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UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Form 10-K

PRG-Schultz International, Inc.

Registrant’s telephone number, including area code: (770) 779-3900

Securities registered pursuant to Section 12(b) of the Act: None

      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 o

      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.  x

      Indicate by check mark whether the registrant is an accelerated filer (as defined by Rule 12b-2 of the Act).  Yes x  No o

      At June 30, 2003, outstanding common shares of the registrant held by non-affiliates were 38,837,213. The aggregate market value, as of June 30, 2003, of such common shares held by non-affiliates of the registrant was approximately $229.5 million, based upon the last sales price reported that date on The Nasdaq Stock Market of $5.91 per share. (Aggregate market value is estimated solely for the purposes of this report and shall not be construed as an admission for the purposes of determining affiliate status.)

      Common shares of the registrant outstanding as of February 29, 2004 were 61,763,345, including shares held by affiliates of the registrant.

Documents Incorporated by Reference

      Part III: Portions of Registrant’s Proxy Statement relating to the Annual Meeting of Shareholders to be held on or about May 18, 2004.

PRG-SCHULTZ INTERNATIONAL, INC.

FORM 10-K

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PART I

      PRG-Schultz International, Inc. and subsidiaries (collectively, the “Company”), a United States of America based company, incorporated in the State of Georgia in 1996, is the leading worldwide provider of recovery audit services to large and mid-size businesses having numerous payment transactions with many vendors. These businesses include, but are not limited to:

	•	retailers such as discount, department, specialty, grocery and drug stores;
	•	manufacturers of high-tech components, pharmaceuticals, consumer electronics, chemicals and aerospace and medical products;
	•	wholesale distributors of computer components, food products and pharmaceuticals;
	•	healthcare providers such as hospitals and health maintenance organizations; and
	•	service providers such as communications providers, transportation providers and financial institutions.

      In businesses with large purchase volumes and continuously fluctuating prices, some small percentage of erroneous overpayments to vendors is inevitable. Although these businesses process the vast majority of payment transactions correctly, a small number of errors do occur. In the aggregate, these transaction errors can represent meaningful “lost profits” that can be particularly significant for businesses with relatively narrow profit margins. The Company’s trained, experienced industry specialists use sophisticated proprietary technology and advanced recovery techniques and methodologies to identify overpayments to vendors. In addition, these specialists review clients’ current practices and processes related to procurement and other expenses in order to identify solutions to manage and reduce expense levels, as well as apply knowledge and expertise of industry best practices to assist clients in improving their business efficiencies.

      In most instances, the Company receives a contractual percentage of overpayments and other savings it identifies and its clients recover or realize. In other instances, the Company receives a fee for specific services provided.

      The Company currently provides services to clients in over 40 countries. For financial reporting purposes, in 2003, the Company had two reportable operating segments, the Accounts Payable Services segment (including the Channel Revenue business) and the Meridian VAT Reclaim (“Meridian”) segment. See Note 5 of Notes to Consolidated Financial Statements included in Item 8. of this Form 10-K for worldwide operating segment disclosures.

      In March 2001, the Company formalized a strategic realignment initiative designed to enhance the Company’s financial position and clarify its investment and operating strategy by focusing primarily on its core Accounts Payable Services business. Under this strategic realignment initiative, the Company announced its intent to divest the following non-core businesses: Meridian VAT Reclaim (“Meridian”), the Logistics Management Services segment, the Communications Services segment and the Channel Revenue division within the Accounts Payable Services segment.

      The Company disposed of its Logistics Management Services segment in October 2001. During the fourth quarter of 2001, the Company closed a unit within Communications Services. In December 2001, the Company disposed of its French Taxation Services business which had been part of continuing operations until time of disposal.

      As indicated above, Meridian, Communications Services and the Channel Revenue business were originally offered for sale in the first quarter of 2001. During the first quarter of 2002, the Company concluded that the then current negative market conditions were not conducive to receiving terms acceptable to the Company for these remaining unsold, non-core businesses. As such, on January 24, 2002, the Company’s Board of Directors approved a proposal to retain these remaining discontinued operations until such time as market conditions were more conducive to their sale.

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      During the fourth quarter of 2003, the Company once again declared its remaining Communications Services operations as a discontinued operation and subsequently sold such operations on January 16, 2004 (see Note 18(a) of Notes to Consolidated Financial Statements included in Item 8. of this Form 10-K).

      The Company’s Consolidated Financial Statements have been reclassified to reflect the remaining non-core businesses, consisting of Meridian and the Channel Revenue business, as part of continuing operations for all periods presented. Additionally, the Company’s Consolidated Financial Statements reflect Logistics Management Services, Communications Services, including a unit that was closed in 2001, and French Taxation Services as discontinued operations for all periods presented.

      Unless specifically stated, all financial and statistical information contained herein is presented with respect to continuing operations only.

      The following discussion includes “forward-looking” statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are at times identified by words such as “plans,” “intends,” “expects,” or “anticipates” and words of similar effect and include statements regarding the Company’s financial and operating plans and goals. These forward-looking statements include any statements that cannot be assessed until the occurrence of a future event or events. Actual results may differ materially from those expressed in any forward-looking statements due to a variety of factors, including but not limited to those discussed herein and below under “Risk Factors.”

The Recovery Audit Industry

      Businesses with substantial volumes of payment transactions involving multiple vendors, numerous discounts and allowances, fluctuating prices and complex pricing arrangements find it difficult to detect all payment errors. Although these businesses process the vast majority of payment transactions correctly, a small number of errors occur principally because of communication failures between the purchasing and accounts payable departments, complex pricing arrangements, personnel turnover and changes in information and accounting systems. These errors include, but are not limited to, missed or inaccurate discounts, allowances and rebates, vendor pricing errors and duplicate payments. In the aggregate, these transaction errors can represent meaningful lost profits that can be particularly significant for businesses with relatively narrow profit margins. For example, the Company believes that a typical U.S. retailer makes payment errors that are not discovered internally, which in the aggregate can range from several hundred thousand dollars to more than $1.0 million per billion dollars of revenues.

      Although some businesses maintain internal recovery audit departments assigned to recover selected types of payment errors and identify opportunities to reduce costs, independent recovery audit firms are often retained as well due to their specialized knowledge and focused technologies.

