PRG-SCHULTZ INTERNATIONAL, INC.
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark
One)
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þ |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 2007
OR
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o |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number 0-28000
PRG-Schultz International, Inc.
(Exact name of registrant as specified in its charter)
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Georgia
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58-2213805 |
(State or other jurisdiction of
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(I.R.S. Employer |
incorporation or organization)
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Identification No.) |
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600 Galleria Parkway
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30339-5986 |
Suite 100
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(Zip Code) |
Atlanta, Georgia |
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(Address of principal executive offices) |
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Registrants telephone number, including area code: (770) 779-3900
Indicate by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days.
Yes þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, 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 o Accelerated filer þ 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 April 30, 2007 were 8,767,345.
PRG-SCHULTZ INTERNATIONAL, INC.
FORM 10-Q
For the Quarter Ended March 31, 2007
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
PRG-SCHULTZ INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except per share data)
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Three Months Ended |
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March 31, |
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2007 |
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2006 |
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Revenues |
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$ |
66,908 |
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$ |
65,538 |
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Cost of revenues |
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45,464 |
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47,257 |
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Gross margin |
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21,444 |
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18,281 |
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Selling, general and administrative expenses |
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14,740 |
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14,894 |
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Operational restructuring expense (NOTE I) |
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408 |
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Operating income (loss) |
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6,704 |
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2,979 |
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Interest expense, net |
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(4,115 |
) |
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(2,543 |
) |
Loss on
financial restructuring (NOTE H) |
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(10,129 |
) |
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Earnings (loss) from continuing operations before income taxes and
discontinued operations |
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2,589 |
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(9,693 |
) |
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Income taxes |
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1,055 |
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650 |
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Earnings (loss) from continuing operations before discontinued
operations |
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1,534 |
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(10,343 |
) |
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Discontinued
operations (NOTE B): |
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Earnings (loss) from discontinued
operations |
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(11 |
) |
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49 |
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Net earnings (loss) |
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$ |
1,523 |
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$ |
(10,294 |
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Basic earnings (loss) per common share (NOTE C): |
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Earnings (loss) from continuing operations before discontinued operations |
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$ |
0.16 |
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$ |
(1.67 |
) |
Earnings (loss) from discontinued operations |
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(0.00 |
) |
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0.01 |
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Net earnings (loss) |
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$ |
0.16 |
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$ |
(1.66 |
) |
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Diluted earnings (loss) per common share (NOTE C): |
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Earnings (loss) from continuing operations before discontinued operations |
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$ |
0.13 |
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$ |
(1.67 |
) |
Earnings (loss) from discontinued operations |
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(0.00 |
) |
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0.01 |
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Net earnings (loss) |
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$ |
0.13 |
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$ |
(1.66 |
) |
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Weighted-average common shares outstanding (NOTE C): |
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Basic |
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8,373 |
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6,211 |
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Diluted |
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12,164 |
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6,211 |
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See accompanying Notes to Condensed Consolidated Financial Statements.
1
PRG-SCHULTZ INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands, except per share data)
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March 31, |
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December 31, |
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2007 |
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2006 |
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ASSETS |
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Current assets: |
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Cash and cash equivalents (Note G) |
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$ |
21,359 |
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$ |
35,013 |
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Restricted cash |
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3,413 |
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3,438 |
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Receivables: |
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Contract receivables, less allowances of $1,490 in 2007 and $1,919 in 2006 |
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Billed |
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30,930 |
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32,464 |
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Unbilled |
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7,790 |
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8,457 |
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38,720 |
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40,921 |
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Employee advances and miscellaneous receivables, less allowances of $1,638 in 2007 and
$1,306 in 2006 |
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769 |
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2,534 |
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Total receivables |
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39,489 |
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43,455 |
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Funds held for client obligations |
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42,104 |
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42,304 |
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Prepaid expenses and other current assets |
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2,488 |
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2,667 |
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Deferred income taxes |
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139 |
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Total current assets |
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108,853 |
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127,016 |
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Property and equipment, at cost |
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66,211 |
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66,650 |
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Less accumulated depreciation and amortization |
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(56,737 |
) |
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(56,247 |
) |
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Property and equipment, net |
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9,474 |
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10,403 |
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Goodwill |
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4,600 |
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4,600 |
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Intangible assets, less accumulated amortization of $7,185 in 2007 and $6,838 in 2006 |
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22,715 |
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23,062 |
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Unbilled receivables |
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1,557 |
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|
3,175 |
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Deferred income taxes |
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171 |
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|
391 |
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Other assets |
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9,806 |
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10,020 |
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$ |
157,176 |
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$ |
178,667 |
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LIABILITIES AND SHAREHOLDERS EQUITY (DEFICIT) |
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Current liabilities: |
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Obligations for client payables |
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$ |
42,104 |
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$ |
42,304 |
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Accounts payable and accrued expenses |
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19,082 |
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23,676 |
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Accrued payroll and related expenses |
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29,777 |
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|
41,026 |
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Refund liabilities |
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10,207 |
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|
10,112 |
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Deferred revenue |
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3,631 |
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3,930 |
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Current portions of debt obligations |
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1,434 |
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750 |
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Total current liabilities |
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106,235 |
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121,798 |
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Senior notes, net of unamortized discount of $7,338 in 2007 and $7,659 in 2006 (Note H) |
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44,117 |
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43,796 |
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Senior convertible notes, including unamortized premium of $5,153 in 2007 and
$5,519 in 2006 (Note H) |
|
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67,108 |
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68,030 |
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Other debt obligations (Note H) |
|
|
15,457 |
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|
25,096 |
|
Noncurrent compensation obligations |
|
|
7,426 |
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|
|
5,859 |
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Refund liabilities |
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|
1,772 |
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|
|
1,659 |
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Other long-term liabilities |
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|
5,602 |
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|
5,713 |
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Total liabilities |
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247,717 |
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|
271,951 |
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Mandatorily redeemable participating preferred stock (Note H) |
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8,916 |
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|
11,199 |
|
Shareholders equity (deficit) (Notes D and H): |
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Common stock, no par value; $.01 stated value per share. Authorized 50,000,000 shares;
issued 9,343,798 in 2007 and 8,398,770 in 2006 |
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93 |
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|
84 |
|
Additional paid-in capital |
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|
517,612 |
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|
|
513,920 |
|
Accumulated deficit |
|
|
(570,625 |
) |
|
|
(571,818 |
) |
Accumulated other comprehensive income |
|
|
2,173 |
|
|
|
2,041 |
|
Treasury stock, at cost; 576,453 shares in 2007 and 2006 |
|
|
(48,710 |
) |
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|
(48,710 |
) |
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|
|
|
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|
Total
shareholders equity (deficit) |
|
|
(99,457 |
) |
|
|
(104,483 |
) |
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|
Commitments and contingencies (Note I) |
|
$ |
157,176 |
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$ |
178,667 |
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See accompanying Notes to Condensed Consolidated Financial Statements.
