PRGX Global, Inc.
Annual Report 2012

Plain-text annual report

Table of Contents UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549 Form 10-K (Mark One)xANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the fiscal year ended December 31, 2012OR ¨TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the transition period from to Commission File Number 0-28000 PRGX Global, Inc.(Exact name of registrant as specified in its charter) Georgia 58-2213805(State or other jurisdiction ofincorporation or organization) (I.R.S. EmployerIdentification No.)600 Galleria ParkwaySuite 100Atlanta, Georgia 30339-5986(Address of principal executive offices) (Zip Code)Registrant’s telephone number, including area code: (770) 779-3900Securities registered pursuant to Section 12(b) of the Act: Title of each class Name of each exchange on which registeredCommon Stock, No Par Value The NASDAQ Stock Market LLC (The Nasdaq Global Select Market)Preferred Stock Purchase Rights The NASDAQ Stock Market LLC (The Nasdaq Global Select Market)Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨ No xIndicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨ No xNote – Checking the box above will not relieve any registrant required to file reports pursuant to Section 13 or 15(d) of the Exchange Act from theirobligations under those Sections.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 1934during 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 requirementsfor 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 bestof 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 Form10-K. ¨Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File requiredto be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required tosubmit and post such files). Yes x No ¨Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. Seedefinitions of “large accelerated filer,” “accelerated filer” and “small reporting company” in Rule 12b-2 of the Exchange Act. (Check One): Large accelerated filer ¨ Accelerated filer xNon-accelerated filer ¨ Small reporting company ¨Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ¨ No xThe aggregate market value, as of June 30, 2012, of common shares of the registrant held by non-affiliates of the registrant was approximately $167.5million, based upon the last sales price reported that date on The Nasdaq Global Select Market of $7.95 per share. (Aggregate market value is estimated solely forthe purposes of this report and shall not be construed as an admission for the purposes of determining affiliate status.)Common shares of the registrant outstanding as of February 27, 2013 were 28,562,575.Documents Incorporated by ReferencePart III: Portions of Registrant’s Proxy Statement relating to the Company’s 2013 Annual Meeting of Shareholders. Table of ContentsPRGX Global, Inc.FORM 10-KDecember 31, 2012 Page Part I Item 1. Business 1 Item 1A. Risk Factors 10 Item 1B. Unresolved Staff Comments 18 Item 2. Properties 18 Item 3. Legal Proceedings 18 Item 4. Mine Safety Disclosures 18 Part II Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities 19 Item 6. Selected Financial Data 21 Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations 23 Item 7A. Quantitative and Qualitative Disclosures About Market Risk 38 Item 8. Financial Statements and Supplementary Data 39 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 71 Item 9A. Controls and Procedures 71 Item 9B. Other Information 72 Part III Item 10. Directors, Executive Officers and Corporate Governance 73 Item 11. Executive Compensation 73 Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 74 Item 13. Certain Relationships and Related Transactions, and Director Independence 75 Item 14. Principal Accountants’ Fees and Services 75 Part IV Item 15. Exhibits, Financial Statement Schedules 76 Signatures 80 Table of ContentsCautionary Statement Regarding Forward-Looking StatementsThe 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 statementsregarding the Company’s financial and operating plans and goals. These forward-looking statements include any statements that cannot be assessed until theoccurrence of a future event or events. Except as otherwise indicated or unless the context otherwise requires, “PRGX,” “we,” “us,” “our” and the “Company”refer to PRGX Global, Inc. and its subsidiaries.These forward-looking statements are subject to risks, uncertainties and other factors, including but not limited to those discussed herein and below underItem 1A “Risk Factors.” Many of these risks are outside of our control and could cause actual results to differ materially from the results discussed in the forward-looking statements. Factors that could lead to material changes in our performance may include, but are not limited to: • our ability to successfully execute our recovery audit growth strategy; • our continued dependence on our largest clients for significant revenue; • changes to Medicare and Medicaid recovery audit contractor (“RAC”) programs and our role in the national Medicare RAC program, theresults of operations of which are included in our Healthcare Claims Recovery Audit business; • changes to revenue from our Medicare audit recovery work due to a number of pressures and uncertainties affecting Medicare spendinggenerally and over which we have little or no control; • revenue that does not meet expectations or justify costs incurred; • our ability to develop material sources of new revenue in addition to revenue from our core accounts payable recovery audit services; changesin the market for our services; • client and vendor bankruptcies and financial difficulties; • our ability to retain and attract qualified personnel; • our inability to protect and maintain the competitive advantage of our proprietary technology and intellectual property rights; • our reliance on operations outside the U.S. for a significant portion of our revenue; • the highly competitive environments in which our recovery audit services and Profit Optimization services businesses operate and theresulting pricing pressure on those businesses; • our ability to integrate recent and future acquisitions; • our ability to realize operational cost savings and the transformation severance and related expenses we may incur to generate these savings; • uncertainty in the global credit markets; • our ability to maintain compliance with our financial covenants; • a cyber-security incident involving the misappropriation, loss or unauthorized disclosure or use of confidential information of our clients; • effects of changes in accounting policies, standards, guidelines or principles; or • terrorist acts, acts of war and other factors over which we have little or no control.Any forward-looking statement speaks only as of the date on which such statement is made, and, except as required by law, we undertake no obligation toupdate any forward-looking statement to reflect events or circumstances after the date on which such statement is made or to reflect the occurrence of unanticipatedevents. New factors emerge from time to time and it is not possible for management to predict all such factors. iTable of ContentsPART IITEM 1. BusinessPRGX Global, Inc., together with its subsidiaries, is an analytics-powered information and professional services firm based in the United States of America(“U.S.”). PRGX Global, Inc. was incorporated in the State of Georgia in 1996. At the heart of our client services portfolio is the core capability of mining clientdata to deliver “actionable insights.” Actionable insights allow our clients to improve their financial performance by reducing costs, improving business processesand increasing profitability. In 2010, we rebranded the Company as “PRGX” and adopted the tagline “Discover Your Hidden Profits.”We currently provide services to clients in approximately 40 countries, and conduct our operations through three reportable segments: Recovery AuditServices – Americas, Recovery Audit Services – Europe/Asia-Pacific and New Services. The Recovery Audit Services – Americas segment represents recoveryaudit services (other than Healthcare Claims Recovery Audit services) we provide in the U.S., Canada and Latin America. The Recovery Audit Services –Europe/Asia-Pacific segment represents recovery audit services (other than Healthcare Claims Recovery Audit services) we provide in Europe, Asia and thePacific region. The New Services segment represents Healthcare Claims Recovery Audit services and our Profit Optimization services (formerly referred to asanalytics and advisory services). We report the unallocated portion of corporate selling, general and administrative expenses not specifically attributable to thethree reportable segments in Corporate Support. For additional financial information relating to our reporting segments, see Note 2 – Operating Segments andRelated Information of our Consolidated Financial Statements included in Item 8 of this Form 10-K.Our core business is “recovery audit,” a service based on the mining of a tremendous amount of our clients’ purchasing data, looking for overpayments totheir third-party suppliers. Most of our large retail clients in mature geographic markets employ their own internal staff to audit and recover overpayments tosuppliers, engaging us as a supplement to this internal function. For other clients, including some large and mid-size retailers and our “commercial” (non-retail)clients, we serve as the complete outsourced provider of this standard function. We process over 2.1 million client files each year, including purchase orders,receipt and shipment data, invoices, payables data and point of sales data, and, at any point in time, have over six petabytes of client data available for analysis.Our Healthcare Claims Recovery Audit services involve the identification of overpayments and underpayments made to healthcare providers such ashospitals and physicians’ practices. We identify such improper payments by using various methods, including proprietary methods which are comparable to theproprietary techniques we developed through many years of performing other types of recovery audits involving massive volumes of transaction data. Auditingmedical claims data requires that we maintain a staff of healthcare professionals with in-depth expertise in healthcare procedures and billing processes.Our Profit Optimization services target client functional and process areas where we have established expertise, enabling us to provide services to seniorfinance executives to optimize working capital, reduce enterprise costs, transform the finance function and improve corporate performance. Recovery auditservices operate in a mindset of continuous improvement, i.e., reporting on the over-payment “categories” and their root causes. Our Profit Optimization servicesteams are well-positioned to help clients resolve many of the root causes of errors identified as part of our recovery audit services. These teams also enhance ourclient value propositions relating to spend analytics and sourcing/procurement excellence. We use the data from our clients to create spend reporting at the line-item level of detail, a capability that many of our clients do not possess in-house. This information enables us to assist clients with supplier rationalization,collaborative purchasing, strategic sourcing and procurement transformation, all of which can dramatically enhance the clients’ bottom lines.We provide certain of our insights through web-based technologies using the “SaaS” (software as a service) delivery model. Our SaaS model uses a periodiclicense fee allowing clients to tailor service levels such as frequency of data refresh and scope of reporting outputs. Our range of software-based solutions extendsto fraud prevention and compliance reporting, control monitoring and contract management. As our clients’ data volumes and complexity levels continue to grow,we are using our deep data management experience to incubate new actionable insight solutions in retail and healthcare, as well as to develop custom analyticsservices. Taken together, our software capability and solutions provide multiple routes to helping our clients achieve greater profitability. 1Table of ContentsThe PRGX Strategy and Client Value PropositionsDuring 2009, our executive management team performed an extensive review of our competitive advantages and marketplace opportunities and developeda revised business strategy for growth. The five components of this growth strategy are: 1.grow the accounts payable recovery audit business; 2.trailblaze accountability in healthcare; 3.expand data mining for profitability; 4.broaden our services footprint; and 5.build a strong team with a high-performance culture.These elements of our growth strategy represent our plans to reinvigorate our core business while significantly expanding our services portfolio. The go-to-market strategy is built on a competency foundation that includes data mining, audit/forensics capabilities, finance and procure-to-pay business process expertise,and a proprietary business intelligence platform. We now refer to these as our core capabilities of “Audit, Analytics and Advice.” We believe that we can combinethese core capabilities effectively to discover and deliver hidden profits for our clients, enabling the creation of a new service category in the professional servicesmarketplace: Profit Discovery™.We have identified five major routes to discover profits for clients, each of which we refer to as a Client Value Proposition, or “CVP.” These CVPs representour services portfolio, and we discuss them within the descriptions of the various planks of our growth strategy below.Grow the Accounts Payable Recovery Audit BusinessThe “Grow the Accounts Payable Recovery Audit Business” component of our business strategy is focused on expanding our traditional stronghold inrecovery audit in the retail industry, along with a renewed focus on profitably delivering recovery audit services to non-retail (or what we internally refer to as“commercial”) clients.To facilitate growth in the accounts payable recovery audit market, we have reintroduced a dedicated sales force. In addition, we have increased our focus onthe quality of our client relationships and management of our existing client accounts. We also have established alliance agreements with several third-partyservice providers to allow us to offer our clients a comprehensive suite of recovery audit services beyond accounts payable to include tax, real estate, andtelecommunications audits. The new service offerings made possible by these alliance partners broaden the scope of audits with existing clients, and we expectthem to help us establish new client relationships and business opportunities around the globe. With a keen focus on business development and audit strategy, wesucceeded in growing our recovery audit business in 2011 for the first year-over-year increase in revenue since 2002. Although our revenue from this businessdeclined slightly in 2012, we believe we will grow recovery audit revenue in 2013.Next-Generation Recovery Audit, one of our five Client Value Propositions, aims to build on these improvements by delivering a better recovery auditservice to our clients. We completed the initial development of our Next-Generation Recovery Audit business model and implemented it in several client teams in2011. Through this model, we are introducing innovation in best practices for recovery audit, increasing the quality and consistency of service and implementingsophisticated central data storage, audit technologies and tools. These improvements also enabled us to lower our cost of delivering our services in both 2011 and2012, and we believe that we will realize further improvements in 2013.Key to serving clients more efficiently and cost-effectively under our Next-Generation Recovery Audit service delivery model is success in our offshoringinitiative. In 2010, we established our operations in Pune, India, and now have over 220 employees in India, providing business analytics, information technologyand other support services to our client teams in other parts of the world. This initiative was a key factor in improving our Recovery Audit Services – Americasgross margins from 43.9% in 2011 to 47.2% in 2012. Also, by lowering our cost of delivery, we are significantly expanding the addressable target market for ourrecovery audit services. Historically, much of our recovery audit focus has been on clients in the retail industry due to the enormous volumes of transactionsengaged in by these clients. With the improvements in our service delivery model that we are building into Next-Generation Recovery Audit, we believe we cancompete more effectively in our core retail market, and also can profitably expand our service offerings to industries such as manufacturing, energy, financialinstitutions and 2Table of Contentstransportation and logistics. We further enhanced our capabilities in this area with our December 2011 acquisition of Business Strategy, Inc. (“BSI”). We acquiredBSI for the scale and efficiencies we believe it will deliver to us in the commercial recovery audit arena. Building on this acquisition, we created a world-classshared service center in Grand Rapids, Michigan.Trailblaze Accountability in HealthcareThe primary focus of our Healthcare Claims Recovery Audit services to date has been the auditing of Medicare spending as part of the legislativelymandated Medicare recovery audit contractor (“RAC”) program of the Centers for Medicare and Medicaid Services (“CMS”), the federal agency that administersthe Medicare program. From March 2005 through March 2008, we were one of three recovery audit contractors that participated in CMS’s Medicare RACdemonstration project. Under the demonstration project, we were responsible for auditing Medicare spending in the State of California. Under CMS’s nationalMedicare RAC program, we are operating as a subcontractor in three of the national Medicare RAC program’s four geographic regions. The principal services weprovide as part of the Medicare RAC program involve the identification of overpayments and underpayments made by Medicare to healthcare providers, such ashospitals and physicians’ practices. We identify such improper payments by using various methods, including proprietary methods that are comparable to theproprietary techniques we developed through many years of performing other types of recovery audits involving massive volumes of transaction data.Our second Client Value Proposition, Healthcare Claims Recovery Audit, drives our growth strategy in healthcare – to execute with excellence our role inthe Medicare RAC program, and leverage our healthcare services infrastructure to expand recovery audit services to other healthcare payers. We have investedheavily in the infrastructure and tools required to execute our Medicare RAC program subcontracts and believe much of this infrastructure can be applied to theaudit of medical claims paid by other healthcare payers.As a result of health care reform in the U.S., as reflected in the Patient Protection and Affordable Care Act, which became law in 2010, recovery auditing ofmedical claims is now mandated for state Medicaid programs. As the opportunities to serve these state Medicaid programs emerge, we are focusing our efforts onopportunities where our capabilities are a good match for the scope and administration of a state’s Medicaid program. With these filters in place, we haveselectively competed in a number of state Medicaid procurements. We were awarded the Medicaid RAC contracts for Mississippi, Rhode Island and the District ofColumbia and have begun associated audit activities.In addition to audits of medical claims under the Medicare and Medicaid programs, we believe that private payers, including health insurance companies,represent a significant opportunity for our recovery audit services, and that we are well-positioned to further grow our Healthcare Claims Recovery Audit businessby focusing on the private payer market. We currently are focusing our sales capabilities on the numerous opportunities for sales of healthcare claims recoveryauditing on behalf of government entities and plan to expand this focus to include private payers and self-insured employers.Expand Data Mining for ProfitabilityIn 2010, we launched Profit Optimization, an integrated set of analytics and advisory services across drivers of client profitability other than the recovery ofoverpayments. Our current Profit Optimization CVPs are Spend Optimization, Fraud Prevention & Compliance, and Profit Performance Optimization. Wecontinue to enhance our client value proposition around spend analytics and sourcing/procurement excellence. In our third CVP, Spend Optimization, we analyzeline-item purchasing detail and provide insights from that analysis to our clients. This information enables our clients to better manage their businesses byimproving their ability to bundle their spend dollars, source their direct and indirect goods globally, negotiate better terms with their suppliers and vendors,organize their procurement organizations and implement better internal processes and controls.Our fourth CVP, Fraud Prevention & Compliance, leverages the unique insights we gain from working closely with our clients in finance, audit and lossprevention and the sophisticated proprietary audit tools we use to mine clients’ data to discover where there is a risk of fraud or abuse. Through these services, wehelp clients protect their organization’s assets, and our reports document and record their proactive efforts to develop an effective fraud management program thatanticipates, prevents, detects and remedies fraud and abuse. 3Table of ContentsBroaden Our Services FootprintSenior executives of complex organizations regularly require external help to identify and maximize profit improvement opportunities. Our ProfitOptimization services combine data analytics with deep functional expertise and a practical hands-on approach to help these client executives improve theiroperating margins.Profit Performance Optimization, our fifth CVP, leverages these capabilities and our long-standing client relationships by providing services includingworking capital optimization, corporate performance management, enterprise cost reduction and finance transformation to senior finance executives. These servicesfocus on improving the profitability of our clients’ procure-to-pay cycle and on merchandise optimization.Build a Strong Team with a High-Performance CultureThe final element of our strategy is to become a magnet for global talent and expertise relevant to our service lines and operations. As part of our overalltransformation, we are building a culture of results-oriented performance and collaboration, and an environment that promotes innovation and knowledge sharing.This transformation is crucial to ensure that we capture, understand, and deploy the very best practices consistently across every client globally. In addition, wehave maintained our increased focus on recruiting. The success of our growth strategy is predicated on continuously improving the capabilities of our client-facingpersonnel who identify the levers to add to clients’ profitability and effectively position all of our service offerings.Update on Our Strategy ExecutionWe now have completed two years since the implementation of our growth strategy, and we are encouraged by the success we have achieved to date. In2011, our accounts payable recovery audit business generated the first year-over-year increase in revenue since 2002. This revenue declined slightly in 2012, butour cost of revenue declined by a greater amount, resulting in incremental gross profit of $4.2 million in 2012 compared to 2011. These improvements in financialperformance over the last two years occurred while we were making significant investments in our accounts payable recovery audit segments, including re-implementing a sales force, establishing and expanding offshore capabilities, completing strategic acquisitions and developing and refining our Next-GenerationRecovery Audit service delivery model. We will continue to drive toward increasing our revenue and lowering our costs as a percentage of revenue in accountspayable recovery audit.Our Healthcare Claims Recovery Audit business grew significantly from 2010 to 2012, and generated positive adjusted earnings before interest, taxes,depreciation and amortization in 2012. This unit more than doubled its revenue in 2012, and we anticipate that we will continue to improve our operating results inthis service line in 2013.We also invested in our Profit Optimization services business over the past three years, both organically and through acquisitions. We have acquired,developed and improved the tools we use in performing these services. The acquisitions we completed in this area also helped us to broaden our services footprintand provide extensive services to our clients and prospective clients. We believe our recent success in adding new clients and improving client retention rates inour recovery audit businesses is due in part to these additional service offerings, although these benefits are not reflected in the New Services segment.Collectively, these changes reflect our transformation from essentially a one-product, one-industry provider to an analytics-powered information andprofessional services firm. We believe that Profit Discovery™, our combination of audit, analytics and advisory capabilities, represents a new category of businessservices that will enable us to provide greater value to our existing clients and to expand our reach into new clients and industries.The Recovery Audit Industry and PRGXMany businesses and government agencies generate substantial volumes of payment transactions involving multiple vendors, numerous discounts andallowances, fluctuating prices and complex pricing arrangements or rate structures. Although these entities correctly process the vast majority of paymenttransactions, errors occur in a small percentage of transactions. These errors include, but are not limited to, missed or inaccurate discounts, allowances and rebates,vendor pricing errors, erroneous coding and duplicate payments. In the aggregate, these transaction errors can represent significant amounts of reduced cash flowand lost profits for these entities. Many factors contribute to the errors, including communication failures between the purchasing and accounts payabledepartments, complex pricing arrangements or rate structures, personnel turnover and changes in information and accounting systems. 4Table of ContentsRecovery auditing is a business service focused on finding overpayments created by these errors. We are the leading worldwide provider of recovery auditservices, principally to large businesses and government agencies having numerous payment transactions and complex purchasing/payment environments. Thesebusinesses and agencies include: • retailers such as discount, department, specialty, grocery and drug stores, and wholesalers who sell to these retailers; • business enterprises other than retailers, such as manufacturers, financial services firms, and pharmaceutical companies; • healthcare payers, both private sector health insurance companies and state and federal government payers such as CMS; and • federal and state government agencies other than government healthcare payers.Under virtually all of our recovery audit contracts, we receive a percentage of overpayments and other savings that we identify and that our clients recoveror realize. We generate the substantial majority of our revenue from accounts payable recovery audit services that we provide to retail clients. These audit servicestypically recur annually and are the most extensive of our recovery audit services, focusing on numerous recovery categories related to procurement and paymentactivities, as well as client/vendor promotions and allowances. These audits typically entail comprehensive and customized data acquisition from the client,frequently including purchasing, receiving, point-of-sale, pricing and deal documentation, emails, and payment data. Recovery audits for larger retail clients oftenrequire year-round on-site work by multi-auditor teams.In addition to these retail clients, we also provide accounts payable recovery audit services to clients in other industries. We typically refer to these clients asour “commercial clients.” Services to these types of clients tend to be either periodic (typically, every two to three years) or rotational in nature with differentdivisions of a given client being audited in pre-arranged periodic sequences, and are typically relatively short in duration. Accordingly, the revenue we derive froma given commercial client may change markedly from year to year.The recovery audit services we provide to our retail and commercial clients involve the identification of overpayments relating to purchases. We alsoprovide recovery audit services relating to healthcare claims which involve the identification of overpayments and underpayments made by healthcare payers tohealthcare providers, such as hospitals and physicians’ practices. Auditing medical claims data requires in-depth expertise in healthcare procedures and billingprocesses. Due to the different expertise necessary to provide such services, we include the results of our operations of Healthcare Claims Recovery Audit servicesin our New Services segment rather than in one of our two recovery audit services segments.Some organizations (primarily large retailers) maintain internal recovery audit departments to recover certain types of payment errors and identifyopportunities to reduce costs. Despite having such internal resources, many companies also retain independent recovery audit firms, such as PRGX, due to theirspecialized knowledge and focused technologies. In the U.S., Canada, the United Kingdom and France, large retailers routinely engage independent recovery auditfirms as a standard business practice. In other countries, large retailers and many other types of businesses also engage independent recovery audit firms, but thispractice is less common.As businesses have evolved, PRGX and the recovery audit industry have evolved with them, innovating processes, error identification tools, and claim typesto maximize recoveries. The following are a number of factors significantly impacting the recovery audit industry: • Data Capture and Availability. Businesses increasingly are using technology to manage complex procurement and accounts payable systems andrealize greater operating efficiencies. Many businesses worldwide communicate with vendors electronically – whether by Electronic Data Interchange(“EDI”) or the Internet – to exchange inventory and sales data, transmit purchase orders, submit invoices, forward shipping and receiving informationand remit payments. These systems capture more detailed data and enable the cost effective review of more transactions by recovery auditors. 5Table of Contents • Increased Role of Email Documentation in Client Transaction Data. Clients and vendors increasingly document transaction terms in emailcorrespondence that is not integrated into their financial systems and increases opportunities for errors. To efficiently identify these errors, recoveryaudit firms must use sophisticated tools that are able to ingest and search through massive volumes of emails to identify potential errors that then areinvestigated by the auditors. A comprehensive recovery audit requires the effective use of email search tools and techniques. • Increasing Number of Auditable Claim Categories. Traditionally, the recovery audit industry identified simple, or “disbursement,” claim types such asthe duplicate payment of invoices. Enhancements to accounts payable software, particularly large enterprise software solutions used by many largecompanies, have reduced the extent to which these companies make simple disbursement errors. However, the introduction of creative vendordiscount programs, complex pricing arrangements and activity-based incentives has led to an increase in auditable transactions and potential sourcesof error. These transactions are complicated to audit, as the underlying transaction data is difficult to access and recognizing mistakes is complex.Recovery audit firms such as PRGX with significant industry-specific expertise and sophisticated technology are best equipped to audit thesecomplicated, or “contract compliance,” claim categories. • Globalization. As the operations of major retailers and other business enterprises become increasingly global, they often seek service providers with aglobal reach. • Consolidation in the Retail Industry. Retailer consolidation continues in both the U.S. and internationally. As retailers grow larger, vendors becomemore reliant on a smaller number of retailer customers, and, as a result, the balance of power favors retailers rather than their vendors. This dynamiccreates an environment that allows retailers to assert overpayment claims more easily. • Significant Promotional Activity. Trade promotion spending is substantial within the retail trade and significant sums are being spent in categorieswith numerous transactions and a high potential for errors, such as scan downs, or discounts at the point of sale. Because of the high volume of tradepromotion within retail, there are significant opportunities for mistakes and, therefore, auditable claims. • Move Toward Standard Auditing Practices. Increasingly, our clients’ vendors are insisting on the satisfaction of certain conditions, such as clearerpost-audit procedures, better documentation and electronic communication of claims, before accepting the validity of a claim.We expect the evolution of the recovery audit industry to continue. In particular, we expect that the industry will continue to move towards the electroniccapture and presentation of data, more automated, centralized processing and faster approvals and deductions of claims.ClientsPRGX provides its services principally to large and mid-sized businesses and government agencies having numerous payment transactions and complexprocurement environments. Retailers continue to constitute the largest part of our client and revenue base. Our five largest clients contributed approximately 28.2%of our revenue in 2012, 30.2% in 2011 and 31.3% in 2010. Wal-Mart Stores, Inc. (and its affiliated companies) accounted for approximately 10.2% of our revenuein 2011 and 12.1% in 2010. No client accounted for 10% or more of total revenue in 2012.Client ContractsPRGX provides services to its clients pursuant to contracts. Our compensation under recovery audit service contracts generally is stated as a stipulatedpercentage of improper payments or other savings recovered for or realized by clients. Recovery audit clients generally recover claims by either (a) taking creditsagainst outstanding payables or future purchases from the involved vendors or service providers, or (b) receiving refund checks directly from those vendors orservice providers. Industry practice generally dictates the manner in which a client receives a recovery audit claim. In many cases, we must satisfy client-specificprocedural guidelines before we can submit recovery audit claims for client approval. For services such as Profit Optimization services, client contracts oftenprovide for compensation to us in the form of a flat fee, fee rate per hour, or a fee per other unit of service.Most of our contracts provide that the client may terminate the contract without cause prior to the completion of the term of the agreement by providingrelatively short prior written notice of termination. In addition to being subject to termination for material default, our Medicare RAC program subcontracts aresubject to termination or 6Table of Contentspartial termination for convenience to the extent all or any portion of the work covered by the associated Medicare RAC prime contract is eliminated by CMS, or tothe extent our performance of the subcontract results in an organizational conflict of interest that is not mitigated or able to be mitigated after joint consultationamong CMS, the Medicare RAC prime contractor and PRGX. