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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 JUNE 30, 1998
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 (I.R.S. Employer
incorporation or organization) Identification No.)
2300 WINDY RIDGE PARKWAY 30339-8426
SUITE 100 NORTH (Zip Code)
ATLANTA, GEORGIA
(Address of principal executive offices)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (770) 779-3900
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
The number of outstanding shares of the issuer's no par value common stock
as of July 31, 1998, the latest practicable date, was 22,173,930.
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THE PROFIT RECOVERY GROUP INTERNATIONAL, INC. AND SUBSIDIARIES
FORM 10-Q
QUARTER ENDED JUNE 30, 1998
INDEX
PAGE NO.
--------
PART I. Financial Information
Item 1. Financial Statements (Unaudited)
1
Condensed Consolidated Statements of Earnings -- Three and
six month periods ended June 30, 1998 and June 30,
1997...................................................
2
Condensed Consolidated Balance Sheets -- June 30, 1998 and
December 31, 1997......................................
3
Condensed Consolidated Statements of Cash Flows -- Six
months ended June 30, 1998 and June 30, 1997...........
4
Notes to Condensed Consolidated Financial Statements......
6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.......................
10
Item 3. Quantitative and Qualitative Disclosures about
Market Risk...............................................
PART II. Other Information........................................... 11
Signatures............................................................ 13
3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
THE PROFIT RECOVERY GROUP INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
------------------ ------------------
1998 1997 1998 1997
------- ------- ------- -------
Revenues............................................ $38,934 $25,858 $72,078 $46,818
Cost of revenues.................................... 20,326 13,331 38,282 24,860
Selling, general and administrative expenses........ 13,991 8,723 27,020 16,919
------- ------- ------- -------
Operating income.................................. 4,617 3,804 6,776 5,039
Interest income (expense), net...................... 186 55 (138) 118
------- ------- ------- -------
Earnings before income taxes...................... 4,803 3,859 6,638 5,157
Income taxes........................................ 1,884 1,491 2,599 1,997
------- ------- ------- -------
Net earnings...................................... $ 2,919 $ 2,368 $ 4,039 $ 3,160
======= ======= ======= =======
Earnings per share (Note B):
Basic............................................. $ 0.13 $ 0.13 $ 0.20 $ 0.17
======= ======= ======= =======
Diluted........................................... $ 0.13 $ 0.13 $ 0.19 $ 0.17
======= ======= ======= =======
Weighted average shares outstanding (Note B):
Basic............................................. 21,759 18,187 20,650 18,138
======= ======= ======= =======
Diluted........................................... 22,513 18,639 21,257 18,625
======= ======= ======= =======
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)
JUNE 30, DECEMBER 31,
1998 1997
-------- ------------
ASSETS
Current assets:
Cash and cash equivalents (Note D)........................ $ 18,710 $ 19,386
Receivables:
Billed contract receivables............................. 12,735 12,100
Unbilled contract receivables........................... 53,272 41,771
Employee advances....................................... 2,927 2,299
-------- --------
Total receivables.................................. 68,934 56,170
Prepaid expenses and other current assets................. 2,130 2,430
-------- --------
Total current assets............................... 89,774 77,986
-------- --------
Property and equipment:
Computer and other equipment.............................. 17,505 10,658
Furniture and fixtures.................................... 2,395 2,111
Leasehold improvements.................................... 2,165 1,760
-------- --------
22,065 14,529
Less accumulated depreciation and amortization............ (8,084) (5,760)
-------- --------
13,981 8,769
-------- --------
Noncompete agreements, less accumulated amortization........ 2,969 3,471
Deferred loan costs, less accumulated amortization.......... 58 24
Goodwill, less accumulated amortization..................... 58,569 39,591
Deferred income taxes....................................... 3,083 3,585
Other assets................................................ 496 459
-------- --------
$168,930 $133,885
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Note payable to bank...................................... $ 38 $ 81
Current installments of long-term debt.................... 82 1,428
Accounts payable and accrued expenses..................... 7,116 4,835
Accrued payroll and related expenses...................... 25,527 26,075
Deferred income taxes..................................... 9,813 9,917
Deferred revenue.......................................... 977 1,087
-------- --------
Total current liabilities.......................... 43,553 43,423
Long-term debt, excluding current installments.............. 5,348 24,365
Deferred compensation....................................... 2,909 2,563
Other long-term liabilities................................. 410 462
-------- --------
Total liabilities.................................. 52,220 70,813
-------- --------
Shareholders' equity (Note F):
Preferred stock, no par value. Authorized 1,000,000
shares; no shares issued or outstanding in 1998 and
1997.................................................... -- --
Common stock, no par value; stated value $.001 per share.
