UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
FORM 10-K/A
AMENDMENT NO. 1
(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, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _____________ TO ___________
COMMISSION FILE NUMBER 0-28000
THE PROFIT RECOVERY GROUP
INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
GEORGIA 58-2213805
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2300 WINDY RIDGE PARKWAY 30339-8426
SUITE 100 NORTH (Zip Code)
ATLANTA, GEORGIA
(Address of principal executive offices)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (770) 955-3815
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
COMMON STOCK, NO PAR VALUE
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes |X| No |_|
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. |_|
Common shares of the registrant outstanding at January 30, 1998 were
19,226,024. The aggregate market value, as of January 30, 1998, of such common
shares held by non-affiliates of the registrant was approximately $111,423,000
based upon the last sales price reported that date on The Nasdaq Stock Market of
$15.813 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 during 1998.
The Registrant is hereby filing Amendment No. 1 to Form 10-K for the fiscal
year ended December 31, 1997 for the purpose of filing Exhibits 10.38 and 10.39,
and amending Item 1. and Exhibit 21.1.
PART I
ITEM 1. BUSINESS
The Company is a leading provider of accounts payable and other recovery
audit services to large retailers, wholesale distributors, healthcare providers,
technology companies and other large transaction-intensive companies, as well as
to certain governmental agencies. In businesses with large purchase volumes and
continuously fluctuating prices, some small percentage of erroneous overpayments
to vendors is inevitable. In addition, the complexity of various tax laws
results in overpayments to governmental agencies. Moreover, services such as
telecommunications, utilities and freight provided to businesses under complex
pricing arrangements can result in overpayments. All of these overpayments
result in "lost profits." The Company identifies and documents overpayments by
using sophisticated proprietary technology and advanced audit techniques and
methodologies, and by employing highly trained, experienced recovery audit
specialists. The Company continuously updates and refines its proprietary
databases that 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, but excluding
confidential client data.
The earliest of the Company's predecessors was formed in November 1990, and
in early 1991 the predecessors acquired the operating assets of Roy Greene
Associates, Inc. and Bottom Line Associates, Inc. which were formed in 1971 and
1985, respectively. In January 1995, the Company's predecessors acquired the
operating assets of Fial & Associates, Inc., a direct competitor.
The predecessor business entities that comprised the Company generally were
either Subchapter S corporations or partnerships, all under common ownership and
control. In April 1995, the Company's predecessors reorganized and its
international entities became C corporations. Additionally, prior to the
Company's March 1996 initial public offering, all domestic entities became C
corporations. Subsequent to the Company's initial public offering, the Company
has conducted its operations through its various wholly-owned domestic and
international subsidiaries.
In January 1997, the Company acquired the net operating assets of Shaps
Group, Inc., a California-based company providing recovery audit services to
manufacturers, and high technology companies. In February 1997, the Company
acquired all of the common stock of Accounts Payable Recovery Services, Inc., a
Texas-based company providing recovery audit services to healthcare entities and
energy companies. In May 1997, the Company acquired all of the common stock of
The Hale Group, a California-based company providing recovery audit services to
healthcare entities. In October 1997, the Company acquired 98.4% of Financiere
Alma, S.A. and subsidiaries, a Paris-based company providing tax recovery audit
services within France. In November 1997, the Company acquired the net operating
assets of TradeCheck, LLC, a Washington-based recovery audit firm specializing
in ocean freight shipments. The Company intends to continue pursuing domestic
and international strategic acquisitions, including direct competitors and
complementary businesses.
The Company has operations outside the United States in Australia, Belgium,
Canada, France, Germany, Mexico, The Netherlands, New Zealand, the United
Kingdom and portions of Asia, including Hong Kong, Indonesia, Malaysia,
Singapore, Taiwan and Thailand. See Note 11 of Notes to Consolidated Financial
Statements for international segment data concerning revenues, operating income
(loss) and indentifiable assets.
THE RECOVERY AUDIT INDUSTRY
Businesses with substantial volumes of payment transactions involving
multiple vendors, numerous discounts and allowances, fluctuating prices and
complex tax and pricing arrangements find it difficult to detect all payment
errors. These businesses include retailers, such as discount, department,
specialty, grocery and drug stores, wholesale distributors, manufacturers and
distributors of technology products and certain governmental agencies and
healthcare providers. Although these businesses process the vast majority of
payment transactions correctly, a small number of errors occur principally
because of communication failures between purchasing and payables departments,
complex pricing arrangements, personnel turnover and changes in information and
accounting systems. These errors include vendor pricing errors, missed or
inaccurate discounts, allowances and rebates, incorrect freight charges and
duplicate payments. In the aggregate, these transaction errors can represent
meaningful lost profits that can be particularly significant for businesses with
relatively narrow profit margins. Although internal recovery audit departments
identify some payment errors, independent recovery audit firms often are
retained by businesses to identify additional overpayments.
In the U.S., large retailers routinely engage independent recovery audit
firms as standard business practice and other businesses increasingly are using
independent recovery audit firms. Outside the U.S., the Company believes that
large retailers and certain other businesses also increasingly are engaging
independent recovery audit firms. The U.S. retailing industry represented
approximately $2.5 trillion in revenues in 1996. The top 100 retailers worldwide
had aggregate revenues of approximately $1.4 trillion in 1996. The Company
believes that a typical U.S. retailer makes payment errors that are not
discovered internally, which in the aggregate can range from several hundred
thousand dollars to more than $1.0 million per billion dollars of revenues. In
addition, the Company believes that businesses in all industries also make
accounts payable errors.
