PRG-SCHULTZ INTERNATIONAL, INC.
Filed Pursuant to Rule 424(b)(3)
Registration No. 333-134698
Prospectus
Supplement No. 2 dated November 13, 2006
To Prospectus, dated August 15, 2006, as supplemented by
Prospectus Supplement No. 1 dated August 31, 2006 (together, the Prospectus)
PRG-Schultz International, Inc.
$24,858,433 IN PRINCIPAL AMOUNT OF 11.0% SENIOR NOTES DUE 2011
$28,776,480 IN PRINCIPAL AMOUNT OF 10.0% SENIOR CONVERTIBLE NOTES DUE 2011
57,406 SHARES OF 9.0% SENIOR SERIES A CONVERTIBLE PARTICIPATING PREFERRED STOCK
(INITIAL AGGREGATE LIQUIDATION PREFERENCE OF $6,888,720, WHICH MAY INCREASE TO
UP TO $10,697,972 TO SATISFY DIVIDENDS OTHERWISE PAYABLE IN CASH)
(THE SERIES A PREFERRED)
3,561 SHARES OF COMMON STOCK, NO PAR VALUE PER SHARE
The Prospectus relates to the potential offer and sale from time to time of the
above securities by the securityholders identified on page 84 of the Prospectus or in any
post-effective amendment or supplement to the Prospectus. The Prospectus may also be used by the
selling securityholders to offer:
|
|
|
UP TO $18,097,373.66 IN PRINCIPAL AMOUNT OF ADDITIONAL 10.0% SENIOR CONVERTIBLE NOTES
THAT MAY BE ISSUED IN PAYMENT OF INTEREST ON OUTSTANDING 10.0% SENIOR CONVERTIBLE NOTES; |
|
|
|
|
UP TO 10,977,733 SHARES OF COMMON STOCK ISSUABLE UPON CONVERSION OF THE 10.0% NOTES
AND/OR 9.0% SENIOR SERIES A PREFERRED STOCK. |
Our common stock is traded on The Nasdaq Global Market under the symbol PRGX. You should
carefully consider the risk factors beginning on page 8 of the Prospectus before investing.
Recent Developments
We have attached to this Prospectus Supplement the Quarterly Report on Form 10-Q of
PRG-Schultz International, Inc. for the period ended September 30, 2006. The attached information
modifies and supersedes, in part, the information in the Prospectus. Any information that is
modified or superseded in the Prospectus shall not be deemed to constitute a part of the Prospectus
except as modified or superseded by this Prospectus Supplement.
THIS SUPPLEMENT IS PART OF THE PROSPECTUS DATED AUGUST 15, 2006, AND MUST ACCOMPANY THAT
PROSPECTUS, TOGETHER WITH ALL OTHER AMENDMENTS AND SUPPLEMENTS THERETO, TO SATISFY PROSPECTUS
DELIVERY REQUIREMENTS UNDER THE SECURITIES ACT OF 1933.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES COMMISSION HAS APPROVED OR
DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE ADEQUACY OR ACCURACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
The
date of this Prospectus Supplement is November 13, 2006.
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
|
|
|
þ |
|
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2006
OR
|
|
|
o |
|
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)
|
|
|
Georgia
|
|
58-2213805 |
(State or other jurisdiction of
|
|
(I.R.S. Employer |
incorporation or organization)
|
|
Identification No.) |
|
|
|
600 Galleria Parkway
|
|
30339-5986 |
Suite 100
|
|
(Zip Code) |
Atlanta, Georgia |
|
|
(Address of principal executive offices) |
|
|
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, or a non-accelerated filer. See definition of accelerated filer and large
accelerated filer in Rule 12b-2 of the Exchange Act. (Check One):
o Large accelerated filer þ Accelerated filer o Non-accelerated filer
Indicate by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act). Yes o No þ
Common shares of the registrant outstanding at October 31, 2006 were 6,890,102.
PRG-SCHULTZ INTERNATIONAL, INC.
FORM 10-Q
For the Quarter Ended September 30, 2006
INDEX
|
|
|
|
|
|
|
Page No. |
|
|
|
|
|
|
|
|
|
|
1 |
|
|
|
|
|
1 |
|
|
|
|
|
2 |
|
|
|
|
|
3 |
|
|
|
|
|
4 |
|
|
|
|
|
17 |
|
|
|
|
|
33 |
|
|
|
|
|
34 |
|
|
|
|
|
|
|
|
|
|
|
35 |
|
|
|
|
|
35 |
|
|
|
|
|
35 |
|
|
|
|
|
35 |
|
|
|
|
|
35 |
|
|
|
|
|
36 |
|
|
|
|
|
37 |
|
|
|
|
|
39 |
|
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)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2006 |
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
Revenues |
|
$ |
64,733 |
|
|
$ |
66,415 |
|
|
$ |
195,579 |
|
|
$ |
219,724 |
|
Cost of revenues |
|
|
44,194 |
|
|
|
48,057 |
|
|
|
137,740 |
|
|
|
147,649 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin |
|
|
20,539 |
|
|
|
18,358 |
|
|
|
57,839 |
|
|
|
72,075 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative expenses |
|
|
18,535 |
|
|
|
27,374 |
|
|
|
49,120 |
|
|
|
87,211 |
|
Operational restructuring expense (Note H) |
|
|
153 |
|
|
|
7,922 |
|
|
|
2,141 |
|
|
|
7,922 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss) |
|
|
1,851 |
|
|
|
(16,938 |
) |
|
|
6,578 |
|
|
|
(23,058 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense, net |
|
|
(5,260 |
) |
|
|
(2,089 |
) |
|
|
(12,072 |
) |
|
|
(5,960 |
) |
Gain (loss) on financial restructuring (Note G) |
|
|
82 |
|
|
|
|
|
|
|
(10,047 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations before
income taxes and discontinued operations |
|
|
(3,327 |
) |
|
|
(19,027 |
) |
|
|
(15,541 |
) |
|
|
(29,018 |
) |
Income taxes |
|
|
726 |
|
|
|
715 |
|
|
|
1,714 |
|
|
|
1,814 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations before
discontinued operations |
|
|
(4,053 |
) |
|
|
(19,742 |
) |
|
|
(17,255 |
) |
|
|
(30,832 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued operations (Note B): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) from discontinued operations |
|
|
(181 |
) |
|
|
(1,056 |
) |
|
|
(918 |
) |
|
|
(1,154 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(4,234 |
) |
|
$ |
(20,798 |
) |
|
$ |
(18,173 |
) |
|
$ |
(31,986 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted loss per common share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations before
discontinued operations |
|
$ |
(0.66 |
) |
|
$ |
(3.18 |
) |
|
$ |
(2.80 |
) |
|
$ |
(4.97 |
) |
Discontinued operations |
|
|
(0.03 |
) |
|
|
(0.17 |
) |
|
|
(0.15 |
) |
|
|
(0.19 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(0.69 |
) |
|
$ |
(3.35 |
) |
|
$ |
(2.95 |
) |
|
$ |
(5.16 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average common shares outstanding (Note
C ): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
6,575 |
|
|
|
6,203 |
|
|
|
6,391 |
|
|
|
6,200 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted |
|
|
6,575 |
|
|
|
6,203 |
|
|
|
6,391 |
|
|
|
6,200 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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)
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
|
|
2006 |
|
|
2005 |
|
|
|
(Unaudited) |
|
|
|
|
|
ASSETS |
|
|
|
|
|
|
|
|
Current assets: |
|
|
|
|
|
|
|
|
Cash and cash equivalents (Note F) |
|
$ |
18,848 |
|
|
$ |
11,848 |
|
Restricted cash |
|
|
3,620 |
|
|
|
3,096 |
|
Receivables: |
|
|
|
|
|
|
|
|
Contract receivables, less allowances of $2,279 in 2006 and $2,717 in 2005 |
|
|
|
|
|
|
|
|
Billed |
|
|
36,691 |
|
|
|
43,591 |
|
Unbilled |
|
|
9,004 |
|
|
|
9,608 |
|
|
|
|
|
|
|
|
|
|
|
45,695 |
|
|
|
53,199 |
|
Employee advances and miscellaneous receivables, less allowances of $1,630 in 2006 and
$2,974 in 2005 |
|
|
2,579 |
|
|
|
2,737 |
|
|
|
|
|
|
|
|
Total receivables |
|
|
48,274 |
|
|
|
55,936 |
|
|
|
|
|
|
|
|
Funds held for client obligations |
|
|
45,212 |
|
|
|
32,479 |
|
Prepaid expenses and other current assets |
|
|
3,313 |
|
|
|
3,113 |
|
Deferred income taxes |
|
|
|
|
|
|
67 |
|
|
|
|
|
|
|
|
Total current assets |
|
|
119,267 |
|
|
|
106,539 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, at cost |
|
|
83,920 |
|
|
|
81,779 |
|
Less accumulated depreciation and amortization |
|
|
(72,490 |
) |
|
|
(64,326 |
) |
|
|
|
|
|
|
|
Property and equipment, net |
|
|
11,430 |
|
|
|
17,453 |
|
|
|
|
|
|
|
|
Goodwill |
|
|
4,600 |
|
|
|
4,600 |
|
Intangible assets, less accumulated amortization of $6,492 in 2006 and $5,453 in 2005 |
|
|
23,408 |
|
|
|
24,447 |
|
Unbilled receivables |
|
|
2,426 |
|
|
|
2,789 |
|
Deferred income taxes |
|
|
660 |
|
|
|
530 |
|
Other assets |
|
|
10,448 |
|
|
|
5,704 |
|
|
|
|
|
|
|
|
|
|
$ |
172,239 |
|
|
$ |
162,062 |
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS EQUITY (DEFICIT) |
|
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
|
|
Obligations for client payables |
|
$ |
45,212 |
|
|
$ |
32,479 |
|
Accounts payable and accrued expenses |
|
|
18,696 |
|
|
|
22,362 |
|
Accrued payroll and related expenses |
|
|
39,442 |
|
|
|
44,031 |
|
Refund liabilities |
|
|
9,551 |
|
|
|
11,741 |
|
Deferred revenue |
|
|
3,577 |
|
|
|
4,583 |
|
Convertible notes, net of unamortized discount of $1 in 2006 and $4 in 2005 (Note G) |
|
|
904 |
|
|
|
466 |
|
Current portion of other debt obligations (Note G) |
|
|
500 |
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
117,882 |
|
|
|
115,662 |
|
|
|
|
|
|
|
|
|
|
Convertible notes, net of unamortized discount of $929 in 2005 (Note G) |
|
|
|
|
|
|
123,601 |
|
Senior notes, net of unamortized discount of $7,982 in 2006 (Note G) |
|
|
43,473 |
|
|
|
|
|
Senior convertible notes, including unamortized premium of $5,753 in 2006 (Note G) |
|
|
68,264 |
|
|
|
|
|
Other debt obligations (Note G) |
|
|
24,500 |
|
|
|
16,800 |
|
Deferred compensation |
|
|
869 |
|
|
|
1,388 |
|
Refund liabilities |
|
|
1,672 |
|
|
|
1,785 |
|
Other long-term liabilities |
|
|
5,792 |
|
|
|
5,191 |
|
|
|
|
|
|
|
|
Total liabilities |
|
|
262,452 |
|
|
|
264,427 |
|
|
|
|
|
|
|
|
Mandatorily redeemable participating preferred stock (Note G) |
|
|
14,340 |
|
|
|
|
|
Shareholders equity (deficit) (Notes C and G): |
|
|
|
|
|
|
|
|
Common stock, no par value; $.01 stated value per share. Authorized 50,000,000 shares;
issued 7,215,037 shares in 2006 and 6,787,683 shares in 2005 |
|
|
72 |
|
|
|
68 |
|
Additional paid-in capital |
|
|
509,900 |
|
|
|
494,826 |
|
Accumulated deficit |
|
|
(568,892 |
) |
|
|
(550,719 |
) |
Accumulated other comprehensive income |
|
|
3,077 |
|
|
|
2,400 |
|
Treasury stock, at cost; 576,453 shares in 2006 and 2005 |
|
|
(48,710 |
) |
|
|
(48,710 |
) |
Unamortized portion of restricted stock compensation expense |
|
|
|
|
|
|
(230 |
) |
|
|
|
|
|
|
|
Total shareholders equity (deficit) |
|
|
(104,553 |
) |
|
|
(102,365 |
) |
|
|
|
|
|
|
|
Commitments and contingencies (Note H) |
|
$ |
172,239 |
|
|
$ |
162,062 |
|
|
|
|
|
|
|
|
See accompanying Notes to Condensed Consolidated Financial Statements.
2
PRG-SCHULTZ INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
|
2006 |
|
|
2005 |
|
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(18,173 |
) |
|
$ |
(31,986 |
) |
Loss from discontinued operations |
|
|
918 |
|
|
|
1,154 |
|
|
|
|
|
|
|
|
Loss from continuing operations |
|
|
(17,255 |
) |
|
|
(30,832 |
) |
Adjustments to reconcile loss from continuing operations to net
cash provided by (used in) operating activities: |
|
|
|
|
|
|
|
|
Loss on financial restructuring |
|
|
10,047 |
|
|
|
|
|
Depreciation and amortization |
|
|
8,286 |
|
|
|
11,024 |
|
Stock-based compensation expense |
|
|
4,835 |
|
|
|
279 |
|
Amortization of debt discounts and deferred costs |
|
|
1,130 |
|
|
|
836 |
|
Gain on sale of property, plant and equipment |
|
|
(8 |
) |
|
|
|
|
Income tax effect relating to stock option exercises |
|
|
|
|
|
|
(41 |
) |
Changes in assets and liabilities: |
|
|
|
|
|
|
|
|
Restricted cash |
|
|
(317 |
) |
|
|
(3,243 |
) |
Billed receivables |
|
|
7,976 |
|
|
|
18,960 |
|
Unbilled receivables |
|
|
967 |
|
|
|
2,803 |
|
Prepaid expenses and other current assets |
|
|
(99 |
) |
|
|
(1,327 |
) |
Other assets |
|
|
1,930 |
|
|
|
(549 |
) |
Accounts payable and accrued expenses |
|
|
792 |
|
|
|
(3,023 |
) |
Accrued payroll and related expenses |
|
|
(5,494 |
) |
|
|
723 |
|
Refund liability |
|
|
(2,303 |
) |
|
|
(1,371 |
) |
Deferred revenue |
|
|
(1,287 |
) |
|
|
(2,414 |
) |
Deferred compensation expense |
|
|
(519 |
) |
|
|
(748 |
) |
Other long-term liabilities |
|
|
(192 |
) |
|
|
(420 |
) |
|
|
|
|
|
|
|
Net cash provided by (used in) operating activities |
|
|
8,489 |
|
|
|
(9,343 |
) |
|
|
|
|
|
|
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
Purchases of property and equipment, net of disposals |
|
|
(923 |
) |
|
|
(5,058 |
) |
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
(923 |
) |
|
|
(5,058 |
) |
|
|
|
|
|
|
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
Net borrowings of debt |
|
|
8,200 |
|
|
|
12,400 |
|
Issuance costs of preferred stock |
|
|
(1,281 |
) |
|
|
|
|
Payments for deferred loan cost |
|
|
(7,750 |
) |
|
|
|
|
Net proceeds from common stock issuances |
|
|
|
|
|
|
772 |
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities |
|
|
(831 |
) |
|
|
13,172 |
|
|
|
|
|
|
|
|
Cash flows from discontinued operations: |
|
|
|
|
|
|
|
|
Operating cash flows |
|
|
(1,151 |
) |
|
|
(1,295 |
) |
Investing cash flows |
|
|
604 |
|
|
|
487 |
|
|
|
|
|
|
|
|
Net cash provided by (used in) discontinued operations |
|
|
(547 |
) |
|
|
(808 |
) |
|
|
|
|
|
|
|
Effect of exchange rates on cash and cash equivalents |
|
|
812 |
|
|
|
(571 |
) |
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents |
|
|
7,000 |
|
|
|
(2,608 |
) |
Cash and cash equivalents at beginning of period |
|
|
11,848 |
|
|
|
12,596 |
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period |
|
$ |
18,848 |
|
|
$ |
9,988 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information: |
|
|
|
|
|
|
|
|
Cash paid during the period for interest |
|
$ |
4,799 |
|
|
$ |
3,438 |
|
|
|
|
|
|
|
|
Cash paid during the period for income taxes, net of refunds |
|
$ |
1,344 |
|
|
$ |
753 |
|
|
|
|
|
|
|
|
See accompanying Notes to Condensed Consolidated Financial Statements.
3
PRG-SCHULTZ
INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2006 and 2005
(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 and
nine-month periods ended September 30, 2006 are not necessarily indicative of the results that may
be expected for the year ending December 31, 2006.
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, 2005.
(1) Reverse Stock Split
At the annual meeting of shareholders held on August 11, 2006, the shareholders of the Company
approved a proposal granting authorization to effect a reverse stock split of the Companys common
stock at a ratio of one-for-ten. The one-for-ten reverse stock split became effective on August 14,
2006. All common stock and per share data for all periods presented in these condensed financial
statements have been restated to give effect to the reverse stock split. In connection with the
reverse stock split, the number of shares subject to outstanding options and the option exercise
prices were automatically proportionately adjusted in accordance with the terms of the grants.
(2) Stock-Based Compensation
In December 2004, the Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standards (SFAS) No. 123(R), Share-Based Payment(SFAS 123(R)). This
pronouncement amended SFAS No. 123, Accounting for Stock-Based Compensation, and superseded
Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees.
SFAS No. 123(R) requires that companies account for awards of equity instruments issued to
employees under the fair value method of accounting and recognize such amounts in their statements
of operations. The Company adopted SFAS No. 123(R) on January 1, 2006, using the modified
prospective method and, accordingly, has not restated the consolidated statements of operations for
periods prior to January 1, 2006. Under SFAS No. 123(R), the Company is required to measure
compensation cost for all stock-based awards at fair value on the date of grant and recognize
compensation expense in its consolidated statements of operations over the service period over
which the awards are expected to vest. The Company recognizes compensation expense over the
indicated vesting periods using the straight-line method.
Prior to January 1, 2006, the Company accounted for stock-based compensation, as permitted by
SFAS No. 123, Accounting for Stock-Based Compensation, under the intrinsic value method described
in APB Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations.
Under the intrinsic value method, no stock-based employee compensation cost is recorded when the
exercise price is equal to, or higher than, the market value of the underlying common stock on the
date of grant. In accordance with APB Opinion No. 25 guidance, no stock-based compensation expense
was recognized for the three-month or nine-month periods ended September 30, 2005 except for
compensation amounts relating to grants of shares of nonvested stock (see Note C).
4
The following table illustrates the effect on net loss and net loss per share if the Company
had applied the fair value recognition provisions of SFAS No. 123, Accounting for Stock-Based
Compensation, to stock-based employee compensation, using the straight-line method, for periods
prior to January 1, 2006 (in thousands, except for pro forma net loss per share information):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, 2005 |
|
|
September 30, 2005 |
|
Net loss before pro forma effect of
compensation expense recognition
provisions of SFAS No.123 |
|
$ |
(20,798 |
) |
|
$ |
(31,986 |
) |
Pro forma effect of compensation
expense recognition provisions of SFAS
No. 123 |
|
|
(1,027 |
) |
|
|
(3,607 |
) |
|
|
|
|
|
|
|
Pro forma net loss |
|
$ |
(21,825 |
) |
|
$ |
(35,593 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma net earnings (loss) per share: |
|
|
|
|
|
|
|
|
Basic and diluted as reported |
|
$ |
(3.35 |
) |
|
$ |
(5.16 |
) |
|
|
|
|
|
|
|
Basic and diluted pro forma |
|
$ |
(3.52 |
) |
|
$ |
(5.74 |
) |
|
|
|
|
|
|
|
In applying the treasury stock method to determine the dilutive impact of common stock
equivalents, the calculation is performed in steps with the impact of each type of dilutive
security calculated separately. For each of the three-month and nine-month periods ended September
30, 2005, 1.6 million shares of common stock underlying the convertible notes due November 2006
were excluded from the computation of pro forma diluted earnings per share calculated using the
treasury stock method, due to their antidilutive effect.
