<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 MARCH 31, 1998
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
---------------------
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 or (I.R.S. Employer Identification No.)
organization)
</TABLE>
2300 WINDY RIDGE PARKWAY
SUITE 100 NORTH
ATLANTA, GEORGIA 30339-8426
(770) 779-3900
(ADDRESS AND TELEPHONE NUMBER, INCLUDING AREA CODE, 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 April 30, 1998, the latest practicable date, was as follows: 21,717,061
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 MARCH 31, 1998
INDEX
<TABLE>
<CAPTION>
PAGE NO.
--------
<S> <C> <C>
PART I. Financial Information
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Statements of Earnings --
Three months ended March 31, 1998 and March 31, 1997... 1
Condensed Consolidated Balance Sheets --
March 31, 1998 and December 31, 1997................... 2
Condensed Consolidated Statements of Cash Flows --
Three months ended March 31, 1998 and March 31, 1997... 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 EARNINGS
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-------------------
1998 1997
-------- --------
<S> <C> <C>
Revenues.................................................... $33,144 $20,960
Cost of revenues............................................ 17,956 11,529
Selling, general and administrative expenses................ 13,029 8,196
------- -------
Operating income.......................................... 2,159 1,235
Interest (expense) income, net.............................. (324) 63
------- -------
Earnings before income taxes.............................. 1,835 1,298
Income taxes................................................ 715 506
------- -------
Net earnings.............................................. $ 1,120 $ 792
======= =======
Earnings per share (Note B):
Basic..................................................... $ 0.06 $ 0.04
======= =======
Diluted................................................... $ 0.06 $ 0.04
======= =======
Weighted-average shares outstanding (Note B):
Basic..................................................... 19,540 18,089
======= =======
Diluted................................................... 20,000 18,610
======= =======
</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>
MARCH 31, DECEMBER 31,
1998 1997
--------- ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents (Note D)........................ $ 25,290 $ 19,386
Receivables:
Billed contract receivables............................ 10,987 12,100
Unbilled contract receivables.......................... 47,392 41,771
Employee advances...................................... 2,292 2,299
-------- --------
Total receivables................................. 60,671 56,170
-------- --------
Prepaid expenses and other current assets................. 1,349 2,430
-------- --------
Total current assets.............................. 87,310 77,986
-------- --------
Property and equipment:
Computer and other equipment.............................. 12,877 10,658
Furniture and fixtures.................................... 2,214 2,111
Leasehold improvements.................................... 1,961 1,760
-------- --------
17,052 14,529
Less accumulated depreciation and amortization............ 6,897 5,760
-------- --------
10,155 8,769
-------- --------
Noncompete agreements, less accumulated amortization........ 3,212 3,471
Deferred loan costs, less accumulated amortization.......... 16 24
Goodwill, less accumulated amortization..................... 49,358 39,591
Deferred income taxes....................................... 3,083 3,585
Other assets................................................ 478 459
-------- --------
$153,612 $133,885
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Note payable to bank...................................... $ 153 $ 81
Current installments of long-term debt.................... 159 1,428
Accounts payable and accrued expenses..................... 7,824 4,835
Accrued payroll and related expenses...................... 21,241 26,075
Deferred income taxes..................................... 9,917 9,917
Deferred revenue.......................................... 1,070 1,087
-------- --------
Total current liabilities......................... 40,364 43,423
Long-term debt, excluding current installments.............. 846 24,365
Deferred compensation....................................... 2,714 2,563
Other long-term liabilities................................. 471 462
-------- --------
Total liabilities................................. 44,395 70,813
-------- --------
Shareholders' equity (Note F):
Preferred stock, no par value. Authorized 1,000,000
shares; no shares issued or outstanding in 1998 and
1997................................................... -- --
Common stock, no par value; stated value $.001 per share.
