PRG-SCHULTZ INTERNATIONAL, INC.
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
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þ |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 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
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58-2213805 |
(State or other jurisdiction of
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(I.R.S. Employer |
incorporation or organization)
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Identification No.) |
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600 Galleria Parkway
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30339-5986 |
Suite 100
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(Zip Code) |
Atlanta, Georgia |
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(Address of principal executive offices) |
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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):
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Large accelerated filer o
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Accelerated filer þ
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Non-accelerated filer o
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Smaller reporting company o |
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(Do not check if a smaller reporting company) |
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Act). Yes o No þ
Common shares of the registrant outstanding at July 31, 2008 were 21,844,841.
PRG-SCHULTZ INTERNATIONAL, INC.
FORM 10-Q
For the Quarter Ended June 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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Six Months Ended |
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June 30, |
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June 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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$ |
49,648 |
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$ |
53,315 |
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$ |
97,911 |
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$ |
110,345 |
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Cost of revenues |
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32,941 |
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34,872 |
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63,193 |
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72,113 |
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Gross margin |
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16,707 |
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18,443 |
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34,718 |
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38,232 |
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Selling, general and administrative expenses |
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11,024 |
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14,486 |
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23,867 |
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28,168 |
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Operational restructuring expense (Note I) |
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Operating income |
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5,683 |
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3,957 |
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10,851 |
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10,064 |
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Interest expense, net |
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765 |
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4,749 |
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1,756 |
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8,890 |
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Loss on financial restructuring (Note H) |
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Earnings (loss) from continuing operations
before income taxes and discontinued
operations |
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4,918 |
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(792 |
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9,095 |
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1,174 |
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Income taxes |
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400 |
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344 |
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993 |
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875 |
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Earnings (loss) from continuing operations
before discontinued operations |
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4,518 |
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(1,136 |
) |
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8,102 |
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299 |
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Discontinued operations (Note B): |
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Earnings from discontinued operations, net of
income taxes |
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19,687 |
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19,775 |
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Net earnings |
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$ |
4,518 |
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$ |
18,551 |
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$ |
8,102 |
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$ |
20,074 |
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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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$ |
0.21 |
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$ |
(0.15 |
) |
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$ |
0.37 |
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$ |
0.00 |
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Earnings from discontinued operations |
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2.17 |
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2.26 |
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Net earnings |
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$ |
0.21 |
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$ |
2.02 |
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$ |
0.37 |
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$ |
2.26 |
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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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$ |
0.20 |
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$ |
(0.15 |
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$ |
0.35 |
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$ |
0.00 |
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Earnings from discontinued operations |
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2.17 |
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2.26 |
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Net earnings |
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$ |
0.20 |
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$ |
2.02 |
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$ |
0.35 |
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$ |
2.26 |
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Weighted-average common shares outstanding (Note
C ): |
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Basic |
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21,734 |
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9,093 |
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21,629 |
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8,733 |
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Diluted |
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22,942 |
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9,093 |
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22,823 |
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8,733 |
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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 per share data)
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June 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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$ |
20,152 |
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$ |
42,364 |
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Restricted cash |
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168 |
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Receivables: |
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Contract receivables, less allowances of $718 in 2008 and $826 in 2007 |
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Billed |
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23,959 |
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30,251 |
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Unbilled |
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5,510 |
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6,440 |
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29,469 |
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36,691 |
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Employee advances and miscellaneous receivables, less allowances of $2,347 in 2008 and
$1,831 in 2007 |
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261 |
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1,118 |
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Total receivables |
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29,730 |
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37,809 |
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Prepaid expenses and other current assets |
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2,611 |
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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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52,661 |
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82,913 |
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Property and equipment, at cost |
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40,973 |
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41,148 |
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Less accumulated depreciation and amortization |
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(33,426 |
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(33,113 |
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Property and equipment, net |
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7,547 |
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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 $9,830 in 2008 and $8,728 in 2007 |
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20,070 |
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21,172 |
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Unbilled receivables |
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1,758 |
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2,072 |
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Deferred income taxes |
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20 |
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279 |
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Other assets |
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3,061 |
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3,367 |
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$ |
89,717 |
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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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$ |