The fair value of all time-vested options is estimated as of the date of grant using the
Black-Scholes option valuation model. The Black-Scholes option valuation model was developed for
use in estimating the fair value of traded options that have no vesting restrictions and are fully
transferable. The fair value of market condition options (also known as path-dependent options) may
be estimated as of their date of grant using more complex option valuation models such as binomial
lattice and the Monte Carlo simulations. The Company chose to use the Monte Carlo simulations for
its valuations. Option valuation models require the input of highly subjective assumptions,
including the expected stock price volatility. Because the Companys employee stock options have
characteristics significantly different from those of traded options and because changes in the
subjective input assumptions can materially affect the fair value estimate, it is managements
opinion that existing models do not necessarily provide a reliable single measure of the fair value
of the Companys employee stock options.
For time-vested option grants made in 2005 which resulted in compensation expense recognition,
the Company used the following assumptions in its Black-Scholes valuation models: volatility
68.4% to 69.2%, risk-free interest rates 3.9% to 4.5%, expected term 5 years. For time-vested
option grants made in 2006, the Company used the following assumptions in its Black-Scholes
valuation models: volatility 84.2%, risk-free interest rate 4.6%, expected term 5 years. For
market based option grants which resulted in compensation expense recognition, the following
assumptions were used in a Monte Carlo simulation valuation model: volatility variable term
structure 40.6% to 74.8%, risk-free interest rate variable term structure based on spot rate
curve of U.S. treasury securities, expected term 4.7 years to 5.6 years, median vesting period
1.9 years to 3.8 years.
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 on the date of the
award. 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. Equity-classified
awards are measured at grant date fair value and are not subsequently remeasured. In general, the
Company has classified its share-based payments which are settled in Company common stock as
equity-classified awards. The Company has classified its share-based payments that are settled in
cash as liability-classified awards. Compensation costs related to equity-classified awards are
generally equal to the fair value of the award at grant-date amortized over the vesting period of
the award. 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.
5
(3) New Accounting Standards
In June 2006, the FASB issued Interpretation No. 48, Accounting for Uncertainty in Income
Taxes an Interpretation of FASB Statement No. 109. This Interpretation prescribes a
more-likely-than-not recognition threshold that must be met before a tax benefit can be
recognized in the financial statements. The Interpretation also offers guidelines to determine how
much of a tax benefit to recognize in the financial statements. The Interpretation also provides
guidance on derecognition, classification, interest and penalties, accounting in interim periods,
disclosure, and transition. This Interpretation is effective for fiscal years beginning after
December 15, 2006. The Company is currently assessing and evaluating the impact this
Interpretation will have on its financial statements.
Note B Discontinued Operations
On October 30, 2001, the Company consummated the sale of its Logistics Management Services
business to Platinum Equity, a firm specializing in acquiring and operating technology
organizations and technology-enabled service companies worldwide. The transaction yielded initial
gross sale proceeds, as adjusted, of approximately $9.5 million with up to an additional $3.0
million payable in the form of a revenue-based royalty over four years. During the first quarter of
2006, the Company recognized a gain on the sale of discontinued operations of approximately $0.3
million related to the receipt of the final portion of the revenue-based royalty from the sale.
During the three and nine months ended September 30, 2005, the Company recognized gains of $0.3
million and $0.5 million, respectively, related to the receipts of portions of the revenue-based
royalty from the sale.
During the fourth quarter of 2005, the Company classified its Channel Revenue and Airline
businesses, and the Accounts Payable Service business units in South Africa and Japan, as
discontinued operations. The Companys Consolidated Financial Statements have been reclassified to
reflect the results of these businesses as discontinued operations for all periods presented. The
carrying values of the assets and liabilities relating to these business units are considered
insignificant for all periods presented. The South Africa and Japan Accounts Payable Services
business units were closed during 2005.
On January 11, 2006, the Company consummated the sale of its Channel Revenue business. The
Channel Revenue business was sold for $0.4 million in cash to Outsource Recovery, Inc. Outsource
Recovery also undertook to pay the Company an amount equal to 12% of gross revenues received by
Outsource Recovery during each of the calendar years 2006, 2007, 2008 and 2009 with respect to the
Channel Revenue business. The Company recognized a first quarter 2006 gain on disposal of
approximately $0.3 million.
On July 17, 2006, the Company completed the sale of its Airline business to a former employee.
During the nine-month period ended September 30, 2006, the Company recognized a loss of $0.4
million relating to the sale of the Airline business unit.
Earnings (loss) from discontinued operations for the three-month and nine-month periods ended
September 30, 2006 and 2005 as reported in the accompanying Condensed Consolidated Statements of
Operations includes the gains and losses related to the sales of discontinued business units as
well as operating income or loss related to the operations of these discontinued units. The net tax
effect on earnings (loss) from discontinued operations is not significant.
The following table summarizes earnings and losses from discontinued operations for the three
and nine-month periods ended September 30, 2006 and 2005 (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months |
|
|
Nine Months |
|
|
|
Ended |
|
|
Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2006 |
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
Operating income (loss) from discontinued operations |
|
$ |
(0.2 |
) |
|
$ |
(1.4 |
) |
|
$ |
(1.1 |
) |
|
$ |
(1.7 |
) |
Gain (loss) on disposal of discontinued operations |
|
|
(0.0 |
) |
|
|
0.3 |
|
|
|
0.2 |
|
|
|
0.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) from discontinued operations |
|
$ |
(0.2 |
) |
|
$ |
(1.1 |
) |
|
$ |
(0.9 |
) |
|
$ |
(1.2 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
6
Note C Stock Compensation Plans
The Company has three stock compensation plans: (1) the Stock Incentive Plan, (2) the HSA
Acquisition Stock Option Plan, and (3) the 2006 Management Incentive Plan. The Company also had an
employee stock purchase plan which was terminated effective December 31, 2005.
The Companys Stock Incentive Plan, as amended, authorizes the grant of options or other stock
based awards, with respect to up to 1,237,500 shares of the Companys common stock to key
employees, directors, consultants and advisors. The majority of options granted through September
30, 2006 had 5 to 7 year terms and vested and became fully exercisable on a ratable basis over
three to five years of continued employment or service.
The Companys HSA Acquisition Stock Option Plan, as amended, authorized the grant of options
to purchase 108,385 shares of the Companys common stock to certain key employees and advisors who
were participants in the 1999 Howard Schultz & Associates International Stock Option Plan. The
options had 5-year terms and vested upon and became fully exercisable upon issuance. No additional
options can be issued under this plan.
Effective May 15, 1997, the Company established an employee stock purchase plan (the Plan)
pursuant to Section 423 of the Internal Revenue Code of 1986, as amended. The Plan covered 262,500
shares of the Companys common stock, which could be authorized unissued shares, or shares
reacquired through private purchase or purchases on the open market. Under the Plan, employees
could contribute up to 10% of their compensation towards the semiannual purchase of stock. The
employees purchase price was 85 percent of the fair market price on the first business day of the
purchase period. The Company was not required to recognize compensation expense related to this
Plan. Effective December 31, 2005, the Company terminated the Plan.
During 2005, in connection with his joining the Company as its President and Chief Executive
Officer, the Company made an inducement option grant outside of its stock compensation plans to Mr.
James B. McCurry. Mr. McCurrys options were granted in two tranches, the first of which,
representing the right to purchase 50,000 shares, vested in December 2005. The second tranche was
subject to specific performance criteria and became exercisable in three tiers of 50,000 shares
each, as follows: Tier 1 would have become exercisable at any time after July 29, 2006, if the
closing market price per share of the Companys common stock was $45.00 or higher for 45
consecutive trading days after July 29, 2006. Tier 2 would have become exercisable at any time
after July 29, 2007, if the closing market price per share of the Companys common stock was $65.00
or higher for 45 consecutive trading days after July 29, 2007. Tier 3 would have become exercisable
at any time after July 29, 2008, if the closing market price per share of the Companys common
stock was $80.00 or higher for 45 consecutive trading days after July 29, 2008. These options were
to expire on July 29, 2012 and had an exercise price of $31.60 per share, the closing price of the
common stock on NASDAQ on July 29, 2005 the date of the option grant. On September 29, 2006, Mr.
McCurry voluntarily surrendered for cancellation his option to purchase all shares under the grant,
thus causing an acceleration of the related compensation costs under SFAS No. 123(R). During the
three-month and nine-month periods ended September 30, 2006, the Company recognized compensation
expense of $2.0 million and $2.6 million, respectively, related to Mr. McCurrys inducement option
grant. Had Mr. McCurry not voluntarily surrendered his option grant, the related compensation
expense for the three and nine months ended September 30, 2006 would have been $1.7 million less.
During 2005, the Company made an option grant to Mr. David A. Cole, a Director of the Company.
Mr. Cole received a non-qualified option to purchase 45,000 shares of the common stock of the
Company at an exercise price of $31.60 per share, the closing price of the Companys common stock
on NASDAQ on July 29, 2005 the date of the option grant. Mr. Coles options were granted in two
tranches, the first of which, representing the right to purchase 15,000 shares, vested in December
2005.The second tranche, representing the balance of the option is performance-vesting and will be
exercisable as follows: (a) Tier 1, representing the right to purchase 10,000 shares, will become
exercisable at any time after June 30, 2006 (the 2006 Vesting Date), if the Company attains a
specified target common stock trading price of $45.00 per share or higher for 45 consecutive
trading days after the 2006 Vesting Date; (b) Tier 2, representing the right to purchase an
additional 10,000 shares, will become exercisable at any time after the 2006 Vesting Date, if the
Company attains a specified target common stock trading price of $65.00 per share or higher for 45
consecutive trading days after the 2006 Vesting Date; and (c) Tier 3, representing the right to
purchase an additional 10,000 shares, will become exercisable at any time after the earlier of the
2007 annual
7
meeting of shareholders and June 30, 2007 (the 2007 Vesting Date), if the Company attains a
specified target common stock trading price of $80.00 or higher for 45 consecutive trading days
after the 2007 Vesting Date. Unless sooner terminated, the option will expire on July 29, 2012.
During the three-month and nine-month periods ended September 30, 2006, the Company recognized
compensation expense of $0.1 million and $0.2 million, respectively, related to Mr. Coles 2005
option grant.
During 2005, the Company also made an inducement option grant outside of its stock
compensation plans to Mr. Peter Limeri, the Companys Chief Financial Officer. Mr. Limeri received
an option to purchase 50,000 shares of the common stock of the Company at an exercise price of
$2.80 per share, the closing price of the Companys common stock on NASDAQ on November 11, 2005 the
date of the option grant. Mr. Limeris options were granted in two tranches, the first of which,
pertaining to 12,500 shares vests over four years. The second tranche is subject to specific
performance criteria and becomes exercisable in three tiers of 12,500 shares each upon the
attainment of the same performance criteria as Mr. McCurrys inducement option grant. The total
estimated fair value of Mr. Limeris inducement option grant was $0.1 million which is being
recognized as compensation expense over a three year period.
On December 15, 2005, the Companys Compensation Committee of the Board of Directors
authorized the immediate vesting of all outstanding unvested time-vesting options that had option
prices that were out of the money as of such date (the underwater stock options). This action
accelerated the vesting of 263,762 options as of November 30, 2005. The accelerated options had
option prices that ranged from $31.60 per share to $172.50 per share and a weighted average option
price per share of $49.70. The Compensation Committees decision to accelerate the vesting of these
underwater stock options was made primarily to avoid recognizing compensation expense associated
with these stock options in future financial statements upon the Companys adoption of SFAS No.
123(R). Management estimates that compensation expense will be approximately $2.4 million, $1.2
million and $0.5 million lower in 2006, 2007 and 2008, respectively, than if the vesting had not
been accelerated.
On September 21, 2006, non-qualified stock options were granted to each of the six
non-employee Directors of the Company pursuant to the Companys Stock Incentive Plan. Each Director
received an option to purchase 29,000 shares of Company common stock at an exercise price of $6.29
per share, the grant date closing price of the Companys common stock on NASDAQ. The options vest
and become exercisable as follows: one-third on March 30, 2007, one-third on March 30, 2008, and
one-third on March 30, 2009. The options expire on September 21, 2013. The Company recognized
compensation expense of $0.1 million during the three-month and nine-month periods ended September
30, 2006 related to these Director options.
The following table summarizes information about stock options outstanding at September 30,
2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number |
|
|
Weighted- |
|
Weighted- |
|
|
Aggregate |
|
|
|
of Shares |
|
|
Average |
|
Average |
|
|
Intrinsic |
|
|
|
Subject |
|
|
Remaining |
|
Exercise |
|
|
Value |
|
|
|
to Options |
|
|
Life |
|
Price |
|
|
(in thousands) |
|
Exercisable |
|
|
336,944 |
|
|
2.02 years |
|
$ |
86.23 |
|
|
$ |
|
|
Non-vested |
|
|
254,000 |
|
|
6.67 years |
|
$ |
8.59 |
|
|
$ |
150 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
590,944 |
|
|
4.02 years |
|
$ |
52.86 |
|
|
$ |
150 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The weighted-average grant date fair value of nonvested options outstanding as of
September 30, 2006 was $4.35 per share. No options were exercised during the nine-month period
ended September 30, 2006.
Nonvested stock awards representing 24,000 shares in the aggregate of the Companys common
stock were granted to six of the Companys officers in February 2005 and 2,500 shares were granted
to a senior management employee in March 2005. The total 26,500 nonvested shares granted were
subject to service-based cliff vesting. The restricted awards vest three years following the date
of the grant, subject to early vesting upon occurrence of certain events including a change of
control, death, disability or involuntary termination of employment without cause. The restricted
awards will be forfeited if the recipient voluntarily terminates his or her employment with the
Company (or a subsidiary, affiliate or successor thereof) prior to vesting. 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. As of
September 30, 2006, former employees had cumulatively forfeited
8
24,000 nonvested common shares. Over the remaining life of the remaining 2,500 nonvested
common shares, the Company will recognize $0.1 million in compensation expense before any future
forfeitures, if any.
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), participants
are paid in common stock and in cash. Participants will receive a number of shares of Company
common stock equal to 60% of the number of Performance Units being paid out, plus a cash payment
equal to 40% of the fair market value of that number of shares of common stock equal to the number
of Performance Units being paid out. The awards were 50% vested at the award date and the remainder
of the awards vest ratably over approximately the next eighteen months with the awards to be fully
vested on March 17, 2008. The awards contain certain anti-dilution and change of control
provisions. Also, the number of Performance Units awarded is automatically adjusted on a pro-rata
basis upon the conversion into common stock of any of the Companys senior convertible notes or
Series A preferred stock. All Performance Units must be settled before April 30, 2016. The Company
recognized compensation expense of $2.0 million during the three-month and nine-month periods ended
September 30, 2006 related to these 2006 MIP Performance Unit awards.
During the three-month and nine-month periods ended September 30, 2006, stock-based
compensation charges aggregated $4.1 million and $4.8 million, respectively. Such charges are
included in selling, general and administrative expenses in the accompanying Condensed Consolidated
Statements of Operations (Unaudited). As of September 30, 2006, there was $3.1 million of
unrecognized stock-based compensation expense related to stock options and Performance Unit awards
which is expected to be recognized over a weighted average period of 1.76 years.
Note D - Operating Segments and Related Information
The Company has two reportable operating segments, Accounts Payable Services and Meridian VAT
Reclaim (Meridian).
Accounts Payable Services
The Accounts Payable Services segment consists of services that entail the review of client
accounts payable disbursements to identify and recover overpayments. This operating segment
includes accounts payable services provided to retailers and wholesale distributors (the Companys
historical client base) and accounts payable services provided to various other types of business
entities. The Accounts Payable Services segment conducts business in North America, Latin America,
Europe, Australia and Asia.
Meridian VAT Reclaim
Meridian is based in Ireland and specializes in the recovery of value-added taxes (VAT) paid
on business expenses for corporate clients located throughout the world. Acting as an agent on
behalf of its clients, Meridian submits claims for refunds of VAT paid on business expenses
incurred primarily in European Union countries. Meridian provides a fully outsourced service
dealing with all aspects of the VAT reclaim process, from the provision of audit and invoice
retrieval services to the preparation and submission of VAT claims and the subsequent collection of
refunds from the relevant VAT authorities.
Corporate Support
In addition to the segments noted above, the Company includes the unallocated portion of
corporate selling, general and administrative expenses not specifically attributable to Accounts
Payable Services or Meridian in the category referred to as corporate support.
The Company evaluates the performance of its operating segments based upon revenues and
operating income. The Company does not have any inter-segment revenues. Segment information for the
three and nine months ended September 30, 2006 and 2005 is as follows (in thousands):
9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts |
|
|
|
|
|
|
|
|
|
|
Payable |
|
|
|
|
|
Corporate |
|
|
|
|
Services |
|
Meridian |
|
Support |
|
Total |
Three Months Ended September 30, 2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
54,830 |
|
|
$ |
9,903 |
|
|
$ |
|
|
|
$ |
64,733 |
|
Operating income (loss) |
|
|
9,248 |
|
|
|
1,310 |
|
|
|
(8,707 |
) |
|
|
1,851 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, 2005 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
56,675 |
|
|
$ |
9,740 |
|
|
$ |
|
|
|
$ |
66,415 |
|
Operating income (loss) |
|
|
(2,712 |
) |
|
|
1,065 |
|
|
|
(15,291 |
) |
|
|
(16,938 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
165,686 |
|
|
$ |
29,893 |
|
|
$ |
|
|
|
$ |
195,579 |
|
Operating income (loss) |
|
|
23,197 |
|
|
|
3,645 |
|
|
|
(20,264 |
) |
|
|
6,578 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2005 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
187,367 |
|
|
$ |
32,357 |
|
|
$ |
|
|
|
$ |
219,724 |
|
Operating income (loss) |
|
|
7,985 |
|
|
|
6,982 |
|
|
|
(38,025 |
) |
|
|
(23,058 |
) |
Note E 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 September 30, 2006 and 2005, the Companys
consolidated comprehensive loss was $(4.3 million) and $(20.1 million), respectively. For the
nine-month periods ended September 30, 2006 and 2005, the Companys consolidated comprehensive
income (loss) was $(17.5 million) and $(31.4 million), respectively. The difference between
consolidated comprehensive income (loss), as disclosed here, and traditionally determined
consolidated net earnings (loss), as set forth on the accompanying Condensed Consolidated
Statements of Operations (Unaudited), results from foreign currency translation adjustments.
Note F - Cash Equivalents
Cash and cash equivalents include all cash balances and highly liquid investments with an
initial maturity of three months or less. The Company places its temporary cash investments with
high credit quality financial institutions. At times, investments on deposit with such institutions
may be in excess of the Federal Deposit Insurance Corporation insurance limit.
