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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ____________ TO ____________
COMMISSION FILE NUMBER 0-28000
THE PROFIT RECOVERY GROUP
INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
GEORGIA 58-2213805
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2300 WINDY RIDGE PARKWAY 30339-8426
SUITE 100 NORTH (Zip Code)
ATLANTA, GEORGIA
(Address of principal executive offices)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (770) 779-3900
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
COMMON STOCK, NO PAR VALUE
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
Common shares of the registrant outstanding at February 16, 2000 were
49,441,671. The aggregate market value, as of February 16, 2000, of such common
shares held by non-affiliates of the registrant was approximately $1.25 billion
based upon the last sales price reported that date on The Nasdaq Stock Market of
$28.625 per share. (Aggregate market value estimated solely for the purposes of
this report. This shall not be construed as an admission for the purposes of
determining affiliate status.)
DOCUMENTS INCORPORATED BY REFERENCE
Part III: Portions of Registrant's Proxy Statement relating to the Annual
Meeting of Shareholders to be held on or about June 8, 2000.
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THE PROFIT RECOVERY GROUP INTERNATIONAL, INC.
FORM 10-K
DECEMBER 31, 1999
PAGE
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Part I
Item 1. Business.................................................... 1
Item 2. Properties.................................................. 13
Item 3. Legal Proceedings........................................... 14
Item 4. Submission of Matters to a Vote of Security Holders......... 14
Part II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters....................................... 14
Item 6. Selected Consolidated Financial Data........................ 15
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 17
Item 7A. Quantitative and Qualitative Disclosures About Market
Risk...................................................... 26
Item 8. Financial Statements and Supplementary Data................. 27
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................. 54
Part III
Item 10. Directors and Executive Officers of the Registrant.......... 54
Item 11. Executive Compensation...................................... 54
Item 12. Security Ownership of Certain Beneficial Owners and
Management................................................ 54
Item 13. Certain Relationships and Related Transactions.............. 54
Part IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form
8-K....................................................... 54
Signatures............................................................... 59
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PART I
ITEM 1. BUSINESS
The Profit Recovery Group International, Inc. and subsidiaries (the
"Company") is a leading provider of accounts payable and other recovery audit
services to large and mid-size businesses and certain governmental agencies
having numerous payment transactions with many vendors. These businesses
include, but are not limited to, the following:
- retailers such as discount, department, specialty, grocery and drug
stores;
- manufacturers of pharmaceuticals, consumer electronics, chemicals and
aerospace and medical products;
- wholesale distributors of computer components, food products and
pharmaceuticals;
- technology companies that engage in telecommunications, computer
equipment assembly and software development; and
- healthcare providers such as hospitals and health maintenance
organizations.
In businesses with large purchase volumes and continuously fluctuating
prices, some small percentage of erroneous overpayments to vendors is
inevitable. In addition, the complexity of various tax laws results in
overpayments to governmental agencies. Services such as freight,
telecommunications and utilities provided to businesses under complex pricing
arrangements also can result in overpayments. All of these overpayments result
in "lost profits." The Company's trained, experienced audit specialists use
sophisticated proprietary technology and advanced audit techniques and
methodologies to identify overpayments to vendors and tax authorities. The
Company receives a contractual percentage of overpayments it identifies and its
clients recover.
The Company currently conducts business in 29 countries and services
approximately 12,000 clients in over 40 different countries. The Company has
four distinct operating segments consisting of Accounts Payable Services,
Freight Services, Tax Services and Facilities Services. Each segment represents
a strategic business unit that offers a different type of recovery audit
service. See Note (11) of Notes to Consolidated Financial Statements for the
worldwide operating segment disclosures.
THE RECOVERY AUDIT INDUSTRY
Businesses with substantial volumes of payment transactions involving
multiple vendors, numerous discounts and allowances, fluctuating prices and
complex tax and pricing arrangements find it difficult to detect all payment
errors. Although these businesses process the vast majority of payment
transactions correctly, a small number of errors occur principally because of
communication failures between purchasing and accounts payable departments,
complex pricing arrangements, personnel turnover and changes in information and
accounting systems. These errors include vendor pricing errors, missed or
inaccurate discounts, allowances and rebates, incorrect freight charges and
duplicate payments. In the aggregate, these transaction errors can represent
meaningful lost profits that can be particularly significant for businesses with
relatively narrow profit margins. For example, the Company believes that a
typical U.S. retailer makes payment errors that are not discovered internally,
which in the aggregate can range from several hundred thousand dollars to more
than $1.0 million per billion dollars of revenues.
In addition to recovery opportunities due to payment errors, businesses
often have the potential to minimize future payments of various types of taxes
and, in some instances, obtain refunds of taxes previously paid. Opportunities
also exist to prospectively reduce operating costs such as telecommunications
expenses through the application of highly specialized assessment techniques and
awareness of cost effective alternatives.
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Although some businesses routinely maintain internal recovery audit
departments assigned to recover selected types of payment errors and identify
opportunities to reduce costs, independent recovery audit firms are often
retained as well due to their specialized knowledge and focused technologies.
In the U.S. and Canada, large retailers routinely engage independent
recovery audit firms as standard business practice, and businesses in other
industries are increasingly using independent recovery audit firms. Outside the
U.S. and Canada, the Company believes that large retailers and many other types
of businesses are also increasingly engaging independent recovery audit firms.
Businesses are increasing the use of technology to manage complex accounts
payable systems and realize greater operating efficiencies. Many businesses
worldwide communicate with vendors electronically to exchange inventory and
sales data, transmit purchase orders, submit invoices, forward shipping and
receiving information and remit payments. These paperless transactions are
widely referred to as Electronic Data Interchange, or "EDI", and implementation
of this technology is accelerating. EDI streamlines processing large numbers of
transactions, but does not eliminate payment errors because operator input
errors may be replicated automatically in thousands of transactions. EDI systems
typically generate significantly more individual transaction details in
electronic form, making these transactions easier to audit than traditional
paper-based accounts payable systems. Recovery audit firms, however, require
sophisticated technology in order to audit EDI accounts payable processes
effectively.
The Company believes that current global business-to-business e-commerce
initiatives involving the internet will ultimately provide the
technologically-advanced independent recovery audit firms with recovery
opportunities that may exceed those existing when EDI is employed as a data
communications medium. Factors contributing to the Company's belief include the
following:
- Extensible Markup Language ("XML"), a set of rules for defining and
sharing document types over the internet, provides a communications
framework, but until data type definitions are established for each
industry, errors due to inconsistent data treatments may be prevalent. We
believe the establishment of industry-specific data type definitions is
not at advanced stages for most industries.
- EDI use has primarily been confined to large business entities and their
suppliers. XML may eventually be utilized by businesses both large and
small, thus facilitating electronic data bases of individual procurement
transactions which may then be audited electronically. Presently, many
small and mid-size businesses still procure large portions of their goods
and services using paper-based documents which are not as cost effective
to audit as those in an electronic format.
The Company believes that many businesses are increasingly outsourcing
internal recovery functions to independent recovery audit firms. Factors
contributing to this trend include the following:
- a need for significant investments in technology, especially in an EDI
environment, which the Company believes are greater than even large
businesses can often justify;
- an inability to duplicate the breadth of industry and auditing expertise
of independent recovery audit firms;
- a desire to focus limited resources on core competencies; and
- a desire for larger and more timely recoveries.
The domestic and international recovery audit industry is characterized by
several large and many small, local and regional firms. Many local and regional
recovery audit firms lack the centralized resources or broad client base to
support technology investments required to provide comprehensive recovery audit
services for large, complex accounts payable systems. These firms are even less
equipped to audit large EDI accounts payable systems. In addition, because of
limited resources, most of these firms subcontract work to third parties and may
lack experience and the knowledge of national promotions, seasonal allowances
and current recovery audit practices. As a result, the Company believes
significant opportunities exist for recovery audit firms with a national and
international presence, well-trained and experienced professionals, and the
advanced technology required to audit increasingly complex accounts payable
systems.
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THE PROFIT RECOVERY GROUP SOLUTION
The Company provides its domestic and international clients with
comprehensive recovery audit services by using sophisticated proprietary
technology and advanced audit techniques and methodologies, and by employing
highly trained, experienced recovery audit specialists. As a result, the Company
believes it is able to identify significantly more payment errors than many of
its competitors. The Company's technology provides uniform platforms for its
auditors to offer consistent and proven audit techniques and methodologies based
on a client's size, industry or geographic scope of operations. By leveraging
its technology investment across a large client base, the Company is able to
continue developing proprietary software tools and expand its technology
leadership in the recovery audit industry.
The Company is a leader in developing and utilizing sophisticated software
audit tools and techniques that enhance the identification and recovery of
payment errors.
The Company is also a leader in establishing new recovery audit practices
to reflect evolving industry trends. The Company's auditors are highly trained
and many have joined the Company from finance-related management positions in
the industries the Company serves. To support its auditors, the Company provides
data processing, marketing, training and administrative services.
THE PROFIT RECOVERY GROUP STRATEGY
The Company's objective is to be the leading worldwide provider of recovery
audit services. Its strategy to achieve this objective consists of the following
elements:
- Provide Additional Services to Existing Clients. Most worldwide clients
of the Company currently utilize only one of the Company's service
offerings such as, for example, accounts payable recovery audit services.
Commencing later in 2000, the Company will devote significant sales and
marketing resources to encourage existing clients to avail themselves of
other service offerings. For example, freight recovery auditing services
could be marketed to an existing client that currently utilizes only
accounts payable services.
- Expand International Operations. Through a combination of opening new
offices, expanding revenues within existing offices and acquiring other
international audit firms, the Company has grown its non-United States
revenues from negligible amounts in the early 1990s to 31% of consolidated
worldwide revenues in 1999. During 2000, the Company intends to emphasize
the expansion of its client base and the provision of additional services
to existing clients within the geographic reach of its existing
international offices.
- Maintain High Client Retention Rates. The Company has historically
maintained very high rates of client retention. The Company intends to
maintain and improve its high client retention rates by providing
comprehensive recovery audit services, utilizing highly trained auditors,
and continuing to refine its advanced audit technology.
- Maintain Technology Leadership. The Company believes its proprietary
technology provides a significant competitive advantage, especially in
audits involving the more sophisticated accounts payable systems. The
Company intends to continue making substantial investments in technology,
including ongoing e-commerce initiatives, to maintain its leadership
position and systems capabilities.
