##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 
 FORM 10-Q
 
 (Mark One)
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended September 30, 2007
 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
 þ o
  o o þ
 o þ




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##### 



PRG-SCHULTZ INTERNATIONAL, INC.
 FORM 10-Q
For the Quarter Ended September 30, 2007
 INDEX
 Page No.Part I.
    
    Financial InformationItem 1.
    
    Financial Statements
    
    1Condensed Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2007 and 2006
    
    1Condensed Consolidated Balance Sheets as of September 30, 2007 and December 31, 2006
    
    2Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2007 and 2006
    
    3Notes to Condensed Consolidated Financial Statements
    
    4Item 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    16Item 3.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    28Item 4.
    
    Controls and Procedures
    
    29Part II.
    
    Other InformationItem 1.
    
    Legal Proceedings
    
    30Item 1A.
    
    Risk Factors
    
    30Item 2.
    
    Unregistered Sales of Equity Securities and Use of Proceeds
    
    31Item 3.
    
    Defaults Upon Senior Securities
    
    31Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    31Item 5.
    
    Other Information
    
    31Item 6.
    
    Exhibits
    
    32Signatures
    
    
    
    34EX-31.1 SECTION 302 CERTIFICATIONEX-31.2 SECTION 302 CERTIFICATIONEX-32.1 SECTION 906 CERTIFICATION




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##### Table of Contents



PART I. FINANCIAL INFORMATION
 
 Item 1. Financial Statements
 
 PRG-SCHULTZ INTERNATIONAL, INC. AND SUBSIDIARIES
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except per share data)
 Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Revenues
    
    $
    53,207
    
    
    $
    54,830
    
    
    $
    163,552
    
    
    $
    165,686Cost of revenues
    
    
    33,511
    
    
    
    37,531
    
    
    
    105,624
    
    
    
    117,254Gross margin
    
    
    19,696
    
    
    
    17,299
    
    
    
    57,928
    
    
    
    48,432Selling, general and administrative expenses
    
    
    17,562
    
    
    
    16,605
    
    
    
    45,730
    
    
    
    43,408Operational restructuring expense (Note I)
    
    
    1,644
    
    
    
    153
    
    
    
    1,644
    
    
    
    2,141Operating income
    
    
    490
    
    
    
    541
    
    
    
    10,554
    
    
    
    2,883Interest expense, net
    
    
    3,133
    
    
    
    5,278
    
    
    
    12,023
    
    
    
    12,137Loss (gain) on financial restructuring (Note H)
    
    
    
    
    
    
    (82
    )
    
    
    
    
    
    
    10,047Loss from continuing operations before
income taxes and discontinued operations
    
    
    (2,643
    )
    
    
    (4,655
    )
    
    
    (1,469
    )
    
    
    (19,301
    )Income taxes
    
    
    337
    
    
    
    306
    
    
    
    1,212
    
    
    
    760Loss from continuing operations before
discontinued operations
    
    
    (2,980
    )
    
    
    (4,961
    )
    
    
    (2,681
    )
    
    
    (20,061
    )Discontinued operations (Note B):Earnings (loss) from discontinued
operations, net of income taxes
    
    
    (11
    )
    
    
    727
    
    
    
    19,764
    
    
    
    1,888Net earnings (loss)
    
    $
    (2,991
    )
    
    $
    (4,234
    )
    
    $
    17,083
    
    
    $
    (18,173
    )Basic and diluted earnings (loss) per
common share (Note C):Loss from continuing operations before
discontinued operations
    
    $
    (0.31
    )
    
    $
    (0.80
    )
    
    $
    (0.34
    )
    
    $
    (3.24
    )Discontinued operations
    
    
    (0.00
    )
    
    
    0.11
    
    
    
    2.14
    
    
    
    0.29Net earnings (loss)
    
    $
    (0.31
    )
    
    $
    (0.69
    )
    
    $
    1.80
    
    
    $
    (2.95
    )Weighted-average common shares outstanding
(Note C ):Basic
    
    
    10,275
    
    
    
    6,575
    
    
    
    9,247
    
    
    
    6,391Diluted
    
    
    10,275
    
    
    
    6,575
    
    
    
    9,247
    
    
    
    6,391
 See accompanying Notes to Condensed Consolidated Financial Statements.
 1




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##### Table of Contents



PRG-SCHULTZ INTERNATIONAL, INC. AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data)
 September 30,2007
    
    
    December 31,(Unaudited)
    
    
    2006ASSETSCurrent assets:Cash and cash equivalents (Note G)
    
    $
    27,757
    
    
    $
    30,228Restricted cash
    
    
    242
    
    
    
