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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
DATE OF REPORT (DATE OF EARLIEST EVENT REPORTED): AUGUST 6, 1998
THE PROFIT RECOVERY GROUP
INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
Commission File Number 0-28000
GEORGIA 58-2213805
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation)
2300 WINDY RIDGE PARKWAY
SUITE 100 NORTH
ATLANTA, GEORGIA 30339-8426
(Address of principal executive offices) (Zip Code)
Registrant's telephone number including area code (770) 779-3900
(Former name or former address, if changed since last report) NOT APPLICABLE
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ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS
On August 6, 1998, The Profit Recovery Group International, Inc., a Georgia
corporation (the "Company"), and its wholly owned subsidiary, The Profit
Recovery Group International I, Inc. ("PRGI"), acquired substantially all the
assets and assumed certain liabilities of Loder, Drew & Associates ("Loder
Drew"), pursuant to the terms of an Asset Purchase Agreement ("Agreement") dated
July 31, 1998, effective July 1, 1998, by and among the Company, PRGI, Loder
Drew and the shareholders of Loder Drew. Loder Drew is an international recovery
auditing firm primarily serving clients in the manufacturing, financial services
and other non-retail sectors.
Pursuant to the Agreement, the initial consideration paid for Loder Drew
consisted of $70.0 million in cash and 803,534 unregistered, restricted shares
of the Company's common stock. Additionally, Loder Drew will be eligible to
receive additional purchase price consideration up to a maximum of $70.0 million
in cash conditioned on the future financial performance of Loder Drew through
December 31, 1999. The consideration given to acquire substantially all the
assets and assume certain liabilities of Loder Drew was determined as a result
of arm's length negotiations among unrelated parties, and the acquisition will
be accounted for using the purchase method of accounting. The Company borrowed
$73.0 million from NationsBank N.A. under its $150.0 million senior credit
facility to fund the cash portion of the initial consideration and the direct
acquisition-related costs estimated at $3.0 million.
The description of the acquisition contained herein is qualified in its
entirety by reference to the Agreement dated July 31, 1998 by and among the
Company, PRGI, Loder Drew and the shareholders of Loder Drew attached hereto as
Exhibit 2.1 and incorporated herein by reference.
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PAGE
NUMBER
------
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS
(a) Financial Statements of business acquired
LODER, DREW & ASSOCIATES
Independent Auditors' Report.............................. 4
Statements of Earnings for the years ended December 31,
1996 and 1997 and the three months ended March 31, 1997
and 1998............................................... 5
Balance Sheets as of December 31, 1996 and 1997 and March
31, 1998............................................... 6
Statements of Shareholders' Equity (Deficiency) for the
years ended December 31, 1996 and 1997 and the three
months ended March 31, 1998............................ 7
Statements of Cash Flows for the years ended December 31,
1996 and 1997 and the three months ended March 31, 1997
and 1998............................................... 8
Notes to Financial Statements............................. 9
(b) Pro Forma Financial Information
THE PROFIT RECOVERY GROUP INTERNATIONAL, INC. AND SUBSIDIARIES
Unaudited Pro Forma Consolidated Financial Information.... 14
Unaudited Pro Forma Consolidated Statement of Earnings for
the year ended December 31, 1997....................... 15
Unaudited Pro Forma Consolidated Statement of Earnings for
the three months ended March 31, 1998.................. 16
Notes to Unaudited Pro Forma Consolidated Statements of
Earnings............................................... 17
Unaudited Pro Forma Condensed Consolidated Balance Sheet
as of March 31, 1998................................... 18
Notes to Unaudited Pro Forma Condensed Consolidated
Balance Sheet.......................................... 19
(c) Exhibits.............................................. 20
Signature................................................. 21
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(a) Financial statements of business acquired
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Loder, Drew & Associates:
We have audited the accompanying balance sheets of Loder, Drew & Associates
as of December 31, 1996 and 1997 and the related statements of earnings,
shareholders' equity (deficiency) and cash flows for the years then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Loder, Drew & Associates as
of December 31, 1996 and 1997 and the results of its operations and its cash
flows for the years then ended in conformity with generally accepted accounting
principles.
