Back to GetFilings.com
1
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000
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 28, 2001 were
47,502,641. The aggregate market value, as of February 28, 2001, of such common
shares held by non-affiliates of the registrant was approximately $290.4 million
based upon the last sales price reported that date on the Nasdaq Stock Market of
$7.094 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 May 25, 2001.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
2
THE PROFIT RECOVERY GROUP INTERNATIONAL, INC.
FORM 10-K
DECEMBER 31, 2000
PAGE
----
Part I
Item 1. Business.................................................... 1
Item 2. Properties.................................................. 15
Item 3. Legal Proceedings........................................... 15
Item 4. Submission of Matters to a Vote of Security Holders......... 15
Part II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters....................................... 16
Item 6. Selected Consolidated Financial Data........................ 16
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 19
Item 7A. Quantitative and Qualitative Disclosures About Market
Risk...................................................... 28
Item 8. Financial Statements and Supplementary Data................. 29
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................. 57
Part III
Item 10. Directors and Executive Officers of the Registrant.......... 57
Item 11. Executive Compensation...................................... 57
Item 12. Security Ownership of Certain Beneficial Owners and
Management................................................ 57
Item 13. Certain Relationships and Related Transactions.............. 57
Part IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form
8-K....................................................... 57
Signatures............................................................... 60
3
PART I
ITEM 1. BUSINESS
The Profit Recovery Group International, Inc. and subsidiaries (the
"Company") is a leading provider of recovery audit, expense containment and
knowledge application services to large and mid-size businesses 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; 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. Although these businesses process the vast majority of payment
transactions correctly, a small number of errors do occur. In the aggregate,
these transaction errors can represent meaningful "lost profits" that can be
particularly significant for businesses with relatively narrow profit margins.
The Company's trained, experienced industry specialists use sophisticated
proprietary technology and advanced recovery techniques and methodologies to
identify overpayments to vendors and tax authorities. In addition, these
specialists review clients' current practices and processes related to
procurement and other expenses in order to identify solutions to manage and
reduce expense levels, as well as apply knowledge and expertise of industry best
practices to assist clients in improving their business efficiencies.
In most instances, the Company receives a contractual percentage of
overpayments and other savings it identifies and its clients recover or realize.
In other instances, the Company receives a fee for specific services provided.
In March 2001, the Company formalized a strategic realignment initiative
designed to enhance the Company's financial position and clarify its investment
and operating strategy by focusing primarily on its core Accounts Payable
business. Under this strategic realignment initiative, the Company will divest
of the following non-core businesses: Meridian VAT Reclaim ("Meridian") within
the former Taxation Services segment, the Logistics Management Services segment,
the Communications Services segment and the Ship and Debit ("Ship & Debit")
division within the Accounts Payable Services segment. The Company's
consolidated financial statements have been restated to reflect Meridian,
Logistics Management Services, Communications Services, and the Ship & Debit
division as discontinued operations for all periods presented. Unless otherwise
specifically stated, all financial and statistical information contained herein
is presented with respect to continuing operations only.
The Company currently services approximately 2,500 clients in over 33
different countries outside the United States. The Company's continuing
operations have two distinct operating segments consisting of Accounts Payable
Services and French Taxation Services. Each segment represents a strategic
business unit that offers different types of recovery and cost containment
services. See Note 13 of Notes to Consolidated Financial Statements included in
Item 8. of this Form 10-K for the worldwide operating segment disclosures.
The following discussion includes "forward-looking" statements within the
meaning of the Private Securities Litigation Reform Act of 1995. These
forward-looking statements are at times identified by words such as "plans,"
"intends," "expects," or "anticipates" and words of similar effect and include
statements regarding the Company's financial and operating plans and goals.
These forward-looking statements include any statements that cannot be assessed
until the occurrence of a future event or events. Actual results may differ
materially from those expressed in any forward-looking statements due to a
variety of factors, including but not limited to those discussed herein and
below under "Risk Factors".
1
4
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 the 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.
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., Canada, and Mexico 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., Canada, and Mexico, 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 maturing. 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
technologically-advanced independent recovery audit firms with recovery
opportunities that may exceed those existing when EDI is employed solely 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;
2
5
- 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 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.
In recent years, the Company has seen increasing competition from the
consulting arms of the five largest international accounting firms (the "Big
5"). Historically, the Big 5 have been precluded from providing significant
levels of recovery audit services due to the potential for conflicts of interest
with audit clients. Additionally, the Big 5 have relied primarily on fee-based
arrangements versus the predominant contingency model associated with recovery
audit services. Since January 2000, three of the Big 5 have spun off, sold or
otherwise granted separate independence to their management consulting units and
one other has announced its intention to eventually effect a similar separation.
With the potential for conflicts of interest substantially reduced, the Company
believes that newly independent Big 5 consulting units may become formidable
competitors in the future.
THE PROFIT RECOVERY GROUP SOLUTION
The Company provides its domestic and international clients with
comprehensive recovery audit, expense containment and knowledge application
services by using sophisticated proprietary technology and advanced techniques
and methodologies, and by employing highly trained, experienced industry
specialists. As a result, the Company believes it is able to identify
significantly more payment errors and expense containment opportunities 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, expense containment and knowledge application services. Its strategy to
achieve this objective consists of the following elements:
- 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 continuing operations from negligible amounts in the early
1990s to 34.7% of consolidated worldwide revenues in 2000. Long-lived
assets from continuing operations in foreign countries have grown to
27.7% of consolidated long-lived assets. During 2001, the Company intends
to continue to emphasize the expansion of its existing client base.
3
6
- Continue to Grow the Core U.S. Accounts Payable Business. The Company
will continue to focus on retaining and growing its core U.S. accounts
payable business by creating a customer-centric organization, maximizing
its use of technology, and leveraging the best skilled auditors.
- 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 and
expense containment efforts. The Company believes that its clients
benefit significantly from these outsourcing arrangements because the
Company generally completes its audits more quickly, identifies larger
claims and executes on cost-saving opportunities more efficiently 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.
THE PROFIT RECOVERY GROUP SERVICES
In March 2001, the Company formalized a strategic realignment initiative
designed to enhance the Company's financial position and clarify its investment
and operating strategy by focusing primarily on its core Accounts Payable
business. Under this strategic realignment initiative, the Company will divest
of the following non-core businesses: Meridian VAT Reclaim within the former
Taxation Services segment, the Logistics Management Services segment, the
Communications Services segment and the Ship & Debit division within the
Accounts Payable Services segment. The Company's consolidated financial
statements have been restated to reflect Meridian, Logistics Management
Services, Communications Service, and Ship & Debit as discontinued operations
for all periods presented.
Continuing Operations
The Company currently conducts its continuing operations through two
operational segments as follows:
RELATIVE PERCENTAGE OF CONSOLIDATED
OPERATIONAL SEGMENTS WORLDWIDE REVENUES DURING 2000
- -------------------- -----------------------------------
Accounts Payable Services................................ 85.9%
French Taxation Services................................. 14.1%
------
100.0%
======
Accounts Payable Services
Through the use of proprietary technology, audit techniques and
methodologies, the Company's trained and experienced auditors examine
merchandise procurement records on a post-payment basis to identify overpayments
resulting from duplicate payments, missed discounts, allowances, rebates and
other forms of pricing concessions offered by vendors.
The Accounts Payable Services segment serves two client types, with each
type currently having different service delivery characteristics.
4
7
Services provided to retail and wholesale clients are currently the
Company's largest worldwide source of revenues. 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
retail/wholesale clients, 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 Company currently serves retail/wholesale clients on six
continents.
The Company also examines merchandise procurements and other payments made
by business entities such as manufacturers, distributors and healthcare
providers which are collectively termed as "commercial clients." 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 Company's capabilities to serve commercial clients
have been formed primarily from the combined operations of Loder, Drew &
Associates, Inc. (acquired August 1998) and PRS International, Ltd. ("PRS")
(acquired August 1999). Currently, the majority of the Company's commercial
clients are located in North America, although expansion to other continents is
planned.
French Taxation Services
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.
The services provided by units within the French Taxation Services division
tend to be based upon discrete projects that are typically non-recurring in
nature.
Discontinued Operations
The Company has operations which it plans to divest within the following
specialty areas:
Meridian VAT Reclaim
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. The services provided to clients by Meridian are
typically recurring in nature.
Logistics Management Services
Assembled through a series of six business acquisitions completed between
1997 and 1999, the Company's Logistics Management Services operations now
maintains the capability to audit on a post-payment or pre-payment basis freight
shipment transactions involving air, express, rail, surface and routing
compliance and to provide 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. In 2000, the Company implemented a web-based platform to provide
front-end reporting to clients over the internet.
Logistics Management Services revenues are typically recurring in nature
since freight payments are usually examined on an ongoing basis once the Company
has been engaged as a new client.
5
8
Communications Services
The Communications Services division currently consists of the
telecommunications expense recovery, reduction and management unit which was
formed by various acquisitions made by the Company. The Communications Services
division applies its specialized expertise to historical client
telecommunications records to identify and recover refunds of previous
overpayments. It also analyzes its clients' current telecommunications invoices,
routing patterns and usage volumes in order to renegotiate terms and conditions
on its clients' behalf, as well as identify cost saving alternatives. The
division also provides expense management services such as invoice processing
and call accounting.
Ship & Debit Division
The Ship & Debit division is a discrete unit within the Company's Accounts
Payable Services segment. The Ship & Debit division provides revenue
maximization services to clients in the semiconductor industry using a discrete
group of specially trained auditors. Ship & Debit clients generally receive two
audits each year.
CLIENT CONTRACTS
The Company's typical client contract provides that the Company is entitled
to a contractual percentage of overpayments or other savings recovered for or
realized by 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. For some
services, the client contract provides that the Company is entitled to a fee for
the rendering of that service.
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.
The Company recognizes revenue on the invoice basis. Clients are invoiced
when it has been determined that they have received economic value, (generally
through credits taken against existing accounts payable due to the involved
vendors or refund checks received from these vendors) and when the following
criteria are met: (a) persuasive evidence of an arrangement exists; (b) services
have been rendered; (c) the fee billed to the client is fixed or determinable
and (d) collectibility is reasonably assured.
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 two operating segments which comprise continuing operations, as
well as the operations that the Company plans to divest, employ separate
technology.
Continuing Operations
Accounts Payable Services 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
6
9
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/wholesale 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.
French Taxation Services 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.
Discontinued Operations
Meridian VAT Reclaim Technology
Meridian utilizes a proprietary software application that assists business
clients in the reclaiming of value-added taxes ("VAT"). The functionality of the
software includes paper flow monitoring, financial and managerial reporting and
Electronic Data Interchange. The paper flow monitoring reflects all stages of
the reclaim business process from logging in claims received to printing out
checks due to clients. The reporting system produces reports that measure the
financial and managerial information for each stage of the business process.
Logistics Management Services Audit Technology
The Company's logistics 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. In 2000, the Company implemented a
web-based platform to provide front-end reporting to clients over the internet.
Communications Services Audit Technology
Although various proprietary processes and databases are used to conduct
telecommunications audits, this segment currently relies heavily upon the
industry and vendor knowledge possessed by its audit personnel in its expense
recovery and reduction service offerings. Delivery of expense management
services, particularly call accounting, is more technologically-driven.
Communications Services utilizes a proprietary web-based software which
provides the client with information from the services delivered. The
proprietary software is used to facilitate charge back reporting, processing of
client invoices and for reporting status on claims and recoveries. Additional
proprietary software is used to facilitate data acquisition and production
processing allowing for expedient and effective management of the data which
results in cost efficiencies.
AUDITOR HIRING AND TRAINING
Many of the Company's auditors and specialists 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
7
10
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 periodically 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 having numerous payment transactions with many vendors.
Retailers/wholesalers 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, 2000.
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.
SALES AND MARKETING
Each of the Company's two operating segments which comprise continuing
operations, as well as each major component of the discontinued operations
maintains a relatively autonomous sales and marketing function. 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 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, including but not limited to
AuditPro(R)(C), eassurance(TM), EAudit(TM), FreightPro(TM), ImagePro(TM),
RecoverNow(R), ReportPro(TM) and Sentinel(TM).
8
11
COMPETITION
The recovery audit business is highly competitive and barriers to entry are
relatively low. 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 many local and regional firms and one firm, Howard Schultz &
Associates, Inc., with operations in the U.S. and abroad. The Company's
competitors with respect to its French Taxation Services segment include major
international accounting firms, tax attorneys and several smaller tax recovery
audit firms.
In recent years, the Company has seen increasing competition from the
consulting arms of the five largest international accounting firms (the "Big
5"). Historically, the Big 5 have been precluded from providing significant
levels of recovery audit services due to the potential for conflicts of interest
with audit clients. Additionally, the Big 5 have relied primarily on fee-based
arrangements versus the predominant contingency model associated with recovery
audit services. Since January 2000, three of the Big 5 have spun off, sold or
otherwise granted separate independence to their management consulting units and
one other has announced its intention to eventually effect a similar separation.
With the potential for conflicts of interest substantially reduced, the Company
believes that newly independent Big 5 consulting units may become formidable
competitors in the future.
EMPLOYEES
At December 31, 2000, the Company had approximately 2,500 employees
dedicated to continuing operations, and 800 dedicated to discontinued
operations, of whom 1,400 and 600, respectively, 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.
Since the Company conducted its operations in a highly decentralized manner
during 2000, each of the respective discontinued operations is essentially a
discrete operation typically employing its own sales, marketing, finance and
human resources personnel.
9
12
RISK FACTORS
OUR ANNOUNCED PLANNED DIVESTITURES MAY NOT ACHIEVE ANTICIPATED BENEFITS
We have previously announced the planned divestiture of our Meridian VAT
Reclaim business, our Communications Services segment, our Logistics Management
Services segment and our Ship & Debit division within the Accounts Payable
Services segment. Although we are currently proceeding to complete these
divestitures, there is no guaranty that they can be completed on a timely basis,
if at all, or that the businesses to be divested can be disposed of at the
prices we anticipate. If we are unable to divest these businesses, if the timing
of the divestitures exceeds that anticipated, or if the prices received in the
divestitures are lower than expected, we may not achieve the anticipated
benefits. For example, we may incur additional losses upon consummation of the
divestitures, we may not realize the cost savings anticipated as a result of the
divestitures and management's time and attention may be diverted to a greater
degree than expected. Any of these events or others could have a material
adverse impact on the Company's business, results of operations and liquidity.
In addition, the announced intention to dispose of these businesses may result
in a diminished value of the assets to be divested through, for example, the
loss of customers or key personnel employed by such businesses and therefore
diminish expected operating results in these businesses.