- Promote Outsourcing Arrangements. The Company seeks to capitalize on the
growing trend of businesses to outsource internal recovery audit efforts.
The Company believes that its clients benefit significantly from these
outsourcing arrangements because the Company generally completes its
audits more quickly and identifies larger claims than internal recovery
audit departments. The Company further believes that as clients continue
to upgrade their systems, outsourcing arrangements involving recovery
audit work will become increasingly prevalent due in part to the absence
of traditional "audit trail" documents.
- Pursue Strategic Acquisitions. The Company intends to pursue making a
limited number of strategic acquisitions in 2000 to broaden the service
offerings of certain operational segments.
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THE PROFIT RECOVERY GROUP SERVICES
The Company currently conducts its operations through four operational
segments as follows:
RELATIVE PERCENTAGE OF CONSOLIDATED
OPERATIONAL SEGMENT WORLDWIDE REVENUES DURING 1999
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Accounts Payable....................................... 71.9%
Taxation............................................... 20.0
Freight................................................ 5.7
Facilities............................................. 2.4
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100.0%
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Accounts Payable
Through the use of proprietary technology, audit techniques and
methodologies, the Company's trained and experienced auditors examine
merchandise procurement records to identify overpayments resulting from
duplicate payments, missed discounts, allowances, rebates and other forms of
pricing concessions offered by vendors.
The Accounts Payable segment is comprised of two divisions.
The retail/wholesale/governmental division is the Company's largest
worldwide operating unit and is heavily dominated by services provided to
clients in the retailing industry. These services typically recur annually and
are largely predictable in terms of estimating the dollar volume of client
overpayments which will be ultimately recovered. For most clients served by this
unit, the Company typically identifies a larger volume of recoveries each year
when compared to recoveries realized in the immediate preceding year. This
growth generally results from factors such as increasing sophistication of the
Company's auditors and software, and continuing client migration toward
electronic merchandise procurements which the Company can more thoroughly audit.
The retail/wholesale/governmental division currently serves clients on six
continents.
The commercial division examines merchandise procurements and other
payments made by business entities such as manufacturers, distributors and
healthcare providers. Services to these types of clients tend to be more
rotational in nature with different divisions of a given client often audited in
pre-arranged annual sequences. Accordingly, revenues derived from a given client
may change markedly from year to year depending on factors such as the size and
nature of the client division under audit. The commercial division was formed
primarily from the combined operations of Loder, Drew & Associates, Inc.
(acquired August 1998) and PRS International, Ltd. (acquired August 1999). The
commercial division currently derives the substantial majority of its revenues
from serving clients in the United States, although rapid international
expansion is planned.
Taxation
The Company began offering tax recovery audit services in France with the
October 1997 acquisition of Financiere Alma S.A. and subsidiaries ("Alma").
These services include the identification and recovery of tax overpayments
involving business and personal property, workers compensation and real
property.
In October 1999, the Company acquired AP SA and its subsidiaries
(collectively, "Groupe AP") which provides services similar to Alma's in France.
Groupe AP along with Novexel S.A. (acquired July 1998) and IP Strategies, SA
(acquired November 1998), which assist clients in securing available European
grants and subsidies, are operated under the auspices of Alma.
In August 1999, the Company acquired Meridian VAT Corporation Limited
("Meridian"). Meridian is based in Ireland and specializes in the recovery of
value-added taxes ("VAT") paid on business expenses for corporate clients
located throughout the world.
While services provided to clients by Meridian are typically recurring in
nature, the services provided by other units within the Taxation division tend
to be based upon discrete projects.
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Freight
Assembled through a series of six business acquisitions in 1997-1999, the
Company's Freight operations now maintain the capability to audit freight
shipment transactions involving air, express, ocean, rail, surface, routing
compliance and payment services. The Company currently utilizes specialized
personnel and sophisticated audit software for each separate freight
transportation mode. Identified overpayments relate to such items as duplicate
payments, refunds due for late deliveries and application of incorrect tariff
rates. Preliminary planning efforts are underway to consolidate each client's
freight purchase data into a composite database which would then be examined by
Company audit personnel using multi-modal proprietary software.
Freight audit services are typically recurring in nature since freight
payments are usually examined on an ongoing basis once a new client is signed.
Facilities
The Facilities division currently consists of the telecommunications audit
unit which was formed by the Company's June 1999 acquisition of Invoice and
Tariff Management Group, LLC ("ITMG"). ITMG applies its specialized expertise to
historical client telecommunications records to identify and recover refunds of
any previous overpayments. ITMG also analyzes its clients' current
telecommunications routing patterns and usage volumes and renegotiates tariff
rates on its clients' behalf.
CLIENT CONTRACTS
The Company's typical client contract provides that the Company is entitled
to a contractual percentage of overpayments recovered for clients. Clients
generally recover claims by either (a) taking credits against outstanding
payables or future purchases from the involved vendors, or (b) receiving refund
checks directly from those vendors. The method of effecting a recovery is often
dictated by industry practice.
In addition to client contracts, many clients establish specific procedural
guidelines that the Company must satisfy prior to submitting claims for client
approval. These guidelines are unique to each client.
With respect to the Company's present and future operations to secure
refunds pursuant to statute or regulation of amounts paid by clients to
governmental entities, the Company recognizes revenues at the time refund claims
containing all required documentation are filed with appropriate governmental
agencies in those instances where historical refund disallowance rates can be
accurately estimated. The Company records its fee participation in these refunds
at estimated net realizable value without reserves. Accordingly, adjustments to
uncollectible fee estimates are charged or credited to earnings, as appropriate.
TECHNOLOGY
The Company employs a variety of proprietary audit tools, proprietary
databases and Company-owned data processing facilities in its business. Each of
the Company's four operating segments employs discrete technology.
Accounts Payable Audit Technology
At the beginning of a typical accounts payable recovery audit engagement,
the Company obtains transaction data from its client for the time period under
audit. The Company receives this data typically by magnetic media, which is then
reformatted into standardized and proprietary layouts at one of the Company's
data processing facilities using the following:
- IBM AS 400 midrange computers;
- Windows NT and OS/2 Warp Connect servers; and
- other PC-based platforms.
The Company's experienced programmers then prepare statistical reports to
verify the completeness and accuracy of the data. The Company delivers this
reformatted data to its auditors who, using the Company's proprietary PC-based
field audit software, sort, filter and search the data for overpayments. The
Company also
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produces client-specific standard reports and statistical data for its auditors.
These reports and data often reveal patterns of activity or unusual
relationships suggestive of potential overpayment situations.
The Company has developed and continuously updates and refines its
proprietary accounts payable databases to assist it in providing recovery audit
services to its domestic retail clients. These databases serve as a central
repository reflecting its auditors' experiences, vendor practices and knowledge
of regional and national pricing information, including seasonal allowances,
discounts and rebates. These proprietary databases, however, do not include
confidential client information. Auditors use these databases to identify
discounts, allowances and other pricing information not previously detected.
Taxation Audit Technology
The Company's France-based corporate tax recovery and grant procurement
operations employ a variety of sophisticated proprietary processes, databases
and PC-based software. Specialists continually review and analyze tax
developments and grant availabilities to identify opportunities. Once
identified, these opportunities are matched by computer to appropriate database
attributes of both clients and non-clients to identify those who might benefit.
Additional proprietary software and processes are subsequently used to develop,
file and track tax claims and grant applications.
Freight Audit Technology
The Company's freight audit activities and clients are currently
concentrated in the United States. Discrete sub-units of specialized personnel
and systems are dedicated to specific transportation modes such as ocean,
overnight air, truck and rail freight. The Company is currently in the planning
process to integrate all client freight payments into a composite database which
would then be audited for overpayments regardless of transportation mode.
Facilities Audit Technology
Although various proprietary processes and databases are used to conduct
telecommunications audits, this segment relies most heavily upon the industry
and vendor knowledge possessed by its audit personnel.
AUDITOR HIRING AND TRAINING
Many of the Company's auditors formerly held finance-related management
positions in the industries the Company serves. To meet its growing need for
additional auditors, the Company also hires recent college graduates,
particularly those with multi-lingual capabilities. While the Company has been
able to hire a sufficient number of new auditors to support its growth, there
can be no assurance that the Company can continue hiring sufficient numbers of
qualified auditors to meet its future needs.
The Company provides intensive training for auditors utilizing both
classroom-type training and self-paced media such as specialized computer-based
training modules. All training programs are continuously upgraded based on
feedback from auditors and changing industry protocols. Additional on-the-job
training provided by experienced auditors enhances the structured training
programs and enables newly hired auditors to refine their skills.
CLIENT BASE
The Company provides its services principally to large and mid-sized
businesses and certain governmental agencies having numerous payment
transactions with many vendors. Retailers continue to constitute an important
part of the Company's client and revenue base. None of the Company's clients
individually represented 10% or greater of the Company's consolidated revenues
for the year ended December 31, 1999.
SEASONALITY
The Company has experienced and expects to continue to experience
significant seasonality in its business. The Company typically realizes
substantially higher revenues and operating income in the last two quarters of
its fiscal year. Recent business acquisitions are not expected to affect this
trend.
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SALES AND MARKETING
Each of the Company's current four operating segments maintains a
relatively autonomous sales and marketing function, although comprehensive
analyses are now underway to assess the continued appropriateness of the current
approach. Due to the highly confidential and proprietary nature of a business'
purchasing patterns and procurement prices combined with the typical desire to
maximize the amount of funds recovered, most prospective clients conduct an
extensive investigation prior to selecting a specific recovery audit firm. This
type of investigation may include an on-site inspection of the Company's service
facilities. The Company has typically found that its service offerings which are
the most annuity-like in nature (e.g., freight services) require the longest
sales cycle and highest levels of direct person-to-person contact. Conversely,
service offerings that are short-term discrete events such as certain taxation
projects are susceptible to more cost effective sales and marketing delivery
approaches such as telemarketing.
