<PAGE> 1
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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 MARCH 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ____________ TO____________
</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 April 30, 1999, the latest practicable date, was 27,161,774.
- --------------------------------------------------------------------------------
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<PAGE> 2
THE PROFIT RECOVERY GROUP INTERNATIONAL, INC. AND SUBSIDIARIES
FORM 10-Q
QUARTER ENDED MARCH 31, 1999
INDEX
<TABLE>
<CAPTION>
PAGE NO.
--------
<S> <C> <C>
PART I. Financial Information
Item 1. Financial Statements (Unaudited)
1
Condensed Consolidated Statements of Earnings --
Three months ended March 31, 1999 and 1998.............
2
Condensed Consolidated Balance Sheets --
March 31, 1999 and December 31, 1998...................
3
Condensed Consolidated Statements of Cash Flows --
Three months ended March 31, 1999 and 1998.............
4
Notes to Condensed Consolidated Financial Statements......
7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.........................
12
Item 3. Quantitative and Qualitative Disclosures about
Market Risk.........................................
PART II. Other Information........................................... 12
Signatures............................................................ 13
</TABLE>
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
THE PROFIT RECOVERY GROUP INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
------------------
1999 1998
------- -------
<S> <C> <C>
Revenues.................................................... $58,016 $33,144
Cost of revenues............................................ 32,492 17,956
Selling, general and administrative expenses................ 20,577 13,029
------- -------
Operating income.......................................... 4,947 2,159
Interest (expense) income, net.............................. (844) (324)
------- -------
Earnings before income taxes.............................. 4,103 1,835
Income taxes................................................ 1,616 715
------- -------
Net earnings.............................................. $ 2,487 $ 1,120
======= =======
Earnings per share (Note B):
Basic..................................................... $ 0.09 $ 0.06
======= =======
Diluted................................................... $ 0.09 $ 0.06
======= =======
Weighted-average shares outstanding (Note B):
Basic..................................................... 26,517 19,540
======= =======
Diluted................................................... 27,511 20,000
======= =======
</TABLE>
See accompanying notes to condensed consolidated financial statements.
1
<PAGE> 4
THE PROFIT RECOVERY GROUP INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1999 1998
--------- ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents (Note D)........................ $ 28,986 $ 28,344
Receivables:
Billed contract receivables............................ 32,936 26,348
Unbilled contract receivables.......................... 64,204 68,001
Employee advances...................................... 6,913 6,791
-------- --------
Total receivables................................. 104,053 101,140
-------- --------
Prepaid expenses and other current assets................. 1,815 2,520
-------- --------
Total current assets.............................. 134,854 132,004
-------- --------
Property and equipment:
Computer and other equipment.............................. 30,155 26,123
Furniture and fixtures.................................... 3,231 2,738
Leasehold improvements.................................... 5,046 4,410
-------- --------
38,432 33,271
Less accumulated depreciation and amortization............ 13,098 10,514
-------- --------
25,334 22,757
-------- --------
Noncompete agreements, less accumulated amortization........ 2,202 2,475
Deferred loan costs, less accumulated amortization.......... 1,542 1,802
Goodwill, less accumulated amortization..................... 218,254 223,508
Deferred income taxes....................................... 3,699 3,158
Other assets................................................ 2,312 1,678
-------- --------
$388,197 $387,382
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Note payable to bank...................................... $ 49 $ 49
Current installments of long-term debt.................... 362 630
Accounts payable and accrued expenses..................... 9,585 13,556
Accrued business acquisition consideration (Note G)....... -- 30,000
Accrued payroll and related expenses...................... 39,335 44,678
Deferred income taxes..................................... 13,310 13,310
Deferred tax recovery audit revenue....................... 1,219 1,238
-------- --------
Total current liabilities......................... 63,860 103,461
Long-term debt, excluding current installments.............. 58,567 112,886
Deferred compensation....................................... 3,642 3,453
Other long-term liabilities................................. 1,418 2,078
-------- --------
Total liabilities................................. 127,487 221,878
-------- --------
Shareholders' equity (Note E):
Preferred stock, no par value. Authorized 1,000,000
shares; no shares issued or outstanding in 1999 and
1998................................................... -- --
Common stock, no par value; stated value $.001 per share.
