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EX-31.2 - EX-31.2 - PRGX GLOBAL, INC. | g26477exv31w2.htm |
EX-21.1 - EX-21.1 - PRGX GLOBAL, INC. | g26477exv21w1.htm |
EX-23.1 - EX-23.1 - PRGX GLOBAL, INC. | g26477exv23w1.htm |
EX-32.1 - EX-32.1 - PRGX GLOBAL, INC. | g26477exv32w1.htm |
EX-31.1 - EX-31.1 - PRGX GLOBAL, INC. | g26477exv31w1.htm |
EX-10.33 - EX-10.33 - PRGX GLOBAL, INC. | g26477exv10w33.htm |
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
(Mark One)
þ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 2010
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 | 58-2213805 | |
(State or other jurisdiction of | (I.R.S. Employer | |
incorporation or organization) | Identification No.) | |
600 Galleria Parkway | ||
Suite 100 | ||
Atlanta, Georgia | 30339-5986 | |
(Address of principal executive offices) | (Zip Code) |
Registrants telephone number, including area code: (770) 779-3900
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Name of each exchange on which registered | |
Common Stock, No Par Value | The NASDAQ Stock Market LLC (The Nasdaq Global Market) | |
Preferred Stock Purchase Rights | The NASDAQ Stock Market LLC (The Nasdaq Global Market) |
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule
405 of the Securities Act. Yes o No þ
Indicate by check mark if the registrant is not required to file reports pursuant to Section
13 or Section 15(d) of the Act. Yes o No þ
NoteChecking the box above will not relieve any registrant required to file reports pursuant
to Section 13 or 15(d) of the Exchange Act from their obligations under those Sections.
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 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 registrants 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. þ
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 small reporting company in Rule 12b-2 of the Exchange
Act. (Check One):
o Large accelerated filer | þ Accelerated filer | o Non-accelerated filer (Do not check if a smaller reporting company) | o Smaller reporting company |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Act). Yes o No þ
The aggregate market value, as of June 30, 2010, of common shares of the registrant held by
non-affiliates of the registrant was approximately $80.1 million, based upon the last sales price
reported that date on The Nasdaq Global Market of $4.15 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 March 1, 2011 were 23,992,854.
Documents Incorporated by Reference
Part III: Portions of Registrants Proxy Statement relating to the Companys 2011 Annual
Meeting of Shareholders.
PRGX Global, Inc.
FORM 10-K
December 31, 2010
December 31, 2010
Table of Contents
Cautionary Statement Regarding Forward-Looking Statements
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 Companys 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. 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.
These forward-looking statements are subject to risks, uncertainties and other factors,
including but not limited to those discussed herein and below under Item 1A Risk Factors. Many of
these risks are outside of our control and could cause actual results to differ materially from the
results discussed in the forward-looking statements. Factors that could lead to material changes
in our performance may include, but are not limited to:
| our ability to successfully execute our recovery audit growth strategy; | ||
| our continued dependence on our largest clients for significant revenues; | ||
| changes to Medicare and Medicaid recovery audit contractor (RAC) programs and the impact of our incurring significant costs as a subcontractor in the national Medicare RAC program and otherwise in connection with our healthcare claims recovery audit business; | ||
| revenues that do not meet expectations or justify costs incurred; | ||
| our ability to develop material sources of new revenue in addition to revenues from our core accounts payable recovery audit services; | ||
| changes to revenues from our Medicare audit recovery work due to a number of pressures and uncertainties affecting Medicare spending generally and over which we have little or no control; | ||
| changes in the market for our services; | ||
| client and vendor bankruptcies and financial difficulties; | ||
| our ability to retain and attract qualified personnel; | ||
| our inability to protect and maintain the competitive advantage of our proprietary technology and intellectual property rights; | ||
| our reliance on operations outside the U.S. for a significant portion of our revenues; | ||
| the highly competitive environments in which our recovery audit services, business analytics and advisory services businesses operate and the resulting pricing pressure on those businesses; | ||
| our ability to integrate recent and future acquisitions; | ||
| uncertainty in the credit markets; | ||
| our ability to maintain compliance with our financial covenants; | ||
| effects of changes in accounting policies, standards, guidelines or principles; or | ||
| terrorist acts, acts of war and other factors over which we have little or no control. |
Any forward-looking statement speaks only as of the date on which such statement is made, and,
except as required by law, we undertake no obligation to update any forward-looking statement to
reflect events or circumstances after the date on which such statement is made or to reflect the
occurrence of unanticipated events. New factors emerge from time to time and it is not possible
for management to predict all such factors.
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PART I
ITEM 1. Business
PRGX Global, Inc., together with its subsidiaries, is an analytics powered information and
professional services firm based in the United States of America (U.S.). PRGX Global, Inc. was
incorporated in the State of Georgia in 1996. At the heart of our client services portfolio is the
core capability of mining client data to deliver actionable insights. Actionable insights allow
our clients to improve their financial performance by reducing costs, improving business processes
and increasing profitability. In 2010, we rebranded the Company as PRGX and adopted the tag line
of Discover Your Hidden Profits.
We currently provide services to clients in 28 countries, and 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 represents healthcare
claims recovery audit services and our business analytics and advisory services. We include the
unallocated portion of corporate selling, general and administrative expenses not specifically
attributable to the three operating segments in Corporate Support.
Our core business is recovery audit, a service based on the mining of a tremendous amount of
our clients purchasing data, looking for overpayments to their third party suppliers. Most of our
large retail clients in mature geographic markets employ their own internal staff to audit and
recover overpayments to suppliers, engaging us as a supplement to this internal function. For other
clients, including some large and mid-size retailers and our commercial (non-retail) clients, we
serve as the complete outsourced provider of this standard function. We process over 1.5 million
client files each year, including purchase orders, receipt and shipment data, invoices, payables
data and point of sales data, and at any point in time, have over 4 petabytes of client data
available for analysis.
Our healthcare claims recovery audit services involve the identification of overpayments and
underpayments made to healthcare providers, such as hospitals and physicians practices. We
identify such improper payments by using various methods, including proprietary methods which are
comparable to the proprietary techniques we developed through many years of performing other types
of recovery audits involving massive volumes of transaction data. Auditing medical claims data
requires in-depth expertise in healthcare procedures and billing processes, requiring a staff of
healthcare professionals, including doctors and nurses.
Our business analytics and advisory services target client functional and process areas where
we have established expertise, enabling us to provide services to senior finance executives to
optimize working capital, reduce enterprise costs, transform the finance function and improve
corporate performance. Recovery audit services operate in a mindset of continuous improvement,
i.e., reporting on the over-payment categories and their root causes. Our advisory services teams
are well positioned to help clients resolve many of the root causes of errors identified as part of
our recovery audit services. Our analytics services teams enhance our client value propositions
relating to spend analytics and sourcing/procurement excellence. We use the data from our clients
to create spend reporting at the line item level of detail, a capability that many of our clients
do not possess in-house. This information enables us to assist clients with supplier
rationalization, collaborative purchasing, strategic sourcing and procurement transformation, all
of which can dramatically enhance the clients bottom lines.
We provide certain of our insights through web based technologies using the SAAS (software
as a service) delivery model. Our SAAS model uses a monthly license fee allowing customers to
tailor service levels such as frequency of data refresh and scope of reporting outputs. Our range
of software based solutions extends to fraud and compliance reporting, control monitoring and
contract management. As our clients data volume and complexity continues to grow, we are utilizing
our deep data management experience to incubate new actionable insight solutions in retail and
healthcare, as well as to develop custom analytics services. Taken together, our software
capability and solutions provide multiple routes to helping our clients discover hidden profits.
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The PRGX Strategy and Client Value Propositions
During 2009, our executive management team performed an extensive review of our competitive
advantages and marketplace opportunities and developed a revised business strategy for growth. The
five components of this growth strategy are:
1. | grow the accounts payable recovery audit business; | ||
2. | trail blaze accountability in healthcare; | ||
3. | expand data mining for profitability; | ||
4. | broaden our services footprint; and | ||
5. | build a strong team with a high-performance culture. |
These elements of our growth strategy represent our plans to reinvigorate our core business
while significantly expanding the services portfolio. The go-to-market strategy is built on a
competency foundation that includes data mining, audit/forensics capabilities, finance and
procure-to-pay business process expertise, and a proprietary business intelligence platform. We now
refer to these as our core capabilities of Audit, Analytics and Advice. We believe that we can
combine these core capabilities effectively to discover and deliver hidden profits for our clients,
enabling the creation of a new service category in the professional services marketplace: Profit
Discovery.
We have identified five major routes to discover profits for clients, each of which we refer
to as a Client Value Proposition, or CVP. These CVPs represent our services portfolio, and we
discuss them within the descriptions of the various planks of our growth strategy below.
Grow the Accounts Payable Recovery Audit Business
The Grow the Accounts Payable Recovery Audit Business component of our business strategy is
focused on expanding our traditional stronghold in recovery audit in the retail industry, along
with a renewed focus on profitably delivering recovery audit services to non-retail (or what we
internally refer to as commercial) clients.
In order to facilitate growth in the accounts payable recovery audit market, we have
reintroduced a dedicated sales force. In addition, we have increased our focus on the quality of
our client relationships and management of our existing client accounts. We also have established
alliance agreements with several third party service providers to allow us to offer our clients a
comprehensive suite of recovery audit services beyond accounts payable to include tax, real estate,
and telecommunications audits. The new service offerings made possible by these alliance partners
broaden the scope of audits with existing clients and we expect them to help us establish new
client relationships and business opportunities around the globe. With a keen focus on business
development and audit strategy, we are optimistic about building this core part of our business.
Next Generation Recovery Audit, one of our five Customer Value Propositions, aims to build on
these improvements by delivering a better recovery audit service to our clients. We are completing
the development of our next-generation recovery audit business model and expect to roll it out to
client teams in 2011. Through this model, we are introducing innovation in best practices for
recovery audit, increasing the quality and consistency of service and implementing sophisticated
central data storage, audit technologies and tools. We believe these improvements will also enable
us to lower our cost of delivering these services.
Key to serving clients more efficiently and cost effectively under our next generation
recovery audit model is success in our offshoring initiative. In 2010, we established our
operations in Pune, India and now have approximately 70 employees in India, providing business
analytics, information technology and other support services to our client teams in other parts of
the world. By lowering our cost of delivery, we believe we can significantly expand the
addressable target market for our recovery audit services. Historically, much of our recovery audit
focus has been on clients in the retail / wholesale industry due to the scale offered by these
clients. With the improvements in our service delivery model that we are building into Next
Generation Recovery Audit, we believe we can compete more effectively in our core retail market,
and also can profitably expand our service offerings to industries such as manufacturing, energy,
financial institutions and transportation and logistics. In anticipation of these improvements, we again have created a dedicated sales team for the
commercial recovery audit market, enabling the aggressive pursuit of this client base.
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Trail Blaze Accountability in Healthcare
The primary focus of our Healthcare Claims Recovery Audit services to date has been the
auditing of Medicare spending as part of the legislatively mandated Medicare recovery audit
contractor (RAC) program of the Centers for Medicare and Medicaid Services (CMS), the federal
agency that administers the Medicare program. From March 2005 through March 2008, we were one of
three recovery audit contractors that participated in CMSs demonstration Medicare RAC project.
Under the demonstration project, we were responsible for auditing Medicare spending in the State of
California. Two other contractors were responsible for auditing Medicare spending in Florida and
New York. Under CMSs national Medicare RAC program, the auditing under which is still ramping up,
we are operating as a subcontractor in three of the national Medicare RAC programs four geographic
regions. The principal services we provide as part of the Medicare RAC program involve the
identification of overpayments and underpayments made by Medicare to healthcare providers, such as
hospitals and physicians practices. We identify such improper payments by using various methods,
including proprietary methods that are comparable to the proprietary techniques we developed
through many years of performing other types of recovery audits involving massive volumes of
transaction data.
Our second Customer Value Proposition, Healthcare Claims Recovery Audit, drives our growth
strategy in healthcare to execute with excellence our role in the Medicare RAC program, and
leverage our healthcare services infrastructure to expand recovery audit services to other
healthcare payers. We have invested heavily in the infrastructure and tools required to execute our
Medicare RAC program subcontracts and believe much of this infrastructure can be applied to audit
medical claims paid by other healthcare payers.
As a result of health care reform in the U.S., as reflected in the Patient Protection and
Affordable Care Act which became law in 2010, recovery auditing of medical claims is now mandated
for state Medicaid programs. As the opportunities to serve these state Medicaid programs emerge, we
are focusing our efforts on opportunities where our capabilities are a good match for the way a
states Medicaid program is run and the scope of the program. With these filters in place, we have
already selectively competed in a few state Medicaid procurements and, although the final contract
is not yet in place, we were recently notified that we have been awarded the Medicaid RAC contract
for the state of Mississippi.
In addition to audits of medical claims under the Medicare and Medicaid programs, we believe
that private payers, including health insurance companies, represent a significant opportunity for
our recovery audit services, and that we are well positioned to further grow our healthcare claims
recovery audit business by focusing on the private payer market. We expect our developing sales
capability to help us capitalize on the numerous opportunities for sales of healthcare claims
recovery auditing across the entire spectrum of healthcare claims payers, including government
entities, private payers, and self-insured employers.
Expand Data Mining for Profitability
In 2010, we launched an integrated value proposition across drivers of client profitability
other than the recovery of overpayments. We are enhancing our client value proposition around spend
analytics and sourcing/procurement excellence. Our third CVP, Spend Optimization, expands on the
information we already provide to our clients in this area. We analyze the line item detail we
generate to enable our clients to manage their businesses better by better bundling their spend
dollars, better sourcing their direct and indirect goods globally, better negotiating terms with
their suppliers and vendors, and better organizing their procurement organizations and implementing
better internal processes and controls.
Our fourth CVP, Fraud & Compliance, leverages the unique insights we gain from working closely
with our clients in finance, audit and loss prevention and the sophisticated proprietary audit
tools we use to mine clients data to discover where there is a risk of fraud or abuse. Through
these services, we help clients protect their organizations assets, and our reports document and
record their proactive efforts to develop an effective fraud management program that anticipates,
prevents, detects and remedies fraud and abuse. We have invested in enhancements to our fraud
analytics tool kit and in a client services leader and are now in a position to provide a broad
range of fraud and compliance services.
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Expand Our Services Footprint
Senior executives of complex organizations regularly require external help to identify and
maximize profit improvement opportunities. Our advisory services combine data analytics with deep
functional expertise and a practical hands-on approach to help these client executives improve
their operating margins.
Profit Performance Optimization, our fifth CVP, leverages these capabilities and our
long-standing client relationships by providing services to support senior finance executives,
including working capital optimization, corporate performance management, enterprise cost reduction
and finance transformation. We are designing these new services to improve the profitability of our
clients procure-to-pay cycle and merchandise optimization.
Build a Strong Team with a High-Performance Culture
The final element of our strategy is to become a magnet for global talent and expertise
relevant to our service lines and operations. As part of our overall transformation, we are working
to build a culture of results-oriented performance and collaboration, and an environment that
promotes innovation and knowledge sharing. This transformation is crucial to ensure that we
capture, understand, and deploy the very best practices consistently across every client globally.
In addition, we intend to maintain our increased focus on recruiting. The success of our growth
strategy is predicated on finding and putting in place client-facing personnel who can identify the
levers to add to clients profitability and effectively position all of our service offerings.
Summary
After
our current President and Chief Executive Officer joined the recovery audit firm then known as PRG-Schultz
International, Inc. in the first quarter of 2009 our management team
set out to reinvigorate our core recovery
audit business and offer a broader suite of services to our clients. In the two years since that time, we have
reinvested in our core recovery audit services by adding a shared services center, re-implementing
a sales force, establishing offshore service capabilities, completing strategic acquisitions and
developing our Next Generation Recovery Audit business model. We also envisioned a
broader value proposition and brand promise beyond recovery audit,
and confirmed this vision in the
first quarter of 2010 by changing our name to PRGX Global, Inc., rebranding the Company as PRGX
and adopting the tag line of Discover Your Hidden Profits.
In 2010, PRGX began generating healthcare claims recovery audit revenues under the Medicare
RAC program. We also announced our expansion into data analytics and senior-level advisory services
in response to suggestions by our existing clients, and we completed strategic
acquisitions of companies that provide purchasing and payables technologies, spend analytics and
finance and procurement operations improvement services. With the
innovations in our recovery audit
services and the introduction of these adjacent services, PRGX is
well positioned to expand our recovery audit services beyond our core retail / wholesale clients and to provide our new
adjacent services to even more industry segments.
Collectively,
these changes reflect our
transformation from essentially a one product, one industry provider to an analytics powered information and
professional services firm. We believe that Profit Discovery, our combination of audit, analytics
and advisory capabilities, represents a new category of business services that will enable us to
provide greater value to our existing clients and to expand our reach
into new clients and industries.
The Recovery Audit Industry and PRGX
Businesses and government agencies with substantial volumes of payment transactions involving
multiple vendors, numerous discounts and allowances, fluctuating prices and complex pricing
arrangements or rate structures find it difficult to process every payment correctly. Although
these entities correctly process the vast majority of payment transactions, errors occur in a small
percentage of transactions. These errors include, but are not limited to, missed or inaccurate
discounts, allowances and rebates, vendor pricing errors, erroneous coding and duplicate payments.
In the aggregate, these transaction errors can represent significant amounts of reduced cash flow
and lost profits for these entities. Many factors contribute to the errors, including communication
failures between the purchasing and accounts payable departments, complex pricing arrangements or
rate structures, personnel turnover and changes in information and accounting systems.
Recovery auditing is a business service focused on finding overpayments created by these
errors. We are the leading worldwide provider of recovery audit services, principally to large
businesses and government agencies
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having numerous payment transactions and complex
purchasing/payment environments. These businesses and agencies include:
| retailers such as discount, department, specialty, grocery and drug stores, and wholesalers who sell to these retailers; | ||
| business enterprises other than retailers/wholesalers such as manufacturers, financial services firms, and pharmaceutical companies; | ||
| healthcare payers, both private sector health insurance companies and state and federal government payers such as the CMS; and | ||
| federal and state government agencies other than government healthcare payers. |
Under virtually all of our recovery audit contracts, we receive a contractual percentage of
overpayments and other savings that we identify and that our clients recover or realize. We
generate the substantial majority of our revenues from accounts payable recovery audit services
that we provide to retail/wholesale clients. These audit services typically recur annually and are
the most extensive of our recovery audit services, focusing on numerous recovery categories related
to procurement and payment activities, as well as client/vendor promotions and allowances. These
audits typically entail comprehensive and customized data acquisition from the client, frequently
including purchasing, receiving, point-of-sale, pricing and deal documentation, emails, and payment
data. Recovery audits for larger retail/wholesale clients often require year-round on-site work by
multi-auditor teams.
In addition to these retail/wholesale clients, we also provide recovery audit services to
other organizations that we refer to as our commercial clients. Services to these types of clients
to date have historically tended to be either periodic (typically, every two to three years) or
rotational in nature with different divisions of a given client being audited in pre-arranged
periodic sequences, and are typically relatively short in duration. Accordingly, the revenues we
derive from a given commercial client may change markedly from year to year.
The recovery audit services we provide to our retail/wholesale and commercial clients involve
the identification of overpayments relating to purchases. We also provide recovery audit services
relating to healthcare claims which involve the identification of overpayments and underpayments
made by healthcare payers to healthcare providers, such as hospitals and physicians practices.
Auditing medical claims data requires in-depth expertise in healthcare procedures and billing
processes. Due to the different expertise necessary to provide healthcare claims recovery audit
services, we include the results of our operations in this area in our New Services segment rather
than in one of our two recovery audit services segments.
Some organizations (including some large retailers) maintain internal recovery audit
departments to recover certain types of payment errors and identify opportunities to reduce costs.
Despite having such internal resources, many companies also retain independent recovery audit
firms, such as PRGX, due to their specialized knowledge and focused technologies. In the U.S.,
Canada, the United Kingdom and France, large retailers routinely engage independent recovery audit
firms as a standard business practice. In other countries, large retailers and many other types of
businesses also engage independent recovery audit firms.
As businesses have evolved, PRGX and the recovery audit industry have evolved with them,
innovating processes, error identification tools, and claim types to maximize recoveries. The
following are a number of factors significantly impacting the recovery audit industry:
| Data Capture and Availability. Businesses increasingly are using technology to manage complex procurement and accounts payable systems and realize greater operating efficiencies. Many businesses worldwide communicate with vendors electronically whether by Electronic Data Interchange (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 identified simple, or disbursement, claim types such as the duplicate payment of invoices. Enhancements to |
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accounts payable software, particularly large enterprise software solutions used by many large companies, have reduced the extent to which these companies make simple disbursement errors. However, the introduction of creative vendor discount programs, complex pricing arrangements and activity-based incentives has led to an increase in 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. Recovery audit firms such as PRGX with significant industry-specific expertise and sophisticated technology are best equipped to audit these complicated, or contract compliance, claim categories. | |||
| Globalization. As the operations of major retailers and other business enterprises become increasingly global, they often seek service providers with a global reach. | ||
| Consolidation in the Retail Industry. Retailer consolidation continues in both the U.S. and internationally. As retailers grow larger, vendors become more reliant on a smaller number of retailer customers and, as a result, the balance of power favors retailers rather than their vendors. This dynamic creates an environment that allows retailers to assert overpayment claims more easily. | ||
| Significant Promotional Activity. Trade promotion spending is substantial within the retail trade and significant sums are being spent in categories with numerous transactions and a high potential for errors, such as scan downs, or discounts at the point of sale. Because of the high volume of trade promotion within retail, there are significant opportunities for mistakes and, therefore, auditable claims. | ||
| Move Toward Standard Auditing Practices. Increasingly, vendors to our clients are insisting on the satisfaction of certain conditions, such as clearer post-audit procedures, better documentation and electronic communication of claims, before accepting the validity of a claim. |
We expect the evolution of the recovery audit industry to continue. In particular, we expect
that the industry will continue to move towards the electronic capture and presentation of data,
more automated, centralized processing and faster approvals and deductions of claims.
Clients
PRGX provides its services principally to large and mid-sized businesses and government
agencies having numerous payment transactions and complex procurement environments.
Retailers/wholesalers continue to constitute the largest part of our client and revenue base. Our
five largest clients contributed approximately 31.3% of our revenues in 2010, 29.9% in 2009 and
30.4% in 2008. Wal-Mart Stores Inc. (and its affiliated companies) accounted for approximately
12.1% of our revenues in 2010, 12.3% in 2009 and 11.2% in 2008.
Client Contracts
PRGX typically provides services to its clients under terms of a contract. Our compensation
under recovery audit service contracts generally is stated as a stipulated percentage of improper
payments or other savings recovered for or realized by clients. Recovery audit clients generally
recover claims by either (a) taking credits against outstanding payables or future purchases from
the involved vendors / service providers, or (b) receiving refund checks directly from those
vendors / service providers. Industry practice generally dictates the manner in which a client
receives a recovery audit claim. In many cases, we must satisfy client-specific procedural
guidelines before we can submit recovery audit claims for client approval. For services such as
advisory services, client contracts often provide for compensation to us in the form of a flat fee,
or fee rate per hour, or a fee per other unit of service.
Most of our contracts contain provisions that permit the client to terminate the contract
without cause prior to the completion of the term of the agreement by providing us with relatively
short prior written notice of the termination. In addition to being subject to termination for material default, our Medicare RAC program
subcontracts are subject to termination or partial termination for convenience to the extent all or
any portion of the work covered by the associated Medicare RAC prime contract is eliminated by CMS,
or to the extent our performance of the subcontract results in an organizational conflict of
interest that is not mitigated or able to be mitigated after joint consultation among CMS, the
Medicare RAC prime contractor and PRGX.
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Technology
PRGX uses advanced, proprietary information systems and processes and a large-scale technology
infrastructure to conduct its audits of clients payment transactions. Because of the ever
increasing volume and complexity of the transactions of our clients, we believe that our
proprietary technology and processes serve as important competitive advantages over both our
principal competitors and our clients in-house internal recovery audit functions. To sustain these
competitive advantages, we continually invest in technology initiatives for the purpose of
sustaining and improving our advantages in delivering innovative solutions that improve both the
effectiveness and efficiency of our services.
We aim our data acquisition, data processing and data management methodologies at maximizing
efficiencies and productivity and maintaining the highest standards of transaction auditing
accuracy. At the beginning of a typical recovery audit engagement, we utilize a dedicated staff of
data acquisition specialists and proprietary tools to acquire a wide array of transaction data from
the client for the time period under review. We typically receive this data by secured electronic
transmissions, magnetic media or paper. For paper-based data, we use a custom, proprietary imaging
technology to scan the paper into electronic format. Upon receipt of the data, we secure,
catalogue, back up and convert it into standard, readable formats using third party and proprietary
tools.
Our technology professionals clean and map massive volumes of client data, primarily using
high performance database and storage technologies, into standardized layouts at one of our data
processing facilities. We also generate statistical reports to verify the completeness and accuracy
of the data.
We then process the data using algorithms (business rules) leveraging over thirty years
experience to help uncover patterns or potential problems in clients various transactional
streams. We deliver this data with a high probability of transaction errors to our auditors who,
using our proprietary audit software, sort, filter and search the data to validate and identify
actual transaction errors. We also maintain a secure database of audit information with the ability
to query on multiple variables, including claim categories, industry codes, vendors and audit
years, to facilitate the identification of additional recovery opportunities and provide
recommendations for process improvements to clients.
Once we validate the errors, we present the information to clients for approval and submission
to vendors as claims. We offer a web-based claim presentation and collaboration tool, which
leverages its proprietary imaging technology to help the client view, approve and submit claims to
vendors.
In providing our spend analytics services, we use proprietary algorithms and technologies to
clean and classify a clients vendor spend data down to the line item level. We then are able to
present this information to clients as a multi-dimensional data cube over a web-based interface. We
believe these proprietary algorithms and technologies provide us with a competitive advantage over
many of our competitors.
Auditor Hiring, Training and Compensation
Many of our auditors and specialists formerly held finance-related management positions in the
industries we serve. Training provided in the field by our experienced auditors enables newly hired
auditors to develop and refine their auditing skills and improve productivity. Additionally, we
provide training for auditors utilizing self-paced media such as specialized computer-based
training modules. We periodically upgrade our training programs based on feedback from auditors and
changing industry protocols. Many of our auditors and specialists participate in one of our
incentive compensation plans that link compensation of the auditor or specialist to audit
performance.
