<PAGE>
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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FORM 10-Q
(MARK ONE)
/x/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1998,
OR
/ / 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 333-41121
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FIRST CONSULTING GROUP, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 95-3539020
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
111 W. OCEAN BLVD. 4TH FLOOR, LONG BEACH, CA 90802
(Address of principal executive offices including zip code)
(562) 624-5200
(Registrant's telephone number, including area code)
----------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes /X / No / /
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
COMMON STOCK, $.001 PAR VALUE 15,924,402 SHARES
(Class) (Outstanding at June 30, 1998)
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FIRST CONSULTING GROUP, INC.
TABLE OF CONTENTS
<TABLE>
<CAPTION> PAGE
NUMBER
------
<S> <C>
COVER PAGE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1
TABLE OF CONTENTS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2
PART I. FINANCIAL INFORMATION. . . . . . . . . . . . . . . . . . . . . . . . . . .3
ITEM 1. FINANCIAL STATEMENTS AND NOTES (UNAUDITED) . . . . . . . . . . . .3
Consolidated Balance Sheets as of June 30, 1998 and
December 1997. . . . . . . . . . . . . . . . . . . . . . . . . . .4
Consolidated Statements of Operations for the three
month periods ended June 30, 1998 and June 30, 1997,
and six month periods ended June 30, 1998 and June 30, 1997. . . .5
Condensed Consolidated Statements of Cash Flows for the six
month periods ended June 30, 1998 and June 30, 1997. . . . . . . .6
Notes to Consolidated Financial Statements . . . . . . . . . . . .7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS. . . . . . . . . . .9
PART II. OTHER INFORMATION. . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
ITEM 1. LEGAL PROCEEDINGS. . . . . . . . . . . . . . . . . . . . . . . . 13
ITEM 2. CHANGES IN SECURITIES. . . . . . . . . . . . . . . . . . . . . . 13
ITEM 3. DEFAULTS UPON SENIOR SECURITIES. . . . . . . . . . . . . . . . . 13
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
ITEM 5. OTHER INFORMATION. . . . . . . . . . . . . . . . . . . . . . . . 13
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K . . . . . . . . . . . . . . . . 14
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
EXHIBIT INDEX. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
</TABLE>
2.
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS AND NOTES (UNAUDITED).
FIRST CONSULTING GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1998 1997
---------------- ---------------
ASSETS (UNAUDITED)
<S> <C> <C>
Current assets
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 13,957 $ 2,950
Investments available for sale. . . . . . . . . . . . . . . . . . . . . . . . . 9,928 -
Accounts receivable, less allowance of $600 and $500
in the periods ended June 30, 1998 and December 31, 1997,
respectively. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16,043 11,846
Work in process . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12,477 8,030
Prepaid expenses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,682 821
Income tax receivables. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 132 1,114
Current portion of notes receivable-stockholders. . . . . . . . . . . . . . . . - 328
-------- -------
Total current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . 55,219 25,089
Notes receivable-stockholders. . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,752 1,368
Property and equipment
Furniture, equipment, and leasehold improvements. . . . . . . . . . . . . . . . 1,988 1,874
Information systems equipment . . . . . . . . . . . . . . . . . . . . . . . . . 11,085 9,040
-------- -------
13,073 10,914
Less accumulated depreciation and amortization . . . . . . . . . . . . . . . . . . . 7,082 5,641
-------- -------
5,991 5,273
Other assets
Executive benefit trust . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,324 2,506
Long term investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25,722 -
Goodwill. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 294 -
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 543 189
-------- -------
29,883 2,695
-------- -------
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $92,845 $34,425
-------- -------
-------- -------
</TABLE>
See accompanying notes.
3.
