e10vq
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, 2010
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
PRGX Global, 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
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30339-5986 |
(Address of principal executive offices)
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(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):
o Large accelerated filer |
o Accelerated filer |
þ Non-accelerated filer (Do not check if a smaller reporting company) |
o Smaller reporting company |
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 August 4, 2010 were 23,866,838.
PRGX GLOBAL, INC.
FORM 10-Q
For the Quarter Ended June 30, 2010
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
PRGX GLOBAL, 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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2010 |
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2009 |
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2010 |
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2009 |
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Revenues |
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$ |
45,507 |
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$ |
45,471 |
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$ |
86,836 |
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$ |
84,723 |
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Cost of revenues |
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31,363 |
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28,328 |
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61,271 |
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54,741 |
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Gross margin |
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14,144 |
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17,143 |
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25,565 |
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29,982 |
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Selling, general and administrative expenses |
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13,211 |
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10,773 |
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25,866 |
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20,496 |
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Operating income (loss) |
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933 |
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6,370 |
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(301 |
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9,486 |
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Interest expense, net |
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271 |
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727 |
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2,036 |
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1,426 |
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Earnings (loss) before income taxes |
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662 |
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5,643 |
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(2,337 |
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8,060 |
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Income taxes |
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627 |
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618 |
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1,063 |
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1,162 |
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Net earnings (loss) |
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$ |
35 |
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$ |
5,025 |
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$ |
(3,400 |
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$ |
6,898 |
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Basic earnings (loss) per common share (Note B) |
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$ |
0.00 |
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$ |
0.22 |
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$ |
(0.14 |
) |
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$ |
0.31 |
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Diluted earnings (loss) per common share (Note B) |
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$ |
0.00 |
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$ |
0.21 |
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$ |
(0.14 |
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$ |
0.30 |
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Weighted-average common shares outstanding (Note B): |
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Basic |
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23,624 |
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22,641 |
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23,575 |
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22,395 |
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Diluted |
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23,806 |
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23,382 |
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23,575 |
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23,260 |
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See accompanying Notes to Condensed Consolidated Financial Statements.
1
PRGX GLOBAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
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June 30, |
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December 31, |
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2010 |
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2009 |
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(Unaudited) |
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ASSETS |
Current assets: |
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Cash and cash equivalents (Notes F and I) |
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$ |
22,309 |
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$ |
33,026 |
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Restricted cash |
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170 |
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256 |
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Receivables: |
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Contract receivables, less allowances of $687 in 2010 and $1,032 in 2009: |
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Billed |
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25,400 |
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28,034 |
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Unbilled |
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4,106 |
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4,481 |
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29,506 |
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32,515 |
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Employee advances and miscellaneous receivables, less allowances of $235 in 2010
and $351 in 2009 |
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685 |
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276 |
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Total receivables |
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30,191 |
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32,791 |
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Prepaid expenses and other current assets |
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2,888 |
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2,335 |
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Total current assets |
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55,558 |
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68,408 |
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Property and equipment, at cost |
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39,764 |
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34,446 |
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Less accumulated depreciation and amortization |
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(25,073 |
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(24,443 |
) |
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Property and equipment, net |
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14,691 |
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10,003 |
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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 $15,445 in 2010 and $13,573 in 2009
(Note I) |
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23,170 |
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24,104 |
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Unbilled receivables |
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1,290 |
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1,410 |
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Other assets |
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887 |
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1,988 |
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$ |
100,196 |
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$ |
110,513 |
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LIABILITIES AND SHAREHOLDERS EQUITY |
Current liabilities: |
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Accounts payable and accrued expenses |
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$ |
13,165 |
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$ |
15,707 |
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Accrued payroll and related expenses |
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15,857 |
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19,884 |
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Refund liabilities |
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7,171 |
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7,467 |
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Deferred revenue |
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1,702 |
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916 |
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Current portions of debt and capital lease obligations (Note G) |
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3,089 |
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3,260 |
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Business acquisition obligations |
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1,571 |
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2,695 |
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Total current liabilities |
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42,555 |
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49,929 |
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Long-term debt and capital lease obligations (Note G) |
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10,500 |
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11,070 |
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Deferred income taxes |
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358 |
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Noncurrent compensation obligations |
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123 |
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978 |
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Refund liabilities |
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698 |
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733 |
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Other long-term liabilities |
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5,984 |
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6,364 |
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Total liabilities |
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60,218 |
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69,074 |
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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; $.01 stated value per share. Authorized 50,000,000 shares;
23,861,063 shares issued and outstanding as of June 30, 2010 and 23,272,892 shares
issued and outstanding as of December 31, 2009 |
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239 |
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233 |
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Additional paid-in capital |
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564,211 |
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562,563 |
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Accumulated deficit |
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(528,061 |
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(524,661 |
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Accumulated other comprehensive income |
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3,589 |
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3,304 |
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Total shareholders equity |
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39,978 |
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41,439 |
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$ |
100,196 |
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$ |
110,513 |
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See accompanying Notes to Condensed Consolidated Financial Statements.
2
PRGX GLOBAL, 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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2010 |
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2009 |
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Cash flows from operating activities: |
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Net earnings (loss) |
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$ |
(3,400 |
) |
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$ |
6,898 |
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Adjustments to reconcile net earnings (loss) to net cash
provided by (used in) operating activities: |
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Depreciation and amortization |
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4,312 |
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2,708 |
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Amortization of deferred loan costs (Note G) |
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1,451 |
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394 |
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Stock-based compensation expense |
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1,876 |
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1,004 |
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Loss on sale of property and equipment |
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2 |
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28 |
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Deferred income taxes |
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(540 |
) |
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10 |
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Changes in assets and liabilities: |
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Restricted cash |
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86 |
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(327 |
) |
Billed receivables |
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1,951 |
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5,200 |
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Unbilled receivables |
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|
495 |
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|
871 |
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Prepaid expenses and other current assets |
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(641 |
) |
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(256 |
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Other assets |
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20 |
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45 |
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Accounts payable and accrued expenses |
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(1,348 |
) |
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(3,748 |
) |
Accrued payroll and related expenses |
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(3,258 |
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(5,535 |
) |
Refund liabilities |
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(331 |
) |
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(1,022 |
) |
Deferred revenue |
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267 |
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(52 |
) |
Noncurrent compensation obligations |
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(855 |
) |
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(578 |
) |
Other long-term liabilities |
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(421 |
) |
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(180 |
) |
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Net cash provided by (used in) operating activities |
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(334 |
) |
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5,460 |
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Cash flows from investing activities: |
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Business acquisitions |
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(3,841 |
) |
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Purchases of property and equipment, net of disposal proceeds |
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(3,978 |
) |
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(1,409 |
) |
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Net cash used in investing activities |
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(7,819 |
) |
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(1,409 |
) |
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Cash flows from financing activities: |
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Repayment of former credit facility (Note G) |
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(14,154 |
) |
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(2,653 |
) |
Repayments of debt |
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(1,587 |
) |
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Proceeds from term loan (Note G) |
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15,000 |
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Repurchases of common stock |
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(246 |
) |
Restricted stock remitted by employees for taxes |
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(201 |
) |
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Payments for deferred loan costs |
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(619 |
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Net cash used in financing activities |
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(1,561 |
) |
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(2,899 |
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Effect of exchange rates on cash and cash equivalents |
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(1,003 |
) |
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|
642 |
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Net change in cash and cash equivalents |
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(10,717 |
) |
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|
1,794 |
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Cash and cash equivalents at beginning of period |
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|
33,026 |
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|
26,688 |
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Cash and cash equivalents at end of period |
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$ |
22,309 |
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$ |
28,482 |
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Supplemental disclosure of cash flow information: |
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Cash paid during the period for interest |
|
$ |
380 |
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|
$ |
1,059 |
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Cash paid during the period for income taxes, net of refunds |
|
$ |
942 |
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|
$ |
2,425 |
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|
|
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|
See accompanying Notes to Condensed Consolidated Financial Statements.
