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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
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(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM
TO ---------------
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COMMISSION FILE NUMBER 0-28000
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THE PROFIT RECOVERY GROUP INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
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GEORGIA 58-2213805
(State or other jurisdiction of incorporation (I.R.S. Employer Identification No.)
or organization)
2300 WINDY RIDGE PARKWAY
SUITE 100 NORTH
ATLANTA, GEORGIA 30339-8426
(770) 955-3815
(ADDRESS AND TELEPHONE NUMBER OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
The number of outstanding shares of the issuer's class of capital stock as
of November 8, 1996, the latest practicable date, was as follows: 17,648,152
shares of Common Stock, no par value.
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THE PROFIT RECOVERY GROUP INTERNATIONAL, INC. AND SUBSIDIARIES
FORM 10-Q
QUARTER ENDED SEPTEMBER 30, 1996
INDEX
PAGE NO.
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PART I. Financial Information
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets --
September 30, 1996 and December 31, 1995.............................. 1
Condensed Consolidated Statements of Operations --
Three and nine month periods ended September 30, 1996 and September
30, 1995.............................................................. 2
Condensed Consolidated Statements of Cash Flows --
Nine months ended September 30, 1996 and September 30, 1995........... 3
Notes to Condensed Consolidated Financial Statements..................... 4
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations...................................................... 7
PART II. Other Information.......................................................... 11
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THE PROFIT RECOVERY GROUP INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
SEPTEMBER 30, DECEMBER 31,
1996 1995
------------- ------------
ASSETS
Current assets:
Cash and cash equivalents (including reverse repurchase agreements
of $11.6 million at September 30, 1996 -- note F)............... $14,895 $ 642
Receivables:
Billed contract receivables..................................... 3,793 3,203
Unbilled contract receivables................................... 28,667 15,960
Employee advances............................................... 1,295 560
------- -------
Total receivables.......................................... 33,755 19,723
------- -------
Prepaid expenses and other current assets.......................... 574 302
------- -------
Total current assets....................................... 49,224 20,667
------- -------
Property and equipment:
Computer and other equipment....................................... 5,258 2,697
Furniture and fixtures............................................. 1,539 615
Leasehold improvements............................................. 1,131 117
------- -------
7,928 3,429
Less accumulated depreciation and amortization..................... 1,916 918
------- -------
6,012 2,511
------- -------
Noncompete agreements, less accumulated amortization................. 4,768 5,543
Deferred loan costs, less accumulated amortization................... -- 867
Goodwill, less accumulated amortization.............................. 412 472
Other assets......................................................... 491 208
------- -------
$60,907 $ 30,268
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Note payable to bank............................................... $ -- $ 1,763
Current installments of long-term debt............................. 63 2,522
Accounts payable and accrued expenses.............................. 2,297 1,504
Accrued payroll and related expenses............................... 14,124 7,836
------- -------
Total current liabilities.................................. 16,484 13,625
Long-term debt, excluding current installments....................... 702 17,629
Loans from shareholders.............................................. -- 1,075
Deferred compensation................................................ 1,477 1,036
Deferred income taxes (note C)....................................... 4,005 305
------- -------
Total liabilities.......................................... 22,668 33,670
------- -------
Shareholders' equity (deficit) -- (note B):
Preferred stock, no par value. Authorized 1,000,000 shares; no
shares issued or outstanding in 1996............................ -- --
Common stock, no par value; stated value $.001 per share.
Authorized 60,000,000 shares; issued and outstanding 17,621,152
in 1996......................................................... 18 58
Additional paid-in capital......................................... 33,940 (1,108)
Cumulative translation adjustments................................. (16) (51)
Retained earnings (accumulated deficit)............................ 4,297 (2,301)
------- -------
Total shareholders' equity (deficit)....................... 38,239 (3,402)
------- -------
$60,907 $ 30,268
======= =======
See accompanying notes to condensed consolidated financial statements.