KPMG PEAT MARWICK LLP
Orange County, California
May 29, 1998
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LODER, DREW & ASSOCIATES
STATEMENTS OF EARNINGS
THREE MONTHS ENDED
YEARS ENDED DECEMBER 31, MARCH 31,
------------------------- -----------------------
1996 1997 1997 1998
----------- ----------- ---------- ----------
(UNAUDITED)
Revenues...................................... $10,878,099 $22,605,804 $4,623,809 $6,766,457
Cost of revenues.............................. 5,942,644 11,895,652 1,965,609 4,267,854
----------- ----------- ---------- ----------
Gross profit................................ 4,935,455 10,710,152 2,658,200 2,498,603
Selling, general and administrative
expenses.................................... 3,095,766 5,687,813 862,301 1,527,567
Nonrecurring litigation expense (note 8)...... 1,342,242 -- -- --
----------- ----------- ---------- ----------
Operating income............................ 497,447 5,022,339 1,795,899 971,036
Interest income (expense), net................ 56,129 131,489 (5,773) 35,244
----------- ----------- ---------- ----------
Earnings before income taxes................ 553,576 5,153,828 1,790,126 1,006,280
Income taxes.................................. 23,947 58,637 28,876 15,094
----------- ----------- ---------- ----------
Net earnings................................ $ 529,629 $ 5,095,191 $1,761,250 $ 991,186
=========== =========== ========== ==========
See accompanying notes to financial statements.
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LODER, DREW & ASSOCIATES
BALANCE SHEETS
DECEMBER 31,
----------------------- MARCH 31,
1996 1997 1998
---------- ---------- -----------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents................................ $ 738,982 $2,852,111 $1,383,534
Marketable securities (note 2)........................... 55,000 22,500 40,620
Trade accounts receivable, less allowance for doubtful
accounts of $50,000 at December 31, 1996, $0 at
December 31, 1997 and $53,200 (unaudited) at March 31,
1998.................................................. 1,242,100 2,962,821 2,859,893
Other current assets..................................... 165,740 135,998 556,105
---------- ---------- ----------
Total current assets............................. 2,201,822 5,973,430 4,840,152
Property and equipment, net (note 4)....................... 282,768 489,528 483,089
Deposits and other assets.................................. 110,519 119,544 125,133
---------- ---------- ----------
$2,595,109 $6,582,502 $5,448,374
========== ========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIENCY)
Current liabilities:
Accounts payable......................................... $ 309,791 $ 640,774 $ 211,796
Accrued payroll.......................................... 1,449,240 589,687 1,275,921
Accrued legal............................................ 525,000 233,000 243,333
Shareholder distributions payable........................ -- 3,509,731 29,731
Loan due to shareholder(note 3).......................... -- -- 1,000,000
Accrued expenses......................................... 109,670 85,535 259,793
---------- ---------- ----------
Total current liabilities........................ 2,393,701 5,058,727 3,020,574
Accrued legal -- noncurrent................................ 525,000 342,000 239,029
---------- ---------- ----------
Total liabilities................................ 2,918,701 5,400,727 3,259,603
---------- ---------- ----------
Shareholders' equity (deficiency) -- (note 5):
Common stock, no par value. Authorized 100,000 shares;
issued and outstanding 8,571 shares at December 31,
1996, 8,928 shares at December 31, 1997 and 10,000
shares (unaudited) at March 31, 1998.................. 601,000 750,940 1,201,180
Retained earnings (accumulated deficit).................. (123,584) 1,064,343 2,055,529
Accumulated other comprehensive loss (note 2)............ (101,008) (133,508) (115,388)
Note receivable from shareholders........................ (700,000) (500,000) (952,550)
---------- ---------- ----------
Total shareholders' equity (deficiency).......... (323,592) 1,181,775 2,188,771
Commitments and contingencies (notes 6, 8 and 9)...........
Subsequent event (note 10).................................
---------- ---------- ----------
$2,595,109 $6,582,502 $5,448,374
========== ========== ==========
See accompanying notes to financial statements.
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LODER, DREW & ASSOCIATES
STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIENCY)
YEARS ENDED DECEMBER 31, 1996 AND 1997 AND THREE MONTHS ENDED MARCH 31, 1998
RETAINED ACCUMULATED NOTE TOTAL
COMMON STOCK EARNINGS OTHER RECEIVABLE SHAREHOLDERS'
------------------- (ACCUMULATED COMPREHENSIVE FROM EQUITY
SHARES AMOUNT DEFICIT) LOSS SHAREHOLDERS (DEFICIENCY)
------ ---------- ------------ ------------- ------------ -------------
Balance at December 31,
1995.................... 7,500 $ 1,000 $ 924,454 $ (53,508) $(399,996) $ 471,950
Unrealized loss on
investment.............. -- -- -- (47,500) -- (47,500)
Repayment of note
receivable from
shareholder............. -- -- -- -- 299,996 299,996
Issuance of common stock
for note................ 1,071 600,000 -- -- (600,000) --
Distributions to
shareholders............ -- -- (1,577,667) -- -- (1,577,667)
Net earnings.............. -- -- 529,629 -- -- 529,629
------ ---------- ----------- --------- --------- -----------
Balance at December 31,
1996.................... 8,571 601,000 (123,584) (101,008) (700,000) (323,592)
Unrealized loss on
investment.............. -- -- -- (32,500) -- (32,500)
Exercise of stock
option.................. 357 149,940 -- -- -- 149,940
Repayments on note
receivable from
shareholder............. -- -- -- -- 200,000 200,000
Distributions to
shareholders............ -- -- (3,907,264) -- -- (3,907,264)
Net earnings.............. -- -- 5,095,191 -- -- 5,095,191
------ ---------- ----------- --------- --------- -----------
Balance at December 31,
1997.................... 8,928 750,940 1,064,343 (133,508) (500,000) 1,181,775
Unrealized gain on
investment
(unaudited)............. -- -- -- 18,120 -- 18,120
Exercise of stock option
for note (unaudited).... 1,072 450,240 -- -- (450,240) --
Distributions to
shareholders
(unaudited)............. -- -- -- -- (2,310) (2,310)
Net earnings
(unaudited)............. -- -- 991,186 -- -- 991,186
------ ---------- ----------- --------- --------- -----------
Balance at March 31, 1998
(unaudited)............. 10,000 $1,201,180 $ 2,055,529 $(115,388) $(952,550) $ 2,188,771
====== ========== =========== ========= ========= ===========
See accompanying notes to financial statements.