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations”included in Item 7 of this Form 10-K for recent developments related to the Medicare RAC program.TechnologyPRGX uses advanced, proprietary information systems and processes and a large-scale technology infrastructure to conduct its audits of clients’ paymenttransactions. Because of the ever-increasing volume and complexity of the transactions of our clients, we believe that our proprietary technology and processesserve as important competitive advantages over both our principal competitors and our clients’ in-house internal recovery audit functions. To sustain thesecompetitive advantages, we continually invest in technology initiatives to deliver innovative solutions that improve both the effectiveness and efficiency of ourservices.We aim our data acquisition, data processing and data management methodologies at maximizing efficiencies and productivity and maintaining the higheststandards of transaction auditing accuracy. At the beginning of a typical recovery audit engagement, we use a dedicated staff of data acquisition specialists andproprietary tools to acquire a wide array of transaction data from the client for the time period under review. We typically receive this data by secured electronictransmissions, digital media or paper. For paper-based data, we use a custom, proprietary imaging technology to scan the paper into electronic format. Upon receiptof the data, we secure, catalogue, back up and convert it into standard, readable formats using third party and proprietary tools.Our technology professionals clean and map massive volumes of client data, primarily using high performance database and storage technologies, intostandardized layouts at one of our data processing facilities. We also generate statistical reports to verify the completeness and accuracy of the data.We then process the data using proprietary algorithms (business rules) leveraging over thirty years’ experience to help uncover patterns or potentialproblems in clients’ various transactional streams. We deliver this data with a high probability of transaction errors to our auditors who, using our proprietary auditsoftware, sort, filter and search the data to validate and identify actual transaction errors. We also maintain a secure database of audit information with the ability toquery on multiple variables, including claim categories, industry codes, vendors and audit years, to facilitate the identification of additional recovery opportunitiesand provide recommendations for process improvements to clients.Once we identify and validate transaction errors, we present the information to clients for approval and submission to vendors as “claims.” We offer a web-based claim presentation and collaboration tool, which uses proprietary imaging technology to help the client view, approve and submit claims to vendors.In providing our spend analytics services, we use proprietary algorithms and technologies to clean and classify a client’s vendor spend data down to the lineitem level. We then are able to present this information to the client as a multi-dimensional data cube over a web-based interface. We believe these proprietaryalgorithms and technologies provide us with a competitive advantage over many of our competitors.Auditor Hiring, Training and CompensationMany of our auditors and specialists formerly held finance-related management positions in the industries we serve. Training provided in the field by ourexperienced auditors enables newly hired auditors to develop and refine their auditing skills and improve productivity. Additionally, we provide training forauditors utilizing self-paced media such as specialized computer-based training modules. We periodically upgrade our training programs based on feedback fromauditors and changing industry protocols. Many of our auditors and specialists participate in one of our incentive compensation plans that link compensation of theauditor or specialist to audit performance.Proprietary RightsFrom time to time, we develop new software and methodologies that replace or enhance existing proprietary software and methodologies. We rely primarilyon trade secret and copyright protection for our proprietary software 7Table of Contentsand other proprietary information. We consider the costs associated with these activities to be research and development costs and expense them as incurred.However, we capitalize the costs incurred for the development of computer software that will be sold, leased, or otherwise marketed or that will be used in ouroperations beginning when technological feasibility has been established. Research and development costs, including the amortization of amounts previouslycapitalized, were $4.0 million in 2012, $3.4 million in 2011 and $3.2 million in 2010.We own or have rights to various trademarks, trade names and copyrights, including U.S. and foreign registered trademarks and trade names and U.S.registered copyrights, that are valuable assets and important to our business. We monitor the status of our copyright and trademark registrations to maintain them inforce and renew them as appropriate. The duration of our active trademark registrations varies based upon the relevant statutes in the applicable jurisdiction, butgenerally endure for as long as they are used. The duration of our active copyright registrations similarly varies based on the relevant statutes in the applicablejurisdiction, but generally endure for the full statutory period. Our trademarks and trade names are of significant importance and include, but are not limited to, thefollowing: PRGX, Discover Your Hidden Profits, PRG-Schultz, imDex, SureF!nd; Profit Discovery™, AuditPro™, DirectF!nd™, claimDex™, GET™;PRGX APTrax™, PRGX AuditTrax™, PRGX ClaimTrax™, PRGX MailTrax™, PRGX FraudTrax™, PRGX MerchTrax™, and PRGX SpendTrax™.CompetitionAccounts Payable Recovery AuditWe believe that the principal providers of domestic and international accounts payable recovery audit services in major markets worldwide consist ofPRGX, one substantial competitor, and numerous other smaller competitors. The smaller recovery audit firms generally do not possess multi-country servicecapabilities and do not have the centralized resources or broad client base required to support the technology investments necessary to provide comprehensiverecovery audit services for large, complex accounts payable systems. These smaller firms, therefore, are less equipped to audit large, data-intensive purchasing andaccounts payable systems. In addition, many of these firms have limited resources and may lack the experience and knowledge of national promotions, seasonalallowances and current recovery audit practices. As a result, we believe that compared to most other firms providing accounts payable recovery audit services,PRGX has competitive advantages based on its national and international presence, well-trained and experienced professionals, and advanced technology.While we believe that PRGX has the greatest depth and breadth of audit expertise, data and technology capabilities, scale and global presence in theindustry, we face competition from the following:Client Internal Recovery Audit Departments. A number of large retailers (particularly those in the discount, grocery and drug sectors) have developed aninternal recovery audit process to review transactions prior to turning them over to external recovery audit firms. Regardless of the level of recoveries madeby internal recovery audit departments, we have observed that virtually all large retail clients retain at least one (primary), and sometimes two (primary andsecondary), external recovery audit firms to capture errors not identified by their internal recovery audit departments.Other Accounts Payable Recovery Audit Firms. The competitive landscape in the recovery audit industry is comprised of: • Full-service accounts payable recovery audit firms. We believe that only one company other than PRGX offers a full suite of U.S. and internationalrecovery audit services; • A large number of smaller accounts payable recovery firms which have a limited client base and which use less sophisticated tools to minedisbursement claim categories at low contingency rates. These firms are most common in the U.S. market. Competition in most international markets,if any, typically comes from small niche providers; • Firms that offer a hybrid of audit software tools and training for use by internal audit departments, or general accounts payable process improvementenablers; and • Firms with specialized skills focused on recovery audit services for discrete sectors such as sales and use tax or real estate. 8®®®®®Table of ContentsOther Providers of Recovery Audit Services. The major international accounting firms provide recovery audit services; however, we believe their practicestend to be primarily focused on tax-related services.Healthcare Claims Recovery Audit ServicesA number of national and regional private payers have developed their own post-payment recovery audit capabilities. Nevertheless, these private payerstypically also retain or engage one or more third party post payment audit service providers. The competitive landscape in Healthcare Claims Recovery Auditservices includes: • Firms that provide recovery audit services across multiple industries including healthcare; • Firms that provide healthcare IT solutions and services to both the government and private payers; and • Firms that contract with federal and state governments’ integrity programs.Profit Optimization ServicesOur Profit Optimization services business faces competition from regional and local consulting firms; privately and publicly held worldwide and nationalfirms; large, well-known ERP software vendors; procurement-specific software providers and smaller, very specialized analytics providers. These businessescompete generally on the basis of the range, quality and cost of the services and products provided to clients. We believe that we differentiate ourselves from ourcompetitors by virtue of synergies with our analytics capabilities and our direct channel to existing accounts payable recovery audit clients.RegulationVarious aspects of our business, including, without limitation, our data acquisition, processing and reporting protocols, are subject to extensive andfrequently changing governmental regulation in both the U.S. and internationally. These regulations include extensive data protection and privacy requirements. Inthe U.S., we are subject to the provisions of the Health Insurance Portability and Accountability Act of 1996 (“HIPAA”) with respect to our Healthcare ClaimsRecovery Audit work. Internationally, we must comply with the European Data Protection Directive that various members of the European Union haveimplemented, as well as with data protection laws that exist in many of the other countries where we have a presence. Failure to comply with such regulations may,depending on the nature of the noncompliance, result in the termination or loss of contracts, the imposition of contractual damages, civil sanctions, damage to ourreputation or in certain circumstances, criminal penalties.EmployeesAs of January 31, 2013, PRGX had approximately 1,700 employees, of whom approximately 760 were in the U.S. The majority of our employees areinvolved in the audit function. None of our employees are covered by a collective bargaining agreement, and we believe our employee relations are satisfactory.WebsitePRGX 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 onForm 8-K and all amendments to those reports. PRGX makes all filings with the Securities and Exchange Commission available on its website no later than theclose of business on the date the filing was made. In addition, investors can access our filings with the Securities and Exchange Commission at www.sec.gov.We also post certain corporate governance materials, including our Board of Directors committee charters and our Code of Conduct and Code of Ethics ForSenior Financial Officers, on our website under the heading “Corporate Governance” on the “Investors” page. From time to time, we may update the corporategovernance materials on our website as necessary to comply with rules issued by the SEC or NASDAQ, or as desirable to further the continued effective andefficient governance of our company. 9Table of ContentsITEM 1A. Risk FactorsRevenue from our accounts payable recovery audit business declined for several years through 2010. We must successfully execute our recovery audit growthstrategy in order to increase our revenue, and must lower our cost of delivery in order to maintain profitability.Over time, our clients tend to resolve recurring transaction processing deficiencies. In addition, many of our clients have an internal staff that audits thetransactions before we do. As the skills, experience and resources of our clients’ internal recovery audit staffs improve, they will identify many overpaymentsthemselves and reduce some of our audit recovery opportunities. Based on these and other factors, including competitive rate pressures and loss of clients fromtime to time, without improved audit execution and acquisition of new clients, we believe that our accounts payable recovery audit business will experiencerevenue declines and may incur losses.We depend on our largest clients for significant revenue, so losing a major client could adversely affect our revenue and liquidity.We generate a significant portion of our revenue from our largest clients. Our five largest clients collectively accounted for approximately 28.2% of ourannual revenue in 2012, 30.2% in 2011 and 31.3% in 2010. Wal-Mart Stores Inc. (and its affiliated companies) accounted for approximately 10.2% of our totalrevenue in 2011 and 12.1% in 2010. No client accounted for 10% or more of total revenue in 2012. If we lose any of our major clients, our results of operations andliquidity could be materially and adversely affected.Although we continually seek to diversify our client base, we may be unable to offset the effects of an adverse change in one of our key client relationships.For example, if our existing clients elect not to renew their contracts with us at the expiration of the current terms of those contracts, or reduce the services theypurchase thereunder, our recurring revenue base will be reduced, which could have a material adverse effect on our results of operations. In addition, we could loseclients if they cancel their agreements with us, if we fail to win a competitive bid at the time of contract renewal, if the financial condition of any of our clientsdeteriorates or if our clients are acquired by, or acquire, companies with which we do not have contracts, any of which could materially and adversely affect ourresults of operations.Our growth strategy may not be successful.As discussed in Item 1 “The PRGX Strategy,” our objectives are to build on our position as the leading worldwide provider of recovery audit services and todevelop and grow our Profit Optimization and Healthcare Claims Recovery Audit services businesses. Our strategic plan to achieve these objectives focuses onefforts designed to maintain our dedicated focus on clients and rekindle our growth. These efforts are ongoing, and the results of the strategy will not be knownuntil sometime in the future. Successful execution of our strategy requires sustained management focus, organization and coordination over time, as well assuccess in building relationships with third parties. If we are unable to execute our strategy successfully, our results of operations and cash flows could beadversely affected. In addition, execution of our strategy will require material investments and additional costs that may not yield incremental revenue andimproved financial performance as planned.Our acquisitions, investments, partnerships and strategic alliances may require significant resources and/or result in significant unanticipated losses, costs orliabilities.Acquisitions have contributed to our growth. Although we cannot predict our rate of growth as the result of acquisitions with complete accuracy, we believethat additional acquisitions, investments and strategic alliances will be important to our growth strategy.We may finance future acquisitions by issuing additional equity and/or debt. The issuance of additional equity in connection with any such transaction couldbe substantially dilutive to existing shareholders. The issuance of additional debt could increase our leverage substantially. In addition, announcement orimplementation of future transactions by us or others could have a material effect on the price of our common stock. We could face financial risks associated withincurring additional debt, particularly if the debt results in significant incremental leverage. Additional debt may reduce our liquidity, curtail our access tofinancing markets, impact our standing with credit agencies and increase the cash flow required for debt service. Any incremental debt incurred to finance anacquisition could also place significant constraints on the operation of our business. 10Table of ContentsFurthermore, any future acquisitions of businesses or facilities could entail a number of additional risks, including: • problems with effective integration of acquired operations; • the inability to maintain key pre-acquisition business relationships; • increased operating costs; • the diversion of our management team from its other operations; • problems with regulatory agencies; • exposure to unanticipated liabilities; • difficulties in realizing projected efficiencies, synergies and cost savings; and • changes in our credit rating and financing costs.The terms of our credit facility place restrictions on us, which create risks of default and reduce our flexibility.Our current credit facility contains a number of affirmative, negative, and financial covenants that limit our ability to take certain actions and require us tocomply with specified financial ratios and other performance covenants. No assurance can be provided that we will not violate the covenants of our secured creditfacility 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 creditfacility, including requiring the immediate repayment in full of all amounts outstanding, if any. Additionally, we cannot be certain that, if the lenders demandedimmediate repayment of any amounts outstanding, we would be able to secure adequate or timely replacement financing on acceptable terms or at all.Our ability to make payments due on our debt will depend upon our future operating performance, which is subject to general economic and competitiveconditions and to financial, business and other factors, many of which we cannot control. If the cash flow from our operating activities is insufficient to make thesepayments, we may take actions such as delaying or reducing capital expenditures, attempting to restructure or refinance our debt, selling assets or operations orseeking additional equity capital. Some or all of these actions may not be sufficient to allow us to service our debt obligations and we could be required to file forbankruptcy. Further, we may be unable to take any of these actions on satisfactory terms, in a timely manner or at all. In addition, our credit agreements may limitour ability to take several of these actions. Our failure to generate sufficient funds to pay our debts or to undertake any of these actions successfully couldmaterially and adversely affect our business, results of operations and financial condition.We have incurred and will continue to incur significant costs in establishing the necessary resources to provide services for Medicare, Medicaid and otherhealthcare claims audit recovery work.We have expended substantial resources in connection with preparing for and providing healthcare claims recovery audit services, including those underCMS’s Medicare RAC program. We continue to incur significant costs relating to our healthcare claims recovery audit services business, including ourparticipation as a subcontractor in the national Medicare RAC program. In addition, as a result of the complex regulations governing many healthcare paymentsand recoupments, including a multi-layered scheme for provider appeals of overpayment determinations under the Medicare RAC program, the terms of theCompany’s Medicare RAC subcontracts and the complexity of Medicare and other healthcare data, systems and processes, generally, it is more difficult and takeslonger to achieve recoveries from healthcare claims recovery auditing than in other areas of our recovery audit business.Our participation in the Medicare recovery audit program is as a subcontractor, and, consequently, is subject to being reduced or eliminated should oursubcontracts be terminated or should the prime contractors with whom we have contracted have their prime contracts with CMS terminated or should thosecontracts expire.Under CMS’s Medicare recovery audit contractor program, we are participating as a subcontractor in three of the program’s four geographic regions.Accordingly, we have entered into three separate subcontracts with the prime contractors and are not directly contracting with CMS. Under these circumstances,we generally bear the risk that the prime contractors will not meet their performance obligations to CMS under the prime contract, that the prime 11Table of Contentscontractors will not pay us amounts due under the subcontracts and that the prime contractors will seek to terminate our subcontracts or otherwise minimize ourrole in the Medicare RAC program. Furthermore, the failure of a prime contractor to perform its obligations to CMS could result in the termination of theassociated contract with CMS, which would, in turn, result in the termination of our subcontract. Additionally, based on recent developments, we believe CMS hasagreed with the prime contractors to allow the prime contracts to expire in August 2013, subject to extension by CMS to allow for a transition period to the newRAC contracts. Should the prime contracts expire in August 2013, our RAC subcontracts will also expire at that time, subject to any additional extensions by CMSin connection with a transition to the new RAC contracts. The termination or expiration of any of these subcontracts or the failure of the prime contractors to makerequired payments to us could have a material adverse effect on our business, financial condition and results of operations.Recovery auditing of Medicare and Medicaid spending is subject to a number of pressures and uncertainties that could impact our future opportunities andrevenue from this business.As contrasted with recovery audit services provided to our retail and commercial clients, recovery auditing of Medicare and Medicaid spending islegislatively mandated and is subject to, among other things, the efforts of healthcare providers and provider associations, including political pressures, to end orseverely limit the Medicare and Medicaid recovery audit programs. We expect these efforts and political pressures to be ongoing throughout the life of theseprograms. If federally mandated recovery audit programs are significantly limited or delayed, subjected to burdensome or commercially challenging requirements,terms and/or conditions, or altogether terminated, our future revenue, operating results and financial condition could be materially and adversely affected.The prime contracts for the Medicare recovery audit program are expected to expire in August 2013, subject to an extension by CMS to allow for a transitionperiod to the new RAC contracts, and we may not be selected to receive any prime contracts or subcontracts during the re-bid process.We currently serve as a subcontractor to the prime contractor on three of the four prime contracts in the Medicare RAC program. Based on recentdevelopments, we believe CMS has agreed with the prime contractors to allow the prime contracts to expire in August 2013, subject to extension by CMS to allowfor a transition period to the new RAC contracts. Should the prime contracts expire in August 2013, our RAC subcontracts will also expire at that time, subject toany additional extensions by CMS in connection with the transition to new RAC contracts, and contracts for the performance of future Medicare RAC services willbe subject to a bidding process administered by CMS. CMS issued a request for proposals in connection with the re-bidding for the RAC contracts, and theproposals are due by March 27, 2013. CMS is expected to award the RAC contracts to more than one contractor and divide the country into geographic regions forcontracting purposes. We will be competing to participate in the RAC program as a prime contractor through the bidding process. While we believe we are well-positioned to compete in the bidding process, there are no assurances that we will receive any contract when the new Medicare RAC contracts are ultimatelyawarded. The failure to receive any of these contracts could have a material adverse effect on our business, financial condition and results of operations.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 protect our proprietary software, audit techniques and methodologies, andother proprietary intellectual property rights. We rely on a combination of trade secret and copyright laws, nondisclosure and other contractual arrangements andtechnical measures to protect our proprietary rights. Although we presently hold U.S. and foreign registered trademarks and U.S. registered copyrights on certain ofour proprietary technology, we may be unable to obtain similar protection on our other intellectual property. In addition, our foreign registered trademarks may notreceive the same enforcement protection as our U.S. registered trademarks.Additionally, to protect our confidential and trade secret information, we generally enter into nondisclosure 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 orunauthorized dissemination of our proprietary information, detect unauthorized use and take appropriate steps to enforce our intellectual property rights. In spite ofthe level of care taken to protect our intellectual property, there is no guarantee that our sensitive proprietary information will not be improperly accessed or thatour competitors will not independently develop technologies that are substantially equivalent or superior to our technology. Moreover, 12Table of Contentsalthough we are not aware of any infringement of our services and products on the intellectual property rights of others, we also are subject to the risk that someoneelse will assert a claim against us in the future for violating their intellectual property rights.Cyber-security incidents, including data security breaches or computer viruses, could harm our business by disrupting our delivery of services, damaging ourreputation or exposing us to liability.We receive, process, store and transmit, often electronically, the confidential data of our clients and others. Unauthorized access to our computer systems orstored data could result in the theft or improper disclosure of confidential information, the deletion or modification of records or could cause interruptions in ouroperations. These cyber-security risks increase when we transmit information from one location to another, including transmissions over the Internet or otherelectronic networks. Despite implemented security measures, our facilities, systems and procedures, and those of our third-party service providers, may bevulnerable to security breaches, acts of vandalism, software viruses, misplaced or lost data, programming and/or human errors or other similar events which maydisrupt our delivery of services or expose the confidential information of our clients and others. Any security breach involving the misappropriation, loss or otherunauthorized disclosure or use of confidential information of our clients or others, whether by us or a third party, could (i) subject us to civil and criminalpenalties, (ii) have a negative impact on our reputation, (iii) expose us to liability to our clients, third parties or government authorities, and (iv) cause our presentand potential clients to choose another service provider. Any of these developments could have a material adverse effect on our business, results of operations andfinancial condition.Operational failures in our data processing facilities could harm our business and reputation.An interruption of data processing services caused by damage or destruction of our facilities or a failure of our data processing equipment could result in aloss of clients, difficulties in obtaining new clients and a reduction in revenue. In addition, we also may be liable to third parties or our clients because of suchinterruption. These risks would increase with longer service interruptions. Despite any disaster recovery and business continuity plans and precautions we haveimplemented (including insurance) to protect against the effects of service delivery interruptions, such interruptions could result in a material adverse effect on ourbusiness, results of operations and financial condition.Our investment of substantial capital in information technology systems, and a failure to successfully implement such systems could adversely affect ourbusiness.We have invested and continue to invest substantial amounts in the development and implementation of information technology systems. Althoughinvestments are carefully planned, there can be no assurance that such systems will justify the related investments. If we fail to realize the benefits expected fromour information technology system investments, or if we fail to do so within the envisioned timeframe, it could have an adverse effect on our results of operationsand financial condition.Client and vendor bankruptcies and financial difficulties could reduce our earnings.Our clients generally operate in intensely competitive environments and, accordingly, bankruptcy filings by our clients are not uncommon. Bankruptcyfilings by our large clients or the significant vendors who supply them or unexpectedly large vendor claim chargebacks lodged against one or more of our largerclients could have a materially adverse effect on our financial condition and results of operations. Similarly, our inability to collect our accounts receivable due toother financial difficulties of one or more of our large clients could adversely affect our financial condition and results of operations.Recent economic conditions which have adversely impacted the retail industry in the U.K and Europe may continue to have a negative impact on ourrevenue. Since we generally audit our clients’ purchases up to 15 months in arrears, we cannot yet determine if we have experienced the full impact of the recenteconomic downturn on our business and revenue. Specifically, client liquidity and the liquidity of client vendors can have a significant impact on claim production,the claim approval process, and the ability of clients to offset or otherwise make recoveries from their vendors. 13Table of ContentsIf a client files for bankruptcy, we could be subject to an action to recover certain payments received in the 90 days prior to the bankruptcy filing known as“preference payments.” If we are unsuccessful in defending against such claims, we would be required to make unbudgeted cash payments which could strain ourfinancial liquidity, and our earnings would be reduced.Our failure to retain the services of key members of our management team and highly skilled personnel could adversely impact our operations and financialperformance.Our future success depends largely on the efforts and skills of our management team, including our executive officers and other key employees. As such, wehave entered into employment agreements with key members of our management team. While these employment agreements include limits on the ability of keyemployees to directly compete with us in the future, nothing prevents them from leaving our company. We also do not maintain “key person” life insurancepolicies on any of our executive officers or other key employees. Thus, we may have to incur costs to replace such employees if we were to lose their services, andour ability to execute our business strategy could be impaired if we are unable to replace such employees in a timely manner.In addition, it is especially challenging to attract and retain highly qualified skilled auditors and other professionals in an industry where competition forskilled personnel is intense. Accordingly, our future performance also depends, in part, on the ability of our management team to work together effectively,manage our workforce, and retain highly qualified personnel.We rely on operations outside the U.S. for a significant portion of our revenue and are increasingly dependent on operations outside the U.S. for supportingour operations globally.Operations outside the U.S. generated approximately 40.4% of our annual revenue in 2012, 47.3% in 2011 and 49.7% in 2010. These internationaloperations are subject to numerous risks, including: • greater exposure to the possibility of economic instability, the disruption of operations from labor and political disturbances, expropriation orwar 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 British pound, the euro, the Canadian dollar, the Mexican peso, theBrazilian real and other currencies of countries in which we transact business, which could result in currency translations that materiallyreduce our revenue and earnings; • costs associated with adapting our services to our foreign clients’ needs; • unexpected changes in regulatory requirements and laws; • expenses and legal restrictions associated with transferring earnings from our foreign subsidiaries to us; • difficulties complying with a variety of foreign laws and regulations, such as those relating to data content retention, privacy and employeewelfare; • business interruptions due to widespread disease, potential terrorist activities, or other catastrophes; • reduced or limited protection of our intellectual property rights; • longer accounts receivable cycles; and • competition with large or state-owned enterprises or regulations that effectively limit our operations and favor local competitors.Because we expect a significant portion of our revenue to continue to come from operations outside the U.S., and expect to continue transitioning certain ofour operations to locations outside the U.S., the occurrence of any of these events could materially and adversely affect our business, financial condition and resultsof operations. 