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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 March 31, 2005
 
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 April 30, 2005 were 62,306,089.
 
 

PRG-SCHULTZ INTERNATIONAL, INC.
FORM 10-Q
For the Quarter Ended March 31, 2005
INDEX
                 
            Page No.
             
   Financial Information        
          1  
            1  
            2  
            3  
            4  
          13  
          25  
          26  
 
   Other Information        
          28  
          28  
          28  
          28  
          28  
          28  
 Signatures     30  
 EX-10.8 MEDICARE AGREEMENT
 EX-10.9 SUPPLEMENT AGREEMENT
 EX-10.10 SUPPLEMENT TO SETTLEMENT AGREEMENT
 EX-10.11 CORRECTION TO CHANGE IN CONTROL
 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 & CFO

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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
PRG-SCHULTZ INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except per share data)
                     
    Three Months Ended
    March 31,
     
    2005   2004
         
Revenues
   $ 76,522     $ 87,649  
Cost of revenues
     50,354       57,629  
Selling, general and administrative expenses
     28,786       33,206  
             
 
Operating loss
     (2,618 )     (3,186 )
Interest (expense)
     (1,927 )     (2,277 )
Interest income
     117       181  
             
 
Loss from continuing operations before income taxes and discontinued operations
     (4,428 )     (5,282 )
Income taxes
     687       (2,007 )
             
 
Loss from continuing operations before discontinued operations
     (5,115 )     (3,275 )
Discontinued operations (Note B):
                
 
Gain on disposal of discontinued operations, including operating results for phase-out period, net of income tax expense of $5,401 in 2004
     219       8,122  
             
 
Earnings from discontinued operations
     219       8,122  
             
   
Net earnings (loss)
   $ (4,896 )   $ 4,847  
             
Basic earnings (loss) per share:
                
 
Loss from continuing operations before discontinued operations
   $ (0.08 )   $ (0.05 )
 
Discontinued operations
     —       0.13  
             
   
Net earnings (loss)
   $ (0.08 )   $ 0.08  
             
Diluted earnings (loss) per share (Note C):
                
 
Loss from continuing operations before discontinued operations
   $ (0.08 )   $ (0.05 )
 
Discontinued operations
     —       0.13  
             
   
Net earnings (loss)
   $ (0.08 )   $ 0.08  
             
Weighted-average shares outstanding (Note C):
                
 
Basic
     61,976       61,693  
             
 
Diluted
     61,976       61,693  
             
See accompanying Notes to Condensed Consolidated Financial Statements.

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PRG-SCHULTZ INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands, except per share data)
                       
    March 31,   December 31,
    2005   2004
         
ASSETS
Current assets:
                
 
Cash and cash equivalents (Note F)
   $ 14,617     $ 12,596  
 
Restricted cash
     145       120  
 
Receivables:
                
   
Contract receivables, less allowances of $3,180 in 2005 and $3,515 in 2004
     44,515       57,514  
   
Employee advances and miscellaneous receivables, less allowances of $2,339 in 2005 and $3,333 in 2004
     3,658       3,490  
             
     
Total receivables
     48,173       61,004  
             
 
Funds held for client obligations
     26,985       30,920  
 
Prepaid expenses and other current assets
     5,629       4,129  
 
Deferred income taxes
     1,951       1,951  
             
     
Total current assets
     97,500       110,720  
Property and equipment:
                
 
Computer and other equipment
     64,076       62,858  
 
Furniture and fixtures
     7,746       7,778  
 
Leasehold improvements
     9,265       9,312  
             
      81,087       79,948  
 
Less accumulated depreciation and amortization
     56,591       53,475  
             
     
Property and equipment, net
     24,496       26,473  
             
Goodwill
     170,667       170,684  
Intangible assets, less accumulated amortization of $4,415 in 2005 and $4,068 in 2004
     29,885       30,232  
Other assets
     3,706       3,827  
             
    $ 326,254     $ 341,936  
             
 
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
                
 
Obligations for client payables
   $ 26,985     $ 30,920  
 
Accounts payable and accrued expenses
     20,897       24,395  
 
Accrued payroll and related expenses
     34,518       41,791  
 
Deferred revenue
     4,343       6,466  
             
     
Total current liabilities
     86,743       103,572  
Long-term bank debt
     6,300       —  
Convertible notes, net of unamortized discount of $1,631 in 2005 and $1,714 in 2004
     123,369       123,286  
Deferred compensation
     1,378       2,195  
Deferred income taxes
     4,201       4,201  
Other long-term liabilities
     4,805       5,098  
             