Authorized 60,000,000 shares; issued and outstanding
22,004,467 in 1998 and 19,193,676 in 1997............... 22 19
Additional paid-in capital................................ 98,521 48,195
Cumulative translation adjustments........................ (1,879) (1,149)
Retained earnings......................................... 20,046 16,007
-------- --------
Total shareholders' equity......................... 116,710 63,072
-------- --------
$168,930 $133,885
======== ========
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)
SIX MONTHS ENDED
JUNE 30,
-------------------
1998 1997
-------- --------
Cash flows from operating activities:
Net earnings.............................................. $ 4,039 $ 3,160
Adjustments to reconcile net earnings to net cash (used
in) provided by operating activities:
Depreciation and amortization.......................... 4,039 1,973
Loss on sale of property, plant and equipment.......... 4 --
Deferred income taxes.................................. 346 --
Deferred compensation expense.......................... 399 305
Cumulative translation adjustments..................... (1,460) (34)
Changes in assets and liabilities, net of effect of
acquisitions:
Receivables.......................................... (11,345) (3,873)
Prepaids and other current assets.................... 309 1,004
Other assets......................................... (131) (120)
Accounts payable and accrued expenses................ 728 538
Accrued payroll and other accrued liabilities........ (811) 264
-------- --------
Net cash (used in) provided by operating
activities....................................... (3,883) 3,217
-------- --------
Cash flows from investing activities:
Purchase of property and equipment........................ (7,236) (2,715)
Purchase of companies (Note G)............................ (10,920) (3,220)
-------- --------
Net cash used in investing activities............. (18,156) (5,935)
-------- --------
Cash flows from financing activities:
Net decrease in note payable to bank...................... (43) --
Proceeds from long-term debt.............................. 5,240 --
Repayment of long-term debt............................... (25,603) --
Proceeds from sale of common stock (Note F)............... 41,769 16
-------- --------
Net cash provided by financing activities......... 21,363 16
-------- --------
Net decrease in cash and cash equivalents......... (676) (2,702)
Cash and cash equivalents at beginning of period............ 19,386 16,891
-------- --------
Cash and cash equivalents at end of period.................. $ 18,710 $ 14,189
======== ========
Supplemental disclosure of cash flow information:
Cash paid during the period for interest.................. $ 421 $ 25
======== ========
Cash paid (refunds received) during the period for income
taxes.................................................. $ 1,890 $ (108)
======== ========
Supplemental disclosure of noncash investing and financing
activities:
In the first six months of both 1998 and 1997, the Company
purchased the net assets of certain companies. In
conjunction with the acquisitions, the Company assumed
liabilities as follows:
Fair value of assets acquired.......................... $ 21,135 $ 6,729
Cash paid for the acquisitions......................... (10,920) (3,220)
Fair value of shares issued for acquisitions........... (9,607) (3,006)
-------- --------
Liabilities assumed............................... $ 608 $ 503
======== ========
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
JUNE 30, 1998
(UNAUDITED)
NOTE A -- BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements of
The Profit Recovery Group International, Inc. and its wholly owned subsidiaries
(the "Company") have been prepared in accordance with generally accepted
accounting principles for interim financial information and with the
instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do
not include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation have been included. Operating results for the
three and six month periods ended June 30, 1998 are not necessarily indicative
of the results that may be expected for the year ending December 31, 1998. 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, 1997.
NOTE B -- EARNINGS PER SHARE
Effective December 31, 1997, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 128, "Earnings per Share." This pronouncement
required the restatement of all prior-period earnings per share data presented
to conform to its provisions. The following table sets forth the computations of
basic and diluted earnings per share for the three and six month periods ended
June 30, 1998 and June 30, 1997 in accordance with the provisions of SFAS No.