14Table of ContentsIn 2012, our European operations accounted for approximately 23.6% of our consolidated revenue. There have been continuing concerns and uncertaintiesregarding the stability of the European economies. A decline in the economic conditions in Europe may materially and adversely affect our operations both inEurope and on a consolidated basis.Furthermore, in 2010 we began transitioning certain of our core data processing and other functions to locations outside the U.S., including India, where12% of our employees were located at December 31, 2012. While our operations in India have been key to serving clients more efficiently and cost-effectivelyunder our Next-Generation Recovery Audit service delivery model, India has from time to time experienced instances of civil unrest and hostilities with Pakistan.In recent years, there have been military confrontations between India and Pakistan in the region of Kashmir and along the India-Pakistan border as well as terroristactivity in several major Indian cities. Although the relations between the two countries generally have been improving, military activity or terrorist attacks in thefuture could adversely affect the Indian economy by disrupting communications and making travel more difficult, which may have a material adverse effect on ourability to deliver services from India. Disruption in our Indian operations could materially and adversely affect our profitability and our ability to execute ourgrowth strategy.Our Next-Generation Recovery Audit, Healthcare Claims Recovery Audit and Profit Optimization services businesses operate in highly competitiveenvironments and are subject to pricing pressure.The environment in which our business operates is highly competitive, with numerous other recovery audit firms and other service providers. In addition,many of our recovery audit clients have developed their own internal recovery audit capabilities. As a result of competition among the providers of these servicesand the availability of certain recovery audit services from clients’ internal audit departments, our business is subject to intense price pressure. In addition, ourHealthcare Claims Recovery Audit services business currently is involved in a very competitive process of bidding for a new contract under the Medicare RACprogram. We may not be awarded a region to audit, or may be awarded a region at a lower contingency rate than we currently earn. Our Profit Optimizationservices business also has numerous competitors varying in size, market strength and specialization, many of whom have established and well-known franchisesand brands. Intense price competition faced by all of our service lines could negatively impact our profit margins and have a potential adverse effect on ourbusiness, financial condition and results of operations.Our client contracts generally contain provisions under which the client may terminate our services prior to the completion of the agreement.Many of our client contracts provide that the client may terminate the contract without cause prior to the end of the term of the agreement by providing uswith relatively short prior written notice of the termination. As a result, the existence of contractual relationships with our clients is not an assurance that we willcontinue to provide services for our clients through the entire terms of their respective agreements. If clients representing a significant portion of our revenueterminated their agreements unexpectedly, we may not, in the short-term, be able to replace the revenue and earnings from such contracts and this would have amaterial adverse effect on our operations and financial results. In addition, client contract terminations also could harm our reputation within the industry whichcould negatively impact our ability to obtain new clients.Our charges to earnings resulting from acquisition, restructuring and integration costs may materially adversely affect the market value of our common stock.We account for the completion of our acquisitions using the purchase method of accounting. We allocate the total estimated purchase prices to net tangibleassets, amortizable intangible assets and indefinite-lived intangible assets, and based on their fair values as of the date of completion of the acquisitions, record theexcess of the purchase price over those fair values as goodwill. Our financial results, including earnings per share, could be adversely affected by a number offinancial adjustments required in purchase accounting including the following: • we will incur additional amortization expense over the estimated useful lives of certain of the intangible assets acquired in connection withacquisitions during such estimated useful lives; • we will incur additional depreciation expense as a result of recording purchased tangible assets; and 15Table of Contents • to the extent the value of goodwill or intangible assets becomes impaired, we may be required to incur material charges relating to theimpairment of those assets.Our failure to comply with applicable governmental privacy laws and regulations could substantially impact our business, operations and financial condition.We are subject to extensive and evolving federal, state and foreign privacy laws and regulations. Changes in privacy laws or regulations or newinterpretations of existing laws or regulations could have a substantial effect on our operating methods and costs. Failure to comply with such regulations couldresult in the termination or loss of contracts, the imposition of contractual damages, civil sanctions, damage to the Company’s reputation, or in certaincircumstances, criminal penalties, any of which could have a material adverse effect on our results of operations, financial condition, business and prospects.Determining compliance with such regulations is complicated by the fact that many of these laws and regulations have not been fully interpreted by governingregulatory authorities or the courts, and many of the provisions of such laws and regulations are open to a wide range of interpretations. There can be no assurancethat we are or have been in compliance with all applicable existing laws and regulations or that we will be able to comply with new laws or regulations.The ownership change that occurred as a result of our 2006 exchange offer limits our ability to use our net operating losses.We have substantial tax loss and credit carry-forwards for U.S. federal income tax purposes. On March 17, 2006, as a result of the closing of its exchangeoffer, the Company experienced an ownership change as defined under Section 382 of the Internal Revenue Code (“IRC”). This ownership change resulted in anannual IRC Section 382 limitation that limits the use of certain tax attribute carry-forwards. Of the $78.6 million of U.S. federal net loss carry-forwards availableto the Company, $17.8 million of the loss carry-forwards are subject to an annual usage limitation of $1.4 million. We believe that such limitations and the loss ofthese carry-forwards may significantly increase our projected future tax liability.We currently are in the process of determining if we experienced an ownership change subsequent to March 17, 2006, but have not yet completed thisanalysis. Based on preliminary calculations we have made with the assistance of external advisors, we believe that any additional limitations on the usage of ourloss carry-forwards that would be imposed if an additional ownership change has occurred would be minimal. We do not believe that an additional ownershipchange would have a material adverse impact on our financial position, results of operations or cash flows.Certain of our tax positions may be subject to challenge by the Internal Revenue Service and other tax authorities, and if successful, these challenges couldincrease our future tax liabilities and expense.For U.S. federal income tax purposes, as well as local country tax purposes in the jurisdictions where we operate, from time to time we take positions underprovisions of applicable tax law that are subject to varying interpretations. Certain of our tax positions may be subject to challenge by the applicable taxingauthorities, including, in the U.S., the Internal Revenue Service. If our tax positions are successfully challenged, our future tax liabilities and expense couldsignificantly increase.While we believe that our tax positions are proper based on applicable law and we believe that it is more likely than not that we would prevail with respectto challenges to these positions, we can make no assurances that we would prevail if our positions are challenged or that business economics would justify themounting of a legal defense against such challenges. If our tax positions are successfully challenged by the U.S. or non-U.S. taxing authorities, it could increaseour future tax liabilities and expense and have a material adverse impact on our financial position, results of operations and cash flows.We may have exposure to additional income tax liabilities or additional costs if the U.S. government changes certain U.S. tax rules or other laws applicable toU.S. corporations doing business in foreign jurisdictions.We are a U.S. corporation that conducts business both in the U.S. and in foreign jurisdictions. As part of the ongoing discussions regarding the federalbudget and the federal debt ceiling, various proposals have been made that may negatively impact U.S. corporations doing business in foreign jurisdictions,including proposals for comprehensive tax reform. While the scope of future changes remains unclear, proposed changes might include 16Table of Contentslimiting the ability of U.S. corporations to deduct certain expenses attributable to offshore earnings, modifying the foreign tax credit rules and taxing currentlycertain transfers of intangible assets offshore or imposing other economic disincentives to doing business outside of the U.S. The enactment of some or all of theseproposals could increase the Company’s effective tax rate or otherwise adversely affect our profitability.Future impairment of goodwill, other intangible assets and long-lived assets would reduce our future earnings.As of December 31, 2012, the Company’s goodwill and other intangible assets totaled $32.1 million. We must perform periodic assessments to determinewhether some portion, or all, of our goodwill, intangible assets and other long-lived assets are impaired. Future impairment testing could result in a determinationthat our goodwill, other intangible assets or our long-lived assets have been impaired. Future adverse changes in the business environment or in our ability toperform audits successfully and compete effectively in our markets or the discontinuation of our use of certain of our intangible or other long-lived assets couldresult in impairment which could materially adversely impact future earnings.Claims under our self-insurance program may differ from our estimates, which could materially impact our results of operations.We use a combination of insurance and self-insurance plans to provide for the potential liabilities for healthcare benefits for our employees. We estimate theliabilities associated with the risks that we retain by considering historical claims experience, demographic factors, severity factors and other actuarialassumptions. Our results could be materially impacted by claims and other expenses related to such plans if future occurrences and claims differ from theseassumptions and historical trends.Our articles of incorporation, bylaws, shareholder rights plan and Georgia law may inhibit a change of control that shareholders may favor.Our articles of incorporation, bylaws and Georgia law contain provisions that may delay, deter or inhibit a future acquisition of PRGX that is not approvedby our Board of Directors. This could occur even if our shareholders receive attractive offers for their shares or if a substantial number, or even a majority, of ourshareholders believe the takeover is in their best interest. These provisions are intended to encourage any person interested in acquiring us to negotiate with andobtain the approval of our Board of Directors in connection with the transaction. Provisions that could delay, deter or inhibit a future acquisition include thefollowing: • a classified Board of Directors; • the requirement that our shareholders may only remove directors for cause; • specified requirements for calling special meetings of shareholders; • the ability of the Board of Directors to consider the interests of various constituencies, including our employees, clients and creditors and thelocal community, in making decisions; and • the ability of 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 could trigger a dilutive issuance of common stock upon substantial purchases ofour common stock by a third party that are not approved by the Board of Directors. These provisions also could discourage bids for our shares of common stock ata premium and could have a material adverse effect on the market price of our common stock.Our stock price has been and may continue to be volatile.Our common stock is currently traded on The Nasdaq Global Select Market. The trading price of our common stock has been and may continue to besubject to large fluctuations. For example, for the year ended December 31, 2012, our stock traded as high as $8.85 per share and as low as $5.29 per share. Ourstock 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 and liquidity; 17Table of Contents • changes in financial estimates and recommendations by securities analysts; • developments with respect to technology or litigation; • changes in applicable laws and regulations; • the operating and stock price performance of other companies that investors may deem comparable to our company; • acquisitions and financings; and • sales and purchases of our stock by insiders.Fluctuations in the stock market, generally, also impact the volatility of our stock price. Finally, general economic conditions and stock market movementsmay adversely affect the price of our common stock, regardless of our operating performance.ITEM 1B. Unresolved Staff CommentsNone.ITEM 2. PropertiesOur principal executive offices are located in approximately 132,000 square feet of office space in Atlanta, Georgia. We lease this space under an agreementexpiring on December 31, 2014. We have subleased approximately 58,000 square feet of our principal executive office space to independent third parties. Ourvarious operating units lease numerous other parcels of operating space in the various countries in which we currently conduct our business.Excluding the lease for our principal executive offices, the majority of our real property leases are individually less than five years in duration. See Note 6 of“Notes to Consolidated Financial Statements” included in Item 8 of this Form 10-K.ITEM 3. Legal ProceedingsOn December 16, 2011, an employee of our wholly owned subsidiary PRGX USA, Inc., filed a lawsuit in the U.S. District Court for the District ofMinnesota (Civil Action No. 0:11-CV-03631-PJS-FLN) alleging that PRGX USA, Inc. failed to pay overtime wages to the Plaintiff and other similarly situatedindividuals as required by the Fair Labor Standards Act (FLSA). In this collective action, the Plaintiff sought an unspecified amount of monetary damages andcosts, including attorneys’ fees. We filed an Answer denying all of the asserted claims on January 31, 2012, and the parties then conducted limited discovery. InAugust 2012, the parties reached an agreement to settle the case for $135,000, which includes the plaintiffs’ attorney fees, and all of the plaintiffs have approvedthe settlement. The settlement received court approval on November 19, 2012 and the case has been dismissed.In addition, we are party to a variety of other legal proceedings arising in the normal course of business. While the results of these proceedings cannot bepredicted with certainty, management believes that the final outcome of these proceedings will not have a material adverse effect on our financial position orresults of operations.ITEM 4. Mine Safety DisclosuresNot applicable. 18Table of ContentsPART II ITEM 5.Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity SecuritiesOur common stock is traded under the symbol “PRGX” on The Nasdaq Global Select Market (Nasdaq). The Company has not paid cash dividends on itscommon stock since it became a public company in 1996 and does not intend to pay cash dividends in the foreseeable future. Moreover, restrictive covenantsincluded in our secured credit facility specifically prohibit payment of cash dividends and limit the amount of our common stock that we may repurchase to $1.0million on an annual basis. As of February 27, 2013, there were 178 holders of record of our common stock and management believes there were approximately3,000 beneficial holders. The following table sets forth, for the quarters indicated, the range of high and low sales prices for the Company’s common stock asreported by Nasdaq during 2012 and 2011. 2012 Calendar Quarter High Low 1st Quarter $6.50 $5.29 2nd Quarter 8.07 5.66 3rd Quarter 8.85 7.00 4th Quarter 8.60 5.93 2011 Calendar Quarter High Low 1st Quarter $6.64 $5.41 2nd Quarter 8.39 5.99 3rd Quarter 7.42 4.48 4th Quarter 6.23 4.07 Issuer Purchases of Equity SecuritiesA summary of our repurchases of our common stock during the fourth quarter ended December 31, 2012 is set forth below. 2012 TotalNumber ofSharesPurchased(a) AveragePricePaid perShare Total Number ofShares Purchasedas Part ofPubliclyAnnounced Plansor Programs MaximumApproximate DollarValue of Shares thatMay Yet BePurchased Under thePlans or Programs (millions of dollars) October 1 – October 31 1,081 $7.45 — $— November 1 – November 30 — $— — $— December 1 – December 31 — $— — $— 1,081 $7.45 — $— (a)All shares reported during the quarter were surrendered by an employee to satisfy tax withholding obligations upon vesting of restricted stock. 19Table of ContentsPerformance GraphSet forth below is a line graph presentation comparing the cumulative shareholder return on our common stock, on an indexed basis, against cumulativetotal returns of The Nasdaq Composite Index and the RDG Technology Composite Index. The graph assumes that the value of the investment in the common stockin each index was $100 on December 31, 2007 and shows total return on investment for the period beginning December 31, 2007 through December 31, 2012,assuming reinvestment of any dividends. Notwithstanding anything to the contrary set forth in any of the Company’s filings under the Securities Act of 1933 or theSecurities Exchange Act of 1934 that might incorporate future filings, including this Annual Report on Form 10-K, in whole or in part, the Performance Graphpresented below shall not be incorporated by reference into any such filings. Cumulative Total Return 12/07 12/08 12/09 12/10 12/11 12/12 PRGX Global, Inc. 100.00 47.61 68.96 73.86 69.43 75.26 NASDAQ Composite 100.00 59.03 82.25 97.32 98.63 110.78 RDG Technology Composite 100.00 56.89 91.53 103.10 103.14 117.75 20Table of ContentsITEM 6. Selected Financial DataThe following table sets forth selected consolidated financial data for the Company as of and for each of the five years in the period ended December 31,2012. The following data reflects the business acquisitions that we have completed through December 31, 2012. We have included the results of operations forthese acquired businesses in our results of operations since the date of their acquisitions. We have derived this historical consolidated financial data from ourConsolidated Financial Statements and Notes thereto, which have been audited by our Independent Registered Public Accounting Firm. The Consolidated BalanceSheets as of December 31, 2012 and 2011, and the related Consolidated Statements of Income, Comprehensive Income, Shareholders’ Equity and Cash Flows foreach of the years in the three-year period ended December 31, 2012 and the report of the Independent Registered Public Accounting Firm thereon are included inItem 8 of this Form 10-K.The data presented below should be read in conjunction with the Consolidated Financial Statements and Notes thereto included elsewhere in this Form 10-Kand other financial information appearing elsewhere in this Form 10-K, including “Management’s Discussion and Analysis of Financial Condition and Resultsof Operations.” Years Ended December 31, 2012 2011 2010 2009 2008 (In thousands, except per share data) Statements of Income Data: Revenue $208,503 $203,117 $184,081 $179,583 $195,706 Operating expenses: Cost of revenue 134,390 137,482 126,069 115,064 124,997 Selling, general and administrative expenses 52,527 49,102 40,735 40,390 36,455 Depreciation of property and equipment 7,084 5,401 4,903 3,505 2,991 Amortization of intangible assets 7,224 4,991 4,131 3,227 2,203 Total operating expenses 201,225 196,976 175,838 162,186 166,646 Operating income 7,278 6,141 8,243 17,397 29,060 Gain on bargain purchase, net (1) — — — (2,388) — Foreign currency transaction (gains) losses on short-term intercompany balances (377) 417 422 (1,595) 3,283 Interest expense, net 966 1,616 1,305 3,025 3,245 Loss on debt extinguishment and financial restructuring — — 1,381 — — Earnings before income taxes 6,689 4,108 5,135 18,355 22,532 Income tax expense (2) 1,297 1,292 1,882 3,028 3,502 Net earnings $5,392 $2,816 $3,253 $15,327 $19,030 Basic earnings per common share $0.21 $0.11 $0.14 $0.67 $0.87 Diluted earnings per common share $0.21 $0.11 $0.13 $0.65 $0.83 21Table of Contents December 31, 2012 2011 2010 2009 2008 (In thousands) Balance Sheet Data: Cash and cash equivalents $37,806 $20,337 $18,448 $33,026 $26,688 Working capital 37,445 16,319 17,678 18,479 10,512 Total assets 143,586 126,413 106,321 110,513 98,783 Long-term debt, excluding current installments 3,000 6,000 9,000 11,070 14,331 Total shareholders’ equity $84,652 $59,090 $48,843 $41,439 $22,710 (1)In July 2009, we acquired the business and certain assets of First Audit Partners LLP. The excess of the fair value of assets acquired over the purchase priceresulted in a gain on bargain purchase for this acquisition.(2)The low effective tax rate relative to the U.S. federal statutory rate in 2012 is attributable to recognition of certain previously unrecognized tax benefits. Loweffective tax rates in 2009 and 2008 are primarily attributable to reductions in the deferred tax asset valuation allowance. See Note 1 (i) and Note 7 of “Notesto Consolidated Financial Statements” included in Item 8 of this Form 10-K. 22Table of ContentsITEM 7. Management’s Discussion and Analysis of Financial Condition and Results of OperationsIntroductionWe conduct our operations through three reportable segments: Recovery Audit Services – Americas, Recovery Audit Services – Europe/Asia-Pacific andNew Services. The Recovery Audit Services – Americas segment represents recovery audit services (other than Healthcare Claims Recovery Audit services) weprovide in the U.S., Canada and Latin America. The Recovery Audit Services – Europe/Asia-Pacific segment represents recovery audit services (other thanHealthcare Claims Recovery Audit services) we provide in Europe, Asia and the Pacific region. The New Services segment includes Profit Optimization servicesas well as Healthcare Claims Recovery Audit services. We include the unallocated portion of corporate selling, general and administrative expenses notspecifically attributable to the three operating segments in Corporate Support.Recovery auditing is a business service focused on finding overpayments created by errors in payment transactions, such as missed or inaccurate discounts,allowances and rebates, vendor pricing errors, erroneous coding and duplicate payments. Generally, we earn our recovery audit revenue by identifyingoverpayments made by our clients, assisting our clients in recovering the overpayments from their vendors, and collecting a specified percentage of the recoveriesfrom our clients as our fee. The fee percentage we earn is based on specific contracts with our clients that generally also specify: (a) time periods covered by theaudit; (b) the nature and extent of services we are to provide; and (c) the client’s responsibilities to assist and cooperate with us. Clients generally recover claims byeither taking credits against outstanding payables or future purchases from the relevant vendors, or receiving refund checks directly from those vendors. Themanner in which a claim is recovered by a client is often dictated by industry practice. In addition, many clients establish client-specific procedural guidelines thatwe must satisfy prior to submitting claims for client approval. For some services we provide, such as certain of our Profit Optimization services, we earn ourcompensation in the form of a flat fee, a fee per hour, or a fee per other unit of service.We earn the vast majority of our recovery audit revenue from clients in the retail industry due to many factors, including the high volume of transactions andthe complicated pricing and allowance programs typical in this industry. Changes in consumer spending associated with economic fluctuations generally impactour recovery audit revenue to a lesser degree than they affect individual retailers due to several factors, including: • Diverse client base – our clients include a diverse mix of discounters, grocery, pharmacy, department and other stores that tend to beimpacted to varying degrees by general economic fluctuations, and even in opposite directions from each other depending on their position inthe market and their market segment; • Motivation – when our clients experience a downturn, they frequently are more motivated to use our services to recover prior overpaymentsto make up for relatively weaker financial performance in their own business operations; • Nature of claims – the relationship between the dollar amount of recovery audit claims identified and client purchases is non-linear. Claimvolumes are generally impacted by purchase volumes, but a number of other factors may have an even more significant impact on claimvolumes, including new items being purchased, changes in discount, rebate, marketing allowance and similar programs offered by vendors andchanges in a client’s or a vendor’s information processing systems; and • Timing – the client purchase data on which we perform our recovery audit services is historical data that typically reflects transactionsbetween our clients and their vendors that took place 3 to 15 months prior to the data being provided to us for audit. As a result, we generallyexperience a delayed impact from economic changes that varies by client and the impact may be positive or negative depending on theindividual clients’ circumstances.While the net impact of the economic environment on our recovery audit revenue is difficult to determine or predict, we believe that for the foreseeablefuture, our revenue will remain at a level that will not have a significant adverse impact on our liquidity, and we have taken steps to mitigate any adverse impact ofan economic downturn on our revenue and overall financial health. These steps include devoting substantial efforts to develop a lower cost service delivery modelto enable us to more cost effectively serve our clients. Further, we continue to pursue our 23Table of Contentsongoing growth strategy to expand our business beyond our core recovery audit services to retailers by growing the portion of our business that provides recoveryaudit services to enterprises other than retailers and growing our New Services segment which includes our Healthcare Claims Recovery Audit services and ourProfit Optimization services. Our Healthcare Claims Recovery Audit services include services we provide as a participant in the Medicare RAC program.Results of OperationsThe following table sets forth the percentage of revenue represented by certain items in our Consolidated Statements of Income for the periods indicated: Years Ended December 31, 2012 2011 2010 Statements of Income Data: Revenue 100.0% 100.0% 100.0% Operating expenses: Cost of revenue 64.5 67.7 68.5 Selling, general and administrative expenses 25.2 24.2 22.1 Depreciation of property and equipment 3.4 2.7 2.7 Amortization of intangible assets 3.4 2.4 2.2 Total operating expenses 96.5 97.0 95.5 Operating income 3.5 3.0 4.5 Foreign currency transaction (gains) losses on short-term intercompany balances (0.2) 0.2 0.2 Interest expense, net 0.5 0.8 0.7 Loss on debt extinguishment — — 0.8 Earnings before income taxes 3.2 2.0 2.8 Income tax expense 0.6 0.6 1.0 Net earnings 2.6% 1.4% 1.8% Revenue. Revenue was as follows (in thousands): Years Ended December 31, 2012 2011 2010 Recovery Audit Services – Americas $121,638 $115,807 $115,156 Recovery Audit Services – Europe/Asia-Pacific 53,783 61,570 57,590 New Services 33,082 25,740 11,335 Total $208,503 $203,117 $184,081 Total revenue increased by $5.4 million, or 2.7%, in 2012 and $19.0 million, or 10.3%, in 2011. Below is a discussion of our revenue for our three reportablesegments.Recovery Audit Services – Americas revenue increased by 5.0% in 2012 and increased by 0.6% in 2011. We experience changes in our reported revenuebased on the strength of the U.S. dollar relative to foreign currencies. Changes in the value of the U.S. dollar relative to currencies in Canada and Latin Americanegatively impacted reported revenue in 2012 and positively impacted reported revenue in 2011. On a constant dollar basis, adjusted for changes in foreignexchange (“FX”) rates, 2012 revenue increased by 6.4% compared to an increase of 5.0% as reported, and 2011 revenue decreased by 0.5% compared to anincrease of 0.6% as reported.The increases in our Recovery Audit Services – Americas revenue in 2012 and 2011 were due to a number of factors. Revenue increased 1.6% in 2012 and7.7% in 2011 due to new clients, new geographic territories for existing clients and a promotion from secondary auditor to primary auditor at a significant client in2011. Revenue from existing clients decreased 1.4% in 2012 and increased 1.6% in 2011. The decrease in 2012 is due primarily to one significant client for which2011 included an audit of purchases from multiple years for one area and 2012 24Table of Contentsincluded an audit of purchases for one year, as well as increased findings by this client’s internal staff that reduced the opportunity available to us. Revenue fromnew clients we gained through our acquisition of Business Strategy, Inc. (“BSI”) in December 2011 added another 7.1% in 2012 and 0.6% in 2011 to our revenue.These increases were offset primarily by discontinued clients and, to a lesser extent, demotions from primary auditor to secondary auditor and from restrictions onclaim types imposed by certain clients.Although we generated year over year increases in revenue in this segment for both 2012 and 2011, we experienced declining revenue in this segment inyears prior to 2011 due to reduced liquidity of our clients’ vendors, competitive rate pressures, client attrition, and the impact of our clients developing andstrengthening their own internal audit capabilities as a substitute for our services. To address these issues, offset their impact and generate growth in this segment,we began implementing several growth strategies in late 2009. We reinstituted a sales function in 2010, resulting in a significant increase in our client count in thepast two years. We continue to implement our service delivery model transformation designed to make our recovery audit process more cost efficient andeffective. We expanded the use of our new service delivery platform in 2012, and are planning to continue the expansion in 2013. We also are providing greatervalue to our existing and potential clients by offering adjacent services in the procure-to-pay value chain and to the CFO suite, and by capitalizing on our existingdata mining and related competencies. While we are encouraged by some of our recent successes, we can provide no assurances that we will be able to build onthem in the future or that we will be able to sustain our current revenue levels in this segment.Recovery Audit Services – Europe/Asia-Pacific revenue decreased by 12.6% in 2012 and increased by 6.9% in 2011. The changes in the strength of the U.S.dollar relative to foreign currencies in Europe, Asia and Australia negatively impacted reported revenue in 2012 but positively impacted reported revenue in 2011.On a constant dollar basis, adjusted for changes in FX rates, 2012 revenue decreased by 10.0% compared to a decrease of 12.6% as reported, and 2011 revenueincreased by 1.5% compared to an increase of 6.9% as reported. Revenue increased 4.8% in 2012 and 6.0% in 2011 due to new clients and new geographicterritories for existing clients. Revenue from existing clients decreased 5.9% in 2012 and 2.0% in 2011, resulting primarily from fewer individually significantclaims at continuing clients in 2012 than were generated in 2011, and audits of special claim concepts that positively impacted 2011 to a greater degree than 2012.The remaining net decrease is due to discontinued clients and lower revenue from cyclical clients, which generally include commercial companies for which wecomplete the audits in a relatively short period of time, and then have several quarters with no revenue while we are between audits. As in our Recovery AuditServices – Americas segment, we experience competitive and other pressures in this segment, but to a lesser degree due to the smaller number of competitors withglobal capabilities. We intend to execute the same strategic initiatives for this segment as we are executing in the Recovery Audit Services – Americas segment.New Services revenue increased by 28.5% in 2012 and increased by 127.1% in 2011. Our Healthcare Claims Recovery Audit business more than doubled itsrevenue in both years. Our Profit Optimization revenue also more than doubled in 2011, but declined approximately 15% in 2012. Approximately 40% of the 2011increase in New Services revenue is attributable to incremental revenue associated with our acquisitions of Etesius Limited (“Etesius”) in February 2010 and TJGHoldings LLC (“TJG”) in November 2010. The remaining 2011 increase resulted from organic growth.We currently serve as a subcontractor to the prime contractor on three of the four prime contracts in the Medicare RAC program. Based on recentdevelopments, we believe CMS has agreed with the prime contractors to allow the prime contracts to expire in August 2013, subject to extension by CMS to allowfor a transition period to the new RAC contracts. Should the prime contracts expire in August 2013, our RAC subcontracts will also expire at that time, subject toany additional extensions by CMS in connection with the transition to new RAC contracts, and contracts for the performance of future Medicare RAC services willbe subject to a bidding process administered by CMS. CMS issued a request for proposals in connection with the re-bidding for the RAC contracts, and theproposals are due by March 27, 2013. CMS is expected to award the RAC contracts to more than one contractor and divide the country into geographic regions forcontracting purposes. We will be competing to participate in the RAC program as a prime contractor through the bidding process. While we believe we are well-positioned to compete in the bidding process, there are no assurances that we will receive any contract when the new Medicare RAC contracts are ultimatelyawarded.Growth in our Profit Optimization business was very strong through the first half of 2011, but revenue declined in the second half of the year compared tothe first half of 2011. As part of our continuing investment in our New 25Table of ContentsServices segment, we changed the leadership and realigned this organization in 2012. Profit Optimization revenue stabilized in 2012, and we anticipate that it willreturn to growth in 2013.Cost of Revenue (“COR”). COR consists principally of commissions and other forms of variable compensation we pay to our auditors based primarily uponthe level of overpayment recoveries and/or profit margins derived therefrom, fixed auditor salaries, compensation paid to various types of hourly support staff, andsalaried operational and client service managers for our recovery audit and Profit Optimization services businesses. COR also includes other direct and indirectcosts incurred by these personnel, including office rent, travel and entertainment, telephone, utilities, maintenance and supplies and clerical assistance. Asignificant portion of the components comprising COR is variable and will increase or decrease with increases or decreases in revenue. Beginning in 2011, wereclassified depreciation and amortization to present them separately from COR and selling, general and administrative expenses (“SG&A”). The COR and SG&Aexpenses presented below for 2010 reflect these reclassifications.COR expenses were as follows (in thousands): Years Ended December 31, 2012 2011 2010 Recovery Audit Services – Americas $64,205 $64,946 $67,744 Recovery Audit Services – Europe/Asia-Pacific 41,715 47,105 44,200 New Services 28,470 25,431 14,125 Total $134,390 $137,482 $126,069 COR as a percentage of revenue for Recovery Audit Services – Americas was 52.8% in 2012, 56.1% in 2011 and 58.8% in 2010. We invested in our variousgrowth and other strategic initiatives, and included significant portions of these costs in Recovery Audit Services – Americas COR in 2010. Although wecontinued to make these investments in subsequent years, we began to realize the benefits of the investments and were able to increase revenue and still reduceCOR by 1.1% in 2012 and 4.1% in 2011, respectively. We continue to implement additional facets of our strategic initiatives, and believe we will continue toreduce COR as a percentage of revenue in 2013.COR as a percentage of revenue for Recovery Audit Services – Europe/Asia-Pacific was 77.6% in 2012, 76.5% in 2011 and 76.7% in 2010. The slightchanges in the gross margins in these periods primarily resulted from changes in the mix of audit revenue and from changes in our methods of providing auditservices in Europe. We subcontract a portion of our audit services in Europe to third-party audit firms, which we refer to as the associate model. We generally earna lower gross margin from associate model audits than we earn from audits we perform ourselves, which we refer to as employee model audits. We migratedseveral of the larger audits to an employee model in 2011 and 2012. In an associate migration, we generally transfer all of the employees of the associate entity toPRGX, and continue to service the related clients with the same personnel after the associate migration as were providing services prior to the associate migration.We intend for the associate migrations to provide more standardization and centralization of our audit procedures, thereby increasing client service while alsodecreasing costs. Generally, revenue remains unchanged as a result of an associate migration, and expenses change from a fixed percentage of revenue to avariable amount based on employee and related costs. In 2012, the benefits we anticipated from these associate migrations were diminished by the revenue declinesin this segment. In 2011 as compared to 2010, we generated a greater percentage of our revenue in this segment from associate model audits, which changed themix of our revenue and negatively impacted our gross margins. Although we incur some increased costs during this migration process, we expect that themigrations ultimately will result in higher gross margins for this segment and for the Company as a whole.The higher COR as a percentage of revenue for Recovery Audit Services – Europe/Asia-Pacific (77.6% for 2012) compared to Recovery Audit Services –Americas (52.8% for 2012) is due primarily to differences in service delivery models, scale and geographic fragmentation. The Recovery Audit Services –Europe/Asia-Pacific segment generally serves fewer clients in each geographic market and generates lower revenue per client than those served by the Company’sRecovery Audit Services – Americas segment.New Services COR relates primarily to costs of Profit Optimization services and costs associated with services we provide under the Medicare RACprogram subcontracts portion of our Healthcare Claims Recovery Audit business. New Services revenue exceeded COR by $4.6 million in 2012 and $0.3 millionin 2011, but COR exceeded revenue by $2.8 million in 2010 primarily due to our investments in the Medicare RAC program as well as our investments in ourProfit Optimization services capabilities. 