................................... 1,463 608 379
Foreign.................................................. 6,766 4,914 3,070
------- ------- ------
22,523 8,034 4,620
------- ------- ------
Deferred:
Federal.................................................. (1,241) 2,487 921
State.................................................... (276) 306 184
Foreign.................................................. (940) 1,001 648
------- ------- ------
(2,457) 3,794 1,753
------- ------- ------
Total............................................ $20,066 $11,828 $6,373
======= ======= ======
In addition, the Company recognized a deferred income tax benefit of
$18,673 in 1999 from the change in revenue recognition (see Note 1 (c)).
The following table summarizes the significant differences between the U.S.
federal statutory tax rate and the Company's effective tax rate for financial
statement purposes.
1999 1998 1997
---- ---- ----
Statutory federal income tax rate........................... 35% 35% 35%
Foreign loss providing no tax benefit....................... 1 6 2
State income taxes, net of federal benefit.................. 2 3 2
Nondeductible goodwill...................................... 1 1 --
Nondeductible acquisition and other costs................... 4 -- --
Foreign earnings subject to lower tax rates................. (2) -- --
Other, net.................................................. 1 (1) --
-- -- --
42% 44% 39%
== == ==
41
44
THE PROFIT RECOVERY GROUP INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A summary of the components of deferred tax assets and liabilities as of
December 31, 1999 and 1998 follows (in thousands):
1999 1998
------- -------
Deferred income tax assets:
Accounts payable and accrued expenses..................... $ 3,143 $ 149
Accrued payroll and related expenses...................... 2,976 10,633
Deferred compensation..................................... 1,796 1,383
Depreciation.............................................. 839 62
Noncompete agreements..................................... 1,129 929
Foreign operating loss carryforward of foreign
subsidiary............................................. 1,404 720
Foreign tax credit carryforwards.......................... 2,861 4,071
State operating loss carryforwards........................ 337 228
Other..................................................... 2,915 1,720
------- -------
Gross deferred tax assets......................... 17,400 19,895
------- -------
Deferred income tax liabilities:
Contract receivables...................................... -- 26,425
Prepaid expenses.......................................... 24 28
Goodwill.................................................. 2,849 328
Acquisition related cash to accrual adjustments........... 154 384
Capitalized software...................................... 1,558 1,547
------- -------
Gross deferred tax liabilities.................... 4,585 28,712
------- -------
Less valuation allowance.................................... (1,250) (720)
------- -------
Net deferred tax assets (liabilities)............. $11,565 $(9,537)
======= =======
SFAS No. 109 requires that deferred tax assets be reduced by a valuation
allowance if it is more likely than not that some portion or all of a deferred
tax asset will not be realized. The valuation allowance as of December 31, 1999
and 1998 relates to the tax benefit of certain foreign operating losses
associated with the Company's foreign subsidiary in Singapore. No other
valuation allowances were deemed necessary for any other deferred tax assets
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 further taxable and foreign source earnings.
As of December 31, 1999, the Company had foreign income tax credit
carryforwards amounting to $2.9 million, of which $.4 million will expire in
2003 and $2.5 million will expire in 2004. The Company expects to generate
sufficient foreign-sourced income by implementing reasonable tax planning
strategies to fully utilize the foreign income tax credit carryforwards.
Appropriate U.S. and international taxes have been provided for earnings of
subsidiary companies that are expected to be remitted to the parent company.
Exclusive of amounts that would result in little or no tax if remitted, the
cumulative amount of unremitted earnings from the Company's international
subsidiaries that is expected to be indefinitely reinvested was approximately
$2.2 million at December 31, 1999. The taxes that would be paid upon remittance
of these indefinitely reinvested earnings are approximately $.8 million based on
current tax laws.
(6) EMPLOYEE BENEFIT PLANS
The Company maintains a 401(k) Plan in accordance with Section 401(k) of
the Internal Revenue Code, which allows eligible participating employees to
defer receipt of a portion of their compensation up to 15% and contribute such
amount to one or more investment funds. Employee contributions are matched by
the Company in a discretionary amount to be determined by the Company each plan
year up to $900 per
42
45
THE PROFIT RECOVERY GROUP INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 $540,000 in 1999, $425,000 in 1998 and $130,000 in 1997.
The Company also maintains deferred compensation arrangements for certain
key officers and executives. Total expense related to these deferred
compensation arrangements was approximately $783,000, $890,000, and $920,000 in
1999, 1998, and 1997, respectively.
Effective May 15, 1997, the Company established an employee stock purchase
plan pursuant to Section 423 of the Internal Revenue Code of 1986, as amended.
The plan covers 1,125,000 shares of the Company's common stock which may be
authorized unissued shares, reacquired shares or shares bought on the open
market. Through December 31, 1999, share certificates for 188,855 shares had
been issued to employees under the plan. The Company is not required to
recognize compensation expense related to this plan.
(7) COMMON STOCK
On March 16, 1998, the Company sold 3.0 million newly issued shares of its
common stock and certain selling shareholders sold an additional 3.6 million
outstanding shares in an underwritten follow-on offering. The offering was
priced at $14.00 per share. The proceeds of the offering (net of underwriting
discounts and commissions) were distributed by the underwriting syndicate on
March 20, 1998. The Company then used a portion of its net proceeds from the
offering to repay the $24.8 million outstanding principal balance on its bank
credit facility, along with accrued interest, on March 20, 1998. In April 1998,
the Company received notification from its underwriting syndicate that the
syndicate had exercised its full over-allotment option to purchase an additional
990,000 shares of Company common stock. All of these shares were then sold to
the syndicate by certain selling shareholders. The Company received no proceeds
from the sale of such shares.
On January 8, 1999, the Company sold 4.1 million newly issued shares of its
common stock and certain selling shareholders sold an additional 1.2 million
outstanding shares in an underwritten follow-on offering. The offering was
priced at $22.67 per share. The proceeds of the offering (net of underwriting
discounts and commissions) were distributed by the underwriting syndicate on
January 13, 1999. The net proceeds from the 2.7 million shares sold by the
Company, combined with the net proceeds from an additional 286,500 shares
subsequently sold by the Company in late January 1999 upon exercise by the
underwriting syndicate of their over-allotment option, were applied to reduce
outstanding borrowings under the Company's $200.0 million bank credit facility.