3
PRGX GLOBAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note A Basis of Presentation
The accompanying Condensed Consolidated Financial Statements (Unaudited) of PRGX Global, 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, 2010 are not necessarily indicative of the results that may be expected for the year
ending December 31, 2010.
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, 2009.
Certain reclassifications have been made to the 2009 amounts to conform to the presentation in
2010.
During the second quarter of 2010, management revised certain fixed asset estimated useful
lives used for the purpose of calculating depreciation expense. Such change in estimate resulted
from a review of managements planned fixed asset replacement cycle. Based on this new fixed asset
replacement cycle anticipated useful lives for fixed assets are three years for computer laptops,
four years for desktops, five years for IT server, storage and network equipment, five years for
furniture and fixtures and three years for purchased software. The impact of the change in estimate
on the quarter and six months ended June 30, 2010 was not significant and is expected to result in
a $0.3 million decline in depreciation expense for the year ended December 31, 2010.
New Accounting Standards
FASB ASC 985-605. In September 2009, the EITF reached final consensus on Issue 08-1, Revenue
Arrangements with Multiple Deliverables (Issue
08-1), which will update FASB ASC 985-605
Software-Revenue Recognition and changes the accounting for certain revenue arrangements. The new
requirements change the allocation methods used in determining how to account for multiple payment
streams and will result in the ability to separately account for more deliverables, and potentially
less revenue deferrals. Additionally, Issue 08-1 requires enhanced disclosures in financial
statements. Issue 08-1 is effective for revenue arrangements entered into or materially modified in
fiscal years beginning after June 15, 2010 on a prospective basis, with early application
permitted. The Company is currently evaluating the impact that the adoption of Issue 08-1 will have
on its consolidated financial statements.
4
PRGX GLOBAL, 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, 2010 and 2009 (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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Basic earnings (loss) per common share: |
|
2010 |
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|
2009 |
|
|
2010 |
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|
2009 |
|
Numerator for earnings (loss) per common share calculations: |
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|
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Net earnings (loss) |
|
$ |
35 |
|
|
$ |
5,025 |
|
|
$ |
(3,400 |
) |
|
$ |
6,898 |
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Denominator: |
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|
|
|
|
|
Denominator for basic earnings (loss) per common share
weighted-average common shares outstanding during
the period |
|
|
23,624 |
|
|
|
22,641 |
|
|
|
23,575 |
|
|
|
22,395 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings (loss) per common share |
|
$ |
0.00 |
|
|
$ |
0.22 |
|
|
$ |
(0.14 |
) |
|
$ |
0.31 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
June 30, |
|
|
June 30, |
|
Diluted earnings (loss) per common share: |
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
Numerator for earnings (loss) per common share calculations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings (loss) |
|
$ |
35 |
|
|
$ |
5,025 |
|
|
$ |
(3,400 |
) |
|
$ |
6,898 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for basic earnings (loss) per common share
weighted-average common shares outstanding during
the period |
|
|
23,624 |
|
|
|
22,641 |
|
|
|
23,575 |
|
|
|
22,395 |
|
Incremental shares from stock-based compensation plans |
|
|
182 |
|
|
|
741 |
|
|
|
|
|
|
|
865 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for diluted earnings (loss) per common share |
|
|
23,806 |
|
|
|
23,382 |
|
|
|
23,575 |
|
|
|
23,260 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings (loss) per common share |
|
$ |
0.00 |
|
|
$ |
0.21 |
|
|
$ |
(0.14 |
) |
|
$ |
0.30 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months ended June 30, 2010, options to purchase 1.9 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
period and were therefore antidilutive. For the six months ended June 30, 2010, 0.1 million
Performance Units related to the Companys 2006 Management Incentive Plan and options to purchase
2.3 million shares of common stock were not included in the computation of diluted earnings per
common share due to their antidilutive effect to loss per common share. 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. The number of common shares used in the earnings per common share
computations for both the three and six months periods ended June 30, 2010 include 1.0 million
nonvested restricted shares and 0.4 million nonvested restricted share units which are considered
to be participating securities. The number of common shares used in the earnings per common share
computations for both the three and six months 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.
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,
2009.
5
PRGX GLOBAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
An amendment to the 2008 EIP was adopted by the Companys Board of Directors in April 2010 and
approved at the Companys annual meeting of shareholders held on June 15, 2010. This amendment,
among other things, increases the number of shares reserved for issuance under the 2008 EIP by
3,400,000 shares to a total of 5,400,000 shares and provides that restricted stock awards and other
full value awards will count as 1.41 shares against the available pool of shares under the plan.
The following table summarizes stock option grants during the six months ended June 30, 2010
and 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
# of |
|
|
|
|
|
Weighted |
|
|
|
|
Options |
|
Vesting |
|
Average |
|
Grant Date |
|
|
Granted |
|
Period |
|
Exercise Price |
|
Fair Value |
|
2010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
42,730 |
|
|
1 year (1) |
|
$ |
3.96 |
|
|
$ |
103,184 |
|
|
|
|
595,010 |
|
|
3 years (2) |
|
|
4.00 |
|
|
|
1,542,951 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
296,296 |
|
|
4 years (3) |
|
|
3.57 |
|
|
|
763,529 |
|
|
|
|
42,730 |
|
|
1 year (4) |
|
|
2.82 |
|
|
|
88,011 |
|
|
|
|
483,255 |
|
|
3 years (2) |
|
|
2.82 |
|
|
|
1,003,866 |
|
|
|
|
(1) |
|
Non-qualified stock options were granted under the 2008 EIP to the Companys five
non-employee directors. The options vest in full upon the earlier of (i) June 23, 2011, and (ii)
the date of, and immediately prior to, the Companys 2011 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 dates. Unvested options are forfeited when a director leaves the Board. The
options expire on June 22, 2017, 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 June 22, 2017. |
|
(2) |
|
Non-qualified stock options were granted to executive and non-executive employees of the
Company pursuant to the 2008 EIP. The options vest in three equal annual installments beginning on
the first anniversary of the grant date. |
|
(3) |
|
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 Bahl. Mr. Bahl received an option to purchase 296,296 shares of
the common stock of the Company. 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. |
|
(4) |
|
Non-qualified stock options were granted under the 2008 EIP to the Companys five non-employee
directors. The options vested in full on May 26, 2010. |
The following table summarizes nonvested stock awards (restricted stock and restricted stock
units) grants during the six months ended June 30, 2010 and 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
# of |
|
|
|
|
|
|
Shares |
|
Vesting |
|
Grant Date |
|
|
Granted |
|
Period |
|
Fair Value |
|
2010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
42,730 |
|
|
1 year (1) |
|
$ |
169,211 |
|
|
|
|
595,010 |
|
|
3 years (2) |
|
|
2,381,465 |
|
|
2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
344,445 |
|
|
4 years (3) |
|
|
1,229,669 |
|
|
|
|
42,730 |
|
|
1 year (4) |
|
|
120,499 |
|
|
|
|
20,000 |
|
|
3 years (5) |
|
|
57,400 |
|
|
|
|
485,332 |
|
|
3 years (2) |
|
|
1,368,636 |
|
6
PRGX GLOBAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
|
|
(1) |
|
Nonvested stock awards (restricted 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) June 23, 2011, and (ii) the date of, and immediately prior to, the Companys 2011 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 dates. 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. |
|
(2) |
|
Nonvested stock awards (restricted stock and restricted stock units) were granted to 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 annual installments beginning
on the first anniversary of the grant date. 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. |
|
(3) |
|
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 Bahl. Mr. Bahl received nonvested stock awards (restricted stock)
representing 344,445 shares of the Companys common stock. Mr. Bahls nonvested stock awards were
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. 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. |
|
(4) |
|
Nonvested stock awards (restricted stock) were granted to the Companys five non-employee
directors pursuant to the 2008 EIP. The shares of restricted stock vested in full on May 26, 2010. |
|
(5) |
|
Nonvested stock awards (restricted stock) were granted to an employee of the Company pursuant
to the Companys 2008 EIP. The shares of restricted stock vest 50% on each of the first and third
anniversaries of the grant date. During the vesting period, the restricted stock grantee will be
entitled to receive dividends, if any, with respect to the nonvested shares and to vote the shares. |
2006 MIP Performance Units
On April 30, 2010, an aggregate of 134,493 Performance Units under the 2006 MIP were settled
by two executive officers and a former executive officer. These settlements resulted in the
issuance of 80,694 shares of common stock and cash payments totaling $0.4 million.
