<PAGE> 1
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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
FORM 10-Q
---------------------
<TABLE>
<S> <C> <S>
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
--------------- ---------------
</TABLE>
COMMISSION FILE NUMBER 0-28000
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THE PROFIT RECOVERY GROUP INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
---------------------
<TABLE>
<S> <C>
GEORGIA 58-2213805
(State or other jurisdiction of incorporation (I.R.S. Employer Identification No.)
or organization)
</TABLE>
2300 WINDY RIDGE PARKWAY
SUITE 100 NORTH
ATLANTA, GEORGIA 30339-8426
(770) 955-3815
(ADDRESS AND TELEPHONE NUMBER OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
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 class of capital stock as
of July 25, 1997, the latest practicable date, was as follows: 18,230,149 shares
of Common Stock, no par value.
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<PAGE> 2
THE PROFIT RECOVERY GROUP INTERNATIONAL, INC. AND SUBSIDIARIES
FORM 10-Q
QUARTER ENDED JUNE 30, 1997
INDEX
<TABLE>
<CAPTION>
PAGE NO.
--------
<S> <C> <C>
PART I. Financial Information
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Statements of Operations --
Three and six month periods ended June 30, 1997 and
June 30, 1996.......................................... 1
Condensed Consolidated Balance Sheets --
June 30, 1997 and December 31, 1996.................... 2
Condensed Consolidated Statements of Cash Flows --
Six months ended June 30, 1997 and June 30, 1996....... 3
Notes to Condensed Consolidated Financial Statements...... 4
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations......................... 6
Item 3. Quantitative and Qualitative Disclosures about
Market Risk......................................... 10
PART II. Other Information........................................... 11
Signatures............................................................ 12
</TABLE>
<PAGE> 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)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------- -----------------
1997 1996 1997 1996
-------- -------- ------- -------
<S> <C> <C> <C> <C>
Revenues.................................................. $25,858 $17,963 $46,818 $33,578
Cost of revenues.......................................... 13,331 9,480 24,860 18,103
Selling, general and administrative expenses.............. 8,723 6,040 16,919 12,071
------- ------- ------- -------
Operating income........................................ 3,804 2,443 5,039 3,404
Interest income (expense), net............................ 55 106 118 (389)
------- ------- ------- -------
Earnings before income taxes............................ 3,859 2,549 5,157 3,015
Income taxes (Note C)..................................... 1,491 994 1,997 4,694
------- ------- ------- -------
Net earnings (loss)..................................... $ 2,368 $ 1,555 $ 3,160 $(1,679)
======= ======= ======= =======
Pro Forma information:
Historical earnings before income taxes................. $ 3,015
Pro forma income taxes (Note C)......................... 1,176
-------
Pro forma net earnings............................... $ 1,839
=======
Net earnings (pro forma net earnings for six months ended
June 30, 1996) per common and common equivalent share
(Note D)................................................ $ .13 $ .09 $ .17 $ .12
======= ======= ======= =======
Weighted average common and common equivalent shares
outstanding............................................. 18,639 18,268 18,625 16,703
======= ======= ======= =======
</TABLE>
See accompanying notes to condensed consolidated financial statements.
1
<PAGE> 4
THE PROFIT RECOVERY GROUP INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1997 1996
-------- ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents (Note F)........................ $14,189 $16,891
Receivables:
Billed contract receivables............................ 3,424 3,864
Unbilled contract receivables.......................... 35,100 30,734
Employee advances...................................... 1,711 1,363
------- -------
Total receivables................................. 40,235 35,961
------- -------
Refundable income taxes................................... -- 2,049
Prepaid expenses and other current assets................. 1,594 528
------- -------
Total current assets.............................. 56,018 55,429
------- -------
Property and equipment:
Computer and other equipment.............................. 8,255 5,753
Furniture and fixtures.................................... 1,830 1,569
Leasehold improvements.................................... 1,309 1,183
------- -------
11,394 8,505
Less accumulated depreciation and amortization............ 3,562 2,272
------- -------
7,832 6,233
------- -------
Noncompete agreements, less accumulated amortization........ 3,992 4,509
Deferred loan costs, less accumulated amortization.......... 40 56
Goodwill, less accumulated amortization..................... 6,300 393
Deferred income taxes....................................... 1,174 1,174
Other assets................................................ 578 524
------- -------
$75,934 $68,318
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current installments of long-term debt.................... $ 84 $ 79
Accounts payable and accrued expenses..................... 1,968 1,383
Accrued payroll and related expenses...................... 16,714 16,356
Deferred income taxes..................................... 7,607 7,607
------- -------
Total current liabilities......................... 26,373 25,425
Long-term debt, excluding current installments.............. 702 692
Deferred compensation....................................... 2,134 1,642
------- -------
Total liabilities................................. 29,209 27,759
------- -------
Shareholders' equity (Note B):
Preferred stock, no par value. Authorized 1,000,000
shares; no shares issued or outstanding in 1997 and
1996................................................... -- --
Common stock, no par value; stated value $.001 per share.
