-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, AHw722ZxnZGLpjnW3j5IF02srMJyumzHKci++0Obi3GvNYP6BO2YINT70l/jeluM pjpuFc0PQ3xDS+4qT+rA/g== 0000950144-98-013570.txt : 19981207 0000950144-98-013570.hdr.sgml : 19981207 ACCESSION NUMBER: 0000950144-98-013570 CONFORMED SUBMISSION TYPE: 10-Q/A PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19980930 FILED AS OF DATE: 19981204 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PROFIT RECOVERY GROUP INTERNATIONAL INC CENTRAL INDEX KEY: 0001007330 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-ENGINEERING, ACCOUNTING, RESEARCH, MANAGEMENT [8700] IRS NUMBER: 582213805 STATE OF INCORPORATION: GA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q/A SEC ACT: SEC FILE NUMBER: 000-28000 FILM NUMBER: 98764146 BUSINESS ADDRESS: STREET 1: 2300 WINDY RIDGE PKWY STREET 2: STE 100 N CITY: ATLANTA STATE: GA ZIP: 30339-8426 BUSINESS PHONE: 7707793900 MAIL ADDRESS: STREET 1: 2300 WINDY RIDGE PKWY STREET 2: STE 100 NORTH CITY: ATLANTA STATE: GA ZIP: 30339-8426 10-Q/A 1 PROFIT RECOVERY GROUP INTERNATIONAL INC 1 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 --------------------- FORM 10-Q/A AMENDMENT NO. 1 --------------------- (MARK ONE) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1998 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ____________ TO____________
COMMISSION FILE NUMBER 0-28000 --------------------- THE PROFIT RECOVERY GROUP INTERNATIONAL, INC. (Exact name of registrant as specified in its charter) --------------------- GEORGIA 58-2213805 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 2300 WINDY RIDGE PARKWAY 30339-8426 SUITE 100 NORTH (Zip Code) ATLANTA, GEORGIA (Address of principal executive offices)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (770) 779-3900 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] The number of outstanding shares of the issuer's no par value common stock as of October 31, 1998, the latest practicable date, was 23,788,139. The Registrant is hereby filing Amendment No. 1 to Form 10-Q for the quarter ended September 30, 1998 for the purpose of supplementing certain disclosures contained in (i) Note G of Notes to Condensed Consolidated Financial Statements and (ii) the Liquidity and Capital Resources section of Management's Discussion and Analysis of Financial Condition and Results of Operations. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS (UNAUDITED) THE PROFIT RECOVERY GROUP INTERNATIONAL, INC. CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED)
NINE MONTHS THREE MONTHS ENDED ENDED SEPTEMBER 30, SEPTEMBER 30, -------------------- ------------------- 1998 1997 1998 1997 -------- -------- -------- ------- Revenues........................................... $61,803 $29,627 $133,881 $76,445 Cost of revenues................................... 30,078 14,693 68,360 39,553 Selling, general and administrative expenses....... 19,312 8,790 46,332 25,709 ------- ------- -------- ------- Operating income................................. 12,413 6,144 19,189 11,183 Interest income (expense), net..................... (1,451) 14 (1,589) 132 ------- ------- -------- ------- Earnings before income taxes..................... 10,962 6,158 17,600 11,315 Income taxes....................................... 4,297 2,400 6,896 4,397 ------- ------- -------- ------- Net earnings..................................... $ 6,665 $ 3,758 $ 10,704 $ 6,918 ======= ======= ======== ======= Earnings per share (Note B): Basic............................................ $ 0.29 $ 0.21 $ 0.50 $ 0.38 ======= ======= ======== ======= Diluted.......................................... $ 0.28 $ 0.20 $ 0.47 $ 0.37 ======= ======= ======== ======= Weighted average shares outstanding (Note B): Basic............................................ 22,963 18,277 21,431 18,184 ======= ======= ======== ======= Diluted.......................................... 23,810 18,910 22,939 18,720 ======= ======= ======== =======
See accompanying notes to condensed consolidated financial statements. 1 3 THE PROFIT RECOVERY GROUP INTERNATIONAL, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA) (UNAUDITED)
SEPTEMBER 30, DECEMBER 31, 1998 1997 ------------- ------------ ASSETS Current assets: Cash and cash equivalents (Note D)........................ $ 15,020 $ 19,386 Receivables: Billed contract receivables............................ 19,332 12,100 Unbilled contract receivables.......................... 65,051 41,771 Employee advances...................................... 4,541 2,299 -------- -------- Total receivables................................. 88,924 56,170 Prepaid expenses and other current assets................. 2,061 2,430 -------- -------- Total current assets.............................. 106,005 77,986 -------- -------- Property and equipment: Computer and other equipment.............................. 21,804 10,658 Furniture and fixtures.................................... 2,552 2,111 Leasehold improvements.................................... 3,717 1,760 -------- -------- 28,073 14,529 Less accumulated depreciation and amortization............ 9,194 5,760 -------- -------- 18,879 8,769 -------- -------- Noncompete agreements, less accumulated amortization........ 2,895 3,471 Deferred loan costs, less accumulated amortization.......... 1,921 24 Goodwill, less accumulated amortization..................... 153,371 39,591 Deferred income taxes....................................... 3,083 3,585 Other assets................................................ 458 459 -------- -------- $286,612 $133,885 ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Note payable to bank...................................... $ 67 $ 81 Current installments of long-term debt.................... 88 1,428 Accounts payable and accrued expenses..................... 12,446 4,835 Accrued payroll and related expenses...................... 33,953 26,075 Deferred income taxes..................................... 9,645 9,917 Deferred revenue.......................................... 985 1,087 -------- -------- Total current liabilities......................... 57,184 43,423 Long-term debt, excluding current installments.............. 