PROFIT RECOVERY GROUP INTERNATIONAL INC, 10-Q, 1999-08-12

PROFIT RECOVERY GROUP INTERNATIONAL INC
10-Q, 1999-08-12
ENGINEERING, ACCOUNTING, RESEARCH, MANAGEMENT

Previous: NUMATICS INC, 10-Q, 1999-08-12

Next: PROFIT RECOVERY GROUP INTERNATIONAL INC, 10-Q/A, 1999-08-12

<PAGE> 1

- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------

UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

---------------------

FORM 10-Q

---------------------

<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 JUNE 30, 1999
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 July 31, 1999, the latest practicable date, was 27,544,168 (41,316,252
after giving effect to a 3-for-2 stock split effected in the form of a stock
dividend which was declared on July 20, 1999 and is payable on August 17, 1999).

- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 2

THE PROFIT RECOVERY GROUP INTERNATIONAL, INC. AND SUBSIDIARIES

FORM 10-Q
QUARTER ENDED JUNE 30, 1999

INDEX

<TABLE>
<CAPTION>
PAGE NO.
--------
<S> <C> <C>
PART I. Financial Information....................................... 1

Item 1. Financial Statements (Unaudited).................... 1

Condensed Consolidated Statements of Operations -- Three
and six month periods ended June 30, 1999 and 1998..... 1

Condensed Consolidated Balance Sheets --
June 30, 1999 and December 31, 1998.................... 2

Condensed Consolidated Statements of Cash Flows --
Six months ended June 30, 1999 and 1998................ 3

Notes to Condensed Consolidated Financial Statements...... 4

Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations................. 9

Item 3. Quantitative and Qualitative Disclosures About
Market Risk......................................... 15

PART II. Other Information........................................... 15

Item 1. Legal Proceedings................................... 15

Item 2. Changes in Securities............................... 15

Item 3. Defaults Upon Senior Securities..................... 15

Item 4. Submission of Matters to Vote of Security Holders... 16

Item 5. Other Information................................... 16

Item 6. Exhibits and Reports on Form 8-K.................... 16
Signatures............................................................ 17
</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,
------------------- ------------------
1999 1998 1999 1998
-------- -------- -------- -------
<S> <C> <C> <C> <C>
Revenues............................................... $71,728 $38,934 $128,343 $72,078
Cost of revenues....................................... 35,913 20,326 67,633 38,282
Selling, general and administrative expenses........... 23,102 13,991 43,671 27,020
------- ------- -------- -------
Operating income..................................... 12,713 4,617 17,039 6,776
Interest (expense) income, net......................... (978) 186 (1,822) (138)
------- ------- -------- -------
Earnings before income taxes and cumulative effect of
accounting change................................. 11,735 4,803 15,217 6,638
Income taxes........................................... 4,609 1,884 5,980 2,599
------- ------- -------- -------
Earnings before cumulative effect of accounting
change............................................ 7,126 2,919 9,237 4,039
Cumulative effect of accounting change (Note H)........ -- -- (29,195) --
------- ------- -------- -------
Net earnings (loss).................................. $ 7,126 $ 2,919 $(19,958) $ 4,039
======= ======= ======== =======
Basic earnings (loss) per share (Notes B and E):
Earnings before cumulative effect of accounting
change............................................ $ 0.17 $ 0.09 $ 0.23 $ 0.13
Cumulative effect of accounting change............... -- -- (0.72) --
------- ------- -------- -------
Net earnings (loss).................................. $ 0.17 $ 0.09 $ (0.49) $ 0.13
======= ======= ======== =======
Diluted earnings (loss) per share (Notes B and E):
Earnings before cumulative effect of accounting
change............................................ $ 0.17 $ 0.09 $ 0.22 $ 0.13
Cumulative effect of accounting change............... -- -- (0.70) --
------- ------- -------- -------
Net earnings (loss).................................. $ 0.17 $ 0.09 $ (0.48) $ 0.13
======= ======= ======== =======
Weighted-average shares outstanding (Notes B and E):
Basic................................................ 40,853 32,639 40,314 30,975
======= ======= ======== =======
Diluted.............................................. 42,542 33,770 41,904 31,886
======= ======= ======== =======

