**UNITED STATES**

**SECURITIESAND EXCHANGE COMMISSION**

**Washington, DC  20549**

 

----

 

**FORM 10-Q**

 

| **(Mark One)** |                                                                                         |
|----------------|----------------------------------------------------------------------------------------------|
|           |                                                                                         |
| **ý**     | **QUARTERLY REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |

 

**For thequarterly period ended March 29, 2002,**

 

**or**

 

| **o** | **TRANSITION REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|-------|-----------------------------------------------------------------------------------------------|

 

**For thetransition periodfrom         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 incorporation or organization) |   | (I.R.S. Employer  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) hasfiled all reports required to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of 1934 during the preceding 12 months (or for such shorter periodthat the registrant was required to file such reports), and (2) has beensubject to such filing requirements for the past 90 days.  Yes ý     No o

 

Indicate the number of shares outstanding of each ofthe issuer’s classes of common stock, as of the latest practicable date.

 

| **Common  Stock, $.001 par value** |   | **23,964,042**                   |
|------------------------------------|--------|----------------------------------|
| (Class)                            |   | (Outstanding at  April 26, 2002) |

 

 

**FirstConsulting Group Inc.**

**Table of Contents**

 
| COVER PAGE        |
|-------------------|
|              |
| TABLE OF CONTENTS |
|              |
| PART I.           | FINANCIAL INFORMATION |
|              |   |
|              | ITEM  1. | FINANCIAL  STATEMENTS AND NOTES (UNAUDITED) |
|              |   |   |
|              |   | Consolidated Balance Sheets  as of March 29, 2002 and December 28, 2001 |
|              |   |   |
|              |   | Consolidated  Statements of Operations for the three month periods ended March 29, 2002 and  March 31, 2001 |
|              |   |   |
|              |   | Condensed  Consolidated Statements of Cash Flows for the three month periods ended March  29, 2002 and March 31, 2001 |
|              |   |   |
|              |   | Notes to  Consolidated Financial Statements |
|              |   |   |
|              | ITEM  2. | MANAGEMENT’S  DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
|              |   |   |
| PART II.          | OTHER INFORMATION |
|              |   |
|              | ITEM 1. | LEGAL PROCEEDINGS |
|              |   |   |
|              | ITEM 2. | CHANGES IN SECURITIES |
|              |   |   |
|              | ITEM 3. | DEFAULTS UPON  SENIOR SECURITIES |
|              |   |   |
|              | ITEM  4. | SUBMISSION  OF MATTERS TO A VOTE OF SECURITY HOLDERS |
|              |   |   |
|              | ITEM 5. | OTHER INFORMATION |
|              |   |   |
|              | ITEM 6. | EXHIBITS AND  REPORTS ON FORM 8-K |
|              |   |   |
| SIGNATURES        |
|              |
| EXHIBIT  INDEX    |

 

2

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**Part I. FinancialInformation**

 

**Item1.    Financial Statements and Notes(Unaudited)****.**

 

**First Consulting Group, Inc. and Subsidiaries**

 

**Consolidated Balance Sheets**

**(in thousands)**

 
|                                                                                                                               |   | **March 29,  2002** |    | **December  28, 2001** |   |
|------------------------------------------------------------------------------------------------------------------------------------|--------|---------------------|---------|------------------------|--------|
|                                                                                                                               |   | **(unaudited)**     |    |                   |   |
| **ASSETS**                                                                                                                         |   |                |    |                   |   |
| Current  assets                                                                                                                    |   |                |    |                   |   |
| Cash  and cash equivalents                                                                                                         |   | $                   | 35,199  |                   | $      | 32,499 |   |
| Short-term  investments                                                                                                            |   | 19,573              |    | 19,410                 |   |
| Accounts  receivable, less allowance of $2,603 and $2,740 in the periods ended March  29, 2002 and December 28, 2001, respectively |   | 26,576              |    | 34,657                 |   |
| Unbilled  receivables                                                                                                              |   | 20,293              |    | 13,963                 |   |
| Deferred  income taxes, net                                                                                                        |   | 7,960               |    | 7,834                  |   |
| Prepaid  expenses and other current assets                                                                                         |   | 2,230               |    | 1,571                  |   |
| Total  current assets                                                                                                              |   | 111,831             |    | 109,934                |   |
| Notes  receivable-stockholders                                                                                                     |   | 753                 |    | 753                    |   |
| Long-term  investments                                                                                                             |   | 1,200               |    | 1,200                  |   |
| Property  and equipment                                                                                                            |   |                |    |                   |   |
| Furniture,  equipment, and leasehold improvements                                                                                  |   | 8,350               |    | 8,033                  |   |
| Information  systems equipment                                                                                                     |   | 27,029              |    | 26,838                 |   |
|                                                                                                                               |   | 35,379              |    | 34,871                 |   |
| Less  accumulated depreciation and amortization                                                                                    |   | 25,407              |    | 24,237                 |   |
|                                                                                                                               |   | 9,972               |    | 10,634                 |   |
| Other  assets                                                                                                                      |   |                |    |                   |   |
| Executive  benefit trust                                                                                                           |   | 6,223               |    | 6,246                  |   |
| Unbilled  long term receivables                                                                                                    |   | 9,862               |    | 10,250                 |   |
| Deferred  income taxes                                                                                                             |   | 2,433               |    | 2,433                  |   |
| Goodwill,  net                                                                                                                     |   | 3,571               |    | 3,587                  |   |
| Other                                                                                                                              |   | 309                 |    | 392                    |   |
|                                                                                                                               |   | 22,398              |    | 22,908                 |   |
| Total  assets                                                                                                                      |   | $                   | 146,154 |                   | $      | 145,429 |   |
|                                                                                                                               |   |                |    |                   |   |
|                                                                                                                                    |        |                     |         |                        |        |  |  |  |  |  |