2
PRG-SCHULTZ INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
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Three Months Ended |
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March 31, |
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2007 |
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2006 |
|
Cash flows from operating activities: |
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|
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|
|
|
|
|
Net earnings (loss) |
|
$ |
1,523 |
|
|
$ |
(10,294 |
) |
Earnings (loss) from discontinued operations |
|
|
(11 |
) |
|
|
49 |
|
|
|
|
|
|
|
|
Earnings (loss) from continuing operations |
|
|
1,534 |
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|
|
(10,343 |
) |
Adjustments to reconcile earnings (loss) from continuing
operations to net cash provided by (used in) operating activities: |
|
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|
|
|
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|
Loss on financial restructuring |
|
|
|
|
|
|
10,129 |
|
Depreciation and amortization |
|
|
2,211 |
|
|
|
2,856 |
|
Amortization of debt discount, premium and deferred loan costs |
|
|
492 |
|
|
|
245 |
|
Stock-based compensation costs |
|
|
2,734 |
|
|
|
367 |
|
(Gain) loss on sale of property, plant and equipment |
|
|
92 |
|
|
|
(6 |
) |
Deferred income taxes |
|
|
359 |
|
|
|
63 |
|
Changes in assets and liabilities: |
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|
|
|
|
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Restricted cash |
|
|
64 |
|
|
|
(334 |
) |
Billed receivables |
|
|
3,493 |
|
|
|
11,298 |
|
Unbilled receivables |
|
|
2,285 |
|
|
|
744 |
|
Prepaid expenses and other current assets |
|
|
201 |
|
|
|
(412 |
) |
Other assets |
|
|
7 |
|
|
|
2,136 |
|
Accounts payable and accrued expenses |
|
|
(5,132 |
) |
|
|
844 |
|
Accrued payroll and related expenses |
|
|
(11,363 |
) |
|
|
(9,202 |
) |
Refund liabilities |
|
|
208 |
|
|
|
(746 |
) |
Deferred revenue |
|
|
(338 |
) |
|
|
290 |
|
Noncurrent compensation obligations |
|
|
(372 |
) |
|
|
(398 |
) |
Other long-term liabilities |
|
|
(111 |
) |
|
|
(57 |
) |
|
|
|
|
|
|
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Net cash provided by (used in) operating activities |
|
|
(3,636 |
) |
|
|
7,474 |
|
|
|
|
|
|
|
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
Purchases of property and equipment, net of disposal proceeds |
|
|
(395 |
) |
|
|
(302 |
) |
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|
|
|
|
|
|
Net cash used in investing activities |
|
|
(395 |
) |
|
|
(302 |
) |
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|
|
|
|
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Cash flows from financing activities: |
|
|
|
|
|
|
|
|
Net borrowings (repayments) of debt |
|
|
(9,580 |
) |
|
|
8,200 |
|
Issuance costs of preferred stock |
|
|
|
|
|
|
(1,281 |
) |
Payments for deferred loan cost |
|
|
(203 |
) |
|
|
(7,750 |
) |
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities |
|
|
(9,783 |
) |
|
|
(831 |
) |
|
|
|
|
|
|
|
Cash flows from discontinued operations: |
|
|
|
|
|
|
|
|
Operating cash flows |
|
|
(11 |
) |
|
|
(430 |
) |
Investing cash flows |
|
|
|
|
|
|
485 |
|
|
|
|
|
|
|
|
Net cash provided by (used in) discontinued operations |
|
|
(11 |
) |
|
|
55 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rates on cash and cash equivalents |
|
|
171 |
|
|
|
21 |
|
|
|
|
|
|
|
|
Net change in cash and cash equivalents |
|
|
(13,654 |
) |
|
|
6,417 |
|
Cash and cash equivalents at beginning of period |
|
|
35,013 |
|
|
|
11,848 |
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period |
|
$ |
21,359 |
|
|
$ |
18,265 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information: |
|
|
|
|
|
|
|
|
Cash paid during the period for interest |
|
$ |
6,986 |
|
|
$ |
310 |
|
|
|
|
|
|
|
|
Cash paid during the period for income taxes, net of refunds |
|
$ |
318 |
|
|
$ |
386 |
|
|
|
|
|
|
|
|
See accompanying Notes to Condensed Consolidated Financial Statements.
3
PRG-SCHULTZ INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2007 and 2006
(Unaudited)
Note A Basis of Presentation
The accompanying Condensed Consolidated Financial Statements (Unaudited) of PRG-Schultz
International, Inc. and its wholly owned subsidiaries (the Company) have been prepared in
accordance with accounting principles generally accepted in the United States of America for
interim financial information and with the instructions for Form 10-Q and Article 10 of Regulation
S-X. Accordingly, they do not include all of the information and footnotes required by accounting
principles generally accepted in the United States of America for complete financial statements. In
the opinion of management, all adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation have been included. Operating results for the three-month period
ended March 31, 2007 are not necessarily indicative of the results that may be expected for the
year ending December 31, 2007.
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, 2006.
Certain reclassifications have been made to the 2006 amounts to conform to the presentation in
2007.
New Accounting Standards
In June 2006, the Financial Accounting Standards Board (FASB) issued Interpretation No. 48
Accounting for Uncertainty in Income Taxes an Interpretation of FASB Statement No. 109 (FIN
No. 48). The Interpretation prescribes a more-likely-than-not recognition threshold and
measurement attribute for the financial statement recognition and measurement of a tax position
taken or expected to be taken in a tax return. The Interpretation also offers guidance on
derecognition, classification, interest and penalties, accounting in interim periods, disclosure,
and transition. The Company adopted FIN No. 48 effective January 1, 2007. In accordance with FIN
No. 48, paragraph 19, the Companys policy for recording interest and penalties associated with tax
positions is to record such items as a component of income before taxes. As a result of the
implementation of FIN No. 48, the Company recognized a $0.3 million increase in liability for
unrecognized tax benefits, which was accounted for as an increase to the January 1, 2007 balance of
accumulated deficit.
In September 2006, the FASB issued Statement of Financial Accounting Standards (SFAS) No.
157, Fair Value Measurements (SFAS No. 157). SFAS No. 157 defines fair value, establishes a
framework for measuring fair value in accordance with accounting principles generally accepted in
the United States, and expands disclosures about fair value measurements. SFAS No. 157 is effective
for fiscal years beginning after November 15, 2007, with earlier application encouraged. Any
amounts recognized upon adoption as a cumulative effect adjustment will be recorded to the opening
balance of retained earnings (deficit) in the year of adoption. The Company is currently evaluating
the impact of adopting SFAS No. 157 on its consolidated financial statements.
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets
and Financial Liabilities Including an amendment of FASB Statement No. 115 (SFAS No. 159).
This standard permits an entity to choose to measure certain financial assets and liabilities at
fair value. SFAS No. 159 also revises provisions of SFAS No. 115 that apply to available-for-sale
and trading securities. This statement is effective for fiscal years beginning after November 15,
2007. The Company is currently evaluating the effect, if any, that the adoption of this
pronouncement will have on its consolidated financial statements.
4
PRG-SCHULTZ INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note B Discontinued Operations
The following table summarizes earnings and losses from discontinued operations for the three
month periods ended March 31, 2007 and 2006 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Three Months |
|
|
|
Ended |
|
|
|
March 31, |
|
|
|
2007 |
|
|
2006 |
|
Operating income (loss) from discontinued operations |
|
$ |
(11 |
) |
|
$ |
(436 |
) |
Gain (loss) on disposal of discontinued operations |
|
|
|
|
|
|
485 |
|
|
|
|
|
|
|
|
Earnings (loss) from discontinued operations |
|
$ |
(11 |
) |
|
$ |
49 |
|
|
|
|
|
|
|
|
During the fourth quarter of 2005, the Company classified its Channel Revenue and Airline
businesses, and the Accounts Payable Services business units in South Africa and Japan, as
discontinued operations. The Companys Condensed Consolidated Financial Statements 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 Channel Revenue. Channel Revenue 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 Channel Revenue. The Company
recognized a first quarter 2006 gain on disposal of approximately $0.3 million. The Airline
business unit was sold July 17, 2006. During the first quarter of 2006, the Company recognized a
loss of $0.1 million relating to the anticipated sale of the Airline business unit.
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 of the Logistics Management Services business in October 2001.
Operating income (loss) from discontinued operations during 2006 and 2007 relates to the
winding down of the operations of business units classified as discontinued in previous periods. No
additional business units were classified as discontinued during 2006 or the first quarter of 2007.
