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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 
 Form 10-K
 (Mark One)
 þ
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
 For the fiscal year ended December 31, 2006
 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.
  Georgia(State or other jurisdiction of 
incorporation or organization)
    
    58-2213805(I.R.S. Employer
Identification No.)600 Galleria Parkway 
Suite 100
Atlanta, Georgia(Address of principal executive offices)
    
    30339-5986(Zip Code)
 Registrants telephone number, including area code : (770) 779-3900
 Securities registered pursuant to Section 12(b) of the Act:
 Title of each class
    
    Name of each exchange on which registeredCommon Stock, No Par Value
    
    The NASDAQ Stock Market LLC (The Nasdaq Global Market)Preferred Stock Purchase Rights
    
    The NASDAQ Stock Market LLC (The Nasdaq Global Market)
 Securities registered pursuant to Section 12(g) of the Act: None
 o þ
 o þ
 Note
 þ o
 o
  o o þ
 o þ
   Documents Incorporated by Reference




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##### 



PRG-SCHULTZ INTERNATIONAL, INC.
 FORM 10-K
December 31, 2006
 PagePart IItem 1.
    
    Business
    
    
    1Item 1A.
    
    Risk Factors
    
    
    10Item 1B.
    
    Unresolved Staff Comments
    
    
    17Item 2.
    
    Properties
    
    
    17Item 3.
    
    Legal Proceedings
    
    
    17Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    
    18Part IIItem 5.
    
    Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
    
    
    19Item 6.
    
    Selected Financial Data
    
    
    21Item 7.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    23Item 7A.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    43Item 8.
    
    Financial Statements and Supplementary Data
    
    
    44Item 9.
    
    Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
    
    
    82Item 9A.
    
    Controls and Procedures
    
    
    82Item 9B.
    
    Other Information
    
    
    84Part IIIItem 10.
    
    Directors, Executive Officers and Corporate Governance
    
    
    85Item 11.
    
    Executive Compensation
    
    
    85Item 12.
    
    Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
    
    
    85Item 13.
    
    Certain Relationships and Related Transactions, and Director Independence
    
    
    86Item 14.
    
    Principal Accounting Fees and Services
    
    
    86Part IVItem 15.
    
    Exhibits, Financial Statement Schedules
    
    
    87Signatures
    
    
    
    
    92EX-10.15 SUMMARY OF COMPENSATION ARRANGEMENTS WITH NON-EMPLOYEE DIRECTORSEX-10.16 SUMMARY OF COMPENSATION ARRANGEMENTS WITH NAMED EXECUTIVE OFFICERSEX-10.24 RELEASE AGREEMENT AND COVENANT NOT TO SUE/ JAMES E. MOYLAN, JR.EX-21.1 SUBSIDIARIES OF THE REGISTRANTEX-23.1 CONSENT OF BDO SEIDMAN, LLPEX-23.2 CONSENT OF KPMG LLPEX-31.1 SECTION 302 CERTIFICATION OF CEOEX-31.2 SECTION 302 CERTIFICATION OF CFOEX-32.1 SECTION 906 CERTIFICATION OF CEO AND CFO




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PART I
 
 ITEM 1. Business
   
    
    retailers such as discount, department, specialty, grocery and drug stores;
    
    manufacturers of high-tech components, pharmaceuticals, consumer electronics, chemicals
and aerospace and medical products;
    
    government agencies such as the Centers for Medicare and Medicaid Services (CMS)
    
    wholesale distributors of computer components, food products and pharmaceuticals; and
 
    
    service providers such as communications providers, transportation providers and financial institutions.
    Operational Restructuring
  1




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Financial Restructuring
  Financial Restructuring
 Other Developments
   2




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The Recovery Audit Industry
      Data Capture and Availability.
 Increasing Number of Auditable Claim Categories.
 Globalization.
 Consolidation in the Retail Industry.
 3




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Significant Promotional Activity.
 Move Toward Standard Auditing Practices
  The PRG-Schultz Solution
    The PRG-Schultz Strategy
  
    
    Centralize Claim Processing and Field Audit Work.The processing of certain claim types
and certain client audits has been shifted to the Companys Shared Service Centers and its
Regional Audit Centers, resulting in cost savings and improved audit productivity.
    
    Flatten Management Structure and Focus on Existing Clients.The Company has reduced its
number of management layers and has focused a greater portion of its resources on its
existing client base, especially larger clients.
    
    Improve Audit Software and Processes.The Company has developed proprietary software
tools and algorithms that enable its auditors to identify trends, exceptions and claims
quickly and efficiently and use the best auditing practices to increase recoveries.
    
    Expand Opportunities with Existing Clients.The Company intends to maximize the revenue
opportunities with its existing clients by identifying and auditing new categories of
potential errors. The Company also intends to increase its emphasis on using its technology
and professional experience to assist its clients in achieving objectives that do not
directly involve recovery of past overpayments. These objectives are related
 4




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to such things as transaction accuracy and compliance, purchasing effectiveness, M&A due
diligence analysis, and processing efficiency in the procure-to-pay value chain.
    
    Focus on Select International Opportunities.The Company believes that its best
opportunities for international growth are related to major multi-national clients and that
it is the only recovery audit firm with the capability to serve these clients in multiple
geographies. Some of the Companys international operations have proved to be unprofitable.
To improve profitability of its international business, the Company plans to exit some
international markets in 2007 and redirect the Companys resources to the profitable
international markets and clients.
    
    Develop Medicare Audit.In 2005, the Centers for Medicare & Medicaid Services (CMS),
the federal agency that administers the Medicare program, awarded the Company a contract to
provide recovery audit services for the State of Californias Medicare spending. The
three-year contract, effective March 28, 2005, was awarded as part of a demonstration
program by CMS to recover overpayments on behalf of taxpayers through the use of recovery
auditing. The Company began generating revenue from the California Medicare audit in 2006
and believes that Medicare audit has significant revenue and profit potential in future
years. In late 2006, legislation was passed that mandated that recovery audit of Medicare
be extended beyond March 27, 2008, the end of the three-year recovery audit demonstration
project under the original authorizing legislation, and that CMS enter into additional
contracts with recovery audit contractors to expand recovery auditing of Medicare out to all
fifty states by January 1, 2010. While it is difficult to assess the impact of this
legislation, management believes it will provide additional opportunities to expand the
Companys Medicare audit recovery business.
 PRG-Schultz Services
 Accounts Payable Services
      5




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Meridian
  Client Contracts
  Technology
  Accounts Payable Services Audit Technology
   6




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Meridian VAT Reclaim Technology
  Auditor Hiring, Training and Compensation
  Clients
  Sales and Marketing
  7




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Proprietary Rights
  PRGSchultz®, ImDex®, AuditPro, SureF!nd Direct
F!nd and claimDex.
 Competition
    Client Internal Recovery Audit Departments
 Other Recovery Audit Firms
 
    
    Full-service accounts payable recovery audit firms. The Company believes that only one
other company also offers a full suite of U.S. and international recovery audit services;
    
    A large number of smaller accounts payable recovery firms which have a limited client
base and which use less sophisticated tools to mine disbursement claim categories at low
contingency rates. These firms are most common in the U.S. market and the largest of these
firms typically have approximately $10  $15 million in annual revenue. Competition in most
international markets, if any, typically comes from small niche providers;
 8




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
    
    Firms that offer a hybrid of audit software tools and training for use by internal audit
departments, and/or general accounts payable process improvement enablers; and
    
    Firms with specialized skills focused on recovery audit services for discrete sectors
such as sales and use tax or real estate.
 Other Providers of Recovery Services
 Regulation
  Employees
  Website
 www.prgx.com www.sec.gov/edgar.shtml
 9




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ITEM 1A. Risk Factors
 We have a history of losses and may not be able to improve our performance to achieve
profitability.
  We believe that our core accounts payable recovery audit business will continue to decline.
Therefore, we must continue to diligently manage our costs and successfully grow other business
lines in order to stabilize and increase our revenues and improve our profitability.
  We depend on our largest clients for significant revenues, so losing a major client could adversely
affect our revenues.
  Client and vendor bankruptcies and financial difficulties could reduce our earnings.
    10




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Our strategic business initiatives may not be successful.
   We have incurred significant costs in establishing the necessary resources to provide services for
Medicare audit recovery work, and to date, have not generated material revenues from this business.
  We may be unable to protect and maintain the competitive advantage of our proprietary technology
and intellectual property rights.
   Our failure to retain the services of key members of management and highly skilled personnel could
adversely impact our continued success.
   11




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We rely on international operations for a significant portion of our revenues.
  
    
    political and economic instability in the international markets we serve;
    
    difficulties in staffing and managing foreign operations and in collecting accounts receivable;
    
    fluctuations in currency exchange rates, particularly weaknesses in the British
pound, the euro, the Canadian dollar, the Mexican peso, and the Brazilian real and
other currencies of countries in which we transact business, which could result in
currency translations that materially reduce our revenues and earnings;
    
    costs associated with adapting our services to our foreign clients needs;
    
    unexpected changes in regulatory requirements and laws;
    
    expenses and legal restrictions associated with transferring earnings from our
foreign subsidiaries to us;
    
    burdens of complying with a wide variety of foreign laws and labor practices;
    
    business interruptions due to widespread disease, potential terrorist activities, or
other catastrophes;
    
    reduced or limited protection of our intellectual property rights; and
    
    longer accounts receivable cycles.
  The market for providing disbursement audit services to commercial clients in the U.S. is rapidly
declining.
  Our U.S. commercial accounts payable services business is subject to price pressure.
  Generally our client contracts contain provisions under which the client may terminate the
agreement prior to the completion of the agreement.
  12




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Our failure to comply with applicable governmental privacy laws and regulations could substantially
impact our business, operations and financial condition.
  Proposed legislation by the European Union, if enacted as currently drafted, will have a materially
adverse impact on Meridians operations.
  Meridian may be required to repay grants received from the Industrial Development Authority.
   Our revenues from certain clients and VAT authorities may change markedly from year to year.
  13




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The ownership change that occurred as a result of the exchange offer limits our ability to use our
net operating losses.
   We may not be allowed to deduct interest with respect to our senior convertible notes issued in the
exchange offer.
   Future impairment of goodwill, other intangible assets and long-lived assets would reduce our
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.
  14




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We have previously reported material weaknesses in our internal control over financial reporting,
and any unidentified material weaknesses could cause us to fail to meet our SEC and other reporting
requirements.
   Our articles of incorporation, bylaws, shareholder rights plan and Georgia law may inhibit a change
of control that shareholders may favor.
  
    
    a classified Board of Directors;
    
    the requirement that our shareholders may only remove directors for cause;
    
    specified requirements for calling special meetings of shareholders; and
    
    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.
  The terms of our senior credit facility place restrictions on us, which create risks of default and
reduce our flexibility.
  15




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Our substantial leverage could materially adversely impact our financial health.
   
    
    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;
    
    limiting our ability to obtain any additional financing we may need to operate,
develop and expand our business;
    
    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
    
    potentially making us more highly leveraged than our competitors, which could
potentially decrease our ability to compete in our industry.
  Our stock price has been and may continue to be volatile.
  
    
    issuance of additional common stock on exercise of conversion rights of our senior
convertible notes or our convertible preferred stock;
    
    future announcements concerning us, key clients or competitors;
    
    quarterly variations in operating results and liquidity;
    
    changes in financial estimates and recommendations by securities analysts;
    
    developments with respect to technology or litigation;
    
    the operating and stock price performance of other companies that investors may deem
comparable to our company;
    
    acquisitions and financings; and
    
    sales and purchases of blocks of stock by insiders.
 
 16




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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.
  
 ITEM 1B. Unresolved Staff Comments
  
 ITEM 2. Properties
   
 ITEM 3. Legal Proceedings
   17




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ITEM 4. Submission of Matters to a Vote of Security Holders
  18




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PART II
 
 ITEM 5. Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities
  2006 Calendar Quarter
    
    High
    
    Low1st Quarter
    
    $
    7.60
    
    
    $
    3.902nd Quarter
    
    
    7.20
    
    
    
    2.703rd Quarter
    
    
    6.38
    
    
    
    2.034th Quarter
    
    
    8.36
    
    
    
    4.67
 2005 Calendar Quarter
    
    High
    
    Low1st Quarter
    
    $
    57.90
    
    
    $
    42.002nd Quarter
    
    
    51.50
    
    
    
    27.503rd Quarter
    
    
    34.90
    
    
    
    25.804th Quarter
    
    
    33.00
    
    
    
    2.40
  19




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Performance Graph
  COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*
 
 
 
 VALUE OF $100 INVESTED ON DECEMBER 31, 2001 AT:
 Cumulative Total Return12/01
    
    
    12/02
    
    
    12/03
    
    
    12/04
    
    
    12/05
    
    
    12/06PRG-Schultz International, Inc.
    
