Back to GetFilings.com
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
| |
|
|
|
(Mark One)
|
|
|
|
[X]
|
|
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 |
| |
|
For the fiscal year ended December 31, 2004 |
|
OR |
|
[ ]
|
|
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 |
| |
|
For the transition period
from to |
|
Commission File Number 0-28000 |
PRG-Schultz International, Inc.
(Exact name of registrant as specified in its charter)
| |
|
|
|
Georgia
|
|
58-2213805 |
|
(State or other jurisdiction of
incorporation or organization)
|
|
(I.R.S. Employer
Identification No.) |
| |
|
600 Galleria Parkway
Suite 100
Atlanta, Georgia
(Address of principal executive offices)
|
|
30339-5986
(Zip Code) |
Registrant’s telephone number, including area code:
(770) 779-3900
Securities registered pursuant to Section 12(b) of the
Act: None
Securities registered pursuant to Section 12(g) of the
Act:
Common Stock, No Par Value
Preferred Stock Purchase Rights
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 x No o
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not
contained herein and will not be contained, to the best of the
registrant’s knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this
Form 10-K or any amendment to this
Form 10-K. x
Indicate by check mark whether the registrant is an accelerated
filer (as defined by Rule 12b-2 of the
Act). Yes x No o
The aggregate market value, as of June 30, 2004, of common
shares of the registrant held by non-affiliates of the
registrant was approximately $229.7 million, based upon the
last sales price reported that date on The Nasdaq Stock Market
of $5.47 per share. (Aggregate market value is estimated
solely for the purposes of this report and shall not be
construed as an admission for the purposes of determining
affiliate status.)
Common shares of the registrant outstanding as of
February 28, 2005 were 62,039,989, including shares held by
affiliates of the registrant.
Documents Incorporated by Reference
Part III: Portions of Registrant’s Proxy Statement
relating to the Annual Meeting of Shareholders to be held on or
about May 3, 2005.
PRG-SCHULTZ INTERNATIONAL, INC.
FORM 10-K
December 31, 2004
PART I
PRG-Schultz International, Inc. and subsidiaries (collectively,
the “Company”), a United States of America based
company, incorporated in the State of Georgia in 1996, is the
leading worldwide provider of recovery audit services to large
and mid-size businesses having numerous payment transactions
with many vendors. These businesses include, but are not limited
to:
|
|
|
| |
• |
retailers such as discount, department, specialty, grocery and
drug stores; |
| |
| |
• |
manufacturers of high-tech components, pharmaceuticals, consumer
electronics, chemicals and aerospace and medical products; |
| |
| |
• |
wholesale distributors of computer components, food products and
pharmaceuticals; |
| |
| |
• |
healthcare providers such as hospitals and health maintenance
organizations; and |
| |
| |
• |
service providers such as communications providers,
transportation providers and financial institutions. |
In businesses with large purchase volumes and continuously
fluctuating prices, some small percentage of erroneous
overpayments to vendors is inevitable. Although these businesses
process the vast majority of payment transactions correctly, a
small number of errors do occur. In the aggregate, these
transaction errors can represent meaningful “lost
profits” that can be particularly significant for
businesses with relatively narrow profit margins. The
Company’s trained, experienced industry specialists use
sophisticated proprietary technology and advanced recovery
techniques and methodologies to identify overpayments to
vendors. In addition, these specialists review clients’
current practices and processes related to procurement and other
expenses in order to identify solutions to manage and reduce
expense levels, as well as apply knowledge and expertise of
industry best practices to assist clients in improving their
business efficiencies.
In most instances, the Company receives a contractual percentage
of overpayments and other savings it identifies and its clients
recover or realize. In other instances, the Company receives a
fee for specific services provided.
The Company currently provides services to clients in over 40
countries. For financial reporting purposes, in 2004, the
Company had two reportable operating segments, the Accounts
Payable Services segment (including the Channel Revenue
business) and the Meridian VAT Reclaim (“Meridian”)
segment. See Note 5 of Notes to Consolidated Financial
Statements included in Item 8. of this Form 10-K for
worldwide operating segment disclosures.
Evaluation of Strategic Alternatives
As disclosed in the Company’s Report on Form 8-K filed
on October 21, 2004, the Company announced that its Board
of Directors, in response to several inquiries received by the
Company, has decided to explore the Company’s strategic
alternatives, including a possible sale of the Company. The
Company’s management intends to complete its strategic
business initiatives, as defined below. However, the exploration
of the strategic alternatives process will require
management’s time, and attention may be diverted from
operations of the business. Additionally, the Company may
experience higher levels of customer and employee turnover
impacting the Company’s ongoing operations. The exploration
of strategic alternatives is ongoing and no decisions have been
made.
The following discussion includes “forward-looking”
statements within the meaning of the Private Securities
Litigation Reform Act of 1995. These forward-looking statements
are at times identified by words such as “plans,”
“intends,” “expects,” or
“anticipates” and words of similar effect and include
statements regarding the Company’s financial and operating
plans and goals. These forward-looking statements include any
statements that cannot be assessed until the occurrence of a
future event or events. Actual results may differ materially
from those expressed in any forward-looking statements due to a
variety of factors, including but not limited to those discussed
herein and below under “Risk Factors.”
1
In March 2001, the Company formalized a strategic realignment
initiative designed to enhance the Company’s financial
position and clarify its investment and operating strategy by
focusing primarily on its core Accounts Payable Services
business. Under this strategic realignment initiative, the
Company announced its intent to divest the following non-core
businesses: Meridian VAT Reclaim (“Meridian”), the
Logistics Management Services segment, the Communications
Services segment and the Channel Revenue division within the
Accounts Payable Services segment.
The Company disposed of its Logistics Management Services
segment in October 2001. During the fourth quarter of 2001, the
Company closed a unit within Communications Services. In
December 2001, the Company disposed of its French Taxation
Services business which had been part of continuing operations
until the time of its disposal.
As indicated above, Meridian, Communications Services and the
Channel Revenue business were originally offered for sale in the
first quarter of 2001. During the first quarter of 2002, the
Company concluded that then current market conditions were not
conducive to receiving terms acceptable to the Company for these
remaining unsold, non-core businesses. As such, on
January 24, 2002, the Company’s Board of Directors
approved a proposal to retain these remaining discontinued
operations until such time as market conditions were more
conducive to their sale.
On January 24, 2002, the Company acquired substantially all
the assets and certain liabilities of Howard Schultz &
Associates International, Inc. and affiliates
(“HSA-Texas”), formerly the Company’s principal
competitor in the Accounts Payable Services business.
During the fourth quarter of 2003, the Company once again
declared its remaining Communications Services operations as a
discontinued operation and subsequently sold such operations on
January 16, 2004 (see Note 2(c) of Notes to
Consolidated Financial Statements included in Item 8. of
this Form 10-K).
The Company’s Consolidated Financial Statements have been
reclassified to reflect the remaining non-core businesses,
consisting of Meridian and the Channel Revenue business, as part
of continuing operations for all periods presented.
Additionally, the Company’s Consolidated Financial
Statements reflect Logistics Management Services, Communications
Services, including a unit that was closed in 2001, and French
Taxation Services as discontinued operations for all periods
presented.
Unless specifically stated, all financial and statistical
information contained herein is presented with respect to
continuing operations only.
The Recovery Audit Industry
Businesses with substantial volumes of payment transactions
involving multiple vendors, numerous discounts and allowances,
fluctuating prices and complex pricing arrangements find it
difficult to process every payment correctly. Although these
businesses process the vast majority of payment transactions
correctly, a small number of errors occur principally because of
communication failures between the purchasing and accounts
payable departments, complex pricing arrangements, personnel
turnover and changes in information and accounting systems.
These errors include, but are not limited to, missed or
inaccurate discounts, allowances and rebates, vendor pricing
errors and duplicate payments. In the aggregate, these
transaction errors can represent meaningful lost profits that
can be particularly significant for businesses with relatively
narrow profit margins. For example, the Company believes that
the typical U.S. retailer makes payment errors that are not
discovered internally, which in the aggregate can range from
several hundred thousand dollars to more than $1.0 million
per billion dollars of revenues.
Although some businesses maintain internal recovery audit
departments assigned to recover selected types of payment errors
and identify opportunities to reduce costs, independent recovery
audit firms are often retained as well due to their specialized
knowledge and focused technologies.
In the U.S., Canada, the United Kingdom and Mexico, large
retailers routinely engage independent recovery audit firms as
standard business practice, and businesses in other industries
are increasingly using independent recovery audit firms. Outside
the U.S., Canada, the United Kingdom and Mexico, the Company
2
believes that large retailers and many other types of businesses
are also increasingly engaging independent recovery audit firms.
The domestic and international recovery audit industry for
accounts payable services is characterized by the Company, the
worldwide leader providing services to clients in over 40
countries, and numerous smaller competitors who typically do not
possess multi-country service capabilities. Many smaller
recovery audit firms lack the centralized resources or broad
client base to support technology investments required to
provide comprehensive recovery audit services for large, complex
accounts payable systems. These firms are less equipped to audit
large Electronic Data Interchange (“EDI”) accounts
payable systems. In addition, because of limited resources, most
of these firms subcontract work to third parties and may lack
experience and the knowledge of national promotions, seasonal
allowances and current recovery audit practices. As a result,
the Company believes that it has significant opportunities due
to its national and international presence, well-trained and
experienced professionals, and advanced technology.
As businesses have evolved, the Company and the recovery
auditing industry have evolved with them, innovating processes,
tools, and claim types to maximize recoveries. The following are
a number of the changes that have been driving the recovery
audit industry in the past several years:
|
|
| |
Data Capture and Availability. Businesses are
increasingly using technology to manage complex procurement and
accounts payable systems and realize greater operating
efficiencies. Many businesses worldwide communicate with vendors
electronically — whether by EDI or the
Internet — to exchange inventory and sales data,
transmit purchase orders, submit invoices, forward shipping and
receiving information and remit payments. These systems capture
more detailed data and enable the cost effective review of more
transactions by recovery auditors. |
| |
| |
Increasing Number of Auditable Claim Categories.
Traditionally, the recovery audit industry was characterized by
the identification of simple, or “disbursement,” claim
types such as the duplicate payment of invoices. However, the
introduction of creative vendor discount programs, complex
pricing arrangements and activity-based incentives has led to an
explosion of auditable transactions and potential sources of
error. These transactions are complicated to audit as the
underlying transaction data is difficult to access and
recognizing mistakes is complex. Only recovery audit firms with
significant industry-specific expertise and sophisticated
technology are capable of auditing these complicated, or
“contract compliance” claim categories. |
| |
| |
Globalization. While global economic and political
developments are presenting companies with a wide range of
challenges, globalization is intensifying throughout the retail
landscape and particularly among the top retailers worldwide.
The average company operates in over seven countries —
up significantly from prior years — and a significant
number of retailers have entered once avoided markets such as
Russia and China. As these retailers are becoming increasingly
global, they seek to obtain similar services from similar
vendors across markets. |
| |
| |
Consolidation in the Retail Industry. Retailer
consolidation in the U.S. and internationally continues. As
retailers grow larger, vendors become more reliant on a smaller
number of customers and, as a result, the balance of power
favors retailers rather than vendors. This dynamic creates an
environment that allows retailers to assert valid claims more
easily. |
| |
| |
Increase in Promotional Activity. Trade promotion
spending is at an all time high and is not expected to decline.
In addition, an increasing number of dollars are being spent in
categories with numerous transactions and a high potential for
error such as scan downs, or discounts at the point of sale. As
this trade promotion spending continues to grow, it creates
increasing opportunities for mistakes and, therefore, auditable
claims. |
| |
| |
Increased Push for Efficiency. Historically, recovery
audit firms audited transactions several years after their
occurrence. Determining whether claims generated from those
periods are valid is costly and time-consuming for clients and
their vendors alike, and becomes even more so the older the
claim. As a result, recovery audit firms, especially in the
U.S., are being asked to audit closer in time to the occurrence
of |
3
|
|
| |
the transaction — typically 12 to 18 months after
the transaction date. This trend has benefited recovery audit
firms since more recent claims are easier to assert against
suppliers, resulting in higher recoveries. |
| |
| |
Move Toward Standard Auditing Practices. Vendors have
been active in demanding clearer post-audit procedures, better
documentation and electronic communication of claims, among
other things. The Company, as the industry leader, has taken a
leadership role in establishing standard recovery auditing
practices for the industry and led the way to establishing the
first ever Retail Summit and Post Audit Best Practices Forum in
2003. The purpose of the Summit was to begin providing a
foundation for industry standards and norms with a goal of
diminished ambiguity, greater efficiencies, lower costs and
higher value for all stakeholders. In December 2004 the second
Retail Summit and Best Practices Forum was held where academic
professionals reported the results of ground-breaking Best
Practices research specific to the post audit industry with the
goal of furthering the establishment of standard practices. |
The evolution of the recovery auditing industry is expected to
continue, and the Company will continue to drive and capitalize
on the changes as it has in the past. In particular, the Company
expects that the industry will continue to move towards the
electronic capture and presentation of data, more automated,
centralized processing, a growing number of potential claim
categories and faster approvals and deductions.
The PRG-Schultz Solution
The Company provides its domestic and international clients with
comprehensive recovery audit services by using sophisticated
proprietary technology and advanced techniques and
methodologies, and by employing highly trained, experienced
industry specialists. As a result, the Company believes it is
able to identify significantly more payment errors and expense
containment opportunities than its clients are able to identify
through their internal audit capabilities or than many of its
competitors are able to identify.
The Company is in the process of consolidating and standardizing
its technology to provide a uniform platform for its auditors
that will offer consistent and proven audit techniques and
methodologies based on a client’s size, industry or
geographic scope of operations. The Company is a leader in
developing and utilizing sophisticated software audit tools and
techniques that enhance the identification and recovery of
payment errors. By leveraging its technology investment across a
large client base, the Company is able to continue developing
proprietary software tools and expand its technology leadership
in the recovery audit industry.
The Company is also a leader in establishing new recovery audit
practices to reflect evolving industry trends. The
Company’s auditors are highly trained and many have joined
the Company from finance-related management positions in the
industries the Company serves. To support its auditors, the
Company provides data processing, marketing, training and
administrative services.
In addition, the Company believes it differentiates itself from
many of its competitors with its client engagement
methodologies, its expertise with respect to managing vendor
relationships and its specialty services offerings in areas of
airline ticket revenue recovery audit services,
direct-to-store-delivery (DSD) audits, media audits, real
estate audits, freight-related vendor compliance audits, and
document imaging and management technology.
The PRG-Schultz Strategy
The Company’s objective is to build on its position as the
leading worldwide provider of recovery audit services. The
Company’s strategic plan to achieve these objectives
focuses on a series of initiatives designed to maintain its
dedicated focus on the Company’s clients and rekindle its
growth. The Company has implemented a number of strategic
business initiatives over the past 18 months to reduce
costs, increase recoveries and fuel growth at existing and new
clients. Some of these key initiatives include:
|
|
|
| |
• |
Centralize Claim Processing and Field Audit Work. The
processing of certain claim types and certain client audits has
been shifted to the Company’s Salt Lake City and Atlanta
Shared Service Centers and its N.J. and Dublin, Ireland Regional
Audit Centers resulting in cost savings and improved audit
productivity. |
4
|
|
|
| |
• |
Standardize Audit Software and Processes. The Company has
developed new standardized proprietary software tools and
algorithms that enable its auditors to identify trends,
exceptions and claims quickly and efficiently and use the best
auditing practices across every audit to increase recoveries. |
| |
| |
• |
Implement Technology Platforms. The Company has
implemented global customer relationship management
(“CRM”) and claims management systems (including
foreign language and functional currency versions
internationally), a new technology platform that provides remote
access to audit information and a new European data center,
resulting in improved sales and audit productivity. |
| |
| |
• |
Optimize the Organization. The Company has made
significant improvements to: (i) its international
knowledge base and management structure by hiring an experienced
international executive, transferring experienced personnel to
key regions, and shifting to a regional management structure;
(ii) its U.S. commercial sales function by hiring
additional U.S. sales personnel, modifying the auditor
compensation model and creating distinct sales and client
development groups; and (iii) its audit staffing model by
reducing U.S. field audit headcount during the last
24 months. |
With these strategic business initiatives in place, the Company
is focused on executing a growth strategy that includes the
following key elements:
|
|
|
| |
• |
Grow Business with Existing Clients. The Company intends
to continue to maximize the revenue opportunities with each of
its existing clients by identifying and auditing new categories
of potential errors (such as its new freight rate audit program
and third-party pharmacy payment service offerings) and
leveraging the productivity enhancements of its recent strategic
business initiatives to drive increased recoveries. An alliance
we made with a national state and local tax consulting firm
offers our clients additional expertise on state and local tax
issues. Finally, the Company was awarded a multi-year contract
for the management of credit card receipts from an existing
client, one of the largest grocery companies in the U.S., a new
service we are offering to our retail clients. |
| |
| |
• |
Grow the International Business. The Company believes
that there are significant opportunities for sustained
international growth as there are numerous retail, commercial
and public sector clients the Company does not currently serve
and major global clients for whom the Company is the only
recovery audit firm with the global capabilities to serve them
in multiple geographies. The Company intends to leverage its
recent strategic business initiatives that significantly
improved its international sales and operating functions to
drive this growth. |
| |
| |
• |
Grow the U.S. Commercial and Government Business.
The Company intends to continue to drive growth in its
U.S. commercial and government segments by:
(i) aggressively moving less complex audit work to its
shared service centers in order to increase productivity and
free-up highly skilled auditor time to scrutinize more complex
claim types; and (ii) leveraging its recent strategic
business initiatives that significantly improved its
U.S. commercial and government sales functions. |
| |
| |
• |
Develop New Vertical Markets. The Company has a long
history of innovation and is developing new revenue sources by
applying its core competencies to vertical markets where there
are high transaction counts, significant price volatility and
likelihood of human error. The Company intends to continue to
identify new markets with these characteristics and launch new
service offerings accordingly. For example, the Company has
launched, and is aggressively growing, its recovery audit
service offerings for the airline and healthcare sectors, and is
planning a 2005 service launch to the energy industry. Further,
a recent contract with the State of Arizona is our first audit
of Medicaid claims. We expect to expand this service offering to
additional states. |
PRG-Schultz Services
|
|
|
Accounts Payable Services |
Through the use of proprietary technology, audit techniques and
methodologies, the Company’s trained and experienced
auditors examine merchandise procurement records on a
post-payment basis to identify
5
overpayments resulting from situations such as missed or
inaccurate discounts, allowances and rebates, vendor pricing
errors, duplicate payments and erroneous application of sales
tax laws and regulations.
To date, the Accounts Payable Services operations have served
two client types, retail/wholesale and commercial, with each
type typically served under a different service delivery model.
Contract compliance audit services provided to retail/wholesale
clients account for the Company’s largest source of
revenues. These services typically recur annually and are
largely predictable in terms of estimating the dollar volume of
client overpayments that will ultimately be recovered. Contract
compliance audit services are the most comprehensive in nature,
focusing on numerous recovery categories related to both
procurement and payment activities. These audits typically
entail comprehensive and customized data acquisition from the
client with the aim of capturing individual line-item
transaction detail. Contract compliance audits are often long
duration endeavors with year-round on-site work by permanent
multi-auditor teams quite common for larger clients. The Company
currently serves retail/wholesale clients on six continents.
The Company also examines merchandise procurements and other
payments made by business entities such as manufacturers,
distributors and healthcare providers that are collectively
termed as “commercial” clients. The substantial
majority of the Company’s domestic commercial Accounts
Payable Services clients are currently served using a
disbursement audit service model which typically entails
obtaining limited purchase data from the client and an audit
focus on a select few recovery categories. Services to these
types of clients to date have tended to be either
“one-time” with no subsequent repeat audit or
rotational in nature with different divisions of a given client
often audited in pre-arranged annual sequences. Accordingly,
revenues derived from a given client may change markedly from
year to year. Additionally, the duration of a disbursement audit
is usually measured in weeks and the number of auditors assigned
per client is usually one or two. Currently, the majority of the
Company’s commercial clients are located in North America
and the United Kingdom, although the Company is focusing its
efforts on growth with commercial clients in other markets
around the world.
The Company is currently modifying its approach to service
delivery to more closely align the scope of its services to the
unique needs and characteristics of each individual client,
regardless of their industry, consistent with maximizing the
Company’s profitability. Thus, ultimately, certain
retail/wholesale clients that have historically been served by
the disbursement audit service model will be served under the
contract compliance service model. Additionally, the Company
believes that the market for providing disbursement audit
services to commercial entities in the United States is reaching
maturity with the existence of many competitors and increasing
pricing pressures. Therefore a substantial number of commercial
clients that historically have been served by the disbursement
audit service model are ultimately intended by the Company to be
served under the contract compliance service model where
barriers to competitive entry are higher.
Additionally, within Accounts Payable Services is a discrete
unit, the Channel Revenue business. Channel Revenue provides
revenue maximization services to clients that are primarily in
the semiconductor industry using a discrete group of specially
trained auditors and proprietary business methodologies. Channel
Revenue clients generally receive two audits each year.
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. For
this service, Meridian receives a contractual percentage of VAT
recovered on behalf of its clients. The services provided to
clients by Meridian are typically recurring in nature.
6
Client Contracts
The Company’s typical client contract provides that the
Company is entitled to a stipulated percentage of overpayments
or other savings recovered for or realized by clients. Clients
generally recover claims by either (a) taking credits
against outstanding payables or future purchases from the
involved vendors, or (b) receiving refund checks directly
from those vendors. The method of effecting a recovery is often
dictated by industry practice. For some services, the client
contract provides that the Company is entitled to a flat fee, or
fee rate per hour, or per unit of usage for the rendering of
that service. In addition to client contracts, many clients
establish specific procedural guidelines that the Company must
satisfy prior to submitting claims for client approval. These
guidelines are unique to each client.
Technology
Technology advancements and increasing volumes of business
transactions have resulted in the Company’s clients
continuously increasing the use of technology to manage complex
accounts payable systems and realize greater operating
efficiencies. Given this environment, the Company believes its
proprietary technology, databases and processes serve as
important competitive advantages over both its principal
competitors and its clients’ internal recovery audit
functions.
To sustain these competitive advantages, the Company intends to
continue investing in technology initiatives to deliver
innovative, client-focused solutions which enable the Company to
provide its services in the most timely, effective and
profitable manner. A cornerstone of the Company’s current
philosophy toward technology investment involves measuring the
performance of its technology through effectiveness ratios to
ensure it leverages technology appropriately.
The Company employs a variety of proprietary audit tools,
proprietary databases and Company-owned and co-locational data
processing facilities in its business. Each of the
Company’s businesses employs custom technology.
|
|
|
Accounts Payable Services Audit Technology |
The Company is in the process of standardizing its audit tools,
audit methodologies and field staffing protocols to provide a
uniform foundation for propagating best practices throughout its
worldwide operations. Until this work is completed, unconverted
clients will continue to be served using the audit tools and
technologies historically in place at their respective
locations. The following paragraphs of this section specify
technology practices and processes that are generally applicable
to all clients worldwide.
The Company’s Accounts Payable Services technology can
analyze massive volumes of data to help clients uncover patterns
or potential problems in overpayments. The Company uses advanced
data mining capabilities for analyzing data to the transaction
level. The Company mines the data using algorithms to find
patterns and associations between fields in relational
databases. The result of data mining is a rule (or set of rules)
that allows the Company to find new relationships among events
and maximize the recovery for the client.
At the beginning of a typical accounts payable recovery audit
engagement, the Company obtains a wide array of transaction data
from its client for the time period under review. The Company
typically receives this data by EDI, magnetic media or paper
(the Company uses a custom, proprietary imaging technology to
scan the paper into electronic format), which is then mapped by
the Company’s technology professionals, primarily using
high performance database and storage technologies, into
standardized and proprietary layouts at one of the
Company’s data processing facilities. The Company’s
data acquisition, data processing and data management
methodologies are aimed at maximizing efficiencies and
productivity while maintaining the highest standards of client
confidentiality.
The Company’s experienced technology professionals then
prepare statistical reports to verify the completeness and
accuracy of the data. The Company’s technology
professionals deliver this reformatted data to field auditors
who, using the Company’s proprietary field audit software,
sort, filter and search the data for indications of erroneous
payments. The Company’s technology professionals also
produce client-specific
7
standard reports and statistical data for the auditors. These
reports and data often reveal patterns of activity or unusual
relationships suggestive of potential overpayment situations.
The Company maintains a secure, automated and web-enabled
database of audit information with the ability to query on
multiple variables, including claim categories, SIC and industry
codes, vendors and audit years, to facilitate data analysis for
the identification of additional recovery opportunities and
provide recommendations for process improvements to clients. The
Company has numerous security measures in place, including
secure and restricted access to this database, to ensure the
highest standards of data integrity and client confidentiality.
|
|
|
Channel Revenue Audit Technology |
The Channel Revenue business (a sub-component of the Accounts
Payable Services operating segment) specializes in providing
comprehensive revenue recovery audits for both the financial and
sales divisions of manufacturing firms in consumer, industrial
and technology industries.
|
|
|
Meridian VAT Reclaim Technology |
Meridian utilizes a proprietary software application that
assists business clients in the reclaiming of VAT. The
functionality of the software includes paper flow monitoring,
financial and managerial reporting and EDI. The paper flow
monitoring reflects all stages of the reclaim business process
from logging in claims received to printing out checks due to
clients. The reporting system produces reports that measure the
financial and managerial information for each stage of the
business process.
Auditor Hiring and Training
Many of the Company’s auditors and specialists formerly
held finance-related management positions in the industries the
Company serves. To meet its need for additional auditors, the
Company also hires recent college graduates, particularly those
with multi-lingual capabilities and technology skills. While the
Company has been able to hire a sufficient number of new
auditors to support its historical needs, there can be no
assurance that the Company can continue hiring sufficient
numbers of qualified auditors to meet its future needs.
The Company provides intensive training for auditors utilizing
both classroom-type training and self-paced media such as
specialized computer-based training modules. All training
programs are periodically upgraded based on feedback from
auditors and changing industry protocols. Additional on-the-job
training provided by experienced auditors enhances the
structured training programs and enables newly hired auditors to
refine their skills.
Clients
The Company provides its services principally to large and
mid-sized businesses having numerous payment transactions with
many vendors. Retailers/wholesalers continue to constitute the
largest part of the Company’s client and revenue base. The
Company’s five largest clients contributed approximately
22.6%, 21.0% and 23.4% of its revenues from continuing
operations for the years ended December 31, 2004, 2003 and
2002, respectively. During the year ended December 31,
2002, the Company’s largest client, Wal-Mart International,
accounted for approximately 10.2% of revenues from continuing
operations. The Company did not have any clients who
individually provided revenues in excess of 10.0% of total
revenues from continuing operations during the years ended
December 31, 2004 and 2003.
Sales and Marketing
Due to the highly confidential and proprietary nature of a
business’s purchasing patterns and procurement practices
combined with the typical desire to maximize the amount of funds
recovered, most prospective clients conduct an extensive
investigation prior to selecting a specific recovery audit firm.
This type of investigation may include an on-site inspection of
the Company’s service facilities. The Company has typically
8
found that its service offerings that are the most annuity-like
in nature such as a contract compliance audit require the
longest sales cycle and highest levels of direct
person-to-person contact. Conversely, service offerings that are
short-term, discrete events, such as certain disbursement
audits, are susceptible to more cost effective sales and
marketing delivery approaches such as telemarketing.
Proprietary Rights
The Company continuously develops new recovery audit software
and methodologies that enhance existing proprietary software and
methodologies. The Company regards its proprietary software as
protected by trade secret and copyright laws of general
applicability. In addition, the Company attempts to safeguard
its proprietary software and methodologies through employee and
third party nondisclosure agreements and other methods of
protection. While the Company’s competitive position may be
affected by its ability to protect its software and other
proprietary information, the Company believes that the
protection afforded by trade secret and copyright laws is
generally less significant to the Company’s overall success
than the continued pursuit and implementation of its operating
strategies and other factors such as the knowledge, ability and
experience of its personnel.
The Company owns or has rights to various copyrights, trademarks
and trade names used in the Company’s business, including
but not limited to AuditPro®, SureF!nd®,
Direct F!nd®, ImDex® and
claimDextm.
Competition
The disbursement audit services business is highly competitive
and barriers to entry are relatively low. The Company believes
that the low barriers to entry result from limited technology
infrastructure requirements, the need for relatively minimal
high-level data, and an audit focus on a select few recovery
categories.
The contract compliance audit business is also highly
competitive with numerous existing competitors that are believed
to be substantially smaller than the Company. Barriers to
effective entry and longevity as a viable contract compliance
audit firm are believed to be high. The Company further believes
that these high barriers to entry result from numerous factors
including, but not limited to, significant technology
infrastructure requirements, the need to gather, summarize and
examine volumes of client data at the line-item level of detail,
the need to establish effective audit techniques and
methodologies, and the need to hire and train audit
professionals to work in a very specialized manner that requires
technical proficiency with numerous recovery categories.
While the Company believes that it is the only company with the
depth and breadth of audit expertise, data and technology
capabilities, scale and global presence to compete in an
increasingly electronic and global marketplace, the Company
faces competition from the following:
|
|
| |
Client Internal Post-Audit Departments. A number of
larger retailers (particularly those in the grocery and drug
segments) have developed an internal post-audit process to
review transactions prior to turning them over to external
post-audit providers. The majority of clients’ internal
activities, however, focus only on disbursement claim types
while a few have implemented broader capabilities. Regardless of
the level of internal recoveries, the Company has observed that
practically all clients continue to retain at least one
(primary), and sometimes two (primary and secondary), external
post-audit recovery firms to capture errors missed by their
internal post-audit departments. There is currently very little
use of internal post-transaction audit groups internationally
other than at certain large Canadian and U.K. retailers. |
| |
| |
Other Post-Audit Recovery Firms. The competitive
landscape in the recovery audit industry is comprised of: |
|
|
|
| |
• |
Several full-service Accounts Payable recovery audit firms, only
one of which the Company believes offers a full suite of
recovery audit services internationally; |
| |
| |
• |
A large number of smaller niche and “mom &
pop” Accounts Payable recovery firms who have a limited
client base and who use less sophisticated tools to mine
disbursement claim categories at low |
9
|
|
|
| |
|
contingency rates. These firms are most common in the
U.S. market and the largest of these firms typically have
approximately $10 – $15 million in annual
revenue. Competition in most international markets is either
non-existent or typically comes from small niche providers; |
| |
| |
• |
Firms who offer a hybrid of audit software tools and training,
and/or general accounts payable process improvement
enablers; and |
| |
| |
• |
Firms with specialized skills focused on recovery services for
discrete sectors like airlines and healthcare. |
|
|
| |
Other Providers of Recovery Services. The “Big
Four” accounting firms provide recovery services; however,
their practices tend to be focused on tax-related services.
American Express also provides, as part of their Tax &
Business Services unit, a range of recovery services and
solutions in the accounts payable and procurement and sales and
use tax areas. |
Employees
At January 31, 2005, the Company had approximately 2,800
employees, of whom approximately 1,400 were located in the
U.S. The majority of the Company’s employees are
involved in the audit function. The Company believes its
employee relations are satisfactory.
Website
The Company makes available free of charge on its website,
www.prgx.com, its annual report on Form 10-K, quarterly
reports on Form 10-Q, current reports on Form 8-K and
all amendments to those reports. The Company makes all filings
with the Securities and Exchange Commission available on its
website no later than the close of business on the date the
filing was made. In addition, investors can access the
Company’s filings with the Securities and Exchange
Commission at www.sec.gov/edgar.shtml.
10
RISK FACTORS
We depend on our largest clients for significant revenues,
and if we lose a major client, our revenues could be adversely
affected.
We generate a significant portion of our revenues from our
largest clients. For the years ended December 31, 2004,
2003, and 2002, our two largest clients accounted for
approximately 13.8%, 12.7% and 15.0% of our revenues from
continuing operations, respectively. If we lose any major
clients, our results of operations could be materially and
adversely affected by the loss of revenue, and we would have to
seek to replace the client with new business.
Client and vendor bankruptcies, including the Fleming
bankruptcy, and financial difficulties could reduce our
earnings.
Our clients generally operate in intensely competitive
environments and bankruptcy filings are not uncommon.
Additionally, adverse economic conditions throughout the world
have increased, and they continue to increase, the financial
difficulties experienced by our clients. On April 1, 2003,
Fleming Companies, Inc. (“Fleming”), which accounted
for 0.2% and 2.4% of our 2003 and 2002 revenues from continuing
operations, respectively, filed for Chapter 11 Bankruptcy
Reorganization. There were no revenues from Fleming recognized
in 2004. As a direct consequence of the bankruptcy filing, we
currently do not expect to generate revenues from Fleming in
2005. In addition, further bankruptcy filings by our large
clients or the significant vendors who supply them, or
unexpectedly large vendor claim chargebacks lodged against one
or more of our larger clients, could have a material adverse
affect on our financial condition and results of operations.
Likewise, our failure to collect our accounts receivable due to
the financial difficulties of one or more of our large clients
could adversely affect our financial condition and results of
operations.
Demands for preference payments by Fleming or other clients
in bankruptcy could reduce our earnings and place unbudgeted
demands on our cash resources.
On April 1, 2003, Fleming, one of our larger
U.S. Accounts Payable Services clients at that time, filed
for Chapter 11 Bankruptcy Reorganization. During the
quarter ended March 31, 2003, we received $5.5 million
in payments on account from this client. A portion of these
payments might be recoverable as “preference payments”
under United States bankruptcy laws. On January 24, 2005,
the Company received a demand for preference payments due from
the trust representing the client. The demand states that the
trust’s calculation of the Company’s preferential
payments was approximately $2.9 million. The Company
believes that it has valid defenses against any claim that may
be made for payments received from Fleming, however, there can
be no guarantee that all or a portion of the payments made to
Fleming will not be recoverable by the bankrupt estate. The
Company has offered to settle such claim. Accordingly, the
Company’s Consolidated Statement of Operations for the year
ended December 31, 2004 includes an expense provision of
$0.2 million with respect to this matter. However, if we
are unsuccessful in defending a preference payment claim against
us, our earnings would be reduced and we would be required to
make unbudgeted cash payments which could strain our financial
liquidity.
Strategic business initiatives for the Accounts Payable
Services business may not be successful.
Our objective is to build on our position as the leading
worldwide provider of recovery audit services. Our strategic
plan to achieve these objectives focuses on a series of
initiatives designed to maintain our dedicated focus on clients
and rekindle our growth. We have implemented a number of
strategic business initiatives over the past 18 months that
have been leveraged to reduce costs, increase recoveries and
fuel growth at existing and new clients. Some of these key
initiatives include: (1) Centralize Claim Processing and
Field Audit Work; (2) Standardize Audit Software and
Processes; (3) Implement Technology Platforms; and
(4) Optimize the Organization. See Part I,
Item 1. “Business — The PRG-Schultz
Strategy”.
The Company has begun implementation of the strategy but remains
in the intermediate stages of that process. Each of the
initiatives requires sustained management focus, organization
and coordination over time,
11
as well as success in building relationships with third parties.
The results of the strategy and implementation will not be known
until some time in the future. If we are unable to implement the
strategy successfully, our results of operations and cash flows
could be adversely affected. Successful implementation of the
strategy may require material increases in costs and expenses.
Exploration of strategic alternatives may not be
successful.
As disclosed in our report on Form 8-K filed on
October 21, 2004, we announced that our Board of Directors,
in response to several inquiries received by the Company, has
decided to explore our strategic alternatives, including a
possible sale of the Company. Management intends to complete its
strategic business initiatives, as discussed above and elsewhere
in this Form 10-K, regardless of the outcome of the
strategic alternatives exploration. However, the exploration of
strategic alternatives process will require management’s
time, and attention may be diverted from operations of the
business. Additionally, we may experience higher levels of
customer and employee turnover impacting our ongoing operations
and will incur additional expense through 2005. During 2004, we
incurred approximately $0.4 million of expense related to
exploration of our strategic alternatives.
We have violated our debt covenants in the past and may do so
in the future.
No assurance can be provided that we will not violate the
covenants of the Senior Credit Facility in the future. If we are
unable to comply with our financial covenants in the future, our
lender could pursue its contractual remedies under the credit
facility, including requiring the immediate repayment in full of
all amounts outstanding, if any. Additionally, we cannot be
certain that, if the lender demanded immediate repayment of any
amounts outstanding, we would be able to secure adequate or
timely replacement financing on acceptable terms or at all.
Additionally, if such a lender accelerated repayment demand is
subsequently made and we are unable to honor it, cross-default
language contained in the indenture underlying our
separately-outstanding $125.0 million convertible notes
issue, due November 26, 2006, could also be triggered,
potentially accelerating the required repayment of those notes
as well. In such an instance, there can likewise be no assurance
that we will be able to secure additional financing that would
be required to make such a rapid repayment. See
Management’s Discussion and Analysis of Financial Condition
and Results of Operations included in Item 7. of this
Form 10-K.
Proposed legislation by the European Union could have a
material adverse impact on Meridian’s operations.
The European Union has currently proposed legislation that will
remove the need for suppliers to charge value-added taxes on the
supply of services to clients within the European Union
(“EU”). The effective date of the proposed legislation
is currently unknown. Management believes that the proposed
legislation, if enacted as currently drafted, could have a
material adverse impact on Meridian’s results of operations
from its value-added tax business and could also negatively
affect our consolidated results of operations.
Meridian may be required to repay grants received from the
Industrial Development Authority.
During the period of May 1993 through September 1999, Meridian
received grants from the Industrial Development Authority of
Ireland (“IDA”) in the sum of 1.4 million Euro
($1.9 million at December 31, 2004 exchange rates).
