1
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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, 1999
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)
---------------------
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 October 31, 1999, the latest practicable date, was 48,662,128.
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THE PROFIT RECOVERY GROUP INTERNATIONAL, INC. AND SUBSIDIARIES
FORM 10-Q
QUARTER ENDED SEPTEMBER 30, 1999
INDEX
PAGE NO.
--------
PART I. Financial Information....................................... 1
Item 1. Financial Statements (Unaudited).................... 1
Condensed Consolidated Statements of Operations -- Three
and nine month periods ended September 30, 1999 and
1998................................................... 1
Condensed Consolidated Balance Sheets --
September 30, 1999 and December 31, 1998............... 2
Condensed Consolidated Statements of Cash Flows --
Nine months ended September 30, 1999 and 1998.......... 3
Notes to Condensed Consolidated Financial Statements...... 4
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations......................... 13
Item 3. Quantitative and Qualitative Disclosures About
Market Risk......................................... 19
PART II. Other Information........................................... 19
Item 1. Legal Proceedings................................... 19
Item 2. Changes in Securities............................... 19
Item 3. Defaults Upon Senior Securities..................... 20
Item 4. Submission of Matters to Vote of Security Holders... 20
Item 5. Other Information................................... 20
Item 6. Exhibits and Reports on Form 8-K.................... 20
Signatures............................................................ 21
3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
THE PROFIT RECOVERY GROUP INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- -------------------
1999 1998 1999 1998
-------- -------- -------- --------
Revenues.............................................. $91,259 $67,982 $246,139 $162,196
Cost of revenues...................................... 43,411 35,318 128,890 85,711
Selling, general and administrative expenses.......... 27,540 22,410 75,073 53,886
Business acquisition expenses......................... 10,380 955 13,371 2,864
------- ------- -------- --------
Operating income.................................... 9,928 9,299 28,805 19,735
Interest (expense), net............................... (1,304) (1,935) (4,278) (3,334)
------- ------- -------- --------
Earnings before income taxes, minority interest and
cumulative effect of accounting change........... 8,624 7,364 24,527 16,401
Income taxes.......................................... 5,495 4,367 11,599 7,064
------- ------- -------- --------
Earnings before minority interest and cumulative
effect of accounting change...................... 3,129 2,997 12,928 9,337
Minority interest in (earnings) loss of consolidated
subsidiaries........................................ (48) 128 (437) (116)
------- ------- -------- --------
Earnings before cumulative effect of accounting
change........................................... 3,081 3,125 12,491 9,221
Cumulative effect of accounting change (Note H)....... -- -- (29,195) --
------- ------- -------- --------
Net earnings (loss)................................. $ 3,081 $ 3,125 $(16,704) $ 9,221
======= ======= ======== ========
Basic earnings (loss) per share (Notes B and E):
Earnings before cumulative effect of accounting
change........................................... $ 0.06 $ 0.08 $ 0.27 $ 0.24
Cumulative effect of accounting change.............. -- -- (0.62) --
------- ------- -------- --------
Net earnings (loss)................................. $ 0.06 $ 0.08 $ (0.35) $ 0.24
======= ======= ======== ========
Diluted earnings (loss) per share (Notes B and E):
Earnings before cumulative effect of accounting
change........................................... $ 0.06 $ 0.07 $ 0.26 $ 0.23
Cumulative effect of accounting change.............. -- -- (0.60) --
------- ------- -------- --------
Net earnings (loss)................................. $ 0.06 $ 0.07 $ (0.34) $ 0.23
======= ======= ======== ========
Weighted-average shares outstanding (Notes B and E):
Basic............................................... 47,988 40,636 47,000 38,322
======= ======= ======== ========
Diluted............................................. 50,094 41,906 48,761 39,352
======= ======= ======== ========
Pro forma amounts, assuming the new accounting method
is applied retroactively (Note H):
Net (loss).......................................... $(1,833) $ (578)
======= ========
Basic (loss) per share.............................. $ (0.05) $ (0.02)
======= ========
Diluted (loss) per share............................ $ (0.04) $ (0.01)
======= ========
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,
1999 1998
------------- ------------
ASSETS
Current assets:
Cash and cash equivalents (Note D)........................ $ 40,462 $ 38,990
Receivables:
Contract receivables.................................... 63,491 109,760
Employee advances....................................... 10,461 8,277
-------- --------
Total receivables.................................. 73,952 118,037
-------- --------
Prepaid expenses and other current assets................. 5,441 4,006
Deferred income taxes..................................... 4,484 --
-------- --------
Total current assets............................... 124,339 161,033
-------- --------
Property and equipment:
Computer and other equipment.............................. 43,675 31,414
Furniture and fixtures.................................... 5,157 4,307
Leasehold improvements.................................... 5,884 5,224
-------- --------
54,716 40,945
Less accumulated depreciation and amortization............ 24,308 16,236
-------- --------
30,408 24,709
-------- --------
Noncompete agreements, less accumulated amortization........ 1,800 2,475
Deferred loan costs, less accumulated amortization.......... 1,405 1,802
Goodwill, less accumulated amortization..................... 239,192 223,912
Deferred income taxes....................................... 3,680 3,773
Other assets................................................ 2,577 1,959
-------- --------
$403,401 $419,663
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Note payable to bank...................................... $ 3,216 $ 5,983
Current installments of long-term debt.................... 258 630
Accounts payable and accrued expenses..................... 18,789 27,727
Accrued business acquisition consideration (Note G)....... -- 30,000
Accrued payroll and related expenses...................... 36,143 50,722
Deferred income taxes..................................... -- 13,310
Deferred tax recovery audit revenue....................... 1,195 1,720
-------- --------
Total current liabilities.......................... 59,601 130,092
Long-term debt, excluding current installments.............. 71,917 140,363
Deferred compensation....................................... 3,088 3,453
Other long-term liabilities................................. 968 1,650
-------- --------
Total liabilities.................................. 135,574 275,558
-------- --------
Shareholders' equity (Note E):
Preferred stock, no par value. Authorized 1,000,000
shares; no shares issued or outstanding in 1999 and
1998.................................................... -- --
Common stock, no par value; stated value $.001 per share.
Authorized 200,000,000 shares; issued and outstanding
48,604,780 in 1999 and 42,247,686 in 1998............... 49 42
Additional paid-in capital................................ 287,270 143,157
Retained earnings (accumulated deficit)................... (15,852) 3,231
Accumulated other comprehensive loss...................... (3,640) (2,325)
-------- --------
Total shareholders' equity......................... 267,827 144,105
-------- --------
Contingencies (Note G)
$403,401 $419,663
======== ========
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,
--------------------
1999 1998
-------- --------
Cash flows from operating activities:
Net earnings (loss)....................................... $(16,704) $ 9,221
Adjustments to reconcile net earnings (loss) to net cash
provided by (used in) operating activities:
Cumulative effect of accounting change.................. 29,195 --
Depreciation and amortization........................... 16,712 7,911
Loss on sale of property and equipment.................. 47 23
Minority interest in earnings of consolidated
subsidiary............................................. 437 116
Interest accrued on shareholder loans................... 860 1,485
Deferred compensation................................... (365) 237
Deferred income taxes................................... 972 619
Foreign translation adjustments......................... (1,242) (1,444)
Changes in assets and liabilities, net of effects of
acquisitions:
Receivables........................................... (21,540) (32,463)
Prepaid expenses and other current assets............. (1,435) (1,100)
Other assets.......................................... (463) (1,678)
Accounts payable and accrued expenses................. (11,408) (5,529)
Accrued payroll and related expenses.................. 6,985 11,898
Deferred tax recovery audit revenue................... (525) 22
Other long-term liabilities........................... (1,119) (46)
-------- --------
Net cash provided by (used in) operating
activities........................................ 407 (10,728)
-------- --------
Cash flows from investing activities:
Purchases of property and equipment....................... (13,713) (13,556)
Acquisitions of businesses (net of cash acquired) -- (Note
G)...................................................... (44,595) (84,128)
-------- --------
Net cash used in investing activities.............. (58,308) (97,684)
-------- --------
Cash flows from financing activities:
Net decrease in note payable to bank...................... (2,767) (2,495)
Proceeds from issuance of long-term debt.................. 55,179 79,245
Repayments of long-term debt.............................. (96,527) (23,804)
Proceeds from shareholder loans........................... 2,061 1,809
Dividends paid to former equity shareholder of
PRS -- (Note G)......................................... (370) --
Acquisition costs paid directly by shareholders........... 1,070 --
Net proceeds from issuance of common stock................ 100,727 41,246
-------- --------
Net cash provided by financing activities.......... 59,373 96,001
-------- --------
Net change in cash and cash equivalents............ 1,472 (12,411)
Cash and cash equivalents at beginning of period............ 38,990 32,652
-------- --------
Cash and cash equivalents at end of period.................. $ 40,462 $ 20,241
======== ========
Supplemental disclosures of cash flow information:
Cash paid during the period for interest.................. $ 3,280 $ 631
======== ========
Cash paid during the period for income taxes.............. $ 6,553 $ 5,327
======== ========
Supplemental disclosure of noncash investing and financing
activities:
In the first nine months of both 1999 and 1998, the
Company purchased the net operating assets of certain
companies. In conjunction with the acquisitions, the
Company assumed liabilities as follows:
Fair value of assets acquired......................... $ 57,065 $118,057
Cash paid for the acquisitions (net of cash
acquired)............................................ (44,595) (84,128)
Fair value of shares issued for the acquisitions...... (9,850) (28,120)
-------- --------
Liabilities assumed................................ $ 2,620 $ 5,809
======== ========
Shareholder loans contributed to capital by former equity
shareholders of Meridian -- (Note G).................... $ 30,391
========
Dividends accrued to former equity shareholder of
PRS -- (Note G)......................................... $ 243
========
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, 1999
(UNAUDITED)
NOTE A -- BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements of
The Profit Recovery Group International, Inc. and its wholly owned subsidiaries
(the "Company") have been prepared in accordance with generally accepted
accounting principles for interim financial information and with the
instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do
not include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation have been included. Operating results for the
three and nine month periods ended September 30, 1999 are not necessarily
indicative of the results that may be expected for the year ending December 31,
1999. For further information, refer to the consolidated financial statements
and footnotes thereto included in the Company's Form 10-K for the year ended
December 31, 1998.