    
    
    100.00
    
    
    
    
    109.20
    
    
    
    
    60.12
    
    
    
    
    61.72
    
    
    
    
    7.48
    
    
    
    
    9.82NASDAQ Composite Index
    
    
    
    100.00
    
    
    
    
    71.97
    
    
    
    
    107.18
    
    
    
    
    117.07
    
    
    
    
    120.50
    
    
    
    
    137.02RDG Technology Composite Index
    
    
    
    100.00
    
    
    
    
    62.44
    
    
    
    
    92.49
    
    
    
    
    95.27
    
    
    
    
    97.49
    
    
    
    
    106.14
 20




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ITEM 6. Selected Financial Data
    Years Ended December 31,2006 (6)
    
    

2005 (1)
    
    
    2004
    
    
    2003 (1)
    
    
    2002 (3) (4)(In thousands, except per share data)Statements of Operations Data:Revenues
    
    $
    266,095
    
    
    $
    292,152
    
    
    $
    350,602
    
    
    $
    367,380
    
    
    $
    439,686Cost of revenues
    
    
    193,747
    
    
    
    195,091
    
    
    
    217,059
    
    
    
    225,938
    
    
    
    248,722Gross margin
    
    
    72,348
    
    
    
    97,061
    
    
    
    133,543
    
    
    
    141,442
    
    
    
    190,964Selling, general and
administrative expenses
    
    
    60,199
    
    
    
    111,439
    
    
    
    124,365
    
    
    
    123,424
    
    
    
    141,151Impairment charges
    
    
    3⁄4
    
    
    
    170,375
    
    
    
    3⁄4
    
    
    
    206,923
    
    
    
    3⁄4Operational restructuring expense
    
    
    4,130
    
    
    
    11,550
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    3⁄4Operating income (loss)
    
    
    8,019
    
    
    
    (196,303
    )
    
    
    9,178
    
    
    
    (188,905
    )
    
    
    49,813Interest expense, net
    
    
    (16,219
    )
    
    
    (8,391
    )
    
    
    (8,549
    )
    
    
    (8,948
    )
    
    
    (9,339
    )Loss on financial restructuring
    
    
    (10,047
    )
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    3⁄4Earnings (loss) from
continuing operations before
income taxes, discontinued
operations and cumulative
effect of accounting changes
    
    
    (18,247
    )
    
    
    (204,694
    )
    
    
    629
    
    
    
    (197,853
    )
    
    
    40,474Income taxes (2)
    
    
    2,019
    
    
    
    821
    
    
    
    76,197
    
    
    
    (35,362
    )
    
    
    14,883Earnings (loss) from
continuing operations before
discontinued operations and
cumulative effect of
accounting changes
    
    
    (20,266
    )
    
    
    (205,515
    )
    
    
    (75,568
    )
    
    
    (162,491
    )
    
    
    25,591Discontinued operations:Earnings (loss) from
discontinued operations, net
of income taxes
    
    
    (833
    )
    
    
    (2,225
    )
    
    
    4,085
    
    
    
    1,673
    
    
    
    (4,307
    )Earnings (loss) before
cumulative effect of
accounting changes
    
    
    (21,099
    )
    
    
    (207,740
    )
    
    
    (71,483
    )
    
    
    (160,818
    )
    
    
    21,284Cumulative effect of accounting
changes, net of income taxes
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    (8,216
    )Net earnings (loss)
    
    $
    (21,099
    )
    
    $
    (207,740
    )
    
    $
    (71,483
    )
    
    $
    (160,818
    )
    
    $
    13,068
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Years Ended December 31,2006 (6)
    
    

2005 (1)
    
    
    2004
    
    
    2003 (1)
    
    
    2002 (3) (4)(In thousands, except per share data)Basic earnings (loss) per share:Earnings (loss) from
continuing operations before
discontinued operations and
cumulative effect of
accounting changes
    
    $
    (3.20
    )
    
    $
    (33.14
    )
    
    $
    (12.23
    )
    
    $
    (26.31
    )
    
    $
    4.08Discontinued operations
    
    
    (0.12
    )
    
    
    (0.36
    )
    
    
    0.66
    
    
    
    0.27
    
    
    
    (0.69
    )Cumulative effect of
accounting changes
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    (1.31
    )Net earnings (loss)
    
    $
    (3.32
    )
    
    $
    (33.50
    )
    
    $
    (11.57
    )
    
    $
    (26.04
    )
    
    $
    2.08Diluted earnings (loss) per share:Earnings (loss) from
continuing operations before
discontinued operations and
cumulative effect of
accounting changes
    
    $
    (3.20
    )
    
    $
    (33.14
    )
    
    $
    (12.23
    )
    
    $
    (26.31
    )
    
    $
    3.20Discontinued operations
    
    
    (0.12
    )
    
    
    (0.36
    )
    
    
    0.66
    
    
    
    0.27
    
    
    
    (0.54
    )Cumulative effect of
accounting changes
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    (1.03
    )Net earnings (loss)
    
    $
    (3.32
    )
    
    $
    (33.50
    )
    
    $
    (11.57
    )
    
    $
    (26.04
    )
    
    $
    1.63
 December 31,2006
    
    

2005 (1)
    
    
    2004
    
    
    2003 (1)
    
    
    2002 (3)(4)(5)(In thousands)Balance Sheet Data:Cash and cash equivalents
    
    $
    35,013
    
    
    $
    11,848
    
    
    $
    12,596
    
    
    $
    26,658
    
    
    $
    14,860Working capital
    
    
    5,218
    
    
    
    (9,123
    )
    
    
    5,882
    
    
    
    1,715
    
    
    
    35,562Total assets
    
    
    178,667
    
    
    
    162,062
    
    
    
    358,593
    
    
    
    429,257
    
    
    
    590,270Long-term debt, excluding
current installments
    
    
    136,922
    
    
    
    140,401
    
    
    
    123,286
    
    
    
    122,395
    
    
    
    147,854Redeemable preferred stock
    
    
    11,199
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    3⁄4Total shareholders equity (deficit)
    
    $
    (104,483
    )
    
    $
    (102,365
    )
    
    $
    103,584
    
    
    $
    173,130
    
    
    $
    337,885
 
 (1)
    
    During 2005 and 2003, the Company recognized impairment charges related to goodwill and
intangible assets. See Notes 1(j) and 7 of Notes to Consolidated Financial Statements
included in Item 8 of this Form 10-K.(2)
    
    During 2004, the Company recognized an increase in the valuation allowance against its
remaining net deferred tax assets. Lower than expected effective tax rates in 2006 and 2005
are primarily attributable to non-recognition of loss carryforward benefits. See Note 10 of
Notes to Consolidated Financial Statements included in Item 8 of this Form 10-K.(3)
    
    During 2002, the Company completed the acquisitions of the businesses of HSA-Texas and
affiliates accounted for as a purchase.(4)
    
    During 2002, the Company incurred a charge in connection with the initial implementation of
Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets
recognized as a cumulative effect of an accounting change.(5)
    
    Reflects December 31, 2004 scheduled maturity of the Companys line of credit, which was
refinanced in November 2004, and its reclassification to current liabilities at December 31,
2003.(6)
    
    The Company adopted the provisions of SFAS 123(R) in 2006 and recognized $6.4 million of
stock-based compensation charges during the year. 
 22




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ITEM 7. Managements Discussion and Analysis of Financial Condition and Results of Operations
 Introduction
  Revenue Recognition 
 Revenue Recognition
    23




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Operational Restructuring
 .
 Financial Restructuring
  Financial Restructuring
 Critical Accounting Policies
   24




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
    
    Revenue Recognition.The Company recognizes revenue on the accrual basis except with
respect to its Meridian VAT reclaim business, and certain international Accounts Payable
Services units where revenue is recognized on the cash basis in accordance with guidance
issued by the Securities and Exchange Commission in Staff Accounting Bulletin (SAB) No.
104, Revenue Recognition. Revenue is generally recognized for a contractually specified
percentage of amounts recovered when it has been determined that our clients have received
economic value (generally through credits taken against existing accounts payable due to
the involved vendors or refund checks received from those vendors), and when the following
criteria are met: (a) persuasive evidence of an arrangement exists; (b) services have been
rendered; (c) the fee billed to the client is fixed or determinable; and (d) collectibility
is reasonably assured. The determination that each of the aforementioned criteria has been
met, particularly the determination of the timing of economic benefit received by the
client and the determination that collectibility is reasonably assured, requires the
application of significant judgment by management and a misapplication of this judgment
could result in inappropriate recognition of revenue.
    
    Unbilled Receivables & Refund Liabilities. Unbilled receivables are usually contractual
and relate to claims for which our client has received economic value. Unbilled
receivables arise when a portion of the Companys fee is deferred at the time of the
initial invoice. At a later date (which can be up to a year after original invoice, or a
year after completion of the audit period), the unbilled receivable amount is invoiced.
Notwithstanding the deferred due date, the Company and the client acknowledge that this
unbilled receivable has been earned at the time of the original invoice, it just has a
deferred due date.
    
    Refund liabilities result from reductions in the economic value previously received by
the Companys clients with respect to vendor claims identified by the Company and for
which the Company has previously recognized revenue. Such refund liabilities are
recognized by either offsets to amounts otherwise due from clients or by cash refunds to
clients. The Company computes the estimate of its refund liabilities at any given time
based on actual historical refund data. A hypothetical 1% change in refund liabilities
would have an impact on operating income of approximately $0.1 million.
  
    
    Accounts Receivable Allowance for Doubtful Accounts.The Company maintains allowances
for doubtful accounts for estimated losses resulting from the inability or unwillingness of
its clients to make required payments. The Company evaluates the adequacy of these
allowances on a periodic basis. This evaluation includes, but is not limited to, historical
loss experience, the aging of current accounts receivable balances and provisions for
adverse situations that may affect a clients ability to pay. If the evaluation of
allowance requirements differs from the actual aggregate allowance, adjustments are made to
the allowance. This evaluation is inherently subjective, as it requires estimates that are
susceptible to revision as more information becomes available. If the financial condition
of any of the Companys clients were to deteriorate, or their operating climates were to
change, resulting in an impairment of either their ability or
 25




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##### Table of Contents



willingness to make payments, additional allowances may be required. If the Companys
estimate of required allowances for doubtful accounts is determined to be insufficient, it
could result in decreased operating income in the period such determination is made.
Conversely, if a client subsequently remits cash for an accounts receivable balance which
has previously been written off, it could result in increased operating income in the period
in which the payment is received. A hypothetical 1% change in the allowance for doubtful
accounts would have an impact on operating income of less than $0.1 million.
    
    Goodwill and Other Intangible Assets. During the fourth quarter of 2006, the Company,
working with its independent valuation advisors, Adams Capital, LLC, completed the required
annual impairment testing of goodwill and other intangible assets in accordance with SFAS
No. 142. As a result of this testing, the Company concluded that there was no impairment of
goodwill and other intangible assets.During the fourth quarter of 2005, as part of its annual intangible asset impairment
testing, the Company, together with its independent valuation advisors, Deloitte Financial
Advisory Services LLP, performed valuation analyses of its goodwill balances as well as
other intangible assets. As a result of this process, the Company determined that non-cash,
pre-tax intangible asset impairment charges totaling $170.4 million were required during the
quarter and year-ended December 31, 2005, in accordance with U.S. generally accepted
accounting principles. The Companys Accounts Payable Services segment had experienced its
third consecutive year of significant declines in revenues and gross profit. The continuing
downward trend in this segment was the single most important factor leading to the necessity
of the impairment charge. This trend is also what necessitated the initiation of the
implementation of the Companys operational restructuring plan in the third quarter of 2005.
    
    Income Taxes.The Companys reported effective tax rates on earnings (loss) from
continuing operations before income taxes and discontinued operations approximated (11.1)%,
(0.4)%, and 12,114% for the years ended December 31, 2006, 2005 and 2004, respectively. The
unusual 2005 rate is primarily attributable to the nondeductible portions of the impairment
charges discussed above and the change in the deferred tax asset valuation allowance. The
unusual 2006 and 2004 rates are primarily attributable to the changes in the deferred tax
asset valuation allowance.The Companys effective tax rate is based on historical and anticipated future taxable
income, statutory tax rates and tax planning opportunities available to the Company in the
various jurisdictions in which it operates. Significant judgment is required in determining
the effective tax rate and in evaluating the Companys tax positions. Tax regulations
require items to be included in the tax returns at different times than the items are
reflected in the financial statements. As a result, the Companys effective tax rate
reflected in its Consolidated Financial Statements included in Item 8. of this Form 10-K is
different than that reported in its tax returns. Some of these differences are permanent,
such as expenses that are not deductible on the Companys tax returns, and some are
temporary differences, such as depreciation expense. Temporary differences create deferred
tax assets and liabilities. Deferred tax assets generally represent items that can be used
as a tax deduction or credit in the Companys tax returns in future years for which it has
already recorded the tax benefit in the statement of operations. The Company establishes
valuation allowances to reduce deferred tax assets to the amounts that it believes are more
likely than not to be realized. These valuation allowances are adjusted in light of changing
facts and circumstances. Deferred tax liabilities generally represent tax expense recognized
in the Companys consolidated financial statements for which payment has been deferred, or
expense for which a deduction has already been taken on the Companys tax returns but has
not yet been recognized as an expense in its consolidated financial statements.SFAS No. 109, Accounting for Income Taxes, requires that deferred tax assets be reduced by
a valuation allowance if it is more likely than not that some portion or all of a deferred
tax asset will not be realized. The ultimate realization of deferred tax assets is dependent
upon the generation of future taxable income during the periods in which those temporary
differences are deductible. In making this determination, management considers all available
positive and negative evidence affecting specific deferred tax assets, including the
Companys past and anticipated future performance, the reversal of deferred tax liabilities,
the length of carry-back and carry-forward periods, and the implementation of tax planning
strategies.Objective positive evidence is necessary to support a conclusion that a valuation allowance
is not needed for all or a portion of deferred tax assets when significant negative evidence
exists. Cumulative losses in
 26




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##### Table of Contents



recent years are the most compelling form of negative evidence considered by management in
this determination. In 2004, the Company recognized an increase in the valuation allowance
against its remaining net deferred tax assets of $76.6 million. This increase was offset by
the use of approximately $4.3 million of capital loss carry-forwards resulting in a net
change in the valuation allowance of approximately $72.3 million. During 2005 the Company
recorded an additional valuation allowance adjustment of $48.5 million, bringing the total
valuation allowance balance to $139.6 million.For the year ended December 31, 2006, management has determined that based on all available
evidence, a valuation allowance of $79.5 million is appropriate, as compared to a valuation
allowance in the amount of $139.6 million as of the year ended December 31, 2005. The
reduction in the valuation allowance is primarily attributable to the write-off of a number
of deferred tax assets as a result of an ownership change as defined in IRC Section 382, and
the corresponding limitations imposed on certain tax attributes as a result of this
ownership change. The impact of IRC Section 382 on the deferred tax assets of the Company is
discussed in more detail in Note 10 of Notes to Consolidated Financial Statements included
in Item 8. of this Form 10-K.
    