PROPRIETARY RIGHTS
The Company continuously develops new recovery audit software and enhances
existing proprietary software. The Company regards its proprietary software as
protected by trade secret and copyright laws of general applicability. In
addition, the Company attempts to safeguard its software through employee and
third-party nondisclosure agreements and other methods of protection. While the
Company's competitive position may be affected by its ability to protect its
software and other proprietary information, the Company believes that the
protection afforded by trade secret and copyright laws is less significant to
the Company's success than the continued pursuit and implementation of its
operating strategies and other factors such as the knowledge, ability and
experience of its personnel.
The Company owns or has rights to various copyrights, trademarks and trade
names used in the Company's business. These include AuditPro(R), AuditPro
97(TM), CLM Processing System(TM), Claims Management System(TM), eassurance,
EAudit, EDI Inquiry(TM), DATAMAP(TM), FreightPro(TM), ImagePro, Meridian VAT
Reclaim(R), PayTech(R), Profit Recovery Group International(R), PRG(R), PRS(R),
RBAdvantage(TM), Recap Express(R), RecoverNow(R), ReportPro(TM), ScanSearch(TM),
Sentinel(TM) and THORANT(TM).
COMPETITION
The recovery audit business is highly competitive. The competitive factors
affecting the market for the Company's recovery audit services include:
- establishing and maintaining client relationships;
- quality and quantity of claims identified;
- experience and professionalism of audit staff;
- rates for services;
- technology; and
- geographic scope of operations.
The Company's principal competitors for accounts payable recovery audit
services include local and regional firms and one firm, Howard Schultz &
Associates, Inc., with operations in the U.S. and abroad. The Company's
competitors for tax recovery audit services in Europe include major
international accounting firms, tax attorneys and several smaller tax recovery
audit firms. Competing recovery audit activities in the freight and facilities
segments are currently conducted by a sizable number of small companies, most of
which have a highly focused niche specialty.
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The Company believes that as businesses continue to expand internationally
and implement more sophisticated electronic accounts payable systems, smaller
recovery audit firms will lack the technology and infrastructure necessary to
remain competitive unless they make substantial investments to upgrade and
expand their skills, technologies and geographic scope of operations.
EMPLOYEES
At December 31, 1999, the Company had approximately 2,856 employees, 1,700
of whom were located in the U.S. The majority of the Company's employees are
involved in the audit function. The Company believes its employee relations are
good.
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RISK FACTORS
OUR RATE OF REVENUE GROWTH WILL BE ADVERSELY AFFECTED IF WE ARE UNABLE TO MAKE
FUTURE ACQUISITIONS
If we are unable to make acquisitions, we may not meet our revenue growth
expectations and our business, financial condition and results of operations
could be materially and adversely affected. From January 1, 1997 through March
24, 2000, we completed 21 acquisitions. While we are not currently a party to
any agreements or understandings for any material acquisitions, we expect to
continue to acquire both domestic and foreign companies as part of our growth
strategy. However, we may be unable to continue to identify suitable acquisition
candidates. We compete with other companies to acquire recovery audit firms and
other businesses. We expect this competition to continue to increase, making it
more difficult to acquire suitable companies on favorable terms.
IF WE CANNOT INTEGRATE ACQUIRED COMPANIES WITH OUR BUSINESS, OUR PROFITABILITY
MAY BE ADVERSELY AFFECTED
Even though we may acquire additional companies in the future, we may be
unable to successfully integrate the acquired businesses and realize anticipated
economic, operational and other benefits in a timely manner. Integration of an
acquired business is especially difficult when we acquire a business in a market
in which we have limited or no expertise, or with a corporate culture different
from ours. If we are unable to successfully integrate acquired businesses, we
may incur substantial costs and delays or other operational, technical or
financial problems. In addition, the failure to successfully integrate
acquisitions may divert management's attention from our existing business and
may damage our relationships with our key clients and employees.
ACQUISITIONS MAY DECREASE OUR SHAREHOLDERS' PERCENTAGE OWNERSHIP IN PRG AND
REQUIRE US TO INCUR ADDITIONAL DEBT
We may issue equity securities in future acquisitions that could be
dilutive to our shareholders. We also may incur additional debt and amortization
expense related to goodwill and other intangible assets in future acquisitions.
This additional debt and amortization expense may reduce significantly our
profitability and materially and adversely affect our business, financial
condition and results of operations.
STRIKES OR OTHER EMPLOYMENT DISRUPTIONS BY OR ON THE PART OF EMPLOYEES OF
FOREIGN GOVERNMENTS WITH WHOM THE COMPANY'S TAXATION DIVISION TRANSACTS BUSINESS
COULD HAVE A MATERIAL ADVERSE EFFECT ON THE REVENUES GENERATED BY THE COMPANY'S
TAXATION DIVISION
Any strike or other disruption of employment by or on the part of the
employees of the foreign governments with whom the Company's Taxation division
transacts business could significantly delay the recognition of revenue by the
Taxation division and cause the Company to fail to achieve its revenue and
earnings estimates for one or more quarters or perhaps for an entire fiscal
year. During a substantial portion of March 2000 certain employees of the French
Tax Administration were on strike. Although we believe the strike is coming to a
close, substantial work backlogs have developed. As a result of the strike, the
revenues of the Company's French tax recovery operations for the first quarter
of 2000 have been materially negatively impacted, and we expect that revenues
from these operations for the second quarter of 2000 will also be adversely
impacted. We therefore believe that our total revenues and results of operations
for the first two quarters of 2000 will be lower than we had originally
anticipated. Furthermore, we are unable to predict how quickly we will be able
to recognize the delayed revenues and we may be unable to recover all delayed
revenues by December 31, 2000.
WE MAY NOT BE ABLE TO CONTINUE TO IDENTIFY A LARGER VOLUME OF RECOVERIES EACH
YEAR FOR THE CLIENTS SERVED BY OUR RETAIL/WHOLESALE/GOVERNMENTAL DIVISION
For most clients served by our retail/wholesale/governmental division, we
typically identify a larger volume of recoveries each year when compared to
recoveries realized in the immediately preceding year.
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There is no guaranty, however, that these larger recoveries will continue. If
such recovery increases do not continue, the Company's revenues and operating
results would be materially adversely affected. Factors that could prevent
recovery from increasing include, but are not limited to, unexpected advances in
technology which significantly reduce the levels of client overpayments and the
unexpected reversal of current trends toward the outsourcing of non-core
competencies such as recovery audit services.
CLIENT AND VENDOR BANKRUPTCIES COULD REDUCE OUR EARNINGS
The Company's clients generally operate in intensely competitive
environments and bankruptcy filings are not uncommon. Future bankruptcy filings
by one or more of our larger clients could have a material adverse effect on our
business, financial condition and results of operations.
WE DEPEND ON CERTAIN CLIENTS FOR SIGNIFICANT REVENUES
With the Company's considerable growth and diversification of services
since its March 1996 initial public offering, dependence on any one client or
group of clients for revenue and profits has been reduced. Nevertheless, the
Company's largest revenue generating clients continue to be retailers, and the
Company's revenues and profitability would be materially adversely affected if
one or more of its largest retail clients filed for bankruptcy or otherwise
ceased to do business with us.
WE RELY ON INTERNATIONAL OPERATIONS FOR SIGNIFICANT REVENUES
We derived 31% of our revenues from international operations in 1999.
International operations are subject to risks, including:
- fluctuations in political and economic instability;
- difficulties in staffing and managing foreign operations and in
collecting accounts receivable;
- fluctuations in currency exchange rates;
- costs associated with adapting our services to our foreign clients'
needs;
- unexpected changes in regulatory requirements and laws;
- difficulties in transferring earnings from our foreign subsidiaries to
us; and
- burdens of complying with a wide variety of foreign laws and labor
practices, including laws that could subject certain tax recovery audit
practices to regulation as the unauthorized practice of law.
Because a significant portion of our revenues come from international
operations, the occurrence of any of the above events may materially and
adversely affect our business, financial condition and results of operations.
RECOVERY AUDIT SERVICES ARE NOT WIDELY USED IN INTERNATIONAL MARKETS
We rely heavily on international expansion to achieve our long-term growth
objectives. Although our recovery audit services constitute a generally accepted
business practice among retailers in the U.S. and Canada, our services have not
yet become widely used in many international markets. Prospective clients,
vendors or other involved parties in foreign markets may not accept our
services. The failure of these parties to accept and use our services could have
a material adverse effect on our business, financial condition and results of
operations.
WE REQUIRE SIGNIFICANT MANAGEMENT AND FINANCIAL RESOURCES TO OPERATE AND EXPAND
OUR RECOVERY AUDIT SERVICES INTERNATIONALLY
In our experience, entry into new international markets requires
considerable management time as well as start-up expenses for market
development, hiring and establishing office facilities. In addition, we have
encountered, and expect to continue to encounter, significant expense and delays
in expanding our interna-
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tional operations because of language and cultural differences, and staffing,
communications and related issues. We generally incur the costs associated with
international expansion before any significant revenues are generated. As a
result, initial operations in a new market typically operate at low margins or
may be unprofitable. Because our international expansion strategy will require
substantial financial resources, we may incur additional indebtedness or issue
additional equity securities which could be dilutive to our shareholders. In
addition, financing for international expansion may not be available to us on
acceptable terms and conditions.
OUR REVENUE MAY BE ADVERSELY AFFECTED IF WE DO NOT CORRECTLY ESTIMATE OUR
UNCOLLECTIBLE ACCOUNTS RECEIVABLE
We estimate uncollectible levels of accounts receivable on an aggregate
basis and reduce earnings, quarterly by the amounts of these estimates. Despite
our experience in providing accounts payable recovery audit services, our
estimates of uncollectible accounts receivable may not be adequate. If we
overestimate the amount of accounts receivable we expect to collect, then our
future earnings will be reduced, and, as a result, our stock price could
decline.
THE LEVEL OF OUR PROFITABILITY IS DETERMINED BY OUR THIRD AND FOURTH QUARTER
OPERATING RESULTS
The purchasing and operational cycles of our clients typically cause us to
realize higher revenues and operating income in the last two quarters of our
fiscal year. If we do not continue to realize increased revenues in future third
and fourth quarter periods, our profitability for any affected quarter and the
entire year could be materially and adversely affected because ongoing selling,
general and administrative expenses are largely fixed over the short term.