Additionally, 501,000 shares were sold in late January 1999 by certain selling
shareholders in connection with the over-allotment option. The Company received
no proceeds from the sale of such shares.
On July 20, 1999, the Company declared a 3-for-2 stock split effected in
the form of a stock dividend for shareholders of record on August 2, 1999,
payable on August 17, 1999. All share and per share amounts have been
retroactively restated to give effect to the aforementioned stock split.
On September 30, 1999, the Company's shareholders voted to amend its
Articles of Incorporation to increase the number of shares of Company common
stock which the Company shall have the authority to issue from 60.0 million
shares to 200.0 million shares.
Although the Company has issued no preferred stock through December 31,
1999, 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.
43
46
THE PROFIT RECOVERY GROUP INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(8) ACQUISITIONS
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 to distributors of high technology products. The Company
issued 562,500 unregistered shares of its common stock in the transaction which
was accounted for as a pooling-of-interests.
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 195,899 restricted, unregistered shares of the Company's common
stock valued at $10.17 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 112,497 restricted, unregistered
shares of the Company's common stock valued at $8.92 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 1.3 million restricted, unregistered
shares of the Company's common stock with an aggregate fair value of $10.0
million. This acquisition resulted in goodwill of $33.0 million which is being
amortized over 20 years using the straight-line method. The Company acquired the
remaining interest in Alma in January 1999, as contractually required.
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 60,000 restricted, unregistered shares of
the Company's common stock valued at $9.58 per share. This acquisition resulted
in goodwill of $1.1 million which is being amortized over 15 years using the
straight-line method.
On March 20, 1998, the Company acquired the net assets of Ginger Quill,
Inc., d/b/a Precision Data Link, an air freight recovery audit firm located in
Salt Lake City, Utah. This transaction was accounted for as a purchase with
consideration of $5.4 million in cash and 656,756 restricted, unregistered
shares of the Company's common stock valued at $9.33 per share. This acquisition
resulted in goodwill of $11.5 million which is being amortized over 25 years
using the straight-line method.
On June 19, 1998, the Company acquired the net assets of The Medallion
Group, an air freight recovery audit operation located in Salt Lake City, Utah.
This transaction was accounted for as a purchase with consideration of $5.2
million in cash and 320,582 restricted, unregistered shares of the Company's
common stock valued at $11.11 per share. This acquisition resulted in goodwill
of $11.2 million which is being amortized over 25 years using the straight-line
method.
On July 30, 1998, the Company acquired all of the outstanding capital stock
of Novexel S.A., a Lyon, France-based company that assists business entities in
securing European Union grants. This transaction was accounted for as a purchase
and involved cash of $3.7 million and 248,795 restricted, unregistered shares of
the Company's common stock valued at $12.29 per share. This acquisition resulted
in goodwill of $6.1 million which is being amortized over 20 years using the
straight-line method.
On August 6, 1998, the Company acquired substantially all the assets and
assumed certain liabilities of Loder, Drew & Associates, Inc. ("Loder Drew"), a
California-based international recovery auditing firm primarily serving clients
in the manufacturing, financial services and other non-retail sectors. The
transaction
44
47
THE PROFIT RECOVERY GROUP INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
was accounted for as a purchase with initial consideration of $70.0 million in
cash and 1.2 million restricted, unregistered shares of the Company's common
stock valued at $11.05 per share. Additionally, the prior owners of Loder Drew
received further purchase price consideration in March 1999 of $30.0 million in
cash based on the financial performance of Loder Drew for the six month period
ended December 31, 1998, and will receive purchase price consideration of $40.0
million in cash in the Spring of 2000 based on the financial performance of
Loder Drew for the year ending December 31, 1999. This acquisition resulted in
final goodwill at December 31, 1999 of $153.6 million which is being amortized
over 25 years using the straight-line method.
On September 28, 1998, the Company acquired the net assets of Cost Recovery
Professionals Pty Ltd, an Australia-based recovery auditing firm primarily
serving clients in the retail sector. The transaction was accounted for as a
purchase with consideration of $1.4 million and 150,000 restricted, unregistered
shares of the Company's common stock valued at $12.31 per share. This
acquisition resulted in goodwill of $3.3 million which is being amortized over
25 years using the straight-line method.
On October 29, 1998, the Company acquired all the issued and outstanding
common stock of Robert Beck & Associates, Inc. ("RBA"), a direct retail sector
recovery auditing competitor based in Ringwood, Illinois. The Company also
simultaneously purchased either the common stock or substantially all net assets
of certain other entities that provided management services to RBA. The
acquisitions were accounted for under the purchase method of accounting, and the
collective consideration paid for RBA and related entities consisted of $26.1
million in cash and 966,651 restricted, unregistered shares of the Company's
common stock valued at $12.36 per share. This acquisition resulted in goodwill
of $36.9 million which is being amortized over 25 years using the straight-line
method.
On November 20, 1998, the Company acquired the net assets of IP Strategies
SA, a Belgium-based firm that assists business entities in securing European
Union grants. This transaction was accounted for as a purchase and involved cash
of $1.9 million and 119,349 restricted, unregistered shares of the Company's
common stock valued at $13.61 per share. This acquisition resulted in goodwill
of $3.3 million which is being amortized over 20 years using the straight-line
method.
On December 10, 1998, the Company acquired the net assets of Industrial
Traffic Consultants, Inc., a ground freight processing and auditing firm based
in Longwood, Florida. This transaction was accounted for as a purchase and
involved cash of $1.9 million and 72,411 restricted, unregistered shares of the
Company's common stock valued at $14.18 per share. This acquisition resulted in
goodwill of $2.6 million which is being amortized over 25 years using the
straight-line method.
