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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
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(Mark One)
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[X]
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 |
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For the fiscal year ended December 31, 2004 |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 |
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For the transition period
from to |
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Commission File Number 0-28000 |
PRG-Schultz International, Inc.
(Exact name of registrant as specified in its charter)
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Georgia
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58-2213805 |
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(State or other jurisdiction of
incorporation or organization)
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(I.R.S. Employer
Identification No.) |
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600 Galleria Parkway
Suite 100
Atlanta, Georgia
(Address of principal executive offices)
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30339-5986
(Zip Code) |
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
Preferred Stock Purchase Rights
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
The aggregate market value, as of June 30, 2004, of common
shares of the registrant held by non-affiliates of the
registrant was approximately $229.7 million, based upon the
last sales price reported that date on The Nasdaq Stock Market
of $5.47 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 28, 2005 were 62,039,989, 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 3, 2005.
PRG-SCHULTZ INTERNATIONAL, INC.
FORM 10-K
December 31, 2004
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:
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retailers such as discount, department, specialty, grocery and
drug stores; |
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manufacturers of high-tech components, pharmaceuticals, consumer
electronics, chemicals and aerospace and medical products; |
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wholesale distributors of computer components, food products and
pharmaceuticals; |
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healthcare providers such as hospitals and health maintenance
organizations; and |
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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 2004, 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.
Evaluation of Strategic Alternatives
As disclosed in the Company’s Report on Form 8-K filed
on October 21, 2004, the Company announced that its Board
of Directors, in response to several inquiries received by the
Company, has decided to explore the Company’s strategic
alternatives, including a possible sale of the Company. The
Company’s management intends to complete its strategic
business initiatives, as defined below. However, the exploration
of the strategic alternatives process will require
management’s time, and attention may be diverted from
operations of the business. Additionally, the Company may
experience higher levels of customer and employee turnover
impacting the Company’s ongoing operations. The exploration
of strategic alternatives is ongoing and no decisions have been
made.
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.”
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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 the time of its 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 then current 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.
On January 24, 2002, the Company acquired substantially all
the assets and certain liabilities of Howard Schultz &
Associates International, Inc. and affiliates
(“HSA-Texas”), formerly the Company’s principal
competitor in the Accounts Payable Services business.
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 2(c) 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 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 process every payment correctly. 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
the 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
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believes that large retailers and many other types of businesses
are also increasingly engaging independent recovery audit firms.
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 Electronic Data Interchange (“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.
As businesses have evolved, the Company and the recovery
auditing industry have evolved with them, innovating processes,
tools, and claim types to maximize recoveries. The following are
a number of the changes that have been driving the recovery
audit industry in the past several years:
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Data Capture and Availability. Businesses are
increasingly using technology to manage complex procurement and
accounts payable systems and realize greater operating
efficiencies. Many businesses worldwide communicate with vendors
electronically — whether by EDI or the
Internet — to exchange inventory and sales data,
transmit purchase orders, submit invoices, forward shipping and
receiving information and remit payments. These systems capture
more detailed data and enable the cost effective review of more
transactions by recovery auditors. |
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Increasing Number of Auditable Claim Categories.
Traditionally, the recovery audit industry was characterized by
the identification of simple, or “disbursement,” claim
types such as the duplicate payment of invoices. However, the
introduction of creative vendor discount programs, complex
pricing arrangements and activity-based incentives has led to an
explosion of auditable transactions and potential sources of
error. These transactions are complicated to audit as the
underlying transaction data is difficult to access and
recognizing mistakes is complex. Only recovery audit firms with
significant industry-specific expertise and sophisticated
technology are capable of auditing these complicated, or
“contract compliance” claim categories. |
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Globalization. While global economic and political
developments are presenting companies with a wide range of
challenges, globalization is intensifying throughout the retail
landscape and particularly among the top retailers worldwide.
The average company operates in over seven countries —
up significantly from prior years — and a significant
number of retailers have entered once avoided markets such as
Russia and China. As these retailers are becoming increasingly
global, they seek to obtain similar services from similar
vendors across markets. |
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Consolidation in the Retail Industry. Retailer
consolidation in the U.S. and internationally continues. As
retailers grow larger, vendors become more reliant on a smaller
number of customers and, as a result, the balance of power
favors retailers rather than vendors. This dynamic creates an
environment that allows retailers to assert valid claims more
easily. |
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Increase in Promotional Activity. Trade promotion
spending is at an all time high and is not expected to decline.