WE MAY BE UNABLE TO PROTECT AND MAINTAIN THE COMPETITIVE ADVANTAGE OF OUR
PROPRIETARY TECHNOLOGY AND INTELLECTUAL PROPERTY RIGHTS
Our operations could be materially and adversely affected if we are not
adequately able to protect our proprietary software, audit techniques and
methodologies, and other proprietary intellectual property rights. We rely on a
combination of trade secret laws, nondisclosure and other contractual
arrangements and technical measures to protect our proprietary rights. Although
we presently hold U.S. and foreign registered trademarks and U.S. registered
copyrights on certain of our proprietary technology, we may be unable to obtain
similar protection on our other intellectual property. In addition, in the case
of foreign registered trademarks, we may not receive the same enforcement
protection on our intellectual property as in the U.S. We generally enter into
confidentiality agreements with our employees, consultants, clients and
potential clients and limit access to, and distribution of, our proprietary
information. Nevertheless, we may be unable to deter misappropriation of our
proprietary information, detect unauthorized use and take appropriate steps to
enforce our intellectual property rights. Our competitors also may independently
develop technologies that are substantially equivalent or superior to our
technology. Although we believe that our services and products do not infringe
on the intellectual property rights of others, we can not prevent someone else
from asserting a claim against us in the future for violating their technology
rights.
OUR NEED TO RETAIN THE SERVICES OF MESSRS. COOK AND LUSTIG
Our success depends largely on the efforts and skills of our executive
officers and key employees, particularly John M. Cook and Michael A. Lustig in
the United States. The loss of the services of one or both of these persons
could materially adversely affect our business, financial condition and results
of operations. We have entered into employment agreements with Messrs. Cook and
Lustig and other members of management. We also maintain key man life insurance
policies in the aggregate amounts of $13.3 million on the life of Mr. Cook and
$5.0 million on the life of Mr. Lustig.
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WE MAY NOT BE ABLE TO CONTINUE TO COMPETE SUCCESSFULLY WITH OTHER RECOVERY AUDIT
FIRMS
The recovery audit business is highly competitive. Our principal
competitors for accounts payable recovery audit services include local and
regional firms and Howard Schultz & Associates, Inc. with operations in the U.S.
and abroad. Our competitors for tax recovery audit services in France include
major international accounting firms, tax attorneys and several smaller tax
recovery audit firms. We are uncertain whether we can continue to compete
successfully with our competitors. In addition, our profit margins could decline
because of competitive pricing pressures that may have a material adverse effect
on our business, financial condition and results of operations.
OUR ARTICLES OF INCORPORATION AND BYLAWS AND GEORGIA LAW MAY INHIBIT A TAKEOVER
OF PRG
Our Articles of Incorporation and Bylaws and Georgia law contain provisions
that may delay, deter or inhibit a future acquisition of us not approved by our
Board of Directors. This could occur even if our shareholders are offered an
attractive value for their shares or if a substantial number or even a majority
of our shareholders believe the takeover is in their best interest. These
provisions are intended to encourage any person interested in acquiring us to
negotiate with and obtain the approval of our Board of Directors in connection
with the transaction. Provisions that could delay, deter or inhibit a future
acquisition include the following:
- a staggered Board of Directors;
- special meeting call restrictions; and
- the ability of the Board of Directors to consider the interests of
various constituencies, including our employees, clients and creditors
and the local community.
In addition, our Articles of Incorporation permit the Board of Directors to
issue shares of preferred stock with such designations, powers, preferences and
rights as it determines, without any further vote or action by our shareholders.
These provisions also could discourage bids for your shares of common stock at a
premium and have a material adverse effect on the market price of your shares.
THE PRICE OF OUR STOCK HAS BEEN VOLATILE AND COULD CONTINUE TO FLUCTUATE
SUBSTANTIALLY
Our common stock is traded on the Nasdaq National Market. The market price
of our common stock has been volatile, has fluctuated substantially and could
continue to do so, based on a variety of factors, including the following:
- future announcements concerning us or our key clients or competitors;
- technological innovations;
- government regulations;
- litigation; or
- changes in earnings estimates by analysts or the publication of negative
reports by analysts about us.
Furthermore, stock prices for many companies fluctuate widely for reasons
that may be unrelated to their operating results. These fluctuations and general
economic, political and market conditions, such as recessions or international
currency fluctuations and demand for our services, may adversely affect the
market price of our common stock.
WE INTEND TO EXPAND FURTHER INTO ELECTRONIC COMMERCE AUDITING STRATEGIES AND
PROCESSES
The Company anticipates a growing need for recovery auditing services among
current clients migrating to internet-based procurement, as well as potential
clients already engaged in electronic commerce transactions. The Company
possesses a number of core competencies, including Electronic Data Interchange
("EDI") expertise, that can be leveraged toward the development of new
electronic commerce audit services. The Company's E-Commerce unit, International
Systems Consultants ("ISC"), is a custom application
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development, consulting and systems integration firm specializing primarily in
providing 3-tier client server software on a project basis as well as managing
projects requiring secure internet-based transaction processing. In response to
future demand for the Company's recovery auditing expertise, the Company intends
to further expand into internet technology areas in the near future and may make
substantial financial investments to do so. The profitability of these
investments can not be assured nor can the demand for these services be fully
anticipated.
FORWARD LOOKING STATEMENTS
Some of the information in this Form 10-K contains forward-looking
statements that involve substantial risks and uncertainties. You can identify
these statements by forward-looking words such as "may," "will," "expect,"
"anticipate," "believe," "estimate" and "continue" or similar words. You should
read statements that contain these words carefully. Such forward-looking
statements include the following:
- the impact on the Company's revenues and results of operations of the
March 2000 strike by certain employees of the French Tax Administration;
- the Company's belief that current business-to-business e-commerce
initiatives involving the internet may provide recovery opportunities
that exceed those existing when EDI is used;
- the Company's ability to cross-sell additional services to existing
clients;
- the Company's ability to make a limited number of strategic acquisitions
in 2000;
- the Company's ability to identify each year a larger volume of recoveries
for most of its retail/ wholesale/governmental clients;
- the ability of Meridian to generate recurring revenues;
- the ability of the freight division to generate recurring revenues;
- ultimate success of the current initiative to integrate all client
freight payments into a composite database;
- the ability of smaller recovery audit firms to compete in the future
without making substantial capital investments;
- the belief that the rate of future revenue growth for international
operations will significantly exceed that for domestic operations; and
- statements that contain projections of our future results of operations
or of our financial condition.
There may be events in the future, however, that we are not accurately able
to predict or over which we have no control. The risk factors listed in this
section, as well as any cautionary language in this Form 10-K, provide examples
of risks, uncertainties and events that may cause our actual results to differ
materially from the expectations we describe in our forward-looking statements.
You should be aware that the occurrence of any of the events denoted as risk
factors above and elsewhere in this Form 10-K could have a material adverse
effect on our business, financial condition and results of operations.
ITEM 2. PROPERTIES
The Company's principal executive office is located in approximately 95,000
square feet of office space in Atlanta, Georgia. The Company leases this space
under various agreements with primary terms expiring from December 2002 through
February 2005. The Company's various operating units lease numerous other
parcels of operating space in the various countries in which the Company
currently conducts its business. Most of the Company's real property leases are
individually less than 5 years in duration. Certain recently acquired operations
in France are conducted from facilities owned by the Company. The Company
anticipates that additional space will be required as its business continues to
expand, and believes that it will be able to obtain suitable space as needed.
See Note 4 of Notes to Consolidated Financial Statements of the Company.
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ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to any legal proceedings that it believes could
have a material adverse effect on its business, financial condition or results
of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the fiscal fourth quarter covered by this report, no matter was
submitted to a vote of security holders of the Company.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock is traded under the symbol "PRGX" on The Nasdaq
Stock Market (Nasdaq). The Company has not paid cash dividends since its March
26, 1996 initial public offering and does not intend to pay cash dividends in
the foreseeable future. Moreover, restrictive covenants included in the
Company's bank credit facility specifically prohibit payment of cash dividends.
Shareholder distributions reflected in the Company's Consolidated Statements of
Shareholders' Equity for the years ended December 31, 1999, 1998 and 1997 relate
to the pre-acquisition operations of PRS International, Ltd. which the Company
acquired in August 1999 and accounted for under the pooling-of-interests method.
As of February 16, 2000, there were approximately 6,000 beneficial holders of
the Company's common stock and 262 holders of record. The following table sets
forth, for the quarters indicated, the range of high and low prices for the
Company's common stock as reported by Nasdaq during 1999 and 1998 and which have
been retroactively adjusted, where appropriate, to reflect the Company's 3-for-2
stock split (effected in the form of a stock dividend) paid on August 17, 1999:
1999 CALENDAR QUARTER HIGH LOW
- --------------------- ------ ------
1st Quarter................................................. $26.67 $18.75
2nd Quarter................................................. 32.25 22.42
3rd Quarter................................................. 45.50 24.83
4th Quarter................................................. 47.50 23.00
1998 CALENDAR QUARTER
- --------------------------------------------------------------------
1st Quarter................................................. $15.33 $10.33
2nd Quarter................................................. 19.67 14.25
3rd Quarter................................................. 22.67 12.58
4th Quarter................................................. 26.08 13.42
On November 15, 1999, in connection with the acquisition of the shares of
AP SA and its subsidiaries (collectively, "Groupe AP"), the Company issued
356,718 restricted, unregistered shares of its common stock to certain former
shareholders of Groupe AP. The shares were issued pursuant to the exemption from
registration provided by Regulation S promulgated pursuant to the Securities Act
of 1933, as amended.
On December 3, 1999, in connection with the acquisition of all outstanding
shares of Freight Rate Services, Inc. ("FRS") the Company issued 60,223
restricted, unregistered shares of its common stock to FRS. The shares were
issued pursuant to the exemption from registration provided by Section 4(2) of
the Securities Act of 1933, as amended.
On December 16, 1999, in connection with the acquisition of substantially
all net assets of Integrated Systems Consultants, Inc. ("ISC"), the Company
issued 77,569 restricted, unregistered shares of its common stock to ISC. The
shares were issued pursuant to the exemption from registration provided by
Section 4(2) of the Securities Act of 1933, as amended.