Proprietary Rights
From time to time, we develop new software and methodologies that replace or enhance existing
proprietary software and methodologies. We rely primarily on trade secret and copyright protection
for our proprietary software and other proprietary information. We own or have rights to various
copyrights, trademarks and trade names used in our business. Our trademarks and trade names
include, but are not limited to the following: PRGX®, Discover Your Hidden
Profits®, PRG-Schultz®, imDex®, AuditPro, SureF!nd , DirectF!nd, claimDex, PRGX
APTrax, PRGX ClaimTrax, PRGX DealTrax, and PRGX SpendTrax.
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Competition
Accounts Payable Recovery Audit
We believe that the domestic and international recovery audit industry for accounts payable
services in major markets worldwide is comprised of PRGX, one smaller but substantial competitor,
and numerous other smaller competitors. We believe that most of the smaller recovery audit firms do
not possess multi-country service capabilities and do not have the centralized resources or broad
client base required to support the technology investments necessary to provide comprehensive
recovery audit services for large, complex accounts payable systems. These smaller firms generally
are less equipped to audit large, data intensive purchasing and accounts payable systems. In
addition, many of these firms have limited resources, and may lack the experience and the knowledge
of national promotions, seasonal allowances and current recovery audit practices. As a result, we
believe that compared to most other firms providing accounts payable recovery audit services, PRGX
has competitive advantages based on its national and international presence, well-trained and
experienced professionals, and advanced technology.
While we believe that PRGX has the greatest depth and breadth of audit expertise, data and
technology capabilities, scale and global presence in the industry, we face competition from the
following:
Client Internal Recovery Audit Departments. A number of large retailers (particularly those in
the discount, grocery and drug sectors) have developed an internal recovery audit process to
review transactions prior to turning them over to external recovery audit firms. Regardless of
the level of recoveries made by internal recovery audit departments, we have observed that
virtually all large retail clients retain at least one (primary), and sometimes two (primary and
secondary), external recovery audit firms to capture errors not identified by their internal
recovery audit departments.
Other Accounts Payable Recovery Audit Firms. The competitive landscape in the recovery audit
industry is comprised of:
| Full-service accounts payable recovery audit firms. We believe that only one company other than PRGX offers a full suite of U.S. and international recovery audit services; | ||
| A large number of smaller accounts payable recovery firms which have a limited client base and which use less sophisticated tools to mine disbursement claim categories at low contingency rates. These firms are most common in the U.S. market. Competition in most international markets, if any, typically comes from small niche providers; | ||
| Firms that offer a hybrid of audit software tools and training for use by internal audit departments, and/or general accounts payable process improvement enablers; and | ||
| Firms with specialized skills focused on recovery audit services for discrete sectors such as sales and use tax or real estate. |
Other Providers of Recovery Audit Services. The major international accounting firms provide
recovery audit services; however, we believe their practices tend to be primarily focused on
tax-related services.
Healthcare Claims Recovery Audit Services
A number of national and regional private payers have developed their own post payment
recovery audit capabilities. Nevertheless, these private payers typically also retain or engage one
or more third party post payment audit service providers. The competitive landscape in the
healthcare claims recovery audit includes:
| Firms that provide recovery audit services across multiple industries including healthcare; | ||
| Firms that provide healthcare IT solutions and services to both the government and private payers; and | ||
| Firms that contract with federal and state governments integrity programs. |
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Business Analytics Services
Our business analytics services compete with a variety of providers ranging from large, well
known ERP software vendors, procurement specific software providers and smaller, very specialized
analytics providers. In addition, in certain instances we compete against consulting firms that
develop custom analytics tools on behalf of their clients.
Advisory Services
Our advisory services business faces competition from regional and local consulting firms as
well as from privately and publicly held worldwide and national firms, many of whom have
established and well known franchises and brands. These businesses compete generally on the basis
of the range, quality and cost of the services and products provided to clients. We believe that we
differentiate ourselves from our competitors by virtue of synergies with our analytics capabilities
and our direct channel to existing accounts payable recovery audit clients.
Regulation
Various aspects of our business, including, without limitation, our data acquisition,
processing and reporting protocols, are subject to extensive and frequently changing governmental
regulation in both the U.S. and internationally. These regulations include extensive data
protection and privacy requirements. In the U.S., we are subject to the provisions of the Health
Insurance Portability and Accountability Act of 1996 (HIPAA) with respect to our healthcare
claims recovery audit work. Internationally, we must comply with the European Data Protection
Directive that various members of the European Union have implemented. Failure to comply with such
regulations may, depending on the nature of the noncompliance, result in the termination or loss of
contracts, the imposition of contractual damages, civil sanctions, damage to our reputation or in
certain circumstances, criminal penalties.
Employees
As of January 31, 2011, PRGX had approximately 1,500 employees, of whom approximately 700 were
located in the U.S. The majority of our employees are involved in the audit function. None of our
employees are covered by a collective bargaining agreement and we believe our employee relations
are satisfactory.
Website
PRGX 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. PRGX 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 our filings with the Securities and Exchange Commission at www.sec.gov.
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ITEM 1A. Risk Factors
Revenues from our accounts payable recovery audit business have declined over the last several years. We must successfully execute our recovery audit growth strategy in order to increase our
revenues, and must lower our cost of delivery in order to maintain profitability.
Over time, our clients tend to resolve recurring transaction processing deficiencies. In
addition, many of our clients have internal staffs that audit the transactions before we do. As the
skills, experience and resources of our clients internal recovery audit staffs improve, they will
identify many overpayments themselves and reduce some of our audit recovery opportunities. Based on
these and other factors, including competitive rate pressures and loss of clients from time to
time, without improved audit execution and acquisition of new clients, we believe that our accounts
payable recovery audit business will experience revenue declines and may incur losses.
We depend on our largest clients for significant revenues, so losing a major client could adversely affect our revenues and liquidity.
We generate a significant portion of our revenues from our largest clients. Our five largest
clients collectively accounted for approximately 31.3% of our annual revenues in 2010, 29.9% in
2009 and 30.4% in 2008. Wal-Mart Stores Inc. (and its affiliated companies) accounted for
approximately 12.1% of our total revenues in 2010, 12.3% in 2009 and 11.2% in 2008. If we lose any
of our major clients, our results of operations and liquidity could be materially and adversely
affected.
Client and vendor bankruptcies and financial difficulties could reduce our earnings.
Our clients generally operate in intensely competitive environments and, accordingly,
bankruptcy filings by our clients are not uncommon. 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 materially adverse effect on our financial condition
and results of operations. Similarly, our inability to collect our accounts receivable due to other
financial difficulties of one or more of our large clients could adversely affect our financial
condition and results of operations.
Recent economic conditions which have adversely impacted the U.S. retail industry may continue
to have a negative impact on our revenues. Since we audit our clients purchases on an average of
12-18 months in arrears, we cannot yet determine if we have experienced the full impact of the
recent economic downturn on our business and revenues. Although retail industry economic conditions
have improved from recent levels, our revenues may continue to be impacted negatively by the
general retail environment. Specifically, client liquidity and the liquidity of client vendors can
have a significant impact on claim production, the claim approval process, and the ability of
clients to offset or otherwise make recoveries from their vendors.
If a client files for bankruptcy, we could be subject to an action to recover certain payments
received in the 90 days prior to the bankruptcy filing known as preference payments. If we are
unsuccessful in defending against such claims, we would be required to make unbudgeted cash
payments which could strain our financial liquidity and our earnings would be reduced.
Our growth strategy may not be successful.
As discussed in Item 1 The PRGX Strategy, our objectives are to build on our position as the
leading worldwide provider of recovery audit services and to develop and grow our business
analytics and advisory services businesses. Our strategic plan to achieve these objectives focuses
on efforts designed to maintain our dedicated focus on clients and rekindle our growth. These
efforts are ongoing and the results of the strategy and implementation will not be known until
sometime in the future. Successful execution of our strategy requires sustained management focus,
organization and coordination over time, as well as success in building relationships with third
parties. If we are unable to implement our strategy successfully, our results of operations and
cash flows could be adversely affected. In addition, implementation of our strategy will require
material investments and cost increases which may not yield incremental revenues and improved
financial performance as planned.
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The terms of our credit facility place restrictions on us, which create risks of default and reduce our flexibility.
Our current credit facility contains a number of affirmative, negative, and financial
covenants which limit our ability to take certain actions and require us to comply with specified
financial ratios and other performance covenants. No assurance can be provided that we will not
violate the covenants of our secured credit facility in the future. If we are unable to comply with
our financial covenants in the future, our lenders could pursue their 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 lenders demanded immediate
repayment of any amounts outstanding, we would be able to secure adequate or timely replacement
financing on acceptable terms or at all.
Our ability to make payments due on our debt will depend upon our future operating
performance, which is subject to general economic and competitive conditions and to financial,
business and other factors, many of which we cannot control. If the cash flow from our operating
activities is insufficient to make these payments, we may take actions such as delaying or reducing
capital expenditures, attempting to restructure or refinance our debt, selling assets or operations
or seeking additional equity capital. Some or all of these actions may not be sufficient to allow
us to service our debt obligations and we could be required to file for bankruptcy. Further, we may
be unable to take any of these actions on satisfactory terms, in a timely manner or at all. In
addition, our credit agreements may limit our ability to take several of these actions. Our failure
to generate sufficient funds to pay our debts or to undertake any of these actions successfully
could materially adversely affect our business, results of operations and financial condition.
We have incurred and will continue to incur significant costs in establishing the necessary resources to provide services for Medicare, Medicaid and other healthcare claims audit recovery
work. Furthermore, revenues from our Medicare, Medicaid and other healthcare claims audit recovery
work lag significantly behind these costs and may not justify the costs incurred.
We have expended substantial resources in connection with preparing for and providing
healthcare claims recovery audit services, including those under CMSs Medicare RAC program. We
continue to incur significant costs relating to our healthcare claims recovery audit services
business, including our participation as a subcontractor in the national Medicare RAC program. We
incurred an operating loss of approximately $4.8 million, $4.0 million and $5.6 million during the
years ended December 31, 2010, 2009 and 2008, respectively, in connection with our healthcare
claims recovery audit work. In addition, as a result of the complex regulations governing many
healthcare payments and recoupments, including a multi-layered scheme for provider appeals of
overpayment determinations under the Medicare RAC program, the terms of the Companys Medicare RAC
subcontracts and the complexity of Medicare and other healthcare data, systems and processes,
generally, it is more difficult and takes longer to achieve recoveries from healthcare claims
recovery auditing than in other areas of our recovery audit business.
Recovery auditing of Medicare and Medicaid spending is subject to a number of pressures and uncertainties that could impact our future opportunities and revenues from this business.
As contrasted with recovery auditing for our retail/wholesale and commercial clients, recovery
auditing of Medicare and Medicaid spending is legislatively mandated and is subject to, among other
things, the efforts of healthcare providers and provider associations, including political
pressures, to end or severely limit the Medicare and Medicaid recovery audit programs. We expect
these efforts and political pressures to be ongoing throughout the life of these programs. During
2007, for example, a number of significant developments resulted from these efforts. In October
2007, CMS implemented a temporary pause in our review under the Medicare RAC demonstration
program of certain payments made to rehabilitation hospitals. Further, on November 8, 2007,
legislation was introduced in Congress proposing a one year halt to CMSs Medicare RAC
demonstration program and calling for an assessment of the program by the U.S. Government
Accountability Office. Although the referenced legislation was not passed, and the national
Medicare RAC program is in place, similar legislative efforts to delay or eliminate RAC programs
could emerge at any time and management is unable to assess the prospects for the success of any
such efforts. If federally mandated recovery audit programs are significantly limited or delayed,
subjected to burdensome or commercially challenging requirements, terms and/or conditions, or
altogether terminated, our future revenues, operating results and financial condition could be
materially adversely impacted.
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Our participation in the Medicare recovery audit program is as a subcontractor, and consequently, is subject to being reduced or eliminated should the prime contractors with whom we have contracted
have their prime contracts with CMS terminated or should those contracts expire.
Under CMSs Medicare recovery audit contractor program, we are participating as a
subcontractor in three of the programs four geographic regions. Accordingly, we have entered into
three separate contracts with the prime contractors and are not directly contracting with CMS.
Under these circumstances, we generally bear the risk that the prime contractors will not meet
their performance obligations to CMS under the prime contract, that the prime contractors will not
pay us amounts due under the subcontracts and that the prime contractors will seek to minimize our
role in the Medicare RAC program. The failure of a prime contractor to perform its obligations to
CMS could result in the termination of the associated contract with CMS which would, in turn,
result in the termination of our subcontract. Additionally, CMS could choose not to exercise its
option to extend its contract with any of the prime contractors at the end of any one-year term,
which would also, in turn, result in our subcontract with that prime contractor expiring. The
termination or expiration of these subcontracts or the failure of the prime contractors to make
required payments to us could have a material adverse effect on our business, financial condition
and results of operations.
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 protect our
proprietary software, audit techniques and methodologies, and other proprietary intellectual
property rights. We rely on a combination of trade secret and copyright 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.
Additionally, to protect our confidential and trade secret information, we generally enter
into nondisclosure 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 or unauthorized dissemination of our proprietary information,
detect unauthorized use and take appropriate steps to enforce our intellectual property rights. In
spite of the level of care taken to protect our intellectual property, there is no guarantee that
our competitors will not independently develop technologies that are substantially equivalent or
superior to our technology. Moreover, although we are not aware of any infringement of our services
and products on the intellectual property rights of others, we also are subject to the risk that
someone else will assert a claim against us in the future for violating their intellectual property
rights.
Data security breaches or computer viruses could harm our business by disrupting our delivery of services, damaging our reputation or exposing us to liability.
We receive, process, store and transmit, often electronically, the confidential data of our
clients and others. Unauthorized access to our computer systems or stored data could result in the
theft or improper disclosure of confidential information or the deletion or modification of records
or could cause interruptions in our operations. These security risks increase when we transmit
information from one location to another, including transmissions over the Internet or other
electronic networks. Despite implemented security measures, our facilities, systems and procedures,
and those of our third-party service providers, may be vulnerable to security breaches, acts of
vandalism, computer viruses, misplaced or lost data, programming and/or human errors or other
similar events which may disrupt our delivery of services or expose the confidential information of
our clients and others. Any security breach involving the misappropriation, loss or other
unauthorized disclosure or use of confidential information of our clients or others, whether by us
or a third party, could (i) subject us to civil and criminal penalties, (ii) have a negative impact
on our reputation, (iii) expose us to liability to our clients, third parties or government
authorities, and (iv) cause our present and potential clients to choose another service provider.
Any of these developments could have a material adverse effect on our business, results of
operations and financial condition.
Operational failures in our data processing facilities could harm our business and reputation.
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An interruption of data processing services caused by damage or destruction of our facilities
or a failure of our data processing equipment could result in a loss of clients, difficulties in
obtaining new clients and a reduction in revenue. In addition, we also may be liable to third
parties or our clients because of such interruption. These risks increase with longer service
interruptions. Despite any disaster recovery and business continuity plans and precautions we have
implemented (including insurance) to protect against the effects of service delivery interruptions,
such interruptions could result in a material adverse effect on our business, results of operations
and financial condition.
Our failure to retain the services of key members of management and highly skilled personnel could adversely impact our operations and financial performance.
Our future success depends largely on the efforts and skills of our executive officers and key
employees. As such, we have entered into employment agreements with key members of management.
While these employment agreements include limits on the ability of key employees to directly
compete with us in the future, nothing prevents them from leaving our company.
In addition, it is especially challenging to attract and retain highly qualified skilled
auditors and other professionals in an industry where competition for skilled personnel is intense.
Accordingly, our future performance also depends, in part, on the ability of our management team to
work together effectively, manage our workforce, and retain highly qualified personnel.
We rely on operations outside the U.S. for a significant portion of our revenues and are increasingly dependent on operations outside the U.S. for supporting our operations globally.
Operations
outside the U.S. generated approximately 49.7% of our annual revenues
in 2010, 45.9% in 2009 and 42.8% in 2008. These international operations are subject to
numerous risks, including:
| greater exposure to the possibility of economic instability, the disruption of operations from labor and political disturbances, expropriation or war 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 British pound, the euro, the Canadian dollar, the Mexican peso, and 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; | ||
| expenses and legal restrictions associated with transferring earnings from our foreign subsidiaries to us; | ||
| difficulties complying with a variety of foreign laws and regulations, such as those relating to data content retention, privacy and employee welfare; | ||
| business interruptions due to widespread disease, potential terrorist activities, or other catastrophes; | ||
| reduced or limited protection of our intellectual property rights; | ||
| longer accounts receivable cycles; and | ||
| competition with large or state-owned enterprises and/or regulations that effectively limit our operations and favor local competitors. |
Because we expect a significant portion of our revenues to continue to come from operations
outside the U.S., and expect to continue transitioning certain of our operations to locations
outside the U.S., the occurrence of any of these events could materially and adversely affect our
business, financial condition and results of operations.
Furthermore, in 2010 we began transitioning certain of our core data processing and other
functions to locations outside the U.S, including India, where 5% of our employees were located at December 31, 2010.
India has from time to time experienced instances of civil unrest and hostilities with Pakistan. In
recent years, there have been military confrontations between India and Pakistan in the region of
Kashmir and along the India-Pakistan border as well as terrorist activity in several major Indian
cities. Although the relations between the two countries generally have been improving, military
activity or terrorist attacks in the future could adversely affect the Indian economy by
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disrupting
communications and making travel more difficult, which may have a material adverse effect on our
ability to deliver services from India. Disruption in our Indian operations could adversely affect
our profitability and our ability to execute our growth strategy.
Our recovery audit services, business analytics and advisory services businesses operate in highly competitive environments and are subject to pricing pressure.
The recovery audit business is highly competitive, with numerous other recovery audit firms
and other providers of recovery audit services. In addition, many of our clients have developed
their own internal recovery audit capabilities. As a result of competition among the providers of
recovery audit services and the availability of certain recovery audit services from clients
internal audit departments, our recovery audit services business is subject to intense price
pressure. Such price pressure could cause our profit margins to decline and have a material adverse
effect on our business, financial condition, and results of operations.
Our business analytics and advisory services businesses also have numerous competitors varying
in size, market strength and specialization. These businesses face fierce competition, in some
cases, from firms who have established and well known franchises and brands. Frequently, these
businesses must compete not only on service quality and expertise, but also on price. Intense price
competition faced by these service lines could negatively impact our profit margins and have a
potential adverse effect on our business, financial condition and results of operations.
Our client contracts generally contain provisions under which the client may terminate our services prior to the completion of the agreement.
Many of our client contracts contain provisions that would permit the client to terminate the
contract without cause prior to the completion of the term of the agreement by providing us with
relatively short prior written notice of the termination. As a result, the existence of
contractual relationships with our clients is not an assurance that we will continue to provide
services for our clients through the entire terms of their respective agreements. If clients
representing a significant portion of our revenues terminated their agreements unexpectedly, we may
not, in the short-term, be able to replace the revenues and earnings from such contracts and this
would have a material adverse effect on our operations and financial results. In addition, client
contract terminations also could harm our reputation within the industry which could negatively
impact our ability to obtain new clients.
Our failure to comply with applicable governmental privacy laws and regulations could substantially impact our business, operations and financial condition.
We are subject to extensive and evolving federal, state and foreign privacy laws and
regulations. Changes in privacy laws or regulations or new interpretations of existing laws or
regulations could have a substantial effect on our operating methods and costs. Failure to comply
with such regulations could result in the termination or loss of contracts, the imposition of
contractual damages, civil sanctions, damage to the Companys reputation, or in certain
circumstances, criminal penalties, any of which could have a material adverse effect on our results
of operations, financial condition, business and prospects. Determining compliance with such
regulations is complicated by the fact that many of these laws and regulations have not been fully
interpreted by governing regulatory authorities or the courts and many of the provisions of such
laws and regulations are open to a wide range of interpretations. There can be no assurance that
we are or have been in compliance with all applicable existing laws and regulations or that we will
be able to comply with new laws or regulations.
The ownership change that occurred as a result of our 2006 exchange offer limits our ability to use our net operating losses.
We have substantial tax loss and credit carry-forwards for U.S. federal income tax purposes.
On March 17, 2006, as a result of the closing of its exchange offer, the Company experienced an ownership change
as defined under Section 382 of the Internal Revenue Code (IRC). This ownership change resulted
in an annual IRC Section 382 limitation that limits the use of certain tax attribute
carry-forwards. Of the $59.6 million of U.S. federal net loss carry-forwards available to the
Company, $20.6 million of the loss carry-forwards are subject to an annual usage limitation of $1.4
million. We believe that such limitations and the loss of these carry-forwards may significantly
increase our projected future tax liability.
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Certain of our tax positions may be subject to challenge by the Internal Revenue Service and other tax authorities, and if successful, these challenges could increase our future tax liabilities and
expense.
For U.S. federal income tax purposes, as well as local country tax purposes in the
jurisdictions where we operate, from time to time we take positions under provisions of applicable
tax law that are subject to varying interpretations. Certain of our tax positions may be subject
to challenge by the applicable taxing authorities, including, in the U.S., the Internal Revenue
Service. If our tax positions are successfully challenged, our future tax liabilities and expense
could significantly increase.
For example, during 2008, the Company acceded to a position taken by the taxing authorities in
the United Kingdom (UK) regarding the denial of certain goodwill deductions taken on UK tax
returns for 2003 through 2005. As a result, we reduced our foreign net operating loss
carry-forwards by approximately $17.0 million based on December 31, 2008 foreign exchange rates.
Accordingly, we wrote off deferred tax assets of $5.1 million.
While we believe that our tax positions are proper based on applicable law and we believe that
it is more likely than not that we would prevail with respect to challenges to these positions, we
can make no assurances that we would prevail if our positions are challenged or that business
economics would justify the mounting of a legal defense against such challenges. If our tax
positions are successfully challenged by the U.S. or non-U.S. taxing authorities, it could increase
our future tax liabilities and expense and have a material adverse impact on our financial
position, results of operations and cash flows.
Future impairment of goodwill, other intangible assets and long-lived assets would reduce our future earnings.
As of December 31, 2010, the Companys goodwill and other intangible assets totaled $29.1
million. We must perform annual assessments to determine whether some portion, or all, of our
goodwill, intangible assets and other long-term assets are impaired. Future annual impairment
testing could result in a determination that our goodwill, other intangible assets or our
long-lived assets have been impaired. Future adverse changes in the business environment or in our
ability to perform audits successfully and compete effectively in our markets or the
discontinuation of our use of certain of our intangible or other long-lived assets could result in
impairment which could materially adversely impact future earnings.
Our articles of incorporation, bylaws, shareholder rights plan and Georgia law may inhibit a change of control that shareholders may favor.
Our articles of incorporation, bylaws and Georgia law contain provisions that may delay, deter
or inhibit a future acquisition of PRGX that is not approved by our Board of Directors. This could
occur even if our shareholders receive attractive offers 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 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 classified Board of Directors; | ||
| the requirement that our shareholders may only remove directors for cause; | ||
| specified requirements for calling special meetings of shareholders; | ||
| the ability of the Board of Directors to consider the interests of various constituencies, including our employees, clients and creditors and the local community, in making decisions; and | ||
| the ability of 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 could trigger a
dilutive issuance of common stock upon substantial purchases of our common stock by a third party
that are not approved by the Board of Directors. These provisions also could discourage bids for
our shares of common stock at a premium and could have a material adverse effect on the market
price of our common stock.
Our stock price has been and may continue to be volatile.
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Our common stock is currently traded on The Nasdaq Global Market. The trading price of our
common stock has been and may continue to be subject to large fluctuations. For example, for the
year ended December 31, 2010, our stock traded as high as $6.93 per share and as low as $3.60 per
share. 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 and liquidity; | ||
| changes in financial estimates and recommendations by securities analysts; | ||
| developments with respect to technology or litigation; | ||
| changes in applicable laws and regulations; | ||
| the operating and stock price performance of other companies that investors may deem comparable to our company; | ||
| acquisitions and financings; and | ||
| sales and purchases of our stock by insiders. |
Fluctuations in the stock market, generally, also impact the volatility of our stock price.
Finally, general economic conditions and stock market movements may adversely affect the price of
our common stock, regardless of our operating performance.
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ITEM 1B. Unresolved Staff Comments
None.
ITEM 2. Properties
Our principal executive offices are located in approximately 132,000 square feet of office
space in Atlanta, Georgia. We lease this space under an agreement expiring on December 31, 2014. We
have subleased approximately 58,000 square feet of our principal executive office space to
independent third parties. Our various operating units lease numerous other parcels of operating
space in the various countries in which we currently conduct our business.
Excluding the lease for our principal executive offices, the majority of our real property
leases are individually less than five years in duration. See Note 8 of Notes to Consolidated
Financial Statements included in Item 8 of this Form 10-K.
ITEM 3. Legal Proceedings
In the normal course of business, we are involved in and subject to claims, contractual
disputes and other uncertainties. Management, after reviewing with legal counsel all of these
actions and proceedings, believes that the aggregate losses, if any, will not have a material
adverse effect on the Companys financial position or results of operations.
ITEM 4. [Reserved]
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PART II
ITEM 5. Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Our common stock is traded under the symbol PRGX on The Nasdaq Global Market (Nasdaq). The
Company has not paid cash dividends on its common stock since it became a public company in 1996
and does not intend to pay cash dividends in the foreseeable future. Moreover, restrictive
covenants included in our secured credit facility specifically prohibit payment of cash dividends
and limits the amount of our common stock that we may repurchase to $1.0 million on an annual
basis. As of March 1, 2011, there were 201 holders of record of our common stock and management
believes there were in excess of 2,500 beneficial holders. The following table sets forth, for the
quarters indicated, the range of high and low sales prices for the Companys common stock as
reported by Nasdaq during 2010 and 2009.
2010 Calendar Quarter | High | Low | ||||||
1st Quarter |
$ | 6.27 | $ | 5.01 | ||||
2nd Quarter |
6.93 | 3.60 | ||||||
3rd Quarter |
5.75 | 4.00 | ||||||
4th Quarter |
6.53 | 5.65 |
2009 Calendar Quarter | High | Low | ||||||
1st Quarter |
$ | 4.91 | $ | 2.74 | ||||
2nd Quarter |
4.04 | 2.48 | ||||||
3rd Quarter |
6.01 | 2.60 | ||||||
4th Quarter |
6.98 | 4.50 |
Issuer Purchases of Equity Securities
A summary of our repurchases of our common stock during the fourth quarter ended December 31,
2010 is set forth below.
