As filed with the Securities and Exchange Commission on August 15, 2006
Registration No. 333-134698
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
__________________________________
AMENDMENT NO. 5
FORM S-1/A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
PRG-SCHULTZ INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
__________541600__________
(Primary Standard Industrial Classification Code Number)
GEORGIA 58-2213805
(State or other jurisdiction of incorporation or (I.R.S. Employer Identification No.)
organization)
__________________________________
PRG-SCHULTZ INTERNATIONAL, INC.
600 GALLERIA PARKWAY
SUITE 100
ATLANTA, GEORGIA 30339
(770) 779-3900
(Address, including zip code, telephone number, including area code,
of registrant's principal executive offices)
__________________________________
COPIES TO:
VICTOR A. ALLUMS B. JOSEPH ALLEY, JR., ESQ.
SENIOR VICE PRESIDENT ARNALL GOLDEN GREGORY LLP
PRG-SCHULTZ INTERNATIONAL, INC. 171 17TH ST.
600 GALLERIA PARKWAY SUITE 2100
SUITE 100 ATLANTA, GEORGIA 30363
ATLANTA, GEORGIA 30339 (404) 873-8500
(770) 779-3900
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
__________________________________
Approximate Date of Commencement of Proposed Sale To The Public: From time
to time after the effective date of this Registration Statement becomes
effective.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [ X ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
CALCULATION OF REGISTRATION FEE
================================= =============================== ====================
Title of Each Class of Proposed Maximum Aggregate Amount of
Securities to be Registered Offering Price (1) Registration Fee*
--------------------------------- ------------------------------- --------------------
11% Senior Notes $ 24,858,433 $ 2,659.85
--------------------------------- ------------------------------- --------------------
10% Senior Convertible Notes 46,873,854 5,015.50
(2)(3)
--------------------------------- ------------------------------- --------------------
9% Senior Series A Convertible 10,697,972 1,144.68
Participating Preferred Stock
(3)(4)
--------------------------------- ------------------------------- --------------------
Common Stock, no par value per 17,270 1.85
share (3)(5)(6)
--------------------------------- ------------------------------- --------------------
Total $ 82,447,528 $ 8,821.89*
================================= =============================== ====================
*$8,820.32 of the fee was paid with the initial filing of this registration
statement on June 2, 2006. The remaining fee was remitted to the Commission via
wire transfer on July 18, 2006.
(1) Estimated solely for purposes of calculating the registration fee pursuant
to Rule 457(o) under the Securities Act.
(2) Includes up to $18,097,373.66 of additional principal amount of notes that
may be issued in payment of interest on the outstanding notes.
(3) Pursuant to Rule 416 under the Securities Act, the registrant is also
registering such indeterminate number of shares of series A preferred stock and
common stock, including the associated preferred share purchase rights, as may
be issued from time to time as a result of the terms of the convertible notes
and the series A convertible preferred stock which provide for a change in the
amount of securities offered to prevent dilution resulting from stock splits,
stock dividends, or similar transactions.
(4) Includes 57,406 shares of Series A preferred stock (liquidation preference
of $6,888,720). The liquidation preference may increase to up to $10,697,972 in
lieu of the payment of cash dividends on the series A preferred stock.
(5) Includes 3,561 shares that are currently outstanding and up to 10,977,733
shares that may be issued upon conversion of the convertible notes and Series A
preferred stock registered. No additional consideration will be received for
these 10,977,733 shares of common stock or the associated preferred share
purchase rights, to be received upon conversion of notes or series A preferred
stock, as applicable, and therefore no additional registration fee is required,
pursuant to Rule 457(i).
(6) The proposed maximum offering price for the outstanding shares of common
stock offered is calculated based on $4.85 per share, the average of the high
and low price of the common stock ("Average Price") on the Nasdaq National
Market on May 31, 2006, for the 3,561 shares included in the registration
statement filed on June 2, 2006, and $3.45 per share, the Average Price on July
14, 2006, for the additional 10 shares included in the first amendment to the
registration statement filed on July 18, 2006. The stock prices have been
adjusted to reflect the one-for-10 reverse stock split effective on August 14,
2006.
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THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(a), MAY DETERMINE.
THE INFORMATION IN THIS PROSPECTUS IS INCOMPLETE AND MAY BE CHANGED. THE SELLING
SECURITYHOLDERS MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT
FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS
IS NOT AN OFFER TO SELL THESE SECURITIES AND IS NOT SOLICITING AN OFFER TO BUY
THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
SUBJECT TO COMPLETION, DATED AUGUST 15, 2006
PROSPECTUS
PRG-SCHULTZ INTERNATIONAL, INC.
$24,858,433 in Principal Amount of 11.0% Senior Notes Due 2011
$28,776,480 in Principal Amount of 10.0% Senior Convertible Notes Due 2011
57,406 Shares ($6,888,720 Liquidation Preference, which may increase to up
to $10,697,972 to satisfy dividends payable) of 9.0% Senior Series A
Convertible Participating Preferred Stock, and
3,561 Shares of Common Stock, No Par Value Per Share
This prospectus relates to the potential offer and sale from time to time of the
above referenced securities by the securityholders identified on page 88 of this
prospectus or in any accompanying post-effective amendment or supplement to this
prospectus. This prospectus may also be used by the selling securityholders to
offer:
o up to $18,097,373.66 in principal amount of additional 10.0% senior
convertible notes that may be issued in payment of interest on
outstanding 10.0% senior notes;
o up to 10,977,733 shares of common stock issuable upon conversion of
the 10.0% notes and/or 9.0% senior series A preferred stock.
On March 17, 2006, we closed an exchange offer in which we issued, in
exchange for $124,530,000 aggregate principal amount of our 4 3/4% Convertible
Subordinated Notes due 2006, $51,635,846 in principal amount of our 11% senior
notes due 2011, $59,774,400 of our 10% senior convertible notes due 2011, and
124,530 shares ($14,943,600 liquidation preference) of our 9% senior series A
convertible preferred stock. Selling securityholders may use this prospectus to
resell up to $24,858,433 of the senior notes, $28,776,480 of the senior
convertible notes, 57,406 shares of the senior series A preferred stock, 3,561
shares of common stock, any additional senior convertible notes issued in
payment of interest on the senior convertible notes registered, and common stock
issuable upon conversion of the convertible notes, and the common stock issuable
upon conversion of the senior series A preferred stock.
None of the senior notes, the senior convertible notes or the senior series
A convertible preferred stock are listed for trading on any exchange or
quotation system. Our common stock is quoted on The Nasdaq National Market. Our
common stock will trade under the symbol "PRGXD" for 20 trading days beginning
August 14, 2006 to designate that it is trading on a post-reverse stock split
basis, and will resume trading under the symbol "PRGX" after the 20-day period
has expired. Prior to August 14, 2006, it traded under the symbol "PRGX." We
recently effected a 1-for-10 reverse stock split, which became effective on that
date. On August 11, 2006, the last reported bid price of our common stock on The
Nasdaq National Market was $3.00 per share. Except as otherwise indicated, all
share and per share information contained in this prospectus has been revised to
give effect to the Company's 1 for 10 reverse stock split effective on August
14, 2006.
We will not receive any proceeds from the sale by the selling
securityholders of the notes or preferred stock or of common stock issuable upon
conversion of the notes and preferred stock. Other than selling commissions and
fees and stock transfer taxes, we will pay all expenses of the registration of
the notes and the common stock and the other expenses specified in the
registration rights agreement.
INVESTING IN THE NOTES AND PREFERRED STOCK AND THE COMMON STOCK ISSUABLE
UPON CONVERSION OF THE NOTES INVOLVES RISKS THAT ARE DESCRIBED IN THE "RISK
FACTORS" SECTION BEGINNING ON PAGE 9 OF THIS PROSPECTUS.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
The date of this prospectus is August 15, 2006.
TABLE OF CONTENTS
SUMMARY.......................................................................1
RISK FACTORS..................................................................9
FORWARD-LOOKING STATEMENTS...................................................18
USE OF PROCEEDS..............................................................19
PRICE RANGE OF COMMON STOCK..................................................19
DIVIDEND POLICY..............................................................20
SELECTED CONSOLIDATED EARNINGS PER SHARE DATA................................20
UNAUDITED PRO FORMA FINANCIAL DATA...........................................21
DESCRIPTION OF THE NOTES.....................................................24
DESCRIPTION OF CAPITAL STOCK.................................................63
MATERIAL UNITED STATES FEDERAL INCOME TAX CONSEQUENCES.......................77
SELLING SECURITYHOLDERS......................................................88
PLAN OF DISTRIBUTION.........................................................92
CERTAIN TRANSACTIONS.........................................................94
LEGAL MATTERS................................................................96
EXPERTS......................................................................96
WHERE YOU CAN FIND MORE INFORMATION..........................................96
INCORPORATION BY REFERENCE...................................................96
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As used in this prospectus, the terms "we," "us" and "our" refer to
PRG-Schultz International, Inc., a Georgia corporation ("PRG-Schultz"), and its
subsidiaries unless otherwise stated.
i
SUMMARY
This summary may not contain all of the information that you should
consider before investing in our notes.
THE COMPANY
We are the leading worldwide provider of recovery audit services to large
and mid-size businesses having numerous payment transactions with many vendors.
We serve clients in over 35 countries. In businesses with large purchase volumes
and continuously fluctuating prices, some small percentage of erroneous
overpayments to vendors is inevitable. Although these businesses process the
vast majority of payment transactions correctly, a small number of errors do
occur. In the aggregate, these transaction errors can represent meaningful "lost
profits" that can be particularly significant for businesses with relatively
narrow profit margins. Our trained, experienced industry specialists use
sophisticated proprietary technology and advanced recovery techniques and
methodologies to identify overpayments to vendors. Our industry specialists also
review our clients' current practices and processes related to procurement and
other expenses to manage and reduce expense levels, and also apply industry best
practices to help improve our clients' business and efficiencies.
In March 2001, we formalized a strategic realignment initiative designed to
enhance our financial position and clarify our investment and operating strategy
by focusing primarily on our core Accounts Payable business. Under this
strategic realignment initiative, we announced our intent to divest the
following non-core businesses: Meridian VAT Reclaim ("Meridian") within the
former Taxation Services segment, the Logistics Management Services segment, the
Communications Services segment and the Channel Revenue division within the
Accounts Payable Services segment. We disposed of our Logistics Management
Services segment in October 2001. Additionally, in December 2001, we disposed of
our French Taxation Services business which had been part of continuing
operations until time of disposal. During the first quarter of 2002, we
concluded that the then current negative market conditions were not conducive to
receiving terms acceptable to us for the Meridian, Communications Services, and
Channel Revenue businesses. As such, on January 24, 2002, our Board of Directors
approved a proposal to retain the three remaining discontinued operations.
On January 24, 2002, we acquired substantially all the assets and certain
liabilities of Howard Schultz & Associates International, Inc. and affiliates
("HSA-Texas"), formerly our principal competitor in the Accounts Payable
Services business. In connection with the acquisition of the business of
HSA-Texas, we changed our name to PRG-Schultz International, Inc.
During the fourth quarter of 2003, we once again declared our remaining
Communications Services operations as a discontinued operation and subsequently
sold such operations on January 16, 2004.
During the fourth quarter of 2005, we declared our channel revenue business
("Channel Revenue") and airline business, and the Accounts Payable Service
segment's business units in South Africa and Japan as discontinued operations.
On January 11, 2006, we consummated the sale of Channel Revenue.
Our principal executive offices are located at 600 Galleria Parkway, Suite
100, Atlanta, Georgia 30339, and our telephone number is (770) 779-3900.
Recent Developments - Our Shareholder Meeting
On August 11, 2006, we held our annual meeting of shareholders. At the
meeting, the shareholders approved several proposals which affect the terms and
conditions of the securities we are offering in this prospectus. The proposals
include:
o An increase in the number of authorized shares of common stock from 20
million shares to 50 million shares.
o An increase in the number of authorized shares of series B preferred
stock from 125,000 shares to 264,000 shares.
o Two separate amendments to our articles of incorporation to revise the
anti-dilution provisions of the series A preferred stock and the
series B preferred stock, to provide that there will be no adjustment
to the conversion price of the preferred stock due to any conversion
of our 10% senior convertible notes, series A preferred stock or
series B preferred stock.
o Two separate amendments to our articles of incorporation to revise the
voting provisions of the series A preferred stock and the series B
preferred stock, to make it clear that the series A and series B
preferred stock have the right to vote as a single class on any
proposed amendment to our bylaws only if the proposed amendment would
adversely affect either class of preferred stock.
The effects of the above proposals are discussed, as applicable, under
"Description of Capital Stock" and "Description of the Notes" in this
prospectus.
In addition, the shareholders approved a 1-for-10 reverse stock split of
our common stock. Except as otherwise indicated, the share and per share data in
this prospectus have been adjusted to reflect the reverse stock split which
became effective on August 14, 2006. The shareholders also approved the issuance
of up to 2.1 million shares of common stock pursuant to our 2006 Management
Incentive Plan.
THE OFFERING
The following is a brief summary of the terms of this offering. For a more
complete description see "Description of the Notes" and "Description of Capital
Stock" below.
Issuer............................................. PRG-Schultz International, Inc.
Senior Notes offered............................... $24,858,433 aggregate principal amount of 11.0% senior notes due March 15,
2011.
Senior Convertible Notes offered................... $28,776,480 aggregate principal amount of 10.0% senior convertible notes due on
March 15, 2011, plus up to $18,097,373.66 aggregate principal amount of senior
notes that may be issued in payment of interest on the senior convertible notes
registered.
Senior Series A Convertible Preferred Stock offered 57,406 shares ($6,888,720 aggregate liquidation preference) of 9.0% senior
series A convertible preferred stock. The liquidation preference may increase
to up to $10,697,972 in satisfaction of dividends otherwise payable in cash
on the series A convertible preferred stock.
Common Stock offered............................. 3,561 shares, plus up to 10,977,733 shares that may be issued upon conversion
of senior convertible notes or senior series A convertible preferred stock.
Securities offered by ............................. Selling securityholders named herein. See "Selling Securityholders."
Registration rights................................ We have filed with the SEC the registration statement of which this prospectus
is a part pursuant to a registration rights agreement with the original
purchasers of certain of the securities. We have agreed to keep the regis-
tration statement effective for five years or until such earlier date when the
selling securityholders are able to sell their securities immediately pursuant
2
to Rule 144(k) under the Securities Act of 1933. If we do not comply with these
registration obligations, we will be required to pay liquidated damages to the
selling securityholders. See "Description of the Notes--Registration Rights."
Use of proceeds.................................... We will not receive any of the proceeds from the sale of the securities offered
by this prospectus.
Trading............................................ We do not intend to list the notes or preferred stock on any national
securities exchange or The Nasdaq National Market. Our common stock is quoted
on The Nasdaq National Market. Our common stock will trade under the symbol
"PRGXD" for 20 trading days beginning August 14, 2006 to designate that it is
trading on a post-reverse stock split basis, and will resume trading under the
symbol "PRGX" after the 20-day period has expired. Prior to August 14, 2006,
it traded under the symbol "PRGX." We recently effected a 1-for-10 reverse
stock split, which became effective on that date.
Risk factors....................................... There are risks associated with this investment. You should examine the factors
discussed in "Risk Factors" and elsewhere in this prospectus and consider them
carefully before deciding to invest in the notes or the common stock issuable
upon conversion of the notes.
SUMMARY DESCRIPTION OF THE SECURITIES OFFERED
SUMMARY DESCRIPTION OF SENIOR NOTES
SECURITIES OFFERED $24,858,433 aggregate principal amount of 11.0% Senior Notes due 2011.
MATURITY DATE March 15, 2011
INTEREST RATE 11.0% per annum on the principal amount, payable semiannually on March 15 and
September 15 of each year, beginning on September 15, 2006. After an event of
default, interest will accrue at a rate of 13.0% until all defaults are cured or
waived.
RANKING The senior notes are:
o senior in right of payment to all existing and future subordinated
indebtedness of the company, including the existing notes, if any;
o effectively (but not expressly) subordinated to our existing and future
secured indebtedness to the extent of the collateral securing that
indebtedness and to the existing and future liabilities of our subsidiaries,
which includes our senior secured credit facility and any permitted
refinancings thereof; and
o pari passu in right of payment with the senior convertible notes and
any future senior indebtedness of the company.
None of our subsidiaries is obligated for the payment of obligations under the
senior notes.
CERTAIN MATERIAL COVENANTS AND The indenture governing the senior notes includes covenants that limit our
RESTRICTIONS ability and the ability of each of our restricted subsidiaries to:
o incur, assume, or guarantee additional debt and issue or sell preferred
stock;
3
o pay dividends on, redeem or repurchase our capital stock;
o make investments;
o create or permit certain liens;
o use the proceeds from sales of assets and subsidiary stock;
o enter into transactions with affiliates;
o incur any indebtedness that is contractually subordinated to any other
indebtedness unless subordinated in right of payment to the senior notes on
substantially identical terms; and
o consolidate or merge or sell all or substantially all of our assets.
See "Description of the Notes -- Senior Notes -- Certain Covenants."
OPTIONAL REDEMPTION We may redeem all or part of the senior notes at any time upon not less than 30
nor more than 60 days' notice at the following redemption prices, plus accrued
and unpaid interest, if any, to the particular redemption date beginning on the
issue date and each of the other following indicated periods:
Redemption Period Percentage
----------------- ----------
Issue Date through March 14, 2007 104.00%
March 15, 2007 through March 14, 2008 102.00%
March 15, 2008 and thereafter 100.00%
See "Description of the Notes -- New Senior Notes -- Optional Redemption."
CHANGE IN CONTROL Upon a change in control, each holder of the senior notes will have the right to
require us to repurchase some or all of its senior notes at a purchase price
equal to 100% of the principal amount of the senior notes plus accrued and
unpaid interest, if any, to the date of purchase. See "Description of the Notes
- Senior Notes - Repurchase at the Option of Holders - Change in Control."
MANDATORY OFFER TO PURCHASE In the event that we consummate an asset sale permitted by the senior notes
indenture governing the senior notes, any proceeds in excess of $10 million will
be required to be paid to the holders of senior notes to purchase the maximum
amount of senior notes and other indebtedness that is pari passu to the senior
notes. The offer price to holders of senior notes will be equal to 100% of the
principal amount, plus accrued and unpaid interest, if any, to the date of
purchase. See "Description of the Notes - Senior Notes - Repurchase at the
Option of Holders - Asset Sales."
LISTING The senior notes will not be listed for trading on any national securities
exchange or authorized for quotation on any automated quotation system.
BOOK ENTRY; DELIVERY AND FORM The senior notes initially will be held only through DTC.
ORIGINAL ISSUE DISCOUNT For U.S. federal income tax purposes, the senior notes were issued with
"original issue discount" to the extent the principal amount of such notes
exceeded their issue price (basically, their fair market value at issuance).
Any original issue discount generally will be required to be included in your
4
gross income as interest on a constant yield basis over the term of the notes,
regardless of your regular method of accounting for U.S. federal income tax
purposes. Accordingly, you may be required to include interest income prior to
the receipt of a corresponding amount of cash. See "Material United States
Federal Income Tax Consequences - Consequences of Ownership and Disposition of
Notes."
SUMMARY DESCRIPTION OF SENIOR CONVERTIBLE NOTES
SECURITIES OFFERED $28,776,480 aggregate principal amount of 10.0% Senior Convertible Notes due
2011, plus up to $18,097,373.66 additional principal amount of 10.0% Senior
Convertible Notes that may be issued in payment of interest on the Senior
Convertible Notes we are registering.
MATURITY DATE March 15, 2011
INTEREST RATE 10.0% per year on the principal amount, payable semiannually on March 15 and
September 15 of each year, beginning on September 15, 2006. Interest may be paid
at our option by issuance of additional senior convertible notes.
RANKING The senior convertible notes are:
o senior unsecured obligations of the company;
o senior in right of payment to all existing and future subordinated
indebtedness of the company, including the existing notes, if any;
o effectively (but not expressly) subordinated to our existing and future
secured indebtedness to the extent of the collateral securing that
indebtedness and to the existing and future liabilities of our
subsidiaries, which includes our senior secured credit facility and any
permitted refinancings thereof; and
o pari passu in right of payment with the senior notes and any future
senior indebtedness of the company.
None of our subsidiaries will be obligated for the payment of our obligations
under the senior convertible notes.
CONVERSION RIGHTS After August 15, 2006 but before the conversion rights date, the senior
convertible notes are convertible, at the option of the holder prior to
maturity, into approximately 2.083 shares of series B convertible preferred
stock per $1,000 principal amount of senior convertible notes. In the event that
a holder converts into series B convertible preferred stock, each share of such
series B convertible preferred stock must be certificated. On the conversion
rights date, these conversion rights into the series B convertible preferred
stock will automatically change to conversion rights into approximately 153.85
shares of our common stock per $1,000 principal amount of senior convertible
notes at a conversion price of $6.50 per share (as adjusted for the reverse stock
split), subject to certain anti-dilution adjustments. The "conversion rights date"
is the first date on which a registration statement registering the resale of the
securities by affiliates becomes effective (this registration statement is expected
to satisfy this obligation).
5
OPTIONAL REDEMPTION We may not call the senior convertible notes for redemption unless the senior
notes have been paid in full and the conversion rights date shall have occurred.
On or after the conversion rights date and the date on which all senior notes
have been paid in full, we may redeem the senior convertible notes, in whole or
in part, at a redemption price of 100% of the principal amount of senior
convertible notes to be redeemed, plus accrued and unpaid interest on the senior
convertible notes to be redeemed to the applicable redemption date. See
"Description of the Notes -- Senior Convertible Notes -- Optional Redemption."
CHANGE IN CONTROL Upon a change of control, each holder of the senior convertible notes will have
the right to require us to repurchase some or all of its senior convertible
notes at a purchase price equal to 100% of the principal amount of the senior
convertible notes plus accrued and unpaid interest to the date of purchase. See
"Description of the Notes -- Senior Convertible Notes -- Repurchase at Option of
Holders Upon a Change in Control."
LISTING The senior convertible notes will not be listed for trading on any national
securities exchange or authorized for quotation on any automated quotation
system.
BOOK ENTRY; DELIVERY AND FORM The senior convertible notes initially will be held only through DTC.
ORIGINAL ISSUE DISCOUNT Due to our ability to pay interest on the senior convertible notes in additional
senior convertible notes, the senior convertible notes will be treated for
U.S. federal income tax purposes as having been issued with "original issue
discount" equal to at least the amount of stated interest payable over the term
of the notes. Such original issue discount (inclusive of all stated interest)
generally would be required to be included in your gross income on a constant
yield basis over the term of the notes, regardless of your regular method of
accounting for U.S. federal income tax purposes. Accordingly, you may be
required to include interest income prior to the receipt of a corresponding
amount of cash. See "Material United States Federal Income Tax Consequences --
Consequences of Ownership and Disposition of the Notes."
SUMMARY DESCRIPTION OF THE SERIES A CONVERTIBLE PREFERRED STOCK
SECURITIES OFFERED 57,406 shares ($6,888,720 aggregate liquidation preference) of 9.0% Senior
Series A Convertible Participating Preferred Stock. The liquidation preference
may increase to up to $10,697,972 in satisfaction of dividends otherwise payable in cash
on the Senior Series A Convertible Participating Preferred Stock we are registering.
DIVIDENDS Cumulative annual dividends at a rate of 9.0% of the then-effective liquidation
preference per share payable in cash if and when declared (subject to accretion if
undeclared, as described below), on March 15 and September 15 of each year,
6
commencing on September 15, 2006. The liquidation preference will be increased by
any dividends not declared on any dividend payment date. In addition, if any
dividends or distributions are paid on the company's common stock (other than a
dividend or distribution paid solely in additional shares of the company's common
stock), the holders of series A convertible preferred stock will be paid dividends
or distributions per share of series A convertible preferred stock in an amount
equal to what such holder would have received had it converted its shares of
series A convertible preferred stock into shares of common stock of the company
immediately prior to the record date for the payment of such dividend or
distribution.
INITIAL LIQUIDATION PREFERENCE $120.00 per share, subject to accretion as described above.
RANKING The series A convertible preferred stock ranks (i) junior to all indebtedness of
the company, (ii) senior to the common stock of the company with respect to
dividends and amounts payable upon the liquidation or winding up of the company
and to all other classes or series of the company's common equity and to all
equity securities the terms of which specifically provide that such equity
securities rank junior to the series A convertible preferred stock, (iii) on a
parity with the series B convertible preferred stock and all other equity
securities issued by the company, subject to the consent of the required holders
of the series A convertible preferred stock, other than those securities described
in clauses (ii) and (iv), and (iv) junior to all equity securities issued by the
company, subject to the consent of the required holders of the series A
convertible preferred stock, the terms of which specifically provide that such
equity securities rank senior to such series A convertible preferred stock.
CONVERSION RIGHTS Each share of the series A convertible preferred stock is convertible, at any
time, into a number of shares of common stock of the company equal to the
then-effective liquidation preference thereof divided by the conversion price of
$2.8405 (as adjusted for the reverse stock split, and subject to certain
additional anti-dilution adjustments). The conversion price was negotiated with
the Ad hoc committee composed of holders of the company's convertible notes due
2006.
OPTIONAL REDEMPTION We may redeem the series A convertible preferred stock after the conversion rights
date, in whole or in part, at the liquidation preference, together with accrued
and undeclared dividends through the redemption date, at any time, subject to the
prior or concurrent repayment in full of all outstanding senior notes and senior
convertible notes.
MANDATORY REDEMPTION On March 15, 2011, we must redeem all outstanding shares of series A convertible
preferred stock for an amount per share equal to the then-effective liquidation
preference, including any accrued and undeclared dividends from the most recent
dividend payment date to the date of redemption.
VOTING RIGHTS Except as otherwise required by law, each share of series A convertible preferred
stock will vote on all matters with the company's common stock on an "as
converted" basis.
The series A convertible preferred stock will also be entitled to vote separately
as a class, together with the series B convertible preferred stock, if any, and
any other series of preferred stock ranking on parity with the series A
convertible preferred stock, on certain matters. See "Description of Capital
Stock -- 9.0% Senior Series A Convertible Participating Preferred Stock -- Voting
Rights."
7
LISTING The series A convertible preferred stock will not be listed for trading on any
national securities exchange or authorized for quotation on any automated
quotation system.
BOOK-ENTRY; DELIVERY AND FORM The series A convertible preferred stock initially will be held only through DTC.
CERTAIN TAX Certain U.S. federal income tax consequences of purchasing, owning and disposing
CONSEQUENCES of the series A convertible preferred stock and any common stock received upon its
conversion are described in "Material United States Federal Income Tax
Consequences -- Consequences of Ownership and Disposition of New Preferred Stock or
Common Stock," including the potential for the receipt of constructive
distributions prior to the receipt of a corresponding amount of cash.
8
RISK FACTORS
An investment in the securities offered by this prospectus involves a high
degree of risk. You should carefully consider the following factors and other
information in this prospectus before deciding to purchase the notes or our
preferred or common stock. These risks and uncertainties are not the only ones
we face. Others that we do not know about now, or that we do not now think are
important, may impair our business or the trading price of our notes or our
preferred or common stock.
RISKS RELATED TO OUR BUSINESS
IN FOUR OF THE FIVE ANNUAL PERIODS ENDED DECEMBER 31, 2005, WE HAVE INCURRED
SIGNIFICANT LOSSES AND WE HAVE NOT GENERATED ENOUGH CASH FROM OPERATIONS TO
FINANCE OUR BUSINESS.
We have not been profitable in four of the five years in the five-year
period ended December 31, 2005, and we have not generated enough cash from
operations to finance our business. There is no guarantee that our cost
reduction plan or attempts to increase our revenues will be successful. If we
are not able to successfully reduce costs and/or increase revenues, we may not
be able to operate profitability in the future or generate sufficient cash to
fund our operations and pay our indebtedness.
OUR CURRENT PROJECTIONS REFLECT THAT OUR CORE ACCOUNTS PAYABLE RECOVERY AUDIT
BUSINESS WILL CONTINUE TO DECLINE. THEREFORE, WE MUST SUCCESSFULLY IMPLEMENT OUR
COST REDUCTION PLAN AND GROW OUR OTHER BUSINESS LINES IN ORDER TO STABILIZE AND
INCREASE OUR REVENUES AND IMPROVE OUR PROFITABILITY.
As our clients improve their systems and processes, fewer transactional
errors occur. In addition, many of our clients have internal staffs that audit
the same transactions before we do. As the skills, experience and resources of
our clients' internal recovery audit staffs improve, they will identify more
overpayments themselves and reduce our audit recovery opportunities. Based on
these and other factors, we currently believe that our core accounts payable
recovery audit business will continue to experience revenue declines over the
long-term. In order to stabilize and increase our revenues and improve our
profitability, we must successfully implement our cost reduction plan, and grow
our other lines of business such as our Medicare audit work, pharmacy payment
service and motor carrier freight bill audits. These other lines of business are
still in the early stages of development, and there can be no guarantee that
they will ultimately succeed.
WE DEPEND ON OUR LARGEST CLIENTS FOR SIGNIFICANT REVENUES, SO LOSING A MAJOR
CLIENT COULD ADVERSELY AFFECT OUR REVENUES.
We generate a significant portion of our revenues from our largest clients.
For the years ended December 31, 2005, 2004, and 2003, our two largest clients
accounted for approximately 13.8%, 13.8% and 12.7% of our revenues from
continuing operations, respectively. If we lose any of our major clients, our
results of operations could be materially and adversely affected by the loss of
revenue unless we acquire new business to replace such clients.
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 the financial difficulties of one or more of our
large clients could adversely affect our financial condition and results of
operations.
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
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.
9
For example, on March 30, 2005, the Fleming Post-Confirmation Trust, PCT,
sued us in the bankruptcy proceeding of the Fleming Companies, a former client,
in the U.S. Bankruptcy Court for the District of Delaware to recover
approximately $5.5 million of alleged preferential payments. PCT subsequently
amended its claims to add a claim for alleged fraudulent transfers representing
approximately $2.0 million in commissions paid to us with respect to claims
deducted from vendors that the client subsequently re-credited to the vendors.
In early December 2005, the PCT offered to settle the case for $2 million. We
countered with an offer to waive our bankruptcy claim and pay the PCT $250,000.
The PCT rejected our counteroffer and the litigation is ongoing.
OUR STRATEGIC BUSINESS INITIATIVES MAY NOT BE SUCCESSFUL.
Our objective is to build on our position as the leading worldwide provider
of recovery audit services. Our strategic plan to achieve these objectives
focuses on a series of initiatives designed to maintain our dedicated focus on
clients and rekindle our growth. Recently, we have implemented a number of
strategic business initiatives that are designed to reduce costs and stabilize
revenues.
Although we have begun to implement these initiatives, we are still in the
early stages of the process. Each of the initiatives requires sustained
management focus, organization and coordination over time, as well as success in
building relationships with third parties. The results of the strategy and
implementation will not be known until some time in the future. If we are unable
to implement the strategy successfully, our results of operations and cash flows
could be adversely affected. Successful implementation of the strategy may
require material increases in costs and expenses.
As part of a pilot program to use recovery auditing to recover overpayments
on behalf of taxpayers, the Centers for Medicare & Medicaid Services, CMS, the
federal agency that administers the Medicare program, awarded us a three-year
contract, effective March 28, 2005, to provide recovery audit services in
connection with the State of California's Medicare spending. We believe this
contract is a significant opportunity for us, but we will have to expend
substantial resources to prepare for and perform the CMS audit services and
there is no guarantee that actual revenues will justify the required
expenditures. Moreover, until the CMS pilot program is well underway, there will
be no way to accurately predict the level of recoveries that will be achieved,
and there is no guarantee that the level of recoveries will be significant. Even
if CMS deems the pilot program sufficiently successful to justify further
ventures, there is no guarantee that it, or any other medical claims client,
will award future contracts to us.
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, 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. Even though we take care to protect our own
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 believe that our services and products
do not infringe on the intellectual property rights of others, we are also
subject to the risk that someone else will assert a claim against us in the
future for violating their intellectual property rights.
10
OUR FAILURE TO RETAIN THE SERVICES OF KEY MEMBERS OF MANAGEMENT AND HIGHLY
SKILLED PERSONNEL COULD ADVERSELY IMPACT OUR CONTINUED SUCCESS.
Our continued 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
limit the ability of key employees to directly compete with us in the future,
nothing prevents them from leaving our company.
In addition, our current financial and operational condition, including,
but not limited to our liquidity concerns, makes it especially challenging to
attract and retain highly qualified skilled auditors 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 INTERNATIONAL OPERATIONS FOR SIGNIFICANT REVENUES.
Approximately 47.2% of our revenues from continuing operations were
generated from international operations in 2005. International operations are
subject to numerous risks, including:
o political and economic instability in the international markets we
serve,
o difficulties in staffing and managing foreign operations and in
collecting accounts receivable,
o 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,
o costs associated with adapting our services to our foreign clients'
needs,
o unexpected changes in regulatory requirements and laws,
o expenses and legal restrictions associated with transferring earnings
from our foreign subsidiaries to us,
o burdens of complying with a wide variety of foreign laws and labor
practices,
o business interruptions due to widespread disease, potential terrorist
activities, or other catastrophes,
o reduced or limited protection of our intellectual property rights, and
o longer accounts receivable cycles.
Because we expect a significant proportion of our revenues to continue to
come from international operations, the occurrence of any of these events could
materially and adversely affect our business, financial condition and results of
operations.
THE MARKET FOR PROVIDING DISBURSEMENT AUDIT SERVICES TO COMMERCIAL CLIENTS IN
THE U.S. IS RAPIDLY DECLINING.
We currently serve the substantial majority of our U.S. commercial accounts
payable services clients using a disbursement audit service model that typically
entails acquisition from the client of limited purchase data and an audit focus
on a select few recovery categories. We believe that the market for providing
disbursement audit services to commercial entities in the United States is
rapidly declining.
11
OUR U.S. COMMERCIAL ACCOUNTS PAYABLE SERVICES BUSINESS IS SUBJECT TO PRICE
PRESSURE.
The substantial majority of our domestic commercial accounts payable
services clients are currently served using a disbursement audit service model
which typically entails obtaining limited purchase data from the client and an
audit focus on a select few recovery categories. The disbursement audit business
is highly competitive and barriers to entry are relatively low. We believe that
the low barriers to entry result from limited technology infrastructure
requirements, the minimal need for audit data that is difficult to extract from
the client's systems, and an audit focus on a select few recovery categories. As
a result of the low barriers to entry, our domestic commercial accounts payable
services business is subject to intense price pressure from our competition.
Such price pressure could cause our profit margins to decline and have a
materially adverse effect on our business, financial condition, and results of
operations.
PROPOSED LEGISLATION BY THE EUROPEAN UNION, IF ENACTED AS CURRENTLY DRAFTED,
WILL HAVE A MATERIALLY ADVERSE IMPACT ON MERIDIAN'S OPERATIONS.
The European Union has currently proposed legislation that would remove the
need for suppliers to charge value-added taxes on the supply of services to
clients within the European Union. It is difficult to estimate whether and/or
when the proposed legislation would be enacted and implemented. Management
believes that the proposed legislation, if enacted as currently drafted, when
implemented would have a materially adverse impact on the results of operations
of our Meridian segment and would also negatively affect our consolidated
results of operations.
MERIDIAN MAY BE REQUIRED TO REPAY GRANTS RECEIVED FROM THE INDUSTRIAL
DEVELOPMENT AUTHORITY.
During the period of May 1993 through September 1999, Meridian received
grants from the Industrial Development Authority of Ireland, IDA, in the sum of
1.4 million Euro ($1.7 million at December 31, 2005 exchange rates). The grants
were paid primarily to stimulate the creation of 145 permanent jobs in Ireland.
As a condition of the grants, if the number of permanently employed Meridian
staff in Ireland falls below 145, then the grants are repayable in full. This
contingency expires on September 23, 2007. As of February 28, 2006, Meridian
employed 204 permanent employees in Dublin, Ireland. As discussed above,
proposed EU legislation could eventually have a materially adverse impact on
Meridian's results of operations. If Meridian's results of operations were to
decline as a result of the enactment of that legislation, it is possible that
the number of permanent employees that Meridian employs in Ireland could fall
below 145 prior to September 2007. Should such an event occur, Meridian will
have to repay the full amount of the grants it previously received from IDA.
Because of the lengthy approval process required for the legislative proposal to
become law and the requirements for numerous systems changes before
implementation, management currently estimates that any impact on employment
levels related to a possible change in the EU legislation will not be realized
until after September 2007, if ever.
As any potential liability related to these grants is not currently
determinable, we have not included any expenses related to this matter in our
financial statements. Management is monitoring this situation and if it appears
probable that Meridian's permanent staff in Ireland will fall below 145 and that
grants will need to be repaid to IDA, Meridian will recognize an expense at that
time. Such expense could be material to Meridian's results of operations.
OUR REVENUES FROM CERTAIN CLIENTS AND VAT AUTHORITIES MAY CHANGE MARKEDLY FROM
YEAR TO YEAR.
We examine merchandise procurements and other payments made by business
entities such as manufacturers, distributors and service firms. To date,
services to these types of clients have tended to be either periodic (typically,
every two or three years) or rotational in nature with different divisions of a
given client often audited in pre-arranged annual sequences. Accordingly,
revenues derived from a given client may change markedly from year to year
depending on factors such as the size and nature of the client division under
audit.
Meridian's revenue recognition policy causes its revenues to vary markedly
from period to period as well. Meridian defers recognition of revenues to the
accounting period in which cash is both received from the foreign governmental
agencies reimbursing VAT claims and transferred to Meridian's clients. The
timing of reimbursement of VAT claims by the various European tax authorities
with which Meridian files claims can differ significantly by country.
12
CHANGES IN THE COMPOSITION OF OUR SHAREHOLDER POPULATION, INCLUDING THOSE
RESULTING FROM THE ISSUANCE OF PREFERRED STOCK IN THE EXCHANGE OFFER, ARE LIKELY
TO LIMIT OUR ABILITY TO USE OUR NET OPERATING LOSSES.
We have substantial tax loss and credit carryforwards for U.S. federal
income tax purposes. As a result of the implementation of the exchange offer and
certain other changes in the composition of our shareholder population
(including purchases or sales of stock by certain 5% shareholders in sufficient
amounts), we believe that our ability to use such carryforwards (and certain
other tax benefits) to offset future income or tax liability will be severely
limited under section 382 of the Internal Revenue Code of 1986, as amended.
Under such section, our ability to use our existing tax loss and credit
carryforwards (and certain other tax benefits) following an "ownership change"
will be limited to an annual amount generally equal to the product of the fair
market value of our stock immediately before the ownership change (subject to
certain reductions) and the "long-term tax-exempt rate" in effect for the month
in which the ownership change occurred.
As a result of the exchange, our ability to utilize our pre-change
carryforwards and possibly certain future deductions to offset future income
will likely be limited to roughly $1.4 million or less per year, based on a
trading price of our common stock of $5.30 per share (as adjusted for the
reverse stock split). Based on our current projections, such a limitation would
significantly increase our projected future tax liability if combined with the
elimination of interest deductions with respect to the senior convertible notes
issued in the exchange (whether due to the conversion of such notes into stock
or, as discussed below, in the event of a determination that such interest was
not deductible).
WE MAY NOT BE ALLOWED TO DEDUCT INTEREST WITH RESPECT TO THE SENIOR CONVERTIBLE
NOTES ISSUED IN THE EXCHANGE OFFER.
For U.S. federal income tax purposes, no deduction is allowed for interest
paid or accrued with respect to convertible debt if it is substantially certain
that the holders will voluntarily convert the debt into equity. The proper
application of this provision in the case of the senior convertible notes is
subject to varying interpretations, depending in part on facts and circumstances
existing on the exchange date. We currently intend to take the position that we
are entitled to interest deductions in respect of the senior convertible notes.
Nevertheless, there is no assurance that the Internal Revenue Service, IRS,
would not take a contrary position, or that any change in facts and
circumstances would not result in us changing our position.
In addition, even if not disallowed, any interest deductions with the
respect to the senior convertible notes would cease upon an actual conversion of
the senior convertible notes into stock.
FUTURE IMPAIRMENT OF GOODWILL, OTHER INTANGIBLE ASSETS AND LONG-LIVED ASSETS
WOULD REDUCE OUR FUTURE EARNINGS.
During the fourth quarter of 2005, we recorded a goodwill impairment charge
of $166.0 million and an impairment charge of $4.4 million relating to our
intangible trade name value. Adverse future changes in the business environment
or in our ability to perform audits successfully and compete effectively in our
market could result in additional impairment of goodwill, other intangible
assets or long-lived assets, which could materially adversely impact future
earnings. We must perform annual assessments to determine whether some portion,
or all, of our goodwill, intangible assets and other long-term assets are
impaired. Annual impairment testing under SFAS No. 142 could result in a
determination that our goodwill or other intangible assets have been further
impaired, and annual impairment testing under SFAS No. 144 could result in a
determination that our other long-lived assets have been impaired. Any future
impairment of goodwill, other intangible assets or long-lived assets would
reduce future earnings.
WE MAY NOT BE ABLE TO CONTINUE TO COMPETE SUCCESSFULLY WITH OTHER BUSINESSES
OFFERING RECOVERY AUDIT SERVICES, INCLUDING CLIENT INTERNAL RECOVERY AUDIT
DEPARTMENTS.
The recovery audit industry is highly competitive. Our principal
competitors for accounts payable recovery audit services include numerous
smaller firms. Because these firms tend to be privately owned, we do not have
access to their financial statements, so we cannot be certain as to whether we
can continue to compete successfully with our competitors. In recent years,
revenues from our core accounts payable recovery audit business have declined,
and are expected to continue to decline, due in part to our clients' continuing
development of their own internal recovery audit capabilities. In addition, the
13
trend toward more effective internal recovery audit departments diminishes
claims available for us to identify in our recovery audits and is likely to
continue to negatively impact our future revenues.
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 and bylaws and Georgia law contain provisions
that may delay, deter or inhibit a future acquisition 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:
o a classified Board of Directors,
o the requirement that our shareholders may only remove directors for
cause,
o specified requirements for calling special meetings of shareholders,
and
o 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.
Our articles of incorporation also permit the Board of Directors to issue
shares of preferred stock with such designations, powers, preferences and rights
as it determines, without any further vote or action by our shareholders. In
addition, we have in place a "poison pill" shareholders' rights plan that 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 have a materially adverse effect on the market price of our common
stock.
WE VIOLATED OUR DEBT COVENANTS IN THE PAST AND MAY DO SO IN THE FUTURE.
We violated the debt covenants of our prior senior credit facility on more
than one occasion. Our current senior secured credit facility requires us and
our subsidiaries to comply with specified financial ratios and other performance
covenants. No assurance can be provided that we will not violate the covenants
of our senior 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. Additionally, if the lenders accelerated repayment demand is
subsequently made and we are unable to honor it, cross-default language
contained in the indentures underlying our separately-outstanding senior notes
and senior convertible notes due March 2011, and any of our untendered
convertible notes due November 2006, could also be triggered, potentially
accelerating the required repayment of those notes as well. In such an instance,
there can likewise be no assurance that we will be able to secure additional
financing that would be required to make such a rapid repayment.
OUR SUBSTANTIAL LEVERAGE COULD MATERIALLY ADVERSELY IMPACT OUR FINANCIAL HEALTH.
We are highly leveraged. As of December 31, 2005, our total outstanding
debt was approximately $140.9 million. As of that date, such total indebtedness
was greater than our total capitalization by approximately $97.7 million. The
instruments governing the notes and preferred stock issued in the restructuring
and the senior credit facility allow the issuance of additional indebtedness
under certain circumstances.
Following the closing of the financial restructuring transactions in March
2006, we continue to be highly leveraged. As of March 31, 2006, we had
approximately $148.6 million of outstanding debt and redeemable preferred stock
14
and a maximum of $15.0 million of additional available borrowings under the
senior secured credit facility.
Our substantial indebtedness could adversely affect our financial health
by, among other things:
o increasing our vulnerability to adverse economic conditions or
increases in prevailing interest rates, particularly with respect to
any of our borrowings at variable interest rates;
o limiting our ability to obtain any additional financing we may need to
operate, develop and expand our business;
o requiring us to dedicate a substantial portion of any cash flow from
operations to service our debt, which reduces the funds available for
operations and future business opportunities; and
o potentially making us more highly leveraged than our competitors,
which could potentially decrease our ability to compete in our
industry.
We will have significant interest, dividend, principal and redemption
payments under the notes and preferred stock issued in the exchange offer coming
due in the next five years. Our ability to make payments due on the notes and
preferred stock and 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, 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 and indentures 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.
