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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, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ____________ TO
____________
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, INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL
EXECUTIVE OFFICES)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
The number of outstanding shares of the issuer's class of capital stock as
of October 30, 1997, the latest practicable date, was as follows: 19,152,976
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, 1997
INDEX
PAGE NO.
--------
PART I. Financial Information
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Statements of Earnings --
Three and nine month periods ended September 30, 1997
and September 30, 1996................................. 1
Condensed Consolidated Balance Sheets --
September 30, 1997 and December 31, 1996............... 2
Condensed Consolidated Statements of Cash Flows --
Nine months ended September 30, 1997 and September 30,
1996................................................... 3
Notes to Condensed Consolidated Financial Statements...... 4
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations......................... 6
Item 3. Quantitative and Qualitative Disclosures about
Market Risk......................................... 11
PART II. Other Information........................................... 12
Signatures............................................................ 13
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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)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- -----------------
1997 1996 1997 1996
-------- -------- ------- -------
Revenues.................................................. $29,627 $21,964 $76,445 $55,542
Cost of revenues.......................................... 14,693 11,002 39,553 29,105
Selling, general and administrative expenses.............. 8,790 6,623 25,709 18,694
------- ------- ------- -------
Operating income........................................ 6,144 4,339 11,183 7,743
Interest income (expense), net............................ 14 162 132 (227)
------- ------- ------- -------
Earnings before income taxes............................ 6,158 4,501 11,315 7,516
Income taxes (Note C)..................................... 2,400 1,759 4,397 6,453
------- ------- ------- -------
Net earnings............................................ $ 3,758 $ 2,742 $ 6,918 $ 1,063
======= ======= ======= =======
Pro forma information:
Historical earnings before income taxes................. $ 7,516
Pro forma income taxes (Note C)......................... 2,935
-------
Pro forma net earnings............................... $ 4,581
=======
Net earnings (pro forma net earnings for nine months ended
September 30, 1996) per common and common equivalent
share (Note D).......................................... $ .20 $ .15 $ .37 $ .27
======= ======= ======= =======
Weighted average common and common equivalent shares
outstanding............................................. 18,910 18,286 18,720 17,231
======= ======= ======= =======
See accompanying notes to condensed consolidated financial statements.
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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,
1997 1996
------------- ------------
ASSETS
Current assets:
Cash and cash equivalents (Note F)........................ $12,231 $16,891
Receivables:
Billed contract receivables............................ 5,122 3,864
Unbilled contract receivables.......................... 40,179 30,734
Employee advances...................................... 2,160 1,363
------- -------
Total receivables................................. 47,461 35,961
------- -------
Refundable income taxes................................... -- 2,049
Prepaid expenses and other current assets................. 1,292 528
------- -------
Total current assets.............................. 60,984 55,429
------- -------
Property and equipment:
Computer and other equipment.............................. 9,627 5,753
Furniture and fixtures.................................... 1,937 1,569
Leasehold improvements.................................... 1,331 1,183
------- -------
12,895 8,505
Less accumulated depreciation and amortization............ 4,314 2,272
------- -------
8,581 6,233
------- -------
Noncompete agreements, less accumulated amortization........ 3,734 4,509
Deferred loan costs, less accumulated amortization.......... 32 56
Goodwill, less accumulated amortization..................... 6,204 393
Deferred income taxes....................................... 1,174 1,174
Other assets................................................ 537 524
------- -------
$81,246 $68,318
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current installments of long-term debt.................... $ 83 $ 79
Accounts payable and accrued expenses..................... 1,719 1,383
Accrued payroll and related expenses...................... 17,788 16,356
Deferred income taxes..................................... 7,607 7,607
------- -------
Total current liabilities......................... 27,197 25,425
Long-term debt, excluding current installments.............. 707 692
Deferred compensation....................................... 2,263 1,642
------- -------
Total liabilities................................. 30,167 27,759
------- -------
Shareholders' equity (Note B):
Preferred stock, no par value. Authorized 1,000,000
shares; no shares issued or outstanding in 1997 and
1996................................................... -- --
Common stock, no par value; stated value $.001 per share.