12,144 |
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$ |
16,117 |
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Accrued payroll and related expenses |
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20,049 |
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31,435 |
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Refund liabilities |
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7,406 |
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9,897 |
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Deferred revenue |
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516 |
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620 |
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Current portions of debt obligations |
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5,297 |
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7,846 |
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Total current liabilities |
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45,412 |
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65,915 |
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Long term debt (Note H) |
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16,992 |
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38,078 |
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Noncurrent compensation obligations |
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8,373 |
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8,548 |
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Refund liabilities |
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1,012 |
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1,676 |
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Other long-term liabilities |
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5,433 |
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5,872 |
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Total liabilities |
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77,222 |
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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; $.01 stated value per share. Authorized 50,000,000 shares;
issued 22,421,294 in 2008 and 22,100,090 in 2007 |
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224 |
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221 |
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Additional paid-in capital |
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608,435 |
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605,592 |
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Accumulated deficit |
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(550,916 |
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(559,018 |
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Accumulated other comprehensive income |
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3,462 |
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4,264 |
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Treasury stock, at cost; 576,453 shares in 2008 and 2007 |
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(48,710 |
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(48,710 |
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Total shareholders equity |
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12,495 |
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2,349 |
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Commitments and contingencies (Note I) |
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$ |
89,717 |
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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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Six Months Ended |
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June 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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$ |
8,102 |
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$ |
20,074 |
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Earnings from discontinued operations |
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19,775 |
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Earnings from continuing operations |
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8,102 |
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299 |
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Adjustments to reconcile earnings from continuing operations to
net cash provided by operating activities: |
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Depreciation and amortization |
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2,716 |
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3,564 |
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Amortization of debt discount, premium and deferred loan costs |
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390 |
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2,003 |
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Stock-based compensation costs |
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4,584 |
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5,429 |
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(Gain) loss on sale of property, plant and equipment |
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(5 |
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223 |
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Deferred income taxes |
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323 |
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320 |
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Changes in assets and liabilities: |
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Restricted cash |
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(164 |
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(34 |
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Billed receivables |
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7,431 |
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4,843 |
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Unbilled receivables |
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1,244 |
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2,096 |
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Prepaid expenses and other current assets |
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108 |
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(1,091 |
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Other assets |
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(13 |
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116 |
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Accounts payable and accrued expenses |
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(4,849 |
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1,456 |
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Accrued payroll and related expenses |
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(12,041 |
) |
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(11,980 |
) |
Refund liabilities |
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(3,155 |
) |
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(376 |
) |
Deferred revenue |
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(117 |
) |
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|
261 |
|
Noncurrent compensation obligations |
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(1,676 |
) |
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(437 |
) |
Other long-term liabilities |
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(439 |
) |
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(255 |
) |
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Net cash provided by operating activities |
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2,439 |
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6,437 |
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Cash flows from investing activities: |
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Purchases of property and equipment, net of disposal proceeds |
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(1,102 |
) |
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(1,139 |
) |
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Net cash used in investing activities |
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(1,102 |
) |
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(1,139 |
) |
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Cash flows from financing activities: |
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Net repayments of debt |
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(23,635 |
) |
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(25,148 |
) |
Payments for deferred loan cost |
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(59 |
) |
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(221 |
) |
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Net cash used in financing activities |
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(23,694 |
) |
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(25,369 |
) |
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Cash flows from discontinued operations: |
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Operating cash flows |
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(2,064 |
) |
Investing cash flows |
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|
21,133 |
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Net cash provided by discontinued operations |
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19,069 |
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Effect of exchange rates on cash and cash equivalents |
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|
145 |
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|
356 |
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Net change in cash and cash equivalents |
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(22,212 |
) |
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(646 |
) |
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Cash and cash equivalents at beginning of period |
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42,364 |
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30,228 |
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Cash and cash equivalents at end of period |
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$ |
20,152 |
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$ |
29,582 |
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Supplemental disclosure of cash flow information: |
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Cash paid during the period for interest |
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$ |
1,955 |
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$ |
7,670 |
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Cash paid during the period for income taxes, net of refunds |
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$ |
1,311 |
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$ |
482 |
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|
See accompanying Notes to Condensed Consolidated Financial Statements.
3
PRG-SCHULTZ INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 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
six-month periods ended June 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.
Certain reclassifications have been made to the 2007 amounts to conform to the presentation in
2008. These reclassifications include the reclassification of the Companys Meridian VAT reclaim
(Meridian) business unit as discontinued operations (see Note B).