Pro forma amounts, assuming the new accounting method
is applied retroactively:
Net earnings (loss).................................. $ 7,126 $ 318 $ 9,237 $ (928)
======= ======= ======== =======
Basic earnings (loss) per share...................... $ .17 $ .01 $ .23 $ (.03)
======= ======= ======== =======
Diluted earnings (loss) per share.................... $ .17 $ .01 $ .22 $ (.03)
======= ======= ======== =======
</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,
1999 1998
-------- ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents (Note D)........................ $ 31,639 $ 28,344
Receivables:
Billed contract receivables............................. 38,093 24,917
Unbilled contract receivables........................... -- 69,432
Employee advances....................................... 5,822 6,791
-------- --------
Total receivables.................................. 43,915 101,140
-------- --------
Prepaid expenses and other current assets................. 2,154 2,520
Deferred income taxes..................................... 4,484 --
-------- --------
Total current assets............................... 82,192 132,004
-------- --------
Property and equipment:
Computer and other equipment.............................. 34,643 26,123
Furniture and fixtures.................................... 3,445 2,738
Leasehold improvements.................................... 5,052 4,410
-------- --------
43,140 33,271
Less accumulated depreciation and amortization............ 15,629 10,514
-------- --------
27,511 22,757
-------- --------
Noncompete agreements, less accumulated amortization........ 1,936 2,475
Deferred loan costs, less accumulated amortization.......... 1,388 1,802
Goodwill, less accumulated amortization..................... 239,615 223,508
Deferred income taxes....................................... 3,786 3,158
Other assets................................................ 2,171 1,678
-------- --------
$358,599 $387,382
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Note payable to bank...................................... $ 49 $ 49
Current installments of long-term debt.................... 450 630
Accounts payable and accrued expenses..................... 5,255 13,556
Accrued business acquisition consideration (Note G)....... -- 30,000
Accrued payroll and related expenses...................... 22,630 44,678
Deferred income taxes..................................... -- 13,310
Deferred tax recovery audit revenue....................... 982 1,238
-------- --------
Total current liabilities.......................... 29,366 103,461
Long-term debt, excluding current installments.............. 73,358 112,886
Deferred compensation....................................... 3,154 3,453
Other long-term liabilities................................. 678 2,078
-------- --------
Total liabilities.................................. 106,556 221,878
-------- --------
Shareholders' equity (Note E):
Preferred stock, no par value. Authorized 1,000,000
shares; no shares issued or outstanding in 1999 and
1998.................................................... -- --
Common stock, no par value; stated value $.001 per share.
Authorized 60,000,000 shares; issued and outstanding
41,254,165 in 1999 and 36,056,878 in 1998............... 41 36
Additional paid-in capital................................ 241,310 133,713
Retained earnings......................................... 14,195 34,153
Accumulated other comprehensive loss...................... (3,503) (2,398)
-------- --------
Total shareholders' equity......................... 252,043 165,504
-------- --------
Contingencies (Note G)
$358,599 $387,382
======== ========
</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,
--------------------
1999 1998
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net earnings (loss)....................................... $(19,958) $ 4,039
Adjustments to reconcile net earnings (loss) to net cash
used in operating activities:
Cumulative effect of accounting change.................. 29,195 --
Depreciation and amortization........................... 10,683 4,039
Loss on sale of property and equipment.................. 45 4
Deferred compensation expense........................... (299) 346
Deferred income taxes................................... 251 399
Foreign translation adjustments......................... (1,105) (1,460)
Changes in assets and liabilities, net of effects of
acquisitions:
Receivables.......................................... (7,651) (11,345)
Prepaid expenses and other current assets............ 366 309
Other assets......................................... (136) (131)
Accounts payable and accrued expenses................ (10,756) 728
Accrued payroll and related expenses................. (484) (649)
Deferred tax recovery audit revenue.................. (256) (110)
Other long-term liabilities.......................... (1,400) (52)
-------- --------
Net cash used in operating activities.............. (1,505) (3,883)
-------- --------
Cash flows from investing activities:
Purchases of property and equipment....................... (9,708) (7,236)
Acquisitions of businesses (net of cash acquired) -- (Note
G)...................................................... (43,521) (10,920)
-------- --------
Net cash used in investing activities.............. (53,229) (18,156)
-------- --------
Cash flows from financing activities:
Net decrease in note payable to bank...................... -- (43)
Proceeds from issuance of long-term debt.................. 56,797 5,240
Repayments of long-term debt.............................. (96,520) (25,603)
Net proceeds from issuance of common stock................ 97,752 41,769
-------- --------
Net cash provided by financing activities.......... 58,029 21,363
-------- --------
Net change in cash and cash equivalents............ 3,295 (676)
Cash and cash equivalents at beginning of period............ 28,344 19,386
-------- --------
Cash and cash equivalents at end of period.................. $ 31,639 $ 18,710
======== ========
Supplemental disclosures of cash flow information:
Cash paid during the period for interest.................. $ 1,792 $ 421
======== ========
Cash paid during the period for income taxes.............. $ 6,323 $ 1,890
======== ========
Supplemental disclosure of noncash investing and financing
activities:
In the first six months of both 1999 and 1998, the Company
purchased the net operating assets of certain companies.
In conjunction with the acquisitions, the Company
assumed liabilities as follows:
Fair value of assets acquired........................ $ 55,991 $ 21,135
Cash paid for the acquisitions (net of cash
acquired)............................................ (43,521) (10,920)
Fair value of shares issued for the acquisitions..... (9,850) (9,607)
-------- --------
Liabilities assumed................................ $ 2,620 $ 608
======== ========
</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, 1999
(UNAUDITED)

NOTE A -- BASIS OF PRESENTATION

The accompanying unaudited condensed consolidated financial statements of
The Profit Recovery Group International, Inc. and its wholly owned subsidiaries
(the "Company") have been prepared in accordance with generally accepted
accounting principles for interim financial information and with the
instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do
not include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation have been included. Operating results for the
three and six month periods ended June 30, 1999 are not necessarily indicative
of the results that may be expected for the year ending December 31, 1999. For
further information, refer to the consolidated financial statements and
footnotes thereto included in the Company's Form 10-K for the year ended
December 31, 1998.

As indicated in Note H, the Company has chosen, retroactive to January 1,
1999, to recognize revenue on all of its currently existing operations when it
invoices clients for its fee. The Company had previously recognized revenue from
services provided to its historical client base at the time overpayment claims
were presented to and approved by its clients. In accordance with applicable
requirements of generally accepted accounting principles, financial statements
for periods prior to 1999 have not been restated. AS A RESULT, CERTAIN FINANCIAL
STATEMENT AMOUNTS FOR 1999 INTERIM PERIODS WILL NOT BE DIRECTLY COMPARABLE TO
CORRESPONDING AMOUNTS FOR THE 1998 INTERIM PERIODS.

NOTE B -- EARNINGS PER SHARE

The following table sets forth the computations of basic and diluted
earnings per share for the three and six month periods ended June 30, 1999 and
June 30, 1998 (in thousands, except for earnings per share information):

<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------- ------------------
1999 1998 1999 1998
-------- -------- -------- -------
<S> <C> <C> <C> <C>
Numerator for both basic earnings (loss) per share
and diluted earnings (loss) per share:
Earnings before cumulative effect of accounting
change......................................... $ 7,126 $ 2,919 $ 9,237 $ 4,039
Cumulative effect of accounting change........... -- -- (29,195) --
------- ------- -------- -------
Net earnings (loss)....................... $ 7,126 $ 2,919 $(19,958) $ 4,039
======= ======= ======== =======
Denominator:
Denominator for basic earnings (loss) per
share -- weighted-average shares outstanding... 40,853 32,639 40,314 30,975
Effect of dilutive securities -- employee stock
options........................................ 1,689 1,131 1,590 911
------- ------- -------- -------
Denominator for diluted earnings (loss) per
share.......................................... 42,542 33,770 41,904 31,886
======= ======= ======== =======
Basic earnings (loss) per share:
Earnings before cumulative effect of accounting
change......................................... $ 0.17 $ 0.09 $ 0.23 $ 0.13
Cumulative effect of accounting change........... -- -- (0.72) --
------- ------- -------- -------
Net earnings (loss)....................... $ 0.17 $ 0.09 $ (0.49) $ 0.13
======= ======= ======== =======
Diluted earnings (loss) per share:
Earnings before cumulative effect of accounting
change......................................... $ 0.17 $ 0.09 $ 0.22 $ 0.13
Cumulative effect of accounting change........... -- -- (0.70) --
------- ------- -------- -------
Net earnings (loss)....................... $ 0.17 $ 0.09 $ (0.48) $ 0.13
======= ======= ======== =======
</TABLE>

4
<PAGE> 7
THE PROFIT RECOVERY GROUP INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE C -- COMPREHENSIVE INCOME

Effective January 1, 1998, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income." This statement establishes items that are required to be
recognized under accounting standards as components of comprehensive income.
SFAS No. 130 requires, among other things, that an enterprise report a total for
comprehensive income in condensed financial statements of interim periods issued
to shareholders. For the three month periods ended June 30, 1999 and 1998, the
Company's consolidated comprehensive income was $8.3 million and $2.9 million,
respectively. For the six month periods ended June 30, 1999 and 1998, the
Company's consolidated comprehensive income (loss) was $(21.1) million and $3.6
million, respectively. The difference between consolidated comprehensive income
(loss), as disclosed here, and traditionally-determined consolidated net
earnings (loss), as set forth on the accompanying Condensed Consolidated
Statements of Operations, results from foreign currency translation adjustments.