Total Number of | Maximum | |||||||||||||||
Total | Shares Purchased | Approximate Dollar | ||||||||||||||
Number of | Average | as Part of | Value of Shares that | |||||||||||||
Shares | Price | Publicly | May Yet Be | |||||||||||||
Purchased | Paid per | Announced Plans | Purchased Under the | |||||||||||||
2010 | (a) | Share | or Programs | Plans or Programs | ||||||||||||
(millions of dollars) | ||||||||||||||||
October 1
October 31 |
1,081 | $ | 5.92 | | $ | | ||||||||||
November 1
November 30 |
| $ | | | $ | | ||||||||||
December 1
December 31 |
| $ | | | $ | | ||||||||||
1,081 | $ | 5.92 | | |||||||||||||
(a) | All shares reported during the quarter were surrendered by employees to satisfy tax withholding obligations upon vesting of restricted stock. |
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Performance Graph
Set forth below is a line graph presentation comparing the cumulative shareholder return on
our common stock, on an indexed basis, against cumulative total returns of The Nasdaq Composite
Index and the RDG Technology Composite Index. The graph assumes that the value of the investment in
the common stock in each index was $100 on December 31, 2005 and shows total return on investment
for the period beginning December 31, 2005 through December 31, 2010, assuming reinvestment of any
dividends. Notwithstanding anything to the contrary set forth in any of the Companys filings under
the Securities Act of 1933 or the Securities Exchange Act of 1934 that might incorporate future
filings, including this Annual Report on Form 10-K, in whole or in part, the Performance Graph
presented below shall not be incorporated by reference into any such filings.
Cumulative Total Return
12/05 | 12/06 | 12/07 | 12/08 | 12/09 | 12/10 | |||||||||||||||||||
PRGX Global, Inc. |
100.00 | 131.15 | 140.49 | 66.89 | 96.89 | 103.77 | ||||||||||||||||||
NASDAQ Composite |
100.00 | 111.23 | 124.24 | 73.47 | 106.76 | 125.43 | ||||||||||||||||||
RDG Technology
Composite |
100.00 | 109.07 | 125.31 | 71.12 | 114.36 | 129.26 |
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ITEM 6. Selected Financial Data
The following table sets forth selected consolidated financial data for the Company as of and
for the five years ended December 31, 2010. We have derived this historical consolidated financial
data from our Consolidated Financial Statements and Notes thereto, which have been audited by our
Independent Registered Public Accounting Firm. The Consolidated Balance Sheets as of December 31,
2010 and 2009, 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, 2010 and the report of the
Independent Registered Public Accounting Firm thereon are included in Item 8 of this Form 10-K.
We have reclassified the Consolidated Financial Statements to reflect Meridian, Communications
Services, Channel Revenue, Airline, and the recovery audit services business units in Japan and
South Africa as discontinued operations for all periods presented. We have restated all per share
data to give effect to the one-for-ten reverse stock split which became effective August 14, 2006.
The data presented below should be read in conjunction with the Consolidated Financial
Statements and Notes thereto included elsewhere in this Form 10-K and other financial information
appearing elsewhere in this Form 10-K, including Managements Discussion and Analysis of Financial
Condition and Results of Operations.
Years Ended December 31, | ||||||||||||||||||||
2010 | 2009 | 2008 | 2007 | 2006 | ||||||||||||||||
(In thousands, except per share data) | ||||||||||||||||||||
Statements of Operations Data: |
||||||||||||||||||||
Revenues |
$ | 184,081 | $ | 179,583 | $ | 195,706 | $ | 227,369 | $ | 225,898 | ||||||||||
Cost of revenues |
127,179 | 116,718 | 125,901 | 140,877 | 161,827 | |||||||||||||||
Gross margin |
56,902 | 62,865 | 69,805 | 86,492 | 64,071 | |||||||||||||||
Selling, general and
administrative expenses |
49,081 | 43,873 | 44,028 | 67,063 | 56,500 | |||||||||||||||
Operational restructuring expense |
| | | 1,644 | 4,130 | |||||||||||||||
Operating income |
7,821 | 18,992 | 25,777 | 17,785 | 3,441 | |||||||||||||||
Gain on bargain purchase, net (1) |
| 2,388 | | | | |||||||||||||||
Interest expense, net |
1,305 | 3,025 | 3,245 | 13,815 | 16,311 | |||||||||||||||
Loss on debt extinguishment and
financial restructuring |
1,381 | | | 9,397 | 10,047 | |||||||||||||||
Income (loss) from
continuing operations before
income taxes |
5,135 | 18,355 | 22,532 | (5,427 | ) | (22,917 | ) | |||||||||||||
Income tax expense (2) |
1,882 | 3,028 | 3,502 | 1,658 | 1,165 | |||||||||||||||
Income (loss) from
continuing operations |
3,253 | 15,327 | 19,030 | (7,085 | ) | (24,082 | ) | |||||||||||||
Discontinued operations: |
||||||||||||||||||||
Earnings from discontinued
operations, net of income
taxes |
| | | 20,215 | 2,983 | |||||||||||||||
Net earnings (loss) |
$ | 3,253 | $ | 15,327 | $ | 19,030 | $ | 13,130 | $ | (21,099 | ) | |||||||||
Basic earnings (loss) per
common share: |
||||||||||||||||||||
Earnings (loss) from continuing
operations |
$ | 0.14 | $ | 0.67 | $ | 0.87 | $ | (0.62 | ) | $ | (3.77 | ) | ||||||||
Earnings from discontinued
operations |
| | | 1.66 | 0.45 | |||||||||||||||
Net earnings
(loss) |
$ | 0.14 | $ | 0.67 | $ | 0.87 | $ | 1.04 | $ | (3.32 | ) | |||||||||
Diluted earnings (loss) per
common share: |
||||||||||||||||||||
Earnings (loss) from continuing
operations |
$ | 0.13 | $ | 0.65 | $ | 0.83 | $ | (0.62 | ) | $ | (3.77 | ) | ||||||||
Earnings from discontinued
operations |
| | | 1.66 | 0.45 | |||||||||||||||
Net earnings
(loss) |
$ | 0.13 | $ | 0.65 | $ | 0.83 | $ | 1.04 | $ | (3.32 | ) | |||||||||
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December 31, | ||||||||||||||||||||
2010 | 2009 | 2008 | 2007 | 2006 | ||||||||||||||||
(In thousands) | ||||||||||||||||||||
Balance Sheet Data: |
||||||||||||||||||||
Cash and cash equivalents |
$ | 18,448 | $ | 33,026 | $ | 26,688 | $ | 42,364 | $ | 30,228 | ||||||||||
Working capital |
17,678 | 18,479 | 10,512 | 16,998 | 5,218 | |||||||||||||||
Total assets |
106,321 | 110,513 | 98,783 | 122,438 | 178,667 | |||||||||||||||
Long-term debt, excluding
current installments |
9,000 | 11,070 | 14,331 | 38,078 | 136,922 | |||||||||||||||
Redeemable preferred stock |
| | | | 11,199 | |||||||||||||||
Total shareholders equity (deficit) |
$ | 48,843 | $ | 41,439 | $ | 22,710 | $ | 2,349 | $ | (104,483 | ) |
(1) | In July 2009, we acquired the business and certain assets of First Audit Partners LLP. The excess of the fair value of assets acquired over the purchase price resulted in a gain on bargain purchase. See Note 14 of Notes to Consolidated Financial Statements included in Item 8 of this Form 10-K. | |
(2) | Low effective tax rates in 2009 and 2008 are primarily attributable to reductions in the deferred tax asset valuation allowance. Low effective tax rates in 2007 and 2006 are primarily attributable to the non-recognition of loss carry-forward benefits. See Note 1 (i) and Note 9 of Notes to Consolidated Financial Statements included in Item 8 of this Form 10-K. |
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ITEM 7. Managements Discussion and Analysis of Financial Condition and Results of Operations
Introduction
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.
Our revenues are based on specific contracts with our clients. Such contracts for recovery
audit services, the services from which most of our revenues are currently derived, generally
specify: (a) time periods covered by the audit; (b) the nature and extent of services to be
provided by PRGX; (c) the clients duties in assisting and cooperating with PRGX; and (d) fees
payable to us, generally expressed as a specified percentage of the amounts recovered by the client
resulting from overpayment claims identified. Clients generally recover claims by either taking
credits against outstanding payables or future purchases from the involved vendors, or receiving
refund checks directly from those vendors. The manner in which a claim is recovered by a client is
often dictated by industry practice. In addition, many clients establish client-specific procedural
guidelines that 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.
The vast majority of our recovery audit revenues are from clients in the retail industry,
which we believe has been impacted significantly by the recent global economic downturn. The
decrease in consumer spending associated with the economic downturn has resulted in many of our
clients reducing their purchases from vendors, which makes it more difficult for those clients to
offset recovery claims that we discover against current vendor invoices. In addition, many client
vendors are experiencing their own financial issues, and the liquidity of these vendors also can
negatively impact the claims recovery process. Because the vast majority of our current business is
based on such recoveries, these factors may negatively impact our revenues in future periods.
Client bankruptcy or insolvency proceedings also could adversely impact our future revenues.
Despite the impact of the recent economic downturn on consumer spending and retailers
purchases from their vendors, the effect on our financial results generally has been delayed, as we
did not begin to experience any material negative effects from the downturn until the first half of
2009. One factor insulating us somewhat from an economic downturn is that our clients 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. Also, the client purchase data on
which we perform our recovery audit services is historical data, the age of which varies from
client to client. Such data 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. The fact that our
audits typically lag current client spending by up to 15 months also delayed somewhat the
corresponding adverse impact of the recent economic downturn on our revenues.
Given this time lag, we expect that PRGX will not begin to recognize increased revenues from
recovery auditing in the retail industry as a result of improving economic conditions until well
after the positive effects of such improved conditions have been realized by our clients. While the
net impact of the recent economic downturn 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 the economic downturn on our revenues and overall financial health. These
steps include limiting salary increases for our employees and devoting substantial efforts in the
development of a lower cost of delivery service 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, such as our efforts to expand our business analytics and advisory
services businesses. The investments we are making in connection with these initiatives have had a
significant negative impact on our recent reported financial results, particularly our results for
the year ended December 31, 2010.
Another example of an area in which we continue to devote considerable effort to expand our
business beyond our core accounts payable retail recovery auditing is our work in the healthcare
industry. Our results in 2006 and
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2007, and to a significantly lesser extent in 2008, were affected by our involvement in the
Medicare recovery audit contractor (RAC) demonstration program of the Centers for Medicare and
Medicaid Services (CMS), the federal agency that administers the Medicare program. The Medicare
RAC demonstration program was designed by CMS to recover Medicare overpayments and identify
Medicare underpayments through the use of recovery auditing. CMS awarded the Company a contract to
audit Medicare spending in the State of California in 2005 as part of the Medicare RAC
demonstration program. Our Medicare RAC demonstration program contract expired in March 2008.
In late 2006, legislation was enacted that mandated that recovery auditing of Medicare
spending be extended beyond the March 2008 end of the Medicare RAC demonstration program and that
CMS enter into additional contracts with recovery audit contractors to expand recovery auditing of
Medicare spending to all 50 states by January 1, 2010. In February 2009, we announced that we had
entered into subcontracts with three of the four national Medicare RAC program contract awardees.
CMS is responsible for implementation and administration of the overall national Medicare RAC
program, and our future revenues from our Medicare RAC program subcontracts are heavily dependent
on CMSs implementation schedule and priorities, both of which are beyond our control. Revenues
from the Medicare RAC program subcontracts showed significant signs of improvement in the third
quarter of 2010 and while the magnitude and timing of additional Medicare RAC program revenues are
difficult to predict, we expect revenues from Medicare auditing to increase steadily through the
first half of 2011. In preparation for our work as a Medicare RAC subcontractor, we have incurred
costs primarily relating to staffing and upgrading our technology systems. We incurred operating
losses of approximately $4.8 million in 2010 and $4.0 million in 2009 related to this effort. We
also are pursuing potential opportunities resulting from more recent federal legislation that
requires Medicaid RAC programs to be implemented in all 50 states. We expect that most states will
undertake a competitive bidding process for their Medicaid RAC programs. We recently were awarded
our first state Medicaid RAC contract by the state of Mississippi, but the amount and timing of
future revenues from our auditing of Medicaid claims, including those from the Mississippi award,
cannot be determined.
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Results of Operations
The following table sets forth the percentage of revenues represented by certain items in our
Consolidated Statements of Operations for the periods indicated:
Years Ended December 31, | ||||||||||||
2010 | 2009 | 2008 | ||||||||||
Statements of Operations Data: |
||||||||||||
Revenues |
100.0 | % | 100.0 | % | 100.0 | % | ||||||
Cost of revenues |
69.1 | 65.0 | 64.3 | |||||||||
Gross margin |
30.9 | 35.0 | 35.7 | |||||||||
Selling, general and administrative expenses |
26.7 | 24.4 | 22.5 | |||||||||
Operating income |
4.2 | 10.6 | 13.2 | |||||||||
Gain on bargain purchase, net |
| 1.3 | | |||||||||
Interest expense, net |
0.7 | 1.7 | 1.7 | |||||||||
Loss on debt extinguishment |
0.7 | | | |||||||||
Earnings before income taxes |
2.8 | 10.2 | 11.5 | |||||||||
Income tax expense |
1.0 | 1.7 | 1.8 | |||||||||
Net earnings |
1.8 | % | 8.5 | % | 9.7 | % | ||||||
Revenues. Revenues were as follows (in thousands):
Years Ended December 31, | ||||||||||||
2010 | 2009 | 2008 | ||||||||||
Recovery Audit Services Americas |
$ | 115,156 | $ | 121,561 | $ | 138,168 | ||||||
Recovery Audit Services Europe/Asia-Pacific |
57,590 | 52,489 | 53,600 | |||||||||
New Services |
11,335 | 5,533 | 3,938 | |||||||||
Total |
$ | 184,081 | $ | 179,583 | $ | 195,706 | ||||||
Total revenues increased in 2010 by $4.5 million, or 2.5%, after decreasing by $16.1 million,
or 8.2%, in 2009.
Recovery Audit Services Americas revenues decreased by 5.3% in 2010 and by 12.0% in 2009.
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 2010 and negatively impacted reported
revenues in 2009. On a constant dollar basis, adjusted for changes in foreign exchange (FX)
rates, 2010 revenues decreased by 7.5% compared to a decrease of 5.3% as reported, and 2009
revenues decreased by 10.4% compared to a decrease of 12.0% as reported.
The decreases in our Recovery Audit Services Americas revenues are due to a number of
factors. The vast majority of our Recovery Audit Services Americas revenues are from the retail
industry, and our operations are subject to the economic pressures the retail industry has faced
over the past few years. The recent unfavorable economic conditions that adversely impacted the
U.S. retail industry also negatively impacted our revenues. The liquidity of our clients vendors
can negatively impact claim production, the claim approval process and the ability of our clients
to offset or otherwise obtain recoveries from their vendors. We also experienced competitive rate
pressures, served fewer clients, and were impacted by our clients developing and strengthening
their own internal audit capabilities as a substitute for our services. Many clients have improved
their procurement processes and are generating fewer recurring transaction errors, although we
somewhat offset these changes with our use of best practices and innovation to identify additional
audit claim categories and recovery opportunities.
We expect that competitive pressures and other factors described above will continue to have a
negative impact on our revenues in this segment in 2011 and beyond. To address these issues, offset
their impact and generate growth in this segment, we adopted several strategies as discussed
previously (see The PRGX Strategy in Item 1. Business above). We reinstituted a sales function
in 2010, resulting in an increase in our client count during the
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year. 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 early in 2011, and expect to expand its use throughout the coming 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 generate
sufficient incremental revenues to offset the declining revenue trend that we have experienced in
this segment for several years. 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, a
reversal of the declining revenue trend for Recovery Audit Services Americas is not likely. We
intend to execute our strategic initiatives to pursue these opportunities.
Recovery Audit Services Europe/Asia-Pacific revenues increased by 9.7% in 2010 and
decreased by 2.1% in 2009. The strengthening of the U.S. dollar relative to foreign currencies in
Europe, Asia and Australia adversely impacted reported revenues in both periods. On a constant
dollar basis, adjusted for changes in foreign exchange (FX) rates, 2010 revenues increased by
12.8% compared to an increase of 9.7% as reported, and 2009 revenues increased by 8.5% compared to
a decrease of 2.1% as reported. These increases on a constant dollar basis are attributable to
revenues from the July 2009 acquisition of First Audit Partners LLP (FAP), and to incremental
revenues from existing and new clients. 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 104.9% in 2010 and increased by 40.5% in 2009. During 2010
and 2009, New Services revenues were primarily from our advisory services. In 2010, we also
generated revenues from business analytics services and during the second half of 2010 from our
participation as a subcontractor in three of the Medicare RAC programs four geographic regions. We
expect New Services revenues to continue to increase in 2011 due to increases in revenues from
advisory services and business analytics. We also expect future revenue growth from our
participation as a subcontractor in three of the Medicare RAC programs four geographic regions and
from state Medicaid RAC audits. We were awarded our first state Medicaid RAC contract early in 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 first half 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, clerical assistance, and depreciation. A significant portion
of the components comprising COR is variable and will increase or decrease with increases or
decreases in revenues.
COR expenses were as follows (in thousands):
Years Ended December 31, | ||||||||||||
2010 | 2009 | 2008 | ||||||||||
Recovery Audit Services Americas |
$ | 68,570 | $ | 68,002 | $ | 76,272 | ||||||
Recovery Audit Services Europe/Asia-Pacific |
44,420 | 40,317 | 41,362 | |||||||||
New Services |
14,189 | 8,399 | 8,267 | |||||||||
Total |
$ | 127,179 | $ | 116,718 | $ | 125,901 | ||||||
COR as a percentage of revenues for Recovery Audit Services Americas was 59.5% in 2010,
55.9% in 2009 and 55.2% in 2008. This equates to gross margin percentages of 40.5% in 2010, 44.1%
in 2009 and 44.8% in 2008. The declines in gross margins in both 2010 and 2009 are partially
attributable to the revenue declines without corresponding reductions in COR. Additionally, we are
making investments in our various growth and other strategic initiatives, and have included
significant portions of these costs in Recovery Audit Services Americas COR.
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COR as a percentage of revenues for Recovery Audit Services Europe/Asia-Pacific was 77.1%
in 2010, 76.8% in 2009 and 77.2% in 2008. This equates to gross margin percentages of 22.9% in
2010, 23.2% in 2009 and 22.8% in 2008. The slight decline in gross margin in 2010 primarily
resulted from deferred consideration attributable to the February 2010 acquisition of Etesius
Limited (Etesius). The slight improvement in gross margin in 2009 primarily resulted from
decreased commissions paid to third parties in Europe.
The higher COR as a percentage of revenues for Recovery Audit Services Europe/Asia-Pacific
(77.1% for 2010) compared to Recovery Audit Services Americas (59.5% for 2010) 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 subcontracts. New Services COR exceeded New Services revenues by $2.9 million
in 2010, $2.9 million in 2009 and $4.3 million in 2008 due primarily to our investments in the
Medicare RAC program as well as our investments in our advisory services and business analytics
capabilities. We expect to continue to experience COR in excess of revenues in the New Services
segment for at least the first half of 2011.
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, gains and losses on asset disposals,
depreciation of property and equipment and amortization of intangibles 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):
Years Ended December 31, | ||||||||||||
2010 | 2009 | 2008 | ||||||||||
Recovery Audit Services Americas |
$ | 21,524 | $ | 17,647 | $ | 16,771 | ||||||
Recovery Audit Services Europe/Asia-Pacific |
6,693 | 5,319 | 8,383 | |||||||||
New Services |
3,950 | 1,151 | 1,893 | |||||||||
Subtotal for segments |
32,167 | 24,117 | 27,047 | |||||||||
Corporate support |
16,914 | 19,756 | 16,981 | |||||||||
Total |
$ | 49,081 | $ | 43,873 | $ | 44,028 | ||||||
SG&A in each of our segments and in corporate support includes foreign currency transaction
gains and losses, including the gains and losses related to intercompany balances. Gains and losses
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 FX rates may significantly impact the amount of such gains and losses.
Recovery Audit Services Americas SG&A increased 22.0% in 2010 and 5.2% in 2009. These
increases resulted primarily from costs incurred in connection with our execution of our growth
strategies. The greater increase in 2010 was primarily a result of costs we incurred to build our
sales and business development capabilities, combined with higher depreciation expense resulting
from investments we made to upgrade our information technology infrastructure.
Recovery Audit Services Europe/Asia-Pacific SG&A included an FX loss of $0.4 million in
2010, an FX gain of $1.2 million in 2009 and an FX loss of $3.5 million in 2008, all related to
intercompany balances. Recovery Audit Services Europe/Asia-Pacific SG&A excluding the FX gains
and losses related to intercompany balances decreased 3.8% in 2010 and increased 33.2% in 2009. The
2010 decrease was attributable to relatively lower severance costs and incentive compensation
accruals, partially offset by the inclusion of a full year of amortization and depreciation costs
resulting from our July 2009 acquisition of FAP (see Note 14 Business Acquisition in Notes to
Consolidated Financial Statements in Part II, Item 8 of this Form 10-K). The 2009 increase was
attributable to non-intercompany FX losses, severance costs and amortization expense associated
with the acquisition of FAP.
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New
Services SG&A increased 243.2% in 2010 and decreased 39.2% in 2009. The increase in 2010
was attributable to the additional operating costs of Etesius which we acquired in February 2010
(See Note 14 Business Acquisition in Notes to Consolidated Financial Statements in Part II,
Item 8 of this Form 10-K), as well as higher costs relating to our performance of the Medicare RAC
program subcontracts and additional sales and business development personnel. New Services SG&A was
higher in 2008 than in 2009 due to expenses associated with winding down the Medicare RAC
demonstration program and the efforts we expended in bidding for a Medicare RAC program contract
and securing the Medicare RAC program subcontracts with three of the four national Medicare RAC
program contract awardees.
Corporate Support SG&A includes stock-based compensation charges of $4.0 million in 2010, $3.3
million in 2009 and $2.2 million in 2008. Excluding stock-based compensation charges, Corporate
Support SG&A decreased 21.2% in 2010 and increased 11.1% in 2009. The 2010 decrease is attributable
to lower 2010 professional fees and a litigation settlement accrual and severance charges in 2009
for which there are no comparable costs in 2010, as well as decreased incentive compensation
accruals in 2010. The increase in these costs for 2009 compared to 2008 is attributable to the
litigation costs and severance charges, and increased compensation and recruiting costs associated
with hiring a new chief executive officer.
Interest Expense, net and Loss on Extinguishment of Debt
Net interest expense was $1.3 million in 2010, $3.0 million in 2009 and $3.2 million in 2008.
We also recorded a $1.4 million loss on extinguishment of debt in 2010. In January 2010, we entered
into a new credit facility with SunTrust Bank and repaid our prior term loan from Ableco LLC in
full (see New 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
December 31, 2010 under the new credit facility was approximately 2.76%, while the prior credit
facility bore a minimum interest rate of 9.75%. The decrease in interest expense in 2010 resulted
from the lower interest rate on the debt and from lower amortization of loan origination fees under
the new credit facility. The decrease in interest expense in 2009 relates to lower average debt
outstanding in 2009.
Income Tax Expense
Our reported effective tax rates on earnings approximated 36.7% in 2010, 16.5% in 2009 and
15.5% in 2008. Reported income tax expense in each year primarily results from taxes on the income
of foreign subsidiaries. The effective tax rates generally are less than the expected tax rate
primarily due to reductions of the Companys deferred tax asset valuation allowance. The higher tax
rate in 2010 is due to earnings before income taxes from our foreign subsidiaries representing a
higher percentage of total earnings before income taxes than in the prior years, partially offset
by a reduction in the deferred tax asset valuation allowance that resulted from additional deferred
tax liabilities that we recorded relating to a 2010 business acquisition.
As of the end of the past three years, management determined that based on all available
evidence, deferred tax asset valuation allowances of $54.8 million in 2010, $58.3 million in 2009
and $64.3 million in 2008 were appropriate. The reduction in each of the three years was due
primarily to lower net deferred tax assets for which we recorded a portion of the valuation
allowance. We expensed or impaired a significant amount of intangible assets in previous years for
financial reporting purposes. For income tax reporting purposes, we continue to amortize these
intangible assets over their tax lives, generally 15 years. The excess of tax amortization over
amortization for financial reporting purposes is reducing the related deferred tax asset each year,
resulting in lower deferred tax assets and a lower related valuation allowance, although increases
in our net operating losses have partially offset this impact in recent years. This reduction in
deferred tax assets related to intangible assets was $6.1 million in 2010, $5.3 million in 2009 and
$5.7 million in 2008, and we currently project this effect to continue through 2013.
As of December 31, 2010, we had approximately $59.6 million of U.S. federal loss
carry-forwards available to reduce future U.S. federal taxable income. The federal loss
carry-forwards expire through 2030. As of December 31, 2010, we had approximately $80.0 million of
state loss carry-forwards available to reduce future state taxable income. The state loss
carry-forwards expire to varying degrees between 2015 and 2030 and are subject to certain
limitations.
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On March 17, 2006, the Company experienced an ownership change as defined under Section 382 of
the Internal Revenue Code (IRC). This ownership change resulted in an annual IRC Section 382
limitation that limits the use of certain tax attribute carry-forwards. Of the $59.6 million of
U.S. federal loss carry-forwards available to the Company, $20.6 million of the loss carry-forwards
are subject to an annual usage limitation of $1.4 million.
Liquidity and Capital Resources
As of December 31, 2010, we had $18.4 million in cash and cash equivalents and no borrowings
under the revolver portion of our credit facility. The revolver had approximately $8.9 million of
calculated availability for borrowings at the end of 2010.
We believe that the recent global economic downturn contributed to a decrease in the revenues
that we otherwise would have earned in recent periods. This decrease has not resulted in the need
for us to draw down on our revolving credit facility to fund our operations and has not materially
adversely impacted our overall liquidity position. However, if revenues were to decline
significantly, it could have an adverse impact on our liquidity. The Company was in compliance with
the covenants in its SunTrust credit facility as of December 31, 2010.
Operating Activities. Net cash provided by operating activities was $3.5 million in 2010,
$18.2 million in 2009 and $16.7 million in 2008. These amounts consist of two components,
specifically, net earnings adjusted for certain non-cash items (such as depreciation, amortization
and stock-based compensation expense) and changes in working capital. The decrease in cash provided
by operating activities in 2010 was due to a $6.5 million reduction in net earnings adjusted for
non-cash items and an $8.2 million decrease in working capital. The decline in net earnings
adjusted for non-cash items was due to lower net earnings resulting from the factors discussed
previously, partially offset by higher non-cash charges. The greater use of cash for working
capital needs resulted from an increase in receivables primarily relating to the Medicare RAC
program, a decrease in incentive compensation accruals in 2010 due to lower payments expected under
our management incentive plans, and deferral of costs associated with the Medicare RAC program. We
include an itemization of these changes in our Consolidated Statements of Cash Flows included in
Part II, Item 8 of this Form 10-K.
