Filer: The Profit Recovery Group 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
NEWS RELEASE
FOR IMMEDIATE RELEASE
THE PROFIT RECOVERY GROUP INTERNATIONAL REPORTS
THIRD-QUARTER FINANCIAL RESULTS
Company Reports Earnings per Diluted Share from Continuing Operations
of $0.04, in Line with Preliminary Results; Sale of Logistics Division
ATLANTA, OCTOBER 31, 2001 - The Profit Recovery Group International, Inc.
(Nasdaq: PRGX) today announced financial results for the third quarter and first
nine months of 2001, which were in line with preliminary results released on
October 8, 2001. The Company also announced that it has closed on the sale of
its Logistics Division.
Results from Continuing Operations
Revenues from continuing operations for the third quarter of 2001 totaled $71.6
million, compared to $79.1 million for the third quarter of 2000. The Company
reported net earnings from continuing operations in the third quarter of 2001 of
$1.9 million, or $0.04 per diluted share, compared to $4.7 million, or $0.09 per
diluted share for the same period in 2000.
Revenues from continuing operations for the first nine months of 2001 totaled
$213.9 million, compared to $219.7 million for the first nine months of 2000.
Excluding non-recurring charges, the Company reported net earnings from
continuing operations in the first nine months of 2001 of $3.6 million, or $0.07
per diluted share, compared to $11.9 million, or $0.24 per diluted share for the
same period in 2000.
During the first quarter of 2001, the Company realized non-recurring charges in
the form of severance and other personnel costs of approximately $0.8 million,
or $0.01 per diluted share on an after-tax basis, related to the implementation
of its strategic realignment announced on January 31, 2001. These charges have
been excluded in the discussion of financial results for the nine months ended
September 30, 2001. "I am encouraged by the fact that we continue to see a
return to normal claims production levels and visibility following the events of
September 11th and I want to reiterate that we continue to generate these claims
in record numbers for our clients," said John Cook, Chairman and Chief Executive
Officer of PRG.
Cook continued, "As we announced on October 8, 2001, our operations were
severely disrupted by the September 11th tragedy at the most critical time in
our quarterly business cycle. Our revenue generation suffered significantly,
while a substantial portion of our expenses remained fixed, resulting in the
considerable decline in earnings from the third quarter of last year. I fully
expect that we will overcome the near-term challenges associated with the
potentially unprecedented downturn in purchasing and payment activity by our
clients which makes it more difficult, in the near-term, to convert claims into
revenues."
Cook added, "I also have no doubt that the value proposition we present to our
clients remains powerful and consistent. The initiatives that we are undertaking
today and in the coming months, most importantly our planned combination with
Howard Schultz & Associates (HS&A), will put us in a leading position to
capitalize on the clear long-term growth opportunities in the accounts payable
recovery audit industry."
Continuing Operations Segment Financial Highlights
Please refer to Schedule 3 of this press release for a presentation of
(pro-forma) segment operating results in table form.
Accounts Payable: Revenues for the third quarter 2001 were $61.6 million
compared to $67.7 million for the same period a year ago. Operating income
(EBIT) for the third quarter 2001 was $12.7 million (20.6 percent of revenues),
compared to $16.3 million (24.1 percent of revenues) in 2000.
Revenues for the first nine months of 2001 were $186.3 million, compared to
$190.3 million for the same period a year ago. Excluding non-recurring charges,
operating income (EBIT) for the first nine months of 2001 was $39.4 million
(21.2 percent of revenues), compared to $45.8 million (24.1 percent of revenues)
in 2000.
French Taxation Services: Revenues for the third quarter 2001 were $10.0
million, compared to $11.4 million for the same period a year ago. Operating
income for the third quarter 2001 was $0.7 million (7.3 percent of revenues),
compared to $2.8 million (24.4 percent of revenues) in 2000.
Revenues for the first nine months of 2001 were $27.6 million, compared to $29.4
million for the same period a year ago. Operating loss for the first nine months
of 2001 was $0.7 million (2.3 percent of revenues), compared to operating income
of $4.9 million (16.6 percent of revenues) in 2000.
While no final determinations have yet been made by its Board of Directors, the
Company continues to explore strategic alternatives with respect to its French
2
Taxation Services operations. As disclosed in recent SEC filings, an alternative
under serious consideration is the potential sale of these operations. The
Company has received significant interest from potential buyers and is engaged
in meaningful discussions.