Authorized 60,000,000 shares; issued and outstanding
26,977,642 in 1999 and 24,037,919 in 1998.............. 27 24
Additional paid-in capital................................ 228,745 133,725
Accumulated other comprehensive loss...................... (4,702) (2,398)
Retained earnings......................................... 36,640 34,153
-------- --------
Total shareholders' equity........................ 260,710 165,504
-------- --------
Contingency (Note G)
$388,197 $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>
THREE MONTHS ENDED
MARCH 31,
--------------------
1999 1998
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net earnings.............................................. $ 2,487 $ 1,120
Adjustments to reconcile net earnings to net cash used in
operating activities:
Depreciation and amortization.......................... 5,307 1,889
Deferred compensation expense.......................... 189 151
Deferred income taxes.................................. (541) 502
Foreign translation adjustments........................ (2,304) (773)
Changes in assets and liabilities, net of effects of
acquisitions:
Receivables.......................................... (107) (3,338)
Prepaid expenses and other current assets............ 705 1,081
Other assets......................................... (415) (40)
Accounts payable and accrued expenses................ (3,821) 1,792
Accrued payroll and related expenses................. (5,343) (4,834)
Deferred tax recovery audit revenue.................. (19) (17)
Other long-term liabilities.......................... (660) 9
-------- --------
Net cash used in operating activities............. (4,522) (2,458)
-------- --------
Cash flows from investing activities:
Purchases of property and equipment....................... (5,122) (2,294)
Acquisition of businesses (net of cash acquired) (Note
G)..................................................... (30,150) (5,354)
-------- --------
Net cash used in investing activities............. (35,272) (7,648)
-------- --------
Cash flows from financing activities:
Net increase in note payable to bank...................... -- 72
Proceeds from issuance of long-term debt.................. 41,933 --
Repayments of long-term debt.............................. (96,520) (24,788)
Net proceeds from issuance of common stock................ 95,023 40,726
-------- --------
Net cash provided by financing activities......... 40,436 16,010
-------- --------
Net change in cash and cash equivalents........... 642 5,904
Cash and cash equivalents at beginning of period............ 28,344 19,386
-------- --------
Cash and cash equivalents at end of period.................. $ 28,986 $ 25,290
======== ========
Supplemental disclosures of cash flow information:
Cash paid during the period for interest.................. $ 814 $ 402
======== ========
Cash paid (refunds received), net during the period for
income taxes........................................... $ 615 $ (653)
======== ========
Supplemental disclosure of noncash investing and financing
activities:
In the first quarter of 1998, the Company purchased the
net operating assets of Ginger Quill, Inc., d/b/a
Precision Data Link. In conjunction with this
acquisition, the Company assumed liabilities as
follows:
Fair value of assets acquired........................ $ 11,623
Cash paid for the acquisition........................ (5,354)
Fair value of shares issued for the acquisition...... (6,119)
--------
Liabilities assumed............................... $ 150
========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
<PAGE> 6
THE PROFIT RECOVERY GROUP INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999
(UNAUDITED)
NOTE A -- BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements of
The Profit Recovery Group International, Inc. and its wholly owned subsidiaries
(the "Company") have been prepared in accordance with generally accepted
accounting principles for interim financial information and with the
instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do
not include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation have been included. Operating results for the
three month period ended March 31, 1999 are not necessarily indicative of the
results that may be expected for the year ending December 31, 1999. For further
information, refer to the consolidated financial statements and footnotes
thereto included in the Company's Form 10-K for the fiscal year ended December
31, 1998.