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On December 28, 1999, in connection with the acquisition of the remaining
minority ownership interests in certain of the Company's consolidated
subsidiaries acquired in connection with the acquisition of Meridian VAT
Corporation Limited, the Company issued 158,178 restricted, unregistered shares
of its common stock to the minority owners of those subsidiaries. The shares
were issued pursuant to the exemption from registration provided by Section 4(2)
of the Securities Act of 1933, as amended.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following table sets forth selected consolidated financial data for the
Company as of and for the five years ended December 31, 1999. Such historical
consolidated financial data as of and for the five years ended December 31, 1999
have been derived from the Company's Consolidated Financial Statements and Notes
thereto, which Consolidated Financial Statements for the three years ended
December 31, 1999 have been audited by KPMG LLP, independent auditors. The
audited Consolidated Balance Sheets as of December 31, 1999 and 1998, and the
related Consolidated Statements of Operations, Shareholders' Equity and Cash
Flows for each of the years in the three-year period ended December 31, 1999 and
the report thereon, which in each such year is based partially upon the report
of other auditors and refers to a change in accounting for revenue recognition
in 1999, are included elsewhere herein. The selected Statements of Earnings data
for the two years ended December 31, 1996 and the selected Balance Sheet data as
of December 31, 1997, 1996 and 1995 are unaudited. Selected consolidated
financial data for the Company as of and for the four years ended December 31,
1998, as previously reported, have been retroactively restated, as required
under generally accepted accounting principles, to include the accounts of
Meridian VAT Corporation Limited and PRS International, Ltd. which were each
acquired in August 1999 and accounted for under the pooling-of-interests method.
Further, the Company made the decision in the second quarter of 1999 to
recognize revenue on all of its then existing operations when it invoices
clients for its fee retroactive to January 1, 1999. The Company had previously
recognized revenue from services provided to its historical client base
(consisting primarily of retailers, wholesale distributors and governmental
entities) at the time overpayment claims were presented to and approved by its
clients. In accordance with the applicable requirements of generally accepted
accounting principles, financial statements for periods prior to 1999 have not
been restated. AS A RESULT, CERTAIN FINANCIAL STATEMENT AMOUNTS FOR 1999 WILL
NOT BE DIRECTLY COMPARABLE TO CORRESPONDING AMOUNTS FOR 1998 AND PRIOR YEARS.
The data presented below should be read in conjunction with the Consolidated
Financial Statements and Notes thereto and other financial information appearing
elsewhere in this Form 10-K including Management's Discussion and Analysis of
Financial Condition and Results of Operations.
YEARS ENDED DECEMBER 31,
-------------------------------------------------------------
1999(2)(11) 1998(1)(3) 1997(1)(4) 1996(1) 1995(1)(5)
----------- ---------- ---------- -------- ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENTS OF EARNINGS DATA:
Revenues............................ $349,647 $242,145 $146,467 $102,981 $77,823
Cost of revenues.................... 180,637 126,230 79,126 57,017 50,538
Selling, general and administrative
expenses.......................... 102,281 79,324 46,174 32,855 26,512
-------- -------- -------- -------- -------
Operating income before
business acquisition and
restructuring expenses....... 66,729 36,591 21,167 13,109 773
Business acquisition and
restructuring expenses(6)......... 13,341 3,818 2,433 366 --
-------- -------- -------- -------- -------
Operating income............... 53,388 32,773 18,734 12,743 773
Interest (expense), net............. (5,529) (5,851) (2,586) (741) (2,696)
-------- -------- -------- -------- -------
Earnings (loss) before income
taxes, minority interest and
cumulative effect of
accounting change............ 47,859 26,922 16,148 12,002 (1,923)
Income tax expense (benefit)(7)..... 20,066 11,828 6,373 7,878 (205)
-------- -------- -------- -------- -------
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YEARS ENDED DECEMBER 31,
-------------------------------------------------------------
1999(2)(11) 1998(1)(3) 1997(1)(4) 1996(1) 1995(1)(5)
----------- ---------- ---------- -------- ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Earnings (loss) before minority
interest and cumulative
effect of accounting
change....................... 27,793 15,094 9,775 4,124 (1,718)
Minority interest in (earnings) loss
of consolidated subsidiaries...... (357) (460) (411) (281) 903
-------- -------- -------- -------- -------
Earnings (loss) before
cumulative effect of
accounting change............ 27,436 14,634 9,364 3,843 (815)
Cumulative effect of accounting
change............................ (29,195) -- -- -- --
-------- -------- -------- -------- -------
Net earnings (loss)............ $ (1,759) $ 14,634 $ 9,364 $ 3,843 $ (815)
======== ======== ======== ======== =======
Cash dividends per share(12)........... $ 0.01 $ 0.01 $ 0.01 $ 0.16 $ 0.44
======== ======== ======== ======== =======
Basic earnings (loss) per share:
Earnings (loss) before cumulative
effect of accounting change....... $ 0.57 $ 0.37 $ 0.28 $ 0.13 $ (0.03)
Cumulative effect of accounting
change............................ (0.61) -- -- -- --
-------- -------- -------- -------- -------
Net earnings (loss)................. $ (0.04) $ 0.37 $ 0.28 $ 0.13 $ (0.03)
======== ======== ======== ======== =======
Diluted earnings (loss) per share:
Earnings (loss) before cumulative
effect of accounting change....... $ 0.55 $ 0.36 $ 0.27 $ 0.12 $ (0.03)
Cumulative effect of accounting
change............................ (0.59) -- -- -- --
-------- -------- -------- -------- -------
Net earnings (loss)................. $ (0.04) $ 0.36 $ 0.27 $ 0.12 $ (0.03)
======== ======== ======== ======== =======
DECEMBER 31,
----------------------------------------------------------------
1999(2)(8) 1998(1)(3)(9) 1997(1)(4) 1996(1)(10) 1995(1)
---------- ------------- ---------- ----------- --------
(IN THOUSANDS)
BALANCE SHEET DATA:
Cash and cash equivalents......... $ 39,260 $ 30,266 $ 20,495 $17,656 $ 1,171
Working capital................... 22,740 30,941 39,018 32,223 4,564
Total assets...................... 529,160 419,663 164,884 89,326 45,753
Long-term debt, excluding current
installments and loans from
shareholders.................... 95,294 112,886 24,382 716 17,629
Loans from shareholders........... -- 27,477 24,101 22,729 19,597
Total shareholders' equity
(deficit)....................... 292,500 144,105 45,515 23,570 (20,192)
- ---------------
(1) Selected consolidated financial data for the Company as of and for the four
years December 31, 1998, as previously reported, have been retroactively
restated, as required under generally accepted accounting principles, to
include the accounts of Meridian VAT Corporation Limited and PRS
International, Ltd. which were each acquired in August 1999 and accounted
for under the pooling-of-interests method.
(2) During 1999, the Company completed six acquisitions accounted for as
purchases consisting of Payment Technologies, Inc. (April), Invoice and
Tariff Management Group, LLC (June), AP SA (October), Freight Rate
Services, Inc. (December), Integrated Systems Consultants, Inc. (December)
and minority interests in three Japanese subsidiaries of Meridian VAT
Corporation Limited (December). See Note 8 of Notes to Consolidated
Financial Statements.
(3) During 1998, the Company completed eight acquisitions accounted for as
purchases consisting of Precision Data Link (March), The Medallion Group
(June), Novexel S.A. (July), Loder, Drew & Associates, Inc. (August), Cost
Recovery Professionals Pty Ltd (September), Robert Beck &
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Associates, Inc. and related businesses (October), IP Strategies SA
(November) and Industrial Traffic Consultants, Inc. (December). See Note 8
of Notes to Consolidated Financial Statements.
(4) During 1997, the Company completed four acquisitions accounted for as
purchases consisting of Accounts Payable Recovery Services, Inc.
(February), The Hale Group (May), 98.4% of Financiere Alma, S.A. and its
subsidiaries (October) and TradeCheck, LLC (November), and one acquisition
accounted for as a pooling of interests, Shaps Group, Inc. (January). See
Note 8 of Notes to Consolidated Financial Statements.
(5) Effective January 1, 1995, the Company acquired Fial & Associates, Inc.
(6) Consists of merger-related charges relating to businesses acquired under
the pooling-of-interests accounting method and certain restructuring
charges. See Note 14 of Notes to Consolidated Financial Statements.
(7) In April 1995, the Company's predecessors reorganized and its international
entities became C corporations. Additionally, in connection with the
Company's March 1996 initial public offering, all domestic entities became
C corporations. As a result of these conversions to C corporations, the
Company incurred charges to operations of $305,000 in 1995 and $3.7 million
in 1996 for cumulative deferred income taxes. The Company's 1996 provision
for income taxes of $7.9 million consists of the above-mentioned $3.7
million charge for cumulative deferred income taxes combined with $4.2
million in tax provisions for the three quarters subsequent to the March
26, 1996 initial public offering.
(8) Balance Sheet Data as of December 31, 1999 reflect the receipt of net
proceeds from the Company's January 1999 follow-on public offering. See
Note 7 of Notes to Consolidated Financial Statements.
(9) Balance Sheet Data as of December 31, 1998 reflect the receipt of net
proceeds from the Company's March 1998 follow-on public offering. See Note
7 of Notes to Consolidated Financial Statements.
(10) Balance Sheet Data as of December 31, 1996 reflect the receipt of net
proceeds from the Company's March 1996 initial public offering together
with the partial use of such proceeds to repay substantially all debt
obligations other than certain convertible debentures which were converted
to equity immediately prior to the offering.
(11) In 1999, the Company changed its method of accounting for revenue
recognition. See Note 1(c) of Notes to Consolidated Financial Statements.
(12) Cash dividends per share represent distributions to shareholders of the
Company prior to the Company's initial public offering and distributions to
the shareholders of PRS International, Ltd.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
The Company is a leading provider of accounts payable and other recovery
audit services to large and mid-size businesses and certain governmental
agencies having numerous payment transactions with many vendors. These
businesses include, but are not limited to, retailers, manufacturers, wholesale
distributors, technology companies and healthcare providers.
In businesses with large purchase volumes and continuously fluctuating
prices, some small percentage of erroneous overpayments to vendors is
inevitable. In addition, the complexity of various tax laws results in
overpayments to governmental agencies. Services such as freight and
telecommunications provided to businesses under complex pricing arrangements
also can result in overpayments. All of these overpayments result in "lost
profits." The Company's trained, experienced audit specialists use sophisticated
proprietary technology and advanced audit techniques and methodologies to
identify overpayments to vendors and tax authorities. The Company receives a
contractual percentage of overpayments it identifies and its clients recover.