128 (in thousands, except for earnings per share information):
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------- -----------------
1998 1997 1998 1997
-------- -------- ------- -------
Numerator for both basic earnings per share and diluted
earnings per share -- net earnings.................... $ 2,919 $ 2,368 $ 4,039 $ 3,160
======= ======= ======= =======
Denominator:
Denominator for basic earnings per share -- weighted
average shares outstanding......................... 21,759 18,187 20,650 18,138
Effect of dilutive securities -- employee stock
options............................................ 754 452 607 487
------- ------- ------- -------
Denominator for diluted earnings per share............ 22,513 18,639 21,257 18,625
======= ======= ======= =======
Earnings per share -- basic............................. $ 0.13 $ 0.13 $ 0.20 $ 0.17
======= ======= ======= =======
Earnings per share -- diluted........................... $ 0.13 $ 0.13 $ 0.19 $ 0.17
======= ======= ======= =======
NOTE C -- COMPREHENSIVE INCOME
Effective January 1, 1998, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income." This statement establishes items that are required to be
recognized under accounting standards as components of comprehensive income.
SFAS No. 130 requires, among other things, that an enterprise report a total for
comprehensive income in condensed financial statements of interim periods issued
to shareholders. For the three month periods ended June 30, 1998 and 1997, the
Company's consolidated comprehensive income was $2,945,000 and $2,349,000,
respectively. For the six month periods ended June 30, 1998 and 1997, the
Company's consolidated comprehensive income was $3,594,000 and $3,139,000,
respectively. The difference between consolidated comprehensive income, as
disclosed here, and traditionally-determined consolidated net earnings, as set
forth on the accompanying Condensed Consolidated Statements of Earnings, results
from tax-effected foreign currency translation adjustments.
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NOTE D -- CASH EQUIVALENTS
Cash equivalents at June 30, 1998 and December 31, 1997 included $5.3
million and $2.5 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
agreement in effect on June 30, 1998 matured and was settled on July 1, 1998. In
addition, cash equivalents at June 30, 1998 and December 31, 1997 also included
$4.3 million and $4.7 million, respectively, of temporary investments held in a
French bank by certain of the Company's French subsidiaries.
The Company does not intend to take possession of collateral securities on
future reverse repurchase agreement transactions conducted with banking
institutions of national standing. The Company does insist, however, that all
such agreements provide for full collateralization using obligations of the
United States of America having a current market value equivalent to or
exceeding the reverse repurchase agreement amount.
NOTE E -- INTERNAL USE COMPUTER SOFTWARE
Statement of Position 98-1, "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use," provides guidance on a variety of
issues relating to costs of internal use software including which of these costs
should be capitalized and which should be expensed as incurred. This
pronouncement is effective for financial statements for fiscal years beginning
after December 15, 1998 although earlier application is encouraged. The Company
has chosen early adoption of this pronouncement effective January 1, 1998 since
it provides definitive accounting guidance on a large-scale information systems
development project initiated by the Company during the first quarter of 1998.
NOTE F -- FOLLOW-ON COMMON STOCK OFFERING
On March 16, 1998, the Company sold 2,000,000 newly issued shares of its
common stock and certain selling shareholders sold an additional 2,400,000
existing shares in an underwritten follow-on offering. The offering was priced
at $21.00 per share. The proceeds of the offering (net of underwriting discounts
and commissions) were distributed by the underwriting syndicate on March 20,
1998. The Company then used a portion of its net proceeds from the offering to
repay the $24.8 million outstanding principal balance on its bank credit
facility, along with accrued interest, on March 20, 1998.
In April 1998, the Company received notification from its underwriting
syndicate that the syndicate had exercised its full over-allotment option to
purchase an additional 660,000 shares of Company common stock. All of these
shares were then sold to the syndicate by certain selling shareholders. The
Company received no proceeds from the sale of such shares.