Authorized 60,000,000 shares; issued and outstanding
18,294,149 in 1997 and 17,649,152 in 1996.............. 18 18
Additional paid-in capital................................ 37,815 34,188
Cumulative translation adjustments........................ (56) (31)
Retained earnings......................................... 13,302 6,384
------- -------
Total shareholders' equity........................ 51,079 40,559
------- -------
$81,246 $68,318
======= =======
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,
--------------------
1997 1996
-------- --------
Cash flows from operating activities:
Net earnings.............................................. $ 6,918 $ 1,063
Adjustments to reconcile net earnings to net cash provided
by (used in) operating activities:
Depreciation and amortization.......................... 3,018 1,908
Deferred compensation expense.......................... 434 441
Deferred income taxes.................................. -- 3,700
Foreign translation adjustments........................ (25) 35
Changes in assets and liabilities, net of effects of
acquisitions:
Receivables.......................................... (10,990) (14,032)
Prepaid expenses and other current assets............ (743) (272)
Refundable income taxes.............................. 2,049 --
Other assets......................................... (93) (250)
Accounts payable and accrued expenses................ 333 741
Accrued payroll and related expenses................. 1,084 6,288
-------- --------
Net cash provided by (used in) operating
activities...................................... 1,985 (378)
-------- --------
Cash flows from investing activities:
Purchases of property and equipment....................... (4,054) (4,499)
Acquisition of businesses (Note E)........................ (3,194) --
-------- --------
Net cash used in investing activities............. (7,248) (4,499)
-------- --------
Cash flows from financing activities:
Net repayments of note payable to bank.................... -- (1,763)
Proceeds from loans from shareholders..................... -- 2,600
Repayments of long-term debt.............................. -- (7,117)
Repayments of loans from shareholders..................... -- (3,675)
Net proceeds from common stock............................ 603 33,961
Distributions............................................. -- (4,876)
-------- --------
Net cash provided by financing activities......... 603 19,130
-------- --------
Net change in cash and cash equivalents........... (4,660) 14,253
Cash and cash equivalents at beginning of period............ 16,891 642
-------- --------
Cash and cash equivalents at end of period.................. $ 12,231 $ 14,895
======== ========
Supplemental disclosure of cash flow information:
Cash paid during the period for interest............... $ 38 $ 1,091
======== ========
Cash paid during the period for income taxes........... $ 2,165 $ 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, 1997
(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, 1997 are not necessarily
indicative of the results that may be expected for the year ending December 31,
1997. 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, 1996.
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. The proceeds from the offering
(net of underwriting discounts and commissions) were not distributed by the
underwriting syndicate until April 1, 1996.
On April 18, 1996, the Company received notification from its 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 syndicate by certain selling shareholders. The
Company received no proceeds from the sale of such shares.
NOTE C -- INCOME TAXES
The Company's predecessor entities prior to its initial public offering on
March 26, 1996 generally were either corporations electing to be taxed as
Subchapter S corporations or partnerships. As a result, any income tax
liabilities were the responsibilities of the respective shareholders and
partners. In connection with the initial public offering, all domestic entities
became C corporations. As a result of these conversions to C corporations, the
Company incurred a charge to operations of $3.7 million in the first quarter of
1996 for cumulative deferred income taxes. The results of operations for the
nine month period ended September 30, 1996 have been adjusted on a pro forma
basis to reflect federal and state income taxes at a composite effective rate of
39% as if the Company's predecessors had been C corporations throughout the
entire period.
NOTE D -- EARNINGS AND PRO FORMA EARNINGS PER COMMON AND COMMON EQUIVALENT SHARE
For operations 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. 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
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THE PROFIT RECOVERY GROUP INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
addition, the aforementioned computation includes the equivalent number of
common shares derived from dividing the distributions payable by $11.00 per
share.
For operations 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. Fully diluted
earnings per share for affected reporting periods is not significantly different
from the primary earnings per share presented.
NOTE E -- ACQUISITIONS
On January 2, 1997, the Company acquired the net operating assets of Shaps
Group, Inc., a California-based company providing recovery audit services to
manufacturers and distributors of technology products. The Company issued
375,000 shares of its common stock in the transaction which was accounted for as
a pooling-of-interests. Since prior years' financial positions and results of
operations of Shaps Group, Inc. are not material in relation to the Company's
historical financial statements, the Company has not restated its prior years'
consolidated financial statements.