5
PRG-SCHULTZ INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note C Earnings (Loss) Per Common Share
The following tables set forth the computations of basic and diluted earnings (loss) per
common share for the three months ended March 31, 2007 and 2006 (in thousands, except per share
data):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
March 31, |
|
|
|
2007 |
|
|
2006 |
|
|
|
|
|
|
|
|
Basic earnings (loss) per common share: |
|
|
|
|
|
|
|
|
Numerator for earnings (loss) per common share calculations: |
|
|
|
|
|
|
|
|
Earnings (loss) from continuing operations before
discontinued operations |
|
$ |
1,534 |
|
|
$ |
(10,343 |
) |
Preferred dividends |
|
|
(158 |
) |
|
|
(49 |
) |
|
|
|
|
|
|
|
Earnings (loss) for
purposes of computing
basic earnings (loss)
per common share from
continuing operations |
|
|
1,376 |
|
|
|
(10,392 |
) |
Earnings (loss) from discontinued operations |
|
|
(11 |
) |
|
|
49 |
|
|
|
|
|
|
|
|
Earnings (loss) for
purposes of computing
basic net earnings
(loss) per common
share |
|
$ |
1,365 |
|
|
$ |
(10,343 |
) |
|
|
|
|
|
|
|
Denominator: |
|
|
|
|
|
|
|
|
Denominator for basic earnings (loss) per common
share weighted-average common shares outstanding
during the period |
|
|
8,373 |
|
|
|
6,211 |
|
|
|
|
|
|
|
|
Basic earnings (loss) per common share: |
|
|
|
|
|
|
|
|
Earnings (loss) from continuing operations before
discontinued operations |
|
$ |
0.16 |
|
|
$ |
(1.67 |
) |
Earnings (loss) from discontinued operations |
|
|
(0.00 |
) |
|
|
0.01 |
|
|
|
|
|
|
|
|
Net earnings (loss) |
|
$ |
0.16 |
|
|
$ |
(1.66 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
March 31, |
|
|
|
2007 |
|
|
2006 |
|
Diluted earnings (loss) per common share: |
|
|
|
|
|
|
|
|
Numerator for earnings (loss) per common share calculations: |
|
|
|
|
|
|
|
|
Earnings (loss) from continuing operations before discontinued operations |
|
$ |
1,534 |
|
|
$ |
(10,343 |
) |
Preferred dividends |
|
|
|
|
|
|
(49 |
) |
|
|
|
|
|
|
|
Earnings (loss) for purposes of
computing diluted earnings
(loss) per common share from
continuing operations |
|
|
1,534 |
|
|
|
(10,392 |
) |
Earnings (loss) from discontinued operations |
|
|
(11 |
) |
|
|
49 |
|
|
|
|
|
|
|
|
Earnings (loss) for purposes of
computing diluted net earnings
(loss) per common share |
|
$ |
1,523 |
|
|
$ |
(10,343 |
) |
|
|
|
|
|
|
|
Denominator: |
|
|
|
|
|
|
|
|
Denominator for basic earnings (loss) per common share weighted-average common shares
outstanding during the period |
|
|
8,373 |
|
|
|
6,211 |
|
Effect of dilutive securities: |
|
|
|
|
|
|
|
|
Incremental shares from stock-based compensation plans |
|
|
452 |
|
|
|
|
|
Incremental shares from conversion of convertible preferred stock |
|
|
3,339 |
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for diluted earnings (loss) per common share |
|
|
12,164 |
|
|
|
6,211 |
|
|
|
|
|
|
|
|
Diluted earnings (loss) per common share: |
|
|
|
|
|
|
|
|
Earnings (loss) from continuing operations before discontinued operations |
|
$ |
0.13 |
|
|
$ |
(1.67 |
) |
Earnings (loss) from discontinued operations |
|
|
(0.00 |
) |
|
|
0.01 |
|
|
|
|
|
|
|
|
Net earnings (loss) |
|
$ |
0.13 |
|
|
$ |
(1.66 |
) |
|
|
|
|
|
|
|
6
PRG-SCHULTZ INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the three months ended March 31, 2007, 9.6 million shares related to the senior
convertible notes were excluded from the calculation of diluted earnings (loss) per common share
due to their antidilutive effect. For the three months ended March 31, 2006, all shares related to
stock-based compensation plans and convertible securities were excluded from the calculation of
diluted earnings (loss) per common share due to their antidilutive effect.
Note D Stock-Based Compensation
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 (collectively, the
Plans). The Plans are described in the Companys Annual Report on Form 10-K for the fiscal year
ended December 31, 2006.
During the first quarter of 2007, one senior officer of the Company was granted 20,000
Performance Units under the 2006 Management Incentive Plan (the 2006 MIP). The award had a grant
date fair value of $0.3 million and vests ratably over four years. No other awards were granted
during the first quarter of 2007 under any of the Companys Plans and no options were exercised.
During the 2007 first quarter, Performance Units outstanding under the 2006 MIP increased by
97,183 as a result of anti-dilution adjustments which occur automatically pursuant to the terms of
the 2006 MIP as the Companys convertible securities are converted into common stock. As of March
31, 2007, a total of 921,558 Performance Units were outstanding, 601,804 of which were vested.
Selling, general and administrative expenses for the three months ended March 31, 2007 and
2006 include $2.7 million and $0.4 million, respectively, related to stock-based compensation
charges. At March 31, 2007, there was $4.2 million of unrecognized stock-based compensation expense
related to stock options and 2006 MIP Performance Unit awards which is expected to be recognized
over a weighted average period of 1.41 years.
Note E - Operating Segments and Related Information
The Company has two reportable operating segments, Accounts Payable Services and Meridian.
Accounts Payable Services
The Accounts Payable Services segment principally 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 and other services provided to various other
types of business entities and governmental agencies. The Accounts Payable Services segment
conducts business in North America, South America, Europe, Australia and Asia.
Meridian
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
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.
7
PRG-SCHULTZ INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Management evaluates the performance of its operating segments based upon revenues and
measures of profit or loss it refers to as EBITDA and Adjusted EBITDA. Adjusted EBITDA is earnings
from continuing operations before interest, taxes, depreciation and amortization (EBITDA)
adjusted for restructuring charges associated with the Companys operational restructuring plan,
stock-based compensation, intangible asset impairment charges and severance charges viewed by
management as individually or collectively significant. The Company does not have any inter-segment
revenues. Segment information for continuing operations for the three months ended March 31, 2007
and 2006 follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts |
|
|
|
|
|
|
|
|
|
|
|
|
|
Payable |
|
|
|
|
|
|
Corporate |
|
|
|
|
|
|
Services |
|
|
Meridian |
|
|
Support |
|
|
Total |
|
Quarter Ended March 31, 2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
57,030 |
|
|
$ |
9,878 |
|
|
$ |
¾ |
|
|
$ |
66,908 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA |
|
$ |
15,373 |
|
|
$ |
797 |
|
|
$ |
(7,255 |
) |
|
$ |
8,915 |
|
Stock-based compensation |
|
|
¾ |
|
|
|
¾ |
|
|
|
2,734 |
|
|
|
2,734 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA |
|
$ |
15,373 |
|
|
$ |
797 |
|
|
$ |
(4,521 |
) |
|
$ |
11,649 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended March 31, 2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
55,715 |
|
|
$ |
9,823 |
|
|
$ |
¾ |
|
|
$ |
65,538 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA |
|
$ |
9,563 |
|
|
$ |
1,707 |
|
|
$ |
(5,435 |
) |
|
$ |
5,835 |
|
Severance and restructuring expenses |
|
|
(123 |
) |
|
|
¾ |
|
|
|
531 |
|
|
|
408 |
|
Stock-based compensation |
|
|
¾ |
|
|
|
¾ |
|
|
|
367 |
|
|
|
367 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA |
|
$ |
9,440 |
|
|
$ |
1,707 |
|
|
$ |
(4,537 |
) |
|
$ |
6,610 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table reconciles earnings (loss) from continuing operations before discontinued
operations to EBITDA and Adjusted EBITDA for each of the three month periods ended March 31, 2007
and 2006 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Three Months |
|
|
|
Ended |
|
|
|
March 31, |
|
|
|
2007 |
|
|
2006 |
|
Earnings (loss) from continuing operations
before discontinued operations |
|
$ |
1,534 |
|
|
$ |
(10,343 |
) |
|
|
|
|
|
|
|
|
|
Income taxes |
|
|
1,055 |
|
|
|
650 |
|
Interest, net |
|
|
4,115 |
|
|
|
2,543 |
|
Loss on financial restructuring |
|
|
¾ |
|
|
|
10,129 |
|
Depreciation and amortization |
|
|
2,211 |
|
|
|
2,856 |
|
|
|
|
|
|
|
|
EBITDA |
|
|
8,915 |
|
|
|
5,835 |
|
|
|
|
|
|
|
|
|
|
Severance and restructuring charges |
|
|
¾ |
|
|
|
408 |
|
Stock-based compensation |
|
|
2,734 |
|
|
|
367 |
|
|
|
|
|
|
|
|
Adjusted EBITDA |
|
$ |
11,649 |
|
|
$ |
6,610 |
|
|
|
|
|
|
|
|
The composition and presentation of segment information as presented above differs from the
composition and presentation of such information as previously reported. Segment information for
the three months ended March 31, 2006 has been reclassified to conform to the 2007 presentation.