    139Receivables:Contract receivables, less allowances of $1,250 in 2007 and $1,795 in 2006Billed
    
    
    32,889
    
    
    
    31,246Unbilled
    
    
    7,104
    
    
    
    8,45739,993
    
    
    
    39,703Employee
advances and miscellaneous receivables, less allowances of$1,631 in 2007
and $1,306 in 2006
    
    
    355
    
    
    
    2,534Total receivables
    
    
    40,348
    
    
    
    42,237Prepaid expenses and other current assets
    
    
    3,007
    
    
    
    1,953Deferred income taxes
    
    
    
    
    
    
    139Current assets of discontinued operations (Note B)
    
    
    2,152
    
    
    
    52,320Total current assets
    
    
    73,506
    
    
    
    127,016Property and equipment, at cost
    
    
    44,789
    
    
    
    52,990Less accumulated depreciation and amortization
    
    
    (37,638
    )
    
    
    (44,180
    )Property and equipment, net
    
    
    7,151
    
    
    
    8,810Goodwill
    
    
    4,600
    
    
    
    4,600Intangible assets, less accumulated amortization of $8,130 in 2007 and $6,838 in 2006
    
    
    21,770
    
    
    
    23,062Unbilled receivables
    
    
    2,295
    
    
    
    3,175Deferred income taxes
    
    
    405
    
    
    
    391Other assets
    
    
    5,601
    
    
    
    7,492Noncurrent assets of discontinued operations (Note B)
    
    
    
    
    
    
    4,121$
    115,328
    
    
    $
    178,667LIABILITIES AND SHAREHOLDERS EQUITY (DEFICIT)Current liabilities:Accounts payable and accrued expenses
    
    $
    14,183
    
    
    $
    17,959Accrued payroll and related expenses
    
    
    27,578
    
    
    
    37,224Refund liabilities
    
    
    9,628
    
    
    
    10,112Deferred revenue
    
    
    809
    
    
    
    545Current portions of debt obligations (Note H)
    
    
    477
    
    
    
    750Current liabilities of discontinued operations (Note B)
    
    
    
    
    
    
    55,208Total current liabilities
    
    
    52,675
    
    
    
    121,798Senior notes, net of unamortized discount of $6,643 in 2007 and $7,659 in 2006 (Note H)
    
    
    44,812
    
    
    
    43,796Senior convertible notes, including unamortized premium of $1,944 in 2007 and
$5,519 in 2006 (Note H)
    
    
    28,216
    
    
    
    68,030Other debt obligations (Note H)
    
    
    647
    
    
    
    25,096Noncurrent compensation obligations
    
    
    10,704
    
    
    
    5,859Refund liabilities
    
    
    1,598
    
    
    
    1,659Other long-term liabilities
    
    
    6,045
    
    
    
    5,713Total liabilities
    
    
    144,697
    
    
    
    271,951Mandatorily redeemable participating preferred stock (Note H)
    
    
    6,481
    
    
    
    11,199Shareholders equity (deficit) (Notes D and H):Common stock, no par value; $.01 stated value per share. Authorized 50,000,000 shares;
issued 15,815,600 in 2007 and 8,398,770 in 2006
    
    
    158
    
    
    
    84Additional paid-in capital
    
    
    563,211
    
    
    
    513,920Accumulated deficit
    
    
    (555,065
    )
    
    
    (571,818
    )Accumulated other comprehensive income
    
    
    4,556
    
    
    
    2,041Treasury stock, at cost; 576,453 shares in 2007 and 2006
    
    
    (48,710
    )
    
    
    (48,710
    )Total shareholders equity (deficit)
    
    
    (35,850
    )
    
    
    (104,483
    )Commitments and contingencies (Note I)
    
    $
    115,328
    
    
    $
    178,667
 See accompanying Notes to Condensed Consolidated Financial Statements.
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PRG-SCHULTZ INTERNATIONAL, INC. AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
 Nine Months EndedSeptember 30,2007
    
    
    2006Cash flows from operating activities:Net earnings (loss)
    
    $
    17,083
    
    
    $
    (18,173
    )Earnings from discontinued operations
    
    
    19,764
    
    
    
    1,888Loss from continuing operations
    
    
    (2,681
    )
    
    
    (20,061
    )Adjustments to reconcile loss from continuing operations to net
cash provided by operating activities:Loss on financial restructuring
    
    
    
    
    
    
    10,047Depreciation and amortization
    
    
    5,263
    
    
    
    7,733Amortization of debt discount, premium and deferred loan costs
    
    
    2,451
    
    
    
    1,130Stock-based compensation costs
    
    
    12,315
    
    
    