NOTE G -- ACQUISITIONS
On March 20, 1998, the Company acquired the net assets of Ginger Quill,
Inc., d/b/a Precision Data Link, a 22 person air freight recovery audit firm. On
June 19, 1998, the Company acquired the net assets of The Medallion Group, a 27
person air freight recovery audit operation consisting of seven separate legal
entities. Both companies are located in Salt Lake City, Utah, and each
transaction was accounted for as a purchase and involved both cash and common
stock consideration.
On July 30, 1998, the Company acquired substantially all of the outstanding
capital stock of Novexel S.A. a Lyon, France-based company that assists business
entities in securing European Union grants. This transaction was accounted for
as a purchase and involved both cash and common stock consideration.
On August 6, 1998, the Company acquired substantially all the assets and
assumed certain liabilities of Loder, Drew & Associates ("Loder Drew"), a
California-based 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
initial 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.
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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 Fial & 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. In November 1997, the Company acquired the net operating assets of
TradeCheck, LLC, a Washington-based recovery audit firm specializing in ocean
freight shipments. On March 20, 1998, the Company acquired the operating assets
of Ginger Quill, Inc., d/b/a Precision Data Link, a 22 person air freight
recovery audit firm based in Utah. On June 19, 1998, the Company acquired The
Medallion Group, a 27 person air freight recovery audit operation consisting of
seven separate legal entities, all based in Utah.
On July 30, the Company acquired substantially all of the outstanding
capital stock of Novexel S.A., a Lyon, France-based company that assists
business entities in securing European Union grants. This transaction was
accounted for as a purchase and involved both cash and common stock
consideration.
The Company announced on July 7, 1998 that it had agreed in principle to
purchase Loder, Drew and Associates, Inc. ("LDA"), an international recovery
auditing firm based in San Juan Capistrano, California. LDA's client
concentration is primarily in the manufacturing, financial services and other
non-retail sectors. The transaction was closed on August 6, 1998, with an
effective date of July 1, 1998.
The Company intends to continue to pursue domestic and international
strategic acquisitions, including direct competitors and complementary
businesses.
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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 SIX MONTHS
ENDED ENDED
JUNE 30, JUNE 30,
------------- ------------------
1998 1997 1998 1997
----- ----- ----- ----------
Revenues................................................... 100.0% 100.0% 100.0% 100.0%
Cost of Revenues........................................... 52.2 51.6 53.1 53.1
Selling, general and administrative expenses............... 35.9 33.7 37.5 36.1
----- ----- ----- -----
Operating income...................................... 11.9 14.7 9.4 10.8
Interest income (expense), net............................. .4 .2 (.2) .2
----- ----- ----- -----
Earnings before income taxes.......................... 12.3 14.9 9.2 11.0
Income taxes............................................... 4.8 5.8 3.6 4.3
----- ----- ----- -----
Net earnings.......................................... 7.5% 9.1% 5.6% 6.7%
===== ===== ===== =====
Three and Six Month Periods Ended June 30, 1998 Compared to Corresponding
Periods of the Prior Year
Revenues. The Company's revenues consist principally of contractual
percentages of overpayments recovered for clients that continue to be heavily
concentrated in the retailing industry. Revenues increased 50.6% to $38.9
million for the second quarter of 1998, up from $25.9 million in the second
quarter of 1997. For the six months ended June 30, 1998, revenues were $72.1
million, or 54.0% higher than $46.8 million achieved in the corresponding period
of 1997.
Domestic revenues were $24.6 million in the second quarter of 1998, up
26.3% from $19.5 million in the second quarter of 1997. This 26.3% increase
consisted of (i) 15.7% growth from existing clients served both in the second
quarter of 1998 and 1997; (ii) 5.7% from the six domestic complementary recovery
audit firms acquired during the last six fiscal quarters; and (iii) 4.9% growth
from provision of services to new clients. For the first six months of 1998
domestic revenues were $45.8 million, an increase of 27.6% over $35.9 million
during the comparable period of 1997.
The Company considers international operations to be all operations located
outside of the United States. International revenues were $14.3 million in the
second quarter of 1998, up 125.7% from $6.3 million in the second quarter of
1997. Of this 125.7% increase, (i) 98.3% was contributed by operations of Alma,
which was acquired in October 1997, and (ii) 27.4% resulted from existing
operations; primarily from services provided to new clients. For the first six
months of 1998, international revenues were $26.3 million, a 140.0% increase
over $11.0 million during the comparable period of 1997. 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 trend will
continue. See "Forward-looking Statements."