Corporate Overhead: Segment operating income (EBIT) as reported above does not
include corporate overhead. For the third quarter 2001, corporate overhead of
$8.1 million represented 11.3 percent of total revenues from continuing
operations, compared to $8.8 million, or 11.1 percent in the third quarter of
2000. For the first nine months of 2001, excluding non-recurring charges,
corporate overhead of $26.8 million represented 12.5 percent of total revenues
from continuing operations, compared to $24.1 million or 11.0 percent in the
first nine months of 2000.
The Company continues to take steps to achieve cost savings through reductions
in corporate overhead and SG&A as a whole, both of which were at a lower levels
this quarter than in the second quarter.
Cash Flow and Days Sales Outstanding (DSO's)
Net cash from operating activities for the nine months ended September 30, 2001
was approximately $10.4 million, compared to $8.7 million in 2000.
DSO's (Days Sales Outstanding) from continuing operations as of September 30,
2001 stood at 78 days, consistent with the same period a year ago. DSO's from
the Accounts Payable operations stood at 64 days as of September 30, 2001
improved from 68 days a year ago.
Bank Credit Facility
During the third quarter, the Company paid down the balance on its bank credit
facility by $10.5 million, to $152.7 million.
On October 8, 2001, the Company announced that as of September 30, 2001, it was
not in compliance with certain financial ratio covenants in its bank credit
facility agreement. Based on dialogue and meetings held with the lead bank and
members of its bank syndicate, the Company is highly confident that a credit
facility amendment to re-establish current and prospective financial covenant
ratios will be successfully finalized prior to November 14, 2001, the due date
of the Company's Form 10-Q for the quarter ended September 30, 2001.
The Company's bank debt at September 30, 2001 of $152.7 million has been
temporarily classified as a long-term liability in Schedule 2 for purposes of
this press release. The Company anticipates that the amended agreement will
provide for a mandatory, permanent reduction to the facility capacity effective
March 31, 2002 and higher applicable interest rates. As a result, the Company
anticipates that a portion of its long-term debt to the banks will need to be
reclassified as a current liability in the Company's consolidated balance sheet
to be included in its Form 10-Q for the third quarter of 2001. If no agreement
is concluded by the November 14, 2001 due date of the Form 10-Q, the Company
will be required to classify the entire amount of bank syndicate debt as a
current liability.
3
Discontinued Operations
On October 30, 2001, the Company closed on the sale of its Logistics Division to
Platinum Equity, a firm specializing in acquiring and operating technology
organizations and technology-enabled service companies worldwide. The
transaction yields initial gross sale proceeds of approximately $10 million,
with an additional $3 million payable in the form of a performance-based royalty
over the next four years.
The Company and its advisors have concluded that current economic conditions and
other factors have had a negative impact on the collective expected net proceeds
from selling the discontinued operations. As a result, the Company has recorded
a write-down of $31 million of the aggregate carrying value of its discontinued
operations as of September 30, 2001. Of this amount, approximately $19 million
is attributed to the already-concluded sale of the Logistics Division.
The other discontinued operations currently remain for sale. However, if the
difficult market conditions continue such that there is further erosion in the
expected sale proceeds, the Company, in consultation with its advisors, may in
the future conclude that the sale of the remaining discontinued operations is no
longer advisable and may revisit the decision to sell some or all of these
businesses.
Planned Acquisition of Howard Schultz & Associates
The Company continues to make substantial progress with its integration planning
in connection with the planned combination with HS&A and is firmly committed to
finalizing the transaction as soon as possible. Current expectations are that
the transaction will close in the first quarter of 2002.
The combination remains subject to approval of both companies' shareholders,
approval from PRG's bank syndicate including modifications of certain aspects of
PRG's credit agreement, and customary regulatory approvals.
The Company believes that it will be able to make the necessary reductions in
the outstanding principal balance of its credit facility in order to meet the
aforementioned anticipated principal reduction requirements of the amended
credit agreement as well as to secure the bank syndicate's approval for the HS&A
transaction. The Company anticipates achieving this through a combination of
selling discontinued operations, potentially selling the French Taxation
Services operations, and through additional debt or equity financing. The
Company, in consultation with its advisors, is currently exploring all of these
alternatives.
Outlook
In light of the current challenging business environment, the Company remains
cautious with respect to its estimates for the fourth quarter of this year and
for the first half of 2002. The Company is maintaining its estimate of 15% for
the long-term annualized sustainable blended growth rate in the Accounts Payable
business.
For the fourth quarter 2001, revenues from continuing operations are expected to
be in the range of $82.0 - $85.0 million. Excluding non-recurring charges,
earnings per diluted share from continuing operations for the fourth quarter are
expected to be in the range of $0.08 - $0.10. As a result, excluding
non-recurring charges, full year 2001 earnings per diluted share are expected to
be in the range of $0.15 - $0.17.