On February 11, 1997, the Company acquired all of the common stock of
Accounts Payable Recovery Services, Inc., a Texas-based company providing
recovery audit services to healthcare entities and energy companies. This
transaction was accounted for as a purchase with consideration of $2.0 million
in cash and 130,599 shares of the Company's common stock valued at $15.25 per
share. Approximately $100,000 in direct acquisition-related costs were also
incurred and capitalized as part of this transaction.
On May 23, 1997, the Company acquired all of the common stock of The Hale
Group, a California-based company providing recovery audit services to
healthcare entities. This transaction was accounted for as a purchase with
consideration of $1.1 million in cash and 74,998 shares of the Company's common
stock valued at $13.38 per share.
NOTE F -- CASH EQUIVALENTS
Cash equivalents at September 30, 1997 and December 31, 1996 consisted of
$2.5 million and $11.9 million, respectively, of reverse repurchase agreements
with NationsBank, N.A. (South) which were fully collateralized by United States
of America Treasury Notes in the possession of such bank. The reverse repurchase
agreements in effect on September 30, 1997 and December 31, 1996 matured and
were settled on October 1, 1997 and January 2, 1997, respectively.
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 G -- SUBSEQUENT EVENTS
On October 7, 1997, the Company acquired 98.4% of Financiere Alma, S.A. and
subsidiaries ("Alma"), a privately held recovery audit firm based in Paris,
France. This transaction was accounted for as a purchase with consideration of
$24.6 million in cash and approximately 859,000 restricted, unregistered shares
of the Company's common stock with an aggregate estimated fair value of
$9,959,000, based on preliminary valuations. Approximately $1.7 million in
direct acquisition-related costs were also incurred and capitalized as part of
this transaction. The Company has an obligation to acquire the remaining
interest in Alma by January 1999 for $398,000 in cash and 13,900 unregistered
shares of the Company's common stock. The Company increased its credit facility
with NationsBank, N.A. from $20.0 million to $30.0 million on October 3, 1997 to
finance the cash consideration paid and a portion of the direct
acquisition-related expenses incurred.
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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.
OVERVIEW
The Company is a leading provider of accounts payable and other recovery
audit services to large retailers, wholesale distributors, healthcare providers,
technology companies and other large transaction-intensive companies, as well as
to certain governmental agencies. In businesses with large purchase volumes and
continuously fluctuating purchase prices, some small percentage of erroneous
overpayments to vendors is inevitable. In addition, compliance with various
complex tax laws also results in overpayments to governmental agencies.
Moreover, services such as telecommunications, utilities and freight provided to
businesses under complex pricing arrangements can result in overpayments. All of
these overpayments result in "lost profits". The Company identifies and
documents overpayments by using sophisticated proprietary technology and
advanced audit techniques and methodologies, and by employing highly trained,
experienced recovery audit specialists. The Company receives a contractually
negotiated percentage of amounts recovered.
The earliest of the Company's predecessors was formed in November 1990, and
in early 1991 acquired the operating assets of Roy Greene Associates, Inc. and
Bottom Line Associates, Inc., which were formed in 1971 and 1985, respectively.
In January 1995, the Company purchased certain assets of Fail & Associates,
Inc., a direct U.S. competitor. In January 1997, the Company acquired the net
operating assets of Shaps Group, Inc., a California-based company providing
recovery audit services to manufacturers and distributors of technology
products. In February 1997, the Company acquired all of the common stock of
Accounts Payable Recovery Services, Inc., a Texas-based company providing
recovery audit services to healthcare entities and energy companies. In May
1997, the Company acquired all of the common stock of The Hale Group, a
California-based company that also provides recovery audit services to
healthcare entities. In October 1997, the Company acquired 98.4% of Financiere
Alma, S.A. and subsidiaries ("Alma"), a Paris-based recovery audit firm
specializing in identifying and recovering various types of French corporate tax
overpayments. The Company intends to continue pursuing domestic and
international strategic acquisitions, including direct competitors and
complementary businesses.
ANTICIPATED CHARGE TO EARNINGS
On October 7, 1997, the Company acquired 98.4% of Paris-based Alma. In
recognition of emerging developments such as the Alma acquisition, the Company
intends to restructure and realign certain facets of its European management
structure and expects to incur related pre-tax charges to operations in the
quarter ending December 31, 1997 in the range of $1.0 million to $1.2 million.
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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.
