Filer: Howard Schultz & Associates International, Inc.
Pursuant to Rule 425 under the Securities Act of 1933
and deemed filed pursuant to Rule 14a-12 under the
Securities Exchange Act of 1934
Subject Company: Howard Schultz & Associates International, Inc.
Commission File No. 000-28000
CONFERENCE CALL TRANSCRIPT
INVESTOR NOTICE
The Profit Recovery Group International, Inc. ("PRG") and Howard Schultz &
Associates International, Inc. ("HS&A") will file a joint proxy
statement/prospectus and other relevant documents concerning the proposed
acquisition with the SEC. Investors of PRG and HS&A are urged to read the joint
proxy statement/prospectus when it becomes available and any other relevant
documents filed with the SEC because they will contain important information.
You will be able to obtain the documents free of charge at the website
maintained by the SEC at www.sec.gov. In addition, you may obtain documents
filed with the SEC by PRG free of charge by requesting them in writing from
Leslie Kratcoski at The Profit Recovery Group International, Inc., 2300 Windy
Ridge Parkway, Suite 100 North, Atlanta, GA 30339-8426 or by telephone at
770-779-3099.
PRG and HS&A, and their respective directors and executive officers, and certain
of their employees, may be deemed to be participants in the solicitation of
proxies from the stockholders of PRG and HS&A in connection with the
acquisition. These participants may have interests in the acquisition, including
interests resulting from holding options or shares of PRG and HS&A common stock.
Information about the interests of directors and executive officers of PRG and
HS&A and their ownership of securities of PRG and HS&A will be set forth in the
joint proxy statement/prospectus.
Investors should read the joint proxy statement/prospectus carefully when it
becomes available before making any voting or investment decisions.
Statements made in this transcript which look forward in time 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 possibilities that (i) PRG's announced divestitures may require a
longer time to accomplish than PRG anticipates, and PRG may incur additional
losses if, upon disposal, it does not receive the prices it anticipates for such
businesses and may incur unanticipated further charges as a result of
divestiture initiatives, (ii) the announced intention by PRG to dispose of the
discontinued operations may result in the loss of key personnel and diminished
operating results in such operations, (iii) PRG may not achieve anticipated
expense savings, (iv) PRG's past and future investments in technology and
e-commerce may not benefit its business, (v) PRG's Accounts Payable and French
Taxation Services businesses may not grow as expected, (vi) PRG's international
expansion may prove unprofitable and (vii), PRG may not be able to successfully
complete the acquisition of HS&A or successfully integrate such firm and achieve
the substantial planned post-acquisition synergy cost savings even if the
acquisition is completed. If the acquisition of HS& is not completed, PRG will
incur a substantial charge to operations for cumulative out-of-pocket business
combination costs incurred. Other risks and uncertainties that may affect PRG's
business include (i) its ability to effectively manage during the divestitures,
(ii) the possibility of an adverse judgment in pending securities litigation,
(iii) the impact of certain accounting pronouncements by the Financial
Accounting Standards Board or the United States Securities and Exchange
Commission, (iv) potential timing issues that could delay revenue recognition,
(v) the effect of strikes, (vi) future weakness in the currencies of countries
in which PRG transacts business, (vii) changes in economic cycles, (viii)
competition from other companies, (ix) the effect of bankruptcies of larger
clients, (x) changes in governmental regulations applicable to PRG, and other
risk factors, detailed in PRG's Securities and Exchange Commission filings,
including PRG's Form 10-K filed March 27, 2001. PRG disclaims any obligation or
duty to update or modify these forward-looking statements.
THE PROFIT RECOVERY GROUP INTERNATIONAL, INC.
July 26, 2001
9:00 a.m. CDT
Coordinator Good morning, and thank you for standing by, and welcome to
PRG's second quarter 2001 earnings conference call. All
participants will be able to listen only. This conference is
being recorded at the request of PRG, and I would like to
introduce Mr. Cook, Chairman and CEO of PRG. Sir, you may
begin.
J. Cook Thank you. Good morning, and thank you for joining us for
this very important announcement, which we are making in
conjunction with our second quarter earnings release. I'm
John Cook, the Chief Executive Officer of Profit Recovery
Group. I'll be hosting today's call along with Gene Ellis,
our Chief Financial Officer. I'm also pleased to have Howard
Schultz, Chairman of Howard Schultz & Associates with us
this morning who will also be joining us on the call.
Our prepared remarks this morning will go as follows: I'll
begin with an overview of the transaction we have announced
this morning and provide our vision for the future as a
2
combined organization, as well as cover some of the
financial implications. I'll then turn it over to Howard,
who will make a few remarks, who will be followed by Gene to
briefly summarize PRG's second quarter earnings and outlook
for the remainder of the year. I'll then wrap it up before
moving on to take your questions.
Before we begin, I'm advised by our legal counsel that I
need to read the following statements: Statements made in
the course of this conference call that state the company's
or management's intentions, hopes, beliefs, expectations and
predictions of the future are forward-looking statements.
It's important to note that the company's actual results
could differ materially from those projected in such
forward-looking statements.
Additional information concerning factors that could cause
actual results to differ materially from those in the
forward-looking statements is contained from time to time in
the company's SEC filings, including the risk factors
section of the company's Form 10-K filed March 27, 2001. The
company disclaims any obligation or duty to update or modify
these forward-looking statements.
PRG and HSA will file a joint proxy/statement prospectus,
and other relevant documents concerning the proposed
acquisition with the SEC. Investors of PRG and HSA are urged
3
to read the joint proxy statement/prospectus when it becomes
available and any other relevant documents filed with the
SEC, because they will contain important information. You
will be able to obtain the documents free of charge at the
Website maintained by the SEC at www.sec.gov. In addition,
you may obtain documents filed with the SEC by PRG free of
charge by requesting them in writing from Leslie Kratcoski,
Director - Investor Relations, PRG International, 2300 Windy
Ridge Parkway, Suite 100 North, Atlanta, GA 30339 or by
telephone at 770/779-3900.
