<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
-------------------------------
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 SEPTEMBER 30, 1999,
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 0-23651
-------------------------------
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 23,897,620 SHARES
- ----------------------------- -----------------------------------
(Class) (Outstanding at September 30, 1999)
<PAGE>
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 September 30, 1999 and
December 31, 1998......................................................................3
Consolidated Statements of Operations for the three
month periods ended September 30, 1999 and September 30, 1998 and for the nine month
periods ended September 30, 1999 and September 30, 1998................................5
Condensed Consolidated Statements of Cash Flows for the nine
month periods ended September 30, 1999 and September 30, 1998..........................6
Notes to Consolidated Financial Statements.............................................7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS.........................................10
PART II. OTHER INFORMATION......................................................................................15
ITEM 1. LEGAL PROCEEDINGS.....................................................................15
ITEM 2. CHANGES IN SECURITIES.................................................................15
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.......................................................15
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS...................................15
ITEM 5. OTHER INFORMATION.....................................................................15
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K......................................................16
SIGNATURES.......................................................................................................17
EXHIBIT INDEX....................................................................................................18
</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)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1999 1998
------------- ------------
ASSETS (UNAUDITED)
<S> <C> <C>
Current assets
Cash and cash equivalents............................................. $ 30,358 $ 20,737
Short-term investments................................................ 12,076 27,168
Accounts receivable, less allowance of $1,579 and $1,449 in the
periods ended September 30, 1999 and December 31, 1998,
respectively........................................................ 44,656 36,955
Work in process....................................................... 17,202 13,185
Prepaid expenses and other current assets............................. 2,959 2,565
--------- ---------
Total current assets.............................................. 107,251 100,610
Notes receivable-stockholders ............................................. 1,862 1,803
Long-term investments...................................................... 11,039 5,644
Property and equipment
Furniture, equipment, and leasehold improvements...................... 7,281 5,418
Information systems equipment......................................... 23,667 17,528
--------- ---------
30,948 22,946
Less accumulated depreciation and amortization............................. 15,878 11,932
--------- ---------
15,070 11,014
Other assets
Executive benefit trust .............................................. 5,113 3,709
Deferred income taxes................................................. 788 763
Goodwill, net......................................................... 6,574 6,134
Other................................................................. 778 784
--------- ---------
13,253 11,390
--------- ---------
Total assets...................................................... $ 148,475 $ 130,461
--------- ---------
--------- ---------
</TABLE>
See accompanying notes.
3.
<PAGE>
FIRST CONSULTING GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONTINUED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1999 1998
------------- ------------
(UNAUDITED)
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Current portion of long-term debt..................................... $ 54 $ 67
Accounts payable...................................................... 2,855 2,150
Accrued liabilities................................................... 8,939 8,090
Accrued vacation...................................................... 4,756 2,655
Accrued bonuses....................................................... 5,286 3,149
Deferred revenue...................................................... 105 491
Customer advances..................................................... 2,451 2,416
Income taxes payable.................................................. 2,459 8,355
Deferred income taxes................................................. 3,335 6,318
--------- ---------
Total current liabilities......................................... 30,240 33,691
Non-current liabilities
Long-term debt, net of current portion................................ 159 238
Supplemental executive retirement plan................................ 5,009 3,946
--------- ---------
Total non-current liabilities..................................... 5,168 4,184
Commitments and contingencies.............................................. -- --
Stockholders' equity
Preferred Stock, $.001 par value; 10,000,000 shares authorized, no
shares issued and outstanding....................................... -- --
Common Stock, $.001 par value; 50,000,000 shares authorized,
23,897,620 shares issued and outstanding at September 30, 1999
and 22,600,773 shares issued and outstanding at December 31, 1998... 24 23
Additional paid-in capital............................................ 99,035 83,611
Retained earnings..................................................... 37,006 21,850
Deferred compensation-stock incentive agreements...................... (5,964) (4,058)
Unearned ASOP shares.................................................. (108) (739)
Notes receivable-stockholders......................................... (16,798) (8,181)