      In the U.S., Canada, the United Kingdom and Mexico, large retailers routinely engage independent recovery audit firms as standard business practice, and businesses in other industries are increasingly using independent recovery audit firms. Outside the U.S., Canada, the United Kingdom and Mexico, the Company believes that large retailers and many other types of businesses are also increasingly engaging independent recovery audit firms.

      Businesses are increasing the use of technology to manage complex accounts payable systems and realize greater operating efficiencies. Many businesses worldwide communicate with vendors electronically to exchange inventory and sales data, transmit purchase orders, submit invoices, forward shipping and receiving information and remit payments. These paperless transactions are widely referred to as Electronic Data Interchange, or “EDI”, and implementation of this technology is maturing. EDI, which typically is carried out using private, proprietary networks, 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.

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      The Company believes that procurement technologies involving the Internet will significantly enhance recovery audit opportunities in both the short term and long term.

      In the short term, Extensible Markup Language (“XML”), a set of rules for defining and sharing document types over the Internet, provides a communications framework, but data type definitions are still needed for many industries. Until data type definitions are widely established, the Company believes that errors due to inconsistent data treatments may be prevalent and may present transitional recovery opportunities.

      In the longer term, the Company believes that XML may be utilized by businesses both large and small whereas EDI use has primarily been confined to larger business entities and their suppliers. If the use of XML does become pervasive, it may become economical for the Company to provide services to businesses smaller than those currently served due to the availability of electronic databases of individual procurement transactions which could then be audited electronically. Presently, many small and mid-sized businesses still procure large portions of their goods and services using paper-based documents that are not as cost effective to audit as those in an electronic format.

      The domestic and international recovery audit industry for accounts payable services is characterized by the Company, the worldwide leader providing services to clients in over 40 countries, and numerous smaller competitors who typically do not possess multi-country service capabilities. Many smaller recovery audit firms lack the centralized resources or broad client base to support technology investments required to provide comprehensive recovery audit services for large, complex accounts payable systems. These firms are less equipped to audit large EDI accounts payable systems. In addition, because of limited resources, most of these firms subcontract work to third parties and may lack experience and the knowledge of national promotions, seasonal allowances and current recovery audit practices. As a result, the Company believes that it has significant opportunities due to its national and international presence, well-trained and experienced professionals, and advanced technology.

The PRG-Schultz Solution

      The Company provides its domestic and international clients with comprehensive recovery audit services by using sophisticated proprietary technology and advanced techniques and methodologies, and by employing highly trained, experienced industry specialists. As a result, the Company believes it is able to identify significantly more payment errors and expense containment opportunities than its clients are able to identify through their internal audit capabilities or than many of its competitors are able to identify.

      The Company is in the process of consolidating and standardizing its technology to provide a uniform platform for its auditors that will offer consistent and proven audit techniques and methodologies based on a client’s size, industry or geographic scope of operations. The Company is a leader in developing and utilizing sophisticated software audit tools and techniques that enhance the identification and recovery of payment errors. 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 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.

      In addition, the Company believes it differentiates itself from many of its competitors with its client engagement methodologies, its expertise with respect to managing vendor relationships and its specialty services offerings in areas of airline ticket revenue recovery audit services, direct-to-store-delivery (DSD) audits, media audits, real estate audits, freight-related vendor compliance audits, and document imaging and management technology.

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The PRG-Schultz Strategy

      The Company’s objective is to build on its position as the leading worldwide provider of recovery audit services. The Company’s strategic plan to achieve these objectives focuses on a series of initiatives designed to maintain our dedicated focus on the Company’s clients and rekindle our growth. Specifically, the Company plans to:

	•	Focus on the Company’s Core Accounts Payable Services Business. In March 2001, the Company formalized a strategic realignment initiative designed to enhance its financial position and clarify its investment and operating strategy by focusing on the core Accounts Payable Services business. The Company believes that this business will provide a greater return on investment and higher growth than other opportunities outside of Accounts Payable Services. As a result, the Company divested certain non-core businesses in 2001 and in January 2004. The Company also believes that it strengthened its Accounts Payable Services business through the January 2002 acquisitions of Howard Schultz & Associates International, Inc. and affiliates (“HSA-Texas”), formerly the Company’s principal competitor in this business.
	•	Evolve the Service Model. The Company as currently constituted is essentially an assemblage of many acquisitions over a dozen years, culminating in the 2002 merger of The Profit Recovery Group International, Inc. and Howard Schultz & Associates International, Inc. Although the Company believes that it has been successful in eliminating duplicative selling, general and administrative costs as merged entities were assimilated, there had been limited focus in developing consistent audit tools, audit methodologies and field staffing protocols until late 2003. The Company believes that this consistency is a critical prerequisite to better serving its clients, since it will provide a uniform foundation for propagating best practices throughout the world. Another area the Company is addressing is gaining cost efficiencies through the standardization of the more routine sub-components of the recovery audit process that lend themselves to greater efficiency and cost-effectiveness when performed in a specialized, centralized work group setting. Management believes that this will allow the Company to maximize recoveries for its clients in both the retail and commercial sectors, as a result of the better tools and methodologies while lowering the Company’s overall cost of revenues percentage. The work on evolving the service model will initially concentrate on the U.S. Accounts Payable Services business and domestic corporate support functions throughout 2004.
	•	Grow the Domestic Accounts Payable Services Business. The Company believes that its in-process service model evolution project (see preceding discussion) will eventually serve to restart growth in its domestic Accounts Payable Services business, when combined with more focused sales and marketing efforts. Although the Company is the largest domestic provider of Accounts Payable Services, there are still businesses in the United States that either do not currently utilize outside accounts payable recovery audit service providers, or do utilize such services but obtain them from the Company’s competitors. The Company’s sales and marketing professionals are continuously working to secure new clients. Additionally, the Company intends to capitalize on continuing advancements in data communications technology to grow its domestic Accounts Payable Services business. The Company also intends to utilize enhanced proprietary technologies to eventually pursue new small and mid-sized clients which historically, due to technology constraints, the Company has not been able to service in a profitable manner.
	•	Grow the International Accounts Payable Services Business. To date, large international retailers and many other international businesses have not utilized recovery audit services to the same extent as similar firms based in the U.S., Canada, the United Kingdom and Mexico. However, the Company believes that many international businesses are increasingly engaging independent recovery audit firms. The Company intends to focus its resources on pursuing potential international clients in geographic regions that it believes offer the greatest potential return on investment. The Company also intends to capitalize on its leading worldwide presence to provide greater recovery audit services to multi-national companies with significant and expanding international operations. A final area of international growth emphasis is working with clients to obtain increasingly greater types and quantities of electronic

