FORM 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
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þ |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2008
OR
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o |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number 0-28000
PRG-Schultz International, Inc.
(Exact name of registrant as specified in its charter)
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Georgia
(State or other jurisdiction of
incorporation or organization)
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58-2213805
(I.R.S. Employer
Identification No.) |
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600 Galleria Parkway
Suite 100
Atlanta, Georgia
(Address of principal executive offices)
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30339-5986
(Zip Code) |
Registrants telephone number, including area code: (770) 779-3900
Indicate by check mark whether the registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer o |
Accelerated filer þ |
Non-accelerated filer o (Do not check if a smaller reporting company) |
Smaller reporting company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Act). Yes o No þ
Common shares of the registrant outstanding at October 31, 2008 were 22,219,023.
PRG-SCHULTZ INTERNATIONAL, INC.
FORM 10-Q
For the Quarter Ended September 30, 2008
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
PRG-SCHULTZ INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except per share data)
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Three Months Ended |
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Nine Months Ended |
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September 30, |
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September 30, |
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2008 |
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2007 |
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2008 |
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2007 |
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Revenues |
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$ |
49,182 |
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$ |
53,207 |
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$ |
147,093 |
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$ |
163,552 |
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Cost of revenues |
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31,169 |
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33,511 |
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94,362 |
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105,624 |
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Gross margin |
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18,013 |
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19,696 |
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52,731 |
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57,928 |
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Selling, general and administrative expenses |
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12,139 |
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17,562 |
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36,006 |
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45,730 |
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Operational restructuring expense (Note I) |
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1,644 |
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1,644 |
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Operating income |
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5,874 |
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490 |
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16,725 |
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10,554 |
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Interest expense, net |
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789 |
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3,133 |
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2,545 |
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12,023 |
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Earnings (loss) from continuing operations
before income taxes and discontinued operations |
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5,085 |
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(2,643 |
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14,180 |
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(1,469 |
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Income taxes |
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879 |
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337 |
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1,872 |
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1,212 |
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Earnings (loss) from continuing operations
before discontinued operations |
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4,206 |
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(2,980 |
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12,308 |
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(2,681 |
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Discontinued operations (Note B): |
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Earnings (loss) from discontinued operations,
net of income taxes |
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(11 |
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19,764 |
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Net earnings (loss) |
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$ |
4,206 |
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$ |
(2,991 |
) |
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$ |
12,308 |
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$ |
17,083 |
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Basic earnings (loss) per common share (Note C): |
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Earnings (loss) from continuing operations
before discontinued operations |
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$ |
0.19 |
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$ |
(0.31 |
) |
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$ |
0.57 |
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$ |
(0.34 |
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Earnings (loss) from discontinued operations |
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(0.00 |
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2.14 |
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Net earnings |
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$ |
0.19 |
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$ |
(0.31 |
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$ |
0.57 |
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$ |
1.80 |
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Diluted earnings (loss) per common share (Note C): |
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Earnings (loss) from continuing operations
before discontinued operations |
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$ |
0.18 |
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$ |
(0.31 |
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$ |
0.54 |
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$ |
(0.34 |
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Earnings (loss) from discontinued operations |
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(0.00 |
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2.14 |
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Net earnings |
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$ |
0.18 |
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$ |
(0.31 |
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$ |
0.54 |
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$ |
1.80 |
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Weighted average common shares outstanding (Note C): |
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Basic |
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21,919 |
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10,275 |
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21,726 |
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9,247 |
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Diluted |
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23,002 |
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10,275 |
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22,942 |
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9,247 |
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See accompanying Notes to Condensed Consolidated Financial Statements.
1
PRG-SCHULTZ INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
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September 30, |
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2008 |
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December 31, |
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(Unaudited) |
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2007 |
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ASSETS |
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Current assets: |
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Cash and cash equivalents (Note G) |
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$ |
22,788 |
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$ |
42,364 |
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Restricted cash |
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251 |
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Receivables: |
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Contract receivables, less allowances of $690 in 2008 and $826 in 2007 |
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Billed |
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25,961 |
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30,251 |
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Unbilled |
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6,067 |
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6,440 |
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32,028 |
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36,691 |
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Employee advances and miscellaneous receivables, less allowances of $1,897 in 2008
and $1,831 in 2007 |
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500 |
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1,118 |
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Total receivables |
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32,528 |
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37,809 |
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Prepaid expenses and other current assets |
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2,296 |
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2,676 |
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Deferred income taxes |
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64 |
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Total current assets |
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57,863 |
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82,913 |
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Property and equipment, at cost |
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41,343 |
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41,148 |
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Less accumulated depreciation and amortization |
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(33,549 |
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(33,113 |
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Property and equipment, net |
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7,794 |
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8,035 |
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Goodwill |
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4,600 |
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4,600 |
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Intangible assets, less accumulated amortization of $10,381 in 2008 and $8,728 in 2007 |
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19,519 |
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21,172 |
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Unbilled receivables |
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1,953 |
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2,072 |
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Deferred income taxes |
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234 |
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279 |
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Other assets |
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2,759 |
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3,367 |
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$ |
94,722 |
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$ |
122,438 |
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LIABILITIES AND SHAREHOLDERS EQUITY |
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Current liabilities: |
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Accounts payable and accrued expenses |
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$ |
13,013 |
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$ |
16,117 |
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Accrued payroll and related expenses |
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24,281 |
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31,435 |
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Refund liabilities |
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6,834 |
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9,897 |
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Deferred revenue |
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417 |
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620 |
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Current portions of debt obligations |
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5,306 |
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7,846 |
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Total current liabilities |
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49,851 |
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65,915 |
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Long term debt (Note H) |
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15,662 |
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38,078 |
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Noncurrent compensation obligations |
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5,186 |
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8,548 |
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Refund liabilities |
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895 |
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1,676 |
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Other long-term liabilities |
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5,264 |
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5,872 |
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Total liabilities |
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76,858 |
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120,089 |
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Shareholders equity (Notes D and H): |
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Common stock, no par value; $.01 stated value per share. Authorized 50,000,000 shares;
issued 22,795,476 in 2008 and 22,100,090 in 2007 |
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228 |
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221 |
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Additional paid-in capital |
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609,110 |
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605,592 |
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Accumulated deficit |
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(546,710 |
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(559,018 |
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Accumulated other comprehensive income |
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3,946 |
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4,264 |
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Treasury stock, at cost; 576,453 shares in 2008 and 2007 |
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(48,710 |
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(48,710 |
) |
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Total shareholders equity |
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17,864 |
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2,349 |
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Commitments and contingencies (Note I) |
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$ |
94,722 |
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$ |
122,438 |
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See accompanying Notes to Condensed Consolidated Financial Statements.
2
PRG-SCHULTZ INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
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Nine Months Ended |
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September 30, |
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2008 |
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2007 |
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Cash flows from operating activities: |
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Net earnings |
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$ |
12,308 |
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$ |
17,083 |
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Earnings from discontinued operations |
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19,764 |
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Earnings (loss) from continuing operations |
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12,308 |
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(2,681 |
) |
Adjustments to reconcile earnings (loss) from continuing operations
to net cash provided by operating activities: |
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Depreciation and amortization |
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3,897 |
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5,263 |
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Amortization of debt discount, premium and deferred loan costs |
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588 |
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2,451 |
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Stock-based compensation costs |
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4,961 |
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12,315 |
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Loss on sale of property, plant and equipment |
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84 |
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|
595 |
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Deferred income taxes |
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109 |
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Changes in assets and liabilities: |
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Restricted cash |
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(262 |
) |
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(103 |
) |
Billed receivables |
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4,022 |
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|
1,666 |
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Unbilled receivables |
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492 |
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|
2,233 |
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Prepaid expenses and other current assets |
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279 |
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(911 |
) |
Other assets |
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24 |
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|
368 |
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Accounts payable and accrued expenses |
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(2,498 |
) |
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|
(3,218 |
) |
Accrued payroll and related expenses |
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(6,864 |
) |
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|
(10,307 |
) |
Refund liabilities |
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(3,844 |
) |
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|
(545 |
) |
Deferred revenue |
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(197 |
) |
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|
213 |
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Noncurrent compensation obligations |
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(4,561 |
) |
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(773 |
) |
Other long-term liabilities |
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(608 |
) |
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|
332 |
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Net cash provided by operating activities |
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|
7,930 |
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|
6,898 |
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Cash flows from investing activities: |
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Purchases of property and equipment, net of disposal proceeds |
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(2,211 |
) |
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(2,172 |
) |
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Net cash used in investing activities |
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|
(2,211 |
) |
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(2,172 |
) |
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Cash flows from financing activities: |
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Net repayments of debt |
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(24,956 |
) |
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|
(25,324 |
) |
Issuance costs of common and preferred stock |
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(15 |
) |
Net proceeds from common stock issuances, including option exercises |
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|
57 |
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Payments for deferred loan costs |
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|
(59 |
) |
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|
(1,787 |
) |
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Net cash used in financing activities |
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|
(25,015 |
) |
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(27,069 |
) |
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Cash flows from discontinued operations: |
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Operating cash flows |
|
|
|
|
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(2,189 |
) |
Investing cash flows |
|
|
|
|
|
|
21,133 |
|
|
|
|
|
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Net cash provided by discontinued operations |
|
|
|
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|
18,944 |
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|
|
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|
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Effect of exchange rates on cash and cash equivalents |
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|
(280 |
) |
|
|
928 |
|
|
|
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Net change in cash and cash equivalents |
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|
(19,576 |
) |
|
|
(2,471 |
) |
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Cash and cash equivalents at beginning of period |
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|
42,364 |
|
|
|
30,228 |
|
|
|
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Cash and cash equivalents at end of period |
|
$ |
22,788 |
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$ |
27,757 |
|
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Supplemental disclosure of cash flow information: |
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Cash paid during the period for interest |
|
$ |
2,564 |
|
|
$ |
13,319 |
|
|
|
|
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Cash paid during the period for income taxes, net of refunds |
|
$ |
1,918 |
|
|
$ |
672 |
|
|
|
|
|
|
|
|
See accompanying Notes to Condensed Consolidated Financial Statements.