At September 30, 2006 and December 31, 2005, the Company had cash and cash equivalents of
$18.8 million and $11.8 million, respectively, of which cash equivalents represent approximately
$2.1 million and $1.7 million, respectively. The Company did not have any cash equivalents at U.S.
banks at September 30, 2006 or December 31, 2005. At September 30, 2006 and December 31, 2005,
certain of the Companys international subsidiaries held $2.1 million and $1.7 million,
respectively, in temporary investments, the majority of which were at banks in Latin America and
the United Kingdom.
Note G - Financial Restructuring
Exchange of Convertible Notes
On March 17, 2006, the Company completed an exchange offer (the Exchange Offer) for its $125
million of 4.75% Convertible Subordinated Notes due 2006 (the Convertible Subordinated Notes).
As a result of the Exchange Offer, substantially all of the outstanding convertible notes were
exchanged for (a) $51.5 million in principal amount of 11.0% Senior Notes Due 2011, (b) $59.6
million in principal amount of 10.0% Senior Convertible Notes Due 2011, and (c) 124,094 shares, or
$14.9 million liquidation preference, of 9.0% Senior Series A Convertible Participating Preferred
Stock.
10
The material terms of these new securities include:
|
|
|
The new senior notes bear interest at 11%, payable semiannually in cash, and are callable
at 104% of face in year 1, 102% in year 2, and at par in years 3 through 5. |
|
|
|
|
The new senior convertible notes bear interest at 10%, payable semiannually in cash or in
kind, at the option of the Company. The new senior convertible notes are convertible at the
option of the holders into common stock at a rate of approximately 153.8 shares per $1,000
principal amount. |
|
|
|
|
The new Series A preferred stock has a 9% cumulative dividend; unpaid dividends increase
the stocks liquidation preference and redemption value. The new Series A preferred stock is
convertible at the option of the holders into shares of common stock at the rate of $2.8405
of liquidation preference per share of common stock. As of September 30, 2006, 10,113 shares
of Series A preferred stock had been converted into 427,262 shares of common stock. |
|
|
|
|
The Series A preferred stock votes with the Companys common stock on most matters
required to be submitted to a vote of the common shareholders. The Company has the right to
redeem the new senior convertible notes at par at any time after repayment of the new senior
notes, subject to certain conditions. The Company also has the right to redeem the new
Series A preferred stock at the stated liquidation preference at any time after repayment of
the new senior notes and the new senior convertible notes. |
|
|
|
|
Both the new senior notes and the new senior convertible notes will mature on the fifth
anniversary of issuance. The new Series A preferred stock must be redeemed on the fifth
anniversary of issuance. |
The aggregate fair value of the new instruments issued exceeded the book value of the
exchanged Convertible Subordinated Notes by approximately $10 million. Such amount was recognized
as a loss on financial restructuring in the first quarter of 2006. Approximately 99.6% of the
aggregate $125 million outstanding Convertible Subordinated Notes were committed to be tendered for
exchange. However, approximately 99.3% were actually tendered and accepted by the Company. As a
result of fewer Convertible Subordinated Notes being tendered than had been committed, the Company
reduced its loss on financial restructuring by $0.1 million during the third quarter of 2006. The
Company will be required to pay off the remaining $0.9 million of Convertible Subordinated Notes in
November 2006. The Company incurred $1.3 million of costs related to the issuance of the new
preferred stock. Such amount was charged to additional paid-in capital in the first quarter of
2006. The Company incurred costs of $5.1 million in connection with the issuance of the new senior
notes and senior convertible notes. Such amount has been capitalized and will be amortized over the
term of the notes.
The excess of the fair value of the preferred stock over its stated liquidation (redemption)
value was credited to additional paid-in capital. The excess of the principal balance of the new
senior notes over their fair value was recorded as a note discount and will be amortized on the
interest method over the term of the notes. The excess of the fair value of the new senior
convertible notes over their principal balance was recorded as a note premium and will be amortized
on the interest method over the term of the notes.
11
New Senior Indebtedness
On December 23, 2005, the Company entered into a Credit Agreement, Security Agreement and
Pledge Agreement (the Bridge Loan) with Petrus Securities L.P. and Parkcentral Global Hub Limited
(collectively, the Petrus Entities) and Blum Strategic Partners II GmbH & Co. K.G. and Blum
Strategic Partners II, L.P. (collectively, the Blum Entities). These agreements evidence a term
loan to PRG-Schultz USA Inc., a wholly owned subsidiary of the Company (the Borrower), in an
aggregate principal amount of $10 million. This loan was repaid upon closing of the new senior
credit facility on March 17, 2006.
As a part of its financial restructuring, the Company entered into a new senior secured credit
facility with Ableco LLC (Ableco) and The CIT/Group/Business Credit, Inc., a portion of which was
syndicated to the Companys prior bridge financing lenders, the Petrus Entities and the Blum
Entities. The new credit facility includes (1) a $25.0 million term loan, and (2) a revolving
credit facility that provides for revolving loan borrowings of up to $20 million. No borrowings
are currently outstanding under the revolving credit facility.
The Borrower is the primary user under the new senior secured credit facility, and the Company
and each of its other existing and subsequent acquired or organized direct and indirect domestic
wholly-owned subsidiaries have guaranteed the new facility. The Companys, the Borrowers and all
of the Companys other subsidiaries obligations under the new senior secured credit facility are
secured by liens on substantially all of its assets (including the stock of the Companys domestic
subsidiaries and two-thirds of the stock of certain of the Companys foreign subsidiaries).
The new senior secured credit facility will expire on March 17, 2010. The term loan under the
new senior secured credit facility will amortize with quarterly payments beginning on April 1, 2007
of $250,000 per quarter for the second year of the facility, and $500,000 per quarter for the third
and fourth years of the facility, with the balance due at maturity on March 17, 2010.
The term loan under the new senior secured credit facility may be repaid at the Companys
option at any time; provided, that any such pre-payment in the first year shall be subject to a
prepayment penalty of 3.0% of the principal amount pre-paid, and pre-payments in the second year
shall be subject to a pre-payment penalty of 2.0% of the principal amount pre-paid. The term loan
may be pre-paid at any time following the second anniversary of the closing date without penalty.
The new senior secured credit facility also provides for certain mandatory repayments, including a
portion of the Companys consolidated excess cash flow (which is based on EBITDA, as defined in the
credit agreement), sales of assets and sales of certain debt and equity securities, in each case
subject to certain exceptions and reinvestment rights.
The Companys ability to borrow under the revolving credit portion of the new senior secured
credit facility is limited to a borrowing base of a percentage of its eligible domestic
receivables, subject to adjustments. Through September 30, 2006, the Company had not borrowed any
funds under the revolving credit facility.
The interest on the term loan is based on a floating rate equal to the reserve adjusted London
inter-bank offered rate, or LIBOR, plus 8.5% (or, at the Companys option, a published prime
lending rate plus 5.5%). The interest rate on outstanding revolving credit loans is based on LIBOR
plus 3.75% (or, at the Companys option, a published prime lending rate plus 1.0%). The Company
will also pay an unused commitment fee on the revolving credit facility of 0.5%. The new senior
secured credit facility also required the payment of commitment fees, closing fees and additional
expense reimbursements of approximately $1.1 million at closing.
The new senior secured credit facility contains customary representations and warranties,
covenants and conditions to borrowing. The new senior secured credit facility also contains a
number of financial maintenance and restrictive covenants that are customary for a facility of this
type, including without limitation (and subject to certain exceptions and qualifications): maximum
capital expenditures (to be measured annually); maximum total debt to EBITDA (to be measured
quarterly); minimum EBITDA (to be measured quarterly); minimum fixed charge coverage ratio (to be
measured quarterly); provision of financial statements and other customary reporting; notices of
litigation, defaults and un-matured defaults with respect to material agreements; compliance with
laws, permits and licenses; inspection of properties, books and records; maintenance of insurance;
limitations with respect to liens and encumbrances, dividends and retirement of capital stock,
guarantees, sale and lease back transactions, consolidations and mergers, investments, capital
expenditures, loans and advances, and indebtedness; compliance
12
with pension, environmental and other laws, operating and capitalized leases, and limitations
on transactions with affiliates and prepayment of other indebtedness.
The new senior secured credit facility contains customary events of default, including
non-payment of principal, interest or fees, inaccuracy of representations or warranties in any
material respect, failure to comply with covenants, cross-default to certain other indebtedness,
loss of lien perfection or priority, material judgments, bankruptcy events and change of ownership
or control.
The Company incurred $2.6 million of costs in connection with entering into the new senior
secured credit facility. Such amount has been capitalized and will be amortized over the term of
the indebtedness.
Note H - Commitments and Contingencies
Legal Proceedings
Beginning on June 6, 2000, three putative class action lawsuits were filed against the Company
and certain of its present and former officers in the United States District Court for the Northern
District of Georgia, Atlanta Division. These cases were subsequently consolidated into one
proceeding styled: In re Profit Recovery Group International, Inc. Sec. Litig., Civil Action File
No. 1:00-CV-1416-CC (the Securities Class Action Litigation). On February 8, 2005, the Company
entered into a Stipulation of Settlement of the Securities Class Action Litigation. On February 10,
2005, the United States District Court for the Northern District of Georgia, Atlanta Division
preliminarily approved the terms of the Settlement. On May 26, 2005, the Court approved the
Stipulation of Settlement (Settlement) entered into by the Company with the Plaintiffs counsel,
on behalf of all putative class members, pursuant to which it agreed to settle the consolidated
class action for $6.75 million, which payment was made by the insurance carrier for the Company.
On April 1, 2003, Fleming Companies, one of the Companys larger U.S. Accounts Payable
Services clients at that time, filed for Chapter 11 Bankruptcy Reorganization. During the quarter
ended March 31, 2003, the Company received $5.5 million in payments on account from this client. On
January 24, 2005, the Company received a demand for preference payments due from the trust
representing the client. The demand stated that the trusts calculation of the Companys
preferential payments was approximately $2.9 million. The Company disputed the claim.
On March 30, 2005, the Company was sued by the Fleming Post-Confirmation Trust (PCT) in a
bankruptcy proceeding of the Fleming Companies in the U.S. Bankruptcy Court for the District of
Delaware to recover approximately $5.5 million of alleged preferential payments. The PCTs claims
were subsequently amended to add a claim for alleged fraudulent transfers representing
approximately $2.0 million in commissions paid to the Company with respect to claims deducted from
vendors that the client subsequently re-credited to the vendors. The Company believes that it has
valid defenses to 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 the parties have agreed
to enter into settlement mediation.
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.
Indemnification and Consideration Concerning Certain Future Asset Impairment Assessments
The Companys Meridian unit and an unrelated German concern named Deutscher Kraftverkehr Euro
Service GmbH & Co. KG (DKV) are each a 50% owner of a joint venture named Transporters VAT
Reclaim Limited (TVR). Since neither owner, acting alone, has majority control over TVR, Meridian
accounts for its ownership using the equity method of accounting. DKV provides European truck
drivers with a credit card that facilitates their fuel purchases. DKV distinguishes itself from its
competitors, in part, by providing its customers with an immediate advance refund of the
value-added taxes (VAT) they pay on their fuel purchases. DKV then recovers the VAT from the
taxing authorities through the TVR joint venture. Meridian processes the VAT refund on behalf of
TVR for
13
which it receives a percentage fee. In April 2000, TVR entered into a financing facility with
Barclays Bank plc (Barclays), whereby it sold the VAT refund claims to Barclays with full
recourse. Effective August 2003, Barclays exercised its contractual rights and unilaterally imposed
significantly stricter terms for the facility, including markedly higher costs and a series of
stipulated cumulative reductions to the facilitys aggregate capacity. TVR repaid all amounts owing
to Barclays during March 2004 and terminated the facility during June 2004. As a result of changes
to the facility occurring during the second half of 2003, Meridian began experiencing a reduction
in the processing fee revenues it derives from TVR as DKV previously transferred certain TVR
clients to another VAT service provider. As of December 31, 2004, the transfer of all DKV customer
contracts from TVR to another VAT service provider was completed. TVR will continue to process
existing claims and collect receivables and pay these to Meridian and DKV in the manner agreed
between the parties.
Meridian agreed with DKV to commence an orderly and managed closeout of the TVR business.
Therefore, Meridians future revenues from TVR for processing TVRs VAT refunds, and the associated
profits therefrom, ceased in October 2004. (Meridians revenues from TVR were $0.5 million and $2.3
million for the years ended December 31, 2004 and 2003, respectively.) As TVR goes about the
orderly wind-down of its business in future periods, it will be receiving VAT refunds from
countries, and a portion of such refunds will be paid to Meridian in liquidation of its investment
in TVR. If there is a marked deterioration in TVRs future financial condition from its inability
to collect refunds from countries, Meridian may be unable to recover some or all of its long-term
investment in TVR, which totaled $2.1 million at September 30, 2006 exchange rates and $1.9 million
at December 31, 2005 exchange rates. This investment is included in Other Assets on the Companys
accompanying Consolidated Balance Sheets.
Bank Guarantee
In July 2003, Meridian entered into a deposit guarantee (the Guarantee) with Credit
Commercial de France (CCF) in the amount of 4.5 million Euros ($5.7 million at September 30, 2006
exchange rates). The Guarantee served as assurance to VAT authorities in France that Meridian will
properly and expeditiously remit all French VAT refunds it receives in its capacity as intermediary
and custodian to the appropriate client recipients. The Guarantee was secured by amounts on deposit
with CCF equal to the amount of the Guarantee. On November 30, 2004, the Guarantee was replaced
with a 3.5 million Euro letter of credit. In May 2005, the Guarantee was reduced to 2.5 million
Euros and on September 30, 2005 the standby letter of credit was replaced with a 2.5 million Euro
($3.2 million at September 30, 2006 exchange rates) cash deposit with CCF.
Industrial Development Authority Grants
During the period of May 1993 through September 1999, Meridian received grants from the
Industrial Development Authority of Ireland (IDA) in the sum of 1.4 million Euros ($1.8 million
at September 30, 2006 exchange rates). The grants were paid primarily to stimulate the creation of
145 permanent jobs in Ireland. As a condition of the grants, if the number of permanently employed
Meridian staff in Ireland falls below 145, then the grants are repayable in full. This contingency
expires on September 23, 2007. Meridian currently employs 206 permanent employees in Dublin,
Ireland. The European Union (EU) has currently proposed legislation that will remove the need for
suppliers to charge VAT on the supply of services to clients within the EU. The effective date of
the proposed legislation is currently unknown. Management estimates that the proposed legislation,
if enacted as currently drafted, would eventually have a material adverse impact on Meridians
results of operations from its value-added tax business. If Meridians results of operations were
to decline as a result of the enactment of the proposed legislation, it is possible that the number
of permanent employees that Meridian employs in Ireland could fall below 145 prior to September
2007. Should such an event occur, the full amount of the grants previously received by Meridian
will need to be repaid to IDA. However, management currently estimates that any impact on
employment levels related to a possible change in the EU legislation will not be realized until
after September 2007, if ever. As any potential liability related to these grants is not currently
determinable, the Companys accompanying Consolidated Statements of Operations do not include any
expense related to this matter. Management is monitoring this situation and if it appears probable
that Meridians permanent staff in Ireland will fall below 145 and that grants will need to be
repaid to IDA, Meridian will be required to recognize an expense at that time. This expense could
be material to Meridians results of operations.
Retirement Obligations
14
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 (present value basis) to be paid in monthly cash installments
principally over a three-year period, beginning February 1, 2006. Charges of $3.9 million, $1.4
million and $2.3 million had been accrued in 2005, 2004 and 2003 and prior years, respectively,
related to these retirement obligations.
The March 16, 2006 amended severance agreements with Messrs. Cook and Toma call for total cash
payments of $7.0 million. The cash payments to Mr. Cook began with a payment of $275,621 in April
2006 and will continue at $91,874 per month for 57 months. The cash payments to Mr. Toma began
with a payment of $93,894 in April 2006 and will continue at $31,298 per month for 45 months.
Additionally, under the amended separation agreements, beginning on or about February 1, 2007, the
Company will reimburse Mr. Cook and Mr. Toma, until each reaches the age of 80, for the cost of
health insurance for them and their respective spouses, provided that the reimbursement shall not
exceed $25,000 per year (subject to CPI adjustment) for Mr. Cook and $20,000 per year (subject to
CPI adjustment) for Mr. Toma. Finally, in April 2006, the Company reimbursed $150,000 to CT
Investments, LLC, to defray the fees and expenses of the legal counsel and financial advisors to
Messrs. Cook and Toma in connection with the negotiation of amendments to their respective
severance agreements. The Companys entering into the amendments to the severance agreements with
Messrs. Cook and Toma was a condition precedent to the closing of the Companys Exchange Offer and
the closing on its replacement credit facility, both of which took place on March 17, 2006.
Operational Restructuring Obligations
On August 19, 2005, the Company announced that it had taken the initial step in implementing
an expense restructuring plan, necessitated by the Companys declining revenue trend over the
previous three years. Revenues for the years 2002, 2003, 2004 and 2005 were $439.7 million, $367.4
million, $350.6 million and $292.2 million, respectively. With revenues decreasing in 2003, 2004
and 2005, the Companys selling, general and administrative expenses had increased as a percentage
of revenue in each period (33.6%, 35.5% and 38.1%, respectively). The expense restructuring plan
encompasses exit activities, including reducing the number of clients served, reducing the number
of countries in which the Company operates, and terminating employees.
On September 30, 2005, the Companys Board of Directors approved the completed restructuring
plan and authorized implementation of the plan. Almost all of the savings have come in the area of
selling, general and administrative expenses and only a small percentage of the Companys auditor
staff were directly impacted by the reductions. The Company expects that the implementation of the
operational restructuring plan will result in severance related and other charges of approximately
$14.6 million. As of December 31, 2005, the Company had recorded an $11.6 million charge related to
the restructuring, $10.0 million of which was for severance pay and benefits costs and $1.6 million
of which related to early termination of operating leases. Accordingly, pursuant to SFAS No. 112,
Employers Accounting for Postemployment Benefits, and SFAS No. 88, Employers Accounting for
Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits, the
Company recorded expense for severance pay and benefits of $10.0 million in the year ended December
31, 2005. As of December 31, 2005 the Company had paid out approximately $2.8 million of severance
and as of September 30, 2006 a total of $9.2 million of severance had been paid. The Company
anticipates that the majority of the remaining severance payments will be paid out during the
remainder of 2006. The $14.6 million estimate for the restructuring plan includes $3.0 million of
operating lease exit costs that the Company expects to incur. As of December 31, 2005, the Company
had accrued $1.2 million of early termination costs in accordance with SFAS No. 146, Accounting for
Costs Associated with Exit or Disposal Activities. The Company also recorded leasehold improvement
impairment charges of $0.4 million related to these leases in 2005. The Company did not record any
new restructuring charges for either early termination costs or impairment charges during the nine
months ended September 30, 2006. The Company continues to evaluate which, if any, additional
operating leases to exit as part of the restructuring plan.
