--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ____________ TO ____________
COMMISSION FILE NUMBER 0-28000
PRG-SCHULTZ INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
GEORGIA 58-2213805
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2300 WINDY RIDGE PARKWAY 30339-8426
SUITE 100 NORTH (Zip Code)
ATLANTA, GEORGIA
(Address of principal executive offices)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (770) 779-3900
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
COMMON STOCK, NO PAR VALUE
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
Common shares of the registrant outstanding at February 28, 2002 were
63,605,220. The aggregate market value, as of February 28, 2002, of such common
shares held by non-affiliates of the registrant was approximately $470.9 million
based upon the last sales price reported that date on The Nasdaq National Market
of $10.02 per share. (Aggregate market value estimated solely for the purposes
of this report. This shall not be construed as an admission for the purposes of
determining affiliate status.)
DOCUMENTS INCORPORATED BY REFERENCE
Part III: Portions of Registrant's Proxy Statement relating to the Annual
Meeting of Shareholders to be held on or about May 15, 2002.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
PRG-SCHULTZ INTERNATIONAL, INC.
FORM 10-K
DECEMBER 31, 2001
PAGE
----
Part I
Item 1. Business.................................................... 1
Item 2. Properties.................................................. 18
Item 3. Legal Proceedings........................................... 18
Item 4. Submission of Matters to a Vote of Security Holders......... 18
Part II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters......................................... 19
Item 6. Selected Consolidated Financial Data........................ 19
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 22
Item 7A Quantitative and Qualitative Disclosures About Market
Risk........................................................ 36
Item 8. Financial Statements and Supplementary Data................. 37
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................... 64
Part III
Item 10. Directors and Executive Officers of the Registrant.......... 64
Item 11. Executive Compensation...................................... 64
Item 12. Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters.................. 64
Item 13. Certain Relationships and Related Transactions.............. 64
Part IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form
8-K......................................................... 64
Signatures................................................................. 69
PART I
ITEM 1. BUSINESS
PRG-Schultz International, Inc., f/k/a The Profit Recovery Group
International, Inc., and subsidiaries (collectively, the "Company") 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 services clients in over 40 different countries. In
2001, the Company had a single operating segment consisting of Accounts Payable
Services which offers recovery and cost containment services. See Note 14 of
Notes to Consolidated Financial Statements included in Item 8. of this Form 10-K
for the 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
business. Under this strategic realignment initiative, the Company announced its
intent to divest the following non-core businesses: Meridian VAT Reclaim
("Meridian") within the former Taxation Services segment, the Logistics
Management Services segment, the Communications Services segment and the Ship
and Debit ("Ship & Debit") division within the Accounts Payable Services
segment. The Company disposed of its Logistics Management Services segment in
October 2001. Additionally, in December 2001 the Company disposed of its French
Taxation Services business which had been part of continuing operations until
time of disposal. The Company's consolidated financial statements have been
reclassified to reflect Meridian, Logistics Management Services, Communications
Services, Ship & Debit division 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, which consisted entirely of Accounts Payable
Services at December 31, 2001.
Meridian, the Communications Services business, and the Ship & Debit
business were originally offered for sale in the first quarter of 2001. The
Company has concluded that the current negative market conditions are not
conducive to receiving terms acceptable to the Company for these businesses. As
such, on January 24, 2002, the Company's Board of Directors approved a proposal
to retain these three remaining discontinued operations. As a result, beginning
in the first quarter of 2002, the financial results of these three businesses,
1
Meridian, the Communications Services business, and the Ship & Debit business
will be reclassified as part of the Company's continuing operations and, based
on their anticipated size with respect to the Company's operations as a whole,
reported in a separate reportable segment called Other Ancillary Services. The
Company's financial statements through December 31, 2001, reflect these
businesses as part of discontinued operations.
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 routinely maintain internal recovery audit
departments assigned to recover selected types of payment errors and identify
opportunities to reduce costs, independent recovery audit firms are often
retained as well due to their specialized knowledge and focused technologies.
In the U.S., Canada, 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.
The Company believes that newly-emerging 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
2
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 data bases 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 Company believes that many businesses are increasingly outsourcing
internal recovery functions to independent recovery audit firms. Factors
contributing to this trend include the following:
- a need for significant investments in technology, especially in an EDI
environment, which the Company believes are greater than even large
businesses can often justify;
- an inability to duplicate the breadth of industry and auditing expertise
of independent recovery audit firms;
- a desire to focus limited resources on core competencies; and
- a desire for larger and more timely recoveries.
The domestic and international recovery audit industry for accounts payable
services is characterized by the Company, the worldwide leader with operations
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 ACQUISITIONS OF HOWARD SCHULTZ & ASSOCIATES INTERNATIONAL, INC. AND
AFFILIATES
On January 24, 2002, the Company acquired substantially all the assets and
assumed certain liabilities of Howard Schultz & Associates International, Inc.
("HSA-Texas"), substantially all of the outstanding stock of HS&A International
Pte Ld. and all of the outstanding stock of Howard Schultz & Associates (Asia)
Limited, Howard Schultz & Associates (Australia), Inc. and Howard Schultz &
Associates (Canada), Inc., each an affiliated foreign operating company of
HSA-Texas, pursuant to an amended and restated agreement and plan of
reorganization by and among PRG-Schultz, HSA-Texas, Howard Schultz, Andrew H.
Schultz and certain trusts dated December 11, 2001 (the "Asset Agreement") and
an amended and restated agreement and plan of reorganization by and among
PRG-Schultz, Howard Schultz, Andrew H. Schultz, Andrew H. Schultz Irrevocable
Trust and Leslie Schultz dated December 11, 2001 (the "Stock Agreement").
HSA-Texas and affiliates are industry pioneers in providing recovery audit
services and the assets acquired will continue to be used for audit recovery
services.
Pursuant to the Asset and Stock Agreements, the consideration paid for the
assets of HSA-Texas and affiliates was 14,759,970 unregistered shares of the
Company's common stock and the assumption of certain HSA-Texas liabilities,
including aggregate net debt of approximately $65.7 million, a portion of which
was repaid at closing. In addition, options to purchase approximately 1.1
million shares of the Company's common stock were issued in exchange for
outstanding HSA-Texas options. The Company's available domestic cash balances
and new $75.0 million senior bank credit facility were used to fund closing
costs related to the HSA-Texas acquisitions and repay certain indebtedness of
HSA-Texas.
3
In connection with the acquisitions of HSA-Texas and affiliates, the
Company changed its name to PRG-Schultz International, Inc.
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's technology provides uniform platforms for its auditors to
offer consistent and proven audit techniques and methodologies based on a
client's size, industry or geographic scope of operations. 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 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. Its strategy to achieve this
objective consists of the following elements:
- 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 separated the remaining non-core
businesses into a discrete reporting segment entitled Other Ancillary
Services in January 2002. The Company also believes that it has
significantly strengthened its accounts payable business through the
January 2002 acquisitions of HSA-Texas and affiliates, formerly the
Company's principal competitor in this business.
- Continue to Grow the U.S. Accounts Payable Services Business. The
Company intends to capitalize on continuing advancements in data
communications technology to grow its U.S. Accounts Payable Services
business. The Company's existing and potential clients are increasingly
capable of providing more data to use in the recovery audit process. In
the past, access to more data has enabled the Company to broaden the
scope of its audits and to increase the level of recoveries from these
audits. Another area of focus for the Company is to reduce or eliminate
client-imposed restrictions in the scope of the Company's work. Many
clients currently restrict the population of suppliers the Company is
permitted to audit or claim types the Company is permitted to pursue. To
the extent the Company is successful in having these restrictions lifted,
its revenues should proportionately grow. In addition, the Company
intends to utilize enhanced proprietary technologies to 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.
4
- Expand International Operations. 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 audit
recovery 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 audit recovery services to multi-national companies with
significant and expanding international operations.
- Promote Outsourcing Arrangements. The Company seeks to capitalize on the
growing trend of businesses to outsource internal recovery audit and
expense containment efforts. Due to factors including the growing
complexity and volume of business transactions and the development of
dynamic purchasing markets, the Company believes that its clients benefit
significantly from these outsourcing arrangements because the Company's
expertise allows it to generally complete its audits more quickly,
identify larger claims and execute on cost-saving opportunities more
efficiently than internal recovery audit departments. The Company further
believes that as clients continue to upgrade their systems, outsourcing
arrangements involving recovery audit work will become increasingly
prevalent due in part to the sophisticated technology necessary to
identify the errors.
- 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.
- Maintain Technology Leadership. The Company believes its proprietary
technology provides a significant competitive advantage over both its
principal competitors and its clients' in-house recovery audit
departments. The Company has a dedicated audit development staff
responsible for interfacing with both field audit personnel and
information technology professionals to continually improve its
proprietary technology as its clients' needs evolve. The Company intends
to continue making substantial investments in technology to enable the
most effective and profitable service delivery.
PRG-SCHULTZ SERVICES
ACCOUNTS PAYABLE SERVICES
Through the use of proprietary technology, audit techniques and
methodologies, the Company's trained and experienced auditors examine
merchandise procurement records on a post-payment basis to identify overpayments
resulting from 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 currently served under a
different service delivery model.
"Broad-scope" audit services provided to retail/wholesale clients account
for the Company's largest worldwide source of revenues. These services typically
recur annually and are largely predictable in terms of estimating the dollar
volume of client overpayments which will ultimately be recovered. For most
retail/wholesale clients, the Company typically identifies a larger volume of
recoveries each year when compared to recoveries realized in the immediate
preceding year. This growth generally results from factors such as increasing
sophistication of the Company's auditors and software, and continuing client
migration toward electronic merchandise procurements which the Company can more
thoroughly audit. Broad-scope audit services are the most comprehensive in
nature, focusing on a greater area of 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. The Company currently serves
retail/wholesale clients on six continents.
5
The Company also examines merchandise procurements and other payments made
by business entities such as manufacturers, distributors and healthcare
providers which are collectively termed as "commercial" clients. Services to
these types of clients 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. Furthermore, audit services to these clients are less
comprehensive in nature, focussing on fewer recovery categories, related most
often to payment activities. These audit services, which are termed
"basic-scope" audit services, entail more standardized data acquisition from the
client and are concentrated primarily at the invoice level of detail. Currently,
the majority of the Company's commercial clients are located in North America
and the United Kingdom, although the Company believes expansion to other markets
is progressing at a satisfactory rate.
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, as consistent with maximizing the Company's
profitability. Thus, prospectively, certain retail/wholesale clients that have
historically been served by the broad-scope service model, will be served under
the basic-scope service model. Conversely, certain commercial clients that
historically have been served by the basic-scope service model, will
prospectively be served under the broad-scope service model.
OTHER ANCILLARY SERVICES
The following specialty areas comprise the Company's Other Ancillary
Services operations.
Meridian VAT Reclaim
In August 1999, the Company acquired 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.
Communications Services Business
The Communications Services business applies its specialized expertise to
historical client telecommunications records to identify and recover refunds of
previous overpayments. It also analyzes its clients' current telecommunications
invoices, routing patterns and usage volumes in order to renegotiate terms and
conditions on its clients' behalf, as well as identify cost saving alternatives.
The Communications Services business also provides expense management services
such as invoice processing and call accounting.
Ship & Debit Business
The Ship & Debit business 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. Ship & Debit
clients generally receive two audits each year.
CLIENT CONTRACTS
The Company's typical client contract provides that the Company is entitled
to a contractual percentage of overpayments or other savings recovered for or
realized by clients. Clients generally recover claims by either (a) taking
credits against outstanding payables or future purchases from the involved
vendors, or (b) receiving refund checks directly from those vendors. The method
of effecting a recovery is often dictated by industry practice. For some
services, the client contract provides that the Company is entitled to a fee for
the rendering of that service. In addition to client contracts, many clients
establish specific procedural guidelines that the Company must satisfy prior to
submitting claims for client approval. These guidelines are unique to each
client.
6
TECHNOLOGY
The Company employs a variety of proprietary audit tools, proprietary
databases and Company-owned data processing facilities in its business. Each of
the Company's businesses employs separate technology.
Accounts Payable Services Audit Technology
At the beginning of a typical accounts payable recovery audit engagement,
the Company obtains transaction data from its client for the time period under
audit. The Company receives this data typically by magnetic media, which is then
reformatted into standardized and proprietary layouts at one of the Company's
data processing facilities primarily using mid-range and PC-based platforms.
The Company's experienced programmers then prepare statistical reports to
verify the completeness and accuracy of the data. The Company delivers this
reformatted data to its auditors who, using the Company's proprietary PC-based
field audit software, sort, filter and search the data for overpayments. The
Company also produces client-specific standard reports and statistical data for
its auditors. These reports and data often reveal patterns of activity or
unusual relationships suggestive of potential overpayment situations.
The Company has developed and continuously updates and refines its
proprietary accounts payable databases to assist it in providing recovery audit
services to its domestic retail/wholesale clients. These databases serve as a
central repository reflecting its auditors' experiences, vendor practices and
knowledge of regional and national pricing information, including seasonal
allowances, discounts and rebates. These proprietary databases, however, do not
include confidential client information. Auditors use these databases to
identify discounts, allowances and other pricing information not previously
detected.
Meridian VAT Reclaim Technology
Meridian utilizes a proprietary software application that assists business
clients in the reclaiming of value-added taxes ("VAT"). The functionality of the
software includes paper flow monitoring, financial and managerial reporting and
Electronic Data Interchange. The paper flow monitoring reflects all stages of
the reclaim business process from logging in claims received to printing out
checks due to clients. The reporting system produces reports that measure the
financial and managerial information for each stage of the business process.
Communications Audit Technology
Although various proprietary processes and databases are used to conduct
telecommunications audits, this segment currently relies heavily upon the
industry and vendor knowledge possessed by its audit personnel in its expense
recovery and reduction service offerings. Delivery of expense management
services, particularly call accounting, is more technologically-driven.
Communications Services utilizes a proprietary web-based software which
provides the client with information from the services delivered. The
proprietary software is used to facilitate charge back reporting, for processing
of client invoices and for reporting status on claims and recoveries. Additional
proprietary software is used to facilitate data acquisition and production
processing, allowing for expedient and effective management of the data, which
results in cost efficiencies.
Ship & Debit Audit Technology
The Ship & Debit business employs customized pc-based software 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.
7
AUDITOR HIRING AND TRAINING
Many of the Company's auditors and specialists formerly held
finance-related management positions in the industries the Company serves. To
meet its growing need for additional auditors, the Company also hires recent
college graduates, particularly those with multi-lingual capabilities and
technology skills. While the Company has been able to hire a sufficient number
of new auditors to support its growth, there can be no assurance that the
Company can continue hiring sufficient numbers of qualified auditors to meet its
future needs.
The Company provides intensive training for auditors utilizing both
classroom-type training and self-paced media such as specialized computer-based
training modules. All training programs are 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 an important part of the Company's
client and revenue base. The Company's five largest clients contributed
approximately 30.5% of its revenues from continuing operations for the year
ended December 31, 2001. The Company's largest client, Wal-Mart International,
contributed approximately 12.1% of its revenues from continuing operations for
the year ended December 31, 2001. Including revenues from discontinued
operations that are being retained by the Company, the five largest clients
contributed 25.1% of total revenues for the year ended December 31, 2001.
Including revenues from discontinued operations that are being retained by the
Company, the Company's largest client, Wal-Mart International, contributed
approximately 10.0% of total revenues for the year ended December 31, 2001. With
the January 2002 acquisition of the Company's largest worldwide competitor,
HSA-Texas and affiliates, the Company believes its future dependence on any
single client or group of clients will be reduced considerably.
SEASONALITY
The Company has experienced and expects to continue to experience
significant seasonality in its business. The Company typically realizes
substantially higher revenues and operating income in the last two quarters of
its fiscal year.
SALES AND MARKETING
Due to the highly confidential and proprietary nature of a business'
purchasing patterns and procurement prices combined with the typical desire to
maximize the amount of funds recovered, most prospective clients conduct an
extensive investigation prior to selecting a specific recovery audit firm. This
type of investigation may include an on-site inspection of the Company's service
facilities. The Company has typically found that its service offerings which are
the most annuity-like in nature require the longest sales cycle and highest
levels of direct person-to-person contact. Conversely, service offerings that
are short-term, discrete events, such as certain taxation projects, are
susceptible to more cost effective sales and marketing delivery approaches such
as telemarketing.
PROPRIETARY RIGHTS
The Company continuously develops new recovery audit software and
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
8
implementation of its operating strategies and other factors such as the
knowledge, ability and experience of its personnel.
The Company owns or has rights to various copyrights, trademarks and trade
names used in the Company's business, including but not limited to AuditPro(R),
eassurance(TM), EAudit(TM), imDex(TM), Sentinel(TM) and Direct F!nd(R).
COMPETITION
The recovery audit business is highly competitive and barriers to entry are
relatively low. The competitive factors affecting the market for the Company's
recovery audit services include:
- establishing and maintaining client relationships;
- quality and quantity of claims identified;
- experience and professionalism of audit staff;
- rates for services;
- technology; and
- geographic scope of operations.
EMPLOYEES
At January 31, 2002, the Company had approximately 3,500 employees, of whom
approximately 2,200 were located in the U.S. This employee count includes
personnel who joined the Company on January 24, 2002 in connection with the
acquisitions of HSA-Texas and affiliates. The majority of the Company's
employees are involved in the audit function. The Company believes its employee
relations are satisfactory.
9
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, 2001, and 2000 our two largest clients
accounted for approximately 18.0% and 16.4% 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 K-MART BANKRUPTCY, AND FINANCIAL
DIFFICULTIES COULD REDUCE OUR EARNINGS.
Our clients generally operate in intensely competitive environments and
bankruptcy filings are not uncommon. Additionally, the recent terrorist attacks
and adverse economic conditions in the United States have increased, and they
continue to increase, the financial difficulties experienced by our clients. On
January 22, 2002, K-Mart Corporation, which accounted for in excess of 5% of our
2001 revenues from continuing operations, filed for Chapter 11 Bankruptcy
reorganization. Although our historical experience with numerous clients that
have filed for Chapter 11 Bankruptcy reorganization suggests a very high
probability that we will eventually resume providing services to K-Mart, should
K-Mart choose to no longer utilize our services at previous levels or should
they fail to emerge from this bankruptcy, or should we be unable to collect from
K-Mart, or from K-Mart customers who are also our clients, amounts that we are
owed for performance of our services, or should we be required by the Bankruptcy
Court to repay amounts previously paid to us by K-Mart, our future results of
operations could be materially adversely impacted. In addition, future
bankruptcy filings by one or more of our other large clients or significant
vendor charge backs by 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 larger clients could adversely affect our financial
condition and results of operations.
IF WE ARE NOT SUCCESSFUL IN INTEGRATING THE BUSINESS OF HSA-TEXAS AND ITS
AFFILIATED COMPANIES, OUR OPERATIONS MAY BE ADVERSELY AFFECTED.
To realize the anticipated benefits of the acquisitions of HSA-Texas and
its affiliated companies, we must efficiently integrate the operations of the
acquired companies with ours. Combining the personnel, technologies and other
aspects of operations, while managing a larger entity, will present a
significant challenge to our management. We cannot be certain that the
integration will be successful or that we will fully realize the anticipated
benefits of the business combination.
The challenges involved in this integration include:
- retaining and integrating management and other key personnel of each
company;
- combining the corporate cultures of us and HSA-Texas;
- combining service offerings effectively and quickly;
- transitioning HSA-Texas' auditors to our information management and
compensation systems;
- integrating sales and marketing efforts so that customers can understand
and do business easily with the combined company;
- transitioning all worldwide facilities to common accounting and
information technology systems; and
- coordinating a large number of employees in widely dispersed operations
in the United States and many foreign countries.
10
Risks from unsuccessful integration of the companies include:
- the impairment of relationships with employees, clients and suppliers;
- the potential disruption of the combined company's ongoing business and
distraction of its management;
- delay in introducing new service offerings by the combined company;
- the failure to achieve anticipated revenues; and
- unanticipated expenses related to integration of the companies.
We may not succeed in addressing these risks. Further, we cannot assure you
that the growth rate of the combined company will equal or exceed the historical
growth rates experienced by us, HSA-Texas or any of its affiliates individually.
Our ability to realize the anticipated benefits of the HSA-Texas acquisitions
will depend on our ability to integrate HSA-Texas' operations into our current
operations in a timely and efficient manner.
This integration may be difficult and unpredictable because our
compensation arrangements, service offerings and processes are highly complex
and have been developed independently from those of HSA-Texas. Successful
integration requires coordination of different management personnel and
auditors, as well as sales and marketing efforts and personnel. If we cannot
successfully integrate the HSA-Texas assets with our operations, we may not
realize the expected benefits of the HSA-Texas acquisitions.
IF WE ARE NOT SUCCESSFUL IN INTEGRATING THE BUSINESS OPERATIONS OF HSA-TEXAS IN
THE UNITED KINGDOM, OUR FINANCIAL RESULTS MAY BE ADVERSELY AFFECTED.
HSA-Texas' operations in the United Kingdom generated revenues of
approximately $24.4 million and operating income of approximately $1.8 million
for the United Kingdom operating companies' fiscal year ended April 30, 2001.
Our ability to realize the anticipated benefits of the HSA-Texas acquisitions
will depend in part on our ability to integrate HSA-Texas' United Kingdom
operations into our current United Kingdom operations in a timely and efficient
manner. If we cannot successfully integrate such operations with our operations,
we may not realize the expected benefits of the HSA-Texas acquisitions and our
financial results may be adversely affected.
THE ACQUISITIONS BY US OF BUSINESSES OUTSIDE OF OUR CORE BUSINESS OF ACCOUNTS
PAYABLE AUDITING HAVE BEEN, IN GENERAL, FINANCIALLY AND OPERATIONALLY
UNSUCCESSFUL.
Our acquisitions of businesses outside of our core business of accounts
payable auditing have been, in general, financially and operationally
unsuccessful. As a result, on January 31, 2001, we announced that our board of
directors had approved the sale of the Meridian VAT Reclaim business, the
Communications Services segment, the Logistics Management Services segment, and
the Ship and Debit division within the Accounts Payable Service segment. The
sale of the Logistics Management Services segment was subsequently consummated
on October 30, 2001 with initial gross proceeds, as adjusted, of approximately
$9.5 million and the potential for additional gross proceeds of up to $3.0
million payable in the form of a revenue-based royalty over the next four years.
We recorded a loss of approximately $19.1 million in the third quarter of 2001
with respect to the Logistics Management Services segment as part of a $31.0
million loss on disposal from discontinued operations recognized during that
quarter. In addition, on December 14, 2001, we consummated the sale of our
French Taxation Services business (which had been part of continuing operations
until time of disposal) for gross proceeds of approximately $48.3 million. We
recognized a loss on this sale of approximately $54.0 million in the fourth
quarter of 2001. The remaining three businesses are no longer for sale. While we
believe that the acquisitions of HSA-Texas and its affiliates are within our
core business, there can be no assurance that we will be more successful in
achieving financial and operational success with the HSA-Texas acquisitions than
we were in previous non-core business acquisitions.
11
OUR FORMER DISCONTINUED OPERATIONS MAY REQUIRE ADDITIONAL WORKING CAPITAL AND
MANAGEMENT ATTENTION.
On January 24, 2002, our Board of Directors approved a resolution to retain
the remaining discontinued operations consisting of Meridian, the Communications
Services business and the Ship & Debit business. As a result, beginning with the
first quarter of 2002, the financial results of these three businesses are
classified as part of our continuing operations. Because these businesses were
offered for sale during 2001, they were operated in such a manner as to maximize
the proceeds to be received upon such sale. As part of continuing operations,
management believes that these businesses may require additional capital
infusions and additional attention from management in order that they might be
operated to their maximum potential. Even if additional cash is spent with
respect to these businesses, however, there is no guarantee that they can be
operated profitably. In addition, to the extent that a disproportionate amount
of management's time is required to operate these businesses, our core business
of accounts payable recovery may suffer. See "-- The acquisitions by us of
businesses outside of our core business of accounts payable auditing have been,
in general, financially and operationally unsuccessful."
