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