    4,835(Gain) loss on sale of property, plant and equipment
    
    
    595
    
    
    
    (8
    )Changes in assets and liabilities:Restricted cash
    
    
    (103
    )
    
    
    (110
    )Billed receivables
    
    
    1,666
    
    
    
    8,388Unbilled receivables
    
    
    2,233
    
    
    
    967Prepaid expenses and other current assets
    
    
    (911
    )
    
    
    15Other assets
    
    
    368
    
    
    
    1,991Accounts payable and accrued expenses
    
    
    (3,218
    )
    
    
    1,202Accrued payroll and related expenses
    
    
    (10,307
    )
    
    
    (4,828
    )Refund liabilities
    
    
    (545
    )
    
    
    (2,303
    )Deferred revenue
    
    
    213
    
    
    
    (1,154
    )Noncurrent compensation obligations
    
    
    (773
    )
    
    
    (519
    )Other long-term liabilities
    
    
    332
    
    
    
    (192
    )Net cash provided by operating activities
    
    
    6,898
    
    
    
    7,133Cash flows from investing activities:Purchases of property and equipment, net of disposal proceeds
    
    
    (2,172
    )
    
    
    (766
    )Net cash used in investing activities
    
    
    (2,172
    )
    
    
    (766
    )Cash flows from financing activities:Net borrowings (repayments) of debt
    
    
    (25,324
    )
    
    
    8,200Issuance costs of common and preferred stock
    
    
    (15
    )
    
    
    (1,281
    )Net proceeds from common stock issuances, including option exercises
    
    
    57
    
    
    
    Payments for deferred loan cost
    
    
    (1,787
    )
    
    
    (7,750
    )Net cash used in financing activities
    
    
    (27,069
    )
    
    
    (831
    )Cash flows from discontinued operations:Operating cash flows
    
    
    (2,189
    )
    
    
    (70
    )Investing cash flows
    
    
    21,133
    
    
    
    529Net cash provided by discontinued operations
    
    
    18,944
    
    
    
    459Effect of exchange rates on cash and cash equivalents
    
    
    928
    
    
    
    927Net change in cash and cash equivalents
    
    
    (2,471
    )
    
    
    6,922Cash and cash equivalents at beginning of period
    
    
    30,228
    
    
    
    8,361Cash and cash equivalents at end of period
    
    $
    27,757
    
    
    $
    15,283Supplemental disclosure of cash flow information:Cash paid during the period for interest
    
    $
    13,319
    
    
    $
    4,799Cash paid during the period for income taxes, net of refunds
    
    $
    672
    
    
    $
    1,344
 See accompanying Notes to Condensed Consolidated Financial Statements.
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PRG-SCHULTZ INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2007 and 2006
(Unaudited)
 Note A  Basis of Presentation
     Goodwill and Other Intangible Assets
 New Accounting Standards
 Accounting for Uncertainty in Income Taxes  an Interpretation of FASB Statement No. 109
 Fair Value Measurements
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PRG-SCHULTZ INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
 The Fair Value Option for Financial Assets
and Financial Liabilities  Including an amendment of FASB Statement No. 115
 Note B  Discontinued Operations
  Three Months
    
    
    Nine MonthsEnded
    
    
    EndedSeptember 30,
    
    
    September 30,Components of discontinued operations:
    
    2007
    
    
    2006
    
    
    2007
    
    
    2006Revenues
    
    $
    
    
    
    $
    9,903
    
    
    $
    17,386
    
    
    $
    31,319Operating income (loss)
    
    
    (11
    )
    
    
    1,147
    
    
    
    713
    
    
    
    2,597Gain on sale or disposal
    
    
    
    
    
    
    
    
    
    
    19,460
    
    
    
    245(11
    )
    
    
    1,147
    
    
    
    20,173
    
    
    
    2,842Income tax expense
    
    
    
    
    
    
    420
    
    
    
    409
    
    
    
    954Earnings (loss) from discontinued operations
    
    $
    (11
    )
    
    $
    727
    
    
    $
    19,764
    
    
    $
    1,888
   December 31, 2006Current assets of discontinued operations:Cash and cash equivalents
    
    $
    4,785Restricted cash
    
    
    3,299Receivables
    
    
    1,218Prepaid expenses and other current assets
    
    
    714Funds held for client obligations
    
    
    42,304$
    52,320Noncurrent assets of discontinued operations:Property and equipment, net
    
    $
    1,593Other assets
    
    
    2,528$
    4,121Current liabilities of discontinued operations:Accounts payable and accrued expenses
    