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THE PROFIT RECOVERY GROUP INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ ------------------
1996 1995 1996 1995
------- ------- ------- -------
Revenues............................................... $21,964 $16,249 $55,542 $39,970
Cost of revenues....................................... 11,002 8,364 29,105 21,893
Selling, general and administrative expenses........... 6,623 5,008 18,694 13,443
------- ------- ------- -------
Operating income..................................... 4,339 2,877 7,743 4,634
Interest income (expense), net......................... 162 (479) (227) (1,089)
------- ------- ------- -------
Earnings before income taxes......................... 4,501 2,398 7,516 3,545
Income taxes (note C).................................. 1,759 -- 6,453 305
------- ------- ------- -------
Net earnings......................................... $ 2,742 $ 2,398 $ 1,063 $ 3,240
======= ======= ======= =======
Pro Forma information:
Historical earnings before income taxes.............. $ 4,501 $ 2,398 $ 7,516 $ 3,545
Pro forma income taxes (note C)...................... 1,759 935 2,935 1,382
------- ------- ------- -------
Pro forma net earnings............................ $ 2,742 $ 1,463 $ 4,581 $ 2,163
======= ======= ======= =======
Pro forma earnings per common and common equivalent
share (note D).................................... $ .15 $ .11 $ .27 $ .15
======= ======= ======= =======
Weighted average common and common equivalent shares
outstanding....................................... 18,286 14,948 17,231 14,948
======= ======= ======= =======
See accompanying notes to condensed consolidated financial statements.
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THE PROFIT RECOVERY GROUP INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS)
(UNAUDITED)
NINE MONTHS ENDED
SEPTEMBER 30,
--------------------
1996 1995
------- --------
Cash flows from operating activities:
Net earnings.......................................................... $ 1,063 $ 3,240
Adjustments to reconcile net earnings to net cash provided by (used
in) operating activities:
Depreciation and amortization...................................... 1,908 1,306
Deferred compensation expense...................................... 441 257
Deferred income taxes.............................................. 3,700 305
Foreign translation adjustments.................................... 35 29
Changes in assets and liabilities, net of effects of acquisition:
Receivables...................................................... (14,032) (6,926)
Prepaid expenses and other current assets........................ (272) (171)
Other assets..................................................... (250) (91)
Accounts payable and accrued expenses............................ 741 173
Accrued payroll and related expenses............................. 6,288 3,225
------- --------
Net cash provided by (used in) operating activities........... (378) 1,347
------- --------
Cash flows from investing activities:
Purchases of property and equipment................................... (4,499) (1,094)
Acquisition of Fial & Associates, Inc. (note E)....................... -- (550)
------- --------
Net cash used in investing activities......................... (4,499) (1,644)
------- --------
Cash flows from financing activities:
Net increase (decrease) in note payable to bank....................... (1,763) 1,233
Proceeds from issuance of long-term debt.............................. -- 12,700
Proceeds from loans from shareholders................................. 2,600 --
Repayment of long-term debt........................................... (7,117) (1,649)
Repayment of loans from shareholders.................................. (3,675) (599)
Payment of deferred loan costs........................................ -- (1,000)
Capital contributions, net............................................ 33,961 --
Dividends and distributions........................................... (4,876) (10,687)
------- --------
Net cash provided by (used in) financing activities........... 19,130 (2)
------- --------
Net change in cash and cash equivalents....................... 14,253 (299)
Cash at beginning of period............................................. 642 1,284
------- --------
Cash and cash equivalents at end of period.............................. $14,895 $ 985
======= ========
Supplemental disclosures of cash flow information:
Cash paid during the period for
Interest........................................................... $ 1,091 $ 749
======= ========
Income taxes....................................................... $ 1,598 $ --
======= ========
See accompanying notes to condensed consolidated financial statements.