The $1.5 million increase in cash provided by operating activities in 2009 was due to a $6.6
million lower use of cash for working capital, partially offset by lower net earnings. The working
capital improvement was due to significant payments for long term compensation and severance
liabilities in 2008 combined with a greater decrease in the refund liability in 2008. These
improvements in cash flow in 2009 were partially offset by significant payments for foreign income
taxes, a legal settlement, and other accrued liabilities in 2009.
We incurred operating losses of approximately $4.8 million in 2010, $4.0 million in 2009 and
$5.6 million in 2008 related to the Medicare RAC program. During 2010, contract receivables
increased by $1.2 million and other current assets increased $1.3 million relating to our deferral
of certain costs associated with this program. Together, these items had a significant negative
impact on our net cash provided by operating activities. We also incurred capital expenditures
associated with this program. We expect to continue to incur losses, increase receivables and other
current assets and incur capital expenditures relating to this program in 2011.
We have one customer, Wal-Mart Stores Inc., that has accounted for 10% or more of our annual
revenues in each of the past three years. The loss of this customer would negatively impact our
operating cash flows and would potentially have a material adverse impact on the Companys
liquidity.
Investing Activities and Depreciation and Amortization Expense. Depreciation and amortization
expense was $8.9 million in 2010, $6.1 million in 2009 and $5.2 million in 2008. Net cash used for
property and equipment capital expenditures was $6.9 million in 2010, $5.5 million in 2009 and $3.3
million in 2008. 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 prepare for participation in the Medicare RAC program.
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
audit systems. Our investments in software development and infrastructure costs related to Medicare
RAC program were $0.8 million in 2010, $1.0 million in 2009 and $0.6 million in 2008. We may alter
our capital expenditure plans should we experience changes in our operating results which cause us
to adjust our operating plans.
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Business Acquisitions
We made several business acquisitions during 2010 and 2009, each of which is discussed more
fully in Note 14 Business Acquisitions in Notes to Consolidated Financial Statements in Part
II, Item 8 of this Form 10-K. A summary of these activities follows.
In July 2009, we acquired the business and certain assets of First Audit Partners LLP (FAP),
a privately-held European provider of recovery audit services based in Cambridge, United Kingdom,
for a purchase price valued at $5.8 million. The purchase price included an initial cash payment of
$1.6 million that we paid in July 2009. We made the first of two deferred payments required as part
of the FAP acquisition in January 2010 in the amount of £0.5 million ($0.8 million) and the second
payment of £0.8 million ($1.3 million) in July 2010. Additional variable consideration may be due
based on the operating results generated by the acquired business over a four year period from the
date of acquisition. We currently estimate the fair value of variable consideration to be $2.0
million.
In February 2010, we acquired all of the issued and outstanding capital stock of Etesius
Limited, a privately-held European provider of purchasing and payables technologies and spend
analytics based in Chelmsford, United Kingdom for a purchase price valued at $3.1 million. The
purchase price included an initial cash payment of $2.8 million and a $0.3 million payment for
obligations on behalf of Etesius shareholders that we paid in February 2010 as well as deferred
payments of $1.2 million over four years from the date of the acquisition. We also may be required
to make additional payments of up to $3.8 million over a four-year period if the financial
performance of this service line meets certain targets. These payments would be to Etesius
employees that we hired in connection with the acquisition. We will not be obligated to make the
deferred and earn-out payments to these employees if they resign or are terminated under certain
circumstances, and therefore are recognizing the accrual of these payments as compensation expense.
In November 2010, we acquired the business and certain assets of TJG Holdings LLC (TJG), a
privately-held provider of finance and procurement operations improvement services based in
Chicago, Illinois for a purchase price valued at $3.7 million. The purchase price included an
initial cash payment of $2.3 million that we paid in November 2010. Additional payments of up to a
maximum of $1.9 million may be due to the sellers in four semi-annual payments if certain
performance targets are met. We recorded $1.4 million as the estimated fair value of these payments
at the acquisition date.
Financing Activities and Interest Expense. Net cash used in financing activities was $3.5
million in 2010, $5.7 million in 2009 and $28.0 million in 2008. As described in more detail below,
we entered into a new credit facility in January 2010. We used the $15.0 million term loan proceeds
to repay the remaining $14.1 million of outstanding principal under our prior term loan and to pay
$0.5 million in loan costs incurred in connection with the new credit facility. During 2010, we
made mandatory principal payments totaling $3.0 million on the new credit facility and reduced our
capital lease obligations by $0.3 million.
During 2009, we made mandatory principal payments totaling $5.0 million on our then-existing
term loan and reduced our capital lease obligations by $0.3 million.
During 2008, we made principal payments under our then-existing term loan of $25.9 million.
This amount included $10.9 million of mandatory principal payments as well as a voluntary
prepayment of $15.0 million. We also reduced our capital lease obligations by $0.3 million during
2008. In December 2008, we repurchased 429,378 shares of our outstanding common stock for $1.7
million.
New 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
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availability under the SunTrust revolver at December 31, 2010 was $8.9 million. We had no
borrowings outstanding under the SunTrust revolver as of December 31, 2010.
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 be payable in April 2011, but we
currently estimate that our leverage ratio did not exceed the threshold and we will not be required
to make an ECF payment for 2010.
Interest on both the revolver and term loan are payable monthly and accrued 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
December 31, 2010. 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.
In September 2010 we entered into an amendment of the SunTrust credit facility that lowered
the required minimum adjusted EBITDA and fixed charge coverage ratio through December 31, 2010. In
October 2010 we entered into an interest rate swap agreement with SunTrust that limits our exposure
to increases in the one-month LIBOR rate.
We believe that we will have sufficient borrowing capacity and cash generated from operations
to fund our capital and operational 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, as extended by the Board of Directors, we may repurchase up to $10 million of our
common stock from time to time through March 31, 2011. The new credit facility permits us to
repurchase up to $1.0 million of our common stock annually. We did not repurchase any shares of our
common stock under this program in 2010. In 2009, we repurchased 78,754 shares at an average price
of $3.10 for a total purchase price of approximately $0.2 million. This equates to approximately
0.4% of the then outstanding shares. In 2008, we repurchased 429,378 shares at an average price of
$3.93 for a total purchase price of approximately $1.7 million. This equates to approximately 2.0%
of the then outstanding shares.
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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 as of December 31, 2010 is as follows:
Payments Due by Period (in thousands) | ||||||||||||||||||||
Less | More | |||||||||||||||||||
Than | 3-5 | Than | ||||||||||||||||||
Contractual obligations | Total | 1 Year | 1-3 Years | Years | 5 Years | |||||||||||||||
Long-term debt obligations (1) |
$ | 12,000 | $ | 3,000 | $ | 6,000 | $ | 3,000 | $ | | ||||||||||
Operating lease obligations |
27,514 | 7,384 | 13,606 | 6,426 | 98 | |||||||||||||||
Cash portions of stock-based compensation (2) |
114 | 114 | | | | |||||||||||||||
Purchase price payments to former FAP owners
(3) |
2,925 | 770 | 2,155 | | | |||||||||||||||
Payments to Messrs. Cook and Toma (4) |
1,073 | 58 | 122 | 129 | 764 | |||||||||||||||
Purchase price payments to Etesius Limited
shareholders (5) |
1,200 | 100 | 400 | 700 | | |||||||||||||||
Purchase price payments to former TJG
Holdings LLC owners (6) |
1,900 | 584 | 1,240 | 76 | | |||||||||||||||
Severance |
405 | 405 | | | | |||||||||||||||
Total |
$ | 47,131 | $ | 12,415 | $ | 23,523 | $ | 10,331 | $ | 862 | ||||||||||
(1) | Excludes variable rate interest (LIBOR plus 2.25% to 3.50% per annum) payable monthly. | |
(2) | Represents the portions of Performance Units outstanding under the 2006 Management Incentive Plan payable in cash. Amounts presented are based on the market price of our common stock at December 31, 2010. The final payment is due to be made on April 30, 2011 and will be based on the market price of our common stock on that date see 2006 Management Incentive Plan below. | |
(3) | Represents deferred payments due under the FAP asset purchase agreement see Business Acquisitions above. The amounts presented include variable consideration which may be due based on cash flows generated by the acquired business over the next three years. The obligations are denominated in British pounds sterling. The U.S. dollar amounts above are based on December 31, 2010 foreign exchange rates. | |
(4) | Represents estimated reimbursements payable for healthcare costs incurred by these former executives. | |
(5) | Represents deferred payments due under the Etesius Limited share purchase agreement. The amounts presented do not include variable consideration which may be due based on the financial performance of certain service lines over the next four years. We currently estimate the fair value of variable consideration to be insignificant. For more information, see Business Acquisitions above. | |
(6) | Represents deferred payments due under the TJG Holdings LLC asset purchase agreement. The amounts presented include an estimate of variable consideration which may be due based on cash flows generated by the acquired business over the next two years. For more information, see Business Acquisitions above. |
2006 Management Incentive Plan
At the annual meeting of shareholders held on August 11, 2006, the shareholders of the Company
approved a proposal granting authorization to issue up to 2.1 million shares of our common stock
under the 2006 Management Incentive Plan (2006 MIP). On September 29, 2006, an aggregate of
682,301 Performance Units were awarded under the 2006 MIP to seven executive officers of the
Company. The awards had an aggregate grant date fair value of $4.0 million. At Performance Unit
settlement dates (which vary by participant), participants are issued that number of shares of
Company common stock equal to 60% of the number of Performance Units being settled, and are paid in
cash an amount equal to 40% of the fair market value of that number of shares of common stock equal
to the number of Performance Units being settled. The awards were 50% vested at the award date and
the remainder of the awards vested ratably over approximately the following eighteen months with
the awards fully vesting on March 17, 2008. On March 28, 2007, the Company granted 20,000
Performance Units to an additional executive officer under the 2006 MIP. The award had a grant date
fair value of $0.3 million and was scheduled to vest ratably over four years. The awards contain
certain anti-dilution and change of control provisions. As a result, the number of Performance
Units awarded were automatically adjusted on a pro-rata basis upon the conversion into common stock
of the Companys senior convertible notes and Series A convertible preferred stock. The Company
granted an additional 1,436,484 Performance Units in 2007 and 122,073 Performance Units in 2006
with aggregate grant date fair values of $24.0 million in 2007 and $1.6 million in 2006 as a result
of this automatic adjustment provision.
All Performance Units must be settled before April 30, 2016. We recognized compensation
expense (credit) of $0.1 million in 2010, $(0.2 million) in 2009 and $(0.4 million) in 2008 related
to these 2006 MIP Performance Unit awards. The 2009 and 2008 compensation credits resulted from the
remeasurement of the liability-classified portion
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of the awards to fair value based on the market price of our common stock. We determined the
amount of compensation expense recognized on the assumption that none of the Performance Unit
awards will be forfeited.
Cash payments relating to these MIP awards were $0.6 million in 2010, $1.9 million in 2009 and
$2.0 million in 2008. The final cash payments relating to these MIP awards of approximately $0.1
million are due in April 2011.
Off Balance Sheet Arrangements
As of December 31, 2010, 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.
Critical Accounting Policies
We describe our significant accounting policies in Note 1 of Notes to Consolidated Financial
Statements included in Item 8 of this Form 10-K. However, certain of our accounting policies are
particularly important to the portrayal of our 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. We consider accounting policies that involve the use of estimates
that meet both of the following criteria to be critical accounting policies. First, the
accounting estimate requires us to make assumptions about matters that are highly uncertain at the
time that the accounting estimate is made. Second, alternative 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 our financial condition, changes in financial condition or results of
operations.
In addition to estimates that meet the critical estimate criteria, we also make many other
accounting estimates in preparing our 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, we evaluate our estimates and judgments, including those related to revenue recognition,
refund liabilities, accounts receivable allowance for doubtful accounts, goodwill and other
intangible assets and income taxes. We base our estimates and judgments on historical experience,
information available prior to the issuance of the consolidated financial statements and on various
other factors that we believe 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.
We believe the following critical accounting policies, among others, involve our more
significant estimates and judgments we used in the preparation of our consolidated financial
statements. We have discussed the development and selection of accounting estimates, including
those deemed critical, and the associated disclosures in this Form 10-K with the audit committee
of the Board of Directors.
| Revenue Recognition. We generally recognize revenues on the accrual basis except with respect to an insignificant number of our international units where we recognize revenues on the cash basis. We generally recognize revenues for a contractually specified percentage of amounts recovered when we have 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 we have met the following criteria: (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) collectability is reasonably assured. Additionally, for purposes of determining appropriate timing of recognition and for internal control purposes, we rely on customary business practices and processes for documenting that the criteria described in (a) through (d) above have been met. Such customary business practices and processes may vary significantly by client. On occasion, it is possible that a transaction has met all of the revenue recognition criteria described above but we do not recognize revenues, unless we can otherwise determine that criteria (a) through (d) above have been met, because our customary business practices and processes specific to that client have not been completed. The determination that we have met each of the aforementioned criteria, particularly the determination of the timing of economic benefit received by the client and the determination that collectability is reasonably assured, requires the application of significant judgment by management and a misapplication of this judgment could result in inappropriate recognition of revenues. |
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| Unbilled Receivables & Refund Liabilities. Unbilled receivables relate to claims for which our clients have received economic value but for which we contractually have agreed not to invoice the clients. Unbilled receivables arise when a portion of our fee is deferred at the time of the initial invoice. At a later date (which can be up to a year after the original invoice, or a year after completion of the audit period), we invoice the unbilled receivable amount. Notwithstanding the deferred due date, our clients acknowledge that we have earned this unbilled receivable at the time of the original invoice, but have agreed to defer billing the client for the related services. | ||
Refund liabilities result from reductions in the economic value previously received by our clients with respect to vendor claims identified by us and for which we previously have recognized revenues. We recognize such refund liabilities either by offsets to amounts otherwise due from clients or by cash refunds to clients. We compute the estimate of our refund liabilities at any given time based on actual historical refund data. | |||
We record periodic changes in unbilled receivables and refund liabilities as adjustments to revenues. | |||
During the fourth quarter of 2010, we revised our estimate of expected refund rates of unbilled receivables in our Recovery Audit Services Americas operating segment. We obtained sufficient historical data on our realization of paybacks from unbilled receivables that enabled us to make this change to our method of calculating this estimate. The impact of this change resulted in a $0.2 million increase in fourth quarter 2010 net earnings, or less than $0.01 per basic and diluted share. We do not expect that this change in estimate will have a material impact on our net earnings in future periods. | |||
During the first quarter of 2008, we revised our estimate of expected refund rates in our Recovery Audit Services Americas operating segment. Such change in estimate resulted from a decline in actual Recovery Audit Services Americas refund rates observed during 2007. The impact of this change in estimate resulted in a $0.8 million increase in first quarter 2008 net earnings. During the fourth quarter of 2008, we changed our method of estimating the refund liability related to our Recovery Audit Services Europe/Asia-Pacific segment to be more consistent with the methodology used in the Recovery Audit Services Americas segment. This change in estimate resulted in a $0.9 million decrease in fourth quarter 2008 net earnings. The combined impact of the 2008 refund liability estimate changes was to decrease net earnings by $0.1 million, or less than $0.01 per basic and diluted share. | |||
| Goodwill and Other Intangible Assets. We assess the recoverability of our goodwill and other intangible assets during the fourth quarter of each year, or sooner if events or changes in circumstances indicate that the carrying amount may exceed its fair value. As a result of this testing, we concluded that there was no impairment of goodwill and other intangible assets in the past three years. | ||
In connection with the business acquisitions we completed in 2010, we recorded additional goodwill of $0.6 million and additional intangible assets of $3.9 million consisting primarily of customer relationships, non-compete agreements and trade names. We determined these amounts based on estimates we made and on valuation reports we obtained from third parties. We generally use accelerated amortization methods for customer relationships and trade names, and straight-line amortization for non-compete agreements. | |||
| Income Taxes. Our effective tax rate is based on historical and anticipated future taxable income, statutory tax rates and tax planning opportunities available to us in the various jurisdictions in which we operate. Significant judgment is required in determining the effective tax rate and in evaluating our 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, our effective tax rate reflected in our Consolidated Financial Statements included in Item 8 of this Form 10-K is different than that reported in our tax returns. Some of these differences are permanent, such as expenses that are not deductible on our 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 our tax returns in future years for which we have already recorded the tax benefit in the statement of operations. We establish valuation allowances to reduce net deferred tax assets to the amounts that we believe are more likely than not to be realized. We adjust these valuation allowances in light of changing facts and circumstances. Deferred tax liabilities generally represent tax expense recognized in our consolidated |
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financial statements for which payment has been deferred, or expense for which a deduction has already been taken on our tax returns but has not yet been recognized as an expense in our consolidated financial statements. | |||
We reduce our deferred tax assets 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 determining the amount of valuation allowance to record, we consider all available positive and negative evidence affecting specific deferred tax assets, including our 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 tax losses in recent years are the most compelling form of negative evidence we considered in this determination. | |||
We apply a more-likely-than-not recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. We refer to U.S. generally accepted accounting principles (GAAP) for guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. Our policy for recording interest and penalties associated with tax positions is to record such items as a component of earnings before income taxes. | |||
| Stock-Based Compensation. We account for awards of equity instruments issued to employees under the fair value method of accounting and recognize such amounts in our statements of operations. We measure compensation cost for all stock-based awards at fair value on the date of grant and recognize compensation expense in our consolidated statements of operations using the straight-line method over the service period over which we expect the awards to vest. | ||
We estimate the fair value of all time-vested options as of the date of grant using the Black-Scholes option valuation model, which was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. Option valuation models require the input of highly subjective assumptions, including the expected stock price volatility. | |||
We estimate the fair value of awards of restricted shares and nonvested shares as being equal to the market value of the common stock on the date of the award. We classify our share-based payments as either liability-classified awards or as equity-classified awards. We remeasure liability-classified awards to fair value at each balance sheet date until the award is settled. We measure equity-classified awards at their grant date fair value and do not subsequently remeasure them. We have classified our share-based payments which are settled in our common stock as equity-classified awards and our share-based payments that are settled in cash as liability-classified awards. Compensation costs related to equity-classified awards generally are equal to the grant-date fair value of the award amortized over the vesting period of the award. The liability for liability-classified awards generally is equal to the fair value of the award as of the balance sheet date multiplied by the percentage vested at the time. We charge (or credit) the change in the liability amount from one balance sheet date to another to compensation expense. | |||
Stock-based compensation expense was $4.0 million in 2010, $3.3 million in 2009 and $2.2 million in 2008. We discuss stock-based compensation in more detail in Note 1(l) and Note 13 of Notes to Consolidated Financial Statements included in Item 8 of this Form 10-K. |
New Accounting Standards
Refer to Note 1 of Notes to Consolidated Financial Statements for a discussion of recent
accounting standards and pronouncements.
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ITEM 7A. 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. In 2010, we recognized $17.2
million of operating income from operations located outside the U.S., virtually all of which we
accounted for originally 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 $1.7
million. We do not have any arrangements in place currently to hedge our foreign currency risk.
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 $12.0 million
outstanding under a term loan and $8.9 million of calculated borrowing availability under our
revolving credit facility as of December 31, 2010, 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 and was 2.76% at December 31, 2010. 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, LIBOR is below 1.23% and we are paying a minimal amount of additional
interest under this agreement. Should 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.
35
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ITEM 8. Financial Statements and Supplementary Data
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page | ||||
Number | ||||
37 | ||||
38 | ||||
39 | ||||
40 | ||||
41 | ||||
42 |
36
Table of Contents
Report of Independent Registered Public Accounting Firm
Board of Directors and Shareholders
PRGX Global, Inc.
Atlanta, Georgia
PRGX Global, Inc.
Atlanta, Georgia
We have audited the accompanying consolidated balance sheets of PRGX Global, Inc. and subsidiaries
(the Company) as of December 31, 2010 and 2009 and the related consolidated statements of
operations, shareholders equity, and cash flows for each of the three years in the period ended
December 31, 2010. In connection with our audits of the financial statements, we have also audited
the financial statement schedule listed in the accompanying index. These financial statements and
schedule are the responsibility of the Companys management. Our responsibility is to express an
opinion on these financial statements and 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, assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall presentation of the financial statements and
schedule. 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 financial position of PRGX Global, Inc. and subsidiaries at December 31,
2010 and 2009, and the results of its operations and its cash flows for each of the three years in
the period ended December 31, 2010, in conformity with accounting principles generally accepted in
the United States of America.
Also, in our opinion, the 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.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), the Companys internal control over financial reporting as of December 31,
2010, based on criteria established in Internal Control Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO) and our report dated March
16, 2011 expressed an unqualified opinion thereon.
Atlanta, Georgia
|
/s/ BDO USA, LLP | |
March 16, 2011 |
37
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PRGX GLOBAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(In thousands, except per share data)
Years Ended December 31, | ||||||||||||
2010 | 2009 | 2008 | ||||||||||
Revenues |
$ | 184,081 | $ | 179,583 | $ | 195,706 | ||||||
Cost of revenues |
127,179 | 116,718 | 125,901 | |||||||||
Gross margin |
56,902 | 62,865 | 69,805 | |||||||||
Selling, general and administrative expenses |
49,081 | 43,873 | 44,028 | |||||||||
Operating income |
7,821 | 18,992 | 25,777 | |||||||||
Gain on bargain purchase, net (Note 14) |
| 2,388 | | |||||||||
Interest expense |
(1,451 | ) | (3,229 | ) | (4,090 | ) | ||||||
Interest income |
146 | 204 | 845 | |||||||||
Loss on debt extinguishment (Note 7) |
(1,381 | ) | | | ||||||||
Earnings before income taxes |
5,135 | 18,355 | 22,532 | |||||||||
Income tax expense (Note 9) |
1,882 | 3,028 | 3,502 | |||||||||
Net earnings |
$ | 3,253 | $ | 15,327 | $ | 19,030 | ||||||
Basic earnings per common share (Note 5) |
$ | 0.14 | $ | 0.67 | $ | 0.87 | ||||||
Diluted earnings per common share (Note 5) |
$ | 0.13 | $ | 0.65 | $ | 0.83 | ||||||
Weighted-average common shares outstanding (Note 5): |
||||||||||||
Basic |
23,906 | 22,915 | 21,829 | |||||||||
Diluted |
24,144 | 23,560 | 23,008 | |||||||||
See accompanying Notes to Consolidated Financial Statements.
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Table of Contents
PRGX GLOBAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
(In thousands, except share and per share data)
December 31, | ||||||||
2010 | 2009 | |||||||
ASSETS | ||||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ | 18,448 | $ | 33,026 | ||||
Restricted cash |
64 | 256 | ||||||
Receivables: |
||||||||
Contract receivables, less allowances of $591 in 2010 and $1,032 in 2009: |
||||||||
Billed |
31,144 | 28,034 | ||||||
Unbilled |
4,749 | 4,481 | ||||||
35,893 | 32,515 | |||||||
Employee advances and miscellaneous receivables, less allowances of $669 in 2010 and $351
in 2009 |
827 | 276 | ||||||
Total receivables |
36,720 | 32,791 | ||||||
Prepaid expenses and other current assets |
3,586 | 2,306 | ||||||
Deferred income taxes (Note 9) |
36 | 29 | ||||||
Total current assets |
58,854 | 68,408 | ||||||
Property and equipment: |
||||||||
Computer and other equipment |
23,068 | 23,032 | ||||||
Furniture and fixtures |
2,982 | 2,888 | ||||||
Leasehold improvements |
3,073 | 2,975 | ||||||
Software |
13,945 | 5,551 | ||||||
43,068 | 34,446 | |||||||
Less accumulated depreciation and amortization |
(27,373 | ) | (24,443 | ) | ||||
Property and equipment, net |
15,695 | 10,003 | ||||||
Goodwill (Note 6) |
5,196 | 4,600 | ||||||
Intangible assets, less accumulated amortization of $17,573 in 2010 and $13,573 in 2009 (Note 6) |
23,855 | 24,104 | ||||||
Unbilled receivables |
1,462 | 1,410 | ||||||
Deferred loan costs, net of accumulated amortization (Note 7) |
558 | 1,431 | ||||||
Deferred income taxes (Note 9) |
403 | 253 | ||||||
Other assets |
298 | 304 | ||||||
$ | 106,321 | $ | 110,513 | |||||
LIABILITIES AND SHAREHOLDERS EQUITY | ||||||||
Current liabilities: |
||||||||
Accounts payable and accrued expenses |
$ | 14,365 | $ | 15,707 | ||||
Accrued payroll and related expenses |
13,871 | 19,884 | ||||||
Refund liabilities |
7,179 | 7,467 | ||||||
Deferred revenues |
1,381 | 916 | ||||||
Current portions of debt and capital lease obligations (Note 7) |
3,000 | 3,260 | ||||||
Business acquisition obligations (Note 14) |
1,380 | 2,695 | ||||||
Total current liabilities |
41,176 | 49,929 | ||||||
Long-term debt and capital lease obligations (Note 7) |
9,000 | 11,070 | ||||||
Noncurrent compensation obligations (Notes 2, 13 and 14) |
271 | 978 | ||||||
Refund liabilities |
982 | 733 | ||||||
Other long-term liabilities |
6,049 | 6,364 | ||||||
Total liabilities |
57,478 | 69,074 | ||||||
Commitments and contingencies (Notes 2, 7, 8, 11 and 12) |
||||||||
Shareholders equity (Notes 11 and 13): |
||||||||
Common stock, no par value; $.01 stated value per share. Authorized 50,000,000 shares;
23,932,774 shares issued and outstanding in 2010 and 23,272,892 shares issued and
outstanding in 2009 |
239 | 233 | ||||||
Additional paid-in capital |
566,328 | 562,563 | ||||||
Accumulated deficit |
(521,408 | ) | (524,661 | ) | ||||
Accumulated other comprehensive income |
3,684 | 3,304 | ||||||
Total shareholders equity |
48,843 | 41,439 | ||||||
$ | 106,321 | $ | 110,513 | |||||
See accompanying Notes to Consolidated Financial Statements.