 

 

 

3

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| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**                                                                                                                                               |   |    |    |    |   |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|---------|---------|---------|--------|
| Current  liabilities                                                                                                                                                                         |   |    |    |    |   |
| Accounts  payable                                                                                                                                                                            |   | $       | 3,111   |    | $      | 1,723 |   |
| Accrued  liabilities                                                                                                                                                                         |   | 15,684  |    | 18,065  |   |
| Accrued  vacation                                                                                                                                                                            |   | 7,092   |    | 6,453   |   |
| Accrued  incentive compensation                                                                                                                                                              |   | 3,562   |    | 4,280   |   |
| Customer  advances                                                                                                                                                                           |   | 4,594   |    | 5,259   |   |
| Total  current liabilities                                                                                                                                                                   |   | 34,043  |    | 35,780  |   |
| Non-current  liabilities                                                                                                                                                                     |   |    |    |    |   |
| Supplemental  executive retirement plan                                                                                                                                                      |   | 6,648   |    | 6,510   |   |
| Minority  interest                                                                                                                                                                           |   | 948     |    | 863     |   |
| Total  non-current liabilities                                                                                                                                                               |   | 7,596   |    | 7,373   |   |
| Commitments  and contingencies                                                                                                                                                               |   |    |    |    |   |
| Stockholders’  equity                                                                                                                                                                   |   |    |    |    |   |
| Preferred  Stock, $.001 par value; 9,500,000 shares authorized, no shares issued and  outstanding                                                                                            |   | —  |    | —  |   |
| Series  A Junior Participating Preferred Stock, $.001 par value; 500,000 shares  authorized, no shares issued and outstanding                                                                |   | —  |    | —  |   |
| Common  Stock, $.001 par value; 50,000,000 shares authorized, 23,936,298 shares  issued and outstanding at March 29, 2002 and 23,715,719 shares issued and  outstanding at December 28, 2001 |   | 24      |    | 24      |   |
| Additional  paid-in capital                                                                                                                                                                  |   | 91,501  |    | 90,215  |   |
| Retained  earnings                                                                                                                                                                           |   | 16,909  |    | 15,895  |   |
| Deferred  compensation-stock incentive  agreements                                                                                                                                           |   | (1,067  | )       | (1,134  | )      |
| Notes  receivable-stockholders                                                                                                                                                               |   | (1,734  | )       | (1,780  | )      |
| Accumulated  other comprehensive income (loss)                                                                                                                                               |   | (1,118  | )       | (944    | )      |
| Total  stockholders’ equity                                                                                                                                                             |   | 104,515 |    | 102,276 |   |
| Total  liabilities and stockholders’ equity                                                                                                                                             |   | $       | 146,154 |    | $      | 145,429 |   |

 

See accompanyingnotes.