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		purchase data, and to reduce client-imposed restrictions on the scope of the Company’s work. Electronic purchase data availability and scope restrictions are among the greatest international challenges the Company faces, but the Company believes that they also present the greatest near-term opportunities for international revenue growth.
	•	Develop New Business. During 2003, the Company created, funded and staffed a discrete business development unit charged with developing new channels of revenue for the Company. New business development entails the Company investing their efforts and resources in industries with large market potential and leveraging the Company’s core competencies. Additionally, the Company is working to develop alliances with strategic partners that will allow us to leverage existing client relationships to cross-sell products and services.
	•	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 continuing to provide comprehensive recovery audit services and utilizing highly trained auditors, and by continuing to refine its advanced audit methodologies, and employing client-centered business approaches to better understand client needs and configure the appropriate service model to meet them.

PRG-Schultz Services

      Through the use of proprietary technology, audit techniques and methodologies, the Company’s trained and experienced auditors examine merchandise procurement records on a post-payment basis to identify overpayments resulting from situations such as missed or inaccurate discounts, allowances and rebates, vendor pricing errors, duplicate payments and erroneous application of sales tax laws and regulations.

      To date, the Accounts Payable Services operations have served two client types, retail/wholesale and commercial, with each type typically served under a different service delivery model.

      “Broad-scope” audit services provided to retail/wholesale clients account for the Company’s largest source of revenues. These services typically recur annually and are largely predictable in terms of estimating the dollar volume of client overpayments that will ultimately be recovered. Broad-scope audit services are the most comprehensive in nature, focusing on numerous recovery categories related to both procurement and payment activities. These audits typically entail comprehensive and customized data acquisition from the client with the aim of capturing individual line-item transaction detail. “Broad-scope” audits are often long duration endeavors with year-round on-site work by permanent multi-auditor teams quite common for larger clients. The Company currently serves retail/wholesale clients on six continents.

      The Company also examines merchandise procurements and other payments made by business entities such as manufacturers, distributors and healthcare providers that are collectively termed as “commercial” clients. The substantial majority of the Company’s domestic commercial Accounts Payable Services clients are currently served using a “basic-scope” model which typically entails acquisition from the client of limited purchase data and an audit focus on a select few recovery categories. Services to these types of clients to date have tended to be either “one-time” with no subsequent repeat or 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. Additionally, the duration of a “basic-scope” audit is usually measured in weeks and the number of auditors assigned per client is usually one or two. Currently, the majority of the Company’s commercial clients are located in North America and the United Kingdom, although the Company is focusing its efforts on expansion into other markets.

      The Company is currently modifying its approach to service delivery to more closely align the scope of its services to the unique needs and characteristics of each individual client, regardless of their industry, as consistent with maximizing the Company’s profitability. Thus, ultimately, certain retail/wholesale clients that have historically been served by the “broad-scope” service model will be served under the “basic-scope” service model. Additionally, the Company believes that the market for providing “basic-scope” recovery audit

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      Additionally, within Accounts Payable Services is a discrete unit, the Channel Revenue business, previously part of the Company’s former Other Ancillary Services segment. Channel Revenue provides revenue maximization services to clients that are primarily in the semiconductor industry using a discrete group of specially trained auditors and proprietary business methodologies. Channel Revenue clients generally receive two audits each year.

      In August 1999, the Company acquired Meridian VAT Reclaim (“Meridian”). Meridian is based in Ireland and specializes in the recovery of value-added taxes (“VAT”) paid on business expenses for corporate clients located throughout the world. The services provided to clients by Meridian are typically recurring in nature.

Client Contracts

      The Company’s typical client contract provides that the Company is entitled to a stipulated percentage of overpayments or other savings recovered for or realized by clients. Clients generally recover claims by either (a) taking credits against outstanding payables or future purchases from the involved vendors, or (b) receiving refund checks directly from those vendors. The method of effecting a recovery is often dictated by industry practice. For some services, the client contract provides that the Company is entitled to a flat fee, or fee rate per hour, or per unit of usage for the rendering of that service. In addition to client contracts, many clients establish specific procedural guidelines that the Company must satisfy prior to submitting claims for client approval. These guidelines are unique to each client.

Technology

      Technology advancements and increasing volumes of business transactions have resulted in the Company’s clients continuously increasing the use of technology to manage complex accounts payable systems and realize greater operating efficiencies. Given this environment, the Company believes its proprietary technology, databases and processes serve as important competitive advantages over both its principal competitors and its clients’ in-house recovery audit functions.

      To sustain these competitive advantages, the Company intends to continue investing in technology initiatives to deliver innovative, client-focused solutions which enable the Company to provide its services in the most timely, effective and profitable manner. A cornerstone of the Company’s current philosophy toward technology investment involves measuring the performance of its technology through effectiveness ratios to ensure it leverages technology appropriately.

      The Company employs a variety of proprietary audit tools, proprietary databases and Company-owned and co-locational data processing facilities in its business. Each of the Company’s businesses employs custom technology.

      The Company employs a variety of proprietary audit tools, proprietary databases and Company-owned and co-locational data processing facilities in its Accounts Payable Services business. The Company is in the process of standardizing its audit tools, audit methodologies and field staffing protocols to provide a uniform foundation for propagating best practices throughout its worldwide operations. This work, internally referred to as “Evolving the Service Model,” entails converting the Company’s clients to these new uniform protocols and will initially concentrate on the U.S. Accounts Payable Services business throughout 2004. Until this work is completed, unconverted clients will continue to be served using the audit tools and technologies historically in

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      The Company’s Accounts Payable Services technology can analyze massive volumes of data to help clients uncover patterns or potential problems in overpayments. The Company uses advanced data mining capabilities for analyzing data to the transaction level. The Company mines the data using algorithms to find patterns and associations between fields in relational databases. The result of data mining is a rule (or set of rules) that allows the Company to find new relationships among events and maximize the recovery for the client.