    Stock-Based Compensation.The Company adopted the provisions of SFAS 123(R) in 2006. See
New Accounting Standards below.
 Results of Operations
  Years Ended December 31,2006
    
    2005
    
    2004Statements of Operations Data:Revenues
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %Cost of revenues
    
    
    72.8
    
    
    
    66.8
    
    
    
    61.9Gross margin
    
    
    27.2
    
    
    
    33.2
    
    
    
    38.1Selling, general and administrative expenses
    
    
    22.6
    
    
    
    38.1
    
    
    
    35.5Impairment charges
    
    
    
    
    
    
    58.3
    
    
    
    Operational restructuring expenses
    
    
    1.6
    
    
    
    4.0
    
    
    
    Operating income (loss)
    
    
    3.0
    
    
    
    (67.2
    )
    
    
    2.6Interest expense, net
    
    
    (6.1
    )
    
    
    (2.9
    )
    
    
    (2.4
    )Loss on financial restructuring
    
    
    (3.8
    )
    
    
    
    
    
    
    Earnings (loss) from continuing
operations before income taxes and
discontinued operations
    
    
    (6.9
    )
    
    
    (70.1
    )
    
    
    0.2Income taxes
    
    
    0.7
    
    
    
    0.3
    
    
    
    21.7Earnings (loss) from continuing
operations before discontinued
operations
    
    
    (7.6
    )
    
    
    (70.4
    )
    
    
    (21.5
    )Discontinued operations:Earnings (loss) from discontinued
operations and disposals, net of income
taxes
    
    
    (0.3
    )
    
    
    (0.7
    )
    
    
    1.1Net earnings (loss)
    
    
    (7.9
    )%
    
    
    (71.1
    )%
    
    
    (20.4
    )%
  27




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##### Table of Contents



Accounts Payable Services
 Revenues.
 2006
    
    
    2005
    
    
    2004Domestic Accounts Payable Services revenue:Retail
    
    $
    126.9
    
    
    $
    137.3
    
    
    $
    167.8Commercial
    
    
    13.5
    
    
    
    17.1
    
    
    
    33.5140.4
    
    
    
    154.4
    
    
    
    201.3International Accounts Payable Services revenue
    
    
    85.5
    
    
    
    97.2
    
    
    
    107.9Total Accounts Payable Services revenue
    
    $
    225.9
    
    
    $
    251.6
    
    
    $
    309.2
      Cost of Revenues (COR).
 28




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##### Table of Contents



2006
    
    
    2005
    
    
    2004Domestic Accounts Payable Services COR
    
    $
    95.3
    
    
    $
    99.8
    
    
    $
    120.2International Accounts Payable Services COR
    
    
    66.6
    
    
    
    68.1
    
    
    
    72.7Total Accounts Payable Services COR
    
    $
    161.9
    
    
    $
    167.9
    
    
    $
    192.9
   Selling, General, and Administrative Expenses (SG&A).
  2006
    
    
    2005
    
    
    2004Domestic Accounts Payable Services SG&A
    
    $
    20.7
    
    
    $
    30.9
    
    
    $
    39.3International Accounts Payable Services SG&A
    
    
    10.2
    
    
    
    28.5
    
    
    
    29.4Total Accounts Payable Services SG&A
    
    $
    30.9
    
    
    $
    59.4
    
    
    $
    68.7
  29




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##### Table of Contents



Meridian
  2006
    
    
    2005
    
    
    2004Revenues
    
    $
    40.2
    
    
    $
    40.6
    
    
    $
    41.4Cost of revenues
    
    
    31.8
    
    
    
    27.2
    
    
    
    24.2Gross margin
    
    
    8.4
    
    
    
    13.4
    
    
    
    17.2Selling, general and administrative expenses
    
    
    3.7
    
    
    
    6.6
    
    
    
    8.2Operational restructuring expense
    
    
    
    
    
    
    0.4
    
    
    
    Operating income
    
    $
    4.7
    
    
    $
    6.4
    
    
    $
    9.0
 Revenues.
   Cost of Revenue (COR).
   30




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##### Table of Contents



Selling, General & Administrative Expenses (SG&A)
   Corporate Support
 SG&A.
 2006
    
    2005
    
    2004Selling, general and administrative expenses
    
    $
    25.6
    
    
    $
    45.4
    
    
    $
    47.5
  -
  Operational Restructuring Expense
   2006
    
    2005
    
    2004Operational restructuring expense
    
    $
    4.1
    
    
    $
    11.6
    
    
    
    3⁄4
  31




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Discontinued Operations
      32




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##### Table of Contents



Other Items
 Depreciation and Amortization.
 Net Interest Expense.
  Income Tax Expense (Benefit).
    33




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##### Table of Contents



Quarterly Results
  2006 Quarter Ended
    
    
    2005 Quarter EndedMar. 31
    
    
    June 30
    
    
    Sept. 30
    
    
    Dec. 31
    
    
    Mar. 31
    
    
    June 30
    
    
    Sept. 30
    
    
    Dec. 31(In thousands, except per share data)Revenues
    
    $
    65,538
    
    
    $
    65,308
    
    
    $
    64,733
    
    
    $
    70,516
    
    
    $
    75,147
    
    
    $
    78,162
    
    
    $
    66,415
    
    
    $
    72,428Cost of revenues
    
    
    47,257
    
    
    
    48,246
    
    
    
    45,172
    
    
    
    53,072
    
    
    
    48,595
    
    
    
    50,997
    
    
    
    48,057
    
    
    
    47,442Gross margin
    
    
    18,281
    
    
    
    17,062
    
    
    
    19,561
    
    
    
    17,444
    
    
    
    26,552
    
    
    
    27,165
    
    
    
    18,358
    
    
    
    24,986Selling, general and administrative
expenses
    
    
    14,894
    
    
    
    13,734
    
    
    
    17,557
    
    
    
    14,014
    
    
    
    28,578
    
    
    
    31,259
    
    
    
    27,374
    
    
    
    24,228Impairment charges
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    170,375Operational restructuring expense
    
    
    408
    
    
    
    1,580
    
    
    
    153
    
    
    
    1,989
    
    
    
    
    
    
    
    
    
    
    
    7,922
    
    
    
    3,628Operating income (loss)
    
    
    2,979
    
    
    
    1,748
    
    
    
    1,851
    
    
    
    1,441
    
    
    
    (2,026
    )
    
    
    (4,094
    )
    
    
    (16,938
    )
    
    
    (173,245
    )Interest expense, net
    
    
    (2,543
    )
    
    
    (4,269
    )
    
    
    (5,260
    )
    
    
    (4,147
    )
    
    
    (1,810
    )
    
    
    (2,061
    )
    
    
    (2,089
    )
    
    
    (2,431
    )Gain (loss) on financial restructuring
    
    
    (10,129
    )
    
    
    
    
    
    
    82
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Earnings (loss) from continuing
operations before income taxes and
discontinued operations
    
    
    (9,693
    
    
    
    (2,521
    )
    
    
    (3,327
    )
    
    
    (2,706
    )
    
    
    (3,836
    )
    
    
    (6,155
    )
    
    
    (19,027
    )
    
    
    (175,676
    )Income tax expense (benefit)
    
    
    650
    
    
    
    338
    
    
    
    726
    
    
    
    305
    
    
    
    687
    
    
    
    412
    
    
    
    715
    
    
    
    (993
    )Earnings (loss) from continuing
operations before discontinued
operations
    
    
    (10,343
    )
    
    
    (2,859
    )
    
    
    (4,053
    )
    
    
    (3,011
    )
    
    
    (4,523
    )
    
    
    (6,567
    )
    
    
    (19,742
    )
    
    
    (174,683
    )Discontinued operations:Earnings (loss) from discontinued
operations and disposals, net
    
    
    49
    
    
    
    (786
    )
    
    
    (181
    )
    
    
    85
    
    
    
    (373
    )
    
    
    275
    
    
    
    (1,056
    )
    
    
    (1,071
    )Net earnings (loss)
    
    $
    (10,294
    )
    
    $
    (3,645
    )
    
    $
    (4,234
    )
    
    $
    (2,926
    )
    
    $
    (4,896
    )
    
    $
    (6,292
    )
    
    $
    (20,798
    )
    
    $
    (175,754
    )Basic and diluted earnings (loss)
per share:Earnings (loss) from continuing
operations before discontinued
operations
    
    $
    (1.67
    )
    
    $
    (0.50
    )
    
    $
    (0.66
    )
    
    $
    (0.44
    )
    
    $
    (0.73
    )
    
    $
    (1.06
    )
    
    $
    (3.18
    )
    
    $
    (28.15
    )Discontinued operations
    
    
    0.01
    
    
    
    (0.12
    )
    
    
    (0.03
    )
    
    
    0.01
    
    
    
    (0.06
    )
    
    
    0.04
    
    
    
    (0.17
    )
    
    
    (0.17
    )Net earnings (loss)
    
    $
    (1.66
    )
    
    $
    (0.62
    )
    
    $
    (0.69
    )
    
    $
    (0.43
    )
    
    $
    (0.79
    )
    
    $
    (1.02
    )
    
    $
    (3.35
    )
    
    $
    (28.32
    )
 Liquidity and Capital Resources
  34




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Financial Restructuring
 .
 35




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##### Table of Contents



Contractual Obligations and Other Commitments
  Payments Due by Period(in thousands)Less
    
    
    
    
    
    
    
    
    
    
    MoreThan
    
    
    
    
    
    
    3-5
    
    
    ThanContractual obligations
    
    Total
    
    
    1 Year
    
    
    1-3 Years
    
    
    Years
    
    
    5 YearsOperating lease obligations
    
    $
    48,672
    
    
    $
    9,051
    
    
    $
    13,257
    
    
    $
    9,576
    
    
    $
    16,788Capital lease obligations
    
    
    1,089
    
    
    
    61
    
    
    
    726
    
    
    
    302
    
    
    
    Senior notes (1)
    
    
    51,455
    
    
    
    
    
    
    
    
    
    
    
    51,455
    
    
    
    Interest on senior notes (1)
    
    
    25,470
    
    
    
    5,660
    
    
    
    11,320
    
    
    
    8,490
    
    
    
    Senior convertible notes (2)
    
    
    62,511
    
    
    
    
    
    
    
    
    
    
    
    62,511
    
    
    
    Interest on senior convertible notes (2)
    
    
    28,130
    
    
    
    6,251
    
    
    
    12,502
    
    
    
    9,377
    
    
    
    Term Loan (3)
    
    
    25,000
    
    
    
    750
    
    
    
    3,750
    
    
    
    20,500
    
    
    
    Series A convertible preferred stock (4)
    
    
    16,225
    
    
    
    
    
    
    
    
    
    
    
    16,225
    
    
    
    Payments to Messrs. Cook and Toma (5)
    
    
    6,826
    
    
    
    1,530
    
    
    
    3,064
    
    
    
    1,217
    
    
    
    1,015Severance and deferred compensation
    
    
    6,076
    
    
    
    6,076
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    $
    271,454
    
    
    $
    29,379
    
    
    $
    44,619
    
    
    $
    179,653
    
    
    $
    17,803
 
 (1)
    
    Due March 2011, interest of 11% payable semi-annually(2)
    
    Due March 2011, interest of 10% payable semi-annually; interest may be paid-in-kind at
Companys option in lieu of cash(3)
    
    Excludes variable-rate interest of LIBOR + 8.5%, payable monthly(4)
    
    87,064 shares mandatorily redeemable March 2011 at $186.36 per share assuming no dividends paid
prior to redemption(5)
    
    In connection with the Companys financial restructuring, required payments to Messrs. Cook
and Toma were revised  see Executive Severance Payments below. Financial Restructuring
   
    
    $400 principal amount of its 11.0% Senior Notes Due 2011, plus an additional amount of
principal equal to accrued and unpaid interest due on the existing notes held by the
tendering holders;
    
    $480 principal amount of its 10.0% Senior Convertible Notes Due 2011 convertible into
common stock; and
    
    one share, $120 liquidation preference, of its 9.0% Senior Series A Convertible
Participating Preferred Stock convertible into common stock;
    
    
    The new senior notes bear interest at 11%, payable semiannually in cash, and are callable
at 104% of face in year 1, 102% in year 2, and at par in years 3 through 5.
 36




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##### Table of Contents




    
    The new senior convertible notes bear interest at 10%, payable semiannually in cash or in
kind, at the option of the Company. The new senior convertible notes are convertible into
common stock at a rate of approximately 153.8 shares per $1,000 principal amount. On
September 15, 2006, the Company issued $2.9 million of additional senior convertible notes
in lieu of the semiannual cash interest payment.
    
