First Consulting Group Reports Fourth Quarter and Fiscal 2004 Results

First Consulting Group Reports Fourth Quarter and Fiscal 2004 Results

    Business Editors

    LONG BEACH, Calif.--(BUSINESS WIRE)--Feb. 17, 2005--First Consulting Group (FCG) (NASDAQ: FCGI):

--	Net Revenues of $72.0 Million
--	Operating Income of $2.2 Million
--	Income from Continuing Operations of $3.7 Million Including $3.0 Million Tax Allowance Reversal and $800,000 Writedown of Venture Investment
--	Income from Continuing Operations of $0.24 for Full Year 2004

    FCG (NASDAQ: FCGI), a leading provider of outsourcing, consulting and systems implementation and integration to the health-related industries, today reported financial results for the fourth quarter and fiscal year ended December 31, 2004.

    Fourth Quarter Performance

    Revenue before out-of-pocket reimbursements ("net revenue") for the fourth quarter of 2004 was $72.0 million, up 12.6 percent from $64.0 million in the fourth quarter of 2003.
    The increase in revenue was primarily related to an extra week in the quarter, given the Company's thirteen week reporting periods, and an increase in outsourcing services. FCG reported income from continuing operations of $3.7 million, or $0.15 per share, for the fourth quarter of 2004, compared to a loss of $6.7 million, or $0.26 per share, in the fourth quarter of 2003. Included in the fourth quarter 2004 income were a pretax non-cash $800,000 writedown of a 2000 investment, and a non-cash tax valuation allowance reversal of $3.0 million. Included in the fourth quarter 2003 loss were pretax restructuring charges of $3.3 million and a non-cash tax valuation allowance of $5.5 million.
    Income from operations was $2.2 million for the fourth quarter of 2004.

    Fiscal 2004 Performance

    For the full year in 2004, revenues were $269.9 million, compared to $270.1 million in 2003. For fiscal 2004, the Company reported income from continuing operations of $5.9 million, or $0.24 per share, compared to a loss from continuing operations of $16.5 million, or $0.66 per share in fiscal 2003. Included in the 2004 fiscal year income were a non-operating charge of $1.6 million attributable to the premium paid by FCG in a previously announced stock repurchase transaction during February 2004, and the fourth quarter items discussed in the paragraph above. Included in the 2003 fiscal year loss were $11.4 million in pretax restructuring charges, $2.6 million in expense from the cumulative effect of change in accounting principle from the Company's adoption of EITF 00-21, and $5.5 million of a non-cash tax valuation allowance.
    In accordance with GAAP and accounting for discontinued operations, the attached tables reflect the reclassification of the quarterly financial results for the recently announced discontinuance of the Company's call center service line. As well as the reclassified operating results, the results of discontinued operations include a loss on disposition in the fourth quarter of 2004 of approximately $1.5 million, or $0.06 per share, primarily related to the writeoff of goodwill.

    Cash Position

    Total cash and investments decreased to $40.3 million at the end of 2004, as compared to $62.6 million at the end of 2003. This reduction was primarily due to a previously announced stock repurchase transaction in February 2004, and an additional payroll which was paid on the last day of the year due to the extra week in the fiscal year. Days sales outstanding were 37 in the fourth quarter of 2004, which is down from 40 in the third quarter of 2004. FCG has no long-term debt.
    Luther Nussbaum, chairman and chief executive officer said, "Our fourth quarter results reflect a consistent trend of profitability and stability. Every five or six years, companies reporting four-thirteen week quarters have an extra week at year end. This year, the extra week affected us with a positive impact on our outsourcing business by providing an additional week of revenue to offset the additional payroll expense. However, when one normalizes the period and considers holiday seasonality, our operating results are solid, marking the fifth consecutive quarter of meeting our operating objectives." Nussbaum added, "We also had three significant below operating income transactions. First, the announced sale of the Call Center Services requires its financial performance to be treated as discontinued operations, which is separately reported from operations. In accordance with GAAP, our quarterly financial results have been reclassified to exclude the discontinued operations. Second, we had one remaining investment from a group of equity investments we made in the late 90's. That company did not achieve its financial targets in 2004 and as such we adjusted its valuation, writing off $800,000 of the original $1.1 million investment. Last, we reversed $3.0 million of a tax valuation allowance due to our positive financial performance and our overall operational outlook."