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THE PROFIT RECOVERY GROUP INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1996
(UNAUDITED)
NOTE A -- BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements of
The Profit Recovery Group International, Inc. and its wholly owned subsidiaries
(the "Company") have been prepared in accordance with generally accepted
accounting principles for interim financial information and with the
instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do
not include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation have been included. Operating results for the
three and nine month periods ended September 30, 1996 are not necessarily
indicative of the results that may be expected for the year ending December 31,
1996. For further information, refer to the consolidated financial statements
and footnotes thereto included in the Company's prospectus dated March 26, 1996,
and issued in connection with the Company's initial public offering of 4.6
million shares of its common stock (the "Prospectus").
NOTE B -- INITIAL PUBLIC OFFERING
The Company's initial public offering of its common stock was declared
effective by the United States Securities and Exchange Commission on March 26,
1996, and public trading in the registered shares commenced March 27, 1996. The
initial public offering consisted of 4.6 million shares priced at $11 per share
with the Company selling 3.4 million newly issued shares and certain selling
shareholders selling 1.2 million existing shares.
On April 18, 1996, the Company received notification from its initial
public offering underwriting syndicate that the syndicate had exercised its full
over-allotment option to purchase an additional 690,000 shares of Company common
stock. All of these shares were then sold to the underwriting syndicate by
certain selling shareholders. The Company received no proceeds from the sale of
such shares.
NOTE C -- INCOME TAXES
The Company's predecessors (prior to March 28, 1996) consisted primarily of
Subchapter S corporations and a partnership. As such, the federal and state
income taxes with regard to these entities historically have been the
responsibility of the respective shareholders and partners. The results of
operations for all periods presented which include operations prior to April 1,
1996 have been adjusted on a pro forma basis to reflect federal and state income
taxes at a combined rate of 39% as if the Company's predecessors had been C
corporations throughout such periods.
In the second quarter of 1995, the Company's predecessors reorganized and
its international entities became C corporations. Additionally, in connection
with the Company's March 1996 initial public offering, all domestic entities
became C corporations. As a result of these conversions to C corporations, the
Company incurred charges to operations of $305,000 in the second quarter of 1995
and $3.7 million in the first quarter of 1996 for cumulative deferred income
taxes.
Deferred income taxes are determined on the liability method in accordance
with Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes." Deferred income taxes arise from temporary differences between the tax
basis of assets and liabilities and their reported amounts in the financial
statements. Deferred tax assets and liabilities are adjusted for the affects of
changes in tax laws and rates on
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THE PROFIT RECOVERY GROUP INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
the date of enactment. A summary of the components of deferred tax liabilities
and assets at March 31, 1996 follows:
Deferred tax liabilities:
Receivables............................................................... $8,537
Accelerated depreciation for tax purposes................................. 195
Goodwill.................................................................. 176
Other..................................................................... 355
------
Gross deferred tax liabilities.................................... $9,263
------
Deferred tax assets:
Accrued payroll and related expenses...................................... $3,938
Accounts payable and accrued expenses..................................... 634
Deferred compensation..................................................... 453
Noncompete agreements..................................................... 233
------
Gross deferred tax assets......................................... $5,258
------
Net deferred tax liabilities...................................... $4,005
======
No valuation allowances were deemed necessary since all deductible
temporary differences will be utilized primarily against reversals of taxable
temporary differences.
NOTE D -- PRO FORMA EARNINGS PER COMMON AND COMMON EQUIVALENT SHARE
For all periods prior to April 1, 1996, pro forma earnings per common and
common equivalent share has been computed by dividing the pro forma net
earnings, which gives effect to pro forma income taxes, by the weighted average
number of common and common equivalent shares outstanding during the period,
after giving effect to the reorganization enacted at the time of the Company's
March 1996 initial public offering. (See note 15 on page F-17 of the Prospectus
for the various components of the reorganization). For purposes of determining
the weighted average number of common and common equivalent shares for all
periods prior to April 1, 1996, the Company has followed required supplementary
guidance contained in Securities and Exchange Commission Staff Accounting
Bulletin Topic 4D and has treated all common shares, warrants, options and
convertible debentures issued within one year prior to its initial public
offering as exercised and outstanding, using the treasury stock method,
regardless if the effect were antidilutive. In addition, the aforementioned
computation includes the equivalent number of common shares derived from
dividing the distributions payable by $11.00 per share.