26Table of ContentsSelling, General and Administrative Expenses (“SG&A”). SG&A expenses of the Recovery Audit and New Services segments include the expenses of salesand marketing activities, information technology services and allocated corporate data center costs, human resources, legal, accounting, administration, foreigncurrency transaction gains and losses other than those relating to short-term intercompany balances, and gains and losses on asset disposals. Corporate SupportSG&A represents the unallocated portion of SG&A expenses which are not specifically attributable to our segment activities and include the expenses ofinformation technology services, the corporate data center, human resources, legal, accounting, treasury, administration and stock-based compensation charges.SG&A expenses were as follows (in thousands): Years Ended December 31, 2012 2011 2010 Recovery Audit Services – Americas $19,882 $18,479 $16,448 Recovery Audit Services – Europe/Asia-Pacific 4,980 4,627 4,764 New Services 5,497 4,907 2,608 Subtotal for segments 30,359 28,013 23,820 Corporate support 22,168 21,089 16,915 Total $52,527 $49,102 $40,735 Recovery Audit Services – Americas SG&A increased 7.6% in 2012 and 12.3% in 2011. These increases resulted primarily from costs incurred inconnection with the execution of our growth strategies. The 2012 increase also includes incremental expenses resulting from our December 2011 BSI acquisitionand costs relating to an overtime wages claim. The 2011 increase also includes greater incentive compensation accruals and some incremental expenses resultingfrom the BSI acquisition.Recovery Audit Services – Europe/Asia-Pacific SG&A increased 7.6% in 2012 and decreased 2.9% in 2011. The 2012 increase resulted primarily fromseverance charges and provisions for bad debts, partially offset by a reduction in a business acquisition obligation resulting from decreased revenue andprofitability generated by the acquired business. Although incentive compensation accruals increased in 2011, most other SG&A expenses decreased in 2011,resulting in the 2.9% decrease from 2010.New Services SG&A increased 12.0% in 2012 and 88.2% in 2011. The increase in 2012 primarily resulted from our continuing efforts to improve ourprocesses and develop new tools for use in our Healthcare Claims Recovery Audit business. The acquisitions of Etesius and TJG in 2010 resulted in increasedexpenses in 2011 due to the inclusion of the acquired entities for the full year in 2011. In addition, during 2011, we hired additional resources for both our ProfitOptimization business and our Healthcare Claims Recovery Audit business and incurred additional SG&A expenses associated with the additional personnel.Corporate Support SG&A includes stock-based compensation charges of $6.3 million in 2012, $5.1 million in 2011 and $4.0 million in 2010. Excludingstock-based compensation charges, Corporate Support SG&A decreased 0.9% in 2012 and increased 23.7% in 2011. The increase in 2011 is due to higher incentivecompensation accruals relative to the decreased incentive compensation accruals in 2010, costs associated with the BSI acquisition, and higher sales and marketingexpenses associated with our renewed focus on revenue growth and client retention.Depreciation of property and equipment. Depreciation of property and equipment was as follows (in thousands): Years Ended December 31, 2012 2011 2010 Recovery Audit Services – Americas $4,651 $3,491 $3,442 Recovery Audit Services – Europe/Asia-Pacific 322 417 354 New Services 2,111 1,493 1,107 Total $7,084 $5,401 $4,903 The increases in depreciation in the Recovery Audit Services – Americas segment relate primarily to improvements we made to our IT infrastructure as wellas depreciation relating to capitalized software development costs. The increase in depreciation in the New Services segment in 2012 is due primarily to an increasein the 27Table of Contentsdepreciation of capitalized software development costs and the 2011 increase is due to software we purchased in the Etesius acquisition in 2010 for which 2011included a full year of depreciation.Amortization of intangible assets. Amortization of intangible assets was as follows (in thousands): Years Ended December 31, 2012 2011 2010 Recovery Audit Services – Americas $4,355 $2,467 $2,427 Recovery Audit Services – Europe/Asia-Pacific 2,062 1,665 1,403 New Services 807 859 301 Total $7,224 $4,991 $4,131 The increase in amortization expense in our recovery audit services segments is due to the amortization of intangible assets recorded in connection with ourrecent acquisitions. These acquisitions include the December 2011 acquisition of BSI in Recovery Audit Services – Americas, the 2011 and 2012 associatemigrations in Recovery Audit Services – Europe / Asia Pacific. The increase in amortization expense in our New Services segment from 2010 to 2011 is due to theamortization of intangible assets recorded in connection with the February 2010 acquisition of Etesius and the November 2010 acquisition of TJG. We anticipatethat, absent our completing additional acquisitions in 2013, amortization expense will decrease in 2013 due to the declining rate of amortization relating to the2011 and prior acquisitions and the completion of substantially all amortization resulting from the associate migrations we completed in 2011 and 2012.Foreign Currency Transaction (Gains) Losses on Short-Term Intercompany Balances. Foreign currency transaction gains and losses on short-termintercompany balances result from fluctuations in the exchange rates for the foreign currencies and the U.S. dollar. Substantial changes from period to period inforeign currency exchange rates may significantly impact the amount of such gains and losses. The strengthening of the U.S. dollar relative to other currenciesresults in recorded losses on short-term intercompany balances receivable from our foreign subsidiaries while the relative weakening of the U.S. dollar results inrecorded gains.In 2011 and 2010, the local currencies of certain of our foreign subsidiaries with significant short-term intercompany balances weakened relative to the U.S.dollar, resulting in recorded losses of $0.4 million in both years. The U.S. dollar generally weakened relative to those foreign currencies in 2012, resulting in ourrecording net foreign currency transaction gains on short-term intercompany balances of $0.4 million for the year.Interest Expense, net and Loss on Extinguishment of Debt. Net interest expense was $1.0 million in 2012, $1.6 million in 2011 and $1.3 million in 2010. Wealso recorded a $1.4 million loss on extinguishment of debt in 2010. In January 2010, we entered into a new credit facility with SunTrust Bank and repaid our priorterm loan from Ableco LLC in full (see “Secured Credit Facility” below for additional information regarding this transaction). The loss on extinguishment of debtconsists of the write-off of the unamortized deferred loan costs associated with the prior credit facility. The interest rate on the new credit facility is based on theone-month LIBOR rate, plus an applicable margin of from 2.25% to 3.5% per annum. The interest rate in effect at December 31, 2012 under the new credit facilitywas approximately 2.71%, while the prior credit facility bore a minimum interest rate of 9.75%. The increase in net interest expense in 2011 was primarily due tointerest expense associated with business acquisition obligations and uncertain tax positions. The decrease in 2012 was due to the reversal of $0.8 million of interestaccruals made in previous years for interest on uncertain tax positions, as described in more detail under Income Tax Expense below.Income Tax Expense. Our reported effective tax rates on earnings approximated 19.4% in 2012, 31.5% in 2011 and 36.7% in 2010. Reported income taxexpense in each year primarily results from taxes on the income of foreign subsidiaries. The effective tax rates generally are less than the expected tax rateprimarily due to reductions of the Company’s deferred tax asset valuation allowance. The 2011 effective tax rate reflects a higher base rate due to taxes on earningsfrom foreign subsidiaries and additional accruals for uncertain tax positions in a foreign jurisdiction, partially offset by the reduction of a portion of the valuationallowance on deferred tax assets resulting from the additional deferred tax liabilities that we recorded in connection with the BSI acquisition and the reversal of aportion of the valuation allowance attributable to the deferred tax assets of a foreign subsidiary. The lower effective tax rate in 2012 reflects the reversal of $0.4million of the accruals made in previous years for uncertain tax positions. 28Table of ContentsTogether with the reversal of interest expense accruals described above, the total reduction to our reserves for uncertain tax positions in 2012 was $1.2million. We initially established these reserves based on estimates we made in prior years of the potential liability we may incur should certain domestic andforeign tax jurisdictions perform audits of our books and records and determine that we owe additional taxes, for which they may also assess penalty and interestamounts. We increased the reserves for additional estimated interest in subsequent years to reflect the additional time from when the estimated potential taxes mayhave been due. In 2012, we adjusted our estimates for several reasons, including the expiration of the statute of limitations for certain of these taxes in severalstates and in two foreign jurisdictions, completion of an audit by a foreign jurisdiction that resulted in a lower tax assessment than we had estimated, and theimposition of limitations on our potential liability resulting from our beginning the voluntary disclosure agreement process with one state.As of the end of the past three years, management determined that based on all available evidence, deferred tax asset valuation allowances of $49.1 millionin 2012, $52.0 million in 2011 and $54.8 million in 2010 were appropriate. We recorded reductions in the deferred tax asset valuation allowance of $1.7 million in2011 and $1.2 million in 2010 as a result of the deferred tax liabilities that we recorded relating to business acquisitions. The remaining reduction in each of thethree years was due primarily to lower net deferred tax assets for which we recorded a portion of the valuation allowance. We expensed or impaired a significantamount of intangible assets in previous years for financial reporting purposes. For income tax reporting purposes, we continue to deduct the amortization of theseintangible assets over their tax lives, generally 15 years. The excess of tax amortization over amortization for financial reporting purposes is reducing the relateddeferred tax asset each year, resulting in lower deferred tax assets and a lower related valuation allowance, although increases in our net operating losses havepartially offset this impact in recent years. This reduction in deferred tax assets related to intangible assets was $5.7 million in 2012, $5.8 million in 2011 and $6.1million in 2010, and we currently project this effect to continue at these elevated levels through 2013 before declining in subsequent years.As of December 31, 2012, we had approximately $78.6 million of U.S. federal loss carry-forwards available to reduce future U.S. federal taxable income.The U.S. federal loss carry-forwards expire through 2032. As of December 31, 2012, we had approximately $91.3 million of state loss carry-forwards available toreduce future state taxable income. The state loss carry-forwards expire to varying degrees between 2017 and 2032 and are subject to certain limitations.On March 17, 2006, the Company experienced an ownership change as defined under Section 382 of the Internal Revenue Code (“IRC”). This ownershipchange resulted in an annual IRC Section 382 limitation that limits the use of certain tax attribute carry-forwards. Of the $78.6 million of U.S. federal loss carry-forwards available to the Company, $17.8 million of the loss carry-forwards are subject to an annual usage limitation of $1.4 million.Liquidity and Capital ResourcesAs of December 31, 2012, we had $37.8 million in cash and cash equivalents and no borrowings under the revolver portion of our credit facility. Therevolver had approximately $8.1 million of calculated availability for borrowings at the end of 2012. The Company was in compliance with the covenants in itsSunTrust credit facility as of December 31, 2012.The $37.8 million in cash and cash equivalents includes $24.8 million held in the U.S., $4.5 million held in Canada, and $8.5 million held in other foreignjurisdictions, primarily in the United Kingdom, France, and Brazil. Certain foreign jurisdictions restrict the amount of cash that can be transferred to the U.S. orimpose taxes and penalties on such transfers of cash. To the extent we have excess cash in foreign locations that could be used in, or is needed by, our operationsin the U.S., we may incur significant penalties and/or taxes to repatriate these funds. Generally, we have not provided deferred taxes on the undistributed earningsof international subsidiaries as we consider these earnings to be permanently reinvested. However, we do not consider the earnings of our Canadian subsidiary tobe permanently invested, and have provided deferred taxes relating to the potential repatriation of the funds held in Canada. 29Table of ContentsOperating Activities. Net cash provided by operating activities was $18.8 million in 2012, $19.3 million in 2011 and $3.5 million in 2010. These amountsconsist of two components, specifically, net earnings adjusted for certain non-cash items (such as depreciation, amortization, stock-based compensation expense,and deferred income taxes) and changes in assets and liabilities, primarily working capital, as follows: Years Ended December 31, 2012 2011 2010 Net earnings $5,392 $2,816 $3,253 Adjustments for certain non-cash items 19,667 13,945 13,636 25,059 16,761 16,889 Changes in operating assets and liabilities (6,216) 2,532 (13,420) Net cash provided by operating activities $18,843 $19,293 $3,469 Net earnings adjusted for certain non-cash items, primarily depreciation, amortization and stock-based compensation expense, increased $8.3 million in2012 as compared to 2011. This increase compared to 2011 was offset primarily by the impact of the change in accounts payable and incentive compensationaccruals between 2010 and 2011, which resulted in the positive change in operating assets and liabilities in 2011. These incentive compensation accruals were lowat the end of 2010 and higher in 2011, thereby generating cash from working capital changes in 2011. The 2012 accruals were more consistent with the 2011 levels,thus not resulting in a comparable benefit in 2012.The $15.8 million improvement in cash provided by operating activities in 2011 compared to 2010 was due to changes in assets and liabilities, primarilyworking capital. The 2011 improvement relates primarily to changes in accounts payable and compensation accruals as we used cash in 2010 to pay the 2009accruals, required less cash in 2011 to pay the lower 2010 incentive compensation accruals, and increased these accruals again in 2011. These changes in accountspayable and compensation accruals resulted in $17.2 million less cash used for working capital, which was partially offset by $2.1 million of additional cash usedto fund the net increase in billed and unbilled receivables. This increase in billed and unbilled receivables is due primarily to our increase in revenue from ourparticipation in the Medicare RAC program, for which we generally cannot invoice until the cash is collected by the prime contractors for whom we operate as asubcontractor. The increase in unbilled receivables was also due to increases in revenue from recovery audit clients for which we have agreed not to invoice theclients until a later date even though we have already earned the related revenue.We include an itemization of these changes in our Consolidated Statements of Cash Flows included in Part II, Item 8 of this Form 10-K.We have one client, Wal-Mart Stores Inc., that accounted for 10% or more of our annual revenue in 2011 and 2010. The loss of this client would negativelyimpact our operating cash flows and would potentially have a material adverse impact on the Company’s liquidity.Investing Activities and Depreciation and Amortization Expense. Depreciation and amortization expense was $14.3 million in 2012, $10.4 million in 2011and $9.0 million in 2010. Net cash used for capital expenditures was $7.9 million in 2012, $8.3 million in 2011 and $6.9 million in 2010. These capitalexpenditures primarily related to investments we made to upgrade our information technology infrastructure, develop our Next-Generation Recovery Audit servicedelivery model and develop software relating to our participation in the Medicare RAC program.Capital expenditures are discretionary and we currently expect future capital expenditures to decline slightly from 2012 levels. Although we continue toenhance our Next-Generation Recovery Audit service delivery model and our Healthcare Claims Recovery Audit systems, we expect that these projects willrequire less development in 2013 than they did in 2011 and 2012. We may alter our capital expenditure plans should we experience changes in our operatingresults which cause us to adjust our operating plans. 30Table of ContentsBusiness AcquisitionsWe made several business acquisitions over the past few years, each of which is discussed more fully in Note 12 – Business Acquisitions in “Notes toConsolidated Financial Statements” in Part II, Item 8 of this Form 10-K. Following is a summary of business acquisition activities impacting our liquidity andcapital resources in the past three years.In July 2009, we acquired the business and certain assets of First Audit Partners LLP (“FAP”), a privately-held European provider of recovery audit servicesbased in Cambridge, United Kingdom, for a purchase price valued at $5.8 million. The purchase price included an initial cash payment of $1.6 million that we paidin July 2009. We made the first of two deferred payments required as part of the FAP acquisition in January 2010 in the amount of £0.5 million ($0.8 million) andthe second payment of £0.8 million ($1.3 million) in July 2010. Additional variable consideration may be due based on the operating results generated by theacquired business over a four year period from the date of acquisition. From the acquisition date to December 31, 2012, we paid £1.1 million ($1.7 million) of theearn-out and recorded accretion and other adjustments of the liability of $1.3 million, resulting in an earn-out payable of $0.9 million as of December 31, 2012.In February 2010, we acquired all of the issued and outstanding capital stock of Etesius Limited, a privately-held European provider of purchasing andpayables technologies and spend analytics based in Chelmsford, United Kingdom for a purchase price valued at $3.1 million. The purchase price included an initialcash payment of $2.8 million and a $0.3 million payment for obligations on behalf of Etesius shareholders that we paid in February 2010 as well as deferredpayments of $1.2 million over four years from the date of the acquisition. We also may be required to make additional payments of up to $3.8 million over a four-year period if the financial performance of this service line meets certain targets. These payments would be to Etesius employees that we hired in connection withthe acquisition. We will not be obligated to make the deferred and earn-out payments to these employees if they resign or are terminated under certaincircumstances. We therefore are recognizing the accrual of the deferred payments as compensation expense. From the acquisition date to December 31, 2012, wepaid $0.2 million of the deferred payments. An additional $1.0 million will be due through February 2014 unless there is a termination of employment of theseemployees under certain circumstances. We have not paid or accrued any earn-out payments as of December 31, 2012.In November 2010, we acquired the business and certain assets of TJG Holdings LLC (“TJG”), a privately-held provider of finance and procurementoperations improvement services based in Chicago, Illinois for a purchase price valued at $3.7 million. The purchase price included an initial cash payment of $2.3million that we paid in November 2010. Additional payments of up to a maximum of $1.9 million may be due to the sellers in four semi-annual payments if certainperformance targets are met. We recorded $1.4 million as the estimated fair value of these payments at the acquisition date. From the acquisition date toDecember 31, 2012, we paid $1.8 million of the earn-out and recorded accretion and other adjustments of the liability of $0.4 million, resulting in an earn-outpayable of less than $0.1 million as of December 31, 2012.In December 2011, we acquired Business Strategy, Inc. and substantially all of the assets of an affiliated company (collectively “BSI”), both based in GrandRapids, Michigan, for a purchase price valued at $11.9 million. BSI was a provider of recovery audit and related procure-to-pay process improvement services forcommercial clients, and a provider of customized software solutions and outsourcing solutions to improve back office payment processes. The purchase priceincluded an initial cash payment of $2.8 million and 640,614 shares of our common stock having a value of $3.7 million. An additional payment of approximately$0.8 million was made in the first half of 2012 for working capital received in excess of a specified minimum level. Additional variable consideration of up to $5.5million, payable via a combination of cash and shares of our common stock, may be due based on the performance of the acquired businesses over a two yearperiod from the date of acquisition. We may also be required to pay additional consideration of up to $8.0 million, payable in cash over a period of two years,based on certain net cash fee receipts from a particular recovery audit claim at a specific client. We recorded an additional $4.9 million payable based onmanagement’s estimate of the fair value of the variable consideration payable. From the acquisition date to December 31, 2012, we paid $0.7 million of deferredconsideration, $0.4 million of the earn-out liability and recorded accretion and other adjustments to the earn-out liability of $0.8 million, resulting in an earn-outpayable of $4.9 million as of December 31, 2012.We also acquired the assets of several third-party audit firms to which we had subcontracted a portion of our audit services in our Recovery Audit Services –Europe/Asia-Pacific segment. These 2012 associate migrations 31Table of Contentsincluded CRC Management Consultants LLP (“CRC”) in January 2012 for a purchase price valued at $1.0 million; QFS Ltd (“QFS”) in June 2012 for a purchaseprice valued at $0.4 million; and Nordic Profit Provider AB (“NPP”) in November 2012 for a purchase price valued at $0.1 million. We completed an additionalassociate migration in May 2011 for a purchase price valued at $0.7 million.Financing Activities and Interest Expense. Net cash provided by financing activities was $7.8 million in 2012. Net cash used in financing activities was $5.4million in 2011 and $3.5 million in 2010. The net cash provided by financing activities in 2012 included net proceeds of $14.7 million from our follow-on publicoffering in December 2012, which we describe in more detail below. Also, we entered into a new credit facility in January 2010, which we describe in more detailbelow. We used the $15.0 million term loan proceeds to repay the remaining $14.1 million of outstanding principal under our prior term loan and to pay $0.5million in loan costs incurred in connection with the new credit facility. We made mandatory principal payments totaling $3.0 million on the new credit facility ineach of 2012, 2011 and 2010. We paid $2.8 million in 2012, $1.7 million in 2011, and $0.4 million in 2010 of deferred acquisition consideration, and alsorepurchased $1.6 million in 2012, $1.1 million in 2011, and $0.2 million in 2010 of stock from employees to allow them to satisfy their tax withholding obligationsin connection with the vesting of restricted stock and restricted stock units.Secured Credit FacilityOn January 19, 2010, we entered into a four-year revolving credit and term loan agreement with SunTrust Bank (“SunTrust”). We used substantially all thefunds from the SunTrust term loan to repay in full the $14.1 million outstanding under our then-existing Ableco LLC term loan. The SunTrust credit facilityconsists of a $15.0 million committed revolving credit facility and a $15.0 million term loan. The SunTrust credit facility is guaranteed by the Company and itsdomestic subsidiaries and is secured by substantially all of our assets. Amounts available for borrowing under the SunTrust revolver are based on our eligibleaccounts receivable and other factors. Borrowing availability under the SunTrust revolver at December 31, 2012 was $8.1 million. We had no borrowingsoutstanding under the SunTrust revolver as of December 31, 2012.The SunTrust term loan requires quarterly principal payments of $0.8 million from March 2010 through December 2013, and a final principal payment of$3.0 million in January 2014. The loan agreement requires mandatory prepayments with the net cash proceeds from certain asset sales, equity offerings andinsurance proceeds received by the Company. In connection with our equity offering in December 2012 (see “Common Stock Offering” below), we obtained awaiver of the requirement to prepay the loan from SunTrust that enabled us to retain the net proceeds from the offering. The loan agreement also requires anadditional annual prepayment contingently payable in April of each year based on excess cash flow (“ECF”) if our leverage ratio as defined in the agreementexceeds a certain threshold. Our leverage ratio has remained below the threshold and ECF payments have not been required in any year, and we do not anticipateone being required in 2013.Interest on both the revolver and term loan are payable monthly and accrued at an index rate based on the one-month LIBOR rate, plus an applicable marginas determined by the loan agreement. The applicable interest rate margin varies from 2.25% per annum to 3.5% per annum, depending on our consolidatedleverage ratio, and is determined in accordance with a pricing grid under the SunTrust loan agreement. The applicable margin was 2.5% and the interest rate wasapproximately 2.71% at December 31, 2012. We also must pay a commitment fee of 0.5% per annum, payable quarterly, on the unused portion of the $15.0million SunTrust revolving credit facility.The SunTrust credit facility includes customary affirmative, negative, and financial covenants binding on the Company, including delivery of financialstatements and other reports, maintenance of existence, and transactions with affiliates. The negative covenants limit the ability of the Company, among otherthings, to incur debt, incur liens, make investments, sell assets, repurchase shares of its capital stock or declare or pay dividends on its capital stock. The financialcovenants included in the SunTrust credit facility, among other things, limit the amount of capital expenditures the Company can make, set forth maximumleverage and net funded debt ratios for the Company and a minimum fixed charge coverage ratio, and also require the Company to maintain minimum consolidatedearnings before interest, taxes, depreciation and amortization. In addition, the SunTrust credit facility includes customary events of default.In September 2010 we entered into an amendment of the SunTrust credit facility that lowered the required minimum adjusted EBITDA and fixed chargecoverage ratio through December 31, 2010. In October 2010 we entered into an interest rate swap agreement with SunTrust that limits our exposure to increases inthe one-month LIBOR rate. In October 2011 we entered into an amendment of the SunTrust credit facility that increased our capital expenditure limits for 2011and 2012. 32Table of ContentsWe believe that we will have sufficient borrowing capacity and cash generated from operations to fund our capital and operational needs for at least the nexttwelve months.Common Stock OfferingOn December 11, 2012, we closed our public offering of 6,249,234 shares of our common stock, which consisted of 2,500,000 shares sold by us and3,749,234 shares sold by certain selling shareholders, at a price to the public of $6.39 per share. The net proceeds to us from the public offering, after deductingunderwriting discounts and commissions and offering expenses, were $14.7 million. We intend to use the net proceeds from the public offering for working capitaland general corporate purposes, including potential acquisitions. We did not receive any proceeds from the sale of shares by the selling shareholders. In addition,the underwriters elected to exercise an overallotment option for an additional 687,385 shares, and we completed the sale of these additional shares on January 8,2013. The net proceeds to us from the exercise of the overallotment option, after deducting underwriting discounts and commission and offering expenses, were$4.1 million.Contractual Obligations and Other CommitmentsAs discussed in “Notes to Consolidated Financial Statements” included in Item 8 of this Form 10-K, the Company has certain contractual obligations andother commitments. A summary of those commitments as of December 31, 2012 is as follows: Payments Due by Period (in thousands) Contractual obligations Total LessThan1 Year 1-3 Years 3-5Years MoreThan5 Years Long-term debt obligations (1) $6,000 $3,000 $3,000 $— $— Interest and commitment fee on Secured Credit Facility (2) 215 207 8 — — Operating lease obligations 18,539 8,127 8,965 1,447 — Payments to Messrs. Cook and Toma (3) 927 60 126 133 608 Purchase price payments for business acquisitions (4) 6,697 4,218 2,479 — — Expected interest and compensation relating to business acquisition obligations (5) 955 856 99 — — Severance 971 971 — — — Total $34,304 $17,439 $14,677 $1,580 $608 (1)Excludes variable rate interest (LIBOR plus 2.25% to 3.50% per annum) payable monthly. For an estimate of interest due on the loan see footnote (2).(2)Represents the estimated commitment fee and interest due on the Secured Credit Facility using the interest rate as of December 31, 2012 and assuming noborrowings on the revolver. See Note 5 of the Notes to Consolidated Financial Statements for additional information regarding the Credit Agreement.(3)Represents estimated reimbursements payable for healthcare costs incurred by these former executives.(4)Represents the estimated present value of deferred payments relating to our acquisitions of FAP, Etesius, TJG and BSI – see “Business Acquisitions” above.These amounts generally represent the estimated present value of the variable consideration which may be due based on cash flows generated by theacquired business over the next few years. Certain of the obligations are denominated in British pounds sterling. The U.S. dollar amounts included above arebased on December 31, 2012 foreign exchange rates.(5)Represents the estimated interest and compensation expense to be incurred to increase the present value amounts for business acquisition obligations listedabove to the estimated payment amounts.As of December 31, 2012, our liabilities for uncertain tax positions were $2.2 million, which are classified as current. We are unable to reasonably estimatethe timing of future cash flows related to such amounts as the timing is dependent on examinations by taxing authorities.2006 Management Incentive PlanAt the annual meeting of shareholders held on August 11, 2006, the shareholders of the Company approved a proposal granting authorization to issue up to2.1 million shares of our common stock under the 2006 Management Incentive Plan (“2006 MIP”). At Performance Unit settlement dates, participants are issuedthat number of shares of 33Table of ContentsCompany common stock equal to 60% of the number of Performance Units being settled, and are paid in cash an amount equal to 40% of the fair market value ofthat number of shares of common stock equal to the number of Performance Units being settled. Prior to 2012, Performance Units were only granted in 2006 and2007, and the last of such units were settled in May 2011. No Performance Units were outstanding as of December 31, 2011.On June 19, 2012, seven senior officers of the Company were granted 154,264 Performance Units under the 2006 MIP, comprising all remaining availableawards under the plan. The awards had an aggregate grant date fair value of $1.2 million and vest ratably over three years.All Performance Units must be settled before April 30, 2016. We recognized compensation expense of $0.2 million in 2012 and less than $0.1 million inboth 2011 and 2010 related to these 2006 MIP Performance Unit awards. We determined the amount of compensation expense recognized on the assumption thatnone of the Performance Unit awards will be forfeited.Cash payments relating to these MIP awards were $0.1 million in 2011 and $0.6 million in 2010. There was no cash payment in 2012 for the MIP awards.Off Balance Sheet ArrangementsAs of December 31, 2012, the Company did not have any material off-balance sheet arrangements, as defined in Item 303(a)(4)(ii) of the SEC’s RegulationS-K.Critical Accounting PoliciesWe describe our significant accounting policies in Note 1 of “Notes to Consolidated Financial Statements” included in Item 8 of this Form 10-K. However,certain of our accounting policies are particularly important to the portrayal of our financial position and results of operations and require the application ofsignificant judgment by management. As a result, they are subject to an inherent degree of uncertainty. We consider accounting policies that involve the use ofestimates that meet both of the following criteria to be “critical” accounting policies. First, the accounting estimate requires us to make assumptions about mattersthat are highly uncertain at the time that the accounting estimate is made. Second, alternative estimates in the current period, or changes in the estimate that arereasonably likely in future periods, would have a material impact on the presentation of our financial condition, changes in financial condition or results ofoperations.In addition to estimates that meet the “critical” estimate criteria, we also make many other accounting estimates in preparing our consolidated financialstatements and related disclosures. All estimates, whether or not deemed critical, affect reported amounts of assets, liabilities, revenue and expenses, as well asdisclosures of contingent assets and liabilities. On an on-going basis, we evaluate our estimates and judgments, including those related to revenue recognition,refund liabilities, accounts receivable allowance for doubtful accounts, goodwill and other intangible assets and income taxes. We base our estimates andjudgments on historical experience, information available prior to the issuance of the consolidated financial statements and on various other factors that we believeto be reasonable under the circumstances. This information forms the basis for making judgments about the carrying values of assets and liabilities that are notreadily apparent from other sources. Materially different results can occur as circumstances change and additional information becomes known, including changesin those estimates not deemed “critical”.We believe the following critical accounting policies, among others, involve our more significant estimates and judgments we used in the preparation of ourconsolidated financial statements. We have discussed the development and selection of accounting estimates, including those deemed “critical,” and the associateddisclosures in this Form 10-K with the audit committee of the Board of Directors. • Revenue Recognition. We generally recognize revenue on the accrual basis except with respect to an insignificant number of our international unitswhere we recognize revenue on the cash basis. We generally recognize revenue for a contractually specified percentage of amounts recovered whenwe have determined that our clients have received economic value (generally through credits taken against existing accounts payable due to theinvolved vendors or refund checks received from those vendors), and when we have met the following criteria: (a) persuasive evidence of anarrangement exists; (b) services have been rendered; (c) the fee billed to the client is fixed or determinable; and (d) collectability is reasonablyassured. 