FORM 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
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þ |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 2009
OR
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o |
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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
PRG-Schultz International, Inc.
(Exact name of registrant as specified in its charter)
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Georgia
(State or other jurisdiction of
incorporation or organization)
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58-2213805
(I.R.S. Employer
Identification No.) |
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600 Galleria Parkway |
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Suite 100 |
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Atlanta, Georgia
(Address of principal executive offices)
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30339-5986
(Zip Code) |
Registrants 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 þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period
that the registrant was required to submit and post such files). Yes o No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer, or a smaller reporting company. See definitions of large
accelerated filer, accelerated filer, and smaller reporting company in Rule 12b-2 of the
Exchange Act. (Check One):
Large accelerated filer o |
Accelerated filer þ |
Non-accelerated filer o (Do not check if a smaller reporting company) |
Smaller reporting company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Act). Yes o No þ
Common shares of the registrant outstanding at July 31, 2009 were 23,163,595.
PRG-SCHULTZ INTERNATIONAL, INC.
FORM 10-Q
For the Quarter Ended June 30, 2009
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
PRG-SCHULTZ INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except per share data)
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Three Months Ended |
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Six Months Ended |
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June 30, |
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June 30, |
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2009 |
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2008 |
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2009 |
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2008 |
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Revenues |
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$ |
45,471 |
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$ |
49,648 |
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$ |
84,723 |
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$ |
97,911 |
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Cost of revenues |
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28,052 |
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32,941 |
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54,219 |
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63,193 |
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Gross margin |
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17,419 |
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16,707 |
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30,504 |
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34,718 |
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Selling, general and administrative expenses |
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11,049 |
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11,024 |
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21,018 |
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23,867 |
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Operating income |
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6,370 |
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5,683 |
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9,486 |
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10,851 |
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Interest expense, net |
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727 |
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765 |
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1,426 |
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1,756 |
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Earnings before income taxes |
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5,643 |
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4,918 |
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8,060 |
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9,095 |
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Income taxes |
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618 |
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400 |
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1,162 |
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993 |
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Net earnings |
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$ |
5,025 |
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$ |
4,518 |
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$ |
6,898 |
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$ |
8,102 |
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Basic earnings per common share (Note B) |
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$ |
0.22 |
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$ |
0.21 |
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$ |
0.31 |
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$ |
0.37 |
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Diluted earnings per common share (Note B) |
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$ |
0.21 |
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$ |
0.20 |
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$ |
0.30 |
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$ |
0.35 |
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Weighted-average common shares outstanding (Note B): |
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Basic |
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22,641 |
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21,734 |
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22,395 |
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21,629 |
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Diluted |
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23,382 |
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22,942 |
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23,260 |
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22,823 |
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See accompanying Notes to Condensed Consolidated Financial Statements.
1
PRG-SCHULTZ INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
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June 30, |
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2009 |
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December 31, |
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(Unaudited) |
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2008 |
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ASSETS |
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Current assets: |
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Cash and cash equivalents (Notes F and I) |
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$ |
28,482 |
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$ |
26,688 |
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Restricted cash |
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388 |
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61 |
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Receivables: |
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Contract receivables, less allowances of $691 in 2009 and $921 in 2008: |
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Billed |
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23,520 |
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28,143 |
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Unbilled |
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4,917 |
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5,568 |
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28,437 |
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33,711 |
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Employee advances and miscellaneous receivables, less allowances of $310 in 2009 and $311 in 2008 |
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226 |
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285 |
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Total receivables |
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28,663 |
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33,996 |
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Prepaid expenses and other current assets |
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2,571 |
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2,264 |
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Total current assets |
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60,104 |
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63,009 |
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Property and equipment, at cost |
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31,543 |
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30,041 |
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Less accumulated depreciation and amortization |
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(23,858 |
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(22,140 |
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Property and equipment, net |
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7,685 |
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7,901 |
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Goodwill (Note I) |
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4,600 |
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4,600 |
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Intangible assets, less accumulated amortization of $11,946 in 2009 and $10,932 in 2008 (Note I) |
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17,954 |
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18,968 |
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Unbilled receivables |
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1,569 |
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1,789 |
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Other assets |
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2,084 |
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2,516 |
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$ |
93,996 |
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$ |
98,783 |
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LIABILITIES AND SHAREHOLDERS EQUITY |
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Current liabilities: |
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Accounts payable and accrued expenses |
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$ |
13,687 |
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$ |
16,275 |
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Accrued payroll and related expenses |
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17,381 |
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22,536 |
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Refund liabilities |
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6,958 |
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7,870 |
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Deferred revenue |
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458 |
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502 |
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Current portions of debt and capital lease obligations (Note G) |
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5,332 |
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5,314 |
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Total current liabilities |
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43,816 |
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52,497 |
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Long-term debt and capital lease obligations (Note G) |
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11,660 |
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14,331 |
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Deferred income taxes |
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244 |
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234 |
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Noncurrent compensation obligations |
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1,464 |
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2,849 |
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Refund liabilities |
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787 |
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897 |
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Other long-term liabilities |
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5,085 |
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5,265 |
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Total liabilities |
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63,056 |
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76,073 |
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Commitments and contingencies (Note H) |
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Shareholders equity (Note B): |
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Common stock, no par value; $.01 stated value per share. Authorized 50,000,000 shares;
23,029,103 shares issued and outstanding in 2009 and 21,789,645 shares issued and
outstanding in 2008 |
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230 |
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218 |
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Additional paid-in capital |
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560,868 |
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559,359 |
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Accumulated deficit |
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(533,090 |
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(539,988 |
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Accumulated other comprehensive income |
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2,932 |
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3,121 |
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Total shareholders equity |
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30,940 |
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22,710 |
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$ |
93,996 |
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$ |
98,783 |
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See accompanying Notes to Condensed Consolidated Financial Statements.
2
PRG-SCHULTZ INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
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Six Months Ended |
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June 30, |
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2009 |
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2008 |
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Cash flows from operating activities: |
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Net earnings |
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$ |
6,898 |
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$ |
8,102 |
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Adjustments to reconcile net earnings to net cash provided by operating activities: |
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Depreciation and amortization |
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2,708 |
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2,716 |
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Amortization of deferred loan costs |
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394 |
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390 |
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Stock-based compensation expense |
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1,004 |
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4,584 |
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(Gain) loss on sale of property and equipment |
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28 |
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(5 |
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Deferred income taxes |
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10 |
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323 |
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Changes in assets and liabilities: |
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Restricted cash |
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(327 |
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(164 |
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Billed receivables |
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5,200 |
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7,431 |
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Unbilled receivables |
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871 |
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1,244 |
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Prepaid expenses and other current assets |
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(256 |
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108 |
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Other assets |
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45 |
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(13 |
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Accounts payable and accrued expenses |
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(3,748 |
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(4,849 |
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Accrued payroll and related expenses |
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(5,535 |
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(12,041 |
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Refund liabilities |
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(1,022 |
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(3,155 |
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Deferred revenue |
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(52 |
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(117 |
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Noncurrent compensation obligations |
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(578 |
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(1,676 |
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Other long-term liabilities |
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(180 |
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(439 |
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Net cash provided by operating activities |
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5,460 |
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2,439 |
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Cash flows from investing activities: |
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Purchases of property and equipment, net of disposal proceeds |
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(1,409 |
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(1,102 |
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Net cash used in investing activities |
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(1,409 |
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(1,102 |
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Cash flows from financing activities: |
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Repayments of debt |
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(2,653 |
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(23,635 |
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Repurchases of common stock |
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(246 |
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Payments for deferred loan costs |
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(59 |
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Net cash used in financing activities |
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(2,899 |
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(23,694 |
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Effect of exchange rates on cash and cash equivalents |
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642 |
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145 |
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Net change in cash and cash equivalents |
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1,794 |
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(22,212 |
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Cash and cash equivalents at beginning of period |
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26,688 |
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42,364 |
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Cash and cash equivalents at end of period |
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$ |
28,482 |
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$ |
20,152 |
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Supplemental disclosure of cash flow information: |
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Cash paid during the period for interest |
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$ |
1,059 |
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$ |
1,955 |
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Cash paid during the period for income taxes, net of refunds |
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$ |
2,425 |
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$ |
1,311 |
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See accompanying Notes to Condensed Consolidated Financial Statements.
3
PRG-SCHULTZ INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note A Basis of Presentation
The accompanying Condensed Consolidated Financial Statements (Unaudited) of PRG-Schultz
International, Inc. and its wholly owned subsidiaries (the Company) have been prepared in
accordance with accounting principles generally accepted in the United States of America for
interim financial information and with the instructions for Form 10-Q and Article 10 of Regulation
S-X. Accordingly, they do not include all of the information and footnotes required by accounting
principles generally accepted in the United States of America for complete financial statements. In
the opinion of management, all adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation have been included. Operating results for the three-month and
six-month periods ended June 30, 2009 are not necessarily indicative of the results that may be
expected for the year ending December 31, 2009.
For further information, refer to the Consolidated Financial Statements and Footnotes thereto
included in the Companys Form 10-K for the year ended December 31, 2008.
During the first quarter of 2008, management revised its estimation of expected refund rates
in its Domestic Accounts Payable Services segment. Such change in estimate resulted from a decline
in actual refund rates observed during 2007. The impact of the change in estimate resulted in a
$0.8 million reduction in the March 31, 2008 refund liability and a corresponding increase in first
quarter 2008 revenues. The impact on the quarter ended June 30, 2008 and quarter and six months
ended June 30, 2009 was not significant and management does not expect that the change in estimate
will have a material impact on future period results.
New Accounting Standards
SFAS No. 141(R). In December 2007 the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 141 (revised 2007), Business
Combinations (SFAS No. 141(R)). SFAS No. 141(R) establishes principles and requirements for how
an acquirer recognizes and measures in its financial statements the identifiable assets acquired,
the liabilities assumed, and any noncontrolling interest in an acquiree; recognizes and measures
the goodwill acquired in a business combination or a gain from a bargain purchase; determines what
information to disclose to enable users of the financial statements to evaluate the nature and
financial effects of a business combination; and requires that costs associated with business
combinations be expensed as incurred. The adoption by the Company of SFAS No. 141(R) effective
January 1, 2009 did not have any material impact on the Companys consolidated financial
statements. See Note J Subsequent Events regarding July 2009 business combination.
SFAS No. 160. In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in
Consolidated Financial Statements (SFAS No. 160). SFAS No. 160 establishes new accounting and
reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of
a subsidiary. Specifically, this statement requires the recognition of a noncontrolling interest
(minority interest) as equity in the consolidated financial statements and separate from the
parents equity. The amount of net income attributable to the noncontrolling interest will be
included in consolidated net income on the face of the income statement. SFAS No. 160 clarifies
that changes in a parents ownership interest in a subsidiary that do not result in deconsolidation
are equity transactions if the parent retains its controlling financial interest. In addition, this
statement requires that a parent recognize a gain or loss in net income when a subsidiary is
deconsolidated. Such gain or loss will be measured using the fair value of the noncontrolling
equity investment on the deconsolidation date. SFAS No. 160 also includes expanded disclosure
requirements regarding the interests of the parent and its noncontrolling interest. The adoption by
the Company of SFAS No. 160 effective January 1, 2009 did not have any material impact on the
Companys consolidated financial statements.