Increasingly, businesses use 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 "EDI" (Electronic Data Interchange), and implementation of this technology
is accelerating. EDI streamlines processing large numbers of transactions, but
does not eliminate payment errors because operator input errors may be
replicated automatically in thousands of transactions. EDI systems typically
generate significantly more individual transaction details in electronic form,
making these transactions easier to audit than traditional paper-based accounts
payable systems. Recovery audit firms, however, require sophisticated technology
in order to audit EDI accounts payable processes effectively.
Many businesses historically have maintained internal recovery audit
departments that review transactions before engaging independent recovery audit
firms. The Company believes that these businesses increasingly are outsourcing
internal recovery functions to independent recovery audit firms. Factors
contributing to this trend include (i) a need for significant investments in
technology, especially in an EDI environment, which the Company believes are
greater than even large businesses often can justify, (ii) an inability to
duplicate the breadth of industry and auditing expertise of independent recovery
audit firms, (iii) a desire to focus limited resources on core competencies, and
(iv) a desire for larger and more timely recoveries.
The domestic and international recovery audit industry is characterized by
several large and many small, local and regional firms. Many local and regional
recovery audit firms lack the centralized resources or broad client base to
support technology investments required to provide comprehensive recovery audit
services for large, complex accounts payable systems. These firms are even less
equipped to audit large EDI accounts payable systems. In addition, because of
limited resources, most of these firms subcontract work to third parties and may
lack experience and the knowledge of national promotions, seasonal allowances
and current recovery audit practices. As a result, the Company believes
significant opportunities exist for recovery audit firms with a national and
international presence, well-trained and experienced professionals and the
advanced technology required to audit increasingly complex accounts payable
systems.
THE PROFIT RECOVERY GROUP SOLUTION
The Company provides its domestic and international clients with
comprehensive recovery audit services by using sophisticated proprietary
technology and advanced audit techniques and methodologies, and by employing
highly trained, experienced recovery audit specialists. As a result, the Company
believes it is able to identify significantly more payment errors in both
traditional paper-based and EDI accounts payable systems. By leveraging its
technology investment across a large client base, the Company is able to
continue developing proprietary software tools and expand its technology
leadership in the recovery audit industry.
The Company is a leader in developing and utilizing sophisticated software
audit tools and techniques that enhance the identification and recovery of
payment errors. In EDI accounts payable systems, the
-2-
Company's proprietary software audit tools and data processing capabilities
enable auditors to sort, filter and evaluate transactions in greater line-item
detail. The Company has developed and continuously updates and refines its
proprietary databases that 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 do not include confidential client information. The
Company's technology provides a uniform platform for its auditors to offer
consistent and proven audit techniques and methodologies regardless of the
client's size, industry or geographic scope of operations.
The Company also is 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 retailing industry. To support its auditors, the Company provides data
processing, marketing, training and administrative services.
THE PROFIT RECOVERY GROUP STRATEGY
The Company's objective is to become the leading worldwide provider of
recovery audit services. The Company believes that it will have to significantly
increase its revenues to achieve this objective. Its strategy consists of the
following elements:
- Expand International Presence. The Company believes international
markets represent significant business opportunities and intends to
continue expanding its international presence. For example, based on 1996
sales, 63 of the top 100 retailers worldwide were headquartered outside
the U.S. Through sales and marketing efforts, the Company targets
countries having a concentration of transaction-intensive businesses. The
Company also enters new international markets by supporting its U.S.
clients' international operations. With the recent acquisition of 98.4%
of Financiere Alma, S.A. and its subsidiaries (collectively, "Alma"), the
Company has significantly increased its presence in France and the
Company intends to offer Alma's services to businesses in other European
countries. In the next twelve months, the Company anticipates that it
will commence operations in South Africa, Argentina and Brazil.
- Expand Client Base. The Company seeks to increase its worldwide retail
client base and expand its recovery audit services to other industries.
The Company recently has expanded its recovery audit services to the
healthcare and technology industries and intends to expand into other
industries, such as financial services, transportation and lodging and
gaming. The Company believes that its proprietary technology and audit
techniques and methodologies also can be applied to these industries. The
Company believes that its typical fee arrangement enhances its ability to
attract new clients because clients pay a contractually negotiated
percentage of overpayments identified by the Company and recovered for
the clients. The Company intends to leverage existing client
relationships into new audit engagements for clients' other operating
units. Based on 1996 sales, 28 of the top 100 retailers worldwide, each
of which had sales of at least $3.9 billion, were clients of the Company
in 1997. The Company principally targets large businesses having at least
$500 million in annual revenues, although smaller businesses may be
attractive clients. Retailers continue to constitute the substantial
majority of the Company's client and revenue base, and the Company's
current marketing efforts are primarily directed toward that industry.
- Pursue Strategic Acquisitions. The Company intends to continue pursuing
the acquisition of domestic and international businesses including both
direct competitors and businesses providing complementary recovery audit
services. As examples, in January 1995, the Company successfully
completed the acquisition of Fial & Associates, Inc., a direct
competitor; in January 1997, the Company acquired Shaps Group, Inc., a
firm providing recovery audit services to manufacturers and distributors
of technology products; in February 1997, the Company acquired Accounts
Payable Recovery Services, Inc., a firm providing recovery audit services
to healthcare entities and energy companies; in May 1997, the Company
acquired The Hale Group, a firm that provides recovery audit services
primarily to healthcare entities; in October 1997, the Company acquired
Alma, a firm that provides tax recovery
-3-
audit services in France; and in November 1997, the Company acquired
TradeCheck, LLC, a firm that provides ocean freight recovery audit
services.