PRG and HSA and their respective directors and executive
officers and certain of their employees may be deemed to be
participants in the solicitation of the proxies from the
stockholders at PRG and HSA in connection with the
acquisition. These participants may have interests in the
acquisition, including interests resulting from holding
options or shares of PRG and HSA common stock. Information
about the interest of directors and executive officers of
PRG and HSA and their ownership of securities of PRG and HSA
will be set forth in the joint proxy statement/ prospectus.
Investors should carefully read the joint proxy statement/
prospectus carefully when it becomes available before making
any voting or investment decisions.
4
With those legal matters out of the way, let's get on to the
reason for today's news. This morning, the Profit Recovery
Group International and Howard Schultz & Associates
International announced that their respective Boards of
Directors have unanimously approved a Letter of Intent under
which PRG will acquire the privately held HSA company in an
all-stock transaction. This transaction is expected to close
in the fourth quarter of 2001. Under the terms of the
proposed agreement, based on PRG's closing stock price of
$10.51 on July 25th, PRG will issue approximately 14.6
million shares of PRG common stock and will assume vested,
in-the-money stock options of HSA, which are equivalent to
approximately a half a million additional shares of PRG
common stock for the purpose of calculating fully diluted
earnings per share.
As a result, current shareholders of PRG will own
approximately 77% of the combined entity immediately
following the closing, while HSA and its affiliates will own
approximately 23%. Based on the July 25th closing price of
PRG's common stock of $10.51, the transaction would have an
aggregate value of approximately $158.7 million. PRG will
also assume approximately $32 million to $37 million of HSA
debt. In addition, PRG is expected to incur or assume
approximately $13 million to $14 million in debt to acquire
HSA's UK and German licensees in all cash transactions,
expected to close in the first quarter of 2002.
5
Approximately 2.5 million of the 14.6 million shares to be
issued at the closing of the acquisition of the HSA
companies will be held in escrow and released only upon the
closing of the acquisition of these licensees. The
combination is subject to the finalization of a definitive
agreement, approval of both company's shareholders, approval
from PRG's bank syndicate, including modifications of
certain aspects of PRG's credit agreement and customary
regulatory approvals.
Prior to close, both PRG and HSA will continue to operate as
separate companies. Excluding one-time charges related to
the transaction, which are currently estimated at up to $10
million, we anticipate that the transaction will be modestly
accretive in 2002. This earnings impact estimate could be
positively or negatively affected by new authoritative rules
governing business combination accounting, which went into
effect on July 1st of this year. Detailed implementation
guidance concerning the new rules was not published by the
Financial Accounting Standards Board until late last week.
With our advisors, we are currently assessing this guidance,
which is complex.
We expect to realize net operating synergies in the combined
company of approximately $15 million on an annualized basis,
resulting primarily from the elimination of duplicate
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positions in facilities, consolidation of technology
expenditures and alignment of HSA's cost structure with that
of PRG. Full achievement of synergies is expected to occur
over a 12 to 18-month post-closed transition period.
This transaction is a significant milestone in PRG's
evolution. As the world of technology continues to rapidly
evolve and the volume of business transactions processed
continues to grow, significant investments and resources are
required to service our clients' businesses. Moreover, this
combination mirrors the consolidation and globalization
trends taking place in the industries we serve. By combining
the strengths of our two companies, we intend to build an
organization that will better serve our clients with the
most comprehensive accounts payable services in the
industry.
I'd now like to introduce Howard Schultz, who will provide
some background on HSA and share with you some of his
thoughts. As the CEO and founder of HSA, he has kept me on
my toes and sometimes even kept me up at night. Howard?
H. Schultz Thank you, John. HS&A was founded in 1970 and is based in
Dallas. We're a leading provider of accounts payable
recovery audit services to retailers, distributors,
7
wholesalers and other transaction intensive companies. As
with PRG, HS&A's strategic focus is on accounts payable
recovery auditing and it derives its revenue strictly from a
percentage of the money it recovers for its clients. The
company has recovered more than $6 billion in overpayments
since its inception. HS&A has more than 1,000 associates
serving 1,500 clients in 17 countries on four continents.
HS&A has a strong customer base in the retail industry,
which it has served for more than 30 years.
With 2001 revenues estimated to be approximately $170
million, HS&A and its European licensees make up
approximately 35% of the estimated combined 2001 revenues of
the two companies. Over the past few years, we have been
undergoing a transformation as the marketplaces evolved, our
clients have consolidated, and we've been making significant
investments in technology. As a result, our profitability,
as a private company, currently does not reflect that of
PRG, providing an opportunity with respect to realizing
synergies and enhancing overall profitability as a combined
company.
Over the past decade, both PRG and HS&A have worked hard to
identify new audit opportunities, enhance software
applications systems and recruit talented audit
8
professionals to serve its clients. Over the years, John has
also kept me on my toes and like him, sometimes up at night
as well. The combination of our businesses will enable us to
pool our best practices, consolidate our research and
development efforts and leverage our unique areas of
specialization to better serve existing and new clients. The
new organization will have approximately 3,500 professionals
serving over 3,900 unique clients in 35 countries.
The integration team, which you'll hear more about from John
in a moment, will develop and implement an organizational
structure with the aim of building a best in class
organization with the most talented and experienced
professionals in the industry. I am thoroughly excited about
the prospects this combination brings to our clients, as
well as employees and to the shareholders. John?
J. Cook Thank you, Howard. I want to strongly emphasize that
combining forces with HSA is a natural extension of PRG's
strategy of focusing on our core accounts payable business.
As a fellow pioneer in the recovery audit services industry,
I have always had a great respect for Howard and the
organization he has built over the past three decades. By
combining our strengths, we'll be able to offer more
comprehensive accounts payable recovery audit services and
leverage a vast base of knowledge and expertise to further
extend and innovate our service offerings within the
accounts payable market.
9
We expect to realize significant operating synergies to
drive profitability, all for the benefit of our clients, our
associates and our shareholders. Following a transition
period expected the last from 12 to 18 months, we anticipate
that the combined company can achieve annualized revenue and
earnings growth of approximately 15% and 20%, respectively,
with EBITDA margins of over 20%.