SFAS No. 161. In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative
Instruments and Hedging Activities an amendment of FASB Statement No. 133 (SFAS No. 161),
which requires additional disclosures about the objectives of derivative instruments and hedging
activities, the method of accounting for such instruments under SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities and its related interpretations, and a tabular
disclosure of the effects of such instruments and related hedged items on a companys financial
position, financial performance, and cash flows. The adoption by the Company of SFAS No. 161
effective January 1, 2009 did not have any material impact on the Companys consolidated financial
statements.
4
PRG-SCHULTZ INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
SFAS No. 165. In May 2009, the FASB issued SFAS No. 165, Subsequent Events (SFAS No. 165),
which establishes principles and requirements regarding the reporting of subsequent events
including disclosure of the date through which subsequent events have been evaluated and whether
that is the date that the financial statements were issued or available to be issued. The Company
adopted SFAS No. 165 effective June 30, 2009. The disclosures required by SFAS No. 165 are
included in Note J.
SFAS No. 166. In June 2009, the FASB issued SFAS No. 166, Accounting for Transfers of
Financial Assets, an amendment of SFAS No. 140 (SFAS No. 166), which eliminates the exceptions
for qualifying special-purpose entities from the consolidation guidance in SFAS No. 140, changes
the requirements for derecognizing financial assets, and requires additional disclosures in order
to enhance information reported to users of financial statements by providing greater transparency
about transfers of financial assets, including securitization transactions, and an entitys
continuing involvement in and exposure to the risks related to transferred financial assets. This
statement is effective for fiscal years beginning after November 15, 2009 and for transfers
occurring on or after the effective date. The Company has not determined the impact, if any, SFAS
No. 166 will have on its future financial statements.
SFAS No. 167. In June 2009, the FASB issued SFAS No. 167, Amendments to FASB Interpretation
No. 46(R) (SFAS No. 167), which amends FASB Interpretation No. 46(R) to require an analysis to
determine whether a variable interest gives a company a controlling financial interest in a
variable interest entity and requires ongoing reassessments of whether an enterprise is the primary
beneficiary of a variable interest entity. This statement is effective for fiscal years beginning
after November 15, 2009. The Company has not determined the impact, if any, SFAS No. 167 will have
on its future financial statements.
FSP APB 14-1. In May 2008, the FASB issued Staff Position No. APB 14-1, Accounting for
Convertible Debt Instruments That May Be Settled in Cash Upon Conversion (Including Partial Cash
Settlement) (FSP APB 14-1). FSP APB 14-1 requires that the liability and equity components of
convertible debt instruments that may be settled in cash upon conversion (including partial cash
settlement) be separately accounted for in a manner that reflects an issuers nonconvertible debt
borrowing rate. The resulting debt discount is amortized over the period the convertible debt is
expected to be outstanding as additional non-cash interest expense. Upon adoption, the provisions
of FSP APB 14-1 are required to be applied retrospectively to all periods presented. The adoption
by the Company of FSP APB 14-1 effective January 1, 2009 did not have any material impact on the
Companys consolidated financial statements.
FSP EITF 03-6-1. In June 2008, the FASB issued Staff Position No. EITF 03-6-1, Determining
Whether Instruments Granted in Share-Based Transactions Are Participating Securities (FSP EITF
03-6-1). FSP EITF 03-6-1 requires that unvested share-based payment awards that contain
nonforfeitable rights to dividends or dividend equivalents (whether paid or unpaid) be accounted
for as participating securities and should be included in the computation of earnings per share
(EPS). The adoption by the Company of FSP EITF 03-6-1 effective January 1, 2009 did not have any
material impact on the Companys consolidated financial statements.
5
PRG-SCHULTZ INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note B Earnings Per Common Share
The following tables set forth the computations of basic and diluted earnings per common share
for the three and six months ended June 30, 2009 and 2008 (in thousands, except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
June 30, |
|
|
June 30, |
|
Basic earnings per common share: |
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
Numerator for earnings per common share calculations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings |
|
$ |
5,025 |
|
|
$ |
4,518 |
|
|
$ |
6,898 |
|
|
$ |
8,102 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for basic earnings per common share
weighted-average common shares outstanding
during the period |
|
|
22,641 |
|
|
|
21,734 |
|
|
|
22,395 |
|
|
|
21,629 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per common share |
|
$ |
0.22 |
|
|
$ |
0.21 |
|
|
$ |
0.31 |
|
|
$ |
0.37 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
June 30, |
|
|
June 30, |
|
Diluted earnings per common share: |
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
Numerator for earnings per common share calculations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings |
|
$ |
5,025 |
|
|
$ |
4,518 |
|
|
$ |
6,898 |
|
|
$ |
8,102 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for basic earnings per common share
weighted-average common shares outstanding during the
period |
|
|
22,641 |
|
|
|
21,734 |
|
|
|
22,395 |
|
|
|
21,629 |
|
Incremental shares from stock-based compensation plans |
|
|
741 |
|
|
|
1,208 |
|
|
|
865 |
|
|
|
1,194 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for diluted earnings per common share |
|
|
23,382 |
|
|
|
22,942 |
|
|
|
23,260 |
|
|
|
22,823 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per common share |
|
$ |
0.21 |
|
|
$ |
0.20 |
|
|
$ |
0.30 |
|
|
$ |
0.35 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three and six months ended June 30, 2009, options to purchase 1.8 million shares of
common stock were not included in the computation of diluted earnings per common share because the
options exercise prices were greater than the average market price of the common shares during the
periods and were therefore antidilutive. For the three and six months ended June 30, 2008, options
to purchase 0.8 million shares of common stock were not included in the computation of diluted
earnings per common share because the options exercise prices were greater than the average market
price of the common shares during the periods and were therefore antidilutive. Weighted-average
common shares outstanding for the three and six month periods ended June 30, 2009 include 1.2
million nonvested restricted shares and 0.2 million nonvested restricted share units which are
considered to be participating securities pursuant to FSP EITF 03-6-1.
Note C Stock-Based Compensation
The Company currently has outstanding awards granted under the following three stock-based
compensation plans: (1) the Stock Incentive Plan, (2) the 2006 Management Incentive Plan (2006
MIP) and (3) the 2008 Equity Incentive Plan (2008 EIP) (collectively, the Plans). The Plans
are described in the Companys Annual Report on Form 10-K for the fiscal year ended December 31,
2008.
During the first quarter of 2009, in connection with his joining the Company as its President
and Chief Executive Officer, the Company made inducement grants outside its existing stock-based
compensation plans to Mr. Romil
6
PRG-SCHULTZ INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Bahl. Mr. Bahl received an option to purchase 296,296 shares of the common stock of the
Company and nonvested stock awards (restricted stock) representing 344,445 shares of the Companys
common stock.
Mr. Bahls options were granted in two tranches, the first of which consists of 111,111 shares
that vest in four equal annual installments beginning in January 2010. The second tranche consists
of 185,185 shares and vests 50% on each of the second and fourth anniversaries of the grant date.
The options have an exercise price of $3.57 per share and expire seven years after their grant
date. The option awards had an aggregate grant date fair value of $0.8 million.
Mr. Bahls nonvested stock awards were also granted in two tranches, the first of which
consists of 233,334 shares that vest in four equal annual installments beginning in January 2010.
The second tranche consists of 111,111 shares and vests 50% on each of the second and fourth
anniversaries of the grant date. These restricted stock grants had an aggregate grant date fair
value of $1.2 million. During the vesting period, Mr. Bahl will be entitled to receive dividends
with respect to the nonvested shares, if any, and to vote the shares.
On May 26, 2009, non-qualified options to purchase an aggregate of 483,255 shares of the
Companys common stock were granted to 72 executive and non-executive employees of the Company
pursuant to the 2008 EIP. The options have an exercise price of $2.82 per share, expire seven years
after their grant date and vest in three equal annual installments beginning on the first
anniversary of the grant date. The option awards had an aggregate grant date fair value of $1.0
million.
On May 26, 2009, nonvested stock awards (restricted stock and restricted stock units)
representing 485,332 shares in aggregate of the Companys common stock were granted to 72 executive
and non-executive employees of the Company pursuant to the Companys 2008 EIP. The shares of
restricted stock and the restricted stock units vest in three equal installments beginning on the
first anniversary of the grant date. These awards had an aggregate grant date fair value of $1.4
million. During the vesting period, the restricted stock grantees will be entitled to receive
dividends, if any, with respect to the nonvested shares and to vote the shares. During the vesting
period, grantees of restricted stock units will be entitled to receive dividends, if any, with
respect to the nonvested shares, but will not be entitled to vote the shares underlying the units.
On May 26, 2009, non-qualified stock options to purchase an aggregate of 42,730 shares of the
Companys common stock were granted under the 2008 EIP to the Companys five non-employee directors
at an exercise price of $2.82. The options vest in full upon the earlier of (i) May 26, 2010 and
(ii) the date of, and immediately prior to, the Companys 2010 annual meeting of shareholders,
provided the director has been continuously serving as a member of the Board from the date of grant
until the earlier of such times. Unvested options are forfeited when a director leaves the Board.
The options terminate on May 25, 2016, except that vested options held by a director who leaves the
Board before a change of control will terminate three years after termination of Board service, if
such date occurs before May 25, 2016. These awards had an aggregate grant date fair value of $0.1
million.
On May 26, 2009, nonvested stock awards (restricted stock) representing 42,730 shares in
aggregate of the Companys common stock were granted to the Companys five non-employee directors
pursuant to the 2008 EIP. The shares of restricted stock will vest upon the earlier of (i) May 26,
2010, and (ii) the date of, and immediately prior to, the Companys 2010 annual meeting of
shareholders, provided the director has been continuously serving as a member of the Board from the
date of grant until the earlier of such times. Unvested shares of restricted stock will be
forfeited when a director leaves the Board. The shares are generally nontransferable until vesting.
During the vesting period, the grantees of the restricted stock will be entitled to receive
dividends with respect to the nonvested shares and to vote the shares. These restricted stock
grants had an aggregate grant date fair value of $0.1 million.
On May 29, 2008, non-qualified stock options to purchase an aggregate of 60,135 shares of the
Companys common stock were granted under the 2008 EIP to the Companys five non-employee directors
at an exercise price of $9.87. The options expire seven years from their grant date and became
fully vested on May 27, 2009, the date of the Companys 2009 annual meeting of the shareholders.
These awards had an aggregate grant date fair value of $0.4 million.
