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 JUNE 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
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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 23,669,949 SHARES
- ------------------------------------ ----------------------------------
(Class) (Outstanding at June 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 June 30, 1999 and
December 31, 1998......................................................................3
Consolidated Statements of Operations for the three
month periods ended June 30, 1999 and June 30, 1998 and for the six month periods
ended June 30, 1999 and June 30, 1998..................................................5
Condensed Consolidated Statements of Cash Flows for the six
month periods ended June 30, 1999 and June 30, 1998....................................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......................................................................................16
ITEM 1. LEGAL PROCEEDINGS.....................................................................16
ITEM 2. CHANGES IN SECURITIES.................................................................16
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.......................................................16
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS...............................................................................16
ITEM 5. OTHER INFORMATION.....................................................................16
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K......................................................17
SIGNATURES.......................................................................................................18
EXHIBIT INDEX....................................................................................................19
</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>
JUNE 30, DECEMBER 31,
1999 1998
---------------- ----------------
ASSETS (UNAUDITED)
<S> <C> <C>
Current assets
Cash and cash equivalents $ 18,333 $ 20,737
Short-term investments ............................................ 19,475 27,168
Accounts receivable, less allowance of $1,545 and $1,449 in the periods 44,362 36,955
ended June 30, 1999 and December 31, 1998, respectively.............
Work in process....................................................... 16,733 13,185
Prepaid expenses and other current assets............................. 4,770 2,565
-------- --------
Total current assets.............................................. 103,673 100,610
Notes receivable-stockholders ............................................. 1,835 1,803
Long-term investments................................................. 7,587 5,644
Property and equipment
Furniture, equipment, and leasehold improvements...................... 6,603 5,418
Information systems equipment......................................... 21,741 17,528
-------- --------
28,344 22,946
Less accumulated depreciation and amortization............................. 14,611 11,932
-------- --------
13,733 11,014
Other assets
Executive benefit trust .............................................. 4,887 3,709
Deferred income taxes................................................. 800 763
Goodwill, net......................................................... 7,531 6,134
Other................................................................. 1,779 784
-------- --------
14,997 11,390
-------- --------
Total assets...................................................... $ 141,825 $ 130,461
-------- --------
-------- --------
</TABLE>
See accompanying notes.
3.
<PAGE>
FIRST CONSULTING GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONTINUED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1999 1998
----------- -------------
LIABILITIES AND STOCKHOLDERS' EQUITY (UNAUDITED)
<S> <C> <C>
Current liabilities
Current portion of long-term debt .................................... $ 54 $ 67
Accounts payable...................................................... 4,091 2,150
Accrued liabilities................................................... 8,660 8,090
Accrued vacation...................................................... 4,594 2,655
Accrued bonuses....................................................... 4,021 3,149
Deferred revenue...................................................... 105 491
Customer advances..................................................... 3,126 2,416
Income taxes payable.................................................. 43 8,355
Deferred income taxes................................................. 4,160 6,318
-------- --------
Total current liabilities......................................... 28,854 33,691
Non-current liabilities
Long-term debt, net of current portion................................ 173 238
Supplemental executive retirement plan................................ 5,124 3,946
-------- --------
Total non-current liabilities..................................... 5,297 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, 23,669,949 24 23
shares issued and outstanding at June 30, 1999 and 22,600,773 shares
issued and outstanding at December 31, 1998.........................
