<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, 2000,
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 24,874,705 SHARES
----------------------------- ----------------------------------
(Class) (Outstanding at November 1, 2000)
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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 September 30, 2000 and
December 31, 1999......................................................................3
Consolidated Statements of Operations for the three month periods ended September 30,
2000 and September 30, 1999 and for the nine month periods ended September 30, 2000
and September 30, 1999.................................................................5
Condensed Consolidated Statements of Cash Flows for the nine
month periods ended September 30, 2000 and September 30, 1999..........................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
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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,
2000 1999
------------- ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents ............................................ $ 11,748 $ 29,674
Short-term investments ............................................... 15,194 3,726
Accounts receivable, less allowance of $2,561 and $2,064 as of
September 30, 2000 and December 31, 1999, respectively.............. 35,433 42,315
Work in process....................................................... 21,760 15,737
Prepaid expenses and other current assets............................. 2,385 2,562
Income taxes receivable............................................... 6,739 --
------------- ------------
Total current assets.............................................. 93,259 94,014
Notes receivable-stockholders ............................................. 1,968 1,888
Long-term investments...................................................... 5,242 17,096
Property and equipment
Furniture, equipment, and leasehold improvements...................... 7,766 7,550
Information systems equipment......................................... 28,281 24,723
------------- ------------
36,047 32,273
Less accumulated depreciation and amortization............................. 21,215 17,283
------------- ------------
14,832 14,990
Other assets
Executive benefit trust .............................................. 7,406 6,832
Long term contract receivable ........................................ 8,921 --
Deferred income taxes................................................. 2,114 2,105
Goodwill, net......................................................... 10,547 6,478
Other................................................................. 519 658
------------- ------------
29,507 16,073
------------- ------------
Total assets...................................................... $ 144,808 $ 144,061
============= ============
</TABLE>
See accompanying notes.
3
<PAGE>
FIRST CONSULTING GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
------------- ------------
(UNAUDITED)
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Current portion of long-term debt .................................... $ 54 $ 54
Accounts payable...................................................... 2,581 874
Accrued liabilities................................................... 14,996 6,516
Accrued vacation...................................................... 5,801 4,668
Accrued bonuses....................................................... 1,586 4,432
Deferred revenue...................................................... 242 722
Customer advances..................................................... 4,307 2,592
Income taxes payable.................................................. -- 2,180
Deferred income taxes................................................. 11 11
------------- ------------
Total current liabilities......................................... 29,578 22,049
Non-current liabilities
Long-term debt, net of current portion................................ 105 146
Supplemental executive retirement plan................................ 7,040 6,959
Minority interest..................................................... 2,244 --
------------- ------------
Total non-current liabilities..................................... 9,389 7,105
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, 24,874,705
shares issued and outstanding at September 30, 2000 and 23,943,092
shares issued and outstanding at December 31, 1999.................. 24 24
Additional paid-in capital............................................ 107,705 99,993
Retained earnings..................................................... 24,908 36,657
Deferred compensation-stock incentive agreements...................... (5,819) (5,495)
Notes receivable-stockholders......................................... (20,008) (16,197)
Accumulated other comprehensive income................................ (969) (75)
------------- ------------
Total stockholders' equity........................................ 105,841 114,907
------------- ------------
Total liabilities and stockholders' equity........................ $144,808 $144,061
============= ============
</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
------------------------ -------------------------
2000 1999 2000 1999
------- ------- -------- --------
<S> <C> <C> <C> <C>
Net revenue............................................ $60,011 $61,411 $187,185 $181,194
Cost of services....................................... 45,883 37,697 141,157 109,810
------- ------- -------- --------
Gross profit...................................... 14,128 23,714 46,028 71,384
General and administrative expenses.................... 19,538 17,061 57,924 52,272
Merger, restructuring and related severance costs...... 5,500 ----- 9,200 1,828
------- ------- -------- --------
Income (loss) from operations.................... (10,910) 6,653 (21,096) 17,284
Other income
Interest income, net............................. 492 654 1,840 1,856
Other (expense) income, net...................... (186) 19 (326) 3,916
------- ------- -------- --------
Income (loss) before taxes.................. (10,604) 7,326 (19,582) 23,056
Provision for income taxes............................ (4,426) 2,789 (7,833) 7,895
------- ------- -------- --------
Net income (loss)............................$ (6,178) $ 4,537 $ (11,749) $ 15,161
======= ======= ======== ========
Basic net income (loss) per share..................... (0.25) 0.19 (0.48) 0.65
======= ======= ======== ========
Diluted net income (loss) per share................... (0.25) 0.19 (0.48) 0.63
======= ======= ======== ========
Shares used in computing basic net income
(loss) per share ................................ 24,922 23,746 24,433 23,234
Shares used in computing diluted net income
(loss) per share ................................ 24,922 24,416 24,433 24,120
</TABLE>
See accompanying notes.