- Expand Recovery Audit Services. The Company seeks to expand its recovery
audit service offerings beyond its traditional accounts payable recovery
audit business. For example, the Company recently began offering tax
recovery and ocean freight audit services following its acquisitions of
Alma and TradeCheck. In addition, the Company intends to expand into or
establish its capabilities in other recovery audit services, including
telecommunications, utilities, freight and sales and property tax.
- Maintain High Client Retention Rates. The Company intends to maintain
and improve its high client retention rate by providing comprehensive
recovery audit services, utilizing highly trained auditors, and
continuing to refine its advanced audit technology. Of the Company's
accounts payable audit clients in 1996 that had claims exceeding $100,000
in that year(excluding clients no longer in existance due to such
clients' bankruptcies or acquisitions), more than 90% continued to
utilize the Company's services in 1997.
- Maintain Technology Leadership. The Company believes its proprietary
technology provides a significant competitive advantage, especially in
audits of EDI accounts payable systems. The Company intends to continue
making substantial investments in technology to maintain its leadership
position and systems capabilities.
- Promote Outsourcing Arrangements. The Company seeks to capitalize on the
growing trend of businesses to outsource internal recovery audit efforts.
The Company believes that its outsourcing clients benefit significantly
from these arrangements because their recoveries generally are larger and
completed more quickly. The Company further believes that as clients
convert their systems to EDI, outsourcing arrangements involving recovery
audit work will become increasingly prevalent due in part to the absence
of traditional "audit trail" documents.
THE PROFIT RECOVERY GROUP SERVICES
The Company provides comprehensive accounts payable, tax and other
ancillary recovery audit services. In 1997, accounts payable recovery audit
services represented approximately 91.0% of the Company's revenues. Assuming the
Alma transaction had occurred on January 1, 1997, accounts payable recovery
audit services and tax recovery audit services would have represented on a pro
forma basis approximately 80.3% and 17.0%, respectively, of the Company's
revenues for 1997.
Accounts Payable Recovery Audit Services
Using its proprietary technology, audit techniques and methodologies, the
Company conducts either primary or secondary accounts payable audits. In primary
audits, the Company is the first independent recovery audit firm engaged. In
secondary audits, the Company audits behind another independent recovery audit
firm. A substantial majority of the accounts payable audits conducted by the
Company are primary audits.
Primary Audits. Although the Company is flexible in structuring recovery
audit programs to meet the individual needs of its clients, there are two basic
types of primary accounts payable audits conducted by the Company: (i) periodic
audits, which are usually performed nine to 18 months after a client's fiscal
year-end; and (ii) continuous audits, marketed as RecoverNow, which are
performed more closely following transaction dates.
In most periodic audits, which constitute the vast majority of the
Company's present audit engagements, the client's internal recovery audit
department conducts a preliminary review of accounts payable records to identify
payment errors. Upon completion of the client's internal recovery audit review
process, which may be as long as nine to 18 months after the client's fiscal
year-end, the Company begins its independent recovery audit.
Under the Company's RecoverNow program, clients provide the Company with
accounts payable data on a regular basis, often within 90 days following the
payment transaction. The Company believes its RecoverNow
4
program generates larger client recoveries for several reasons, including: (i)
transaction data, especially paper-based records, are more complete and
accessible; (ii) the impact of vendor bankruptcies is minimized because claims
are made more timely and continuously throughout the year; (iii) certain
recoveries are facilitated when claims are made prior to the expiration of
seasonal or other special pricing promotions; and (iv) vendor relationships are
improved because of on-going communications regarding billing and payment
practices.
In some cases, the Company's clients outsource all or a portion of their
internal recovery audit functions to the Company. In these cases, the client
does not conduct an internal review prior to the Company's audit. In its
outsourcing engagements, the Company also may use client staff in the review
process. The Company believes that more businesses will outsource their recovery
audit functions in an effort to control personnel and technology costs, focus
resources on their core business functions, and increase recoveries.
Secondary Audits. In secondary audits, the Company conducts an accounts
payable audit after another independent recovery audit firm has completed its
audit. The Company usually receives a higher percentage recovery fee than
received from primary audits because it generally is more difficult to detect
payment errors in secondary audits. In most cases, the Company is able to
identify significant payment errors not previously detected by a client's
primary independent recovery audit firm. The Company utilizes secondary audits
as a marketing strategy to obtain new, primary audit clients and believes it has
been successful in implementing this strategy. Of the 28 secondary audits
performed in 1995 which individually provided revenues to the Company exceeding
$100,000, nine were converted to primary audit clients prior to December 31,
1997.
Tax Recovery Audit Services
With the recent acquisition of Alma, the Company now offers tax recovery
audit services in France. These services include the identification and recovery
of tax overpayments (other than income taxes), including business and personal
property taxes (referred to in France as "fiscal" taxes), workers compensation
taxes (referred to in France as "social" taxes), real property taxes (referred
to in France as "foncier" taxes), and value added taxes (referred to in France
as "TVA" taxes).
