Attached files
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EX-31.1 - EX-31.1 - PRGX GLOBAL, INC. | g27160exv31w1.htm |
EX-31.2 - EX-31.2 - PRGX GLOBAL, INC. | g27160exv31w2.htm |
EX-32.1 - EX-32.1 - PRGX GLOBAL, INC. | g27160exv32w1.htm |
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One) |
þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 2011
OR
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number 0-28000
PRGX Global, Inc.
(Exact name of registrant as specified in its charter)
Georgia (State or other jurisdiction of incorporation or organization) |
58-2213805 (I.R.S. Employer Identification No.) |
|
600 Galleria Parkway Suite 100 Atlanta, Georgia (Address of principal executive offices) |
30339-5986 (Zip Code) |
Registrants telephone number, including area code: (770) 779-3900
Indicate by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days. Yes þ No
o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period
that the registrant was required to submit and post such files). Yes o No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer, or a smaller reporting company. See definitions of large
accelerated filer, accelerated filer, and smaller reporting company in Rule 12b-2 of the
Exchange Act. (Check One):
Large accelerated filer o | Accelerated filer þ | Non-accelerated filer o (Do not check if a smaller reporting company) | Smaller reporting company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act). Yes o No þ
Common shares of the registrant outstanding at May 2, 2011 were 24,054,881.
PRGX GLOBAL, INC.
FORM 10-Q
For the Quarter Ended March 31, 2011
For the Quarter Ended March 31, 2011
INDEX
Table of Contents
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
PRGX GLOBAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except per share data)
(Unaudited)
(In thousands, except per share data)
Three Months Ended | ||||||||
March 31, | ||||||||
2011 | 2010 | |||||||
Revenues |
$ | 50,718 | $ | 41,329 | ||||
Cost of revenues |
34,594 | 29,833 | ||||||
Gross margin |
16,124 | 11,496 | ||||||
Selling, general and administrative expenses |
12,430 | 9,999 | ||||||
Depreciation and amortization |
2,302 | 2,110 | ||||||
Operating income (loss) |
1,392 | (613 | ) | |||||
Foreign currency transaction (gains) losses on intercompany balances |
(448 | ) | 621 | |||||
Interest expense, net |
347 | 384 | ||||||
Loss on debt extinguishment |
| 1,381 | ||||||
Earnings (loss) before income taxes |
1,493 | (2,999 | ) | |||||
Income tax expense |
1,121 | 436 | ||||||
Net earnings (loss) |
$ | 372 | $ | (3,435 | ) | |||
Basic earnings (loss) per common share (Note B) |
$ | 0.02 | $ | (0.15 | ) | |||
Diluted earnings (loss) per common share (Note B) |
$ | 0.02 | $ | (0.15 | ) | |||
Weighted-average common shares outstanding (Note B): |
||||||||
Basic |
24,258 | 23,527 | ||||||
Diluted |
24,533 | 23,527 | ||||||
See accompanying Notes to Condensed Consolidated Financial Statements.
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Table of Contents
PRGX GLOBAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
(In thousands, except share data)
March 31, | ||||||||
2011 | December 31, | |||||||
(Unaudited) | 2010 | |||||||
ASSETS |
||||||||
Current assets: |
||||||||
Cash and cash equivalents (Note F) |
$ | 22,667 | $ | 18,448 | ||||
Restricted cash |
124 | 64 | ||||||
Receivables: |
||||||||
Contract receivables, less allowances of $731 in 2011 and $591 in 2010: |
||||||||
Billed |
32,079 | 31,144 | ||||||
Unbilled |
4,038 | 4,749 | ||||||
36,117 | 35,893 | |||||||
Employee advances and miscellaneous receivables, less allowances of $607 in 2011 and
$669 in 2010 |
1,377 | 827 | ||||||
Total receivables |
37,494 | 36,720 | ||||||
Prepaid expenses and other current assets |
3,548 | 3,622 | ||||||
Total current assets |
63,833 | 58,854 | ||||||
Property and equipment |
44,381 | 43,068 | ||||||
Less accumulated depreciation and amortization |
(28,435 | ) | (27,373 | ) | ||||
Property and equipment, net |
15,946 | 15,695 | ||||||
Goodwill |
5,196 | 5,196 | ||||||
Intangible assets, less accumulated amortization of $18,752 in 2011 and $17,573 in 2010 |
22,923 | 23,855 | ||||||
Noncurrent portion of unbilled receivables |
1,195 | 1,462 | ||||||
Other assets |
1,439 | 1,259 | ||||||
$ | 110,532 | $ | 106,321 | |||||
LIABILITIES AND SHAREHOLDERS EQUITY |
||||||||
Current liabilities: |
||||||||
Accounts payable and accrued expenses |
$ | 14,422 | $ | 14,365 | ||||
Accrued payroll and related expenses |
17,075 | 13,871 | ||||||
Refund liabilities |
7,205 | 7,179 | ||||||
Deferred revenues |
1,547 | 1,381 | ||||||
Current portion of debt (Note G) |
3,000 | 3,000 | ||||||
Business acquisition obligations |
1,376 | 1,380 | ||||||
Total current liabilities |
44,625 | 41,176 | ||||||
Long-term debt (Note G) |
8,250 | 9,000 | ||||||
Noncurrent business acquisition obligations |
2,644 | 2,435 | ||||||
Noncurrent refund liabilities |
1,130 | 982 | ||||||
Other long-term liabilities |
3,617 | 3,885 | ||||||
Total liabilities |
60,266 | 57,478 | ||||||
Commitments and contingencies (Note I) |
||||||||
Shareholders equity (Note B): |
||||||||
Common stock, no par value; $.01 stated value per share. Authorized 50,000,000 shares;
23,986,052 shares issued and outstanding as of March 31, 2011 and 23,932,774 shares
issued and outstanding as of December 31, 2010 |
240 | 239 | ||||||
Additional paid-in capital |
567,100 | 566,328 | ||||||
Accumulated deficit |
(521,036 | ) | (521,408 | ) | ||||
Accumulated other comprehensive income |
3,962 | 3,684 | ||||||
Total shareholders equity |
50,266 | 48,843 | ||||||
$ | 110,532 | $ | 106,321 | |||||
See accompanying Notes to Condensed Consolidated Financial Statements.
2
Table of Contents
PRGX GLOBAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
(Unaudited)
(In thousands)
Three Months Ended | ||||||||
March 31, | ||||||||
2011 | 2010 | |||||||
Cash flows from operating activities: |
||||||||
Net earnings (loss) |
$ | 372 | $ | (3,435 | ) | |||
Adjustments to reconcile net earnings (loss) from operations to net cash
provided by (used in) operating activities: |
||||||||
Depreciation and amortization |
2,302 | 2,110 | ||||||
Amortization of deferred loan costs (Note G) |
45 | 1,411 | ||||||
Stock-based compensation expense |
901 | 818 | ||||||
Loss on sale of property and equipment |
3 | | ||||||
Deferred income taxes |
(112 | ) | (520 | ) | ||||
Foreign currency transaction (gains) losses on intercompany balances |
(448 | ) | 621 | |||||
Changes in assets and liabilities: |
||||||||
Restricted cash |
(60 | ) | 135 | |||||
Billed receivables |
(344 | ) | 2,225 | |||||
Unbilled receivables |
978 | 1,196 | ||||||
Prepaid expenses and other current assets |
(402 | ) | (7 | ) | ||||
Other assets |
(104 | ) | 20 | |||||
Accounts payable and accrued expenses |
(210 | ) | (4,623 | ) | ||||
Accrued payroll and related expenses |
3,020 | (3,341 | ) | |||||
Refund liabilities |
174 | (226 | ) | |||||
Deferred revenue |
143 | 282 | ||||||
Noncurrent compensation obligations |
(8 | ) | (3 | ) | ||||
Other long-term liabilities |
(96 | ) | (130 | ) | ||||
Net cash provided by (used in) operating activities |
6,154 | (3,467 | ) | |||||
Cash flows from investing activities: |
||||||||
Business acquisition |
| (3,059 | ) | |||||
Purchases of property and equipment, net of disposal proceeds |
(1,479 | ) | (1,457 | ) | ||||
Net cash used in investing activities |
(1,479 | ) | (4,516 | ) | ||||
Cash flows from financing activities: |
||||||||
Repayment of former credit facility (Note G) |
| (14,070 | ) | |||||
Repayments of long-term debt and capital lease obligations |
(750 | ) | (834 | ) | ||||
Proceeds from term loan (Note G) |
| 15,000 | ||||||
Restricted stock remitted by employees for taxes |
(236 | ) | (6 | ) | ||||
Proceeds from option exercises |
127 | | ||||||
Payments for deferred loan costs |
| (540 | ) | |||||
Payments of deferred acquisition consideration |
| (782 | ) | |||||
Net cash used in financing activities |
(859 | ) | (1,232 | ) | ||||
Effect of exchange rates on cash and cash equivalents |
403 | (304 | ) | |||||
Net change in cash and cash equivalents |
4,219 | (9,519 | ) | |||||
Cash and cash equivalents at beginning of period |
18,448 | 33,026 | ||||||
Cash and cash equivalents at end of period |
$ | 22,667 | $ | 23,507 | ||||
Supplemental disclosure of cash flow information: |
||||||||
Cash paid during the period for interest |
$ | 113 | $ | 313 | ||||
Cash paid during the period for income taxes, net of refunds received |
$ | 816 | $ | 691 | ||||
See accompanying Notes to Condensed Consolidated Financial Statements.