OUR STOCK PRICE HAS BEEN AND MAY CONTINUE TO BE VOLATILE.
Our common stock is currently traded on The Nasdaq Stock Market. The
trading price of our common stock has been and may continue to be subject to
large fluctuations. Our stock price may increase or decrease in response to a
number of events and factors, including:
o issuance of additional common stock on exercise of conversion rights
of the senior convertible notes or the convertible preferred stock,
o future announcements concerning us, key clients or competitors,
o quarterly variations in operating results and liquidity,
o changes in financial estimates and recommendations by securities
analysts,
o developments with respect to technology or litigation,
o the operating and stock price performance of other companies that
investors may deem comparable to our company,
o acquisitions and financings, and
o sales of blocks of stock by insiders.
15
Fluctuations in the stock market, generally, also impact the volatility of
our stock price. General stock market movements may adversely affect the price
of our common stock, regardless of our operating performance.
WE MAY FAIL TO MAINTAIN OUR LISTING ON THE NASDAQ STOCK MARKET, AND THE VALUE OF
OUR STOCK MAY BE ADVERSELY AFFECTED IF WE FAIL TO MAINTAIN SUCH LISTING.
The closing bid price of our common stock, which is traded on The Nasdaq
Stock Market, was below $1.00 per share for more than 180 consecutive trading
days (on a pre-reverse stock split basis). On June 14, 2006, we received notice
from Nasdaq informing us that, because our common stock did not meet Nasdaq's
minimum $1.00 closing bid price requirement during the 180-day period ended June
12, 2006, our common stock would be delisted on June 23, 2006, unless we
requested a hearing to appeal Nasdaq's decision on or before June 21, 2006. We
requested an oral hearing on June 20, 2006. The hearing before the Nasdaq
Qualifications Panel (the "Panel") was held on August 3, 2006. The Company's
plan of compliance was presented to the Panel. At our shareholders meeting on
August 11, 2006, our shareholders approved a reverse stock split that has
brought our common stock trading price above the Nasdaq $1.00 minimum; however,
there is no guaranty that our common stock trading price will remain above
$1.00. In addition, there is no guaranty that we will be able to continue to
comply with all of the additional Nasdaq requirements, including the requirement
that we maintain a market value of publicly held shares of at least $15 million,
or that the hearing panel will allow us to remain listed, even if our common
stock trading price remains above $1.00. The Company will not be notified of the
outcome until the Panel makes a formal decision, which is expected within ten to
thirty days following the hearing.
In the event that our common stock is delisted from The Nasdaq Stock
Market, shares of our common stock would likely trade in the over-the-counter
market on the OTC Bulletin Board or the so-called "pink sheets." Selling our
common stock would be more difficult because smaller quantities of shares would
likely be bought and sold and transactions could be delayed. In addition,
securities analysts' and news media coverage of us may be further reduced. These
factors could result in lower prices and larger spreads in the bid and ask
prices for shares of our common stock.
IF OUR COMMON STOCK IS DEEMED A "PENNY STOCK," ITS LIQUIDITY WILL BE ADVERSELY
AFFECTED.
The market price for our common stock has recently traded below $1.00 per
share (pre-reverse stock split). If the market price for our common stock dips
below $1.00 per share, our common stock may be deemed to be penny stock. If our
common stock is considered penny stock, it would be subject to rules that impose
additional sales practices on broker-dealers who sell our securities. For
example, broker-dealers must make special suitability determinations for
purchasers of penny stock and obtain the purchasers' written consent to the
transaction prior to the sale. Also, broker-dealers must deliver disclosure
schedules disclosing sales commissions and current quotations for the securities
to each purchaser of a penny stock. Broker-dealers must also send monthly
statements disclosing recent price information for the penny stock held in the
purchaser's account as well as information regarding the limited market in penny
stocks. These rules may cause some broker-dealers to choose not to deal in penny
stocks, which could have an adverse effect on the price and liquidity of shares
of our common stock.
ISSUANCE OF SHARES OF OUR COMMON STOCK UPON CONVERSION OF OUR PREFERRED STOCK
AND SENIOR CONVERTIBLE NOTES AND PURSUANT TO OUR NEW MANAGEMENT INCENTIVE PLAN
WILL DILUTE OUR COMMON STOCK.
Our convertible notes and preferred stock, upon full conversion, would
represent in excess of a majority of our outstanding common stock, based on the
current number of shares of common stock outstanding. In addition, in order to
retain key executive employees, we are adopting a new management incentive plan,
pursuant to which certain senior management employees will receive phantom
shares of stock that, subject to shareholder approval, will be payable in common
stock. We will reserve 10% of our outstanding common stock on a fully-diluted
basis, as measured on the dates of distribution, to settle phantom shares under
the management incentive plan. In addition, we may need to issue additional
equity securities in the future in order to execute our business plan or for
other reasons, which could lead to further dilution to holders of our common
stock. This dilution of our common stock could depress the price of our common
stock.
16
RISKS RELATED TO THE NOTES AND PREFERRED STOCK
AN ACTIVE TRADING MARKET FOR THE NOTES AND PREFERRED STOCK MAY NOT DEVELOP, AND
HOLDERS OF THE NOTES AND PREFERRED STOCK MAY NOT BE ABLE TO SELL THEIR
SECURITIES WHEN THEY WANT AND, IF THEY DO SELL, THEY MAY NOT BE ABLE TO RECEIVE
THE PRICE THEY WANT.
The notes and preferred stock are not listed for trading on any national
securities exchange or authorized to be quoted in any inter-dealer quotation
system of any national securities association, and we do not intend to apply for
any such listing or quotation. We do not know the extent to which investor
interest will lead to the development of a trading market for the notes or
preferred stock or how liquid any such market might be. Moreover, the liquidity
of any market for the securities will also depend upon the number of holders of
the securities, our financial performance, the market for similar securities and
the interest of securities dealers in making a market in the securities. We
cannot assure investors that an active trading market will develop or, if it
does, at what prices these securities may trade. Therefore, holders of the notes
and preferred stock may not be able to sell the securities when they want and,
if they do sell, they may not be able to receive the price they want.
THE SENIOR CONVERTIBLE NOTES AND THE SENIOR NOTE WERE ISSUED WITH ORIGINAL ISSUE
DISCOUNT, WHICH WILL CONSTITUTE TAXABLE INCOME TO THE HOLDER OVER THE TERM OF
THE NOTES.
Both the senior convertible notes and the senior notes were issued at a
discount from their principal amount. In addition, in respect of the senior
convertible notes, we have the right to pay all stated interest in cash or
additional notes. Consequently, the senior convertible notes and the senior
notes were issued with original issue discount (or OID) for U.S. federal income
tax purposes. You will be required to include any such OID (including the stated
interest on the senior convertible notes) in your income as it accrues for U.S.
federal income tax purposes, even if no cash payment is received by you. Any
payment of stated interest on the senior convertible notes will not be
separately taxable to you. In contrast, the stated interest on the senior notes
will be includible as interest income by you in accordance with your regular
method of accounting for U.S. federal income tax purposes. See "Material United
States Federal Income Tax Consequences -- Consequences of Ownership and
Disposition of the Notes."
ADJUSTMENT TO THE CONVERSION PRICE OF THE SENIOR CONVERTIBLE NOTES OR THE
PREFERRED STOCK MAY RESULT IN A TAXABLE DEEMED DISTRIBUTION TO YOU.
The conversion prices of the senior convertible notes and series A
convertible preferred stock are subject to adjustment under certain
circumstances, such as in the event of certain cash or property distributions
with respect to shares of our common stock. The presence or absence of an
adjustment to the conversion prices at which such notes or stock are convertible
may result in constructive distributions to the holders of such securities, or
in certain cases to existing common stockholders, which would be taxable similar
to an ordinary distribution on stock.
OUR HOLDING COMPANY STRUCTURE RESULTS IN SUBSTANTIAL STRUCTURAL SUBORDINATION
AND MAY AFFECT OUR ABILITY TO MAKE PAYMENTS ON THE NOTES.
We are a holding company and we conduct all of our operations through our
subsidiaries. As a result, our ability to meet our debt service obligations,
including our obligations under the notes, substantially depends upon our
subsidiaries' cash flow and payment of funds to us by our subsidiaries as
dividends, loans, advances or other payments. Our subsidiaries' payment of
dividends or making of loans, advances or other payments may be subject to
contractual restrictions or other limitations.
The notes are also effectively subordinated to all existing and future
indebtedness and other liabilities of our subsidiaries, including our senior
credit facility. At June 30, 2006, our subsidiaries had aggregate liabilities of
approximately $140 million. We expect that our subsidiaries will continue to
incur additional indebtedness from time to time. Any right we may have to
receive assets of our subsidiaries upon their liquidation or reorganization, and
your resulting rights to participate in those assets, would be effectively
subordinated to the claims of our subsidiaries' creditors.
17
FORWARD-LOOKING STATEMENTS
This prospectus contains certain forward-looking statements and information
made by us that are based on the beliefs of our respective management as well as
estimates and assumptions made by and information currently available to our
management. The words "could," "may," "might," "will," "would," "shall,"
"should," "pro forma," "potential," "pending," "intend," "believe," "expect,"
"anticipate," "estimate," "plan," "future" and other similar expressions
generally identify forward-looking statements, including, in particular,
statements regarding future services, market expansion and pending litigation.
These forward-looking statements are made pursuant to the safe harbor provisions
of the Private Securities Litigation Reform Act of 1995. Investors are cautioned
not to place undue reliance on these forward-looking statements. Such
forward-looking statements reflect the views of our management at the time such
statements are made and are subject to a number of risks, uncertainties,
estimates and assumptions, including, without limitation, in addition to those
identified in the text surrounding such statements, those identified under "Risk
Factors" and elsewhere in this prospectus.
In addition, important factors to consider in evaluating such
forward-looking statements include changes or developments in United States and
international economic, market, legal or regulatory circumstances, changes in
our business or growth strategy or an inability to execute our strategy due to
changes in our industry or the economy generally, the emergence of new or
growing competitors, the actions or omissions of third parties, including
suppliers, customers, competitors and United States and foreign governmental
authorities, and various other factors. Should any one or more of these risks or
uncertainties materialize, or the underlying estimates or assumptions prove
incorrect, actual results may vary significantly and markedly from those
expressed in such forward-looking statements, and there can be no assurance that
the forward-looking statements contained in this prospectus will in fact occur.
Given these uncertainties, you are cautioned not to place undue reliance on
our forward-looking statements. We disclaim any obligation to announce publicly
the results of any revisions to any of the forward-looking statements contained
in this prospectus, to reflect future events or developments.
18
RATIO OF EARNINGS TO FIXED CHARGES
Our ratio of earnings to fixed charges for the six months ended June 30,
2006 and for each of the last five fiscal years is as follows:
SIX MONTHS
ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
2006
----------------------------------------------------------------------------------------- --------------
2001 2002 2003 2004 2005
-------- --------- --------- --------- ----------
1.4x 4.4x Less 1.1x Less Less
than 1 than 1 than 1
-------- --------- --------- --------- ---------- -------------
Deficiency in millions $197.9 $204.7 $12.6
of dollars if less than 1
We define earnings as earnings (loss) before discontinued operations,
extraordinary items, interest expense, amortization of discounts and premiums
related to indebtedness, taxes and the estimated portion of rent expense under
operating leases representative of interest. Fixed charges consist of interest
expense (including amortization of discounts and premiums related to
indebtedness), dividends on mandatorily redeemable preferred stock, taxes and
the estimated portion of rent expenses under operating leases representative of
interest.
USE OF PROCEEDS
The selling securityholders will receive all of the proceeds from the sale
under this prospectus of the notes and the common stock issuable upon conversion
of the notes. We will not receive any proceeds.
PRICE RANGE OF COMMON STOCK
Our common stock traded principally on The Nasdaq National Market. Our
common stock will trade under the symbol "PRGXD" for 20 trading days beginning
August 14, 2006 to designate that it is trading on a post-reverse stock split
basis, and will resume trading under the symbol "PRGX" after the 20-day period
has expired. Prior to August 14, 2006, it traded under the symbol "PRGX." We
recently effected a 1-for-10 reverse stock split, which became effective on that
date. The table below sets forth for the periods presented the high and low
sales prices per share for our common stock, as reported on The Nasdaq National
Market. All prices have been adjusted to reflect the 1-for-10 reverse stock
split which became effective on August 14, 2006.
HIGH LOW
------------- --------------
YEAR ENDED DECEMBER 31, 2004:
First Quarter................................................ $ 50.50 $ 38.70
Second Quarter............................................... 55.70 42.10
Third Quarter................................................ 62.10 47.70
Fourth Quarter............................................... 61.30 48.50
YEAR ENDED DECEMBER 31, 2005:
First Quarter................................................ $ 57.90 $ 42.00
Second Quarter............................................... 51.50 27.50
Third Quarter................................................ 34.90 25.80
Fourth Quarter............................................... 33.00 2.40
YEAR ENDED DECEMBER 31, 2006:
First Quarter................................................ $ 7.60 $ 3.90
Second Quarter............................................... 6.90 3.70
Third Quarter (through August 11, 2006)...................... 4.50 3.00
As of June 30, 2006, there were approximately 6,511,755 shares of our
common stock outstanding (as adjusted for the reverse stock split), which were
owned by 163 holders of record.
19
DIVIDEND POLICY
We have not paid cash dividends on our common stock since our initial
public offering on March 26, 1996 and do not intend to pay cash dividends in the
foreseeable future. Moreover, restrictive covenants included in our senior
credit facility limit our ability to pay cash dividends.
SELECTED CONSOLIDATED EARNINGS PER SHARE DATA
The following table reflects the Company's basic and diluted earnings
(loss) per common share and weighted-average common shares outstanding for each
year of the five-year period ended December 31, 2005 after giving effect to the
Company's 1 for 10 reverse stock split effective on August 14, 2006. The data
have been derived from the Company's Consolidated Financial Statements and Notes
thereto, which have been audited by KPMG LLP, Independent Registered Public
Accounting Firm. The Consolidated Balance Sheets as of December 31, 2005 and
2004, 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, 2005 and the report of the Independent Registered Public Accounting
Firm thereon are included in Item 8. of the Company's Annual Report on Form 10-K
for the year ended December 31, 2005, which is incorporated into this
registration statement by reference.
Years Ended December 31,
------------------------------------------------------------------------------------
2005 2004 2003 2002 2001
=============== ================ ============== =============== ================
Basic earnings (loss) per common
share:
Earnings (loss) from continuing
operations before
discontinued operations and
cumulative effect of
accounting changes.............. $(33.14) $ (12.24) $ (26.31) $ 4.08 $ 0.31
Discontinued operations............ (0.36) 0.66 0.27 (0.69) (17.64)
Cumulative effect of accounting
changes......................... -- -- -- (1.31) --
--------------- ---------------- -------------- --------------- ----------------
Net earnings (loss)................ $(33.50) $ (11.58) $ (26.04) $ 2.08 $(17.33)
=============== ================ ============== =============== ================
Diluted earnings (loss) per common
share:
Earnings (loss) from continuing
operations before
discontinued operations and
cumulative effect of
accounting changes.............. $(33.14) $ (12.24) $ (26.31) $ 3.20 $ 0.31
Discontinued operations............ (0.36) 0.66 0.27 (0.54) (17.64)
Cumulative effect of accounting
changes......................... -- -- -- (1.03) --
--------------- ---------------- -------------- --------------- ----------------
Net earnings (loss)................ $(33.50) $ (11.58) $ (26.04) $ 1.63 $(17.33)
=============== ================ ============== =============== ================
Weighted-average common shares
outstanding (in thousands):
Basic 6,201 6,176 6,175 6,270 4,830
=============== ================ ============== =============== ================
Diluted........................ 6,201 6,176 6,175 7,999 4,830
=============== ================ ============== =============== ================
The following table reflects the Company's basic and diluted earnings
(loss) per common share and weighted-average common shares outstanding for the
three and six months ended June 30, 2006 and 2005 after giving effect to the
Company's 1 for 10 reverse stock split effective on August 14, 2006: The data
have been derived from the Company's unaudited Consolidated Financial Statements
and Notes thereto, which are included in the Company's Quarterly Report on Form
10-Q for the quarterly period ended June 30, 2006, which is incorporated by
reference into this registration statement.
Three Months Ended Six Months Ended
June 30, June 30,
------------------------------- ---------------------------------
2006 2005 2006 2005
============= ============== ============== ================
Basic and diluted earnings (loss) per common share:
Loss from continuing operations before
discontinued operations........................ $ (0.50) $ (1.06) $ (2.15) $ (1.79)
Discontinued operations........................... (0.12) 0.05 (0.12) (0.01)
-------------- -------------- -------------- ----------------
Net loss..................................... $ (0.62) $ (1.01) $ (2.27) $ (1.80)
============== ============== ============== ================
Weighted-average common shares outstanding (in
thousands):
Basic............................................. 6,388 6,200 6,300 6,199
============== ============== ============== ================
Diluted........................................... 6,388 6,200 6,300 6,199
============== ============== ============== ================
20
UNAUDITED PRO FORMA FINANCIAL DATA
UNAUDITED PRO FORMA CONDENSED FINANCIAL STATEMENTS
The following unaudited pro forma condensed financial statements are based
on, and should be read in conjunction with our consolidated financial statements
as of and for the year ended December 31, 2005 and our unaudited condensed
consolidated financial statements as of and for the three and six months ended
June 30, 2006, and related notes thereto and "management's discussion and
analysis of financial condition and results of operations" for each such period,
all of which are incorporated by reference into this prospectus. See "Where You
Can Find More Information" and "Incorporation of Documents by Reference."
The unaudited pro forma condensed financial statements give effect to the
following restructuring transactions, which occurred on March 17, 2006, as if
each such transaction occurred on the date at the beginning of the period
indicated:
o the tender and cancellation of $124,530,000 of the existing notes due
November 2006;
o the issuance of new senior notes, new senior convertible notes and new
series A convertible preferred stock;
o the repayment in full of the prior senior secured credit facility and
bridge loan;
o the borrowings under the new senior secured credit facility.
The following unaudited pro forma condensed statements of operations for
the year ended December 31, 2005 and for the six months ended June 30, 2006 are
for informational purposes only, are not indications of future performance, and
should not be considered indicative of actual results that would have been
achieved had the restructuring transactions actually been consummated on the
date or at the beginning of the period presented.
The company is adopting a new management incentive plan for certain key
executive officers. The management incentive plan will initially provide for
payments in cash, subject to conversion into a stock-based plan upon the
approval of the company's common shareholders at the next annual or special
meeting called for that purpose. The unaudited pro forma condensed financial
statements do not reflect any adjustments, or take into account any award
grants, vesting or distributions in cash or common stock under the plan.
21
PRG-SCHULTZ INTERNATIONAL, INC.
--------------------------------------------------------------------------------
Unaudited Pro Forma Condensed Statement of Operations
(Dollars in Thousands)
FISCAL YEAR ENDED DECEMBER 31, 2005 AS REPORTED ADJUSTMENTS PRO FORMA (C)
--------------- -------------- ---------------
Revenues $292,152 $ -- $292,152
Cost of revenues 195,091 -- 195,091
--------------- -------------- ---------------
Gross margin 97,061 -- 97,061
Selling, general and administrative expenses 111,439 -- 111,439
Impairment charges 170,375 -- 170,375
Restructuring expense 11,550 -- 11,550
--------------- -------------- ---------------
Operating loss (196,303) -- (196,303)
Interest expense (8,936) (8,337) (a) (17,273)
Interest income 545 -- 545
--------------- -------------- ---------------
Loss from continuing operations before income taxes
and discontinued operations (204,694) (8,337) (213,031)
Income taxes 821 -- (d) 821
--------------- -------------- ---------------
Loss from continuing operations (205,515) (8,337) (213,852)
Dividends on preferred stock -- 1,375 (b) 1,375
--------------- -------------- ---------------
Loss from continuing operations attributable to
common shareholders $(205,515) $(9,712) $(215,227)
=============== ============== ===============
Basic and diluted earnings (loss) per common share:
Earnings (loss) from continuing operations (e) $(33.10) (e) $(34.70)
=============== ===============
Weighted-average shares outstanding:
Basic (e) 6,201 (e) 6,201
Diluted (e) 6,201 (e) 6,201
(a) Represents the net change in interest expense assuming the completion of the
exchange and senior credit facility transactions as of the beginning of the
year.
(b) Represents the dividends accrued for the Series A convertible preferred
stock.
(c) Excludes $10.1 million nonrecurring charges related to the loss on financial
restructuring.
(d) Any pro forma tax effect is assumed to be offset by a change in the deferred
tax asset valuation allowance.
(e) Adjusted to reflect the 1-for-10 reverse stock split which became effective
as of August 14, 2006.
22
PRG-SCHULTZ INTERNATIONAL, INC.
--------------------------------------------------------------------------------
Unaudited Pro Forma Condensed Statement of Operations
(Dollars in Thousands)
SIX MONTHS ENDED JUNE 30, 2006 AS REPORTED ADJUSTMENTS PRO FORMA
---------------- ---------------- ----------------
Revenues $ 130,846 $ -- $ 130,846
Cost of revenues 93,546 -- 93,546
---------------- ---------------- ----------------
Gross margin 37,300 -- 37,300
Selling, general and administrative expenses 30,585 -- 30,585
Operational restructuring expense 1,988 -- 1,988
---------------- ---------------- ----------------
Operating income 4,727 -- 4,727
Interest expense, net (6,812) (1,490) (a) (8,302)
Loss on financial restructuring (10,129) 10,129 (b) --
---------------- ---------------- ----------------
Loss from continuing operations before income taxes
and discontinued operations (12,214) 8,639 (3,575)
Income taxes 988 -- (d) 988
---------------- ---------------- ----------------
Loss from continuing operations (13,202) 8,639 (4,563)
Dividends on preferred stock 370 287 (c) 657
--- --- ---
Loss from continuing operations attributable to
common shareholders $ (13,572) $ 8,352 $ (5,220)
================ ================ ================
Basic and diluted earnings (loss) per common share:
Earnings (loss) from continuing operations (e) $ (2.20) (e) $ (0.80)
================
Weighted-average shares outstanding:
Basic (e) 6,300 (e) 6,300
Diluted (e) 6,300 (e) 6,300
(a) Represents the net change in interest expense assuming the completion of the
exchange and senior credit facility transactions as of the beginning of the
period.
(b) To exclude the $10.1 million nonrecurring charges related to the loss on
financial restructuring.
(c) Represents the adjustment to dividends accrued for the Series A convertible
preferred stock pro forma the completion of the exchange transaction as of the
beginning of the period.
(d) Any pro forma tax effect is assumed to be offset by a change in the deferred
tax asset valuation allowance.
(e) Adjusted to reflect the 1-for-10 reverse stock split which became effective
as of August 14, 2006.
23
DESCRIPTION OF THE NOTES
The senior notes and senior convertible notes were issued under indentures
between us and U.S. Bank, National Association, as trustee. A copy of the
indentures for each of the senior notes and senior convertible notes is filed as
an exhibit to the registration statement of which this prospectus forms a part.
We have summarized portions of the indentures below. This summary is not
complete. We urge you to read the indentures because those documents define your
rights as a holder of the senior notes and senior convertible notes. You can
find the definitions of certain terms used in these descriptions under the
subheadings "-- Certain Definitions." Terms not defined in these descriptions
have the meanings given to them in the respective indenture. In this section,
the words "we," "us," "our" or "PRG" do not include any current or future
subsidiary of PRG-Schultz International, Inc.
SENIOR NOTES
GENERAL
The Senior notes
o are senior unsecured obligations of PRG;
o are senior in right of payment to all existing and future subordinated
Indebtedness of PRG, including the existing notes, if any;
o are effectively (but not expressly) subordinated to our existing and
future secured Indebtedness to the extent of the collateral securing
that Indebtedness, and to the existing and future liabilities of our
subsidiaries, which includes our senior secured credit facility and
any permitted refinancings thereof; and
o are pari passu in right of payment with our senior convertible notes
and any future senior Indebtedness of PRG.
None of our Subsidiaries is obligated for the payment of our obligations
under the senior notes. As of the date of the senior notes indenture, all of our
Subsidiaries were "Restricted Subsidiaries." However, under certain
circumstances, we will be permitted to designate certain of our Subsidiaries as
"Unrestricted Subsidiaries." Our Unrestricted Subsidiaries will not be subject
to any of the restrictive covenants in the senior notes indenture. As of June
30, 2006, there were $51,635,846 principal amount of senior notes outstanding.
PRINCIPAL, MATURITY AND INTEREST
As of June 30, 2006, senior notes in the aggregate principal amount of
$51,635,846 were outstanding. The senior notes will mature on March 15, 2011,
unless earlier redeemed by us or repurchased at the option of the holders upon
the occurrence of a Change in Control or certain Asset Sales as described below
under the subheadings "-- Optional Redemption" and "-- Repurchase at the Option
of the Holders."
The senior notes bear interest at the rate of 11.0% per annum from the date
of issuance of the senior notes, or from the most recent date to which interest
has been paid or provided for. Upon the occurrence of and continuance of an
Event of Default, interest will accrue at a rate of 13.0% until all Events of
Default have been waived or cured. Interest will be payable semi-annually on
March 15 and September 15 of each year, commencing September 15, 2006 to holders
of record at the close of business on the preceding March 1 and September 1,
respectively.
Interest will be computed on the basis of a 360-day year comprised of
twelve 30-day months. In the event of the payment at maturity, purchase by us at
the option of the holder or redemption by us of any senior notes, interest will
cease to accrue on such senior notes under the terms of and subject to the
conditions of the senior notes indenture.
If any interest payment date or maturity date of a senior note or date for
repurchase of a senior note at the option of the holder following a Change in
Control or Asset Sale Offer is not a business day, then payment of the
principal, premium, if any, and interest due on that date may be made on the
next business day. In that case, no interest will accrue on the amount payable
for the period from and after the applicable interest payment date, maturity
date or repurchase date, as the case may be.
24
TRANSFER, PAYMENT AND FORM
The senior notes have been issued in book-entry form and are evidenced by
one or more global certificates, which we sometimes refer to as "global notes,"
registered in the name of Cede & Co., as nominee for The Depository Trust
Company (DTC). Except in limited circumstances, holders of interests in global
notes are not entitled to receive senior notes in definitive certificated form
registered in their names and will not be considered registered owners or
holders of the global note under the indenture for any purpose.
Principal will be payable, and the senior notes, in certificated form, may
be presented for registration of transfer and exchange, without service charge,
at our office or agency in New York City, which shall initially be at the office
of U.S. Bank National Association. See "-- Global Notes; Book-Entry Form."
Payment of interest on global notes will be made to DTC or its nominee.
Payment of interest on senior notes in definitive certificated form will be made
against presentation of those senior notes at the agency referred to in the
preceding paragraph or, at our option, by mailing checks payable to the persons
entitled to that interest to their addresses as they appear in the note
register. A holder of senior notes with an aggregate principal amount in excess
of $5 million may be paid by wire transfer in immediately available funds at the
election of such holder.
RANKING
The right to payment on the senior notes of principal, premium (if any),
interest, and liquidated damages, if any, is senior in right of payment, as set
forth in the senior notes indenture, to our notes due November 2006 and pari
passu with respect to payment of all senior Indebtedness of PRG, including all
of our secured Indebtedness, the senior convertible notes and all of our general
unsecured obligations, whether outstanding on the date of the senior notes
indenture or thereafter incurred.
The senior notes are, however, effectively (though not expressly)
subordinated to all liabilities and obligations of our Subsidiaries under our
senior secured credit facility, trade payables and lease obligations, if any,
and similarly are effectively subordinated to obligations of PRG under our
senior secured credit facility in a principal amount not to exceed $47.5 million
to the extent of our assets securing such obligations. The secured debt under
our senior secured credit facility will be the obligations of PRG and most of
our Subsidiaries and will be secured by liens and security interests on
substantially all of our assets, including the stock of PRG's Subsidiaries and
any intercompany claims PRG may have against its Subsidiaries. Any right by us
to receive the assets of any of our Subsidiaries upon the liquidation or
reorganization thereof, and, because the senior notes are solely the obligations
of PRG, the consequent right of the holders of the senior notes to participate
in these assets, will be effectively (though not expressly) subordinated to the
claims of that Subsidiary's creditors including trade creditors, except to the
extent that we are recognized as a creditor of such Subsidiary, in which case
our claims would still be subordinate to any security interests in the assets of
such Subsidiary and any Indebtedness of such Subsidiary senior to that held by
us. Moreover, PRG's only source of cash or assets, before or after an insolvency
event or before or after liquidation of the Subsidiaries is from dividends on
the Subsidiaries' stock, the payment of interest or principal on intercompany
claims, or fees for services provided to the Subsidiaries.
In addition, the senior notes indenture explicitly provides that the
effective subordination described above shall apply even if a court at some
future date determines to pierce the corporate veil between PRG and its
Subsidiaries or substantively consolidate the assets and liabilities of PRG and
its Subsidiaries. In such event, as between the senior secured credit facility
and the senior notes, the senior secured credit facility would be entitled to
receive from such consolidated entities the value it would have received through
the liens on the stock of PRG's Subsidiaries (including the proceeds from any
sale of such Subsidiaries) and/or the assets of such Subsidiaries as if the
corporate veil had not been pierced or substantive consolidation had not been
granted.
25
HOLDING COMPANY STRUCTURE
We are a holding company with no material assets other than the ownership
of the Capital Stock of our Subsidiaries. Our Subsidiaries are separate and
distinct legal entities and have no obligation, contingent or otherwise, to pay
any amounts due pursuant to the senior notes or to make any funds available for
paying such amounts, whether by dividends, loans or other payments. In addition,
the payment of dividends and the making of loans and advances to us by our
Subsidiaries may be subject to statutory, contractual or other restrictions and
are dependent upon the earnings or financial condition of those Subsidiaries and
subject to various business considerations. As a result, we may be unable to
gain access to the cash flow or assets of our Subsidiaries.
PAYING AGENT AND REGISTRAR FOR THE NOTES
The trustee is currently acting as paying agent and registrar for the
senior notes. We may change the paying agent or registrar without prior notice
to the holders of the senior notes, and PRG or any of our Subsidiaries may act
as paying agent or registrar.
We are obligated to pay reasonable compensation to the trustee and to
indemnify the trustee against certain losses, liabilities or expenses incurred
by it in connection with its duties relating to the senior notes. The trustee's
claims for such payments will generally be senior to those of the holders of the
senior notes in respect of all funds collected or held by the trustee.
OPTIONAL REDEMPTION
There is no sinking fund for the senior notes. We may redeem all or part of
the senior notes at any time upon not less than 30 nor more than 60 days' prior
notice at the following redemption prices plus accrued and unpaid interest on
the senior notes to be redeemed to the applicable redemption date, if redeemed
during the periods beginning on the Issue Date and each of the other following
indicated periods, subject to the rights of holders on the relevant record date
to receive interest on the relevant interest payment date:
PERIOD PERCENTAGE
-------------------------------------------------------------- --------------
Issue Date through March 14, 2007 104.00%
March 15, 2007 through March 14, 2008 102.00%
March 15, 2008 and thereafter 100.00%
Unless we default in the payment of the redemption price, interest will
cease to accrue on the senior notes or portions thereof called for redemption on
the applicable redemption date.
If we do not redeem all of the senior notes, the trustee will select the
senior notes to be redeemed in principal amounts of $1,000 or whole multiples of
$1,000 by lot, on a pro rata basis or in accordance with any other method the
trustee considers fair and appropriate. If any senior notes are to be redeemed
in part only, a senior note or notes in principal amount equal to the unredeemed
principal portion thereof will be issued.
REPURCHASE AT THE OPTION OF HOLDERS
CHANGE IN CONTROL
If a Change in Control occurs, each holder of senior notes will have the
right to require us to repurchase all of such holder's senior notes not
previously called for redemption, or any portion of those senior notes that is
equal to $1,000 or a whole multiple of $1,000, on the date that is 45 days (or
if that 45th day is not a business day, the next succeeding business day) after
the date we give notice of the Change in Control at a repurchase price equal to
100% of the principal amount of the senior notes to be repurchased, together
with interest accrued and unpaid to, but excluding, the repurchase date;
provided that, if such repurchase date is an interest payment date, then the
26
interest payable on such date shall be payable to the holder of record at the
close of business on the relevant record date and the repurchase price shall not
include such interest payment.
Within 30 days after the occurrence of a Change in Control, we are required
to give notice to all holders of record of senior notes, as provided in the
senior notes indenture, of the occurrence of the Change in Control and of their
resulting repurchase right. We must also deliver a copy of our notice to the
trustee. In order to exercise the repurchase right, a holder of senior notes
must deliver, on or before the 45th day after the date of our notice of the
Change in Control, written notice to the trustee of the holder's exercise of its
repurchase right, together with the senior notes with respect to which the right
is being exercised.
A holder may withdraw the notice at any time prior to the close of business
on the repurchase date by delivering a written notice of withdrawal to the
trustee as provided in the senior notes indenture.
Under the senior notes indenture, a "Change in Control" of PRG will be
deemed to have occurred at such time after the original issuance of the senior
notes when the following has occurred:
o the acquisition by any person, including any syndicate or group deemed
to be a "person" under Section 13(d)(3) of the Exchange Act, of
beneficial ownership, directly or indirectly, through a purchase,
merger or other acquisition transaction or series of transactions, of
shares of our capital stock entitling that person to exercise 50% or
more of the total voting power of all shares of our capital stock
entitled to vote generally in elections of directors, other than any
acquisition by us, any of our subsidiaries or any of our employee
benefit plans;
o our consolidation or merger with or into any other person, any merger
of another person into us, or any conveyance, transfer, sale, lease or
other disposition of all or substantially all of our properties and
assets to another person, other than:
(1) any transaction (A) that does not result in any reclassification,
conversion, exchange or cancellation of outstanding shares of our capital
stock and (B) pursuant to which holders of our capital stock immediately
prior to the transaction are entitled to exercise, directly or indirectly,
50% or more of the total voting power of all shares of our capital stock
entitled to vote generally in the election of directors of the continuing
or surviving person immediately after the transaction; or
(2) any merger solely for the purpose of changing our jurisdiction of
incorporation and resulting in a reclassification, conversion or exchange
of outstanding shares of (A) common stock solely into shares of common
stock of the surviving entity, (B) series A convertible preferred stock
solely into shares of a series of preferred stock of the surviving entity
having the same designations, rights and privileges with respect to such
surviving entity as the series A convertible preferred stock has with
respect to us, and (C) the series B convertible preferred stock solely into
shares of a series of preferred stock of the surviving entity having the
same designations, rights and privileges with respect to such surviving
entity as the series B convertible preferred stock has with respect to us;
o during any consecutive two-year, period, individuals who at the
beginning of that two-year period constituted our Board of Directors
(together with any new directors whose election to our Board of
Directors, or whose nomination for election by our shareholders, was
approved by a vote of a majority of the directors then still in office
who were either directors at the beginning of such period or whose
election or nomination for election was previously so approved) cease
for any reason to constitute a majority of our Board of Directors then
in office; or
o we are liquidated or dissolved or our shareholders pass a resolution
approving a plan of liquidation or dissolution.
Beneficial ownership shall be determined in accordance with Rule 13d-3
promulgated by the SEC under the Exchange Act. The term "person" includes any
syndicate or group that would be deemed to be a "person" under Section 13(d)(3)
of the Exchange Act.
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Rule 13e-4 under the Exchange Act requires the dissemination of information
to securityholders if an issuer tender offer occurs and may apply, if the
repurchase option becomes available to holders of the senior notes. We will
comply with this rule to the extent applicable at that time.
We may, to the extent permitted by applicable law, at any time purchase the
senior notes in the open market or by tender at any price or by private
agreement. Any senior note so purchased by us may, to the extent permitted by
applicable law, be reissued or resold or may be surrendered to the trustee for
cancellation. Any notes surrendered to the trustee may not be reissued or resold
and will be canceled promptly.
Our ability to repurchase senior notes upon the occurrence of a Change in
Control is subject to important limitations. We cannot assure you that we would
have the financial resources, or would be able to arrange financing, to pay the
repurchase price for all the senior notes that might be delivered by holders of
notes seeking to exercise the repurchase right. Any failure by us to repurchase
the senior notes when required following a Change in Control would result in an
event of default under the senior notes indenture.
Any such default may, in turn, cause a default under existing or other
Indebtedness.
ASSET SALES
In the event that we consummate an Asset Sale permitted by the terms and
conditions of the senior notes indenture and the aggregate amount of Excess
Proceeds therefrom exceeds $10 million, within twenty business days thereof, we
will make an Asset Sale Offer in accordance with the procedures set forth in the
senior notes indenture to all holders of senior notes and all holders of other
indebtedness that is pari passu with the senior notes containing provisions
similar to those set forth in the senior notes indenture with respect to offers
to purchase or redeem with the proceeds of sales of assets to purchase the
maximum principal amount of senior notes and such other pari passu indebtedness
that may be purchased out of the Excess Proceeds. The offer price in any Asset
Sale Offer will be equal to 100% of the principal amount plus accrued and unpaid
interest to the date of purchase and will be payable in cash. If any Excess
Proceeds remain after consummation of an Asset Sale Offer, we may use those
Excess Proceeds for any purpose not otherwise prohibited by the senior notes
indenture.
If the aggregate principal amount of the senior notes and other pari passu
indebtedness tendered into such Asset Sale Offer exceeds the amount of Excess
Proceeds, the trustee shall select the senior notes and such other pari passu
Indebtedness to be purchased on a pro rata basis. Upon completion of each Asset
Sale Offer, the amount of Excess Proceeds will be reset at zero.
We will comply with the requirements of Rule 14e-1 under the Exchange Act
and any other securities laws and regulations thereunder to the extent those
laws and regulations are applicable in connection with each repurchase of senior
notes pursuant to an Asset Sale Offer. To the extent that the provisions of any
securities laws or regulations conflict with the provisions of the senior notes
indenture, we will comply with the applicable securities laws and regulations
and will not be deemed to have breached our obligations under the senior notes
indenture by virtue of such compliance.
CERTAIN COVENANTS
RESTRICTED PAYMENTS
We will not, and will not permit any of our Restricted Subsidiaries to,
directly or indirectly:
(i) declare or pay any dividend or make any other payment or
distribution on account of our or any of our Restricted Subsidiaries'
Equity Interests (including, without limitation, any payment in connection
with any merger or consolidation involving us or any of our Restricted
Subsidiaries) or to the direct or indirect holders of our or any of our
Restricted Subsidiaries' Equity Interests in their capacity as such, other
than
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(A) dividends or distributions payable in Equity Interests (other
than Disqualified Stock) of us); or
(B) dividends or distributions by a Restricted Subsidiary;
provided, that, in the case of any dividend or distribution payable on
or in respect of any class or series of securities issued by a
Restricted Subsidiary that is not wholly-owned by PRG or another
Restricted Subsidiary, PRG or a Restricted Subsidiary receives at
least its pro rata share of such dividend or distribution in
accordance with its Equity Interests in such class or series of
securities;
(ii) purchase, redeem or otherwise acquire or retire for value
(including, without limitation, in connection with any merger or
consolidation involving PRG) any Equity Interests of PRG or any direct or
indirect parent of PRG;
(iii) make any payment on or with respect to, or purchase, redeem,
defease or otherwise acquire or retire for value any Indebtedness of PRG or
any Restricted Subsidiary that is contractually subordinated to the senior
notes (excluding any intercompany Indebtedness between or among us and any
of our Restricted Subsidiaries), except (A) a payment of interest or
principal at the Stated Maturity thereof or (B) the purchase, repurchase or
other acquisition of any such Indebtedness in anticipation of satisfying a
sinking fund obligation, principal installment or final maturity, in each
case, due within one year of the date of such purchase, repurchase or other
acquisition; or
(iv) make any Restricted Investment (all such payments and other
actions set forth in these clauses (i) through (iv) being collectively
referred to as "Restricted Payments").
The foregoing provisions will not prohibit the following Restricted
Payments:
(1) the making of any Restricted Payment in exchange for, or out of
the net cash proceeds of the substantially concurrent sale (other than to a
Restricted Subsidiary of PRG) of, Equity Interests of PRG (other than
Disqualified Stock) or from the substantially concurrent contribution of
common equity capital to us;
(2) the redemption, repurchase or other acquisition or retirement of
Indebtedness of us or any Restricted Subsidiary that is contractually
subordinated to the senior notes (excluding any intercompany Indebtedness
between or among us and any of our Restricted Subsidiaries) made by
exchange for, or out of the proceeds of the substantially concurrent
issuance or sale of, new Indebtedness of us which is incurred in compliance
with the covenant described below under "-- Incurrence of Indebtedness and
Issuance of Preferred Stock" so long as:
(A) the principal amount of such new Indebtedness does not exceed
the principal amount of (or accreted value, if applicable), plus any
accrued and unpaid interest on the subordinated Indebtedness being so
redeemed, repurchased, acquired or retired, plus the amount of any
reasonable premium required to be paid under the terms of the
instrument governing the subordinated Indebtedness being so redeemed,
repurchased, acquired or retired, plus reasonable fees and expenses
incurred in connection with the issuance of such new Indebtedness,
(B) such Indebtedness is subordinated to the senior notes at
least to the same extent as such subordinated Indebtedness so
redeemed, repurchased, acquired or retired,
(C) such Indebtedness has a final scheduled maturity date equal
to or later than the final scheduled maturity date of the subordinated
Indebtedness being so redeemed, repurchased, acquired or retired, and
(D) such Indebtedness has a Weighted Average Life to Maturity
equal to or greater than the remaining Weighted Average Life to
Maturity of the subordinated Indebtedness being so redeemed,
repurchased, acquired or retired;
(3) a Restricted Payment to pay for the repurchase, retirement or
other acquisition or retirement of Equity Interests of PRG held by any
future, present or former employee, director or consultant of us, any of
our Subsidiaries or any of our direct or indirect parents pursuant to any
management equity plan or stock option plan or any other management or
29
employee benefit plan or agreement; provided, however, that the aggregate
Restricted Payments made under this clause (3) do not exceed in any
calendar year $1.0 million (with unused amounts in any calendar year being
carried over to succeeding calendar years);
(4) repurchases of Equity Interests deemed to occur upon cashless
exercise of stock options or warrants if such Equity Interests represent a
portion of the exercise price of such options or warrants or cash payments
made to satisfy tax obligations in accordance with the management incentive
plan; or
(5) the repurchase, redemption or other acquisition or retirement of
any subordinated Indebtedness pursuant to the provisions similar to those
described under "-- Redemption at the Option of Holders -- Change in
Control" and "-- Asset Sales"; provided that all senior notes tendered by
holders in connection with a Change in Control or an Asset Sale Offer, as
applicable, have been repurchased, redeemed, acquired or retired.
provided, however, that at the time of, and after giving effect to, any
Restricted Payment permitted under clauses (3) or (5) above, no Default or Event
of Default shall have occurred and be continuing or would occur as a consequence
thereof.
The amount of all Restricted Payments (other than cash) will be the Fair
Market Value on the date of the Restricted Payment of the asset(s) or securities
proposed to be transferred or issued by us or such Restricted Subsidiary, as the
case may be, pursuant to the Restricted Payment. The Fair Market Value of any
assets or securities that are required to be valued by this covenant will be
determined by our Board of Directors whose resolution with respect thereto will
be delivered to the Trustee in the event that the Fair Market Value exceeds
$10.0 million.
The Company will not permit any Unrestricted Subsidiary to become a
Restricted Subsidiary except pursuant to the last sentence of the definition of
"Unrestricted Subsidiary." For purposes of designating any Restricted Subsidiary
as an Unrestricted Subsidiary, all outstanding Investments by PRG and the
Restricted Subsidiaries (except to the extent repaid) in the Subsidiary so
designated will be deemed to be Restricted Payments in an amount equal to the
lesser of (i) the Fair Market Value of our Investment in such Subsidiary as of
the date of such redesignation and (ii) such Fair Market Value as of the date on
which such Subsidiary was originally designated as an Unrestricted Subsidiary
after the Issue Date, determined in accordance with the preceding paragraph.
Such designation will be permitted only if a payment of such amount would be
permitted at such time pursuant to the definition of "Permitted Investments,"
and if such Subsidiary otherwise meets the definition of an Unrestricted
Subsidiary. Unrestricted Subsidiaries will not be subject to any of the
restrictive covenants set forth in the senior notes indenture.