 

4

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**First Consulting Group, Inc. andSubsidiaries**

 

**Consolidated Statements of Operations(Unaudited)**

**(in thousands, except per share data)**

 

|                                                 |   | **Three  Months Ended** |       |
|------------------------------------------------------|--------|-------------------------|------------|
|                                                 |   | **March 29,  2002**     | ** ** | **March 31,  2001** | ** ** |
| Revenue before  reimbursements                       |   | $                       | 63,277     |   | $ | 70,300 |   |
| Out of pocket  reimbursements                        |   | 3,877                   |       | 4,986 |   |
| Total revenue                                        |   | 67,154                  |       | 75,286 |   |
|                                                 |   |                    |       |   |   |
| Cost of services  before reimbursable expenses       |   | 40,073                  |       | 43,853 |   |
| Out of pocket  reimbursable expenses                 |   | 3,877                   |       | 4,986 |   |
| Total cost of  services                              |   | 43,950                  |       | 48,839 |   |
|                                                 |   |                    |       |   |   |
| Gross profit                                         |   | 23,204                  |       | 26,447 |   |
| Selling expenses                                     |   | 6,894                   |       | 7,859 |   |
| General and  administrative expenses                 |   | 14,713                  |       | 17,402 |   |
| Income from  operations                              |   | 1,597                   |       | 1,186 |   |
| Other income                                         |   |                    |       |   |   |
| Interest income,  net                                |   | 208                     |       | 411 |   |
| Other expense,  net                                  |   | (57                     | )          | (61 | ) |
| Income before  income taxes                          |   | 1,748                   |       | 1,536 |   |
| Provision for  income taxes                          |   | 734                     |       | 645 |   |
| Net income                                           |   | $                       | 1,014      |   | $ | 891 |   |
| Basic net income  per share                          |   | $                       | 0.04       |   | $ | 0.04 |   |
| Diluted net  income per share                        |   | $                       | 0.04       |   | $ | 0.04 |   |
| Shares used in  computing basic net income per share |   | 23,897                  |       | 23,573 |   |
| Shares used in  diluted net income per share         |   | 25,166                  |       | 24,402 |   |

 

See accompanyingnotes.

 

5

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**First Consulting Group, Inc. andSubsidiaries**

 

**Condensed Consolidated Statements ofCash Flows (Unaudited)**

**(in thousands)**

 
|                                                  |   | **Three  Months Ended** |       |
|-------------------------------------------------------|--------|-------------------------|------------|
|                                                  |   | **March 29,  2002**     | ** ** | **March 31,  2001** | ** ** |
| Cash  flows from operating activities:                |   |                    |       |   |   |
| Net  income                                           |   | $                       | 1,014      |   | $ | 891 |   |
| Adjustments  to reconcile net income                  |   | 1,522                   |       | 2,370 |   |
| Change  in assets and liabilities                     |   | (246                    | )          | 777 |   |
| Net  cash provided by operating activities            |   | 2,290                   |       | 4,038 |   |
| Cash  flows from investing activities:                |   |                    |       |   |   |
| Net  sale (purchase) of investments                   |   | (163                    | )          | 6,279 |   |
| Furniture,  equipment, and leasehold improvements     |   | (833                    | )          | (799 | ) |
| Acquisition  of business                              |   | —                  |       | (114 | ) |
| Net  cash provided by (used for) investing activities |   | (996                    | )          | 5,366 |   |
| Cash  flows used in financing activities:             |   |                    |       |   |   |
| Principal  payments of long-term debt                 |   | —                  |       | (13 | ) |
| Proceeds  from stock/tax loan payments                |   | 120                     |       | 314 |   |
| Proceeds  from issuance of stock                      |   | 1,286                   |       | 320 |   |
| Net  cash provided by financing activities            |   | 1,406                   |       | 621 |   |
| Net  increase in cash and equivalents                 |   | 2,700                   |       | 10,025 |   |
| Cash  and equivalents at beginning of period          |   | 32,499                  |       | 11,429 |   |
| Cash  and equivalents at end of period                |   | $                       | 35,199     |   | $ | 21,454 |   |
|                                                  |   |                    |       |   |   |
| Cash  paid during the period for:                     |   |                    |       |   |   |
| Interest                                              |   | $                       | 2          |   | $ | 2 |   |
| Income  taxes                                         |   | $                       | 189        |   | $ | 203 |   |

 

See accompanyingnotes.

 

6

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**Notes to Consolidated FinancialStatements**

 

**1.             Basis of Presentation**

 

The consolidated balance sheet of First ConsultingGroup, Inc. (the “Company”) at March 29, 2002 and consolidated statements ofoperations and condensed consolidated statements of cash flows for the periodsended March 29, 2002 and March 31, 2001 are unaudited.  These financial statements reflect alladjustments, consisting of only normal recurring adjustments, which, in theopinion of management, are necessary to fairly present the financial positionof the Company at March 29, 2002 and the results of operations for the threemonth periods ended March 29, 2002 and March 31, 2001.  The results of operations for the threemonths ended March 29, 2002 are not necessarily indicative of the results to beexpected for the year ending December 27, 2002.  For more complete financial information, these financialstatements should be read in conjunction with the audited financial statementsfor the year ended December 28, 2001 included in the Company’s Annual Report onForm 10-K.