NOTE B -- EARNINGS PER SHARE
The following table sets forth the computations of basic and diluted
earnings per share for the three month periods ended March 31, 1999 and March
31, 1998 (in thousands, except for earnings per share information):
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-------------------
1999 1998
-------- --------
<S> <C> <C>
Numerator for both basic earnings per share and diluted
earnings per share -- net earnings........................ $ 2,487 $ 1,120
======= =======
Denominator:
Denominator for basic earnings per
share -- weighted-average shares outstanding........... 26,517 19,540
Effect of dilutive securities -- employee stock options... 994 460
------- -------
Denominator for diluted earnings per share................ 27,511 20,000
======= =======
Earnings per share -- basic................................. $ 0.09 $ 0.06
======= =======
Earnings per share -- diluted............................... $ 0.09 $ 0.06
======= =======
</TABLE>
NOTE C -- COMPREHENSIVE INCOME
Effective January 1, 1998, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income." This statement establishes items that are required to be
recognized under accounting standards as components of comprehensive income.
SFAS No. 130 requires, among other things, that an enterprise report a total for
comprehensive income in condensed financial statements of interim periods issued
to shareholders. For the three month periods ended March 31, 1999 and 1998, the
Company's consolidated comprehensive income was $183,000 and $648,000,
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 foreign currency translation adjustments.
NOTE D -- CASH EQUIVALENTS
Cash equivalents at March 31, 1999 and December 31, 1998 included $4.0
million and $6.3 million, respectively, of reverse repurchase agreements with
NationsBank, N.A. (South) which were fully
4
<PAGE> 7
THE PROFIT RECOVERY GROUP INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
collateralized by United States of America Treasury Notes in the possession of
such bank. The reverse repurchase agreement in effect on March 31, 1999 matured
and was settled on April 1, 1999. In addition, cash equivalents at March 31,
1999 and December 31, 1998 also included $6.3 million and $7.1 million,
respectively, of temporary investments held in a French bank by certain of the
Company's French subsidiaries.
The Company does not intend to take possession of collateral securities on
future reverse repurchase agreement transactions conducted with banking
institutions of national standing. The Company does insist, however, that all
such agreements provide for full collateralization using obligations of the
United States of America having a current market value equivalent to or
exceeding the reverse repurchase agreement amount.
NOTE E -- FOLLOW-ON COMMON STOCK OFFERINGS
On March 16, 1998, the Company sold 2.0 million newly issued shares of its
common stock and certain selling shareholders sold an additional 2.4 million
outstanding shares in an underwritten follow-on offering. The offering was
priced at $21.00 per share. The proceeds of the offering (net of underwriting
discounts and commissions) were distributed by the underwriting syndicate on
March 20, 1998. The Company then used a portion of its net proceeds from the
offering to repay the $24.8 million outstanding principal balance on its bank
credit facility, along with accrued interest, on March 20, 1998. In April 1998,
the Company received notification from its underwriting syndicate that the
syndicate had exercised its full over-allotment option to purchase an additional
660,000 shares of Company common stock. All of these shares were then sold to
the syndicate by certain selling shareholders. The Company received no proceeds
from the sale of such shares.
On January 8, 1999, the Company sold 2.7 million newly issued shares of its
common stock and certain selling shareholders sold an additional 800,000
outstanding shares in an underwritten follow-on offering. The offering was
priced at $34.00 per share. The proceeds of the offering (net of underwriting
discounts and commissions) were distributed by the underwriting syndicate on
January 13, 1999. The net proceeds from the 2.7 million shares sold by the
Company, combined with the net proceeds from an additional 191,000 shares
subsequently sold by the Company in late January 1999 upon exercise by the
underwriting syndicate of their over-allotment option, were applied to reduce
outstanding borrowings under the Company's $200.0 million bank credit facility.
Additionally, 334,000 shares were sold in late January 1999 by certain selling
shareholders in connection with the over-allotment option. The Company received
no proceeds from the sale of such shares.
NOTE F -- OPERATING SEGMENTS AND RELATED INFORMATION
The Company adopted SFAS No. 131, "Disclosures About Segments of an
Enterprise and Related Information," in 1998 which changes the methodology by
which the Company reports information about its operating segments and requires
limited interim period reporting.
The Company has three reportable operating segments consisting of Accounts
Payable Services, Freight Services and Tax Services. Each segment represents a
strategic business unit that offers a different type of recovery audit service.
These business units are managed separately because each business requires
different technology and marketing strategies.