INCURRENCE OF INDEBTEDNESS AND ISSUANCE OF PREFERRED STOCK
We will not, and will not permit any of our Restricted Subsidiaries to,
directly or indirectly, create, incur, issue, assume, guarantee or otherwise
become directly or indirectly liable, contingently or otherwise, with respect to
(collectively, "incur") any Indebtedness (including Acquired Debt), and we will
not issue any Disqualified Stock and will not permit any of our Restricted
Subsidiaries to issue any shares of preferred stock; provided, however, that the
foregoing restrictions shall not prohibit us and our Restricted Subsidiaries
from incurring any of the following items of Indebtedness or issuances of
Disqualified Stock or preferred stock (collectively, "Permitted Debt"):
(i) Indebtedness incurred under the Credit Facilities (including the
related Guarantees thereof and fees, expenses and accrued interest related
thereto), the principal amount of which (with letters of credit being
deemed to have a principal amount equal to the maximum potential liability
of us and our Restricted Subsidiaries thereunder) does not exceed $47.5
million outstanding at any one time under this clause (i), less the
aggregate amount of all Net Proceeds of Asset Sales applied by us or any of
our Restricted Subsidiaries since the Issue Date to repay any term
Indebtedness with the effect of permanently reducing such term Indebtedness
and revolving credit Indebtedness under a Credit Facility and effect a
corresponding commitment reduction thereunder pursuant to the covenant
described under "-- Asset Sales" (it being understood that a temporary
reduction of revolving credit Indebtedness with Net Proceeds pending
application thereof as permitted by such covenant shall not reduce the
amounts available for borrowing under this clause (i));
30
(ii) the incurrence by us of Indebtedness represented by the senior
notes and the senior convertible notes and, if applicable, the series A
convertible preferred stock and series B convertible preferred stock;
(iii) the issuance by any of our Restricted Subsidiaries to us or to
any of our Restricted Subsidiaries of shares of preferred stock; provided,
however, that:
(A) any subsequent issuance or transfer of Capital Stock that
results in any such preferred stock being held by a Person other than
us or a Restricted Subsidiary; and
(B) any sale or other transfer of any such preferred stock to a
Person that is not either us or a Restricted Subsidiary, will be
deemed, in each case, to constitute an issuance of such preferred
stock by such Restricted Subsidiary that was not permitted by this
clause (iii);
(iv) the Guarantee by us or any of our Restricted Subsidiaries of
Indebtedness of us or our Restricted Subsidiary that was permitted to be
incurred by another provision of this covenant;
(v) Existing Indebtedness (other than Indebtedness described in clause
(i) above);
(vi) Indebtedness (including Capital Lease Obligations), Disqualified
Stock and preferred stock incurred by us or any of our Restricted
Subsidiaries, to finance the purchase, lease, construction or improvement
of property (real or personal) or equipment that is used or useful in a
Permitted Business, in an aggregate principal amount which, when aggregated
with the principal amount of all other Indebtedness, Disqualified Stock and
preferred stock then outstanding and incurred pursuant to this clause (vi)
does not exceed at any time in the aggregate outstanding $10.0 million;
(vii) Indebtedness incurred by any Restricted Subsidiary constituting
reimbursement obligations with respect to letters of credit issued in the
ordinary course of business; provided, however, that upon the drawing of
such letters of credit or the incurrence of such Indebtedness, such
obligations are reimbursed within 30 days following such drawing or
incurrence; provided, further, that any such Indebtedness outstanding and
incurred pursuant to this clause (vii) does not exceed at any time in the
aggregate outstanding $5.0 million;
(viii) the incurrence by us or any Restricted Subsidiary of Permitted
Refinancing Indebtedness in exchange for, or the net proceeds of which are
used to extend, refund, refinance, defease, renew or replace, any
Indebtedness, Disqualified Stock or preferred stock incurred under clauses
(ii), (v) and (vi) above, this clause (viii) and clause (ix) below or any
Permitted Refinancing Indebtedness incurred in exchange for, or the net
proceeds of which are used to extend, refund, refinance, defease, renew or
replace, such Indebtedness, Disqualified Stock or preferred stock including
additional Indebtedness, Disqualified Stock or preferred stock incurred to
pay premiums (including tender premiums), defeasance costs and fees in
connection therewith prior to its respective maturity;
(ix) Indebtedness of us owed to and held by any Restricted Subsidiary
or Indebtedness of a Restricted Subsidiary owed to and held by us or any
other Restricted Subsidiary; provided, however, that any subsequent
issuance or transfer of any Capital Stock or any other event that results
in any such Restricted Subsidiary ceasing to be a Restricted Subsidiary or
any subsequent transfer of such Indebtedness (except to us or a Restricted
Subsidiary) shall be deemed, in each case, to constitute an incurrence of
such Indebtedness by the issuer thereof; and
(x) the incurrence by us or any of the Restricted Subsidiaries of
Indebtedness, Disqualified Stock or preferred stock in an aggregate
principal amount at any time outstanding under this clause (x) not to
exceed $7.5 million.
For purposes of determining compliance with this covenant, in the event
that an item of Indebtedness, Disqualified Stock or preferred stock meets the
criteria of more than one of the categories of Permitted Debt described in
clauses (i) through (x) in the immediate preceding paragraph above, we, in our
sole discretion, will classify or reclassify such item of Indebtedness,
Disqualified Stock or preferred stock (or any portion thereof) and will only be
required to include the amount and type of such Indebtedness, Disqualified Stock
or preferred stock in one of the above clauses. For purposes of determining
31
compliance with this covenant, at the time of incurrence, we will be entitled to
divide and classify an item of Indebtedness in more than one of the types of
Indebtedness described above.
Accrual of interest, the accretion of accreted value and the payment of
interest in the form of additional Indebtedness, Disqualified Stock or preferred
stock will not be deemed to be an incurrence of Indebtedness, Disqualified Stock
or preferred stock for purposes of this covenant.
For purposes of determining compliance with any U.S. dollar-denominated
restriction on the incurrence of Indebtedness, the U.S. dollar-equivalent
principal amount of Indebtedness denominated in a foreign currency shall be
calculated based on the relevant currency exchange rate in effect on the date
such Indebtedness was incurred, in the case of term debt, or first committed, in
the case of revolving credit debt; provided that if such Indebtedness is
incurred to refinance other Indebtedness denominated in a foreign currency, and
such refinancing would cause the applicable U.S. dollar denominated restriction
to be exceeded if calculated at the relevant currency exchange rate in effect on
the date of such refinancing, such U.S. dollar-denominated restriction shall be
deemed not to have been exceeded so long as the principal amount of such
refinancing Indebtedness does not exceed the principal amount of such
Indebtedness being refinanced. The principal amount of any Indebtedness incurred
to refinance other Indebtedness, if incurred in a different currency from the
Indebtedness being refinanced, shall be calculated based on the currency
exchange rate applicable to the currencies in which such respective Indebtedness
is denominated that is in effect on the date of such refinancing.
Notwithstanding the foregoing, we will not, directly or indirectly, incur
any Indebtedness (including Permitted Debt) that is contractually subordinated
in right of payment to any other Indebtedness of PRG unless such Indebtedness is
also contractually subordinated in right of payment to the senior notes on
substantially identical terms.
The amount of any Indebtedness outstanding as of any date will be:
o the accreted value of the Indebtedness, in the case of any
Indebtedness issued with original issue discount;
o the principal amount of the Indebtedness, in the case of any other
Indebtedness; and
o in respect of Indebtedness of another Person secured by a Lien on the
assets of the specified Person, the lesser of: (A) the Fair Market
Value of such assets at the date of determination; and (B) the amount
of the Indebtedness of the other Person.
ASSET SALES
We will not, and will not permit any of our Restricted Subsidiaries to,
consummate an Asset Sale unless:
(i) we (or the Restricted Subsidiary, as the case may be) receive
consideration at the time of the Asset Sale at least equal to the Fair
Market Value of the assets or Capital Stock issued or sold or otherwise
disposed of; and
(ii) at least 75% of the consideration received in the Asset Sale by
PRG or such Restricted Subsidiary is in the form of cash. For purposes of
this provision (but not the definition of Net Proceeds), each of the
following will be deemed to be cash:
(A) Cash Equivalents;
(B) any liabilities, as shown on our most recent consolidated
balance sheet, of us or any Restricted Subsidiary (other than
contingent liabilities and liabilities that are by their terms
subordinated to the senior notes) that are assumed by the transferee
of any such assets pursuant to a customary assumption agreement that
releases us or such Restricted Subsidiary from further liability; and
32
(C) any securities, notes or other obligations received by us or
any such Restricted Subsidiary from such transferee that are, within
180 days of the Asset Sale, converted by us or such Restricted
Subsidiary into cash, to the extent of the cash received in that
conversion.
Within 365 days after the receipt of any Net Proceeds from an Asset Sale,
we (or our applicable Restricted Subsidiary, as the case may be) may apply such
Net Proceeds at our option:
(i) to repay or prepay Indebtedness of PRG or our Restricted
Subsidiaries and, if such Indebtedness repaid is revolving credit
Indebtedness, to correspondingly reduce commitments with respect thereto;
or
(ii) to acquire (or enter into a definitive agreement to acquire, the
closing of which is expected to occur no later than 455 days following the
receipt of such Net Proceeds) all or substantially all of the assets of, or
any Capital Stock of, another Person engaged in a Permitted Business (if,
after giving effect to any such acquisition of Capital Stock, such Person
is or becomes a Restricted Subsidiary of PRG), or to invest in productive
assets of a kind used or usable by us or our Restricted Subsidiaries in a
Permitted Business.
Pending the final application of any Net Proceeds, PRG may temporarily reduce
revolving credit borrowings or otherwise invest the Net Proceeds in any manner
that is not prohibited by the senior notes indenture.
Any net proceeds from asset sales that are not applied or invested as
provided above will constitute "Excess Proceeds" to be used to repurchase all or
part of the senior notes or other indebtedness that is pari passu with the
senior notes. See "-- Repurchase at the Option of Holders -- Asset Sales."
TRANSACTIONS WITH AFFILIATES
We will not, and will not permit any of our Restricted Subsidiaries to,
make any payment to, or sell, lease, transfer or otherwise dispose of any of its
properties or assets to, or purchase any property or assets from, or enter into
or make or amend any transaction, contract, agreement, understanding, loan,
advance or guarantee with, or for the benefit of, any Affiliate of PRG (each, an
"Affiliate Transaction"), unless:
(i) the Affiliate Transaction is on terms that are no less favorable
to us or the relevant Restricted Subsidiary than those that would have been
obtained in a comparable transaction by us or such Restricted Subsidiary
with an unrelated Person; and
(ii) we deliver to the trustee:
(A) with respect to any Affiliate Transaction or series of
related Affiliate Transactions involving aggregate consideration in
excess of $3.0 million, a resolution of our Board of Directors set
forth in an Officers' Certificate certifying that such Affiliate
Transaction complies with clause (i) of this covenant and that such
Affiliate Transaction has been approved by a majority of the
disinterested members of the Board of Directors of PRG; and
(B) with respect to any Affiliate Transaction or series of
related Affiliate Transactions involving aggregate consideration in
excess of $10.0 million, an opinion as to the fairness to PRG or such
Subsidiary of such Affiliate Transaction from a financial point of
view issued by an accounting, appraisal or investment banking firm of
national standing.
The following items will not be deemed to be Affiliate Transactions and,
therefore, will not be subject to the provisions of this covenant:
(i) any consulting or employment agreement or arrangements, incentive
compensation plan, stock option or stock ownership plan, employee benefit
plan, severance arrangements, officer or director indemnification agreement
or any similar arrangement entered into by us or any of our Restricted
Subsidiaries for the benefit of directors, officers, employees and
consultants of us or a direct or indirect parent of us and payments and
transactions pursuant thereto, including without limitation, pursuant to
the management incentive plan;
33
(ii) transactions between or among PRG and/or our Restricted
Subsidiaries;
(iii) transactions with a Person (other than an Unrestricted
Subsidiary of us) that is an Affiliate of us solely because we own,
directly or through a Restricted Subsidiary, an Equity Interest in, or
control, such Person;
(iv) payment of reasonable directors' fees to Persons who are not
employees of us; and
(v) any Investment of us or any of our Restricted Subsidiaries
existing on the date of the senior notes indenture and any extension,
modification or renewal of such existing Investments, to the extent not
involving any additional Investment other than as the result of the accrual
or accretion of interest or original issue discount or the issuance of
pay-in-kind securities, in each case pursuant to the terms of such
Investments as in effect on the date of the senior notes indenture.
LIMITATION ON LIENS
We will not, and will not permit any of our Restricted Subsidiaries to,
create, incur, assume or otherwise cause or suffer to exist or become effective
any Lien of any kind securing Indebtedness upon any of their property or assets,
now owned or hereafter acquired, other than Permitted Liens, unless all payments
due on the senior notes are secured on an equal and ratable basis with the
obligations so secured until such time as such obligations are no longer secured
by a Lien; provided that if such Indebtedness is by its terms expressly
subordinated to the senior notes, the Lien securing such Indebtedness shall be
subordinate and junior to the Lien securing the senior notes with the same
relative priority as such subordinate or junior Indebtedness shall have with
respect to the senior notes.
BUSINESS ACTIVITIES
We will not, and will not permit any of our Restricted Subsidiaries to,
engage in any business other than Permitted Businesses, except to such extent as
would not be material to us and our Restricted Subsidiaries taken as a whole.
PAYMENTS FOR CONSENt
We will not, and will not permit any of our Restricted Subsidiaries to,
directly or indirectly, pay or cause to be paid any consideration to or for the
benefit of any holder of senior notes for or as an inducement to any consent,
waiver or amendment of any of the terms or provisions of the senior notes
indenture or the senior notes unless such consideration is offered to be paid
and is paid to all holders that consent, waive or agree to amend in the time
frame set forth in the solicitation documents relating to such consent, waiver
or agreement.
CONSOLIDATION, MERGERS AND SALES OF ASSETS
PRG shall not consolidate with, merge or amalgamate with or into any other
Person or convey, transfer or lease the properties and assets of PRG and its
Restricted Subsidiaries, taken as a whole, substantially as an entirety to any
Person, unless:
(i) either (A) PRG shall be the continuing corporation or (B) the
Person (if other than PRG) formed by such consolidation or into which PRG
is merged or amalgamated or the Person which acquires by conveyance,
transfer or lease the properties and assets of PRG substantially as an
entirety (1) shall be organized and validly existing under the laws of the
United States or any state thereof or the District of Columbia and (2)
shall expressly assume, by a supplemental indenture executed and delivered
to the trustee in form reasonably satisfactory to the trustee, all of the
obligations of PRG under the senior notes and the senior notes indenture;
(ii) at the time of such transaction, no Event of Default and no event
which, after notice or lapse of time, would become an Event of Default,
shall have happened and be continuing; and
34
(iii) we shall have delivered to the trustee an Officers' Certificate
and an Opinion of Counsel, each stating that such consolidation, merger,
amalgamation, conveyance, transfer or lease and, if a supplemental
indenture is required in connection with such transaction, such
supplemental indenture complies with the terms of this covenant and that
all conditions precedent herein provided for relating to such transaction
have been satisfied.
For purposes of the foregoing, the transfer (by lease, assignment, sale or
otherwise) of the properties and assets of one or more Subsidiaries (other than
to us or another Subsidiary), which, if such assets were owned by us, would
constitute all or substantially all of the properties and assets of us, shall be
deemed to be the transfer of all or substantially all of the properties and
assets of PRG.
EVENT OF DEFAULT
Each of the following constitutes an Event of Default under the senior
notes indenture:
(1) our failure to pay when due the principal of or premium, if any,
on any of the senior notes at maturity, upon redemption or exercise of a
repurchase right or otherwise;
(2) our failure to pay an installment of interest (including
Registration Delay Payments, if any) on any of the senior notes that
continues for 30 days after the date when due;
(3) our failure to perform or observe any other term, covenant or
agreement contained in the senior notes or the senior notes indenture for a
period of 30 days after written notice of such failure, requiring us to
remedy the same, shall have been given to us by the trustee or to us and
the trustee by the holders of at least 25% in aggregate principal amount of
the senior notes then outstanding;
(4) our failure to give the notice required by the senior notes
indenture regarding any Change in Control or Asset Sale Offer within the
time period prescribed by the senior notes indenture after the occurrence
of such Change in Control or Asset Sale;
(5) (A) one or more defaults in the payment of principal of or
premium, if any, on any of our or our Restricted Subsidiaries' indebtedness
aggregating $5.0 million or more, when the same becomes due and payable at
the scheduled maturity thereof, and such default or defaults shall have
continued after any applicable grace period and shall not have cured or
waived within a thirty day period after the date of such default or (B) any
of our or our Restricted Subsidiaries' indebtedness aggregating $5.0
million or more shall have been accelerated or otherwise declared due and
payable, or required to be prepaid or repurchased (other than by regularly
scheduled required payment) prior to the scheduled maturity thereof and
such acceleration is not rescinded or annulled within a thirty day period
after the date of such acceleration;
(6) final unsatisfied judgments not covered by insurance aggregating
in excess of $5.0 million rendered against us or any of our Restricted
Subsidiaries and not stayed, bonded or discharged within 60 days;
(7) certain events of our bankruptcy, insolvency or reorganization or
that of any Significant Subsidiaries, including our filing of a voluntary
petition seeking liquidation, reorganization arrangement, readjustment of
debts or for any other relief under the federal bankruptcy code; or
(8) one or more defaults under the convertible notes indenture with
respect to the senior convertible notes should have occurred and be
continuing.
The senior notes indenture provides that the trustee shall, within 90 days
of the occurrence of an Event of Default, give to the registered holders of the
senior notes notice of all uncured defaults known to it, but the trustee shall
be protected in withholding such notice if it, in good faith, determines that
the withholding of such notice is in the best interest of such registered
holders, except in the case of a default in the payment of the principal of, or
premium, if any, or interest on, any of the senior notes when due or in the
payment of any redemption or repurchase obligation.
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If an Event of Default specified in clause (7) above occurs and is
continuing, then automatically the principal of all the senior notes and the
accrued and unpaid interest thereon shall become immediately due and payable. If
an Event of Default shall occur and be continuing, other than with respect to
clause (7) above, the default not having been cured or waived as provided under
"-- Modifications and Waiver" below, the trustee or the holders of at least 25%
in aggregate principal amount of the senior notes then outstanding may declare
the senior notes due and payable at their principal amount together with accrued
and unpaid interest, and thereupon the trustee may, at its discretion, proceed
to protect and enforce the rights of the holders of senior notes by appropriate
judicial proceedings. Such declaration may be rescinded or annulled with the
written consent of the holders of a majority in aggregate principal amount of
the senior notes then outstanding upon the conditions provided in the senior
notes indenture.
The senior notes indenture contains a provision entitling the trustee,
subject to the duty of the trustee during default to act with the required
standard of care, to be indemnified by the holders of senior notes before
proceeding to exercise any right or power under the senior notes indenture at
the request of such holders. The senior notes indenture provides that, subject
to certain limitations, the holders of a majority in aggregate principal amount
of the senior notes then outstanding through their written consent may direct
the time, method and place of conducting any proceeding for any remedy available
to the trustee or exercising any trust or power conferred upon the trustee.
We will be required to furnish annually to the trustee a statement as to
the fulfillment of our obligations under the senior notes indenture.
MODIFICATIONS AND WAIVER
The senior notes indenture, including the terms and conditions of the
senior notes, may be modified or amended by us and the trustee, without the
consent of the holder of any senior note, for the purposes of, among other
things:
o adding to our covenants for the benefit of the holders of senior
notes;
o surrendering any right or power conferred upon us;
o complying with the requirements of the SEC in order to effect or
maintain the qualification of the indenture under the Trust Indenture
Act of 1939, as amended;
o curing any ambiguity, omission, inconsistency or correcting or
supplementing any defective provision contained in the senior notes
indenture;
o complying with the covenant described under "-- Consolidations,
Mergers and Sales of Assets;" or
o adding or modifying any other provisions which we and the trustee may
deem necessary or desirable and which will not adversely affect the
interests of the holders of senior notes.
Modifications and amendments to the senior notes indenture or to the terms
and conditions of the senior notes may also be made, and noncompliance by us may
be waived, with the written consent of the holders of at least a majority in
aggregate principal amount of the senior notes at the time outstanding or by the
adoption of a resolution at a meeting of holders at which a quorum is present by
at least a majority in aggregate principal amount of the senior notes
represented at the meeting.
However, no such modification, amendment or waiver may, without the written
consent of the holder of each senior note affected:
o change the maturity of the principal of or any installment of interest
on (including Registration Delay Payments, if any), any senior note,
including payment of Registration Delay Payments, if any;
o reduce the principal amount of, or any premium, if any, on any senior
note;
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o reduce the interest rate or interest on (including Registration Delay
Payments, if any), any senior note;
o change the currency of payment of principal of, premium, if any, or
interest of any senior note;
o impair the right to institute suit for the enforcement of any payment
on or with respect to any senior note; or
o reduce the percentage in aggregate principal amount of senior notes
outstanding necessary to modify or amend the senior notes indenture or
to waive any past default.
SATISFACTION AND DISCHARGE
We may discharge our obligations under the senior notes indenture while
senior notes remain outstanding, subject to certain conditions, if:
o all outstanding senior notes will become due and payable at their
scheduled maturity within 60 days; or
o all outstanding senior notes are scheduled for redemption within 60
days;
and, in either case, we have deposited with the trustee for the purpose of
making such principal or redemption payment an amount sufficient to pay and
discharge all outstanding senior notes on the date of their scheduled maturity
or the scheduled date of redemption.
GOVERNING LAW
The senior notes indenture and the senior notes are governed by, and
construed in accordance with, the law of the State of New York.
INFORMATION CONCERNING THE TRUSTEE
U.S. Bank National Association, as trustee under the senior notes
indenture, has been appointed by us as paying agent and registrar with regard to
the senior notes. The trustee or its affiliates may from time to time in the
future provide banking and other services to us in the ordinary course of their
business.
CERTAIN DEFINITIONS
Set forth below are certain of the defined terms used in the covenants and
other provisions of the senior notes indenture. Reference is made to the senior
notes indenture for the full definition of all such terms as well as any other
capitalized terms used herein for which no definition is provided.
"Acquired Debt" means, with respect to any specified Person:
(i) Indebtedness of any other Person existing at the time such other
Person is merged with or into or became a Restricted Subsidiary of such
specified Person, whether or not such Indebtedness is incurred in
connection with, or in contemplation of, such other Person merging with or
into, or becoming a Restricted Subsidiary of, such specified Person; and
(ii) Indebtedness secured by a Lien encumbering any asset acquired by
such specified Person.
"Affiliate" of any specified Person means any other person directly or
indirectly controlling or controlled by or under direct or indirect common
control with such specified person. For purposes of this definition, "control"
when used with respect to any specified person means the power to direct or
cause the direction of the management and policies of such person, directly or
indirectly, whether through the ownership of voting securities, by contract or
otherwise; and the terms "controlling" and "controlled" have meanings
correlative to the foregoing.
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"Asset Sale" means:
(i) the sale, lease, conveyance or other disposition of any property
or assets of PRG or any Restricted Subsidiary; or
(ii) the issuance of Equity Interests in PRG or in any of PRG's
Restricted Subsidiaries or the sale of Equity Interests in any of its
Restricted Subsidiaries.
Notwithstanding the preceding, none of the following items will be deemed
to be an Asset Sale:
(a) any single transaction or series of related transactions that
involves assets having a Fair Market Value of less than $10.0 million;
(b) a transfer of assets between or among PRG and its Restricted
Subsidiaries;
(c) an issuance of Equity Interests by a Restricted Subsidiary of PRG
to PRG or to a Restricted Subsidiary of PRG;
(d) the licensing on a non-exclusionary basis of intellectual property
or other general intangibles to third persons on customary terms as
determined by the Board of Directors in good faith and the ordinary course
of business;
(e) the sale or disposition in the ordinary course of business of any
property or equipment that has become damaged, worn-out or obsolete, in the
ordinary course of business;
(f) to the extent allowable under Section 1031 of the Internal Revenue
Code of 1986, any exchange of like property for use in a Permitted
Business;
(g) the sale or other disposition of cash or Cash Equivalents;
(h) a Restricted Payment that does not violate the covenant set forth
under "-- Certain Covenants -- Restricted Payments" or A Permitted
Investment;
(i) the sale, lease, sub-lease, license, sub-license, consignment,
conveyance or other disposition of equipment, inventory or other assets in
the ordinary course of business, including leases with respect to
facilities that are temporarily not in use or pending their disposition, or
accounts receivable in connection with the compromise, settlement or
collection thereof;
(j) the creation of a Lien (but not the sale or other disposition of
property subject to such Lien); or
(k) the sale of all or substantially all of the assets of PRG and its
Subsidiaries in compliance with the covenant described under "-- Certain
Covenants -- Consolidations, Mergers and Sales of Assets."
"Board of Directors" means either the Board of Directors of PRG or any duly
authorized committee of such board.
"Board Resolution" means a resolution duly adopted by the Board of
Directors, a copy of which, certified by the Secretary or an Assistant Secretary
of PRG to be in full force and effect on the date of such certification, shall
have been delivered to the Trustee."
"Capital Lease Obligation" means, at the time any determination is to be
made, the amount of the liability in respect of a capital lease that would at
that time be required to be capitalized on a balance sheet prepared in
accordance with GAAP, and the Stated Maturity thereof shall be the date of the
38
last payment of rent or any other amount due under such lease prior to the first
date upon which such lease may be prepaid by the lessee without payment of a
penalty.
"Capital Stock" of any corporation means any and all shares, interests,
rights to purchase, warrants, options, participations or other equivalents of or
interests in (however designated) stock issued by that corporation.
"Cash Equivalents" means:
(i) United States dollars;
(ii) securities issued or directly and fully guaranteed or insured by
the United States government or any agency or instrumentality of the United
States government (provided that the full faith and credit of the United
States is pledged in support of those securities) having maturities of not
more than 360 days from the date of acquisition;
(iii) certificates of deposit and eurodollar time deposits with
maturities of six months or less from the date of acquisition, bankers'
acceptances with maturities not exceeding six months and overnight bank
deposits, in each case, with any lender party to the Credit Agreement or
with any domestic commercial bank having capital and surplus in excess of
$500.0 million and a Thomson Bank Watch Rating of "B" or better at the time
of acquisition;
(iv) repurchase obligations for underlying securities of the types
described in clauses (ii) and (iii) above entered into with any financial
institution meeting the qualifications specified in clause (iii) above;
(v) commercial paper having at the time of acquisition one of the two
highest ratings obtainable from Moody's Investors Service, Inc. or Standard
& Poor's Rating Service and, in each case, maturing within nine months
after the date of acquisition;
(vi) securities issued by any state of the United States of America or
any political subdivision of any such state or any public instrumentality
thereof maturing within one year from the date of
(vii) acquisition thereof and at the time of acquisition thereof,
having one of the two highest ratings obtainable from either Standard &
Poor's Rating Services or Moody's Investors Service, Inc.;
(viii) money market funds at least 95% of the assets of which
constitute Cash Equivalents of the kinds described in clauses (1) through
(6) of this definition; and
(ix) local currencies held by PRG or any of its Restricted
Subsidiaries, from time to time in the ordinary course of business and
consistent with past practice.
"Common Stock" means the Common Stock, without par value, of PRG authorized
on the Issue Date or any stock of any class of Capital Stock of a successor to
PRG which has no preference in respect of dividends or of amounts payable in the
event of any voluntary or involuntary liquidation, dissolution or winding up of
such successor to PRG.
"Credit Agreement" means the Credit Agreement, dated as of March 17, 2006,
by and among PRG-Schultz USA, Inc., as borrower, PRG and certain Subsidiaries,
as guarantors, and Ableco Finance LLC, as lender and agent thereunder.
"Credit Facilities" means one or more debt facilities (including, without
limitation, the Credit Agreement), indentures or commercial paper facilities, in
each case, with banks or other institutional lenders or a trustee providing for
revolving credit loans, term loans, receivables financing (including through the
sale of receivables to such lenders or to special purpose entities formed to
borrow from such lenders against such receivables) or letters of credit or
issuances of notes, in each case, as amended, restated, modified, renewed,
39
refunded, replaced (whether upon or after termination or otherwise), substituted
or refinanced (including by means of sales of debt securities to institutional
investors) in whole or in part from time to time.
"Default" or "default" means any event which is, or after notice or passage
of time or both would be, an Event of Default.
"Disqualified Stock" means any Capital Stock that, by its terms (or by the
terms of any security into which it is convertible, or for which it is
exchangeable, in each case, at the option of the holder of the Capital Stock),
or upon the happening of any event, matures or is mandatorily redeemable,
pursuant to a sinking fund obligation or otherwise, or redeemable at the option
of the holder of the Capital Stock, in whole or in part, on or prior to the date
that is 91 days after the date on which the senior notes mature. Notwithstanding
the preceding sentence, any Capital Stock that would constitute Disqualified
Stock solely because the holders of the Capital Stock have the right to require
PRG to repurchase such Capital Stock upon the occurrence of a change of control
or an asset sale will not constitute Disqualified Stock if the terms of such
Capital Stock provide that PRG may not repurchase or redeem any such Capital
Stock pursuant to such provisions unless such repurchase or redemption complies
with the covenant set forth under "-- Certain Covenants -- Incurrence of
Indebtedness and Issuance of Preferred Stock." The amount of Disqualified Stock
deemed to be outstanding at any time for purposes of the senior notes indenture
will be the maximum amount that PRG and its Restricted Subsidiaries may become
obligated to pay upon the maturity of, or pursuant to any mandatory redemption
provisions of, such Disqualified Stock, exclusive of accrued dividends.
"Equity Interests" means Capital Stock and all warrants, options or other
rights to acquire Capital Stock (but excluding any debt security that is
convertible into, or exchangeable for, Capital Stock).
"Existing Indebtedness" means Indebtedness of PRG and its Restricted
Subsidiaries in existence on the Issue Date.
"Existing Notes" means PRG's existing 4(3)/4% Convertible Subordinated
Notes due 2006.
"Fair Market Value" means the value that would be paid by a willing buyer
to an unaffiliated willing seller in a transaction not involving distress or
necessity of either party, determined in good faith by the Board of Directors of
PRG (unless otherwise provided in the senior notes indenture).
"GAAP" means United States generally accepted accounting principles as in
effect from time to time.
"Guarantee" means a guarantee (other than by endorsement of negotiable
instruments for collection in the ordinary course of business), direct or
indirect, contingent or otherwise, in any manner (including, without limitation,
letters of credit and reimbursement agreements in respect thereof), of all or
any part of any Indebtedness.
"Hedging Obligations" means, with respect to any specified Person, the
obligations of such Person under:
(i) interest rate swap agreements (whether from fixed to floating or
from floating to fixed), interest rate cap agreements, interest rate collar
agreements and other agreements or arrangements designated for the purpose
of fixing, hedging or swapping interest rate risk;
(ii) other agreements or arrangements designed to manage interest
rates or interest rate risk; and
(iii) other agreements or arrangements designed to protect such Person
against fluctuations in currency exchange rates or commodity prices.
"Holder" means a person in whose name a senior note is registered on the
Registrar's books.
"Indebtedness" means, with respect to any Person, without duplication:
(i) all indebtedness, obligations and other liabilities, contingent or
otherwise, of such Person for borrowed money (including overdrafts) or for
the deferred purchase price of property or services, if and to the extent
such obligations, liabilities or indebtedness would appear as a liability
40
of such Person on a balance sheet prepared in accordance with GAAP,
excluding any trade payables and other accrued current liabilities incurred
in the ordinary course of business, but including, without limitation, all
obligations, contingent or otherwise, of such Person in connection with any
letters of credit and acceptances issued under letter of credit facilities,
acceptance facilities or other similar facilities;
(ii) all obligations of such Person evidenced by bonds, credit or loan
agreements, notes, debentures or other similar instruments;
(iii) indebtedness of such Person created or arising under any
conditional sale or other title retention agreement with respect to
property acquired by such person (even if the rights and remedies of the
seller or lender under such agreement in the event of default are limited
to repossession or sale of such property), if and to the extent such
obligations, liabilities or indebtedness would appear as a liability of
such Person on a balance sheet prepared in accordance with GAAP, but
excluding trade payables arising in the ordinary course of business;
(iv) all obligations and liabilities, contingent or otherwise, in
respect of Capital Lease Obligations of such Person;
(v) all Hedging Obligations of such Person;
(vi) all indebtedness referred to in (but not excluded from) the
preceding clauses (i) through (v) of other persons and all dividends of
other persons, the payment of which is secured by (or for which the holder
of such indebtedness has an existing right, contingent or otherwise, to be
secured by) any Lien or with respect to property (including, without
limitation, accounts and contract rights) owned by such person, even though
such person has not assumed or become liable for the payment of such
indebtedness (the amount of such obligation being deemed to be the lesser
of the value of such property or asset or the amount of the obligation so
secured);
(vii) all guarantees by such Person of indebtedness referred to in
this definition or of any other Person; and
(viii) any and all refinancings, replacements, deferrals, renewals,
extensions and refundings of or amendments, modifications or supplements
to, any indebtedness, obligation or liability of the kind described in
clauses (i) through (vii) above.
"Interest Payment Date" means the Stated Maturity of an installment of
interest on the senior notes.
"Interest Rate" means 11.0% per annum.
"Investments" means, with respect to any Person, all direct or indirect
investments by such Person in other Persons (including Affiliates of such
Person) in the forms of loans (including Guarantees or other obligations),
advances or capital contributions (excluding (i) commission, travel and similar
advances to officers and employees made in the ordinary course of business and
(ii) extensions of credit to customers or advances, deposits or payment to or
with suppliers, lessors or utilities or for workers' compensation, in each case,
that are incurred in the ordinary course of business and recorded as accounts
receivable, prepaid expenses or deposits on the balance sheet of such Person
prepared in accordance with GAAP), purchases or other acquisitions for
consideration of Indebtedness, Equity Interests or other securities, together
with all items that are or would be classified as investments on a balance sheet
prepared in accordance with GAAP. If PRG or any Restricted Subsidiary of PRG
sells or otherwise disposes of any Equity Interests of any direct or indirect
Restricted Subsidiary of PRG such that, after giving effect to any such sale or
disposition, such Person is no longer a Subsidiary of PRG, PRG will be deemed to
have made an Investment on the date of any such sale or disposition equal to the
Fair Market Value of PRG's Investments in such Subsidiary that were not sold or
disposed of in an amount determined as provided in the penultimate paragraph of
the covenant described under "-- Certain Covenants -- Restricted Payments."
Except as otherwise provided in the senior notes indenture, the amount of an
Investment will be determined at the time the Investment is made and without
giving effect to subsequent changes in value.
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"Issue Date" of any senior note means March 17, 2006.
"Lien" means, with respect to any asset, any mortgage, lien, pledge,
charge, security interest or encumbrance of any kind in respect of such asset
given to secure Indebtedness, whether or not filed, recorded or otherwise
perfected under applicable law (including any conditional sale or other title
retention agreement, any lease in the nature thereof, any option or other
agreement to sell or give a security interest in and any filing of or agreement
to give any financing statement under the Uniform Commercial Code (or equivalent
statutes) of any jurisdiction with respect to any such lien, security interest).
"Net Proceeds" means the aggregate cash proceeds received by PRG or any of
its Restricted Subsidiaries in respect of any Asset Sale (including, without
limitation, any cash received upon the sale or other disposition of any non-cash
consideration, including Designated Non-cash Consideration, received in any
Asset Sale), net of the direct costs relating to such Asset Sale, including,
without limitation, legal, accounting and investment banking fees, appraisal and
insurance adjuster fees and sales commissions, and any relocation expenses
incurred as a result of the Asset Sale, taxes paid or payable as a result of the
Asset Sale, in each case, after taking into account, without duplication, (1)
any amounts required to be applied to the repayment of Indebtedness, other than
revolving credit Indebtedness unless there is a required reduction in
commitments, secured by a Lien on the asset or assets that were the subject of
such Asset Sale, (2) any reserve or payment with respect to liabilities
associated with such asset or assets and retained by PRG or a Restricted
Subsidiary after such sale or other disposition thereof, including, without
limitation, severance costs, pension and other post-employment benefit
liabilities and liabilities related to environmental matters or against any
indemnification obligations associated with such transaction, (3) any reserves
for adjustment in respect of the sale price of such asset established in
accordance with GAAP, and (4) any cash escrows in connection with purchase price
adjustments, reserves or indemnities (until released).
"Non-Recourse Debt" means Indebtedness:
(1) as to which neither PRG nor any of its Restricted Subsidiaries (a)
provides credit support of any kind (including any undertaking, agreement
or instrument that would constitute Indebtedness), (b) is directly or
indirectly liable as a guarantor or otherwise, or (c) constitutes the
lender;
(2) no default with respect to which (including any rights that the
holders of the Indebtedness may have to take enforcement action against an
Unrestricted Subsidiary) would permit upon notice, lapse of time or both
any holder of any other Indebtedness of PRG or any of its Restricted
Subsidiaries to declare a default on such other Indebtedness or cause the
payment of the Indebtedness to be accelerated or payable prior to its
Stated Maturity; and
(3) as to which (a) the explicit terms provide that there is no
recourse against any assets of PRG or any of its Restricted Subsidiaries or
(b) the lenders have been notified in writing that they will not have any
recourse to the stock or assets of PRG or any of its Restricted
Subsidiaries.
"Permitted Business" means any business engaged in by PRG or any of its
Restricted Subsidiaries on the Issue Date and any business or other activities
that are reasonably similar, ancillary, complementary or related to, or a
reasonable extension, development or expansion of, the businesses in which PRG
and its Restricted Subsidiaries are engaged on the Issue Date.
"Permitted Investments" means:
(1) any Investment in PRG or in a Restricted Subsidiary of PRG;
(2) any Investment in Cash Equivalents;
(3) any Investment by PRG or any Restricted Subsidiary of PRG in a
Person, if as a result of such Investment:
(A) such Person becomes a Restricted Subsidiary of PRG; or
42
(B) such Person is merged, consolidated or amalgamated with or
into, or transfers or conveys substantially all of its assets to, or
is liquidated into, PRG or a Restricted Subsidiary of PRG;
(4) any Investment made as a result of the receipt of non-cash
consideration from (a) an Asset Sale that was made pursuant to and in
compliance with the covenant set forth under "-- Certain Covenants --
Assets Sales" hereof or (b) a sale or other disposition of assets not
constituting an Asset Sale;
(5) any acquisition of assets or Capital Stock solely in exchange for
the issuance of Equity Interests (other than Disqualified Stock) of PRG or
a direct or indirect parent of PRG;
(6) any Investment acquired by PRG or any of its Restricted
Subsidiaries:
(A) in exchange for any other Investment or accounts receivable
held by PRG or any such Restricted Subsidiary in connection with or as
a result of a bankruptcy, workout, reorganization or recapitalization
of a Person or the good faith settlement of delinquent obligations of
a Person or of a litigation, arbitration or other dispute, or
(B) as a result of a foreclosure by PRG or any of its Restricted
Subsidiaries with respect to any secured Investment or other transfer
of title with respect to any secured Investment in default;
(7) Investments represented by Hedging Obligations;
(8) repurchases or redemptions of the senior convertible notes, the
existing notes due November 2006 and the senior notes;
(9) repurchases or redemptions of PRG's Series A Preferred Stock or
Series B Preferred Stock;
(10) any Investment of PRG or any of its Restricted Subsidiaries
existing on the date of the senior notes indenture and any extension,
modification or renewal of such existing Investments, to the extent not
involving any additional Investment other than as the result of the accrual
or accretion of interest or original issue discount or the issuance of
pay-in-kind securities, in each case pursuant to the terms of such
Investments as in effect on the date of the senior notes indenture;
(11) Guarantees otherwise permitted by the terms of the senior notes
indenture;
(12) receivables owing to PRG or any Restricted Subsidiary, prepaid
expenses, and deposits, if created, acquired or entered into in the
ordinary course of business;
(13) payroll, business-related travel, and similar advances to cover
matters that are expected at the time of such advances to be ultimately
treated as expenses for accounting purposes and that are made in the
ordinary course of business;
(14) Investments resulting from the acquisition of a Person, otherwise
permitted by the senior notes indenture, which Investments at the time of
such acquisition were held by the acquired Person and were not acquired in
contemplation of the acquisition of such Person; and
(15) Investments in a Permitted Business having an aggregate Fair
Market Value outstanding at any one time not to exceed $10.0 million.
"Permitted Liens" means:
(1) Liens for taxes, assessments or governmental charges or levies not
yet due and payable or delinquent and Liens for taxes, assessments or
governmental charges or levies, which are being contested in good faith by
appropriate proceedings;
43
(2) Liens in respect of property of PRG or any Restricted Subsidiary
imposed by law, which were incurred in the ordinary course of business and
do not secure Indebtedness for borrowed money, such as carriers',
warehousemen's, materialmen's, landlords' and mechanics' Liens, maritime
Liens and other similar Liens arising in the ordinary course of business;
(3) Liens securing Existing Indebtedness on property of PRG or any
Restricted Subsidiary existing on the Issue Date;
(4) easements, rights-of-way, restrictions (including zoning
restrictions), covenants, encroachments, protrusions and other similar
charges or encumbrances, and minor title deficiencies on or with respect to
any real property, in each case whether now or hereafter in existence, not
(i) securing Indebtedness, (ii) individually or in the aggregate materially
impairing the value or marketability of such real property and (iii)
individually or in the aggregate materially interfering with the conduct of
the business of PRG and its Restricted Subsidiaries at such real property;
(5) Liens arising out of judgments or awards not resulting in an Event
of Default and in respect of which PRG or any Restricted Subsidiary shall
in good faith be prosecuting an appeal or proceedings for review in respect
of which there shall be secured a subsisting stay of execution pending such
appeal or proceedings;
(6) Liens (other than any Lien imposed by the United States Employee
Retirement Income Security Act of 1974, as amended) (i) imposed by law or
deposits made in connection therewith in the ordinary course of business in
connection with workers' compensation, unemployment insurance and other
types of social security or public utility obligations, (ii) incurred in
the ordinary course of business to secure the performance of tenders,
statutory obligations (other than excise taxes), surety, stay, customs and
appeal bonds, statutory bonds, bids, leases, government contracts, trade
contracts, performance and return of money bonds and other similar
obligations (exclusive of obligations for the payment of borrowed money) or
(iii) arising by virtue of deposits made in the ordinary course of business
to secure liability for premiums to insurance carriers;
(7) Leases with respect to the properties of PRG or any Restricted
Subsidiary, in each case entered into in the ordinary course of PRG or
Restricted Subsidiary's business, so long as they do not, individually or
in the aggregate, (i) interfere in any material respect with the ordinary
conduct of the business of PRG's and the Restricted Subsidiaries and (ii)
materially impair the use (for its intended purposes) or the value of the
property subject thereto;
(8) Liens securing the Indebtedness (including all obligations in
respect thereof) described in clause (i) under the definition of Permitted
Debt under "-- Certain Covenants -- Incurrence of Indebtedness and Issuance
of Preferred Stock" and HedginG Obligations, subject to the limitations set
forth in clause (x) under the definition of Permitted Debt under "--
Certain Covenants -- Incurrence of Indebtedness and Issuance of Preferred
Stock," payable to any lender or holder of such Indebtedness or an
Affiliate thereof to the extent such Hedging Obligations are secured by
Liens on assets also securing such Indebtedness (including all obligations
in respect thereof);
(9) Liens arising out of conditional sale, title retention,
consignment or similar arrangements for the sale of goods entered into by
PRG or any Restricted Subsidiary in the ordinary course of business in
accordance with the past practices;
(10) Liens securing Indebtedness incurred pursuant to clause (vi) of
the definition of Permitted Debt under the covenant "-- Certain Covenants
-- Incurrence of Indebtedness and Issuance of Preferred Stock"; provided
that (i) the Indebtedness secured bY any such Lien (including refinancings
thereof) does not exceed 100% of the cost (including fees and premiums in
connection with such transactions) of the property being acquired, leased
or otherwise financed at the time of the incurrence of such Indebtedness
and (ii) any such Liens attach only to the property being financed pursuant
to such Indebtedness and do not encumber any other property of PRG or any
Restricted Subsidiary;
44
(11) bankers' Liens, rights of setoff and other similar Liens existing
solely with respect to cash and Cash Equivalents on deposit in one or more
accounts maintained by PRG or any Restricted Subsidiary, in each case
granted in the ordinary course of business in favor of the bank or banks
with which such accounts are maintained, securing amounts owing to such
bank with respect to cash management and operating account arrangements,
including those involving pooled accounts and netting arrangements;
provided that in no case shall any such Liens secure (either directly or
indirectly) the repayment of any Indebtedness;
(12) Liens securing Acquired Debt (and any Permitted Refinancing
Indebtedness which refinances such Acquired Debt) incurred in accordance
with the definition of Permitted Debt under the covenant "-- Certain
Covenants -- Incurrence of Indebtedness and Issuance of Preferred Stock;"
provided that (i) such Liens secured the Acquired Debt at the time of and
prior to the incurrence of such Acquired Debt by PRG or a Restricted
Subsidiary and were not granted in connection with, or in anticipation of
the incurrence of such Acquired Debt by PRG or a Restricted Subsidiary and
(ii) such Liens do not extend to or cover any property of PRG or its
Restricted Subsidiaries other than the property that secured the Acquired
Debt prior to the time such Indebtedness became Acquired Debt of PRG or
Restricted Subsidiary;
(13) licenses of the patents, patent applications, trademarks,
trademark applications, service marks, service mark applications, trade
names, copyrights, trade-secrets, know-how and processes, granted by PRG or
any Restricted Subsidiary in the ordinary course of business and not
interfering in any material respect with the ordinary conduct of the
business of PRG and its Restricted Subsidiaries;
(14) Liens in favor of PRG or any Restricted Subsidiary;
(15) Liens on Equity Interests in any Unrestricted Subsidiaries that
secure Indebtedness of such Unrestricted Subsidiary;
(16) Liens securing Permitted Refinancing Indebtedness; provided that
the terms of such Liens are not less favorable to the Holders in any
material respect, taken as a whole, as compared to the terms of the Liens
(if any) securing such refinanced Indebtedness;
(17) Liens extending, renewing or replacing, in whole or in part, any
of the Liens referred to above, so long as that Lien does not extend to any
other property (other than improvements, accessions, proceeds or dividends
or distributions with respect thereto); and
(18) Liens securing Indebtedness incurred pursuant to clause (x) of
the definition of Permitted Debt under the covenant "-- Certain Covenants
-- Incurrence of Indebtedness and Issuance of Preferred Stock."