3
PRG-SCHULTZ INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2008 and 2007
(Unaudited)
Note A Basis of Presentation
The accompanying Condensed Consolidated Financial Statements (Unaudited) of PRG-Schultz
International, Inc. and its wholly owned subsidiaries (the Company) have been prepared in
accordance with accounting principles generally accepted in the United States of America for
interim financial information and with the instructions for Form 10-Q and Article 10 of Regulation
S-X. Accordingly, they do not include all of the information and footnotes required by accounting
principles generally accepted in the United States of America for complete financial statements. In
the opinion of management, all adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation have been included. Operating results for the three-month and
nine-month periods ended September 30, 2008 are not necessarily indicative of the results that may
be expected for the year ending December 31, 2008.
Disclosures included herein pertain to the Companys continuing operations unless otherwise
noted.
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, 2007.
During the first quarter of 2008, management revised its estimation of expected refund rates.
Such change in estimate resulted from a decline in actual refund rates observed during 2007. The
impact of the change in estimate resulted in a $0.8 million reduction in the March 31, 2008 refund
liability and a corresponding increase in first quarter 2008 revenues. The impact on the quarter
ended September 30, 2008 was not significant and management does not expect that the change in
estimate will have a material impact on future period results.
New Accounting Standards
In September 2006, the Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standards (SFAS) No. 157, Fair Value Measurements (SFAS No. 157). SFAS
No. 157 defines fair value, establishes a framework for measuring fair value in accordance with
accounting principles generally accepted in the United States, and expands disclosures about fair
value measurements. The standard describes three levels of inputs that may be used to measure fair
value.
Level 1: quoted price (unadjusted) in active markets for identical assets
Level 2: inputs to the valuation methodology include quoted prices for similar assets and
liabilities in active markets, and inputs that are observable for the asset or liability,
either directly or indirectly, for substantially the full term of the instrument
Level 3: inputs to the valuation methodology are unobservable for the asset or liability
SFAS No. 157 defines fair value as the exchange price that would be received for an asset or
paid to transfer a liability (exit price) in the principal or most advantageous market for the
asset or liability in an orderly transaction between market participants on the measurement date.
Relative to SFAS No. 157, the FASB issued FASB Staff Positions (FSP) 157-1 and 157-2. FSP
157-1 amends SFAS No. 157 to exclude SFAS No. 13, Accounting for Leases, and its related
interpretive accounting pronouncements that address leasing transactions, while FSP 157-2 delays
the effective date of the application of SFAS No. 157 to fiscal years beginning after November 15,
2008 for all nonfinancial assets and nonfinancial liabilities that are recognized or disclosed at
fair value in the financial statements on a nonrecurring basis.
4
PRG-SCHULTZ INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The Company adopted SFAS No. 157 as of January 1, 2008, with the exception of the application
of the statement to non-recurring nonfinancial assets and nonfinancial liabilities. Non-recurring
nonfinancial assets and nonfinancial liabilities for which the Company has not applied the
provisions of SFAS No. 157 include those measured at fair value in goodwill and other intangible
asset impairment testing. Assets and liabilities measured at fair value on a recurring basis as of
September 30, 2008 included cash equivalents of $22.8 million which were valued based on Level 1
inputs and debt and capital lease obligations of $21.0 million which were valued based on Level 2
inputs. The Company did not have any assets valued based on Level 3 inputs.
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets
and Financial Liabilities Including an amendment of FASB Statement No. 115 (SFAS No. 159).
This standard permits an entity to choose to measure certain financial assets and liabilities at
fair value. SFAS No. 159 also revises provisions of SFAS No. 115 that apply to available-for-sale
and trading securities. This statement is effective for fiscal years beginning after November 15,
2007. The adoption by the Company of SFAS No. 159 effective January 1, 2008 did not have any
material impact on the Companys consolidated financial statements.
In December 2007, the FASB issued SFAS No. 141 (revised 2007), Business Combinations (SFAS
No. 141(R)). SFAS No. 141(R) establishes principles and requirements for how the acquirer
recognizes and measures in its financial statements the identifiable assets acquired, the
liabilities assumed, and any noncontrolling interest in the acquiree; recognizes and measures the
goodwill acquired in a business combination or a gain from a bargain purchase; determines what
information to disclose to enable users of the financial statements to evaluate the nature and
financial effects of a business combination. SFAS No. 141(R) is effective as of the beginning of an
entitys first fiscal year that begins after December 15, 2008. The Company has not determined the
impact, if any, SFAS No. 141(R) will have on its future financial statements.
In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated
Financial Statements (SFAS No. 160). SFAS No. 160 establishes new accounting and reporting
standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a
subsidiary. Specifically, this statement requires the recognition of a noncontrolling interest
(minority interest) as equity in the consolidated financial statements and separate from the
parents equity. The amount of net income attributable to the noncontrolling interest will be
included in consolidated net income on the face of the income statement. SFAS No. 160 clarifies
that changes in a parents ownership interest in a subsidiary that do not result in deconsolidation
are equity transactions if the parent retains its controlling financial interest. In addition, this
statement requires that a parent recognize a gain or loss in net income when a subsidiary is
deconsolidated. Such gain or loss will be measured using the fair value of the noncontrolling
equity investment on the deconsolidation date. SFAS No. 160 also includes expanded disclosure
requirements regarding the interests of the parent and its noncontrolling interest. SFAS No. 160 is
effective for fiscal years beginning on or after December 15, 2008. Earlier adoption is prohibited.
The Company has not determined the impact, if any, SFAS No. 160 will have on its future financial
statements.
Note B Discontinued Operations
The following table summarizes the components of earnings (loss) from discontinued operations
for the three and nine-month periods ended September 30, 2008 and 2007 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months |
|
|
Nine Months |
|
|
|
Ended |
|
|
Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
Revenues |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
17,386 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss) |
|
|
|
|
|
|
(11 |
) |
|
|
|
|
|
|
713 |
|
Gain on sale or disposal |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
19,460 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(11 |
) |
|
|
|
|
|
|
20,173 |
|
Income tax expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
409 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) from discontinued operations |
|
$ |
|
|
|
$ |
(11 |
) |
|
$ |
|
|
|
$ |
19,764 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Substantially all the results from discontinued operations for the three and nine months ended
September 30, 2007 relate to the Meridian VAT reclaim business (Meridian) that was sold on May
30, 2007 to Averio Holdings Limited, a Dublin, Ireland based company affiliated with management of
Meridian (Averio). Meridian had previously been
5
PRG-SCHULTZ INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
reported as a separate reportable operating
segment. Meridians operating results for all periods presented have been reclassified and are
included in discontinued operations.
In addition to amounts already paid by Averio at the closing of the sale and on December 31,
2007, the sale agreement required Averio to pay the Company 1.5 million (Euros) each year on
December 31, 2008 and 2009. However, the additional payments owed were contingent upon certain
place of supply legislation remaining in effect in the European Union without amendment prior to
the relevant payment date. During the quarter ended March 31, 2008, the place of supply legislation
was amended and, as a result, Averio is not required to make the additional payments under the
terms of the sale agreement.
Note C Earnings (Loss) Per Common Share
The following tables set forth the computations of basic and diluted earnings (loss) per
common share for the three and nine months ended September 30, 2008 and 2007 (in thousands, except
per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
Basic earnings (loss) per common share: |
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
Numerator for earnings (loss) per common share calculations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) from continuing operations before
discontinued operations |
|
$ |
4,206 |
|
|
$ |
(2,980 |
) |
|
$ |
12,308 |
|
|
$ |
(2,681 |
) |
Preferred dividends |
|
|
|
|
|
|
(151 |
) |
|
|
|
|
|
|
(487 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) for purposes of computing basic
earnings per common share from continuing
operations |
|
|
4,206 |
|
|
|
(3,131 |
) |
|
|
12,308 |
|
|
|
(3,168 |
) |
|
Earnings (loss) from discontinued operations |
|
|
|
|
|
|
(11 |
) |
|
|
|
|
|
|
19,764 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) for purposes of computing basic
net earnings per common share |
|
$ |
4,206 |
|
|
$ |
(3,142 |
) |
|
$ |
12,308 |
|
|
$ |
16,596 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for basic earnings (loss) per common share
Weighted average common shares outstanding during the
period |
|
|
21,919 |
|
|
|
10,275 |
|
|
|
21,726 |
|
|
|
9,247 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings (loss) per common share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) from continuing operations before
discontinued operations |
|
$ |
0.19 |
|
|
$ |
(0.31 |
) |
|
$ |
0.57 |
|
|
$ |
(0.34 |
) |
Earnings (loss) from discontinued operations |
|
|
|
|
|
|
(0.00 |
) |
|
|
|
|
|
|
2.14 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings (loss) |
|
$ |
0.19 |
|
|
$ |
(0.31 |
) |
|
$ |
0.57 |
|
|
$ |
1.80 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6
PRG-SCHULTZ INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
Diluted earnings (loss) per common share: |
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
Numerator for earnings (loss) per common share calculations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) from continuing operations before
discontinued operations |
|
$ |
4,206 |
|
|
$ |
(2,980 |
) |
|
$ |
12,308 |
|
|
$ |
(2,681 |
) |
Preferred dividends |
|
|
|
|
|
|
(151 |
) |
|
|
|
|
|
|
(487 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) for purposes of computing diluted
earnings (loss) per common share from continuing
operations |
|
|
4,206 |
|
|
|
(3,131 |
) |
|
|
12,308 |
|
|
|
(3,168 |
) |
|
Earnings (loss) from discontinued operations |
|
|
|
|
|
|
(11 |
) |
|
|
|
|
|
|
19,764 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) for purposes of computing diluted
net earnings (loss) per common share |
|
$ |
4,206 |
|
|
$ |
(3,142 |
) |
|
$ |
12,308 |
|
|
$ |
16,596 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for basic earnings (loss) per common share
weighted-average common shares outstanding during the
period |
|
|
21,919 |
|
|
|
10,275 |
|
|
|
21,726 |
|
|
|
9,247 |
|
Incremental shares from stock-based compensation plans |
|
|
1,083 |
|
|
|
|
|
|
|
1,216 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for diluted earnings (loss) per common share |
|
|
23,002 |
|
|
|
10,275 |
|
|
|
22,942 |
|
|
|
9,247 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings (loss) per common share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) from continuing operations before
discontinued operations |
|
$ |
0.18 |
|
|
$ |
(0.31 |
) |
|
$ |
0.54 |
|
|
$ |
(0.34 |
) |
Earnings (loss) from discontinued operations |
|
|
|
|
|
|
(0.00 |
) |
|
|
|
|
|
|
2.14 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings (loss) |
|
$ |
0.18 |
|
|
$ |
(0.31 |
) |
|
$ |
0.54 |
|
|
$ |
1.80 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three and nine months ended September 30, 2008, options to purchase 1.0 million shares
of common stock were not included in the computation of diluted earnings (loss) per common share
due to their anti-dilutive effect as the options exercise prices were greater than the average
market price of the common shares during the periods. For the three and nine months ended September
30, 2007, 0.9 million shares subject to outstanding stock options and 2006 Management Incentive
Plan (2006 MIP) awards were excluded from the computation of diluted earnings (loss) per common
share due to their antidilutive effect to earnings (loss) per common share from continuing
operations. For the three and nine months ended September 30, 2007, 8.4 million shares and 9.1
million shares, respectively, related to the Companys 10% senior convertible notes were excluded
from the calculation of diluted earnings (loss) per common share due to their antidilutive effect
to earnings (loss) per common share from continuing operations. For the three and nine months ended
September 30, 2007, 2.8 million shares and 3.1 million shares, respectively, related to the
Companys 9% Series A convertible preferred stock were excluded from the calculation of diluted
earnings (loss) per common share due to their antidilutive effect to earnings (loss) per common
share from continuing operations.