5
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FIRST CONSULTING GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
----------------------------------
SEPTEMBER 30, SEPTEMBER 30,
2000 1999
------------- -------------
<S> <C> <C>
Cash flows from operating activities:
Net (loss) income..................................................... $ (11,749) $ 15,161
Adjustments to reconcile net income................................... 7,193 1,741
Change in assets and liabilities...................................... (7,443) (12,515)
------------- -------------
Net cash used in operating activities............................. (11,999) 4,387
------------- -------------
Cash flows from investing activities:......................................
Purchase of investments............................................... 9,905
187
Furniture, equipment, and leasehold improvements...................... (4,640) (8,085)
Acquisition of business, net of cash acquired......................... (2,883) (2,027)
Notes receivable stockholders......................................... -- (221)
------------- -------------
Net cash used in investing activities............................. (7,336) (428)
------------- -------------
Cash flows used in financing activities:
Long-term debt........................................................ (41) (92)
Proceeds from issuance of stock....................................... 1,451 5,754
------------- -------------
Net cash generated in financing activities........................ 1,410 5,662
------------- -------------
Net increase (decrease) in cash and equivalents............................ (17,925) 9,621
Cash and equivalents at beginning of period................................ 29,674 20,737
------------- -------------
Cash and equivalents at end of period...................................... $11,748 $30,358
============= =============
</TABLE>
See accompanying notes.
6
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The consolidated balance sheet of First Consulting Group, Inc. (the
"Company") at September 30, 2000 and consolidated statements of operations and
condensed consolidated statements of cash flows for the periods ended September
30, 2000 and 1999 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 September 30, 2000 and the results of operations for the three
month and nine month periods ended September 30, 2000 and September 30, 1999.
The results of operations for the nine months ended September 30, 2000 are not
necessarily indicative of the results to be expected for the year ending
December 31, 2000. For more complete financial information, these financial
statements should be read in conjunction with the audited financial statements
for the year ended December 31, 1999 included in the Company's Annual Report on
Form 10K.
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. The Company has approximately $15.2 million in short term
investments and $5.2 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, 2000.
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,
2000 and 1999, respectively (amounts rounded to thousands, except per share
data):
<TABLE>
<CAPTION>
Three Months Ended Three Months Ended
September 30, 2000 September 30, 1999
------------------------------------ -----------------------------------
Weighted Weighted
Average Per share Average Per share
Loss Shares amount Income Shares amount
--------- ------ --------- ------ -------- -------
<S> <C> <C> <C> <C> <C> <C>
Basic EPS:
Income (loss) available to
common stockholders........... $(6,178) 24,922 $(0.25) $4,537 23,746 $0.19
Effect of dilutive options and
warrants...................... 670
--------- ------- --------- ------ -------- -------
Diluted EPS:
Income (loss) available to
common stockholders and assumed
conversions................... $(6,178) 24,922 $(0.25) $4,537 24,416 $0.19
========= ======= ========= ====== ======== =======
</TABLE>
7
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<TABLE>
<CAPTION>
Nine Months Ended Nine Months Ended
September 30, 2000 September 30, 1999
------------------------------------ -----------------------------------
Weighted Weighted
Average Per share Average Per share
Loss Shares amount Income Shares amount
--------- ------ --------- ------ -------- -------
<S> <C> <C> <C> <C> <C> <C>
Basic EPS:
Income (loss) available to
common stockholders........... $(11,749) 24,433 $(0.48) $15,161 23,234 $0.65
Effect of dilutive options and
warrants...................... 886
--------- ------- --------- ------ -------- -------
Diluted EPS:
Income (loss) available to
common stockholders and assumed
conversions................... $(11,749) 24,433 $(0.48) $15,161 24,120 $0.63
========= ======= ========= ====== ======== =======
</TABLE>
4. DISCLOSURE OF SEGMENT INFORMATION
The Company has the following four reportable segments: North America
consulting, North America integration, Management Services, and European
Healthcare. 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.