For full-year 2002, the Company expects its continuing operations on a
stand-alone basis to generate revenues in the range of $310.0 - $320.0 million,
with earnings per diluted share in the range of $0.45 - $0.50.
The outlook for full-year 2002 includes the impact of the adoption of FAS 142,
"Goodwill and Other Intangible Assets," effective January 1, 2002. FAS 142
requires that an intangible asset be amortized over its useful life and that
goodwill not be amortized but evaluated periodically for impairment.
Accordingly, the 2002 outlook does not include any goodwill amortization
expense. For purposes of comparison, in 2001 goodwill amortization expense for
the Company's continuing operations is expected to total approximately $12
million, or $0.15 per diluted share.
The 2002 outlook also does not include goodwill impairment charges, if any,
which may be required under FAS 142. To date, the Company has not made an
evaluation or assessment of future potential goodwill impairment under the rules
prescribed in FAS 142.
The outlook for the fourth quarter of 2001 and full-year 2002 excludes any
impact of non-recurring charges, revenue contribution and earnings impact
resulting from the planned acquisition of Howard Schultz and Associates or
possible additional debt or equity financing. The Company currently estimates
that fourth quarter 2001 one-time charges associated with realignment and
integration activities will be approximately $0.04 per diluted share.
Conference Call and Webcast Information
PRG will hold a conference call today, October 31, 2001 at 10 a.m. EST to
further discuss the information in this press release and to provide an update
with respect to other company developments. Listeners in the U.S. should dial
888-396-0289 at least 5 minutes prior to the start of the conference. Listeners
outside the U.S. should dial 212-547-0303. To access the conference call,
provide the leader's name 'John Cook' and the passcode 'PRGX.'
The teleconference will also be audiocast on the Internet at www.prgx.com.
Microsoft Windows Media Player is required to access the audiocast. Media Player
can be downloaded from www.microsoft.com/windows/mediaplayer.
About The Profit Recovery Group International, Inc.
Headquartered in Atlanta, The Profit Recovery Group International, Inc. (PRG) is
one of the world's leading providers of recovery audit services. PRG's
4
continuing operations employ approximately 2,500 employees in 34 countries
providing more than 2,500 clients with insightful value to optimize and expertly
manage their business transactions. PRG's clients represent a variety of
industries including retailing, wholesale distribution, manufacturing,
government, high-tech and healthcare organizations. PRG was founded in 1990 and
became a publicly-traded company in 1996. Shares of PRG are traded on the NASDAQ
National Market under the symbol PRGX. For additional information visit our web
site at www.prgx.com.
Forward Looking Statements
Statements made in this news release 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) we may be unable to obtain current or
prospective covenant relief from our lenders and our indebtedness could be
accelerated or our credit facility revoked, (ii) if the current economic
slowdown continues, our clients may not return to previous purchasing levels,
and as a result we may be unable to recognize anticipated revenues, (iii)
announced divestitures may require a longer time to accomplish than we
anticipate, or may not be consummated at all, and we may incur additional losses
if, upon disposal, we do not receive the prices we anticipate for such
businesses and may incur unanticipated further charges as a result of our
divestiture initiatives, (iv) the announced intention to dispose of the
discontinued operations may result in the loss of key personnel and diminished
operating results in such operations, (v) we may not achieve anticipated expense
savings, (vi) our past and future investments in technology and e-commerce may
not benefit our business, (vii) our Accounts Payable and French Taxation
Services businesses may not grow as expected, (viii) our international expansion
may prove unprofitable, (ix) a decision to sell Groupe Alma could result in a
material net loss on the transaction; (x) we may not be able to successfully
complete the acquisition of Howard Schultz and Associates or successfully
integrate such firm and achieve the substantial planned post-acquisition synergy
cost savings even if the acquisition is completed, and (xi) we may be unable to
obtain any necessary additional debt or equity financing on acceptable terms or
at all. If the acquisition of Howard Schultz and Associates is not completed,
the Company will incur a substantial charge to operations for cumulative
out-of-pocket business combination costs incurred and may be required to pay
HSA-Texas transaction expenses and/or a breakup fee. Other risks and
uncertainties that may affect our business include (i) our ability to
effectively manage our business during the divestitures and our business
integration with Howard Schultz and Associates, (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 we transact business, (vii)
changes in economic cycles, (viii) competition from other companies, (ix) the
effect of bankruptcies of our larger clients, (x) changes in governmental
regulations applicable to us, and other risk factors, detailed in our Securities
and Exchange Commission filings, including the Company's Form S-4 filed
September 7, 2001 (File No. 333-69142). The Company disclaims any obligation or
duty to update or modify these forward-looking statements.