Note D Stock-Based Compensation
The Company currently has three stock-based compensation plans under which awards have been
granted: (1) the Stock Incentive Plan, (2) the 2006 MIP, and (3) the 2008 Equity Incentive Plan
(2008 EIP). The Stock Incentive Plan and 2006 MIP are described in the Companys Annual Report on
Form 10-K for the fiscal year ended December 31, 2007.
During the first quarter of 2008, the Board of Directors of the Company adopted the 2008 EIP, which
was approved by the shareholders at the annual meeting of the shareholders on May 29, 2008. The
2008 EIP authorizes the grant of incentive and non-qualified stock options, stock appreciation
rights, restricted stock, restricted stock units and other incentive awards. 2,000,000 shares of the Companys common stock have been
reserved for issuance under the 2008 EIP pursuant to award grants to key employees, directors and
service providers.
7
PRG-SCHULTZ INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
On May 29, 2008, non-qualified stock options were granted under the 2008 EIP to each of the
Companys five non-employee Directors to purchase an aggregate of 60,135 shares of Company common
stock at an exercise price of $9.87, the grant date closing price of the Companys common stock on
NASDAQ. The options vest in full upon the earlier of (i) May 29, 2009 and (ii) the date of, and
immediately prior to, the Companys 2009 annual meeting of shareholders, provided the director has
been continuously serving as a member of the Board from the date of grant until the earlier of such
times. In addition, the options will become 100% vested upon a change of control. Unvested options
are forfeited when a director leaves the Board. The options terminate on May 28, 2015, except that
vested options held by a director who leaves the Board before a change of control will terminate
three years after termination of Board service, if such date occurs before May 28, 2015.
On May 29, 2008, nonvested stock awards (restricted stock) representing 25,325 shares in
aggregate of the Companys common stock were granted to the Companys non-employee Directors
pursuant to the Companys 2008 EIP. These restricted stock grants had an aggregate grant date fair
value of $0.2 million. The shares of restricted stock will vest upon the earlier of (i) May 29,
2009, and (ii) the date of, and immediately prior to, the Companys 2009 annual meeting of
shareholders, provided the director has been continuously serving as a member of the Board from the
date of grant until the earlier of such times. In addition, the shares will become 100% vested upon
a change of control. 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
award recipients will be entitled to receive dividends with respect to the nonvested shares and to
vote the shares.
On September 17, 2008, options aggregating 211,460 shares were granted to 68 employees of the
Company pursuant to the 2008 EIP. The options have an exercise price of $9.51 per share, expire
seven years after their grant date and vest over three years, one-third on each of the first three
anniversaries of the grant date. The option awards had an aggregate grant date fair value of $1.3
million.
On September 17, 2008, nonvested stock awards (restricted stock and restricted stock units)
representing 171,323 shares in aggregate of the Companys common stock were granted to 68 executive
and non-executive employees of the Company pursuant to the 2008 EIP. These shares of restricted
stock and restricted stock units will vest over three years, one-third on each of the first three
anniversaries of the grant date. These awards had an aggregate grant date fair value of $1.6
million. During the vesting period, the award recipients of restricted stock will be entitled to
receive dividends with respect to the nonvested shares and to vote the shares. During the vesting
period, award recipients of restricted stock units will be entitled to receive dividends with
respect to the nonvested shares, but will not be entitled to vote the shares underlying the units.
On September 17, 2008, nonvested stock awards (restricted stock and restricted stock units)
representing 317,192 shares in aggregate of the Companys common stock were granted to 68 executive
and non-executive employees of the Company pursuant to the Companys 2008 EIP. These shares of
restricted stock and restricted stock units will vest on December 31, 2011 provided that Company
performance goals outlined in the stock award agreements are met for the three-year period ending
December 31, 2011. These awards had an aggregate grant date fair value of $3.0 million. During the
vesting period, the award recipients of restricted stock will be entitled to receive dividends with
respect to the nonvested shares and to vote the shares. During the vesting period, award recipients
of restricted stock units will be entitled to receive dividends with respect to the nonvested
shares, but will not be entitled to vote the shares underlying the units.
On September 12, 2007 options for 17,391 shares of common stock were granted to each of the
Companys six non-employee directors. The options have an exercise price of $12.89 per share,
expire seven years after their grant date and became fully vested at the date of the Companys 2008
annual meeting of shareholders. The awards had an aggregate grant date fair value of $0.9 million.
On September 19, 2007, options aggregating 511,000 shares were granted to 67 non-executive
employees of the Company. The options have an exercise price of $13.54 per share, expire seven
years after their grant date and vest over three years, one-third on each of the first three
anniversaries of the grant date. The awards had an aggregate grant date fair value of $4.6 million.
During the first nine months of 2007, Performance Units outstanding under the 2006 MIP
increased by 776,200 as a result of anti-dilution adjustments which occurred automatically pursuant
to the terms of the 2006 MIP as the Companys convertible securities converted into common stock.
As of September 30, 2007, a total of 1,600,575 Performance Units were outstanding, 1,310,589 of
which were vested.
8
PRG-SCHULTZ INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
On April 30, 2008, an aggregate of 493,137 Performance Units were settled by six executive
officers. Such settlements resulted in the issuance of 295,879 shares of common stock and cash
payments totaling $2.0 million. As of September 30, 2008, a total of 1,767,721 Performance Units
were outstanding, 1,739,016 of which were vested.
During the third quarter of 2007, options for 9,000 shares were exercised for an aggregate
price of less than $0.1 million.
Selling, general and administrative expenses for the three months ended September 30, 2008 and
2007 include $0.4 million and $6.9 million, respectively, related to stock-based compensation
charges. Selling, general and administrative expenses for the nine months ended September 30, 2008
and 2007 include $5.0 million and $12.3 million, respectively, related to stock-based compensation
charges. At September 30, 2008, there was $6.7 million of unrecognized stock-based compensation
expense related to stock options, restricted stock awards and 2006 MIP Performance Unit awards
which is expected to be recognized over a weighted average period of 2.2 years.
Note E Operating Segments and Related Information
The Company is comprised of the following reportable operating segments:
Domestic Accounts Payable Services
The Domestic Accounts Payable Services segment represents business conducted in the United
States of America (USA).
International Accounts Payable Services
The International Accounts Payable Services segment represents business conducted in countries
other than the USA.
Corporate Support
The Company includes the unallocated portion of corporate selling, general and administrative
expenses not specifically attributable to the Accounts Payable Services segments in a category
referred to as corporate support.