7
PRG-SCHULTZ INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
On May 29, 2008, nonvested stock awards (restricted stock) representing 25,325 shares in
aggregate of the Companys common stock were granted to the Companys five non-employee directors
pursuant to the 2008 EIP. The shares of restricted stock vested on May 27, 2009, the date of the
Companys 2009 annual meeting of shareholders. These restricted stock grants had an aggregate grant
date fair value of $0.2 million.
On April 30, 2008, an aggregate of 493,137 Performance Units under the 2006 MIP were settled
by six executive officers. Such settlements resulted in the issuance of 295,879 shares of common
stock and cash payments totaling $2.0 million. During the second quarter of 2009, an aggregate of
1,040,766 Performance Units under the 2006 MIP were settled by seven current and former executive
officers. Such settlements resulted in the issuance of 624,456 shares of common stock and cash
payments totaling $1.3 million.
As of June 30, 2009, a total of 702,348 Performance Units were outstanding and fully vested
under the 2006 MIP. In July 2009, 224,154 Performance Units were settled by a former executive
officer. This settlement resulted in the issuance of 134,492 shares of common stock and a cash
payment of $0.3 million.
Selling, general and administrative expenses for the three months ended June 30, 2009 and 2008
include $1.0 million and $1.6 million, respectively, related to stock-based compensation charges.
Selling, general and administrative expenses for the six months ended June 30, 2009 and 2008
include $1.0 million and $4.6 million, respectively, related to stock-based compensation charges.
At June 30, 2009, there was $21.4 million of unrecognized stock-based compensation expense related
to stock options, restricted stock and restricted stock unit awards which is expected to be
recognized over a weighted-average period of 2.8 years.
Note D Operating Segments and Related Information
The Company is comprised of the following reportable operating segments:
Domestic Accounts Payable Services
The Domestic Accounts Payable Services segment represents business conducted in the United
States of America (USA).
International Accounts Payable Services
The International Accounts Payable Services segment represents business conducted in countries
other than the USA.
Corporate Support
The Company includes the unallocated portion of corporate selling, general and administrative
expenses not specifically attributable to the Accounts Payable Services segments in a category
referred to as Corporate Support.
8
PRG-SCHULTZ INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Management evaluates the performance of its operating segments based upon revenues and
measures of profit or loss it refers to as EBITDA and adjusted EBITDA. Adjusted EBITDA is earnings
from continuing operations before interest, taxes, depreciation and amortization (EBITDA) as
adjusted for unusual and other significant items that management views as distorting the operating
results of the various segments from period to period. Adjustments include restructuring charges,
stock-based compensation, intangible asset impairment charges, litigation settlements, severance
charges and foreign currency gains and losses on intercompany balances viewed by management as
individually or collectively significant. The Company does not have any inter-segment revenues.
Segment information for the three and six months ended June 30, 2009 and 2008 follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
International |
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts |
|
|
|
|
|
|
|
|
|
Domestic Accounts |
|
|
Payable |
|
|
Corporate |
|
|
|
|
|
|
Payable Services |
|
|
Services |
|
|
Support |
|
|
Total |
|
Three Months Ended June 30, 2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
26,443 |
|
|
$ |
19,028 |
|
|
$ |
|
|
|
$ |
45,471 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA |
|
$ |
8,633 |
|
|
$ |
4,822 |
|
|
$ |
(5,668 |
) |
|
$ |
7,787 |
|
Foreign currency (gains) losses on
intercompany balances |
|
|
|
|
|
|
(1,679 |
) |
|
|
|
|
|
|
(1,679 |
) |
Litigation settlement |
|
|
|
|
|
|
|
|
|
|
650 |
|
|
|
650 |
|
Stock-based compensation |
|
|
|
|
|
|
|
|
|
|
989 |
|
|
|
989 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA |
|
$ |
8,633 |
|
|
$ |
3,143 |
|
|
$ |
(4,029 |
) |
|
$ |
7,747 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, 2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
28,280 |
|
|
$ |
21,368 |
|
|
$ |
|
|
|
$ |
49,648 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA |
|
$ |
8,759 |
|
|
$ |
3,118 |
|
|
$ |
(4,879 |
) |
|
$ |
6,998 |
|
Foreign currency (gains) losses on
intercompany balances |
|
|
|
|
|
|
91 |
|
|
|
|
|
|
|
91 |
|
Stock-based compensation |
|
|
|
|
|
|
|
|
|
|
1,550 |
|
|
|
1,550 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA |
|
$ |
8,759 |
|
|
$ |
3,209 |
|
|
$ |
(3,329 |
) |
|
$ |
8,639 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, 2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
49,678 |
|
|
$ |
35,045 |
|
|
$ |
|
|
|
$ |
84,723 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA |
|
$ |
15,121 |
|
|
$ |
6,535 |
|
|
$ |
(9,462 |
) |
|
$ |
12,194 |
|
Foreign currency (gains) losses on
intercompany balances |
|
|
|
|
|
|
(1,074 |
) |
|
|
|
|
|
|
(1,074 |
) |
Litigation settlement |
|
|
|
|
|
|
|
|
|
|
650 |
|
|
|
650 |
|
Stock-based compensation |
|
|
|
|
|
|
|
|
|
|
1,004 |
|
|
|
1,004 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA |
|
$ |
15,121 |
|
|
$ |
5,461 |
|
|
$ |
(7,808 |
) |
|
$ |
12,774 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, 2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
56,494 |
|
|
$ |
41,417 |
|
|
$ |
|
|
|
$ |
97,911 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA |
|
$ |
18,143 |
|
|
$ |
6,902 |
|
|
$ |
(11,478 |
) |
|
$ |
13,567 |
|
Foreign currency (gains) losses on
intercompany balances |
|
|
|
|
|
|
(466 |
) |
|
|
|
|
|
|
(466 |
) |
Stock-based compensation |
|
|
|
|
|
|
|
|
|
|
4,584 |
|
|
|
4,584 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA |
|
$ |
18,143 |
|
|
$ |
6,436 |
|
|
$ |
(6,894 |
) |
|
$ |
17,685 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9
PRG-SCHULTZ INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following table reconciles net earnings to EBITDA and adjusted EBITDA for each of the
three and six month periods ended June 30, 2009 and 2008 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
June 30, |
|
|
June 30, |
|
|
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
Net earnings |
|
$ |
5,025 |
|
|
$ |
4,518 |
|
|
$ |
6,898 |
|
|
$ |
8,102 |
|
Income taxes |
|
|
618 |
|
|
|
400 |
|
|
|
1,162 |
|
|
|
993 |
|
Interest, net |
|
|
727 |
|
|
|
765 |
|
|
|
1,426 |
|
|
|
1,756 |
|
Depreciation and amortization |
|
|
1,417 |
|
|
|
1,315 |
|
|
|
2,708 |
|
|
|
2,716 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA |
|
|
7,787 |
|
|
|
6,998 |
|
|
|
12,194 |
|
|
|
13,567 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency (gains) losses on
intercompany balances |
|
|
(1,679 |
) |
|
|
91 |
|
|
|
(1,074 |
) |
|
|
(466 |
) |
Litigation settlement |
|
|
650 |
|
|
|
|
|
|
|
650 |
|
|
|
|
|
Stock-based compensation |
|
|
989 |
|
|
|
1,550 |
|
|
|
1,004 |
|
|
|
4,584 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA |
|
$ |
7,747 |
|
|
$ |
8,639 |
|
|
$ |
12,774 |
|
|
$ |
17,685 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note E Comprehensive Income
The Company applies the provisions of SFAS No. 130, Reporting Comprehensive Income (SFAS
No. 130). This Statement establishes items that are required to be recognized under accounting
standards as components of comprehensive income. SFAS No. 130 requires, among other things, that an
enterprise report a total for comprehensive income in condensed financial statements of interim
periods issued to shareholders. For the three-month periods ended June 30, 2009 and 2008, the
Companys consolidated comprehensive income was $4.6 million and $4.7 million, respectively. For
the six-month periods ended June 30, 2009 and 2008, the Companys consolidated comprehensive income
was $6.7 million and $7.3 million, respectively. The difference between consolidated comprehensive
income, as disclosed here, and traditionally determined consolidated net earnings, as set forth on
the accompanying Condensed Consolidated Statements of Operations (Unaudited), results from foreign
currency translation adjustments.
Note F Cash Equivalents
Cash and cash equivalents include all cash balances and highly liquid investments with an
initial maturity of three months or less. The Company places its temporary cash investments with
high credit quality financial institutions. At times, certain investments may be in excess of the
Federal Deposit Insurance Corporation insurance limit.
At June 30, 2009 and December 31, 2008, the Company had cash and cash equivalents of $28.5
million and $26.7 million, respectively, of which cash equivalents represented approximately $20.1
million and $23.3 million, respectively. The Company had $17.0 million and $18.5 million in cash
equivalents at U.S. banks at June 30, 2009 and December 31, 2008, respectively. At June 30, 2009
and December 31, 2008, certain of the Companys international subsidiaries held $3.1 million and
$4.8 million, respectively, in temporary investments. Most of the temporary investments held by
international subsidiaries at June 30, 2009 were held in Canada.
Note G Long Term Debt
Total debt outstanding at June 30, 2009 was $17.0 million which included a $16.6 million
outstanding balance on a variable rate term loan due 2011 and a $0.4 million capital lease
obligation. At June 30, 2009, there were no borrowings outstanding under the revolver portion of
the Companys credit facility.
The Company made mandatory principal payments on its term loan totaling $2.5 million during
the six months ended June 30, 2009. In March 2009, the Company entered into the second amendment
of its credit facility, lowering certain of the debt covenant thresholds through March 10, 2010 and
revising the borrowing base
10
PRG-SCHULTZ INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
calculation, which had the effect of reducing the borrowing capacity under the revolver
portion of the facility by $6.5 million as of June 30, 2009. The borrowing capacity is reduced over
the term of the credit facility and availability is based on eligible accounts receivable and other
factors. Availability under the revolver at June 30, 2009 was $16.4 million.
During the first quarter of 2008, the Company reduced the balance on its term loan under the
credit facility by $22.2 million. This reduction included $7.2 million of mandatory payments as
well as a voluntary payment of $15.0 million. In March 2008, the Company completed an amendment of
its credit facility, permitting the $15.0 million pre-payment without penalty and increasing the
initial borrowing capacity under the revolver portion of the facility by $10.0 million. An
additional $1.3 million mandatory principal payment was made in June 2008.
Note H Commitments and Contingencies
Legal Proceedings
On April 1, 2003, Fleming Companies (Fleming), one of the Companys larger U.S. Accounts
Payable Services clients at the time filed for Chapter 11 bankruptcy reorganization. During the
quarter ended March 31, 2003, the Company received approximately $5.6 million in payments on
account from Fleming. On January 24, 2005, the Company received a demand from the Fleming Post
Confirmation Trust (PCT), a trust which was created pursuant to Flemings Chapter 11
reorganization plan to represent the client, for preference payments received by the Company. The
demand stated that the PCTs calculation of the preference payments was approximately $2.9 million.