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 June 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 157, the FASB issued FASB Staff Positions (FSP) 157-1 and 157-2. FSP 157-1
amends SFAS 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 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 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 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 June
30, 2008 included cash equivalents of $20.2 million which were valued based on Level 1 inputs and
debt and capital lease obligations of $22.3 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 from discontinued operations for the
three and six month periods ended June 30, 2008 and 2007 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months |
|
|
Six Months |
|
|
|
Ended |
|
|
Ended |
|
|
|
June 30, |
|
|
June 30, |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
Revenues |
|
$ |
|
|
|
$ |
7,505 |
|
|
$ |
|
|
|
$ |
17,386 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
|
|
|
|
|
112 |
|
|
|
|
|
|
|
724 |
|
Gain on sale or disposal |
|
|
|
|
|
|
19,460 |
|
|
|
|
|
|
|
19,460 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
19,572 |
|
|
|
|
|
|
|
20,184 |
|
Income tax expense (benefit) |
|
|
|
|
|
|
(115 |
) |
|
|
|
|
|
|
409 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings from discontinued operations |
|
$ |
|
|
|
$ |
19,687 |
|
|
$ |
|
|
|
$ |
19,775 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5
PRG-SCHULTZ INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Substantially all the results from discontinued operations for the three and six months ended
June 30, 2007 relate to the Meridian VAT reclaim business 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 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 Per Common Share
The following tables set forth the computations of basic and diluted earnings per common share
for the three and six months ended June 30, 2008 and 2007 (in thousands, except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
June 30, |
|
|
June 30, |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
Basic earnings per common share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator for earnings per common share calculations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) from continuing operations
before discontinued operations |
|
$ |
4,518 |
|
|
$ |
(1,136 |
) |
|
$ |
8,102 |
|
|
$ |
299 |
|
Preferred dividends |
|
|
|
|
|
|
(178 |
) |
|
|
|
|
|
|
(336 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) for purposes of computing
basic earnings per common share from
continuing operations |
|
|
4,518 |
|
|
|
(1,314 |
) |
|
|
8,102 |
|
|
|
(37 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings from discontinued operations |
|
|
|
|
|
|
19,687 |
|
|
|
|
|
|
|
19,775 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings for purposes of computing basic
net earnings per common share |
|
$ |
4,518 |
|
|
$ |
18,373 |
|
|
$ |
8,102 |
|
|
$ |
19,738 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for basic earnings per common share
weighted-average common shares outstanding
during the period |
|
|
21,734 |
|
|
|
9,093 |
|
|
|
21,629 |
|
|
|
8,733 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per common share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) from continuing operations
before discontinued operations |
|
$ |
0.21 |
|
|
$ |
(0.15 |
) |
|
$ |
0.37 |
|
|
$ |
0.00 |
|
Earnings from discontinued operations |
|
|
|
|
|
|
2.17 |
|
|
|
|
|
|
|
2.26 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings |
|
$ |
0.21 |
|
|
$ |
2.02 |
|
|
$ |
0.37 |
|
|
$ |
2.26 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6
PRG-SCHULTZ INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
June 30, |
|
|
June 30, |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
Diluted earnings per common share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator for earnings per common share calculations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) from continuing operations before
discontinued operations |
|
$ |
4,518 |
|
|
$ |
(1,136 |
) |
|
$ |
8,102 |
|
|
$ |
299 |
|
Preferred dividends |
|
|
|
|
|
|
(178 |
) |
|
|
|
|
|
|
(336 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) for purposes of computing
diluted earnings (loss) per common share from
continuing operations |
|
|
4,518 |
|
|
|
(1,314 |
) |
|
|
8,102 |
|
|
|
(37 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings from discontinued operations |
|
|
|
|
|
|
19,687 |
|
|
|
|
|
|
|
19,775 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings for purposes of computing diluted net
earnings per common share |
|
$ |
4,518 |
|
|
$ |
18,373 |
|
|
$ |
8,102 |
|
|
$ |
19,738 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for basic earnings per common share
weighted-average common shares outstanding during the
period |
|
|
21,734 |
|
|
|
9,093 |
|
|
|
21,629 |
|
|
|
8,733 |
|
Incremental shares from stock-based compensation plans |
|
|
1,208 |
|
|
|
|
|
|
|
1,194 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for diluted earnings per common share |
|
|
22,942 |
|
|
|
9,093 |
|
|
|
22,823 |
|
|
|
8,733 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per common share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) from continuing operations before
discontinued operations |
|
$ |
0.20 |
|
|
$ |
(0.15 |
) |
|
$ |
0.35 |
|
|
$ |
0.00 |
|
Earnings from discontinued operations |
|
|
|
|
|
|
2.17 |
|
|
|
|
|
|
|
2.26 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings |
|
$ |
0.20 |
|
|
$ |
2.02 |
|
|
$ |
0.35 |
|
|
$ |
2.26 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three and six months ended June 30, 2008, options to purchase 0.8 million shares of
common stock were not included in the computation of diluted earnings per common share 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 six months ended June 30, 2007, 0.6 million
shares subject to outstanding stock options and 2006 Management Incentive Plan (2006 MIP) awards
were excluded from the computation of diluted earnings per common share due to their antidilutive
effect to earnings (loss) per common share from continuing operations. For the three and six months
ended June 30, 2007, 9.3 million shares and 9.5 million shares, respectively, related to the senior
convertible notes were excluded from the calculation of diluted earnings per common share due to
their antidilutive effect to earnings (loss) per common share from continuing operations. For the
three and six months ended June 30, 2007, 3.0 million shares and 3.2 million shares, respectively,
related to the Series A convertible preferred stock were excluded from the calculation of diluted
earnings 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.