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LODER, DREW & ASSOCIATES
STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED
YEARS ENDED DECEMBER 31, MARCH 31,
------------------------- -------------------------
1996 1997 1997 1998
----------- ----------- ----------- -----------
(UNAUDITED)
Cash flows from operating activities:
Net earnings.............................. $ 529,629 $ 5,095,191 $ 1,761,250 $ 991,186
Adjustments to reconcile net earnings to
net cash provided by (used in)
operating activities:
Depreciation and amortization........ 104,067 189,695 17,254 50,667
Increase in provision for bad
debts............................. -- -- -- 53,200
Change in assets and liabilities:
Trade accounts receivable......... (66,900) (1,720,721) (1,013,387) 49,728
Other current assets.............. (165,740) 29,742 75,868 (420,107)
Deposits and other assets......... (110,519) (9,025) (501) (5,589)
Accounts payable and accrued
expenses........................ 215,638 306,849 (21,745) (254,720)
Accrued payroll................... 200,351 (859,553) (862,864) 686,234
Accrued legal..................... 1,050,000 (475,000) (344,303) (92,638)
----------- ----------- ----------- -----------
Net cash provided by (used in)
operating activities......... 1,756,526 2,557,178 (388,428) 1,057,961
----------- ----------- ----------- -----------
Cash flows from investing
activities -- purchase of property and
equipment................................. (227,239) (396,455) (71,492) (44,228)
----------- ----------- ----------- -----------
Cash flows from financing activities:
Distributions to shareholders............. (1,577,667) (397,534) (28,799) (3,482,310)
Payments on note receivable from
officer................................ 299,996 200,000 -- --
Exercise of stock options................. -- 149,940 -- --
Proceeds from shareholder loan............ -- -- 1,214,090 1,000,000
----------- ----------- ----------- -----------
Net cash provided by (used in)
financing activities............ (1,277,671) (47,594) 1,185,291 (2,482,310)
----------- ----------- ----------- -----------
Net increase (decrease) in cash
and cash equivalents............ 251,616 2,113,129 725,371 (1,468,577)
Cash and cash equivalents at beginning of
period.................................... 487,366 738,982 738,982 2,852,111
----------- ----------- ----------- -----------
Cash and cash equivalents at end of
period.................................... $ 738,982 $ 2,852,111 $ 1,464,353 $ 1,383,534
=========== =========== =========== ===========
Supplemental disclosures of cash flow
information -- cash paid during the period
for income taxes.......................... $ 800 $ 40,135 $ 4,160 $ 20,199
=========== =========== =========== ===========
Supplemental disclosure of noncash
transactions:
Shareholder distribution payable.......... $ -- $ 3,509,730 $ -- $ --
=========== =========== =========== ===========
Note receivable from officer.............. $ 600,000 $ -- $ -- $ 452,550
=========== =========== =========== ===========
Change in valuation allowance for
unrealized holding losses (gains) on
available for sale marketable
securities............................. $ 47,500 $ 32,500 $ (25,000) $ (18,120)
=========== =========== =========== ===========
See accompanying notes to financial statements.
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LODER, DREW & ASSOCIATES
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1997, AND MARCH 31, 1998
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
GENERAL BUSINESS INFORMATION
Loder, Drew & Associates (the "Company") was incorporated in the State of
California in September 1986. The Company provides accounts payable and other
recovery audit services to major corporations throughout the United States and,
to a lesser extent Europe.
CASH EQUIVALENTS
The Company considers all highly liquid debt instruments purchased with an
original maturity of three months or less to be cash equivalents for purposes of
the statements of cash flows.