    Business Area Update

    FCG is providing the following performance summary for each business area during the fourth quarter of 2004:

    Healthcare Delivery: During 2004, FCG successfully completed three qualifications of blended shore implementation projects for health delivery clients. While hospitals have been slow to adopt both offsite and offshore delivery, the Company believes that its demonstrated track record of blended shore delivery, which creates significant project savings to its clients, will become more attractive. In some cases, FCG can reduce project fees by 50% and deliver specific project outcomes on a rapid deployment timeframe. The Company continues to invest in its offsite and offshore service centers creating compelling alternatives for its clients. During the quarter, FCG implemented a new reimbursement policy for travel expenses and also added experienced sales staff which will assist in achieving 2005 plans. The impact of these increased costs was partially offset by improved benefit management. FCG expects solid growth and profits from Health Delivery during 2005.

    Health Plans: In Health Plans, FCG believes this unit's financial performance is stable. The signing of the letter of intent with Rocky Mountain Health Plan represents the Company's first outsourcing arrangement in this market segment. FCG expects to finalize this arrangement during the first quarter of 2005 with an expected start at the beginning of the second quarter of 2005. The Company also stated that blended shore software implementation and application hosting services are gaining traction. In Health Plans, FCG expects modest growth in the first half of 2005 with profitability for the year.

    Healthcare Delivery Outsourcing (Including Meditech): During the fourth quarter of 2004, the Company announced the signing of a five-year IT and BPO agreement with Aspen Valley Hospital. FCG indicated that the outsourcing pipeline is strong with a good range of large, medium and small opportunities. The Company stated that it believes it is recognized as the market leader in Meditech shared services and sees significant growth opportunities in this segment. As new outsourcing contracts begin, the Company cautioned that the profitability of all new contracts takes a quarter or two but turns positive as appropriate expense adjustments are made.

    Life Sciences: The Company continued to make progress in stabilizing the losses generated by the Life Sciences segment. Losses were reduced to less than $100,000 compared to $1.4 million in the third quarter of 2004. During 2004, most of the revenue generated by Life Sciences was derived from FirstDoc(R) sales and related services. During 2005, FCG expects to expand its service offerings by selling other FCG shared services to new and existing clients. The Company expects Life Sciences to be profitable for the full year 2005.

    Government and Technology Services (GTS): This newly formed client facing organization includes Paragon, Government and Technology Staffing Services. Combined, this group will represent FCG's second largest business unit after Healthcare Delivery which includes most of Outsourcing. Paragon continues to experience profitable growth. During the quarter, Paragon Solutions Vietnam was certified SEI CMMI Level 5 joining FCG India at this highest certified level. The GTS business unit enters 2005 with a solid pipeline and expects continued profitable growth.

    Nussbaum concluded, "Overall, we are pleased with 2004. We believe we have established a new level of profitability and a real opportunity to grow our revenue. We have established a solid base for growth in multiple areas of the firm. We have simplified our organization and our approach to market. We now have four areas--Healthcare Delivery, Health Plans, Life Sciences, and GTS. Healthcare delivery and GTS are both profitable. Health Plans and Life Sciences have solid plans to return to the black. All areas now have services that give us opportunities for growth."

    Outlook

    Although the Company's pipeline of opportunities remains stronger than it has been the last several years, the competition for new business also is fierce among software vendors and system integrators. FCG believes that its blended shore offerings will emerge as a key competitive advantage, though it acknowledges that the Health Delivery segment has been slow to adopt offsite and blended shore delivery. The Company is encouraged by the progress made in Life Sciences and Health Plans and expects this to continue throughout 2005. The Company anticipates revenues and profitability in the first quarter of 2005 at about the same level as the fourth quarter of 2004, adjusted for 13 weeks instead of 14. FCG reiterated that it remains focused on moving quarterly revenues above $75 million while improving quarterly profitability to $0.08-$0.10 per share during the year. The timing of moving revenues and profitability to this higher level is dependent upon closing outsourcing opportunities that are currently in the pipeline.

