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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 8-K
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CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
DATE OF REPORT (DATE OF EARLIEST EVENT REPORTED): DECEMBER 23, 2005
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PRG-SCHULTZ INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
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GEORGIA 000-28000 58-2213805
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(State or Other Jurisdiction (Commission File Number) (IRS Employer
of Incorporation) Identification No.)
600 GALLERIA PARKWAY, SUITE 100, ATLANTA, GEORGIA 30339-5949
(Address of principal executive office) (zip code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (770) 779-3900
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(Former name or former address, if changed since last report)
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Check the appropriate box below if the Form 8-K filing is intended to
simultaneously satisfy the filing obligation of the registrant under any of the
following provisions (see General Instruction A.2. below):
|_| Written communications pursuant to Rule 425 under the Securities Act (17
CFR 230.425)
|_| Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR
240.14a-12)
|_| Pre-commencement communications pursuant to Rule 14d-2(b) under the
Exchange Act (17 CFR 240.14d-2(b))
|X| Pre-commencement communications pursuant to Rule 13e-4(c) under the
Exchange Act (17 CFR 240.13e-4(c))
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ITEM 1.01 ENTRY INTO A MATERIAL DEFINITIVE AGREEMENT.
1. $10 MILLION BRIDGE LOAN AGREEMENTS
On December 23, 2005 PRG-Schultz International, Inc. (the "Company") and certain
of its U.S. subsidiaries including PRG-Schultz USA, Inc. (the "Borrower"),
entered into a Credit Agreement, Security Agreement and Pledge Agreement with
Petrus Securities L.P. and Parkcentral Global Hub Limited (collectively, the
"Petrus Entities") and Blum Strategic Partners II GmbH & Co. KG. and Blum
Strategic Partners II, L.P. (collectively, the "Blum Entities"). These
agreements provide for a term loan to the Borrower in an aggregate principal
amount of $10 million that matures on the earlier of the closing of the
Company's restructuring of its debt or August 15, 2006 (the "Bridge Loan"). The
Company and certain of its U.S. subsidiaries guarantee the repayment of the
Bridge Loan and provides collateral to secure such guarantee. The proceeds of
the Bridge Loan may be used to finance working capital needs and to pay fees and
expenses relating to the Bridge Loan transaction. The Bridge Loan has no
scheduled payments, bears interest at 12% per annum, payable monthly and is
secured by a lien on all or substantially all of the assets of the Company, the
Borrower and certain of their subsidiaries. The Bridge Loan and the liens
securing the Bridge Loan are subordinated to the Borrower's indebtedness to Bank
of America, N.A.
The Blum Entities are beneficial owners of the Company's common stock and 4 3/4%
Convertible Subordinated Notes due 2006 (the "Convertible Notes"), and they have
the right to designate a member of the Company's Board of Directors and to have
an observer present at all Board meetings. The Petrus Entities are beneficial
owners of the Company's common stock and Convertible Notes. The Petrus entities
and Blum Capital Partners L.P. serve on the Ad Hoc Committee of holders of the
Convertible Notes to facilitate the exchange of securities contemplated by the
Restructuring Support Agreement described below.
The lenders under the Bridge Loan are entitled to accelerate the Company's
obligations under the Bridge Loan upon the occurrence of certain events of
default which are substantially the same as those provided for under the
Company's Senior Credit Facility. Such events include (but are not limited to)
the following: continued nonpayment for 5 or more business days of principal or
interest (or other amounts owing) when due; breach of certain representations
and warranties, including representations as to use of the proceeds of the
Bridge Loan; failure to observe certain covenants related to the existence and
entitlement to do business of the Credit Parties and related to collateral for
the Bridge Loan; incurring prohibited indebtedness; failure to deliver certain
required periodic reports and certificates; occurrence of certain bankruptcy
events; certain defaults under other material contracts, leases, and debt
obligations (including an event of default under the Indenture governing the
Company's 4 3/4% Convertible Subordinated Notes due 2006 and acceleration of the
indebtedness under the Senior Credit Facility); and a change of control (as
defined therein or as defined under the Indenture).