NOTE D -- CASH EQUIVALENTS

Cash equivalents at December 31, 1998 included $6.3 million 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. In addition, cash equivalents at June 30, 1999 and December 31, 1998
also included $4.9 million and $7.1 million, respectively, of temporary
investments held in a French bank by certain of the Company's French
subsidiaries.

The Company does not intend to take possession of collateral securities on
future reverse repurchase agreement transactions conducted with banking
institutions of national standing. The Company does insist, however, that all
such agreements provide for full collateralization using obligations of the
United States of America having a current market value equivalent to or
exceeding the reverse repurchase agreement amount.

NOTE E -- SHAREHOLDERS' EQUITY

On July 20, 1999, the Company declared a 3-for-2 stock split effected in
the form of a stock dividend for shareholders of record on August 2, 1999,
payable on August 17, 1999. All share and per share amounts have been
retroactively restated to give effect to the aforementioned stock split.

On August 11, 1999, the Company filed a preliminary proxy statement on Form
14A seeking to amend its Articles of Incorporation to increase the number of
shares of Company common stock which the Company shall have the authority to
issue from 60.0 million shares to 200.0 million shares.

On March 16, 1998, the Company sold 2.0 million newly issued shares
(equivalent to 3.0 million post-split shares) of its common stock and certain
selling shareholders sold an additional 2.4 million outstanding shares
(equivalent to 3.6 million post-split shares) in an underwritten follow-on
offering. The offering was priced at $21.00 per share (equivalent to $14.00 per
share post-split). 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 (equivalent to 990,000 post-split shares) of Company common stock. All of
these shares were then sold to the syndicate by certain selling shareholders.
The Company received no proceeds from the sale of such shares.

On January 8, 1999, the Company sold 2.7 million newly issued shares
(equivalent to 4.1 million post-split shares) of its common stock and certain
selling shareholders sold an additional 800,000 outstanding shares (equivalent
to 1.2 million post-split shares) in an underwritten follow-on offering. The
offering was priced at $34.00 per share (equivalent to $22.67 per share
post-split). The proceeds of the offering (net of underwriting discounts and
commissions) were distributed by the underwriting syndicate on January 13, 1999.
5
<PAGE> 8
THE PROFIT RECOVERY GROUP INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The net proceeds from the 2.7 million shares (equivalent to 4.1 million
post-split shares) sold by the Company, combined with the net proceeds from an
additional 191,000 shares (equivalent to 286,500 post-split shares) subsequently
sold by the Company in late January 1999 upon exercise by the underwriting
syndicate of their over-allotment option, were applied to reduce outstanding
borrowings under the Company's $200.0 million bank credit facility.
Additionally, 334,000 shares (equivalent to 501,000 post-split shares) were sold
in late January 1999 by certain selling shareholders in connection with the
over-allotment option. The Company received no proceeds from the sale of such
shares.

NOTE F -- OPERATING SEGMENTS AND RELATED INFORMATION

The Company adopted SFAS No. 131, "Disclosures About Segments of an
Enterprise and Related Information," in 1998 which changes the methodology by
which the Company reports information about its operating segments and requires
limited interim period reporting.

The Company has three reportable operating segments consisting of Accounts
Payable Services, Freight Services and Tax Services. Each segment represents a
strategic business unit that offers a different type of recovery audit service.
These business units are managed separately because each business requires
different technology and marketing strategies.

Accounts Payable Services consist of the review of client accounts payable
disbursements to identify and recover overpayments. This operating segment
includes accounts payable services provided to retailers, wholesale distributors
and governmental agencies (the Company's historical client base) and accounts
payable services provided to various other types of business entities by the
Company's Loder Drew & Associates division. The Accounts Payable Services
operating segment conducts business in twenty-five countries.

Freight Services consist primarily of various businesses acquired by the
Company beginning in 1997 which audit freight-related disbursements to identify
and recover overpayments. Areas of current specialization include ocean freight,
ground freight and overnight freight. This operating segment currently serves
primarily businesses located in the United States, although international
expansion is planned.

Tax Services consist primarily of various European businesses acquired by
the Company in 1998 and 1997 which audit tax-related disbursements to identify
and recover overpayments (primarily within France) and assist business entities
throughout Europe in securing available grants.

The Company evaluates the performance of its operating segments based upon
revenues and operating income. Intersegment revenues are not significant.

Segment information for the three and six month periods ended June 30, 1999
and 1998 follows (in thousands):

<TABLE>
<CAPTION>
ACCOUNTS
PAYABLE FREIGHT TAX
SERVICES SERVICES SERVICES TOTAL
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Three months ended June 30, 1999
Revenues....................................... $ 58,794 $5,109 $ 7,825 $ 71,728
Operating income............................... 9,601 1,760 1,352 12,713
Three months ended June 30, 1998
Revenues....................................... $ 31,315 $1,403 $ 6,216 $ 38,934
Operating income............................... 3,396 294 927 4,617
Six months ended June 30, 1999
Revenues....................................... $105,281 $9,264 $13,798 $128,343
Operating income............................... 11,695 3,841 1,503 17,039
Six months ended June 30, 1998
Revenues....................................... $ 59,587 $1,899 $10,592 $ 72,078
Operating income............................... 4,982 664 1,130 6,776
</TABLE>

6
<PAGE> 9
THE PROFIT RECOVERY GROUP INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE G -- ACQUISITIONS

On March 20, 1998, the Company acquired Ginger Quill, Inc., d/b/a Precision
Data Link, a 22 person air freight recovery audit firm based in Salt Lake City,
Utah. This transaction was accounted for as a purchase and involved both cash
and common stock consideration.

On August 6, 1998, the Company acquired all the assets and assumed certain
liabilities of Loder Drew & Associates, Inc. ("Loder Drew") effective as of July
1, 1998. Loder Drew is an international recovery auditing firm primarily serving
clients in the manufacturing, financial services and other non-retail sectors.
Pursuant to the acquisition agreements, the initial consideration paid for Loder
Drew consisted of $70.0 million in cash and 803,535 restricted, unregistered
shares (equivalent to 1.2 million post-split shares) of the Company's common
stock. Additionally, the acquisition agreements provided that the former owners
of Loder Drew would be eligible to receive additional purchase price
consideration up to a maximum of $70.0 million in cash conditioned on the
performance of Loder Drew through December 31, 1999. Of this $70.0 million,
$30.0 million was based on the financial performance of Loder Drew for the six
months ended December 31, 1998. Since the financial performance of Loder Drew
for the six months ended December 31, 1998 exceeded applicable thresholds, the
entire $30.0 million was recorded on the Company's December 31, 1998
Consolidated Balance Sheet as additional goodwill and corresponding accrued
business acquisition consideration. The $30.0 million was paid in March 1999
(along with related accrued interest) from borrowings under the Company's
existing $200.0 million credit facility. Of the above-mentioned $70.0 million,
up to $40.0 million in additional purchase price consideration is payable in the
Spring of 2000 based upon the financial performance of the Loder Drew division
during calendar 1999.