On April 1, 1999, the Company acquired substantially all the assets and
assumed certain liabilities of Payment Technologies, Inc. d/b/a PayTech
("PayTech"), a Georgia-based firm in the business of handling freight data,
auditing freight bills and other related services. The transaction was accounted
for as a purchase, with consideration of $4.9 million in cash and 228,798
restricted, unregistered shares of the Company's common stock valued at $15.37
per share. The acquisition resulted in goodwill of $8.5 million which is being
amortized over 25 years using the straight-line method.
On June 14, 1999, the Company acquired the net assets of Invoice and Tariff
Management Group, LLC ("ITMG"), a Georgia-based firm in the business of
telecommunications recovery auditing and negotiating integrated services
contracts with its clients' telecom suppliers on a gain-share basis. The
transaction was accounted for as a purchase and involved initial consideration
of $10.9 million in cash and 355,310 restricted, unregistered shares of the
Company's common stock valued at $17.83 per share. The former owners of ITMG are
also entitled to receive additional purchase price consideration of $5.0 million
in cash as of December 31, 1999, payable in February 2000, based on the
financial performance of ITMG for the period from acquisition date through
December 31, 1999, and are eligible to receive further purchase price
consideration of $15.0 million in cash conditioned on the future financial
performance of ITMG for the year ending December 31,
45
48
THE PROFIT RECOVERY GROUP INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2000. This acquisition resulted in goodwill through December 31, 1999 of $23.0
million which is being amortized over 30 years using the straight-line method.
On August 19, 1999, the Company acquired Meridian VAT Corporation Limited
("Meridian"). Meridian is based in Dublin, Ireland and specializes in the
recovery of value-added taxes paid on business expenses by corporate clients.
The transaction was accounted for as a pooling-of-interests with consideration
of 6,114,375 unregistered shares of the Company's common stock.
On August 31, 1999, the Company acquired substantially all of the assets
and assumed substantially all the liabilities of PRS International, Ltd.
("PRS"). PRS is a Texas-based recovery audit firm servicing primarily
middle-market clients in a variety of industrial and commercial sectors. The
transaction was accounted for as a pooling-of-interests with consideration of
1,113,043 unregistered shares of the Company's common stock.
On October 14, 1999, the Company signed a definitive agreement with certain
private shareholders to acquire approximately 89% of the total outstanding
shares of AP SA and its subsidiaries (collectively, "Groupe AP"), a tax recovery
audit firm which operates primarily within France. At the time the definitive
agreement was signed, Groupe AP was publicly traded on the French
over-the-counter market with approximately 11% of its total outstanding shares
publicly held. The Company initiated a cash tender for all publicly-traded
shares of Groupe AP in November 1999 and substantially all of the publicly-held
shares were subsequently tendered as of December 31, 1999. Acquisition of the
89% portion of Groupe AP shares held by private shareholders was closed on
November 15, 1999. The acquisition of Groupe AP was accounted for as a purchase
with aggregate initial consideration paid to public and private shareholders
combined of $18.6 million in cash and 356,718 restricted, unregistered shares of
the Company's common stock valued at $23.91 per share. In addition to the
initial consideration received by the private shareholders of Groupe AP, these
shareholders will also be eligible to receive additional purchase price
consideration based upon the profitability of Groupe AP for the two year period
ending December 31, 2001 of up to 89.0 million French Francs (approximately
$15.0 million at December 31, 1999) payable no later than April 30, 2002 using a
prescribed combination of cash and restricted, unregistered shares of the
Company's common stock. The acquisition resulted in goodwill through December
31, 1999 of $29.1 million which is being amortized over 20 years using the
straight-line method.
On December 3, 1999, the Company acquired all outstanding shares of Freight
Rate Services, Inc. ("FRS"), a freight auditing and consulting firm based in
Missouri. The transaction was accounted for as a purchase, with consideration of
$1.3 million in cash and 60,223 restricted, unregistered shares of the Company's
common stock valued at $21.47 per share. The acquisition resulted in goodwill of
$2.7 million which is being amortized over 25 years using the straight-line
method.
On December 16, 1999, the Company acquired substantially all net assets of
Integrated Systems Consultants, Inc. ("ISC"), a custom application development,
consulting and system integration firm located in Atlanta, Georgia. The
transaction was accounted for as a purchase, with consideration of $3.0 million
in cash and 77,569 restricted, unregistered shares of the Company's common stock
valued at $20.37 per share. The acquisition resulted in goodwill of $4.2 million
which is being amortized over 20 years using the straight-line method.
On December 28, 1999, the Company acquired the 49% minority ownership
interests in two Meridian operating subsidiaries which were not acquired by the
Company as part of the Meridian pooling-of-interests acquisition in August 1999.
The transaction was accounted for as a purchase, with consideration of $6.0
million in cash and 158,178 restricted, unregistered shares of the Company's
common stock valued at $12.74 per share. The acquisition resulted in goodwill of
$8.8 million which is being amortized over 20 years using the straight-line
method.
46
49
THE PROFIT RECOVERY GROUP INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Results of operations for all 1997-1999 acquisitions accounted for under
the purchase method of accounting have been included in the accompanying
Consolidated Statements of Operations from their respective dates of acquisition
except for (a) the October 7, 1997 acquisition of Alma, which was included
effective October 1, 1997, (b) the August 6, 1998 acquisition of Loder Drew,
which was included effective July 1, 1998, (c) the October 29, 1998 acquisition
of RBA, which was included effective October 1, 1998 and (d) the November 15,
1999 acquisition of Groupe AP, which was included effective October 14, 1999.
The following represents the summary (unaudited) pro forma results of
operations as if the 1997 and 1998 acquisitions of Alma, Loder Drew and RBA had
occurred at the beginning of 1997 (in thousands):
YEARS ENDED
DECEMBER 31,
-------------------
1998 1997
-------- --------
Revenues.................................................... $271,962 $198,868
======== ========
Net earnings................................................ $ 14,183 $ 7,145
======== ========
Earnings per share:
Basic..................................................... $ .36 $ .21
======== ========
Diluted................................................... $ .35 $ .21
======== ========
The Company has not included pro forma accrual basis results of operations
for 1999 or for the various smaller acquisitions it made during 1998 and 1997
since the entities involved are relatively small, and most of them have
historically maintained their respective accounting records using the cash basis
of accounting. The Company believes, however, that the pro forma accrual basis
results of operations for these entities, if determined, would not be
significant, either individually or in the aggregate.