TRANSITION COSTS OF THE HSA-TEXAS ACQUISITIONS COULD ADVERSELY AFFECT COMBINED
FINANCIAL RESULTS.
We and HSA-Texas are expected to incur direct transition costs of up to
approximately $28.0 million, pre-tax in connection with the HSA-Texas
acquisitions. If the benefits of the HSA-Texas acquisitions do not exceed the
costs associated with the transition, the combined company's financial results,
including earnings per share, could be adversely affected.
THE HSA-TEXAS ACQUISITIONS ARE ANTICIPATED TO RESULT IN LOWER COMBINED REVENUES
FROM CLIENTS WITH RESPECT TO WHICH WE AND HSA-TEXAS TOGETHER HAVE HAD THE FIRST
AND SECOND AUDIT POSITIONS.
Some of our clients require that two independent audit companies perform
recovery audits of their payment transactions in a first recovery audit followed
by a second recovery audit. In situations where both we and HSA-Texas now
perform both the first and second recovery audit services, it is possible that
the client will, upon our acquisitions of HSA-Texas, retain another company for
the first or second audit position in place of them. We estimate that there are
46 clients with respect to which we and HSA-Texas together have had the first
and second recovery audit positions. These clients represented approximately 31%
of our total revenues for the year ended December 31, 2001 and approximately 76%
of the total revenues of HSA-Texas for that year. After the combination, a
substantial number of these clients may request that the combined company
perform the first or second audits at reduced rates, or they may award the first
or second recovery audit position to another party, rather than allowing the
combined company to keep both positions. In either case, the combined revenues
from these clients may be materially lower.
IF WE FAIL TO HIRE AND RETAIN HSA-TEXAS' AUDITORS AND OTHER CRITICAL HSA-TEXAS
PERSONNEL, IT COULD DIMINISH THE BENEFITS OF THE HSA-TEXAS ACQUISITIONS TO US.
The successful integration of the HSA-Texas business into our current
business operations will depend in large part on our ability to hire and retain
HSA-Texas' auditors and other personnel critical to the business and operations
of HSA-Texas. We may be unable to retain management personnel and auditors that
are critical to the successful operation of the HSA-Texas business, resulting in
loss of key information, expertise or know-how and unanticipated additional
recruiting and training costs and otherwise diminishing anticipated benefits of
the HSA-Texas acquisitions for us and our shareholders. In addition, any
auditors not retained by the combined company could compete with the combined
company, particularly in Europe, and could cause former HSA-Texas clients to
cease doing business with us or to require more client favorable terms to retain
their business. Also, if we cannot successfully implement a revised compensation
plan that reduces the compensation level of a large number of HSA-Texas'
auditors, the anticipated benefits of the HSA-Texas acquisitions will be
diminished. Even if we are successful in implementing the revised compensation
plan, some HSA-Texas auditors may elect not to work for us if their compensation
is reduced. Although we have had success in hiring HSA-Texas' domestic auditors
and in implementing a revised compensation plan for these auditors, there can be
no assurance that we will be successful in hiring and retaining HSA-Texas'
international auditors and implementing a revised compensation plan for the
international auditors.
12
THE ACQUISITIONS OF HSA-TEXAS AND AFFILIATES COULD RESULT IN MATERIAL DILUTION
TO OUR EARNINGS PER SHARE.
The unaudited pro forma combined financial statements contained in our
proxy statement dated December 19, 2001 for our special shareholder meeting at
which the HSA-Texas acquisitions were approved and which give effect to the
acquisitions as if they had closed on January 1, 2000, show a reduction of $0.06
per share in our pro forma combined diluted earnings per share from continuing
operations for the year ended December 31, 2000 as compared to our historical
audited results for the same period. Our earnings from continuing operations for
the year ended December 31, 2000 were approximately $5.6 million as compared to
pro forma combined earnings from continuing operations of approximately $3.5
million for the same period. It is possible that our future earnings per share
will be materially diluted as a result of the acquisitions of HSA-Texas and
affiliates. If the acquisitions of HSA-Texas and affiliates have a material
negative impact on our earnings per share, the trading price of our common stock
may be materially adversely affected.
WE HAVE VIOLATED OUR DEBT COVENANTS IN THE PAST AND MAY DO SO IN THE FUTURE.
As of September 30, 2001, we were not in compliance with certain financial
ratio covenants in our then-existing senior credit facility. Those covenant
violations were waived by the lenders in an amendment to the senior credit
facility dated November 9, 2001. This amendment also relaxed certain financial
ratio covenants for the fourth quarter of 2001 and for each of the quarters of
2002. On December 31, 2001, we entered into a new senior credit facility and
canceled the prior credit facility. No assurance can be provided that we will
not violate the covenants of the new credit facility 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 that we would be able to secure adequate or
timely replacement financing on acceptable terms or at all.
WE RELY ON INTERNATIONAL OPERATIONS FOR SIGNIFICANT REVENUES.
In 2001, approximately 23.8% of our revenues from continuing operations and
13.3% of HSA-Texas' revenues were generated from international operations.
HSA-Texas international revenues for 2001 included primarily revenues derived by
its foreign affiliates, excluding gross revenues derived by HSA-Texas' United
Kingdom and Germany affiliates, which were owned by others under a licensure
relationship, but included licensing fees from the United Kingdom and Germany
operations. HSA-Texas acquired the United Kingdom and Germany businesses prior
to our January 2002 acquisitions of HSA-Texas and affiliates. Accordingly, our
additional international revenue exposure as a result of acquiring HSA-Texas and
affiliates is greater than that indicated by the above 13.3% proportion.
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
Euro, the British Pound, the Canadian dollar 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; and
- burdens of complying with a wide variety of foreign laws and labor
practices.
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.
13
WE REQUIRE SIGNIFICANT MANAGEMENT AND FINANCIAL RESOURCES TO OPERATE AND EXPAND
OUR RECOVERY AUDIT SERVICES INTERNATIONALLY.
In our experience, entry into new international markets requires
considerable management time as well as start-up expenses for market
development, hiring and establishing office facilities. In addition, we have
encountered, and expect to continue to encounter, significant expense and delays
in expanding our international operations because of language and cultural
differences, staffing, communications and related issues. We generally incur the
costs associated with international expansion before any significant revenues
are generated. As a result, initial operations in a new market typically operate
at low margins or may be unprofitable. Because our international expansion
strategy will require substantial financial resources, we may incur additional
indebtedness or issue additional equity securities which could be dilutive to
our shareholders. In addition, financing for international expansion may not be
available to us on acceptable terms and conditions.
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 COULD MATERIALLY REDUCE OUR FUTURE EARNINGS.
As of December 31, 2001, we had unamortized goodwill of $160.2 million
related to continuing operations and has, effective January 1, 2002,
reclassified to continuing operations an additional amount of unamortized
goodwill of approximately $36.6 million associated with Meridian, the
Communications Services business and the Ship & Debit business formerly
classified in discontinued operations as of December 31, 2001. Also, we will be
increasing our goodwill by approximately $200.0 million as a result of the
acquisitions of HSA-Texas and affiliates which were completed on January 24,
2002. Under Statement of Financial Accounting Standards ("SFAS") No. 142,
"Goodwill and Other Intangible Assets," we will be required to perform a
transitional assessment of whether goodwill existing as of January 1, 2002 is
impaired, and any transitional impairment loss will be recognized as the
cumulative effect of a change in accounting principle in our Consolidated
Statement of Operations, thereby reducing earnings. Prospective goodwill
impairment testing as of any testing date subsequent to January 24, 2002, will
also include testing of the $200.0 million of goodwill associated with HSA-Texas
and affiliates. To the extent that management misjudges any of the critical
factors necessary to determine whether or not there is a goodwill impairment, or
if any of our goodwill is accurately determined to be impaired, our future
earnings could be materially adversely impacted.
THE LEVEL OF OUR ANNUAL PROFITABILITY IS SIGNIFICANTLY AFFECTED BY OUR THIRD AND
FOURTH QUARTER OPERATING RESULTS.
The purchasing and operational cycles of our clients typically cause us to
realize higher revenues and operating income in the last two quarters of our
fiscal year. If we do not continue to realize increased revenues in future third
and fourth quarter periods, 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.
OUR REVENUES FROM COMMERCIAL CLIENTS MAY CHANGE MARKEDLY FROM YEAR TO YEAR.
The Company examines merchandise procurements and other payments made by
business entities such as manufacturers, distributors and healthcare providers
which are collectively termed as "commercial clients." Services to these types
of clients 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
14
client may change markedly from year to year depending on factors such as the
size and nature of the client division under audit.
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 President
and Chief Executive Officer. 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. We also maintain key man life insurance policies in the aggregate
amount of $13.3 million on the life of Mr. Cook. 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 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 are uncertain whether we can continue to compete successfully
with our competitors. In addition, our profit margins could decline because of
competitive pricing pressures that may have a material adverse effect on our
business, financial condition and results of operations.
OUR 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 President and Chief Executive Officer, are
defendants in three putative class action lawsuits filed on June 6, 2000 in the
United States District Court for the Northern District of Georgia, Atlanta
Division, which have since been consolidated into one proceeding (the
"Securities Class Action
15
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;
- 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.
Also, the shareholders' rights plan requires approval by a majority of the
continuing directors, as defined in the plan, to redeem the rights plan, amend
the rights plan, or exclude a person or group who acquires beneficial ownership
or more than 15 percent of our outstanding common stock from being considered an
acquiring person under the rights plan. 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.
OUR STOCK PRICE HAS BEEN AND MAY CONTINUE TO BE VOLATILE.
Our common stock is traded on The Nasdaq National 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;
16
- 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.
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 our
respective 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 non-recurring expenses expected to be incurred in
2002;
- statements regarding the potential dilutive effect of the acquisitions of
HSA-Texas and affiliates on the Company's earnings per share;
- statements regarding the Company's expected future dependency on its
major clients;
- statements regarding increasing outsourcing of internal recovery audit
functions;
- statements regarding the benefits of global e-commerce initiatives to
technologically advanced recovery audit firms;
- statements regarding market opportunities for recovery audit firms and
the opportunities offered by the Accounts Payable Services business;
- 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 impact on the Company's revenues of elimination
of client-imposed restrictions on the scope of the Company's work;
- statements regarding the Company's ability to improve 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
17
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 undue reliance on
our forward-looking statements. We disclaim any obligation to announce publicly
the results of any revisions to any of the forward-looking statements contained
in this Form 10-K, to reflect future events or developments.
ITEM 2. PROPERTIES
The Company's principal executive office is located in approximately 95,000
square feet of office space in Atlanta, Georgia. The Company leases this space
under various agreements with primary terms expiring from December 2002 through
February 2005. In February 2002, the Company entered into a lease to relocate
the Company's principal executive offices. This lease is for approximately
120,000 square feet of office space in Atlanta, Georgia and expires in 2015. In
conjunction with the planned relocation, the Company anticipates incurring
approximately $5.0 million of additional costs during 2002, the majority of
which will be related to future payment obligations for unexpired lease
commitments on the Company's present executive offices. The Company believes
that these additional costs have been appropriately contemplated in its publicly
communicated earnings outlook for 2002.
The Company's various operating units lease numerous other parcels of
operating space in the various countries in which the Company currently conducts
its business. Most of the Company's real property leases are individually less
than five years in duration. See Note 6 of Notes to Consolidated Financial
Statements included in Item 8. of this Form 10-K.
ITEM 3. LEGAL PROCEEDINGS
Beginning on June 6, 2000, three putative class action lawsuits were filed
against the Company and certain of its present and former officers in the United
States District Court for the Northern District of Georgia, Atlanta Division.
These cases were subsequently consolidated into one proceeding styled: In re
Profit Recovery Group International, Inc. Sec. Litig., Civil Action File No.
1:00-CV-1416-CC (the "Securities Class Action Litigation"). On November 13,
2000, the Plaintiffs in these cases filed a Consolidated and Amended Complaint
(the "Complaint"). In that Complaint, Plaintiffs allege in general terms that
the Company, John M. Cook, Scott L. Colabuono, the Company's former Chief
Financial Officer, and Michael A. Lustig, the Company's former Chief Operating
Officer, (the "Defendants") violated Sections 10(b) and 20(a) of the Securities
Exchange Act of 1934 and Rule 10b-5 promulgated thereunder by allegedly
disseminating materially false and misleading information about a change in the
Company's method of recognizing revenue and in connection with revenue reported
for a division. Plaintiffs purport to bring this action on behalf of a putative
class of persons who purchased the Company's stock between July 19, 1999 and
July 26, 2000. Plaintiffs seek an unspecified amount of compensatory damages,
payment of litigation fees and expenses, and equitable and/or injunctive relief.
On January 24, 2001, Defendants filed a Motion to Dismiss the Complaint for
failure to state a claim under the Private Securities Litigation Reform Act, 15
U.S.C. sec. 78u-4 et seq. The Court denied Defendants' Motion to Dismiss on June
5, 2001. Defendants served their answer to Plaintiffs' Complaint on June 19,
2001. Discovery is in the early stages. The Company believes the alleged claims
in this lawsuit are without merit and intends to defend this lawsuit vigorously.
Due to the inherent uncertainties of the litigation process and the judicial
system, the Company is unable to predict the outcome of this litigation. If the
outcome of this litigation is adverse to the Company, it could have a material
adverse effect on the Company's business, financial condition, and results of
operations.
In the normal course of business, the Company is involved in and subject to
other claims, contractual disputes and other uncertainties. Management, after
reviewing with legal counsel all of these actions and proceedings, believes that
the aggregate losses, if any, will not have a material adverse effect on the
Company's financial position or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the fiscal fourth quarter covered by this report, no matter was
submitted to a vote of security holders of the Company.
18
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock is traded under the symbol "PRGX" on The Nasdaq
National Market (Nasdaq). The Company has not paid cash dividends since its
March 26, 1996 initial public offering and does not intend to pay cash dividends
in the foreseeable future. Moreover, restrictive covenants included in the
Company's bank credit facility specifically limit payment of cash dividends.
Shareholder distributions reflected in the Company's Consolidated Statement of
Shareholders' Equity for the year ended December 31, 1999 relate to the
pre-acquisition operations of PRS International, Ltd. which the Company acquired
in August 1999 and accounted for under the pooling-of-interests method. As of
February 28, 2002, there were approximately 6,000 beneficial holders of the
Company's common stock and 342 holders of record. The following table sets
forth, for the quarters indicated, the range of high and low trading prices for
the Company's common stock as reported by Nasdaq during 2001 and 2000.
HIGH LOW
------ ------
2001 CALENDAR QUARTER
1st Quarter................................................. $ 7.67 $ 4.81
2nd Quarter................................................. 14.00 4.88
3rd Quarter................................................. 16.10 9.18
4th Quarter................................................. 9.80 4.20
2000 CALENDAR QUARTER
1st Quarter................................................. $34.38 $14.75
2nd Quarter................................................. 20.56 13.00
3rd Quarter................................................. 18.81 7.88
4th Quarter................................................. 9.91 3.06
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following table sets forth selected consolidated financial data for the
Company as of and for the five years ended December 31, 2001. Such historical
consolidated financial data as of and for the five years ended December 31, 2001
have been derived from the Company's Consolidated Financial Statements and Notes
thereto, which Consolidated Financial Statements as of December 31, 2001 and
2000 and for each of the years in the three-year period ended December 31, 2001
have been audited by KPMG LLP, independent auditors. The Consolidated Balance
Sheets as of December 31, 2001 and 2000, and the related Consolidated Statements
of Operations, Shareholders' Equity and Cash Flows for each of the years in the
three-year period ended December 31, 2001 and the independent auditors' report
thereon, which in 2000 and 1999 is based partially upon the report of other
auditors and refers to a change in accounting for revenue recognition in 2000
and 1999, are included in Item 8. of this Form 10-K. In March 2001, the Company
formalized a strategic realignment initiative designed to enhance the Company's
financial position and clarify its investment and operating strategy by focusing
primarily on its core Accounts Payable business. Under this strategic
realignment initiative, the Company announced its intent to divest the following
non-core businesses: Meridian within the former Taxation Services segment, the
Logistics Management Services segment, the Communications Services segment and
the Ship & Debit division within the Accounts Payable Services segment. Selected
Consolidated Financial data for the Company have been reclassified to reflect
Meridian, Logistics Management Services, Communications Services, and Ship &
Debit as discontinued operations for all periods presented. In addition, in
December of 2001, the executive committee of the Company's Board of Directors
authorized the sale of the Company's French Taxation Services business. As a
result of the forgoing, the French Taxation Services business has been
classified as a discontinued operation and all historical financial information
contained herein has been reclassified to remove this business from continuing
operations. Selected Consolidated Financial data for the Company was
retroactively restated, as required under accounting principles generally
accepted in the United States of America, to include the accounts of
19
Meridian and PRS International, Ltd. which were acquired in August 1999 and
accounted for under the pooling-of-interests method. Further, the Company made
the decision in the second quarter of 1999 to recognize revenue for all of its
then-existing operations when it invoices clients for its fee retroactive to
January 1, 1999. The Company had previously recognized revenue from services
provided to its historical client base (consisting primarily of retailers,
wholesale distributors and governmental entities) at the time overpayment claims
were presented to and approved by its clients. In accordance with the applicable
requirements of accounting principles generally accepted in the United States of
America, consolidated financial statements for periods prior to 1999 have not
been restated. Due to accounting changes, certain financial statement amounts
related to continuing operations for 1999 will not be directly comparable to
corresponding amounts for 1998 and prior years, and certain financial statements
amounts related to discontinued operations for 2001 and 2000 will not be
directly comparable to corresponding amounts for 1999 and prior years. The data
presented below should be read in conjunction with the Consolidated Financial
Statements and Notes thereto included in Item 8. of this Form 10-K and other
financial information appearing elsewhere in this Form 10-K including
Management's Discussion and Analysis of Financial Condition and Results of
Operations.
YEARS ENDED DECEMBER 31,
------------------------------------------------------------
2001(11) 2000(10) 1999(2)(8) 1998(1)(3) 1997(1)(4)
--------- --------- ---------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENTS OF OPERATIONS DATA:
Revenues................................................ $259,264 $255,110 $246,378 $180,903 $118,539
Cost of revenues........................................ 141,442 139,430 132,115 97,268 62,572
Selling, general and administrative expenses(5)......... 101,915 100,435 78,757 60,900 41,055
-------- -------- -------- -------- --------
Operating income...................................... 15,907 15,245 35,506 22,735 14,912
Interest (expense), net................................. (4,980) (5,270) (2,234) (403) 3
-------- -------- -------- -------- --------
Earnings from continuing operations before income
taxes, discontinued operations, extraordinary item
and cumulative effect of accounting change.......... 10,927 9,975 33,272 22,332 14,915
Income taxes............................................ 4,808 4,389 13,642 8,263 5,519
-------- -------- -------- -------- --------
Earnings from continuing operations before
discontinued operations, extraordinary item and
cumulative effect of accounting change.............. 6,119 5,586 19,630 14,069 9,396
Discontinued operations:
Earnings (loss) from discontinued operations, net of
income taxes(8)..................................... (3,294) (44,714) 7,806 565 (32)
Loss on disposal from discontinued operations
including operating results for phase out period,
net of income taxes................................. (84,955) -- -- -- --
-------- -------- -------- -------- --------
Earnings (loss) from discontinued operations.......... (88,249) (44,714) 7,806 565 (32)
-------- -------- -------- -------- --------
Earnings (loss) before extraordinary item and
cumulative effect of accounting change.............. (82,130) (39,128) 27,436 14,634 9,364
Extraordinary item...................................... (1,581) -- -- -- --
-------- -------- -------- -------- --------
Earnings (loss) before cumulative effect of accounting
change.............................................. (83,711) (39,128) 27,436 14,634 9,364
Cumulative effect of accounting change.................. -- -- (29,195) -- --
-------- -------- -------- -------- --------
Net earnings (loss)................................... $(83,711) $(39,128) $ (1,759) $ 14,634 $ 9,364
======== ======== ======== ======== ========
Cash dividends per share(9)............................. $ -- $ -- $ 0.01 $ 0.01 $ 0.01
======== ======== ======== ======== ========
Basic earnings (loss) per share:
Earnings from continuing operations before discontinued
operations, extraordinary item and cumulative effect
of accounting change.................................. $ 0.13 $ 0.11 $ 0.41 $ 0.36 $ 0.28
Discontinued operations................................. (1.83) (0.91) 0.16 0.01 --
Extraordinary item...................................... (0.03) -- -- -- --
Cumulative effect of accounting change.................. -- -- (0.61) -- --
-------- -------- -------- -------- --------
Net earnings (loss)..................................... $ (1.73) $ (0.80) $ (0.04) $ 0.37 $ 0.28
======== ======== ======== ======== ========
20
YEARS ENDED DECEMBER 31,
----------------------------------------------------------
2001(11) 2000(10) 1999(2)(8) 1998(1)(3) 1997(1)(4)
-------- -------- ---------- ---------- ----------
Diluted earnings (loss) per share:
Earnings from continuing operations before discontinued
operations, extraordinary item and cumulative effect
of accounting change.................................. $ 0.12 $ 0.11 $ 0.40 $ 0.35 $ 0.27
Discontinued operations................................. (1.81) (0.90) 0.15 0.01 --
Extraordinary item...................................... (0.03) -- -- -- --
Cumulative effect of accounting change.................. -- -- (0.59) -- --
-------- -------- -------- -------- --------
Net earnings (loss)..................................... $ (1.72) $ (0.79) $ (0.04) $ 0.36 $ 0.27
======== ======== ======== ======== ========
DECEMBER 31,
-------------------------------------------------------------
2001(11) 2000(10) 1999(2)(6) 1998(1)(3)(7) 1997(1)(4)
-------- -------- ---------- ------------- ----------
(IN THOUSANDS)
BALANCE SHEET DATA:
Cash and cash equivalents............................ $28,488 $16,127 $ 14,150 $ 20,016 $ 13,664
Working capital...................................... 93,971 208,308 177,072 85,592 55,172
Total assets......................................... 341,459 454,924 460,757 349,430 102,074
Long-term debt, excluding current installments and
loans from shareholders............................ -- 153,361 92,811 111,132 24,199
Convertible notes.................................... 121,166 -- -- -- --
Total shareholders' equity........................... 168,095 247,529 294,970 143,828 45,537
---------------
(1) Selected consolidated financial data for the Company as of and for the two
years ended December 31, 1998, as previously reported, have been
retroactively restated, as required under accounting principles generally
accepted in the United States of America, to include the accounts of
Meridian VAT Corporation Limited and PRS International, Ltd. which were
each acquired in August 1999 and accounted for under the
pooling-of-interests method. See Notes 2 and 11 of Notes to Consolidated
Financial Statements included in Item 8. of this Form 10-K.
(2) During 1999, the Company completed six acquisitions accounted for as
purchases consisting of Payment Technologies, Inc. (April), Invoice and
Tariff Management Group, LLC (June), AP SA (October), Freight Rate
Services, Inc. (December), Integrated Systems Consultants, Inc. (December)
and minority interests in three subsidiaries of Meridian VAT Corporation
Limited (December). See Note 2 of Notes to Consolidated Financial
Statements included in Item 8. of this Form 10-K.
(3) During 1998, the Company completed eight acquisitions accounted for as
purchases consisting of Precision Data Link (March), The Medallion Group
(June), Novexel S.A. (July), Loder, Drew & Associates, Inc. (August), Cost
Recovery Professionals Pty Ltd (September), Robert Beck & Associates, Inc.
and related businesses (October), IP Strategies SA (November) and
Industrial Traffic Consultants, Inc. (December). See Notes 2 and 11 of
Notes to Consolidated Financial Statements included in Item 8. of this Form
10-K.
(4) During 1997, the Company completed four acquisitions accounted for as
purchases consisting of Accounts Payable Recovery Services, Inc.
(February), The Hale Group (May), 98.4% of Financiere Alma, S.A. and its
subsidiaries (October) and TradeCheck, LLC (November), and one acquisition
accounted for as a pooling-of-interests, Shaps Group, Inc. (January). See
Note 2 of Notes to Consolidated Financial Statements included in Item 8. of
this Form 10-K.
(5) Includes merger-related charges relating to businesses acquired under the
pooling-of-interests accounting method and certain restructuring charges.