    $
    5,717Accrued payroll and related expenses
    
    
    3,802Deferred revenue
    
    
    3,385Obligations for client payables
    
    
    42,304$
    55,208
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PRG-SCHULTZ INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
   Note C  Earnings (Loss) Per Common Share
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Numerator for basic and diluted earnings (loss)
per common share:Loss from continuing operations before
discontinued operations
    
    $
    (2,980
    )
    
    $
    (4,961
    )
    
    $
    (2,681
    )
    
    $
    (20,061
    )Preferred dividends
    
    
    (151
    )
    
    
    (292
    )
    
    
    (487
    )
    
    
    (662
    )Loss for purposes of computing basic
and diluted loss per common share from
continuing operations
    
    
    (3,131
    )
    
    
    (5,253
    )
    
    
    (3,168
    )
    
    
    (20,723
    )Earnings (loss) from discontinued operations
    
    
    (11
    )
    
    
    727
    
    
    
    19,764
    
    
    
    1,888Earnings (loss) for purposes of
computing basic and diluted net
earnings (loss) per common share
    
    $
    (3,142
    )
    
    $
    (4,526
    )
    
    $
    16,596
    
    
    $
    18,835Denominator:Denominator for basic earnings (loss) per
common share  weighted-average shares
outstanding
    
    
    10,275
    
    
    
    6,575
    
    
    
    9,247
    
    
    
    6,391Effect of dilutive securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Denominator
for diluted earnings (loss) per common share
    
    
    10,275
    
    
    
    6,575
    
    
    
    9,247
    
    
    
    6,391Basic and diluted earnings (loss) per common share:Loss from continuing operations before
discontinued operations
    
    $
    (0.31
    )
    
    $
    (0.80
    )
    
    $
    (0.34
    )
    
    $
    (3.24
    )Discontinued operations
    
    
    (0.00
    )
    
    
    0.11
    
    
    
    2.14
    
    
    
    0.29Net earnings (loss)
    
    $
    (0.31
    )
    
    $
    (0.69
    )
    
    $
    1.80
    
    
    $
    (2.95
    )
  6




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##### Table of Contents



PRG-SCHULTZ INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
  Note D  Stock-Based Compensation
         Note E
 Operating Segments and Related Information
   7




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PRG-SCHULTZ INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
   AccountsPayable
    
    
    CorporateServices
    
    
    Support
    
    
    TotalThree Months Ended September 30, 2007Revenues
    
    $
    53,207
    
    
    $
    
    
    
    $
    53,207EBITDA
    
    $
    14,420
    
    
    $
    (12,231
    )
    
    $
    2,189Severance and restructuring expenses
    
    
    
    
    
    
    1,644
    
    
    
    1,644Stock-based compensation
    
    
    
    
    
    
    6,886
    
    
    
    6,886Adjusted EBITDA
    
    $
    14,420
    
    
    $
    (3,701
    )
    
    $
    10,719Three Months Ended September 30, 2006Revenues
    
    $
    54,830
    
    
    $
    
    
    
    $
    54,830EBITDA
    
    $
    11,642
    
    
    $
    (8,707
    )
    
    $
    2,935Severance and restructuring expenses
    
    
    153
    
    
    
    
    
    
    
    153Stock-based compensation
    
    
    
    
    
    
    4,101
    
    
    
    4,101Adjusted EBITDA
    
    $
    11,795
    
    
    $
    (4,606
    )
    
    $
    7,189Nine Months Ended September 30, 2007Revenues
    
    $
    163,552
    
    
    $
    
    
    
    $
    163,552EBITDA
    
    $
    42,651
    
    
    $
    (26,834
    )
    
    $
    15,817Severance and restructuring expenses
    
    
    
    
    
    
    1,644
    
    
    
    1,644Stock-based compensation
    
    
    
    
    
    
    12,315
    
    
    
    12,315Adjusted EBITDA
    
    $
    42,651
    
    
    $
    (12,875
    )
    
    $
    29,776Nine Months Ended September 30, 2006Revenues
    
    $
    165,686
    
    
    $
    
    
    
    $
    165,686EBITDA
    
    $
    30,864
    
    
    $
    (20,248
    )
    
    $
    10,616Severance and restructuring expenses
    
    
    1,610
    
    
    
    531
    
    
    
    2,141Stock-based compensation
    
    
    
    
    
    
    4,835
    
    
    
    4,835Adjusted EBITDA
    
    $
    32,474
    
    
    $
    (14,882
    )
    
    $
    17,592
 8




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PRG-SCHULTZ INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Loss from continuing operations
before discontinued operations
    
    $
    (2,980
    )
    
    $
    (4,961
    )
    
    $
    (2,681
    )
    