I'd like to say a few words about integration. Prior to this
announcement, PRG has acquired seven accounts payable
recovery audit firms and the integration of those have been
quite successful. We've gained valuable insight on
integrating organizations during the past few years, and
we've realized that this transaction will bring new
challenges and opportunities.
To ensure success, both Howard and myself will drive the
integration of our two companies, and our first step will be
to appoint a broad integration team with experienced
representatives from both our companies, charged with
carrying out the detailed integration plan. We've also
enlisted the continued assistance of Bain & Company, a
well-respected management-consulting firm with expertise in
this area, who have been working with PRG since last year
with our strategic realignment.
10
Upon completion of the transaction, the combined company
will be renamed PRG-Schulz and headquartered in Atlanta.
PRG-Schultz will continue to be traded on the NASDAQ under
the ticker symbol PRGX. I will continue to serve as Chief
Executive Officer and President. Howard will become Chairman
of PRG-Schultz's Board of Directors. In addition to Howard,
three additional seats will be added, raising the total
number of board seats from the current level of nine to 13.
Now I'd like to turn it over briefly to Gene, who will
summarize PRG's second quarter financial results and provide
PRG's outlook on a stand-alone basis for the remainder of
the year. Gene?
G. Ellis Thank you, John. In the interest of time, I'm going to
simply summarize the financial results for the second
quarter of 2001 reported in our press release this morning.
Revenues from continuing operations for the second quarter
2001 totaled $76.8 million. The company reported net
earnings from continuing operations in the second quarter of
2001 of $2.7 million or $0.06 per diluted share, which was
within the range we previously indicated.
11
Second quarter 2001 operating income or EBIT from continuing
operations was $6.3 million or 8.2% of revenues. Earnings
before interest taxes, depreciation and amortization, also
known as EBITDA, was $11.9 million or 15.5% of revenues in
the second quarter of 2001. For a summary of segment
operating results in tabular form, please refer to Schedule
3 of the earnings press release.
Accounts payable revenues for the second quarter of 2001
were $67.1 million, an increase of 3.1% over the same period
a year ago. Accounts payable revenue for the second quarter
was composed of approximately 50% from US retail, 28% from
US commercial and 22% from international. For the same
period a year ago, the contribution to accounts payable
segment revenues from US retail, US commercial and
international were approximately 50%, 27% and 23%
respectively. Operating income or EBIT for the second
quarter of 2001 was $15.6 million or 23.3% of revenues and
EBITDA was $19.1 million or 28.4% of revenues.
Revenues in French taxation services for the second quarter
of 2001 were $9.7 million, compared to $11.6 million for the
same period a year ago. Operating loss for the second
quarter of 2001 was one-half million dollars or 5.1% of
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revenues. EBITDA was a half million dollars or 5.1% of
revenues for the second quarter of 2001. While no final
determinations have yet been made, the company continues to
explore its strategic alternatives with respect to its
French taxation operations.
Segment operating income as reported above does not include
corporate overhead. For the second quarter of 2001,
corporate overhead represented 11.5% of total revenues from
continuing operations, compared to 8.6% in the second
quarter of 2000. The company generated a loss from
discontinued operations in the second quarter of 2001 of
$3.8 million, which has been deferred as required under
generally accepted accounting principles, since it is
expected to be recovered upon ultimate sales of these
businesses.
I would point out that approximately one-half of this loss
relates to sales activities and employee retention bonuses.
This compares to approximately break-even results for the
discontinued operations during the second quarter of 2000,
which did not have similar sales related activities or
costs.
The company and its investment bankers have made substantial
progress in their efforts to sell the discontinued
operations.
13
Net cash from operating activities for the three months
ended June 30, 2001 was approximately $8.1 million, compared
to $2.6 million in 2000, and DSO's from continuing
operations as of June 30, 2001 stood at 78 days, compared to
79 days a year earlier.
I would now like to share with you our outlook for the
remainder of 2001. Please note that our outlook excludes any
impact from our planned acquisition of Howard Schultz &
Associates. Revenues from continuing operations for the
second half of 2001 are expected to grow approximately 14%
over the prior year with accounts payable revenues growing
approximately 18% and French taxation services revenues
declining approximately 4%.
Earnings per diluted share from continuing operations for
the second half of 2001 are expected to total within the
range of $0.41 to $0.42. As such, we expect to achieve the
lower end of the $0.45 to $0.50 range previously provided
for earnings per diluted share for the full year of 2001,
excluding non-recurring charges, which we incurred in the
first quarter.
For the third quarter of 2001, revenues from continuing
operations are expected to grow approximately 7% over the
prior year with accounts payable revenues growing
14
approximately 12% over the prior year. French taxation
services revenues are expected to decrease in the third
quarter by approximately 21% as compared to the prior year.
This is due in large part to both currency impact, as well
as the mismatch of revenues between the third and the fourth
quarter as compared to last year. Earnings per diluted share
from continuing operations for the third quarter are
expected to be in the range of $0.14 to $0.16 per share.
Now I'd like to turn it back over to John to conclude our
prepared remarks. John?
J. Cook Thank you. Regarding our outlook for the remainder of the
year as Gene said, we expect our accounts payable business
to grow approximately 18%. Let me comment on our core
business for few minutes.
Our US retail accounts payable business is expected to
perform very well in the neighborhood of 25% growth over
last year, due in large part to the signing of some major
new clients, but also from growth in our existing client
base. With respect to US commercial, we continued to be
cautious in our estimates, but see healthy leading
indicators. For example, our unbilled validations increased
by $5 million over the last quarter and our audit starts for
the first half of the year were up 12% over last year. We
are forecasting our commercial business to grow
approximately 10% in the second half.
15
Finally, second half year-over-year growth in our
international accounts payable business is expected to be
approximately 8%, impacted by significant currency weakness
and the loss of some major clients in Europe. At a constant
US dollar growth in the second half would probably be double
what we have forecasted.