On April 1, 1999, the Company acquired substantially all the assets and
assumed certain liabilities of Payment Technologies, Inc. d/b/a PayTech
("PayTech"), a Georgia-based firm in the business of handling freight data,
auditing freight bills and other related services. The transaction was accounted
for as a purchase, with consideration of $5.0 million in cash and 152,532
restricted, unregistered shares (equivalent to 228,798 post-split shares) of the
Company's common stock.

On June 14, 1999, the Company acquired the net assets of Invoice and Tariff
Management Group, LLC ("ITMG"), a Georgia-based firm in the business of
telecommunications recovery auditing and negotiating integrated services
contracts with its clients' telecom suppliers on a gain-share basis. The
transaction was accounted for as a purchase and involved initial consideration
of $11.0 million in cash and 236,873 unregistered, restricted shares (equivalent
to 355,310 post-split shares) of the Company's common stock. The former owners
of ITMG are also eligible to receive additional purchase price consideration
through December 31, 2000 of up to $20.0 million based upon the earnings of
ITMG. Of this $20.0 million, $5.0 million is payable in February 2000 based upon
the financial performance of ITMG from the acquisition date through December 31,
1999, and $15.0 million is payable in February 2001 based upon the financial
performance of ITMG in 2000.

NOTE H -- ACCOUNTING CHANGE

Due to the Company's continuing and substantial expansion beyond its
historical client base and original service offerings, as well as the
administrative desirability of standardizing revenue recognition practices, the
Company has chosen, retroactive to January 1, 1999, to recognize revenue on all
of its currently existing operations when it invoices clients for its fee. The
Company had previously recognized revenue from services provided to its
historical client base (consisting primarily of retailers, wholesale
distributors and governmental entities) at the time overpayment claims were
presented to and approved by its clients. In effecting this change, the Company
has reported, as of January 1, 1999, a non-cash, after-tax change of $29.2
million as the cumulative effect of a change in an accounting principle. The
previously issued financial statements for the

7
<PAGE> 10
THE PROFIT RECOVERY GROUP INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

three months ended March 31, 1999 have been restated to give retroactive effect
to the change. The cumulative effect of the accounting change was derived as
follows:

<TABLE>
<S> <C>
Unbilled contract receivables at December 31, 1998, as
adjusted.............................................. $69,432
Less: auditor payroll accrual at December 31, 1998,
associated with unbilled contract receivables......... (21,564)
-------
Subtotal............................................... 47,868
Less: related income tax effect at 39.0%............... (18,673)
-------
Cumulative effect of accounting change................. $29,195
=======
</TABLE>

The Company's Revenue Recognition Policy as previously stated in Note 1(c)
to its annual consolidated financial statements included in Form 10-K for the
year ended December 31, 1998 has been subsequently revised, effective January 1,
1999, to read as follows:

The Company's revenues are based on specific contracts with its clients.
Such contracts generally specify (a) time periods covered by the audit, (b)
nature and extent of audit service to be provided by the Company, (c) client's
duties in assisting and cooperating with the Company, and (d) fee payable to the
Company generally expressed as a specified percentage of the amounts recovered
by the client resulting from liability overpayment claims identified. In the
case of prospective facilities audits such as telecommunications tariff
negotiations conducted by the Company on behalf of its clients, contracts
typically provide for a percentage-of-savings fee which is calculated and fixed
at the time the new tariff agreement is executed, and is payable to the Company
on a current basis.

In addition to contractual provisions, most clients also establish specific
procedural guidelines which the Company must satisfy prior to submitting claims
for client approval. These guidelines are unique to each client and impose
specific requirements on the Company such as adherence to vendor interaction
protocols, provision of advance written notification to vendors of forthcoming
claims, securing written claim validity concurrence from designated client
personnel and, in limited cases, securing written claim validity concurrence
from the involved vendors. Approved claims are processed by clients and
generally taken as credits against outstanding payables or future purchases from
the vendors involved. The Company then invoices its clients for a contractually
stipulated percentage of amounts recovered.

Invoice basis of revenue recognition

The Company recognizes revenues when it invoices clients for its fee. For
the three months and six months ended June 30, 1999, revenues recognized on the
invoice basis represented 100% of consolidated revenues.

Submitted claims basis of revenue recognition

With respect to the Company's contemplated future operations to secure
refunds pursuant to statute or regulation of amounts paid by clients to
governmental entities, the Company will recognize revenues at the time refund
claims containing all required documentation are filed with appropriate
governmental agencies in those instances where historical refund disallowance
rates can be accurately estimated. The Company will record its fee participation
in these refunds at estimated net realizable value without reserves.
Accordingly, adjustments to uncollectible fee estimates will be charged or
credited to earnings, as appropriate. The Company has not yet acquired or
developed operations for which this submitted claims basis of revenue
recognition would be applicable.

8
<PAGE> 11

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

The following discussion and analysis should be read in conjunction with
the condensed consolidated financial statements and notes thereto included
elsewhere herein.

As indicated in Note H contained elsewhere in this Form 10-Q, the Company
has chosen, retroactive to January 1, 1999, to recognize revenue on all of its
currently existing operations when it invoices clients for its fee. The Company
had previously recognized revenue from services provided to its historical
client base at the time overpayment claims were presented to and approved by its
clients. In accordance with applicable requirements of generally accepted
accounting principles, financial statements for periods prior to 1999 will not
be restated. AS A RESULT, CERTAIN FINANCIAL STATEMENT AMOUNTS FOR 1999 INTERIM
PERIODS WILL NOT BE DIRECTLY COMPARABLE TO CORRESPONDING AMOUNTS FOR THE 1998
INTERIM PERIODS.

OVERVIEW

The Company is a leading provider of accounts payable and other recovery
audit services to large businesses and certain governmental agencies having
numerous payment transactions with many vendors. These businesses include
retailers, manufacturers, wholesale distributors, technology companies and
healthcare providers.

