ITEM 1.     Business

      PRG-Schultz International, Inc., a United States of America based Company, 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 operates in over 40 different countries. See Note 5 of Notes to Consolidated Financial Statements included in Item 8. of this Form 10-K for the worldwide operating segment disclosures. The Company’s principal reportable operating segment is the Accounts Payable Services segment with all other operations reported in the Other Ancillary Services segment.

      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 Channel Revenue 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.

      As indicated in the preceding paragraph, Meridian, the Communications Services business, and the Channel Revenue business were originally offered for sale in the first quarter of 2001. During the first quarter of 2002, the Company concluded that the then current negative market conditions were not conducive to receiving terms acceptable to the Company for these businesses. As such, on January 24, 2002, the Company’s Board of Directors approved a proposal to retain these three remaining discontinued operations. The Company’s Consolidated Financial Statements included in Item 8. of this Form 10-K have been reclassified to reflect Meridian, the Communications Services business and the Channel Revenue business as part of continuing operations for all periods presented. In addition, Logistics Management Services, a unit that was closed within Communications Services, and French Taxation Services have been presented as discontinued

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      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 procurement technologies involving the Internet will significantly enhance recovery audit opportunities in both the short-term and long-term.

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

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

The Acquisitions of the Businesses 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”).

      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. 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 senior bank credit facility were used to fund closing costs related to the acquisitions of the businesses of HSA-Texas and affiliates and to repay certain indebtedness of HSA-Texas and affiliates.

      In connection with the acquisitions of the businesses of HSA-Texas and affiliates, the Company changed its name to PRG-Schultz International, Inc.

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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. The Company also believes that it has significantly strengthened its accounts payable business through the January 2002 acquisitions of the businesses of HSA-Texas and affiliates, formerly the Company’s principal competitor in this business.
	•	Continue to grow the Domestic Accounts Payable Services Business. Although the Company is by far the largest domestic provider of accounts payable services, there is still a large number of potential clients in the U.S. that either do not currently utilize outside accounts payable recovery audit service providers, or do utilize such services but obtain them from the Company’s competitors. The Company’s sales and marketing professionals are continuously working to secure new clients. Additionally, the Company intends to capitalize on continuing advancements in data communications technology to grow its domestic Accounts Payable Services business. The Company’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 eventually pursue new small and mid-sized clients which historically, due to technology constraints, the Company has not been able to service in a profitable manner.

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	•	Expand International Operations. To date, many large international retailers and other international businesses have not utilized recovery audit services to the same extent as similar firms based in the U.S., Canada, the United Kingdom and Mexico. However, the Company believes that many international businesses are increasingly engaging independent recovery audit firms. The Company intends to focus its resources on pursuing potential international clients in geographic regions that it believes offer the greatest potential return on investment. The Company also intends to capitalize on its leading worldwide presence to provide greater recovery audit services to multi-national companies with significant and expanding international operations. An additional area of international growth emphasis is working with clients to obtain increasingly greater types and quantities of electronic purchase data, and to reduce client-imposed restrictions on the scope of the Company’s work. Electronic purchase data availability and scope restrictions are among the greatest international challenges the Company faces, but are also believed to present the greatest near-term opportunities for international revenue growth.
	•	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 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 typically 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 that 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

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      The Company also examines merchandise procurements and other payments made by business entities such as manufacturers, distributors and healthcare providers that are collectively termed as “commercial” clients. The substantial majority of the Company’s domestic commercial Accounts Payable Services clients are currently served using a “basic-scope” model which typically entails acquisition from the client of limited purchase data and an audit focus on a select few recovery categories. Services to these types of clients to date have tended to be either “one-time” with no subsequent repeat or rotational in nature with different divisions of a given client often audited in pre-arranged annual sequences. Accordingly, revenues derived from a given client may change markedly from year-to-year. Additionally, the duration of a “basic-scope” audit is usually measured in weeks and the number of auditors assigned per client is usually one or two. Currently, the majority of the Company’s commercial clients are located in North America and the United Kingdom, although the Company 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, regardless of their industry, to the extent 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.