3
Table of Contents
RGX GLOBAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note A Basis of Presentation
The accompanying Condensed Consolidated Financial Statements (Unaudited) of PRGX Global, Inc.
and its wholly owned subsidiaries have been prepared in accordance with accounting principles
generally accepted in the United States of America for interim financial information and with the
instructions for Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all
of the information and footnotes required by accounting principles generally accepted in the United
States of America for complete financial statements. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for a fair presentation have been
included. Operating results for the three-month period ended March 31, 2011 are not necessarily
indicative of the results that may be expected for the year ending December 31, 2011.
Except as otherwise indicated or unless the context otherwise requires, PRGX, we, us,
our and the Company refer to PRGX Global, Inc. and its subsidiaries. For further information,
refer to the Consolidated Financial Statements and Footnotes thereto included in the Companys Form
10-K for the year ended December 31, 2010.
Certain reclassifications have been made to the 2010 financial statements to conform to the
presentations adopted in 2011. We now reflect depreciation and amortization as a separate line item
in our condensed consolidated statements of operations. We also now reflect net foreign currency
transaction gains and losses on intercompany balances (previously included in selling, general and
administrative expenses) as a non-operating item excluded from operating income (loss).
New Accounting Standards
A summary of new accounting standards issued by the Financial Accounting Standards Board
(FASB) and included in the Accounting Standards Codification (ASC) that apply to PRGX is as
follows:
FASB ASC 985-605. In September 2009, the Emerging Issues Task Force (EITF) reached final
consensus on Issue 08-1, Revenue Arrangements with Multiple Deliverables (Issue 08-1), which
updates FASB ASC 985-605 Software-Revenue Recognition and changes the accounting for certain
revenue arrangements. The new requirements change the allocation methods used in determining how to
account for multiple payment streams and will result in the ability to separately account for more
deliverables, and potentially less revenue deferrals. Additionally, Issue 08-1 requires enhanced
disclosures in financial statements. Issue 08-1 is effective for revenue arrangements entered into
or materially modified in fiscal years beginning after June 15, 2010 on a prospective basis, with
early application permitted. The adoption of FASB ASC 985-605 effective January 1, 2011 did not
have a material impact on our consolidated results of operations, financial position or cash flows.
FASB ASC Update No. 2010-26. In October 2010, the FASB issued Accounting Standards Update No.
2010-26, Accounting for Costs Associated with Acquiring or Renewing Insurance Contracts (ASU No.
2010-26). ASU No. 2010-26 clarifies which costs relating to the acquisition of new or renewal
insurance qualify for deferral (deferred acquisition costs), and which should be expensed as
incurred. This guidance is effective for fiscal years, and interim periods within those fiscal
years, beginning after December 15, 2011. We do not believe that the adoption of ASU No. 2010-26
will have a material impact on our consolidated results of operations, financial position or cash
flows.
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Note B Earnings Per Common Share
The following tables set forth the computations of basic and diluted earnings per common share
for the three months ended March 31, 2011 and 2010 (in thousands, except per share data):
Three Months Ended | ||||||||
March 31, | ||||||||
2011 | 2010 | |||||||
Basic earnings (loss) per common share: |
||||||||
Numerator: |
||||||||
Net earnings (loss) |
$ | 372 | $ | (3,435 | ) | |||
Denominator: |
||||||||
Weighted-average common shares outstanding |
24,258 | 23,527 | ||||||
Basic earnings (loss) per common share |
$ | 0.02 | $ | (0.15 | ) | |||
Three Months Ended | ||||||||
March 31, | ||||||||
2011 | 2010 | |||||||
Diluted earnings (loss) per common share: |
||||||||
Numerator: |
||||||||
Net earnings (loss) |
$ | 372 | $ | (3,435 | ) | |||
Denominator: |
||||||||
Weighted-average common shares outstanding |
24,258 | 23,527 | ||||||
Incremental shares from stock-based compensation plans |
275 | | ||||||
Denominator for diluted earnings (loss) per common share |
24,533 | 23,527 | ||||||
Diluted earnings (loss) per common share |
$ | 0.02 | $ | (0.15 | ) | |||
For the three months ended March 31, 2011, options to purchase 1.3 million shares of common
stock were excluded from the computation of diluted earnings per common share because the options
exercise prices were greater than the average market price of the common shares during the period
and were therefore antidilutive. For the three months ended March 31, 2010, 268,988 Performance
Units related to the Companys 2006 Management Incentive Plan and options to purchase 1.7 million
shares of common stock were excluded from the computation of diluted earnings per common share due
to their antidilutive effect to loss per common share. We consider nonvested restricted shares and
nonvested restricted share units to be participating securities, thus for the three months ended
March 31, 2011 and 2010, 1.1 million and 0.9 million, respectively, nonvested restricted shares and
0.3 million nonvested restricted share units were included in our basic and diluted earnings per
share calculations.
Note C Stock-Based Compensation
The Company currently has three stock-based compensation plans under which awards have been
granted: (1) the Stock Incentive Plan, (2) the 2006 Management Incentive Plan (2006 MIP) and (3)
the 2008 Equity Incentive Plan (2008 EIP) (collectively, the Plans). The Plans are described in
the Companys Annual Report on Form 10-K for the fiscal year ended December 31, 2010.
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Stock options granted under the 2008 EIP generally have a term of seven years and vest in
equal annual increments over the vesting period, which typically is three years for employees and
one year for directors. The following table summarizes stock option grants during the three months
ended March 31, 2011 and 2010:
Weighted | ||||||||||||||||
Grantee | # of Options | Vesting | Average | Grant Date | ||||||||||||
Type | Granted | Period | Exercise Price | Fair Value | ||||||||||||
2011 |
||||||||||||||||
Director | 4,273 | 5 months | $ | 6.11 | $ | 14,497 | ||||||||||
Director | 8,546 | 3 years | 6.11 | 33,723 | ||||||||||||
Employee group | 140,000 | 2 years | 6.09 | 521,108 | ||||||||||||
Employee | 10,000 | 3 years | 6.01 | 38,372 | ||||||||||||
2010 |
||||||||||||||||
Employee | 10,000 | 3 years | 5.98 | 44,363 |
Nonvested stock awards, including both restricted stock and restricted stock units,
generally are nontransferable until vesting and the holders are entitled to receive dividends with
respect to the nonvested shares. Prior to vesting, the grantees of restricted stock are entitled to
vote the shares, but the grantees of restricted stock units are not entitled to vote the shares.