Accumulated other comprehensive income................................ (128) 80
--------- ---------
Total stockholders' equity........................................ 113,067 92,586
--------- ---------
Total liabilities and stockholders' equity........................ $ 148,475 $ 130,461
--------- ---------
--------- ---------
</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 Nine Months Ended
September 30 September 30
------------------------- --------------------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net revenue......................................... $ 61,411 $ 51,082 $ 181,194 $ 142,443
Cost of services.................................... 37,697 28,550 109,810 80,628
-------- -------- --------- ---------
Gross profit................................... 23,714 22,532 71,384 61,815
General and administrative expenses................. 17,061 16,433 52,272 45,617
Merger and related severance costs.................. ---- 486 1,828 486
-------- -------- --------- ---------
Income from operations......................... 6,653 5,613 17,284 15,712
Other income
Interest income, net........................... 654 593 1,856 1,561
Other income, net.............................. 19 13 3,916 48
-------- -------- --------- ---------
Income before taxes....................... 7,326 6,219 23,056 17,321
Provision for income taxes.......................... 2,789 2,848 7,895 7,823
-------- -------- --------- ---------
Net income ................................ $ 4,537 $ 3,371 $ 15,161 $ 9,498
-------- -------- --------- ---------
-------- -------- --------- ---------
Basic net income per share.......................... 0.19 0.15 0.65 0.45
-------- -------- --------- ---------
-------- -------- --------- ---------
Diluted net income per share........................ 0.19 0.14 0.63 0.42
-------- -------- --------- ---------
-------- -------- --------- ---------
Shares used in computing basic net income
per share...................................... 23,746 22,029 23,234 21,332
Shares used in diluted net income per share......... 24,416 23,478 24,120 22,781
</TABLE>
See accompanying notes.
5.
<PAGE>
FIRST CONSULTING GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1999 1998
------------- -------------
<S> <C> <C>
Cash flows from operating activities:
Net income............................................................ $ 15,161 $ 9,498
Adjustments to reconcile net income................................... 1,741 3,771
Change in assets and liabilities...................................... (12,515) (6,376)
-------- --------
Net cash provided by operating activities......................... 4,387 6,893
-------- --------
Cash flows from investing activities:
Sale (Purchase) of investments........................................ 9,905 (36,195)
Furniture, equipment, and leasehold improvements...................... (8,085) (4,270)
Acquisition of businesses............................................. (2,027) (4,095)
Notes receivable stockholders......................................... (221) (1,808)
-------- --------
Net cash used in investing activities............................. (428) (46,368)
-------- --------
Cash flows used in financing activities:
Long-term debt........................................................ (92) (2,053)
Proceeds from issuance of stock....................................... 5,754 47,246
-------- --------
Net cash generated in financing activities........................ 5,662 45,193
-------- --------
Net increase in cash and equivalents....................................... 9,621 5,718
Cash and equivalents at beginning of period................................ 20,737 12,187
-------- --------
Cash and equivalents at end of period...................................... $ 30,358 $ 17,905
-------- --------
-------- --------
</TABLE>
See accompanying notes.
6.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The consolidated balance sheets of First Consulting Group, Inc.
("FCG") at September 30, 1999 and consolidated statements of operations and
condensed consolidated statements of cash flows for the periods ended
September 30, 1999 and 1998 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 FCG at September 30, 1999 and the results of operations for the
three month and nine month periods ended September 30, 1999 and September 30,
1998. The results of operations for the three month and nine month periods
ended September 30, 1999 are not necessarily indicative of the results to be
expected for the year ending December 31, 1999. For more complete financial
information, these financial statements should be read in conjunction with
the audited financial statements for the year ended December 31, 1998
included in FCG's Annual Report on Form 10-K.
2. 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. FCG has approximately $12.1 million in
short term investments and $11.0 million in non-current investments
classified as available for sale. Such investments are currently held
primarily in tax-exempt government securities. Net unrealized gains and
losses on investments were not material at September 30, 1999.
3. NET INCOME PER SHARE
The following represents a reconciliation of basic and diluted net
income per share for the three month and nine month periods ended September
30, 1999 and 1998, respectively (amounts rounded to thousands, except per
share data):
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED FOR THE THREE MONTHS ENDED
SEPTEMBER 30, 1999 SEPTEMBER 30, 1998
---------------------------------- -----------------------------------
INCOME WEIGHTED PER SHARE INCOME WEIGHTED PER SHARE
AVERAGE AMOUNT AVERAGE AMOUNT
SHARES SHARES
------ -------- --------- ------ -------- ---------
<S> <C> <C> <C> <C> <C> <C>
Basic EPS:
Income available to common
stockholders................ $ 4,537 23,746 $ 0.19 $ 3,371 22,029 $ 0.15
Effect of dilutive options and
warrants: ................. 670 1,449
------- ------ ------ ------- ------ ------
Diluted EPS:
Income available to common
stockholders and assumed
conversions................. $ 4,537 24,416 $ 0.19 $ 3,371 23,478 $ 0.14
------- ------ ------ ------- ------ ------
------- ------ ------ ------- ------ ------
</TABLE>
7.