The consolidated financial statements for periods prior to the acquisitions
of Meridian and PRS have been restated to include the accounts and results of
operations of Meridian and PRS. The results of operations previously reported by
the separate enterprises and the combined amounts included in the accompanying
consolidated financial statements are summarized below:
YEARS ENDED
SIX MONTHS DECEMBER 31,
ENDED -------------------
JUNE 30, 1999 1998 1997
------------- -------- --------
(UNAUDITED)
Revenues
The Profit Recovery Group International, Inc...... $128,343 $202,827 $112,363
Meridian VAT Corporation Limited.................. 16,931 24,594 21,296
PRS International, Ltd............................ 9,606 14,724 12,808
-------- -------- --------
Combined.................................. $154,880 $242,145 $146,467
======== ======== ========
Net earnings (loss)
The Profit Recovery Group International, Inc...... $(19,958) $ 18,146 $ 9,623
Meridian VAT Corporation Limited.................. (697) (3,919) (928)
PRS International, Ltd............................ 870 407 669
-------- -------- --------
Combined.................................. $(19,785) $ 14,634 $ 9,364
======== ======== ========
(9) STOCK OPTION PLAN
The Company's Stock Incentive Plan, as amended, has authorized the grant of
options to purchase 9,375,500 shares of the Company's common stock to key
employees and directors. The substantial majority of
47
50
THE PROFIT RECOVERY GROUP INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
options granted through December 31, 1999 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 1999, 1998 and 1997:
1999 1998 1997
------- ------- -------
Risk-free interest rates.................................... 5.85% 5.0% 6.17%
Dividend yields............................................. -- -- --
Volatility factor of expected market price.................. .533 .550 .537
Weighted-average expected life of option.................... 6 years 6 years 6 years
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 periods. The Company's
pro forma information for the years ended December 31, 1999, 1998 and 1997
follows (in thousands, except for pro forma net earnings per share information):
1999 1998 1997
------- ------- -------
Net earnings before accounting change and pro forma effect
of compensation expense recognition provisions of SFAS
No. 123................................................. $27,436 $14,634 $ 9,364
Pro forma effect of compensation expense recognition
provisions of SFAS No. 123.............................. (6,146) (2,707) (1,377)
------- ------- -------
Pro forma net earnings before accounting change........... $21,290 $11,927 $ 7,987
======= ======= =======
Pro forma net earnings per share before accounting change:
Basic................................................... $ .45 $ .30 $ .24
======= ======= =======
Diluted................................................. $ .43 $ .30 $ .23
======= ======= =======
48
51
THE PROFIT RECOVERY GROUP INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A summary of the Company's stock option activity and related information
for the years ended December 31 follows:
1999 1998 1997
--------------------- --------------------- ---------------------
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
--------- --------- --------- --------- --------- ---------
Outstanding -- beginning
of year................. 5,450,419 $13.13 3,306,740 $ 8.29 1,887,045 $ 6.40
Granted................... 2,344,775 27.94 2,578,350 18.34 1,545,395 10.31
Exercised................. (420,413) 8.15 (340,771) 6.20 (99,150) 3.60
Forfeited................. (241,755) 16.48 (93,900) 11.41 (26,550) 8.59
--------- --------- ---------
Outstanding -- end of
year.................... 7,133,026 $18.18 5,450,419 $13.13 3,306,740 $ 8.29
========= ========= =========
Exercisable at end of
year.................... 1,448,711 $10.86 773,601 $ 7.83 430,959 $ 6.08
Weighted average fair
value of options granted
during year............. $ 16.02 $ 10.46 $ 5.97
The following table summarizes information about stock options outstanding
at December 31, 1999:
EXERCISABLE
NUMBER WEIGHTED- WEIGHTED- ------------------------
OF SHARES AVERAGE AVERAGE NUMBER WEIGHTED-
RANGE OF SUBJECT REMAINING EXERCISE OF AVERAGE
EXERCISE PRICES TO OPTION LIFE PRICE SHARES EXERCISE PRICE
--------------- --------- ---------- --------- ------- --------------
$3.53 - $10.99..................... 2,368,944 6.8 years $ 8.22 901,176 $ 7.36
$11.00 - $25.00.................... 2,885,582 8.59 years 19.17 547,535 16.61
Over $25.00........................ 1,878,500 9.81 years 29.21 -- --
The weighted average remaining contract life of options outstanding at
December 31, 1999 was 8.3 years.
(10) MAJOR CLIENTS
The Company did not have any major clients during 1999 or 1998 which
individually provided revenues in excess of 10% of total revenues. After
restatement for poolings-of-interests, two clients which provided revenues in
excess of 10% of the Company's previously reported 1997 revenues were no longer
in excess of 10%. The Company derived 8.0% of its total 1997 revenues from its
historically largest client. Additionally, during 1997, the Company derived 9.4%
of its total revenues from another client due in large part to a nonrecurring
situation involving concurrent audits of multiple years. Both major clients are
mass merchandisers operating in the retail industry.
(11) OPERATING SEGMENTS AND RELATED INFORMATION
The Company adopted SFAS No. 131, "Disclosures About Segments of an
Enterprise and Related Information," in 1998 which changed the methodology by
which the Company reports information about its operating segments. The
information for 1998 and 1997 has been restated from the prior year's
presentation in order to conform to the 1999 presentation and to give
retroactive effect to the 1999 acquisitions of Meridian and PRS (see Note 8)
which were each accounted for as a pooling-of-interests.
The Company has four reportable operating segments consisting of Accounts
Payable Services, Freight Services, Taxation Services and Facilities Services.
Each segment represents a strategic business unit that offers a different type
of recovery audit service. These business units are managed separately because
each business requires different technology and marketing strategies.
49
52
THE PROFIT RECOVERY GROUP INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 governmental agencies (the Company's historical client base) and accounts
payable services provided to various other types of business entities by the
Company's Commercial Division. The Accounts Payable Services operating segment
conducts business in North America, South America, Europe, Australia, Africa and
Asia.