We continued to be very excited about the growth prospects
in the international markets. Notably if you look at the
global 200 retailers outside the US, neither PRG nor HSA
does business with over 80% of them. This is an enormous
untapped market, which I believe will be a strong driver of
growth in the years to come.
Before I turn it over to the conference operator for
questions, I'd like to thank our employees, associates,
clients and shareholders for the support you've given and
will continue to give as we move forward. As you can
imagine, with an event of this magnitude, there is a lot of
work ahead of us. Let me assure you that Howard and I are
committed to ensuring a smooth transition and paving the way
for our new organization to deliver outstanding service to
our clients leading to outstanding financial results and
further building shareholder value.
16
This combination makes perfect sense. It is consistent with
our strategy to focus on our core accounts payable recovery
audit services. It mirrors the trend of consolidation and
globalization in the industries we serve. Our strategic
initiatives are as applicable to HSA as they are to PRG. We
have complementary strengths in the accounts payable arena
and our two businesses mirror each other in such a way as to
allow significant operating synergies. This combination
truly paves the way for a world-class provider to offer
unmatched services in the industry now and in the future.
With that, we'd like to open the call to answer your
questions. Operator?
Coordinator Thank you, sir. At this time, we are ready to begin the
question and answer session. You will be announced prior to
asking your question. Our first question comes from Alex
Paris from Barrington Research. Sir, you may ask your
question.
A. Paris Good morning, gentlemen.
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J. Cook Hello, Alex.
A. Paris Congratulations. A big event today, an event a long time in
coming, I think.
J. Cook Yes. Howard and I've known each other for quite a while.
A. Paris Yes. It strikes me as a knee bone connected to the leg bone
sort of acquisition.
J. Cook Thank you.
A. Paris But with regard to the acquisition and the financials that
come along with it, I just want to talk a bit about the
guidance that you gave, if you can call it guidance I guess
at this point. You said that it's your expectation if you
close this thing at the end of the fourth quarter, that it
would be modestly accretive to 2000 earnings based on your
review of the current FASB rule changes. What assumptions
have you made?
You said that upon further study, it could increase or
decrease that guidance. I would imagine an acquisition like
this is going to include a lot of intangibles, a lot of
goodwill. I guess, it's how it turns out that you categorize
these things. But because you will no longer have to
amortize goodwill, maybe just go through the assumptions
that you've made there in giving that one line sort of
guidance.
18
G. Ellis Yes. Okay. Alex, this is Gene. The new pronouncement--its
that a lot of people [____]. First of all, the
pronouncements in final form just came out last Friday.
There's two of them and collectively, there are 250 pages in
length full of--chalked full of information that really we
haven't had time to totally access. There has been a lot of
focus that investors and the press had had about goodwill
not being amortized anymore. The tradeoff in the
pronouncement, and one part that people haven't focused on
is that you are required to allocate a portion of the
purchase price to identifiable intangibles other than
goodwill if you have them. Those identifiable intangibles,
for which there's a laundry list in the pronouncement, have
relatively short lives.
In our case, we've determined that about 10% of our [seller
to] purchase price will be identifiable intangibles, and
then we'll have to write those off over about 10 to 15
years. That is the best information we had, just based on
our reading of preliminary versions of the pronouncements.
In discussions with Arthur Anderson's valuation group who
we've hired to help us with this allocation, but as a place
holder right now, we've assumed about 10% to 15% of the
transaction is identifiable intangibles, that those have a
life of 10 or 15 years. That the rest is goodwill and would
19
not be amortized. The language in the press release just
says, in essence, if there's more or less that falls into
the identifiable intangible's bucket, it would affect the
outcome a little bit.
A. Paris Okay. So based on the fact that 80%-85% of this transaction
is goodwill, that does not need to be amortized unless
impaired at some future date, you expect it to be modestly
accretive to diluted earnings per share?
G. Ellis Correct.
A. Paris Okay. There was an implication on the call about the
profitability of Howard Schultz. Based on that $170 million
forecast for revenue, what is the kind of corresponding
expectation for EBITDA or EBIT? Are you willing to share
that at this point?
J. Cook Well, I think, again, clearly Howard has run this as a
private company, but excluding legal and accounting and a
lot things that this year had been involved in the merger
itself, a number of somewhere probably around 3%, Howard?
H. Schultz I would say the 3% to 4% range would be right.
20
A. Paris For what, EBIT?
H. Schultz For net.
A. Paris For net. Okay.
H. Schultz That's pre-tax.
A. Paris Okay. Pre-tax.
H. Schultz Right. In the $5 million to $6 million range.
A. Paris All right. Okay and because you have been spending heavily
on infrastructure and that sort of thing, the combined
companies have the very likely possibility that they can
increase the profitability of that operation on a standalone
basis?
J. Cook With the combination, we've identified about $15 million in
hard synergies that we're comfortable we can benefit from.
Again, because the companies are just mirrors of each other,
we don't need to be having duplicate spending on technology
and items like that.
21
A. Paris Okay. Fine, and then I'll leave it at that for now.
One other question and it's a broad question, how about a
little bit more detail on the status of the divestitures of
the non-core operations?
J. Cook They're going quite well. Again, because were at a stage
where we're actually negotiating with people, I think we'd
rather not get into any detailed comments on it on the
conference call. I think we're quite hopeful that we can be
making announcements about significant progress in this over
the reasonably near term.
G. Ellis Alex, where we are, we put out a sales memorandum on every
one of them. We've long since identified buyers. The
potential buyers have had meetings with our management.
We're well down the road in discussions on most of them, but
point being is that we're in advanced stages on most of
them. But where we're a little bit resistant and if we get
into a lot of discussion about individuals ones, that may
prejudice the amount we can sell them for.
A. Paris A knee jerk reaction on the part of some investors looking
at the announcement today is are they biting off more than
they can chew? They are in the process of selling the
non-core operations that largely makes up the three non-core
22
divisions, I would assume by making this announcement today
that you must feel pretty confident on the divestiture and
the timing of the divestitures and the proceeds of the
divestitures in order to make a big move like this.