<PAGE>
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1999 SEPTEMBER 30, 1998
---------------------------------- -----------------------------------
INCOME WEIGHTED PER SHARE INCOME WEIGHTED PER SHARE
AVERAGE AMOUNT AVERAGE AMOUNT
SHARES SHARES
------ -------- --------- ------ -------- ---------
<S> <C> <C> <C> <C> <C> <C>
Basic EPS:
Income available to common
stockholders................ $ 15,161 23,234 $ 0.65 $ 9,498 21,332 $ 0.45
Effect of dilutive options and
warrants: ................. 886 1,449
-------- ------ ------ ------- ------ ------
Diluted EPS:
Income available to common
stockholders and assumed
conversions................. $ 15,161 24,120 $ 0.63 $ 9,498 22,781 $ 0.42
-------- ------ ------ ------- ------ ------
-------- ------ ------ ------- ------ ------
</TABLE>
4. DISCLOSURE OF SEGMENT INFORMATION
FCG has the following three reportable segments: North America
consulting, North America integration, and international services. The
consulting services consist of strategic planning, operations effectiveness,
procurement and contracting, and general consulting. The integration services
include implementation of packaged vendor software, design and development of
comprehensive system architectures, infrastructures, interfaces, databases,
applications and networks to address the need for information integration and
dissemination throughout a client's organization. International primarily
represents services provided in the United Kingdom and parts of continental
Europe and includes a blend of consulting and integration services.
FCG manages segment reporting at a gross margin level. Selling,
general and administrative expenses (including corporate functions, occupancy
related costs, depreciation, professional development, recruiting, and
marketing), and fixed assets (primarily computer equipment, furniture, and
leasehold improvements) are managed at the corporate level separately from the
segments. FCG's segments are managed on an integrated basis in order to serve
clients by assembling multi-disciplinary teams, which provide comprehensive
services.
The following is a summary of certain financial information by segment
(in thousands):
FOR THE THREE MONTH PERIOD ENDED SEPTEMBER 30, 1999:
<TABLE>
<CAPTION>
NORTH AMERICA NORTH AMERICA
CONSULTING INTEGRATION EUROPE ALL OTHER TOTALS
------------- ------------- ------ --------- -------
<S> <C> <C> <C> <C> <C>
Net revenues........................... $13,074 $45,011 $2,091 $1,235 $61,411
Cost of services....................... 8,152 26,262 2,150 1,133 37,697
------------- ------------- ------ --------- -------
Gross profit........................... $4,922 $18,749 $(59) $102 23,714
Selling, general & administrative................................................................. 17,061
-------
Merger and related severance costs............................................................... -
-------
Income from operations............................................................................ $6,653
-------
-------
</TABLE>
8.