    The new Series A convertible preferred stock has a 9% dividend, payable in cash or in
kind, at the option of the Company. The new Series A convertible preferred stock is
convertible at the option of the holders into shares of common stock at the rate of $2.8405
of liquidation preference per share of common stock. As of December 31, 2006, 37,030 shares
of Series A convertible preferred stock had been converted into 1,618,995 shares of common
stock.
    
    The Series A convertible preferred stock has the right to vote with the Companys common
stock on most matters requiring shareholder votes. The Company has the right to redeem the
new senior convertible notes at par at any time after repayment of the new senior notes. The
Company also has the right to redeem the new Series A convertible preferred stock at the
stated liquidation preference at any time after repayment of the new senior notes and the
new senior convertible notes.
    
    Both the new senior notes and the new senior convertible notes mature on the fifth
anniversary of issuance. The new Series A convertible preferred stock must be redeemed on
the fifth anniversary of issuance.
    ,
  37




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Transaction Costs of Financial Restructuring, Including Exchange Offer
  Forbearance Agreement
 3 4
  38




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##### Table of Contents



$10 million Bridge Loan
   Prior Senior Credit Facility
  Executive Severance Payments
  Bankruptcy Litigation
  39




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French Taxation Services Settlement
  Contingent Obligation to Repay Industrial Development Authority of Ireland Grant
  Limitation on Tax Loss and Credit Carryforwards
  40




---



##### Table of Contents



Off Balance Sheet Arrangements
  New Accounting Standards
 SFAS No. 123(R Share-Based Payment Accounting for Stock-Based Compensation Accounting for Stock Issued to
Employees
  SFAS No. 154 Accounting Changes and Error
Corrections Accounting Changes Reporting Accounting Changes in Interim Financial Statements
 FIN No. 48. Accounting for Uncertainty
in Income Taxes  an Interpretation of FASB Statement No. 109
 41




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##### Table of Contents



SFAS No. 157. Fair Value Measurements
 SAB 108 . Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year
Financial Statements
 SFAS No. 159. The Fair Value Option for
Financial Assets and Financial Liabilities  Including an amendment of FASB Statement No. 115
 42




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##### Table of Contents



ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk
 Foreign Currency Market Risk.
 Interest Rate Risk
 Derivative Instruments.
 Stock-Based Compensation.
 43




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##### Table of Contents



ITEM 8. Financial Statements and Supplementary Data
 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
 PageNumberReports of Independent Registered Public Accounting Firms
    
    
    45 & 46Consolidated Statements of Operations for the Years ended December 31, 2006, 2005 and 2004
    
    
    47Consolidated Balance Sheets as of December 31, 2006 and 2005
    
    
    48Consolidated Statements of Shareholders Equity (Deficit) for the Years ended December
31, 2006, 2005 and 2004
    
    
    49Consolidated Statements of Cash Flows for the Years ended December 31, 2006, 2005 and 2004
    
    
    50Notes to Consolidated Financial Statements
    
    
    51
 44




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##### Table of Contents



Report of Independent Registered Public Accounting Firm
 
   ,
  Atlanta, Georgia
    
    /s/ BDO SEIDMAN, LLPMarch 21, 2007
 45




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##### Table of Contents



Report of Independent Registered Public Accounting Firm
 
     Atlanta, Georgia
    
    /s/ KPMG LLPMarch 17, 2006
 46




---



##### Table of Contents



PRG-SCHULTZ INTERNATIONAL, INC. AND SUBSIDIARIES
 
 CONSOLIDATED STATEMENTS OF OPERATIONS
 (In thousands, except per share data)
 Years Ended December 31,2006
    
    
    2005
    
    
    2004Revenues
    
    $
    266,095
    
    
    $
    292,152
    
    
    $
    350,602Cost of revenues
    
    
    193,747
    
    
    
    195,091
    
    
    
    217,059Gross margin
    
    
    72,348
    
    
    
    97,061
    
    
    
    133,543Selling, general and administrative expenses
    
    
    60,199
    
    
    
    111,439
    
    
    
    124,365Impairment charges (Notes 1(j) and 7)
    
    
    
    
    
    
    170,375
    
    
    
    Operational restructuring expense (Note 16)
    
    
    4,130
    
    
    
    11,550
    
    
    
    Operating income (loss)
    
    
    8,019
    
    
    
    (196,303
    )
    
    
    9,178Interest (expense)
    
    
    (17,145
    )
    
    
    (8,936
    )
    
    
    (9,142
    )Interest income
    
    
    926
    
    
    
    545
    
    
    
    593Loss on financial restructuring (Note 8)
    
    
    (10,047
    )
    
    
    
    
    
    
    Earnings (loss) from continuing operations before income
taxes and discontinued operations
    
    
    (18,247
    )
    
    
    (204,694
    )
    
    
    629Income taxes (Note 10)
    
    
    2,019
    
    
    
    821
    
    
    
    76,197Earnings (loss) from continuing operations before
discontinued operations
    
    
    (20,266
    )
    
    
    (205,515
    )
    
    
    (75,568
    )Discontinued operations (Note 2):Earnings (loss) from discontinued operations, net of
income tax benefit of $1,080 in 2004
    
    
    (1,125
    )
    
    
    (2,704
    )
    
    
    (1,411
    )Net gains on sales of discontinued operations, net of
income tax expense of $5,722 in 2004
    
    
    292
    
    
    
    479
    
    
    
    5,496Earnings (loss) from discontinued operations
    
    
    (833
    )
    
    
    (2,225
    )
    
    
    4,085Net earnings (loss)
    
    $
    (21,099
    )
    
    $
    (207,740
    )
    
    $
    (71,483
    )Basic and diluted earnings (loss) per common share (Note 6):Earnings (loss) from continuing operations before
discontinued operations
    
    $
    (3.20
    )
    
    $
    (33.14
    )
    
    $
    (12.23
    )Discontinued operations
    
    
    (0.12
    )
    
    
    (0.36
    )
    
    
    0.66Net earnings (loss)
    
    $
    (3.32
    )
    
    $
    (33.50
    )
    
    $
    (11.57
    )Weighted-average common shares outstanding (Note 6 ):Basic and diluted
    
    
    6,616
    
    
    
    6,201
    
    
    
    6,177
 See accompanying Notes to Consolidated Financial Statements.
 47




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##### Table of Contents



PRG-SCHULTZ INTERNATIONAL, INC. AND SUBSIDIARIES
 
 CONSOLIDATED BALANCE SHEETS
 (In thousands, except share and per share data)
 December 31,2006
    
    
    2005ASSETS (Note 8)Current assets:Cash and cash equivalents
    
    $
    35,013
    
    
    $
    11,848Restricted cash (Note 13(c))
    
    
    3,438
    
    
    
    3,096Receivables:Contract receivables, less allowances of $1,919 in 2006 and $2,717 in 2005:Billed
    
    
    32,464
    
    
    
    43,591Unbilled
    
    
    8,457
    
    
    
    9,60840,921
    
    
    
    53,199Employee advances and miscellaneous receivables, less allowances of $1,306 in 2006 and
$2,974 in 2005
    
    
    2,534
    
    
    
    2,737Total receivables
    
    
    43,455
    
    
    
    55,936Funds held for client obligations
    
    
    42,304
    
    
    
    32,479Prepaid expenses and other current assets
    
    
    2,667
    
    
    
    3,113Deferred income taxes (Note 10)
    
    
    139
    
    
    
    67Total current assets
    
    
    127,016
    
    
    
    106,539Property and equipment:Computer and other equipment
    
    
    52,083
    
    
    
    65,575Furniture and fixtures
    
    
    6,326
    
    
    
    7,744Leasehold improvements
    
    
    8,241
    
    
    
    8,46066,650
    
    
    
    81,779Less accumulated depreciation and amortization
    
    
    56,247
    
    
    
    64,326Property and equipment, net
    
    
    10,403
    
    
    
    17,453Goodwill (Note 7)
    
    
    4,600
    
    
    
    4,600Intangible assets, less accumulated amortization of $6,838 in 2006 and $5,453 in 2005 (Note 7)
    
    
    23,062
    
    
    
    24,447Unbilled receivables
    
    
    3,175
    
    
    
    2,789Deferred loan costs, net of accumulated amortization
    
    
    6,822
    
    
    
    2,650Deferred income taxes (Note 10)
    
    
    391
    
    
    
    530Other assets (Note 13(b))
    
    
    3,198
    
    
    
    3,054$
    178,667
    
    
    $
    162,062LIABILITIES AND SHAREHOLDERS EQUITY (DEFICIT)Current liabilities:Obligations for client payables
    
    $
    42,304
    
    
    $
    32,479Accounts payable and accrued expenses
    
    
    23,676
    
    
    
    22,362Accrued payroll and related expenses
    
    
    41,026
    
    
    
    44,031Refund liabilities
    
    
    10,112
    
    
    
    11,741Deferred revenue
    
    
    3,930
    
    
    
    4,583Convertible subordinated notes, net of unamortized discount of $4 in 2005 (Note 8)
    
    
    3⁄4
    
    
    
    466Current portions of other debt obligations
    
    
    750
    
    
    
    3⁄4Total current liabilities
    
    
    121,798
    
    
    
    115,662Convertible subordinated notes, net of unamortized discount of $929 in 2005 (Note 8)
    
    
    3⁄4
    
    
    
    123,601Senior notes, net of unamortized discount of $7,659 in 2006 (Note 8)
    
    
    43,796
    
    
    
    3⁄4Senior convertible notes, including unamortized premium of $5,519 in 2006 (Note 8)
    
    
    68,030
    
    
    
    3⁄4Other debt and capital lease obligations (Note 8)
    
    
    25,096
    
    
    
    16,800Noncurrent compensation obligations (Note 13(e))
    
    
    5,859
    
    
    
    1,388Refund liabilities
    
    
    1,659
    
    
    
    1,785Other long-term liabilities
    
    
    5,713
    
    
    
    5,191Total liabilities
    
    
    271,951
    
    
    
    264,427Mandatorily redeemable participating preferred stock (Note 8)
    
    
    11,199
    
    
    
    3⁄4Shareholders equity (deficit) (Notes 8, 12 and 14):Common stock, no par value; $.01 stated value per share. Authorized 50,000,000 shares; issued
8,398,770 shares in 2006 and 6,787,683 shares in 2005
    
    
    84
    
    
    
    68Additional paid-in capital
    
    
    513,920
    
    
    
    494,826Accumulated deficit
    
    
    (571,818
    )
    
    
    (550,719
    )Accumulated other comprehensive income
    
    
    2,041
    
    
    
    2,400Treasury stock at cost, 576,453 shares in 2006 and 2005
    
    
    (48,710
    )
    
    
    (48,710
    )Unamortized portion of compensation expense
    
    
    3⁄4
    
    
    
    (230
    )Total shareholders equity (deficit)
    
    
    (104,483
    )
    
    
    (102,365
    )Commitments and contingencies (Notes 2, 3, 8, 9, 12 and 13)$
    178,667
    
    
    $
    162,062
 See accompanying Notes to Consolidated Financial Statements.
 48




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##### Table of Contents



PRG-SCHULTZ INTERNATIONAL, INC. AND SUBSIDIARIES
 
 CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY (DEFICIT)
 Years Ended December 31, 2006, 2005 and 2004
(In thousands, except share data)
 Accumulated
    
    
    
    
    
    
    UnamortizedCommon Stock
    
    
    Additional
Paid-In
    
    
    Accumulated

    
    
    Other 
Comprehensive
    
    

    Treasury
    
    
    Portion of
Compensation
    
    
    Total
Shareholders
    
    
    ComprehensiveShares
    
    
    Amount
    
    
    Capital
    
    
    Deficit
    
    
    Income (Loss)
    
    
    Stock
    
    
    Expense
    
    
    Equity (Deficit)
    
    
    Income (Loss)Balance at December 31, 2003
    
    
    6,748,961
    
    
    $
    67
    
    
    $
    492,878
    
    
    $
    (271,496
    )
    
    $
    616
    
    
    $
    (48,710
    )
    
    $
    (225
    )
    
    $
    173,130Comprehensive loss:Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (71,483
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (71,483
    )
    
    $
    (71,483
    )Other comprehensive income-foreign currency
translation adjustments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,124
    
    
    
    
    
    
    
    
    
    
    
    1,124
    
    
    
    1,124Comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    (70,359
    )Issuances of common stock:Issuances under employee stock plans
(including tax benefits of $17)
    
    
    18,505
    
    
    
    1
    
    
    
    808
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    809Restricted share forfeitures
    
    
    (1,600
    )
    
    
    
    
    
    
    (154
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    154
    
    
    
    Amortization of expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4
    
    
    
    4Balance at December 31, 2004
    
    
    6,765,866
    
    
    
    68
    
    
    