Authorized 60,000,000 shares; issued and outstanding
18,230,149 in 1997 and 17,649,152 in 1996.............. 18 18
Additional paid-in capital................................ 37,228 34,188
Cumulative translation adjustments........................ (65) (31)
Retained earnings......................................... 9,544 6,384
------- -------
Total shareholders' equity........................ 46,725 40,559
------- -------
$75,934 $68,318
======= =======
</TABLE>
See accompanying notes to condensed consolidated financial statements.
2
<PAGE> 5
THE PROFIT RECOVERY GROUP INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
------------------
1997 1996
------- -------
<S> <C> <C>
Cash flows from operating activities:
Net earnings (loss)....................................... $ 3,160 $(1,679)
Adjustments to reconcile net earnings (loss) to net cash
provided by operating activities:
Depreciation and amortization.......................... 1,973 1,100
Deferred compensation expense.......................... 305 274
Deferred income taxes.................................. -- 3,700
Foreign translation adjustments........................ (34) 54
Changes in assets and liabilities, net of effects of
acquisitions:
Receivables.......................................... (3,873) (6,930)
Prepaid expenses and other current assets............ 1,004 (338)
Other assets......................................... (120) (581)
Accounts payable and accrued expenses................ 538 350
Accrued payroll and related expenses................. 264 4,527
------- -------
Net cash provided by operating activities......... 3,217 477
------- -------
Cash flows from investing activities:
Purchases of property and equipment....................... (2,715) (2,637)
Acquisitions (Note E)..................................... (3,220) --
------- -------
Net cash used in investing activities............. (5,935) (2,637)
------- -------
Cash flows from financing activities:
Net decrease in note payable to bank...................... -- (1,763)
Proceeds from loans from shareholders..................... -- 2,600
Repayment of long-term debt............................... -- (7,117)
Repayment of loans from shareholders...................... -- (3,675)
Capital contributions, net................................ 16 33,961
Dividends and distributions............................... -- (4,876)
------- -------
Net cash provided by financing activities......... 16 19,130
------- -------
Net change in cash and cash equivalents........... (2,702) 16,970
Cash and cash equivalents at beginning of period............ 16,891 642
------- -------
Cash and cash equivalents at end of period.................. $14,189 $17,612
======= =======
Supplemental disclosures of cash flow information:
Cash paid (refunds received) during the period for
Interest............................................... $ 25 $ 1,091
======= =======
Income taxes........................................... $ (108) $ 164
======= =======
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
<PAGE> 6
THE PROFIT RECOVERY GROUP INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997
(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 June 30, 1997 are not necessarily indicative of the
results that may be expected for the year ending December 31, 1997. 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, 1996.
NOTE B -- INITIAL PUBLIC OFFERING
The Company's initial public offering of its common stock was declared
effective by the United States Securities and Exchange Commission on March 26,
1996, and public trading in the registered shares commenced March 27, 1996. The
initial public offering consisted of 4.6 million shares priced at $11 per share
with the Company selling 3.4 million newly issued shares and certain selling
shareholders selling 1.2 million existing shares. The proceeds from the offering
(net of underwriting discounts and commissions) were not distributed by the
underwriting syndicate until April 1, 1996.
On April 18, 1996, the Company received notification from its underwriting
syndicate that the syndicate had exercised its full over-allotment option to
purchase an additional 690,000 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 C -- INCOME TAXES
The Company's predecessor entities prior to its initial public offering on
March 26, 1996 generally were either corporations electing to be taxed as
Subchapter S corporations or partnerships. As a result, any income tax
liabilities were the responsibilities of the respective shareholders and
partners. In connection with the initial public offering, all domestic entities
became C corporations. As a result of these conversions to C corporations, the
Company incurred a charge to operations of $3.7 million in the first quarter of
1996 for cumulative deferred income taxes. The results of operations for the six
month period ended June 30, 1996 have been adjusted on a pro forma basis to
reflect federal and state income taxes at a combined effective rate of 39% as if
the Company's predecessors had been C corporations throughout the entire period.