     
Total liabilities
     226,796       238,352  
             
Shareholders’ equity (Note G):
                
 
Preferred stock, no par value. Authorized 500,000 shares; no shares issued or outstanding in 2005 and 2004
     —       —  
 
Participating preferred stock, no par value. Authorized 500,000 shares; no shares issued or outstanding in 2005 and 2004
     —       —  
 
Common stock, no par value; $.001 stated value per share. Authorized 200,000,000 shares; issued 68,069,114 shares in 2005 and 67,658,656 shares in 2004
     68       68  
 
Additional paid-in capital
     495,526       493,532  
 
Accumulated deficit
     (347,875 )     (342,979 )
 
Accumulated other comprehensive income
     1,748       1,740  
 
Treasury stock at cost; 5,764,525 shares in 2005 and 2004
     (48,710 )     (48,710 )
 
Unearned portion of restricted stock
     (1,299 )     (67 )
             
     
Total shareholders’ equity
     99,458       103,584  
             
Commitments and contingencies (Note H)
   $ 326,254     $ 341,936  
             
See accompanying Notes to Condensed Consolidated Financial Statements.

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PRG-SCHULTZ INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
                         
    Three Months Ended
    March 31,
     
    2005   2004
         
Cash flows from operating activities:
                
 
Net earnings (loss)
   $ (4,896 )   $ 4,847  
 
Gain on disposal of discontinued operations
     (219 )     (8,122 )
             
 
Loss from continuing operations
     (5,115 )     (3,275 )
 
Adjustments to reconcile loss from continuing operations to net cash provided by (used in) operating activities:
                
   
Depreciation and amortization
     4,227       4,431  
   
Restricted stock compensation expense
     69       (25 )
   
Gain (loss) on sale of property and equipment
     (3 )     21  
   
Deferred income taxes
     —       (3,286 )
   
Income tax benefit relating to stock option exercises
     1       —  
   
Changes in operating assets and liabilities:
                
     
Restricted cash securing letter of credit obligation
     (27 )     5,463  
     
Receivables
     12,416       870  
     
Prepaid expenses and other current assets
     (1,535 )     (41 )
     
Other assets
     (237 )     (17 )
     
Accounts payable and accrued expenses
     (2,618 )     (1,206 )
     
Accrued payroll and related expenses
     (6,808 )     1,312  
     
Deferred revenue
     (1,910 )     1,794  
     
Deferred compensation expense
     (817 )     (464 )
     
Other long-term liabilities
     (293 )     (199 )
             
       
Net cash provided by (used in) operating activities
     (2,650 )     5,378  
             
Cash flows from investing activities:
                
 
Purchases of property and equipment, net of sale proceeds
     (1,906 )     (4,141 )
 
Proceeds from sale of certain discontinued operations
     —       19,116  
             
       
Net cash provided by (used in) investing activities
     (1,906 )     14,975  
             
Cash flows from financing activities:
                
 
Net borrowings (repayments) of debt
     6,300       (25,100 )
 
Net proceeds from common stock issuances
     692       223  
             
       
Net cash provided by (used in) financing activities
     6,992       (24,877 )
             
Net cash provided by (used in) discontinued operations
     234       (1,391 )
Effect of exchange rates on cash and cash equivalents
     (649 )     (634 )
             
       
Net change in cash and cash equivalents
     2,021       (6,549 )
Cash and cash equivalents at beginning of period
     12,596       26,658  
             
Cash and cash equivalents at end of period
   $ 14,617     $ 20,109  
             
Supplemental disclosure of cash flow information:
                
 
Cash paid during the period for interest
   $ 189     $ 107  
             
 
Cash paid during the period for income taxes, net of refunds received
   $ 196     $ 1,107  
             
See accompanying Notes to Condensed Consolidated Financial Statements.