    493,532
    
    
    
    (342,979
    )
    
    
    1,740
    
    
    
    (48,710
    )
    
    
    (67
    )
    
    
    103,584Comprehensive loss:Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (207,740
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (207,740
    )
    
    $
    (207,740
    )Other comprehensive income-foreign currency
translation adjustments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    660
    
    
    
    
    
    
    
    
    
    
    
    660
    
    
    
    660Comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    (207,080
    )Issuances of common stock:Issuances under employee stock plans
(including tax benefits of $1)
    
    
    17,075
    
    
    
    
    
    
    
    773
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    773Restricted share forfeitures
    
    
    (20,400
    )
    
    
    
    
    
    
    (1,029
    )
    
    
    
    
    
    
    
    
    
    
    3⁄4
    
    
    
    1,029
    
    
    
    Restricted shares retired for payroll taxes
    
    
    (1,358
    )
    
    
    
    
    
    
    (42
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (42
    )Restricted share and option awards
    
    
    26,500
    
    
    
    
    
    
    
    1,592
    
    
    
    
    
    
    
    
    
    
    
    3⁄4
    
    
    
    (1,592
    )
    
    
    Amortization of expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    400
    
    
    
    400Balance at December 31, 2005
    
    
    6,787,683
    
    
    
    68
    
    
    
    494,826
    
    
    
    (550,719
    )
    
    
    2,400
    
    
    
    (48,710
    )
    
    
    (230
    )
    
    
    (102,365
    )Reclassification of unamortized portion of
compensation expense
    
    
    
    
    
    
    
    
    
    
    (230
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    230
    
    
    
    Comprehensive loss:Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (21,099
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (21,099
    )
    
    $
    (21,099
    )Other comprehensive income-foreign currency
translation adjustments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (359
    )
    
    
    
    
    
    
    
    
    
    
    (359
    )
    
    
    (359
    )Comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    (21,458
    )Excess of fair value over redemption value of
preferred stock issued
    
    
    
    
    
    
    
    
    
    
    11,995
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    11,995Issuance costs of preferred stock
    
    
    
    
    
    
    
    
    
    
    (1,281
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,281
    )Issuances of common stock:Conversions of Series A preferred stock
    
    
    1,614,995
    
    
    
    16
    
    
    
    4,571
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,587Fractional shares issued pursuant to reverse split
    
    
    92
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Restricted share forfeitures
    
    
    (4,000
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Accumulated dividends on preferred stock
    
    
    
    
    
    
    
    
    
    
    (895
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (895
    )Stock-based compensation expense
    
    
    
    
    
    
    
    
    
    
    4,934
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,934Balance at December 31, 2006
    
    
    8,398,770
    
    
    $
    84
    
    
    $
    513,920
    
    
    $
    (571,818
    )
    
    $
    2,041
    
    
    $
    (48,710
    )
    
    $
    
    
    
    $
    (104,483
    )
 See accompanying Notes to Consolidated Financial Statements.
 49




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##### Table of Contents



PRG-SCHULTZ INTERNATIONAL, INC. AND SUBSIDIARIES
 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
 (In thousands)
 Years Ended December 31,2006
    
    
    2005
    
    
    2004Cash flows from operating activities:Net loss
    
    $
    (21,099
    )
    
    $
    (207,740
    )
    
    $
    (71,483
    )(Earnings) loss from discontinued operations
    
    
    833
    
    
    
    2,225
    
    
    
    (4,085
    )Loss from continuing operations
    
    
    (20,266
    )
    
    
    (205,515
    )
    
    
    (75,568
    )Adjustments to reconcile loss from continuing operations to net
cash provided by (used in) operating activities:Loss on financial restructuring
    
    
    10,047
    
    
    
    3⁄4
    
    
    
    3⁄4Impairment charges
    
    
    3⁄4
    
    
    
    170,375
    
    
    
    3⁄4Impairment charges included in operational restructuring
    
    
    546
    
    
    
    372
    
    
    
    3⁄4Depreciation and amortization
    
    
    10,783
    
    
    
    14,375
    
    
    
    15,645Amortization of debt discount, premium and deferred loan costs
    
    
    1,858
    
    
    
    1,301
    
    
    
    1,968Stock-based compensation expense
    
    
    6,436
    
    
    
    358
    
    
    
    4Loss on disposals of property, plant and equipment, net
    
    
    28
    
    
    
    9
    
    
    
    187Deferred income taxes
    
    
    67
    
    
    
    (2,847
    )
    
    
    72,845Income tax benefit relating to stock option exercises
    
    
    3⁄4
    
    
    
    1
    
    
    
    17Changes in assets and liabilities:Restricted cash
    
    
    (2
    )
    
    
    (3,014
    )
    
    
    6,203Billed Receivables
    
    
    12,663
    
    
    
    14,718
    
    
    
    (4,121
    )Unbilled Receivables
    
    
    765
    
    
    
    2,999
    
    
    
    (2,188
    )Prepaid expenses and other current assets
    
    
    684
    
    
    
    908
    
    
    
    (1,280
    )Other assets
    
    
    229
    
    
    
    (509
    )
    
    
    (411
    )Accounts payable and accrued expenses
    
    
    5,188
    
    
    
    (55
    )
    
    
    (7,438
    )Accrued payroll and related expenses
    
    
    (4,299
    )
    
    
    3,577
    
    
    
    735Refund liabilities
    
    
    (1,755
    )
    
    
    (3,131
    )
    
    
    3,449Deferred revenue
    
    
    (1,073
    )
    
    
    (1,195
    )
    
    
    1,682Noncurrent compensation obligations
    
    
    2,969
    
    
    
    (807
    )
    
    
    (1,500
    )Other long-term liabilities
    
    
    521
    
    
    
    93
    
    
    
    587Net cash provided by (used in) operating activities
    
    
    25,389
    
    
    
    (7,987
    )
    
    
    10,816Cash flows from investing activities:Purchases of property and equipment, net of disposal proceeds
    
    
    (1,683
    )
    
    
    (5,374
    )
    
    
    (11,520
    )Net cash used in investing activities
    
    
    (1,683
    )
    
    
    (5,374
    )
    
    
    (11,520
    )Cash flows from financing activities:Principal payments on convertible notes
    
    
    (905
    )
    
    
    3⁄4
    
    
    
    3⁄4Net borrowings (repayments) of other debt obligations
    
    
    8,200
    
    
    
    16,800
    
    
    
    (31,600
    )Payments for deferred loan costs
    
    
    (6,197
    )
    
    
    (2,648
    )
    
    
    (451
    )Net proceeds from common stock issuances
    
    
    3⁄4
    
    
    
    772
    
    
    
    792Issuance costs of preferred stock
    
    
    (1,281
    )
    
    
    3⁄4
    
    
    
    Net cash provided by (used in) financing activities
    
    
    (183
    )
    
    
    14,924
    
    
    
    (31,259
    )Cash flows from discontinued operations:Operating cash flows
    
    
    (1,116
    )
    
    
    (2,348
    )
    
    
    (1,978
    )Investing cash flows
    
    
    296
    
    
    
    473
    
    
    
    19,104Net cash provided by (used in) discontinued operations
    
    
    (820
    )
    
    
    (1,875
    )
    
    
    17,126Effect of exchange rates on cash and cash equivalents
    
    
    462
    
    
    
    (436
    )
    
    
    775Net change in cash and cash equivalents
    
    
    23,165
    
    
    
    (748
    )
    
    
    (14,062
    )Cash and cash equivalents at beginning of year
    
    
    11,848
    
    
    
    12,596
    
    
    
    26,658Cash and cash equivalents at end of year
    
    $
    35,013
    
    
    $
    11,848
    
    
    $
    12,596Supplemental disclosure of cash flow information:Cash paid during the year for interest
    
    $
    5,701
    
    
    $
    6,782
    
    
    $
    6,440Cash paid during the year for income taxes, net of refunds received
    
    $
    1,513
    
    
    $
    2,298
    
    
    $
    3,210
 See accompanying Notes to Consolidated Financial Statements.
 50




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##### Table of Contents



PRG-SCHULTZ INTERNATIONAL, INC. AND SUBSIDIARIES
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 (a) Description of Business and Basis of Presentation
 Description of Business
  
    
    retailers such as discount, department, specialty, grocery and drug stores;
    
    manufacturers of high-tech components, pharmaceuticals, consumer electronics, chemicals
and aerospace and medical products;
    
    government agencies such as the Centers for Medicare and Medicaid Services (CMS);
    
    wholesale distributors of computer components, food products and pharmaceuticals; and
    
    service providers such as communications providers, transportation providers and financial institutions.
  Basis of Presentation
  Reverse Stock Split
  (b) Principles of Consolidation
   51




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PRG-SCHULTZ INTERNATIONAL, INC. AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (c) Discontinued Operations
  (d) Revenue Recognition
      Revenue Recognition
 52




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##### Table of Contents



PRG-SCHULTZ INTERNATIONAL, INC. AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
  (e) Cash and Cash Equivalents
   (f) Derivative Financial Instruments
    (g) Funds Held for Payment of Client Payables
  (h) Property and Equipment
  Accounting for the Impairment or Disposal of
Long-Lived Assets.
 53




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##### Table of Contents



PRG-SCHULTZ INTERNATIONAL, INC. AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
  (i) Internally Developed Software
 Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use.
  (j) Goodwill and Other Intangible Assets
 Goodwill and Other Intangible Assets. Accounting for the Impairment or Disposal of
Long-Lived Assets
  (k) Direct Expenses
  (l) Income Taxes
  Accounting for Income Taxes"
 54




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PRG-SCHULTZ INTERNATIONAL, INC. AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
  (m) Foreign Currency
  (n) Earnings Per Share
 Earnings Per Share 
 (o) Stock-Based Compensation
 Share-Based Payment Accounting for Stock-Based Compensation Accounting for Stock Issued to Employees
 Accounting for Stock-Based Compensation Accounting for Stock Issued to Employees
 55




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##### Table of Contents



PRG-SCHULTZ INTERNATIONAL, INC. AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 Accounting for Stock-Based Compensation Accounting
for Stock-Based Compensation - Transition and Disclosure
 2005
    
    2004Risk-free interest rates
    
    
    3.98
    %
    
    
    2.94
    %Dividend yields
    
    
    
    
    
    
    Volatility factor of expected market price
    
    
    .744
    
    
    
    .813Weighted-average expected life of option
    
    5 years
    
    5 years
 Accounting for Stock-Based Compensation
 2005
    
    
    2004Net loss before pro forma effect of
compensation expense recognition
provisions of SFAS No. 123
    
    $
    (207,740
    )
    
    $
    (71,483
    )Stock-based compensation expense
included in net loss reported
    
    
    358
    
    
    
    4Pro forma effect of compensation expense
recognition provisions of SFAS No. 123,
net of income taxes of $(3,438) and
$(2,701) in 2005 and 2004, respectively
    
    
    (5,309
    )
    
    
    (4,170
    )Pro forma net loss for purposes of
computing basic and diluted pro forma
earnings (loss) per share
    
    $
    (212,691
    )
    
    $
    (75,649
    )Pro forma net earnings (loss) per share:Basic and diluted  as reported
    
    $
    (33.50
    )
    
    $
    (11.57
    )Basic and diluted  pro forma
    
    $
    (34.30
    )
    
    $
    (12.25
    )
   56




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##### Table of Contents



PRG-SCHULTZ INTERNATIONAL, INC. AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
   (p) Comprehensive Income (Loss)
 Reporting Comprehensive Income 
 (q) Segment Reporting
 Disclosures about Segments of an Enterprise and Related Information
  57




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PRG-SCHULTZ INTERNATIONAL, INC. AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (r) New Accounting Standards
 Accounting Changes and Error Corrections" Accounting Changes" Reporting Accounting
Changes in Interim Financial Statements 
 Accounting for Uncertainty in Income
Taxes  an Interpretation of FASB Statement No. 109.
 Fair Value Measurements
 Considering the
Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial
Statements
 The Fair Value Option for Financial Assets
and Financial Liabilities  Including an amendment of FASB Statement No. 115
 (2) DISCONTINUED OPERATIONS
  58




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PRG-SCHULTZ INTERNATIONAL, INC. AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
      Years Ended December 31,Business sold:
    
    2006
    
    
    2005
    
    
    2004(In thousands)Logistics Management Services, net
of income tax expense of $209 in
2004
    
    $
    289
    
    
    $
    479
    
    
    $
    314Channel Revenue
    
    
    316
    
    
    
    
    
    
    
    Airline
    
    
    (313
    )
    
    
    
    
    
    
    Communications Services, net of
income tax expense of $5,513 in
2004
    
    
    
    
    
    
    
    
    
    
    8,268French Taxation Services
    
    
    
    
    
    
    
    
    
    
    (3,086
    )$
    292
    
    
    $
    479
    
    
    $
    5,496
 59




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##### Table of Contents



PRG-SCHULTZ INTERNATIONAL, INC. AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
  Years Ended December 31,2006
    
    
    2005
    
    
    2004(In thousands)Revenues
    
    $
    1,422
    
    
    $
    5,893
    
    
    $
    6,386Operating losses
    
    $
    (1,125
    )
    
    $
    (2,704
    )
    