Generally, nonvested stock awards vest in equal annual increments over the vesting period, which
typically is three years for employees and one year for directors. The following table summarizes
nonvested stock award grants (restricted stock and restricted stock units) during the three months
ended March 31, 2011 and 2010:
Grantee | # of Shares | Vesting | Grant Date | |||||||||
Type | Granted | Period | Fair Value | |||||||||
2011 |
||||||||||||
Director | 4,273 | 5 months | $ | 52,216 | ||||||||
Director | 8,546 | 3 years | 26,108 | |||||||||
Employee group | 60,000 | 2 years | 365,400 | |||||||||
2010 |
||||||||||||
Employee | 10,000 | 3 years | 59,800 |
2006 MIP Performance Units
As of March 31, 2011, a total of 44,831 Performance Units were outstanding and fully vested
under the 2006 MIP. All of the outstanding 2006 MIP Performance Units were settled by an executive
officer on May 2, 2011. This settlement resulted in the issuance of 26,898 shares of common stock
and a cash payment totaling $0.1 million.
Selling, general and administrative expenses for the three months ended March 31, 2011 and
2010 include $0.9 million and $0.8 million, respectively, related to stock-based compensation
charges. At March 31, 2011, there was $6.3 million of unrecognized stock-based compensation expense
related to stock options, restricted stock and restricted stock unit awards which is expected to be
recognized over a weighted-average period of 1.8 years.
Note D Operating Segments and Related Information
The Company is comprised of the following three reportable operating segments:
Recovery Audit Services Americas represents recovery audit services (other than healthcare
claims recovery audit services) provided in the United States of America (U.S.), Canada and Latin
America.
Recovery Audit Services Europe/Asia-Pacific represents recovery audit services (other than
healthcare claims recovery audit services) provided in Europe, Asia and the Pacific region.
New Services represents healthcare claims recovery audit services and our business analytics
and advisory services.
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Table of Contents
Additionally, Corporate Support includes the unallocated portion of corporate selling, general
and administrative expenses not specifically attributable to the three operating segments.
We evaluate the performance of our operating segments based upon revenues and measures of
profit or loss we refer to as EBITDA and Adjusted EBITDA. We define Adjusted EBITDA as earnings
from continuing operations before interest, taxes, depreciation and amortization (EBITDA) as
adjusted for unusual and other significant items that management views as distorting the operating
results of the various segments from period to period. Adjustments include restructuring charges,
stock-based compensation, bargain purchase gains, acquisition obligations classified as
compensation, intangible asset impairment charges, litigation settlements, severance charges
(including severance charges relating to the transformation of our recovery audit service delivery
model, or transformation severance) and foreign currency transaction gains and losses on
intercompany balances viewed by management as individually or collectively significant. We do not
have any inter-segment revenues. Segment information for the three months ended March 31, 2011 and
2010 (in thousands) is as follows:
Recovery | Recovery Audit | |||||||||||||||||||
Audit | Services | |||||||||||||||||||
Services | Europe/Asia | New | Corporate | |||||||||||||||||
Americas | Pacific | Services | Support | Total | ||||||||||||||||
Three Months Ended March 31, 2011 |
||||||||||||||||||||
Revenues |
$ | 29,113 | $ | 14,752 | $ | 6,853 | $ | | $ | 50,718 | ||||||||||
Operating income (loss) |
$ | 5,747 | $ | 1,579 | $ | (1,271 | ) | $ | (4,663 | ) | $ | 1,392 | ||||||||
Depreciation and amortization |
1,347 | 420 | 535 | | 2,302 | |||||||||||||||
Foreign currency transaction
gains on intercompany balances |
9 | 438 | 1 | | 448 | |||||||||||||||
EBITDA |
7,103 | 2,437 | (735 | ) | (4,663 | ) | 4,142 | |||||||||||||
Foreign currency transaction
gains on intercompany balances |
(9 | ) | (438 | ) | (1 | ) | | (448 | ) | |||||||||||
Acquisition obligations
classified as compensation |
| | 97 | | 97 | |||||||||||||||
Transformation severance |
667 | 160 | | | 827 | |||||||||||||||
Stock-based compensation |
| | | 901 | 901 | |||||||||||||||
Adjusted EBITDA |
$ | 7,761 | $ | 2,159 | $ | (639 | ) | $ | (3,762 | ) | $ | 5,519 | ||||||||
Three Months Ended March 31, 2010 |
||||||||||||||||||||
Revenues |
$ | 24,974 | $ | 14,738 | $ | 1,617 | $ | | $ | 41,329 | ||||||||||
Operating income (loss) |
$ | 3,830 | $ | 1,741 | $ | (1,460 | ) | $ | (4,724 | ) | $ | (613 | ) | |||||||
Depreciation and amortization |
1,480 | 405 | 225 | | 2,110 | |||||||||||||||
Foreign currency transaction
gains (losses) on intercompany
balances |
7 | (628 | ) | | | (621 | ) | |||||||||||||
EBITDA |
5,317 | 1,518 | (1,235 | ) | (4,724 | ) | 876 | |||||||||||||
Foreign currency transaction
(gains) losses on intercompany
balances |
(7 | ) | 628 | | | 621 | ||||||||||||||
Stock-based compensation |
| | | 818 | 818 | |||||||||||||||
Adjusted EBITDA |
$ | 5,310 | $ | 2,146 | $ | (1,235 | ) | $ | (3,906 | ) | $ | 2,315 | ||||||||
Note E Comprehensive Income (Loss)
Consolidated comprehensive income (loss) consists of consolidated net earnings (loss) and
foreign currency translation adjustments and consisted of the following for the three months ended
March 31, 2011 and 2010 (in thousands):
Three Months Ended | ||||||||
March 31, | ||||||||
2011 | 2010 | |||||||
Net earnings (loss) |
$ | 372 | $ | (3,435 | ) | |||
Foreign currency translation adjustments |
278 | 158 | ||||||
Comprehensive income (loss) |
$ | 650 | $ | (3,277 | ) | |||
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Note F Cash Equivalents
Cash and cash equivalents include all cash balances and highly liquid investments with an
initial maturity of three months or less from date of purchase. We place our temporary cash
investments with high credit quality financial institutions. At times, certain investments may be
in excess of the Federal Deposit Insurance Corporation (FDIC) insurance limit, or otherwise may
not be covered by FDIC insurance.
Our cash and cash equivalents included short-term investments of approximately $2.0 million as
of March 31, 2011 and $1.7 million as of December 31, 2010 which were held at a bank in Brazil.
Note G Long Term Debt
Long-term debt consisted of the following (in thousands):
March 31, | December 31, | |||||||
2011 | 2010 | |||||||
SunTrust term loan due quarterly through January 2014 |
$ | 11,250 | $ | 12,000 | ||||
Less current portion |
3,000 | 3,000 | ||||||
$ | 8,250 | $ | 9,000 | |||||
On January 19, 2010, we entered into a four-year revolving credit and term loan agreement with
SunTrust Bank (SunTrust). The SunTrust credit facility consists of a $15.0 million committed
revolving credit facility and a $15.0 million term loan. The SunTrust credit facility is guaranteed
by the Company and all of its material domestic subsidiaries and secured by substantially all of
the assets of the Company. Availability under the SunTrust revolver is based on eligible accounts
receivable and other factors. As of March 31, 2011, we had no outstanding borrowings under the
SunTrust revolver.
The SunTrust term loan requires quarterly principal payments of $0.8 million each which
commenced in March 2010, and a final principal payment of $3.0 million in January 2014. The loan
agreement requires mandatory prepayments with the net cash proceeds from certain asset sales,
equity offerings and insurance proceeds received by the Company. The loan agreement also requires
an annual additional prepayment contingently payable in April of each year based on excess cash
flow (ECF) if our leverage ratio, as defined in the agreement, exceeds a certain threshold. No
ECF payment was required in April 2011.
Interest on both the revolver and term loan is payable monthly and accrues at an index rate
using the one-month LIBOR rate, plus an applicable margin as determined by the loan agreement. The
applicable interest rate margin varies from 2.25% per annum to 3.5% per annum, dependent on our
consolidated leverage ratio, and is determined in accordance with a pricing grid under the SunTrust
loan agreement. The applicable margin was 2.5% and the interest rate was approximately 2.76% at
March 31, 2011. We also must pay a commitment fee of 0.5% per annum, payable quarterly, on the
unused portion of the $15.0 million SunTrust revolving credit facility. We made mandatory principal
payments on the SunTrust term loan totaling $0.8 million during the three months ended March 31,
2011.