Management services consist of assessment/due diligence, program management,
discrete outsourcing, and full IT outsourcing. European Healthcare primarily
represents services provided in the United Kingdom and parts of continental
Europe and includes a blend of consulting and integration services.
The Company manages segment reporting at a gross margin level. 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.
The Company'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):
THREE MONTHS PERIOD ENDED SEPTEMBER 30, 2000:
<TABLE>
<CAPTION>
NORTH AMERICA NORTH AMERICA EUROPEAN MANAGEMENT
CONSULTING INTEGRATION HEALTHCARE SERVICES TOTALS
------------ ------------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C>
Net revenues........................... $8,899 $40,460 $ 636 $10,016 $ 60,011
Cost of services....................... 6,731 30,109 1,097 7,946 45,883
------------ ------------- ---------- ---------- ---------
Gross profit........................... $ 2,168 $10,351 $ (461) $ 2,070 14,128
General & administrative............................................................................ 19,538
Merger, restructuring, and severance costs.......................................................... 5,500
---------
Loss from operations................................................................................ $(10,910)
=========
</TABLE>
8
<PAGE>
THREE MONTHS PERIOD ENDED SEPTEMBER 30, 1999:
<TABLE>
<CAPTION>
NORTH AMERICA NORTH AMERICA EUROPEAN MANAGEMENT
CONSULTING INTEGRATION HEALTHCARE SERVICES 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
General & administrative............................................................................ 17,061
Merger, restructuring, and severance costs.......................................................... --
------
Income from operations.............................................................................. $6,653
======
</TABLE>
NINE MONTHS PERIOD ENDED SEPTEMBER 30, 2000:
<TABLE>
<CAPTION>
NORTH AMERICA NORTH AMERICA EUROPEAN MANAGEMENT
CONSULTING INTEGRATION HEALTHCARE SERVICES TOTALS
-------------- ------------- ---------- ---------- --------
<S> <C> <C> <C> <C> <C>
Net revenues........................... $31,304 $121,527 $3,472 $ 30,882 $187,185
Cost of services....................... 24,720 87,184 4,095 25,158 141,157
-------------- ------------- ---------- ---------- --------
Gross profit........................... $6,584 $34,343 $ (623) $ 5,724 46,028
General & administrative............................................................................ 57,924
Merger, restructuring, and severance costs.......................................................... 9,200
--------
Loss from operations................................................................................ $(21,096)
========
</TABLE>
NINE MONTHS PERIOD ENDED SEPTEMBER 30, 1999:
<TABLE>
<CAPTION>
NORTH AMERICA NORTH AMERICA EUROPEAN MANAGEMENT
CONSULTING INTEGRATION HEALTHCARE SERVICES 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
General & administrative............................................................................ 52,272
Merger, restructuring, and severance costs.......................................................... 1,828
---------
Income from operations.............................................................................. $ 17,284
=========
</TABLE>
9
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5. COMPREHENSIVE INCOME
For the three and nine month periods ended September 30, 2000,
comprehensive income is as follows (for the three and nine month periods ended
September 30, 1999, other comprehensive income items are not shown because they
were not material):
Three months period ended September 30, 2000:
<TABLE>
<CAPTION>
UNREALIZED GAIN ON
NET LOSS CURRENCY TRANSLATION LOSS INVESTMENTS COMPREHENSIVE LOSS
-------- ------------------------- ----------- ------------------
<S> <C> <C> <C>
($6,178,000) ($711,000) $27,000 ($6,862,000)
</TABLE>
Nine months period ended September 30,2000:
<TABLE>
<CAPTION>
UNREALIZED GAIN ON
NET LOSS CURRENCY TRANSLATION LOSS INVESTMENTS COMPREHENSIVE LOSS
-------- ------------------------- ----------- ------------------
<S> <C> <C> <C>
($11,749,000) ($1,076,000) $221,000 ($12,604,000)
</TABLE>
6. ACQUISITION
On May 24, 2000, the Company created a new e-services company
composed of the newly acquired web development & design business of Doghouse
Productions, LLC and existing web expertise from FCG. Under terms of the
agreement, FCG acquired certain assets of Doghouse Productions, LLC for
approximately $6.9 million including a minority equity stake in the new
e-service company. The acquisition was accounted for using the purchase method
of accounting and the allocation of the purchase price is set forth below:
Consideration Paid $6,941,000
Fair Value of Tangible Assets 181,000
Fair Value of Liabilities assumed 83,000
Goodwill 6,759,000
The estimated fair market values reflected above are based on
preliminary estimates and assumptions and are subject to revision. In
management's opinion, the preliminary allocations are not expected to be
materially different from the final allocations.
