-----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, FRWjgCMfltl6MmFAHnE+3iy6t63akYa71ktErMA8CSrfoE0I8PzZydKsPJ3dKHVa yUbLpQ7qd0eIETnB7Fg/BQ== 0000950144-99-009978.txt : 19990813 0000950144-99-009978.hdr.sgml : 19990813 ACCESSION NUMBER: 0000950144-99-009978 CONFORMED SUBMISSION TYPE: 10-Q/A PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990331 FILED AS OF DATE: 19990812 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: 99685837 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 --------------------- (MARK ONE) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1999 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 April 30, 1999, the latest practicable date, was 27,161,774. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2 THE PROFIT RECOVERY GROUP INTERNATIONAL, INC. AND SUBSIDIARIES FORM 10-Q/A QUARTER ENDED MARCH 31, 1999 AMENDMENT AND RESTATEMENT On July 19, 1999, The Profit Recovery Group International, Inc. and subsidiaries (the "Company") announced a change in its method of accounting for certain aspects of its revenue recognition. In accordance with applicable requirements of generally accepted accounting principles, the Company's financial statements for all interim periods in 1999 must be restated to conform to the new revenue recognition method, but financial statements (both interim and annual) for all fiscal periods ending prior to January 1, 1999 are not permitted to be similarly restated. Accordingly, the Company's Form 10-Q for the quarter ended March 31, 1999 is being amended and restated to reflect this accounting change, as more fully discussed in Note H herein. INDEX
PAGE NO. -------- PART I. Financial Information....................................... 1 1 Item 1. Financial Statements (Unaudited).................... 1 Condensed Consolidated Statements of Operations -- Three months ended March 31, 1999 and 1998............. 2 Condensed Consolidated Balance Sheets -- March 31, 1999 and December 31, 1998................... 3 Condensed Consolidated Statements of Cash Flows -- Three months ended March 31, 1999 and 1998............. 4 Notes to Condensed Consolidated Financial Statements...... 9 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations................. 14 Item 3. Quantitative and Qualitative Disclosures about Market Risk......................................... PART II. Other Information........................................... 14 Signatures............................................................ 16
3 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS (UNAUDITED) THE PROFIT RECOVERY GROUP INTERNATIONAL, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED)
THREE MONTHS ENDED MARCH 31, ------------------- 1999 1998 -------- ------- Revenues.................................................... $ 56,615 $33,144 Cost of revenues............................................ 31,720 17,956 Selling, general and administrative expenses................ 20,569 13,029 -------- ------- Operating income.......................................... 4,326 2,159 Interest (expense) income, net.............................. (844) (324) -------- ------- Earnings before income taxes and cumulative effect of accounting change...................................... 3,482 1,835 Income taxes................................................ 1,371 715 -------- ------- Earnings before cumulative effect of accounting change.... 2,111 1,120 Cumulative effect of accounting change (Note H)............. (29,195) -- -------- ------- Net earnings (loss)....................................... $(27,084) $ 1,120 ======== ======= Basic earnings (loss) per share (Note B): Earnings before cumulative effect of accounting change.... $ 0.08 $ 0.06 Cumulative effect of accounting change.................... (1.10) -- -------- ------- Net earnings (loss)....................................... $ (1.02) $ 0.06 ======== ======= Diluted earnings (loss) per share (Note B): Earnings before cumulative effect of accounting change.... $ 0.08 $ 0.06 Cumulative effect of accounting change.................... (1.06) -- -------- ------- Net earnings (loss)....................................... $ (0.98) $ 0.06 ======== ======= Weighted-average shares outstanding (Note B): Basic..................................................... 26,517 19,540 ======== ======= Diluted................................................... 27,511 20,000 ======== ======= Pro forma amounts, assuming the new accounting method is applied retroactively: Net earnings (loss)....................................... $ 2,111 $(1,246) ======== ======= Basic earnings (loss) per share........................... $ 0.08 $ (0.06) ======== ======= Diluted earnings (loss) per share......................... $ 0.08 $ (0.06) ======== =======
See accompanying notes to condensed consolidated financial statements. 1 4 THE PROFIT RECOVERY GROUP INTERNATIONAL, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA) (UNAUDITED)