<PAGE>
FIRST CONSULTING GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1998 1997
---------------- --------------
LIABILITIES AND STOCKHOLDERS' EQUITY (UNAUDITED)
<S> <C> <C>
Current liabilities
Line of credit. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ - $ 2,000
Current portion of long-term debt . . . . . . . . . . . . . . . . . . . . . . . 445 871
Accounts payable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,319 735
Accrued liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,079 2,219
Accrued vacation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,681 1,923
Deferred revenue. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 527 391
Customer advances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,269 1,965
Current income tax liability. . . . . . . . . . . . . . . . . . . . . . . . . . 2,662 -
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,679 5,679
-------- -----------
Total current liabilities. . . . . . . . . . . . . . . . . . . . . . . . . 24,661 15,783
Non-current liabilities
Long-term debt, net of current portion. . . . . . . . . . . . . . . . . . . . . 177 262
Supplemental executive retirement plan. . . . . . . . . . . . . . . . . . . . . 3,333 2,506
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 447 447
-------- -----------
3,957 3,215
Commitments and contingencies. . . . . . . . . . . . . . . . . . . . . . . . . . . . - -
Put obligation related to Associate 401(k) and Stock Ownership Plan
(ASOP) and capital stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - 9,965
Stockholders' equity
Preferred Stock, 10,000,000 shares authorized, no shares issued and
outstanding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - -
Common Stock, 50,000,000 shares authorized, 15,924,402 shares
issued and outstanding at June 30, 1998 and 12,042,664 shares
issued and outstanding at December 31, 1997 . . . . . . . . . . . . . . . . . 16 12
Additional paid-in capital. . . . . . . . . . . . . . . . . . . . . . . . . . . 66,739 20,822
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,918 4,215
Deferred compensation-stock incentive agreements. . . . . . . . . . . . . . . . (3,700) (3,635)
Unearned ASOP shares. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (853) (853)
Notes receivable-stockholders . . . . . . . . . . . . . . . . . . . . . . . . . (5,871) (5,134)
Unrealized loss on investments. . . . . . . . . . . . . . . . . . . . . . . . . (21) -
Loss on currency translation. . . . . . . . . . . . . . . . . . . . . . . . . . (1) -
Put obligation related to ASOP and capital stock. . . . . . . . . . . . . . . . - (9,965)
-------- ----------
Total stockholders' equity . . . . . . . . . . . . . . . . . . . . . . . . 64,227 5,462
-------- ----------
Total liabilities and stockholders' equity . . . . . . . . . . . . . . . . $92,845 $34,425
-------- ----------
-------- ----------
</TABLE>
See accompanying notes.
4.
<PAGE>
FIRST CONSULTING GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
------------------------- --------------------------
JUNE 30, JUNE 30, JUNE 30, JUNE 30,
1998 1997 1998 1997
---------- ---------- --------- ---------
<S> <C> <C> <C> <C>
Net revenue. . . . . . . . . . . . . . . . . . . . . . . . . $31,554 $21,673 $60,386 $41,828
Cost of services . . . . . . . . . . . . . . . . . . . . . . 17,132 12,659 33,386 24,725
---------- ---------- --------- ---------
Gross profit. . . . . . . . . . . . . . . . . . . . . . 14,422 9,014 27,000 17,103
General and administrative expenses. . . . . . . . . . . . . 10,808 7,404 20,737 14,156
Compensation expenses related to stock issuances . . . . . . - 523 - 1,046
---------- ---------- --------- ---------
Income from operations. . . . . . . . . . . . . . . . . 3,614 1,087 6,263 1,901
Other income
Interest income (expense), net. . . . . . . . . . . . . 481 (27) 797 (48)
Other income, net . . . . . . . . . . . . . . . . . . . 8 10 35 101
---------- ---------- --------- ---------
Income before income taxes . . . . . . . . . . . . 4,103 1,070 7,095 1,954
Provision for income taxes . . . . . . . . . . . . . . . . . 2,134 593 3,391 1,083
---------- ---------- --------- ---------
Net income. . . . . . . . . . . . . . . . . . . . . . . $ 1,969 $ 477 $ 3,704 $ 871
---------- ---------- --------- ---------
---------- ---------- --------- ---------
Basic net income per share . . . . . . . . . . . . . . . . . $ 0.126 $ 0.050 $ 0.252 $ 0.091
Diluted net income per share . . . . . . . . . . . . . . . . $ 0.120 $ 0.047 $ 0.241 $ 0.086
Shares used in computing basic net income
per share . . . . . . . . . . . . . . . . . . . . . . . 15,625 9,564 14,671 9,554
Shares used in diluted net income per share. . . . . . . . . 16,414 10,131 15,372 10,130
</TABLE>
See accompanying notes.