Accounts Payable Services consist of the review of client accounts payable
disbursements to identify and recover overpayments. This operating segment
includes accounts payable services provided to retailers, wholesale distributors
and governmental agencies (the Company's historical client base) and accounts
payable services provided to various other types of business entities by the
Company's Loder Drew & Associates division. The Accounts Payable Services
operating segment conducts business in twenty-three countries.
Freight Services consist primarily of various businesses acquired by the
Company in 1998 and 1997 which audit freight-related disbursements to identify
and recover overpayments. Areas of current specialization include ocean freight,
ground freight and overnight freight. This operating segment currently serves
primarily businesses located in the United States, although international
expansion is planned.
5
<PAGE> 8
THE PROFIT RECOVERY GROUP INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Tax Services consist primarily of various European businesses acquired by
the Company in 1998 and 1997 which audit tax-related disbursements to identify
and recover overpayments (primarily within France) and assist business entities
throughout Europe in securing available grants.
The Company evaluates the performance of its operating segments based upon
revenues and operating income. Intersegment revenues are not significant.
Segment information for the quarters ended March 31, 1999 and 1998 follows
(in thousands):
<TABLE>
<CAPTION>
ACCOUNTS
PAYABLE FREIGHT TAX
SERVICES SERVICES SERVICES TOTAL
-------- -------- -------- -------
<S> <C> <C> <C> <C>
1999
Revenues.......................................... $48,070 $3,975 $5,971 $58,016
Operating income.................................. 2,607 2,137 203 4,947
1998
Revenues.......................................... $28,271 $ 496 $4,377 $33,144
Operating income.................................. 1,586 369 204 2,159
</TABLE>
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 effective as of July 1, 1998. Loder Drew is an
international recovery auditing firm primarily serving clients in the
manufacturing, financial services and other non-retail sectors. Pursuant to the
acquisition agreements, the initial consideration paid for Loder Drew consisted
of $70.0 million in cash and 803,535 restricted, unregistered shares of the
Company's common stock. Additionally, the acquisition agreements provided that
the former owners of Loder Drew would be eligible to receive additional purchase
price consideration up to a maximum of $70.0 million in cash conditioned on the
performance of Loder Drew through December 31, 1999. Of this $70.0 million,
$30.0 million was based on the financial performance of Loder Drew for the six
months ended December 31, 1998. Since the financial performance of Loder Drew
for the six months ended December 31, 1998 exceeded applicable thresholds, the
entire $30.0 million was recorded on the Company's December 31, 1998
Consolidated Balance Sheet as additional goodwill and corresponding accrued
business acquisition consideration. The $30.0 million was paid in March 1999
(along with related accrued interest) from borrowings under the Company's
existing $200.0 million credit facility. Of the above-mentioned $70.0 million,
up to $40.0 million in additional purchase price consideration is payable in the
Spring of 2000 based upon the financial performance of the Loder Drew division
during calendar 1999.
6
<PAGE> 9
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 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 earnings as a percentage of revenues.
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
MARCH 31,
--------------
1999 1998
----- -----
<S> <C> <C>
Revenues.................................................... 100.0% 100.0%
Cost of revenues............................................ 56.0 54.2
Selling, general and administrative expenses................ 35.5 39.3
----- -----
Operating income.................................. 8.5 6.5
Interest (expense) income, net.............................. (1.4) (1.0)
----- -----
Earnings before income taxes...................... 7.1 5.5
Income taxes................................................ 2.8 2.1
----- -----
Net earnings...................................... 4.3% 3.4%
===== =====
</TABLE>
Three Month Period Ended March 31, 1999 Compared to Corresponding Period of the
Prior Year
Revenues. The Company's revenues consist principally of contractual
percentages of overpayments recovered for clients that continue to be heavily
concentrated in the retail industry. Revenues increased 75.0% to $58.0 million
in the first quarter of 1999, up from $33.1 million in the first quarter of
1998.