15
The following table summarizes activity associated with the workforce reductions and other
operational restructuring liabilities (in thousands) as of September 30, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts |
|
|
|
|
|
|
Corporate |
|
|
|
|
|
|
Payable |
|
|
Meridian |
|
|
Support |
|
|
Total |
|
Balance as of December 31, 2005 |
|
$ |
2,567 |
|
|
$ |
383 |
|
|
$ |
5,266 |
|
|
$ |
8,216 |
|
Accruals 1st quarter 2006 |
|
|
(123 |
) |
|
|
|
|
|
|
531 |
|
|
|
408 |
|
Cash payments 1st quarter 2006 |
|
|
(825 |
) |
|
|
(38 |
) |
|
|
(2,215 |
) |
|
|
(3,078 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of March 31, 2006 |
|
|
1,619 |
|
|
|
345 |
|
|
|
3,582 |
|
|
|
5,546 |
|
Accruals 2nd quarter 2006 |
|
|
1,580 |
|
|
|
|
|
|
|
|
|
|
|
1,580 |
|
Cash payments 2nd quarter 2006 |
|
|
(563 |
) |
|
|
|
|
|
|
(1,089 |
) |
|
|
(1,652 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of June 30, 2006 |
|
|
2,636 |
|
|
|
345 |
|
|
|
2,493 |
|
|
|
5,474 |
|
Accruals 3rd quarter 2006 |
|
|
153 |
|
|
|
|
|
|
|
|
|
|
|
153 |
|
Cash payments 3rd quarter 2006 |
|
|
(1,220 |
) |
|
|
|
|
|
|
(1,210 |
) |
|
|
(2,430 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of September 30, 2006 |
|
$ |
1,569 |
|
|
$ |
345 |
|
|
$ |
1,283 |
|
|
$ |
3,197 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income Taxes
The Company has substantial historical net operating losses, credit carryforwards and certain
built-in losses for U.S. Federal Income Tax purposes. The Company has completed an analysis and
has determined that an ownership change as defined in Section 382 of the Internal Revenue Code
occurred coincident with the exchange offering. As a result, the limitations imposed by Section
382 of the Internal Revenue Code will significantly restrict the Companys ability to fully utilize
its U.S. tax losses and certain other tax benefits to offset future taxable income.
16
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
Introduction
The Companys revenues are based on specific contracts with its clients. Such contracts
generally specify: (a) time periods covered by the audit; (b) 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 liability overpayment claims identified.
In addition to contractual provisions, most clients also establish specific procedural
guidelines that the Company must follow prior to submitting claims for client approval. These
guidelines are unique to each client and impose specific requirements on the Company, such as
adherence to vendor interaction protocols, provision of advance written notification to vendors of
forthcoming claims, securing written claim validity concurrence from designated client personnel
and, in limited cases, securing written claim validity concurrence from the involved vendors.
Approved claims are processed by clients and are generally realized by a cash payment or by a
reduction to the vendors accounts payable balance.
The Company generally recognizes revenue on the accrual basis except with respect to its
Meridian VAT refunds business (Meridian) and certain international Accounts Payable Services
units where revenue is recognized on the cash basis in accordance with guidance issued by the
Securities and Exchange Commission in Staff Accounting Bulletin (SAB) No. 104, Revenue
Recognition. Revenue is generally recognized for a contractually specified percentage of amounts
recovered when it has been determined that the client has received economic value (generally
through credits taken against existing accounts payable due to the involved vendors or refund
checks received from those vendors), and when the following criteria are met: (a) persuasive
evidence of an existing contractual arrangement between the Company and the client exists; (b)
services have been rendered; (c) the fee billed to the client is fixed or determinable; and (d)
collectability is reasonably assured. In certain limited circumstances, the Company will invoice a
client prior to meeting all four of these criteria. In those instances, revenue is deferred until
all of the criteria are met. Historically, there has been a certain amount of revenue that, even
though meeting the requirements of the Companys revenue recognition policy, relates to underlying
claims ultimately rejected by the Companys clients vendors. In that case, the Companys clients
may request a refund of such amount. The Company records such refunds as a reduction of revenue.
The contingent fee based VAT Reclaim division of the Companys Meridian business, along with
certain other international Accounts Payable Services units, recognize revenue on the cash basis in
accordance with guidance issued by the Securities and Exchange Commission in Staff Accounting
Bulletin (SAB) No. 104, Revenue Recognition. Based on the guidance in SAB No. 104, Meridian
defers recognition of contingent fee revenues to the accounting period in which cash is both
received from the foreign governmental agencies reimbursing the value-added tax (VAT) claims and
transferred to Meridians clients.
The Company derives an insignificant amount of revenues on a fee-for-service basis where
revenue is based upon a flat fee, or fee per hour, or fee per unit of usage. The Company recognizes
revenue for these types of services as they are provided and invoiced and when the revenue
recognition criteria described above in clauses (a) through (d) have been satisfied.
On March 29, 2005, the Company announced that the Centers for Medicare & Medicaid Services
(CMS), the federal agency that administers the Medicare program, awarded the Company a contract
to provide recovery audit services for the State of Californias Medicare spending. The three-year
contract was effective on March 28, 2005. To fully address the range of payment recovery
opportunities, the Company has sub-contracted with Concentra Preferred Systems, the nations
largest provider of specialized cost containment services for the healthcare industry, which will
add its clinical experience to the Companys expertise in recovery audit services.
The contract was awarded as part of a demonstration program by CMS to recover overpayments
through the use of recovery auditing. The Company began to incur capital expenditures and employee
compensation costs related to this contract in 2005. Such capital expenditures and employee
compensation costs will continue to be incurred during 2006 as the Company continues to build this
business. Management remains optimistic that the audit of
17
Medicare payments in California will make an important contribution to future earnings;
however, the Company has only limited ability to influence the timing of the processing of
identified claims by third party claims processors, and the Companys revenues from its Medicare
audit efforts may vary significantly from period to period.
Operational Restructuring
On August 19, 2005, the Company announced that it had taken the initial step in implementing
an expense restructuring plan, necessitated by the Companys declining revenue trend over the
previous three years. Revenues for the years 2002, 2003, 2004 and 2005 were $439.7 million, $367.4
million, $350.6 million and $292.2 million, respectively. With revenues decreasing in 2003, 2004
and 2005, the Companys selling, general and administrative expenses had increased as a percentage
of revenue in each period (33.6%, 35.5% and 38.1%, respectively). The expense restructuring plan
encompasses exit activities, including reducing the number of clients served, reducing the number
of countries in which the Company operates, and terminating employees.
On September 30, 2005, the Companys Board of Directors approved the completed restructuring
plan and authorized implementation of the plan. Almost all of the savings have come in the area of
selling, general and administrative expenses and only a small percentage of the Companys auditor
staff were directly impacted by the reductions. The Company expects that the implementation of the
operational restructuring plan will result in severance related and other charges of approximately
$14.6 million. As of December 31, 2005, the Company had recorded an $11.6 million charge related
to the restructuring, $10.0 million of which was for severance pay and benefits costs and $1.6
million of which related to early termination of operating leases. Accordingly, pursuant to SFAS
No. 112, Employers Accounting for Postemployment Benefits, and SFAS No. 88, Employers Accounting
for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits, the
Company recorded expense for severance pay and benefits of $10.0 million in the year ended December
31, 2005. As of December 31, 2005 the Company had paid out approximately $2.8 million of severance
and as of September 30, 2006 a total of $9.2 million of severance had been paid. The Company
anticipates that the majority of the remaining severance payments will be paid out during the
remainder of 2006. The $14.6 million estimate for the restructuring plan includes $3.0 million of
operating lease exit costs that the Company expects to incur. As of December 31, 2005, the Company
had accrued $1.2 million of early termination costs in accordance with SFAS No. 146, Accounting for
Costs Associated with Exit or Disposal Activities. The Company also recorded leasehold improvement
impairment charges of $0.4 million related to these leases in 2005. The Company did not record any
new restructuring charges for either early termination costs or impairment charges during the nine
months ended September 30, 2006. The Company continues to evaluate which, if any, additional
operating leases to exit as part of the restructuring plan.
18
Reverse Stock Split
As discussed in Part II, Item 4 of this Form 10-Q, at the annual meeting of shareholders held
on August 11, 2006, the shareholders of the Company approved a proposal granting authorization to
effect a reverse stock split of the Companys common stock at a ratio of one-for-ten. The
one-for-ten reverse stock split became effective on August 14, 2006. All common stock and per
share data for all periods presented in this quarterly report on Form 10-Q have been restated to
give effect to the reverse stock split. In connection with the reverse stock split, the number of
shares subject to outstanding options and the option exercise prices were automatically
proportionately adjusted in accordance with the terms of the grants.
Stock Compensation Plan
During 2005, in connection with his joining the Company as its President and Chief Executive
Officer, the Company made an inducement option grant outside of its stock compensation plans to Mr.
James B. McCurry. Mr. McCurrys options were granted in two tranches, the first of which,
representing the right to purchase 50,000 shares, vested in December 2005. The second tranche was
subject to specific performance criteria and became exercisable in three tiers of 50,000 shares
each, as follows: Tier 1 would have become exercisable at any time after July 29, 2006, if the
closing market price per share of the Companys common stock was $45.00 or higher for 45
consecutive trading days after July 29, 2006. Tier 2 would have become exercisable at any time
after July 29, 2007, if the closing market price per share of the Companys common stock was $65.00
or higher for 45 consecutive trading days after July 29, 2007. Tier 3 would have become exercisable
at any time after July 29, 2008, if the closing market price per share of the Companys common
stock was $80.00 or higher for 45 consecutive trading days after July 29, 2008. These options were
to expire on July 29, 2012 and had an exercise price of $31.60 per share, the closing price of the
common stock on NASDAQ on July 29, 2005 the date of the option grant. On September 29, 2006, Mr.
McCurry voluntarily surrendered for cancellation his option to purchase all shares under the grant,
thus causing an acceleration of the related compensation costs under SFAS No. 123(R). During the
three-month and nine-month periods ended September 30, 2006, the Company recognized compensation
expense of $2.0 million and $2.6 million, respectively, related to Mr. McCurrys inducement option
grant. Had Mr. McCurry not voluntarily surrendered his option grant, the related compensation
expense for the three and nine months ended September 30, 2006 would have been $1.7 million less.
On September 21, 2006, nonqualified stock options were granted to each of the six non-employee
Directors of the Company. Each Director received an option to purchase 29,000 shares of Company
common stock at an exercise price of $6.29 per share, the grant date closing price of the Companys
common stock on NASDAQ. The options vest and become exercisable as follows: one-third on March 30,
2007, one-third on March 30, 2008, and one-third on March 30, 2009. The options expire on September
21, 2013. The Company recognized compensation expense of $0.1 million during the three-month and
nine-month periods ended September 30, 2006 related to these Director options.
The following table summarizes information about stock options outstanding at September 30,
2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number |
|
|
Weighted- |
|
Weighted- |
|
|
Aggregate |
|
|
|
of Shares |
|
|
Average |
|
Average |
|
|
Intrinsic |
|
|
|
Subject |
|
|
Remaining |
|
Exercise |
|
|
Value |
|
|
|
to Options |
|
|
Life |
|
Price |
|
|
(in thousands) |
|
Exercisable |
|
|
336,944 |
|
|
2.02 years |
|
$ |
86.23 |
|
|
$ |
|
|
Non-vested |
|
|
254,000 |
|
|
6.67 years |
|
$ |
8.59 |
|
|
$ |
150 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
590,944 |
|
|
4.02 years |
|
$ |
52.86 |
|
|
$ |
150 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The weighted-average grant date fair value of nonvested options outstanding as of September
30, 2006 was $4.35 per share. No options were exercised during the nine-month period ended
September 30, 2006.
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), participants
are paid in common stock and in cash. Participants will
19
receive a number of shares of Company common stock equal to 60% of the number of Performance
Units being paid out, plus a cash payment equal to 40% of the fair market value of that number of
shares of common stock equal to the number of Performance Units being paid out. The awards were 50%
vested at the award date and the remainder of the awards vest ratably over approximately the next
eighteen months with the awards to be fully vested on March 17, 2008. The awards contain certain
anti-dilution and change of control provisions. Also, the number of Performance Units awarded is
automatically adjusted on a pro-rata basis upon the conversion into common stock of any of the
Companys senior convertible notes or Series A preferred stock. All Performance Units must be
settled before April 30, 2016. The Company recognized compensation expense of $2.0 million during
the three-month and nine-month periods ended September 30, 2006 related to these 2006 MIP
Performance Unit awards.
During the three-month and nine-month periods ended September 30, 2006, stock-based
compensation charges aggregated $4.1 million and $4.8 million, respectively. Such charges are
included in selling, general and administrative expenses in the accompanying Condensed Consolidated
Statements of Operations (Unaudited). As of September 30, 2006, there was $3.1 million of
unrecognized stock-based compensation expense related to stock options and Performance Unit awards
which is expected to be recognized over a weighted average period of 1.76 years.
Critical Accounting Policies
Except as set forth below with respect to SFAS 123(R), 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, 2005. 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, 2005. 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.
In December 2004, the Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standards (SFAS) No. 123(R), Share-Based Payment (SFAS 123(R)). This
pronouncement amended SFAS No. 123, Accounting for Stock-Based Compensation, and superseded
Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees.
SFAS No. 123(R) requires that companies account for awards of equity instruments issued to
employees under the fair value method of accounting and recognize such amounts in their statements
of operations. The Company adopted SFAS No. 123(R) on January 1, 2006, using the modified
prospective method and, accordingly, has not restated the consolidated statements of operations for
periods prior to January 1, 2006. Under SFAS No. 123(R), the Company is required to measure
compensation cost for all stock-based awards at fair value on the date of grant and recognize
compensation expense in its consolidated statements of operations over the service period that the
awards are expected to vest. The Company recognizes compensation expense over the indicated vesting
periods using the straight-line method.
Prior to January 1, 2006, the Company accounted for stock-based compensation, as permitted by
SFAS No. 123, Accounting for Stock-Based Compensation, under the intrinsic value method described
in APB Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations.
Under the intrinsic value method, no stock-based employee compensation cost is recorded when the
exercise price is equal to, or higher than, the market value of the underlying common stock on the
date of grant. In accordance with APB Opinion No. 25 guidance, no stock-based compensation expense
was recognized for the nine month period ended September 30, 2005 except for compensation amounts
relating to grants of shares of nonvested common stock.
The fair value of all time-vested options is estimated as of the date of grant using the
Black-Scholes option valuation model. The Black-Scholes option valuation model was developed for
use in estimating the fair value of
20
traded options that have no vesting restrictions and are fully transferable. The fair value of
market condition options (also known as path-dependent options) are estimated using the Monte Carlo
simulations as of their date of grant. Option valuation models require the input of highly
subjective assumptions, including the expected stock price volatility. Because the Companys
employee stock options have characteristics significantly different from those of traded options
and because changes in the subjective input assumptions can materially affect the fair value
estimate, it is managements opinion that existing models do not necessarily provide a reliable
single measure of the fair value of the Companys employee stock options.
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 on the date of the
award. 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. Equity-classified
awards are measured at grant date fair value and are not subsequently remeasured. In general, the
Company has classified its share-based payments which are settled in Company common stock as
equity-classified awards. The Company has classified its share-based payments that are settled in
cash as liability-classified awards. Compensation costs related to equity-classified awards are
generally equal to the fair value of the award at grant-date amortized over the vesting period of
the award. 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.
New Accounting Standards
In June 2006, the FASB issued Interpretation No. 48, Accounting for Uncertainty in Income
Taxes an Interpretation of FASB Statement No. 109. This Interpretation prescribes a
more-likely-than-not recognition threshold that must be met before a tax benefit can be
recognized in the financial statements. The Interpretation also offers guidelines to determine how
much of a tax benefit to recognize in the financial statements. The Interpretation also provides
guidance on derecognition, classification, interest and penalties, accounting in interim periods,
disclosure, and transition. This Interpretation is effective for fiscal years beginning after
December 15, 2006. The Company is currently assessing and evaluating the impact this
Interpretation will have on its financial statements.
Results of Operations
The following table sets forth the percentage of revenues represented by certain items in the
Companys Condensed Consolidated Statements of Operations (Unaudited) for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months |
|
Nine Months |
|
|
Ended |
|
Ended |
|
|
September 30, |
|
September 30, |
|
|
2006 |
|
2005 |
|
2006 |
|
2005 |
Revenues |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
Cost of revenues |
|
|
68.3 |
|
|
|
72.4 |
|
|
|
70.4 |
|
|
|
67.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin |
|
|
31.7 |
|
|
|
27.6 |
|
|
|
29.6 |
|
|
|
32.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative expenses |
|
|
28.6 |
|
|
|
41.2 |
|
|
|
25.1 |
|
|
|
39.7 |
|
Operational restructuring expenses |
|
|
0.2 |
|
|
|
11.9 |
|
|
|
1.1 |
|
|
|
3.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss) |
|
|
2.9 |
|
|
|
(25.5 |
) |
|
|
3.4 |
|
|
|
(10.5 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense, net |
|
|
(8.1 |
) |
|
|
(3.1 |
) |
|
|
(6.2 |
) |
|
|
(2.7 |
) |
Gain (loss) on financial restructuring |
|
|
0.1 |
|
|
|
|
|
|
|
(5.1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations
before income taxes and discontinued
operations |
|
|
(5.1 |
) |
|
|
(28.6 |
) |
|
|
(7.9 |
) |
|
|
(13.2 |
) |
Income taxes |
|
|
1.1 |
|
|
|
1.1 |
|
|
|
0.9 |
|
|
|
0.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations before
discontinued operations |
|
|
(6.2 |
) |
|
|
(29.7 |
) |
|
|
(8.8 |
) |
|
|
(14.0 |
) |
Earnings (loss) from discontinued operations |
|
|
(0.3 |
) |
|
|
(1.6 |
) |
|
|
(0.5 |
) |
|
|
(0.5 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
|
(6.5 |
)% |
|
|
(31.3 |
)% |
|
|
(9.3 |
)% |
|
|
(14.5 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
21
The Company has two reportable operating segments, the Accounts Payable Services segment and
Meridian VAT Reclaim.
Three and Nine Months Ended September 30, 2006 Compared to the Corresponding Periods of the Prior
Year
Accounts Payable Services
Revenues. Accounts Payable Services revenues for the three months and nine months ended
September 30, 2006 and 2005 were as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months |
|
|
Nine Months |
|
|
|
Ended |
|
|
Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2006 |
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
Domestic Accounts Payable Services revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail |
|
$ |
29.2 |
|
|
$ |
30.5 |
|
|
$ |
91.9 |
|
|
$ |
101.7 |
|
Commercial |
|
|
3.3 |
|
|
|
3.8 |
|
|
|
10.9 |
|
|
|
13.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
32.5 |
|
|
|
34.3 |
|
|
|
102.8 |
|
|
|
115.0 |
|
International Accounts Payable Services revenues |
|
|
22.3 |
|
|
|
22.4 |
|
|
|
62.8 |
|
|
|
72.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Accounts Payable Services revenues |
|
$ |
54.8 |
|
|
$ |
56.7 |
|
|
$ |
165.6 |
|
|
$ |
187.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three and nine months ended September 30, 2006 compared to the three and nine months
ended September 30, 2005, the Company experienced a decline in total Accounts Payable Services
revenues of 3.4% and 11.6%, respectively. The decline in revenues is consistent with what the
Company has been experiencing over the past several years and was primarily attributable to fewer
claims being processed as a result of improved client processes. Revenues from both domestic and
international operations decreased as the Companys clients developed and strengthened their own
internal audit capabilities as a substitute for the Companys services. Further, the Companys
clients made 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 for the foreseeable future, and as a result, revenues from the Accounts Payable Services
segment are expected to continue to decline for the foreseeable future.
Revenues from the Companys domestic commercial Accounts Payable Services clients declined
during the three and nine months ended September 30, 2006 as compared to the same periods in 2005.
The Company believes the market for providing disbursement audit services (which typically entail
acquisition from the client of limited purchase data and an audit focus on a select few recovery
categories) to commercial entities in the United States is declining with fewer audit starts and
lower fee rates due to increasing pricing pressures. In response to the decline in performance for
the commercial business, the Company continues to intentionally reduce the number of commercial
clients serviced based on profitability, and this trend is expected to continue. As a result of the
foregoing, revenues from domestic commercial Accounts Payable Services are expected to continue to
decline for the foreseeable future.