See Note 17 of Notes to Consolidated Financial Statements included in Item
8. of this Form 10-K.
(6) Balance Sheet Data as of December 31, 1999 reflect the receipt of $118.5
million in net proceeds from the Company's January 1999 follow-on public
offering. See Note 9 of Notes to Consolidated Financial Statements included
in Item 8. of this Form 10-K.
(7) Balance Sheet Data as of December 31, 1998 reflect the receipt of $81.2
million in net proceeds from the Company's March 1998 follow-on public
offering.
(8) In 2000 and 1999, the Company changed its method of accounting for revenue
recognition. See Notes 2(b) and 1(d) of Notes to Consolidated Financial
Statements included in Item 8. of this Form 10-K.
(9) Cash dividends per share represent distributions to the shareholders of PRS
International, Ltd.
(10) During 2000, the Company completed two acquisitions accounted for as
purchases consisting of The Right Answer, Inc. (March) and TSL Services,
Inc. (June). See Note 2 of Notes to Consolidated Financial Statements
included in Item 8. of this Form 10-K.
(11) During 2001, the Company completed the sale of its French Taxation Services
business and Logistics Management Services segment at net losses of $54.0
million and $19.1 million, respectively.
21
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
PRG-Schultz International, Inc. and subsidiaries (the "Company") is the
leading provider of recovery audit services to large and mid-size businesses
having numerous payment transactions with many vendors.
In businesses with large purchase volumes and continuously fluctuating
prices, some small percentage of erroneous overpayments to vendors is
inevitable. Although these businesses process the vast majority of payment
transactions correctly, a small number of errors do occur. In the aggregate,
these transaction errors can represent meaningful "lost profits" that can be
particularly significant for businesses with relatively narrow profit margins.
The Company's trained, experienced industry specialists use sophisticated
proprietary technology and advanced recovery techniques and methodologies to
identify overpayments to vendors. 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.
CRITICAL ACCOUNTING POLICIES
Management's Discussion and Analysis of Financial Condition and Results of
Operations discusses the Company's consolidated financial statements, which have
been prepared in accordance with accounting principles generally accepted in the
United States of America. The preparation of these financial statements requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and the disclosure of contingent assets and liabilities
at the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. On an on-going basis, management evaluates
its estimates and judgements, including those related to revenue recognition and
accounts receivable reserves, income taxes and intangible assets. Management
bases its estimates and judgements on historical experience and on various other
factors that are believed to be reasonable under the circumstances, the results
of which form the basis for making judgements about the carrying values of
assets and liabilities that are not readily apparent from other sources. Actual
results may differ from these estimates under different assumptions or
conditions.
The Company's significant accounting policies are more fully described in
Note 1 of Notes to Consolidated Financial Statements included in Item 8. of this
Form 10-K. However, certain of the Company's accounting policies are
particularly important to the portrayal of its financial position and results of
operations and require the application of significant judgment by management; as
a result they are subject to an inherent degree of uncertainty. Management
believes the following critical accounting policies, among others, involve its
more significant judgements and estimates used in the preparation of its
consolidated financial statements.
- Revenue Recognition. The Company recognizes revenue on the invoice
basis. Clients are invoiced for a contractually specified percentage of
amounts recovered when it has been determined that they have received
economic value (generally through credits taken against existing accounts
payable due to the involved vendors or refund checks received from those
vendors), and when the following criteria are met: (a) persuasive
evidence of an arrangement exists; (b) services have been rendered; (c)
the fee billed to the client is fixed or determinable and (d)
collectibility is reasonably assured. The determination that each of the
aforementioned criteria are met requires the application of significant
judgement by management and a misapplication of this judgement could
result in inappropriate recognition of revenue.
- Accounts Receivable Reserves. The Company maintains allowances for
doubtful accounts for estimated losses resulting from the inability or
unwillingness of its clients to make required payments. If the financial
condition of the Company's clients were to deteriorate, or their
operating climate were to change, resulting in an impairment of either
their ability or willingness to make payments, additional allowances may
be required.
- Income Taxes. The Company records a valuation allowance to reduce its
deferred tax assets to the amount that it believes is more likely than
not to be realized. While the Company has considered
22
future taxable income and ongoing prudent and feasible tax planning strategies
in assessing the need for the valuation allowance, in the event the Company were
to determine that it would not be able to realize all or part of its 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. Likewise, should the Company determine that it would be able to
realize its deferred tax assets in the future in excess of its net
recorded amount, an adjustment to the deferred tax assets would increase
income in the period such determination was made.
- Goodwill. As of December 31, 2001, the Company had unamortized goodwill
of $160.2 million related to continuing operations and has, effective
January 1, 2002, reclassified to continuing operations an additional
amount of unamortized goodwill of approximately $36.6 million associated
with Meridian, the Communications Services business and the Ship & Debit
business formerly classified in discontinued operations as of December
31, 2001. Also, the Company will be increasing its goodwill by
approximately $200.0 million as a result of the acquisitions of HSA-Texas
and affiliates which were completed on January 24, 2002.
The Company adopted the provisions of Statement of Financial Accounting
Standards ("SFAS") No. 142, "Goodwill and Other Intangible Assets"
effective January 1, 2002. Under the new guidance the Company will be
required to perform a transitional assessment of whether goodwill existing
as of January 1, 2002 is impaired. To accomplish this transitional
impairment analysis the Company must identify its reporting units and
determine the carrying value of each reporting unit by assigning the
assets and liabilities, including the existing goodwill and intangible
assets, to those reporting units as of the date of adoption. The Company
has until June 2002 to determine the fair value of each reporting unit and
compare it to the reporting unit's carrying amount. To the extent a
reporting unit's carrying amount exceeds its fair value, an indication
exists that the reporting unit's goodwill may be impaired and the Company
must perform the second step of the transitional impairment test. In the
second step, the Company must compare the implied fair value of the
reporting unit's goodwill, determined by allocating the reporting unit's
fair value to all of it assets (recognized and unrecognized) and
liabilities in a manner similar to a purchase price allocation in
accordance with SFAS No. 141, "Business Combinations", to its carrying
amount, both of which would be measured as of January 1, 2002, the date of
adoption. This second step is required to be completed as soon as
possible, but no later than December 31, 2002 and any transitional
impairment loss will be recognized as the cumulative effect of a change in
accounting principle in the Company's Consolidated Statement of
Operations, thereby reducing earnings. Prospective goodwill impairment
testing as of any testing date subsequent to January 24, 2002, will
include testing of the approximately $200.0 million of goodwill associated
with HSA-Texas and affiliates.
The identification of reporting units, the determination of carrying
value of each reporting unit and the determination of fair value for each
reporting unit requires a significant amount of judgement on the part of
management. To the extent that management misapplies the judgement
surrounding any of the critical factors during the implementation and
maintenance of the requirements set forth under SFAS No. 142, the
Company's financial results could be materially and adversely effected.
23
RESULTS OF OPERATIONS
The following table sets forth the percentage of revenues represented by
certain items in the Company's Consolidated Statements of Operations for the
periods indicated:
YEARS ENDED DECEMBER 31,
-------------------------
2001 2000 1999
----- ----- -----
STATEMENTS OF OPERATIONS DATA:
Revenues................................................ 100.0% 100.0% 100.0%
Cost of revenues........................................ 54.6 54.6 53.6
Selling, general and administrative expenses............ 39.3 39.4 32.0
----- ----- -----
Operating income..................................... 6.1 6.0 14.4
Interest (expense), net................................. (1.9) (2.1) (0.9)
----- ----- -----
Earnings from continuing operations before income
taxes, discontinued operations, extraordinary item
and cumulative effect of accounting change......... 4.2 3.9 13.5
Income taxes............................................ 1.9 1.7 5.5
----- ----- -----
Earnings from continuing operations before
discontinued operations, extraordinary item and
cumulative effect of accounting change............. 2.3 2.2 8.0
Discontinued operations:
Earnings (loss) from discontinued operations, net of
income taxes....................................... (1.3) (17.5) 3.1
Loss on disposal from discontinued operations
including operating results for phase out period,
net of income taxes................................ (32.7) -- --
----- ----- -----
Earnings (loss) from discontinued operations......... (34.0) (17.5) 3.1
----- ----- -----
Earnings (loss) before extraordinary item and
cumulative effect of accounting change............. (31.7) (15.3) 11.1
Extraordinary item, net of income taxes................. (0.6) -- --
----- ----- -----
Earnings (loss) before cumulative effect of
accounting change.................................. (32.3) (15.3) 11.1
Cumulative effect of accounting change, net of income
taxes................................................ -- -- (11.8)
----- ----- -----
Net loss........................................ (32.3)% (15.3)% (0.7)%
===== ===== =====
2001 COMPARED TO 2000
Revenues. The Company's revenues consist principally of contractual
percentages of overpayments recovered for clients. In 2001 and 2000, the
Company's revenues from continuing operations were generated entirely from
Accounts Payable Services (see Note 14 of Notes to Consolidated Financial
Statements included in Item 8. of this Form 10-K).
For the year ended December 31, 2001, revenues from continuing operations
were $259.3 million or 1.6% higher than revenues from continuing operations of
$255.1 million achieved in the corresponding period of 2000.
Internationally, revenues from continuing operations from the Company's
international operations increased slightly to $61.8 million in 2001, up from
$61.0 million in 2000. This growth in international operations was the result of
modest growth in Canada due to new clients and an expansion of services to
existing clients. This increase was partially offset by a decrease in
year-over-year revenues for Europe primarily due to the loss of one significant
client.
24
Domestic revenues from continuing operations, increased 1.7% to $197.5
million for the year ended December 31, 2001, up from $194.1 million for the
comparable period of 2000. The increase is primarily due to increased revenues
related to services provided to retail clients partially offset by decreased
revenues related to services provided to commercial clients. Services provided
to commercial clients tend to be 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.
Cost of Revenues. Cost of revenues consists principally of commissions
paid or payable to the Company's auditors based primarily upon the level of
overpayment recoveries, and compensation paid to various types of hourly workers
and salaried operational managers. Also included in cost of revenues are other
direct costs incurred by these personnel including rental of non-headquarters
offices, travel and entertainment, telephone, utilities, maintenance and
supplies and clerical assistance.
Cost of revenues as a percentage of revenues from continuing operations was
54.6% of revenues for both years ended December 31, 2001 and 2000.
Cost of revenues as a percentage of revenues from international continuing
operations increased to 54.0% in the year ended December 31, 2001, up from 51.0%
in the comparable period of 2000. This year-over-year increase was the result of
increased levels of auditor staffing in the developing areas of Latin America
and Asia. These countries added staff in order to penetrate new markets. During
the initial period as new markets are entered, audit staff compensation is
spread over a relatively small revenue base, which serves to increase the cost
of revenues as a percentage of revenues.
Domestically, for the year ended December 31, 2001, cost of revenues as a
percentage of revenues from domestic continuing operations improved compared to
the same period of the prior year. For the year ended December 31, 2001,
domestic cost of revenues as a percentage of revenues from domestic continuing
operations was 54.7%, a decrease compared to 55.8% for 2000. This year-over-year
decrease was primarily due to one time charges taken in 2000 for employee
advance account reductions due to auditor draws forgiven.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses include the expenses of sales and marketing activities,
information technology services and the corporate data center, human resources,
legal and accounting, administration, accounts receivable reserves, the impact
of foreign currency transactions, headquarters-related depreciation of property
and equipment and amortization of intangibles.
Selling, general and administrative expenses, as a percentage of revenues
from continuing operations were fairly constant compared to the same period of
the prior year. For the year ended December 31, 2001, selling, general and
administrative expenses were 39.3% of revenues from continuing operations,
compared to 39.4% for 2000.
Internationally, selling, general and administrative expenses as a
percentage of revenues from the Company's international continuing operations
increased to 26.5% in the year ended December 31, 2001, up from 22.5% in 2000,
primarily due to increases in accounts receivable reserves, particularly in
Europe and Latin America. Additionally, Latin America incurred increased
expenses in 2001 as a result of expansion of the commercial operations in Mexico
and Brazil.
Domestically, excluding corporate overhead, selling, general and
administrative expenses as a percentage of revenues from continuing operations
were 24.6% in the year ended December 31, 2001, up from 23.9% during the same
period of the prior year. The increase in selling, general and administrative
expenses on a year-over-year basis was primarily due to increases in accounts
receivable reserves related to the Company's domestic operations including
additional reserves for client bankruptcies, primarily K-Mart, partially offset
by a reduction in administrative support costs.
Corporate overhead selling, general and administrative expenses include the
expenses of the corporate data center, human resources, legal and accounting,
administration, currency translation, headquarters-related depreciation of
property and equipment and amortization of intangibles. Corporate overhead
selling, general
25
and administrative expenses as a percentage of revenues from continuing
operations was 14.3% in the year ended December 31, 2001, down from 15.8% in the
same period of 2000. This decrease is due in part to reduced period costs in
2001 for general expenses such as consulting fees and professional services and
severance costs. During 2001, the Company incurred approximately $16.0 million
for consulting and professional services of which approximately $8.0 million was
capitalized as part of the acquisitions of HSA-Texas and affiliates, with the
remaining $8.0 million being expensed as incurred. Conversely, the Company
incurred approximately $10.3 million for consulting and professional services in
2000, all of which was expensed as incurred. Additionally, the Company had a
year-over-year decrease in severance costs of approximately $1.7 million. During
2001, the Company continued to incur corporate overhead expenses to support its
discontinued operations. Under accounting principles generally accepted in the
United States of America, a Company is not allowed to allocate general corporate
overhead costs to discontinued operations with the exception of applicable
interest expense.
In connection with acquired businesses, the Company has recorded intangible
assets including goodwill and deferred non-compete costs. Amortization of these
intangible assets totaled $8.5 million and $8.6 million in 2001 and 2000,
respectively. As of January 1, 2002, goodwill and intangible assets with
indefinite lives are no longer subject to amortization pursuant to Statement of
Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets".
Operating Income. Operating income as a percentage of revenues from
continuing operations was 6.1% in 2001, compared to 6.0% in 2000.
Internationally, operating income as a percentage of revenues in the
international portion of the Company's operations was 19.5% in the year ended
December 31, 2001, down from 26.5% in the year ended December 31, 2000. The
decline was driven by the increased cost of revenue and selling, general and
administrative expenses as discussed above.
Domestically, operating income as a percentage of domestic revenues from
continuing operations, excluding corporate overhead, increased to 20.7% in 2001,
up from 20.3% in 2000, for reasons outlined above.
Interest (Expense), Net. Interest (expense), net for the year ended 2001
was $4.8 million, up from $4.4 million in 2000. Most of the Company's interest
expense in 2001 and 2000 pertains to its previously existing $200.0 million
senior credit facility with a banking syndicate which was replaced with a new
three-year $75.0 million senior credit facility on December 31, 2001. The
Company historically made periodic borrowings under the former $200.0 million
credit facility primarily to finance the cash portion of considerations paid for
businesses it acquired (see Notes 2 and 11 of Notes to Consolidated Financial
Statements included in Item 8. of this Form 10-K). Without these acquisitions,
the Company's need for bank borrowings would have been minimal. The
year-over-year increase in interest expense was directly attributable to higher
outstanding balances due to borrowings under the senior credit facility during
the year ended December 31, 2001 and a higher weighted average interest rate on
outstanding borrowings year-over-year. Although the external interest rate
environment improved in 2001 in comparison to 2000, the Company incurred
increased marginal interest charges over the prevailing rates in 2001 versus
2000 due to the tiered pricing structure of the $200.0 million senior credit
facility. Specifically, in 2001 the Company's bank covenant ratios deteriorated
in relationship to the ratios achieved in 2000. This deterioration in ratios
caused the Company to move into a higher interest rate strata within the tiered
pricing structure of the $200.0 million senior credit facility.
On November 26, 2001, the Company completed a $95.0 million offering of its
4 3/4% convertible subordinated notes due in 2006. The Company issued an
additional $15.0 million of the notes on December 3, 2001, and on December 4,
2001, the initial purchasers of the notes issued on November 26, 2001 purchased
an additional $15.0 million of the notes to cover over allotments, bringing to
$125.0 million the aggregate amount issued. The Company received net proceeds
from the offering of approximately $121.4 million. The proceeds of the notes
were used to pay down the Company's outstanding balance under its senior credit
facility. The convertible notes had minimal impact on interest expense during
the year ended December 31, 2001 because they were issued late in the year,
however, interest expense for the year ending December 31, 2002 related to the
convertible notes including amortization of the discount is estimated to be
approximately $6.7 million.
26
Earnings From Continuing Operations Before Income Taxes, Discontinued
Operations, Extraordinary Item and Cumulative Effect of Accounting
Change. Earnings from continuing operations before income taxes, discontinued
operations, extraordinary item and cumulative effect of accounting change as a
percentage of total revenues were 4.2% in 2001, compared to 3.9% in 2000. The
change in earnings from continuing operations before income taxes, discontinued
operations, extraordinary item and cumulative effect of accounting change was
the result of the factors noted above.
Income Taxes. The provisions for income taxes for 2001 and 2000 consist of
federal, state and foreign income taxes at the Company's effective tax rate
which approximated 44.0% for the years ended December 31, 2001 and 2000. These
44.0% rates were higher than in years prior to 2000 due to the impact of
non-deductible items such as certain goodwill combined with lower levels of
earnings.
Earnings (Loss) From Discontinued Operations. In March 2001, the Company
formalized a strategic realignment initiative designed to enhance the Company's
financial position and clarify its investment and operating strategy by focusing
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 within the former Taxation Services segment, the Logistics
Management Services segment, the Communications Services segment and the Ship &
Debit division within the Accounts Payable Services segment. The Company
disposed of its Logistics Management Services segment in October 2001.
Additionally, in December 2001, the Company disposed of its French Taxation
Services business which until that time had been part of continuing operations
(see Note 2 of Notes to Consolidated Financial Statements included in Item 8. of
this Form 10-K).
The Company incurred a loss from discontinued operations for the year ended
December 31, 2001 of $88.2 million compared to $44.7 million for 2000.
Approximately $78.2 million of the loss for the year ended December 31, 2001 was
due to losses on the sales of the French Taxation Services business (which had
been part of continuing operations until time of disposal) and the Logistics
Management Services segment of approximately $54.0 million and $19.1 million,
respectively, as well as the closing of a unit within the Communications
Services segment which resulted in a loss of approximately $5.1 million.
Approximately $26.1 million of the loss for the year ended December 31, 2000 was
due to the Company's decision to retroactively change its method of accounting
for revenue recognition for Meridian and the Ship & Debit business, in
consideration of guidance issued by the Securities and Exchange Commission under
Staff Accounting Bulletin No. 101 "Revenue Recognition in Financial Statements"
(see Note 2 of Notes to Consolidated Financial Statements included in Item 8. of
this Form 10-K).
As required under accounting principles generally accepted in the United
States of America, the Company has continually updated its assessment of the
estimated gain (loss) on disposal from discontinued operations including
operating results for the phase-out period, net of tax. Due to the negative
impact of prevailing economic conditions and other factors on the anticipated
collective net proceeds from selling the discontinued operations, the Company
concluded as of September 2001, that there would be an estimated net loss of
approximately $31.0 million upon disposal of the discontinued operations. The
Company recorded this non-cash, after-tax charge during the third quarter of
2001. The $31.0 million after-tax charge is comprised of an adjustment to the
net proceeds anticipated to be received upon the sale of the discontinued
operations, net losses from discontinued operations for the year ended December
31, 2001 and estimated net earnings (losses) from discontinued operations for
the three months ending March 31, 2002. The $31.0 million after tax charge
includes a $19.1 million loss specifically relating to the Logistics Management
Services segment which was subsequently sold on October 30, 2001. The $31.0
million after-tax charge also includes a $5.1 million loss specifically relating
to the closing of a unit within the Communications Services segment.
The remaining discontinued operations have been for sale since the first
quarter of 2001. The Company has concluded that the current negative market
conditions are not conducive to receiving terms acceptable to the Company for
these businesses. As such, on January 24, 2002, the Company's Board of Directors
approved a proposal to retain the Company's three remaining discontinued
operations. As a result, beginning January 1, 2002, the financial results of
these three businesses, Meridian, the Communications Services business, and the
Ship & Debit business will be reclassified as part of the Company's continuing
operations.
27
Extraordinary Item, Net of Income Taxes. During the year ended December
31, 2001, the Company incurred an extraordinary loss of $1.6 million net of tax
as a result of the early termination of its $200.0 million senior credit
facility on December 31, 2001 which was concurrently replaced by a new
three-year $75.0 million senior bank credit facility. The extraordinary loss
consisted of the write-off of $2.6 million in unamortized deferred loan costs,
net of a tax benefit of $1.0 million.
Weighted-Average Shares Outstanding -- Basic. The Company's
weighted-average shares outstanding for purposes of calculating basic earnings
per share were 48.3 million for the year ended December 31, 2001 down from 48.9
million for the year ended December 31, 2000. This decrease was comprised
primarily of outstanding shares repurchased in the open market under the
Company's publicly announced share repurchase program in the third quarter of
2000, partially offset by restricted, unregistered shares issued by the Company
in April, 2001 in connection with the Groupe AP earnout.
In connection with the acquisitions of HSA-Texas and affiliates, which
closed on January 24, 2002, the Company issued 14.8 million unregistered shares
of its common stock. These shares will be included in the calculation of the
weighted-average shares outstanding, basic and dilutive, in future periods.
Additionally, the Company's $125.0 million of convertible notes are convertible
into the Company's common stock at a conversion price of $7.74 per share, which
is equal to a conversion rate of approximately 129.2 shares per $1,000 principal
amount of notes, subject to adjustment. At December 31, 2001, the shares that
would be issued on an if-converted basis relative to the convertible notes
outstanding were excluded from the calculation of the dilutive shares
outstanding as antidilutive. The Company anticipates that these shares
(approximately 16.1 million on an if-converted basis) will be dilutive in future
periods and therefore will be included in the calculation of diluted
weighted-average shares outstanding in future years.
2000 COMPARED TO 1999
Revenues. The Company's revenues consist principally of contractual
percentages of over payments recovered for clients. In 2000 and 1999, the
Company's revenues from continuing operations were generated entirely from
Accounts Payable Services (see Note 14 of Notes to Consolidated Financial
Statements included in Item 8. of this Form 10-K).
Revenues from continuing operations increased 3.5% to $255.1 million in
2000, up from $246.4 million in 1999.
Revenues from the international portion of the Company's operations
increased 31.3% to $61.0 million in 2000, up from $46.4 million in 1999. This
growth in international operations was driven by new clients and by an expansion
of services to existing clients, with the majority of the growth generated in
Europe and Latin America.
Domestic revenues from continuing operations decreased 2.9% to $194.1
million in 2000, down from $199.9 million in 1999. This decrease was driven by
various factors in 2000, including delays or shifts in certain audit starts due
to client-specific factors, certain clients that filed bankruptcy, longer than
anticipated time frames for clients to recover overpayments for certain
categories of claims, and shortfalls in execution of sales strategies to drive
revenue generation.
Cost of Revenues. Cost of revenues as a percentage of revenues from
continuing operations increased to 54.6% of revenues in 2000, up from 53.6% of
revenues in 1999.
Internationally, cost of revenues as a percentage of international revenues
from continuing operations improved to 51.0% in 2000, down from 55.7% in 1999.
This year-over-year reduction was primarily driven by improvements in the cost
structure of the Company's international operations, most notably in the
European and Asia operations.
Domestically, cost of revenues as a percentage of domestic revenues from
continuing operations increased to 55.8% in 2000, up from 53.1% in 1999. This
increase was principally driven by an increase in cost of revenues both as a
percentage of revenues and on an absolute basis in the domestic commercial
Accounts Payable Services operations, while revenues during 2000 were lower.
28
Selling, General and Administrative Expenses. Selling, general and
administrative expenses, as a percentage of revenues from continuing operations
increased to 39.4% in 2000, up from 32.0% in 1999. A significant portion of this
year-over-year increase was due to non-recurring charges incurred by the Company
during the fourth quarter of 2000 of approximately $6.4 million consisting of:
employee terminations, elimination of duplicate facilities, accounts receivable
write-offs, and the write-down of certain property and equipment. In addition, a
portion of the year-over-year increase in selling, general and administrative
expenses is due to expenditures resulting from the Company's investment in
infrastructure to support anticipated future growth, research and development
costs related to the Company's e-Commerce business initiatives, and costs
incurred in connection with the Company's branding initiatives.