81,141 24,365 Deferred compensation....................................... 3,200 2,563 Other long-term liabilities................................. 2,736 462 -------- -------- Total liabilities................................. 144,261 70,813 -------- -------- Shareholders' equity (Note F): Preferred stock, no par value. Authorized 1,000,000 shares; no shares issued or outstanding in 1998 and 1997................................................... -- -- Common stock, no par value; stated value $.001 per share. Authorized 60,000,000 shares; issued and outstanding 23,143,705 in 1998 and 19,193,676 in 1997.............. 23 19 Additional paid-in capital................................ 117,557 48,195 Cumulative translation adjustments........................ (1,940) (1,149) Retained earnings......................................... 26,711 16,007 -------- -------- Total shareholders' equity........................ 142,351 63,072 -------- -------- $286,612 $133,885 ======== ========
See accompanying notes to condensed consolidated financial statements. 2 4 THE PROFIT RECOVERY GROUP INTERNATIONAL, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (AMOUNTS IN THOUSANDS) (UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30, -------------------- 1998 1997 -------- -------- Cash flows from operating activities: Net earnings.............................................. $ 10,704 $ 6,918 Adjustments to reconcile net earnings to net cash (used in) provided by operating activities: Depreciation and amortization.......................... 7,366 3,018 Loss on sale of property and equipment................. 26 -- Deferred income taxes.................................. 637 -- Deferred compensation expense.......................... 237 434 Cumulative translation adjustments..................... (1,582) (25) Changes in assets and liabilities, net of effect of acquisitions: Contract receivables................................. (31,864) (10,990) Prepaids and other current assets.................... 413 (743) Refundable income taxes.............................. -- 2,049 Other assets......................................... (1,680) (93) Accounts payable and accrued expenses................ 2,836 333 Accrued payroll and other accrued liabilities........ 9,016 1,084 -------- -------- Net cash (used in) provided by operating activities...................................... (3,891) 1,985 -------- -------- Cash flows from investing activities: Purchase of property and equipment........................ (13,015) (4,054) Purchase of companies..................................... (84,128) (3,194) -------- -------- Net cash used in investing activities............. (97,143) (7,248) -------- -------- Cash flows from financing activities: Net decrease in note payable to bank...................... (14) -- Proceeds from issuance of long-term debt.................. 79,240 -- Repayment of long-term debt............................... (23,804) -- Proceeds from sale of common stock........................ 41,246 603 -------- -------- Net cash provided by financing activities......... 96,668 603 -------- -------- Net decrease in cash and cash equivalents......... (4,366) (4,660) Cash and cash equivalents at beginning of period............ 19,386 16,891 -------- -------- Cash and cash equivalents at end of period.................. $ 15,020 $ 12,231 ======== ======== Supplemental disclosure of cash flow information: Cash paid during the period for interest.................. $ 411 $ 38 ======== ======== Cash paid during the period for income taxes.............. $ 5,159 $ 2,165 ======== ======== Supplemental disclosure of noncash investing and financing activities: In the first nine months of both 1998 and 1997, the Company purchased the net assets of certain companies. In conjunction with the acquisitions, the Company assumed liabilities as follows: Fair value of assets acquired........................ $118,057 $ 6,729 Cash paid for the acquisitions....................... (84,128) (3,194) Fair value of shares issued for acquisitions......... (28,120) (3,006) -------- -------- Liabilities assumed............................... $ 5,809 $ 529 ======== ========
See accompanying notes to condensed consolidated financial statements. 3 5 THE PROFIT RECOVERY GROUP INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 1998 (UNAUDITED) NOTE A -- BASIS OF PRESENTATION The accompanying unaudited condensed consolidated financial statements of The Profit Recovery Group International, Inc. and its wholly owned subsidiaries (the "Company") have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and nine-month periods ended September 30, 1998 are not necessarily indicative of the results that may be expected for the year ending December 31, 1998. For further information refer to the consolidated financial statements and footnotes thereto included in the Company's Form 10-K for the fiscal year ended December 31, 1997. NOTE B -- EARNINGS PER SHARE Effective December 31, 1997, the Company adopted Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings per Share." This pronouncement required the restatement of all prior-period earnings per share data presented to conform to its provisions. The following table sets forth the computation of basic and diluted earnings per share for the three and nine-month periods ended September 30, 1998 and 1997 in accordance with the provisions of SFAS No. 128 (in thousands, except for earnings per share information):
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ------------------- ----------------- 1998 1997 1998 1997 -------- -------- ------- ------- Numerator for both basic earnings per share and diluted earnings per share -- net earnings...... $ 6,665 $ 3,758 $10,704 $ 6,918 ======= ======= ======= ======= Denominator: Denominator for basic earnings per share -- weighted average shares outstanding.................................. 22,963 18,277 21,431 18,184 Effect of dilutive securities -- employee stock options...................................... 847 633 1,508 536 ------- ------- ------- ------- Denominator for diluted earnings per share...... 23,810 18,910 22,939 18,720 ======= ======= ======= ======= Earnings per share -- basic....................... $ 0.29 $ 0.21 $ 0.50 $ 0.38 ======= ======= ======= ======= Earnings per share -- diluted..................... $ 0.28 $ 0.20 $ 0.47 $ 0.37 ======= ======= ======= =======