5.
<PAGE>
FIRST CONSULTING GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
-----------------------------
JUNE 30, JUNE 30,
1998 1997
------------ ----------
<S> <C> <C>
Cash flows from operating activities:
Net income. . . . . . . . . . . . . . . . . . . . . . . $ 3,704 $ 871
Adjustments to reconcile net income . . . . . . . . . . 1,441 3,539
Change in assets and liabilities. . . . . . . . . . . . 658 730
----------- ----------
Net cash provided by operating activities . . . . . . . 5,803 5,140
----------- ----------
Cash flows from investing activities:
Purchase of investments . . . . . . . . . . . . . . . . (35,671) -
Furniture, equipment, and leasehold improvements. . . . (114) (640)
Information systems equipment . . . . . . . . . . . . . (2,045) (1,331)
Notes receivable stockholders . . . . . . . . . . . . . (737) (801)
----------- ----------
Net cash used in investing activities . . . . . . . . . (38,567) (2,772)
----------- ----------
Cash flows from financing activities:
Long term debt. . . . . . . . . . . . . . . . . . . . . (85) (375)
Line of credit. . . . . . . . . . . . . . . . . . . . . (2,000) -
Proceeds from issuance of stock . . . . . . . . . . . . 45,921 155
Deferred compensation stock incentive . . . . . . . . . (65) -
----------- ----------
Net cash generated in financing activities. . . . . 43,771 (220)
----------- ----------
Net increase (decrease) in cash and equivalents. . . . . . . 11,007 2,148
Cash and equivalents at beginning of period. . . . . . . . . 2,950 214
----------- ----------
Cash and equivalents at end of period. . . . . . . . . . . . $ 13,957 $ 2,362
----------- ----------
----------- ----------
</TABLE>
See accompanying notes.
6.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The consolidated balance sheets of First Consulting Group, Inc. (the
"Company") at June 30, 1998 and 1997 and consolidated statements of
operations and condensed consolidated statements of cash flows for the
periods ended June 30, 1998 and 1997 are unaudited. These financial
statements reflect all adjustments, consisting of only normal recurring
adjustments, which, in the opinion of management, are necessary to fairly
present the financial position of the Company at June 30, 1998 and the
results of operations for the three month periods ended June 30, 1998 and
June 30, 1997, and the six month periods ended June 30, 1998 and June 30,
1997. The results of operations for the six months ended June 30, 1998 are
not necessarily indicative of the results to be expected for the year ending
December 31, 1998. For more complete financial information, these financial
statements should be read in conjunction with the audited financial
statements for the year ended December 31, 1997 included in the Company's
Registration Statement on Form S-1, File No. 333-41121, declared effective on
February 12, 1998.
2. STOCKHOLDERS' EQUITY
On November 25, 1997, a certificate of incorporation was filed with the
state of Delaware forming First Consulting Group, Inc. and authorizing
50,000,000 shares of common stock and authorizing 10,000,000 shares of
preferred stock. On January 22, 1998, the Board of Directors of FCG
Enterprises, Inc., a California company, approved a 4-for-1 split of common
stock in the form of a stock dividend. On February 10, 1998, FCG
Enterprises, Inc., a California company, merged into First Consulting Group,
Inc., a Delaware company. On February 13, 1998, First Consulting Group,
Inc., completed an initial public offering of its common stock in which
3,801,858 shares of common stock were sold by the Company, resulting in net
proceeds of approximately $45.1 million; an additional 812,384 shares of
common stock were sold by existing stockholders.