J. Cook We do, and as we said, we expect this to close sometime in
Q4. It is certainly our expectation at this point, that we
will have sold or be close to selling the discontinueds in
that same time frame.
A. Paris Okay. Very good. Thank you for those comments. Very
exciting. I'll get out of the queue.
J. Cook Thank you....
Coordinator Mr. Thatcher Thompson from Merrill Lynch, you may ask your
question.
T. Thompson Good morning, guys. Congratulations.
J. Cook Hello, Thatcher.
J. Cook Good morning.
23
T. Thompson Howard, I look forward to finally meeting you.
H. Schultz And me, too.
T. Thompson You've competed with PRG now for a decade and they've grown
very rapidly. I just want to hear from your perspective what
it is you think PRG does real well that can help you service
your clients and visa versa, where Howard Schultz &
Associates has particular strength and that PRG lacks.
H. Schultz Well, I think we're complementary. We're not identical, of
course. We've been on separate tracks. We started 30 years
ago. PRG came along after us, but a very formidable
competitor and we meet them in the marketplace head on. We
think that as a public company, they've had some particular
advantages here and having resources, particularly financial
resources available to them that a private company doesn't
have. As technology is coming into the fore, it has become
hard--much harder for a private company to compete in this
environment. Add to that the consolidation of a lot of
clients and the change in the market place, and you have a
picture that just makes perfect sense for us to come
together and bring our complementary but very similar
operations together, and this is what has prompted me to
24
contact John and say, I think it's time for us to move
together. Add to that the opportunities in the global market
place, and we're very excited about what that portends for
the combined company.
T. Thompson And John, could you state again, you mentioned something
about the global 200 retailers and what percentage the
combined entity serves right now.
J. Cook Right. We only serve 20ish percent of them.
T. Thompson And was the global 200 retailing, is that...?
J. Cook It's those outside the US.
T. Thompson Okay. The one notable weakness was group Alma, can you give
us a little description on what's going on there?
J. Cook Yes, and I think, as we've said, it clearly contributed to
the revenue weakness for the quarter. We did about $11.6
million last year and a little under $10 million and then
$9.7 this year. Two factors--one, there was some weakness in
their revenue generation for the quarter, but a very, very
significant currency issue. The euro this year in this
quarter..., was running $0.84, $0.85 versus $0.95 or so last
year. So those results are very heavily influenced by that
25
currency now. Again, fortunately, when the revenues get
depreciated, so do all the expenses associated with it. So
it's not quite as challenging on the earnings line as it
would appear at first with missing revenues by that amount.
So you're challenged to overcome the differential and the
currency valuation of the earnings themselves, but, and I
think that our outlook for the rest of the year, this
continues to be guarded and we don't see, although maybe for
the last day or two it's been up, but their past history has
been not to really count on any real strength in the euro
for sometime to come, and so we have not forecasted any
improvements for the back half of the year.
T. Thompson Okay, and Gene, you guys have about $3 million per quarter
in goodwill amortization, is that right?
G. Ellis Correct.
T. Thompson And how much of that relates to the French tax business?
G. Ellis Sorry, I haven't parsed that. Let me see if someone else has
it here, but I haven't parsed it in that fashion.
26
T. Thompson All right. I can get it after the call.
G. Ellis Okay.
T. Thompson Looks exciting, guys. Congratulations.
J. Cook Thank you.
G. Ellis Thank you a lot.
H. Schultz Thank you.
Coordinator Mr. Bill Baker from Garp Research. You may ask your
question.
B. Baker Okay. Just a couple of questions. One, it's kind of
interesting looking at your number of clients and number of
associates' data that you provided us, and it looks like
just looking at the ratios of those that PRG was a lot
more--had a lot more people per client. Is that just because
Schultz does smaller sized customers or something? Maybe and
then if you could talk about that, I'm just curious, you
talk about having EBIT DA margins over 20% for the combined
entity. I'm wondering if you still really need the same
number of people and whether you--how you hit those numbers
without changing the headcount?
27
J. Cook Right.
B. Baker Secondly, if you could just tell us a little bit about what
the revenues of Schultz were last year, and the year before
and how the profitability behaved over that time period.
J. Cook I think it's several questions there. I'll attempt to ask
answer some and let Howard answer some of the others.
I think in terms of our different employee populations,
clearly we have taken some different approaches and some
different methodologies to these audits. It's not a question
of smaller or larger audits. We both have some very, very
large clients. PRG's methodology has always included a heavy
use of clerical help, and we've got a lot of audit
assistants in addition to our auditors. I think that
probably more than anything is accounting for that apparent
difference. I don't think that there is a dramatic
difference in the actual--claims per auditor themselves,
that is much probably much more heavily driven by the use of
clericals, but Howard, would you have any ....?
28
H. Schultz No. I would say that's correct. I would say--I wouldn't put
too much emphasis on the count, because we tend to count a
little bit differently. We might have somebody who would
engage some clericals to help them, but yet when it comes to
the number of auditors that are actually functioning, I
think we're very comparable in terms of that we don't--we're
working big clients and small clients and so, of course, is
PRG. So I don't think that is anything necessarily to focus
on. It's pretty difficult to keep track of all the counts
from all over the world when they tally perhaps a little bit
differently.
In terms of the volume, in the year 2000, our volume was in
the range of $160 million, and this year we project about
$170 million, a modest increase. So I hope we've answered
your question there.
B. Baker And profitability, has it always been a 3% to 4% sort of
level?
H. Schultz Well, it's kind of different. It's a private company. You
don't keep track of things in the same kind of way. We
certainly don't focus on numbers quarterly. We just tend to
look at them on an annual basis, although monthly for
operating purposes, but I would say that early on we, of
29
course, we were much more profitable until we had to make
some significant investments in technology, and that tended
to drive our costs up. So we're not as profitable in this
day and age as we were ten years ago, for example. This is
part of the reason why we're together today.