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
22
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 months and nine months ended September 30, 2006
and 2005 were as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months |
|
|
Nine Months |
|
|
|
Ended |
|
|
Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2006 |
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
Domestic Accounts Payable Services COR |
|
$ |
20.6 |
|
|
$ |
24.9 |
|
|
$ |
66.2 |
|
|
$ |
75.3 |
|
International Accounts Payable Services COR |
|
|
16.0 |
|
|
|
16.6 |
|
|
|
48.2 |
|
|
|
52.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Accounts Payable Services COR |
|
$ |
36.6 |
|
|
$ |
41.5 |
|
|
$ |
114.4 |
|
|
$ |
127.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The dollar decrease in COR for the Accounts Payable Services was primarily due to lower
revenues during the three and nine months ended September 30, 2006 when compared to the same
periods of the prior year. On a percentage basis, COR as a percentage of revenues from the Accounts
Payable Services segment decreased to 66.8% for the three months ended September 30, 2006, down
from 73.2% in 2005. COR as a percentage of revenues increased to 69.1% for the nine months ended
September 30, 2006 up from 68.0% for the same period of the prior year. The percentage variance is
primarily related to the fixed versus variable expense components within this category.
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. The SG&A
support bases for domestic retail and domestic commercial operations are not separately
distinguishable and are not evaluated by management individually.
Accounts Payable Services SG&A for the three and nine months ended September 30, 2006 and 2005
were as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months |
|
|
Nine Months |
|
|
|
Ended |
|
|
Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2006 |
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
Domestic Accounts Payable Services |
|
$ |
6.4 |
|
|
$ |
8.0 |
|
|
$ |
18.6 |
|
|
$ |
25.6 |
|
International Accounts Payable Services |
|
|
2.4 |
|
|
|
7.1 |
|
|
|
8.0 |
|
|
|
23.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Accounts Payable Services SG&A
|
|
$ |
8.8 |
|
|
$ |
15.1 |
|
|
$ |
26.6 |
|
|
$ |
48.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
On a dollar basis, for the three and nine months ended September 30, 2006, SG&A expenses
decreased by $6.3 million or 41.7% and $22.1 million or 45.4%, respectively, for the Companys
Accounts Payable Services operations, when compared to the same periods of 2005. This reduction is
primarily related to the Companys 2005 operational restructuring plan. When compared on a
percentage of revenue basis, SG&A for the three months ended September 30, 2006 was 16.1% down from
26.6% for the same period in 2005. SG&A as a percentage of revenue for the nine months ended
September 30, 2006 was 16.1% down from 26.0% for the same period in 2005.
Meridian
Meridians operating income for the three and nine months ended September 30, 2006 and 2005
was as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2006 |
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
Revenues |
|
$ |
9.9 |
|
|
$ |
9.7 |
|
|
$ |
29.9 |
|
|
$ |
32.3 |
|
Cost of revenues |
|
|
7.6 |
|
|
|
6.6 |
|
|
|
23.3 |
|
|
|
20.2 |
|
Selling, general and administrative expenses |
|
|
1.0 |
|
|
|
1.7 |
|
|
|
2.9 |
|
|
|
4.7 |
|
Operational restructuring expense |
|
|
|
|
|
|
0.4 |
|
|
|
|
|
|
|
0.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
$ |
1.3 |
|
|
$ |
1.0 |
|
|
$ |
3.7 |
|
|
$ |
7.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
23
Revenues. Meridian recognizes revenue in its contingent fee based VAT reclaim operations on
the cash basis in accordance with SAB No. 104. Based on the guidance in SAB No. 104, Meridian
defers recognition of revenues to the accounting period in which cash is both received from the
foreign governmental agencies reimbursing VAT claims and transferred to Meridians clients. Since
Meridian has minimal influence over when the foreign governmental agencies make their respective
VAT reimbursement payments, Meridians revenues can vary markedly from period to period.
Revenue generated by Meridian increased by $0.2 million for the three months ended September
30, 2006 when compared to the same period in 2005. Fee income on VAT refunds decreased by $0.5
million for the three months ended September 30, 2006 when compared to the same period in 2005 due
to the timing of refunds from local VAT authorities. However, the decrease in fee income was
partially offset by an increase in revenue as a result of a $0.4 million benefit from exchange rate
impact related to the strengthening of the Euro, Meridians functional currency, relative to the
U.S. dollar. Meridian is in the process of developing a number of new business services such as
fee for service basis, accounts payable and employee expense processing for third parties, tax
return processing for governmental departments, and Local Agent Services Division (LASD)
opportunities. The revenues from these services totaled $1.2 million for the quarter ended
September 30, 2006 as compared to $0.8 million for the quarter ended September 30, 2005. Revenue
from such new business services is expected to continue to increase for the remainder of the year.
COR. COR for Meridian consists principally of 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 offices, travel and entertainment, telephone, utilities,
maintenance and supplies and clerical assistance. COR for the Companys Meridian operations are
largely fixed and, for the most part, will not vary significantly with changes in revenue.
Meridians COR for the three and nine months ended September 30, 2006 compared to the same
periods of the prior year, on a dollar basis, increased primarily due to an increased headcount in
the Dublin processing center, increases in commissions paid to joint venture partners, and
consulting and IT costs related to Meridians new business services.
SG&A. Meridians SG&A expenses include the expenses of marketing activities, administration,
professional services, property rentals and currency translation. Due to the relatively fixed
nature of Meridians SG&A expenses, these expenses as a percentage of revenues can vary markedly
period to period based on fluctuations in revenues.
On a dollar basis, the decrease in Meridians SG&A for the three and nine months ended
September 30, 2006 compared to 2005 was primarily related to lower expenses for professional fees
related to the new business development in 2006 as compared to 2005.
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, 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
Accounts Payable Services or Meridian and totaled as follows for the three and nine months ended
September 30, 2006 and 2005 (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months |
|
|
Nine Months |
|
|
|
Ended |
|
|
Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2006 |
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
Selling, general and administrative expenses |
|
$ |
8.7 |
|
|
$ |
10.6 |
|
|
$ |
19.6 |
|
|
$ |
33.8 |
|
24
On a dollar basis, Corporate Support SG&A expenses for the three and nine months ended
September 30, 2006, decreased by $1.9 million or 17.9% and $14.2 million or 42.0%, respectively,
for the Corporate Support operations, when compared to the same periods in 2005. These amounts
include stock-based compensation expense for the three and nine months in 2006 of $4.1 million and
$4.8 million, respectively, compared to $0.1 million and $0.3 million in 2005. This reduction in
Corporate Support SG&A expenses is primarily related to the implementation of the Companys 2005
operational restructuring plan. When compared on a percentage basis to consolidated revenue, for
the three months ended September 30, 2006 Corporate Support SG&A was 13.4% compared to 16.0% for
the three months ended September 30, 2005. Corporate support SG&A as a percentage of consolidated
revenue for the nine months ended September 30, 2006 was 10.0% compared to 15.4% for the same
period of 2005.
Restructuring Expense
As discussed above under the heading Operational Restructuring, we are continuing to
implement a restructuring plan approved by the Companys Board of Directors in September 2005. In
connection therewith, the restructuring expense for the three and nine months ended September 30,
2006 and 2005 was as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months |
|
|
Nine Months |
|
|
|
Ended |
|
|
Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2006 |
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
Restructuring expense |
|
$ |
0.2 |
|
|
$ |
7.9 |
|
|
$ |
2.1 |
|
|
$ |
7.9 |
|
Discontinued Operations
On October 30, 2001, the Company consummated the sale of its Logistics Management Services
business to Platinum Equity, a firm specializing in acquiring and operating technology
organizations and technology-enabled service companies worldwide. The transaction yielded initial
gross sale proceeds, as adjusted, of approximately $9.5 million with up to an additional $3.0
million payable in the form of a revenue-based royalty over four years. During the first quarter of
2006, the Company recognized a gain on the sale of discontinued operations of approximately $0.3
million related to the receipt of the final portion of the revenue-based royalty from the sale.
During the three and nine months ended September 30, 2005, the Company recognized gains of $0.3
million and $0.5 million, respectively, related to the receipts of portions of the revenue-based
royalty from the sale.
During the fourth quarter of 2005, the Company classified its Channel Revenue and Airline
businesses, and the Accounts Payable Service business units in South Africa and Japan, as
discontinued operations. The Companys Consolidated Financial Statements have been reclassified to
reflect the results of these businesses as discontinued operations for all periods presented. The
carrying values of the assets and liabilities relating to these business units are considered
insignificant for all periods presented. The South Africa and Japan Accounts Payable Services
business units were closed during 2005.
On January 11, 2006, the Company consummated the sale of the Channel Revenue business. The
Channel Revenue business was sold for $0.4 million in cash to Outsource Recovery, Inc. Outsource
Recovery also undertook to pay the Company an amount equal to 12% of gross revenues received by
Outsource Recovery during each of the calendar years 2006, 2007, 2008 and 2009 with respect to the
Channel Revenue business. The Company recognized a first quarter 2006 gain on disposal of
approximately $0.3 million.
On July 17, 2006, the Company completed the sale of its Airline business to a former employee.
During the nine-month period ended September 30, 2006, the Company recognized a loss of $0.4
million relating to the sale of the Airline business unit.
25
Earnings (loss) from discontinued operations for the three-month and nine-month periods ended
September 30, 2006 and 2005 as reported in the accompanying Condensed Consolidated Statements of
Operations includes the gains and losses related to the sales of discontinued business units as
well as operating income or loss related to the operations of these discontinued units. The net tax
effect on earnings (loss) from discontinued operations is not significant.
Other Items
Debt Issuance Cost. In connection with the Companys completed financial restructuring and
related transactions, the Company incurred professional fees and other transaction costs of
approximately $7.7 million which has been capitalized and will be amortized over the term of the
new indebtedness.
Interest Expense. Net interest expense was $5.3 million and $2.1 million for the three months
ended September 30, 2006 and 2005, respectively. Interest expense was $12.1 million and $6.0
million for the nine months ended September 30, 2006 and 2005, respectively. The Companys interest
expense for the periods ended through March 31, 2006 was primarily comprised of interest expense
and amortization of the discount related to the Companys convertible notes due November 2006 and
interest on borrowings outstanding under the prior senior bank credit facility. Interest expense
for the period from March 31, 2006 through September 30, 2006 was primarily comprised of interest
expense and amortization related to the new senior notes, senior convertible notes, and term loan;
all of which were originated on March 17, 2006. Interest expense for the three and nine months
ended September 30, 2006 also includes $0.7 million and $0.9 million, respectively, related to the
excess of fair value over face value of the senior convertible notes which were issued on September
15, 2006 as paid-in-kind interest payments on the existing senior convertible notes.
Net interest expense increased significantly as a result of the Companys recently completed
financial restructuring. The exchange of substantially all of the Convertible Subordinated Notes
due November 2006 for the new senior convertible notes and new senior notes resulted in additional
annual interest expense of approximately $7.7 million. Such amount may change in future periods.
The Company has the option to pay interest on the new senior convertible notes in cash or in kind.
Payment in kind further increases the Companys interest expense. As discussed below, in September
2006, the Company made interest payments in kind of $2.9 million on the senior convertible notes.
The Company has also incurred additional interest expense under its new senior secured credit
facility.
Income Tax Expense (Benefit). The provisions for income taxes for the three months and nine
months ended September 30, 2006 and 2005 consist of federal, state and foreign income taxes at the
Companys effective tax rate. For the three and nine months ended September 30, 2006 the Companys
tax expense was $0.7 million and $1.7 million, respectively, representing effective tax rates of
negative 21.8% and negative 11.0%. For the three months and nine months ended September 30, 2005,
tax expense was $0.7 million and $1.8 million, respectively, representing effective tax rates of
negative 3.4% and negative 6.3%. The negative tax rates for all periods primarily result from the
recognition of taxes on foreign taxable income combined with the non-recognition of tax benefits on
domestic losses.
The Company has substantial historical net operating losses, credit carryforwards and certain
built-in losses for U.S. Federal Income Tax purposes. The Company has completed an analysis and
has determined that an ownership change as defined in Section 382 of the Internal Revenue Code
occurred coincident with the Exchange Offer. As a result, the limitations imposed by Section 382
of the Internal Revenue Code will significantly restrict the Companys ability to fully utilize its
U.S. tax losses and certain other tax benefits to offset future taxable income.
Liquidity and Capital Resources
Net cash provided by (used in) operating activities was $8.5 million for the nine months ended
September 30, 2006, as compared to $(9.3 million) for the prior year period. The 2006 amount is
net of $4.8 million of interest payments versus $3.4 million in 2005. Cash provided by operating
activities during the nine months ended September 30, 2006 was primarily the result of the
Companys net loss being offset by non-cash charges, including
26
those related to the financial
restructuring and stock-based compensation expense, and the Companys cost cutting initiatives.
Net cash used in investing activities was $(0.9 million) for the first nine months of 2006 and
$(5.1 million) in the first nine months of 2005. Cash used in investing activities during the first
nine months of 2006 and 2005 were primarily related to capital purchases.
Net cash provided by (used in) financing activities was $(0.8 million) in the first nine
months of 2006 versus $13.2 million for the first nine months of 2005. 2006 noncash financing
activities included the issuance of $2.9 million of paid in kind interest in September for the
$59.6 million in principal amount of 10.0% Senior Convertible Notes due 2011. The net cash used in
financing activities during the nine months ended September 30, 2006 related to the refinancing of
the 4.75% Subordinated Convertible Notes and the payoff of the Bridge Loan. The net cash provided
in the nine months ended September 30, 2005 related primarily to net borrowings on the Companys
revolving credit facility.
Net cash provided by (used in) discontinued operations was $(0.5 million) and $(0.8 million)
during the nine months ended September 30, 2006 and 2005, respectively. Net cash used in
discontinued operations during the first nine months ended September 30, 2006 included a $0.4
million receipt of a payment related to the sale of the Channel Revenue business and a $0.3 million
receipt of a payment related to a portion of the revenue-based royalty from the former Logistics
Management Services segment that was sold in October 2001. Net cash used in discontinued operations
during the first nine months of 2005 included a receipt of a $0.2 million payment related to a
portion of the revenue-based royalty from the former Logistics Management Services segment that was
sold in October 2001.
As of September 30, 2006, the Company had cash and cash equivalents of $18.8 million, and no
borrowings against the credit facility. At September 30, 2006, total debt included a $25.0 million
variable rate term loan due 2010, $0.9 million of the 4.75% Subordinated Convertible Notes due
2006, $51.5 million in principal amount of 11.0% Senior Notes Due 2011, and $62.5 million in
principal amount of 10.0% Senior Convertible Notes Due 2011. In addition, the Company had 113,981
shares of Series A Convertible Preferred Stock outstanding with an aggregate liquidation preference
of $14.3 million that is due in 2011. As permitted under the terms of the Series A preferred stock,
in September 2006, the Company elected to increase the liquidation preference of the Series A
preferred stock in lieu of declaring a dividend on the Series A preferred stock which resulted in
an increase in the liquidation preference of $0.6 million.
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 business will
continue to decline and the Companys new senior secured credit facility requires the Company to
comply with specific financial ratios and other performance covenants. Therefore, the Company must
successfully implement managements cost reduction plan and grow its other business lines in order
to stabilize and increase revenues and improve profitability.
Financial Restructuring
On October 19, 2005 the Board of Directors of the Company formed a Special Restructuring
Committee to oversee the efforts of the Company, with the assistance of its financial advisor,
Rothschild Inc., to restructure the Companys financial obligations, including its obligations
under its convertible notes due November 2006, and to improve the Companys liquidity. The Company
successfully completed the financial restructuring on March 17, 2006.
Pursuant to the financial restructuring, the Company exchanged:
|
|
|
$400 principal amount of its 11.0% Senior Notes Due 2011, plus an additional amount of
principal equal to accrued and unpaid interest due on the existing notes held by the
tendering holders; |
|
|
|
|
$480 principal amount of its 10.0% Senior Convertible Notes Due 2011 convertible into
new 10.0% Senior Series B Convertible Participating Preferred Stock and/or common stock;
and |
27
|
|
|
one share, $120 liquidation preference, of its 9.0% Senior Series A Convertible
Participating Preferred Stock convertible into common stock; |
for each $1,000 principal amount of outstanding 4.75% Convertible Subordinated Notes due November
2006 that was tendered.
Approximately 99.6% of the aggregate $125 million outstanding convertible notes were committed
to be tendered for exchange. Approximately 99.3% were actually tendered and accepted by the
Company.
The material terms of these new securities include:
|
|
|
The new senior notes bear interest at 11%, payable semiannually in cash, and are callable
at 104% of face in year 1, 102% in year 2, and at par in years 3 through 5. |
|
|
|
|
The new senior convertible notes bear interest at 10%, payable semiannually in cash or in
kind, at the option of the Company. The new senior convertible notes are convertible at the
option of the holders into common stock at a rate of approximately 153.8 shares per $1,000
principal amount. |
|
|
|
|
The new Series A preferred stock has a 9% cumulative dividend; unpaid dividends increase
the stocks liquidation preference and redemption value. The new Series A preferred stock is
convertible at the option of the holders into shares of common stock at the rate of $2.8405
of liquidation preference per share of common stock. As of September 30, 2006, 10,113 shares
of Series A preferred stock had been converted into 427,262 shares of common stock. |
|
|
|
|
The Series A preferred stock has the right to vote with the Companys common stock on
most matters required to be submitted to a vote of the common shareholders. The Company has
the right to redeem the new senior convertible notes at par at any time after repayment of
the new senior notes. The Company also has the right to redeem the new Series A preferred
stock at the stated liquidation preference at any time after repayment of the new senior
notes and the new senior convertible notes. |
|
|
|
|
Both the new senior notes and the new senior convertible notes mature on the fifth
anniversary of issuance. The new Series A preferred stock must be redeemed on the fifth
anniversary of issuance. |
As a part of its financial restructuring, the Company also entered into a new senior secured
credit facility with Ableco LLC (Ableco) and The CIT/Group/Business Credit, Inc., a portion of
which is being syndicated to the Companys prior bridge financing lenders, Petrus Securities L.P.
and Parkcentral Global Hub Limited (collectively, the Petrus Entities) and Blum Strategic
Partners II GmbH & Co. K.G. and Blum Strategic Partners II, L.P. (collectively, the Blum
Entities). An affiliate of the Blum Entities was a member of the Ad Hoc Committee of holders of
the Companys convertible notes due November 2006, with the right to designate one member of the
Companys Board of Directors, and together with its affiliates, the Companys largest shareholder.
The new credit facility includes (1) a $25.0 million term loan, and (2) a revolving credit facility
that provides for revolving loan borrowings of up to $20 million. No borrowings are currently
outstanding under the revolving credit facility.
PRG-Schultz USA, Inc., the Companys direct wholly-owned subsidiary (the borrower), is the
primary borrower under the new senior secured credit facility, and the Company and each of its
other existing and subsequent acquired or organized direct and indirect domestic wholly-owned
subsidiaries have guaranteed the new facility. The borrowers and all of the Companys other
subsidiaries obligations under the new senior secured credit facility are secured by liens on
substantially all of the Companys assets (including the stock of our domestic subsidiaries and
two-thirds of the stock of certain of our foreign subsidiaries).