On May 3, 2010, 44,832 Performance Units were settled by a former executive officer. This
settlement resulted in the issuance of 26,898 shares of common stock and a cash payment of $0.1
million.
As of June 30, 2010, a total of 89,662 Performance Units were outstanding and fully vested
under the 2006 MIP.
Selling, general and administrative expenses for the three months ended June 30, 2010 and 2009
include $1.1 million and $1.0 million, respectively, related to stock-based compensation charges.
Selling, general and administrative expenses for the six months ended June 30, 2010 and 2009
include $1.9 million and $1.0 million, respectively, related to stock-based compensation charges.
At June 30, 2010, there was $8.0 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 2.38 years.
7
PRGX GLOBAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note D Operating Segments and Related Information
The Company is comprised of the following reportable operating segments:
Recovery Audit Services Americas
The Recovery Audit Services Americas segment represents recovery audit services (other than
healthcare recovery audit services) provided in the United States of America (U.S.), Canada and
Latin America.
Recovery Audit Services Europe/Asia-Pacific
The Recovery Audit Services Europe/Asia-Pacific segment represents recovery audit services
(other than healthcare recovery audit services) provided in Europe, Asia and the Pacific region.
New Services
The New Services segment represents services to healthcare organizations, including recovery
audit services, business analytics and advisory services.
Corporate Support
The Company includes the unallocated portion of corporate selling, general and administrative
expenses not specifically attributable to the Recovery Audit Services and New Services segments in
a segment referred to as Corporate Support.
The Company revised its reportable segments during the fourth quarter of 2009 to reflect the
current management and operational structure. Prior to the fourth quarter of 2009, the Company
reported its results under two operating segments Domestic Accounts Payable Services and
International Accounts Payable Services. The presentation of the prior years financial information
in this Form 10-Q has been restated to conform to the current presentation.
8
PRGX GLOBAL, 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, bargain purchase gains, acquisition obligations classified as
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, 2010 and 2009 is presented below (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recovery |
|
|
Recovery Audit |
|
|
|
|
|
|
|
|
|
|
|
|
Audit |
|
|
Services |
|
|
|
|
|
|
|
|
|
|
|
|
Services |
|
|
Europe/Asia |
|
|
New |
|
|
Corporate |
|
|
|
|
|
|
Americas |
|
|
Pacific |
|
|
Services |
|
|
Support |
|
|
Total |
|
Three Months Ended June 30, 2010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
29,870 |
|
|
$ |
12,957 |
|
|
$ |
2,680 |
|
|
$ |
|
|
|
$ |
45,507 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA |
|
$ |
7,887 |
|
|
$ |
855 |
|
|
$ |
(1,694 |
) |
|
$ |
(3,914 |
) |
|
$ |
3,134 |
|
Foreign currency (gains)
losses on intercompany
balances |
|
|
78 |
|
|
|
1,013 |
|
|
|
|
|
|
|
|
|
|
|
1,091 |
|
Acquisition obligations
classified as compensation |
|
|
|
|
|
|
106 |
|
|
|
|
|
|
|
|
|
|
|
106 |
|
Stock-based compensation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,058 |
|
|
|
1,058 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA |
|
$ |
7,965 |
|
|
$ |
1,974 |
|
|
$ |
(1,694 |
) |
|
$ |
(2,856 |
) |
|
$ |
5,389 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, 2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
32,070 |
|
|
$ |
11,951 |
|
|
$ |
1,450 |
|
|
$ |
|
|
|
$ |
45,471 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA |
|
$ |
11,641 |
|
|
$ |
2,439 |
|
|
$ |
(625 |
) |
|
$ |
(5,668 |
) |
|
$ |
7,787 |
|
Foreign currency (gains)
losses on intercompany
balances |
|
|
(320 |
) |
|
|
(1,359 |
) |
|
|
|
|
|
|
|
|
|
|
(1,679 |
) |
Litigation settlement |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
650 |
|
|
|
650 |
|
Stock-based compensation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
989 |
|
|
|
989 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA |
|
$ |
11,321 |
|
|
$ |
1,080 |
|
|
$ |
(625 |
) |
|
$ |
(4,029 |
) |
|
$ |
7,747 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9
PRGX GLOBAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recovery Audit |
|
|
|
|
|
|
|
|
|
|
|
|
Recovery Audit |
|
|
Services |
|
|
|
|
|
|
|
|
|
|
|
|
Services |
|
|
Europe/Asia |
|
|
New |
|
|
Corporate |
|
|
|
|
|
|
Americas |
|
|
Pacific |
|
|
Services |
|
|
Support |
|
|
Total |
|
Six Months Ended June 30, 2010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
54,843 |
|
|
$ |
27,695 |
|
|
$ |
4,298 |
|
|
$ |
|
|
|
$ |
86,836 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA |
|
$ |
13,471 |
|
|
$ |
2,372 |
|
|
$ |
(2,891 |
) |
|
$ |
(8,941 |
) |
|
$ |
4,011 |
|
Foreign currency
(gains) losses on
intercompany balances |
|
|
72 |
|
|
|
1,640 |
|
|
|
|
|
|
|
|
|
|
|
1,712 |
|
Acquisition obligations
classified as
compensation |
|
|
|
|
|
|
158 |
|
|
|
|
|
|
|
|
|
|
|
158 |
|
Stock-based compensation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,876 |
|
|
|
1,876 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA |
|
$ |
13,543 |
|
|
$ |
4,170 |
|
|
$ |
(2,891 |
) |
|
$ |
(7,065 |
) |
|
$ |
7,757 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, 2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
60,211 |
|
|
$ |
21,959 |
|
|
$ |
2,553 |
|
|
$ |
|
|
|
$ |
84,723 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA |
|
$ |
20,895 |
|
|
$ |
2,199 |
|
|
$ |
(1,438 |
) |
|
$ |
(9,462 |
) |
|
$ |
12,194 |
|
Foreign currency
(gains) losses on
intercompany balances |
|
|
(321 |
) |
|
|
(753 |
) |
|
|
|
|
|
|
|
|
|
|
(1,074 |
) |
Litigation settlement |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
650 |
|
|
|
650 |
|
Stock-based compensation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,004 |
|
|
|
1,004 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA |
|
$ |
20,574 |
|
|
$ |
1,446 |
|
|
$ |
(1,438 |
) |
|
$ |
(7,808 |
) |
|
$ |
12,774 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table reconciles net earnings to EBITDA and adjusted EBITDA for each of the
three and six month periods ended June 30, 2010 and 2009 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
June 30, |
|
|
June 30, |
|
|
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
Net earnings (loss) |
|
$ |
35 |
|
|
$ |
5,025 |
|
|
$ |
(3,400 |
) |
|
$ |
6,898 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income taxes |
|
|
627 |
|
|
|
618 |
|
|
|
1,063 |
|
|
|
1,162 |
|
Interest, net |
|
|
271 |
|
|
|
727 |
|
|
|
2,036 |
|
|
|
1,426 |
|
Depreciation and amortization |
|
|
2,201 |
|
|
|
1,417 |
|
|
|
4,312 |
|
|
|
2,708 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA |
|
|
3,134 |
|
|
|
7,787 |
|
|
|
4,011 |
|
|
|
12,194 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency (gains) losses on intercompany balances |
|
|
1,091 |
|
|
|
(1,679 |
) |
|
|
1,712 |
|
|
|
(1,074 |
) |
Litigation settlement |
|
|
|
|
|
|
650 |
|
|
|
|
|
|
|
650 |
|
Acquisition obligations classified as compensation |
|
|
106 |
|
|
|
|
|
|
|
158 |
|
|
|
|
|
Stock-based compensation |
|
|
1,058 |
|
|
|
989 |
|
|
|
1,876 |
|
|
|
1,004 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA |
|
$ |
5,389 |
|
|
$ |
7,747 |
|
|
$ |
7,757 |
|
|
$ |
12,774 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note E Comprehensive Income
The Company applies the provisions of FASB ASC 220, Comprehensive Income (FASB ASC 220).