ANNUAL COST SAVINGS OF BETWEEN $5 MILLION AND $8 MILLION AS A RESULT OF PLANNED
REDUCTIONS IN CORPORATE OVERHEAD MAY NOT BE ACHIEVED
We have announced our intention to reduce overhead expenses in our Atlanta
headquarters office. As a result of this planned reduction, we expect to realize
annualized cost savings in continuing operations in 2001 of approximately $5
million to $8 million. Failure to achieve these cost savings as expected could
have a material adverse impact on our expected results of operations and
liquidity. Although the cost savings are expected to come from a combination of
reductions in personnel and other overhead expenses resulting from a
streamlining of corporate support responsibilities, changes in accounts payable
growth patterns and varying economic conditions could result in unexpected
personnel needs or payroll requirements, therefore diminishing expected
annualized cost savings.
AN ADVERSE JUDGMENT IN THE SECURITIES ACTION LITIGATION IN WHICH THE COMPANY AND
JOHN M. COOK ARE DEFENDANTS COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR RESULTS
OF OPERATIONS AND LIQUIDITY
We and John M. Cook are defendants in three putative class action lawsuits
filed on June 6, 2000 in the United States District Court for the Northern
District of Georgia, Atlanta Division, which have since been consolidated into
one proceeding (the "Securities Class Action Litigation"). A judgment against us
in this case could have a material adverse effect on our results of operations
and liquidity, while a judgment against Mr. Cook could adversely affect his
financial condition and therefore have a negative impact upon his performance as
our chief executive officer. Plaintiffs in the Securities Class Action
Litigation have alleged in general terms that the defendants violated Sections
10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5
promulgated thereunder by allegedly disseminating materially false and
misleading information about a change in our method of recognizing revenue and
in connection with revenue reported for a division. The plaintiffs further
allege that these misstatements and omissions led to an artificially inflated
price for our common stock during the putative class period which runs from July
19, 1999 to July 26, 2000. This case seeks an unspecified amount of compensatory
damages, payment of litigation fees and expenses, and equitable and/or
injunctive relief. Although we believe the alleged claims in this lawsuit are
without merit and intend to defend the lawsuit vigorously, due to the inherent
uncertainties of the litigation process and the judicial system, we are unable
to predict the outcome of this litigation.
IF WE CANNOT INTEGRATE ACQUIRED COMPANIES WITH OUR BUSINESS, OUR PROFITABILITY
MAY BE ADVERSELY AFFECTED
We may be unable to successfully integrate 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 that is significant in size as compared to us, or that operates in a
market in which
10
13
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.
WE MAY NOT BE ABLE TO CONTINUE TO IDENTIFY A LARGER VOLUME OF RECOVERIES EACH
YEAR FOR THE CLIENTS SERVED BY OUR RETAIL/WHOLESALE OPERATIONS
For most clients served by our retail/wholesale operations, we typically
identify a larger volume of recoveries each year when compared to recoveries
realized in the immediately preceding year. 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 recoveries 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.
STRIKES OR OTHER EMPLOYMENT DISRUPTIONS BY OR ON THE PART OF EMPLOYEES OF
FOREIGN GOVERNMENTS WITH WHOM THE COMPANY'S FRENCH TAXATION SERVICES DIVISION
TRANSACTS BUSINESS COULD HAVE A MATERIAL ADVERSE EFFECT ON THE REVENUES
GENERATED BY THE COMPANY'S FRENCH TAXATION SERVICES DIVISION
Any strike or other disruption of employment by or on the part of the
employees of the French government with whom the Company's French Taxation
Services division transacts business could significantly delay the recognition
of revenue by the French Taxation Services 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.
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
Approximately 34.7% of the Company's revenues from continuing operations
was generated from international operations in 2000. 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;
11
14
- fluctuations in currency exchange rates, particularly weaknesses in the
Euro, the pound and other currencies of countries in which we transact
business, which could result in currency translations that materially
reduce our revenues and earnings per share;
- 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 could 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., Canada, and Mexico, 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 international operations because of language and cultural
differences, 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.
12
15
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 FAILURE TO RETAIN THE SERVICES OF MR. COOK COULD ADVERSELY IMPACT OUR
CONTINUED SUCCESS
Our continued success depends largely on the efforts and skills of our
executive officers and key employees, particularly John M. Cook. The loss of the
services of Mr. Cook could materially adversely affect our business, financial
condition and results of operations. We have entered into employment agreements
with Mr. Cook 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.
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 many 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. Also, we believe that newly independent Big 5
consulting units may become formidable competitors in the future. 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, BYLAWS, SHAREHOLDERS' RIGHTS PLAN 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.
Our Articles of Incorporation also 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
13
16
shareholders. In addition, we have in place a "poison pill" shareholders' rights
plan that will trigger a dilutive issuance of common stock upon substantial
purchases of our common stock by a third party which are not approved by the
Board of Directors. These provisions also could discourage bids for our shares
of common stock at a premium and have a material adverse effect on the market
price of our shares.
THE PRICE OF OUR STOCK HAS BEEN VOLATILE AND COULD CONTINUE TO FLUCTUATE
SUBSTANTIALLY
Our common stock is traded on the Nasdaq Stock 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.
OUR FURTHER EXPANSION INTO ELECTRONIC COMMERCE AUDITING STRATEGIES AND PROCESSES
MAY NOT BE PROFITABLE
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. 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 which look forward in time and involve substantial risks and
uncertainties. All statements that cannot be assessed until the occurrence of a
future event or events should be considered forward-looking. These statements
are forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995 and can be identified by the use of
forward-looking words such as "may," "will," "expect," "anticipate," "believe,"
"estimate" and "continue" or similar words. Such statements include, without
limitation, the following:
- statements regarding the anticipated benefits of the planned
divestitures;
- 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 identify each year a larger volume of recoveries
for most of its retail/ wholesale clients;
- the ability of smaller recovery audit firms to compete in the future
without making substantial capital investments;
- statements that contain projections of the Company's future results of
operations or of the Company's financial condition; and
14
17
- statements as to the adequacy of the Company's current working capital.
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 under the
heading "Risk Factors" in this Item 1., 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 five years in duration. See Note 5 of Notes to
Consolidated Financial Statements included in Item 8. of this Form 10-K.
ITEM 3. LEGAL PROCEEDINGS
Beginning on June 6, 2000, three putative class action lawsuits were filed
against the Company and certain of its present and former officers in the United
States District Court for the Northern District of Georgia, Atlanta Division.
These cases were subsequently consolidated into one proceeding styled: In re
Profit Recovery Group International, Inc. Sec. Litig., Civil Action File No.
1:00-CV-1416-CC (the "Securities Class Action Litigation"). On November 13,
2000, the Plaintiffs in these cases filed a Consolidated and Amended Complaint
(the "Complaint"). In that Complaint, Plaintiffs allege in general terms that
the Company, John M. Cook, Scott L. Colabuono, and Michael A. Lustig (the
"Defendants") violated Sections 10(b) and 20(a) of the Securities Exchange Act
of 1934 and Rule 10b-5 promulgated thereunder by allegedly disseminating
materially false and misleading information about a change in the Company's
method of recognizing revenue and in connection with revenue reported for a
division. Plaintiffs purport to bring this action on behalf of a putative class
of persons who purchased the Company's stock between July 19, 1999 and July 26,
2000. Plaintiffs seek an unspecified amount of compensatory damages, payment of
litigation fees and expenses, and equitable and/or injunctive relief. On January
24, 2001, Defendants filed a Motion to Dismiss the Complaint for failure to
state a claim under the Private Securities Litigation Reform Act, 15 U.S.C.
sec. 78u-4 et seq. Plaintiffs filed their response to the Motion to Dismiss
March 12, 2001 and Defendant's reply in support of that Motion is due on April
11, 2001. The Company believes the alleged claims in this lawsuit are without
merit. The Company intends to defend this lawsuit vigorously. Due to the
inherent uncertainties of the litigation process and the judicial system, the
Company is unable to predict the outcome of this litigation. If the outcome of
this litigation is adverse to the Company, it could have a material adverse
effect on the Company's business, financial condition, and results of
operations.
In the normal course of business, the Company is involved in and subject to
other claims, contractual disputes and other uncertainties. Management, after
reviewing with legal counsel all of these actions and proceedings, believes that
the aggregate losses, if any, will not have a material adverse effect on the
Company's financial position 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.
15
18
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 and 1998 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 28, 2001, there were approximately 6,000 beneficial holders of
the Company's common stock and 333 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 2000 and 1999 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:
2000 CALENDAR QUARTER HIGH LOW
- --------------------- ------ ------
1st Quarter................................................. $33.50 $18.38
2nd Quarter................................................. 20.50 13.06
3rd Quarter................................................. 17.56 7.94
4th Quarter................................................. 9.38 3.75
1999 CALENDAR QUARTER
- ------------------------------------------------------------
1st Quarter................................................. $26.67 $18.75
2nd Quarter................................................. 32.25 22.42
3rd Quarter................................................. 45.50 24.83
4th Quarter................................................. 47.50 23.00
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, 2000. Such historical
consolidated financial data as of and for the five years ended December 31, 2000
have been derived from the Company's Consolidated Financial Statements and Notes
thereto, which Consolidated Financial Statements as of December 31, 2000 and
1999 and for each of the years in the three-year period ended December 31, 2000
have been audited by KPMG LLP, independent auditors. The Consolidated Balance
Sheets as of December 31, 2000 and 1999, 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, 2000 and the independent auditors' report
thereon, which in each such year is based partially upon the report of other
auditors and refers to changes in accounting for revenue recognition in 2000 and
1999, are included in Item 8. of this Form 10-K. In March 2001, the Company
formalized a strategic realignment initiative designed to enhance the Company's
financial position and clarify its investment and operating strategy by focusing
primarily on its core Accounts Payable business. Under this strategic
realignment initiative, the Company will divest of the following non-core
businesses: Meridian within the former Taxation Services segment, the Logistics
Management Services segment, the Communications Services segment and the Ship &
Debit division within the Accounts Payable Services segment. Selected
Consolidated Financial data for the Company have been restated to reflect
Meridian, Logistics Management Services, Communications Services, and Ship &
Debit as discontinued operations for all periods presented. Selected
Consolidated Financial data for the Company was retroactively restated, as
required under accounting principles generally accepted in the United States of
America, to include the accounts of Meridian and PRS International, Ltd. which
were 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 accounting
16
19
principles generally accepted in the United States of America, consolidated
financial statements for periods prior to 1999 have not been restated. Due to
accounting changes and acquisitions accounted for as poolings-of-interests,
certain financial statement amounts related to continuing operations for 1999
will not be directly comparable to corresponding amounts for 1998 and prior
years, and certain financial statement amounts related to discontinued
operations for 2000 will not be directly comparable to corresponding amounts for
1999 and prior years. The data presented below should be read in conjunction
with the Consolidated Financial Statements and Notes thereto included in Item 8.
of this Form 10-K 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,
----------------------------------------------------------
2000(12) 1999(2)(10) 1998(1)(3) 1997(1)(4) 1996(1)
-------- ----------- ---------- ---------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENTS OF OPERATIONS DATA:
Revenues.............................. $297,089 $280,367 $206,859 $125,171 $85,439
Cost of revenues...................... 156,408 145,949 108,004 65,502 45,227
Selling, general and administrative
expenses(5)......................... 119,779 90,952 69,917 42,841 28,925
-------- -------- -------- -------- -------
Operating income................. 20,902 43,466 28,938 16,828 11,287
Interest (expense), net............... (8,253) (4,190) (2,053) (383) (90)
-------- -------- -------- -------- -------
Earnings from continuing
operations before income taxes,
discontinued operations and
cumulative effect of accounting
change......................... 12,649 39,276 26,885 16,445 11,197
Income taxes(6)....................... 5,313 15,632 9,948 6,153 7,799
-------- -------- -------- -------- -------
Earnings from continuing
operations before discontinued
operations and cumulative
effect of accounting change.... 7,336 23,644 16,937 10,292 3,398
Discontinued operations:
Earnings (loss) from discontinued
operations, net of income
taxes(10)...................... (46,464) 3,792 (2,303) (928) 445
Gain (loss) on disposal from
discontinued operations
including operating results for
phase out period, net of income
taxes.......................... -- -- -- -- --
-------- -------- -------- -------- -------
Earnings (loss) from discontinued
operations..................... (46,464) 3,792 (2,303) (928) 445
-------- -------- -------- -------- -------
Earnings (loss) before cumulative
effect of accounting change.... (39,128) 27,436 14,634 9,364 3,843
Cumulative effect of accounting
change.............................. -- (29,195) -- -- --
-------- -------- -------- -------- -------
Net earnings (loss).............. $(39,128) $ (1,759) $ 14,634 $ 9,364 $ 3,843
======== ======== ======== ======== =======
Cash dividends per share(11).......... $ -- $ 0.01 $ 0.01 $ 0.01 $ 0.16
======== ======== ======== ======== =======
Basic earnings (loss) per share:
Earnings from continuing operations
before discontinued operations and
cumulative effect of accounting
change.............................. $ 0.15 $ 0.50 $ 0.43 $ 0.31 $ 0.11
Discontinued operations............... (0.95) 0.07 (0.06) (0.03) 0.02
Cumulative effect of accounting
change.............................. -- (0.61) -- -- --
-------- -------- -------- -------- -------
Net earnings (loss)................... $ (0.80) $ (0.04) $ 0.37 $ 0.28 $ 0.13
======== ======== ======== ======== =======
Diluted earnings (loss) per share:
Earnings from continuing operations
before discontinued operations and
cumulative effect of accounting
change.............................. $ 0.15 $ 0.48 $ 0.42 $ 0.30 $ 0.11
Discontinued operations............... (0.94) 0.07 (0.06) (0.03) 0.01
Cumulative effect of accounting
change.............................. -- (0.59) -- -- --
-------- -------- -------- -------- -------
Net earnings (loss)................... $ (0.79) $ (0.04) $ 0.36 $ 0.27 $ 0.12
======== ======== ======== ======== =======
17
20
DECEMBER 31,
---------------------------------------------------------------
2000(12) 1999(2)(7) 1998(1)(3)(8) 1997(1)(4) 1996(1)(9)
-------- ---------- ------------- ---------- ----------
(IN THOUSANDS)
BALANCE SHEET DATA:
Cash and cash equivalents.......... $ 23,870 $ 22,315 $ 28,000 $ 19,926 $17,056
Working capital.................... 127,958 112,166 45,343 17,946 36,388
Total assets....................... 464,831 484,719 366,545 117,629 51,936
Long-term debt, excluding current
installments and loans from
shareholders..................... 154,563 95,294 112,886 24,372 716
Loans from shareholders............ -- -- -- -- 52
Total shareholders' equity......... 239,156 292,500 144,105 45,515 23,570
- ---------------
(1) Selected consolidated financial data for the Company as of and for the
three years December 31, 1998, as previously reported, have been
retroactively restated, as required under accounting principles generally
accepted in the United States of America, 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. See Notes 2 and 10 of Notes to Consolidated
Financial Statements included in Item 8. of this Form 10-K.