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Table of Contents
PRGX GLOBAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY
Years Ended December 31, 2010, 2009 and 2008
(In thousands, except share data)
Years Ended December 31, 2010, 2009 and 2008
(In thousands, except share data)
Accumulated | ||||||||||||||||||||||||||||||||
Additional | Other | Total | ||||||||||||||||||||||||||||||
Common Stock | Paid-In | Comprehensive | Treasury | Shareholders | Comprehensive | |||||||||||||||||||||||||||
Shares | Amount | Capital | Accumulated Deficit | Income | Stock | Equity | Income | |||||||||||||||||||||||||
Balance at December 31, 2007 |
22,100,090 | $ | 221 | $ | 605,592 | $ | (559,018 | ) | $ | 4,264 | $ | (48,710 | ) | $ | 2,349 | |||||||||||||||||
Comprehensive income: |
||||||||||||||||||||||||||||||||
Net earnings |
| | | 19,030 | | | 19,030 | $ | 19,030 | |||||||||||||||||||||||
Foreign currency translation adjustments |
| | | | (1,143 | ) | | (1,143 | ) | (1,143 | ) | |||||||||||||||||||||
Comprehensive income |
$ | 17,887 | ||||||||||||||||||||||||||||||
Issuances of common stock: |
||||||||||||||||||||||||||||||||
Restricted share awards |
399,507 | 4 | (4 | ) | | | | | ||||||||||||||||||||||||
2006 MIP Performance Unit settlements |
295,879 | 3 | (3 | ) | | | | | ||||||||||||||||||||||||
Purchase of treasury stock |
| | | | | (1,687 | ) | (1,687 | ) | |||||||||||||||||||||||
Retirement of treasury stock |
(1,005,831 | ) | (10 | ) | (50,387 | ) | | | 50,397 | | ||||||||||||||||||||||
Stock-based compensation expense |
| | 4,161 | | | | 4,161 | |||||||||||||||||||||||||
Balance at December 31, 2008 |
21,789,645 | 218 | 559,359 | (539,988 | ) | 3,121 | | 22,710 | ||||||||||||||||||||||||
Comprehensive income: |
||||||||||||||||||||||||||||||||
Net earnings |
| | | 15,327 | | | 15,327 | $ | 15,327 | |||||||||||||||||||||||
Foreign currency translation adjustments |
| | | | 183 | | 183 | 183 | ||||||||||||||||||||||||
Comprehensive income |
$ | 15,510 | ||||||||||||||||||||||||||||||
Issuances of common stock: |
||||||||||||||||||||||||||||||||
Restricted share awards |
817,905 | 8 | (8 | ) | | | | | ||||||||||||||||||||||||
Restricted shares remitted by employees
for taxes |
(15,096 | ) | | (116 | ) | | | | (116 | ) | ||||||||||||||||||||||
Stock option exercises |
9,375 | | 26 | | | | 26 | |||||||||||||||||||||||||
2006 MIP Performance Unit settlements |
884,473 | 9 | (9 | ) | | | | | ||||||||||||||||||||||||
Forfeited restricted share awards |
(134,656 | ) | (1 | ) | 1 | | | | | |||||||||||||||||||||||
Purchase of treasury stock |
| | | | | (246 | ) | (246 | ) | |||||||||||||||||||||||
Retirement of treasury stock |
(78,754 | ) | (1 | ) | (245 | ) | | | 246 | | ||||||||||||||||||||||
Stock-based compensation expense |
| | 3,555 | | | | 3,555 | |||||||||||||||||||||||||
Balance at December 31, 2009 |
23,272,892 | 233 | 562,563 | (524,661 | ) | 3,304 | | 41,439 | ||||||||||||||||||||||||
Comprehensive income: |
||||||||||||||||||||||||||||||||
Net earnings |
| | | 3,253 | | | 3,253 | $ | 3,253 | |||||||||||||||||||||||
Foreign currency translation adjustments |
| | | | 380 | | 380 | 380 | ||||||||||||||||||||||||
Comprehensive income |
$ | 3,633 | ||||||||||||||||||||||||||||||
Issuances of common stock: |
||||||||||||||||||||||||||||||||
Restricted share awards |
560,460 | 6 | (6 | ) | | | | | ||||||||||||||||||||||||
Restricted shares remitted by employees
for taxes |
(28,547 | ) | | (214 | ) | | | | (214 | ) | ||||||||||||||||||||||
Stock option exercises |
38,633 | | 109 | | | | 109 | |||||||||||||||||||||||||
2006 MIP Performance Unit settlements |
134,490 | 1 | (1 | ) | | | | | ||||||||||||||||||||||||
Forfeited restricted share awards |
(45,154 | ) | (1 | ) | 1 | | | | | |||||||||||||||||||||||
Stock-based compensation expense |
| | 3,876 | | | | 3,876 | |||||||||||||||||||||||||
Balance at December 31, 2010 |
23,932,774 | $ | 239 | $ | 566,328 | $ | (521,408 | ) | $ | 3,684 | $ | | $ | 48,843 | ||||||||||||||||||
See accompanying Notes to Consolidated Financial Statements.
40
Table of Contents
PRGX GLOBAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(In thousands)
Years Ended December 31, | ||||||||||||
2010 | 2009 | 2008 | ||||||||||
Cash flows from operating activities: |
||||||||||||
Net earnings |
$ | 3,253 | $ | 15,327 | $ | 19,030 | ||||||
Adjustments to reconcile earnings from operations to net cash provided by
operating activities: |
||||||||||||
Gain on bargain purchase, net |
| (2,388 | ) | | ||||||||
Depreciation and amortization |
8,908 | 6,140 | 5,194 | |||||||||
Amortization of debt discount, premium and deferred loan costs |
1,539 | 789 | 786 | |||||||||
Stock-based compensation expense |
3,980 | 3,345 | 2,207 | |||||||||
Loss on disposals of property, plant and equipment, net |
15 | 109 | 101 | |||||||||
Deferred income taxes |
(1,354 | ) | (516 | ) | 577 | |||||||
Changes in operating assets and liabilities, net of business acquisitions: |
||||||||||||
Restricted cash |
193 | (195 | ) | (61 | ) | |||||||
Billed receivables |
(1,757 | ) | 1,092 | 423 | ||||||||
Unbilled receivables |
(320 | ) | 1,466 | 1,155 | ||||||||
Prepaid expenses and other current assets |
(1,274 | ) | 775 | 186 | ||||||||
Other assets |
56 | 55 | 3 | |||||||||
Accounts payable and accrued expenses |
(2,107 | ) | (2,531 | ) | 1,634 | |||||||
Accrued payroll and related expenses |
(6,255 | ) | (3,163 | ) | (7,561 | ) | ||||||
Refund liabilities |
(39 | ) | (567 | ) | (2,806 | ) | ||||||
Deferred revenues |
(139 | ) | 405 | (63 | ) | |||||||
Noncurrent compensation obligations |
(707 | ) | (1,589 | ) | (3,508 | ) | ||||||
Other long-term liabilities |
(523 | ) | (388 | ) | (607 | ) | ||||||
Net cash provided by operating activities |
3,469 | 18,166 | 16,690 | |||||||||
Cash flows from investing activities: |
||||||||||||
Business acquisitions |
(7,741 | ) | (2,029 | ) | | |||||||
Purchases of property and equipment, net of disposal proceeds |
(6,934 | ) | (5,511 | ) | (3,298 | ) | ||||||
Net cash used in investing activities |
(14,675 | ) | (7,540 | ) | (3,298 | ) | ||||||
Cash flows from financing activities: |
||||||||||||
Repayments of former credit facility (Note 7) |
(14,070 | ) | (5,315 | ) | (26,279 | ) | ||||||
Repayments of long-term debt and capital lease obligations |
(3,260 | ) | | | ||||||||
Proceeds from term loan (Note 7) |
15,000 | | | |||||||||
Payments for deferred loan costs |
(666 | ) | (50 | ) | (59 | ) | ||||||
Payments of deferred acquisition consideration |
(409 | ) | | | ||||||||
Repurchases of common stock |
| (246 | ) | (1,687 | ) | |||||||
Restricted stock remitted by employees for taxes |
(214 | ) | (116 | ) | | |||||||
Proceeds from stock option exercises |
109 | 26 | | |||||||||
Net cash used in financing activities |
(3,510 | ) | (5,701 | ) | (28,025 | ) | ||||||
Effect of exchange rates on cash and cash equivalents |
138 | 1,413 | (1,043 | ) | ||||||||
Net change in cash and cash equivalents |
(14,578 | ) | 6,338 | (15,676 | ) | |||||||
Cash and cash equivalents at beginning of year |
33,026 | 26,688 | 42,364 | |||||||||
Cash and cash equivalents at end of year |
$ | 18,448 | $ | 33,026 | $ | 26,688 | ||||||
Supplemental cash flow statement information: |
||||||||||||
Cash paid during the year for interest |
$ | 570 | $ | 1,939 | $ | 3,191 | ||||||
Cash paid during the year for income taxes, net of refunds received |
$ | 2,743 | $ | 4,247 | $ | 2,475 | ||||||
Deferred and contingent business acquisition consideration (Note 14) |
$ | 1,638 | $ | 4,210 | $ | | ||||||
See accompanying Notes to Consolidated Financial Statements.
41
Table of Contents
PRGX GLOBAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Description of Business and Basis of Presentation
Description of Business
The principal business of PRGX Global, Inc. and subsidiaries is providing recovery audit
services to large businesses and government agencies having numerous payment transactions. These
businesses include, but are not limited to:
| retailers such as discount, department, specialty, grocery and drug stores, and wholesalers who sell to these retailers; | ||
| business enterprises other than retailers/wholesalers such as manufacturers, financial services firms, and pharmaceutical companies; | ||
| healthcare payers, both private sector health insurance companies and state and federal government payers such as the Centers for Medicare and Medicaid Services (CMS); and | ||
| federal and state government agencies. |
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. PRGX currently provides
services to clients in 28 countries.
Basis of Presentation
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 U.S. generally accepted
accounting principles (GAAP). Actual results could differ from those estimates.
(b) Revenue Recognition, Unbilled Receivables and Refund Liabilities
We base our revenues on specific contracts with our clients. These contracts generally
specify: (a) time periods covered by the audit; (b) nature and extent of audit services we are to
provide; (c) the clients duties in assisting and cooperating with us; and (d) fees payable to us,
generally expressed as a specified percentage of the amounts recovered by the client resulting from
overpayment claims identified. Clients generally recover claims either by taking credits against
outstanding payables or future purchases from the involved vendors, or receiving refund checks
directly from those vendors. The manner in which a claim is recovered by a client often is dictated
by industry practice. In addition, many clients establish specific procedural guidelines that we
must satisfy prior to submitting claims for client approval, and these guidelines are unique to
each client. For some services we provide, we earn our compensation in the form of a flat fee, a
fee per hour, or a fee per other unit of service.
We generally recognize revenues on the accrual basis except with respect to an insignificant number
of our international units where we recognize revenues on the cash basis. We generally recognize
revenues for a contractually specified percentage of amounts recovered when we have 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 we have met the following criteria: (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) collectability is reasonably assured. In certain
limited circumstances, we will invoice a client prior to
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PRGX GLOBAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
meeting all four of these criteria; in
such cases, we defer the revenues until we meet all of the criteria. Additionally, for purposes of
determining appropriate timing of recognition and for internal control purposes, we rely on
customary business practices and processes for documenting that we have met the criteria described
in (a) through (d) above. Such customary business practices and processes may vary significantly by
client. On occasion, it is possible that a transaction has met all of the revenue recognition
criteria described above but we do not recognize revenues, unless we can otherwise determine that
criteria (a) through (d) above have been met, because our customary business practices and
processes specific to that client have not been completed.
Historically, there has been a certain amount of revenues with respect to which, even though
we had met the requirements of our revenue recognition policy, our clients vendors ultimately have
rejected the claims underlying the revenues. In that case, our clients may request a refund or
offset of such amount even though we may have collected fees. We record any such refunds as a
reduction of revenues. We provide refund liabilities for these reductions in the economic value
previously received by our clients with respect to vendor claims we identified and for which we
previously have recognized revenues. We compute an estimate of our refund liabilities at any given
time based on actual historical refund data.
During the fourth quarter of 2010, we revised our estimate of expected refund rates of
unbilled receivables in our Recovery Audit Services Americas operating segment. We obtained
sufficient historical data on our realization of paybacks from unbilled receivables that enabled us
to make this change to our method of calculating this estimate. The impact of this change in
estimate resulted in a $0.2 million increase in fourth quarter 2010 net earnings, or less than
$0.01 per basic and diluted share. We believe that this change represents an improvement in our
method for determining this estimate.
During the first quarter of 2008, we revised our estimate of expected refund rates in our
Recovery Audit Services Americas operating segment. Such change in estimate resulted from a
decline in actual Recovery Audit Services Americas refund rates observed during 2007. The impact
of this change in estimate resulted in a $0.8 million increase in first quarter 2008 net earnings.
During the fourth quarter of 2008, we changed our method of estimating the refund liability related
to our Recovery Audit Services Europe/Asia-Pacific segment to be more consistent with the
methodology used in the Recovery Audit Services Americas segment. This change in estimate
resulted in a $0.9 million decrease in fourth quarter 2008 net earnings. The combined impact of the
2008 refund liability estimate changes was to decrease net earnings by $0.1 million, or less than
$0.01 per basic and diluted share.
Unbilled receivables relate to claims for which clients have received economic value but for
which we contractually have agreed not to invoice the clients. Unbilled receivables arise when a
portion of our fee is deferred at the time of the initial invoice. At a later date (which can be up
to a year after original invoice, and at other times a year after completion of the audit period),
we invoice the unbilled receivable amount. Notwithstanding the deferred due date, our clients
acknowledge that we have earned this unbilled receivable at the time of the original invoice, but
have agreed to defer billing the client for the related services.
We record periodic changes in unbilled receivables and refund liabilities as adjustments to
revenues.
We derive a relatively small portion of revenues on a fee-for-service basis whereby billing
is based upon a flat fee, a fee per hour, or a fee per other unit of service. We recognize revenues
for these types of services as we provide and invoice for them, and when criteria (a) through (d)
as set forth above are met.
(c) 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. 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 insurance limit.
Our cash and cash equivalents included short-term investments of approximately $1.7 million in
2010 and $0.7 million in 2009 which were held at banks in Brazil.
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PRGX GLOBAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(d) Fair Value of Financial Instruments
We state cash and cash equivalents at cost, which approximates fair market value. The carrying
values for receivables from clients, unbilled services, accounts payable, deferred revenues 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.
We recorded long-term debt and capital lease obligations of $12.0 million as of December 31,
2010 and $14.3 million as of December 31, 2009 at their unpaid balances as of those dates based on
their effective borrowing rates and repayment terms when originated. Substantially all of these
balances include variable borrowing rates, and we believe that the fair values of such instruments
are approximately equal to their carrying values as of those dates.
We recorded lease obligations of $3.2 million as of December 31, 2010 and $3.6 million as of
December 31, 2009 representing the fair value of future lease payments for office space we no
longer use, reduced by sublease rentals we expect to earn. We adjust the fair value of the
remaining lease payments, net of sublease income, based on payments we make and sublease income we
receive.
We recorded business acquisition obligations of $3.8 million as of December 31, 2010 and $4.4
million as of December 31, 2009 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 future revenues or other factors used in the calculation of the ultimate payment to
be made. We use the discount rate that we 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).
(e) Property and Equipment
We report property and equipment at cost or estimated fair value at acquisition date and
depreciate them over their estimated useful lives using the straight-line method. During the second
quarter of 2010, we revised our estimate of the useful lives of certain fixed assets used for the
purpose of calculating depreciation expense based on a review of our planned fixed asset
replacement cycle. Our revised useful lives for fixed assets are three years for computer laptops,
four years for desktops, five years for IT server, storage and network equipment, five years for
furniture and fixtures and three years for purchased software. We continue to amortize leasehold
improvements using the straight-line method over the shorter of the lease term or ten years. The
impact of the change in estimate was a reduction in depreciation expense of approximately $0.6
million in 2010. Depreciation expense was $4.9 million in 2010, $3.5 million in 2009 and $3.0
million in 2008.
We review 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, we will recognize
an impairment loss equal to the amount by which the carrying value exceeds the fair value of the
asset.
(f) Software Development Costs
We capitalize a portion of the costs we incur relating to our internal development of software
that we use in our operations and amortize these costs using the straight-line method over the
expected useful lives of three to seven years.
We also capitalize a portion of the costs we incur related to our internal development of software
that we intend to market to others. We amortize these costs over the products estimated economic
lives, which typically are three years, beginning when the underlying products are available for
general release to customers. We review the carrying value of capitalized software development
costs for impairment whenever events and circumstances indicate that the carrying value of the 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, we will recognize an impairment loss equal to the
amount by which the carrying value exceeds the fair value of the asset.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(g) Goodwill and Intangible Assets
Goodwill represents the excess of the purchase price over the estimated fair market value of
net assets of acquired businesses. We evaluate the recoverability of goodwill in the fourth quarter
of each year or sooner if events or changes in circumstances indicate that the carrying amount may
exceed its fair value. This evaluation has two steps. The first step identifies potential
impairments by comparing the fair value of the reporting unit with its carrying value, including
goodwill. If the calculated fair value of a reporting unit exceeds the carrying value, goodwill is
not impaired, and the second step is not necessary. If the carrying value of a reporting unit
exceeds the fair value, the second step calculates the possible impairment loss by comparing the
implied fair value with the carrying value. If the fair value is less than the carrying value, we
would record an impairment charge. We use independent business valuation professionals for the
purpose of estimating fair value. These analyses did not result in an impairment charge during the
periods presented.
Intangible assets include those with definite lives subject to amortization and those with
indefinite lives. We currently do not have any intangible assets with indefinite lives. For
intangible assets with definite lives, we perform tests for impairment if conditions exist that
indicate the carrying value may not be recoverable, such as declines in sales, earnings or cash
flows or material adverse changes in the business climate. We did not record any impairment charges
relating to our intangible assets with definite lives.
(h) Direct Expenses and Deferred Costs
We typically expense direct expenses that we incur during the course of recovery audit and
delivery of advisory services as incurred. For certain implementation and set-up costs associated
with our fee for service revenues that we earn over an extended period of time, we defer the
related costs and recognize them as expenses over the life of the underlying contract.
In addition, we incur significant personnel and other costs when performing recovery audit
services to certain healthcare organizations. The process of documenting that we have met our
revenue recognition criteria as described in (b) Revenue Recognition, Unbilled Receivables and
Refund Liabilities above is extensive and generally is completed from three months to a year after
we substantially have completed our services. We defer these costs and recognize them as expenses
when we record the related revenues. As of December 31, 2010, we had deferred $1.3 million of these
costs and reflected them as Prepaid expenses and other current assets in our consolidated balance
sheet.
(i) Income Taxes
We account for income taxes under the asset and liability method. We recognize deferred tax
assets and liabilities 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. We measure deferred tax assets and
liabilities using enacted tax rates we expect to apply to taxable income in the years in which we
expect to recover or settle those temporary differences. We recognize the effect on the deferred
tax assets and liabilities of a change in tax rates in income in the period that includes the
enactment date.
We reduce our deferred tax assets 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 determining the amount of valuation allowance to record, we consider all available positive and
negative evidence affecting specific deferred tax assets, including our 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 for tax reporting purposes in recent
years are the most compelling form of negative evidence we considered in this determination.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
We apply a more-likely-than-not recognition threshold and measurement attribute for the
financial statement recognition and measurement of a tax position taken or expected to be taken in
a tax return. We refer to GAAP for guidance on derecognition, classification, interest and
penalties, accounting in interim periods, disclosure, and transition. In accordance with FASB ASC
740, our policy for recording interest and penalties associated with tax positions is to record
such items as a component of earnings before income taxes.
(j) Foreign Currency
We use the local currency as the functional currency in the majority of the countries in which
we conduct business outside of the United States. We translate the assets and liabilities
denominated in foreign currencies into U.S. dollars at the current rates of exchange at the balance
sheet date. We include the translation gains and losses as a separate component of shareholders
equity and in the determination of comprehensive income. Comprehensive income included translation
gains (losses) related to long-term intercompany balances of $(0.1 million) in 2010, $0.2 million
in 2009 and $(0.7 million) in 2008. We translate revenues and expenses in foreign currencies at the
weighted average exchange rates for the period. We include all realized and unrealized foreign
currency transaction gains (losses) in selling, general and administrative expenses. Foreign
currency transaction gains (losses) included in selling, general and administrative expenses were
$(0.6 million) in 2010, $1.6 million in 2009 and $(1.5 million) in 2008.
(k) Earnings Per Common Share
We compute basic earnings per common share by dividing net earnings available to common
shareholders by the weighted-average number of shares of common stock outstanding during the
period. We compute diluted earnings per common share by dividing net earnings available to common
shareholders 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. We
exclude the potential dilutive effect of stock options and convertible instruments from the
determination of diluted earnings per share if the effect of including them would be antidilutive.
(l) Stock-Based Compensation
We account for awards of equity instruments issued to employees under the fair value method of
accounting and recognize such amounts in our statements of operations. We measure compensation cost
for all stock-based awards at fair value on the date of grant and recognize compensation expense in
our consolidated statements of operations using the straight-line method over the service period
over which we expect the awards to vest. We recognize compensation costs for awards with
performance conditions based on the probable outcome of the performance conditions. We accrue
compensation cost if we believe it is probable that the performance condition(s) will be achieved
and do not accrue compensation cost if we believe it is not probable that the performance
condition(s) will be achieved.
We estimate the fair value of all time-vested options as of the date of grant using the
Black-Scholes option valuation model, which was developed for use in estimating the fair value of
traded options that have no vesting restrictions and are fully transferable. Option valuation
models require the input of highly subjective assumptions, including the expected stock price
volatility. For time-vested option grants that resulted in compensation expense recognition, we used the
following assumptions in our Black-Scholes valuation models:
Years Ended December 31, | ||||||||||||
2010 | 2009 | 2008 | ||||||||||
Risk-free interest rates |
0.80% 2.65 | % | 1.60% 2.71 | % | 2.37% 3.08 | % | ||||||
Dividend yields |
| | | |||||||||
Volatility factor of expected market price |
.795 1.036 | .950 1.081 | .876 .919 | |||||||||
Weighted-average expected term of option |
3.9 4.9 years | 4 5 years | 4 4.5 years | |||||||||
Forfeiture rate |
| | |
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PRGX GLOBAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
We estimate the fair value of awards of restricted shares and nonvested shares as being equal
to the market value of the common stock on the date of the award. We classify our share-based
payments as either liability-classified awards or as equity-classified awards. We remeasure
liability-classified awards to fair value at each balance sheet date until the award is settled. We
measure equity-classified awards at their grant date fair value and do not subsequently remeasure
them. We have classified our share-based payments which are settled in our common stock as
equity-classified awards and our share-based payments that are settled in cash as
liability-classified awards. Compensation costs related to equity-classified awards generally are
equal to the fair value of the award at grant-date amortized over the vesting period of the award.
The liability for liability-classified awards generally is equal to the fair value of the award as
of the balance sheet date multiplied by the percentage vested at the time. We record the change in
the liability amount from one balance sheet date to another to compensation expense.
(m) Comprehensive Income
Consolidated comprehensive income consists of consolidated net earnings and foreign currency
translation adjustments. We present the calculation of consolidated comprehensive income in the
accompanying Consolidated Statements of Shareholders Equity.
(n) Segment Reporting
We report our operating segment information in three segments: Recovery Audit Services
Americas; Recovery Audit Services Europe / Asia Pacific; and New Services. We include the
unallocated portion of corporate selling, general and administrative expenses not specifically
attributable to our three segments in Corporate Support. Our business segments reflect the internal
reporting that our Chief Executive Officer, who is our chief operating decision maker, uses for the
purpose of making decisions about allocating resources and assessing performance. Our management,
including our Chief Executive Officer, uses what we internally refer to as Adjusted EBITDA as the
primary measure of profit or loss for purposes of assessing the operating performance of all
operating segments. 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.
EBITDA and Adjusted EBITDA are not financial measures determined in accordance with GAAP. Such
non-GAAP financial measures do not measure the profit or loss of the reportable segments in
accordance with GAAP. Given that we use Adjusted EBITDA as our primary measure of segment
performance, GAAP rules on segment reporting require that we include this non-GAAP measure in our
discussion of our operating segments. We also must reconcile Adjusted EBITDA to our operating
results presented on a GAAP basis. We provide this reconciliation in Note 4 to these consolidated
financial statements along with other information about our reportable segments. We do not intend
the reconciling items to be, nor should they be, interpreted as non-recurring or extraordinary, or
in any manner be deemed as adjustments made in accordance with GAAP. Because Adjusted EBITDA is not
a financial measure determined in accordance with GAAP, it may not be comparable to other similarly
titled measures of other companies.
We revised our reportable operating segments during the fourth quarter of 2009 to reflect the
current management and operational structure. See Note 4 below.
(o) 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 860. In June 2009, the FASB issued Statement of Financial Accounting Standards
(SFAS) No. 166, Accounting for Transfers of Financial Assets, an amendment of SFAS No. 140 (
currently included in the FASB ASC as FASB ASC 860), which eliminates the exceptions for qualifying
special-purpose entities from the consolidation guidance in FASB ASC 860, changes the requirements
for derecognizing financial assets, and requires additional disclosures in order to enhance
information reported to users of financial statements by providing greater transparency about
transfers of financial assets, including securitization transactions, and an
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PRGX GLOBAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
entitys continuing
involvement in and exposure to the risks related to transferred financial assets. This statement is
effective for fiscal years beginning after November 15, 2009 and for transfers occurring on or
after the effective date. The adoption of FASB ASC 860 effective January 1, 2010 did not have a
material impact on our consolidated results of operations, financial position or cash flows.
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. We currently estimate that these new requirements will impact the way
we account for certain new revenues we expect to generate primarily in our New Services segment,
but do not expect the adoption of FASB ASC 985-605 effective January 1, 2011 to 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 currently are evaluating the impact that the adoption
of ASU No. 2010-26 will have on our consolidated results of operations, financial position or cash
flows.
(2) RETIREMENT OBLIGATIONS
The July 31, 2005 retirements of the Companys former Chairman, President and CEO, John M.
Cook, and the Companys former Vice Chairman, John M. Toma, resulted in an obligation to pay
retirement benefits of approximately $7.6 million (present value basis) to be paid in monthly cash
installments principally over a three-year period, beginning February 1, 2006. On March 16, 2006,
the parties amended the terms of the applicable severance agreements in conjunction with the
Companys financial restructuring. Pursuant to the terms of the severance agreements, as amended
(1) the Companys obligations to pay monthly cash installments to Mr. Cook and Mr. Toma were
extended from 36 months to 58 months and from 24 months to 46 months, respectively; however, the
total dollar amount of monthly cash payments to be made to each remained unchanged, and (2) we
agreed to pay a fixed sum of $150,000 to defray the fees and expenses of the legal counsel and
financial advisors to Messrs. Cook and Toma. We completed the final payments under these portions
of the agreements in 2010.
The severance agreements also provide for an annual reimbursement, beginning in February 2007,
to Mr. Cook and Mr. Toma for the cost of health insurance for themselves and their respective
spouses (not to exceed $25,000 and $20,000, respectively, subject to adjustment based on changes in
the Consumer Price Index), continuing until each reaches the age of 80. At December 31, 2010, we
had accrued $0.8 million related to these health insurance obligations.