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PRG-SCHULTZ INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2005 and 2004
(Unaudited)
Note A — Basis of Presentation
      The accompanying Condensed Consolidated Financial Statements (Unaudited) of PRG-Schultz International, Inc. and its wholly owned subsidiaries (the “Company”) have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions for Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. In preparing Condensed Consolidated Financial Statements (Unaudited), it is necessary for management to make assumptions and estimates affecting the amounts reported in such financial statements and related notes. These estimates and assumptions are developed based upon all information available. Actual results could differ from estimated amounts. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three-month period ended March 31, 2005 are not necessarily indicative of the results that may be expected for the year ending December 31, 2005.
      Disclosures included herein pertain to the Company’s continuing operations unless otherwise noted.
      For further information, refer to the Consolidated Financial Statements and Footnotes thereto included in the Company’s Form 10-K for the year ended December 31, 2004.
     (1)  Employee Stock Compensation Plans
      At March 31, 2005, the Company had two stock compensation plans and an employee stock purchase plan (the “Plans”). The Company accounts for the Plans under the provisions of Accounting Principles Board (“APB”) Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations. As such, compensation expense is measured on the date of grant only if the current market price of the underlying stock exceeds the exercise price. The options granted generally vest and become fully exercisable on a ratable basis over four years of continued employment. In accordance with APB Opinion No. 25 guidance, no compensation expense has been recognized for the Plans in the accompanying Condensed Consolidated Statements of Operations (Unaudited) except for compensation amounts relating to grants of shares of restricted stock issued in 2005 and 2000. The Company recognizes compensation expense over the indicated vesting periods using the straight-line method for its restricted stock awards.
      Pro forma information regarding net earnings and earnings per share is required by Statement of Financial Accounting Standards (“SFAS”) No. 123, Accounting for Stock-Based Compensation, as amended by SFAS No. 148, Accounting for Stock-Based Compensation — Transition and Disclosure. The following pro forma information has been determined as if the Company had accounted for its employee stock options as an operating expense under the fair value method of SFAS No. 123. The fair value of these options was estimated as of the date of grant using the Black-Scholes option valuation model.
      The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions, including the expected stock price volatility. Because the Company’s employee stock options have characteristics significantly different from those of traded options and because changes in the subjective input assumptions can materially affect the fair value estimate, it is management’s opinion that existing models do not necessarily provide a reliable single measure of the fair value of the Company’s employee stock options. For purposes of pro forma disclosures below, the estimated fair value of the options is amortized to expense over the options’ vesting periods.

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PRG-SCHULTZ INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
      The Company’s pro forma information for the three months ended March 31, 2005 and 2004 for continuing and discontinued operations, combined, is as follows (in thousands, except for pro forma net earnings per share information):
                     
    Three Months Ended
    March 31,
     
    2005   2004
         
Numerator for basic and diluted pro forma net earnings (loss) per share:
                
 
Net earnings (loss) before pro forma effect of compensation expense recognition provisions of SFAS No. 123
   $ (4,896 )   $ 4,847  
 
Pro forma effect of compensation expense recognition provisions of SFAS No. 123, net of income taxes of $(650) in 2005 and $(848) in 2004
     (1,003 )     (1,309 )
             
 
Pro forma net earnings (loss)
   $ (5,899 )   $ 3,538  
             
Denominator for diluted pro forma net earnings (loss) per share:
                
 
Weighted-average shares outstanding, as reported for basic earnings (loss) per share
     61,976       61,693  
 
Effect of dilutive securities:
                
   
Employee stock options
     —       —  
             
   
Denominator for pro forma diluted earnings (loss) per share
     61,976       61,693  
             
Pro forma net earnings (loss) per share:
                
 
Basic — as reported
   $ (0.08 )   $ 0.08  
             
 
Basic — pro forma
   $ (0.10 )   $ 0.06  
             
 
Diluted — as reported
   $ (0.08 )   $ 0.08  
             
 
Diluted — pro forma
   $ (0.10 )   $ 0.06  
             
      In applying the treasury stock method to determine the dilutive impact of common stock equivalents, the calculation is performed in steps with the impact of each type of dilutive security calculated separately. For each of the three-month periods ended March 31, 2005 and 2004, 16.1 million shares related to the convertible notes were excluded from the computation of pro forma diluted earnings per share calculated using the treasury stock method, due to their antidilutive effect.
      When the Company adopts SFAS No. 123 (revised 2004) (“SFAS No. 123(R)”), Share-Based Payments, as discussed below, it will include the expense associated with share-based payments issued to employees in its Condensed Consolidated Statements of Operations (Unaudited). The Company is currently scheduled to adopt SFAS No. 123(R) at the beginning of 2006. The Company has not yet completed its assessment of which valuation model or transition option to select.
     (2)  New Accounting Standards
      In December 2004, the FASB issued SFAS No. 123(R). This Statement requires a public entity to measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award (with limited exceptions). That cost will be recognized over the period during which an employee is required to provide service in exchange for the award — the requisite service period (usually the vesting period). No compensation cost is recognized for equity instruments for which employees do not render the requisite service. Employee share purchase plans will not result in recognition of compensation cost if certain conditions are met.