MARCH 31, DECEMBER 31, 1999 1998 --------- ------------ ASSETS Current assets: Cash and cash equivalents (Note D)........................ $ 28,986 $ 28,344 Receivables: Billed contract receivables............................. 27,045 24,917 Unbilled contract receivables........................... -- 69,432 Employee advances....................................... 6,913 6,791 -------- -------- Total receivables.................................. 33,958 101,140 -------- -------- Prepaid expenses and other current assets................. 1,815 2,520 Deferred income taxes..................................... 4,484 -- -------- -------- Total current assets............................... 69,243 132,004 -------- -------- Property and equipment: Computer and other equipment.............................. 30,155 26,123 Furniture and fixtures.................................... 3,231 2,738 Leasehold improvements.................................... 5,046 4,410 -------- -------- 38,432 33,271 Less accumulated depreciation and amortization............ 13,098 10,514 -------- -------- 25,334 22,757 -------- -------- Noncompete agreements, less accumulated amortization........ 2,202 2,475 Deferred loan costs, less accumulated amortization.......... 1,542 1,802 Goodwill, less accumulated amortization..................... 218,254 223,508 Deferred income taxes....................................... 4,644 3,158 Other assets................................................ 2,312 1,678 -------- -------- $323,531 $387,382 ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Note payable to bank...................................... $ 49 $ 49 Current installments of long-term debt.................... 362 630 Accounts payable and accrued expenses..................... 9,585 13,556 Accrued business acquisition consideration (Note G)....... -- 30,000 Accrued payroll and related expenses...................... 17,550 44,678 Deferred income taxes..................................... -- 13,310 Deferred tax recovery audit revenue....................... 1,219 1,238 -------- -------- Total current liabilities.......................... 28,765 103,461 Long-term debt, excluding current installments.............. 58,567 112,886 Deferred compensation....................................... 3,642 3,453 Other long-term liabilities................................. 1,418 2,078 -------- -------- Total liabilities.................................. 92,392 221,878 -------- -------- Shareholders' equity (Note E): Preferred stock, no par value. Authorized 1,000,000 shares; no shares issued or outstanding in 1999 and 1998.................................................... -- -- Common stock, no par value; stated value $.001 per share. Authorized 60,000,000 shares; issued and outstanding 26,977,642 in 1999 and 24,037,919 in 1998............... 27 24 Additional paid-in capital................................ 228,745 133,725 Retained earnings......................................... 7,069 34,153 Accumulated other comprehensive loss...................... (4,702) (2,398) -------- -------- Total shareholders' equity......................... 231,139 165,504 -------- -------- Contingency (Note G) $323,531 $387,382 ======== ========
See accompanying notes to condensed consolidated financial statements. 2 5 THE PROFIT RECOVERY GROUP INTERNATIONAL, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (AMOUNTS IN THOUSANDS) (UNAUDITED)
THREE MONTHS ENDED MARCH 31, -------------------- 1999 1998 -------- -------- Cash flows from operating activities: Net earnings (loss)....................................... $(27,084) $ 1,120 Adjustments to reconcile net earnings (loss) to net cash used in operating activities: Cumulative effect of accounting change................. 29,195 -- Depreciation and amortization.......................... 5,307 1,889 Deferred compensation expense.......................... 189 151 Deferred income taxes.................................. (607) 502 Foreign translation adjustments........................ (2,304) (773) Changes in assets and liabilities, net of effects of acquisitions: Receivables.......................................... 556 (3,338) Prepaid expenses and other current assets............ 705 1,081 Other assets......................................... (415) (40) Accounts payable and accrued expenses................ (3,821) 1,792 Accrued payroll and related expenses................. (5,564) (4,834) Deferred tax recovery audit revenue.................. (19) (17) Other long-term liabilities.......................... (660) 9 -------- -------- Net cash used in operating activities............. (4,522) (2,458) -------- -------- Cash flows from investing activities: Purchases of property and equipment....................... (5,122) (2,294) Acquisitions of businesses (net of cash acquired) -- (Note G)..................................................... (30,150) (5,354) -------- -------- Net cash used in investing activities............. (35,272) (7,648) -------- -------- Cash flows from financing activities: Net increase in note payable to bank...................... -- 72 Proceeds from issuance of long-term debt.................. 41,933 -- Repayments of long-term debt.............................. (96,520) (24,788) Net proceeds from issuance of common stock................ 95,023 40,726 -------- -------- Net cash provided by financing activities......... 40,436 16,010 -------- -------- Net change in cash and cash equivalents........... 642 5,904 Cash and cash equivalents at beginning of period............ 28,344 19,386 -------- -------- Cash and cash equivalents at end of period.................. $ 28,986 $ 25,290 ======== ======== Supplemental disclosures of cash flow information: Cash paid during the period for interest.................. $ 814 $ 402 ======== ======== Cash paid (refunds received), net during the period for income taxes........................................... $ 615 $ (653) ======== ======== Supplemental disclosure of noncash investing and financing activities: In the first quarter of 1998, the Company purchased the net operating assets of Ginger Quill, Inc., d/b/a Precision Data Link. In conjunction with this acquisition, the Company assumed liabilities as follows: Fair value of assets acquired........................ $ 11,623 Cash paid for the acquisition........................ (5,354) Fair value of shares issued for the acquisition...... (6,119) -------- Liabilities assumed............................... $ 150 ========