The grants were paid primarily to stimulate the creation of 145
permanent jobs in Ireland. As a condition of the grants, if the
number of permanently employed Meridian staff in Ireland falls
below 145, then the grants are repayable in full. This
contingency expires on September 23, 2007. Meridian
currently employs 205 permanent employees in Dublin, Ireland.
The EU has currently proposed legislation that will remove the
need for suppliers to charge VAT on the supply of services to
clients within the EU. The effective date of the proposed
legislation is currently unknown. Management estimates that the
proposed legislation, if enacted as currently drafted, could
eventually have a material adverse impact on Meridian’s
results of operations from its value-added tax business. If
Meridian’s results of operations were to decline as a
result of the enactment of the proposed legislation, it is
possible that the number of permanent employees that Meridian
employs in Ireland could fall below 145 prior to September 2007.
Should such an event occur, the full amount of the grants
previously received by Meridian will need to be repaid to IDA.
However,
12
management currently estimates that any impact on employment
levels related to a possible change in the EU legislation will
not be realized until after September 2007, if ever. As any
potential liability related to these grants is not currently
determinable, the Company’s Consolidated Statement of
Operations for the year ended December 31, 2004 does not
include any expense related to this matter. Management is
monitoring this situation and if it appears probable that
Meridian’s permanent staff in Ireland will fall below 145
and that grants will need to be repaid to IDA, Meridian will be
required to recognize an expense at that time. This expense
could be material to Meridian’s results of operations.
The Company’s current intention is to expand the service
offerings of Meridian to offer outsourced accounts payable and
employee expense reimbursement processing and redirect most of
the Meridian employees who may be affected by the proposed
legislation to provide services to its core Accounts Payable
Services business. The Company believes that this redirection
will significantly enhance its Accounts Payable Services
business internationally as well as provide the peripheral
benefit of mitigating the risk of a future IDA grant repayment.
External factors such as potential terrorist attacks could
have a material adverse affect on our future revenues and
earnings.
The terrorist events of September 11, 2001 that occurred in
the United States significantly disrupted our business. In the
days and months following these terrorist events, many of our
clients were urgently attending to new security imperatives and
other matters of immediate priority. Future potential terrorist
events could again have a material and adverse affect on our
revenues and earnings, including potentially, adverse effects on
both our United States and international operations.
We rely on international operations for significant
revenues.
In 2004, approximately 42.0% of our revenues from continuing
operations were generated from international operations.
International operations are subject to risks, including:
|
|
|
| |
• |
political and economic instability in the international markets
we serve; |
| |
| |
• |
difficulties in staffing and managing foreign operations and in
collecting accounts receivable; |
| |
| |
• |
fluctuations in currency exchange rates, particularly weaknesses
in the Australian Dollar, the Euro, the British Pound, the
Canadian Dollar, the Argentine Peso, the Brazilian Real and
other currencies of countries in which we transact business,
which could result in currency translations that materially
reduce our revenues and earnings; |
| |
| |
• |
costs associated with adapting our services to our foreign
clients’ needs; |
| |
| |
• |
unexpected changes in regulatory requirements and laws; |
| |
| |
• |
difficulties in transferring earnings from our foreign
subsidiaries to us; |
| |
| |
• |
burdens of complying with a wide variety of foreign laws and
labor practices; and |
| |
| |
• |
business interruptions due to potential terrorist activities. |
Because we expect a significant and growing proportion of our
revenues to continue to come from international operations, the
occurrence of any of the above events could materially and
adversely affect our business, financial condition and results
of operations.
We require significant management and financial resources to
operate and expand our recovery audit services internationally
and international expansion may result in lower profit margins
or be unsuccessful.
In our experience, entry into new international markets requires
considerable management time as well as start-up expenses for
market development, hiring and establishing office facilities.
In addition, we have encountered, and expect to continue to
encounter, significant expense and delays in expanding our
international operations because of language and cultural
differences, communications and related issues. We
13
generally incur the costs associated with international
expansion before any significant revenues are generated. As a
result, initial operations in a new international market
typically operate at low margins or may be unprofitable.
Additionally, these operations may continue to operate at lower
profit margins until revenues can be built up. If operations do
not achieve an acceptable profit margin, we may need to forego
our initial investment altogether and abandon our efforts in
certain countries.
We may not achieve increased revenues as expected from new
international clients.
During the last six months of 2004, we signed service contracts
with 44 customers expected to lead to an increase in
revenues in 2005. The new client audit process involves the
Company obtaining and analyzing customer payment data before
generating potential claims against the customers’ vendors.
The Company’s customers must receive economic benefit from
our services before revenue can be recognized pursuant to the
Company’s revenue recognition policy. These anticipated
revenues may be delayed, or may not occur, for reasons beyond
our control.
Recovery audit services are not widely used in international
markets.
Our long-term growth objectives are based in part on achieving
significant future growth in international markets. Although our
recovery audit services constitute a generally accepted business
practice among retailers in the U.S., Canada, the United Kingdom
and Mexico, these services have not yet become widely used in
many international markets. Prospective clients, vendors or
other involved parties in foreign markets may not accept our
services. The failure of these parties to accept and use our
services could have a material adverse effect on our future
growth.
Future impairment of goodwill, other intangible assets and
long-lived assets could materially reduce our future
earnings.
During the fourth quarter of 2003, we recorded impairment
charges of $206.9 million related to the impairment of
goodwill, impairment of intangible assets with indefinite lives
and impairment of internally developed software (see Note 7
of Notes to Consolidated Financial Statements in Item 8. of
this Form 10-K.) There were no such impairment charges
recorded in 2004.
Adverse future changes in the business environment or in our
ability to perform audits successfully and compete effectively
in our market could result in additional impairment of goodwill,
other intangible assets or long-lived assets, which could
materially adversely impact future earnings.
The level of our annual profitability has historically been
significantly affected by our third and fourth quarter operating
results.
Prior to 2002, we had historically experienced significant
seasonality in our business. We typically realized higher
revenues and operating income in the last two quarters of our
fiscal year. This trend reflected the inherent purchasing and
operational cycles of our clients. As of January 24, 2002,
our results of operations include the results of the business
acquired as part of the acquisitions of the businesses of
HSA-Texas and affiliates. Also impacting seasonality in 2002
were certain costs associated with the integration of the
acquired operations and the integration of our domestic retail
and domestic commercial operations. During 2003, our results of
operations were negatively impacted by client reaction to
well-publicized inquiries by the United States Securities and
Exchange Commission into the accounting by retailers for
vendor-supplied promotional allowances as well as other factors
discussed elsewhere in this Form 10-K. Although we
currently anticipate that our revenues and profits in the third
and fourth quarters of 2005 will be greater than comparable
amounts for the first and second quarters of 2005, if we do not
realize increased revenues in future third and fourth quarter
periods, including 2005, due to adverse economic conditions in
those quarters or otherwise, our profitability for any affected
quarter and the entire year could be materially and adversely
affected because ongoing selling, general and administrative
expenses are largely fixed.
14
Our revenues from certain clients and VAT authorities may
change markedly from year to year.
We examine merchandise procurements and other payments made by
business entities such as manufacturers, distributors and
healthcare providers. Services to these types of clients to date
have tended to be more rotational in nature with different
divisions of a given client often audited in pre-arranged annual
sequences. Accordingly, revenues derived from a given client may
change markedly from year to year depending on factors such as
the size and nature of the client division under audit.
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
Meridian’s clients. The timing of reimbursement of VAT
claims by the various European tax authorities with which
Meridian files claims can differ significantly by country. As a
result of Meridian’s revenue recognition policy, and the
timing of claim reimbursements, its revenues can vary markedly
from period to period.
The market for providing disbursement audit services to
commercial entities in the United States is maturing.
The substantial majority of our domestic commercial Accounts
Payable Services clients are currently served using a
disbursement audit service model that typically entails
acquisition from the client of limited purchase data and an
audit focus on a select few recovery categories. We believe that
the market for providing disbursement audit services to
commercial entities in the United States is reaching maturity
with the existence of many competitors and increasing pricing
pressures. We intend to distinguish ourselves by providing
recurring, contract compliance audits to commercial entities
where line item client purchase data is available and client
purchase volumes are sufficient to achieve the Company’s
profitability objectives. Contract compliance audits typically
entail a vast expansion of recovery categories reviewed by our
auditors with commensurately greater dollars recovered and fees
earned. Until we can convert a substantial number of our current
domestic Accounts Payable Services commercial clients to
contract compliance audits, annual revenues derived from
domestic commercial clients may not grow and may decrease.
Although we are giving this conversion managerial emphasis, no
definitive completion timetable has been established.
Our domestic commercial Accounts Payable Services business is
subject to price pressure.
The substantial majority of the Company’s domestic
commercial Accounts Payable Services clients are currently
served using a disbursement audit service model which typically
entails obtaining limited purchase data from the client and an
audit focus on a select few recovery categories. The
disbursement audit business is highly competitive and barriers
to entry are relatively low. We believe that the low barriers to
entry result from limited technology infrastructure
requirements, the need for relatively minimal high-level data,
and an audit focus on a select few recovery categories. As a
result of the low barriers to entry, our domestic commercial
Accounts Payable Services business is subject to intense price
pressure from our competition.
We may be unable to protect and maintain the competitive
advantage of our proprietary technology and intellectual
property rights.
Our operations could be materially and adversely affected if we
are not able to adequately protect our proprietary software,
audit techniques and methodologies, and other proprietary
intellectual property rights. We rely on a combination of trade
secret laws, nondisclosure and other contractual arrangements
and technical measures to protect our proprietary rights.
Although we presently hold U.S. and foreign registered
trademarks and U.S. registered copyrights on certain of our
proprietary technology, we may be unable to obtain similar
protection on our other intellectual property. In addition, our
foreign registered trademarks may not receive the same
enforcement protection as our U.S. registered trademarks.
We generally enter into confidentiality agreements with our
employees, consultants, clients and potential clients. We also
limit access to, and distribution of, our proprietary
information. Nevertheless, we may be unable to deter
misappropriation of our proprietary information, detect
unauthorized use and take appropriate steps to enforce our
intellectual property rights. Our competitors also may
independently develop technologies that are substantially
equivalent or superior to our technology. Although we believe
that our services and products do not infringe on the
15
intellectual property rights of others, we can not prevent
someone else from asserting a claim against us in the future for
violating their technology rights.
Our failure to retain the services of John M. Cook, or other
key members of management, could adversely impact our continued
success.
Our continued success depends largely on the efforts and skills
of our executive officers and key employees, particularly John
M. Cook, our Chief Executive Officer and Chairman of the Board.
The loss of the services of Mr. Cook or other key members
of management could materially and adversely affect our
business. We have entered into employment agreements with
Mr. Cook and other key members of management. While these
employment agreements limit the ability of Mr. Cook and
other key employees to directly compete with us in the future,
nothing prevents them from leaving our company. We also maintain
key man life insurance policies in the aggregate amount of
$13.3 million on the life of Mr. Cook.
We may not be able to continue to compete successfully with
other businesses offering recovery audit services.
The recovery audit business is highly competitive. Our principal
competitors for accounts payable recovery audit services include
numerous smaller firms. We cannot be certain as to whether we
can continue to compete successfully with our competitors. In
addition, our profit margins could decline because of
competitive pricing pressures that may have a material adverse
effect on our business, financial condition and results of
operations.
Our further expansion into electronic commerce auditing
strategies and processes may not be profitable.
We anticipate a growing need for recovery auditing services
among current clients migrating to Internet-based procurement,
as well as potential clients already engaged in electronic
commerce transactions. In response to this anticipated future
demand for our recovery auditing expertise, we have made and may
continue to make significant capital and other expenditures to
further expand into Internet technology areas. We can give no
assurance that these investments will be profitable or that we
have correctly anticipated demand for these services.
An adverse judgment in the securities action litigation in
which we and John M. Cook are defendants could have a material
adverse effect on our results of operations and liquidity.
We and John M. Cook, our Chief Executive Officer, are defendants
in a class action lawsuit initiated on June 6, 2000 in the
United States District Court for the Northern District of
Georgia, Atlanta Division (the “Securities
Class Action Litigation”). On February 8, 2005,
we entered into a Stipulation of Settlement
(“Settlement”) with Plaintiffs’ counsel, on
behalf of all putative class members, pursuant to which we
agreed to settle the consolidated class action for
$6.75 million, which payment is expected to be made by the
insurance carrier for the Company. On February 10, 2005,
the Court preliminarily approved the terms of the Settlement.
Consistent with the Federal Rules of Civil procedure, the class
will be provided notice of the Settlement and given the right to
object or opt-out of the Settlement. The Court will hold a final
approval hearing on May 26, 2005. Final settlement of the
consolidated class action is subject to final approval by the
Court. Should the Court not approve the final settlement of the
consolidated class action and should a judgment subsequently be
entered against the Company, it may have a material adverse
effect on our results of operations and liquidity.
Our articles of incorporation, bylaws, and shareholders’
rights plan and Georgia law may inhibit a change in control that
you may favor.
Our articles of incorporation and bylaws and Georgia law contain
provisions that may delay, deter or inhibit a future acquisition
of us not approved by our board of directors. This could occur
even if our shareholders are offered an attractive value for
their shares or if a substantial number or even a majority of
our shareholders believe the takeover is in their best interest.
These provisions are intended to encourage any
16
person interested in acquiring us to negotiate with and obtain
the approval of our board of directors in connection with the
transaction. Provisions that could delay, deter or inhibit a
future acquisition include the following:
|
|
|
| |
• |
a staggered board of directors; |
| |
| |
• |
the requirement that our shareholders may only remove directors
for cause; |
| |
| |
• |
specified requirements for calling special meetings of
shareholders; and |
| |
| |
• |
the ability of the board of directors to consider the interests
of various constituencies, including our employees, clients and
creditors and the local community. |
Our articles of incorporation also permit the board of directors
to issue shares of preferred stock with such designations,
powers, preferences and rights as it determines, without any
further vote or action by our shareholders. In addition, we have
in place a “poison pill” shareholders’ rights
plan that will trigger a dilutive issuance of common stock upon
substantial purchases of our common stock by a third party which
are not approved by the board of directors. These provisions
also could discourage bids for our shares of common stock at a
premium and have a material adverse effect on the market price
of our shares.
Our stock price has been and may continue to be volatile.
Our common stock is traded on The Nasdaq Stock Market. The
trading price of our common stock has been and may continue to
be subject to large fluctuations. Our stock price may increase
or decrease in response to a number of events and factors,
including:
|
|
|
| |
• |
future announcements concerning us, key clients or competitors; |
| |
| |
• |
quarterly variations in operating results; |
| |
| |
• |
changes in financial estimates and recommendations by securities
analysts; |
| |
| |
• |
developments with respect to technology or litigation; |
| |
| |
• |
the operating and stock price performance of other companies
that investors may deem comparable to our Company; |
| |
| |
• |
acquisitions and financings; and |
| |
| |
• |
sales of blocks of stock by insiders. |
Stock price volatility is also attributable to the current state
of the stock market, in which wide price swings are common. This
volatility may adversely affect the price of our common stock,
regardless of our operating performance.
Our ability to pay off or repurchase convertible notes, if
required, may be limited.
Our convertible notes are due in 2006. Additionally, in certain
circumstances, including a change in control, the holders of the
notes may require us to repurchase some or all of the
convertible notes. We may not have sufficient financial
resources at such time or may be unable to arrange financing to
pay the repurchase price of the convertible notes. Our ability
to pay off when due or repurchase the convertible notes may be
limited by law, the indenture, or the terms of other agreements
relating to our senior indebtedness. For example, under the
terms of our senior bank credit facility, the lender under that
facility is required to consent to any payment of principal
under the convertible notes. We may be required to refinance our
senior indebtedness in order to make such payments, and we can
give no assurance that we would be able to obtain such financing
on acceptable terms or at all.
17
FORWARD LOOKING STATEMENTS
Some of the information in this Form 10-K contains
forward-looking statements and information made by us that are
based on the beliefs of management as well as estimates and
assumptions made by and information currently available to our
management. The words “could,” “may,”
“might,” “will,” “would,”
“shall,” “should,” “pro forma,”
“potential,” “pending,” “intend,”
“believe,” “expect,” “anticipate,”
“estimate,” “plan,” “future” and
other similar expressions generally identify forward-looking
statements, including, in particular, statements regarding
future services, market expansion and pending litigation. These
forward-looking statements are made pursuant to the safe harbor
provisions of the Private Securities Litigation Reform Act of
1995. Investors are cautioned not to place undue reliance on
these forward-looking statements. Such forward-looking
statements reflect the views of our management at the time such
statements are made and are subject to a number of risks,
uncertainties, estimates and assumptions, including, without
limitation, in addition to those identified in the text
surrounding such statements, those identified under “Risk
Factors” and elsewhere in this Form 10-K.
Some of the forward-looking statements contained in this
Form 10-K include:
|
|
|
| |
• |
statements regarding the Company’s expected future
dependency on its major clients; |
| |
| |
• |
statements regarding market opportunities for recovery audit
firms and the opportunities offered by the Accounts Payable
Services business; |
| |
| |
• |
statements regarding the Company’s strategic business
initiatives; |
| |
| |
• |
statements regarding conversion of a substantial number of the
Company’s commercial clients from the disbursement audit
service model to the contract compliance service model; |
| |
| |
• |
statements regarding future revenues for international Accounts
Payable Services including European revenue growth; |
| |
| |
• |
statements regarding the Company’s expected increase in
revenues in its international Accounts Payable Services
operations relating to increased signed service contracts; |
| |
| |
• |
statements regarding the exploration of the Company’s
strategic business alternatives; |
| |
| |
• |
statements regarding the Company’s future revenues
returning to pre-2002 seasonal patterns; |
| |
| |
• |
statements regarding future run-rate basis cost savings in
relation to the Company’s strategic initiatives; |
| |
| |
• |
statements regarding the future dilutive effect of shares
subject to the convertible notes; |
| |
| |
• |
statements regarding the impact of newly-emerging procurement
technologies involving the Internet and the lack of data type
definitions on recovery audit opportunities; |
| |
| |
• |
statements regarding the expected relative return on investment
and growth of the Accounts Payable Services business; |
| |
| |
• |
statements regarding new service offerings in the Company’s
Meridian operating segment; |
| |
| |
• |
statements regarding future revenue growth resulting from
improvement in the Company’s audit start trend and
increased claim productivity; |
| |
| |
• |
statements regarding the Company’s ability to maintain its
client retention rates; and |
| |
| |
• |
statements regarding the sufficiency of the Company’s
resources to meet its working capital and capital expenditure
needs. |
In addition, important factors to consider in evaluating such
forward-looking statements include changes or developments in
United States and international economic, market, legal or
regulatory circumstances, changes in our business or growth
strategy or an inability to execute our strategy due to changes
in our industry or the economy generally, the emergence of new
or growing competitors, the actions or omissions of third
parties, including suppliers, customers, competitors and United
States and foreign governmental authorities,
18
and various other factors. Should any one or more of these risks
or uncertainties materialize, or the underlying estimates or
assumptions prove incorrect, actual results may vary
significantly and markedly from those expressed in such
forward-looking statements, and there can be no assurance that
the forward-looking statements contained in this Form 10-K
will in fact occur.
Given these uncertainties, you are cautioned not to place undue
reliance on our forward-looking statements. We disclaim any
obligation to announce publicly the results of any revisions to
any of the forward-looking statements contained in this
Form 10-K, to reflect future events or developments.
The Company’s principal executive offices are located in
approximately 132,000 square feet of office space in
Atlanta, Georgia. The Company leases this space under an
agreement expiring on December 31, 2014. The Company’s
various operating units lease numerous other parcels of
operating space in the various countries in which the Company
currently conducts its business.
Excluding the lease for the Company’s principal executive
offices, the majority of the Company’s real property leases
are individually less than five years in duration. See
Note 9 of Notes to Consolidated Financial Statements
included in Item 8. of this Form 10-K.
|
|
| ITEM 3. |
Legal Proceedings |
Beginning on June 6, 2000, three putative class action
lawsuits were filed against the Company and certain of its
present and former officers in the United States District Court
for the Northern District of Georgia, Atlanta Division. These
cases were subsequently consolidated into one proceeding styled:
In re Profit Recovery Group International, Inc. Sec.
Litig., Civil Action File No. 1:00-CV-1416-CC (the
“Securities Class Action Litigation”). On
November 13, 2000, the Plaintiffs in these cases filed a
Consolidated and Amended Complaint (the “Complaint”).
In that Complaint, Plaintiffs allege that the Company, John M.
Cook, Scott L. Colabuono, the Company’s former Chief
Financial Officer, and Michael A. Lustig, the Company’s
former Chief Operating Officer, (the “Defendants”)
violated Sections 10(b) and 20(a) of the Securities
Exchange Act of 1934 and Rule 10b-5 promulgated thereunder
by allegedly disseminating false and misleading information
about a change in the Company’s method of recognizing
revenue and in connection with revenue reported for a division.
Plaintiffs purport to bring this action on behalf of a class of
persons who purchased the Company’s stock between
July 19, 1999 and July 26, 2000. Plaintiffs seek an
unspecified amount of compensatory damages, payment of
litigation fees and expenses, and equitable and/or injunctive
relief. On January 24, 2001, Defendants filed a Motion to
Dismiss the Complaint for failure to state a claim under the
Private Securities Litigation Reform Act, 15 U.S.C.
§ 78u-4 et seq. The Court denied
Defendant’s Motion to Dismiss on June 5, 2001.
Defendants served their Answer to Plaintiffs’ Complaint on
June 19, 2001. The Court granted Plaintiffs’ Motion
for Class Certification on December 3, 2002.
On February 8, 2005, the Company entered into a Stipulation
of Settlement of the Securities Class Action Litigation. On
February 10, 2005, the United States District Court for the
Northern District of Georgia, Atlanta Division preliminarily
approved the terms of the Settlement. If approved by the Court,
the Settlement is not expected to require any financial
contribution by the Company. Consistent with the Federal Rules
of Civil Procedure, the class will be provided notice of the
Settlement and given the right to object or opt-out of the
Settlement. The Court will hold a final approval hearing on
May 26, 2005. Final settlement of the consolidated class
action is subject to final approval by the Court.
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 Company’s financial position or results of
operations.
|
|
| ITEM 4. |
Submission of Matters to a Vote of Security Holders |
During the fourth quarter covered by this report, no matter was
submitted to a vote of security holders of the Company.
19
PART II
|
|
| ITEM 5. |
Market for Registrant’s Common Equity, Related
Stockholder Matters and Issuer Purchases of Equity Securities |
The Company’s common stock is traded under the symbol
“PRGX” on The Nasdaq Stock Market (Nasdaq). The
Company has not paid cash dividends since its March 26,
1996 initial public offering and does not intend to pay cash
dividends in the foreseeable future. Moreover, restrictive
covenants included in the Company’s senior bank credit
facility specifically prohibit payment of cash dividends. As of
February 28, 2005, there were approximately
4,410 beneficial holders of the Company’s common stock
and 209 holders of record. The following table sets forth,
for the quarters indicated, the range of high and low trading
prices for the Company’s common stock as reported by Nasdaq
during 2004 and 2003.
| |
|
|
|
|
|
|
|
|
| |
|
High | |
|
Low | |
| 2004 Calendar Quarter |
|
| |
|
| |
|
1st Quarter
|
|
$ |
5.05 |
|
|
$ |
3.87 |
|
|
2nd Quarter
|
|
|
5.57 |
|
|
|
4.21 |
|
|
3rd Quarter
|
|
|
6.21 |
|
|
|
4.77 |
|
|
4th Quarter
|
|
|
6.13 |
|
|
|
4.85 |
|
| |
|
|
|
|
|
|
|
|
| |
|
High | |
|
Low | |
| 2003 Calendar Quarter |
|
| |
|
| |
|
1st Quarter
|
|
$ |
9.18 |
|
|
$ |
6.72 |
|
|
2nd Quarter
|
|
|
8.99 |
|
|
|
5.85 |
|
|
3rd Quarter
|
|
|
6.85 |
|
|
|
4.96 |
|
|
4th Quarter
|
|
|
6.30 |
|
|
|
4.43 |
|
The Company did not repurchase any of its outstanding common
stock during 2004 as its Senior Credit Facility prohibits stock
repurchases.
|
|
| ITEM 6. |
Selected Consolidated Financial Data |
The following table sets forth selected consolidated financial
data for the Company as of and for the five years ended
December 31, 2004. Such historical consolidated financial
data have been derived from the Company’s Consolidated
Financial Statements and Notes thereto, which have been audited
by KPMG LLP, Independent Registered Public Accounting Firm. The
Consolidated Balance Sheets as of December 31, 2004 and
2003, and the related Consolidated Statements of Operations,
Shareholders’ Equity and Cash Flows for each of the years
in the three-year period ended December 31, 2004 and the
report of the Independent Registered Public Accounting Firm
thereon are included in Item 8. of this Form 10-K. The
Company disposed of its Logistics Management Services segment in
October 2001 and closed a unit within the Communications
Services business during the third quarter of 2001. In December
2001, the Company disposed of its French Taxation Services
business which had been part of continuing operations until the
time of its disposal. Additionally, in January 2004, the Company
consummated the sale of the remaining Communications Services
operations. Selected consolidated financial data for the Company
has been reclassified to reflect Logistics Management Services,
the closed unit within Communications Services, the French
Taxation Services business and the remaining Communications
Services operations as discontinued operations, and all
historical financial information contained herein has been
reclassified to remove these businesses from continuing
operations for all periods presented. During the fourth quarter
of 2000, the Company’s Meridian and Channel Revenue
businesses adopted Staff Accounting Bulletin (“SAB”)
No. 101, Revenue Recognition in Financial
Statements, retroactive to January 1, 2000. The data
presented below should be read in conjunction with the
Consolidated Financial Statements and Notes thereto included
elsewhere in
20
this Form 10-K and other financial information appearing
elsewhere in this Form 10-K including Management’s
Discussion and Analysis of Financial Condition and Results of
Operations.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Years Ended December 31, | |
| |
|
| |
| |
|
2004(1)(2) | |
|
2003(2)(3) | |
|
2002(2)(4)(5) | |
|
2001(2)(6) | |
|
2000(2)(5) | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| |
|
(In thousands, except per share data) | |
|
Statements of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Revenues
|
|
$ |
356,873 |
|
|
$ |
375,701 |
|
|
$ |
446,890 |
|
|
$ |
296,494 |
|
|
$ |
290,017 |
|
| |
Cost of revenues
|
|
|
224,527 |
|
|
|
233,689 |
|
|
|
253,852 |
|
|
|
168,537 |
|
|
|
170,438 |
|
| |
Selling, general and administrative expenses
|
|
|
125,113 |
|
|
|
124,240 |
|
|
|
142,001 |
|
|
|
113,861 |
|
|
|
104,565 |
|
| |
Impairment charges
|
|
|
— |
|
|
|
206,923 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Operating income (loss)
|
|
|
7,233 |
|
|
|
(189,151 |
) |
|
|
51,037 |
|
|
|
14,096 |
|
|
|
15,014 |
|
| |
Interest (expense)
|
|
|
(9,142 |
) |
|
|
(9,520 |
) |
|
|
(9,934 |
) |
|
|
(9,403 |
) |
|
|
(7,839 |
) |
| |
Interest income
|
|
|
593 |
|
|
|
572 |
|
|
|
595 |
|
|
|
500 |
|
|
|
250 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Earnings (loss) from continuing operations before income taxes,
discontinued operations and cumulative effect of accounting
changes
|
|
|
(1,316 |
) |
|
|
(198,099 |
) |
|
|
41,698 |
|
|
|
5,193 |
|
|
|
7,425 |
|
| |
Income taxes
|
|
|
75,344 |
|
|
|
(35,484 |
) |
|
|
15,336 |
|
|
|
3,152 |
|
|
|
4,423 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Earnings (loss) from continuing operations before discontinued
operations and cumulative effect of accounting changes
|
|
|
(76,660 |
) |
|
|
(162,615 |
) |
|
|
26,362 |
|
|
|
2,041 |
|
|
|
3,002 |
|
| |
Discontinued operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Earnings (loss) from discontinued operations, net of income taxes
|
|
|
— |
|
|
|
1,267 |
|
|
|
(7,794 |
) |
|
|
(2,997 |
) |
|
|
(15,985 |
) |
| |
|
Gain (loss) on disposal/retention of discontinued operations,
including operating results for phase out period, net of income
taxes
|
|
|
5,177 |
|
|
|
530 |
|
|
|
2,716 |
|
|
|
(82,755 |
) |
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Earnings (loss) from discontinued operations
|
|
|
5,177 |
|
|
|
1,797 |
|
|
|
(5,078 |
) |
|
|
(85,752 |
) |
|
|
(15,985 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Earnings (loss) before cumulative effect of accounting changes
|
|
|
(71,483 |
) |
|
|
(160,818 |
) |
|
|
21,284 |
|
|
|
(83,711 |
) |
|
|
(12,983 |
) |
| |
Cumulative effect of accounting changes, net of income taxes
|
|
|
— |
|
|
|
— |
|
|
|
(8,216 |
) |
|
|
— |
|
|
|
(26,145 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Net earnings (loss)
|
|
$ |
(71,483 |
) |
|
$ |
(160,818 |
) |
|
$ |
13,068 |
|
|
$ |
(83,711 |
) |
|
$ |
(39,128 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Basic earnings (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Earnings (loss) from continuing operations before discontinued
operations and cumulative effect of accounting changes
|
|
$ |
(1.24 |
) |
|
$ |
(2.63 |
) |
|
$ |
0.42 |
|
|
$ |
0.04 |
|
|
$ |
0.06 |
|
| |
|
Discontinued operations
|
|
|
0.08 |
|
|
|
0.03 |
|
|
|
(0.08 |
) |
|
|
(1.77 |
) |
|
|
(0.33 |
) |
| |
|
Cumulative effect of accounting changes
|
|
|
— |
|
|
|
— |
|
|
|
(0.13 |
) |
|
|
— |
|
|
|
(0.53 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Net earnings (loss)
|
|
$ |
(1.16 |
) |
|
$ |
(2.60 |
) |
|
$ |
0.21 |
|
|
$ |
(1.73 |
) |
|
$ |
(0.80 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Diluted earnings (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Earnings (loss) from continuing operations before discontinued
operations and cumulative effect of accounting changes
|
|
$ |
(1.24 |
) |
|
$ |
(2.63 |
) |
|
$ |
0.38 |
|
|
$ |
0.04 |
|
|
$ |
0.06 |
|
| |
|
Discontinued operations
|
|
|
0.08 |
|
|
|
0.03 |
|
|
|
(0.06 |
) |
|
|
(1.76 |
) |
|
|
(0.32 |
) |
| |
|
Cumulative effect of accounting changes
|
|
|
— |
|
|
|
— |
|
|
|
(0.10 |
) |
|
|
— |
|
|
|
(0.53 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Net earnings (loss)
|
|
$ |
(1.16 |
) |
|
$ |
(2.60 |
) |
|
$ |
0.22 |
|
|
$ |
(1.72 |
) |
|
$ |
(0.79 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
December 31, | |
| |
|
| |
| |
|
2004(1)(2) | |
|
2003(2)(3) | |
|
2002(2)(4)(5) | |
|
2001(2)(6) | |
|
2000(2)(5) | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| |
|
(In thousands) | |
|
Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Cash and cash equivalents
|
|
$ |
12,596 |
|
|
$ |
26,658 |
|
|
$ |
14,860 |
|
|
$ |
33,334 |
|
|
$ |
18,748 |
|
| |
Working capital(7)
|
|
|
7,148 |
|
|
|
1,715 |
|
|
|
35,562 |
|
|
|
39,987 |
|
|
|
156,944 |
|
| |
Total assets
|
|
|
341,936 |
|
|
|
426,049 |
|
|
|
585,780 |
|
|
|
379,260 |
|
|
|
497,364 |
|
| |
Long-term debt, excluding current installments and loans from
shareholders
|
|
|
— |
|
|
|
— |
|
|
|
26,363 |
|
|
|
— |
|
|
|
153,563 |
|
| |
Convertible notes
|
|
|
123,286 |
|
|
|
122,395 |
|
|
|
121,491 |
|
|
|
121,166 |
|
|
|
— |
|
| |
Total shareholders’ equity
|
|
|
103,584 |
|
|
|
173,130 |
|
|
|
337,885 |
|
|
|
168,095 |
|
|
|
247,529 |
|
|
|
| (1) |
In 2004, the Company recognized an increase in the valuation
allowance against its remaining net deferred tax assets. See
Note 10 of Notes to Consolidated Financial Statements
included in Item 8. of this Form 10-K. |
21
|
|
| (2) |
During January 2004, the Company completed the sale of its
remaining Communications Services operations. In accordance with
accounting principles generally accepted in the United States of
America, Communications Services has been reflected as
discontinued operations for all periods presented. See
Note 2(c) of Notes to Consolidated Financial Statements
included in Item 8. of this Form 10-K. |
| |
| (3) |
During 2003, the Company recognized impairment charges related
to goodwill, intangible assets with indefinite lives and
long-lived assets. See Notes 1(j) and 7 of Notes to
Consolidated Financial Statements included in Item 8. of
this Form 10-K. |
| |
| (4) |
During 2002, the Company completed the acquisitions of the
businesses of HSA-Texas and affiliates accounted for as a
purchase. See Note 14 of Notes to Consolidated Financial
Statements included in Item 8. of this Form 10-K. |
| |
| (5) |
In 2002, the Company incurred a charge in connection with the
implementation of Statement of Financial Accounting Standards
No. 142, Goodwill and Other Intangible Assets. See
Note 7 of Notes to Consolidated Financial Statements
included in Item 8. of this Form 10-K. Additionally,
in 2000 the Company changed its method of accounting for revenue
recognition. During the fourth quarter of 2000, the
Company’s Meridian and Channel Revenue businesses adopted
Staff Accounting Bulletin (“SAB”) No. 101,
Revenue Recognition in Financial Statements, retroactive
to January 1, 2000. |
| |
| (6) |
During 2001, the Company completed the sale of its French
Taxation Services business and Logistics Management Services
segment at net losses of $54.0 million and
$19.1 million, respectively. See Note 2 of Notes to
Consolidated Financial Statements included in Item 8. of
this Form 10-K. |
| |
| (7) |
Reflects December 31, 2004 scheduled maturity of the
Company’s line of credit, which was refinanced in November
2004, and reclassification to current liabilities at
December 31, 2003. |
|
|
| ITEM 7. |
Management’s Discussion and Analysis of Financial
Condition and Results of Operations |
Introduction
The Company’s revenues are based on specific contracts with
its clients. Such contracts generally specify: (a) time
periods covered by the audit; (b) nature and extent of
audit services to be provided by the Company; (c) the
clients’ duties in assisting and cooperating with the
Company; and (d) fees payable to the Company, generally
expressed as a specified percentage of the amounts recovered by
the client resulting from liability overpayment claims
identified.
In addition to contractual provisions, most clients also
establish specific procedural guidelines that the Company must
satisfy prior to submitting claims for client approval. These
guidelines are unique to each client and impose specific
requirements on the Company, such as adherence to vendor
interaction protocols, provision of advance written notification
to vendors of forthcoming claims, securing written claim
validity concurrence from designated client personnel and, in
limited cases, securing written claim validity concurrence from
the involved vendors. Approved claims are processed by clients
and generally taken by them as a recovery of cash from the
vendor or a reduction to the vendor’s accounts payable
balance.
The Company generally recognizes revenue on the accrual basis
except with respect to its Meridian VAT Reclaim business unit
(“Meridian”) and Channel Revenue, a division of
Accounts Payable Services. Revenue is generally recognized for a
contractually specified percentage of amounts recovered when it
has been determined that our clients have 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 arrangement exists;
(b) services have been rendered; (c) the fee billed to
the client is fixed or determinable; and (d) collectibility
is reasonably assured. In certain limited circumstances, the
Company will invoice a client prior to meeting all four of these
criteria; in such cases, revenue is deferred until all of the
criteria are met.
The Company’s Meridian and Channel Revenue 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 revenues to the accounting period
in which cash is both received from the foreign governmental
agencies reimbursing value-added tax (“VAT”) claims
and transferred to Meridian’s clients. Channel Revenue
defers recognition of revenue to the accounting period in which
cash is received from its clients as a result of overpayment
claims identified.
The Company derives an insignificant amount of revenues on a
“fee-for-service” basis whereby billing is based upon
a flat fee, or fee per hour, or fee per unit of usage. The
Company recognizes revenue for these
22
types of services as they are provided and invoiced and when
criteria (a) through (d) as set forth above are met.
|
|
|
Evaluation of Strategic Alternatives |
On October 21, 2004, the Company announced that its Board
of Directors, in response to several inquiries received by the
Company, has decided to explore the Company’s strategic
alternatives, including a possible sale of the Company. The
Board, together with its financial advisor, CIBC World Markets
Corp., will evaluate the Company’s options and determine
the course of action that is in the best interests of its
shareholders. The exploration of strategic alternatives is
ongoing; however, the Company is not engaged in any negotiations
at this time and there can be no assurance that any transaction
or other corporate action will result from this effort.
|
|
|
Strategic Business Initiatives for the Accounts Payable
Services Business |
The Company’s objective is to build on its position as the
leading worldwide provider of recovery audit services. The
Company’s strategic plan to achieve these objectives
focuses on a series of initiatives designed to maintain its
dedicated focus on the Company’s clients and rekindle its
growth. The Company has implemented a number of strategic
business initiatives over the past 18 months that have been
leveraged to reduce costs, increase recoveries and fuel growth
at existing and new clients. Some of these key initiatives
include: (1) Centralize Claim Processing and Field Audit
Work; (2) Standardize Audit Software and Processes;
(3) Implement Technology Platforms; and (4) Optimize
the Organization. With these strategic business initiatives in
place, the Company is focused on executing a growth strategy
that includes the following key elements: (1) Grow Business
with Existing Clients; (2) Grow the International Business;
(3) Grow the U.S. Commercial and Government Business;
and (4) Develop New Vertical Markets. See Part I,
Item 1. “Business — The PRG-Schultz
Strategy”.