3. INVESTMENTS
For purposes of reporting cash flows, cash and cash equivalents include
cash and interest earning deposits or securities with original maturities of
three months or less. Securities available for sale are measured at fair
value, with net unrealized holding gains and losses, net of tax, reported as
a net amount as a separate component of stockholders' equity. The Company
has approximately $9.9 million in short term investments and $25.7 in
non-current investments classified as available for sale. Such investments
are currently held primarily in tax-exempt government securities.
7.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. NET INCOME PER SHARE
The following represents a reconciliation of basic and diluted net
income per share for the three month and six month periods ended June 30,
1998 and 1997, respectively (amounts rounded to thousands, except per share
data):
<TABLE>
FOR THE THREE MONTHS ENDED FOR THE THREE MONTHS ENDED
JUNE 30, 1998 JUNE 30, 1997
------------------------------------ ------------------------------------
WEIGHTED WEIGHTED
AVERAGE PER SHARE AVERAGE PER SHARE
INCOME SHARES AMOUNT INCOME SHARES AMOUNT
------ ------- --------- ------ -------- ---------
<S> <C> <C> <C> <C> <C> <C>
Basic EPS:
Income available to common
stockholders. . . . . . . . . . . $1,969 15,625 $0.126 $477 9,564 $0.050
Effect of dilutive securities:
Options:. . . . . . . . . . . . . . 789 567
------ ------ --------- ---- ------ ------
Diluted EPS:
Income available to common
stockholders and assumed
conversions . . . . . . . . . . . $1,969 16,414 $0.120 $477 10,131 $0.047
------ ------- --------- ------ ------ ------
------ ------- --------- ------ ------ ------
FOR THE SIX MONTHS ENDED FOR THE SIX MONTHS ENDED
JUNE 30, 1998 JUNE 30, 1997
------------------------------------ ------------------------------------
WEIGHTED WEIGHTED
AVERAGE PER SHARE AVERAGE PER SHARE
INCOME SHARES AMOUNT INCOME SHARES AMOUNT
------ -------- --------- ------ --------- ---------
Basic EPS:
Income available to common
stockholders. . . . . . . . . . . $3,704 14,671 $0.252 $871 9,554 $0.091
Effect of dilutive securities:
Options:. . . . . . . . . . . . . . 701 576
------ ------ ------- ---- ------ --------
Diluted EPS:
Income available to common
stockholders and assumed
conversions . . . . . . . . . . . $3,704 15,372 $0.241 $871 10,130 $0.086
------ ------ --------- ------ -------- ---------
------ ------ --------- ------ -------- ---------
</TABLE>
8.
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
THE FOLLOWING MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS CONTAINS FORWARD-LOOKING STATEMENTS
WITHIN THE MEANING OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995.
SUCH FORWARD LOOKING STATEMENTS INVOLVE RISKS AND UNCERTAINTIES, INCLUDING
THOSE SET FORTH HEREIN AND UNDER THE CAPTION "RISK FACTORS" IN THE COMPANY'S
REGISTRATION STATEMENT ON FORM S-1, FILE NO. 333-41121, DECLARED EFFECTIVE ON
FEBRUARY 12, 1998. THE COMPANY'S ACTUAL RESULTS COULD DIFFER MATERIALLY FROM
THOSE ANTICIPATED IN THESE FORWARD-LOOKING STATEMENTS.
OVERVIEW
FCG provides consulting, implementation, integration and management
services to payors, providers and other healthcare organizations in North
America and Europe. The Company's services are designed to increase its
clients' operations effectiveness in order to reduce cost, improve customer
service and enhance the quality of patient care. The Company's services
address the increasing need of its clients for healthcare-specific
information technology expertise to objectively evaluate, select, implement
and manage an optimal set of information systems and infrastructures. The
Company's consultants provide this expertise through multi-disciplinary teams
specifically formed to provide a unique solution for each client. The
Company believes that its success is attributable to its strong relationships
with industry-leading clients, the healthcare, technology and consulting
expertise of the Company's consultants, and the depth and breadth of its
consulting services.