(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 Notes 2 and 10 of Notes to Consolidated
Financial Statements included in Item 8. of this Form 10-K.
(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 & Associates, Inc.
and related businesses (October), IP Strategies SA (November) and
Industrial Traffic Consultants, Inc. (December). See Notes 2 and 10 of
Notes to Consolidated Financial Statements included in Item 8. of this Form
10-K.
(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
Notes 2 and 10 of Notes to Consolidated Financial Statements included in
Item 8. of this Form 10-K.
(5) Includes merger-related charges relating to a business acquired under the
pooling-of-interests accounting method and certain restructuring charges.
See Note 16 of Notes to Consolidated Financial Statements included in Item
8. of this Form 10-K.
(6) 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 a charge to operations of $3.7
million in 1996 for cumulative deferred income taxes. The Company's 1996
provision for income taxes of $7.8 million consists of the above-mentioned
$3.7 million charge for cumulative deferred income taxes combined with $4.1
million in tax provisions for the three quarters subsequent to the March
26, 1996 initial public offering.
(7) 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 8 of Notes to Consolidated Financial Statements included in Item 8. of
this Form 10-K.
(8) 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
8 of Notes to Consolidated Financial Statements included in Item 8. of this
Form 10-K.
(9) 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.
(10) In 2000 and 1999, the Company changed its method of accounting for revenue
recognition. See Notes 2(b) and 1(d) of Notes to Consolidated Financial
Statements included in Item 8. of this Form 10-K.
(11) 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.
(12) During 2000, the Company completed two acquisitions accounted for as
purchases consisting of The Right Answer, Inc. (March) and TSL Services,
Inc. (June). See Note 2 of Notes to Consolidated Financial Statements
included in Item 8. of this Form 10-K.
18
21
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
The Profit Recovery Group International, Inc. and subsidiaries (the
"Company") is a leading provider of recovery audit, expense containment and
knowledge application services to large and mid-size businesses having numerous
payment transactions with many vendors.
In businesses with large purchase volumes and continuously fluctuating
prices, some small percentage of erroneous overpayments to vendors is
inevitable. Although these businesses process the vast majority of payment
transactions correctly, a small number of errors do occur. In the aggregate,
these transaction errors can represent meaningful "lost profits" that can be
particularly significant for businesses with relatively narrow profit margins.
The Company's trained, experienced industry specialists use sophisticated
proprietary technology and advanced recovery techniques and methodologies to
identify overpayments to vendors and tax authorities. In addition, these
specialists review clients' current practices and processes related to
procurement and other expenses in order to identify solutions to manage and
reduce expense levels, as well as apply knowledge and expertise of industry best
practices to assist clients in improving their business efficiencies.
In proceeding with the Company's strategic realignment initiative, the
Company anticipates recognizing certain non-recurring charges related to the
termination of certain of personnel during the first quarter of 2001.
RESULTS OF OPERATIONS
The following table sets forth the percentage of revenues represented by
certain items in the Company's Consolidated Statements of Operations for the
periods indicated:
YEARS ENDED DECEMBER 31,
--------------------------
2000 1999 1998
------ ------ ------
STATEMENTS OF OPERATIONS DATA:
Revenues.................................................. 100.0% 100.0% 100.0%
Cost of revenues.......................................... 52.7 52.1 52.2
Selling, general and administrative expenses.............. 40.3 32.4 33.8
----- ----- -----
Operating income.................................. 7.0 15.5 14.0
Interest (expense), net................................... (2.7) (1.5) (1.0)
----- ----- -----
Earnings from continuing operations before income
taxes, discontinued operations and cumulative
effect of accounting change..................... 4.3 14.0 13.0
Income taxes.............................................. 1.8 5.6 4.8
----- ----- -----
Earnings from continuing operations before
discontinued operations and cumulative effect of
accounting change............................... 2.5 8.4 8.2
Discontinued operations:
Earnings (loss) from discontinued operations, net
of income taxes................................. (15.7) 1.4 (1.1)
Gain (loss) on disposal from discontinued
operations including operating results for phase
out period, net of income taxes................. -- -- --
----- ----- -----
Earnings (loss) from discontinued operations.............. (15.7) 1.4 (1.1)
----- ----- -----
Earnings (loss) before cumulative effect of
accounting change............................... (13.2) 9.8 7.1
Cumulative effect of accounting change.................... -- (10.4) --
----- ----- -----
Net earnings (loss)............................... (13.2)% (0.6)% 7.1%
===== ===== =====
19
22
2000 COMPARED TO 1999
Revenues. The Company's revenues consist principally of contractual
percentages of overpayments recovered for clients. The Company's services from
continuing operations are currently grouped into two distinct operating
segments: Accounts Payable Services and French Taxation Services (see Note 13 of
Notes to Consolidated Financial Statements included in Item 8. of this Form
10-K).
Revenues from continuing operations increased 6.0% to $297.1 million in
2000, up from $280.4 million in 1999. This year-over-year increase of $16.7
million was comprised of an increase of $8.7 million from the Accounts Payable
Services segment and $8.0 million from the Company's French Taxation Services
segment.
International revenues from continuing operations grew 28.0% to $103.0
million in 2000, up from $80.5 million in 1999. Revenues from the international
portion of the Company's Accounts Payable Services segment increased 31.2% to
$61.0 million in 2000, up from $46.5 million in 1999. This growth in the
Accounts Payable Services segment was driven by new clients and by an expansion
of services to existing clients, with the majority of the growth generated in
Europe and Latin America. Year-over-year revenue growth in the Company's French
Taxation Services segment of 23.5% resulted primarily from the acquisition of AP
SA and its subsidiaries (collectively, "Groupe AP") in October 1999.
Domestic revenues from continuing operations, which are generated entirely
by the Company's Accounts Payable Services segment, decreased 2.9% to $194.1
million in 2000, down from $199.9 million in 1999. This decrease was driven by
various factors in 2000, including delays or shifts in certain audit starts due
to client-specific factors, certain clients that filed bankruptcy, longer than
anticipated client recovery of overpayments for certain categories of
recoveries, and shortfalls in execution of sales strategies to drive revenue
generation.
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 as a percentage of revenues from continuing operations
increased slightly to 52.7% of revenues in 2000, up from 52.1% of revenues in
1999.
Internationally, cost of revenues as a percentage of international revenues
from continuing operations improved to 46.7% in 2000, down from 49.3% in 1999.
This year-over-year reduction in the cost of revenues as a percentage of
revenues was primarily driven by improvements in the cost structure of the
Company's international component of the Accounts Payable Services segment, most
notably in the European and Asia operations. Cost of revenues as a percentage of
segment revenues in the Company's French Taxation Services segment for 2000
remained comparable with previous year performance.
Domestically, cost of revenues as a percentage of domestic revenues from
continuing operations increased to 55.8% in 2000, up from 53.1% in 1999. This
increase was principally driven by an increase in cost of revenues both as a
percentage of revenues and on an absolute basis in the domestic commercial
Accounts Payable Services operations, while revenues during this same period
were lower. Costs of revenues as a percentage of revenue in the domestic
retail/wholesale Accounts Payable Services operations on an absolute basis was
comparable for 2000 as compared to 1999.
Selling, General, and Administrative Expenses. Selling, general and
administrative expenses include the expenses of sales and marketing activities,
information technology services and the corporate data center, human resources,
legal and accounting, administration, headquarters-related depreciation of
property and equipment and amortization of intangibles.
Selling, general and administrative expenses, as a percentage of revenues
from continuing operations increased to 40.3% in 2000, up from 32.4% in 1999. A
significant portion of this year-over-year increase was due to non-recurring
charges incurred by the Company during the fourth quarter of 2000 of
approximately $9.8 million consisting of: goodwill impairment charges, employee
terminations, elimination of duplicate facilities, accounts receivable
write-offs, and the write-down of certain property and equipment. In addition, a
20
23
portion of the year-over-year increase in selling, general and administrative
expenses is due to expenditures resulting from the Company's investment in
infrastructure to support anticipated future growth, research and development
costs related to the Company's e-commerce business initiatives, and costs
incurred in connection with the Company's branding initiatives.
Internationally, excluding corporate overhead, selling, general and
administrative expenses as a percentage of revenues from continuing operations
increased to 32.1% in 2000, up from 28.5% in 1999. This increase was attributed
primarily to the above-mentioned goodwill impairment charges related to the
acquisition of IP Strategies, part of the French Taxation Services segment.
Overall, French Taxation Services experienced an increase in selling, general,
and administrative expenses as a percentage of segment revenues to 46.1% in 2000
versus 35.9% in 1999. Selling, general and administrative expenses as a
percentage of segment revenues for international Accounts Payable Services
decreased slightly to 22.5% in 2000, down from 23.2% in 1999.
Domestically, excluding corporate overhead, selling, general and
administrative expenses as a percentage of revenues from continuing operations
increased to 23.9% in 2000, up from 20.4% in 1999. This increase is attributable
to an increase in overhead support dedicated to the Accounts Payable Services
business segment.
Corporate selling, general, and administrative expenses as a percentage of
revenues from continuing operations increased to 13.6% in 2000 up, from 9.7% in
1999. This increase is attributed to certain non-recurring charges outlined
above.
In August 1999, the Company acquired PRS International, Ltd. ("PRS") in a
transaction accounted for as a pooling-of-interest. Costs incurred to combine
the operations of PRS with the existing Accounts Payable Services business
resulted in a non-recurring, restructuring charge of $1.1 million to provide for
certain employee severance payments and the costs of closing duplicate office
facilities.
In connection with acquired businesses, the Company has recorded intangible
assets including goodwill and deferred non-compete costs. Amortization of these
intangible assets totaled $14.7 million in 2000 and $9.5 million in 1999.
Operating Income. Operating income as a percentage of revenues from
continuing operations decreased to 7.0% in 2000, down from 15.5% in 1999.
Internationally, operating income as a percentage of revenues from continuing
operations, excluding corporate overhead, decreased to 21.2% in 2000, from 22.1%
in 1999. This decline was driven by a decrease in operating income in French
Taxation Services to 13.5% in 2000, down from 23.4% in 1999, for reasons
outlined above. Operating income for international Accounts Payable Services
improved to 26.5% in 2000, up from 21.2% in 1999, primarily due to strong
revenue growth and a reduction in cost of revenues. Domestically, operating
income as a percentage of revenues from continuing operations, excluding
corporate overhead, decreased to 20.3% in 2000, down from 26.5% in 1999 for
reasons outlined above.
Interest (Expense), Net. Interest (expense), net for 2000 was $8.3
million, up from $4.2 million in 1999. 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
Notes 2 and 10 of Notes to Consolidated Financial Statements included in Item 8.
of this Form 10-K). Without these acquisitions, the Company's need for bank
borrowings would have been minimal.
Earnings From Continuing Operations Before Income Taxes, Discontinued
Operations and Cumulative Effect of Accounting Change. Earnings from continuing
operations before income taxes, discontinued operations and cumulative effect of
accounting change decreased 67.8% to $12.6 million in 2000, down from $39.3
million in 1999. As a percentage of total revenues, earnings from continuing
operations before income taxes, discontinued operations and cumulative effect of
accounting change were 4.3% in 2000 and 14.0% in 1999.
Income Taxes. The provisions for income taxes for 2000 and 1999 consist of
federal, state and foreign income taxes at the Company's effective tax rate
which approximated 42% in 2000 and 40% in 1999.
21
24
Earnings (Loss) From Discontinued Operations. In March 2001, the Company
formalized a strategic realignment initiative designed to enhance the Company's
financial position and clarify its investment and operating strategy by focusing
primarily on its core Accounts Payable Services business. Under this strategic
realignment initiative, the Company will divest of the following non-core
businesses: Meridian within the former Taxation Services segment, the Logistics
Management Services segment, the Communications Services segment and the Ship &
Debit division within the Accounts Payable Services segment.
Earnings (loss) from discontinued operations decreased by $50.3 million
from earnings of $3.8 million in 1999 to a loss of $46.5 million in 2000.
Approximately $34.7 million of this year-over-year decline was due to the
Company's decision to retroactively change its method of accounting for revenue
recognition for the Meridian and Ship & Debit divisions, in consideration of
guidance issued by the Securities and Exchange Commission under Staff Accounting
Bulletin No. 101 "Revenue Recognition in Financial Statements" ("SAB 101") (see
Note 2 of Notes to Consolidated Financial Statements included in Item 8. of this
Form 10-K). Additionally, the Company recognized an after tax non-recurring
goodwill impairment charge of approximately $15.6 million to adjust the net book
value of the goodwill contained within the Communications Services segment.
If the Company does not divest itself of the non-core businesses within
approximately one year, their results may be reconsolidated with the results
from continuing operations.
Weighted-Average Shares Outstanding -- Basic. The Company's
weighted-average shares outstanding for purposes of calculating basic earnings
per share increased to 48.9 million for 2000, up from 47.5 million for 1999.
This increase was comprised primarily of (i) restricted, unregistered shares
issued by the Company in connection with acquisitions of various companies in
2000 and 1999 (ii) unregistered shares issued by the Company in liquidation of
Meridian's shareholder loans in 1999 and reduced by (iii) outstanding shares
repurchased in the open market under the Company's publicly announced share
repurchase program in 2000 (see Notes 2, 8 and 10 of Notes to Consolidated
Financial Statements included in Item 8. of this Form 10-K).
1999 COMPARED WITH 1998
As indicated in Note 1(a) and elsewhere in the Notes to Consolidated
Financial Statements included in Item 8. of this Form 10-K, 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
accounting principles generally accepted in the United States of America, 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 Notes 1(a) and 2 and elsewhere in the Notes to
Consolidated Financial Statements included in Item 8. of this Form 10-K, during
August 1999 the Company acquired Meridian and PRS. 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 accounting principles generally
accepted in the United States of America, to include the operations of Meridian
and PRS.
Revenues. Revenues from continuing operations increased 35.5% to $280.4
million in 1999, up from $206.9 million in 1998. This year-over-year increase of
$73.5 million was driven by similar revenue growth on a percentage basis for
both domestic and international operations.
International revenues from continuing operations grew 34.9% to $80.5
million in 1999, up from $59.7 million in 1998. Revenue increases of 38.0% in
the international component of the Accounts Payable Services segment to $46.5
million in 1999, up from $33.7 in 1998, were driven primarily by internal growth
resulting from both new clients and additional revenues from existing clients.
Revenue growth in the French Taxation Services segment of 30.9% in 1999 compared
to 1998 resulted both from internal growth as well as from the acquisitions of
Novexel S.A. (1998), IP Strategies SA (1998), and AP SA (1999).
