PRG SCHULTZ INTERNATIONAL INC - 10-Q Quarterly Report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q


(Mark One)
þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

		For the quarterly period ended September 30, 2004

OR

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

		For the transition period from to

Commission File Number 0-28000

PRG-Schultz International, Inc.

(Exact name of registrant as specified in its charter)


Georgia		58-2213805
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

600 Galleria Parkway Suite 100 Atlanta, Georgia (Address of principal executive offices)		30339-5986 (Zip Code)

Registrant’s telephone number, including area code: (770) 779-3900

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

Indicate by check mark whether the registrant is an accelerated filer (as defined by Rule 12b-2 of the Exchange Act). Yes þ No o

Common shares of the registrant outstanding at October 31, 2004 were 61,894,131.

PRG-SCHULTZ INTERNATIONAL, INC.

FORM 10-Q

For the Quarter Ended September 30, 2004

INDEX


			Page No.

Part I.	Financial Information
	Item 1.	Financial Statements (Unaudited)		1
		Condensed Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2004 and 2003		1
		Condensed Consolidated Balance Sheets as of September 30, 2004 and December 31, 2003		2
		Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2004 and 2003		3
		Notes to Condensed Consolidated Financial Statements		4
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		13
	Item 3.	Quantitative and Qualitative Disclosures About Market Risk		27
	Item 4.	Controls and Procedures		27

Part II.	Other Information
	Item 1.	Legal Proceedings		28
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		28
	Item 3.	Defaults Upon Senior Securities		28
	Item 4.	Submission of Matters to a Vote of Security Holders		28
	Item 5.	Other Information		28
	Item 6.	Exhibits		28
Signatures				29
EX-10.1 WAIVER TO THE COVENANT VIOLATIONS TO THE CREDIT AGREEMENT
EX-31.1 SECTION 302 CERTIFICATION OF THE CEO
EX-31.2 SECTION 302 CERTIFICATION OF THE CFO
EX-32.1 SECTION 906 CERTIFICATION OF THE CEO AND CFO

PART I. FINANCIAL INFORMATION


Item 1.	Financial Statements (Unaudited)

PRG-SCHULTZ INTERNATIONAL, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

(Amounts in thousands, except per share data)



				Three Months Ended						Nine Months Ended
				September 30,						September 30,

				2004			2003			2004			2003

Revenues				$	85,137		$	88,221		$	263,192		$	279,837
Cost of revenues					54,249			57,155			168,372			173,755
Selling, general and administrative expenses					28,425			32,649			94,875			90,382

	Operating income (loss)				2,463			(1,583	)		(55	)		15,700
Interest (expense)					(2,253	)		(2,423	)		(6,793	)		(7,131	)
Interest income					120			189			416			467

	Earnings (loss) from continuing operations before income taxes and discontinued operations				330			(3,817	)		(6,432	)		9,036
Income tax expense (benefit)					125			(1,465	)		(2,445	)		3,309

	Earnings (loss) from continuing operations before discontinued operations				205			(2,352	)		(3,987	)		5,727
Discontinued operations (Note B):
	Earnings from discontinued operations, net of income tax expense of $317 and $745 in 2003				—			438			—			1,027
	Gain on disposal of discontinued operations, including operating results for phase-out period, net of income tax expense of $173 and $5,495 in 2004 and $138 and $354 in 2003				260			206			7,349			530

	Earnings (loss) from discontinued operations				260			644			7,349			1,557

		Net earnings (loss)		$	465		$	(1,708	)	$	3,362		$	7,284

Basic earnings (loss) per share:
	Earnings (loss) from continuing operations before discontinued operations			$	—		$	(0.04	)	$	(0.07	)	$	0.09
	Discontinued operations				0.01			0.01			0.12			0.03

		Net earnings (loss)		$	0.01		$	(0.03	)	$	0.05		$	0.12

Diluted earnings (loss) per share (Note C):
	Earnings (loss) from continuing operations before discontinued operations			$	—		$	(0.04	)	$	(0.07	)	$	0.09
	Discontinued operations				0.01			0.01			0.12			0.03

			Net earnings (loss)	$	0.01		$	(0.03	)	$	0.05		$	0.12

Weighted-average shares outstanding (Note C):
	Basic				61,808			61,450			61,734			61,830

	Diluted				62,108			61,450			61,734			62,090

See accompanying Notes to Condensed Consolidated Financial Statements.