The Company disputed the claim. Later in 2005, the PCT filed suit against the Company seeking to
recover approximately $5.6 million in payments that were made to the Company by Fleming during the
90 days preceding Flemings bankruptcy filing, and that were alleged to be avoidable either as
preferences or fraudulent transfers under the Bankruptcy Code.
On July 29, 2009, the Company entered into a settlement agreement in connection with the PCT
lawsuit. Under the terms of the settlement agreement, the Company paid the PCT $1.65 million to
resolve all claims made by the PCT in the litigation. In connection with the settlement, the
Company has also agreed to dismiss all proofs of claim it may have against Fleming in connection
with the bankruptcy.
Retirement Obligations
The July 31, 2005 retirements of the Companys former Chairman, President and CEO, John M.
Cook, and the Companys former Vice Chairman, John M. Toma, resulted in an obligation to pay
retirement benefits of approximately $7.6 million (present value basis) to be paid in monthly cash
installments principally over a three-year period, beginning February 1, 2006. On March 16, 2006,
the terms of the applicable severance agreements were amended in conjunction with the Companys
financial restructuring. Pursuant to the terms of the severance agreements, as amended (1) the
Companys obligations to pay monthly cash installments to Mr. Cook and Mr. Toma were extended from
36 months to 58 months and from 24 months to 46 months, respectively; however, the total dollar
amount of monthly cash payments to be made to each remained unchanged, and (2) the Company agreed
to pay a fixed sum of $150,000 to defray the fees and expenses of the legal counsel and financial
advisors to Messrs. Cook and Toma. The original severance agreements, and the severance agreements,
as amended, also provide for an annual reimbursement, beginning on or about February 1, 2007, to
Mr. Cook and Mr. Toma for the cost of health insurance for themselves and their respective spouses
(not to exceed $25,000 and $20,000, respectively, subject to adjustment based on changes in the
Consumer Price Index), continuing until each reaches the age of 80. At June 30, 2009, accrued
payroll and related expenses included $1.3 million and noncurrent compensation obligations included
an additional $1.3 million related to these obligations.
Note I Fair Value Measurements
Effective January 1, 2008, the Company adopted SFAS No. 157, Fair Value Measurements (SFAS
No. 157), for all financial instruments and non-financial assets and liabilities accounted for at
fair value on a recurring basis.
Effective January 1, 2009, the Company adopted SFAS No. 157 for all non-financial assets and
liabilities accounted for at fair value on a non-recurring basis.
11
PRG-SCHULTZ INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Information regarding assets and liabilities measured at fair value on a recurring basis as of
June 30, 2009 and December 31, 2008 follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at Reporting Date Using |
|
|
|
|
|
|
|
Quoted Prices in |
|
|
|
|
|
|
|
|
|
|
|
|
|
Active Markets for |
|
|
Significant Other |
|
|
Significant |
|
|
|
|
|
|
|
Identical Assets |
|
|
Observable Inputs |
|
|
Unobservable Inputs |
|
|
|
Reporting Value |
|
|
(Level 1) |
|
|
(Level 2) |
|
|
(Level 3) |
|
As of June 30, 2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
28,482 |
|
|
$ |
28,482 |
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
26,688 |
|
|
$ |
26,688 |
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Information regarding non-financial assets and liabilities measured at fair value on a
nonrecurring basis as of June 30, 2009 and December 31, 2008 follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements Using |
|
|
|
|
|
|
|
Quoted Prices in |
|
|
|
|
|
|
|
|
|
|
|
|
|
Active Markets for |
|
|
Significant Other |
|
|
Significant |
|
|
|
|
|
|
|
Identical Assets |
|
|
Observable Inputs |
|
|
Unobservable Inputs |
|
|
|
Reporting Value |
|
|
(Level 1) |
|
|
(Level 2) |
|
|
(Level 3) |
|
As of June 30, 2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill |
|
$ |
4,600 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
4,600 |
|
Intangible assets, net |
|
|
17,954 |
|
|
|
|
|
|
|
|
|
|
|
17,954 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
22,554 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
22,554 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill |
|
$ |
4,600 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
4,600 |
|
Intangible assets, net |
|
|
18,968 |
|
|
|
|
|
|
|
|
|
|
|
18,968 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
23,568 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
23,568 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In accordance with the provisions of SFAS No. 142, Goodwill and Other Intangible Assets
(SFAS No. 142), the Company tests its goodwill and other intangible assets for impairment at
least annually. The annual impairment tests are based on fair value measurements using Level 3
inputs primarily consisting of estimated discounted cash flows expected to result from the use of
the assets. As of the date of the last test, which was October 1, 2008,
management concluded that there was no impairment of goodwill or other intangible assets as of
that date. SFAS No. 142 requires that intangible assets with finite lives be amortized over their
expected lives. During the three months ended June 30, 2009 and 2008, the Company recorded $0.5
million and $0.6 million, respectively, related to intangible assets with finite lives. During the
six months ended June 30, 2009 and 2008, the Company recorded $1.0 million and $1.1 million,
respectively, related to intangible assets with finite lives.
12
PRG-SCHULTZ INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Debt and capital lease obligations of $17.0 million and $19.6 million as of June 30, 2009 and
December 31, 2008, respectively, are reported at their unpaid balances as of those dates based on
their effective borrowing rates and repayment terms when originated. Management believes that the
fair values of such instruments are approximately equal to their carrying values as of those dates.
Fair value measurements of debt and capital lease obligations are based on Level 2 inputs as
defined in SFAS No. 157 (significant other observable inputs). Significant other observable inputs
would include effective borrowing rates for comparable instruments given the Companys perceived
credit risk.
Note J Subsequent Events
On July 1, 2009, 224,154 Performance Units under the 2006 MIP were settled by a former
executive officer. This settlement resulted in the issuance of 134,492 shares of common stock and a
cash payment of $0.3 million.
On July 17, 2009 the Company announced that its UK subsidiary had acquired the business and
assets of First Audit Partners LLP (FAP), a privately-held European provider of recovery audit
services based in Cambridge, England. The business and assets of FAP are expected to be fully
integrated into the Companys European operations (included in the International Accounts Payable
Services operating segment) and will expand the growing list of major European retailers to whom
the Company provides services.
The financial terms of the FAP Asset Purchase Agreement (APA) are denominated in British
pounds sterling; parenthetical references to U.S. dollar equivalents below are based on June 30,
2009 foreign exchange rates. The APA required an initial payment to the FAP owners of £1.0 million
($1.6 million) and requires additional deferred payments of £0.5 million ($0.8 million) in January
2010 and £0.8 million ($1.3 million) in July 2010. Additional variable consideration may also be
due based on the operating results generated by the acquired business over the next four years. The
Company has not completed the valuations and accounting required under SFAS No. 141(R).
On July 29, 2009, the Company entered into a settlement agreement in connection with the
previously disclosed lawsuit filed against the Company by the PCT, a trust created pursuant to
Flemings Chapter 11 reorganization plan. Under the terms of the settlement agreement, the Company
will pay the PCT $1.65 million to resolve all claims made by the PCT in the litigation. In
connection with the settlement, the Company has also agreed to dismiss all proofs of claim it may
have against Fleming in connection with the bankruptcy.
Selling, general and administrative expenses for the three and six month periods ended June
30, 2009 include a charge of $0.65 million related to the settlement with the PCT for amounts not
previously accrued and accounts payable and accrued expenses at June 30, 2009 includes $1.65
million related to the PCT settlement.
For purposes of accounting and disclosure requirements, the Company has evaluated events
through August 10, 2009, the issuance date of the condensed consolidated financial statements.
13
Item 2. Managements Discussion and Analysis of Financial Condition and Results of
Operations
Introduction
The Company conducts its operations through two reportable operating segments Domestic
Accounts Payable Services and International Accounts Payable Services. The Company includes the
unallocated portion of corporate selling, general and administrative expenses not specifically
attributable to the Accounts Payable Services segments in a category referred to as Corporate
Support. The Domestic and International Accounts Payable Services segments principally consist of
services that entail the review of client accounts payable disbursements to identify and recover
overpayments. These operating segments include accounts payable services provided to retailers and
wholesale distributors (the Companys historical client base) and accounts payable and other
services provided to various other types of business entities and governmental agencies. The
Company conducts business in North America, South America, Europe, Australia and Asia.
The Companys revenues are based on specific contracts with its clients. Such contracts
generally specify: (a) time periods covered by the audit; (b) the nature and extent of audit
services to be provided by the Company; (c) the clients duties in assisting and cooperating with
the Company; and (d) fees payable to the Company, generally expressed as a specified percentage of
the amounts recovered by the client resulting from overpayment claims identified. Clients generally
recover claims by either taking credits against outstanding payables or future purchases from the
involved vendors, or receiving refund checks directly from those vendors. The manner in which a
claim is recovered by a client is often dictated by industry practice. In addition, many clients
establish client-specific procedural guidelines that the Company must satisfy prior to submitting
claims for client approval. For some services provided by the Company, client contracts provide for
compensation to the Company in the form of a flat fee, a fee per hour, or a fee per other unit of
service.
The Companys results over the past several years have been affected by its involvement in the
demonstration recovery audit contractor (RAC) program of the Centers for Medicare and Medicaid
Services (CMS), the federal agency that administers the Medicare program. The demonstration RAC
program was designed by CMS to recover Medicare overpayments and identify Medicare underpayments
through the use of recovery auditing. CMS awarded the Company a contract to audit Medicare
spending in the State of California in 2005 as part of the RAC demonstration program. As a result
of the expiration of the Companys RAC demonstration program contract in March 2008, revenues from
the auditing of Medicare payments in California made only a small contribution to the Companys
overall revenues in the three and six months ended June 30, 2008. Pursuant to the Companys
agreement with CMS, there will be no additional revenues to the Company or repayments to CMS
relating to the RAC demonstration program.
In late 2006, legislation was enacted that mandated that recovery auditing of Medicare be
extended beyond the March 2008 end of the RAC demonstration program and that CMS enter into
additional contracts with recovery audit contractors to expand recovery auditing of Medicare
spending to all 50 states by January 1, 2010. On February 9, 2009, the Company announced that it
had entered into subcontracts with three of the four national RAC program contract awardees. The
Company expects future revenues from its participation as a RAC subcontractor; however, the
magnitude and timing of such revenues is not predictable. Management currently does not expect to
receive any meaningful revenues from Medicare auditing until the second half of 2010.