Additional paid-in capital............................................ 95,850 83,611
Retained earnings..................................................... 32,544 21,850
Deferred compensation-stock incentive agreements...................... (5,781) (4,058)
Unearned ASOP shares.................................................. (355) (739)
Notes receivable-stockholders......................................... (14,773) (8,181)
Accumulated other comprehensive income................................ 165 80
-------- --------
Total stockholders' equity........................................ 107,674 92,586
-------- --------
Total liabilities and stockholders' equity........................ $141,825 $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 Six Months Ended
June 30 June 30
----------------------- ----------------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net revenue.......................................... $60,919 $47,792 $119,783 $91,361
Cost of services..................................... 36,969 26,589 72,113 52,078
------- ------- -------- -------
Gross profit.................................... 23,950 21,203 47,670 39,283
General and administrative expenses.................. 17,531 15,373 35,211 29,184
Merger and related severance costs................... 1,718 -- 1,828 --
------- ------- -------- -------
Income from operations.......................... 4,701 5,830 10,631 10,099
Other income
Interest income, net............................ 602 545 1,202 968
Other income, net............................... 3,875 8 3,897 35
------- ------- -------- -------
Income before taxes........................ 9,178 6,383 15,730 11,102
Provision for income taxes........................... 2,288 3,048 5,106 4,975
------- ------- -------- -------
Net income................................. $ 6,890 $3,335 $10,624 $ 6,127
------- ------- -------- -------
------- ------- -------- -------
Basic net income per share........................... 0.29 0.15 0.46 0.29
------- ------- -------- -------
------- ------- -------- -------
Diluted net income per share......................... 0.29 0.14 0.44 0.27
------- ------- -------- -------
------- ------- -------- -------
Shares used in computing basic net income
per share....................................... 23,363 21,954 22,974 20,983
Shares used in diluted net income per share.......... 23,963 23,526 23,971 22,432
</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,
---------------- ----------------
1999 1998
<S> <C> <C>
Cash flows from operating activities:
Net income............................................................ $ 10,624 $ 6,127
Adjustments to reconcile net income................................... 1,090 2,419
Change in assets and liabilities...................................... (16,523) (2,690)
-------- -------
Net cash (used for) provided by operating activities.............. (4,809) 5,856
-------- -------
Cash flows from investing activities:......................................
Purchase of investments............................................... 5,665 (35,070)
Furniture, equipment, and leasehold improvements...................... (5,464) (2,805)
Acquisition of businesses............................................. (2,027) (3,940)
Notes receivable stockholders......................................... (221) (737)
-------- -------
Net cash used in investing activities............................. (2,047) (42,552)
-------- -------
Cash flows used in financing activities:
Long-term debt........................................................ (78) (2,085)
Proceeds from issuance of stock....................................... 4,530 46,056
-------- -------
Net cash generated in financing activities........................ 4,452 43,971
-------- -------
Net increase (decrease) in cash and equivalents............................ (2,404) 7,275
Cash and equivalents at beginning of period................................ 20,737 12,187
-------- -------
Cash and equivalents at end of period...................................... $18,333 $19,462
-------- -------
-------- -------
</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 June 30, 1999 and 1998 and consolidated statements of operations and
condensed consolidated statements of cash flows for the periods ended June 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
June 30, 1999 and the results of operations for the three month and six month
periods ended June 30, 1999 and June 30, 1998. The results of operations for the
three month and six month periods ended June 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 $19.5 million in short term
investments and $7.6 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
June 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 six month periods ended June 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
JUNE 30, 1999 JUNE 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................ $6,890 23,363 $0.29 $3,335 21,954 $0.15
Effect of dilutive options and
warrants: ................. 600 1,572
------ ------ ----- ------- ------ -----
Diluted EPS:
Income available to common
stockholders and assumed
conversions................. $6,890 23,963 $0.29 $3,335 23,526 $0.14
------ ------ ----- ------- ------ -----
------ ------ ----- ------- ------ -----
</TABLE>
7.