"Permitted Refinancing Indebtedness" means:
(i) any Indebtedness of any of PRG or its Restricted Subsidiaries
issued in exchange for, or the net proceeds of which are used to renew,
refund, refinance, replace, defease or discharge other Indebtedness of any
of PRG's or its Restricted Subsidiaries; provided that:
(A) the principal amount (or accreted value, if applicable) of
such Permitted Refinancing Indebtedness does not exceed the principal
amount (or accreted value, if applicable) of the Indebtedness renewed,
refunded, refinanced, replaced, defeased or discharged (plus all
accrued interest on the Indebtedness and the amount of all fees and
expenses, including the amount of any reasonably determined premium
and defeasance costs, incurred in connection therewith and other
amounts necessary to accomplish such refinancing);
(B) such Permitted Refinancing Indebtedness has a final maturity
date equal to or later than the final maturity date of, and has a
Weighted Average Life to Maturity equal to or greater than the
Weighted Average Life to Maturity of, the Indebtedness being renewed,
refunded, refinanced, replaced, defeased or discharged; and
45
(C) if the Indebtedness being renewed, refunded, refinanced,
replaced, defeased or discharged is subordinated in right of payment
to the senior notes, such Permitted Refinancing Indebtedness and is
subordinated in right of payment to the senior notes on terms at least
as favorable to the Holders as those contained in the documentation
governing the Indebtedness being renewed, refunded, refinanced,
replaced, defeased or discharged; and
(ii) any Disqualified Stock of PRG or preferred stock of any of PRG's
Restricted Subsidiaries issued in exchange for, or the net proceeds of
which are used to extend, refinance, renew, refund, replace, defease or
discharge other Indebtedness or Disqualified Stock of PRG or preferred
stock of any of PRG's Restricted Subsidiaries (other than Indebtedness or
Disqualified Stock held by PRG or any of its Restricted Subsidiaries
including intercompany Indebtedness); provided that:
(A) the liquidation or face value of such Permitted Refinancing
Indebtedness does not exceed the principal amount (or accreted value,
if applicable) of the Indebtedness, or the liquidation or face value
of the Disqualified Stock, as applicable, so renewed, refunded,
refinanced, replaced, defeased or discharged (plus all accrued
interest or dividends thereon and the amount of any reasonably
determined premium incurred in connection therewith);
(B) such Permitted Refinancing Indebtedness has a final
redemption date equal to or later than the final maturity or
redemption date of, and has a Weighted Average Life to Maturity equal
to or greater than the Weighted Average Life to Maturity of, the
Indebtedness or Disqualified Stock being renewed, refunded,
refinanced, replaced, defeased or discharged; and
(C) such Permitted Refinancing Indebtedness is subordinated in
right of payment to the senior notes on terms at least as favorable to
the Holders as those contained in the documentation governing the
Indebtedness or Disqualified Stock being renewed, refunded,
refinanced, replaced, defeased or discharged.
"Person" or "person" means any individual, corporation, limited liability
company, partnership, joint venture, association, joint-stock company, trust,
unincorporated organization, or government or any agency or political
subdivision thereof, including any subdivision or ongoing business of any such
entity or substantially all of the assets of any such entity, subdivision or
business.
"principal" of a Note means the principal amount due on the Stated Maturity
of the principal payment of such senior note as set forth on the face of the
senior note.
"Registration Rights Agreement" means that certain Registration Rights
Agreement dated as of the Issue Date, by and among PRG and certain holders
listed on Exhibit A thereto.
"Restricted Investment" means an Investment other than a Permitted
Investment.
"Restricted Subsidiary" of a Person means any Subsidiary of the referent
Person that is not an Unrestricted Subsidiary.
"Series A Convertible Preferred Stock" means PRG's Senior Series A
Convertible Participating Preferred Stock.
"Series B Convertible Preferred Stock" means PRG's Senior Series B
Convertible Participating Preferred Stock.
"Significant Subsidiary" means a Subsidiary of PRG, including its
Subsidiaries, which meets any of the following conditions:
(i) PRG's and its other Subsidiaries' Investments in and advances to
the Subsidiary exceed 10.0% of the total assets of PRG and its Subsidiaries
consolidated as of the end of any two of the three most recently completed
fiscal years; or
46
(ii) PRG's and its other Subsidiaries' proportionate share of the
total assets of the Subsidiary exceeds 10.0% of the total assets of PRG and
its Subsidiaries consolidated as of the end of any two of the three most
recently completed fiscal years; or
(iii) PRG's and its other Subsidiaries' equity in the income from
continuing operations before income taxes, extraordinary items and
cumulative effect of a change in accounting principles of the Subsidiary
exceeds 10.0% of such income of PRG and its Subsidiaries consolidated as of
the end of any two of the three most recently completed fiscal years.
"Stated Maturity" means, with respect to any installment of interest or
principal on any series of Indebtedness, the date on which the payment of
interest or principal was scheduled to be paid in the documentation governing
such Indebtedness as of the date of the senior notes indenture, and will not
include any contingent obligations to repay, redeem or repurchase any such
interest or principal prior to the date originally scheduled for the payment
thereof.
"Subsidiary" means (i) a corporation, a majority of whose Capital Stock
with voting power, under ordinary circumstances, to elect directors is, at the
date of determination, directly or indirectly owned by PRG, by one or more
Subsidiaries of PRG or by PRG and one or more Subsidiaries of PRG, (ii) a
partnership in which PRG or a Subsidiary of PRG holds a majority interest in the
equity capital or profits of such partnership, or (iii) any other person (other
than a corporation) in which PRG, a Subsidiary of PRG or PRG and one or more
Subsidiaries of PRG, directly or indirectly, at the date of determination, has
(x) at least a majority ownership interest or (y) the power to elect or direct
the election of a majority of the directors or other governing body of such
person.
"Unrestricted Subsidiary" means any Subsidiary of PRG that is designated by
the Board of Directors of PRG as an Unrestricted Subsidiary pursuant to a
resolution of the Board of Directors, but only to the extent that such
Subsidiary:
(i) has no Indebtedness other than Non-Recourse Debt;
(ii) except as permitted by the covenant described under "--
Transactions with Affiliates," is not party to any agreement, contract,
arrangement or understanding with PRG or any Restricted Subsidiary of PRG
unless the terms of any such agreement, contract, arrangement or
understanding are no less favorable to PRG or such Restricted Subsidiary
than those that might be obtained at the time from Persons who are not
Affiliates of PRG;
(iii) is a Person with respect to which neither PRG nor any of its
Restricted Subsidiaries has any direct or indirect obligation (a) to
subscribe for additional Equity Interests or (b) to maintain or
preserve such Person's financial condition or to cause such Person to achieve
any specified levels of operating results; and
(iv) has not guaranteed or otherwise directly or indirectly provided
credit support for any Indebtedness of PRG or any of its Restricted
Subsidiaries unless such Guarantee or credit support is released upon its
designation as an Unrestricted Subsidiary.
The Board of Directors of PRG may designate any Unrestricted Subsidiary to
be a Restricted Subsidiary; provided that, immediately after giving effect to
such designation, no Default or Event of Default shall have occurred and be
continuing.
Notice of any such designation by the Board of Directors of PRG shall be
provided by PRG to the Trustee by promptly filing with the Trustee a copy of the
resolution adopted by the Board of Directors of PRG giving effect to such
designation and an Officers' Certificate certifying that such designation
complied with the foregoing provisions, as applicable.
"Weighted Average Life to Maturity" means, when applied to any Indebtedness
at any date, the number of years obtained by dividing:
47
(i) the sum of the products obtained by multiplying (a) the amount of
each then remaining installment, sinking fund, serial maturity or other
required payments of principal, including payment at final maturity, in
respect of the Indebtedness, by (b) the number of years (calculated to the
nearest one-twelfth) that will elapse between such date and the making of
such payment; by
(ii) then outstanding principal amount of such Indebtedness.
SENIOR CONVERTIBLE NOTES
GENERAL
The senior convertible notes
o are senior unsecured obligations of PRG;
o are senior in right of payment to all existing and future subordinated
Indebtedness of PRG, including the existing notes, if any;
o are effectively (but not expressly) subordinated to our existing and
future secured Indebtedness to the extent of the collateral securing
that Indebtedness, and to the existing and future liabilities of our
Subsidiaries, including our senior secured credit facility; and
o are pari passu in right of payment with the senior notes and any
future senior Indebtedness of PRG.
None of our Subsidiaries will be obligated for the payment of our
obligations under the senior convertible notes.
PRINCIPAL, MATURITY AND INTEREST
There were senior convertible notes in the aggregate principal amount of
$59,774,400 million outstanding as of June 30, 2006.
The senior convertible notes will mature on March 15, 2011, unless earlier
redeemed by us, repurchased at the option of the holders upon the occurrence of
a Change in Control described below under the subheadings "-- Optional
Redemption" and "-- Repurchase at the Option of the Holders Upon a Change in
Control," or converted into shares of series B convertible preferred stock or
common stock.
The senior convertible notes bear interest at the rate of 10.0% per annum
from the date of issuance of the senior convertible notes, or from the most
recent date to which interest has been paid or provided for. Interest will be
payable semi-annually on March 15 and September 15 of each year, commencing
September 15, 2006 to holders of record at the close of business on the
preceding March 1 and September 1, respectively.
Interest on the senior convertible notes shall be paid either in cash or,
at the election of PRG, in the form of additional senior convertible notes of
like tenor and issued to the holder in the amount of such interest payable on
such interest payment date.
Interest will be computed on the basis of a 360-day year comprised of
twelve 30-day months. In the event of the payment at maturity, purchase by us at
the option of the holder or redemption by us of any senior convertible notes,
interest will cease to accrue on such senior convertible notes under the terms
of and subject to the conditions of the senior convertible notes indenture.
If any interest payment date or maturity date of a senior convertible note
or date for repurchase of a senior convertible note at the option of the holder
following a Change in Control is not a business day, then payment of the
principal, premium, if any, and interest due on that date may be made on the
48
next business day. In that case, no interest will accrue on the amount payable
for the period from and after the applicable interest payment date, maturity
date or repurchase date, as the case may be.
TRANSFER, PAYMENT AND FORM
The senior convertible notes have been issued in book-entry form and are
evidenced by one or more global certificates, which we sometimes refer to as
"global notes," registered in the name of Cede & Co., as nominee for The
Depository Trust Company (DTC). Except in limited circumstances, holders of
interests in global notes are not entitled to receive senior notes in definitive
certificated form registered in their names and will not be considered
registered owners or holders of the global note under the indenture for any
purpose.
Principal is payable, and the senior convertible notes, in certificated
form, may be presented for registration of transfer and exchange, without
service charge, at our office or agency in New York City, which shall initially
be at the office of U.S. Bank National Association. See "-- Global Notes;
Book-Entry Form."
Payment of interest on global notes will be made to DTC or its nominee.
Payment of cash interest on senior convertible notes in definitive certificated
form will be made against presentation of those senior convertible notes at the
agency referred to in the preceding paragraph or, at our option, by mailing
checks payable to the persons entitled to that interest to their addresses as
they appear in the note register. A holder of senior convertible notes with an
aggregate principal amount in excess of $5 million may be paid by wire transfer
in immediately available funds at the election of such holder. Payment of
interest in the form of additional senior convertible notes will be made in
respect of global notes by increasing the principal amount thereof, and in
respect of senior convertible notes in definitive certificated form by issuance
of additional senior convertible notes in definitive certificated form payable
to the persons entitled to that interest at their address as they appear in the
note register or against presentation of those senior convertible notes at the
agency referred to in the preceding paragraph.
RANKING
The right to payment on the senior convertible notes of principal, premium
(if any), interest, and liquidated damages, if any, is senior in right of
payment, as set forth in the convertible notes indenture, to the existing notes
due November 2006 and pari passu with respect to payment of all senior
Indebtedness of PRG, including all of our secured Indebtedness, the senior notes
and all of our general unsecured obligations, whether outstanding on the date of
the senior convertible notes indenture or thereafter incurred.
The senior convertible notes are, however, effectively (though not
expressly) subordinated to all liabilities and obligations of our Subsidiaries
under our senior secured credit facility, trade payables and lease obligations,
if any, and similarly are effectively subordinated to obligations of PRG under
our senior secured credit facility in a principal amount not to exceed $47.5
million to the extent of our assets securing such obligations. The secured debt
under our senior secured credit facility is the obligation of PRG and most of
our Subsidiaries and is secured by liens and security interests on substantially
all of our assets, including the stock of PRG's Subsidiaries and any
intercompany claims PRG may have against its Subsidiaries. Any right by us to
receive the assets of any of our Subsidiaries upon the liquidation or
reorganization thereof, and, because the senior notes are solely the obligations
of PRG, the consequent right of the holders of the senior convertible notes to
participate in these assets, will be effectively (though not expressly)
subordinated to the claims of that Subsidiary's creditors, including trade
creditors, except to the extent that we are recognized as a creditor of such
Subsidiary, in which case our claims would still be subordinate to any security
interests in the assets of such Subsidiary and any Indebtedness of such
Subsidiary senior to that held by us. Moreover, PRG's only source of cash or
assets, before or after an insolvency event or before or after liquidation of
the Subsidiaries is from dividends on the Subsidiaries' stock, the payment of
interest or principal on intercompany claims, or fees for services provided to
the Subsidiaries.
In addition, the convertible notes indenture explicitly provides that the
effective subordination described above shall apply even if a court at some
future date determines to pierce the corporate veil between PRG and its
Subsidiaries or substantively consolidate the assets and liabilities of PRG and
its Subsidiaries. In such event, as between the senior secured credit facility
and the senior convertible notes, the senior secured credit facility would be
49
entitled to receive from such consolidated entities the value it would have
received through the liens on the stock of PRG's Subsidiaries (including the
proceeds from any sale of such Subsidiaries) and/or the assets of such
Subsidiaries as if the corporate veil had not been pierced or substantive
consolidation had not been granted.
HOLDING COMPANY STRUCTURE
We are a holding company with no material assets other than the ownership
of the Capital Stock of our Subsidiaries. Our Subsidiaries are separate and
distinct legal entities and have no obligation, contingent or otherwise, to pay
any amounts due pursuant to the senior convertible notes or to make any funds
available for paying such amounts, whether by dividends, loans or other
payments. In addition, the payment of dividends and the making of loans and
advances to us by our Subsidiaries may be subject to statutory, contractual or
other restrictions and are dependent upon the earnings or financial condition of
those Subsidiaries and subject to various business considerations. As a result,
we may be unable to gain access to the cash flow or assets of our Subsidiaries.
PAYING AGENT AND REGISTRAR FOR THE NOTES
The trustee is currently acting as paying agent and registrar for the
senior convertible notes. We may change the paying agent or registrar without
prior notice to the holders of the senior convertible notes, and PRG or any of
our Subsidiaries may act as paying agent or registrar.
We are obligated to pay reasonable compensation to the trustee and to
indemnify the trustee against certain losses, liabilities or expenses incurred
by it in connection with its duties relating to the senior convertible notes.
The trustee's claims for such payments will generally be senior to those of the
holders of the senior convertible notes in respect of all funds collected or
held by the trustee.
RESTRICTIVE COVENANTS
The convertible notes indenture does not contain any covenants or other
provisions to afford protection to holders of the senior convertible notes in
the event of a highly leveraged transaction or a Change in Control of PRG except
to the extent described under "-- Repurchase at Option of Holders Upon a Change
in Control" below.
CONVERSION RIGHTS
The senior convertible notes are convertible, at the option of the holder
prior to maturity, from and after the earlier of (i) the conversion rights date,
or (ii) the B Conversion Date as set forth below.
In the event that the B Conversion Date has occurred but not the conversion
rights date, the senior convertible notes shall only be convertible into shares
of the series B convertible preferred stock, and holders of the senior
convertible notes may convert any outstanding senior convertible notes, or
portions thereof, into series B convertible preferred stock, at a conversion
rate of approximately 2.083 shares of series B convertible preferred stock per
$1,000 principal amount of senior convertible notes. The shares of series B
convertible preferred stock are issuable only by certificate in definitive form
to any such holder and it is expected that the liquidity of such class of our
preferred stock will be significantly limited. See "Description of Capital Stock
-- Preferred Stock -- 10.0% Senior Series B Convertible Preferred Stock" and
"Risk Factors -- Risks Related to the Exchange Offer."
From and after the conversion rights date, the senior convertible note
shall be convertible only into shares of our common stock at an initial
conversion price of $6.50 per share of common stock. The initial conversion
price provides an initial conversion rate of approximately 153.85 shares of
common stock per $1,000 principal amount of senior convertible notes (as
adjusted for the reverse stock split), subject to adjustment as described below.
Holders may convert the senior convertible notes only in denominations of $1,000
and whole multiples of $1,000. Except as described below, no payment or other
adjustment will be made on conversion of any senior convertible notes for
interest accrued thereon or for dividends on common stock.
"conversion rights date" shall mean the first date on which the
Registration Statement has been declared effective.
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"B Conversion Date" shall mean August 15, 2006.
If senior convertible notes are converted after a record date for an
interest payment but prior to the next interest payment date, those senior
convertible notes, other than senior convertible notes called for redemption,
will receive interest payable on such senior convertible notes on the
corresponding interest payment date notwithstanding the conversion. Such senior
convertible notes, upon surrender, must be accompanied by funds equal to the
interest payable to the record holder on the next interest payment date on the
principal amount so converted. No payment will be required from a holder if we
exercise our right to redeem such notes on a redemption date that occurs after a
record date and on or prior to the third business day after that interest
payment date. We are not required to issue fractional shares of either series B
convertible preferred stock or common stock, as applicable, upon conversion of
senior convertible notes and instead will pay a cash adjustment in an amount
equal to the same fraction of the conversion price at the time of such payment.
In the case of senior convertible notes called for redemption, conversion rights
will expire at the close of business on the business day preceding the date
fixed for redemption, unless we default in the payment of the redemption price.
A holder may exercise the right of conversion by delivering the senior
convertible note to be converted, duly endorsed or assigned as provided in the
indenture, to the specified office of a conversion agent, with a completed
notice of conversion, together with any funds that may be required as described
in the preceding paragraph. The conversion date will be the date on which the
senior convertible notes, the notice of conversion and any required funds have
been so delivered. A holder delivering a senior convertible note for conversion
will not be required to pay any taxes or duties relating to the issuance or
delivery of the series B convertible preferred stock or common stock, as
applicable, for such conversion, but will be required to pay any tax or duty
which may be payable relating to any transfer involved in the issuance or
delivery of the series B convertible preferred stock or common stock in a name
other than the holder of the senior convertible note. Certificates representing
shares of series B convertible preferred stock or common stock will be issued or
delivered only after all applicable taxes and duties, if any, payable by the
holder have been paid.
The initial conversion price for conversions to common stock will be
adjusted for certain future events, including:
(i) the issuance of our common stock as a dividend or distribution on
our common stock;
(ii) certain subdivisions and combinations of our common stock;
(iii) the issuance to all holders of our common stock of certain
rights, options or warrants to purchase our common stock or securities
convertible into our common stock (or having a conversion price per share)
less than the lower of the current market price (as defined in the
indenture) of our common stock or the conversion price then in effect;
(iv) the dividend or other distribution to all holders of our common
stock of shares of our capital stock or the capital stock of any of our
subsidiaries, other than our common stock, or evidences of our Indebtedness
or our assets, including securities, but excluding (a) those rights,
options and warrants referred to in clause (iii) above, (b) dividends and
distributions in connection with a reclassification, change, consolidation,
merger, combination, sale or conveyance resulting in a change in the
conversion consideration pursuant to the third succeeding paragraph below
or (c) dividends or distributions paid exclusively in cash;
(v) dividends or other distributions consisting exclusively of cash to
all holders of our common stock excluding any cash that is distributed upon
a reclassification or change of our common stock, merger, consolidation,
statutory share exchange, combination, sale or conveyance as described in
the third succeeding paragraph below or as part of a distribution referred
to in clause (iv) above to the extent that such distributions, combined
together with (A) all other such all-cash distributions made within the
preceding 12 months for which no adjustment has been made plus (B) any cash
and the fair market value of other consideration paid for any tender or
exchange offers by us or any of our subsidiaries for our common stock
51
concluded within the preceding 12 months for which no adjustment has been
made, exceeds 10% of our market capitalization on the record date for such
distribution; market capitalization is the product of then current market
price of our common stock and the number of shares of our common stock then
outstanding; and
(vi) the purchase of our common stock pursuant to a tender offer or
exchange offer made by us or any of our subsidiaries which involves an
aggregate consideration that, together with (A) any cash and the fair
market value of any other consideration paid in any other tender offer or
exchange offer by us or any of our subsidiaries for our common stock
expiring within the 12 months preceding such tender offer or exchange offer
for which no adjustment has been made plus (B) the aggregate amount of any
all-cash distributions referred to in clause (5) above to all holders of
our common stock within 12 months preceding the expiration of that tender
offer or exchange offer for which no adjustment has been made, exceeds 10%
of our market capitalization on the expiration of such tender offer or
exchange offer.
In the event that we pay a dividend or make a distribution on shares of our
common stock consisting of capital stock of, or similar equity interests in, as
described in clause (iv) above, a subsidiary or other business unit of ours, the
conversion rate will be adjusted based on the market value of the securities so
distributed relative to the market value of our common stock, in each case based
on the average sale prices of those securities for the 10 trading days
commencing on and including the fifth trading day after the date on which
"ex-dividend trading" commences for such dividend or distribution on The Nasdaq
National Market or such other national or regional exchange or market on which
the securities are then listed or quoted.
No adjustment in the conversion price will be required unless such
adjustment would require a change of at least 1% in the conversion price then in
effect at such time. Any adjustment that would otherwise be required to be made
shall be carried forward and taken into account in any subsequent adjustment.
Except as stated above, the conversion price will not be adjusted for the
issuance of common stock or any securities convertible into or exchangeable for
our common stock or carrying the right to purchase any of the foregoing.
In the case of:
o any reclassification or change of our common stock (other than changes
resulting from a subdivision or combination);
o a consolidation, merger or combination involving us;
o a sale or conveyance to another corporation of all or substantially
all of our property and assets; or
o any statutory share exchange;
in each case as a result of which holders of our common stock are entitled to
receive stock, other securities, other property or assets (including cash or any
combination thereof) with respect to or in exchange for our common stock, the
holders of the senior convertible notes then outstanding will be entitled
thereafter to convert such senior convertible notes into the kind and amount of
shares of stock, other securities or other property or assets (including cash or
any combination thereof) which they would have owned or been entitled to receive
upon such reclassification or change of our common stock, consolidation, merger,
combination, sale, conveyance or statutory share exchange had such notes been
converted into our common stock immediately prior to such transaction. We may
not become a party to any such transaction unless its terms are consistent with
the foregoing.
If a taxable distribution to holders of our common stock or transaction
occurs which results in any adjustment of the conversion price, the holders of
senior convertible notes may, in certain circumstances, be deemed to have
received a distribution subject to United States income tax as a dividend. In
certain other circumstances, the absence of such an adjustment may result in a
taxable dividend to the holders of common stock. See "United States Federal
Income Tax Considerations."
52
In addition to the foregoing, we will be prohibited from making certain
dilutive or other changes in our series B convertible preferred stock prior to
the conversion rights date.
OPTIONAL REDEMPTION
There is no sinking fund for the senior convertible notes. We may not call
the senior convertible notes for redemption unless both of (1) the senior notes
have been paid in full and (2) the conversion rights date shall have occurred
(the "Optional Redemption Conditions"). On or after the first date on which the
Optional Redemption Conditions have occurred, we may redeem all or part of the
senior convertible notes at any time upon not less than 30 nor more than 60
days' prior notice at a redemption price of 100% of the principal amount thereof
plus accrued and unpaid interest to the date of redemption.
Unless we default in the payment of the redemption price, interest will
cease to accrue on the senior convertible notes or portions thereof called for
redemption on the applicable redemption date.
If we do not redeem all of the senior convertible notes, the trustee will
select the senior convertible notes to be redeemed in principal amounts of
$1,000 or whole multiples of $1,000 by lot, on a pro rata basis or in accordance
with any other method the trustee considers fair and appropriate. If any senior
convertible notes are to be redeemed in part only, a senior convertible note or
notes in principal amount equal to the unredeemed principal portion thereof will
be issued.
REPURCHASE AT OPTION OF HOLDERS UPON A CHANGE IN CONTROL
If a Change in Control occurs, each holder of senior convertible notes will
have the right to require us to repurchase all of such holder's senior
convertible notes not previously called for redemption, or any portion of those
senior convertible notes that is equal to $1,000 or a whole multiple of $1,000,
on the date that is 45 days (or if that 45th day is not a business day, the next
succeeding business day) after the date we give notice of the Change in Control
at a repurchase price equal to 100% of the principal amount of the senior
convertible notes to be repurchased, together with interest accrued and unpaid
to, but excluding, the repurchase date; provided that, if such repurchase date
is an interest payment date, then the interest payable on such date shall be
payable to the holder of record at the close of business on the relevant record
date and the repurchase price shall not include such interest payment.
Within 30 days after the occurrence of a Change in Control, we are required
to give notice to all holders of record of senior convertible notes, as provided
in the convertible notes indenture, of the occurrence of the Change in Control
and of their resulting repurchase right. We must also deliver a copy of our
notice to the trustee. In order to exercise the repurchase right, a holder of
senior convertible notes must deliver, on or before the 45th day after the date
of our notice of the Change in Control, written notice to the trustee of the
holder's exercise of its repurchase right, together with the senior convertible
notes with respect to which the right is being exercised.
A holder may withdraw the notice at any time prior to the close of business
on the repurchase date by delivering a written notice of withdrawal to the
trustee as provided in the senior convertible notes indenture.
Under the senior convertible notes indenture, a "Change in Control" of PRG
will be deemed to have occurred at such time after the original issuance of the
senior convertible notes when the following has occurred:
o the acquisition by any person, including any syndicate or group deemed
to be a "person" under Section 13(d)(3) of the Exchange Act, of
beneficial ownership, directly or indirectly, through a purchase,
merger or other acquisition transaction or series of transactions, of
shares of our capital stock entitling that person to exercise 50% or
more of the total voting power of all shares of our capital stock
entitled to vote generally in elections of directors, other than any
acquisition by us, any of our subsidiaries or any of our employee
benefit plans;
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o our consolidation or merger with or into any other person, any merger
of another person into us, or any conveyance, transfer, sale, lease or
other disposition of all or substantially all of our properties and
assets to another person, other than:
(1) any transaction (A) that does not result in any
reclassification, conversion, exchange or cancellation of outstanding
shares of our capital stock and (B) pursuant to which holders of our
capital stock immediately prior to the transaction are entitled to
exercise, directly or indirectly, 50% or more of the total voting
power of all shares of our capital stock entitled to vote generally in
the election of directors of the continuing or surviving person
immediately after the transaction; or
(2) any merger solely for the purpose of changing our
jurisdiction of incorporation and resulting in a reclassification,
conversion or exchange of outstanding shares of (A) common stock
solely into shares of common stock of the surviving entity, (B) series
A convertible preferred stock solely into shares of a series of
preferred stock of the surviving entity having the same designations,
rights and privileges with respect to such surviving entity as the
series A convertible preferred stock has with respect to us, and (C)
the series B convertible preferred stock solely into shares of a
series of preferred stock of the surviving entity having the same
designations, rights and privileges with respect to such surviving
entity as the series B convertible preferred stock has with respect to
us;
o during any consecutive two-year, period, individuals who at the
beginning of that two-year period constituted our Board of Directors
(together with any new directors whose election to our Board of
Directors, or whose nomination for election by our shareholders, was
approved by a vote of a majority of the directors then still in office
who were either directors at the beginning of such period or whose
election or nomination for election was previously so approved) cease
for any reason to constitute a majority of our Board of Directors then
in office; or
o we are liquidated or dissolved or our shareholders pass a resolution
approving a plan of liquidation or dissolution.
Beneficial ownership shall be determined in accordance with Rule 13d-3
promulgated by the SEC under the Exchange Act. The term "person" includes any
syndicate or group that would be deemed to be a "person" under Section 13(d)(3)
of the Exchange Act.
Rule 13e-4 under the Exchange Act requires the dissemination of information
to securityholders if an issuer tender offer occurs and may apply, if the
repurchase option becomes available to holders of the senior convertible notes.
We will comply with this rule to the extent applicable at that time.
We may, to the extent permitted by applicable law, at any time purchase the
senior convertible notes in the open market or by tender at any price or by
private agreement. Any senior convertible note so purchased by us may, to the
extent permitted by applicable law, be reissued or resold or may be surrendered
to the trustee for cancellation. Any notes surrendered to the trustee may not be
reissued or resold and will be canceled promptly.
Our ability to repurchase senior convertible notes upon the occurrence of a
Change in Control is subject to important limitations. We cannot assure you that
we would have the financial resources, or would be able to arrange financing, to
pay the repurchase price for all the senior convertible notes that might be
delivered by holders of notes seeking to exercise the repurchase right. Any
failure by us to repurchase the senior convertible notes when required following
a Change in Control would result in an event of default under the convertible
notes indenture.
Any such default may, in turn, cause a default under existing or other
Indebtedness.
EVENT OF DEFAULT
Each of the following constitutes an Event of Default under the senior
convertible notes indenture:
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(1) our failure to pay when due the principal of or premium, if any,
on any of the senior convertible notes at maturity, upon redemption or
exercise of a repurchase right or otherwise;
(2) or failure to pay an installment of interest (including
Registration Delay Payments, if any) on any of the senior convertible notes
that continues for 30 days after the date when due;
(3) our failure to deliver shares of series B convertible preferred
stock or common stock, as applicable, together with cash in lieu of
fractional shares, if any, when such shares or cash are required to be
delivered for conversion of a senior convertible note and such failure
continues for 10 days after such delivery date;
(4) our failure to perform or observe any other term, covenant or
agreement contained in the senior convertible notes or the convertible
notes indenture for a period of 30 days after written notice of such
failure, requiring us to remedy the same, shall have been given to us by
the trustee or to us and the trustee by the holders of at least 25% in
aggregate principal amount of the senior convertible notes then
outstanding;
(5) our failure to give the notice required by the senior convertible
notes indenture regarding any offer to purchase upon a Change in Control
within the time period prescribed by the convertible notes indenture after
the occurrence of such Change in Control;
(6) (A) one or more defaults in the payment of principal of or
premium, if any, on any of our or our Subsidiaries' Indebtedness
aggregating $5.0 million or more, when the same becomes due and payable at
the scheduled maturity thereof, and such default or defaults shall have
continued after any applicable grace period and shall not have cured or
waived within a thirty day period after the date of such default or (B) any
of our or our Subsidiaries' Indebtedness aggregating $5.0 million or more
shall have been accelerated or otherwise declared due and payable, or
required to be prepaid or repurchased (other than by regularly scheduled
required payment) prior to the scheduled maturity thereof and such
acceleration is not rescinded or annulled within a thirty day period after
the date of such acceleration;
(7) final unsatisfied judgments not covered by insurance aggregating
in excess of $5.0 million rendered against us or any of our subsidiaries
and not stayed, bonded or discharged within 60 days; or
(8) certain events of our bankruptcy, insolvency or reorganization or
that of any Significant Subsidiaries, including our filing of a voluntary
petition seeking liquidation, reorganization arrangement, readjustment of
debts or for any other relief under the federal bankruptcy code.
The convertible notes indenture provides that the trustee shall, within 90
days of the occurrence of an Event of Default, give to the registered holders of
the senior convertible notes notice of all uncured defaults known to it, but the
trustee shall be protected in withholding such notice if it, in good faith,
determines that the withholding of such notice is in the best interest of such
registered holders, except in the case of a default in the payment of the
principal of, or premium, if any, or interest on, any of the senior convertible
notes when due or in the payment of any redemption or repurchase obligation.
If an Event of Default specified in clause (8) above occurs and is
continuing, then automatically the principal of all the senior convertible notes
and the accrued and unpaid interest thereon shall become immediately due and
payable. If an Event of Default shall occur and be continuing, other than with
respect to clause (8) above, the default not having been cured or waived as
provided under "-- Modifications and Waiver" below, the trustee or the holders
of at least 25% in aggregate principal amount of the senior convertible notes
then outstanding may declare the senior convertible notes due and payable at
their principal amount together with accrued and unpaid interest, and thereupon
the trustee may, at its discretion, proceed to protect and enforce the rights of
the holders of senior convertible notes by appropriate judicial proceedings.
Such declaration may be rescinded or annulled with the written consent of the
holders of a majority in aggregate principal amount of the senior convertible
notes then outstanding upon the conditions provided in the convertible notes
indenture.
The convertible notes indenture contains a provision entitling the trustee,
subject to the duty of the trustee during default to act with the required
standard of care, to be indemnified by the holders of senior convertible notes
before proceeding to exercise any right or power under the convertible notes
indenture at the request of such holders. The convertible notes indenture
provides that, subject to certain limitations, the holders of a majority in
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aggregate principal amount of the senior convertible notes then outstanding
through their written consent may direct the time, method and place of
conducting any proceeding for any remedy available to the trustee or exercising
any trust or power conferred upon the trustee.
We will be required to furnish annually to the trustee a statement as to
the fulfillment of our obligations under the convertible notes indenture.
CONSOLIDATION, MERGERS AND SALES OF ASSETS
The convertible notes indenture will also provide that PRG shall not
consolidate with, merge or amalgamate with or into any other Person or convey,
transfer or lease the properties and assets of PRG and its Subsidiaries, taken
as a whole, substantially as an entirety to any Person, unless:
(i) either (A) PRG shall be the continuing corporation or (B) the
Person (if other than PRG) formed by such consolidation or into which PRG
is merged or amalgamated or the Person which acquires by conveyance,
transfer or lease the properties and assets of PRG substantially as an
entirety (1) shall be organized and validly existing under the laws of the
United States or any state thereof or the District of Columbia and (2)
shall expressly assume, by a supplemental indenture executed and delivered
to the trustee in form reasonably satisfactory to the trustee, all of the
obligations of PRG under the senior convertible notes and the convertible
notes indenture;
(ii) at the time of such transaction, no Event of Default and no event
which, after notice or lapse of time, would become an Event of Default,
shall have happened and be continuing; and
(iii) we shall have delivered to the trustee an Officers' Certificate
and an Opinion of Counsel, each stating that such consolidation, merger,
amalgamation, conveyance, transfer or lease and, if a supplemental
indenture is required in connection with such transaction, such
supplemental indenture complies with the terms of this covenant and that
all conditions precedent herein provided for relating to such transaction
have been satisfied.
For purposes of the foregoing, the transfer (by lease, assignment, sale or
otherwise) of the properties and assets of one or more Subsidiaries (other than
to us or another Subsidiary), which, if such assets were owned by us, would
constitute all or substantially all of the properties and assets of us, shall be
deemed to be the transfer of all or substantially all of the properties and
assets of PRG.
MODIFICATIONS AND WAIVER
The convertible notes indenture, including the terms and conditions of the
senior convertible notes, may be modified or amended by us and the trustee,
without the consent of the holder of any senior convertible note, for the
purposes of, among other things:
o adding to our covenants for the benefit of the holders of senior
notes;
o surrendering any right or power conferred upon us;
o providing for conversion rights of holders if any reclassification or
change of series B convertible preferred stock or common stock or any
consolidation, merger or sale of all or substantially all of our
assets;
o reducing the conversion price or conversion rate, provided that such
reduction will not adversely affect the interest of holders in any
material respect;
o complying with the requirements of the SEC in order to effect or
maintain the qualification of the convertible notes indenture under
the Trust Indenture Act of 1939, as amended;
o curing any ambiguity, omission, inconsistency or correcting or
supplementing any defective provision contained in the senior
convertible notes indenture;
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o complying with the covenant described under "-- Consolidations,
Mergers and Sales of Assets"; or
o adding or modifying any other provisions which we and the trustee may
deem necessary or desirable and which will not adversely affect the
interests of the holders of senior convertible notes.
Modifications and amendments to the convertible notes indenture or to the
terms and conditions of the senior convertible notes may also be made, and
noncompliance by us may be waived, with the written consent of the holders of at
least a majority in aggregate principal amount of the senior convertible notes
at the time outstanding or by the adoption of a resolution at a meeting of
holders at which a quorum is present by at least a majority in aggregate
principal amount of the senior convertible notes represented at the meeting.
However, no such modification, amendment or waiver may, without the written
consent of the holder of each senior convertible note affected:
o change the maturity of the principal of or any installment of interest
on (including Registration Delay Payments, if any), any senior
convertible note, including payment of Registration Delay Payments, if
any;
o reduce the principal amount of, or any premium, if any, on any senior
convertible note;
o reduce the interest rate or interest on (including Registration Delay
Payments, if any), any senior convertible note;
o change the currency of payment of principal of, premium, if any, or
interest of any senior convertible note;
o impair the right to institute suit for the enforcement of any payment
on or with respect to any senior convertible note; or
o reduce the percentage in aggregate principal amount of senior
convertible notes outstanding necessary to modify or amend the
convertible notes indenture or to waive any past default.
SATISFACTION AND DISCHARGE
We may discharge our obligations under the convertible notes indenture
while senior convertible notes remain outstanding, subject to certain
conditions, if:
o all outstanding senior convertible notes will become due and payable
at their scheduled maturity within 60 days; or
o all outstanding senior convertible notes are scheduled for redemption
within 60 days; and, in either case, we have deposited with the
trustee for the purpose of making such principal or redemption payment
an amount sufficient to pay and discharge all outstanding senior
convertible notes on the date of their scheduled maturity or the
scheduled date of redemption.
GOVERNING LAW
The convertible notes indenture and the senior convertible notes will be
governed by, and construed in accordance with, the law of the State of New York.
INFORMATION CONCERNING THE TRUSTEE AND TRANSFER AGENT
U.S. Bank National Association, as trustee under the convertible notes
indenture, has been appointed by us as paying agent, conversion agent and
registrar with regard to the senior convertible notes. US Bank Corporate Trust
Services is the transfer agent and registrar for the series B preferred stock
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and our common stock. The trustee, the transfer agent or their affiliates may
from time to time in the future provide banking and other services to us in the
ordinary course of their business.
CERTAIN DEFINITIONS
Set forth below is certain of the defined terms used in the convertible
notes indenture. Reference is made to the convertible notes indenture for the
full definition of all such terms as well as any other capitalized terms used
herein for which no definition is provided.
"Board of Directors" means either the Board of Directors of PRG or any duly
authorized committee of such board.
"Board Resolution" means a resolution duly adopted by the Board of
Directors, a copy of which, certified by the Secretary or an Assistant Secretary
of PRG to be in full force and effect on the date of such certification, shall
have been delivered to the Trustee."
"Capital Lease Obligation" means, at the time any determination is to be
made, the amount of the liability in respect of a capital lease that would at
that time be required to be capitalized on a balance sheet prepared in
accordance with GAAP, and the Stated Maturity thereof shall be the date of the
last payment of rent or any other amount due under such lease prior to the first
date upon which such lease may be prepaid by the lessee without payment of a
penalty.
"Capital Stock" of any corporation means any and all shares, interests,
rights to purchase, warrants, options, participations or other equivalents of or
interests in (however designated) stock issued by that corporation.
"Common Stock" means the Common Stock, without par value, of PRG authorized
on the Issue Date or any stock of any class of Capital Stock of a successor to
PRG which has no preference in respect of dividends or of amounts payable in the
event of any voluntary or involuntary liquidation, dissolution or winding up of
such successor to PRG.
"Default" or "default" means any event which is, or after notice or passage
of time or both would be, an Event of Default.
"Equity Interests" means Capital Stock and all warrants, options or other
rights to acquire Capital Stock (but excluding any debt security that is
convertible into, or exchangeable for, Capital Stock).
"Existing Notes" means PRG's existing 4(3)/4% Convertible Subordinated
Notes due 2006.
"Holder" or means a person in whose name a senior convertible note is
registered on the Registrar's books.
"Indebtedness" means, with respect to any Person, without duplication:
(i) all indebtedness, obligations and other liabilities, contingent or
otherwise, of such Person for borrowed money (including overdrafts) or for
the deferred purchase price of property or services, if and to the extent
such obligations, liabilities or indebtedness would appear as a liability
of such Person on a balance sheet prepared in accordance with GAAP,
excluding any trade payables and other accrued current liabilities incurred
in the ordinary course of business, but including, without limitation, all
obligations, contingent or otherwise, of such Person in connection with any
letters of credit and acceptances issued under letter of credit facilities,
acceptance facilities or other similar facilities;
(ii) all obligations of such Person evidenced by bonds, credit or loan
agreements, notes, debentures or other similar instruments;
(iii) indebtedness of such Person created or arising under any
conditional sale or other title retention agreement with respect to
property acquired by such person (even if the rights and remedies of the
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seller or lender under such agreement in the event of default are limited
to repossession or sale of such property), if and to the extent such
obligations, liabilities or indebtedness would appear as a liability of
such Person on a balance sheet prepared in accordance with GAAP, but
excluding trade payables arising in the ordinary course of business;
(iv) all obligations and liabilities, contingent or otherwise, in
respect of Capital Lease Obligations (as defined in the convertible notes
indenture) of such Person;
(v) all Hedging Obligations (as defined in the convertible notes
indenture) of such Person;
(vi) all indebtedness referred to in (but not excluded from) the
preceding clauses (i) through (v) of other persons and all dividends of
other persons, the payment of which is secured by (or for which the holder
of such indebtedness has an existing right, contingent or otherwise, to be
secured by) any Lien or with respect to property (including, without
limitation, accounts and contract rights) owned by such person, even though
such person has not assumed or become liable for the payment of such
indebtedness (the amount of such obligation being deemed to be the lesser
of the value of such property or asset or the amount of the obligation so
secured);
(vii) all guarantees by such Person of indebtedness referred to in
this definition or of any other Person; and
(viii) any and all refinancings, replacements, deferrals, renewals,
extensions and refundings of or amendments, modifications or supplements
to, any indebtedness, obligation or liability of the kind described in
clauses (i) through (vii) above.
"Interest Payment Date" means the Stated Maturity of an installment of
interest on the senior convertible notes.
"Interest Rate" means 10.0% per annum.
"Issue Date" of any senior convertible note means March 17, 2006.
"Lien" means, with respect to any asset, any mortgage, lien, pledge,
charge, security interest or encumbrance of any kind in respect of such asset
given to secure Indebtedness, whether or not filed, recorded or otherwise
perfected under applicable law (including any conditional sale or other title
retention agreement, any lease in the nature thereof, any option or other
agreement to sell or give a security interest in and any filing of or agreement
to give any financing statement under the Uniform Commercial Code (or equivalent
statutes) of any jurisdiction with respect to any such lien, security interest).