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PRG-SCHULTZ INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
      A public entity will initially measure the cost of employee services received in exchange for an award of liability instruments based on its current fair value; the fair value of that award will be remeasured subsequently at each reporting date through the settlement date. Changes in fair value during the requisite service period will be recognized as compensation cost over that period.
      As of the required effective date, all public entities will apply this Statement using a modified version of prospective application. Under that transition method, compensation cost is recognized on or after the required effective date for the portion of outstanding awards for which the requisite service has not yet been rendered, based on the grant-date fair value of those awards calculated under SFAS No. 123(R) for either recognition or pro forma disclosures. For periods before the required effective date, entities may elect to apply a modified version of retrospective application under which financial statements for prior periods are adjusted on a basis consistent with the pro forma disclosures required for those periods by Statement 123(R) (see Note A(1) for pro forma disclosures). The impact of this Statement on future periods cannot be estimated at this time.
      On April 14, 2005 the U.S. Securities and Exchange Commission (the “SEC”) announced a deferral of the effective date of SFAS No. 123(R) until the first annual period after June 15, 2005.
Note B — Discontinued Operations
     (a)  Revenue-Based Royalty from Sale of Logistics Management Services in 2001
      On October 30, 2001, the Company consummated the sale of its Logistics Management Services business to Platinum Equity, a firm specializing in acquiring and operating technology organizations and technology-enabled service companies worldwide. The transaction yielded initial gross sale proceeds, as adjusted, of approximately $9.5 million with an additional amount payable in the form of a revenue-based royalty over four years, of which $1.9 million had been cumulatively received through March 31, 2005.
      During the first quarters of 2005 and 2004, the Company recognized a gain on the sale of discontinued operations of approximately $0.2 million and $0.1 million, respectively, net of tax expenses of approximately $-0- million and $0.1 million, respectively, related to the receipt of a portion of the revenue-based royalty from the sale of the Logistics Management Services business in October 2001, as adjusted for certain expenses accrued as part of the estimated loss on the sale of that business.
     (b)  Sale of Discontinued Operations — French Taxation Services in 2001
      On December 14, 2001, the Company consummated the sale of its French Taxation Services business (“ALMA”), as well as certain notes payable due to the Company, to Chequers Capital, a Paris-based private equity firm. In conjunction with this sale, the Company provided the buyer with certain warranties. Effective December 30, 2004, the Company, Meridian and ALMA (the “Parties”) entered into a Settlement Agreement (the “Agreement”) requiring the Company to pay a total of 3.4 million Euros ($4.7 million at January 3, 2005 exchange rates, the payment date), to resolve the buyer’s warranty claims with respect to a commission dispute with Meridian. During the fourth quarter of 2004, the Company recognized a loss on discontinued operations of $3.1 million for amounts not previously accrued to provide for these claims. No tax benefit was recognized in relation to the expense. The Agreement settles all remaining indemnification obligations and terminates all contractual relationships between the Parties and further specifies that the Parties will renounce all complaints, grievances and other actions.
     (c)  Sale of Communications Services
      During the fourth quarter of 2003, the Company declared its remaining Communications Services operations, formerly part of the Company’s then-existing Other Ancillary Services segment, as a discontinued operation. On January 16, 2004, the Company consummated the sale of the remaining Communications

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PRG-SCHULTZ INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Services operations to TSL (DE) Corp., a newly formed company whose principal investor is One Equity Partners, the private equity division of Bank One. The operations were sold for approximately $19.1 million in cash paid at closing, plus the assumption of certain liabilities of Communications Services. The Company recognized a gain on disposal of approximately $8.3 million, net of tax expense of approximately $5.5 million, subject to possible adjustments for final determination of the sale-