NOTE C -- COMPREHENSIVE INCOME Effective January 1, 1998, the Company adopted SFAS No. 130, "Reporting Comprehensive Income." This statement establishes items that are required to be recognized under accounting standards as components of comprehensive income. SFAS No. 130 requires, among other things, that an enterprise report a total for comprehensive income in condensed financial statements of interim periods issued to shareholders. For the three month periods ended September 30, 1998 and 1997, the Company's consolidated comprehensive income was $6,630,000 and $3,763,000, respectively. For the nine month periods ended September 30, 1998 and 1997, the Company's consolidated comprehensive income was $10,223,000 and $6,903,000, respectively. The difference between consolidated comprehensive income, as disclosed here, and traditionally-determined consolidated net earnings, as set forth on the accompanying Condensed Consolidated Statements of Earnings, results from tax-effected foreign currency translation adjustments. 4 6 THE PROFIT RECOVERY GROUP INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE D -- CASH EQUIVALENTS Cash equivalents at September 30, 1998 and December 31, 1997 included $1.4 million and $2.5 million, respectively, of reverse repurchase agreements with NationsBank, N.A. (South) which were fully collateralized by United States of America Treasury Notes in the possession of such bank. The reverse repurchase agreement in effect on September 30, 1998 matured and was settled on October 1, 1998. In addition, cash equivalents at September 30, 1998 and December 31, 1997 also included $4.0 million and $4.7 million, respectively, of temporary investments held in a French bank by certain of the Company's French subsidiaries. The Company does not intend to take possession of collateral securities on future reverse repurchase agreement transactions conducted with banking institutions of national standing. The Company does insist, however, that all such agreements provide for full collateralization using obligations of the United States of America having a current market value equivalent to or exceeding the reverse repurchase agreement amount. NOTE E -- INTERNAL USE COMPUTER SOFTWARE Statement of Position 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use" provides guidance on a variety of issues relating to costs of internal use software including which of these costs should be capitalized and which should be expensed as incurred. This pronouncement is effective for fiscal years beginning after December 15, 1998 although earlier application is encouraged. The Company has chosen to early adopt this pronouncement effective January 1, 1998 since it provides definitive accounting guidance on a large-scale information systems development project initiated by the Company during the first quarter of 1998. NOTE F -- FOLLOW-ON COMMON STOCK OFFERING On March 16, 1998, the Company sold 2,000,000 newly issued shares of its common stock and certain selling shareholders sold an additional 2,400,000 outstanding shares in an underwritten follow-on offering. The offering was priced at $21.00 per share. The proceeds of the offering (net of underwriting discounts and commissions) were distributed by the underwriting syndicate on March 20, 1998. The Company then used a portion of its net proceeds from the offering to repay the $24.8 million outstanding principal balance on its bank credit facility, along with accrued interest, on March 20, 1998. In April 1998, the Company received notification from its underwriting syndicate that the syndicate had exercised its full over-allotment option to purchase an additional 660,000 shares of Company common stock. All of these shares were then sold to the syndicate by certain selling shareholders. The Company received no proceeds from the sale of such shares. NOTE G -- ACQUISITIONS On March 20, 1998, the Company acquired the net assets Ginger Quill, Inc., d/b/a Precision Data Link, a 22-person air freight recovery audit firm. On June 19, 1998, the Company acquired the net assets of The Medallion Group, a 27-person air freight recovery audit operation consisting of seven separate legal entities. All companies are located in Salt Lake City, Utah, and each transaction was accounted for as a purchase and involved both cash and common stock consideration. On July 30, 1998, the Company acquired all of the outstanding capital stock of Novexel S.A., a Lyon, France-based company that assists business entities in securing European Union grants. This transaction was accounted for as a purchase and involved cash of $3.7 million and 165,863 restricted, unregistered shares of the Company's common stock. On August 6, 1998, the Company acquired substantially all the assets and assumed certain liabilities of Loder, Drew & Associates ("Loder Drew"), a California-based international recovery auditing firm primarily 5 7 THE PROFIT RECOVERY GROUP INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) serving clients in the manufacturing, financial services and other non-retail sectors. The transaction was accounted for as a purchase, effective as of July 1, 1998, with initial consideration of $70.0 million in cash and 803,535 restricted, unregistered shares of the Company's common stock. Approximately $3.0 million in direct acquisition-related costs were also incurred and capitalized as part of this transaction. Additionally, Loder Drew will be eligible to receive further purchase price consideration up to a maximum of $70.0 million in cash conditioned on future financial performance of Loder Drew through December 31, 1999. On September 28, 1998, the Company acquired the net assets of Cost Recovery Professionals Pty Ltd, an Australia-based recovery auditing firm primarily serving clients in the retail sector. The transaction was accounted for as a purchase with consideration of $1.4 million and 100,000 