For periods subsequent to March 31, 1996, the weighted average number of
common and common equivalent shares has been derived pursuant to requirements of
Accounting Principles Board Opinion No. 15, Earnings per Share. Common
equivalent shares consist of dilutive stock options, calculated using the
treasury stock method. Fully diluted earnings per share is not significantly
different from the primary earnings per share presented.
NOTE E -- ACQUISITION
Effective January 1, 1995, the Company acquired certain assets of Fial &
Associates, Inc. (Fial). The transaction was accounted for under the purchase
method of acquisition accounting. Accordingly, the Company's condensed
consolidated financial statements for the three and nine month periods ended
September 30, 1996 and 1995 include the operating results of Fial throughout
such periods.
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THE PROFIT RECOVERY GROUP INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE F -- CASH EQUIVALENTS
Cash equivalents at September 30, 1996 consisted of an $11.6 million
reverse repurchase agreement with NationsBank, N.A. (South) which was fully
collateralized by United States of America Treasury Notes in the possession of
such bank. The reverse repurchase agreement in effect on September 30, 1996
matured and was settled on October 1, 1996.
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.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The following discussion and analysis should be read in conjunction with
the condensed consolidated financial statements and notes thereto included
elsewhere herein.
RESULTS OF OPERATIONS
The following table presents, for the periods indicated, certain items in
the condensed consolidated statements of operations as a percentage of revenues.
THREE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------- --------------
1996 1995 1996 1995
----- ----- ----- -----
HISTORICAL
Revenues..................................................... 100.0% 100.0% 100.0% 100.0%
Cost of revenues............................................. 50.1 51.5 52.4 54.8
Selling, general and administrative expenses................. 30.1 30.8 33.7 33.6
----- ----- ----- -----
Operating income..................................... 19.8 17.7 13.9 11.6
Interest income (expense), net............................... .7 (2.9) (.4) (2.7)
----- ----- ----- -----
Earnings before income taxes......................... 20.5 14.8 13.5 8.9
Income taxes................................................. 8.0 -- 11.6 .8
----- ----- ----- -----
Net earnings......................................... 12.5% 14.8% 1.9% 8.1%
===== ===== ===== =====
PRO FORMA
Historical earnings before income taxes...................... 20.5% 14.8% 13.5% 8.9%
Pro forma income taxes....................................... 8.0 5.8 5.3 3.5
----- ----- ----- -----
Pro forma net earnings............................... 12.5% 9.0% 8.2% 5.4%
===== ===== ===== =====
Three and Nine Month Periods Ended September 30, 1996 compared to
Corresponding Periods of the Prior Year
Revenues. The Company's revenues consist principally of contractual
percentages of overpayments recovered for clients that are primarily in the
retailing industry. Revenues increased 35% to $22 million for the third quarter
of 1996, up from $16.2 million in the third quarter of 1995. For the nine months
ended September 30, 1996, revenues were $55.5 million, or 39% higher than $40
million achieved in the corresponding period of 1995.
Domestic revenues were $17.7 million in the third quarter of 1996, up 24.1%
from $14.2 million in the third quarter of 1995. For the first nine months of
1996, domestic revenues were $45.2 million, an increase of 29.4% over the
comparable period of 1995. This 29.4% revenue increase consisted of growth from
provision of services to new clients of approximately 12.3% and growth from
existing clients of approximately 17.1%.