The Company generates substantially all of its revenue from fees for
professional services. The Company typically bills for its services on an
hourly, fixed-fee or fixed-fee per month basis as specified by the agreement
with a particular client. The Company establishes standard hourly rates for
each level of consultant based on several factors including industry and
assignment-related experience, technical expertise, skills and knowledge.
For services billed on an hourly basis, fees are determined by multiplying
the amount of time expended on each assignment by the hourly rate for the
consultant(s) assigned to the engagement. Fixed fees are established on a
per-assignment or monthly basis and are based on several factors such as the
size, scope, complexity and duration of an assignment and the number of
consultants required to complete the assignment. Actual hourly or fixed fees
for an assignment may vary from the standard or historical rates charged by
the Company. For services billed on an hourly basis, the Company recognizes
revenue as services are performed. For services billed on a fixed fee basis,
the Company recognizes revenue using the percentage of completion method
based on the amount of time completed on each assignment versus the projected
number of hours required to complete such assignment. Revenue is recorded as
incurred at assignment rates net of unplanned adjustments for specific
engagements. Unplanned adjustments to revenue are booked at the time they are
known. The Company may obtain payment in advance of providing services.
These advances are recorded as deferred revenue and reflected as a liability
on the Company's balance sheet.
Cost of services primarily consists of the salaries, bonuses and related
benefits of consultants, subcontractor expenses, and the costs of the
Company's supplemental executive retirement plan. General and administrative
expenses primarily consist of the costs attributable to office space
occupancy; investments in the Company's information systems, research and
practice support and quality initiatives; salaries and expenses for executive
management, financial accounting and administrative personnel;
9.
<PAGE>
recruiting fees and professional development; and marketing, legal and other
professional services.
In connection with the Company's Associate 401(k) and Stock Ownership
Plan ("ASOP") and certain non-qualified stock options granted to the
Company's vice presidents, the Company recognizes a compensation expense on
its consolidated statement of operations. The recurring portion of the
Company's compensation expense relating to stock issuances and the
amortization of deferred compensation is reflected in the Company's
consolidated statements of operations as general and administrative expenses
or cost of services based on the function of the employee to whom the charge
relates. Beginning in 1998, the Company has granted all stock options at
fair market value and, in connection with the Company's ASOP, matches
employee 401(k) contributions with shares of Common Stock based on the fair
market value of the shares.
The Company's most significant expenses are its human resource-
related salary and benefit expenses. As of June 30, 1998, approximately 79%
of the Company's 707 employees are consultants, and the salaries and benefits
of such consultants are recognized in the Company's cost of services.
Non-billable employee salaries and benefits are recognized as a component of
general and administrative expenses. The Company's cost of services as a
percentage of revenue is directly related to its consultant utilization,
which is the ratio of total billable hours to available hours in a given
month. The Company manages consultant utilization by monitoring assignment
requirements and timetables, available and required skills, and available
consultant hours per week and per month. The number of consultants staffed
on an assignment will vary according to the size, complexity, duration and
demands of the assignment. Assignment terminations, completions and
scheduling delays may result in periods in which consultants are not
optimally utilized. An unanticipated termination of a significant assignment
or an overall lengthening of the sales cycle could result in a higher than
expected number of unassigned consultants and could cause the Company to
experience lower margins. In addition, the opening of new offices, expansion
into new markets, and the hiring of consultants in advance of client
assignments have resulted and may continue to result in periods of lower
consultant utilization.
The Company's effective tax rate has varied from period to period due to
non-deductible losses from the Company's foreign operations and differences
between book and tax deductions associated with certain non-deductible
operating expenses, including certain compensation expenses related to the
ASOP.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, 1998 AND 1997
NET REVENUE. The Company's net revenue increased to $31.6 million, or
45.6%, for the quarter ended June 30, 1998 from $21.7 million for the quarter
ended June 30, 1997. This increase was primarily attributable to an increase
in revenue from the Company's implementation, operations effectiveness, and
integration services.