Freight Services consist primarily of various businesses acquired by the
Company since 1997 which audit freight-related disbursements to identify and
recover overpayments. Areas of current specialization include ocean freight,
truck freight, rail freight and overnight freight. This operating segment serves
primarily businesses located in the United States, although rapid international
expansion is planned.
Taxation Services consist primarily of various European businesses acquired
by the Company since 1997 which audit tax-related disbursements to identify and
recover overpayments (primarily within France), obtain refunds of European VAT
for clients located in many parts of the world, and assist business entities
throughout Europe in securing available grants.
Facilities Services consist of telecommunications auditing within the
United States based primarily upon a business acquired by the Company in 1999.
The accounting policies of the four reportable operating segments are the
same as those described in Note (1). The Company evaluates the performance of
its operating segments based upon revenues and operating income. Intersegment
revenues are not significant.
Segment information as of or for the years ended December 31, 1999, 1998
and 1997 follows (in thousands):
ACCOUNTS
PAYABLE FREIGHT TAXATION FACILITIES
SERVICES SERVICES SERVICES SERVICES TOTAL
-------- -------- -------- ---------- --------
1999
Revenues............................ $251,383 $19,750 $ 69,951 $ 8,563 $349,647
Operating income.................... 42,651 4,837 2,688 3,212 53,388
Total assets........................ 308,269 55,902 135,926 29,063 529,160
Capital expenditures................ 17,566 923 1,036 90 19,615
Depreciation and amortization....... 16,277 1,730 3,794 316 22,117
1998
Revenues............................ $182,757 $ 7,866 $ 50,550 $ 972 $242,145
Operating income.................... 26,969 2,816 2,933 55 32,773
Total assets........................ 358,088 2,257 59,318 -- 419,663
Capital expenditures................ 16,688 376 1,994 -- 19,058
Depreciation and amortization....... 10,960 113 1,060 -- 12,133
1997
Revenues............................ $118,457 $ 82 $ 27,928 $ -- $146,467
Operating income.................... 14,845 66 3,823 -- 18,734
Total assets........................ 120,546 -- 44,338 -- 164,884
Capital expenditures................ 4,737 -- 1,103 -- 5,840
Depreciation and amortization....... 4,817 -- 673 -- 5,490
50
53
THE PROFIT RECOVERY GROUP INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table presents revenues by country based upon the location of
clients served (in thousands):
1999 1998 1997
-------- -------- --------
United States.......................................... $247,971 $168,422 $102,691
France................................................. 33,259 26,265 8,279
United Kingdom......................................... 31,688 20,250 11,721
Canada................................................. 12,706 11,646 9,425
Mexico................................................. 5,945 3,568 2,444
Japan.................................................. 5,217 3,603 3,704
Other.................................................. 12,861 8,391 8,203
-------- -------- --------
$349,647 $242,145 $146,467
======== ======== ========
The following table presents long-lived assets by country based on location
of the asset (in thousands):
1999 1998 1997
-------- -------- -------
United States........................................... $303,484 $203,496 $18,878
France.................................................. 53,607 39,483 33,093
United Kingdom.......................................... 1,174 1,247 1,008
Canada.................................................. 623 305 275
Mexico.................................................. 264 94 72
Ireland................................................. 1,160 1,380 673
Other................................................... 6,468 8,852 317
-------- -------- -------
$366,780 $254,857 $54,316
======== ======== =======
(12) FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts for cash and cash equivalents, receivables, funds held
for payment of client payables, retained interest in receivables sold, notes
payable to bank, obligation for client payables, accounts payable and accrued
expenses, accrued business acquisition consideration, accrued payroll and
related expenses, and deferred tax recovery audit revenue approximate fair value
because of the short maturity of these instruments.
The fair values of each of the Company's long-term debt instruments are
based on the amount of future cash flows associated with each instrument
discounted using the Company's current borrowing rate for similar debt
instruments of comparable maturity. The estimated fair value of the Company's
long-term debt instruments at December 31, 1999 and 1998 was $94.4 million and
$111.4 million, respectively, and the carrying value of the Company's long-term
debt at December 31, 1999 and 1998 was $96.3 million and $113.5 million,
respectively.
Fair value estimates are made at a specific point in time, based on
relevant market information about the financial instrument. These estimates are
subjective in nature and involve uncertainties and matters of significant
judgment and therefore cannot be determined with precision. Changes in
assumptions could significantly affect the estimates.
51
54
THE PROFIT RECOVERY GROUP INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(13) EARNINGS PER SHARE
The following table sets forth the computations of basic and diluted
earnings per share for the years ended December 31, 1999, 1998 and 1997 (in
thousands except for earnings per share information):
1999 1998 1997
-------- ------- -------
Numerator:
Earnings before business acquisition and restructuring
expenses and cumulative effect of accounting
change.............................................. $ 39,045 $18,452 $11,797
Business acquisition and restructuring expenses, net of
tax................................................. (11,609) (3,818) (2,433)
Cumulative effect of accounting change................. (29,195) -- --
-------- ------- -------
Net earnings (loss)................................. $ (1,759) $14,634 $ 9,364
======== ======= =======
Denominator:
Denominator for basic earnings per
share -- weighted-average shares outstanding........ 47,498 39,248 33,814
Effect of dilutive securities:
Employee stock options.............................. 1,882 1,128 740
-------- ------- -------
Denominator for diluted earnings.................... 49,380 40,376 34,554
======== ======= =======
Basic earnings (loss) per share:
Earnings before business acquisition and restructuring
expenses and cumulative effect of accounting
change.............................................. $ 0.82 $ 0.47 $ 0.35
Business acquisition and restructuring expenses........ (0.25) (0.10) (0.07)
Cumulative effect of accounting change................. (0.61) -- --
-------- ------- -------
Net earnings (loss)................................. $ (0.04) $ 0.37 $ 0.28
======== ======= =======
Diluted earnings (loss) per share:
Earnings before business acquisitions and restructuring
expenses and cumulative effect of accounting
change.............................................. $ 0.79 $ 0.45 $ 0.34
Business acquisition and restructuring expenses........ (0.24) (0.09) (0.07)
Cumulative effect of accounting change................. (0.59) -- --
-------- ------- -------
Net earnings (loss)................................. $ (0.04) $ 0.36 $ 0.27
======== ======= =======
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
prices were greater than the average market price of the common shares and,
therefore, the effect would be antidilutive.