During the third quarter of 1996 the Company was notified by a large
grocery client that the Company will not be retained to serve as primary
recovery auditor in 1997. This client represented one of the five largest
domestic accounts of the Company during the nine months ended September 30,
1996, based upon revenues, and represented $2.9 million, or 6.4% of all domestic
revenues earned during that period. Although the Company is seeking an
appointment to serve this client as secondary recovery auditor for 1997 and has
been orally informed by a cognizant client representative that the Company will
be allowed to serve in such capacity, no written 1997 service contract for this
client has been executed as of the date of this filing. Additionally, the
Company's experience indicates that a contract to serve as secondary auditor for
a given client generally provides significantly less in revenues than a contract
to serve as primary auditor.
The Company believes that 1997 revenues which can be reasonably estimated
to be derived from new domestic audits signed so far in 1996 (most of which will
not yield appreciable levels of revenue until 1997) will significantly exceed
the 1997 revenues anticipated to be lost due to domestic clients who have
notified the
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Company of their intent to either discontinue using the Company's services or to
reduce the level of such services. Factors which influence the amount and timing
of revenues derived from a client include, but are not limited to, client size
and retail industry segment, availability of required audit data, audit
commencement date, level of client cooperation and Company staffing and data
center capacities. Due to these factors, no assurance can be given that 1997
revenues estimated to be derived from new domestic audits signed so far in 1996
will exceed 1997 revenues anticipated to be lost due to client notifications of
service discontinuance or reduction. (See "Forward-looking Statements" elsewhere
herein).
International revenues were $4.3 million in the third quarter of 1996, up
112.9% from $2 million in the third quarter of 1995. For the first nine months
of 1996, international revenues were $10.3 million, a 105.4% increase over $5
million during the comparable period of 1995. International revenue increases
for the 1996 periods over the corresponding periods of 1995 were attributable
primarily to new clients. Company operations in almost all international markets
experienced high rates of revenue growth during the 1996 periods. 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. There can be no assurance, however, that recent
international growth trends will continue.
Cost of Revenues. Cost of revenues consists principally of commissions
paid or payable to the Company's auditors and regional managers based upon the
level of overpayment recoveries. 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 third quarter of 1996, down from 51.5%
for the comparable quarter of 1995. For the nine months ended September 30,
1996, cost of revenues was 52.4%, down from 54.8% during the comparable period
of 1995.
Domestically, cost of revenues as a percentage of revenues was 50.4% and
52.8%, respectively, for the three and nine month periods ended September 30,
1996. For the corresponding periods of 1995, these percentages were higher at
52.2% and 56.0%, respectively. The 1996 percentage improvements related
principally to contracts-in-progress acquired in January 1995 as part of the
Company's purchase of a domestic competitor, Fial & Associates, Inc. (Fial).
These contracts carried higher auditor compensation rates than those customarily
paid by the Company. Substantially all of these auditor contracts were concluded
in 1995 and, as the audits were concluded, the auditors were transitioned to the
Company's standard compensation arrangements.
Internationally, cost of revenues as a percentage of revenues was 48.7% and
50.6%, respectively, for the quarter and nine months ended September 30, 1996.
These percentages increased from 46.7% and 46.6%, respectively, for the
comparable periods of 1995 due primarily to initial auditor compensation
guarantees in various new markets.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses include the costs of sales and marketing activities,
information technology services and the corporate data center, human resources,
finance 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 slightly to 30.1%
in the third quarter of 1996, down from 30.8% in the third quarter of 1995. For
the nine months ended September 30, 1996, selling, general and administrative
expenses as a percentage of revenues was 33.7%, relatively unchanged from 33.6%
in the comparable period of 1995.
On a domestic basis, selling, general and administrative expenses as a
percentage of revenues improved to 25.9% for the quarter ended September 30,
1996, from 27.6% in the comparable quarter of 1995. For the first nine months of
1996, selling, general and administrative expenses as a percentage of revenues
improved to 29.7%, down from 30.2% during the comparable period of 1995. Since
domestic selling, general and administrative expenses are primarily fixed costs,
these quarterly and year-to-date percentage improvements were achieved primarily
due to emerging economies of scale whereby the Company's rates of domestic
revenue growth have exceeded the related rates of domestic expense growth
required to support the incremental revenues.