 

**2.             Investments**

 

For purposes of reporting cash flows, cash and cashequivalents include cash and interest-earning deposits or securities with originalmaturities of three months or less. The Company has approximately $19.6 millionin short term investments classified as available for sale.  Such investments are currently heldprimarily in tax-exempt government securities. Net unrealized gains and losses on investments were not material atMarch 29, 2002.

 

**3.             Net Income Per Share**

 

The following represents a reconciliation of basic anddiluted net income per share for the three month periods ended March 29, 2002and March 31, 2001, respectively (amounts rounded to thousands, except pershare data):

 
|                                                                 |   | **For the  Three Months Ended  March 29, 2002** |       | **For the  Three Months Ended  March 31, 2001** |       |
|----------------------------------------------------------------------|--------|-------------------------------------------------|------------|-------------------------------------------------|------------|
|                                                                 |   | **Net  Income**                                 | ** ** | **Weighted  Average  Shares**                   | ** ** | **Per share  amount** | ** ** | **Net  Income** | ** ** | **Weighted  Average  Shares** | ** ** | **Per share  amount** |   |
| Basic  EPS:                                                          |   |                                            |       |                                            |       |   |   |   |   |   |   |   |   |
| Net  Income available to common stockholders                         |   | $                                               | 1,014      |                                            | 23,897     |   | $ | 0.04 |   | $ | 891 |   | 23,573 |   | $ | 0.04 |   |
| Effect  of dilutive options and warrants:                            |   |                                            |       | 1,269                                           |       |   |   |   |   | 829 |   |   |   |
| Diluted  EPS:                                                        |   |                                            |       |                                            |       |   |   |   |   |   |   |   |   |
| Net Income available to common stockholders and  assumed conversions |   | $                                               | 1,014      |                                            | 25,166     |   | $ | 0.04 |   | $ | 891 |   | 24,402 |   | $ | 0.04 |   |

 

7

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**4.            ****Disclosureof Segment Information**

 

The Company provides segment reporting at a grossmargin level. Selling and general and administrative expense (includingcorporate functions, occupancy related costs, depreciation, professionaldevelopment, recruiting, and marketing), and fixed assets (primarily computerequipment, furniture, and leasehold improvements) are managed at the corporatelevel.  The Company currently has threesegments: Healthcare, Life Sciences and Outsourcing.  The Company’s segments are managed on an integrated basis inorder to serve clients by assembling multi-disciplinary teams, which providecomprehensive services.

 

The following is a summary of certain financialinformation by segment (in thousands):

 

**For the quarter ended March 29, 2002:**

 
|                                          |   | **Healthcare** |       | **Life Sciences** |       | **Outsourcing** |       | **Totals** |       |
|-----------------------------------------------|--------|----------------|------------|-------------------|------------|-----------------|------------|------------|------------|
| Revenue before reimbursements                 |   | $              | 28,843     |              | $          | 17,521          |       | $          | 16,913     | ** ** | **$** | **63,277** | ** ** |
| Out of pocket reimbursements                  |   | 3,292          |       | 536               |       | 49              | ** ** | **3,877**  | ** ** |
| Total revenue                                 |   | 32,135         |       | 18,057            |       | 16,962          | ** ** | **67,154** | ** ** |
| Cost of services before reimbursable expenses |   | 16,398         |       | 10,626            |       | 13,049          | ** ** | **40,073** | ** ** |
| Out of pocket reimbursable expenses           |   | 3,292          |       | 536               |       | 49              | ** ** | **3,877**  | ** ** |
| Total cost of services                        |   | 19,690         |       | 11,162            |       | 13,098          | ** ** | **43,950** | ** ** |
| Gross profit                                  |   | 12,445         |       | 6,895             |       | 3,864           | ** ** | **23,204** | ** ** |
| Selling expenses                              |   |           | ** ** |              | ** ** |            | ** ** | **6,894**  | ** ** |
| General & administrative expenses         |   |           | ** ** |              | ** ** |            | ** ** | **14,713** | ** ** |
| Income from operations                        |   |           | ** ** |              | ** ** |            | ** ** | **$**      | **1,597**  | ** ** |
|                                               |        |                |            |                   |            |                 |            |            |            |  |  |  |  |

 