PRG-SCHULTZ INTERNATIONAL, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

(Amounts in thousands, except share and per share data)


				September 30,			December 31,
				2004			2003

ASSETS
Current assets:
	Cash and cash equivalents (Note F)			$	13,735		$	26,658
	Restricted cash (Note H)				6,018			5,758
	Receivables:
		Contract receivables, less allowance of $3,684 in 2004 and $3,236 in 2003			51,562			53,185
		Employee advances and miscellaneous receivables, less allowance of $3,638 in 2004 and $4,760 in 2003			2,670			3,573

			Total receivables		54,232			56,758

	Funds held for client obligations				15,184			18,690
	Prepaid expenses and other current assets				4,218			3,779
	Deferred income taxes				9,211			9,211
	Current assets of discontinued operations				—			3,179

			Total current assets		102,598			124,033

Property and equipment:
	Computer and other equipment				61,025			54,482
	Furniture and fixtures				7,646			7,531
	Leasehold improvements				8,892			8,543

					77,563			70,556
	Less accumulated depreciation and amortization				49,936			41,090

			Property and equipment, net		27,627			29,466

Goodwill					170,561			170,619
Intangible assets, less accumulated amortization of $3,722 in 2004 and $2,683 in 2003					30,578			31,617
Deferred income taxes					65,049			65,370
Other assets					3,213			3,152
Long-term assets of discontinued operations					—			1,792

				$	399,626		$	426,049


LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
	Current installments of long-term debt			$	7,900		$	31,600
	Obligations for client payables				15,184			18,690
	Accounts payable and accrued expenses				22,569			25,780
	Accrued payroll and related expenses				41,127			40,256
	Deferred revenue				4,794			4,601
	Current liabilities of discontinued operations				—			1,391

			Total current liabilities		91,574			122,318
Convertible notes, net of unamortized discount of $1,943 in 2004 and $2,605 in 2003					123,057			122,395
Deferred compensation					3,137			3,695
Other long-term liabilities					4,908			4,511

			Total liabilities		222,676			252,919

Shareholders’ equity (Note G):
	Preferred stock, no par value. Authorized 500,000 shares; no shares issued or outstanding				—			—
	Participating preferred stock, no par value. Authorized 500,000 shares; no shares issued or outstanding				—			—
	Common stock, no par value; $.001 stated value per share. Authorized 200,000,000 shares; issued 67,651,656 shares in 2004 and 67,489,608 shares in 2003				68			67
	Additional paid-in capital				493,501			492,878
	Accumulated deficit				(268,134	)		(271,496	)
	Accumulated other comprehensive income				319			616
	Treasury stock at cost, 5,764,525 shares in 2004 and 2003				(48,710	)		(48,710	)
	Unearned portion of restricted stock				(94	)		(225	)

			Total shareholders’ equity		176,950			173,130

Commitments and contingencies (Notes B(3) and H)
				$	399,626		$	426,049

See accompanying Notes to Condensed Consolidated Financial Statements.

PRG-SCHULTZ INTERNATIONAL, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(Amounts in thousands)



					Nine Months Ended
					September 30,

					2004			2003

Cash flows from operating activities:
	Net earnings				$	3,362		$	7,284
	Gain on disposal of discontinued operations					(7,349	)		(530	)
	Earnings from discontinued operations					—			(1,027	)

	Earnings (loss) from continuing operations					(3,987	)		5,727
	Adjustments to reconcile earnings (loss) from continuing operations to net cash provided by operating activities:
		Depreciation and amortization				13,374			13,465
		Restricted stock compensation expense				(23	)		271
		Gain on sale of property and equipment				161			115
		Deferred compensation expense				(558	)		(430	)
		Deferred income taxes				(5,542	)		(114	)
		Income tax benefit relating to stock option exercises				11			88
		Changes in operating assets and liabilities:
			Restricted cash			(217	)		(5,756	)
			Receivables			2,486			19,124
			Prepaid expenses and other current assets			(1,203	)		(406	)
			Other assets			(131	)		(345	)
			Accounts payable and accrued expenses			(4,550	)		(858	)
			Accrued payroll and related expenses			916			(11,028	)
			Deferred revenue			348			2,021
			Other long-term liabilities			397			(315	)

				Net cash provided by operating activities		1,482			21,559

Cash flows from investing activities:
	Purchases of property and equipment, net of sale proceeds					(9,294	)		(7,385	)
	Proceeds from sale of certain discontinued operations					19,116			—

				Net cash provided by (used in) investing activities		9,822			(7,385	)

Cash flows from financing activities:
	Net repayments of debt					(23,700	)		(2,890	)
	Payments for issuance costs on convertible notes					(21	)		(12	)
	Net proceeds from common stock issuances					767

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