Internationally, selling, general and administrative expenses as a
percentage of revenues from continuing operations decreased slightly to 22.5% in
2000, down from 23.2% in 1999.
Domestically, excluding corporate overhead, selling, general and
administrative expenses as a percentage of revenues from continuing operations
increased to 23.9% in 2000, up from 20.4% in 1999. This increase is attributable
to an increase in overhead support dedicated to the Accounts Payable Services
business.
Corporate selling, general, and administrative expenses as a percentage of
revenues from continuing operations increased to 15.8% in 2000, up from 11.1% in
1999. This increase is attributed to certain non-recurring charges outlined
above.
In August 1999, the Company acquired PRS International, Ltd. ("PRS") in a
transaction accounted for as a pooling-of-interests. Costs incurred to combine
the operations of PRS with the Company's existing Accounts Payable Services
business resulted in a non-recurring, restructuring charge of $1.1 million to
provide for certain employee severance payments and the costs of closing
duplicate office facilities.
In connection with acquired businesses, the Company has recorded intangible
assets including goodwill and deferred non-compete costs. Amortization of these
intangible assets totaled $8.6 million in 2000 and $8.2 million in 1999.
Operating Income. Operating income as a percentage of revenues from
continuing operations decreased to 6.0% in 2000, down from 14.4% in 1999.
Internationally, operating income as a percentage of revenues from continuing
operations from international operations improved to 26.5% in 2000, up from
21.2% in 1999, primarily due to strong revenue growth and a reduction in cost of
revenues. Domestically, operating income as a percentage of revenues from
continuing operations, excluding corporate overhead, decreased to 20.3% in 2000,
down from 26.5% in 1999 for reasons outlined above.
Interest (Expense), Net. Interest (expense), net for 2000 was $5.3
million, up from $2.2 million in 1999. Most of the Company's interest expense
pertains to its $200.0 million senior credit facility with a banking syndicate.
Earnings From Continuing Operations Before Income Taxes, Discontinued
Operations, Extraordinary Item and Cumulative Effect of Accounting
Change. Earnings from continuing operations before income taxes, discontinued
operations, extraordinary item and cumulative effect of accounting change
decreased 70.0% to $10.0 million in 2000, down from $33.3 million in 1999. As a
percentage of total revenues, earnings from continuing operations before income
taxes, discontinued operations, extraordinary item and cumulative effect of
accounting change were 3.9% in 2000 and 13.5% in 1999.
Income Taxes. The provisions for income taxes for 2000 and 1999 consist of
federal, state and foreign income taxes at the Company's effective tax rate
which approximated 44% in 2000 and 41% in 1999. Effective tax rates for 2000 are
higher than 1999 as a partial result of non-deductible losses incurred during
2000 at certain of the Company's international subsidiaries.
Earnings (loss) From Discontinued Operations. In March 2001, the Company
formalized a strategic realignment initiative designed to enhance the Company's
financial position and clarify its investment and operating strategy by focusing
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 within the former Taxation Services segment, the Logistics
Management Services segment, the
29
Communications Services segment and the Ship & Debit division within the
Accounts Payable Services segment. The Company disposed of its Logistics
Management Services segment in October 2001. Additionally, in December 2001, the
Company disposed of its French Taxation Services business (see Note 2 of Notes
to Consolidated Financial Statements included in Item 8. of this Form 10-K).
Earnings (loss) from discontinued operations decreased by $52.5 million
from earnings of $7.8 million in 1999 to a loss of $(44.7) million in 2000.
Approximately $26.1 million of this year-over-year decline was due to the
Company's decision to retroactively change its method of accounting for revenue
recognition for the Meridian and Ship & Debit divisions, in consideration of
guidance issued by the Securities and Exchange Commission under Staff Accounting
Bulletin No. 101 "Revenue Recognition in Financial Statements" ("SAB 101") (See
Note 2 of Notes to Consolidated Financial Statements included in Item 8. of this
Form 10-K). Additionally, the Company recognized an after tax non-recurring
goodwill impairment charge of approximately $19.2 million in 2000 to adjust the
net book value of the goodwill contained within the Communications and French
Taxation Services segments.
The remaining discontinued operations have been for sale since the first
quarter of 2001. The Company has concluded that the current negative market
conditions are not conducive to receiving terms acceptable to the Company for
these businesses. As such, on January 24, 2002, the Company's Board of Directors
approved a proposal to retain the Company's three remaining discontinued
operations. As a result, beginning January 1, 2002, the financial results of
these three businesses, Meridian, the Communications Services business, and the
Ship & Debit business will be reclassified as part of the Company's continuing
operations.
Weighted-Average Shares Outstanding -- Basic. The Company's
weighted-average shares outstanding for purposes of calculating basic earnings
per share increased to 48.9 million for 2000, up from 47.5 million for 1999.
This increase was comprised primarily of (i) restricted, unregistered shares
issued by the Company in connection with acquisitions of various companies in
2000 and 1999 (ii) unregistered shares issued by the Company in liquidation of
Meridian's shareholder loans in 1999 and reduced by (iii) outstanding shares
repurchased in the open market under the Company's publicly announced share
repurchase program in 2000 (see Notes 2 and 9 of Notes to Consolidated Financial
Statements including in Item 8. of this Form 10-K).
30
QUARTERLY RESULTS
The following tables set forth certain unaudited quarterly financial data
for each of the Company's last eight quarters. The information has been derived
from unaudited Consolidated Financial Statements that, in the opinion of
management, reflect all adjustments (consisting only of normal recurring
adjustments) necessary for a fair presentation of such quarterly information.
The operating results for any quarter are not necessarily indicative of the
results to be expected for any future period.
2001 QUARTER ENDED 2000 QUARTER ENDED
--------------------------------------- ----------------------------------------
MAR. 31 JUNE 30 SEPT. 30 DEC. 31 MAR. 31 JUNE 30 SEPT. 30 DEC. 31
------- ------- -------- -------- -------- ------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Revenues.................................. $57,640 $67,046 $ 61,613 $ 72,965 $ 57,528 $65,038 $67,721 $ 64,823
Cost of revenues.......................... 31,247 35,253 33,541 41,401 31,749 33,837 36,150 37,694
Selling, general and administrative
expenses................................ 25,988 25,045 23,488 27,394 22,291 20,564 24,012 33,568
------- ------- -------- -------- -------- ------- ------- --------
Operating income (loss)................... 405 6,748 4,584 4,170 3,488 10,637 7,559 (6,439)
Interest (expense), net................... (1,321) (1,080) (1,499) (1,080) (764) (1,409) (1,589) (1,508)
------- ------- -------- -------- -------- ------- ------- --------
Earnings (loss) from continuing operations
before income taxes, discontinued
operations and extraordinary item....... (916) 5,668 3,085 3,090 2,724 9,228 5,970 (7,947)
Income tax expense (benefit).............. (403) 2,494 1,357 1,360 1,199 4,060 2,627 (3,497)
------- ------- -------- -------- -------- ------- ------- --------
Earnings (loss) from continuing operations
before discontinued operations and
extraordinary item...................... (513) 3,174 1,728 1,730 1,525 5,168 3,343 (4,450)
Discontinued operations:
Earnings (loss) from discontinued
operations............................ (979) (464) 140 (1,991) (25,321) 1,480 1,086 (21,959)
Loss on disposal from discontinued
operations............................ -- -- (31,000) (53,955) -- -- -- --
------- ------- -------- -------- -------- ------- ------- --------
Earnings (loss) from discontinued
operations.............................. (979) (464) (30,860) (55,946) (25,321) 1,480 1,086 (21,959)
------- ------- -------- -------- -------- ------- ------- --------
Earnings (loss) before extraordinary
item.................................... (1,492) 2,710 (29,132) (54,216) (23,796) 6,648 4,429 (26,409)
Extraordinary item........................ -- -- -- (1,581) -- -- -- --
------- ------- -------- -------- -------- ------- ------- --------
Net earnings (loss)............... $(1,492) $ 2,710 $(29,132) $(55,797) $(23,796) $ 6,648 $ 4,429 $(26,409)
======= ======= ======== ======== ======== ======= ======= ========
Basic earnings (loss) per share:
Earnings (loss) from continuing
operations before discontinued
operations and extraordinary item..... $ (0.01) $ 0.07 $ 0.04 $ 0.04 $ 0.03 $ 0.10 $ 0.07 $ (0.10)
Discontinued operations................. (0.02) (0.01) (0.64) (1.15) (0.51) 0.03 0.02 (0.46)
Extraordinary item...................... -- -- -- (0.04) -- -- -- --
------- ------- -------- -------- -------- ------- ------- --------
Net earnings (loss)............... $ (0.03) $ 0.06 $ (0.60) $ (1.15) $ (0.48) $ 0.13 $ 0.09 $ (0.56)
======= ======= ======== ======== ======== ======= ======= ========
Diluted earnings (loss) per share:
Earnings (loss) from continuing
operations before discontinued
operations and extraordinary item..... $ (0.01) $ 0.07 $ 0.04 $ 0.03 $ 0.03 $ 0.10 $ 0.07 $ (0.10)
Discontinued operations................. (0.02) (0.01) (0.63) (1.14) (0.50) 0.03 0.02 (0.46)
Extraordinary item...................... -- -- -- (0.03) -- -- -- --
------- ------- -------- -------- -------- ------- ------- --------
Net earnings (loss)............... $ (0.03) $ 0.06 $ (0.59) $ (1.14) $ (0.47) $ 0.13 $ 0.09 $ (0.56)
======= ======= ======== ======== ======== ======= ======= ========
The Company has experienced and expects to continue to experience
significant seasonality in its business. The Company typically realizes higher
revenues and operating income in the last two quarters of its fiscal year. This
trend reflects the inherent purchasing and operational cycles of the Company's
clients. Should the Company not continue to realize increased revenues in future
third and fourth quarter periods, profitability for any affected quarter and the
entire year could be materially and adversely affected due to ongoing selling,
general and administrative expenses that are largely fixed over the short term.
31
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities was $22.9 million, $31.1 million
and $2.9 million during the years ended December 31, 2001, 2000 and 1999,
respectively.
Net cash provided by investing activities was $44.8 million during the year
ended December 31, 2001 compared to net cash used in investing activities of
$48.2 million and $50.9 million during the years ended December 31, 2000 and
1999, respectively. Cash provided by investing activities during the year ended
December 31, 2001 related primarily to cash proceeds from the sale of
discontinued operations. Cash used in investing activities during the years
ended December 31, 2000 and 1999 related primarily to additional purchase price
consideration (earnout) paid to the former owners of Loder, Drew & Associates,
Inc. (see Note 11 of Notes to Consolidated Financial Statements included in Item
8. of this Form 10-K.)
Net cash used in financing activities was $31.1 million during the year
ended December 31, 2001. Net cash provided by financing activities was $46.3
million and $86.5 million for the years ended December 31, 2000 and 1999,
respectively. The net cash used in financing activities during the year ended
December 31, 2001 related primarily to repayment of all outstanding principal
balances under the Company's then-existing $200.0 million credit facility (which
was terminated and replaced on December 31, 2001) using the net cash proceeds
from the issuance of $125.0 million of convertible notes and cash provided by
the sales of certain discontinued operations. The net cash provided by financing
activities during the year ended December 31, 2000 related primarily to proceeds
borrowed under the Company's then-existing $200.0 million credit facility net of
treasury share purchases. As discussed in Note 9 of the Notes to Consolidated
Financial Statements included in Item 8. of this Form 10-K, the Company
completed an underwritten follow-on stock offering in January 1999.
Net cash used in discontinued operations was $24.4 million, $26.6 million
and $44.1 million during the years ended December 31, 2001, 2000 and 1999,
respectively. Cash used in discontinued operations for the year ended December
31, 2001 was primarily due to the $7.3 million Groupe AP earnout, increased
operational funding provided to Meridian and cash used to support the
discontinued operations marketing process which was extensive and costly. Cash
used in discontinued operations for the year ended December 31, 2000 related
primarily to $22.2 million paid for acquisitions within the Communications
Services business. For the year ended December 31, 1999, cash used in
discontinued operations was primarily due to $6.0 million related to the
acquisition of a business unit within Meridian, $17.6 million related to the
acquisition of Groupe AP (part of the French Taxation Services business) and
$17.3 million related to acquisitions within the Logistics Management Services
segment.
On December 31, 2001, the Company retired the then-existing $200.0 million
senior bank credit facility and replaced it with a three-year $75.0 million
senior bank credit facility. $55.0 million of the facility is syndicated between
three banking institutions led by Bank of America, N.A. as agent for the group.
The Company continues to work with Bank of America to syndicate the remaining
$20.0 million of the credit facility. If syndication can not be achieved on the
remaining $20.0 million based on the terms and conditions of the current
agreement, the terms and potentially the aggregate credit capacity of the
facility may be modified to complete syndication. This could result in less
borrowing availability or other terms less favorable to the Company than those
currently available.
Borrowings under the new $75.0 million credit facility are subject to
limitations based upon the Company's eligible accounts receivable. The Company
is not required to make principal payments under the new $75.0 million senior
bank credit facility until its maturity on December 31, 2004 unless the Company
violates its debt covenants or unless other stipulated events, as defined in the
credit facility agreement, occur including, but not limited to, the Company's
outstanding facility borrowings exceeding the prescribed accounts receivable
borrowing base. The credit facility is secured by substantially all assets of
the Company and interest on borrowings is tied to either the prime rate or LIBOR
at the Company's option. The credit facility requires a fee for committed but
unused credit capacity of .50% per annum. The credit facility contains customary
covenants, including financial ratios. At December 31, 2001, the Company was in
compliance with all such covenants. At February 28, 2002, the Company had
approximately $11.0 million of borrowings outstanding under the new $75.0
million senior bank credit facility.
32
An extraordinary after-tax loss of $1.6 million was incurred as a result of
the early termination of the $200.0 million credit facility on December 31,
2001, consisting of the write-off of $2.6 million in unamortized deferred loan
costs, net of a tax benefit of $1.0 million.
On November 21, 2001, the Company entered into a Standby Letter of Credit
("Letter of Credit") with Bank of America, N.A. in the face amount of 2.3
million EUR. On December 31, 2001, the Letter of Credit was amended to increase
the face amount to 3.0 million EUR. The current rate of the Letter of Credit was
2.75% at December 31, 2001. At February 28, 2002, the Company had no borrowings
outstanding under the Letter of Credit.
On November 26, 2001, the Company completed a $95.0 million offering of its
4 3/4% convertible subordinated notes due in 2006. The Company issued an
additional $15.0 million of the notes on December 3, 2001, and on December 4,
2001, the initial purchasers of the notes issued on November 26, 2001 purchased
an additional $15.0 million of the notes to cover over allotments, bringing to
$125.0 million the aggregate amount issued. The Company received net proceeds
from the offering of approximately $121.1 million. The proceeds of the notes
were used to pay down the Company's outstanding balance under its then-existing
senior credit facility.
The notes are convertible into the Company's common stock at a conversion
price of $7.74 per share, which is equal to a conversion rate of 129.1990 shares
per $1,000 principal amount of notes, subject to adjustment. The Company may
redeem some or all of the notes at any time on or after November 26, 2004 at a
redemption price of $1,000 per $1,000 principal amount of notes, plus accrued
and unpaid interest, if prior to the redemption date the closing price of the
Company's common stock has exceeded $10.836 for at least 20 trading days within
a period of 30 consecutive days ending on the trading date before the date of
mailing of the optional redemption notice.
On October 30, 2001, the Company consummated the sale of its Logistics
Management Services segment to Platinum Equity, a firm specializing in acquiring
and operating technology organizations and technology-enabled service companies
worldwide. The transaction yielded initial gross sale proceeds, as adjusted, of
approximately $9.5 million with up to an additional $3.0 million payable in the
form of a revenue-based royalty over the next four years. This transaction
resulted in an estimated loss on the sale of approximately $19.1 million which
is included as part of the $31.0 million after tax charge recorded by the
Company during the third quarter of 2001.
On December 14, 2001, the Company consummated the sale of its French
Taxation Services business, as well as certain notes payable due to the Company,
to Chequers Capital, a Paris-based private equity firm. The transaction yielded
gross sale proceeds of approximately $48.3 million. This transaction resulted in
a loss of approximately $54.0 million.
The remaining unsold discontinued operations as of December 31, 2001
(Meridian, the Communications Services business and the Ship & Debit business)
have been for sale since the first quarter of 2001. The Company has concluded
that the current negative market conditions are not conducive to receiving terms
acceptable to the Company for these businesses. As such, on January 24, 2002,
the Company's Board of Directors approved a proposal to retain the Company's
three remaining discontinued operations. As a result, beginning January 1, 2002,
the financial results of these three businesses, Meridian, the Communications
Services business, and the Ship & Debit business will be reclassified as part of
the Company's continuing operations.
On January 24, 2002, the Company acquired substantially all the assets and
assumed certain liabilities of Howard Schultz & Associates International, Inc.
("HSA-Texas"), substantially all of the outstanding stock of HS&A International
Pte Ltd. and all of the outstanding stock of Howard Schultz & Associates (Asia)
Limited, Howard Schultz & Associates (Australia), Inc and Howard Schultz &
Associates (Canada), Inc., each an affiliated foreign operating company of
HSA-Texas, pursuant to an amended and restated agreement and plan of
reorganization by and among PRG-Schultz, HSA-Texas, Howard Schultz, Andrew H.
Schultz and certain trusts dated December 11, 2001 (the "Asset Agreement") and
an amended and restated agreement and plan of reorganization by and among
PRG-Schultz, Howard Schultz, Andrew H. Schultz,
33
Andrew H. Schultz Irrevocable Trust and Leslie Schultz dated December 11, 2001
(the "Stock Agreement"). HSA-Texas and affiliates are considered industry
pioneers in providing recovery audit services and the assets acquired will
continue to be used for audit recovery services.
Pursuant to the Asset and Stock Agreements, the consideration paid for the
assets of HSA-Texas and affiliates was 14,759,970 unregistered shares of the
Company's common stock and the assumption of certain HSA-Texas liabilities,
including aggregate net debt of approximately $65.7 million, a portion of which
was repaid at closing. In addition, options to purchase approximately 1.1
million shares of the Company's common stock were issued in exchange for
outstanding HSA-Texas options. The Company's available domestic cash balances
and new $75.0 million senior bank credit facility were used to fund closing
costs related to the HSA-Texas acquisitions and to repay certain indebtedness of
HSA-Texas.
Through January 31, 2002, the Company acquired 24 recovery audit firms. The
Company intends to significantly limit future business acquisitions to those
having compelling strategic importance. There can be no assurance, however, that
the Company will be successful in consummating further acquisitions due to
factors such as receptivity of potential acquisition candidates and valuation
issues.
During 2002, the Company expects to incur non-recurring expenses estimated
at $28.0 million relating to the integration of HSA-Texas and affiliates. Of the
total expenses the Company anticipates incurring, approximately $10.0 million
consists of one-time charges related to employee severances and costs associated
with the elimination of duplicate facilities and facilities relocations
(including a planned relocation of the Company's executive offices). Transition
expenses, which represent costs in the process of being eliminated over the
course of the year, are estimated at $18.0 million and relate primarily to
centralization of information technology functions, employment of duplicate
personnel for a transition period, and consultancy services related to
integration execution. The Company believes that these additional costs have
been appropriately contemplated in its publicly communicated earnings outlook
for 2002.
The Company anticipates making capital expenditures of approximately $20.0
million in 2002.
The Company believes that its working capital, availability under its $75.0
million credit facility and cash flow generated from future operations will be
sufficient to meet the Company's working capital and capital expenditure
requirements through December 31, 2002.
CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS
As of December 31, 2001, the Company maintained $121.2 million of
convertible subordinated notes, net of unamortized discount of $3.8 million, due
in 2006, the payment parameters of which are discussed in Note 5 of Notes to
Consolidated Financial Statements included in Item 8. of this Form 10-K.
As of December 31, 2001, the Company maintained a Standby Letter of Credit
with Bank of America, N.A. in the face amount of 3.0 million EUR. At February
28, 2002, the Company had no borrowings outstanding under the Letter of Credit
and therefore has no repayment obligation.
As of December 31, 2001 the Company maintains a $75.0 million senior bank
credit facility. Borrowings under the $75.0 million senior bank credit facility
are subject to limitations based upon the Company's eligible accounts
receivable. The Company is not required to make principal payments under the
$75.0 million senior bank credit facility until its maturity on December 31,
2004 unless the Company violates its debt covenants or unless other stipulated
events, as defined in the credit facility agreement, occur including, but not
limited to, the Company's outstanding facility borrowings exceeding the
prescribed accounts receivable borrowing base. At December 31, 2001, the Company
was in compliance with all such covenants. At February 28, 2002, the Company had
approximately $11.0 million of borrowings outstanding under the $75.0 million
senior credit facility.
In February 2002, the Company entered into a lease to relocate the
Company's executive offices. This lease is for approximately 120,000 square feet
of office space in Atlanta, Georgia. The new lease expires in 2015 and will
require aggregate minimum payments over its term of approximately $38.3 million
(averaging approximately $3.2 million per year starting in 2003). In conjunction
with the planned relocation, the
34
Company anticipates incurring approximately $5.0 million of additional costs in
2002, the majority of which will be related to remaining payment obligations for
unexpired lease commitments with respect to the Company's present Atlanta
headquarters. This $5.0 million is included in the $28.0 million of estimated
non-recurring expenses that the Company expects to incur in 2002, as more
specifically discussed above in Liquidity and Capital Resources.
The Company also maintains numerous operating leases principally in the
form of rental properties, the repayment terms of which are discussed in Note 6
of Notes to Consolidated Financial Statements included in Item 8. of this Form
10-K.
NEW ACCOUNTING STANDARDS
In October 2001, the Financial Accounting Standards Board (the "FASB")
issued Statement of Financial Accounting Standards ("SFAS") No. 144, "Accounting
for the Impairment or Disposal of Long-Lived Assets". SFAS No. 144 establishes a
single accounting model for impairment or disposal of long-lived assets. The
Company is required to adopt the provisions of SFAS No. 144 for 2002. The
Company is in the process of determining the impact, if any, of adopting SFAS
No. 144.
In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations", which addresses financial accounting and reporting for
obligations associated with the retirement of tangible long-lived assets and the
associated asset retirement costs. SFAS No. 143 requires that the fair value of
a liability for an asset retirement obligation be recognized in the period in
which it is incurred if a reasonable estimate of fair value can be made. The
fair value of the liability is added to the carrying amount of the associated
asset and this additional carrying amount is depreciated over the life of the
asset. The liability is accreted at the end of each period through charges to
operating expense. If the obligation is settled for other than the carrying
amount of the liability, a gain or loss on settlement will be recognized.
The Company is required to adopt the provisions of SFAS No. 143 for 2003.
To accomplish this, the Company must identify all legal obligations for asset
retirement obligations, if any, and determine the fair value of these
obligations on the date of adoption. The determination of fair value is complex
and will require the Company to gather market information and develop cash flow
models. Additionally, the Company will be required to develop processes to track
and monitor these obligations. Because of the effort necessary to comply with
the provisions of SFAS No. 143, it is not practicable for management to estimate
the impact of adopting this Statement at the date of this report.
In July 2001, the FASB issued SFAS No. 141, "Business Combinations", and
SFAS No. 142, "Goodwill and Other Intangible Assets". SFAS No. 141 requires that
the purchase method of accounting be used for all business combinations
initiated after June 30, 2001 as well as all business combinations initiated
before June 30, 2001 and completed after June 30, 2001. SFAS No. 141 also
specifies criteria that intangible assets acquired in a purchase method business
combination must meet in order to be recognized and reported apart from
goodwill, noting that any purchase price allocable to an assembled workforce may
not be accounted for separately. SFAS No. 142 requires that goodwill as well as
intangible assets with indefinite useful lives no longer be amortized, but
instead these assets must be tested for impairment at least annually in
accordance with the guidance set forth in SFAS No. 142. SFAS No. 142 also
requires that intangible assets with definite useful lives be amortized over
their respective estimated useful lives to their estimated residual values, and
reviewed for impairment in accordance with SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of".