      The following specialty areas comprise the Company’s Other Ancillary Services operations:

      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.

      The Communications Services business analyzes and summarizes its clients’ current telecommunications invoices, routing patterns and usage volumes to enable interdepartmental expense allocations. It also applies its specialized expertise to historical client telecommunications records to identify and recover refunds of previous overpayments. The Communications Services business also provides expense management services such as invoice processing and call accounting.

      The Channel Revenue 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. Channel Revenue clients generally receive two audits each year.

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Client Contracts

      The Company’s typical client contract provides that the Company is entitled to a stipulated percentage of overpayments or other savings recovered for or realized by clients. Clients generally recover claims by either (a) taking credits against outstanding payables or future purchases from the involved vendors, or (b) receiving refund checks directly from those vendors. The method of effecting a recovery is often dictated by industry practice. For some services, the client contract provides that the Company is entitled to a 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.

Technology

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

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

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

      The Company employs a variety of proprietary audit tools, proprietary databases and Company-owned and co-locational data processing facilities in its Accounts Payable Services business. Client transaction systems are designed to optimize execution in the present time. The Company’s tools provide visibility to past transactions and allow its auditors to take frequent snapshots of data. The Company’s proprietary technology is optimized for mining overpayments with the flexibility of coordinating these snapshots in time.

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

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

      The Company’s experienced technology professionals then prepare statistical reports to verify the completeness and accuracy of the data. The Company delivers this reformatted data to its auditors who, using the Company’s proprietary client server-based field audit software, sort, filter and search the data for

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

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

      Although various proprietary processes and databases are used to conduct telecommunications audits, the Communications Services business 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 that provides the client with information from the services delivered. The proprietary software is used to facilitate charge back reporting, to process client invoices and to report the status of 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.

      The Channel Revenue business employs proprietary audit methodologies to analyze data in search of various situations in which its clients may not have received all of the revenues to which they are entitled.

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 the largest part of the Company’s client and revenue base. The Company’s five largest clients contributed approximately 22.6% and 25.1% of its revenues from continuing operations for the years ended December 31, 2002 and 2001, respectively. The Company did not have any clients that contributed 10.0% or more of revenues from continuing operations for the year ended December 31, 2002. The Company’s largest client, Wal-Mart International, contributed 10.0% of total revenues for the year ended December 31, 2001.

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Sales and Marketing

      Due to the highly confidential and proprietary nature of a business’s 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 that are the most annuity-like in nature such as a “broad-scope” audit require the longest sales cycle and highest levels of direct person-to-person contact. Conversely, service offerings that are short-term, discrete events, such as certain “basic-scope” audits, are susceptible to more cost effective sales and marketing delivery approaches such as telemarketing.

Proprietary Rights

      The Company continuously develops new recovery audit software and methodologies that enhance existing proprietary software and methodologies. The Company regards its proprietary software as protected by trade secret and copyright laws of general applicability. In addition, the Company attempts to safeguard its proprietary software and methodologies through employee and third-party nondisclosure agreements and other methods of protection. While the Company’s competitive position may be affected by its ability to protect its software and other proprietary information, the Company believes that the protection afforded by trade secret and copyright laws is generally less significant to the Company’s overall success than the continued pursuit and implementation of its operating strategies and other factors such as the knowledge, ability and experience of its personnel.

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

Competition

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

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

      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.

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Employees

      At January 31, 2003, the Company had approximately 3,350 employees, of whom approximately 2,160 were located in the U.S. The majority of the Company’s employees are involved in the audit function. The Company believes its employee relations are satisfactory.

Website

      The Company makes available free of charge on its website, www.prgx.com, its annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to those reports. Since November 15, 2002, the Company has made all filings with the Securities and Exchange Commission available on its website, no later then the close of business on the date the filing was made. In addition, investors can access the Company’s filings with the Security Exchange Commission at www.sec.gov/edgar.shtml.