22
25
Domestic revenues from continuing operations, which are generated entirely
from the Accounts Payable Services segment, increased 35.8% to $199.9 million in
1999, up from $147.2 million in 1998. Domestic revenue growth in 1999 was driven
by a combination of revenues from Accounts Payable companies acquired during
1998 under the purchase method of accounting (Loder, Drew & Associates, and
Robert Beck and Associates, Inc. -- see Note 10 of Notes to Consolidated
Financial Statements included in Item 8. of this Form 10-K), and internal growth
resulting from both new clients and additional revenues from existing clients.
Cost of Revenues. Cost of revenues as a percentage of revenues from
continuing operations decreased slightly to 52.1% of revenues in 1999, down from
52.2% of revenues in 1998.
Internationally, cost of revenues as a percentage of revenues from
continuing operations increased to 49.3% in 1999, up from 46.3% in 1998. This
higher cost of revenues as a percentage of revenues was primarily due to
increases in the Company's international Accounts Payable Services business due
to the increased auditor management costs associated with geographic business
expansion. Cost of revenues as a percentage of revenues in French Taxation
Services improved to 40.7% in 1999 from 41.4% in 1998.
Domestically, cost of revenues as a percentage of revenues from continuing
operations decreased to 53.1% in 1999, down from 54.6% in 1998. This decrease on
a percentage basis was driven primarily by an improvement in cost of revenues as
a percentage of revenues in the Company's domestic retail/wholesale Accounts
Payable portion of its Accounts Payable Services segment. Cost of revenues as a
percentage of revenues in the domestic commercial Accounts Payable Services
business was slightly higher in 1999 when compared to 1998.
Selling, General, and Administrative Expenses. Selling, general and
administrative expenses as a percentage of revenues from continuing operations
decreased to 32.4% in 1999, down from 33.8% in 1998.
Internationally, excluding corporate overhead, selling, general and
administrative expenses as a percentage of revenues from continuing operations
decreased to 28.5% in 1999, down from 35.0% in 1998. This improvement was driven
by a decrease in selling, general and administrative expenses in international
Accounts Payable Services to 23.2% in 1999, down from 35.3% in 1998, related
principally to fixed cost elements being spread over a growing revenue base.
Selling, general and administrative expenses as a percentage of revenues for
French Taxation Services increased slightly to 35.9% in 1999, up from 34.7% in
1998.
Domestically, excluding corporate overhead, selling, general and
administrative expenses as a percentage of revenues from continuing operations
increased to 20.4% in 1999, up from 19.7% in 1998. This rise in costs was driven
by an increase in domestic retail Accounts Payable Services selling, general,
and administrative expenses in 1999 from 1998, offset to some extent by a
decrease in domestic commercial Accounts Payable Services selling, general, and
administrative expenses.
Corporate selling, general, and administrative expenses as a percentage of
revenues from continuing operations was 9.7% in 1999 and 1998.
In August 1999, the Company acquired PRS in a transaction accounted for as
a pooling-of-interest. Costs incurred to combine the operations of PRS with its
existing Accounts Payable Services business resulted in a non-recurring,
restructuring charge of $1.1 million to provide for certain employee severance
payments and the costs of closing duplicate office facilities.
In connection with acquired businesses, the Company has recorded intangible
assets including goodwill and deferred non-compete costs. Amortization of these
intangible assets totaled $9.5 million in 1999 and $5.9 million in 1998.
Operating Income. Operating income as a percentage of revenues from
continuing operations increased to 15.5% in 1999, up from 14.0% in 1998.
Internationally, operating income as a percentage of revenues from continuing
operations, excluding corporate overhead, improved to 22.1% in 1999, up from
18.7% in 1998, as a result of improvements in operating income in international
Accounts Payable for reasons outlined above. Operating income for French
Taxation Services decreased slightly to 23.4% in 1999, down from 23.9% in 1998.
Domestically, operating income as a percentage of revenues from continuing
operations, excluding corporate
23
26
overhead, improved slightly to 26.5% in 1999, up from 25.7% in 1998, driven by
an improvement in operating income for domestic commercial Accounts Payable for
reasons outlined above.
Interest (Expense), Net. Interest (expense), net for 1999 was $4.2
million, up from $2.1 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
Notes 2 and 10 of Notes to Consolidated Financial Statements included in Item 8.
of this Form 10-K). Without these acquisitions, the Company's need for bank
borrowings would have been minimal.
Earnings From Continuing Operations Before Income Taxes, Discontinued
Operations and Cumulative Effect of Accounting Change. Earnings from continuing
operations before income taxes, discontinued operations and cumulative effect of
accounting change increased 46.1% to $39.3 million in 1999, up from $26.9
million in 1998. As a percentage of total revenues, earnings from continuing
operations before income taxes, discontinued operations and cumulative effect of
accounting change were 14.0% in 1999 and 13.0% 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 40% in 1999 and 37% in 1998. Effective tax rates in 1999 are
higher than 1998 as a result of business acquisition transactions.
Earnings (Loss) From Discontinued Operations. Earnings (loss) from
discontinued operations improved by $6.1 million from a loss of $2.3 million in
1998 to earnings of $3.8 million in 1999. A substantial portion of this
year-over-year increase was attributable to acquisitions that the Company
completed in 1999 related to both the Communications Services and the Logistics
Management Services segments. Additionally, the Meridian division improved its
year-over-year performance by approximately 24.9% in 1999 compared to its 1998
operating income levels.
If the Company does not divest itself of the non-core businesses within
approximately one year, their results may be reconsolidated with the results
from continuing operations.
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 in 1999 and 1998 (see Notes 2, 8 and 10 of
Notes to Consolidated Financial Statements included in Item 8. of this Form
10-K).
24
27
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 operating results for any quarter are not necessarily indicative of the
results to be expected for any future period.
2000 QUARTER ENDED 1999 QUARTER ENDED
---------------------------------------- ---------------------------------------
MAR. 31 JUNE 30 SEPT. 30 DEC. 31 MAR. 31 JUNE 30 SEPT. 30 DEC. 31
-------- ------- -------- -------- -------- ------- -------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Revenues............................ $ 63,894 $76,683 $79,087 $ 77,425 $ 56,218 $70,229 $74,472 $79,448
Cost of revenues.................... 35,350 38,572 40,594 41,892 32,100 38,091 35,181 40,577
Selling, general and administrative
expenses.......................... 25,910 24,520 28,161 41,188 21,148 21,663 25,516 22,625
-------- ------- ------- -------- -------- ------- ------- -------
Operating income (loss)..... 2,634 13,591 10,332 (5,655) 2,970 10,475 13,775 16,246
Interest (expense), net............. (1,570) (2,171) (2,287) (2,225) (781) (1,003) (1,102) (1,304)
-------- ------- ------- -------- -------- ------- ------- -------
Earnings (loss) from continuing
operations before income taxes,
discontinued operations and
cumulative effect of accounting
change............................ 1,064 11,420 8,045 (7,880) 2,189 9,472 12,673 14,942
Income tax expense (benefit)........ 447 4,796 3,380 (3,310) 871 3,770 5,044 5,947
-------- ------- ------- -------- -------- ------- ------- -------
Earnings (loss) from continuing
operations before discontinued
operations and cumulative effect
of accounting change.............. 617 6,624 4,665 (4,570) 1,318 5,702 7,629 8,995
Discontinued operations:
Earnings (loss) from discontinued
operations, net of income
taxes........................... (24,413) 24 (236) (21,839) (2,164) 4,554 (4,548) 5,950
Gain (loss) on disposal from
discontinued operations
including operating results for
phase out period, net of income
taxes........................... -- -- -- -- -- -- -- --
-------- ------- ------- -------- -------- ------- ------- -------
Earnings (loss) from discontinued
operations........................ (24,413) 24 (236) (21,839) (2,164) 4,554 (4,548) 5,950
-------- ------- ------- -------- -------- ------- ------- -------
Earnings (loss) before cumulative
effect of accounting change....... (23,796) 6,648 4,429 (26,409) (846) 10,256 3,081 14,945
Cumulative effect of accounting
change............................ -- -- -- -- (29,195) -- -- --
-------- ------- ------- -------- -------- ------- ------- -------
Net earnings (loss)......... $(23,796) $ 6,648 $ 4,429 $(26,409) $(30,041) $10,256 $ 3,081 $14,945
======== ======= ======= ======== ======== ======= ======= =======
Basic earnings (loss) per share:
Earnings (loss) from continuing
operations before discontinued
operations and cumulative effect
of accounting change............ $ 0.01 $ 0.13 $ 0.10 $ (0.10) $ 0.03 $ 0.12 $ 0.16 $ 0.19
Discontinued operations........... (0.49) -- (0.01) (0.46) (0.05) 0.10 (0.09) 0.12
Cumulative effect of accounting
change.......................... -- -- -- -- (0.63) -- -- --
-------- ------- ------- -------- -------- ------- ------- -------
Net earnings (loss)......... $ (0.48) $ 0.13 $ 0.09 $ (0.56) $ (0.65) $ 0.22 $ 0.07 $ 0.31
======== ======= ======= ======== ======== ======= ======= =======
Diluted earnings (loss) per share:
Earnings (loss) from continuing
operations before discontinued
operations and cumulative effect
of accounting change............ $ 0.01 $ 0.13 $ 0.09 $ (0.10) $ 0.03 $ 0.12 $ 0.15 $ 0.18
Discontinued operations........... (0.48) -- -- (0.46) (0.05) 0.09 (0.09) 0.11
Cumulative effect of accounting
change.......................... -- -- -- -- (0.61) -- -- --
-------- ------- ------- -------- -------- ------- ------- -------
Net earnings (loss)......... $ (0.47) $ 0.13 $ 0.09 $ (0.56) $ (0.63) $ 0.21 $ 0.06 $ 0.29
======== ======= ======= ======== ======== ======= ======= =======
25
28
The information for the seven quarters ended September 30, 2000, as
originally reported prior to presentation of discontinued operations were as
follows:
2000 QUARTER ENDED 1999 QUARTER ENDED
----------------------------- ----------------------------------------
MAR. 31 JUNE 30 SEPT. 30 MAR. 31 JUNE 30 SEPT. 30 DEC. 31
------- -------- -------- -------- ------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Revenues................................... $81,829 $105,751 $101,973 $ 64,437 $90,443 $91,259 $103,508
Cost of revenues........................... 45,738 53,267 56,541 38,038 47,441 43,411 51,747
Selling, general and administrative
expenses................................. 31,282 29,264 35,072 22,873 24,660 27,540 27,208
------- -------- -------- -------- ------- ------- --------
Operating income before business
acquisition and restructuring expenses... 4,809 23,220 10,360 3,526 18,342 20,308 24,553
Business acquisition and restructuring
expenses................................. -- -- -- 1,495 1,496 10,380 (30)
------- -------- -------- -------- ------- ------- --------
Operating income................... 4,809 23,220 10,360 2,031 16,846 9,928 24,583
Interest (expense), net.................... (1,550) (2,580) (2,645) (1,414) (1,560) (1,304) (1,251)
------- -------- -------- -------- ------- ------- --------
Earnings before income taxes, minority
interest and cumulative effect of
accounting change........................ 3,259 20,640 7,715 617 15,286 8,624 23,332
Income taxes............................... 1,214 7,688 2,874 1,386 4,718 5,495 8,467
------- -------- -------- -------- ------- ------- --------
Earnings (loss) before minority interest
and cumulative effect of accounting
change................................... 2,045 12,952 4,841 (769) 10,568 3,129 14,865
Minority interest in (earnings) of
consolidated subsidiaries................ -- -- -- (77) (312) (48) 80
------- -------- -------- -------- ------- ------- --------
Earnings (loss) before cumulative effect of
accounting change........................ 2,045 12,952 4,841 (846) 10,256 3,081 14,945
Cumulative effect of accounting change..... -- -- -- (29,195) -- -- --
------- -------- -------- -------- ------- ------- --------
Net earnings (loss)................ $ 2,045 $ 12,952 $ 4,841 $(30,041) $10,256 $ 3,081 $ 14,945
======= ======== ======== ======== ======= ======= ========
Basic earnings (loss) per share:
Earnings (loss) before cumulative effect
of accounting change................... $ 0.04 $ 0.26 $ 0.10 $ (0.02) $ 0.22 $ 0.06 $ 0.31
Cumulative effect of accounting change... -- -- -- (0.63) -- -- --
------- -------- -------- -------- ------- ------- --------
Net earnings (loss)................ $ 0.04 $ 0.26 $ 0.10 $ (0.65) $ 0.22 $ 0.06 $ 0.31
======= ======== ======== ======== ======= ======= ========
Diluted earnings (loss) per share:
Earnings (loss) before cumulative effect
of accounting change................... $ 0.04 $ 0.26 $ 0.10 $ (0.02) $ .021 $ 0.06 $ 0.29
Cumulative effect of accounting change... -- -- -- (0.63) -- -- --
------- -------- -------- -------- ------- ------- --------
Net earnings (loss)................ $ 0.04 $ 0.26 $ 0.10 $ (0.65) $ 0.21 $ 0.06 $ 0.29
======= ======== ======== ======== ======= ======= ========
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 recent years 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
The Company maintains a $200.0 million senior bank credit facility that is
syndicated between nine banking institutions led by NationsBank, N.A. (now Bank
of America) as agent for the group. Subject to adherence to standard loan
covenants, borrowings under the credit facility are available for working
capital, acquisitions of other companies in the recovery audit industry, capital
expenditures and general corporate purposes. As of March 13, 2001, the Company
had $147.8 million in outstanding principal borrowings under its credit
facility.
Net cash provided by operating activities was $33.5 million in 2000, $5.5
million in 1999 and $15.4 million in 1998. The 2000 improvement related in part
to increased managerial emphasis on client billings and cash collections.
26
29
Net cash used in investing activities was $51.7 million in 2000, $45.3
million in 1999 and $96.6 million in 1998. During 2000, 1999 and 1998, the
Company spent $44.0 million, $27.2 million and $79.0 million, respectively, as
the cash portion of consideration paid to acquire various recovery audit firms.
Net cash provided by financing activities was $43.6 million in 2000, $84.4
million in 1999 and $128.5 million in 1998. As discussed in Note 8 of the Notes
to Consolidated Financial Statements included in Item 8. of this Form 10-K, the
Company completed an underwritten follow-on stock offering in January 1999.
Net cash used in discontinued operations was $24.3 million in 2000, $50.3
million in 1999 and $39.2 million in 1998. During 2000, 1999 and 1998, the
Company spent $23.8 million, $48.6 million and $34.3 million, respectively, as
the cash portion of consideration paid to acquire various recovery audit firms
that are currently designated as discontinued operations.