The new senior secured credit facility will expire on March 17, 2010. The term loan under the
new senior secured credit facility will amortize with quarterly payments beginning on April 1, 2007
of $250,000 per quarter for the second year of the facility, and $500,000 per quarter for the third
and fourth years of the facility, with the balance due at maturity on March 17, 2010.
28
The term loan under the new senior secured credit facility may be repaid at the Companys
option at any time; provided, that any such pre-payment in the first year shall be subject to a
prepayment penalty of 3.0% of the principal amount pre-paid, and pre-payments in the second year
shall be subject to a pre-payment penalty of 2.0% of the principal amount pre-paid. The term loan
may be pre-paid at any time following the second anniversary of the closing date without penalty.
The new senior secured credit facility also provides for certain mandatory repayments, including a
portion of our consolidated excess cash flow (which is based on EBITDA, as defined in the credit
agreement), sales of assets and sales of certain debt and equity securities, in each case subject
to certain exceptions and reinvestment rights.
The Companys ability to borrow revolving loans under the new senior secured credit facility
is limited to a borrowing base of a percentage of the Companys eligible domestic receivables,
subject to adjustments. Based on this borrowing base calculation, the Company had approximately
$20.0 million of availability under the revolving credit facility at September 30, 2006. Through
September 30, 2006, the Company had not borrowed any funds under the revolving credit facility.
The interest on the term loan is based on a floating rate equal to the reserve adjusted London
inter-bank offered rate, or LIBOR, plus 8.5% (or, at the Companys option, a published prime
lending rate plus 5.5%). The interest rate on outstanding revolving credit loans is based on LIBOR
plus 3.75% (or, at the Companys option, a published prime lending rate plus 1.0%). The Company
will also pay an unused commitment fee on its revolving credit facility of 0.5%. The new senior
secured credit facility also required the payment of commitment fees, closing fees and additional
expense reimbursements of approximately $1.1 million at closing.
The new senior secured credit facility contains customary representations and warranties,
covenants and conditions to borrowing. The new senior secured credit facility also contains a
number of financial maintenance and restrictive covenants that are customary for a facility of this
type, including without limitation (and subject to certain exceptions and qualifications): maximum
capital expenditures (to be measured annually); maximum total debt to EBITDA (to be measured
quarterly); minimum EBITDA (to be measured quarterly); minimum fixed charge coverage ratio (to be
measured quarterly); provision of financial statements and other customary reporting; notices of
litigation, defaults and un-matured defaults with respect to material agreements; compliance with
laws, permits and licenses; inspection of properties, books and records; maintenance of insurance;
limitations with respect to liens and encumbrances, dividends and retirement of capital stock,
guarantees, sale and lease back transactions, consolidations and mergers, investments, capital
expenditures, loans and advances, and indebtedness; compliance with pension, environmental and
other laws, operating and capitalized leases, and limitations on transactions with affiliates and
prepayment of other indebtedness.
The new senior secured credit facility contains customary events of default, including
non-payment of principal, interest or fees, inaccuracy of representations or warranties in any
material respect, failure to comply with covenants, cross-default to certain other indebtedness,
loss of lien perfection or priority, material judgments, bankruptcy events and change of ownership
or control.
Transaction Costs of Financial Restructuring, Including Exchange Offer
In connection with the Companys financial restructuring and Exchange Offer, the Company
incurred a total of approximately $9.7 million of transaction costs, including legal and financial
advisory fees. These costs include fees and costs of the Ad Hoc Committee of Noteholders paid by
the Company, of which approximately $7.7 million was incurred in the first quarter of 2006.
$10 Million Bridge Loan
On December 23, 2005, the Company entered into a Credit Agreement, Security Agreement and
Pledge Agreement with Petrus Securities L.P. and Parkcentral Global Hub Limited (collectively, the
Petrus Entities) and
Blum Strategic Partners II GmbH & Co. K.G. and Blum Strategic Partners II, L.P. (collectively,
the Blum Entities). These agreements evidence a term loan to PRG-Schultz USA Inc., a wholly owned
subsidiary of the Company, in an aggregate principal amount of $10 million. This loan was repaid
upon closing of the new senior credit facility on March 17, 2006.
29
New Senior Indebtedness
The Companys prior senior credit facility with Bank of America (the Lender) provided for
revolving credit loans up to a maximum amount of $30.0 million, limited by the Companys accounts
receivable balances. The prior senior credit facility provided for the availability of Letters of
Credit subject to a $10.0 million sub-limit. The prior senior credit facility was retired and
replaced by a new senior credit facility on March 17, 2006, in connection with the closing of the
Exchange Offer.
As a part of its financial restructuring, the Company entered into a new senior secured credit
facility with Ableco LLC (Ableco) and The CIT/Group/Business Credit, Inc., a portion of which is
being syndicated to the Companys prior bridge financing lenders, Petrus Securities L.P. and
Parkcentral Global Hub Limited (collectively, the Petrus Entities) and Blum Strategic Partners II
GmbH & Co. K.G. and Blum Strategic Partners II, L.P. (collectively, the Blum Entities). An
affiliate of the Blum Entities was a member of the Ad Hoc Committee of holders of the Companys
convertible notes due November 2006, with the right to designate one member of the Companys Board
of Directors, and together with its affiliates, the Companys largest shareholder. The new credit
facility includes (1) a $25.0 million term loan, and (2) a revolving credit facility that provides
for revolving loan borrowings of up to $20 million. No borrowings are currently outstanding under
the revolving credit facility.
The Companys ability to borrow revolving loans under the new senior secured credit facility
is limited to a borrowing base of a percentage of its eligible domestic receivables, subject to
adjustments. Through September 30, 2006, the Company had not borrowed any funds under the revolving
credit facility.
Off Balance Sheet Arrangements
As of September 30, 2006, we did not have any significant off-balance sheet arrangements, as
defined in Item 303(a)(4)(ii) of SEC Regulation S-K.
Executive Severance Payments
The March 16, 2006 amended severance agreements with the Companys former Chairman, President
and CEO, John M. Cook, and the Companys former Vice Chairman, John M. Toma, call for total cash
payments of $7.0 million. The cash payments to Mr. Cook began with a payment of $275,621 in April
2006 and will continue at $91,874 per month for 57 months. The cash payments to Mr. Toma began
with a payment of $93,894 in April 2006 and will continue at $31,298 per month for 45 months.
Additionally, under the amended separation agreements, beginning on or about February 1, 2007, the
Company will reimburse Mr. Cook and Mr. Toma, until each reaches the age of 80, for the cost of
health insurance for them and their respective spouses, provided that the reimbursement shall not
exceed $25,000 (subject to CPI adjustment) for Mr. Cook and $20,000 (subject to CPI adjustment) for
Mr. Toma. Finally, in April 2006, the Company reimbursed $150,000 to CT Investments, LLC, to
defray the fees and expenses of the legal counsel and financial advisors to Messrs. Cook and Toma
in connection with the negotiation of amendments to their respective severance agreements. The
Companys entering into the amendments to the severance agreements with Messrs. Cook and Toma was a
condition precedent to the closing of the Companys exchange offer restructuring its bondholder
debt and the closing on its replacement credit facility, both of which took place on March 17,
2006.
French Taxation Services Settlement
On December 14, 2001, the Company consummated the sale of its French Taxation Services
business (ALMA), as well as certain notes payable due to the Company, to Chequers Capital, a
Paris-based private equity firm. In conjunction with this sale, the Company provided the buyer with
certain warranties. Effective December 30, 2004, the Company, Meridian and ALMA (the Parties)
entered into a Settlement Agreement (the Agreement)
pursuant to which the Company paid a total of 3.4 million Euros on January 3, 2005 ($4.7 million at
January 3, 2005 exchange rates), to resolve the buyers warranty claims and a commission dispute
with Meridian.
Contingent Obligation to Repay Industrial Development Authority of Ireland Grant
30
During the period of May 1993 through September 1999, Meridian received grants from the
Industrial Development Authority of Ireland (IDA) in the sum of 1.4 million Euros ($1.6 million
at September 30, 2005 exchange rates). The grants were paid primarily to stimulate the creation of
145 permanent jobs in Ireland. As a condition of the grants, if the number of permanently employed
Meridian staff in Ireland falls below 145 prior to September 23, 2007, the date the contingency
expires, then the grants are repayable in full. Meridian currently employs 206 permanent employees
in Dublin, Ireland. The European Union (EU) has currently proposed legislation that will remove
the need for suppliers to charge VAT on the supply of goods and services to clients within the EU.
The effective date of the proposed legislation is currently unknown. Management estimates that the
proposed legislation, if enacted as currently drafted, would eventually have a material adverse
impact on Meridians results of operations from its value-added tax business. If Meridians results
of operations were to decline as a result of the enactment of the proposed legislation, it is
possible that the number of permanent employees that Meridian employs in Ireland could fall below
145 prior to September 2007. Should such an event occur, the full amount of the grants previously
received by Meridian will need to be repaid to IDA. However, management currently estimates that
any impact on employment levels related to a possible change in the EU legislation will not be
realized until after September 2007, if ever.
Principal and Interest Payments on Notes
On November 26, 2006 the Company will be required to pay in full the remaining outstanding
principal amount of its 4.75% Subordinated Convertible Notes. That amount is approximately $0.9
million. On March 15, 2007, the Company will be required to pay approximately $2.8 million in
interest on its 11% Senior Notes.
Forward Looking Statements
This Form 10-Q contains forward-looking statements which look forward in time and involve
substantial risks and uncertainties. These statements are based on our beliefs and assumptions, as
well as information currently available to us. All statements that express expectations and
projections with respect to future matters and 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 are
intended to be covered by the safe harbors created thereby. These statements can be identified by
the use of forward-looking words such as may, will, expect, anticipate, intend, plan,
believe, estimate and continue or similar words. Actual risks and uncertainties that may
potentially impact these forward-looking statements include, without limitation, the following:
|
|
In four of the five annual periods ended December 31, 2005, we incurred significant
losses and we did not generate enough cash from operations to finance our business. |
|
|
Our current projections reflect that revenues from our core accounts payable recovery
audit business will continue to decline. |
|
|
We depend on our largest clients for significant revenues, so losing a major client could
adversely affect our revenues. |
|
|
Client and client vendor bankruptcies and financial difficulties could reduce our earnings. |
|
|
Our strategic business initiatives may not be successful. |
|
|
Our failure to retain the services of key members of management and highly skilled
personnel could adversely impact our continued success. |
|
|
We rely on international operations for significant revenues. |
|
|
The market for providing disbursement audit services to commercial clients in the U.S. is
rapidly declining. |
|
|
We may not be able to continue to compete successfully with other businesses offering
recovery audit services, including client internal recovery audit departments. |
|
|
We have significant indebtedness and fixed obligations, and our operating cash flow may
not be sufficient to satisfy these obligations. |
|
|
Our senior credit facility contains financial performance requirements, and there can be
no guarantee that we will be able to satisfy those requirements. |
|
|
Proposed legislation by the European Union, if enacted as currently drafted, will have a
materially adverse impact on Meridians operations. |
|
|
Meridians revenue recognition policy causes its revenues to vary markedly from period to
period. |
31
|
|
We continue to incur expense in connection with the Medicare audit, and there is no
guaranty that actual revenues will justify the required expenditures; further, even if the
government deems the Medicare pilot program sufficiently successful to justify further
ventures, there is no guaranty that we will be awarded future contracts. |
|
|
Other risk factors detailed in the Companys Securities and Exchange Commission filings,
including the Companys Form 10-K for the year ended December 31, 2005, as filed with the
Securities and Exchange Commission on March 23, 2006. |
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. The Company disclaims any
obligation to update or revise any forward-looking statements, whether as a result of new
information, future events, or otherwise, except as may be required by law.
32
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.
Interest Rate Risk. Our interest income and expense are most 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. At September 30,
2006, we had a $25.0 million term loan outstanding which is variable-rate debt. The interest on the
term loan is based on a floating rate equal to the reserve adjusted London inter-bank offered rate,
or LIBOR, plus 8.5% (or, at our option, a published prime lending rate plus 5.5%). A hypothetical
100 basis point change in interest rates would result in an approximate $0.3 million change in
annual interest expense. As of September 30, 2006, the Company had $15.0 million available for
revolving loans under the new senior credit facility. No borrowings were outstanding under this
revolving portion of the new credit facility at September 30, 2006. The interest rate on any
outstanding balances on the revolving credit loan is based on LIBOR plus 3.75% (or, at our option,
a published prime lending rate plus 1.0%). Although there were no borrowings outstanding under the
revolving portion of the credit facility at September 30, 2006, assuming $15.0 million of
borrowings, a hypothetical 100 basis point change in interest rates would result in an approximate
$0.2 million change in annual interest expense.
Derivative Instruments. As a multi-national company, the Company faces risks related to
foreign currency fluctuations on its foreign-denominated cash flows, net earnings, new investments
and large foreign currency denominated transactions. The Company uses derivative financial
instruments from time to time to manage foreign currency risks. The use of financial instruments
modifies the exposure of these risks with the intent to reduce the risk to the Company. The Company
does not use financial instruments for trading purposes, nor does it use leveraged financial
instruments. The Company did not have any such derivative financial instruments outstanding as of
September 30, 2006 and December 31, 2005.
33
Item 4. Controls and Procedures
The Companys management conducted an evaluation, with the participation of its Chairman,
President and Chief Executive Officer (CEO) and its Chief Financial Officer (CFO), of the
effectiveness of the Companys disclosure controls and procedures (as defined in Rules 13a-15(e)
and 15d-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 not 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, because of unremediated material weaknesses in its
internal control over financial reporting, as described in Item 9A of the Companys Form 10-K for
the year ended December 31, 2005.
Management believes that during the quarter ended September 30, 2006 the Company made
significant progress in remediating the material weaknesses reported in the Companys Annual Report
on Form 10-K for the year ended December 31, 2005. Those reported weaknesses related to
ineffective internal controls over revenue recognition and company level controls, including the
expertise of the accounting and finance staff. Management will continue its remediation efforts
and its evaluation of the effectiveness of its internal controls during the remainder of 2006.
Other than as described above, there were no changes in internal control over financial reporting
during the quarter ended September 30, 2006 that have materially affected, or are reasonably likely
to materially affect, the Companys internal control over financial reporting.
34
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
See Legal Proceedings in Note H of Notes to Condensed Consolidated Financial Statements
(Unaudited) included in Part I. Item 1. of this Form 10-Q which is incorporated herein 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, 2005.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
The Companys senior credit facility entered into on March 17, 2006 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 shareholders held on August 11, 2006, 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 July 5, 2006. Note that
the vote details below are based on the actual number of shares outstanding and eligible to vote as
of the meeting date and have not been pro forma adjusted to give effect to the Companys reverse
stock split which was effected on August 14, 2006.
With respect to Proposal 1 (election of Class I directors):
98,854,245 votes, or 98.5% of the votes cast, in person or by proxy, by the common
shares and Series A Preferred voting together as a group, were voted FOR the election of
James B. McCurry as a Class I director, and 1,527,307 votes withheld authority.
98,840,725 votes, or 98.5% of the votes cast, in person or by proxy, by the common shares
and Series A Preferred, voting together as a class, were voted FOR the election of Eugene I.
Davis as a Class I director, and 1,540,827 votes withheld authority.
98,820,240 votes, or 98.4% of the votes cast, in person or by proxy, by the common shares
and Series A Preferred voting together as a group, were voted FOR the election of Steven P.
Rosenberg as a Class I director, and 1,561,312 votes withheld authority.
The Companys directors serving in Class II and Class III did not stand for election at the annual
meeting. The directors serving in Class II, Patrick G. Dills and N. Colin Lind will continue to
serve until the 2007 annual meeting of shareholders and until their successors are elected and
qualified. The directors serving in Class III, David A. Cole and Phillip J. Mazzilli, Jr. will
continue to serve until the 2008 annual meeting of shareholders and until their successors are
elected and qualified.
With respect to Proposal 2, as to the grant of authority to the Board of Directors to amend
PRG-Schultzs Articles of Incorporation in order to increase the number of shares of capital stock
authorized for issuance, 50,466,006 common shares, or 78.6% of the outstanding shares of common
stock, were voted FOR the Proposal, 3,960,180 common shares voted AGAINST the Proposal and 218,471
common shares ABSTAINED; and 96,202,899 votes, or 84.0% of the votes
35
eligible to be cast by holders of common stock and Series A Preferred, voting together as a class,
were cast FOR the Proposal, 3,960,180 votes were cast AGAINST the Proposal and 218,471 votes
ABSTAINED.
With respect to Proposal 3, as to the grant of authority to the Board of Directors to amend
PRG-Schultzs Articles of Incorporation to effect a reverse stock split of PRG-Schultzs common
stock at a ratio of one-for-ten, 50,699,932 common shares, or 78.9% of the outstanding shares of
common stock, were voted FOR the Proposal, 3,886,542 shares voted AGAINST the Proposal and 58,184
shares ABSTAINED; and 96,436,825 votes, or 84.2% of the votes eligible to be cast by holders of
common stock and Series A Preferred, voting together as a class, were cast FOR the Proposal,
3,886,542 votes were cast AGAINST the Proposal and 58,184 votes ABSTAINED.
With respect to Proposal 4, as to the issuance of shares of common stock under the Companys 2006
Management Incentive Plan up to a maximum amount of 21 million shares of common stock (pre-reverse
stock split), 67,981,169 votes, or 93.8% of the votes cast by holders of common stock and Series A
Preferred, voting together as a class, were cast FOR the Proposal, 3,906,496 votes were cast
AGAINST the Proposal and 599,324 votes ABSTAINED.
With respect to Proposal 5, as to amending PRG-Schultzs Articles of Incorporation in order to
increase the number of shares of the Companys 10% Senior Convertible Series B Preferred Stock
authorized for issuance from 125,000 to 264,000, 43,319,348 votes, or 86.1% of the votes eligible
to be cast by holders of Series A Preferred, were cast FOR the Proposal, 0 votes were cast AGAINST
the Proposal and 0 votes ABSTAINED.
With respect to Proposal 6, as to amending PRG-Schultzs Articles of Incorporation in order to
revise the anti-dilution provisions of the Companys 9% Senior Convertible Series A Preferred
Stock, 43,319,348 votes, or 86.1% of the votes eligible to be cast by holders of Series A
Preferred, were cast FOR the Proposal, 0 votes were cast AGAINST the Proposal and 0 votes
ABSTAINED; and 68,929,423 votes, or 60.2% of the votes eligible to be cast by holders of common
stock and Series A Preferred, voting together as a class, were cast FOR the Proposal, 2,970,594
votes were cast AGAINST the Proposal and 586,971 votes ABSTAINED.
With respect to Proposal 7, as to amending PRG-Schultzs Articles of Incorporation in order to
revise the anti-dilution provisions of the Series B Preferred, 43,319,348 votes, or 86.1% of the
votes eligible to be cast by holders of Series A Preferred, were cast FOR the Proposal, 0 votes
were cast AGAINST the Proposal and 0 votes ABSTAINED.
With respect to Proposal 8, as to amending PRG-Schultzs Articles of Incorporation in order to
revise the voting power provisions of the Series A Preferred, 43,319,348 votes, or 86.1% of the
votes eligible to be cast by holders of Series A Preferred, were cast FOR the Proposal, 0 votes
were cast AGAINST the Proposal and 0 votes ABSTAINED; and 68,624,509 votes, or 59.9% of the votes
eligible to be cast by holders of common stock and Series A Preferred, voting together as a class,
were cast FOR the Proposal, 3,037,508 votes were cast AGAINST the Proposal and 824,971 votes
ABSTAINED.