As indicated in Note H, the Company has chosen in its quarter ended June
30, 1999, retroactive to January 1, 1999, to recognize revenue when it invoices
clients for its fee, except for its recently acquired Meridian operations where
payment terms are otherwise fixed by binding agreement with the client,
allowance of claims is subject to clearly defined regulations and disallowance
rates can be accurately estimated. The Company had previously recognized revenue
from services provided to its historical client base at the time overpayment
claims were presented to and approved by its clients. In accordance with
applicable requirements of generally accepted accounting principles, financial
statements for periods prior to 1999 have not been restated. AS A RESULT,
CERTAIN FINANCIAL STATEMENT AMOUNTS FOR 1999 INTERIM PERIODS WILL NOT BE
DIRECTLY COMPARABLE TO CORRESPONDING AMOUNTS FOR THE 1998 INTERIM PERIODS.
During August 1999, the Company acquired Meridian VAT Corporation Limited
("Meridian") and PRS International, Ltd. ("PRS"). Both of these acquisitions
have been accounted for as poolings-of-interests. Therefore, the accompanying
condensed consolidated financial statements have been restated to include the
operations of Meridian and PRS for all periods presented.
NOTE B -- EARNINGS PER SHARE
The following table sets forth the computations of basic and diluted
earnings per share for the three and nine month periods ended September 30, 1999
and September 30, 1998 (in thousands, except for earnings (loss) per share
information):
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- ------------------
1999 1998 1999 1998
-------- -------- -------- -------
Numerator for both basic earnings (loss) per share and
diluted earnings (loss) per share:
Earnings before cumulative effect of accounting
change............................................... $ 3,081 $ 3,125 $ 12,491 $ 9,221
Cumulative effect of accounting change................. -- -- (29,195) --
-------- -------- -------- -------
Net earnings (loss)............................. $ 3,081 $ 3,125 $(16,704) $ 9,221
======== ======== ======== =======
Denominator:
Denominator for basic earnings (loss) per share --
weighted-average shares outstanding.................. 47,988 40,636 47,000 38,322
Effect of dilutive securities -- employee stock
options.............................................. 2,106 1,270 1,761 1,030
-------- -------- -------- -------
Denominator for diluted earnings (loss) per share...... 50,094 41,906 48,761 39,352
======== ======== ======== =======
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THE PROFIT RECOVERY GROUP INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- ------------------
1999 1998 1999 1998
-------- -------- -------- -------
Basic earnings (loss) per share:
Earnings before cumulative effect of accounting
change............................................... $ 0.06 $ 0.08 $ 0.27 $ 0.24
Cumulative effect of accounting change................. -- -- (0.62) --
-------- -------- -------- -------
Net earnings (loss)............................. $ 0.06 $ 0.08 $ (0.35) $ 0.24
======== ======== ======== =======
Diluted earnings (loss) per share:
Earnings before cumulative effect of accounting
change............................................... $ 0.06 $ 0.07 $ 0.26 $ 0.23
Cumulative effect of accounting change................. -- -- (0.60) --
-------- -------- -------- -------
Net earnings (loss)............................. $ 0.06 $ 0.07 $ (0.34) $ 0.23
======== ======== ======== =======
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 September 30, 1999 and 1998,
the Company's consolidated comprehensive income was $2.9 million and $2.7
million, respectively. For the nine month periods ended September 30, 1999 and
1998, the Company's consolidated comprehensive income (loss) was $(18.0) million
and $8.0 million, respectively. The difference between consolidated
comprehensive income (loss), as disclosed here, and traditionally-determined
consolidated net earnings (loss), as set forth on the accompanying Condensed
Consolidated Statements of Operations, results from foreign currency translation
adjustments.
NOTE D -- CASH EQUIVALENTS
Cash equivalents at December 31, 1998 included $6.3 million (none at
September 30, 1999) 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. In addition, cash equivalents at September
30, 1999 and December 31, 1998 also included $4.6 million and $7.1 million,
respectively, of temporary investments held in a French bank by certain of the
Company's French subsidiaries.
The Company does not intend to take possession of collateral securities on
future reverse repurchase agreement transactions conducted with banking
institutions of national standing. The Company does insist, however, that all
such agreements provide for full collateralization using obligations of the
United States of America having a current market value equivalent to or
exceeding the reverse repurchase agreement amount.
NOTE E -- SHAREHOLDERS' EQUITY
On July 20, 1999, the Company declared a 3-for-2 stock split effected in
the form of a stock dividend for shareholders of record on August 2, 1999,
payable on August 17, 1999. All share and per share amounts have been
retroactively restated to give effect to the aforementioned stock split.
On September 30, 1999, the Company's shareholders voted to amend its
Articles of Incorporation to increase the number of shares of Company common
stock which the Company shall have the authority to issue from 60.0 million
shares to 200.0 million shares.
On March 16, 1998, the Company sold 3.0 million newly issued shares
(equivalent to 2.0 million pre-split shares) of its common stock and certain
selling shareholders sold an additional 3.6 million outstanding shares
(equivalent to 2.4 million pre-split shares) in an underwritten follow-on
offering. The offering was priced at $14.00 per share (equivalent to $21.00 per
share pre-split). The proceeds of the offering (net of underwriting
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THE PROFIT RECOVERY GROUP INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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
990,000 shares (equivalent to 660,000 pre-split shares) of Company common stock.
All of these shares were then sold to the syndicate by certain selling
shareholders. The Company received no proceeds from the sale of such shares.
On January 8, 1999, the Company sold 4.1 million newly issued shares
(equivalent to 2.7 million pre-split shares) of its common stock and certain
selling shareholders sold an additional 1.2 million outstanding shares
(equivalent to 800,000 pre-split shares) in an underwritten follow-on offering.
The offering was priced at $22.67 per share (equivalent to $34.00 per share
pre-split). The proceeds of the offering (net of underwriting discounts and
commissions) were distributed by the underwriting syndicate on January 13, 1999.
The net proceeds from the 4.1 million shares (equivalent to 2.7 million
pre-split shares) sold by the Company, combined with the net proceeds from an
additional 286,500 shares (equivalent to 191,000 pre-split shares) subsequently
sold by the Company in late January 1999 upon exercise by the underwriting
syndicate of their over-allotment option, were applied to reduce outstanding
borrowings under the Company's $200.0 million bank credit facility.
Additionally, 501,000 shares (equivalent to 334,000 pre-split shares) were sold
in late January 1999 by certain selling shareholders in connection with the
over-allotment option. The Company received no proceeds from the sale of such
shares.
NOTE F -- OPERATING SEGMENTS AND RELATED INFORMATION
The Company adopted SFAS No. 131, "Disclosures About Segments of an
Enterprise and Related Information," in 1998 which changes the methodology by
which the Company reports information about its operating segments and requires
limited interim period reporting.
The Company has four reportable operating segments consisting of Accounts
Payable Services, Freight Services, Tax Services and Facilities Services. Each
segment represents a strategic business unit that offers a different type of
recovery audit service. These business units are managed separately because each
business requires different technology and marketing strategies.
Accounts Payable Services consist of the review of client accounts payable
disbursements to identify and recover overpayments. This operating segment
includes accounts payable services provided to retailers, wholesale distributors
and governmental agencies (the Company's historical client base) and accounts
payable services provided to various other types of business entities by the
Company's Loder Drew & Associates division. The Accounts Payable Services
operating segment conducts business in 25 countries.
Freight Services consist primarily of various businesses acquired by the
Company beginning in 1997 which audit freight-related disbursements to identify
and recover overpayments. Areas of current specialization include ocean freight,
ground freight and overnight freight. This operating segment currently serves
primarily businesses located in the United States, although international
expansion is planned.
Tax Services consist primarily of various European businesses acquired by
the Company beginning in 1997 which audit tax-related disbursements to identify
and recover overpayments and assist business entities in securing available
grants.
Facilities Services consist of the review of facilities-related contracts
and disbursements to identify and recover overpayments. Prior to the June 1999
acquisition of Invoice and Tariff Management Group, LLC ("ITMG"), most revenues
related to client real estate leases. ITMG is in the business of auditing
telecommunications disbursements and negotiating integrated telecom contracts.