See accompanying notes to condensed consolidated financial statements. 3 6 THE PROFIT RECOVERY GROUP INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 1999 (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 month period ended March 31, 1999 are not necessarily indicative of the results that may be expected for the year ending December 31, 1999. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company's Form 10-K for the year ended December 31, 1998. As indicated in Note H, the Company has chosen, retroactive to January 1, 1999, to recognize revenue on all of its currently existing operations when it invoices clients for its fee. The Company had previously recognized revenue from services provided to its historical client base at the time overpayment claims were presented to and approved by its clients. In accordance with applicable requirements of generally accepted accounting principles, financial statements for periods prior to 1999 have not been restated. AS A RESULT, CERTAIN FINANCIAL STATEMENT AMOUNTS FOR 1999 INTERIM PERIODS WILL NOT BE DIRECTLY COMPARABLE TO CORRESPONDING AMOUNTS FOR THE 1998 INTERIM PERIODS. NOTE B -- EARNINGS PER SHARE The following table sets forth the computations of basic and diluted earnings per share for the three month periods ended March 31, 1999 and March 31, 1998 (in thousands, except for earnings per share information):
THREE MONTHS ENDED MARCH 31, ------------------ 1999 1998 -------- ------- Numerator for both basic earnings (loss) per share and diluted earnings (loss) per share: Earnings before cumulative effect of accounting change.... $ 2,111 $ 1,120 Cumulative effect of accounting change.................... (29,195) -- -------- ------- Net earnings (loss)............................... $(27,084) $ 1,120 ======== ======= Denominator: Denominator for basic earnings (loss) per share -- weighted-average shares outstanding........... 26,517 19,540 Effect of dilutive securities -- employee stock options... 994 460 -------- ------- Denominator for diluted earnings (loss) per share......... 27,511 20,000 ======== ======= Basic earnings (loss) per share: Earnings before cumulative effect of accounting change.... $ 0.08 $ 0.06 Cumulative effect of accounting change.................... (1.10) -- -------- ------- Net earnings (loss)............................... $ (1.02) $ 0.06 ======== ======= Diluted earnings (loss) per share: Earnings before cumulative effect of accounting change.... $ 0.08 $ 0.06 Cumulative effect of accounting change.................... (1.06) -- -------- ------- Net earnings (loss)............................... $ (0.98) $ 0.06 ======== =======
4 7 THE PROFIT RECOVERY GROUP INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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 March 31, 1999 and 1998, the Company's consolidated comprehensive income (loss) was $(29.3) million and $648,000, respectively. The difference between consolidated comprehensive income (loss), as disclosed here, and traditionally-determined consolidated net earnings (loss), as set forth on the accompanying Condensed Consolidated Statements of Operations, results from foreign currency translation adjustments. NOTE D -- CASH EQUIVALENTS Cash equivalents at March 31, 1999 and December 31, 1998 included $4.0 million and $6.3 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 March 31, 1999 matured and was settled on April 1, 1999. In addition, cash equivalents at March 31, 1999 and December 31, 1998 also included $6.3 million and $7.1 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 -- FOLLOW-ON COMMON STOCK OFFERINGS On March 16, 1998, the Company sold 2.0 million newly issued shares of its common stock and certain selling shareholders sold an additional 2.4 million 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. On January 8, 1999, the Company sold 2.7 million newly issued shares of its common stock and certain selling shareholders sold an additional 800,000 outstanding shares in an underwritten follow-on offering. The offering was priced at $34.00 per share. The proceeds of the offering (net of underwriting discounts and commissions) were distributed by the underwriting syndicate on January 13, 1999. The net proceeds from the 2.7 million shares sold by the Company, combined with the net proceeds from an additional 191,000 shares subsequently sold by the Company in late January 1999 upon exercise by the underwriting syndicate of their over-allotment option, were applied to reduce outstanding borrowings under the Company's $200.0 million bank credit facility. Additionally, 334,000 shares were sold in late January 1999 by certain selling shareholders in connection with the over-allotment option. The Company received no proceeds from the sale of such shares. 