Using highly trained, experienced personnel together with proprietary audit
techniques and methodologies, Alma assists businesses in identifying and
recovering tax overpayments and reducing future tax obligations. Alma, with
assistance from professionals such as tax attorneys, physicians and surveyors,
applies its thorough understanding of the numerous complex French tax laws and
audits the factual information which underlies the tax in question. For example,
certain fiscal taxes are based upon a client's number of employees, payroll and
fixed assets. Certain social taxes are based upon industry segment and prior
years' claim history. Foncier or real property taxes are based on the size, use
and valuation of building improvements. Alma is constantly researching new and
expanded tax audit opportunities.
The time necessary to conduct a French tax audit and obtain governmental
approval of a claim can vary significantly based upon the type of audit. A
typical social tax audit, for example, is performed in six to nine months and
governmental approval can take an additional six to 12 months. In certain cases
when the tax authority denies a client's claim, litigation is necessary to seek
recovery. Like the Company's standard accounts payable recovery audits, the
Company receives a contractually negotiated percentage of the taxes recovered.
Ancillary Audit Services
In addition to accounts payable and tax recovery audit services, the
Company also offers ancillary recovery audit services. These ancillary services
may be offered individually or in conjunction with accounts payable and tax
recovery audit services.
- Freight Audits. The Company provides domestic freight audits using
FreightPro, the Company's proprietary freight recovery audit software, and
provides ocean freight audits. The Company also maintains centralized
domestic freight and shipping databases and has auditors who specialize in
freight audits. Freight audits are usually conducted in conjunction with
accounts payable recovery audits.
5
- Lease Compliance Audits. Real estate lease and landlord compliance
audits involve an examination of all aspects of a client's facility lease
arrangements to assist the client in identifying lease overpayments or
expenses incurred through landlord noncompliance with lease terms.
- Telecommunications Audits. This program assists clients in reducing
their overall telecommunications costs. For example, overpayments often
can result from the incorrect application of rates and tariffs. Auditors
also review clients' equipment, usage and systems configuration needs and
make recommendations on how to reduce future telecommunications costs.
- Utility Audits. Auditors also review clients' electrical and natural gas
requirements and analyze alternative rates and billing plans to verify
that the billing was proper and that the proper tariff rate was applied.
- Expense Reduction Audits. With the recent acquisition of Alma, the
Company assists clients in reducing their costs for building and security
services.
CLIENT CONTRACTS
The Company's standard accounts payable client contract provides that the
Company is entitled to a contractual percentage of overpayments recovered for
clients. Clients generally recover claims by taking credits against outstanding
payables or future purchases from the involved vendors. In many cases, the
Company's auditors work on site with client personnel and continually monitor
credits taken. In other situations, Company auditors schedule periodic
reconciliations with clients to determine which claims have been processed for
credit. The Company's standard accounts payable client contract imposes a duty
on the client to process promptly all claims against vendors. In the interest of
maintaining good vendor relations, however, many clients modify the standard
client contract with the Company to provide that they retain discretion on
whether to pursue collection of a claim. In the Company's experience, it is
extremely unusual for a client to forego the collection of a large, valid claim.
In some cases, a vendor may dispute a claim by providing additional
documentation or information supporting its position. Consequently, many clients
revise the Company's standard client contract to clarify that the Company is not
entitled to payment of its fee until the client recovers the claim from its
vendor.
In addition to the client contracts, most accounts payable clients
establish specific procedural guidelines that 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 prior to submitting
claims. With respect to accounts payable recovery audits for retailers,
wholesale distributors and governmental agencies, the Company recognizes
revenues at the time overpayment claims are presented to and approved by its
clients, as adjusted for estimated uncollectible claims. Estimated uncollectible
claims initially are established, and subsequently adjusted, for each individual
client based on a number of factors including historical experience. With
respect to accounts payable and other recovery audits for most entities other
than retailers, wholesale distributors and governmental agencies, the Company
recognizes revenues when it invoices clients for its portion of amounts
recovered.
The Company's standard tax recovery client contract provides that the
Company is entitled to a contractual percentage of the taxes recovered and
anticipated savings for a specified period following the audit. The Company
recognizes revenue from its fiscal, social and foncier tax recovery audit
services when it receives notification that the applicable governmental agency
has approved a claim, the client is entitled to a recovery, and an invoice is
submitted to the client requesting payment. For TVA recovery audit services, the
Company recognizes revenues when all documentation is filed with the appropriate
government agency.
TECHNOLOGY
The Company believes that its proprietary software audit tools and
proprietary databases, together with its centralized data processing
capabilities, provide it a competitive advantage over smaller local and regional
firms, especially when auditing complex EDI accounts payable systems. The
Company has devoted more than six years and has made substantial financial
investments in developing its proprietary technology. At
6
January 31, 1998, the Company's information services department in the United
States had 64 employees, 10 of whom were dedicated to software development
activities, including updating and modifying the Company's existing proprietary
software. In addition, Alma's information services department had four employees
as of January 31, 1998.
Centralized Data Preparation and Verification
At the beginning of a typical accounts payable audit, magnetic media
containing accounts payable transaction data are delivered to the Company's
central data processing facility. Experienced programmers in the Company's
information services department write specialized conversion programs that
permit this data to be reformatted into standardized and proprietary formats
using IBM ES 9000 mainframe and IBM AS 400 midrange computers and Windows NT and
OS/2 Warp Connect servers. Statistical reports are then prepared to verify the
completeness and accuracy of the data. Generally, it is not necessary to rewrite
conversion programs for clients for each successive audit. This reformatted data
is compressed onto CD-ROM media and delivered to the Company's auditors who,
using the Company's proprietary field audit software, sort, filter and search
the data for overpayments. Standard reports and client-specific statistical data
also are produced for auditors.