We used substantially all the funds from the SunTrust term loan in January 2010 to repay in
full the principal of $14.1 million outstanding under a term loan with Ableco LLC (Ableco). In
conjunction with terminating the Ableco credit facility, we recorded a loss on extinguishment of
debt totaling $1.4 million consisting of unamortized deferred loan costs.
Note H Fair Value of Financial Instruments
Cash and cash equivalents are stated at cost, which we believe approximates fair market value.
We believe the carrying values for billed and unbilled receivables, accounts payable and other
accrued liabilities reasonably approximate fair market value due to the nature of the financial
instrument and the short term maturity of these items.
Long-term debt of $11.3 million as of March 31, 2011 and $12.0 million as of December 31, 2010
represents the outstanding balance of the SunTrust term loan and is reported at the unpaid
principal balance as of those dates. We believe that the fair value of such instrument is
approximately equal to its carrying value as of those dates.
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Reported liabilities include business acquisition obligations of $4.0 million as of March 31,
2011 and $3.8 million as of December 31, 2010 representing the fair value of deferred consideration
and earn-out payments estimated to be due as of those dates. We determine the estimated fair values
based on our projections of relevant future revenues and other factors used in the calculation of
the ultimate payment to be made. We use the discount rate that was initially used to value the
liability at the acquisition date which we based on specific business risk, cost of capital, and
other factors. We consider these factors to be Level 3 inputs (significant unobservable inputs).
We test our reported goodwill and other intangible assets for impairment at least annually.
The annual impairment tests are based on fair value measurements using Level 3 inputs primarily
consisting of estimated discounted cash flows expected to result from the use of the relevant
assets. As of the date of the last test, which was October 1, 2010, management concluded that there
was no impairment of goodwill or other intangible assets as of that date and no events have
occurred since then that would indicate impairment.
Note I Commitments and Contingencies
Legal Proceedings
In the normal course of business, the Company is involved in and subject to various claims,
disputes and uncertainties. After reviewing with legal counsel all of such matters, we believe that
the aggregate losses, if any, related to such matters will not have a material adverse effect on
the Companys financial position or results of operations.
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Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
Overview
We conduct our operations through three reportable operating segments: Recovery Audit Services
Americas, Recovery Audit Services Europe/Asia-Pacific and New Services. The Recovery Audit
Services Americas segment represents recovery audit services (other than healthcare claims
recovery audit services) we provide in the U.S., Canada and Latin America. The Recovery Audit
Services Europe/Asia-Pacific segment represents recovery audit services (other than healthcare
claims recovery audit services) we provide in Europe, Asia and the Pacific region. The New Services
segment includes business analytics and advisory services as well as healthcare claims recovery
audit services. We include the unallocated portion of corporate selling, general and administrative
expenses not specifically attributable to the three operating segments in Corporate Support.
Recovery auditing is a business service focused on finding overpayments created by errors in
payment transactions, such as missed or inaccurate discounts, allowances and rebates, vendor
pricing errors, erroneous coding and duplicate payments. Generally, we earn our recovery audit
revenues by identifying overpayments made by our clients, assisting our clients in recovering the
overpayments from their vendors, and collecting a specified percentage of the recoveries from our
clients as our fee. The fee percentage we earn is based on specific contracts with our clients,
which generally also specify: (a) time periods covered by the audit; (b) the nature and extent of
services we are to provided; and (c) the clients duties in assisting and cooperating with us.
Clients generally recover claims by either taking credits against outstanding payables or future
purchases from the relevant vendors, or receiving refund checks directly from those vendors. The
manner in which a claim is recovered by a client is often dictated by industry practice. In
addition, many clients establish client-specific procedural guidelines that we must satisfy prior
to submitting claims for client approval. For some services we provide, such as advisory services,
we earn our compensation in the form of a flat fee, a fee per hour, or a fee per other unit of
service.
We earn the vast majority of our recovery audit revenues from clients in the retail industry
due to the high volume of purchases and the complicated discount programs typical in this industry.
Changes in consumer spending associated with economic fluctuations such as the recent global
downturn generally impact our revenues to a lesser degree than they affect individual retailers due
to several factors. First, our clients include a diverse mix of discounters, grocery, pharmacy,
department and other stores that tend to be impacted to varying degrees by general economic
fluctuations, and even in opposite directions from each other depending on their position in the
market and their market segment. Also, when our clients experience a downturn, they frequently are
more motivated to use our services to recover prior overpayments to make up for relatively weaker
financial performance in their own business operations. Further, the client purchase data on which
we perform our recovery audit services is historical data that typically reflects transactions
between our clients and their vendors that took place 3 to 15 months prior to the data being
provided to us for audit. As a result, we generally experience a delayed impact from economic
changes that varies by client and the impact may be positive or negative depending on the
individual clients circumstances.
While the net impact of changes in the current economic environment on our recovery audit
revenues is difficult to determine or predict, we believe that for the foreseeable future, our
revenues will remain at a level that will not have a significant adverse impact on our liquidity,
and we have taken steps to mitigate any adverse impact of an economic downturn on our revenues and
overall financial health. These steps include devoting substantial efforts to the development of a
lower cost service delivery model to enable us to more cost effectively serve our clients.
Further, we are working diligently to expand our business beyond our core recovery audit services
to retailers by growing the portion of our business that provides recovery audit services to
enterprises other than retailers and growing our New Services segment which includes our healthcare
claims recovery audit services and our business analytics and advisory services. Our healthcare
claims recovery audit services include our participation in the Medicare Recovery Audit Contractor
program (the Medicare RAC program.)
The investments we are making in connection with our growth initiatives have had a significant
negative impact on our recent reported financial results. While we generated $5.2 million of
incremental revenues in our New Services segment from these efforts in the first quarter of 2011
compared to the first quarter of 2010, we only marginally reduced our operating loss in this
segment between these periods. These operating losses primarily relate to our healthcare claims
recovery audit services, which generated improved revenues in the first quarter of 2011 and which
we believe will continue to generate increasing revenues through the remainder of 2011. We will
continue to
monitor the performance of the New Services segment, and will focus on achieving profitability
and reducing and/or reversing the negative impact that these efforts have had on our financial
position and results of operations.
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Results of Operations
The following table sets forth the percentage of revenues represented by certain items in the
Companys Condensed Consolidated Statements of Operations (Unaudited) for the periods indicated:
Three Months | ||||||||
Ended | ||||||||
March 31, | ||||||||
2011 | 2010 | |||||||
Revenues |
100.0 | % | 100.0 | % | ||||
Cost of revenues |
68.2 | 72.2 | ||||||
Gross margin |
31.8 | 27.8 | ||||||
Selling, general and administrative expenses |
24.5 | 24.2 | ||||||
Depreciation and amortization |
4.6 | 5.1 | ||||||
Operating income (loss) |
2.7 | (1.5 | ) | |||||
Foreign currency transaction (gains) losses on
intercompany balances |
(0.9 | ) | 1.5 | |||||
Interest expense, net |
0.7 | 0.9 | ||||||
Loss on debt extinguishment |
0.0 | 3.3 | ||||||
Earnings (loss) before income taxes |
2.9 | (7.2 | ) | |||||
Income tax expense |
2.2 | 1.1 | ||||||
Net earnings (loss) |
0.7 | % | (8.3 | %) | ||||
Three Months Ended March 31, 2011 Compared to the Corresponding Period of the Prior Year
Revenues. Revenues were as follows (in thousands):
Three Months Ended | ||||||||
March 31, | ||||||||
2011 | 2010 | |||||||
Recovery Audit Services Americas |
$ | 29,113 | $ | 24,974 | ||||
Recovery Audit Services Europe/Asia-Pacific |
14,752 | 14,738 | ||||||
New Services |
6,853 | 1,617 | ||||||
Total |
$ | 50,718 | $ | 41,329 | ||||
Total revenues increased for the three months ended March 31, 2011 by $9.4 million, or 22.7%,
compared to the same period in 2010.