During the first quarter of 2007, one senior officer of the Company was granted 20,000
Performance Units under the 2006 MIP. The award had a grant date fair value of $0.3 million and
vests ratably over four years. No other awards were granted during the first six months of 2007
under the Companys incentive plans and no options were exercised.
During the first six months of 2007, Performance Units outstanding under the 2006 MIP
increased by 233,165 as a result of anti-dilution adjustments which occur automatically pursuant to
the terms of the 2006 MIP as the Companys convertible securities converted into common stock. As
of June 30, 2007, a total of 1,047,540 Performance Units were outstanding, 770,934 of which were
vested.
As of June 30, 2008, a total of 1,767,723 Performance Units were outstanding, 1,735,940 of
which were vested. 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.
Selling, general and administrative expenses for the three months ended June 30, 2008 and 2007
include $1.5 million and $2.7 million, respectively, related to stock-based compensation charges.
Selling, general and administrative expenses for the six months ended June 30, 2008 and 2007
include $4.3 million and $5.4 million, respectively, related to stock-based compensation charges.
At June 30, 2008, there was $4.5 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 1.9 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.
8
PRG-SCHULTZ INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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.
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
and severance charges 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 six months ended June 30, 2008 and 2007 follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic |
|
|
International |
|
|
|
|
|
|
|
|
|
Accounts |
|
|
Accounts |
|
|
|
|
|
|
|
|
|
Payable |
|
|
Payable |
|
|
Corporate |
|
|
|
|
|
|
Services |
|
|
Services |
|
|
Support |
|
|
Total |
|
Three Months Ended June 30, 2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
28,280 |
|
|
$ |
21,368 |
|
|
$ |
¾ |
|
|
$ |
49,648 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA |
|
$ |
8,759 |
|
|
$ |
3,118 |
|
|
$ |
(4,879 |
) |
|
$ |
6,998 |
|
Stock-based compensation |
|
|
¾ |
|
|
|
¾ |
|
|
|
1,550 |
|
|
|
1,550 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA |
|
$ |
8,759 |
|
|
$ |
3,118 |
|
|
$ |
(3,329 |
) |
|
$ |
8,548 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, 2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
32,695 |
|
|
$ |
20,620 |
|
|
$ |
¾ |
|
|
$ |
53,315 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA |
|
$ |
10,257 |
|
|
$ |
2,601 |
|
|
$ |
(7,348 |
) |
|
$ |
5,510 |
|
Stock-based compensation |
|
|
¾ |
|
|
|
¾ |
|
|
|
2,695 |
|
|
|
2,695 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA |
|
$ |
10,257 |
|
|
$ |
2,601 |
|
|
$ |
(4,653 |
) |
|
$ |
8,205 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, 2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
56,494 |
|
|
$ |
41,417 |
|
|
$ |
¾ |
|
|
$ |
97,911 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA |
|
$ |
18,143 |
|
|
$ |
6,902 |
|
|
$ |
(11,478 |
) |
|
$ |
13,567 |
|
Stock-based compensation |
|
|
¾ |
|
|
|
¾ |
|
|
|
4,584 |
|
|
|
4,584 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA |
|
$ |
18,143 |
|
|
$ |
6,902 |
|
|
$ |
(6,894 |
) |
|
$ |
18,151 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, 2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
69,699 |
|
|
$ |
40,646 |
|
|
$ |
¾ |
|
|
$ |
110,345 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA |
|
$ |
23,279 |
|
|
$ |
4,952 |
|
|
$ |
(14,603 |
) |
|
$ |
13,628 |
|
Stock-based compensation |
|
|
¾ |
|
|
|
¾ |
|
|
|
5,429 |
|
|
|
5,429 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA |
|
$ |
23,279 |
|
|
$ |
4,952 |
|
|
$ |
(9,174 |
) |
|
$ |
19,057 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9
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 six month periods ended June 30,
2008 and 2007 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
June 30, |
|
|
June 30, |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
Earnings (loss) from continuing
operations
before discontinued operations |
|
$ |
4,518 |
|
|
$ |
(1,136 |
) |
|
$ |
8,102 |
|
|
$ |
299 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income taxes |
|
|
400 |
|
|
|
344 |
|
|
|
993 |
|
|
|
875 |
|
Interest, net |
|
|
765 |
|
|
|
4,749 |
|
|
|
1,756 |
|
|
|
8,890 |
|
Depreciation and amortization |
|
|
1,315 |
|
|
|
1,553 |
|
|
|
2,716 |
|
|
|
3,564 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA |
|
|
6,998 |
|
|
|
5,510 |
|
|
|
13,567 |
|
|
|
13,628 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation |
|
|
1,550 |
|
|
|
2,695 |
|
|
|
4,584 |
|
|
|
5,429 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA |
|
$ |
8,548 |
|
|
$ |
8,205 |
|
|
$ |
18,151 |
|
|
$ |
19,057 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 six months ended June 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. This
Statement establishes items that are required to be recognized under accounting standards as
components of comprehensive income. SFAS No. 130 requires, among other things, that an enterprise
report a total for comprehensive income in condensed financial statements of interim periods issued
to shareholders. For the three-month periods ended June 30, 2008 and 2007, the Companys
consolidated comprehensive income was $4.3 million and $19.8 million, respectively. For the
six-month periods ended June 30, 2008 and 2007, the Companys consolidated comprehensive income was
$6.9 million and $21.5 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 places its temporary cash investments with
high credit quality financial institutions. At times, certain investments may be in excess of the
Federal Deposit Insurance Corporation insurance limit.
