**UNITED STATES**

**SECURITIESAND 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 thequarterly period ended September 30, 2001,**

** **

**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 ofregistrant 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)                                            |   | (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 reportsrequired to be filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject to suchfiling requirements for the past 90 days. Yes     ý     No    o

 

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

 

| **Common Stock, $.001 par value** |   | **23,609,813**                    |
|-----------------------------------|--------|-----------------------------------|
| (Class)                           |   | (Outstanding at November 1, 2001) |

 

**First Consulting Group, Inc.**

**Tableof Contents**

 
| COVER  PAGE       |
|-------------------|
|              |
| TABLE OF CONTENTS |
|              |   |  
Part I.

Financial  Information

 
 

Item 1.

Financial  Statements and Notes (Unaudited)

 
 

 

 

 
 

 

Consolidated Balance Sheets as of September  30, 2001 and December  31, 2000

 
 

 

 

 
 

 

Consolidated  Statements of Operations for the three month periods ended September 30, 2001  and September 30, 2000 and for the nine month periods ended September 30,  2001 and September 30, 2000

 
 

 

 

 
 

 

Condensed Consolidated Statements of Cash  Flows for the nine month periods ended September 30, 2001 and September 30,  2000

 
 

 

 

 
 

 

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

 

 

**PART I****.FINANCIAL INFORMATION**

** **

**Item 1.****    Financial Statements and Notes (Unaudited).**

** **

**FirstConsulting Group, Inc. and Subsidiaries**

** **

**ConsolidatedBalance Sheets**

**(inthousands)**

 

 

 

**September 30,**

 

**December 31,**

 

 

 

**2001**

 

**2000**

 

**ASSETS**

 

**(unaudited)**

 

 

 

Current assets

 

 

 

 

 

Cash and cash equivalents

 

$

23,132

 

$

11,429

 

Short-term investments

 

19,442

 

15,146

 

Accounts receivable, less allowance of  $2,927 and $3,331 as of September 30, 2001  and December 31, 2000, respectively

 

32,686

 

38,637

 

Unbilled receivables

 

19,348

 

17,465

 

Deferred income taxes, net

 

3,948

 

3,948

 

Income tax receivable

 

--

 

2,232

 

Prepaid expenses and other current assets

 

4,324

 

1,845

 

Total current assets

 

102,880

 

90,702

 

Notes receivable-stockholders

 

1,409

 

1,891

 

Long-term investments

 

1,800

 

4,520

 

Property and equipment

 

 

 

 

 

Furniture, equipment, and leasehold  improvements

 

8,028

 

7,805

 

Information systems equipment

 

27,526

 

25,956

 

 

 

35,554

 

33,761

 

Less accumulated depreciation and  amortization

 

23,940

 

20,028

 

 

 

11,614

 

13,733

 

Other assets

 

 

 

 

 

Executive benefit trust

 

6,052

 

6,872

 

Unbilled long term receivables

 

10,943

 

11,008

 

Deferred income taxes

 

2,639

 

2,817

 

Goodwill, net

 

7,995

 

9,927

 

Other

 

640

 

526

 

 

 

28,269

 

31,150

 

Total assets

 

$

145,972

 

$

141,996

 

 

See accompanying notes.

 

**ConsolidatedBalance Sheets**

**(inthousands)**

** **

 

 

**September 30,**

 

**December 31,**

 

 

 

**2001**

 

**2000**

 

**LIABILITIES AND STOCKHOLDERS’ EQUITY**

 

**(unaudited)**

 

 

 

Current liabilities

 

 

 

 

 

Current portion of long-term debt

 

$

--

 

$

54

 

Accounts payable

 

2,466

 

1,522

 

Accrued liabilities

 

13,337

 

11,035

 

Accrued vacation

 

6,900

 

5,732

 

Accrued incentive compensation

 

4,905

 

3,283

 

Deferred revenue

 

29

 

108

 

Customer advances

 

3,908

 

6,178

 

Total current liabilities

 

31,545

 

27,912

 

Non-current liabilities

 

 

 

 

 

Long-term debt, net of current portion

 

--

 

91

 

Supplemental executive retirement plan

 

6,641

 

6,588

 

Minority interest

 

711

 

2,143

 

Total non-current liabilities

 

7,352

 

8,822

 

Commitments and contingencies

 

--

 

--

 

Stockholders’ equity

 

 

 

 

 