Recovery Audit Services Americas revenues increased by 16.6% for the first quarter of 2011
compared to the first quarter of 2010. We experience changes in our reported revenues based on the
strength of the U.S. dollar relative to foreign currencies. Changes in the value of the U.S. dollar
relative to currencies in Canada and Latin America positively impacted reported revenues in first
quarter of 2011 and negatively impacted reported revenues in first quarter of 2010. On a constant
dollar basis, adjusted for changes in foreign exchange (FX) rates, revenues for the first quarter
of 2011 increased by 14.6% compared to an increase of 16.6% as reported.
The increase in our Recovery Audit Services Americas revenues is due to a number of
factors. A portion of this increase was attributable to some atypical revenues at several clients,
including revenues from client-driven audit timeline changes and some individually significant
claims. Also, revenues in the first quarter of 2010 generally were below expectations, and we
generated higher revenues in most of our larger client engagements in the first quarter of 2011.
Although we generated year over year increases in quarterly revenues in this segment for the
fourth quarter of 2010 and the first quarter of 2011, we experienced declining revenues in this
segment in recent years due to reduced liquidity of our clients vendors, competitive rate
pressures, client attrition, and the impact of our clients developing and strengthening their own
internal audit capabilities as a substitute for our services. To address these issues, offset their
impact and generate growth in this segment, we began implementing several growth strategies in late
2009. We
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reinstituted a sales function in 2010, resulting in an increase in our client count in
recent quarters. We continue to develop our Next Generation Recovery Audit platform that we
designed to make our recovery audit process more cost efficient and effective. We concluded
successful pilots of this technology in the first quarter of 2011, and expect to expand its use
throughout the year. We also are providing greater value to our existing and potential clients by
offering adjacent services in the procure-to-pay value chain and to the CFO suite, and by
capitalizing on our existing data mining and related competencies. While we are encouraged by some
of our recent successes, we can provide no assurances that we will be able to build on them in the
future or that we will be able to sustain our current revenue levels in this segment. In addition,
we have invested heavily in the pursuit of these opportunities and will continue to invest in them.
We believe that without such investments, revenue growth for Recovery Audit Services Americas is
not likely.
Recovery Audit Services Europe/Asia-Pacific revenues increased by 0.1% for the three months
ended March 31, 2011 compared to the same period in 2010. The strengthening of the U.S. dollar
relative to foreign currencies in Europe, Asia and Australia positively impacted reported revenues
in both periods. On a constant dollar basis, adjusted for changes in foreign exchange (FX) rates,
revenues for the three months ended March 31, 2011 decreased by 3.2% compared to an increase of
0.1% as reported. This decrease on a constant dollar basis primarily is attributable to audit
delays experienced at key clients for which we expect to record the related revenues in the second
and third quarters of 2011. As in our Recovery Audit Services Americas segment, we experience
competitive and other pressures in this segment, but to a lesser degree due to the smaller number
of competitors with global capabilities. We intend to execute the same strategic initiatives for
this segment as we are in the Recovery Audit Services Americas segment.
New Services revenues increased by 323.8% for the three months ended March 31, 2011 compared
to the same period in 2010. We generate New Services revenues from our advisory services, business
analytics services and from our participation in the Medicare RAC program. We generated increases
in our first quarter 2011 revenues in each of these areas, particularly in our advisory services
due in part to our November 2010 acquisition of The Johnsson Group. We include a full quarter of
the operating results of The Johnsson Group in the 2011 period, with no comparable results in the
2010 period. We expect New Services revenues to continue to increase in 2011 in the aggregate. We
were awarded our first state Medicaid RAC contract early in the first quarter of 2011 and are
continuing to evaluate and bid for additional state Medicaid RAC opportunities that we believe are
a good match for us based on the way the states Medicaid program is run and the scope of the
program. While the magnitude and timing of additional Medicare and Medicaid RAC program revenues
are difficult to predict, we expect revenues from our healthcare claims auditing to increase
steadily through at least the third quarter of 2011.
Cost of Revenues (COR). COR consists principally of commissions and other forms of variable
compensation we pay to our auditors based primarily upon the level of overpayment recoveries and/or
profit margins derived therefrom, fixed auditor salaries, compensation paid to various types of
hourly support staff, and salaried operational and client service managers for our recovery audit,
business analytics and advisory services businesses. COR also includes other direct and indirect
costs incurred by these personnel, including office rent, travel and entertainment, telephone,
utilities, maintenance and supplies and clerical assistance. A significant portion of the
components comprising COR is variable and will increase or decrease with increases or decreases in
revenues.
COR was as follows (in thousands):
Three Months Ended | ||||||||
March 31, | ||||||||
2011 | 2010 | |||||||
Recovery Audit Services Americas |
$ | 16,643 | $ | 16,155 | ||||
Recovery Audit Services Europe/Asia-Pacific |
11,590 | 11,243 | ||||||
New Services |
6,361 | 2,435 | ||||||
Total |
$ | 34,594 | $ | 29,833 | ||||
COR as a percentage of revenues for Recovery Audit Services Americas was 57.2% and 64.7%
for the three months ended March 31, 2011 and 2010, respectively. This equates to gross margin
percentages of 42.8% and 35.3%, respectively, for the Recovery Audit Services Americas. The
increase in gross margins for the three months ended March 31, 2011 compared to the same period in
2010 is attributable to higher revenues in our recovery audit service lines without comparable
increases in costs, which we achieved primarily by beginning to implement the transformation of our
recovery audit service delivery model. This transformation involves the centralization of functions
and other process improvements that we believe will improve the efficiency and lower the costs of
our recovery audit processes. Investments we are making in our growth strategies continued to
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negatively impact gross margins in both quarters. Significant portions of the non-capitalized
amounts of these costs are being absorbed within the Recovery Audit Services Americas segments
cost of revenues.
COR as a percentage of revenues for Recovery Audit Services Europe/Asia-Pacific was 78.6%
and 76.3% for the three months ended March 31, 2011 and 2010, respectively. This equates to gross
margin percentages of 21.4% and 23.7%, respectively, for the Recovery audit Services
Europe/Asia-Pacific. The decrease in gross margin in the three months ended March 31, 2011
primarily resulted from hiring several audit teams as employees rather than retaining them on a
subcontract basis, combined with the aforementioned revenue delays at key clients in the United
Kingdom. While we expect the employee auditor model to yield higher margins once fully implemented,
we expect to incur higher costs during the remainder of 2011 as we transition to this model.
The higher COR as a percentage of revenues for Recovery Audit Services Europe/Asia-Pacific
(78.6% for the first quarter of 2011) compared to Recovery Audit Services Americas (57.2% for
the first quarter of 2011) is due primarily to differences in service delivery models, scale and
geographic fragmentation. The Recovery Audit Services Europe/Asia-Pacific segment generally
serves fewer clients in each geographic market and generates lower revenues per client than those
served by the Companys Recovery Audit Services Americas segment.
New Services COR relates primarily to costs of advisory services and costs associated with the
Medicare RAC program. New Services revenues exceeded New Services COR by $0.5 million for the three
months ended March 31, 2011 compared to New Services COR exceeding New Services revenues by $0.8
million for the three months ended March 31, 2010. This increase in gross margin is due to revenue
growth in all of the Companys newly incubated Client Value Propositions, including healthcare
claims recovery audit, spend optimization, and profit performance optimization due in part to our
acquisition of The Johnsson Group in November 2010. However, COR exceeded revenues for the
healthcare claims recovery audit unit within our New Services segment by $0.3 million for the three
months ended March 31, 2011. While these results represent an improvement over the performance in
the first quarter of 2010, we must continue to increase revenues in this unit in order to reduce
these losses or generate operating profits. We expect to increase these revenues in the second and
third quarters of 2011 and to improve our operating performance as a result of these increased
revenues.