52
55
THE PROFIT RECOVERY GROUP INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(14) BUSINESS ACQUISITION AND RESTRUCTURING EXPENSES
Business acquisition and restructuring expenses consisted of the following
components (in thousands):
YEAR ENDED DECEMBER 31,
---------------------------
1999 1998 1997
------- ------ ------
Acquisition-related expenses incurred by all parties in
connection with the August 1999 acquisitions of Meridian
and PRS................................................... $ 9,291 $ -- $ --
Expenses incurred by Meridian with respect to phantom stock
plan...................................................... 2,991 3,818 1,225
Restructuring charge incurred in the fourth quarter of 1999
in connection with combining the operations of PRS with
those of the Company's existing Accounts Payable
Commercial unit........................................... 1,059 -- --
Restructuring charge incurred in the fourth quarter of 1997
in connection European management structure............... -- -- 1,208
------- ------ ------
$13,341 $3,818 $2,433
======= ====== ======
The Company effected separate acquisitions with Meridian and PRS which were
each completed in August 1999 and each accounted for as a pooling-of-interests.
As required under generally accepted accounting principles governing
pooling-of-interests accounting, acquisition-related expenses incurred by the
Company, Meridian, PRS and the respective shareholders of Meridian and PRS have
been aggregated and charged to current operations in 1999. These expenses
principally included investment banking fees and legal and accounting fees.
Substantially all of these expenses were paid during the third and fourth
quarters of 1999.
Meridian established a phantom stock plan in 1996 whereby participants were
entitled to receive the subsequent appreciation in the value of Meridian's
shares in direct proportion to the number of phantom shares assigned to each
individual. No actual shares of Meridian stock were granted or issued to
participants. Subsequent appreciation in value of the phantom shares was charged
to operations as incurred, and was payable in cash upon the occurrence of
certain specified events such as a sale of Meridian. The phantom stock plan was
terminated upon the Company's purchase of Meridian, and participants will be
paid their respective proceeds pursuant to a schedule of periodic payments which
conclude with a final installment in January 2001.
The Company combined the operations of PRS with its existing Accounts
Payable Commercial Division in the fourth quarter of 1999 and incurred a charge
to operations of $1.1 million to provide for certain employee severance payments
and the costs of closing duplicative or unnecessary office facilities.
Substantially all of this $1.1 million was reflected as an accrued liability as
of December 31, 1999.
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 substantially all of the remaining $525,000
was paid in 1998.
53
56
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
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 29, 2000.
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 27:
Independent Auditors' Reports............................... 28,29,30
Consolidated Statements of Operations for the Years ended
December 31, 1999, 1998 and 1997.......................... 31
Consolidated Balance Sheets as of December 31, 1999 and
1998...................................................... 32
Consolidated Statements of Shareholders' Equity (Deficit)
for the Years ended December 31, 1999, 1998 and 1997...... 33
Consolidated Statements of Cash Flows for the Years ended
December 31, 1999, 1998 and 1997.......................... 34
Notes to Consolidated Financial Statements.................. 35
(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
None.
(d) Exhibits
EXHIBIT
NUMBER DESCRIPTION
------- -----------
**2.1 -- Stock Purchase Agreement dated as of October 29, 1998 among
the Company, PRGI, Robert Beck & Associates, Inc., and the
shareholders of Robert Beck & Associates, Inc. (incorporated
by reference to Exhibit 2.1 to Registrant's Form 8-K filed
November 10, 1998).
**2.2 -- Stock Purchase Agreement dated as of October 29, 1998 among
the Company, PRGI, Taylor, Blackburn & Associates, Inc., and
the shareholders of Taylor, Blackburn & Associates, Inc.
(incorporated by reference to Exhibit 2.2 to Registrant's
Form 8-K filed November 10, 1998).
**2.3 -- Stock Purchase Agreement dated as of October 29, 1998 among
the Company, PRGI, John E. Flatley & Associates, Inc., and
the shareholder of John E. Flatley & Associates, Inc.
(incorporated by reference to Exhibit 2.3 to Registrant's
Form 8-K filed November 10, 1998).
**2.4 -- Asset Purchase Agreement dated as of October 29, 1998 among
the Company, PRGI, and Vincent Creadon, a sole
proprietorship. (incorporated by reference to Exhibit 2.4 to
Registrant's Form 8-K filed November 10, 1998).
54
57
EXHIBIT
NUMBER DESCRIPTION
------- -----------
**2.5 -- Asset Purchase Agreement dated as of October 29, 1998 among
the Company, PRGI, and John H. Cavins, a sole
proprietorship. (incorporated by reference to Exhibit 2.5 to
Registrant's Form 8-K filed November 10, 1998).
**2.6 -- Asset Purchase Agreement dated as of October 29, 1998 among
the Company, PRGI, RBA Audits, Inc., and the shareholders of
RBA Audits, Inc. (incorporated by reference to Exhibit 2.6
to Registrant's Form 8-K filed November 10, 1998).
**2.7 -- Asset Purchase Agreement dated as of October 29, 1998 among
the Company, PRGI, and John M. Kirkeide, a sole
proprietorship. (incorporated by reference to Exhibit 2.7 to
Registrant's Form 8-K filed November 10, 1998).
**2.8 -- Asset Purchase Agreement dated as of October 29, 1998 among
the Company, PRGI, and Robert N. Beck, Jr., a sole
proprietorship. (incorporated by reference to Exhibit 2.8 to
Registrant's Form 8-K filed November 10, 1998).
**2.9 -- Asset Purchase Agreement dated as of October 29, 1998 among
the Company, PRGI, Savant Consulting, L.L.C., and the
members of Savant Consulting, L.L.C. (incorporated by
reference to Exhibit 2.9 to Registrant's Form 8-K filed
November 10, 1998).