As discussed in Note 10 of Notes to Consolidated Financial Statements
included in Item 8. of this Form 10-K, at December 31, 1999 the Company recorded
$40.0 million as accrued business acquisition consideration. Additionally, as of
December 31, 1999 the Company accrued $5.0 million of business acquisition
consideration as a component of net assets of discontinued operations on its
Consolidated Balance Sheet in connection with an acquired recovery audit firm.
$44.0 million was borrowed under the Company's credit facility in 2000 and
simultaneously paid to the prior owners of these two firms.
The private shareholders of Groupe AP are eligible to receive additional
purchase price consideration based upon the profitability of Groupe AP for the
two year period ending December 31, 2000 of up to 88.7 million French Francs
(approximately $12.7 million at December 31, 2000) payable no later than April
30, 2001 using a prescribed combination of cash and restricted, unregistered
shares of the Company's common stock. The Company currently anticipates paying
approximately $7.6 million in cash and issuing approximately $5.1 million in
shares of the Company's common stock. The Company expects to fund the cash
portion of this anticipated payout through additional borrowings under the
Company's credit facility.
Through March 23, 2001, the Company acquired 23 recovery audit firms. The
Company intends to significantly limit future business acquisitions to those
having compelling strategic importance. 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 repurchased approximately 2.4 million shares of its outstanding
common stock under its share repurchase program at a cost of approximately $21.0
million. Under the share repurchase program, the Company can purchase an
additional $29.0 million of its outstanding common stock in the open market. No
borrowings under the credit facility were made to fund the purchase of these
shares. Currently, the Company anticipates funding additional share repurchases,
if any, under this program with funds from operations, however, additional
borrowings under the credit facility are available, if necessary, to fund the
repurchases.
As discussed in Note 2 of Notes to Consolidated Financial Statements
included in Item 8. of this Form 10-K, the Company formalized a strategic
realignment initiative designed to enhance the Company's financial position and
clarify its investment and operating strategy by focusing primarily on its core
Accounts Payable business. Under this strategic realignment initiative, the
Company will divest of the following non-core businesses: Meridian VAT Reclaim
("Meridian") within the former Taxation Services segment, the Logistics
Management Services segment, the Communications Services segment and the Ship
and Debit ("Ship & Debit") division within the Accounts Payable segment.
Proceeds from the divestiture of these businesses are expected to be used to pay
down outstanding principal borrowings under the Company's credit facility.
27
30
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, 2001 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 Statements of Financial Accounting Standards No.
137 and No. 138, 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 began
January 1, 2001 and does not believe that it will materially affect its reported
results of operations or financial condition upon adoption.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
On August 19, 1999, the Company acquired Meridian VAT Corporation Limited
("Meridian"). Meridian (which was declared a discontinued operation in March
2001) 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 had no derivative financial instruments outstanding
at December 31, 2000. None of the Company's operating units other than Meridian
have historically utilized derivative financial instruments.
28
31
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
NUMBER
------
Independent Auditors' Reports............................... 30, 31
Consolidated Statements of Operations for the Years ended
December 31, 2000, 1999 and 1998.......................... 32
Consolidated Balance Sheets as of December 31, 2000 and
1999...................................................... 33
Consolidated Statements of Shareholders' Equity for the
Years ended December 31, 2000, 1999 and 1998.............. 34
Consolidated Statements of Cash Flows for the Years ended
December 31, 2000, 1999 and 1998.......................... 35
Notes to Consolidated Financial Statements.................. 36
29
32
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, 2000 and
1999, 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, 2000. In connection with our audits of the consolidated financial
statements, we have also audited the financial statement schedule as listed in
Item 14(a)2. These consolidated financial statements and financial statement
schedule are the responsibility of the Company's management. Our responsibility
is to express an opinion on these consolidated financial statements and
financial statement schedule 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 21% and 19% as of
December 31, 2000 and 1999, respectively, and total revenues constituting 13%,
11% and 13% in 2000, 1999 and 1998, respectively, of the related consolidated
totals. Those financial statements were audited by other auditors whose report
has been furnished to us, and our opinion, insofar as it relates to the amounts
included for PRG France, S.A. and subsidiaries, is based solely on the report of
the other auditors.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits and the report of
the other auditors provide a reasonable basis for our opinion.
In our opinion, based on our audits and the report of the other auditors,
the consolidated financial statements referred to above present fairly, in all
material respects, the financial position of The Profit Recovery Group
International, Inc. and subsidiaries as of December 31, 2000 and 1999, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 2000 in conformity with accounting
principles generally accepted in the United States of America. Also in our
opinion, the related financial statement schedule, when considered in relation
to the basic consolidated financial statements taken as a whole, presents
fairly, in all material respects, the information set forth therein.
As discussed in Notes 2(b) and 1(d) to the consolidated financial
statements, the Company changed its method of revenue recognition in 2000 and
1999, respectively.
KPMG LLP
Atlanta, Georgia
March 15, 2001
30
33
INDEPENDENT AUDITORS' REPORT
Board of 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, 2000 and 1999 and the related consolidated
statements of earnings, changes in shareholders' equity and cash flows for each
of the three years in the period ended December 31, 2000. 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, such consolidated financial statements present fairly, in all
material respects, the consolidated financial position of the Company and its
subsidiaries as of December 31, 2000 and 1999, and the consolidated results of
their operations and their cash flows for each of the three years in the period
ended December 31, 2000, in conformity with accounting principles generally
accepted in the United States.
ERNST & YOUNG Audit
Any ANTOLA
Paris, France
March 9, 2001
31
34
THE PROFIT RECOVERY GROUP INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31,
--------------------------------------
2000 1999 1998
---------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Revenues................................................... $297,089 $280,367 $206,859
Cost of revenues........................................... 156,408 145,949 108,004
Selling, general and administrative expenses (Note 16)..... 119,779 90,952 69,917
-------- -------- --------
Operating income................................. 20,902 43,466 28,938
Interest (expense), net.................................... (8,253) (4,190) (2,053)
-------- -------- --------
Earnings from continuing operations before income
taxes, discontinued operations and cumulative
effect of accounting change.................... 12,649 39,276 26,885
Income taxes (Note 6)...................................... 5,313 15,632 9,948
-------- -------- --------
Earnings from continuing operations before
discontinued operations and cumulative effect
of accounting change........................... 7,336 23,644 16,937
Discontinued operations (Note 2):
Earnings (loss) from discontinued operations, net of
income taxes of $(11,141), $4,434 and $1,880 in 2000,
1999 and 1998, respectively, including cumulative
effect of accounting change of $(26,145) in 2000...... (46,464) 3,792 (2,303)
Gain (loss) on disposal from discontinued operations
including operating results for phase-out period, net
of income taxes....................................... -- -- --
-------- -------- --------
Earnings (loss) from discontinued operations............. (46,464) 3,792 (2,303)
-------- -------- --------
Earnings (loss) before cumulative effect of accounting
change................................................ (39,128) 27,436 14,634
Cumulative effect of accounting change (Note 1 (d))........ -- (29,195) --
-------- -------- --------
Net earnings (loss).............................. $(39,128) $ (1,759) $ 14,634
======== ======== ========
Basic earnings (loss) per share (Note 15):
Earnings from continuing operations before
discontinued operations and cumulative effect
of accounting change........................... $ 0.15 $ 0.50 $ 0.43
Discontinued operations.......................... (0.95) 0.07 (0.06)
Cumulative effect of accounting change........... -- (0.61) --
-------- -------- --------
Net earnings (loss).............................. $ (0.80) $ (0.04) $ 0.37
======== ======== ========
Diluted earnings (loss) per share (Note 15):
Earnings from continuing operations before
discontinued operations and cumulative effect
of accounting change........................... $ 0.15 $ 0.48 $ 0.42
Discontinued operations.......................... (0.94) 0.07 (0.06)
Cumulative effect of accounting change........... -- (0.59) --
-------- -------- --------
Net earnings (loss).............................. $ (0.79) $ (0.04) $ 0.36
======== ======== ========
Pro forma amounts, assuming the new accounting method is
applied retroactively (Note 1(d)):
Earnings from continuing operations................. $ 5,295
========
Basic earnings per share from continuing
operations....................................... $ 0.13
========
Diluted earnings per share from continuing
operations....................................... $ 0.13
========
See accompanying Notes to Consolidated Financial Statements.
32
35
THE PROFIT RECOVERY GROUP INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
-------------------
2000 1999
-------- --------
(IN THOUSANDS,
EXCEPT SHARE AND
PER SHARE DATA)
ASSETS
Current assets:
Cash and cash equivalents................................. $ 23,870 $ 22,315
Receivables:
Contract receivables, less allowance for doubtful
accounts of $5,243 in 2000 and $3,624 in 1999.......... 67,399 61,722
Employee advances and miscellaneous receivables......... 5,073 8,553
-------- --------
Total receivables................................... 72,472 70,275
-------- --------
Prepaid expenses and other current assets................. 3,470 2,109
Deferred income taxes (Note 6)............................ 12,565 5,814
Net assets of discontinued operations (Note 2)............ 79,534 101,101
-------- --------
Total current assets................................ 191,911 201,614
-------- --------
Property and equipment:
Computer and other equipment.............................. 49,708 42,803
Furniture and fixtures.................................... 3,755 4,046
Land and buildings........................................ -- 1,412
Leasehold improvements.................................... 5,957 5,217
-------- --------
59,420 53,478
Less accumulated depreciation and amortization............ 32,516 20,453
-------- --------
Property and equipment, net......................... 26,904 33,025
-------- --------
Noncompete agreements, less accumulated amortization of
$6,707 in 2000 and $5,796 in 1999......................... 937 1,711
Deferred loan costs, less accumulated amortization of $1,341
in 2000 and $795 in 1999.................................. 1,701 1,492
Goodwill, less accumulated amortization of $23,469 in 2000
and $12,842 in 1999....................................... 235,153 240,775
Deferred income taxes (Note 6).............................. 6,236 5,505
Other assets................................................ 1,989 597
-------- --------
$464,831 $484,719
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Notes payable to bank..................................... $ -- $ 736
Current installments of long-term debt (Note 4)........... 391 1,014
Accounts payable and accrued expenses..................... 17,284 13,224
Accrued business acquisition consideration (Note 10)...... 7,567 40,000
Accrued payroll and related expenses...................... 38,017 33,051
Deferred tax recovery audit revenue....................... 694 1,423
-------- --------
Total current liabilities........................... 63,953 89,448
Long-term debt, excluding current installments (Note 4)..... 154,563 95,294
Deferred compensation (Note 7).............................. 5,615 4,656
Other long-term liabilities................................. 1,544 2,821
-------- --------
Total liabilities................................... 225,675 192,219
-------- --------
Shareholders' equity (Notes 2, 4, 7, 8, 10 and 11):
Preferred stock, no par value. Authorized 500,000 shares;
no shares issued or outstanding in 2000 and 1999........ -- --
Participating preferred stock, no par value. Authorized
500,000 shares; no shares issued or outstanding in 2000
and 1999................................................ -- --
Common stock, no par value; $.001 stated value per share.
Authorized 200,000,000 shares; issued 49,912,231 shares
in 2000 and 49,363,044 shares in 1999................... 50 49
Additional paid-in capital................................ 316,127 302,455
Accumulated deficit....................................... (40,035) (907)
Accumulated other comprehensive loss...................... (14,237) (9,097)
Treasury stock at cost, 2,435,990 shares in 2000.......... (21,024) --
Unearned portion of restricted stock...................... (1,725) --
-------- --------
Total shareholders' equity.......................... 239,156 292,500
-------- --------
Commitments and contingencies (Notes 2, 3, 4, 5, 8, 9, and
10)
$464,831 $484,719
======== ========
See accompanying Notes to Consolidated Financial Statements.
33
36
THE PROFIT RECOVERY GROUP INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
ACCUMULATED
OTHER
COMPREHENSIVE
RETAINED (LOSS) FOREIGN UNEARNED
COMMON STOCK ADDITIONAL EARNINGS CURRENCY PORTION OF
--------------- PAID-IN (ACCUMULATED TRANSLATION TREASURY RESTRICTED
SHARES AMOUNT CAPITAL DEFICIT) ADJUSTMENTS STOCK STOCK
------ ------ ---------- ------------ -------------- -------- ----------
(IN THOUSANDS)
BALANCE AT DECEMBER 31,
1997....................... 34,981 $35 $ 57,629 $(10,964) $ (1,149) $ -- $ --
Comprehensive income:
Net earnings............... -- -- -- 14,634 -- -- --
Other comprehensive loss --
foreign currency
translation
adjustments.............. -- -- -- -- (1,176) -- --
Comprehensive income....... -- -- -- -- -- -- --
Issuances of common stock:
Issuances under employee
stock option plans
(including tax benefits
of $1,096)............... 341 -- 4,365 -- -- -- --
Other common stock
issuances................ 6,926 7 81,163 -- -- -- --
Distributions to former Sub
S shareholders............. -- -- -- (439) -- -- --
------ --- -------- -------- -------- -------- -------
BALANCE AT DECEMBER 31,
1998....................... 42,248 42 143,157 3,231 (2,325) -- --
Reclassification of S
Corporation earnings of
PRS........................ -- -- 1,766 (1,766) -- -- --
Comprehensive loss:
Net loss................... -- -- -- (1,759) -- -- --
Other comprehensive loss --
foreign currency
translation
adjustments.............. -- -- -- -- (6,772) -- --
Comprehensive loss......... -- -- -- -- -- -- --
Issuances of common stock:
Issuances under employee
stock option plans
(including tax benefits
of $3,551)............... 421 -- 7,599 -- -- -- --
Other common stock
issuances................ 5,657 6 118,504 -- -- -- --
Distributions to former Sub
S shareholders............. -- -- -- (613) -- -- --
Conversion of shareholder
loans...................... 1,037 1 30,391 -- -- -- --
Transaction costs paid
directly by shareholders... -- -- 1,070 -- -- -- --
Fractional shares paid in
cash....................... -- -- (32) -- -- -- --
------ --- -------- -------- -------- -------- -------
BALANCE AT DECEMBER 31,
1999....................... 49,363 49 302,455 (907) (9,097) -- --
Comprehensive loss:
Net loss................... -- -- -- (39,128) -- -- --
Other comprehensive loss --
foreign currency
translation
adjustments.............. -- -- -- -- (5,140) -- --
Comprehensive loss......... -- -- -- -- -- -- --
Issuances of common stock:
Issuances under employee
stock option plans
(including tax benefits
of $2,165)............... 241 1 7,770 -- -- -- (1,725)
Other common stock
issuances................ 308 -- 5,902 -- -- -- --
Treasury shares repurchased
(2,436 shares)............. -- -- -- -- -- (21,024) --
------ --- -------- -------- -------- -------- -------
BALANCE AT DECEMBER 31,
2000....................... 49,912 $50 $316,127 $(40,035) $(14,237) $(21,024) $(1,725)
====== === ======== ======== ======== ======== =======
TOTAL
COMPREHENSIVE SHAREHOLDERS'
INCOME (LOSS) EQUITY
------------- -------------
(IN THOUSANDS)
BALANCE AT DECEMBER 31,
1997....................... $ -- $ 45,551
Comprehensive income:
Net earnings............... 14,634 14,634
Other comprehensive loss --
foreign currency
translation
adjustments.............. (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
Other common stock
issuances................ -- 81,170
Distributions to former Sub
S shareholders............. -- (439)
-------- --------
BALANCE AT DECEMBER 31,
1998....................... -- 144,105
Reclassification of S
Corporation earnings of
PRS........................ -- --
Comprehensive loss:
Net loss................... (1,759) (1,759)
Other comprehensive loss --
foreign currency
translation
adjustments.............. (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
Other common stock
issuances................ -- 118,510
Distributions to former Sub
S shareholders............. -- (613)
Conversion of shareholder
loans...................... -- 30,392
Transaction costs paid
directly by shareholders... -- 1,070
Fractional shares paid in
cash....................... -- (32)
-------- --------
BALANCE AT DECEMBER 31,
1999....................... -- 292,500
Comprehensive loss:
Net loss................... (39,128) (39,128)
Other comprehensive loss --
foreign currency
translation
adjustments.............. (5,140) (5,140)
Comprehensive loss......... (44,268) --
Issuances of common stock:
Issuances under employee
stock option plans
(including tax benefits
of $2,165)............... -- 6,046
Other common stock
issuances................ -- 5,902
Treasury shares repurchased
(2,436 shares)............. -- (21,024)
-------- --------
BALANCE AT DECEMBER 31,
2000....................... $ -- $239,156
======== ========
See accompanying Notes to Consolidated Financial Statements.