In addition, an increasing number of dollars are being spent in
categories with numerous transactions and a high potential for
error such as scan downs, or discounts at the point of sale. As
this trade promotion spending continues to grow, it creates
increasing opportunities for mistakes and, therefore, auditable
claims. |
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Increased Push for Efficiency. Historically, recovery
audit firms audited transactions several years after their
occurrence. Determining whether claims generated from those
periods are valid is costly and time-consuming for clients and
their vendors alike, and becomes even more so the older the
claim. As a result, recovery audit firms, especially in the
U.S., are being asked to audit closer in time to the occurrence
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the transaction — typically 12 to 18 months after
the transaction date. This trend has benefited recovery audit
firms since more recent claims are easier to assert against
suppliers, resulting in higher recoveries. |
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Move Toward Standard Auditing Practices. Vendors have
been active in demanding clearer post-audit procedures, better
documentation and electronic communication of claims, among
other things. The Company, as the industry leader, has taken a
leadership role in establishing standard recovery auditing
practices for the industry and led the way to establishing the
first ever Retail Summit and Post Audit Best Practices Forum in
2003. The purpose of the Summit was to begin providing a
foundation for industry standards and norms with a goal of
diminished ambiguity, greater efficiencies, lower costs and
higher value for all stakeholders. In December 2004 the second
Retail Summit and Best Practices Forum was held where academic
professionals reported the results of ground-breaking Best
Practices research specific to the post audit industry with the
goal of furthering the establishment of standard practices. |
The evolution of the recovery auditing industry is expected to
continue, and the Company will continue to drive and capitalize
on the changes as it has in the past. In particular, the Company
expects that the industry will continue to move towards the
electronic capture and presentation of data, more automated,
centralized processing, a growing number of potential claim
categories and faster approvals and deductions.
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.
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 its
dedicated focus on the Company’s clients and rekindle its
growth. The Company has implemented a number of strategic
business initiatives over the past 18 months to reduce
costs, increase recoveries and fuel growth at existing and new
clients. Some of these key initiatives include:
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Centralize Claim Processing and Field Audit Work. The
processing of certain claim types and certain client audits has
been shifted to the Company’s Salt Lake City and Atlanta
Shared Service Centers and its N.J. and Dublin, Ireland Regional
Audit Centers resulting in cost savings and improved audit
productivity. |
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Standardize Audit Software and Processes. The Company has
developed new standardized proprietary software tools and
algorithms that enable its auditors to identify trends,
exceptions and claims quickly and efficiently and use the best
auditing practices across every audit to increase recoveries. |
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Implement Technology Platforms. The Company has
implemented global customer relationship management
(“CRM”) and claims management systems (including
foreign language and functional currency versions
internationally), a new technology platform that provides remote
access to audit information and a new European data center,
resulting in improved sales and audit productivity. |
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Optimize the Organization. The Company has made
significant improvements to: (i) its international
knowledge base and management structure by hiring an experienced
international executive, transferring experienced personnel to
key regions, and shifting to a regional management structure;
(ii) its U.S. commercial sales function by hiring
additional U.S. sales personnel, modifying the auditor
compensation model and creating distinct sales and client
development groups; and (iii) its audit staffing model by
reducing U.S. field audit headcount during the last
24 months. |
With these strategic business initiatives in place, the Company
is focused on executing a growth strategy that includes the
following key elements:
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Grow Business with Existing Clients. The Company intends
to continue to maximize the revenue opportunities with each of
its existing clients by identifying and auditing new categories
of potential errors (such as its new freight rate audit program
and third-party pharmacy payment service offerings) and
leveraging the productivity enhancements of its recent strategic
business initiatives to drive increased recoveries. An alliance
we made with a national state and local tax consulting firm
offers our clients additional expertise on state and local tax
issues. Finally, the Company was awarded a multi-year contract
for the management of credit card receipts from an existing
client, one of the largest grocery companies in the U.S., a new
service we are offering to our retail clients. |
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Grow the International Business. The Company believes
that there are significant opportunities for sustained
international growth as there are numerous retail, commercial
and public sector clients the Company does not currently serve
and major global clients for whom the Company is the only
recovery audit firm with the global capabilities to serve them
in multiple geographies. The Company intends to leverage its
recent strategic business initiatives that significantly
improved its international sales and operating functions to
drive this growth. |
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Grow the U.S. Commercial and Government Business.