The Company adopted the provisions of SFAS No. 141 in July 2001 and adopted
SFAS No. 142 effective January 1, 2002. Furthermore, any goodwill and any
intangible assets determined to have an indefinite useful life that are acquired
in a purchase business combination completed after June 30, 2001 will not be
amortized, but will continue to be evaluated for impairment in accordance with
the appropriate pre-SFAS No. 142 accounting literature. Goodwill and intangible
assets acquired in business combinations completed before July 1, 2001 continued
to be amortized prior to January 1, 2002.
35
SFAS No. 141 requires upon adoption of SFAS No. 142, that the Company
evaluate its existing intangible assets and goodwill that were acquired in prior
purchase business combinations and make any necessary reclassifications in order
to conform with the new criteria in SFAS No. 141 for recognition apart from
goodwill. Following adoption of SFAS No. 142, the Company will be required to
reassess the useful lives and residual values of all intangible assets acquired
in purchase business combinations, and make any necessary amortization period
adjustments by the end of the first interim period after adoption. In addition,
to the extent an intangible asset is identified as having an indefinite useful
life, the Company will be required to test the intangible asset for impairment
in accordance with the provisions of SFAS No. 142 prior to March 31, 2002. Any
impairment loss will be measured as of January 1, 2002 and recognized as the
cumulative effect of a change in accounting principle in the quarter ending
March 31, 2002.
In connection with the transitional goodwill impairment evaluation, SFAS
No. 142 will require the Company to perform an assessment of whether there is an
indication that goodwill is impaired as of the date of adoption. To accomplish
this, the Company must identify its reporting units and determine the carrying
value of each reporting unit by assigning the assets and liabilities, including
the existing goodwill and intangible assets, to those reporting units as of the
date of adoption. The Company has until June 30, 2002 to determine the fair
value of each reporting unit and compare it to the reporting unit's carrying
amount. To the extent a reporting unit's carrying amount exceeds its fair value,
an indication exists that the reporting unit's goodwill may be impaired and the
Company must perform the second step of the transitional impairment test. In the
second step, the Company must compare the implied fair value of the reporting
unit's goodwill, determined by allocating the reporting unit's fair value to all
of it assets (recognized and unrecognized) and liabilities in a manner similar
to a purchase price allocation in accordance with SFAS No. 141, to its carrying
amount, both of which would be measured as of the date of adoption. This second
step is required to be completed as soon as possible, but no later than December
31, 2002. Any transitional impairment loss will be recognized as the cumulative
effect of a change in accounting principle in the Company's Consolidated
Statement of Operations.
The Company had unamortized goodwill on January 1, 2002 (the date on which
the Company adopted SFAS No. 142) of approximately $160.2 million (at exchange
rates in effect at December 31, 2001) which will be subject to the transition
provisions of SFAS Nos. 141 and 142. Amortization expense related to goodwill
was $7.7 million and $7.8 million for the years ended December 31, 2001 and
2000, respectively. Additionally, unamortized goodwill related to certain
discontinued operations which were reclassified as part of continuing operations
effective January 1, 2002 was $36.6 million on that date and will also be
subject to the transition provisions of SFAS Nos. 141 and 142. Amortization
expense related to goodwill for this group of previously discontinued operations
was $1.7 million and $1.4 million for the years ended December 31, 2001 and
2000, respectively. Because of the extensive effort needed to comply with
adopting SFAS Nos. 141 and 142, it is not practicable to reasonably estimate the
impact of adopting these Statements on the Company's financial statements at the
date of this Form 10-K, including whether any transitional impairment losses
will be required to be recognized as the cumulative effect of a change in
accounting principle.
The Company completed the largest business combination in its history on
January 24, 2002 when it acquired its largest competitor, HSA-Texas and
affiliates, in a transaction which resulted in very significant levels of
goodwill and other identified intangibles. Since the acquisition was completed
subsequent to the initial SFAS 142 impairment testing date of January 1, 2002,
the goodwill and other identified intangibles that resulted are not subject to
the transitional impairment testing provisions of SFAS No. 142, but will be
subjected to ongoing future impairment testing.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Derivative Financial Instruments. On August 19, 1999, we acquired Meridian
VAT Corporation Limited. Meridian, based in Ireland, specializes in the recovery
of value-added taxes. Meridian utilized derivative financial instruments in 2000
and 1999 to hedge against adverse currency fluctuations. Meridian has not
utilized derivative financial instruments since the fourth quarter of 2000 and
had no derivative financial instruments outstanding at December 31, 2000. None
of the Company's operating units other than Meridian
36
have ever utilized derivative financial instruments although future use of these
instruments is under consideration.
Foreign Currency Market Risk. Our functional currency is the U.S. dollar
although we transact business in various foreign locations and currencies. As a
result, our financial results could be significantly affected by factors such as
changes in foreign currency exchange rates, or weak economic conditions in the
foreign markets in which we provide services. Our operating results are exposed
to changes in exchange rates between the U.S. dollar and the currencies of the
other countries in which we operate. When the U.S. dollar strengthens against
other currencies, the value of nonfunctional currency revenues decreases. When
the U.S. dollar weakens, the functional currency amount of revenues increases.
Overall, we are a net receiver of currencies other than the U.S. dollar and, as
such, benefit from a weaker dollar. We are therefore adversely affected by a
stronger dollar relative to major currencies worldwide.
Interest Rate Risk. Our interest income and expense are most sensitive to
changes in the general level of U.S. interest rates. In this regard, changes in
U.S. interest rates affect the interest earned on our cash equivalents as well
as interest paid on our debt. At December 31, 2001, we had no long-term
variable-rate debt outstanding. At December 31, 2001, we had fixed-rate
convertible notes outstanding with a principal amount of $125.0 million which
bear interest at 4 3/4% per annum. A hypothetical 100 basis point change in
interest rates during the twelve months ended December 31, 2001 would have
resulted in approximately a $1.3 million change in pre-tax income.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
NUMBER
------
Independent Auditors' Reports............................... 38, 39
Consolidated Statements of Operations for the Years ended
December 31, 2001, 2000 and 1999.......................... 40
Consolidated Balance Sheets as of December 31, 2001 and
2000...................................................... 41
Consolidated Statements of Shareholders' Equity for the
Years ended December 31, 2001, 2000 and 1999.............. 42
Consolidated Statements of Cash Flows for the Years ended
December 31, 2001, 2000 and 1999.......................... 43
Notes to Consolidated Financial Statements.................. 44
37
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
PRG-Schultz International, Inc.:
We have audited the accompanying Consolidated Balance Sheets of PRG-Schultz
International, Inc. and subsidiaries (formerly The Profit Recovery Group
International, Inc.) as of December 31, 2001 and 2000, and the related
Consolidated Statements of Operations, Shareholders' Equity, and Cash Flows for
each of the years in the three-year period ended December 31, 2001. In
connection with our audits of the consolidated financial statements, we have
also audited the financial statement schedule as listed in Item 14(a)2. These
consolidated financial statements and financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements and financial statement
schedule based on our audits. We did not audit the consolidated financial
statements of PRG France, S.A. and subsidiaries, a wholly owned subsidiary, as
of December 31, 2000 and for each of the years in the two-year period ended
December 31, 2000. Those financial statements were audited by other auditors
whose report has been furnished to us, and our opinion, insofar as it relates to
the amounts included for PRG France, S.A. and subsidiaries is based solely on
the report of the other auditors.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits and the report of
the other auditors provide a reasonable basis for our opinion.
In our opinion, based on our audits and the report of the other auditors,
the consolidated financial statements referred to above present fairly, in all
material respects, the financial position of PRG-Schultz International, Inc. and
subsidiaries as of December 31, 2001 and 2000, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 2001, in conformity with accounting principles generally
accepted in the United States of America. Also in our opinion, the related
financial statement schedule, when considered in relation to the basic
consolidated financial statements taken as a whole, presents fairly, in all
material respects, the information set forth therein.
As discussed in Notes 2(b) and 1(d) to the consolidated financial
statements, the Company changed its method of revenue recognition in 2000 and
1999, respectively.
KPMG LLP
Atlanta, Georgia
February 22, 2002
38
INDEPENDENT AUDITORS' REPORT
Board of Directors and Shareholders of
PRG France, S.A.
We have audited the consolidated balance sheet of PRG France, S.A. and
subsidiaries as of December 31, 2000 and the related consolidated statements of
earnings, changes shareholders' equity and cash flows for each of the two years
in the period ended December 31, 2000. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the consolidated financial position of the Company and
its subsidiaries as of December 31, 2000, and the consolidated results of their
operations and their cash flows for each of the two years in the period ended
December 31, 2000, in conformity with accounting principles generally accepted
in the United States.
ERNST & YOUNG Audit
Any ANTOLA
Paris, France
March 9, 2001
39
PRG-SCHULTZ INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31,
---------------------------------------
2001 2000 1999
----------- ----------- -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Revenues.................................................... $259,264 $255,110 $246,378
Cost of revenues............................................ 141,442 139,430 132,115
Selling, general and administrative expenses (Note 17)...... 101,915 100,435 78,757
-------- -------- --------
Operating income.......................................... 15,907 15,245 35,506
Interest (expense), net..................................... (4,980) (5,270) (2,234)
-------- -------- --------
Earnings from continuing operations before income taxes,
discontinued operations, extraordinary item and
cumulative effect of accounting change.................. 10,927 9,975 33,272
Income taxes (Note 7)....................................... 4,808 4,389 13,642
-------- -------- --------
Earnings from continuing operations before discontinued
operations, extraordinary item and cumulative effect of
accounting change....................................... 6,119 5,586 19,630
Discontinued operations (Note 2):
Earnings (loss) from discontinued operations, net of
income taxes of $(1,732), $(10,217) and $6,424 in 2001,
2000 and 1999, respectively, including cumulative effect
of accounting change of $(26,145) in 2000............... (3,294) (44,714) 7,806
Loss on disposal from discontinued operations including
operating results for phase-out period, net of income
taxes of $(14,528)...................................... (84,955) -- --
-------- -------- --------
Earnings (loss) from discontinued operations.............. (88,249) (44,714) 7,806
-------- -------- --------
Earnings (loss) before extraordinary item and cumulative
effect of accounting change............................. (82,130) (39,128) 27,436
Extraordinary item, net of income taxes of $(1,021) -- (Note
5)........................................................ (1,581) -- --
-------- -------- --------
Earnings (loss) before cumulative effect of accounting
change.................................................. (83,711) (39,128) 27,436
Cumulative effect of accounting change (Note 1(d)).......... -- -- (29,195)
-------- -------- --------
Net loss........................................... $(83,711) $(39,128) $ (1,759)
======== ======== ========
Basic earnings (loss) per share (Note 16):
Earnings from continuing operations before discontinued
operations, extraordinary item and cumulative effect of
accounting change....................................... $ 0.13 $ 0.11 $ 0.41
Discontinued operations................................... (1.83) (0.91) 0.16
Extraordinary item........................................ (0.03) -- --
Cumulative effect of accounting change.................... -- -- (0.61)
-------- -------- --------
Net loss........................................... $ (1.73) $ (0.80) $ (0.04)
======== ======== ========
Diluted earnings (loss) per share (Note 16):
Earnings from continuing operations before discontinued
operations, extraordinary item and cumulative effect of
accounting change....................................... $ 0.12 $ 0.11 $ 0.40
Discontinued operations................................... (1.81) (0.90) 0.15
Extraordinary item........................................ (0.03) -- --
Cumulative effect of accounting change.................... -- -- (0.59)
-------- -------- --------
Net loss........................................... $ (1.72) $ (0.79) $ (0.04)
======== ======== ========
See accompanying Notes to Consolidated Financial Statements.
40
PRG-SCHULTZ INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
---------------------
2001 2000
--------- --------
(IN THOUSANDS, EXCEPT
SHARE AND PER SHARE
DATA)
ASSETS (NOTE 5)
Current assets:
Cash and cash equivalents................................. $ 28,488 $ 16,127
Receivables:
Contract receivables, less allowance for doubtful
accounts of $5,871 in 2001 and $2,782 in 2000.......... 48,374 48,029
Employee advances and miscellaneous receivables, less
allowance of $2,796 in 2001 and $1,166 in 2000......... 4,013 6,192
--------- --------
Total receivables................................... 52,387 54,221
--------- --------
Prepaid expenses and other current assets................. 2,073 2,117
Deferred income taxes (Note 7)............................ 23,357 10,099
Net assets of discontinued operations (Note 2)............ 35,840 173,769
--------- --------
Total current assets................................ 142,145 256,333
--------- --------
Property and equipment:
Computer and other equipment.............................. 44,321 47,642
Furniture and fixtures.................................... 3,318 3,501
Leasehold improvements.................................... 4,524 4,763
--------- --------
52,163 55,906
Less accumulated depreciation and amortization............ 31,921 30,546
--------- --------
Property and equipment, net......................... 20,242 25,360
--------- --------
Noncompete agreements, less accumulated amortization of
$7,523 in 2001 and $6,707 in 2000......................... 120 937
Deferred loan costs, less accumulated amortization of $-0-
in 2001 and $1,341 in 2000................................ 875 1,701
Goodwill, less accumulated amortization of $24,497 in 2001
and $16,812 in 2000....................................... 160,248 168,206
Deferred income taxes (Note 7).............................. 9,235 1,785
Other assets................................................ 8,594 602
--------- --------
$ 341,459 $454,924
========= ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses (Note 4)............ $ 21,709 $ 12,950
Accrued business acquisition consideration (Note 2)....... -- 7,567
Accrued payroll and related expenses...................... 26,465 27,508
--------- --------
Total current liabilities........................... 48,174 48,025
Long-term bank debt (Note 5)................................ -- 153,361
Convertible notes, net of unamortized discount of $3,834 in
2001 (Note 5)............................................. 121,166 --
Deferred compensation (Note 8).............................. 4,024 5,615
Other long-term liabilities................................. -- 394
--------- --------
Total liabilities................................... 173,364 207,395
--------- --------
Shareholders' equity (Notes 2, 3, 5, 8, 9, 11 and 12):
Preferred stock, no par value. Authorized 500,000 shares;
no shares issued or outstanding in 2001 and 2000........ -- --
Participating preferred stock, no par value. Authorized
500,000 shares; no shares issued or outstanding in 2001
and 2000................................................ -- --
Common stock, no par value; $.001 stated value per share.
Authorized 200,000,000 shares; issued 51,206,610 shares
in 2001 and 49,912,231 shares in 2000................... 51 50
Additional paid-in capital................................ 320,126 316,127
Accumulated deficit....................................... (123,746) (40,035)
Accumulated other comprehensive loss...................... (6,385) (5,864)
Treasury stock at cost, 2,435,990 shares in 2001 and
2000.................................................... (21,024) (21,024)
Unearned portion of restricted stock...................... (927) (1,725)
--------- --------
Total shareholders' equity.......................... 168,095 247,529
--------- --------
Commitments and contingencies (Notes 2, 3, 5, 6, 9 and 10)
$ 341,459 $454,924
========= ========
See accompanying Notes to Consolidated Financial Statements.
41
PRG-SCHULTZ INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
ACCUMULATED
OTHER
COMPREHENSIVE
RETAINED INCOME (LOSS) -- UNEARNED
COMMON STOCK ADDITIONAL EARNINGS FOREIGN CURRENCY PORTION OF
--------------- PAID-IN (ACCUMULATED TRANSLATION TREASURY RESTRICTED
SHARES AMOUNT CAPITAL DEFICIT) ADJUSTMENTS STOCK STOCK
------ ------ ---------- ------------ ----------------- -------- ----------
(IN THOUSANDS)
BALANCE AT DECEMBER 31, 1998.............. 42,248 $42 $143,157 $ 3,231 $(2,602) $ -- $ --
Reclassification of S Corporation earnings
of PRS................................... -- -- 1,766 (1,766) -- -- --
Comprehensive loss:
Net loss................................. -- -- -- (1,759) -- -- --
Other comprehensive loss -- foreign
currency translation adjustments:
Continuing operations.................. -- -- -- -- (4,025) -- --
Discontinued operations................ -- -- -- -- -- -- --
Comprehensive loss....................... -- -- -- -- -- -- --
Issuances of common stock:
Issuances under employee stock option
plans (including tax benefits of
$3,551)................................ 421 -- 7,599 -- -- -- --
Other common stock issuances............. 5,657 6 118,504 -- -- -- --
Distributions to former Sub S
shareholders............................. -- -- -- (613) -- -- --
Conversion of shareholder loans........... 1,037 1 30,391 -- -- -- --
Transaction costs paid directly by
shareholders............................. -- -- 1,070 -- -- -- --
Fractional shares paid in cash............ -- -- (32) -- -- -- --
------ --- -------- --------- ------- -------- -------
BALANCE AT DECEMBER 31, 1999.............. 49,363 49 302,455 (907) (6,627) -- --
Comprehensive loss:
Net loss................................. -- -- -- (39,128) -- -- --
Other comprehensive income
(loss) -- foreign currency translation
adjustments:
Continuing operations.................. -- -- -- -- 763 -- --
Discontinued operations................ -- -- -- -- -- -- --
Comprehensive loss....................... -- -- -- -- -- -- --
Issuances of common stock:
Issuances under employee stock option
plans (including tax benefits of
$2,165)................................ 241 1 7,770 -- -- -- (1,725)
Other common stock issuances............. 308 -- 5,902 -- -- -- --
Treasury shares repurchased (2,436
shares).................................. -- -- -- -- -- (21,024) --
------ --- -------- --------- ------- -------- -------
BALANCE AT DECEMBER 31, 2000.............. 49,912 50 316,127 (40,035) (5,864) (21,024) (1,725)
Comprehensive loss:
Net loss................................. -- -- -- (83,711) -- -- --
Other comprehensive loss -- foreign
currency translation adjustments:
Continuing operations.................. -- -- -- -- (521) -- --
Discontinued operations................ -- -- -- -- -- -- --
Comprehensive loss....................... -- -- -- -- -- -- --
Issuances of common stock:
Issuances under employee stock option
plans (including tax benefits of
$694).................................. 380 -- 3,500 -- -- --
Other common stock issuances............. 915 1 499 -- -- -- 798
------ --- -------- --------- ------- -------- -------
BALANCE AT DECEMBER 31, 2001.............. 51,207 $51 $320,126 $(123,746) $(6,385) $(21,024) $ (927)
====== === ======== ========= ======= ======== =======
COMPREHENSIVE TOTAL
INCOME SHAREHOLDERS'
(LOSS) EQUITY
------------- -------------
(IN THOUSANDS)
BALANCE AT DECEMBER 31, 1998.............. $ -- $143,828
Reclassification of S Corporation earnings
of PRS................................... -- --
Comprehensive loss:
Net loss................................. (1,759) (1,759)
Other comprehensive loss -- foreign
currency translation adjustments:
Continuing operations.................. (4,025) (4,025)
Discontinued operations................ (2,747) --
--------
Comprehensive loss....................... (8,531) --
Issuances of common stock:
Issuances under employee stock option
plans (including tax benefits of
$3,551)................................ -- 7,599
Other common stock issuances............. -- 118,510
Distributions to former Sub S
shareholders............................. -- (613)
Conversion of shareholder loans........... -- 30,392
Transaction costs paid directly by
shareholders............................. -- 1,070
Fractional shares paid in cash............ -- (32)
-------- --------
BALANCE AT DECEMBER 31, 1999.............. -- 294,970
Comprehensive loss:
Net loss................................. (39,128) (39,128)
Other comprehensive income
(loss) -- foreign currency translation
adjustments:
Continuing operations.................. 763 763
Discontinued operations................ (5,903) --
--------
Comprehensive loss....................... (44,268) --
Issuances of common stock:
Issuances under employee stock option
plans (including tax benefits of
$2,165)................................ -- 6,046
Other common stock issuances............. -- 5,902
Treasury shares repurchased (2,436
shares).................................. -- (21,024)
-------- --------
BALANCE AT DECEMBER 31, 2000.............. -- 247,529
Comprehensive loss:
Net loss................................. (83,711) (83,711)
Other comprehensive loss -- foreign
currency translation adjustments:
Continuing operations.................. (521) (521)
Discontinued operations................ -- --
--------
Comprehensive loss....................... (84,232) --
Issuances of common stock:
Issuances under employee stock option
plans (including tax benefits of
$694).................................. -- 3,500
Other common stock issuances............. -- 1,298
-------- --------
BALANCE AT DECEMBER 31, 2001.............. $ -- $168,095
======== ========
See accompanying Notes to Consolidated Financial Statements.
42
PRG-SCHULTZ INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31
-------------------------------
2001 2000 1999
--------- -------- --------
(IN THOUSANDS)
Cash flows from operating activities:
Net loss.................................................. $ (83,711) $(39,128) $ (1,759)
Extraordinary item........................................ 1,581 -- --
Cumulative effect of accounting change.................... -- -- 29,195
(Earnings) loss from discontinued operations.............. 88,249 44,714 (7,806)
--------- -------- --------
Earnings from continuing operations....................... 6,119 5,586 19,630
Adjustments to reconcile net loss to net cash provided by
operating activities:
Depreciation and amortization........................... 19,897 22,203 17,564
Restricted stock compensation expense................... 240 247 --
Interest accrued on shareholder loans................... -- -- 860
Deferred compensation expense........................... (1,591) 950 783
Deferred income taxes, net of cumulative effect of
accounting change..................................... (3,120) (4,475) 661
Changes in assets and liabilities, net of effects of
acquisitions:
Receivables............................................. 1,226 (4,658) (36,403)
Prepaid expenses and other current assets............... 131 (828) (800)
Other assets............................................ (147) (127) 927
Accounts payable and accrued expenses................... 1,818 7,497 (2,893)
Accrued payroll and related expenses.................... (952) 4,729 2,521
Other long-term liabilities............................. (715) 14 20
--------- -------- --------
Net cash provided by operating activities.......... 22,906 31,138 2,870
--------- -------- --------
Cash flows from investing activities:
Purchases of property and equipment....................... (5,758) (8,169) (17,567)
Proceeds from sales of certain discontinued operations.... 57,834 -- --
Acquisitions of businesses (net of cash acquired)......... (7,279) (40,000) (33,343)
--------- -------- --------
Net cash provided by (used in) investing
activities....................................... 44,797 (48,169) (50,910)
--------- -------- --------
Cash flows from financing activities:
Repayments of long-term bank debt......................... (153,361) -- (93,732)
Proceeds from issuance of long-term bank debt............. -- 62,206 75,399
Proceeds from issuance of convertible notes, net of
issuance costs.......................................... 121,089 -- --
Proceeds from loans from shareholders..................... -- -- 2,061
Acquisition costs paid directly by former Meridian and PRS
shareholders............................................ -- -- 1,070
Payments for deferred loan costs.......................... (2,817) (650) (249)
Net proceeds from common stock issuances.................. 4,026 5,784 102,575
Distributions to former Sub S shareholders................ -- -- (613)
Purchase of treasury shares............................... -- (21,024) --
--------- -------- --------
Net cash provided by (used in) financing
activities....................................... (31,063) 46,316 86,511
--------- -------- --------
Net cash used in discontinued operations.................... (24,352) (26,607) (44,106)
Effect of exchange rates on cash and cash equivalents....... 73 (701) (231)
--------- -------- --------
Net change in cash and cash equivalents............ 12,361 1,977 (5,866)
Cash and cash equivalents at beginning of year.............. 16,127 14,150 20,016
--------- -------- --------
Cash and cash equivalents at end of year.................... $ 28,488 $ 16,127 $ 14,150
========= ======== ========
Supplemental disclosure of cash flow information:
Cash paid during the year for interest.................... $ 4,217 $ 3,410 $ 1,342
========= ======== ========
Cash paid (received) during the year for income taxes, net
of refunds received..................................... $ (404) $ 10,673 $ 12,004
========= ======== ========
Supplemental disclosure of noncash investing and financing
activities:
In conjunction with acquisitions of businesses, the
Company assumed liabilities as follows:
Fair value of assets acquired............................. $ -- $ 40,000 $ 33,343
Cash paid for the acquisitions (net of cash acquired)..... -- (40,000) (33,343)
Fair value of shares issued for acquisitions.............. -- -- --
--------- -------- --------
Liabilities assumed..................................... $ -- $ -- $ --
========= ======== ========
Shareholder loans contributed to capital by former equity
shareholders of Meridian.................................. $ -- $ -- $ 30,391
========= ======== ========
See accompanying Notes to Consolidated Financial Statements.