34Table of Contents Additionally, for purposes of determining appropriate timing of recognition and for internal control purposes, we rely on customary business practicesand processes for documenting that the criteria described in (a) through (d) above have been met. Such customary business practices and processesmay vary significantly by client. On occasion, it is possible that a transaction has met all of the revenue recognition criteria described above but we donot recognize revenue, unless we can otherwise determine that criteria (a) through (d) above have been met, because our customary business practicesand processes specific to that client have not been completed. The determination that we have met each of the aforementioned criteria, particularly thedetermination of the timing of economic benefit received by the client and the determination that collectability is reasonably assured, requires theapplication of significant judgment by management and a misapplication of this judgment could result in inappropriate recognition of revenue.During the third quarter of 2011, we changed the point at which we recognize revenue for our Healthcare Claims Recovery Audit services within ourNew Services segment based on our gaining sufficient experience with auditing such claims. We now recognize revenue without formal client sign-off provided that we can objectively demonstrate that the acceptance criteria specified by the client are satisfied. This change resulted in a $1.4 millionincrease in revenue, a $0.4 million increase in net earnings and a $0.02 increase in basic and diluted earnings per common share in 2011. • Unbilled Receivables & Refund Liabilities. Unbilled receivables relate to claims for which our clients have received economic value but for which wecontractually have agreed not to invoice the clients. These unbilled receivables arise when a portion of our fee is deferred at the time of the initialinvoice. At a later date (which can be up to a year after the original invoice, or a year after completion of the audit period), we invoice the unbilledreceivable amount. Notwithstanding the deferred due date, our clients acknowledge that we have earned this unbilled receivable at the time of theoriginal invoice, but have agreed to defer billing the client for the related services. Unbilled receivables also arise in our Healthcare Claims RecoveryAudit services as we generally cannot invoice the prime contractors for whom we operate as a subcontractor under the Medicare RAC program untilcash is collected by the prime contractors.Refund liabilities result from reductions in the economic value previously received by our clients with respect to vendor claims identified by us andfor which we previously have recognized revenue. We satisfy such refund liabilities either by offsets to amounts otherwise due from clients or by cashrefunds to clients. We compute the estimate of our refund liabilities at any given time based on actual historical refund data.We record periodic changes in unbilled receivables and refund liabilities as adjustments to revenue.During the fourth quarter of 2010, we revised our estimate of expected refund rates of unbilled receivables in our Recovery Audit Services –Americas operating segment. We obtained sufficient historical data on our realization of paybacks from unbilled receivables that enabled us to makethis change to our method of calculating this estimate. The impact of this change resulted in a $0.2 million increase in fourth quarter 2010 netearnings, or less than $0.01 per basic and diluted share. We do not expect that this change in estimate will have a material impact on our net earningsin future periods. • Goodwill and Other Intangible Assets. We assess the recoverability of our goodwill and other intangible assets during the fourth quarter of each year,or sooner if events or changes in circumstances indicate that the carrying amount may exceed its fair value. For our goodwill impairment testing in thefourth quarter of 2011, we implemented Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) UpdateNo. 2011-08 and elected to assess qualitative factors prior to performing the two-step process utilized in this testing. Under the new guidance, we arenot required to calculate the fair value of our reporting units that hold goodwill unless we determine that it is more likely than not that the fair value ofthese reporting units is less than their carrying values. In this analysis, we considered a number of factors, including changes in our legal, businessand regulatory climates, changes in competition or key personnel, macroeconomic factors impacting our company or our clients, our recent financialperformance and expectations of future performance and other pertinent factors. We also utilized this methodology in 2012. Based on these analyses,we determined that it was not necessary for us to perform the two-step process, and we did not record an impairment charge in 2011 or 2012. We lastused independent business valuation professionals to calculate the fair value of our reporting units that hold goodwill in the fourth quarter of 2010, buthave performed internal calculations in 2011 and 2012. 35Table of ContentsIn 2012, we recorded a purchase price adjustment for our acquisition of BSI, which led to a reduction of goodwill of $0.2 million. In connection withthe associate migrations we completed in 2012, we recorded additional goodwill of $0.7 million and additional intangible assets of $0.2 millionconsisting of non-compete agreements. In connection with the business acquisitions we completed in 2011, we recorded additional goodwill of $8.0million and additional intangible assets of $4.1 million consisting primarily of customer relationships, non-compete agreements and trademarks. Inconnection with the business acquisitions we completed in 2010, we recorded additional goodwill of $0.6 million and additional intangible assets of$3.9 million consisting primarily of customer relationships, non-compete agreements and trade names. We determined these amounts based onestimates we made and on valuation reports we obtained from third parties. We generally use accelerated amortization methods for customerrelationships and trade names, and straight-line amortization for non-compete agreements. • Income Taxes. Our effective tax rate is based on historical and anticipated future taxable income, statutory tax rates and tax planning opportunitiesavailable to us in the various jurisdictions in which we operate. Significant judgment is required in determining the effective tax rate and in evaluatingour tax positions. Tax regulations require items to be included in the tax returns at different times than the items are reflected in the financialstatements. As a result, our effective tax rate reflected in our Consolidated Financial Statements included in Item 8 of this Form 10-K is different thanthat reported in our tax returns. Some of these differences are permanent, such as expenses that are not deductible on our tax returns, and some aretemporary differences, such as depreciation expense. Temporary differences create deferred tax assets and liabilities. Deferred tax assets generallyrepresent items that can be used as a tax deduction or credit in our tax returns in future years for which we have already recorded the tax benefit in ourConsolidated Statements of Income. We establish valuation allowances to reduce net deferred tax assets to the amounts that we believe are morelikely than not to be realized. We adjust these valuation allowances in light of changing facts and circumstances. Deferred tax liabilities generallyrepresent tax expense recognized in our consolidated financial statements for which payment has been deferred, or expense for which a deduction hasalready been taken on our tax returns but has not yet been recognized as an expense in our consolidated financial statements.We reduce our deferred tax assets by a valuation allowance if it is more likely than not that some portion or all of a deferred tax asset will not berealized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which thosetemporary differences are deductible. In determining the amount of valuation allowance to record, we consider all available positive and negativeevidence affecting specific deferred tax assets, including our past and anticipated future performance, the reversal of deferred tax liabilities, the lengthof carry-back and carry-forward periods, and the implementation of tax planning strategies. Objective positive evidence is necessary to support aconclusion that a valuation allowance is not needed for all or a portion of deferred tax assets when significant negative evidence exists. Cumulativetax losses in recent years are the most compelling form of negative evidence we considered in this determination.As a result of our review of the deferred tax assets in 2011, we released a portion of our valuation allowance relating to a foreign subsidiary, andrecorded $0.5 million of tax benefit in the fourth quarter of 2011. Also in the fourth quarter of 2011, management recorded the initial purchaseaccounting entries for the December 2011 acquisition of BSI. As a part of this process, we recorded a $1.7 million reduction in the deferred tax assetvaluation allowance that resulted from the deferred tax liabilities that we recorded relating to the acquisition. This reduction was accounted for as anincome tax benefit in the fourth quarter of 2011.We apply a “more-likely-than-not” recognition threshold and measurement attribute for the financial statement recognition and measurement of a taxposition taken or expected to be taken in a tax return. We refer to U.S. generally accepted accounting principles (“GAAP”) for guidance onderecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. Our policy for recording interest andpenalties associated with tax positions is to record such items as a component of earnings before income taxes. As a part of an ongoing Canadian taxaudit, we continue to defend our tax position related to the valuation of an intercompany transaction. We recognized $0.6 million of additional taxexpense in the fourth quarter of 2011 to reflect our estimate of the potential tax due based on our continuing discussions with the Canadian taxauthorities. In the fourth quarter of 2012, we reduced our tax expense by $0.4 million and our interest expense by $0.8 million to reflect adjustments toour estimates for 36Table of Contentsuncertain tax positions. We adjusted our estimates for several reasons, including the expiration of the statute of limitations for certain of these taxes inseveral states and in two foreign jurisdictions, completion of an audit by a foreign jurisdiction that resulted in a lower tax assessment than we hadestimated, and the imposition of limitations on our potential liability resulting from our beginning the voluntary disclosure agreement process withone state. • Stock-Based Compensation. We account for awards of equity instruments issued to employees under the fair value method of accounting andrecognize such amounts in our Consolidated Statements of Income. We measure compensation cost for all stock-based awards at fair value on the dateof grant and recognize compensation expense using the straight-line method over the service period over which we expect the awards to vest. Werecognize compensation costs for awards with performance conditions based on the probable outcome of the performance conditions. We accruecompensation cost if we believe it is probable that the performance condition(s) will be achieved and do not accrue compensation cost if we believe itis not probable that the performance condition(s) will be achieved.We estimate the fair value of all time-vested options as of the date of grant using the Black-Scholes option valuation model, which was developed foruse in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. Option valuation models require the inputof highly subjective assumptions, including the expected stock price volatility.We estimate the fair value of awards of restricted shares and nonvested shares as being equal to the market value of the common stock on the date ofthe award. We classify our share-based payments as either liability-classified awards or as equity-classified awards. We remeasure liability-classifiedawards to fair value at each balance sheet date until the award is settled. We measure equity-classified awards at their grant date fair value and do notsubsequently remeasure them. We have classified our share-based payments which are settled in our common stock as equity-classified awards andour share-based payments that are settled in cash as liability-classified awards. Compensation costs related to equity-classified awards generally areequal to the grant-date fair value of the award amortized over the vesting period of the award. The liability for liability-classified awards generally isequal to the fair value of the award as of the balance sheet date multiplied by the percentage vested at the time. We charge (or credit) the change in theliability amount from one balance sheet date to another to compensation expense.Stock-based compensation expense was $6.3 million in 2012, $5.1 million in 2011 and $4.0 million in 2010. We discuss stock-based compensation inmore detail in Note 1(l) and Note 11 of “Notes to Consolidated Financial Statements” included in Item 8 of this Form 10-K.New Accounting StandardsNo new accounting standards have been issued by the FASB and included in the ASC that PRGX has not yet adopted that we expect will have a significantimpact on the Company’s financial statements. 37Table of ContentsITEM 7A. Quantitative and Qualitative Disclosures About Market RiskForeign Currency Market Risk. Our reporting currency is the U.S. dollar although we transact business in various foreign locations and currencies. As aresult, our financial results could be significantly affected by factors such as changes in foreign currency exchange rates, or weak economic conditions in theforeign markets in which we provide our services. Our operating results are exposed to changes in exchange rates between the U.S. dollar and the currencies of theother countries in which we operate. When the U.S. dollar strengthens against other currencies, the value of foreign functional currency revenue decreases. Whenthe U.S. dollar weakens, the value of the foreign functional currency revenue increases. Overall, we are a net receiver of currencies other than the U.S. dollar and,as such, benefit from a weaker dollar. We therefore are adversely affected by a stronger dollar relative to major currencies worldwide. In 2012, we recognized$11.6 million of operating income from operations located outside the U.S., virtually all of which we accounted for originally in currencies other than the U.S.dollar. Upon translation into U.S. dollars, such operating income would increase or decrease, assuming a hypothetical 10% change in weighted-average foreigncurrency exchange rates against the U.S. dollar, by approximately $1.2 million. We do not have any arrangements in place currently to hedge our foreign currencyrisk.Interest Rate Risk. Our interest income and expense are sensitive to changes in the general level of U.S. interest rates. In this regard, changes in U.S. interestrates affect the interest earned on our cash equivalents as well as interest paid on our debt. We had $6.0 million outstanding under a term loan and $8.1 million ofcalculated borrowing availability under our revolving credit facility as of December 31, 2012, but had no amounts drawn under the revolving credit facility as ofthat date. Interest on both the revolver and the term loan are payable monthly and accrue at an index rate using the one-month LIBOR rate plus an applicablemargin as determined by the loan agreement. The applicable interest rate margin varies from 2.25% per annum to 3.5% per annum and was 2.71% atDecember 31, 2012. Assuming full utilization of the revolving credit facility, a hypothetical 100 basis point change in interest rates applicable to the revolverwould result in an approximate $0.1 million change in annual pre-tax income. A hypothetical 100 basis point change in interest rates applicable to the term loanwould result in an approximate $0.1 million change in annual pre-tax income.In order to mitigate some of this interest rate risk, we entered into an interest rate swap agreement with SunTrust Bank in October 2010 under which we payadditional interest on a notional amount of $3.8 million through December 31, 2013 to the extent that the one-month LIBOR rate is below 1.23%, and receivepayments from SunTrust Bank to the extent the index exceeds this level. The notional amount is equal to the final two payments due under the term loan inDecember 2013 and January 2014. Currently, LIBOR is below 1.23% and we are paying a minimal amount of additional interest under this agreement. ShouldLIBOR rates increase above the 1.23% level, we will incur additional interest expense on all of the amounts outstanding under our credit facility, but will offset aportion of this additional expense with the income we earn from the swap agreement. 38Table of ContentsITEM 8. Financial Statements and Supplementary DataINDEX TO CONSOLIDATED FINANCIAL STATEMENTS PageNumber Report of Independent Registered Public Accounting Firm 40 Consolidated Statements of Income for the Years ended December 31, 2012, 2011 and 2010 41 Consolidated Statements of Comprehensive Income for the Years ended December 31, 2012, 2011 and 2010 41 Consolidated Balance Sheets as of December 31, 2012 and 2011 42 Consolidated Statements of Shareholders’ Equity for the Years ended December 31, 2012, 2011 and 2010 43 Consolidated Statements of Cash Flows for the Years ended December 31, 2012, 2011 and 2010 44 Notes to Consolidated Financial Statements 45 39Table of ContentsReport of Independent Registered Public Accounting FirmBoard of Directors and ShareholdersPRGX Global, Inc.Atlanta, GeorgiaWe have audited the accompanying consolidated balance sheets of PRGX Global, Inc. and subsidiaries (the Company) as of December 31, 2012 and 2011 and therelated consolidated statements of income, comprehensive income, shareholders’ equity, and cash flows for each of the three years in the period endedDecember 31, 2012. In connection with our audits of the financial statements, we have also audited the financial statement schedule listed in the accompanyingindex. These financial statements and schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financialstatements and schedule based on our audits.We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that weplan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining,on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates madeby management, as well as evaluating the overall presentation of the financial statements and schedule. We believe that our audits provide a reasonable basis forour opinion.In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of PRGX Global, Inc. andsubsidiaries at December 31, 2012 and 2011, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2012,in conformity with accounting principles generally accepted in the United States of America.Also, in our opinion, the financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly,in all material respects, the information set forth therein.We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company’s internal control overfinancial reporting as of December 31, 2012, based on criteria established in Internal Control – Integrated Framework issued by the Committee of SponsoringOrganizations of the Treadway Commission (COSO) and our report dated March 13, 2013 expressed an unqualified opinion thereon./s/ BDO USA, LLPAtlanta, GeorgiaMarch 13, 2013 40Table of ContentsPRGX GLOBAL, INC. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF INCOME(In thousands, except per share data) Years Ended December 31, 2012 2011 2010 Revenue $208,503 $203,117 $184,081 Operating expenses: Cost of revenue 134,390 137,482 126,069 Selling, general and administrative expenses 52,527 49,102 40,735 Depreciation of property and equipment 7,084 5,401 4,903 Amortization of intangible assets 7,224 4,991 4,131 Total operating expenses 201,225 196,976 175,838 Operating income 7,278 6,141 8,243 Foreign currency transaction (gains) losses on short-term intercompany balances (377) 417 422 Interest expense (1,116) (1,904) (1,451) Interest income 150 288 146 Loss on debt extinguishment (Note 5) — — (1,381) Earnings before income taxes 6,689 4,108 5,135 Income tax expense (Note 7) 1,297 1,292 1,882 Net earnings $5,392 $2,816 $3,253 Basic earnings per common share (Note 3) $0.21 $0.11 $0.14 Diluted earnings per common share (Note 3) $0.21 $0.11 $0.13 Weighted-average common shares outstanding (Note 3): Basic 25,566 24,634 23,906 Diluted 26,137 25,029 24,144 CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME(In thousands) Years Ended December 31, 2012 2011 2010 Net earnings $5,392 $2,816 $3,253 Foreign currency translation adjustments 363 (519) 380 Comprehensive income $5,755 $2,297 $3,633 See accompanying Notes to Consolidated Financial Statements. 41Table of ContentsPRGX GLOBAL, INC. AND SUBSIDIARIESCONSOLIDATED BALANCE SHEETS(In thousands, except share and per share data) December 31, 2012 2011 ASSETS Current assets: Cash and cash equivalents $37,806 $20,337 Restricted cash 65 64 Receivables: Contract receivables, less allowances of $1,693 in 2012 and $811 in 2011: Billed 32,626 30,583 Unbilled 12,501 10,041 45,127 40,624 Employee advances and miscellaneous receivables, less allowances of $538 in 2012 and $272 in 2011 1,352 1,591 Total receivables 46,479 42,215 Prepaid expenses and other current assets 3,801 5,571 Deferred income taxes (Note 7) 52 23 Total current assets 88,203 68,210 Property and equipment: Computer and other equipment 25,320 24,993 Furniture and fixtures 3,022 2,980 Leasehold improvements 3,270 3,066 Software 25,312 19,753 56,924 50,792 Less accumulated depreciation and amortization (37,350) (32,206) Property and equipment, net 19,574 18,586 Goodwill (Note 4) 13,669 12,946 Intangible assets, less accumulated amortization of $27,720 in 2012 and $22,116 in 2011 (Note 4) 18,399 23,406 Unbilled receivables 1,391 1,672 Deferred loan costs, net of accumulated amortization (Note 5) 193 376 Deferred income taxes (Note 7) 1,552 831 Other assets 605 386 $143,586 $126,413 LIABILITIES AND SHAREHOLDERS’ EQUITY Current liabilities: Accounts payable and accrued expenses $14,136 $15,035 Accrued payroll and related expenses 20,874 21,920 Refund liabilities 6,979 6,746 Deferred revenue 1,551 1,688 Current portions of debt (Note 5) 3,000 3,000 Business acquisition obligations (Note 12) 4,218 3,502 Total current liabilities 50,758 51,891 Long-term debt (Note 5) 3,000 6,000 Noncurrent business acquisition obligations (Note 12) 2,479 5,604 Refund liabilities 1,159 1,000 Other long-term liabilities 1,538 2,828 Total liabilities 58,934 67,323 Commitments and contingencies (Notes 2, 5, 6, 9 and 10) Shareholders’ equity (Notes 10 and 12): Common stock, no par value; $.01 stated value per share. Authorized 50,000,000 shares; 27,893,132 shares issued andoutstanding in 2012 and 25,108,754 shares issued and outstanding in 2011 279 251 Additional paid-in capital 594,045 574,266 Accumulated deficit (513,200) (518,592) Accumulated other comprehensive income 3,528 3,165 Total shareholders’ equity 84,652 59,090 $143,586 $126,413 See accompanying Notes to Consolidated Financial Statements. 42Table of ContentsPRGX GLOBAL, INC. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITYYears Ended December 31, 2012, 2011 and 2010(In thousands, except share data) Common Stock AdditionalPaid-In Accumulated AccumulatedOtherComprehensive TotalShareholders’ Shares Amount Capital Deficit Income Equity Balance at December 31, 2009 23,272,892 $233 $562,563 $(524,661) $3,304 $41,439 Net earnings — — — 3,253 — 3,253 Foreign currency translation adjustments — — — — 380 380 Issuances of common stock: Restricted share awards 560,460 6 (6) — — — Restricted shares remitted by employees for taxes (28,547) — (214) — — (214) Stock option exercises 38,633 — 109 — — 109 2006 MIP Performance Unit settlements 134,490 1 (1) — — — Forfeited restricted share awards (45,154) (1) 1 — — — Stock-based compensation expense — — 3,876 — — 3,876 Balance at December 31, 2010 23,932,774 239 566,328 (521,408) 3,684 48,843 Net earnings — — — 2,816 — 2,816 Foreign currency translation adjustments — — — — (519) (519) Issuances of common stock: Restricted share awards 694,030 7 (7) — — — Shares issued for acquisition 640,614 6 3,716 — — 3,722 Restricted shares remitted by employees for taxes (132,974) (1) (1,062) — — (1,063) Stock option exercises 116,073 1 352 — — 353 2006 MIP Performance Unit settlements 26,898 — — — — — Forfeited restricted share awards (168,661) (1) 1 — — — Stock-based compensation expense — — 4,938 — — 4,938 Balance at December 31, 2011 25,108,754 251 574,266 (518,592) 3,165 59,090 Net earnings — — — 5,392 — 5,392 Foreign currency translation adjustments — — — — 363 363 Issuances of common stock: Restricted share awards 500,128 5 (5) — — — Shares issued for stock offering 2,500,000 25 14,657 — — 14,682 Restricted shares remitted by employees for taxes (161,514) (2) (1,603) — — (1,605) Stock option exercises 141,849 2 557 — — 559 Forfeited restricted share awards (196,085) (2) 2 — — — Stock-based compensation expense — — 6,171 — — 6,171 Balance at December 31, 2012 27,893,132 $279 $594,045 $(513,200) $3,528 $84,652 See accompanying Notes to Consolidated Financial Statements. 43Table of ContentsPRGX GLOBAL, INC. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF CASH FLOWS(In thousands) Years Ended December 31, 2012 2011 2010 Cash flows from operating activities: Net earnings $5,392 $2,816 $3,253 Adjustments to reconcile earnings from operations to net cash provided by operating activities: Depreciation and amortization 14,308 10,392 9,034 Amortization of debt discount, premium and deferred loan costs 183 188 1,539 Stock-based compensation expense 6,321 5,093 3,980 Loss on disposals of property, plant and equipment, net 31 6 15 Foreign currency transaction (gains) losses on short-term intercompany balances (377) 417 422 Deferred income taxes (799) (2,151) (1,354) Changes in operating assets and liabilities, net of business acquisitions: Restricted cash (1) — 193 Billed receivables (1,598) 1,717 (1,757) Unbilled receivables (2,179) (5,419) (320) Prepaid expenses and other current assets 693 (718) (1,400) Other assets (179) (455) 56 Accounts payable and accrued expenses (1,125) 110 (2,529) Accrued payroll and related expenses (1,258) 8,289 (6,255) Refund liabilities 392 (837) (39) Deferred revenue (157) (338) (139) Noncurrent compensation obligations 345 432 (707) Other long-term liabilities (1,149) (249) (523) Net cash provided by operating activities 18,843 19,293 3,469 Cash flows from investing activities: Business acquisitions, net of cash acquired (1,542) (3,155) (7,741) Purchases of property and equipment, net of disposal proceeds (7,931) (8,287) (6,934) Net cash used in investing activities (9,473) (11,442) (14,675) Cash flows from financing activities: Repayments of former credit facility (Note 5) — — (14,070) Repayments of long-term debt and capital lease obligations (3,000) (3,000) (3,260) Proceeds from term loan (Note 5) — — 15,000 Payments for deferred loan costs — (6) (666) Payments of deferred acquisition consideration (2,837) (1,694) (409) Net proceeds from issuance of common stock 14,682 — — Restricted stock remitted by employees for taxes (1,605) (1,063) (214) Proceeds from stock option exercises 559 353 109 Net cash provided by (used in) financing activities 7,799 (5,410) (3,510) Effect of exchange rates on cash and cash equivalents 300 (552) 138 Net change in cash and cash equivalents 17,469 1,889 (14,578) Cash and cash equivalents at beginning of year 20,337 18,448 33,026 Cash and cash equivalents at end of year $37,806 $20,337 $18,448 Supplemental cash flow statement information: Cash paid during the year for interest $340 $422 $570 Cash paid during the year for income taxes, net of refunds received $2,730 $4,235 $2,743 Deferred and contingent business acquisition consideration (Note 12) $189 $5,643 $1,638 See accompanying Notes to Consolidated Financial Statements. 44Table of ContentsPRGX GLOBAL, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES(a) Description of Business and Basis of PresentationDescription of BusinessThe principal business of PRGX Global, Inc. and subsidiaries is providing recovery audit services to large businesses and government agencies havingnumerous payment transactions. PRGX Global, Inc. also provides Profit Optimization services, including analytics and advisory services, to a similar client base.These businesses include, but are not limited to: • retailers such as discount, department, specialty, grocery and drug stores; • business enterprises other than retailers such as manufacturers, financial services firms, and pharmaceutical companies; • healthcare payers, both private sector health insurance companies and state and federal government payers such as the Centers for Medicare andMedicaid Services (“CMS”); and • federal and state government agencies.Except as otherwise indicated or unless the context otherwise requires, “PRGX,” “we,” “us,” “our” and the “Company” refer to PRGX Global, Inc. and itssubsidiaries. PRGX currently provides services to clients in approximately 40 countries.Basis of PresentationThe consolidated financial statements include the financial statements of the Company and its wholly owned subsidiaries. All significant intercompanybalances and transactions have been eliminated in consolidation.Certain reclassifications have been made to the 2011 financial statements to conform to the presentations adopted in 2012.Management of the Company has made a number of estimates and assumptions relating to the reporting of assets and liabilities and the disclosure ofcontingent assets and liabilities to prepare these consolidated financial statements in conformity with U.S. generally accepted accounting principles (“GAAP”).Actual results could differ from those estimates.(b) Revenue Recognition, Unbilled Receivables and Refund LiabilitiesWe base our revenue on specific contracts with our clients. These contracts generally specify: (a) time periods covered by the audit; (b) nature and extent ofaudit services we are to provide; (c) the client’s duties in assisting and cooperating with us; and (d) fees payable to us, generally expressed as a specifiedpercentage of the amounts recovered by the client resulting from overpayment claims identified. Clients generally recover claims either by taking credits againstoutstanding payables or future purchases from the involved vendors, or receiving refund checks directly from those vendors. The manner in which a claim isrecovered by a client often is dictated by industry practice. In addition, many clients establish specific procedural guidelines that we must satisfy prior tosubmitting claims for client approval, and these guidelines are unique to each client. For some services we provide, we earn our compensation in the form of a flatfee, a fee per hour, or a fee per other unit of service.We generally recognize revenue on the accrual basis except with respect to an insignificant number of our international units where we recognize revenue onthe cash basis. We generally recognize revenue for a contractually specified percentage of amounts recovered when we have determined that our clients havereceived economic value (generally through credits taken against existing accounts payable due to the involved vendors or refund checks received from thosevendors) and when we have met the following criteria: (a) persuasive evidence of an arrangement exists; (b) services have been rendered; (c) the fee billed to theclient is fixed or determinable; and (d) collectability is reasonably assured. In certain limited circumstances, we will invoice a client prior to meeting all four ofthese criteria; in such cases, we defer the revenue until we meet all of the criteria. Additionally, 45Table of ContentsPRGX GLOBAL, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS for purposes of determining appropriate timing of recognition and for internal control purposes, we rely on customary business practices and processes fordocumenting that we have met the criteria described in (a) through (d) above. Such customary business practices and processes may vary significantly by client. Onoccasion, it is possible that a transaction has met all of the revenue recognition criteria described above but we do not recognize revenue, unless we can otherwisedetermine that criteria (a) through (d) above have been met, because our customary business practices and processes specific to that client have not beencompleted.Historically, there has been a certain amount of revenue with respect to which, even though we had met the requirements of our revenue recognition policy,our clients’ vendors ultimately have rejected the claims underlying the revenue. In that case, our clients may request a refund or offset of such amount even thoughwe may have collected fees. We record any such refunds as a reduction of revenue. We provide refund liabilities for these reductions in the economic valuepreviously received by our clients with respect to vendor claims we identified and for which we previously have recognized revenue. We compute an estimate ofour refund liabilities at any given time based on actual historical refund data.During the fourth quarter of 2010, we revised our estimate of expected refund rates of unbilled receivables in our Recovery Audit Services – Americasoperating segment. We obtained sufficient historical data on our realization of paybacks from unbilled receivables that enabled us to make this change to ourmethod of calculating this estimate. The impact of this change in estimate resulted in a $0.2 million increase in fourth quarter 2010 net earnings, or less than $0.01per basic and diluted share. We believe that this change represents an improvement in our method for determining this estimate.During the third quarter of 2011, we changed the point at which we recognize revenue for our Healthcare Claims Recovery Audit services within our NewServices segment based on our gaining sufficient experience with auditing such claims. We now recognize revenue without formal client sign-off provided that wecan objectively demonstrate that the acceptance criteria specified by the client are satisfied. This change resulted in a $1.4 million increase in revenue, a $0.4million increase in net earnings and a $0.02 increase in basic and diluted earnings per common share in 2011.Unbilled receivables relate to claims for which clients have received economic value but for which we contractually have agreed not to submit an invoice tothe clients at such time. Unbilled receivables arise when a portion of our fee is deferred at the time of the initial invoice. At a later date (which can be up to a yearafter original invoice, and at other times a year after completion of the audit period), we invoice the unbilled receivable amount. Notwithstanding the deferred duedate, our clients acknowledge that we have earned this unbilled receivable at the time of the original invoice, but have agreed to defer billing the client for therelated services. Unbilled receivables also arise in our Healthcare Claims Recovery Audit services as we generally cannot invoice the prime contractors for whomwe operate as a subcontractor under the Medicare RAC program until cash is collected by the prime contractors.We record periodic changes in unbilled receivables and refund liabilities as adjustments to revenue.We derive a relatively small portion of revenue on a “fee-for-service” basis whereby billing is based upon a flat fee, a fee per hour, or a fee per other unit ofservice. We recognize revenue for these types of services as we provide and invoice for them, and when criteria (a) through (d) as set forth above are met.