COST OF SERVICES. Cost of services increased to $17.1 million, or
35.3%, for the quarter ended June 30, 1998 from $12.7 million for the quarter
ended June 30, 1997. The increase was primarily attributable to an increase
in the number of consultants. Cost of services as a percentage of revenue
decreased to 54.3% for the quarter ended June 30, 1998 from 58.4% for the
quarter ended June 30, 1997. This decrease was primarily attributable to
increased realization of standard fees during the quarter ended June 30, 1998.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative
expenses increased to $10.8 million, or 46.0%, for the quarter ended June 30,
1998 from $7.4 million for the quarter ended June 30, 1997. General and
administrative expenses as a percentage of revenue remained consistent at
34.3% for the quarter ended June 30, 1998 compared to 34.2% for
10.
<PAGE>
the quarter ended June 30, 1997.
COMPENSATION EXPENSES RELATED TO STOCK ISSUANCES. Compensation expenses
related to stock issuances decreased to zero for the quarter June 30, 1998
from $523,000 and for the quarter ended June 30, 1997. This decrease was
attributable to the discontinuance of certain compensatory stock and option
issuances.
INTEREST INCOME, NET. Interest income, net of interest expense,
increased to $481,000 for the quarter ended June 30, 1998 from $27,000 net
expense for the quarter ended June 30, 1997. Interest income net of interest
expense as a percentage of revenue increased to 1.5% for the quarter ended
June 30, 1998 from (0.1%) for the quarter ended June 30, 1997. This increase
was primarily attributable to the investment of the net proceeds from the
Company's initial public offering in February 1998.
INCOME TAXES. The provision for income taxes of 52.0% in the quarter
ended June 30, 1998 increased from the 42.0% reported for the quarter ended
March 31, 1998. The Company increased its provision for income taxes in
order to bring the tax rate for the first two quarters cumulatively to the
new estimated effective tax rate for the fiscal year of 47.8%. The increase
in the annual effective tax rate is due to an expectation of losses in the
Company's foreign operations which are not currently deductible in any
jurisdiction.
RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND 1997
NET REVENUE. The Company's net revenue increased to $60.4 million, or
44.4%, for the six months ended June 30, 1998 from $41.8 million for the six
months ended June 30, 1997. This increase was primarily attributable to an
increase in revenue from the Company's implementation, operations
effectiveness, and integration services.
COST OF SERVICES. Cost of services increased to $33.4 million, or
35.0%, for the six months ended June 30, 1998 from $24.7 million for the six
months ended June 30, 1997. The increase was primarily attributable to an
increase in the number of consultants. Cost of services as a percentage of
revenue decreased to 55.3% for the six months ended June 30, 1998 from 59.1%
for the six months ended June 30, 1997. This decrease was primarily
attributable to increased realization of standard fees and a higher
proportion of billable associates to total associates during the quarter
ended June 30, 1998.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative
expenses increased to $20.7 million, or 46.5%, for the six months ended June
30, 1998 from $14.2 million for the six months ended June 30, 1997. General
and administrative expenses as a percentage of revenue increased to 34.3% for
the six months ended June 30, 1998 from 33.8% for the six months ended June
30, 1997. This increase was primarily attributable to an increase in the
Company's hiring, including increased hiring from its expansion into Europe.
COMPENSATION EXPENSES RELATED TO STOCK ISSUANCES. Compensation expenses
related to stock issuances decreased to zero for the six months ended June
30, 1998 from $1.0 million for the six months ended June 30, 1997. This
decrease was attributable to the discontinuance of certain compensatory stock
and option issuances.
INTEREST INCOME, NET. Interest income, net of interest expense,
increased to $797,000 for the six months ended June 30, 1998 from $48,000 net
expense for the six months ended June 30, 1997. Interest income net of
interest expense as a percentage of revenue increased to 1.3% for the six
months ended
11.