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THE PROFIT RECOVERY GROUP INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company evaluates the performance of its operating segments based upon
revenues and operating income. Intersegment revenues are not significant.
Segment information for the three and nine month periods ended September
30, 1999 and 1998 follows (in thousands):
ACCOUNTS
PAYABLE FREIGHT TAX FACILITIES
SERVICES SERVICES SERVICES SERVICES TOTAL
-------- -------- -------- ---------- --------
Three months ended September 30, 1999
Revenues..................................... $ 69,195 $ 6,659 $13,059 $2,346 $ 91,259
Operating income (loss)...................... 13,576 3,286 (7,736) 802 9,928
Nine months ended September 30, 1999
Revenues..................................... $183,981 $14,679 $43,789 $3,690 $246,139
Operating income............................. 26,486 6,411 (5,672) 1,580 28,805
Three months ended September 30, 1998
Revenues..................................... $ 57,127 $ 2,428 $ 8,027 $ 400 $ 67,982
Operating income (loss)...................... 9,437 1,308 (1,722) 276 9,299
Nine months ended September 30, 1998
Revenues..................................... $123,939 $ 4,725 $32,732 $ 800 $162,196
Operating income............................. 13,843 2,693 2,647 552 19,735
The following additional segment information is provided to facilitate
comparison of revenues to previously issued financial statements (in thousands):
ACCOUNTS
PAYABLE FREIGHT TAX FACILITIES
SERVICES SERVICES SERVICES SERVICES TOTAL
-------- -------- -------- ---------- --------
Three months ended March 31, 1999
Domestic revenues as previously reported..... $ 39,458 $ 3,563 $ -- $ 27 $ 43,048
Reclassification of Central Freight and Lease
revenue................................... (426) 202 -- 224 --
-------- ------- ------- ------ --------
Domestic revenues without pooled entities.... 39,032 3,765 -- 251 43,048
Add acquisitions accounted for as
poolings-of-interests:
Meridian VAT Corporation Limited.......... -- -- 1,292 -- 1,292
PRS International, Ltd.................... 4,318 -- -- -- 4,318
-------- ------- ------- ------ --------
Domestic revenues including pooled
entities.................................. 43,350 3,765 1,292 251 48,658
-------- ------- ------- ------ --------
International revenues without pooled
entities.................................. 7,594 -- 5,973 -- 13,567
Add acquisitions accounted for as
poolings-of-interests:
Meridian VAT Corporation Limited.......... -- -- 1,985 -- 1,985
PRS International, Ltd.................... 227 -- -- -- 227
-------- ------- ------- ------ --------
International revenues including pooled
entities.................................. 7,821 -- 7,958 -- 15,779
-------- ------- ------- ------ --------
Total revenues $ 51,171 $ 3,765 $ 9,250 $ 251 $ 64,437
======== ======= ======= ====== ========
7
10
THE PROFIT RECOVERY GROUP INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
ACCOUNTS
PAYABLE FREIGHT TAX FACILITIES
SERVICES SERVICES SERVICES SERVICES TOTAL
-------- -------- -------- ---------- --------
Three months ended June 30, 1999
Domestic revenues as previously reported..... $ 47,606 $ 4,046 $ -- $ 851 $ 52,503
Reclassification of Central Freight and Lease
revenue................................... (451) 209 -- 242 --
-------- ------- ------- ------ --------
Domestic revenues without pooled entities.... 47,155 4,255 -- 1,093 52,503
Add acquisitions accounted for as
poolings-of-interests:
Meridian VAT Corporation Limited.......... -- -- 2,002 -- 2,002
PRS International, Ltd.................... 4,812 -- -- -- 4,812
-------- ------- ------- ------ --------
Domestic revenues including pooled
entities.................................. 51,967 4,255 2,002 1,093 59,317
-------- ------- ------- ------ --------
International revenues without pooled
entities.................................. 11,400 -- 7,825 -- 19,225
Add acquisitions accounted for as
poolings-of-interests:
Meridian VAT Corporation Limited.......... -- -- 11,653 -- 11,653
PRS International, Ltd.................... 248 -- -- -- 248
-------- ------- ------- ------ --------
International revenues including pooled
entities.................................. 11,648 -- 19,478 -- 31,126
-------- ------- ------- ------ --------
Total revenues....................... $ 63,615 $ 4,255 $21,480 $1,093 $ 90,443
======== ======= ======= ====== ========
ACCOUNTS
PAYABLE FREIGHT TAX FACILITIES
SERVICES SERVICES SERVICES SERVICES TOTAL
-------- -------- -------- ---------- --------
Three months ended September 30, 1999
Domestic revenues without pooled entities.... $ 50,491 $ 6,659 $ -- $2,346 $ 59,496
Add acquisitions accounted for as
poolings-of-interests:
Meridian VAT Corporation Limited.......... -- -- 1,198 -- 1,198
PRS International, Ltd.................... 4,170 -- -- -- 4,170
-------- ------- ------- ------ --------
Domestic revenues including pooled
entities.................................. 54,661 6,659 1,198 2,346 64,864
-------- ------- ------- ------ --------
International revenues without pooled
entities.................................. 14,124 -- 6,535 -- 20,659
Add acquisitions accounted for as
poolings-of-interests:
Meridian VAT Corporation Limited.......... -- -- 5,326 -- 5,326
PRS International, Ltd.................... 410 -- -- -- 410
-------- ------- ------- ------ --------
International revenues including pooled
entities.................................. 14,534 -- 11,861 -- 26,395
-------- ------- ------- ------ --------
Total revenues....................... $ 69,195 $ 6,659 $13,059 $2,346 $ 91,259
======== ======= ======= ====== ========
8
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THE PROFIT RECOVERY GROUP INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
ACCOUNTS
PAYABLE FREIGHT TAX FACILITIES
SERVICES SERVICES SERVICES SERVICES TOTAL
-------- -------- -------- ---------- --------
Nine months ended September 30, 1999
Domestic revenues without pooled entities.... $136,678 $14,679 $ -- $3,690 $155,047
Add acquisitions accounted for as
poolings-of-interests:
Meridian VAT Corporation Limited.......... -- -- 4,492 -- 4,492
PRS International, Ltd.................... 13,300 -- -- -- 13,300
-------- ------- ------- ------ --------
Domestic revenues including pooled
entities.................................. 149,978 14,679 4,492 3,690 172,839
-------- ------- ------- ------ --------
International revenues without pooled
entities.................................. 33,118 -- 20,333 -- 53,451
Add acquisitions accounted for as
poolings-of-interests:
Meridian VAT Corporation Limited.......... -- -- 18,964 -- 18,964
PRS International, Ltd.................... 885 -- -- -- 885
-------- ------- ------- ------ --------
International revenues including pooled
entities.................................. 34,003 -- 39,297 -- 73,300
-------- ------- ------- ------ --------
Total revenues....................... $183,981 $14,679 $43,789 $3,690 $246,139
======== ======= ======= ====== ========
Three months ended March 31, 1998
Domestic revenues as originally reported..... $ 20,588 $ 496 $ -- $ -- $ 21,084
Reclassification of Central Freight and Lease
revenue................................... (318) 160 -- 158 --
-------- ------- ------- ------ --------
Domestic revenues without pooled entities.... 20,270 656 -- 158 21,084
Add acquisitions accounted for as
poolings-of-interests:
Meridian VAT Corporation Limited.......... -- -- 1,051 -- 1,051
PRS International Ltd..................... 3,141 -- -- -- 3,141
-------- ------- ------- ------ --------
Domestic revenues including pooled
entities.................................. 23,411 656 1,051 158 25,276
Proforma impact, assuming the new accounting
method is applied retroactively (Note
H)........................................ (2,580) (127) -- -- (2,707)
-------- ------- ------- ------ --------
Total proforma domestic revenues..... 20,831 529 1,051 158 22,569
-------- ------- ------- ------ --------
International revenues without pooled
entities.................................. 7,684 -- 4,376 -- 12,060
Add acquisitions accounted for as
poolings-of-interests:
Meridian VAT Corporation Limited.......... -- -- 1,462 -- 1,462
PRS International, Ltd.................... 55 -- -- -- 55
-------- ------- ------- ------ --------
International revenues including pooled
entities.................................. 7,739 -- 5,838 -- 13,577
Proforma impact, assuming the new accounting
method is applied retroactively (Note
H)........................................ (2,914) -- -- -- (2,914)
-------- ------- ------- ------ --------
Total proforma international
revenues........................... 4,825 -- 5,838 -- 10,663
-------- ------- ------- ------ --------
Total revenues without pooled entities....... $ 27,954 $ 656 $ 4,376 $ 158 $ 33,144
======== ======= ======= ====== ========
Total revenues including pooled entities..... $ 31,150 $ 656 $ 6,889 $ 158 $ 38,853
======== ======= ======= ====== ========
Total proforma revenues...................... $ 25,656 $ 529 $ 6,889 $ 158 $ 33,232
======== ======= ======= ====== ========
9
12
THE PROFIT RECOVERY GROUP INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
ACCOUNTS
PAYABLE FREIGHT TAX FACILITIES
SERVICES SERVICES SERVICES SERVICES TOTAL
-------- -------- -------- ---------- --------
Three months ended June 30, 1998
Domestic revenues as originally reported..... $ 23,264 $ 1,403 $ -- $ -- $ 24,667
Reclassification of Central Freight and Lease
revenue................................... (480) 238 -- 242 --
-------- ------- ------- ------ --------
Domestic revenues without pooled entities.... 22,784 1,641 -- 242 24,667
Add acquisitions accounted for as
poolings-of-interests:
Meridian VAT Corporation Limited.......... -- -- 1,727 -- 1,727
PRS International, Ltd.................... 4,676 -- -- -- 4,676
-------- ------- ------- ------ --------
Domestic revenues including pooled
entities.................................. 27,460 1,641 1,727 242 31,070
Proforma impact, assuming the new accounting
method is applied retroactively (Note
H)........................................ (6,068) (279) -- -- (6,347)
-------- ------- ------- ------ --------
Total proforma domestic revenues..... 21,392 1,362 1,727 242 24,723
-------- ------- ------- ------ --------
International revenues without pooled
entities.................................. 8,051 -- 6,216 -- 14,267
Add acquisitions accounted for as