Domestic revenues were $42.0 million in the first quarter of 1999, up 99.0%
from $21.1 million in the first quarter of 1998. Of this 99.0% increase, 34.3%
was contributed by growth in the Company's traditional retail, wholesale
distribution and governmental agency business, and 64.7% was derived from
companies acquired primarily in 1998 in new areas of audit emphasis (e.g.,
freight). Although the October 1998 acquisition of Robert Beck & Associates
contributed substantially to first quarter domestic revenue growth in the
Company's traditional retail, wholesale distribution and governmental agency
business, it is no longer practicable to separate the effect of this former
block of business since the clients, personnel and operations of Robert Beck &
Associates have been assimilated into the Company's domestic operations
effective January 1, 1999.
The Company considers international operations to be all operations located
outside of the United States. International revenues were $16.0 million in the
first quarter of 1999, up 33.2% from $12.0 million in the first
7
<PAGE> 10
quarter of 1998. Most of this increase related to the Company's European
operations. The Company continues to believe that the rate of revenue growth for
its international operations will significantly exceed its rate of domestic
revenue growth for the foreseeable future if the revenue impact of acquired
businesses is excluded. There can be no assurance, however, that international
growth trends will continue. See "Forward-looking Statements."
The Company has experienced and expects to continue to experience
significant seasonality in its business. The Company typically realizes higher
revenues and operating income in the last two quarters of its fiscal year. This
trend is expected to continue and reflects the inherent purchasing and
operational cycles of the retailing industry which continues to be the principal
industry served by the Company. The Company's recent larger acquisitions,
including the October 1997 acquisition of Alma, the August 1998 acquisition of
Loder, Drew & Associates and the October 1998 acquisition of Robert Beck &
Associates are not expected to significantly affect this trend because these
entities, in the aggregate, have historically experienced similar seasonality in
revenue and operating income. Should the Company not continue to realize
increased revenues in future third and fourth quarter periods, profitability for
any affected quarter and the entire year could be materially and adversely
affected due to ongoing selling, general and administrative expenses that are
largely fixed over the short term. See "Forward-looking Statements."
Cost of Revenues. Cost of revenues consists principally of commissions
paid or payable to the Company's auditors based upon the level of overpayment
recoveries, and salaries and bonuses paid or payable to divisional and regional
managers. Also included are other direct costs incurred by these personnel
including rental of field offices, travel and entertainment, telephone,
utilities, maintenance and supplies, and clerical assistance. Cost of revenues
was 56.0% of revenues for the first quarter of 1999, up from 54.2% in the
comparable quarter of 1998.
Domestically, cost of revenues as a percentage of revenues was 57.0% in the
first quarter of 1999, down from 58.8% during the corresponding quarter of 1998.
The 1999 reduction related primarily to the newly-acquired operations of Loder,
Drew & Associates and the Company's freight division which operated at lower
cost of revenue percentages than the Company's traditional retail, wholesale
distribution and governmental agency business.
Internationally, cost of revenues as a percentage of revenues was 53.3% in
the first quarter of 1999, up from 46.1% in the first quarter of the prior year.
The 1999 increase relates principally to increased expansion efforts in the
Company's traditional retail, wholesale distribution and governmental agency
business.
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 35.5% in the
first quarter of 1999, down from 39.3% in the comparable period of 1998.
Domestic selling, general and administrative expenses as a percentage of
revenues was 37.7% in the first quarter of 1999, down slightly from 37.9% in the
year earlier period.
Internationally, selling, general and administrative expenses as a
percentage of revenues decreased substantially to 29.6% in the first quarter of
1999, down from 41.7% in the comparable quarter of 1998. This improvement
resulted primarily from various components of fixed costs being spread over a
rapidly growing revenue base.
In connection with acquired businesses, the Company has recorded intangible
assets including goodwill and deferred non-compete costs. Amortization of these
intangible assets totaled $2.8 million in the first quarter of 1999, and
$848,000 during the first quarter of 1998.
Operating Income. Operating income increased 129.1% to $4.9 million in the
first quarter of 1999, up from $2.2 million in the comparable 1998 quarter. As
percentage of total revenues, operating income increased to 8.5% in the first
quarter of 1999, up from 6.5% in the first quarter of 1998. The components of
this improvement have been discussed above.
8
<PAGE> 11
Interest (Expense) Income, Net. The Company incurred net interest expense
of $844,000 in the first quarter of 1999, up from $324,000 in the first quarter
of 1998. This increase related almost totally to interest expense incurred on
the Company's $200.0 million bank credit facility in connection with acquired
companies.