**For the quarter ended March 31, 2001:**

 
|                                          |   | **Healthcare** |       | **Life Sciences** |       | **Outsourcing** |       | **Totals** |       |
|-----------------------------------------------|--------|----------------|------------|-------------------|------------|-----------------|------------|------------|------------|
| Revenue before reimbursements                 |   | $              | 38,639     |              | $          | 19,815          |       | $          | 11,846     | ** ** | **$** | **70,300** | ** ** |
| Out of pocket reimbursements                  |   | 4,429          |       | 557               |       | —          | ** ** | **4,986**  | ** ** |
| Total revenue                                 |   | 43,068         |       | 20,372            |       | 11,846          | ** ** | **75,286** | ** ** |
| Cost of services before reimbursable expenses |   | 21,379         |       | 13,302            |       | 9,172           | ** ** | **43,853** | ** ** |
| Out of pocket reimbursable expenses           |   | 4,429          |       | 557               |       | —          | ** ** | **4,986**  | ** ** |
| Total cost of services                        |   | 25,808         |       | 13,859            |       | 9,172           | ** ** | **48,839** | ** ** |
| Gross profit                                  |   | 17,260         |       | 6,513             |       | 2,674           | ** ** | **26,447** | ** ** |
| Selling expenses                              |   |           | ** ** |              | ** ** |            | ** ** | **7,859**  | ** ** |
| General & administrative expenses         |   |           | ** ** |              | ** ** |            | ** ** | **17,402** | ** ** |
| Income from operations                        |   |           | ** ** |              | ** ** |            | ** ** | **$**      | **1,186**  | ** ** |
|                                               |        |                |            |                   |            |                 |            |            |            |  |  |  |  |

 

8

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**5.**             **ComprehensiveIncome**

 

Comprehensive income, netof taxes is as follows (in thousands):

 

For the quarter endedMarch 29, 2002:

 
| **Net Income** |   | **Currency  Translation (Loss)** |   | **Unrealized  (Loss) on Investments** |   | **Comprehensive  Income** |   |
|----------------|--------|----------------------------------|--------|---------------------------------------|--------|---------------------------|--------|
| $              | 1,014  |                             | $      | (161                                  | )      | $                         | (13    | ) | $ | 840 |   |
|                |        |                                  |        |                                       |        |                           |        |  |  |  |  |

 

For the quarter endedMarch 31, 2001:

 
| **Net Income** |   | **Currency Translation (Loss)** |   | **Unrealized Gain on Investments** |   | **Comprehensive Income** |   |
|----------------|--------|---------------------------------|--------|------------------------------------|--------|--------------------------|--------|
| $              | 891    |                            | $      | (142                               | )      | $                        | 42     |   | $ | 791 |   |
|                |        |                                 |        |                                    |        |                          |        |  |  |  |  |

 

**6.             AccountsReceivable**

 

At March 29, 2002, the Company carried a long-termaccount receivable of approximately $9.9 million from a single client.  The receivable relates to a majoroutsourcing contract, and will be paid over a five-year period.

 

The allowance for doubtful accounts is developed basedupon several factors including clients' credit quality, historical write-offexperience and any known specific issues or disputes which exist as of thebalance sheet date.

 

**7.             RecentAccounting Pronouncements**

 

The Company has adopted the provisions of theFinancial Accounting Standards Board (FASB) EITF No. 01-14 regarding the“income statement characterization of reimbursements received for out-of-pocketexpenses incurred” during the quarter. In accordance with the provisions of the announcement, the Companyadjusted revenue and cost of services for all periods reported to includeout-of-pocket expenses.  Adoption of theprovisions of this FASB announcement had no impact on reported net income(loss) or earnings (loss) per share for either the current period or past periods.

 

Effective December29, 2001, the Company adopted SFAS 141 and SFAS 142. SFAS 141 requires businesscombinations initiated after June 30, 2001 to be accounted for using thepurchase method of accounting. It also specifies the types of acquiredintangible assets that are required to be recognized and reported separate fromgoodwill.  SFAS 142 requires thatgoodwill and certain intangibles no longer be amortized, but instead are to bereviewed at least annually for impairment.