      At the beginning of a typical accounts payable recovery audit engagement, the Company obtains a wide array of transaction data from its client for the time period under review. The Company typically receives this data by Electronic Data Interchange (“EDI”), magnetic media or paper (the Company uses a custom, proprietary imaging technology to scan the paper into electronic format), which is then mapped by the Company’s technology professionals, primarily using high performance database and storage technologies, into standardized and proprietary layouts at one of the Company’s data processing facilities. The Company’s data acquisition, data processing and data management methodologies are aimed at maximizing efficiencies and productivity while maintaining the highest standards of client confidentiality.

      The Company’s experienced technology professionals 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 field audit software, sort, filter and search the data for indications of erroneous payments. The Company’s technology professionals also produce client-specific standard reports and statistical data for the auditors. These reports and data often reveal patterns of activity or unusual relationships suggestive of potential overpayment situations.

      The Company maintains a secure, automated and web-enabled database of audit information with the ability to query on multiple variables, including claim categories, SIC and industry codes, vendors and audit years, to facilitate data analysis for the identification of additional recovery opportunities and provide recommendations for process improvements to clients. The Company has numerous security measures in place, including secure and restricted access to this database, to ensure the highest standards of data integrity and client confidentiality.

      The Channel Revenue business (a sub-component of the Accounts Payable Services operating segment) employs proprietary audit methodologies to analyze data in search of various situations in which its clients may not have received all of the revenues to which they are entitled.

      Meridian utilizes a proprietary software application that assists business clients in the reclaiming of value-added taxes (“VAT”). The functionality of the software includes paper flow monitoring, financial and managerial reporting and EDI. The paper flow monitoring reflects all stages of the reclaim business process from logging in claims received to printing out checks due to clients. The reporting system produces reports that measure the financial and managerial information for each stage of the business process.

Auditor Hiring and Training

      Many of the Company’s auditors and specialists formerly held finance-related management positions in the industries the Company serves. To meet its need for additional auditors, the Company also hires recent college graduates, particularly those with multi-lingual capabilities and technology skills. While the Company has been able to hire a sufficient number of new auditors to support its historical needs, there can be no assurance that the Company can continue hiring sufficient numbers of qualified auditors to meet its future needs.

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      The Company provides intensive training for auditors utilizing both classroom-type training and self-paced media such as specialized computer-based training modules. All training programs are periodically upgraded based on feedback from auditors and changing industry protocols. Additional on-the-job training provided by experienced auditors enhances the structured training programs and enables newly hired auditors to refine their skills.

Clients

      The Company provides its services principally to large and mid-sized businesses having numerous payment transactions with many vendors. Retailers/ wholesalers continue to constitute the largest part of the Company’s client and revenue base. The Company’s five largest clients contributed approximately 21.0%, 23.4% and 26.6% of its revenues from continuing operations for the years ended December 31, 2003, 2002 and 2001, respectively. During the years ended December 31, 2002 and 2001, the Company’s largest client, Wal-Mart International, accounted for 10.2% and 10.6% of revenues from continuing operations, respectively. The Company did not have any clients who individually provided revenues in excess of 10.0% of total revenues from continuing operations during the year ended December 31, 2003.

Sales and Marketing

      Due to the highly confidential and proprietary nature of a business’s purchasing patterns and procurement practices 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 that are the most annuity-like in nature such as a “broad-scope” audit 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 “basic-scope” audits, 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 methodologies that enhance existing proprietary software and methodologies. 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 proprietary software and methodologies 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 generally less significant to the Company’s overall success than the continued pursuit and implementation of its operating strategies and other factors such as the knowledge, ability and experience of its personnel.

      The Company owns or has rights to various copyrights, trademarks and trade names used in the Company’s business, including but not limited to AuditPro®, SureF!nd®, Direct F!nd®, ImDex® and claimDex^TM.

Competition

      The “basic-scope” recovery audit business is highly competitive and barriers to entry are relatively low. The Company believes that the low barriers to entry result from limited technology infrastructure requirements, the need for relatively minimal high-level data, and an audit focus on a select few recovery categories.

      The “broad-scope” recovery audit business is also highly competitive with numerous existing competitors that are believed to be substantially smaller than the Company. Barriers to effective entry and longevity as a viable “broad-scope” recovery audit firm are believed to be high. The Company further believes that these high barriers to entry result from numerous factors including, but not limited to, significant technology infrastructure requirements, the need to gather, summarize and examine volumes of client data at the line-item level of detail, the need to establish effective audit techniques and methodologies, and the need to hire

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      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.

Employees

      At January 31, 2004, the Company had approximately 3,100 employees, of whom approximately 1,700 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 satisfactory.

Website

      The Company makes available free of charge on its website, www.prgx.com, its annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to those reports. The Company makes all filings with the Securities and Exchange Commission available on its website no later then the close of business on the date the filing was made. In addition, investors can access the Company’s filings with the Securities and Exchange Commission at www.sec.gov/edgar.shtml.

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RISK FACTORS

We depend on our largest clients for significant revenues, and if we lose a major client, our revenues could be adversely affected.

      We generate a significant portion of our revenues from our largest clients. For the years ended December 31, 2003, 2002, and 2001, our two largest clients accounted for approximately 12.7%, 15.0% and 15.8% of our revenues from continuing operations, respectively. If we lose any major clients, our results of operations could be materially and adversely affected by the loss of revenue, and we would have to seek to replace the client with new business.

We may not be able to secure replacement financing when our Credit Agreement expires.

      Our Credit Agreement, as amended, matures on December 31, 2004. We intend to work with the Banking Syndicate to extend the current credit facility or negotiate a new credit facility. While the Banking Syndicate has historically displayed its willingness to provide financing to us, there can be no assurance that we will be able to successfully establish an extended or replacement credit facility. If we are not able to successfully negotiate an extended or replacement credit facility with the current Banking Syndicate, we will have to seek alternative measures of financing. There can be no assurance that these efforts will be successful.