Authorized 60,000,000 shares; issued and outstanding
21,715,461 in 1998 and 19,193,676 in 1997.............. 22 19
Additional paid-in capital................................ 93,990 48,195
Cumulative translation adjustments........................ (1,922) (1,149)
Retained earnings......................................... 17,127 16,007
-------- --------
Total shareholders' equity........................ 109,217 63,072
-------- --------
$153,612 $133,885
======== ========
</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>
THREE MONTHS ENDED
MARCH 31,
--------------------
1998 1997
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net earnings.............................................. $ 1,120 $ 792
Adjustments to reconcile net earnings to net cash used in
operating activities:
Depreciation and amortization.......................... 1,889 977
Deferred compensation expense.......................... 151 151
Deferred income taxes.................................. 502 --
Changes in assets and liabilities, net of effects of
acquisitions:
Receivables.......................................... (4,111) (2,967)
Refundable income taxes.............................. -- 2,049
Prepaid expenses and other current assets............ 1,081 (456)
Other assets......................................... (40) (72)
Accounts payable and accrued expenses................ 1,792 (105)
Accrued payroll and related expenses................. (4,834) (1,282)
Deferred revenue..................................... (17) --
Other long-term liabilities.......................... 9 --
-------- --------
Net cash used in operating activities............. (2,458) (913)
-------- --------
Cash flows from investing activities:
Purchases of property and equipment....................... (2,294) (1,627)
Acquisition of businesses (Note G)........................ (5,354) (2,115)
-------- --------
Net cash used in investing activities............. (7,648) (3,742)
-------- --------
Cash flows from financing activities:
Net increase in note payable to bank...................... 72 --
Repayments of long-term debt.............................. (24,788) --
Net proceeds from common stock............................ 40,726 16
-------- --------
Net cash provided by financing activities......... 16,010 16
-------- --------
Net change in cash and cash equivalents........... 5,904 (4,639)
Cash and cash equivalents at beginning of period............ 19,386 16,891
-------- --------
Cash and cash equivalents at end of period.................. $ 25,290 $ 12,252
======== ========
Supplemental disclosures of cash flow information:
Cash paid during the period for interest............... $ 402 $ 12
======== ========
Cash paid (refunds received), net during the period for
income taxes.......................................... $ (653) $ (974)
======== ========
Supplemental disclosure of noncash investing and financing
activities:
In the first quarter of both 1998 and 1997, the Company
purchased all of the outstanding stock of certain
companies. In conjunction with the acquisitions, the
Company assumed liabilities as follows:
Fair value of assets acquired........................ $ 11,623 $ 4,484
Cash paid for the acquisitions....................... (5,354) (2,115)
Fair value of shares issued for acquisitions......... (6,119) (2,003)
-------- --------
Liabilities assumed............................... $ 150 $ 366
======== ========
</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
MARCH 31, 1998
(UNAUDITED)
NOTE A -- BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements of
The Profit Recovery Group International, Inc. and its wholly owned subsidiaries
(the "Company") have been prepared in accordance with generally accepted
accounting principles for interim financial information and with the
instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do
not include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation have been included. Operating results for the
three month period ended March 31, 1998 are not necessarily indicative of the
results that may be expected for the year ending December 31, 1998. For further
information, refer to the consolidated financial statements and footnotes
thereto included in the Company's Form 10-K for the fiscal year ended December
31, 1997.
NOTE B -- EARNINGS PER SHARE
Effective December 31, 1997, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 128, "Earnings per Share." This pronouncement
required the restatement of all prior-period earnings per share data presented
to conform to its provisions. The following table sets forth the computations of
basic and diluted earnings per share for the three month periods ended March 31,
1998 and March 31, 1997 in accordance with the provisions of SFAS No. 128 (in
thousands, except for earnings per share information):
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-------------------
1998 1997
-------- --------
<S> <C> <C>
Numerator for both basic earnings per share and diluted
earnings per share -- net earnings........................ $ 1,120 $ 792
======= =======
Denominator:
Denominator for basic earnings per
share -- weighted-average shares outstanding........... 19,540 18,089
Effect of dilutive securities -- employee stock options... 460 521
------- -------
Denominator for diluted earnings per share................ 20,000 18,610
======= =======
Earnings per share -- basic................................. $ 0.06 $ 0.04
======= =======
Earnings per share -- diluted............................... $ 0.06 $ 0.04
======= =======
</TABLE>
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, 1998 and 1997, the
Company's consolidated comprehensive income was $648,000 and $790,000,
respectively. The difference between consolidated comprehensive income, as
disclosed here, and traditionally-determined consolidated net earnings, as set
forth on the accompanying Condensed Consolidated Statements of Earnings, results
from tax-effected foreign currency translation adjustments.