Note F Comprehensive Income
The Company applies the provisions of SFAS No. 130, Reporting Comprehensive Income. This Statement
establishes items that are required to be recognized under accounting standards as components of
comprehensive income. SFAS No. 130 requires, among other things, that an enterprise report a total
for comprehensive income in
8
PRG-SCHULTZ INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
condensed financial statements of interim periods issued to shareholders. For the three-month
periods ended March 31, 2007 and 2006, the Companys consolidated comprehensive income (loss) was
$1.7 million and $(10.4) million, respectively. The difference between consolidated comprehensive
income (loss), as disclosed here, and traditionally determined consolidated net earnings, as set
forth on the accompanying Condensed Consolidated Statements of Operations (Unaudited), results from
foreign currency translation adjustments.
Note G - Cash Equivalents
Cash and cash equivalents include all cash balances and highly liquid investments with an
initial maturity of three months or less. The Company places its temporary cash investments with
high credit quality financial institutions. At times, certain investments may be in excess of the
Federal Deposit Insurance Corporation insurance limit.
At March 31, 2007 and December 31, 2006, the Company had cash and cash equivalents of $21.4
million and $35.0 million, respectively, of which cash equivalents represent approximately $12.2
million and $22.2 million, respectively. The Company had $10.9 million and $20.5 million in cash
equivalents at U.S. banks at March 31, 2007 and December 31, 2006, respectively. At March 31, 2007
and December 31, 2006, certain of the Companys international subsidiaries held $1.3 million and
$1.7 million, respectively, in temporary investments, the majority of which were at banks in Latin
America and the United Kingdom.
Note H - Financial Restructuring
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 Subordinated 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.
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. 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
was capitalized and is being 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 is being 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 is being
amortized on the interest method over the term of the notes.
As a part of its financial restructuring in March 2006, the Company entered into a new senior
secured credit facility with Ableco LLC (Ableco) and The CIT/Group/Business Credit, Inc. The new
credit facility included (1) a $25.0 million term loan, and (2) a revolving credit facility that
provides for revolving loan borrowings of up to $20.0 million. The Company incurred $2.6 million of
costs in connection with entering into the new senior secured credit facility. Such amount was
capitalized and is being amortized over the term of the indebtedness.
During the first quarter of 2007, 19,249 shares of Series A preferred stock and $0.6 million
in principal amount of senior convertible notes were converted into 945,028 shares of common stock.
Also during the first quarter of 2007, the Company repaid $9.6 million of the term loan. No
borrowings are currently outstanding under the revolving credit facility. As of March 31, 2007, the
revolving credit facility had approximately $16.3 million of calculated availability.
9
PRG-SCHULTZ INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note I - Commitments and Contingencies
Legal Proceedings
On April 1, 2003, Fleming Companies, one of the Companys larger U.S. Accounts Payable
Services clients at the time, filed for Chapter 11 bankruptcy reorganization. During the quarter
ended March 31, 2003, the Company received approximately $5.6 million in payments on account from
Fleming. On January 24, 2005, the Company received a demand from the Fleming Post Confirmation
Trust (PCT), a trust which was created pursuant to Flemings Chapter 11 reorganization plan to
represent the client, for preference payments received by the Company. The demand stated that the
PCTs calculation of the preferential payments was approximately $2.9 million. The Company
disputed the claim. Later in 2005, the PCT filed suit against the Company seeking to recover
approximately $5.6 million in payments that were made to the Company by Fleming during the 90 days
preceding Flemings bankruptcy filing, and that are alleged to be avoidable either as preferences
or fraudulent transfers under the Bankruptcy Code. The Company believes that it has valid defenses
to certain of the PCTs claims in the proceeding. In December 2005, the PCT offered to settle the
case for $2 million. The Company countered with an offer to waive its bankruptcy claim and to pay
the PCT $250,000. The PCT rejected the Companys settlement offer, and although the parties have
agreed to settlement mediation, the litigation is ongoing.
In the normal course of business, the Company is involved in and subject to other claims,
contractual disputes and other uncertainties. Management, after reviewing with legal counsel all of
these actions and proceedings, believes that the aggregate losses, if any, will not have a material
adverse effect on the Companys financial position or results of operations.
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 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 revenues from TVR for processing TVRs VAT refunds, and the associated
profits therefrom, ceased in October 2004. 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 $2.2 million at March 31, 2007 exchange rates. This investment is included in other assets
in the accompanying Condensed Consolidated Balance Sheets.
10
PRG-SCHULTZ INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Industrial Development Authority Grants
During the period of May 1993 through April 1999, Meridian received grants from the Industrial
Development Authority of Ireland (IDA) in the sum of 1.4 million Euros ($1.9 million at March 31,
2007 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 fell below 145, then the grants would have been repayable in full. This contingency
expired on April 29, 2007.
Retirement Obligations
The July 31, 2005 retirements of the Companys former Chairman, President and CEO, John M.
Cook, and the Companys former Vice Chairman, John M. Toma, resulted in an obligation to pay
retirement benefits of approximately $7.0 million to be paid in monthly cash installments
principally over a three-year period, beginning February 1, 2006. On March 16, 2006, the terms of
the applicable severance agreements were amended in conjunction with the Companys financial
restructuring. Pursuant to the terms of the severance agreements, as amended (1) the Companys
obligations to pay monthly cash installments to Mr. Cook and Mr. Toma were extended from 36 months
to 58 months and from 24 months to 46 months, respectively; however, the total dollar amount of
monthly cash payments to be made to each remained unchanged, and (2) the Company agreed to pay a
fixed sum of $150,000 to CT Investments, LLC, to defray the fees and expenses of the legal counsel
and financial advisors to Messrs. Cook and Toma. The original severance agreements, and the
severance agreements, as amended, also provide for an annual reimbursement, beginning on or about
February 1, 2007, to Mr. Cook and Mr. Toma for the cost of health insurance for themselves and
their respective spouses (not to exceed $25,000 and $20,000, respectively, subject to adjustment
based on changes in the Consumer Price Index), continuing until each reaches the age of 80. At
March 31, 2007, accrued payroll and related expenses and noncurrent compensation obligations
include $1.6 million and $4.0 million, respectively, related to these obligations.
Operational Restructuring Obligations
On August 19, 2005, the Company announced that it had taken the initial step in implementing
an operational restructuring plan, necessitated by the Companys declining revenue trend over the
previous two and one-half years. On September 30, 2005, the Companys Board of Directors approved
the restructuring plan and authorized implementation of the plan. The operational restructuring
plan encompassed exit activities, including reducing the number of clients served, reducing the
number of countries in which the Company operates, reducing headcount, and terminating operating
leases. Almost all of the savings were realized in the area of selling, general and administrative
expenses and only a small percentage of the Companys auditor staff was directly impacted by the
reductions.
The Company recognized $0.4 million in operational restructuring expense for the three months
ended March 31, 2006. As of December 31, 2006, the operational restructuring plan as originally
contemplated and approved in 2005 had essentially been completed. Management plans to continue to
diligently manage costs on an ongoing basis. As of March 31, 2007, accrued payroll and related
expenses included $3.5 million for severance and other costs related to the Companys expense
reduction initiatives. Accounts payable and accrued expenses and other long-term liabilities at
March 31, 2007 include $0.5 million and $2.2 million, respectively, related to operating leases
terminated or exited as part of the original restructuring plan.