Evolving the service model (Model Evolution) entails developing
consistent audit tools, audit methodologies and field staffing
protocols. The Company believes that this consistency is a
critical prerequisite to better serving its clients, since it
will provide a uniform foundation for propagating best practices
throughout the world. Another area the Company is addressing is
gaining cost efficiencies through the standardization of the
more routine sub-components of the recovery audit process that
lend themselves to greater efficiency and cost-effectiveness
when performed in a specialized, centralized work group setting.
Management believes that this will allow the Company to maximize
recoveries for its clients in both the retail and commercial
sectors as a result of the better tools and methodologies while
lowering the Company’s overall cost of revenues as a
percentage of revenues.
The Model Evolution work will initially concentrate on the
U.S. Accounts Payable Services business and domestic
corporate support functions. The Company has been conducting the
U.S.-based aspect of its work through most of 2004 and continues
to drive towards a goal of run-rate basis cost savings, compared
to the 2003 level, of approximately $16.0 million to
$20.0 million upon completion of the U.S.-based work
effort. A significant portion of these expected cost savings are
being targeted for reinvestment to fund the cost of new growth
initiatives, including significant additional financial
commitments to international Accounts Payable Services expansion
and new business development. In conducting this service model
initiative, the Company is incurring significant expenses for
items such as employee severances, the closure of offices and
the fees of outside advisors. The Company’s recently
announced exploration of strategic alternatives is not expected
to negatively impact the timing for completion of the
Company’s strategic business initiatives work.
|
|
|
Potential Settlement of Class Action Lawsuit |
On February 8, 2005, the Company entered into a Stipulation
of Settlement (“Settlement”) with Plaintiffs’
counsel, on behalf of all putative class members, pursuant to
which it preliminarily agreed to settle the consolidated class
action for $6.75 million, which payment is expected to be
made by the insurance carrier for the Company. On
February 10, 2005, the Court preliminarily approved the
terms of the Settlement.
23
Consistent with the Federal Rules of Civil procedure, the class
will be provided notice of the Settlement and given the right to
object or opt-out of the Settlement. The Court will hold a final
approval hearing on May 26, 2005. Final settlement of the
consolidated class action is subject to final approval by the
Court.
|
|
|
Settlement of Warranty Claims Pertaining to a Business
Sold in 2001 |
On December 14, 2001, the Company consummated the sale of
its French Taxation Services business (“ALMA”), as
well as certain notes payable due to the Company, to Chequers
Capital, a Paris-based private equity firm. In conjunction with
this sale, the Company provided the buyer with certain
warranties. Effective December 30, 2004, the Company,
Meridian and ALMA (the “Parties”) entered into a
Settlement Agreement (the “Agreement”) requiring the
Company to pay a total of 3.4 million Euros
($4.7 million at January 3, 2005 exchange rates, the
payment date), to resolve the buyer’s warranty claims and a
commission dispute with Meridian. During 2004, the Company
recognized a loss on discontinued operations of
$3.1 million for amounts not previously accrued to provide
for these claims. No tax benefit was recognized in relation to
the expense. The Agreement settles all remaining indemnification
obligations and terminates all contractual relationships between
the Parties and further specifies that the Parties will renounce
all complaints, grievances and other actions.
|
|
|
New Senior Credit Facility |
On November 30, 2004, the Company entered into an amended
and restated credit agreement (the “Senior Credit
Facility”) with Bank of America, N.A. (the
“Lender”). The Senior Credit Facility amends and
restates the Company’s previous senior credit facility,
which was maintained by a syndicate of banking institutions led
by the Lender. The Senior Credit Facility currently provides for
revolving credit loans (the “Revolver”) up to a
maximum amount of $25.0 million, subject to certain
borrowing base limitations; provided, however, that the maximum
amount of loans outstanding may be increased to
$30.0 million as early as July 1, 2005 upon
achievement of certain performance milestones. The Senior Credit
Facility provides for the availability of letters of credit
subject to a $10.0 million sublimit.
The occurrence of certain stipulated events, as defined in the
Senior Credit Facility, including but not limited to the event
that the Company’s outstanding borrowings exceed the
prescribed borrowing base, would require accelerated principal
payments. Otherwise, so long as there is no violation of any of
the covenants (or any such violations are waived), no principal
payments are due until the maturity date on May 26, 2006.
The Senior Credit Facility is secured by substantially all
assets of the Company. Revolving loans under the Senior Credit
Facility bear interest at either (1) the Lender’s
prime rate plus 0.5%, or (2) the London Interbank Offered
Rate (“LIBOR”) plus 3.0%. The Senior Credit Facility
requires a fee for committed but unused credit capacity of
..50% per annum. The Senior Credit Facility contains
customary financial covenants relating to the maintenance of a
maximum leverage ratio and minimum consolidated earnings before
interest, taxes, depreciation and amortization as defined in the
Senior Credit Facility. Covenants in the previous Senior Credit
Facility related to Senior Leverage, Fixed Charge Coverage, and
Minimum Net Worth were eliminated. At December 31, 2004,
the Company was in compliance with all such covenants.
|
|
|
Revision to Previously Reported 2004 Results from
Continuing Operations |
On March 3, 2005, the Company filed under Form 8-K its
press release announcing the results for the quarter and year
ended December 31, 2004. The Company has revised its
results from continuing operations for a non-cash reduction of
$0.9 million from the previously announced income tax
expense for the year ended December 31, 2004. This 1.1%
reduction from $76.2 million to $75.3 million resulted
from an increase in the amount recorded for the Company’s
foreign income tax receivables, and increased results from
continuing operations by $0.9 million, or $0.01 per share,
for the fourth-quarter and full-year 2004, as compared to the
results initially reported in the Company’s press release
dated March 3, 2005.
24
Critical Accounting Policies
Management’s Discussion and Analysis of Financial Condition
and Results of Operations discusses the Company’s
consolidated financial statements, which have been prepared in
accordance with accounting principles generally accepted in the
United States of America. The preparation of these consolidated
financial statements requires management to make estimates and
assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and
liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting
period.
The Company’s significant accounting policies are more
fully described in Note 1 of Notes to Consolidated
Financial Statements included in Item 8. of this
Form 10-K. However, certain of the Company’s
accounting policies are particularly important to the portrayal
of its financial position and results of operations and require
the application of significant judgment by management. As a
result, they are subject to an inherent degree of uncertainty.
Accounting policies that involve the use of estimates that meet
both of the following criteria are considered by management to
be “critical” accounting policies. First, the
accounting estimate requires the Company to make assumptions
about matters that are highly uncertain at the time that the
accounting estimate is made. Second, alternate estimates in the
current period, or changes in the estimate that are reasonably
likely in future periods, would have a material impact on the
presentation of the Company’s financial condition, changes
in financial condition or results of operations.
In addition to estimates that meet the “critical”
estimate criteria, the Company also makes many other accounting
estimates in preparing its consolidated financial statements and
related disclosures. All estimates, whether or not deemed
critical, affect reported amounts of assets, liabilities,
revenues and expenses, as well as disclosures of contingent
assets and liabilities. On an on-going basis, management
evaluates its estimates and judgments, including those related
to revenue recognition, accounts receivable allowance for
doubtful accounts, goodwill and other intangible assets and
income taxes. Management bases its estimates and judgments on
historical experience, information available prior to the
issuance of the consolidated financial statements and on various
other factors that are believed to be reasonable under the
circumstances. This information forms the basis for making
judgments about the carrying values of assets and liabilities
that are not readily apparent from other sources. Materially
different results can occur as circumstances change and
additional information becomes known, including changes in those
estimates not deemed “critical”.
Management believes the following critical accounting policies,
among others, involve its more significant estimates and
judgments used in the preparation of its consolidated financial
statements. The development and selection of accounting
estimates, including those deemed “critical,” and the
associated disclosures in this Form 10-K have been
discussed with the audit committee of the Board of Directors.
|
|
|
| |
• |
Revenue Recognition. The Company recognizes revenue on
the accrual basis except with respect to its Meridian business
unit, Channel Revenue, a division of Accounts Payable Services,
and certain international Accounts Payable Services units where
revenue is recognized on the cash basis in accordance with
guidance issued by the Securities and Exchange Commission in
Staff Accounting Bulletin (“SAB”) No. 104,
Revenue Recognition. Revenue is generally recognized for
a contractually specified percentage of amounts recovered when
it has been determined that our clients have 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 arrangement exists;
(b) services have been rendered; (c) the fee billed to
the client is fixed or determinable; and (d) collectibility
is reasonably assured. The determination that each of the
aforementioned criteria are met, particularly the determination
of the timing of economic benefit received by the client and the
determination that collectibility is reasonably assured,
requires the application of significant judgment by management
and a misapplication of this judgment could result in
inappropriate recognition of revenue. |
| |
| |
• |
Accounts Receivable Allowance for Doubtful Accounts. The
Company maintains allowances for doubtful accounts for estimated
losses resulting from the inability or unwillingness of its
clients to make required payments. The Company evaluates the
adequacy of the allowances on a periodic basis. The valuation
includes, but is not limited to, historical loss experience, the
aging of current accounts |
25
|
|
|
| |
|
receivable balances and provisions for adverse situations that
may affect a client’s ability to pay. If the evaluation of
allowance requirements differs from the actual aggregate
allowance, adjustments are made to the allowance. This
evaluation is inherently subjective, as it requires estimates
that are susceptible to revision as more information becomes
available. If the financial condition of any of the
Company’s clients were to deteriorate, or their operating
climates were to change, resulting in an impairment of either
their ability or willingness to make payments, additional
allowances may be required. If the Company’s estimate of
required allowances for doubtful accounts is determined to be
insufficient, it could result in decreased operating income in
the period such determination is made. Conversely, if a client
subsequently remits cash for an accounts receivable balance
which has previously been written off, it could result in
increased operating income in the period in which the payment is
received. A hypothetical 0.1% change in the allowance for
doubtful accounts would have a $0.1 million impact on
operating income. |
| |
| |
• |
Paybacks and Chargebacks. The Company has calculated an
estimate of amounts that could be potentially paid back to
customers in the form of a cash payment or credit against future
invoicings to that customer. Historically, there has been a
certain amount of revenues that, even though meeting all
requirements of the Company’s revenue recognition policy,
our customers’ vendors have ultimately rejected the claims
underlying such revenues. In that case, our customers, even
though cash may have been collected by the Company, may request
a refund of such amount. The Company has recorded such refunds
as a reduction of revenue. During 2004, the Company experienced
a $1.0 million decrease in revenues due to a change in the
estimate related to customer paybacks. In the future, if the
Company was to underestimate the amount of revenue that could
potentially be paid or credited back to customers, then revenues
and cash flows from operations could be adversely impacted. A
hypothetical 0.1% change in paybacks and chargebacks would have
a $0.4 million impact on operating income. |
| |
| |
• |
Goodwill and Other Intangible Assets. As of
December 31, 2004, the Company had a consolidated goodwill
asset of $170.7 million relating to the Accounts Payable
Services segment and other intangible assets of
$30.2 million, including intangible assets with indefinite
useful lives of $6.6 million, relating to the Accounts
Payable Services segment (see Note 7 of Notes to
Consolidated Financial Statements included in Item 8. of
this Form 10-K). |
|
|
| |
The goodwill impairment valuation is a two-part test. First, the
fair value of each reporting unit is developed and compared with
its recorded book value. If the fair value is less than the book
value, a second test is required. |
| |
| |
To the extent that management (or its independent valuation
advisors) misjudges or miscalculates any of the critical factors
necessary to determine the fair value of its reporting units or
intangible assets, future earnings could be materially adversely
impacted. |
|
|
|
| |
• |
Income Taxes. The Company’s reported effective tax
rate approximated 5,725%, (18%) and 37% for the years ended
December 31, 2004, 2003, and 2002, respectively. |
|
|
| |
The Company’s effective tax rate is based on historical and
anticipated future taxable income, statutory tax rates and tax
planning opportunities available to the Company in the various
jurisdictions in which it operates. Significant judgment is
required in determining the effective tax rate and in evaluating
the Company’s tax positions. Tax regulations require items
to be included in the tax returns at different times than the
items are reflected in the financial statements. As a result,
the Company’s effective tax rate reflected in its
Consolidated Financial Statements included in Item 8. of
this Form 10-K is different than that reported in its tax
returns. Some of these differences are permanent, such as
expenses that are not deductible on the Company’s tax
returns, and some are temporary differences, such as
depreciation expense. Temporary differences create deferred tax
assets and liabilities. Deferred tax assets generally represent
items that can be used as a tax deduction or credit in the
Company’s tax returns in future years for which it has
already recorded the tax benefit in the income statement. The
Company establishes valuation allowances to reduce deferred tax
assets to the amounts that it believes are more likely than not
to be realized. These valuation allowances are adjusted in light
of changing |
26
|
|
| |
facts and circumstances. Deferred tax liabilities generally
represent tax expense recognized in the Company’s
consolidated financial statements for which payment has been
deferred, or expense for which a deduction has already been
taken on the Company’s tax returns but has not yet been
recognized as an expense in its consolidated financial
statements. |
| |
| |
SFAS No. 109, Accounting for Income Taxes,
requires that deferred tax assets be reduced by a valuation
allowance if it is more likely than not that some portion or all
of a deferred tax asset will not be realized. The ultimate
realization of deferred tax assets is dependent upon the
generation of future taxable income during the periods in which
those temporary differences are deductible. In making this
determination, management considers all available positive and
negative evidence affecting specific deferred tax assets,
including the Company’s past and anticipated future
performance, the reversal of deferred tax liabilities, the
length of carry-back and carry-forward periods, and the
implementation of tax planning strategies. |
| |
| |
Objective positive evidence is necessary to support a conclusion
that a valuation allowance is not needed for all or a portion of
deferred tax assets when significant negative evidence exists.
Cumulative losses in recent years are the most compelling form
of negative evidence considered by management in this
determination. For the year ended December 31, 2004 the
Company recognized an increase in the valuation allowance
against its remaining net deferred tax assets of
$76.6 million. This increase was offset by the use of
approximately $4.3 million of capital loss carry-forwards
resulting in a net change in the valuation allowance of
approximately $72.3 million. The Company expects to
continue to record a full valuation allowance on future tax
benefits until an appropriate level of profitability is
sustained. Over time, the Company believes it will fully utilize
these assets as its results continue to improve. |
| |
| |
In addition, the Company’s Consolidated Balance Sheet as of
December 31, 2004 included in Item 8. of this
Form 10-K reflects a net deferred income tax liability of
$2.3 million ($1.9 million current deferred tax asset
and $4.2 million long-term deferred tax liability). |
27
Results of Operations
The following table sets forth the percentage of revenues
represented by certain items in the Company’s Consolidated
Statements of Operations for the periods indicated:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Years Ended December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
|
Statements of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Revenues
|
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
| |
Cost of revenues
|
|
|
62.9 |
|
|
|
62.2 |
|
|
|
56.8 |
|
| |
Selling, general and administrative expenses
|
|
|
35.1 |
|
|
|
33.1 |
|
|
|
31.8 |
|
| |
Impairment charges
|
|
|
— |
|
|
|
55.0 |
|
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
| |
|
Operating income (loss)
|
|
|
2.0 |
|
|
|
(50.3 |
) |
|
|
11.4 |
|
| |
Interest (expense)
|
|
|
(2.6 |
) |
|
|
(2.5 |
) |
|
|
(2.2 |
) |
| |
Interest income
|
|
|
0.2 |
|
|
|
0.1 |
|
|
|
0.1 |
|
| |
|
|
|
|
|
|
|
|
|
| |
|
Earnings (loss) from continuing operations before income taxes,
discontinued operations and cumulative effect of accounting
change
|
|
|
(0.4 |
) |
|
|
(52.7 |
) |
|
|
9.3 |
|
| |
Income taxes
|
|
|
21.1 |
|
|
|
(9.4 |
) |
|
|
3.4 |
|
| |
|
|
|
|
|
|
|
|
|
| |
|
Earnings (loss) from continuing operations before discontinued
operations and cumulative effect of accounting change
|
|
|
(21.5 |
) |
|
|
(43.3 |
) |
|
|
5.9 |
|
| |
Discontinued operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Earnings (loss) from discontinued operations, net of income taxes
|
|
|
— |
|
|
|
0.4 |
|
|
|
(1.7 |
) |
| |
|
Gain on disposal/retention of discontinued operations including
operating results for phase out period, net of income taxes
|
|
|
1.5 |
|
|
|
0.1 |
|
|
|
0.6 |
|
| |
|
|
|
|
|
|
|
|
|
| |
|
Earnings (loss) from discontinued operations
|
|
|
1.5 |
|
|
|
0.5 |
|
|
|
(1.1 |
) |
| |
|
|
|
|
|
|
|
|
|
| |
|
Earnings (loss) before cumulative effect of accounting change
|
|
|
(20.0 |
) |
|
|
(42.8 |
) |
|
|
4.8 |
|
| |
Cumulative effect of accounting change, net of income taxes
|
|
|
— |
|
|
|
— |
|
|
|
(1.9 |
) |
| |
|
|
|
|
|
|
|
|
|
| |
|
|
Net earnings (loss)
|
|
|
(20.0 |
)% |
|
|
(42.8 |
)% |
|
|
2.9 |
% |
| |
|
|
|
|
|
|
|
|
|
The Company has two reportable operating segments, the Accounts
Payable Services segment and Meridian VAT Reclaim (see
Note 5 of Notes to Consolidated Financial Statements
included in Item 8. of this Form 10-K).
Accounts Payable Services
Revenues. Accounts Payable Services revenues for the
years ended December 31, 2004, 2003 and 2002 were as
follows (in millions):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
|
Domestic Accounts Payable Services revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Retail
|
|
$ |
169.7 |
|
|
$ |
171.0 |
|
|
$ |
231.4 |
|
| |
Commercial
|
|
|
33.5 |
|
|
|
47.4 |
|
|
|
70.5 |
|
| |
|
|
|
|
|
|
|
|
|
| |
|
|
203.2 |
|
|
|
218.4 |
|
|
|
301.9 |
|
|
International Accounts Payable Services revenue
|
|
|
112.3 |
|
|
|
116.9 |
|
|
|
111.4 |
|
| |
|
|
|
|
|
|
|
|
|
| |
Total Accounts Payable Services revenue
|
|
$ |
315.5 |
|
|
$ |
335.3 |
|
|
$ |
413.3 |
|
| |
|
|
|
|
|
|
|
|
|
For the year ended December 31, 2004, compared to the year
ended December 31, 2003, the Company experienced a decrease
in revenues for domestic retail Accounts Payable Services. This
decrease was due to a
28
$5.2 million decrease in base retail audit revenue and a
$1.0 million decrease in revenues due to a change in the
estimate related to customer paybacks. Partially offsetting
these decreases were a $3.3 million increase in the
Company’s Sales and Use Tax operations as well as a
$1.6 million settlement for past services rendered to an
existing client but for which revenues had not been previously
recognized. These increases are not expected to be recurring
items in future periods, although the Company has experienced
large Sales and Use Tax revenues in some periods in the past and
could do so in the future. Management believes the decrease in
base retail audit revenue was largely attributable to
customers’ increased use of their own internal post-audit
functions and continuing changes in the claims approval and
processing patterns in some of the Company’s largest retail
accounts whereby the elapsed time between claim identification
by the Company and claim recovery by our clients has been
elongated and some claims have lapsed as unrecoverable due to
additional challenges associated with the passage of time. The
Company believes that well-publicized inquiries during 2003 by
the United States Securities and Exchange Commission into the
accounting by retailers for vendor-supplied promotional
allowances have caused many of its largest clients to slow the
approval and processing of claims against vendors as related
policies and procedures are re-examined. The Company believes
that this trend has stabilized. Also, some of our domestic
retail Accounts Payable Services clients generally continue to
take a more conservative approach towards claims recognition,
and we expect clients to continue to attempt to use their own
internal post-audit functions as a substitute for some or all of
our services.
Revenues from the Company’s domestic commercial Accounts
Payable Services clients also declined during the year ended
December 31, 2004 compared to the same period of 2003. The
period-over-period decrease was largely due to fewer audit
starts in the first six months of 2004. As a result, the Company
has focused its sales effort on new client opportunities within
the disbursement audit services arena resulting in an
improvement in signed contracts during the second half of 2004
as compared to the first half of 2004. This resulted in an
improvement in the Company’s audit start trend. To date,
disbursement audit services (which typically entail acquisition
from the client of limited purchase data and an audit focus on a
select few recovery categories) have tended to be either
“one-time” with no subsequent repeat or rotational in
nature with different divisions of a given client often audited
in pre-arranged annual sequences. Revenues derived from a given
client may change markedly from period to period. Claims
productivity on disbursement audits improved during 2004. The
Company also continues its focus on converting a substantial
number of its current domestic commercial Accounts Payable
Services to contract compliance audits. The improvement in audit
start trends, combined with increased claims productivity and
increased focus on contract compliance audits, could potentially
result in higher commercial revenues in 2005.
For the year ended December 31, 2003 compared to the year
ended December 31, 2002, the Company experienced a decline
in revenues for domestic retail Accounts Payable Services. This
decline was primarily the result of: (a) revenues lost in
2003 as certain larger clients of the post-merger PRG-Schultz
combined operation utilized other recovery audit service
providers for a portion of their overall needs,
(b) revenues lost in 2003 after one of the Company’s
larger clients filed for Chapter 11 Bankruptcy
Reorganization on April 1, 2003 ($10.6 million),
(c) a generally weak retailing environment in which
aggregate client purchasing volumes have been depressed,
(d) changes in the claims approval and processing patterns
in some of the Company’s largest retail accounts whereby
the elapsed time between claim identification by the Company and
claim recovery by our clients has been elongated and some claims
have lapsed as unrecoverable due to additional challenges
associated with the passage of time, and (e) reduced claims
due to improvements in some clients’ internal recovery
capabilities. The Company believes that well-publicized
inquiries during 2003 by the United States Securities and
Exchange Commission into the accounting by retailers for
vendor-supplied promotional allowances have caused many of its
largest clients to slow the approval and processing of claims
against vendors as related policies and procedures are
re-examined.
Revenues from the Company’s domestic commercial Accounts
Payable Services clients also declined during 2003 compared to
2002. The year-over-year decreases were largely due to fewer
audit starts as a result of the nature of the commercial audit
cycle, as discussed further below. Also contributing to the
decrease in revenues from commercial clients is the maturing of
the market for providing disbursement recovery audit services
(which typically entails acquisition from the client of limited
purchase data and an audit focus on a select few recovery
categories) to commercial entities in the United States. To
date, disbursement audit
29
services have tended to be either “one-time” with no
subsequent repeat or rotational in nature with different
divisions of a given client often audited in pre-arranged annual
sequences. Accordingly, revenues derived from a given client may
change markedly from period to period.
The decrease in revenues from the international portion of
Accounts Payable Services in the year ended December 31,
2004 compared to 2003 was primarily attributable to
client-specific issues in the Company’s European operations
($9.4 million) and a lengthened approval process in the
Company’s Canadian operations ($3.0 million).
Additionally, the Company experienced a decrease in revenues of
$2.2 million for the year ended December 31, 2004 from
one large client acquired as part of the January 24, 2002
acquisition of the businesses of Howard Schultz &
Associates International, Inc. and affiliates
(“HSA-Texas”) for which the Company provides airline
ticket revenue recovery audit services primarily due to a
decrease in claims and an increase of paybacks during the
current period when compared to the same period of the prior
year. These decreases in revenues were partially offset by an
increase in revenues attributable to strengthening of the local
currencies of the Company’s international Accounts Payable
Services operations, as a whole, relative to the
U.S. dollar for the year ended December 31, 2004
($8.7 million).
During the third quarter of 2004, the Company also reengaged
with a large retailer in the United Kingdom and reached an
agreement to be paid a minimum of $2.5 million (at
December 31, 2004 exchange rates) through February 2006. Of
the $2.5 million, $1.8 million has been deferred at
December 31, 2004. The deferred revenues will be recognized
in future periods as claims recoveries are made under the new
client service agreement. Further, during the second half of
2004, the Company signed service contracts with 44 customers
expected to lead to an increase in revenues in 2005.
Until the Board has completed the process of exploring strategic
alternatives, as discussed above, uncertainty as to the outcome
of the process may cause the Company to experience a reduction
in revenues relating to potential customer turnover.
The increase in revenues from international Accounts Payable
Services for the year ended December 31, 2003, compared to
the same period of the prior year is primarily attributable to
increased revenues generated by the Company’s Canadian
operations combined with increased revenues from one large
client acquired as part of the Company’s January 24,
2002 acquisition of the businesses of HSA-Texas for which the
Company provides airline ticket revenue recovery audit services,
as well as increased revenues generated by the Company’s
Asian operations. The Company’s Canadian operations
experienced increased revenues period over period as a result of
a strengthening of the local currency to the U.S. dollar
when compared to currency rates for the same period of the prior
year. The increase in year-over-year revenues generated by
airline ticket revenue recovery audit services was due to a
change in the Company’s contract arrangement with one large
client and an increase in the number of categories on which the
Company has been able to write claims. The increased revenues
year over year experienced by the Asian operations resulted from
the fact that during the quarter ended March 31, 2002, the
Company recorded no revenues from its Asian operations due to
certain transitional considerations associated with the
acquisitions of the businesses of HSA-Texas. Partially
offsetting these increases in international revenues were
declines in revenues from the Company’s Latin American and
European operations. Revenues from the Company’s Latin
American operations were down year over year primarily due to
decreases in revenues generated from its client base. The
decline in revenues from European accounts, primarily within the
United Kingdom, was due to a decrease in revenues generated from
the existing client base as a result of a year-over-year change
in client mix. Partially offsetting this decline was an increase
in revenues attributable to strengthening of the local currency
to the U.S. dollar during 2003 when compared to currency
rates for the same period of the prior year ($11.0 million).
Cost of Revenues (“COR”). COR consists
principally of commissions paid or payable to the Company’s
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 Company’s domestic Accounts Payable Services
operations are variable compensation-related costs and will
increase or decrease with increases and decreases in revenues.
The COR support base for
30
domestic retail and domestic commercial operations are not
separately distinguishable and are not evaluated by management
individually. The Company’s 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 years ended
December 31, 2004, 2003 and 2002 were as follows (in
millions):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
|
Domestic Accounts Payable Services COR
|
|
$ |
121.4 |
|
|
$ |
135.4 |
|
|
$ |
164.6 |
|
|
International Accounts Payable Services COR
|
|
|
78.9 |
|
|
|
76.0 |
|
|
|
66.9 |
|
| |
|
|
|
|
|
|
|
|
|
| |
Total Accounts Payable Services COR
|
|
$ |
200.3 |
|
|
$ |
211.4 |
|
|
$ |
231.5 |
|
| |
|
|
|
|
|
|
|
|
|
The $14.0 million decrease in COR for domestic Accounts
Payable Services was primarily due to lower revenues
($9.1 million) and a lower COR as a percentage of revenues
($4.9 million or 4.0% of revenues) during the year ended
December 31, 2004 when compared to the same period of 2003.
COR as a percentage of revenues from domestic Accounts Payable
Services decreased to 59.7% for the year ended December 31,
2004 compared to 62.0% for the prior year. This improvement in
COR as a percentage of revenues was largely driven by cost
reductions in the Company’s U.S. Accounts Payable
Services operations where the Company’s strategic business
initiatives, as previously discussed, have been implemented. The
Company has reduced its headcount in its domestic Accounts
Payable Services operations, year over year, by approximately
314 in connection with its strategic business initiatives.
The dollar decrease in COR for 2003 compared to 2002 for
domestic Accounts Payable Services was primarily due to lower
revenues during 2003 and correspondingly lower costs that vary
with revenues. Also contributing to the decrease in COR for
domestic Accounts Payable Services was the elimination of
transitional expenses for integration efforts associated with
the acquisitions of the businesses of HSA-Texas incurred by the
Company during the year ended December 31, 2002. On a
percentage basis, COR as a percentage of revenues from domestic
Accounts Payable Services increased significantly to 62.0% for
the year ended December 31, 2003, up from 54.5% for 2002.
Although, as a result of decreased revenues, the Company has
experienced a decrease in the variable cost component of COR,
the Company continues to incur certain fixed costs that are a
significant component of COR. As revenues decrease, these fixed
costs constitute a larger percentage of COR and result in a
higher COR as a percentage of revenues on a comparable basis.
On a dollar basis, cost of revenues for the Company’s
international Accounts Payable Services increased during the
year ended December 31, 2004 compared to the same period of
2003 primarily due to increases attributable to currency
fluctuations in the countries in which the Company operates.
On a dollar basis, 2003 COR for international Accounts Payable
Services increased over the same period of the prior year
primarily due to increases attributable to currency fluctuations
in the countries in which the Company operates, combined with
local currency increases in COR associated with airline ticket
revenue recovery audit services currently provided to one large
client, and to a lesser degree, local currency increases in COR
for the Company’s Asian operations. Partially offsetting
these increases were local currency decreases in COR experienced
by the Company’s Latin American operations. The increase in
COR for international Accounts Payable Services with airline
ticket revenue recovery audit services currently provided to one
large client directly related to increased revenues derived from
this client, as discussed above, when compared to the same
period of the prior year. The improvement in COR for the
Company’s Latin American operations was primarily due to a
reduction in personnel and a change in the commission structure
for some of the auditors in the Latin American operations.
Internationally, COR as a percentage of revenues from
international Accounts Payable Services for the year ended
December 31, 2004 was 70.3%, up from 65.0% in the
comparable period of 2003. The increase in COR as a percentage
of revenues for international Accounts Payable Services for the
year ended December 31, 2004, as compared with the same
period of the prior year, was predominantly due to COR associated
31
with airline ticket revenue recovery audit services currently
provided to one large client. On a dollar basis, COR associated
with this client are relatively fixed in the short term.
Therefore, while the dollar amount of COR for airline ticket
revenue recovery audit services is relatively constant
($5.6 million and $5.7 million for 2004 and 2003,
respectively), the decrease in revenues generated
($2.2 million) from these services during the year ended
December 31, 2004 resulted in an increase in COR as a
percentage of revenues for those time periods. Although the
Company believes that its European revenues will grow in 2005
over levels achieved in 2004, if revenues were to remain at
lower than historical levels, COR as a percentage of revenues
for the Company’s international Accounts Payable Services
operations will remain at a higher level than in prior periods.
Internationally, COR as a percentage of revenues for
international Accounts Payable Services for the year ended
December 31, 2003 was 65.0%, up from 60.0% in the
comparable period of 2002. This increase was predominately due
to the Company’s European operations. As a result of
decreased revenues, the Company’s European operations
experienced a decrease in the variable cost component of COR.
However, the European operations continue to incur certain fixed
costs that are a component of COR. As revenues decrease, these
fixed costs constitute a larger percentage of COR and result in
a higher overall COR as a percentage of revenues.
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 base 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 Company’s SG&A expenses, these
expenses as a percentage of revenues can vary markedly period to
period based on fluctuations in revenues.
Accounts Payable Services SG&A for the years ended
December 31, 2004, 2003 and 2002 were as follows (in
millions):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
|
Domestic Accounts Payable Services SG&A
|
|
$ |
39.4 |
|
|
$ |
37.9 |
|
|
$ |
42.0 |
|
|
International Accounts Payable Services SG&A
|
|
|
30.1 |
|
|
|
27.1 |
|
|
|
25.8 |
|
| |
|
|
|
|
|
|
|
|
|
| |
Total Accounts Payable Services SG&A
|
|
$ |
69.5 |
|
|
$ |
65.0 |
|
|
$ |
67.8 |
|
| |
|
|
|
|
|
|
|
|
|
On a dollar basis, the increase in SG&A expenses for the
Company’s domestic Accounts Payable Services operations for
the year ended December 31, 2004 when compared to the same
period of 2003 was primarily due to a $2.3 million increase
in depreciation expense relating to fixed assets acquired to
support the business. This increase was partially offset by a
$1.3 million settlement in the third quarter of 2004 for
previous services rendered to an existing client that had
previously been written-off, which reduced SG&A.
Additionally, the Company received $0.8 million relating to
a claim from its 2002 acquisition of HSA-Texas during the third
quarter of 2004. The $1.3 million bad debt recovery and the
$0.8 million HSA-Texas claim will not be recurring items in
future periods.
On a dollar basis, the 2003 decrease in SG&A expenses for
the Company’s domestic Accounts Payable Services
operations, when compared to 2002, was primarily the result of
the integration of the Company’s domestic commercial
Accounts Payable Services operations with the domestic retail
Accounts Payable Services operations during the fourth quarter
of 2002. As a result of the integration, the Company had lower
payroll expenses due to staffing reductions and a decrease in
other support costs.
The increase in SG&A expenses, on a local currency basis,
for the year ended December 31, 2004 compared to the year
ended December 31, 2003 for international Accounts Payable
Services resulted primarily from increased SG&A expenses
experienced by the Company’s Pacific and Asian operations,
partially offset by lower SG&A expenses incurred by the
Company’s Latin American operations. Contributing to the
increase experienced by the Company’s Pacific and Asian
operations were increased payroll expenses attributable to
management compensation. SG&A from the Company’s Latin
American operations was lower
32
primarily due to the closure of the Latin American regional
headquarters during the last quarter of 2003. Additionally, on a
dollar basis, SG&A increased due to the strengthening of the
local currencies of the Company’s international Accounts
Payable Services operations, as a whole, to the U.S. dollar.
The increase in SG&A expenses, on a dollar basis, for the
year ended December 31, 2003 compared to the year ended
December 31, 2002 for international Accounts Payable
Services resulted primarily from increased SG&A expenses
experienced by the Company’s European operations, partially
offset by lower SG&A expenses incurred by the Company’s
Latin American operations and the elimination of transitional
expenses for integration efforts incurred during the year ended
December 31, 2002 in connection with the acquisitions of
the businesses of HSA-Texas. The Company’s European
operations experienced an increase in SG&A expenses due to
increased support costs and fluctuations of the local currency
for various countries of operations relative to the
U.S. dollar when compared to currency rates for the same
period of the prior year. SG&A from the Company’s Latin
American operations was lower for the year ended
December 31, 2003 when compared to the same period of 2002
primarily due to currency fluctuations period over period.
Meridian VAT Reclaim
Meridian’s operating income for the years ended
December 31, 2004, 2003 and 2002 was as follows (in
millions):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
|
Revenues
|
|
$ |
41.4 |
|
|
$ |
40.4 |
|
|
$ |
33.6 |
|
|
Cost of revenues
|
|
|
24.2 |
|
|
|
22.3 |
|
|
|
22.4 |
|
|
Selling, general and administrative expenses
|
|
|
8.2 |
|
|
|
6.2 |
|
|
|
6.5 |
|
| |
|
|
|
|
|
|
|
|
|
| |
Operating income
|
|
$ |
9.0 |
|
|
$ |
11.9 |
|
|
$ |
4.7 |
|
| |
|
|
|
|
|
|
|
|
|
Revenues. Meridian recognizes revenue 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 Meridian’s clients. Meridian also earns
interest income revenue on the cash balances for the period when
cash is received from the foreign governmental agencies until
such time the cash is repaid to clients. As a result of
Meridian’s revenue recognition policies, its revenues can
vary markedly from period to period.
Revenue generated by Meridian increased $1.0 million for
the year ended December 31, 2004 when compared to the same
period of 2003. A $3.5 million benefit from exchange rate
impact related to the strengthening of the Euro, Meridian’s
functional currency, to the U.S. dollar and a
$1.0 million increase in revenues from new clients
attributed to initiatives to develop new service offerings was
partially offset by decreases in fee income from VAT refunds and
TVR fees. Meridian has developed new service offerings on a
fee-for-service basis providing accounts payable and employee
expense reimbursement processing for third parties. Revenue from
such new offerings is expected to increase in 2005. Fee income
on VAT refunds decreased $1.6 million for the year ended
December 31, 2004 when compared to the same period of 2003
because Meridian received an unusually high volume of refunds in
the first six months of 2003 from certain European VAT
authorities for claims that had been outstanding for an extended
period of time. During the first six months of 2003, the tax
authorities for various countries paid claims that, in some
cases, had been outstanding in excess of two years
($6.5 million). The timing of reimbursement of VAT claims
by the various European tax authorities with which Meridian
files claims can differ significantly by country.
Also impacting Meridian’s revenues for the year ended
December 31, 2004 was a decrease in revenues generated from
Meridian’s joint venture (Transporters VAT Reclaim Limited
(“TVR”)) with an unrelated German concern named
Deutscher Kraftverkehr Euro Service GmbH & Co. KG
(“DKV”). Meridian experienced a decrease in TVR
revenues of $1.8 million for the year ended
December 31, 2004 compared to the year ended
December 31, 2003. During 2004, Meridian agreed with DKV to
commence an orderly and managed closeout of the TVR business.
Therefore, Meridian’s future revenues from TVR for
processing TVR’s VAT refunds, and the associated profits
therefrom, ceased in October 2004. As TVR goes about the
33
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. (See Note 13(b) of Notes to Condensed
Consolidated Financial Statements included in Item 8. of
this Form 10-K).
Revenue generated by Meridian increased for the year ended
December 31, 2003 over the comparable period of 2002
primarily due to higher refunds received from certain European
VAT authorities for claims that had been outstanding for an
extended period of time. The timing of reimbursement of VAT
claims by the various European tax authorities with which
Meridian files claims can differ significantly by country.