5 8 THE PROFIT RECOVERY GROUP INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE F -- OPERATING SEGMENTS AND RELATED INFORMATION The Company adopted SFAS No. 131, "Disclosures About Segments of an Enterprise and Related Information," in 1998 which changes the methodology by which the Company reports information about its operating segments and requires limited interim period reporting. The Company has three reportable operating segments consisting of Accounts Payable Services, Freight Services and Tax Services. Each segment represents a strategic business unit that offers a different type of recovery audit service. These business units are managed separately because each business requires different technology and marketing strategies. Accounts Payable Services consist of the review of client accounts payable disbursements to identify and recover overpayments. This operating segment includes accounts payable services provided to retailers, wholesale distributors and governmental agencies (the Company's historical client base) and accounts payable services provided to various other types of business entities by the Company's Loder Drew & Associates division. The Accounts Payable Services operating segment conducts business in twenty-three countries. Freight Services consist primarily of various businesses acquired by the Company in 1998 and 1997 which audit freight-related disbursements to identify and recover overpayments. Areas of current specialization include ocean freight, ground freight and overnight freight. This operating segment currently serves primarily businesses located in the United States, although international expansion is planned. Tax Services consist primarily of various European businesses acquired by the Company in 1998 and 1997 which audit tax-related disbursements to identify and recover overpayments (primarily within France) and assist business entities throughout Europe in securing available grants. The Company evaluates the performance of its operating segments based upon revenues and operating income. Intersegment revenues are not significant. Segment information for the quarters ended March 31, 1999 and 1998 follows (in thousands):
ACCOUNTS PAYABLE FREIGHT TAX SERVICES SERVICES SERVICES TOTAL -------- -------- -------- ------- 1999 Revenues.......................................... $46,669 $3,975 $5,971 $56,615 Operating income.................................. 1,986 2,137 203 4,326 1998 Revenues.......................................... $28,271 $ 496 $4,377 $33,144 Operating income.................................. 1,586 369 204 2,159
NOTE G -- ACQUISITIONS On March 20, 1998, the Company acquired Ginger Quill, Inc., d/b/a Precision Data Link, a 22 person air freight recovery audit firm based in Salt Lake City, Utah. This transaction was accounted for as a purchase and involved both cash and common stock consideration. On August 6, 1998, the Company acquired all the assets and assumed certain liabilities of Loder Drew & Associates, Inc. ("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 agreements, the initial consideration paid for Loder Drew consisted of $70.0 million in cash and 803,535 restricted, unregistered shares of the Company's common stock. Additionally, the acquisition agreements provided that the former owners of Loder Drew would be eligible to receive additional purchase price consideration up to a maximum of $70.0 million in cash conditioned on the performance of Loder Drew 6 9 THE PROFIT RECOVERY GROUP INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) through December 31, 1999. Of this $70.0 million, $30.0 million was based on the financial performance of Loder Drew for the six months ended December 31, 1998. Since the financial performance of Loder Drew for the six months ended December 31, 1998 exceeded applicable thresholds, the entire $30.0 million was recorded on the Company's December 31, 1998 Consolidated Balance Sheet as additional goodwill and corresponding accrued business acquisition consideration. The $30.0 million was paid in March 1999 (along with related accrued interest) from borrowings under the Company's existing $200.0 million credit facility. Of the above-mentioned $70.0 million, up to $40.0 million in additional purchase price consideration is payable in the Spring of 2000 based upon the financial performance of the Loder Drew division during calendar 1999. NOTE H -- ACCOUNTING CHANGE Due to the Company's continuing and substantial expansion beyond its historical client base and original service offerings, as well as the administrative desirability of standardizing revenue recognition practices, the Company has chosen, retroactive to January 1, 1999, to recognize revenue on all of its currently existing operations when it invoices clients for its fee. The Company had previously recognized revenue from services provided to its historical client base (consisting primarily of retailers, wholesale distributors and governmental entities) at the time overpayment claims were presented to and approved by its clients. In effecting this change, the Company has reported, as of January 1, 1999, a non-cash, after-tax change of $29.2 million as the cumulative effect of a change in accounting principle. The previously issued financial statements for the three months ended March 31, 1999 have been restated to give retroactive effect to the change. The cumulative effect of the accounting change was derived as follows: Unbilled contract receivables at December 31, 1998, as adjusted.............................................. $69,432 Less: auditor payroll accrual at December 31, 1998, associated with unbilled contract receivables......... (21,564) ------- Subtotal............................................... 47,868 Less: related income tax effect at 39.0%............... (18,673) ------- Cumulative effect of accounting change................. $29,195 =======