5
Additional Information
PRG and HS&A have filed a preliminary joint proxy statement/prospectus contained
in PRG's registration statement on Form S-4 (File no.333-69142) filed with the
SEC on September 7, 2001. Investors of PRG and HS&A are urged to read the
preliminary joint proxy statement/prospectus 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 H. Kratcoski, Director,
Investor Relations, PRG International, Inc., 2300 Windy Ridge Parkway, Suite
100N, Atlanta, GA 30339, or by telephone at 770-779-3900.
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 is set forth in the
preliminary joint proxy statement/prospectus.
# # #
Contacts:
Investor Contact: Media & Client Contact:
Leslie H. Kratcoski Michelle B. Duncan
Investor Relations Corporate Communications
(770) 779-3099 (770) 779-3295
6
SCHEDULE 1
The Profit Recovery Group International, Inc. and Subsidiaries
Condensed Consolidated Statements of Operations
(Amounts in thousands, except per share data)
(Unaudited)
Three Months Nine Months
Ended September 30, Ended September 30,
----------------------------- ----------------------------
2001 2000 2001 2000
------------- ------------ ------------ ------------
Revenues $ 71,559 $ 79,087 $ 213,870 $ 219,664
Cost of revenues 37,640 40,594 112,429 114,516
Selling, general and administrative expenses 28,607 28,161 90,298 78,591
------------- ------------ ------------ -------------
Operating income 5,312 10,332 11,143 26,557
Interest (expense), net (2,199) (2,287) (6,000) (6,028)
------------- ------------ ------------ -------------
Earnings from continuing operations before income
taxes and loss from discontinued operations 3,113 8,045 5,143 20,529
Income taxes 1,245 3,380 2,057 8,623
------------- ------------ ------------ -------------
Earnings from continuing operations before loss from
discontinued operations 1,868 4,665 3,086 11,906
Discontinued operations:
Loss from operations of discontinued divisions, net
of income taxes of $(112) and $(530) in 2000,
respectively, and including cumulative effect of
accounting change of $(26,145) in 2000 - (236) - (24,625)
Loss on disposal from discontinued operations
including operating results for phase-out period,
net of income taxes (31,000) - (31,000) -
------------- ------------ ------------ -------------
Loss from discontinued operations (31,000) (236) (31,000) (24,625)
------------- ------------ ------------ -------------
Net earnings (loss) $ (29,132) $ 4,429 $ (27,914) $ (12,719)
============= ============ ============ =============
Basic earnings (loss) per share
Earnings from continuing operations before discontinued
operations $ 0.04 $ 0.10 $ 0.06 $ 0.24
Discontinued operations
(0.64) (0.01) (0.64) (0.50)
------------- ------------ ------------ -------------
Net earnings (loss) $ (0.60) $ 0.09 $ (0.58) $ (0.26)
============= ============ ============ =============
Diluted earnings (loss) per share
Earnings from continuing operations before discontinued
operations $ 0.04 $ 0.09 $ 0.06 $ 0.24
Discontinued operations
(0.63) - (0.63) (0.49)
------------- ------------ ------------ -------------
Net earnings (loss) $ (0.59) $ 0.09 $ (0.57) $ (0.25)
============= ============ ============ =============
Weighted average shares outstanding
Basic 48,414 48,936 48,182 49,330
============= ============ ============ =============
Diluted 49,338 49,395 48,678 50,265
============= ============ ============ =============
SCHEDULE 2
The Profit Recovery Group International, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(Amounts in thousands)
(Unaudited)
September 30, December 31,
2001 2000
------------- ------------
ASSETS
Current assets:
Cash and cash equivalents $ 15,936 $ 23,870
Receivables
Contract receivables 62,186 67,399
Employee advances and miscellaneous receivables 4,907 5,073
------------- -------------
Total receivables 67,093 72,472
------------- -------------
Prepaid expenses and other current assets 3,268 3,470
Deferred income taxes 12,565 12,565
Net assets of discontinued operations 58,552 80,682
------------- -------------
Total current assets 157,414 193,059
Property and equipment 22,703 26,904
Noncompete agreements 315 937
Deferred loan costs 2,139 1,701
Goodwill 224,011 235,153
Deferred income taxes 6,252 6,236
Other assets 5,415 841