In businesses with large purchase volumes and continuously fluctuating
prices, some small percentage of erroneous overpayments to vendors is
inevitable. In addition, the complexity of various tax laws results in
overpayments to governmental agencies. Services such as freight,
telecommunications and utilities provided to businesses under complex pricing
arrangements also can result in overpayments. All of these overpayments result
in "lost profits." The Company's trained, experienced audit specialists use
sophisticated proprietary technology and advanced audit techniques and
methodologies to identify overpayments to vendors and tax authorities. The
Company receives a contractual percentage of overpayments it identifies and its
clients recover.

RESULTS OF OPERATIONS

The following table presents, for the periods indicated, certain items in
the condensed consolidated statements of operations as a percentage of revenues.

<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED ENDED
JUNE 30, JUNE 30,
-------------- ----------------
1999 1998 1999 1998
----- ----- ------- -----
<S> <C> <C> <C> <C>
Revenues................................................ 100.0% 100.0% 100.0% 100.0%
Cost of revenues........................................ 50.1 52.2 52.7 53.1
Selling, general and administrative expenses............ 32.2 35.9 34.0 37.5
----- ----- ------- -----
Operating income...................................... 17.7 11.9 13.3 9.4
Interest income (expense), net.......................... (1.4) 0.4 (1.4) (0.2)
----- ----- ------- -----
Earnings before income taxes and cumulative effect of
accounting change.................................. 16.3 12.3 11.9 9.2
Income taxes............................................ 6.4 4.8 4.7 3.6
----- ----- ------- -----
Earnings before cumulative effect of accounting
change............................................. 9.9 7.5 7.2 5.6
Cumulative effect of accounting change.................. -- -- (22.8) --
----- ----- ------- -----
Net earnings (loss)................................... 9.9% 7.5% (15.6)% 5.6%
===== ===== ======= =====
</TABLE>

Three and Six Month Periods Ended June 30, 1999 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 retail industry. Revenues increased 84.2% to $71.7 million
for the second quarter of 1999, up from $38.9 million in the second quarter of
1998. For the

9
<PAGE> 12

six months ended June 30, 1999, revenues were $128.3 million, or 78.1% higher
than $72.1 million achieved in the corresponding period of 1998.

Domestic revenues were $52.5 million in the second quarter of 1999, up
112.8% from $24.6 million in the second quarter of 1998. Of this 112.8%
increase, 37.6% was contributed by growth in the Company's traditional retail,
wholesale distribution and governmental agency business, and 75.2% was derived
from companies acquired primarily in 1998 in new areas of audit emphasis (e.g.,
freight). For the first six months of 1999, domestic revenues were $95.5
million, an increase of 108.8% over $45.8 million during the comparable period
of 1998. Of this 108.8% increase, 69.4% was derived from companies acquired in
new areas of audit emphasis. Although the October 1998 acquisition of Robert
Beck & Associates contributed substantially to second quarter and year to date
revenue growth in the Company's traditional retail, wholesale distribution and
governmental agency business, it is no longer practicable to separate the effect
of this former block of business since the clients, personnel and operations of
Robert Beck & Associates have been assimilated into the Company's domestic
operations effective January 1, 1999.

The Company considers international operations to be all operations located
outside of the United States. International revenues were $19.2 million in the
second quarter of 1999, up 34.8% from $14.3 million in the second quarter of
1998. Most of this increase related to the Company's European operations. For
the first six months of 1999, international revenues were $32.8 million, a 24.6%
increase over $26.3 million during the comparable period of 1998. The Company
continues to believe that the rate of revenue growth for its international
operations will significantly exceed its rate of domestic revenue growth for the
foreseeable future if the revenue impact of acquired businesses is excluded.
There can be no assurance, however, that international growth trends will
continue. See "Forward-Looking Statements".

The Company has experienced and expects to continue to experience
significant seasonality in its business. The Company typically realizes higher
revenues and operating income in the last two quarters of its fiscal year. This
trend is expected to continue and reflects the inherent purchasing and
operational cycles of the retailing industry which continues to be the principal
industry served by the Company. The Company's recent larger acquisitions,
including the October 1997 acquisition of Alma, the August 1998 acquisition of
Loder, Drew & Associates and the October 1998 acquisition of Robert Beck &
Associates are not expected to significantly affect this trend because these
entities, in the aggregate, have historically experienced similar seasonality in
revenue and operating income. Should the Company not continue to realize
increased revenues in future third and fourth quarter periods, profitability for
any affected quarter and the entire year could be materially and adversely
affected due to ongoing selling, general and administrative expenses that are
largely fixed over the short term. See "Forward-Looking Statements."

Cost of Revenues. Cost of revenues consists principally of commissions
paid or payable to the Company's auditors based upon the level of overpayment
recoveries, and salaries and bonuses paid or payable to divisional and regional
managers. Also included are other direct costs incurred by these personnel
including rental of field offices, travel and entertainment, telephone,
utilities, maintenance and supplies, and clerical assistance. Cost of revenues
was 50.1% of revenues for the second quarter of 1999, down from 52.2% in the
comparable quarter of 1998. For the six months ended June 30, 1999, cost of
revenues was 52.7%, down from 53.1% in the first six months of 1998.

Domestically, cost of revenues as a percentage of revenues was 50.5% in the
second quarter of 1999, down from 55.2% during the corresponding quarter of
1998. For the six months ended June 30, 1999, domestic cost of revenues as a
percentage of revenues was 52.2%, down from 56.9% during the first half of 1998.
The 1999 reductions relate primarily to the newly-acquired operations of Loder,
Drew & Associates and the Company's freight division which operated at lower
cost of revenue percentages than the Company's traditional retail, wholesale
distribution and governmental agency business.

Internationally, cost of revenues as a percentage of revenues was 48.8% in
the second quarter of 1999, up from 47.0% during the corresponding quarter of
1998. For the six months ended June 30, 1999, international cost of revenues as
a percentage of revenues was 54.3%, up from 46.5% during the first half of 1998.
The 1999 increases relate principally to increased expansion efforts in the
Company's traditional retail, wholesale

10
<PAGE> 13

distribution and governmental agency business since auditors in newly developed
countries typically draw salaries until adequate revenues are developed to
support commission-based compensation structures.

Selling, General and Administrative Expenses. Selling, general and
administrative expenses include the expenses of sales and marketing activities,
information technology services and the corporate data center, human resources,
legal and accounting, administration, headquarters-related depreciation of
property and equipment and amortization of intangibles. Selling, general and
administrative expenses as a percentage of revenues decreased to 32.2% in the
second quarter of 1999, down from 35.9% in the comparable period of 1998. For
the six months ended June 30, 1999, selling, general and administrative expenses
as a percentage of revenues was 34.0%, also down from 37.5% in the comparable
period of 1998.