    Fourth Quarter and Fiscal 2004 Conference Call

    FCG will hold an investor conference call to discuss fourth quarter and fiscal 2004 results on Thursday, February 17, at 4:45 p.m. Eastern Time (1:45 p.m. Pacific Time). This call is being webcast by CCBN and can be accessed at FCG's Web site at www.fcg.com. The webcast will also be distributed over CCBN's Investor Distribution Network to both institutional and individual investors. Individual investors can listen to the call through CCBN's individual investor center at www.companyboardroom.com or by visiting any of the investor sites in CCBN's Individual Investor Network such as America Online's Personal Finance Channel. Institutional investors can access the call via CCBN's password protected event management site, StreetEvents (www.streetevents.com).

    2005 Annual Meeting of Stockholders

    FCG indicated that the 2005 Annual Meeting of Stockholders will be held at 10:00 a.m. on Wednesday, June 1, 2005 at the Company's Long Beach, California corporate headquarters.

    About FCG

    FCG is a leading provider of outsourcing, consulting, systems implementation and integration for healthcare, pharmaceutical, and other life sciences organizations throughout North America, Europe and Asia. Through combinations of onsite, off-site and offshore outsourced services, FCG provides low cost, high quality offerings to improve its clients' performance. The firm's consulting and integration services increase clients' operations effectiveness with and through information technology, resulting in reduced costs, improved customer service, enhanced quality of patient care, and more rapid introduction of new pharmaceutical compounds. For more information about FCG, visit www.fcg.com or call 800-345-0957.

    Forward-Looking Statements

    This news release includes forward-looking statements based on FCG's current expectations, estimates and projections about its industry, management's beliefs and certain assumptions made by the Company. These forward-looking statements can typically be identified by use of words such as "believes," "anticipates" or "expects" and include statements regarding (i) the future prospects of FCG's business in healthcare, life sciences and outsourcing; (ii) expected trends in and predictability of the markets that FCG serves; (iii) FCG's ability to gain closure on key engagements, including new outsourcing engagements and large scale implementations, during 2005; (iv) the ability of FCG to deliver effective offsite and blended shore services and resources to its clients; (v) FCG's anticipated financial and operating performance for 2005, including its ability to continue to maintain and improve revenue and profitability levels overall; achieve profitability in Life Sciences and Health Plans; and leverage its current level of corporate general and administrative expenses. These forward-looking statements involve known and unknown risks which may cause the Company's actual results and performance to be materially different from the future results and performance stated or implied by the forward looking statements.
    Some of the risks investors should consider include the following: (a) the unpredictable nature of the Company's pipeline of potential business and of negotiations with clients on new outsourcing and other engagements, resulting in uncertainty as to whether and when FCG will enter into new agreements and whether those agreements will be on terms favorable to FCG; (b) the unpredictable nature of the business of FCG's clients and the markets that they serve, which could result in clients canceling, modifying or delaying current or prospective engagements with FCG; (c) the ability of FCG to deliver services on an offsite and/or blended shore basis utilizing a global operations base, including its operations in Nashville, Tennessee; India; Vietnam; and Europe; (d) the ability of FCG to increase its sales effectiveness; (e) the ability of FCG to leverage general and administrative expenses, improve profitability in outsourcing and achieve profitability in Life Sciences and Health Plans; (f) the importance of FCG's personnel to its operations, including whether FCG can attract and retain qualified management and personnel and keep personnel utilized on client engagements in order to achieve growth, revenue and profitability; (g) foreign currency exchange rates and cost of labor and availability of resources in FCG's offshore development centers; (h) the ability of FCG to effectively manage client expectations and cost reductions on the outsourcing accounts; and (i) other risk factors referenced in the Company's most recent Forms 10-K, 10-Q and other periodic reports filed with the Securities and Exchange Commission.
    In light of the significant uncertainties inherent in the forward-looking information included in this release, the inclusion of such information should not be regarded as a representation by FCG or any other person that FCG's objectives or plans will be achieved. FCG undertakes no obligation to release publicly any revisions to any forward-looking statements to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.