(c) Cash and Cash EquivalentsCash and cash equivalents include all cash balances and highly liquid investments with an initial maturity of three months or less from date of purchase. Weplace our temporary cash investments with high credit quality financial institutions. At times, certain investments may be in excess of the Federal DepositInsurance Corporation (“FDIC”) insurance limit or otherwise may not be covered by FDIC insurance.Our cash and cash equivalents included short-term investments of approximately $25.1 million as of December 31, 2012 and $8.2 million as ofDecember 31, 2011, of which approximately $1.6 million and $2.7 million, respectively, were held at banks outside of the United States, primarily in Brazil. 46Table of ContentsPRGX GLOBAL, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (d) Fair Value of Financial InstrumentsWe state cash equivalents at cost, which approximates fair market value. The carrying values for receivables from clients, unbilled services, accountspayable, deferred revenue and other accrued liabilities reasonably approximate fair market value due to the nature of the financial instrument and the short termmaturity of these items.We recorded bank debt of $6.0 million as of December 31, 2012 and $9.0 million as of December 31, 2011 at the unpaid balances as of those dates based onthe effective borrowing rates and repayment terms when originated. This debt is subject to variable rate terms, and we believe that its fair value is approximatelyequal to its carrying value. We consider the factors used in determining the fair value of this debt to be Level 3 inputs (significant unobservable inputs).We recorded business acquisition obligations of $6.7 million as of December 31, 2012 and $9.1 million as of December 31, 2011 representing the fair valueof deferred consideration and earn-out payments estimated to be due as of those dates. We determine the estimated fair values based on our projections of futurerevenue and profits or other factors used in the calculation of the ultimate payment to be made. The discount rate that we use to value the liability is based onspecific business risk, cost of capital, and other factors. We consider these factors to be Level 3 inputs (significant unobservable inputs).(e) Property and EquipmentWe report property and equipment at cost or estimated fair value at acquisition date and depreciate them over their estimated useful lives using the straight-line method. During the second quarter of 2010, we revised our estimate of the useful lives of certain fixed assets used for the purpose of calculating depreciationexpense based on a review of our planned fixed asset replacement cycle. Our revised useful lives for fixed assets are three years for computer laptops, four yearsfor desktops, five years for IT server, storage and network equipment, five years for furniture and fixtures and three years for purchased software. We continue toamortize leasehold improvements using the straight-line method over the shorter of the lease term or ten years. The impact of the change in estimate was areduction in depreciation expense of approximately $0.6 million in 2010. Depreciation expense was $7.1 million in 2012, $5.4 million in 2011 and $4.9 million in2010.We review the carrying value of property and equipment for impairment whenever events and circumstances indicate that the carrying value of an asset maynot be recoverable from the estimated future cash flows expected to result from its use and eventual disposition. In cases where undiscounted expected future cashflows are less than the carrying value, we will recognize an impairment loss equal to the amount by which the carrying value exceeds the fair value of the asset. Noimpairment charges were necessary in the three years ended December 31, 2012.(f) Software Development CostsWe capitalize a portion of the costs we incur related to our internal development of software that we use in our operations and amortize these costs using thestraight-line method over the expected useful lives of three to seven years.We also capitalize a portion of the costs we incur related to our internal development of software that we intend to market to others. We amortize these costsover the products’ estimated economic lives, which typically are three years, beginning when the underlying products are available for general release to clients.We review the carrying value of capitalized software development costs for impairment whenever events and circumstances indicate that the carrying value of theasset may not be recoverable from the estimated future cash flows expected to result from its use and eventual disposition. In cases where undiscounted expectedfuture cash flows are less than the carrying value, we will recognize an impairment loss equal to the amount by which the carrying value exceeds the fair value ofthe asset. No impairment charges were necessary in the three years ended December 31, 2012. We consider these software development activities to be researchand development costs and expense them as incurred. However, we capitalize the costs incurred for the development of computer software that will be sold, leased,or otherwise marketed or that will be used in our operations beginning when technological feasibility has been established. Research and development costs,including the amortization of amounts previously capitalized, were $4.0 million in 2012, $3.4 million in 2011 and $3.2 million in 2010. 47Table of ContentsPRGX GLOBAL, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (g) Goodwill and Intangible AssetsGoodwill represents the excess of the purchase price over the estimated fair market value of net identifiable assets of acquired businesses. We evaluate therecoverability of goodwill in the fourth quarter of each year or sooner if events or changes in circumstances indicate that the carrying amount may exceed its fairvalue. This evaluation has two steps. The first step identifies potential impairments by comparing the fair value of the reporting unit with its carrying value,including goodwill. If the calculated fair value of a reporting unit exceeds the carrying value, goodwill is not impaired, and the second step is not necessary. If thecarrying value of a reporting unit exceeds the fair value, the second step calculates the possible impairment loss by comparing the implied fair value of goodwillwith the carrying value. If the fair value is less than the carrying value, we would record an impairment charge.We implemented Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Update No. 2011-08 in 2011 and elected toassess qualitative factors in both 2011 and 2012 prior to performing the two-step process described above. Under the new guidance, we are not required tocalculate the fair value of our reporting units that hold goodwill unless we determine that it is more likely than not that the fair value of these reporting units is lessthan their carrying values. In this analysis, we considered a number of factors, including changes in our legal, business and regulatory climates, changes incompetition or key personnel, macroeconomic factors impacting our company or our clients, our recent financial performance and expectations of futureperformance and other pertinent factors. Based on these analyses, we determined that it was not necessary for us to perform the two-step process. We last usedindependent business valuation professionals to estimate fair value in the fourth quarter of 2010 and determined that fair value exceeded carrying value for allrelevant reporting units. No impairment charges were necessary in the three years ended December 31, 2012.(h) Direct Expenses and Deferred CostsWe typically expense direct expenses that we incur during the course of recovery audit and delivery of Profit Optimization services as incurred. For certainimplementation and set-up costs associated with our “fee for service” revenue that we earn over an extended period of time, we defer the related direct andincremental costs and recognize them as expenses over the life of the underlying contract.In addition, we incur significant personnel and other costs when performing recovery audit services to certain healthcare organizations. The process ofdocumenting that we have met our revenue recognition criteria as described in (b) Revenue Recognition, Unbilled Receivables and Refund Liabilities above isextensive and generally is completed from three months to a year after we substantially have completed our services. We defer these costs and recognize them asexpenses when we record the related revenue. We had deferred $0.9 million of these costs as of December 31, 2012 and $1.1 million as of December 31, 2011 andreflected them as “Prepaid expenses and other current assets” in our Consolidated Balance Sheets.(i) Income TaxesWe account for income taxes under the asset and liability method. We recognize deferred tax assets and liabilities for the future tax consequencesattributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss andtax credit carry forwards. We measure deferred tax assets and liabilities using enacted tax rates we expect to apply to taxable income in the years in which weexpect to recover or settle those temporary differences. We recognize the effect on the deferred tax assets and liabilities of a change in tax rates in income in theperiod that includes the enactment date.We reduce our deferred tax assets by a valuation allowance if it is more likely than not that some portion or all of a deferred tax asset will not be realized.The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differencesare deductible. In determining the amount of valuation allowance to record, we consider all available positive and negative evidence 48Table of ContentsPRGX GLOBAL, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS affecting specific deferred tax assets, including our past and anticipated future performance, the reversal of deferred tax liabilities, the length of carry-back andcarry-forward periods and the implementation of tax planning strategies. Objective positive evidence is necessary to support a conclusion that a valuationallowance is not needed for all or a portion of deferred tax assets when significant negative evidence exists. Cumulative losses for tax reporting purposes in recentyears are the most compelling form of negative evidence we considered in this determination.We apply a “more-likely-than-not” recognition threshold and measurement attribute for the financial statement recognition and measurement of a taxposition taken or expected to be taken in a tax return. We refer to GAAP for guidance on derecognition, classification, interest and penalties, accounting in interimperiods, disclosure, and transition. In accordance with FASB ASC 740, our policy for recording interest and penalties associated with tax positions is to recordsuch items as a component of earnings before income taxes.(j) Foreign CurrencyWe use the local currency as the functional currency in the majority of the countries in which we conduct business outside of the United States. We translatethe assets and liabilities denominated in foreign currencies into U.S. dollars at the current rates of exchange at the balance sheet date. We include the translationgains and losses as a separate component of shareholders’ equity and in the determination of comprehensive income. We translate revenue and expenses in foreigncurrencies at the weighted average exchange rates for the period. We separately state the foreign currency transaction gains and losses on short-term intercompanybalances in the Consolidated Statements of Income. We include all other realized and unrealized foreign currency transaction gains (losses) in “Selling, general andadministrative expenses.”(k) Earnings Per Common ShareWe compute basic earnings per common share by dividing net earnings available to common shareholders by the weighted-average number of shares ofcommon stock outstanding during the period. We compute diluted earnings per common share by dividing net earnings available to common shareholders by thesum of (1) the weighted-average number of shares of common stock outstanding during the period, (2) the dilutive effect of the assumed exercise of stock optionsusing the treasury stock method, and (3) the dilutive effect of other potentially dilutive securities. We exclude the potential dilutive effect of stock options andconvertible instruments from the determination of diluted earnings per share if the effect of including them would be antidilutive.(l) Stock-Based CompensationWe account for awards of equity instruments issued to employees under the fair value method of accounting and recognize such amounts in ourConsolidated Statements of Income. We measure compensation cost for all stock-based awards at fair value on the date of grant and recognize compensationexpense in our Consolidated Statements of Income using the straight-line method over the service period over which we expect the awards to vest. We recognizecompensation costs for awards with performance conditions based on the probable outcome of the performance conditions. We accrue compensation cost if webelieve it is probable that the performance condition(s) will be achieved and do not accrue compensation cost if we believe it is not probable that the performancecondition(s) will be achieved.We estimate the fair value of all time-vested options as of the date of grant using the Black-Scholes option valuation model, which was developed for use inestimating the fair value of traded options that have no vesting restrictions and are fully transferable. Option valuation models require the input of highly subjectiveassumptions, including the expected stock price volatility. 49Table of ContentsPRGX GLOBAL, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS For time-vested option grants that resulted in compensation expense recognition, we used the following assumptions in our Black-Scholes valuation models: Years Ended December 31, 2012 2011 2010Risk-free interest rates 0.33% – 0.83% 0.86% – 2.30% 0.80% – 2.65%Dividend yields — — — Volatility factor of expected market price .530 – .710 .732 – .797 .795 – 1.036Weighted-average expected term of option 3.8 – 5 years 3.7 – 5 years 3.9 – 4.9 yearsForfeiture rate — — — We estimate the fair value of awards of restricted shares and nonvested shares as being equal to the market value of the common stock on the date of theaward. We classify our share-based payments as either liability-classified awards or as equity-classified awards. We remeasure liability-classified awards to fairvalue at each balance sheet date until the award is settled. We measure equity-classified awards at their grant date fair value and do not subsequently remeasurethem. We have classified our share-based payments which are settled in our common stock as equity-classified awards and our share-based payments that aresettled in cash as liability-classified awards. Compensation costs related to equity-classified awards generally are equal to the fair value of the award at grant-dateamortized over the vesting period of the award. The liability for liability-classified awards generally is equal to the fair value of the award as of the balance sheetdate multiplied by the percentage vested at the time. We record the change in the liability amount from one balance sheet date to another to compensation expense.(m) Comprehensive IncomeConsolidated comprehensive income consists of consolidated net earnings and foreign currency translation adjustments. We present the calculation ofconsolidated comprehensive income in the accompanying Consolidated Statements of Comprehensive Income.(n) Segment ReportingWe report our operating segment information in three segments: Recovery Audit Services – Americas; Recovery Audit Services – Europe / Asia Pacific;and New Services. We include the unallocated portion of corporate selling, general and administrative expenses not specifically attributable to our three segmentsin Corporate Support. Our business segments reflect the internal reporting that our Chief Executive Officer, who is our chief operating decision maker, uses for thepurpose of making decisions about allocating resources and assessing performance. Our management, including our Chief Executive Officer, uses what weinternally refer to as “Adjusted EBITDA” as the primary measure of profit or loss for purposes of assessing the operating performance of all operating segments.We define Adjusted EBITDA as earnings from continuing operations before interest, taxes, depreciation and amortization (“EBITDA”) as adjusted for unusual andother significant items that management views as distorting the operating results of the various segments from period to period.EBITDA and Adjusted EBITDA are not financial measures determined in accordance with GAAP. Such non-GAAP financial measures do not measure theprofit or loss of the reportable segments in accordance with GAAP. Given that we use Adjusted EBITDA as our primary measure of segment performance, GAAPrules on segment reporting require that we include this non-GAAP measure in our discussion of our operating segments. We also must reconcile AdjustedEBITDA to our operating results presented on a GAAP basis. We provide this reconciliation in Note 2 to these consolidated financial statements along with otherinformation about our reportable segments. We do not intend the reconciling items to be, nor should they be, interpreted as non-recurring or extraordinary, or inany manner be deemed as adjustments made in accordance with GAAP. Because Adjusted EBITDA is not a financial measure determined in accordance withGAAP, it may not be comparable to other similarly titled measures of other companies. 50Table of ContentsPRGX GLOBAL, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (o) New Accounting StandardsNo new accounting standards have been issued by the FASB and included in the ASC that PRGX has not yet adopted that we expect will have a significantimpact on the Company’s financial statements.(2) OPERATING SEGMENTS AND RELATED INFORMATIONWe conduct our operations through three reportable segments:Recovery Audit Services – Americas represents recovery audit services (other than Healthcare Claims Recovery Audit services) we provide in the U.S.,Canada and Latin America.Recovery Audit Services – Europe/Asia-Pacific represents recovery audit services (other than Healthcare Claims Recovery Audit services) we provide inEurope, Asia and the Pacific region.New Services includes Profit Optimization services (formerly referred to as analytics and advisory services) and Healthcare Claims Recovery Audit services.We include the unallocated portion of corporate selling, general and administrative expenses not specifically attributable to the three reportable segments inCorporate Support.We evaluate the performance of our operating segments based upon revenue and measures of profit or loss we refer to as EBITDA and Adjusted EBITDA.We define Adjusted EBITDA as earnings from continuing operations before interest and taxes (“EBIT”), adjusted for depreciation and amortization (“EBITDA”),and then adjusted for unusual and other significant items that management views as distorting the operating results of the various segments from period to period.Such adjustments include restructuring charges, stock-based compensation, bargain purchase gains, acquisition transaction costs and acquisition obligationsclassified as compensation, intangible asset impairment charges, certain litigation costs and litigation settlements, severance charges and foreign currencytransaction gains and losses on short-term intercompany balances viewed by management as individually or collectively significant. We do not have any inter-segment revenue. Segment information for the years ended December 31, 2012, 2011 and 2010 and segment asset information as of December 31, 2012 and 2011(in thousands) is as follows: 2012 RecoveryAuditServices –Americas Recovery AuditServices –Europe/Asia-Pacific NewServices CorporateSupport Total Revenue $ 121,638 $ 53,783 $33,082 $— $208,503 Net earnings $5,392 Income tax expense 1,297 Interest expense, net 966 EBIT $28,589 $5,035 $(3,803) $(22,166) 7,655 Depreciation of property and equipment 4,651 322 2,111 — 7,084 Amortization of intangible assets 4,355 2,062 807 — 7,224 EBITDA 37,595 7,419 (885) (22,166) 21,963 Foreign currency transaction gains on short-term intercompanybalances (44) (331) — (2) (377) Acquisition obligations classified as compensation — — 382 — 382 Transformation severance and related expenses 493 1,156 394 64 2,107 Wage claim costs 577 — 407 — 984 Stock-based compensation — — — 6,321 6,321 Adjusted EBITDA $38,621 $8,244 $298 $(15,783) $ 31,380 51Table of ContentsPRGX GLOBAL, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS 2012 RecoveryAuditServices –Americas Recovery AuditServices –Europe/Asia-Pacific NewServices CorporateSupport Total Capital expenditures $5,699 $846 $1,386 $— $7,931 Allocated assets $57,722 $ 17,893 $ 25,126 $— $100,741 Unallocated assets: Cash and cash equivalents — — — 37,806 37,806 Restricted cash — — — 65 65 Deferred loan costs — — — 193 193 Deferred income taxes — — — 1,604 1,604 Prepaid expenses and other assets — — — 3,177 3,177 Total assets $ 57,722 $17,893 $25,126 $ 42,845 $143,586 2011 RecoveryAuditServices –Americas Recovery AuditServices –Europe/Asia-Pacific NewServices CorporateSupport Total Revenue $ 115,807 $ 61,570 $ 25,740 $— $203,117 Net earnings $2,816 Income tax expense 1,292 Interest expense, net 1,616 EBIT $26,280 $7,484 $(6,951) $(21,089) 5,724 Depreciation of property and equipment 3,491 417 1,493 — 5,401 Amortization of intangible assets 2,467 1,665 859 — 4,991 EBITDA 32,238 9,566 (4,599) (21,089) 16,116 Foreign currency transaction losses on short-term intercompanybalances 144 272 1 — 417 Acquisition transaction costs and acquisition obligations classified ascompensation — — 440 360 800 Transformation severance and related expenses 1,465 566 — — 2,031 Stock-based compensation — — — 5,093 5,093 Adjusted EBITDA $33,847 $10,404 $(4,158) $(15,636) $24,457 Capital expenditures $5,459 $1,041 $1,787 $— $8,287 Allocated assets $62,702 $20,308 $17,316 $— $100,326 Unallocated assets: Cash and cash equivalents — — — 20,337 20,337 Restricted cash — — — 64 64 Deferred loan costs — — — 376 376 Deferred income taxes — — — 854 854 Prepaid expenses and other assets — — — 4,456 4,456 Total assets $62,702 $20,308 $17,316 $26,087 $126,413 52Table of ContentsPRGX GLOBAL, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS 2010 RecoveryAuditServices –Americas Recovery AuditServices –Europe/Asia-Pacific NewServices CorporateSupport Total Revenue $ 115,156 $ 57,590 $11,335 $— $184,081 Net earnings $3,253 Income tax expense 1,882 Interest expense, net 1,305 Loss on debt extinguishment 1,381 EBIT $25,062 $6,478 $(6,804) $(16,915) 7,821 Depreciation of property and equipment 3,442 354 1,107 — 4,903 Amortization of intangible assets 2,427 1,403 301 — 4,131 EBITDA 30,931 8,235 (5,396) (16,915) 16,855 Foreign currency transaction (gains) losses on short-termintercompany balances 33 391 (2) — 422 Acquisition transaction costs and acquisition obligations classified ascompensation — — 371 — 371 Stock-based compensation — — — 3,980 3,980 Adjusted EBITDA $30,964 $8,626 $(5,027) $(12,935) $21,628 Capital expenditures $5,674 $329 $931 $— $6,934 The following table presents revenue by country based on the location of clients served (in thousands): Years Ended December 31, 2012 2011 2010 United States $124,302 $107,072 $92,574 United Kingdom 30,437 36,123 31,422 Canada 17,007 20,200 22,141 France 11,330 13,425 12,231 Brazil 5,919 5,718 5,128 Mexico 4,877 4,836 3,950 Australia 2,467 1,299 1,690 Sweden 1,753 2,145 1,460 Spain 1,252 1,901 2,065 Czech Republic 1,110 706 654 New Zealand 984 1,111 738 Ireland 954 776 1,024 Other 6,111 7,805 9,004 $208,503 $203,117 $184,081 The following table presents long-lived assets by country based on the location of the asset (in thousands): December 31, 2012 2011 United States $42,629 $46,083 United Kingdom 8,328 8,792 All Other 1,483 1,073 $52,440 $55,948 Wal-Mart Stores Inc. (and its affiliated companies) accounted for approximately 10.2% of total revenue in 2011 and 12.1% in 2010. We recorded thisrevenue primarily in the Recovery Audit Services – Americas Segment. No client accounted for 10% or more of total revenue in 2012. 53Table of ContentsPRGX GLOBAL, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (3) EARNINGS PER COMMON SHAREThe following tables set forth the computations of basic and diluted earnings per common share (in thousands, except per share data). Years Ended December 31, 2012 2011 2010 Basic earnings per common share: Numerator: Net earnings $5,392 $2,816 $3,253 Denominator: Weighted-average common shares outstanding $25,566 $24,634 $23,906 Basic earnings per common share $0.21 $0.11 $0.14 Diluted earnings per common share: Numerator: Net earnings $5,392 $2,816 $3,253 Denominator: Weighted-average common shares outstanding $25,566 $24,634 $23,906 Incremental shares from stock-based compensation plans 571 395 238 Denominator for diluted earnings per common share $26,137 $25,029 $24,144 Diluted earnings per common share $0.21 $0.11 $0.13 Weighted average shares outstanding excludes anti-dilutive shares underlying options that totaled 1.6 million shares in 2012, 1.5 million shares in 2011 and1.7 million shares in 2010. The number of common shares we used in the basic and diluted earnings per common share computations include nonvested restrictedshares of 0.9 million in 2012, 1.2 million in 2011 and 1.2 million in 2010, and nonvested restricted share units that we consider to be participating securities of0.2 million in 2012, 0.2 million in 2011 and 0.3 million in 2010.On December 11, 2012, we closed a public offering of 6,249,234 shares of our common stock, which consisted of 2,500,000 shares sold by us and3,749,234 shares sold by certain selling shareholders, at a price to the public of $6.39 per share. The net proceeds to us from the public offering, after deductingunderwriting discounts and commissions and offering expenses, were $14.7 million. We intend to use the net proceeds from the public offering for working capitaland general corporate purposes, including potential acquisitions. We did not receive any proceeds from the sale of shares by the selling shareholders. In addition,the underwriters elected to exercise an overallotment option for an additional 687,385 shares, and completed the additional sale on January 8, 2013. The netproceeds to us from the overallotment, after deducting underwriting discounts and commission and offering expenses were $4.1 million.(4) GOODWILL AND INTANGIBLE ASSETS(a) GoodwillWe evaluate the recoverability of goodwill in the fourth quarter of each year or sooner if events or changes in circumstances indicate that the carryingamount may exceed its fair value. These analyses did not result in an impairment charge during the periods presented. 54Table of ContentsPRGX GLOBAL, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS Goodwill by reportable segments was as follows (in thousands): December 31, 2012 2011 Recovery Audit Services – Americas $12,177 $12,177 Recovery Audit Services – Europe/Asia-Pacific 896 173 New Services 596 596 Total $13,669 $12,946 We initially recorded goodwill of $7.8 million in our Recovery Audit Services – Americas segment in conjunction with our December 2011 acquisition ofBusiness Strategy, Inc. (“BSI”) (see Note 12 – Business Acquisitions below). We recorded purchase price adjustments in 2012 of $0.2 million that reduced the BSIgoodwill to $7.6 million and recorded this change retroactively to 2011. We also recorded additions to goodwill of $0.7 million and $0.2 million in our RecoveryAudit Services – Europe Asia/Pacific segment in 2012 and 2011, respectively, relating to our acquisitions in 2012 of two third-party audit firms to which we hadsubcontracted a portion of our audit services (“associate migrations”) and our completion of one associate migration in 2011. There were no changes in goodwill inour New Services segment during 2012 and 2011.(b) Intangible AssetsIntangible assets consist principally of amounts we assigned to customer relationships, trademarks, non-compete agreements and trade names in conjunctionwith business acquisitions. Changes in intangible assets in 2012 related primarily to the completion of two associate migrations, CRC Management ConsultantsLLP (“CRC”) and QFS Ltd (“QFS”). Changes in intangible assets in 2011 related primarily to our December 2011 BSI acquisition and an associate migration.Note 12 – Business Acquisitions below includes a more detailed description of the acquisitions in both 2012 and 2011. Intangible assets associated with CRC, QFSand the 2011 associate migration are denominated in British pounds sterling and are subject to movements in foreign currency rates (“FX adjustments”). Wepresent the amounts below in United States dollars utilizing foreign currency exchange rates as of December 31, 2012.As of January 21, 2010, the Company changed its trade name from PRG-Schultz International, Inc. to PRGX Global, Inc. and is using the previous tradename only in limited circumstances. We intend to maintain the legal rights to the former name but, for accounting purposes, have reclassified the intangible assetassociated with this trade name from an indefinite lived intangible asset to one with a definite life and began amortizing the trade name in January 2010.Amortization expense relating to intangible assets was $5.4 million in 2012, $4.6 million in 2011 and $4.0 million in 2010. As of December 31, 2012 andbased on our current amortization methods, we project amortization expense relating to intangible assets for the next five years will be $4.9 million in 2013, $3.6million in 2014, $2.7 million in 2015, $1.7 million in 2016 and $1.4 million in 2017. We generally use accelerated amortization methods for customerrelationships and trade names, and straight-line amortization for non-compete agreements. 55Table of ContentsPRGX GLOBAL, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS Changes in noncurrent intangible assets during 2012 and 2011 were as follows (in thousands): CustomerRelationships Trademarks Non-competeAgreements TradeNames Total Gross carrying amount: Balance, January 1, 2011 $36,505 $505 $1,553 $2,865 $41,428 Associate migration — — 98 — 98 Acquisition of BSI 2,836 555 650 — 4,041 FX adjustments and other (35) (2) (8) — (45) Balance, December 31, 2011 39,306 1,058 2,293 2,865 45,522 Acquisition of CRC — — 128 — 128 Acquisition of QFS — — 43 — 43 FX adjustments and other 359 23 44 — 426 Balance, December 31, 2012 $39,665 $1,081 $2,508 $2,865 $46,119 Accumulated amortization: Balance, January 1, 2011 $(16,609) $(123) $(274) $(567) $(17,573) Amortization expense (3,236) (104) (519) (747) (4,606) FX adjustments and other 52 3 8 — 63 Balance, December 31, 2011 (19,793) (224) (785) (1,314) (22,116) Amortization expense (3,692) (238) (751) (713) (5,394) FX adjustments and other (170) (11) (29) — (210) Balance, December 31, 2012 $(23,655) $(473) $(1,565) $(2,027) $(27,720) Net carrying amount: Balance, December 31, 2011 $19,513 $834 $1,508 $1,551 $23,406 Balance, December 31, 2012 $16,010 $608 $943 $838 $18,399 Estimated useful life (years) 6–20 years 6 years 1–5 years 4–5 years (5) DEBTLong-term debt consisted of the following (in thousands): December 31, 2012 2011 SunTrust term loan due quarterly through January 2014 $6,000 $9,000 Less current portion 3,000 3,000 Noncurrent portion $3,000 $6,000 On January 19, 2010, we entered into a four-year revolving credit and term loan agreement with SunTrust Bank (“SunTrust”). The SunTrust credit facilityconsists of a $15.0 million committed revolving credit facility and a $15.0 million term loan. The SunTrust credit facility is guaranteed by the Company and all ofits material domestic subsidiaries and secured by substantially all of the assets of the Company. Availability under the SunTrust revolver is based on eligibleaccounts receivable and other factors. As of December 31, 2012, availability under the SunTrust revolver was $8.1 million and we had no outstanding borrowings.The SunTrust term loan requires quarterly principal payments of $0.8 million beginning in March 2010, and a final principal payment of $3.0 million due inJanuary 2014. The loan agreement requires mandatory prepayments with the net cash proceeds from certain asset sales, equity offerings and insurance proceedsreceived by the Company. In connection with the equity offering (see Note 3, Earnings Per Common Share), we obtained a waiver of the requirement to prepay theloan from SunTrust that enabled us to retain the net proceeds from the offering. The loan agreement also requires an annual additional prepayment contingentlypayable in April of each year based on excess cash flow (“ECF”) in the prior year if our leverage ratio as defined in the agreement exceeds a certain threshold. Ourleverage ratio has remained below the threshold and ECF payments have not been required in any year, and we do not anticipate one being required in 2013. 