NOTE D -- CASH EQUIVALENTS
Cash equivalents at March 31, 1998 and December 31, 1997 included $11.5
million and $2.5 million, respectively, of reverse repurchase agreements with
NationsBank, N.A. (South) which were fully collateralized by United States of
America Treasury Notes in the possession of such bank. The reverse repurchase
4
<PAGE> 7
THE PROFIT RECOVERY GROUP INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
agreement in effect on March 31, 1998 matured and was settled on April 1, 1998.
In addition, cash equivalents at March 31, 1998 and December 31, 1997 also
included $5.2 million and $4.7 million, respectively, of temporary investments
held in a French bank by certain of the Company's French subsidiaries.
The Company does not intend to take possession of collateral securities on
future reverse repurchase agreement transactions conducted with banking
institutions of national standing. The Company does insist, however, that all
such agreements provide for full collateralization using obligations of the
United States of America having a current market value equivalent to or
exceeding the reverse repurchase agreement amount.
NOTE E -- INTERNAL USE COMPUTER SOFTWARE
Statement of Position 98-1, "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use" provides guidance on a variety of issues
relating to costs of internal use software including which of these costs should
be capitalized and which should be expensed as incurred. This pronouncement is
effective for financial statements for fiscal years beginning after December 15,
1998 although earlier application is encouraged. The Company has chosen to early
adopt this pronouncement effective January 1, 1998 since it provides definitive
accounting guidance on a large-scale information systems development project
initiated by the Company during the first quarter of 1998.
NOTE F -- FOLLOW-ON COMMON STOCK OFFERING
On March 17, 1998, the Company sold 2,000,000 newly-issued shares of its
common stock and certain selling shareholders sold an additional 2,400,000
existing shares in an underwritten follow-on offering. The offering was priced
at $21.00 per share. The proceeds of the offering (net of underwriting discounts
and commissions) were distributed by the underwriting syndicate on March 20,
1998. The Company then used a portion of its net proceeds from the offering to
repay the $24.8 million outstanding principal balance on its bank credit
facility, along with accrued interest, on March 20, 1998.
In April 1998, the Company received notification from its underwriting
syndicate that the syndicate had exercised its full over-allotment option to
purchase an additional 660,000 shares of Company common stock. All of these
shares were then sold to the syndicate by certain selling shareholders. The
Company received no proceeds from the sale of such shares.
NOTE G -- ACQUISITION
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.
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.
OVERVIEW
The Company is a leading provider of accounts payable and other recovery
audit services to large retailers, wholesale distributors, healthcare providers,
technology companies and other large transaction-intensive companies, as well as
to certain governmental agencies. In businesses with large purchase volumes and
continuously fluctuating purchase prices, some small percentage of erroneous
overpayments to vendors is inevitable. In addition, compliance with various
complex tax laws also results in overpayments to governmental agencies.
Moreover, services such as telecommunications, utilities and freight provided to
businesses under complex pricing arrangements can result in overpayments. All of
these overpayments result in "lost profits." The Company identifies and
documents overpayments by using sophisticated proprietary technology and
advanced audit techniques and methodologies, and by employing highly trained,
experienced recovery audit specialists. The Company receives a contractually
negotiated percentage of amounts recovered.
The earliest of the Company's predecessors was formed in November 1990, and
in early 1991 acquired the operating assets of Roy Greene Associates, Inc. and
Bottom Line Associates, Inc., which were formed in 1971 and 1985, respectively.