Internationally, selling, general and administrative expenses as a
percentage of revenues improved significantly to 47.7% of revenues for the
quarter ended September 30, 1996, compared to 53.3% in the 1995
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third quarter. For the nine month periods ended September 30, 1996 and 1995,
this percentage likewise improved to 51.1% (1996) from 57.5% (1995). Similar to
the Company's domestic experience, improvements in 1996 related primarily to
various components of fixed costs being spread over a rapidly growing revenue
base.
In connection with acquired businesses, the previous owners agreed to enter
into agreements not to compete with the Company. The intangible assets resulting
from non-compete obligations are amortized on a straight-line basis over their
respective periods. Amortization of deferred non-compete assets totaled $278,000
for both the third quarter of 1996 and the third quarter of 1995. For the nine
month periods ended September 30, 1996 and 1995, such amortization totaled
$834,000 and $923,000, respectively.
Operating Income. Operating income increased 50.8% to $4.3 million in the
third quarter of 1996, up from $2.9 million in the third quarter of 1995. For
the nine months ended September 30, 1996, operating income increased 67.1% to
$7.7 million, up from $4.6 million in the comparable period of 1995. Significant
revenue increases coupled with operating margin increases, the components of
which are discussed above, yielded the improvements in the 1996 periods.
Interest Income (Expense), Net. Subsequent to the Company's initial public
offering in March 1996, substantially all of its long-term debt obligations were
repaid in full. Additionally, the offering provided the Company with substantial
cash balances which have been temporarily invested in interest bearing
instruments. Net interest income of $162,000 during the quarter ended September
30, 1996 consists of interest earned on temporary investments, net of interest
accrued on the Company's remaining long-term debt obligations and deferred
compensation liabilities.
Earnings Before Income Taxes. Earnings before income taxes rose 87.7% and
112.0% in the quarter and nine months ended September 30, 1996, respectively,
compared to the same periods of 1995. Increased revenues, improved operating
margins, and changes in interest income (expense), net, yielded the earnings
growth.
Income Taxes. The Company's predecessors (prior to March 28, 1996)
consisted primarily of Subchapter S corporations and a partnership. As such, the
federal and state income taxes with regard to these entities historically have
been the responsibility of the respective shareholders and partners. In the
second quarter of 1995, the Company's predecessors reorganized and its
international entities became C corporations. Additionally, in connection with
the Company's March 1996 initial public offering, all domestic entities became C
corporations. As a result of these conversions to C corporations, the Company
incurred charges to operations of $305,000 in the second quarter of 1995 and
$3.7 million in the first quarter of 1996 for cumulative deferred income taxes.
During the quarters ended June 30, 1996 and September 30, 1996, income taxes
were provided at the Company's effective tax rate of 39%.
Pro Forma Income Taxes. The results of operations for all periods
presented which include operations prior to April 1, 1996 have been adjusted on
a pro forma basis to reflect federal and state income taxes at a combined rate
of 39% as if the Company's predecessors had been C corporations throughout such
periods.
LIQUIDITY AND CAPITAL RESOURCES
Since 1991, the Company's predecessors have acquired and assimilated three
operating companies and financed these acquisitions primarily through a
combination of bank and seller financing. Ongoing Company operations and capital
requirements have been met primarily with cash flows provided by operating
activities and, to a lesser extent, with the proceeds from bank and shareholder
loans. On March 26, 1996, the Company's initial public offering of its common
stock was declared effective by the United States Securities and Exchange
Commission. On April 1, 1996, the Company received its $34.8 million portion of
the proceeds (net of underwriting discounts and commissions) from the offering.
Of these proceeds, approximately $1.1 million was subsequently utilized to pay
expenses of the offering, approximately $4.9 million was used to pay previously
declared and unpaid Subchapter S shareholder distributions and approximately
$14.6 million was used to pay principal and accrued interest on substantially
all outstanding interest-bearing debt (other than convertible debt that was
converted to common stock concurrent with the initial public offering).