THREE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------- -------------
1997 1996 1997 1996
----- ----- ----- -----
HISTORICAL
Revenues.................................................. 100.0% 100.0% 100.0% 100.0%
Cost of revenues.......................................... 49.6 50.1 51.8 52.4
Selling, general and administrative expenses.............. 29.7 30.1 33.6 33.7
----- ----- ----- -----
Operating income.................................. 20.7 19.8 14.6 13.9
Interest income (expense), net............................ 0.1 0.7 0.2 (0.4)
----- ----- ----- -----
Earnings before income taxes...................... 20.8 20.5 14.8 13.5
Income taxes.............................................. 8.1 8.0 5.8 11.6
----- ----- ----- -----
Net earnings...................................... 12.7% 12.5% 9.0% 1.9%
===== ===== ===== =====
PRO FORMA
Historical earnings before income taxes................... 13.5%
Pro forma income taxes.................................... 5.3
-----
Pro forma net earnings............................ 8.2%
=====
Three and Nine Month Periods Ended September 30, 1997 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 34.9% to $29.6 million for the third
quarter of 1997, up from $22.0 million for the third quarter of 1996. For the
nine months ended September 30, 1997, revenues were $76.4 million, or 37.6%
higher than $55.5 million achieved in the corresponding period of 1996.
Domestic revenues were $23.0 million in the third quarter of 1997, up 30.2%
from $17.7 million in the third quarter of 1997. This 30.2% increase consisted
of (i) 8.0% growth from existing clients served in both the 1997 and 1996
periods; (ii) 14.4% growth from the three complementary recovery audit firms
acquired in the first half of 1997; and (iii) 7.8% growth from provision of
services to new clients (net of the effect of revenues in the third quarter of
1996 from clients not served in the third quarter of 1997). For the first nine
months of 1997, domestic revenues were $58.8 million, an increase of 30.1% over
$45.2 million during the comparable period of 1996.
International revenues were $6.6 million in the third quarter of 1997, up
54.1% from $4.3 million in the third quarter of 1996. For the first nine months
of 1997, international revenues were $17.6 million, a 70.6% increase over $10.3
million during the comparable period of 1996. International revenue increases
for the 1997 periods over the corresponding periods of 1996 were primarily
attributable to new clients. Company operations in almost all international
markets experienced significant rates of revenue growth during the three and
nine month periods ended September 30, 1997, as compared with comparable periods
of 1996. The Company continues to believe that the rate of revenue growth for
its international operations will significantly exceed its rate of domestic
revenue growth for the foreseeable future if the revenue effect of acquired
businesses, if any, is excluded. There can be no assurance, however, that recent
international growth trends will continue. See "Forward-looking Statements."
The Company has experienced and expects to continue to experience
significant seasonality in its business. The Company typically realizes higher
revenues and operating income in the last two quarters of its fiscal year. This
trend is expected to continue and reflects the inherent purchasing and
operational cycles of the
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retailing industry, which is the principal industry served by the Company. The
Company's October 1997 acquisition of Alma is not expected to affect this trend
because Alma historically has experienced similar seasonality in its revenues
and operating income. Should the Company not continue to realize increased
revenues in future third and fourth quarter periods, profitability for any
affected quarter and the entire year could be materially and adversely affected
due to ongoing selling, general and administrative expenses that are largely
fixed over the short term. See "Forward-looking Statements."
Cost of Revenues. Cost of revenues consists principally of commissions
paid or payable to the Company's auditors based upon the level of overpayment
recoveries, and salaries and bonuses paid or payable to divisional and regional
managers. Also included are other direct costs incurred by these personnel
including rental of field offices, travel and entertainment, telephone,
utilities, maintenance and supplies, and clerical assistance. Cost of revenues
was 49.6% of revenues for third quarter of 1997, down from 50.1% in the
comparable quarter of 1996. For the nine months ended September 30, 1997, cost
of revenues was 51.8%, down from 52.4% during the comparable 1996 nine month
period.
Domestically, cost of revenues as a percentage of revenues was 49.9% and
52.6%, respectively, for the quarter and nine months ended September 30, 1997.