    $
    (20,061
    )Income taxes
    
    
    337
    
    
    
    306
    
    
    
    1,212
    
    
    
    760Interest, net
    
    
    3,133
    
    
    
    5,278
    
    
    
    12,023
    
    
    
    12,137Loss on financial restructuring
    
    
    
    
    
    
    (82
    )
    
    
    
    
    
    
    10,047Depreciation and amortization
    
    
    1,699
    
    
    
    2,394
    
    
    
    5,263
    
    
    
    7,733EBITDA
    
    
    2,189
    
    
    
    2,935
    
    
    
    15,817
    
    
    
    10,616Severance and restructuring charges
    
    
    1,644
    
    
    
    153
    
    
    
    1,644
    
    
    
    2,141Stock-based compensation
    
    
    6,886
    
    
    
    4,101
    
    
    
    12,315
    
    
    
    4,835Adjusted EBITDA
    
    $
    10,719
    
    
    $
    7,189
    
    
    $
    29,776
    
    
    $
    17,592
  Note F  Comprehensive Income
 Reporting Comprehensive Income
 Note G
 Cash Equivalents
   9




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PRG-SCHULTZ INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
 Note H
 Financial Restructuring
 2006 Financial Restructuring
   10% Senior
    
    
    9% Series A11% Senior
    
    
    Convertible
    
    
    PreferredNotes
    
    
    Notes
    
    
    StockImputed borrowing rates used for valuation
    
    
    16
    %
    
    
    17
    %
    
    
    18
    %Fair values of cash flows based on imputed rates
    
    $
    42,795
    
    
    $
    42,891
    
    
    $
    10,109Fair values of conversion features
    
    
    
    
    
    
    21,993
    
    
    
    16,777Total estimated fair value
    
    
    42,795
    
    
    
    64,884
    
    
    
    26,886Face value of instruments issued
    
    
    51,455
    
    
    
    59,566
    
    
    
    14,891Excess of face value over fair value
    
    $
    8,660Excess of fair value over face value
    
    
    
    
    
    $
    5,318
    
    
    $
    11,995
     10




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PRG-SCHULTZ INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
  11% Senior
    
    
    10% SeniorNotes
    
    
    Convertible NotesInitial carrying value  estimated
fair value at date of issuance 
March 17, 2006
    
    $
    42,795
    
    
    $
    64,884Fair value of additional notes
issued September 15, 2006 as
paid-in-kind interest payment
(Face value of $2,945)
    
    
    
    
    
    
    3,869Amortization of discount (premium)
    
    
    1,001
    
    
    
    (723
    )Carrying value December 31, 2006
    
    $
    43,796
    
    
    $
    68,030
  9% Series APreferred StockInitial carrying value  liquidation value at date of issuance
 March 17, 2006
    
    $
    14,891Liquidation value of preferred shares converted to common shares
    
    
    (4,587
    )Accumulated dividends (accrual basis)
    
    
    895Liquidation value December 31, 2006 (accrual basis)
    
    $
    11,199
 2007 Conversions, Repayments, Redemptions and New Credit Facility
     11




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##### Table of Contents



PRG-SCHULTZ INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
    11% Senior
    
    
    10% SeniorNotes
    
    
    Convertible NotesCarrying value December 31, 2006
    
    $
    43,796
    
    
    $
    68,030Carrying value of notes converted into common
stock prior to September 30, 2007 (Face value
of $36,239)
    
    
    
    
    
    
    (38,961
    )Amortization of discount (premium)
    
    
    1,016
    
    
    
    (853
    )Carrying value September 30, 2007
    
    $
    44,812
    
    
    $
    28,216Carrying value of notes converted into common
stock subsequent to September 30, 2007 (Face
value of $26,121)
    
    
    
    
    
    
    (28,054
    )Carrying value of notes redeemed in October 2007
    
    
    (44,812
    )
    
    
    (162
    )Balance
    
    $
    
    
    
    $
    
  9%Series APreferred StockLiquidation value December 31, 2006 (accrual basis)
    
    $
    11,199Liquidation value of preferred shares converted to common
shares prior to September 30, 2007
    
    
    (5,205
    )Accumulated dividends (accrual basis)
    
    
    487Liquidation value September 30, 2007 (accrual basis)
    
    $
    6,481Liquidation value of preferred shares converted to common
shares subsequent to September 30, 2007
    
    
    (6,437
    )Liquidation value of preferred shares redeemed in October 2007
    
    
    (44
    )Balance
    
    $
    
 12




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##### Table of Contents



PRG-SCHULTZ INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
  September 30,
    
    
    
    
    