At June 30, 2008 and December 31, 2007, the Company had cash and cash equivalents of $20.2
million and $42.4 million, respectively, of which cash equivalents represent approximately $14.9
million and $37.0 million, respectively. The Company had $13.9 million and $36.7 million in cash
equivalents at U.S. banks at June 30, 2008 and December 31, 2007, respectively. At June 30, 2008
and December 31, 2007, certain of the Companys international subsidiaries held $1.0 million and
$0.3 million, respectively, in temporary investments. Most of the temporary investments held by
international subsidiaries at June 30, 2008 were held in Canada.
Note H - Long Term Debt
Total debt outstanding at June 30, 2008 was $22.3 million and included a $21.6 million
outstanding balance on a variable rate term loan due 2011 and a $0.7 million capital lease
obligation.
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
10
PRG-SCHULTZ INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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 June 30, 2008,
there were no borrowings outstanding under the revolver portion of the Companys credit facility.
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.
During the first quarter of 2007, the Company repaid $9.6 million of its term loan. During the
second quarter of 2007, the Company repaid the remaining $15.4 million balance of the term loan.
Upon the full satisfaction of the term loan, the Company recognized a $1.1 million charge related
to unamortized deferred loan costs associated with the term loan. Such charge is included in
interest expense in the Condensed Consolidated Statements of Operations (Unaudited) for the three
and six months ended June 30, 2007.
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.
11
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 June 30, 2008, accrued
payroll and related expenses and noncurrent compensation obligations include $1.4 million and $2.6
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. No costs incurred
during the three and six months ended June 30, 2008 or 2007 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 June 30, 2008, accounts payable
and accrued expenses and other long-term liabilities include $0.8 million and $3.2 million,
respectively, related to operating leases terminated or exited early.
12
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, including the Centers for Medicare and Medicaid
Services (CMS). 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 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 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. During the second quarter of 2007, the Companys CMS demonstration project
contract was amended to include recovery audit services for the State of Arizonas Medicare
spending, although the Company never received any Arizona Medicare data to audit. Revenues from the
auditing of Medicare payments made in California made a small contribution to the Companys overall
revenues in the six months ended June 30, 2008 primarily as a result of the expiration of the
contract. 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 project and that CMS enter into additional
contracts with recovery audit contractors to expand recovery auditing of Medicare spending to all
50 states by January 1, 2010. On October 19, 2007, CMS issued a Request for Proposal (RFP), which
included a deadline for response of no later than
13
November 19, 2007, and a planned initial rollout beginning April 1, 2008. The RFP contains
certain terms that are significantly different from the terms that were applicable to the Medicare
recovery audit demonstration project. For instance, the RFP requires participating recovery audit
contractors to repay to CMS the contingency fee associated with any claim that is subsequently
overturned at any level of appeal. Due to the uncertainties inherent in the Medicare recovery
audit program, it is difficult to assess the overall impact of the proposed national rollout of
recovery auditing of Medicare spending on the Companys business. Nevertheless, management
believes that, should it participate in the national rollout of Medicare auditing, the Company will
have the opportunity to continue and expand its Medicare audit recovery business. However, the
continuation and expansion of the Companys Medicare recovery audit services is subject to numerous
risks and variables, including the timing, terms and rollout schedule of the national expansion by
CMS and changes in the political, legislative and regulatory environment. For example, on November
7, 2007, CMS significantly modified the RFP to, among other things, introduce provisions which
limit the scope of the Medicare payments to be reviewed by participating recovery audit contractors
to those made on or after October 1, 2007. The amendment also extended the deadline for response
to the RFP. The Company submitted its proposal responding to the RFP on December 14, 2007, before
the applicable deadline. To date, CMS has not announced its preferred recovery audit contractors
for the four regions to be covered by new contracts. The Company will not have Medicare audit
revenues for up to nine months after the new recovery audit contracts are awarded, if ever, and
although management has taken steps to reduce its costs associated with its Medicare audit
capabilities, the Company continues to incur significant expenses to maintain those capabilities in
anticipation of the national rollout.