REVENUE RECOGNITION
The Company's revenues are based on specific contracts with its clients.
Such contracts generally specify (a) time periods covered by the audit, (b)
nature and extent of audit services to be provided by the Company, (c) client
duties in assisting and cooperating with the Company, and (d) fee payable to the
Company expressed as a specified percentage of the amounts recovered by the
client resulting from liability overpayment claims identified. In addition to
contractual provisions, most clients also establish specific procedural
guidelines which the Company must satisfy prior to submitting claims for client
approval. The Company recognizes revenue at the time it is notified of
collection by its clients from their vendors.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost and depreciated using the
straight-line method over estimated useful lives of three to five years.
Leasehold improvements are amortized using the straight-line method over the
lesser of the lease term or the estimated useful life of the related asset.
INCOME TAXES
Effective September 1986, the Company's shareholders elected to be taxed as
an S Corporation under the Internal Revenue Code. As an S Corporation, the
Company is subject to a 1.5% California state franchise tax on taxable income
and is not directly subject to Federal income taxes. State franchise taxes
amounted to $23,947 and $58,637 for the years ended December 31, 1996 and 1997,
respectively. Deferred income taxes are immaterial to the Company's financial
statements.
STOCK OPTIONS
On January 1, 1996, the Company adopted Statement of Financial Accounting
Standards (SFAS) No. 123, "Accounting for Stock-Based Compensation," which
permits entities to recognize expense over the vesting period of the fair value
of all stock-based awards on the date of grant. Alternatively, SFAS No. 123 also
allows entities to continue to apply the provisions of APB Opinion No. 25 and
provide pro forma net income disclosures for employee stock option grants made
in 1995 and future years as if the fair-value-based method defined in SFAS No.
123 had been applied. The Company has elected to continue to apply the
provisions of APB Opinion No. 25 and provide the pro forma disclosure
information of SFAS No. 123.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENT
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 130 ("SFAS No. 130") "Reporting
Comprehensive Income," which establishes standards for reporting and disclosures
of comprehensive income and its components (revenues, expenses,
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LODER, DREW & ASSOCIATES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
gains and losses) is a full set of general purpose financial statements. SFAS
No. 130 is effective for fiscal years beginning after December 16, 1997 and
requires reclassification of financial statements for earlier periods to be
provided for comparative purposes. The Company has not determined the manner in
which it will present the information required by SFAS No. 130 in its financial
statements for the year ending December 31, 1998. The Company's total
comprehensive income for all periods presented herein was $482,129 for fiscal
1996 and $5,062,691 for fiscal 1997, and $1,009,306 (unaudited) for the first
quarter of fiscal 1998.
IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE DISPOSED OF
Long-lived assets and certain identifiable intangibles are reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Recoverability of assets to
be held and used is measured by a comparison of the carrying amount of an asset
to future net cash flows expected to be generated by the asset. If such assets
are considered to be impaired, the impairment to be recognized is measured by
the amount by which the carrying amount of the assets exceed the fair value of
the assets. Assets to be disposed of are reported at the lower of the carrying
amount or fair value less costs to sell.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
BASIS OF PRESENTATION
The accompanying unaudited condensed financial statements of the Company as
of March 31, 1998 and for the three months ended March 31, 1997 and 1998 have
been prepared in accordance with generally accepted accounting principles for
interim financial information. 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, 1998 are not necessarily indicative of the results that may be
expected for the year ending December 31, 1998.
(2) MARKETABLE SECURITIES
At December 31, 1996 and 1997, the Company classified all of its
investments in securities which did not meet the definition of cash equivalents
as marketable securities available for sale.
The carrying values (cost) and estimated market values of investment
securities available for sale are summarized as follows:
GROSS
FAIR UNREALIZED
COST VALUE HOLDING LOSSES
-------- ------- --------------
As of December 31, 1996............................... $156,008 $55,000 $101,008
As of December 31, 1997............................... $156,008 $22,500 $133,508
All realized gains and losses are computed on the specific identification
basis.
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LODER, DREW & ASSOCIATES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(3) RELATED PARTY TRANSACTIONS
The Company made interest free loans during 1996 to the majority
shareholder, evidenced by unsecured promissory notes payable upon demand. These
notes were repaid during 1997.
From time to time, cash is advanced to the Company from the majority
shareholder during the normal course of business. Advances are noninterest
bearing and are due on demand. Amounts advanced at March 31, 1998 totaled
$1,000,000 (unaudited).