PC-Based Software Modules
The Company has developed PC-based proprietary software modules for use
primarily in the field by its accounts payable auditors. These software modules
include the following:
- AuditPro is used in non-EDI systems to facilitate auditor-defined
searches of reformatted client accounts payable records for patterns
indicative of potential overpayments. In addition to using the standard
analytical reports produced by AuditPro, auditors may design sophisticated
custom inquiries to sort, filter and print client records.
- EDI Inquiry is a comprehensive module used to sort, filter and print
purchasing, receiving and payment records at the line-item level for
clients operating in an EDI environment. By utilizing line-item detail,
this module facilitates the search of a significantly greater number of
transaction records and improves auditor productivity.
- AuditPro 97 is a newly released module which will eventually replace both
AuditPro and EDI Inquiry. It can be utilized in both EDI and non-EDI
environments and includes considerably greater audit functionality than
the modules it replaces.
- Claims Management System enables the auditor to compile, print and report
on claims information by individual audit. This module also is used to
summarize audit findings for management reports that are typically
provided to clients at the conclusion of each engagement.
- FreightPro is used to audit and produce claims from electronic freight
records. Client freight billing data is compared with vendor routing guide
instructions to isolate potential overcharges.
- ReportPro is a specialized report generator designed to create and
display customized reports in conjunction with the Company's other
proprietary software modules.
Proprietary Databases
The Company has developed and continuously updates and refines its
proprietary accounts payable and other non-tax recovery audit databases that
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 do not
include confidential client information. Auditors use these databases to
identify discounts, allowances and other pricing information not previously
detected.
7
AUDITOR HIRING AND TRAINING
Many of the Company's auditors formerly held finance-related management
positions in the retailing industry. These experienced auditors provide
important insights into certain aspects of the retailing industry. The Company
also has relied on its auditors to assist in creating its auditor training
programs and techniques and in developing its proprietary audit software. To
meet its growing need for additional auditors, the Company has begun hiring
recent college graduates, particularly those with multi-lingual capabilities.
While the Company has been able to hire a sufficient number of new auditors to
support its growth, there can be no assurance that the Company will be able to
continue hiring sufficient numbers of qualified auditors to meet its future
needs.
The Company provides intensive in-house training for auditors utilizing
many self-paced media including specialized computer-based training modules. The
Company utilizes experienced auditors as full-time field trainers to assess each
trainee's progress as he or she completes the training program. The in-house
training program is continuously upgraded based on feedback from auditors and on
changing industry protocols. Additional on-the-job training by experienced
auditors enhances the in-house training and enables newly hired auditors to
refine their skills. Because auditor compensation is based on team performance
results as well as nine different categories of individual competency composed
of job-based skills and personal success factors, the Company believes senior
auditors are motivated to continue training new auditors to maximize client
recoveries and audit team compensation. As the Company hires new auditors, there
can be no assurance that it will be able to continue providing the same in-depth
training or have sufficient numbers of experienced auditors to continue its
on-the-job training program.
CLIENT BASE
The Company provides its services principally to large
transaction-intensive businesses that include retailers, such as discount,
department, specialty, grocery and drug stores, wholesale distributors,
manufacturers and distributors of technology products, certain governmental
agencies and healthcare providers. Based on 1996 sales, 28 of the top 100
retailers worldwide, each having sales in excess of $3.9 billion, were clients
of the Company in 1997. Although the Company targets clients principally with
$500 million or more in annual revenues, smaller businesses may be attractive
clients. Retailers continue to constitute the substantial majority of the
Company's client and revenue base, and the Company's current marketing efforts
are primarily directed toward that industry.
For the years ended December 31, 1997, 1996 and 1995, the Company derived
33.8%, 34.6% and 30.1%, respectively, of its revenues form its five largest
clients. Wal-Mart Stores, Inc. and its affiliates (collectively "Wal-Mart"),
historically the Company's largest client, represented 10.4%, 14.4% and 12.7% of
revenues during 1997, 1996 and 1995, respectively. In 1997, Kmart Corporation
was the Company's largest client representing 12.3% of the revenues during the
period, due in large part to a nonrecurring situation involving concurrent
audits of multiple years. There can be no assurance that the Company's client
base will increase or that the Company's largest clients will continue to
utilize the Company's services at the same level. For example, one of the
Company's five largest accounts representing 4.6% of all of the Company's
domestic revenues for 1996 changed the Company's status from primary recovery
auditor in 1996 to secondary recovery auditor in 1997. This change resulted in
significantly lower revenues from that client in 1997. In addition, should one
or more of the Company's large clients file for bankruptcy or otherwise cease to
do business with the Company, or should one or more of the Company's large
client's vendors file for bankruptcy, the Company's business, financial
condition and results of operations could be materially and adversely affected.
SEASONALITY
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.
Should this trend not continue, the Company's profitability for any affected
quarter and the entire year could be materially and adversely impacted due to
ongoing selling, general and administrative expenses that are largely fixed over
the short term.
8
SALES AND MARKETING
The Company markets its services primarily through one-on-one meetings with
executives of targeted clients. The decision to engage a recovery audit firm is
similar to the decision to engage most professional service firms and usually
involves a lengthy period of familiarization, investigation and evaluation by
the prospective client. The sales cycle often exceeds one year in both domestic
and international markets. In the U.S. and Canada, where the use of recovery
audit services is a generally accepted business practice among retailers, the
Company generally must displace a competing firm in order to expand market
share. In many other countries, recovery auditing is a new business service that
requires an initial educational process in order to gain acceptance.