<PAGE>
FOR THE THREE MONTH PERIOD ENDED SEPTEMBER 30, 1998:
<TABLE>
<CAPTION>
NORTH AMERICA NORTH AMERICA
CONSULTING INTEGRATION EUROPE ALL OTHER TOTALS
------------- ------------- ------ --------- -------
<S> <C> <C> <C> <C> <C>
Net revenues........................... $ 12,468 $ 36,835 $ 1,556 $ 223 $ 51,082
Cost of services....................... 7,093 20,010 1,340 107 28,550
------------- ------------- ------- --------- --------
Gross profit........................... $ 5,375 $ 16,825 $ 216 $ 116 22,532
Selling, general & administrative................................................................... 16,433
Merger and related severance costs.................................................................. 486
--------
Income from operations.............................................................................. $ 5,613
--------
--------
</TABLE>
FOR THE NINE MONTH PERIOD ENDED SEPTEMBER 30, 1999:
<TABLE>
<CAPTION>
NORTH AMERICA NORTH AMERICA
CONSULTING INTEGRATION EUROPE ALL OTHER TOTALS
------------- ------------- ------ --------- ---------
<S> <C> <C> <C> <C> <C>
Net revenues........................... $ 38,038 $ 133,413 $6,261 $ 3,482 $ 181,194
Cost of services....................... 24,922 75,955 6,283 2,650 109,810
------------- ------------- ------ --------- ---------
Gross profit........................... $ 13,116 $ 57,458 $ (22) $ 832 71,384
Selling, general & administrative.................................................................. 52,272
Merger and related severance costs................................................................. 1,828
---------
Income from operations............................................................................. $ 17,284
---------
---------
</TABLE>
FOR THE NINE MONTH PERIOD ENDED SEPTEMBER 30, 1998:
<TABLE>
<CAPTION>
NORTH AMERICA NORTH AMERICA
CONSULTING INTEGRATION EUROPE ALL OTHER TOTALS
------------- ------------- ------- --------- ---------
<S> <C> <C> <C> <C> <C>
Net revenues........................... $ 36,499 $ 100,807 $ 4,714 $ 423 $ 142,443
Cost of services....................... 20,863 55,409 4,139 217 80,628
------------- ------------- ------- --------- ---------
Gross profit........................... $ 15,636 $ 45,398 $ 575 $ 206 61,815
Selling, general & administrative................................................................. 45,617
Merger and related severance costs................................................................ 486
---------
Income from operations............................................................................ $ 15,712
---------
---------
</TABLE>
5. COMPREHENSIVE INCOME
Other comprehensive income, consisting of foreign currency translation
adjustments, is not shown because it is not significant.
9.
<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 "Risks Relating to the Business
of FCG" in FCG's Annual Report on Form 10-K for the year ended December 31,
1998, and subsequent reports filed with the Securities and Exchange
Commission. FCG's actual results could differ materially from those
anticipated in these forward-looking statements.
OVERVIEW
FCG provides services to payors, providers, government agencies,
pharmaceutical and life science companies, and other healthcare organizations
in North America and Europe. FCG generates substantially all of its revenue
from fees for professional services. FCG typically bills for its services on
an hourly, fixed-fee or monthly fixed-fee basis as specified by the agreement
with a particular client. FCG establishes either standard or target hourly
rates for each level of consultant based on several factors including
prevailing rates, 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,
target, or historical rates charged by FCG. For services billed on an hourly
basis, FCG recognizes revenue as services are performed. For services billed
on a fixed fee basis, FCG 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. Out-of-pocket expenses are reimbursed by
clients and offset against expenses incurred and are not included in
recognized revenues. Provisions are made for estimated uncollectible amounts
based on FCG's experience. FCG may obtain payment in advance of providing
services. These advances are recorded as deferred revenue and reflected as a
liability on FCG's balance sheet.
Cost of services primarily consists of the salaries, bonuses and related
benefits of client-serving consultants and subcontractor expenses. General
and administrative expenses primarily consist of the costs attributable to
the development of the business and the support of its client-serving
professionals, such as: non-billable travel; office space occupancy;
investments in FCG's information systems, research and practice support and
quality initiatives; salaries and expenses for executive management,
financial accounting and administrative personnel; expenses for firm and
service line governance meetings; recruiting fees and professional
development and training; and marketing, legal and other professional
services. As associate-related costs are relatively fixed, variations in
FCG's revenues and operating results can occur as a result of variations in
billing margins and utilization rates of its billable associates. FCG
routinely reviews its fees for services, professional compensation and
overhead costs to ensure that its services and compensation are competitive
within the industry. In addition, FCG routinely monitors the progress of
client projects with its clients' senior management. Quality of Service
Questionnaires are
10.
<PAGE>
sent to the client after each engagement with the results compiled and
reported to FCG executive management.
FCG's most significant expenses are its human resource and related salary and
benefit expenses. As of September 30, 1999, approximately 84% of FCG's 1,748
employees are consultants, and the salaries and benefits of such consultants
are recognized in FCG's cost of services. Non-billable employee salaries and
benefits are recognized as a component of general and administrative
expenses. FCG'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. FCG manages consultant utilization
by monitoring assignment requirements and timetables, available and required
skills, and available consultant hours per week and per month. Differences in
personnel utilization rates can result from variations in the amount of
non-billed time, which has historically consisted of training time, vacation
and holiday time, time lost to illness and inclement weather and unassigned
time. Non-billed time also includes time devoted to other necessary and
productive activities such as sales support and interviewing prospective
employees. Unassigned time results from differences in the timing of the
completion of an existing assignment and the beginning of a new assignment.