56Table of ContentsPRGX GLOBAL, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS Interest on both the revolver and term loan is payable monthly and accrues at an index rate using the one-month LIBOR rate, plus an applicable margin asdetermined by the loan agreement. The applicable interest rate margin varies from 2.25% per annum to 3.5% per annum, dependent on our consolidated leverageratio, and is determined in accordance with a pricing grid under the SunTrust loan agreement. The applicable margin was 2.5% and the interest rate wasapproximately 2.71% at December 31, 2012. We also must pay a commitment fee of 0.5% per annum, payable quarterly, on the unused portion of the $15.0million SunTrust revolving credit facility. The weighted-average interest rate on term loan balances outstanding under the SunTrust credit facility during 2012,including fees, was 3.8%.The SunTrust credit facility includes customary affirmative, negative, and financial covenants binding on the Company, including delivery of financialstatements and other reports, maintenance of existence, and transactions with affiliates. The negative covenants limit the ability of the Company, among otherthings, to incur debt, incur liens, make investments, sell assets, repurchase shares of its capital stock or declare or pay dividends on its capital stock. The financialcovenants included in the SunTrust credit facility, among other things, limit the amount of capital expenditures the Company can make, set forth maximumleverage and net funded debt ratios for the Company and a minimum fixed charge coverage ratio, and also require the Company to maintain minimum consolidatedearnings before interest, taxes, depreciation and amortization. In addition, the SunTrust credit facility includes customary events of default. The Company was incompliance with the covenants in its SunTrust credit facility as of December 31, 2012.We used substantially all the funds from the SunTrust term loan to repay in full the principal of $14.1 million outstanding under a previous term loan. Inconjunction with terminating the previous credit facility, we recorded a loss on extinguishment of debt totaling $1.4 million consisting of the write-off of theunamortized deferred loan costs.In September 2010 we entered into an amendment of the SunTrust credit facility that lowered the required minimum adjusted EBITDA and fixed chargecoverage ratio through December 31, 2010. In October 2010 we entered into an interest rate swap agreement with SunTrust that limits our exposure to increases inthe one-month LIBOR rate. In October 2011 we entered into an amendment of the SunTrust credit facility that increased our capital expenditure limits for 2011and 2012.Future Minimum PaymentsFuture minimum principal payments of long-term debt as of December 31, 2012 are as follows (in thousands): Year Ending December 31, 2013 $3,000 2014 3,000 2015 — 2016 — 2017 — Thereafter — $6,000 (6) LEASE COMMITMENTSPRGX is committed under noncancelable lease arrangements for facilities and equipment. Rent expense, excluding costs associated with the termination ofnoncancelable lease arrangements, was $6.2 million in 2012, $6.7 million in 2011 and $6.2 million in 2010.We have subleased approximately 58,000 square feet of our principal executive office space to independent third parties. The sublease rental income weearn is less than the lease payments we make. We also accrue future rental obligations relating to leases for which we no longer are utilizing the office space. AtDecember 31, 2012, our liabilities relating to these lease obligations were $2.0 million, of which we have included $1.1 million in 57Table of ContentsPRGX GLOBAL, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS “Accounts payable and accrued expenses” and $0.9 million in “Other long-term liabilities” in our Consolidated Balance Sheet. We adjust the fair value of theremaining lease payments, net of sublease income, based on payments we make and sublease income we receive. We include accretion of this liability related todiscounting in rent expense.We have entered into several operating lease agreements that contain provisions for future rent increases, free rent periods or periods in which rent paymentsare reduced (abated). We charge the total amount of rental payments due over the lease term to rent expense on the straight-line, undiscounted method over thelease terms.Future minimum lease payments under noncancelable operating leases (both gross and net of any sublease income) are as follows (in thousands): Year Ending December 31, Gross SubleaseIncome Net 2013 $8,127 $(847) $7,280 2014 7,375 (863) 6,512 2015 1,590 — 1,590 2016 971 — 971 2017 476 — 476 Thereafter — — — Total payments $18,539 $(1,710) $16,829 (7) INCOME TAXESEarnings (loss) before income taxes relate to the following jurisdictions (in thousands): Years Ended December 31, 2012 2011 2010 United States $3,158 $(3,182) $(3,189) Foreign 3,531 7,290 8,324 $6,689 $4,108 $5,135 The provision for income taxes consists of the following (in thousands): Years Ended December 31, 2012 2011 2010 Current: Federal $78 $— $— State (30) 79 30 Foreign 2,048 3,364 3,206 2,096 3,443 3,236 Deferred: Federal — (1,603) (514) State — (133) — Foreign (799) (415) (840) (799) (2,151) (1,354) Total $1,297 $1,292 $1,882 58Table of ContentsPRGX GLOBAL, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS The significant differences between the U.S. federal statutory tax rate of 34% and the Company’s effective income tax expense for earnings (in thousands)are as follows: Years Ended December 31, 2012 2011 2010 Statutory federal income tax rate $2,274 $1,397 $1,746 State income taxes, net of federal effect 24 (130) 577 Change in deferred tax asset valuation allowance (1,883) (1,910) (3,254) Foreign taxes in excess of U.S. statutory rate 486 1,481 2,407 Compensation deduction limitation 265 360 448 Other, net 131 94 (42) $1,297 $1,292 $1,882 The tax effects of temporary differences and carry-forwards that give rise to deferred tax assets and liabilities consist of the following (in thousands): December 31, 2012 2011 Deferred income tax assets: Accounts payable and accrued expenses $2,088 $1,770 Accrued payroll and related expenses 3,902 2,998 Stock-based compensation expense 9,221 8,700 Depreciation of property and equipment 3,746 3,861 Non-compete agreements 27 50 Operating loss carry-forwards of foreign subsidiary 1,501 1,422 Federal operating loss carry-forwards 27,494 26,332 Intangible assets 6,195 11,935 State operating loss carry-forwards 2,648 2,625 Other 3,243 3,630 Gross deferred tax assets 60,065 63,323 Less valuation allowance 48,489 51,630 Gross deferred tax assets net of valuation allowance 11,576 11,693 Deferred income tax liabilities: Intangible assets 5,790 7,405 Unbilled receivables and refund liabilities 2,538 1,781 Capitalized software 969 974 Other 675 679 Gross deferred tax liabilities 9,972 10,839 Net deferred tax assets $1,604 $854 Our reported effective tax rates on earnings approximated 19.4% in 2012, 31.5% in 2011 and 36.7% in 2010. Reported income tax expense in each yearprimarily results from taxes on the income of foreign subsidiaries. The effective tax rates generally are less than the expected tax rate primarily due to reductionsof the Company’s deferred tax asset valuation allowance.We reduce our deferred tax assets by a valuation allowance if it is more likely than not that some portion or all of a deferred tax asset will not be realized.The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differencesare deductible. In making this determination, we consider all available positive and negative evidence affecting specific deferred tax assets, including our past andanticipated future performance, the reversal of deferred tax liabilities, the length of carry-back and carry-forward periods and the implementation of tax planningstrategies.Objective positive evidence is necessary to support a conclusion that a valuation allowance is not needed for all or a portion of deferred tax assets whensignificant negative evidence exists. Cumulative tax losses in recent years are the most compelling form of negative evidence considered by management in thisdetermination. As of 59Table of ContentsPRGX GLOBAL, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2012, management determined that based on all available evidence, a valuation allowance of $48.5 million is appropriate, representing a decrease of$3.1 million from the valuation allowance of $51.6 million recorded as of December 31, 2011.As of December 31, 2012, we had approximately $78.6 million of U.S. federal loss carry-forwards available to reduce future U.S. federal taxable income.The U.S. federal loss carry-forwards expire through 2032. As of December 31, 2012, we had approximately $91.3 million of state loss carry-forwards available toreduce future state taxable income. The state loss carry-forwards expire to varying degrees between 2017 and 2032 and are subject to certain limitations.Generally, we have not provided deferred taxes on the undistributed earnings of international subsidiaries as we consider these earnings to be permanentlyreinvested. However, in 2011, we determined that the earnings of our Canadian subsidiary should no longer be considered to be permanently reinvested. Thischange resulted in earnings of $4.8 million that we anticipated we would repatriate, and we provided additional deferred taxes of $0.2 million in 2011 relating tothis potential repatriation, representing the estimated withholding tax liability to be due when such amounts are repatriated. In 2012, our Canadian subsidiarygenerated $4.3 million of earnings that we anticipated would be repatriated at some future date, and we provided additional deferred taxes of $0.2 million in 2012relating to this potential repatriation, which represents the estimated withholding tax liability due if such amounts are repatriated. We did not provide additionalincremental U.S. income tax expense on these amounts as the Canadian subsidiary is classified as a branch for U.S. income tax purposes.On March 17, 2006, the Company experienced an ownership change as defined under Section 382 of the Internal Revenue Code (“IRC”). This ownershipchange resulted in an annual IRC Section 382 limitation that limits the use of certain tax attribute carry-forwards. Of the $78.6 million of U.S. federal loss carry-forwards available to the Company, $17.8 million of the loss carry-forwards are subject to an annual usage limitation of $1.4 million.We currently are in the process of determining if we experienced an ownership change subsequent to March 17, 2006, but have not yet completed thisanalysis. Based on preliminary calculations we have made with the assistance of external advisors, we believe that any additional limitations on the usage of ourloss carry-forwards that would be imposed if an additional ownership change has occurred would be minimal. We do not believe that an additional ownershipchange would have a material adverse impact on our financial position, results of operations or cash flows.We apply a “more-likely-than-not” recognition threshold and measurement attribute for the financial statement recognition and measurement of a taxposition taken or expected to be taken in a tax return. We refer to GAAP for guidance on derecognition, classification, interest and penalties, accounting in interimperiods, disclosure, and transition. Our policy for recording potential interest and penalties associated with uncertain tax positions is to record such items as acomponent of earnings before income taxes.We recorded unrecognized tax benefits of $2.2 million as of December 31, 2012, a decrease of $0.4 million over the $2.6 million recorded at December 31,2011. We recorded accrued interest and penalties of $1.4 million as of December 31, 2012, a decrease of $0.8 million over the $2.2 million recorded atDecember 31, 2011. We recognized a reduction of interest expense of $0.8 million in 2012 and additions to interest expense of $0.4 million in 2011 related to theliability for unrecognized tax benefits. The decreases in the unrecognized tax benefits and the related accrued interest and penalties in 2012 occurred for severalreasons, including the expiration of the statute of limitations for certain of these taxes in several states and in two foreign jurisdictions, completion of an audit by aforeign jurisdiction that resulted in a lower tax assessment than we had estimated, and the imposition of limitations on our potential liability resulting from ourbeginning the voluntary disclosure agreement process with one state. Due to the complexity of the tax rules underlying these unrecognized tax benefits, and theunclear timing of tax audits, tax agency determinations, and other events, we cannot establish reasonably reliable estimates for the periods in which the cashsettlement of these liabilities will occur.We file U.S., state, and foreign income tax returns in jurisdictions with varying statutes of limitations. As of December 31, 2012, the 2009 through 2011 taxyears generally remain subject to examination by federal and most state and foreign tax authorities. The use of net operating losses generated in tax years prior to2009 may also subject returns for those years to examination. 60Table of ContentsPRGX GLOBAL, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (8) EMPLOYEE BENEFIT PLANSWe maintain a defined contribution retirement plan in accordance with Section 401(k) of the Internal Revenue Code, which allows eligible participatingemployees to defer receipt of up to 50% of their annual compensation and contribute such amount to one or more investment funds. We match employeecontributions in a discretionary amount to be determined by management and approved by the Board of Directors each plan year up to the lesser of 6% of anemployee’s annual compensation or $3,000 per participant. We also may make additional discretionary contributions to the Plan as determined by management andapproved by the Board of Directors each plan year. Company matching funds and discretionary contributions vest 100% after three years of service for participantswho either had attained three or more years of service or were hired on or after January 1, 2012. For all other participants, company matching funds anddiscretionary contributions vest at the rate of 20% after two years of service and 100% after three years of service. We contributed approximately $1.1 million in2012 and $1.0 million in 2010 to the Plan. We did not make a contribution in 2011 to the Plan.(9) SHAREHOLDER RIGHTS PLAN AND PARTICIPATING PREFERRED STOCKOn August 1, 2000, the Board authorized a shareholder protection rights plan designed to protect Company shareholders from coercive or unfair takeovertechniques through the use of a Shareholder Protection Rights Agreement approved by the Board (the “Rights Plan”). The terms of the Rights Plan, as amended,provide for a dividend of one right (collectively, the “Rights”) to purchase a fraction of a share of participating preferred stock for each share owned. This dividendwas declared for each share of common stock outstanding at the close of business on August 14, 2000. The Rights, which expire on August 9, 2013, may beexercised only if certain conditions are met, such as the acquisition (or the announcement of a tender offer, the consummation of which would result in theacquisition) of 15% or more of our common stock by a person or affiliated group in a transaction that is not approved by the Board. Issuance of the Rights does notaffect our finances, interfere with our operations or business plans, or affect our earnings per share. The dividend was not taxable to the Company or itsshareholders and did not change the way in which the Company’s shares may be traded.Effective July 31, 2000, in connection with the Rights Plan, the Board amended the Company’s Articles of Incorporation to establish a new series of stock,which is designated as participating preferred stock. The Company’s remaining, undesignated preferred stock may be issued at any time or from time to time inone or more series with such designations, powers, preferences, rights, qualifications, limitations and restrictions (including dividend, conversion and voting rights)as may be determined by the Board, without any further votes or action by the shareholders.(10) COMMITMENTS AND CONTINGENCIESLegal ProceedingsOn December 16, 2011, an employee of our wholly owned subsidiary PRGX USA, Inc., filed a lawsuit in the U.S. District Court for the District ofMinnesota (Civil Action No. 0:11-CV-03631-PJS-FLN) alleging that PRGX USA, Inc. failed to pay overtime wages to the Plaintiff and other similarly situatedindividuals as required by the Fair Labor Standards Act (FLSA). In this collective action, the Plaintiff sought an unspecified amount of monetary damages andcosts, including attorneys’ fees. We filed an Answer denying all of the asserted claims on January 31, 2012, and the parties then conducted limited discovery. InAugust 2012, the parties reached an agreement to settle the case for $135,000, which includes the plaintiffs’ attorney fees, and all of the plaintiffs have approvedthe settlement. The settlement received court approval on November 19, 2012 and the case has been dismissed.We are party to a variety of legal proceedings arising in the normal course of business. While the results of these proceedings cannot be predicted withcertainty, management believes that the final outcome of these proceedings will not have a material adverse effect on our financial position or results ofoperations. 61Table of ContentsPRGX GLOBAL, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (11) STOCK-BASED COMPENSATIONThe Company currently has three stock-based compensation plans under which awards have been granted: (1) the Stock Incentive Plan (“SIP”), (2) the 2006Management Incentive Plan (“2006 MIP”), and (3) the 2008 Equity Incentive Plan (“2008 EIP”) (collectively, the “Plans”). The Company generally issuesauthorized but previously unissued shares to satisfy stock option exercises, grants of restricted stock awards and vesting of restricted stock units and settlements of2006 MIP Performance Units.SIP AwardsThe SIP, as amended, authorized the grant of options or other stock-based awards, with respect to up to 1,237,500 shares of the Company’s common stock tokey employees, directors, consultants and advisors. The majority of options granted pursuant to the SIP had five to seven year terms and vested and became fullyexercisable on a ratable basis over one to five years of continued employment or service. The SIP expired in June 2008.2008 EIP AwardsDuring the first quarter of 2008, the Board of Directors of the Company adopted the 2008 EIP, which was approved by the shareholders at the annualmeeting of the shareholders on May 29, 2008. The 2008 EIP authorizes the grant of incentive and non-qualified stock options, stock appreciation rights, restrictedstock, restricted stock units and other incentive awards. Two million shares of the Company’s common stock initially were reserved for issuance under the 2008EIP pursuant to award grants to key employees, directors and service providers. The options granted pursuant to the 2008 EIP have seven year terms.An amendment to the 2008 EIP was adopted by the Company’s Board of Directors in April 2010 and approved at the Company’s annual meeting ofshareholders held on June 15, 2010. This amendment, among other things, increased the number of shares reserved for issuance under the 2008 EIP by 3,400,000shares to a total of 5,400,000 shares and provides that restricted stock awards and other full value awards will count as 1.41 shares against the available pool ofshares under the plan. Another amendment to the 2008 EIP was adopted by the Company’s Board of Directors in April 2012 and approved at the Company’sannual meeting of shareholders held on June 19, 2012. This amendment increased the number of shares reserved for issuance under the 2008 EIP by 2,200,000shares to a total of 7,600,000 shares. As of December 31, 2012, there were 2,125,164 shares available for future grants under the 2008 EIP. 62Table of ContentsPRGX GLOBAL, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS Stock options granted under the 2008 EIP generally have a term of seven years and vest in equal annual increments over the vesting period, which typicallyis three years for employees and one year for directors. The following table summarizes stock option grants during the years ended December 31, 2012, 2011 and2010: Grantee Type # ofOptionsGranted VestingPeriod WeightedAverageExercise Price WeightedAverage GrantDate FairValue 2012 Director group 56,261 1 year or less $7.55 $3.89 Director 8,546 3 years 7.72 4.25 Employee group 597,250 3 years 7.54 4.12 Employee inducement 45,000 3 years (1) 8.54 4.58 2011 Director group 65,801 1 year or less $7.23 $4.06 Director group 16,237 3 years 6.32 3.98 Employee group 140,000 2 years 6.09 3.72 Employee group 475,064 3 years 7.38 4.33 Employee inducement 200,000 3-4 years (2) 5.37 3.13 2010 Director group 51,276 1 year or less $4.20 $2.53 Director 8,546 3 years 5.39 4.00 Employee group 649,010 3 years 4.14 2.68 (1)The Company granted non-qualified stock options outside its existing stock-based compensation plans in the third quarter of 2012 to one employee inconnection with the employee joining the company.(2)The Company granted non-qualified stock options outside its existing stock-based compensation plans in the fourth quarter of 2011 to three employees inconnection with their joining the company, which included 100,000 performance-based options. These options were forfeited in 2012. 63Table of ContentsPRGX GLOBAL, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS Nonvested stock awards, including both restricted stock and restricted stock units, generally are nontransferable until vesting and the holders are entitled toreceive dividends with respect to the nonvested shares. Prior to vesting, the grantees of restricted stock are entitled to vote the shares, but the grantees of restrictedstock units are not entitled to vote the shares. Generally, nonvested stock awards vest in equal annual increments over the vesting period, which typically is threeyears for employees and one year for directors. The following table summarizes nonvested stock awards (restricted stock and restricted stock units) grants duringthe years ended December 31, 2012, 2011 and 2010: Grantee Type # ofSharesGranted VestingPeriod WeightedAverage GrantDate FairValue 2012 Director group 56,261 1 year or less $7.55 Director 8,546 3 years 7.72 Employee group 426,286 3 years 7.55 Employee inducement 45,000 3 years (1) 8.54 2011 Director group 65,801 1 year or less $7.23 Director group 17,237 3 years 6.34 Employee group 60,000 2 years 6.09 Employee group 455,064 3 years 7.41 Employee inducement 120,000 3-4 years (2) 5.66 2010 Director group 51,276 1 year or less $4.20 Director 8,546 3 years 5.39 Employee group 600,010 3 years 4.02 (1)The Company granted nonvested stock awards (restricted stock) outside its existing stock-based compensation plans in the third quarter of 2012 to oneemployee in connection with the employee joining the company.The Company granted performance-based nonvested stock awards (restricted stock) outside its existing stock-based compensation plans in the fourth quarterof 2011 to two employees in connection with their joining the company. These restricted stock awards were forfeited in 2012.A summary of option activity as of December 31, 2012, and changes during the year then ended is presented below: Options Shares Weighted-AverageExercisePrice(Per Share) Weighted-AverageRemainingContractualTerm AggregateIntrinsicValue($ 000’s) Outstanding at January 1, 2012 2,860,890 $6.61 Granted 707,057 7.60 Exercised (141,849) 3.93 $467 Forfeited (411,938) 6.66 Expired (30,000) 31.60 Outstanding at December 31, 2012 2,984,160 $6.70 3.33 years $3,147 Exercisable at December 31, 2012 1,691,200 $6.78 1.53 years $2,347 The weighted-average grant date fair value of options granted was $4.13 per share in 2012, $3.94 per share in 2011 and $2.69 per share in 2010. The totalintrinsic value of options exercised was $0.5 million in 2012, $0.4 million in 2011 and less than $0.1 million in 2010. 64Table of ContentsPRGX GLOBAL, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS A summary of nonvested stock awards (restricted stock and restricted stock units) activity as of December 31, 2012, and changes during the year then endedis presented below: Nonvested Stock Shares WeightedAverage GrantDate Fair Value(Per Share) Nonvested at January 1, 2012 1,418,494 $5.37 Granted 536,093 7.64 Vested (685,740) 5.16 Forfeited (200,839) 5.93 Nonvested at December 31, 2012 1,068,008 $6.54 The weighted-average grant date fair value of nonvested stock awards (restricted stock and restricted stock units) granted was $7.64 per share in 2012, $6.96per share in 2011 and $4.05 per share in 2010. The total vest date fair value of stock awards vested during the year was $4.9 million in 2012, $3.6 million in 2011,and $1.5 million in 2010.2006 MIP Performance UnitsAt the annual meeting of shareholders held on August 11, 2006, the shareholders of the Company approved a proposal granting authorization to issue up to2.1 million shares of the Company’s common stock under the 2006 MIP. At Performance Unit settlement dates, participants were issued that number of shares ofCompany common stock equal to 60% of the number of Performance Units being settled, and were paid in cash an amount equal to 40% of the fair market value ofthat number of shares of common stock equal to the number of Performance Units being settled. Prior to 2012, Performance Units were only granted in 2006 and2007, and the last of such units were settled in May 2011. No Performance Units were outstanding as of December 31, 2011.On June 19, 2012, seven senior officers of the Company were granted 154,264 Performance Units under the 2006 MIP, comprising all remaining availableawards under the plan. The awards had an aggregate grant date fair value of $1.2 million and vest ratably over three years. On vesting, the Performance Units willbe settled by the issuance of Company common stock equal to 60% of the number of Performance Units being settled and the payment of cash in an amount equalto 40% of the fair market value of that number of shares of common stock equal to the number of Performance Units being settled.All Performance Units must be settled before April 30, 2016. We recognized compensation expense of $0.2 million in 2012 and less than $0.1 million inboth 2011 and 2010 related to these 2006 MIP Performance Unit awards. We determined the amount of compensation expense recognized on the assumption thatnone of the Performance Unit awards would be forfeited.There was no settlement of Performance Units during 2012. During 2011, one current executive officer settled 44,831 Performance Units, resulting in theissuance of 26,898 shares of common stock and a cash payment of $0.1 million. During 2010, three current and former executive officers settled an aggregate of224,158 Performance Units resulting in the issuance of 134,490 shares of common stock and cash payments totaling $0.6 million.Stock-based compensation charges aggregated $6.3 million in 2012, $5.1 million in 2011 and $4.0 million in 2010. We include these charges in “Selling,general and administrative expenses” in the accompanying Consolidated Statements of Income. As of December 31, 2012, there was $8.7 million of unrecognizedstock-based compensation expense related to stock options and nonvested stock which we expect to be recognized over a weighted average period of 1.60 years. 65Table of ContentsPRGX GLOBAL, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (12) BUSINESS ACQUISITIONSWe completed several acquisitions since 2010 that we describe below. Generally, we acquire businesses that we believe will provide a strategic fit for ourexisting operations, cost savings and revenue synergies, or enable us to expand our capabilities in our New Services segment.We allocate the total purchase price in a business acquisition to the fair value of identified assets acquired and liabilities assumed based on the fair values atthe acquisition date, and record amounts exceeding the fair values as goodwill. If the fair value of the assets acquired exceeds the purchase price, we record thisexcess as a gain on bargain purchase. We determine the estimated fair values of intangible assets acquired using our estimates of future discounted cash flows to begenerated by the acquired business over the estimated duration of those cash flows. We base the estimated cash flows on our projections of future revenue, cost ofrevenue, capital expenditures, working capital needs and tax rates. We estimate the duration of the cash flows based on the projected useful life of the assets andbusiness acquired. We determine the discount rate based on specific business risk, cost of capital and other factors.Etesius LimitedIn February 2010, the Company’s UK subsidiary acquired all the issued and outstanding capital stock of Etesius Limited (“Etesius”), a privately-heldEuropean provider of purchasing and payables technologies and spend analytics based in Chelmsford, United Kingdom. We have included the results of operationsof Etesius in our New Services segment results of operations since the acquisition date. We intend for Etesius to expand our capabilities in our Profit Optimizationservices business.The financial terms of the Etesius share purchase agreement (“SPA”) required an initial payment to the Etesius shareholders of $2.8 million and a $0.3million payment for obligations on behalf of Etesius shareholders which resulted in a total estimated purchase price value of approximately $3.1 million.The SPA requires deferred payments of $1.2 million over four years from the date of the SPA to certain selling shareholders who are now our employees.The SPA also provides for potential additional variable payments (“earn-out”) to these selling shareholders/employees over the same four-year period based on thefinancial performance of certain of the Company’s services lines, up to a maximum of $3.8 million. Because we will not be obligated to make the deferred andearn-out payments upon the termination of employment of these employees under certain circumstances, we have recognized these payments as compensationexpense as earned. From the acquisition date to December 31, 2012, we paid $0.2 million of the deferred payments. An additional $1.0 million will be due throughFebruary 2014 unless there is a termination of employment of these employees under certain circumstances. We currently estimate that we will not pay anyvariable consideration relating to these provisions.TJG Holdings LLCIn November 2010, we acquired the business and certain assets of TJG Holdings LLC (“TJG”), a privately-held provider of finance and procurementoperations improvement services based in Chicago, Illinois. We have included the results of operations of TJG in our New Services segment results of operationssince the acquisition date. We intend for the TJG acquisition to allow us to expand our Profit Optimization services business. We recorded goodwill in connectionwith this acquisition, representing the value of the assembled workforce, including a management team with deep industry knowledge. This goodwill is deductiblefor tax purposes.The financial terms of the TJG Asset Purchase Agreement required an initial payment to the TJG owners of $2.3 million. Additional variable consideration(“earn-out”) may also be due based on the operating results generated by the acquired business over the next two years subject to a maximum of $1.9 million. Werecorded an additional $1.4 million payable based on management’s estimate of the fair value of the earn-out liability. We calculated the earn-out liability based onestimated future discounted cash flows to be generated by the acquired business over a two year period. We determined the discount rate based on specificbusiness risk, cost of capital and other factors. The total estimated purchase price was valued at approximately $3.7 million. From the acquisition date toDecember 31, 2012, we paid $1.8 million of the earn-out and recorded accretion and other adjustments of the liability of $0.5 million, resulting in an earn-outpayable of less than $0.1 million as of December 31, 2012. 66Table of ContentsPRGX GLOBAL, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS Associate MigrationsDuring 2012, we acquired the assets of several third-party audit firms to which we had subcontracted a portion of our audit services in our Recovery AuditServices – Europe/Asia-Pacific segment. We refer to the subcontractors as associates, and to the acquisitions as associate migrations. We generally transfer all ofthe employees of the associate entity to PRGX, and continue to service the related clients with the same personnel after the associate migration as were providingservices prior to the associate migration. We intend for the associate migrations to provide more standardization and centralization of our audit procedures, therebyincreasing client service while also decreasing costs. Generally, revenue remains unchanged as a result of an associate migration, and expenses change from a fixedpercentage of revenue to a variable amount based on employee and related costs. These associate migrations included CRC Management Consultants LLP (“CRC”)in January 2012 for a purchase price valued at $1.0 million; QFS Ltd (“QFS”) in June 2012 for a purchase price valued at $0.4 million; and Nordic Profit ProviderAB (“NPP”) in November 2012 for a purchase price valued at $0.1 million. The allocation of the aggregate fair values of the assets acquired and purchase price forthese associate migrations is summarized as follows (in thousands): Fair values of net assets acquired: Equipment $10 Intangible assets, primarily non-compete agreements 171 Working capital, including work in progress 666 Goodwill 695 Fair value of net assets acquired $1,542 Fair value of purchase price $1,542 Business Strategy, Inc.In December 2011, we acquired Business Strategy, Inc. and substantially all of the assets of an affiliated company (collectively “BSI”), based in GrandRapids, Michigan, for a purchase price valued at $11.9 million. BSI was a provider of recovery audit and related procure-to-pay process improvement services forcommercial clients, and a provider of customized software solutions and outsourcing solutions to improve back office payment processes. We have included theresults of operations of Business Strategy, Inc. in our Recovery Audit Services – Americas segment and the results of operations of the affiliated company in ourNew Services segment results of operations since the acquisition date. These amounts aggregated $0.8 million of revenue and $0.1 million of net earnings in 2011and $10.9 million of revenue and $1.5 million of net earnings in 2012. We intend for the BSI acquisition to allow us to expand our commercial recovery auditcapabilities and to expand the services we offer to our clients.The purchase price included an initial cash payment of $2.8 million and 640,614 shares of our common stock having a value of $3.7 million. An additionalpayment of approximately $0.8 million was due and paid in the first half of 2012 for working capital received in excess of a specified minimum level. Additionalvariable consideration of up to $5.5 million, payable via a combination of cash and shares of our common stock, may be due based on the performance of theacquired businesses over a two-year period from the date of acquisition. We may also be required to pay additional consideration of up to $8.0 million, payable incash over a period of two years, based on certain net cash fee receipts from a particular recovery audit claim at a specific client. We recorded an additional $4.9million payable based on management’s estimate of the fair value of the variable consideration payable. We adjusted the $12.2 million initial estimates of the fairvalue of the assets and liabilities in 2012, resulting in reductions to goodwill of $0.2 million, and the fair value of the purchase price of $0.2 million, and recordedthis change retroactively to 2011. 67Table of ContentsPRGX GLOBAL, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS The final allocation of the fair values of the assets acquired and purchase price is summarized as follows (in thousands): FinalAllocation Fair values of net assets acquired: Equipment $70 Intangible assets, primarily customer relationships 4,041 Working capital, including work in progress 1,967 Deferred tax liabilities (1,736) Goodwill 7,577 Fair value of net assets acquired $11,919 Fair value of purchase price $11,919 From the acquisition date to December 31, 2012, we paid $0.7 million of deferred consideration, $0.4 million of the earn-out liability and recorded accretionand other adjustments of the earn-out liability of $0.8 million, resulting in an earn-out payable of $4.9 million as of December 31, 2012.The following unaudited pro forma condensed financial information presents the combined results of operations of the Company, BSI, CRC, QFS, and NPPas if the acquisitions had occurred as of January 1, 2011. The unaudited pro forma financial information is not indicative of, nor does it purport to project, thefuture financial position or operating results of the Company. Pro forma adjustments included in these amounts consist primarily of amortization expenseassociated with the intangible assets recorded in the allocation of the purchase price. The unaudited pro forma financial information excludes acquisition andintegration costs and does not give effect to any estimated and potential cost savings or other operating efficiencies that could result from the acquisition. Year Ended December 31, 2012 2011 Revenue $208,503 $210,073 Net earnings $5,913 $4,341 68Table of ContentsPRGX GLOBAL, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (13) QUARTERLY RESULTS (UNAUDITED)The following tables set forth certain unaudited condensed quarterly financial data for each of the last eight quarters during our fiscal years endedDecember 31, 2012 and 2011. We have derived the information from unaudited Condensed Consolidated Financial Statements that, in the opinion of management,reflect all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation of such quarterly information. The operating results forany quarter are not necessarily indicative of the results to be expected for any future period. 