This standard establishes items that are required to be recognized under accounting standards as
components of comprehensive income. FASB ASC 220 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, 2010 and 2009, the Companys
consolidated comprehensive income was $0.2 million
10
PRGX GLOBAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
and $4.6 million, respectively. For the six-month periods ended June 30, 2010 and 2009, the
Companys consolidated comprehensive income (loss) was $(3.1 million) and $6.7 million,
respectively. The difference between consolidated comprehensive income (loss), as disclosed here,
and traditionally determined consolidated net earnings (loss), as set forth on the accompanying
Condensed Consolidated Statements of Operations (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, 2010 and December 31, 2009, the Company had cash and cash equivalents of $22.3
million and $33.0 million, respectively, of which cash equivalents represented approximately $10.1
million and $20.7 million, respectively. The Company had $6.9 million and $17.1 million in cash
equivalents at U.S. banks at June 30, 2010 and December 31, 2009, respectively. At June 30, 2010
and December 31, 2009, certain of the Companys international subsidiaries held $3.2 million and
$3.6 million, respectively, in temporary investments. Most of the temporary investments held by
international subsidiaries at June 30, 2010 were held in Canada.
Note G - Long Term Debt
On January 19, 2010, the Company entered into a four-year revolving credit and term loan
agreement with SunTrust Bank (SunTrust). The SunTrust credit facility consists of a $15.0
million committed revolving credit facility and a $15.0 million term loan. The SunTrust credit
facility is guaranteed by the Company and all of its material domestic subsidiaries and secured by
substantially all of the assets of the Company. Availability under the SunTrust revolver is based
on eligible accounts receivable and other factors.
The principal portion of the SunTrust term loan must be repaid in quarterly installments of
$0.8 million each commencing in March 2010. The loan agreement requires mandatory prepayments with
the net cash proceeds from certain asset sales, equity offerings and insurance proceeds received by
the Company. The loan agreement also requires an annual additional prepayment contingently payable
based on an excess cash flow calculation as defined in the agreement. The first such payment is
payable in April 2011. The remaining balance of the SunTrust term loan is due in January 2014. As
of June 30, 2010, there were no outstanding borrowings under the SunTrust revolver. Interest on
both the revolver and term loan are payable monthly and accrued at an index rate using the
one-month LIBOR rate, plus an applicable margin as determined by the loan agreement. The applicable
interest rate margin varies from 2.25% per annum to 3.5% per annum, dependent on the Companys
consolidated leverage ratio, and is determined in accordance with a pricing grid under the SunTrust
loan agreement. The Company also must pay a commitment fee of 0.5% per annum, payable monthly, on
the unused portion of the $15.0 million SunTrust revolving credit facility. The Company made
mandatory principal payments on its SunTrust term loan totaling $1.5 million during the six months
ended June 30, 2010.
The Company used substantially all the funds from the SunTrust term loan to prepay in full the
$14.2 million outstanding under the Ableco LLC (Ableco) term loan. In conjunction with entering
into the new credit facility, $1.4 million of unamortized deferred loan costs from the Ableco LLC
term loan were written off in January 2010. No draw under the SunTrust revolver was necessary in
connection with the prepayment and termination of the Ableco term loan. See the Companys Form 10-K
for the year ended December 31, 2009 for additional information regarding the former Ableco credit
facility (including term loan) that was outstanding during the first six months of 2009 and for the
first 19 days of 2010.
Total debt outstanding at June 30, 2010 was $13.6 million which included a $13.5 million
outstanding balance on the SunTrust term loan and a $0.1 million capital lease obligation.
The Company made mandatory principal payments of $2.5 million on its Ableco term loan during the
six months ended June 30, 2009.
11
PRGX GLOBAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note H - Commitments and Contingencies
Legal Proceedings
In the normal course of business, the Company is involved in and subject to various claims,
contractual disputes and other uncertainties. Management, after reviewing with legal counsel all of
these actions and proceedings, believes that the aggregate losses, if any, will not have a material
adverse effect on the Companys financial position or results of operations.
Note I - Fair Value Measurements
Effective January 1, 2008, the Company adopted FASB ASC 820, Fair Value Measurements and
Disclosures (FASB ASC 820), 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 FASB ASC 820 for all non-financial assets and liabilities accounted for at fair
value on a non-recurring basis.
Information regarding assets and liabilities measured at fair value on a recurring basis as of
June 30, 2010 and December 31, 2009 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at Reporting Date Using |
|
|
|
|
|
|
|
Quoted Prices in |
|
|
|
|
|
|
|
|
|
|
|
|
|
Active Markets for |
|
|
Significant Other |
|
|
Significant |
|
|
|
Reporting |
|
|
Identical Assets |
|
|
Observable Inputs |
|
|
Unobservable Inputs |
|
|
|
Value |
|
|
(Level 1) |
|
|
(Level 2) |
|
|
(Level 3) |
|
As of June 30, 2010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
22,309 |
|
|
$ |
22,309 |
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Business acquisition obligations |
|
$ |
3,449 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
3,449 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
33,026 |
|
|
$ |
33,026 |
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Business acquisition obligations |
|
$ |
4,369 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
4,369 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In accordance with the provisions of FASB ASC 350, 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, 2009, management concluded that there was no impairment of goodwill or other intangible
assets as of that date. FASB ASC 350 requires that intangible assets with finite lives be
amortized over their expected lives.
Debt and capital lease obligations of $13.6 million and $14.3 million as of June 30, 2010 and
December 31, 2009, 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 FASB ASC 820 (significant other observable inputs). Significant other observable inputs
would include effective borrowing rates for comparable instruments given the Companys perceived
credit risk.
12
PRGX GLOBAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note J - Business Acquisition
In February 2010, the Company acquired all the issued and outstanding capital stock of Etesius
Limited (Etesius), a privately-held European provider of purchasing and payables technologies and
spend analytics based in Chelmsford, United Kingdom. The Etesius acquisition is allowing the
Company to expand its New Services offering, more specifically, its business analytics and advisory
services businesses.
The financial terms of the Etesius share purchase agreement (SPA) required an initial
payment to the Etesius shareholders of $2.8 million and a $0.3 million payment for obligations on
behalf of Etesius shareholders which resulted in a total estimated purchase price value of
approximately $3.1 million.
The SPA requires deferred payments to certain selling shareholders who are now employees of
the Company of $1.2 million over four years from the date of the SPA. The SPA also provides for
potential additional variable payments (earn-out) to such selling shareholders/employees over
such four-year period based on the financial performance of certain of the Companys services
lines, up to a maximum of $3.8 million. Because the Company will not be obligated to make the
deferred and earn-out payments upon the termination of employment of these employees under certain
circumstances, these payments will be recognized as compensation expense if earned.