9
PRG-SCHULTZ INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Management evaluates the performance of its operating segments based upon revenues and
measures of profit or loss it refers to as EBITDA and Adjusted EBITDA. Adjusted EBITDA is earnings
from continuing operations before interest, taxes, depreciation and amortization (EBITDA)
adjusted for restructuring charges, stock-based compensation, intangible asset impairment charges,
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 continuing operations for the three and nine months ended
September 30, 2008 and 2007 follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic |
|
|
International |
|
|
|
|
|
|
|
|
|
Accounts |
|
|
Accounts |
|
|
|
|
|
|
|
|
|
Payable |
|
|
Payable |
|
|
Corporate |
|
|
|
|
|
|
Services |
|
|
Services |
|
|
Support |
|
|
Total |
|
Three Months Ended September 30, 2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
27,853 |
|
|
$ |
21,329 |
|
|
$ |
|
|
|
$ |
49,182 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA |
|
$ |
8,167 |
|
|
$ |
2,850 |
|
|
$ |
(3,962 |
) |
|
$ |
7,055 |
|
Foreign currency (gains) losses on
intercompany balances |
|
|
|
|
|
|
1,801 |
|
|
|
|
|
|
|
1,801 |
|
Stock-based compensation |
|
|
|
|
|
|
|
|
|
|
377 |
|
|
|
377 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA |
|
$ |
8,167 |
|
|
$ |
4,651 |
|
|
$ |
(3,585 |
) |
|
$ |
9,233 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, 2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
32,853 |
|
|
$ |
20,354 |
|
|
$ |
|
|
|
$ |
53,207 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA |
|
$ |
12,209 |
|
|
$ |
2,211 |
|
|
$ |
(12,231 |
) |
|
$ |
2,189 |
|
Operational restructuring expense |
|
|
|
|
|
|
|
|
|
|
1,644 |
|
|
|
1,644 |
|
Foreign currency (gains) losses on
intercompany balances |
|
|
|
|
|
|
(505 |
) |
|
|
|
|
|
|
(505 |
) |
Stock-based compensation |
|
|
|
|
|
|
|
|
|
|
6,886 |
|
|
|
6,886 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA |
|
$ |
12,209 |
|
|
$ |
1,706 |
|
|
$ |
(3,701 |
) |
|
$ |
10,214 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
84,347 |
|
|
$ |
62,746 |
|
|
$ |
|
|
|
$ |
147,093 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA |
|
$ |
26,310 |
|
|
$ |
9,752 |
|
|
$ |
(15,440 |
) |
|
$ |
20,622 |
|
Foreign currency (gains) losses on
intercompany balances |
|
|
|
|
|
|
1,335 |
|
|
|
|
|
|
|
1,335 |
|
Stock-based compensation |
|
|
|
|
|
|
|
|
|
|
4,961 |
|
|
|
4,961 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA |
|
$ |
26,310 |
|
|
$ |
11,087 |
|
|
$ |
(10,479 |
) |
|
$ |
26,918 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
102,552 |
|
|
$ |
61,000 |
|
|
$ |
|
|
|
$ |
163,552 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA |
|
$ |
35,488 |
|
|
$ |
7,163 |
|
|
$ |
(26,834 |
) |
|
$ |
15,817 |
|
Operational restructuring expense |
|
|
|
|
|
|
|
|
|
|
1,644 |
|
|
|
1,644 |
|
Foreign currency (gains) losses on
intercompany balances |
|
|
|
|
|
|
(1,085 |
) |
|
|
|
|
|
|
(1,085 |
) |
Stock-based compensation |
|
|
|
|
|
|
|
|
|
|
12,315 |
|
|
|
12,315 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA |
|
$ |
35,488 |
|
|
$ |
6,078 |
|
|
$ |
(12,875 |
) |
|
$ |
28,691 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10
PRG-SCHULTZ INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following table reconciles earnings (loss) from continuing operations before discontinued
operations to EBITDA and Adjusted EBITDA for each of the three and nine month periods ended
September 30, 2008 and 2007 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
Earnings (loss) from continuing operations
before discontinued operations |
|
$ |
4,206 |
|
|
$ |
(2,980 |
) |
|
$ |
12,308 |
|
|
$ |
(2,681 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income taxes |
|
|
879 |
|
|
|
337 |
|
|
|
1,872 |
|
|
|
1,212 |
|
Interest, net |
|
|
789 |
|
|
|
3,133 |
|
|
|
2,545 |
|
|
|
12,023 |
|
Depreciation and amortization |
|
|
1,181 |
|
|
|
1,699 |
|
|
|
3,897 |
|
|
|
5,263 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA |
|
|
7,055 |
|
|
|
2,189 |
|
|
|
20,622 |
|
|
|
15,817 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operational restructuring expense |
|
|
|
|
|
|
1,644 |
|
|
|
|
|
|
|
1,644 |
|
Foreign currency (gains) losses on
intercompany balances |
|
|
1,801 |
|
|
|
(505 |
) |
|
|
1,335 |
|
|
|
(1,085 |
) |
Stock-based compensation |
|
|
377 |
|
|
|
6,886 |
|
|
|
4,961 |
|
|
|
12,315 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA |
|
$ |
9,233 |
|
|
$ |
10,214 |
|
|
$ |
26,918 |
|
|
$ |
28,691 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The composition and presentation of segment information as presented above differs from the
composition and presentation of such information as previously reported. Segment information for
the three and nine months ended September 30, 2007 has been reclassified to conform to the 2008
presentation.
Note F Comprehensive Income
The Company applies the provisions of SFAS No. 130, Reporting Comprehensive Income (SFAS
No. 130). This Statement establishes items that are required to be recognized under accounting
standards as components of comprehensive income. SFAS No. 130 requires, among other things, that an
enterprise report a total for comprehensive income in condensed financial statements of interim
periods issued to shareholders. For the three-month periods ended September 30, 2008 and 2007, the
Companys consolidated comprehensive income (loss) was $4.7 million and $(1.9) million,
respectively. For the nine-month periods ended September 30, 2008 and 2007, the Companys
consolidated comprehensive income was $12.0 million and $19.6 million, respectively. The difference
between consolidated comprehensive income, as disclosed here, and traditionally determined
consolidated net earnings, as set forth on the accompanying Condensed Consolidated Statements of
Operations (Unaudited), results from foreign currency translation adjustments.
Note G 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 deposits its temporary cash investments with
high credit quality financial institutions. At times, certain deposits may be in excess of the
Federal Deposit Insurance Corporation insurance limit.
At September 30, 2008 and December 31, 2007, the Company had cash and cash equivalents of
$22.8 million and $42.4 million, respectively, of which cash equivalents represented approximately
$17.6 million and $37.0 million, respectively. The Company had $15.7 million and $36.7 million in
cash equivalents at U.S. banks at September 30, 2008 and December 31, 2007, respectively. At
September 30, 2008 and December 31, 2007, certain of the Companys international subsidiaries held
$1.9 million and $0.3 million, respectively, in temporary investments. Most of the temporary
investments held by international subsidiaries at September 30, 2008 were held in Canada.
Note H Long Term Debt
Total debt outstanding at September 30, 2008 was $21.0 million and included a $20.3 million
outstanding balance on a variable rate term loan due 2011 and a $0.7 million capital lease
obligation.
11
PRG-SCHULTZ INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
During the first quarter of 2007, the Company repaid $9.6 million of its then existing term
loan. During the second quarter of 2007, the Company repaid the remaining $15.4 million balance of
such loan. Upon the full satisfaction of the loan, the Company recognized a $1.1 million charge
related to unamortized deferred loan costs associated with the loan. Such charge is included in
interest expense in the Condensed Consolidated Statements of Operations (Unaudited) for the three
and nine months ended September 30, 2007.
During the first quarter of 2007, 19,249 shares of Series A preferred stock and $0.6 million
in principal amount of senior convertible notes were converted into 945,028 shares of common stock.
During the second quarter of 2007, 6,413 shares of Series A preferred stock and $5.9 million in
principal amount of senior convertible notes were converted into 1,199,089 shares of common stock.
In September 2007, the Company initiated the redemption of all of the then outstanding 11%
senior notes, 10% senior convertible notes and 9% Series A convertible preferred stock. In
September 2007, the Company also entered into an amended and restated credit facility with Ableco
LLC (Ableco) consisting of a $20 million revolving credit facility, a $45 million term loan
(funded in October 2007) and a delayed funding facility to fund the redemption of any convertible
securities that did not convert to common stock prior to their redemption dates.
During the third quarter of 2007, 14,056 shares of Series A preferred stock and $29.8 million
in principal amount of senior convertible notes were converted into 5,263,714 shares of common
stock. In October 2007, 47,026 shares of Series A preferred stock and $26.1 million in principal
amount of senior convertible notes were converted into 6,284,489 shares of common stock. In
addition, in October 2007, the Company redeemed $51.5 million of 11% senior notes, along with a
$0.3 million interest payment and $1.0 million prepayment premium. The redemption was funded with a
portion of the Companys unrestricted funds and the proceeds of the term loan. The Ableco delayed
funding facility was not used, and therefore terminated, since the remaining outstanding 10% senior
convertible notes and 9% Series A convertible preferred stock, after conversions by holders prior
to the redemption dates, totaled less than $0.2 million and were redeemed with available
unrestricted funds.
The Company reduced the balance on its term loan by $22.2 million during the first quarter of
2008. This reduction included $7.2 million of mandatory payments as well as a voluntary payment of
$15 million. In March 2008, the Company completed an amendment of its credit facility, permitting
the Company to make the $15 million voluntary pre-payment of the term loan without penalty and
increasing the borrowing capacity under the revolver portion of the facility by $10 million. At
September 30, 2008, there were no borrowings outstanding under the revolver portion of the
Companys credit facility.
Note I Commitments and Contingencies
Legal Proceedings
On April 1, 2003, Fleming Companies, one of the Companys larger U.S. Accounts Payable
Services clients at the time, filed for Chapter 11 bankruptcy reorganization. During the quarter
ended March 31, 2003, the Company received approximately $5.6 million in payments on account from
Fleming. On January 24, 2005, the Company received a demand from the Fleming Post Confirmation
Trust (PCT), a trust which was created pursuant to Flemings Chapter 11 reorganization plan to
represent the client, for preference payments received by the Company. The demand stated that the
PCTs calculation of the preferential payments was approximately $2.9 million. The Company
disputed the claim. Later in 2005, the PCT filed suit against the Company seeking to recover
approximately $5.6 million in payments that were made to the Company by Fleming during the 90 days
preceding Flemings bankruptcy filing, and that are alleged to be avoidable either as preferences
or fraudulent transfers under the Bankruptcy Code. The Company believes that it has valid defenses
to certain of the PCTs claims in the proceeding. In December 2005, the PCT offered to settle the
case for $2 million. The Company countered with an offer to waive its bankruptcy claim and to pay
the PCT $250,000. The PCT rejected the Companys settlement offer, and although the parties are
engaged in efforts to resolve the dispute informally and have agreed to settlement mediation, the
litigation is ongoing.
In the normal course of business, the Company is involved in and subject to other 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.
12
PRG-SCHULTZ INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Retirement Obligations
The July 31, 2005 retirements of the Companys former Chairman, President and CEO, John M.
Cook, and the Companys former Vice Chairman, John M. Toma, resulted in an obligation to pay
retirement benefits of approximately $7.6 million (present value basis) to be paid in monthly cash
installments principally over a three-year period, beginning February 1, 2006. On March 16, 2006,
the terms of the applicable severance agreements were amended in conjunction with the Companys
financial restructuring. Pursuant to the terms of the severance agreements, as amended (1) the
Companys obligations to pay monthly cash installments to Mr. Cook and Mr. Toma were extended from
36 months to 58 months and from 24 months to 46 months, respectively; however, the total dollar
amount of monthly cash payments to be made to each remained unchanged, and (2) the Company agreed
to pay a fixed sum of $150,000 to defray the fees and expenses of the legal counsel and financial
advisors to Messrs. Cook and Toma. The original severance agreements, and the severance agreements,
as amended, also provide for an annual reimbursement, beginning on or about February 1, 2007, to
Mr. Cook and Mr. Toma for the cost of health insurance for themselves and their respective spouses
(not to exceed $25,000 and $20,000, respectively, subject to adjustment based on changes in the
Consumer Price Index), continuing until each reaches the age of 80. At September 30, 2008, accrued
payroll and related expenses and noncurrent compensation obligations include $1.4 million and $2.2
million, respectively, related to these obligations.