Domestic selling, general and administrative expenses as a percentage of
revenues was 29.0% in the second quarter of 1999, down from 34.6% in the year
earlier period. For the first six months of 1999, domestic selling, general and
administrative expenses as a percentage of revenues decreased to 30.3%, down
from 36.1% in the corresponding period of 1998. Improvements in 1999 related
primarily to various components of fixed costs being spread over a rapidly
growing revenue base.

Internationally, selling, general and administrative expenses as a
percentage of revenues was 40.9% in the second quarter of 1999, up from 38.3% in
the 1998 second quarter. For the six month periods, this percentage likewise
increased to 44.8% in 1999 from 39.8% in 1998. Increases in 1999 related
primarily to the Company's expansion of infrastructure in the United Kingdom,
Singapore and Latin America.

In connection with acquired businesses, the Company has recorded intangible
assets including goodwill and deferred non-compete costs. Amortization of these
intangible assets totaled $2.7 million and $1.0 million for the quarters ended
June 30, 1999 and 1998, respectively, and $5.5 million and $1.8 million for the
six month periods ended June 30, 1999 and 1998, respectively.

Operating Income. Operating income increased 175.4% to $12.7 million in
the second quarter of 1999, up from $4.6 million in the second quarter of 1998.
For the six months ended June 30, 1999, operating income increased 151.5% to
$17.0 million, up from $6.8 million in the comparable period of 1998. As a
percentage of revenues, operating income increased to 17.7% in the second
quarter of 1999, up from 11.9% in the second quarter of 1998. For the six months
ended June 30, 1999, operating income increased to 13.3% of revenues, up from
9.4% of revenues in the comparable period of 1998. The components of this
improvement have been discussed above.

Interest (Expense) Income, Net. The Company incurred net interest expense
of $978,000 in the second quarter of 1999, compared to net interest income of
$186,000 in the second quarter of 1998. For the six months ended June 30, 1999,
net interest expense was $1.8 million, compared to $138,000 during the
comparable period of 1998. This increase in net interest expense related almost
totally to interest expense incurred on the Company's $200.0 million bank credit
facility in connection with acquired companies.

Earnings Before Income Taxes and Cumulative Effect of Accounting
Change. Earnings before income taxes and cumulative effect of accounting change
rose 144.3% and 129.2% in the quarter and six months ended June 30, 1999,
respectively, compared to the comparable periods of 1998. This improvement
resulted from increased revenues and improved operating margins during the 1999
periods.

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%.

Cumulative Effect of Accounting Change. As more fully described in Note H
to this Form 10-Q, the Company has chosen, retroactive to January 1, 1999, to
change its method of accounting for certain aspects of its revenue recognition.
In effecting this change, the Company has reported, as of January 1, 1999, a
non-cash, after-tax charge of $29.2 million as the cumulative effect of a change
in accounting principle.

Weighted-Average Shares Outstanding -- Basic. On July 20, 1999, the
Company declared a 3-for-2 stock split effected in the form of a stock dividend
for shareholders of record on August 2, 1999, payable on August 17, 1999. All
share and per share amounts have been retroactively restated to give effect to
the aforementioned stock split. The Company's weighted-average shares
outstanding for purposes of calculating
11
<PAGE> 14

basic earnings per share increased to 40.9 million during the second quarter of
1999, up 8.3 million shares from 32.6 million during the second quarter of 1998.
This increase was comprised primarily of (i) 4.4 million registered shares
issued by the Company in an underwritten stock offering completed in January
1999 and, (ii) restricted, unregistered shares issued by the Company 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 general
corporate purposes. The Company transferred $5.4 million in outstanding
borrowings to the new credit facility on July 29, 1998. On September 18, 1998,
the Company increased its credit facility from $150.0 million to $200.0 million
and the facility was syndicated between ten banking institutions led by
NationsBank, N.A. as agent for the group. In January 1999, the Company completed
a public offering of its common stock. This offering provided net proceeds to
the Company of $92.8 million, all of which were used to repay credit facility
borrowings. As of June 30, 1999, the Company had outstanding principal
borrowings of $72.8 million under this $200.0 million credit facility.

Net cash used in operating activities was $1.5 million in the first six
months of 1999 and $3.9 million during the corresponding period of 1998. The
first quarter is typically the lowest quarter of each year in terms of cash
collections on accounts receivable. Additionally, payroll-related liabilities at
December 31, 1998 were unusually high since the final payroll for that year took
place during mid-December. Accordingly, an unusually large level of cash
disbursements to auditors and other employees was made in January 1999
pertaining to December 31, 1998 obligations.

Net cash used in investing activities was $53.2 million during the first
six months of 1999, up considerably from $18.2 million during the corresponding
period of 1998. The increase related primarily to $30.0 million of additional
purchase price consideration paid to the former owners of Loder Drew &
Associates, as more fully discussed in a subsequent paragraph.

Net cash provided by financing activities was $58.0 million during the
first six months of 1999, and $21.4 million during the first six months of 1998.
The net cash provided by financing activities during each of the two first
quarter periods related primarily to follow-on common stock offerings as
discussed in Note E of Notes to Condensed Consolidated Financial Statements.

On August 6, 1998, the Company acquired all the assets and assumed certain
liabilities of Loder Drew effective as of July 1, 1998. Loder Drew is an
international recovery auditing firm primarily serving clients in the
manufacturing, financial services and other non-retail sectors. Pursuant to the
acquisition agreements, the initial consideration paid for Loder Drew consisted
of $70.0 million in cash and 803,535 restricted, unregistered shares of the
Company's common stock (equivalent to 1.2 million post-split shares).
Additionally, the acquisition agreements provided that the former owners of
Loder Drew would be eligible to receive additional purchase price consideration
up to a maximum of $70.0 million in cash conditioned on the performance of Loder
Drew through December 31, 1999. Of this $70.0 million, $30.0 million was based
on the financial performance of Loder Drew for the six months ended December 31,
1998. Since the financial performance of Loder Drew for the six months ended
December 31, 1998 exceeded applicable thresholds, the entire $30.0 million was
recorded on the Company's December 31, 1998 Consolidated Balance Sheet as
additional goodwill and corresponding accrued business acquisition
consideration. The $30.0 million was paid in March 1999 (along with related
accrued interest) from borrowings under the Company's existing $200.0 million
credit facility. Of the above-mentioned $70.0 million, up to $40.0 million in
additional purchase price consideration is payable in the Spring of 2000 based
upon the financial performance of the Loder Drew division during calendar 1999.
The Company is presently unable to estimate what portion, if any, of this $40.0
million will ultimately become due and payable since the required financial
performance payment thresholds for 1999 significantly exceed Loder Drew's actual
performance for 1998. The Company currently anticipates that any portion of the
$40.0 million which ultimately becomes due and payable will be borrowed under
its

12
<PAGE> 15

existing $200.0 million credit facility to the extent that excess cash derived
from the increased financial performance of the Loder Drew division is
insufficient to satisfy any required payment.