<PAGE>
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED FOR THE SIX MONTHS ENDED
JUNE 30, 1999 JUNE 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................ $10,624 22,974 $0.46 $6,127 20,983 $0.29
Effect of dilutive options and
warrants: ................. 997 1,449
-------- --------- -------- -------- ---------- ---------
Diluted EPS:
Income available to common
stockholders and assumed
conversions................. $10,624 23,971 $0.44 $6,127 22,432 $0.27
-------- --------- -------- -------- ---------- ---------
-------- --------- -------- -------- ---------- ---------
</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 JUNE 30, 1999:
<TABLE>
<CAPTION>
NORTH AMERICA NORTH AMERICA
CONSULTING INTEGRATION EUROPE ALL OTHER TOTALS
------------- ------------- ------ --------- ------
<S> <C> <C> <C> <C> <C>
Net revenues........................... $12,518 $44,951 $2,134 $ 1,316 $ 60,919
Cost of services....................... 8,490 25,429 2,165 885 36,969
------- ------- ------ ------- --------
Gross profit........................... $ 4,028 $19,522 $ (31) $ 431 23,950
Selling, general & administrative................................................................... 17,531
Merger and related severance costs.................................................................. 1,718
--------
Income from operations.............................................................................. $ 4,701
--------
--------
</TABLE>
8.
<PAGE>
FOR THE THREE MONTH PERIOD ENDED JUNE 30, 1998:
<TABLE>
<CAPTION>
NORTH AMERICA NORTH AMERICA
CONSULTING INTEGRATION EUROPE ALL OTHER TOTALS
------------- ------------- ------ --------- ------
<S> <C> <C> <C> <C> <C>
Net revenues........................... $12,814 $33,292 $1,585 $ 101 $ 47,792
Cost of services....................... 7,014 17,934 1,590 51 26,589
------- ------- ------ ------- --------
Gross profit........................... $ 5,800 $15,358 $ (5) $ 50 21,203
Selling, general & administrative................................................................... 15,373
Merger and related severance costs.................................................................. -
--------
Income from operations.............................................................................. $ 5,830
--------
--------
</TABLE>
FOR THE SIX MONTH PERIOD ENDED JUNE 30, 1999:
<TABLE>
<CAPTION>
NORTH AMERICA NORTH AMERICA
CONSULTING INTEGRATION EUROPE ALL OTHER TOTALS
------------- ------------- ------ --------- ------
<S> <C> <C> <C> <C> <C>
Net revenues........................... $24,964 $88,402 $4,170 $ 2,247 $ 119,783
Cost of services....................... 16,770 49,693 4,133 1,517 72,113
------- ------- ------ ------- --------
Gross profit........................... $ 8,194 $38,709 $ 37 $ 730 47,670
Selling, general & administrative................................................................... 35,211
Merger and related severance costs.................................................................. 1,828
--------
Income from operations.............................................................................. $ 10,631
--------
--------
</TABLE>
FOR THE SIX MONTH PERIOD ENDED JUNE 30, 1998:
<TABLE>
<CAPTION>
NORTH AMERICA NORTH AMERICA
CONSULTING INTEGRATION EUROPE ALL OTHER TOTALS
------------- ------------- ------ --------- ------
<S> <C> <C> <C> <C> <C>
Net revenues........................... $24,031 $63,972 $3,158 $ 200 $ 91,361
Cost of services....................... 13,770 35,399 2,799 110 52,078
------- ------- ------ ------- --------
Gross profit........................... $ 10,261 $28,573 $ 359 $ 90 39,283
Selling, general & administrative................................................................... 29,184
Merger and related severance costs.................................................................. -
--------
Income from operations.............................................................................. $ 10,099
--------
--------
</TABLE>
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
9.
<PAGE>
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 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 June 30, 1999, approximately 81% of FCG's 1,710
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
10.
<PAGE>
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 43% rate level.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, 1999 AND 1998
NET REVENUE. FCG's net revenue increased 27.5% to $60.9 million for
the quarter ended June 30, 1999 from $47.8 million for the quarter ended June
30, 1998. This increase was primarily attributable to an increase in revenue
from FCG's integration services.
COST OF SERVICES. Cost of services increased 39.0% to $37.0 million
for the quarter ended June 30, 1999 from $26.6 million for the quarter ended
June 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 60.7% for the quarter ended June 30, 1999 from 55.6% for the quarter ended
June 30, 1998. This increase was due to 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 the second quarter of 1998.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative
expenses increased 14.0% to $17.5 million for the quarter ended June 30, 1999
from $15.4 million for the quarter ended June 30, 1998. General and
administrative expenses as a percentage of revenue decreased from 32.2% for
the quarter ended June 30, 1998 to 28.8% for the quarter ended June 30, 1999
due to tighter expense management.