In January 1995, the Company purchased certain assets of Fial & Associates,
Inc., a direct U.S. competitor. In January 1997, the Company acquired the net
operating assets of Shaps Group, Inc., a California-based company providing
recovery audit services to manufacturers and distributors of technology
products. In February 1997, the Company acquired all of the common stock of
Accounts Payable Recovery Services, Inc., a Texas-based company providing
recovery audit services to healthcare entities and energy companies. In May
1997, the Company acquired all of the common stock of The Hale Group, a
California-based company that also provides recovery audit services to
healthcare entities. In October 1997, the Company acquired 98.4% of Financiere
Alma, S.A. and subsidiaries ("Alma"), a Paris-based recovery audit firm
specializing in identifying and recovering various types of French corporate tax
overpayments. In November 1997, the Company acquired the net operating assets of
TradeCheck, LLC, a Washington-based recovery audit firm specializing in ocean
freight shipments. In March 1998, the Company acquired the net operating assets
of Ginger Quill, Inc., d/b/a Precision Data Link, an air freight recovery audit
firm based in Utah. The Company intends to continue pursuing domestic and
international strategic acquisitions, including direct competitors and
complementary businesses.
RESULTS OF OPERATIONS
The following table presents, for the periods indicated, certain items in
the condensed consolidated statements of earnings as a percentage of revenues.
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
MARCH 31,
-------------
1998 1997
----- -----
<S> <C> <C>
Revenues.................................................. 100.0% 100.0%
Cost of revenues.......................................... 54.2 55.0
Selling, general and administrative expenses.............. 39.3 39.1
----- -----
Operating income.................................. 6.5 5.9
Interest (expense) income, net............................ (1.0) .3
----- -----
Earnings before income taxes...................... 5.5 6.2
Income taxes.............................................. 2.1 2.4
----- -----
Net earnings...................................... 3.4% 3.8%
===== =====
</TABLE>
6
<PAGE> 9
Three Months Ended March 31, 1998 Compared to Three Months Ended March 31, 1997
Revenues. The Company's revenues consist principally of contractual
percentages of overpayments recovered for clients that continue to be heavily
concentrated in the retailing industry. Revenues increased 58.1% to $33.1
million for the first quarter of 1998, up from $21.0 million for the first
quarter of 1997.
Domestic revenues were $21.1 million in the first quarter of 1998, up 29.3%
from $16.3 million in the first quarter of 1997. This 29.3% increase consisted
of (i) 4.4% growth from existing clients served in both the 1998 and 1997
periods; (ii) 13.4% growth from the five domestic complementary recovery audit
firms acquired during the last five fiscal quarters; and (iii) 11.5% growth from
provision of services to new clients.
The Company considers international operations to be all operations located
outside of the United States. International revenues were $12.0 million in the
first quarter of 1998, up 159.5% from $4.7 million in the first quarter of 1997.
Of this 159.5% increase, (i) 94.2% was contributed by operations of Alma, which
was acquired in October 1997, and (ii) 65.3% resulted from existing operations,
primarily from services provided to new clients. The Company continues to
believe that the rate of 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 is excluded. There can be no
assurance, however, that recent international growth trends will continue. See
"Forward-looking Statements."
The Company has experienced and expects to continue to experience
significant seasonality in its business. The Company typically realizes higher
revenues and operating income in the last two quarters of its fiscal year. This
trend is expected to continue and reflects the inherent purchasing and
operational cycles of the retailing industry, which continues to be the source
of the majority of the Company's revenues. The Company's recent acquisitions,
including the October 1997 acquisition of Alma, are not expected to
significantly affect this trend because these entities, in the aggregate, have
historically experienced similar seasonality in revenues and operating income.
Should the Company not continue to realize increased revenues in future third
and fourth quarter periods, profitability for any affected quarter and the
entire year could be 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 54.2% of revenues for the first quarter of 1998, down from 55.0% in the
comparable quarter of 1997.
Domestically, cost of revenues as a percentage of revenues was 58.8% in the
first quarter of 1998, up from 55.1% during the corresponding quarter of 1997.
This percentage increase resulted from the hiring of additional divisional and
regional managers, and intensified levels of domestic travel.
Internationally, cost of revenues as a percentage of revenues decreased
substantially to 46.1% during the first quarter of 1998, from 54.6% during the
corresponding quarter of 1997. This improvement resulted primarily from
significant gross margin increases during 1998 in the Company's more established
international locations as well as the inclusion of Alma which operated at a
cost of revenues percentage of 47.2% during the first quarter of 1998.