B. Baker And what are the main line items then that create your 3% to
4% margins being so much lower than PRGX?
J. Cook I think without wanting to go into a great deal of detail on
that, I think our real focus from the beginning has not been
so much what those historical earnings have been, but what
we have in absolute certainty we can do as a combined
company. And again of the $15 million in synergies we expect
to generate, about a third of that will come from savings in
the IT area, and about a third of it will come from just
duplicate corporate functions and a third from everything
else.
B. Baker Okay, and there'll be a lot more specificity in MD&A when we
get to proxy up. All right. Okay. Thank you.
Coordinator Mike Neery from Neery Asset Management. You may ask your
question.
M. Neery Hello. Just a quick question--cap ex in the quarter, what
was it--what do you expect it to be for the year?
30
G. Ellis It's about $2 million for the quarter, and about $10 million
for the year.
M. Neery Neery Okay, and the $15 million in synergies then, I just
want to make sure I kind of got the gist of what you were
saying, about a third of that is the overhead and about a
third is in kind of employee level efficiencies, or?
J. Cook I said about a third of it is in technology. Again, we
really are mirrors of each other organizationally and so,
there is a heavy amount of technology that's required to do
this work, but we don't need to replicate that. We can have
one set of systems. Granted, we'll want to make sure we're
capturing the best of both in those, but it would still go
down to one of everything where there's currently two of
everything. We currently have a number of data processing
centers. We'll be able to make consolidations on those.
So again, about a third of the hard synergies are going to
be IT related. Another third we said are just pure
duplications of corporate type costs and then things like
duplicate leases. We both operate in virtually every major
city in the US and internationally, we have some huge
duplications of facilities and various costs of one kind or
another, and we have done a good job of identifying what
those synergies are and fully expect we can realize them.
31
M. Neery Okay. So I think the guy earlier who asked about the
efficiency per employee was trying to get to the point of
are they the exact same business and you're just eliminating
duplicate overhead? Or is one business less profitable
because you have to have more people per account because
they're a smaller account?
J. Cook No. Clearly there is no real difference in our customer mix.
We both have very significant size clients. We both have
some smaller clients, but it really is not that, and I think
as Howard indicated. In his operation, where we would use
employees pretty well across the board, he might have a
situation where the auditors themselves have used outside
contracting labor and would not be included in his number,
where for us those would be employees and included in our
number. So I really would not put any particular emphasis on
the difference in employee count.
M. Neery Okay. Thank you again.
J. Cook Right.
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Coordinator Adam Holt from JP Morgan Headquarters. You may ask your
question.
A. Holt JP Morgan H&Q,...headquarters. Good morning,
and...congratulations.
J. Cook Thank you, Adam.
A. Holt I've always historically thought of PRG and Schultz as the
two by far leading providers of accounts payable recovery
services. How are you all thinking about market share on a
going forward basis and along that line, are you going to
use that sort of 20% of the top 200 accounts in the world
type of analysis to get through HSR?
J. Cook Well, I think that there are several things with the whole
issue of HSR. One, we are quite confident that we really are
reacting to the trends that are going on both in the
industries we serve, but also to a very changing
marketplace. There are an awful lot clients that we don't
have in the US, and an enormous amount of them
international. There are a lot of other companies that do
what we do. There are a lot of emerging players in this
area--certainly PricewaterhouseCoopers, Ernst & Young. We
see what we're doing as something that is really necessary
for us to continue to provide the sort of service that we've
provided to our clients over the years.
33
A. Holt And so would it be possible to talk about the market share
in the core domestic retail business of the combined entity?
J. Cook Well, I think that there are several things on that. One, I
know there are certainly still dozens of accounts in the top
100 retailers in the US that neither Howard or we serve.
In addition to that in the middle market, everyone from 500
million on up, that middle market group, neither of us have
served well in the past. But also I think we're overlooking
the--domestically the importance of the commercial area
also, which of the Fortune 1000, we only have about a third
of them that we're doing business with. So that means
there's two-thirds of them that is still an opportunity for
us. So there is an awful lot of room for growth for new
clients, and there's also--we haven't reflected any of this
in our synergies, but we clearly approach things from a
different perspective, and we clearly are each successful.
Proof of that is we really have a number of times where we
come behind each other and invariably we both find
something, which is sort of saying that we apply our
different techniques and that gets you to a different
answer. I think as we really engage in a best practice
review, in coming up with the best of both of our
34
technologies, we believe we will see a solid expansion of
our revenues from our existing clients. So when you add all
of that together, we think that there's just enormous growth
opportunity for PRG-Schultz to continue to do well for years
to come.
A. Holt You actually touched on two things I want to follow up on.
The first is what is going to happen in situations of client
overlap where one firm might be the primary auditor? And
number two, you mentioned the commercial business. I know
that HS&A has historically been very strong in retail, but
to what extent have they begun to penetrate the commercial
marketplace?
J. Cook Howard, I'll let you.
H. Schultz Well, we just actually started that within the last several
years as a reaction to the marketplace. So we are novices at
that, but we think there's tremendous growth potential
there. Our early experience is a very good one, and we're
very encouraged by it. We think that this is going to be a
good add on to the total picture.
A. Holt And then in the situation where you've got I guess an
overlap with a client?
35
J. Cook I think I would rather not get into any sort of detailed
discussion of clients themselves. We historically don't, but
we believe that working with each of those clients
one-on-one, that we could come up with a solution that works
well for both them and us. I will say that an overall trend
throughout the industries we serve, is a desire to do these
audits more rapidly and get the audit results in more
quickly, and this combination will, have it be closer to the
actual payment event. I think that our combination will
actually give us a lot more flexibility in meeting that need
of our clients.
A. Holt Just two final questions. You suggested that the deal should
close in the fourth quarter. Did you say at the beginning of
the fourth quarter?
J. Cook I don't know if we can be that precise. At sometime in the
fourth quarter, but if you just go through the process,
you're probably talking at least 90 days from now. By the
time you get through the proxy and all the different
processes and shareholder approval, just somewhere in the 90
days, plus or minus a little bit area.