    
    September 30,2007
    
    
    Pro Forma
    
    
    2007As Reported
    
    
    Adjustments
    
    
    Pro FormaASSETSCurrent assets:Cash and cash equivalents
    
    $
    27,757
    
    
    
    (7,980
    ) (a)
    
    $
    19,777Restricted cash
    
    
    242
    
    
    
    
    
    
    
    242Total receivables
    
    
    40,348
    
    
    
    
    
    
    
    40,348Prepaid expenses and other current assets
    
    
    3,007
    
    
    
    
    
    
    
    3,007Current assets of discontinued operations
    
    
    2,152
    
    
    
    
    
    
    
    2,152Total current assets
    
    
    73,506
    
    
    
    
    
    
    
    65,526Property and equipment, net
    
    
    7,151
    
    
    
    
    
    
    
    7,151Goodwill
    
    
    4,600
    
    
    
    
    
    
    
    4,600Intangible assets, less accumulated amortization
    
    
    21,770
    
    
    
    
    
    
    
    21,770Unbilled receivables
    
    
    2,295
    
    
    
    
    
    
    
    2,295Deferred income taxes
    
    
    405
    
    
    
    
    
    
    
    405Other assets
    
    
    5,601
    
    
    
    (2,182
    ) (b)
    
    
    3,419$
    115,328
    
    
    
    
    
    
    $
    105,166LIABILITIES AND SHAREHOLDERS EQUITY (DEFICIT)Current liabilities:Accounts payable and accrued expenses
    
    $
    14,183
    
    
    
    735
    (c)
    
    $
    14,918Accrued payroll and related expenses
    
    
    27,578
    
    
    
    
    
    
    
    27,578Refund liabilities
    
    
    9,628
    
    
    
    
    
    
    
    9,628Deferred revenue
    
    
    809
    
    
    
    
    
    
    
    809Current portions of debt obligations
    
    
    477
    
    
    
    1,250
    (d)
    
    
    1,727Total current liabilities
    
    
    52,675
    
    
    
    
    
    
    
    54,660Senior notes, net of unamortized discount
    
    
    44,812
    
    
    
    (44,812
    ) (e)Senior convertible notes, including unamortized premium
    
    
    28,216
    
    
    
    (28,216
    ) (e)Other debt obligations
    
    
    647
    
    
    
    43,750
    (d)
    
    
    44,397Noncurrent compensation obligations
    
    
    10,704
    
    
    
    
    
    
    
    10,704Refund liabilities
    
    
    1,598
    
    
    
    
    
    
    
    1,598Other long-term liabilities
    
    
    6,045
    
    
    
    
    
    
    
    6,045Total liabilities
    
    
    144,697
    
    
    
    
    
    
    
    117,404Mandatorily redeemable participating preferred stock
    
    
    6,481
    
    
    
    (6,481
    ) (e)Shareholders equity (deficit):Common stock
    
    
    158
    
    
    
    57
    (f)
    
    
    215Additional paid-in capital
    
    
    563,211
    
    
    
    33,565
    (g)
    
    
    596,776Accumulated deficit
    
    
    (555,065
    )
    
    
    (10,010
    ) (h)
    
    
    (565,075
    )Accumulated other comprehensive income
    
    
    4,556
    
    
    
    
    
    
    
    4,556Treasury stock, at cost
    
    
    (48,710
    )
    
    
    
    
    
    
    (48,710
    )Total shareholders equity (deficit)
    
    
    (35,850
    )
    
    
    
    
    
    
    (12,238
    )$
    115,328
    
    
    
    
    
    
    $
    105,166
 
 (a)
    
    Cash used for redemptions and interest, net of funds provided by new term loan(b)
    
    Write-off of old deferred loan costs net of new deferred loan costs(c)
    
    Accrual of unpaid loan costs less accrued interest assumed to be paid(d)
    
    Current and noncurrent portions of new term loan(e)
    
    Carrying values of securities converted and/or redeemed(f)
    
    Stated value of additional shares issued for convertible securities(g)
    
    Carrying values of converted securities, less deferred costs and stated value of common stock issued(h)
    
    Loss on extinguishment of senior notes and write-off of old credit facility deferred costs 13




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##### Table of Contents



PRG-SCHULTZ INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
 Note I  Commitments and Contingencies
 Legal Proceedings
   Retirement Obligations
  Operational Restructuring Obligations
  Accounting for Costs Associated with Exit or
Disposal Activities.
 14




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PRG-SCHULTZ INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
  15




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##### Table of Contents



Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
 Introduction
     Revenue Recognition 
   16




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##### Table of Contents



Critical Accounting Policies
  17




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Goodwill and Other Intangible Assets
 18