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, 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 39.3%
of revenues during the first quarter of 1998, up from 39.1% in the first quarter
of 1997.
Domestic selling, general and administrative expenses as a percentage of
revenues increased to 37.9% in the first quarter of 1998, up from 35.8% during
the comparable quarter of 1997. This increase resulted from
7
<PAGE> 10
significant additional resource commitments in the Company's information
technology functions, and period costs associated with intensified mergers and
acquisition efforts.
In connection with acquired businesses, the Company has recorded intangible
assets including goodwill and deferred non-compete agreements. Amortization of
these intangible assets totaled $848,000 in the first quarter of 1998 and
$305,000 during the first quarter of 1997. Amortization of goodwill in
connection with the Company's October 1997 acquisition of Alma represented the
principal component of the increase in the first quarter of 1998.
Internationally, selling, general and administrative expenses as a
percentage of revenues decreased significantly to 41.7% of revenues during the
first quarter of 1998, down from 50.8% in the corresponding quarter of 1997.
This reduction was due in part to the operations of Alma during the first
quarter of 1998 which were conducted at a selling, general and administrative
expense percentage of 37.6%. Excluding Alma's revenues and selling, general and
administrative expenses from the Company's international operations,
international selling, general and administrative expenses as a percentage of
revenues would have been 44.1%, or a 6.7% reduction from the first quarter of
1997. This improvement resulted primarily from various components of fixed costs
being spread over a rapidly growing revenue base.
Operating Income. Operating income increased 74.8% to $2.2 million in the
first quarter of 1998, up from $1.2 million in the comparable 1997 quarter. As a
percentage of total revenues, operating income increased to 6.5% of revenues in
the first quarter of 1998, up from 5.9% in the first quarter of 1997. The
components of this improvement have been discussed above.
Interest (Expense) Income, Net. The Company incurred net interest expense
of $324,000 during the first quarter of 1998, as compared to net interest income
of $63,000 during the first quarter of 1997. Interest expense, net, for the
first quarter of 1998 consisted of (i) interest expense of $454,000, comprised
primarily of interest on $24.8 million of bank borrowings outstanding since
October 1997 which were used to finance a portion of the Alma acquisition, net
of (ii) $130,000 of interest income derived primarily from overnight
investments. On March 20, 1998, the Company repaid the $24.8 million of bank
borrowings, along with related accrued interest, with a portion of the proceeds
from a follow-on public offering of its common stock.
Earnings Before Income Taxes. Earnings before income taxes rose 41.4% in
the quarter ended March 31, 1998 as compared to the first quarter of 1997. This
improvement resulted from increased revenues and an improved operating margin
during the 1998 quarter.
Income Taxes. The provisions for income taxes for the first quarters of
both 1998 and 1997 consist of federal, state and foreign income taxes at the
Company's composite effective rate of 39.0%.
Weighted-Average Shares Outstanding -- Basic. The Company's
weighted-average shares outstanding for purposes of calculating basic earnings
per share increased to 19,540,000 during the first quarter of 1998, up from
18,089,000 during the first quarter of 1997. This increase related primarily to
common shares issued in connection with acquisitions of various companies.
Because the Company's public sale of 2,000,000 newly-issued common shares did
not become effective until March 17, 1998, these shares did not significantly
influence the weighted-average shares outstanding during the first quarter of
1998.
LIQUIDITY AND CAPITAL RESOURCES
During October 1997, the Company increased its credit facility with
NationsBank, N.A. from $20.0 million to $30.0 million. The credit facility
permits the Company to borrow up to $30.0 million on a term loan basis.
Alternatively, the Company, at its option, may utilize up to $10.0 million as a
revolving line of credit for working capital and utilize the remaining $20.0
million for mergers and acquisitions. Borrowings under the credit facility can
be made through September 1999. On March 20, 1998, the Company repaid
outstanding principal borrowings of $24.8 million under this facility, along
with related accrued interest, with a portion of the proceeds from the public
sale of 2,000,000 newly-issued shares of its common stock. As of April 30, 1998,
the Company had no outstanding borrowings under the credit facility.