CMSs recovery audit contractor program is designed, among other things, to recover improper
payments made to healthcare providers such as hospitals and physicians practices. These providers,
both individually and collectively through provider associations, have sought and will likely
continue to seek to end or severely limit this legislatively mandated program. The recovery audit
program generally and recovery audit contractors, including the Company, have been and will likely
continue to be the subject of complaints by health care providers and their associations, and
efforts, including political pressures, to end or limit CMSs recovery audit program are likely to
continue for the foreseeable future. These complaints and pressures could lead to additional
program changes and limitations or to the discontinuation of CMSs recovery audit program entirely.
As an example of the impact of such efforts and pressures, on November 8, 2007, legislation was
introduced in Congress proposing a one year halt to CMSs recovery audit program and calling for an
assessment of the program by the U.S. Government Accountability Office. To date, such legislation
has not been passed. Although it is difficult to assess the prospects for the success of any
particular legislative or other effort to limit or end the recovery audit program at this time,
management believes that opposition efforts are likely to continue as long as the program is
successful at recovering meaningful amounts of improper payments made to healthcare providers.
Despite the end to the Medicare recovery audit demonstration project on March 27, 2008 and the
uncertainties inherent in the Medicare recovery audit program, generally, including those relating
to the rollout of the program to all 50 states as mandated by Congress, management believes it has
an opportunity to significantly expand its Medicare audit recovery business if it participates in
the national rollout.
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.
14
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 June 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 157, the FASB issued FASB Staff Positions (FSP) 157-1 and 157-2. FSP 157-1
amends SFAS 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 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 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 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 June
30, 2008 included cash equivalents of $20.2 million which were valued based on Level 1 inputs and
debt and capital lease obligations of $22.3 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
15
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 |
|
Six Months |
|
|
Ended |
|
Ended |
|
|
June 30, |
|
June 30, |
|
|
2008 |
|
2007 |
|
2008 |
|
2007 |
Revenues |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
Cost of revenues |
|
|
66.4 |
|
|
|
65.4 |
|
|
|
64.5 |
|
|
|
65.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin |
|
|
33.6 |
|
|
|
34.6 |
|
|
|
35.5 |
|
|
|
34.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative expenses |
|
|
22.2 |
|
|
|
27.2 |
|
|
|
24.4 |
|
|
|
25.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
|
11.4 |
|
|
|
7.4 |
|
|
|
11.1 |
|
|
|
9.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense, net |
|
|
1.5 |
|
|
|
8.9 |
|
|
|
1.8 |
|
|
|
8.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) from continuing
operations before income taxes and
discontinued operations |
|
|
9.9 |
|
|
|
(1.5 |
) |
|
|
9.3 |
|
|
|
1.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income taxes |
|
|
0.8 |
|
|
|
0.6 |
|
|
|
1.0 |
|
|
|
0.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) from continuing
operations before discontinued
operations |
|
|
9.1 |
|
|
|
(2.1 |
) |
|
|
8.3 |
|
|
|
0.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings from discontinued operations |
|
|
¾ |
|
|
|
36.9 |
|
|
|
¾ |
|
|
|
17.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings |
|
|
9.1 |
% |
|
|
34.8 |
% |
|
|
8.3 |
% |
|
|
18.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings from discontinued operations for the three and six months ended June 30, 2007 includes the
gain recognized on the sale of Meridian (36.5% and 17.6% of revenue, respectively). See
Discontinued Operations below.
16
Three and Six Months Ended June 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 six
months ended June 30, 2008 and 2007 were as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months |
|
|
Six Months |
|
|
|
Ended |
|
|
Ended |
|
|
|
June 30, |
|
|
June 30, |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
Domestic Accounts Payable Services revenues |
|
$ |
28.3 |
|
|
$ |
32.7 |
|
|
$ |
56.5 |
|
|
$ |
69.7 |
|
International Accounts Payable Services revenues |
|
|
21.3 |
|
|
|
20.6 |
|
|
|
41.4 |
|
|
|
40.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Accounts Payable Services revenues |
|
$ |
49.6 |
|
|
$ |
53.3 |
|
|
$ |
97.9 |
|
|
$ |
110.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months ended June 30, 2008 total Domestic and International Accounts Payable
Services revenues decreased by approximately 6.9% compared to the same period in 2007. For the six
months ended June 30, 2008 total Domestic and International Accounts Payable Services revenues
decreased by approximately 11.2% compared to the same period in 2007. Domestic Accounts Payable
Services revenues include any revenues generated from the Medicare recovery audit contract. The
year over year decline in Domestic Accounts Payable Services revenues is consistent with the
Companys general trend of declining revenues from the past several years; however, the rate of the
year over year decline for the three months ended June 30, 2008 is lower than the historical trend.