On June 14, 1999, the Company acquired the net assets of ITMG, a
Georgia-based firm in the business of telecommunications recovery auditing and
negotiating integrated services contracts with its clients' telecom suppliers on
a gain-share basis. The transaction was accounted for as a purchase and involved
initial consideration of $11.0 million in cash and 236,873 unregistered,
restricted shares (equivalent to 355,310 post-split shares) of the Company's
common stock. The former owners of ITMG are also eligible to receive additional
purchase price consideration through December 31, 2000 of up to $20.0 million in
cash based upon the earnings of ITMG. Of this $20.0 million, $5.0 million is
based on the financial performance of ITMG from the acquisition date through
December 31, 1999, and $15.0 million is based on ITMG's financial performance
for 2000. Additional purchase price consideration, if any, is payable in the
February immediately following the fiscal period to which it relates. The
Company is presently unable to estimate whether any additional purchase price
consideration will ultimately become due and payable since the required
financial performance thresholds significantly exceed ITMG's historical
performance levels. The Company currently anticipates that any portion of the
$20.0 million which ultimately becomes due and payable will be borrowed under
its existing $200.0 million credit facility to the extent that excess cash
derived from the increased financial performance of ITMG is insufficient to
satisfy any required payment.

During the two year period ended December 31, 1998, the Company acquired
thirteen recovery audit firms. During the six month period ended June 30, 1999,
the Company acquired two additional recovery audit firms. The Company is
pursuing, and intends to continue to pursue, the acquisition of domestic and
international businesses including both direct competitors and businesses
providing other types of recovery services. There can be no assurance, however,
that the Company will be successful in consummating further acquisitions due to
factors such as receptivity of potential acquisition candidates and valuation
issues. Additionally, there can be no assurance that future acquisitions, if
consummated, can be successfully assimilated into the Company.

The Company from time to time issues restricted, unregistered common stock
in partial consideration for the business entities it acquires. The timing and
quantity of any future securities issuances are not susceptible to estimation.
Additionally, if the Company is successful in arranging for future acquisitions
which individually or collectively are large relative to the Company's size, it
may need to secure additional debt or equity financing. There are no current
plans to seek such financing.

The Company believes that its current working capital, availability
remaining under its $200.0 million credit facility and cash flow generated from
future operations will be sufficient to meet the Company's working capital and
capital expenditure requirements through June 30, 2000 unless one or more
acquisitions are consummated which require the Company to seek additional debt
or equity financing.

NEW ACCOUNTING STANDARD

Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities" establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities. This
pronouncement is effective for all fiscal quarters of fiscal years beginning
after June 15, 2000 although earlier application is encouraged. The Company has
chosen to adopt this pronouncement effective with its fiscal year which begins
January 1, 2001 and does not believe that it will materially affect its reported
results of operations or financial condition upon adoption.

YEAR 2000 ISSUE

Many existing computer programs use only two digits to identify a year in
the date field. These programs were designed and developed without considering
the impact of the upcoming change in the century. If not corrected, many
computer applications could fail or create erroneous results by or at the Year
2000.

13
<PAGE> 16

The Company has completed an assessment of its Year 2000 issues. The
assessment indicates that exposure is limited by the fact that the Company has
virtually no active information technology systems that are more than two years
old and has no non-information technology systems that could materially impact
the Company's operations.

The Company has a significant dependence on personal computer systems both
for internal accounting and for completion of audit engagements for its clients.
It recently has completed an inventory of those personal computer systems and
expended approximately $750,000 during 1998 to replace older hardware and
software which was possibly not Year 2000 compliant. Another $250,000 is
expected to be spent in 1999 to complete the required upgrades. The Company has
adopted and enforced corporate standards for operating systems and
administrative applications.

The Company has not verified that its financial accounting software is Year
2000 compliant because it made a decision totally independent of any Year 2000
issue to replace substantially all of its existing financial packages.
Replacement of certain general accounting components was completed in January
1999. Replacement of the balance of the financial accounting systems is
scheduled prior to the end of 1999. As of June 30, 1999, the Company has
estimated that it will incur additional capital expenditures of approximately
$2.0 million through the remainder of 1999 to complete its financial accounting
systems project. Any portion of this cost which cannot be funded from current
operations will be financed under the Company's existing $200.0 million credit
facility.

One of the existing internally developed financial system components is not
Year 2000 compliant. The Company has initiated a complete rewrite of that
component as part of its overall plan to replace the existing financial systems.
This component is reasonably complex, and there is some risk that it will not be
completed on schedule. Failure to complete the system by the end of 1999 could
result in inability of the Company's systems to accurately determine its
revenues or calculate incentive compensation for its employees. In the unlikely
event that the replacement is not completed in time to handle Year 2000
transactions, the Company would be forced to hire temporary staff to perform the
tasks manually. The potential cost cannot be estimated, but the Company believes
that the impact would be immaterial to its financial position or results of
operations.

Certain of the Company's international operations continue to utilize an
older version of the Company's proprietary recovery audit software which is not
Year 2000 compliant. Plans are in place to upgrade all operations to the current
version by the end of 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 due
diligence efforts related to acquisitions include an assessment of risk from
Year 2000 issues. The Company's long-range plan includes conversion of the
financial systems of acquired companies to the same packaged software utilized
by the rest of the Company.

The Company's business operations involve working with outputs from its
clients' financial systems. Each of the Company's clients is assessing its own
risks related to Year 2000 issues which may cause them to upgrade or replace
certain of their systems. The Company believes that its investment in advanced
technology is a competitive advantage as clients and potential clients are
implementing new and more sophisticated accounts payable systems. In the case of
clients which experience a temporary inability to process payables due to Year
2000 issues, the Company's risk of lost revenues is mitigated by the fact that
it audits in arrears and would have advance notice of client problems in making
vendor payments.

14
<PAGE> 17

FORWARD-LOOKING STATEMENTS

Statements made in Management's Discussion and Analysis of Financial
Condition and Results of Operations which look forward in time involve risks and
uncertainties and are forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995. Such risks and uncertainties
include the following:

- the Company's assessment of the state of its Year 2000 readiness;

- unanticipated expenditures and potential risks;

- the adequacy of the Company's current working capital and other available
sources of funds;

- the ability of the Company to successfully implement its operating
strategy and acquisition strategy;

- the Company's ability to manage rapid expansion, including, without
limitation, the assimilation of acquired companies;

- changes in economic cycles;

- competition from other companies;

- changes in laws and governmental regulations applicable to the Company;
and

- other risk factors detailed in this Form 10-Q and in the risk factors
section of the Company's Prospectus dated January 8, 1999 contained in
its Registration Statement on Form S-3 (No. 333-67711).