Client and vendor bankruptcies, including the Fleming bankruptcy, and financial difficulties could reduce our earnings.

      Our clients generally operate in intensely competitive environments and bankruptcy filings are not uncommon. Additionally, adverse economic conditions throughout the world have increased, and they continue to increase, the financial difficulties experienced by our clients. On April 1, 2003, Fleming Companies, Inc. (“Fleming”), which accounted for 0.2%, 2.4% and 1.9% of our 2003, 2002 and 2001 revenues from continuing operations, respectively, filed for Chapter 11 Bankruptcy Reorganization. At the time of the bankruptcy filing, Fleming owed the Company $0.6 million for services invoiced but unpaid. Of this amount, the Company charged $0.5 million to expense in 2003 for amounts due that had not previously been reserved. As a direct consequence of the bankruptcy filing, we did not derive significant revenues from Fleming in 2003 and currently do not expect to generate revenues from Fleming in 2004. In addition, further bankruptcy filings by our large clients or the significant vendors who supply them, or unexpectedly large vendor claim chargebacks lodged against one or more of our larger clients, could have a material adverse affect on our financial condition and results of operations. Likewise, our failure to collect our accounts receivable due to the financial difficulties of one or more of our large clients could adversely affect our financial condition and results of operations.

Demands for preference payments related to client bankruptcies could reduce our earnings and place unbudgeted demands on our cash resources.

      On April 1, 2003, Fleming, one of our larger U.S. Accounts Payable Services clients, filed for Chapter 11 Bankruptcy Reorganization. During the quarter ended March 31, 2003, we received $5.5 million in payments on account from this client. A portion of these payments might be recoverable as “preference payments” under United States bankruptcy laws. It is not possible at this point to estimate whether a claim for repayment will ever be asserted and, if so, whether and to what extent it may be successful. Accordingly, our Consolidated Financial Statements for the year ended December 31, 2003 do not include any expense provision with respect to this matter. Should a preference payment claim be asserted against us, we will vigorously defend against it. However, if we are unsuccessful in defending a preference payment claim against us, our earnings would be reduced and we would be required to make unbudgeted cash payments which could strain our financial liquidity.

Strategic business initiatives for the Accounts Payable Services business may not be successful.

      We have adopted a strategic plan to revitalize the business and respond to the changing competitive environment. The strategic plan focuses on a series of initiatives designed to maintain our dedicated focus on

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      We have begun implementation of the strategy but remain in the relatively early stages of that process. Each of the initiatives requires sustained management focus, organization and coordination over time, as well as success in building relationships with third parties. The results of the strategy and implementation will not be known until some time in the future. If we are unable to implement the strategy successfully, our results of operations and cash flows could be adversely affected. Successful implementation of the strategy may require material increases in costs and expenses.

We have violated our debt covenants in the past and may do so in the future.

      As of September 30, 2003, we were not in compliance with certain of the debt covenants contained in our senior bank credit facility (the “Credit Agreement”), namely certain financial ratio covenants. On November 12, 2003, the members of our Banking Syndicate waived these covenant violations as of September 30, 2003, and relaxed the stringency of future financial ratio requirements. See Notes 9 and 18 of Notes to Consolidated Financial Statements included in Item 8. of this Form 10-K. As of February 29, 2004, outstanding borrowings under the Credit Agreement, as amended, were $17.2 million and the Company’s borrowing base was $29.1 million, thus producing additional borrowing availability of $11.9 million as of that date.

      No assurance can be provided that we will not violate the covenants of the Credit Agreement, as amended, in the future. If we are unable to comply with our financial covenants in the future, our lenders could pursue their contractual remedies under the credit facility, including requiring the immediate repayment in full of all amounts outstanding, if any. Additionally, we cannot be certain that, if the lenders demanded immediate repayment of any amounts outstanding, we would be able to secure adequate or timely replacement financing on acceptable terms or at all. Additionally, if such a Banking Syndicate accelerated repayment demand is subsequently made and we are unable to honor it, cross-default language contained in the indenture underlying our separately-outstanding $125.0 million convertible notes issue, due November 26, 2006, could also be triggered, potentially accelerating the required repayment of those notes as well. In such an instance, there can likewise be no assurance that we will be able to secure additional financing that would be required to make such a rapid repayment. See Managements’ Discussion and Analysis included in Item 7. of this Form 10-K.

Proposed legislation by the European Union could have a material adverse impact on Meridian’s operations.

      The European Union has currently proposed legislation that will remove the need for suppliers to charge value-added taxes on the supply of services to clients within the European Union. The effective date of the proposed legislation is currently unknown. Management estimates that the proposed legislation, if enacted as currently drafted, would have a material adverse impact on Meridian’s results of operations from its value-added tax business and would also negatively affect our consolidated results of operations.

The inability of Transporters VAT Reclaim Limited to retain financing may have an adverse impact on Meridian’s operations.

      The Company’s Meridian unit and an unrelated German concern named Deutscher Kraftverkehr Euro Service GmbH & Co. KG (“DKV”) are each a 50% owner of a joint venture named Transporters VAT Reclaim Limited (“TVR”) which was established in 1999. Since neither owner, acting alone, has majority control over TVR, Meridian accounts for its ownership using the equity method of accounting. DKV provides European truck drivers with a credit card that facilitates their fuel purchases. DKV distinguishes itself from its competitors, in part, by providing its customers with an immediate advance refund of the value-added taxes (“VAT”) paid on fuel purchases. DKV then recovers the VAT from the taxing authorities through the TVR joint venture. Meridian processes the VAT refund on behalf of TVR for which it receives a percentage fee. In

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      As a condition of the financing facility between TVR and Barclays, Meridian has provided an indemnity to Barclays for any losses that Barclays may suffer in the event that Meridian processes any fraudulent claims on TVR’s behalf. Meridian has not been required to remit funds to Barclays under this indemnity and the Company believes the probability of the indemnity clause being invoked is remote. Meridian has no obligation to Barclays as to the collectibility of VAT refund claims sold by TVR to Barclays unless fraudulent conduct is involved.