During the first six months of 2003, the tax authorities for
various countries paid claims that, in some cases, had been
outstanding in excess of two years ($6.5 million). The VAT
tax authorities’ payment of this substantial backlog of
claims resulted in an unusually high revenue increase in 2003 in
comparison to 2002. Partially offsetting this increase was a
decrease in revenues generated from Meridian’s joint
venture, TVR. Meridian experienced a decrease in TVR revenues of
$1.3 million for the year ended December 31, 2003
compared to the year ended December 31, 2002.
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 non-headquarters
offices, travel and entertainment, telephone, utilities,
maintenance and supplies and clerical assistance. COR for the
Company’s Meridian operations is largely fixed and, for the
most part, will not vary significantly with changes in revenue.
For the year ended December 31, 2004 compared to the same
period of the prior year, on a dollar basis, COR for the
Company’s Meridian operations increased primarily due to
increased payroll costs as a result of higher headcount related
to new service offerings. For the year ended December 31,
2004 and 2003, Meridian’s COR as a percentage of revenues
was 58.4% and 55.1%, respectively. The increase in COR as a
percentage of revenues for Meridian was the result of the slight
increase in revenues for the year ended December 31, 2004
compared to the same period of 2003 as discussed above combined
with increased COR on a dollar basis.
For the year ended December 31, 2003 compared to the year
ended December 31, 2002, COR for Meridian was relatively
stable on a dollar basis. COR as a percentage of revenues for
Meridian was 55.1% for the year ended December 31, 2003,
compared to 66.6% for the same period of 2002. The improvement
in COR as a percentage of revenues for Meridian was the result
of a significant increase in revenues as discussed above
combined with a stable COR.
SG&A. Meridian’s SG&A expenses include the
expenses of marketing activities, administration, professional
services, property rentals and currency translation. Due to the
relatively fixed nature of the Company’s SG&A expenses,
these expenses as a percentage of revenues can vary markedly
period to period based on fluctuations in revenues.
On a dollar basis, the increase in Meridian’s SG&A for
the year ended December 31, 2004 compared to 2003 was
primarily the result of increased payroll and professional fees
relating to new business development.
On a dollar basis, the decrease in Meridian’s SG&A for
2003 compared to 2002 was the result of a reduction in foreign
currency exchange losses experienced by Meridian during the year
ended December 31, 2003 partially offset by recognized
losses related to its joint venture, TVR. Prior to the third
quarter of 2002, Meridian maintained a Receivable Financing
Agreement (the “Agreement”) with Barclays Bank plc
(“Barclays”). Meridian recognized a loss on this
facility during 2002 due to foreign exchange rate fluctuations
related to the facility. Meridian paid off and terminated the
facility in the third quarter of 2002, thereby eliminating these
foreign exchange losses during 2003. Also contributing to the
reduction in foreign currency losses were translation gains
recognized during 2003 related to foreign currency deposits and
loans. Partially offsetting the reduction in currency losses
were recognized losses related to Meridian’s joint venture,
TVR. During the fourth quarter of 2003, Meridian recognized a
loss of $0.8 million, its share of losses generated by the
TVR joint venture. No income or loss from TVR was recognized
during the prior year, as TVR’s operations were break-even.
34
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 Company’s 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 years
ended December 31, 2004, 2003 and 2002 (in millions):
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
|
Selling, general and administrative expenses
|
|
$ |
47.5 |
|
|
$ |
53.0 |
|
|
$ |
67.7 |
|
The period-over-period improvement in SG&A for corporate
support for the year ended December 31, 2004 compared to
the same period of 2003, on a dollar basis, was primarily the
result of a decrease in outside consultancy costs and
expenditures for severance costs incurred in 2003 by the
Company. This period-over-period decrease was partially offset
by an increase in the strategic business initiatives previously
discussed, an increase in SG&A relating to an offer to
settle a preference claim in a client bankruptcy as well as
costs relating to the Company’s Sarbanes-Oxley Act of 2002
compliance initiative. Also partially offsetting the year over
year decrease was a severance payment made to the Company’s
former chief financial officer during the first quarter of 2004.
The Company incurred professional fees during 2004 of
$0.4 million in conjunction with evaluating its strategic
alternatives. Such costs will be expensed as incurred and will
persist into 2005 at an increased amount.
The year-over-year improvement in SG&A for corporate
overhead from 2002 to 2003, on a dollar basis, was primarily the
result of the elimination of transitional expenses incurred by
the Company during 2002 and a reduction in bonus-related
compensation expense for 2003. During the year ended
December 31, 2002, the Company incurred transitional
expenses related to consultancy services for integration efforts
associated with the acquisitions of the businesses of HSA-Texas.
The year-over-year improvement in SG&A for corporate
overhead was partially offset by increases in expenditures for
outside consultancy services associated with the development and
implementation of strategic business initiatives, and
expenditures for legal services. Also offsetting the improvement
in SG&A for corporate overhead was a dollar increase in
support costs during 2003 resulting from the 2002 integration of
the Company’s commercial operations as well as certain
other employee severance and lease termination expenses.
Discontinued Operations
During 2004, the Company recognized net earnings from
discontinued operations of $5.2 million.
During the fourth quarter of 2003, the Company declared its
remaining Communications Services operations, formerly part of
the Company’s then-existing Other Ancillary Services
segment, as a discontinued operation. On January 16, 2004,
the Company consummated the sale of the remaining Communications
Services operations to TSL (DE) Corp., a newly formed
company whose principal investor was One Equity Partners, the
private equity division of Bank One. The operations were sold
for approximately $19.1 million in cash paid at closing,
plus the assumption of certain liabilities of Communications
Services. The Company recognized a gain on disposal of
approximately $8.3 million, net of tax expense of
approximately $5.5 million. Operating results for
Communications Services during the phase-out period
(January 1, 2004 through January 16, 2004) were a loss
of $(0.3) million, net of an income tax benefit of
$(0.2) million.
On December 14, 2001, the Company consummated the sale of
its French Taxation Services business (“ALMA”), as
well as certain notes payable due to the Company, to Chequers
Capital, a Paris-based private equity firm. In conjunction with
this sale, the Company provided the buyer with certain
warranties. Effective December 30, 2004, the Company,
Meridian and ALMA (the “Parties”) entered into a
Settlement
35
Agreement (the “Agreement”) requiring the Company to
pay a total of 3.4 million Euros ($4.7 million at
January 3, 2005 exchange rates, the payment date), to
resolve the buyer’s warranty claims and a commission
dispute with Meridian. During 2004, the Company recognized an
expense of $3.1 million for amounts not previously accrued
to provide for these claims. No tax benefit was recognized in
relation to the expense. The Agreement terminates all
contractual relationships between the Parties and specifies that
the Parties will renounce all complaints, grievances and other
actions.
The Company also recognized a gain on the sale of discontinued
operations during the year ended December 31, 2004 of
approximately $0.3 million, net of tax expense of
approximately $0.2 million. This gain represented the
receipt of a portion of the revenue-based royalty from the sale
of the Logistics Management Services segment in October 2001.
During 2003, the Company recognized net earnings from
discontinued operations of $1.8 million. Net earnings
generated by the Company’s Communications Services
operations that were sold in January 2004 were
$1.3 million. Communications Services has been reclassified
to discontinued operations for all periods presented. The
Company also recognized a gain on the sale of discontinued
operations of approximately $0.5 million, net of tax
expense of approximately $0.4 million. This gain
represented the receipt of a portion of the revenue-based
royalty from the sale of the Logistics Management Services
segment in October 2001, as adjusted for certain expenses
accrued as part of the estimated loss on the sale of the segment.
The first component of the 2002 loss from discontinued
operations was a loss related to the Communications Services
operations arising from a cumulative effect of an accounting
change, net of earnings for 2002. The Company adopted
SFAS No. 142, effective January 1, 2002.
SFAS No. 142 requires that goodwill and intangible
assets with indefinite useful lives no longer be amortized, but
instead, be tested for impairment at least annually.
SFAS No. 142 also required that the Company perform
transitional goodwill impairment testing on recorded net
goodwill balances as they existed on January 1, 2002 using
a prescribed two-step, fair value approach. During the second
quarter of 2002, the Company, working with its independent
valuation advisors, completed the required transitional
impairment testing and concluded that all recorded net goodwill
balances associated with its Communications Services operations
were impaired as of January 1, 2002 under the then-new
SFAS No. 142 guidance. As a result, the Company
recognized a charge of $14.8 million as the cumulative
effect of an accounting change, retroactive to January 1,
2002. The Company recorded an income tax benefit of
$5.8 million as a reduction to this goodwill impairment
charge, resulting in an after-tax charge of $9.0 million.
Net earnings generated by Communications Services during 2002 of
$1.2 million partially offset this loss.
Offsetting the 2002 loss from discontinued operations was a gain
resulting from the retention of formerly discontinued
operations. On January 24, 2002, the Company’s Board
of Directors made a decision to retain formerly discontinued
operations, Meridian, the Communications Services business and
Channel Revenue, and to reinstate these businesses as part of
continuing operations until such time as market conditions were
more conducive to their sale. As a result of this decision, the
Company recognized a net gain of $2.3 million. This gain
represents the excess of the carrying values of these three
businesses at historical cost as they were returned to
continuing operations over their former net realizable carrying
values while classified as discontinued operations.
Additionally, during 2002, the Company recognized a gain on the
sale of discontinued operations of approximately
$0.4 million, net of tax expense of approximately
$0.3 million. This gain related to the receipt a portion of
the revenue-based royalty from the sale of the Logistics
Management Services segment in October 2001, as adjusted for
certain expenses accrued as part of the estimated loss on the
sale of the segment. Such revenue-based royalty will continue to
be earned through December 31, 2005.
Cumulative Effect of Accounting Change
The Company adopted SFAS No. 142, Goodwill and
Other Intangible Assets, effective January 1, 2002.
SFAS No. 142 requires that goodwill and intangible
assets with indefinite useful lives no longer be amortized, but
instead be tested for impairment at least annually.
SFAS No. 142 also required that the Company perform
transitional goodwill impairment testing on recorded net
goodwill balances as they existed on January 1, 2002
36
using a prescribed two-step, fair value approach. During the
second quarter of 2002, the Company, working with independent
valuation advisors, completed the required transitional
impairment testing and concluded that all recorded net goodwill
balances associated with its Channel Revenue unit was impaired
as of January 1, 2002 under the then-new
SFAS No. 142 guidance. As a result, the Company
recognized a before-tax charge of $13.5 million as the
cumulative effect of an accounting change, retroactive to
January 1, 2002. The Company recorded an income tax benefit
of $5.3 million as a reduction to this goodwill impairment
charge, resulting in an after-tax charge of $8.2 million.
Other Items
Interest (Expense). Interest (expense) was
$9.1 million, $9.5 million and $9.9 million for
the years ended December 31, 2004, 2003 and 2002,
respectively. The Company’s interest expense for the years
ended December 31, 2004 and 2003 was comprised of interest
expense and amortization of the discount related to the
convertible notes, interest on borrowings outstanding under the
Senior Credit Facility and interest on debt acquired as part of
the acquisitions of the businesses of HSA-Texas. The decrease in
interest expense for 2004 compared to 2003 was due to lower
interest on borrowings outstanding under the Senior Credit
Facility. The decrease in interest expense for 2003 compared to
2002 was due to the debt acquired as part of the acquisitions of
the businesses of HSA-Texas being paid off during the second
quarter of 2003.
Income Tax Expense (Benefit). The provisions for income
taxes for the three years ended December 31, 2004, 2003 and
2002 consist of federal, state and foreign income taxes. The
Company’s reported effective tax rate approximated 5,725%,
(18%) and 37% for the years ended December 31, 2004, 2003
and 2002, respectively. The change in the tax rate from an 18%
benefit in 2003 to 5,725% expense in 2004 was primarily the
result of the Company recording a non-cash charge of
$76.6 million to provide a valuation allowance against its
remaining net deferred tax assets for the year ended
December 31, 2004. Over time, the Company believes it will
fully utilize these assets as its results continue to improve.
Additionally, the Company recorded $0.7 million of expense
related to the repatriation of cash from Meridian as allowed
under the American Jobs Creation Act of 2004. The change in rate
from 37% in 2002 to an 18% benefit in 2003 was primarily the
result of impairment charges in 2003 that created non-tax
deductible goodwill offset by a tax benefit on operating losses.
Quarterly Results
The following tables set forth certain unaudited quarterly
financial data for each of the last eight quarters during the
Company’s fiscal years ended December 31, 2004 and
2003. The information has been derived from unaudited
Consolidated Financial Statements that, in the opinion of
management, reflect all adjustments (consisting only of normal
recurring adjustments) necessary for a fair presentation of such
quarterly
37
information. The operating results for any quarter are not
necessarily indicative of the results to be expected for any
future period.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2004 Quarter Ended | |
|
2003 Quarter Ended | |
| |
|
| |
|
| |
| |
|
Mar. 31 | |
|
June 30 | |
|
Sept. 30 | |
|
Dec. 31 | |
|
Mar. 31 | |
|
June 30 | |
|
Sept. 30 | |
|
Dec. 31 | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| |
|
(In thousands, except per share data) | |
|
Revenues
|
|
$ |
87,649 |
|
|
$ |
90,406 |
|
|
$ |
85,137 |
|
|
$ |
93,681 |
|
|
$ |
96,593 |
|
|
$ |
95,023 |
|
|
$ |
88,221 |
|
|
$ |
95,864 |
|
|
Cost of revenues
|
|
|
57,629 |
|
|
|
56,494 |
|
|
|
54,249 |
|
|
|
56,155 |
|
|
|
59,034 |
|
|
|
57,566 |
|
|
|
57,155 |
|
|
|
59,934 |
|
|
Selling, general and administrative expenses
|
|
|
33,206 |
|
|
|
33,244 |
|
|
|
28,425 |
|
|
|
30,238 |
|
|
|
28,793 |
|
|
|
28,940 |
|
|
|
32,649 |
|
|
|
33,858 |
|
|
Impairment charges
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
206,923 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Operating income (loss)
|
|
|
(3,186 |
) |
|
|
668 |
|
|
|
2,463 |
|
|
|
7,288 |
|
|
|
8,766 |
|
|
|
8,517 |
|
|
|
(1,583 |
) |
|
|
(204,851 |
) |
|
Interest (expense)
|
|
|
(2,277 |
) |
|
|
(2,263 |
) |
|
|
(2,253 |
) |
|
|
(2,349 |
) |
|
|
(2,357 |
) |
|
|
(2,351 |
) |
|
|
(2,423 |
) |
|
|
(2,389 |
) |
|
Interest income
|
|
|
181 |
|
|
|
115 |
|
|
|
120 |
|
|
|
177 |
|
|
|
145 |
|
|
|
133 |
|
|
|
189 |
|
|
|
105 |
|
| |
Earnings (loss) from continuing operations before income taxes
and discontinued operations
|
|
|
(5,282 |
) |
|
|
(1,480 |
) |
|
|
330 |
|
|
|
5,116 |
|
|
|
6,554 |
|
|
|
6,299 |
|
|
|
(3,817 |
) |
|
|
(207,135 |
) |
|
Income tax expense (benefit)
|
|
|
(2,007 |
) |
|
|
(563 |
) |
|
|
125 |
|
|
|
77,789 |
|
|
|
2,440 |
|
|
|
2,334 |
|
|
|
(1,465 |
) |
|
|
(38,793 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Earnings (loss) from continuing operations before discontinued
operations
|
|
|
(3,275 |
) |
|
|
(917 |
) |
|
|
205 |
|
|
|
(72,673 |
) |
|
|
4,114 |
|
|
|
3,965 |
|
|
|
(2,352 |
) |
|
|
(168,342 |
) |
|
Discontinued operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Earnings (loss) from discontinued operations
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
231 |
|
|
|
358 |
|
|
|
438 |
|
|
|
240 |
|
| |
Gain (loss) on disposal/retention of discontinued operations
|
|
|
8,122 |
|
|
|
(1,033 |
) |
|
|
260 |
|
|
|
(2,172 |
) |
|
|
324 |
|
|
|
— |
|
|
|
206 |
|
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Earnings (loss) from discontinued operations
|
|
|
8,122 |
|
|
|
(1,033 |
) |
|
|
260 |
|
|
|
(2,172 |
) |
|
|
555 |
|
|
|
358 |
|
|
|
644 |
|
|
|
240 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Net earnings (loss)
|
|
$ |
4,847 |
|
|
$ |
(1,950 |
) |
|
$ |
465 |
|
|
$ |
(74,845 |
) |
|
$ |
4,669 |
|
|
$ |
4,323 |
|
|
$ |
(1,708 |
) |
|
$ |
(168,102 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Earnings (loss) from continuing operations before discontinued
operations
|
|
$ |
(0.05 |
) |
|
$ |
(0.01 |
) |
|
$ |
— |
|
|
$ |
(1.17 |
) |
|
$ |
0.07 |
|
|
$ |
0.06 |
|
|
$ |
(0.04 |
) |
|
$ |
(2.74 |
) |
| |
Discontinued operations
|
|
|
0.13 |
|
|
|
(0.02 |
) |
|
|
0.01 |
|
|
|
(0.04 |
) |
|
|
— |
|
|
|
0.01 |
|
|
|
0.01 |
|
|
|
0.01 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Net earnings (loss)
|
|
$ |
0.08 |
|
|
$ |
(0.03 |
) |
|
$ |
0.01 |
|
|
$ |
(1.21 |
) |
|
$ |
0.07 |
|
|
$ |
0.07 |
|
|
$ |
(0.03 |
) |
|
$ |
(2.73 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Earnings (loss) from continuing operations before discontinued
operations
|
|
$ |
(0.05 |
) |
|
$ |
(0.01 |
) |
|
$ |
— |
|
|
$ |
(1.17 |
) |
|
$ |
0.07 |
|
|
$ |
0.06 |
|
|
$ |
(0.04 |
) |
|
$ |
(2.74 |
) |
| |
Discontinued operations
|
|
|
0.13 |
|
|
|
(0.02 |
) |
|
|
0.01 |
|
|
|
(0.04 |
) |
|
|
— |
|
|
|
0.01 |
|
|
|
0.01 |
|
|
|
0.01 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Net earnings (loss)
|
|
$ |
0.08 |
|
|
$ |
(0.03 |
) |
|
$ |
0.01 |
|
|
$ |
(1.21 |
) |
|
$ |
0.07 |
|
|
$ |
0.07 |
|
|
$ |
(0.03 |
) |
|
$ |
(2.73 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During 2004, the Company’s results of operations were
negatively impacted by decreased revenues due to the
Company’s customers’ increased use of their own
internal post-audit functions and continuing changes in the
claims approval and processing patterns in some of the
Company’s largest retail accounts whereby the elapsed time
between claim identification by the Company and claim recovery
by our clients has been elongated and some claims have lapsed as
unrecoverable due to additional challenges associated with the
passage of time. The Company believes that well-publicized
inquiries during 2003 by the United States Securities and
Exchange Commission into the accounting by retailers for
vendor-supplied promotional allowances have caused many of its
largest clients to slow the approval and processing of claims
against vendors as related policies and procedures are
re-examined. The Company believes that this trend has
stabilized. Other factors impacting the Company’s revenues
are discussed above in Managements’ Discussion and Analysis.
38
Liquidity and Capital Resources
Net cash provided by operating activities was
$10.0 million, $28.0 million and $39.4 million
during the years ended December 31, 2004, 2003 and 2002,
respectively. Cash provided by operations for the year ended
December 31, 2004 was primarily attributable to the offset
of a loss from continuing operations by a non-cash charge to
provide a valuation allowance against the Company’s
remaining deferred tax assets as of December 31, 2004, in
addition to a release of restricted cash as a result of the
Company’s new Senior Credit Facility. Cash provided by
operating activities during the year ended December 31,
2003 was principally influenced by a loss from continuing
operations combined with a reduction in accrued payroll and
related expenses offset by non-cash impairment charges and an
overall decline in accounts receivable balances. The overall
change in accrued payroll and related expenses and accounts
receivable balances was the result of normal operations.
Net cash provided by (used in) investing activities was
$7.6 million, $(11.7) million and $(9.3) million
during the years ended December 31, 2004, 2003 and 2002,
respectively. Cash provided by investing activities during the
year ended December 31, 2004 related primarily to proceeds
of $19.1 million from the sale of the remaining
Communications Services business in January 2004 partially
offset by capital expenditures of $11.3 million. During the
year ended December 31, 2003, cash used in investing
activities related primarily to capital expenditures. Cash used
in investing activities during the year ended December 31,
2002 related primarily to capital expenditures of approximately
$23.3 million partially offset by $4.0 million in net
cash on hand provided by HSA-Texas at the time of its
acquisitions.
Net cash used in financing activities was $31.3 million,
$6.9 million and $42.1 million for the years ended
December 31, 2004, 2003 and 2002, respectively. Net cash
used in financing activities during the year ended
December 31, 2004 related primarily to repayment of amounts
outstanding under the Company’s previous Senior Credit
Facility. Net cash used in financing activities during the year
ended December 31, 2003 related primarily to the repurchase
of treasury shares on the open market. During the year ended
December 31, 2002, net cash used in financing activities
related primarily to the repayment of certain indebtedness
acquired in the acquisitions of the business of HSA-Texas, net
repayments of notes payable, including the repayment of
Meridian’s facility with Barclays Bank, the exercise of an
option to purchase 1.45 million shares of the
Company’s outstanding common stock from an affiliate of
Howard Schultz, a former director of the Company, and the
repurchase of 0.8 million treasury shares on the open
market. These uses of cash for financing activities during the
year ended December 31, 2002 were partially offset by cash
provided by borrowings under the Company’s credit facility
to fund the purchase of treasury shares, cash provided by common
stock issuances related to the exercise of vested stock options
and cash provided by sales of the Company’s common stock
under the Company’s employee stock purchase plan.
Net cash provided by (used in) discontinued operations was
$(1.1) million, $0.7 million and $2.5 million
during the years ended December 31, 2004, 2003 and 2002,
respectively. Cash used in discontinued operations during 2004
was the result of losses generated by the Communications
Services operations prior to its sale on January 16, 2004.
These losses were offset by the receipt of a portion of the
revenue-based royalty from the former Logistics Management
Services segment that was sold in October 2001. Cash provided by
discontinued operations during 2003 and 2002 was the result of
earnings generated from discontinued operations combined with
the receipt of a portion of the revenue-based royalty from the
sale of the Logistics Management Services segment in October
2001.
39
|
|
|
Contractual Obligations and Other Commitments |
As discussed in Notes to Consolidated Financial Statements
included in Item 8. of this Form 10-K, the Company has
certain contractual obligations and other commitments. A summary
of those commitments is as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Payments Due by Period | |
| |
|
| |
| |
|
(in thousands) | |
| |
|
|
|
Less | |
|
|
|
More | |
| |
|
|
|
Than | |
|
|
|
3-5 | |
|
Than | |
| |
|
Total | |
|
1 Year | |
|
1-3 Years | |
|
Years | |
|
5 Years | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
Leases
|
|
$ |
63,298 |
|
|
$ |
10,254 |
|
|
$ |
14,224 |
|
|
$ |
10,918 |
|
|
$ |
27,902 |
|
|
Convertible notes(1)
|
|
|
125,000 |
|
|
|
— |
|
|
|
125,000 |
|
|
|
— |
|
|
|
— |
|
|
Interest on convertible notes(2)
|
|
|
11,875 |
|
|
|
5,938 |
|
|
|
5,937 |
|
|
|
— |
|
|
|
— |
|
|
Interest on Senior Credit Facility(3)
|
|
|
213 |
|
|
|
150 |
|
|
|
63 |
|
|
|
— |
|
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Total
|
|
$ |
200,386 |
|
|
$ |
16,342 |
|
|
$ |
145,224 |
|
|
$ |
10,918 |
|
|
$ |
27,902 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (1) |
If a future credit ratio covenant violation under the Senior
Credit Facility does occur, and the Lender declares the
then-outstanding principal to be immediately due and payable and
the Company is unable to honor it, cross-default language
contained in the indenture underlying the convertible notes
could also be triggered, potentially accelerating the required
repayment of those notes. |
| |
| (2) |
Assumes convertible notes are redeemed on November 26,
2006. See Note 8(b) of Notes to Consolidated Financial
Statements included in Item 8. of this Form 10-K. |
| |
| (3) |
The Company is required to pay interest on outstanding balances
on its Senior Credit Facility. Additionally, a fee is required
for committed but unused credit capacity of 0.5% per annum based
on a gross facility amount of $30.0 million. Interest
expense on the Senior Credit Facility for the years ended
December 31, 2004, 2003 and 2002 was $0.7 million,
$1.4 million and $1.1 million, respectively. |
On February 8, 2005, the Company entered into a Stipulation
of Settlement (“Settlement”) to preliminarily settle
the consolidated class action. For complete discussion of the
Settlement and certain other litigation to which the Company is
a party and which may have an impact on future liquidity and
capital resources, see Notes 13(a) and 17 of Notes to
Consolidated Financial Statements included in Item 8. of
this Form 10-K.
The Company expects to incur professional fees during 2005
relating to its evaluation of strategic alternatives. The
magnitude of such fees is likely to increase if a transaction is
consummated, and will be impacted by the form such transaction
would take (i.e., sale of the entire company, sale of individual
operating units, merger, tender offer or other transaction not
involving a sale of the Company or its assets.) Cash costs may
be paid relating to recruitment fees if the Company experiences
higher levels of employee turnover. Additionally, if the Company
experiences a loss of customers, there would be an associated
loss of revenues, operating income and cash provided by
operations.
To promote retention of key employees during the Company’s
exploration of strategic alternatives, among other goals, the
Company’s Compensation Committee approved a program under
which the Company modified employment and compensation
arrangements with certain management employees as disclosed in
the Company’s Report on Form 8-K filed on
February 11, 2005. Under the program, the officers are
entitled to additional benefits related to certain termination
and change of control events in exchange for revised restrictive
covenants. Also, in October 2004 the Compensation Committee
approved transaction success bonuses payable upon a change of
control for 26 additional key managers. Such bonuses would be
calculated as a percentage of each manager’s annual salary
with the applicable percentage based on the per share
consideration received in a change of control transaction.
Payments under all these arrangements, together with other costs
incurred in the completion of a transaction that would result in
a change of control would be a material use of cash.
40
Among the additional benefits, restricted stock awards
representing 40,000 shares of the Company’s common
stock were granted to each of six of the Company’s officers
in February 2005. The total 240,000 restricted shares are
subject to service-based cliff vesting. The restricted awards
vest 3 years following the date of the grant, subject to
early vesting upon a change of control, death, disability or
involuntary termination of employment without cause. The
restricted awards will be forfeited if the recipient voluntarily
terminates his or her employment with the Company (or a
subsidiary, affiliate or successor thereof) prior to vesting.
The shares are generally nontransferable until vesting. During
the vesting period, the award recipients will be entitled to
receive dividends with respect to the escrowed shares and to
vote the shares. Over the 3-year vesting period, the Company
will incur non-cash stock compensation expense relating to the
restricted stock awards. Based on the closing stock price on
February 11, 2005, the Company will incur non-cash stock
compensation expense of $1.2 million over the 3-year
vesting period.
On November 30, 2004, the Company entered into an amended
and restated credit agreement (the “Senior Credit
Facility”) with Bank of America, N.A. (the
“Lender”). The Senior Credit Facility amends and
restates the Company’s previous senior credit facility,
which was maintained by a syndicate of banking institutions led
by the Lender. The Senior Credit Facility currently provides for
revolving credit loans up to a maximum amount of
$25.0 million, subject to certain borrowing base
limitations; provided, however, that the maximum amount of loans
outstanding may be increased to $30.0 million as early as
July 1, 2005 upon achievement of certain performance
milestones. The Senior Credit Facility provides for the
availability of letters of credit subject to a
$10.0 million sublimit.
The occurrence of certain stipulated events, as defined in the
Senior Credit Facility, including but not limited to the event
that the Company’s outstanding borrowings exceed the
prescribed borrowing base, would require accelerated principal
payments. Otherwise, so long as there is no violation of any of
the covenants (or any such violations are waived), no principal
payments are due until the maturity date on May 26, 2006.
The Senior Credit Facility is secured by substantially all
assets of the Company. Revolving loans under the Senior Credit
Facility bear interest at either (1) the Lender’s
prime rate plus 0.5%, or (2) the London Interbank Offered
Rate (“LIBOR”) plus 3.0%. The Senior Credit Facility
requires a fee for committed but unused credit capacity of
0.5% per annum. The Senior Credit Facility contains
customary financial covenants relating to the maintenance of a
maximum leverage ratio and minimum consolidated earnings before
interest, taxes, depreciation and amortization, as those terms
are defined in the Senior Credit Facility. Covenants in the
previous credit facility related to Senior Leverage, Fixed
Charge Coverage, and Minimum Net Worth were eliminated. At
December 31, 2004, the Company was in compliance with all
such covenants.
On November 30, 2004, the Company drew down approximately
$9.3 million under the Senior Credit Facility in order to
repay borrowings outstanding under the previous facility. Fees
and expenses incurred in connection with the refinancing were
paid from cash on hand. Additionally, new Standby Letters of
Credit (“Letters of Credit”) totaling approximately
$0.2 million were obtained to replace those outstanding
under the previous Senior Credit Facility. The Company had
outstanding borrowings of $2.3 million under the Revolver
at February 28, 2005. Additionally, the Company had Letters
of Credit of $5.1 million, under which no borrowings were
outstanding at February 28, 2005. As of February 28,
2005, approximately $16.1 million remains available for
revolving loans, of which approximately $4.9 million is
available for Letters of Credit, under the Senior Credit
Facility.
The Company currently anticipates that it will satisfy the
financial ratio covenants of the Senior Credit Facility for at
least the next four calendar quarters. Notwithstanding the
Company’s current forecasts, no assurances can be provided
that financial ratio covenant violations of the Senior Credit
Facility will not occur in the future or that, if such
violations occur, the Lender will not elect to pursue its
contractual remedies under the Senior Credit Facility, including
requiring the immediate repayment in full of all amounts
outstanding. There can also be no assurance that the Company can
secure adequate or timely replacement financing to repay the
Lender in the event of an unanticipated repayment demand.
On December 14, 2001, the Company consummated the sale of
its French Taxation Services business (“ALMA”), as
well as certain notes payable due to the Company, to Chequers
Capital, a Paris-based private equity firm. In conjunction with
this sale, the Company provided the buyer with certain
warranties. Effective
41
December 30, 2004, the Company, Meridian and ALMA (the
“Parties”) entered into a Settlement Agreement (the
“Agreement”) requiring the Company to pay a total of
3.4 million Euros ($4.7 million at January 3,
2005 exchange rates, the payment date), to resolve the
buyer’s warranty claims and a commission dispute with
Meridian. During 2004, the Company recognized a loss on
discontinued operations of $3.1 million for amounts not
previously accrued to provide for those claims. No tax benefit
was recognized in relation to the expense. The Agreement settles
all remaining indemnification obligations and terminates all
contractual relationships between the Parties and further
specifies that the Parties will renounce all complaints,
grievances and other actions.
On April 1, 2003, Fleming, one of the Company’s larger
U.S. Accounts Payable Services clients at that time, filed
for Chapter 11 Bankruptcy Reorganization. During the
quarter ended March 31, 2003, the Company received
$5.5 million in payments on account from this client. A
portion of these payments might be recoverable as
“preference payments” under United States bankruptcy
laws. On January 24, 2005, the Company received a demand
for preference payments due from the trust representing the
client. The demand states that the trust’s calculation of
the Company’s preferential payments was approximately
$2.9 million. The Company believes that it has valid
defenses against any claim that may be made for payments
received from Fleming. The Company has offered to settle such
claim. Accordingly, the Company’s Consolidated Statement of
Operations for the year ended December 31, 2004 includes an
expense provision of $0.2 million with respect to this
matter. However, if the Company is unsuccessful in defending a
preference payment claim, the Company’s earnings would be
reduced and the Company would be required to make unbudgeted
cash payments which could strain its financial liquidity.
During the period of May 1993 through September 1999, Meridian
received grants from the Industrial Development Authority of
Ireland (“IDA”) in the sum of 1.4 million Euro
($1.9 million at December 31, 2004 exchange rates).
The grants were paid primarily to stimulate the creation of 145
permanent jobs in Ireland. As a condition of the grants, if the
number of permanently employed Meridian staff in Ireland falls
below 145, then the grants are repayable in full. This
contingency expires on September 23, 2007. Meridian
currently employs 205 permanent employees in Dublin, Ireland.
The European Union (“EU”) has currently proposed
legislation that will remove the need for suppliers to charge
VAT on the supply of services to clients within the EU. The
effective date of the proposed legislation is currently unknown.
Management estimates that the proposed legislation, if enacted
as currently drafted, would eventually have a material adverse
impact on Meridian’s results of operations from its
value-added tax business. If Meridian’s results of
operations were to decline as a result of the enactment of the
proposed legislation, it is possible that the number of
permanent employees that Meridian employs in Ireland could fall
below 145 prior to September 2007. Should such an event occur,
the full amount of the grants previously received by Meridian
will need to be repaid to IDA. However, management currently
estimates that any impact on employment levels related to a
possible change in the EU legislation will not be realized until
after September 2007, if ever. As any potential liability
related to these grants is not currently determinable, the
Company’s Consolidated Statement of Operations for the year
ended December 31, 2004 does not include any expense
related to this matter. Management is monitoring this situation
and if it appears probable Meridian’s permanent staff in
Ireland will fall below 145 and that grants will need to be
repaid to IDA, Meridian will be required to recognize an expense
at that time. This expense could be material to Meridian’s
results of operations.
The Company’s current intention is to expand the service
offerings of Meridian to offer outsourced accounts payable and
employee expense reimbursement processing and redirect most of
the Meridian employees who may be affected by the proposed
legislation to provide services to its core Accounts Payable
Services business. The Company believes that this redirection
will significantly enhance its Accounts Payable Services
business internationally as well as provide the peripheral
benefit of mitigating the risk of a future IDA grant repayment.
The Company has adopted a strategic plan to revitalize the
business and respond to the changing competitive environment.
The strategic plan focuses on a series of initiatives designed
to maintain the Company’s dedicated focus on its clients
and rekindle the Company’s growth. The Company has
implemented a number of strategic business initiatives over the
past 18 months that have been leveraged to reduce costs,
increase recoveries and fuel growth at existing and new clients.
Some of these key initiatives include:
42
(1) Centralize claim processing and field audit work;
(2) Standardize audit software and processes;
(3) Implement technology platforms; and (4) Optimize
the organization.
The Company has begun implementation of the strategy but remains
in the intermediate stages of that process. Each of the
initiatives requires sustained management focus, organization
and coordination over time, as well as success in building
relationships with third parties. The results of the strategy
and implementation will not be known until some time in the
future. During 2004 and 2003, total costs incurred relating to
the implementation totaled $10.9 million and
$11.0 million, respectively. Implementation costs in 2005
are expected to be approximately $10.0 million less than in
2004. If the Company is unable to implement the strategy
successfully, results of operations and cash flows could be
adversely affected. Successful implementation of the strategy
may require material increases in costs and expenses.
The Company anticipates making capital expenditures in the range
of $10.0 million to $12.0 million during 2005,
including approximately $2.0 million to $3.0 million
of capital expenditures anticipated to be incurred related to
the Company’s Model Evolution efforts under its strategic
plan.
The Company believes that its working capital, current
availability under its Senior Credit Facility, and cash flows
generated from future operations will be sufficient to meet the
Company’s working capital and capital expenditure
requirements through December 31, 2005 unless it is
required to make unanticipated accelerated debt repayments due
to future unanticipated violations of the Senior Credit Facility
that are not waived by the Lender. If a future credit ratio
covenant violation under the Senior Credit Facility does occur,
and if the Lender declares the then-outstanding principal to be
immediately due and payable, there can be no assurance that the
Company will be able to secure additional financing that will be
required to make such a rapid repayment. Additionally, if such a
Lender accelerated repayment demand is subsequently made and the
Company is unable to honor it, cross-default language contained
in the indenture underlying the Company’s
separately-outstanding $125.0 million convertible notes
issue, due November 26, 2006, could also be triggered,
potentially accelerating the required repayment of those notes
as well. In such an instance, there can likewise be no assurance
that the Company will be able to secure additional financing
that would be required to make such a rapid repayment.
In December 2004, the FASB issued SFAS No. 123
(revised 2004) (“SFAS No. 123(R)”),
Share-Based Payment, which will require the Company to
recognize compensation expense relating to its stock options.
This Statement requires a public entity to measure the cost of
employee services received in exchange for an award of equity
instruments based on the grant-date fair value of the award
(with limited exceptions). That cost will be recognized over the
period during which an employee is required to provide service
in exchange for the award — the requisite service
period (usually the vesting period). No compensation cost is
recognized for equity instruments for which employees do not
render the requisite service. Employee share purchase plans will
not result in recognition of compensation cost if certain
conditions are met.
A public entity will initially measure the cost of employee
services received in exchange for an award of liability
instruments based on its current fair value; the fair value of
that award will be remeasured subsequently at each reporting
date through the settlement date. Changes in fair value during
the requisite service period will be recognized as compensation
cost over that period.
SFAS No. 123(R) is effective for all periods beginning
after June 15, 2005. Early adoption of this Statement for
interim or annual periods for which financial statements or
interim reports have not been issued is encouraged. As of the
required effective date, all public entities will apply this
Statement using a modified version of prospective application.