poolings-of-interests:
Meridian VAT Corporation Limited.......... -- -- 9,874 -- 9,874
PRS International, Ltd.................... 150 -- -- -- 150
-------- ------- ------- ------ --------
International revenues including pooled
entities.................................. 8,201 -- 16,090 -- 24,291
Proforma impact, assuming the new accounting
method is applied retroactively (Note
H)........................................ 467 -- -- -- 467
-------- ------- ------- ------ --------
Total proforma international
revenues........................... 8,668 -- 16,090 -- 24,758
-------- ------- ------- ------ --------
Total revenues without pooled entities....... $ 30,835 $ 1,641 $ 6,216 $ 242 $ 38,934
======== ======= ======= ====== ========
Total revenues including pooled entities..... $ 35,661 $ 1,641 $17,817 $ 242 $ 55,361
======== ======= ======= ====== ========
Total proforma revenues...................... $ 30,060 $ 1,362 $17,817 $ 242 $ 49,481
======== ======= ======= ====== ========
10
13
THE PROFIT RECOVERY GROUP INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
ACCOUNTS
PAYABLE FREIGHT TAX FACILITIES
SERVICES SERVICES SERVICES SERVICES TOTAL
-------- -------- -------- ---------- --------
Three months ended September 30, 1998
Domestic revenues without pooled entities.... $ 43,431 $ 2,428 $ -- $ 400 $ 46,259
Add acquisitions accounted for as
poolings-of-interests:
Meridian VAT Corporation Limited.......... -- -- 947 -- 947
PRS International, Ltd.................... 4,090 -- -- -- 4,090
-------- ------- ------- ------ --------
Domestic revenues including pooled
entities.................................. 47,521 2,428 947 400 51,296
Proforma impact, assuming the new accounting
method is applied retroactively (Note
H)........................................ (6,786) (310) -- -- (7,096)
-------- ------- ------- ------ --------
Total pro forma domestic revenues.... 40,735 2,118 947 400 44,200
-------- ------- ------- ------ --------
International revenues as originally
reported.................................. 9,606 -- 5,938 -- 15,544
Add acquisitions accounted for as
poolings-of-interests:
Meridian VAT Corporation Limited.......... -- -- 1,142 -- 1,142
PRS International, Ltd.................... -- -- -- -- --
-------- ------- ------- ------ --------
International revenues including pooled
entities.................................. 9,606 -- 7,080 -- 16,686
Proforma impact, assuming the new accounting
method is applied retroactively (Note
H)........................................ (4,683) -- -- -- (4,683)
-------- ------- ------- ------ --------
Total pro forma international
revenues........................... 4,923 -- 7,080 -- 12,003
-------- ------- ------- ------ --------
Total revenues as originally
reported........................... $ 53,037 $ 2,428 $ 5,938 $ 400 $ 61,803
======== ======= ======= ====== ========
Total revenues including pooled
entities........................... $ 57,127 $ 2,428 $ 8,027 $ 400 $ 67,982
======== ======= ======= ====== ========
Total pro forma revenues............. $ 45,658 $ 2,118 $ 8,027 $ 400 $ 56,203
======== ======= ======= ====== ========
11
14
THE PROFIT RECOVERY GROUP INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
ACCOUNTS
PAYABLE FREIGHT TAX FACILITIES
SERVICES SERVICES SERVICES SERVICES TOTAL
-------- -------- -------- ---------- --------
Nine months ended September 30, 1998
Domestic revenues without pooled entities.... $ 86,486 $ 4,725 $ -- $ 800 $ 92,011
Add acquisitions accounted for as
poolings-of-interests:
Meridian VAT Corporation Limited.......... -- -- 3,725 -- 3,725
PRS International, Ltd.................... 11,907 -- -- -- 11,907
-------- ------- ------- ------ --------
Domestic revenues including pooled
entities.................................. 98,393 4,725 3,725 800 107,643
-------- ------- ------- ------ --------
Proforma impact, assuming the new accounting
method is applied retroactively (Note
H)........................................ (15,434) (716) -- -- (16,150)
-------- ------- ------- ------ --------
Total pro forma domestic revenues.... 82,959 4,009 3,725 800 91,493
-------- ------- ------- ------ --------
International revenues as originally reported 25,341 -- 16,529 -- 41,870
Add acquisitions accounted for as
poolings-of-interests:
Meridian VAT Corporation Limited.......... -- -- 12,478 -- 12,478
PRS International, Ltd.................... 205 -- -- -- 205
-------- ------- ------- ------ --------
International revenues including pooled
entities.................................. 25,546 -- 29,007 -- 54,553
Proforma impact, assuming the new accounting
method is applied retroactively (Note
H)........................................ (7,130) -- -- -- (7,130)
-------- ------- ------- ------ --------
Total pro forma international
revenues........................... 18,416 -- 29,007 -- 47,423
-------- ------- ------- ------ --------
Total revenues as originally
reported........................... $111,827 $ 4,725 $16,529 $ 800 $133,881
======== ======= ======= ====== ========
Total revenues including pooled
entities........................... $123,939 $ 4,725 $32,732 $ 800 $162,196
======== ======= ======= ====== ========
Total pro forma revenues............. $101,375 $ 4,009 $32,732 $ 800 $138,916
======== ======= ======= ====== ========
The following additional segment information is provided to facilitate
comparison of operating income to previously issued financial statements (in
thousands):
ACCOUNTS
PAYABLE FREIGHT TAX FACILITIES
SERVICES SERVICES SERVICES SERVICES TOTAL
-------- -------- -------- ---------- --------
SEGMENT INFORMATION FOR 1999 WITH PROFORMA
ADD-BACK OF NON-
RECURRING BUSINESS ACQUISITION EXPENSES
Three months ended March 31, 1999
Revenues..................................... $ 51,171 $ 3,765 $ 9,250 $ 251 $ 64,437
Operating income (loss)...................... 3,185 1,900 (3,196) 142 2,031
Add non-recurring business acquisition
expenses................................ -- -- 1,495 -- 1,495
-------- ------- ------- ------ --------
Proforma operating income (loss) without non-
recurring business acquisition expenses... 3,185 1,900 (1,701) 142 3,526
-------- ------- ------- ------ --------
Three months ended June 30, 1999
Revenues..................................... $ 63,615 $ 4,255 $21,480 $1,093 $ 90,443
Operating income............................. 9,725 1,225 5,260 636 16,846
Add non-recurring business acquisition
expenses................................ -- -- 1,496 -- 1,496
-------- ------- ------- ------ --------
Proforma operating income (loss) without non-
recurring business acquisition expenses... 9,725 1,225 6,756 636 18,342
-------- ------- ------- ------ --------
12
15
THE PROFIT RECOVERY GROUP INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
ACCOUNTS
PAYABLE FREIGHT TAX FACILITIES
SERVICES SERVICES SERVICES SERVICES TOTAL
-------- -------- -------- ---------- --------
Three months ended September 30, 1999
Revenues..................................... $ 69,195 $ 6,659 $13,059 $2,346 $ 91,259
Operating income (loss)...................... 13,576 3,286 (7,736) 802 9,928
Add non-recurring business acquisition
expenses................................ 978 -- 9,402 -- 10,380
-------- ------- ------- ------ --------
Proforma operating income (loss) without non-
recurring business acquisition expenses... 14,554 3,286 1,666 802 20,308
-------- ------- ------- ------ --------
Nine months ended September 30, 1999
Revenues..................................... $183,981 $14,679 $43,789 $3,690 $246,139
Operating income (loss)...................... 26,486 6,411 (5,672) 1,580 28,805
Add non-recurring business acquisition
expenses................................ 978 -- 12,393 -- 13,371
-------- ------- ------- ------ --------
Proforma operating income (loss) without non-
recurring business acquisition expenses... 27,464 6,411 6,721 1,580 42,176
-------- ------- ------- ------ --------
SEGMENT INFORMATION FOR 1998 ASSUMING THE NEW
ACCOUNTING METHOD IS APPLIED RETROACTIVELY
(NOTE H) AND WITH PROFORMA ADD-BACK OF NON-
RECURRING BUSINESS ACQUISITION EXPENSES
Three months ended March 31, 1998
Total proforma revenues...................... $ 25,656 $ 529 $ 6,889 $ 158 $ 33,232
Proforma operating income (loss)............. (2,816) 397 (2,048) 109 (4,358)
Add non-recurring business acquisition
expenses................................ -- -- 955 -- 955
-------- ------- ------- ------ --------
Proforma operating income (loss) without non-
recurring business acquisition expenses... (2,816) 397 (1,093) 109 (3,403)
-------- ------- ------- ------ --------
Three months ended June 30, 1998
Total proforma revenues...................... $ 30,060 $ 1,362 $17,817 $ 242 $ 49,481
Proforma operating income (loss)............. (381) 655 6,417 167 6,858
Add non-recurring business acquisition
expenses................................ -- -- 954 -- 954
-------- ------- ------- ------ --------
Proforma operating income (loss) without non-
recurring business acquisition expenses... (381) 655 7,371 167 7,812
-------- ------- ------- ------ --------
Three months ended September 30, 1998
Total proforma revenues...................... $ 45,658 $ 2,118 $ 8,027 $ 400 $ 56,203
Proforma operating income (loss)............. 1,563 1,054 (1,722) 276 1,171
Add non-recurring business acquisition
expenses................................ -- -- 955 -- 955
-------- ------- ------- ------ --------
Proforma operating income (loss) without non-
recurring business acquisition expenses... 1,563 1,054 (767) 276 2,126
-------- ------- ------- ------ --------
Nine months ended September 30, 1998
Total proforma revenues...................... $101,375 $ 4,009 $32,732 $ 800 $138,916
Proforma operating income (loss)............. (1,634) 2,106 2,647 552 3,671
Add non-recurring business acquisition
expenses................................ -- -- 2,864 -- 2,864
-------- ------- ------- ------ --------
Proforma operating income (loss) without non-
recurring business acquisition expenses... (1,634) 2,106 5,511 552 6,535
-------- ------- ------- ------ --------
13
16
THE PROFIT RECOVERY GROUP INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE G -- ACQUISITIONS
On March 20, 1998, the Company acquired Ginger Quill, Inc., d/b/a Precision
Data Link, a 22 person air freight recovery audit firm based in Salt Lake City,
Utah. This transaction was accounted for as a purchase and involved both cash
and common stock consideration.