A. Holt And then my other question is sort of a derivative question
from that, which is, Gene, as you look into the back half
for the core PRG business, HS&A obviously excluded, you
reiterated or affirmed guidance $0.45 to $0.50 on the
36
earnings side and $0.14 to $0.16 for Q3, which implies a
pretty significant increase Q3 to Q4 in legacy PRG business.
Obviously that's a seasonably strong period for you, but how
are you getting comfortable with that kind of sequential
increase Q3 to Q4?
G. Ellis There are about five of our six new clients that we have
picked up that we either did not have last year or we were
providing a lesser level of service to last year. These are
very large clients with multi-million dollar a piece type of
revenue potential that are coming on stream that will
produce that type of revenue. So it isn't an aspiration,
there's actually specific clients that will make that up.
A. Holt The other is that there is a significant differential in
revenues in Alma between Q3 and Q4.
G. Ellis Right.
A. Holt And that's fairly pronounced?
G. Ellis Yes. Alma, basically has a natural conclusion to their year
because there's certain things that the tax authorities are
incented to get through and sort of clean the slate going
into a new year. So Alma gets assistance from the government
in the Q4 that they don't any other time of year, because
37
the officers they deal with are trying to sort of clean
their caseloads going into the next years. So there's a lot
of resolution on Alma that takes place. So Q4 has
historically been one of their strongest quarters.
So that is part of it, but the biggest single driver is a
half dozen or so very large clients where we pick them up.
We are commencing the work and we will be entering the sweet
spots of revenue achievement on those. A. Holt Great. Thank
you for your help.
J. Cook Thank you.
Coordinator Ray Reed from Kalmar Investments. You may ask your question.
R. Reed Good morning.
J. Cook Good morning.
R. Reed I have a question on the timing of the deal and a question
just on some terms. In terms of timing, while it certainly
makes great strategic sense for these companies to be
combining, I wonder, I do still wonder about the timing,
given all of the other things that you're working on in
38
terms of restructuring the core business and selling the
discontinued operations. Did Howard Schultz go through some
kind of process once in deciding to sell the company, and
was this a competitive situation where PRG felt that it had
to respond now, rather than wait six or nine months? Maybe
you could elaborate on that a little bit?
H. Schultz Well, let me say really the delay is really on our shoulders
here. As a private company, we really weren't even under the
rules of GAAP. And in order to even meet the test, we had to
go to an accrual system, hire outside accountants, and this
took us many more months than we anticipated. We had been
talking for the whole year actually, John and I, and yet
it's taken us to this time to get to the point that we now
can bring our audited statements and look at numbers
quarterly, which is unlike what we did before. So we have
been the cause of the delay here to PRG. It's nothing to do
with the interest in the transaction, it was the mechanics
of just getting the job done.
J. Cook I also think that in just sort of answering your question
about the discontinueds, clearly we believe that those will
be sold in the very short term. As far as our efforts in
terms of restructuring and refocusing on our core AP
business, this is actually a very helpful development to
that. It clearly strengthens us competitively. It clearly
adds to the experienced auditors that we have to work with.
We're picking up some additional strong management.
39
Again, the best practices of both companies will allow us to
we think benefit all of our clients and benefit our combined
company's revenues. So it is not a distraction from what we
have said since the first of the year we want to do, which
is to focus on our core accounts payable business.
R. Reed Okay. In terms of the letter of intent, have you negotiated
any price collars with respect to your stock price on the
deal, number one. Number two, I wonder if you could tell us
what kind of lockups the deal anticipates on the Howard
Schultz principles that will be receiving PRG stock and what
kind of registration rights they have?
J. Cook Let me say first, we're well, well, well along the path of
finalizing the definitive agreement. There are no collars.
At this point, we have reached a final number on that. We
expect the definitive agreement to be signed very quickly,
and other than that I'd probably say, Gene, do you have any
things to add to that? I'm not really prepared to go into
the details of that.
G. Ellis Yes. I think there are some understandings in that regard
that will be reflected in the proxy statement that given the
complexity, it's probably inappropriate to go into them
here, because we wouldn't be able to do justice to it, but
your concern has indeed been entertained.
40
R. Reed Right.
G. Ellis The only thing I would say, there are no outstanding
business issues. This really is just finalization of a lot
of schedules and a lot of attachments and a lot of
different--some of the final reviews of all the documents.
R. Reed When do you anticipate the proxy will be filed?
G. Ellis It's really more of a function of when we can get
through--get Arthur Anderson through doing evaluations, so
we can do a pro forma purchase price allocation for the pro
forma financials in the proxy, and we would hope to get the
thing filed preliminary in sometime in August. But exactly
when in August, would be a function of how long it takes us
to get through this pronouncement, and as you know you have
to put our financials, their financials and then put pro
forma adjustments in there to superimpose the purchase price
allocation, which relate--which then you've got to go to the
new accounting pronouncements. So I--wish--I could be more
definitive, but there's about 250 pages of documents we have
to go through and apply.
41
R. Reed Okay. Thank you.
Coordinator Samir Sikka From TCW. You may ask your question.
S. Sikka John, congratulations. You'll finally be getting it done.
J. Cook Thank you.
S. Sikka The question for you, for Howard actually, if you take your
$170 million in revenue that you have estimated for this
year, if you can provide a breakdown of how much of that is
within the retail, how much of that is the groceries and
non-groceries. Then also provide a commercial breakdown, and
then also provide what are you doing at this point in
international business?
H. Schultz Okay. Well, let me say that I'd rather not get into too many
specifics on that. We're pretty much into the picture where
I would say roughly half of our business is in grocery and
related products. In terms of the breakdown here, commercial
is relatively new and as I mentioned here just a while ago,
international represents about 25% to 30% of our total
business. So that's where clearly where the growth lies in
the future.
42
S. Sikka Is international all grocery?
H. Schultz International is a mix of all. It's retail, groceries, but
mostly retail. Distribution industry would be the better
categorization of it.