The Company intends to continue to drive growth in its
U.S. commercial and government segments by:
(i) aggressively moving less complex audit work to its
shared service centers in order to increase productivity and
free-up highly skilled auditor time to scrutinize more complex
claim types; and (ii) leveraging its recent strategic
business initiatives that significantly improved its
U.S. commercial and government sales functions. |
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Develop New Vertical Markets. The Company has a long
history of innovation and is developing new revenue sources by
applying its core competencies to vertical markets where there
are high transaction counts, significant price volatility and
likelihood of human error. The Company intends to continue to
identify new markets with these characteristics and launch new
service offerings accordingly. For example, the Company has
launched, and is aggressively growing, its recovery audit
service offerings for the airline and healthcare sectors, and is
planning a 2005 service launch to the energy industry. Further,
a recent contract with the State of Arizona is our first audit
of Medicaid claims. We expect to expand this service offering to
additional states. |
PRG-Schultz Services
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Accounts Payable Services |
Through the use of proprietary technology, audit techniques and
methodologies, the Company’s trained and experienced
auditors examine merchandise procurement records on a
post-payment basis to identify
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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.
Contract compliance 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. Contract
compliance 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. Contract compliance 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
disbursement audit service model which typically entails
obtaining limited purchase data from the client 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 audit 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 disbursement 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 growth with commercial clients in other markets
around the world.
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, consistent with maximizing the
Company’s profitability. Thus, ultimately, certain
retail/wholesale clients that have historically been served by
the disbursement audit service model will be served under the
contract compliance service model. Additionally, the Company
believes that the market for providing disbursement audit
services to commercial entities in the United States is reaching
maturity with the existence of many competitors and increasing
pricing pressures. Therefore a substantial number of commercial
clients that historically have been served by the disbursement
audit service model are ultimately intended by the Company to be
served under the contract compliance service model where
barriers to competitive entry are higher.
Additionally, within Accounts Payable Services is a discrete
unit, the Channel Revenue business. 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.
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. Acting as an
agent on behalf of its clients, Meridian submits claims for
refunds of VAT paid on business expenses incurred primarily in
European Union countries. Meridian provides a fully outsourced
service dealing with all aspects of the VAT reclaim process,
from the provision of audit and invoice retrieval services to
the preparation and submission of VAT claims and the subsequent
collection of refunds from the relevant VAT authorities. For
this service, Meridian receives a contractual percentage of VAT
recovered on behalf of its clients. The services provided to
clients by Meridian are typically recurring in nature.
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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’ internal 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.
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Accounts Payable Services Audit Technology |
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. Until this work is completed, unconverted
clients will continue to be served using the audit tools and
technologies historically in place at their respective
locations. The following paragraphs of this section specify
technology practices and processes that are generally applicable
to all clients worldwide.
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 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’s technology
professionals deliver this reformatted data to field 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
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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.
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Channel Revenue Audit Technology |
The Channel Revenue business (a sub-component of the Accounts
Payable Services operating segment) specializes in providing
comprehensive revenue recovery audits for both the financial and
sales divisions of manufacturing firms in consumer, industrial
and technology industries.
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Meridian VAT Reclaim Technology |
Meridian utilizes a proprietary software application that
assists business clients in the reclaiming of 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.
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
22.6%, 21.0% and 23.4% of its revenues from continuing
operations for the years ended December 31, 2004, 2003 and
2002, respectively. During the year ended December 31,
2002, the Company’s largest client, Wal-Mart International,
accounted for approximately 10.2% of revenues from continuing
operations. The Company did not have any clients who
individually provided revenues in excess of 10.0% of total
revenues from continuing operations during the years ended
December 31, 2004 and 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
8
found that its service offerings that are the most annuity-like
in nature such as a contract compliance 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 disbursement
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
claimDextm.
Competition
The disbursement audit services 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 contract compliance 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 contract compliance
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 and train audit
professionals to work in a very specialized manner that requires
technical proficiency with numerous recovery categories.