"Person" or "person" means any individual, corporation, limited liability
company, partnership, joint venture, association, joint-stock company, trust,
unincorporated organization, or government or any agency or political
subdivision thereof, including any subdivision or ongoing business of any such
entity or substantially all of the assets of any such entity, subdivision or
business.
"principal" of a senior convertible note means the principal amount due on
the Stated Maturity of the principal payment of such senior convertible note as
set forth on the face of the senior convertible note.
"Registration Rights Agreement" means that certain Registration Rights
Agreement dated as of the Issue Date, by and among PRG and certain holders
listed on Exhibit A thereto.
"Registration Statement" means the registration statement required to be
filed pursuant to the Registration Rights Agreement.
"Series A Convertible Preferred Stock" means PRG's 9.0% Senior Series A
Convertible Participating Preferred Stock.
"Series B Convertible Preferred Stock" means PRG's 10.0% Senior Series B
Convertible Participating Preferred Stock.
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"Significant Subsidiary" means a Subsidiary of PRG, including its
Subsidiaries, which meets any of the following conditions:
(A) PRG's and its other Subsidiaries' Investments in and advances to
the Subsidiary exceed 10% of the total assets of PRG and its Subsidiaries
consolidated as of the end of any two of the three most recently completed
fiscal years; or
(B) PRG's and its other Subsidiaries' proportionate share of the total
assets of the Subsidiary exceeds 10% of the total assets of PRG and its
Subsidiaries consolidated as of the end of any two of the three most
recently completed fiscal years; or
(C) PRG's and its other Subsidiaries' equity in the income from
continuing operations before income taxes, extraordinary items and
cumulative effect of a change in accounting principles of the Subsidiary
exceeds 10% of such income of PRG and its Subsidiaries consolidated as of
the end of any two of the three most recently completed fiscal years.
"Stated Maturity" means, with respect to any installment of interest or
principal on any series of Indebtedness, the date on which the payment of
interest or principal was scheduled to be paid in the documentation governing
such Indebtedness as of the date of the senior notes indenture, and will not
include any contingent obligations to repay, redeem or repurchase any such
interest or principal prior to the date originally scheduled for the payment
thereof.
"Subsidiary" means (i) a corporation, a majority of whose Capital Stock
with voting power, under ordinary circumstances, to elect directors is, at the
date of determination, directly or indirectly owned by PRG, by one or more
Subsidiaries of PRG or by PRG and one or more Subsidiaries of PRG, (ii) a
partnership in which PRG or a Subsidiary of PRG holds a majority interest in the
equity capital or profits of such partnership, or (iii) any other person (other
than a corporation) in which PRG, a Subsidiary of PRG or PRG and one or more
Subsidiaries of PRG, directly or indirectly, at the date of determination, has
(x) at least a majority ownership interest or (y) the power to elect or direct
the election of a majority of the directors or other governing body of such
person.
GLOBAL NOTES; BOOK-ENTRY FORM
Except as noted below, all senior notes and senior convertible notes are
evidenced by one or more global notes. Each global note is deposited with, or on
behalf of, a custodian for DTC and registered in the name of Cede & Co., as
nominee of DTC.
Except as set forth below, the global note may be transferred, in whole and
not in part, solely to DTC or another nominee of DTC or to a successor of DTC or
its nominee. Beneficial interests in the global notes may not be exchanged for
certificated senior notes or senior convertible notes except in the limited
circumstances described below.
As described above, beneficial interests in the global notes generally may
not be exchanged for certificated senior notes or senior convertible notes.
However, the indenture provides that we will execute and the trustee will
authenticate and deliver certificated senior notes or senior convertible notes
in exchange for interests in the global notes, if:
o the depositary for the global notes notifies us that it is unwilling
or unable to continue as depositary for the global notes or the
depositary for the global notes is no longer eligible or in good
standing under the Securities Exchange Act of 1934 or any other
applicable statute or regulation and we do not appoint a successor
depositary within 90 days after we receive that notice or become aware
of that ineligibility,
o we in our sole discretion determine that the senior notes or senior
convertible notes will no longer be represented by global notes, or
o an event of default with respect to the senior notes or senior
convertible notes has occurred and is continuing.
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We anticipate that those certificated senior notes and senior convertible
notes will be registered in such name or names as DTC instructs the trustee and
that those instructions will be based upon directions received by DTC from its
participants with respect to ownership of beneficial interest in the global
notes. Neither we nor the trustee shall be liable for any delay by DTC or any
participant or indirect participant in identifying the beneficial owners of the
related notes and each of them may conclusively rely on, and will be protected
in relying on, instructions from DTC for all purposes, including with respect to
the registration and delivery, and the respective principal amounts, of the
certificated senior notes or senior convertible notes to be issued.
A holder may hold its interest in a global note directly through DTC if
such holder is a participant in DTC, or indirectly through organizations that
are participants in DTC, which are referred to as "participants." Transfers
between participants will be effected in the ordinary way in accordance with DTC
rules and will be settled in clearing house funds. The laws of some states
require that certain persons take physical delivery of securities in definitive
form.
As a result, the ability to transfer beneficial interests in the global
note to such persons may be limited.
Persons who are not participants may beneficially own interests in a global
note held by DTC only through participants, or certain banks, brokers, dealers,
trust companies and other parties that clear through or maintain a custodial
relationship with a participant, either directly or indirectly, which are
referred to as "indirect participants." So long as Cede & Co., as the nominee of
DTC, is the registered owner of a global note, Cede & Co., for all purposes,
will be considered the sole holder of such global note. Except as provided
below, owners of beneficial interests in a global note will:
o not be entitled to have certificates registered in their names;
o not receive physical delivery of certificates in definitive registered
form; and
o not be considered registered owners or holders of the global note
under the indenture for any purpose.
We will pay interest on and the redemption price of a global note to Cede &
Co., as the registered owner of the global note, by wire transfer of immediately
available funds on each interest payment date or the redemption or repurchase
date, as the case may be.
Neither we, the trustee nor any paying agent will be responsible or liable:
o for the records relating to, or payments made on account of,
beneficial ownership interests in a global note; or
o for maintaining, supervising or reviewing any records relating to the
beneficial ownership interests.
We have been informed that DTC's practice is to credit participants'
accounts on any payment date with payments in amounts proportionate to their
respective beneficial interests in the principal amount represented by a global
note as shown on the records of DTC, unless DTC has reason to believe that it
will not receive payment on that payment date. Payments by participants to
owners of beneficial interests in the principal amount represented by a global
note held through participants will be the responsibility of the participants,
as is now the case with securities held for the accounts of customers registered
in "street name."
Because DTC can only act on behalf of participants, who in turn act on
behalf of indirect participants, the ability of a person having a beneficial
interest in the principal amount represented by the global note to pledge such
interest to persons or entities that do not participate in the DTC system, or
otherwise take actions in respect of such interest, may be affected by the lack
of a physical certificate evidencing its interest.
Neither we, the trustee, the registrar, the paying agent nor the conversion
agent will have any responsibility for the performance by DTC or its
participants or indirect participants of their respective obligations under the
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rules and procedures governing their operation. DTC has advised us that it will
take any action permitted to be taken by a holder of senior notes or senior
convertible notes, including the presentation of senior notes or senior
convertible notes for exchange, only at the direction of one or more
participants to whose account with DTC interests in the global note are
credited, and only in respect of the principal amount of the senior notes or
senior convertible notes represented by the global note as to which the
participant or participants has or have given such direction.
DTC has advised us that it is:
o a limited purpose trust company organized under the laws of the State
of New York;
o a "banking organization" within the meaning of the New York Banking
Law;
o a member of the Federal Reserve System;
o a "clearing corporation" within the meaning of the Uniform Commercial
Code; and
o a "clearing agency" registered pursuant to the provisions of Section
17A of the Exchange Act.
DTC was created to hold securities for its participants and to facilitate
the clearance and settlement of securities transactions between participants
through electronic book-entry changes to the accounts of its participants.
Participants include securities brokers, dealers, banks, trust companies,
clearing corporations and other organizations. Some of the participants or their
representatives, together with other entities, own DTC. Indirect access to the
DTC system is available to others such as banks, brokers, dealers and trust
companies that clear through or maintain a custodial relationship with a
participant, either directly or indirectly.
DTC has agreed to the foregoing procedures to facilitate transfers of
interests in a global note among participants. However, DTC is under no
obligation to perform or continue to perform these procedures, and may
discontinue these procedures at any time. If DTC is at any time unwilling or
unable to continue as depositary and a successor depositary is not appointed by
us within 90 days, we will issue notes in certificated form in exchange for
global notes.
REGISTRATION RIGHTS
We have entered into a registration rights agreement with certain holders
of the notes and preferred stock that may be deemed to be affiliates of the
company that requires us to file a registration statement relating to all senior
notes, all senior convertible notes, all series A convertible preferred stock,
all series B convertible preferred stock and the common stock issuable upon
conversion of the series A convertible preferred stock, the series B convertible
preferred stock or the senior convertible notes (as the case may be) held by
such holder no later than May 15, 2006. We have also agreed to use our
reasonable best efforts to have the registration statement declared effective no
later than 150 days following the closing date of the exchange offer. The
registration statement of which this prospectus forms a part has been filed to
satisfy these obligations.
We are required to keep the registration statement effective until the
earlier of (A) the fifth anniversary of the date such registration statement is
declared effective, and (ii) the date as of which all of the holders party
thereto have sold all of their registrable securities thereunder pursuant to the
registration statement, pursuant to Rule 144 under the Securities Act, or such
securities may be sold immediately and are no longer subject to volume or manner
of sale restrictions under Rule 144.
Upon a delay of filing or having the registration statement declared
effective, then damages (the "Registration Delay Payments") will accrue
(calculated as set forth in the registration rights agreement) from and
including the date on which any such Registration Delay shall occur to but
excluding the date on which all Registration Delays have been cured. During the
continuation of such delay, Registration Delay Payments will accrue at a rate of
0.05% per month during the 90-day period immediately following the occurrence of
such Registration Default and shall increase by 0.05% per month at the end of
each subsequent 90-day period, but in no event shall such rate exceed 3.00% per
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annum. The Registration Delay Payments shall be due and payable with respect to
the senior notes and senior convertible notes on the next scheduled interest
payment date. Failure by us to make such payments when due may give rise to an
event of default (subject to applicable grace periods) under the senior notes
indenture and the convertible notes indenture.
The summary herein of provisions of the registration rights agreement is
subject to, and is qualified in its entirety by reference to, all of the
provisions of the registration rights agreement, a copy of which is filed as an
exhibit to the registration statement of which this prospectus forms a part.
Only holders of existing notes that may be deemed to be affiliates of PRG and
that executed the registration rights agreement are entitled to its benefits,
including without limitation, Registration Delay Payments, if any.
DESCRIPTION OF CAPITAL STOCK
We are authorized to issue up to 50,000,000 shares of common stock, no par
value, and 1,000,000 shares of preferred stock, no par value. The following
description summarizes information about our capital stock. You can obtain more
information about our capital stock by reviewing our articles of incorporation
and bylaws, as well as the Georgia Business Corporation Code. At our
shareholders' meeting on August 11, 2006, the shareholders approved a 1-for-10
reverse stock split of our common stock, and a proposal to increase the number
of authorized shares of common stock to 50 million, post-split. Except as
otherwise indicated, the share and per share data in this prospectus have been
adjusted to reflect the reverse stock split which was approved by the
shareholders at the meeting.
COMMON STOCK
As of June 30, 2006, there were approximately 6,511,755 shares of common
stock (as adjusted for the reverse stock split) outstanding held of record by
163 shareholders. Holders of common stock are entitled to one vote for each
share held of record on all matters submitted to a vote of the shareholders.
Holders of common stock do not have cumulative voting rights. Subject to the
preferences applicable to any outstanding preferred stock, including the series
A convertible preferred stock and series B convertible preferred stock, if any,
holders of common stock are entitled to receive ratably such dividends, if any,
as may be declared from time to time by the Board of Directors out of funds
legally available therefor. Except as otherwise required by law, the preferred
stock will be entitled to vote on all matters with the common stock on an "as
converted" basis, including the election of directors.
Upon any liquidation, dissolution or winding up, whether voluntary or
involuntary, holders of our common stock are entitled to receive pro rata all
assets available for distribution to shareholders after payment or provision for
payment of our debts and other liabilities and the liquidation preferences of
any then outstanding preferred stock. There are no preemptive or other
subscription rights, conversion rights, or redemption or sinking fund provisions
with respect to shares of our common stock.
Except as otherwise provided by law or as may be provided by the
resolutions of the Board of Directors authorizing the issuance of any class or
series of preferred stock, the holders of the common stock shall be entitled to
receive, on a pro-rata basis, when, as and if provided by the Board of
Directors, out of funds legally available therefor, dividends payable in cash,
stock or otherwise. The Company's credit facility currently prohibits the
payment of dividends on the common stock.
PREFERRED STOCK
We are authorized to issue up to 1,000,000 shares of preferred stock.
125,000 shares of preferred stock have been designated 9.0% Senior Series A
Convertible Participating Preferred Stock and as of June 30, 2006, 117,417
shares are issued and outstanding. 264,000 shares of preferred stock have been
designated 10.0% Senior Series B Convertible Participating Preferred Stock and
have been reserved for issuance upon the conversion of outstanding senior
convertible notes, but no such shares are issued and outstanding. Subject to
certain approval rights of the series A convertible preferred stock and series B
convertible preferred stock, if any, additional shares of 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 fixed
by the Board of Directors, without any further vote or action by the
shareholders.
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9.0% SENIOR SERIES A CONVERTIBLE PARTICIPATING PREFERRED STOCK
GENERAL
Holders of shares of series A convertible preferred stock have no
preemptive or sinking fund rights. The shares of series A convertible preferred
stock have been issued in book-entry form and are evidenced by one or more
global certificates registered in the name of Cede & Co., as nominee for The
Depository Trust Company (DTC). Except in limited circumstances, holders of
interests in global certificates are not entitled to receive shares of series A
convertible preferred stock in definitive certificated form registered in their
names and will not be considered registered owners or holders of the global
certificates for any purpose.
RANKING
The series A convertible preferred stock, with respect to dividend rights
and the distribution of assets upon the company's liquidation, dissolution or
winding up, will rank (i) junior to all indebtedness of the company; (ii) senior
to all classes or series of the company's common stock and to all other equity
securities the terms of which specifically provide that such equity securities
rank junior to the series A convertible preferred stock (such equity securities
being referred to herein as "junior stock"); (iii) on a parity with the series B
convertible preferred stock described below and all other preferred equity
securities issued by the company, other than those equity securities referred to
in clauses (ii) and (iv) of this paragraph, which issuance shall be subject to
the receipt of the applicable consent of the holders of the series A convertible
preferred stock as described under "Voting Rights" below; and (iv) junior to all
equity securities issued by the company, the terms of which specifically provide
that such equity securities rank senior to such series A convertible preferred
stock, which issuance shall be subject to the receipt of the applicable consent
of the holders of the series A convertible preferred stock as described under
"Voting Rights" below.
DIVIDENDS
The holders of shares of series A convertible preferred stock, in
preference to the holders of shares of any junior stock, shall be entitled to
receive, when, as and if declared by the Board of Directors of the company out
of funds legally available therefor, cumulative dividends, at a rate of 9.0% per
annum of then-effective liquidation preference payable in cash semi-annually on
March 15 and September 15 of each year commencing September 15, 2006. Declared
dividends will be payable in cash. Any undeclared dividends will increase the
liquidation preference as of the applicable dividend payment date.
In addition, if any dividends or distributions are paid on the company's
common stock (other than a dividend or distribution paid solely in additional
shares of the company's common stock), the holders of series A convertible
preferred stock will be paid dividends or distributions per share of series A
convertible preferred stock in an amount equal to what such holder would have
received had it converted its shares of series A convertible preferred stock
into shares of common stock of the company immediately prior to the record date
for the payment of such dividend or distribution.
The company will prorate and compute any dividend payable for a partial
dividend period on the basis of a 360-day year consisting of twelve 30-day
months. The company will pay dividends to holders of record as they appear in
its share records at the close of business on the applicable dividend record
date.
No dividend on the series A convertible preferred stock will be authorized
or declared or paid or set apart for payment by the company if such
authorization, declaration, payment or setting apart for payment would violate
any of its agreements or is restricted or prohibited by law. Notwithstanding the
foregoing, dividends on the series A convertible preferred stock will accrue
whether or not the company has earnings, whether or not there are funds legally
64
available for the payment of dividends and whether or not such dividends are
authorized or declared by its Board of Directors.
When dividends are not declared and paid in full (or a sum sufficient for
such full payment is not so set apart) on the series A convertible preferred
stock and all other equity securities ranking on a parity as to dividends with
the series A convertible preferred stock (including the series B convertible
preferred stock, if any), all dividends declared upon the series A convertible
preferred stock and any other equity securities ranking on a parity as to
dividends with the series A convertible preferred stock shall be declared pro
rata so that the amount of dividends declared per share of series A convertible
preferred stock and such other equity security shall in all cases bear to each
other the same ratio that accumulated dividends per share on the series A
convertible preferred stock and such other equity security bear to each other.
Except as provided in the immediately preceding paragraph, unless full
cumulative dividends on the series A convertible preferred stock have been or
contemporaneously are authorized and paid or authorized and a sum sufficient set
apart for payment for all past distribution periods and then current dividend
period:
(i) no dividends, other than distributions in kind of common stock of
the company or other shares of junior stock, may be authorized or paid or
set aside for payment, and no other dividend may be authorized or made
upon, shares of common stock of the company or any other shares of junior
stock; and
(ii) no shares of common stock of the company or any other shares of
junior stock may be redeemed, purchased or otherwise acquired for any
consideration (or any moneys be paid to or made available for a sinking
fund for the redemption of any such shares) by the company or any
subsidiary of the company, except by conversion into or exchange for other
junior stock.
FORM AND DENOMINATION
Except in very limited circumstances, the shares of series A convertible
preferred stock will be evidenced by a global certificate that will be deposited
with, or on behalf of, the Depository Trust Company, or DTC, and registered in
the name of Cede & Co. as DTC's nominee. Except as set forth below, the global
certificate may be transferred, in whole or in part, only to another nominee of
DTC or to a successor of DTC or its nominee. See "Description of the Notes -
Global Notes; Book-Entry Form" for additional discussion of DTC.
Purchasers may hold their interests in the global certificate directly
through DTC or indirectly through organizations that are participants in DTC.
Transfers between participants will be effected in the ordinary way in
accordance with DTC rules and will be settled in clearing house funds. The laws
of some states require that certain persons take physical delivery of securities
in definitive form. Consequently, the ability to transfer beneficial interests
in the global certificate to such persons may be limited.
Purchasers may beneficially own interests in the global certificate held by
DTC only through participants, or certain banks, brokers, dealers, trust
companies and other parties that clear through or maintain a custodial
relationship with a participant, either directly or indirectly through indirect
participants. So long as Cede & Co., as the nominee of DTC, is the registered
owner of the global certificate, Cede & Co. for all purposes will be considered
the sole holder of the global certificate. Except as provided below, owners of
beneficial interests in the global certificate will:
o not be entitled to have certificates registered in their names;
o not receive or be entitled to receive physical delivery of
certificates in definitive form; and
o not be considered the registered owners or holders of the series A
convertible preferred stock for any purpose.
Payment of dividends on and the redemption price of the global certificate
will be made to Cede & Co. by wire transfer of immediately available funds.
Neither we nor any paying agent will have any responsibility or liability for
any aspect of the records relating to or payments made on account of beneficial
65
ownership interests in the global certificate or for maintaining, supervising or
reviewing any records relating to such beneficial ownership interests.
We have been informed by DTC that, with respect to any payment of dividends
on or the redemption price of the global certificate, DTC's practice is to
credit participants' accounts on the payment date with payments in amounts
proportionate to their respective beneficial interests in the series A
convertible preferred stock represented by the global certificate as shown on
the records of DTC, unless DTC has reason to believe that it will not receive
payment on such payment date. Payments by participants to owners of beneficial
interests in series A convertible preferred stock represented by the global
certificate held through such participants will be the responsibility of such
participants, as is now the case with securities held for the accounts of
customers registered in "street name."
If you would like to convert your series A convertible preferred stock into
common stock pursuant to the terms of the series A convertible preferred stock,
you should contact your broker or other direct or indirect DTC participant to
obtain information on procedures, including proper forms and cut-off times, for
submitting those requests.
Because DTC can only act on behalf of participants, who in turn act on
behalf of indirect participants and certain banks, the ability of a person
having a beneficial interest in series A convertible preferred stock represented
by the global certificate to pledge such interest to persons or entities that do
not participate in the DTC system, or otherwise take actions in respect of such
interest, may be affected by the lack of a physical certificate evidencing such
interest.
Neither we, the transfer agent, registrar, paying agent nor conversion
agent will have any responsibility for the performance by DTC or its
participants or indirect participants under the rules and procedures governing
their operations. DTC has advised us that it will take any action permitted to
be taken by a holder of series A convertible preferred stock only at the
direction of one or more participants to whose account with DTC interests in the
global certificate are credited and only in respect of the amount of shares of
the series A convertible preferred stock represented by the global certificate
as to which the participant has given this direction.
VOTING RIGHTS
Each share of series A convertible preferred stock will have the number of
votes that the shares of common stock issuable upon conversion of a share of
series A convertible preferred stock would have (referred to herein as voting on
an "as converted" basis. Currently, each share of series A convertible preferred
stock has approximately 42.25 votes (as adjusted for the reverse stock split).
The common stock, series A convertible preferred stock and series B convertible
preferred stock, if any, vote together as a single class, except in the limited
circumstances provided by the certificate of designation and described in this
section or as required under applicable law.
The terms of the series A convertible preferred stock provide that any
amendment, modification or repeal of the terms of the company's articles of
incorporation including the terms of the certificate of designation relating to
the series A convertible preferred stock that would materially adversely affect
the powers, preferences or rights of the series A convertible preferred stock or
the bylaws including but not limited to modifications resulting from or in
connection with any merger, consolidation or sale of all or substantially all of
the assets of the company, will require the approval of holders of at least a
majority of the issued and outstanding shares of series A convertible preferred
stock and series B convertible preferred stock, voting together as a separate
class. In addition, without the affirmative vote or consent of holders of at
least a majority of the outstanding shares of series A convertible preferred
stock and series B convertible preferred stock, if any, voting together as a
separate class, the company shall not authorize, create, or increase the
authorized or issued amount of, any class or series of equity securities ranking
senior to or on parity with the series A convertible preferred stock with
respect to the payment of dividends or the distribution of assets upon the
voluntary or involuntary liquidation, dissolution or winding up of the company.
At our shareholders' meeting on August 11, 2006, the shareholders approved
proposals to amend our articles of incorporation to revise the voting provisions
of the series A preferred stock and the series B preferred stock, to make it
clear that the series A and series B preferred stock have the right to vote as a
single class on any proposed amendment to our bylaws only if the proposed
amendment would adversely affect either class of preferred stock.
66
The company will cause a notice of any meeting at which holders of the
series A convertible preferred stock are entitled to vote to be given to each
holder of record in accordance with its bylaws. This notice will be given to DTC
or its nominee as the sole record holder of the global certificate. We
anticipate that DTC and its direct participants will send notices to the holders
of beneficial interests in the global certificate, but we take no responsibility
for the performance of DTC or its participants regarding such notices.
CONVERSION RIGHTS
The series A convertible preferred stock is convertible at the holder's
option at any time. Each share of series A convertible preferred stock is
initially convertible into approximately 42.25 shares of common stock of the
company (as adjusted for the reverse stock split), which is calculated by
dividing then-effective liquidation preference of each share of series A
convertible preferred stock by the conversion price. The initial conversion
price is $2.8405, subject to anti-dilution adjustments described below.
In order to effect a conversion of series A convertible preferred stock, a
holder must deliver a notice of conversion to the company. Upon receipt by the
company of the notice of conversion, the holder's shares of series A convertible
preferred stock will immediately cease to have the rights and restrictions of
preferred stock, and the holder will immediately be deemed to have all the
rights of a holder of shares of common stock in accordance with the terms
outlined above. We will deliver a copy of the form of notice of conversion to
each holder of series A convertible preferred stock prior to the convening of
the stockholders meeting to increase our authorized capital (described below),
or at any time at the request of a holder of series A convertible preferred
stock.
The conversion price will be subject to adjustment in the event the company
(i) pays a dividend or distribution solely in shares of common stock; (ii)
subdivides its outstanding shares of common stock into a greater number of
shares of common stock, or (iii) combines its outstanding shares of common stock
into a smaller number of shares of common stock. Concurrently with the
effectiveness of any of the events described in clauses (i) through (iii), the
conversion price in effect immediately prior thereto shall be adjusted by
multiplying the conversion price in effect immediately prior to such adjustment
by a fraction of which the numerator shall be the number of shares of common
stock outstanding immediately prior to such adjustment and the denominator shall
be the number of shares of common stock outstanding immediately following such
adjustment. To the extent that we provide for antidilution adjustments in our
new management incentive plan that are more favorable than those in effect for
the series A preferred stock, the series A preferred stock will also receive the
benefit of such adjustments.
At our shareholders' meeting on August 11, 2006, the shareholders approved
a proposal to amend our articles of incorporation to revise the anti-dilution
provisions of the series A preferred stock, to provide that there will be no
adjustment to the conversion price of the series A preferred stock due to any
conversion of our 10% senior convertible notes, series A preferred stock or
series B preferred.
In case of any reclassification of the common stock, any consolidation of
the company with, or merger of the company into, any other entity, any merger of
any entity into the company (other than a merger that does not result in
reclassification, conversion, exchange or cancellation of the outstanding shares
of common stock), any sale or transfer of all or substantially all of the assets
of the company or any compulsory share exchange whereby the common stock is
converted into other certain securities, cash or other property, then the holder
of each share of series A convertible preferred stock then outstanding shall
have the right thereafter, during the period that the series A convertible
preferred stock shall be convertible, to convert that share only into the kind
and amount of securities, cash and other property receivable upon the
reclassification, consolidation, merger, sale, transfer or share exchange by a
holder of the number of shares of common stock into which one share of series A
convertible preferred stock would have been convertible immediately prior to the
reclassification, consolidation, merger, sale, transfer or share exchange.
LIQUIDATION RIGHTS
The series A convertible preferred stock issued in the exchange offer has
an initial liquidation preference of $120.00 per share, subject to accretion.
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Upon any voluntary or involuntary liquidation, dissolution or winding up of
the company, holders of series A convertible preferred stock will be entitled to
receive out of the assets of the company available for distribution to
stockholders (after payment or provision for all of the company's debts and
other liabilities and preference payments to holders of equity securities
ranking senior to the series A convertible preferred stock but before any
payment or provision for any junior stock) an amount equal to the greater of:
(i) the amount per share of series A convertible preferred stock equal
to then-effective liquidation preference, plus any accrued and undeclared
dividends to the date of payment; and
(ii) the amount per share the holder would have received in connection
with such voluntary or involuntary liquidation, dissolution or winding up
of the company had such holder converted such share of series A convertible
preferred stock into shares of common stock immediately prior to such
event.
In any voluntary or involuntary liquidation, dissolution or winding up of
the company its assets are insufficient to make full payment of the liquidating
distributions to holders of the series A convertible preferred stock and any
other shares the company's equity securities ranking on a parity with the series
A convertible preferred stock as to liquidation rights (including the series B
convertible preferred stock, if any), then the holders of the series A
convertible preferred stock and parity shares will share ratably in any
distribution of assets in proportion to the full liquidating distributions to
which they would otherwise be respectively entitled.
OPTIONAL REDEMPTION
The company shall have the right to redeem the series A convertible
preferred stock at any time, after the conversion rights date, in whole or in
part at any time concurrently with or after all outstanding senior notes and
senior convertible notes have been repurchased, redeemed or otherwise repaid in
full. Any such redemption shall be for a cash amount per share equal to
then-effective liquidation preference, together with any accrued and undeclared
dividends to the date of redemption. The holders' option to convert shares of
series A convertible preferred stock into shares of common stock of the company
will terminate at the close of business on the business day preceding the
optional redemption date, unless the company defaults in making any redemption
payment upon such mandatory redemption date. Holders shall have the right to
exercise conversion rights in lieu of the receipt of the redemption payment up
to and including such date. The company will provide notice of the optional
redemption date at least 30 days in advance of such date to all holders of
series A convertible preferred stock showing on the stockholder records of the
company as of such date and make such other public announcement as it deems
reasonable.
MANDATORY REDEMPTION
On March 15, 2011, the company must redeem all outstanding shares of series
A convertible preferred stock for a cash redemption price per share equal to
then-effective liquidation preference, together with any accrued and undeclared
dividends to the date of redemption.
The certificate of designation of the series A convertible preferred stock
will provide that if at the mandatory redemption date, the company does not have
sufficient capital and surplus legally available to redeem all the outstanding
shares of series A convertible preferred stock, the company will take all
reasonable measures permitted under the Georgia Business Corporation Code to
increase the amount of its capital and surplus legally available, and the
company will redeem as many shares of series A convertible preferred stock as it
may legally redeem, ratably (as nearly as may be practicable without creating
fractional shares) from the holders thereof in proportion to the number of
shares held by them, and shall thereafter from time to time, as soon as it shall
have funds available therefor, redeem as many shares of series A convertible
preferred stock as it legally may until it has redeemed all of the outstanding
shares of series A convertible preferred stock.
The holders' option to convert shares of series A convertible preferred
stock into shares of common stock of the company will terminate at the close of
business on the business day preceding the mandatory redemption date (subject to
any extension necessary to permit the expiration of any applicable waiting
period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as
amended (the "HSR Act"), if applicable), unless the company defaults in making
any redemption payment upon such mandatory redemption date. Holders will have
the right to exercise conversion rights in lieu of the receipt of the redemption
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payment up to and including such date. The company will provide notice of the
mandatory redemption date at least 30 days in advance of such date to all
holders of series A convertible preferred stock showing on the stockholder
records of the company as of such date and make such other public announcement
as it deems reasonable.
10.0% SENIOR SERIES B CONVERTIBLE PARTICIPATING PREFERRED STOCK
GENERAL
The 264,000 shares of preferred stock that may be issued upon the
conversion of the senior convertible notes will be a series of preferred stock
of the company designated "10.0% Senior Series B Convertible Participating
Preferred Stock" pursuant to a certificate of designation adopted by resolution
of the Board of Directors of the company. In this section, we refer to the 10.0%
Senior Series B Convertible Participating Preferred Stock as "series B
convertible preferred stock." The material terms of the series B convertible
preferred stock are described below. The description contained in this section
is qualified in its entirety by the certificate of designation relating to the
series B convertible preferred stock. Holders of shares of series B convertible
preferred stock have no preemptive or sinking fund rights.
RANKING
The series B convertible preferred stock, with respect to dividend rights
and the distribution of assets upon the company's liquidation, dissolution or
winding up, will rank (i) junior to all indebtedness of the company; (ii) senior
to all classes or series of the company's common stock and to all equity
securities the terms of which specifically provide that such equity securities
rank junior to the series B convertible preferred stock (such equity securities
being referred to herein as "junior stock"); (iii) on a parity with the series A
convertible preferred stock and all other preferred equity securities issued by
the company, other than those equity securities referred to in clauses (ii) and
(iv) of this paragraph, which issuance shall be subject to the receipt of the
applicable consent of the holders of the series B convertible preferred stock as
described under "Voting Rights" below; and (iv) junior to all equity securities
issued by the company, the terms of which specifically provide that such equity
securities rank senior to such series B convertible preferred stock, which
issuance shall be subject to the receipt of the applicable consent of the
holders of the series B convertible preferred stock as described under "Voting
Rights" below.
DIVIDENDS
The holders of shares of series B convertible preferred stock, in
preference to the holders of shares of any junior stock, shall be entitled to
receive, when, as and if declared by the Board of Directors of the company out
of funds legally available therefor, cumulative dividends, at a rate of 10.0%
per annum of then-effective liquidation preference payable in cash semi-annually
on March 15 and September 15 of each year. Declared dividends will be payable in
cash. Any undeclared dividends will increase the liquidation preference as of
the applicable dividend payment date.
In addition, if any dividends or distributions are paid on the company's
common stock (other than a dividend or distribution paid solely in additional
shares of the company's common stock), the holders of series B convertible
preferred stock will be paid dividends or distributions per share of series B
convertible preferred stock in an amount equal to what such holder would have
received had it converted its shares of series B convertible preferred stock
into shares of common stock of the company immediately prior to the record date
for the payment of such dividend or distribution.
The company will prorate and compute any dividend payable for a partial
dividend period on the basis of a 360-day year consisting of twelve 30-day
months. The company will pay dividends to holders of record as they appear in
its share records at the close of business on the applicable dividend record
date.
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No dividend on the series B convertible preferred stock will be authorized
or declared or paid or set apart for payment by the company if such
authorization, declaration, payment or setting apart for payment would violate
any of its agreements or is restricted or prohibited by law. Notwithstanding the
foregoing, dividends on the series B convertible preferred stock will accrue
whether or not the company has earnings, whether or not there are funds legally
available for the payment of dividends and whether or not such dividends are
authorized or declared by its Board of Directors.
When dividends are not declared and paid in full (or a sum sufficient for
such full payment is not so set apart) on the series B convertible preferred
stock and all other equity securities ranking on a parity as to dividends with
the series B convertible preferred stock (including the series A convertible
preferred stock), all dividends declared upon the series B convertible preferred
stock and any other equity securities ranking on a parity as to dividends with
the series B convertible preferred stock shall be declared pro rata so that the
amount of dividends declared per share of series B convertible preferred stock
and such other equity security shall in all cases bear to each other the same
ratio that accumulated dividends per share on the series B convertible preferred
stock and such other equity security bear to each other.
Except as provided in the immediately preceding paragraph, unless full
cumulative dividends on the series B convertible preferred stock have been or
contemporaneously are authorized and paid or authorized and a sum sufficient set
apart for payment for all past distribution periods and then current dividend
period:
(iii) no dividends, other than distributions in kind of common stock
of the company or other shares of junior stock, may be authorized or paid
or set aside for payment, and no other dividend may be authorized or made
upon, shares of common stock of the company or any other shares of junior
stock; and
(iv) no shares of common stock of the company or any other shares of
junior stock may be redeemed, purchased or otherwise acquired for any
consideration (or any moneys be paid to or made available for a sinking
fund for the redemption of any such shares) by the company or any
subsidiary of the company, except by conversion into or exchange for other
junior stock.
VOTING RIGHTS
Except as set forth below, each share of series B convertible preferred
stock will vote on all matters with the holders of common stock on an "as
converted" basis. If the senior convertible notes were converted into series B
convertible preferred stock immediately following the completion of the exchange
offer, each share of series B convertible preferred stock would have
approximately 73.85 votes (as adjusted for the reverse stock split). The common
stock, series B convertible preferred stock and series A convertible preferred
stock will vote together as a single class, except in the limited circumstances
provided by the certificate of designation and described in this section or as
required under applicable law.
The terms of the series B convertible preferred stock provide that any
amendment, modification or repeal of the terms of the certificate of
incorporation and bylaws or in the certificate of designation relating to the
series B convertible preferred stock that would materially adversely affect the
powers, preferences or rights of the series B convertible preferred stock,
including but not limited to modifications resulting from or in connection with
any merger, consolidation or sale of all or substantially all of the assets of
the company, will require the approval of holders of at least a majority of the
issued and outstanding shares of series B convertible preferred stock and series
A convertible preferred stock, voting together as a separate class. In addition,
without the affirmative vote or consent of holders of at least a majority of the
outstanding shares of series B convertible preferred stock and series A
convertible preferred stock, voting together as a separate class, the company
shall not authorize, create, or increase the authorized or issued amount of, any
class or series of equity securities ranking senior to or on parity with the
series B convertible preferred stock with respect to the payment of dividends or
the distribution of assets upon the voluntary or involuntary liquidation,
dissolution or winding up of the company.
At our shareholders' meeting on August 11, 2006, the shareholders approved
proposals to amend our articles of incorporation to revise the voting provisions
of the series A preferred stock and the series B preferred stock, to make it
clear that the series A and series B preferred stock have the right to vote as a
single class on any proposed amendment to our bylaws only if the proposed
amendment would adversely affect either class of preferred stock.
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The company will cause a notice of any meeting at which holders of the
series B convertible preferred stock are entitled to vote to be given to each
holder of record in accordance with its bylaws.
CONVERSION RIGHTS
The series B convertible preferred stock will be convertible into shares of
common stock at the holder's option at any time after the conversion rights
date. Each share of series B convertible preferred stock will initially be
convertible into approximately 73.85 shares of common stock of the company (as
adjusted for the reverse stock split), which is calculated by dividing
then-effective liquidation preference of each share of series B convertible
preferred stock by the conversion price. The initial conversion price is $6.50
(as adjusted for the reverse stock split), subject to anti-dilution adjustments
described below.
The company intends to call and hold a special meeting of voting
stockholders to effect this increase of its authorized capital stock promptly
after the completion of the exchange offer. If the number of authorized shares
of common stock is so increased, the shares of series B convertible preferred
stock will become convertible at the holder's option on the date of the
stockholders meeting described above. If the number of authorized shares of
common stock is not so increased, the series B convertible preferred stock will
not be convertible into common stock but will remain shares of preferred stock
of the company.
In order to effect a conversion of series B convertible preferred stock, a
holder must deliver a notice of conversion to the company. Upon receipt by the
company of the notice of conversion, the holder's shares of series B convertible
preferred stock will immediately cease to have the rights and restrictions of
preferred stock, and the holder will simultaneously receive shares of common
stock in accordance with the terms outlined above. We will deliver a copy of the
form of notice of conversion to each holder of series B convertible preferred
stock prior to the convening of the stockholders meeting to increase our
authorized capital (described below), or at any time at the request of a holder
of series B convertible preferred stock.
The conversion price will be subject to adjustment in the event the company
(i) pays a dividend or distribution solely in shares of common stock; (ii)
subdivides its outstanding shares of common stock into a greater number of
shares of common stock, or (iii) combines its outstanding shares of common stock
into a smaller number of shares of common stock. Concurrently with the
effectiveness of any of the events described in clauses (i) through (iii), the
conversion price in effect immediately prior thereto shall be adjusted by
multiplying the conversion price in effect immediately prior to such adjustment
by a fraction of which the numerator shall be the number of shares of common
stock outstanding immediately prior to such adjustment and the denominator shall
be the number of shares of common stock outstanding immediately following such
adjustment. To the extent that we provide for antidilution adjustments in our
new management incentive plan that are more favorable than those in effect for
the series B preferred stock, the series B preferred stock will also receive the
benefit of such adjustments. At our shareholders' meeting on August 11, 2006,
the shareholders approved a proposal to amend our articles of incorporation to
revise the anti-dilution provisions of the series B preferred stock, to provide
that there will be no adjustment to the conversion price of the series B
preferred stock due to any conversion of our 10% senior convertible notes,
series A preferred stock or series B preferred stock.
In case of any reclassification of the common stock, any consolidation of
the company with, or merger of the company into, any other entity, any merger of
any entity into the company (other than a merger that does not result in
reclassification, conversion, exchange or cancellation of the outstanding shares
of common stock), any sale or transfer of all or substantially all of the assets
of the company or any compulsory share exchange whereby the common stock is
converted into other certain securities, cash or other property, then the holder
of each share of series B convertible preferred stock then outstanding shall
have the right thereafter, during the period that the series B convertible
preferred stock shall be convertible, to convert that share only into the kind
and amount of securities, cash and other property receivable upon the
reclassification, consolidation, merger, sale, transfer or share exchange by a
holder of the number of shares of common stock into which one share of series B
convertible preferred stock would have been convertible immediately prior to the
reclassification, consolidation, merger, sale, transfer or share exchange.
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LIQUIDATION RIGHTS
The series B convertible preferred stock will have an initial liquidation
preference at issuance of $480.00 per share, subject to accretion.
Upon any voluntary or involuntary liquidation, dissolution or winding up of
the company, holders of series B convertible preferred stock will be entitled to
receive out of the assets of the company available for distribution to
stockholders (after payment or provision for all of the company's debts and
other liabilities and preference payments to holders of equity securities
ranking senior to the series B convertible preferred stock but before any
payment or provision for any junior stock) an amount equal to the greater of:
(i) the amount per share of series B convertible preferred stock equal
to then-effective liquidation preference, plus any accrued and undeclared
dividends to the date of payment; and
(ii) the amount per share the holder would have received in connection
with such voluntary or involuntary liquidation, dissolution or winding up
of the company had such holder converted such share of series B convertible
preferred stock into shares of common stock immediately prior to such
event.
If, upon any voluntary or involuntary liquidation, dissolution or winding
up of the company its assets are insufficient to make full payment of the
liquidating distributions to holders of the series B convertible preferred stock
and any other shares the company's equity securities ranking on a parity with
the series B convertible preferred stock as to liquidation rights (including the
series A convertible preferred stock), then the holders of the series B
convertible preferred stock and parity shares will share ratably in any
distribution of assets in proportion to the full liquidating distributions to
which they would otherwise be respectively entitled.
OPTIONAL REDEMPTION
The company shall have the right to redeem the series B convertible
preferred stock at any time after the conversion rights date, in whole or in
part at any time concurrently with or after all outstanding senior notes and
senior convertible notes (to the extent any such notes remain outstanding and
have not been converted into series B convertible preferred stock) have been
repurchased, redeemed or otherwise repaid in full. Any such redemption shall be
for a cash amount per share equal to then-effective liquidation preference,
together with any accrued and undeclared dividends to the date of redemption.
The holders' option to convert shares of series B convertible preferred stock
into shares of common stock of the company will terminate at the close of
business on the business day preceding the optional redemption date, unless the
company defaults in making any redemption payment upon such optional redemption
date. Holders shall have the right to exercise conversion rights in lieu of the
receipt of the redemption payment up to and including such date. The company
will provide notice of the optional redemption date at least 30 days in advance
of such date to all holders of series B convertible preferred stock showing on
the stockholder records of the company as of such date and make such other
public announcement as it deems reasonable.
MANDATORY REDEMPTION
On the later of (1) March 15, 2011 and (2) 120 days following the
conversion rights date, the company must redeem all outstanding shares of series
B convertible preferred stock for a cash redemption price per share equal to
then-effective liquidation preference, together with any accrued and undeclared
dividends to the date of redemption. In the event that the conversion rights
date has not occurred on or before March 15, 2011, then on each semi-annual
dividend payment date on or after March 15, 2011, in the event that any holder
has given the company at least 60 days notice prior to such dividend payment
date, the company will redeem such holders' series B convertible preferred stock
at a price per share equal to then-effective liquidation preference, together
with any accrued and undeclared dividends to the date of redemption.
The certificate of designation of the series B convertible preferred stock
will provide that if at the mandatory redemption date, the company does not have
sufficient capital and surplus legally available to redeem all the outstanding
shares of series B convertible preferred stock, the company will take all
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reasonable measures permitted under the Georgia Business Corporation Code to
increase the amount of its capital and surplus legally available, and the
company will redeem as many shares of series B convertible preferred stock as it
may legally redeem, ratably (as nearly as may be practicable without creating
fractional shares) from the holders thereof in proportion to the number of
shares held by them, and shall thereafter from time to time, as soon as it shall
have funds available therefor, redeem as many shares of series B convertible
preferred stock as it legally may until it has redeemed all of the outstanding
shares of series B convertible preferred stock.
The holders' option to convert shares of series B convertible preferred
stock into shares of common stock the company will terminate at the close of
business on the business day preceding the mandatory redemption date (subject to
any extension necessary to permit the expiration of any applicable waiting
period under the HSR Act, if applicable), unless the company defaults in making
any redemption payment upon such mandatory redemption date. Holders will have
the right to exercise conversion rights in lieu of the receipt of the redemption
payment up to and including such date. The company will provide notice of the
mandatory redemption date at least 30 days in advance of such date to all
holders of series B convertible preferred stock showing on the stockholder
records of the company as of such date and make such other public announcement
as it deems reasonable.
PREFERRED SHARE PURCHASE RIGHTS PLAN
On July 31, 2000, our Board of Directors declared a dividend of one
preferred share purchase right for each outstanding share of common stock. Each
right entitles the registered holder to purchase from PRG, subject to the
occurrence of certain events, one one-hundredth of a share of participating
preferred stock at an initial price of $100, subject to adjustment for stock
splits, reverse stock splits, and other recapitalizations and similar corporate
events. Shares of our common stock subsequently issued are to include an
associated purchase right. The purchase rights, until exercisable, cannot be
transferred apart from their associated shares of common stock, except upon
redemption; transfer of shares of common stock also constitutes transfer of the
associated purchase rights.