43
PRG-SCHULTZ INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001, 2000 AND 1999
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(A) DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
Description of Business
The principal business of PRG-Schultz International, Inc. and subsidiaries
(the "Company") is providing 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 pharmaceuticals, consumer electronics, chemicals and
aerospace and medical products;
- wholesale distributors of computer components, food products and
pharmaceuticals; and
- healthcare providers such as hospitals and health maintenance
organizations.
The Company currently services clients in over 40 different countries.
Basis of Presentation
As indicated in Note (1)(d), the Company made the decision in the second
quarter of 1999, to recognize revenue on all of its then-existing operations
when it invoices clients for its fee, retroactive to January 1, 1999.
As indicated in Note 11, the Company acquired PRS International, Ltd.
("PRS") in August 1999. This acquisition was accounted for as a
pooling-of-interests. Accordingly, the Company's previously reported
consolidated financial statements for all prior periods have been retroactively
restated, as required under accounting principles generally accepted in the
United States of America, to include the accounts of PRS.
On July 20, 1999, the Company declared a 3-for-2 stock split effected in
the form of a stock dividend for shareholders of record on August 2, 1999,
payable on August 17, 1999. All share and per share amounts have been
retroactively restated to give effect to the aforementioned stock split.
Certain reclassifications have been made to 2000 and 1999 amounts to
conform to the presentation in 2001.
(B) PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the financial statements of
the Company and its wholly and majority owned subsidiaries. All significant
intercompany balances and transactions have been eliminated in consolidation.
Management of the Company has made a number of estimates and assumptions
relating to the reporting of assets and liabilities and the disclosure of
contingent assets and liabilities to prepare these financial statements in
conformity with accounting principles generally accepted in the United States of
America. Actual results could differ from those estimates.
(C) DISCONTINUED OPERATIONS
Financial statements for all years presented have been reclassified to
separately report results of discontinued operations from results of continuing
operations (see Note 2). Disclosures included herein pertain to the Company's
continuing operations unless otherwise noted.
44
PRG-SCHULTZ INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(D) REVENUE RECOGNITION
Due to the Company's continuing and substantial expansion beyond its
historical client base and original service offerings, as well as the
administrative desirability of standardizing revenue recognition practices, the
Company made the decision at the conclusion of the second quarter of 1999 to
recognize revenue on all of its then-existing operations when it invoices
clients for its fee. Accounting principles generally accepted in the United
States of America required that this change be implemented retroactively to
January 1, 1999. The Company had previously recognized revenue from services
provided to its historical client base (consisting of retailers, wholesale
distributors and governmental agencies) at the time overpayment claims were
presented to and approved by its clients. In effecting this change, the Company
has reported, as of January 1, 1999, a non-cash, after-tax charge of $29.2
million as the cumulative effect of a change in an accounting principle. The
cumulative effect of the accounting change was derived as follows (in
thousands):
Unbilled contract receivables at December 31, 1998, as
adjusted.................................................. $ 69,432
Less: auditor payroll accrual at December 31, 1998
associated with unbilled contract receivables............. (21,564)
--------
Subtotal............................................... 47,868
Less: related income tax effect at 39.0%.................... (18,673)
--------
Cumulative effect of accounting change.................... $ 29,195
========
During years ended December 31, 1998 and prior, the Company recognized
revenues on services provided to its historical client base at the time
overpayment claims were presented to and approved by its clients, as adjusted
for estimated uncollectible claims. Estimated uncollectible claims were
initially established, and subsequently adjusted, for each individual client
based upon historical collection rates, types of claims identified, current
industry conditions, and other factors which, in the opinion of management,
deserved recognition. Under this submitted claims basis of revenue recognition,
as applied to the Company's historical client base, the Company recorded
revenues at estimated net realizable value without reserves. Accordingly,
adjustments to uncollectible claim estimates were directly charged or credited
to earnings, as appropriate.
The Company's revenue recognition policy was revised, effective January 1,
1999, as follows:
The Company's revenues are based on specific contracts with its clients.
Such contracts generally specify (a) time periods covered by the audit, (b)
nature and extent of audit services to be provided by the Company, (c) client's
duties in assisting and cooperating with the Company, and (d) fees payable to
the Company generally expressed as a specified percentage of the amounts
recovered by the client resulting from liability overpayment claims identified.
In addition to contractual provisions, most clients also establish specific
procedural guidelines which the Company must satisfy prior to submitting claims
for client approval. These guidelines are unique to each client and impose
specific requirements on the Company such as adherence to vendor interaction
protocols, provision of advance written notification to vendors of forthcoming
claims, securing written claim validity concurrence from designated client
personnel and, in limited cases, securing written claim validity concurrence
from the involved vendors. Approved claims are processed by clients and
generally taken as credits against outstanding payables or future purchases from
the vendors involved. The Company recognizes revenue on the invoice basis.
Clients are invoiced for a contractually specified percentage of amounts
recovered when it has been determined that they have received economic value
(generally through credits taken against existing accounts payable due to the
involved vendors or refund checks received from those vendors), and when the
following criteria are met: (a) persuasive evidence of an arrangement exists;
(b) services have been rendered; (c) the fee billed to the client is fixed or
determinable and (d) collectibility is reasonably assured.
45
PRG-SCHULTZ INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(E) CASH EQUIVALENTS
Cash equivalents at December 31, 2001 and 2000 included $21.1 million and
$0.9 million, respectively, of temporary investments held at U.S. banks. At
December 31, 2001, certain of the Company's subsidiaries held $0.4 million in
temporary investments at banks in the United Kingdom.
From time to time, the Company invests excess cash in repurchase agreements
with Bank of America, N.A., which are fully collateralized by United States of
America Treasury Securities in the possession of such bank. The Company does not
intend to take possession of collateral securities on future repurchase
agreement transactions conducted with banking institutions of national standing.
The Company does insist, however, that all such agreements provide for full
collateralization using obligations of the United States of America having a
current market value equivalent to or exceeding the repurchase agreement amount.
No such repurchase agreements were outstanding at December 31, 2001 or 2000.
(F) PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is provided using
the straight-line method over the estimated useful lives of the assets (3 years
for computer and other equipment and 5 years for furniture and fixtures).
Leasehold improvements are amortized using the straight-line method over the
shorter of the lease term or estimated life of the asset. Internally developed
software is amortized over expected useful lives ranging from three to seven
years.
(G) DIRECT EXPENSES
Direct expenses incurred during the course of accounts payable audits and
other recovery audit services are expensed as incurred.
(H) INTERNAL USE COMPUTER SOFTWARE
Internal use computer software is accounted for in accordance with
Statement of Position 98-1, "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use" ("SOP 98-1"). SOP 98-1 provides guidance
on a variety of issues relating to costs of internal use software including
which of these costs should be capitalized and which should be expensed as
incurred.
(I) INTANGIBLES
Goodwill. Goodwill represents the excess of the purchase price over the
estimated fair market value of net assets of acquired businesses. The Company
has historically evaluated the unique relevant aspects of each individual
acquisition when establishing an appropriate goodwill amortization period, and
has amortized all goodwill amounts on a straight-line basis. Goodwill recorded
as of December 31, 2001 was in the process of being amortized over periods
ranging from seven to 25 years. The Company has historically assessed the
recoverability of this intangible asset by determining whether the amortization
of the goodwill balance over its remaining life can be recovered through
undiscounted future operating cash flows of the acquired operation. This amount
of goodwill impairment, if any, has been measured based on projected discounted
future operating cash flows using a discount rate reflecting the Company's
average cost of funds. The assessment of the recoverability of goodwill is
impacted if estimated future operating cash flows are not achieved. Effective
January 1, 2002, the Company became subject to the provisions of SFAS No. 142,
"Goodwill and Other Intangible Assets" as discussed in Note 1(o) below.
Noncompete Agreements. Noncompete agreements are recorded at cost and are
amortized on a straight-line basis over the terms of the respective agreements.
46
PRG-SCHULTZ INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Deferred Loan Costs. Deferred loan costs are recorded at cost and are
amortized on a straight-line basis over the terms of the respective loan
agreements.
(J) INCOME TAXES
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.
(K) FOREIGN CURRENCY TRANSLATION
The local currency has been used as the functional currency in the
countries in which the Company conducts business outside of the United States.
The assets and liabilities denominated in foreign currency are translated into
U.S. dollars at the current rates of exchange at the balance sheet date and
revenues and expenses are translated at the average monthly exchange rates. The
translation gains and losses are included as a separate component of
shareholders' equity. Translation gains and losses included in results of
operations are not material.
(L) EARNINGS PER SHARE
The Company applies the provisions of Statement of Financial Accounting
Standards ("SFAS") No. 128, "Earnings per Share." Basic earnings per share is
computed by dividing net earnings by the weighted average number of shares of
common stock outstanding during the year. Diluted earnings per share is computed
by dividing net earnings by the sum of (1) the weighted average number of shares
of common stock outstanding during the period, (2) the dilutive effect of the
assumed exercise of stock options using the treasury stock method, and (3)
dilutive effect of other potentially dilutive securities including the Company's
convertible subordinated note obligations.
(M) EMPLOYEE STOCK OPTIONS
The Company accounts for its stock option plan in accordance with the
provisions of Accounting Principles Board ("APB") Opinion No. 25, "Accounting
for Stock Issued to Employees," and related interpretations. As such,
compensation expense would be measured on the date of grant only if the current
market price of the underlying stock exceeded the exercise price. The Company
has elected to continue to apply the provisions of APB Opinion No. 25 and
provide pro forma net earnings and pro forma earnings per share disclosures for
employee stock option grants made in 1995 and future years as if the
fair-value-based method defined in SFAS No. 123, "Accounting for Stock-Based
Compensation," had been applied. The options granted generally vest and become
fully exercisable on a ratable basis over four or five years of continued
employment. The Company recognizes compensation expense on the straight line
basis for compensatory stock awards with ratable vesting.
(N) COMPREHENSIVE INCOME
The Company applies the provisions of SFAS No. 130, "Reporting
Comprehensive Income." This statement established rules for the reporting of
comprehensive income and its components. Comprehensive income for the Company
consists of net earnings (loss) and foreign currency translation adjustments,
and is presented in the accompanying Consolidated Statements of Shareholders'
Equity.
47
PRG-SCHULTZ INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(O) NEW ACCOUNTING STANDARDS
In July 2001, the FASB issued SFAS No. 141, "Business Combinations", and
SFAS No. 142, "Goodwill and Other Intangible Assets". SFAS No. 141 requires that
the purchase method of accounting be used for all business combinations
initiated after June 30, 2001 as well as all business combinations initiated
prior to June 30, 2001 and completed after June 30, 2001. SFAS No. 141 also
specifies criteria that intangible assets acquired in a purchase method business
combination must meet in order to be recognized and reported apart from
goodwill, noting that any purchase price allocable to an assembled workforce may
not be accounted for separately. SFAS No. 142 requires that goodwill as well as
intangible assets with indefinite useful lives no longer be amortized, but
instead these assets must be tested for impairment at least annually in
accordance with the guidance set forth in SFAS No. 142. SFAS No. 142 also
requires that intangible assets with definite useful lives be amortized over
their respective estimated useful lives to their estimated residual values, and
reviewed for impairment in accordance with SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of".
The Company adopted the provisions of SFAS No. 141 in July 2001 and adopted
SFAS No. 142 effective January 1, 2002. Furthermore, any goodwill and any
intangible assets determined to have an indefinite useful life that are acquired
in a business combination completed after June 30, 2001 will not be amortized,
but will continue to be evaluated for impairment in accordance with the
appropriate pre-SFAS No. 142 accounting literature.
(2) DISCONTINUED OPERATIONS
In March 2001, the Company formalized a strategic realignment initiative
designed to enhance the Company's financial position and clarify its investment
and operating strategy by focusing primarily on its core Accounts Payable
business. Under this strategic realignment initiative, the Company announced its
intent to divest the following non-core businesses: Meridian VAT Reclaim
("Meridian") within the former Taxation Services segment, the Logistics
Management Services segment, the Communications Services segment and the Ship
and Debit ("Ship & Debit") division within the Accounts Payable Services
segment. The Company disposed of its Logistics Management Services segment in
October 2001. Additionally, in December 2001, the Company disposed of its French
Taxation Services business which had been part of continuing operations until
time of disposal.
The non-core businesses that were authorized to be divested are comprised
of various acquisitions completed by the Company during the periods 1997 through
2000. The acquisition of Meridian was accounted for as a pooling-of-interests,
in which the Company issued 6,114,375 unregistered shares of the Company's
common stock. The other acquisitions which comprise the remainder of non-core
businesses that were authorized to be divested and the French Taxation Services
business were accounted for as purchases with collective consideration paid of
$116.2 million in cash (including accrued business acquisition consideration at
December 31, 2000) and 4,884,106 restricted, unregistered shares of the
Company's common stock.
The Company's Consolidated Financial Statements have been reclassified to
reflect Meridian, Logistics Management Services, Communications Services, Ship &
Debit and the French Taxation Services business as discontinued operations for
all periods presented. Operating results of the discontinued operations are
summarized below. The amounts exclude general corporate overhead previously
allocated to Meridian, Logistics Management Services, Communications Services
and French Taxation Services for segment reporting purposes. The amounts include
interest on debt and an allocation of the interest on the Company's general
credit facility. Interest allocated to discontinued operations was $5.6 million,
$4.8 million and $3.3 million in 2001, 2000 and 1999, respectively.
48
PRG-SCHULTZ INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Summarized financial information for the discontinued operations is as
follows:
YEARS ENDED DECEMBER 31,
------------------------------
2001 2000 1999
-------- -------- --------
(IN THOUSANDS)
Revenues............................................. $106,239 $122,829 $103,269
DECEMBER 31,
-------------------
2001 2000
-------- --------
(IN THOUSANDS)
Current assets....................................... $ 21,520 $ 74,574
Total assets......................................... 75,504 230,622
Current liabilities.................................. 39,664 62,672
Total liabilities.................................... 39,664 65,226
Accumulated other comprehensive loss................. -- (8,373)
Net assets of discontinued operations................ 35,840 173,769
As required under accounting principles generally accepted in the United
States of America, the Company has continually updated its assessment of the
estimated gain (loss) on disposal from discontinued operations including
operating results for the phase-out period, net of tax. Due to the negative
impact of prevailing economic conditions and other factors on the anticipated
collective net proceeds from selling the discontinued operations, the Company
concluded during the third quarter of 2001, that there would be an estimated net
loss of approximately $31.0 million upon disposal of the discontinued
operations, which was recorded as an after-tax charge during that quarter. The
$31.0 million after-tax charge is comprised of an adjustment to the net proceeds
anticipated to be received upon the disposal of the discontinued operations, net
losses from discontinued operations for the year ended December 31, 2001 and
estimated net earnings (losses) from discontinued operations for the three
months ending March 31, 2002. The $31.0 million after-tax charge includes the
realized loss on the sale of Logistics (see Note 2(c)) and the loss on the
closing of a unit within the Communications Services operations (see Note 2(e)).
Additionally, in December 2001, the Company recognized a loss of $54.0 million
on the sale of the French Taxation Services business (see Note 2(d)).
(A) CHARGES TAKEN IN DISCONTINUED OPERATIONS IN 2000
During the fourth quarter of 2000, the Company recognized approximately
$32.7 million of nonrecurring charges (including goodwill impairment charges)
related to discontinued operations.
The Company determined that the net book value of goodwill recorded for
certain of the discontinued operations exceeded the projected undiscounted
future operating cash flows of those business units. Accordingly, the Company
recognized a goodwill impairment charge of approximately $28.7 million to adjust
the net book value of the goodwill to the sum of the projected discounted future
operating cash flows.
Additionally, during the fourth quarter of 2000, the Company recognized
charges of approximately $2.4 million related to the write-off of certain
accounts receivable balances that were determined to be uncollectible, $0.9
million for employee termination benefits, $0.3 million related to the
forgiveness of certain employee advances, $0.2 million in legal expenses and
$0.2 million in exit costs related to certain facilities.
(B) REVENUE RECOGNITION -- CONVERSION TO CASH BASIS FOR CERTAIN DISCONTINUED
OPERATIONS IN 2000
In consideration of guidance issued by the Securities and Exchange
Commission under Staff Accounting Bulletin No. 101, "Revenue Recognition in
Financial Statements" ("SAB 101"), the Company changed its method of accounting
for revenues for Meridian retroactively to January 1, 2000. Based upon guidance
in
49
PRG-SCHULTZ INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
SAB 101, the Company defers recognition of revenues to the accounting period
when cash received from the foreign governments reimbursing value-added tax
claims is transferred to Meridian's client. In 1999 and prior periods, under the
prior method of accounting, revenues were recognized at the time refund claims
containing all required documentation were filed with appropriate governmental
agencies in those instances where historical refund disallowance rates could be
accurately estimated. The Company has recorded a non-cash, after-tax charge as
of January 1, 2000, of $24.1 million related to Meridian's cumulative effect of
a change in an accounting principle as part of the loss from discontinued
operations.
Additionally, in consideration of the guidance under SAB 101, the Company
changed its method of accounting for revenues for Ship & Debit retroactively to
January 1, 2000. Based upon this guidance, the Company defers recognition of
revenues to the accounting period when cash is received by the client as a
result of overpayment claims identified by Ship & Debit. In 1999 and prior
periods, under the prior method of accounting, revenues were recognized at the
time the Company invoiced clients for its fee. The Company has recorded a
non-cash, after-tax charge as of January 1, 2000 of $2.0 million related to Ship
& Debit's cumulative effect of a change in accounting principle as part of the
loss from discontinued operations.
(C) SALE OF DISCONTINUED OPERATIONS -- LOGISTICS IN 2001
On October 30, 2001, the Company consummated the sale of its Logistics
Management Services business to Platinum Equity, a firm specializing in
acquiring and operating technology organizations and technology-enabled service
companies worldwide. The transaction yielded initial gross sale proceeds, as
adjusted, of approximately $9.5 million with up to an additional $3.0 million
payable in the form of a revenue-based royalty over the next four years. This
transaction resulted in an estimated loss on the sale of approximately $19.1
million which is included as part of the $31.0 million after-tax charge recorded
by the Company during the third quarter of 2001.
(D) SALE OF DISCONTINUED OPERATIONS -- FRENCH TAXATION SERVICES IN 2001
On December 14, 2001, the Company consummated the sale of its French
Taxation Services business, as well as certain notes payable due to the Company,
to Chequers Capital, a Paris-based private equity firm. The transaction yielded
gross sale proceeds of approximately $48.3 million. This transaction resulted in
a loss on sale of approximately $54.0 million.
(E) CLOSING OF A UNIT WITHIN COMMUNICATIONS SERVICES BUSINESS IN 2001
During the third quarter of 2001, the Company concluded that one of the
units within the Communications Services business was no longer a viable
operation. As such, the Company recognized a loss of approximately $5.1 million
relative to this unit which was included as part of the $31.0 million after tax
charge recorded by the Company during that quarter.
(F) CERTAIN DISCONTINUED OPERATIONS SUBSEQUENTLY RETAINED IN 2002
Meridian, the Communications Services business, and the Ship & Debit
business were originally offered for sale in the first quarter of 2001. The
Company has concluded that the current negative market conditions are not
conducive to receiving terms acceptable to the Company for these businesses. As
such, on January 24, 2002, the Company's Board of Directors approved a proposal
to retain these three remaining discontinued operations. As a result, beginning
in the first quarter of 2002, the financial results of these three businesses,
Meridian, the Communications Services business, and the Ship & Debit business
will be classified as part of the Company's continuing operations.
50
PRG-SCHULTZ INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Selected proforma unaudited consolidated information had these discontinued
operations been classified as a component of continuing operations is as
follows:
YEARS ENDED DECEMBER 31,
--------------------------------------
2001 2000 1999
---------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Revenues........................................... $314,025 $302,080 $287,345
Operating income................................... 17,206 18,322 35,274
(3) RELATED PARTY TRANSACTIONS
Financial advisory and management services historically have been provided
to the Company by two directors who are also shareholders of the Company. Such
services by directors aggregated $69,000 in 2001, $39,000 in 2000, and $64,000
in 1999. The Company will continue to utilize the services provided by one
director, and, as such, has agreed to pay that director a minimum of $72,000 in
2002 for financial advisory and management services.
As indicated in Note 2, the Company acquired Meridian in August 1999 in a
transaction accounted for as a pooling-of-interests. Accordingly, the Company's
previously reported consolidated financial statements for all periods presented
(which are now included in discontinued operations) have been retroactively
restated, as required under accounting principles generally accepted in the
United States of America, to include the accounts of Meridian. Long-term loans
due to Meridian's two principal shareholders plus additional borrowings in 1999
were converted into equity at their estimated fair value during August 1999
concurrent with completion of the merger.
(4) ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses at December 31, 2001 and 2000 include
the following:
DECEMBER 31,
-----------------
2001 2000
------- -------
(IN THOUSANDS)
Income taxes payable........................................ $ 5,119 $ --
Insurance payables.......................................... 2,631 2,128
Accrued disposition costs................................... 3,465 --
Other accrued expenses...................................... 10,494 10,822
------- -------
Accounts payable and accrued expenses.................. $21,709 $12,950
======= =======
(5) LONG-TERM BANK DEBT AND CONVERTIBLE NOTES
(A) LONG-TERM BANK DEBT
At December 31, 2000, the Company maintained a $200.0 million senior bank
credit facility with interest tied to either the prime rate or LIBOR at the
Company's option. On December 31, 2001, the Company retired the then-existing
$200.0 million senior bank credit facility and replaced it with a three-year,
$75.0 million senior bank credit facility. $55.0 million of the new facility has
been syndicated between three banking institutions led by Bank of America, N.A.
as agent for the group. The Company continues to work with Bank of America to
syndicate the remaining $20.0 million of the credit facility. If syndication can
not be achieved on the remaining $20.0 million based on the terms and conditions
of the current agreement, the terms and potentially the aggregate credit
capacity of the facility may be modified to complete syndication.
51
PRG-SCHULTZ INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Borrowings under the new $75.0 million senior bank credit facility are
subject to limitations based upon the Company's eligible accounts receivable.
The Company is not required to make principal payments under the credit facility
until its maturity on December 31, 2004 unless the Company violates its debt
covenants or unless other stipulated events, as defined in the credit facility
agreement, occur including, but not limited to, the Company's outstanding
facility borrowings exceeding the prescribed accounts receivable borrowing base.
The credit facility is secured by substantially all assets of the Company and
interest on borrowings is tied to either the prime rate or LIBOR at the
Company's option. The credit facility requires a fee for committed but unused
credit capacity of .50% per annum. The credit facility contains customary
covenants, including financial ratios. At December 31, 2001, the Company was in
compliance with all such covenants. At December 31, 2001, there were no
borrowings outstanding under the new $75.0 million senior bank credit facility.
At December 31, 2000, the Company had principal outstanding under the
then-existing $200.0 million senior bank credit facility of $153.4 million with
a weighted average interest rate of 7.45%.
An extraordinary after-tax loss of $1.6 million was incurred as a result of
the early termination of the $200.0 million senior credit facility on December
31, 2001, consisting of the write-off of $2.6 million in unamortized deferred
loan costs, net of a tax benefit of $1.0 million.
(B) CONVERTIBLE NOTES
On November 26, 2001, the Company completed a $95.0 million offering of its
4 3/4% convertible subordinated notes due 2006. The Company issued an additional
$15.0 million of the notes on December 3, 2001, and on December 4, 2001, the
initial purchasers of the notes issued on November 26, 2001 purchased an
additional $15.0 million of the notes to cover over allotments, bringing the
aggregate amount issued to $125.0 million. The Company received net proceeds
from the offering of approximately $121.1 million. The proceeds of the notes
were used to pay down the Company's outstanding balance under its then-existing
$200.0 million senior bank credit facility.