 

9

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Net income and earnings per share for the firstquarter ended March 29, 2002 and March 31, 2001 adjusted to excludeamortization expense (net of taxes) are as follows (amounts rounded tothousands, except per share data):

 

|                                 |   | **Three  Months Ended** |   |
|--------------------------------------|--------|-------------------------|--------|
|                                 |   | **March 29,  2002**     |   | **March 31,  2001** |   |
| Net income:                          |   |                    |   |   |   |
| Reported net  income                 |   | $                       | 1,014  |   | $ | 891 |   |
| Goodwill  amortization               |   | —                  |   | 378 |   |
| Adjusted net  income                 |   | $                       | 1,014  |   | $ | 1,269 |   |
| Basic earnings  per share:           |   |                    |   |   |   |
| Reported basic  earnings per share   |   | $                       | 0.04   |   | $ | 0.04 |   |
| Goodwill  amortization               |   | —                  |   | 0.01 |   |
| Adjusted basic  earnings per share   |   | $                       | 0.04   |   | $ | 0.05 |   |
| Diluted earnings  per share:         |   |                    |   |   |   |
| Reported diluted  earnings per share |   | $                       | 0.04   |   | $ | 0.04 |   |
| Goodwill  amortization               |   | —                  |   | 0.01 |   |
| Adjusted diluted  earnings per share |   | $                       | 0.04   |   | $ | 0.05 |   |

 

There were no material acquisitions of intangibleassets during the first quarter of fiscal 2002.  The components of intangible assets were as follows:

 

|                  |   | **As of March 29, 2002**    |   |
|-----------------------|--------|-----------------------------|--------|
| Goodwill:             |   | **Gross  Carrying  Amount** |   | **Accumulated  Amortization** |   |
| The Healthcare  Group |   | $                           | 3,523  |   | $ | (1,380 | ) |
| Life Sciences         |   | 2,260                       |   | (832 | ) |
| Total                 |   | $                           | 5,783  |   | $ | (2,212 | ) |

 

 

10

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**ITEM2.  MANAGEMENT’S DISCUSSION AND ANALYSISOF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

 

THE FOLLOWING MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSCONTAINS FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF THE PRIVATESECURITIES LITIGATION REFORM ACT OF 1995. SUCH FORWARD-LOOKING STATEMENTSINVOLVE RISKS AND UNCERTAINTIES, INCLUDING THOSE SET FORTH HEREIN AND UNDER THECAPTION “RISKS RELATING TO OUR BUSINESS” IN OUR ANNUAL REPORT ON FORM 10-K FORTHE YEAR ENDED DECEMBER 28, 2001, AND SUBSEQUENT REPORTS FILED WITH THESECURITIES AND EXCHANGE COMMISSION.  OURACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE ANTICIPATED IN THESEFORWARD-LOOKING STATEMENTS.

 

## **Overview**

 

We provide services primarily to payors, providers, governmentagencies, pharmaceutical, biogenetic, and life science companies, and otherhealthcare organizations in North America and Europe. We generate substantiallyall of our revenue from fees for professional services. We typically bill forour services on an hourly, fixed-fee or monthly fixed-fee basis as specified bythe agreement with a particular client. We establish either standard or target hourly rates for each level ofconsultant based on several factors including industry and assignment-relatedexperience, technical expertise, skills and knowledge.  For services billed on an hourly basis, feesare determined by multiplying the amount of time expended on each assignment bythe project hourly rate for the consultant(s) assigned to the engagement.  Fixed fees, including outsourcing fees, areestablished on a per-assignment or monthly basis and are based on severalfactors such as the size, scope, complexity and duration of an assignment andthe number of our people required to complete the assignment.  Actual hourly or fixed fees for anassignment may vary from the standard, target, or historical rates that we havecharged. For services billed on an hourly basis, we recognize revenue asservices are performed. For services billed on a fixed fee basis, we recognizerevenue using the percentage of completion method based either on 1) the amountof time completed on each assignment versus the projected number of hoursrequired to complete such assignment, or 2) the amount of cost incurred on theassignment versus the estimated total cost to complete the assignment. Revenueis recorded as incurred at assignment rates net of unplanned adjustments forspecific engagements. Unplanned adjustments to revenue are booked at the timethey are known.  Provisions are made forestimated uncollectible amounts based on our experience. We may obtain paymentin advance of providing services. These advances are recorded as customeradvances and reflected as a liability on our balance sheet.

 

Out of pocket expenses billed and reimbursed byclients are included in gross revenue, and then deducted to determine netrevenue.  For purposes of analysis, allpercentages in this discussion are stated as a percentage of net revenue, sincewe believe that this is the more relevant measure of our business over time.

 

Cost of servicesprimarily consists of the salaries, bonuses and related benefits ofclient-serving consultants and subcontractor expenses.  Selling expenses primarily consist of thesalaries, benefits, travel and other costs of our sales force, as well asmarketing and research expenses. General and administrative expenses primarilyconsist of the costs attributable to the support of our client-servingprofessionals, such as: non-billable travel; office space occupancy;investments in our information

 

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systems, practice supportand quality initiatives; salaries and expenses for executive management,financial accounting and administrative personnel; expenses for firm andbusiness unit governance meetings; recruiting fees and professional developmentand training; and, legal and other professional services.  As associate related costs are relativelyfixed, variations in our revenues and operating results can occur as a resultof variations in billing margins and utilization rates of our billable associates.