      Should Barclays continue to reduce the facility’s aggregate capacity each month and should DKV continue to transfer TVR clients to another VAT service provider as a result thereof, Meridian’s future revenues from TVR for processing TVR’s VAT refunds, and the associated profits therefrom, would be further reduced and maybe even eliminated. (Meridian’s revenues from TVR were $2.3 million, $3.6 million and $3.1 million for the years ended December 31, 2003, 2002 and 2001, respectively. Meridian’s revenues from TVR were 5.7%, 10.7% and 9.7% of its total revenues for the years ended December 31, 2003, 2002 and 2001, respectively.) Moreover, if the newly-imposed Barclays financing terms and conditions are such that they eventually cause a marked deterioration in TVR’s future financial condition, Meridian may be unable to recover some or all of its long-term investment in TVR which stood at $2.1 million at December 31, 2003 exchange rates. During 2003, Meridian recognized a loss of $0.8 million related to TVR. This loss was recorded as a reduction of Meridian’s investment in TVR. No income or loss from TVR was recognized during prior years, as TVR’s operations were break-even. Any future losses related to TVR will result in lower earnings for Meridian and further reductions of its investment in TVR. This investment is included in Other Assets on the Company’s December 31, 2003 and 2002 Consolidated Balance Sheets included in Item 8. of this Form 10-K.

Meridian may be required to repay grants received from the Industrial Development Authority.

      During the period of May 1993 through September 1999, Meridian received grants from the Industrial Development Authority of Ireland (“IDA”) in the sum of 1.4 million Euro ($1.7 million at December 31, 2003 exchange rates). The grants were paid primarily to stimulate the creation of 145 permanent jobs in Ireland. As a condition of the grants, if the number of permanently employed Meridian staff in Ireland falls below 145, then the grants are repayable in full. This contingency expires on September 23, 2007. Meridian currently employs 176 permanent employees in Dublin, Ireland. The European Union has currently proposed legislation that will remove the need for suppliers to charge VAT on the supply of services to clients within the European Union. The effective date of the proposed legislation is currently unknown. Management estimates that the proposed legislation, if enacted as currently drafted, would have a material adverse impact on Meridian’s results of operations from its value-added tax business. If Meridian’s results of operations were to decline as a result of the enactment of the proposed legislation, it is possible that the number of permanent employees that Meridian employs in Ireland could fall below 145 prior to September 2007. If the number of permanent employees that Meridian employs in Ireland falls below 145 prior to September 2007, the full amount of the grants previously received will need to be repaid to IDA. As any potential liability related to these grants is not currently determinable, the Company’s Consolidated Statement of Operations for the year ended December 31, 2003 does not include any expense related to this matter. Management is monitoring this situation and if it appears probable Meridian’s permanent staff in Ireland will fall below 145 and that grants

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      The Company’s current intention is to redirect most of the Meridian employees who would be made redundant by the proposed legislation to provide services to its core Accounts Payable Services business. The Company believes that this redirection will significantly enhance its Accounts Payable Services business internationally as well as provide the peripheral benefit of mitigating the risk of a future IDA grant repayment.

External factors such as potential terrorist attacks could have a material adverse affect on our future revenues and earnings.

      The terrorist events of September 11, 2001 that occurred in the United States significantly disrupted our business. In the days and months following these terrorist events, many of our clients were urgently attending to new security imperatives and other matters of immediate priority. Future potential terrorist events could again have a material and adverse affect on our revenues and earnings, including potentially, adverse affects on both our United States operations and our international operations.

We rely on international operations for significant revenues.

      In 2003, approximately 37.6% of our revenues from continuing operations were generated from international operations. International operations are subject to risks, including:

	•	political and economic instability in the international markets we serve;
	•	difficulties in staffing and managing foreign operations and in collecting accounts receivable;
	•	fluctuations in currency exchange rates, particularly weaknesses in the Australian Dollar, the Euro, the British Pound, the Canadian Dollar, the Argentine Peso, the Brazilian Real and other currencies of countries in which we transact business, which could result in currency translations that materially reduce our revenues and earnings;
	•	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;
	•	burdens of complying with a wide variety of foreign laws and labor practices; and
	•	business interruptions due to potential terrorist activities.

      Because we expect a significant and growing proportion of our revenues to continue to come from international operations, the occurrence of any of the above events could materially and adversely affect our business, financial condition and results of operations.

We require significant management and financial resources to operate and expand our recovery audit services internationally.

      In our experience, entry into new international markets requires considerable management time as well as start-up expenses for market development, hiring and establishing office facilities. In addition, we have encountered, and expect to continue to encounter significant expense and delays in expanding our international operations because of language and cultural differences, communications and related issues. We generally incur the costs associated with international expansion before any significant revenues are generated. 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.

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Expansion of our recovery audit services internationally may result in lower profit margins or be unsuccessful.

      In our experience, entry into new international markets requires considerable start-up expenses for market development, hiring and establishing office facilities. In addition, we have encountered, and expect to continue to encounter, significant expense and delays in expanding our international operations because of language and cultural differences, 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 international market typically operate at low margins or may be unprofitable. Additionally, these operations may continue to operate at lower profit margins until revenues can be built up. If operations do not achieve an acceptable profit margin, we may need to forego our initial investment altogether and abandon our efforts in certain countries.

Recovery audit services are not widely used in international markets.

      Our long-term growth objectives are based in part on achieving significant future growth in international markets. Although our recovery audit services constitute a generally accepted business practice among retailers in the U.S., Canada, the United Kingdom and Mexico, these 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 future growth.

Future impairment of goodwill, other intangible assets and long-lived assets could materially reduce our future earnings.

      During the fourth quarter of 2003, we recorded impairment charges of $206.9 million, pre-tax, related to the impairment of goodwill, impairment of intangible assets with indefinite lives and impairment of internally developed software (see Managements’ Discussion and Analysis in Item 7. of this Form 10-K.)

      Adverse future changes in the business environment or in our ability to perform audits successfully and compete effectively in our market could result in additional impairment of goodwill, other intangible assets or long-lived assets, which could materially adversely impact future earnings.

We may not recover our net deferred tax assets, which could materially reduce our future earnings.