And with respect to Proposal 9, as to amending PRG-Schultzs Articles of Incorporation in order to
revise the voting power provisions of the Series B Preferred, 43,319,348 votes, or 86.1% of the
votes eligible to be cast by holders of Series A Preferred, were cast FOR the Proposal, 0 votes
were cast AGAINST the Proposal and 0 votes ABSTAINED.
Abstentions indicated above include broker non-votes.
Item 5. Other Information
None.
36
Item 6. Exhibits
|
|
|
Exhibit |
|
|
Number |
|
Description |
|
|
|
3.1
|
|
PRG-Schultz International, Inc. Amended and Restated Articles of
Incorporation, as amended through August 11, 2006 (restated solely for
the purposes of filing with the Securities and Exchange Commission)
(incorporated by reference to Exhibit 3.1 to the Registrants Form 8-K
filed on August 17, 2006). |
|
|
|
3.2
|
|
Restated Bylaws of the Registrant (incorporated by reference to
Exhibit 3.2 to the Registrants Form 10-Q for the quarter ended
September 30, 2005). |
|
|
|
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). |
|
|
|
4.4
|
|
Indenture dated November 26, 2001 by and between Registrant and Sun
Trust Bank (incorporated by reference to Exhibit 4.3 to Registrants
Registration Statement No. 333-76018 on Form S-3 filed December 27,
2001). |
|
|
|
4.5
|
|
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). |
|
|
|
4.6
|
|
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). |
|
4.7
|
|
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). |
|
|
|
4.8
|
|
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). |
|
|
|
4.9
|
|
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 Report
on Form 10-K for the year ended December 31, 2005). |
|
|
|
4.10
|
|
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). |
|
|
|
4.11
|
|
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). |
37
|
|
|
Exhibit |
|
|
Number |
|
Description |
|
|
|
10.1
|
|
Amended and Restated 2006 Management Incentive Plan |
|
|
|
10.2
|
|
Form of Performance Unit Agreement under 2006 Amended and Restated Management Incentive Plan |
|
|
|
10.3
|
|
Form of Non-Employee Director Stock Option Agreement (incorporated by
reference to Exhibit 10.1 to the registrants Form 8-K filed on
September 27, 2006). |
|
|
|
10.4
|
|
Option Termination Agreement with James B. McCurry dated September 29,
2006 (incorporated by reference to Exhibit 10.1 to the registrants
Form 8-K filed on October 5, 2006). |
|
|
|
31.1
|
|
Certification of the Chief Executive Officer, pursuant to Rule
13a-14(a) or 15d-14(a), for the quarter ended September 30, 2006. |
|
|
|
31.2
|
|
Certification of the Chief Financial Officer, pursuant to Rule
13a-14(a) or 15d-14(a), for the quarter ended September 30, 2006. |
|
|
|
32.1
|
|
Certification of the Chief Executive Officer and Chief Financial
Officer, pursuant to 18 U.S.C. Section 1350, for the quarter ended
September 30, 2006. |
38
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
|
|
|
|
|
|
|
PRG-SCHULTZ INTERNATIONAL, INC. |
|
|
|
|
|
November 8, 2006
|
|
By:
|
|
/s/ James B. McCurry |
|
|
|
|
|
|
|
|
|
James B. McCurry |
|
|
|
|
President, Chairman of the Board and |
|
|
|
|
Chief Executive Officer |
|
|
|
|
(Principal Executive Officer) |
|
|
|
|
|
November 8, 2006
|
|
By:
|
|
/s/ PETER LIMERI |
|
|
|
|
|
|
|
|
|
Peter Limeri |
|
|
|
|
Chief Financial Officer and Treasurer |
|
|
|
|
(Principal Financial Officer) |
39
EXHIBIT 10.1
PRG-SCHULTZ INTERNATIONAL, INC.
AMENDED AND RESTATED
2006 MANAGEMENT INCENTIVE PLAN
1. Purpose
The purpose of the PRG-Schultz International, Inc. 2006 Management Incentive Plan (the Plan)
is to enable PRG-Schultz International, Inc. ( the Company) to attract, retain, and reward
certain key employees of the Company, and strengthen the mutuality of interests between such key
employees and the Companys shareholders, by providing deferred compensation to participants
herein. Such deferred compensation shall be based upon the award of Performance Units, which are
hereinafter defined, the value of which is related to the value of the Common Stock of the Company.
For purposes of the Plan, the following terms shall be defined as set forth below:
(a) Adjusted Outstanding Shares as of any given date shall mean 6,211,231 shares plus any shares of Common Stock issued on or after March 17, 2006 upon conversion of 10% senior
convertible notes due 2011, 9% senior convertible series A preferred stock or 10% senior
convertible series B preferred stock, subject to adjustment in accordance with Section 8.
(b) Board means the Board of Directors of the Company.
(c) Change in Control means a change in the ownership or effective control of, or in the
ownership of a substantial portion of the assets of, the Company, to the extent consistent with
Section 409A of the Code, and any regulatory or other interpretive authority promulgated
thereunder. By way of example and not limitation, Change of Control includes the occurrence of
one or more of the events described in paragraphs (i) through (iii), below.
(i) Change in Ownership of the Company. A change in the ownership of the Company shall
occur on the date that any one person, or more than one person acting as a group (within the
meaning of paragraph (i)(D), acquires ownership of Company stock that, together with Company
stock held by such person or group, constitutes more than 50% of the total fair market value
or total voting power of the stock of the Company.
(A) If any one person or more than one person acting as a group (within the
meaning of paragraph (i)(D)) is considered to own more than 50% of the total fair
market value or total voting power of the stock of the Company, the acquisition of
additional Company stock by such person or persons shall not be considered to cause
a change in the ownership of the Company or to cause a change in the effective
control of the Company (within the meaning of paragraph (ii) below).
(B) An increase in the percentage of Company stock owned by any one person, or
persons acting as a group (within the meaning of paragraph (i)(D)), as a result of a
transaction in which the Company acquires its stock in exchange for property, shall
be treated as an acquisition of stock for purposes of this paragraph (i).
(C) The provisions of this paragraph (i) shall apply only to the transfer or
issuance of Company stock if such Company stock remains outstanding after such
transfer or issuance.
(D) For purposes of this paragraph (i), persons shall be considered to be
acting as a group if they are owners of a corporation that enters into a merger,
consolidation, purchase, or acquisition of stock, or similar business transaction
with the Company. If a person, including an entity, owns stock in the Company and
another entity with which the Company enters into a merger, consolidation, purchase,
or acquisition of stock, or similar business transaction, such shareholder shall
40
be considered to be acting as a group with other Company shareholders prior to
the transaction giving rise to the change and not with respect to the ownership
interest in the other corporation. Persons shall not be considered to be acting as
a group solely because they purchase or own stock of the same corporation at the
same time, or as a result of the same public offering.
(ii) Change in Effective Control of the Company.
(A) A change in the effective control of the Company shall occur on the date
that either of (1) or (2) below occurs:
(1) Any one person, or more than one person acting as a group (within
the meaning of paragraph (ii)(D)), acquires (or has acquired during the
twelve (12) month period ending on the date of the most recent acquisition
by such person or persons) ownership of stock of the Company possessing 35%
or more of the total voting power of the stock of the Company; or
(2) A majority of members of the Board is replaced during any twelve
(12) month period by directors whose appointment or election is not endorsed
by a majority of the Board prior to the date of the appointment or election.
(B) A change in effective control of the Company also may occur with respect to
any transaction in which either of the Company or the other corporation involved in
a transaction experiences a Change of Control described in paragraphs (i) or (iii).
(C) If any one person, or more than one person acting as a group (within the
meaning of paragraph (ii)(D)), is considered to effectively control the Company
(within the meaning of this paragraph (ii)), the acquisition of additional control
of the Company by the same person or persons shall not be considered to cause a
change in the effective control of the Company (or to cause a change in the
ownership of the Company within the meaning of paragraph (i)).
(D) For purposes of this paragraph (ii), persons shall be considered to be
acting as a group if they are owners of a corporation that enters into a merger,
consolidation, purchase, or acquisition of stock, or similar business transaction
with the Company. If a person, including an entity, owns stock in the Company and
another entity with which the Company enters into a merger, consolidation, purchase,
or acquisition of stock, or similar business transaction, such shareholder shall be
considered to be acting as a group with other Company shareholders only with respect
to the ownership in the Company prior to the transaction giving rise to the change
and not with respect to the ownership interest in the other corporation. Persons
shall not be considered to be acting as a group solely because they purchase or own
stock of the same corporation at the same time, or as a result of the same public
offering.
(iii) Change in Ownership of a Substantial Portion of the Companys Assets. A change
in the ownership of a substantial portion of the Companys assets shall occur on the date
that any one person, or more than one person acting as a group (within the meaning of
paragraph (iii)(C)), acquires (or has acquired during the twelve (12) month period ending on
the date of the most recent acquisition by such person or persons) assets from the Company
that have a total gross fair market value (within the meaning of paragraph (iii)(B)) equal
to or more than 40% of the total gross fair market value of all of the assets of the Company
immediately prior to such acquisition or acquisitions.
(A) A transfer of the Companys assets shall not be treated as a change in the
ownership of such assets if the assets are transferred to one or more of the
following:
(1) A shareholder of the Company (immediately before the asset
transfer) in exchange for or with respect to Company Common Stock;
(2) An entity, 50% or more of the total value or voting power of which
is owned, directly or indirectly, by the Company;
41
(3) A person, or more than one person acting as a group (within the
meaning of paragraph (iii)(C)) that owns, directly or indirectly, 50% or
more of the total value or voting power of all of the outstanding stock of
the Company; or
(4) An entity, at least 50% of the total value or voting power of which
is owned, directly or indirectly, by a person described in paragraph
(iii)(A)(3).
For purposes of this paragraph (iii)(A), and except as otherwise provided, a persons status is
determined immediately after the transfer of assets.
(B) For purposes of this paragraph (iii), gross fair market value means the
value of all Company assets, or the value of the assets being disposed of,
determined without regard to any liabilities associated with such assets.
(C) For purposes of this paragraph (iii), persons shall be considered to be
acting as a group if they are owners of a corporation that enters into a merger,
consolidation, purchase, or acquisition of assets, or similar business transaction
with the Company. If a person, including an entity shareholder, owns stock in the
Company and another entity with which the Company enters into a merger,
consolidation, purchase, or acquisition of stock, or similar business transaction,
such shareholder shall be considered to be acting as a group with other Company
shareholders only to the extent of the ownership in the Company prior to the
transaction giving rise to the change and not with respect to the ownership interest
in the other corporation. Persons shall not be considered to be acting as a group
solely because they purchase or own stock of the same corporation at the same time,
or as a result of the same public offering.
(iv) Attribution of Stock Ownership. For purposes of this Change of Control
definition, Section 318(a) of the Code shall apply to determine stock ownership. Common
Stock underlying a vested option shall be considered to be owned by the individual who holds
the vested option, provided that such vested option is exercisable for Common Stock that is
vested or substantially vested (as defined by Treasury Regulations Section 1.83(b) and (j)).
Common Stock underlying an unvested option is not considered to be owned by the individual
who holds the unvested option.
(v) Notwithstanding the foregoing, the following acquisitions of Company
securities shall not constitute a Change of Control: (1) any acquisition of Company
securities directly from the Company, (2) any acquisition of Company securities by
the Company, or (3) any acquisition of Company securities by any employee benefit
plan (or related trust) sponsored or maintained by the Company or any affiliated
company.
(d) Code means the Internal Revenue Code of 1986, as amended from time to time, and any
successor thereto.
(e) Committee means the Committee referred to in Section 2 of the Plan. If at any time no
Committee shall be in office, then the functions of the Committee specified in the Plan may
be exercised by the Board, as set forth in Section 2 hereof.
(f) Common Stock means the common stock, no par value, of the Company.
(g) Company means PRG-Schultz International, Inc., a corporation organized under the laws
of the State of Georgia, or any successor corporation.
(h) Disability means a determination that a Participant (i) is unable to engage in any
substantial gainful activity by reason of any medically determinable physical or mental
impairment which can be expected to result in death or can be expected to last for a
continuous period of not less than twelve (12) months; (ii) is, by reason of any medically
determinable physical or mental impairment which can be expected to last for a continuous
period of not less than twelve (12) months, receiving income replacement benefits for a
period
42
not less than three (3) months under an accident and health plan covering employees of the
Company, or (iii) has been determined by the Social Security Administration to be totally
disabled.
(i) Fair Market Value means, as of any given date, unless otherwise determined by the
Committee in good faith, the average of the following over the thirty trading days preceding
such date:
|
(i) |
|
if the Common Stock is listed on an established stock exchange or
exchanges, or traded on the Nasdaq National Market System or Small Cap Market
(Nasdaq), the closing price of the Common Stock as listed thereon on the
applicable day; |
|
|
(ii) |
|
if the Common Stock is not listed on an established stock exchange or
Nasdaq but is instead traded over-the-counter, the mean of the dealer bid and
ask prices of the Common Stock in the over-the-counter market on the applicable
day, as reported by the National Association of Securities Dealers, Inc.; or |
|
|
(iii) |
|
if the Common Stock is not listed on any exchange or traded
over-the-counter, the value determined in good faith by the Committee. |
(j) Participants shall mean those key employees who are granted Performance Units pursuant
to the terms and conditions of the Plan.
(k) Performance Unit means a right to payment from the Company in accordance with the
terms of the Plan pursuant to an award granted under Section 3 hereof.
(l) Plan means this 2006 Management Incentive Plan, as hereinafter amended from time to
time.
(m) Termination Date means April 30, 2016.
2. Administration
Unless otherwise determined by the Board of Directors, the Plan shall be administered by the
Compensation Committee of the Board of Directors (the Committee). The functions of the Committee
specified in the Plan may be exercised by the Board, if and to the extent that no Committee exists
which has the authority to so administer the Plan and if a resolution to such effect is adopted by
the Board. Subject to the provisions of the Plan, the Committee shall have exclusive power to
select the key employees to be granted Performance Units, to determine the number of Performance
Units to be granted to each key employee selected and to determine the time or times when
Performance Units will be granted.
The Committee shall have the authority to adopt, alter and repeal such rules, guidelines and
practices governing the Plan as it shall, from time to time, deem advisable; to interpret the terms
and provisions of the Plan and any award issued under the Plan (and any agreements relating
thereto); and to otherwise supervise the administration of the Plan.
All decisions made by the Committee pursuant to the provisions of the Plan shall be made in
the Committees sole discretion and shall be final and binding on all persons, including the
Company and Participants.
3. Grants
A maximum of 3,262,399 Performance Units may be issued hereunder, provided that at no time may
the sum of the number of Performance Units outstanding hereunder and the number of previously
issued Performance Units that have been paid out exceed 10% of the sum of (a) the Companys
Adjusted Outstanding Shares, plus (b) the number of Performance Units outstanding hereunder, plus
(c) the number of previously issued Performance Units that have been paid out. As of September 1,
2006, 737,620 Performance Units may be issued hereunder. As the number of Adjusted Outstanding
Shares changes, the aggregate number of Performance Units that may be granted under this Plan shall
change proportionately. Of the aggregate Performance Units that may be issued hereunder, a minimum
of 40% shall be
43
reserved for issuance to the Companys Chief Executive Officer. Performance Units shall be granted
to such key employees of the Company as the Committee shall determine. Upon the receipt of such a
grant of Performance Units, such employee shall be a Participant in the Plan. If any Performance
Units awarded under the Plan shall be forfeited or cancelled, such Performance Units shall again be
available for awards under the Plan. Performance Units shall be granted at such time or times and
shall be subject to such terms and conditions, in addition to the terms and conditions set forth in
the Plan, as the Committee shall, in its sole discretion, determine. No grants may be made under
the Plan following the Termination Date; however, if as of the Termination Date, Performance Units
remain available for grant under the Plan, the Committee may allocate the remaining Performance
Units to eligible Participants, in its discretion. To the extent that any such Performance Units
are allocated to employees other than the Chief Executive Officer, the Committee shall consult with
the Chief Executive Officer prior to any such allocation.
4. Performance Units
Performance Units granted to a Participant shall be evidenced by a written agreement
(Performance Unit Agreement) and shall be credited to a Performance Unit account established and
maintained for such Participant. The Performance Unit account of a Participant shall be the record
of Performance Units granted to him under the Plan, is solely for accounting purposes and shall not
require a segregation of any Company assets.
5. Vesting of Performance Units
(a) Performance Units granted to a Participant shall vest in accordance with the schedule
agreed upon between the Committee and the Participant pursuant to the Performance Unit
Agreement.
(b) Notwithstanding anything contained in the Plan or any Performance Unit Agreement to the
contrary, all Performance Units granted to a Participant shall become fully vested upon a
Change of Control, upon the Companys entering into a definitive agreement to effect a
Change of Control, upon the liquidation or dissolution of the Company or upon a
reorganization, merger, statutory share exchange or consolidation or similar corporate
transaction involving the Company or any of its subsidiaries, unless, following such
transaction, all or substantially all of the individuals and entities that were the
beneficial owners of the Companys voting securities immediately prior to such transaction
beneficially own, directly or indirectly, more than 50% of the then-outstanding shares of
common stock and the combined voting power of the then-outstanding voting securities
entitled to vote generally in the election of directors, as the case may be, of the
corporation resulting from such transaction (including, without limitation, a corporation
that, as a result of such transaction, owns the Company or all or substantially all of the
Companys assets either directly or through one or more subsidiaries) in substantially the
same proportions as their ownership immediately prior to such transaction.
6. Payment for Performance Units
(a) Payment for vested Performance Units shall be made in accordance with the payment
schedule set forth in, or established pursuant to, the Performance Unit Agreement entered
into with each Participant, provided that, in no event may any Participant receive payments
earlier than the dates and in excess of the cumulative amounts set forth below:
|
|
|
Payment Dates |
|
Maximum Payment Amount |
March 17, 2008
|
|
25% of the total Performance Units awarded to Participant
under the Plan |
March 17, 2009
|
|
50% of the total Performance Units awarded to Participant
under the Plan |
March 17, 2010
|
|
75% of the total Performance Units awarded to Participant
under the Plan |
March 17, 2011
|
|
100% of the total Performance Units awarded to Participant
under the Plan |
44
All payments made to a Participant under the Plan will be aggregated for purposes of
determining when the maximum for any period has been reached. All amounts not paid as of
April 30, 2016 will be distributed as soon as reasonably practicable thereafter.
Performance Units shall be paid out, subject to the restrictions above, according to the
following formula:
A. Amount of payment =
Number of Performance Units scheduled for payment on the relevant payment
date (determined in accordance with the applicable Performance Unit
Agreement) X the Fair Market Value of the Companys Common Stock as of the
payment date;
provided, however, that in the event that the Companys shareholders approve
the issuance of Common Stock under the Plan, then at all times thereafter,
no Participant shall be entitled to the cash payment set forth in A. above,
but instead shall receive the following:
B. 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.
(b) All payments under the Plan shall be subject to applicable tax withholding in accordance
with Section 10, and notwithstanding anything to the contrary contained in any Performance
Unit Agreement or in (a) above, in the event that there shall not be sufficient shares
reserved and available to allow the payment of Performance Units in Common Stock, such
Performance Units shall be paid in cash, in accordance with Section 6(a)(A), to the extent
of any shortfall, and in accordance with such rules and procedures as may be established by
the Committee from time to time.