<PAGE>
June 30, 1998 from (0.1%) for the six months ended June 30, 1997. This
increase was primarily attributable to the investment of net proceeds
from the Company's initial public offering in February 1998.
INCOME TAXES. Income taxes as a percentage of income before income taxes
decreased to 47.8% for the six months ended June 30, 1997 from 55.4% for the
six months ended June 30, 1997 due to a reduction in certain non deductible
compensation related expenses partly offset by the existence of non
deductible foreign losses in the current period. The provision of 47.8% for
the six months ended June 30, 1998 represents the new estimated tax rate for
the 1998 fiscal year. This increased estimated rate is due to an expectation
of losses in the Company's foreign operations which are not currently
deductible in any jurisdiction.
A substantial portion of the Company's expenses, particularly personnel
and related costs, depreciation, office rent and occupancy costs, are
relatively fixed. Certain variable costs are assignment-specific and are
billed as incurred. The Company's quarterly operating results may vary
significantly in the future depending on a number of factors, many of which
are outside the control of the Company. These factors may include: the
reduction in size, delay in commencement, interruption or termination of one
or more significant engagements or assignments; fluctuations in consultant
hiring and utilization; the loss of personnel; the loss of one or more
significant clients; the unpredictability of engaging new clients and
additional assignments from existing clients; increased competition;
write-offs of client billings; consolidation of, and subsequent reduction in
the number of, healthcare providers; pricing pressure; the number, timing and
contractual terms of significant client engagements; market demand for the
Company's services; delays or increased expenses incurred in connection with
existing assignments; changes in pricing policies by the Company or its
competitors; changes in the Company's business strategies; variability in the
number of business days within a quarter; and international currency
fluctuations. Due to the foregoing factors, quarterly revenue and operating
results are not predictable with any significant degree of accuracy. In
particular, the timing between initial client contract and fulfillment of the
criteria necessary for revenue recognition can be lengthy and unpredictable.
Business practices of clients, such as deferring commitments on new
assignments until after the end of fiscal periods, could require the Company
to maintain a significant number of under-utilized consultants which could
have a material adverse effect on the Company's business, financial condition
and results of operations.
LIQUIDITY AND CAPITAL RESOURCES
During the six months ended June 30, 1998, the Company generated cash
flow from operations of $5.8 million. During the six months ended June 30,
1998, the Company used cash flow of approximately $2.2 million to purchase
property and equipment, including computer and related equipment and office
furniture. Depreciation and amortization expense for the six months ended
June 30, 1998 was approximately $1.4 million. During the six months ended
June 30, 1998, the Company generated cash flow of $43.8 million from
financing activities. At June 30, 1998, the Company had working capital of
$30.6 million and long term investments of $25.7 million. At December 31,
1997, the Company had working capital of $9.3 million. The primary reason
for the increase was the completion of the Company's initial public offering
in February 1998.
The Company has a revolving line of credit which allows the Company to
borrow up to $6.0 million at an interest rate of the prevailing prime rate.
The revolving line of credit expires on December 31, 1998. There was no
outstanding balance under the line of credit at June 30, 1998. The Company
has two term loan facilities ("Term Loan A" and Term Loan B"). Term Loan A
is a $305,000 facility under
12.
<PAGE>
which approximately $257,000 was outstanding as of June 30, 1998. Term Loan A
expires on July 1, 2003. Term Loan B is a $4.0 million facility under which
approximately $440,000 was outstanding as of June 30, 1998. Term Loan B
expires on December 4, 2001. Term Loan A and Term Loan B bear interest at a
rate per annum equal to the prevailing prime rate plus 0.5%. All borrowings
under the Company's credit facilities are secured by the Company's accounts
receivable and other rights to payment, general intangibles and equipment.
The line of credit agreement provides that the Company must satisfy certain
covenants and restrictions.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
None.