Selling, General and Administrative Expenses (SG&A). SG&A expenses of the Recovery Audit
and New Services segments include the expenses of sales and marketing activities, information
technology services and allocated corporate data center costs, human resources, legal, accounting,
administration, foreign currency transaction gains and losses on other than intercompany balances
and gains and losses on asset disposals related to the Recovery Audit and New Services segments.
Corporate Support SG&A represents the unallocated portion of SG&A expenses which are not
specifically attributable to our segment activities and include the expenses of information
technology services, the corporate data center, human resources, legal, accounting, treasury,
administration and stock-based compensation charges.
SG&A expenses were as follows (in thousands):
Three Months Ended | ||||||||
March 31, | ||||||||
2011 | 2010 | |||||||
Recovery Audit Services Americas |
$ | 5,376 | $ | 3,509 | ||||
Recovery Audit Services Europe/Asia-Pacific |
1,163 | 1,349 | ||||||
New Services |
1,228 | 417 | ||||||
Subtotal for segments |
7,767 | 5,275 | ||||||
Corporate support |
4,663 | 4,724 | ||||||
Total |
$ | 12,430 | $ | 9,999 | ||||
Recovery Audit Services Americas SG&A increased 53.2% for the three months ended March 31,
2011 compared to the three months ended March 31, 2010. This increase resulted primarily from
severance costs related to the transformation of our recovery audit service delivery model and
incentive compensation accruals, combined with higher selling and marketing costs we incurred in
connection with our efforts to increase revenues in this segment.
Recovery Audit Services Europe/Asia-Pacific SG&A decreased 13.8% for the three months ended
March 31, 2011 compared to the three months ended March 31, 2010 due to lower professional fees and
bad debt expenses in the 2011 period.
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New Services SG&A increased by 194.5% in the first quarter of 2011 compared to the first
quarter of 2010. The increase was attributable to the additional operating costs of Etesius Limited
which we acquired late in February 2010, higher costs relating to our participation in the Medicare
RAC program subcontracts, as well the hiring of additional sales and business development
personnel.
Corporate Support SG&A includes stock-based compensation charges of $0.9 million and $0.8
million for the three months ended March 31, 2011 and 2010, respectively. Excluding stock-based
compensation charges, Corporate Support SG&A decreased 4.6% for the quarter ended March 31, 2011
compared to the quarter ended March 31, 2010. The 2010 period included marketing and other costs
associated with our corporate re-branding that were in excess of the higher professional fees and
incentive compensation accruals we incurred in the first quarter of 2011.
Depreciation and Amortization. Depreciation and amortization was as follows (in thousands):
Three Months Ended | ||||||||
March 31, | ||||||||
2011 | 2010 | |||||||
Recovery Audit Services Americas |
$ | 1,347 | $ | 1,480 | ||||
Recovery Audit Services Europe/Asia-Pacific |
420 | 405 | ||||||
New Services |
535 | 225 | ||||||
Total |
$ | 2,302 | $ | 2,110 | ||||
During the second quarter of 2010, we revised our estimate of the useful lives of certain
fixed assets for the purpose of calculating depreciation expense based on a review of our planned
fixed asset replacement cycle. The effects of these changes reduced depreciation expense in the
three months ended March 31, 2011 but not in the three months ended March 31, 2010, resulting in
the reduction in these expenses for the Recovery Audit Services Americas segment. The increase
in these expenses in the New Services segment is due to amortization of intangible assets we
recorded in connection with our acquisitions of Etesius Limited and The Johnsson Group, as well as
an increase in the depreciation of capitalized software development costs.
Foreign Currency Transaction (Gains) Losses on Intercompany Balances. Foreign currency
transaction gains and losses on intercompany balances result from the re-translation of the foreign
subsidiaries balances payable to the U.S. parent from their local currency to their U.S. dollar
equivalent. Substantial changes from period to period in foreign currency exchange rates may
significantly impact the amount of such gains and losses. In the three months ended March 31, 2011,
we recorded gains of $0.5 million, while we recorded losses of $0.6 million in the three months
ended March 31, 2010, a change of $1.1 million between periods.
Interest Expense, net and Loss on Debt Extinguishment. Net interest expense was $0.3 million
and $0.4 million for the three months ended March 31, 2011 and 2010, respectively. We also recorded
a $1.4 million loss on extinguishment of debt in the first quarter 2010 when we entered into a new
credit facility with SunTrust Bank and repaid our prior term loan from Ableco LLC in full (see
Secured Credit Facility below for additional information regarding this transaction). The loss on
extinguishment of debt consists of the unamortized deferred loan costs associated with the prior
credit facility. The interest rate on the new credit facility is based on the one-month LIBOR
rate, plus an applicable margin of from 2.25% to 3.5% per annum. The interest rate in effect
at March 31, 2011 under the new credit facility was approximately 2.76%, while the prior credit
facility bore a minimum interest rate of 9.75%.
Income Tax Expense. Our income tax expense amounts as reported in the accompanying Condensed
Consolidated Financial Statements (Unaudited) do not reflect amounts that normally would be
expected due to several factors. We have cumulative net operating losses in the United States, and
we record a valuation allowance against our deferred tax assets. Generally, these factors result in
our recording no income tax expense or benefit relating to our operations in the United States.
Reported income tax expense for the three months ended March 31, 2011 and 2010 primarily results
from taxes on the income of our foreign subsidiaries.
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Liquidity and Capital Resources
As of March 31, 2011, we had $22.7 million in cash and cash equivalents and no borrowings
under the revolver portion of our credit facility. The revolver had approximately $8.8 million of
calculated availability for borrowings. The Company was in compliance with the covenants in its
SunTrust credit facility as of March 31, 2011.
Operating Activities. Net cash provided by (used in) operating activities was $6.2 million
and $(3.5 million) during the first quarter of 2011 and 2010, respectively. These amounts consist
of two components, specifically, net earnings (loss) adjusted for certain non-cash items (such as
depreciation, amortization and stock-based compensation expense) and changes in assets and
liabilities, primarily working capital, as follows:
Three Months Ended | ||||||||
March 31, | ||||||||
2011 | 2010 | |||||||
Net earnings (loss) |
$ | 372 | $ | (3,435 | ) | |||
Adjustments to net earnings (loss) |
2,691 | 4,440 | ||||||
Net earnings as adjusted |
3,063 | 1,005 | ||||||
Changes in assets and liabilities |
3,091 | (4,472 | ) | |||||
Net cash provided by (used in) operating activities |
$ | 6,154 | $ | (3,467 | ) | |||
The $9.6 million increase in cash provided by operating activities in the first quarter of
2011 was due to a $2.1 million increase in net earnings (loss) adjusted for non-cash items and a
$7.6 million improvement from changes in assets and liabilities, primarily working capital. The
increase in net earnings (loss) adjusted for non-cash items was due to higher net earnings
resulting from the factors discussed previously, partially offset by lower non-cash charges of $1.4
million related to the amortization of deferred loan costs as part of the extinguishment of debt in
the first quarter 2010 for which there is no comparable amount in 2011. The cash provided by assets
and liabilities, primarily working capital changes resulted from increases in incentive
compensation and commission accruals in the first quarter of 2011, partially offset by lower
decreases in receivables in the 2011 period. We include an itemization of these changes in our
Consolidated Statements of Cash Flows included in Item 1 of this Form 10-Q.
We incurred operating losses of approximately $1.0 million and $0.8 million during the first
quarter of 2011 and 2010, respectively related to the Medicare RAC program. As of March 31, 2011,
we had contract receivables of $1.6 million, deferred costs (included in other current assets) of
$1.2 million, as well as capitalized software development costs and other fixed assets associated
with this program. These losses and investments have had a significant negative impact on our
liquidity and cash flows. We expect to continue to incur losses, increase receivables and other
current assets and incur capital expenditures relating to this program in 2011.
Investing Activities and Depreciation and Amortization. Depreciation and amortization for the
three months ended March 31, 2011 and 2010 amounted to $2.3 million and $2.1 million, respectively.
Net cash used for property and equipment capital expenditures was $1.5 million during both the
three months ended March 31, 2011 and 2010. These capital expenditures primarily related to
investments we made to upgrade our information technology infrastructure, develop our
next-generation recovery audit business model and to generate efficiencies in the performance of
our healthcare claims recovery audit procedures.