**2.10 -- Representations, Covenants and Indemnification Agreement.
(incorporated by reference to Exhibit 2.10 to Registrant's
Form 8-K filed November 10, 1998).
*2.11 -- Asset Purchase Agreement dated as of July 31, 1998 among the
Company, The Profit Recovery Group International I, Inc.,
Loder, Drew & Associates, Inc., Ronald K. Loder and H.
Richard Byrne. (incorporated by reference to Exhibit 2.1 to
Registrant's Form 8-K filed August 12, 1998).
**2.12 -- Share Purchase Agreement dated as of August 19, 1999 among
the Registrant, the Vendors and Mr. Nathan Kirsh
(incorporated by reference to Exhibit 2.1 to the
Registrant's Current Report on Form 8-K filed on September
2, 1999).
3.1 -- Restated Articles of Incorporation of the Registrant.
3.2 -- Bylaws of the Registrant (incorporated by reference to
Exhibit 3.2 to Registrant's March 26, 1996 registration
statement number 333-1086 on Form S-1).
4.1 -- Specimen Common Stock Certificate (incorporated by reference
to Exhibit 4.1 to Registrant's March 26, 1996 registration
statement number 333-1086 on Form S-1).
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 (incorporated by reference to Exhibit
10.1 to Registrant's March 26, 1996 registration statement
number 333-1086 on Form S-1).
10.2 -- 1996 Stock Option Plan dated as of January 25, 1996,
together with Forms of Non-qualified Stock Option Agreement
(incorporated by reference to Exhibit 10.2 to Registrant's
March 26, 1996 registration statement number 333-1086 on
Form S-1).
10.3 -- The Profit Recovery Group International I, Inc., 401(K) Plan
(incorporated by reference to Exhibit 10.3 to Registrant's
March 26, 1996 registration statement number 333-1086 on
Form S-1).
10.4 -- Form of Employment Agreement dated March 20, 1996 between
Registrant and John M. Cook (incorporated by reference to
Exhibit 10.4 to Registrant's March 26, 1996 registration
statement number 333-1086 on Form S-1).
10.5 -- Form of Employment Agreement dated March 20, 1996 between
Registrant and John M. Toma (incorporated by reference to
Exhibit 10.5 to Registrant's March 26, 1996 registration
statement number 333-1086 on Form S-1).
55
58
EXHIBIT
NUMBER DESCRIPTION
------- -----------
10.6 -- Form of Employment Agreement dated March 20, 1996 between
Registrant and Donald E. Ellis, Jr. (incorporated by
reference to Exhibit 10.8 to Registrant's March 26, 1996
registration statement number 333-1086 on Form S-1).
10.7 -- 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 (incorporated by reference to Exhibit 10.9 to
Registrant's March 26, 1996 registration statement number
333-1086 on Form S-1).
10.8 -- Form of Indemnification Agreement between the Registrant and
the Directors and certain officers of the Registrant
(incorporated by reference to Exhibit 10.10 to Registrant's
March 26, 1996 registration statement number 333-1086 on
Form S-1).
10.9 -- First Amendment dated March 7, 1997 to Employment Agreement
between Registrant and John M. Cook (incorporated by
reference to Exhibit 10.22 to Registrant's Form 10-K for the
year ended December 31, 1996).
10.10 -- The Profit Recovery Group International, Inc. Employee Stock
Purchase Plan (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).
10.11 -- Second Amendment to Employment Agreement dated September 17,
1997 between The Profit Recovery Group International I, Inc.
and John M. Cook (incorporated by reference to Exhibit 10.3
to Registrant's Form 10-Q for the quarterly period ended
September 30, 1997).
10.12 -- Employment Agreement dated October 17, 1997 between The
Profit Recovery Group International I, Inc. and Michael A.
Lustig (incorporated by reference to Exhibit 10.4 to
Registrant's Form 10-Q for the quarterly period ended
September 30, 1997).
10.13 -- Compensation Agreement dated October 17, 1997 between The
Profit Recovery Group International I, Inc. and Michael A.
Lustig (incorporated by reference to Exhibit 10.5 to
Registrant's Form 10-Q for the quarterly period ended
September 30, 1997).
10.14 -- Lease Agreement dated January 30, 1998 between Wildwood
Associates and The Profit Recovery Group International I,
Inc. (incorporated by reference to Exhibit 10.30 to
Registrant's Form 10-K for the year ended December 31,
1997).
****10.15 -- Services Agreement dated April 7, 1993 between Registrant
and Kmart Corporation as amended by Addendum dated January
28, 1997 (incorporated by reference to Exhibit 10.31 to
Registrant's Form 10-K for the year ended December 31,
1997).
10.16 -- 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 (incorporated by reference to
Exhibit 10.32 to Registrant's Form 10-K for the year ended
December 31, 1997).
10.17 -- Sublease dated October 29, 1993, between The Profit Recovery
Group I, Inc. and International Business Machines
Corporation (incorporated by reference to Exhibit 10.15 to
Registrant's March 26, 1996 registration statement number
333-1086 on Form S-1).
10.18 -- Employment Agreement dated August 23, 1996 between
Registrant and David A. Brookmire; Compensation Agreement
dated August 23, 1996 between Registrant and Mr. Brookmire;
and description of 1998 compensation arrangement between
Registrant and Mr. Brookmire (incorporated by reference to
Exhibit 10.33 to Registrant's Form 10-K for the year ended
December 31, 1997).
10.19 -- Description of 1998-2002 compensation arrangement between
Registrant and John M. Cook (incorporated by reference to
Exhibit 10.34 to Registrant's Form 10-K for the year ended
December 31, 1997).
56
59
EXHIBIT
NUMBER DESCRIPTION
------- -----------
10.20 -- Description of 1998 compensation arrangement between
Registrant and John M. Toma (incorporated by reference to
Exhibit 10.35 to Registrant's Form 10-K for the year ended
December 31, 1997).
10.21 -- Description of 1998 compensation arrangement between
Registrant and Michael A. Lustig (incorporated by reference
to Exhibit 10.36 to Registrant's Form 10-K for the year
ended December 31, 1997).