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RESULTS OF OPERATIONS
The following table sets forth the percentage of revenues represented by
certain items in the Company's Consolidated Statements of Earnings for the
periods indicated:
YEARS ENDED DECEMBER 31,
--------------------------
1999 1998 1997
------ ------ ------
STATEMENTS OF EARNINGS DATA:
Revenues................................................ 100.0% 100.0% 100.0%
Cost of revenues........................................ 51.7 52.1 54.0
Selling, general and administrative expenses............ 29.3 32.8 31.5
----- ----- -----
Operating income before business acquisition and
restructuring expenses........................ 19.0 15.1 14.5
Business acquisition and restructuring expenses......... 3.8 1.6 1.7
----- ----- -----
Operating income................................ 15.2 13.5 12.8
Interest (expense), net................................. (1.6) (2.4) (1.8)
----- ----- -----
Earnings before income taxes, minority interest
and cumulative effect of accounting change.... 13.6 11.1 11.0
Income taxes............................................ 5.7 4.9 4.3
----- ----- -----
Earnings before minority interest and cumulative
effect of accounting change................... 7.9 6.2 6.7
Minority interest in (earnings) of consolidated
subsidiaries......................................... (.1) (.2) (.3)
----- ----- -----
Earnings before cumulative effect of accounting
change........................................ 7.8 6.0 6.4
Cumulative effect of accounting change.................. (8.3) -- --
----- ----- -----
Net earnings (loss)............................. (.5)% 6.0% 6.4%
===== ===== =====
1999 COMPARED WITH 1998
As indicated in Note 1(c) of Notes to Consolidated Financial Statements,
the Company chose during its quarter ended June 30, 1999, retroactive to January
1, 1999, to recognize revenue for the substantial majority of its operations
when it invoices clients for its fee. In accordance with the applicable
requirements of generally accepted accounting principles, the consolidated
financial statements for periods prior to 1999 have not been restated. AS A
RESULT, CERTAIN FINANCIAL STATEMENT ACCOUNTS FOR 1999 WILL NOT BE DIRECTLY
COMPARABLE TO CORRESPONDING AMOUNTS FOR 1998 AND PRIOR YEARS.
As further indicated in Note 1(c) and elsewhere in the Notes to
Consolidated Financial Statements, during August 1999, the Company acquired
Meridian VAT Corporation Limited ("Meridian") and PRS International, Ltd.
("PRS"). Both of these acquisitions were accounted for as poolings-of-interests.
Accordingly, the Company's previously reported consolidated financial statements
for all prior periods have been retroactively restated, as required under
generally accepted accounting principles, to include the operations of Meridian
and PRS.
Revenues. The Company's revenues consist principally of contractual
percentages of overpayments recovered for clients. The Company's services and
operations are currently grouped into four distinct operating segments: Accounts
Payable; Freight; Taxation; and Facilities (see Note 11 of Notes to Consolidated
Financial Statements).
Revenues increased 44.4% to $349.6 million in 1999, up from $242.1 million
in 1998. Domestic revenues increased 46.9% to $240.3 million in 1999, up from
$163.6 million in 1998. International revenues, which the Company considers to
be revenues derived from all operations outside of the United States, increased
39.4% to $109.4 million, up from $78.5 million in 1998.
Domestic revenue growth in 1999 was broad-based with Accounts Payable
revenues up 37.5%, Freight revenues up 151.1%, Facilities revenues up 781.0% and
Taxation revenues up 24.0% in 1999 as compared to 1998. Domestic revenue growth
in 1999 was driven by a combination of revenues from companies acquired during
1999 and 1998 under the purchase method of accounting (see Note 8 of Notes to
Consolidated
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Financial Statements) and strong internal growth resulting from both new clients
and additional services provided to existing clients.
International revenue growth in 1999 was also broad-based with Accounts
Payable revenues up 38.0% and Taxation revenues up 40.2% as compared to 1998.
The Company's Freight and Facilities segments do not currently conduct
international operations. International revenue growth in 1999 was driven
primarily by the same factors as set forth above for domestic revenue growth.
The Company continues to believe that the rate of growth for its
international operations will significantly exceed its rate of domestic revenue
growth for the foreseeable future if the revenue effect of acquired businesses
is excluded.
Cost of Revenues. Cost of revenues consists principally of commissions
paid or payable to the Company's auditors based primarily upon the level of
overpayment recoveries, and compensation paid to various types of hourly workers
and salaried operational managers. Also, included in cost of revenues are other
direct costs incurred by these personnel including rental of non-headquarters
offices, travel and entertainment, telephone, utilities, maintenance and
supplies, and clerical assistance. Cost of revenues decreased to 51.7% in 1999,
down from 52.1% in 1998.
Domestically, cost of revenues as a percentage of revenues decreased to
52.2% in 1999, down from 52.8% in 1998. Internationally, cost of revenues as a
percentage of revenues also decreased slightly to 50.5% in 1999, down from 50.6%
in 1998. Percentage improvements worldwide related principally to fixed cost
elements being spread over rapidly growing revenue bases.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses include the expenses of sales and marketing activities,
information technology services and various corporate data centers, human
resources, legal and accounting, corporate development, administration,
headquarters-related depreciation of property and equipment and amortization of
intangibles. Selling, general and administrative expenses as a percentage of
revenues decreased to 29.3% of revenues in 1999, down from 32.8% in 1998.
Domestically, selling, general and administrative expenses as a percentage
of revenues decreased to 28.8% in 1999, down from 29.8% in 1998.
Internationally, selling, general and administrative expenses as a percentage of
revenues also decreased to 30.3% in 1999, down from 38.9% in 1998. As with cost
of revenues, percentage improvements worldwide related principally to fixed cost
elements being spread over rapidly growing revenue bases.
In connection with acquired businesses, the Company has recorded intangible
assets including goodwill and deferred non-compete costs. Amortization of these
intangible assets totalled $11.6 million in 1999 and $6.3 million in 1998.
Business Acquisition and Restructuring Expenses. Business acquisition and
restructuring expenses consisted of the following components (in thousands):
YEAR ENDED
DECEMBER 31,
----------------
1999 1998
------- ------
Acquisition-related expenses incurred by all parties in
connection with the August 1999 acquisitions of Meridian
and PRS................................................... $ 9,291 $ --
Expenses incurred by Meridian with respect to phantom stock
plan...................................................... 2,991 3,818
Restructuring charge incurred in the fourth quarter of 1999
in connection with combining the operations of PRS with
those of the Company's existing Accounts Payable
Commercial unit........................................... 1,059 --
------- ------
$13,341 $3,818
======= ======
The Company effected separate acquisitions of Meridian and PRS which were
each completed in August 1999 and each accounted for as a pooling-of-interests.
As required under generally accepted accounting principles governing
pooling-of-interests accounting, acquisition-related expenses incurred by the
Company,
19
22
Meridian, PRS and the respective shareholders of Meridian and PRS have been
aggregated and charged to current operations in 1999. These expenses principally
included investment banking fees and legal and accounting fees.
Meridian established a phantom stock plan in 1996 whereby participants were
entitled to receive the subsequent appreciation in the value of Meridian's
shares in direct proportion to the number of phantom shares assigned to each
individual. No actual shares of Meridian stock were granted or issued to
participants. Subsequent appreciation in value of the phantom shares was charged
to operations as incurred, and was payable in cash upon the occurrence of
certain specified events such as a sale of Merdian. The phantom stock plan was
terminated upon the Company's acquisition of Meridian, and participants were
paid a portion of their respective proceeds during the fourth quarter of 1999
and will receive future periodic payments concluding with a final payment
scheduled for January 2001.
The Company combined the operations of PRS with its existing Accounts
Payable Commercial Division in the fourth quarter of 1999 and incurred a charge
to operations of $1.1 million to provide for certain employee severance payments
and the costs of closing duplicative or unnecessary office facilities.
Operating Income. Operating income increased 62.9% from to $53.4 million
in 1999, up from $32.8 million in 1998. As a percentage of revenues, operating
income increased to 15.2% in 1999, up from 13.5% in 1998. Excluding the effect
of business acquisition and restructuring expenses, operating income as a
percentage of revenues would have been 19.1% in 1999 and 15.1% in 1998.
Interest Expense (Net). Interest expense (net) for 1999 was $5.5 million,
down slightly from $5.9 million in 1998. Most of the Company's interest expense
pertains to its $200.0 million senior credit facility with a banking syndicate.
The Company makes periodic borrowings under its credit facility primarily to
finance the cash portion of consideration paid for businesses it acquires (see
Note 8 of Notes to Consolidated Financial Statements). Without these
acquisitions, the Company's need for bank borrowings would have been minimal.
Earnings Before Income Taxes, Minority Interest and Cumulative Effect of
Accounting Change. Earnings before income taxes, minority interest and
cumulative effect of accounting change increased 77.8% to $47.9 million in 1999,
up from $26.9 million in 1998. As a percentage of total revenues, earnings
before income taxes, minority interest and cumulative effect of accounting
charge were 13.6% in 1999 and 11.1% in 1998. Excluding the effect of business
acquisition and restructuring expenses, earnings before income taxes, minority
interest and cumulative effect of accounting change as a percentage of revenues
would have been 17.5% in 1999 and 12.7% in 1998.
Income Taxes. The provisions for income taxes for 1999 and 1998 consist of
federal, state and foreign income taxes at the Company's effective tax rate
which approximated 42% in 1999 and 44% in 1998. Effective tax rates are higher
than previous years' rates as a result of nondeductible business acquisition
costs in pooling of interests transactions.
Minority Interest in (Earnings) of Consolidated Subsidiaries. Minority
interest in (earnings) of consolidated subsidiaries relates to the 49% minority
ownership interests in two Meridian operating subsidiaries that were not
acquired by the Company as part of the Meridian pooling-of-interests acquisition
in August 1999. These minority interests were subsequently acquired by the
Company in December 1999.
Weighted-Average Shares Outstanding -- Basic. The Company's
weighted-average shares outstanding for purposes of calculating basic earnings
per share increased to 47.5 million for 1999, up from 39.2 million for 1998.
This increase related primarily to 4.1 million common shares issued in a public
offering in January 1999 and common shares issued in connection with
acquisitions of various companies (see Notes 7 and 8 of Notes to Consolidated
Financial Statements).