(c) Notwithstanding the foregoing, upon occurrence of a Change of Control, or if the Company
is liquidated or dissolved, subject to compliance with Section 409A of the Code, each
Participant whose employment has not already terminated shall receive payment for all of his
or her Performance Units, whether or not previously vested, immediately prior to the
consummation of such event, calculated in accordance with 6(a)A or B above, as applicable.
(d) Notwithstanding the foregoing, upon the death or Disability of a Participant, the
Participant, or his or her executor, shall receive prompt payment in full, calculated in
accordance with 6(a)A or B above, as applicable, for all vested Performance Units.
(e) Notwithstanding the foregoing, upon the termination of a Participants employment with
the Company, for reasons other than death or Disability and which determination constitutes
a separation from service under Section 409A of the Code and applicable interpretations
thereof, whether with or without cause, the Participant shall receive payment in full,
calculated in accordance with 6(a)A or B above, as applicable, for all vested Performance
Units, such payment to be made as soon as reasonably practicable following the date which is
six months from the date of such termination (or if earlier the date of such Participants
death or Disability).
(f) Notwithstanding the foregoing, in no event shall the Company issue in excess of 2.1
million shares of Common Stock under this Plan, subject to automatic proportional adjustment
in the event of any recapitalization, reclassification, reorganization, stock split, reverse
stock split, combination of shares, stock dividend or similar transaction applicable to the
Common Stock as a whole.
7. Forfeiture of Performance Units
45
If the employment of a Participant with the Company is terminated for any reason, except as
the result of a Change of Control or the liquidation or dissolution of the Company, all of such
Participants unvested Performance Units will terminate and be forfeited, and neither the
Participant nor his or her heirs, personal representatives, successors or assigns shall have any
future rights with respect to any such forfeited Performance Units. Vested Performance Units shall
not be forfeited and shall be paid out pursuant to Section 6.
8. Changes in Capital and Corporate Structure
(a) In the event of any change in the number of outstanding shares of Common Stock by reason
of any recapitalization, reclassification, reorganization, stock split, reverse stock split,
combination of shares, stock dividend or similar transaction, the maximum number of Performance
Units that may be granted hereunder and the Adjusted Outstanding Shares, as well as the number of
Performance Units held by Participants under the Plan, shall automatically be proportionately
adjusted to reflect such event. In addition, upon any increase in the number of shares of Common
Stock outstanding as the result of conversions of the Companys 10% senior convertible notes due
2011, 9% senior convertible series A preferred stock or 10% senior convertible series B preferred
stock, the number of Performance Units held by Participants under the Plan shall automatically be
proportionately adjusted to reflect such event. No adjustment will be made under this Section 8 to
any shares of Common Stock after they have been issued in payment of Performance Units in
accordance with Section 6. The decision of the Committee with respect to any such adjustment shall
be final.
(b) In case of any reclassification of the Common Stock, any consolidation of the
Company with, or merger of the Company into, any other entity, any merger of any entity into
the Company (other than a merger that does not result in reclassification, conversion, exchange
or cancellation of the outstanding shares of common stock), any sale or transfer of
all or substantially all of the assets of the Company or any compulsory share exchange
whereby the common stock is converted into other certain securities, cash or other property, then
each Participant shall thereafter, to the extent that such Participants Performance Units are
payable in Company Common Stock, be paid, with respect to any Performance Unit, in the kind and
amount of securities, cash and other property receivable upon the reclassification, consolidation,
merger, sale, transfer or share exchange by a holder of the number of shares of common stock to
which the Participant would otherwise have been entitled. Any amounts payable in cash will remain
payable in cash, calculated in a comparable manner to the calculations set forth in Section 6(a)A
or B, as applicable.
9. Nontransferability
Performance Units granted under the Plan, and any rights and privileges pertaining thereto,
may not be transferred, assigned, pledged or hypothecated in any manner, by operation of law or
otherwise, other than by will or by the laws of descent and distribution, and shall not be subject
to execution, attachment or similar process. In the event of a Participants death, payment of any
amount due under the Plan with respect to vested Performance Units shall be made to the duly
appointed and qualified executor or other personal representative of the Participant to be
distributed in accordance with the Participants will or applicable intestacy law.
10. Withholding
The Company shall have the right to deduct from all amounts paid pursuant to the Plan any
taxes required by the Code or any other applicable law to be withheld with respect to such awards.
11. Voting and Dividend Rights
Except for adjustments in the number of Performance Units as provided under Section 8, no
Participant shall be entitled to any voting rights, to receive any dividends, or to have his or her
Performance Unit account credited or increased as a result of any dividends or other distribution
with respect to the Common Stock of the Company.
12. Rights Unsecured; Unfunded Plan; ERISA.
46
(a) Unsecured and Unfunded. The Companys obligations arising under the Plan to pay
benefits to any Participant or his Beneficiary constitute a mere promise by the Company to
make payments in the future in accordance with the terms of the Plan and each Performance
Unit Agreement. Each Participant and Beneficiary shall have the status of a general
unsecured creditor of Company. No Participant or Beneficiary shall have any rights in or
against any specific assets of Company, whether or not the Company, in its sole and absolute
discretion, acquires or segregates any assets for its anticipated obligations arising under
the Plan.
(b) ERISA. The Companys obligations under the Plan shall be unfunded for income
tax purposes and for purposes of Title I of the Employee Retirement Income Retirement
Security Act of 1974, as amended (ERISA). The Company shall treat the Plan as maintained
for a select group of management and highly-compensated employees and therefore exempt from
Parts 2, 3 and 4 of Title I of ERISA. The Company shall comply with the reporting and
disclosure requirements of Part 1 of Title I of ERISA in accordance with U.S. Department of
Labor Regulation §2520.104-23.
13. Miscellaneous Provisions
(a) No employee or other person shall have any claim or right to be granted an award under
the Plan. Neither the Plan nor any action taken hereunder shall be construed as giving any
employee any right to continue to be retained in the employ of the Company.
(b) Except when otherwise required by the context, any masculine terminology in this
document shall include the feminine, and any singular terminology shall include the plural.
(c) The Plan is intended to be governed by the laws of the State of Georgia.
(d) Unless a registration statement pertaining thereto has been filed in the discretion of
the Company, any shares of Common Stock that may be issued pursuant to the Plan shall be
restricted under the Securities Act of 1933, as amended, and may not be resold without
registration or unless an exemption is available. All such shares shall bear a legend to
that effect.
(e) The Plan shall at all times be interpreted to comply with Section 409A of the Code and
any regulations promulgated thereunder.
14. Amendment of the Plan
Except as required by law or by the rules of the Nasdaq National Market, to the extent the
Companys Common Stock is listed thereon, the Board may alter or amend the Plan from time to time
in its discretion without obtaining the approval of the shareholders of the Company. No amendment
to the Plan may alter, impair or reduce the number of Performance Units granted under the Plan
prior to the effective date of such amendment without the written consent of any affected
Participant.
15. Effectiveness and Terms of Plan
The effective date of the Plan shall be September 1, 2006. The Committee may, at any time,
terminate the Plan. No Performance Units shall be granted pursuant to the Plan after the
Termination Date, although after such date payments shall be made with respect to Performance Units
granted prior to the date of termination.
47
Exhibit 10.2
PRG-SCHULTZ INTERNATIONAL, INC.
PERFORMANCE UNIT AGREEMENT
THIS PRG-SCHULTZ INTERNATIONAL, INC. PERFORMANCE UNIT AGREEMENT (this Agreement) is
entered into as of the ___ day of September, 2006 by and between PRG-Schultz International, Inc.,
a Georgia corporation (the Company), and (Participant).
WITNESSETH:
WHEREAS, the Company has adopted that certain PRG-Schultz International, Inc. 2006 Management
Incentive Plan, a copy of which is attached hereto and incorporated herein by this reference (the
Plan);
WHEREAS, Participant is an employee of the Company who has been selected to receive
Performance Units (as defined in the Plan) subject to and in accordance with the terms of the Plan
and this Agreement.
NOW, THEREFORE, in consideration of the aforesaid premises and the covenants and agreements
hereinafter set forth, and other good and valuable consideration, the receipt and sufficiency of
which are acknowledged, the parties hereto covenant and agree as follows:
1. The Plan. The Plan, as amended from time to time in accordance with its terms, is
incorporated herein by this reference and made a part hereof. To the extent that anything herein
is inconsistent with the Plan, the terms of the Plan shall control. All capitalized terms not
otherwise defined herein shall have the meanings given to such terms in the Plan. The Participant
acknowledges that he has been given a copy of the Plan.
2. Grant of Performance Units. Subject to the terms and conditions of the Plan and
this Agreement, the Company hereby grants to Participant Performance Units.
3. Vesting and Payment.
(a) 1/2 of the Performance Units shall be immediately vested as of the date hereof); and
(b) the remainder of the Performance Units shall vest in equal 1/36s of the total number of
Performance Units granted, beginning on October 17, 2006, and continuing on the 17th of
each month thereafter, with the final 1/36th vesting on March 17, 2008.
Any additional Performance Units issued or deemed to be issued to Participant as the result of a
recapitalization, stock split or other adjustment event pursuant to Section 8 of the Plan shall
vest and be paid in the same proportions, and on the same dates, as those Performance Units issued
on the date hereof.
Notwithstanding the foregoing, Participant must be an employee of the Company or a subsidiary or
designated affiliate thereof on the vesting date for any unvested Performance Units to vest on that
date. All unvested Performance Units shall be forfeited following the termination of Participants
employment with the Company or a subsidiary or designated affiliate, except as otherwise provided
in the Plan.
(b) Payment of vested Performance Units shall be made in accordance with the payment schedule
set forth on Exhibit A attached hereto, subject to modification as provided in (c) below.
(c) On one occasion annually, during the month of February of each year beginning in 2007
through 2015, inclusive, Participant may change his or her payout schedule, subject to compliance
with the following:
48
(i) no payment may be accelerated to a date earlier than that originally scheduled;
(ii) no payment date that is less than one year and one day from the date of Participants
change may be altered;
(iii) any payment date that is changed must be changed to a new payment date that is at least
five years later than such original payment date;
(iv) the payout schedule must comply in all respects with Section 6(a) of the Plan;
(v) payments may only be elected to be made as of April 30 of years between 2008 and 2016,
inclusive; and
(vi) no less than 25% of total Performance Units granted to a Participant may be selected for
payment on any given date (as a result, there may be no more than four payment dates).
(vii) additional Performance Units, if any, resulting from adjustments pursuant to Paragraph 8
of the Plan shall be paid in the same proportions as specified in the Participants then current
payout schedule.
4. Nontransferability of Agreement. Except as may be otherwise provided in the Plan,
this Agreement is personal and no rights granted hereunder may be transferred, assigned, pledged or
hypothecated in any way (whether by operation of law or otherwise) nor shall any such rights be
subject to execution, attachment or similar process. Upon any attempt to transfer, assign, pledge,
hypothecate or otherwise dispose of this Agreement or of such rights contrary to the provisions
hereof, or upon the levy of any attachment or similar process upon this Agreement or such rights,
this Agreement and such rights shall, at the election of the Company, become null and void.
5. Determinations by the Committee Pursuant to the Plan Final. The Participant
understands and agrees that the Compensation Committee of the Companys Board of Directors has been
granted authority to interpret and apply the provisions of the Plan and this Agreement and that all
determinations by the Committee shall be final and binding. The Participant further understands
and agrees that the Committee owes no fiduciary or other duty to the Participant with respect to
the Plan or this Agreement.
6. Notices. Any notice required or permitted hereunder shall be given in writing and
shall be given by (i) personal delivery, (ii) via facsimile, or (iii) by an internationally
recognized commercial courier service addressed as follows:
|
|
|
|
If to the Company:
|
|
PRG-Schultz International, Inc. |
|
|
|
600 Galleria Parkway |
|
|
|
Suite 100 |
|
|
|
Atlanta, Georgia 30339 |
|
|
|
Attention: Victor A. Allums, |
|
|
|
Senior Vice President, |
|
|
|
Facsimile: (770) 779-3034 |
|
|
|
|
|
If to the Participant:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notice shall be effective upon receipt. Either party may change its address by notice given
in accordance with this Paragraph 6 designating such change of address.
7. No Special Employment Rights or Rights as a Shareholder. Participant shall in no
event have any rights with respect to the common stock of the Company and shall in no event be
treated as a shareholder of the Company by virtue of ownership of Performance Units. The grant of
Performance Units to Participant pursuant to this Agreement shall not be construed to imply or to
constitute evidence of any agreement, express or implied, on the part of
49
the Company to retain Participant in the employ of the Company, notwithstanding that such
termination of employment could result in a reduction of amounts being paid to the Participant
pursuant to the Plan and this Agreement.
8. Entire Agreement. This Agreement, together with the Plan, contains the sole and
entire agreement of Company and Participant with respect to the transaction contemplated hereunder
and no representation, inducement, promise or agreement, oral or written, between Company and
Participant not incorporated herein shall be of any force or effect concerning the subject matter
hereof. Any amendments to this Agreement shall be in writing and executed by the parties.
9. Successors and Assigns. This Agreement shall be binding upon and inure to the
benefit of and be enforceable against the parties hereto and their respective heirs, legal
representative, successors and permitted assigns.
10. Time is of the Essence. Time is of the essence of this Agreement.
11. Binding Effect. This Agreement shall inure to the benefit of and be binding upon
the parties hereto and their respective heirs, executors, administrators, successors and assigns.
Notwithstanding anything to the contrary herein, no pledge, hypothecation, sale, transfer,
assignment or other disposition of any Performance Unit or any interest therein shall be valid
unless the terms of this Agreement have been complied with.
12. Further Assurances. The parties to this Agreement agree to execute and deliver in
a timely fashion any and all additional documents necessary to effectuate the purposes of this
Agreement.
14. Miscellaneous. This Agreement shall be governed by and construed under the laws
of the State of Georgia. If any term or provision hereof shall be held invalid or unenforceable,
the remaining terms and provisions hereof shall continue in full force and effect. Any
modification to this Agreement shall not be effective unless the same shall be in writing and such
writing shall be signed by the parties hereto. This Agreement constitutes the entire agreement
between the parties with respect to the subject matter hereof and supersedes and terminates all
prior understandings, agreements, or arrangements between the parties, both oral and written, with
respect thereto. The headings in this Agreement are inserted for convenience only and are in no
way intended to describe, interpret, define, or limit the scope, extent or intent of this Agreement
or any provision hereof. The failure of any party to seek redress for violation of or to insist
upon the strict performance of any covenant or condition of this Agreement shall not prevent a
subsequent act, which would have originally constituted a violation, from having the effect of an
original violation.
IN WITNESS WHEREOF, the undersigned have set their hands and seals as of the ___ day of
September 2006.
|
|
|
|
|
|
|
|
|
PRG-SCHULTZ INTERNATIONAL, INC. |
|
|
|
|
|
|
|
|
|
|
|
By: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Name: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Title: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PARTICIPANT |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Name: |
|
|
|
|
|
|
|
|
|
|
|
50
Exhibit A
Payment Schedule
|
|
|
|
|
Payment Date |
|
% |
April 30, |
|
|
|
% |
|
April 30, |
|
|
|
% |
|
April 30, |
|
|
|
% |
|
April 30, |
|
|
|
% |
51
EXHIBIT 31.1
CERTIFICATION
I, James B. McCurry, certify that:
1. I have reviewed this Form 10-Q of PRG-Schultz International, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact
or omit to state a material fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not misleading with respect to the period
covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included
in this report, fairly present in all material respects the financial condition, results of
operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrants other certifying officer and I are responsible for establishing and
maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and
15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules
13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls
and procedures to be designed under our supervision, to ensure that material information
relating to the registrant, including its consolidated subsidiaries, is made known to us by
others within those entities, particularly during the period in which this report is being
prepared;
(b) Designed such internal control over financial reporting, or caused such internal
control over financial reporting to be designed under our supervision, to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrants disclosure controls and procedures and
presented in this report our conclusions about the effectiveness of the disclosure controls and
procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrants internal control over financial
reporting that occurred during the registrants most recent fiscal quarter (the registrants
fourth fiscal quarter in the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the registrants internal control over financial
reporting; and
5. The registrants other certifying officer and I have disclosed, based on our most recent
evaluation of internal control over financial reporting, to the registrants auditors and the audit
committee of the registrants board of directors:
(a) All significant deficiencies and material weaknesses in the design or operation of
internal control over financial reporting which are reasonably likely to adversely affect the
registrants ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who
have a significant role in the registrants internal control over financial reporting.
|
|
|
|
|
|
|
November 8, 2006
|
|
By:
|
/s/ James B. McCurry |
|
|
|
|
|
James B. McCurry
|
|
|
|
|
|
|
President, Chairman of the Board and |
|
|
|
|
|
|
Chief Executive Officer |
|
|
|
|
|
|
(Principal Executive Officer) |
|
|
52
EXHIBIT 31.2
CERTIFICATION
I, Peter Limeri, certify that:
1. I have reviewed this Form 10-Q of PRG-Schultz International, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact
or omit to state a material fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not misleading with respect to the period
covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included
in this report, fairly present in all material respects the financial condition, results of
operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrants other certifying officer and I are responsible for establishing and
maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and
15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules
13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls
and procedures to be designed under our supervision, to ensure that material information
relating to the registrant, including its consolidated subsidiaries, is made known to us by
others within those entities, particularly during the period in which this report is being
prepared;
(b) Designed such internal control over financial reporting, or caused such internal
control over financial reporting to be designed under our supervision, to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrants disclosure controls and procedures and
presented in this report our conclusions about the effectiveness of the disclosure controls and
procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrants internal control over financial
reporting that occurred during the registrants most recent fiscal quarter (the registrants
fourth fiscal quarter in the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the registrants internal control over financial
reporting; and
5. The registrants other certifying officer and I have disclosed, based on our most recent
evaluation of internal control over financial reporting, to the registrants auditors and the audit
committee of the registrants board of directors:
(a) All significant deficiencies and material weaknesses in the design or operation of
internal control over financial reporting which are reasonably likely to adversely affect the
registrants ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who
have a significant role in the registrants internal control over financial reporting.
|
|
|
|
|
|
|
November 8, 2006
|
|
By:
|
/s/ Peter Limeri |
|
|
|
|
|
Peter Limeri
|
|
|
|
|
|
|
Chief Financial Officer and Treasurer |
|
|
|
|
|
|
(Principal Financial Officer) |
|
|
53
EXHIBIT 32.1
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906
OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of PRG-Schultz International, Inc. (the Company) on
Form 10-Q for the period ending September 30, 2006 as filed with the Securities and Exchange
Commission on the date hereof (the Report), I, James B. McCurry, President, Chairman of the Board
and Chief Executive Officer of the Company and I, Peter Limeri., Chief Financial Officer and
Treasurer of the Company, certify pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the
Sarbanes-Oxley Act of 2002, that to the best of the undersigneds knowledge: (1) the Report fully
complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934; and (2) the
information contained in the Report fairly presents, in all material respects, the financial
condition and results of operations of the Company.
|
|
|
|
|
|
|
November 8, 2006
|
|
By:
|
/s/ James B. McCurry |
|
|
|
|
|
James B. McCurry
|
|
|
|
|
|
|
President, Chairman of the Board and |
|
|
|
|
|
|
Chief Executive Officer |
|
|
|
|
|
|
(Principal Executive Officer) |
|
|
|
|
|
|
|
|
|
November 8, 2006
|
|
By:
|
/s/ Peter Limeri |
|
|
|
|
|
Peter Limeri
|
|
|
|
|
|
|
Chief Financial Officer and Treasurer |
|
|
|
|
|
|
(Principal Financial Officer) |
|
|
54