NOTE D -- EARNINGS AND PRO FORMA EARNINGS PER COMMON AND COMMON EQUIVALENT SHARE
For operations prior to April 1, 1996, pro forma earnings per common and
common equivalent share has been computed by dividing the pro forma net
earnings, which gives effect to pro forma income taxes, by the weighted average
number of common and common equivalent shares outstanding during the period,
after giving effect to the reorganization enacted at the time of the Company's
March 1996 initial public offering. For purposes of determining the weighted
average number of common and common equivalent shares for all periods prior to
April 1, 1996, the Company has followed required supplementary guidance
contained in Securities and Exchange Commission Staff Accounting Bulletin Topic
4D and has treated all common shares, warrants, options and convertible
debentures issued within one year prior to its initial public offering as
exercised and outstanding, using the treasury stock method, regardless if the
effect were antidilutive. In
4
<PAGE> 7
THE PROFIT RECOVERY GROUP INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
addition, the aforementioned computation includes the equivalent number of
common shares derived from dividing the distributions payable by $11.00 per
share.
For operations subsequent to March 31, 1996, the weighted average number of
common and common equivalent shares has been derived pursuant to requirements of
Accounting Principles Board Opinion No. 15, Earnings per Share. Fully diluted
earnings per share for affected reporting periods is not significantly different
from the primary earnings per share presented.
NOTE E -- ACQUISITIONS
On January 2, 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 high technology products. The Company issued
375,000 shares of its common stock in the transaction which was accounted for as
a pooling-of-interests. Since prior years' financial positions and results of
operations of Shaps Group, Inc. are not material in relation to the Company's
historical financial statements, the Company has not restated its prior years'
consolidated financial statements.
On February 11, 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. This
transaction was accounted for as a purchase with consideration of $2.0 million
in cash and 130,599 shares of the Company's common stock valued at $15.25 per
share. Approximately $100,000 in direct acquisition-related costs were also
incurred and capitalized as part of this transaction.
On May 23, 1997, the Company acquired all of the common stock of The Hale
Group, a California-based company providing recovery audit services to
healthcare entities. This transaction was accounted for as a purchase with
consideration of $1.1 million in cash and 74,998 shares of the Company's common
stock valued at $13.38 per share.
NOTE F -- CASH EQUIVALENTS
Cash equivalents at June 30, 1997 and December 31, 1996 consisted of $3.1
million and $11.9 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
agreements in effect on June 30, 1997 and December 31, 1996 matured and were
settled on July 1, 1997 and January 2, 1997, respectively.
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.
5
<PAGE> 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.
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.
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED ENDED
JUNE 30, JUNE 30,
------------- -------------
1997 1996 1997 1996
----- ----- ----- -----
<S> <C> <C> <C> <C>
HISTORICAL
Revenues.................................................. 100.0% 100.0% 100.0% 100.0%
Cost of revenues.......................................... 51.6 52.8 53.1 53.9
Selling, general and administrative expenses.............. 33.7 33.6 36.1 35.9
----- ----- ----- -----
Operating income.................................. 14.7 13.6 10.8 10.2
Interest income (expense), net............................ .2 .6 .2 (1.2)
----- ----- ----- -----
Earnings before income taxes...................... 14.9 14.2 11.0 9.0
Income taxes.............................................. 5.8 5.5 4.3 14.0
----- ----- ----- -----
Net earnings (loss)............................... 9.1% 8.7% 6.7% (5.0)%
===== ===== ===== =====
PRO FORMA
Historical earnings before income taxes................... 9.0%
Pro forma income taxes.................................... 3.5
-----
Pro forma net earnings............................ 5.5%
=====
</TABLE>
Three and Six Month Periods Ended June 30, 1997 Compared to Corresponding
Periods of the Prior Year
Revenues. The Company's revenues consist principally of contractual
percentages of overpayments recovered for clients that are primarily in the
retailing industry. Revenues increased 44.0% to $25.9 million for the second
quarter of 1997, up from $18.0 million in the second quarter of 1996. For the
six months ended June 30, 1997, revenues were $46.8 million, or 39.4% higher
than $33.6 million achieved in the corresponding period of 1996.