 

We routinely review our fees for services, professional compensationand overhead costs to ensure that our services and compensation are competitivewithin the industry.  In addition, weroutinely monitor the progress of client projects with our clients’ seniormanagement. Quality of Service Questionnaires are sent to the client after eachengagement with the results compiled and reported to our executive management.

 

In connection with shares issued to certain of our vice presidents inreturn for interest-free notes, we recognize compensation expense on ourconsolidated statement of operations. The recurring portion of our compensation expense relating to stockissuances and the amortization of deferred compensation is reflected in ourconsolidated statements of operations as general and administrative expense,selling expenses, or cost of services based on the function of the employee towhom the charge relates.

 

Our most significant expenses are our human resourceand related salary and benefit expenses. As of March 29, 2002, approximately879 of our employees are billable consultants. Another 543 employees form ourfirm’s outsourcing business. The salaries and benefits of such billableconsultants and outsourcing related employees are recognized in our cost ofservices.  Non-billable employeesalaries and benefits are recognized as a component of either selling orgeneral and administrative expenses. Approximately 20.0%, or 360 employees are classified as non-billable.Our cost of services as a percentage of revenue is directly related to ourconsultant utilization, which is the ratio of total billable hours to availablehours in a given period, and the amount of cost recognized under percentage ofcompletion accounting. We manage consultant utilization by monitoringassignment requirements and timetables, available and required skills, andavailable consultant hours per week and per month. We evaluate our fixedcontracts on a monthly basis using percentage of completion accounting.  Differences in personnel utilization ratescan result from variations in the amount of non-billed time, which hashistorically consisted of training time, vacation time, time lost to illnessand inclement weather and unassigned time. Non-billed time also includes timedevoted to other necessary and productive activities such as sales support andinterviewing prospective employees. Unassigned time results from differences in the timing of the completionof an existing assignment and the beginning of a new assignment. In order toreduce and limit unassigned time, we actively manage personnel utilization bymonitoring and projecting estimated engagement start and completion dates andmatching consultant availability with current and projected clientrequirements. The number of consultants staffed on an assignment will varyaccording to the size, complexity, duration and demands of the assignment.Assignment terminations, completions, inclement weather, and scheduling delaysmay result in periods in which consultants are not optimally utilized. Anunanticipated termination of a significant assignment or an overall lengtheningof the sales cycle could result in a higher than expected number of unassignedconsultants and could cause us to experience lower margins. In addition,expansion into new markets and the hiring of consultants in advance of clientassignments have resulted and may continue to result in periods of lowerconsultant utilization.

 

**Results of Operations for the Three Months Ended March 29,2002 and March 31, 2001**

 

*Net Revenue*.  Our net revenue decreased to $63.3 millionfor the quarter ended March 29, 2002,

 

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a decrease of 10.0% from$70.3 million for the quarter ended March 31, 2001.  This decrease was primarily due to a decline in billable headcountand lower pricing due to the increased competitiveness of the market.

 

*Total Revenue*.  Total revenue decreased to $67.2 million forthe quarter ended March 29, 2002, a decrease of 10.8% from $75.3 million forthe quarter ended March 31, 2001.  Thedecrease is due to a decline in billable headcount, lower pricing and a declinein Healthcare revenue, which generally requires the most reimbursable travelexpense.

 

*Gross Profit*.  Gross profit decreased to $23.2 million forthe quarter ended March 29, 2002, a decrease of 12.3% from $26.4 million forthe quarter ended March 31, 2001.  Thedecrease was primarily attributable to the decrease in the number ofconsultants and outsourcing staff. Gross profit as a percentage of net revenue decreased to 36.7% for thequarter ended March 29, 2002 from 37.6% for the quarter ended March 31,2001.  This decrease was due to lowerpricing due to the increased competitiveness of the market.

 

*Selling Expenses.* Selling expenses decreased to $6.9 millionfor the quarter ended March 29, 2002, a decrease of 12.3% from $7.9 million forthe quarter ended March 31, 2001 due to cost reductions.  Selling expenses as a percentage of netrevenue decreased slightly from 11.2% for the quarter ended March 31, 2001 to10.9% for the quarter ended March 29, 2002.