On August 6, 1998, the Company acquired all the assets and assumed certain
liabilities of Loder Drew & Associates, Inc. ("Loder Drew") effective as of July
1, 1998. Loder Drew is an international recovery auditing firm primarily serving
clients in the manufacturing, financial services and other non-retail sectors.
Pursuant to the acquisition agreements, the initial consideration paid for Loder
Drew consisted of $70.0 million in cash and 1,205,302 restricted, unregistered
shares (equivalent to 803,535 pre-split shares) of the Company's common stock.
Additionally, the acquisition agreements provided that the former owners of
Loder Drew would be eligible to receive additional purchase price consideration
up to a maximum of $70.0 million in cash conditioned on the performance of Loder
Drew through December 31, 1999. Of this $70.0 million, $30.0 million was based
on the financial performance of Loder Drew for the six months ended December 31,
1998. Since the financial performance of Loder Drew for the six months ended
December 31, 1998 exceeded applicable thresholds, the entire $30.0 million was
recorded on the Company's December 31, 1998 Consolidated Balance Sheet as
additional goodwill and corresponding accrued business acquisition
consideration. The $30.0 million was paid in March 1999 (along with related
accrued interest) from borrowings under the Company's existing $200.0 million
credit facility. Of the above-mentioned $70.0 million, up to $40.0 million in
additional purchase price consideration is payable in the Spring of 2000 based
upon the financial performance of the Loder Drew division during calendar 1999.
The Company believes it highly probable that the entire $40.0 million will
become recordable on the Company's December 31, 1999 Consolidated Balance Sheet
as additional goodwill and corresponding accrued business acquisition
consideration.
On April 1, 1999, the Company acquired substantially all the assets and
assumed certain liabilities of Payment Technologies, Inc. d/b/a PayTech
("PayTech"), a Georgia-based firm in the business of handling freight data,
auditing freight bills and other related services. The transaction was accounted
for as a purchase, with consideration of $5.0 million in cash and 228,798
restricted, unregistered shares (equivalent to 152,532 pre-split shares) of the
Company's common stock.
On June 14, 1999, the Company acquired the net assets of Invoice and Tariff
Management Group, LLC ("ITMG"), a Georgia-based firm in the business of
telecommunications recovery auditing and negotiating integrated services
contracts with its clients' telecom suppliers on a gain-share basis. The
transaction was accounted for as a purchase and involved initial consideration
of $11.0 million in cash and 353,310 unregistered, restricted shares (equivalent
to 236,873 pre-split shares) of the Company's common stock. The former owners of
ITMG are also eligible to receive additional purchase price consideration
through December 31, 2000 of up to $20.0 million based upon the earnings of
ITMG. Of this $20.0 million, $5.0 million is payable in February 2000 based upon
the financial performance of ITMG from the acquisition date through December 31,
1999, and $15.0 million is payable in February 2001 based upon the financial
performance of ITMG in 2000.
On August 19, 1999, the Company acquired Meridian VAT Corporation Limited
("Meridian"). Meridian is based in Dublin, Ireland and specializes in the
recovery of value-added taxes paid on business expenses for corporate clients.
Meridian is a 300 person firm with active clients in 26 countries. The
transaction was accounted for as a pooling-of-interests with consideration of
6,114,375 unregistered shares of the Company's common stock.
On August 31, 1999, the Company acquired substantially all the assets and
assumed substantially all the liabilities of PRS International, Ltd. ("PRS").
PRS is a 250 person Texas-based recovery audit firm servicing primarily
middle-market clients in a variety of industrial and commercial sectors. The
transaction was accounted for as a pooling-of-interests with consideration of
1,113,043 unregistered shares of the Company's common stock.
14
17
THE PROFIT RECOVERY GROUP INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The consolidated financial statements for periods prior to the acquisitions
of Meridian and PRS have been restated to include the accounts and results of
operations of Meridian and PRS. The results of operations previously reported by
the separate enterprises and the combined amounts included in the accompanying
condensed consolidated financial statements are summarized below:
SIX MONTHS
ENDED
JUNE 30,
------------------
1999 1998
-------- -------
Revenues
Profit Recovery Group International, Inc.................. $128,343 $72,078
Meridian VAT Corporation Limited.......................... 16,931 14,114
PRS International, Ltd.................................... 9,605 8,022
-------- -------
Combined.......................................... $154,879 $94,214
======== =======
Net earnings (loss)
Profit Recovery Group International, Inc.................. $(19,958) $ 4,039
Meridian VAT Corporation Limited.......................... (697) 1,069
PRS International, Ltd.................................... 868 988
-------- -------
Combined.......................................... $(19,787) $ 6,096
======== =======
On October 15, 1999, the Company signed a definitive agreement with certain
private shareholders to acquire approximately 89% of AP SA and its subsidiaries
(collectively, "Groupe AP"), a 75-person tax recovery audit firm which operates
primarily within France. Groupe AP is publicly traded on the French over-
the-counter market with approximately 11% of its total outstanding shares
currently publicly held. PRG currently intends to initiate a cash tender for all
publicly-traded shares of Groupe AP. Acquisition of the 89% portion of Groupe AP
shares held by private shareholders is expected to close by November 22, 1999.
Details and timing of the anticipated public tender offer for the remaining 11%
of the AP Group shares have not been finalized, and there can be no assurance
that it will proceed.
The acquisition of Groupe AP will be accounted for as a purchase. PRG
currently anticipates that the initial indicated purchase price for the 89% of
Groupe AP which is held by private shareholders will approximate $30 million,
with approximately 45% to be paid in cash and the remaining 55% to be paid in
restricted, unregistered PRG shares. In addition to the initial consideration to
be received by the private shareholders of Groupe AP, these shareholders will
also be eligible to receive additional purchase price consideration relative to
the profitability of Groupe AP for the two year period ending December 31, 2000.
NOTE H -- ACCOUNTING CHANGE
Due to the Company's continuing and substantial expansion beyond its
historical client base and original service offerings, as well as the
administrative desirability of standardizing revenue recognition practices, the
Company has chosen, retroactive to January 1, 1999, to recognize revenue when it
invoices clients for its fee, except for its recently acquired Meridian
operations where payment terms are otherwise fixed by binding agreement with the
client, allowance of claims is subject to clearly defined regulations and
disallowance rates can be accurately estimated. The Company had previously
recognized revenue from services provided to its historical client base
(consisting primarily of retailers, wholesale distributors and governmental
entities) at the time overpayment claims were presented to and approved by its
clients. In effecting this change, the Company has reported, as of January 1,
1999, a non-cash, after-tax change of $29.2 million as the cumulative effect of
a change in an accounting principle. The previously issued financial statements
for the three months ended
15
18
THE PROFIT RECOVERY GROUP INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
March 31, 1999 have been restated to give retroactive effect to the change. The
cumulative effect of the accounting change was derived as follows:
Unbilled contract receivables at December 31, 1998, as
adjusted.................................................... $69,432
Less: auditor payroll accrual at December 31, 1998,
associated with unbilled contract receivables......... (21,564)
-------
Subtotal............................................... 47,868
Less: related income tax effect at 39.0%............... (18,673)
-------
Cumulative effect of accounting change................. $29,195
=======
The Company's Revenue Recognition Policy as previously stated in Note 1(c)
to its annual consolidated financial statements included in Form 10-K for the
year ended December 31, 1998 has been subsequently revised, effective January 1,
1999, to read as follows:
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 service to be provided by the Company, (c) client's
duties in assisting and cooperating with the Company, and (d) fee payable to the
Company generally expressed as a specified percentage of the amounts recovered
by the client resulting from liability overpayment claims identified. In the
case of prospective facilities audits such as telecommunications tariff
negotiations conducted by the Company on behalf of its clients, contracts
typically provide for a percentage-of-savings fee which is calculated and fixed
at the time the new tariff agreement is executed, and is payable to the Company
on a current basis.