MERGER AND RELATED SEVERANCE COSTS. Merger and related severance
costs in the quarter ended June 30, 1999 of $1.7 million, or 2.8% of revenue,
consisted of $1.1 million of separation costs related to the December 1998
acquisition of Integrated Systems Consulting Group (ISCG), including costs
related to the retirement from active management of ISCG founder and FCG Vice
Chairman David Lipson, and $0.6 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.
11.
<PAGE>
OTHER INCOME, NET. Other income for the quarter ended June 30, 1999
of $3.9 million, or 6.3% 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 $602,000 for the quarter ended June 30, 1999 from $545,000 for
the quarter ended June 30, 1998. Interest income net of interest expense as a
percentage of revenue declined slightly to 1.0% for the quarter ended June
30, 1999 compared to 1.1% for the quarter ended June 30, 1998.
INCOME TAXES. The provision for income taxes of 24.9% in the quarter
ended June 30, 1999 decreased from the 47.8% reported for the quarter ended
June 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 quarter, while there had been an
increase in certain nondeductible expenses related to the European operations
which had raised the rate in the second quarter of 1998.
NET INCOME. Net income increased 106.6% to $6.9 million or $.29 per
diluted share for the quarter ended June 30, 1999 from $3.3 million or $.14
per diluted share for the quarter ended June 30, 1998. Excluding the after
tax effects of the $3.9 million life insurance proceeds included in other
income and the $1.7 million of merger and related severance costs, net income
would have been $4.0 million or $.17 per diluted share for the quarter ended
June 30, 1999.
RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND 1998
NET REVENUE. FCG's net revenue increased 31.1% to $119.8 million for
the six months ended June 30, 1999 from $91.4 million for the six months
ended June 30, 1998. This increase was primarily attributable to an increase
in revenue from FCG's integration services.
COST OF SERVICES. Cost of services increased 38.5% to $72.1 million
for the six months ended June 30, 1999 from $52.1 million for the six months
ended June 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 60.2% for the six months ended June 30, 1999 from 57.0% for the
six months ended June 30, 1998. This increase was due to 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 the first half of 1998.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative
expenses increased 20.7% to $35.2 million for the six months ended June 30,
1999 from $29.2 million for the six months ended June 30, 1998. General and
administrative expenses as a percentage of revenue decreased from 31.9% for
the six months ended June 30, 1998 to 29.4% for the six months ended June 30,
1999 due to tighter expense management.
MERGER AND RELATED SEVERANCE COSTS. Merger and related severance
costs in the six months ended June 30, 1999 of $1.8 million, or 1.5% 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.
12.
<PAGE>
OTHER INCOME, NET. Other income for the six months ended June 30,
1999 of $3.9 million, or 3.3% 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 $1.2 million for the six months ended June 30, 1999 from $1.0
million for the six months ended June 30, 1998. Interest income net of
interest expense as a percentage of revenue declined slightly to 1.0% for the
six months ended June 30, 1999 compared to 1.1% for the six months ended June
30, 1998.
INCOME TAXES. The provision for income taxes of 32.5% in the six
months ended June 30, 1999 decreased from the 44.8% reported for the six
months ended June 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 six
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 six months of 1998.
NET INCOME. Net income increased 73.4% to $10.6 million or $.44 per
diluted share for the six months ended June 30, 1999 from $6.1 million or
$.27 per diluted share for the six months ended June 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 $7.8 million or $.33 per diluted share for the six
months ended June 30, 1999.
LIQUIDITY AND CAPITAL RESOURCES
During the six month period ended June 30, 1999, FCG used cash flow
for operations of $4.8 million, principally to pay income taxes on income
earned in the prior year, and to fund an increase in accounts receivable.