2012 Quarter Ended 2011 Quarter Ended Mar. 31 June 30 Sept. 30 Dec. 31 Mar. 31 June 30 Sept. 30 Dec. 31 (In thousands, except per share data) Revenue $51,649 $51,658 $52,087 $53,109 $50,718 $50,704 $51,751 $49,944 Operating expenses: Cost of revenue 34,218 33,312 32,461 34,399 34,594 34,523 34,125 34,240 Selling, general and administrative expenses 12,637 12,696 13,242 13,952 12,430 12,297 12,417 11,958 Depreciation of property and equipment 1,513 1,579 1,716 2,276 1,181 1,214 1,464 1,542 Amortization of intangible assets 2,327 1,459 1,431 2,007 1,121 1,129 1,277 1,464 Total operating expenses 50,695 49,046 48,850 52,634 49,326 49,163 49,283 49,204 Operating income 954 2,612 3,237 475 1,392 1,541 2,468 740 Foreign currency transaction (gains) losses on short-term intercompanybalances (339) 497 (348) (187) (448) (431) 1,055 241 Interest expense (income), net 504 529 515 (582) 347 478 398 393 Earnings before income taxes 789 1,586 3,070 1,244 1,493 1,494 1,015 106 Income tax expense (benefit) 497 584 505 (289) 1,121 784 593 (1,206) Net earnings $292 $1,002 $2,565 $1,533 $372 $710 $422 $1,312 Basic earnings per common share (1) $0.01 $0.04 $0.10 $0.06 $0.02 $0.03 $0.02 $0.05 Diluted earnings per common share (1) $0.01 $0.04 $0.10 $0.06 $0.02 $0.03 $0.02 $0.05 (1)We calculate each quarter as a discrete period; the sum of the four quarters may not equal the calculated full-year amount.In the fourth quarter of 2012, we reduced our tax expense by $0.4 million and our interest expense by $0.8 million to reflect adjustments to our estimates foruncertain tax positions. We adjusted our estimates for several reasons, including the expiration of the statute of limitations for certain of these taxes in several statesand in two foreign jurisdictions, completion of an audit by a foreign jurisdiction that resulted in a lower tax assessment than we had estimated, and the impositionof limitations on our potential liability resulting from our beginning the voluntary disclosure agreement process with one state.In the fourth quarter of 2011, management determined that a valuation allowance was no longer required against the deferred tax assets for one of theCompany’s foreign subsidiaries given its return to profitability and future projected profitability. This adjustment resulted in a $0.5 million income tax benefit inthe fourth quarter of 2011. Also in the fourth quarter of 2011, management recorded the initial purchase accounting entries for the December 2011 acquisition ofBusiness Strategy, Inc. As a part of this process, we recorded a $1.7 million reduction in the deferred tax asset valuation allowance that resulted from the deferredtax liabilities that we recorded relating to the acquisition. This reduction was accounted for as an income tax benefit in the fourth quarter of 2011.As part of an ongoing Canadian tax audit, we continue to defend our tax position related to the valuation of an intercompany transaction. We recognized$0.6 million of additional tax expense in the fourth quarter of 2011 to reflect our estimate of the potential tax due based on our continuing discussions with theCanadian tax authorities. 69Table of ContentsPRGX GLOBAL, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (14) SUBSEQUENT EVENTSIn connection with the common stock offering we completed on December 11, 2012, the underwriters elected to exercise an overallotment option for anadditional 687,385 shares, and completed the additional sale on January 8, 2013. The net proceeds to us from the overallotment, after deducting underwritingdiscounts and commission and offering expenses were $4.1 million. 70Table of ContentsITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial DisclosureNoneITEM 9A. Controls and ProceduresEvaluation of Disclosure Controls and ProceduresThe Company carried out an evaluation, under the supervision and with the participation of its management, including the Chief Executive Officer andChief Financial Officer, of the effectiveness of the design and operation of the Company’s “disclosure controls and procedures” (as defined in the Exchange ActRule 13a-15(e)) as of the end of the period covered by this report. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concludedthat the Company’s disclosure controls and procedures are effective as of December 31, 2012.Management’s Annual Report on Internal Control Over Financial ReportingThe Company’s management is responsible for establishing and maintaining an adequate system of internal control over financial reporting, as defined in theExchange Act Rule 13a-15(f). Our internal control system is designed to provide reasonable assurance regarding the preparation and fair presentation of financialstatements for external purposes in accordance with generally accepted accounting principles. All internal control systems, no matter how well designed, haveinherent limitations and can provide only reasonable assurance that the objectives of the internal control system are met. Under the supervision and with theparticipation of the Company’s management, including the Company’s President and Chief Executive Officer along with the Company’s Chief Financial Officerand Treasurer, the Company conducted an assessment of the effectiveness of internal control over financial reporting based on the framework in Internal Control –Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on the assessment, management concluded that,as of December 31, 2012, the Company’s internal control over financial reporting is effective. The Company’s internal control over financial reporting as ofDecember 31, 2012 has been audited by BDO USA, LLP, an independent registered public accounting firm, as stated in their report which is included herein,which expresses an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting as of December 31, 2012.There was no change in the Company’s internal control over financial reporting that occurred during the Company’s most recently completed fiscal quarterthat has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting. Management’s report shall not bedeemed filed for purposes of Section 18 of the Exchange Act.Report of Independent Registered Public Accounting FirmBoard of Directors and ShareholdersPRGX Global, Inc.Atlanta, GeorgiaWe have audited PRGX Global, Inc. and subsidiaries’ (the Company) internal control over financial reporting as of December 31, 2012, based on criteriaestablished in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria).The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internalcontrol over financial reporting, included in the accompanying Item 9A, “Management’s Annual Report on Internal Control Over Financial Reporting”. Ourresponsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that weplan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing andevaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as weconsidered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. 71Table of ContentsA company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and thepreparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financialreporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect thetransactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation offinancial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only inaccordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection ofunauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation ofeffectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance withthe policies or procedures may deteriorate.In our opinion, PRGX Global, Inc. and subsidiaries maintained, in all material respects, effective internal control over financial reporting as of December 31, 2012,based on the COSO criteria.We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of theCompany as of December 31, 2012 and 2011, and the related consolidated statements of income, comprehensive income, shareholders’ equity, and cash flows foreach of the three years in the period ended December 31, 2012 and our report dated March 13, 2013 expressed an unqualified opinion thereon./s/ BDO USA, LLPAtlanta, GeorgiaMarch 13, 2013ITEM 9B. Other Information.None. 72Table of ContentsPART IIIITEM 10. Directors, Executive Officers and Corporate GovernanceExcept as set forth below, the information required by Item 10 of this Form 10-K is incorporated herein by reference to the information contained in thesections captioned “Proposal I: Election of Directors”, “Information about the Board of Directors and Committees of the Board of Directors”, “Executive Officers”and “Section 16(a) Beneficial Ownership Reporting Compliance” of our definitive proxy statement (the “Proxy Statement”) for the 2013 Annual Meeting ofStockholders to be filed with the Securities and Exchange Commission pursuant to Regulation 14A under the Securities and Exchange Act of 1934, as amended(the “Exchange Act”).We have undertaken to provide to any person without charge, upon request, a copy of our code of ethics applicable to our chief executive officer and seniorfinancial officers. You may obtain a copy of this code of ethics free of charge from our website, www.prgx.com.ITEM 11. Executive CompensationThe information required by Item 11 of this Form 10-K is incorporated by reference to the information contained in the sections captioned “ExecutiveCompensation”, “Information about the Board of Directors and Committees of the Board of Directors”, and “Report of the Compensation Committee” of the ProxyStatement. 73Table of ContentsITEM 12.Security Ownership of Certain Beneficial Owners and Management and Related Stockholder MattersExcept as set forth below, the information required by Item 12 of this Form 10-K is incorporated by reference to the information contained in the sectioncaptioned “Ownership of Directors, Principal Shareholders and Certain Executive Officers” of the Proxy Statement.Securities Authorized for Issuance Under Equity Compensation PlansThe Company currently has three stock-based compensation plans under which awards have been granted: (1) the Stock Incentive Plan (“SIP”), (2) the 2006Management Incentive Plan (“2006 MIP”), and (3) the 2008 Equity Incentive Plan (“2008 EIP”). The SIP, as amended, authorized the grant of options or otherstock-based awards, with respect to up to 1,237,500 shares of the Company’s common stock to key employees, directors, consultants and advisors. The SIP expiredin June 2008.At the annual meeting of shareholders held on August 11, 2006, the shareholders of the Company approved a proposal granting authorization to issue up to2.1 million shares of the Company’s common stock under the 2006 MIP. At Performance Unit settlement dates (which varied), participants were paid in commonstock and in cash. Participants received a number of shares of Company common stock equal to 60% of the number of Performance Units being paid out, plus acash payment equal to 40% of the fair market value of that number of shares of common stock equal to the number of Performance Units being paid out. Theawards were 50% vested at the award date and the remainder of the awards vested ratably over approximately the following eighteen months. The awards containcertain anti-dilution and change of control provisions. Also, the number of Performance Units awarded were automatically adjusted on a pro-rata basis upon theconversion into common stock of any of the Company’s senior convertible notes or Series A convertible preferred stock.During the first quarter of 2008, the Board of Directors of the Company adopted the 2008 EIP, which was approved by the shareholders at the annualmeeting of the shareholders on May 29, 2008. The 2008 EIP authorizes the grant of incentive and non-qualified stock options, stock appreciation rights, restrictedstock, restricted stock units and other incentive awards. Two million shares of the Company’s common stock initially were reserved for issuance under the 2008EIP pursuant to award grants to key employees, directors and service providers.An amendment to the 2008 EIP was adopted by the Company’s Board of Directors in April 2010 and approved at the Company’s annual meeting ofshareholders held on June 15, 2010. The amendment, among other things, increased the number of shares reserved for issuance under the 2008 EIP by 3,400,000shares to a total of 5,400,000 shares and provided that restricted stock awards and other full value awards would count as 1.41 shares against the available pool ofshares under the plan.An amendment to the 2008 EIP was adopted by the Company’s Board of Directors in April 2012 and approved at the Company’s annual meeting ofshareholders held on June 19, 2012. This amendment increased the number of shares reserved for issuance under the 2008 EIP by 2,200,000 shares to a total of7,600,000 shares. 74Table of ContentsThe following table presents certain information with respect to compensation plans under which equity securities of the registrant were authorized forissuance as of December 31, 2012: Plan category Number of securitiesto be issued uponexercise ofoutstanding options,warrants and rights Weighted-averageexercise price ofoutstandingoptions, warrantsand rights Number of securitiesremaining availablefor future issuanceunder equitycompensation plans(excluding securitiesreflected in column (a)) (a) (b) (c) Equity compensation plans approved by securityholders: Stock Incentive Plan 452,955 $11.24 — 2008 Equity Incentive Plan 2,217,686 6.12 2,125,164 Share awards (1) 92,558 — — Equity compensation plans not approved bysecurity holders (2), (3) 313,519 4.28 — Total 3,076,718 $6.70 2,125,164 (1)Amounts presented represent 60% of Performance Unit awards under the Company’s 2006 Management Incentive Plan. Performance Unit awards arerequired to be settled 60% in common stock and 40% in cash.(2)Inducement Option Grant – during the first quarter of 2009, in connection with his joining the Company as its President and Chief Executive Officer, theCompany made inducement grants outside its existing stock-based compensation plans to Mr. Romil Bahl. Mr. Bahl received an option to purchase 296,296shares of the common stock of the Company and had exercised options to purchase 27,777 shares through December 31, 2012.(3)Inducement Option Grant – during the third quarter of 2012, in connection with an employee joining the Company in a senior leadership position, theCompany made an inducement grant outside its existing stock-based compensation plans to the executive. The executive received an option to purchase45,000 shares of the common stock of the Company.ITEM 13. Certain Relationships and Related Transactions, and Director IndependenceThe information required by Item 13 of this Form 10-K is incorporated by reference to the information contained in the sections captioned “Informationabout the Board of Directors and Committees of the Board of Directors”, “Executive Compensation – Employment Agreements” and “Certain Transactions” of theProxy Statement.ITEM 14. Principal Accountants’ Fees and ServicesThe information required by Item 14 of this Form 10-K is incorporated by reference to the information contained in the sections captioned “PrincipalAccountants’ Fees and Services” of the Proxy Statement. 75Table of ContentsPART IVITEM 15. Exhibits, Financial Statement Schedules (a) Documents filed as part of the report (1) Consolidated Financial Statements: For the following consolidated financial information included herein, see Index on Page 39. Page Report of Independent Registered Public Accounting Firm 40 Consolidated Statements of Income for the Years ended December 31, 2012, 2011, and 2010 41 Consolidated Statements of Comprehensive Income for the Years ended December 31, 2012, 2011, and 2010 41 Consolidated Balance Sheets as of December 31, 2012 and 2011 42 Consolidated Statements of Shareholders’ Equity for the Years ended December 31, 2012, 2011, and 2010 43 Consolidated Statements of Cash Flows for the Years ended December 31, 2012, 2011, and 2010 44 Notes to Consolidated Financial Statements 45 (2) Financial Statement Schedule: Schedule II – Valuation and Qualifying Accounts S-1 (3) Exhibits ExhibitNumber Description 2.1 Share Purchase Agreement dated February 28, 2010 by and between PRGX U.K. Limited and Sajid Ghani and Others (incorporated by referenceto Exhibit 2.1 to the Registrant’s Form 10-K filed on March 29, 2010). 2.2 Acquisition Agreement dated December 1, 2011, among PRGX Global, Inc., PRGX Commercial LLC, Business Strategy, Inc., StrategicDocument Solutions, LLC, DD&C Investments, L.L.C., Charles Fayon, Daniel Geelhoed and Dennis VanDyke. (incorporated by reference toExhibit 2.1 to the Registrant’s Form 8-K filed on December 2, 2011). 3.1 Restated Articles of Incorporation of the Registrant, as amended and corrected through August 11, 2006 (restated solely for the purpose of filingwith the Commission) (incorporated by reference to Exhibit 3.1 to the Registrant’s Form 8-K filed on August 17, 2006). 3.1.1 Articles of Amendment of the Registrant effective January 20, 2010 (incorporated by reference to Exhibit 3.1 to the Registrant’s Form 8-K filed onJanuary 25, 2010). 3.2 Amended and Restated Bylaws of the Registrant (incorporated by reference to Exhibit 3.1 to the Registrant’s Form 8-K filed on December 11,2007). 4.1 Specimen Common Stock Certificate (incorporated by reference to Exhibit 4.1 to the Registrant’s Form 10-K for the year ended December 31,2001). 4.2 See Restated Articles of Incorporation and Bylaws of the Registrant, filed as Exhibits 3.1 and 3.2, respectively. 4.3 Shareholder Protection Rights Agreement, dated as of August 9, 2000, between the Registrant and Rights Agent (incorporated by reference toExhibit 4.1 to the Registrant’s Form 8-K filed on August 9, 2000). 4.3.1 First Amendment to Shareholder Protection Rights Agreement, dated as of March 12, 2002, between the Registrant and Rights Agent(incorporated by reference to Exhibit 4.3 to the Registrant’s Form 10-Q for the quarterly period ended June 30, 2002). 76Table of Contents 4.3.2 Second Amendment to Shareholder Protection Rights Agreement, effective as of August 16, 2002, between the Registrant and Rights Agent(incorporated by reference to Exhibit 4.3 to the Registrant’s Form 10-Q for the quarterly period ended September 30, 2002). 4.3.3 Third Amendment to Shareholder Protection Rights Agreement, effective as of November 7, 2005, between the Registrant and Rights Agent(incorporated by reference to Exhibit 4.1 to the Registrant’s Form 8-K filed on November 14, 2005). 4.3.4 Fourth Amendment to Shareholder Protection Rights Agreement, effective as of November 14, 2005, between the Registrant and Rights Agent(incorporated by reference to Exhibit 4.1 to the Registrant’s Form 8-K filed on November 30, 2005). 4.3.5 Fifth Amendment to Shareholder Protection Rights Agreement, effective as of March 15, 2006, between the Registrant and Rights Agent(incorporated by reference to Exhibit 4.9 to the Registrant’s Form 10-K for the year ended December 31, 2005). 4.3.6 Sixth Amendment to Shareholder Protection Rights Agreement, effective as of September 17, 2007, between the Registrant and Rights Agent(incorporated by reference to Exhibit 4.1 to the Registrant’s Form 8-K filed on September 21, 2007). 4.3.7 Seventh Amendment to Shareholder Protection Rights Agreement, effective as of August 9, 2010, between the Registrant and Rights Agent(incorporated by reference to Exhibit 4.1 to the Registrant’s Form 8-K filed on August 9, 2010). 4.3.8 Eighth Amendment to Shareholder Protection Rights Agreement, effective as of August 4, 2011, between the Registrant and Rights Agent(incorporated by reference to Exhibit 10.1 to the Registrant’s Form 10-Q for the quarterly period ended June 30, 2011). 4.3.9 Ninth Amendment to Shareholder Protection Rights Agreement, effective as of August 2, 2012, between the Registrant and Rights Agent(incorporated by reference to Exhibit 4.3.9 to the Registrant’s Form 10-Q for the quarterly period ended June 30, 2012).+10.1 1996 Stock Option Plan, dated as of January 25, 1996, together with Forms of Non-qualified Stock Option Agreement (incorporated by referenceto Exhibit 10.2 to the Registrant’s March 26, 1996 Registration Statement No. 333-1086 on Form S-1).+10.2 Form of Indemnification Agreement between the Registrant and Directors and certain officers, including named executive officers, of theRegistrant (incorporated by reference to Exhibit 10.4 to the Registrant’s Form 10-K for the year ended December 31, 2003).+10.3 Form of the Registrant’s Non-Qualified Stock Option Agreement (incorporated by reference to Exhibit 10.2 to the Registrant’s Form 10-Q for thequarterly period ended June 30, 2001). 10.4 Noncompetition, Nonsolicitation and Confidentiality Agreement among The Profit Recovery Group International, Inc., Howard Schultz &Associates International, Inc., Howard Schultz, Andrew Schultz and certain trusts, dated January 24, 2002 (incorporated by reference to Exhibit10.34 to the Registrant’s Form 10-K for the year ended December 31, 2001). 10.5 Office Lease Agreement between Galleria 600, LLC and PRG-Schultz International, Inc. (incorporated by reference to Exhibit 10.43 to theRegistrant’s Form 10-K for the year ended December 31, 2001). 10.5.1 First Amendment to Office Lease Agreement between Galleria 600, LLC and PRG-Schultz International, Inc. (incorporated by reference toExhibit 10.65 to the Registrant’s Form 10-K for the year ended December 31, 2002).+10. 6 Amended Stock Incentive Plan (incorporated by reference to Exhibit 10.3 to the Registrant’s Form 10-Q for the quarterly period ended June 30,2002).+10.7 Amended HSA-Texas Stock Option Plan (incorporated by reference to Exhibit 10.4 to the Registrant’s Form 10-Q for the quarterly period endedJune 30, 2002).+10.9 Form of Non-employee Director Option Agreement (incorporated by reference to Exhibit 99.1 to the Registrant’s Report on Form 8-K filed onFebruary 11, 2005).+10.22 Amended and Restated 2006 Management Incentive Plan (incorporated by reference to Exhibit 10.1 to the Registrant’s Form 10-Q for the quarterended September 30, 2006).+10.22.1 Form of Performance Unit Agreement under 2006 Amended and Restated Management Incentive Plan (incorporated by reference to Exhibit 10.2to the Registrant’s Form 8-K filed on June 22, 2012).+10.24 Form of Non-Employee Director Stock Option Agreement (incorporated by reference to Exhibit 10.1 to the Registrant’s Form 8-K filed onSeptember 18, 2007). 77Table of Contents+10.26.1 PRGX Global, Inc. 2008 Equity Incentive Plan, as Amended and Restated Effective April 23, 2012 (incorporated by reference to Exhibit 10.1 tothe Registrant’s Form 8-K filed on June 22, 2012).+10.26.2 Form of Restricted Stock Agreement for Non-Employee Directors (incorporated by reference to Exhibit 10.2 to the Registrant’s Form 8-K filed onJune 4, 2008).+10.26.3 Form of Non-Qualified Stock Option Agreement for Non-Employee Directors (incorporated by reference to Exhibit 10.3 to the Registrant’s Form8-K filed on June 4, 2008).+10.27 Employment Agreement dated January 8, 2009, by and between Mr. Romil Bahl and the Registrant (incorporated by reference to Exhibit 10.1 tothe Registrant’s Form 8-K filed on January 14, 2009).+10.27.1 Form of Nonqualified Stock Option Agreement (incorporated by reference to Exhibit 10.2 to the Registrant’s Form 8-K filed on January 14, 2009).+10.27.2 Form of Restricted Stock Agreement (incorporated by reference to Exhibit 10.3 to the Registrant’s Form 8-K filed on January 14, 2009).+10.28 Employment Agreement dated May 26, 2009 by and between the Registrant and Robert B. Lee (incorporated by reference to Exhibit 10.1 to theRegistrant’s Form 8-K filed on June 1, 2009). 10.29 Revolving Credit and Term Loan Agreement dated as of January 19, 2010, by and among PRGX Global, Inc. (formerly PRG-SchultzInternational, Inc), and PRGX USA, Inc. (formerly PRG-Schultz USA, Inc.), as co-borrowers, the lenders from time to time party thereto,SunTrust Bank, as issuing bank, and SunTrust Bank, as administrative agent (incorporated by reference to Exhibit 10.2 to the Registrant’s Form10-Q filed on November 7, 2011). 10.29.1 Subsidiary Guaranty Agreement dated as of January 19, 2010 by and among PRGX Global, Inc. (formerly PRG-Schultz International, Inc), andPRGX USA, Inc. (formerly PRG-Schultz USA, Inc.), as borrowers, each of the subsidiaries of PRGX Global, Inc. listed on Schedule I thereto, asguarantors, and SunTrust Bank, as administrative agent (incorporated by reference to Exhibit 10.2 to the Registrant’s Form 8-K filed on January25, 2010). 10.29.2 Security Agreement dated January 19, 2010 among PRGX Global, Inc. (formerly PRG-Schultz International, Inc), PRGX USA, Inc. (formerlyPRG-Schultz USA, Inc.), and the other direct and indirect subsidiaries of PRGX Global, Inc. signatory thereto, as grantors, in favor of SunTrustBank, as administrative agent (incorporated by reference to Exhibit 10.3 to the Registrant’s Form 8-K filed on January 25, 2010). 10.29.3 Equity Pledge Agreement dated as of January 19, 2010, made by PRGX Global, Inc. (formerly PRG-Schultz International, Inc), PRGX USA, Inc.(formerly PRG-Schultz USA, Inc.), and the other direct and indirect subsidiaries of PRGX Global, Inc. signatory thereto, as grantors, in favor ofSunTrust Bank, as administrative agent (incorporated by reference to Exhibit 10.4 to the Registrant’s Form 8-K filed on January 25, 2010). 10.29.4 Loan Documents Modification Agreement dated June 21, 2010, by and among the Borrowers, the Guarantors and the Lender (incorporated byreference to Exhibit 10.29.4 to the Registrant’s Form 10-K filed on March 15, 2012). 10.29.5 Second Loan Documents Modification Agreement dated September 30, 2010, by and among the Borrowers and the Lender (incorporated byreference to Exhibit 10.1 to the Registrant’s Form 8-K filed on October 1, 2010). 10.29.6 Third Loan Documents Modification Agreement dated October 17, 2011, by and among the Borrowers and the Lender (incorporated by referenceto Exhibit 10.29.6 to the Registrant’s Form 10-K filed on March 15, 2012).+10.30 Employment Agreement between the Registrant and Victor A. Allums dated November 28, 2008 (incorporated by reference to Exhibit 10.31 tothe Registrant’s Form 10-K filed on March 29, 2010).+10.32 Employment Agreement between the Registrant and James Shand dated March 12, 2009 (incorporated by reference to Exhibit 10.33 to theRegistrant’s Form 10-K filed on March 29, 2010). 78Table of Contents+10.33 Employment Agreement between the Registrant and Michael Noel dated September 30, 2009. (incorporated by reference to Exhibit 10.33 to theRegistrant’s Form 10-K filed on March 16, 2011).+10.34 Employment Agreement between the Registrant and Catherine Lafiandra dated February 1, 2010 (incorporated by reference to Exhibit 10.34 to theRegistrant’s Form 10-K filed on March 15, 2012).+10.35 Employment Agreement between the Registrant and Puneet Pamnani dated February 8, 2012 (incorporated by reference to Exhibit 10.35 to theRegistrant’s Form 10-K filed on March 15, 2012). 14.1 Code of Ethics for Senior Financial Officers (incorporated by reference to Exhibit 14.1 to the Registrant’s Form 10-K for the year ended December31, 2003). 21.1 Subsidiaries of the Registrant. 23.1 Consent of BDO USA, LLP 31.1 Certification of the Chief Executive Officer, pursuant to Rule 13a-14(a) or 15d-14(a), for the year ended December 31, 2012. 31.2 Certification of the Chief Financial Officer, pursuant to Rule 13a-14(a) or 15d-14(a), for the year ended December 31, 2012. 32.1 Certification of the Chief Executive Officer and Chief Financial Officer, pursuant to 18 U.S.C. Section 1350, for the year ended December 31,2012.101 The following financial information from the Registrant’s Annual Report on Form 10-K for the fiscal year ended December 31, 2012, formatted inExtensible Business Reporting Language (“XBRL”): (i) Consolidated Statements of Income, (ii) Consolidated Statements of ComprehensiveIncome, (iii) Consolidated Balance Sheets, (iv) Consolidated Statements of Cash Flows and (v) Notes to Consolidated Financial Statements.* +Designates management contract or compensatory plan or arrangement.*Pursuant to Rule 406T of Regulation S-T, these interactive data files are deemed not to be “filed” or part of a registration statement or prospectus for purposesof Sections 11 or 12 of the Securities Act of 1933, as amended, or Section 18 of the Securities Act of 1934, as amended, and otherwise are not subject toliability under these sections. 79Table of ContentsSIGNATURESPursuant 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 itsbehalf by the undersigned, thereunto duly authorized. PRGX GLOBAL, INC.By: /s/ ROMIL BAHL Romil Bahl President, Chief Executive Officer, Director (Principal Executive Officer)Date: March 13, 2013Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrantand in the capacities and on the dates indicated. Signature Title Date/s/ ROMIL BAHL President, Chief Executive Officer March 13, 2013Romil Bahl and Director (Principal Executive Officer) /s/ ROBERT B. LEE Chief Financial Officer and Treasurer March 13, 2013Robert B. Lee (Principal Financial Officer) /s/ BRIAN D. LANE Controller March 13, 2013Brian D. Lane (Principal Accounting Officer) /s/ DAVID A. COLE Director March 13, 2013David A. Cole /s/ PATRICK G. DILLS Chairman of the Board March 13, 2013Patrick G. Dills /s/ ARCHELLE GEORGIOU FELDSHON Director March 13, 2013Archelle Georgiou Feldshon /s/ MYLLE H. MANGUM Director March 13, 2013Mylle H. Mangum /s/ PHILIP J. MAZZILLI, JR. Director March 13, 2013Philip J. Mazzilli, Jr. /s/ STEVEN P. ROSENBERG Director March 13, 2013Steven P. Rosenberg /s/ RONALD E. STEWART Director March 13, 2013Ronald E. Stewart /s/ JOSEPH E. WHITTERS Director March 13, 2013Joseph E. Whitters 80Table of Contents SCHEDULE II – VALUATION AND QUALIFYING ACCOUNTSFOR THE YEARS ENDED DECEMBER 31, 2012, 2011 AND 2010(In thousands) Balance atBeginningof Year Additions Deductions Balance atEnd ofYear Description Charge(Credit) toCosts andExpenses Credit tothe respectivereceivable (1) 2012 Allowance for doubtful accounts receivable $811 882 — $1,693 Allowance for doubtful employee advances and miscellaneous receivables $272 584 (318) $538 Deferred tax valuation allowance $51,630 (3,141) — $48,489 2011 Allowance for doubtful accounts receivable $591 221 (1) $811 Allowance for doubtful employee advances and miscellaneous receivables $669 366 (763) $272 Deferred tax valuation allowance $54,801 (3,171) — $51,630 2010 Allowance for doubtful accounts receivable $1,032 (360) (81) $591 Allowance for doubtful employee advances and miscellaneous receivables $351 559 (241) $669 Deferred tax valuation allowance $58,304 (3,503) — $54,801 (1)Write-offs, net of recoveries S-1Table of Contents EXHIBIT 21.1PRGX GLOBAL, INC.SUBSIDIARIESAs of December 31, 2012 Company Jurisdiction of OrganizationPRGX USA, Inc. GeorgiaPRGX Asia, Inc. GeorgiaPRGX Australia, Inc. GeorgiaPRGX Belgium, Inc. GeorgiaPRGX Canada, LLC GeorgiaPRGX Commercial, LLC GeorgiaPRGX Costa Rica, Inc. GeorgiaPRGX New Zealand, Inc. GeorgiaPRGX Netherlands, Inc. GeorgiaPRGX Mexico, Inc. GeorgiaPRGX France, Inc. GeorgiaPRGX Germany, Inc. GeorgiaPRGX Acquisition, Corp. GeorgiaPRGX Switzerland, Inc. GeorgiaPRGX Italy, Inc. GeorgiaPRGX Spain, Inc. GeorgiaPRGX Portugal, Inc. GeorgiaPRG International, Inc. GeorgiaPRG USA, Inc. GeorgiaPRGX Scandinavia, Inc. GeorgiaPRGX Holdings, Inc. GeorgiaPRGX Puerto Rico, Inc. GeorgiaPRGX Chile, Inc. GeorgiaPRGX Europe, Inc. GeorgiaPRGX Brasil, LLC GeorgiaPRGX India Private Limited IndiaPRGX Holdings Mexico, S de RL de CV MexicoPRGX Servicios Mexico S de RL de CV MexicoPRGX de Mexico S de RL de CV MexicoPRGX Argentina S.A. ArgentinaProfit Recovery Brasil Ltda. BrazilPRG-Schultz International PTE LTD SingaporePRG-Schultz Suzhou’ Co Ltd. ChinaPRGX CR s.r.o. Czech RepublicPRGFS, Inc. DelawarePRGX Texas, Inc. TexasMeridian Corporation Limited Jersey (Channel Islands)PRGX UK Holdings Ltd United KingdomPRGX UK Ltd United KingdomEtesius Limited United KingdomPRGX Canada Corp. CanadaPRG-Schultz Deutschland GmbH GermanyPRGX Nederland B.V. NetherlandsPRG-Schultz Colombia Ltda. ColumbiaPRG-Schultz Svenska AB SwedenPRG-Schultz Venezuela S. R. L. VenezuelaPRGX Polska Sp. z o.o PolandPRGDS, LLC GeorgiaPRGTS, LLC GeorgiaEXHIBIT 23.1Consent of Independent Registered Public Accounting FirmPRGX Global, Inc.Atlanta, GeorgiaWe hereby consent to the incorporation by reference in the Registration Statements on Form S-3 (File No. 333-134698, No. 333-171986, and No. 333-185027) andForm S-8 (File No. 333-153837, No. 333-64125, No. 333-08707, No. 333-30885, No. 333-61578, No. 333-81168, No. 333-100817, No. 333-137438 and No. 333-170809) of PRGX Global, Inc. and subsidiaries of our reports dated March 13, 2013, relating to the consolidated financial statements and financial statementschedule, and the effectiveness of PRGX Global, Inc. and subsidiaries internal control over financial reporting, which appear in this Form 10-K./s/ BDO USA, LLPAtlanta, GeorgiaMarch 13, 2013EXHIBIT 31.1CERTIFICATIONI, Romil Bahl, certify that:1. I have reviewed this Form 10-K of PRGX Global, Inc.;2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make thestatements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects thefinancial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in ExchangeAct Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant andhave:(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, toensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities,particularly during the period in which this report is being prepared; and(b) Designed such internal control over financial reporting or caused such internal control over financial reporting to be designed under oursupervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposesin accordance with generally accepted accounting principles; and(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about theeffectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recentfiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, theregistrant’s internal control over financial reporting; and5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to theregistrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonablylikely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controlover financial reporting. By: /s/ Romil Bahl Romil BahlMarch 13, 2013 President, Chief Executive Officer, Director(Principal Executive Officer)EXHIBIT 31.2CERTIFICATIONI, Robert B. Lee, certify that:1. I have reviewed this Form 10-K of PRGX Global, Inc.;2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make thestatements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects thefinancial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in ExchangeAct Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant andhave:(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, toensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities,particularly during the period in which this report is being prepared; and(b) Designed such internal control over financial reporting or caused such internal control over financial reporting to be designed under oursupervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposesin accordance with generally accepted accounting principles; and(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about theeffectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recentfiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, theregistrant’s internal control over financial reporting; and5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to theregistrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonablylikely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controlover financial reporting. By: /s/ Robert B. Lee Robert B. LeeMarch 13, 2013 Chief Financial Officer and Treasurer(Principal Financial Officer)EXHIBIT 32.1CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,AS ADOPTED PURSUANT TO SECTION 906OF THE SARBANES-OXLEY ACT OF 2002In connection with the Annual Report of PRGX Global, Inc. (the “Company”) on Form 10-K for the period ending December 31, 2012 as filed with theSecurities and Exchange Commission on the date hereof (the “Report”), I, Romil Bahl, President and Chief Executive Officer of the Company and I, Robert B.Lee, Chief Financial Officer and Treasurer, certify pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that to the bestof the undersigned’s knowledge: (1) the Report fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934; and (2) theinformation contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. By: /s/ Romil Bahl Romil BahlMarch 13, 2013 President, Chief Executive Officer, Director(Principal Executive Officer) By: /s/ Robert B. Lee Robert B. LeeMarch 13, 2013 Chief Financial Officer and Treasurer(Principal Financial Officer)

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