Under that transition method, compensation cost is recognized on
or after the required effective date for the portion of
outstanding awards for which the requisite service has not yet
been rendered, based on the grant-date fair value of those
awards calculated under SFAS No. 123(R) for either
recognition or pro forma disclosures. For periods before the
required effective date, entities may elect to apply a modified
version of retrospective application under which financial
statements for prior periods are adjusted on a basis consistent
with the pro forma disclosures required for those periods by
Statement 123(R)
43
(See Note 1(o) of Notes to Consolidated Financial
Statements included in Item 8. of this Form 10-K for
pro forma disclosures). The impact of this Statement on future
periods cannot be estimated.
|
|
| ITEM 7A. |
Quantitative and Qualitative Disclosures About Market Risk |
Foreign Currency Market Risk. Our functional currency is
the U.S. dollar although we transact business in various
foreign locations and currencies. As a result, our financial
results could be significantly affected by factors such as
changes in foreign currency exchange rates, or weak economic
conditions in the foreign markets in which we provide services.
Our operating results are exposed to changes in exchange rates
between the U.S. dollar and the currencies of the other
countries in which we operate. When the U.S. dollar
strengthens against other currencies, the value of nonfunctional
currency revenues decreases. When the U.S. dollar weakens,
the functional currency amount of revenues increases. Overall,
we are a net receiver of currencies other than the
U.S. dollar and, as such, benefit from a weaker dollar. We
are therefore adversely affected by a stronger dollar relative
to major currencies worldwide.
Interest Rate Risk. Our interest income and expense are
most sensitive to changes in the general level of
U.S. interest rates. In this regard, changes in
U.S. interest rates affect the interest earned on our cash
equivalents as well as interest paid on our debt. At
December 31, 2004, we had fixed-rate convertible notes
outstanding with a principal amount of $125.0 million which
bear interest at
43/4% per
annum. At December 31, 2004, we had no variable-rate debt
outstanding. A hypothetical 100 basis point change in
interest rates on variable-rate debt during the twelve months
ended December 31, 2004 would have resulted in
approximately a $0.1 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
December 31, 2004. See Note 1(f) of Notes to
Consolidated Financial Statements included in Item 8. of
this Form 10-K.
44
|
|
| ITEM 8. |
Financial Statements and Supplementary Data |
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
| |
|
|
|
|
| |
|
Page | |
| |
|
Number | |
| |
|
| |
|
Report of Independent Registered Public Accounting Firm
|
|
|
46 |
|
|
Consolidated Statements of Operations for the Years ended
December 31, 2004, 2003 and 2002
|
|
|
47 |
|
|
Consolidated Balance Sheets as of December 31, 2004 and 2003
|
|
|
48 |
|
|
Consolidated Statements of Shareholders’ Equity for the
Years ended December 31, 2004, 2003 and 2002
|
|
|
49 |
|
|
Consolidated Statements of Cash Flows for the Years ended
December 31, 2004, 2003 and 2002
|
|
|
50 |
|
|
Notes to Consolidated Financial Statements
|
|
|
51 |
|
45
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders
PRG-Schultz International, Inc.:
We have audited the accompanying Consolidated Balance Sheets of
PRG-Schultz International, Inc. and subsidiaries (“the
Company”) as of December 31, 2004 and 2003, and the
related Consolidated Statements of Operations,
Shareholders’ Equity, and Cash Flows for each of the years
in the three-year period ended December 31, 2004. In
connection with our audits of the consolidated financial
statements, we have also audited the financial statement
schedule as listed in Item 15(a)(2). The consolidated
financial statements and financial statement schedule are the
responsibility of the Company’s management. Our
responsibility is to express an opinion on the consolidated
financial statements and financial statement schedule based on
our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred
to above present fairly, in all material respects, the
consolidated financial position of PRG-Schultz International,
Inc. and subsidiaries as of December 31, 2004 and 2003, and
the results of their operations and their cash flows for each of
the years in the three-year period ended December 31, 2004,
in conformity with U.S. generally accepted accounting
principles. Also in our opinion, the related financial statement
schedule, when considered in relation to the basic consolidated
financial statements taken as a whole, presents fairly, in all
material respects, the information set forth therein.
Atlanta, Georgia
March 16, 2005
46
PRG-SCHULTZ INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Years Ended December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
|
Revenues
|
|
$ |
356,873 |
|
|
$ |
375,701 |
|
|
$ |
446,890 |
|
|
Cost of revenues
|
|
|
224,527 |
|
|
|
233,689 |
|
|
|
253,852 |
|
|
Selling, general and administrative expenses
|
|
|
125,113 |
|
|
|
124,240 |
|
|
|
142,001 |
|
|
Impairment charges (Notes 1(i) and 7)
|
|
|
— |
|
|
|
206,923 |
|
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
| |
Operating income (loss)
|
|
|
7,233 |
|
|
|
(189,151 |
) |
|
|
51,037 |
|
|
Interest (expense)
|
|
|
(9,142 |
) |
|
|
(9,520 |
) |
|
|
(9,934 |
) |
|
Interest income
|
|
|
593 |
|
|
|
572 |
|
|
|
595 |
|
| |
|
|
|
|
|
|
|
|
|
| |
Earnings (loss) from continuing operations before income taxes,
discontinued operations and cumulative effect of accounting
change
|
|
|
(1,316 |
) |
|
|
(198,099 |
) |
|
|
41,698 |
|
|
Income taxes (Note 10)
|
|
|
75,344 |
|
|
|
(35,484 |
) |
|
|
15,336 |
|
| |
|
|
|
|
|
|
|
|
|
| |
Earnings (loss) from continuing operations before discontinued
operations and cumulative effect of accounting change
|
|
|
(76,660 |
) |
|
|
(162,615 |
) |
|
|
26,362 |
|
|
Discontinued operations (Note 2):
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Earnings (loss) from discontinued operations, net of income tax
expense (benefit) of $917 and $(4,959) in 2003 and 2002
respectively
|
|
|
— |
|
|
|
1,267 |
|
|
|
(7,794 |
) |
| |
Gain on disposal/retention of discontinued operations including
operating results for phase-out period, net of income tax
expense of $5,495, $354 and $9,604 in 2004, 2003 and 2002,
respectively
|
|
|
5,177 |
|
|
|
530 |
|
|
|
2,716 |
|
| |
|
|
|
|
|
|
|
|
|
| |
Earnings (loss) from discontinued operations
|
|
|
5,177 |
|
|
|
1,797 |
|
|
|
(5,078 |
) |
| |
|
|
|
|
|
|
|
|
|
| |
Earnings (loss) before cumulative effect of accounting change
|
|
|
(71,483 |
) |
|
|
(160,818 |
) |
|
|
21,284 |
|
|
Cumulative effect of accounting change, net of income tax
benefit of $(5,309) in 2002 (Note 7)
|
|
|
— |
|
|
|
— |
|
|
|
(8,216 |
) |
| |
|
|
|
|
|
|
|
|
|
| |
|
Net earnings (loss)
|
|
$ |
(71,483 |
) |
|
$ |
(160,818 |
) |
|
$ |
13,068 |
|
| |
|
|
|
|
|
|
|
|
|
|
Basic earnings (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Earnings (loss) from continuing operations before discontinued
operations and cumulative effect of accounting change
|
|
$ |
(1.24 |
) |
|
$ |
(2.63 |
) |
|
$ |
0.42 |
|
| |
Discontinued operations
|
|
|
0.08 |
|
|
|
0.03 |
|
|
|
(0.08 |
) |
| |
Cumulative effect of accounting change
|
|
|
— |
|
|
|
— |
|
|
|
(0.13 |
) |
| |
|
|
|
|
|
|
|
|
|
| |
|
Net earnings (loss)
|
|
$ |
(1.16 |
) |
|
$ |
(2.60 |
) |
|
$ |
0.21 |
|
| |
|
|
|
|
|
|
|
|
|
|
Diluted earnings (loss) per share (Note 6):
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Earnings (loss) from continuing operations before discontinued
operations and cumulative effect of accounting change
|
|
$ |
(1.24 |
) |
|
$ |
(2.63 |
) |
|
$ |
0.38 |
|
| |
Discontinued operations
|
|
|
0.08 |
|
|
|
0.03 |
|
|
|
(0.06 |
) |
| |
Cumulative effect of accounting change
|
|
|
— |
|
|
|
— |
|
|
|
(0.10 |
) |
| |
|
|
|
|
|
|
|
|
|
| |
|
Net earnings (loss)
|
|
$ |
(1.16 |
) |
|
$ |
(2.60 |
) |
|
$ |
0.22 |
|
| |
|
|
|
|
|
|
|
|
|
|
Weighted-average shares outstanding (Note 6):
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Basic
|
|
|
61,760 |
|
|
|
61,751 |
|
|
|
62,702 |
|
| |
|
|
|
|
|
|
|
|
|
| |
Diluted
|
|
|
61,760 |
|
|
|
61,751 |
|
|
|
79,988 |
|
| |
|
|
|
|
|
|
|
|
|
See accompanying Notes to Consolidated Financial
Statements.
47
PRG-SCHULTZ INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
| |
|
|
|
|
|
|
|
|
|
|
|
| |
|
December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
| |
|
| |
|
| |
|
ASSETS (Note 8) |
|
Current assets:
|
|
|
|
|
|
|
|
|
| |
Cash and cash equivalents
|
|
$ |
12,596 |
|
|
$ |
26,658 |
|
| |
Restricted cash (Note 13(d))
|
|
|
120 |
|
|
|
5,758 |
|
| |
Receivables:
|
|
|
|
|
|
|
|
|
| |
|
Contract receivables, less allowances of $3,515 in 2004 and
$3,236 in 2003
|
|
|
57,514 |
|
|
|
53,185 |
|
| |
|
Employee advances and miscellaneous receivables, less allowances
of $3,333 in 2004 and $4,760 in 2003
|
|
|
3,490 |
|
|
|
3,573 |
|
| |
|
|
|
|
|
|
| |
|
|
Total receivables
|
|
|
61,004 |
|
|
|
56,758 |
|
| |
|
|
|
|
|
|
| |
Funds held for client obligations
|
|
|
30,920 |
|
|
|
18,690 |
|
| |
Prepaid expenses and other current assets
|
|
|
4,129 |
|
|
|
3,779 |
|
| |
Deferred income taxes (Note 10)
|
|
|
1,951 |
|
|
|
9,211 |
|
| |
Current assets of discontinued operations
|
|
|
— |
|
|
|
3,179 |
|
| |
|
|
|
|
|
|
| |
|
|
Total current assets
|
|
|
110,720 |
|
|
|
124,033 |
|
| |
|
|
|
|
|
|
|
Property and equipment:
|
|
|
|
|
|
|
|
|
| |
Computer and other equipment
|
|
|
62,858 |
|
|
|
54,482 |
|
| |
Furniture and fixtures
|
|
|
7,778 |
|
|
|
7,531 |
|
| |
Leasehold improvements
|
|
|
9,312 |
|
|
|
8,543 |
|
| |
|
|
|
|
|
|
| |
|
|
79,948 |
|
|
|
70,556 |
|
| |
Less accumulated depreciation and amortization
|
|
|
53,475 |
|
|
|
41,090 |
|
| |
|
|
|
|
|
|
| |
|
|
Property and equipment, net
|
|
|
26,473 |
|
|
|
29,466 |
|
| |
|
|
|
|
|
|
|
Goodwill (Note 7)
|
|
|
170,684 |
|
|
|
170,619 |
|
|
Intangible assets, less accumulated amortization of $4,068 in
2004 and $2,683 in 2003 (Note 7)
|
|
|
30,232 |
|
|
|
31,617 |
|
|
Deferred income taxes (Note 10)
|
|
|
— |
|
|
|
65,370 |
|
|
Other assets (Note 13)
|
|
|
3,827 |
|
|
|
3,152 |
|
|
Long-term assets of discontinued operations
|
|
|
— |
|
|
|
1,792 |
|
| |
|
|
|
|
|
|
| |
|
$ |
341,936 |
|
|
$ |
426,049 |
|
| |
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS’ EQUITY |
|
Current liabilities:
|
|
|
|
|
|
|
|
|
| |
Current installments of debt (Note 8)
|
|
$ |
— |
|
|
$ |
31,600 |
|
| |
Obligations for client payables
|
|
|
30,920 |
|
|
|
18,690 |
|
| |
Accounts payable and accrued expenses
|
|
|
24,395 |
|
|
|
25,780 |
|
| |
Accrued payroll and related expenses
|
|
|
41,791 |
|
|
|
40,256 |
|
| |
Deferred revenue
|
|
|
6,466 |
|
|
|
4,601 |
|
| |
Current liabilities of discontinued operations
|
|
|
— |
|
|
|
1,391 |
|
| |
|
|
|
|
|
|
| |
|
|
Total current liabilities
|
|
|
103,572 |
|
|
|
122,318 |
|
|
Convertible notes, net of unamortized discount of $1,714 in 2004
and $2,605 in 2003 (Note 8)
|
|
|
123,286 |
|
|
|
122,395 |
|
|
Deferred compensation (Note 11)
|
|
|
2,195 |
|
|
|
3,695 |
|
|
Deferred income taxes (Note 10)
|
|
|
4,201 |
|
|
|
— |
|
|
Other long-term liabilities
|
|
|
5,098 |
|
|
|
4,511 |
|
| |
|
|
|
|
|
|
| |
|
|
Total liabilities
|
|
|
238,352 |
|
|
|
252,919 |
|
| |
|
|
|
|
|
|
|
Shareholders’ equity (Notes 8, 12 and 15):
|
|
|
|
|
|
|
|
|
| |
Preferred stock, no par value. Authorized 500,000 shares;
no shares issued or outstanding in 2004 and 2003
|
|
|
— |
|
|
|
— |
|
| |
Participating preferred stock, no par value. Authorized
500,000 shares; no shares issued or outstanding in 2004 and
2003
|
|
|
— |
|
|
|
— |
|
| |
Common stock, no par value; $.001 stated value per share.
Authorized 200,000,000 shares; issued
67,658,656 shares in 2004 and 67,489,608 shares in 2003
|
|
|
68 |
|
|
|
67 |
|
| |
Additional paid-in capital
|
|
|
493,532 |
|
|
|
492,878 |
|
| |
Accumulated deficit
|
|
|
(342,979 |
) |
|
|
(271,496 |
) |
| |
Accumulated other comprehensive income
|
|
|
1,740 |
|
|
|
616 |
|
| |
Treasury stock at cost, 5,764,525 shares in 2004 and 2003
|
|
|
(48,710 |
) |
|
|
(48,710 |
) |
| |
Unearned portion of restricted stock
|
|
|
(67 |
) |
|
|
(225 |
) |
| |
|
|
|
|
|
|
| |
|
|
Total shareholders’ equity
|
|
|
103,584 |
|
|
|
173,130 |
|
| |
|
|
|
|
|
|
|
Commitments and contingencies (Notes 2, 3,
8, 9, 12 and 13)
|
|
|
|
|
|
|
|
|
| |
|
$ |
341,936 |
|
|
$ |
426,049 |
|
| |
|
|
|
|
|
|
See accompanying Notes to Consolidated Financial
Statements.
48
PRG-SCHULTZ INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
Years Ended December 31, 2004, 2003 and 2002
(In thousands)
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
Accumulated | |
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
Other | |
|
|
|
Unearned | |
|
|
|
|
| |
|
Common Stock | |
|
Additional | |
|
|
|
Comprehensive | |
|
|
|
Portion of | |
|
Total | |
|
|
| |
|
| |
|
Paid-In | |
|
Accumulated | |
|
Income | |
|
Treasury | |
|
Restricted | |
|
Shareholders’ | |
|
Comprehensive | |
| |
|
Shares | |
|
Amount | |
|
Capital | |
|
Deficit | |
|
(Loss) | |
|
Stock | |
|
Stock | |
|
Equity | |
|
Income (Loss) | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
Balance at December 31, 2001
|
|
|
51,207 |
|
|
$ |
51 |
|
|
$ |
320,126 |
|
|
$ |
(123,746 |
) |
|
$ |
(6,385 |
) |
|
$ |
(21,024 |
) |
|
$ |
(927 |
) |
|
$ |
168,095 |
|
|
|
|
|
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Net income
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
13,068 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
13,068 |
|
|
$ |
13,068 |
|
| |
Other comprehensive loss — foreign currency
translation adjustments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Continuing operations
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
4,784 |
|
|
|
— |
|
|
|
— |
|
|
|
4,784 |
|
|
|
4,784 |
|
| |
|
Discontinued operations
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(2,577 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Comprehensive income
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
$ |
15,275 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuances of common stock:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Issuances under employee stock plans (including tax benefits of
$3,007)
|
|
|
1,119 |
|
|
|
1 |
|
|
|
10,742 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
10,743 |
|
|
|
|
|
| |
Restricted share forfeitures
|
|
|
(9 |
) |
|
|
— |
|
|
|
(82 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
82 |
|
|
|
— |
|
|
|
|
|
| |
Other common stock issuances
|
|
|
14,965 |
|
|
|
15 |
|
|
|
161,108 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
230 |
|
|
|
161,353 |
|
|
|
|
|
|
Treasury shares repurchased (2,254 shares)
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(20,158 |
) |
|
|
— |
|
|
|
(20,158 |
) |
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2002
|
|
|
67,282 |
|
|
|
67 |
|
|
|
491,894 |
|
|
|
(110,678 |
) |
|
|
(1,601 |
) |
|
|
(41,182 |
) |
|
|
(615 |
) |
|
|
337,885 |
|
|
|
|
|
|
Comprehensive loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Net loss
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(160,818 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(160,818 |
) |
|
$ |
(160,818 |
) |
| |
Other comprehensive income — foreign currency
translation adjustments
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
2,217 |
|
|
|
— |
|
|
|
— |
|
|
|
2,217 |
|
|
|
2,217 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Comprehensive loss
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
$ |
(158,601 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuances of common stock:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Issuances under employee stock plans (including tax benefits of
$155)
|
|
|
223 |
|
|
|
— |
|
|
|
1,128 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
1,128 |
|
|
|
|
|
| |
Restricted share forfeitures
|
|
|
(15 |
) |
|
|
— |
|
|
|
(144 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
144 |
|
|
|
— |
|
|
|
|
|
| |
Other common stock issuances
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
246 |
|
|
|
246 |
|
|
|
|
|
|
Treasury shares repurchased (1,074 shares)
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(7,528 |
) |
|
|
— |
|
|
|
(7,528 |
) |
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2003
|
|
|
67,490 |
|
|
|
67 |
|
|
|
492,878 |
|
|
|
(271,496 |
) |
|
|
616 |
|
|
|
(48,710 |
) |
|
|
(225 |
) |
|
|
173,130 |
|
|
|
|
|
|
Comprehensive loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Net loss
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(71,483 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(71,483 |
) |
|
$ |
(71,483 |
) |
| |
Other comprehensive income — foreign currency
translation adjustments
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
1,124 |
|
|
|
— |
|
|
|
— |
|
|
|
1,124 |
|
|
|
1,124 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Comprehensive loss
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
$ |
(70,359 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuances of common stock:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Issuances under employee stock plans (including tax benefits of
$17)
|
|
|
185 |
|
|
|
1 |
|
|
|
808 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
809 |
|
|
|
|
|
| |
Restricted share forfeitures
|
|
|
(16 |
) |
|
|
— |
|
|
|
(154 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
154 |
|
|
|
— |
|
|
|
|
|
| |
Other common stock issuances
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
4 |
|
|
|
4 |
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2004
|
|
|
67,659 |
|
|
$ |
68 |
|
|
$ |
493,532 |
|
|
$ |
(342,979 |
) |
|
$ |
1,740 |
|
|
$ |
(48,710 |
) |
|
$ |
(67 |
) |
|
$ |
103,584 |
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying Notes to Consolidated Financial
Statements.
49
PRG-SCHULTZ INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Years Ended December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Net earnings (loss)
|
|
$ |
(71,483 |
) |
|
$ |
(160,818 |
) |
|
$ |
13,068 |
|
| |
(Earnings) loss from discontinued operations
|
|
|
— |
|
|
|
(1,267 |
) |
|
|
7,794 |
|
| |
Gain on disposal/retention of discontinued operations
|
|
|
(5,177 |
) |
|
|
(530 |
) |
|
|
(2,716 |
) |
| |
Cumulative effect of accounting change
|
|
|
— |
|
|
|
— |
|
|
|
8,216 |
|
| |
|
|
|
|
|
|
|
|
|
| |
Earnings (loss) from continuing operations
|
|
|
(76,660 |
) |
|
|
(162,615 |
) |
|
|
26,362 |
|
| |
Adjustments to reconcile earnings (loss) from continuing
operations to net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Impairment charges
|
|
|
— |
|
|
|
206,923 |
|
|
|
— |
|
| |
|
Depreciation and amortization
|
|
|
18,094 |
|
|
|
17,827 |
|
|
|
19,116 |
|
| |
|
Restricted stock compensation expense
|
|
|
4 |
|
|
|
246 |
|
|
|
230 |
|
| |
|
Loss on sale of property, plant and equipment
|
|
|
187 |
|
|
|
258 |
|
|
|
724 |
|
| |
|
Deferred income taxes, net of cumulative effect of accounting
change
|
|
|
71,992 |
|
|
|
(38,377 |
) |
|
|
8,213 |
|
| |
|
Income tax benefit relating to stock option exercises
|
|
|
17 |
|
|
|
155 |
|
|
|
3,007 |
|
| |
|
Changes in assets and liabilities, net of effects of
acquisitions:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
Restricted cash securing letter of credit obligation
|
|
|
6,203 |
|
|
|
(5,758 |
) |
|
|
— |
|
| |
|
|
Receivables
|
|
|
(2,563 |
) |
|
|
16,467 |
|
|
|
(4,872 |
) |
| |
|
|
Prepaid expenses and other current assets
|
|
|
(1,280 |
) |
|
|
197 |
|
|
|
1,553 |
|
| |
|
|
Other assets
|
|
|
(411 |
) |
|
|
699 |
|
|
|
(204 |
) |
| |
|
|
Accounts payable and accrued expenses
|
|
|
(7,103 |
) |
|
|
(343 |
) |
|
|
(12,027 |
) |
| |
|
|
Accrued payroll and related expenses
|
|
|
735 |
|
|
|
(9,872 |
) |
|
|
(1,371 |
) |
| |
|
|
Deferred revenue
|
|
|
1,682 |
|
|
|
2,111 |
|
|
|
(3,874 |
) |
| |
|
|
Deferred compensation benefit
|
|
|
(1,500 |
) |
|
|
(316 |
) |
|
|
(13 |
) |
| |
|
|
Other long-term liabilities
|
|
|
587 |
|
|
|
396 |
|
|
|
2,586 |
|
| |
|
|
|
|
|
|
|
|
|
| |
|
|
|
Net cash provided by operating activities
|
|
|
9,984 |
|
|
|
27,998 |
|
|
|
39,430 |
|
| |
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Purchases of property and equipment, net of sale proceeds
|
|
|
(11,532 |
) |
|
|
(11,695 |
) |
|
|
(23,295 |
) |
| |
Proceeds from sale of certain discontinued operations
|
|
|
19,116 |
|
|
|
— |
|
|
|
— |
|
| |
Acquisitions of businesses (net of cash acquired)
|
|
|
— |
|
|
|
— |
|
|
|
4,023 |
|
| |
|
|
|
|
|
|
|
|
|
| |
|
|
|
Net cash provided by (used in) investing activities
|
|
|
7,584 |
|
|
|
(11,695 |
) |
|
|
(19,272 |
) |
| |
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Net repayments of notes payable
|
|
|
— |
|
|
|
— |
|
|
|
(11,564 |
) |
| |
Net repayments of bank debt
|
|
|
(31,600 |
) |
|
|
(290 |
) |
|
|
(18,330 |
) |
| |
Payments for issuance of convertible notes
|
|
|
(21 |
) |
|
|
(12 |
) |
|
|
(569 |
) |
| |
Payments for deferred loan costs
|
|
|
(430 |
) |
|
|
— |
|
|
|
(596 |
) |
| |
Net proceeds from common stock issuances
|
|
|
792 |
|
|
|
973 |
|
|
|
9,120 |
|
| |
Purchase of treasury shares
|
|
|
— |
|
|
|
(7,528 |
) |
|
|
(20,158 |
) |
| |
|
|
|
|
|
|
|
|
|
| |
|
|
|
Net cash used in financing activities
|
|
|
(31,259 |
) |
|
|
(6,857 |
) |
|
|
(42,097 |
) |
| |
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) discontinued operations
|
|
|
(1,146 |
) |
|
|
703 |
|
|
|
2,520 |
|
|
Effect of exchange rates on cash and cash equivalents
|
|
|
775 |
|
|
|
1,649 |
|
|
|
945 |
|
| |
|
|
|
|
|
|
|
|
|
| |
|
|
|
Net change in cash and cash equivalents
|
|
|
(14,062 |
) |
|
|
11,798 |
|
|
|
(18,474 |
) |
|
Cash and cash equivalents at beginning of year
|
|
|
26,658 |
|
|
|
14,860 |
|
|
|
33,334 |
|
| |
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of year
|
|
$ |
12,596 |
|
|
$ |
26,658 |
|
|
$ |
14,860 |
|
| |
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Cash paid during the year for interest
|
|
$ |
6,440 |
|
|
$ |
7,283 |
|
|
$ |
8,141 |
|
| |
|
|
|
|
|
|
|
|
|
| |
Cash paid during the year for income taxes, net of refunds
received
|
|
$ |
3,210 |
|
|
$ |
3,409 |
|
|
$ |
4,306 |
|
| |
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of non-cash investing and financing
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
In conjunction with acquisitions of businesses, the Company
assumed liabilities as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
Fair value of assets acquired
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
262,205 |
|
| |
|
|
Cash paid for acquisitions (net of cash acquired)
|
|
|
— |
|
|
|
— |
|
|
|
4,023 |
|
| |
|
|
Transaction costs
|
|
|
— |
|
|
|
— |
|
|
|
(11,191 |
) |
| |
|
|
Fair value of shares issued for acquisitions
|
|
|
— |
|
|
|
— |
|
|
|
(159,762 |
) |
| |
|
|
|
|
|
|
|
|
|
| |
|
|
|
Liabilities assumed
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
95,275 |
|
| |
|
|
|
|
|
|
|
|
|
See accompanying Notes to Consolidated Financial
Statements.
50
PRG-SCHULTZ INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004, 2003 and 2002
|
|
| (1) |
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES |
|
|
| (a) |
Description of Business and Basis of Presentation |
The principal business of PRG-Schultz International, Inc. and
subsidiaries (the “Company”) is providing recovery
audit services to large and mid-size businesses having numerous
payment transactions with many vendors. These businesses
include, but are not limited to:
|
|
|
| |
• |
retailers such as discount, department, specialty, grocery and
drug stores; |
| |
| |
• |
manufacturers of high-tech components, pharmaceuticals, consumer
electronics, chemicals and aerospace and medical products; |
| |
| |
• |
wholesale distributors of computer components, food products and
pharmaceuticals; |
| |
| |
• |
healthcare providers such as hospitals and health maintenance
organizations; and |
| |
| |
• |
service providers such as communications providers,
transportation providers and financial institutions. |
The Company currently provides services to clients in over 40
countries.
Certain reclassifications have been made to 2003 and 2002
amounts to conform to the presentation in 2004. These
reclassifications include the reclassification of Communications
Services as discontinued operations (see Note 2(c)).
|
|
| (b) |
Principles of Consolidation |
The consolidated financial statements include the financial
statements of the Company and its wholly owned subsidiaries. All
significant intercompany balances and transactions have been
eliminated in consolidation.
Management of the Company has made a number of estimates and
assumptions relating to the reporting of assets and liabilities
and the disclosure of contingent assets and liabilities to
prepare these consolidated financial statements in conformity
with accounting principles generally accepted in the United
States of America. Actual results could differ from those
estimates.
|
|
| (c) |
Discontinued Operations |
Financial statements for all years presented have been
reclassified to separately report results of discontinued
operations from results of continuing operations (see
Note 2). Disclosures included herein pertain to the
Company’s continuing operations, unless otherwise noted.
The Company’s 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
client’s duties in assisting and cooperating with the
Company; and (d) fees payable to the Company, generally as
a specified percentage of the amounts recovered by the client
resulting from overpayment claims identified.
In addition to contractual provisions, most clients also
establish specific procedural guidelines that the Company must
satisfy prior to submitting claims for client approval. These
guidelines are unique to each
51
PRG-SCHULTZ INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
client and impose specific requirements on the Company, such as
adherence to vendor interaction protocols, provision of advance
written notification to vendors of forthcoming claims, securing
written claim validity concurrence from designated client
personnel and, in limited cases, securing written claim validity
concurrence from the involved vendors. Approved claims are
processed by clients and generally taken as a recovery of cash
from the vendor or a reduction to the vendor’s accounts
payable balance.
The Company generally recognizes revenue on the accrual basis
except with respect to its Meridian VAT Reclaim
(“Meridian”) business and Channel Revenue unit, a
division of Accounts Payable Services, and in certain
international Accounts Payable Services units. Revenue is
generally recognized for a contractually specified percentage of
amounts recovered when it has been determined that the
Company’s clients have 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 arrangement exists;
(b) services have been rendered; (c) the fee billed to
the client is fixed or determinable and (d) collectibility
is reasonably assured. In certain limited circumstances, the
Company will invoice a client prior to meeting all four of these
criteria; in such cases, 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
Company’s revenue recognition policy, the Company’s
customers’ vendors have ultimately rejected the claims
underlying them. In that case, the Company’s customers,
even though cash may have been collected by the Company, may
request a refund of such amount. The Company records such
refunds as a reduction of revenue.
The Company’s Meridian and Channel Revenue units, along
with certain 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 revenues to the accounting period
in which cash is both received from the foreign governmental
agencies reimbursing value-added tax (“VAT”) claims
and transferred to Meridian’s clients. Channel Revenue
defers recognition of revenues to the accounting period in which
cash is received from its clients as a result of overpayment
claims identified.
The Company derives an insignificant amount of revenues on a
“fee-for-service” basis whereby billing 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 criteria (a) through
(d) as set forth above are met.
|
|
| (e) |
Cash and 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 December 31, 2004 and 2003, the Company had cash and
cash equivalents of $12.6 million and $26.7 million,
respectively, of which cash equivalents represent approximately
$1.6 million and $3.4 million, respectively. At
December 31, 2004, the Company had $0.2 million in
cash equivalents at U.S. banks. The Company did not have
any cash equivalents at U.S. banks at December 31,
2003. At December 31, 2004 and 2003, certain of the
Company’s international subsidiaries held $1.4 million
and $3.4 million, respectively, in temporary investments,
the majority of which were at banks in the United Kingdom.
52
PRG-SCHULTZ INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
|
|
| (f) |
Derivative Financial 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.
Changes in fair value of derivative financial instruments are
recorded as adjustments to the assets or liabilities being
hedged in the statement of operations or in accumulated other
comprehensive income (loss), depending on whether the derivative
is designated and qualifies for hedge accounting, the type of
hedge transaction represented and the effectiveness of the
hedge. The Company did not have any derivative financial
instruments outstanding as of December 31, 2004 and 2003.
|
|
| (g) |
Funds Held for Payment of Client Payables |
In connection with the Company’s Meridian unit that assists
clients in obtaining refunds of VAT, the Company is often in
possession of amounts refunded by the various VAT authorities
but not yet processed for further payment to the clients
involved. The Company functions as a fiduciary custodian in
connection with these cash balances belonging to its clients.
The Company reports these cash balances on its Consolidated
Balance Sheets as a separate current asset and corresponding
current liability.
|
|
| (h) |
Property and Equipment |
Property and equipment are stated at cost. Depreciation is
provided using the straight-line method over the estimated
useful lives of the assets (three years for computer and other
equipment, five years for furniture and fixtures and three to
seven years for purchased software). Leasehold improvements are
amortized using the straight-line method over the shorter of the
lease term or estimated life of the asset.
The Company evaluates property and equipment for impairment in
accordance with Statement of Financial Accounting Standards
(“SFAS”) No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets. In accordance
with the provisions of SFAS No. 144, the Company
reviews the carrying value of property and equipment for
impairment whenever events and circumstances indicate that the
carrying value of an asset may not be recoverable from the
estimated future cash flows expected to result from its use and
eventual disposition. In cases where undiscounted expected
future cash flows are less than the carrying value, an
impairment loss equal to an amount by which the carrying value
exceeds the fair value of assets is recognized.
|
|
| (i) |
Internally Developed Software |
The Company accounts for software developed for internal use in
accordance with Statement of Position (“SOP”) 98-1,
Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use. SOP 98-1 provides guidance
on a variety of issues relating to costs of internal use
software, including which of these costs should be capitalized
and which should be expensed as incurred. Internally developed
software is amortized using the straight-line method over the
expected useful lives of three years to seven years.
The Company evaluates internally developed software for
impairment in accordance with SFAS No. 144. In
accordance with the provisions of SFAS No. 144, the
Company reviews the carrying value of internally developed
software for impairment whenever events and circumstances
indicate that the carrying value of an asset may not be
recoverable from the estimated future cash flows expected to
result from its use and eventual disposition. In cases where
undiscounted expected future cash flows are less than the
carrying value, an impairment loss equal to an amount by which
the carrying value exceeds the fair value of assets is
recognized.
53
PRG-SCHULTZ INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
During 2003, the Company recorded an impairment of internally
developed software of $1.8 million, before income tax
benefit of $0.7 million. This pre-tax charge has been
included in impairment charges in the Company’s
Consolidated Statement of Operations for the year ended
December 31, 2003. The Company did not incur any impairment
charges related to internally developed software during the
years ended December 31, 2004 and 2002.
|
|
| (j) |
Goodwill and Other Intangible Assets |
Goodwill represents the excess of the purchase price over the
estimated fair market value of net assets of acquired
businesses. The Company accounts for goodwill and other
intangible assets in accordance with SFAS No. 142,
Goodwill and Other Intangible Assets.
SFAS No. 142 requires that goodwill and intangible
assets with indefinite useful lives no longer be amortized, but
instead be tested for impairment at least annually. This
Statement also requires that intangible assets with estimable
useful lives be amortized over their respective estimated useful
lives and reviewed for impairment in accordance with
SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets (see Note 7).
Management evaluates the recoverability of goodwill and other
intangible assets annually, or more frequently if events or
changes in circumstances, such as declines in sales, earnings or
cash flows or material adverse changes in the business climate
indicate that the carrying value of an asset might be impaired.
Goodwill is considered to be impaired when the net book value of
a reporting unit exceeds its estimated fair value. Fair values
are primarily established using a discounted cash flow
methodology. The determination of discounted cash flows is based
on the business’ strategic plan and long-range planning
forecasts.
Direct expenses incurred during the course of accounts payable
audits and other recovery audit services are expensed as
incurred.
Income taxes are accounted for under the asset and liability
method. Deferred tax assets and liabilities are recognized for
the future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and
liabilities and their respective tax bases and operating loss
and tax credit carry forwards. Deferred tax assets and liability
are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences
are expected to be recovered or settled. The effect on the
deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment
date.
SFAS No. 109, Accounting for Income Taxes,
requires that a valuation allowance be established when it is
more likely than not that all or a portion of a deferred tax
asset will not be realized. The ultimate realization of deferred
tax assets is dependent upon the generation of future taxable
income during the periods in which those temporary differences
are deductible. In making this determination, management
considers all available positive and negative evidence affecting
specific deferred tax assets, including the Company’s past
and anticipated future performance, the reversal of deferred tax
liabilities and the implementation of tax planning strategies.
Objective positive evidence is necessary to support a conclusion
that a valuation allowance is not needed for all or a portion of
the deferred tax assets when significant negative evidence
exists.
The local currency has been used as the functional currency in
the majority of the countries in which the Company conducts
business outside of the United States. The assets and
liabilities denominated in foreign currency are translated into
U.S. dollars at the current rates of exchange at the
balance sheet date and revenues and expenses are translated at
the average monthly exchange rates. The translation gains and
losses are included as a separate component of
shareholders’ equity. Revenues and expenses in foreign
currencies are
54
PRG-SCHULTZ INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
translated at the weighted average exchange rates for the
period. All realized and unrealized foreign currency gains and
losses are included in selling, general and administrative
expenses. For the years ended December 31, 2004, 2003 and
2002, foreign currency gains (losses) included in results of
operations were $0.5 million, $1.8 million and
$(0.8) million, respectively.
The Company applies the provisions of SFAS No. 128,
Earnings Per Share. Basic earnings per share is computed
by dividing net earnings available to common shareholders by the
weighted average number of shares of common stock outstanding
during the year. Diluted earnings per share is computed by
dividing net earnings by the sum of (1) the weighted
average number of shares of common stock outstanding during the
period, (2) the dilutive effect of the assumed exercise of
stock options using the treasury stock method, and (3) the
dilutive effect of other potentially dilutive securities,
including the Company’s convertible subordinated note
obligations.
|
|
|
(o) Employee Stock Compensation Plans |
At December 31, 2004, the Company had two stock
compensation plans and an employee stock purchase plan (the
“Plans”) (see Note 15). The Company accounts for
the Plans under the provisions of Accounting Principles Board
(“APB”) Opinion No. 25, Accounting for Stock
Issued to Employees, and related interpretations. As such,
compensation expense is measured on the date of grant only if
the current market price of the underlying stock exceeds the
exercise price. The options granted under the stock compensation
plans generally vest and become fully exercisable on a ratable
basis over four or five years of continued employment. In
accordance with APB Opinion No. 25 guidance, no
compensation expense has been recognized for the Plans in the
accompanying Consolidated Statements of Operations except for
compensation amounts relating to grants of certain restricted
stock issued in 2000 (see Note 12). The Company recognizes
compensation expense over the indicated vesting periods using
the straight-line method for its restricted stock awards.