14
Results of Operations
The following table sets forth the percentage of revenues represented by certain items in the
Companys Condensed Consolidated Statements of Operations (Unaudited) for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months |
|
Six Months |
|
|
Ended |
|
Ended |
|
|
June 30, |
|
June 30, |
|
|
2009 |
|
2008 |
|
2009 |
|
2008 |
Revenues |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
Cost of revenues |
|
|
61.7 |
|
|
|
66.4 |
|
|
|
64.0 |
|
|
|
64.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin |
|
|
38.3 |
|
|
|
33.6 |
|
|
|
36.0 |
|
|
|
35.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative expenses |
|
|
24.3 |
|
|
|
22.2 |
|
|
|
24.8 |
|
|
|
24.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
|
14.0 |
|
|
|
11.4 |
|
|
|
11.2 |
|
|
|
11.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense, net |
|
|
1.6 |
|
|
|
1.5 |
|
|
|
1.7 |
|
|
|
1.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings before income taxes |
|
|
12.4 |
|
|
|
9.9 |
|
|
|
9.5 |
|
|
|
9.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income taxes |
|
|
1.4 |
|
|
|
0.8 |
|
|
|
1.4 |
|
|
|
1.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings |
|
|
11.0 |
% |
|
|
9.1 |
% |
|
|
8.1 |
% |
|
|
8.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three and Six Months Ended June 30, 2009 Compared to the Corresponding Periods of the Prior Year
Accounts Payable Services
Revenues. Domestic and International Accounts Payable Services revenues for the three and six
months ended June 30, 2009 and 2008 were as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months |
|
|
Six Months |
|
|
|
Ended |
|
|
Ended |
|
|
|
June 30, |
|
|
June 30, |
|
|
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
Domestic Accounts Payable Services revenues |
|
$ |
26.4 |
|
|
$ |
28.3 |
|
|
$ |
49.7 |
|
|
$ |
56.5 |
|
International Accounts Payable Services revenues |
|
|
19.0 |
|
|
|
21.3 |
|
|
|
35.0 |
|
|
|
41.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Accounts Payable Services revenues |
|
$ |
45.4 |
|
|
$ |
49.6 |
|
|
$ |
84.7 |
|
|
$ |
97.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Accounts Payable Services revenues for the quarter ended June 30, 2009 decreased by $4.2
million, or 8.4%, compared to the quarter ended June 30, 2008. Total Accounts Payable Services
revenues for the six months ended June 30, 2009 decreased by $13.2 million, or 13.5%, compared to
the prior period.
Domestic Accounts Payable Service revenues decreased by $1.9 million, or 6.5%, in the second
quarter of 2009 compared to the second quarter of 2008. For the six months ended June 30, 2009,
revenues decreased by $6.8 million, or 12.1%, compared to the prior year period. The improved year
over year revenue performance (lesser rate of decline) in the second quarter of 2009 as compared to
the first quarter of 2009 is partially attributable to focused efforts to reduce the backlog of
claims which built up during the previous three to six months. However, the vast majority of the
Companys recovery audit clients are in the retail industry segment. Thus, the Companys operations
are subject to the economic pressures the retail industry faces. Economic conditions which have
adversely impacted the U.S. retail industry have negatively impacted the Companys revenues,
particularly during the first quarter of 2009. Many of the Companys clients purchases have
declined making it more difficult to offset recovery claims. In addition, the liquidity of the
Companys clients vendor partners can significantly impact claim production, the claim approval
process and the ability of clients to offset or otherwise make recoveries from their vendors.
Management is also aware of speculation regarding an increase in retailer bankruptcies, which, if
correct, could adversely impact future revenues. In addition, the first six months of 2008 included
a small amount of revenue
earned from auditing Medicare payments in California under the CMS demonstration program and
there were no such revenues in the first six months of 2009.
15
Revenues in the International Accounts Payable Services segment for the three months ended
June 30, 2009 decreased by $2.3 million, or 10.9%, compared to the same period in 2008. For the six
months ended June 30, 2009, revenues decreased by $6.4 million, or 15.4%, compared to the prior
year period. The reported international revenues were adversely impacted by strengthening of the
U.S. dollar relative to foreign currencies throughout the world, particularly during the latter
half of 2008 and the first quarter of 2009. On a constant dollar basis adjusted for changes in
foreign exchange (FX) rates, International Accounts Payable Services revenues increased by 7.6%
during the second quarter of 2009 as compared to the second quarter of 2008 and increased by 5.5%
during the first six months of 2009 compared to the prior year period. These increases are
principally attributable to revenue gains in Canada and Latin America and were derived from both
incremental revenues from existing clients and, to a lesser extent, revenues from new clients.
Management believes there is opportunity to increase revenues in its core accounts payable
services segments as a result of both market share growth and the
growth of the addressable market for
such services. Management also believes that the Company has growth opportunities
related to the provision of adjacent services in the procure-to-pay
value chain and to the CFO suite of its core client base, and from
capitalizing on the Companys existing data mining and related competencies. Management believes
that the pursuit of such opportunities will require modest investments and that without such
investments, a reversal of the Companys declining revenue trend is not likely. Management intends
to execute newly developed strategic initiatives to pursue these opportunities. No assurances can
be provided, however, as to when any revenues from these opportunities will be recognized or the
magnitude of any such revenues.
The Company also expects future revenues from its participation as a subcontractor in three of
the Medicare RAC programs four geographic regions; however, the magnitude and timing of such
revenues is not predictable. Management currently does not expect to receive any meaningful
revenues from Medicare auditing until the second half of 2010.
Cost of Revenues (COR). COR consists principally of commissions and other forms of variable
compensation paid or payable to the Companys auditors based primarily upon the level of
overpayment recoveries and/or profit margins derived therefrom, fixed auditor salaries,
compensation paid to various types of hourly support staff, and salaried operational and client
service managers. Also included in COR are other direct and indirect costs incurred by these
personnel, including office rent, travel and entertainment, telephone, utilities, maintenance and
supplies, clerical assistance, and depreciation. A significant portion of the components comprising
COR is variable and will increase or decrease with increases and decreases in revenues.
Accounts Payable Services COR for the three and six months ended June 30, 2009 and 2008 were
as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months |
|
|
Six Months |
|
|
|
Ended |
|
|
Ended |
|
|
|
June 30, |
|
|
June 30, |
|
|
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
Domestic Accounts Payable Services COR |
|
$ |
14.5 |
|
|
$ |
16.8 |
|
|
$ |
29.1 |
|
|
$ |
32.5 |
|
International Accounts Payable Services COR |
|
|
13.5 |
|
|
|
16.2 |
|
|
|
25.1 |
|
|
|
30.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Accounts Payable Services COR |
|
$ |
28.0 |
|
|
$ |
33.0 |
|
|
$ |
54.2 |
|
|
$ |
63.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COR as a percentage of revenue for Domestic Accounts Payable Services was 55.0% and 59.4% for
the three months ended June 30, 2009 and 2008, respectively. This equates to gross margin
percentages of 45.0% and 40.6%, respectively, for the Domestic Accounts Payable Services segment
for the quarters ended June 30, 2009 and 2008. For the six months ended June 30, 2009 and 2008, COR
as a percentage of revenue for Domestic Accounts Payable Services was 58.6% and 57.5%,
respectively. This equates to gross margin percentages of 41.4% and 42.5%, respectively, for the
Domestic Accounts Payable Services segment for the six month periods ended June 30, 2009 and 2008.
16
The second quarter 2009 gross margin improvements are primarily attributable to a reduction in
healthcare audit spending, reductions in indirect costs (principally reduced headcount), increased
margins on management consulting projects, and severance charges included in the second quarter of
2008.
COR as a percentage of revenue for International Accounts Payable Services was 71.1% and 76.1%
for the three months ended June 30, 2009 and 2008, respectively. This equates to gross margin
percentages of 28.9% and 23.9%, respectively. For the six months ended June 30, 2009 and 2008 COR
as a percentage of revenue for International Accounts Payable Services was 71.7% and 74.4%,
respectively. This equates to gross margin percentages of 28.3% and 25.6%, respectively. COR as a
percentage of revenue has historically, and continues to be, higher in the International Accounts
Payable Services segment compared to the Domestic segment because of differences in the service
delivery models which, in turn, are principally attributable to scale. The margin increases in the
three-month and six-month periods ended June 30, 2009 compared to the same periods in 2008 are
largely due to a higher percentage of International Accounts Payable Services revenues coming from
geographic territories that have historically enjoyed higher margins.
Selling, General and Administrative Expenses (SG&A). SG&A expenses of the Accounts Payable
Services segments include the expenses of sales and marketing activities, information technology
services and allocated corporate data center costs, human resources, legal, accounting,
administration, foreign currency transaction gains and losses, gains and losses on assets
disposals, depreciation of property and equipment and amortization of intangibles related to the
Accounts Payable Services segments.
Accounts Payable Services SG&A for the three and six months ended June 30, 2009 and 2008 were
as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months |
|
|
Six Months |
|
|
|
Ended |
|
|
Ended |
|
|
|
June 30, |
|
|
June 30, |
|
|
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
Domestic Accounts Payable Services SG&A |
|
$ |
4.5 |
|
|
$ |
4.0 |
|
|
$ |
7.9 |
|
|
$ |
8.3 |
|
International Accounts Payable Services SG&A |
|
|
0.9 |
|
|
|
2.2 |
|
|
|
3.7 |
|
|
|
4.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Accounts Payable Services SG&A |
|
$ |
5.4 |
|
|
$ |
6.2 |
|
|
$ |
11.6 |
|
|
$ |
12.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic Accounts Payable Services SG&A expenses for the second quarter of 2009 increased by
$0.5 million, or 12.5%, and decreased for the six months ended June 30, 2009 by $0.4 million, or
4.8%, from the same periods in 2008. The second quarter 2009 increase is primarily attributable to
costs associated with the development and early stage execution of new strategic initiatives
discussed above.
International Accounts Payable Services SG&A includes foreign currency transaction gains and
losses, including the gains and losses related to intercompany balances. Gains and losses result
from the re-translation of the foreign subsidiaries payable to the U.S. parent from their local
currency to their U.S. dollar equivalent and substantial changes from period to period in FX rates
can significantly impact the amount of such gains and losses. During the three months ended June
30, 2009, the Company recognized $1.7 million of FX gains related to intercompany balances as
compared to $0.1 million of FX losses for the same period in 2008. For the first six months of
2009, the Company recognized $1.1 million of FX gains related to intercompany balances as compared
to $0.5 million of FX gains for the same period in 2008.
International Accounts Payable Services SG&A excluding the FX gains and losses related to
intercompany balances increased by $0.4 million for the three months ended June 30, 2009 compared
to the same period in 2008. Most of such increase is attributable to professional fees and other
costs associated with the acquisition of the business and assets of First Audit Partners LLP
(FAP), which was completed in July 2009 (see Note J Subsequent Events included in Notes to
Condensed Consolidated Financial Statements in Part I, Item 1 of this Form 10-Q). For the six
months ended June 30, 2009, International Accounts Payable Services SG&A excluding the FX gains and
losses related to intercompany balances increased by $0.2 million compared to the same period in
2008.