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RISK FACTORS

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

      Our business was significantly disrupted in the aftermath of the terrorist events that occurred in the United States on September 11, 2001. In the days and months following September 11, 2001, many of our clients in the United States were urgently attending to new security imperatives and other matters of immediate priority. Additionally, there was an understandable and temporary reluctance on the part of our employees and clients to travel by air in order to conduct business. As a partial consequence of the events of September 11, 2001, our Company’s revenues and earnings for the quarter ended September 30, 2001 were significantly below both internally-planned and externally-published expectations. Future external factors such as the potential conflict with Iraq and/or future terrorist events could again have a material and adverse affect on our revenues and earnings, including, potentially, adverse affects on both our United States operations and our international operations.

We 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, 2002 and 2001, our two largest clients accounted for approximately 14.5% and 14.9% 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. This is especially true with regard to retailers worldwide from which the Company derives a majority portion of its consolidated revenues. Additionally, adverse economic conditions throughout the world have increased, and they continue to increase, the financial difficulties experienced by our clients. On January 22, 2002, K-Mart Corporation, which accounted for 0.1% and 4.9% of our 2002 and 2001 revenues from continuing operations, respectively, filed for Chapter 11 Bankruptcy reorganization. At the time of the K-Mart filing, K-Mart owed the Company $2.0 million for services invoiced but unpaid. Of this amount, the Company charged $1.5 million to expense in 2001 and the remaining $0.5 million to expense in 2002. As a direct consequence of the bankruptcy filing, the Company derived modest revenues from K-Mart in 2002 and currently expects moderate revenues from K-Mart in 2003. There can be no assurances that the Company’s expected level of 2003 revenues from K-Mart will be achieved. In addition, further bankruptcy filings by one or more of our other significant clients, or significant vendors who supply them, or unexpectedly large vendor claim chargebacks lodged against our clients, could have a material adverse affect on our financial condition and results of operations. Likewise, our failure to collect our accounts receivable due to the financial difficulties of one or more of our large clients could adversely affect our financial condition and results of operations even if such clients do not ultimately file for bankruptcy protection.

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

      The substantial majority of our domestic commercial Accounts Payable Services clients are currently served using a “basic-scope” model that typically entails acquisition from the client of limited purchase data and an audit focus on a select few recovery categories. We believe that the market for providing “basic-scope” recovery audit services to commercial entities in the U.S. is reaching maturity with the existence of many competitors and increasing pricing pressures. We intend to distinguish ourselves by providing recurring, “broad-scope” audits to commercial entities where line item client purchase data is available and client purchase volumes are sufficient to achieve the Company’s profitability objectives. “Broad-scope” audits

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Our revenues from certain clients may change markedly from year-to-year.

      We examine merchandise procurements and other payments made by business entities such as manufacturers, distributors and healthcare providers. Services to these types of clients to date have tended to be either “one-time” or rotational in nature with different divisions of a given client often audited in pre-arranged annual sequences. Accordingly, revenues derived from a given client may change markedly from year-to-year depending on factors such as the size and nature of the client division under audit.

We rely on international operations for significant revenues.

      In 2002, approximately 31.0% of our revenues from continuing operations were generated from international operations. International operations are subject to risks, including:

	•	political and economic instability in the international markets we serve;
	•	difficulties in staffing and managing foreign operations and in collecting accounts receivable;
	•	fluctuations in currency exchange rates, particularly weaknesses in the Australian Dollar, the Euro, the British Pound, the Canadian Dollar, the Argentine Peso, the Brazilian Real and other currencies of countries in which we transact business, which could result in currency translations that materially reduce our revenues and earnings;
	•	costs associated with adapting our services to our foreign clients’ needs;
	•	unexpected changes in regulatory requirements and laws;
	•	difficulties in transferring earnings from our foreign subsidiaries to us; 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.