Pro forma information regarding net earnings and earnings per
share is required by SFAS No. 123, Accounting for
Stock-Based Compensation, as amended by
SFAS No. 148, Accounting for Stock-Based
Compensation — Transition and Disclosure. The
following pro forma information has been determined as if the
Company had accounted for its employee stock options as an
operating expense under the fair value method of
SFAS No. 123. The fair value for these options was
estimated at the date of grant using a Black-Scholes option
pricing model with the following weighted-average assumptions:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
|
Risk-free interest rates
|
|
|
2.94 |
% |
|
|
2.73 |
% |
|
|
3.75 |
% |
|
Dividend yields
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Volatility factor of expected market price
|
|
|
.813 |
|
|
|
.846 |
|
|
|
.808 |
|
|
Weighted-average expected life of option
|
|
|
5 years |
|
|
|
5 years |
|
|
|
5 years |
|
Pro forma compensation expense is calculated for the fair value
of the employees’ purchase rights using the Black-Scholes
model. Assumptions included an expected life of six months and
weighted average risk-free interest rates of 1.42%, 0.95% and
1.84% in 2004, 2003 and 2002, respectively. Other underlying
assumptions are consistent with those used in the Company’s
stock option plan.
The Black-Scholes option valuation model was developed for use
in estimating the fair value of traded options that have no
vesting restrictions and are fully transferable. In addition,
option valuation models require the input of highly subjective
assumptions, including expected stock price volatility. Because
the Company’s employee stock options have characteristics
significantly different from those of traded options and because
55
PRG-SCHULTZ INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
changes in the subjective input assumptions can materially
affect the fair value estimate, it is management’s opinion
that existing models do not necessarily provide a reliable
single measure of the fair value of the Company’s employee
stock options. For purposes of pro forma disclosures below, the
estimated fair value of the options is amortized to expense over
the options’ vesting periods.
The Company’s pro forma information for the years ended
December 31, 2004, 2003 and 2002 for continuing and
discontinued operations, combined, is as follows (in thousands,
except for pro forma net earnings (loss) per share information):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
|
Numerator for basic pro forma net earnings (loss) per share
before cumulative effect of accounting change:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Net earnings (loss) before cumulative effect of accounting
change and pro forma effect of compensation expense recognition
provisions of SFAS No. 123
|
|
$ |
(71,483 |
) |
|
$ |
(160,818 |
) |
|
$ |
21,284 |
|
| |
Pro forma effect of compensation expense recognition provisions
of SFAS No. 123, net of income taxes of $(2,701),
$(4,890) and $(5,233) in 2004, 2003 and 2002, respectively
|
|
|
(4,170 |
) |
|
|
(7,554 |
) |
|
|
(8,082 |
) |
| |
|
|
|
|
|
|
|
|
|
| |
Pro forma net earnings (loss) for purposes of computing basic
earnings per share before cumulative effect of accounting change
|
|
$ |
(75,653 |
) |
|
$ |
(168,372 |
) |
|
$ |
13,202 |
|
| |
|
|
|
|
|
|
|
|
|
|
Numerator for diluted pro forma net earnings (loss) per share
before cumulative effect of accounting change:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Net earnings (loss) before cumulative effect of accounting
change and pro forma effect of compensation expense recognition
provisions of SFAS No. 123
|
|
$ |
(71,483 |
) |
|
$ |
(160,818 |
) |
|
$ |
21,284 |
|
| |
After-tax interest expense, including amortization of discount,
on convertible notes
|
|
|
— |
|
|
|
— |
|
|
|
4,157 |
|
| |
|
|
|
|
|
|
|
|
|
| |
Net earnings (loss) for purposes of computing diluted earnings
per share before cumulative effect of accounting change
|
|
|
(71,483 |
) |
|
|
(160,818 |
) |
|
|
25,441 |
|
| |
Pro forma effect of compensation expense recognition provisions
of SFAS No. 123, net of income taxes of $(2,701),
$(4,890) and $(5,233) in 2004, 2003 and 2002, respectively
|
|
|
(4,170 |
) |
|
|
(7,554 |
) |
|
|
(8,082 |
) |
| |
|
|
|
|
|
|
|
|
|
| |
Pro forma net earnings (loss) for purposes of computing diluted
earnings (loss) per share before cumulative effect of accounting
change
|
|
$ |
(75,653 |
) |
|
$ |
(168,372 |
) |
|
$ |
17,359 |
|
| |
|
|
|
|
|
|
|
|
|
|
Pro forma net earnings (loss) per share before cumulative effect
of accounting change:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Basic — as reported
|
|
$ |
(1.16 |
) |
|
$ |
(2.60 |
) |
|
$ |
0.34 |
|
| |
|
|
|
|
|
|
|
|
|
| |
Basic — pro forma
|
|
$ |
(1.22 |
) |
|
$ |
(2.73 |
) |
|
$ |
0.21 |
|
| |
|
|
|
|
|
|
|
|
|
| |
Diluted — as reported
|
|
$ |
(1.16 |
) |
|
$ |
(2.60 |
) |
|
$ |
0.32 |
|
| |
|
|
|
|
|
|
|
|
|
| |
Diluted — pro forma
|
|
$ |
(1.22 |
) |
|
$ |
(2.73 |
) |
|
$ |
0.22 |
|
| |
|
|
|
|
|
|
|
|
|
56
PRG-SCHULTZ INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The number of employee stock options that are dilutive for pro
forma purposes may vary from period to period from those under
APB No. 25, due to the timing difference in recognition of
compensation expense under APB No. 25 compared to
SFAS No. 123.
In applying the treasury stock method to determine the dilutive
impact of common stock equivalents, the calculation is performed
in steps with the impact of each type of dilutive security
calculated separately. For the years ended December 31,
2004 and 2003, 16.1 million shares related to the
convertible notes were excluded from the computation of pro
forma diluted earnings (loss) per share calculated using the
treasury stock method, due to their antidilutive effect. For the
year ended December 31, 2002, 16.1 million shares
related to the convertible notes were included in the
computation of pro forma diluted earnings (loss) per share
calculated using the treasury stock method, due to their
dilutive effect (see Note 6).
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.
Consolidated comprehensive income (loss) for the Company
consists of consolidated net earnings (loss) and foreign
currency translation adjustments, and is presented in the
accompanying Consolidated Statements of Shareholders’
Equity.
|
|
|
(q) Recently Adopted Accounting Standards |
In December 2004, the FASB issued SFAS No. 153,
Exchanges of Nonmonetary Assets — an amendment of
APB Opinion No. 29. The guidance in APB Opinion
No. 29, Accounting for Nonmonetary Transactions, is
based on the principle that exchanges of nonmonetary assets
should be measured based on the fair value of the assets
exchanged. The guidance in that Opinion, however, included
certain exceptions to that principle. This Statement amends
Opinion 29 to eliminate the exception for nonmonetary
exchanges of similar productive assets and replaces it with a
general exception for exchanges of nonmonetary assets that do
not have commercial substance. A nonmonetary exchange has
commercial substance if the future cash flows of the entity are
expected to change significantly as a result of the exchange.
The Company adopted the provisions of SFAS No. 153
effective December 31, 2004. The Company did not enter into
any transactions within the scope of this Statement during 2004.
The adoption of SFAS No. 153 did not have a material
impact on the Company’s operating results or financial
position.
|
|
|
(r) New Accounting Standards |
In December 2004, the FASB issued SFAS No. 123
(revised 2004) (“SFAS No. 123(R)”),
Share-Based Payment. This Statement requires a public
entity to measure the cost of employee services received in
exchange for an award of equity instruments based on the
grant-date fair value of the award (with limited exceptions).
That cost will be recognized over the period during which an
employee is required to provide service in exchange for the
award — the requisite service period (usually the
vesting period). No compensation cost is recognized for equity
instruments for which employees do not render the requisite
service. Employee share purchase plans will not result in
recognition of compensation cost if certain conditions are met.
A public entity will initially measure the cost of employee
services received in exchange for an award of liability
instruments based on its current fair value; the fair value of
that award will be remeasured subsequently at each reporting
date through the settlement date. Changes in fair value during
the requisite service period will be recognized as compensation
cost over that period.
SFAS No. 123(R) is effective for all periods beginning
after June 15, 2005. As of the required effective date, all
public entities will apply this Statement using a modified
version of prospective application. Under
57
PRG-SCHULTZ INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
that transition method, compensation cost is recognized on or
after the required effective date for the portion of outstanding
awards for which the requisite service has not yet been
rendered, based on the grant-date fair value of those awards
calculated under SFAS No. 123(R) for either
recognition or pro forma disclosures. For periods before the
required effective date, entities may elect to apply a modified
version of retrospective application under which financial
statements for prior periods are adjusted on a basis consistent
with the pro forma disclosures required for those periods by
Statement 123(R) (see Note 1(o) for pro forma
disclosures). The impact of this Statement on future periods
cannot be estimated at this time.
|
|
| (2) |
DISCONTINUED OPERATIONS |
In March 2001, the Company announced its intent to divest the
following non-core businesses: Meridian VAT Reclaim
(“Meridian”), the Logistics Management Services
segment, the Communications Services segment and the Channel
Revenue division within the Accounts Payable Services segment.
The Company disposed of its Logistics Management Services
segment in October 2001. During the fourth quarter of 2001, the
Company closed a unit within Communications Services. In
December 2001, the Company disposed of its French Taxation
Services business which had been part of continuing operations
until time of disposal.
As indicated above, Meridian, Communications Services and the
Channel Revenue business were originally offered for sale in the
first quarter of 2001. During the first quarter of 2002, the
Company concluded that the then current negative market
conditions were not conducive to receiving terms acceptable to
the Company for these remaining unsold, non-core businesses. As
such, on January 24, 2002, the Company’s Board of
Directors approved a proposal to retain these remaining
discontinued operations until such time as market conditions
were more conducive to their sale. During the fourth quarter of
2003, the Company once again declared its remaining
Communications Services operations as a discontinued operation
and subsequently sold such operations on January 16, 2004
(see Note 2(c)). The accompanying Consolidated Financial
Statements reflect the remaining non-core businesses, consisting
of Meridian and the Channel Revenue business, as part of
continuing operations for all periods presented.
The non-core businesses that were divested and the unit that was
closed within the Communications Service segment were comprised
of various acquisitions completed by the Company from 1997
through 2000. The acquisitions were accounted for as purchases
with collective consideration paid of $96.3 million in cash
and 4,293,049 restricted, unregistered shares of the
Company’s common stock.
The accompanying Consolidated Financial Statements reflect the
remaining non-core businesses, consisting of Meridian and
Channel Revenue business, as part of continuing operations for
all periods presented. Additionally, the Company’s
Consolidated Financial Statements reflect Communications
Services as discontinued operations for all periods presented.
Operating results of the discontinued operations are summarized
below. The amounts exclude general corporate overhead previously
allocated to Communications Services for segment reporting
purposes.
Summarized financial information for the discontinued operations
is as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Years Ended December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
| |
|
(In thousands) | |
|
Revenues
|
|
$ |
115 |
|
|
$ |
16,967 |
|
|
$ |
16,407 |
|
|
Operating income (loss)
|
|
|
(546 |
) |
|
|
2,184 |
|
|
|
2,048 |
|
58
PRG-SCHULTZ INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
|
|
|
(a) Revenue-Based Royalty from Sale of Logistics
Management Services in 2001 |
For the years ended December 31, 2004, 2003 and 2002, the
Company recognized a gain on the sale of discontinued operations
of approximately $0.3 million (net of tax expenses of
approximately $0.2 million), approximately
$0.5 million (net of tax expenses of approximately
$0.4 million) and approximately $0.4 million (net of
tax expenses of approximately $0.3 million), respectively,
related to the receipt of a portion of the revenue-based royalty
from the sale of the Logistics Management Services business in
October 2001, as adjusted for certain expenses accrued as part
of the estimated loss on the sale of that business.
|
|
|
(b) Sale of Discontinued Operations —
French Taxation Services in 2001 |
On December 14, 2001, the Company consummated the sale of
its French Taxation Services business (“ALMA”), as
well as certain notes payable due to the Company, to Chequers
Capital, a Paris-based private equity firm. In conjunction with
this sale, the Company provided the buyer with certain
warranties. Effective December 30, 2004, the Company,
Meridian and ALMA (the “Parties”) entered into a
Settlement Agreement (the “Agreement”) requiring the
Company to pay a total of 3.4 million Euros
($4.7 million at January 3, 2005 exchange rates, the
payment date), to resolve the buyer’s warranty claims are a
commission dispute with Meridian. During 2004, the Company
recognized a loss on discontinued operations of
$3.1 million for amounts not previously accrued to provide
for these claims. No tax benefit was recognized in relation to
the expense. The Agreement settles all remaining indemnification
obligations and terminates all contractual relationships between
the Parties and further specifies that the Parties will renounce
all complaints, grievances and other actions.
|
|
|
(c) Sale of Communications Services |
During the fourth quarter of 2003, the Company declared its
remaining Communications Services operations, formerly part of
the Company’s then-existing Other Ancillary Services
segment, as a discontinued operation. On January 16, 2004,
the Company consummated the sale of the remaining Communications
Services operations to TSL (DE) Corp., a newly formed
company whose principal investor was One Equity Partners, the
private equity division of Bank One. The operations were sold
for approximately $19.1 million in cash paid at closing,
plus the assumption of certain liabilities of Communications
Services. The Company recognized a gain on disposal of
approximately $8.3 million, net of tax expense of
approximately $5.5 million. Operating results for
Communications Services during the phase-out period
(January 1, 2004 through January 16, 2004) were a loss
of $(0.3) million, net of an income tax benefit of
$(0.2) million.
|
|
| (3) |
RELATED PARTY TRANSACTIONS |
During August 2002, an affiliate of Howard Schultz, a former
director of the Company, granted the Company two options (the
“First Option Agreement” and the “Second Option
Agreement”) to purchase, in total, approximately
2.9 million shares of the Company’s common stock at a
price of $8.72 per share plus accretion of 8% per
annum from August 27, 2002.
On September 20, 2002, the Company exercised the First
Option Agreement in its entirety and purchased approximately
1.45 million shares of its common stock from the Howard
Schultz affiliate, for approximately $12.68 million,
representing a price of $8.72 per share plus accretion of
8% per annum from the August 27, 2002 option issuance
date. The option purchase price was funded through borrowings
under the Company’s senior bank credit facility. The Second
Option Agreement expired unexercised on May 9, 2003.
In November 2002, Messrs. Howard and Andrew Schultz’
employment agreements were terminated on mutually acceptable
terms. The Company recorded expense of approximately
$1.2 million in 2002 related to the termination of these
employment agreements.
59
PRG-SCHULTZ INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
During the year ended December 31, 2002, the Company paid
Howard Schultz approximately $0.2 million for property
leased from Mr. Schultz. This lease was terminated in
conjunction with the termination of his employment agreement.
In November 2002, the Company relocated its principal executive
offices. In conjunction with this relocation, the Company is
subleasing approximately 3,300 square feet of office space
to CT Investments, Inc. (“CT Investments”)
at a pass through rate equal to the cash cost per square foot
paid by the Company under the master lease and the tenant finish
in excess of the landlord’s allowance. CT Investments
is 90% owned by John M. Cook, Chairman of the Board and Chief
Executive Officer of the Company and 10% owned by John M. Toma,
Vice Chairman of the Company. The Company received sublease
payments of approximately $44,000 and $39,000 from
CT Investments during 2004 and 2003, respectively.
The Company’s 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 a 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”) paid on 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. Revenues earned related to TVR were
$0.5 million in 2004, $2.3 million in 2003 and
$3.6 million in 2002. During 2004, Meridian agreed with DKV
to commence an orderly and managed closeout of the TVR business.
Therefore, Meridian’s future revenues from TVR for
processing TVR’s VAT refunds, and the associated profits
therefrom, ceased in October 2004 (See Note 13(b)).
Financial advisory and management services historically have
been provided to the Company by one of the Company’s
directors, Mr. Jonathan Golden, who is also a shareholder
of the Company. Payments for such services to Mr. Golden
aggregated $72,000 in 2004, 2003 and 2002, respectively. The
Company will continue to utilize the services provided by
Mr. Golden and, as such, has agreed to pay him a minimum of
$72,000 in 2005 for financial advisory and management services.
In addition to the foregoing, Mr. Golden is a senior
partner in a law firm that serves as the Company’s
principal outside legal counsel. Fees paid to this law firm
aggregated $1.1 million in 2004, $0.5 million in 2003
and $1.8 million in 2002. The Company expects to continue
to utilize the services of this law firm.
The Company currently uses and expects to continue its use of
the services of Flightworks, Inc. (“Flightworks”), a
company specializing in aviation charter transportation. During
2002 and a portion of 2003, the aircraft used by the Company was
leased by Flightworks from CT Aviation Leasing LLC
(“CT Aviation Leasing”), a company 100% owned by
Mr. Cook. The Company paid Flightworks approximately
$2,900 per hour plus landing fees and other incidentals for
use of such charter transportation services, of which 95% of
such amount was paid by Flightworks to CT Aviation Leasing.
During 2003 and 2002, the Company recorded expenses of
approximately $0.5 million and $0.4 million,
respectively, for the use of CT Aviation Leasing’s
plane. Subsequent to October 29, 2003, neither
CT Aviation Leasing nor Mr. Cook owned any aircraft
utilized by the Company.
During the year ended December 31, 2002, the Company had
one client, a mass merchandiser, which accounted for 10.2% of
revenues from continuing operations. The Company did not have
any clients who individually provided revenues in excess of
10.0% of total revenues from continuing operations during the
years ended December 31, 2004 and 2003.
60
PRG-SCHULTZ INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
|
|
| (5) |
OPERATING SEGMENTS AND RELATED INFORMATION |
The Company has two reportable operating segments, Accounts
Payable Services (including the Channel Revenue business) and
Meridian VAT Reclaim.
|
|
|
Accounts Payable Services |
The Accounts Payable Services segment consists of services that
entail the review of client accounts payable disbursements to
identify and recover overpayments. This operating segment
includes accounts payable services provided to retailers and
wholesale distributors (the Company’s historical client
base) and accounts payable services provided to various other
types of business entities. The Accounts Payable Services
segment conducts business in North America, South America,
Europe, Australia, Africa and Asia.
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.
In addition to the segments noted above, the Company includes
the unallocated portion of corporate selling, general and
administrative expenses not specifically attributable to
Accounts Payable Services or Meridian in the category referred
to as corporate support.
61
PRG-SCHULTZ INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The Company evaluates the performance of its operating segments
based upon revenues and operating income. The Company does not
have any intersegment revenues. Segment information for
continuing operations for the years ended December 31,
2004, 2003 and 2002 follows (in thousands):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Accounts | |
|
Meridian | |
|
|
|
|
| |
|
Payable | |
|
VAT | |
|
Corporate | |
|
|
| |
|
Services | |
|
Reclaim | |
|
Support | |
|
Total | |
| |
|
| |
|
| |
|
| |
|
| |
|
2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Revenues
|
|
$ |
315,505 |
|
|
$ |
41,368 |
|
|
$ |
— |
|
|
$ |
356,873 |
|
| |
Operating income (loss)
|
|
|
45,667 |
|
|
|
8,987 |
|
|
|
(47,421 |
) |
|
|
7,233 |
|
| |
Total assets
|
|
|
293,520 |
|
|
|
41,492 |
|
|
|
6,924 |
|
|
|
341,936 |
|
| |
Capital expenditures
|
|
|
3,867 |
|
|
|
462 |
|
|
|
7,203 |
|
|
|
11,532 |
|
| |
Depreciation and amortization
|
|
|
11,335 |
|
|
|
889 |
|
|
|
5,870 |
|
|
|
18,094 |
|
|
2003
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Revenues
|
|
$ |
335,328 |
|
|
$ |
40,373 |
|
|
$ |
— |
|
|
$ |
375,701 |
|
| |
Impairment Charges
|
|
|
196,900 |
|
|
|
8,246 |
|
|
|
1,777 |
|
|
|
206,923 |
|
| |
Operating income (loss)
|
|
|
(137,977 |
) |
|
|
3,702 |
|
|
|
(54,876 |
) |
|
|
(189,151 |
) |
| |
Total assets
|
|
|
365,619 |
|
|
|
45,685 |
|
|
|
9,774 |
|
|
|
421,078 |
|
| |
Capital expenditures
|
|
|
5,172 |
|
|
|
396 |
|
|
|
6,127 |
|
|
|
11,695 |
|
| |
Depreciation and amortization
|
|
|
9,645 |
|
|
|
1,012 |
|
|
|
7,170 |
|
|
|
17,827 |
|
|
2002
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Revenues
|
|
$ |
413,260 |
|
|
$ |
33,630 |
|
|
$ |
— |
|
|
$ |
446,890 |
|
| |
Operating income (loss)
|
|
|
114,004 |
|
|
|
4,768 |
|
|
|
(67,735 |
) |
|
|
51,037 |
|
| |
Total assets
|
|
|
531,301 |
|
|
|
32,143 |
|
|
|
18,158 |
|
|
|
581,602 |
|
| |
Capital expenditures
|
|
|
10,430 |
|
|
|
1,010 |
|
|
|
11,855 |
|
|
|
23,295 |
|
| |
Depreciation and amortization
|
|
|
7,541 |
|
|
|
913 |
|
|
|
10,662 |
|
|
|
19,116 |
|
The following table presents revenues by country based on the
location of clients served (in thousands):
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
|
United States
|
|
$ |
206,829 |
|
|
$ |
224,276 |
|
|
$ |
304,476 |
|
|
United Kingdom
|
|
|
54,672 |
|
|
|
58,478 |
|
|
|
59,806 |
|
|
Canada
|
|
|
21,221 |
|
|
|
22,250 |
|
|
|
18,585 |
|
|
Ireland
|
|
|
14,618 |
|
|
|
15,566 |
|
|
|
14,508 |
|
|
France
|
|
|
13,674 |
|
|
|
11,805 |
|
|
|
9,838 |
|
|
Germany
|
|
|
8,343 |
|
|
|
10,791 |
|
|
|
7,845 |
|
|
Japan
|
|
|
5,176 |
|
|
|
4,233 |
|
|
|
3,835 |
|
|
Mexico
|
|
|
4,786 |
|
|
|
4,697 |
|
|
|
6,923 |
|
|
Spain
|
|
|
3,812 |
|
|
|
2,932 |
|
|
|
2,028 |
|
|
Brazil
|
|
|
3,707 |
|
|
|
3,973 |
|
|
|
4,230 |
|
|
Australia
|
|
|
2,812 |
|
|
|
3,974 |
|
|
|
4,065 |
|
|
Other
|
|
|
17,223 |
|
|
|
12,726 |
|
|
|
10,751 |
|
| |
|
|
|
|
|
|
|
|
|
| |
|
$ |
356,873 |
|
|
$ |
375,701 |
|
|
$ |
446,890 |
|
| |
|
|
|
|
|
|
|
|
|
62
PRG-SCHULTZ INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The following table presents long-lived assets by country based
on the location of the asset (in thousands):
| |
|
|
|
|
|
|
|
|
| |
|
2004 | |
|
2003 | |
| |
|
| |
|
| |
|
United States
|
|
$ |
219,604 |
|
|
$ |
221,692 |
|
|
Ireland
|
|
|
4,294 |
|
|
|
5,264 |
|
|
United Kingdom
|
|
|
2,915 |
|
|
|
2,818 |
|
|
Australia
|
|
|
2,071 |
|
|
|
3,868 |
|
|
Other
|
|
|
2,332 |
|
|
|
1,212 |
|
| |
|
|
|
|
|
|
| |
|
$ |
231,216 |
|
|
$ |
234,854 |
|
| |
|
|
|
|
|
|
(6) DILUTED EARNINGS (LOSS) PER
SHARE
The following table sets forth the computations of diluted
earnings (loss) per share for the years ended December 31,
2004, 2003 and 2002 (in thousands, except for earnings (loss)
per share information):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
|
Numerator for diluted earnings (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Earnings (loss) from continuing operations before discontinued
operations and cumulative effect of accounting change
|
|
$ |
(76,660 |
) |
|
$ |
(162,615 |
) |
|
$ |
26,362 |
|
| |
After-tax interest expense, including amortization of discount,
on convertible notes
|
|
|
— |
|
|
|
— |
|
|
|
4,157 |
|
| |
|
|
|
|
|
|
|
|
|
| |
|
Earnings (loss) for purposes of computing diluted earnings per
share from continuing operations
|
|
|
(76,660 |
) |
|
|
(162,615 |
) |
|
|
30,519 |
|
| |
Discontinued operations
|
|
|
5,177 |
|
|
|
1,797 |
|
|
|
(5,078 |
) |
| |
Cumulative effect of accounting change
|
|
|
— |
|
|
|
— |
|
|
|
(8,216 |
) |
| |
|
|
|
|
|
|
|
|
|
| |
|
|
Earnings (loss) for purposes of computing diluted earnings
(loss) per share
|
|
$ |
(71,483 |
) |
|
$ |
(160,818 |
) |
|
$ |
17,225 |
|
| |
|
|
|
|
|
|
|
|
|
|
Denominator for diluted earnings (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Denominator for basic earnings per share —
weighted-average shares outstanding
|
|
|
61,760 |
|
|
|
61,751 |
|
|
|
62,702 |
|
| |
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Convertible notes
|
|
|
— |
|
|
|
— |
|
|
|
16,150 |
|
| |
|
Employee stock options
|
|
|
— |
|
|
|
— |
|
|
|
1,136 |
|
| |
|
|
|
|
|
|
|
|
|
| |
|
Denominator for diluted earnings
|
|
|
61,760 |
|
|
|
61,751 |
|
|
|
79,988 |
|
| |
|
|
|
|
|
|
|
|
|
|
Diluted earnings (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Earnings (loss) from continuing operations before discontinued
operations and cumulative effect of accounting changes
|
|
$ |
(1.24 |
) |
|
$ |
(2.63 |
) |
|
$ |
0.38 |
|
| |
Discontinued operations
|
|
|
0.08 |
|
|
|
0.03 |
|
|
|
(0.06 |
) |
| |
Cumulative effect of accounting change
|
|
|
— |
|
|
|
— |
|
|
|
(0.10 |
) |
| |
|
|
|
|
|
|
|
|
|
| |
|
|
Net earnings (loss)
|
|
$ |
(1.16 |
) |
|
$ |
(2.60 |
) |
|
$ |
0.22 |
|
| |
|
|
|
|
|
|
|
|
|
63
PRG-SCHULTZ INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
In 2004, 2003 and 2002, 5.0 million, 3.9 million and
1.1 million stock options, respectively, were excluded from
the computation of diluted earnings (loss) per share, due to
their antidilutive effect. Additionally, in 2004 and 2003,
16.1 million shares related to the convertible notes were
excluded from the computation of diluted earnings (loss) per
share, due to their antidilutive effect.
(7) ACCOUNTING FOR GOODWILL AND
OTHER INTANGIBLE ASSETS
SFAS No. 142, Goodwill and Other Intangible Assets,
requires that goodwill and intangible assets with indefinite
useful lives no longer be amortized, but instead be tested for
impairment at least annually. The Company has selected
October 1, the first day of its fourth quarter, as its
annual assessment date. Prior to the adoption of
SFAS No. 142, the Company evaluated the recoverability
of goodwill based upon undiscounted estimated future cash flows.
SFAS No. 142 required that the Company perform
transitional goodwill impairment testing on recorded net
goodwill balances as they existed on January 1, 2002, the
date of adoption, using a prescribed two-step, fair value
approach.
During the second quarter of 2002, the Company, working with
independent valuation advisors, completed the required
transitional impairment testing and concluded that the entire
recorded net goodwill balance associated with its Channel
Revenue unit was impaired as of January 1, 2002 under the
new SFAS No. 142 guidance. As a result, the Company
recognized a before-tax charge of $13.5 million as a
cumulative effect of an accounting change, retroactive to
January 1, 2002. The Company recorded an income tax benefit
of $5.3 million as a reduction to this goodwill impairment
charge, resulting in an after-tax charge of $8.2 million.
During the fourth quarter of 2003, the Company conducted its
long-term strategic planning process for 2004 and future years
with specific focus on 2004. The plan involved receiving a
detailed revenue outlook for 2004 from all components of the
Company. This outlook supported the conclusion that the
Company’s 2003 reductions in domestic revenues were not
anticipated to reverse during 2004. The completion of the
Company’s strategic planning process provided the first
clear indication that previous near-term domestic growth
projections for Accounts Payable Services were no longer
achievable.
The Company, working with its independent valuation advisors,
completed the required annual impairment testing of goodwill in
accordance with SFAS No. 142 during the fourth quarter
of 2003. The valuation requires an estimation of the fair value
of the asset being tested. The fair value of the asset being
tested is determined, in part, based on the sum of the
discounted future cash flows expected to result from its use and
eventual disposition. This analysis required the Company to
provide its advisors with various financial information
including, but not limited to, projected financial results for
the next several years. The Company’s revised 2004 and
subsequent years’ projections for financial performance,
mentioned in the previous paragraph, were incorporated into the
calculation of discounted cash flows required for the valuation
under SFAS No. 142.
Based upon the valuation analysis of the Company’s goodwill
assets and the recommendation of the advisors, the Company
concluded that all net goodwill balances relating to its
Meridian reporting unit and a significant portion of the
goodwill associated with the Company’s Accounts Payable
Services business were impaired. The Company recorded a charge
of $8.2 million related to the write-off of Meridian’s
goodwill. Additionally, the Company recognized a charge of
$193.9 million for the partial write-off of goodwill
related to Accounts Payable Services. This charge has been
included in the line item titled “Impairment Charges”
in the Company’s Consolidated Statement of Operations for
the year ended December 31, 2003.
During the fourth quarter of 2004, the Company, working with its
independent valuation advisors, completed the required annual
impairment testing of goodwill in accordance with
SFAS No. 142. As a result of this testing, the Company
concluded that there was no impairment of goodwill.
64
PRG-SCHULTZ INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The following table reconciles goodwill balances by reportable
operating segment (in thousands):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Accounts | |
|
|
|
|
| |
|
Payable | |
|
|
|
|
| |
|
Services | |
|
|
|
|
| |
|
(including | |
|
Meridian | |
|
|
| |
|
Channel | |
|
VAT | |
|
|
| |
|
Revenue) | |
|
Reclaim | |
|
Total | |
| |
|
| |
|
| |
|
| |
|
Balance at December 31, 2002
|
|
$ |
363,587 |
|
|
$ |
8,246 |
|
|
$ |
371,833 |
|
|
SFAS No. 142 goodwill impairment losses
|
|
|
(193,900 |
) |
|
|
(8,246 |
) |
|
|
(202,146 |
) |
|
Foreign currency translation
|
|
|
932 |
|
|
|
— |
|
|
|
932 |
|
| |
|
|
|
|
|
|
|
|
|
| |
Balance at December 31, 2003
|
|
|
170,619 |
|
|
|
— |
|
|
|
170,619 |
|
|
Foreign currency translation
|
|
|
65 |
|
|
|
— |
|
|
|
65 |
|
| |
|
|
|
|
|
|
|
|
|
| |
Balance at December 31, 2004
|
|
$ |
170,684 |
|
|
$ |
— |
|
|
$ |
170,684 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
(b) Other Intangible Assets |
The Company’s other intangible assets were acquired as part
of the January 24, 2002 acquisitions of the businesses of
Howard Schultz & Associates International, Inc. and
affiliates (“HSA-Texas”). Intangible assets consist of
the following at December 31, 2004 (in thousands):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
Gross | |
|
|
|
Net | |
| |
|
Estimated | |
|
Carrying | |
|
Accumulated | |
|
Carrying | |
| |
|
Useful Life | |
|
Amount | |
|
Amortization | |
|
Amount | |
| |
|
| |
|
| |
|
| |
|
| |
|
Amortized intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Customer relationships
|
|
|
20 years |
|
|
$ |
27,700 |
|
|
$ |
4,068 |
|
|
$ |
23,632 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Unamortized intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Trade name
|
|
|
Indefinite |
|
|
$ |
6,600 |
|
|
|
|
|
|
|
6,600 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Total intangible assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
30,232 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
The provisions of SFAS No. 142 require that the
Company review the carrying value of intangible assets with
indefinite useful lives for impairment annually or whenever
events and circumstances indicate that the carrying value of an
asset may not be recoverable from the estimated discounted
future cash flows expected to result from its use and eventual
disposition. At the time of adoption, the Company selected
October 1, the first day of its fourth quarter, as its
annual assessment date. During the fourth quarter of 2003, the
Company worked with its independent valuation advisors and
completed the analysis of its trade name. In relation to the
2003 impairment testing, since the discounted expected future
cash flows were determined to be less than the carrying value of
the Company’s trade name, an impairment loss of
$3.0 million was recognized. This pre-tax charge is equal
to the amount by which the carrying value exceeded the fair
value of the asset and has been included in the line item titled
“Impairment Charges” in the Company’s
Consolidated Statement of Operations for the year ended
December 31, 2003.
During the fourth quarter of 2004, the Company, working with its
independent valuation advisors, completed the required annual
impairment testing of its trade name in accordance with
SFAS No. 142. As a result of this testing, the Company
concluded that there was no impairment of its trade name.
Intangible assets with definite useful lives are being amortized
on a straight-line basis over their estimated useful lives to
their estimated residual values, and are reviewed for impairment
in accordance with SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets. Amortization of
intangible assets amounted to $1.4 million,
$1.6 million and $3.1 million for the years ended
December 31, 2004, 2003 and 2002, respectively.
65
PRG-SCHULTZ INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Estimated amortization expense for the next five years is as
follows (in thousands):
| |
|
|
|
|
| Year Ending December 31, |
|
|
| |
|
|
|
2005
|
|
$ |
1,385 |
|
|
2006
|
|
|
1,385 |
|
|
2007
|
|
|
1,385 |
|
|
2008
|
|
|
1,385 |
|
|
2009
|
|
|
1,385 |
|
(8) DEBT AND CONVERTIBLE
NOTES
On November 30, 2004, the Company entered into an amended
and restated credit agreement (the “Senior Credit
Facility”) with Bank of America, N.A. (the
“Lender”). The Senior Credit Facility amends and
restates the Company’s previous senior credit facility,
which was maintained by a syndicate of banking institutions led
by the Lender. The previous facility had an indicated face value
of $38.0 million (after amendment) and a maturity date of
December 31, 2004. The Senior Credit Facility currently
provides for revolving credit loans up to a maximum amount of
$25.0 million, subject to certain borrowing base
limitations; provided, however, that the maximum amount of loans
outstanding may be increased to $30.0 million as early as
July 1, 2005 upon achievement of certain performance
milestones. The Senior Credit Facility provides for the
availability of letters of credit subject to a
$10.0 million sublimit.
The occurrence of certain stipulated events, as defined in the
Senior Credit Facility, including but not limited to the event
that the Company’s outstanding borrowings exceed the
prescribed borrowing base, would require accelerated principal
payments. Otherwise, so long as there is no violation of any of
the covenants (or any such violations are waived), no principal
payments are due until the maturity date on May 26, 2006.
The Senior Credit Facility is secured by substantially all
assets of the Company. Revolving loans (the
“Revolver”) under the Senior Credit Facility bear
interest at either (1) the Lender’s prime rate plus
0.5%, or (2) the London Interbank Offered Rate
(“LIBOR”) plus 3.0%. The Senior Credit Facility
requires a fee for committed but unused credit capacity of
0.5% per annum. The Senior Credit Facility contains
customary financial covenants relating to the maintenance of a
maximum leverage ratio and minimum consolidated earnings before
interest, taxes, depreciation and amortization as those terms
are defined in the Senior Credit Facility. Covenants in the
previous credit facility related to Senior Leverage, Fixed
Charge Coverage, and Minimum Net Worth were eliminated. At
December 31, 2004, the Company was in compliance with all
covenants contained in the Senior Credit Facility.
At December 31, 2004, the Company had two standby Letters
of Credit (“Letters of Credit”) totaling
$4.9 million (See Note 13(c)). The Company had no
borrowings outstanding under the Revolver or the Letters of
Credit at December 31, 2004. The Company’s borrowing
base capacity was $25.0 million at December 31, 2004,
which therefore permitted up to $20.1 million in additional
borrowings as of the date of which $5.1 million was
available for Letters of Credit. The Company pays a 3.0% per
annum fee on the amount of the standby Letters of Credit. The
Company had no borrowings outstanding under the Letters of
Credit at December 31, 2004. The Company’s weighted
average interest rate for 2004 was 4.0% per annum. At
December 31, 2003, the Company had approximately
$31.6 million of borrowings outstanding, under its
then-existing credit facility, with a weighted average interest
rate of 3.8% per annum.
In December 2001, the Company completed a $125.0 million
offering of its
43/4% convertible
subordinated notes due November 2006. The Company received net
proceeds from the offering of approximately
66
PRG-SCHULTZ INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
$121.1 million, which were used to pay down the
Company’s outstanding balance under its then-existing
$200.0 million senior bank credit facility.
The notes are convertible into the Company’s common stock
at a conversion price of $7.74 per share which is equal to
a conversion rate of 129.1990 shares per $1,000 principal
amount of notes, subject to adjustment. The Company may redeem
some or all of the notes at any time on or after
November 26, 2004 at a redemption price of $1,000 per
$1,000 principal amount of notes, plus accrued and unpaid
interest, if prior to the redemption date the closing price of
the Company’s common stock has exceeded 140% of the then
conversion price for at least 20 trading days within a period of
30 consecutive days ending on the trading date before the date
of mailing of the optional redemption notice.
At December 31, 2004 and 2003, the Company had convertible
notes outstanding of $123.3 million and
$122.4 million, net of unamortized discount of
$1.7 million and $2.6 million, respectively.