ITEM 2. CHANGES IN SECURITIES.
Under the Company's 1994 Restricted Stock Plan, (the "1994 Plan") the
Company has entered into Restricted Stock Agreements ("RSAs") with each of
its vice presidents. The 1994 Plan and RSAs provide that each person, upon
becoming a vice president of the Company, must purchase and hold a minimum
number of shares of common stock of the Company ("Common Stock").
On April 14, April 16 and May 4, 1998, the Company issued an aggregate
of 43,580 shares (the "Shares") of Common Stock to certain of its vice
presidents (the "Purchasing Vice Presidents") pursuant to the 1994 Plan. The
Purchasing Vice Presidents paid an aggregate of $933,720 in consideration of
the Shares. The Shares were issued in reliance on Regulation D promulgated
under the Securities Act of 1933, as amended.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
ITEM 5. OTHER INFORMATION.
None.
13.
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) EXHIBITS
ITEM DESCRIPTION
--------- ------------------------------------------------
3(i)(1) Certificate of Incorporation of the Company.
3(ii)(1) Bylaws of the Company.
4.1(1) Specimen Common Stock Certificate.
11.1(2) Statement of computation of per share earnings.
27.1 Financial Data Schedule.
-------------------------
(1) Filed with the Company's Registration Statement on Form S-1, File No.
333-41121, declared effective on February 12, 1998, incorporated
herein by reference.
(2) See Note 4 to Consolidated Financial Statements, "Net Income Per
Share."
(b) REPORTS ON FORM 8-K
None.
14.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934,
the registrant has duly caused this report to be signed in its behalf by the
undersigned thereunto duly authorized.
FIRST CONSULTING GROUP, INC.
Date: July 29, 1998 /s/ James A. Reep
------------------------------------------
James A. Reep
Chairman, President
and Chief Executive Officer
Date: July 29, 1998 /s/ Thomas A. Reep
------------------------------------------
Thomas A. Reep
Chief Financial Officer
and Vice President, Finance
(Principal Financial and Accounting Officer)
15.
<PAGE>
EXHIBIT INDEX
NO. OF
EXHIBIT DESCRIPTION
----------- -------------------------------------------------------
3(i)(1) Certificate of Incorporation of the Company.
3(ii)(1) Bylaws of the Company.
4.1(1) Specimen Common Stock Certificate.
11.1(2) Statement of computation of per share earnings.
27.1 Financial Data Schedule.
-----------------------------
(1) Filed with the Company's Registration Statement on Form S-1, File No.
333-41121, declared effective on February 12, 1998, incorporated
herein by reference.
(2) See Note 4 to Consolidated Financial Statements, "Net Income Per
Share."
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEETS, STATEMENTS OF OPERATIONS AND STATEMENTS OF CASH
FLOWS INCLUDED IN THE COMPANY'S FORM 10-Q FOR THE PERIOD ENDED JUNE 30, 1998,
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS AND
NOTES THERETO.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 13,957,000
<SECURITIES> 9,928,000
<RECEIVABLES> 16,643,000
<ALLOWANCES> (600,000)
<INVENTORY> 12,477,000
<CURRENT-ASSETS> 55,219,000
<PP&E> 13,073,000
<DEPRECIATION> 7,082,000
<TOTAL-ASSETS> 92,845,000
<CURRENT-LIABILITIES> 24,661,000
<BONDS> 0
0
0
<COMMON> 16,000
<OTHER-SE> 64,211,000
<TOTAL-LIABILITY-AND-EQUITY> 92,845,000
<SALES> 60,386,000
<TOTAL-REVENUES> 60,386,000
<CGS> 33,386,000
<TOTAL-COSTS> 20,737,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 797,000
<INCOME-PRETAX> 7,095,000
<INCOME-TAX> 3,391,000
<INCOME-CONTINUING> 3,704,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,704,000
<EPS-PRIMARY> .252
<EPS-DILUTED> .241
</TABLE>