Corporate Support
Corporate Support SG&A represents the unallocated portion of SG&A expenses which are not
specifically attributable to Domestic or International Accounts Payable Services and include the
expenses of information
17
technology services, the corporate data center, human resources, legal, accounting, treasury,
administration, hedging activities and stock-based compensation charges.
Corporate Support SG&A totaled the following for the three and six months ended June 30, 2009
and 2008 (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months |
|
Six Months |
|
|
Ended |
|
Ended |
|
|
June 30, |
|
June 30, |
|
|
2009 |
|
2008 |
|
2009 |
|
2008 |
Corporate Support SG&A |
|
$ |
5.6 |
|
|
$ |
4.8 |
|
|
$ |
9.4 |
|
|
$ |
11.4 |
|
Corporate Support SG&A increased by $0.8 million in the second quarter of 2009 and decreased
by $2.0 million for the six months ended June 30, 2009, when compared to the same periods of 2008.
The second quarter of 2009 includes $1.0 million of stock-based compensation expense as compared to
$1.6 million of stock-based compensation expense included in the second quarter of 2008. The first
six months of 2009 includes $1.0 million of stock-based compensation expense as compared to $4.6
million of stock-based compensation expense included in the same period in 2008. Excluding the
stock-based compensation charges for both periods, Corporate Support SG&A increased by $1.4 million
in the second quarter of 2009 and increased by $1.6 million in the six months ended June 30, 2009
as compared to the same periods in 2008. Such increases are attributable to a $0.7 million
additional accrual for the settlement of the Fleming Post Confirmation Trust (PCT) litigation
(see Part II, Item 1 Legal Proceedings), professional fees related to the litigation, severance
charges, and increased compensation associated with hiring a new chief executive officer.
Other Items
Interest Expense. Net interest expense was $0.7 million and $0.8 million for the three months
ended June 30, 2009 and 2008, respectively. Net interest expense was $1.4 million and $1.8 million
for the six months ended June 30, 2009 and 2008, respectively. The decrease in interest expense
resulted from the $26.3 million of debt repayments made during 2008. Interest expense in the six
months ended June 30, 2009 primarily related to the term loan under the Companys senior credit
facility, which had an outstanding balance of $16.6 million as of June 30, 2009.
Income Tax Expense. The Companys effective income tax expense rates as indicated in the
accompanying Condensed Consolidated Financial Statements (Unaudited) do not reflect amounts that
would normally be expected because of the Companys valuation allowance against its deferred tax
assets. Reported income tax expense for the three and six month periods ended June 30, 2009 and
2008 primarily results from taxes on income of foreign subsidiaries.
Liquidity and Capital Resources
As of June 30, 2009, the Company had $28.5 million in cash and cash equivalents and no
borrowings under the revolver portion of its credit facility. The revolver had approximately $16.4
million of calculated availability for borrowings, however, management does not currently
anticipate any borrowings under the revolver. As of June 30, 2009, the Company was in compliance
with all of its debt covenants under the credit facility.
Operating Activities. Net cash provided by operating activities was $5.5 million and $2.4
million during the six months ended June 30, 2009 and 2008, respectively. During both six-month
periods, significant decreases in current assets, particularly receivables, and current liability
balances, particularly accounts payable, accrued payroll and other accrued expenses, were made.
Such changes are itemized in the Companys Condensed Consolidated Statements of Cash Flows included
in Part I, Item 1 of this Form 10-Q.
Investing Activities and Depreciation Expense. Depreciation and amortization expense for the
six months ended June 30, 2009 and 2008 amounted to $2.7 million in each six-month period. Net cash
used in investing activities was $1.4 million and $1.1 million during the six months ended June 30,
2009 and 2008, respectively. Cash used in investing activities for both periods was solely
attributable to capital expenditures. The increase in capital
18
expenditure spending in the first six months of 2009 compared to the first six months of 2008
was primarily related to investments to upgrade the Companys information technology
infrastructure.
Capital expenditures are discretionary and management currently expects future capital
expenditures to increase over the next several quarters as the Company continues to enhance its
healthcare audit systems in preparation for its performance of the CMS RAC subcontracts and other
healthcare audits and in preparation of the Companys strategic initiatives discussed above.
Changes in operating plans and results could change these expectations.
Financing Activities and Interest Expense. Net cash used in financing activities was $2.9
million and $23.7 million for the six months ended June 30, 2009 and 2008, respectively. During the
first six months of 2009, the Company made mandatory payments totaling $2.5 million on its term
loan, reduced its capital lease obligations by $0.2 million and repurchased 78,754 shares of its
outstanding common stock for approximately $0.2 million. During the first six months of 2008, the
Company reduced the balance of its term loan by $23.4 million. This amount included $8.4 million of
mandatory payments as well as a voluntary prepayment of $15.0 million. The Company also reduced its
capital lease obligations by $0.2 million during the first six months of 2008.
Management believes that the Company will have sufficient borrowing capacity and cash
generated from operations to fund its capital and operational needs for at least the next twelve
months.
Secured Credit Facility
In September 2007, the Company entered into an amended and restated credit facility with
Ableco LLC (Ableco) consisting of a $20 million revolving credit facility and a $45 million term
loan which was funded in October 2007. The principal portion of the $45 million term loan with
Ableco must be repaid in quarterly installments of $1.25 million each commencing in April 2008. The
loan agreement also requires an annual additional payment contingently payable based on an excess
cash flow calculation as defined in the agreement. During the first six months of 2008, the Company
reduced the balance on its term loan by $23.4 million. This reduction included $8.4 million of
mandatory payments as well as a voluntary payment of $15.0 million. During the first quarter of
2008, the Company entered into an amendment of its credit facility, permitting the $15.0 million
pre-payment without penalty and increasing the initial borrowing capacity under the revolver
portion of its facility by $10 million.
The Company reduced the balance on its term loan by $2.5 million during the first six months
of 2009. In March 2009, the Company entered into the second amendment of its credit facility,
lowering certain of the debt covenant thresholds through March 10, 2010 and revising the borrowing
base calculation, which had the effect of reducing the borrowing capacity under the revolver
portion of the facility by $6.5 million as of June 30, 2009. The borrowing capacity is reduced over
the term of the credit facility and availability is based on eligible accounts receivable and other
factors. Availability under the revolver at June 30, 2009 was $16.4 million.
The remaining balance of the term loan is due on September 17, 2011. Interest on the term loan
balance is payable monthly and accrues at the Companys option at either prime plus 2.0% or at
LIBOR plus 4.75%, but under either option may not be less than 9.75%. Interest on outstanding
balances under the revolving credit facility, if any, will accrue at the Companys option at either
prime plus 0.25% or at LIBOR plus 2.25%. The Company must also pay a commitment fee of 0.5% per
annum, payable monthly, on the unused portion of the revolving credit facility. As of June 30,
2009, there were no outstanding borrowings under the revolving credit facility. The
weighted-average interest rates on term loan balances outstanding under the credit facility during
the second quarter of 2009 and 2008, including fees, were 10.92% and 11.41%, respectively. The
weighted-average interest rates on term loan balances outstanding under the credit facility during
the first six months of 2009 and 2008, including fees, were 10.89% and 10.73%, respectively.
Due to the $15.0 million voluntary payment made in the first quarter of 2008, the annual
additional contingent payment based on 2008 excess cash flow due in April 2009 was not required.
The credit facility is guaranteed by each of the Companys direct and indirect domestic wholly
owned subsidiaries and certain of its foreign subsidiaries and is secured by substantially all of
the Companys assets (including the stock of the Companys domestic subsidiaries and two-thirds of
the stock of certain of the Companys foreign subsidiaries). The credit facility will mature on
September 17, 2011.
19
Stock Repurchase Program
In February 2008, the Board of Directors of the Company approved a stock repurchase program.
Under the terms of the program, the Company may repurchase up to $10 million of its common stock
from time to time through March 30, 2009. In March 2009, the Companys Board of Directors extended
the stock repurchase program through March 31, 2010. The second amendment to the Companys secured
credit facility permits the Company to repurchase up to $5.0 million of the Companys common stock
during the period from April 1, 2009 to March 31, 2010. For the six months ended June 30, 2009, the
Company repurchased 78,754 shares at an average price of $3.13 for a total purchase price of
approximately $0.2 million, all of which were made in the first quarter. This equates to
approximately 0.4% of the then outstanding shares.
2006 Management Incentive Plan
At the annual meeting of shareholders held on August 11, 2006, the shareholders of the Company
approved a proposal granting authorization to issue up to 2.1 million shares of the Companys
common stock under the Companys 2006 Management Incentive Plan (2006 MIP). On September 29,
2006, an aggregate of 682,301 Performance Units were awarded under the 2006 MIP to the seven
executive officers of the Company. At Performance Unit settlement dates (which vary by
participant), participants are paid in common stock and in cash. Participants will receive a number
of shares of Company common stock equal to 60% of the number of Performance Units being paid out,
plus a cash payment equal to 40% of the fair market value of that number of shares of common stock
equal to the number of Performance Units being paid out. On March 28, 2007, an additional executive
officer of the Company was granted 20,000 Performance Units under the 2006 MIP. The awards contain
certain anti-dilution and change of control provisions. Also, the number of Performance Units
awarded were automatically adjusted on a pro-rata basis upon the conversion into common stock of
the Companys senior convertible notes and Series A convertible preferred stock. During 2006 and
2007, an additional 1,558,557 Performance Units were granted as a result of this automatic
adjustment provision.
All Performance Units must be settled before April 30, 2016. On April 30, 2009, an aggregate
of 323,478 Performance Units were settled by six executive officers. Such settlements resulted in
the issuance of 194,084 shares of common stock and cash payments totaling $0.4 million. On June 1,
2009, an aggregate of 717,287 Performance Units were settled by a former executive officer. This
settlement resulted in the issuance of 430,372 shares of common stock and cash payments totaling
$0.9 million. As of June 30, 2009, total Performance Unit awards outstanding were 702,348 with an
aggregate intrinsic value of $1.9 million.
On July 1, 2009, 224,154 Performance Units were settled by a former executive officer. This
settlement resulted in the issuance of 134,492 shares of common stock and cash payments totaling
$0.3 million.
Executive Severance Payments
The July 31, 2005 retirements of the Companys former Chairman, President and CEO, John M.