The rights are not exercisable until the business day following the
earliest of:
o a public announcement that a person or group of affiliated or
associated persons has acquired beneficial ownership of 15% or more of
the outstanding shares of common stock; and
o either 10 business days following the commencement of, or announcement
of an intention to make, a tender offer or exchange offer the
consummation of which would result in the beneficial ownership by a
person or group of 15% or more of the outstanding shares of common
stock, or such later date as may be determined by the Board of
Directors prior to any person or group's acquiring 15% or more of the
outstanding shares of common stock.
The rights will have substantial anti-takeover effects, but do not prevent
a takeover. The rights may cause substantial dilution to a person or group that
acquires 15% or more of the outstanding shares of our common stock unless the
rights are first redeemed or the acquisition is approved by the Board of
Directors.
In the event that any person or group of affiliated or associated persons
acquires 15% or more of the outstanding shares in a transaction that is not
approved by our Board of Directors, we will take such action as shall be
necessary to ensure and provide that each right, other than rights beneficially
owned by the acquiring person, which rights shall become void, will constitute
the right to purchase, upon the exercise thereof in accordance with the terms of
the rights agreement, that number of shares of common stock or preferred shares
having an aggregate market price (as defined in the rights agreement) equal to
twice the exercise price for an amount in cash equal to then current exercise
price.
At any time after any person or group becomes an acquiring person and prior
to the acquisition by such person or group of 50% or more of our outstanding
common shares, our Board of Directors may exchange all, but not less than all,
of then outstanding rights, other than rights owned by such person or group
which will have become void, at an exchange ratio of one common share, or one
one-hundredth of a preferred share, per right, appropriately adjusted to reflect
any stock split, stock dividend or similar transaction occurring after the date
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the rights become exercisable. Immediately upon such action by the Board of
Directors, the right to exercise the rights will terminate and each right will
thereafter represent only the right to receive a number of shares of common
stock or one one-hundredths of a preferred share equal to the exchange ratio as
described above.
In the event that prior to the expiration of the rights we enter into a
transaction in which, directly or indirectly, we consolidate or merge or
participate in a share exchange with any other person or we shall sell or
otherwise transfer 50% of our assets or 50% of our operating income or cash
flow, and at the time of the entry by us into the agreement with respect to such
merger, sale or transfer of assets, such other person controls the Board of
Directors of PRG, we will take such action as shall be necessary to ensure that
each holder of a right, other than rights beneficially owned by such other
person, which will thereafter be void, will thereafter have the right to
receive, upon the exercise thereof at then current exercise price of the right,
that number of shares of common stock of the acquiring company which at the time
of such transaction will have an aggregate market price equal to twice the
exercise price of the right for an amount in cash equal to then current exercise
price.
Prior to an occurrence described above, we may at our option redeem all,
but not less than all, of then outstanding rights at a price of $.001 per right.
Immediately upon any redemption of the rights, the right to exercise the rights
will terminate and each right will thereafter represent only the right to
receive the redemption price in cash for each right so held. In addition, the
rights agreement provides that if the Board of Directors, at the time the
decision to redeem is made, includes any directors who were elected by the
shareholders, but not nominated by the Board of Directors in office immediately
prior to their election, then redemption requires the vote of the majority of
the remaining directors.
Until a right is exercised, the holder thereof, as such, will have no
rights as a shareholder, including the right to vote or to receive dividends.
Under the rights agreement, until the occurrence of either of the events
described above, the rights may be transferred only with the common stock. The
rights will expire on the earlier of action by the Board of Directors, the close
of business on August 14, 2010, the date on which the rights are redeemed as
described above, or the merger of PRG into another corporation pursuant to an
agreement entered into when there is no acquiring person unless such transaction
would entitle our shareholders to shares of common stock of the acquiring
company as described above.
CERTAIN ARTICLES AND BYLAW PROVISIONS
Shareholders' rights and related matters are governed by the Georgia
Business Corporation Code and our articles of incorporation and bylaws. Certain
provisions of our articles of incorporation and bylaws, which are summarized
below, could either alone or in combination with each other, have the effect of
preventing a change in control of PRG or making changes in management more
difficult.
CORPORATE TAKEOVER PROVISIONS
Our bylaws make applicable certain corporate takeover provisions authorized
by the Georgia Business Corporation Code relating to business combinations with
interested shareholders. The corporate takeover provisions are designed to
encourage any person, before acquiring 10% of our voting shares, to negotiate
with and seek approval of our Board of Directors for the terms of any
contemplated business combination. The corporate takeover provisions will
prevent for five years certain business combinations with an "interested
shareholder" (as defined in the corporate takeover provisions) unless:
o prior to the time such shareholder became an interested shareholder,
the Board of Directors approved either the business combination or the
transaction that resulted in the shareholder becoming an interested
shareholder,
o in the transaction that resulted in the shareholder becoming an
interested shareholder, the interested shareholder became the
beneficial owner of at least 90% of the outstanding voting shares of
PRG excluding, however, shares owned by our officers, directors,
affiliates, subsidiaries and certain employee stock plans, or
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o subsequent to becoming an interested shareholder, such shareholder
acquired additional shares resulting in the interested shareholder
becoming the owner of at least 90% of our outstanding voting shares
and the business combination being approved by the holders of a
majority of our voting shares, excluding from the vote the stock owned
by the interested shareholder or by our officers, directors,
affiliates, subsidiaries and certain employee stock plans.
The corporate takeover provisions may be repealed only by the affirmative
vote of:
o two-thirds of all directors who are unaffiliated with an interested
shareholder, and
o a majority of all outstanding shares, excluding those held by
affiliates of an interested shareholder. Shareholders who became
interested shareholders prior to the time of the adoption of the
corporate takeover provisions are not subject to such provisions.
The proposed restructuring transactions will be approved by our Board of
Directors such that the corporate takeover provisions will not apply to them.
CLASSIFIED BOARD OF DIRECTORS
Our Board of Directors is divided into three classes of directors serving
staggered terms of three years each. As a result, it will be more difficult to
change the composition of our Board of Directors, which may discourage or make
more difficult an attempt by a person or group of persons to obtain control.
TRANSACTIONS WITH INTERESTED SHAREHOLDERS
Our bylaws provide that we will be subject to the fair price provisions of
the Georgia Business Corporation Code (the "fair price provisions"). The fair
price provisions require that certain business combinations between PRG and
shareholders who beneficially own ten percent or more of our outstanding stock
must satisfy certain conditions unless the business combination is:
o unanimously approved by members of the Board of Directors who are not
affiliated with the interested shareholder, or
o recommended by two-thirds of such unaffiliated directors and approved
by a majority of outstanding shares, excluding those held by
affiliates of the interested shareholder.
The conditions to be satisfied require that:
o the aggregate of the cash and fair market value, as defined in the
Georgia Business Corporation Code, of property exchanged for shares is
equal to the highest of: the highest per share price paid by the
interested shareholder within certain periods, the fair market value
of the shares on the day the interested transaction is announced, or
the highest preferential amount to which holders of such shares would
be entitled upon liquidation or dissolution;
o the interested shareholder acquires the shares using the same form of
consideration as used in any prior acquisition of the shares; and
o there have not been certain changes in our dividend policy or practice
since the interested shareholder became an interested shareholder.
SPECIAL MEETING CALL RESTRICTIONS
Under our articles of incorporation, special meetings of the shareholders
may only be called by the Chairman of the Board of Directors, the President, a
majority of the Board of Directors or upon the written demand of the holders of
35% of the outstanding shares of common stock entitled to vote at any such
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meeting, provided that we have more than 100 shareholders. If we have 100 or
fewer shareholders, 25% of the holders of the outstanding shares of common stock
entitled to vote at a meeting may submit written demand for such meeting. This
provision may make it more difficult for shareholders to require us to call a
special meeting of shareholders to consider any proposed corporate action,
including any sale of PRG, which may be favored by the shareholders.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for our common stock, series A convertible
preferred stock and series B convertible preferred stock is US Bank Corporate
Trust Services.
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MATERIAL UNITED STATES FEDERAL INCOME TAX CONSEQUENCES
The following is a general discussion of certain U.S. federal income tax
considerations relevant to holders of the notes, preferred stock and common
stock into which the notes and preferred stock may be converted. This discussion
is based upon the Internal Revenue Code of 1986, as amended (the Code), Treasury
Regulations, Internal Revenue Service (IRS) rulings and judicial decisions now
in effect, all of which are subject to change (possibly, with retroactive
effect) or different interpretations. There can be no assurance that the IRS
will not challenge one or more of the tax consequences described herein, and we
have not obtained, nor do we intend to obtain, a ruling from the IRS with
respect to the U.S. federal income tax consequences of acquiring or holding the
notes, preferred stock or common stock.
This discussion does not purport to deal with all aspects of U.S. federal
income taxation that may be relevant to a particular holder in light of the
holder's circumstances (for example, persons subject to the alternative minimum
tax provisions of the Code or a holder whose "functional currency" is not the
U.S. dollar). Also, it is not intended to be wholly applicable to all categories
of investors, some of which (such as dealers in securities or currencies,
traders in securities that elect to use a mark-to-market method of accounting,
banks, thrifts, regulated investment companies, insurance companies, tax-exempt
organizations, and persons holding notes or shares as part of a hedging or
conversion transaction or straddle or persons deemed to sell notes or shares
under the constructive sale provisions of the Code) may be subject to special
rules. This discussion also does not consider any aspect of state, local or
foreign law, or U.S. federal estate and gift tax law as applicable to the
holders of the notes, preferred stock or common stock into which the notes and
preferred stock may be converted.
In addition, this discussion is limited to purchasers of the notes and
preferred stock who will hold the notes and stock as "capital assets" within the
meaning of Section 1221 of the Code (generally, for investment).
ALL PROSPECTIVE PURCHASERS OF THE NOTES AND PREFERRED STOCK ARE ADVISED TO
CONSULT THEIR OWN TAX ADVISORS REGARDING THE U.S. FEDERAL, STATE, LOCAL AND
FOREIGN TAX CONSEQUENCES OF THE PURCHASE, OWNERSHIP AND DISPOSITION OF THE
NOTES, PREFERRED STOCK AND COMMON STOCK IN THEIR PARTICULAR SITUATIONS.
U.S. HOLDERS
As used herein, the term "U.S. Holder" means a beneficial holder of a note
or stock that for U.S. federal income tax purposes is (i) a citizen or resident
(as defined in Section 7701(b) of the Code) of the United States, (ii) a
corporation, or an entity treated as a corporation, created or organized under
the laws of the United States or any political subdivision thereof, (iii) an
estate the income of which is subject to U.S. federal income taxation regardless
of its source and (iv) in general, a trust subject to the primary supervision of
a court within the United States and the control of a United States person as
described in Section 7701(a)(30) of the Code. A "Non-U.S. Holder" is any holder
of a note or stock other than a U.S. Holder or a foreign or domestic
partnership.
If a partnership (including for this purpose any entity, domestic or
foreign, treated as a partnership for U.S. federal income tax purposes) is a
beneficial owner of the notes, preferred stock or common stock into which the
notes and preferred stock may be converted, the U.S. federal income tax
treatment of a partner in the partnership generally will depend on the status of
the partner and the activities of the partnership. As a general matter, income
earned through a foreign or domestic partnership is attributed to its owners. A
holder of the notes, preferred stock or common stock into which the notes and
preferred stock may be converted that is a partnership, and partners in such
partnership, should consult their individual tax advisors about the U.S. federal
income tax consequences of holding and disposing of the notes, preferred stock
or common stock into which the notes and preferred stock may be converted.
CONSEQUENCES OF OWNERSHIP AND DISPOSITION OF NOTES
INTEREST, ORIGINAL ISSUE DISCOUNT AND LIQUIDATED DAMAGES ON THE SENIOR
NOTES
A U.S. Holder will be required to include stated interest on the senior
notes in income in accordance with the U.S. Holder's regular method of
accounting.
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In addition, the senior notes were issued with original issue discount
(OID). A debt instrument generally has OID if its stated redemption price at
maturity (in the case of the senior notes, the principal amount of such notes)
exceeds its "issue price" (discussed below) by more than a de minimis amount. A
U.S. Holder other than a U.S. Holder whose senior notes have acquisition premium
or amortizable bond premium (as described below under "--Acquisition Premium and
Amortizable Bond Premium") is required to include any OID in income over the
term of the notes (for so long as the notes continue to be owned by the holder)
in accordance with a constant yield-to-maturity method, regardless of whether
the U.S. Holder is a cash or accrual method taxpayer, and regardless of whether
and when the U.S. Holder receives payments of interest on the senior notes.
Accordingly, a U.S. Holder could be treated as receiving interest income without
a corresponding receipt of cash. Any OID that a U.S. holder includes in income
will increase the tax basis of the holder in its senior notes. In compliance
with applicable Treasury regulations, the company will furnish annually to the
IRS and holders of the senior notes information with respect to the amount of
any accrued OID.
ORIGINAL ISSUE DISCOUNT ON SENIOR CONVERTIBLE NOTES
The senior convertible notes were issued with OID. As indicated above, a
debt instrument generally has OID if its "stated redemption price at maturity"
exceeds its issue price by more than a de minimis amount. In this case, because
the company has the ability to pay all stated interest "in kind" in additional
notes, the stated redemption price at maturity includes all principal and
interest payable over the term of the notes. Accordingly, a U.S. Holder, other
than a U.S. Holder whose senior convertible notes have acquisition premium or
amortizable bond premium (as described below under "-Acquisition Premium and
Amortizable Bond Premium") will be required to include all OID (including all
stated interest) in income over the term of the notes (for so long as the notes
continue to be owned by the holder) in accordance with a constant
yield-to-maturity method, regardless of whether the holder is a cash or accrual
method taxpayer, and regardless of whether and when the holder receives cash
payments of interest on the senior convertible notes. Accordingly, a U.S. Holder
could be treated as receiving interest income without a corresponding receipt of
cash. A U.S. Holder's aggregate tax basis in its senior convertible notes will
be increased by any OID that the holder includes in income. Any payment of
stated interest will not be separately taxable to the holder, but will reduce
the holder's tax basis in the notes. In compliance with applicable Treasury
regulations, the company will furnish annually to the IRS and holders of the
senior convertible notes information with respect to the amount of accrued OID.
ISSUE PRICE OF THE NOTES
The issue price of the senior convertible notes will depend on whether such
class of notes is "publicly traded" for purposes of the OID provisions of the
Code. If publicly traded, the issue price of such notes will equal their fair
market value (i.e., their trading price) as of the date the exchange offer
occurred. If the notes are not publicly traded, the issue price of the
non-publicly traded notes will equal the portion of the fair market value of the
existing notes (which notes are publicly traded) properly allocable thereto in
accordance with applicable regulations, taking into account any other new
securities received (i.e., any stock or publicly traded notes received). In
general, the company's determination of the issue price of the notes is binding
on all holders, other than a holder that explicitly discloses that its
allocation is different from the company's allocation in a statement attached to
the holder's timely filed tax return for the taxable year in which the exchange
offer occurred.
The senior notes and the senior convertible notes, respectively, should be
considered publicly traded for these purposes if, at any time during the 60-day
period ending 30 days after the exchange date, such class of notes appears on an
"established market." Pursuant to Treasury regulations, an "established market"
need not be a formal market. It is sufficient that the claims appear on a system
of general circulation (including computer listings disseminated to subscribing
brokers, dealers or traders) that provides a reasonable basis to determine fair
market value by disseminating either recent price quotations or actual prices of
recent sales transactions, or that, under certain circumstances, price
quotations for such notes are readily available from dealers, brokers or
traders. It is not clear whether either class of notes would be treated as
"publicly traded" for this purpose, given that the notes will not be listed for
trading on any national securities exchange or authorized to be quoted in any
inter-dealer quotation system of any national securities association.
Nevertheless, a market for the notes could be established.
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CHANGE IN CONTROL PROVISION
In the event of a change in control of the company (see "Description of the
Notes -- "Senior Notes Repurchase at the Option of Holders Upon a Change in
Control" and "Senior Convertible Notes -- Repurchase at Option of Holders Upon a
Change in Control"), a U.S. Holder may require the company to repurchase its
notes. According to applicable Treasury regulations, the presence of a put right
will not affect the amount and timing of a U.S. Holder's OID inclusions and
interest income if, as of the date the notes were issued, there is only a remote
chance that the put right will be exercised. The company believes (and the
discussion herein assumes) that the likelihood that a change in control will
occur is remote. Accordingly, the company does not intend to treat the
possibility that the notes would have to be repurchased upon a change in control
as affecting the yield to maturity (and the resulting treatment) of the notes
under the OID provisions of the Tax Code. Our determination in this regard is
binding on all U.S. Holders, other than a U.S. Holder that explicitly discloses
that it is taking a position different than the Company in a statement attached
to the U.S. Holder's timely filed tax return for the taxable year in which the
exchange date occurs. However, there is no assurance that the IRS would not take
a contrary position.
LIQUIDATED DAMAGES
Because of the delay in complying with certain obligations under the
registration rights agreement (see "Description of Notes--Registration Rights"),
we will be required to make payments of liquidated damages. The payment of
liquidated damages on the notes generally should be taxable to a U.S. holder as
ordinary income at the time such payment is accrued or received in accordance
with the holder's regular method of accounting.
MARKET DISCOUNT
If a U.S. Holder acquires a note other than in connection with its original
issue at a price that is less than its revised issue price, the amount of such
difference is treated as "market discount" for U.S. federal income tax purposes,
unless such difference is less than 1/4 of one percent of the stated redemption
price at maturity multiplied by the number of complete years to maturity from
the date of acquisition. The revised issue price of a note is the sum of its
issue price and all OID includible in the income of holders prior to the U.S.
Holder's acquisition of the note. Market discount accrues in addition to OID.
However, in contrast to OID, a U.S. Holder is not required to include market
discount in income periodically over the term of the notes before receipt of the
cash or other payment attributable to such income. Instead, upon the sale,
exchange, retirement or other disposition of a note, any gain recognized is
required to be treated as ordinary income to the extent of the accrued market
discount that has not previously been included in income. If a U.S. Holder
disposes of a note that has accrued market discount in a non-recognition
transaction in which the U.S. Holder receives property the basis of which is
determined in whole or in part by reference to the basis of the note, the
accrued market discount generally is includible in income at the time of such
transaction only to the extent of the gain recognized. To the extent not
included in income at the time of the non-recognition transaction, the accrued
market discount attaches to the property received and is recognized as ordinary
income upon the disposition of such property. In general, the amount of market
discount that has accrued is determined on a ratable basis, by allocating an
equal amount of market discount to each day of every accrual period. A U.S.
Holder may, however, elect to determine the amount of accrued market discount
allocable to any accrual period under the constant yield method. Any such
election applies to all debt instruments with market discount acquired by the
U.S. Holder on or after the first day of the first taxable year to which the
election applies, and is irrevocable without the consent of the IRS. If such an
election is made, the U.S Holder's tax basis in the notes will be increased by
the amount of market discount included in income. Unless a U.S. Holder elects to
include market discount in income as it accrues, such U.S. Holder may not be
allowed to deduct on a current basis a portion of the interest expense on any
indebtedness incurred or continued to purchase or carry notes with market
discount.
ACQUISITION PREMIUM AND AMORTIZABLE BOND PREMIUM
If a U.S. Holder purchases a note at a price that exceeds its adjusted
issue price, the amount of such excess, referred to as "acquisition premium" for
U.S federal income tax purposes, would reduce the amount of OID that the U.S.
Holder is required to include in income. If a U.S Holder purchases a note at a
price that exceeds the principal amount of the note and, in the case of the
senior convertible notes the principal amount of the note plus all stated
interest, the amount of such excess (except in the case of the senior
convertible notes to the extent that the excess is attributable to the
conversion feature of such notes) is referred to as "bond premium" for U.S
federal income tax purposes. The U.S. Holder would not be required to include
any OID in income, and may elect to amortize the bond premium against interest
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payable on the note. Any amortizable bond premium in excess of interest payable
on the note may be deductible over the term of the note. If a U.S. Holder elects
to amortize bond premium, the amount of bond premium allocable to each accrual
period will be based on a constant yield to maturity over the period the note is
held. The amortized bond premium would reduce the U.S. Holder's tax basis in the
note. Any such election applies to all fully taxable bonds held by the U.S.
Holder at the beginning of the first taxable year to which the election applies,
and all fully taxable bonds acquired thereafter, and is irrevocable without the
consent of the IRS. If the election is not made, a U.S. Holder must include in
income the full amount of any interest as it accrues or is paid, and premium
will not be taken into account until principal payments are received on the note
or the note is sold or otherwise disposed of.
ADJUSTMENTS TO CONVERSION PRICE OF SENIOR CONVERTIBLE NOTES
The presence or absence of an adjustment to the conversion price at which
the senior convertible notes are convertible into common stock (such as under
the anti-dilution provisions) may result in constructive distributions to the
holders of the notes (or, in certain cases, to existing stockholders) taxable
similar to an ordinary distribution on stock.
SALE, EXCHANGE OR OTHER DISPOSITION OF NOTES
Except as discussed below with respect to market discount, and unless a
non-recognition provision applies, any gain or loss realized by a U.S. Holder on
a sale, exchange or other disposition of a note generally should be capital gain
or loss in an amount equal to the difference, if any, between the amount
realized and the U.S. Holder's adjusted tax basis in the note immediately before
the sale, exchange, redemption or other disposition (increased for any OID
accrued through the date of disposition, which OID would be includible as
ordinary income). Any such gain or loss generally should be long-term capital
gain or loss if the U.S. Holder's holding period in its note is more than one
year at that time.
As discussed above, under "-- Market Discount," if a note is acquired with
market discount any gain recognized by the U.S. Holder upon a subsequent
disposition of such note would be treated as ordinary income to the extent of
any accrued market discount not previously included in income. Different rules
may apply to the treatment of accrued market discount in the event of the
disposition qualifies for certain non-recognition treatment or, as discussed
below, upon a subsequent conversion of such notes into stock.
CONVERSION OF SENIOR CONVERTIBLE NOTES INTO STOCK
A U.S. holder's conversion of a senior convertible note into series B
convertible preferred stock or common stock will not be a taxable event, except
that any OID accrued to the date of conversion would be includible as ordinary
income and the receipt of cash in lieu of a fractional share will result in
capital gain or loss (except with respect to any accrued market discount carried
over to the fractional share). A U.S. holder will recognize gain or loss upon
the receipt of cash in lieu of a fractional share of series B convertible
preferred stock or common stock, measured by the difference between the cash
received and the U.S. holder's tax basis attributable to the fractional share.
A U.S. holder's aggregate tax basis in the series B convertible preferred
stock or common stock received upon a conversion of a senior convertible note
will be the same as the U.S. holder's adjusted tax basis in the senior
convertible note at the time of conversion (increased for any accrued OID
through the date of conversion), reduced by any basis allocated to a fractional
share. The U.S. holder's holding period for the series B convertible preferred
stock or common stock received will include the U.S. holder's holding period for
the converted note.
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CONSEQUENCES OF OWNERSHIP AND DISPOSITION OF PREFERRED STOCK OR COMMON STOCK
DISTRIBUTIONS
Distributions with respect to preferred stock generally will be treated as
a taxable dividend to the extent paid out of the company's current or
accumulated earnings and profits as determined under federal income tax
principles ("earnings and profits"), and will be includible as ordinary income
by the U.S. holder when received.
Distributions paid on common stock received upon the conversion of
preferred stock or senior convertible notes, other than certain pro rata
distributions of common shares, generally will be treated as a taxable dividend
to the extent paid out of earnings and profits after taking into account any
distributions on preferred stock, and to the extent so treated will be
includible as ordinary income by the U.S. holder when received.
To the extent the amount of any distributions exceeds the company's
available earnings and profits with respect to such distribution, the excess
will be applied against and will reduce the U.S. holder's adjusted tax basis (on
a dollar-for-dollar basis) in respect of the stock as to which the distribution
was made (but not below zero). Any remaining excess will be treated as gain or
loss from the sale or exchange of such stock, with the consequences discussed
below (see "-- Sale, Exchange or Other Disposition").
CONSTRUCTIVE DIVIDEND POTENTIAL
Under section 305 of the Code, a U.S. holder of series A convertible
preferred stock or series B convertible preferred stock may be treated as
receiving constructive distributions over the term of the preferred stock based
on the excess, if any, of the stock's redemption price over the stock's "issue
price" (subject to a de minimis exception) -- sometimes referred to as
"preferred OID" -- unless such stock participates in corporate growth to any
significant extent (disregarding conversion privileges). A right to participate
in corporate growth that lacks substance (i.e., as to which it is reasonable to
anticipate at the time of the distribution that there is little or no likelihood
of participating beyond a fixed preferential return) will not be respected.
Although both classes of preferred stock have the right to participate, over and
above their preference amounts, in any dividends or liquidation proceeds along
with the common stock on an as-if converted basis, the price at which the
preferred stock is mandatorily redeemable includes no corresponding
participation or growth feature. Accordingly, although not free from doubt, the
company currently intends to treat the preferred stock as subject to the
preferred OID rules of section 305. In general, each U.S. holder is bound by the
company's determination as to whether there is a constructive distribution,
unless the U.S. holder explicitly discloses that it is taking a contrary
position in a statement attached to its timely filed tax return for the taxable
year in which it acquires the stock.
Neither the statute nor applicable Treasury regulations defines the term
"issue price" for this purpose. Logically, however, the issue price of preferred
stock should be its fair market value at issuance. Accordingly, the issue price
of any shares of series A convertible preferred stock received upon consummation
of the exchange offer should be the fair market value of such stock on that
date. In contrast, each issuance of series B convertible preferred stock upon a
U.S. holder's conversion of all or part of its senior convertible notes into
such stock may have a different issue price than an issuance of such stock upon
conversion of other senior convertible notes. As a result, each such issuance
may have separate CUSIP numbers so as to distinguish such shares from any
previously issued shares having different tax characteristics.
There is also some uncertainty as to whether the presence of a cumulative
dividend feature that increases the redemption price of preferred stock in the
event a dividend is not declared should be taken into account in determining the
"redemption price" of preferred stock for purposes of determining the amount of
preferred OID at the time of issuance. Although the IRS has authority to issue
regulations taking a cumulative dividend feature into account, and continues to
study the issue, no such regulations have yet been issued. Accordingly, the
company does not currently intend to take the cumulative dividend feature into
account for this purpose. There is no assurance, however, that the IRS will not
take a contrary position, or otherwise issue regulations to the contrary.
In the event that any preferred stock is issued with preferred OID, such
amount would be amortized and treated as a constructive distribution with
respect to the preferred stock on a constant yield-to-maturity basis over term
of the preferred stock, regardless of whether the U.S. holder is a cash or
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accrual method taxpayer. Any constructive distributions would be treated in the
same manner as an ordinary distribution (discussed above). Accordingly, to the
extent the company has available earnings and profits, or such distribution
exceeds the U.S. holder's adjusted tax basis in its stock, the U.S. holder would
recognize taxable income prior to any corresponding cash payment.
Aside from the treatment of any preferred OID, the presence or absence of
an adjustment to the conversion price at which the preferred stock is
convertible into common stock (such as under the anti-dilution provisions) may
also result in constructive distributions to the U.S. holders of the preferred
stock (or, in certain cases, to existing common stockholders or existing U.S.
holders of senior convertible notes), which would be taxable similar to an
ordinary distribution on stock.
DIVIDENDS TO NON-CORPORATE SHAREHOLDERS
Dividends are generally taxed as ordinary income; however, dividends
received by non-corporate holders in taxable years beginning on or before
December 31, 2008, may qualify for taxation at lower rates applicable to
long-term capital gains, provided certain holding period and other requirements
are satisfied. Non-corporate holders should consult their own tax advisors
regarding the applicability of such lower rates under their particular factual
situation.
DIVIDENDS TO CORPORATE SHAREHOLDERS
In general, a distribution to a corporate shareholder which is treated as a
dividend for federal income tax purposes will qualify for the 70% dividends
received deduction that is available to corporate shareholders that own less
than 20% of the voting power or value of the outstanding stock of the
distributing corporation (other than certain preferred stock not applicable
here). A corporate shareholder holding 20% or more of the distributing
corporation may be eligible for an 80% dividends received deduction. No
assurance can be given that we will have sufficient earnings and profits (as
determined for federal income tax purposes) to cause distributions to be
eligible for a dividends received deduction. Dividend income that is not subject
to regular federal income tax as a consequence of the dividends received
deduction may be subject to the federal alternative minimum tax.
The dividends received deduction is only available if certain holding
periods and taxable income requirements are satisfied. The length of time that a
shareholder has held stock is reduced for any period during which the
shareholder's risk of loss with respect to the stock is diminished by reason of
the existence of certain options, contracts to sell, short sales or similar
transactions. In addition, to the extent that a corporation incurs indebtedness
that is directly attributable to an investment in the stock on which the
dividend is paid, all or a portion of the dividends received deduction may be
disallowed.
In general, for the first two years of a corporation's holding period, the
tax basis of its stock is reduced (but not below zero) by the non-taxed portion
of any "extraordinary dividend" received with respect to such stock (generally,
the portion of an extraordinary dividend for which a dividends received
deduction is allowed). In addition, certain dividend distribution may be treated
as extraordinary dividends without regard to the corporation's holding period
(such as in the case of preferred stock where the issue price of such stock
exceeded, at issuance, its liquidation or stated redemption price). In the event
that the non-taxed portion of an extraordinary dividend exceeds the corporate
holder's tax basis in its stock, such excess is treated as current gain from the
sale or exchange of the stock. Generally, an "extraordinary dividend" is a
dividend that (i) equals or exceeds 5% of the holder's adjusted basis in
preferred stock (treating all dividends having ex-dividend dates within an
85-day period as a single dividend) or (ii) exceeds 20% of the holder's adjusted
basis in the stock (treating all dividends having ex-dividend dates within a
365-day period as a single dividend). For these purposes, any deemed dividends
arising by reason of the application of section 305 of the tax code are taken
into account. Under certain circumstances, if the holder so elects, the fair
market value of the stock as of the day before the ex-dividend date may be
substituted for the holder's basis in applying these tests.
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SALE, EXCHANGE OR OTHER DISPOSITION
Except to the extent of any market discount that has carried over to the
stock (as discussed below), and unless a non-recognition provision applies, any
gain or loss realized by a holder on a sale, exchange, or other disposition of
preferred stock or common stock generally should be capital gain or loss in an
amount equal to the difference, if any, between the amount realized and the
holder's adjusted tax basis in the preferred stock immediately before the sale,
exchange, or other disposition. Any such gain or loss generally should be
long-term if the holder's holding period for its stock is more than one year at
that time.
In the case of a redemption of stock for cash or property, the federal
income tax treatment of the redemption to a shareholder depends on the
particular facts relating to such holder at the time of the redemption. If the
redemption of such stock (i) is "not essentially equivalent to a dividend" with
respect to the holder, (ii) is "substantially disproportionate" with respect to
the holder (as defined generally as a greater than 20% reduction in a
shareholder's relative voting stock of a corporation), or (iii) results in a
"complete termination" of all of such holder's equity interest in the
corporation, then the receipt of cash or property by such holder will be
respected as a sale or exchange of its stock and taxed accordingly. In applying
these tests, certain constructive ownership rules apply to determine stock
ownership. If the redemption does not qualify for sale or exchange treatment,
the holder will instead be treated as having received a distribution on such
stock (in an amount that generally will be equal to the amount of cash and the
fair market value of property received in the redemption) with the general
consequences described above under "-- Distributions." If the holder does not
retain any actual stock ownership in the company following such redemption, the
holder's may lose its tax basis completely (in that the tax basis would shift to
the stock that was treated as constructively owned by the holder). If such
distribution is taxable as a dividend to a corporate shareholder, it will be
subject to the "extraordinary dividend" provisions of the tax code (see "--
Distributions to Corporate Shareholders," above) and, if such a redemption is
not pro rata as to all shareholders or if the redemption is treated as a
dividend solely by reason of the constructive ownership rules for options, the
"extraordinary dividend" provisions will apply irrespective of whether the
corporate holder held the stock for two years or more.
CONVERSION OF PREFERRED STOCK INTO COMMON STOCK
For federal income tax purposes, a U.S. holder generally will not recognize
gain or loss upon the optional conversion of its preferred stock to common
stock, except in respect of (1) any cash paid to a U.S. holder in lieu of
fractional shares and (2) any common stock received attributable to any dividend
arrearages.
A U.S. holder that receives cash in lieu of a fractional share will
recognize capital gain or loss (except with respect to any accrued market
discount carried over to the fractional share), equal to the difference between
the amount of cash received and the U.S. holder's tax basis in the stock
exchanged allocable to the fractional share. Any common stock received
attributable to dividend arrearages generally should be treated as a
distribution on the preferred stock, with the consequences described above,
under "-- Distributions."
A U.S. holder's aggregate tax basis in the common stock received upon
conversion generally will be equal to the U.S. holder's aggregate tax basis in
the preferred stock converted (less the portion of the U.S. holder's basis
allocable to any fractional share, as to which the U.S. holder receives cash). A
U.S. holder's holding period in the common stock received, other than any such
stock received attributable to any dividend arrearages, will include the holding
period of the preferred stock exchanged. In addition, although not free from
doubt, any still unrecognized accrued market discount that previously carried
over to either the series A convertible preferred stock (from the existing
notes) or the series B convertible preferred stock (from the senior convertible
notes) should, in turn, carry over to the common stock received upon conversion
of such preferred stock. The tax basis of any common stock received that is
attributable to any dividend arrearages will be equal to its fair market value
on the date of the exchange, and the holding period of such stock will commence
on the day after the conversion.
INFORMATION REPORTING AND BACKUP WITHHOLDING
Payments of interest or dividends (including accruals of OID) and payments
of proceeds from the sale, retirement or other disposition of securities may be
subject to "backup withholding" tax if a recipient of those payments fails to
furnish to the payor certain identifying information. Any amounts deducted and
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withheld should generally be allowed as a credit against that recipient's United
States federal income tax, provided that appropriate proof is provided under
rules established by the IRS. Furthermore, certain penalties may be imposed by
the IRS on a recipient of payments that is required to supply information but
that does not do so in the proper manner. Backup withholding generally should
not apply with respect to payments made to certain exempt recipients, such as
corporations and financial institutions. Information may also be required to be
provided to the IRS concerning payments, unless an exemption applies. U.S.
Holders should consult their tax advisors regarding their qualification for
exemption from backup withholding and information reporting and the procedures
for obtaining such an exemption.
NON-U.S. HOLDERS
The following discussion is limited to the U.S. federal income tax
consequences relevant to a Non-U.S. Holder (as defined above).
For purposes of withholding tax on dividends discussed below, a Non-U.S.
Holder includes a nonresident fiduciary of an estate or trust. For purposes of
the following discussion, liquidated damages, dividends and gain on the sale,
exchange or other disposition of a note or shares will be considered to be "U.S.
trade or business income" if such income or gain is (i) effectively connected
with the conduct of a U.S. trade or business and (ii) in the case of a Non-U.S.
Holder eligible for the benefits of an applicable U.S. bilateral income tax
treaty, attributable to a permanent establishment (or, in the case of an
individual, a fixed base) in the United States.
INTEREST, ORIGINAL ISSUE DISCOUNT AND LIQUIDATED DAMAGES
In general and subject to the discussion below under "--Backup Withholding
and Information Reporting," payments of interest and payments attributable to
accrued OID on the notes made to a Non-U.S. Holder should qualify as "portfolio
interest," and should be exempt from withholding of U.S. federal income tax, if
the Non-U.S. Holder certifies its nonresident status as described below. The
portfolio interest exception will not apply to payments to a Non-U.S. Holder
that owns, actually or constructively, at least 10% of our voting stock, or is a
controlled foreign corporation that is related to us. In general, a foreign
corporation is a controlled foreign corporation if more than 50% of its stock is
owned, actually or constructively, by one or more U.S. persons that each owns,
actually or constructively, at least 10% of the corporation's voting stock. If
the portfolio interest exception does not apply, payments of interest and
payments attributable to accrued OID on the notes to a Non-U.S. Holder will be
subject to withholding tax at a rate of 30%, or such lesser rate as provided
under the terms of an applicable income tax treaty between the United States and
the Non-U.S. Holder's country of residence.
The portfolio interest exception, entitlement to treaty benefits and
several of the special rules for Non-U.S. Holders described below apply only if
the Non-U.S. Holder certifies its nonresident status. A Non-U.S. Holder can meet
this certification requirement by providing a Form W-8BEN or appropriate
substitute form to us or our paying agent. If the holder holds the note through
a financial institution or other agent acting on the holder's behalf, the holder
will be required to provide appropriate documentation to the agent. The holder's
agent will then be required to provide certification to us or our paying agent,
either directly or through other intermediaries. For payments made to a foreign
partnership or other flow-through entity, the certification requirements
generally apply to the partners or other owners, rather than to the partnership
or other entity, and the partnership or other entity must provide the partners'
or other owners' documentation to us or our paying agent.
Absent further guidance from the IRS as to whether payments of liquidated
damages qualify for an exemption from withholding as portfolio interest, we may
treat payments of liquidated damages as described above under "Description of
Notes--Registration Rights," made to a Non-U.S. Holder, if any, as subject to
U.S. federal withholding tax. Therefore, we may withhold on such payments at a
rate of 30% unless we receive an IRS Form W-8BEN or an IRS Form W-8ECI from a
Non-U.S. Holder claiming, respectively, that such payments are subject to
reduction or elimination of withholding under an applicable income tax treaty
that reduces or eliminates the withholding on "other income" or that such
payments are effectively connected with the conduct of a U.S. trade or business.
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A Non-U.S. Holder considering the purchase of notes should consult its tax
advisor regarding whether it can obtain a refund for the withholding tax imposed
on any payments of liquidated damages on the grounds that such payments
represent interest qualifying for an exemption or some other grounds.
DIVIDENDS
In general, dividends (including constructive dividends) paid to a Non-U.S.
Holder of shares will be subject to withholding of U.S. federal income tax at a
30% rate unless such rate is reduced by an applicable income tax treaty.
Dividends that are U.S. trade or business income generally are subject to U.S.
federal income tax in the same manner as if the Non-U.S. Holder were a U.S.
Holder, and are not generally subject to the 30% withholding tax or
treaty-reduced rate if the Non-U.S. Holder files a properly executed Form W-8ECI
(or appropriate substitute form), as applicable with the payor. Any U.S. trade
or business income received by a Non-U.S. Holder that is a corporation may also,
under certain circumstances, be subject to an additional "branch profits tax" at
a 30% rate or such lower rate as may be applicable under an income tax treaty. A
Non-U.S. Holder of shares who wishes to claim the benefit of an applicable
treaty rate for dividends must provide a properly executed IRS Form W-8BEN (or
appropriate substitute form), as applicable. In addition, a Non-U.S. Holder may
under certain circumstances be required to obtain a U.S. taxpayer identification
number and make certain certifications to us. Special procedures are provided
for payments through qualified intermediaries. A Non-U.S. Holder of shares that
is eligible for a reduced rate of U.S. withholding tax pursuant to an income tax
treaty may obtain a refund of amounts withheld at a higher rate by filing an
appropriate claim for a refund with the IRS.
CONVERSION OF THE NOTES INTO CASH OR CASH AND SHARES OR SALE, EXCHANGE,
REPURCHASE OR RETIREMENT OF THE NOTES OR SHARES
Except as described below and subject to the discussion concerning backup
withholding, any gain realized by a Non-U.S. Holder on the conversion of the
notes into cash or cash and shares or on the sale, exchange, redemption or
retirement of a note or shares generally will not be subject to U.S. federal
income tax, unless (i) such gain is U.S. trade or business income, (ii) subject
to certain exceptions, the Non-U.S. Holder is an individual who holds the note
or shares as capital assets and is present in the United States for 183 days or
more in the taxable year of the disposition, (iii) the Non-U.S. Holder is
subject to tax pursuant to the provisions of U.S. tax law applicable to certain
U.S. expatriates (including certain former citizens or residents of the United
States), or (iv) we are a United States real property holding corporation within
the meaning of Section 897 of the Code. We do not believe that we are currently
a United States real property holding corporation within the meaning of Section
897 of the Code, or that we will become one in the future. Even if we were a
United States real property holding corporation, gain arising from a disposition
of our shares still would not be subject to tax if our shares were considered
regularly traded under applicable Treasury Regulations on an established
securities market, such as the Nasdaq National Market, and a Non-U.S. Holder did
not own, actually or constructively, more than 5% of the total fair market value
of our common stock at any time during the five year period ending on the date
of disposition.
BACKUP WITHHOLDING AND INFORMATION REPORTING
The Code and the Treasury Regulations require those who make specified
payments to report the payments to the IRS. Among the specified payments are
interest (including payments attributable to accrued OID), dividends and
proceeds paid by brokers to their customers. The required information returns
enable the IRS to determine whether the recipient properly included the payments
in income. This reporting regime is reinforced by "backup withholding" rules.
These rules require the payors to withhold tax from payments subject to
information reporting if the recipient fails to cooperate with the reporting
regime by failing to provide his taxpayer identification number to the payor,
furnishing an incorrect identification number, or repeatedly failing to report
interest or dividends on his returns. The backup withholding tax rate is
currently 28%. The backup withholding rules do not apply to payments to
corporations, whether domestic or foreign. Payments of interest (including
payments attributable to accrued OID), dividends to individual U.S. Holders of
notes or common stock will generally be subject to information reporting, and
will be subject to backup withholding unless the holder provides us or our
paying agent with a correct taxpayer identification number and complies with
applicable certification requirements. Payments that are subject to withholding
(such as liquidated damages as described above) are not subject to backup
withholding.
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To avoid backup withholding on payments of interest (including payments
attributable to accrued OID), dividends on common stock, a Non-U.S. Holder will
have to certify its nonresident status. Some of the common means of doing so are
described under "--Non-U.S. Holders--Interest, Original Issue Discount and
Liquidated Damages." We must report annually to the IRS the payments of
interest, payments attributable to accrued OID and the dividends paid to each
Non-U.S. Holder and the tax withheld, if any, with respect to such payments,
including any tax withheld under the rules described above under "--Non-U.S.
Holders--Interest, Original Issue Discount and Liquidated Damages" and
"--Non-U.S. Holders--Dividends." Copies of these reports may be made available
to tax authorities in the country where the Non-U.S. Holder resides.
Payments made to U.S. Holders by a broker upon a sale of notes or common
stock will generally be subject to information reporting and backup withholding.
If the sale is made through a foreign office of a foreign broker, the sale will
generally not be subject to either information reporting or backup withholding.
This exception may not apply, however, if the foreign broker is owned or
controlled by U.S. persons, or is engaged in a U.S. trade or business.
Payments made to Non-U.S. Holders by a broker upon a sale of notes or
common stock will not be subject to information reporting or backup withholding
as long as the Non-U.S. Holder certifies its foreign status.
Any amounts withheld from a payment to a holder of notes or shares under
the backup withholding rules can be credited against the U.S. federal income tax
of the holder and may entitle the holder to a refund, provided that the required
information is furnished to the IRS in a timely manner.
CONSEQUENCES TO THE COMPANY
POTENTIAL LIMITATIONS ON LOSS CARRYFORWARDS AND OTHER TAX BENEFITS
Under section 382, if a corporation undergoes an "ownership change," the
amount of its pre-change losses that may be utilized to offset future taxable
income is, in general, subject to an annual limitation (the "section 382 annual
limitation"). Such limitation also may apply to certain losses or deductions
which are "built-in" (i.e., economically accrued but unrecognized) as of the
date of the ownership change and that are subsequently recognized. A loss
corporation generally undergoes an ownership change if the percentage of stock
of the corporation owned by one or more 5% shareholders has increased by more
than 50 percentage points over a three-year period (with certain groups of
less-than-5% shareholders treated as a single shareholder for this purpose). As
a result of the restructuring transactions that occurred in connection with the
exchange offer, there has been a substantial change in the stock ownership of
the company over the relevant three-year period which likely has triggered the
imposition of limitations under section 382.
In general, the section 382 annual limitation equals the product of (i) the
value of the stock of the corporation immediately before the ownership change
(with certain adjustments, including for capital infusions within the preceding
two years) and (ii) the applicable "long-term tax-exempt rate" in effect for the
month in which the ownership change occurs. In the case of a consolidated group,
the section 382 annual limitation generally is based upon the value of the
parent corporation. In certain cases, the section 382 annual limitation may be
increased by an amount of income or gain that is "built-in" as of the date of
the ownership change and subsequently recognized. The company does not expect to
be able to increase its limitation under these provisions. Any unused limitation
may be carried forward, thereby increasing the annual limitation in the
subsequent taxable year. However, if the corporation (or consolidated group)
does not continue its historic business or use a significant portion of its
assets in a new business for two years after the ownership change, the annual
limitation resulting from the ownership change is zero.