(4) PROPERTY AND EQUIPMENT
A summary of property and equipment follows:
1996 1997
-------- --------
Furniture and fixtures...................................... $120,296 $133,856
Computer and other equipment................................ 404,795 779,285
-------- --------
525,091 913,141
Less accumulated depreciation and amortization.............. 242,323 423,613
-------- --------
$282,768 $489,528
======== ========
(5) SHAREHOLDERS' EQUITY (DEFICIENCY)
On May 5, 1996, the Company and one of its officers entered into a stock
purchase agreement whereby the officer agreed to purchase 1,071 newly issued
shares of the Company's common stock at an estimated fair market value of
$600,000. In exchange for the common stock, the officer issued a full recourse
promissory note, secured by the related common stock, equal to the purchase
price. On each May 5 before the maturity date of May 5, 2002, all accrued
interest and a principal installment of $100,000 is due and payable. Interest on
the note accrues at 6.36% per annum during the first year and 10% per annum in
years two through six.
In addition to the stock purchase agreement, the Company granted a stock
option on May 5, 1996 to the same officer with an exercise price of $420 per
share. The option authorizes the purchase of up to 1,429 shares of authorized
but unissued common stock. The stock option was granted with an exercise price
equal to the estimated fair market value at the date of grant. One sixteenth of
the shares under the option become exercisable every three months during the
four-year period after the grant date.
SHARES SUBJECT TO
OPTION
-----------------
EXERCISE
SHARES PRICE
------ --------
December 31, 1995........................................... -- $ --
Granted................................................... 1,429 420
-----
December 31, 1996........................................... 1,429 420
Exercised................................................. (357) 420
-----
December 31, 1997........................................... 1,072 $420
===== ====
The aggregate exercise price of the options exercised in 1997 was $149,940.
Under the current ownership structure, the Company has an option to
repurchase the shares acquired under the aforementioned stock purchase and stock
option agreements if the officer's employment with the Company terminates.
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LODER, DREW & ASSOCIATES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The per share fair value of the stock option on the date of grant was $95
using the Black Scholes option-pricing model with the following weighted-average
assumptions.
1996 1997
-------- --------
Expected dividend yield.................................... 0.00% 0.00%
Risk-free interest rate.................................... 6.5% 6.4%
Expected life.............................................. 4 years 4 years
======== ========
The Company applies APB Opinion No. 25 in accounting for its stock options
and, accordingly, no compensation cost has been recognized for its stock option
in the financial statements. Had the Company determined compensation cost based
on the fair value at the grant date for its stock options under SFAS No. 123,
the Company's net earnings would have been reduced to the pro forma amounts
indicated below:
1996 1997
-------- ----------
Net earnings:
As reported............................................ $529,629 $5,095,191
======== ==========
Pro forma.............................................. $507,000 $5,061,318
======== ==========
Pro forma net income reflects only options granted in 1996. Therefore, the
full impact of calculating compensation cost for stock options under SFAS No.
123 is not reflected in the pro forma net earnings amounts presented above
because compensation cost is reflected over the option's vesting period of four
years.
Stock options for 357 shares had been exercised as of December 31, 1997.
The number of shares under the option that were exerciseable and the remaining
contractual life of the options at December 31, 1997 were 178 and 4.4 years,
respectively. An agreement was made in 1997, such that if certain income targets
were met, the remaining options outstanding would have an accelerated vesting.
During 1998, the vesting of the remaining options was accelerated to March 31,
1998.
(6) LEASES
The Company leases certain office facilities and equipment under
noncancelable operating lease agreements with initial terms ranging from one to
five years. Future minimum lease payments under noncancelable operating leases
as of December 31, 1997 are as follows:
YEAR ENDING DECEMBER 31:
1998................................................... $210,154
1999................................................... 173,464
2000................................................... 165,251
2001................................................... 159,185
2002................................................... 49,063
--------
$757,117
========
Total rent expense for the years ended December 31, 1996 and 1997,
including month-to-month rentals, amounted to approximately $98,200 and
$171,266, respectively.
In January 1997, the Company subleased an office location. Income to be
received under the sublease for the year ending December 31, 1998 is $27,466.
(7) FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair values of cash and cash equivalents, trade accounts receivable,
shareholder receivable, other assets, loan due to shareholder, accounts payable
and accrued liabilities approximate cost because of the
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LODER, DREW & ASSOCIATES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
immediate or short-term maturity of these financial instruments. The fair value
of marketable securities is based on quoted market prices at the reporting date.
(8) LITIGATION COSTS
In February 1997, the Company settled a lawsuit filed by a former employee
and agreed to pay $1,050,000. The settlement agreement calls for an initial
principal payment of $350,000 and, commencing June 1, 1997, twelve quarterly
principal installments of $58,333 plus interest at 8.25% per annum. There is
also a stipulation of judgment agreement stating the Company would be liable for
an additional $1,500,000 should it default on its settlement obligation.