The Company has experienced and expects to continue to experience
significant seasonality in its business. The Company typically realizes higher
revenues and operating income in the last two quarters of its fiscal year. This
trend is expected to continue and reflects the inherent purchasing and
operational cycles of the retailing industry, which continues to be the source
of the majority of the Company's revenues. The Company's recent acquisitions,
including the October 1997 acquisition of Alma, are not expected to
significantly affect this trend because these entities, in the aggregate, have
historically experienced similar seasonality in 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."
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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 52.2% of revenues for the second quarter of 1998, up from 51.6% in the
comparable quarter of 1997. For the six months ended June 30, 1998 and 1997,
cost of revenues remained the same at 53.1%.
Domestically, cost of revenues as a percentage of revenues was 55.2% in the
second quarter of 1998, up from 53.7% during the corresponding quarter of 1997.
For the six months ended June 30, 1998, domestic cost of revenue as a percentage
of revenues was 56.9%, up from 54.4% during the first half of 1997. Increased
percentages in the 1998 periods resulted from costs associated with an
accelerated level of new auditor hiring.
Internationally, cost of revenues as a percentage of revenues was 47.0% in
the second quarter of 1998, up from 44.8% during the corresponding quarter of
1997 due primarily to additional costs in the Company's Asia Pacific operations.
For the six months ended June 30, 1998, international cost of revenue as a
percentage of revenues was 46.5%, down from 49.0% during the first half of 1997.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses include the expenses of sales and marketing activities,
information technology services and the corporate data center, human resources,
legal and accounting, administration, headquarters-related depreciation of
property and equipment and amortization of intangibles. Selling, general and
administrative expenses as a percentage of revenues increased to 35.9% in the
second quarter of 1998, up from 33.7% in the second quarter of 1997. For the six
months ended June 30, 1998, selling, general and administrative expenses as a
percentage of revenues was 37.5%, also up from 36.1% in the comparable period of
1997.
On a domestic basis, selling, general and administrative expenses as a
percentage of revenues was 34.6% in the second quarter of 1998, up from 30.3% in
the comparable quarter of 1997. For the first six months of 1998, domestic
selling, general and administrative expenses as a percentage of revenues
increased to 36.1%, up from 32.8% in the corresponding period of 1997. The
Company's 1998 domestic selling, general and administrative expense percentages
are higher than the comparable percentages in 1997 due to increased expenditures
for various 1998 initiatives such as significantly expanded auditor hiring and
training programs, significant additional resource commitments in the Company's
information technology functions, and period costs associated with intensified
mergers and acquisitions efforts.
Internationally, selling, general and administrative expenses as a
percentage of revenues improved to 38.3% of revenues in the second quarter of
1998, compared to 44.5% in the 1997 second quarter. For the six month periods
ended June 30, 1998 and 1997, this percentage likewise improved to 39.8% in 1998
from 47.2% in 1997. Improvements in 1998 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 non-compete costs. Amortization of these
intangible assets totaled $1.0 million and $348,000 for the quarters ended June
30, 1998 and 1997, respectively, and $1.8 million and $672,000 for the six month
periods ended June 30, 1998 and 1997, respectively.
Operating Income. Operating income increased 21.4% to $4.6 million in the
second quarter of 1998, up from $3.8 million in the second quarter of 1997. For
the six months ended June 30, 1998, operating income increased 34.5% to $6.8
million, up from $5.0 million in the comparable period of 1997. Operating income
did not grow proportionately with revenues during the 1998 periods due to
increased domestic expenses associated with various planned initiatives, as
previously discussed.
Interest Income (Expense), Net. The Company reported net interest income
of $186,000 during the second quarter of 1998, compared to $55,000 during the
comparable quarter of 1997. For the six months ended June 30, 1998, net interest
expense was $138,000, compared to net interest income of $118,000 during the
comparable period of 1997.