    $
    (2,491
    )
  (3) RELATED PARTY TRANSACTIONS
    (4) MAJOR CLIENTS
  60




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PRG-SCHULTZ INTERNATIONAL, INC. AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (5) OPERATING SEGMENTS AND RELATED INFORMATION
  Accounts Payable Services
  Meridian
  Corporate Support
  61




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##### Table of Contents



PRG-SCHULTZ INTERNATIONAL, INC. AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
  AccountsPayable
    
    
    
    
    
    
    CorporateServices
    
    
    Meridian
    
    
    Support
    
    
    Total2006Revenues
    
    $
    225,898
    
    
    $
    40,197
    
    
    $
    3⁄4
    
    
    $
    266,095EBITDA
    
    $
    41,590
    
    
    $
    5,247
    
    
    $
    (28,035
    )
    
    $
    18,802Severance and restructuring expenses
    
    
    5,591
    
    
    
    3⁄4
    
    
    
    2,449
    
    
    
    8,040Stock-based compensation
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    6,436
    
    
    
    6,436Adjusted EBITDA
    
    $
    47,181
    
    
    $
    5,247
    
    
    $
    (19,150
    )
    
    $
    33,2782005Revenues
    
    $
    251,527
    
    
    $
    40,625
    
    
    $
    3⁄4
    
    
    $
    292,152EBITDA
    
    $
    (145,926
    )
    
    $
    7,222
    
    
    $
    (43,224
    )
    
    $
    (181,928
    )Impairment charges
    
    
    170,375
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    170,375Severance and restructuring expenses
    
    
    4,764
    
    
    
    383
    
    
    
    10,329
    
    
    
    15,476Stock-based compensation
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    358
    
    
    
    358Adjusted EBITDA
    
    $
    29,213
    
    
    $
    7,605
    
    
    $
    (32,537
    )
    
    $
    4,2812004Revenues
    
    $
    309,234
    
    
    $
    41,368
    
    
    $
    3⁄4
    
    
    $
    350,602EBITDA
    
    $
    58,466
    
    
    $
    9,876
    
    
    $
    (43,519
    )
    
    $
    24,823Severance and restructuring expenses
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    1,413
    
    
    
    1,413Stock-based compensation
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    4
    
    
    
    4Adjusted EBITDA
    
    $
    58,466
    
    
    $
    9,876
    
    
    $
    (42,102
    )
    
    $
    26,240
  2006
    
    
    2005
    
    
    2004Earnings (loss) from continuing operations
before discontinued operations
    
    $
    (20,266
    )
    
    $
    (205,515
    )
    
    $
    (75,568
    )Income taxes
    
    
    2,019
    
    
    
    821
    
    
    
    76,197Interest, net
    
    
    16,219
    
    
    
    8,391
    
    
    
    8,549Loss on financial restructuring
    
    
    10,047
    
    
    
    3⁄4
    
    
    
    3⁄4Depreciation and amortization
    
    
    10,783
    
    
    
    14,375
    
    
    
    15,645EBITDA
    
    
    18,802
    
    
    
    (181,928
    )
    
    
    24,823Impairment charges
    
    
    3⁄4
    
    
    
    170,375
    
    
    
    3⁄4Severance and restructuring charges
    
    
    8,040
    
    
    
    15,476
    
    
    
    1,413Stock-based compensation
    
    
    6,436
    
    
    
    358
    
    
    
    4Adjusted EBITDA
    
    $
    33,278
    
    
    $
    4,281
    
    
    $
    26,240
 62




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PRG-SCHULTZ INTERNATIONAL, INC. AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
   2006
    
    
    2005
    
    
    2004United States
    
    $
    140,415
    
    
    $
    154,279
    
    
    $
    204,985United Kingdom
    
    
    39,951
    
    
    
    44,082
    
    
    
    51,036Canada
    
    
    16,867
    
    
    
    20,093
    
    
    
    21,221Ireland
    
    
    14,628
    
    
    
    13,084
    
    
    
    14,618France
    
    
    14,560
    
    
    
    13,914
    
    
    
    13,674Japan
    
    
    5,244
    
    
    
    5,966
    
    
    
    5,145Germany
    
    
    5,135
    
    
    
    8,375
    
    
    
    8,343Mexico
    
    
    4,581
    
    
    
    5,722
    
    
    
    4,786Brazil
    
    
    3,790
    
    
    
    4,674
    
    
    
    3,707Spain
    
    
    3,009
    
    
    
    2,582
    
    
    
    3,812Australia
    
    
    1,793
    
    
    
    3,012
    
    
    
    2,812Other
    
    
    16,122
    
    
    
    16,369
    
    
    
    16,463$
    266,095
    
    
    $
    292,152
    
    
    $
    350,602
  2006
    
    
    2005United States
    
    $
    41,826
    
    
    $
    43,943Ireland
    
    
    3,829
    
    
    
    3,788United Kingdom
    
    
    844
    
    
    
    2,066Australia
    
    
    207
    
    
    
    281Other
    
    
    1,379
    
    
    
    2,126$
    48,085
    
    
    $
    52,204
 (6) DILUTED EARNINGS (LOSS) PER SHARE
   (7) ACCOUNTING FOR GOODWILL AND OTHER INTANGIBLE ASSETS
 (a) Goodwill
 Goodwill and Other Intangible Assets,
 63




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PRG-SCHULTZ INTERNATIONAL, INC. AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
     TotalBalance at December 31, 2003
    
    $
    170,619Foreign currency translation
    
    
    65Balance at December 31, 2004
    
    
    170,684Foreign currency translation
    
    
    (109
    )SFAS No. 142 goodwill impairment losses
    
    
    (165,975
    )Balance at December 31, 2005
    
    
    4,600Foreign currency translation
    
    
    3⁄4Balance at December 31, 2006
    
    $
    4,600
 64




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##### Table of Contents



PRG-SCHULTZ INTERNATIONAL, INC. AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (b) Other Intangible Assets
  Balances at December 31, 2006Gross
    
    
    
    
    
    
    NetEstimated
    
    
    Carrying
    
    
    Accumulated
    
    
    CarryingUseful Life
    
    
    Amount
    
    
    Amortization
    
    
    AmountAmortized intangible assets:Customer relationships
    
    20 years
    
    $
    27,700
    
    
    $
    6,838
    
    
    $
    20,862Unamortized intangible assets:Trade name
    
    Indefinite
    
    $
    2,200
    
    
    
    
    
    
    
    2,200Total intangible assets
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    23,062
 Balances at December 31, 2005Gross
    
    
    
    
    
    
    NetEstimated
    
    
    Carrying
    
    
    Accumulated
    
    
    CarryingUseful Life
    
    
    Amount
    
    
    Amortization
    
    
    AmountAmortized intangible assets:Customer relationships
    
    20 years
    
    $
    27,700
    
    
    $
    5,453
    
    
    $
    22,247Unamortized intangible assets:Trade name
    
    Indefinite
    
    $
    2,200
    
    
    
    
    
    
    
    2,200Total intangible assets
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    24,447
     Accounting for the Impairment or Disposal of Long-Lived Assets 
 65




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##### Table of Contents



PRG-SCHULTZ INTERNATIONAL, INC. AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (8) DEBT AND MANDATORILY REDEEMABLE PARTICIPATING PREFERRED STOCK
 Exchange of Convertible Subordinated Notes
   
    
    The new senior notes bear interest at 11%, payable semiannually in cash, and are callable
at 104% of face in year 1, 102% in year 2, and at par in years 3 through 5.
    
    The new senior convertible notes bear interest at 10%, payable semiannually in cash or in
kind, at the option of the Company. The new senior convertible notes are convertible at the
option of the holders into common stock at a rate of approximately 153.8 shares per $1,000
principal amount. On September 15, 2006, the Company issued $2.9 million of additional
senior convertible notes in lieu of the semiannual cash interest payment.
    
    The new Series A convertible preferred stock has a 9% cumulative dividend; unpaid
dividends increase the stocks liquidation preference and redemption value. The new Series A
convertible preferred stock is convertible at the option of the holders into shares of
common stock at the rate of $2.8405 of liquidation preference per share of common stock. As
of December 31, 2006, 37,030 shares of Series A convertible preferred stock had been
converted into 1,618,995 shares of common stock.
    
    The Series A convertible preferred stock votes with the Companys common stock on most
matters required to be submitted to a vote of the common shareholders. The Company has the
right to redeem the new senior convertible notes at par at any time after repayment of the
new senior notes, subject to certain conditions. The Company also has the right to redeem
the new Series A convertible preferred stock at the stated liquidation preference at any
time after repayment of the new senior notes and the new senior convertible notes.
    
    Both the new senior notes and the new senior convertible notes will mature on the fifth
anniversary of issuance. The new Series A convertible preferred stock must be redeemed on
the fifth anniversary of issuance.
   66




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##### Table of Contents



PRG-SCHULTZ INTERNATIONAL, INC. AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
  Senior Credit Facility
 $10 Million
Bridge Loan Agreements
   ,
    67




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##### Table of Contents



PRG-SCHULTZ INTERNATIONAL, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


Prior Senior Credit Facility and Forbearance Agreement
    3 4
 68




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##### Table of Contents



PRG-SCHULTZ INTERNATIONAL, INC. AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
    $10 Million Bridge Loan Agreements
  Prior Convertible Subordinated Notes
 3 4
  69




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##### Table of Contents



PRG-SCHULTZ INTERNATIONAL, INC. AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
       Capital Lease Obligation
   Year Ending December 31,2007
    
    $
    7502008
    
    
    2,0212009
    
    
    2,3142010
    
    
    20,7602011
    
    
    125,165Thereafter
    
    
    3⁄4$
    151,010
 70




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##### Table of Contents



PRG-SCHULTZ INTERNATIONAL, INC. AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (9) LEASE COMMITMENTS
  Accounting for Costs Associated with Exit or Disposal Activities,
 Accounting for Operating Leases with Scheduled
Rent Increases,
   Operating
    
    
    CapitalYear Ending December 31,
    
    Leases
    
    
    Leases2007
    
    $
    9,051
    
    
    $
    612008
    
    
    7,329
    
    
    
    3632009
    
    
    5,928
    
    
    
    3632010
    
    
    4,853
    
    
    
    3022011
    
    
    4,723
    
    
    
    3⁄4Thereafter
    
    
    16,788
    
    
    
    3⁄4Total payments
    
    $
    48,672
    
    
    
    1,089Less amounts representing interest
    
    
    
    
    
    
    (243
    )Principal balance at December 31, 2006
    
    
    
    
    
    $
    846
 71




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##### Table of Contents



PRG-SCHULTZ INTERNATIONAL, INC. AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (10) INCOME TAXES
 Accounting for Income
Taxes 
 2006
    
    
    2005
    
    
    2004Earnings (loss) from continuing operations
    
    $
    2,019
    
    
    $
    821
    
    
    $
    76,197Earnings (loss) from discontinued operations
    
    
    
    
    
    
    
    
    
    
    (1,080
    )Gain on disposal of discontinued operations
    
    
    
    
    
    
    
    
    
    
    5,722Shareholders equity, compensation expense
for tax purposes in excess of financial
purposes
    
    
    
    
    
    
    1
    
    
    
    (17
    )Effect of cumulative translation adjustment
    
    
    (1
    )
    
    
    2
    
    
    
    3$
    2,018
    
    
    $
    824
    
    
    $
    80,825
  2006
    
    
    2005
    
    
    2004United States
    
    $
    (19,947
    )
    
    $
    (190,095
    )
    
    $
    5,910Foreign
    
    
    1,700
    
    
    
    (14,599
    )
    
    
    (5,281
    )$
    (18,247
    )
    
    $
    (204,694
    )
    
    $
    629
  2006
    
    
    2005
    
    
    2004Current:Federal
    
    $
    123
    
    
    $
    58
    
    
    $
    104State
    
    
    14
    
    
    
    166
    
    
    
    10Foreign
    
    
    1,815
    
    
    
    3,444
    
    
    
    3,3891,952
    
    
    
    3,668
    
    
    
    3,503Deferred:Federal
    
    
    
    
    
    
    (1,553
    )
    
    
    42,210State
    
    
    
    
    
    
    (178
    )
    
    
    7,976Foreign
    
    
    67
    
    
    
    (1,116
    )
    
    
    22,50867
    
    
    
    (2,847
    )
    
    
    72,694Total
    
    $
    2,019
    
    
    $
    821
    
    
    $
    76,197
  2006
    
    
    2005
    
    
    2004Statutory federal income tax rate
    
    $
    (6,386
    )
    
    $
    (71,643
    )
    
    $
    220State income taxes, net of federal benefit
    
    
    (839
    )
    
    
    (8
    )
    
    
    (506
    )Nondeductible goodwill
    
    
    
    
    
    
    28,215
    
    
    
    Job Creation Act dividend
    
    
    
    
    
    
    
    
    
    
    700Change in deferred tax asset valuation allowance
    
    
    (60,072
    )
    
    
    42,358
    
    
    
    76,747IRC Sec. 382 limitation impacts
    
    
    62,797Loss on extinguishment of debt
    
    
    3,516
    
    
    
    
    
    
    
    Foreign taxes
    
    
    821
    
    
    
    
    
    
    
    Other, net
    
    
    2,182
    
    
    
    1,899
    
    
    
    (964
    )$
    2,019
    
    
    $
    821
    
    
    $
    76,197
 72




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##### Table of Contents



PRG-SCHULTZ INTERNATIONAL, INC. AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
  2006
    