restricted, unregistered shares of the Company's common stock. On October 29, 1998, the Company acquired all the issued and outstanding common stock of Robert Beck & Associates, Inc. ("RBA"), a direct retail sector recovery auditing competitor based in Ringwood, Illinois. The Company also simultaneously purchased either the common stock or substantially all net assets of certain other entities that provided management services to RBA. The acquisitions were accounted for under the purchase method of accounting, and the collective consideration paid for RBA and related entities consisted of $26.1 million in cash and 644,434 restricted, unregistered shares of the Company's common stock. The following represents the summary (unaudited) pro forma results of operations as if the acquisitions of Loder Drew and RBA had occurred at the beginning of 1998. All amounts are in thousands except per share information. The pro forma results are not necessarily indicative of the results that will occur in the future.
NINE MONTHS ENDED SEPTEMBER 30, 1998 ------------------ Revenues $159,650 ======== Net earnings $ 9,520 ======== Earnings per share: $ .42 Basic ======== Diluted $ .39 ========
The Company has not included pro forma accrual basis results of operations for its various smaller acquisitions with respect to the nine months ended September 30, 1998 since these entities have historically maintained their respective accounting records using the cash basis of accounting. The Company believes, however, that pro forma accrual basis results of operations for these entities, if determined, would not be significant, either individually or in the aggregate. It is not reasonably practicable to provide accrual basis pro forma results of operations for the nine months ended September 30, 1997. 6 8 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis should be read in conjunction with the condensed consolidated financial statements and notes thereto included elsewhere herein. OVERVIEW The Company is a leading provider of accounts payable and other recovery audit services to large retailers, wholesale distributors, healthcare providers, technology companies and other large transaction-intensive companies, as well as to certain governmental agencies. In businesses with large purchase volumes and continuously fluctuating purchase prices, some small percentage of erroneous overpayments to vendors is inevitable. In addition, compliance with various complex tax laws also results in overpayments to governmental agencies. Moreover, services such as telecommunications, utilities and freight provided to businesses under complex pricing arrangements can result in overpayments. All of these overpayments result in "lost profits." The Company identifies and documents overpayments by using sophisticated proprietary technology and advanced audit techniques and methodologies, and by employing highly trained, experienced recovery audit specialists. The Company receives a contractually negotiated percentage of amounts recovered. The earliest of the Company's predecessors was formed in November 1990, and in early 1991 acquired the operating assets of Roy Greene Associates, Inc. and Bottom Line Associates, Inc., which were formed in 1971 and 1985, respectively. In January 1995, the Company purchased certain assets of Fial & Associates, Inc., a direct U.S. competitor. In January 1997, the Company acquired the net operating assets of Shaps Group, Inc., a California-based company providing recovery audit services to manufacturers and distributors of technology products. In February 1997, the Company acquired all of the common stock of Accounts Payable Recovery Services, Inc., a Texas-based company providing recovery audit services to healthcare entities and energy companies. In May 1997, the Company acquired all of the common stock of The Hale Group, a California-based company that also provides recovery audit services to healthcare entities. In October 1997, the Company acquired 98.4% of Financiere Alma, S.A. and subsidiaries ("Alma"), a Paris-based recovery audit firm specializing in identifying and recovering various types of French corporate tax overpayments. In November 1997, the Company acquired the net operating assets of TradeCheck, LLC, a Washington-based recovery audit firm specializing in ocean freight shipments. On March 20, 1998, the Company acquired Ginger Quill, Inc., d/b/a Precision Data Link, a air freight recovery audit firm based in Utah. On June 19, 1998, the Company acquired The Medallion Group, a air freight recovery audit operation consisting of seven separate legal entities, all based in Utah. On July 30, 1998, the Company acquired substantially all of the outstanding capital stock of Novexel S.A., a Lyon, France-based company that assists business entities in securing European Union grants. The Company announced on July 7, 1998 that it had agreed in principle to purchase Loder, Drew and Associates, Inc. ("LDA"), an international recovery auditing firm based in San Juan Capistrano, California. LDA's client concentration is primarily in the manufacturing, financial services and other non-retail sectors. The transaction was closed on August 6, 1998, with an effective date of July 1, 1998. On September 28, 1998 the Company acquired the net assets of Cost Recovery Professionals Pty Ltd, an Australia-based recovery auditing firm primarily serving clients in the retail sector. On October 29, 1998 the Company acquired, effective as of October 1, 1998, all the issued and outstanding stock of Robert Beck & Associates, Inc. ("RBA"), a direct retail sector recovery auditing competitor based in Ringwood, Illinois. The Company also simultaneously purchased either the common stock or substantially all net assets of certain other entities that provided management services to RBA. The Company intends to continue to pursue domestic and international strategic acquisitions, including acquisitions of direct competitors and complementary businesses. 7 9 RESULTS OF OPERATIONS The following table presents, for the periods indicated, certain items in the condensed consolidated statements of earnings as a percentage of revenues.