34
37
THE PROFIT RECOVERY GROUP INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31,
-------------------------------
2000 1999 1998
-------- -------- ---------
(IN THOUSANDS)
Cash flows from operating activities:
Net earnings (loss)....................................... $(39,128) $ (1,759) $ 14,634
Cumulative effect of accounting change.................... -- 29,195 --
(Earnings) loss from discontinued operations.............. 46,464 (3,792) 2,303
-------- -------- ---------
Earnings from continuing operations....................... 7,336 23,644 16,937
Adjustments to reconcile net earnings (loss) to net cash
provided by operating activities:
Depreciation and amortization........................... 28,880 19,120 11,203
Loss on sale of property and equipment.................. -- 47 168
Restricted stock compensation expense................... 247 -- --
Interest accrued on shareholder loans................... -- 860 --
Deferred compensation expense........................... 950 783 890
Deferred income taxes, net of cumulative effect of
accounting change..................................... (7,482) (115) 3,826
Changes in assets and liabilities, net of effects of
acquisitions:
Receivables............................................. (2,488) (40,953) (35,400)
Prepaid expenses and other current assets............... (1,499) 531 (41)
Other assets............................................ (1,391) 1,005 (443)
Accounts payable and accrued expenses................... 7,763 (3,290) (1,135)
Accrued payroll and related expenses.................... 5,450 4,303 19,156
Deferred tax recovery audit revenue..................... (630) (57) 125
Other long-term liabilities............................. (3,633) (402) 139
-------- -------- ---------
Net cash provided by operating activities.......... 33,503 5,476 15,425
-------- -------- ---------
Cash flows from investing activities:
Purchases of property and equipment....................... (7,730) (18,062) (17,628)
Acquisitions of businesses (net of cash acquired)......... (44,000) (27,191) (79,008)
-------- -------- ---------
Net cash used in investing activities.............. (51,730) (45,253) (96,636)
-------- -------- ---------
Cash flows from financing activities:
Net proceeds (repayments) of notes payable to bank........ (1,187) 686 (31)
Proceeds from issuance of long-term debt.................. 60,635 75,399 112,640
Proceeds from loans from shareholders..................... -- 2,061 --
Acquisition costs paid directly by former PRS
shareholders............................................ -- 1,070 --
Repayments of long-term debt.............................. -- (96,527) (24,924)
Payments for deferred loan costs.......................... (650) (249) (1,797)
Net proceeds from common stock issuances.................. 5,784 102,575 43,031
Distributions to former Sub S shareholders................ -- (613) (439)
Purchase of treasury shares............................... (21,024) -- --
-------- -------- ---------
Net cash provided by financing activities.......... 43,558 84,402 128,480
-------- -------- ---------
Net cash used in discontinued operations.................... (24,271) (50,310) (39,195)
Effect of exchange rates on cash and cash equivalents....... 495 -- --
-------- -------- ---------
Net change in cash and cash equivalents............ 1,555 (5,685) 8,074
Cash and cash equivalents at beginning of year.............. 22,315 28,000 19,926
-------- -------- ---------
Cash and cash equivalents at end of year.................... $ 23,870 $ 22,315 $ 28,000
======== ======== =========
Supplemental disclosure of cash flow information:
Cash paid during the year for interest.................. $ 5,340 $ 2,518 $ 2,274
======== ======== =========
Cash paid during the year for income taxes, net of
refunds received...................................... $ 14,120 $ 15,451 $ 6,493
======== ======== =========
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............................. $ 67,729 $112,479 $ 199,034
Cash paid for the acquisitions(net of cash acquired)...... (66,294) (75,821) (113,340)
Fair value of shares issued for acquisitions.............. (725) (23,267) (42,504)
-------- -------- ---------
Liabilities assumed................................ $ 710 $ 13,391 $ 43,190
======== ======== =========
Shareholder loans contributed to capital by former equity
shareholders of Meridian................................ $ -- $ 30,391 $ --
======== ======== =========
See accompanying Notes to Consolidated Financial Statements.
35
38
THE PROFIT RECOVERY GROUP INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000, 1999 AND 1998
(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 recovery audit, expense containment
and knowledge application services to large and mid-size businesses 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; and
- healthcare providers such as hospitals and health maintenance
organizations.
The Company currently services approximately 2,500 clients in over 33
different countries outside the United States.
Basis of Presentation
As indicated in Note 1 (d), 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 accounting principles generally
accepted in the United States of America, 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.
As indicated in Note 10, the Company acquired PRS International, Ltd.
("PRS") in August 1999. This acquisition was accounted for as a
pooling-of-interests. Accordingly, the Company's previously reported
consolidated financial statements for all prior periods have been retroactively
restated, as required under accounting principles generally accepted in the
United States of America, to include the accounts of 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.
Certain reclassifications have been made to 1999 and 1998 amounts to
conform to the presentation in 2000.
(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 (d) Revenue
Recognition).
36
39
THE PROFIT RECOVERY GROUP INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(c) Discontinued Operations
Financial statements for years prior to 2000 have been restated to
separately report results of discontinued operations from results of continuing
operations. Disclosures included herein pertain to the Company's continuing
operations unless otherwise noted.
(d) 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. Accounting principles generally accepted in the United
States of America 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 charge of $29.2
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 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 recognizes revenues on the invoice basis.
Clients are invoiced for a contractually specified percentage of amounts
recovered when it has been determined that they have received economic value,
(generally through credits
37
40
THE PROFIT RECOVERY GROUP INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
taken against existing accounts payable due to the involved vendors or refund
checks received from those vendors), and when the following criteria are met:
(a) persuasive evidence of an arrangement exists; (b) services have been
rendered; (c) the fee billed to the client is fixed or determinable and (d)
collectibility is reasonably assured.
(e) Cash Equivalents
Cash equivalents at December 31, 2000 and 1999 included $0.9 million and
$-0- million, respectively, of temporary investments held at U.S. banks. Cash
equivalents at December 31, 2000 and 1999 also included $7.1 million and $5.1
million, respectively, held at a French bank by certain of the Company's French
subsidiaries.
From time to time, the Company invests excess cash in reverse repurchase
agreements with Bank of America, which are fully collateralized by United States
of America Treasury Notes in the possession of such 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. No such reverse purchase agreements were outstanding at December 31,
2000 or 1999.
(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 three to seven
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 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,
2000 is being amortized over periods ranging from seven to 25 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
38
41
THE PROFIT RECOVERY GROUP INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 projected future operating
cash flows are not achieved.
During the fourth quarter of 2000, the Company determined that the net book
value of goodwill recorded for one of the Company's business units exceeded the
projected undiscounted future operating cash flows of that business unit.
Accordingly, the Company recognized a goodwill impairment charge of
approximately $3.0 million to adjust the net book value of the goodwill to the
sum of the projected discounted future operating cash flows.
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 rates 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. Translation 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 year, (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.
(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. The
39
42
THE PROFIT RECOVERY GROUP INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
options granted generally vest and become fully exercisable on a ratable basis
over four or five years of continued employment. The Company recognizes
compensation expense on the straight line basis for compensatory stock awards
with ratable vesting.
(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 (loss) 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) DISCONTINUED OPERATIONS
In March 2001, the Company formalized a strategic realignment initiative
designed to enhance the Company's financial position and clarify its investment
and operating strategy by focusing primarily on its core Accounts Payable
business. Under this strategic realignment initiative, the Company will divest
of the following non-core businesses: Meridian VAT Reclaim ("Meridian") within
the former Taxation Services segment, the Logistics Management Services segment,
the Communications Services segment and the Ship and Debit ("Ship & Debit")
division within the Accounts Payable Services segment.
The non-core businesses to be divested are comprised of various
acquisitions completed by the Company during the periods 1997 through 2000. The
acquisition of Meridian was accounted for as a pooling-of-interests, in which
the Company issued 6,114,375 unregistered shares of the Company's common stock.
The other acquisitions which comprise the remainder of non-core businesses to be
divested were accounted for as purchases with collective consideration paid of
$61.5 million in cash and 2,044,206 restricted, unregistered shares of the
Company's common stock.
The Company's consolidated financial statements have been restated to
reflect Meridian, Logistics Management Services, Communications Services, and
Ship & Debit as discontinued operations for all periods presented. Operating
results of the discontinued operations are summarized below. The amounts exclude
general corporate overhead previously allocated to Meridian, Logistics
Management Services and Communications Services for segment reporting purposes.
The amounts include interest on debt and an allocation of the interest on the
Company's general credit facility. Interest allocated to discontinued operations
was $2.9 million, $0.9 million and $1.4 million in 2000, 1999 and 1998,
respectively.
Summarized financial information for the discontinued operations is as
follows:
YEARS ENDED DECEMBER 31,
-------------------------------
2000 1999 1998
-------- -------- -------
(IN THOUSANDS)
Revenues............................................ $80,850 $69,280 $35,286
DECEMBER 31,
--------------------
2000 1999
-------- --------
(IN THOUSANDS)
Current assets...................................... $ 43,069 $ 49,878
Total assets........................................ 125,936 139,673
Total current liabilities........................... 46,200 38,572
Total liabilities................................... 46,402 38,572
Net assets of discontinued operations............... 79,534 101,101
40
43
THE PROFIT RECOVERY GROUP INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(a) Charges Taken in Discontinued Operations
During the fourth quarter of 2000, the Company recognized approximately
$29.4 million of nonrecurring charges (including goodwill impairment charges)
related to discontinued operations.
The Company determined that the net book value of goodwill recorded for
certain of the discontinued operations exceeded the projected undiscounted
future operating cash flows of those business units. Accordingly, the Company
recognized a goodwill impairment charge of approximately $25.7 million to adjust
the net book value of the goodwill to the sum of the projected discounted future
operating cash flows.
Additionally, during the fourth quarter of 2000, the Company recognized
charges of approximately $2.4 million related to the write-off of certain
accounts receivable balances that were determined to be uncollectible, $0.8
million for employee termination benefits, $0.3 million related to the
forgiveness of certain employee advances and $0.2 million in exit costs related
to certain facilities.
(b) Revenue Recognition -- Conversion to Cash Basis for Certain Discontinued
Operations
In consideration of guidance issued by the Securities and Exchange
Commission under Staff Accounting Bulletin No. 101, "Revenue Recognition in
Financial Statements" ("SAB 101"), the Company has changed its method of
accounting for revenues for Meridian retroactively to January 1, 2000. Based
upon the guidance in SAB 101, the Company defers recognition of revenues to the
accounting period when cash received from the foreign governments reimbursing
value-added tax claims is transferred to Meridian's clients. In 1999 and prior
periods, under the prior method of accounting, revenues were recognized at the
time refund claims containing all required documentation were filed with
appropriate governmental agencies in those instances where historical refund
disallowance rates could be accurately estimated. The Company has recorded a
non-cash, after-tax charge as of January 1, 2000, of $24.1 million related to
Meridian's cumulative effect of a change in accounting principle as part of the
loss from discontinued operations.
Additionally, in consideration of the guidance under SAB 101, the Company
has changed its method of accounting for revenues for Ship & Debit retroactively
to January 1, 2000. Based upon the guidance, the Company defers recognition of
revenues to the accounting period when cash is received by the client. In 1999
and prior periods, under the prior method of accounting, revenues were
recognized at the time that the Company invoiced clients for its fee. The
Company has recorded a non-cash, after-tax charge as of January 1, 2000 of $2.0
million related to Ship & Debit's cumulative effect of a change in accounting
principle as part of the loss from discontinued operations.
(3) 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 $39,000 in 2000, $64,000 in 1999, and $140,000
in 1998. The Company will continue to utilize the services provided by one
director, and, as such, has agreed to pay that director a minimum of $72,000 in
2001 for financial advisory and management services.
As indicated in Note 2, 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
(which are now included in discontinued operations) have been retroactively
restated, as required under generally accepted accounting principles, to include
the accounts of Meridian. As of December 31, 1998, Meridian's separate 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.
41
44
THE PROFIT RECOVERY GROUP INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(4) LONG-TERM DEBT
Long-term debt is summarized as follows:
DECEMBER 31,
-------------------
2000 1999
-------- -------
(IN THOUSANDS)
Principal outstanding under $200.0 million senior bank
credit facility (with weighted average interest rates of
7.45% and 7.24% at December 31, 2000 and 1999,
respectively). Principal due on July 29, 2003 at credit
facility maturity......................................... $153,361 $92,811
Other....................................................... 1,593 3,497
-------- -------
154,954 96,308
Less current installments................................... 391 1,014
-------- -------
Long-term debt, excluding current installments.... $154,563 $95,294
======== =======
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, 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 nine 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 .50% per annum depending upon the
Company's leverage ratio. As of December 31, 2000, the applicable rate for
unused credit capacity was .50%. The credit facility contains customary
covenants, including financial ratios and the prohibition of cash dividend
payments to shareholders. At December 31, 2000, the Company was in compliance
with all such covenants.