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

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

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

      Prior to 2001, the Company had historically experienced significant seasonality in its business. We typically realized higher revenues and operating income in the last two quarters of our fiscal year. This trend reflected the inherent purchasing and operational cycles of our clients. During the year ended December 31, 2001, we did not experience the revenue and operating income trend that we had historically experienced in prior years due primarily to the impact of the events in the United States on September 11, 2001 and costs incurred that were associated with the Company’s abandoned attempt to sell certain discontinued operations subsequently retained. As of January 24, 2002, the Company’s results of operations have included the results of the business acquired as part of the acquisitions of the businesses of HSA-Texas and affiliates. Also impacting 2002, were certain costs associated with the integration of the acquired operations and the integration of the Company’s domestic retail and domestic commercial operations. We currently believe that our revenues and operating income in 2003 will return to the same seasonality previously experienced prior to 2001. If this belief is subsequently borne out and we do not 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 revised compensation plan in the United States may cause us to lose auditors.

      We are in the process as of March 2003 of implementing a revised compensation plan in the United States for our field audit professionals. Although this plan has been carefully developed over a considerable period of time by a task force that included field auditor representation, there can be no assurance that all of our United States field audit professionals will find it acceptable, and some may choose to leave our employment as a result. If we cannot retain or hire sufficient numbers of qualified auditors in the United States to meet our needs, our future revenues and profitability could be materially adversely impacted.

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

      We and John M. Cook, our Chief Executive Officer, are defendants in three class action lawsuits initiated 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 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 failure to retain the services of John M. Cook, or other key members of management, could adversely impact our continued success.

      Our continued success depends largely on the efforts and skills of our executive officers and key employees, particularly John M. Cook, our Chief Executive Officer and Chairman of the Board. The loss of the services of Mr. Cook or other key members of management could materially and adversely affect our

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

      The Company’s Meridian unit and an unrelated German concern named Deutscher Kraftverkehr Euro Service GmbH & Co. KG (“DKV”) are each a 50% owner of a joint venture named Transporters VAT Reclaim Limited (“TVR”). Since neither owner, acting alone, has majority control over TVR, Meridian accounts for its ownership using the equity method of accounting. DKV provides European truck drivers with a credit card that facilitates their fuel purchases. DKV distinguishes itself from its competitors, in part, by providing its customers with an immediate advance refund of the Value Added Taxes (“VAT”) paid on fuel purchases. DKV then recovers the VAT from the taxing authorities through the TVR joint venture. Meridian processes the VAT refund on behalf of TVR, for which it receives a percentage fee. TVR maintains a 38.3 million Euro ($40.2 million at December 31, 2002 exchange rates) financing facility with Barclays Bank plc (“Barclays”) whereby its sells the VAT refund claims to Barclays with full recourse. As of December 31, 2002, there was 35.0 million Euro ($36.7 million at December 31, 2002 exchange rates) outstanding under this facility. As a condition of the financing facility between TVR and Barclays, Meridian has provided an indemnity to Barclays for any losses that Barclays may suffer in the event that Meridian processes any fraudulent claims on TVR’s behalf. Meridian has not been required to remit funds to Barclays under this indemnity and the Company believes the probability of the indemnity clause being invoked is remote. Meridian has no obligation to Barclays as to the collectibility of VAT refund claims sold by TVR to Barclays unless fraudulent conduct is involved. The Barclays credit financing facility expires on March 31, 2003 and negotiations are currently underway to extend it. Should the Barclays credit financing facility not be extended or if it is extended under financial terms and conditions that are more expensive to TVR, Meridian’s future revenues from TVR ($3.6 million in 2002) and the associated profits therefrom could be substantially reduced or even eliminated. Moreover, if the new financing terms and conditions are such that they eventually cause a marked deterioration in TVR’s future financial condition, Meridian may be unable to recover some or all of its long-term investment in TVR which was $2.4 million at December 31, 2002. This investment is included in Other Assets on the Company’s December 31, 2002 Consolidated Balance Sheet included in Item 8. of this Form 10-K.

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.

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

      We believe that we are the largest recovery audit firm in the world and possess considerable and unique competitive advantages that would be difficult to duplicate. Nevertheless, the recovery audit business is highly competitive. Our principal competitors for accounts payable recovery audit services include numerous smaller firms. We can not provide assurance that 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.