THREE MONTHS NINE MONTHS ENDED ENDED SEPTEMBER 30, SEPTEMBER 30, -------------- -------------- 1998 1997 1998 1997 ----- ----- ----- ----- Revenues.................................................... 100.0% 100.0% 100.0% 100.0% Cost of Revenues............................................ 48.7 49.6 51.1 51.8 Selling, general and administrative expenses................ 31.2 29.7 34.6 33.6 ----- ----- ----- ----- Operating income.......................................... 20.1 20.7 14.3 14.6 Interest income (expense), net.............................. (2.3) 0.1 (1.2) 0.2 ----- ----- ----- ----- Earnings before income taxes.............................. 17.8 20.8 13.1 14.8 Income taxes................................................ 7.0 8.1 5.1 5.8 ----- ----- ----- ----- Net earnings.............................................. 10.8% 12.7% 8.0% 9.0% ===== ===== ===== =====
Three and Nine Month Periods Ended September 30, 1998 Compared to Corresponding Periods of the Prior Year Revenues. The Company's revenues consist principally of contractual percentages of overpayments recovered for clients that continue to be heavily concentrated in the retailing industry. Revenues increased 108.6% to $61.8 million for the third quarter of 1998, up from $29.6 million in the third quarter of 1997. For the nine months ended September 30, 1998, revenues were $133.9 million, or 75.1% higher than $76.4 million achieved in the corresponding period of 1997. Domestic revenues were $47.7 million in the third quarter of 1998, up 107.6% from $23.0 million in the third quarter of 1997. Of this 107.6% increase, (i) 11.6% was contributed by growth from existing retail, wholesale distribution and governmental agency clients (the Company's historical client base) which were served both in the third quarter of 1998 and 1997; (ii) 80.6% was derived from the seven domestic complementary recovery audit firms acquired during the last nine fiscal quarters; and (iii) 15.4% was contributed by growth from provision of services to new clients. For the first nine months of 1998 domestic revenues were $93.5 million, an increase of 58.9% over $58.8 million during the comparable period of 1997. The Company considers international operations to be all operations located outside of the United States. International revenues were $14.1 million in the third quarter of 1998, up 112.1% from $6.6 million in the third quarter of 1997. Of this 112.1% increase, (i) 89.3% was contributed by operations of Alma and Novexel, which were acquired in October 1997 and July 1998, respectively, and (ii) 22.8% resulted from existing operations, primarily from services provided to new clients. For the first nine months of 1998, international revenues were $40.4 million, a 129.5% increase over $17.6 million during the comparable period of 1997. The Company continues to believe that the rate of revenue growth for its international operations will significantly exceed its rate of domestic revenue growth for the foreseeable future if the revenue effect of acquired businesses, if any, is excluded. There can be no assurance, however, that recent international growth trends will continue. See "Forward-looking Statements." The Company has experienced and expects to continue to experience significant seasonality in its business. The Company typically realizes higher revenues and operating income in the last two quarters of its fiscal year. This trend is expected to continue and reflects the inherent purchasing and operational cycles of the retailing industry, which continues to be the source of the majority of the Company's revenues. The Company's recent acquisitions, including the October 1997 acquisition of Alma, the August 1998 acquisition of Loder, Drew & Associates and the October 1998 acquisition of Robert Beck & Associates are not expected to significantly affect this trend because these entities, in the aggregate, have historically experienced similar seasonality in revenues and operating income. Should the Company not continue to realize increased revenues in future third and fourth quarter periods, profitability for any affected quarter and the entire year could be 8 10 materially and adversely affected due to ongoing selling, general and administrative expenses that are largely fixed over the short term. See "Forward-looking Statements." Cost of Revenues. Cost of revenues consists principally of commissions paid or payable to the Company's auditors based upon the level of overpayment recoveries, and salaries and bonuses paid or payable to divisional and regional managers. Also included are other direct costs incurred by these personnel including rental of field offices, travel and entertainment, telephone, utilities, maintenance and supplies, and clerical assistance. Cost of revenues was 48.7% of revenues for the third quarter of 1998, down from 49.6% in the comparable quarter of 1997. For the nine months ended September 30, 1998 and 1997, cost of revenues was 51.1% and 51.8%, respectively. Domestically, cost of revenues as a percentage of revenues was 48.8% in the third quarter of 1998, down from 50.0% during the corresponding quarter of 1997. The 1998 improvement relates principally to the operations of Loder, Drew & Associates, which conducts its business at a lower cost of revenues ratio than the Company's core domestic retail, wholesale and government operations. For the nine months ended September 30, 1998, domestic cost of revenues as a percentage of revenues was 52.8%, up slightly from 52.6% during the corresponding quarter of 1997. Internationally, cost of revenues as a percentage of revenues remained flat at 48.3% in the third quarter of 1998 and the corresponding quarter of 1997. For the nine months ended September 30, 1998, international cost of revenues as a percentage of revenues was 47.1%, down from 48.7% for the corresponding period in 1997. Improvements in the 1998 nine month period related primarily to various