2. AMENDMENT TO FORBEARANCE AGREEMENT AND CREDIT AGREEMENT WITH BANK OF AMERICA
On December 23, 2005, the Company also entered into an Amendment to Forbearance
Agreement and Credit Agreement with Bank of America, N.A. (the "Amendment"). The
Amendment provides for an extension of the deadline to provide a refinancing
commitment to January 31, 2006, the pledge of additional collateral in the form
of certain foreign accounts receivable by January 15, 2006 and the extension of
the deadline for providing the pledge of certain United Kingdom receivables to
January 15, 2006, the incurrence of the indebtedness and the granting of the
liens in respect of the Bridge Loan, and certain additional reporting
requirements. The Amendment also decreases the capital expenditures limitation
to $6 million per year.
Bank of America is the Borrower's senior lender and provides the Borrower a
secured line of credit for revolving credit loans up to a maximum amount of $30
million, limited by the Borrower's account receivable balances. The Company
guarantees the repayment of the loans and provides collateral to secure such
guarantee.
3. RESTRUCTURING SUPPORT AGREEMENT
On December 23, 2005, the Company entered into a Restructuring Support Agreement
(the "RSA") with the five current members of the Ad Hoc Committee of the holders
of the Convertible Notes. The five members of the Ad Hoc Committee are Blum
Capital Partners L.P., Parkcentral Global Hub Limited, Petrus Securities L.P.,
Tenor Opportunity Master Fund, Ltd. and Thales Fund Management, LLC (the
"Noteholders").
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The RSA provides that (i) the parties will participate in and support the
restructuring transactions described in or contemplated by the Term Sheet which
is attached to the RSA as an exhibit (the "Restructuring"), including the
exchange offer (the "Exchange Offer"); (ii) the Company intends to commence the
exchange offer as soon as practicable; (iii) the parties will not pursue
alternative restructuring transactions, except that the Company may terminate
the RSA in the event it receives an unsolicited proposal that is superior to the
Exchange Offer and repays the Bridge Loan prior to such termination; (iv) the
Company's is restricted from selling any of its assets prior to the closing of
the Exchange Offer without the prior consent of the Noteholders; (v) the
Noteholders are restricted from selling any of their Convertible Notes to
entities that are not parties to the RSA.
The Noteholders may terminate the RSA if the Exchange Offer has not been
commenced by January 31, 2006 or completed by March 31, 2006. The Noteholders
may also terminate the RSA under other circumstances including the Company's
failure to repay the Bridge Loan upon the closing of the Exchange Offer or a
lender's exercise of its remedies following the occurrence of certain events of
default under the Bridge Loan or any events of default under the Company's
existing senior secured credit facility. If none of the parties terminates the
RSA, it will expire on June 15, 2006.
The RSA incorporates the Term Sheet reflecting the terms of the Restructuring.
The Term Sheet provides that in exchange for the Convertible Notes, the Company
will offer the following new securities: $50 million of new senior notes, $60
million of new senior convertible notes, and new series A convertible preferred
stock having a liquidation preference of $15 million. In 2011 all the new notes
will mature and any shares of the preferred stock remaining outstanding will be
redeemed by the Company. The material terms of these new securities include:
o The new senior notes will bear interest at 11%, payable semiannually in
cash, and are callable at 104% of face in year 1, 102% in year 2, and at
par in years 3 through 5.
o The new senior convertible notes will bear interest at 10%, payable
semiannually in cash or in kind, at the option of the Company. The new
senior convertible notes will be convertible at the option of the holders
(and in certain circumstances, at the option of the Company) into shares of
new series B preferred stock having a 10% annual dividend and a liquidation
preference equal to the principal amount of notes converted. Dividends on
the new series B preferred stock may be paid in cash or in kind, at the
option of the Company. The new series B preferred stock will be convertible
at the option of the holders into shares of common stock at the rate of
$0.65 of liquidation preference per share of common stock.