The Company's Revenue Recognition Policy as previously stated in Note 1(c) to its annual consolidated financial statements included in Form 10-K for the year ended December 31, 1998 has been subsequently revised, effective January 1, 1999, to read as follows: The Company's revenues are based on specific contracts with its clients. Such contracts generally specify (a) time periods covered by the audit, (b) nature and extent of audit service to be provided by the Company, (c) client's duties in assisting and cooperating with the Company, and (d) fee payable to the Company generally expressed as a specified percentage of the amounts recovered by the client resulting from liability overpayment claims identified. In the case of prospective facilities audits such as telecommunications tariff negotiations conducted by the Company on behalf of its clients, contracts typically provide for a percentage-of-savings fee which is calculated and fixed at the time the new tariff agreement is executed, and is payable to the Company on a current basis. In addition to contractual provisions, most clients also establish specific procedural guidelines which the Company must satisfy prior to submitting claims for client approval. These guidelines are unique to each client and impose specific requirements on the Company such as adherence to vendor interaction protocols, provision of advance written notification to vendors of forthcoming claims, securing written claim validity concurrence from designated client personnel and, in limited cases, securing written claim validity concurrence from the involved vendors. Approved claims are processed by clients and generally taken as credits against outstanding payables or future purchases from the vendors involved. The Company then invoices its clients for a contractually stipulated percentage of amounts recovered. 7 10 THE PROFIT RECOVERY GROUP INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Invoice basis of revenue recognition The Company recognizes revenues when it invoices clients for its fee. For the three months ended March 31, 1999, revenues recognized on the invoice basis represented 100% of consolidated revenues. Submitted claims basis of revenue recognition With respect to the Company's contemplated future operations to secure refunds pursuant to statute or regulation of amounts paid by clients to governmental entities, the Company will recognize revenues at the time refund claims containing all required documentation are filed with appropriate governmental agencies in those instances where historical refund disallowance rates can be accurately estimated. The Company will record its fee participation in these refunds at estimated net realizable value without reserves. Accordingly, adjustments to uncollectible fee estimates will be charged or credited to earnings, as appropriate. The Company has not yet acquired or developed operations for which this submitted claims basis of revenue recognition would be applicable. 8 11 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. As indicated in Note H contained elsewhere in this Form 10-Q, the Company has chosen, retroactive to January 1, 1999, to recognize revenue on all of its currently existing operations when it invoices clients for its fee. The Company had previously recognized revenue from services provided to its historical client base at the time overpayment claims were presented to and approved by its clients. In accordance with applicable requirements of generally accepted accounting principles, financial statements for periods prior to 1999 will not be restated. AS A RESULT, CERTAIN FINANCIAL STATEMENT AMOUNTS FOR 1999 INTERIM PERIODS WILL NOT BE DIRECTLY COMPARABLE TO CORRESPONDING AMOUNTS FOR THE 1998 INTERIM PERIODS. OVERVIEW The Company is a leading provider of accounts payable and other recovery audit services to large businesses and certain governmental agencies having numerous payment transactions with many vendors. These businesses include retailers, manufacturers, wholesale distributors, technology companies and healthcare providers. In businesses with large purchase volumes and continuously fluctuating prices, some small percentage of erroneous overpayments to vendors is inevitable. In addition, the complexity of various tax laws results in overpayments to governmental agencies. Services such as freight, telecommunications and utilities provided to businesses under complex pricing arrangements also can result in overpayments. All of these overpayments result in "lost profits." The Company's trained, experienced audit specialists use sophisticated proprietary technology and advanced audit techniques and methodologies to identify overpayments to vendors and tax authorities. The Company receives a contractual percentage of overpayments it identifies and its clients recover. RESULTS OF OPERATIONS The following table presents, for the periods indicated, certain items in the condensed consolidated statements of operations as a percentage of revenues.