7. VICE PRESIDENT STOCK LOANS
Under the Company's 1994 Restricted Stock Plan (the "1994 Plan"),
the Company has required that each vice president of the Company purchase and
hold a minimum number of shares of common stock of the Company. The Company
sold shares of common stock to each vice president, with the vice president
signing a promissory note for the purchase price of the shares. Each
promissory note is secured by the common stock purchased by the vice
president and is repaid principally through annual bonuses. Primarily due to
personnel separations during 2000 and the decline in the Company's stock
price, the Company has a number of former vice presidents who owe the Company
amounts on their stock loans in excess of the value of the shares securing
those loans. As of November 1, 2000, these former vice presidents owed
$6,455,000 in loans, secured by $3,049,000 of the Company stock. The Company
has agreed with most of the former vice presidents to extend the repayment
date for these loans; however, the Company cannot provide any assurance as to
whether the Company will be able to collect on all amounts owed by these
former vice presidents, or that the Company will be able to collect on all
amounts owed by any current vice presidents whose employment with the Company
is later terminated. Since the sales were cashless transactions and the shares
are the collateral for the loans, the Company has accounted for all such
loans on its balance sheet as an offset to the stockholders' equity created
by the related sale of the shares.
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
THE COMPANY'S ANNUAL REPORT ON
10
<PAGE>
FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1999, 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,
biogenetic, 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 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 either on 1) the amount of time
completed on each assignment versus the projected number of hours required to
complete such assignment, or 2) the amount of cost incurred on the assignment
versus the total projected cost to complete the 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 billed to and reimbursed by clients and offset
against expenses incurred and are not included in recognized revenues.
Provisions are made for estimated uncollectible amounts based on the Company'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 the 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 business unit 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. The Company 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 September 30, 2000, approximately 61% or 1,182 of FCG's
1,942 employees are consultants. Another
11
<PAGE>
372 employees form the firm's outsourcing business. 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
period, and the amount of cost recognized under percentage of completion
accounting. 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. In order to reduce and limit
unassigned time, FCG actively manages personnel utilization by monitoring and
projecting estimated engagement start and completion dates and matching
consultant availability with current and projected client requirements. The
number of consultants staffed on an assignment will vary according to the
size, complexity, duration and demands of the assignment. Assignment
terminations, completions, inclement weather 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, merger related activities and
certain nontaxable insurance proceeds.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
NET REVENUE. The Company's net revenue decreased 2.3% to $60.0 million
for the quarter ended September 30, 2000 from $61.4 million for the quarter
ended September 30, 1999. This decrease was primarily attributable to a decline
in FCG's health delivery sector due to financial pressures affecting clients in
the sector as well as the unusually high level of activity in that sector in
1999 preparing for Y2K.
COST OF SERVICES. Cost of services increased 21.7% to $45.9 million for
the quarter ended September 30, 2000 from $37.7 million for the quarter ended
September 30, 1999. The increase was primarily attributable to an increase in
outsourcing staff. Cost of services as a percentage of revenue increased to
76.5% for the quarter ended September 30, 2000 from 61.4% for the quarter ended
September 30, 1999. This increase was due to lower utilization and lower pricing
in the health delivery sector and to some degree in the health plan sector,
lower margins received in the outsourcing sector, where FCG experienced high
revenue growth, and the restructuring of a significant web development
engagement for a healthcare internet start-up.