------------- -------------
Total assets $ 418,249 $ 464,831
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current installments of long-term debt $ 412 $ 391
Accounts payable and accrued expenses 16,540 17,284
Accrued business acquisition consideration - 7,567
Accrued payroll and related expenses 28,310 38,017
Deferred tax recovery audit revenue 772 694
------------- -------------
Total current liabilities 46,034 63,953
Long-term debt, excluding current installments 152,684 154,563
Deferred compensation 4,296 5,615
Other long-term liabilities 1,713 1,544
------------- -------------
Total liabilities 204,727 225,675
------------- -------------
Shareholders' equity:
Preferred stock - -
Common stock 51 50
Additional paid-in capital 320,238 316,127
Accumulated deficit (67,949) (40,035)
Accumulated other comprehensive loss (16,542) (14,237)
Less treasury stock at cost (21,024) (21,024)
Unearned portion of restricted stock (1,252) (1,725)
------------- -------------
Total shareholders' equity 213,522 239,156
------------- -------------
------------- -------------
Total liabilities and $ 418,249 $ 464,831
shareholders' equity
============= =============
SCHEDULE 3
The Profit Recovery Group International, Inc. and Subsidiaries
Pro-Forma Operating Results From Continuing Operations By Segment
(Amounts in millions)
(Unaudited)
Three Months Ended September 30
----------------------------- ------------------------------ --------------------------------
Accounts Payable Services French Taxation Services Corporate Support
----------------------------- -------------- --------------- ----------------- --------------
2001 2000 2001 2000 2001 2000
-------------- -------------- -------------- --------------- ----------------- --------------
$ % of $ % of $ % of $ % of $ % of $ % of
Revenues Revenues Revenues Revenues Revenues Revenues
----- -------- ----- -------- ----- -------- ------ -------- ------- -------- ------ --------
Revenues 61.6 100.0% 67.7 100.0% 10.0 100.0% 11.4 100.0% - -
Operating
Income (EBIT) 12.7 20.6% 16.3 24.1% 0.7 7.3% 2.8 24.4% (8.1) 11.3% (8.8) -11.1%
EBITDA 16.1 26.2% 20.2 29.8% 1.8 17.8% 3.6 31.9% (6.9) -10.0% (7.8) -9.9%
------ ------- ----- -------- ----- -------- ------ -------- ------- -------- ------ --------
-------------------------------
Total
-------------------------------
2001 2000
-------------- ---------------
$ % of $ % of
Revenues Revenues
----- -------- ------ --------
Revenues 71.6 100.0% 79.1 100.00%
Operating
Income
(EBIT) 5.3 7.4% 10.3 13.1%
EBITDA 11.0 15.4% 16.0 20.2%
Nine Months Ended September 30
--------------------------------------------------------------------------------------------
Accounts Payable Services French Taxation Services Corporate Support
-------------- -------------- ------------------------------ -------------------------------
2001 2000 2001 2000 2001 2000
-------------- -------------- -------------- --------------- --------------- ---------------
$ % of $ % of $ % of $ % of $ % of $ % of
Revenues Revenues Revenues Revenues Revenues Revenues
----- -------- ----- -------- ----- -------- ------ -------- ------ -------- ------ --------
Revenues 186.3 100.0% 190.3 100.0% 27.6 100.0% 29.4% 100.0% - -
Pro-Forma
Operating
Income (EBIT) 39.4 21.2% 45.8 24.1% (0.7) -2.3% 4.9 16.6% (26.8) -12.5% (24.1) -11.0%
Pro-Forma
EBITDA 49.7 26.7% 57.6 30.3% 2.5 9.0% 7.7 26.3% (23.1) -10.8% (21.1) -9.6%
----- -------- ----- -------- ----- -------- ------ -------- ------ -------- ------- -------
-------------------------------
Total
-------------------------------
2001 2000
-------------- ---------------
$ % of $ % of
Revenues Revenues
----- -------- ------ --------
Revenues 213.9 100.0% 219.7 100.0%
Pro-Forma
Operating
Income
(EBIT) 11.9 5.6% 26.6 12.1%
EBITDA 29.1 13.6% 44.3 20.2%
Notes: Pro Forma Operating Income (EBIT) and EBITDA for the nine months ended
September 30, 2001 excludes non-recurring charges in Q1 2001 of approximately
$0.8 million related to implementation of the strategic realigment. Accounts
Payable Services and French Taxation Services "% of Revenues" is calculated
based on segment revenues. Corporate Support and Total "% of Revenues" is
calculated based on total revenues.
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