S. Sikka Okay. Thank you.
Coordinator Will Stakeoff from Farralon Capital. You may ask your
question.
B. Duhamel Hello,.... It's Bill Duhamel.
J. Cook Hello, Bill.
B. Duhamel Hello, guys. A couple of questions. First of all, can you
quantify the amount of overlap revenue where either Howard
Schultz or we are doing a secondary to the other one and
just to get a sense for how big that is?
J. Cook I don't think I do want to get into that level of detail at
this point. One of the things is that we as competitors have
to be very sensitive about is any exchanging absolute client
specific data. And again, we've used our outside consultants
to effectively run like a clean room, so that we could get
some overall perspective. But again, I don't think it's
particularly helpful for us to get into a discussion of
anything that is client specific.
43
B. Duhamel Secondly, my understanding of Mr. Schultz's organization,
that it was somewhat of a franchise organization, because
there are a lot of people that worked as independent--worked
somewhat independently and paid a certain amount up to the
organization. I'm just curious organizationally, if that's
an accurate characterization of at least part of the Schultz
organization?
M Yes.
B. Duhamel If so, how, organizationally, are you going to integrate
that into the PRGX organization?
H. Schultz Well, as I mentioned, we went through a transformation and,
yes, we were franchise-like about five, six years ago, but
we made the determination that we needed to change to serve
our clients better to react to the marketplace. So we moved
from a franchise-like operation to a company owned one.
We've been that now for several years.
As a matter of fact, that's the reason that we refer to the
UK and Germany the way we did, because they are coming on
stream January 1 and would have been, regardless of this
transaction. So we've been moving in this direction for
several years. This is just a logical extension of it and it
just positions us now to be like the mirror image of PRG in
a sense.
44
B. Duhamel Okay. So in other words, at least in the US, there are no
franchise operations?
H. Schultz Right. There are no franchise operations in the US, correct.
B. Duhamel Okay. Thank you very much.
Coordinator Godfrey Gill from Kingdon Capital. You may ask your
question.
G. Gill Very quickly, congratulations on the quarters. A couple of
quick housekeeping points, as well as another just kind of
strategic question. One, could you just refresh the number
on free cash flow for the quarter on a year-over-year versus
last year, this year versus last year, as well as the EBIT
assumptions and EBIT DA assumptions and your numbers going
forward for the remainder of the year, and then I have a
follow up?
J. Cook Yes. We had as we indicated, we had cash flow from
operations for the first--for the last quarter of $8
million, and for the year, we're looking at EBIT DA of
around 21%. That goal really has never changed.
45
The other question that you didn't ask is hopefully, we're
on the line of March, to actually have stronger operating
cash flow this year than we did last year when we produced,
I think it was about $33 million.
G. Gill Okay.
J. Cook So the cash flow is on a much stronger line of march than it
was this time last year.
G. Gill Additionally, I guess, my understanding, and this could be
incorrect so I'd like to just get some clarification that
Howard Schultz's organization was a little bit more price
competitive in the market. Can you speak to the truth or I
guess lack of truth to that comment, and it'd probably be
difficult to speak to pricing assumptions going forward, but
to the extent that you can? I'd love to hear it.
J. Cook Well, I would tell that overall, we believe that our two
companies are basically mirrors of each other. There are not
sharp differences one way or another, but again, I certainly
wouldn't want to get into any type of client related or
client specific information, but I would say overall, we're
pretty well mirrors of each other.
46
G. Gill So they have not been more price competitive in the market
previously?
J. Cook No.
H. Schultz That's correct.
G. Gill Okay. Thank you.
Coordinator Albert Long, Private Investor, you may ask your question.
A. Long I have a question, I guess, addressed both to Mr. Schultz
and Mr. Cook, if I could and it relates to what the fellow
previously from Barrett & Associates and JP Morgan said. The
first one then was about biting off more than one could
chew. I was a little concerned about that, but you seem to
be comfortable with the divestiture of these businesses
there. So I accept that, and it sounds good. From JP Morgan,
they said that you all told them that you had about 20% of
the market share of the business here domestically?
J. Cook No. No. Let me clarify that. What we said was that of the
top 100 retailers in the US, there were dozens of them we
don't have. I said that in the middle market, retailers
neither of us serve the vast bulk of those. It was on the
international area that I said we have less than 20% of the
47
international folks. Again, of the top 200 of the
international ones, there's--of the top 200 about 123 of
them are international and again, neither of us serve about
87% of those.
A. Long Yes. Okay. Well, I guess my follow up question to both of
those types of things is as a private investor, I've been
picking up the larger companies off season, large auditing
firms like H&R Block coming in and finding out they could
pick up extra business here. I was just wondering what you
all were doing to think ahead to gain more market share and
whatever, and I don't know how wide internationally H&R
Block is. I know they're pretty strong here in this country.
J. Cook To the best of my knowledge, H&R Block does absolutely
nothing in our space. I have never heard of a single client
domestically or internationally that they have, but I would
go back to the international area and say it really is a
wonderful, wonderful growth opportunity for our new combined
companies.
With the combination, we double our audit forces. We're able
to eliminate some duplicate infrastructure in facilities.
We're able to invest more heavily in the technologies to
serve those clients. Again, there are some enormous
international players, and we believe that the combination
that we've announced today really positions us very, very
well for capitalizing on those growth opportunities
internationally.
48
A. Long Okay. Well, that sounds good to hear you put it that way. I
thank you.
J. Cook Thank you.
Coordinator This concludes our question and answer session for today.
J. Cook Just in closing, I'd like to say that if that's all the
questions, I'd like to reiterate that we think that we
really are having a momentous occasion in what we're
announcing today, and that the steps we're taking truly
represent building upon the strategy that PRG announced back
in January of focusing on our core competency, accounts
payable. I'm convinced that this combination brings us even
closer to maximizing the near and long-term operating
results in order to realize enhanced shareholder value.
Gene Ellis, Leslie Kratcoski and myself will all be
available after this call to answer any of your additional
questions. Thank you very much.
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