8
<PAGE> 11
Net cash used in operating activities was $2.5 million during the first
quarter of 1998 and $913,000 during the corresponding quarter of 1997. The first
quarter is typically the lowest quarter of each year in terms of cash
collections on accounts receivable. There can be no assurance, however, that
this trend will continue. See "Forward-looking Statements."
Net cash used in investing activities was $7.6 million in the first quarter
of 1998 and $3.7 million in the first quarter of 1997. Net cash used in
investing activities for the first quarter of 1998 consisted of $2.3 million
used to acquire property and equipment (primarily computer-related equipment)
and $5.3 million paid in connection with a business acquisition.
During the five quarters ended March 31, 1998, the Company acquired six
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.
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 $16.0 million and $16,000 for
the quarters ended March 31, 1998 and 1997, respectively. For the quarter ended
March 31, 1998, net cash provided by financing activities consisted primarily of
$40.7 million in net proceeds from the sale of common stock, as reduced by the
subsequent $24.8 million repayment of the outstanding principal balance on the
Company's bank credit facility. Net proceeds from the sale of common stock
primarily relate to the Company's public sale of 2,000,000 newly-issued common
shares in a underwritten offering which became effective on March 17, 1998.
The Company believes that its current working capital, its existing credit
facility and cash flow generated from future operations will be sufficient to
meet the Company's working capital and capital expenditure requirements through
March 31, 1999 unless one or more acquisitions are consummated which require the
Company to seek additional debt or equity financing.
NEW ACCOUNTING STANDARDS
Statement of Financial Accounting Standards No. 131, "Disclosures about
Segments of an Enterprise and Related Information" establishes revised standards
for the manner in which public business enterprises report information about
operating segments. The Company does not believe that this Statement will
significantly alter the segment disclosures it has historically provided. This
Statement is effective for fiscal years beginning after December 15, 1997.
Statement of Position 98-5, "Reporting on the Costs of Start-Up Activities"
defines such costs and requires that they be expensed as incurred. This
pronouncement is effective for financial statements for fiscal years beginning
after December 15, 1998 although earlier application is encouraged. The Company
has chosen to adopt this pronouncement effective January 1, 1999 and does not
believe that it will materially affect its reported results of operations or
financial condition upon adoption.
YEAR 2000 ISSUE
Many existing computer programs use only two digits to identify a year in
the date field. These programs were designed and developed without considering
the impact of the upcoming change in the century. If not corrected, many
computer applications could fail or create erroneous results by or at the year
2000.
The Company believes that its principal year 2000 exposure is confined to
one accounting subsystem which is currently under intense review by outside
consultants. The Company believes that this subsystem will be revised or
replaced within the next 10 months. Consulting costs to revise or replace this
subsystem have not been estimated, but are not anticipated to be material to the
Company's business, operations or financial condition.
9
<PAGE> 12
FORWARD-LOOKING STATEMENTS
Statements made in this Form 10-Q for the quarter ended March 31, 1998 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
March 16, 1998 included in registration statement number 333-46225 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 March 20, 1998, in connection with the acquisition of the net operating
assets of Ginger Quill, Inc., d/b/a Precision Data Link, the Company issued
437,837 shares of its Common Stock to the former shareholders of Ginger Quill,
Inc. The shares were issued pursuant to the exemption from registration provided
by Section 4(2) of the Securities Act of 1933, as amended.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
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
<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).
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 (for SEC use only).
27.2 -- Restated Financial Data Schedule for Form 10-Q for quarterly
period ended September 30, 1996 to reflect provisions of
SFAS No. 128 (for SEC use only).
27.3 -- Restated Financial Data Schedule for Form 10-K for annual
period ended December 31, 1996 to reflect provisions of SFAS
No. 128 (for SEC use only).
27.4 -- Restated Financial Data Schedule for Form 10-Q for quarterly
period ended September 30, 1997 to reflect provisions of
SFAS No. 128 (for SEC use only).