THREE MONTHS ENDED MARCH 31, -------------- 1999 1998 ----- ----- Revenues.................................................... 100.0% 100.0% Cost of revenues............................................ 56.0 54.2 Selling, general and administrative expenses................ 36.3 39.3 ----- ----- Operating income.................................. 7.7 6.5 Interest (expense) income, net.............................. (1.5) (1.0) ----- ----- Earnings before income taxes...................... 6.2 5.5 Income taxes................................................ 2.5 2.1 ----- ----- Earnings before cumulative effect of accounting change........................................... 3.7 3.4 Cumulative effect of accounting change...................... (51.6) -- ----- ----- Net earnings (loss)............................... (47.9)% 3.4% ===== =====
Three Month Period Ended March 31, 1999 Compared to Corresponding Period 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 retail industry. Revenues increased 70.8% to $56.6 million in the first quarter of 1999, up from $33.1 million in the first quarter of 1998. 9 12 Domestic revenues were $43.0 million in the first quarter of 1999, up 104.1% from $21.1 million in the first quarter of 1998. Of this 104.1% increase, 41.5% was contributed by growth in the Company's traditional retail, wholesale distribution and governmental agency business, and 62.6% was derived from companies acquired primarily in 1998 in new areas of audit emphasis (e.g., freight). Although the October 1998 acquisition of Robert Beck & Associates contributed substantially to first quarter domestic revenue growth in the Company's traditional retail, wholesale distribution and governmental agency business, it is no longer practicable to separate the effect of this former block of business since the clients, personnel and operations of Robert Beck & Associates have been assimilated into the Company's domestic operations effective January 1, 1999. The Company considers international operations to be all operations located outside of the United States. International revenues were $13.6 million in the first quarter of 1999, up 12.5% from $12.0 million in the first quarter of 1998. Most of this increase related to the Company's European operations. 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 impact of acquired businesses is excluded. There can be no assurance, however, that 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 principal industry served by the Company. The Company's recent larger 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 revenue 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 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 56.0% of revenues for the first quarter of 1999, up from 54.2% in the comparable quarter of 1998. Domestically, cost of revenues as a percentage of revenues was 54.2% in the first quarter of 1999, down from 58.9% during the corresponding quarter of 1998. The 1999 reduction related primarily to the newly-acquired operations of Loder, Drew & Associates and the Company's freight division which operated at lower cost of revenue percentages than the Company's traditional retail, wholesale distribution and governmental agency business. Internationally, cost of revenues as a percentage of revenues was 61.9% in the first quarter of 1999, up from 46.0% in the first quarter of the prior year. This increase resulted from significantly reduced revenues recorded by the Company from its historical client base (consisting primarily of retailers, wholesale distributors and governmental entities) in the first quarter of 1999 under the "invoice method" of revenue recognition as compared to the "accepted claims method" employed in the first quarter of 1998 (see Note H in this Form 10-Q/A). 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 decreased to 36.3% in the first quarter of 1999, down from 39.3% in the comparable period of 1998. 10 13 Domestic selling, general and administrative expenses as a percentage of revenues was 31.9% in the first quarter of 1999, down significantly from 38.0% in the year earlier period due primarily to considerable revenue growth. Internationally, selling, general and administrative expenses as a percentage of revenues increased substantially to 50.4% in the first quarter of 1999, up from 41.6% in the comparable quarter of 1998. This increase resulted from significantly reduced revenues recorded by the Company from its historical client base (consisting primarily of retailers, wholesale distributors and governmental entities) in the first quarter of 1999 under the "invoice method" of revenue recognition as compared to the "accepted claims method" employed in the first quarter of 1998 (see Note H in this Form 10-Q/A). In connection with acquired businesses, the Company has recorded intangible assets including goodwill and deferred non-compete costs. Amortization of these intangible assets totaled $2.8 million in the first quarter of 1999, and $848,000 during the first quarter of 1998. Operating Income. Operating income increased 100.4% to $4.3 million in the first quarter of 1999, up from $2.2 million in the comparable 1998 quarter. As percentage of total revenues, operating income increased to 7.7% in the first quarter of 1999, up from 6.5% in the first quarter of 1998. The components of this improvement have been discussed above. Interest (Expense) Income, Net. The Company incurred net interest expense of $844,000 in the first quarter of 1999, up from $324,000 in the first quarter of 1998. This increase related almost totally to interest expense incurred on the Company's $200.0 million bank credit facility in connection with acquired companies. Earnings Before Income Taxes and Cumulative Effect of Accounting Change. Earnings before income taxes and cumulative effect of accounting change rose 89.8% in the