Included in accrued legal and nonrecurring litigation expense in the
accompanying financial statements as of and for the year ended December 31, 1996
is the settlement amount. Legal costs incurred to defend and settle the
aforementioned lawsuit are also included in nonrecurring litigation expense in
the accompanying statement of earnings for the year ended December 31, 1996.
(9) CONTINGENCIES
The Company is a defendant in various liability claims. Management believes
that the allegations in most of the claims are substantially without merit and
that others may be settled or lost, resulting in expenses incurred by the
Company. Management has accrued an estimate of the Company's eventual liability
related to these claims. In the opinion of management, any defense, judgment or
settlement of these claims will not have a material adverse effect on the
Company's financial position, results of operations or liquidity.
(10) SALE OF COMPANY (UNAUDITED)
On August 6, 1998, The Profit Recovery Group International, Inc. ("PRG")
and its wholly owned subsidiary, The Profit Recovery Group International I, Inc.
("PRGI"), acquired substantially all the assets and assumed certain liabilities
of the Company, pursuant to the terms of an Asset Purchase Agreement
("Agreement") dated July 31, 1998, effective July 1, 1998, by and among PRG,
PRGI, the Company and the Company's shareholders.
Pursuant to the Agreement, the initial consideration paid for the Company
consisted of $70,000,000 in cash and 803,534 unregistered, restricted shares of
PRG's common stock. Additionally, the Company will be eligible to receive
additional purchase price consideration up to a maximum of $70,000,000
conditioned on the future financial performance of the Company through December
31, 1999.
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(b) Pro Forma Financial Information
THE PROFIT RECOVERY GROUP INTERNATIONAL, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
On August 6, 1998, The Profit Recovery Group International, Inc. (the
"Company"), and its wholly owned subsidiary, The Profit Recovery Group
International I, Inc. acquired substantially all the assets and assumed certain
liabilities of Loder, Drew & Associates ("Loder Drew"), an international
recovery auditing firm primarily serving clients in the manufacturing, financial
services and other non-retail sectors. The transaction was accounted for as a
purchase, effective as of July 1, 1998, with consideration of $70.0 million in
cash and 803,535 restricted, unregistered shares of the Company's common stock.
Approximately $3.0 million in direct acquisition-related costs were also
incurred and capitalized as part of this transaction. Additionally, Loder Drew
will be eligible to receive further purchase price consideration up to a maximum
of $70.0 million in cash conditioned on future financial performance of Loder
Drew through December 31, 1999.
The Company borrowed $73.0 million from NationsBank N.A. under its $150.0
million senior credit facility to pay the cash consideration and direct
acquisition-related expenses incurred in connection with the acquisition of
Loder Drew.
The following unaudited pro forma consolidated statements of earnings for
the year ended December 31, 1997 and the three months ended March 31, 1998
present the consolidated historical accounts of the Company, adjusted to give
effect to the acquisition of Loder Drew as of the beginning of the periods
presented. The following unaudited pro forma condensed consolidated balance
sheet as of March 31, 1998 presents the consolidated historical accounts of the
Company as of that date, adjusted to give effect to the acquisition of Loder
Drew as if the transaction had occurred on March 31, 1998.
The unaudited pro forma consolidated financial information and accompanying
notes should be read in conjunction with the consolidated financial statements
of the Company and related notes, as well as the financial statements and
related notes of Loder Drew. The Company believes that the assumptions set forth
in the notes on pages 17 and 19 provide a reasonable basis on which to present
the pro forma financial information, which is provided for informational
purposes only and should not be construed to be indicative of the Company's
financial condition or results of operations had the transactions and events
described above been consummated on the dates assumed. The unaudited pro forma
financial information is not intended to project the Company's financial
condition on any future date or results of operations for any future period.
14
15
THE PROFIT RECOVERY GROUP INTERNATIONAL, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF EARNINGS
YEAR ENDED DECEMBER 31, 1997
THE PROFIT
RECOVERY
GROUP
INTERNATIONAL, LODER PRO FORMA PRO FORMA
INC. DREW ADJUSTMENTS AS ADJUSTED
--------------- -------- ------------ ------------
(AMOUNTS IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE DATA)
Revenues......................................... $112,363 $22,606 $ -- $134,969
Cost of revenues................................. 57,726 11,896 -- 69,622
Selling, general and administrative expenses..... 37,254 5,688 3,377(A) 45,319
(1,000)(B)
Restructuring costs.............................. 1,208 -- -- 1,208
-------- ------- ------- --------
Operating income............................... 16,175 5,022 (2,377) 18,820
Interest income (expense), net................... (403) 132 (4,928)(C) (5,199)
-------- ------- ------- --------
Earning before income taxes.................... 15,772 5,154 (7,305) 13,621
Income taxes..................................... 6,149 59 (896)(D) 5,312
-------- ------- ------- --------
Net earnings................................... $ 9,623 $ 5,095 $(6,409) $ 8,309
======== ======= ======= ========
Earnings per share:
Basic.......................................... $ 0.52 $ 0.43
======== ========
Diluted........................................ $ 0.51 $ 0.42
======== ========
Weighted average shares outstanding:
Basic.......................................... 18,415 804(E) 19,219
======== ======= ========
Diluted........................................ 18,909 804(E) 19,713
======== ======= ========
See accompanying notes to unaudited pro forma consolidated statements of
earnings.