Approximate future minimum annual principal payments for long-term debt for
each of the four years subsequent to December 31, 2000 are as follows (in
thousands):
2001........................................................ $ 391
2002........................................................ 658
2003........................................................ 153,765
2004........................................................ 140
--------
$154,954
========
42
45
THE PROFIT RECOVERY GROUP INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(5) LEASE COMMITMENTS
The Company is committed under noncancelable operating lease arrangements
for facilities and equipment. Rent expense for 2000, 1999, and 1998 was $7.6
million, $7.5 million, and $5.5 million, respectively. The future minimum annual
lease payments under these leases by year are summarized as follows (in
thousands):
YEAR ENDING DECEMBER 31,
- ------------------------
2001................................................. $ 6,765
2002................................................. 6,717
2003................................................. 3,990
2004................................................. 2,583
2005................................................. 447
Thereafter........................................... 3
-------
$20,505
=======
(6) INCOME TAXES
Total income taxes for the years ended December 31, 2000, 1999 and 1998
were allocated as follows:
2000 1999 1998
------- -------- -------
Earnings from continuing operations.................. $ 5,313 $ 15,632 $ 9,948
Discontinued operations, including accounting change
of $(1,268) in 2000................................ (11,141) 4,434 1,880
Cumulative effect of accounting change............... -- (18,673) --
Shareholders' equity, for compensation expense for
tax purposes in excess of financial purposes....... (2,213) (3,551) (1,096)
------- -------- -------
$(8,041) $ (2,158) $10,732
======= ======== =======
Income taxes have been provided in accordance with SFAS No. 109,
"Accounting for Income Taxes". Earnings before income taxes, discontinued
operations and cumulative effect of accounting change for the years ended
December 31, 2000, 1999 and 1998 relate to the following jurisdictions (in
thousands):
2000 1999 1998
------- ------- -------
United States......................................... $ 5,182 $31,873 $17,547
Foreign............................................... 7,467 7,403 9,338
------- ------- -------
$12,649 $39,276 $26,885
======= ======= =======
43
46
THE PROFIT RECOVERY GROUP INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The provision for income taxes attributable to earnings from continuing
operations for the years ended December 31, 2000, 1999 and 1998 consists of the
following (in thousands):
2000 1999 1998
------ ------- ------
Current:
Federal................................................... $5,598 $10,725 $1,459
State..................................................... 280 1,054 474
Foreign................................................... 5,928 5,224 3,892
------ ------- ------
11,806 17,003 5,825
------ ------- ------
Deferred:
Federal................................................... (5,983) (858) 2,205
State..................................................... (661) (266) 271
Foreign................................................... 151 (247) 1,647
------ ------- ------
(6,493) (1,371) 4,123
------ ------- ------
Total............................................. $5,313 $15,632 $9,948
====== ======= ======
The following table summarizes the significant differences between the U.S.
federal statutory tax rate and the Company's effective tax rate for earnings
from continuing operations:
2000 1999 1998
---- ---- ----
Statutory federal income tax rate........................... 35% 35% 35%
Foreign loss providing no tax benefit....................... 2 2 1
State income taxes, net of federal benefit.................. (4) 2 3
Nondeductible goodwill...................................... 5 1 1
Other, net.................................................. 4 -- (3)
-- -- --
42% 40% 37%
== == ==
44
47
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, 2000 and 1999 follows (in thousands):
2000 1999
------- -------
Deferred income tax assets:
Accounts payable and accrued expenses..................... $ 1,577 $ 2,101
Accrued payroll and related expenses...................... 6,904 3,011
Deferred compensation..................................... 2,204 1,796
Depreciation.............................................. 1,560 786
Noncompete agreements..................................... 1,548 1,129
Bad debts................................................. 2,020 153
Realignment charges....................................... 1,016 --
Foreign operating loss carryforward of foreign
subsidiary............................................. 2,648 2,632
Foreign tax credit carryforwards.......................... 394 2,179
State operating loss carryforwards........................ 445 337
Other..................................................... 5,574 2,093
------- -------
Gross deferred tax assets......................... 25,890 16,217
------- -------
Deferred income tax liabilities:
Prepaid expenses.......................................... 82 24
Goodwill.................................................. 3,607 2,038
Capitalized software...................................... 1,856 1,586
------- -------
Gross deferred tax liabilities.................... 5,545 3,648
------- -------
Less valuation allowance.................................... (1,544) (1,250)
------- -------
Net deferred tax assets........................... $18,801 $11,319
======= =======
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, 2000
and 1999 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 future taxable and foreign source earnings.
As of December 31, 2000, the Company had foreign income tax credit
carryforwards amounting to $0.4 million, which will expire in 2005. 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 recognized for
earnings of subsidiary companies that are expected to be remitted to the parent
company. As of December 31, 2000, the cumulative amount of unremitted earnings
from the Company's international subsidiaries that is expected to be
indefinitely reinvested was zero.
(7) 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 $1,500 per participant. The Company may also make discretionary
contributions to the Plan as determined by the Company each plan year. Company
matching funds and discretionary contributions vest at the rate of 20%
45
48
THE PROFIT RECOVERY GROUP INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
each year beginning after the participants' first year of service. Company
contributions for continuing and discontinued operations were approximately $1.2
million in 2000, $0.5 million in 1999 and $0.4 million in 1998.
The Company also maintains deferred compensation arrangements for certain
key officers and executives. Total expense related to these deferred
compensation arrangements was approximately $0.9 million, $0.8 million and $0.9
million in 2000, 1999, and 1998, 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, 2000, share certificates for 249,131 shares had
been issued to employees under the plan. The Company is not required to
recognize compensation expense related to this plan.
(8) SHAREHOLDER'S EQUITY
On August 14, 2000, the Company issued 286,000 restricted shares of its
common stock to certain employees (the "Stock Awards"). Of the total restricted
shares issued, 135,000 restricted shares vest on a ratable basis over five years
of continued employment. The remaining 151,000 restricted shares vest at the end
of five years of continued employment. At December 31, 2000, 92,000 shares of
the restricted common stock had been forfeited by former employees. Until
vested, the restricted stock is nontransferable. The holders of the restricted
shares are entitled to all other rights as a shareholder. Over the life of the
Stock Awards, the Company will recognize $1.8 million in compensation expense.
For the year ended December 31, 2000, the Company has recognized $0.1 million of
compensation expense related to the Stock Awards.
On August 1, 2000, the Company's Board of Directors (the "Board")
authorized a shareholder protection plan designed to protect Company
shareholders from coercive or unfair takeover techniques through the use of a
shareholder protection rights agreement approved by the Board (the "Agreement").
The terms of the Agreement provide for a dividend of one right (collectively,
the "Rights") to purchase a fraction of a share of participating preferred stock
for each share owned. This dividend was declared for each share of common stock
outstanding at the close of business on August 14, 2000. The Rights, which
expire on August 14, 2010, may be exercised only if certain conditions are met,
such as the acquisition (or the announcement of a tender offer the consummation
of which would result in the acquisition) of 15% or more of the Company's common
stock by a person or affiliated group. Issuance of the Rights does not affect
the finances of the Company, interfere with the Company's operations or business
plans or affect earnings per share. The dividend is not taxable to the Company
or its shareholders and does not change the way in which the Company's shares
may be traded.
Effective July 31, 2000, the Board amended the Company's Articles of
Incorporation to establish a new class of stock, the participating preferred
stock. The Board authorized 500,000 shares of the participating preferred stock,
none of which have been issued.
On July 26, 2000, the Board approved a share repurchase program. Under the
share repurchase program, the Company could buy up to $40.0 million of its
outstanding common stock. On October 24, 2000, the Board approved an increase of
$10.0 million to the share repurchase plan, bringing the total the Company is
authorized to spend to repurchase shares of its outstanding common stock in the
open market to $50.0 million. As of December 31, 2000, the Company had
repurchased approximately 2.4 million shares under the program at a cost of
approximately $21.0 million.
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.
46
49
THE PROFIT RECOVERY GROUP INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 4.1 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 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.
The Company has issued no preferred stock through December 31, 2000, and
has no present intentions to issue any preferred stock, except for any potential
issuance of participating preferred stock (500,000 shares authorized) pursuant
to the shareholders protection rights agreement. The Company's other category of
preferred stock (1,000,000 shares authorized) 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 votes or action by the shareholders.
(9) COMMITMENTS AND CONTINGENCIES
Beginning on June 6, 2000, three putative class action lawsuits were filed
against the Company and certain of its present and former officers in the United
States District Court for the Northern District of Georgia, Atlanta Division.
These cases were subsequently consolidated into one proceeding styled: In re
Profit Recovery Group International, Inc. Sec. Litig., Civil Action File No.
1:00-CV-1416-CC (the "Securities Class Action Litigation"). On November 13,
2000, the Plaintiffs in these cases filed a Consolidated and Amended Complaint
(the "Complaint"). In that Complaint, Plaintiffs allege that the Company, John
M. Cook, Scott L. Colabuono, and Michael A. Lustig (the "Defendants") violated
Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5
promulgated thereunder by allegedly disseminating materially false and
misleading information about a change in the Company's method of recognizing
revenue and in connection with revenue reported for a division. Plaintiffs
purport to bring this action on behalf of a putative class of persons who
purchased the Company's stock between July 19, 1999 and July 26, 2000.
Plaintiffs seek an unspecified amount of compensatory damages, payment of
litigation fees and expenses, and equitable and/or injunctive relief. On January
24, 2001, Defendants filed a Motion to Dismiss the Complaint for failure to
state a claim under the Private Securities Litigation Reform Act, 15 U.S.C. sec.
78u-4 et seq. Plaintiffs filed their response to the Motion to Dismiss March 12,
2001 and Defendant's reply in support of that Motion is due on April 11, 2001.
The Company believes the alleged claims in this lawsuit are without merit. The
Company intends to defend this lawsuit vigorously. Due to the inherent
uncertainties of the litigation process and the judicial system, the Company is
unable to predict the outcome of this litigation. If the outcome of this
litigation is adverse to the Company, it could have a material adverse effect on
the Company's business, financial condition, and results of operations.
47
50
THE PROFIT RECOVERY GROUP INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In the normal course of business, the Company is involved in and subject to
other claims, contractual disputes and other uncertainties. Management, after
reviewing with legal counsel all of these actions and proceedings, believes that
the aggregate losses, if any, will not have a material adverse effect on the
Company's financial position or results of operations.
(10) ACQUISITIONS
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 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 nine
month period ended December 31, 1998, and purchase price consideration of $40.0
million in cash in the first quarter 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 of 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. These
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. These acquisitions 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 August 31, 1999, the Company acquired substantially all of the assets
and assumed substantially all the liabilities of PRS International, Ltd.
("PRS"). PRS was 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,
48
51
THE PROFIT RECOVERY GROUP INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
"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 are also eligible to receive additional purchase
price consideration based upon the profitability of Groupe AP for the two year
period ending December 31, 2000 of up to 88.7 million French Francs
(approximately $12.7 million at December 31, 2000) payable no later than April
30, 2001 using a prescribed combination of cash and restricted, unregistered
shares of the Company's common stock. The Company currently anticipates paying
approximately $7.5 million in cash and $5.2 million in shares of the Company's
common stock. The acquisition resulted in goodwill through December 31, 2000 of
$38.4 million which is being amortized over 20 years using the straight-line
method.
Results of operations for all 1998-1999 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 August 6, 1998 acquisition of Loder Drew, which was included
effective July 1, 1998, (b) the October 29, 1998 acquisition of RBA, which was
included effective October 1, 1998 and (c) 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 1998 and 1999 acquisitions of Loder Drew and Alma, had
occurred at the beginning of 1998 (in thousands):
YEAR ENDED
DECEMBER 31,
1998
------------
Revenues.................................................... $236,676
========
Net earnings................................................ $ 16,486
========
Earnings per share:
Basic..................................................... $ 0.42
========
Diluted................................................... $ 0.41
========
The Company has not included pro forma accrual basis results of operations
for 1999 or for the various smaller acquisitions it made during 1999 and 1998
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.
49
52
THE PROFIT RECOVERY GROUP INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Consolidated Financial Statements for periods prior to the acquisition
of PRS have been restated to include the accounts and results of operations of
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:
SIX MONTHS
ENDED YEAR ENDED
JUNE 30, 1999 DECEMBER 31, 1998
------------- -----------------
(UNAUDITED)
Revenues
The Profit Recovery Group International, Inc......... $116,841 $192,135
PRS International, Ltd............................... 9,606 14,724
-------- --------
Combined..................................... $126,447 $206,859
======== ========
Net earnings (loss) from continuing operations
The Profit Recovery Group International, Inc......... $(23,045) $ 16,530
PRS International, Ltd............................... 870 407
-------- --------
Combined..................................... $(22,175) $ 16,937
======== ========
(11) STOCK OPTION PLAN
The Company's Stock Incentive Plan, as amended, has authorized the grant of
options to purchase 10,875,000 shares of the Company's common stock to key
employees, directors, consultants and advisors. The substantial majority of
options granted through December 31, 2000 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 2000, 1999 and 1998:
2000 1999 1998
------- ------- -------
Risk-free interest rates................................ 5.12% 5.85% 5.00%
Dividend yields......................................... -- -- --
Volatility factor of expected market price.............. .716 .533 .550
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.
50
53
THE PROFIT RECOVERY GROUP INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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, 2000, 1999 and 1998 for
continuing and discontinued operations, combined, is as follows (in thousands,
except for pro forma net earnings (loss) per share information):
2000 1999 1998
-------- ------- -------
Net earnings (loss) before accounting change and pro
forma effect of compensation expense recognition
provisions of SFAS No. 123............................. $(39,128) $27,436 $14,634
Pro forma effect of compensation expense recognition
provisions of SFAS No. 123............................. (4,679) (6,146) (2,707)
-------- ------- -------
Pro forma net earnings (loss) before accounting change... $(43,807) $21,290 $11,927
======== ======= =======
Pro forma net earnings (loss) per share before accounting
change:
Basic.................................................. $ (0.90) $ 0.45 $ 0.30
======== ======= =======
Diluted................................................ $ (0.88) $ 0.43 $ 0.30
======== ======= =======
A summary of the Company's stock option activity and related information
for the years ended December 31 follows:
2000 1999 1998
----------- --------------------- ----------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
----------- -------- ---------- -------- ----------- --------
Outstanding -- beginning
of year.............. 7,133,026 $18.18 5,450,419 $13.13 3,306,740 $ 8.29
Granted................ 2,981,690 14.21 2,344,775 27.94 2,578,350 18.34
Exercised.............. (240,649) 8.58 (420,413) 8.15 (340,771) 6.20
Forfeited.............. (2,746,240) 23.85 (241,755) 16.48 (93,900) 11.41
----------- ---------- -----------
Outstanding -- end of
year................. 7,127,827 $14.79 7,133,026 $18.18 5,450,419 $13.13
=========== ========== ===========
Exercisable at end of
year................. 2,295,328 $11.42 1,448,711 $10.86 773,601 $ 7.83
Weighted average fair
value of options
granted during
year................. $ 9.58 $ 16.02 $ 10.46
The following table summarizes information about stock options outstanding
at December 31, 2000:
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.................. 3,793,385 5.52 years $ 8.32 1,415,469 $ 7.31
$11.00 - $25.00................. 2,049,567 7.76 years 18.19 761,154 15.93
Over $25.00..................... 1,284,875 8.87 years 28.48 118,705 31.52
The weighted average remaining contract life of options outstanding at
December 31, 2000 was 6.8 years.