At January 31, 1998, the Company's marketing staff consisted of 12 persons
in the United States headed by a senior officer and 36 persons in Europe. The
Company plans to expand its marketing staff in the U.S. and internationally as
its business grows and it enters new markets.
PROPRIETARY RIGHTS
The Company continuously develops new recovery audit software and enhances
existing proprietary software. The Company regards its proprietary software as
protected by trade secret and copyright laws of general applicability. In
addition, the Company attempts to safeguard its software through employee and
third-party nondisclosure agreements and other methods of protection. Despite
these precautions, it may be possible for unauthorized third parties to copy,
obtain or reverse engineer certain portions of the Company's software or
otherwise to obtain or use other information the Company regards as proprietary.
While the Company's competitive position may be affected by its ability to
protect its software and other proprietary information, the Company believes
that the protection afforded by trade secret and copyright laws is less
significant to the Company's success than the continued pursuit and
implementation of its operating strategies and other factors such as the
knowledge, ability and experience of its personnel.
The Company has registered its copyrights for AuditPro, EDI Inquiry, Claims
Management System, FreightPro and RecoverNow with the U.S. copyright office.
Third parties with functionally similar software could assert claims under the
Copyright Act of 1986, as amended, the federal patent law or state trade secret
laws that the Company's proprietary recovery audit software application products
infringe or may infringe the proprietary rights of such entities. These third
parties may seek damages from the Company as a result of such alleged
infringement, demand that the Company license certain proprietary rights from
them or otherwise demand that the Company cease and desist from its use or
license the allegedly infringing software. Such action may result in protracted
and costly litigation or royalty arrangements or otherwise have a material
adverse effect on the Company's business, financial condition or results of
operations. Although the Company believes that its recovery audit software does
not infringe on the intellectual property rights of others and the Company knows
of no such pending or other extended claims of infringement, there can be no
assurance that such a claim will not be asserted against the Company in the
future.
The Company's trademarks include "Profit Recovery Group International,"
"PRG," "AuditPro," "AuditPro 97," "EDI Inquiry," "Claims Management System,"
"FreightPro," "ReportPro" and "RecoverNow." The Company has registered "Profit
Recovery Group International," "PRG," "AuditPro," "RecoverNow" and the Company's
logo as federal trademarks with the U.S. Patent and Trademark Office. There can
be no assurance, however, that the Company will be successful in its attempt to
register such trademarks or that it otherwise will be able to continue to use
any of the foregoing trademarks.
The Company has filed applications for protection of certain of its
trademarks outside of the U.S. in the various countries where the Company
conducts business, and such protection is available. There can be no assurance,
however, that the Company will be successful in its attempt to register or
continue to use such trademarks outside of the U.S.
9
COMPETITION
The recovery audit business is highly competitive. The competitive factors
affecting the market for the Company's recovery audit services include:
establishing and maintaining client relationships, quality and quantity of
claims identified, experience and professionalism of audit staff, rates for
services, technology and geographic scope of operations. The Company's principal
competitors for accounts payable recovery audit services include local and
regional firms and one firm, Howard Schultz & Associates, with a network of
affiliate organizations in the U.S. and abroad. The Company believes that Howard
Schultz & Associates has been in operation longer than the Company and may have
achieved greater revenues than the Company in 1997. The Company's competitors
for tax recovery audit services in France include major international accounting
firms, tax attorneys and several smaller tax recovery audit firms. There can be
no assurance that the Company will continue competing successfully with such
competitors.
The Company believes that as large, transaction-intensive businesses expand
internationally and implement EDI accounts payable systems, smaller recovery
audit firms will lack the technology and infrastructure necessary to remain
competitive unless they make substantial investments to upgrade and expand their
skills, technologies and geographic scope of operations.
EMPLOYEES
At January 31, 1998, the Company had 1,174 employees, 709 of whom were
located in the U.S., with 575 persons in the audit function, 12 persons in sales
and marketing, 64 persons in information services and the remainder in
corporate, finance and administrative functions. In addition to its 465
employees located outside the U.S., internationally the Company engaged 26
independent contractors at January 31, 1998. The Company believes its employee
relations are good.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Consolidated Financial Statements.
For the following consolidated financial information included herein,
see Index on Page 21:
Independent Auditors' Reports
Consolidated Statements of Earnings for the Years ended December
31, 1997, 1996 and 1995
Consolidated Balance Sheets as of December 31, 1997 and 1996
Consolidated Statements of Shareholders' Equity (Deficit) for the
Years ended December 31, 1997, 1996 and 1995
Consolidated Statements of Cash Flows for the Years ended
December 31, 1997, 1996 and 1995
Notes to Consolidated Financial Statements
(b) All financial statement schedules are omitted for the reason that they
are either not applicable or not required or because the information is
contained in the consolidated financial statements or notes thereto.
(c) Reports on Form 8-K.
On October 22, 1997, Registrant filed Form 8-K regarding Registrant's
October 7, 1997 acquisition of 98.4% of Financiere Alma, S.A. and its
subsidiaries (collectively, "Alma").
On November 21, 1997, Registrant filed Form 8-K/A to provide required
audited and pro forma financial statements regarding Alma.