First Consulting Group, Inc. and Subsidiaries Consolidated Statements of Operations (in thousands except per share data)

Quarter Ended Year Ended Dec. 31, Dec. 26, Dec. 31, Dec. 26, 2004 2003 2004 2003 -------------------------------------

Revenues before reimbursements (net revenues) $72,016 $63,953 $269,908 $270,123 Reimbursements 4,515 3,899 17,381 15,624 -------- -------- --------- --------- Total revenues 76,531 67,852 287,289 285,747

Cost of services before reimbursable expenses 48,910 43,019 181,914 184,335 Reimbursable expenses 4,515 3,899 17,381 15,624 -------- -------- --------- --------- Total cost of services 53,425 46,918 199,295 199,959

-------- -------- --------- --------- Gross profit 23,106 20,934 87,994 85,788

Selling expenses 6,618 6,831 27,501 31,058 General and administrative expenses 14,327 12,752 52,068 56,996 Restructuring charges - 3,270 - 11,363 -------- -------- --------- --------- Operating income (loss) 2,161 (1,919) 8,425 (13,629) Interest income, net 255 201 784 961 Other expense, net (812) (246) (925) (410) Expense for premium on repurchase of stock - - (1,561) - -------- -------- --------- --------- Income (loss) from continuing operations before income taxes and cumulative effect of change in accounting principle 1,604 (1,964) 6,723 (13,078) Income tax provision (benefit) (2,122) 4,744 823 856 -------- -------- --------- --------- Income (loss) from continuing operations before cumulative effect of change in accounting principle, net of tax 3,726 (6,708) 5,900 (13,934) Loss on discontinued operations, net of tax (1,564) (252) (2,073) (422) Cumulative effect of change in accounting principle, net of tax - - - (2,597) -------- -------- --------- --------- Net income (loss) $2,162 $(6,960) $3,827 $(16,953) ======== ======== ========= =========

Basic EPS: Income (loss) from continuing operations before cumulative effect of change in accounting principle, net of tax $0.15 $(0.26) $0.24 $(0.56) Loss on discontinued operations, net of tax (0.06) (0.01) (0.08) (0.02) Cumulative effect of change in accounting principle, net of tax - - - (0.10) -------- -------- --------- --------- Net income (loss) $0.09 $(0.27) $0.16 $(0.68) ======== ======== ========= =========

Diluted EPS: Income (loss) from continuing operations before cumulative effect of change in accounting principle, net of tax $0.15 $(0.26) $0.24 $(0.56) Loss on discontinued operations, net of tax (0.06) (0.01) (0.09) (0.02) Cumulative effect of change in accounting principle, net of tax - - - (0.10) -------- -------- --------- --------- Net income (loss) $0.09 $(0.27) $0.15 $(0.68) ======== ======== ========= =========

Basic weighted avg. shares 24,323 25,919 24,539 25,044 Diluted weighted avg. shares 24,564 25,919 24,733 25,044

Note: certain reclassifications have been made to the 2003 results to conform to the 2004 presentation

First Consulting Group, Inc. and Subsidiaries Consolidated Balance Sheet Data (in thousands except per share data)

Dec. 31 Dec. 26 2004 2003 -------- -------- Cash, cash equivalents, and investments $40,321 $62,645 Accounts receivable, net 26,266 27,564 Unbilled receivables 11,005 9,947 Current assets 88,471 106,132 Total assets 139,171 157,401 Current liabilities 30,597 42,507 Long-term debt - - Total stockholders' equity 96,260 101,810

Selected Business Metrics

Q4 Q3 Q2 Q1 Q4 2004 2004 2004 2004 2003 ----- ----- ----- ----- -----

Revenues before reimbursements (net revenues) ($ in millions) 72.0 65.3 67.2 65.3 64.0 Out-of-pocket reimbursements ($ in millions) 4.5 4.4 4.5 4.0 3.9 Total revenues ($ in millions) 76.5 69.7 71.7 69.3 67.9 Gross margin % 32.1 33.1 33.4 31.9 32.7 Selling expense % 9.2 10.0 10.6 11.1 10.7 General and admin expense % 19.9 19.5 19.5 18.2 19.9 Operating income (loss) % (see note below) 3.0 3.6 3.3 2.6 (3.0) Utilization % 70.9 75.5 79.7 77.2 76.1 Total associates 2435 2409 2287 2226 2066 Billable associates 1293 1279 1187 1150 1058 Outsourcing associates 817 782 766 749 697 Days sales outstanding 37 40 38 40 38

Note: Operating income percentage is inclusive of a restructuring charge of $3.6 million (5.6% of revenue) in Q4 2003