We have violated our debt covenants in the past and may inadvertently 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 cancelled the prior credit facility. We have remained continuously in compliance with all financial ratio covenants contained in the new credit facility during 2002. Nevertheless, no assurance can be provided that we will not violate the covenants of our 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.

Future impairment of goodwill and other intangible assets could materially reduce our future earnings.

      Effective January 1, 2002, the Company implemented Statement of Financial Accounting Standards (“SFAS”) No. 142, Goodwill and Other Intangible Assets. SFAS No. 142 requires that goodwill and intangible assets with indefinite useful lives no longer be amortized, but instead, such assets must be tested for impairment at least annually in accordance with the provisions of SFAS No. 142. This statement also requires that intangible assets with estimable useful lives be amortized over their respective estimated useful lives and reviewed for impairment in accordance with SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets . The Company and its independent valuation advisors completed all required transitional testing related to the adoption of SFAS No. 142 in the second quarter of 2002. Based upon this testing, the Company concluded that all net goodwill balances relating to its Communications Services and Channel Revenue reporting units, which are part of the Company’s Other Ancillary Services segment, were impaired. As a result, the Company recognized a before-tax charge of $28.3 million as a cumulative effect of an accounting change, retroactive to January 1, 2002. The Company recorded an income tax benefit of $11.1 million as a reduction to this goodwill impairment charge, resulting in an after-tax charge of $17.2 million. During the fourth quarter of 2002, the Company, working with independent valuation advisors, completed the required annual impairment testing and concluded that there was not an impairment of goodwill or intangible assets with indefinite useful lives as of October 1, 2002. As of December 31, 2002, the Company had a consolidated goodwill asset of $371.8 million, consisting of $363.6 million relating to the Accounts Payable Services segment and $8.2 million relating to the Other Ancillary Services segment and other intangible assets of $36.2 million relating to the Accounts Payable Services segment. To the extent that management (or its independent valuation advisers) misjudges or miscalculates any of the critical factors necessary to determine whether or not there is a goodwill or other intangible assets impairment, or if any of our goodwill or other intangible assets are accurately determined to be impaired, our future earnings could be materially adversely impacted.

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

      Our articles of incorporation and bylaws and Georgia law contain provisions that may delay, deter or inhibit a future acquisition of us not approved by our board of directors. This could occur even if our shareholders are offered an attractive value for their shares or if a substantial number or even a majority of our shareholders believe the takeover is in their best interest. These provisions are intended to encourage any person interested in acquiring us to negotiate with and obtain the approval of our board of directors in connection with the transaction. Provisions that could delay, deter or inhibit a future acquisition include the following:

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

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

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;
	•	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.

We may be required to repurchase convertible notes.

      In certain circumstances, including a change in control, the holders of our convertible notes may require us to repurchase some or all of the notes. We cannot assure that we will have sufficient financial resources at such time or that we will be able to arrange financing to pay the repurchase price of the convertible notes. We may be required to refinance our senior indebtedness in order to make such payments, and we can give no assurance that we would be able to obtain such financing on acceptable terms or at all. Our failure to repurchase the notes would be an event of default under the notes, which could materially adversely affect our business, financial position and results of operations.

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

      We anticipate a growing need for recovery auditing services among current clients migrating to Internet-based procurement, as well as potential clients already engaged in electronic commerce transactions. In response to this anticipated future demand for our recovery auditing expertise, we have made and may continue to make significant capital and other expenditures to further expand into Internet technology areas. We can give no assurance that these investments will be profitable or that we have correctly anticipated demand for these services.

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 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 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, clients, competitors and United States and foreign governmental authorities, and various other factors. Should any one or more of these risks or uncertainties materialize, or the underlying estimates or assumptions prove incorrect, actual results may vary significantly and markedly from those expressed in such forward-looking statements, and there can be no assurance that the forward-looking statements contained in this Form 10-K will in fact occur.

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      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.