In addition to contractual provisions, most clients also establish specific
procedural guidelines which the Company must satisfy prior to submitting claims
for client approval. These guidelines are unique to each client and impose
specific requirements on the Company such as adherence to vendor interaction
protocols, provision of advance written notification to vendors of forthcoming
claims, securing written claim validity concurrence from designated client
personnel and, in limited cases, securing written claim validity concurrence
from the involved vendors. Approved claims are processed by clients and
generally taken as credits against outstanding payables or future purchases from
the vendors involved. The Company then invoices its clients for a contractually
stipulated percentage of amounts recovered.
Invoice basis of revenue recognition
The Company recognizes revenues when it invoices clients for its fee,
except for its recently acquired Meridian operations as described below.
Submitted claims basis of revenue recognition
With respect to Meridian's operations to secure refunds pursuant to statute
or regulation of amounts paid by clients to governmental entities, the Company
recognizes revenues at the time refund claims containing all required
documentation are filed with appropriate governmental agencies in those
instances where historical refund disallowance rates can be accurately
estimated. The Company records its fee participation in these refunds at
estimated net realizable value without reserves. Accordingly, adjustments to
uncollectible fee estimates are charged or credited to earnings, as appropriate.
16
19
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.
As indicated in Note H contained elsewhere in this Form 10-Q, the Company
has chosen, retroactive to January 1, 1999, to recognize revenue when it
invoices clients for its fee, except for its recently acquired Meridian
operations where payment terms are otherwise fixed by binding agreement with the
client, allowance of claims is subject to clearly defined regulations and
disallowance rates can be accurately estimated. The Company had previously
recognized revenue from services provided to its historical client base at the
time overpayment claims were presented to and approved by its clients. In
accordance with applicable requirements of generally accepted accounting
principles, financial statements for periods prior to 1999 will not be restated.
AS A RESULT, CERTAIN FINANCIAL STATEMENT AMOUNTS FOR 1999 INTERIM PERIODS WILL
NOT BE DIRECTLY COMPARABLE TO CORRESPONDING AMOUNTS FOR THE 1998 INTERIM
PERIODS.
OVERVIEW
The Company is a leading provider of accounts payable and other recovery
audit services to large businesses and certain governmental agencies having
numerous payment transactions with many vendors. These businesses include
retailers, manufacturers, wholesale distributors, technology companies and
healthcare providers.
In businesses with large purchase volumes and continuously fluctuating
prices, some small percentage of erroneous overpayments to vendors is
inevitable. In addition, the complexity of various tax laws results in
overpayments to governmental agencies. Services such as freight,
telecommunications and utilities provided to businesses under complex pricing
arrangements also can result in overpayments. All of these overpayments result
in "lost profits." The Company's trained, experienced audit specialists use
sophisticated proprietary technology and advanced audit techniques and
methodologies to identify overpayments to vendors and tax authorities. The
Company receives a contractual percentage of overpayments it identifies and its
clients recover.
RESULTS OF OPERATIONS
The following table presents, for the periods indicated, certain items in
the condensed consolidated statements of operations as a percentage of revenues.
THREE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------- --------------
1999 1998 1999 1998
----- ----- ----- -----
Revenues.................................................. 100.0% 100.0% 100.0% 100.0%
Cost of revenues.......................................... 47.6 52.0 52.4 52.8
Selling, general and administrative expenses.............. 30.2 33.0 30.5 33.2
Business acquisition expenses............................. 11.4 1.4 5.4 1.8
----- ----- ----- -----
Operating income........................................ 10.8 13.6 11.7 12.2
Interest (expense), net................................... (1.4) (2.8) (1.7) (2.1)
----- ----- ----- -----
Earnings before income taxes, minority interest and
cumulative effect of accounting change............... 9.4 10.8 10.0 10.1
Income taxes.............................................. 6.0 6.4 4.7 4.3
----- ----- ----- -----
Earnings before minority interest and cumulative effect
of accounting change................................. 3.4 4.4 5.3 5.8
Minority interest in (earnings) loss of consolidated
subsidiaries............................................ -- 0.2 (0.2) (0.1)
----- ----- ----- -----
Earnings before cumulative effect of accounting
change............................................... 3.4 4.6 5.1 5.7
Cumulative effect of accounting change.................... -- -- (11.9) --
----- ----- ----- -----
Net earnings (loss)..................................... 3.4% 4.6% (6.8)% 5.7%
===== ===== ===== =====
17
20
Three and Nine Month Periods Ended September 30, 1999 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 retail industry. Revenues increased 34.2% to $91.3 million
for the third quarter of 1999, up from $68.0 million in the third quarter of
1998. For the nine months ended September 30, 1999, revenues were $246.1
million, or 51.8% higher than $162.2 million achieved in the corresponding
period of 1998. On a pro-forma basis, assuming the new accounting method (Note
H) had been applied retroactively to the 1998 periods, revenues increased 62.4%
for the three month period and 77.2% for the nine month period.
Domestic revenues were $64.9 million in the third quarter of 1999, up 26.5%
from $51.3 million in the third quarter of 1998. Of this 26.5% increase, 16.0%
was contributed by growth in the Company's traditional retail, wholesale
distribution and governmental agency business, and 10.5% was derived from
companies acquired, primarily those acquired in 1998 in new areas of audit
emphasis (e.g., freight). For the first nine months of 1999 domestic revenues
were $172.8 million, an increase of 60.6% over $107.6 million during the
comparable period of 1998. Of this 60.6% increase, 37.5% was derived from
companies acquired in new areas of audit emphasis. Although the October 1998
acquisition of Robert Beck & Associates contributed substantially to third
quarter and year to date revenue growth in the Company's traditional retail,
wholesale distribution and governmental agency business, it is no longer
practicable to separate the effect of this former block of business since the
clients, personnel and operations of Robert Beck & Associates have been
assimilated into the Company's domestic operations effective January 1, 1999.
The Company considers international operations to be all operations located
outside of the United States. International revenues were $26.4 million in the
third quarter of 1999, up 58.2% from $16.7 million in the third quarter of 1998.
Most of this increase related to the Company's European operations. For the
first nine months of 1999, international revenues were $73.3 million, a 34.4%
increase over $54.6 million during the comparable period of 1998. The Company
continues to believe that the rate of revenue growth for its international
operations will significantly exceed its rate of domestic revenue growth for the
foreseeable future if the revenue impact of acquired businesses is excluded.
There can be no assurance, however, that international growth trends will
continue. See "Forward-looking Statements".
The Company has experienced and expects to continue to experience
significant seasonality in its business. The Company typically realizes higher
revenues and operating income in the last two quarters of its fiscal year. This
trend is expected to continue and reflects the inherent purchasing and
operational cycles of the retailing industry, which continues to be the
principal industry served by the Company. Most of the Company's recent larger
acquisitions, including the October 1997 acquisition of Alma, the August 1998
acquisition of Loder, Drew & Associates, the October 1998 acquisition of Robert
Beck & Associates and the August 1999 acquisition of PRS International, Ltd. are
not expected to significantly affect this trend because these entities, in the
aggregate, have historically experienced similar seasonality in revenue and
operating income. The August 1999 acquisition of Meridian VAT Corporation
Limited adds a line of business with revenue concentrations in the second and
fourth quarters of the year. 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 47.6% of revenues for the third quarter of 1999, down from 52.0% in the
comparable quarter of 1998. For the nine months ended September 30, 1999, cost
of revenues was 52.4%, down from 52.8% in the first nine months of 1998.
Domestically, cost of revenues as a percentage of revenues was 48.6% in the
third quarter of 1999, down from 49.1% during the corresponding quarter of 1998.
For the nine months ended September 30, 1999,
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domestic cost of revenue as a percentage of revenues was 51.4%, down from 53.7%
during the first nine months of 1998. The 1999 reduction related primarily to
the newly-acquired operations of Loder, Drew & Associates and the Company's
freight division which operated at lower cost of revenue percentages than the
Company's traditional retail, wholesale distribution and governmental agency
business.