Domestic revenues were $19.6 million in the second quarter of 1997, up
34.4% from $14.6 million in the second quarter of 1996. This 34.4% increase
consisted of (i) 12.5% growth from existing clients served in both the 1997 and
1996 periods; (ii) 12.0% growth from the three complementary recovery audit
firms acquired in 1997 and (iii) 9.9% growth from provision of services to new
clients (net of the effect of revenues in the second quarter of 1996 from
clients not served in the second quarter of 1997). For the first six months of
1997, domestic revenues were $35.8 million, an increase of 30.0% over $27.6
million during the comparable period of 1996.
International revenues were $6.3 million in the second quarter of 1997, up
84.5% from $3.4 million in the second quarter of 1996. For the first six months
of 1997, international revenues were $11.0 million, an 82.5% increase over $6.0
million during the comparable period of 1996. International revenue increases
for the 1997 periods over the corresponding periods of 1996 were primarily
attributable to new clients. Company operations in almost all international
markets experienced significant rates of revenue growth during the first and
second quarters of 1997 as compared with the comparable periods of 1996. 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."
6
<PAGE> 9
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 51.6% of revenues for the second quarter of 1997, down from 52.8% in the
comparable quarter of 1996. For the six months ended June 30, 1997, cost of
revenues was 53.1%, down from 53.9% during the comparable 1996 six month period.
Domestically, cost of revenues as a percentage of revenues was 53.7% and
54.4%, respectively, for the quarter and six months ended June 30, 1997. For the
corresponding periods of 1996, these percentages were 53.0% and 54.4%,
respectively.
The Company has developed a revised compensation program for its
non-management domestic field auditors which it believes will more equitably
compensate these individuals for their unique experience, skills and
contributions in meeting Company objectives. The revised program has been
designed with considerable input from auditor focus groups, has been subjected
to thorough in-house testing, and has undergone extensive field tests in the
first quarter of 1997. The revised program was implemented in May 1997. The
Company has attempted to design the revised program such that future aggregate
domestic auditor compensation expense will be unchanged from aggregate amounts
which would otherwise be paid under the program historically in place. Although
the Company and certain of its domestic auditors have expended considerable time
and resources to design the revised program, there can be no assurance that it
will meet its design objectives. If the design objectives of the revised
compensation program are not achieved, the Company's domestic costs and revenues
could be materially and adversely affected. See "Forward-looking Statements."
Internationally, cost of revenues as a percentage of revenues was 44.8% and
49.0%, respectively, for the quarter and six months ended June 30, 1997. These
percentages were 51.8% for both of the comparable periods of 1996. The 1997
improvements resulted primarily from gross margin expansions in the second
quarter of 1997 in the Company's more established international locations.
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 slightly to 33.7%
in the second quarter of 1997, up from 33.6% in the second quarter of 1996. For
the six months ended June 30, 1997, selling, general and administrative expenses
as a percentage of revenues was 36.1%, also up slightly from 35.9% in the
comparable period of 1996.
On a domestic basis, selling, general and administrative expenses as a
percentage of revenues was 30.3% in the second quarter of 1997, up from 29.8% in
the comparable quarter of 1996. For the first six months of 1997, domestic
selling, general and administrative expenses as a percentage of revenues
increased to 32.8%, up from 32.0% in the corresponding period of 1996. The
Company's 1997 domestic selling, general and administrative expense percentages
are higher than the comparable percentages in 1996 due to increased expenditures
for various 1997 initiatives such as significantly expanded training programs
and period costs associated with intensified mergers and acquisitions efforts.
Internationally, selling, general and administrative expenses as a
percentage of revenues improved to 44.4% of revenues in the second quarter of
1997, compared to 49.9% in the 1996 second quarter. For the six month periods
ended June 30, 1997 and 1996, this percentage likewise improved to 47.1% (1997)
from 54.1% (1996). Improvements in 1997 related primarily to various components
of fixed costs being spread over a rapidly growing revenue base.
In connection with acquired businesses, the Company has recorded intangible
assets including goodwill and deferred non-compete costs. Amortization of these
intangible assets totaled $348,000 and $278,000 for the quarters ended June 30,
1997 and 1996, respectively, and $672,000 and $556,000 for the six month periods
ended June 30, 1997 and 1996, respectively.