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company has not conducted transactions, established commitments or
entered into relationships requiring disclosures beyond those provided elsewhere
in this Form 10-Q.

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

None.

ITEM 2. CHANGES IN SECURITIES

On April 1, 1999, in connection with the acquisition of substantially all
of the net assets of Payment Technologies, Inc. d/b/a PayTech ("PayTech"), the
Company issued 152,532 unregistered, restricted shares (equivalent to 228,798
shares subsequent to the Company's pending 3-for-2 stock split) to the former
owners of PayTech. The shares were issued pursuant to the exemption from
registration provided by Section 4(2) of the Securities Act of 1933, as amended.

On June 14, 1999, in connection with the acquisition of the net assets of
Invoice and Tariff Management Group, LLC ("ITMG"), the Company issued 236,873
unregistered, restricted shares (equivalent to 355,310 shares subsequent to the
Company's pending 3-for-2 stock split) to the former owners of ITMG. The shares
were issued pursuant to the exemption granted by Section 4(2) of the Securities
Act of 1933, as amended.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

15
<PAGE> 18

ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS

At the Company's Annual Meeting of Shareholders held on May 11, 1999, the
following individuals were elected to the Company's Board of Directors to serve
as directors until the Annual Meeting of Shareholders held in the year indicated
and until their successors are elected and have qualified:

<TABLE>
<CAPTION>
VOTES VOTES
FOR WITHHELD
---------- --------
<S> <C> <C>
Class I directors until the year 2000
Marc S. Eisenberg......................................... 21,811,894 471,946
Ronald K. Loder........................................... 22,003,889 279,951
Class II directors until the year 2001
E. James Lowrey........................................... 22,059,739 224,101
Class III directors until the year 2002
Fred W. I. Lachotzki...................................... 22,059,739 224,101
Michael A. Lustig......................................... 22,004,889 278,951
Thomas S. Robertson....................................... 22,066,644 217,196
Jackie M. Ward............................................ 22,066,164 217,676
</TABLE>

At the Company's Annual Meeting of Shareholders held on May 11, 1999, the
following proposal was also approved:

<TABLE>
<CAPTION>
VOTES VOTES VOTES
FOR AGAINST ABSTAINED
---------- --------- ---------
<S> <C> <C> <C>
Amendment of the Company's Stock Incentive Plan....... 17,068,356 4,664,163 26,029
</TABLE>

ITEM 5. OTHER INFORMATION

None.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits

<TABLE>
<S> <C> <C>
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).
18.1 -- Letter from KPMG LLP regarding change in accounting
principle (revenue recognition).
27.1 -- Financial Data Schedule for six months ended June 30, 1999
(for SEC use only).
27.2 -- Financial Data Schedule for six months ended June 30, 1998,
as restated for common stock split (for SEC use only).
</TABLE>

(b) Reports on Form 8-K

None.

16
<PAGE> 19

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 12, 1999 By: /s/ SCOTT L. COLABUONO
--------------------------------------------
Scott L. Colabuono
Executive Vice President
and Chief Financial Officer
(principal financial officer)

Dated: August 12, 1999 By: /s/ MICHAEL R. MELTON
--------------------------------------------
Michael R. Melton
Vice President -- Finance
(principal accounting officer)
</TABLE>

<PAGE> 1
EXHIBIT 18.1

The Profit Recovery Group International, Inc.
Atlanta, Georgia

August 12, 1999

Ladies and Gentlemen:

We have been furnished with a copy of Form 10-Q of The Profit Recovery Group
International, Inc. (the "Company") for the three months ended June 30, 1999,
and have read the Company's statements contained in Note H to the condensed
consolidated financial statements included therein. As stated in Note H, the
Company changed its method of accounting for certain aspects of its revenue
recognition and states that the newly adopted accounting principle is preferable
in the circumstances because the Company has expanded significantly beyond its
historical client base and original service offerings and believes it
appropriate to standardize its revenue recognition practices.

In accordance with your request, we have reviewed and discussed with Company
officials the circumstances and business judgment and planning upon which the
decision to make this change in the method of accounting was based.

We have not audited any consolidated financial statements of The Profit Recovery
Group International, Inc. and subsidiaries as of any date or for any period
subsequent to December 31, 1998, nor have we audited the information set forth
in the aforementioned Note H to the condensed consolidated financial statements;
accordingly, we do not express an opinion concerning the factual information
contained therein.

With regard to the aforementioned accounting change, authoritative criteria have
not been established for evaluating the preferability of one acceptable method
of accounting over another acceptable method. However, for purposes of The
Profit Recovery Group International, Inc.'s compliance with the requirements of
the Securities and Exchange Commission, we are furnishing this letter.

Based on our review and discussion, with reliance on management's business
judgment and planning, we concur that the newly adopted method of accounting is
preferable in the Company's circumstances.

Very truly yours,

KPMG LLP

<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, 1999 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-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 31,639
<SECURITIES> 0
<RECEIVABLES> 43,915
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 82,192
<PP&E> 43,140
<DEPRECIATION> 15,629
<TOTAL-ASSETS> 358,599
<CURRENT-LIABILITIES> 29,366
<BONDS> 73,358
0
0
<COMMON> 27
<OTHER-SE> 252,016
<TOTAL-LIABILITY-AND-EQUITY> 358,599
<SALES> 0
<TOTAL-REVENUES> 128,343
<CGS> 67,633
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 43,671
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,822
<INCOME-PRETAX> 15,217
<INCOME-TAX> 5,980
<INCOME-CONTINUING> 9,237
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> (29,195)
<NET-INCOME> (19,958)
<EPS-BASIC> (.75)
<EPS-DILUTED> (.71)

</TABLE>

<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS RESTATED SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF THE PROFIT RECOVERY GROUP INTERNATIONAL, INC. FOR THE
SIX MONTH PERIOD ENDED JUNE 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000

<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 18,710
<SECURITIES> 0
<RECEIVABLES> 68,934
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 89,774
<PP&E> 22,065
<DEPRECIATION> 8,084
<TOTAL-ASSETS> 168,930
<CURRENT-LIABILITIES> 43,553
<BONDS> 5,348
0
0
<COMMON> 22
<OTHER-SE> 116,688
<TOTAL-LIABILITY-AND-EQUITY> 168,930
<SALES> 0
<TOTAL-REVENUES> 72,078
<CGS> 38,282
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 27,020
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (138)
<INCOME-PRETAX> 6,638
<INCOME-TAX> 2,599
<INCOME-CONTINUING> 4,039
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,039
<EPS-BASIC> .13
<EPS-DILUTED> .13

</TABLE>