Substantially all of the remaining $14.2 million continued to be available as of
September 30, 1996 to expand international
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operations, to acquire complementary businesses and for general corporate
purposes, including working capital.
In September 1996, the Company executed a $20 million credit facility with
NationsBank N.A. (South). The facility permits the Company to borrow up to $20
million on a term loan basis to finance mergers and acquisitions. Alternatively,
the Company, at its option, may utilize up to $10 million as a revolving line of
credit for working capital and employ the remaining $10 million for mergers and
acquisitions. Through the date of this filing, the Company has made no draws
against this credit facility.
During the quarter ended September 30, 1996, the Company achieved an
unusually large proportion of its quarterly revenues in the last month of the
quarter. This resulted from delays in commencing three large domestic audit
engagements which had been anticipated to provide significant revenues during
the quarter. Although the Company was ultimately successful in redeploying its
domestic auditors to overcome the revenue shortfall from these three delayed
engagements, much of the replacement revenue was earned in September 1996 and
served to increase the Company's accounts receivable from $26.7 million at June
30, 1996 to $33.8 million at September 30, 1996. Since the fourth quarter is
typically the Company's highest cash collections quarter of the year, the
Company is hopeful of reducing its accounts receivable levels by December 31,
1996. There can be no assurance, however, that such reduction can be achieved if
cash collections do not follow historical patterns.
Due to rapid growth, the Company has undertaken in 1996 to double the size
of its Atlanta home office to approximately 45,000 square feet. This project was
completed in the third quarter of 1996 and, combined with ongoing
computer-related equipment additions, comprises the majority portion of the
Company's property and equipment additions during the nine months ended
September 30, 1996. The Company currently has no plans for any materially large
capital additions during the fourth quarter of 1996.
FORWARD-LOOKING STATEMENTS
Statements made in this Form 10-Q for the quarter ended September 30, 1996
that state the Company's or management's intentions, hopes, beliefs,
expectations or predictions of the future are forward-looking statements within
the meaning of the Private Securities Litigation Reform Act of 1995. It is
important to note that the Company's actual results could differ materially from
those contained in such forward-looking statements. Additional information
concerning factors that could cause actual results to differ materially from
those in forward-looking statements is contained from time to time in the
Company's SEC filings including the Risk Factors section of the Company's
Prospectus dated March 26, 1996 included in registration statement number
333-1086 on Form S-1. Copies of the Prospectus may be obtained free of charge by
contacting the Company.
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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
3.1 -- Articles of Incorporation of the Registrant (incorporated by
reference to Exhibit 3.1 to Registrant's March 26, 1996 registration
statement number 333-1086 on Form S-1).
3.2 -- Bylaws of the Registrant (incorporated by reference to Exhibit 3.2 to
Registrant's March 26, 1996 registration statement number 333-1086 on
Form S-1).
10.1 -- Loan and Security Agreement by and among NationsBank, N.A. (South) as
Lender, and The Profit Recovery Group International, Inc. as
Borrower, and Certain Affiliates of Borrower, as Guarantors, dated
September 27, 1996.
11.1 -- Statement Re: Computation of pro forma earnings per share.
27.1 -- Financial Data Schedule (for SEC use only).
(b) Reports on Form 8-K
The Company did not file a report on Form 8-K during the quarter ended
September 30, 1996.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
THE PROFIT RECOVERY GROUP
INTERNATIONAL, INC.
Dated: November 12, 1996 By: /s/ DONALD E. ELLIS, JR.
--------------------------------------------
Donald E. Ellis, Jr.
Senior Vice President,
Treasurer and
Chief Financial Officer
(principal financial officer)
Dated: November 12, 1996 By: /s/ JORGE E. CORA
--------------------------------------------
Jorge E. Cora
Vice President -- Finance
(principal accounting officer)
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