51
54
THE PROFIT RECOVERY GROUP INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(12) MAJOR CLIENTS
The Company did not have any major clients during 2000, 1999 or 1998 which
individually provided revenues in excess of 10% of total revenues.
(13) OPERATING SEGMENTS AND RELATED INFORMATION
The Company has two reportable operating segments consisting of Accounts
Payable Services, and French Taxation 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.
The Accounts Payable Services segment consists of the review of client
accounts payable disbursements to identify and recover overpayments. This
operating segment includes accounts payable services provided to retailers and
wholesale distributors (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.
The French Taxation Services segment consists of audits or related
disbursements to identify and recover overpayments (primarily within France),
and assisting business entities throughout Europe in securing available grants.
Corporate support represents the unallocated portion of corporate general
and administrative expenses not specifically attributable to Accounts Payable
Services or French Taxation Services.
The accounting policies of the 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.
52
55
THE PROFIT RECOVERY GROUP INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Segment information as of or for the years ended December 31, 2000, 1999
and 1998 follows (in thousands):
ACCOUNTS FRENCH
PAYABLE TAXATION CORPORATE
SERVICES SERVICES SUPPORT TOTAL
-------- -------- --------- --------
2000
Revenues.............................. $255,110 $ 41,979 $ -- $297,089
Operating income...................... 55,581 5,657 (40,336) 20,902
Total assets.......................... 222,238 163,059 -- 385,297
Capital expenditures.................. 7,449 281 -- 7,730
Depreciation and amortization......... 21,646 6,677 557 28,880
1999
Revenues.............................. $246,378 $ 33,989 $ -- $280,367
Operating income...................... 62,734 7,960 (27,228) 43,466
Total assets.......................... 283,980 99,638 -- 383,618
Capital expenditures.................. 17,567 495 -- 18,062
Depreciation and amortization......... 14,288 3,270 1,562 19,120
1998
Revenues.............................. $180,903 $ 25,956 $ -- $206,859
Operating income...................... 42,787 6,203 (20,052) 28,938
Total assets.......................... 318,681 30,170 -- 348,851
Capital expenditures.................. 16,688 940 -- 17,628
Depreciation and amortization......... 9,782 382 1,039 11,203
The following table presents revenues by country based upon the location of
clients served (in thousands):
2000 1999 1998
-------- -------- --------
United States...................................... $194,124 $199,945 $147,232
France............................................. 41,991 33,259 26,265
United Kingdom..................................... 25,506 19,912 13,540
Canada............................................. 13,358 12,212 11,285
Mexico............................................. 9,703 5,945 3,568
Other.............................................. 12,407 9,094 4,969
-------- -------- --------
$297,089 $280,367 $206,859
======== ======== ========
The following table presents long-lived assets by country based on location
of the asset (in thousands):
2000 1999 1998
-------- -------- --------
United States...................................... $192,696 $216,137 $164,369
France............................................. 68,649 53,607 39,483
United Kingdom..................................... 782 569 562
Canada............................................. 503 623 305
Mexico............................................. 471 264 94
Other.............................................. 3,583 6,400 8,780
-------- -------- --------
$266,684 $277,600 $213,593
======== ======== ========
53
56
THE PROFIT RECOVERY GROUP INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(14) FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts for cash and cash equivalents, receivables, notes
payable to bank, 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, 2000 and 1999 was $140.0 million and
$94.0 million, respectively, and the carrying value of the Company's long-term
debt at December 31, 2000 and 1999 was $155.0 million and $96.3 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.
54
57
THE PROFIT RECOVERY GROUP INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(15) EARNINGS PER SHARE
The following table sets forth the computations of basic and diluted
earnings per share for the years ended December 31, 2000, 1999 and 1998 (in
thousands, except for earnings (loss) per share information):
2000 1999 1998
-------- -------- -------
Numerator:
Earnings from continuing operations before
discontinued operations and cumulative effect of
accounting change.................................. $ 7,336 $ 23,644 $16,937
Discontinued operations............................... (46,464) 3,792 (2,303)
Cumulative effect of accounting change................ -- (29,195) --
-------- -------- -------
Net earnings (loss)................................ $(39,128) $ (1,759) $14,634
======== ======== =======
Denominator:
Denominator for basic earnings per
share -- weighted-average shares outstanding....... 48,871 47,498 39,248
Effect of dilutive securities:
Shares issuable for Groupe AP earnout.............. 201 -- --
Employee stock options............................. 737 1,882 1,128
-------- -------- -------
Denominator for diluted earnings................... 49,809 49,380 40,376
======== ======== =======
Basic earnings (loss) per share:
Earnings from continuing operations before
discontinued operations and cumulative effect of
accounting change.................................. $ 0.15 $ 0.50 $ 0.43
Discontinued operations............................... (0.95) 0.07 (0.06)
Cumulative effect of accounting change................ -- (0.61) --
-------- -------- -------
Net earnings (loss)................................ $ (0.80) $ (0.04) $ 0.37
======== ======== =======
Diluted earnings (loss) per share:
Earnings from continuing operations before
discontinued operations and cumulative effect of
accounting change.................................. $ 0.15 $ 0.48 $ 0.42
Discontinued operations............................... (0.94) 0.07 (0.06)
Cumulative effect of accounting change................ -- (0.59) --
-------- -------- -------
Net earnings (loss)................................ $ (0.79) $ (0.04) $ 0.36
======== ======== =======
In 2000, 5.7 million stock options were excluded from the computation of
diluted earnings per share due to their antidilutive effect.
55
58
THE PROFIT RECOVERY GROUP INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(16) BUSINESS ACQUISITION AND RESTRUCTURING EXPENSES
Business acquisition and restructuring expenses included in selling,
general and administrative expense consisted of the following components (in
thousands):
YEAR
ENDED
DECEMBER 31,
1999
------------
Acquisition-related expenses incurred by all parties in
connection with the August 1999 acquisition of PRS........ $ 948
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 Services
commercial unit........................................... 1,059
------
$2,007
======
The Company effected an acquisition of PRS which was completed in August
1999 and was accounted for as a pooling-of-interests. As required under
accounting principles generally accepted in the United States of America
governing pooling-of-interests accounting, acquisition-related expenses incurred
by the Company, PRS and the shareholders of PRS were aggregated and charged to
current operations in 1999. These expenses of approximately $0.9 million
consisted principally of investment banking fees, legal and accounting fees. The
Company combined the operations of PRS with its existing Accounts Payable
Services commercial unit in the fourth quarter of 1999 and incurred a charge to
operations of approximately $1.1 million to provide for certain employee
severance payments and the costs of closing duplicative or unnecessary office
facilities.
56
59
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 20, 2001.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Documents filed as part of the report:
(1) Consolidated Financial Statements.
For the following consolidated financial information included herein,
see Index on Page 29.
Independent Auditors' Reports............................... 30, 31
Consolidated Statements of Operations for the Years ended
December 31, 2000, 1999 and 1998.......................... 32
Consolidated Balance Sheets as of December 31, 2000 and
1999...................................................... 33
Consolidated Statements of Shareholders' Equity for the
Years ended December 31, 2000, 1999 and 1998.............. 34
Consolidated Statements of Cash Flows for the Years ended
December 31, 2000, 1999 and 1998.......................... 35
Notes to Consolidated Financial Statements.................. 36
(2) Financial Statement Schedule:
Schedule II -- Valuation and Qualifying Accounts............ 61
(3) Exhibits
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
*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 Registrant's
Current Report on Form 8-K filed on September 2, 1999).
3.1 -- Restated Articles of Incorporation of the Registrant
(incorporated by reference to Exhibit 4.2 to Registrant's
Form 8-A/A filed August 9, 2000).
3.2 -- Restated Bylaws of the Registrant (incorporated by reference
to Exhibit 4.3 to Registrant's Form 8-A/A filed August 9,
2000).
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 Restated Articles of Incorporation and Bylaws of the
Registrant, filed as Exhibits 3.1 and 3.2, respectively.
4.3 -- Rights Agreement, dated as of August 9, 2000 between
Registrant and Rights Agent (incorporated by reference to
Exhibit 4.1 to Registrant's Current Report on Form 8-K filed
August 9, 2000).
10.1 -- 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).
57
60
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
10.2 -- 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).
10.3 -- 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).
10.4 -- Second Amendment to Employment Agreement dated September 17,
1997 between The Profit Recovery Group International I, Inc.
and Mr. John M. Cook (incorporated by reference to Exhibit
10.3 to Registrant's Form 10-Q for the quarterly period
ended September 30, 1997).
10.5 -- 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).
10.6 -- 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).
10.7 -- Seventh Amendment to Credit Agreement dated July 29, 1998
among Bank of America, N.A., formerly NationsBank, N.A., as
Agent for the Lenders, The Profit Recovery Group
International, Inc., and certain guarantors named therein
(incorporated by reference to the Registrant's Form 10-Q for
the quarterly period ended September 30, 2000).
10.8 -- Eighth Amendment to Credit Agreement dated July 29, 1998
among Bank of America, N.A., formerly NationsBank, N.A., as
Agent for the Lenders, The Profit Recovery Group
International, Inc., and certain guarantors named therein
(incorporated by reference to the Registrant's Form 10-Q for
the quarterly period ended September 30, 2000).
10.9 -- Description of 2001-2005 Compensation Arrangement between
Registrant and Mr. John M. Cook.
10.10 -- Employment Agreement between Registrant and Mr. Robert G.
Kramer; Compensation Agreement 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).
10.11 -- Syndication Amendment and Assignment dated as of September
17, 1998 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).
10.12 -- 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).
10.13 -- 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).
10.14 -- 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).
10.15 -- 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).
58
61
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
10.16 -- Description of Compensation Arrangement between Mr. Donald
E. Ellis, Jr. and Registrant, dated January 15, 2001.
10.17 -- Description of 2000 Compensation Arrangement between Mr.
Mark C. Perlberg and Registrant, dated January 7, 2000.
10.18 -- Form of The Profit Recovery Group International, Inc. Stock
Award Agreement -- Ratable Vesting.
10.19 -- Form of The Profit Recovery Group International, Inc. Stock
Award Agreement -- Cliff Vesting.
10.20 -- Ninth Amendment to Credit Agreement dated July 29, 1998
among Bank of America, N.A., formerly NationsBank, N.A., as
Agent for the Lenders, The Profit Recovery Group
International, Inc. and certain guarantors named therein.
**10.21 -- 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).
***10.22 -- 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).
10.23 -- Description of 2001 compensation arrangement between
Registrant and Mr. John M. Toma.
10.24 -- Non-qualified Stock Option Agreement between Mr. Donald E.
Ellis, Jr. and the Registrant dated October 26, 2000.
10.25 -- Description of 2001 Compensation Arrangement between Mr.
Mark C. Perlberg and the Registrant.
10.26 -- Description of 2001 Compensation Arrangement between Mr.
Robert A. Kramer and the Registrant.
10.27 -- Discussion of Management and Professional Incentive Plan.
10.28 -- Amendment to 2000 Compensation Agreement between Mr. Mark C.
Perlberg and Registrant, dated October 30, 2000.
21.1 -- Subsidiaries of the Registrant.
23.1 -- Consent of KPMG LLP.
23.2 -- Consent of ERNST & YOUNG Audit.
- ---------------
* 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.
(b) Reports on Form 8-K
The registrant filed one report on Form 8-K during the quarter ended
December 31, 2000:
(1) Form 8-K describing the resignation of two executive officers was
filed on November 7, 2000.
59
62
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 27, 2001 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 Chief March 27, 2001
- ----------------------------------------------------- Executive Officer
John M. Cook (Principal Executive Officer)
/s/ DONALD E. ELLIS, JR. Executive Vice President -- March 27 2001
- ----------------------------------------------------- Finance, Chief Financial
Donald E. Ellis, Jr. Officer and Treasurer
(Principal Financial Officer)
/s/ ALLISON ADEN Vice President -- Finance March 27, 2001
- ----------------------------------------------------- (Principal Accounting
Allison Aden Officer)
/s/ STANLEY B. COHEN Director March 27, 2001
- -----------------------------------------------------
Stanley B. Cohen
/s/ MARC S. EISENBERG Director March 27, 2001
- -----------------------------------------------------
Marc S. Eisenberg
/s/ JONATHAN GOLDEN Director March 27, 2001
- -----------------------------------------------------
Jonathan Golden
/s/ GARTH H. GREIMANN Director March 27, 2001
- -----------------------------------------------------
Garth H. Greimann
/s/ FRED W.I. LACHOTZKI Director March 27, 2001
- -----------------------------------------------------
Fred W.I. Lachotzki
/s/ E. JAMES LOWREY Director March 27, 2001
- -----------------------------------------------------
E. James Lowrey
/s/ THOMAS S. ROBERTSON Director March 27, 2001
- -----------------------------------------------------
Thomas S. Robertson
/s/ JOHN M. TOMA Vice Chairman and Director March 27, 2001
- -----------------------------------------------------
John M. Toma
/s/ JACKIE M. WARD Director March 27, 2001
- -----------------------------------------------------
Jackie M. Ward
60
63
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
(IN THOUSANDS)
ADDITIONS DEDUCTIONS
------------------------ -----------
BALANCE AT CHARGE TO CREDITED TO BALANCE AT
BEGINNING COSTS AND ACCOUNTS END OF
DESCRIPTION OF YEAR EXPENSES ACQUISITIONS RECEIVABLE YEAR
- ----------- ---------- --------- ------------ ----------- ----------
2000
Allowance for doubtful accounts
receivable................................ $3,624 $2,725 $ -- $ (1,106) $5,243
Deferred tax valuation allowance............ $1,250 $ 294 $ -- $ -- $1,544
1999
Allowance for doubtful accounts
receivable................................ $3,858 $ 346 $ 569 $ (1,149) $3,624
Deferred tax valuation allowance............ $ 720 $ 530 $ -- $ -- $1,250
1998
Allowance for doubtful accounts
receivable................................ $ -- $ -- $4,087 $ (229) $3,858
Deferred tax valuation allowance............ $ -- $ 720 $ -- $ -- $ 720
61
64
(LOGO The Profit Recovery Group International, Inc.)