quarter ended March 31, 1999 as compared to the first quarter of 1998. This improvement resulted from increased revenues and an improved operating margin during the 1999 quarter. Income Taxes. The provisions for income taxes for the first quarters of both 1999 and 1998 consist of federal, state and foreign income taxes at the Company's composite effective rate of approximately 39%. Cumulative Effect of Accounting Change. As more fully described in Note H to this Form 10-Q/A, the Company has chosen, retroactive to January 1, 1999, to change its method of accounting for certain aspects of its revenue recognition. In effecting this change, the Company has reported, as of January 1, 1999, a non-cash, after-tax charge of $29.2 million as the cumulative effect of a change in accounting principle. Weighted-Average Shares Outstanding -- Basic. The Company's weighted-average shares outstanding for purposes of calculating basic earnings per share increased to 26.5 million during the first quarter of 1999, up 7.0 million shares from 19.5 million shares during the first quarter of 1998. This increase was comprised primarily of (i) 4.9 million registered shares collectively issued by the Company in underwritten stock offerings completed in January 1999 and March 1998 and, (ii) restricted, unregistered shares issued by the Company during the three quarters ended December 31, 1998 in connection with various acquired companies. The Company did not complete any business acquisitions during the first quarter of 1999. 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 general corporate purposes. The Company transferred $5.4 million in outstanding borrowings to the new credit facility on July 29, 1998. 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 banking institutions led by NationsBank, N.A. as agent for the group. In January 1999, the Company completed a public offering of its common stock. This offering provided net proceeds to the Company of $92.8 million, all of which were used to repay credit facility borrowings. As of March 31, 1999, the Company had outstanding principal borrowings of $57.5 million under this $200.0 million credit facility. 11 14 Net cash used in operating activities was $4.5 million in the first quarter 1999 and $2.5 million during the corresponding quarter of 1998. The first quarter is typically the lowest quarter of each year in terms of cash collections on accounts receivable. Additionally, payroll-related liabilities at December 31, 1998 were unusually high since the final payroll for that year took place during mid-December. Accordingly, an unusually large level of cash disbursements to auditors and other employees was made in January 1999 pertaining to December 31, 1998 obligations. Net cash used in investing activities was $35.3 million during the first quarter of 1999, up considerably from $7.6 million during the corresponding quarter of 1998. The increase related primarily to $30.0 million of additional purchase price consideration paid to the former owners of Loder Drew & Associates, as more fully discussed in a subsequent paragraph. Net cash provided by financing activities was $40.4 million during the first quarter of 1999, and $16.0 million during the first quarter of 1998. The net cash provided by financing activities during each of the two first quarter periods related primarily to follow-on common stock offerings as 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 agreements, the initial consideration paid for Loder Drew consisted of $70.0 million in cash and 803,535 restricted, unregistered shares of the Company's common stock. Additionally, the acquisition agreements provided that the former owners of Loder Drew would be eligible to receive additional purchase price consideration up to a maximum of $70.0 million in cash conditioned on the performance of Loder Drew through December 31, 1999. Of this $70.0 million, $30.0 million was based on the financial performance of Loder Drew for the six months ended December 31, 1998. Since the financial performance of Loder Drew for the six months ended December 31, 1998 exceeded applicable thresholds, the entire $30.0 million was recorded on the Company's December 31, 1998 Consolidated Balance Sheet as additional goodwill and corresponding accrued business acquisition consideration. The $30.0 million was paid in March 1999 (along with related accrued interest) from borrowings under the Company's existing $200.0 million credit facility. Of the above-mentioned $70.0 million, up to $40.0 million in additional purchase price consideration is payable in the Spring of 2000 based upon the financial performance of the Loder Drew division during calendar 1999. The Company is presently unable to estimate what portion, if any, of this $40.0 million will ultimately become due and payable since the required financial performance payment thresholds for 1999 significantly exceed Loder Drew's actual performance for 1998. The Company currently anticipates that any portion of the $40.0 million which ultimately becomes due and payable will be borrowed under its existing $200.0 million credit facility to the extent that excess cash derived from the increased financial performance of the Loder Drew division is insufficient to satisfy any required payment. During the two year period ended December 31, 1998, the Company acquired thirteen recovery audit firms. The Company is pursuing, and intends to continue to pursue, the acquisition of domestic and international businesses including both direct competitors and businesses 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. Additionally, there can be no assurance that future acquisitions, if consummated, can be successfully assimilated into the Company. The Company from time to time issues restricted, unregistered common stock in partial consideration for the business entities it