components of fixed costs being spread over a rapidly growing revenue base. Selling, General and Administrative Expenses. Selling, general and administrative expenses include the expenses of sales and marketing activities, information technology services and the corporate data center, human resources, legal and accounting, administration, headquarters-related depreciation of property and equipment and amortization of intangibles. Selling, general and administrative expenses as a percentage of revenues increased to 31.2% in the third quarter of 1998, up from 29.7% in the third quarter of 1997. For the nine months ended September 30, 1998, selling, general and administrative expenses as a percentage of revenues was 34.6%, up from 33.6% in the comparable period of 1997. On a domestic basis, selling, general and administrative expenses as a percentage of revenues was 29.9% in the third quarter of 1998, up from 26.2% in the comparable quarter of 1997. For the first nine months of 1998, domestic selling, general and administrative expenses as a percentage of revenues increased to 33.0% from 30.2% in the corresponding period of 1997. The Company's 1998 domestic selling, general and administrative expenses percentages are higher than the comparable percentages in 1997 due to increased expenditures for various 1998 initiatives such as significantly expanded auditor hiring and training programs, significant additional resource commitments in the Company's information technology functions, and period costs associated with intensified mergers and acquisitions efforts. Internationally, selling, general and administrative expenses as a percentage of revenues improved to 35.7% of revenues in the third quarter of 1998, compared to 41.7% in the 1997 third quarter. For the nine month periods ended September 30, 1998 and 1997, this percentage likewise improved to 38.4% in 1998 from 45.1% in 1997. Improvements in 1998 related primarily to various components of fixed costs being spread over a rapidly growing revenue base. In connection with acquired business, the Company has recorded intangible assets including goodwill and deferred non-compete costs. Amortization of these intangible assets totaled $1.9 million and $365,000 for the quarters ended September 30, 1998 and 1997, respectively, and $3.7 million and $1.0 million for the nine month periods ended September 30, 1998 and 1997, respectively. Operating Income. Operating income increased 102.0% to $12.4 million in the third quarter of 1998, up from $6.1 million in the third quarter of 1997. For the nine months ended September 30, 1998, operating income increased 71.6% to $19.2 million, up from $11.2 million in the comparable period of 1997. Operating income did not grow proportionately with revenues during the 1998 periods due to increased domestic selling, general and administrative expenses associated with various planned initiatives, as previously discussed. 9 11 Interest Income (Expense), Net. The Company reported net interest expense of $1.5 million during the third quarter of 1998, compared to $14,000 of net interest income during the comparable quarter of 1997. For the nine months ended September 30, 1998, net interest expense was $1.6 million, compared to net interest income of $132,000 during the comparable period of 1997. The 1998 increase relates principally to interest on bank borrowings in connection with the Company's purchases of Alma, Medallion, Novexel, Cost Recovery Professionals and Loder, Drew & Associates, offset in part by interest income as a result of the follow-on public offering completed at the end of the first quarter. Earnings Before Income Taxes. Earnings before income taxes rose 78.0% and 55.5% in the quarter and nine-month period ended September 30, 1998, respectively, compared to the same periods of 1997. Earnings before income taxes did not grow proportionately with revenues during the 1998 periods due primarily to increased domestic selling, general and administrative expenses associated with various planned initiatives and additional net interest expense, as previously discussed. Income Taxes. The provisions for income taxes for all periods presented consist of federal, state and foreign income taxes at a composite effective rate which approximates 39.0%. Weighted-Average Shares Outstanding-Basic. The Company's weighted-average shares outstanding for purposes of calculating basic earnings per share increased to 22,963,000 during the third quarter of 1998, up from 18,277,000 during the third quarter of 1997. For the nine months ended September 30, 1998 the Company's weighted-average shares outstanding was 21,431,000 compared to 18,184,000 for the same period in 1997. These increases related primarily to 2,000,000 common shares issued in a public offering on March 16, 1998 and common shares issued in connection with acquisitions of various companies. LIQUIDITY AND CAPITAL RESOURCES On July 29, 1998 the Company replaced its existing $30.0 million senior bank credit facility with a five-year $150.0 million senior bank credit facility. Subject to adherence to standard loan covenants, borrowings under the new credit facility are available for working capital, acquisitions of other companies in the recovery audit industry, capital expenditures and for general corporate purposes. The Company transferred $5.4 million in outstanding borrowings to the new credit facility on July 29, 1998 and borrowed an additional $74.0 million on August 6, 1998 in connection with its acquisition of Loder, Drew & Associates, Inc. and for normal working capital needs. On September 18, 1998 the Company increased its credit facility from $150.0 million to $200.0 million and the facility was syndicated between ten prominent banking institutions led by NationsBank, N.A. as agent for the group. As of September 30, 1998 the Company had $80.9 million in outstanding borrowings under the credit facility. On October 29, 1998, the Company