Preferred Stock, $.001 par value;  10,000,000 shares authorized, no shares issued and outstanding

 

--

 

--

 

Common Stock, $.001 par value; 50,000,000  shares authorized, 23,593,036 shares issued and outstanding at September 30,  2001 and 23,736,700 shares issued and outstanding at December 31, 2000

 

24

 

24

 

Additional paid-in capital

 

88,806

 

92,455

 

Retained earnings

 

21,856

 

22,783

 

Deferred compensation-stock  incentive agreements

 

(1,398

)

(2,850

)

Notes receivable-stockholders

 

(1,347

)

(6,539

)

Accumulated other comprehensive loss

 

(866

)

(611

)

Total stockholders’ equity

 

107,075

 

105,262

 

Total liabilities and stockholders’ equity

 

$

145,972

 

$

141,996

 

 

See accompanying notes.

 

**Consolidated****Statementsof Operations (Unaudited)**

**(inthousands, except per share data)**  

 

 

 

**Three Months Ended**

 

**Nine Months Ended**

 

 

 

**September 30**

 

**September 30**

 

 

 

**2001**

** **

**2000**

** **

**2001**

 

**2000**

 

Net revenue

 

$

65,732

 

$

60,011

 

$

202,238

 

$

187,185

 

Cost of services

 

40,499

 

40,545

 

126,446

 

123,296

 

Gross profit

 

25,233

 

19,466

 

75,792

 

63,889

 

Selling expenses

 

7,861

 

7,696

 

23,858

 

22,962

 

General and administrative expenses

 

15,592

 

17,180

 

49,878

 

52,823

 

Merger, restructuring and severance costs

 

--

 

5,500

 

4,349

 

9,200

 

Income (loss) from operations

 

1,780

 

(10,910

)

(2,293

)

(21,096

)

Other income

 

 

 

 

 

 

 

 

 

Interest income, net

 

434

 

492

 

1,144

 

1,840

 

Other expense, net

 

(209

)

(186

)

(449

)

(326

)

Income (loss) before income taxes

 

2,005

 

(10,604

)

(1,598

)

(19,582

)

Provision (benefit) for income taxes

 

842

 

(4,426

)

(671

)

(7,833

)

Net income (loss)

 

$

1,163

 

$

(6,178

)

$

(927

)

$

(11,749

)

Basic net income (loss)  per share

 

$

0.05

 

$

(0.25

)

$

(0.04

)

$

(0.48

)

Diluted net income (loss) per share

 

$

0.05

 

$

(0.25

)

$

(0.04

)

$

(0.48

)

Shares used in computing basic net income  (loss) per share

 

23,609

 

24,922

 

23,526

 

24,433

 

Shares used in diluted net income (loss)  per share

 

24,299

 

24,922

 

23,526

 

24,433

 

 

See accompanying notes. 

 

**Condensed****Consolidated Statements of Cash Flows (Unaudited)**

**(inthousands)**

** **

 

 

**Nine Months Ended**

 

 

 

**September 30,**

** **

**September 30,**

** **

 

 

**2001**

 

**2000**

 

Cash flows from operating activities:

 

 

 

 

 

Net loss

 

$

(927

)

$

(11,749

)

Adjustments to reconcile net income

 

7,131

 

7,193

 

Change in assets and liabilities

 

7,317

 

(7,443

)

Net cash provided by (used for) operating  activities

 

13,521

 

(11,999

)

Cash flows from investing activities:

 

 

 

 

 

Net purchase of investments

 

(1,076

)

187

 

Furniture, equipment, and leasehold  improvements

 

(2,714

)

(4,640

)

Note receivable stockholders

 

--

 

 

 

Acquisition of business, net of cash  acquired

 

(193

)

(2,883

)

Net cash used for investing activities

 

(3,983

)

(7,336

)

Cash flows used in financing activities:

 

 

 

 

 

Principal payments of long-term debt

 

(132

)

(41

)

Proceeds from issuance of stock

 

2,297

 

1,451

 

Net cash provided by financing activities

 

2,165

 

1,410

 

Net increase (decrease) in cash and  equivalents

 

11,703

 

(17,925

)

Cash and equivalents at beginning of period

 

11,429

 

29,674

 

Cash and equivalents at end of period

 

$

23,132

 

$

11,748

 

 

 

 

 

 

 

Cash paid during the period for:

 

 

 

 

 

Interest

 

$

19

 

$

38

 

Income taxes

 

$

575

 

$

1,145

 

 

See accompanying notes.