The preliminary estimated fair values of the assets acquired and purchase price is summarized
as follows (in thousands):
|
|
|
|
|
Fair values of net assets acquired: |
|
|
|
|
Equipment |
|
$ |
18 |
|
Software |
|
|
3,207 |
|
Intangible assets, primarily customer relationships |
|
|
1,565 |
|
Deferred tax liabilities |
|
|
(1,168 |
) |
Working capital |
|
|
(489 |
) |
|
|
|
|
Fair value of net assets acquired |
|
$ |
3,133 |
|
|
|
|
|
|
|
|
|
|
Fair value of purchase price |
|
$ |
3,133 |
|
|
|
|
|
The estimated fair values of intangible assets were based on managements estimates of future
discounted cash flows to be generated by the acquired business over the estimated duration of those
cash flows. The estimated cash flows were based on managements projection of future revenues,
cost of revenues, capital expenditures, working capital needs and tax rates. Although the cash
flow projections are based on Etesius historical performance, there could be an unforeseen change
in the business that could negatively impact the estimated future cash flows which would negatively
impact the value of the intangible assets. Management estimated the duration of the cash flows
based on its projected useful life of the assets and business acquired. The discount rate was
determined based on specific business risk, cost of capital and other factors.
13
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
Overview
The Company conducts its operations through three reportable operating segments: Recovery
Audit Services Americas, Recovery Audit Services Europe/Asia-Pacific and New Services. The
Recovery Audit Services Americas segment represents recovery audit services (other than
healthcare recovery audit services) provided in the U.S., Canada and Latin America. The Recovery
Audit Services Europe/Asia-Pacific segment represents recovery audit services (other than
healthcare recovery audit services) provided in Europe, Asia and the Pacific region. The New
Services segment represents services to businesses and organizations in the healthcare industry
including recovery audit services, business analytics and advisory services. The Company includes
the unallocated portion of corporate selling, general and administrative expenses not specifically
attributable to the Recovery Audit Services and New Services segments in a segment referred to as
Corporate Support. The Company revised its reportable segments during the fourth quarter of 2009
to reflect the current management and operational structure. Prior to the fourth quarter of 2009,
the Company reported its results under two operating segments Domestic Accounts Payable Services
and International Accounts Payable Services. The presentation of the prior years financial
information in this Form 10-Q has been restated to conform to the current presentation.
The Companys revenues are based on specific contracts with its clients. Such contracts for
recovery audit services generally specify: (a) time periods covered by the audit; (b) the nature
and extent of 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, such as advisory services, 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 vast majority of the Companys recovery audit clients are in the retail industry segment,
which the Company believes has been significantly impacted by the recent global economic downturn.
The decrease in consumer spending associated with the economic downturn has resulted in many of the
Companys clients reducing their purchases from vendors, which makes it more difficult for those
clients to offset recovery claims that the Company discovers against current vendor invoices. In
addition, many client vendors are experiencing their own financial issues, and the liquidity of
these vendors can also negatively impact the claims recovery process. Because the vast majority
of the Companys current business is based on such recoveries, these factors may negatively impact
the Companys revenues in future periods. Client bankruptcy or insolvency proceedings could also
adversely impact the Companys future revenues.
Despite the impact of the recent economic downturn on consumer spending and retailers
purchases from their vendors, the effect on the Companys financial results has generally been
delayed, as the Company did not begin to experience any material negative effects from the downturn
until the first half of 2009. One factor insulating the Company somewhat from an economic downturn
is that the Companys clients are frequently more motivated to use the Companys services to
recover prior overpayments to make up for relatively weaker financial performance in their own
business operations. Also, the client purchase data on which the Company performs its recovery
audit services is historical data, the age of which varies from client to client; however, such
data typically reflects transactions between the Companys clients and their vendors that generally
took place 3 to 15 months prior to the data being provided to the Company for audit. The fact that
the Companys audits typically lag current client spending by up to 15 months has also delayed
somewhat the corresponding adverse impact of the recent economic downturn on the Companys
revenues.
Given that the data on which the Company performs its recovery audit services is typically 3
to 15 months removed from the actual dates of transactions between the Companys clients and their
vendors, the Company expects that it will not begin to recognize increased revenues from recovery
auditing in the retail industry as a result of improving economic conditions until well after the
positive effects of such improved conditions have been realized by its clients. While the net
impact of the recent economic downturn on the Companys recovery audit revenues is difficult to
precisely determine or predict, the Company believes that for the foreseeable future, its revenues
will remain at a level that will not have a significant adverse impact on the Companys liquidity,
and management has taken steps to mitigate any adverse impact of the economic downturn on the
Companys revenues and overall financial health. These steps include limiting salary increases for
Company employees and devoting substantial efforts in the development of a lower cost-to-serve
service model to enable the Company to more cost
14
effectively serve commercial clients in an effort to reduce the Companys dependency on
customers in the retail industry. Further, management is working diligently to expand the
Companys business beyond its core recovery audit services to retailers, such as the Companys
efforts to expand its business analytics and advisory services
businesses. Recent reported financial results have been significantly
impacted by the investments the Company is making in connection with
these initiatives.
Another example of an area in which the Company continues to devote considerable effort to
expand its business beyond its core accounts payable retail recovery auditing is the Companys work
in the healthcare industry. The Companys results in 2006 and 2007, and to a significantly lesser
extent in 2008, were 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. The Companys RAC demonstration program contract expired in
March 2008.
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. CMS is
responsible for implementation of the overall national RAC program, and the Companys future
revenues from its RAC program subcontracts are heavily dependent on CMSs implementation schedule
and priorities, both of which are beyond the Companys control. While the magnitude and timing of
the RAC program revenues are difficult to predict, management expects revenues from Medicare
auditing to become more meaningful in the second half of 2010. In preparation for its work as a RAC
subcontractor, the Company has incurred costs primarily relating to staffing and upgrading its
technology systems. The Company incurred an operating loss of $4.0 million and $2.3 million during
the year ended December 31, 2009 and six months ended June 30, 2010, respectively, related to this
effort.
15
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, |
|
|
2010 |
|
2009 |
|
2010 |
|
2009 |
Revenues |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
Cost of revenues |
|
|
68.9 |
|
|
|
62.3 |
|
|
|
70.6 |
|
|
|
64.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin |
|
|
31.1 |
|
|
|
37.7 |
|
|
|
29.4 |
|
|
|
35.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative expenses |
|
|
29.0 |
|
|
|
23.7 |
|
|
|
29.8 |
|
|
|
24.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss) |
|
|
2.1 |
|
|
|
14.0 |
|
|
|
(0.4 |
) |
|
|
11.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense, net |
|
|
0.6 |
|
|
|
1.6 |
|
|
|
2.3 |
|
|
|
1.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) before income taxes |
|
|
1.5 |
|
|
|
12.4 |
|
|
|
(2.7 |
) |
|
|
9.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income taxes |
|
|
1.4 |
|
|
|
1.4 |
|
|
|
1.2 |
|
|
|
1.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings (loss) |
|
|
0.1 |
% |
|
|
11.0 |
% |
|
|
(3.9 |
)% |
|
|
8.1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three and Six Months Ended June 30, 2010 Compared to the Corresponding Periods of the Prior Year
Revenues. Revenues for the three and six months ended June 30, 2010 and 2009 were as follows
(in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
June 30, |
|
|
June 30, |
|
|
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
Recovery Audit Services Americas |
|
$ |
29.9 |
|
|
$ |
32.1 |
|
|
$ |
54.8 |
|
|
$ |
60.2 |
|
Recovery Audit Services Europe/Asia-Pacific |
|
|
12.9 |
|
|
|
12.0 |
|
|
|
27.7 |
|
|
|
22.0 |
|
New Services |
|
|
2.7 |
|
|
|
1.4 |
|
|
|
4.3 |
|
|
|
2.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
45.5 |
|
|
$ |
45.5 |
|
|
$ |
86.8 |
|
|
$ |
84.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues for the quarter ended June 30, 2010 increased slightly from the amount
recognized in the quarter ended June 30, 2009. The net impact of changes in foreign currency
exchange (FX) rates on the comparison of the 2010 and 2009 second quarter revenues was
negligible. Total revenues for the six months ended June 30, 2010 increased by $2.1 million, or
2.5%, compared to the six months ended June 30, 2009. On a constant dollar basis, adjusted for
changes in foreign currency exchange rates, 2010 first half revenues were essentially flat with
2009 revenues, declining a net amount of 0.2%.