Operational Restructuring Obligations
In 2005, 2006 and 2007, the Company incurred various costs, principally severance and early
lease termination costs, associated with an operational restructuring plan. During August of 2007,
the Company sub-leased and exited approximately 25% of its remaining headquarters office space. As
a result, the Company recognized a $1.6 million lease exit restructuring charge in the third
quarter of 2007 in accordance with SFAS No. 146 Accounting for Costs Associated with Exit or
Disposal Activities. No costs incurred during the three and nine months ended September 30, 2008
were classified and reported by the Company as operational restructuring expenses. However,
payments related to previously accrued restructuring obligations will continue into future years.
As of September 30, 2008, accounts payable and accrued expenses and other long-term liabilities
include $0.8 million and $3.1 million, respectively, related to operating leases terminated or
exited early.
13
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
Introduction
Prior to the second quarter of 2007, the Company conducted its operations through two
reportable operating segments, Accounts Payable Services and Meridian VAT Reclaim (Meridian). On
May 30, 2007, the Company sold its Meridian business to Averio Holdings Limited, a Dublin, Ireland
based company affiliated with management of Meridian (Averio). Meridians operating results for
all periods presented in the accompanying consolidated financial statements have been reclassified
and are now reported in discontinued operations. Unless stated otherwise, the discussion which
follows pertains solely to the Companys continuing operations.
Beginning with the fourth quarter of 2007, the Company segregated Accounts Payable Services
into two reportable operating segments Domestic and International. The Domestic and
International Accounts Payable Services segments principally consist of services that entail the
review of client accounts payable disbursements to identify and recover overpayments. These
operating segments include accounts payable services provided to retailers and wholesale
distributors (the Companys historical client base) and accounts payable and other services
provided to various other types of business entities and governmental agencies. The Company
conducts business in North America, South America, Europe, Australia and Asia.
The Companys revenues are based on specific contracts with its clients. Such contracts
generally specify: (a) time periods covered by the audit; (b) the nature and extent of audit
services to be provided by the Company; (c) the clients duties in assisting and cooperating with
the Company; and (d) fees payable to the Company, generally expressed as a specified percentage of
the amounts recovered by the client resulting from overpayment claims identified. Clients generally
recover claims by either taking credits against outstanding payables or future purchases from the
involved vendors, or receiving refund checks directly from those vendors. The manner in which a
claim is recovered by a client is often dictated by industry practice. In addition, many clients
establish client-specific procedural guidelines that the Company must satisfy prior to submitting
claims for client approval. For some services provided by the Company, client contracts provide for
compensation to the Company in the form of a flat fee or a rate per hour or per unit of usage for
the rendering of that service.
Medicare
On March 29, 2005, the Company announced that the Centers for Medicare and Medicaid Services
(CMS), the federal agency that administers the Medicare program, awarded the Company a contract
to provide recovery audit services for the State of Californias Medicare spending. The contract
was awarded as part of a demonstration program by CMS to recover overpayments and identify
underpayments through the use of recovery auditing. The three-year contract was effective on March
28, 2005 and expired on March 27, 2008. To fully address the range of payment recovery
opportunities under the CMS demonstration project contract, the Company sub-contracted with
Concentra Preferred Systems, Inc., a business unit of Concentra Network Services, now Viant, Inc.
(Viant), the nations largest provider of specialized cost containment services for the
healthcare industry, to add Viants clinical experience to the Companys expertise in recovery
audit services.
The Company began to incur capital expenditures and employee compensation costs primarily
related to the CMS demonstration project contract in 2005. Such capital expenditures and employee
compensation costs continued to be incurred throughout 2006 and 2007 as the Company continued to
build this business. Primarily as a result of the expiration of the demonstration program contract
in March, 2008, revenues from the auditing of Medicare payments in California made only a small
contribution to the Companys overall revenues in the nine months ended September 30, 2008.
Pursuant to the Companys agreement with CMS, there will be no additional revenues to the Company
or repayments to CMS relating to the CMS demonstration project contract.
In late 2006, legislation was enacted that mandated that recovery auditing of Medicare be
extended beyond the March 2008 end of the 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. In connection with the expansion, the Company submitted its proposal
to participate in the expansion on December 14, 2007. After discussions with CMS and the
submission of two subsequent Final Proposal Revisions,, on October 3, 2008, the Company was
notified by CMS that the Company had not been selected to take part in the national rollout of the
Medicare recovery audit program. On October 29, 2008, the Company received a written debriefing
from CMS regarding its decision not to award the Company a contract for any of the four regions of
the national rollout. In this debriefing, CMS confirmed to the Company that, although the Company
had one of the highest technical scores, it was not awarded a contract because it ultimately did
not have the lowest contingency fee bid in any region. On November 3, 2008, the Company filed a
protest of the CMS contract awards with the Government Accountability
14
Office (the GAO). For the time being, CMS implementation of the national Medicare recovery
audit program has been postponed as a result of an automatic stay that results from the filing of
a protest with GAO within a certain timeframe. At this time, the Company expects that the GAO
will issue its decision on the protest on or before February 11, 2009. The Company cannot predict
whether or not the protest will be successful. Even if the Companys protest is successful, there
is no guarantee that the Company would ultimately be awarded a contract for any of the four regions
covered by the expansion of the CMS recovery audit program.
Following the end of the Medicare recovery audit demonstration project in the first quarter of
2008, the Company took steps to limit its expenses related to its Medicare audit capabilities until
such time as the results of the national rollout were announced, including the furlough of
employees primarily involved with the Medicare audit. Following CMS awards of contracts in the
national rollout of the Medicare audit recovery program, the Company has taken, and continues to
take, additional steps to further reduce such costs.
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, 2007. 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, 2007. Management bases its estimates and
judgments on historical experience and on various other factors that are believed to be reasonable
under the circumstances, the results of which form the basis for making judgments about the
carrying values of assets and liabilities that are not readily apparent from other sources. Actual
results may differ from these estimates under different assumptions or conditions. On an ongoing
basis, management evaluates its estimates and judgments, including those considered critical. The
development, selection and evaluation of accounting estimates, including those deemed critical,
and the associated disclosures in this Form 10-Q have been discussed with the Audit Committee of
the Board of Directors.
During the first quarter of 2008, management revised its estimation of expected refund rates.
Such change in estimate resulted from a decline in actual refund rates observed during 2007. The
impact of the change in estimate resulted in a $0.8 million reduction in the March 31, 2008 refund
liability and a corresponding increase in first quarter 2008 revenues. The impact on the quarter
ended September 30, 2008 was not significant and management does not expect that the change in
estimate will have a material impact on future period results.
New Accounting Standards
In September 2006, the FASB issued Statement of Financial Accounting Standards (SFAS) No.
157, Fair Value Measurements (SFAS No. 157). SFAS No. 157 defines fair value, establishes a
framework for measuring fair value in accordance with accounting principles generally accepted in
the United States, and expands disclosures about fair value measurements. The standard describes
three levels of inputs that may be used to measure fair value.
Level 1: quoted price (unadjusted) in active markets for identical assets
Level 2: inputs to the valuation methodology include quoted prices for similar assets and
liabilities in active markets, and inputs that are observable for the asset or liability,
either directly or indirectly, for substantially the full term of the instrument
Level 3: inputs to the valuation methodology are unobservable for the asset or liability
SFAS No. 157 defines fair value as the exchange price that would be received for an asset or
paid to transfer a liability (exit price) in the principal or most advantageous market for the
asset or liability in an orderly transaction between market participants on the measurement date.
Relative to SFAS No. 157, the FASB issued FASB Staff Positions (FSP) 157-1 and 157-2. FSP
157-1 amends SFAS No. 157 to exclude SFAS No. 13, Accounting for Leases, and its related
interpretive accounting pronouncements that address leasing transactions, while FSP 157-2 delays
the effective date of the application of
15
SFAS No. 157 to fiscal years beginning after November 15, 2008 for all nonfinancial assets and
nonfinancial liabilities that are recognized or disclosed at fair value in the financial statements
on a nonrecurring basis.
The Company adopted SFAS No. 157 as of January 1, 2008, with the exception of the application
of the statement to non-recurring nonfinancial assets and nonfinancial liabilities. Non-recurring
nonfinancial assets and nonfinancial liabilities for which the Company has not applied the
provisions of SFAS No. 157 include those measured at fair value in goodwill and other intangible
asset impairment testing. Assets and liabilities measured at fair value on a recurring basis as of
September 30, 2008 included cash equivalents of $22.8 million which were valued based on Level 1
inputs and debt and capital lease obligations of $21.0 million which were valued based on Level 2
inputs. The Company did not have any assets valued based on Level 3 inputs.
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets
and Financial Liabilities Including an amendment of FASB Statement No. 115 (SFAS No. 159).
This standard permits an entity to choose to measure certain financial assets and liabilities at
fair value. SFAS No. 159 also revises provisions of SFAS No. 115 that apply to available-for-sale
and trading securities. This statement is effective for fiscal years beginning after November 15,
2007. The adoption by the Company of SFAS No. 159 effective January 1, 2008 did not have any
material impact on the Companys consolidated financial statements.
In December 2007, the FASB issued SFAS No. 141 (revised 2007), Business Combinations (SFAS
No. 141(R)). SFAS No. 141(R) establishes principles and requirements for how the acquirer
recognizes and measures in its financial statements the identifiable assets acquired, the
liabilities assumed, and any noncontrolling interest in the acquiree; recognizes and measures the
goodwill acquired in a business combination or a gain from a bargain purchase; determines what
information to disclose to enable users of the financial statements to evaluate the nature and
financial effects of a business combination. SFAS No. 141(R) is effective as of the beginning of an
entitys first fiscal year that begins after December 15, 2008. The Company has not determined the
impact, if any, SFAS No. 141(R) will have on its future financial statements.