11
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 overpayment claims identified. Clients generally
recover claims by either taking credits against outstanding payables or future purchases from the
involved vendors, or receiving refund checks directly from those vendors. The manner in which a
claim is recovered by a client is often dictated by industry practice. In addition, many clients
establish client-specific procedural guidelines that the Company must satisfy prior to submitting
claims for client approval. For some services provided by the Company, client contracts provide for
compensation to the Company in the form of a flat fee, or fee rate per hour, or per unit of usage
for the rendering of that service.
The Company generally recognizes revenue on the accrual basis except with respect to its
Meridian VAT reclaim business 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 when invoiced. Invoicing typically occurs 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 VAT claims and transferred to
Meridians clients.
The Company derives a relatively small 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 sub-contracted with Concentra Preferred Systems (Concentra), the
nations largest provider of specialized cost containment services for the healthcare industry, to
add Concentras clinical experience to the Companys expertise in recovery audit services.
The CMS 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 2007 as the Company continues to build this
business. Management remains optimistic that the audit of 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.
12
In late 2006, legislation was passed that mandated that recovery audit of Medicare be extended
beyond March 27, 2008, the end of the three-year recovery audit demonstration project under the
original authorizing legislation, and that CMS enter into additional contracts with recovery audit
contractors to expand recovery auditing of Medicare out to all fifty states by January 1, 2010.
While it is difficult to assess the impact of this legislation, management believes it will provide
additional opportunities to expand the Companys Medicare audit recovery business, and the Company
is working to strengthen its Medicare auditing capabilities in preparation for these opportunities.
Critical Accounting Policies
The Companys significant accounting policies have been fully described in Note 1 of Notes to
Consolidated Financial Statements of the Companys Annual Report on Form 10-K for the year ended
December 31, 2006. 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, 2006. 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.
New Accounting Standards
In June 2006, the Financial Accounting Standards Board (FASB) issued Interpretation No. 48
Accounting for Uncertainty in Income Taxes an Interpretation of FASB Statement No. 109 (FIN
No. 48). The Interpretation prescribes a more-likely-than-not recognition threshold and
measurement attribute for the financial statement recognition and measurement of a tax position
taken or expected to be taken in a tax return. The Interpretation also offers guidance on
derecognition, classification, interest and penalties, accounting in interim periods, disclosure,
and transition. The Company adopted FIN 48 effective January 1, 2007. In accordance with FIN 48,
paragraph 19, the Companys policy for recording interest and penalties associated with tax
positions is to record such items as a component of income before taxes. As a result of the
implementation of FIN 48, the Company recognized a $0.3 million increase in liability for
unrecognized tax benefits, which was accounted for as an increase to the January 1, 2007 balance of
accumulated deficit.
In September 2006, the FASB issued Statement of Financial Accounting Standards (SFAS) No.
157, Fair Value Measurements (SFAS No. 157). SFAS No. 157 defines fair value, establishes a
framework for measuring fair value in accordance with accounting principles generally accepted in
the United States, and expands disclosures about fair value measurements. SFAS No. 157 is effective
for fiscal years beginning after November 15, 2007, with earlier application encouraged. Any
amounts recognized upon adoption as a cumulative effect adjustment will be recorded to the opening
balance of retained earnings (deficit) in the year of adoption. The Company is currently evaluating
the impact of adopting SFAS No. 157 on its consolidated financial statements.
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets
and Financial Liabilities Including an amendment of FASB Statement No. 115 (SFAS No. 159).
This standard permits an entity to choose to measure certain financial assets and liabilities at
fair value. SFAS No. 159 also revises provisions of SFAS No. 115 that apply to available-for-sale
and trading securities. This statement is effective for fiscal years beginning after November 15,
2007. The Company is currently evaluating the effect, if any, that the adoption of this
pronouncement will have on its consolidated financial statements.
13
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 Ended |
|
|
|
March 31, |
|
|
|
2007 |
|
|
2006 |
|
Revenues |
|
|
100.0 |
% |
|
|
100.0 |
% |
Cost of revenues |
|
|
68.0 |
|
|
|
72.1 |
|
|
|
|
|
|
|
|
Gross margin |
|
|
32.0 |
|
|
|
27.9 |
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative expenses |
|
|
22.0 |
|
|
|
22.7 |
|
Operational restructuring expenses |
|
|
|
|
|
|
0.6 |
|
|
|
|
|
|
|
|
Operating income (loss) |
|
|
10.0 |
|
|
|
4.6 |
|
|
|
|
|
|
|
|
|
|
Interest expense, net |
|
|
(6.1 |
) |
|
|
(3.9 |
) |
Loss on financial
restructuring |
|
|
|
|
|
|
(15.5 |
) |
|
|
|
|
|
|
|
Earnings (loss) from continuing
operations before income taxes and
discontinued operations |
|
|
3.9 |
|
|
|
(14.8 |
) |
Income taxes |
|
|
1.6 |
|
|
|
1.0 |
|
|
|
|
|
|
|
|
Earnings (loss) from continuing
operations before discontinued
operations |
|
|
2.3 |
|
|
|
(15.8 |
) |
Earnings (loss) from discontinued
operations |
|
|
0.0 |
|
|
|
0.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings (loss) |
|
|
2.3 |
% |
|
|
(15.7 |
)% |
|
|
|
|
|
|
|
The Company has two reportable operating segments, the Accounts Payable Services segment and
Meridian VAT Reclaim.
Quarter Ended March 31, 2007 Compared to the Quarter Ended March 31, 2006
Accounts Payable Services
Revenues. Accounts Payable Services revenues for the three months ended March 31, 2007 and
2006 were as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
2007 |
|
|
2006 |
|
Domestic Accounts Payable Services revenue |
|
$ |
37.0 |
|
|
$ |
34.7 |
|
International Accounts Payable Services revenue |
|
|
20.0 |
|
|
|
21.0 |
|
|
|
|
|
|
|
|
Total Accounts Payable Services revenue |
|
$ |
57.0 |
|
|
$ |
55.7 |
|
|
|
|
|
|
|
|
For the quarter ended March 31, 2007 compared to the quarter ended March 31, 2006, total
Accounts Payable Services revenues increased approximately 2.3%. Although the Company experienced
this slight increase in first quarter 2007 revenues compared to the same period last year, the
Company has experienced a trend of declining revenues in Accounts Payable Services for the past
several years. Improvements by clients in their own internal processes and internal audit
capabilities have contributed to the Companys recent historical trend of declining Accounts
Payable Services revenues. The Company believes that the declining revenue trend in its core
retail/wholesale accounts payable services is likely to continue for the foreseeable future, and as
a result, the overall trend in revenues from the Accounts Payable Services as a whole is largely
dependent on the Companys ability to generate additional revenues from its Medicare audit
activities and its new services offerings.
The Company intends to maximize the revenue opportunities with each of its existing clients by
identifying and auditing new categories of potential errors. The Company also intends to increase
its emphasis on using its technology and professional experience to assist its clients in achieving
objectives that do not directly involve recovery of past overpayments. These objectives are
related to such things as transaction accuracy and compliance, purchasing effectiveness, M&A due
diligence analysis, and processing efficiency in the procure-to-pay value chain.
14
In addition the Company will continue to focus on its business within the Health Care industry
and in particular with the Medicare Audit. As discussed above, in late 2006, legislation was passed
that mandated that recovery audit of Medicare be extended beyond March 27, 2008, the end of the
three-year recovery audit demonstration project under the original authorizing legislation, and
that CMS enter into additional contracts with recovery audit contractors to expand recovery
auditing of Medicare out to all fifty states by January 1, 2010. While it is difficult to assess
the impact of this legislation, management believes it will provide additional opportunities to
expand the Companys Medicare audit recovery business, and the Company is working to strengthen its
Medicare auditing capabilities in preparation for these opportunities.