Management believes that the trend of declining year over year Domestic Accounts Payable Services
revenues is 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. These trends are expected to continue, and as a result, revenues
from the Domestic Accounts Payable Services segment are likely to decline for the foreseeable
future. In addition, the end of the CMS demonstration project in the first quarter of 2008 also
contributed to the decline in Domestic Accounts Payable Services year over year revenues for the
quarter and six months ended June 30, 2008. Revenues in the International Accounts Payable business
for the three-month and six-month periods ended June 30, 2008 were essentially unchanged from
revenues from the same periods in 2007 after consideration of the impacts of currency translation.
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 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.
In addition, the Company intends to continue to focus on its business within the health care
industry and assuming it participates in the proposed expansion of Medicare recovery auditing to
all 50 states, particularly its Medicare recovery audit services. See Medicare above.
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 COR support bases for domestic retail and domestic commercial operations are not
separately distinguishable and are not evaluated by management individually. The Companys
International Accounts Payable Services also have a portion of their COR, although less than
Domestic Accounts Payable Services, that will vary
17
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 six months ended June 30, 2008 and 2007 were
as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months |
|
|
Six Months |
|
|
|
Ended |
|
|
Ended |
|
|
|
June 30, |
|
|
June 30, |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
Domestic Accounts Payable Services COR |
|
$ |
16.8 |
|
|
$ |
19.0 |
|
|
$ |
32.5 |
|
|
$ |
40.8 |
|
International Accounts Payable Services COR |
|
|
16.2 |
|
|
|
15.9 |
|
|
|
30.8 |
|
|
|
31.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Accounts Payable Services COR |
|
$ |
33.0 |
|
|
$ |
34.9 |
|
|
$ |
63.3 |
|
|
$ |
72.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COR as a percentage of revenues increased to 66.4% for the three months ended June 30, 2008
compared to 65.4% 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 six months ended June 30, 2008, COR
decreased to 64.5% compared to 65.4% for the same period in 2007. The improvement in COR for both
the Domestic and International Accounts Payable Services for the 2008 six-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.
As noted above, the Company continues to incur significant expenses to maintain its Medicare
audit capabilities in anticipation of the national rollout of Medicare recovery auditing to all 50
states as previously disclosed and discussed above. Management continues to evaluate and make
adjustments to expenditures that support its Medicare recovery auditing capabilities in light of
the latest information and developments associated with the proposed national rollout and the
Companys possible participation in that program.
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 six months ended June 30, 2008 and 2007 were
as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months |
|
|
Six Months |
|
|
|
Ended |
|
|
Ended |
|
|
|
June 30, |
|
|
June 30, |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
Domestic Accounts Payable Services SG&A |
|
$ |
4.0 |
|
|
$ |
4.9 |
|
|
$ |
8.3 |
|
|
$ |
8.5 |
|
International Accounts Payable Services SG&A |
|
|
2.2 |
|
|
|
2.3 |
|
|
|
4.1 |
|
|
|
5.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Accounts Payable Services SG&A |
|
$ |
6.2 |
|
|
$ |
7.2 |
|
|
$ |
12.4 |
|
|
$ |
13.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SG&A expenses for the three months ended June 30, 2008 decreased by $1.0 million for the
Companys Accounts Payable Services operations, when compared to the same period of 2007. As a
percentage of revenue, Accounts Payable Services SG&A expenses were 12.5% compared to 13.5% for the
same period in 2007. For the six months ended June 30, 2008 compared to the six months ended June
30, 2007, Accounts Payable Services SG&A expenses decreased by $1.2 million and as a percentage of
revenue were 12.7% for the six months ended June 30, 2008 compared to 12.3% for the same period
ended June 30, 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.
18
Corporate Support
SG&A. Corporate Support SG&A expenses include the expenses of sales and marketing activities,
information technology services associated with the corporate data center, human resources, legal,
accounting, administration, currency translation, stock-based compensation, headquarters-related
depreciation of property and equipment and amortization of intangibles with finite lives. 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
six months ended June 30, 2008 and 2007 (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months |
|
Six Months |
|
|
Ended |
|
Ended |
|
|
June 30, |
|
June 30, |
|
|
2008 |
|
2007 |
|
2008 |
|
2007 |
Corporate Support SG&A |
|
$ |
4.8 |
|
|
$ |
7.3 |
|
|
$ |
11.4 |
|
|
$ |
14.6 |
|
Corporate Support SG&A expenses include stock-based compensation charges of $1.6 million and
$2.7 million, respectively, for the three months ended June 30, 2008 and 2007. Excluding such
charges, Corporate Support SG&A decreased by $1.4 million, or 30.4%, in the second quarter of 2008
compared to the second quarter of 2007. For the six months ended June 30, 2008 and June 30, 2007,
Corporate Support SG&A expenses included stock-based compensation charges of $4.6 million and $5.4
million respectively. Excluding such charges, Corporate Support SG&A decreased by $2.4 million, or
26.1%, in the first half of 2008 compared to the first half 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 six months ended
June 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 $4.7 million for the three months
ended June 30, 2008 and 2007, respectively. Net interest expense was $1.8 million and $8.9 million
for the six months ended June 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 expense in the second quarter of
2008 primarily related to the term loan under the Companys senior credit facility with an
outstanding balance of $21.6 million as of June 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 six month periods ended June 30, 2008 and
2007 primarily results from taxes on income of foreign subsidiaries.