Based on the company's current projections, the resulting section 382
annual limitation would significantly increase the company's projected future
tax liability if combined with the elimination of interest deductions with
respect to the senior convertible notes (whether due to the conversion of such
notes into stock or, as discussed below, in the event of a determination that
such interest was not deductible). Moreover, the company's actual operating
results may differ from those projected, and there can be no assurance that the
IRS will not challenge the amount of any claimed NOLs or the company's
determination of any section 382 annual limitation.
86
POTENTIAL DISALLOWANCE OF INTEREST DEDUCTIONS ON SENIOR CONVERTIBLE NOTES
Under section 163(l) of the tax code, no deduction is allowed for interest
paid or accrued with respect to indebtedness if a substantial amount of the
principal of or interest on such indebtedness is required to be paid or
converted into equity of the issuer, or the indebtedness is part of an
arrangement which is reasonably expected to have such outcome. Where the
conversion into equity is at the option of the holder, such principal or
interest is treated as required to be paid or converted only if there is a
substantial certainty that the holder will exercise its option. No Treasury
regulations have yet been issued under this section.
The proper application of this section in the case of the senior
convertible notes is subject to varying interpretations. Pursuant to the terms
of the senior convertible notes, a holder of a senior convertible note may
convert the senior convertible notes into stock of the company (either new
series B convertible preferred stock or common stock, depending on certain
conditions) beginning on the earlier of August 15, 2006 and the conversion
rights date. The Company believes that as of the date of the exchange offer, it
was not substantially certain the holders of the senior convertible notes would
convert. Accordingly, the company currently intends to take the position that
the company is entitled to interest deductions in respect of such notes.
Nevertheless, there is no assurance that the IRS would not take a contrary
position. If the IRS were successful in challenging this position, the interest
paid or accrued with respect to the senior convertible notes would not be
deductible.
The preceding discussion of certain U.S. federal income tax consequences is
for general information only and is not tax advice. Accordingly, each investor
should consult its own tax advisor as to particular tax consequences to it of
purchasing, holding and disposing of the notes or shares, including the
applicability and effect of any state, local or foreign tax laws, and of any
proposed changes in applicable laws.
87
SELLING SECURITYHOLDERS
The notes, convertible notes and series A preferred stock were originally
issued by us in a transaction exempt from the registration requirements of the
Securities Act to holders of our convertible notes due November 2006. Selling
securityholders, including their transferees, pledgees or donees or their
successors, may from time to time offer and sell pursuant to this prospectus any
or all of the notes, convertible notes, series A preferred stock, shares of
common stock into which the convertible notes and the series A preferred stock
are convertible, together with any convertible notes that may be issued in
payment of interest on any of the convertible notes we are registering, and any
securities that may be deemed issued upon increases in the liquidation
preference of the Series A preferred stock made in payment of dividends thereon
(collectively, the "Registered Securities").
The following sets forth information with respect to the selling
securityholders, as of June 30, 2006, regarding the principal amounts of notes
and PRG-Schultz preferred stock (including securities that may be deemed issued
upon increases in the liquidation preference of the Series A preferred stock
made in payment of dividends thereon) and common stock owned by each selling
securityholder and that may be offered pursuant to this prospectus. The
information is based on information provided by or on behalf of the selling
securityholders. The selling securityholders may offer all, some or none of the
Registered Securities. Because the selling securityholders may offer all or some
portion of the Registered Securities, we cannot estimate the amount of the
Registered Securities that will be held by the selling securityholders upon
termination of any of these sales. The percentage of senior notes outstanding
beneficially owned by each selling securityholder is based on $51,635,846
million aggregate principal amount of notes outstanding. The percentage of
convertible senior notes outstanding beneficially owned by each selling
securityholder is based on $59,774,400 million aggregate principal amount of
notes outstanding. The percentage of Series A preferred stock outstanding
beneficially owned by each selling securityholder is based on 117,417 shares
outstanding. The number of shares of common stock beneficially owned prior to
the offering includes shares of common stock into which the Series A preferred
stock is convertible. The percentages of our common stock beneficially owned by
the selling securityholders named in the table below were computed based on
6,511,755 shares of common stock outstanding, plus, with respect to each selling
securityholder, that number of shares of common stock into which the Series A
preferred stock beneficially owned by it may be converted. Parkcentral Global
Hub Limited is offering all of the 3,561 shares of outstanding common stock
covered by this prospectus. All numbers of shares of common stock have been
adjusted to reflect the effect of the reverse stock split effective as of August
14, 2006.
PERCENTAGE PERCENTAGE
PRINCIPAL OF 11% OF SHARES OF PERCENTAGE
AMOUNT OF SENIOR PRINCIPAL 10% SENIOR SERIES A OF SERIES A
11% SENIOR NOTES AMOUNT OF CONVERTIBLE PREFERRED PREFERRED
NOTES OUT- 10% SENIOR PRINCIPAL NOTES STOCK SHARES
BENE- STANDING CONVERTIBLE AMOUNT OF OUTSTANDING BENE- OUTSTANDING
FICIALLY AFTER NOTES 10% SENIOR AFTER FICIALLY AFTER
OWNED AND COMPLETION BENE- CONVERTIBLE COMPLETION OWNED AND COMPLETION
OFFERED OF OFFERING FICIALLY NOTES OF OFFERING OFFERED OF OFFERING
NAME HEREBY (1) OWNED OFFERED HEREBY (1) HEREBY (1)
-------------------- ----------- ----------- ----------- -------------- ----------- ----------- -----------
Blum Strategic $14,929,734 0% $17,282,880 $28,151,990.37 0% 36,006 0%
Partners II,
L.P.(3)
Blum Strategic 14,929,734 0% 17,282,880 28,151,990.37 0% 36,006 0%
Partners II GmbH
& Co. KG(3)
Blum Capital 14,929,734 0% 17,282,880 28,151,990.37 0% 36,006 0%
Partners, L. P.
Stinson Capital 14,929,734 0% 17,282,880 28,151,990.37 0% 36,006 0%
Partners, L.P.(3)
Stinson Capital 14,929,734 0% 17,282,880 28,151,990.37 0% 36,006 0%
Partners (QP),
L.P.(3)
Stinson Capital 14,929,734 0% 17,282,880 28,151,990.37 0% 36,006 0%
Partners II,
L.P.(3)
Stinson Capital 14,929,734 0% 17,282,880 28,151,990.37 0% 36,006 0%
Partners S,
L.P.(3)
Parkcentral Global 8,311,576 0% 9,621,600 15,672,572.54 0% 17,500 0%
Hub Limited(4)
Petrus Securities, 1,617,119 0% 1,872,000 3,049,290.75 0% 3,900 0%
L.P.(4)
Total $24,858,433 0% $28,776,480 $46,873,853.66 0% 57,406 0%
88
PERCENTAGE OF COMMON STOCK
SHARES OF COMMON STOCK OUTSTANDING AFTER
BENEFICIALLY OWNED PRIOR SHARES OF COMMON STOCK COMPLETION OF THE OFFERING
NAME TO THE OFFERING (2) OFFERED HEREBY (2) (1)
------------------------------- ------------------------ ---------------------- ---------------------------
Blum Strategic Partners II, 2,449,961 6,693,459 30.8%
L.P.(3)
Blum Strategic Partners II 2,449,961 6,693,459 30.8%
GmbH & Co. KG(3)
Blum Capital Partners, L. P. 2,449,961 6,693,459 30.8%
Stinson Capital Partners, 2,449,961 6,693,459 30.8%
L.P.(3)
Stinson Capital Partners 2,449,961 6,693,459 30.8%
(QP), L.P.(3)
Stinson Capital Partners II, 2,449,961 6,693,459 30.8%
L.P.(3)
Stinson Capital Partners S, 2,449,961 6,693,459 30.8%
L.P.(3)
Parkcentral Global Hub 804,409 3,562,846 11.2%
Limited(4)
Petrus Securities, L.P.(4) 164,775 724,989 2.5%
Total 3,419,145 10,981,294 38.7%
(1) With respect to the calculation for each securityholder, assumes all
securities offered by that securityholder have been issued and sold and
that no securities issuable upon conversion that are offered by any other
securityholder have been issued.
(2) Shares of Common Stock Beneficially Owned Prior to the Offering does not
include, and Shares of Common Stock Offered Hereby does include, shares of
common stock the selling security holders will have the right to acquire,
upon conversion of convertible notes acquired on March 17, 2006 and that
may be issued in payment of interest thereon, as follows: Blum Strategic
Partners II, L.P., 1,767,868 shares, Blum Strategic Partners II GmbH & Co.
KG, 36,447 shares, Blum Capital Partners, L. P., 722 shares, Stinson
Capital Partners, L.P., 883,754 shares, Stinson Capital Partners (QP),
L.P., 786,321 shares, Stinson Capital Partners II, L.P., 721,726 shares,
Stinson Capital Partners S, L.P., 134,241 shares, Parkcentral Global Hub
Limited, 2,411,165 shares, and Petrus Securities, L.P., 469,122 shares.
Shares of Common Stock Beneficially Owned Prior to the Offering does not
include, and Shares of Common Stock Offered Hereby does include, shares of
common stock the selling security holders will have the right to acquire
upon conversion of Series A preferred stock acquired on March 17, 2006 in
connection with securities that may be deemed to be issued upon increase in
the liquidation preference of the Series A preferred stock in payment of
dividends thereon: Blum Strategic Partners II, L.P., 343,334 shares, Blum
Strategic Partners II GmbH & Co. KG, 7,079 shares, Blum Capital Partners,
L. P., 141 shares, Stinson Capital Partners, L.P., 171,632 shares, Stinson
Capital Partners (QP), L.P., 152,710 shares, Stinson Capital Partners II,
L.P., 140,165 shares, Stinson Capital Partners S, L.P., 26,071 shares,
Parkcentral Global Hub Limited, 408,814 shares, and Petrus Securities,
L.P., 91,108 shares. Common Stock beneficially owned prior to this offering
includes the following shares of outstanding Common Stock: Blum Strategic
Partners II, L.P., 827,640 shares, Blum Strategic Partners II GmbH & Co.
KG, 17,065 shares, Blum Capital Partners, L. P., 23 shares, Stinson Capital
Partners, L.P., 19,529 shares, Stinson Capital Partners (QP), L.P., 17,376
shares, Stinson Capital Partners II, L.P., 17,870 shares, Stinson Capital
Partners S, L.P., 2,966 shares, Blum Strategic Partners, L. P., 11,770
shares,
89
Stinson Capital Fund (Cayman), Ltd., 6,170 shares, BK Capital Partners IV,
L.P., 8,300 shares, and Parkcentral Global Hub Limited, 66,936 shares.
Common Stock beneficially owned prior to this offering includes shares of
common stock the selling security holders have the right to acquire upon
conversion of Series A convertible preferred stock acquired on March 17,
2006, as follows: Blum Strategic Partners II, L.P., 620,948, shares, Blum
Strategic Partners II GmbH & Co. KG, 12,802 shares, Blum Capital Partners,
L. P., 254 shares, Stinson Capital Partners, L.P., 310,411 shares, Stinson
Capital Partners (QP), L.P., 276,189 shares, Stinson Capital Partners II,
L.P., 253,500 shares, Stinson Capital Partners S, L.P., 47,151 shares,
Parkcentral Global Hub Limited, 739,375 shares, and Petrus Securities,
L.P., 164,775 shares. All of these shares of common stock are offered for
sale pursuant to this prospectus.
(3) Blum Capital Partners, L.P. ("BLUM L.P.") is a California limited
partnership whose principal business is acting as general partner for
investment partnerships and providing investment advisory services. BLUM
L.P. is an investment advisor registered with the Securities and Exchange
Commission. The general partner of Stinson Capital Partners, L.P., Stinson
Capital Partners II, L.P., Stinson Capital Partners (QP), L.P. and Stinson
Capital Partners S, L.P. is BLUM L. P. As general partner, BLUM L.P. has
voting and investment discretion with respect to the securities owned by
each of these entities. Therefore the securities may be deemed to be owned
indirectly by the following parties: (a) BLUM L.P., and (b) Richard C. Blum
& Associates, Inc., the sole general partner of BLUM L.P. Richard C. Blum &
Associates, Inc. and BLUM L.P. disclaim beneficial ownership of these
securities, except to the extent of any pecuniary interest therein. The
general partner of Blum Strategic Partners II, L.P. and the managing
limited partner of Blum Strategic Partners II GmbH & Co. KG is Blum
Strategic GP II, L.L.C. As general partner and managing limited partner,
Blum Strategic GP II, L.L.C. has voting and investment discretion with
respect to the securities owned by each of these entities. Therefore the
securities may be deemed to be owned indirectly by Blum Strategic GP II, L.
L.C. Blum Strategic GP II, L.L.C. disclaims beneficial ownership of these
securities, except to the extent of any pecuniary interest therein. BLUM
L.P., Richard C. Blum & Associates, Inc. and Blum Strategic GP II, L.L.C.
share voting and dispositive power over the securities reported. In
addition to the shares of common stock and series B preferred stock
reference in footnotes (1) and (2) above, the securities reported include
the following: Blum Strategic Partners II, L.P., $6,094,050 principal
amount of senior notes, $7,054,560 principal amount of senior convertible
notes, and 14,697 shares of series A preferred stock, Blum Strategic
Partners II GmbH & Co. KG, $125,638 principal amount of senior notes,
$145,440 principal amount of senior convertible notes, and 303 shares of
series A preferred stock, Blum Capital Partners, L. P., $2,487 principal
amount of senior notes, $2,880 principal amount of senior convertible
notes, and 6 shares of series A preferred stock, Stinson Capital Partners,
L.P., $3,046,402 principal amount of senior notes, $3,526,560 principal
amount of senior convertible notes, and 7,347 shares of series A preferred
stock, Stinson Capital Partners (QP), L.P., $2,710,539 principal amount of
senior notes, $3,137,760 principal amount of senior convertible notes, and
6,537 shares of series A preferred stock, Stinson Capital Partners II,
L.P., $2,487,874 principal amount of senior notes, $2,880,000 principal
amount of senior convertible notes, and 6,000 shares of series A preferred
stock, and Stinson Capital Partners S, L.P. $462,744 principal amount of
senior notes, $535,680 principal amount of senior convertible notes, and
1,116 shares of series A preferred stock. The principal office for each of
Blum Strategic Partners II, L.P., Blum Strategic Partners II GmbH & Co. KG,
Blum Capital Partners, L. P., Stinson Capital Partners, L.P., Stinson
Capital Partners (QP), L.P., Stinson Capital Partners II, L.P., and Stinson
Capital Partners S, L.P. (the "Blum Sellers") is 909 Montgomery Street,
Suite 400, San Francisco, California 94133. Blum Strategic Partners, L. P.,
Stinson Capital Fund (Cayman), Ltd., and BK Capital Partners IV, L.P., are
affiliates of the Blum Sellers.
(4) Parkcentral Capital Management, L.P. ("Parkcentral Capital"), a registered
investment adviser, acts as an investment adviser to various entities,
including Parkcentral Global. Pursuant to a investment advisory agreement
between Parkcentral Capital and Parkcentral Global, Parkcentral Capital has
voting and investment (including dispositive) power with respect to the
Registered Securities owned by Parkcentral Global. Steven Blasnik is the
President of Parkcentral Capital. Hill Air Company I, LLC ("Hill Air") is
denominated as a general partner of Petrus and has voting and investment
(including dispositive) power with respect to the Registered Securities
owned by Petrus pursuant to the partnership agreement of Petrus. Steven
Blasnik is the President of Hill Air.
To the best of our knowledge, the selling securityholders have no short
positions in our common stock. The selling securityholders have informed us that
they are not broker-dealers or affiliates of a broker-dealer (a broker-dealer
may be a record holder of their securities). None of the selling securityholders
nor any of their affiliates, officers, directors or principal equity holders has
held any position or office or has had any material relationship with
PRG-Schultz within the past three years, except as described below.
90
Blum Capital Partners, L.P. and its affiliates obtained all securities
offered by them hereby in connection with the company's exchange offer for its
convertible notes due 2006. Mr. N. Colin Lind is a managing partner of Blum
Capital Partners, L.P. (together with its affiliates, "Blum"). Mr. Lind was a
director of the company from May 2002 to October 2005, and was reelected to the
Board of Directors in March 2006 pursuant to an agreement with the Ad hoc
bondholders committee formed to negotiate the company's exchange offer and
financial restructuring. Mr. Lind represented Blum affiliates on the Ad hoc
Bondholders Committee. Blum affiliates are lenders under the company's current
senior secured credit facility. Their participation in the loan is approximately
$7 million. Blum affiliates were also lenders under the Company's prior $10
million bridge loan that was repaid on March 17, 2006. Their participation was
approximately $6 million. In connection with the foregoing, Blum received
interest and commitment and origination fees of approximately $236,000 in 2005
related to the bridge loan and approximately $152,000 in interest related to the
bridge loan in 2006. Blum is expected to receive interest under the senior
secured credit facility of approximately $748,125 in 2006. In addition, the Ad
hoc Bondholders Committee, of which Blum was a member, was reimbursed for legal
and financial advisory fees of approximately $498,354 in 2005 and $2,043,083 in
2006. The Ad hoc bondholders committee had the contractual right to designate
four of the company's seven directors to be elected immediately following the
closing of the exchange offer.
As of November 14, 2005, the Company amended and restated its Standstill
Agreement with Blum to provide among other things that purchases of the
Company's convertible notes due 2006 by Blum would not violate the Standstill
Agreement.
On March 17, 2006, Parkcentral Global Hub Limited and Petrus Securities,
L.P. exchanged $23,945,000 of the Company's convertible notes due November 2006
for $9,578,000 of 11% senior notes due March 2011, $11,493,600 of 10% senior
convertible notes due March 2011 and 23,945 shares of senior series A
convertible participating preferred stock (aggregate liquidation preference of
$2,873,400), in connection with the Company's exchange offer for its convertible
notes due 2006. Parkcentral Global Hub Limited and Petrus Securities, L.P. were
also represented on the Ad hoc Bondholders Committee, are lenders under the
Company's current senior credit facility and were lenders under the Company's
prior $10 million bridge loan. Their participation in the senior credit facility
is approximately $5 million and their participation in the bridge loan was
approximately $4 million. In connection with the foregoing, they received
interest and commitment and origination fees of approximately $174,000 in 2005
related to the bridge loan and approximately $101,000 in interest related to the
bridge loan in 2006. Parkcentral and Petrus are expected to receive interest
under the senior secured credit facility of approximately $534,000 in 2006.
Information concerning other selling securityholders, including donees and
pledgees of selling securityholders, will be set forth in prospectus
supplements, exchange act reports incorporated by reference into the
registration statement of which this prospectus forms a part or post effective
amendments from time to time, as necessary. Information concerning the
securityholders may change from time to time and any changed information will be
set forth in supplements to this prospectus, exchange act reports incorporated
by reference into the registration statement of which this prospectus forms a
part or amendments to the registration statement, if and when necessary. In
addition, the conversion price, and therefore, the number of shares of common
stock issuable upon conversion of the notes, is subject to adjustment under
certain circumstances. Accordingly, the aggregate principal amount of notes and
the number of shares of common stock into which the notes are convertible may
increase or decrease.
91
PLAN OF DISTRIBUTION
The selling securityholders and their successors, which term includes their
transferees, pledgees or donees or their successors may sell the notes,
preferred stock and the underlying common stock directly to purchasers or
through underwriters, broker-dealers or agents, who may receive compensation in
the form of discounts, concessions or commissions from the selling
securityholders or the purchasers. These discounts, concessions or commissions
as to any particular underwriter, broker-dealer or agent may be in excess of
those customary in the types of transactions involved.
The notes, the preferred stock and the common stock may be sold in one or
more transactions at:
o fixed prices,
o prevailing market prices at the time of sale,
o prices related to the prevailing market prices,
o varying prices determined at the time of sale, or
o negotiated prices.
In the case of the common stock, these sales may be effected in
transactions:
o on any national securities exchange or quotation service on which our
common stock may be listed or quoted at the time of sale, including
The Nasdaq National Market,
o in the over-the-counter market,
o otherwise than on such exchanges or services or in the
over-the-counter market,
o through the writing of options, whether the options are listed on an
options exchange or otherwise, or
o through the settlement of short sales.
These transactions may include block transactions or crosses. Crosses are
transactions in which the same broker acts as agent on both sides of the trade.
In connection with the sale of the notes, the preferred stock and the
underlying common stock or otherwise, the selling securityholders may enter into
hedging transactions with broker-dealers or other financial institutions. These
broker-dealers or financial institutions may in turn engage in short sales of
the securities in the course of hedging the positions they assume with selling
securityholders. The selling securityholders may also sell the notes, the
preferred stock and the underlying common stock short and deliver these
securities to close out such short positions, or loan or pledge the notes or the
underlying common stock to broker-dealers that in turn may sell these
securities.
The aggregate proceeds to the selling securityholders from the sale of the
notes, the preferred stock or the underlying common stock offered by them hereby
will be the purchase price of such securities less discounts and commissions, if
any. Each of the selling securityholders reserves the right to accept and,
together with their agents from time to time, to reject, in whole or in part,
any proposed purchase of notes, preferred stock or common stock to be made
directly or through agents. We will not receive any of the proceeds from this
offering.
Our outstanding common stock is listed for trading on The Nasdaq National
Market. We do not intend to list the notes or the preferred stock for trading on
any national securities exchange or on The Nasdaq National Market and can give
no assurance about the development of any trading market for the notes or
preferred stock.
92
In order to comply with the securities laws of some states, if applicable,
the notes, the preferred stock and the underlying common stock may be sold in
these jurisdictions only through registered or licensed brokers or dealers. In
addition, in some states the notes may not be sold unless they have been
registered or qualified for sale or an exemption from registration or
qualification requirements is available and is complied with.
The selling securityholders and any broker-dealers or agents that
participate in the sale of the notes, preferred stock and the underlying common
stock may be deemed to be "underwriters" within the meaning of Section 2(a)(11)
of the Securities Act. Profits on the sale of the notes, the preferred stock and
the underlying common stock by selling securityholders and any discounts,
commissions or concessions received by any broker-dealers or agents might be
deemed to be underwriting discounts and commissions under the Securities Act.
Selling securityholders who are deemed to be "underwriters" within the meaning
of Section 2(a)(11) of the Securities Act will be subject to the prospectus
delivery requirements of the Securities Act. To the extent the selling
securityholders are deemed to be "underwriters," they may be subject to
statutory liabilities, including, but not limited to, liabilities under Sections
11, 12 and 17 of the Securities Act.
The selling securityholders and any other person participating in a
distribution will be subject to applicable provisions of the Exchange Act and
the rules and regulations thereunder. Regulation M of the Exchange Act may limit
the timing of purchases and sales of the notes, preferred stock or common stock
by the selling securityholders and any other person. In addition, Regulation M
may restrict the ability of any person engaged in the distribution of these
securities to engage in market-making activities with respect to the particular
securities being distributed for a period of up to five business days before the
distribution. The selling securityholders have acknowledged that they understand
their obligations to comply with the provisions of the Exchange Act and the
rules thereunder relating to stock manipulation, particularly Regulation M, and
have agreed that they will not engage in any transaction in violation of such
provisions.
To our knowledge, there are currently no plans, arrangements or
understandings between any selling securityholder and any underwriter,
broker-dealer or agent regarding the sale of the securities offered hereby by
the selling securityholders.
A selling securityholder may decide not to sell any notes, preferred stock
or the underlying common stock described in this prospectus. We cannot assure
you that any selling securityholder will use this prospectus to sell any or all
of the notes, preferred stock or the underlying common stock. Any securities
covered by this prospectus which qualify for sale pursuant to Rule 144 or Rule
144A of the Securities Act may be sold under Rule 144 or Rule 144A rather than
pursuant to this prospectus. In addition, a selling securityholder may transfer,
devise or gift the notes, preferred stock and the underlying common stock by
other means not described in this prospectus.
With respect to a particular offering of the notes, preferred stock and the
underlying common stock, to the extent required, an accompanying prospectus
supplement or, if appropriate, a post-effective amendment to the registration
statement of which this prospectus is a part will be prepared and will set forth
the following information:
o the specific notes, preferred stock, or common stock to be offered and
sold,
o the names of the selling securityholders,
o the respective purchase prices and public offering prices and other
material terms of the offering,
o the names of any participating agents, broker-dealers or underwriters,
and
o any applicable commissions, discounts, concessions and other items
constituting compensation from the selling securityholders.
We entered into the registration rights agreement for the benefit of
holders of the Registered Securities to register their notes, preferred stock
and the underlying common stock under applicable federal securities laws under
certain circumstances and at certain times. The registration rights agreement
provides that we and the selling securityholders will indemnify each other and
93
our respective directors, officers and controlling persons against specific
liabilities in connection with the offer and sale of the notes, preferred stock
and the underlying common stock, including liabilities under the Securities Act,
or will be entitled to contribution in connection with those liabilities. We
will pay all of our expenses and specified expenses incurred by the selling
securityholders incidental to the registration, offering and sale of the notes,
preferred stock and the underlying common stock to the public, but each selling
securityholder will be responsible for payment of commissions, concessions, fees
and discounts of underwriters, broker-dealers and agents.
We are permitted to suspend the use of this prospectus in the event of
certain pending corporate developments, public filings with the SEC and similar
events for a period not to exceed 30 days in any three-month period, but not to
exceed an aggregate of 90 days in any 365 day period. However, if the duration
of such suspension exceeds any of the periods above-mentioned, we have agreed to
pay liquidated damages. Please refer to the section entitled "Description of the
Notes - Registration Rights."
If we have a stock split, stock dividend or similar transaction involving
our common stock or preferred stock and, as a result, the numbers of shares of
our common stock issuable upon conversion of the convertible notes or preferred
stock increases, or the number of shares of Series B preferred stock issuable
upon conversion of notes increases, the registration statement that includes
this prospectus will cover the additional shares from that increase. However, if
we complete certain other transactions that cause an increase in the shares
issuable upon conversion, those additional shares may not be covered by this
registration statement, and we may be required to file additional registration
statements to cover the additional shares.
CERTAIN TRANSACTIONS
The following members of the immediate family of John M. Cook, the
Company's previous Chairman of the Board of Directors, President and Chief
Executive Officer were employed by the Company during, and received cash
compensation for, 2003 and 2004 in the approximate amounts set forth beside
their names: For 2004, David H. Cook, brother -- $197,848, Harriette L. Cook,
sister-in-law -- $90,317, Patricia Sluiter, sister -- $61,457, and Allen R.
Sluiter, brother-in-law -- $90,706. In addition, for 2004 performance, on March
4, 2005, David H. Cook received a grant of 5,000 nonqualified stock options,
granted at $4.95 per share, the fair market value on the date of the grant. As
of December 2005, these options were forfeited. For 2003, David H. Cook, brother
-- $200,073, Harriette L. Cook, sister-in-law -- $90,000, Patricia Sluiter,
sister -- $86,348, and Allen R. Sluiter, brother-in-law -- $172,232. In
addition, for 2003 David H. Cook received a grant of 2,000 nonqualified stock
options, granted at an exercise price of $7.41 per share, the fair market value
on the date of grant. As of December 2005, these options were forfeited.
Maria A. Neff, the sister-in-law of John Toma, the Company's previous Vice
Chairman, was employed with the Company as Executive Vice President - Human
Resources during 2003 and 2004. Ms. Neff's cash compensation for 2004 was
$255,000 and for 2003 was $241,154. In addition, for 2004 she received a grant
of 25,000 nonqualified stock options, granted at an exercise price of $4.16 per
share, the fair market value on the date of the grant, and for 2003, she
received a grant of 25,000 nonqualified stock options, granted at an exercise
price of $7.41 per share, the fair market value on the date of grant. These
options were forfeited in November, 2005. In February 2005 Ms. Neff received
40,000 shares of restricted stock. These shares were forfeited in September,
2005.
The Company previously subleased approximately 3,300 square feet of office
space to CT Investments, LLC, at a "pass-through" rate equal to the cash cost
per square foot paid by the Company under the master lease. CT Investments is 90
percent owned by John M. Cook and 10 percent owned by John Toma. The Company
received payments of approximately $44,655 in 2004 and $39,000 in 2003 in
connection with such sublease.
In 2003, the Company used the services of FlightWorks, Inc., a company
specializing in aviation charter transportation. Through October 24, 2003, the
aircraft used by the Company was leased by FlightWorks from CT Aviation Leasing
LLC, a company 100 percent owned by John M. Cook. The Company paid FlightWorks
approximately $2,900 per hour plus landing fees and other incidentals for use of
such charter transportation services, of which 95 percent of such amount was
paid by FlightWorks to CT Aviation Leasing LLC. The Company had no minimum usage
94
requirement under its arrangement with FlightWorks. This arrangement was
terminated in October 2003 upon sale of the CT Aviation Leasing LLC aircraft.
During 2003, the Company recorded expenses of approximately $627,000 for the use
of the CT Aviation Leasing LLC aircraft.
Jonathan Golden, a former director of the Company, provided financial
advisory and management consulting services to the Company through his personal
corporation. During 2004 and 2003, the Company paid his personal corporation
aggregate consulting fees of approximately $72,000 in each year. Mr. Golden,
through his personal corporation, is also a senior partner in the law firm that
serves as the Company's principal outside legal counsel. Fees paid to this law
firm aggregated approximately $541,000 in 2003.
95
LEGAL MATTERS
The validity of the issuance of the notes, preferred stock and common
stock, the preferred stock issuable upon conversion of convertible notes and the
common stock issuable upon conversion of the preferred stock and notes was
passed upon for us by Arnall Golden Gregory LLP, 171 17th St., Suite 2100,
Atlanta, Georgia.
EXPERTS
The consolidated financial statements and schedule of PRG-Schultz
International, Inc. and subsidiaries (the Company) as of December 31, 2005 and
2004, and for each of the years in the three-year period ended December 31,
2005, and management's assessment of the effectiveness of internal control over
financial reporting as of December 31, 2005 have been incorporated by reference
in this prospectus and elsewhere in the registration statement in reliance upon
the reports of KPMG LLP, independent registered public accounting firm,
incorporated by reference herein, and upon the authority of said firm as experts
in accounting and auditing.
The audit report covering the December 31, 2005 consolidated financial
statements contains an explanatory paragraph that states that the Company has
incurred significant losses in each of the years in the three-year period ended
December 31, 2005, has a shareholders' deficit of $102.4 million at December 31,
2005, and that the realization of assets and the satisfaction of liabilities in
the normal course of business are dependent on, among other things, the
Company's ability to return to profitability, to complete planned restructuring
activities and to generate positive cash flows from operations, as well as
maintaining credit facilities adequate to conduct its business and that such
matters raise substantial doubt about the Company's ability to continue as a
going concern. The consolidated financial statements do not include any
adjustments that might result from the outcome of that uncertainty.
The audit report on management's assessment of the effectiveness of
internal control over financial reporting and the effectiveness of internal
control over financial reporting as of December 31, 2005, expresses KPMG's
opinion that PRG-Schultz International, Inc. and subsidiaries did not maintain
effective internal control over financial reporting as of December 31, 2005
because of the effect of material weaknesses on the achievement of the
objectives of the control criteria and contains an explanatory paragraph that
states that the Company identified material weaknesses relating to company level
controls and internal controls over revenue recognition.
WHERE YOU CAN FIND MORE INFORMATION
We file annual, quarterly and current reports, proxy and information
statements and other information with the Securities and Exchange Commission.
You may read and copy any materials we file at the SEC's public reference room
at 100 F Street, N.E., Washington, D.C. 20549. Please call the SEC at
1-800-SEC-0330 for further information regarding the public reference room. Our
SEC filings, as well as reports, proxy and information statements and other
information regarding other issuers that file electronically with the SEC, are
also available to the public at the SEC's web site at http://www.sec.gov. Our
SEC filings are also available on our web site, at http://www.prgx.com, or by
going directly to http://phx.corporate-ir.net/phoenix.zhtml?c=85608&p=irol-sec.
We have agreed that we will furnish to holders of the Registered Securities
the information required to be delivered pursuant to Rule 144A(d)(4) under the
Securities Act of 1933 to permit compliance with Rule 144A in connection with
resales of the Registered Securities.
INCORPORATION BY REFERENCE
The following documents, which we filed with the SEC (File No. 0-28000),
are incorporated by reference in and made a part of this prospectus:
o Annual Report on Form 10-K for the year ended December 31, 2005, as
amended by Form 10-K/A filed on April 28, 2006;
o Quarterly Report on Form 10-Q for the quarter ended June 30, 2006;
o Quarterly Report on Form 10-Q for the quarter ended March 31, 2006, as
amended by Form 10-Q/A filed on May 18, 2006;
96
o Current Report on Form 8-K filed on February 1, 2006;
o Current Report on Form 8-K filed on February 6, 2006;
o Current Report on Form 8-K filed on February 6, 2006;
o Current Report on Form 8-K filed on February 10, 2006;
o Current Report on Form 8-K filed on March 21, 2006;
o Current Report on Form 8-K filed on March 22, 2006;
o Current Report on Form 8-K filed on March 23, 2006;
o Current Report on Form 8-K filed on April 3, 2006;
o Current Report on Form 8-K filed on April 20, 2006;
o Current Report on Form 8-K filed on April 27, 2006;
o Current Report on Form 8-K filed on May 16, 2006, as amended by Form
8-K/A filed on May 23, 2006;
o Current Report on Form 8-K filed on May 23, 2006;
o Current Report on Form 8-K filed on May 24, 2006;
o Current Report on Form 8-K filed on June 6, 2006;
o Current Report on Form 8-K filed on June 20, 2006;
o Current Report on Form 8-K filed on June 29, 2006;
o Current Report on Form 8-K filed on July 5, 2006; and
o Current Report on Form 8-K filed on July 25, 2006.
We will provide copies of these documents to any person, including a
beneficial holder, to whom this prospectus is delivered, a copy of any or all of
the foregoing filings. You may obtain a copy of these filings, excluding all
exhibits unless we have specifically incorporated by reference an exhibit in
this prospectus or in a document incorporated by reference herein, at no cost,
by writing or telephoning:
PRG-Schultz International, Inc.
Victor A. Allums
600 Galleria Parkway
Suite 100
Atlanta, Georgia 30339
(770) 779-3900
email: Vic.Allums@prgx.com
97
PRG-SCHULTZ INTERNATIONAL, INC.
$24,858,433 IN PRINCIPAL AMOUNT OF 11.0% SENIOR NOTES DUE 2011
$28,776,480 IN PRINCIPAL AMOUNT OF 10.0% SENIOR CONVERTIBLE NOTES DUE 2011
57,406 SHARES ($6,888,720 LIQUIDATION PREFERENCE WHICH MAY
INCREASE TO UP TO $10,697,792 IN SATISFACTION OF
DIVIDENDS OTHERWISE PAYABLE IN CASH) OF 9.0% SENIOR SERIES A
CONVERTIBLE PARTICIPATING PREFERRED STOCK, AND
3,561 SHARES OF COMMON STOCK, NO PAR VALUE PER SHARE
THIS PROSPECTUS MAY ALSO BE USED TO OFFER UP TO $18,097,373.66 IN PRINCIPAL
AMOUNT OF ADDITIONAL 10.0% SENIOR CONVERTIBLE NOTES THAT MAY BE ISSUED IN
PAYMENT OF INTEREST ON OUTSTANDING 10.0% SENIOR NOTES, UP TO 10,977,733 SHARES
OF COMMON STOCK ISSUABLE UPON CONVERSION OF THE 10.0% NOTES AND 9.0% SENIOR
SERIES A PREFERRED STOCK.
PROSPECTUS
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED OR INCORPORATED BY REFERENCE
IN THIS PROSPECTUS. WE HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH DIFFERENT
INFORMATION. YOU SHOULD NOT ASSUME THAT THE INFORMATION CONTAINED OR
INCORPORATED BY REFERENCE IN THIS PROSPECTUS IS ACCURATE AS OF ANY DATE OTHER
THAN THE DATE OF THIS PROSPECTUS. WE ARE NOT MAKING AN OFFER OF THESE SECURITIES
IN ANY STATE WHERE THE OFFER IS NOT PERMITTED.
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the costs and expenses payable by the
registrant in connection with the resale of the senior notes, convertible notes,
series A preferred stock, and common stock being registered. All of the amounts
shown are estimates except the Securities and Exchange Commission (the
"Commission") registration fee.
AMOUNT
Commission Registration Fee ......................... $ 8,821.89
--------------
*Legal Fees and Expenses ........................... 120,000.00
--------------
*Accounting Fees and Expenses ....................... 10,000.00
--------------
*Miscellaneous Expenses ............................. 10,000.00
--------------
*Total ...................................... $ 148,821.89
==============
* Estimated
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Legally Authorized Indemnification. Under the Company's articles, bylaws,
and Georgia law, the Company may indemnify (or obligate itself to indemnify,
pursuant to an agreement or otherwise) a director or officer for any liability
or expenses incurred in any of several types of legal proceedings and lawsuits,
whether threatened, pending or completed; whether civil, criminal,
administrative, arbitrative, or investigative; and whether formal or informal.
However, the Company may not indemnify any director or officer who has been
adjudged liable or is subjected to injunctive relief for any of the following:
o misappropriation of a business opportunity;
o intentional misconduct or a knowing violation of law;
o receipt of an improper personal benefit; or
o an unlawful distribution to shareholders (meaning a dividend or other
distribution that violates the Company's articles and/or certain
capitalization requirements of Georgia law).
Advancement or reimbursement of expenses prior to a final disposition
requires a written affirmation that the foregoing criteria were met and an
undertaking to repay any advances if it is ultimately determined that the
criteria were not met.
Legally Required Indemnification. Georgia law requires the Company to
indemnify any director who was wholly successful in defense of the proceeding
for his or her reasonable expenses incurred. The Company's bylaws also require
indemnification of officers and directors under these circumstances.
Indemnification Provided by Bylaws. The Company's bylaws require
PRG-Schultz to indemnify its directors and officers against liability incurred
in the defense of any proceeding, to which he or she was made a party by reason
of the fact that he or she is or was a director or officer of PRG-Schultz, if he
or she acted in a manner he or she believed in good faith to be in, or not
opposed to, the best interest of PRG-Schultz, and with respect to any criminal
proceeding, had no reasonable cause to believe his or her conduct was unlawful.
PRG-Schultz is also required to provide advances of expenses incurred by a
director or officer in defending such proceeding upon receipt of a written
II-1
affirmation of such officer or director that he or she has met certain standards
of conduct and an undertaking by or on behalf of such officer or director to
repay such advances if it is ultimately determined that he or she is not
entitled to indemnification by PRG-Schultz.
Indemnification required under the bylaws does not cover:
o proceedings by (or in the right of) the Company for which he or she
was adjudged liable; or
o proceedings in which he or she was held liable for improper receipt of
a personal benefit.
However, because the indemnification required by the bylaws is
nonexclusive, the foregoing limitation does not prevent the Company from
indemnifying an officer or director for any liabilities other than those
specifically prohibited by Georgia law, as discussed above under "-Legally
Authorized Indemnification."
Indemnification Agreements. PRG-Schultz has entered into indemnification
agreements with each of its directors and certain executive officers
("Indemnitees"). Pursuant to such agreements, subject to the restrictions on
indemnification imposed by Georgia law discussed above, under "-Legally
Authorized Indemnification," PRG-Schultz is required to indemnify each
Indemnitee whenever he or she is or was a party or is threatened to be made a
party to any proceeding (including without limitation any such proceeding
brought by or in the right of PRG-Schultz), because he or she is or was a
director or officer of PRG-Schultz (or because he or she is or was serving at
the request of PRG-Schultz in any of specified capacities for some other
entity), or because of anything done or not done by the Indemnitee in such
capacity, against expenses and liabilities (including the costs of any
investigation, defense, settlement or appeal) actually and reasonably incurred
by the Indemnitee or on his or her behalf in connection with such proceeding, if
he or she acted in good faith and in a manner he or she reasonably believed to
be in or not opposed to the best interests of PRG-Schultz, and, with respect to
any criminal action or proceeding, had no reasonable cause to believe his or her
conduct was unlawful. The termination of any action suit or proceeding by
judgment, order, settlement, conviction, or upon a plea of nolo contendere or
its equivalent, shall not, of itself, create a presumption that an Indemnitee
did not act in good faith and in a manner which he or she reasonably believed to
be in or not opposed to the best interests of PRG-Schultz, and, with respect to
any criminal action or proceeding, had reasonable cause to believe that his or
her conduct was unlawful. The agreements also provide that under certain
circumstances all reasonable expenses incurred by or on behalf of such
Indemnitee shall be advanced from time to time by PRG-Schultz to the Indemnitee
within a specified period after PRG-Schultz's receipt of a written request for
an advance of expenses by such Indemnitee, whether prior to or after final
disposition of a proceeding.
Indemnification for Securities Law Liabilities. Insofar as indemnification
for liabilities arising under the Securities Act of 1933 (the "1933 Act") may be
permitted to directors, officers or persons controlling PRG-Schultz pursuant to
the foregoing provisions of the Georgia Business Corporation Code and
PRG-Schultz's articles of incorporation and bylaws, PRG-Schultz has been
informed that indemnification is considered by the Commission to be against
public policy and therefore unenforceable.
D&O Insurance. PRG-Schultz currently maintains an insurance policy which
insures the directors and officers of PRG-Schultz against certain liabilities,
including certain liabilities under the 1933 Act.
Indemnification under Stock Incentive Plan. Pursuant to PRG-Schultz's Stock
Incentive Plan (the "Plan"), in addition to such other rights of indemnification
that they may have as directors of PRG-Schultz or as members of the Compensation
Committee of the Board of Directors of PRG-Schultz (the "Committee"), and
subject to applicable restrictions under Georgia law as described above under
"-Legally Authorized Indemnification," the members of the Committee shall be
indemnified by PRG-Schultz against the reasonable expenses, including attorneys'
fees actually and necessarily incurred in connection with the defense of any
action, suit or proceeding, or in connection with any appeal thereof, to which
they or any of them may be a party by reason of any action taken or failure to
act under or in connection with the Plan or any option granted thereunder, and
against all amounts paid by them in settlement thereof (provided such settlement
is approved by independent legal counsel selected by PRG-Schultz) or paid by
them in satisfaction of a judgment in any such action, suit or proceeding,
except in relation to matters as to which it shall be adjudged in such action,
suit or proceeding that such Committee member is liable for negligence or
misconduct in the performance of his or her duties.
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Elimination of Monetary Liability of Directors. Under the Company's
articles of incorporation, directors cannot be held personally liable to the
Company or its shareholders for monetary damages, except liability for:
o misappropriation of a business opportunity;
o intentional misconduct or a knowing violation of law;
o receipt of an improper personal benefit; or
o an unlawful distribution to shareholders (meaning a dividend or other
distribution that violates the Company's articles and/or certain
capitalization requirements of Georgia law).
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
Holders of the Company's 9.0% Senior Series A Convertible Participating
Preferred Stock (the "Series A Preferred") have converted a total of 7,113
shares of the Series A Preferred into an aggregate of 300,524 shares of the
Company's common stock, as described in the table below (adjusted for the
1-for-10 reverse stock split):
NUMBER OF SHARES OF NUMBER OF SHARES OF
SERIES A PREFERRED STOCK COMMON STOCK ISSUED
DATE OF CONVERSION CONVERTED UPON CONVERSION
--------------------------------------------------------------------------------
March 28, 2006 45 1,902
--------------------------------------------------------------------------------
April 6, 2006 1,000 42,250
--------------------------------------------------------------------------------
April 21, 2006 1,750 73,938
--------------------------------------------------------------------------------
April 25, 2006 700 29,575
--------------------------------------------------------------------------------
May 8, 2006 1500 63,375
--------------------------------------------------------------------------------
May 17, 2006 10 423
--------------------------------------------------------------------------------
May 31, 2006 2,108 89,063
--------------------------------------------------------------------------------
TOTAL: 7,113 300,524
--------------------------------------------------------------------------------
The Series A Preferred Stock above was converted at the current conversion
ratio under the terms of the Series A Preferred Stock, which is approximately
42.25 shares of common stock per one share ($120 liquidation preference) of
Series A Preferred. No fractional shares were issued. The shares of common stock
above were issued solely to holders of the Series A Preferred Stock upon
conversion of the Series A Preferred Stock pursuant to the exemption from
registration provided under Section 3(a)(9) of the Securities Act of 1933, as
amended. Section 3(a)(9) is available because the shares of common stock were
exchanged by the Company with its existing security holders exclusively, and no
commission or other remuneration was paid or given directly or indirectly for
soliciting such an exchange.