12
<PAGE>
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative
expenses increased 14.5% to $19.5 million for the quarter ended September 30,
2000 from $17.1 million for the quarter ended September 30, 1999 due to costs
associated with FCG's increased outsourcing business and the formation of FCG
Doghouse, FCG's new e-services business. Additionally, FCG incurred a one-time
charge of $0.6 million during the quarter related to the failure of a vendor to
deliver on certain prepaid services. General and administrative expenses as a
percentage of revenue increased from 27.8% for the quarter ended September 30,
1999 to 32.6% for the quarter ended September 30, 2000 as a result of these cost
increases and the lower revenue level.
MERGER, RESTRUCTURING, AND SEVERANCE COSTS. Merger, restructuring, and
severance costs were $5.5 million for the quarter ended September 30, 2000 while
there were no such costs for the quarter ended September 30, 1999. Merger,
restructuring, and severance costs for the quarter ended September 30, 2000
consisted of costs associated with separating approximately sixty employees,
consolidating and resizing selected offices, and closing the European healthcare
operations.
INTEREST INCOME, NET. Interest income, net of interest expense declined
slightly to approximately $0.5 million for the quarter ended September 30, 2000
compared to $0.7 million for the quarter ended September 30, 1999 due to FCG's
lower level of cash and investments. Interest income net of interest expense as
a percentage of revenue declined from 1.1% to 0.8%.
OTHER INCOME (EXPENSE). Other expense increased to $186,000 for the
quarter ended September 30, 2000 compared to other income of $19,000 for the
quarter ended September 30, 1999.
INCOME TAXES. The benefit for income taxes of 41.7% in the quarter
ended September 30, 2000 compared to the provision of 38.1% reported for the
quarter ended September 30, 1999 due to varying levels of non-deductible items.
RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
NET REVENUE. The Company's net revenue increased 3.3% to $187.2
million for the nine months ended September 30, 2000 from $181.2 million for the
nine months ended September 30, 1999. This increase was primarily attributable
to an increase in revenue from FCG's outsourcing business, partly offset by a
decline in the health delivery sector.
COST OF SERVICES. Cost of services increased 28.6% to $141.2 million
for the nine months ended September 30, 2000 from $109.8 million for the nine
months ended September 30, 1999. The increase was primarily attributable to an
increase in outsourcing staff. Cost of services as a percentage of revenue
increased to 75.4% for the nine months ended September 30, 2000 from 60.6% for
the nine months ended September 30, 1999. This increase was primarily due to
lower utilization and lower pricing in the health delivery sector and to some
degree in the health plan sector, and the lower margins received in the
outsourcing sector where FCG experienced high revenue growth.
13
<PAGE>
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative
expenses increased 10.8% to $57.9 million for the nine months ended September
30, 2000 from $52.3 million for the nine months ended September 30, 1999.
General and administrative expenses as a percentage of revenue increased from
28.9% for the nine months ended September 30, 1999 to 30.9% for the nine months
ended September 30, 2000 primarily due to costs associated with FCG's increased
outsourcing business and the formation of Doghouse, FCG's new e-services
business.
MERGER, RESTRUCTURING, AND SEVERANCE COSTS. Merger, restructuring, and
severance costs were $9.2 million for the nine months ended September 30, 2000
compared to $1.8 million for the nine months ended September 30, 1999. Merger,
restructuring, and severance costs for the nine months ended September 30, 2000
consisted primarily of severance costs related to a reduction in the U.S.
workforce, costs for consolidating and resizing selected offices and costs
associated with the closing of the European healthcare operations. Merger,
restructuring, and severance costs for the nine months ended September 30, 1999
consisted primarily of costs related to the integration of acquired companies.
INTEREST INCOME, NET. Interest income, net of interest expense,
remained consistent at $1.8 million for the nine months ended September 30, 2000
compared to $1.9 million for the nine months ended September 30, 1999. Interest
income net of interest expense as a percentage of revenue remained constant at
1.0%.
OTHER INCOME (EXPENSE). Other expense of $0.3 million for the nine
months ended September 30, 2000 compared to other income of $3.9 million for the
nine months ended September 30, 1999. The other income in the prior year
consisted primarily of the net proceeds from a life insurance policy for former
Chairman James Reep, who passed away in April 1999.