15
16
THE PROPERTY RECOVERY GROUP INTERNATIONAL, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF EARNINGS
THREE MONTHS ENDED MARCH 31, 1998
THE PROFIT
RECOVERY
GROUP
INTERNATIONAL, LODER PRO FORMA PRO FORMA
INC. DREW ADJUSTMENTS AS ADJUSTED
--------------- ------- ------------ ------------
(AMOUNTS IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE DATA)
Revenues......................................... $33,144 $6,766 $ -- $39,910
Cost of revenues................................. 17,956 4,268 -- 22,224
Selling, general and administrative expenses..... 13,029 1,527 $ 844(A) 15,400
------- ------ ------- -------
Operating income............................ 2,159 971 (844) 2,286
Interest income (expense), net................... (324) 35 (1,232)(C) (1,521)
------- ------ ------- -------
Earning before income taxes.................... 1,835 1,006 (2,076) 765
Income taxes..................................... 715 15 (432)(D) 298
------- ------ ------- -------
Net earnings................................ $ 1,120 $ 991 $(1,644) $ 467
======= ====== ======= =======
Earnings per share:
Basic.......................................... $ 0.06 $ 0.02
======= =======
Diluted........................................ $ 0.06 $ 0.02
======= =======
Weighted average shares outstanding:
Basic.......................................... 19,540 804(E) 20,344
======= ======= =======
Diluted........................................ 20,000 804(E) 20,804
======= ======= =======
See accompanying notes to unaudited pro forma consolidated statements of
earnings.
16
17
THE PROFIT RECOVERY GROUP INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF EARNINGS
YEAR ENDED DECEMBER 31, 1997 AND THREE MONTHS ENDED MARCH 31, 1998
The following explanations describe the assumptions used in determining the
unaudited pro forma adjustments necessary to present the historical results of
operations, giving effect to the acquisition of Loder Drew, as of the beginning
of each period presented.
(A) Adjustment relates to amortization of the estimated goodwill amounting
to $83.3 million over a 25-year period and the noncompete agreements with a
combined estimated fair value of $225,000 over a five-year period. Loder Drew is
also eligible to receive additional purchase price consideration up to a maximum
of $70.0 million in cash conditioned on the future financial performance of
Loder Drew through December 31, 1999. To the extent that additional purchase
price consideration, if any, becomes due, goodwill and related amortization
could be substantially increased.
(B) Adjustment relates to historical Loder Drew owner compensation in 1997
in excess of compensation levels to be paid prospectively to these former owners
pursuant to employment agreements.
(C) Adjustment relates to the $73.0 million of indebtedness, at an interest
rate of 6.75%, incurred in connection with the Loder Drew acquisition.
(D) Adjustment relates to the tax benefit derived from the deductibility of
the goodwill and interest expense assuming a combined Federal and state
effective income tax rate of 39%, and also reflects Loder Drew's results of
operations on a pro forma basis to include Federal and state income taxes at a
composite rate of 39% as if Loder Drew had been a C corporation throughout the
periods presented.
(E) Adjustment reflects the issuance of 803,585 shares in connection with
the Loder Drew acquisition.