As a result of an exchange offer made to the holders of the Company's
convertible notes due 2006 and which was completed on March 17, 2006,
substantially all of the outstanding convertible notes were exchanged for (a)
$51.6 million in principal amount of 11.0% Senior Notes Due 2011, (b) $59.8
million in principal amount of 10.0% Senior Convertible Notes Due 2011, and (c)
124,530 shares, or $14.9 million liquidation preference, of 9.0% Senior Series A
Convertible Participating Preferred Stock. The securities were issued in
reliance on the exemption contained in Section 3(a)(9) of the Securities Act of
1933, as amended (the "Securities Act"), were exchanged with existing security
holders exclusively, and no commission or other remuneration was paid or given
directly or indirectly for soliciting the exchange.
As reported in the Company's filing on Form 8-K made on November 17, 2005,
an inducement option grant relating to 50,000 shares of common stock was made
to Peter Limeri, the Company's Chief Financial Officer on November 11, 2005. The
options were issued pursuant to the exemption from registration contained in
Section 4(2) of the Securities Exchange Act of 1933, as amended.
As reported in the Company's filing on Form 8-K made on July 25, 2005, an
inducement option grant relating to 2 million shares of common stock was made to
James McCurry, the Company's Chairman of the Board of Directors, President and
II-3
Chief Executive Officer, effective as of July 29, 2005. The options were issued
pursuant to the exemption from registration contained in Section 4(2) of the
Securities Exchange Act of 1933, as amended.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(A) EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
------------ --------------------------------------------------------------
3.1 Restated Articles of Incorporation of the Registrant
(incorporated by reference to Exhibit 3.1 to the Registrant's
Form 8-K filed on July 25, 2006).
3.2 Restated Bylaws of the Registrant (incorporated by reference to
Exhibit 3.2 to the Registrant's Form 10-Q for the quarter ended
September 30, 2005).
4.1 Specimen Common Stock Certificate (incorporated by reference to
Exhibit 4.1 to the Registrant's Form 10-K for the year ended
December 31, 2001).
4.2 See Restated Articles of Incorporation and Bylaws of the
Registrant, filed as Exhibits 3.1 and 3.2, respectively.
4.3 Shareholder Protection Rights Agreement, dated as of August 9,
2000, between the Registrant and Rights Agent, effective May 1,
2002 (incorporated by reference to Exhibit 4.3 to the
Registrant's Form 10-Q for the quarterly period ended June 30,
2002.
4.4 Indenture dated November 26, 2001 by and between Registrant and
Sun Trust Bank (incorporated by reference to Exhibit 4.3 to
Registrant's Registration Statement No. 333-76018 on Form S-3
filed December 27, 2001).
4.5 First Amendment to Shareholder Protection Rights Agreement, dated
as of March 12, 2002, between the Registrant and Rights Agent
(incorporated by reference to Exhibit 4.3 to the Registrant's
Form 10-Q for the quarterly period ended September 30, 2002).
4.6 Second Amendment to Shareholder Protection Rights Agreement,
dated as of August 16, 2002, between the Registrant and Rights
Agent (incorporated by reference to Exhibit 4.3 to the
Registrant's Form 10-Q for the quarterly period ended September
30, 2002).
4.7 Third Amendment to Shareholder Protection Rights Agreement, dated
as of November 7, 2006, between the Registrant and Rights Agent
(incorporated by reference to Exhibit 4.1 to the Registrant's
Form 8-K filed on November 14, 2005).
4.8 Fourth Amendment to Shareholder Protection Rights Agreement,
dated as of November 14, 2006, between the Registrant and Rights
Agent (incorporated by reference to Exhibit 4.1 to the
Registrant's Form 8-K filed on November 30, 2005).
4.9 Fifth Amendment to Shareholder Protection Rights Agreement, dated
as of March 16, 2006, between the Registrant and Rights Agent
(incorporated by reference to Exhibit 4.9 to the Registrant's
Annual Report on Form 10-K for the year ended December 31, 2005).
4.10 Indenture dated as of March 17, 2006 governing the 10% Senior
Convertible Notes due 2011, with Form of Note appended
(Incorporated by reference to Exhibit 4.1 to the Registrant's
Current Report on Form 8-K filed on March 23, 2006).
4.11 Indenture dated as of March 17, 2006 governing the 11% Senior
Notes due 2011, with Form of Note appended (Incorporated by
II-4
reference to Exhibit 4.2 to the Registrant's Current Report on
Form 8-K filed on March 23, 2006).
5.1** Opinion of Arnall Golden Gregory LLP on legality of the
securities offered.
8.1** Opinion of Arnall Golden Gregory LLP on certain tax matters.
10.23 Third Amendment to Credit Agreement among PRG-Schultz USA, Inc.,
PRG-Schultz International, Inc., each of the domestic
subsidiaries of the Registrant, the several lenders and Bank of
America, N.A., dated as of September 12, 2002 (incorporated by
reference to Exhibit 10.11 to the Registrant's Form 10-Q for the
quarterly period ended September 30, 2002).
10.24 First Amendment to Office Lease Agreement between Galleria 600,
LLC and PRG-Schultz International, Inc. (incorporated by
reference to Exhibit 10.65 to the Registrant's Form 10-K for the
year ended December 31, 2002).
10.25 Amendment to Employment Agreement, as amended, between Mr. John
M. Cook and Registrant, dated March 7, 2003 (incorporated by
reference to Exhibit 10.1 to the Registrant's Form 10-Q for the
quarterly period ended March 31, 2003).
10.26 Fourth Amendment to Credit Agreement among PRG-Schultz USA, Inc.,
PRG-Schultz International, Inc., each of the domestic
subsidiaries of the Registrant, the several lenders and Bank of
America, N.A., dated as of November 12, 2003 (incorporated by
reference to Exhibit 10.63 to the Registrant's Form 10-K for the
year ended December 31, 2003).
10.27 Employment Agreement between Registrant and Mr. James L.
Benjamin, dated as of October 28, 2002 (incorporated by reference
to Exhibit 10.64 to the Registrant's Form 10-K for the year ended
December 31, 2003).
10.28 Form of Employment Agreement between Mr. James E. Moylan, Jr. and
Registrant, dated as of March 5, 2004 (incorporated by reference
to Exhibit 10.1 to the Registrant's Form 10-Q for the quarterly
period ended March 31, 2004).
10.29 Fifth Amendment to Credit Agreement among PRG-Schultz USA, Inc.,
PRG-Schultz International, Inc., each of the domestic
subsidiaries of the Registrant, the Lenders party thereto and
Bank of America, N.A., dated as of March 4, 2004 (incorporated by
reference to Exhibit 10.3 to the Registrant's Form 10-Q for the
quarterly period ended March 31, 2004).
10.30 Sixth Amendment to Credit Agreement among PRG-Schultz USA, Inc.,
PRG-Schultz International, Inc., each of the domestic
subsidiaries of the Registrant, the Lenders party thereto and
Bank of America, N.A., dated as of March 25, 2004 (incorporated
by reference to Exhibit 10.4 to the Registrant's Form 10-Q for
the quarterly period ended March 31, 2004).
10.31 PRG Schultz International, Inc. 2004 Executive Incentive Plan as
approved by shareholders on May 18, 2004 (incorporated by
reference to Exhibit 10.1 to the Registrant's Form 10-Q for the
quarterly period ended June 30, 2004).
10.32 Waiver to the covenant violations to the Credit Agreement, as
amended, dated October 25, 2004 (incorporated by reference to
Exhibit 10.1 to the Registrant's Form 10-Q for the quarterly
period ended September 30, 2004).
10.33 Amended and Restated Credit Agreement among PRG-Schultz USA,
Inc., PRG-Schultz International, Inc. ("PRGX"), Certain
Subsidiaries of PRGX from Time to Time Party Thereto, and Bank of
America, N.A., dated as of November 30, 2004 (incorporated by
reference to Exhibit 99.1 to the Registrant's Report on Form 8-K
filed on December 6, 2004).
10.34 Amended and Restated Credit Agreement among PRG-Schultz USA,
Inc., PRG-Schultz International, Inc. ("PRGX"), Certain
Subsidiaries of PRGX from Time to Time Party Thereto, and Bank of
II-5
America, N.A., dated as of November 30, 2004 (as modified on
December 7, 2004) (incorporated by reference to Exhibit 10(a) to
the Registrant's Report on Form 8-K filed on December 13, 2004).
10.35 Form of Non-employee Director Option Agreement (incorporated by
reference to Exhibit 99.1 to the Registrant's Report on Form 8-K
filed on February 11, 2005).
10.36 Amendment to Employment Agreement and Restrictive Covenant
Agreement between Mr. John M. Cook and Registrant dated March 7,
2005. (Incorporated by reference to Exhibit 10.43 to the
Registrant's Form 10-K for the quarterly period ended September
30, 2005).
10.37 Change of Control and Restrictive Covenant Agreement between Mr.
James E. Moylan, Jr. and Registrant dated February 14, 2005
(Incorporated by reference to Exhibit 10.37 to the Registrant's
Report on Form 10-K for the year ended December 31, 2005).
10.38 Change of Control and Restrictive Covenant Agreement between Mr.
John M. Toma and Registrant dated February 14, 2005 (Incorporated
by reference to Exhibit 10.38 to the Registrant's Report on Form
10-K for the year ended December 31, 2005).
10.39 Change of Control and Restrictive Covenant Agreement between Mr.
Richard J. Bacon and Registrant dated February 14, 2005.
(Incorporated by reference to Exhibit 10.39 to the Registrant's
Report on Form 10-K for the year ended December 31, 2005).
10.40 Change of Control and Restrictive Covenant Agreement between Mr.
James L. Benjamin and Registrant dated February 14, 2005.
(Incorporated by reference to Exhibit 10.40 to the Registrant's
Report on Form 10-K for the year ended December 31, 2005).
10.41 Summary of compensation arrangements with non-employee directors
of the Registrant. (Incorporated by reference to Exhibit 10.41 to
the Registrant's Report on Form 10-K for the year ended December
31, 2005).
10.42 Summary of compensation arrangements with named executive
officers of Registrant. (Incorporated by reference to Exhibit
10.42 to the Registrant's Report on Form 10-K for the year ended
December 31, 2005).
10.43 Employment Agreement between Registrant and Mr. Richard J. Bacon,
dated as of July 15, 2003 (Incorporated by reference to Exhibit
10.50 to the Registrant's Form 10-K for the year ended December
31, 2004).
10.44 September 11, 2003 Addendum to Employment Agreement with Mr.
Richard J. Bacon (Incorporated by reference to Exhibit 10.51 to
the Registrant's Form 10-K for the year ended December 31, 2004).
10.45 December 2, 2003 Addendum to Employment Agreement with Mr.
Richard J. Bacon (Incorporated by reference to Exhibit 10.52 to
the Registrant's Form 10-K for the year ended December 31, 2004).
10.46 May 1, 2004 Amendment to Employment Agreement with Mr. Richard J.
Bacon (Incorporated by reference to Exhibit 10.53 to the
Registrant's Form 10-K for the year ended December 31, 2004).
10.47 February 2005 Addendum to Employment Agreement with Mr. Richard
J. Bacon (Incorporated by reference to Exhibit 10.54 to the
Registrant's Form 10-K for the year ended December 31, 2004).
10.48* Medicare & Medicaid Services Contract dated March 7, 2005
(Incorporated by reference to Exhibit 10.8 to the Registrant's
Form 10-Q for the quarter ended March 31, 2005).
II-6
10.49* Stipulation of Settlement dated as of February 8, 2005
(Incorporated by reference to Exhibit 10.9 to the Registrant's
Form 10-Q for the quarter ended March 31, 2005).
10.50 Supplement to Settlement Agreement dated as of February 8, 2005
(Incorporated by reference to Exhibit 10.6 to the Registrant's
Form 10-Q for the quarter ended September 30, 2005).
10.51 Correction to Change of Control and Restrictive Covenant
Agreement between Mr. John M. Toma and Registrant dated February
14, 2005 (Incorporated by reference to the Registrant's Form 10-Q
for the quarter ended March, 31, 2005).
10.52 Employment Agreement between Registrant and Mr. James B. McCurry,
dated as of July 25, 2005 (Incorporated by reference to Exhibit
99.3 to the Registrant's Form 8-K filed on July 25, 2005).
10.53 Retainer Agreement between Registrant and Mr. David A. Cole,
dated as of July 20, 2005 (Incorporated by reference to Exhibit
99.2 to the Registrant's Form 8-K filed on July 25, 2005).
10.54 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 Registrant's Form 8-K filed on August 8, 2005).
10.55 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 Registrant's Form 8-K filed on August 8, 2005).
10.56 Separation and Release Agreement between Registrant and Mr.
Richard J. Bacon, dated as of October 25, 2005 (Incorporated by
reference to Exhibit 10.5 to the Registrant's Form 10-Q for the
quarter ended September 30, 2005).
10.57 Employment Agreement between the Registrant and Peter Limeri
entered into on November 11, 2005 (Incorporated by reference to
Exhibit 99.1 to the Registrant's Form 8-K filed on November 17,
2005).
10.58 Amended and Restated Standstill Agreement, dated as of November
14, 2005, between Registrant and Blum Capital Partners, L.P. and
certain of its affiliates, entered into on November 23, 2005
(Incorporated by reference to Exhibit 99.1 to the Registrant's
Form 8-K filed on November 30, 2005).
10.59 Amendment to Employment Agreement with James B. McCurry dated
December 8, 2005. (Incorporated by reference to Exhibit 10.59 to
the Registrant's Report on Form 10-K for the year ended December
31, 2005).
10.60 Vesting on December 15, 2005 of certain employee stock options
outstanding as of November 30, 2005. (Incorporated by reference
to Exhibit 10.60 to the Registrant's Report on Form 10-K for the
year ended December 31, 2005).
10.61 Credit Agreement dated December 23, 2005 among the Registrant,
certain of its U.S. subsidiaries, Petrus Securities L.P.,
ParkCentral Global Hub Limited, Blum Strategic Partners II GmbH &
Co. Kg. and Blum Strategic Partners II, L.P. (Incorporated by
reference to Exhibit 10.61 to the Registrant's Report on Form
10-K for the year ended December 31, 2005).
10.62 Security Agreement dated December 23, 2005 among the Registrant,
certain of its U.S. subsidiaries, Petrus Securities L.P.,
ParkCentral Global Hub Limited, Blum Strategic Partners II GmbH &
Co. Kg. and Blum Strategic Partners II, L.P. (Incorporated by
reference to Exhibit 10.62 to the Registrant's Report on Form
10-K for the year ended December 31, 2005).
10.63 Pledge Agreement dated December 23, 2005 among the Registrant,
certain of its U.S. subsidiaries, Petrus Securities L.P.,
ParkCentral Global Hub Limited, Blum Strategic Partners II GmbH &
Co. Kg. and Blum Strategic Partners II, L.P. (Incorporated by
reference to Exhibit 10.63 to the Registrant's Report on Form
10-K for the year ended December 31, 2005).
II-7
10.64 Forbearance Agreement dated December 23, 2005 between Registrant
and Bank of America, N.A (Incorporated by reference to Exhibit
10.64 to the Registrant's Report on Form 10-K for the year ended
December 31, 2005).
10.65 Amendment to Forbearance Agreement and Credit Agreement with Bank
of America, N.A. dated December 23, 2005 (Incorporated by
reference to Exhibit 10.65 to the Registrant's Report on Form
10-K for the year ended December 31, 2005).
10.66 Restructuring Support Agreement dated December 23, 2005
(Incorporated by reference to Exhibit 10.66 to the Registrant's
Report on Form 10-K for the year ended December 31, 2005).
10.67 Amendment to Retainer Agreement with David A. Cole dated October
19, 2005 (Incorporated by reference to Exhibit 10.67 to the
Registrant's Report on Form 10-K for the year ended December 31,
2005).
10.68 Form of Employment Agreement with Larry Robinson dated January 1,
2006 (Incorporated by reference to Exhibit 10.68 to the
Registrant's Report on Form 10-K for the year ended December 31,
2005).
10.69 Employment Agreement with Brad Roos dated June 1, 2001
(Incorporated by reference to Exhibit 10.69 to the Registrant's
Report on Form 10-K for the year ended December 31, 2005).
10.70 Form of Expatriate Assignment Agreement with Brad Roos
(Incorporated by reference to Exhibit 10.70 to the Registrant's
Report on Form 10-K for the year ended December 31, 2005).
10.71 Houlihan Lokey Agreement dated October 21, 2005 (Incorporated by
reference to Exhibit 10.71 to the Registrant's Report on Form
10-K for the year ended December 31, 2005).
10.72 Amendment Letter with Houlihan Lokey dated February 1, 2006
(Incorporated by reference to Exhibit 10.72 to the Registrant's
Report on Form 10-K for the year ended December 31, 2005).
10.73 Rothschild Inc. Agreement dated as of September 14, 2005
(Incorporated by reference to Exhibit 10.73 to the Registrant's
Report on Form 10-K for the year ended December 31, 2005).
10.74 Letter Agreement with Rothschild Inc. dated February 1, 2006
(Incorporated by reference to Exhibit 10.74 to the Registrant's
Report on Form 10-K for the year ended December 31, 2005).
10.75* 2006 Performance Bonus Plan (Incorporated by reference to Exhibit
10. 5 to the Registrant's Report on Form 10-Q for the quarter
ended March 31, 2006).
10.76 First Amendment to Separation and Release Agreement with John M.
Cook dated March 16, 2006 (Incorporated by reference to Exhibit
99.1 to the Registrant's Report on Form 8-K filed on March 22,
2006).
10.77 First Amendment to Separation and Release Agreement with John M.
Toma dated March 16, 2006 (Incorporated by reference to Exhibit
99.2 to the Registrant's Report on Form 8-K filed on March 22,
2006).
10.78 Amendment to Investor Rights Agreement dated March 28, 2006
(Incorporated by reference to Exhibit 10.8 to the Registrant's
Report on Form 10-Q for the quarter ended March 31, 2006).
10.79 Amended and Restated Restructuring Support Agreement
(Incorporated by reference to Exhibit 10.1 to the Registrant's
Report on Form 10-Q for the quarter ended March 31, 2006).
10.80 Registration Rights Agreement dated March 17, 2006 (Incorporated
by reference to Exhibit 10.2 to the Registrant's Report on Form
10-Q for the quarter ended March 31, 2006).
II-8
10.81 Financing Agreement dated March 17, 2006 (Incorporated by
reference to Exhibit 10.3 to the Registrant's Report on Form 10-Q
for the quarter ended March 31, 2006).
10.82 Security Agreement dated March 17, 2006 (Incorporated by
reference to Exhibit 10.4 to the Registrant's Report on Form 10-Q
for the quarter ended March 31, 2006).
10.83 Employment Agreement with N. Lee White dated June 14, 2006
(Incorporated by reference to Exhibit 10.1 to the Registrant's
Current Report on Form 8-K filed on June 20, 2006).
12.1+ Statement Re: Computation of Ratios.
21.1 Subsidiaries of the Registrant (Incorporated by reference to
Exhibit 21.1 to the Registrant's Report on Form 10-K for the year
ended December 31, 2005).
23.1** Consent of KPMG LLP.
23.2** Consent of Arnall Golden Gregory LLP (Included as part of Exhibit
5 hereto).
24.1+ Power of attorney (Included in signature page of Registration
Statement on Form S-1 filed on June 2, 2006).
* Confidential treatment, pursuant to 17 CFR Secs. ss.ss. 200.80 and
240.24b-2, has been granted regarding certain portions of the indicated
Exhibit, which portions have been filed separately with the Commission.
+ Previously filed.
** Filed herewith.
(B) FINANCIAL STATEMENT SCHEDULES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003
(IN THOUSANDS)
ADDITIONS DEDUCTIONS
-------------- ----------------
BALANCE AT CHARGE TO: CREDITED TO: BALANCE
BEGINNING COSTS AND ACCOUNTS AT END
DESCRIPTION OF YEAR EXPENSES RECEIVABLE (1) OF YEAR
---------------------------------------- ----------- -------------- ---------------- ----------
2005
Allowance for doubtful accounts
receivable........................... $ 2,254 1,207 (744) $ 2,717
Allowance for doubtful employee
advances and miscellaneous
receivables.......................... $ 3,333 540 (899) $ 2,974
Deferred tax valuation allowance........ $ 97,254 42,358 -- $ 139,612
2004
Allowance for doubtful accounts
receivable............................ $ 3,236 1,312 (2,294) $ 2,254
Allowance for doubtful employee
advances and miscellaneous receivables $ 4,760 2,590 (4,017) $ 3,333
Deferred tax valuation allowance........ $ 24,967 72,287 -- $ 97,254
2003
Allowance for doubtful accounts
receivable............................ $ 4,937 525 (2,226) $ 3,236
Allowance for doubtful employee
advances and miscellaneous receivables $ 4,188 4,174 (3,602) $ 4,760
Deferred tax valuation allowance........ $ 20,374 4,593 -- $ 24,967
------------------
(1) Write-offs, net of recoveries
II-9
ITEM 17. UNDERTAKINGS
(a) The undersigned Registrant hereby undertakes as follows:
1. To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act;
(ii) To reflect in the prospectus any facts or events arising after the
effective date of the registration statement (or the most recent post-effective
amendment thereof) which, individually or in the aggregate, represent a
fundamental change in the information set forth in the registration statement.
Notwithstanding the foregoing, any increase or decrease in volume of securities
offered (if the total dollar value of securities offered would not exceed that
which was registered) and any deviation from the low or high end of the
estimated maximum offering range may be reflected in the form of prospectus
filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than 20% change in the maximum
aggregate offering price set forth in the "Calculation of Registration Fee"
table in the effective registration statement.; and
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or any
material change to such information in the registration statement;
Provided, however, That paragraphs (a)1(i) and (a)(1)(ii) of this section do not
apply if the information required to be included in a post-effective amendment
by those paragraphs is contained in periodic reports filed with or furnished to
the Commission by the Registrant pursuant to Section 13 or Section 15(d) of the
Securities Exchange Act of 1934 that are incorporated by reference in the
registration statement.
Provided however, That:
Paragraphs (a)(1)(i), (a)(1)(ii) and (a)(1)(iii) of this section do not apply if
the information required to be included in a post-effective amendment by those
paragraphs is contained in reports filed with or furnished to the Commission by
the Registrant pursuant to Section 13 or Section 15(d) of the Securities
Exchange Act of 1934 that are incorporated by reference in the registration
statement, or is contained in a form of prospectus filed pursuant to Rule 424(b)
that is part of the registration statement.
2. That, for the purpose of determining any liability under the Securities
Act, each such post-effective amendment shall be deemed to be a new registration
statement relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide offering
thereof.
3. To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of the
offering.
4. That, for the purpose of determining liability under the Securities Act
of 1933 to any purchaser:
(i) If the Registrant is relying on Rule 430B:
A. Each prospectus filed by the Registrant pursuant to Rule 424(b)(3)shall
be deemed to be part of the registration statement as of the date the filed
prospectus was deemed part of and included in the registration statement; and
B. Each prospectus required to be filed pursuant to Rule 424(b)(2), (b)(5),
or (b)(7) as part of a registration statement in reliance on Rule 430B relating
to an offering made pursuant to Rule 415(a)(1)(i), (vii), or (x) for the purpose
of providing the information required by section 10(a) of the Securities Act of
II-10
1933 shall be deemed to be part of and included in the registration statement as
of the earlier of the date such form of prospectus is first used after
effectiveness or the date of the first contract of sale of securities in the
offering described in the prospectus. As provided in Rule 430B, for liability
purposes of the issuer and any person that is at that date an underwriter, such
date shall be deemed to be a new effective date of the registration statement
relating to the securities in the registration statement to which that
prospectus relates, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof. Provided, however, that no
statement made in a registration statement or prospectus that is part of the
registration statement or made in a document incorporated or deemed incorporated
by reference into the registration statement or prospectus that is part of the
registration statement will, as to a purchaser with a time of contract of sale
prior to such effective date, supersede or modify any statement that was made in
the registration statement or prospectus that was part of the registration
statement or made in any such document immediately prior to such effective date;
or
(ii) If the registrant is subject to Rule 430C, each prospectus filed
pursuant to Rule 424(b) as part of a registration statement relating to an
offering, other than registration statements relying on Rule 430B or other than
prospectuses filed in reliance on Rule 430A, shall be deemed to be part of and
included in the registration statement as of the date it is first used after
effectiveness. Provided, however, that no statement made in a registration
statement or prospectus that is part of the registration statement or made in a
document incorporated or deemed incorporated by reference into the registration
statement or prospectus that is part of the registration statement will, as to a
purchaser with a time of contract of sale prior to such first use, supersede or
modify any statement that was made in the registration statement or prospectus
that was part of the registration statement or made in any such document
immediately prior to such date of first use.
5. Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the SEC such indemnification is against
public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Registrant of expenses incurred or
paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
II-11
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized in the City of Atlanta, State of Georgia,
on August 15, 2006.
PRG-SCHULTZ INTERNATIONAL, INC.
By: /s/ JAMES B. MCCURRY
--------------------------------------
James B. McCurry
President, Chief Executive Officer and
Chairman of the Board
(Principal Executive Officer)
Pursuant to the requirements of the Securities Act of 1933, this Registration
Statement has been signed by the following persons in the capacities and on the
dates indicated.
SIGNATURE TITLE DATE
/s/ JAMES B. MCCURRY President, Chief Executive Officer
---------------------------------------- and Chairman of the Board August 15, 2006
James B. McCurry (Principal Executive Officer)
/s/ PETER LIMERI Chief Financial Officer and Treasurer August 15, 2006
---------------------------------------- (Principal Financial Officer)
Peter Limeri
/s/ ROBERT B. LEE Senior Vice President - Finance and Controller August 15, 2006
---------------------------------------- (Principal Accounting Officer)
Robert B. Lee
* Director August 15, 2006
----------------------------------------
David A. Cole
* Director August 15, 2006
----------------------------------------
Eugene I. Davis
* Director August 15, 2006
----------------------------------------
Patrick G. Dills
* Director August 15, 2006
----------------------------------------
N. Colin Lind
* Director August 15, 2006
----------------------------------------
Philip J. Mazzilli, Jr.
* Director August 15, 2006
----------------------------------------
Steven Rosenberg
*by: /s/ Victor A. Allums
----------------------------------------
Victor A. Allums
Attorney-in-Fact
II-12
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
------------ --------------------------------------------------------------
3.1 Restated Articles of Incorporation of the Registrant
(incorporated by reference to Exhibit 3.1 to the Registrant's
Form 8-K filed on July 25, 2006).
3.2 Restated Bylaws of the Registrant (incorporated by reference to
Exhibit 3.2 to the Registrant's Form 10-Q for the quarter ended
September 30, 2005).
4.1 Specimen Common Stock Certificate (incorporated by reference to
Exhibit 4.1 to the Registrant's Form 10-K for the year ended
December 31, 2001).
4.2 See Restated Articles of Incorporation and Bylaws of the
Registrant, filed as Exhibits 3.1 and 3.2, respectively.
4.3 Shareholder Protection Rights Agreement, dated as of August 9,
2000, between the Registrant and Rights Agent, effective May 1,
2002 (incorporated by reference to Exhibit 4.3 to the
Registrant's Form 10-Q for the quarterly period ended June 30,
2002.
4.4 Indenture dated November 26, 2001 by and between Registrant and
Sun Trust Bank (incorporated by reference to Exhibit 4.3 to
Registrant's Registration Statement No. 333-76018 on Form S-3
filed December 27, 2001).
4.5 First Amendment to Shareholder Protection Rights Agreement, dated
as of March 12, 2002, between the Registrant and Rights Agent
(incorporated by reference to Exhibit 4.3 to the Registrant's
Form 10-Q for the quarterly period ended September 30, 2002).
4.6 Second Amendment to Shareholder Protection Rights Agreement,
dated as of August 16, 2002, between the Registrant and Rights
Agent (incorporated by reference to Exhibit 4.3 to the
Registrant's Form 10-Q for the quarterly period ended September
30, 2002).
4.7 Third Amendment to Shareholder Protection Rights Agreement, dated
as of November 7, 2006, between the Registrant and Rights Agent
(incorporated by reference to Exhibit 4.1 to the Registrant's
Form 8-K filed on November 14, 2005).
4.8 Fourth Amendment to Shareholder Protection Rights Agreement,
dated as of November 14, 2006, between the Registrant and Rights
Agent (incorporated by reference to Exhibit 4.1 to the
Registrant's Form 8-K filed on November 30, 2005).
4.9 Fifth Amendment to Shareholder Protection Rights Agreement, dated
as of March 16, 2006, between the Registrant and Rights Agent
(incorporated by reference to Exhibit 4.9 to the Registrant's
Annual Report on Form 10-K for the year ended December 31, 2005).
4.10 Indenture dated as of March 17, 2006 governing the 10% Senior
Convertible Notes due 2011, with Form of Note appended
(Incorporated by reference to Exhibit 4.1 to the Registrant's
Current Report on Form 8-K filed on March 23, 2006).
4.11 Indenture dated as of March 17, 2006 governing the 11% Senior
Notes due 2011, with Form of Note appended (Incorporated by
reference to Exhibit 4.2 to the Registrant's Current Report on
Form 8-K filed on March 23, 2006).
5.1** Opinion of Arnall Golden Gregory LLP on legality of the
securities offered.
8.1** Opinion of Arnall Golden Gregory LLP on certain tax matters.
10.23 Third Amendment to Credit Agreement among PRG-Schultz USA, Inc.,
PRG-Schultz International, Inc., each of the domestic
subsidiaries of the Registrant, the several lenders and Bank of
America, N.A., dated as of September 12, 2002 (incorporated by
reference to Exhibit 10.11 to the Registrant's Form 10-Q for the
quarterly period ended September 30, 2002).
10.24 First Amendment to Office Lease Agreement between Galleria 600,
LLC and PRG-Schultz International, Inc. (incorporated by
reference to Exhibit 10.65 to the Registrant's Form 10-K for the
year ended December 31, 2002).
10.25 Amendment to Employment Agreement, as amended, between Mr. John
M. Cook and Registrant, dated March 7, 2003 (incorporated by
reference to Exhibit 10.1 to the Registrant's Form 10-Q for the
quarterly period ended March 31, 2003).
10.26 Fourth Amendment to Credit Agreement among PRG-Schultz USA, Inc.,
PRG-Schultz International, Inc., each of the domestic
subsidiaries of the Registrant, the several lenders and Bank of
America, N.A., dated as of November 12, 2003 (incorporated by
reference to Exhibit 10.63 to the Registrant's Form 10-K for the
year ended December 31, 2003).
10.27 Employment Agreement between Registrant and Mr. James L.
Benjamin, dated as of October 28, 2002 (incorporated by reference
to Exhibit 10.64 to the Registrant's Form 10-K for the year ended
December 31, 2003).
10.28 Form of Employment Agreement between Mr. James E. Moylan, Jr. and
Registrant, dated as of March 5, 2004 (incorporated by reference
to Exhibit 10.1 to the Registrant's Form 10-Q for the quarterly
period ended March 31, 2004).
10.29 Fifth Amendment to Credit Agreement among PRG-Schultz USA, Inc.,
PRG-Schultz International, Inc., each of the domestic
subsidiaries of the Registrant, the Lenders party thereto and
Bank of America, N.A., dated as of March 4, 2004 (incorporated by
reference to Exhibit 10.3 to the Registrant's Form 10-Q for the
quarterly period ended March 31, 2004).
10.30 Sixth Amendment to Credit Agreement among PRG-Schultz USA, Inc.,
PRG-Schultz International, Inc., each of the domestic
subsidiaries of the Registrant, the Lenders party thereto and
Bank of America, N.A., dated as of March 25, 2004 (incorporated
by reference to Exhibit 10.4 to the Registrant's Form 10-Q for
the quarterly period ended March 31, 2004).
10.31 PRG Schultz International, Inc. 2004 Executive Incentive Plan as
approved by shareholders on May 18, 2004 (incorporated by
reference to Exhibit 10.1 to the Registrant's Form 10-Q for the
quarterly period ended June 30, 2004).
10.32 Waiver to the covenant violations to the Credit Agreement, as
amended, dated October 25, 2004 (incorporated by reference to
Exhibit 10.1 to the Registrant's Form 10-Q for the quarterly
period ended September 30, 2004).
10.33 Amended and Restated Credit Agreement among PRG-Schultz USA,
Inc., PRG-Schultz International, Inc. ("PRGX"), Certain
Subsidiaries of PRGX from Time to Time Party Thereto, and Bank of
America, N.A., dated as of November 30, 2004 (incorporated by
reference to Exhibit 99.1 to the Registrant's Report on Form 8-K
filed on December 6, 2004).
10.34 Amended and Restated Credit Agreement among PRG-Schultz USA,
Inc., PRG-Schultz International, Inc. ("PRGX"), Certain
Subsidiaries of PRGX from Time to Time Party Thereto, and Bank of
America, N.A., dated as of November 30, 2004 (as modified on
December 7, 2004) (incorporated by reference to Exhibit 10(a) to
the Registrant's Report on Form 8-K filed on December 13, 2004).
10.35 Form of Non-employee Director Option Agreement (incorporated by
reference to Exhibit 99.1 to the Registrant's Report on Form 8-K
filed on February 11, 2005).
10.36 Amendment to Employment Agreement and Restrictive Covenant
Agreement between Mr. John M. Cook and Registrant dated March 7,
2005. (Incorporated by reference to Exhibit 10.43 to the
Registrant's Form 10-K for the quarterly period ended September
30, 2005).
10.37 Change of Control and Restrictive Covenant Agreement between Mr.
James E. Moylan, Jr. and Registrant dated February 14, 2005
(Incorporated by reference to Exhibit 10.37 to the Registrant's
Report on Form 10-K for the year ended December 31, 2005).
10.38 Change of Control and Restrictive Covenant Agreement between Mr.
John M. Toma and Registrant dated February 14, 2005 (Incorporated
by reference to Exhibit 10.38 to the Registrant's Report on Form
10-K for the year ended December 31, 2005).
10.39 Change of Control and Restrictive Covenant Agreement between Mr.
Richard J. Bacon and Registrant dated February 14, 2005.
(Incorporated by reference to Exhibit 10.39 to the Registrant's
Report on Form 10-K for the year ended December 31, 2005).
10.40 Change of Control and Restrictive Covenant Agreement between Mr.
James L. Benjamin and Registrant dated February 14, 2005.
(Incorporated by reference to Exhibit 10.40 to the Registrant's
Report on Form 10-K for the year ended December 31, 2005).
10.41 Summary of compensation arrangements with non-employee directors
of the Registrant. (Incorporated by reference to Exhibit 10.41 to
the Registrant's Report on Form 10-K for the year ended December
31, 2005).
10.42 Summary of compensation arrangements with named executive
officers of Registrant. (Incorporated by reference to Exhibit
10.42 to the Registrant's Report on Form 10-K for the year ended
December 31, 2005).
10.43 Employment Agreement between Registrant and Mr. Richard J. Bacon,
dated as of July 15, 2003 (Incorporated by reference to Exhibit
10.50 to the Registrant's Form 10-K for the year ended December
31, 2004).
10.44 September 11, 2003 Addendum to Employment Agreement with Mr.
Richard J. Bacon (Incorporated by reference to Exhibit 10.51 to
the Registrant's Form 10-K for the year ended December 31, 2004).
10.45 December 2, 2003 Addendum to Employment Agreement with Mr.
Richard J. Bacon (Incorporated by reference to Exhibit 10.52 to
the Registrant's Form 10-K for the year ended December 31, 2004).
10.46 May 1, 2004 Amendment to Employment Agreement with Mr. Richard J.
Bacon (Incorporated by reference to Exhibit 10.53 to the
Registrant's Form 10-K for the year ended December 31, 2004).
10.47 February 2005 Addendum to Employment Agreement with Mr. Richard
J. Bacon (Incorporated by reference to Exhibit 10.54 to the
Registrant's Form 10-K for the year ended December 31, 2004).
10.48* Medicare & Medicaid Services Contract dated March 7, 2005
(Incorporated by reference to Exhibit 10.8 to the Registrant's
Form 10-Q for the quarter ended March 31, 2005).
10.49* Stipulation of Settlement dated as of February 8, 2005
(Incorporated by reference to Exhibit 10.9 to the Registrant's
Form 10-Q for the quarter ended March 31, 2005).
10.50 Supplement to Settlement Agreement dated as of February 8, 2005
(Incorporated by reference to Exhibit 10.6 to the Registrant's
Form 10-Q for the quarter ended September 30, 2005).
10.51 Correction to Change of Control and Restrictive Covenant
Agreement between Mr. John M. Toma and Registrant dated February
14, 2005 (Incorporated by reference to the Registrant's Form 10-Q
for the quarter ended March, 31, 2005).
10.52 Employment Agreement between Registrant and Mr. James B. McCurry,
dated as of July 25, 2005 (Incorporated by reference to Exhibit
99.3 to the Registrant's Form 8-K filed on July 25, 2005).
10.53 Retainer Agreement between Registrant and Mr. David A. Cole,
dated as of July 20, 2005 (Incorporated by reference to Exhibit
99.2 to the Registrant's Form 8-K filed on July 25, 2005).
10.54 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 Registrant's Form 8-K filed on August 8, 2005).
10.55 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 Registrant's Form 8-K filed on August 8, 2005).
10.56 Separation and Release Agreement between Registrant and Mr.
Richard J. Bacon, dated as of October 25, 2005 (Incorporated by
reference to Exhibit 10.5 to the Registrant's Form 10-Q for the
quarter ended September 30, 2005).
10.57 Employment Agreement between the Registrant and Peter Limeri
entered into on November 11, 2005 (Incorporated by reference to
Exhibit 99.1 to the Registrant's Form 8-K filed on November 17,
2005).
10.58 Amended and Restated Standstill Agreement, dated as of November
14, 2005, between Registrant and Blum Capital Partners, L.P. and
certain of its affiliates, entered into on November 23, 2005
(Incorporated by reference to Exhibit 99.1 to the Registrant's
Form 8-K filed on November 30, 2005).
10.59 Amendment to Employment Agreement with James B. McCurry dated
December 8, 2005. (Incorporated by reference to Exhibit 10.59 to
the Registrant's Report on Form 10-K for the year ended December
31, 2005).
10.60 Vesting on December 15, 2005 of certain employee stock options
outstanding as of November 30, 2005. (Incorporated by reference
to Exhibit 10.60 to the Registrant's Report on Form 10-K for the
year ended December 31, 2005).
10.61 Credit Agreement dated December 23, 2005 among the Registrant,
certain of its U.S. subsidiaries, Petrus Securities L.P.,
ParkCentral Global Hub Limited, Blum Strategic Partners II GmbH &
Co. Kg. and Blum Strategic Partners II, L.P. (Incorporated by
reference to Exhibit 10.61 to the Registrant's Report on Form
10-K for the year ended December 31, 2005).
10.62 Security Agreement dated December 23, 2005 among the Registrant,
certain of its U.S. subsidiaries, Petrus Securities L.P.,
ParkCentral Global Hub Limited, Blum Strategic Partners II GmbH &
Co. Kg. and Blum Strategic Partners II, L.P. (Incorporated by
reference to Exhibit 10.62 to the Registrant's Report on Form
10-K for the year ended December 31, 2005).
10.63 Pledge Agreement dated December 23, 2005 among the Registrant,
certain of its U.S. subsidiaries, Petrus Securities L.P.,
ParkCentral Global Hub Limited, Blum Strategic Partners II GmbH &
Co. Kg. and Blum Strategic Partners II, L.P. (Incorporated by
reference to Exhibit 10.63 to the Registrant's Report on Form
10-K for the year ended December 31, 2005).
10.64 Forbearance Agreement dated December 23, 2005 between Registrant
and Bank of America, N.A (Incorporated by reference to Exhibit
10.64 to the Registrant's Report on Form 10-K for the year ended
December 31, 2005).
10.65 Amendment to Forbearance Agreement and Credit Agreement with Bank
of America, N.A. dated December 23, 2005 (Incorporated by
reference to Exhibit 10.65 to the Registrant's Report on Form
10-K for the year ended December 31, 2005).
10.66 Restructuring Support Agreement dated December 23, 2005
(Incorporated by reference to Exhibit 10.66 to the Registrant's
Report on Form 10-K for the year ended December 31, 2005).
10.67 Amendment to Retainer Agreement with David A. Cole dated October
19, 2005 (Incorporated by reference to Exhibit 10.67 to the
Registrant's Report on Form 10-K for the year ended December 31,
2005).
10.68 Form of Employment Agreement with Larry Robinson dated January 1,
2006 (Incorporated by reference to Exhibit 10.68 to the
Registrant's Report on Form 10-K for the year ended December 31,
2005).
10.69 Employment Agreement with Brad Roos dated June 1, 2001
(Incorporated by reference to Exhibit 10.69 to the Registrant's
Report on Form 10-K for the year ended December 31, 2005).
10.70 Form of Expatriate Assignment Agreement with Brad Roos
(Incorporated by reference to Exhibit 10.70 to the Registrant's
Report on Form 10-K for the year ended December 31, 2005).
10.71 Houlihan Lokey Agreement dated October 21, 2005 (Incorporated by
reference to Exhibit 10.71 to the Registrant's Report on Form
10-K for the year ended December 31, 2005).
10.72 Amendment Letter with Houlihan Lokey dated February 1, 2006
(Incorporated by reference to Exhibit 10.72 to the Registrant's
Report on Form 10-K for the year ended December 31, 2005).
10.73 Rothschild Inc. Agreement dated as of September 14, 2005
(Incorporated by reference to Exhibit 10.73 to the Registrant's
Report on Form 10-K for the year ended December 31, 2005).
10.74 Letter Agreement with Rothschild Inc. dated February 1, 2006
(Incorporated by reference to Exhibit 10.74 to the Registrant's
Report on Form 10-K for the year ended December 31, 2005).
10.75* 2006 Performance Bonus Plan (Incorporated by reference to Exhibit
10. 5 to the Registrant's Report on Form 10-Q for the quarter
ended March 31, 2006).
10.76 First Amendment to Separation and Release Agreement with John M.
Cook dated March 16, 2006 (Incorporated by reference to Exhibit
99.1 to the Registrant's Report on Form 8-K filed on March 22,
2006).
10.77 First Amendment to Separation and Release Agreement with John M.
Toma dated March 16, 2006 (Incorporated by reference to Exhibit
99.2 to the Registrant's Report on Form 8-K filed on March 22,
2006).
10.78 Amendment to Investor Rights Agreement dated March 28, 2006
(Incorporated by reference to Exhibit 10.8 to the Registrant's
Report on Form 10-Q for the quarter ended March 31, 2006).
10.79 Amended and Restated Restructuring Support Agreement
(Incorporated by reference to Exhibit 10.1 to the Registrant's
Report on Form 10-Q for the quarter ended March 31, 2006).
10.80 Registration Rights Agreement dated March 17, 2006 (Incorporated
by reference to Exhibit 10.2 to the Registrant's Report on Form
10-Q for the quarter ended March 31, 2006).
10.81 Financing Agreement dated March 17, 2006 (Incorporated by
reference to Exhibit 10.3 to the Registrant's Report on Form 10-Q
for the quarter ended March 31, 2006).
10.82 Security Agreement dated March 17, 2006 (Incorporated by
reference to Exhibit 10.4 to the Registrant's Report on Form 10-Q
for the quarter ended March 31, 2006).
10.83 Employment Agreement with N. Lee White dated June 14, 2006
(Incorporated by reference to Exhibit 10.1 to the Registrant's
Current Report on Form 8-K filed on June 20, 2006).
12.1+ Statement Re: Computation of Ratios.
21.1 Subsidiaries of the Registrant (Incorporated by reference to
Exhibit 21.1 to the Registrant's Report on Form 10-K for the year
ended December 31, 2005).
23.1** Consent of KPMG LLP.
23.2** Consent of Arnall Golden Gregory LLP (Included as part of Exhibit
5 hereto).
24.1+ Power of attorney (Included in signature page of Registration
Statement on Form S-1 filed on June 2, 2006).
* Confidential treatment, pursuant to 17 CFR Secs. ss.ss. 200.80 and
240.24b-2, has been granted regarding certain portions of the indicated
Exhibit, which portions have been filed separately with the Commission.
+ Previously filed.
** Filed herewith.