While the Company believes that it is the only company with the
depth and breadth of audit expertise, data and technology
capabilities, scale and global presence to compete in an
increasingly electronic and global marketplace, the Company
faces competition from the following:
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Client Internal Post-Audit Departments. A number of
larger retailers (particularly those in the grocery and drug
segments) have developed an internal post-audit process to
review transactions prior to turning them over to external
post-audit providers. The majority of clients’ internal
activities, however, focus only on disbursement claim types
while a few have implemented broader capabilities. Regardless of
the level of internal recoveries, the Company has observed that
practically all clients continue to retain at least one
(primary), and sometimes two (primary and secondary), external
post-audit recovery firms to capture errors missed by their
internal post-audit departments. There is currently very little
use of internal post-transaction audit groups internationally
other than at certain large Canadian and U.K. retailers. |
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Other Post-Audit Recovery Firms. The competitive
landscape in the recovery audit industry is comprised of: |
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Several full-service Accounts Payable recovery audit firms, only
one of which the Company believes offers a full suite of
recovery audit services internationally; |
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A large number of smaller niche and “mom &
pop” Accounts Payable recovery firms who have a limited
client base and who use less sophisticated tools to mine
disbursement claim categories at low |
9
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contingency rates. These firms are most common in the
U.S. market and the largest of these firms typically have
approximately $10 – $15 million in annual
revenue. Competition in most international markets is either
non-existent or typically comes from small niche providers; |
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Firms who offer a hybrid of audit software tools and training,
and/or general accounts payable process improvement
enablers; and |
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Firms with specialized skills focused on recovery services for
discrete sectors like airlines and healthcare. |
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Other Providers of Recovery Services. The “Big
Four” accounting firms provide recovery services; however,
their practices tend to be focused on tax-related services.
American Express also provides, as part of their Tax &
Business Services unit, a range of recovery services and
solutions in the accounts payable and procurement and sales and
use tax areas. |
Employees
At January 31, 2005, the Company had approximately 2,800
employees, of whom approximately 1,400 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 than 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.
10
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, 2004,
2003, and 2002, our two largest clients accounted for
approximately 13.8%, 12.7% and 15.0% 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.
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% and 2.4% of our 2003 and 2002 revenues from continuing
operations, respectively, filed for Chapter 11 Bankruptcy
Reorganization. There were no revenues from Fleming recognized
in 2004. As a direct consequence of the bankruptcy filing, we
currently do not expect to generate revenues from Fleming in
2005. 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 by Fleming or other clients
in bankruptcy 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 at that time, 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. On January 24, 2005,
the Company received a demand for preference payments due from
the trust representing the client. The demand states that the
trust’s calculation of the Company’s preferential
payments was approximately $2.9 million. The Company
believes that it has valid defenses against any claim that may
be made for payments received from Fleming, however, there can
be no guarantee that all or a portion of the payments made to
Fleming will not be recoverable by the bankrupt estate. The
Company has offered to settle such claim. Accordingly, the
Company’s Consolidated Statement of Operations for the year
ended December 31, 2004 includes an expense provision of
$0.2 million with respect to this matter. 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.
Our objective is to build on our position as the leading
worldwide provider of recovery audit services. Our strategic
plan to achieve these objectives focuses on a series of
initiatives designed to maintain our dedicated focus on clients
and rekindle our growth. We have implemented a number of
strategic business initiatives over the past 18 months that
have been leveraged to reduce costs, increase recoveries and
fuel growth at existing and new clients. Some of these key
initiatives include: (1) Centralize Claim Processing and
Field Audit Work; (2) Standardize Audit Software and
Processes; (3) Implement Technology Platforms; and
(4) Optimize the Organization. See Part I,
Item 1. “Business — The PRG-Schultz
Strategy”.
The Company has begun implementation of the strategy but remains
in the intermediate stages of that process. Each of the
initiatives requires sustained management focus, organization
and coordination over time,
11
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.
Exploration of strategic alternatives may not be
successful.
As disclosed in our report on Form 8-K filed on
October 21, 2004, we announced that our Board of Directors,
in response to several inquiries received by the Company, has
decided to explore our strategic alternatives, including a
possible sale of the Company. Management intends to complete its
strategic business initiatives, as discussed above and elsewhere
in this Form 10-K, regardless of the outcome of the
strategic alternatives exploration. However, the exploration of
strategic alternatives process will require management’s
time, and attention may be diverted from operations of the
business. Additionally, we may experience higher levels of
customer and employee turnover impacting our ongoing operations
and will incur additional expense through 2005. During 2004, we
incurred approximately $0.4 million of expense related to
exploration of our strategic alternatives.
We have violated our debt covenants in the past and may do so
in the future.