The notes are convertible into the Company's common stock at a conversion
price of $7.74 per share which is equal to a conversion rate of 129.1990 shares
per $1,000 principal amount of notes, subject to adjustment. The Company may
redeem some or all of the notes at any time on or after November 26, 2004 at a
redemption price of $1,000 per $1,000 principal amount of notes, plus accrued
and unpaid interest, if prior to the redemption date the closing price of the
Company's common stock has exceeded 140% of the then conversion price for at
least 20 trading days within a period of 30 consecutive days ending on the
trading date before the date of mailing of the optional redemption notice.
At December 31, 2001, the Company had convertible notes outstanding of
$121.2 million, net of unamortized discount of $3.8 million.
(C) STANDBY LETTER OF CREDIT
On November 21, 2001, the Company entered into a Standby Letter of Credit
("Letter of Credit") with Bank of America, N.A. in the face amount of 2.3
million EUR. On December 31, 2001, the Letter of Credit was amended to increase
the face amount to 3.0 million EUR. The current rate of the Letter of Credit was
2.75% at December 31, 2001. There were no borrowings outstanding under the
Letter of Credit at December 31, 2001.
(6) LEASE COMMITMENTS
The Company is committed under noncancelable operating lease arrangements
for facilities and equipment. Rent expense for 2001, 2000, and 1999 was $6.5
million, $6.7 million, and $5.3 million,
52
PRG-SCHULTZ INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
respectively. The future minimum annual lease payments under these leases by
year are summarized as follows (in thousands):
YEAR ENDING DECEMBER 31,
------------------------
2002................................................. $ 6,186
2003................................................. 1,965
2004................................................. 1,254
2005................................................. 762
2006................................................. 3
Thereafter........................................... --
-------
$10,170
=======
In February 2002, the Company entered into a lease to relocate the
Company's principal executive offices. This lease is for approximately 120,000
square feet of office space in Atlanta, Georgia and expires in 2015. In
conjunction with the planned relocation, the Company anticipates incurring
approximately $5.0 million of additional costs in 2002, the majority of which
will be related to future payment obligations for unexpired lease commitments on
the Company's present executive offices. From 2003 through 2015, the Company
will incur aggregate minimum lease expense for the new executive offices of
approximately $38.3 million, or approximately $3.2 million per year. This lease
expense is in addition to the lease commitments set forth in the preceding table
in this Note 6.
(7) INCOME TAXES
Total income taxes for the years ended December 31, 2001, 2000 and 1999
were allocated as follows (in thousands):
2001 2000 1999
-------- -------- --------
Earnings from continuing operations.................. $ 4,808 $ 4,389 $ 13,642
Earnings (loss) from discontinued operations,
including accounting change of $(1,268) in 2000.... (1,732) (10,217) 6,424
Loss on disposal from discontinued operations
including operating results for phase-out period... (14,528) -- --
Extraordinary item................................... (1,021) -- --
Cumulative effect of accounting change............... -- -- (18,673)
Shareholders' equity, for compensation expense for
tax purposes in excess of financial purposes....... (694) (2,213) (3,551)
-------- -------- --------
$(13,167) $ (8,041) $ (2,158)
======== ======== ========
Income taxes have been provided in accordance with SFAS No. 109,
"Accounting for Income Taxes". Earnings before income taxes, discontinued
operations, extraordinary item and cumulative effect of accounting change the
years ended December 31, 2001, 2000 and 1999 relate to the following
jurisdictions (in thousands):
2001 2000 1999
------- ------ -------
United States............................................ $11,412 $5,182 $31,873
Foreign.................................................. (485) 4,793 1,399
------- ------ -------
$10,927 $9,975 $33,272
======= ====== =======
53
PRG-SCHULTZ INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The provision for income taxes attributable to earnings from continuing
operations for the years ended December 31, 2001, 2000 and 1999 consists of the
following (in thousands):
2001 2000 1999
------- ------- -------
Current:
Federal............................................... $ 8,246 $ 5,841 $10,871
State................................................. 55 275 1,059
Foreign............................................... 2,787 2,926 2,525
------- ------- -------
11,088 9,042 14,455
------- ------- -------
Deferred:
Federal............................................... (5,764) (3,489) (80)
State................................................. (585) (613) (222)
Foreign............................................... 69 (551) (511)
------- ------- -------
(6,280) (4,653) (813)
------- ------- -------
Total......................................... $ 4,808 $ 4,389 $13,642
======= ======= =======
The following table summarizes the significant differences between the U.S.
federal statutory tax rate and the Company's effective tax rate for earnings
from continuing operations:
2001 2000 1999
---- ---- ----
Statutory federal income tax rate........................... 35% 35% 35%
Foreign loss providing no tax benefit....................... 5 3 2
State income taxes, net of federal benefit.................. (8) (4) 2
Nondeductible goodwill...................................... 6 5 1
Other, net.................................................. 6 5 1
-- -- --
44% 44% 41%
== == ==
54
PRG-SCHULTZ INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A summary of the components of deferred tax assets and liabilities as of
December 31, 2001 and 2000 follows (in thousands):
2001 2000
------- -------
Deferred income tax assets:
Accounts payable and accrued expenses..................... $ 34 $ 1,192
Accrued payroll and related expenses...................... 6,066 6,840
Deferred compensation..................................... 1,582 2,204
Depreciation.............................................. 2,319 1,585
Noncompete agreements..................................... 1,707 1,548
Bad debts................................................. 2,623 2,128
Realignment charges....................................... 513 1,016
Foreign operating loss carryforward of foreign
subsidiary............................................. 2,296 1,621
Foreign tax credit carryforwards.......................... 3,275 394
Federal operating loss carryforward....................... 11,720 --
State operating loss carryforwards........................ 3,684 445
Other..................................................... 5,209 --
------- -------
Gross deferred tax assets......................... 41,028 18,973
Less valuation allowance.................................. (1,967) (1,544)
------- -------
Net deferred tax assets........................... 39,061 17,429
------- -------
Deferred income tax liabilities:
Prepaid expenses.......................................... 318 82
Goodwill.................................................. 4,357 3,607
Capitalized software...................................... 1,794 1,856
------- -------
Gross deferred tax liabilities.................... 6,469 5,545
------- -------
Net deferred tax assets........................... $32,592 $11,884
======= =======
SFAS No. 109 requires that deferred tax assets be reduced by a valuation
allowance if it is more likely than not that some portion or all of a deferred
tax asset will not be realized. The valuation allowance and the change therein
as of December 31, 2001 and 2000 and for the three years ended December 31, 2001
relates to the tax benefit of certain foreign operating losses associated with
the Company's foreign subsidiary in Singapore. No other valuation allowances
were deemed necessary for any other deferred tax assets since all deductible
temporary differences are expected to be utilized primarily against reversals of
taxable temporary differences and net operating loss carryforwards and foreign
tax credit carryforwards are expected to be utilized through related future
taxable and foreign source earnings.
As of December 31, 2001, the Company had net operating loss carryforwards
amounting to $33.5 million, which will expire in 2021. Additionally, as of
December 31, 2001, the Company currently had foreign income tax credit
carryforwards amounting to $3.3 million which will expire in 2006. The Company
expects to generate sufficient foreign-sourced income by implementing reasonable
tax planning strategies to fully utilize the foreign income tax credit
carryforwards. Appropriate U.S. and international taxes have been provided for
earnings of subsidiary companies that are expected to be remitted to the parent
company. As of December 31, 2001, the cumulative amount of unremitted earnings
from the Company's international subsidiaries that is expected to be
indefinitely reinvested was zero.
55
PRG-SCHULTZ INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(8) EMPLOYEE BENEFIT PLANS
The Company maintains a 401(k) Plan in accordance with Section 401(k) of
the Internal Revenue Code, which allows eligible participating employees to
defer receipt of a portion of their compensation up to 15% and contribute such
amount to one or more investment funds. Employee contributions are matched by
the Company in a discretionary amount to be determined by the Company each plan
year up to $1,750 per participant. The Company may also make additional
discretionary contributions to the Plan as determined by the Company each plan
year. Company matching funds and discretionary contributions vest at the rate of
20% each year beginning after the participants' first year of service. Company
contributions for continuing and discontinued operations were approximately $1.3
million in 2001, $1.2 million in 2000 and $0.5 million in 1999.
The Company also maintains deferred compensation arrangements for certain
key officers and executives. Total expense related to these deferred
compensation arrangements was approximately $0.6 million, $0.9 million and $0.8
million in 2001, 2000, and 1999, respectively.
Effective May 15, 1997, the Company established an employee stock purchase
plan pursuant to Section 423 of the Internal Revenue Code of 1986, as amended.
The plan covers 1,125,000 shares of the Company's common stock which may be
authorized unissued shares, reacquired shares or shares bought on the open
market. Through December 31, 2001, share certificates for 473,955 shares had
been issued under the plan. The Company is not required to recognize
compensation expense related to this plan.
(9) SHAREHOLDER'S EQUITY
On January 8, 1999, the Company sold 4.1 million newly issued shares of its
common stock and certain selling shareholders sold an additional 1.2 million
outstanding shares in an underwritten follow-on offering. The offering was
priced at $22.67 per share. The proceeds of the offering (net of underwriting
discounts and commissions) were distributed by the underwriting syndicate on
January 13, 1999. The net proceeds from the 4.1 million shares sold by the
Company, combined with the net proceeds from an additional 286,500 shares
subsequently sold by the Company in late January 1999 upon exercise by the
underwriting syndicate of their over-allotment option, were applied to reduce
outstanding borrowings under the Company's $200.0 million bank credit facility.
Additionally, 501,000 shares were sold in late January 1999 by certain selling
shareholders in connection with the over-allotment option. The Company received
no proceeds from the sale of such shares.
On July 20, 1999, the Company declared a 3-for-2 stock split effected in
the form of a stock dividend for shareholders of record on August 2, 1999,
payable on August 17, 1999. All share and per share amounts have been
retroactively restated to give effect to the aforementioned stock split.
On July 26, 2000, the Company's Board of Directors (the "Board") approved a
share repurchase program. Under the share repurchase program, the Company could
buy up to $40.0 million of its outstanding common stock.
On October 24, 2000, the Board approved an increase of $10.0 million to the
share repurchase plan, bringing the total the Company is authorized to spend to
repurchase shares of its outstanding common stock in the open market to $50.0
million. As of December 31, 2000, the Company had repurchased approximately 2.4
million shares under the program at a cost of approximately $21.0 million. The
Company did not effect any share repurchases in 2001 due in part to a
prohibition on such repurchases contained in a May 9, 2001 amendment to the
Company's previous $200.0 million senior bank credit facility. As part of the
Company's new $75.0 million senior bank credit facility, the Company is
permitted to effect future repurchases of its common stock subject to prescribed
financial covenant limitations.
On August 1, 2000, the Board authorized a shareholder protection plan
designed to protect Company shareholders from coercive or unfair takeover
techniques through the use of a Shareholder Protection Rights
56
PRG-SCHULTZ INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Agreement approved by the Board (the "Rights Plan"). The terms of the Rights
Plan provide for a dividend of one right (collectively, the "Rights") to
purchase a fraction of a share of participating preferred stock for each share
owned. This dividend was declared for each share of common stock outstanding at
the close of business on August 14, 2000. The Rights, which expire on August 14,
2010, may be exercised only if certain conditions are met, such as the
acquisition (or the announcement of a tender offer the consummation of which
would result in the acquisition) of 15% or more of the Company's common stock by
a person or affiliated group. Issuance of the Rights does not affect the
finances of the Company, interfere with the Company's operations or business
plans or affect earnings per share. The dividend is not taxable to the Company
or its shareholders and does not change the way in which the Company's shares
may be traded. At a meeting of the Board on July 24, 2001, the Board appointed a
special committee to review the Rights Plan and to report their recommendations
for Company action on the Rights Plan to the board at the October 2001 meeting.
At the October 2001 meeting, the special committee reported that in view of the
significant change in ownership of the Company that would result from the
pending acquisitions of Howard Schultz & Associates International, Inc. and
affiliates, which closed in the first quarter of 2002, the advisability of
modifying the rights Plan should be considered by a special committee comprised
of members of the post-acquisition, reconstituted Board.
Effective July 31, 2000, in connection with the Rights Plan, the Board
amended the Company's Articles of Incorporation to establish a new class of
stock, the participating preferred stock. The Board authorized 500,000 shares of
the participating preferred stock, none of which has been issued.
On August 14, 2000, the Company issued 286,000 restricted shares of its
common stock to certain employees (the "Stock Awards"). Of the total restricted
shares issued, 135,000 restricted shares were structured to vest on a ratable
basis over five years of continued employment. The remaining 151,000 restricted
shares were structured to vest at the end of five years of continued employment.
At December 31, 2001, there were 10,000 shares of the restricted common stock
vested and 150,000 shares of the restricted common stock had been forfeited by
former employees. Until vested, the restricted stock is nontransferable. The
holders of the restricted shares are entitled to all other rights as a
shareholder. Over the life of the Stock Awards (as adjusted at December 31, 2001
to reflect forfeitures), the Company will recognize $1.3 million in compensation
expense. For the years ended December 31, 2001 and 2000, the Company recognized
$0.2 million and $0.1 million, respectively, of compensation expense related to
the Stock Awards.
The Company has issued no preferred stock through December 31, 2001, and
has no present intentions to issue any preferred stock, except for any potential
issuance of participating preferred stock (500,000 shares authorized) pursuant
to the Rights Plan. The Company's remaining, undesignated preferred stock
(500,000 shares authorized) may be issued at any time or from time to time in
one or more series with such designations, powers, preferences, rights,
qualifications, limitations and restrictions (including dividend, conversion and
voting rights) as may be determined by the Company's Board, without any further
votes or action by the shareholders.
(10) COMMITMENTS AND CONTINGENCIES
(A) LEGAL PROCEEDINGS
Beginning on June 6, 2000, three putative class action lawsuits were filed
against the Company and certain of its present and former officers in the United
States District Court for the Northern District of Georgia, Atlanta Division.
These cases were subsequently consolidated into one proceeding styled: In re
Profit Recovery Group International, et seq. Inc. Sec. Litig., Civil Action File
No. 1:00-CV-1416-CC (the "Securities Class Action Litigation"). On November 13,
2000, the Plaintiffs in these cases filed a Consolidated and Amended Complaint
(the "Complaint"). In that Complaint, Plaintiffs allege that the Company, John
M. Cook, Scott L. Colabuono, the Company's former Chief Financial Officer, and
Michael A. Lustig, the Company's former Chief Operating Officer, (the
"Defendants") violated Sections 10(b) and 20(a) of the Securities Exchange Act
of 1934 and Rule 10b-5 promulgated thereunder by allegedly
57
PRG-SCHULTZ INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
disseminating materially false and misleading information about a change in the
Company's method of recognizing revenue and in connection with revenue reported
for a division. Plaintiffs purport to bring this action on behalf of a putative
class of persons who purchased the Company's stock between July 19, 1999 and
July 26, 2000. Plaintiffs seek an unspecified amount of compensatory damages,
payment of litigation fees and expenses, and equitable and/or injunctive relief.
On January 24, 2001, Defendants filed a Motion to Dismiss the Complaint for
failure to state a claim under the Private Securities Litigation Reform Act, 15
U.S.C. sec. 78u-4 et seq. The Court denied Defendant's Motion to Dismiss on June
5, 2001. Defendants served their Answer to Plaintiffs' Complaint on June 19,
2001. Discovery is in the early stages. The Company believes the alleged claims
in this lawsuit are without merit and intends to defend this lawsuit vigorously.
Due to the inherent uncertainties of the litigation process and the judicial
system, the Company is unable to predict the outcome of this litigation. If the
outcome of this litigation is adverse to the Company, it could have a material
adverse effect on the Company's business, financial condition, and results of
operations.
In the normal course of business, the Company is involved in and subject to
other claims, contractual disputes and other uncertainties. Management, after
reviewing with legal counsel all of these actions and proceedings, believes that
the aggregate losses, if any, will not have a material adverse effect on the
Company's financial position or results of operations.
(B) ACQUISITIONS OF HOWARD SCHULTZ & ASSOCIATES INTERNATIONAL, INC. AND
AFFILIATES
On January 24, 2002, the Company acquired substantially all the assets and
assumed certain liabilities of Howard Schultz & Associates International, Inc.
("HSA-Texas"), substantially all of the outstanding stock of HS&A International
Pte Ltd. and all of the outstanding stock of Howard Schultz & Associates (Asia)
Limited, Howard Schultz & Associates (Australia), Inc. and Howard Schultz &
Associates (Canada), Inc., each an affiliated foreign operating company of
HSA-Texas, pursuant to an amended and restated agreement and plan of
reorganization by and among PRG-Schultz, HSA-Texas, Howard Schultz, Andrew H.
Schultz and certain trusts dated December 11, 2001 (the "Asset Agreement") and
an amended and restated agreement and plan of reorganization by and among
PRG-Schultz, Howard Schultz, Andrew H. Schultz, Andrew H. Schultz Irrevocable
Trust and Leslie Schultz dated December 11, 2001 (the "Stock Agreement").
HSA-Texas and affiliates are considered industry pioneers in providing recovery
audit services and the assets acquired will continue to be used for audit
recovery services.
Pursuant to the Asset and Stock Agreements, the consideration paid for the
assets of HSA-Texas and affiliates was 14,759,970 unregistered shares of the
Company's common stock and the assumption of certain HSA-Texas liabilities,
including aggregate net debt of approximately $65.7 million, a portion of which
was repaid at closing. In addition, options to purchase approximately 1.1
million shares of the Company's common stock were issued in exchange for
outstanding HSA-Texas options. The Company's available domestic cash balances
and new $75.0 million senior bank credit facility were used to fund closing
costs related to the HSA-Texas acquisitions and repay certain indebtedness of
HSA-Texas.
(11) ACQUISITIONS
On August 6, 1998, the Company acquired substantially all the assets and
assumed certain liabilities of Loder, Drew & Associates, Inc. ("Loder Drew"), a
California-based international recovery auditing firm primarily serving clients
in the manufacturing, financial services and other non-retail sectors. The
transaction was accounted for as a purchase with initial consideration of $70.0
million in cash and 1.2 million restricted, unregistered shares of the Company's
common stock valued at $11.05 per share. Additionally, the prior owners of Loder
Drew received further purchase price consideration in March 1999 of $30.0
million in cash based on the financial performance of Loder Drew for the nine
month period ended December 31, 1998, and purchase price consideration of $40.0
million in cash in the first quarter of 2000 based on the financial performance
of Loder Drew for the year ending December 31, 1999. This acquisition resulted
in final goodwill at
58
PRG-SCHULTZ INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
December 31, 1999 of $153.6 million which was assigned an amortization period of
25 years using the straight-line method.
On August 31, 1999, the Company acquired substantially all of the assets
and assumed substantially all the liabilities of PRS International, Ltd.
("PRS"). PRS was a Texas-based recovery audit firm servicing primarily
middle-market clients in a variety of industrial and commercial sectors. The
transaction was accounted for as a pooling-of-interests with consideration of
1,113,043 unregistered shares of the Company's common stock.
The Consolidated Financial Statements for periods prior to the acquisition
of PRS have been restated to include the accounts and results of operations of
PRS. The results of operations previously reported by the separate enterprises
and the combined amounts included in the accompanying Consolidated Financial
Statements are summarized below:
SIX MONTHS
ENDED
JUNE 30,
1999
-----------
(UNAUDITED)
Revenues:
PRG-Schultz International, Inc............................ $103,043
PRS International, Ltd.................................... 9,606
--------
Combined............................................... $112,649
========
Net earnings (loss) from continuing operations:
PRG-Schultz International, Inc............................ $(23,539)
PRS International, Ltd.................................... 870
--------
Combined............................................... $(22,669)
========
(12) STOCK OPTION PLAN
The Company's Stock Incentive Plan, as amended, has authorized the grant of
options to purchase 10,875,000 shares of the Company's common stock to key
employees, directors, consultants and advisors. The substantial majority of
options granted through December 31, 2001 have 10-year terms and vest and become
fully exercisable on a ratable basis over four or five years of continued
employment.
Pro forma information regarding net earnings and earnings per share is
required by SFAS No. 123, and has been determined as if the Company had
accounted for its employee stock options under the fair value method of that
Statement. The fair value for these options was estimated at the date of grant
using a Black-Scholes option pricing model with the following weighted-average
assumptions for 2001, 2000 and 1999:
2001 2000 1999
------- ------- -------
Risk-free interest rates.................................. 4.56% 5.12% 5.85%
Dividend yields........................................... -- -- --
Volatility factor of expected market price................ .889 .716 .533
Weighted-average expected life of option.................. 6 years 6 years 6 years
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions, including the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
59
PRG-SCHULTZ INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting periods. The Company's
pro forma information for the years ended December 31, 2001, 2000 and 1999 for
continuing and discontinued operations, combined, is as follows (in thousands,
except for pro forma net earnings (loss) per share information):
2001 2000 1999
-------- -------- -------
Net earnings (loss) before extraordinary item,
accounting change and pro forma effect of
compensation expense recognition provisions of SFAS
No. 123............................................. $(82,130) $(39,128) $27,436
Pro forma effect of compensation expense recognition
provisions of SFAS No. 123.......................... (4,875) (4,679) (6,146)
-------- -------- -------
Pro forma net earnings (loss) before extraordinary
item and accounting change.......................... $(87,005) $(43,807) $21,290
======== ======== =======
Pro forma net earnings (loss) per share before
extraordinary item and accounting change:
Basic............................................... $ (1.80) $ (0.90) $ 0.45
======== ======== =======
Diluted............................................. $ (1.79) $ (0.88) $ 0.43
======== ======== =======
A summary of the Company's stock option activity and related information
for the years ended December 31 follows:
2001 2000 1999
--------------------- ---------------------- ---------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
---------- -------- ----------- -------- ---------- --------
Outstanding -- beginning of
year........................... 7,127,827 $14.79 7,133,026 $18.18 5,450,419 $13.13
Granted.......................... 1,440,000 7.82 2,981,690 14.21 2,344,775 27.94
Exercised........................ (379,660) 7.39 (240,649) 8.58 (420,413) 8.15
Forfeited........................ (2,212,558) 17.33 (2,746,240) 23.85 (241,755) 16.48
---------- ----------- ----------
Outstanding -- end of year....... 5,975,609 $12.64 7,127,827 $14.79 7,133,026 $18.18
========== =========== ==========
Exercisable at end of year....... 3,158,893 $11.68 2,295,328 $11.42 1,448,711 $10.86
Weighted average fair value of
options granted during year.... $ 5.60 $ 9.58 $ 16.02
The following table summarizes information about stock options outstanding
at December 31, 2001:
EXERCISABLE
NUMBER WEIGHTED- ----------------------------
OF SHARES AVERAGE WEIGHTED- NUMBER WEIGHTED-
RANGE OF SUBJECT REMAINING AVERAGE OF AVERAGE
EXERCISE PRICES TO OPTION LIFE EXERCISE PRICE SHARES EXERCISE PRICE
--------------- --------- ---------- -------------- ----------- --------------
$3.53 - $10.99............ 3,924,257 4.45 years $ 7.96 2,141,400 $ 7.55
$11.00 - $25.00........... 1,299,412 6.48 years 17.32 748,433 16.98
Over $25.00............... 751,940 7.85 years 29.00 269,060 29.80
The weighted average remaining contract life of options outstanding at
December 31, 2001 was 5.32 years.
60
PRG-SCHULTZ INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(13) MAJOR CLIENTS
During the years ended December 31, 2001 and 2000, the Company had one
client, a mass merchandiser, that accounted for 12.1% and 10.1% of revenues from
continuing operations, respectively. The Company did not have any clients who
individually provided revenues in excess of 10% of total revenues during the
year ended December 31, 1999.
(14) OPERATING SEGMENTS AND RELATED INFORMATION
The Company has a single reportable operating segment consisting of
Accounts Payable Services. Accounts Payable Services entails the review of
client accounts payable disbursements to identify and recover overpayments. This
operating segment includes accounts payable services provided to retailers and
wholesale distributors (the Company's historical client base) and Accounts
Payable Services provided to various other types of business entities by the
Company's Commercial Division. The Accounts Payable Services operations conduct
business in North America, South America, Europe, Australia, Africa and Asia.