For the corresponding periods of 1996, these percentages were 50.4% and 52.8%,
respectively. Domestic cost of revenues as a percentage of revenues historically
has been lower in each of the last two quarters of a fiscal year as compared to
each of the initial two quarters of that year. This trend is expected to
continue and relates to the Company's historical quarterly revenue seasonality
patterns that result in various fixed components of domestic cost of revenues
being spread over a growing quarterly domestic revenue base. See
"Forward-looking Statements."
The Company has developed a revised compensation program for its
non-management domestic field auditors which it believes will more equitably
compensate these individuals for their unique experience, skills and
contributions in meeting Company objectives. The revised program has been
designed with considerable input from auditor focus groups, has been subjected
to thorough in-house testing, and has undergone extensive field tests in the
first quarter of 1997. The revised program was implemented in May 1997. The
Company has attempted to design the revised program such that future aggregate
domestic auditor compensation expense will be unchanged from aggregate amounts
which would otherwise be paid under the program historically in place. Although
the Company and certain of its domestic auditors have expended considerable time
and resources to design the revised program, there can be no assurance that it
will meet its design objectives. If the design objectives of the revised
compensation program are not achieved, the Company's domestic costs and revenues
could be materially and adversely affected. See "Forward-looking Statements."
Internationally, cost of revenues as a percentage of revenues was 48.4% and
48.8%, respectively, for the quarter and nine months ended September 30, 1997.
For the corresponding periods of 1996, these percentages were 48.7% and 50.6%,
respectively. The 1997 improvements resulted primarily from gross margin
expansions in the second and third quarters of 1997 in the Company's more
established international locations.
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, headquarters-related depreciation of property and
equipment and amortization of intangibles. Selling, general and administrative
expenses as a percentage of revenues decreased to 29.7% of revenues in the third
quarter of 1997, down from 30.1% in the third quarter of 1996. For the nine
months ended September 30, 1997, selling, general and administrative expenses as
a percentage of revenues was 33.6%, down slightly from 33.7% in the comparable
period of 1996.
On a domestic basis, selling, general and administrative expenses as a
percentage of revenues was 26.2% in the third quarter of 1997, up from 25.9% in
the comparable quarter of 1996. For the nine months ended September 30, 1997,
domestic selling, general and administrative expenses as a percentage of
revenues increased to 30.2%, up from 29.7% in the corresponding period of 1996.
The Company's 1997 domestic selling, general and administrative expense
percentages are higher than the comparable percentages in 1996 due to increased
expenditures for various 1997 initiatives such as significantly expanded
training programs and period costs associated with intensified mergers and
acquisitions efforts.
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Internationally, selling, general and administrative expenses as a
percentage of revenues improved to 41.6% of revenues in the second quarter of
1997, compared to 47.7% in the 1996 third quarter. For the nine month periods
ended September 30, 1997 and 1996, this percentage likewise improved to 45.1%
(1997) from 51.2% (1996). Improvements in 1997 related primarily to 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 con-compete costs. Amortization of these
intangible assets totaled $365,000 and $278,000 for the quarters ended September
30, 1997 and 1996, respectively, and $1.0 million and $834,000 for the nine
month periods ended September 30, 1997 and 1996, respectively.
Operating Income. Operating income increased 41.6% to $6.1 million in the
third quarter of 1997, up from $4.3 million in the third quarter of 1996. For
the nine months ended September 30, 1997, operating income increased 44.4% to
$11.2 million, up from $7.7 million in the comparable period of 1996. As a
percentage of total revenues, operating income increased to 20.7% for the
quarter ended September 30, 1997, up from 19.8% for the quarter ended September
30, 1996. For the nine months ended September 30, 1997, operating income as a
percentage of total revenues was 14.6%, up from 13.9% during the comparable
period of 1996. Significant revenue increases coupled with operating margin
improvements, the components of which are discussed above, yielded the
improvements in the 1997 periods.
Interest Income (Expense), Net. The Company reported net interest income
of $14,000 during the third quarter of 1997, compared to $162,000 during the
comparable quarter of 1996. The 1997 reduction relates principally to increased
interest expense on growing deferred compensation liabilities and a reduction of
investable funds as proceeds from the Company's March 1996 initial public
offering are expended on acquired companies and used for other corporate
purposes. For the nine months ended September 30, 1997, net interest income was
$132,000, compared to net interest expense of $227,000 during the comparable
period of 1996. The 1996 nine month period reflects significant levels of
interest expense incurred during the first quarter of that year in connection
with various debt obligations. Substantially all of such debt obligations were
repaid with a portion of the proceeds from the March 1996 initial public
offering.