 

*General and Administrative Expenses.* General andadministrative expenses decreased to $14.7 million for the quarter ended March29, 2002, a decrease of 15.5% from $17.4 million for the quarter ended March31, 2001.  The decrease resulted fromcost reductions we made and the elimination of goodwill amortization (See Note7 of the Notes to Consolidated Financial Statements).  General and administrative expenses as a percentage of netrevenue decreased from 24.8% for the quarter ended March 31, 2001 to 23.3% forthe quarter ended March 29, 2002.

 

*Interest Income, Net.*  Interest income, net of interest expense,decreased to $0.2 million for the quarter ended March 29, 2002 from $0.4million for the quarter ended March 31, 2001, due to lower interest rates,despite a higher level of cash and investments.  Interest income net of interest expense as a percentage of netrevenue decreased to 0.3% for the quarter ended March 29, 2002 from 0.6% forthe quarter ended March 31, 2001.

 

*Other Expense, Net.*  Other expense of $0.1 million was the samefor the quarters ended, March 29, 2002 and March 31, 2001.

 

*Income Taxes.* The provision for income taxes of 42% in thequarter ended March 29, 2002 remained the same as in the quarter ended March31, 2001.

 

**Liquidity and Capital Resources**

 

During the three monthsended March 29, 2002, we generated cash flow from operations of $2.3million.  During the three months endedMarch 29, 2002, we used cash flow of approximately $0.8 million to purchaseproperty and equipment, including computer and related equipment and officefurniture, while depreciation and amortization expense was approximately $1.4million.  At March 29, 2002, we had cashand investments available for sale of $54.8 million compared to $51.9 millionat December 28, 2001.

 

 

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We have a revolving lineof credit, under which we are allowed to borrow up to $10.0 million at aninterest rate of the prevailing prime rate with an expiration date of May 1,2003.  There was no outstanding balanceunder the line of credit at March 29, 2002.

 

Management believes thatour existing cash and investments together with funds generated from operationswill be sufficient to meet operating requirements for the next 12 months.  Our cash and investments are available forstrategic investments, mergers and acquisitions, and other potentiallarge-scale cash needs that may arise.

 

 

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**Part II. Other Information**

** **

**Item1. Legal Proceedings.**

 

None.

 

**Item2. Changes in Securities.**

 

None.

 

**Item3.   Defaults Upon Senior Securities.**

 

None.

 

**Item4. Submission of Matters to a Vote of Security Holders.**

 

None.

 

**Item5. Other Information.**

 

None.

 

**Item6. Exhibits and Reports on Form 8-K.**

 

**(a)           Exhibits**

 
| **Item** |   | **Description**                                                              |
|----------|--------|------------------------------------------------------------------------------|
| 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.                             |

 

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(1)                                  Incorporatedby 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)                                  Incorporatedby reference to Exhibit 99.1 to FCG’s Current Report on Form 8-K dated December9, 2000.

 

(3)                                  Incorporatedby reference to Exhibit 3.3 to FCG’s Form S-1.

 

(4)                                  Incorporatedby reference to Exhibit 4.1 to FCG’s Form S-1.

 

(5)                                  SeeNote 3 to Consolidated Financial Statements, “Net Income Per Share.”

 

 

**(b)           Reportson Form 8-K**

 

None.

 

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**SIGNATURES**

 

Pursuant to therequirements of the Securities and Exchange Act of 1934, the registrant hasduly caused this report to be signed in its behalf by the undersigned thereuntoduly authorized.

 
|                     | FIRST CONSULTING GROUP,  INC.                                                                           |
|--------------------------|---------------------------------------------------------------------------------------------------------|
|                     |                                                                                                    |
| Date:  May 13, 2002 | LUTHER J. NUSSBAUM                                                                                      |
|                     | Luther J. Nussbaum                                                                                      |
|                     | Chairman and Chief  Executive Officer                                                                   |
|                     |                                                                                                    |
| Date:  May 13, 2002 | WALTER J. McBRIDE                                                                                       |
|                     | Walter J. McBride                                                                                       |
|                     | Executive Vice  President, Practice Support  and Chief Financial Officer  (Principal Financial Officer) |

 

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**ExhibitIndex**

 

| **Item** |   | **Description**                                                              |
|----------|--------|------------------------------------------------------------------------------|
| 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.                             |

 

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(1)                                  Incorporatedby 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)                                  Incorporatedby reference to Exhibit 99.1 to FCG’s Current Report on Form 8-K dated December9, 2000.

 

(3)                                  Incorporatedby reference to Exhibit 3.3 to FCG’s Form S-1.

 

(4)                                  Incorporatedby reference to Exhibit 4.1 to FCG’s Form S-1.

 

(5)                                  SeeNote 3 to Consolidated Financial Statements, “Net Income Per Share.”

 

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