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 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 ended March 31, 2007 and 2006 were as
follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
2007 |
|
|
2006 |
|
Domestic Accounts Payable Services COR |
|
$ |
21.8 |
|
|
$ |
23.6 |
|
International Accounts Payable Services COR |
|
|
15.5 |
|
|
|
16.3 |
|
|
|
|
|
|
|
|
Total Accounts Payable Services COR |
|
$ |
37.3 |
|
|
$ |
39.9 |
|
|
|
|
|
|
|
|
On a percentage basis, COR as a percentage of revenues from the Accounts Payable services
decreased to 65.4% for the three months ended March 31, 2007 compared to 71.6% in 2006. The
improvement is primarily related to the fact that the 2007 first quarter is the first quarter that
reflects the full implementation of the 2005 operational restructuring plan that was still being
implemented during the first half of 2006. In addition, the improvement also reflects the initial
impact from the 2006 fourth quarter headcount reductions that were primarily targeted at reducing
COR expenses.
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. Due to the relatively fixed
nature of the Companys SG&A expenses, these expenses as a percentage of revenues can vary markedly
period to period based on fluctuations in revenues.
15
Accounts Payable Services SG&A for the three months ended March 31, 2007 and 2006 were as
follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
2007 |
|
|
2006 |
|
Domestic Accounts Payable Services SG&A |
|
$ |
3.6 |
|
|
$ |
5.8 |
|
International Accounts Payable Services SG&A |
|
|
2.7 |
|
|
|
3.3 |
|
|
|
|
|
|
|
|
Total Accounts Payable Services SG&A |
|
$ |
6.3 |
|
|
$ |
9.1 |
|
|
|
|
|
|
|
|
SG&A expenses decreased by $2.8 million or 30.8% for the Companys Accounts Payable Services
operations, when compared to the same period of 2006. This reduction was primarily related to the
fact that the 2007 first quarter is the first quarter that reflects the full implementation of the
Companys 2005 operational restructuring plan that was still being implemented during the first
half of 2006. As a percentage of revenue, first quarter 2007 SG&A was 11.1% as compared to 16.3%
in the first quarter of 2006.
Meridian
Meridians operating income for the three months ended March 31, 2007 and 2006 were as follows
(in millions):
|
|
|
|
|
|
|
|
|
|
|
2007 |
|
|
2006 |
|
Revenues |
|
$ |
9.9 |
|
|
$ |
9.8 |
|
Cost of revenues |
|
|
8.2 |
|
|
|
7.4 |
|
Selling, general and administrative expenses |
|
|
1.1 |
|
|
|
0.9 |
|
|
|
|
|
|
|
|
Operating income |
|
$ |
0.6 |
|
|
$ |
1.5 |
|
|
|
|
|
|
|
|
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 $0.1 million for the three months ended March 31,
2007 when compared to the same period of 2006 due to a combination of timing of cash receipts and
the exchange rate impact relating to the strengthening of the Euro to the US dollar. In addition to
its contingency fee based VAT reclaim services, Meridian offers a number of other business
services such as services on a 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) services. The revenues from these services totaled $ 1.4 million for
the quarter ended March 31, 2007 as compared to $ 1.0 million for the quarter ended March 31, 2006.
COR. COR 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.
COR for the quarter ended March 31, 2007 was $8.2 million as compared to $7.4 million for the
same period in the prior year. The increase was primarily due to the exchange rate impact of the
strengthening of the Euro to the US dollar.
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.
Meridians SG&A for the quarter ended March 31, 2007 compared to the quarter ended March 31,
2006 increased by $0.2 million. This increase was primarily due to the exchange rate impact of the
strengthening of the Euro to the US dollar.
16
Corporate Support
SG&A. 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. Due to the relatively fixed nature of the
Companys Corporate Support SG&A expenses, these expenses as a percentage of revenues can vary
markedly period to period based on fluctuations in revenues. Corporate support represents the
unallocated portion of corporate SG&A expenses not specifically attributable to Accounts Payable
Services or Meridian and totaled the following for the three months ended March 31, 2007 and 2006
(in millions):
|
|
|
|
|
|
|
|
|
|
|
2007 |
|
|
2006 |
|
Selling, general and administrative expenses |
|
$ |
7.3 |
|
|
$ |
4.9 |
|
|
|
|
|
|
|
|
Corporate Support SG&A expenses increased by $2.4 million or 49.0% for the Corporate
Support operations, when compared to the same period of 2006. This increase was primarily related
to approximately $2.7 million of SFAS No. 123R compensation expense that was recorded in the first
quarter of 2007 as compared to approximately $0.4 million during the first quarter of 2006.
Excluding the impact of SFAS No. 123R compensation expense, the Corporate Support expenses for the
quarter are basically flat year over year.
Operational Restructuring Expense
On August 19, 2005, the Company announced that it had taken the initial step in
implementing an operational restructuring plan, necessitated by the Companys declining revenue
trend over the previous two and one-half years. On September 30, 2005, the Companys Board of
Directors approved the restructuring plan and authorized implementation of the plan. The
operational restructuring plan encompassed exit activities, including reducing the number of
clients served, reducing the number of countries in which the Company operates, reducing headcount,
and terminating operating leases. Almost all of the savings were realized in the area of selling,
general and administrative expenses and only a small percentage of the Companys auditor staff was
directly impacted by the reductions.
The restructuring expense for the periods ending March 31, 2007 and 2006 was as follows (in
millions):
|
|
|
|
|
|
|
|
|
|
|
2007 |
|
|
2006 |
|
Restructuring expense |
|
$ |
0.0 |
|
|
$ |
0.4 |
|
|
|
|
|
|
|
|
As of December 31, 2006, the operational restructuring plan as originally contemplated and
approved in 2005 had essentially been completed. Management plans to continue to diligently manage
costs on an ongoing basis.
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 then existing convertible subordinated notes, and to improve the Companys liquidity. The
restructuring was successfully completed on March 17, 2006.
Pursuant to the restructuring, the Company exchanged for $124.1 million of its existing
convertible subordinated notes due November 2006 (and $1.8 million of accrued interest thereon) the
following new securities: $51.5 million of new senior notes, $59.6 million of new senior
convertible notes that may be converted into shares of common stock, and new Series A convertible
preferred stock having an initial liquidation preference of $14.9 million. As of March 31, 2007,
the outstanding Series A convertible preferred stock had a liquidation preference of $8.9 million.
Concurrently with closing the exchange offer, the Company also refinanced its senior indebtedness.
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 was 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
17
noteholders of the Companys convertible subordinated notes due November 2006, with the right to designate one
member of the Companys Board of Directors, and together with its affiliates, is the Companys
largest shareholder. The new credit facility included (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.
During the first quarter of 2007, 19,249 shares of Series A preferred stock and $0.6 million
in principal amount of senior convertible notes were converted into 945,028 shares of common stock.
Also during the first quarter of 2007, the Company repaid $9.6 million of the term loan. No
borrowings are currently outstanding under the revolving credit facility. As of March 31, 2007, the
revolving credit facility had approximately $16.3 million of calculated availability.
Discontinued Operations
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 Condensed Consolidated Financial Statements 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 Channel Revenue. Channel Revenue 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 Channel Revenue. The Company
recognized a first quarter 2006 gain on disposal of approximately $0.3 million. The Airline
business unit was sold July 17, 2006. During the first quarter of 2006, the Company recognized a
loss of $0.1 million relating to the anticipated sale of the Airline business unit.
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 of the Logistics Management Services business in October 2001.
Operating income (loss) from discontinued operations during 2006 and 2007 relates to the
winding down of the operations of business units classified as discontinued in previous periods. No
additional business units were classified as discontinued during 2006 or the first quarter of 2007.
Other Items
Interest Expense. Net interest expense was $4.1 million and $2.5 million for the three
months ended March 31, 2007 and 2006, respectively. The increase in interest expense results from
the Companys March 2006 financial restructuring described above. Net interest expense in future
periods is expected to decrease slightly as a result the $9.6 million pay down of the term loan
during the first quarter of 2007.
Income Tax Expense (Benefit). The Companys effective income tax expense (benefit) rates as
indicated in the accompanying Condensed Consolidated Financial Statements do not reflect amounts
that would normally be expected because of the Companys valuation allowance against its deferred
tax assets. Reported income tax expense for the three month periods ended March 31, 2007 and 2006
primarily results from taxes on income of foreign subsidiaries.