No assurance can be provided that we will not violate the
covenants of the Senior Credit Facility in the future. If we are
unable to comply with our financial covenants in the future, our
lender could pursue its 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 lender 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 lender 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
Management’s Discussion and Analysis of Financial Condition
and Results of Operations 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
(“EU”). The effective date of the proposed legislation
is currently unknown. Management believes that the proposed
legislation, if enacted as currently drafted, could have a
material adverse impact on Meridian’s results of operations
from its value-added tax business and could also negatively
affect our consolidated results of operations.
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
($1.9 million at December 31, 2004 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 205 permanent employees in Dublin, Ireland.
The EU has currently proposed legislation that will remove the
need for suppliers to charge VAT on the supply of services to
clients within the EU. The effective date of the proposed
legislation is currently unknown. Management estimates that the
proposed legislation, if enacted as currently drafted, could
eventually 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.
Should such an event occur, the full amount of the grants
previously received by Meridian will need to be repaid to IDA.
However,
12
management currently estimates that any impact on employment
levels related to a possible change in the EU legislation will
not be realized until after September 2007, if ever. 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, 2004 does not
include any expense related to this matter. Management is
monitoring this situation and if it appears probable that
Meridian’s permanent staff in Ireland will fall below 145
and that grants will need to be repaid to IDA, Meridian will be
required to recognize an expense at that time. This expense
could be material to Meridian’s results of operations.
The Company’s current intention is to expand the service
offerings of Meridian to offer outsourced accounts payable and
employee expense reimbursement processing and redirect most of
the Meridian employees who may be affected 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 effects on
both our United States and international operations.
We rely on international operations for significant
revenues.
In 2004, approximately 42.0% of our revenues from continuing
operations were generated from international operations.
International operations are subject to risks, including:
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political and economic instability in the international markets
we serve; |
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difficulties in staffing and managing foreign operations and in
collecting accounts receivable; |
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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; |
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costs associated with adapting our services to our foreign
clients’ needs; |
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unexpected changes in regulatory requirements and laws; |
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difficulties in transferring earnings from our foreign
subsidiaries to us; |
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burdens of complying with a wide variety of foreign laws and
labor practices; and |
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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
and international expansion may result in lower profit margins
or be unsuccessful.
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
13
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.
We may not achieve increased revenues as expected from new
international clients.
During the last six months of 2004, we signed service contracts
with 44 customers expected to lead to an increase in
revenues in 2005. The new client audit process involves the
Company obtaining and analyzing customer payment data before
generating potential claims against the customers’ vendors.
The Company’s customers must receive economic benefit from
our services before revenue can be recognized pursuant to the
Company’s revenue recognition policy. These anticipated
revenues may be delayed, or may not occur, for reasons beyond
our control.
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 related to the impairment of
goodwill, impairment of intangible assets with indefinite lives
and impairment of internally developed software (see Note 7
of Notes to Consolidated Financial Statements in Item 8. of
this Form 10-K.) There were no such impairment charges
recorded in 2004.
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.
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 allowances as well as other factors
discussed elsewhere in this Form 10-K. Although we
currently anticipate that our revenues and profits in the third
and fourth quarters of 2005 will be greater than comparable
amounts for the first and second quarters of 2005, if we do not
realize increased revenues in future third and fourth quarter
periods, including 2005, due to adverse economic conditions in
those quarters or otherwise, 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.
14
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 disbursement 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
disbursement audit service 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 disbursement 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, contract compliance 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. Contract compliance 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
contract compliance audits, annual revenues derived from
domestic commercial clients may not 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 disbursement audit service model which typically
entails obtaining limited purchase data from the client and an
audit focus on a select few recovery categories. The
disbursement 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.
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
15
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 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.
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”). On February 8, 2005,
we entered into a Stipulation of Settlement
(“Settlement”) with Plaintiffs’ counsel, on
behalf of all putative class members, pursuant to which we
agreed to settle the consolidated class action for
$6.75 million, which payment is expected to be made by the
insurance carrier for the Company. On February 10, 2005,
the Court preliminarily approved the terms of the Settlement.
Consistent with the Federal Rules of Civil procedure, the class
will be provided notice of the Settlement and given the right to
object or opt-out of the Settlement. The Court will hold a final
approval hearing on May 26, 2005. Final settlement of the
consolidated class action is subject to final approval by the
Court. Should the Court not approve the final settlement of the
consolidated class action and should a judgment subsequently be
entered against the Company, it may have a material adverse
effect on our results of operations and liquidity.