Amortization of the discount on convertible notes is included as
a component of interest (expense), net as presented in the
accompanying Consolidated Statements of Operations.
The Company is committed under noncancelable lease arrangements
for facilities and equipment. Rent expense, excluding costs
associated with the termination of noncancelable lease
arrangements, for 2004, 2003 and 2002, was $12.5 million,
$13.3 million and $13.4 million, respectively.
SFAS No. 146, Accounting for Costs Associated with
Exit or Disposal Activities, requires that a liability for
costs to terminate a contract before the end of its term be
recognized and measured at its fair value when the entity
terminates the contract in accordance with the contract terms.
The Company incurred approximately $0.3 million,
$1.0 million and $5.7 million in 2004, 2003 and 2002,
respectively, in termination costs of noncancelable lease
arrangements. The Company recognized a corresponding liability
for the fair-value of the remaining lease rentals, reduced by
any estimable sublease rentals that could be reasonably obtained
for the properties. This liability is reduced ratably over the
remaining term of the cancelled lease arrangements as cash
payments are made.
The Company has entered into several operating lease agreements
that contain provisions for future rent increases, free rent
periods or periods in which rent payments are reduced (abated).
In accordance with Financial Accounting Standards Board
Technical Bulletin No. 85-3, Accounting for
Operating Leases with Scheduled Rent Increases, the total
amount of rental payments due over the lease term is being
charged to rent expense on the straight-line method over the
lease terms.
The future minimum lease payments under noncancelable leases are
summarized as follows (in thousands):
| |
|
|
|
|
| Year Ending December 31, |
|
|
| |
|
|
|
2005
|
|
$ |
10,254 |
|
|
2006
|
|
|
7,684 |
|
|
2007
|
|
|
6,540 |
|
|
2008
|
|
|
5,883 |
|
|
2009
|
|
|
5,035 |
|
|
Thereafter
|
|
|
27,902 |
|
| |
|
|
|
| |
|
$ |
63,298 |
|
| |
|
|
|
67
PRG-SCHULTZ INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Income taxes have been provided in accordance with
SFAS No. 109, Accounting for Income Taxes.
Total income taxes for the years ended December 31, 2004,
2003 and 2002 were allocated as follows (in thousands):
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
|
Earnings (loss) from continuing operations
|
|
$ |
75,344 |
|
|
$ |
(35,484 |
) |
|
$ |
15,336 |
|
|
Earnings (loss) from discontinued operations
|
|
|
— |
|
|
|
917 |
|
|
|
(4,959 |
) |
|
Gain on disposal/retention of discontinued operations including
operating results for phase-out period
|
|
|
5,495 |
|
|
|
354 |
|
|
|
9,604 |
|
|
Cumulative effect of accounting change
|
|
|
— |
|
|
|
— |
|
|
|
(5,309 |
) |
|
Shareholders’ equity, compensation expense for tax purposes
in excess of financial purposes
|
|
|
(17 |
) |
|
|
(155 |
) |
|
|
(3,007 |
) |
|
Effect of cumulative translation adjustment
|
|
|
3 |
|
|
|
— |
|
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
| |
|
$ |
80,825 |
|
|
$ |
(34,368 |
) |
|
$ |
11,665 |
|
| |
|
|
|
|
|
|
|
|
|
Earnings (loss) before income taxes from continuing operations
for the years ended December 31, 2004, 2003 and 2002 relate
to the following jurisdictions (in thousands):
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
|
United States
|
|
$ |
6,429 |
|
|
$ |
(201,699 |
) |
|
$ |
34,009 |
|
|
Foreign
|
|
|
(7,745 |
) |
|
|
3,600 |
|
|
|
7,689 |
|
| |
|
|
|
|
|
|
|
|
|
| |
|
$ |
(1,316 |
) |
|
$ |
(198,099 |
) |
|
$ |
41,698 |
|
| |
|
|
|
|
|
|
|
|
|
The provision for income taxes attributable to earnings from
continuing operations for the years ended December 31,
2004, 2003 and 2002 consists of the following (in thousands):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
|
Current:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Federal
|
|
$ |
104 |
|
|
$ |
31 |
|
|
$ |
174 |
|
| |
State
|
|
|
10 |
|
|
|
3 |
|
|
|
15 |
|
| |
Foreign
|
|
|
3,389 |
|
|
|
4,750 |
|
|
|
4,895 |
|
| |
|
|
|
|
|
|
|
|
|
| |
|
|
3,503 |
|
|
|
4,784 |
|
|
|
5,084 |
|
| |
|
|
|
|
|
|
|
|
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Federal
|
|
|
42,434 |
|
|
|
(35,168 |
) |
|
|
9,792 |
|
| |
State
|
|
|
7,976 |
|
|
|
(4,361 |
) |
|
|
162 |
|
| |
Foreign
|
|
|
21,431 |
|
|
|
(739 |
) |
|
|
298 |
|
| |
|
|
|
|
|
|
|
|
|
| |
|
|
71,841 |
|
|
|
(40,268 |
) |
|
|
10,252 |
|
| |
|
|
|
|
|
|
|
|
|
| |
|
Total
|
|
$ |
75,344 |
|
|
$ |
(35,484 |
) |
|
$ |
15,336 |
|
| |
|
|
|
|
|
|
|
|
|
68
PRG-SCHULTZ INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The following table summarizes the significant differences
between the U.S. federal statutory tax rate and the
Company’s effective tax expense (benefit) for earnings
(loss) from continuing operations:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
|
Statutory federal income tax rate
|
|
$ |
(460 |
) |
|
$ |
(69,335 |
) |
|
$ |
14,594 |
|
|
State income taxes, net of federal benefit
|
|
|
(506 |
) |
|
|
(9,905 |
) |
|
|
371 |
|
|
Nondeductible goodwill
|
|
|
— |
|
|
|
41,601 |
|
|
|
— |
|
|
Job Creation Act dividend
|
|
|
700 |
|
|
|
— |
|
|
|
— |
|
|
Change in deferred tax asset valuation allowance
|
|
|
76,747 |
|
|
|
4,593 |
|
|
|
(1,555 |
) |
|
Other, net
|
|
|
(1,137 |
) |
|
|
(2,438 |
) |
|
|
1,926 |
|
| |
|
|
|
|
|
|
|
|
|
| |
|
$ |
75,344 |
|
|
$ |
(35,484 |
) |
|
$ |
15,336 |
|
| |
|
|
|
|
|
|
|
|
|
The tax effects of temporary differences and carry-forwards that
give rise to deferred tax assets and liabilities consist of the
following (in thousands):
| |
|
|
|
|
|
|
|
|
|
|
| |
|
2004 | |
|
2003 | |
| |
|
| |
|
| |
|
Deferred income tax assets:
|
|
|
|
|
|
|
|
|
| |
Accounts payable and accrued expenses
|
|
$ |
2,306 |
|
|
$ |
2,752 |
|
| |
Accrued payroll and related expenses
|
|
|
7,637 |
|
|
|
7,803 |
|
| |
Deferred compensation
|
|
|
864 |
|
|
|
1,452 |
|
| |
Depreciation
|
|
|
4,225 |
|
|
|
4,376 |
|
| |
Noncompete agreements
|
|
|
1,139 |
|
|
|
1,951 |
|
| |
Bad debts
|
|
|
953 |
|
|
|
1,194 |
|
| |
Foreign operating loss carryforward of foreign subsidiary
|
|
|
9,576 |
|
|
|
4,581 |
|
| |
Foreign tax credit carryforwards
|
|
|
13,282 |
|
|
|
10,836 |
|
| |
Federal operating loss carryforward
|
|
|
20,047 |
|
|
|
16,049 |
|
| |
Intangible assets
|
|
|
27,241 |
|
|
|
37,888 |
|
| |
State operating loss carryforwards
|
|
|
6,837 |
|
|
|
5,586 |
|
| |
Capital loss carryforwards
|
|
|
12,910 |
|
|
|
17,237 |
|
| |
Other
|
|
|
5,072 |
|
|
|
2,874 |
|
| |
|
|
|
|
|
|
| |
|
Gross deferred tax assets
|
|
|
112,089 |
|
|
|
114,579 |
|
| |
Less valuation allowance
|
|
|
97,254 |
|
|
|
24,967 |
|
| |
|
|
|
|
|
|
| |
|
Gross deferred tax assets net of valuation allowance
|
|
|
14,835 |
|
|
|
89,612 |
|
| |
|
|
|
|
|
|
|
Deferred income tax liabilities:
|
|
|
|
|
|
|
|
|
| |
Intangible assets
|
|
|
12,091 |
|
|
|
12,635 |
|
| |
Capitalized software
|
|
|
2,149 |
|
|
|
1,932 |
|
| |
Other
|
|
|
2,845 |
|
|
|
464 |
|
| |
|
|
|
|
|
|
| |
|
Gross deferred tax liabilities
|
|
|
17,085 |
|
|
|
15,031 |
|
| |
|
|
|
|
|
|
| |
|
Net deferred tax assets (liabilities)
|
|
$ |
(2,250 |
) |
|
$ |
74,581 |
|
| |
|
|
|
|
|
|
SFAS No. 109 requires that deferred tax assets be
reduced by a valuation allowance if it is more likely than not
that some portion or all of a deferred tax asset will not be
realized. The ultimate realization of deferred tax assets is
dependent upon the generation of future taxable income during
the periods in which those temporary differences are deductible.
In making this determination, management considers all available
69
PRG-SCHULTZ INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
positive and negative evidence affecting specific deferred tax
assets, including the Company’s past and anticipated future
performance, the reversal of deferred tax liabilities, the
length of carry-back and carry-forward periods and, the
implementation of tax planning strategies.
Objective positive evidence is necessary to support a conclusion
that a valuation allowance is not needed for all or a portion of
deferred tax assets when significant negative evidence exists.
Cumulative losses in recent years are the most compelling form
of negative evidence considered by management in this
determination. For the year ended December 31, 2004 the
Company recognized an increase in the valuation allowance
against its remaining net deferred tax assets of
$76.6 million. This increase was offset by the use of
approximately $4.3 million of capital loss carry-forwards
resulting in a net change in the valuation allowance of
approximately $72.3 million. The Company expects to
continue to record a full valuation allowance on future tax
benefits until an appropriate level of profitability is
sustained.
As of December 31, 2004, the Company had approximately
$57.2 million of U.S. Federal loss carry-forwards
available to reduce future taxable income. The majority of the
loss carry-forwards expire through 2024. Additionally, as of
December 31, 2004, the Company had foreign income tax
credit carry-forwards amounting to $13.3 million, which
expire through 2014. The Company is currently investigating
strategic alternatives, including the possible sale of the
Company. If substantial changes in the Company’s ownership
should occur, there would be an annual limitation on the amount
of the carry-forwards that can be utilized. The annual
limitation is equal to the value of the corporation at the time
of the ownership change multiplied by a long-term tax-exempt
rate published by the Internal Revenue Service.
Undistributed earnings of the Company’s foreign
subsidiaries amounted to approximately $11.9 million at
December 31, 2004. Those earnings are considered to be
indefinitely reinvested and accordingly, no U.S. federal
and state income taxes have been provided thereon. Upon
distribution of those earnings, the Company would be subject to
approximately $4.3 million of U.S. federal and state
income taxes. In 2004, the Company repatriated approximately
$1.8 million of earnings that were previously indefinitely
reinvested as a result of the enactment of The American Jobs
Creation Act of 2004, which was signed into law on
October 22, 2004. As a result of this repatriation, the
Company recorded additional current income tax expense of
approximately $0.7 million.
|
|
| (11) |
EMPLOYEE BENEFIT PLANS |
The Company maintains a 401(k) Plan in accordance with
Section 401(k) of the Internal Revenue Code, which allows
eligible participating employees to defer receipt of up to 25%
of their compensation and contribute such amount to one or more
investment funds. Employee contributions are matched by the
Company in a discretionary amount to be determined by the
Company each plan year up to $1,750 per participant. The
Company may also make additional discretionary contributions to
the Plan as determined by the Company each plan year. Company
matching funds and discretionary contributions vest at the rate
of 20% each year beginning after the participants’ first
year of service. Company contributions for continuing and
discontinued operations were approximately $1.1 million in
2004, $1.4 million in 2003 and $1.6 million in 2002.
The Company also maintains deferred compensation arrangements
for certain key officers and executives. Total expense related
to these deferred compensation arrangements was approximately
$0.2 million, $0.3 million and $0.4 million in
2004, 2003 and 2002, respectively. Net payments related to these
deferred compensation arrangements were approximately
$1.5 million and $0.3 million in 2004 and 2003,
respectively.
70
PRG-SCHULTZ INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
|
|
| (12) |
SHAREHOLDERS’ EQUITY |
On September 20, 2002, the Company exercised an option to
purchase approximately 1.45 million shares of its common
stock from an affiliate of Howard Schultz, a former director of
the Company, for approximately $12.68 million (see
Note 3).
On October 24, 2002, the Board authorized the repurchase of
up to $50.0 million of the Company’s common shares.
During 2003 and 2002, the Company repurchased 1.1 million
and 0.8 million shares, respectively, of its outstanding
common stock on the open market at a cost of $7.53 million
and $7.48 million, respectively. The Company did not
purchase any of its outstanding common shares during 2004 and
does not currently anticipate a resumption of such purchases in
the foreseeable future.
On August 1, 2000, the Board authorized a shareholder
protection rights plan designed to protect Company shareholders
from coercive or unfair takeover techniques through the use of a
Shareholder Protection Rights Agreement approved by the Board
(the “Rights Plan”). The terms of the Rights Plan
provide for a dividend of one right (collectively, the
“Rights”) to purchase a fraction of a share of
participating preferred stock for each share owned. This
dividend was declared for each share of common stock outstanding
at the close of business on August 14, 2000. The Rights,
which expire on August 14, 2010, may be exercised only if
certain conditions are met, such as the acquisition (or the
announcement of a tender offer, the consummation of which would
result in the acquisition) of 15% or more of the Company’s
common stock by a person or affiliated group in a transaction
that is not approved by the Board. Issuance of the Rights does
not affect the finances of the Company, interfere with the
Company’s operations or business plans, or affect earnings
per share. The dividend was not taxable to the Company or its
shareholders and did not change the way in which the
Company’s shares may be traded. At the 2001 annual meeting,
the Company’s shareholders approved a resolution
recommending redemption of the Rights, as the Rights Plan
contained a “continuing directors” provision. In March
2002, a special committee, appointed to consider the matter,
recommended to the Board that the Rights Plan be amended to
remove the continuing directors provision contingent upon the
shareholders approving an amendment to the Company’s
Articles of Incorporation providing that directors can only be
removed for cause. At the 2002 annual meeting, the shareholders
approved the amendment to the Company’s Articles of
Incorporation to provide that directors can only be removed for
cause, and the Rights Plan was therefore automatically amended
to remove the continuing directors provision. Additionally, the
shareholders voted against a second proposal to redeem the
Rights Plan. During August 2002, the Board approved a one-time
and limited exemption to the 15% ownership clause under the
Rights Plan to Blum Capital Partners LP.
Effective July 31, 2000, in connection with the Rights
Plan, the Board amended the Company’s Articles of
Incorporation to establish a new class of stock, the
participating preferred stock. The Board authorized
500,000 shares of the participating preferred stock, none
of which has been issued.
On August 14, 2000, the Company issued 286,000 restricted
shares of its common stock to certain employees (the “Stock
Awards”). Of the total restricted shares issued, 135,000
restricted shares were structured to vest on a ratable basis
over five years of continued employment. The remaining 151,000
restricted shares were structured to vest at the end of five
years of continued employment. At December 31, 2004, there
were 40,500 shares of this common stock which were no
longer forfeitable and for which all restrictions had
accordingly been removed. Additionally, as of December 31,
2004, former employees had cumulatively forfeited
189,500 shares of the restricted common stock. Over the
remaining life of the Stock Awards (as adjusted at
December 31, 2004 to reflect actual cumulative forfeitures
to date), the Company will recognize $67 thousand in
compensation expense before any future forfeitures. For the
years ended December 31, 2004, 2003 and 2002, respectively,
the Company recognized $4 thousand, $246 thousand and $230
thousand of compensation expense related to the Stock Awards.
Additionally, the Company reduced unamortized compensation
expense for forfeitures of the Stock Awards by $154 thousand,
$144 thousand and $82 thousand for the years ended
December 31, 2004, 2003 and 2002, respectively.
71
PRG-SCHULTZ INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
To promote retention of key employees during the Company’s
exploration of strategic alternatives, among other goals, on
October 19, 2004, the Company’s Compensation Committee
approved a program under which the Company intends to modify
employment and compensation arrangements with certain management
employees as disclosed in the Company’s Report on
Form 8-K filed on October 26, 2004. Under the program,
the officers will be offered additional benefits related to
certain termination and change of control events if they agree
to revised restrictive covenants.
Among the additional benefits, restricted stock awards
representing 40,000 shares of the Company’s common
stock were granted to each of six of the Company’s
officers. The total 240,000 restricted shares will be subject to
service-based cliff vesting. The restricted awards vest
3 years following the date of the grant, subject to early
vesting upon a change of control, death, disability or
involuntary termination of employment without cause. The
restricted awards are forfeited if the recipient voluntarily
terminates his or her employment with the Company (or a
subsidiary, affiliate or successor thereof) prior to vesting.
The shares are generally nontransferable until vesting. During
the vesting period, the award recipients will be entitled to
receive dividends with respect to the escrowed shares and to
vote the shares. Over the 3-year vesting period, the Company
will incur non-cash stock compensation expense relating to the
restricted stock awards. These agreements were signed on
February 11, 2005 (See Note 17(b)).
The Company has issued no preferred stock through
December 31, 2004, and has no present intentions to issue
any preferred stock, except for any potential issuance of
participating preferred stock (500,000 shares authorized)
pursuant to the Rights Plan. The Company’s remaining,
undesignated preferred stock (500,000 shares authorized)
may be issued at any time or from time to time in one or more
series with such designations, powers, preferences, rights,
qualifications, limitations and restrictions (including
dividend, conversion and voting rights) as may be determined by
the Board, without any further votes or action by the
shareholders.
|
|
| (13) |
COMMITMENTS AND CONTINGENCIES |
Beginning on June 6, 2000, three putative class action
lawsuits were filed against the Company and certain of its
present and former officers in the United States District Court
for the Northern District of Georgia, Atlanta Division. These
cases were subsequently consolidated into one proceeding styled:
In re Profit Recovery Group International, Inc. Sec.
Litig., Civil Action File No. 1:00-CV-1416-CC (the
“Securities Class Action Litigation”). On
November 13, 2000, the Plaintiffs in these cases filed a
Consolidated and Amended Complaint (the “Complaint”).
In that Complaint, Plaintiffs allege that the Company, John M.
Cook, Scott L. Colabuono, the Company’s former Chief
Financial Officer, and Michael A. Lustig, the Company’s
former Chief Operating Officer, (the “Defendants”)
violated Sections 10(b) and 20(a) of the Securities
Exchange Act of 1934 and Rule 10b-5 promulgated thereunder
by allegedly disseminating false and misleading information
about a change in the Company’s method of recognizing
revenue and in connection with revenue reported for a division.
Plaintiffs purport to bring this action on behalf of a class of
persons who purchased the Company’s stock between
July 19, 1999 and July 26, 2000. Plaintiffs seek an
unspecified amount of compensatory damages, payment of
litigation fees and expenses, and equitable and/or injunctive
relief. On January 24, 2001, Defendants filed a Motion to
Dismiss the Complaint for failure to state a claim under the
Private Securities Litigation Reform Act, 15 U.S.C.
§ 78u-4 et seq. The Court denied
Defendant’s Motion to Dismiss on June 5, 2001.
Defendants served their Answer to Plaintiffs’ Complaint on
June 19, 2001. The Court granted Plaintiffs’ Motion
for Class Certification on December 3, 2002.
On February 8, 2005, the Company entered into a Stipulation
of Settlement of the Securities Class Action Litigation
(See Note 17(a)). On February 10, 2005, the United States
District Court for the Northern District of Georgia, Atlanta
Division preliminarily approved the terms of the Settlement. If
approved by the Court, the Settlement is not expected to require
any financial contribution by the Company.
72
PRG-SCHULTZ INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Consistent with the Federal Rules of Civil Procedure, the class
will be provided notice of the Settlement and given the right to
object or opt-out of the Settlement. The Court will hold a final
approval hearing on May 26, 2005. Final settlement of the
consolidated class action is subject to final approval by the
Court.
|
|
| (b) |
Indemnification and Consideration Concerning Certain
Future Asset Impairment Assessments |
The Company’s 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 facility’s 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, Meridian’s future
revenues from TVR for processing TVR’s VAT refunds, and the
associated profits therefrom, ceased in October 2004.
(Meridian’s revenues from TVR were $0.5 million,
$2.3 million and $3.6 million for the years ended
December 31, 2004, 2003 and 2002, respectively.) As TVR
goes about the orderly wind-down of its business in future
periods, it will be receiving VAT refunds from countries, and a
portion of such refunds will be paid to Meridian in liquidation
of its investment in TVR. If there is a marked deterioration in
TVR’s 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 December 31, 2004 exchange
rates and $2.1 million at December 31, 2003 exchange
rates. This investment is included in Other Assets on the
Company’s December 31, 2004 and 2003 Consolidated
Balance Sheets.
|
|
| (c) |
Standby Letters of Credit |
On November 30, 2004, the Company entered into a standby
letter of credit under its Senior Bank Credit Facility in the
face amount of 3.5 million Euro ($4.7 million at
December 31, 2004 exchange rates). The letter of credit
serves as assurance to VAT authorities in France that the
Company’s Meridian unit will properly and expeditiously
remit all French VAT refunds it receives in its capacity as
intermediary and custodian to the appropriate client recipients.
The current annual interest rate of the letter of credit was
3.0% at December 31, 2004. There were no borrowings
outstanding under the letter of credit at December 31, 2004.
Additionally, on November 30, 2004, the Company entered
into a letter of credit under its Senior Bank Credit Facility in
the face amount of $0.2 million. The letter of credit is
required by an insurer in which the Company maintains a policy
to provide workers’ compensation and employers’
liability insurance. The current annual interest rate of the
letter of credit was 0.125% at December 31, 2004. There
were no borrowings outstanding under the letter of credit at
December 31, 2004.
73
PRG-SCHULTZ INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
In July 2003, Meridian entered into a deposit guarantee (the
“Guarantee”) with Credit Commercial de France
(“CCF”) in the amount of 4.5 million Euros
($5.7 million at December 31, 2003 exchange rates).
The Guarantee served as assurance to VAT authorities in France
that Meridian will properly and expeditiously remit all French
VAT refunds it receives in its capacity as intermediary and
custodian to the appropriate client recipients. The Guarantee
was secured by amounts on deposit with CCF equal to the amount
of the Guarantee. These funds were restricted as security for
the Guarantee, and are included in the Company’s
Consolidated Balance Sheet as of December 31, 2003 as
restricted cash. The current annual interest rate earned on this
money is 1.0% for 2004. At December 31, 2004, the Guarantee
was replaced with the 3.5 million Euro letter of credit
discussed above.
On April 1, 2003, one of the Company’s larger domestic
Accounts Payable Services clients at that time, filed for
Chapter 11 Bankruptcy Reorganization. During the quarter
ended March 31, 2003, the Company received
$5.5 million in payments on account from this client. A
portion of these payments might be recoverable as
“preference payments” under United States bankruptcy
laws and recovered for the benefit of the debtor’s estate.
On January 24, 2005, the Company received a Demand of
Preference Payment from this client for $2.6 million. The
Company believes that it has valid defenses against this demand.
The Company has offered to settle such claim. Accordingly, the
Company’s Consolidated Statement of Operations for the year
ended December 31, 2004 includes an expense provision of
$0.2 million with respect to this matter.
|
|
|
| |
(f) |
Industrial Development Authority Grants |
During the period of May 1993 through September 1999, Meridian
received grants from the Industrial Development Authority of
Ireland (“IDA”) in the sum of 1.4 million Euro
($1.9 million at December 31, 2004 exchange rates).
The grants were paid primarily to stimulate the creation of 145
permanent jobs in Ireland. As a condition of the grants, if the
number of permanently employed Meridian staff in Ireland falls
below 145, then the grants are repayable in full. This
contingency expires on September 23, 2007. Meridian
currently employs 205 permanent employees in Dublin, Ireland.
The European Union (“EU”) has currently proposed
legislation that will remove the need for suppliers to charge
VAT on the supply of services to clients within the EU. The
effective date of the proposed legislation is currently unknown.
Management estimates that the proposed legislation, if enacted
as currently drafted, would eventually have a material adverse
impact on Meridian’s results of operations from its
value-added tax business. If Meridian’s results of
operations were to decline as a result of the enactment of the
proposed legislation, it is possible that the number of
permanent employees that Meridian employs in Ireland could fall
below 145 prior to September 2007. Should such an event occur,
the full amount of the grants previously received by Meridian
will need to be repaid to IDA. However, management currently
estimates that any impact on employment levels related to a
possible change in the EU legislation will not be realized until
after September 2007, if ever. As any potential liability
related to these grants is not currently determinable, the
Company’s Consolidated Statement of Operations for the year
ended December 31, 2004 does not include any expense
related to this matter. Management is monitoring this situation
and if it appears probable Meridian’s permanent staff in
Ireland will fall below 145 and that grants will need to be
repaid to IDA, Meridian will be required to recognize an expense
at that time. This expense could be material to Meridian’s
results of operations.
On January 24, 2002, the Company acquired substantially all
the assets and assumed certain liabilities of Howard
Schultz & Associates International, Inc.
(“HSA-Texas”), substantially all of the outstanding
stock of HS&A International Pte Ltd., and all of the
outstanding stock of Howard Schultz & Associates (Asia)
Limited, Howard Schultz & Associates (Australia), Inc.
and Howard Schultz & Associates (Canada), Inc.,
74
PRG-SCHULTZ INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
each an affiliated foreign operating company of HSA-Texas,
pursuant to an amended and restated agreement and plan of
reorganization by and among PRG-Schultz, HSA-Texas, Howard
Schultz, Andrew H. Schultz and certain trusts dated
December 11, 2001 (the “Asset Agreement”) and an
amended and restated agreement and plan of reorganization by and
among PRG-Schultz, Howard Schultz, Andrew H. Schultz, Andrew H.
Schultz Irrevocable Trust and Leslie Schultz dated
December 11, 2001 (the “Stock Agreement”).
The results of HSA-Texas and affiliates’ operations have
been included in the Company’s consolidated financial
statements since the date of acquisition.
Selected (unaudited) pro forma results of operations of the
Company for the year ended December 31, 2002 as if the
acquisitions of the businesses of HSA-Texas and affiliates had
been completed as of January 1, 2002, are as follows
(amounts in thousands, except per share data):
| |
|
|
|
|
|
Revenues
|
|
$ |
448,821 |
|
|
Operating income
|
|
|
43,385 |
|
|
Earnings from continuing operations before discontinued
operations and cumulative effect of accounting change
|
|
|
20,154 |
|
|
Net earnings (loss)
|
|
|
6,860 |
|
|
Diluted earnings from continuing operations before discontinued
operations and cumulative effect of accounting change per share
|
|
$ |
0.29 |
|
|
Diluted net earnings (loss) per share
|
|
$ |
0.13 |
|
Unusual or non-recurring items included in the reported
(unaudited) pro forma results are as follows:
|
|
| |
1) HSA-Texas and affiliates recorded $1.9 million in
revenues for the 24-day period in January 2002 prior to the
finalization of the acquisitions. This reduced billing amount
was a direct consequence of an atypically large invoice volume
for HSA-Texas and affiliates during December 2001. |
| |
| |
2) In January 2002, HSA-Texas and affiliates recorded
approximately $7.8 million of obligations owed to
independent contractor associates resulting from revisions made
to their contractual compensation agreements. During the 24-day
period in January 2002 prior to finalization of the
acquisitions, HSA-Texas entered into revised individual
agreements with certain domestic independent contractor
associates whereby such associates each agreed to accept a
stipulated future lump sum payment representing the differential
between (a) the associate’s future compensation for
work-in-process as calculated under their then current HSA-Texas
compensation plan and (b) the associate’s future
compensation on that same work-in-process as calculated under
The Profit Recovery Group International, Inc. compensation plan.
These agreements enabled the participating HSA-Texas workforce
to join The Profit Recovery Group International, Inc.
compensation plan immediately upon merger completion and without
disruptive transitional delays. |
|
|
| (15) |
STOCK OPTION PLANS AND EMPLOYEE STOCK PURCHASE PLAN |
At December 31, 2004, the Company had two stock
compensation plans: (1) the Stock Incentive Plan and
(2) the HSA Acquisition Stock Option Plan; and an employee
stock purchase plan.
The Company’s Stock Incentive Plan, as amended, has
authorized the grant of options or other stock based awards,
with respect to up to 12,375,000 shares of the
Company’s common stock to key employees, directors,
consultants and advisors. The majority of options granted
through December 31, 2004 have 5-year terms and vest and
become fully exercisable on a ratable basis over four or five
years of continued employment.
75
PRG-SCHULTZ INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The Company’s HSA Acquisition Stock Option Plan, as
amended, authorized the grant of options to
purchase 1,083,846 shares of the Company’s common
stock to former key employees and advisors of HSA-Texas who were
hired or elected to the Board of Directors in connection with
the acquisitions of the businesses of HSA-Texas and affiliates
and who were participants in the 1999 Howard Schultz &
Associates International Stock Option Plan. The options have
5-year terms and vested upon and became fully exercisable upon
issuance. No additional options can be issued under this plan.
A summary of the Company’s stock option activity and
related information for the years ended December 31, 2004,
2003 and 2002 is as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
| |
|
|
|
Weighted- | |
|
|
|
Weighted- | |
|
|
|
Weighted- | |
| |
|
|
|
Average | |
|
|
|
Average | |
|
|
|
Average | |
| |
|
|
|
Exercise | |
|
|
|
Exercise | |
|
|
|
Exercise | |
| |
|
Options | |
|
Price | |
|
Options | |
|
Price | |
|
Options | |
|
Price | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
Outstanding at beginning of year
|
|
|
8,080,175 |
|
|
$ |
10.70 |
|
|
|
8,071,222 |
|
|
$ |
11.31 |
|
|
|
5,975,609 |
|
|
$ |
12.64 |
|
|
Granted
|
|
|
1,541,000 |
|
|
|
4.35 |
|
|
|
1,368,500 |
|
|
|
7.40 |
|
|
|
3,972,366 |
|
|
|
8.72 |
|
|
Exercised
|
|
|
(19,090 |
) |
|
|
3.59 |
|
|
|
(223,023 |
) |
|
|
4.37 |
|
|
|
(1,119,274 |
) |
|
|
6.91 |
|
|
Forfeited
|
|
|
(1,707,394 |
) |
|
|
11.68 |
|
|
|
(1,136,524 |
) |
|
|
12.26 |
|
|
|
(757,479 |
) |
|
|
14.69 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at end of year
|
|
|
7,894,691 |
|
|
|
9.27 |
|
|
|
8,080,175 |
|
|
|
10.70 |
|
|
|
8,071,222 |
|
|
|
11.31 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at end of year
|
|
|
5,296,247 |
|
|
|
10.44 |
|
|
|
5,202,996 |
|
|
|
11.01 |
|
|
|
4,101,985 |
|
|
|
11.07 |
|
|
Weighted average fair value of options granted during year
|
|
$ |
2.89 |
|
|
|
|
|
|
$ |
5.02 |
|
|
|
|
|
|
$ |
6.16 |
|
|
|
|
|
The following table summarizes information about stock options
outstanding at December 31, 2004:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
Exercisable | |
| |
|
Number | |
|
Weighted- | |
|
Weighted- | |
|
| |
| |
|
of Shares | |
|
Average | |
|
Average | |
|
Number | |
|
Weighted- | |
| |
|
Subject | |
|
Remaining | |
|
Exercise | |
|
of | |
|
Average | |
| Range of Exercise Prices |
|
to Option | |
|
Life | |
|
Price | |
|
Shares | |
|
Exercise Price | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
$3.53 – $4.31
|
|
|
1,188,820 |
|
|
|
3.43 years |
|
|
$ |
4.18 |
|
|
|
497,326 |
|
|
$ |
4.20 |
|
|
$4.43 – $7.41
|
|
|
2,823,724 |
|
|
|
2.63 years |
|
|
|
6.53 |
|
|
|
1,763,184 |
|
|
|
6.95 |
|
|
$8.50 – $11.83
|
|
|
2,917,022 |
|
|
|
2.06 years |
|
|
|
9.63 |
|
|
|
2,167,762 |
|
|
|
9.74 |
|
|
$12.00 – $18.88
|
|
|
363,725 |
|
|
|
3.23 years |
|
|
|
15.85 |
|
|
|
307,675 |
|
|
|
16.07 |
|
|
$19.16 – $26.56
|
|
|
488,050 |
|
|
|
4.55 years |
|
|
|
24.63 |
|
|
|
447,150 |
|
|
|
24.53 |
|
|
$28.77 – $41.50
|
|
|
92,350 |
|
|
|
4.67 years |
|
|
|
32.54 |
|
|
|
92,150 |
|
|
|
32.55 |
|
|
$43.69
|
|
|
21,000 |
|
|
|
4.80 years |
|
|
|
43.69 |
|
|
|
21,000 |
|
|
|
43.69 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
7,894,691 |
|
|
|
|
|
|
|
|
|
|
|
5,296,247 |
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The weighted-average remaining contract life of options
outstanding at December 31, 2004 was 2.72 years.
Effective May 15, 1997, the Company established an employee
stock purchase plan pursuant to Section 423 of the Internal
Revenue Code of 1986, as amended. The plan covers
2,625,000 shares of Company’s common stock, which may
be authorized unissued shares, or shares reacquired through
private purchase or purchases on the open market. Employees can
contribute up to 10% of their compensation towards the
semiannual purchase of stock. The employee’s purchase price
is 85 percent of the fair market price on the first
business day of the purchase period. The Company is not required
to recognize compensation expense related to this plan. In
January 2005, approximately 142,000 shares were issued
under the plan
76
PRG-SCHULTZ INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
relating to 2004. During 2004, approximately 166,000 shares
were issued under the plan. No shares were issued under the plan
in 2003.
|
|
| (16) |
FAIR VALUE OF FINANCIAL INSTRUMENTS |
The carrying amounts for cash and cash equivalents, receivables,
funds held for client obligations, notes payable, current
installments of long-term debt, obligations for client payables,
accounts payable and accrued expenses, and accrued payroll and
related expenses approximate fair value because of the short
maturity of these instruments.
The fair value of the Company’s convertible notes was
calculated as the discounted present value of future cash flows
related to the convertible notes using the stated interest rate
which management believes is the approximate rate at which the
notes could be refinanced as of December 31, 2004. The
estimated fair value of the Company’s convertible notes at
December 31, 2004 and 2003 was $124.1 million and
$123.1 million, respectively, and the carrying value of the
Company’s convertible notes at December 31, 2004 and
2003 was $123.3 million and $122.4 million,
respectively.
Fair value estimates are made at a specific point in time, based
on relevant market information about the financial instrument.
These estimates are subjective in nature and involve
uncertainties and matters of significant judgment and therefore
cannot be determined with precision. Changes in assumptions
could significantly affect the estimates. Accordingly, the
estimates presented are not necessarily indicative of the
amounts that could be realized in a current market exchange.
|
|
| (17) |
SUBSEQUENT EVENTS (UNAUDITED) |
|
|
|
| |
(a) |
Preliminary Settlement of Securities Class Action
Litigation |
On February 8, 2005, the Company entered into a Stipulation
of Settlement (“Settlement”) with Plaintiffs’
counsel, on behalf of all putative class members, pursuant to
which it agreed to preliminarily settle the consolidated class
action for $6.75 million, which payment is expected to be
made by the insurance carrier for the Company. On
February 10, 2005, the Court preliminarily approved the
terms of the Settlement. Consistent with the Federal Rules of
Civil procedure, the class will be provided notice of the
Settlement and given the right to object or opt-out of the
Settlement. The Court will hold a final approval hearing on
May 26, 2005. Final settlement of the consolidated class
action is subject to final approval by the Court (see
Note 13(a)).
|
|
|
| |
(b) |
Change in Control and Termination Agreements |
To promote retention of key employees during the Company’s
exploration of strategic alternatives, among other goals, the
Company’s Compensation Committee approved a program under
which the Company modified employment and compensation
arrangements with certain management employees as disclosed in
the Company’s Report on Form 8-K filed on
February 11, 2005. Under the program, the officers are
entitled to additional benefits related to certain change of
control and termination events in exchange for revised
restrictive covenants. Also, in October 2004 the Compensation
Committee approved transaction success bonuses payable upon a
change of control for 26 additional key managers. Such bonuses
would be calculated as a percentage of each manager’s
annual salary with the applicable percentage based on the per
share consideration received in a change of control transaction.
Among the additional benefits, restricted stock awards
representing 40,000 shares of the Company’s common
stock were granted to each of six of the Company’s officers
in February 2005. The total 240,000 restricted shares are
subject to service-based cliff vesting. The restricted awards
vest 3 years following the date of the grant, subject to
early vesting upon a change of control, death, disability or
involuntary termination of employment without cause. The
restricted awards will be forfeited if the recipient voluntarily
terminates his or
77
PRG-SCHULTZ INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
her employment with the Company (or a subsidiary, affiliate or
successor thereof) prior to vesting. The shares are generally
nontransferable until vesting. During the vesting period, the
award recipients will be entitled to receive dividends with
respect to the escrowed shares and to vote the shares. Over the
3-year vesting period, the Company will incur non-cash stock
compensation expense relating to the restricted stock awards.
