PRG-Schultz Announces Fourth Quarter & Fiscal Year 2006 Financial Results

PRG-Schultz International, Inc. (Nasdaq:PRGX), the world's largest recovery audit firm, today announced its unaudited financial results for the fourth quarter and the fiscal year ended December 31, 2006. Highlights of Financial Results Consolidated revenue for the fourth quarter of 2006 was $70.5 million, down 2.6% compared to $72.4 million for the same period in 2005. Net loss for the 2006 fourth quarter was $2.9 million or ($.43) per basic and diluted share, compared to a net loss of $175.8 million, or ($28.32) per basic and diluted share for the same period in 2005. The fourth quarter 2006 net loss included a charge of $4.0 million for severance associated with a major staff reduction implemented during the quarter, $1.9 million for charges related to the Company’s successful sub-leasing of approximately 20% of its headquarters office space, a charge of $1.6 million related to stock-based compensation, and a gain on discontinued operations of $0.1 million. The fourth quarter 2005 net loss included a non-cash charge of $170.4 million for the impairment of goodwill and other intangibles, a loss from discontinued operations of $1.1 million, a charge of $4.0 million for severance and other charges related to the Company’s operational restructuring, and a charge of $0.1 million for stock-based compensation. Adjusted EBITDA for the 2006 fourth quarter was $11.4 million compared to $4.6 million of adjusted EBITDA for the same period in 2005. The 2006 fourth quarter adjusted EBITDA is earnings from continuing operations before interest, taxes, depreciation and amortization (EBITDA) excluding the $4.0 million charge for severance, the $1.9 million charge related to the headquarters sublease, and the $1.6 million of charges related to stock-based compensation. The comparable adjusted EBITDA amount for the fourth quarter of 2005 is EBITDA for the period excluding the non-cash charge of $170.4 million for the impairment of goodwill and other intangibles, a charge of $4.0 million for severance and other charges related to an operational restructuring, and a charge of $0.1 million for other stock-based compensation. (Schedule 3 attached to this press release provides a reconciliation of net earnings (loss) to each of EBITDA and adjusted EBITDA). Consolidated revenue for 2006 was $266.1 million, a decrease of 8.9% compared to $292.2 million for 2005. Net loss for 2006 was $21.1 million or ($3.32) per basic and diluted share, compared to a net loss of $207.7 million or ($33.50) per basic and diluted share for fiscal year 2005. The 2006 loss included a non-cash charge of $10 million resulting from the Company’s successful financial restructuring completed in March 2006, a charge of $8.0 million for severance and operational restructuring costs, charges of $4.7 million for stock-based compensation, a charge of $1.7 million related to the voluntary forfeiture of stock options by the Company’s CEO, and a loss on discontinued operations of $0.8 million. The 2005 loss included the non-cash charge of $170.4 million for impairment of goodwill and other intangibles, a charge of $11.6 million associated with the Company’s operational restructuring, a charge of $3.9 million for severance costs related to the departures of the Company’s former CEO and former Vice Chairman, a loss on discontinued operations of $2.2 million and a charge of $0.4 million for stock-based compensation. Adjusted EBITDA for 2006 was $33.3 million compared to $4.3 million of adjusted EBITDA for the same period in 2005. The 2006 adjusted EBITDA excludes the non-cash charge of $10 million resulting from the financial restructuring, the charge of $8.0 million related to severance and operational restructuring charges, the $4.7 million charge for stock-based compensation, and the $1.7 million charge related to a voluntary forfeiture of stock options. The comparable 2005 adjusted EBITDA amount excludes the non-cash charge of $170.4 million for impairment of goodwill and other intangibles, a charge of $11.6 associated with the Company’s operational restructuring, a charge of $3.9 million for severance costs related to the departures of the Company’s former CEO and former Vice Chairman and a charge of $0.4 million for stock-based compensation. Liquidity At December 31, 2006 the Company had cash and cash equivalents of $35.0 million and had no borrowings against its revolving credit facility. Total debt outstanding at year-end was $139.8 million and included a $25 million variable