(3) MAJOR CLIENTS
Wal-Mart Stores Inc. (and its affiliated companies) accounted for approximately 12.1% of total
revenues in 2010, 12.3% in 2009 and 11.2% in 2008. We recorded these revenues primarily in the
Recovery Audit Services Americas Segment.
(4) OPERATING SEGMENTS AND RELATED INFORMATION
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
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PRGX GLOBAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
segment includes 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 includes 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 and recovery audit services we provide to
organizations in the healthcare industry. We include the unallocated portion of corporate selling,
general and administrative expenses not specifically attributable to the three operating segments
in Corporate Support.
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 and
foreign currency 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
years ended December 31, 2010, 2009 and 2008 and segment asset information as of December 31, 2010
and 2009 (in thousands) is as follows:
Recovery | ||||||||||||||||||||
Audit | Recovery Audit | |||||||||||||||||||
Services | Services | New | Corporate | |||||||||||||||||
Americas | Europe/Asia-Pacific | Services | Support | Total | ||||||||||||||||
2010 |
||||||||||||||||||||
Revenues |
$ | 115,156 | $ | 57,590 | $ | 11,335 | $ | | $ | 184,081 | ||||||||||
Net earnings (loss) |
$ | 25,190 | $ | 6,062 | $ | (6,842 | ) | $ | (21,157 | ) | $ | 3,253 | ||||||||
Income taxes |
| | | 1,882 | 1,882 | |||||||||||||||
Interest, net |
(128 | ) | 416 | 38 | 979 | 1,305 | ||||||||||||||
Loss on debt extinguishment |
| | | 1,381 | 1,381 | |||||||||||||||
Depreciation and amortization expense |
5,869 | 1,631 | 1,408 | | 8,908 | |||||||||||||||
EBITDA |
30,931 | 8,109 | (5,396 | ) | (16,915 | ) | 16,729 | |||||||||||||
Foreign currency gains on intercompany
balances |
33 | 391 | (2 | ) | | 422 | ||||||||||||||
Acquisition obligations
classified as compensation |
| 371 | | | 371 | |||||||||||||||
Stock-based compensation |
| | | 3,980 | 3,980 | |||||||||||||||
Adjusted EBITDA |
$ | 30,964 | $ | 8,871 | $ | (5,398 | ) | $ | (12,935 | ) | $ | 21,502 | ||||||||
Capital expenditures |
$ | 5,674 | $ | 329 | $ | 931 | $ | | $ | 6,934 | ||||||||||
Allocated assets |
$ | 57,143 | $ | 17,698 | $ | 9,347 | $ | | $ | 84,188 | ||||||||||
Unallocated assets: |
||||||||||||||||||||
Cash and cash equivalents |
| | | 18,448 | 18,448 | |||||||||||||||
Restricted cash |
| | | 64 | 64 | |||||||||||||||
Deferred loan costs |
| | | 558 | 558 | |||||||||||||||
Deferred income taxes |
| | | 439 | 439 | |||||||||||||||
Prepaid expenses and other assets |
| | | 2,624 | 2,624 | |||||||||||||||
Total assets |
$ | 57,143 | $ | 17,698 | $ | 9,347 | $ | 22,133 | $ | 106,321 | ||||||||||
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Recovery Audit | Recovery Audit | |||||||||||||||||||
Services | Services | New | Corporate | |||||||||||||||||
Americas | Europe/Asia-Pacific | Services | Support | Total | ||||||||||||||||
2009 |
||||||||||||||||||||
Revenues |
$ | 121,561 | $ | 52,489 | $ | 5,533 | $ | | $ | 179,583 | ||||||||||
Net earnings (loss) |
$ | 36,013 | $ | 9,055 | $ | (4,017 | ) | $ | (25,724 | ) | $ | 15,327 | ||||||||
Income taxes |
| | | 3,028 | 3,028 | |||||||||||||||
Interest, net |
(99 | ) | 184 | | 2,940 | 3,025 | ||||||||||||||
Depreciation and amortization expense |
4,798 | 911 | 431 | | 6,140 | |||||||||||||||
EBITDA |
40,712 | 10,150 | (3,586 | ) | (19,756 | ) | 27,520 | |||||||||||||
Foreign currency gains on intercompany
balances |
(360 | ) | (1,235 | ) | | | (1,595 | ) | ||||||||||||
Litigation settlement |
| | | 650 | 650 | |||||||||||||||
Stock-based compensation |
| | | 3,345 | 3,345 | |||||||||||||||
Gain on bargain purchase, net |
| (2,388 | ) | | | (2,388 | ) | |||||||||||||
Adjusted EBITDA |
$ | 40,352 | $ | 6,527 | $ | (3,586 | ) | $ | (15,761 | ) | $ | 27,532 | ||||||||
Capital expenditures |
$ | 4,281 | $ | 266 | $ | 964 | $ | | $ | 5,511 | ||||||||||
Allocated assets |
$ | 47,263 | $ | 21,421 | $ | 2,814 | $ | | $ | 71,498 | ||||||||||
Unallocated assets: |
||||||||||||||||||||
Cash and cash equivalents |
| | | 33,026 | 33,026 | |||||||||||||||
Restricted cash |
| | | 256 | 256 | |||||||||||||||
Deferred loan costs |
| | | 1,431 | 1,431 | |||||||||||||||
Deferred income taxes |
| | | 282 | 282 | |||||||||||||||
Prepaid expenses and other assets |
| | | 4,020 | 4,020 | |||||||||||||||
Total assets |
$ | 47,263 | $ | 21,421 | $ | 2,814 | $ | 39,015 | $ | 110,513 | ||||||||||
2008 |
||||||||||||||||||||
Revenues |
$ | 138,168 | $ | 53,600 | $ | 3,938 | $ | | $ | 195,706 | ||||||||||
Net earnings (loss) |
$ | 45,305 | $ | 3,900 | $ | (6,222 | ) | $ | (23,953 | ) | $ | 19,030 | ||||||||
Income taxes |
| | | 3,502 | 3,502 | |||||||||||||||
Interest, net |
(178 | ) | (45 | ) | | 3,468 | 3,245 | |||||||||||||
Depreciation and amortization expense |
4,657 | 308 | 229 | | 5,194 | |||||||||||||||
EBITDA |
49,784 | 4,163 | (5,993 | ) | (16,983 | ) | 30,971 | |||||||||||||
Foreign currency (gains) losses on
intercompany balances |
(181 | ) | 3,464 | | | 3,283 | ||||||||||||||
Stock-based compensation |
| | | 2,207 | 2,207 | |||||||||||||||
Adjusted EBITDA |
$ | 49,603 | $ | 7,627 | $ | (5,993 | ) | $ | (14,776 | ) | $ | 36,461 | ||||||||
Capital expenditures |
$ | 2,441 | $ | 302 | $ | 555 | $ | | $ | 3,298 | ||||||||||
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PRGX GLOBAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table presents revenues by country based on the location of clients served (in
thousands):
Years Ended December 31, | ||||||||||||
2010 | 2009 | 2008 | ||||||||||
United States |
$ | 92,574 | $ | 97,141 | $ | 111,954 | ||||||
United Kingdom |
31,422 | 25,169 | 26,649 | |||||||||
Canada |
22,141 | 20,560 | 21,099 | |||||||||
France |
12,231 | 12,055 | 11,438 | |||||||||
Brazil |
5,128 | 4,320 | 3,339 | |||||||||
Mexico |
3,950 | 3,740 | 4,697 | |||||||||
Belgium |
2,705 | 2,186 | 885 | |||||||||
Spain |
2,065 | 2,547 | 3,319 | |||||||||
Australia |
1,690 | 1,424 | 1,113 | |||||||||
Sweden |
1,460 | 2,158 | 2,459 | |||||||||
Ireland |
1,024 | 225 | | |||||||||
Germany |
744 | 1,224 | 2,373 | |||||||||
Other |
6,947 | 6,834 | 6,381 | |||||||||
$ | 184,081 | $ | 179,583 | $ | 195,706 | |||||||
The following table presents long-lived assets by country based on the location of the asset
(in thousands):
December 31, | ||||||||
2010 | 2009 | |||||||
United States |
$ | 34,273 | $ | 31,678 | ||||
United Kingdom |
10,295 | 7,701 | ||||||
All Other |
1,034 | 1,063 | ||||||
$ | 45,602 | $ | 40,442 | |||||
(5) EARNINGS PER COMMON SHARE
The following tables set forth the computations of basic and diluted earnings per common share
(in thousands, except per share data).
Years Ended December 31, | ||||||||||||
2010 | 2009 | 2008 | ||||||||||
Basic earnings per common share: |
||||||||||||
Numerator: |
||||||||||||
Net earnings |
$ | 3,253 | $ | 15,327 | $ | 19,030 | ||||||
Denominator: |
||||||||||||
Weighted-average common shares outstanding |
23,906 | 22,915 | 21,829 | |||||||||
Basic earnings per common share |
$ | 0.14 | $ | 0.67 | $ | 0.87 | ||||||
Diluted earnings per common share: |
||||||||||||
Numerator: |
||||||||||||
Net earnings |
$ | 3,253 | $ | 15,327 | $ | 19,030 | ||||||
Denominator: |
||||||||||||
Weighted-average common shares outstanding |
23,906 | 22,915 | 21,829 | |||||||||
Incremental shares from stock-based compensation plans |
238 | 645 | 1,179 | |||||||||
Denominator for diluted earnings per common share |
24,144 | 23,560 | 23,008 | |||||||||
Diluted earnings per common share |
$ | 0.13 | $ | 0.65 | $ | 0.83 | ||||||
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PRGX GLOBAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
We excluded options to purchase 1.7 million shares in 2010, 1.2 million shares in 2009 and 1.0
million shares in 2008 of common stock from the computation of diluted earnings per common share
due to their antidilutive effect as the exercise prices of the options were greater than the
average market price of the common shares during the periods. The number of common shares we used
in the earnings per common share computations include nonvested restricted shares of 1.2 million in
2010, 1.0 million in 2009 and 0.4 million in 2008, and nonvested restricted share units that we
consider to be participating securities of 0.3 million in 2010, 0.2 million in 2009 and 0.1 million
in 2008.
(6) GOODWILL AND INTANGIBLE ASSETS
(a) Goodwill
We evaluate the recoverability of goodwill in the fourth quarter of each year or sooner if
events or changes in circumstances indicate that the carrying amount may exceed its fair value.
These analyses did not result in an impairment charge during the periods presented. Goodwill in our
Recovery Audit Services Americas segment was $4.6 million at December 31, 2010 and 2009. This
amount represents gross goodwill of $203.1 million less total
accumulated impairment losses of $198.5 million recorded prior to
2009. In conjunction with our 2010 acquisition of TJG Holdings, LLC, we recorded goodwill of $0.6
million in our New Services segment (see Note 14 Business Acquisitions below). We did not record
any changes in our reported goodwill balances in 2009.
(b) Intangible Assets
Intangible assets consist principally of amounts we assigned to customer relationships,
trademarks, non-compete agreements and trade names in conjunction with business acquisitions.
Substantially all of our intangible assets as of January 1, 2009 relate to our January 24, 2002
acquisition of the businesses of Howard Schultz & Associates International, Inc. and affiliates.
Changes in intangible assets in 2010 and 2009 relate primarily to the acquisitions of First Audit
Partners LLP (FAP), Etesius Limited (Etesius) and TJG Holdings LLC (TJG) which we describe in
more detail in Note 14 Business Acquisitions below. Intangible assets associated with the FAP
and Etesius acquisitions are denominated in British pounds sterling and are subject to movements in
foreign currency rates (FX adjustments). We present the amounts below in United States dollars
utilizing foreign currency exchange rates as of December 31, 2010.
As of January 21, 2010, the Company changed its trade name from PRG-Schultz International,
Inc. to PRGX Global, Inc. and will use the previous trade name only in limited circumstances. We
intend to maintain the legal rights to the former name but, for accounting purposes, have
reclassified the intangible asset associated with this trade name from an indefinite lived
intangible asset to one with a definite life and began amortizing the trade name in January 2010.
Amortization expense relating to intangible assets was $4.0 million in 2010, $2.6 million in
2009 and $2.2 million in 2008. Based on our current amortization methods, we project amortization
expense for the next five years will be $4.4 million in 2011, $4.2 million in 2010, $4.0 million in
2013, $2.9 million in 2014 and $2.1 million in 2015.
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PRGX GLOBAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Changes in intangible assets during 2010 and 2009 were as follows (in thousands):
Customer | Non-compete | |||||||||||||||||||
Relationships | Trademarks | agreements | Trade Names | Total | ||||||||||||||||
Gross carrying amount: |
||||||||||||||||||||
Balance, January 1, 2009 |
$ | 27,700 | $ | | $ | | $ | 2,200 | $ | 29,900 | ||||||||||
Acquisition of FAP |
6,525 | 527 | 778 | | 7,830 | |||||||||||||||
FX adjustments |
(44 | ) | (4 | ) | (5 | ) | | (53 | ) | |||||||||||
Balance, December 31, 2009 |
34,181 | 523 | 773 | 2,200 | 37,677 | |||||||||||||||
Acquisition of Etesius |
1,565 | | | | 1,565 | |||||||||||||||
Acquisition of TJG |
829 | | 808 | 665 | 2,302 | |||||||||||||||
FX adjustments and other |
(70 | ) | (18 | ) | (28 | ) | | (116 | ) | |||||||||||
Balance, December 31, 2010 |
$ | 36,505 | $ | 505 | $ | 1,553 | $ | 2,865 | $ | 41,428 | ||||||||||
Accumulated amortization: |
||||||||||||||||||||
Balance, January 1, 2009 |
$ | (10,932 | ) | $ | | $ | | $ | | $ | (10,932 | ) | ||||||||
Amortization expense |
(2,517 | ) | (40 | ) | (78 | ) | | (2,635 | ) | |||||||||||
FX adjustments and other |
(5 | ) | | (1 | ) | | (6 | ) | ||||||||||||
Balance, December 31, 2009 |
(13,454 | ) | (40 | ) | (79 | ) | | (13,573 | ) | |||||||||||
Amortization expense |
(3,158 | ) | (83 | ) | (197 | ) | (567 | ) | (4,005 | ) | ||||||||||
FX adjustments and other |
3 | | 2 | | 5 | |||||||||||||||
Balance, December 31, 2010 |
$ | (16,609 | ) | $ | (123 | ) | $ | (274 | ) | $ | (567 | ) | $ | (17,573 | ) | |||||
Net carrying amount: |
||||||||||||||||||||
Balance, December 31, 2009 |
$ | 20,727 | $ | 483 | $ | 694 | $ | 2,200 | $ | 24,104 | ||||||||||
Balance, December 31, 2010 |
$ | 19,896 | $ | 382 | $ | 1,279 | $ | 2,298 | $ | 23,855 | ||||||||||
Estimated useful life (years) |
6-20 years | 6 years | 3-4.5 years | 4-5 years |
(7) DEBT AND CAPITAL LEASES
Long-term debt and capital lease obligations consisted of the following (in thousands):
December 31, | ||||||||
2010 | 2009 | |||||||
SunTrust term loan due quarterly through January 2014 |
$ | 12,000 | $ | | ||||
Ableco term loan repaid in January 2010 |
| 14,070 | ||||||
Capital lease obligations |
| 260 | ||||||
12,000 | 14,330 | |||||||
Less current portion |
3,000 | 3,260 | ||||||
$ | 9,000 | $ | 11,070 | |||||
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 December 31, 2010, 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 based on excess cash flow (ECF) if our leverage ratio as defined in the
agreement exceeds a certain threshold. The first ECF payment will be due in April 2011 if required
by the calculation.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Interest on both the revolver and term loan are payable monthly and accrued 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
December 31, 2010. 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 weighted-average
interest rate on term loan balances outstanding under the SunTrust credit facility during 2010,
including fees, was 3.3%.
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 used substantially all the funds from the SunTrust term loan to repay in full the principal
of $14.1 million outstanding under a term loan with Ableco LLC (Ableco) (see Ableco
Credit Facility below). 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.
In September 2010 we entered into an amendment of the SunTrust credit facility that lowered
the required minimum adjusted EBITDA and fixed charge coverage ratio through December 31, 2010. In
October 2010 we entered into an interest rate swap agreement with SunTrust that limits our exposure
to increases in the one-month LIBOR rate.
Ableco Credit Facility
In September 2007, we entered into an Ableco credit facility that included a $20 million
revolving credit facility and a $45 million term loan. During 2008, we made principal payments
under the Ableco term loan of $25.9 million. This amount included $10.9 million of mandatory
payments, including contingent payments (see below), as well as a voluntary prepayment of $15.0
million that we made pursuant to an amendment of this credit facility that provided for the $15.0
million pre-payment without penalty. The amendment also increased the initial borrowing capacity
under the revolver portion of the facility by $10 million and reduced certain components of the
borrowing availability calculation over the term of the loan. The borrowing availability
calculation was based on eligible accounts receivable and other factors.
During 2009, we paid the required quarterly payments and reduced the balance on the term loan
by $5.0 million. In March 2009, we entered into the second amendment of this credit facility that
reduced certain of the debt covenant thresholds through March 10, 2010 and revised the borrowing
availability calculation for the remaining term of the credit facility.
The Ableco term loan required quarterly principal payments of $1.25 million commencing in
April 2008. The loan agreement also required an ECF payment based on an excess cash flow
calculation as defined in the agreement. The balance remaining after the quarterly and ECF payments
was due in September 2011. We made
the first ECF payment in April 2008. We were not required to make an ECF payment in 2009 and we
replaced the credit facility in January 2010 before any additional ECF payments were required.
Interest was payable monthly and accrued at our option at either prime plus 2.0% or at LIBOR plus
4.75%, but under either option could not have been less than 9.75%. Interest on outstanding
balances under the revolving credit facility, if any, accrued at our option at either prime plus
0.25% or at LIBOR plus 2.25%. We also paid a commitment fee of 0.5% per annum, payable monthly, on
the unused portion of the $22.5 million revolving credit facility. The weighted-average interest
rates on term loan balances outstanding under the Ableco credit facility, including fees, were
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PRGX GLOBAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
12.3% in 2010, 11.3% in 2009 and 10.9% in 2008. The Ableco credit facility was guaranteed by each
of the Companys direct and indirect domestic wholly owned subsidiaries and certain of its foreign
subsidiaries and was secured by substantially all of the Companys assets (including the stock of
the Companys domestic subsidiaries and two-thirds of the stock of certain of the Companys foreign
subsidiaries).
Future Minimum Payments
Future minimum principal payments of long-term debt as of December 31, 2010 are as follows (in
thousands):
Year Ending December 31, | ||||
2011 |
$ | 3,000 | ||
2012 |
3,000 | |||
2013 |
3,000 | |||
2014 |
3,000 | |||
2015 |
| |||
Thereafter |
| |||
$ | 12,000 | |||
(8) LEASE COMMITMENTS
PRGX is committed under noncancelable lease arrangements for facilities and equipment. Rent
expense, excluding costs associated with the termination of noncancelable lease arrangements, was
$6.2 million in 2010, $6.2 million in 2009 and $7.2 million in 2008.
We have subleased approximately 58,000 square feet of our principal executive office space to
independent third parties. The sublease rental income we earn is less than the lease payments we
make. At December 31, 2010, our liabilities relating to these lease obligations were $3.2 million,
of which we have included $0.9 million in accounts payable and accrued expenses and $2.3 million in
other long-term liabilities in our consolidated balance sheet. We adjust the fair value of the
remaining lease payments, net of sublease income, based on payments we make and sublease income we
receive. We include accretion of this liability related to discounting in rent expense.
We have 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). We charge
the total amount of rental payments due over the lease term to rent expense on the straight-line,
undiscounted method over the lease terms.
Future
minimum lease payments under noncancelable operating leases (both
gross and net of any sublease income) are as follows (in thousands):
Sub-lease | ||||||||||||
Year Ending December 31, | Gross | Income | Net | |||||||||
2011 |
$ | 7,384 | $ | (877 | ) | $ | 6,507 | |||||
2012 |
7,046 | (829 | ) | 6,217 | ||||||||
2013 |
6,560 | (751 | ) | 5,809 | ||||||||
2014 |
6,006 | (751 | ) | 5,255 | ||||||||
2015 |
420 | | 420 | |||||||||
Thereafter |
98 | | 98 | |||||||||
Total payments |
$ | 27,514 | $ | (3,208 | ) | $ | 24,306 | |||||
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PRGX GLOBAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(9) INCOME TAXES
Earnings before income taxes relate to the following jurisdictions (in thousands):
Years Ended December 31, | ||||||||||||
2010 | 2009 | 2008 | ||||||||||
United States |
$ | (3,189 | ) | $ | 4,369 | $ | 18,300 | |||||
Foreign |
8,324 | 13,986 | 4,232 | |||||||||
$ | 5,135 | $ | 18,355 | $ | 22,532 | |||||||
The provision for income taxes consists of the following (in thousands):
Years Ended December 31, | ||||||||||||
2010 | 2009 | 2008 | ||||||||||
Current: |
||||||||||||
Federal |
$ | | $ | 40 | $ | (130 | ) | |||||
State |
30 | 85 | | |||||||||
Foreign |
3,206 | 3,419 | 3,055 | |||||||||
3,236 | 3,544 | 2,925 | ||||||||||
Deferred: |
||||||||||||
Federal |
(514 | ) | | 130 | ||||||||
State |
| | | |||||||||
Foreign |
(840 | ) | (516 | ) | 447 | |||||||
(1,354 | ) | (516 | ) | 577 | ||||||||
Total |
$ | 1,882 | $ | 3,028 | $ | 3,502 | ||||||
The significant differences between the U.S. federal statutory tax rate and the Companys
effective income tax expense for earnings (in thousands) are as follows:
Years Ended December 31, | ||||||||||||
2010 | 2009 | 2008 | ||||||||||
Statutory federal income tax rate |
$ | 1,746 | $ | 6,424 | $ | 7,886 | ||||||
State income taxes, net of federal benefit |
577 | 90 | 362 | |||||||||
Change in deferred tax asset valuation allowance |
(3,254 | ) | (6,093 | ) | (13,058 | ) | ||||||
First Audit Partners acquisition basis difference |
| 668 | | |||||||||
Foreign loss carry-forward adjustment |
| | 5,115 | |||||||||
Foreign taxes |
2,407 | 586 | 1,930 | |||||||||
Compensation deduction limitation |
448 | 1,104 | | |||||||||
Other, net |
(42 | ) | 249 | 1,267 | ||||||||
$ | 1,882 | $ | 3,028 | $ | 3,502 | |||||||
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PRGX GLOBAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The tax effects of temporary differences and carry-forwards that give rise to deferred tax
assets and liabilities consist of the following (in thousands):
December 31, | ||||||||
2010 | 2009 | |||||||
Deferred income tax assets: |
||||||||
Accounts payable and accrued expenses |
$ | 2,100 | $ | 2,165 | ||||
Accrued payroll and related expenses |
1,748 | 3,052 | ||||||
Stock-based compensation expense |
8,314 | 8,060 | ||||||
Depreciation |
4,074 | 3,482 | ||||||
Noncompete agreements |
84 | 122 | ||||||
Unbilled receivables and refund liabilities |
1,064 | 1,426 | ||||||
Foreign operating loss carry-forwards of foreign subsidiary |
1,875 | 2,071 | ||||||
Federal operating loss carry-forwards |
20,877 | 16,597 | ||||||
Intangible assets |
17,686 | 23,832 | ||||||
State operating loss carry-forwards |
2,321 | 2,624 | ||||||
Other |
4,032 | 4,003 | ||||||
Gross deferred tax assets |
64,175 | 67,434 | ||||||
Less valuation allowance |
54,801 | 58,304 | ||||||
Gross deferred tax assets net of valuation allowance |
9,374 | 9,130 | ||||||
Deferred income tax liabilities: |
||||||||
Intangible assets |
7,177 | 7,340 | ||||||
Capitalized software |
1,106 | 1,206 | ||||||
Other |
652 | 302 | ||||||
Gross deferred tax liabilities |
8,935 | 8,848 | ||||||
Net deferred tax assets |
$ | 439 | $ | 282 | ||||
We reduce our deferred tax assets 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, we consider all
available positive and negative evidence affecting specific deferred tax assets, including our 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 tax losses in recent years are the most compelling form of negative evidence considered
by management in this determination. As of December 31, 2010, management has determined that based
on all available evidence, a valuation allowance of
$54.8 million is appropriate, representing a decrease of
$3.5 million from the valuation allowance of $58.3 million
recorded as of December 31, 2009.
As of December 31, 2010, we had approximately $59.6 million of U.S. federal loss
carry-forwards available to reduce future U.S. federal taxable income. The federal loss
carry-forwards expire through 2030. As of December 31, 2010, we had approximately $80.0 million of
state loss carry-forwards available to reduce future state taxable income. The state loss
carry-forwards expire to varying degrees between 2015 and 2030 and are subject to certain
limitations.
Generally, we have not provided deferred taxes on the undistributed earnings of international
subsidiaries as we consider these earnings to be permanently reinvested. In 2010, we identified
$6.8 million of foreign earnings that we anticipated we would repatriate, and we provided
additional deferred taxes of $0.3 million in the current year relating to this potential
repatriation.
On March 17, 2006, the Company experienced an ownership change as defined under Section 382 of
the Internal Revenue Code (IRC). This ownership change resulted in an annual IRC Section 382
limitation that limits the use of certain tax attribute carry-forwards. Of the $59.6 million of
U.S. federal loss carry-forwards available to the Company, $20.6 million of the loss carry-forwards
are subject to an annual usage limitation of $1.4 million.
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PRGX GLOBAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
During 2008, the Company acceded to a position taken by the taxing authorities in the United
Kingdom (UK) regarding the denial of certain goodwill deductions taken on UK tax returns for 2003
through 2005. As a result, we reduced foreign net operating loss carry-forwards by approximately
$17.0 million based on December 31, 2008 foreign exchange rates and we wrote off deferred tax assets of $5.1 million.
We offset this reduction in our deferred tax assets by a corresponding reduction in the previously
established valuation allowance against these assets.
We apply a more-likely-than-not recognition threshold and measurement attribute for the
financial statement recognition and measurement of a tax position taken or expected to be taken in
a tax return We refer to GAAP for guidance on derecognition, classification, interest and
penalties, accounting in interim periods, disclosure, and transition. Our policy for recording
potential interest and penalties associated with uncertain tax positions is to record such items as
a component of earnings before income taxes.