Earnings Before Income Taxes. Earnings before income taxes rose 123.6% in
the quarter ended March 31, 1999 as compared to the first quarter of 1998. This
improvement resulted from increased revenues and an improved operating margin
during the 1999 quarter.
Income Taxes. The provisions for income taxes for the first quarters of
both 1999 and 1998 consist of federal, state and foreign income taxes at the
Company's composite effective rate of approximately 39.0%.
Weighted-Average Shares Outstanding -- Basic. The Company's
weighted-average shares outstanding for purposes of calculating basic earnings
per share increased to 26.5 million during the first quarter of 1999, up 7.0
million shares from 19.5 million shares during the first quarter of 1998. This
increase was comprised primarily of (i) 4.9 million registered shares
collectively issued by the Company in underwritten stock offerings completed in
January 1999 and March 1998 and, (ii) restricted, unregistered shares issued by
the Company during the three quarters ended December 31, 1998 in connection with
various acquired companies. The Company did not complete any business
acquisitions during the first quarter of 1999.
LIQUIDITY AND CAPITAL RESOURCES
On July 29, 1998, the Company replaced its existing $30.0 million senior
bank credit facility with a five-year, $150.0 million senior bank credit
facility. Subject to adherence to standard loan covenants, borrowings under the
new credit facility are available for working capital, acquisitions of other
companies in the recovery audit industry, capital expenditures and general
corporate purposes. The Company transferred $5.4 million in outstanding
borrowings to the new credit facility on July 29, 1998. On September 18, 1998,
the Company increased its credit facility from $150.0 million to $200.0 million
and the facility was syndicated between ten banking institutions led by
NationsBank, N.A. as agent for the group. In January 1999, the Company completed
a public offering of its common stock. This offering provided net proceeds to
the Company of $92.8 million, all of which were used to repay credit facility
borrowings. As of March 31, 1999, the Company had outstanding principal
borrowings of $57.5 million under this $200.0 million credit facility.
Net cash used in operating activities was $4.5 million in the first quarter
1999 and $2.5 million during the corresponding quarter of 1998. The first
quarter is typically the lowest quarter of each year in terms of cash
collections on accounts receivable. Additionally, payroll-related liabilities at
December 31, 1998 were unusually high since the final payroll for that year took
place during mid-December. Accordingly, an unusually large level of cash
disbursements to auditors and other employees was made in January 1999
pertaining to December 31, 1998 obligations.
Net cash used in investing activities was $35.3 million during the first
quarter of 1999, up considerably from $7.6 million during the corresponding
quarter of 1998. The increase related primarily to $30.0 million of additional
purchase price consideration paid to the former owners of Loder Drew &
Associates, as more fully discussed in a subsequent paragraph.
Net cash provided by financing activities was $40.4 million during the
first quarter of 1999, and $16.0 million during the first quarter of 1998. The
net cash provided by financing activities during each of the two first quarter
periods related primarily to follow-on common stock offerings as discussed in
Note E of Notes to Condensed Consolidated Financial Statements.
On August 6, 1998, the Company acquired all the assets and assumed certain
liabilities of Loder Drew effective as of July 1, 1998. Loder Drew is an
international recovery auditing firm primarily serving clients in the
manufacturing, financial services and other non-retail sectors. Pursuant to the
acquisition agreements, the initial consideration paid for Loder Drew consisted
of $70.0 million in cash and 803,535 restricted, unregistered shares of the
Company's common stock. Additionally, the acquisition agreements provided that
the former owners of Loder Drew would be eligible to receive additional purchase
price consideration up to a maximum of $70.0 million in cash conditioned on the
performance of Loder Drew through December 31, 1999. Of this $70.0 million,
$30.0 million was based on the financial performance of Loder Drew for the six
9
<PAGE> 12
months ended December 31, 1998. Since the financial performance of Loder Drew
for the six months ended December 31, 1998 exceeded applicable thresholds, the
entire $30.0 million was recorded on the Company's December 31, 1998
Consolidated Balance Sheet as additional goodwill and corresponding accrued
business acquisition consideration. The $30.0 million was paid in March 1999
(along with related accrued interest) from borrowings under the Company's
existing $200.0 million credit facility. Of the above-mentioned $70.0 million,
up to $40.0 million in additional purchase price consideration is payable in the
Spring of 2000 based upon the financial performance of the Loder Drew division
during calendar 1999. The Company is presently unable to estimate what portion,
if any, of this $40.0 million will ultimately become due and payable since the
required financial performance payment thresholds for 1999 significantly exceed
Loder Drew's actual performance for 1998. The Company currently anticipates that
any portion of the $40.0 million which ultimately becomes due and payable will
be borrowed under its existing $200.0 million credit facility to the extent that
excess cash derived from the increased financial performance of the Loder Drew
division is insufficient to satisfy any required payment.