Recovery Audit Services Americas revenues decreased by $2.2 million, or 6.9%, in the second
quarter of 2010 compared to the second quarter of 2009. For the six months ended June 30, 2010,
revenues decreased by $5.4 million, or 9.0%, compared to the prior year period. On a constant
dollar basis, adjusted for changes in FX rates, Recovery Audit Services Americas revenues
decreased by 9.2% during the second quarter of 2010 as compared to the second quarter of 2009 and
decreased by 12.2% during the first six months of 2010 compared to the six months ended June 30,
2009. These decreases in Recovery Audit Services Americas revenues are due to several factors,
including fewer clients served, the impact of the Companys clients developing and strengthening
their own internal audit capabilities as a substitute for the Companys services and competitive
rate pressures. The Company is executing several strategic initiatives such as reintroducing a
sales and business development capability and making investments in software and the Companys
information technology infrastructure to enhance the Companys audit strategies and effectiveness.
Revenues in the Recovery Audit Services Europe/Asia-Pacific segment for the three months
ended June 30, 2010 increased by $0.9 million, or 7.5%, compared to the three months ended June 30,
2009. For the six months ended June 30, 2010, revenues increased by $5.7 million, or 25.9%,
compared to the prior year period. Reported revenues were negatively impacted by a comparatively
stronger U.S. dollar in the second quarter of 2010 relative to currencies in Europe and Asia. On a
constant dollar basis, adjusted for changes in FX rates, Recovery Audit Services
16
Europe/Asia-Pacific revenues increased by 14.1% during the second quarter of 2010 as compared to
the second
quarter of 2009. Differences in FX rates for the first half of 2010 compared to the first half
of 2009 had a net positive impact on reported comparative revenues. On a constant dollar basis,
adjusted for changes in FX rates, Recovery Audit Services Europe/Asia-Pacific revenues increased
by 24.9% during the first six months of 2010 compared to the corresponding prior year period. These
increases are largely attributable to revenues from the July 2009 acquisition of First Audit
Partners LLP (FAP), and to a lesser extent, to incremental revenues from existing and new
clients.
New Services revenues for the three months ended June 30, 2010 increased by $1.3 million, or
92.9%, compared to the three months ended June 30, 2009. For the six months ended June 30, 2010,
revenues increased by $1.8 million, or 72.0%, compared to the corresponding prior year period. New
Services revenues for both the three and six month periods ended June 30 in each of 2010 and 2009
primarily consist of advisory services revenues. Management expects New Services revenues to
significantly increase in the second half of 2010 due to increases in advisory services revenues
and revenues from entry into analytics services. The Company also expects future revenues from its
participation as a subcontractor in three of the Medicare RAC programs four geographic regions.
While the magnitude and timing of the RAC program revenues is difficult to predict, management
expects revenues from Medicare auditing to become more meaningful in 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 for the Companys recovery audit, business analytics and advisory services
businesses. 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.
COR for the three and six months ended June 30, 2010 and 2009 was as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
June 30, |
|
|
June 30, |
|
|
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
Recovery Audit Services Americas |
|
$ |
17.6 |
|
|
$ |
17.0 |
|
|
$ |
33.7 |
|
|
$ |
33.8 |
|
Recovery Audit Services Europe/Asia-Pacific |
|
|
10.2 |
|
|
|
9.4 |
|
|
|
21.5 |
|
|
|
17.4 |
|
New Services |
|
|
3.6 |
|
|
|
1.9 |
|
|
|
6.1 |
|
|
|
3.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
31.4 |
|
|
$ |
28.3 |
|
|
$ |
61.3 |
|
|
$ |
54.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COR as a percentage of revenues for Recovery Audit Services Americas was 58.9% and 53% for
the three months ended June 30, 2010 and 2009, respectively. This equates to gross margin
percentages of 41.1% and 47%, respectively, for the Recovery Audit Services Americas segment for
the quarters ended June 30, 2010 and 2009. For the six months ended June 30, 2010 and 2009, COR as
a percentage of revenues for Recovery Audit Services Americas was 61.5% and 56.1%, respectively.
This equates to gross margin percentages of 38.5% and 43.9%, respectively, for the Recovery Audit
Services Americas segment for the six-month periods ended June 30, 2010 and 2009.
The increases in Recovery Audit Services Americas COR as a percentage of revenues for the
second quarter of 2010 and six months ended June 30, 2010 as compared to the corresponding prior
year periods are attributable to COR not declining at the same rate as the related revenues
declined. More significantly, the Company is making investments in its various growth and other
strategic initiatives, portions of which are included in Recovery Audit Services Americas COR.
COR as a percentage of revenues for Recovery Audit Services Europe/Asia-Pacific was 79.1%
and 78.3% for the three months ended June 30, 2010 and 2009, respectively. This equates to gross
margin percentages of 20.9% and 21.7%, respectively, for the Recovery Audit Services
Europe/Asia-Pacific segment for the quarters ended June 30, 2010 and 2009. For the six months ended
June 30, 2010 and 2009, COR as a percentage of revenues for Recovery Audit Services
Europe/Asia-Pacific was 77.6% and 79.1%, respectively. This equates to gross margin percentages of
22.4% and 20.9%, respectively, for the Recovery Audit Services Europe/Asia-Pacific segment for
the six-month periods ended June 30, 2010 and 2009.
17
The percentage of revenues improvement for Recovery Audit Services Europe/Asia-Pacific COR
in the six months ended June 30, 2010 primarily resulted from lower commissions paid to third
parties in Europe as a percentage of revenues.
The higher COR as a percentage of revenues for Recovery Audit Services Europe/Asia-Pacific
(79.1% for the second quarter of 2010 and 77.6% for the six months ended June 30, 2010) compared to
Recovery Audit Services Americas (58.9% for the second quarter of 2010 and 61.5% for the six
months ended June 30, 2010) is primarily due to differences in service delivery models, scale and
geographic fragmentation. The Recovery Audit Services Europe/Asia-Pacific segment generally
serves fewer clients in each geographic market and generates lower revenues per client than those
served by the Companys Recovery Audit Services Americas segment.
New Services COR for the three and six months ended June 30, 2010 and 2009 relates primarily
to costs of advisory services and costs associated with the Companys performance of the CMS RAC
program subcontracts. The amount by which New Services COR exceeds New Services revenues represents
a portion of the Companys investment in the New Services segment. Management expects such
investment (COR in excess of revenues) to continue throughout 2010.
Selling, General and Administrative Expenses (SG&A). SG&A expenses of the Recovery Audit
and New 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
Recovery Audit and New Services segments.
Recovery Audit and New Services SG&A for the three and six months ended June 30, 2010 and 2009
were as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
June 30, |
|
|
June 30, |
|
|
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
Recovery Audit Services Americas |
|
$ |
5.8 |
|
|
$ |
4.5 |
|
|
$ |
10.6 |
|
|
$ |
7.8 |
|
Recovery Audit Services Europe/Asia-Pacific |
|
|
2.3 |
|
|
|
0.2 |
|
|
|
4.7 |
|
|
|
2.5 |
|
New Services |
|
|
1.2 |
|
|
|
0.4 |
|
|
|
1.7 |
|
|
|
0.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
9.3 |
|
|
$ |
5.1 |
|
|
$ |
17.0 |
|
|
$ |
11.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recovery Audit Services Americas SG&A increased 28.9% for the three months ended June 30,
2010 and increased 35.9% for the six months ended June 30, 2010 from the comparable periods in
2009. These increases in Recovery Audit Services Americas SG&A were primarily a result of costs
incurred in connection with the Companys efforts to build its sales and business development
capabilities, combined with higher depreciation expense resulting from investments to upgrade the
Companys information technology infrastructure.