o The new series A preferred stock will have a 9% dividend, payable in cash
or in kind, at the option of the Company. The new series A preferred stock
will be convertible at the option of the holders into shares of common
stock at the rate of $0.28405 of liquidation preference per share of common
stock.
o The series A and series B preferred stock will vote with the Company's
common stock on most matters requiring shareholder votes. The Company has
the right to redeem the new senior convertible notes at par at any time
after repayment of the new senior notes. The Company also has the right to
redeem the new series A and series B preferred stock at the stated
liquidation preference at any time after repayment of the new senior notes
and the new senior convertible notes.
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o Both the new senior notes and the new senior convertible notes will mature
on the fifth anniversary of issuance. The new series A and series B
preferred stock must be redeemed on the fifth anniversary of issuance.
Immediately after completion of the Restructuring, existing common shareholders
will own 54.1% of the equity of the Company. If all the new senior convertible
notes converted into series B preferred stock immediately on completion of the
Restructuring, existing common shareholders would own approximately 30% of the
equity of the Company (exclusive of any dilution for management incentive
plans). Including the dilution for the proposed management incentive plan
discussed below, the existing common shareholders would own approximately 27% of
the Company's equity.
Under the proposed management incentive plan (the "MIP"), the post-restructuring
board of directors will allocate to the Company's executives phantom shares
representing 10% of the Company's common stock, of which 40% must be allocated
to the Company's CEO. The MIP provides that one-third of the phantom shares will
vest upon the completion of the Restructuring (the "Effective Date") and the
remaining thirds will vest on the first and second anniversaries of the
Effective Date, respectively. The shares will vest fully upon the occurrence of
a change in control other than the conversion of the new senior convertible
notes and new series A and series B preferred stock into common stock.
Commencing on the second anniversary of the Effective Date, the shares will be
distributed according to the executives' elections, but executives may not elect
to receive more than 25% (cumulatively) each year. The value of an executive's
MIP award will be distributed in cash only to extent required to satisfy
applicable taxes. The balance will be distributed in common stock.
The Exchange Offer is currently scheduled to commence in mid-January 2006 and
will be conducted pursuant to an exemption provided by Section 3(a)(9) of the
Securities Act of 1933. The Company will seek a 99% minimum acceptance level of
the Notes in the Exchange Offer. In addition, as a condition to the Exchange
Offer, the Company must refinance its senior secured bank debt and add a second
lien facility to increase liquidity. The aggregate amount of first and second
lien debt cannot exceed $47.5 million.
Blum Capital Partners L.P. and its affiliates are beneficial owners of the
Company's common stock and Convertible Notes, and they have the right to
designate a member of the Company's Board of Directors and to have an observer
present at all Board meetings. The Petrus Entities are beneficial owners of the
Company's common stock and Convertible Notes. The other members of the Ad Hoc
Committee own Convertible Notes. Thales Fund Management, LLC also owns common
stock of the Company. The members of the Ad Hoc Committee own in the aggregate
52% of the Convertible Notes.
ITEM 2.03 CREATION OF A DIRECT FINANCIAL OBLIGATION OR AN OBLIGATION UNDER AN
OFF-BALANCE SHEET ARRANGEMENT OF A REGISTRANT
See "$10 Million Bridge Loan Agreements" under Item 1.01 above.
ITEM 3.02 UNREGISTERED SALES OF EQUITY SECURITIES
See "Restructuring Support Agreement" under Item 1.01 above for a discussion of
commitments to purchase Company preferred stock.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
PRG-Schultz International, Inc. has duly caused this report to be signed on its
behalf by the undersigned hereunto duly authorized.
PRG-SCHULTZ INTERNATIONAL, INC.
Date: December 28, 2005 By: /s/ C. McKellar, Jr.
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Clinton McKellar, Jr.
General Counsel and Secretary
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