rate term loan due 2010, $51.5 million in principal amount of 11.0% Senior Notes Due 2011, $62.5 million in principal amount of 10.0% Senior Convertible Notes Due 2011, and a $0.8 million capital lease obligation. In addition, the Company had 9.0% Series A preferred stock outstanding with an aggregate liquidation preference of $11.2 million, which is mandatorily redeemable in 2011. At December 31, 2005, the Company had cash and cash equivalents of $11.8 million, and total debt outstanding of $141.8 million. Total debt at year end 2005 included borrowings on a bank credit facility of $6.8 million, a $10 million bridge loan facility from certain of the Company’s noteholders and the Company’s previously outstanding $125 million of convertible subordinated notes. "The first full year of our turnaround has put our company on a solid footing for attacking our future opportunities,” said James B. McCurry, chairman, president and chief executive officer. "A realigned cost structure and a focused commitment to meeting the objectives of our most important clients have transformed our core recovery audit business into a reliable source of cash for paying down debt and investing in new sources of future revenue. We are learning and developing new ways to bring value to our strong existing base of clients throughout the world. In addition, the impending national expansion of recovery audit of Medicare to all fifty states, Congressionally mandated late last year, provides us with an exciting growth opportunity that builds on our proven experience auditing Medicare payments in California since 2005.” Fourth Quarter Earnings Call As previously announced, management will hold a conference call at 8:30 AM (EST) tomorrow to discuss its fourth quarter and fiscal 2006 financial results. To access the conference call, listeners in the U.S. and Canada should dial +1 800-265-0241 at least 5 minutes prior to the start of the conference. Listeners outside the U.S. and Canada should dial 617-847-8704. To be admitted to the call, listeners should use passcode 98942846. A replay of the call will be available one hour after the conclusion of the live call, extending through March 30, 2007. To directly access the replay, dial +1-888-286-8010 (U.S. and Canada) or 617-801-6888 (outside the U.S. and Canada). The passcode for the replay is 60769303. This teleconference will also be audiocast on the Internet at www.prgx.com (click on "(NASDAQ: PRGX)” under "Investor Relations”). A replay of the audiocast will be available at the same location on www.prgx.com beginning one hour after the conclusion of the live audiocast, extending through March 30, 2007. Please note that the Internet audiocast is "listen-only." Microsoft Windows Media Player is required to access the live audiocast and the replay and can be downloaded from www.microsoft.com/windows/mediaplayer. About PRG-Schultz International, Inc. Headquartered in Atlanta, PRG-Schultz International, Inc. is the world's leading recovery audit firm, providing clients throughout the world with insightful value to optimize and expertly manage their business transactions. Using proprietary software and expert audit methodologies, PRG industry specialists review client purchases and payment information to identify and recover overpayments. Non-GAAP Financial Measures EBITDA and adjusted EBITDA are both "non-GAAP financial measures" presented as supplemental measures of our performance. They are not presented in accordance with accounting principles generally accepted in the United States, or GAAP. The Company believes these measures provide additional meaningful information in evaluating the Company's performance over time, and that the rating agencies and a number of lenders use EBITDA and similar measures for similar purposes. In addition, a measure similar to adjusted EBITDA is used in the restrictive covenants contained in the Company’s secured credit facility. However, EBITDA and adjusted EBITDA have limitations as analytical tools, and you should not consider them in isolation, or as substitutes for analysis of our results as reported under GAAP. In addition, in evaluating EBITDA and adjusted EBITDA, you should be aware that, as described above, the adjustments may vary from period to period and in the future we will incur expenses such as those used in calculating these measures. Our presentation of these measures should not be construed as an inference that our future results will be unaffected by unusual or nonrecurring items. Schedule 3 provides a reconciliation of net earnings (loss) to each of EBITDA and adjusted EBITDA. Forward Looking Statements In addition to historical information, this press release includes certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements include both implied and express statements regarding the Company’s financial condition and position, the Company’s ability to exploit future opportunities, including opportunities associated with the expansion of the Medicare recovery audit program, and the reliability of the cash flow from the Company’s core audit recovery business. Such forward looking statements are not guarantees of future performance and are subject to risks, uncertainties and other factors that may cause the actual results, performance or achievements of the Company to differ materially from the historical results or from any results expressed or implied by such forward-looking statements. Risks that could affect the Company’s future performance include the Company’s ability to retain personnel, Medicare audit revenues that do not meet expectations or justify costs incurred, the Company’s ability to replace the declining revenues from its core accounts payable services, changes in the market for the Company’s services, client bankruptcies, loss of major clients, and other risks generally applicable to the Company’s business. For a discussion of other risk factors that may impact the Company's business and the success of its restructuring plan, please see the Company’s filings with the Securities and Exchange Commission, including its Form 10-K filed on March 23, 2006 and its Registration Statement on Form S-1, as amended and filed on August 15, 2006. The Company disclaims any obligation or duty to update or modify these forward-looking statements. SCHEDULE 1 PRG-Schultz International, Inc. and Subsidiaries Condensed Consolidated Statements of Operations (Amounts in thousands, except per share data) (Unaudited)     Three Months Twelve Months Ended December 31, Ended December 31,   2006    2005    2006    2005    Revenues $ 70,516  $ 72,428  $ 266,095  $ 292,152  Cost of revenues   53,072    47,442    193,747    195,091  Gross margin 17,444  24,986  72,348  97,061    Selling, general and administrative expenses 14,014  24,228  60,199  111,439  Impairment charges 170,375  170,375  Operational restructuring expenses   1,989    3,628    4,130    11,550    Operating income (loss) 1,441  (173,245) 8,019  (196,303)   Interest expense, net (4,147) (2,431) (16,219) (8,391) Loss on financial restructuring   -    -    (10,047)   -    Earnings (loss) from continuing operations before income taxes and discontinued operations (2,706) (175,676) (18,247) (204,694)   Income tax expense (benefit)   305    (993)   2,019    821    Earnings (loss) from continuing operations before discontinued operations (3,011) (174,683) (20,266) (205,515)   Discontinued operations: Earnings (loss) from discontinued operations and disposals, net   85    (1,071)   (833)   (2,225)   Net earnings (loss) $ (2,926) $ (175,754) $ (21,099) $ (207,740)     Basic and diluted earnings (loss) per common share: Loss from continuing operations before discontinued operations $ (0.44) $ (28.15) $ (3.20) $ (33.14) Discontinued operations   0.01    (0.17)   (0.12)   (0.36) Net earnings (loss) $ (0.43) $ (28.32) $ (3.32) $ (33.50)   Weighted-average common shares outstanding: Basic and diluted   7,291    6,205    6,616    6,201  SCHEDULE 2 PRG-Schultz International, Inc. and Subsidiaries Condensed Consolidated Balance Sheets (Amounts in thousands) (Unaudited)       December 31, December 31,   2006  2005  ASSETS Current assets: Cash and cash equivalents $ 35,013  $ 11,848  Restricted cash 3,438  3,096  Receivables: Contract receivables 40,921  53,199  Employee advances and miscellaneous receivables   2,534  2,737  Total receivables 43,455  55,936    Funds held for client obligations 42,304  32,479  Prepaid expenses and other current assets   2,806  3,180  Total current assets 127,016  106,539    Property and equipment 10,403  17,453  Goodwill 4,600  4,600  Intangible assets 23,062  24,447  Other assets   13,586  9,023  Total assets $ 178,667  $   162,062      LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT) Current liabilities: Convertible notes $ -  $ 466  Current portions of other debt obligations 750  -  Obligations for client payables 42,304  32,479  Accounts payable and accrued expenses 33,788  34,103  Accrued payroll and related expenses 41,026  44,031  Deferred revenue   3,930  4,583  Total current liabilities 121,798  115,662    Convertible notes -  123,601  