Earnings Before Income Taxes. Earnings before income taxes rose 36.8% and
50.5% in the quarter and nine months ended September 30, 1997, respectively,
compared to the same periods of 1996. The improvements in earnings before income
taxes in the 1997 periods resulted from increased revenues, improved operating
margins and changes in interest income (expense), net.
Income Taxes. The Company's predecessor entities prior to its initial
public offering on March 26, 1996 generally were either corporations electing to
be taxed as Subchapter S corporations or partnerships. As a result, any income
tax liabilities were the responsibilities of the respective shareholders and
partners. In connection with the initial public offering, all domestic entities
became C corporations. As a result of these conversions to C corporations, the
Company incurred a charge to operations of $3.7 million in the first quarter of
1996 for cumulative deferred income taxes.
The provisions for income taxes for all periods subsequent to March 31,
1996 consist of federal and state income taxes at the Company's composite
effective rate of 39.0%. The provision for income taxes for the nine months
ended September 30, 1997 consists of the above-described $3.7 million charge for
cumulative deferred income taxes in the first quarter of such year combined with
$2.8 million in tax provisions at a 39.0% composite effective rate for the two
quarters subsequent to the March 26, 1996 initial public offering.
Pro Forma Income Taxes. The results of operations for the nine months
ended September 30, 1996 have been adjusted on a pro forma basis to reflect
federal and state income taxes as a composite effective rate of 39.0% as if the
Company's predecessors had been C corporations throughout the entire period.
LIQUIDITY AND CAPITAL RESOURCES
Through December 31, 1996, the Company's predecessors had 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 prior to the Company's initial public offering were met
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primarily with cash flows provided by operating activities and, to a lesser
extent, with the proceeds from bank and shareholder loans. On April 1, 1996, the
Company received its $34.8 million portion of the proceeds (net of underwriting
discounts and commissions) from its initial public 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 partnership distributions, and
approximately $14.6 million was used to pay principal and accrued interest on
substantially all outstanding interest-bearing debt (other than that portion of
certain convertible debt that was converted to Common Stock concurrent with the
initial public offering). Of the residual $14.2 million of net proceeds,
approximately $2.9 million continued to be available as of September 30, 1997 to
expand international operations, to acquire complementary businesses and for
general corporate purposes, including working capital.
During October 1997, the Company increased its Credit Facility with
NationsBank, N.A. from $20.0 million to $30.0 million. The credit facility
permits the Company to borrow up to $30.0 million on a term loan basis to
finance mergers and acquisitions. Alternatively, the Company, at its option, may
utilize up to $10.0 million as a revolving line of credit for working capital
and utilize the remaining $20.0 million for mergers and acquisitions. Borrowings
under the Credit Facility can be made through September 1999. As of October 30,
1997, the Company had outstanding principal borrowings of $24.7 million under
the credit facility at a floating prime interest rate then at 8.5% per annum.
Such borrowings were made in October 1997 in connection with the financing of
the Alma acquisition.
Net cash provided by operating activities was $2.0 million for the nine
months ended September 30, 1997. For the nine months ended September 30, 1996,
net cash used in operating activities was $378,000. During 1996, the Company
overestimated its federal and state income tax liabilities resulting in $2.0
million in refundable income taxes on its Consolidated Balance Sheet at December
31, 1996 which was subsequently recovered by the Company in the first quarter of
1997. Excluding the effect of having recovered this $2.0 million in excess
payments, net cash provided by operating activities for the nine months ended
September 30, 1997 would have been negligible.
Net cash used in investing activities was $7.2 million for the nine months
ended September 30, 1997. This total consisted of $4.0 million used to acquire
property and equipment (primarily computed-related equipment), $2.1 million paid
in connection with the February 1997 acquisition of Accounts Payable Recovery
Services, Inc., and $1.1 million paid in connection with the May 1997
acquisition of The Hale Group. Net cash used in investing activities was $4.5
million for the nine months ended September 30, 1996. Due to the Company's rapid
growth, the Company doubled the size of its Atlanta home office during 1996 to
approximately 45,000 square feet. This project was completed in the third
quarter of 1996 and, combined with ongoing computer-related equipment additions,
comprised the majority portion of the Company's property and equipment additions
for the nine months ended September 30, 1996.