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11
On August 6, 1998 the Company completed its acquisition of Loder, Drew &
Associates, Inc. (with an effective acquisition date for accounting purposes of
July 1, 1998). In connection with this transaction and normal working capital
needs, the Company borrowed $74.0 million at a rate of interest initially equal
to LIBOR plus 1.25%. Accordingly, interest income (expense), net for the first
six months of 1998 is not indicative of amounts expected during the final six
months of the year.
Earnings Before Income Taxes. Earnings before income taxes rose 24.5% and
28.7% in the quarter and six months ended June 30, 1998, respectively, compared
to the comparable periods of 1997. Earnings before income taxes did not grow
proportionately with revenues during the 1998 periods due to increased domestic
expenses associated with various planned initiatives, as previously discussed.
Income Taxes. The provisions for income taxes for all periods presented
consist of federal, state and foreign income taxes at a composite effective rate
which approximates 39.0%.
Weighted-Average Shares Outstanding-Basic. The Company's weighted-average
shares outstanding for purposes of calculating basic earnings per share
increased to 21.8 million during the second quarter of 1998, up from 18.2
million during the second quarter of 1997. This increase related primarily to
2,000,000 common shares issued in a public offering on March 16, 1998 and common
shares issued in connection with acquisitions of various companies.
LIQUIDITY AND CAPITAL RESOURCES
On July 29, 1998 the Company replaced its existing $30.0 million senior
bank credit facility with a five-year $150.0 million senior bank credit
facility. Subject to adherence to standard loan covenants, borrowings under the
new credit facility are available for working capital, acquisitions of other
companies in the recovery audit industry, capital expenditures and for general
corporate purposes. The Company transferred $5.4 million in outstanding
borrowings to the new credit facility on July 29, 1998 and borrowed an
additional $74.0 million on August 6, 1998 in connection with its acquisition of
Loder, Drew & Associates, Inc and for normal working capital needs.
Net cash used in operating activities was $3.9 million for the first six
months of 1998, and $3.2 million was provided by operations for the same period
in 1997. The change was primarily a result of an increase in accounts receivable
during the first six months of 1998 as compared with the corresponding increase
during the first half of 1997.
Net cash used in investing activities was $18.2 million in the first six
months of 1998, and $5.9 million in the first six months of 1997. In the first
six months of 1998, $7.2 million was used to acquire property and equipment
(primarily computer-related equipment) and $10.9 million was paid in connection
with acquisitions. Of the $7.2 million in capital additions, $2.2 million
relates to the large-scale information systems development project discussed in
Note E of notes to condensed consolidated financial statements.
During the six quarters ended June 30, 1998, the Company acquired seven
recovery audit firms. The Company is pursuing, and intends to continue to
pursue, the acquisition of domestic and international businesses including both
direct competitors and businesses providing other types of recovery services.
There can be no assurance, however, that the Company will be successful in
consummating further acquisitions due to factors such as receptivity of
potential acquisition candidates and valuation issues. Additionally, there can
be no assurance that future acquisitions, if consummated, can be successfully
assimilated into the Company. See "Forward-looking Statements."
Net cash provided by financing activities was $21.4 million for the first
six months of 1998 and $16,000 for the same period in 1997. For the first six
months of 1998, net cash provided by financing activities consisted primarily of
$41.8 million in net proceeds from the sale of common stock and $5.2 million
borrowed under the Company's bank credit facility, as offset in part by a $25.6
million principal repayment under the credit facility. Net proceeds from the
sale of common stock primarily relate to the Company's public sale of 2,000,000
newly-issued common shares in an underwritten offering which became effective on
March 16, 1998.
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The Company believes that its current working capital, its $150 million
senior bank credit facility and cash flow generated from future operations will
be sufficient to meet the Company's working capital and capital expenditure
requirements through June 30, 1999, unless one or more future acquisitions are
consummated which require the Company to seek additional debt or equity
financing.
NEW ACCOUNTING STANDARDS
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 has historically provided. This
Statement is effective for fiscal years beginning after December 15, 1997.
Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities" establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, (collectively referred to as
"derivatives") and for hedging activities. This pronouncement is effective for
all fiscal quarters of fiscal years beginning after June 15, 1999 although
earlier application is encouraged. The Company has chosen to adopt this
pronouncement effective with its fiscal year which begins January 1, 2000 and
does not believe that it will materially affect its reported results of
operations or financial condition upon adoption.
Statement of Position 98-5, "Reporting on the Costs of Start-Up Activities"
defines such costs and requires that they be expensed as incurred. This
pronouncement is effective for financial statements for fiscal years beginning
after December 15, 1998 although earlier application is encouraged. The Company
has chosen to adopt this pronouncement effective January 1, 1999 and does not
believe that it will materially affect its reported results of operations or
financial condition upon adoption.
YEAR 2000 ISSUE
Many existing computer programs use only two digits to identify a year in
the date field. These programs were designed and developed without considering
the impact of the upcoming change in the century. If not corrected, many
computer applications could fail or create erroneous results by or at the year
2000.
The Company believes that its principal year 2000 exposure is confined to
one accounting subsystem which is currently under intense review by outside
consultants. The Company believes that this subsystem will be revised or
replaced by December 31, 1998. Consulting costs to revise or replace this
subsystem have not been separately estimated, but are not anticipated to be
material to the Company's business, operations or financial condition.
FORWARD-LOOKING STATEMENTS
Statements made in this Form 10-Q for the quarter and six months ended June
30, 1998 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 16, 1998 included in registration statement number
333-46225 on Form S-3.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Not applicable.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On June 19, 1998, in connection with the acquisition of the net operating
assets of The Medallion Group ("Medallion"), the Company issued 213,721 shares
of its Common Stock to the former shareholders of Medallion. The shares were
issued pursuant to the exemption from registration provided by Section 4(2) of
the Securities Act of 1933, as amended.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Company's Annual Meeting of Shareholders held on June 15, 1998, the
following individuals were elected to the Company's Board of Directors to serve
as Class II directors until the Annual Meeting of Shareholders held in 2001 and
until their successors are elected and have qualified:
VOTES VOTES
FOR WITHHELD
----- --------
Stanley B. Cohen............................................ 16,920,001 262,123
Jonathan Golden............................................. 16,920,001 262,123
Garth H. Greimann........................................... 17,120,504 61,620
At the Company's Annual Meeting of Shareholders held on June 15, 1998, the
following proposals were also approved:
VOTES VOTES VOTES
FOR AGAINST ABSTAINED
----- ------- ---------
Ratification of the Company's Stock Incentive Plan.... 14,648,823 2,518,969 7,625
Ratification of the Company's Executive Incentive
Plan................................................ 16,772,533 400,766 8,825
ITEM 5. OTHER INFORMATION
With respect to the Company's annual meeting of shareholders to be held in
1999, all shareholder proposals submitted outside the shareholder proposal rules
contained in Rule 14a-8 promulgated under the Securities Exchange Act of 1934,
as amended, which pertains to the inclusion of shareholder proposals in a
Company's proxy materials, must be received by the Company by March 31, 1999, in
order to be considered timely. With regard to such shareholder proposals, if the
date of the next annual meeting of shareholders is advanced or delayed by more
than 30 calendar days from June 15, 1999, the Company shall, in a timely manner,
inform its shareholders of the change, and the date by which such proposals must
be received. As set forth in the Company's Proxy Statement dated May 15, 1998,
shareholders who wish to avail themselves of the provisions of Rule 14a-8 must
submit their proposals no later than January 15, 1999.
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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).
4.1 -- Specimen Common Stock Certificate (incorporated by reference
to Exhibit 4.1 to Registrant's March 16, 1998 registration
statement number 333-46225 on Form S-3).
27.1 -- Financial Data Schedule (for SEC use only).
(b) Reports on Form 8-K.
None.
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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: August 13, 1998 By: /s/ DONALD E. ELLIS, JR.
-----------------------------------------
Donald E. Ellis, Jr.
Senior Vice President,
Treasurer and
Chief Financial Officer
(principal financial officer)
Dated: August 13, 1998 By: /s/ MICHAEL R. MELTON
-----------------------------------------
Michael R. Melton
Vice President -- Finance
(principal accounting officer)
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