Internationally, cost of revenues as a percentage of revenues was 45.0% in
the third quarter of 1999, down from 60.8% during the corresponding quarter of
1998. The 1999 improvement results from significantly higher revenues in the
company's Meridian VAT Corporation Limited subsidiary as compared to the same
period in 1998, with no significant increase in cost. For the nine months ended
September 30, 1999, international cost of revenue as a percentage of revenues
was 54.5%, up from 51.2% during the first nine months of 1998. The 1999 increase
relates principally to increased expansion efforts in the Company's traditional
retail, wholesale distribution and governmental agency business, partially
offset by improved margins in the Meridian business.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses include the expenses of sales and marketing activities,
information technology services and the corporate data center, human resources,
legal and accounting, administration, headquarters-related depreciation of
property and equipment and amortization of intangibles. Selling, general and
administrative expenses as a percentage of revenues decreased to 30.2% in the
third quarter of 1999, down from 33.0% in the comparable period of 1998. For the
nine months ended June 30, 1999, selling, general and administrative expenses as
a percentage of revenues was 30.5%, also down from 33.2% in the comparable
period of 1998.
Domestic selling, general and administrative expenses as a percentage of
revenues was 25.7% in the third quarter of 1999, down from 31.8% in the year
earlier period. For the first nine months of 1999, domestic selling, general and
administrative expenses as a percentage of revenues decreased to 28.7%, down
from 33.2% in the corresponding period of 1998. Improvements in 1999 related
primarily to various components of fixed costs being spread over a rapidly
growing revenue base.
Internationally, selling, general and administrative expenses as a
percentage of revenues was 41.4%, up from 35.7% in the 1998 third quarter. For
the nine month periods, this percentage likewise increased to 35.4% in 1999 from
33.4% in 1998. Increases in 1999 related primarily to the Company's expansion of
infrastructure in the United Kingdom, Singapore and Latin America.
In August 1999, the Company acquired Meridian VAT Corporation Limited and
PRS International, Ltd. in transactions accounted for as poolings-of-interests.
Costs incurred to consummate these transactions totaled $10.4 million in the
third quarter of 1999 and $13.4 million during the first nine months of 1999.
These costs are charged to operations in the periods incurred, but are
non-recurring in nature.
In connection with acquired businesses, the Company has recorded intangible
assets including goodwill and deferred non-compete costs. Amortization of these
intangible assets totaled $2.7 million and $1.9 million for the quarters ended
September 30, 1999 and 1998, respectively, and $8.2 million and $3.7 million for
the nine month periods ended September 30, 1999 and 1998, respectively.
Operating Income. Operating income increased 6.8% to $9.9 million in the
third quarter of 1999, up from $9.3 million in the third quarter of 1998. For
the nine months ended September 30, 1999, operating income increased 46.0% to
$28.8 million, up from $19.7 million in the comparable period of 1998. As a
percentage of revenues, operating income decreased to 10.8% in the third quarter
of 1999, down from 13.6% in the second quarter of 1998. For the nine months
ended September 30, 1999, operating income fell to 11.7% of revenues from 12.2%
of revenues in the comparable period of 1998. The most significant factors
impacting operating income as a percentage of revenues were the business
acquisition expenses related to Meridian VAT Corporation Limited and PRS
International, Ltd. Those expenses totaled 11.4% of revenues in the third
quarter of 1999 and 5.4% of revenues in the nine months ended September 30,
1999. Other components of the change have been discussed above.
Interest (Expense) Income, Net. The Company incurred net interest expense
of $1.3 million in the third quarter of 1999, compared to net interest expense
of $1.9 million in the third quarter of 1998. For the nine months ended
September 30, 1999, net interest expense was $4.3 million, compared to $3.3
million during the comparable period of 1998. The decrease in net interest
expense for the quarter related to the conversion of
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$30.4 million in shareholder loans made to Meridian by its former equity
shareholders to additional paid-in capital as a result of the Company's
acquisition of Meridian VAT Corporation Limited on August 19, 1999. This
increase in net interest expense for the nine month periods related to interest
expense incurred on the Company's $200.0 million bank credit facility in
connection with acquired companies.
Earnings Before Income Taxes, Minority Interest and Cumulative Effect of
Accounting Change. Earnings before income taxes rose 17.1% and 49.5% in the
quarter and nine months ended September 30, 1999, respectively, compared to the
comparable periods of 1998. This improvement resulted from increased revenues
and an improved operating margin during the 1999 periods, partially offset by
the non-recurring business acquisition expenses.
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%, except for the impact of certain non-deductible merger
costs. Non-deductible merger costs cause the composite effective tax rate to be
63.7% and 47.3% for the three and nine months ended September 30, 1999, as
compared to 59.3% and 43.1% in the comparable periods of 1998.
Cumulative Effect of Accounting Change. As more fully described in Note H
to this Form 10-Q, the Company has chosen, retroactive to January 1, 1999, to
change its method of accounting for certain aspects of its revenue recognition.
In effecting this change, the Company has reported, as of January 1, 1999, a
non-cash, after-tax charge of $29.2 million as the cumulative effect of a change
in accounting principle.
Weighted-Average Shares Outstanding -- Basic. On July 20, 1999, the
Company declared a 3-for-2 stock split effected in the form of a stock dividend
for shareholders of record on August 2, 1999, payable on August 17, 1999. All
share and per share amounts have been retroactively restated to give effect to
the aforementioned stock split. The Company's weighted-average shares
outstanding for purposes of calculating basic earnings per share increased to
48.0 million during the third quarter of 1999, up 7.4 million shares from 40.6
million during the third quarter of 1998. This increase was comprised primarily
of (i) 2.9 million registered shares issued by the Company in an underwritten
stock offering completed in January 1999 and, (ii) unregistered shares issued by
the Company 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 general
corporate purposes. The Company transferred $5.4 million in outstanding
borrowings to the new credit facility on July 29, 1998. On September 18, 1998,
the Company increased its credit facility from $150.0 million to $200.0 million
and the facility was syndicated between ten banking institutions led by
NationsBank, N.A. as agent for the group. In January 1999, the Company completed
a public offering of its common stock. This offering provided net proceeds to
the Company of $92.8 million, all of which were used to repay credit facility
borrowings. As of September 30, 1999, the Company had outstanding principal
borrowings of $71.5 million under this $200.0 million credit facility.
Net cash provided by operating activities was $407,000 in the first nine
months of 1999 contrasted with net cash used in operating activities of $10.7
million during the corresponding period of 1998. The improvement results from an
increase in the sum of earnings (loss) plus non-cash operating expenses when
compared to the same amounts in the earlier period. During the second and third
quarters of 1999, the Company paid $7.2 million of business acquisition expenses
related to Meridian and PRS, which reduced the amount of cash provided by
operating activities.
Net cash used in investing activities was $58.3 million during the first
nine months of 1999, down from $97.7 million during the corresponding period of
1998. The decrease related primarily to timing of purchase price consideration
paid to the former owners of Loder Drew & Associates, as more fully discussed in
a subsequent paragraph.
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Net cash provided by financing activities was $59.3 million during the
first nine months of 1999, and $96.0 million during the first nine months of
1998. The net cash provided by financing activities during each of the two
periods related primarily to follow-on common stock offerings as discussed in
Note E of Notes to Condensed Consolidated Financial Statements and proceeds from
the Company's $200.0 million credit facility which were used to fund business
acquisitions.
On August 6, 1998, the Company acquired all the assets and assumed certain
liabilities of Loder Drew effective as of July 1, 1998. Loder Drew is an
international recovery auditing firm primarily serving clients in the
manufacturing, financial services and other non-retail sectors. Pursuant to the
acquisition agreements, the initial consideration paid for Loder Drew consisted
of $70.0 million in cash and 1,205,302 restricted, unregistered shares of the
Company's common stock (equivalent to 803,535 pre-split shares). Additionally,
the acquisition agreements provided that the former owners of Loder Drew would
be eligible to receive additional purchase price consideration up to a maximum
of $70.0 million in cash conditioned on the performance of Loder Drew through
December 31, 1999. Of this $70.0 million, $30.0 million was based on the
financial performance of Loder Drew for the six months ended December 31, 1998.
Since the financial performance of Loder Drew for the six months ended December
31, 1998 exceeded applicable thresholds, the entire $30.0 million was recorded
on the Company's December 31, 1998 Consolidated Balance Sheet as additional
goodwill and corresponding accrued business acquisition consideration. The $30.0
million was paid in March 1999 (along with related accrued interest) from
borrowings under the Company's existing $200.0 million credit facility. Of the
above-mentioned $70.0 million, up to $40.0 million in additional purchase price
consideration is payable in the Spring of 2000 based upon the financial
performance of the Loder Drew division during calendar 1999. The Company
currently anticipates that the entire $40.0 million will become recordable as
additional goodwill and corresponding accrued business acquisition consideration
during the last half of the quarter ending December 31, 1999. The Company
further anticipates that it will borrow most of any required payment in the
Spring of 2000 under its existing $200.0 million credit facility.