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##### Table of Contents



New Accounting Standards
 Accounting for Uncertainty in Income Taxes  an Interpretation of FASB Statement No. 109
 Fair Value Measurements
 The Fair Value Option for Financial Assets
and Financial Liabilities  Including an amendment of FASB Statement No. 115
 Results of Operations
  Three Months
    
    Nine MonthsEnded
    
    EndedSeptember 30,
    
    September 30,2007
    
    2006
    
    2007
    
    2006Revenues
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %Cost of revenues
    
    
    63.0
    
    
    
    68.4
    
    
    
    64.6
    
    
    
    70.8Gross margin
    
    
    37.0
    
    
    
    31.6
    
    
    
    35.4
    
    
    
    29.2Selling, general and administrative expenses
    
    
    33.0
    
    
    
    30.3
    
    
    
    28.0
    
    
    
    26.2Operational restructuring expenses
    
    
    3.1
    
    
    
    0.3
    
    
    
    1.0
    
    
    
    1.3Operating income
    
    
    0.9
    
    
    
    1.0
    
    
    
    6.4
    
    
    
    1.7Interest expense, net
    
    
    5.9
    
    
    
    9.6
    
    
    
    7.3
    
    
    
    7.3Loss (gain) on financial restructuring
    
    
    
    
    
    
    (0.1
    )
    
    
    
    
    
    
    6.1Loss from continuing operations before
income taxes and discontinued
operations
    
    
    (5.0
    )
    
    
    (8.5
    )
    
    
    (0.9
    )
    
    
    (11.7
    )Income taxes
    
    
    0.6
    
    
    
    0.5
    
    
    
    0.7
    
    
    
    0.4Loss from continuing operations before
discontinued operations
    
    
    (5.6
    )
    
    
    (9.0
    )
    
    
    (1.6
    )
    
    
    (12.1
    )Earnings (loss) from discontinued operations
    
    
    (0.0
    )
    
    
    1.3
    
    
    
    12.1
    
    
    
    1.1Net earnings (loss)
    
    
    (5.6
    )%
    
    
    (7.7
    )%
    
    
    10.5
    %
    
    
    (11.0
    )%
  19




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Three and Nine Months Ended September 30, 2007 Compared to the Corresponding Periods of the Prior
Year
 Accounts Payable Services
 Revenue
 Three Months
    
    
    Nine MonthsEnded
    
    
    EndedSeptember 30,
    
    
    September 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Domestic Accounts Payable Services revenues
    
    $
    32.9
    
    
    $
    32.5
    
    
    $
    102.6
    
    
    $
    102.8International Accounts Payable Services revenues
    
    
    20.3
    
    
    
    22.3
    
    
    
    61.0
    
    
    
    62.9Total Accounts Payable Services revenues
    
    $
    53.2
    
    
    $
    54.8
    
    
    $
    163.6
    
    
    $
    165.7
    Cost of Revenues ( ).
 20




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##### Table of Contents



Three Months
    
    
    Nine MonthsEnded
    
    
    EndedSeptember 30,
    
    
    September 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Domestic Accounts Payable Services COR
    
    $
    17.6
    
    
    $
    21.3
    
    
    $
    58.4
    
    
    $
    68.2International Accounts Payable Services COR
    
    
    15.9
    
    
    
    16.2
    
    
    
    47.2
    
    
    
    49.0Total Accounts Payable Services COR
    
    $
    33.5
    
    
    $
    37.5
    
    
    $
    105.6
    
    
    $
    117.2
  Selling, General, and Administrative Expenses .
  Three Months
    
    
    Nine MonthsEnded
    
    
    EndedSeptember 30,
    
    
    September 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Domestic Accounts Payable Services SG&A
    
    $
    4.5
    
    
    $
    5.7
    
    
    $
    13.0
    
    
    $
    16.6International Accounts Payable Services SG&A
    
    
    2.4
    
    
    
    2.2
    
    
    
    7.5
    
    
    
    7.2Total Accounts Payable Services SG&A
    
    $
    6.9
    
    
    $
    7.9
    
    
    $
    20.5
    
    
    $
    23.8
  Corporate Support
  Three Months
    
    
    Nine MonthsEnded
    
    
    EndedSeptember 30,
    
    
    September 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Corporate Support SG&A
    
    $
    10.6
    
    
    $
    8.7
    
    
    $
    25.2
    
    
    $
    19.6
  21




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##### Table of Contents



Operational Restructuring Expense
   Three Months
    
    
    Nine MonthsEnded
    
    
    EndedSeptember 30,
    
    
    September 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Restructuring expense
    