17
18
THE PROFIT RECOVERY GROUP INTERNATIONAL, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
MARCH 31, 1998
THE PROFIT
RECOVERY
GROUP
INTERNATIONAL, LODER PRO FORMA PRO FORMA
INC. DREW ADJUSTMENTS AS ADJUSTED
-------------- ------ ----------- -----------
(AMOUNTS IN THOUSANDS OF DOLLARS)
Current assets:
Cash and cash equivalents............................ $ 25,290 $1,384 $ (884)(A) $ 25,790
Marketable securities................................ -- 41 (41)(A) --
Receivables:
Billed contract receivables........................ 10,987 2,860 -- 13,847
Unbilled contract receivables...................... 47,392 -- -- 47,392
Employee and shareholder advances.................. 2,292 -- -- 2,292
-------- ------ ------- --------
Total receivables............................. 60,671 2,860 $ -- 63,531
-------- ------ ------- --------
Prepaid expenses and other current assets............ 1,349 556 -- 1,905
-------- ------ ------- --------
Total current assets.......................... 87,310 4,841 (925) 91,226
Property and equipment, net............................ 10,155 483 -- 10,638
Noncompete agreements, less accumulated amortization... 3,212 -- 225(B) 3,437
Goodwill, less accumulated amortization................ 49,358 -- 83,305(B) 132,663
Deferred income taxes.................................. 3,083 -- -- 3,083
Other assets........................................... 494 125 -- 619
-------- ------ ------- --------
$153,612 $5,449 $82,605 $241,666
======== ====== ======= ========
Current liabilities:
Note payable to bank................................. $ 153 $ -- -- $ 153
Current installments of long term-debt............... 159 -- -- 159
Accounts payable and accrued expenses................ 7,824 715 (258)(A) 8,281
Accrued payroll and related expenses................. 21,241 1,276 -- 22,517
Shareholder distributions payable.................... -- 30 (30)(A) --
Loan due to shareholder.............................. -- 1,000 (1,000)(A) --
Deferred income taxes................................ 9,917 -- -- 9,917
Deferred revenues.................................... 1,070 -- -- 1,070
-------- ------ ------- --------
Total current liabilities..................... 40,364 3,021 $(1,288) 42,097
Long-term debt, excluding current installments......... 846 -- 73,000(C) 73,846
Deferred compensation.................................. 2,714 -- -- 2,714
Other long-term liabilities............................ 471 239 (239)(A) 471
-------- ------ ------- --------
Total liabilities............................. 44,395 3,260 71,473 119,128
Shareholders' equity:
Preferred stock...................................... -- -- -- --
Common stock......................................... 22 1,201 (1,200)(D) 23
Additional paid-in capital........................... 93,990 -- 13,320(D) 107,310
Note receivable to shareholder....................... -- (953) 953(A) --
Accumulated other comprehensive loss................. -- (115) 115(A) --
Cumulative translation adjustments................... (1,922) -- -- (1,922)
Retained earnings.................................... 17,127 2,056 (2,056)(D) 17,127
-------- ------ ------- --------
Total shareholders' equity.................... 109,217 2,189 11,132 122,538
-------- ------ ------- --------
$153,612 $5,449 $82,605 $241,666
======== ====== ======= ========
See accompanying notes to unaudited pro forma condensed consolidated balance
sheet.
18
19
THE PROFIT RECOVERY GROUP INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
MARCH 31, 1998
The following describe the assumptions used in determining the unaudited
pro forma adjustments necessary to present the historical financial position,
giving effect to the acquisition of Loder Drew, as of March 31, 1998.
(A) Assets not acquired or liabilities not assumed.
(B) The acquisition is accounted for as a purchase in accordance with
Accounting Principles Board Opinion 16, "Business Combinations." The purchase
price is allocated first to the tangible and identifiable assets and liabilities
of the acquired company based on preliminary estimates of their fair value, with
the remainder allocated to goodwill. The following schedule presents the
goodwill computation (with amounts in thousands):
Purchase price:
Cash paid................................................. $70,000
Fair value of restricted, unregistered shares issued...... 13,321
-------
83,321
Estimated direct acquisition-related costs.................. 3,000
Less net book value of net assets acquired from Loder Drew,
which approximates fair value............................. (2,791)
Less estimated value of noncompete agreements............... (225)
-------
Goodwill............................................... $83,305
=======
(C) The Company incurred indebtedness of $73.0 million to finance the cash
paid and direct acquisition-related costs incurred in connection with the
acquisition of Loder Drew.
(D) The changes in components of shareholders' equity are a result of
recording the initial acquisition date equity in Loder Drew.
19
20
(c) Exhibits
EXHIBIT
NUMBER DESCRIPTION
- --------- -----------
2.1+* -- Asset Purchase Agreement dated as of July 31, 1998 among the
Company, The Profit Recovery Group International I, Inc.,
Loder, Drew & Associates, Inc., Ronald K. Loder and H.
Richard Byrne.
23.1+ -- Consent of KPMG Peat Marwick LLP.
- ---------------
+ Filed herewith.
* The Company has applied for confidential treatment of portions of this
Agreement. Accordingly, portions thereof have been omitted and filed
separately with the Securities and Exchange Commission. In addition, in
accordance with Item 601(b)(2) of Regulation S-K, the schedules have been
omitted and a list briefly describing the schedules is at the end of the
Exhibit. The Registrant will furnish supplementally a copy of any omitted
schedule to the Commission upon request.
20
21
SIGNATURE
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 hereunto duly authorized.
THE PROFIT RECOVERY GROUP
INTERNATIONAL, INC.
By: /s/ DONALD E. ELLIS, JR.
------------------------------------
Donald E. Ellis, Jr.
Senior Vice President, Chief
Financial
Officer and Treasurer
Date: August 12, 1998
21