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 FCG 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.
FCG's effective tax rate has varied from period to period due to
non-deductible losses from FCG'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, and
merger related activities. FCG believes that its tax rate has normalized
around the 41.5% rate level.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
NET REVENUE. FCG's net revenue increased 20.2% to $61.4 million for
the quarter ended September 30, 1999 from $51.1 million for the quarter ended
September 30, 1998. This increase was primarily attributable to an increase
in revenue from FCG's integration services.
COST OF SERVICES. Cost of services increased 32.0% to $37.7 million
for the quarter ended September 30, 1999 from $28.6 million for the quarter
ended September 30, 1998. The increase was primarily attributable to an
increase in the number of consultants. Cost of services as a percentage of
revenue increased to 61.4% for the quarter ended September 30, 1999 from
55.9% for the quarter ended September 30, 1998. This increase was due to
lower utilization, pricing pressure in the healthcare segment, investment in
a large outsourcing proposal, and low margins in European operations.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative
expenses increased 3.8% to $17.1 million for the quarter ended September 30,
1999 from $16.4 million for the quarter ended September 30, 1998. General and
administrative expenses as a percentage of revenue decreased from 32.2% for
the quarter ended September 30, 1998 to 27.8% for the quarter ended September
30, 1999 due to tighter expense management.
11.
<PAGE>
INTEREST INCOME, NET. Interest income, net of interest expense,
increased to $654,000 for the quarter ended September 30, 1999 from $593,000
for the quarter ended September 30, 1998. Interest income net of interest
expense as a percentage of revenue declined slightly to 1.1% for the quarter
ended September 30, 1999 compared to 1.2% for the quarter ended September 30,
1998.
INCOME TAXES. The provision for income taxes of 38.1% in the quarter
ended September 30, 1999 decreased from the 45.8% reported for the quarter
ended September 30, 1998 primarily due to a change in the effective tax rate
for the full year 1999 from 43% to 41.5% reflected in the current quarter,
resulting from efficiencies we are realizing in the state tax area and
reduced nondeductible expenses, while there had been an increase in certain
nondeductible expenses related to the European operations which had raised
the rate in the third quarter of 1998.
NET INCOME. Net income increased 34.6% to $4.5 million or $.19 per
diluted share for the quarter ended September 30, 1999 from $3.4 million or
$.14 per diluted share for the quarter ended September 30, 1998. Excluding
the after tax effect of the $0.5 million merger and related severance costs,
net income would have been $3.6 million or $.15 per diluted share for the
quarter ended September 30, 1998.
RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
NET REVENUE. FCG's net revenue increased 27.2% to $181.2 million for
the nine months ended September 30, 1999 from $142.4 million for the nine
months ended September 30, 1998. This increase was primarily attributable to
an increase in revenue from FCG's integration services.
COST OF SERVICES. Cost of services increased 36.2% to $109.8 million
for the nine months ended September 30, 1999 from $80.6 million for the nine
months ended September 30, 1998. The increase was primarily attributable to
an increase in the number of consultants. Cost of services as a percentage of
revenue increased to 60.6% for the nine months ended September 30, 1999 from
56.6% for the nine months ended September 30, 1998. This increase was due to
lower utilization, pricing pressure in the healthcare segment, increased
receivables reserves, investment in a large outsourcing proposal, lower
margins in European operations, and the absence of unusual project write-ups
that were present in 1998.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative
expenses increased 14.6% to $52.3 million for the nine months ended September
30, 1999 from $45.6 million for the nine months ended September 30, 1998.
General and administrative expenses as a percentage of revenue decreased from
32.0% for the nine months ended September 30, 1998 to 28.8% for the nine
months ended September 30, 1999 due to tighter expense management.
MERGER AND RELATED SEVERANCE COSTS. Merger and related severance
costs in the nine months ended September 30, 1999 of $1.8 million, or 1.0% of
revenue, consisted of $1.1 million of separation costs related to the
December, 1998 acquisition of ISCG, including costs related to the retirement
from active management of ISCG founder and FCG Vice Chairman David Lipson,
and $0.7 million in Europe related to retention bonuses and the
rationalization of capacity and overhead subsequent to the acquisition of two
businesses in late 1998 and early 1999. Merger and related severance costs
for the nine months ended September 30, 1998 of $0.5 million consisted of
costs as a result of termination of a potential business combination
contemplated by ISCG with a third party prior to the definitive merger
agreement between FCG and ISCG.