    $
    1.6
    
    
    $
    0.2
    
    
    $
    1.6
    
    
    $
    2.1
  22




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##### Table of Contents



2006 Financial Restructuring
     2007 Conversions, Loan Repayments, Redemptions and New Credit Facility
     23




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##### Table of Contents



Discontinued Operations
      Other Items
 Interest Expense.
  24




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##### Table of Contents



Income Tax Expense.
 Accounting for Uncertainty in Income Taxes  an Interpretation of FASB Statement No. 109
 Liquidity and Capital Resources
       25




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##### Table of Contents



Off Balance Sheet Arrangements
  Executive Severance Payments
  Bankruptcy Litigation
  Limitation on Tax Loss and Credit Carryforwards
  26




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##### Table of Contents



Forward Looking Statements
   27




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##### Table of Contents



Item 3. Quantitative and Qualitative Disclosures About Market Risk
 Foreign Currency Market Risk.
 Interest Rate Risk
 Derivative Instruments.
 Stock-Based Compensation.
 28




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##### Table of Contents



Item 4. Controls and Procedures
   29




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##### Table of Contents



PART II. OTHER INFORMATION
 
 Item 1. Legal Proceedings
  
 Item 1A. Risk Factors
  Recovery auditing of Medicare spending is subject to a number of pressures and uncertainties that
could impact our future opportunities and revenues from this business.
  Our ability to significantly grow our Medicare recovery audit services is largely dependent on the
viability and continued success of, and our participation in, the planned expansion of recovery
auditing of Medicare spending to all 50 states.
   30




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##### Table of Contents



Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
  
 Item 3. Defaults Upon Senior Securities
  
 Item 4. Submission of Matters to a Vote of Security Holders
  
 Item 5. Other Information
  31




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##### Table of Contents



Item 6. Exhibits
 ExhibitNumber
    
    Description3.1
    
    Restated Articles of Incorporation of the Registrant, as
amended and restated 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 Report on Form 10-K for the year ended
December 31, 2005).4.3.6
    
    Sixth Amendment to Shareholder Rights Protection Agreement,
dated September 17, 2007, by and between PRG-Schultz
International, Inc. and the Rights Agent (incorporated by
reference to Exhibit 4.1 to the registrants Form 8-K filed
on September 21, 2007).4.4
    
    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).
 32




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##### Table of Contents



ExhibitNumber
    
    Description4.4.1
    
    Supplemental Indenture, dated September 4, 2007, to the 10%
Senior Convertible Notes Indenture, dated March 17, 2006,
between PRG-Schultz International, Inc. and U.S. Bank
National Association, as Trustee (incorporated by reference
to Exhibit 10.2 to the registrants Form 8-K filed on
September 5, 2007).4.5
    
    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).4.5.1
    
    Supplemental Indenture, dated September 4, 2007, to the 11%
Senior Notes Indenture, dated March 17, 2006, between
PRG-Schultz International, Inc. and U.S. Bank National
Association, as Trustee (incorporated by reference to
Exhibit 10.1 to the registrants Form 8-K filed on
September 5, 2007).10.1
    
    Amended and Restated Standstill Agreement, dated as of July
16, 2007, by and among PRG-Schultz International, Inc.,
Blum Capital Partners, L.P. and certain of its affiliates
(incorporated by reference to Exhibit 10.1 to the
registrants Form 8-K filed on July 16, 2007).10.2
    
    Form of Non-Employee Director Stock Option Agreement
(incorporated by reference to Exhibit 10.1 to the
registrants Form 8-K filed on September 18, 2007).10.3
    
    Amended and Restated Financing Agreement dated September
17, 2007 (incorporated by reference to Exhibit 10.1 to the
registrants Form 8-K filed on September 21, 2007).31.1
    
    Certification of the Chief Executive Officer, pursuant to
Rule 13a-14(a) or 15d-14(a), for the quarter ended
September 30, 2007.31.2
    
    Certification of the Chief Financial Officer, pursuant to
Rule 13a-14(a) or 15d-14(a), for the quarter ended
September 30, 2007.32.1
    
    Certification of the Chief Executive Officer and Chief
Financial Officer, pursuant to 18 U.S.C. Section 1350, for
the quarter ended September 30, 2007.
 33




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##### Table of Contents



SIGNATURES
  PRG-SCHULTZ INTERNATIONAL, INC.November 13, 2007
    By:
    /s/ James B. McCurryJames B. McCurryPresident, Chairman of the Board and Chief
Executive Officer
(Principal Executive Officer) November 13, 2007
    By:
    /s/ Peter LimeriPeter LimeriChief Financial Officer and Treasurer
(Principal Financial Officer) 34