On June 14, 1999, the Company acquired the net assets of ITMG, a
Georgia-based firm in the business of telecommunications recovery auditing and
negotiating integrated services contracts with its clients' telecom suppliers on
a gain-share basis. The transaction was accounted for as a purchase and involved
initial consideration of $11.0 million in cash and 355,310 unregistered,
restricted shares (equivalent to 236,873 pre-split shares) of the Company's
common stock. The former owners of ITMG are also eligible to receive additional
purchase price consideration through December 31, 2000 of up to $20.0 million in
cash based upon the earnings of ITMG. Of this $20.0 million, $5.0 million is
based on the financial performance of ITMG from the acquisition date through
December 31, 1999, and $15.0 million is based on ITMG's financial performance
for 2000. Additional purchase price consideration, if any, is payable in the
February immediately following the fiscal period to which it relates. The
Company is presently unable to estimate whether any additional purchase price
consideration will ultimately become due and payable since the required
financial performance thresholds significantly exceed ITMG's historical
performance levels. The Company currently anticipates that any portion of the
$20.0 million which ultimately becomes due and payable will be borrowed under
its existing $200.0 million credit facility to the extent that excess cash
derived from the increased financial performance of ITMG is insufficient to
satisfy any required payment.
During the two year period ended December 31, 1998, the Company acquired
thirteen recovery audit firms. During the nine month period ended September 30,
1999, the Company acquired four additional recovery audit firms. The Company is
pursuing, and intends to continue to pursue, the acquisition of domestic and
international businesses including both direct competitors and businesses
providing other types of recovery services. There can be no assurance, however,
that the Company will be successful in consummating further acquisitions due to
factors such as receptivity of potential acquisition candidates and valuation
issues. Additionally, there can be no assurance that future acquisitions, if
consummated, can be successfully assimilated into the Company.
The Company from time to time issues unregistered common stock in partial
or full consideration for the business entities it acquires. The timing and
quantity of any future securities issuances are not susceptible to estimation.
Additionally, if the Company is successful in arranging for future acquisitions
which individually
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or collectively are large relative to the Company's size, it may need to secure
additional debt or equity financing. There are no current plans to seek such
financing.
The Company believes that its current working capital, availability
remaining under its $200.0 million credit facility and cash flow generated from
future operations will be sufficient to meet the Company's working capital and
capital expenditure requirements through June 30, 2000 unless one or more
acquisitions are consummated which require the Company to seek additional debt
or equity financing.
NEW ACCOUNTING STANDARD
Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities" establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities. This
pronouncement is effective for all fiscal quarters of fiscal years beginning
after June 15, 2000 although earlier application is encouraged. The Company has
chosen to adopt this pronouncement effective with its fiscal year which begins
January 1, 2001 and does not believe that it will materially affect its reported
results of operations or financial condition upon adoption.
YEAR 2000 ISSUE
Many existing computer programs use only two digits to identify a year in
the date field. These programs were designed and developed without considering
the impact of the upcoming change in the century. If not corrected, many
computer applications could fail or create erroneous results by or at the Year
2000.
The Company has completed an assessment of its Year 2000 issues, which
included obtaining certification from its systems vendors as well as testing the
systems as deployed. The assessment indicates that exposure is limited by the
fact that the Company has virtually no active information technology systems
that are more than two years old and has no non-information technology systems
that could materially impact the Company's operations.
The Company has a significant dependence on personal computer systems both
for internal accounting and for completion of audit engagements for its clients.
It has completed an inventory of those personal computer systems and expended
approximately $750,000 during 1998 and 1999 to replace older hardware and
software which was possibly not Year 2000 compliant. The Company has adopted and
enforced corporate standards for operating systems and administrative
applications.
The Company made a decision totally independent of any Year 2000 issue to
replace substantially all of its existing financial packages. Replacement of
certain general accounting components was completed in January 1999. Replacement
of the balance of the financial accounting systems is scheduled prior to the end
of 1999. The only significant component of the financial applications yet to be
replaced has been tested and a remediation plan has been implemented to allow
accurate processing in the event that replacement systems are not completed on
schedule. As of September 30, 1999, the Company has estimated that it will incur
additional capital expenditures of approximately $1.0 million through the
remainder of 1999 to complete its financial accounting systems project. Any
portion of this cost which cannot be funded from current operations will be
financed under the Company's existing $200.0 million credit facility.
One of the Company's internally developed financial system components was
determined to not be Year 2000 compliant. The Company has completely rewritten
that component as part of its overall plan to replace the existing financial
systems and is now implementing the revision in its field operations. This
component is reasonably complex, and there is some risk that the rollout will
not be completed on schedule. Failure to complete the rollout by the end of 1999
could result in inability of the Company's systems to accurately determine its
revenues or calculate incentive compensation for its employees. In the unlikely
event that the replacement is not completed in time to handle Year 2000
transactions, the Company would be forced to hire temporary staff to perform the
tasks manually. The potential cost cannot be estimated, but the Company believes
that the impact would be immaterial to its financial position or results of
operations.
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The Company has made and continues to make acquisitions of other companies
in the recovery audit business. It is possible that the Company might acquire a
business with a significant risk from Year 2000 issues. The Company's due
diligence efforts related to acquisitions include an assessment of risk from
Year 2000 issues. The Company's long-range plan includes conversion of the
financial systems of acquired companies to the same packaged software utilized
by the rest of the Company.
The Company's business operations involve working with outputs from its
clients' financial systems. Each of the Company's clients is assessing its own
risks related to Year 2000 issues which may cause them to upgrade or replace
certain of their systems. The Company believes that its investment in advanced
technology is a competitive advantage as clients and potential clients are
implementing new and more sophisticated accounts payable systems. In the case of
clients which experience a temporary inability to process payables due to Year
2000 issues, the Company's risk of lost revenues is mitigated by the fact that
it audits in arrears and would have advance notice of client problems in making
vendor payments.
FORWARD-LOOKING STATEMENTS
Statements made in Management's Discussion and Analysis of Financial
Condition and Results of Operations which look forward in time, including
without limitation, the Company's assessment of its obligation to pay contingent
consideration to the former equity holders of Loder Drew and ITMG and of its
year 2000 compliance risk, involve risks and uncertainties and are
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. Such risks and uncertainties include the
following:
- failure of the Company or its major suppliers or customers to adequately
address year 2000 issues;
- future performance of the Company's Loder Drew and ITMG divisions;
- unanticipated expenditures and potential risks;
- the adequacy of the Company's current working capital and other available
sources of funds;
- the ability of the Company to successfully implement its operating
strategy and acquisition strategy;
- the Company's ability to manage rapid expansion, including, without
limitation, the assimilation of acquired companies;
- changes in economic cycles;
- competition from other companies;
- changes in laws and governmental regulations applicable to the Company;
and
- other risk factors detailed in this Form 10-Q and in the risk factors
section of the Company's Prospectus dated January 8, 1999 contained in
its Registration Statement on Form S-3 (No. 333-67711).
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company has not conducted transactions, established commitments or
entered into relationships requiring disclosures beyond those provided elsewhere
in this Form 10-Q.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
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ITEM 2. CHANGES IN SECURITIES
On August 19, 1999, in connection with the acquisition of Meridian VAT
Corporation Limited ("Meridian"), the Company issued 6,114,375 unregistered
shares of the Company's common stock to the former owners of Meridian. The
shares were issued pursuant to the exemption from registration provided by
Section 4(2) of the Securities Act of 1933, as amended.
On August 31, 1999, in connection with the acquisition of substantially all
the assets of PRS International, Ltd. ("PRS"), the Company issued 1,113,043 ,
unregistered shares of the Company's common stock to the former owners of PRS.
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 Special Meeting of Shareholders held on September 30,
1999, the following proposal was approved:
VOTES VOTES VOTES
FOR AGAINST ABSTAINED
----- ------- ---------
Amendment of the Company's Articles of Incorporation to
increase the authorized number of shares of Common Stock.... 27,925,521 10,238,104 10,305
ITEM 5. OTHER INFORMATION
On July 20, 1999, the Company declared a 3-for-2 stock split effected in
the form of stock dividend for shareholders of record on August 2, 1999, payable
on August 17, 1999.
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).
3.1a -- Articles of Amendment to Articles of Incorporation of the
Registrant.
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 -- Registration Rights Agreement with respect to the Meridian
transaction (incorporated by reference to Exhibit 2.1 to
Registrant's September 2, 1999 report on Form 8-K).
10.2 -- Acquisition Agreement with respect to the Meridian
transaction (incorporated by reference to Exhibit 4.1 to
Registrant's September 2, 1999 report on Form 8-K).
4.1 -- Specimen Common Stock Certificate (incorporated by reference
to Exhibit 4.1 to Registrant's March 16, 1998 registration
statement number 333-46225 of Form S-3).
27.1 -- Financial Data Schedule for nine months ended September 30,
1999 (for SEC use only).
27.2 -- Financial Data Schedule for nine months ended September 30,
1998, as restated for poolings-of-interest and common stock
split (for SEC use only).
(b) Reports on Form 8-K
The registrant filed one report on Form 8-K during the quarter ended
September 30, 1999:
(1) Form 8-K describing the Meridian transaction, as required by Item 2
thereof, was filed on September 2, 1999.
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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 15, 1999 By: /s/ SCOTT L. COLABUONO
--------------------------------------------
Scott L. Colabuono
Executive Vice President
and Chief Financial Officer
(principal financial officer)
Dated: November 15, 1999 By: /s/ MICHAEL R. MELTON
--------------------------------------------
Michael R. Melton
Vice President -- Finance
(principal accounting officer)
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