borrowed an additional $27.2 million to acquire Robert Beck & Associates, thereby increasing its outstanding credit facility borrowings to $108.1 million. Net cash used in operating activities was $3.9 million for the first nine months of 1998 and $2.0 million was provided by operations for the same period in 1997. The change was primarily a result of an increase in accounts receivable, offset in part by increased earnings, depreciation and amortization as a result of internal and acquired growth. Net cash used in investing activities was $97.1 million in the first nine months of 1998 and $7.2 million in the first nine months of 1997. In the first nine months of 1998, $13.0 million was used to acquire property and equipment (primarily computer-related equipment), and $84.1 million was paid in connection with business acquisitions. Of the $13.0 million in capital additions, $4.3 million relates to the large-scale systems development project discussed in Note E of notes to condensed consolidated financial statements. On August 6, 1998, the Company acquired all the assets and assumed certain liabilities of Loder Drew effective as of July 1, 1998. Loder Drew is an international recovery auditing firm primarily serving clients in the manufacturing, financial services and other non-retail sectors. Pursuant to the acquisition agreement, the initial consideration paid for Loder Drew consisted of $70.0 million in cash and 803,535 unregistered, restricted shares of the Company's common stock. Additionally, the former owners of Loder Drew will be eligible to receive additional purchase price consideration up to a maximum of $70.0 million in cash conditioned on the future performance of Loder Drew through December 31, 1999. Of this $70.0 million, up to $30.0 million is payable in the Spring of 1999 based on the financial performance of Loder Drew for the six months ending December 31, 1998. The Company considers it probable that the entire $30.0 million will ultimately become due and payable, and intends to borrow the entire amount of any required payment under its existing $200.0 million Credit Facility. During the seven quarters ended September 30, 1998, the Company acquired ten recovery audit firms. Additionally, the Company subsequently acquired Robert Beck & Associates along with certain related companies in October 1998. The Company is pursuing, and intends to continue to pursue, the acquisition of domestic and international businesses including both direct competitors and business providing other types of recovery services. There can be no assurance, however, that the Company will be successful in consummating further acquisitions due to factors such as receptivity of potential acquisition candidates and valuation issues. 10 12 Additionally, there can be no assurance that future acquisitions, if consummated, can be successfully assimilated into the Company. See "Forward-looking Statements." Net cash provided by financing activities was $96.7 million for the first nine months of 1998 and $603,000 for the same period in 1997. For the first nine months of 1998, net cash provided by financing activities consisted primarily of $79.2 million in credit facility borrowings and $41.2 million in net proceeds from the sale of common stock, offset in part by a $23.8 million March 1998 principal repayment under the credit facility. Net proceeds from the sale of common stock primarily relate to the Company's public sale of 2,000,000 newly issued common shares in an underwritten offering which became effective on March 16, 1998. The Company believes that its current working capital, availability remaining under its $200.0 million senior bank credit facility and cash flow generated from future operations will be sufficient to meet the Company's working capital and capital expenditure requirements through September 30, 1999 unless one or more acquisitions are consummated which require the Company to seek additional debt or equity financing. NEW ACCOUNTING STANDARDS Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information" establishes revised standards for the manner in which public business enterprises report information about operating segments. The Company does not believe that this Statement will significantly alter the segment disclosures it has historically provided. This Statement is effective for fiscal years beginning after December 15, 1997. Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts (collectively referred to as "derivatives"), and for hedging activities. This pronouncement is effective for all fiscal quarters beginning after June 15, 1999 although earlier application is encouraged. The Company has chosen to adopt this pronouncement effective with its fiscal year which begins January 1, 2000 and does not believe that it will materially affect its reported results of operations or financial condition upon adoption. Statement of Position 98-5, "Reporting on the Costs of Start-Up Activities" defines such costs and requires that they be expensed as incurred. This pronouncement is effective for financial statements for fiscal years beginning after December 15, 1998 although earlier application is encouraged. The Company has chosen to adopt this pronouncement effective January 1,1999 and does not believe that it will materially affect its reported results of operations or financial condition upon adoption. YEAR 2000 ISSUE Many existing computer programs use only two digits to identify a year in the date field. These programs were designed and developed without considering the impact of the upcoming change in the century. If not corrected, many computer applications could fail or create erroneous results by or at the Year 2000. The Company has undertaken, but not completed, an assessment of its Year 2000 issues. The assessment is scheduled for completion in January 1999, pending receipt of information from third parties whose software and hardware are integral components of the Company's information technology ("IT") systems. Preliminary analysis indicates that exposure is limited by the fact that the Company has virtually no active IT systems that are more than two years old and has no non-IT systems that could materially impact the Company's operations. The Company has a significant dependence on personal computer ("PC") systems both for internal accounting and for completion of audit engagements for its clients. It has recently completed an inventory of those PC systems and expended approximately $745,000 to replace older hardware and software which was possibly incapable of handling the Year 2000, and intends to expend another $170,000 in the fourth quarter of 1998 to complete the process. The Company has adopted and enforced corporate standards for operating systems and administrative applications. 