(d) Exhibits
+2.1-- Agreement and Plan of Reorganization dated January 4, 1995, among The
Profit Recovery Group, Inc., Fial & Associates, Inc. and T. Charles
Fial. The following is a list of omitted schedules and exhibits which
the Registrant agrees to furnish supplementally to the Commission upon
request: Exhibits: A--List of Purchasers, with Principal Amount of
Each Purchaser's Note; B--Form of Note; C-1 and C- 2--Form of Amended
and Restated Partnership Agreement; D-1 and D-2--Form of Amended and
Restated Certificate of Limited Partnership; E--Form of Registration
Rights Agreement; Schedules; 2F--List of Shareholders and
Proportionate Obligation to Purchase; 2L--Earnings Test; 3C--List of
Limited Partners and Their Respective Units; 3D--List of Stockholders
of General Partner and Their Respective Ownership Interests;
3F--Balance Sheet; and 3P--Transactions with Affiliates.
+2.2-- Note Purchase Agreement dated April 27, 1995, among The Profit
Recovery Group International, L.P. (the "Partnership"), The Profit
Recovery Group International I, Inc., T. Charles Fial and certain
limited partners and purchasers named therein. The following is a list
of omitted schedules and exhibits which the Registrant agrees to
furnish supplementally to the Commission upon request: Schedules:
1.1(c)--Contracts and Agreements; 1.1(f)--Fixed Assets; 3.6--Company
Trade Area; 3.7--Affiliated Companies; 4.8--Employee Plans;
4.13--Seller's Tax Returns; 4.14--Employee Bonuses; 4.15--Accounts
Receivable; 4.16--Independent Contractors; 5.1-A--Articles of
Incorporation of Purchaser; 5.1-B--List of agreements among
shareholders of Purchaser; 5.7--Certain Liabilities of Purchaser;
5.8--Subsequent Events; Exhibits: 1.3(a)--Bill of Sale;
1.3(b)--Assignment and Assumption Agreement; 3.2--Consulting
Agreement; 3.3--Form of Noncompetition Agreement with Stockholder;
3.9--Stockholders' Agreement; 7.1(a)(vi)--Form of Opinion of Counsel
to Seller and Stockholder; and 7.1(b)(ix)--Form of Opinion of Counsel
to Purchaser.
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+3.1-- Articles of Incorporation of the Registrant.
+3.2-- Amended and Restated Bylaws of the Registrant.
+4.1-- Specimen Common Stock Certificate.
+4.2-- See Articles of Incorporation and Bylaws of the Registrant, filed as
Exhibits 3.1 and 3.2, respectively.
*+10.1-- Letter Agreement dated May 25, 1995 between Wal-Mart Stores, Inc. and
Registrant.
+10.2-- 1996 Stock Option Plan dated as of January 25, 1996, together with
Forms of Non-qualified Stock Option Agreement.
+10.3-- The Profit Recovery Group International I, Inc. 401(k) Plan.
+10.4-- Form of Employment Agreement, dated March 20, 1996, between the
Registrant and John M. Cook.
+10.5-- Form of Employment Agreement, dated March 20, 1996, between the
Registrant and John M. Toma.
+10.6-- Form of Employment Agreement, dated March 20, 1996, between the
Registrant and Paul J. Dinkins.
+10.7-- Form of Employment Agreement, dated March 20, 1996, between the
Registrant and Brian M. O'Toole.
+10.8-- Form of Employment Agreement, dated March 20, 1996, between the
Registrant and Donald E. Ellis, Jr.
+10.9-- Form of Consulting Agreement, dated January 1, 1996, between The
Profit Recovery Group International , Inc. and SBC Financial
Corporation, Jonathan Golden, P.C. and Berkshire Partners.
+10.10-- Form of Identification Agreement between the Registrant and the
Directors and certain officers of the Registrant.
+10.11-- First Amendment to Amended and Restated Loan and Security Agreement
dated January 3, 1996 among NationsBank of Georgia, N.A.
("NationsBank"), the Partnership and certain guarantors named therein.
+10.12-- Amended and Restated Loan and Security Agreement dated April 27, 1995
among NationsBank, the Partnership and certain guarantors named
therein. The following is a list of omitted schedules and exhibits
which the Registrant agrees to furnish supplementally to the
Commission upon request: Exhibits: A-1--Amended and Restated
Promissory Note, A-2--Amended and Restated Promissory Note,
B-1--Borrower's Business Locations, B-2--Other Business Locations,
C-1--Borrower's Corporate Names, C-2--Other Corporate Names,
D--Litigation, E--Form of Compliance Certificate, F--Berkshire
Lenders, G--Other Liens, H--Indebtedness.
+10.13-- First Amendment to Loan and Security Agreement dated January 4, 1995
among NationsBank, The Profit Recovery Group, Inc., PRG International,
Inc., the Partnership and the Foreign Companies.
+10.14-- Loan and Security Agreement dated March 24, 1994 among NationsBank,
The Profit Recovery Group, Inc., PRG International, Inc., the
Partnership and the Foreign Companies. The following is a list of
omitted schedules and exhibits which the Registrant agrees to furnish
supplementally to the Commission upon request; Exhibits:
A-1--Promissory Note, A-2--Promissory Note, B-1--Borrower's Business
Locations, B-2--Other Business Locations, C-1--Borrower's Corporate
Names, C-2--Other Corporate Names, D--Litigation, E--Form of
Compliance Certificate, F--Collateral Assignment of Policy, G--Other
Liens, H--Indebtedness.