The following table presents revenues by country based upon the location of
clients served (in thousands):
2001 2000 1999
-------- -------- --------
United States........................................ $197,482 $194,124 $199,945
United Kingdom....................................... 25,174 25,506 19,912
Canada............................................... 15,585 13,358 12,212
Mexico............................................... 5,001 9,703 5,945
Brazil............................................... 3,391 2,146 169
France............................................... 2,895 2,305 2,649
Other................................................ 9,736 7,968 5,546
-------- -------- --------
$259,264 $255,110 $246,378
======== ======== ========
The following table presents long-lived assets by country based on location
of the asset (in thousands):
2001 2000
-------- --------
United States........................................ $185,710 $191,548
Australia............................................ 2,565 3,080
United Kingdom....................................... 564 782
Canada............................................... 325 503
Mexico............................................... 368 471
Other................................................ 547 422
-------- --------
$190,079 $196,806
======== ========
(15) FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts for cash and cash equivalents, receivables, accounts
payable and accrued expenses, accrued business acquisition consideration and
accrued payroll and related expenses approximate fair value because of the short
maturity of these instruments.
The fair value of each of the Company's long-term debt instruments is based
on the amount of future cash flows associated with that instrument discounted
using the Company's current borrowing rate for similar debt instruments of
comparable maturity. The estimated fair value of the Company's long-term debt
61
PRG-SCHULTZ INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
instruments at December 31, 2001 and 2000 was $122.1 million and $138.1 million,
respectively, and the carrying value of the Company's long-term debt instruments
at December 31, 2001 and 2000 was $121.2 million and $153.4 million,
respectively.
Fair value estimates are made at a specific point in time, based on
relevant market information about the financial instrument. These estimates are
subjective in nature and involve uncertainties and matters of significant
judgment and therefore cannot be determined with precision. Changes in
assumptions could significantly affect the estimates.
(16) EARNINGS (LOSS) PER SHARE
The following table sets forth the computations of basic and diluted
earnings per share for the years ended December 31, 2001, 2000 and 1999 (in
thousands, except for earnings (loss) per share information):
2001 2000 1999
-------- -------- --------
Numerator:
Earnings from continuing operations before
discontinued operations, extraordinary item and
cumulative effect of accounting change.......... $ 6,119 $ 5,586 $ 19,630
Discontinued operations............................ (88,249) (44,714) 7,806
Extraordinary item................................. (1,581) -- --
Cumulative effect of accounting change............. -- -- (29,195)
-------- -------- --------
Net loss........................................ $(83,711) $(39,128) $ (1,759)
======== ======== ========
Denominator:
Denominator for basic earnings per
share -- weighted-average shares outstanding.... 48,298 48,871 47,498
Effect of dilutive securities:
Shares issuable for acquisition earnout......... -- 201 --
Employee stock options.......................... 435 737 1,882
-------- -------- --------
Denominator for diluted earnings................ 48,733 49,809 49,380
======== ======== ========
Basic earnings (loss) per share:
Earnings from continuing operations before
discontinued operations, extraordinary item and
cumulative effect of accounting change.......... $ 0.13 $ 0.11 $ 0.41
Discontinued operations............................ (1.83) (0.91) 0.16
Extraordinary items................................ (0.03) -- --
Cumulative effect of accounting change............. -- -- (0.61)
-------- -------- --------
Net loss........................................ $ (1.73) $ (0.80) $ (0.04)
======== ======== ========
62
PRG-SCHULTZ INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2001 2000 1999
-------- -------- --------
Diluted earnings (loss) per share:
Earnings from continuing operations before
discontinued operations, extraordinary item and
cumulative effect of accounting change.......... $ 0.12 $ 0.11 $ 0.40
Discontinued operations............................ (1.81) (0.90) 0.15
Extraordinary item................................. (0.03) -- --
Cumulative effect of accounting change............. -- -- (0.59)
-------- -------- --------
Net loss........................................ $ (1.72) $ (0.79) $ (0.04)
======== ======== ========
In 2001 and 2000, 3.3 million and 5.7 million stock options, respectively,
were excluded from the computation of diluted earnings per share due to their
antidilutive effect. Additionally, in 2001, 1.5 million shares related to the
convertible notes were excluded from the computation of diluted earnings per
share due to their antidilutive effect.
(17) BUSINESS ACQUISITION AND RESTRUCTURING EXPENSES
Business acquisition and restructuring expenses included in selling,
general and administrative expense consisted of the following components (in
thousands):
YEAR ENDED
DECEMBER 31,
1999
------------
Acquisition-related expenses incurred by all parties in
connection with the August 1999 acquisition of PRS........ $ 948
Restructuring charge incurred in the fourth quarter of 1999
in connection with combining the operations of PRS with
those of the Company's existing Accounts Payable Services
commercial unit........................................... 1,059
------
$2,007
======
The Company effected an acquisition of PRS which was completed in August
1999 and was accounted for as a pooling-of-interests. As required under
accounting principles generally accepted in the United States of America
governing pooling-of-interests accounting, acquisition-related expenses incurred
by the Company, PRS and the shareholders of PRS were aggregated and charged to
current operations in 1999. These expenses of approximately $0.9 million
consisted principally of investment banking fees, legal and accounting fees. The
Company combined the operations of PRS with its existing Accounts Payable
Services commercial unit in the fourth quarter of 1999 and incurred a charge to
operations of approximately $1.1 million to provide for certain employee
severance payments and the costs of closing duplicative or unnecessary office
facilities.
63
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
Pursuant to Instruction G(3) to Form 10-K, the information required in
Items 10 through 13 is incorporated by reference from the Company's definitive
proxy statement, which is expected to be filed pursuant to Regulation 14A on or
before April 10, 2002.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Documents filed as part of the report:
(1) Consolidated Financial Statements:
For the following consolidated financial information included herein,
see Index on Page 37.
PAGE
-------
Independent Auditors' Reports............................... 38, 39
Consolidated Statements of Operations for the Years ended
December 31, 2001, 2000 and 1999.......................... 40
Consolidated Balance Sheets as of December 31, 2001 and
2000...................................................... 41
Consolidated Statements of Shareholders' Equity for the
Years ended December 31, 2001, 2000 and 1999.............. 42
Consolidated Statements of Cash Flows for the Years ended
December 31, 2001, 2000 and 1999.......................... 43
Notes to Consolidated Financial Statements.................. 44
(2) Financial Statement Schedule:
Schedule II -- Valuation and Qualifying Accounts............ 71
(3) Exhibits:
EXHIBIT
NUMBER DESCRIPTION
------- -----------
*2.1 -- Amended and Restated Agreement and Plan of Reorganization,
dated as of December 11, 2001, among PRG-Schultz
International, Inc. f/k/a The Profit Recovery Group
International, Inc., Howard Schultz & Associates
International, Inc., Howard Schultz, Andrew Schultz and
certain trusts (incorporated by reference to Annex A of the
Registrant's Definitive proxy statement filed on December
20, 2001).
*2.2 -- Amended and Restated Agreement and Plan of Reorganization
pursuant to Section 368(a)(1)(B) of the Internal Revenue
Code dated as of December 11, 2001 among PRG-Schultz
International, Inc. f/k/a The Profit Recovery Group
International, Inc., Howard Schultz, Andrew Schultz, Andrew
H. Schultz Irrevocable Trust and Leslie Schultz
(incorporated by reference to Annex B of the Registrant's
Definitive proxy statement filed on December 20, 2001).
*2.3 -- Share Purchase Agreement dated as of August 19, 1999 among
the Registrant, the Vendors and Mr. Nathan Kirsh
(incorporated by reference to Exhibit 2.1 to Registrant's
Current Report on Form 8-K filed on September 2, 1999).
3.1 -- Restated Articles of Incorporation of the Registrant.
3.2 -- Restated Bylaws of the Registrant.
4.1 -- Specimen Common Stock Certificate.
64
EXHIBIT
NUMBER DESCRIPTION
------- -----------
4.2 -- Shareholder Protection Rights Agreement, dated as of August
9, 2000 between Registrant and Rights Agent (incorporated by
reference to Exhibit 4.1 to Registrant's Current Report on
Form 8-K filed August 9, 2000).
4.3 -- Indenture dated November 26, 2001 by and between Registrant
and SunTrust Bank (incorporated by reference to Exhibit 4.3
to Registrant's Registration Statement No. 333-76018 on Form
S-3 filed December 27, 2001).
10.1 -- 1996 Stock Option Plan dated as of January 25, 1996,
together with Forms of Non-qualified Stock Option Agreement
(incorporated by reference to Exhibit 10.2 to Registrant's
March 26, 1996 registration statement No. 333-1086 on Form
S-1).
10.2 -- Form of Indemnification Agreement between the Registrant and
the Directors and certain officers of the Registrant
(incorporated by reference to Exhibit 10.l0 to Registrant's
March 26, 1996 registration statement No. 333-1086 on Form
S-1).
10.3 -- First Amendment dated March 7, 1997 to Employment Agreement
between Registrant and John M. Cook (incorporated by
reference to Exhibit 10.22 to Registrant's Form 10-K for the
year ended December 31, 1996).
10.4 -- Second Amendment to Employment Agreement dated September 17,
1997 between The Profit Recovery Group International I, Inc.
and Mr. John M. Cook (incorporated by reference to Exhibit
10.3 to Registrant's Form 10-Q for the quarterly period
ended September 30, 1997).
10.5 -- Lease Agreement dated January 30, 1998 between Wildwood
Associates and The Profit Recovery Group International I,
Inc. (incorporated by reference to Exhibit 10.30 to
Registrant's Form 10-K for the year ended December 31,
1997).
10.6 -- Sublease dated October 29, 1993, between The Profit Recovery
Group I, Inc. and International Business Machines
Corporation (incorporated by Reference to Exhibit 10.15 to
Registrant's March 26, 1996 registration statement No.
333-1086 on Form S-1).
10.7 -- Description of 2001-2005 compensation arrangement between
Registrant and John M. Cook (incorporated by reference to
Exhibit 10.9 to the Registrant's Form 10-K for the year
ended December 31, 2000).
10.8 -- Employment Agreement between Registrant and Mr. Robert G.
Kramer; Compensation Agreement between Registrant and Mr.
Kramer (incorporated by reference to Exhibit 10.38 to
Registrant's Form 10-K for the year ended December 31,
1997).
10.9 -- Syndication Amendment and Assignment dated as of September
17, 1998 and among the Registrant, certain of subsidiaries
of the Registrant and various banking institutions
(incorporated by reference to Exhibit 10.1 to Registrant's
Form 10-Q for the quarterly period ended September 30,
1998).
10.10 -- Sub-Sublease agreement dated August 19, 1998 by and between
a subsidiary of the Registrant and Manhattan Associates,
Inc. (incorporated by reference to Exhibit 10.3 to
Registrant's Form 10-Q for the quarterly period ended
September 30, 1998).
10.11 -- Lease agreement dated July 17, 1998 by and between Wildwood
Associates and a subsidiary of the Registrant (incorporated
by reference to Exhibit 10.4 to Registrant's Form 10-Q for
the quarterly period ended September 30, 1998).
10.12 -- The Profit Recovery Group International Inc. Stock Incentive
Plan. (incorporated by reference to Exhibit 10.5 to
Registrant's Form 10-Q for the quarterly period ended
September 30, 1998).
10.13 -- Description of The Profit Recovery Group International, Inc.
Executive Incentive Plan (incorporated by reference to
Exhibit 10.6 to Registrant's Form 10-Q for the quarterly
period ended September 30, 1998).
10.14 -- Description of Compensation Arrangement between Mr. Donald
E. Ellis, Jr. and Registrant, dated January 15, 2001
(incorporated by reference to Exhibit 10.16 to the
Registrant's Form 10-K for the year ended December 31,
2000).
10.15 -- Description of 2000 Compensation Arrangement between Mr.
Mark C. Perlberg and Registrant, dated January 7, 2000
(incorporated by reference to Exhibit 10.17 to the
Registrant's Form 10-K for the year ended December 31,
2000).
65
EXHIBIT
NUMBER DESCRIPTION
------- -----------
**10.18 -- Letter Agreement dated May 25, 1995 between Wal-Mart Stores,
Inc. and Registrant (incorporated by reference to Exhibit
10.1 to Registrant's March 26, 1996 registration statement
No. 333-1086 on Form S-1).
***10.19 -- Services Agreement dated April 7, 1993 between Registrant
and Kmart Corporation as amended by Addendum dated January
28, 1997 (incorporated by reference to Exhibit 10.31 to
Registrant's Form 10-K for the year ended December 31,
1997).
10.20 -- Description of 2001 compensation arrangement between
Registrant and Mr. John M. Toma (incorporated by reference
to Exhibit 10.23 to the Registrant's Form 10-K for the year
ended December 31, 2000).
10.21 -- Non-qualified Stock Option Agreement between Mr. Donald E.
Ellis, Jr. and the Registrant dated October 26, 2000
(incorporated by reference to Exhibit 10.24 to the
Registrant's Form 10-K for the year ended December 31,
2000).
10.22 -- Description of 2001 Compensation Arrangement between Mr.
Mark C. Perlberg and the Registrant (incorporated by
reference to Exhibit 10.25 to the Registrant's Form 10-K for
the year ended December 31, 2000).
10.23 -- Description of 2001 Compensation Arrangement between Mr.
Robert A. Kramer and the Registrant (incorporated by
reference to Exhibit 10.26 to the Registrant's Form 10-K for
the year ended December 31, 2000).
10.24 -- Discussion of Management and Professional Incentive Plan
(incorporated by reference to Exhibit 10.27 to the
Registrant's Form 10-K for the year ended December 31,
2000).
10.25 -- Amendment to 2000 Compensation Agreement between Mr. Mark C.
Perlberg and Registrant, dated October 30, 2000
(incorporated by reference to Exhibit 10.28 to the
Registrant's Form 10-K for the year ended December 31,
2000).
10.26 -- Separation Agreement between Mr. Michael A. Lustig and the
Registrant, dated February 2, 2001 (incorporated by
reference to Exhibit 10.1 to the Registrant's Form 10-Q for
the quarterly period ended March 31, 2001).
10.27 -- Separation Agreement between Mr. Scott L. Colabuono and the
Registrant, dated January 31, 2001 (incorporated by
reference to Exhibit 10.2 to the Registrant's Form 10-Q for
the quarterly period ended March 31, 2001).
10.28 -- Non-qualified Stock Option Agreement between Mr. John Cook
and the Registrant dated March 26, 2001 (incorporated by
reference to Exhibit 10.3 to the Registrant's Form 10-Q for
the quarterly period ended March 31, 2001).
10.29 -- Non-qualified Stock Option Agreement between Mr. John M.
Toma and the Registrant dated March 26, 2001 (incorporated
by reference to Exhibit 10.4 to the Registrant's Form 10-Q
for the quarterly period ended March 31, 2001).
10.30 -- Non-qualified Stock Option Agreement between Mr. Mark C.
Perlberg and the Registrant dated March 26, 2001
(incorporated by reference to Exhibit 10.5 to the
Registrant's Form 10-Q for the quarterly period ended March
31, 2001).
10.31 -- Form of the Registrant's Non-Qualified Stock Option
Agreement (incorporated by reference to Exhibit 10.2 to the
Registrant's Form 10-Q for the quarterly period ended June
30, 2001).
10.32 -- Shareholder Agreement among The Profit Recovery Group
International, Inc., Howard Schultz & Associates
International, Inc., Howard Schultz, Andrew H. Schultz, John
M. Cook, John M. Toma and certain trusts.
10.33 -- Registration Rights Agreement by and among The Profit
Recovery Group International, Inc., Howard Schultz &
Associates International, Inc. and certain other entities
and individuals.
10.34 -- Noncompetition, Nonsolicitation, and Confidentiality
Agreement among The Profit Recovery Group International,
Inc., Howard Schultz & Associates International, Inc.,
Howard Schultz, Andrew Schultz and certain trusts.
10.35 -- Noncompetition, Nonsolicitation and Confidentiality
Agreement between The Profit Recovery Group International,
Inc. and Michael Lowery, Gertrude Lowery, Charlie Schembri
and Mac Martirossian shareholders of Howard Schultz &
Associates International, Inc.
66
EXHIBIT
NUMBER DESCRIPTION
------- -----------
10.36 -- Employment Offer Letter with Howard Schultz.
10.37 -- Employment Offer Letter with Andrew Schultz.
10.38 -- Indemnification Agreement among The Profit Recovery Group
International, Inc., Howard Schultz & Associates
International, Inc., Howard Schultz, Andrew Schultz and
certain trusts.
10.39 -- PRG-Schultz HSA Acquisition Stock Option Plan (incorporated
by reference to Exhibit 99.1 to the Registrant's
Registration statement No. 333-81168 on Form S-8 filed
January 22, 2002).
10.40 -- Credit Agreement among The Profit Recovery Group USA, Inc.,
The Profit Recovery Group International, Inc. and certain
subsidiaries of the registrant, the several lenders and Bank
of America, N.A. dated as of December 31, 2001 (incorporated
by reference to Exhibit 99.1 to the Registrant's
Registration Statement No. 333-76018 on Form S-3 filed
January 23, 2002).
10.41 -- Pledge Agreement among The Profit Recovery Group USA, Inc.,
The Profit Recovery Group International, Inc. certain of the
domestic subsidiaries of the registrant, and Bank of
America, N.A. dated December 31, 2001.
10.42 -- First Amendment to Credit Agreement among PRG-Schultz USA,
Inc., PRG-Schultz International, Inc. each of the domestic
subsidiaries of the registrant, the several lenders and Bank
of America, N.A. dated as of February 7, 2002.
10.43 -- Office Lease Agreement between Galleria 600, LLC, and
PRG-Schultz International, Inc.
10.44 -- Security Agreement among The Profit Recovery Group USA,
Inc., The Profit Recovery Group International, Inc. certain
of the domestic subsidiaries of the registrant and Bank of
America, N.A. dated December 31, 2001.
10.45 -- Registration Rights Agreement dated November 26, 2001 by and
among the Registrant, Merrill Lynch Pierce, Fenner & Smith
Incorporated and the Other Initial Purchasers (incorporated
by reference to Exhibit 4.4 to Registrant's Registration
Statement No. 333-76018 on Form S-3 filed December 27,
2001).
21.1 -- Subsidiaries of the Registrant.
23.1 -- Consent of KPMG LLP.
23.2 -- Consent of ERNST & YOUNG Audit.
---------------
* In accordance with Item 601(b)(2) of Regulation S-K, the schedules have been
omitted and a list briefly describing the schedules is contained at the end
of the Exhibit. The Company will furnish supplementally a copy of any
omitted schedule to the Commission upon request.
** Confidential treatment pursuant to 17 CFR Secs. sec.sec. 200.80 and 230.406
has been granted regarding certain portions of the indicated Exhibit, which
portions have been filed separately with the Commission.
*** Confidential treatment pursuant to 17 CFR Secs. sec.sec. 200.80 and
240.24b-2 has been granted regarding certain portions of the indicated
Exhibit, which portions have been filed separately with the Commission.
(b) Reports on Form 8-K
The registrant filed six reports on Form 8-K during the quarter ended
December 31, 2001:
(1) Form 8-K commenting on the Registrant's third quarter 2001
estimated operating results was filed on October 9, 2001;
(2) Form 8-K announcing financial results for the third quarter and
first nine months of 2001 was filed on November 1, 2001;
(3) Form 8-K announcing the Registrant's proposed private offering of
convertible subordinated notes was filed on November 15, 2001;
(4) Form 8-K furnishing unaudited pro forma combined financial data,
giving effect to the completion of the acquisitions of Howard Schultz &
Associates International, Inc. ("HSA-Texas") and certain of its affiliates,
and certain other financial data of HSA-Texas as of and for the nine months
ended September 30, 2001 was filed on November 16, 2001;
67
(5) Form 8-K announcing the sale of the stock of the registrant's
French Taxation Services business and providing reclassified historical
audited consolidated financial statements and as of December 31, 2000 and
1999 and for each of the years in the three year period ended December 31,
2000 and its historical unaudited condensed consolidated financial
statements, as of September 30, 2001 and for the three and nine months
ended September 30, 2001 and 2000 to reflect the former French Taxation
Services business as a discontinued operation was filed on December 17,
2001; and
(6) Form 8-K regarding the incorporation by reference in certain
registrant Registration Statements on Form S-8 of the Audit Report of KPMG
LLP was filed on December 26, 2001.
68
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
PRG-SCHULTZ INTERNATIONAL, INC.
By: /s/ JOHN M. COOK
------------------------------------
John M. Cook
President and Chief Executive
Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the date indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ JOHN M. COOK President and Chief Executive March 15, 2002
------------------------------------------------ Officer (Principal Executive
John M. Cook Officer)
/s/ DONALD E. ELLIS, JR. Executive Vice March 15, 2002
------------------------------------------------ President -- Finance, Chief
Donald E. Ellis, Jr. Financial Officer and Treasurer
(Principal Financial Officer)
/s/ ALLISON ADEN Vice President -- Finance March 15, 2002
------------------------------------------------ (Principal Accounting Officer)
Allison Aden
/s/ ARTHUR N. BUDGE Director March 15, 2002
------------------------------------------------
Arthur N. Budge
/s/ STANLEY B. COHEN Director March 15, 2002
------------------------------------------------
Stanley B. Cohen
/s/ JONATHAN GOLDEN Director March 15, 2002
------------------------------------------------
Jonathan Golden
/s/ GARTH H. GREIMANN Director March 15, 2002
------------------------------------------------
Garth H. Greimann
/s/ FRED W.I. LACHOTZKI Director March 15, 2002
------------------------------------------------
Fred W.I. Lachotzki
/s/ NATHAN A. LEVINE Director March 15, 2002
------------------------------------------------
Nathan A. Levine
/s/ E. JAMES LOWREY Director March 15, 2002
------------------------------------------------
E. James Lowrey
/s/ THOMAS S. ROBERTSON Director March 15, 2002
------------------------------------------------
Thomas S. Robertson
69
SIGNATURE TITLE DATE
--------- ----- ----
/s/ ANDREW SCHULTZ Director March 15, 2002
------------------------------------------------
Andrew Schultz
/s/ HOWARD SCHULTZ Chairman of the Board and Director March 15, 2002
------------------------------------------------
Howard Schultz
/s/ JOHN M. TOMA Vice Chairman and Director March 15, 2002
------------------------------------------------
John M. Toma
/s/ JACKIE M. WARD Director March 15, 2002
------------------------------------------------
Jackie M. Ward
70
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
ADDITIONS DEDUCTIONS
------------------------ -------------
BALANCE AT CHARGE TO CREDITED TO BALANCE AT
BEGINNING COSTS AND ACCOUNTS END OF
DESCRIPTION OF YEAR EXPENSES ACQUISITIONS RECEIVABLE(1) YEAR
----------- ---------- --------- ------------ ------------- ----------
2001
Allowance for doubtful accounts
receivable.......................... $2,782 $6,567 $-- $(3,478) $5,871
Allowance for doubtful employee
advances and miscellaneous
receivables......................... $1,166 $1,816 $-- $ (186) $2,796
Deferred tax valuation allowance...... $1,544 $ 423 $-- $ -- $1,967
2000
Allowance for doubtful accounts
receivable.......................... $ 794 $2,150 $-- $ (162) $2,782
Allowance for doubtful employee
advances and miscellaneous
receivables......................... $ 229 $4,487 $-- $(3,550) $1,166
Deferred tax valuation allowance...... $1,250 $ 294 $-- $ -- $1,544
1999
Allowance for doubtful accounts
receivable.......................... $1,477 $ 346 $-- $(1,029) $ 794
Allowance for doubtful employee
advances and miscellaneous
receivables......................... $ 298 $1,736 $-- $(1,805) $ 229
Deferred tax valuation allowance...... $ 720 $ 530 $-- $ -- $1,250
---------------
(1) Write-offs, net of recoveries.
71
(PRG SCHULTZ LOGO)