Recovery Audit Services Europe/Asia-Pacific SG&A includes FX transaction gains and losses,
including the gains and losses related to intercompany balances. During the three and six months
ended June 30, 2010, Recovery Audit Services Europe/Asia-Pacific SG&A recognized $1.0 million
and $1.6 million of FX transaction losses, respectively, related to intercompany balances. During
the three and six months ended June 30, 2009, Recovery Audit Services Europe/Asia-Pacific SG&A
recognized $1.4 million and $0.8 million of FX transaction gains, respectively, related to
intercompany balances.
Recovery Audit Services Europe/Asia-Pacific SG&A, excluding the FX transaction losses
related to intercompany balances, decreased by $0.3 million for the three months ended June 30,
2010 compared to the three months ended June 30, 2009. For the six months ended June 30, 2010,
Recovery Audit Services Europe/Asia-Pacific SG&A excluding the FX transaction losses related to
intercompany balances, decreased by $0.2 million compared to the same period in 2009. The slightly
higher 2009 amounts resulted from professional fees associated with the acquisition of FAP which
was completed in July 2009.
New Services SG&A for the second quarter of 2010 increased by $0.8 million compared to the
second quarter of 2009. For the six months ended June 30, 2010, New Services SG&A increased $1.0
million compared to the same period in 2009. These increases were primarily attributable to
operating costs of Etesius Limited which was acquired in January 2010 (See Note J Business
Acquisition), increased use of professional services and depreciation of fixed assets acquired for
the Companys preparation for performance of the CMS RAC program subcontracts.
18
Corporate Support
Corporate Support SG&A represents the unallocated portion of SG&A expenses which are not
specifically attributable to Recovery Audit Services Americas, Recovery Audit Services
Europe/Asia-Pacific or New Services and includes the expenses of information technology services,
the corporate data center, human resources, legal, accounting, treasury, administration and
stock-based compensation charges.
Corporate Support SG&A totaled the following for the three and six months ended June 30, 2010
and 2009 (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Six Months Ended |
|
|
June 30, |
|
June 30, |
|
|
2010 |
|
2009 |
|
2010 |
|
2009 |
Selling, general and administrative expenses |
|
$ |
3.9 |
|
|
$ |
5.7 |
|
|
$ |
8.9 |
|
|
$ |
9.5 |
|
Corporate Support SG&A for the quarter ended June 30, 2010 and 2009 includes stock-based
compensation charges of $1.1 million and $1.0 million, respectively. The first six months of 2010
includes $1.9 million of stock-based compensation charges as compared to $1.0 million of
stock-based compensation charges included in the same period in 2009.
Corporate Support SG&A, excluding stock-based compensation charges, decreased 40.4% for the
quarter ended June 30, 2010 and decreased 17.6% for the six months ended June 30, 2010, when
compared to the same periods in 2009. These decreases are attributable to a $0.7 million accrual
for the settlement of the Fleming Post Confirmation Trust litigation, professional fees related to
litigation and severance charges incurred in 2009 for which there is no comparable costs in 2010
and decreased incentive compensation accruals in 2010.
Other Items
Interest Expense. Net interest expense was $0.3 million and $0.7 million for the three months
ended June 30, 2010 and 2009, respectively. Net interest expense was $2.0 million and $1.4 million
for the six months ended June 30, 2010 and 2009, respectively. Interest expense in the three months
ended June 30, 2010 consisted primarily of interest related to the SunTrust Bank term loan under
the Companys credit facility, which had an outstanding balance of $13.5 million as of June 30,
2010. Interest expense in the six months ended June 30, 2010 included a charge of $1.4 million for
unamortized deferred loan costs from the Ableco LLC term loan which were written off in January
2010 in conjunction with the Company entering into a new credit facility with SunTrust Bank (see
New Credit Facility below).
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-month and six-month periods ended June 30, 2010
and 2009 primarily results from taxes on income of foreign subsidiaries.
19
Liquidity and Capital Resources
As of June 30, 2010, the Company had $22.3 million in cash and cash equivalents and no
borrowings under the revolver portion of its credit facility. The revolver had approximately $8.0
million of calculated availability for borrowings.
While management believes that the recent global economic downturn has contributed to a
decrease in the revenues that the Company would have otherwise earned in recent periods, this
decrease has not resulted in the need for the Company to draw down on its revolving credit facility
to fund its operations and has not materially adversely impacted the Companys overall liquidity
position. However, if revenues were to significantly decline, it could have an adverse impact on
the Companys liquidity. The Company was in compliance with the covenants in its new credit
facility as of June 30, 2010 (see New Credit Facility below).
Operating Activities. Net cash provided by (used in) operating activities was $(0.3 million)
and $5.5 million during the six months ended June 30, 2010 and 2009, respectively. The $5.8 million
decrease in cash provided by (used in) operating activities in the six months ended June 30, 2010
compared to the same period in 2009 was due to a $9.8 million reduction in operating profit
partially offset by a $1.5 million increase in the change in operating assets and liabilities from
the beginning to the end of the relevant periods. Portions of the reduced operating profit were
attributable to increases in noncash charges such as depreciation and amortization expense and
stock-based compensation which do not impact cash generated by operating activities. The $1.5
million increase in the change in operating assets and liabilities in the first six months of 2010
compared to the same period in 2009 was the result of lower payments for compensation, severance
and other accrued liabilities made during the six months ended June 30, 2010 compared to the first
six months of 2009. Such changes are itemized in the Companys Consolidated Statements of Cash
Flows included in Item 1 of this Form 10-Q.
Investing Activities and Depreciation and Amortization Expense. Depreciation and amortization
expense for the six months ended June 30, 2010 and 2009 amounted to $4.3 million and $2.7 million,
respectively. Net cash used for property and equipment capital expenditures was $4.0 million and
$1.4 million during the six months ended June 30, 2010 and 2009, respectively. Management
currently expects this increased level of capital expenditures to continue over the next several
quarters as the Company continues to enhance its healthcare audit systems supporting its
performance in the CMS RAC program and other healthcare audits and in preparation and execution of
the Companys strategic initiatives. Capital expenditures are discretionary and changes in
operating plans and results could cause management to alter its capital expenditure plans.
In January 2010, the Company made the first of two deferred payments required as part of the
acquisition of First Audit Partners LLP in the amount of £0.5 million ($0.8 million). The second
payment of £0.8 million ($1.3 million) is due in July 2010.
As discussed more fully in Note J Business Acquisition in Notes to Condensed Consolidated
Financial Statements in Item 1 of this Form 10-Q, in February 2010, the Company acquired all the
issued and outstanding capital stock of Etesius Limited for a purchase price valued at $3.1
million. The purchase price included an initial cash payment of $2.8 million which was paid in
February 2010.
Financing Activities and Interest Expense. Net cash used in financing activities was $1.6
million and $2.9 million for the six months ended June 30, 2010 and 2009, respectively. As
described in more detail below, in January 2010, the Company entered into a new $15.0 million term
loan, the proceeds of which were used to repay the remaining $14.2 million of outstanding principal
from the Ableco LLC term loan and to pay $0.5 million in loan costs incurred in connection with the
new SunTrust credit facility. During the first six months of 2010, the Company made mandatory
payments totaling $1.5 million on its new term loan and reduced its capital lease obligations by
$0.1 million.
New Credit Facility
On January 19, 2010, the Company entered into a four-year revolving credit and term loan
agreement with SunTrust Bank (SunTrust). The SunTrust credit facility consists of a $15.0
million committed revolving credit facility and a $15.0 million term loan. The SunTrust credit
facility is guaranteed by the Company and its domestic subsidiaries and secured by substantially
all of the assets of the Company. Amounts eligible for borrowing under the SunTrust revolver are
based on eligible accounts receivable and other factors. Availability under the SunTrust revolver
at June 30, 2010 was $8.0 million.