1998 COMPARED WITH 1997
As further indicated in Note 1(c) and elsewhere in the Notes to
Consolidated Financial Statements, during August 1999, the Company acquired
Meridian and PRS. Each of these acquisitions was accounted for
20
23
as a pooling-of-interests. Accordingly, the Company's previously reported
consolidated financial statements for the years ended December 31, 1998 and 1997
have been retroactively restated, as required under generally accepted
accounting principles, to include the operations of Meridian and PRS.
Revenues. Revenues increased 65.3% to $242.1 million in 1998, up from
$146.5 million in 1997. Domestic revenues increased 66.4% to $163.6 million in
1998, up from $98.3 million in 1997. International revenues increased 62.9% to
$78.5 million in 1998, up from $48.2 million in 1997.
Domestic revenue growth in 1998 was significant with Accounts Payable
revenues up 59.3%, Freight revenues up over 9400% on a small initial 1997 base
and Taxation revenue up 24.6% only achieved a significant level of domestic
Facilities segment operations with the June 1999 acquisition of Invoice and
Tariff Management Group, LLC, a firm specializing in telecommunications recovery
auditing. Domestic revenue growth for 1998 was driven by a combination of
revenues from companies acquired during 1998 and 1997 under the purchase method
of accounting (see Note 8 of Notes to Consolidated Financial Statements) and
strong internal growth resulting from both new clients and additional services
provided to existing clients.
International revenue growth for 1998 was also significant with Accounts
Payable revenues up 35.5% and Taxation revenues up 92.0%. Both segments
benefited from strong internal growth resulting from new clients and additional
services provided to existing clients. Additionally, the Tax segment benefited
from the Company's October 1997 acquisition of Financiere Alma, S.A. and
subsidiaries (collectively, "Alma"). (See Note 8 of Notes to Consolidated
Financial Statements).
Cost of Revenues. Cost of revenues as a percentage of revenues decreased
to 52.1% in 1998, down from 54.0% in 1997.
Domestically, cost of revenues as a percentage of revenues decreased to
52.8% in 1998, down from 55.0% in 1997. Internationally, cost of revenues as a
percentage of revenues also decreased to 50.6% in 1998, down from 52.0% in 1997.
Percentage improvements worldwide related principally to fixed cost elements
being spread over rapidly growing revenue bases.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses as a percentage of revenues increased to 32.8% of
revenues in 1998, up from 31.5% in 1997.
Domestically, selling, general and administrative expenses as a percentage
of revenues decreased slightly to 29.8% in 1998, down from 30.7% in 1997.
Internationally, selling, general and administrative expenses as a percentage of
revenues rose to 38.9% in 1998, up from 33.1% in 1997 due primarily to increased
European infrastructure costs.
In connection with the acquisition of businesses, the Company has recorded
intangible assets including goodwill and deferred non-compete costs.
Amortization of these intangible assets totalled $6.3 million in 1998 and $1.9
million in 1997.
Business Acquisition and Restructuring Expenses. Business acquisition and
restructuring expenses consisted of the following components:
YEAR ENDED
DECEMBER 31,
----------------
1998 1997
------ ------
Expenses incurred by Meridian with respect to phantom stock
plan...................................................... $3,818 $1,225
Restructuring charge incurred in the fourth quarter of 1997
in connection European management structure............... -- 1,208
------ ------
$3,818 $2,433
====== ======
In recognition of emerging developments such as the Alma acquisition, the
Company restructured and realigned certain facets of its European management
structure in the fourth quarter of 1997. This charge consisted of employment
termination costs directly applicable to four of the Company's senior European
21
24
executives and residual contract costs due to an independent European advisor
for services no longer required by the Company. Substantially all amounts
accrued were subsequently paid.
Operating Income. Operating income increased 74.9% to $32.8 million in
1998, up from $18.7 million in 1997. As a percentage of revenues, operating
income increased to 13.5% in 1998, up from 12.8% in 1997. Excluding the effect
of business acquisition and restructuring expenses, operating income as a
percentage of revenues would have been 15.1% in 1998 and 14.5% in 1997.
Interest Expense (Net). Interest expense (net) for 1998 was $5.9 million,
up from slightly from $2.6 million in 1997. Most of the Company's interest
expense pertains to its $200.0 million senior credit facility with a banking
syndicate. The Company makes periodic borrowings under its credit facility
primarily to finance the cash portion of consideration paid for businesses it
acquires (see Note 8 of Notes to Consolidated Financial Statements). Without
these acquisitions, the Company believes that its need for bank borrowings would
have been minimal.
Earnings Before Income Taxes and Minority Interest. Earnings before income
taxes and minority interest increased 83.0% to $49.3 million in 1999, up from
$26.9 million in 1998. As a percentage of total revenues, earnings before income
taxes and minority interest were 14.0% in 1999 and 11.1% in 1998. Excluding the
effect of business acquisition and restructuring expenses, earnings before
income taxes and minority interest as a percentage of revenues would have been
12.7% in 1998 and 12.7% in 1997.
Income Taxes. The provisions for income taxes for 1998 and 1997 consist of
federal, state and foreign income taxes at the Company's effective tax rate
which approximated 44% in 1998 and 39% in 1997.
Minority Interest in (Earnings) of Consolidated Subsidiaries. Minority
interest in (earnings) of consolidated subsidiaries relates to the 49% minority
ownership interests in two Meridian operating subsidiaries that were not
acquired by the Company as part of the Meridian pooling-of-interests acquisition
in August 1999. These minority interests were subsequently acquired by the
Company in December 1999.
Weighted-Average Shares Outstanding -- Basic. The Company's
weighted-average shares outstanding for purposes of calculating basic earnings
per share increased to 39.2 million for 1998, up from 33.8 million for 1997.
This increase related primarily to 3.0 million common shares issued in a public
offering in March 1998 and common shares issued in connection with acquisitions
of various companies (see Notes 7 and 8 of Notes to Consolidated Financial
Statements).
22
25
QUARTERLY RESULTS
The following tables set forth certain unaudited quarterly financial data
for each of the Company's last eight quarters. The information has been derived
from unaudited consolidated financial statements that, in the opinion of
management, reflect all adjustments (consisting only of normal recurring
adjustments) necessary for a fair presentation of such quarterly information.
The information for all quarters ended prior to September 30, 1999 has been
retroactively restated and differs from amounts originally reported due to the
inclusion of the accounts of Meridian and PRS which were each acquired in August
1999 and accounted for under the pooling-of-interests method. The operating
results for any quarter are not necessarily indicative of the results to be
expected for any future period.
1999 QUARTER ENDED 1998 QUARTER ENDED
---------------------------------------- --------------------------------------
MAR. 31 JUNE 30 SEPT. 30 DEC. 31 MAR. 31 JUNE 30 SEPT. 30 DEC. 31
-------- ------- -------- -------- ------- ------- -------- -------
(IN THOUSANDS)
Revenues....................... $ 64,437 $90,443 $91,259 $103,508 $38,853 $55,361 $67,982 $79,949
Cost of revenues............... 38,038 47,441 43,411 51,747 23,038 27,355 35,318 40,519
Selling, general and
administrative expenses...... 22,873 24,660 27,540 27,208 14,959 16,517 22,410 25,438
-------- ------- ------- -------- ------- ------- ------- -------
Operating income (loss) before
business acquisition and
restructuring expenses....... 3,526 18,342 20,308 24,553 857 11,489 10,254 13,992
Business acquisition and
restructuring expenses....... 1,495 1,496 10,380 (30) 955 954 955 954
-------- ------- ------- -------- ------- ------- ------- -------
Operating income
(loss).............. 2,031 16,846 9,928 24,583 (99) 10,535 9,299 13,038
Interest (expense), net........ (1,414) (1,560) (1,304) (1,251) (880) (519) (1,935) (2,517)
-------- ------- ------- -------- ------- ------- ------- -------
Earnings (loss) before
income taxes,
minority interest
and cumulative
effect of accounting
change.............. 617 15,286 8,624 23,332 (979) 10,016 7,364 10,521
Income taxes................... 1,386 4,718 5,495 8,467 763 1,934 4,367 4,764
-------- ------- ------- -------- ------- ------- ------- -------
Earnings (loss) before
minority interest
and cumulative
effect of accounting
change.............. (769) 10,568 3,129 14,865 (1,742) 8,082 2,997 5,757
Minority interest in (earnings)
loss of consolidated
subsidiaries................. (77) (312) (48) 80 (122) (122) 128 (344)
-------- ------- ------- -------- ------- ------- ------- -------
Earnings (loss) before
cumulative effect of
accounting change... (846) 10,256 3,081 14,945 (1,864) 7,960 3,125 5,413
Cumulative effect of accounting
change....................... (29,195) -- -- -- -- -- -- --
-------- ------- ------- -------- ------- ------- ------- -------
Net earnings (loss)... $(30,041) $10,256 $ 3,081 $ 14,945 $(1,864) $ 7,960 $ 3,125 $ 5,413
======== ======= ======= ======== ======= ======= ======= =======
23
26
The information for the six quarters ended June 30, 1999, as originally
reported prior to the retroactive restatements to include the accounts of
Meridian and PRS, were as follows:
1999 QUARTER ENDED 1998 QUARTER ENDED
------------------ --------------------------------------
MAR. 31 JUNE 30 MAR. 31 JUNE 30 SEPT. 30 DEC. 31
-------- ------- ------- ------- -------- -------
Revenues......................................... $ 56,615 $71,728 $33,144 $38,934 $61,803 $68,946
Cost of revenues................................. 31,720 35,913 17,956 20,326 30,078 33,571
Selling, general and administrative expenses..... 20,569 23,102 13,029 13,991 19,312 21,194
Business acquisition and restructuring
expenses....................................... -- -- -- -- -- --
-------- ------- ------- ------- ------- -------
Operating income........................ 4,326 12,713 2,159 4,617 12,413 14,181
Interest income (expense), net................... (844) (978) (324) 186 (1,451) (1,920)
-------- ------- ------- ------- ------- -------
Earnings before income taxes, minority
interest and cumulative effect of
accounting change..................... 3,482 11,735 1,835 4,803 10,962 12,261
Income taxes..................................... 1,371 4,609 715 1,884 4,297 4,819
-------- ------- ------- ------- ------- -------
Earnings before minority interest and
cumulative effect of accounting
change................................ 2,111 7,126 1,120 2,919 6,665 7,442
Minority interest in (earnings) loss of
consolidated subsidiaries...................... -- -- -- -- -- --
-------- ------- ------- ------- ------- -------
Earnings before cumulative effect of
accounting change..................... 2,111 7,126 1,120 2,919 6,665 7,442
Cumulative effect of accounting change........... (29,195) -- -- -- -- --
-------- ------- ------- ------- ------- -------
Net earnings (loss)..................... $(27,084) $ 7,126 $ 1,120 $ 2,919 $ 6,665 $ 7,442
======== ======= ======= ======= ======= =======
The Company has experienced and expects to continue to experience
significant seasonality in its business. The Company typically realizes higher
revenues and operating income in the last two quarters of its fiscal year. This
trend reflects the inherent purchasing and operational cycles of the Company's
clients. The Company's larger acquisitions during 1999 and 1998 are not expected
to affect this trend because these entities have historically experienced
similar seasonality in their revenues and operating income. Should the Company
not continue to realize increased revenues in future third and fourth quarter
periods, profitability for any affected quarter and the entire year could be
materially and adversely affected due to ongoing selling, general and
administrative expenses that are largely fixed over the short term.