We recorded unrecognized tax benefits of $2.1 million as of December 31, 2010, an increase of
$0.3 million over the $1.8 million recorded at December 31, 2009. We recorded accrued interest and
penalties of $1.8 million as of December 31, 2010, an increase of $0.3 million over the $1.5
million recorded at December 31, 2009. We recognized interest expense of $0.3 million in 2010 and
$0.3 million in 2009 related to the liability for unrecognized tax benefits. Due to the complexity
of the tax rules underlying these unrecognized tax benefits, and the unclear timing of tax audits,
tax agency determinations, and other events, we cannot establish reasonably reliable estimates for
the periods in which the cash settlement of these liabilities will occur.
We file U.S., state, and foreign income tax returns in jurisdictions with varying statutes of
limitations. As of December 31, 2010, the 2007 through 2010 tax years generally remain subject to
examination by federal and most state and foreign tax authorities. The use of net operating losses
generated in tax years prior to 2007 may also subject returns for those years to examination.
(10) EMPLOYEE BENEFIT PLANS
We maintain a defined contribution retirement plan in accordance with Section 401(k) of the
Internal Revenue Code, which allows eligible participating employees to defer receipt of up to 50%
of their annual compensation and contribute such amount to one or more investment funds. We match
employee contributions in a discretionary amount to be determined by management each plan year up
to the lesser of 6% of an employees annual compensation or $3,000 per participant. We also may
make additional discretionary contributions to the Plan as determined by management 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. We contributed approximately $1.0 million in 2010,
$1.0 million in 2009 and $1.0 million in 2008.
(11) SHAREHOLDER RIGHTS PLAN
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, as amended, 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 12, 2011, 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 our
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 our finances, interfere with our operations or business
plans, or affect our earnings per share. The dividend was not taxable to the Company or its
shareholders and did not change the way in which the Companys shares may be traded.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Effective July 31, 2000, in connection with the Rights Plan, the Board amended the Companys
Articles of Incorporation to establish a new series of stock, which
is designated as participating preferred stock. The
Companys remaining, undesignated preferred stock 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.
(12) COMMITMENTS AND CONTINGENCIES
Legal Proceedings
On April 1, 2003, Fleming Companies (Fleming), one of the Companys larger U.S. recovery
audit services clients at the time, filed for Chapter 11 bankruptcy reorganization. During the
quarter ended March 31, 2003, the Company received approximately $5.6 million in payments on
account from Fleming. On January 24, 2005, the Company received a demand from the Fleming Post
Confirmation Trust (PCT), a trust which was created pursuant to Flemings Chapter 11
reorganization plan to represent the client, for preference payments received by the Company. The
demand stated that the PCTs calculation of the preference payments was approximately $2.9 million.
The Company disputed the claim. Later in 2005, the PCT filed suit against the Company seeking to
recover approximately $5.6 million in payments that were made to the Company by Fleming during the
90 days preceding Flemings bankruptcy filing, and that were alleged to be avoidable either as
preferences or fraudulent transfers under the Bankruptcy Code.
On July 29, 2009, the Company entered into a settlement agreement in connection with the PCT
lawsuit. Under the terms of the settlement agreement, the Company paid the PCT $1.7 million to
resolve all claims made by the PCT in the litigation. In connection with the settlement, the
Company also agreed to dismiss all proofs of claim it may have against Fleming in connection with
the bankruptcy. Selling, general and administrative expenses for the year ended December 31, 2009
includes a charge of $0.7 million related to the settlement with the PCT for amounts not previously
accrued.
In the normal course of business, the Company is involved in and subject to other claims,
disputes and uncertainties. Management, after reviewing with legal counsel all of such matters,
believes 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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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(13) STOCK-BASED COMPENSATION
The Company currently has three stock-based compensation plans under which awards have been
granted: (1) the Stock Incentive Plan (SIP), (2) the 2006 Management Incentive Plan (2006 MIP),
and (3) the 2008 Equity Incentive Plan (2008 EIP).
The Company generally issues authorized but previously unissued
shares to satisfy stock option exercises, grants of restricted stock
awards and vesting of restricted stock units.
The SIP, as amended, authorized the grant of options or other stock-based awards, with respect
to up to 1,237,500 shares of the Companys common stock to key employees, directors, consultants
and advisors. The majority of options granted pursuant to the SIP had five to seven year terms and
vested and became fully exercisable on a ratable basis over one to five years of continued
employment or service. The SIP expired in June 2008.
During the first quarter of 2008, the Board of Directors of the Company adopted the 2008 EIP,
which was approved by the shareholders at the annual meeting of the shareholders on May 29, 2008.
The 2008 EIP authorizes the grant of incentive and non-qualified stock options, stock appreciation
rights, restricted stock, restricted stock units and other incentive awards. Two million shares of
the Companys common stock have been reserved for issuance under the 2008 EIP pursuant to award
grants to key employees, directors and service providers. The options granted pursuant to the 2008
EIP have seven year terms.
An amendment to the 2008 EIP was adopted by the Companys Board of Directors in April 2010 and
approved at the Companys annual meeting of shareholders held on June 15, 2010. This amendment,
among other things, increases the number of shares reserved for issuance under the 2008 EIP by
3,400,000 shares to a total of 5,400,000 shares and provides that restricted stock awards and other
full value awards will count as 1.41 shares against the available pool of shares under the plan. As
of December 31, 2010, there were 2,127,037 shares available for future grants under the 2008 EIP.
The following table summarizes stock option grants during the years ended December 31, 2010,
2009 and 2008:
# of | Weighted | |||||||||||||||
Options | Vesting | Average | Grant Date | |||||||||||||
Granted | Period | Exercise Price | Fair Value | |||||||||||||
2010 |
||||||||||||||||
51,276 | 1 year | (1) | $ | 4.20 | $ | 129,604 | ||||||||||
8,546 | 3 years | (2) | 5.39 | 34,146 | ||||||||||||
649,010 | 3 years | (3) | 4.14 | 1,739,687 | ||||||||||||
2009 |
||||||||||||||||
296,296 | 4 years | (4) | $ | 3.57 | $ | 763,529 | ||||||||||
42,730 | 1 year | (5) | 2.82 | 88,011 | ||||||||||||
505,755 | 3 years | (3) | 2.92 | 1,088,334 | ||||||||||||
2008 |
||||||||||||||||
60,135 | 1 year | (6) | $ | 9.87 | $ | 393,722 | ||||||||||
211,460 | 3 years | (3) | 9.51 | 1,338,330 |
(1) | Non-qualified stock options were granted under the 2008 EIP to the Companys non-employee directors. The options vest in full upon the earlier of (i) June 23, 2011, and (ii) the date of, and immediately prior to, the Companys 2011 annual meeting of shareholders, provided the director has been continuously serving as a member of the Board from the date of grant until the earlier of such dates. Unvested options are forfeited when a director leaves the Board. 42,730 of these options expire on June 22, 2017, except that vested options held by a director who leaves the Board before a change of control will terminate three years after termination of Board service, if such date occurs before June 22, 2017. The remaining 8,546 options expire on September 7, 2017, |
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
except that vested options held by a director who leaves the Board before a change of control will terminate three years after termination of Board service, if such date occurs before September 7, 2017. | ||
(2) | Non-qualified stock options were granted under the 2008 EIP to a new non-employee director. The options vest in full upon the earlier of (i) June 23, 2013, and (ii) the date of, and immediately prior to, the Companys 2013 annual meeting of shareholders, provided the director has been continuously serving as a member of the Board from the date of grant until the earlier of such dates. Unvested options are forfeited when a director leaves the Board. The options expire on September 7, 2017, except that vested options held by a director who leaves the Board before a change of control will terminate three years after termination of Board service, if such date occurs before September 7, 2017. | |
(3) | Non-qualified stock options were granted to certain executive and non-executive employees of the Company pursuant to the 2008 EIP. The options vest in three equal annual installments beginning on the first anniversary of the grant date. | |
(4) | During the first quarter of 2009, in connection with his joining the Company as its President and Chief Executive Officer, the Company made inducement grants outside its existing stock-based compensation plans to Mr. Romil Bahl. Mr. Bahl received an option to purchase 296,296 shares of the common stock of the Company. Mr. Bahls options were granted in two tranches, the first of which consists of 111,111 shares that vest in four equal annual installments beginning in January 2010. The second tranche consists of 185,185 shares and vests 50% on each of the second and fourth anniversaries of the grant date. | |
(5) | Non-qualified stock options were granted under the 2008 EIP to the Companys non-employee directors. The options vested in full on May 26, 2010. The options expire on May 25, 2016, except that vested options held by a director who leaves the Board before a change of control will terminate three years after termination of Board service, if such date occurs before May 25, 2016. | |
(6) | Non-qualified stock options were granted under the 2008 EIP to the Companys non-employee directors. The options became fully vested on May 27, 2009, the date of the Companys 2009 annual meeting of the shareholders. |
The following table summarizes nonvested stock awards (restricted stock and restricted stock
units) grants during the years ended December 31, 2010, 2009 and 2008:
# of | ||||||||||||
Shares | Vesting | Grant Date | ||||||||||
Granted | Period | Fair Value | ||||||||||
2010 |
||||||||||||
51,276 | 1 year | (1) | $ | 215,274 | ||||||||
8,546 | 3 years | (2) | 46,063 | |||||||||
600,010 | 3 years | (3) | 2,410,965 | |||||||||
2009 |
||||||||||||
344,445 | 4 years | (4) | $ | 1,229,669 | ||||||||
42,730 | 1 year | (5) | 120,499 | |||||||||
20,000 | 3 years | (6) | 57,400 | |||||||||
522,832 | 3 years | (3) | 1,546,636 | |||||||||
25,000 | 3 years | (7) | 168,500 | |||||||||
2008 |
||||||||||||
25,325 | 1 year | (8) | $ | 249,958 | ||||||||
171,323 | 3 years | (3) | 1,629,282 | |||||||||
317,192 | 3 years | (9) | 3,016,496 |
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) | Nonvested stock awards (restricted stock) were granted to the Companys non-employee directors pursuant to the 2008 EIP. The shares of restricted stock will vest upon the earlier of (i) June 23, 2011, and (ii) the date of, and immediately prior to, the Companys 2011 annual meeting of shareholders, provided the director has been continuously serving as a member of the Board from the date of grant until the earlier of such dates. Unvested shares of restricted stock will be forfeited when a director leaves the Board. The shares are generally nontransferable until vesting. During the vesting period, the grantees of the restricted stock will be entitled to receive dividends with respect to the nonvested shares and to vote the shares. | |
(2) | Nonvested stock awards (restricted stock) were granted to a new non-employee director pursuant to the 2008 EIP. The shares of restricted stock will vest upon the earlier of (i) June 23, 2013, and (ii) the date of, and immediately prior to, the Companys 2013 annual meeting of shareholders, provided the director has been continuously serving as a member of the Board from the date of grant until the earlier of such dates. Unvested shares of restricted stock will be forfeited when the director leaves the Board. The shares are generally nontransferable until vesting. During the vesting period, the grantee of the restricted stock will be entitled to receive dividends with respect to the nonvested shares and to vote the shares. | |
(3) | Nonvested stock awards (restricted stock and restricted stock units) were granted to certain executive and non-executive employees of the Company pursuant to the Companys 2008 EIP. The shares of restricted stock and the restricted stock units vest in three equal annual installments beginning on the first anniversary of the grant date. During the vesting period, the restricted stock grantees will be entitled to receive dividends, if any, with respect to the nonvested shares and to vote the shares. During the vesting period, grantees of restricted stock units will be entitled to receive dividends, if any, with respect to the nonvested shares, but will not be entitled to vote the shares underlying the units. | |
(4) | During the first quarter of 2009, in connection with his joining the Company as its President and Chief Executive Officer, the Company made inducement grants outside its existing stock-based compensation plans to Mr. Romil Bahl. Mr. Bahl received nonvested stock awards (restricted stock) representing 344,445 shares of the Companys common stock. Mr. Bahls nonvested stock awards were granted in two tranches, the first of which consists of 233,334 shares that vest in four equal annual installments beginning in January 2010. The second tranche consists of 111,111 shares and vests 50% on each of the second and fourth anniversaries of the grant date. During the vesting period, Mr. Bahl will be entitled to receive dividends with respect to the nonvested shares, if any, and to vote the shares. | |
(5) | Nonvested stock awards (restricted stock) were granted to the Companys non-employee directors pursuant to the 2008 EIP. The shares of restricted stock vested in full on May 26, 2010. | |
(6) | Nonvested stock awards (restricted stock) were granted to an employee of the Company pursuant to the Companys 2008 EIP. The shares of restricted stock vest 50% on each of the first and third anniversaries of the grant date. During the vesting period, the restricted stock grantee will be entitled to receive dividends, if any, with respect to the nonvested shares and to vote the shares. | |
(7) | Nonvested stock awards (restricted stock units) granted to 3 employees of the Company pursuant to the Companys 2008 EIP. The shares of restricted stock units vest on the third anniversary of the grant date. During the vesting period, grantees of restricted stock units will be entitled to receive dividends, if any, with respect to the nonvested shares, but will not be entitled to vote the shares underlying the units. | |
(8) | Nonvested stock awards (restricted stock) were granted to the Companys non-employee directors pursuant to the 2008 EIP. The shares of restricted stock vested on May 27, 2009. | |
(9) | Nonvested stock awards (restricted stock and restricted stock units) were granted to 68 executive and non-executive employees of the Company pursuant to the Companys 2008 EIP. These shares of restricted stock and restricted stock units will vest on December 31, 2011 provided that Company performance goals outlined in the stock award agreements are met for the three-year period ending December 31, 2011. During the vesting period, the award recipients of restricted stock will be entitled to receive dividends with respect to the nonvested shares and to vote the shares. During the vesting period, award recipients of restricted stock units will be entitled to receive dividends with respect to the nonvested shares, but will not be entitled to vote the shares underlying the units. |
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A summary of option activity as of December 31, 2010, and changes during the year then ended
is presented below:
Weighted- | Weighted- | |||||||||||||||
Average | Average | Aggregate | ||||||||||||||
Exercise | Remaining | Intrinsic | ||||||||||||||
Price | Contractual | Value | ||||||||||||||
Options | Shares | (Per Share) | Term | ($000s) | ||||||||||||
Outstanding at January 1, 2010 |
1,740,569 | $ | 8.98 | |||||||||||||
Granted |
709,874 | 4.16 | ||||||||||||||
Exercised |
(38,633 | ) | 2.82 | $ | 98 | |||||||||||
Forfeited |
(43,440 | ) | 6.72 | |||||||||||||
Expired |
(99,591 | ) | 33.47 | |||||||||||||
Outstanding at December 31, 2010 |
2,268,779 | $ | 6.54 | 5.01 years | $ | 3,956 | ||||||||||
Exercisable at December 31, 2010 |
975,294 | $ | 9.97 | 3.80 years | $ | 745 | ||||||||||
The weighted-average grant date fair value of options granted was $2.69 per share in
2010, $2.31 per share in 2009 and $6.38 per share in 2008.
A summary of nonvested stock awards (restricted stock and restricted stock units) activity as
of December 31, 2010, and changes during the year then ended is presented below:
Weighted | ||||||||
Average Grant | ||||||||
Date Fair Value | ||||||||
Nonvested Stock | Shares | (Per Share) | ||||||
Nonvested at January 1, 2010 |
1,230,718 | $ | 4.86 | |||||
Granted |
659,832 | 4.05 | ||||||
Vested |
(335,173 | ) | 3.86 | |||||
Forfeited |
(66,346 | ) | 7.41 | |||||
Nonvested at December 31, 2010 |
1,489,031 | $ | 4.61 | |||||
The weighted-average grant date fair value of nonvested stock awards (restricted stock
and restricted stock units) granted was $4.05 per share in 2010, $3.27 per share in 2009 and $9.56
per share in 2008. The total vest date fair value of stock awards vested during the year was $1.5
million in 2010 and $0.5 million in 2009. No stock awards vested in 2008.
2006 MIP Performance Units
At the annual meeting of shareholders held on August 11, 2006, the shareholders of the Company
approved a proposal granting authorization to issue up to 2.1 million shares of the Companys
common stock under the 2006 MIP. On September 29, 2006, an aggregate of 682,301 Performance Units
were awarded under the 2006 MIP to seven executive officers of the Company. The awards had an
aggregate grant date fair value of $4.0 million. At Performance Unit settlement dates (which vary),
participants are issued that number of shares of Company common stock equal to 60% of the number of
Performance Units being settled, and are paid in cash an amount equal to 40% of the fair market
value of that number of shares of common stock equal to the number of Performance Units being
settled. The awards were 50% vested at the award date and the remainder of the awards vests ratably
over approximately the following eighteen months with the awards fully vesting on March 17, 2008.
The awards contain certain anti-dilution and change of control provisions. As a result, the number
of Performance Units awarded were automatically adjusted on a pro-rata basis upon the conversion
into common stock of any of the Companys senior convertible notes or Series A convertible
preferred stock. During 2006, the Company granted an additional 122,073 Performance Units with
aggregate grant date fair values of $1.6 million as a result of this automatic adjustment
provision.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
On March 28, 2007, the Company granted 20,000 Performance Units to an additional executive
officer under the 2006 MIP. The award had a grant date fair value of $0.3 million and was scheduled
to vest ratably over four years. During 2007, the Company granted an additional 1,436,484
Performance Units to the eight executive officers with aggregate grant date fair values of $24.0
million as a result of the automatic adjustment provision related to the conversions of convertible
securities into common stock.
All Performance Units must be settled before April 30, 2016. We recognized compensation
expense (credit) of $0.1 million in 2010, $(0.2 million) in 2009 and $(0.4 million) in 2008 related
to these 2006 MIP Performance Unit awards. The 2009 and 2008 compensation credits resulted from the
remeasurement of the liability-classified portion of the awards to fair value based on the market
price of our common stock. We determined the amount of compensation expense recognized on the
assumption that none of the Performance Unit awards would be forfeited.
During
2010, three current and former executive officers settled an aggregate of 224,158
Performance Units under the 2006 MIP. These settlements resulted in the issuance of 134,490 shares
of common stock and cash payments totaling $0.6 million. As of December 31, 2010, a total of 44,831
Performance Units were outstanding and fully vested under the 2006 MIP.
During 2009, eight current and former executive officers settled an aggregate of 1,474,129
Performance Units under the 2006 MIP. These settlements resulted in the issuance of 884,473 shares
of common stock and cash payments totaling $1.9 million.
During 2008, six executive officers settled an aggregate of 493,137 Performance Units under
the 2006 MIP. These settlements resulted in the issuance of 295,879 shares of common stock and cash
payments totaling $2.0 million.
Stock-based compensation charges aggregated $4.0 million in 2010, $3.3 million in 2009 and
$2.2 million in 2008. We include these charges in selling, general and administrative expenses in
the accompanying Consolidated Statements of Operations. As of December 31, 2010, there was $6.3
million of unrecognized stock-based compensation expense related to stock options, nonvested stock
and Performance Unit awards which we expect to be recognized over a weighted average period of 2.02
years.
(14) BUSINESS ACQUISTIONS
We completed two acquisitions in 2010 and one acquisition in 2009 that we describe below. We
did not complete any acquisitions in 2008. Generally, we acquire businesses that we believe will
provide a strategic fit for our existing operations, cost savings and revenue synergies, or enable
us to expand our capabilities in our New Services segment.
We allocate the total purchase price in a business acquisition to the fair value of assets
acquired and liabilities assumed based on the fair values at the acquisition date, and record
amounts exceeding the fair values as goodwill. If the fair value of the assets acquired exceeds the
purchase price, we record this excess as a gain on bargain purchase. We determine the estimated
fair values of intangible assets acquired using our estimates of future discounted cash flows to be
generated by the acquired business over the estimated duration of those cash flows. We base the
estimated cash flows on our projections of future revenues, cost of revenues, capital expenditures,
working capital needs and tax rates. We estimate the duration of the cash flows based on the
projected useful life of the assets and business acquired. We determine the discount rate based on
specific business risk, cost of capital and other factors.
Etesius Limited
In February 2010, the Companys UK subsidiary acquired all the issued and outstanding capital
stock of Etesius Limited (Etesius), a privately-held European provider of purchasing and payables
technologies and spend analytics based in Chelmsford, United Kingdom. We have included the results
of operations of Etesius in our New
Services segment results of operations since the acquisition date. We intend for Etesius to
expand our capabilities in our business analytics and advisory services businesses.
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PRGX GLOBAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The financial terms of the Etesius share purchase agreement (SPA) required an initial
payment to the Etesius shareholders of $2.8 million and a $0.3 million payment for obligations on
behalf of Etesius shareholders which resulted in a total estimated purchase price value of
approximately $3.1 million.
The SPA requires deferred payments of $1.2 million over four years from the date of the SPA to
certain selling shareholders who are now our employees. The SPA also provides for potential
additional variable payments (earn-out) to these selling shareholders/employees over the same
four-year period based on the financial performance of certain of the Companys services lines, up
to a maximum of $3.8 million. Because we will not be obligated to make the deferred and earn-out
payments upon the termination of employment of these employees under certain circumstances, we will
recognize these payments as compensation expense if earned.
The estimated fair values of the assets acquired and purchase price is summarized as follows
(in thousands):
Fair values of net assets acquired: |
||||
Equipment |
$ | 18 | ||
Software |
3,100 | |||
Intangible assets, primarily customer relationships |
1,565 | |||
Deferred tax liabilities |
(1,168 | ) | ||
Working capital |
(382 | ) | ||
Fair value of net assets acquired |
$ | 3,133 | ||
Fair value of purchase price |
$ | 3,133 | ||
TJG Holdings LLC
In November 2010, we acquired the business and certain assets of TJG Holdings LLC (TJG), a
privately-held provider of finance and procurement operations improvement services based in
Chicago, Illinois. We have included the results of operations of TJG in our New Services segment
results of operations since the acquisition date. We intend for the TJG acquisition to allow us to
expand our business analytics and advisory services businesses.
We recorded goodwill in connection with this acquisition,
representing the value of the assembled workforce, including a
management team with deep industry knowledge. We expect this goodwill
to be deductible for tax purposes.
The financial terms of the TJG Asset Purchase Agreement (APA) required an initial payment to
the TJG owners of $2.3 million. Additional variable consideration (earn-out) may also be due
based on the operating results generated by the acquired business over the next two years. We
recorded an additional $1.4 million payable based on managements estimate of the fair value of the
earn-out liability. We calculated the earn-out liability based on estimated future discounted cash
flows to be generated by the acquired business over a two year period. We determined the discount
rate based on specific business risk, cost of capital and other factors. The total estimated
purchase price was valued at approximately $3.7 million.
The estimated fair values of the assets acquired and purchase price is summarized as follows
(in thousands):
Fair values of net assets acquired: |
||||
Equipment |
$ | 67 | ||
Intangible assets, primarily customer relationships |
2,302 | |||
Working capital |
762 | |||
Goodwill |
596 | |||
Fair value of net assets acquired |
$ | 3,727 | ||
Fair value of purchase price |
$ | 3,727 | ||
First Audit Partners LLP
On July 16, 2009, the Companys UK subsidiary acquired the business and certain assets of
First Audit Partners LLP (FAP), a privately-held European provider of recovery audit services
based in Cambridge, United
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Kingdom. We have integrated the business and assets of FAP into our Recovery Audit Services
Europe/Asia-Pacific operating segment and have included the results of operations of FAP in this
segment results of operations since the acquisition date. This acquisition enabled us to expand the
growing list of major European retailers to whom we provide our services.
The financial terms of the FAP APA are denominated in British pounds sterling; parenthetical
references to U.S. dollar equivalents below are based on the foreign exchange rates as of the
acquisition date. The APA required an initial payment to the FAP owners of £1.0 million ($1.6
million) and required additional deferred payments of £0.5 million ($0.8 million) in January 2010
and £0.8 million ($1.3 million) in July 2010. Additional variable consideration (earn-out) also
may be due based on the operating results generated by the acquired business over the next four
years. We recorded an additional £1.3 million ($2.1 million) payable based on managements estimate
of the fair value of the earn-out liability. We based this calculation on our estimate of the
amount and timing of the variable consideration to be earned over the four-year period using a
discount rate that we determined based on specific business risk, cost of capital and other
factors. We recorded a total estimated purchase price of approximately $5.8 million. The excess of
fair values of assets acquired over the purchase price resulted in a gain on bargain purchase of
$2.8 million. From the acquisition date to December 31, 2010, we paid £0.3 million ($0.4 million)
of the earn-out and recorded accretion and other adjustments of the liability of $0.4 million,
resulting in an earn-out payable of $2.0 million as of December 31, 2010.
The estimated fair values of the assets acquired and purchase price is summarized as follows
(in thousands):
Fair values of assets acquired: |
||||
Equipment |
$ | 56 | ||
Current assets, primarily work in progress |
741 | |||
Intangible assets, primarily customer relationships |
7,830 | |||
8,627 | ||||
Fair value of purchase price |
5,839 | |||
Gain on bargain purchase |
2,788 | |||
Transaction costs |
(400 | ) | ||
Gain on bargain purchase, net |
$ | 2,388 | ||
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PRGX GLOBAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(15) QUARTERLY RESULTS
The following tables set forth certain unaudited condensed quarterly financial data for each
of the last eight quarters during our fiscal years ended December 31, 2010 and 2009. We have
derived the information from unaudited Condensed 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 information. The operating results for any
quarter are not necessarily indicative of the results to be expected for any future period.
2010 Quarter Ended | 2009 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 |
$ | 41,329 | $ | 45,507 | $ | 46,900 | $ | 50,345 | $ | 39,252 | $ | 45,471 | $ | 45,321 | $ | 49,539 | ||||||||||||||||
Cost of revenues (1) |
30,175 | 31,036 | 31,952 | 34,016 | 26,413 | 28,328 | 28,974 | 33,003 | ||||||||||||||||||||||||
Gross margin |
11,154 | 14,471 | 14,948 | 16,329 | 12,839 | 17,143 | 16,347 | 16,536 | ||||||||||||||||||||||||
Selling, general and administrative
expenses (1) |
12,388 | 13,537 | 10,895 | 12,261 | 9,723 | 10,773 | 11,001 | 12,376 | ||||||||||||||||||||||||
Operating income (loss) |
(1,234 | ) | 934 | 4,053 | 4,068 | 3,116 | 6,370 | 5,346 | 4,160 | |||||||||||||||||||||||
Gain on bargain purchase, net |
| | | | | | 2,388 | | ||||||||||||||||||||||||
Interest expense, net |
384 | 271 | 315 | 335 | 699 | 727 | 728 | 871 | ||||||||||||||||||||||||
Loss on debt extinguishment |
1,381 | | | | | | | | ||||||||||||||||||||||||
Earnings (loss) before income taxes |
(2,999 | ) | 663 | 3,738 | 3,733 | 2,417 | 5,643 | 7,006 | 3,289 | |||||||||||||||||||||||
Income tax expense (benefit) |
436 | 628 | 1,177 | (359 | ) | 544 | 618 | 605 | 1,261 | |||||||||||||||||||||||
Net earnings (loss) |
$ | (3,435 | ) | $ | 35 | $ | 2,561 | $ | 4,092 | $ | 1,873 | $ | 5,025 | $ | 6,401 | $ | 2,028 | |||||||||||||||
Basic earnings (loss) per common share |
$ | (0.15 | ) | $ | 0.00 | $ | 0.11 | $ | 0.17 | $ | 0.08 | $ | 0.22 | $ | 0.27 | $ | 0.09 | |||||||||||||||
Diluted earnings (loss) per common share |
$ | (0.15 | ) | $ | 0.00 | $ | 0.11 | $ | 0.17 | $ | 0.08 | $ | 0.21 | $ | 0.27 | $ | 0.08 | |||||||||||||||
(1) | We have reclassified certain previously reported amounts for the first three quarters of 2010 to conform with classifications adopted in fourth quarter of 2010. | |
(2) | We calculate each quarter as a discrete period; the sum of the four quarters may not equal the calculated full-year amount. |
In
the fourth quarter of 2010, management determined that it was not probable that the Company would
make a matching contribution to the defined contribution retirement plan in 2011 for contributions
made by employees in 2010. As a result, we reversed the amount recorded as of September 30, 2010 of
$0.9 million in the fourth quarter of 2010.