During the six month period ended June 30, 1999, FCG used cash flow of
approximately $5.5 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 six month period
ended June 30, 1999 was approximately $3.2 million. At June 30, 1999, FCG had
working capital of $74.8 million and long-term investments of $7.6 million.
At December 31, 1998, FCG had working capital of $66.9 million and long-term
investments of $5.6 million. Working capital increased due to the tax
payments and increased receivables noted above.
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 June 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
June 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.
Additionally, one of FCG's current time and billing systems for its
internal use is not Y2K compliant. FCG has purchased an upgrade to this
system that will render it Y2K compliant and expects to complete deployment
of this upgrade in the third quarter of 1999. FCG estimates that the cost of
such upgrade will be less than $100,000. There can be no assurance that such
deployment will begin as planned or, if begun, will be completed in a timely
and cost-effective manner.
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 is attempting to
obtain written assurances from them that there will be no interruption of
service as a result of the Y2K Problem. Where such assurances are not given,
FCG intends, where practical, to devise contingency plans to allow FCG to
operate in the event of Y2K-related service interruption. 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. To better estimate the
scope of this potential problem, FCG is planning to review representative
samples of the custom applications it has worked on in its larger engagements
in the past three years. To the extent this review indicates that any of such
applications are not Y2K compliant, FCG will evaluate whether such
non-compliance may result in liability for FCG. 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.
14.
<PAGE>
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.
15.
<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").
In April, May, and June 1999, FCG issued an aggregate of 23,121
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 $240,000 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.
FCG held its 1999 Annual Meeting of Stockholders on June 8, 1999. The
stockholders elected the Board's nominees as directors to serve three-year terms
expiring at the 2002 Annual Meeting of Stockholders by the votes indicated:
NOMINEE VOTES IN FAVOR VOTES AGAINST ABSTENTIONS
------- -------------- ------------- -----------
Frank Baldino, Jr. .... 18,363,961 95,180 0
Steven Heck............ 18,363,961 95,180 0
Stephen E. Olson....... 18,363,961 95,180 0
The stockholders also ratified FCG's selection of Grant Thornton LLP as FCG's
independent auditors for the year ending December 31, 1999, with 18,271,183
votes cast in favor, 179,900 votes cast against and 8,058 votes abstaining
from the proposal.
ITEM 5. OTHER INFORMATION.
None.
16.
<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
FCG filed a report on Form 8-K dated April 19, 1999 announcing the
death of its Chairman of the Board of Directors, James Reep, from
cancer.
17.
<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: August 13, 1999 LUTHER J. NUSSBAUM
---------------------------------------
Luther J. Nussbaum
Chief Executive Officer
Date: August 13, 1999 THOMAS A. REEP
---------------------------------------
Thomas A. Reep
Chief Financial Officer
and Vice President, Finance
(Principal Financial Officer)
18.
<PAGE>
EXHIBIT INDEX
NO. OF
EXHIBIT 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."
19.
<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 JUNE 30, 1999, 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-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 18,333,000
<SECURITIES> 19,475,000
<RECEIVABLES> 45,907,000
<ALLOWANCES> (1,545,000)
<INVENTORY> 16,733,000
<CURRENT-ASSETS> 103,673,000
<PP&E> 28,344,000
<DEPRECIATION> 14,611,000
<TOTAL-ASSETS> 141,825,000
<CURRENT-LIABILITIES> 28,854,000
<BONDS> 0
0
0
<COMMON> 24,000
<OTHER-SE> 107,650,000
<TOTAL-LIABILITY-AND-EQUITY> 141,825,000
<SALES> 119,783,000
<TOTAL-REVENUES> 119,783,000
<CGS> 72,113,000
<TOTAL-COSTS> 37,039,000
<OTHER-EXPENSES> (3,897,000)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (1,202,000)
<INCOME-PRETAX> 15,730,000
<INCOME-TAX> 5,106,000
<INCOME-CONTINUING> 10,624,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 10,624,000
<EPS-BASIC> .46
<EPS-DILUTED> .44
</TABLE>