+10.15-- Sublease dated October 29, 1993, between The Profit Recovery Group
International I, Inc. and International Business Machines Corporation.
+10.16-- Lease dated January 19, 1996 between the Partnership and "J" Street
Development Inc.
+10.17-- Agreement dated January 19, 1996 between the Partnership and May
Construction Company, Inc. The following is a list of omitted
schedules and exhibits which Registrant agrees to furnish
supplementally to the Commission upon request: Exhibit A--General
Conditions of the Contract for Construction.
+10.18-- Second Amendment to Amended and Restated Loan and Security Agreement
dated February 8, 1996 among NationsBank, the Partnership, The Profit
Recovery Group International I, Inc., PRG International Holding Co.
and the Foreign Companies.
+10.19-- First Sublease Amendment dated February 12, 1996 among International
Business Machines Corporation, the Partnership and The Profit Recovery
Group International I, Inc.
+10.20-- Promissory Note dated February 8, 1996, in the amount of $1,600,000 by
the Partnership to CT Investments, L.L.C.
**10.21-- Loan and Security Agreement by and among NationsBank, N.A. (South) as
Lender, and The Profit Recovery Group International, Inc. as Borrower,
and Certain Affiliates of Borrower, as Guarantors, dated September 27,
1996.
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***10.22-- First Amendment dated March 7, 1997 to Employment Agreement between
the Registrant and John M. Cook.
****10.23-- The Profit Recovery Group International, Inc. Employee Stock
Purchase Plan.
*****10.24-- Contract for the Mandate of the President of the Directorate, dated
October 7, 1997, between Alma Intervention and Marc Eisenberg.
*****10.25-- Consulting Agreement, dated October 7, 1997, between the Registrant
and Lieb Finance S.A.
*****10.26-- Second Amendment to Employment Agreement, dated September 17, 1997,
between The Profit Recovery Group International I, Inc. and John M.
Cook.
*****10.27-- Employment Agreement, dated October 17, 1997, between The Profit
Recovery Group International I, Inc. and Michael A. Lustig.
*****10.28-- Compensation Agreement, dated October 17, 1997, between The Profit
Recovery Group International I, Inc. and Michael A. Lustig.
*****10.29-- First Amendment to Loan and Security Agreement, dated October 3,
1997, between NationsBank, N.A. and the Registrant and its
subsidiaries.
++++10.30-- Lease Agreement dated January 30, 1998 between Wildwood Associates
and The Profit Recovery Group International I, Inc.
++10.31-- Services Agreement dated April 7, 1993 between Registrant and Kmart
Corporation as amended by Addendum dated January 28, 1997.
++++10.32-- Employment Agreement dated August 26, 1996 between Registrant and
Tony G. Mills; Compensation Agreement dated August 26, 1996 between
Registrant and Mr. Mills; and description of 1998 compensation
arrangement between Registrant and Mr. Mills.
++++10.33-- Employment Agreement dated August 23, 1996 between Registrant and
David A. Brookmire; Compensation Agreement dated August 23, 1996
between Registrant and Mr. Brookmire; and description of 1998
compensation arrangement between Registrant and Mr. Brookmire.
++++10.34-- Description of 1998-2002 compensation arrangement between
Registrant and John M. Cook.
++++10.35-- Description of 1998 compensation arrangement between Registrant and
John M. Toma.
++++10.36-- Description of 1998 compensation arrangement between Registrant and
Michael A. Lustig.
++++10.37-- Description of 1998 compensation arrangement between Registrant and
Donald E. Ellis, Jr.
+++10.38-- Employment Agreement between Registrant and Robert G. Kramer;
Compensation Agreement between Registrant and Mr. Kramer; and
description of 1998 compensation arrangement between Registrant and
Mr. Kramer.
+++10.39-- Employment Agreement between Registrant and Clinton McKellar, Jr.;
Compensation Arrangement between Registrant and Mr. McKellar; and
description of 1998 compensation arrangement between Registrant and
Mr. McKellar.
++++21.1-- Subsidiaries of the Registrant.
++++23.1-- Consent of KPMG Peat Marwick LLP.
++++23.2-- Consent of ERNST & YOUNG Entrepreneurs.
++++27.1-- Financial Data Schedule (for SEC use only).
- -----------------------
+ Incorporated by reference to Exhibit of same number of the
Registrant's Registration Statement on Form S-1 (Registration No.
333-1086).
* Confidential treatment pursuant to 17 CFR ss.ss. 200.80 and 230.406
has been granted regarding certain portions of the indicated
Exhibit, which portions have been filed separately with the
Commission.
+++ Filed herewith.
++ Confidential treatment pursuant to 17 CFR ss.ss. 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.
** Incorporated by reference to Exhibit 10.1 of Registrant's Form 10-Q
for the quarterly period ended September 30, 1996.
*** Incorporated by reference to Exhibit of same number of the
Registrant's Form 10-K for the year ended December 31, 1996.
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**** Incorporated by reference to Exhibit "A" to Registrant's proxy
statement dated April 15, 1997, which was issued in connection with
Registrant's 1997 Annual Meeting of Shareholders.
***** Incorporated by reference to Exhibits 10.1-10.6 of Registrant's
Form 10-Q for the quarterly period ended September 30, 1997.
++++ Previously filed.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
THE PROFIT RECOVERY GROUP
INTERNATIONAL, INC.
March 13, 1998 By: /s/ JOHN M. COOK
----------------
John M. Cook
Chairman of the Board
and Chief Executive Officer
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