    
    2005Deferred income tax assets:Accounts payable and accrued expenses
    
    $
    2,641
    
    
    $
    7,175Accrued payroll and related expenses
    
    
    14,224
    
    
    
    8,751Deferred compensation
    
    
    329
    
    
    
    540Depreciation
    
    
    2,622
    
    
    
    5,375Noncompete agreements
    
    
    779
    
    
    
    997Bad debts
    
    
    1,893
    
    
    
    752Foreign operating loss carryforward of foreign subsidiary
    
    
    9,992
    
    
    
    4,770Foreign tax credit carryforwards
    
    
    
    
    
    
    14,347Federal operating loss carryforward
    
    
    11,944
    
    
    
    30,935Intangible assets
    
    
    40,511
    
    
    
    52,356State operating loss carryforwards
    
    
    1,747
    
    
    
    7,556Capital loss carryforwards
    
    
    
    
    
    
    13,263Other
    
    
    4,688
    
    
    
    7,913Gross deferred tax assets
    
    
    91,370
    
    
    
    154,730Less valuation allowance
    
    
    79,540
    
    
    
    139,612Gross deferred tax assets net of valuation allowance
    
    
    11,830
    
    
    
    15,118Deferred income tax liabilities:Intangible assets
    
    
    8,885
    
    
    
    9,424Capitalized software
    
    
    2,057
    
    
    
    1,949Other
    
    
    358
    
    
    
    3,148Gross deferred tax liabilities
    
    
    11,300
    
    
    
    14,521Net deferred tax assets
    
    $
    530
    
    
    $
    597
     73




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##### Table of Contents



PRG-SCHULTZ INTERNATIONAL, INC. AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
   (11) EMPLOYEE BENEFIT PLANS
   (12) SHAREHOLDERS EQUITY (DEFICIT)
  74




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##### Table of Contents



PRG-SCHULTZ INTERNATIONAL, INC. AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
   (13) COMMITMENTS AND CONTINGENCIES
 (a) Legal Proceedings
 In re Profit Recovery Group International, Inc. Sec. Litig et seq
   75




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##### Table of Contents



PRG-SCHULTZ INTERNATIONAL, INC. AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
  (b) Indemnification and Consideration Concerning Certain Future Asset Impairment Assessments
   (c) Bank Guarantee
  (d) Industrial Development Authority Grants
  76




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##### Table of Contents



PRG-SCHULTZ INTERNATIONAL, INC. AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
  (e) Retirement Obligations
  (14) STOCK-BASED COMPENSATION
     77




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PRG-SCHULTZ INTERNATIONAL, INC. AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
      78




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PRG-SCHULTZ INTERNATIONAL, INC. AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
    Weighted-Weighted-
    
    
    Average
    
    
    AggregateAverage
    
    
    Remaining
    
    
    IntrinsicExercise
    
    
    Contractual
    
    
    ValueOptions
    
    Shares
    
    
    Price
    
    
    Term
    
    
    ($000)Outstanding at January 1, 2006
    
    
    840,579
    
    
    $
    84.10Granted
    
    
    174,000
    
    
    
    6.29Exercised
    
    
    Forfeited or expired
    
    
    (524,204
    )
    
    
    91.39Outstanding at December 31, 2006
    
    
    490,375
    
    
    
    48.70
    
    
    4.19 years
    
    $
    557,540Exercisable at December 31, 2006
    
    
    239,500
    
    
    
    90.63
    
    
    1.85 years
    
    $
    16,250
    79




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##### Table of Contents



PRG-SCHULTZ INTERNATIONAL, INC. AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
   (15) FAIR VALUE OF FINANCIAL INSTRUMENTS
     (16) WORKFORCE REDUCTION AND RESTRUCTURING
 Employers Accounting for Postemployment Benefits, Employers Accounting for Settlements and Curtailments of Defined Benefit Pension
Plans and for Termination Benefits
 80




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##### Table of Contents



PRG-SCHULTZ INTERNATIONAL, INC. AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 Accounting
for Costs Associated with Exit or Disposal Activities 
  Accounts
    
    
    
    
    
    
    CorporatePayable
    
    
    Meridian
    
    
    Support
    
    
    TotalBalance as of January 1, 2005
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    2005 Accruals
    
    
    4,764
    
    
    
    383
    
    
    
    6,403
    
    
    
    11,5502005 Cash payments
    
    
    (1,962
    )
    
    
    
    
    
    
    (1,000
    )
    
    
    (2,962
    )2005 Non cash impairment charges
    
    
    (235
    )
    
    
    
    
    
    
    (137
    )
    
    
    (372
    )Balance as of December 31, 2005
    
    
    2,567
    
    
    
    383
    
    
    
    5,266
    
    
    
    8,2162006 Accruals
    
    
    1,681
    
    
    
    
    
    
    
    2,449
    
    
    
    4,1302006 Cash payments
    
    
    (3,781
    )
    
    
    (286
    )
    
    
    (4,970
    )
    
    
    (9,037
    )2006 Non cash impairment charges
    
    
    
    
    
    
    
    
    
    
    (546
    )
    
    
    (546
    )2006 Allocations
    
    
    
    
    
    
    
    
    
    
    1,262
    
    
    
    1,262Balance as of December 31, 2006
    
    $
    467
    
    
    $
    97
    
    
    $
    3,461
    
    
    $
    4,025
 Accounting for Operating Leases with Scheduled Rent Increases.
 81




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##### Table of Contents



ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
  
 ITEM 9A. CONTROLS AND PROCEDURES
 a) Changes in Accelerated Filer Status
    b) Disclosure Controls and Procedures
   c) Remediation of Certain Prior Year Material Weaknesses
  Company Level Controls
  
    
    The Companys accounting function lacked personnel with adequate expertise
related to accounting for and reporting of the Companys non-routine transactions and
complex accounting matters. This deficiency resulted in material errors in the accounting
for the impairment of goodwill and other long-lived assets and
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##### Table of Contents



in the recognition of employee severance costs. This deficiency also resulted in errors in
the recognition of revenue and the recognition of stock compensation expense.
    
    The Company had inadequate review controls over account reconciliations and
account analyses. This deficiency resulted in errors in the accounting for (i) property
and equipment; (ii) current income tax receivables and payables; and (iii) accrued
liabilities.
    
    The Companys policies and procedures relating to the financial reporting
process did not ensure that financial statements were prepared and reviewed in a timely
manner. Specifically, the Company had insufficient (i) review and supervision within the
accounting department, and (ii) preparation and review procedures for footnote disclosures
accompanying the Companys financial statements. These deficiencies resulted in
misclassifications and insufficient disclosures during the preparation of the Companys
interim and annual financial statements.
    
    The Company did not have adequately designed processes and controls regarding
communication among the accounting, finance, operations and human resource departments with
respect to matters affecting the Companys financial reporting. This deficiency resulted in
errors in the accounting for lease payments, severance, and employee compensation.
  
    
    The Company upgraded and supplemented the talent of its accounting staff throughout the
organization by hiring and promoting qualified candidates, including a number of external
candidates.
    
    The Company has hired a new Controller with requisite professional and technical
accounting experience to prepare and review the financial statements of the Company.
    
    The Company has enhanced its account reconciliation process to ensure that accounts are
being reconciled on a timely basis, whereupon the reconciliations are then independently
reviewed and any reconciling items are cleared on a timely basis.
    
    The Company has improved documentation of management review and reconciliation
performance through policies, education, and re-enforcement.
    
    The Company has created documented approval processes in order to strengthen the lines
of communication between various departments in the Company.
    
    The Company has implemented checklists as additional controls to ensure that information
was appropriately passed to the accounting department.
  Revenue Recognition
  
    
    The Companys review controls were not adequate to ensure consistent application of the
Companys revenue recognition policy. Specifically, review controls over the determination
of when our services are considered performed were not designed effectively.
    
    The Companys review procedures to ensure that non-standard terms included in client
agreements are identified and accounted for correctly were not operating effectively.
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##### Table of Contents




    
    The Company formed a special committee to review and evaluate the controls surrounding
revenue recognition.
    
    The Company revised and implemented several key controls surrounding revenue
recognition, including the documented certification of each invoice by the submitting
employee.
    
    The Company performed training sessions with key employees to educate on the Company
policy for recognizing revenue.
    
    Senior management increased its involvement with regards to revenue recognition.
   
    
    The Company has implemented a review of all new contracts by finance and operational
management to identify any non-standard terms or accounting issues prior to execution of
the contract.
    
    The Company reviews contract terms with all first billings of each client to ensure that
the billing is in accordance with contract terms.
   
 ITEM 9B. Other Information.
  84




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##### Table of Contents



PART III
 
 ITEM 10. Directors, Executive Officers and Corporate Governance
  www.prgx.com
 
 ITEM 11. Executive Compensation
  
 ITEM 12.
    
    Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
  85




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##### Table of Contents



Securities Authorized for Issuance Under Equity Compensation Plans
  Equity Compensation Plan Information
  Weighted-average exercise
    
    Number of securities remainingNumber of securities to be issued
    
    price of outstanding
    
    available for future issuance underupon exercise of outstanding
    
    options, warrants and
    
    equity compensation plans (excludingPlan category
    
    options, warrants and rights
    
    rights (1)
    
    securities reflected in column (a))(a)
    
    (b)
    
    (c)Equity compensation plans
approved by security holders:Options and restricted stock
    
    
    442,875
    
    
    $
    53.91
    
    
    
    569,745
    (2)Share awards (3)
    
    
    482,624
    
    
    
    
    
    
    
    39,132Equity compensation plans not
approved by security holders
(4)
    
    
    50,000
    
    
    
    2.80
    
    
    
    Total
    
    
    975,499
    
    
    $
    48.70
    
    
    
    608,877
 
 (1)
    
    Excludes impact of restricted stock and share awards which is $0.00 per share.(2)
    
    Includes 27,500 shares available for restricted stock awards.(3)
    
    Amounts presented represent 60% of Performance Unit awards under the Companys 2006
Management Incentive Plan. Performance Unit awards are required to be settled 60% in common
stock and 40% in cash. Performance Unit awards are automatically adjusted pro rata upon any
conversions of senior convertible notes or Series A convertible preferred stock into common
stock.(4)
    
    Inducement Option Grant  See Note 14 of Notes to Consolidated Financial Statements
included in Item 8. of this Form 10-K. 
 ITEM 13. Certain Relationships and Related Transactions, and Director Independence
 -
 
 ITEM 14. Principal Accounting Fees and Services
   86




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##### Table of Contents



PART IV
 
 ITEM 15. Exhibits, Financial Statement Schedules
    PageReports of Independent Registered Public Accounting Firms
    
    
    45 & 46Consolidated Statements of Operations for the Years ended December
31, 2006, 2005 and 2004
    
    
    47Consolidated Balance Sheets as of December 31, 2006 and 2005
    
    
    48Consolidated Statements of Shareholders Equity (Deficit) for the
Years ended December 31, 2006, 2005 and 2004
    
    
    49Consolidated Statements of Cash Flows for the Years ended December
31, 2006, 2005 and 2004
    
    
    50Notes to Consolidated Financial Statements
    
    
    51(2) Financial Statement Schedule:Schedule II  Valuation and Qualifying Accounts
    
    
    S-1(3) Exhibits
 ExhibitNumber
    
    Description3.1
    
    
    Restated Articles of Incorporation of the Registrant, as amended and corrected
through August 11, 2006 (restated solely for the purpose of filing with the
Commission) (incorporated by reference to Exhibit 3.1 to the Registrants Report
on Form 8-K filed on August 17, 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).4.3.1
    
    
    First Amendment to Shareholder Protection Rights Agreement, dated as of March 12,
2002, between the Registrant and Rights Agent (incorporated by reference to
Exhibit 4.3 to the Registrants Form 10-Q for the quarterly period ended September
30, 2002).4.3.2
    
    
    Second Amendment to Shareholder Protection Rights Agreement, dated as of August
16, 2002, between the Registrant and Rights Agent (incorporated by reference to
Exhibit 4.3 to the Registrants Form 10-Q for the quarterly period ended September
30, 2002).4.3.3
    
    
    Third Amendment to Shareholder Protection Rights Agreement, dated as of November
7, 2006, between the Registrant and Rights Agent (incorporated by reference to
Exhibit 4.1 to the Registrants Form 8-K filed on November 14, 2005).4.3.4
    
    
    Fourth Amendment to Shareholder Protection Rights Agreement, dated as of November
14, 2006, between the Registrant and Rights Agent (incorporated by reference to
Exhibit 4.1 to the Registrants Form 8-K filed on November 30, 2005).4.3.5
    
    
    Fifth Amendment to Shareholder Protection Rights Agreement, dated as of March 9,
2006, between the Registrant and Rights Agent (incorporated by reference to
Exhibit 4.9 to the Registrants Form 10-K for the year ended December 31, 2005).
 87




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##### Table of Contents



ExhibitNumber
    
    Description4.4
    
    
    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
    
    
    Indenture dated as of March 17, 2006 governing 10% Senior Convertible Notes due
2011, with Form of Note appended (incorporated by reference to Exhibit 4.1 to the
Registrants Form 8-K filed on March 23, 2006).4.6
    
    
    Indenture dated as of March 17, 2006 governing 11% Senior Notes due 2011, with
Form of Note appended (incorporated by reference to Exhibit 4.2 to the
Registrants Form 8-K filed on March 23, 2006).+10.1
    