During the two year period ended December 31, 1998, the Company acquired
thirteen recovery audit firms. The Company is pursuing, and intends to continue
to pursue, the acquisition of domestic and international businesses including
both direct competitors and businesses providing other types of recovery
services. There can be no assurance, however, that the Company will be
successful in consummating further acquisitions due to factors such as
receptivity of potential acquisition candidates and valuation issues.
Additionally, there can be no assurance that future acquisitions, if
consummated, can be successfully assimilated into the Company.
The Company from time to time issues restricted, unregistered common stock
in partial consideration for the business entities it acquires. The timing and
quantity of any future securities issuances are not susceptible to estimation.
Additionally, if the Company is successful in arranging for future acquisitions
which individually or collectively are large relative to the Company's size, it
may need to secure additional debt or equity financing. There are no current
plans to seek such financing.
The Company believes that its current working capital, availability
remaining under its $200.0 million credit facility and cash flow generated from
future operations will be sufficient to meet the Company's working capital and
capital expenditure requirements through March 31, 2000 unless one or more
acquisitions are consummated which require the Company to seek additional debt
or equity financing.
NEW ACCOUNTING STANDARD
Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities" establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities. This
pronouncement is effective for all fiscal quarters of fiscal years beginning
after June 15, 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.
YEAR 2000 ISSUE
Many existing computer programs use only two digits to identify a year in
the date field. These programs were designed and developed without considering
the impact of the upcoming change in the century. If not corrected, many
computer applications could fail or create erroneous results by or at the Year
2000.
The Company has completed an assessment of its Year 2000 issues. The
assessment indicates that exposure is limited by the fact that the Company has
virtually no active information technology systems that are more than two years
old and has no non-information technology systems that could materially impact
the Company's operations.
The Company has a significant dependence on personal computer systems both
for internal accounting and for completion of audit engagements for its clients.
It recently has completed an inventory of those
10
<PAGE> 13
personal computer systems and expended approximately $750,000 during 1998 to
replace older hardware and software which was possibly not Year 2000 compliant.
Another $250,000 is expected to be spent in 1999 to complete the required
upgrades. The Company has adopted and enforced corporate standards for operating
systems and administrative applications.
The Company has not verified that its financial accounting software is Year
2000 compliant because it made a decision totally independent of any Year 2000
issue to replace substantially all of its existing financial packages.
Replacement of certain general accounting components was completed in January
1999. Replacement of the balance of the financial accounting systems is
scheduled for mid-year 1999. As of March 31, 1999, the Company has estimated
that it will incur additional capital expenditures of approximately $2.5 million
through 1999 to complete its financial accounting systems project. Any portion
of this cost which cannot be funded from current operations will be financed
under the Company's existing $200.0 million credit facility.
One of the existing internally developed financial system components is not
Year 2000 compliant. The Company has initiated a complete rewrite of that
component as part of its overall plan to replace the existing financial systems.
This component is reasonably complex, and there is some risk that it will not be
completed on schedule. Failure to complete the system by the end of 1999 could
result in inability of the Company's systems to accurately determine its
revenues or calculate incentive compensation for its employees. In the unlikely
event that the replacement is not completed in time to handle Year 2000
transactions, the Company would be forced to hire temporary staff to perform the
tasks manually. The potential cost cannot be estimated, but the Company believes
that the impact would be immaterial to its financial position or results of
operations.