Capital expenditures are discretionary and we currently expect future capital expenditures to
continue at current levels over the next several quarters as we continue to enhance our healthcare
claims recovery audit systems. We may alter our capital expenditure plans should we experience
changes in our operating results which cause us to adjust our operating plans.
In February 2010, the Company acquired all of the issued and outstanding capital stock of
Etesius Limited for a purchase price valued at $3.1 million. The purchase price included an initial
cash payment of $2.8 million and payment of obligations on behalf of Etesius shareholders of $0.3
million that we paid in February 2010.
Financing Activities and Interest Expense. Net cash used in financing activities was $0.9
million and $1.2 million for the three months ended March 31, 2011 and 2010, respectively. During
the first three months of 2011, we made mandatory payments totaling $0.8 million on our new term
loan, received $0.1 million in proceeds from
stock option exercises and paid $0.2 million for restricted stock remitted by employees as
payment for taxes they incurred upon vesting of the restricted stock. As described in more detail
below, in January 2010, we entered into a new $15.0 million term loan, the proceeds of which were
used to repay the remaining $14.1 million of outstanding
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principal from the Ableco LLC term loan
and to pay $0.5 million of the loan costs we incurred in connection with the new SunTrust credit
facility.
In January 2010, the Company made the first of two deferred payments required as part of the
acquisition of First Audit Partners LLP in the amount of £0.5 million ($0.8 million). The second
payment of £0.8 million ($1.3 million) was made in July 2010.
Secured Credit Facility
On January 19, 2010, we entered into a four-year revolving credit and term loan agreement with
SunTrust Bank (SunTrust). We used substantially all the funds from the SunTrust term loan to
repay in full the $14.1 million outstanding under our then-existing Ableco LLC term loan. The
SunTrust credit facility consists of a $15.0 million committed revolving credit facility and a
$15.0 million term loan. The SunTrust credit facility is guaranteed by the Company and its domestic
subsidiaries and is secured by substantially all of our assets. Amounts available for borrowing
under the SunTrust revolver are based on our eligible accounts receivable and other factors.
Borrowing availability under the SunTrust revolver at March 31, 2011 was $8.8 million. We had no
borrowings outstanding under the SunTrust revolver as of March 31, 2011.
The SunTrust term loan requires quarterly principal payments of $0.8 million from March 2010
and through December 2013, and a final payment of $3.0 million in January 2014. The loan agreement
requires mandatory prepayments with the net cash proceeds from certain asset sales, equity
offerings and insurance claims. The loan agreement also requires an additional annual prepayment
based on excess cash flow (ECF) if our leverage ratio, as defined in the agreement, exceeds a
certain threshold. The first of any such ECF payments would have been payable in April 2011, but
our leverage ratio did not exceed the threshold and we did not make an ECF payment for 2010.
Interest on both the revolver and term loan is payable monthly and accrues at an index rate
based on the one-month LIBOR rate, plus an applicable margin as determined by the loan agreement.
The applicable interest rate margin varies from 2.25% per annum to 3.5% per annum, depending on our
consolidated leverage ratio, and is determined in accordance with a pricing grid under the SunTrust
loan agreement. The applicable margin was 2.5% and the interest rate was approximately 2.76% at
March 31, 2011. We also must pay a commitment fee of 0.5% per annum, payable quarterly, on the
unused portion of the $15.0 million SunTrust revolving credit facility.
The SunTrust credit facility includes customary affirmative, negative, and financial covenants
binding on the Company, including delivery of financial statements and other reports, maintenance
of existence, and transactions with affiliates. The negative covenants limit the ability of the
Company, among other things, to incur debt, incur liens, make investments, sell assets, repurchase
shares of its capital stock or declare or pay dividends on its capital stock. The financial
covenants included in the SunTrust credit facility, among other things, limit the amount of capital
expenditures the Company can make, set forth maximum leverage and net funded debt ratios for the
Company and a minimum fixed charge coverage ratio, and also require the Company to maintain minimum
consolidated earnings before interest, taxes, depreciation and amortization. In addition, the
SunTrust credit facility includes customary events of default.
We believe that we will have sufficient borrowing capacity and cash generated from operations
to fund our capital and operating needs for at least the next twelve months.
Stock Repurchase Program
In February 2008, our Board of Directors approved a stock repurchase program. Under the terms
of the program, we were permitted to repurchase up to $10 million of our common stock from time to
time through March 31, 2011. We did not repurchase any shares of our common stock under this
program in the first quarter of 2011 or 2010. The stock repurchase program expired on March 31,
2011.
Off Balance Sheet Arrangements
As of March 31, 2011, the Company did not have any material off-balance sheet arrangements, as
defined in Item 303(a)(4)(ii) of the SECs Regulation S-K.
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Critical Accounting Policies
We describe the Companys significant accounting policies in Note 1 of Notes to Consolidated
Financial Statements of the Companys Annual Report on Form 10-K for the year ended December 31,
2010. We consider certain of these accounting policies to be critical to the portrayal of the
Companys financial position and results of operations, as they require the application of
significant judgment by management. As a result, they are subject to an inherent degree of
uncertainty. We identify and discuss these critical accounting policies in the Managements
Discussion and Analysis of Financial Condition and Results of Operations section of the Companys
Annual Report on Form 10-K for the year ended December 31, 2010. Management bases its estimates and
judgments on historical experience and on various other factors that management believes to be
reasonable under the circumstances, the results of which form the basis for making judgments about
the carrying values of assets and liabilities that are not readily apparent from other sources.
Actual results may differ from these estimates under different assumptions or conditions. On an
ongoing basis, management evaluates its estimates and judgments, including those considered
critical. Management has discussed the development, selection and evaluation of accounting
estimates, including those deemed critical, and the associated disclosures in this Form 10-Q with
the Audit Committee of the Board of Directors.
Forward-Looking Statements
Some of the information in this Form 10-Q contains forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act
of 1934, which statements involve substantial risks and uncertainties including, without
limitation, (1) statements that contain projections of the Companys future results of operations
or of the Companys financial condition, (2) statements regarding the adequacy of the Companys
current working capital and other available sources of funds, (3) statements regarding goals and
plans for the future, including the Companys growth opportunities, (4) expectations regarding
future accounts payable services revenue trends, and (5) the anticipated impact of the Companys
participation in the Medicare RAC program. All statements that cannot be assessed until the
occurrence of a future event or events should be considered forward-looking. These statements are
forward-looking statements within the meaning of the Private Securities Litigation Reform Act of
1995 and can be identified by the use of forward-looking words such as may, will, expect,
anticipate, believe, estimate and continue or similar words. Risks and uncertainties that
may potentially impact these forward-looking statements include, without limitation, those set
forth under Part I, Item 1A Risk Factors in the Companys Annual Report on Form 10-K for the year
ended December 31, 2010 and its other periodic reports filed with the Securities and Exchange
Commission. The Company disclaims any obligation or duty to update or modify these forward-looking
statements.
There may be events in the future, however, that the Company cannot accurately predict or over
which the Company has no control. The risks and uncertainties listed in this section, as well as
any cautionary language in this Form 10-Q, provide examples of risks, uncertainties and events that
may cause our actual results to differ materially from the expectations we describe in our
forward-looking statements. You should be aware that the occurrence of any of the events denoted
above as risks and uncertainties and elsewhere in this Form 10-Q could have a material adverse
effect on our business, financial condition and results of operations.
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Item 3. Quantitative and Qualitative Disclosures About Market Risk
Foreign Currency Market Risk. Our reporting 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 our 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 foreign functional currency revenues decreases. When the U.S. dollar weakens, the value of the
foreign functional currency 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 therefore are adversely
affected by a stronger dollar relative to major currencies worldwide. During the three months ended
March 31, 2011, we recognized $4.6 million of operating income from operations located outside the
U.S., virtually all of which was originally accounted for in currencies other than the U.S. dollar.