7
<PAGE> 10
Operating Income. Operating income increased 55.7% to $3.8 million in the
second quarter of 1997, up from $2.4 million in the second quarter of 1996. For
the six months ended June 30, 1997, operating income increased 48.0% to $5.0
million, up from $3.4 million in the comparable period of 1996. Significant
revenue increases coupled with operating margin improvements, the components of
which are discussed above, yielded the improvements in the 1997 periods.
Interest Income (Expense), Net. The Company reported net interest income
of $55,000 during the second quarter of 1997, compared to $106,000 during the
comparable quarter of 1996. The 1997 reduction relates principally to increased
interest expense on growing deferred compensation liabilities and a reduction of
investable funds as proceeds from the Company's March 1996 initial public
offering are expended on acquired companies and used for other corporate
purposes. For the six months ended June 30, 1997, net interest income was
$118,000, compared to net interest expense of $389,000 during the comparable
period of 1996. The 1996 six month period reflects significant levels of
interest expense incurred during the first quarter of that year in connection
with various debt obligations. Substantially all of such debt obligations were
repaid with a portion of the proceeds from the March 1996 initial public
offering.
Earnings Before Income Taxes. Earnings before income taxes rose 51.4% and
71.0% in the quarter and six months ended June 30, 1997, respectively, compared
to the same periods of 1996. Increased revenues, improved operating margins, and
changes in interest income (expense), net, yielded the earnings growth.
Income Taxes. The Company's predecessor entities prior to its initial
public offering on March 26, 1996 generally were either corporations electing to
be taxed as Subchapter S Corporations or partnerships. As a result, any income
tax liabilities were the responsibilities of the respective shareholders and
partners. In connection with the initial public offering, all domestic entities
became C corporations. As a result of these conversions to C corporations, the
Company incurred a charge to operations of $3.7 million in the first quarter of
1996 for cumulative deferred income taxes.
The provisions for income taxes for all periods subsequent to March 31,
1996 consist of federal and state income taxes at the Company's combined
effective rate of 39.0%. The provision for income taxes for the six month period
ended June 30, 1996 consists of the above-described $3.7 million charge for
cumulative deferred income taxes in the first quarter of such year combined with
a $994,000 tax provision at a combined effective rate of 39.0% for the quarter
ended June 30, 1996.
Pro Forma Income Taxes. The results of operations for the six months ended
June 30, 1996 have been adjusted on a pro forma basis to reflect federal and
state income taxes at a combined effective rate of 39.0% as if the Company's
predecessors had been C corporations throughout the entire period.
LIQUIDITY AND CAPITAL RESOURCES
Through December 31, 1996, the Company's predecessors had acquired and
assimilated three operating companies and financed these acquisitions primarily
through a combination of bank and seller financing. Ongoing Company operations
and capital requirements prior to the Company's initial public offering were met
primarily with cash flows provided by operating activities and, to a lesser
extent, with the proceeds from bank and shareholder loans. On March 26, 1996,
the Company's initial public offering of its common stock was declared effective
by the United States Securities and Exchange Commission. On April 1, 1996, the
Company received its $34.8 million portion of the proceeds (net of underwriting
discounts and commissions) from the offering. Of these proceeds, approximately
$1.1 million was used to pay expenses of the offering, approximately $4.9
million was used to pay previously declared and unpaid Subchapter S shareholder
distributions and partnership distributions, and approximately $14.6 million was
used to pay principal and accrued interest on substantially all outstanding
interest-bearing debt (other than that portion of certain convertible debt that
was converted to common stock concurrent with the initial public offering). Of
the residual $14.2 million of net proceeds, approximately $4.3 million continued
to be available as of June 30, 1997 to expand international operations, to
acquire complementary businesses and for general corporate purposes, including
working capital.
8
<PAGE> 11
In September 1996, the Company executed a $20.0 million credit facility
with NationsBank N.A. (South). The facility permits the Company to borrow up to
$20.0 million on a term loan basis to finance mergers and acquisitions.
Alternatively, the Company, at its option, may utilize up to $10.0 million as a
revolving line of credit for working capital and employ the remaining $10.0
million for mergers and acquisitions. Through July 25, 1997, the Company had
made no draws against this credit facility, pursuant to which borrowings can be
made through September 1998.