20
The principal portion of the SunTrust term loan must be repaid in quarterly installments of
$0.8 million each commencing in March 2010. The loan agreement requires mandatory prepayments with
the net cash proceeds from certain asset sales, equity offerings and insurance proceeds received by
the Company. The loan agreement also requires an additional annual prepayment if excess cash flow
as defined in the agreement exceeds a certain threshold. The first of any such excess cash flow
payments would be payable in April 2011. The remaining balance of the SunTrust term loan is due in
January 2014. As of June 30, 2010, there were no outstanding borrowings under the SunTrust
revolver. Interest on both the revolver and term loan are payable monthly and accrues at an index
rate using the one-month LIBOR rate, plus an applicable margin as determined by the loan agreement.
The applicable interest rate margin varies from 2.25% per annum to 3.5% per annum, dependent on the
Companys consolidated leverage ratio, and is determined in accordance with a pricing grid under
the SunTrust loan agreement. The Company also must pay a commitment fee of 0.5% per annum, payable
monthly, on the unused portion of the $15.0 million SunTrust revolving credit facility. As of June
30, 2010 the applicable interest rate under the SunTrust credit facility was 2.85%. The Company
incurred approximately $0.7 million of costs in connection with entering into the SunTrust credit
facility. Such amount has been capitalized and is being amortized over the life of the facility.
The SunTrust credit facility includes customary affirmative, negative, and financial covenants
binding on the Company, including delivery of financial statements and other reports, maintenance
of existence, and transactions with affiliates. The negative covenants limit the ability of the
Company, among other things, to incur debt, incur liens, make investments, sell assets, repurchase
shares of its capital stock or declare or pay dividends on its capital stock. The financial
covenants included in the SunTrust credit facility, among other things, limit the amount of capital
expenditures the Company can make, set forth maximum leverage and net funded debt ratios for the
Company and a minimum fixed charge coverage ratio, and also require the Company to maintain minimum
consolidated earnings before interest, taxes, depreciation and amortization. In addition, the
SunTrust credit facility includes customary events of default.
The Company used substantially all the funds from the SunTrust term loan to repay in full the
$14.2 million outstanding under the Ableco LLC term loan.
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.
Stock Repurchase Program
In February 2008, the Board of Directors of the Company approved a stock repurchase program.
Under the terms of the program, as extended by the Board of Directors, the Company may repurchase
up to $10 million of its common stock from time to time through March 31, 2011. The SunTrust credit
facility permits the Company to repurchase up to $1.0 million of its common stock annually. For the
six months ended June 30, 2010, the Company did not repurchase any shares of its common stock under
this program.
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. 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, 2010, an aggregate
of 134,493 Performance Units were settled by two executive officers and one former executive
officer. These settlements resulted in the issuance of 80,694 shares of common stock and cash
payments totaling $0.4 million. On May 3, 2010, an aggregate of 44,831 Performance Units were
settled by a former executive officer. This settlement resulted in the issuance of 26,898 shares of
common stock and a cash payment of $0.1 million. As of June 30, 2010, total Performance Unit awards
outstanding were 89,662 with an aggregate intrinsic value of $0.4 million.
21
Off Balance Sheet Arrangements
As of June 30, 2010, 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, 2009. 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, 2009. 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.
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 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, 2009. 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.
22
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, 2010, we recognized $3.9 million and $7.9 million, respectively, of operating
income from operations located outside the U.S., 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 $0.8 million,
respectively, for the three and six months ended June 30, 2010.
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. The Company had $8.0 million
of calculated borrowing availability under its revolving credit facility and $13.5 million
outstanding under a term loan as of June 30, 2010. Interest on both the revolver and term loan are
payable monthly and accrued at an index rate using the one-month LIBOR rate, plus an applicable
margin as determined by the loan agreement. The applicable interest rate margin varies from 2.25%
per annum to 3.5% per annum. There are 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 $0.1
million change in annual pre-tax income. A hypothetical 100 basis point change in interest rates
applicable to the term loan would result in an approximate $0.1 million change in annual pre-tax
income.
23
Item 4. Controls and Procedures
The Company carried out an evaluation, under the supervision and with the participation of its
management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness
of the design and operation of the Companys disclosure controls and procedures (as defined in
the Exchange Act Rule 13a-15(e)) as of the end of the period covered by this report. Based upon
that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the
Companys disclosure controls and procedures were effective as of June 30, 2010.
There were no changes in the Companys internal control over financial reporting during the
quarter ended June 30, 2010 that have materially affected, or are reasonably likely to materially
affect, the Companys internal control over financial reporting.
24
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
In the normal course of business, the Company is involved in and subject to claims,
contractual disputes and other uncertainties. Management, after reviewing with legal counsel all of
these actions and proceedings, believes that the aggregate losses, if any, will not have a material
adverse effect on the Companys financial position or results of operations.
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, 2009.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
The Companys credit facility entered into on January 19, 2010 prohibits the payment of any
cash dividends on the Companys capital stock.
The following table sets forth information regarding the purchases of the Companys equity
securities made by or on behalf of the Company or any affiliated purchaser (as defined in Exchange
Act Rule 10b-18) during the three-month period ended June 30, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maximum Approximate |
|
|
|
|
|
|
|
|
|
|
Total Number of |
|
Dollar Value of |
|
|
|
|
|
|
|
|
|
|
Shares Purchased as |
|
Shares that May Yet |
|
|
Total Number of |
|
|
|
|
|
Part of Publicly |
|
Be Purchased Under |
|
|
Shares Purchased |
|
Average Price Paid |
|
Announced Plans or |
|
the Plans or |
2010 |
|
(a) |
|
per Share |
|
Programs |
|
Programs |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(millions of dollars) |
April 1
April 30 |
|
|
|
|
|
$ |
|
|
|
|
|
|
|
$ |
|
|
May 1 May 31 |
|
|
|
|
|
$ |
|
|
|
|
|
|
|
$ |
|
|
June 1 June 30 |
|
|
19,667 |
|
|
$ |
4.03 |
|
|
|
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
19,667 |
|
|
$ |
4.03 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
All shares reported during the quarter were surrendered by employees to satisfy tax
withholding obligations upon vesting of restricted stock. |
Item 3. Defaults Upon Senior Securities
None.
Item 4. [Reserved]
Item 5. Other Information
None.
25
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). |
|
|
|
3.1.1
|
|
Articles of Amendment to the Registrant dated January 20, 2010
(incorporated by reference to Exhibit 3.1 to the Registrants Form
8-K filed on January 15, 2010). |
|
|
|
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). |
|
|
|
10.1
|
|
PRGX Global, Inc. 2008 Equity Incentive Plan, as amended and
restated effective April 27, 2010 (incorporated by reference to
Exhibit 10.1 to the Registrants Form 8-K filed on June 21, 2010). |
|
|
|
31.1
|
|
Certification of the Chief Executive Officer, pursuant to Rule
13a-14(a) or 15d-14(a), for the quarter ended June 30, 2010. |
|
|
|
31.2
|
|
Certification of the Chief Financial Officer, pursuant to Rule
13a-14(a) or 15d-14(a), for the quarter ended June 30, 2010. |
|
|
|
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, 2010. |
26
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.
|
|
|
|
|
|
PRGX GLOBAL, INC.
|
|
August 13, 2010 |
By: |
/s/ Romil Bahl
|
|
|
|
Romil Bahl |
|
|
|
President, Chief Executive Officer, Director
(Principal Executive Officer) |
|
|
|
|
|
August 13, 2010 |
By: |
/s/ Robert B. Lee
|
|
|
|
Robert B. Lee |
|
|
|
Chief Financial Officer, Treasurer and Controller
(Principal Financial and Accounting Officer) |
|
|
27