      The derivation of the effective tax rate, deferred tax assets and liabilities, and any required valuation allowances is inherently subjective, as it requires the use of highly complex estimates and assumptions that are susceptible to revision as more information becomes available. As of December 31, 2003, our Consolidated Balance Sheet, included in Item 8. of this Form 10-K, reflects net deferred income tax assets of $74.6 million ($9.2 million current and $65.4 million long-term). While we have considered anticipated future taxable income and ongoing prudent and feasible tax planning strategies in assessing the need for valuation allowances, in the event we were to determine that we would not be able to realize all or any portion of our net deferred tax assets in the future, an adjustment to the deferred tax assets would be charged to income in the period such determination was made and could have a materially adverse impact on future earnings.

The level of our annual profitability has historically been significantly affected by our third and fourth quarter operating results.

      Prior to 2002, we had historically experienced significant seasonality in our business. We typically realized higher revenues and operating income in the last two quarters of our fiscal year. This trend reflected the inherent purchasing and operational cycles of our clients. As of January 24, 2002, our results of operations include the results of the business acquired as part of the acquisitions of the businesses of HSA-Texas and affiliates. Also impacting seasonality in 2002 were certain costs associated with the integration of the acquired operations and the integration of our domestic retail and domestic commercial operations. During 2003, our results of operations were negatively impacted by client reaction to well-publicized inquiries by the United States Securities and Exchange Commission into the accounting by retailers for vendor-supplied promotional

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Our revenues from certain clients and VAT authorities may change markedly from year to year.

      We examine merchandise procurements and other payments made by business entities such as manufacturers, distributors and healthcare providers. Services to these types of clients to date have tended 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.

      Meridian defers recognition of revenues to the accounting period in which cash is both received from the foreign governmental agencies reimbursing VAT claims and transferred to Meridian’s clients. The timing of reimbursement of VAT claims by the various European tax authorities with which Meridian files claims can differ significantly by country. As a result of Meridian’s revenue recognition policy, and the timing of claim reimbursements, its revenues can vary markedly from period to period.

The market for providing “basic-scope” recovery audit services to commercial entities in the United States is maturing.

      The substantial majority of our domestic commercial Accounts Payable Services clients are currently served using a “basic-scope” model that typically entails acquisition from the client of limited purchase data and an audit focus on a select few recovery categories. We believe that the market for providing “basic-scope” recovery audit services to commercial entities in the United States is reaching maturity with the existence of many competitors and increasing pricing pressures. We intend to distinguish ourselves by providing recurring, “broad-scope” audits to commercial entities where line item client purchase data is available and client purchase volumes are sufficient to achieve the Company’s profitability objectives. “Broad-scope” audits typically entail a vast expansion of recovery categories reviewed by our auditors with commensurately greater dollars recovered and fees earned. Until we can convert a substantial number of our current domestic Accounts Payable Services commercial clients to “broad-scope” audits, annual revenues derived from domestic commercial clients is not expected to grow and may decrease. Although we are giving this conversion managerial emphasis, no definitive completion timetable has been established.

Our domestic commercial Accounts Payable Services business is subject to price pressure.

      The substantial majority of the Company’s domestic commercial Accounts Payable Services clients are currently served using a “basic-scope” model which typically entails acquisition from the client of limited purchase data and an audit focus on a select few recovery categories. The “basic-scope” recovery audit business is highly competitive and barriers to entry are relatively low. We believe that the low barriers to entry result from limited technology infrastructure requirements, the need for relatively minimal high-level data, and an audit focus on a select few recovery categories. As a result of the low barriers to entry, our domestic commercial Accounts Payable Services business is subject to intense price pressure from our competition.

The recent change in Meridian VAT Reclaim’s functional currency will subject the Company to additional foreign currency risk.

      The functional currency for the majority of our operations is the currency of the country in which they operate. Historically, Meridian VAT Reclaim’s (“Meridian”) functional currency has been the U.S. dollar. All assets and liabilities that are recorded in functional currencies other than U.S. dollars are translated at current exchange rates at the end of each accounting period. The resulting adjustments are charged or credited directly to accumulated other comprehensive income (loss) in shareholders’ equity. Revenues and expenses in

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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 able to adequately 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, our foreign registered trademarks may not receive the same enforcement protection as our U.S. registered trademarks. We generally enter into confidentiality agreements with our employees, consultants, clients and potential clients. We also limit access to, and distribution of, our proprietary information. Nevertheless, we may be unable to deter misappropriation of our proprietary information, detect unauthorized use and take appropriate steps to enforce our intellectual property rights. Our competitors also may independently develop technologies that are substantially equivalent or superior to our technology. Although we believe that our services and products do not infringe on the intellectual property rights of others, we can not prevent someone else from asserting a claim against us in the future for violating their technology rights.

Our failure to retain the services of John M. Cook, or other key members of management, could adversely impact our continued success.

      Our continued success depends largely on the efforts and skills of our executive officers and key employees, particularly John M. Cook, our Chief Executive Officer and Chairman of the Board. The loss of the services of Mr. Cook or other key members of management prior to an adequate succession plan being put in place could materially and adversely affect our business. We have entered into employment agreements with Mr. Cook and other key members of management. While these employment agreements limit the ability of Mr. Cook and other key employees to directly compete with us in the future, nothing prevents them from leaving our company. We also maintain key man life insurance policies in the aggregate amount of $13.3 million on the life of Mr. Cook.

We may not be able to continue to compete successfully with other businesses offering recovery audit services.

      The recovery audit business is highly competitive. Our principal competitors for accounts payable recovery audit services include numerous smaller firms. We cannot be certain as to 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.

Revisions to our compensation plan may cause us to lose auditors.

      In 2003, we implemented a new compensation plan to revise auditor compensation in the United States, and we may continue to modify auditor compensation plans in the future. Revising auditor compensation plans always introduces the possibility of unintended, unexpected auditor resignations.

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Our further expansion into electronic commerce auditing strategies and processes may not be profitable.

      We anticipate 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. In response to this anticipated future demand for our recovery auditing expertise, we have made and may continue to make significant capital and other expenditures to further expand into Internet technology areas. We can give no assurance that these investments will be profitable or that we have correctly anticipated demand for these services.