11 13 The Company has not verified that its financial accounting software is capable of handling the Year 2000 because it made a decision totally independent of any Year 2000 issue to replace substantially all of its existing financial packages. Replacement of certain general accounting components is scheduled for completion in January 1999. Replacement of the balance of the financial accounting systems is scheduled for mid-year 1999. One of the existing internally developed financial system components is not ready for the Year 2000. The Company has initiated a complete rewrite of that component as part of its overall plan to replace the existing financial systems. This component is reasonably complex, and there is some risk that it will not be completed on schedule. Failure to complete the system by the end of 1999 could result in inability of the Company's systems to accurately determine its revenues or calculate incentive compensation for its employees. In the unlikely event that the replacement is not completed in time to handle Year 2000 transactions, the Company would be forced to hire temporary staff to perform the tasks manually. The potential cost cannot be estimated but the Company believes that the impact would be immaterial to its financial position or results of operations. Certain of the Company's international operations continue to utilize an older (not ready for Year 2000) version of the Company's proprietary recovery audit software. Plans are in place to upgrade all operations to the current version by mid-year 1999. The only significant issue in completing the upgrade is developing a training plan in the native language of the users. If the upgrade is not completed, affected international auditors may be required to utilize other less effective audit tools, techniques and processes, and the Company could suffer a loss of revenues outside the U.S. as a result. The Company has made and continues to make acquisitions of other companies in the recovery audit business. It is possible that the Company might acquire a business with a significant risk from Year 2000 issues. The Company's preliminary risk assessment does not include assessment of risks within Financiere Alma, S.A. ("Alma"), which was acquired by the Company in October 1997. Alma's financial systems are separate from and independent of the Company's other financial systems, and are subject to similar risks which have yet to be specifically identified or quantified. Should a subsequent Year 2000 Alma risk assessment indicate the existence of significant problems, the Company could experience a loss of revenues from Alma's operations. The Company's long-range plan includes conversion of Alma's financial systems to the same packaged software utilized by the rest of the Company. The Company's business operations involve working with outputs from its clients' financial systems. Each of the Company's clients is assessing its own risks related to Year 2000 issues which may cause them to upgrade or replace certain of their systems. The Company believes that its investment in advanced technology is a competitive advantage as clients and potential clients are implementing new and more sophisticated accounts payable systems. In the case of clients which experience a temporary inability to process payables due to Year 2000 issues, the Company's risk of lost revenues is mitigated by the fact that it audits in arrears and would have advance notice of client problems in making vendor payments. FORWARD-LOOKING STATEMENTS Statements made in this Form 10-Q for the quarter and nine month period ended September 30, 1998 which look forward in time involve risks and uncertainties and are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such risks and uncertainties include the Company's assessment of the state of its Year 2000 readiness, anticipated expenditures and potential risks, the adequacy of the Company's current working capital and other available sources of funds, the ability of the Company to successfully implement its operating strategy and acquisition strategy, the Company's ability to manage rapid expansion, including, without limitation, the assimilation of acquired companies, changes in economic cycles, competition from other companies, changes in laws and governmental regulations applicable to the Company and other risk factors detailed in the Company's Securities and Exchange commission filings, including the Company's Prospectus dated March 16, 1998 contained in its Registration Statement on Form S-3 (No. 333-46225). 12 14 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. THE PROFIT RECOVERY GROUP INTERNATIONAL, INC. Dated: December 4, 1998 By: /s/ DONALD E. ELLIS, JR. -------------------------------------------- Donald E. Ellis, Jr. Senior Vice President, Treasurer and Chief Financial Officer (principal financial officer) Dated: December 4, 1998 By: /s/ MICHAEL R. MELTON -------------------------------------------- Michael R. Melton Vice President -- Finance (principal accounting officer)
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