OTHER INCOME, NET. Other income for the nine months ended September
30, 1999 of $3.9 million,
12.
<PAGE>
or 2.2% of revenue, consisted primarily of the net proceeds from a life
insurance policy for former Chairman James Reep, who passed away in April
1999. Other income was negligible in the prior year.
INTEREST INCOME, NET. Interest income, net of interest expense,
increased to $1.9 million for the nine months ended September 30, 1999 from
$1.6 million for the nine months ended September 30, 1998. Interest income
net of interest expense as a percentage of revenue declined slightly to 1.0%
for the nine months ended September 30, 1999 compared to 1.1% for the nine
months ended September 30, 1998.
INCOME TAXES. The provision for income taxes of 34.2% in the nine
months ended September 30, 1999 decreased from the 45.2% reported for the
nine months ended September 30, 1998 primarily due to the effect of the other
income in the current year from the life insurance proceeds noted above not
being taxable income, thus lowering the effective tax rate for the current
nine month period, while there had been an increase in certain nondeductible
expenses related to the European operations which had raised the rate in the
first nine months of 1998.
NET INCOME. Net income increased 59.6% to $15.2 million or $.63 per
diluted share for the nine months ended September 30, 1999 from $9.5 million
or $.42 per diluted share for the nine months ended September 30, 1998.
Excluding the after tax effects of the $3.9 million life insurance proceeds
included in other income and the $1.8 million of merger and related severance
costs, net income would have been $12.4 million or $.51 per diluted share for
the nine months ended September 30, 1999.
LIQUIDITY AND CAPITAL RESOURCES
During the nine month period ended September 30, 1999, FCG provided
cash flow from operations of $4.4 million, principally as a result of net
income and depreciation exceeding working capital requirements. During the
nine month period ended September 30, 1999, FCG used cash flow of
approximately $8.1 million to purchase property and equipment, including
computer and related equipment and office furniture, and approximately $2.0
million to purchase the assets (principally goodwill) of a U.K. consulting
business. Depreciation and amortization expense for the nine month period
ended September 30, 1999 was approximately $4.8 million. At September 30,
1999, FCG had working capital of $77.0 million and long-term investments of
$11.0 million. At December 31, 1998, FCG had working capital of $66.9 million
and long-term investments of $5.6 million. Working capital increased
primarily due to increased accounts receivables.
FCG has a revolving line of credit which allows it to borrow up to
$9.0 million at an interest rate of the prevailing prime rate. The revolving
line of credit expires on May 1, 2000. There was no outstanding balance under
the line of credit at September 30, 1999. The line of credit agreement
provides that FCG must satisfy certain covenants and restrictions.
Management believes existing cash and short-term investments
together with funds generated from operations will be sufficient to meet
operating requirements for the next 12 months. FCG's cash and short-term
investments are available for strategic investments, mergers and
acquisitions, and other potential large-scale cash needs that may arise. At
September 30, 1999, most of FCG's proceeds from its initial public offering
in February 1998 were retained as cash or investments.
13.
<PAGE>
YEAR 2000 COMPLIANCE
Many existing computer programs and systems, including those used by
FCG's clients, use only two digits to identify the year in the date field.
These programs may be unable to process date/time information between the
twentieth and twenty-first centuries. This inability could cause the
disruption or failure of such computer systems (the "Y2K Problem"). Solving
the Y2K Problem is requiring a large amount of time and resources. FCG's
clients have reallocated a portion of their budgets away from FCG's services
to address this problem. Further such reallocations would reduce FCG's
revenues and have a material adverse effect on FCG's business, financial
condition and results of operations. Currently, FCG is not able to predict
the full extent to which its clients will divert their resources to the Y2K
Problem or to estimate the impact, if any, this may have on FCG's revenues.
In addition, business interruptions experienced by FCG's clients due to the
Y2K Problem could result in reduced demand for FCG's services or delay in the
payment of FCG's invoices. Reduced demand or delay in payments could have a
material adverse effect on FCG's business.