10.22 -- Description of 1998 compensation arrangement between
Registrant and Donald E. Ellis, Jr. (incorporated by
reference to Exhibit 10.37 to Registrant's Form 10-K for the
year ended December 31, 1997).
10.23 -- 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 (incorporated by reference to
Exhibit 10.38 to Registrant's Form 10-K for the year ended
December 31, 1997).
10.24 -- 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
(incorporated by reference to Exhibit 10.39 to Registrant's
Form 10-K for the year ended December 31, 1997).
10.25 -- Syndication Amendment and Assignment dated as of September
17, 1998 by and among the Registrant, certain of
subsidiaries of the Registrant and various banking
institutions; Credit Agreement dated as of July 29, 1998
among the Registrant, certain subsidiaries of the Registrant
and various banking institutions (incorporated by reference
to Exhibit 10.1 to Registrant's Form 10-Q for the quarterly
period ended September 30, 1998).
10.26 -- Sublease agreement dated June 1, 1998, by and between
Electrolux, LLC and a subsidiary of the Registrant
(incorporated by reference to Exhibit 10.2 to Registrant's
Form 10-Q for the quarterly period ended September 30,
1998).
10.27 -- Sub-Sublease agreement dated August 19, 1998 by and between
a subsidiary of the Registrant and Manhattan Associates,
Inc. (incorporated by reference to Exhibit 10.2 to
Registrant's Form 10-Q for the quarterly period ended
September 30, 1998).
10.28 -- Lease agreement dated July 17, 1998 by and between Wildwood
Associates and a subsidiary of the Registrant. (incorporated
by reference to Exhibit 10.4 to Registrant's Form 10-Q for
the quarterly period ended September 30, 1998).
10.29 -- The Profit Recovery Group International, Inc. Stock
Incentive Plan. (incorporated by reference to Exhibit 10.5
to Registrant's Form 10-Q for the quarterly period ended
September 30, 1998).
10.30 -- Description of The Profit Recovery Group International, Inc.
Executive Incentive Plan. (incorporated by reference to
Exhibit 10.6 to Registrant's Form 10-Q for the quarterly
period ended September 30, 1998).
10.31 -- Registration Rights Agreement among the Registrant and the
Vendors dated August 19, 1999 (incorporated by reference to
Exhibit 2.1 to the Registrant's Current Report on Form 8-K
filed on September 2, 1999).
10.32 -- Description of Compensation Arrangement between Mr. Scott L.
Colabuono and Registrant.
21.1 -- Subsidiaries of the Registrant.
23.1 -- Consent of KPMG LLP.
23.2 -- Consent of ERNST & YOUNG Entrepreneurs.
27.1 -- Financial Data Schedule -- 1999 (for SEC use only).
57
60
EXHIBIT
NUMBER DESCRIPTION
------- -----------
27.2 -- Restated Financial Data Schedule -- 1998 (for SEC use only;
restated to reflect 1999 acquisitions accounted for as
poolings-of-interest).
27.3 -- Restated Financial Data Schedule -- 1997 (for SEC use only;
restated to reflect 1999 acquisitions accounted for as
poolings-of-interest).
- ---------------
* The Company has received confidential treatment of portions of this
Agreement. Accordingly, portions thereof have been omitted and filed
separately with the Securities and Exchange Commission. In addition, in
accordance with Item 601(b)(2) of Regulation S-K, the schedules have been
omitted and a list briefly describing the schedules is at the end of the
Exhibit. The Registrant will furnish supplementally a copy of any omitted
schedule to the Commission upon request.
** In accordance with Item 601(b)(2) of Regulation S-K, the schedules have
been omitted and a list briefly describing the schedules is contained at
the end of the Exhibit. The Company will furnish supplementally a copy of
any omitted schedule to the Commission upon request.
*** 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.
**** Confidential treatment pursuant to 17 CFR sec.sec. 200.80 and 240.24b-2 has
been granted regarding certain portions of the indicated Exhibit, which
portions have been filed separately with the Commission.
58
61
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
THE PROFIT RECOVERY GROUP
INTERNATIONAL, INC.
March 30, 2000 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 March 30, 2000
- ----------------------------------------------------- Chief Executive Officer
John M. Cook (Principal Executive
Officer)
/s/ SCOTT L. COLABUONO Executive Vice President -- March 30, 2000
- ----------------------------------------------------- Finance, Treasurer and
Scott L. Colabuono Chief Financial Officer
(Principal Financial
Officer)
/s/ MICHAEL R. MELTON Vice President -- Finance March 30, 2000
- ----------------------------------------------------- (Principal Accounting
Michael R. Melton Officer)
/s/ STANLEY B. COHEN Director March 30, 2000
- -----------------------------------------------------
Stanley B. Cohen
/s/ MARC S. EISENBERG Director March 30, 2000
- -----------------------------------------------------
Marc S. Eisenberg
/s/ JONATHAN GOLDEN Director March 30, 2000
- -----------------------------------------------------
Jonathan Golden
/s/ GARTH H. GREIMANN Director March 30, 2000
- -----------------------------------------------------
Garth H. Greimann
/s/ FRED W.I. LACHOTZKI Director March 30, 2000
- -----------------------------------------------------
Fred W.I. Lachotzki
/s/ RONALD K. LODER Director March 30, 2000
- -----------------------------------------------------
Ronald K. Loder
/s/ E. JAMES LOWREY Director March 30, 2000
- -----------------------------------------------------
E. James Lowrey
62
SIGNATURE TITLE DATE
--------- ----- ----
/s/ MICHAEL A. LUSTIG Director March 30, 2000
- -----------------------------------------------------
Michael A. Lustig
/s/ THOMAS S. ROBERTSON Director March 30, 2000
- -----------------------------------------------------
Thomas S. Robertson
/s/ JOHN M. TOMA Vice Chairman and Director March 30, 2000
- -----------------------------------------------------
John M. Toma
/s/ JACKIE M. WARD Director March 30, 2000
- -----------------------------------------------------
Jackie M. Ward