19
Liquidity and Capital Resources
As of June 30, 2008, the Company had cash and cash equivalents of $20.2 million, and no
borrowings under the revolver portion of its senior credit facility. 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 MIP Performance
Units that were settled in April 2008. Finally, during the six months ended June 30, 2008, the
Company made interest payments of $2.0 million related to its term loan.
Net cash used in investing activities in each of the six-month periods ended June 30, 2008 and
2007 was $1.1 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 six months ended June 30, 2008 was $23.7 million
compared to $25.4 million for the six months ended June 30, 2007. As mentioned above, $23.4 million
of the net cash used in financing activities during the six months ended June 30, 2008 was related
to paying down the principal amount of the term loan. The net use of cash during the six months
ended June 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 will 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 June 30, 2008, the Companys accrued
payroll and related expenses and noncurrent compensation obligations include $1.4 million and $2.6
million, respectively, related to these obligations.
Bankruptcy Litigation
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.
20
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 the second quarter 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 June 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 six 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 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
21
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. As of March 31, 2008, a total of
2,260,858 Performance Unit awards were outstanding with an aggregate intrinsic value of $19.8
million. 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.
Off Balance Sheet Arrangements
As of June 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 which look
forward in time and 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 June 30, 2008, the
Company had $20.0 million available under its revolving credit facility and $21.6 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
June 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 June 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 June 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
At the annual meeting of the shareholders held on May 29, 2008, the shareholders of the
Company approved all of the proposals which had been recommended by the Board of Directors and
included in the Companys proxy statement which was mailed to shareholders on or about April 16,
2008.
With respect to Proposal 1 (election of Class III directors to serve until the 2011 annual
meeting and until their successors are elected and qualified):
19,231,943 shares, or 98.08% of the votes cast, in person or by proxy, by the holders
of the Companys common stock were voted FOR the election of David A. Cole as a Class III
director, and 376,913 shares withheld authority.
19,231,929 shares, or 98.08% of the votes cast, in person or by proxy, by the holders of the
Companys common stock were voted FOR the election of Philip J. Mazzilli, Jr. as a Class III
director, and 376,927 shares withheld authority.
The Companys directors serving in Class I and Class II did not stand for election at the
annual meeting. The directors serving in Class I, James B. McCurry and Steven P. Rosenberg, will
continue to serve until the 2009 annual meeting of shareholders and until their successors are
elected and qualified. The directors serving in Class II, Patrick G. Dills and N. Colin Lind, will
continue to serve until the 2010 annual meeting of shareholders and until their successors are
elected and qualified.
With respect to Proposal 2 (approval of the 2008 Equity Incentive Plan), 14,590,689 shares, or
86.78% of the votes cast, voted FOR approval of the plan, 2,232,997 shares voted AGAINST approval
of the plan, and 137,421 shares abstained from voting on the proposal.
With respect to Proposal 3 (ratification of BDO Seidman, LLP as the Companys independent
auditors for 2008), 19,605,624 shares, or 99.99% of the votes cast, voted FOR the ratification,
1,328 shares voted AGAINST the ratification, and 1,902 shares abstained from voting on the
proposal.
Item 5. Other Information
None.
25
Item 6. Exhibits
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|
|
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 June 30, 2008. |
|
|
|
31.2
|
|
Certification of the Chief Financial Officer, pursuant to Rule
13a-14(a) or 15d-14(a), for the quarter ended June 30, 2008. |
26
|
|
|
Exhibit |
|
|
Number |
|
Description |
32.1
|
|
Certification of the Chief Executive Officer and Chief Financial
Officer, pursuant to 18 U.S.C. Section 1350, for the quarter ended
June 30, 2008. |
27
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.
|
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|
|
|
PRG-SCHULTZ INTERNATIONAL, INC.
|
|
August 6, 2008 |
By: |
/s/ James B. McCurry
|
|
|
|
James B. McCurry |
|
|
|
President, Chairman of the Board and
Chief Executive Officer
(Principal Executive Officer) |
|
|
|
|
|
August 6, 2008 |
By: |
/s/ Peter Limeri
|
|
|
|
Peter Limeri |
|
|
|
Chief Financial Officer and Treasurer
(Principal Financial Officer) |
|
28