Cook, and the Companys former Vice Chairman, John M. Toma, resulted in an obligation to pay
retirement benefits of approximately $7.6 million (present value basis) to be paid in monthly cash
installments principally over a three-year period, beginning February 1, 2006. On March 16, 2006,
the terms of the applicable severance agreements were amended in conjunction with the Companys
financial restructuring. Pursuant to the terms of the severance agreements, as amended (1) the
Companys obligations to pay monthly cash installments to Mr. Cook and Mr. Toma were extended from
36 months to 58 months and from 24 months to 46 months, respectively; however, the total dollar
amount of monthly cash payments to be made to each remained unchanged, and (2) the Company agreed
to pay a fixed sum of $150,000 to defray the fees and expenses of the legal counsel and financial
advisors to Messrs. Cook and Toma. The original severance agreements, and the severance agreements,
as amended, also provide for an annual reimbursement, beginning on or about February 1, 2007, to
Mr. Cook and Mr. Toma for the cost of health insurance for themselves and their respective spouses
(not to exceed $25,000 and $20,000, respectively, subject to adjustment based on changes in the
Consumer Price Index), continuing until each reaches the age of 80. At June 30, 2009, accrued
payroll and related expenses included $1.3 million and noncurrent compensation obligations included
an additional $1.3 million related to these obligations.
20
Off Balance Sheet Arrangements
As of June 30, 2009, the Company did not have any material off-balance sheet arrangements, as
defined in Item 303(a)(4)(ii) of the SECs Regulation S-K.
Critical Accounting Policies
The Companys significant accounting policies have been fully described in Note 1 of Notes to
Consolidated Financial Statements of the Companys Annual Report on Form 10-K for the year ended
December 31, 2008. Certain of these accounting policies are considered critical to the portrayal
of the Companys financial position and results of operations, as they require the application of
significant judgment by management. As a result, they are subject to an inherent degree of
uncertainty. These critical accounting policies are identified and discussed in the Managements
Discussion and Analysis of Financial Condition and Results of Operations section of the Companys
Annual Report on Form 10-K for the year ended December 31, 2008. Management bases its estimates and
judgments on historical experience and on various other factors that are believed to be reasonable
under the circumstances, the results of which form the basis for making judgments about the
carrying values of assets and liabilities that are not readily apparent from other sources. Actual
results may differ from these estimates under different assumptions or conditions. On an ongoing
basis, management evaluates its estimates and judgments, including those considered critical. The
development, selection and evaluation of accounting estimates, including those deemed critical,
and the associated disclosures in this Form 10-Q have been discussed with the Audit Committee of
the Board of Directors.
During the first quarter of 2008, management revised its estimation of expected refund rates
in its Domestic Accounts Payable Services segment. Such change in estimate resulted from a decline
in actual refund rates observed during 2007. The impact of the change in estimate resulted in a
$0.8 million reduction in the March 31, 2008 refund liability and a corresponding increase in first
quarter 2008 revenues. The impact on the quarter ended June 30, 2008 and the quarter and six months
ended June 30, 2009 was not significant and management does not expect that the change in estimate
will have a material impact on future period results.
New Accounting Standards
SFAS No. 141(R). In December 2007 the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 141 (revised 2007), Business
Combinations (SFAS No. 141(R)). SFAS No. 141(R) establishes principles and requirements for how
an acquirer recognizes and measures in its financial statements the identifiable assets acquired,
the liabilities assumed, and any noncontrolling interest in an acquiree; recognizes and measures
the goodwill acquired in a business combination or a gain from a bargain purchase; determines what
information to disclose to enable users of the financial statements to evaluate the nature and
financial effects of a business combination; and requires that costs associated with business
combinations be expensed as incurred. The adoption by the Company of SFAS No. 141(R) effective
January 1, 2009 did not have any material impact on the Companys consolidated financial
statements.
SFAS No. 160. In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in
Consolidated Financial Statements (SFAS No. 160). SFAS No. 160 establishes new accounting and
reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of
a subsidiary. Specifically, this statement requires the recognition of a noncontrolling interest
(minority interest) as equity in the consolidated financial statements and separate from the
parents equity. The amount of net income attributable to the noncontrolling interest will be
included in consolidated net income on the face of the income statement. SFAS No. 160 clarifies
that changes in a parents ownership interest in a subsidiary that do not result in deconsolidation
are equity transactions if the parent retains its controlling financial interest. In addition, this
statement requires that a parent recognize a gain or loss in net income when a subsidiary is
deconsolidated. Such gain or loss will be measured using the fair value of the noncontrolling
equity investment on the deconsolidation date. SFAS No. 160 also includes expanded disclosure
requirements regarding the interests of the parent and its noncontrolling interest. The adoption by
the Company of SFAS No. 160 effective January 1, 2009 did not have any material impact on the
Companys consolidated financial statements.
21
SFAS No. 161. In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative
Instruments and Hedging Activities an amendment of FASB Statement No. 133 (SFAS No. 161),
which requires additional disclosures about the objectives of derivative instruments and hedging
activities, the method of accounting for such instruments under SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities and its related interpretations, and a tabular
disclosure of the effects of such instruments and related hedged items on a companys financial
position, financial performance, and cash flows. The adoption by the Company of SFAS No. 161
effective January 1, 2009 did not have any material impact on the Companys consolidated financial
statements.
SFAS No. 165. In May 2009, the FASB issued SFAS No. 165, Subsequent Events (SFAS No. 165),
which establishes principles and requirements regarding the reporting of subsequent events
including disclosure of the date through which subsequent events have been evaluated and whether
that is the date that the financial statements were issued or available to be issued. The Company
adopted SFAS No. 165 effective June 30, 2009. The disclosures required by SFAS No. 165 are
included in Note J Subsequent Events included in Notes to Condensed Consolidated Financial
Statements in Part I, Item 1 of this Form 10-Q).
SFAS No. 166. In June 2009, the FASB issued SFAS No. 166, Accounting for Transfers of
Financial Assets, an amendment of SFAS No. 140 (SFAS No. 166), which eliminates the exceptions
for qualifying special-purpose entities from the consolidation guidance in SFAS No. 140, changes
the requirements for derecognizing financial assets, and requires additional disclosures in order
to enhance information reported to users of financial statements by providing greater transparency
about transfers of financial assets, including securitization transactions, and an entitys
continuing involvement in and exposure to the risks related to transferred financial assets. This
statement is effective for fiscal years beginning after November 15, 2009 and for transfers
occurring on or after the effective date. The Company has not determined the impact, if any, SFAS
No. 166 will have on its future financial statements.
SFAS No. 167. In June 2009, the FASB issued SFAS No. 167, Amendments to FASB Interpretation
No. 46(R) (SFAS No. 167), which amends FASB Interpretation No. 46(R) to require an analysis to
determine whether a variable interest gives a company a controlling financial interest in a
variable interest entity and requires ongoing reassessments of whether an enterprise is the primary
beneficiary of a variable interest entity. This statement is effective for fiscal years beginning
after November 15, 2009. The Company has not determined the impact, if any, SFAS No. 167 will have
on its future financial statements.
FSP APB 14-1. In May 2008, the FASB issued Staff Position No. APB 14-1, Accounting for
Convertible Debt Instruments That May Be Settled in Cash Upon Conversion (Including Partial Cash
Settlement) (FSP APB 14-1). FSP APB 14-1 requires that the liability and equity components of
convertible debt instruments that may be settled in cash upon conversion (including partial cash
settlement) be separately accounted for in a manner that reflects an issuers nonconvertible debt
borrowing rate. The resulting debt discount is amortized over the period the convertible debt is
expected to be outstanding as additional non-cash interest expense. Upon adoption, the provisions
of FSP APB 14-1 are required to be applied retrospectively to all periods presented. The adoption
by the Company of FSP APB 14-1 effective January 1, 2009 did not have any material impact on the
Companys consolidated financial statements.
FSP EITF 03-6-1. In June 2008, the FASB issued Staff Position No. EITF 03-6-1, Determining
Whether Instruments Granted in Share-Based Transactions Are Participating Securities (FSP EITF
03-6-1). FSP EITF 03-6-1 requires that unvested share-based payment awards that contain
nonforfeitable rights to dividends or dividend equivalents (whether paid or unpaid) be accounted
for as participating securities and should be included in the computation of EPS. The adoption by
the Company of FSP EITF 03-6-1 effective January 1, 2009 did not have any material impact on the
Companys consolidated financial statements.
Forward-Looking Statements
Some of the information in this Form 10-Q contains forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act
of 1934, which statements involve substantial risks and uncertainties including, without
limitation, (1) statements that contain projections of the Companys future results of operations
or of the Companys financial condition, (2) statements regarding the adequacy of the Companys
current working capital and other available sources of funds, (3) statements regarding goals and
plans for the future, including the Companys growth opportunities, (4) expectations regarding
future
22
accounts payable services revenue trends, and (5) the anticipated impact of Medicare recovery
audit services on the Companys business. All statements that cannot be assessed until the
occurrence of a future event or events should be considered forward-looking. These statements are
forward-looking statements within the meaning of the Private Securities Litigation Reform Act of
1995 and can be identified by the use of forward-looking words such as may, will, expect,
anticipate, believe, estimate and continue or similar words. Risks and uncertainties that
may potentially impact these forward-looking statements include, without limitation, those set
forth under Part I, Item 1A Risk Factors in the Companys Annual Report on Form 10-K for the year
ended December 31, 2008. The Company disclaims any obligation or duty to update or modify these
forward-looking statements.
There may be events in the future, however, that the Company cannot accurately predict or over
which the Company has no control. The risks and uncertainties listed in this section, as well as
any cautionary language in this Form 10-Q, provide examples of risks, uncertainties and events that
may cause our actual results to differ materially from the expectations we describe in our
forward-looking statements. You should be aware that the occurrence of any of the events denoted
above as risks and uncertainties and elsewhere in this Form 10-Q could have a material adverse
effect on our business, financial condition and results of operations.
23
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Foreign Currency Market Risk. Our reporting currency is the U.S. dollar although we transact
business in various foreign locations and currencies. As a result, our financial results could be
significantly affected by factors such as changes in foreign currency exchange rates, or weak
economic conditions in the foreign markets in which we provide services. Our operating results are
exposed to changes in exchange rates between the U.S. dollar and the currencies of the other
countries in which we operate. When the U.S. dollar strengthens against other currencies, the value
of foreign functional currency revenues decreases. When the U.S. dollar weakens, the value of the
foreign functional currency revenues increases. Overall, we are a net receiver of currencies other
than the U.S. dollar and, as such, benefit from a weaker dollar. We are therefore adversely
affected by a stronger dollar relative to major currencies worldwide. During the three and six
months ended June 30, 2009, we recognized $4.7 million and $6.2 million of operating income from
our International Accounts Payable Services segment, virtually all of which was originally
accounted for in currencies other than the U.S. dollar. Upon translation into U.S. dollars, such
operating income would increase or decrease, assuming a hypothetical 10% change in weighted-average
foreign currency exchange rates against the U.S. dollar, by approximately $0.4 million and $0.6
million, respectively for the three and six months ended June 30, 2009.