Also in the fourth quarter of 2010, management finalized the purchase accounting entries
relating to the February 2010 acquisition of Etesius Limited. In this process, we recorded a $1.2
million reduction in the deferred tax asset valuation allowance that resulted from the deferred tax
liabilities that we recorded relating to the acquisition. We recorded this amount as a reduction in
our income tax expense in the fourth quarter of 2010. As we completed the acquisition in the first
quarter of 2010, we should have recorded this reduction in income tax expense in the first quarter
of 2010. Had we recorded the adjustment in the first quarter of 2010, our net loss would have been
$2.2 million as compared to the reported net loss of $3.4 million. We do not believe that the delay
in recording this non-cash item is material to the users of our financial statements as it had no
impact on our revenues, operating income, Adjusted EBITDA or cash flows, which we believe are the
key metrics used by analysts, lenders and other users of our financial statements in evaluating the
Companys performance. Therefore, we do not consider it necessary to restate the 2010 quarterly
financial statements.
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ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None
ITEM 9A. Controls and Procedures
Evaluation of Disclosure 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 are effective as of December 31, 2010.
Managements Annual Report on Internal Control Over Financial Reporting
The Companys management is responsible for establishing and maintaining an adequate system of
internal control over financial reporting, as defined in the Exchange Act Rule 13a-15(f). Our
internal control system is designed to provide reasonable assurance regarding the preparation and
fair presentation of financial statements for external purposes in accordance with generally
accepted accounting principles. All internal control systems, no matter how well designed, have
inherent limitations and can provide only reasonable assurance that the objectives of the internal
control system are met. Under the supervision and with the participation of the Companys
management, including the Companys President and Chief Executive Officer along with the Companys
Chief Financial Officer and Treasurer, the Company conducted an assessment of the effectiveness of
internal control over financial reporting based on the framework in Internal Control Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on
the assessment, management concluded that, as of December 31, 2010, the Companys internal control
over financial reporting is effective. The Companys internal control over financial reporting as
of December 31, 2010 has been audited by BDO USA, LLP, an independent registered public accounting
firm, as stated in their report which is included herein, which expresses an unqualified opinion on
the effectiveness of the Companys internal control over financial reporting as of December 31,
2010.
There was no change in the Companys internal control over financial reporting that occurred
during the Companys most recently completed fiscal quarter that has materially affected, or is
reasonably likely to materially affect, the Companys internal control over financial reporting.
Managements report shall not be deemed filed for purposes of Section 18 of the Exchange Act.
Report of Independent Registered Public Accounting Firm
Board of Directors and Shareholders
PRGX Global, Inc.
Atlanta, Georgia
PRGX Global, Inc.
Atlanta, Georgia
We have audited PRGX Global, Inc. and subsidiaries (the Company) internal control over financial
reporting as of December 31, 2010, based on criteria established in Internal Control Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO
criteria). The Companys management is responsible for maintaining effective internal control over
financial reporting and for its assessment of the effectiveness of internal control over financial
reporting, included in the accompanying Item 9A, Managements Annual Report on Internal Control
Over Financial Reporting. Our responsibility is to express an opinion on the Companys internal
control over financial reporting based on our audit.
We conducted our audit 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 effective internal control over financial reporting was
maintained in all material respects. Our audit included obtaining an understanding of internal
control over financial reporting, assessing the risk that a material weakness exists, and testing
and evaluating the design and operating effectiveness of internal control based on the
68
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assessed risk. Our audit also included performing such other procedures as we considered necessary
in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A companys internal control over financial reporting is a process designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting principles. A
companys internal control over financial reporting includes those policies and procedures that (1)
pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the company; (2) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of financial statements in accordance
with generally accepted accounting principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of management and directors of the company;
and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the companys assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or
detect misstatements. Also, projections of any evaluation of effectiveness to future periods are
subject to the risk that controls may become inadequate because of changes in conditions, or that
the degree of compliance with the policies or procedures may deteriorate.
In our opinion, PRGX Global, Inc. and subsidiaries maintained, in all material respects, effective
internal control over financial reporting as of December 31, 2010, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), the consolidated balance sheets of the Company as of December 31, 2010 and
2009, and the related consolidated statements of operations, shareholders equity, and cash flows
for each of the three years in the period ended December 31,
2010 and our report dated March 16,
2011 expressed an unqualified opinion thereon.
Atlanta, Georgia March 16, 2011 |
/s/ BDO USA, LLP |
ITEM 9B. Other Information.
None.
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PART III
ITEM 10. Directors, Executive Officers and Corporate Governance
Except as set forth below, the information required by Item 10 of this Form 10-K is
incorporated herein by reference to the information contained in the sections captioned Proposal
I: Election of Directors, Information about the Board of Directors and Committees of the Board of
Directors, Executive Officers and Section 16(a) Beneficial Ownership Reporting Compliance of
our definitive proxy statement (the Proxy Statement) for the 2011 Annual Meeting of Stockholders
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).
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.
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 sections captioned Executive Compensation, Information about the
Board of Directors and Committees of the Board of Directors, and Report of the Compensation
Committee of the Proxy Statement.
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ITEM 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters |
Except as set forth below, 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 of the Proxy Statement.
Securities Authorized for Issuance Under Equity Compensation Plans
The Company currently has three stock-based compensation plans under which awards have been
granted: (1) the Stock Incentive Plan (SIP), (2) the 2006 Management Incentive Plan (2006 MIP),
and (3) the 2008 Equity Incentive Plan (2008 EIP). The SIP, as amended, authorized the grant of
options or other stock-based awards, with respect to up to 1,237,500 shares of the Companys common
stock to key employees, directors, consultants and advisors. The SIP expired in June 2008.
At the annual meeting of shareholders held on August 11, 2006, the shareholders of the Company
approved a proposal granting authorization to issue up to 2.1 million shares of the Companys
common stock under the 2006 MIP. At Performance Unit settlement dates (which vary), participants
are paid in common stock and in cash. Participants will receive a number of shares of Company
common stock equal to 60% of the number of Performance Units being paid out, plus a cash payment
equal to 40% of the fair market value of that number of shares of common stock equal to the number
of Performance Units being paid out. The awards were 50% vested at the award date and the remainder
of the awards vests ratably over approximately the following eighteen months. The awards contain
certain anti-dilution and change of control provisions. Also, the number of Performance Units
awarded were automatically adjusted on a pro-rata basis upon the conversion into common stock of
any of the Companys senior convertible notes or Series A convertible preferred stock.
During the first quarter of 2008, the Board of Directors of the Company adopted the 2008 EIP,
which was approved by the shareholders at the annual meeting of the shareholders on May 29, 2008.
The 2008 EIP authorizes the grant of incentive and non-qualified stock options, stock appreciation
rights, restricted stock, restricted stock units and other incentive awards. Two million shares of
the Companys common stock were reserved for issuance under the 2008 EIP pursuant to award grants
to key employees, directors and service providers.
An amendment to the 2008 EIP was adopted by the Companys Board of Directors in April 2010 and
approved at the Companys annual meeting of shareholders held on June 15, 2010. The amendment,
among other things, increased the number of shares reserved for issuance under the 2008 EIP by
3,400,000 shares to a total of 5,400,000 shares and provided that restricted stock awards and other
full value awards would count as 1.41 shares against the available pool of shares under the plan.
The following table presents certain information with respect to compensation plans under
which equity securities of the registrant were authorized for issuance as of December 31, 2010:
Weighted-average exercise | Number of securities remaining | |||||||||||
Number of securities to be issued | price of outstanding | available for future issuance under | ||||||||||
upon exercise of outstanding | options, warrants and | equity compensation plans (excluding | ||||||||||
Plan category | options, warrants and rights | rights | securities reflected in column (a)) | |||||||||
(a) | (b) | (c) | ||||||||||
Equity compensation plans
approved by security
holders: |
||||||||||||
Stock Incentive Plan |
588,455 | $ | 12.69 | | ||||||||
2008 Equity Incentive Plan |
2,586,947 | 4.57 | 2,127,037 | |||||||||
Share awards (1) |
26,898 | | 77,794 | |||||||||
Equity compensation plans
not approved by security
holders (2) |
582,408 | 3.57 | | |||||||||
Total |
3,784,708 | $ | 6.54 | 2,204,831 | ||||||||
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(1) | Amounts presented represent 60% of Performance Unit awards under the Companys 2006 Management Incentive Plan. Performance Unit awards are required to be settled 60% in common stock and 40% in cash. | |
(2) | Inducement Option Grant during the first quarter of 2009, in connection with his joining the Company as its President and Chief Executive Officer, the Company made inducement grants outside its existing stock-based compensation plans to Mr. Romil Bahl. Mr. Bahl received an option to purchase 296,296 shares of the common stock of the Company and nonvested stock awards (restricted stock) representing 344,445 shares of the Companys common stock. Of those grants, 58,333 of restricted stock vested in 2010. |
ITEM 13. Certain Relationships and Related Transactions, and Director Independence
The information required by Item 13 of this Form 10-K is incorporated by reference to the
information contained in the sections captioned Information about the Board of Directors and
Committees of the Board of Directors, Executive Compensation - Employment Agreements and
Certain Transactions of the Proxy Statement.
ITEM 14. Principal Accountants 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.
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PART IV
ITEM 15. | Exhibits, 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 36. |
Page | ||||||
Report of Independent Registered Public Accounting Firm
|
37 | |||||
Consolidated Statements of Operations for the Years ended December
31, 2010, 2009 and 2008
|
38 | |||||
Consolidated Balance Sheets as of December 31, 2010 and 2009
|
39 | |||||
Consolidated Statements of Shareholders Equity for the Years ended
December 31, 2010, 2009 and 2008
|
40 | |||||
Consolidated Statements of Cash Flows for the Years ended December
31, 2010, 2009 and 2008
|
41 | |||||
Notes to Consolidated Financial Statements
|
42 |
(2) | Financial Statement Schedule: |
Schedule II Valuation and Qualifying Accounts
|
S-1 |
(3) | Exhibits |
Exhibit | ||
Number | Description | |
2.1
|
Share Purchase Agreement dated February 25, 2010 by and between PRGX U.K. Limited and Etesius Limited (incorporated by reference to Exhibit 2.1 to the Registrants Form 10-K filed on March 29, 2010). | |
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 Form 8-K filed on August 17, 2006). | |
3.1.1
|
Articles of Amendment of the Registrant dated January 20, 2010 (incorporated by reference to Exhibit 3.1 to the Registrants Form 8-K filed on January 25, 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). |
73
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Exhibit | ||
Number | Description | |
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). | |
+10.1
|
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 Registrants March 26, 1996 Registration Statement No. 333-1086 on Form S-1). | |
+10.2
|
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 Registrants Form 10-K for the year ended December 31, 2003). | |
+10.3
|
Form of the Registrants Non-Qualified Stock Option Agreement (incorporated by reference to Exhibit 10.2 to the Registrants Form 10-Q for the quarterly period ended June 30, 2001). | |
10.4
|
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 Registrants Form 10-K for the year ended December 31, 2001). | |
10.5
|
Office Lease Agreement between Galleria 600, LLC and PRG-Schultz International, Inc. (incorporated by reference to Exhibit 10.43 to the Registrants Form 10-K for the year ended December 31, 2001). | |
10.5.1
|
First Amendment to Office Lease Agreement between Galleria 600, LLC and PRG-Schultz International, Inc. (incorporated by reference to Exhibit 10.65 to the Registrants Form 10-K for the year ended December 31, 2002). | |
+10. 6
|
Amended Stock Incentive Plan (incorporated by reference to Exhibit 10.3 to the Registrants Form 10-Q for the quarterly period ended June 30, 2002). | |
+10.7
|
Amended HSA-Texas Stock Option Plan (incorporated by reference to Exhibit 10.4 to the Registrants Form 10-Q for the quarterly period ended June 30, 2002). | |
10.8
|
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 Registrants Form 10-Q for the quarterly period ended September 30, 2002). | |
10.8.1
|
Amendment to Investor Rights Agreement dated March 28, 2006 (incorporated by reference to Exhibit 10.8 to the Registrants Form 10-Q for the quarter ended March 31, 2006). | |
+10.9
|
Form of Non-employee Director Option Agreement (incorporated by reference to Exhibit 99.1 to the Registrants Report on Form 8-K filed on February 11, 2005). | |
+10.10
|
Amended and Restated Employment Agreement between Registrant and Mr. James B. McCurry, dated as of December 17, 2007 (incorporated by reference to Exhibit 10.1 to the Registrants Form 8-K filed on December 19, 2007). | |
+10.10.1
|
Release Agreement dated December 1, 2008 between the Registrant and Mr. McCurry (incorporated by reference to Exhibit 10.1 to the Registrants Form 8-K filed on December 4, 2008). | |
+10.11
|
Separation and Release Agreement between Registrant and Mr. John M. Cook, dated as of August 2, 2005 (incorporated by reference to Exhibit 99.1 to Registrants Form 8-K filed on August 8, 2005). | |
+10.11.1
|
First Amendment to Separation and Release Agreement with John M. Cook dated March 16, 2006 (incorporated by reference to Exhibit 99.1 to the registrants Form 8-K filed on March 22, 2006). |
74
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Exhibit | ||
Number | Description | |
+10.12
|
Separation and Release Agreement between Registrant and Mr. John M. Toma, dated as of August 2, 2005 (incorporated by reference to Exhibit 99.2 to Registrants Form 8-K filed on August 8, 2005). | |
+10.12.1
|
First Amendment to Separation and Release Agreement with John M. Toma dated March 16, 2006 (incorporated by reference to Exhibit 99.2 to the registrants Form 8-K filed on March 22, 2006). | |
+10.13
|
Employment Agreement between the Registrant and Peter Limeri entered into on November 28, 2008 (incorporated by reference to Exhibit 10.2 to the Registrants Form 8-K filed on December 4, 2008). | |
10.14
|
Amended and Restated Standstill Agreement, dated as of July 16, 2007, between Registrant and Blum Capital Partners, L.P. and certain of its affiliates (incorporated by reference to Exhibit 10.1 to the Registrants Form 8-K filed on July 16, 2007). | |
10.15
|
Restructuring Support Agreement dated December 23, 2005 (incorporated by reference to Exhibit 10.66 to the Registrants Form 10-K for the year ended December 31, 2005). | |
10.15.1
|
Amended and Restated Restructuring Support Agreement (incorporated by reference to Exhibit 10.1 to the Registrants Form 10-Q for the quarter ended March 31, 2006). | |
+10.16
|
Employment Agreement between the Registrant and Larry Robinson dated November 28, 2008 (incorporated by reference to Exhibit 10.3 to the Registrants Form 8-K filed on December 4, 2008). | |
+10.16.1
|
Separation Agreement between the Registrant and Larry Robinson dated August 3, 2010 (incorporated by reference to Exhibit 10.1 to the Registrants Form 8-K filed on August 9, 2010). | |
+10.17
|
Employment Agreement between the Registrant and Brad Roos dated November 28, 2008 (incorporated by reference to Exhibit 10.4 to the Registrants Form 8-K filed on December 4, 2008). | |
+10.18
|
Expatriate Assignment Agreement with Brad Roos (incorporated by reference to Exhibit 10.1 to the Registrants Form 8-K filed on February 14, 2008). | |
+10.18.1
|
Separation Agreement between the Registrant and Brad Roos dated May 29, 2009 (incorporated by reference to Exhibit 10.2 to the Registrants Form 8-K filed on June 1, 2009). | |
10.19
|
Registration Rights Agreement dated March 17, 2006 (incorporated by reference to Exhibit 10.2 to the Registrants Form 10-Q for the quarter ended March 31, 2006). | |
10.20
|
Amended and Restated Financing Agreement dated September 17, 2007 (incorporated by reference to Exhibit 10.1 to the Registrants Form 8-K filed on September 21, 2007). | |
10.20.1
|
Amendment Number One to Amended and Restated Financing Agreement (incorporated by reference to Exhibit 10.1 to the Registrants Form 8-K filed on April 3, 2008). | |
10.20.2
|
Amendment Number Two to Amended and Restated Financing Agreement (incorporated by reference to Exhibit 10.1 to the Registrants Form 8-K filed on April 3, 2009) | |
10.21
|
Security Agreement dated March 17, 2006 (incorporated by reference to Exhibit 10.4 to the Registrants Form 10-Q for the quarter ended March 31, 2006). | |
+10.22
|
Amended and Restated 2006 Management Incentive Plan (incorporated by reference to Exhibit 10.1 to the Registrants Form 10-Q for the quarter ended September 30, 2006). | |
+10.22.1
|
Form of Performance Unit Agreement under 2006 Amended and Restated Management Incentive Plan (incorporated by reference to Exhibit 10.2 to the Registrants Form 10-Q for the quarter ended September 30, 2006). | |
+10.22.2
|
Form of Amendment to Performance Unit Agreement (incorporated by reference to Exhibit 10.1 to the Registrants Form 8-K filed on December 11, 2007). | |
+10.23
|
Employment Agreement with Norman Lee White dated June 19, 2006 (incorporated by reference to Exhibit 10.1 to the Registrants Report on Form 8-K filed on June 20, 2006). | |
+10.23.1
|
Separation Agreement dated November 30, 2008 between PRG-Schultz USA and Mr. White (incorporated by reference to Exhibit 10.5 to the Registrants Form 8-K filed on December 4, 2008). | |
+10.24
|
Form of Non-Employee Director Stock Option Agreement (incorporated by reference to Exhibit 10.1 to the Registrants Form 8-K filed on September 18, 2007). | |
+10.25
|
2009 PRG-Schultz Performance Bonus Plan (incorporated by reference to Exhibit 10.25 to the Registrants Form 10-K filed on March 29, 2010). |
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Exhibit | ||
Number | Description | |
+10.26
|
PRGX Global, Inc. 2008 Equity Incentive Plan (incorporated by reference to Exhibit 10.1 to the Registrants Form 8-K filed on June 4, 2008). | |
+10.26.1
|
Form of Restricted Stock Agreement for Non-Employee Directors (incorporated by reference to Exhibit 10.2 to the Registrants Form 8-K filed on June 4, 2008). | |
+10.26.2
|
Form of Non-Qualified Stock Option Agreement for Non-Employee Directors (incorporated by reference to Exhibit 10.3 to the Registrants Form 8-K filed on June 4, 2008). | |
+10.27
|
Employment Agreement dated January 8, 2009, by and between Mr. Romil Bahl and the Registrant (incorporated by reference to Exhibit 10.1 to the Registrants Form 8-K filed on January 14, 2009). | |
+10.27.1
|
Form of Nonqualified Stock Option Agreement (incorporated by reference to Exhibit 10.2 to the Registrants Form 8-K filed on January 14, 2009). | |
+10.27.2
|
Form of Restricted Stock Agreement (incorporated by reference to Exhibit 10.3 to the Registrants Form 8-K filed on January 14, 2009). | |
+10.28
|
Employment Agreement dated May 26, 2009 by and between the Registrant and Robert B. Lee (incorporated by reference to Exhibit 10.1 to the Registrants Form 8-K filed on June 1, 2009). | |
10.29
|
Revolving Credit and Term Loan Agreement dated as of January 19, 2010, by and among PRGX Global, Inc. (formerly PRG-Schultz International, Inc), and PRGX USA, Inc. (formerly PRG-Schultz USA, Inc.), as co-borrowers, the lenders from time to time party thereto, SunTrust Bank, as issuing bank, and SunTrust Bank, as administrative agent (incorporated by reference to Exhibit 10.1 to the Registrants Form 8-K filed on January 25, 2010). | |
10.29.1
|
Subsidiary Guaranty Agreement dated as of January 19, 2010 by and among PRGX Global, Inc. (formerly PRG-Schultz International, Inc), and PRGX USA, Inc. (formerly PRG-Schultz USA, Inc.), as borrowers, each of the subsidiaries of PRGX Global, Inc. listed on schedule I thereto, as guarantors, and SunTrust Bank, as administrative agent (incorporated by reference to Exhibit 10.2 to the Registrants Form 8-K filed on January 25, 2010). | |
10.29.2
|
Security Agreement dated January 19, 2010 among PRGX Global, Inc. (formerly PRG-Schultz International, Inc), PRGX USA, Inc. (formerly PRG-Schultz USA, Inc.), and the other direct and indirect subsidiaries of PRGX Global, Inc. signatory thereto, as grantors, in favor of SunTrust Bank, as administrative agent (incorporated by reference to Exhibit 10.3 to the Registrants Form 8-K filed on January 25, 2010). | |
10.29.3
|
Equity Pledge Agreement dated as of January 19, 2010, made by PRGX Global, Inc. (formerly PRG-Schultz International, Inc), PRGX USA, Inc. (formerly PRG-Schultz USA, Inc.), and the other direct and indirect subsidiaries of PRGX Global, Inc. signatory thereto, as grantors, in favor of SunTrust Bank, as administrative agent (incorporated by reference to Exhibit 10.4 to the Registrants Form 8-K filed on January 25, 2010). | |
+10.30
|
Employment Agreement between the Registrant and Victor A. Allums dated November 28, 2008 (incorporated by reference to Exhibit 10.31 to the Registrants Form 10-K filed on March 29, 2010). | |
+10.31
|
Employment Agreement between the Registrant and Jennifer G. Moore dated November 28, 2008 (incorporated by reference to Exhibit 10.32 to the Registrants Form 10-K filed on March 29, 2010). | |
+10.31.1
|
Separation Agreement between the Registrant and Jennifer G. Moore dated October 26, 2009 (incorporated by reference to Exhibit 10.32.1 to the Registrants Form 10-K filed on March 29, 2010). | |
+10.32
|
Employment Agreement between the Registrant and James Shand dated March 12, 2009 (incorporated by reference to Exhibit 10.33 to the Registrants Form 10-K filed on March 29, 2010). | |
+10.33
|
Employment Agreement between the Registrant and Michael Noel dated September 30, 2009. | |
14.1
|
Code of Ethics for Senior Financial Officers (incorporated by reference to Exhibit 14.1 to the Registrants Form 10-K for the year ended December 31, 2003). | |
21.1
|
Subsidiaries of the Registrant. | |
23.1
|
Consent of BDO USA, LLP |
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Exhibit | ||
Number | Description | |
31.1
|
Certification of the Chief Executive Officer, pursuant to Rule 13a-14(a) or 15d-14(a), for the year ended December 31, 2010. | |
31.2
|
Certification of the Chief Financial Officer, pursuant to Rule 13a-14(a) or 15d-14(a), for the year ended December 31, 2010. | |
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, 2010. |
+ | Designates management contract or compensatory plan or arrangement. |
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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.
PRGX GLOBAL, INC. |
||||
By: | /s/ ROMIL BAHL | |||
Romil Bahl | ||||
President, Chief Executive Officer, Director (Principal Executive Officer) |
||||
Date:
March 16, 2011
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.
Signature | Title | Date | ||
/s/ ROMIL BAHL |
President, Chief Executive Officer and Director (Principal Executive Officer) |
March 16, 2011 | ||
/s/ ROBERT B. LEE |
Chief Financial Officer and Treasurer (Principal Financial Officer) |
March 16, 2011 | ||
/s/ BRIAN D. LANE |
Controller (Principal Accounting Officer) |
March 16, 2011 | ||
/s/ PATRICK M. BYRNE |
Director | March 16, 2011 | ||
/s/ DAVID A. COLE |
Director | March 16, 2011 | ||
/s/ PATRICK G. DILLS |
Chairman of the Board | March 16, 2011 | ||
/s/ ARCHELLE GEORGIOU FELDSHON |
Director | March 16, 2011 | ||
/s/ N. COLIN LIND |
Director | March 16, 2011 | ||
/s/ PHILIP J. MAZZILLI, JR. |
Director | March 16, 2011 | ||
/s/ STEVEN P. ROSENBERG |
Director | March 16, 2011 |
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SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 2010, 2009 AND 2008
(In thousands)
FOR THE YEARS ENDED DECEMBER 31, 2010, 2009 AND 2008
(In thousands)
Additions | Deductions | |||||||||||||||
Charge | ||||||||||||||||
Balance at | (Credit) to | Credit to | Balance at | |||||||||||||
Beginning | Costs and | the respective | End of | |||||||||||||
Description | of Year | Expenses | receivable (1) | Year | ||||||||||||
2010 |
||||||||||||||||
Allowance for doubtful accounts receivable |
$ | 1,032 | (360 | ) | (81 | ) | $ | 591 | ||||||||
Allowance for doubtful employee advances
and miscellaneous receivables |
$ | 351 | 559 | (241 | ) | $ | 669 | |||||||||
Deferred tax valuation allowance |
$ | 58,304 | (3,503 | ) | | $ | 54,801 | |||||||||
2009 |
||||||||||||||||
Allowance for doubtful accounts receivable |
$ | 921 | 137 | (26 | ) | $ | 1,032 | |||||||||
Allowance for doubtful employee advances
and miscellaneous receivables |
$ | 311 | 235 | (195 | ) | $ | 351 | |||||||||
Deferred tax valuation allowance |
$ | 64,307 | (6,003 | ) | | $ | 58,304 | |||||||||
2008 |
||||||||||||||||
Allowance for doubtful accounts receivable |
$ | 826 | 319 | (224 | ) | $ | 921 | |||||||||
Allowance for doubtful employee advances
and miscellaneous receivables |
$ | 1,831 | | (1,520 | ) | $ | 311 | |||||||||
Deferred tax valuation allowance |
$ | 79,805 | (15,498 | ) | | $ | 64,307 |
(1) | Write-offs, net of recoveries |
S-1