The computer systems of third parties with whom FCG regularly deals
could be disrupted or fail, causing an interruption or decrease in FCG's
ability to continue its operations. FCG relies on third party relationships
in the conduct of its business, including suppliers, vendors, utilities,
financial institutions and others. FCG has created a list of the third
parties it believes are material to its operations and has obtained written
assurances from them that there will be no interruption of service as a
result of the Y2K Problem. It is possible that FCG will experience
interruptions in third party services despite vendors' assurances otherwise,
and that FCG will not be able to develop contingency plans to meet individual
or multiple third party failures, resulting in an operations interruption
that could materially adversely affect FCG's business.
FCG could be exposed to liabilities if any of the custom
applications designed, built or modified by FCG for its clients are disrupted
or fail. FCG believes it is likely that certain custom software applications
it designed, built or modified in the past are non-Y2K compliant. FCG has not
made a determination of which custom applications may not be Y2K compliant.
Further, FCG has not determined the extent to which it may be legally
responsible for either (1) fixing any non-Y2K compliant applications or (2)
the consequences of such non-compliance. FCG has not quantified the impact
that the foregoing risk could have on its business. Even in the absence of
legal liability, FCG may determine that it is in FCG's best interests to
offer to fix non-compliant applications under a variety of arrangements
including at no charge or at rates below FCG's normal rates. The failure of
custom software applications delivered by FCG in the past to be Y2K
compliant, and the liability or the need to devote additional resources that
could result from such failure, could have a material adverse effect on FCG's
business.
FCG has not yet devised, and may not be able to devise, a
contingency plan that will adequately address all of the Y2K Problem. Because
of the uncertainty surrounding the Y2K Problem, unforeseen and unpredictable
costs and liabilities associated with the Y2K Problem could materially
adversely impact the business, prospects, financial condition and results of
operations of FCG.
14.
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
None.
ITEM 2. CHANGES IN SECURITIES.
Under FCG's 1994 Restricted Stock Plan, (the "1994 Plan") FCG 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 FCG, must purchase and hold a minimum number of shares of
common stock of FCG ("Common Stock").
During the quarter ended September 30, 1999, FCG issued an aggregate
of 205,640 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 $2,315,000 in consideration
of the Shares. The Shares were issued in reliance on Section 4(2) of 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.
15.
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) EXHIBITS
ITEM DESCRIPTION
- ------------------------------- -----------------------------------------------
3(i)(1) Certificate of Incorporation of FCG.
3(ii)(1) Bylaws of FCG.
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 FCG'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.
16.
<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: November 12, 1999 /s/ LUTHER J. NUSSBAUM
---------------------------------------------
Luther J. Nussbaum
Chief Executive Officer
Date: November 12, 1999 /s/ THOMAS A. REEP
---------------------------------------------
Thomas A. Reep
Chief Financial Officer
and Vice President, Finance
(Principal Financial Officer)
17.
<PAGE>
ITEM DESCRIPTION
- ------------------------------- -----------------------------------------------
3(i)(1) Certificate of Incorporation of FCG.
3(ii)(1) Bylaws of FCG.
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 FCG'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."
18.
<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 FCG'S FORM 10-Q FOR THE PERIOD ENDED SEPTEMBER 30, 1999, AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS AND NOTES
THERETO.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 30,358,000
<SECURITIES> 12,076,000
<RECEIVABLES> 46,235,000
<ALLOWANCES> (1,579,000)
<INVENTORY> 17,202,000
<CURRENT-ASSETS> 107,251,000
<PP&E> 30,948,000
<DEPRECIATION> 15,878,000
<TOTAL-ASSETS> 148,475,000
<CURRENT-LIABILITIES> 30,240,000
<BONDS> 0
0
0
<COMMON> 24,000
<OTHER-SE> 113,043,000
<TOTAL-LIABILITY-AND-EQUITY> 148,475,000
<SALES> 181,194,000
<TOTAL-REVENUES> 181,194,000
<CGS> 109,810,000
<TOTAL-COSTS> 54,100,000
<OTHER-EXPENSES> (3,916,000)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (1,856,000)
<INCOME-PRETAX> 23,056,000
<INCOME-TAX> 7,895,000
<INCOME-CONTINUING> 15,161,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 15,161,000
<EPS-BASIC> 0.65
<EPS-DILUTED> 0.63
</TABLE>