Delivery Units Selected Financial Metrics

Health Delivery Q4 Q3 Q2 Q1 Q4 2004 2004 2004 2004 2003 Revenues before reimbursements (net revenues)($ in millions) 16.7 16.3 16.4 15.6 15.6 Out-of-pocket reimbursable expenses ($ in millions) 2.2 2.2 2.2 2.0 2.3 Total revenues ($ in millions) 18.9 18.5 18.6 17.6 17.9 Gross margin % 38.6 45.2 48.5 44.7 43.1 Utilization % 70.9 82.0 83.9 75.9 75.3 Billable associates 216 213 191 200 207 Total associates 242 239 217 226 238

Health Plan Q4 Q3 Q2 Q1 Q4 2004 2004 2004 2004 2003 Revenues before reimbursements (net revenues)($ in millions) 3.9 3.8 3.6 4.2 5.2 Out-of-pocket reimbursable expenses ($ in millions) 0.7 0.5 0.7 0.6 0.8 Total revenues ($ in millions) 4.6 4.3 4.3 4.8 6.0 Gross margin % 27.6 30.8 27.0 42.6 42.7 Utilization % 81.0 77.1 90.3 77.8 82.6 Billable associates 51 44 48 45 50 Total associates 57 51 54 50 56

Life Sciences Q4 Q3 Q2 Q1 Q4 2004 2004 2004 2004 2003 Revenues before reimbursements (net revenues)($ in millions) 9.4 8.8 9.2 8.9 8.3 Out-of-pocket reimbursable expenses ($ in millions) 0.3 0.3 0.3 0.2 0.3 Total revenues ($ in millions) 9.8 9.1 9.5 9.1 8.6 Gross margin % 49.5 42.4 42.2 43.0 37.1 Utilization % 56.2 58.8 76.2 71.0 65.1 Billable associates 181 205 171 179 189 Total associates 228 257 204 215 226

Health Delivery Outsourcing Q4 Q3 Q2 Q1 Q4 2004 2004 2004 2004 2003 Revenues before reimbursements (net revenues)($ in millions) 28.9 24.4 25.4 25.2 23.6 Out-of-pocket reimbursable expenses ($ in millions) 0.1 0.2 0.1 0.1 0.1 Total revenues ($ in millions) 29.0 24.6 25.5 25.3 23.7 Gross margin % 19.3 16.6 17.9 16.7 16.7 Total associates 561 546 571 566 571

Meditech Service Center Q4 Q3 Q2 Q1 Q4 2004 2004 2004 2004 2003 Revenues before reimbursements (net revenues)($ in millions) 6.0 6.4 6.2 5.5 5.4 Out-of-pocket reimbursable expenses ($ in millions) 0.5 0.4 0.4 0.4 0.4 Total revenues ($ in millions) 6.5 6.8 6.6 5.9 5.8 Gross margin % 31.4 32.3 33.7 30.9 40.9 Billable associates 61 58 56 60 58 Outsourcing associates 48 48 42 42 56 Total associates 122 121 114 122 121

Other Business Units Q4 Q3 Q2 Q1 Q4 2004 2004 2004 2004 2003 Revenues before reimbursements (net revenues)($ in millions) 7.2 5.7 6.4 5.9 5.8 Out-of-pocket reimbursable expenses ($ in millions) 0.2 0.2 0.2 0.2 0.1 Total revenues ($ in millions) 7.4 5.9 6.6 6.1 5.9 Gross margin % 34.5 30.9 34.8 27.3 34.5 Billable associates 373 338 288 271 249 Total associates 422 387 338 320 293

Shared Service Centers Q4 Q3 Q2 Q1 Q4 2004 2004 2004 2004 2003

Billable associates 406 415 429 394 303 Outsourcing associates 164 142 109 93 20 Total associates 613 617 601 536 356

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CONTACT: First Consulting Group Luther Nussbaum, Chairman and Chief Executive Officer 562-624-5221 lnussbaum@fcg.com or Chuck McBride, Chief Financial Officer 562-624-5300 cmcbride@fcg.com or Thomas Reep, VP Investor Relations 562-624-5250 treep@fcg.com

KEYWORD: CALIFORNIA INDUSTRY KEYWORD: HARDWARE MEDICAL SOFTWARE NETWORKING EARNINGS CONFERENCE CALLS SOURCE: First Consulting Group

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