In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated
Financial Statements (SFAS No. 160). SFAS No. 160 establishes new accounting and reporting
standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a
subsidiary. Specifically, this statement requires the recognition of a noncontrolling interest
(minority interest) as equity in the consolidated financial statements and separate from the
parents equity. The amount of net income attributable to the noncontrolling interest will be
included in consolidated net income on the face of the income statement. SFAS No. 160 clarifies
that changes in a parents ownership interest in a subsidiary that do not result in deconsolidation
are equity transactions if the parent retains its controlling financial interest. In addition, this
statement requires that a parent recognize a gain or loss in net income when a subsidiary is
deconsolidated. Such gain or loss will be measured using the fair value of the noncontrolling
equity investment on the deconsolidation date. SFAS No. 160 also includes expanded disclosure
requirements regarding the interests of the parent and its noncontrolling interest. SFAS No. 160 is
effective for fiscal years beginning on or after December 15, 2008. Earlier adoption is prohibited.
The Company has not determined the impact, if any, SFAS No. 160 will have on its future financial
statements.
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 |
|
|
Nine Months |
|
|
|
Ended |
|
|
Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
Revenues |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
Cost of revenues |
|
|
63.4 |
|
|
|
63.0 |
|
|
|
64.1 |
|
|
|
64.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin |
|
|
36.6 |
|
|
|
37.0 |
|
|
|
35.9 |
|
|
|
35.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative expenses |
|
|
24.7 |
|
|
|
33.0 |
|
|
|
24.5 |
|
|
|
28.0 |
|
Operational restructuring expenses |
|
|
|
|
|
|
3.1 |
|
|
|
|
|
|
|
1.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
|
11.9 |
|
|
|
0.9 |
|
|
|
11.4 |
|
|
|
6.4 |
|
Interest expense, net |
|
|
1.6 |
|
|
|
5.9 |
|
|
|
1.7 |
|
|
|
7.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) from continuing
operations before income taxes and
discontinued operations |
|
|
10.3 |
|
|
|
(5.0 |
) |
|
|
9.7 |
|
|
|
(0.9 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
16
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months |
|
|
Nine Months |
|
|
|
Ended |
|
|
Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income taxes |
|
|
1.8 |
|
|
|
0.6 |
|
|
|
1.3 |
|
|
|
0.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) from continuing
operations before discontinued
operations |
|
|
8.5 |
|
|
|
(5.6 |
) |
|
|
8.4 |
|
|
|
(1.6 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings from discontinued operations |
|
|
|
|
|
|
(0.0 |
) |
|
|
|
|
|
|
12.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings |
|
|
8.5 |
% |
|
|
(5.6 |
)% |
|
|
8.4 |
% |
|
|
10.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings from discontinued operations for the nine months ended September 30, 2007 includes the
gain recognized on the sale of Meridian (11.9% of revenue). See Discontinued Operations below.
Three and Nine Months Ended September 30, 2008 Compared to the Corresponding Periods of the Prior Year
Accounts Payable Services
Revenues. Domestic and International Accounts Payable Services revenues for the three and
nine months ended September 30, 2008 and 2007 were as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months |
|
|
Nine Months |
|
|
|
Ended |
|
|
Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
Domestic Accounts Payable Services revenues |
|
$ |
27.9 |
|
|
$ |
32.9 |
|
|
$ |
84.3 |
|
|
$ |
102.6 |
|
International Accounts Payable Services revenues |
|
|
21.3 |
|
|
|
20.3 |
|
|
|
62.8 |
|
|
|
61.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Accounts Payable Services revenues |
|
$ |
49.2 |
|
|
$ |
53.2 |
|
|
$ |
147.1 |
|
|
$ |
163.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months ended September 30, 2008 total Domestic and International Accounts
Payable Services revenues decreased by approximately 7.6% compared to the same period in 2007. For
the nine months ended September 30, 2008 total Domestic and International Accounts Payable Services
revenues decreased by approximately 10.1% compared to the same period in 2007. Domestic Accounts
Payable Services revenues include any revenues generated from the Medicare recovery audit
demonstration program. The end of the Medicare demonstration program in the first quarter of 2008
was the primary factor leading to the decline in Domestic Accounts Payable Services revenues for
the three and nine months ended September 30, 2008 compared to the same periods in the prior year.
Excluding Medicare audit revenues, Domestic Accounts Payable Services revenues increased in the
three month period ending September 30, 2008 compared to the same period in the prior year. Such
increase resulted primarily from increased recoveries obtained for the Companys existing client
base. The year over year increase in Domestic Accounts Payable Services revenues, excluding
Medicare audit revenues, is not consistent with the Companys general declining trend of such
revenues over the past several years. It should be noted, however, that a significant portion of
the recent historical trend of declining Domestic Accounts Payable Services revenues, excluding
Medicare audit revenues, resulted from the Companys strategy of exiting smaller, less profitable
clients. Additionally, management believes that this historical declining revenues trend was
related to several factors, including fewer claims being processed as a result of improved client
processes and the impact of the Companys clients developing and strengthening their own internal
audit capabilities as a substitute for the Companys services. Furthermore, the Company has
observed that with the passage of time numerous clients make fewer transaction errors as a result
of the training and methodologies provided by the Company as part of the Companys accounts payable
recovery process.. International Accounts Payable Services revenues for the three months ended
September 30, 2008 were $21.3 million compared to $20.3 million for the same period in 2007, a 4.4%
improvement. Such improvement is net of an adverse impact of foreign currency translation. In
local (functional) currencies the Companys International Accounts Payable Services revenues
increased by 9.9% for the three months ended September 30, 2008 as compared to the same period in
the prior year. For the nine months ended September 30, 2008 the International Accounts Payable
Services business generated a 2.9% revenue increase compared to the same period in 2007, 2.4%
measured in local currencies.
The Company intends to maximize the value it delivers to its existing clients by identifying
and auditing new categories of potential errors. The Company also intends to increase its emphasis
on using its technology and
17
professional experience to assist its clients in achieving objectives that do not directly involve
recovery of past overpayments. These objectives are related to such things as transaction accuracy
and compliance, managing trade and vendor promotional programs, purchasing effectiveness, M&A due
diligence analysis, and processing efficiency in the procure-to-pay value chain.
Cost of Revenues (COR). COR consists principally of commissions paid or payable to the
Companys auditors based primarily upon the level of overpayment recoveries, and compensation paid
to various types of hourly workers and salaried operational managers. Also included in COR are
other direct costs incurred by these personnel, including rental of non-headquarters offices,
travel and entertainment, telephone, utilities, maintenance and supplies and clerical assistance. A
significant portion of the components comprising COR for the Companys Domestic Accounts Payable
Services operations are variable and will increase or decrease with increases and decreases in
revenues. The Companys International Accounts Payable Services also have a portion of their COR,
although less than Domestic Accounts Payable Services, that will vary with revenues. The lower
variability is due to the predominant use of salaried auditor compensation plans in most
emerging-market countries.
Accounts Payable Services COR for the three and nine months ended September 30, 2008 and 2007
were as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months |
|
|
Nine Months |
|
|
|
Ended |
|
|
Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
Domestic Accounts Payable Services COR |
|
$ |
16.8 |
|
|
$ |
17.6 |
|
|
$ |
49.3 |
|
|
$ |
58.4 |
|
International Accounts Payable Services COR |
|
|
14.3 |
|
|
|
15.9 |
|
|
|
45.1 |
|
|
|
47.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Accounts Payable Services COR |
|
$ |
31.1 |
|
|
$ |
33.5 |
|
|
$ |
94.4 |
|
|
$ |
105.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COR as a percentage of revenues increased to 63.4% for the three months ended September 30,
2008 compared to 63.0% for the same period in 2007. The increase in the Companys COR as a
percentage of revenue is primarily related to the continuation of the costs of its Medicare related
infrastructure without corresponding revenues. For the nine months ended September 30, 2008, COR
decreased to 64.1% compared to 64.6% for the same period in 2007. The improvement in COR for both
the Domestic and International Accounts Payable Services for the 2008 nine-month period relative to
the prior year period was primarily related to the Companys ongoing strategy of focusing its
efforts and resources on its largest clients while exiting its smaller unprofitable clients. The
execution of this strategy continues to have a positive impact on gross margin as a percentage of
revenue.
During the nine months ended September 30, 2008, the Company incurred significant expenses to
maintain its Medicare audit capabilities. However, as a result of the decision by CMS not to award
a contract to the Company in connection with the national rollout of Medicare recovery auditing,
the Company intends to reduce the costs associated with such Medicare audit capabilities.
Selling, General, and Administrative Expenses (SG&A). SG&A expenses include the expenses of
sales and marketing activities, information technology services and the corporate data center,
human resources, legal, accounting, administration, currency translation, headquarters-related
depreciation of property and equipment and amortization of intangibles with finite lives. Due to
the relatively fixed nature of the Companys SG&A expenses, these expenses as a percentage of
revenues can vary markedly period to period based on fluctuations in revenues.
Accounts Payable Services SG&A for the three and nine months ended September 30, 2008 and 2007
were as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months |
|
|
Nine Months |
|
|
|
Ended |
|
|
Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
Domestic Accounts Payable Services SG&A |
|
$ |
3.9 |
|
|
$ |
4.5 |
|
|
$ |
12.2 |
|
|
$ |
13.0 |
|
International Accounts Payable Services SG&A |
|
|
4.3 |
|
|
|
2.4 |
|
|
|
8.4 |
|
|
|
7.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Accounts Payable Services SG&A |
|
$ |
8.2 |
|
|
$ |
6.9 |
|
|
$ |
20.6 |
|
|
$ |
20.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SG&A expenses for the three months ended September 30, 2008 were $8.2 million or 17.1% of
revenue compared to $6.9 million or 13.0% of revenue for the same period in 2007. Included in the
International Accounts Payable Services SG&A for the three months ended September 30, 2008 is $1.8
million of foreign currency losses related to intercompany balances compared to $0.5 million of
foreign currency gains for the same period in 2007. The foreign currency intercompany balance
gains and losses are primarily related to the build up of the Companys
18
intercompany transfer
pricing balances over time. Gains and losses result from the re-measurement of the foreign
subsidiaries payable to the U.S. parent from their local currency to their U.S. dollar
equivalent and substantial changes from period to period in currency exchange rates can
significantly impact the amount of such gains and losses. Excluding the foreign currency gains and
losses, SG&A expenses for the three months ended September 30, 2008 would be $6.4 million, or 13.0%
of revenue, compared to $7.4 million, or 13.9% of revenue, for the same period in 2007.