</TABLE>
(b) Reports on Form 8-K
None.
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: May 15, 1998 By: /s/ DONALD E. ELLIS, JR.
-------------------------------------------------
Donald E. Ellis, Jr.
Senior Vice President,
Treasurer and
Chief Financial Officer
(principal financial officer)
Dated: May 15, 1998 By: /s/ MICHAEL R. MELTON
-------------------------------------------------
Michael R. Melton
Vice President -- Finance
(principal accounting officer)
</TABLE>
12
<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
THREE MONTH PERIOD ENDED MARCH 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 25,290
<SECURITIES> 0
<RECEIVABLES> 60,671
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 87,310
<PP&E> 17,052
<DEPRECIATION> 6,897
<TOTAL-ASSETS> 153,612
<CURRENT-LIABILITIES> 40,364
<BONDS> 846
0
0
<COMMON> 22
<OTHER-SE> 109,195
<TOTAL-LIABILITY-AND-EQUITY> 153,612
<SALES> 0
<TOTAL-REVENUES> 33,144
<CGS> 0
<TOTAL-COSTS> 17,956
<OTHER-EXPENSES> 13,029
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (324)
<INCOME-PRETAX> 1,835
<INCOME-TAX> 715
<INCOME-CONTINUING> 1,120
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,120
<EPS-PRIMARY> .06
<EPS-DILUTED> .06
</TABLE>
<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
NINE MONTH PERIOD ENDED SEPTEMBER 30, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 14,895
<SECURITIES> 0
<RECEIVABLES> 33,755
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 49,224
<PP&E> 7,928
<DEPRECIATION> 1,916
<TOTAL-ASSETS> 60,907
<CURRENT-LIABILITIES> 16,484
<BONDS> 702
0
0
<COMMON> 18
<OTHER-SE> 38,221
<TOTAL-LIABILITY-AND-EQUITY> 60,907
<SALES> 0
<TOTAL-REVENUES> 55,542
<CGS> 0
<TOTAL-COSTS> 29,105
<OTHER-EXPENSES> 18,694
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 227
<INCOME-PRETAX> 7,516
<INCOME-TAX> 6,453
<INCOME-CONTINUING> 1,063
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,063
<EPS-PRIMARY> .29
<EPS-DILUTED> .27
</TABLE>
<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
YEAR ENDED DECEMBER 31, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 16,891
<SECURITIES> 0
<RECEIVABLES> 35,961
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 55,429
<PP&E> 8,505
<DEPRECIATION> 2,272
<TOTAL-ASSETS> 68,318
<CURRENT-LIABILITIES> 25,425
<BONDS> 692
0
0
<COMMON> 18
<OTHER-SE> 40,541
<TOTAL-LIABILITY-AND-EQUITY> 68,318
<SALES> 0
<TOTAL-REVENUES> 77,330
<CGS> 0
<TOTAL-COSTS> 40,330
<OTHER-EXPENSES> 25,961
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 100
<INCOME-PRETAX> 10,939
<INCOME-TAX> 7,789
<INCOME-CONTINUING> 3,150
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,150
<EPS-PRIMARY> .41
<EPS-DILUTED> .39
</TABLE>
<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
NINE MONTH PERIOD ENDED SEPTEMBER 30, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 12,231
<SECURITIES> 0
<RECEIVABLES> 47,461
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 60,984
<PP&E> 12,895
<DEPRECIATION> 4,314
<TOTAL-ASSETS> 81,246
<CURRENT-LIABILITIES> 27,197
<BONDS> 707
0
0
<COMMON> 18
<OTHER-SE> 51,061
<TOTAL-LIABILITY-AND-EQUITY> 81,246
<SALES> 0
<TOTAL-REVENUES> 76,445
<CGS> 0
<TOTAL-COSTS> 39,553
<OTHER-EXPENSES> 25,709
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (132)
<INCOME-PRETAX> 11,315
<INCOME-TAX> 4,397
<INCOME-CONTINUING> 6,918
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,918
<EPS-PRIMARY> .38
<EPS-DILUTED> .37
</TABLE>