Upon translation into U.S. dollars, such operating income would increase or decrease, assuming a
hypothetical 10% change in weighted-average foreign currency exchange rates against the U.S.
dollar, by approximately $0.5 million for the three months ended March 31, 2011.
Interest Rate Risk. Our interest income and expense are sensitive to changes in the general
level of U.S. interest rates. In this regard, changes in U.S. interest rates affect the interest
earned on our cash equivalents as well as interest paid on our debt. We had $11.3 million
outstanding under a term loan and $8.8 million of calculated borrowing availability under our
revolving credit facility as of March 31, 2011, but had no amounts drawn under the revolving credit
facility as of that date. Interest on both the revolver and the term loan are payable monthly and
accrue at an index rate using the one-month LIBOR rate plus an applicable margin as determined by
the loan agreement. The applicable interest rate margin varies from 2.25% per annum to 3.5% per
annum. The applicable margin was 2.5% and the interest rate was approximately 2.76% at March 31,
2011. Assuming full utilization of the revolving credit facility, a hypothetical 100 basis point
change in interest rates applicable to the revolver would result in an approximate $0.1 million
change in annual pre-tax income. A hypothetical 100 basis point change in interest rates applicable
to the term loan would result in an approximate $0.1 million change in annual pre-tax income.
In order to mitigate some of this interest rate risk, we entered into an interest rate swap
agreement with SunTrust Bank in October 2010 under which we pay additional interest on a notional
amount of $3.8 million through December 31, 2013 to the extent that the one-month LIBOR rate is
below 1.23%, and receive payments from SunTrust Bank to the extent the index exceeds this level.
The notional amount is equal to the final two payments due under the term loan in December 2013 and
January 2014. Currently, one-month LIBOR is below 1.23% and we are paying a minimal
amount of additional interest under this agreement. Should one-month LIBOR rates increase
above the 1.23% level, we will incur additional interest expense on all of the amounts outstanding
under our credit facility, but will offset a portion of this additional expense with the income we
earn from the swap agreement.
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Item 4. Controls and Procedures
The Company carried out an evaluation, under the supervision and with the participation of its
management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness
of the design and operation of the Companys disclosure controls and procedures (as defined in
the Exchange Act Rule 13a-15(e)) as of the end of the period covered by this report. Based upon
that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the
Companys disclosure controls and procedures were effective as of March 31, 2011.
There were no changes in the Companys internal control over financial reporting during the
quarter ended March 31, 2011 that have materially affected, or are reasonably likely to materially
affect, the Companys internal control over financial reporting.
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings
In the normal course of business, the Company is involved in and subject to various claims,
disputes and uncertainties. After reviewing with legal counsel all of such matters, we believe that
the aggregate losses, if any, related to such matters will not have a material adverse effect on
the Companys financial position or results of operations.
Item 1A. Risk Factors
There have been no material changes in the risks facing the Company as described in the
Companys Form 10-K for the year ended December 31, 2010.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
The Companys current credit facility prohibits the payment of any cash dividends on the
Companys capital stock.
The following table sets forth information regarding the purchases of the Companys equity
securities made by or on behalf of the Company or any affiliated purchaser (as defined in Exchange
Act Rule 10b-18) during the three-month period ended March 31, 2011:
Total Number of | Maximum Approximate | |||||||||||||||
Shares Purchased | Dollar Value of Shares | |||||||||||||||
Total Number | Average | as Part of Publicly | that May Yet Be | |||||||||||||
of Shares | Price Paid | Announced Plans | Purchased Under the | |||||||||||||
2011 | Purchased (a) | per Share | or Programs | Plans or Programs | ||||||||||||
(millions of dollars) | ||||||||||||||||
January 1
January 31 |
37,514 | $ | 6.25 | | $ | | ||||||||||
February 1
February 28 |
| $ | | | $ | | ||||||||||
March 1 March 31 |
| $ | | | $ | | ||||||||||
37,514 | $ | 6.25 | | |||||||||||||
(a) | All shares purchased during the quarter were surrendered by employees to satisfy tax withholding obligations upon vesting of restricted stock. |
Item 3. Defaults Upon Senior Securities
None.
Item 4. [Reserved]
Item 5. Other Information
None.
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Item 6. Exhibits
Exhibit | ||
Number | Description | |
3.1
|
Restated Articles of Incorporation of the Registrant, as amended and corrected through August 11, 2006 (restated solely for the purpose of filing with the Commission) (incorporated by reference to Exhibit 3.1 to the Registrants Report on Form 8-K filed on August 17, 2006). | |
3.1.1
|
Articles of Amendment to the Registrant dated January 20, 2010 (incorporated by reference to Exhibit 3.1 to the Registrants Form 8-K filed on January 15, 2010). | |
3.2
|
Amended and Restated Bylaws of the Registrant (incorporated by reference to Exhibit 3.1 to the Registrants Form 8-K filed on December 11, 2007). | |
4.1
|
Specimen Common Stock Certificate (incorporated by reference to Exhibit 4.1 to the Registrants Form 10-K for the year ended December 31, 2001). | |
4.2
|
See Restated Articles of Incorporation and Bylaws of the Registrant, filed as Exhibits 3.1 and 3.2, respectively. | |
4.3
|
Shareholder Protection Rights Agreement, dated as of August 9, 2000, between the Registrant and Rights Agent, effective May 1, 2002 (incorporated by reference to Exhibit 4.3 to the Registrants Form 10-Q for the quarterly period ended June 30, 2002). | |
4.3.1
|
First Amendment to Shareholder Protection Rights Agreement, dated as of March 12, 2002, between the Registrant and Rights Agent (incorporated by reference to Exhibit 4.3 to the Registrants Form 10-Q for the quarterly period ended September 30, 2002). | |
4.3.2
|
Second Amendment to Shareholder Protection Rights Agreement, dated as of August 16, 2002, between the Registrant and Rights Agent (incorporated by reference to Exhibit 4.3 to the Registrants Form 10-Q for the quarterly period ended September 30, 2002). | |
4.3.3
|
Third Amendment to Shareholder Protection Rights Agreement, dated as of November 7, 2006, between the Registrant and Rights Agent (incorporated by reference to Exhibit 4.1 to the Registrants Form 8-K filed on November 14, 2005). | |
4.3.4
|
Fourth Amendment to Shareholder Protection Rights Agreement, dated as of November 14, 2006, between the Registrant and Rights Agent (incorporated by reference to Exhibit 4.1 to the Registrants Form 8-K filed on November 30, 2005). | |
4.3.5
|
Fifth Amendment to Shareholder Protection Rights Agreement, dated as of March 9, 2006, between the Registrant and Rights Agent (incorporated by reference to Exhibit 4.9 to the Registrants Form 10-K for the year ended December 31, 2005). | |
4.3.6
|
Sixth Amendment to Shareholder Protection Rights Agreement, dated as of September 17, 2007, between the Registrant and Rights Agent (incorporated by reference to Exhibit 4.1 to the Registrants Form 8-K filed on September 21, 2007). | |
4.3.7
|
Seventh Amendment to Shareholder Protection Rights Agreement, dated as of August 9, 2010, between the Registrant and Rights Agent (incorporated by reference to Exhibit 4.1 to the Registrants Form 8-K filed on August 9, 2010). | |
31.1
|
Certification of the Chief Executive Officer, pursuant to Rule 13a-14(a) or 15d-14(a), for the quarter ended March 31, 2011. | |
31.2
|
Certification of the Chief Financial Officer, pursuant to Rule 13a-14(a) or 15d-14(a), for the quarter ended March 31, 2011. | |
32.1
|
Certification of the Chief Executive Officer and Chief Financial Officer, pursuant to 18 U.S.C. Section 1350, for the quarter ended March 31, 2011. |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
PRGX GLOBAL, INC. |
||||
May 9, 2011 | By: | /s/ Romil Bahl | ||
Romil Bahl | ||||
President, Chief Executive Officer, Director (Principal Executive Officer) |
||||
May 9, 2011 | By: | /s/ Robert B. Lee | ||
Robert B. Lee | ||||
Chief Financial Officer and Treasurer (Principal Financial Officer) |
||||
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