Senior notes 43,796  -  Senior convertible notes 68,030  -  Other debt obligations 25,096  16,800  Noncurrent compensation obligations 5,859  1,388  Other long-term liabilities   7,372  6,976  Total liabilities   271,951  264,427    Mandatorily redeemable participating preferred stock 11,199  -    Shareholders' equity (deficit): Common stock 84  68  Additional paid-in capital 513,920  494,826  Accumulated deficit (571,818) (550,719) Accumulated other comprehensive income 2,041  2,400  Treasury stock at cost (48,710) (48,710) Unamortized portion of restricted stock compensation expense   -    (230) Total shareholders' equity (deficit)   (104,483) (102,365)   Total liabilities and shareholders' equity (deficit) $ 178,667  $   162,062  SCHEDULE 3 PRG-Schultz International, Inc. and Subsidiaries Reconciliation of Net Earnings (Loss) to Adjusted EBITDA (Amounts in thousands) (Unaudited)     Three Months Twelve Months Ended December 31, Ended December 31, 2006  2005  2006  2005  Reconciliation of net loss to Adjusted EBITDA:   Net loss $ (2,926) $(175,754) $ (21,099) $(207,740)   Earnings (loss) from discontinued operations 85  (1,071) (833) (2,225)   Loss from continuing operations (3,011) (174,683) (20,266) (205,515)   Adjust for: Income taxes 305  (993) 2,019  821  Interest 4,147  2,431  16,219  8,391  Loss on financial restructuring -  -  10,047  -  Depreciation and amortization 2,497  3,351  10,783  14,375    EBITDA 3,938  (169,894) 18,802  (181,928)   Impairment charges -  170,375  -  170,375  Severance and restructuring expenses 5,899  4,025  8,040  15,476  Stock-based compensation 1,601  79  6,436  358    Adjusted EBITDA $ 11,438  $ 4,585  $ 33,278  $ 4,281      EBITDA and adjusted EBITDA are both "non-GAAP financial measures" presented as supplemental measures of our performance. They are not presented in accordance with accounting principles generally accepted in the United States, or GAAP. The Company believes these measures provide additional meaningful information in evaluating the Company's performance over time, and that the rating agencies and a number of lenders use EBITDA and similar measures for similar purposes. In addition, a measure similar to adjusted EBITDA is used in the restrictive covenants contained in the Company’s secured credit facility. However, EBITDA and adjusted EBITDA have limitations as analytical tools, and you should not consider them in isolation, or as substitutes for analysis of our results as reported under GAAP. In addition, in evaluating EBITDA and adjusted EBITDA, you should be aware that in the future we will incur expenses such as those used in calculating these measures. Our presentation of these measures should not be construed as an inference that our future results will be unaffected by unusual or nonrecurring items. SCHEDULE 4 PRG-Schultz International, Inc. and Subsidiaries Condensed Consolidated Statements of Cash Flows (Amounts in thousands) (Unaudited)     Three Months Twelve Months Ended December 31, Ended December 31,   2006    2005    2006    2005  Cash flows from operating activities:   Net earnings (loss) $ (2,926) $ (175,754) $ (21,099) $ (207,740) Earnings (loss) from discontinued operations   85    (1,071)   (833)   (2,225) Loss from continuing operations (3,011) (174,683) (20,266) (205,515)   Adjustments to reconcile loss from continuing operations to net cash provided by (used in) operations: Loss on financial restructuring -  -  10,047  -  Impairment charges -  170,375  -  170,375  Depreciation and amortization 2,497  3,351  10,783  14,375  Stock-based compensation expense 1,601  79  6,436  358  Amortization of debt discounts and deferred costs 728  465  1,858  1,301  (Increase) decrease in receivables 4,485  (4,046) 13,428  17,717  Other, primarily changes in assets and liabilities   10,600    5,815    3,103    (6,598) Net cash provided by (used in) operating activities   16,900    1,356    25,389    (7,987)   Cash flows from investing activities - purchases of property and equipment, net of disposals   (760)   (316)   (1,683)   (5,374)   Net cash provided by (used in) financing activities   648    1,752    (183)   14,924    Cash flows from discontinued operations   (273)   (1,067)   (820)   (1,875)   Effect of exchange rates on cash and cash equivalents   (350)   135    462    (436)   Net increase (decrease) in cash and cash equivalents 16,165  1,860  23,165  (748)   Cash and cash equivalents at beginning of period   18,848    9,988    11,848    12,596    Cash and cash equivalents at end of period $ 35,013  $ 11,848  $ 35,013  $ 11,848