LIQUIDITY AND CAPITAL RESOURCES
On July 29, 1998, the Company replaced its existing $30.0 million senior
bank credit facility with a five-year, $150.0 million senior bank credit
facility. Subject to adherence to standard loan covenants, borrowings under the
new credit facility are available for working capital, acquisitions of other
companies in the recovery audit industry, capital expenditures and general
corporate purposes. The Company transferred $5.4 million in outstanding
borrowings to the new credit facility on July 29, 1998. On September 18, 1998,
the Company increased its credit facility from $150.0 million to $200.0 million
and the facility was syndicated between ten banking institutions led by
NationsBank, N.A. (now Bank of America) as agent for the group. As of March 24,
2000, the Company had $145.0 million in outstanding principal borrowings under
its credit facility.
Net cash provided by operating activities was $23.4 million in 1999, $13.4
million in 1998 and $10.4 million in 1997. The 1999 improvement related in part
to increased managerial emphasis on client billings and cash collections.
Operating cash flow, defined by the Company as cash provided by operating
activities excluding the impact of business acquisition expenses/restructuring
charges, increased to approximately $32 million in 1999, up from approximately
$14 million in 1998.
Net cash used in investing activities was $95.4 million in 1999, $132.4
million in 1998 and $31.9 million in 1997. During 1999 and 1998, the Company
spent $75.8 million and $113.3 million, respectively, as the cash portion of
consideration paid to acquire various recovery audit firms.
Net cash provided by financing activities was $81.1 million in 1999, $128.8
million in 1998 and $24.3 million in 1997. As discussed in Note 7 of the Notes
to Consolidated Financial Statements, the Company completed underwritten
follow-on stock offerings in January 1999 and March 1998.
24
27
As discussed in Note 8 of Notes to Consolidated Financial Statements, at
December 31, 1999 the Company recorded $45.0 million as accrued business
acquisition consideration on its Consolidated Balance Sheet in connection with
two acquired recovery audit firms. $43.0 million was borrowed under the
Company's credit facility in March 2000 and simultaneously paid to the prior
owners of these two firms. The remainder is expected to be paid during 2000
pursuant to additional borrowing under the Company's credit facility.
The Company will pay $5.1 million to the former participants in the
Meridian phantom stock plan periodic payments through January 2001. These
payments are expected to be funded with cash generated from the sale of certain
Meridian receivables.
Through March 24, 2000, the Company acquired 21 recovery audit firms. The
Company is pursuing, and intends to continue to pursue, the acquisition of
domestic and international businesses including both direct competitors and
businesses providing other types of recovery services. There can be no
assurance, however, that the Company will be successful in consummating further
acquisitions due to factors such as receptivity of potential acquisition
candidates and valuation issues. Additionally, there can be no assurance that
future acquisitions, if consummated, can be successfully assimilated into the
Company.
The Company from time to time issues restricted, unregistered common stock
in partial consideration for the business entities it acquires. The timing and
quantity of any future securities issuances are not susceptible to estimation.
Additionally, if the Company is successful in arranging for future acquisitions
which individually or collectively are large relative to the Company's size, it
may need to secure additional debt or equity financing. There are no current
plans to seek such financing.
The Company believes that its current working capital, availability
remaining under its $200.0 million credit facility and cash flow generated from
future operations will be sufficient to meet the Company's working capital and
capital expenditure requirements through December 31, 2000 unless one or more
acquisitions are consummated which require the Company to seek additional debt
or equity financing.
NEW ACCOUNTING STANDARD
Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities" establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities. This
pronouncement, as amended by Statement of Financial Accounting Standards No.
137, is effective for all fiscal quarters of fiscal years beginning after June
15, 2000 although earlier application is encouraged. The Company has chosen to
adopt this pronouncement effective with its fiscal year which begins January 1,
2001 and does not believe that it will materially affect its reported results of
operations or financial condition upon adoption.
YEAR 2000 ISSUE
As a result of the Company's planning, remediation and testing efforts in
1999, no significant disruptions in mission critical information technology
systems and non-information technology systems were experienced in the first 75
days of 2000. The Company believes that these systems have successfully
responded to the Year 2000 date change. The Company is not aware of any material
problems resulting from Year 2000 issues, either with our services, our internal
systems, or the products and services of our third party suppliers. The Company
will continue to monitor our mission critical computer applications and those of
our suppliers throughout the Year 2000 to ensure that any latent Year 2000
matters that may arise are addressed promptly.
25
28
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
On August 19, 1999, the Company acquired Meridian VAT Corporation Limited
("Meridian"). Meridian is based in Dublin, Ireland and specializes in the
recovery of value-added taxes paid on business expenses by corporate clients.
Meridian periodically utilizes derivative financial instruments to hedge against
adverse currency fluctuations since it must transact business using a variety of
European and Asian currencies. Meridian's derivative financial instruments
outstanding at December 31, 1999 were not material, and all such instruments
were settled in January 2000 without significantly affecting either the
consolidated financial position or results of operations of the Company. None of
the Company's operating units other than Meridian have historically utilized
derivative financial instruments although future use of these types of
instruments is presently under consideration.
26
29
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
NUMBER
----------
Independent Auditors' Reports............................... 28, 29, 30
Consolidated Statements of Operations for the Years ended
December 31, 1999, 1998 and 1997.......................... 31
Consolidated Balance Sheets as of December 31, 1999 and
1998...................................................... 32
Consolidated Statements of Shareholders' Equity for the
Years ended December 31, 1999, 1998 and 1997.............. 33
Consolidated Statements of Cash Flows for the Years ended
December 31, 1999, 1998 and 1997.......................... 34
Notes to Consolidated Financial Statements.................. 35
27
30
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
The Profit Recovery Group International, Inc.:
We have audited the accompanying Consolidated Balance Sheets of The Profit
Recovery Group International, Inc. and subsidiaries as of December 31, 1999 and
1998, and the related Consolidated Statements of Operations, Shareholders'
Equity, and Cash Flows for each of the years in the three-year period ended
December 31, 1999. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits. We did
not audit the consolidated financial statements of PRG France, S.A. and
subsidiaries, which financial statements reflect total assets constituting 18%
and 14% as of December 31, 1999 and 1998, respectively, and total revenues
constituting 9% and 10% in 1999 and 1998, respectively, of the related
consolidated totals. We did not audit the consolidated financial statements of
Financiere Alma, S.A. and subsidiaries, which financial statements reflect total
revenues constituting 5% in 1997 of the related consolidated totals. Those
financial statements were audited by other auditors whose reports have been
furnished to us, and our opinion, insofar as it relates to the amounts included
for PRG France, S.A. and subsidiaries and Financiere Alma, S.A. and
subsidiaries, are based solely on the reports of the other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our report and the reports of the other auditors provide a
reasonable basis for our opinion.
In our opinion, based on our audits and the reports of the other auditors,
the consolidated financial statements referred to above present fairly, in all
material respects, the financial position of The Profit Recovery Group
International, Inc. and subsidiaries as of December 31, 1999 and 1998, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1999 in conformity with generally accepted
accounting principles.
As discussed in Note 1(c) to the consolidated financial statements, the
Company changed its method of revenue recognition in 1999.
KPMG LLP
Atlanta, Georgia
February 15, 2000
28
31
INDEPENDENT AUDITORS' REPORT
The Directors and Shareholders of
PRG France, S.A.
We have audited the consolidated balance sheets of PRG France, S.A. and
subsidiaries as of December 31, 1999 and 1998, and the related consolidated
statements of earnings, shareholders' equity and cash flows for the years ended
December 31, 1999 and 1998. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of PRG France,
S.A. and subsidiaries as of December 31, 1999 and 1998, and the results of their
operations and their cash flows for the years ended December 31, 1999 and 1998,
in conformity with accounting principles generally accepted in the United
States.
ERNST & YOUNG Entrepreneurs
Division of E&Y Audit
Any Antola
Paris, France
February 1, 2000
29
32
INDEPENDENT AUDITORS' REPORT
The Directors and Shareholders of
Financiere Alma, S.A.
We have audited the consolidated statements of earnings and cash flows of
Financiere Alma, S.A. and subsidiaries for the three months ended December 31,
1997. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the results of operations and cash
flows of Financiere Alma, S.A. and subsidiaries for the three months ended
December 31, 1997 in conformity with accounting principles generally accepted in
the United States.
ERNST & YOUNG Entrepreneurs
Department d'E&Y Audit
Any Antola
Paris, France
January 31, 1998
30
33
THE PROFIT RECOVERY GROUP INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31,
--------------------------------------
1999 1998 1997
---------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Revenues................................................... $349,647 $242,145 $146,467
Cost of revenues........................................... 180,637 126,230 79,126
Selling, general and administrative expenses............... 102,281 79,324 46,174
Business acquisition and restructuring expenses (Note
14)...................................................... 13,341 3,818 2,433
-------- -------- --------
Operating income................................. 53,388 32,773 18,734
Interest (expense), net.................................... (5,529) (5,851) (2,586)