For the nine months ended September 30, 2008 compared to the nine months ended September 30,
2007, Accounts Payable Services SG&A expenses increased by $0.1 million and as a percentage of
revenue were 14.0% for the nine months ended September 30, 2008 compared to 12.5% for the same
period ended September 30, 2007. Included in the International Accounts Payable Services SG&A for
the nine months ended September 30, 2008 is $1.3 million of foreign currency losses on
intercompany balances compared to $1.1 million of foreign currency gains for the same period in
2007. Excluding the foreign currency gains and losses, SG&A expenses for the nine months ended
September 30, 2008 would be $19.2 million, or 13.1% of revenue, compared to $21.6 million, or 13.2%
of revenue, for the same period in 2007. The reduction in total Accounts Payable Services SG&A was
primarily the result of reducing the number of clients served, reducing the number of countries in
which the Company operates, reducing headcount, and otherwise diligently managing the operating
expenses of the business.
Corporate Support
Corporate Support represents the unallocated portion of corporate SG&A expenses not
specifically attributable to Domestic or International Accounts Payable Services and totaled the
following for the three and nine months ended September 30, 2008 and 2007 (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months |
|
|
Nine Months |
|
|
|
Ended |
|
|
Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
Corporate Support SG&A |
|
$ |
4.0 |
|
|
$ |
10.6 |
|
|
$ |
15.4 |
|
|
$ |
25.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate Support SG&A expenses include stock-based compensation charges of $0.4 million and
$6.9 million, respectively, for the three months ended September 30, 2008 and 2007. Excluding such
charges, Corporate Support SG&A decreased by $0.1 million, or 3.3%, in the third quarter of 2008
compared to the third quarter of 2007. For the nine months ended September 30, 2008 and September
30, 2007, Corporate Support SG&A expenses included stock-based compensation charges of $5.0 million
and $12.3 million respectively. Excluding such charges, Corporate Support SG&A decreased by $2.5
million, or 18.6%, in the first nine months of 2008 compared to the first nine months of 2007.
These reductions in costs primarily related to payroll, occupancy, insurance, professional fees,
and other miscellaneous expenses.
Discontinued Operations
Substantially all the results from discontinued operations for the three and nine months ended
September 30, 2007 relate to Meridian which was sold on May 30, 2007 to Averio. Meridian had
previously been reported as a separate reportable operating segment. Meridians operating results
for all periods presented have been reclassified and are included in discontinued operations.
In addition to amounts already paid by Averio at the closing of the sale and on December 31,
2007, the sale agreement required Averio to pay the Company 1.5 million (Euros) each year on
December 31, 2008 and 2009. However, the additional payments owed were contingent upon certain
place of supply legislation remaining in effect in the European Union without amendment prior to
the relevant payment date. During the quarter ended March 31, 2008, the place of supply legislation
was amended and, as a result, Averio is not required to make the additional payments under the
terms of the sale agreement.
Other Items
Interest Expense. Net interest expense was $0.8 million and $3.1 million for the three months
ended September 30, 2008 and 2007, respectively. Net interest expense was $2.5 million and $12.0
million for the nine months ended September 30, 2008 and 2007, respectively. These decreases in
interest expense resulted from the conversions to common stock of the Companys senior convertible
notes that occurred throughout 2007 and the October 2007 redemption of all the then-outstanding
balances of the Companys senior notes and senior convertible notes. Interest
19
expense in the third
quarter of 2008 primarily related to the term loan under the Companys senior credit facility with
an outstanding balance of $20.3 million as of September 30, 2008.
Income Tax Expense. The Companys effective income tax expense rates as indicated in the
accompanying Condensed Consolidated Financial Statements (Unaudited) do not reflect amounts that
would normally be expected because of the Companys valuation allowance against its deferred tax
assets. Reported income tax expense for the three and nine month periods ended September 30, 2008
and 2007 primarily results from taxes on income of foreign subsidiaries.
Liquidity and Capital Resources
As of September 30, 2008, the Company had cash and cash equivalents of $22.8 million. This
compares to the Companys $42.4 million of cash and cash equivalents as of December 31, 2007. The
decrease in cash and cash equivalents resulted from numerous factors. First, during the quarter
ended March 31, 2008, the Company reduced the balance of its term loan by $22.2 million. This
amount included $7.2 million of mandatory payments as well as a voluntary payment of $15.0 million.
During that same period, the Company also completed an amendment of its credit facility, permitting
the $15.0 million pre-payment without penalty and increasing the borrowing capacity under the
revolver portion of its facility by $10 million. Additionally, during the quarter ended March 31,
2008, the Company paid annual management bonuses related to and accrued for in 2007 of
approximately $7.2 million. During the quarter ended June 30, 2008 the Company paid a mandatory
principal payment of $1.2 million on its term loan, and approximately $2.0 million related to the
cash portion of the 2006 MIP Performance Units that were settled in April 2008. During the quarter
ended September 30, 2008, the Company paid a mandatory principal payment of $1.2 million of its
term loan. Finally, during the nine months ended September 30, 2008, the Company made interest
payments of $2.6 million related to its term loan.
Net cash used in investing activities in each of the nine-month periods ended September 30,
2008 and 2007 was $2.2 million. Cash used in investing activities was attributable to capital
expenditures, net of proceeds from sales of assets.
Net cash used in financing activities for the nine months ended September 30, 2008 was $25.0
million compared to $27.1 million for the nine months ended September 30, 2007. As mentioned above,
$25.0 million of the net cash used in financing activities during the nine months ended September
30, 2008 was related to paying down the principal amount of the term loan. The net use of cash
during the nine months ended September 30, 2007 primarily related to repayments of debt.
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; however, current projections reflect that the Companys core Accounts Payable Services
business may continue to decline. Therefore, the Company must continue to successfully manage its
expenses and grow its other business lines in order to stabilize and increase revenues and improve
profitability.
Executive Severance Payments
The July 31, 2005 retirements of the Companys former Chairman, President and CEO, John M.
Cook, and the Companys former Vice Chairman, John M. Toma, resulted in an obligation to pay
retirement benefits of $7.6 million to be paid in monthly cash installments principally over a
three-year period, beginning February 1, 2006. On March 16, 2006, the terms of the applicable
severance agreements were amended in conjunction with the Companys financial restructuring.
Pursuant to the terms of the severance agreements, as amended (1) the Companys obligations to pay
monthly cash installments to Mr. Cook and Mr. Toma have been extended from 36 months to 58 months
and from 24 months to 46 months, respectively; however, the total dollar amount of monthly cash
payments to be made to each remains unchanged, and (2) the Company agreed to pay a fixed sum of
$150,000 to defray the fees and expenses of the legal counsel and financial advisors to Messrs.
Cook and Toma. The original severance agreements, and the severance agreements, as amended, also
provide for an annual reimbursement, beginning on or about February 1, 2007, to Mr. Cook and Mr.
Toma for the cost of health insurance for themselves and their respective spouses (not to exceed
$25,000 and $20,000, respectively, subject to adjustment based on changes in the Consumer Price
Index), continuing until each reaches the age of 80. At September 30, 2008, the Companys accrued
payroll and related expenses and noncurrent compensation obligations include $1.4 million and $2.2
million, respectively, related to these obligations.
Bankruptcy Litigation
20
On April 1, 2003, Fleming Companies, one of the Companys larger U.S. Accounts Payable
Services clients at the time filed for Chapter 11 bankruptcy reorganization. During the quarter
ended March 31, 2003, the Company received approximately $5.6 million in payments on account from
Fleming. On January 24, 2005, the Company received a demand from the Fleming Post Confirmation
Trust (PCT), a trust which was created pursuant to Flemings Chapter 11 reorganization plan to
represent the client, for preference payments received by the Company. The demand stated that the
PCTs calculation of the preferential payments was approximately $2.9 million. The Company
disputed the claim. Later in 2005, the PCT filed suit against the Company seeking to recover
approximately $5.6 million in payments that were made to the Company by Fleming during the 90 days
preceding Flemings bankruptcy filing, and that are alleged to be avoidable either as preferences
or fraudulent transfers under the Bankruptcy Code. The Company believes that it has valid defenses
to certain of the PCTs claims in the proceeding. In December 2005, the PCT offered to settle the
case for $2 million. The Company countered with an offer to waive its bankruptcy claim and to pay
the PCT $250,000. The PCT rejected the Companys settlement offer, and although the parties are
engaged in efforts to resolve the dispute informally and have agreed to settlement mediation, the
litigation is ongoing.
Secured Credit Facility
In September 2007, the Company entered into an amended and restated credit facility with
Ableco LLC (Ableco) consisting of a $20 million revolving credit facility and a $45 million term
loan which was funded in October 2007. The principal portion of the $45 million term loan with
Ableco must be repaid in quarterly installments of $1.2 million each commencing in April 2008. The
loan agreement also requires an annual mandatory prepayment contingently payable based on an excess
cash flow calculation as defined in the agreement. During the first quarter of 2008, the Company
reduced the balance on its term loan by $22.2 million. This reduction included $7.2 million of
mandatory payments as well as a voluntary payment of $15.0 million. During the quarter ended March
31, 2008, the Company completed an amendment of its credit facility, permitting the $15.0 million
pre-payment without penalty and increasing the borrowing capacity under the revolver portion of its
facility by $10 million. An additional $1.2 million was repaid during each of the second and third
quarters of 2008 as required under the terms of the term loan.
The remaining balance of the term loan is due in September 2011. Interest is payable monthly
and accrues at the Companys option at either prime plus 1.75% or at LIBOR plus 4.5%, but under
either option may not be less than 9.75%. Interest on outstanding balances under the revolving
credit facility, if any, will accrue at the Companys option at either prime or at LIBOR plus 2%.
The Company must also pay a commitment fee of 0.5% per annum, payable monthly, on the unused
portion of the revolving credit facility. As of September 30, 2008, there were no outstanding
borrowings under the revolving credit facility.
The credit facility is guaranteed by each of the Companys direct and indirect domestic wholly
owned subsidiaries and certain of its foreign subsidiaries and is secured by substantially all of
the Companys assets (including the stock of the Companys domestic subsidiaries and two-thirds of
the stock of certain of the Companys foreign subsidiaries). The credit facility will mature on
September 17, 2011.
Stock Repurchase Program
In February 2008, the Board of Directors of the Company approved a stock repurchase program.