Net cash provided by operating activities was $3.2 million and $477,000 for
the six month periods ended June 30, 1997 and 1996, respectively. Receipt of a
$2.0 million income tax refund and improved accounts receivable collections were
two principal reasons for improvement during the first six months of 1997 as
compared to the comparable 1996 period.
Net cash used in investing activities was $5.9 million in the first six
months of 1997, and $2.6 million in the first six months of 1996. In the 1997
six months, $2.7 million was used to acquire property and equipment (primarily
computer-related equipment), $2.1 was paid in connection with the February 1997
acquisition of Accounts Payable Recovery Services, Inc., and $1.1 million was
paid in connection with the May 1997 acquisition of The Hale Group.
The Company has acquired three recovery audit firms during the first six
months of 1997. See Note E of Notes to Condensed Consolidated Financial
Statements. 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. Future
acquisitions may include much larger businesses than those acquired to date.
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. See "Forward-looking Statements."
Net cash provided by financing activities was $16,000 during the first six
months of 1997 and $19.1 million during the comparable six months of 1996.
During the first six months of 1996, the Company completed its initial public
offering and repaid various obligations, as discussed above.
The Company believes that its current working capital, its existing line of
credit and cash flow generated from future operations will be sufficient to meet
the Company's working capital and capital expenditure requirements through June
30, 1998 unless one or more large acquisitions are consummated which require the
Company to seek additional debt or equity financing.
NEW ACCOUNTING STANDARDS
The Company has determined that the adoption of Statement of Financial
Accounting Standards No. 128, "Earnings per Share", will not have a material
impact on the Company's reported per share results of operations. This
pronouncement is effective for periods ending after December 15, 1997, including
interim periods; earlier application is not permitted. Once effective, this
pronouncement requires restatement of all prior-period earnings per share data
presented.
Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income", establishes standards for reporting and display of
comprehensive income and its components (revenues, expenses, gains and losses)
in a full set of general purpose financial statements. This Statement requires
that all items that are required to be recognized under accounting standards as
components of comprehensive income be reported in a financial statement that is
displayed with the same prominence as other financial statements. The Company
believes that its components of comprehensive income will consist principally of
traditionally-determined net income and foreign currency translation
adjustments. This Statement is effective for fiscal years beginning after
December 15, 1997. Reclassification of financial statements for earlier periods
provided for comparative purposes is required.
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
9
<PAGE> 12
report information about operating segments. The Company does not believe that
this Statement will significantly alter the segment disclosures it currently
provides. This Statement is effective for fiscal years beginning after December
15, 1997.
FORWARD-LOOKING STATEMENTS
Statements made in this Form 10-Q for the quarter ended June 30, 1997 that
state the Company's or management's intentions, hopes, beliefs, expectations or
predictions of the future are forward-looking statements within the meaning of
the Private Securities Litigation Reform Act of 1995. It is important to note
that the Company's actual results could differ materially from those contained
in such forward-looking statements. Additional information concerning factors
that could cause actual results to differ materially from those in
forward-looking statements is contained from time to time in the Company's SEC
filings including the Risk Factors section of the Company's Prospectus dated
July 29, 1997 included in registration statement number 333-31805 on Form S-3.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
10
<PAGE> 13
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2. CHANGES IN SECURITIES
On May 23, 1997, in connection with the acquisition of all of the
outstanding Common Stock of The Hale Group ("Hale"), the Company paid $1.1
million in cash consideration to a combination of the former Hale shareholders
and certain parties to whom Hale was then obligated. Additionally, the Company
issued 74,998 shares of the Company's common stock to the former Hale
shareholders. The shares were issued pursuant to the exemptions from
registration provided by Rule 506 of Regulation D promulgated pursuant to the
Securities Act of 1933, as amended (the "Act"), and Section 4(2) of the Act.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Company's Annual Meeting of Shareholders held on May 15, 1997, the
following individuals were elected to the Company's Board of Directors to serve
as Class I directors until the Annual Meeting of Shareholders held in 2000 and
until their successors are elected and have qualified:
<TABLE>
<CAPTION>
VOTES VOTES
FOR WITHHELD
---------- --------
<S> <C> <C>
John M. Cook................................................ 15,677,091 9,100
John M. Toma................................................ 15,677,091 9,100
</TABLE>
At the Company's Annual Meeting of Shareholders held on May 15, 1997, the
following proposal was also approved:
<TABLE>
<CAPTION>
VOTES VOTES VOTES
FOR AGAINST ABSTAINED
---------- ------- ---------
<S> <C> <C> <C>
Ratification of the Company's Employee Stock Purchase
Plan................................................. 15,274,713 362,794 4,500
</TABLE>
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
<TABLE>
<C> <C> <S>
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).