In June 2006, the Financial Accounting Standards Board (FASB) issued Interpretation No. 48
Accounting for Uncertainty in Income Taxes an Interpretation of FASB Statement No. 109 (FIN
No. 48). The Interpretation prescribes a more-likely-than-not recognition threshold and
measurement attribute for the financial statement recognition and measurement of a tax position
taken or expected to be taken in a tax return. The Interpretation also offers guidance on
derecognition, classification, interest and penalties, accounting in interim periods, disclosure,
and transition. The Company adopted FIN 48 effective January 1, 2007. In accordance with FIN 48,
paragraph 19, the Companys policy for recording interest and penalties associated with tax
positions is to record such items as a
18
component of income before taxes. As a result of the
implementation of FIN 48, the Company recognized a $0.3 million increase in liability for
unrecognized tax benefits, which was accounted for as an increase to the January 1, 2007 balance of
accumulated deficit.
Liquidity and Capital Resources
As of March 31, 2007, the Company had cash and cash equivalents of $21.4 million, and no
borrowings under the revolver portion of its senior credit facility. As of March 31, 2007, the
revolver had approximately $16.3 million of calculated availability. This compares to
approximately $35 million of cash and cash equivalents as of December 31, 2006. The decrease in
cash and cash equivalents resulted primarily from three factors. During the first quarter of 2007,
the Company paid down its term loan by $9.6 million, reducing the principal amount from $25.0
million to $15.4 million. The $9.6 million reduction consisted of two mandatory payments, the
first being based on an adjusted EBITDA calculation of the Companys consolidated excess cash flow,
as defined in the loan agreement, totaling approximately $9.3
million, and the second payment being a quarterly principal payment of $250 thousand required
under the terms of the loan. During the first quarter of 2007, the Company also made interest
payments on the senior notes and senior convertible notes totaling $5.9 million and paid annual
management bonuses related to 2006 of approximately $7.8 million.
Net cash used in investing activities for the quarter ended March 31, 2007 was $0.4 million
compared to $0.3 million for the quarter ended March 31, 2006. Cash used in investing activities
was attributable to capital expenditures net of proceeds from sales.
Net cash used in financing activities for the quarter ended March 31, 2007 was $9.8 million
compared to $0.8 million for the quarter ended March 31, 2006. As mentioned above, $9.6 million of
the net cash used in financing activities during the quarter ended March 31, 2007 was related to
paying down the principal amount of the term loan. The cash usage of $0.8 million for the quarter
ended March 31, 2006 was primarily related to the previously discussed financial restructuring.
Management believes that the Company will have sufficient borrowing capacity and cash
generated from operations to fund its capital and operational needs for at least the next twelve
months; however, current projections reflect that the Companys core Accounts Payable Services
business will continue to decline. Therefore, the Company must continue to successfully manage its
expenses and grow its other business lines in order to stabilize and increase revenues and improve
profitability.
Off Balance Sheet Arrangements
As of March 31, 2007, the Company did not have any material off-balance sheet arrangements, as
defined in Item 303(a)(4)(ii) of the SECs Regulation S-K.
Executive Severance Payments
The July 31, 2005 retirements of the Companys former Chairman, President and CEO, John M.
Cook, and the Companys former Vice Chairman, John M. Toma, resulted in an obligation to pay
retirement benefits of $7.0 million to be paid in monthly cash installments principally over a
three-year period, beginning February 1, 2006. On March 16, 2006, the terms of the applicable
severance agreements were amended in conjunction with the Companys financial restructuring.
Pursuant to the terms of the severance agreements, as amended (1) the Companys obligations to pay
monthly cash installments to Mr. Cook and Mr. Toma have been extended from 36 months to 58 months
and from 24 months to 46 months, respectively; however, the total dollar amount of monthly cash
payments to be made to each remains unchanged, and (2) the Company agreed to pay a fixed sum of
$150,000 to CT Investments, LLC, to defray the fees and expenses of the legal counsel and financial
advisors to Messrs. Cook and Toma. The original severance agreements, and the severance
agreements, as amended, also provide for an annual reimbursement, beginning on or about February 1,
2007, to Mr. Cook and Mr. Toma for the cost of health insurance for themselves and their respective
spouses (not to exceed $25,000 and $20,000, respectively, subject to adjustment based on changes in
the Consumer Price Index), continuing until each reaches the age of 80. At March
19
31, 2007, the
Companys accrued payroll and related expenses and noncurrent compensation obligations include $1.6
million and $4.0 million, respectively, related to these obligations.
Bankruptcy Litigation
On April 1, 2003, Fleming Companies, one of the Companys larger U.S. Accounts Payable
Services clients at the time filed for Chapter 11 bankruptcy reorganization. During the quarter
ended March 31, 2003, the Company received approximately $5.6 million in payments on account
from Fleming. On January 24, 2005, the Company received a demand from the Fleming Post
Confirmation Trust (PCT), a trust which was created pursuant to Flemings Chapter 11
reorganization plan to represent the client, for preference payments received by the Company. The
demand stated that the PCTs calculation of the preferential payments was approximately $2.9
million. The Company disputed the claim. Later in 2005, the PCT filed suit against the Company
seeking to recover approximately $5.6 million in payments that were made to the Company by Fleming
during the 90 days preceding Flemings bankruptcy filing, and that are alleged to be avoidable
either as preferences or fraudulent transfers under the Bankruptcy Code. The Company believes that
it has valid defenses to certain of the PCTs claims in the proceeding. In December 2005, the PCT
offered to settle the case for $2 million. The Company countered with an offer to waive its
bankruptcy claim and to pay the PCT $250,000. The PCT rejected the Companys settlement offer, and
although the parties have agreed to settlement mediation, the litigation is ongoing.
Contingent Obligation to Repay Industrial Development Authority of Ireland Grant
During the period of May 1993 through April 1999, Meridian received grants from the Industrial
Development Authority of Ireland (IDA) in the sum of 1.4 million Euros ($1.9 million at March 31,
2007 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 fell below 145, then the grants would have been repayable in full. This contingency
expired on April 29, 2007.
Limitation on Tax Loss and Credit Carryforwards
On March 17, 2006, as a result of the financial restructuring, the company experienced an
ownership change as defined under Section 382 of the Internal Revenue Code (IRC). This ownership
change resulted in an annual IRC Section 382 limitation that mathematically limits the use of
certain tax attribute carryforwards. Of the $34.1 million of U.S. federal net loss carryforwards
available to the company at year end 2006, $27.1 million of the loss carryforwards are subject to
an annual usage limitation of $1.4 million. The ownership change that took place in March 2006,
resulted in the write-off of approximately $72.6 million in previously incurred and unexpired
federal net operating loss carryforward amounts and the write-off of approximately $7.4 million in
future tax deductions related to certain built-in losses associated with intangible and fixed
assets. The following write-offs also took place in 2006 as a result of the ownership change: $34.1
million in unexpired capital loss carryforwards, $14.3 million in unexpired foreign tax credit
carryforwards, and $0.2 million in unexpired R&D credit carryforward amounts. Approximately $191.9
million of previously incurred and unexpired state net operating losses were also written off as a
result of this ownership change. The write-off of the tax attributes noted above resulted in a
$62.8 million reduction in the Companys deferred tax assets which was offset by a corresponding
reduction in the previously established valuation allowance against these assets.
Forward Looking Statements
Some of the information in this Form 10-Q contains forward-looking statements which look
forward in time and involve substantial risks and uncertainties including, without limitation, (1)
statements that contain projections of the Companys future results of operations or of the
Companys financial condition, (2) statements regarding the adequacy of the Companys current
working capital and other available sources of funds, (3) statements regarding goals and plans for
the future, (4) statements regarding the potential impact and outcome of the Companys exploration
of strategic alternatives, (5), expectations regarding future accounts payable and Meridian revenue
trends, (6) statements regarding the impact of potential regulatory changes. All statements that
cannot be assessed until the occurrence of a future event or events should be considered
forward-looking. These statements are forward-looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995 and can be identified by the use of forward-looking words
such as may, will, expect, anticipate, believe, estimate and
20
continue or similar
words. Risks and uncertainties that may potentially impact these forward-looking statements
include, without limitation, those set forth under Part I, Item 1A Risk Factors in the Companys
Annual Report on Form 10-K for the year ended December 31, 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.