Under the terms of the program, the Company may repurchase up to $10 million of its common stock
from time to time through March 30, 2009. The timing and amount of repurchases, if any, will depend
upon the Companys stock price, economic and market conditions, regulatory requirements, and other
corporate considerations. No repurchases were made during the first nine months of 2008.
2006 Management Incentive Plan
At the annual meeting of shareholders held on August 11, 2006, the shareholders of the Company
approved a proposal granting authorization to issue up to 2.1 million shares of the Companys
common stock under the Companys 2006 Management Incentive Plan (2006 MIP). On September 29,
2006, an aggregate of 682,301 Performance Units were awarded under the 2006 MIP to the seven
executive officers of the Company. At Performance Unit settlement dates (which vary by
participant), participants are paid in common stock and in cash. Participants will receive a number
of shares of Company common stock equal to 60% of the number of Performance Units being paid out,
plus a cash payment equal to 40% of the fair market value of that number of shares of common stock
equal to the number of Performance Units being paid out. On March 28, 2007, an additional executive
officer
21
of the Company was granted 20,000 Performance Units under the 2006 MIP. The awards contain
certain anti-dilution and change of control provisions. Also, the number of Performance Units
awarded were automatically
adjusted on a pro-rata basis upon the conversion into common stock of the Companys senior
convertible notes and Series A convertible preferred stock. During 2006 and 2007, an additional
1,558,557 Performance Units were granted as a result of this automatic adjustment provision.
All Performance Units must be settled before April 30, 2016. On April 30, 2008, an aggregate
of 493,137 Performance Units were settled by six executive officers. Such settlements resulted in
the issuance of 295,879 shares of common stock and cash payments totaling $2.0 million. As of
September 30, 2008, total Performance Unit awards outstanding are 1,767,721 with an aggregate
intrinsic value of $15.8 million.
Off Balance Sheet Arrangements
As of September 30, 2008, 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.
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, (4) statements regarding the potential impact and outcome of the Companys
exploration of strategic alternatives, (5) expectations regarding future accounts payable services
revenue trends, (6) the anticipated impact of Medicare recovery audit services on the Companys
business, and (7) statements regarding the impact of potential legislative and regulatory changes.
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, 2007.
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 functional 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 nonfunctional currency revenues decreases. When the U.S. dollar weakens, the functional currency
amount of 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. Given the number of variables involved in
calculating our revenues and expenses derived from currencies other than the U.S. dollar, including
multiple currencies and fluctuating transaction volumes, the Company believes that it cannot
provide a quantitative analysis of the impact of hypothetical changes in foreign currency exchange
rates that would be meaningful to investors.
Interest Rate Risk. Our interest income and expense are sensitive to changes in the general
level of U.S. interest rates. In this regard, changes in U.S. interest rates affect the interest
earned on our cash equivalents as well as interest paid on our debt. As of September 30, 2008, the
Company had $20.0 million available under its revolving credit facility and $20.3 million
outstanding under the term loan. The interest rate on outstanding revolving credit loans is based
on a floating rate equal to LIBOR plus 2.0% (or, at our option, a published prime lending rate). At
September 30, 2008, there were no borrowings outstanding under the revolving credit facility.
However, assuming full utilization of the revolving credit facility, a hypothetical 100 basis point
change in interest rates applicable to the revolver would result in an approximate $0.2 million
change in annual pre-tax income. Interest on the term loan accrues at the Companys option at
either prime plus 1.75% or at LIBOR plus 4.5%. A hypothetical 100 basis point change in interest
rates applicable to the term loan would result in an approximate $0.2 million change in annual
pre-tax income.
Stock-Based Compensation. The Company estimates the fair value of awards of restricted shares
and nonvested shares, as defined in SFAS 123(R), as being equal to the market value of the common
stock. Also, under SFAS 123(R), companies must classify their share-based payments as either
liability-classified awards or as equity-classified awards. Liability-classified awards are
remeasured to fair value at each balance sheet date until the award is settled. The Company has
classified its share-based payments that are settled in cash as liability-classified awards. The
liability for liability-classified awards is generally equal to the fair value of the award as of
the balance sheet date times the percentage vested at the time. The change in the liability amount
from one balance sheet date to another is charged (or credited) to compensation cost. Based on the
number of liability-classified awards outstanding as of September 30, 2008, a hypothetical $1.00
change in the market value of the Companys common stock would result in a $0.7 million change in
pre-tax income.
23
Item 4. Controls and Procedures
The Companys management carried out an evaluation, under the supervision and with the
participation of its Chairman, President and Chief Executive Officer (CEO) and its Chief Financial
Officer (CFO), of the effectiveness of the design and operation of the Companys disclosure
controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934
(the Exchange Act)) as of the end of the period covered by this Quarterly Report on Form 10-Q.
Based upon that evaluation, the CEO and CFO concluded that the Companys disclosure controls and
procedures were effective in reporting, on a timely basis, information required to be disclosed by
the Company in the reports the Company files or submits under the Exchange Act.
There were no changes in our internal control over financial reporting during the quarter
ended September 30, 2008 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
See Note I of Notes to Condensed Consolidated Financial Statements (Unaudited) included in
Part I. Item 1. of this Form 10-Q which is incorporated by reference.
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, 2007.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
The Companys senior credit facility entered into on March 17, 2006 and amended on September
17, 2007 and March 28, 2008 prohibits the payment of any cash dividends on the Companys capital
stock.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
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). |
|
|
|
3.2
|
|
Amended and Restated Bylaws of the Registrant (incorporated by
reference to Exhibit 3.1 to the Registrants Form 8-K filed on
December 11, 2007). |
|
|
|
4.1
|
|
Specimen Common Stock Certificate (incorporated by reference to
Exhibit 4.1 to the Registrants Form 10-K for the year ended
December 31, 2001). |
|
|
|
4.2
|
|
See Restated Articles of Incorporation and Bylaws of the
Registrant, filed as Exhibits 3.1 and 3.2, respectively. |
|
|
|
4.3
|
|
Shareholder Protection Rights Agreement, dated as of August 9,
2000, between the Registrant and Rights Agent, effective May 1,
2002 (incorporated by reference to Exhibit 4.3 to the Registrants
Form 10-Q for the quarterly period ended June 30, 2002). |
|
|
|
4.3.1
|
|
First Amendment to Shareholder Protection Rights Agreement, dated
as of March 12, 2002, between the Registrant and Rights Agent
(incorporated by reference to Exhibit 4.3 to the Registrants Form
10-Q for the quarterly period ended September 30, 2002). |
|
|
|
4.3.2
|
|
Second Amendment to Shareholder Protection Rights Agreement, dated
as of August 16, 2002, between the Registrant and Rights Agent
(incorporated by reference to Exhibit 4.3 to the Registrants Form
10-Q for the quarterly period ended September 30, 2002). |
|
|
|
4.3.3
|
|
Third Amendment to Shareholder Protection Rights Agreement, dated
as of November 7, 2006, between the Registrant and Rights Agent
(incorporated by reference to Exhibit 4.1 to the Registrants Form
8-K filed on November 14, 2005). |
|
|
|
4.3.4
|
|
Fourth Amendment to Shareholder Protection Rights Agreement, dated
as of November 14, 2006, between the Registrant and Rights Agent
(incorporated by reference to Exhibit 4.1 to the Registrants Form
8-K filed on November 30, 2005). |
|
|
|
4.3.5
|
|
Fifth Amendment to Shareholder Protection Rights Agreement, dated
as of March 9, 2006, between the Registrant and Rights Agent
(incorporated by reference to Exhibit 4.9 to the Registrants Form
10-K for the year ended December 31, 2005). |
|
|
|
4.3.6
|
|
Sixth Amendment to Shareholder Protection Rights Agreement, dated
as of September 17, 2007, between the Registrant and Rights Agent
(incorporated by reference to Exhibit 4.1 to the Registrants Form
8-K filed on September 21, 2007). |
|
|
|
4.4
|
|
Indenture dated November 26, 2001 by and between Registrant and
Sun Trust Bank (incorporated by reference to Exhibit 4.3 to the
Registrants Registration Statement No. 333-76018 on Form S-3
filed December 27, 2001). |
|
|
|
4.5
|
|
Indenture dated as of March 17, 2006 governing 10% Senior
Convertible Notes due 2011, with Form of Note appended
(incorporated by reference to Exhibit 4.1 to the Registrants Form
8-K filed on March 23, 2006). |
|
|
|
4.5.1
|
|
Supplemental Indenture to 10% Senior Convertible Notes Indenture
dated September 4, 2007 (incorporated by reference to Exhibit 10.2
to the Registrants Form 8-K filed on September 5, 2007). |
|
|
|
4.6
|
|
Indenture dated as of March 17, 2006 governing 11% Senior Notes
due 2011, with Form of Note appended (incorporated by reference to
Exhibit 4.2 to the Registrants Form 8-K filed on March 23,
2006). |
|
|
|
4.6.1
|
|
Supplemental Indenture to 11% Senior Notes Indenture dated
September 4, 2007 (incorporated by reference to Exhibit 10.1 to
the Registrants Form 8-K filed on September 5, 2007). |
|
|
|
31.1
|
|
Certification of the Chief Executive Officer, pursuant to Rule
13a-14(a) or 15d-14(a), for the quarter ended September 30, 2008. |
|
|
|
31.2
|
|
Certification of the Chief Financial Officer, pursuant to Rule
13a-14(a) or 15d-14(a), for the quarter ended September 30, 2008. |
|
|
|
32.1
|
|
Certification of the Chief Executive Officer and Chief Financial
Officer, pursuant to 18 U.S.C. Section 1350, for the quarter ended
September 30, 2008. |
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.
|
|
|
|
|
|
PRG-SCHULTZ INTERNATIONAL, INC.
|
|
November 6, 2008 |
By: |
/s/ James B. McCurry
|
|
|
|
James B. McCurry |
|
|
|
President, Chairman of the Board and Chief
Executive Officer
(Principal Executive Officer) |
|
|
|
|
|
November 6, 2008 |
By: |
/s/ Peter Limeri
|
|
|
|
Peter Limeri |
|
|
|
Chief Financial Officer and Treasurer
(Principal Financial Officer) |
|
|
27