    
    1996 Stock Option Plan, dated as of January 25, 1996, together with Forms of
Non-qualified Stock Option Agreement (incorporated by reference to Exhibit 10.2 to
the Registrants March 26, 1996 Registration Statement No. 333-1086 on Form S-1).+10.2
    
    
    Form of Indemnification Agreement between the Registrant and Directors and certain
officers, including named executive officers, of the Registrant (incorporated by
reference to Exhibit 10.4 to the Registrants Form 10-K for the year ended
December 31, 2003).+10.3
    
    
    Discussion of Management and Professional Incentive Plan (incorporated by
reference to Exhibit 10.27 to the Registrants Form 10-K for the year ended
December 31, 2000).+10.4
    
    
    Form of the Registrants Non-Qualified Stock Option Agreement (incorporated by
reference to Exhibit 10.2 to the Registrants Form 10-Q for the quarterly period
ended June 30, 2001).10.5
    
    
    Noncompetition, Nonsolicitation and Confidentiality Agreement among The Profit
Recovery Group International, Inc., Howard Schultz & Associates International,
Inc., Howard Schultz, Andrew Schultz and certain trusts, dated January 24, 2002
(incorporated by reference to Exhibit 10.34 to the Registrants Form 10-K for the
year ended December 31, 2001).10.6
    
    
    Office Lease Agreement between Galleria 600, LLC and PRG-Schultz International,
Inc. (incorporated by reference to Exhibit 10.43 to the Registrants Form 10-K for
the year ended December 31, 2001).10.6.1
    
    
    First Amendment to Office Lease Agreement between Galleria 600, LLC and
PRG-Schultz International, Inc. (incorporated by reference to Exhibit 10.65 to the
Registrants Form 10-K for the year ended December 31, 2002).+10. 7
    
    
    Amended Stock Incentive Plan (incorporated by reference to Exhibit 10.3 to the
Registrants Form 10-Q for the quarterly period ended June 30, 2002).+10.8
    
    
    Amended HSA-Texas Stock Option Plan (incorporated by reference to Exhibit 10.4 to
the Registrants Form 10-Q for the quarterly period ended June 30, 2002).10.9
    
    
    Investor Rights Agreement, dated as of August 27, 2002, among PRG-Schultz
International, Inc., Berkshire Fund V, LP, Berkshire Investors LLC and Blum
Strategic Partners II, L.P. (incorporated by reference to Exhibit 10.7 to the
Registrants Form 10-Q for the quarterly period ended September 30, 2002).10.9.1
    
    
    Amendment to Investor Rights Agreement dated March 28, 2006 (incorporated by
reference to Exhibit 10.8 to the Registrants Form 10-Q for the quarter ended
March 31, 2006).10.10
    
    
    Registration Rights Agreement, dated as of August 27, 2002, by and between
PRG-Schultz International, Inc., Blum Strategic Partners II, L.P. and other
affiliates of Blum Capital Partners, LP (incorporated by reference to Exhibit 10.8
to the Registrants Form 10-Q for the quarterly period ended September 30, 2002).10.11
    
    
    Registration Rights Agreement, dated as of August 27, 2002, by and between
PRG-Schultz International, Inc., Berkshire Fund V, LP and Berkshire Investors LLC
(incorporated by reference to Exhibit 10.9 to the Registrants Form 10-Q for the
quarterly period ended September 30, 2002).+10.12
    
    
    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).10.13
    
    
    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).10.13.1
    
    
    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 Form
10-K for the year ended December 31, 2005).
 88




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##### Table of Contents



ExhibitNumber
    
    Description10.13.2
    
    
    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 Form 10-K for the year ended December 31, 2005).+10.14
    
    
    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).10.15
    
    
    Summary of compensation arrangements with non-employee directors of the Registrant.10.16
    
    
    Summary of compensation arrangements with named executive officers of Registrant.*10.17
    
    
    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).*10.18
    
    
    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).10.18.1
    
    
    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).+10.19
    
    
    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).+10.19.1
    
    
    Amendment to Employment Agreement with James B. McCurry dated December 8, 2005
(incorporated by reference to Exhibit 10.59 to the Registrants Form 10-K for the
year ended December 31, 2005).+10.20
    
    
    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).+10.20.1
    
    
    Amendment to Retainer Agreement with David A. Cole dated October 19, 2005
(incorporated by reference to Exhibit 10.67 to the Registrants Form 10-K for the
year ended December 31, 2005).10.21
    
    
    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).10.21.1
    
    
    First Amendment to Separation and Release Agreement with John M. Cook dated March
16, 2006 (incorporated by reference to Exhibit 99.1 to the registrants Form 8-K
filed on March 22, 2006).10.22
    
    
    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).10.22.1
    
    
    First Amendment to Separation and Release Agreement with John M. Toma dated March
16, 2006 (incorporated by reference to Exhibit 99.2 to the registrants Form 8-K
filed on March 22, 2006).10.23
    
    
    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).10.24
    
    
    Release Agreement and Covenant Not to Sue between Registrant and Mr. James E.
Moylan, Jr., effective as of February 18, 2006.+10.25
    
    
    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).10.26
    
    
    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).10.7
    
    
    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
Form 10-K for the year ended December 31, 2005).10.28
    
    
    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 Form 10-K for the
year ended December 31, 2005).10.29
    
    
    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 Form 10-K for the
year ended December 31, 2005).
 89




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##### Table of Contents



ExhibitNumber
    
    Description10.30
    
    
    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 Form 10-K for the
year ended December 31, 2005).10.31
    
    
    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 Form
10-K for the year ended December 31, 2005).10.32
    
    
    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 Form 10-K for the year ended December 31, 2005).10.33
    
    
    Restructuring Support Agreement dated December 23, 2005 (incorporated by reference
to Exhibit 10.66 to the Registrants Form 10-K for the year ended December 31,
2005).10.33.1
    
    
    Amended and Restated Restructuring Support Agreement (incorporated by reference to
Exhibit 10.1 to the Registrants Form 10-Q for the quarter ended March 31, 2006).+10.34
    
    
    Employment Agreement with Larry Robinson dated January 1, 2006 (incorporated by
reference to Exhibit 10.68 to the Registrants Form 10-K for the year ended
December 31, 2005).+10.35
    
    
    Employment Agreement with Brad Roos dated June 1, 2001 (incorporated by reference
to Exhibit 10.69 to the Registrants Form 10-K for the year ended December 31,
2005).+10.36
    
    
    Form of Expatriate Assignment Agreement with Brad Roos (incorporated by reference
to Exhibit 10.70 to the Registrants Form 10-K for the year ended December 31,
2005).10.37
    
    
    Houlihan Lokey Agreement dated October 21, 2005 (incorporated by reference to
Exhibit 10.71 to the Registrants Form 10-K for the year ended December 31, 2005).10.37.1
    
    
    Amendment Letter with Houlihan Lokey dated February 1, 2006 (incorporated by
reference to Exhibit 10.72 to the Registrants Form 10-K for the year ended
December 31, 2005).10.38
    
    
    Rothschild Inc. Agreement dated as of September 14, 2005 (incorporated by
reference to Exhibit 10.73 to the Registrants Form 10-K for the year ended
December 31, 2005).10.38.1
    
    
    Letter Agreement with Rothschild Inc. dated February 1, 2006 (incorporated by
reference to Exhibit 10.74 to the Registrants Form 10-K for the year ended
December 31, 2005).10.39
    
    
    Registration Rights Agreement dated March 17, 2006 (incorporated by reference to
Exhibit 10.2 to the Registrants Form 10-Q for the quarter ended March 31, 2006).10.40
    
    
    Financing Agreement dated March 17, 2006 (incorporated by reference to Exhibit
10.3 to the Registrants Form 10-Q for the quarter ended March 31, 2006).10.41
    
    
    Security Agreement dated March 17, 2006 (incorporated by reference to Exhibit 10.4
to the Registrants Form 10-Q for the quarter ended March 31, 2006).10.42
    
    
    2006 Performance Bonus Plan (incorporated by reference to Exhibit 10.5 to the
Registrants Form 10-Q for the quarter ended March 31, 2006).+10.43
    
    
    Amended and Restated 2006 Management Incentive Plan (incorporated by reference to
Exhibit 10.1 to the Registrants Form 10-Q for the quarter ended September 30,
2006).+10.43.1
    
    
    Form of Performance Unit Agreement under 2006 Amended and Restated Management
Incentive Plan (incorporated by reference to Exhibit 10.2 to the Registrants Form
10-Q for the quarter ended September 30, 2006).+10.44
    
    
    Employment Agreement with Norman Lee White, dated June 19, 2006 (incorporated by
reference to Exhibit 10.1 to the Registrants Report on Form 8-K filed on June 20,
2006).+10.45
    
    
    Form of Non-Employee Director Stock Option Agreement (incorporated by reference to
Exhibit 10.1 to the Registrants Report on Form 8-K filed on September 27, 2006).10.46
    
    
    Option Termination Agreement with James B. McCurry dated September 29, 2006
(incorporated by reference to Exhibit 10.1 to the Registrants Report on Form 8-K
filed on October 5, 2006).14.1
    
    
    Code of Ethics for Senior Financial Officers (incorporated by reference to Exhibit
14.1 to the Registrants Form 10-K for the year ended December 31, 2003).21.1
    
    
    Subsidiaries of the Registrant.23.1
    
    
    Consent of BDO Seidman, LLP23.2
    
    
    Consent of KPMG LLP.31.1
    
    
    Certification of the Chief Executive Officer, pursuant to Rule 13a-14(a) or
15d-14(a), for the year ended December 31, 2006.31.2
    
    
    Certification of the Chief Financial Officer, pursuant to Rule 13a-14(a) or
15d-14(a), for the year ended December 31, 2006.32.1
    
    
    Certification of the Chief Executive Officer and Chief Financial Officer, pursuant
to 18 U.S.C. Section 1350, for the year ended December 31, 2006.
 90




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##### Table of Contents



*
    
    Confidential treatment, pursuant to 17 CFR Secs. §§ 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.+
    
    Designates management contract or compensatory plan or arrangement. 91




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##### Table of Contents



SIGNATURES
  PRG-SCHULTZ INTERNATIONAL, INC.By:
    
    /s/ JAMES B. MCCURRYJames B. McCurryPresident, Chairman of the Board and Chief Executive Officer

(Principal Executive Officer)Date:
    
    March 21, 2007
  Signature
    
    Title
    
    Date/s/ JAMES B. MCCURRY

James B. McCurry
    
    President, Chairman of the Board
and Chief Executive Officer

(Principal Executive Officer)
    
    March 21, 2007/s/ PETER LIMERI
Peter Limeri
    
    Chief Financial Officer and Treasurer
(Principal Financial Officer)
    
    March 21, 2007/s/ ROBERT B. LEE

Robert B. Lee
    
    Controller
(Principal Accounting Officer)
    
    March 21, 2007/s/ DAVID A. COLE

David A. Cole
    
    Director
    
    March 21, 2007/s/ PATRICK G. DILLS

Patrick G. Dills
    
    Director
    
    March 21, 2007/s/ EUGENE I. DAVIS

Eugene I. Davis
    
    Director
    
    March 21, 2007/s/ N. COLIN LIND

N. Colin Lind
    
    Director
    
    March 21, 2007/s/ PHILLIP J. MAZZILLI

Phillip J. Mazzilli
    
    Director
    
    March 21, 2007/s/ STEVEN P. ROSENBERG

Steven P. Rosenberg
    
    Director
    
    March 21, 2007
 92




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##### Table of Contents



SCHEDULE II  VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004
(In thousands)
 Additions
    
    DeductionsChargeBalance at
    
    (Credit) to
    
    Credit to
    
    Balance atBeginning
    
    Costs and
    
    the respective
    
    End ofDescription
    
    of Year
    
    Expenses
    
    receivable (1)
    
    Year2006Allowance for doubtful accounts receivable
    
    $
    2,717
    
    
    
    (588
    )
    
    
    (210
    )
    
    $
    1,919Allowance for doubtful employee advances
and miscellaneous receivables
    
    $
    2,974
    
    
    
    460
    
    
    
    (2,128
    )
    
    $
    1,306Deferred tax valuation allowance
    
    $
    139,612
    
    
    
    (60,072
    )
    
    
    
    
    
    $
    79,5402005Allowance for doubtful accounts receivable
    
    $
    2,254
    
    
    
    1,207
    
    
    
    (744
    )
    
    $
    2,717Allowance for doubtful employee advances
and miscellaneous receivables
    
    $
    3,333
    
    
    
    540
    
    
    
    (899
    )
    
    $
    2,974Deferred tax valuation allowance
    
    $
    97,254
    
    
    
    42,358
    
    
    
    
    
    
    $
    139,6122004Allowance for doubtful accounts receivable
    
    $
    3,236
    
    
    
    1,312
    
    
    
    (2,294
    )
    
    $
    2,254Allowance for doubtful employee advances
and miscellaneous receivables
    
    $
    4,760
    
    
    
    2,590
    
    
    
    (4,017
    )
    
    $
    3,333Deferred tax valuation allowance
    
    $
    24,967
    
    
    
    72,287
    
    
    
    3⁄4
    
    
    $
    97,254
 
 (1)
    
    Write-offs, net of recoveries S-1




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##### Table of Contents