Interest Rate Risk. Our interest income and expense are sensitive to changes in the general
level of U.S. interest rates. In this regard, changes in U.S. interest rates affect the interest
earned on our cash equivalents as well as interest paid on our debt. As of June 30, 2009, the
Company had $16.4 million of calculated borrowing availability under its revolving credit facility
and $16.6 million outstanding under a term loan. The interest rate on outstanding revolving credit
loans is based on a floating rate equal to LIBOR plus 2.25% (or, at our option, a published prime
lending rate plus 0.25%). At June 30, 2009, there were no borrowings outstanding under the
revolving credit facility. However, assuming full utilization of the revolving credit facility, a
hypothetical 100 basis point change in interest rates applicable to the revolver would result in an
approximate $0.2 million change in annual pre-tax income. Interest on the term loan accrues at the
Companys option at either prime plus 2.0% or at LIBOR plus 4.75%, but under either option may not
be less than 9.75%. A hypothetical 100 basis point change in interest rates applicable to the term
loan would result in an approximate $0.2 million change in annual pre-tax income.
Stock-Based Compensation. The Company estimates the fair value of awards of restricted shares
and nonvested shares, as defined in SFAS No. 123(R), as being equal to the market value of the
common stock. Also, under SFAS No. 123(R), companies must classify their share-based payments as
either liability-classified awards or as equity-classified awards. Liability-classified awards are
remeasured to fair value at each balance sheet date until the award is settled. The Company has
classified its share-based payments that are settled in cash as liability-classified awards. The
liability for liability-classified awards is generally equal to the fair value of the award as of
the balance sheet date times the percentage vested at the time. The change in the liability amount
from one balance sheet date to another is charged (or credited) to compensation cost. Based on the
number of liability-classified awards outstanding as of June 30, 2009, a hypothetical $1.00 change
in the market value of the Companys common stock would result in a $0.3 million change in pre-tax
income.
24
Item 4. Controls and Procedures
The Companys management carried out an evaluation, under the supervision and with the
participation of its President and Chief Executive Officer (CEO) and its Chief Financial Officer
(CFO), of the effectiveness of the design and operation of the Companys disclosure controls and
procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934 (the Exchange
Act)) as of the end of the period covered by this Quarterly Report on Form 10-Q. Based upon that
evaluation, the CEO and CFO concluded that the Companys disclosure controls and procedures were
effective in reporting, on a timely basis, information required to be disclosed by the Company in
the reports the Company files or submits under the Exchange Act.
There were no changes in our internal control over financial reporting during the quarter
ended June 30, 2009 that have materially affected, or are reasonably likely to materially affect,
the Companys internal control over financial reporting.
25
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
On April 1, 2003, Fleming Companies (Fleming), one of the Companys larger U.S. Accounts
Payable Services clients at the time filed for Chapter 11 bankruptcy reorganization. During the
quarter ended March 31, 2003, the Company received approximately $5.6 million in payments on
account from Fleming. On January 24, 2005, the Company received a demand from the Fleming Post
Confirmation Trust (PCT), a trust which was created pursuant to Flemings Chapter 11
reorganization plan to represent the client, for preference payments received by the Company. The
demand stated that the PCTs calculation of the preference payments was approximately $2.9 million.
The Company disputed the claim. Later in 2005, the PCT filed suit against the Company seeking to
recover approximately $5.6 million in payments that were made to the Company by Fleming during the
90 days preceding Flemings bankruptcy filing, and that were alleged to be avoidable either as
preferences or fraudulent transfers under the Bankruptcy Code.
On July 29, 2009, the Company entered into a settlement agreement in connection with the PCT
lawsuit. Under the terms of the settlement agreement, the Company paid the PCT $1.65 million to
resolve all claims made by the PCT in the litigation. In connection with the settlement, the
Company has also agreed to dismiss all proofs of claim it may have against Fleming in connection
with the bankruptcy.
Item 1A. Risk Factors
There have been no material changes in the risks facing the Company as described in the
Companys Form 10-K for the year ended December 31, 2008.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
The Companys senior credit facility entered into on March 17, 2006 and amended on September
17, 2007, March 28, 2008 and March 30, 2009 prohibits the payment of any cash dividends on the
Companys capital stock.
No repurchases of the Companys common stock were made during the three months ended June 30,
2009.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
At the annual meeting of the shareholders held on May 27, 2009, the shareholders of the
Company approved all of the proposals which had been recommended by the Board of Directors and
included in the Companys proxy statement which was mailed to shareholders on or about April 23,
2009.
With respect to Proposal 1 (election of two Class I directors to serve until the 2012 annual
meeting and until their successors are elected and qualified):
19,504,555 shares, or 97.56% of the votes cast, in person or by proxy,
by the holders of the Companys common stock were voted for the election of Romil Bahl as a
Class I director, and 488,179 shares withheld authority.
19,486,880 shares, or 97.47% of the votes cast, in person or by proxy, by
the holders of the Companys common stock were voted for the election of Steven P. Rosenberg
as a Class I director, and 505,854 shares withheld authority.
The Companys directors serving in Class II and Class III did not stand for election at the
annual meeting. The directors serving in Class II, Patrick G. Dills and N. Colin Lind, will
continue to serve until the 2010 annual meeting
26
of shareholders and until their successors are elected and qualified. The directors serving
in Class III, David A. Cole and Philip J. Mazzilli Jr., will continue to serve until the 2011
annual meeting of shareholders and until their successors are elected and qualified.
With respect to Proposal 2 (to ratify BDO Seidman, LLP as the Companys independent registered
public accounting firm for fiscal year 2009), 19,774,322 shares, or 98.91% of the
votes cast, voted for the ratification, 209,225 shares voted against the ratification, and
9,187 shares abstained from voting on the proposal.
Item 5. Other Information
None.
27
Item 6. Exhibits
|
|
|
Exhibit |
|
|
Number |
|
Description |
3.1
|
|
Restated Articles of Incorporation of the Registrant, as amended
and corrected through August 11, 2006 (restated solely for the
purpose of filing with the Commission) (incorporated by reference
to Exhibit 3.1 to the Registrants Report on Form 8-K filed on
August 17, 2006). |
|
|
|
3.2
|
|
Amended and Restated Bylaws of the Registrant (incorporated by
reference to Exhibit 3.1 to the Registrants Form 8-K filed on
December 11, 2007). |
|
|
|
4.1
|
|
Specimen Common Stock Certificate (incorporated by reference to
Exhibit 4.1 to the Registrants Form 10-K for the year ended
December 31, 2001). |
|
|
|
4.2
|
|
See Restated Articles of Incorporation and Bylaws of the
Registrant, filed as Exhibits 3.1 and 3.2, respectively. |
|
|
|
4.3
|
|
Shareholder Protection Rights Agreement, dated as of August 9,
2000, between the Registrant and Rights Agent, effective May 1,
2002 (incorporated by reference to Exhibit 4.3 to the Registrants
Form 10-Q for the quarterly period ended June 30, 2002). |
|
|
|
4.3.1
|
|
First Amendment to Shareholder Protection Rights Agreement, dated
as of March 12, 2002, between the Registrant and Rights Agent
(incorporated by reference to Exhibit 4.3 to the Registrants Form
10-Q for the quarterly period ended September 30, 2002). |
|
|
|
4.3.2
|
|
Second Amendment to Shareholder Protection Rights Agreement, dated
as of August 16, 2002, between the Registrant and Rights Agent
(incorporated by reference to Exhibit 4.3 to the Registrants Form
10-Q for the quarterly period ended September 30, 2002). |
|
|
|
4.3.3
|
|
Third Amendment to Shareholder Protection Rights Agreement, dated
as of November 7, 2006, between the Registrant and Rights Agent
(incorporated by reference to Exhibit 4.1 to the Registrants Form
8-K filed on November 14, 2005). |
|
|
|
4.3.4
|
|
Fourth Amendment to Shareholder Protection Rights Agreement, dated
as of November 14, 2006, between the Registrant and Rights Agent
(incorporated by reference to Exhibit 4.1 to the Registrants Form
8-K filed on November 30, 2005). |
|
|
|
4.3.5
|
|
Fifth Amendment to Shareholder Protection Rights Agreement, dated
as of March 9, 2006, between the Registrant and Rights Agent
(incorporated by reference to Exhibit 4.9 to the Registrants Form
10-K for the year ended December 31, 2005). |
|
|
|
4.3.6
|
|
Sixth Amendment to Shareholder Protection Rights Agreement, dated
as of September 17, 2007, between the Registrant and Rights Agent
(incorporated by reference to Exhibit 4.1 to the Registrants Form
8-K filed on September 21, 2007). |
|
|
|
4.4
|
|
Indenture dated as of March 17, 2006 governing 10% Senior
Convertible Notes due 2011, with Form of Note appended
(incorporated by reference to Exhibit 4.1 to the Registrants Form
8-K filed on March 23, 2006). |
|
|
|
4.4.1
|
|
Supplemental Indenture to 10% Senior Convertible Notes Indenture
dated September 4, 2007 (incorporated by reference to Exhibit 10.2
to the Registrants Form 8-K filed on September 5, 2007). |
|
|
|
4.5
|
|
Indenture dated as of March 17, 2006 governing 11% Senior Notes
due 2011, with Form of Note appended (incorporated by reference to
Exhibit 4.2 to the Registrants Form 8-K filed on March 23,
2006). |
|
|
|
4.5.1
|
|
Supplemental Indenture to 11% Senior Notes Indenture dated
September 4, 2007 (incorporated by reference to Exhibit 10.1 to
the Registrants Form 8-K filed on September 5, 2007). |
|
|
|
10.1
|
|
Employment Agreement dated May 26, 2009, by and between Mr. Robert
B. Lee and the Company (incorporated by reference to Exhibit 10.1
to the Registrants Form 8-K filed on June 1, 2009). |
|
|
|
10.2
|
|
Separation Agreement, dated May 29, 2009, by and between Mr.
Bradley T. Roos and the Company (incorporated by reference to
Exhibit 10.2 to the Registrants Form 8-K filed on June 1, 2009). |
|
|
|
31.1
|
|
Certification of the Chief Executive Officer, pursuant to Rule
13a-14(a) or 15d-14(a), for the quarter ended June 30, 2009. |
28
|
|
|
Exhibit |
|
|
Number |
|
Description |
31.2
|
|
Certification of the Chief Financial Officer, pursuant to Rule
13a-14(a) or 15d-14(a), for the quarter ended June 30, 2009. |
|
|
|
32.1
|
|
Certification of the Chief Executive Officer and Chief Financial
Officer, pursuant to 18 U.S.C. Section 1350, for the quarter ended
June 30, 2009. |
29
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.
|
|
|
|
|
|
PRG-SCHULTZ INTERNATIONAL, INC.
|
|
August 10, 2009 |
By: |
/s/ Romil Bahl
|
|
|
|
Romil Bahl |
|
|
|
President, Chief Executive Officer, Director
(Principal Executive Officer) |
|
|
|
|
|
August 10, 2009 |
By: |
/s/ Robert B. Lee
|
|
|
|
Robert B. Lee |
|
|
|
Chief Financial Officer, Treasurer and Controller
(Principal Financial and Accounting Officer) |
|
|
30