21
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Foreign Currency Market Risk. Our functional currency is the U.S. dollar although we transact
business in various foreign locations and currencies. As a result, our financial results could be
significantly affected by factors such as changes in foreign currency exchange rates, or weak
economic conditions in the foreign markets in which we provide services. Our operating results are
exposed to changes in exchange rates between the U.S. dollar and the currencies of the other
countries in which we operate. When the U.S. dollar strengthens against other currencies, the value
of nonfunctional currency revenues decreases. When the U.S. dollar weakens, the functional currency
amount of revenues increases. Overall, we are a net receiver of currencies other than the U.S.
dollar and, as such, benefit from a weaker dollar. We are therefore adversely affected by a
stronger dollar relative to major currencies worldwide. Given the number of variables involved in
calculating our revenues and expenses derived from currencies other than the U.S. dollar, including
multiple currencies and fluctuating transaction volumes, the Company believes that it cannot
provide a quantitative analysis of the impact of hypothetical changes in foreign currency exchange
rates that would be meaningful to investors.
Interest Rate Risk. Our interest income and expense are 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 March 31, 2007,
there were borrowings of $15.4 million outstanding under the term loan portion of the Companys
senior credit facility. As of March 31, 2007, the Company had $16.3 million available for revolving
loans under the senior credit facility, but had no borrowings under the revolver portion of the
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 our 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 our option, a published prime lending rate plus 1.0%). A hypothetical 100 basis
point change in interest rates applicable to the term loan would result in an approximate $0.2
million change in pre-tax income. Assuming full utilization of the revolving credit facility, a
hypothetical 100 basis point change in interest rates applicable to the revolver would result in an
approximate $0.2 million change in pre-tax income.
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 derivative financial instruments outstanding as of March
31, 2007.
Stock-Based Compensation. The Company estimates the fair value of awards of restricted shares
and nonvested shares, as defined in SFAS 123(R), as being equal to the market value of the common
stock. Also, under SFAS 123(R), companies must classify their share-based payments as either
liability-classified awards or as equity-classified awards. Liability-classified awards are
remeasured to fair value at each balance sheet date until the award is settled. The Company has
classified its share-based payments that are settled in cash as liability-classified
awards. The liability for liability-classified awards is generally equal to the fair value of
the award as of the balance sheet date times the percentage vested at the time. The change in the
liability amount from one balance sheet date to another is charged (or credited) to compensation
cost. Based on the number of liability-classified awards outstanding as of March 31, 2007, a
hypothetical $1.00 change in the market value of the Companys common stock would result in $0.4
million change in pre-tax income.
22
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 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.
Management believes that during the quarter ended March 31, 2007 the Company made progress in
remediating the deficiencies reported in the Companys Annual Report on Form 10-K for the year
ended December 31, 2006. Those reported deficiencies related to ineffective internal controls over
revenue recognition and company level controls. Management will continue its remediation efforts
and its evaluation of the effectiveness of its internal controls during the remainder of 2007.
Other than as described above, there were no changes in internal control over financial reporting
during the quarter ended March 31, 2007 that have materially affected, or are reasonably likely to
materially affect, the Companys internal control over financial reporting.
23
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
See Note I of Notes to Condensed Consolidated Financial Statements (Unaudited) included
in Part I. Item 1. of this Form 10-Q which is incorporated by reference.
Item 1A. Risk Factors
There have been no material changes in the risks facing the Company as described in the
Companys Form 10-K for the year ended December 31, 2006.
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
None.
Item 5. Other Information
None.
24
Item 6. Exhibits
|
|
|
Exhibit |
|
|
Number |
|
Description |
|
|
|
3.1
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|
Restated Articles of Incorporation of the Registrant,
as amended and restated through August 11, 2006
(restated solely for the purpose of filing with the
Commission) (incorporated by reference to Exhibit 3.1
to the Registrants Report on Form 8-K filed on August
17, 2006). |
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|
|
3.2
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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
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Specimen Common Stock Certificate (incorporated by
reference to Exhibit 4.1 to the Registrants Form 10-K
for the year ended December 31, 2001). |
|
|
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4.2
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|
See Restated Articles of Incorporation and Bylaws of
the Registrant, filed as Exhibits 3.1 and 3.2,
respectively. |
|
|
|
4.3
|
|
Shareholder Protection Rights Agreement, dated as of
August 9, 2000, between the Registrant and Rights
Agent, effective May 1, 2002 (incorporated by
reference to Exhibit 4.3 to the Registrants Form 10-Q
for the quarterly period ended June 30, 2002. |
|
|
|
4.3.1
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First Amendment to Shareholder Protection Rights
Agreement, dated as of March 12, 2002, between the
Registrant and Rights Agent (incorporated by reference
to Exhibit 4.3 to the Registrants Form 10-Q for the
quarterly period ended September 30, 2002). |
|
|
|
4.3.2
|
|
Second Amendment to Shareholder Protection Rights
Agreement, dated as of August 16, 2002, between the
Registrant and Rights Agent (incorporated by reference
to Exhibit 4.3 to the Registrants Form 10-Q for the
quarterly period ended September 30, 2002). |
|
|
|
4.3.3
|
|
Third Amendment to Shareholder Protection Rights
Agreement, dated as of November 7, 2006, between the
Registrant and Rights Agent (incorporated by reference
to Exhibit 4.1 to the Registrants Form 8-K filed on
November 14, 2005). |
|
|
|
4.3.4
|
|
Fourth Amendment to Shareholder Protection Rights
Agreement, dated as of November 14, 2006, between the
Registrant and Rights Agent (incorporated by reference
to Exhibit 4.1 to the Registrants Form 8-K filed on
November 30, 2005). |
|
|
|
4.3.5
|
|
Fifth Amendment to Shareholder Protection Rights
Agreement, dated as of March 9, 2006, between the
Registrant and Rights Agent (Incorporated by Reference
to Exhibit 4.9 to the Registrants Report on Form 10-K
for the year ended December 31, 2005). |
|
|
|
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
|
|
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). |
|
|
|
4.6
|
|
Indenture dated as of March 17, 2006 governing 11%
Senior Notes due 2011, with Form of Note appended
(incorporated by reference to Exhibit 4.2 to the
registrants Form 8-K filed on March 23, 2006). |
25
|
|
|
Exhibit |
|
|
Number |
|
Description |
|
|
|
10.1*
|
|
2007 Performance Bonus Plan |
|
|
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31.1
|
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Certification of the Chief Executive Officer, pursuant
to Rule 13a-14(a) or 15d-14(a), for the quarter ended
March 31, 2007. |
|
|
|
31.2
|
|
Certification of the Chief Financial Officer, pursuant
to Rule 13a-14(a) or 15d-14(a), for the quarter ended
March 31, 2007. |
|
|
|
32.1
|
|
Certification of the Chief Executive Officer and Chief
Financial Officer, pursuant to 18 U.S.C. Section 1350,
for the quarter ended March 31, 2007. |
|
|
|
* |
|
Confidential treatment, pursuant to 17 CFR Secs. §§ 200.80 and 240.24b-2, has been requested
regarding certain portions of the indicated Exhibit, which portions have been filed separately with
the Commission. |
26
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
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PRG-SCHULTZ INTERNATIONAL, INC. |
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May 14, 2007
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By:
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/s/ James B. McCurry |
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|
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James B. McCurry |
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President, Chairman of the Board and |
|
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Chief Executive Officer |
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(Principal Executive Officer) |
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May 14, 2007
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By:
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/s/ PETER LIMERI |
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Peter Limeri. |
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Chief Financial Officer and Treasurer |
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(Principal Financial Officer) |
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27