acquires. The timing and quantity of any future securities issuances are not susceptible to estimation. Additionally, if the Company is successful in arranging for future acquisitions which individually or collectively are large relative to the Company's size, it may need to secure additional debt or equity financing. There are no current plans to seek such financing. The Company believes that its current working capital, availability remaining under its $200.0 million credit facility and cash flow generated from future operations will be sufficient to meet the Company's working 12 15 capital and capital expenditure requirements through March 31, 2000 unless one or more acquisitions are consummated which require the Company to seek additional debt or equity financing. NEW ACCOUNTING STANDARD 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, and for hedging activities. This pronouncement is effective for all fiscal quarters of fiscal years beginning after June 15, 2000 although earlier application is encouraged. The Company has chosen to adopt this pronouncement effective with its fiscal year which begins January 1, 2001 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 completed an assessment of its Year 2000 issues. The assessment indicates that exposure is limited by the fact that the Company has virtually no active information technology systems that are more than two years old and has no non-information technology systems that could materially impact the Company's operations. The Company has a significant dependence on personal computer systems both for internal accounting and for completion of audit engagements for its clients. It recently has completed an inventory of those personal computer systems and expended approximately $750,000 during 1998 to replace older hardware and software which was possibly not Year 2000 compliant. Another $250,000 is expected to be spent in 1999 to complete the required upgrades. The Company has adopted and enforced corporate standards for operating systems and administrative applications. The Company has not verified that its financial accounting software is Year 2000 compliant 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 was completed in January 1999. Replacement of the balance of the financial accounting systems is scheduled for mid-year 1999. As of March 31, 1999, the Company has estimated that it will incur additional capital expenditures of approximately $2.5 million through 1999 to complete its financial accounting systems project. Any portion of this cost which cannot be funded from current operations will be financed under the Company's existing $200.0 million credit facility. One of the existing internally developed financial system components is not Year 2000 compliant. 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 version of the Company's proprietary recovery audit software which is not Year 2000 compliant. 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 13 16 issues. The Company's due diligence efforts related to acquisitions include an assessment of risk from Year 2000 issues. The Company's long-range plan includes conversion of the financial systems of acquired companies 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 Management's Discussion and Analysis of Financial Condition and Results of Operations 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 following: - the Company's assessment of the state of its Year 2000 readiness; - unanticipated 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 this Form 10-Q and in the risk factors section of the Company's Prospectus dated January 8, 1999 contained in its Registration Statement on Form S-3 (No. 333-67711). ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company has not conducted transactions, established commitments or entered into relationships requiring disclosures beyond those provided elsewhere in this Form 10-Q. PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS None. ITEM 2. CHANGES IN SECURITIES None. ITEM 3. DEFAULTS UPON SENIOR SECURITIES None. 14 17 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. ITEM 5. OTHER INFORMATION None. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 3.1 -- Articles of Incorporation of the Registrant (incorporated by reference to Exhibit 3.1 to Registrant's March 26, 1996 registration statement number 333-1086 on Form S-1). 3.2 -- Bylaws of the Registrant (incorporated by reference to Exhibit 3.2 to Registrant's March 26, 1996 registration statement number 333-1086 on Form S-1). 4.1 -- Specimen Common Stock Certificate (incorporated by reference to Exhibit 4.1 to Registrant's March 16, 1998 registration statement number 333-46225 of Form S-3). 27.1 -- Financial Data Schedule, as restated for the effect of the change in accounting principle regarding revenue recognition (for SEC use only).
(b) Reports on Form 8-K None. 15 18 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: August 12, 1999 By: /s/ SCOTT L. COLABUONO -------------------------------------------- Scott L. Colabuono Executive Vice President and Chief Financial Officer (principal financial officer) Dated: August 12, 1999 By: /s/ MICHAEL R. MELTON -------------------------------------------- Michael R. Melton Vice President -- Finance (principal accounting officer)
16 EX-27.1 2 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS RESTATED SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FINANCIAL STATEMENTS OF THE PROFIT RECOVERY GROUP INTERNATIONAL, INC. FOR THE THREE MONTH PERIOD ENDED MARCH 31, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 3-MOS DEC-31-1999 JAN-01-1999 MAR-31-1999 28,986 0 33,958 0 0 69,243 38,432 13,098 323,531 28,765 58,567 0 0 27 323,504 323,531 0 56,615 31,720 0 20,569 0 844 3,482 1,371 2,111 0 0 (29,195) (27,084) (1.02) (.98)
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