An adverse judgment in the securities action litigation in which we and John M. Cook are defendants could have a material adverse effect on our results of operations and liquidity.

      We and John M. Cook, our Chief Executive Officer, are defendants in a class action lawsuit initiated on June 6, 2000 in the United States District Court for the Northern District of Georgia, Atlanta Division (the “Securities Class Action Litigation”). A judgment against us in this case could have a material adverse effect on our results of operations and liquidity, while a judgment against Mr. Cook could adversely affect his financial condition and therefore have a negative impact upon his performance as our chief executive officer. Plaintiffs in the Securities Class Action Litigation have alleged in general terms that the defendants violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder by allegedly disseminating materially false and misleading information about a change in our method of recognizing revenue and in connection with revenue reported for a division. The plaintiffs further allege that these misstatements and omissions led to an artificially inflated price for our common stock during the putative class period, which runs from July 19, 1999 to July 26, 2000. This case seeks an unspecified amount of compensatory damages, payment of litigation fees and expenses, and equitable and/or injunctive relief. Although we believe the alleged claims in this lawsuit are without merit and intend to defend the lawsuit vigorously, due to the inherent uncertainties of the litigation process and the judicial system, we are unable to predict the outcome of this litigation.

Our articles of incorporation, bylaws, and shareholders’ rights plan and Georgia law may inhibit a change in control that you may favor.

      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;
	•	the requirement that our shareholders may only remove directors for cause;
	•	specified requirements for calling special meetings of shareholders; and
	•	the ability of the board of directors to consider the interests of various constituencies, including our employees, clients and creditors and the local community.

      Our articles of incorporation also permit the board of directors to issue shares of preferred stock with such designations, powers, preferences and rights as it determines, without any further vote or action by our shareholders. In addition, we have in place a “poison pill” shareholders’ rights plan that will trigger a dilutive issuance of common stock upon substantial purchases of our common stock by a third party which are not approved by the board of directors. These provisions also could discourage bids for our shares of common stock at a premium and have a material adverse effect on the market price of our shares.

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Our stock price has been and may continue to be volatile.

      Our common stock is traded on The Nasdaq Stock Market. The trading price of our common stock has been and may continue to be subject to large fluctuations. Our stock price may increase or decrease in response to a number of events and factors, including:

	•	future announcements concerning us, key clients or competitors;
	•	quarterly variations in operating results;
	•	changes in financial estimates and recommendations by securities analysts;
	•	developments with respect to technology or litigation;
	•	the operating and stock price performance of other companies that investors may deem comparable to our Company;
	•	acquisitions and financings; and
	•	sales of blocks of stock by insiders.

      Stock price volatility is also attributable to the current state of the stock market, in which wide price swings are common. This volatility may adversely affect the price of our common stock, regardless of our operating performance.

Our ability to pay off or repurchase convertible notes, if required, may be limited.

      Our convertible notes are due in 2006. Additionally, in certain circumstances, including a change in control, the holders of the notes may require us to repurchase some or all of the convertible notes. We cannot assure that we will have sufficient financial resources at such time or would be able to arrange financing to pay the repurchase price of the convertible notes. Our ability to pay off when due or repurchase the convertible notes may be limited by law, the indenture, or the terms of other agreements relating to our senior indebtedness. For example, under the terms of our senior bank credit facility, the lenders under that facility are required to consent to any payment of principal under the convertible notes. We may be required to refinance our senior indebtedness in order to make such payments, and we can give no assurance that we would be able to obtain such financing on acceptable terms or at all.

FORWARD LOOKING STATEMENTS

      Some of the information in this Form 10-K contains forward-looking statements and information made by us that are based on the beliefs of management as well as estimates and assumptions made by and information currently available to our management. The words “could,” “may,” “might,” “will,” “would,” “shall,” “should,” “pro forma,” “potential,” “pending,” “intend,” “believe,” “expect,” “anticipate,” “estimate,” “plan,” “future” and other similar expressions generally identify forward-looking statements, including, in particular, statements regarding future services, market expansion and pending litigation. These forward-looking statements are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Investors are cautioned not to place undue reliance on these forward-looking statements. Such forward-looking statements reflect the views of our management at the time such statements are made and are subject to a number of risks, uncertainties, estimates and assumptions, including, without limitation, in addition to those identified in the text surrounding such statements, those identified under “Risk Factors” and elsewhere in this Form 10-K.

      Some of the forward-looking statements contained in this Form 10-K include:

	•	statements regarding the Company’s expected future dependency on its major clients;
	•	statements regarding market opportunities for recovery audit firms and the opportunities offered by the Accounts Payable Services business;
	•	statements regarding the Company’s strategic business initiatives;

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	•	statements regarding conversion of a substantial number of the Company’s commercial clients from the “basic-scope” service model to the “broad-scope” service model;
	•	statements regarding future revenues for international Accounts Payable Services including European revenue growth;
	•	statements regarding the Company’s future revenues returning to pre-2002 seasonal patterns;
	•	statements regarding future annualized cost savings;
	•	statements regarding the future dilutive effect of shares subject to the convertible notes;
	•	statements regarding the impact of newly-emerging procurement technologies involving the Internet and the lack of data type definitions on recovery audit opportunities;
	•	statements regarding the expected relative return on investment and growth of the Accounts Payable Services business;
	•	statements regarding the Company’s ability to maintain its client retention rates; and
	•	statements regarding the sufficiency of the Company’s resources to meet its working capital and capital expenditure needs.

      In addition, important factors to consider in evaluating such forward-looking statements include changes or developments in United States and international economic, market, legal or regulatory circumstances, changes in our business or growth strategy or an inability to execute our strategy due to changes in our industry or the economy generally, the emergence of new or growing competitors, the actions or omissions of third parties, including suppliers, customers, competitors and United States and foreign governmental authorities, and various other factors. Should any one or more of these risks or uncertainties materialize, or the underlying estimates or assumptions prove incorrect, actual results may vary significantly and markedly from those expressed in such forward-looking statements, and there can be no assurance that the forward-looking statements contained in this Form 10-K will in fact occur.

      Given these uncertainties, you are cautioned not to place und