Based on the closing stock price on February 14, 2005, the
Company will incur non-cash stock compensation expense of
$1.2 million over the 3-year vesting period.
On April 1, 2003, Fleming, one of the Company’s larger
U.S. Accounts Payable Services clients at that time, filed
for Chapter 11 Bankruptcy Reorganization. During the
quarter ended March 31, 2003, the Company received
$5.5 million in payments on account from this client. A
portion of these payments might be recoverable as
“preference payments” under United States bankruptcy
laws. On January 24, 2005, the Company received a demand
for preference payments due from the trust representing the
client. The demand states that the trust’s calculation of
the Company’s preferential payments was approximately
$2.9 million. The Company believes that it has valid
defenses against any claim that may be made for payments
received from Fleming. The Company has offered to settle such
claim. Accordingly, the Company’s Consolidated Statement of
Operations for the year ended December 31, 2004 includes an
expense provision of $0.2 million with respect to this
matter.
78
|
|
| ITEM 9. |
Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure |
None
|
|
| ITEM 9A. |
Controls and Procedures |
Conclusion Regarding the Effectiveness of Disclosure Controls
and Procedures —
The Company has established disclosure controls and procedures
to ensure, among other things, that material information
relating to the Company, including its consolidated
subsidiaries, is made known to the officers who certify the
Company’s financial reports and to other members of senior
management and the Board of Directors.
The Company’s Chairman and Chief Executive Officer
(CEO) and its Executive Vice President and Chief Financial
Officer (CFO) are responsible for establishing and
maintaining disclosure controls and procedures (as defined in
Rules 13a-15(e) and 15d-15(e) under the Securities Exchange
Act of 1934, as amended (“Disclosure Controls”)) for
the Company.
Management has informed the Audit Committee of the Board of
Directors that, although it has not completed its assessment, it
has identified material weaknesses in the Company’s
internal control over financial reporting, as defined in
Rules 13a-15(f) and 15d-15(f) under the Securities Exchange
Act of 1934, in the course of its evaluation of the
effectiveness of the Company’s internal control over
financial reporting as of December 31, 2004.
A “material weakness” in internal control over
financial reporting is defined by the Public Company Accounting
Oversight Board’s (“PCAOB”) Auditing Standard
No. 2 as a significant deficiency, or combination of
significant deficiencies, that result in a more than remote
likelihood that a material misstatement of the annual or interim
financial statements will not be prevented or detected.
The first material weakness relates to ineffective oversight and
review over revenue and the reserve for estimated refunds,
resulting from the following matters:
|
|
|
| |
• |
Inexperienced and inadequately trained personnel; |
| |
| |
• |
Insufficient evidence supporting the subjective factors in the
Company’s calculation of the reserve for estimated refunds; |
| |
| |
• |
Inadequate review of changes in controls being implemented in
the fourth quarter, which resulted in a deficiency in the design
of management’s review of documentation to determine when
the Company’s services are considered performed. |
The aforementioned material weakness in internal control over
financial reporting results in more than a remote likelihood
that the Company’s revenue or reserve for estimated refunds
could have been materially misstated. The Company is in the
process of completing its remediation efforts, which includes
additional training and management review procedures. The
Company believes that these new policies and procedures will be
effective in remediating this material weakness.
The second material weakness relates to insufficient oversight
and review of the Company’s income tax accounting
practices. Specifically, the Company did not maintain adequate
review procedures related to the determination of its tax assets
and the related valuation allowance. This material weakness
resulted in errors in the Company’s accounting for income
taxes which were identified during the course of the
Company’s 2004 audit. The Company plans to improve its
controls over the accounting for income taxes by establishing
additional review steps by management and believes these
additional controls will be effective in remediating this
material weakness.
79
Management does not expect the results reported in the
accompanying financial statements as of December 31, 2004
or the financial statements for any prior period to change as a
result of the aforementioned material weaknesses.
Management has not finalized its assessment of the
Company’s internal control over financial reporting.
Therefore, management is availing itself of the exemptive order
granted by the Securities Exchange Commission permitting
companies to file Section 404 compliance and audit reports
and certifications within 45 days of March 16, 2005.
Such reports will be filed with the Company’s Annual Report
on Form 10-K/ A for the year ended December 31, 2004,
to be filed on or before May 2, 2005.
Based on the criteria set forth by PCAOB Standard No. 2 and
considering the material weaknesses identified above, the CEO
and CFO have concluded that the Company’s Disclosure
Controls were not effective as of December 31, 2004. In
addition, based on such material weaknesses, it is currently
anticipated that management’s and KPMG LLP’s report on
the Company’s internal control over financial reporting
will conclude that the Company’s internal control over
financial reporting was not effective as of December 31,
2004.
ITEM 9B. Other Information
Mr. Toma’s deferred compensation. Effective
December 31, 2004, Mr. Toma closed his deferred
compensation account with the Company. At that time, he received
a distribution from the account in the amount of $691,251.10.
Beginning January 1, 2005, Mr. Toma began receiving
$65,000 in direct pay per year in lieu of the $65,000 annual
contribution which the Company was previously obligated to
contribute to his deferred compensation account under his
Employment Agreement. This amount is not considered part of his
base salary for purposes of calculating any bonus.
2004 Bonuses. On February 7, 2005, the Compensation
Committee approved payment of discretionary bonuses with respect
to 2004 to the Named Executive Officers (except as noted with
respect to Mr. Moylan). The bonuses awarded were as
follows: $220,000 to Mr. Cook, $40,000 to Mr. Toma,
$40,000 to Mr. Bacon, and $40,000 to Mr. Benjamin.
Mr. Moylan received $60,000 during the fourth quarter of
2004 as reimbursement of social club dues, in the form of a
bonus.
2005 Bonuses. Also on February 7, 2005, the
Compensation Committee approved the bonus program for 2005. The
Named Executive Officers were all granted an opportunity to earn
bonuses based on Company performance during 2005, as described
below. The bonus amount depends upon achievement of certain
Performance Measures for each quarter and for the full year.
However, bonuses are paid annually. The Committee reserved
discretion to adjust the amounts of any bonuses upward or
downward, regardless of Company performance, with respect to all
bonuses not intended to be eligible for exclusion from the
calculation of the $1 million cap on deductibility imposed
by Section 162(m) of the Internal Revenue Code.
The Compensation Committee determines Target Performance Measure
levels for each period. Bonus amounts also vary according to
whether certain Minimum and Maximum levels of the Performance
Measure are attained. Minimum levels are 95% of Target, and
Maximum levels are 110% of the Target.
Mr. Cook’s bonus is based upon Company EBIT (Earnings
Before Interest and Taxes). Achievement of Target EBIT for any
one of the five periods (each of the four quarters and the full
year) would entitle him to 40% of his base salary. Achievement
of Minimum EBIT for any of the five periods would entitle him to
10% of his base salary. Thus, if Minimum EBIT were achieved for
all of the five periods, his bonus would equal 50% of his base
salary, and if Target EBIT were achieved for all of the five
periods, his bonus would equal 200% of his base salary. The
award does not provide for any additional bonus pay if Target
EBIT is exceeded. If EBIT falls between Minimum and Target EBIT,
Mr. Cook’s bonus will be prorated accordingly.
Mr. Toma’s bonus is based upon Company EBIT.
Achievement of Target EBIT for any one of the five periods (each
of the four quarters and the full year) would entitle him to 10%
of his base salary. Achievement of Minimum EBIT for any of the
five periods would entitle him to 2.5% of his base salary.
Achievement of Maximum EBIT for any of the five periods would
entitle him to 20% of his base salary. Thus, if Minimum
80
EBIT were achieved for all of the five periods, his bonus would
equal 12.5% of his base salary, if Target EBIT were achieved for
all of the five periods, his bonus would equal 50% of his base
salary, and if Maximum EBIT were achieved for all of the five
periods his bonus would equal 100% of his base salary. If EBIT
falls between Minimum and Target EBIT, or between Target and
Maximum EBIT, Mr. Toma’s bonus will be prorated
accordingly. Mr. Toma’s base salary does not include
the $65,000 in direct payments which he receives in lieu of the
former deferred compensation contribution of the same amount.
Mr. Moylan’s bonus is based upon Company EBIT.
Achievement of Target EBIT for any one of the five periods (each
of the four quarters and the full year) would entitle him to 8%
of his base salary. Achievement of Minimum EBIT for any of the
five periods would entitle him to 2% of his base salary.
Achievement of Maximum EBIT for any of the five periods would
entitle him to 16% of his base salary. Thus, if Minimum EBIT
were achieved for all of the five periods, his bonus would equal
10% of his base salary, if Target EBIT were achieved for all of
the five periods, his bonus would equal 40% of his base salary,
and if Maximum EBIT were achieved for all of the five periods
his bonus would equal 80% of his base salary. If EBIT falls
between Minimum and Target EBIT, or between Target and Maximum
EBIT, Mr. Moylan’s bonus will be prorated accordingly.
Mr. Bacon’s bonus is based upon a Performance Measure
which is weighted as follows: 35% Company EBIT, and 65% EBIT of
his business unit. Mr. Bacon’s business unit includes
Meridian VAT and non-U.S. Accounts Payable. Achievement of
Target Performance for any one of the five periods (each of the
four quarters and the full year) would entitle him to 8% of his
base salary. Achievement of Minimum Performance for any of the
five periods would entitle him to 2% of his base salary.
Achievement of Maximum Performance for any of the five periods
would entitle him to 16% of his base salary. Thus, if Minimum
Performance were achieved for all of the five periods, his bonus
would equal 10% of his base salary, if Target Performance were
achieved for all of the five periods, his bonus would equal 40%
of his base salary, and if Maximum Performance were achieved for
all of the five periods his bonus would equal 80% of his base
salary. If Performance falls between Minimum and Target, or
between Target and Maximum, Mr. Bacon’s bonus will be
prorated accordingly.
Mr. Benjamin’s bonus is based upon a Performance
Measure which is weighted as follows: 35% Company EBIT, and 65%
EBIT of his business unit. Mr. Benjamin’s business
unit includes U.S. Accounts Payable only. Achievement of Target
Performance for any one of the five periods (each of the four
quarters and the full year) would entitle him to 8% of his base
salary. Achievement of Minimum Performance for any of the five
periods would entitle him to 2% of his base salary. Achievement
of Maximum Performance for any of the five periods would entitle
him to 16% of his base salary. Thus, if Minimum Performance were
achieved for all of the five periods, his bonus would equal 10%
of his base salary, if Target Performance were achieved for all
of the five periods, his bonus would equal 40% of his base
salary, and if Maximum Performance were achieved for all of the
five periods his bonus would equal 80% of his base salary. If
Performance falls between Minimum and Target, or between Target
and Maximum, Mr. Bacon’s bonus will be prorated
accordingly.
Bonus amounts are based on year-to-date adjusted base salary
earnings, except as noted above with respect to Mr. Toma.
Bonuses will be paid anytime between 60 and 75 days after
the end of the fiscal year 2005.
Reimbursement for Certain Legal Fees. During the
negotiation of the Change of Control and Restrictive Covenant
agreements implementing the Company’s change of control
program (previously reported on Forms 8-K filed on
February 11, 2005 and on October 26, 2004), an
independent law firm was retained in the fourth quarter of 2004
to represent the employees who would be participating in the
change of control program, including the Named Executive
Officers. The Company paid all legal fees and costs incurred in
connection with such representation. This benefit was allocated
in an amount equal to $2,972.71 for each Named Executive Officer
(the remainder of the legal bill was allocated to other
employees).
81
PART III
ITEM 10. Directors
and Executive Officers of the Registrant
The information required with respect to directors is
incorporated herein by reference to the information contained in
the section captioned “Election of Directors” of our
definitive proxy statement (the “Proxy Statement”) for
the Annual Meeting of Stockholders to be held May 3, 2005,
to be filed with the Securities and Exchange Commission pursuant
to Regulation 14A under the Securities and Exchange Act of
1934, as amended (the “Exchange Act”). The information
with respect to our audit committee financial expert is
incorporated herein by reference to the information contained in
the section captioned “Audit Committee” of the Proxy
Statement. We have undertaken to provide to any person without
charge, upon request, a copy of our code of ethics applicable to
our chief executive officer and senior financial officers. You
may obtain a copy of this code of ethics free of charge from our
website, www.prgx.com. The information required with respect to
our executive officers is incorporated herein by reference to
the information contained in the section captioned
“Executive Officers” of the Proxy Statement.
The information regarding filings under Section 16(a) of
the Exchange Act is incorporated herein by reference to the
section captioned “Section 16(a) Beneficial Ownership
Reporting Compliance” of the Proxy Statement.
ITEM 11. Executive
Compensation
The information required by Item 11. of this Form 10-K
is incorporated by reference to the information contained in the
section captioned “Executive Compensation” of the
Proxy Statement.
ITEM 12. Security
Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
The information required by Item 12. of this Form 10-K
is incorporated by reference to the information contained in the
section captioned “Ownership of Directors, Principal
Shareholders and Certain Executive Officers” and the Equity
Compensation Plan Information contained in the section captioned
“Executive Compensation” of the Proxy Statement.
ITEM 13. Certain
Relationships and Related Transactions
The information required by Item 13. of this Form 10-K
is incorporated by reference to the information contained in the
sections captioned “Executive Compensation —
Employment Agreements” and “Certain Transactions”
of the Proxy Statement.
ITEM 14. Principal
Accountant Fees and Services
The information required by Item 14. of this Form 10-K
is incorporated by reference to the information contained in the
sections captioned “Principal Accountants’ Fees and
Services” of the Proxy Statement.
82
PART IV
ITEM 15. Exhibits
and Financial Statement Schedules
(a) Documents filed as part of the report
(1) Consolidated Financial Statements:
|
|
| |
For the following consolidated financial information included
herein, see Index on Page 45. |
| |
|
|
|
|
| |
|
Page | |
| |
|
| |
|
Report of Independent Registered Public Accounting Firm
|
|
|
46 |
|
|
Consolidated Statements of Operations for the Years ended
December 31, 2004, 2003 and 2002
|
|
|
47 |
|
|
Consolidated Balance Sheets as of December 31, 2004 and 2003
|
|
|
48 |
|
|
Consolidated Statements of Shareholders’ Equity for the
Years ended December 31, 2004, 2003 and 2002
|
|
|
49 |
|
|
Consolidated Statements of Cash Flows for the Years ended
December 31, 2004, 2003 and 2002
|
|
|
50 |
|
|
Notes to Consolidated Financial Statements
|
|
|
51 |
|
(2) Financial Statement Schedule:
| |
|
|
|
|
|
Schedule II — Valuation and Qualifying Accounts
|
|
|
S-1 |
|
(3) Exhibits
| |
|
|
|
|
|
|
| Exhibit |
|
|
|
|
| Number |
|
|
|
Description |
| |
|
|
|
|
| |
3.1 |
|
|
— |
|
Restated Articles of Incorporation of the Registrant
(incorporated by reference to Exhibit 3.1 to the
Registrant’s Form 10-Q for the quarterly period ended
June 30, 2002). |
| |
3.2 |
|
|
— |
|
Restated Bylaws of the Registrant (incorporated by reference to
Exhibit 99.1 to the Registrant’s Form 8-K/A filed
April 3, 2002). |
| |
4.1 |
|
|
— |
|
Specimen Common Stock Certificate (incorporated by reference to
Exhibit 4.1 to the Registrant’s Form 10-K for the
year ended December 31, 2001). |
| |
4.2 |
|
|
— |
|
See Restated Articles of Incorporation and Bylaws of the
Registrant, filed as Exhibits 3.1 and 3.2, respectively. |
| |
4.3 |
|
|
— |
|
Shareholder Protection Rights Agreement, dated as of
August 9, 2000, between the Registrant and Rights Agent,
effective May 1, 2002 (incorporated by reference to
Exhibit 4.3 to the Registrant’s Form 10-Q for the
quarterly period ended June 30, 2002. |
| |
4.4 |
|
|
— |
|
Indenture dated November 26, 2001 by and between Registrant
and Sun Trust Bank (incorporated by reference to
Exhibit 4.3 to Registrant’s Registration Statement
No. 333-76018 on Form S-3 filed December 27,
2001). |
| |
4.5 |
|
|
— |
|
First Amendment to Shareholder Protection Rights Agreement,
dated as of March 12, 2002, between the Registrant and
Rights Agent (incorporated by reference to Exhibit 4.3 to
the Registrant’s Form 10-Q for the quarterly period
ended September 30, 2002). |
| |
4.6 |
|
|
— |
|
Second Amendment to Shareholder Protection Rights Agreement,
dated as of August 16, 2002, between the Registrant and
Rights Agent (incorporated by reference to Exhibit 4.3 to
the Registrant’s Form 10-Q for the quarterly period
ended September 30, 2002). |
| |
10.1 |
|
|
— |
|
Employment Agreement dated March 20, 1996 between
Registrant and John M. Cook (incorporated by reference to
Exhibit 10.4 to Registrant’s March 26, 1996
registration statement number 333-1086 on Form S-1). |
| |
10.2 |
|
|
— |
|
Employment Agreement dated March 20, 1996 between
Registrant and John M. Toma (incorporated by reference to
Exhibit 10.5 to Registrant’s March 26, 1996
registration statement number 333-1086 on Form S-1). |
83
| |
|
|
|
|
|
|
| Exhibit | |
|
|
|
|
| Number | |
|
|
|
Description |
| | |
|
|
|
|
| |
10.3 |
|
|
— |
|
1996 Stock Option Plan, dated as of January 25, 1996,
together with Forms of Non-qualified Stock Option Agreement
(incorporated by reference to Exhibit 10.2 to the
Registrant’s March 26, 1996 Registration Statement
No. 333-1086 on Form S-1). |
| |
10.4 |
|
|
— |
|
Form of Indemnification Agreement between the Registrant and
Directors and certain officers, including named executive
officers, of the Registrant (incorporated by reference to
Exhibit 10.4 to the Registrant’s Form 10-K for
the year ended December 31, 2003). |
| |
10.5 |
|
|
— |
|
First Amendment, dated March 7, 1997, to Employment
Agreement between Registrant and Mr. John M. Cook
(incorporated by reference to Exhibit 10.22 to the
Registrant’s Form 10-K for the year ended
December 31, 1996). |
| |
10.6 |
|
|
— |
|
Second Amendment to Employment Agreement, dated
September 17, 1997, between The Profit Recovery Group
International, I, Inc. and Mr. John M. Cook
(incorporated by reference to Exhibit 10.3 to the
Registrant’s Form 10-Q for the quarterly period ended
September 30, 1997). |
| |
10.7 |
|
|
— |
|
Description of 2001-2005 Compensation Arrangement between
Registrant and Mr. John M. Cook (incorporated by reference
to Exhibit 10.9 to the Registrant’s Form 10-K for
the year ended December 31, 2000). |
| |
*10.8 |
|
|
— |
|
Letter Agreement, dated May 25, 1995, between Wal-Mart
Stores, Inc. and Registrant (incorporated by reference to
Exhibit 10.1 to the Registrant’s March 26, 1996
registration statement No. 333-1086 on Form S-1). |
| |
10.9 |
|
|
— |
|
Description of 2001 Compensation Arrangement between Registrant
and Mr. John M. Toma (incorporated by reference to
Exhibit 10.23 to the Registrant’s Form 10-K for
the year ended December 31, 2000). |
| |
10.10 |
|
|
— |
|
Discussion of Management and Professional Incentive Plan
(incorporated by reference to Exhibit 10.27 to the
Registrant’s Form 10-K for the year ended
December 31, 2000). |
| |
10.11 |
|
|
— |
|
Non-qualified Stock Option Agreement between Mr. John M.
Cook and the Registrant, dated March 26, 2001 (incorporated
by reference to Exhibit 10.3 to the Registrant’s
Form 10-Q for the quarterly period ended March 31,
2001). |
| |
10.12 |
|
|
— |
|
Non-qualified Stock Option Agreement between Mr. John M.
Toma and the Registrant, dated March 26, 2001 (incorporated
by reference to Exhibit 10.4 to the Registrant’s
Form 10-Q for the quarterly period ended March 31,
2001). |
| |
10.13 |
|
|
— |
|
Form of the Registrant’s Non-Qualified Stock Option
Agreement (incorporated by reference to Exhibit 10.2 to the
Registrant’s Form 10-Q for the quarterly period ended
June 30, 2001). |
| |
10.14 |
|
|
— |
|
Noncompetition, Nonsolicitation and Confidentiality Agreement
among The Profit Recovery Group International, Inc., Howard
Schultz & Associates International, Inc., Howard
Schultz, Andrew Schultz and certain trusts, dated
January 24, 2002 (incorporated by reference to
Exhibit 10.34 to the Registrant’s Form 10-K for
the year ended December 31, 2001). |
| |
10.15 |
|
|
— |
|
Credit Agreement among The Profit Recovery Group USA, Inc., The
Profit Recovery Group International, Inc. and certain
subsidiaries of the Registrant, the several lenders and Bank of
America, N.A., dated as of December 31, 2001 (incorporated
by reference to Exhibit 99.1 to the Registrant’s
Registration Statement No. 333-76018 on Form S-3 filed
January 23, 2002). |
| |
10.16 |
|
|
— |
|
Pledge Agreement among The Profit Recovery Group USA, Inc., The
Profit Recovery Group International, Inc., certain of the
domestic subsidiaries of the Registrant and Bank of America,
N.A., dated December 31, 2001 (incorporated by reference to
Exhibit 10.41 to the Registrant’s Form 10-K for
the year ended December 31, 2001). |
| |
10.17 |
|
|
— |
|
Security Agreement among The Profit Recovery Group USA, Inc.,
The Profit Recovery Group International, Inc., certain of the
domestic subsidiaries of the Registrant and Bank of America,
N.A., dated December 31, 2001 (incorporated by reference to
Exhibit 10.44 to the Registrant’s Form 10-K for
the year ended December 31, 2001). |
| |
10.18 |
|
|
— |
|
First Amendment to Credit Agreement among PRG-Schultz USA, Inc.,
PRG-Schultz International, Inc., each of the domestic
subsidiaries of the Registrant, the several lenders and Bank of
America, N.A., dated as of February 7, 2002 (incorporated
by reference to Exhibit 10.42 to the Registrant’s
Form 10-K for the year ended December 31, 2001). |
84
| |
|
|
|
|
|
|
| Exhibit | |
|
|
|
|
| Number | |
|
|
|
Description |
| | |
|
|
|
|
| |
10.19 |
|
|
— |
|
Office Lease Agreement between Galleria 600, LLC and PRG-Schultz
International, Inc. (incorporated by reference to
Exhibit 10.43 to the Registrant’s Form 10-K for
the year ended December 31, 2001). |
| |
10.20 |
|
|
— |
|
Amendment to Employment Agreement, as amended, between
Mr. John M. Cook and Registrant, dated May 1, 2002
(incorporated by reference to Exhibit 10.1 to the
Registrant’s Form 10-Q for the quarterly period ended
June 30, 2002). |
| |
10.21 |
|
|
— |
|
Amendment to Employment Agreement, as amended, between
Mr. John M. Toma and Registrant, dated May 14, 2002
(incorporated by reference to Exhibit 10.2 to the
Registrant’s Form 10-Q for the quarterly period ended
June 30, 2002). |
| |
10.22 |
|
|
— |
|
Amended Stock Incentive Plan (incorporated by reference to
Exhibit 10.3 to the Registrant’s Form 10-Q for
the quarterly period ended June 30, 2002). |
| |
10.23 |
|
|
— |
|
Amended HSA-Texas Stock Option Plan (incorporated by reference
to Exhibit 10.4 to the Registrant’s Form 10-Q for
the quarterly period ended June 30, 2002). |
| |
10.24 |
|
|
— |
|
Amended and Restated Standstill Agreement, dated as of
August 21, 2002, by and between PRG-Schultz International,
Inc., Blum Strategic Partners II, L.P. and other affiliates
of Blum Capital Partners, LP (incorporated by reference to
Exhibit 10.6 to the Registrant’s Form 10-Q
for the quarterly period ended September 30, 2002). |
| |
10.25 |
|
|
— |
|
Investor Rights Agreement, dated as of August 27, 2002,
among PRG-Schultz International, Inc., Berkshire Fund V,
LP, Berkshire Investors LLC and Blum Strategic Partners II,
L.P. (incorporated by reference to Exhibit 10.7 to the
Registrant’s Form 10-Q for the quarterly period ended
September 30, 2002). |
| |
10.26 |
|
|
— |
|
Registration Rights Agreement, dated as of August 27, 2002,
by and between PRG-Schultz International, Inc., Blum Strategic
Partners II, L.P. and other affiliates of Blum Capital
Partners, LP (incorporated by reference to Exhibit 10.8 to
the Registrant’s Form 10-Q for the quarterly period
ended September 30, 2002). |
| |
10.27 |
|
|
— |
|
Registration Rights Agreement, dated as of August 27, 2002,
by and between PRG-Schultz International, Inc., Berkshire
Fund V, LP and Berkshire Investors LLC (incorporated by
reference to Exhibit 10.9 to the Registrant’s
Form 10-Q for the quarterly period ended September 30,
2002). |
| |
10.28 |
|
|
— |
|
Second Amendment to Credit Agreement among PRG-Schultz USA,
Inc., PRG-Schultz International, Inc., each of the domestic
subsidiaries of the Registrant, the several lenders and Bank of
America, N.A., dated as of August 19, 2002 (incorporated by
reference to Exhibit 10.10 to the Registrant’s
Form 10-Q for the quarterly period ended September 30,
2002). |
| |
10.29 |
|
|
— |
|
Third Amendment to Credit Agreement among PRG-Schultz USA, Inc.,
PRG-Schultz International, Inc., each of the domestic
subsidiaries of the Registrant, the several lenders and Bank of
America, N.A., dated as of September 12, 2002 (incorporated
by reference to Exhibit 10.11 to the Registrant’s
Form 10-Q for the quarterly period ended September 30,
2002). |
| |
10.30 |
|
|
— |
|
First Amendment to Office Lease Agreement between Galleria 600,
LLC and PRG-Schultz International, Inc. (incorporated by
reference to Exhibit 10.65 to the Registrant’s
Form 10-K for the year ended December 31, 2002). |
| |
10.31 |
|
|
— |
|
Amendment to Employment Agreement, as amended, between
Mr. John M. Cook and Registrant, dated March 7, 2003
(incorporated by reference to Exhibit 10.1 to the
Registrant’s Form 10-Q for the quarterly period ended
March 31, 2003). |
| |
10.32 |
|
|
— |
|
Waiver to the covenant violations to the Credit Agreement, dated
September 29, 2003 (incorporated by reference to
Exhibit 10.2 to the Registrant’s Form 10-Q for
the quarterly period ended September 30, 2003). |
| |
10.33 |
|
|
— |
|
Fourth Amendment to Credit Agreement among PRG-Schultz USA,
Inc., PRG-Schultz International, Inc., each of the domestic
subsidiaries of the Registrant, the several lenders and Bank of
America, N.A., dated as of November 12, 2003 (incorporated
by reference to Exhibit 10.63 to the Registrant’s
Form 10-K for the year ended December 31, 2003). |
85
| |
|
|
|
|
|
|
| Exhibit | |
|
|
|
|
| Number | |
|
|
|
Description |
| | |
|
|
|
|
| |
10.34 |
|
|
— |
|
Employment Agreement between Registrant and Mr. James L.
Benjamin, dated as of October 28, 2002 (incorporated by
reference to Exhibit 10.64 to the Registrant’s
Form 10-K for the year ended December 31, 2003). |
| |
10.35 |
|
|
— |
|
Form of Employment Agreement between Mr. James E.
Moylan, Jr. and Registrant, dated as of March 5, 2004
(incorporated by reference to Exhibit 10.1 to the
Registrant’s Form 10-Q for the quarterly period ended
March 31, 2004). |
| |
10.36 |
|
|
— |
|
Fifth Amendment to Credit Agreement among PRG-Schultz USA, Inc.,
PRG-Schultz International, Inc., each of the domestic
subsidiaries of the Registrant, the Lenders party thereto and
Bank of America, N.A., dated as of March 4, 2004
(incorporated by reference to Exhibit 10.3 to the
Registrant’s Form 10-Q for the quarterly period ended
March 31, 2004). |
| |
10.37 |
|
|
— |
|
Sixth Amendment to Credit Agreement among PRG-Schultz USA, Inc.,
PRG-Schultz International, Inc., each of the domestic
subsidiaries of the Registrant, the Lenders party thereto and
Bank of America, N.A., dated as of March 25, 2004
(incorporated by reference to Exhibit 10.4 to the
Registrant’s Form 10-Q for the quarterly period ended
March 31, 2004). |
| |
10.38 |
|
|
— |
|
PRG Schultz International, Inc. 2004 Executive Incentive Plan as
approved by shareholders on May 18, 2004 (incorporated by
reference to Exhibit 10.1 to the Registrant’s
Form 10-Q for the quarterly period ended June 30,
2004). |
| |
10.39 |
|
|
— |
|
Waiver to the covenant violations to the Credit Agreement, as
amended, dated October 25, 2004 (incorporated by reference
to Exhibit 10.1 to the Registrant’s Form 10-Q for
the quarterly period ended September 30, 2004). |
| |
10.40 |
|
|
— |
|
Amended and Restated Credit Agreement among PRG-Schultz USA,
Inc., PRG-Schultz International, Inc. (“PRGX”),
Certain Subsidiaries of PRGX from Time to Time Party Thereto,
and Bank of America, N.A., dated as of November 30, 2004
(incorporated by reference to Exhibit 99.1 to the
Registrant’s Report on Form 8-K filed on
December 6, 2004). |
| |
10.41 |
|
|
— |
|
Amended and Restated Credit Agreement among PRG-Schultz USA,
Inc., PRG-Schultz International, Inc. (“PRGX”),
Certain Subsidiaries of PRGX from Time to Time Party Thereto,
and Bank of America, N.A., dated as of November 30, 2004
(as modified on December 7, 2004) (incorporated by
reference to Exhibit 10(a) to the Registrant’s Report
on Form 8-K filed on December 13, 2004). |
| |
10.42 |
|
|
— |
|
Form of Non-employee Director Option Agreement (incorporated by
reference to Exhibit 99.1 to the Registrant’s Report
on Form 8-K filed on February 11, 2005). |
| |
10.43 |
|
|
— |
|
Amendment to Employment Agreement and Restrictive Covenant
Agreement between Mr. John M. Cook and Registrant dated
March 7, 2005. |
| |
**10.44 |
|
|
— |
|
Change of Control and Restrictive Covenant Agreement between
Mr. James E. Moylan, Jr. and Registrant dated
February 14, 2005. |
| |
**10.45 |
|
|
— |
|
Change of Control and Restrictive Covenant Agreement between
Mr. John M. Toma and Registrant dated February 14,
2005. |
| |
**10.46 |
|
|
— |
|
Change of Control and Restrictive Covenant Agreement between
Mr. Richard J. Bacon and Registrant dated February 14,
2005. |
| |
**10.47 |
|
|
— |
|
Change of Control and Restrictive Covenant Agreement between
Mr. James L. Benjamin and Registrant dated
February 14, 2005. |
| |
10.48 |
|
|
— |
|
Summary of compensation arrangements with non-employee directors
of the Registrant. |
| |
10.49 |
|
|
— |
|
Summary of compensation arrangements with executive officers of
Registrant. |
| |
10.50 |
|
|
— |
|
Employment Agreement between Registrant and Mr. Richard J.
Bacon, dated as of July 15, 2003. |
| |
10.51 |
|
|
— |
|
September 11, 2003 Addendum to Employment Agreement with
Mr. Richard J. Bacon. |
| |
10.52 |
|
|
— |
|
December 2, 2003 Addendum to Employment Agreement with
Mr. Richard J. Bacon. |
| |
10.53 |
|
|
— |
|
May 1, 2004 Amendment to Employment Agreement with
Mr. Richard J. Bacon. |
| |
10.54 |
|
|
— |
|
February 2005 Addendum to Employment Agreement with
Mr. Richard J. Bacon. |
| |
14.1 |
|
|
— |
|
Code of Ethics for Senior Financial Officers (incorporated by
reference to Exhibit 14.1 to the Registrant’s
Form 10-K for the year ended December 31, 2003). |
86
| |
|
|
|
|
|
|
| Exhibit | |
|
|
|
|
| Number | |
|
|
|
Description |
| | |
|
|
|
|
| |
21.1 |
|
|
— |
|
Subsidiaries of the Registrant. |
| |
23.1 |
|
|
— |
|
Consent of KPMG LLP. |
| |
31.1 |
|
|
— |
|
Certification of the Chief Executive Officer, pursuant to
Rule 13a-14(a) or 15d-14(a), for the year ended
December 31, 2004. |
| |
31.2 |
|
|
— |
|
Certification of the Chief Financial Officer, pursuant to
Rule 13a-14(a) or 15d-14(a), for the year ended
December 31, 2004. |
| |
32.1 |
|
|
— |
|
Certification of the Chief Executive Officer and Chief Financial
Officer, pursuant to 18 U.S.C. Section 1350, for the
year ended December 31, 2004. |
|
|
| * |
Confidential treatment, pursuant to 17 CFR Secs.
§§ 200.80 and 230.406, has been granted regarding
certain portions of the indicated Exhibit, which portions have
been filed separately with the Commission. |
|
|
| ** |
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. |
87
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
|
|
| |
PRG-SCHULTZ INTERNATIONAL, INC. |
|
|
| |
|
| |
John M. Cook |
| |
President, Chairman of the Board |
| |
and Chief Executive Officer |
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons
on behalf of the registrant and in the capacities and on the
dates indicated.
| |
|
|
|
|
|
|
| |
|
Title |
|
Date |
| Signature |
|
|
|
|
| |
|
|
|
|
| |
/s/ John M. Cook
John
M. Cook |
|
President, Chairman of the Board and Chief Executive Officer
(Principal Executive Officer) |
|
March 16, 2005 |
| |
/s/ James E.
Moylan, Jr.
James
E. Moylan, Jr. |
|
Executive Vice President — Finance Chief Financial
Officer and Treasurer, (Principal Financial Officer) |
|
March 16, 2005 |
| |
/s/ Michael D. Picchi
Michael
D. Picchi |
|
Senior Vice President — Finance and Controller
(Principal Accounting Officer) |
|
March 16, 2005 |
| |
/s/ Arthur N.
Budge, Jr.
Arthur
N. Budge, Jr. |
|
Director |
|
March 16, 2005 |
| |
/s/ David A. Cole
David
A. Cole |
|
Director |
|
March 16, 2005 |
| |
/s/ Gerald E. Daniels
Gerald
E. Daniels |
|
Director |
|
March 16, 2005 |
| |
/s/ Jonathan Golden
Jonathan
Golden |
|
Director |
|
March 16, 2005 |
| |
/s/ Garth H. Greimann
Garth
H. Greimann |
|
Director |
|
March 16, 2005 |
| |
/s/ N. Colin Lind
N.
Colin Lind |
|
Director |
|
March 16, 2005 |
88
| |
|
|
|
|
|
|
| |
|
Title |
|
Date |
| Signature |
|
|
|
|
| |
|
|
|
|
| |
/s/ Thomas S. Robertson
Thomas
S. Robertson |
|
Director |
|
March 16, 2005 |
| |
/s/ Jimmy M. Woodward
Jimmy
M. Woodward |
|
Director |
|
March 16, 2005 |
89
SCHEDULE II — VALUATION AND QUALIFYING
ACCOUNTS
For the Years Ended December 31, 2004, 2003 and 2002
(In thousands)
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
Additions | |
|
Deductions | |
|
|
| |
|
|
|
| |
|
| |
|
|
| |
|
Balance at | |
|
Charge to | |
|
|
|
Credited to | |
|
Balance at | |
| |
|
Beginning | |
|
Costs and | |
|
|
|
Accounts | |
|
End of | |
| Description |
|
of Year | |
|
Expenses | |
|
Acquisitions | |
|
Receivable (1) | |
|
Year | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for accounts receivable
|
|
$ |
3,236 |
|
|
|
1,312 |
|
|
|
— |
|
|
|
(1,033 |
) |
|
$ |
3,515 |
|
|
Allowance for employee advances and miscellaneous receivables
|
|
$ |
4,760 |
|
|
|
2,590 |
|
|
|
— |
|
|
|
(4,017 |
) |
|
$ |
3,333 |
|
|
Deferred tax valuation allowance
|
|
$ |
24,967 |
|
|
|
72,287 |
|
|
|
— |
|
|
|
— |
|
|
$ |
97,254 |
|
|
2003
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for accounts receivable
|
|
$ |
4,937 |
|
|
|
525 |
|
|
|
— |
|
|
|
(2,226 |
) |
|
$ |
3,236 |
|
|
Allowance for employee advances and miscellaneous receivables
|
|
$ |
4,188 |
|
|
|
4,174 |
|
|
|
— |
|
|
|
(3,602 |
) |
|
$ |
4,760 |
|
|
Deferred tax valuation allowance
|
|
$ |
20,374 |
|
|
|
4,593 |
|
|
|
— |
|
|
|
— |
|
|
$ |
24,967 |
|
|
2002
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for accounts receivable
|
|
$ |
5,871 |
|
|
|
1,836 |
|
|
|
2,479 |
|
|
|
(5,249 |
) |
|
$ |
4,937 |
|
|
Allowance for employee advances and miscellaneous receivables
|
|
$ |
2,796 |
|
|
|
1,472 |
|
|
|
620 |
|
|
|
(700 |
) |
|
$ |
4,188 |
|
|
Deferred tax valuation allowance
|
|
$ |
21,929 |
|
|
|
(1,555 |
) |
|
|
— |
|
|
|
— |
|
|
$ |
20,374 |
|
|
|
| (1) |
Write-offs, net of recoveries |
S-1