10.1 -- The Profit Recovery Group International, Inc. Employee Stock
Purchase Plan (incorporated by reference to Exhibit "A" to
Registrant's proxy statement dated April 15, 1997, which was
issued in connection with Registrant's 1997 Annual Meeting
of Shareholders).
11.1 -- Statement Re: Computation of net earnings per share.
27.1 -- Financial Data Schedule (for SEC use only).
</TABLE>
(b) Reports on Form 8-K
The Company did not file a report on Form 8-K during the quarter ended
June 30, 1997.
11
<PAGE> 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.
<TABLE>
<S> <C>
THE PROFIT RECOVERY GROUP
INTERNATIONAL, INC.
Dated: August 4, 1997 By: /s/ DONALD E. ELLIS, JR.
--------------------------------------------
Donald E. Ellis, Jr.
Senior Vice President,
Treasurer and
Chief Financial Officer
(principal financial officer)
Dated: August 4, 1997 By: /s/ MICHAEL R. MELTON
--------------------------------------------
Michael R. Melton
Vice President -- Finance
(principal accounting officer)
</TABLE>
12
<PAGE> 1
EXHIBIT 11.1
THE PROFIT RECOVERY GROUP INTERNATIONAL, INC. AND SUBSIDIARIES
STATEMENT RE: COMPUTATION OF NET EARNINGS PER SHARE(1)
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------- -----------------
1997 1996 1997 1996
-------- -------- ------- -------
<S> <C> <C> <C> <C>
Net earnings (pro forma net earnings for six months ended
June 30, 1996).......................................... $ 2,368 $ 1,555 $ 3,160 $ 1,839
Interest accrued on convertible debt, net of income
taxes(2)................................................ -- -- -- 97
------- ------- ------- -------
Adjusted net earnings (pro forma net
earnings)..................................... $ 2,368 $ 1,555 $ 3,160 $ 1,936
======= ======= ======= =======
Weighted average number of shares outstanding(3).......... 18,187 17,621 18,138 14,903
Weighted average number of common equivalent shares
(computed using the treasury stock method).............. 452 647 487 511
Common shares from convertible debt(2).................... -- -- -- 1,079
Common equivalent shares from the distribution payable
$(4,875,576) divided by the initial public offering
price of $11.00 per share (and weighted since the
initial public offering)................................ -- -- -- 210
------- ------- ------- -------
Weighted average number of common and common
equivalent shares............................. 18,639 18,268 18,625 16,703
======= ======= ======= =======
Net earnings (pro forma net earnings) per common and
common equivalent share................................. $ .13 $ .09 $ .17 $ .12
======= ======= ======= =======
</TABLE>
- ---------------
(1) All share and per share data has been adjusted to reflect the effect of the
2-for-1 stock split (effected in the form of a stock dividend) at the time
of the March 1996 initial public offering.
(2) Assumes convertible debentures were converted, as a component of the initial
public offering-related reorganization, as of the beginning of the period
and the related interest expense, net of income taxes, is added back to pro
forma net earnings.
(3) Assumes number of shares outstanding, after giving effect to the initial
public offering-related reorganization, as of the beginning of the period.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF THE PROFIT RECOVERY GROUP INTERNATIONAL, INC. FOR THE
SIX MONTH PERIOD ENDED JUNE 30, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 14,189
<SECURITIES> 0
<RECEIVABLES> 40,235
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 56,018
<PP&E> 11,394
<DEPRECIATION> 3,562
<TOTAL-ASSETS> 75,934
<CURRENT-LIABILITIES> 26,373
<BONDS> 702
0
0
<COMMON> 18
<OTHER-SE> 46,707
<TOTAL-LIABILITY-AND-EQUITY> 75,934
<SALES> 0
<TOTAL-REVENUES> 46,818
<CGS> 0
<TOTAL-COSTS> 24,860
<OTHER-EXPENSES> 16,919
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (118)
<INCOME-PRETAX> 5,157
<INCOME-TAX> 1,997
<INCOME-CONTINUING> 3,160
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,160
<EPS-PRIMARY> .17
<EPS-DILUTED> .17
</TABLE>