From January 1, 1997 through October 30, 1997, the Company acquired four
recovery audit firms. The Company is pursuing, and intends to continue to
pursue, the acquisition of domestic and international businesses including both
direct competitors and businesses providing other types of recovery services.
Future acquisitions may include much larger businesses than those acquired to
date. There can be no assurance, however, that the Company will be successful in
consummating further acquisitions due to factors such as receptivity of
potential acquisition candidates and valuation issues. Additionally, there can
be no assurance that future acquisitions, if consummated, can be successfully
assimilated into the Company. See "Forward-looking Statements."
Net cash provided by financing activities was $603,000 for the nine months
ended September 30, 1997 and consisted of proceeds from the exercise of certain
employee stock options. Net cash provided by financing activities was $19.1
million for the nine months ended September 30, 1996, and reflects proceeds from
the Company's initial public offering, net of repayments of debt and other
obligations paid from those proceeds.
The Company believes that its current working capital, its existing line of
credit and cash flow generated from future operations will be sufficient to meet
the Company's working capital and capital expenditure requirements through
September 30, 1998 unless one or more acquisitions are consummated which require
the Company to seek additional debt or equity financing.
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NEW ACCOUNTING STANDARDS
The Company has determined that the adoption of Statement of Financial
Accounting Standards No. 128, "Earnings per Share", will not have a material
impact on the Company's reported per share results of operations. This
pronouncement is effective for periods ending after December 15, 1997, including
interim periods; earlier application is not permitted. Once effective, this
pronouncement requires restatement of all prior-period earnings per share data
presented.
Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income", establishes standards for reporting and display of
comprehensive income and its components (revenues, expenses, gains and losses)
in a full set of general purpose financial statements. This Statement requires
that all items that are required to be recognized under accounting standards as
components of comprehensive income be reported in a financial statement that is
displayed with the same prominence as other financial statements. The Company
believes that its components of comprehensive income will consist principally of
traditionally-determined net income and foreign currency translation
adjustments. This Statement is effective for fiscal years beginning after
December 15, 1997. Reclassification of financial statements for earlier periods
provided for comparative purposes is required.
Statement of Financial Accounting Standards No. 131, "Disclosures about
Segments of an Enterprise and Related Information" establishes revised standards
for the manner in which public business enterprises report information about
operating segments. The Company does not believe that this Statement will
significantly alter the segment disclosures it currently provides. This
Statement is effective for fiscal years beginning after December 15, 1997.
FORWARD-LOOKING STATEMENTS
Statements made in this Form 10-Q for the quarter ended September 30, 1997
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 July 29, 1997 included in registration statement number
333-31805 on Form S-3.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
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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 -- Contract for the Mandate of the President of the
Directorate, dated October 7, 1997, between Alma
Intervention and Marc Eisenberg.
10.2 -- Consulting Agreement, dated October 7, 1997, between the
Registrant and Lieb Finance S.A.
10.3 -- Second Amendment to Employment Agreement, dated September
17, 1997, between The Profit Recovery Group International I,
Inc. and John M. Cook.
10.4 -- Employment Agreement, dated October 17, 1997, between The
Profit Recovery Group International I, Inc. and Michael A.
Lustig.
10.5 -- Compensation Agreement, dated October 17, 1997, between The
Profit Recovery Group International I, Inc. and Michael A.
Lustig.
10.6 -- First Amendment to Loan and Security Agreement, dated
October 3, 1997, between NationsBank, N.A. and the
Registrant and its subsidiaries.
11.1 -- Statement Re: Computation of net earnings per share.
27.1 -- Financial Data Schedule (for SEC use only).
(b) Reports on Form 8-K
On July 30, 1997, Registrant filed a report on Form 8-K dated July 29,
1997 which contained Registrant's press release of July 14, 1997 whereby
Registrant reported its financial results for the quarter ended June 30,
1997.
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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 7, 1997 By: /s/ DONALD E. ELLIS, JR.
--------------------------------------------
Donald E. Ellis, Jr.
Senior Vice President,
Treasurer and
Chief Financial Officer
(principal financial officer)
Dated: November 7, 1997 By: /s/ MICHAEL R. MELTON
--------------------------------------------
Michael R. Melton
Vice President -- Finance
(principal accounting officer)
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