Certain of the Company's international operations continue to utilize an
older version of the Company's proprietary recovery audit software which is not
Year 2000 compliant. Plans are in place to upgrade all operations to the current
version by mid-year 1999. The only significant issue in completing the upgrade
is developing a training plan in the native language of the users. If the
upgrade is not completed, affected international auditors may be required to
utilize other less effective audit tools, techniques and processes, and the
Company could suffer a loss of revenues outside the U.S. as a result.
The Company has made and continues to make acquisitions of other companies
in the recovery audit business. It is possible that the Company might acquire a
business with a significant risk from Year 2000 issues. The Company's due
diligence efforts related to acquisitions include an assessment of risk from
Year 2000 issues. The Company's long-range plan includes conversion of the
financial systems of acquired companies to the same packaged software utilized
by the rest of the Company.
The Company's business operations involve working with outputs from its
clients' financial systems. Each of the Company's clients is assessing its own
risks related to Year 2000 issues which may cause them to upgrade or replace
certain of their systems. The Company believes that its investment in advanced
technology is a competitive advantage as clients and potential clients are
implementing new and more sophisticated accounts payable systems. In the case of
clients which experience a temporary inability to process payables due to Year
2000 issues, the Company's risk of lost revenues is mitigated by the fact that
it audits in arrears and would have advance notice of client problems in making
vendor payments.
FORWARD-LOOKING STATEMENTS
Statements made in Management's Discussion and Analysis of Financial
Condition and Results of Operations which look forward in time involve risks and
uncertainties and are forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995. Such risks and uncertainties
include the following:
- the Company's assessment of the state of its Year 2000 readiness;
- unanticipated expenditures and potential risks;
- the adequacy of the Company's current working capital and other available
sources of funds;
- the ability of the Company to successfully implement its operating
strategy and acquisition strategy;
11
<PAGE> 14
- the Company's ability to manage rapid expansion, including, without
limitation, the assimilation of acquired companies;
- changes in economic cycles;
- competition from other companies;
- changes in laws and governmental regulations applicable to the Company;
and
- other risk factors detailed in this Form 10-Q and in the risk factors
section of the Company's Prospectus dated January 8, 1999 contained in
its Registration Statement on Form S-3 (No. 333-67711).
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company has not conducted transactions, established commitments or
entered into relationships requiring disclosures beyond those provided elsewhere
in this Form 10-Q.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2. CHANGES IN SECURITIES
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
<TABLE>
<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).
27.1 -- Financial Data Schedule (for SEC use only).
</TABLE>
(b) Reports on Form 8-K
None.
12
<PAGE> 15
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
<TABLE>
<S> <C>
THE PROFIT RECOVERY GROUP
INTERNATIONAL, INC.
Dated: May 14, 1999 By: /s/ DONALD E. ELLIS, JR.
--------------------------------------------
Donald E. Ellis, Jr.
Senior Vice President,
Treasurer and
Chief Financial Officer
(principal financial officer)
Dated: May 14, 1999 By: /s/ MICHAEL R. MELTON
--------------------------------------------
Michael R. Melton
Vice President -- Finance
(principal accounting officer)
</TABLE>
13
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF THE PROFIT RECOVERY GROUP INTERNATIONAL, INC. FOR THE
THREE MONTH PERIOD ENDED MARCH 31, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 28,986
<SECURITIES> 0
<RECEIVABLES> 104,053
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 134,854
<PP&E> 38,432
<DEPRECIATION> 13,098
<TOTAL-ASSETS> 388,197
<CURRENT-LIABILITIES> 63,860
<BONDS> 58,567
0
0
<COMMON> 27
<OTHER-SE> 260,683
<TOTAL-LIABILITY-AND-EQUITY> 388,197
<SALES> 0
<TOTAL-REVENUES> 58,016
<CGS> 32,492
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 20,577
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 844
<INCOME-PRETAX> 4,103
<INCOME-TAX> 1,616
<INCOME-CONTINUING> 2,487
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,487
<EPS-PRIMARY> .09
<EPS-DILUTED> .09
</TABLE>