INCOME TAXES. The benefit for income taxes of 40.0% in the nine months
ended September 30, 2000 compared to the provision of 34.2% reported for the
nine months ended September 30, 1999. The provision in the prior year was
unusually low because of the nontaxable life insurance proceeds discussed in
Other Income (Expense).
LIQUIDITY AND CAPITAL RESOURCES
During the nine month period ended September 30, 2000, the Company used
cash flow from operations of $12.0 million, principally to fund operating losses
and a long-term contract receivable on a major outsourcing contract. During the
nine month period ended September 30, 2000, the Company used cash flow of
approximately $4.6 million to purchase property and equipment, including
computer and related equipment and office. Depreciation and amortization expense
for the nine-month period ended September 30, 2000 was approximately $5.4
million. At September 30, 2000, the Company had working capital of $63.7
million. At December 31, 1999, the Company had working capital of $72.0 million.
Working capital decreased primarily due to a decline in cash resulting from
funding the company's operating loss, FCG's asset acquisition and investment
transaction with Doghouse Productions, LLC and the long-term contract receivable
on a major outsourcing contract.
The Company's revolving line of credit, which allowed the Company to
borrow up to $9.0 million at an interest rate of the prevailing prime rate,
expired on May 1, 2000. There was no outstanding balance under the line of
credit at that time. The Company is in the process of negotiating a new line of
credit.
14
<PAGE>
Management believes that existing cash and investments together with
funds generated from operations will be sufficient to meet operating
requirements for the next 12 months. FCG's cash and investments are available
for strategic investments, mergers and acquisitions, and other potential
large-scale cash needs that may arise. At September 30, 2000, part of the
Company's proceeds from its initial public offering in February 1998 had been
used to fund operations and receivables, while the remaining proceeds were
retained as cash or investments.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
The Company is subject to claims and charges from time to time in
the ordinary course of business, none of which is anticipated to have a
material adverse effect on the Company's business, finances, or operations.
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").
During the quarter ended September 30, 2000, the Company issued an
aggregate of 96,416 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 $619,000 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
<TABLE>
<CAPTION>
ITEM DESCRIPTION
-------- ---------------------------------------------------------------------------
<S> <C>
3.1(1) Certificate of Incorporation of the Company.
3.2(2) Certificate of Designation of Series A Junior Participating Preferred Stock
3.3(3) Bylaws of the Company.
4.1(4) Specimen Common Stock Certificate.
11.1(5) Statement of computation of per share earnings.
27.1 Financial Data Schedule.
</TABLE>
(1) Incorporated by reference to Exhibit 3.1 to FCG's Form S-1
Registration Statement (No. 333-41121) originally filed on
November 26, 1997 (the "Form S-1").
(2) Incorporated by reference to Exhibit 99.1 to FCG's Current
Report on Form 8-K dated December 9, 1999.
(3) Incorporated by reference to Exhibit 3.3 to FCG's Form S-1.
(4) Incorporated by reference to Exhibit 4.1 to FCG's Form S-1.
(5) See Note 3 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 13, 2000 LUTHER J. NUSSBAUM
------------------------------------------------
Luther J. Nussbaum
Chairman and Chief Executive Officer
Date: November 13, 2000 WALTER J. MCBRIDE
------------------------------------------------
Walter J. McBride
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer)
17
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
ITEM DESCRIPTION
-------- ---------------------------------------------------------------------------
<S> <C>
3.1(1) Certificate of Incorporation of the Company.
3.2(2) Certificate of Designation of Series A Junior Participating Preferred Stock
3.3(3) Bylaws of the Company.
4.1(4) Specimen Common Stock Certificate.
11.1(5) Statement of computation of per share earnings.
27.1 Financial Data Schedule.
</TABLE>
(1) Incorporated by reference to Exhibit 3.1 to FCG's Form S-1 Registration
Statement (No. 333-41121) originally filed on November 26, 1997 (the
"Form S-1").
(2) Incorporated by reference to Exhibit 99.1 to FCG's Current Report on
Form 8-K dated December 9, 1999.
(3) Incorporated by reference to Exhibit 3.3 to FCG's Form S-1.
(4) Incorporated by reference to Exhibit 4.1 to FCG's Form S-1.
(5) See Note 3 to Consolidated Financial Statements, "Net Income Per Share."
18