 
****
**Notes****toConsolidated Financial Statements**

** **

**1.             Basis ofPresentation**

The consolidated balance sheets of First Consulting Group, Inc. (the“Company”) at September 30, 2001 and consolidated statements of operations andcondensed consolidated statements of cash flows for the periods ended September30, 2001 and 2000 are unaudited.  Thesefinancial statements reflect all adjustments, consisting of only normalrecurring adjustments, which, in the opinion of management, are necessary tofairly present the financial position of the Company at September 30, 2001 andthe results of operations for the three-month and nine-month periods endedSeptember 30, 2001 and September 30, 2000. The results of operations for the nine months ended September 30, 2001are not necessarily indicative of the results to be expected for the yearending December 31, 2001.  For morecomplete financial information, these financial statements should be read inconjunction with the audited financial statements for the year ended December31, 2000 included in the Company’s Annual Report on Form 10–K.

 

**2.             Investments**

For purposes of reporting cash flows, cash and cash equivalents includecash and interest-earning deposits or securities with original maturities ofthree months or less. The Company has approximately $19.4 million in short terminvestments classified as available for sale. Such investments are currently held in high-grade taxable and tax-exemptsecurities.  Net unrealized gains andlosses on investments were not material at September 30, 2001.

 

**3.             NetIncome (Loss) Per Share**

The following represents a reconciliation of basic and diluted netincome per share for the three month periods ended September 30, 2001 and 2000,respectively (amounts rounded to thousands, except per share data):

 

 

 

**For the three months ended**

 

**For the three months ended**

 

 

 

**September 30, 2001**

 

**September 30, 2000**

 

 

 

 

 

**Weighted**

 

 

 

 

 

**Weighted**

 

 

 

 

 

**Net**

 

**Average**

 

**Per share**

 

**Net**

 

**Average**

 

**Per share**

 

 

 

**Income**

 

**Shares**

 

**amount**

 

**Loss**

 

**Shares**

 

**amount**

 

Basic EPS:

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss) available to common  stockholders

 

$

1,163

 

23,609

 

$

0.05

 

$

(6,178

)

24,922

 

$

(0.25

)

Effect of dilutive options and warrants:

 

 

 

690

 

 

 

 

 

 

 

 

 

Diluted EPS:

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss) available to common  stockholders and assumed conversions

 

$

1,163

 

24,299

 

$

0.05

 

$

(6,178

)

24,922

 

$

(0.25

)

 

 

 

 

**For the three months ended**

 

**For the three months ended**

 

 

 

**September 30, 2001**

 

**September 30, 2000**

 

 

 

 

 

**Weighted**

 

 

 

 

 

**Weighted**

 

 

 

 

 

**Net**

 

**Average**

 

**Per share**

 

**Net**

 

**Average**

 

**Per share**

 

 

 

**Income**

 

**Shares**

 

**amount**

 

**Loss**

 

**Shares**

 

**amount**

 

Basic EPS:

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss available to common stockholders

 

$

(927

)

23,526

 

$

(0.04

)

$

(11,749

)

24,433

 

$

(0.48

)

Effect of dilutive options and warrants:

 

 

 

 

 

 

 

 

 

 

 

 

 

Diluted EPS:

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss available to common stockholders  and assumed conversions

 

$

(927

)

23,526

 

$

(0.04

)

$

(11,749

)

24,433

 

$

(0.48

)

 

**4.             Disclosureof Segment Information**

FCG has consolidated itsbusiness units as follows:

 

•      **TheHealthcare Group.**  Combinesthe Health Delivery, Health Plan, Healthcare Technology  (formerly Doghouse Technology Services) andGovernment business units under common leadership.  This group contributed 50 percent of revenue in the first ninemonths of 2001.  

 

•      **LifeSciences.**  This unit isdedicated to selling and delivering content management, validation, datawarehousing, and general systems development services to the pharmaceutical,biotech, and Contract Research Organizations markets.  Life Sciences contributed 28 percent of revenue in the first ninemonths of 2001.

 

•      **FCGManagement Services.**  Thisunit provides IT outsourcing services to the healthcare industries. FCGMScontributed 22 percent of revenue in the first nine months of 2001.

 

The Company provides segment reporting at a gross margin level. Sellingand general and administrative expense (including corporate functions,occupancy related costs, depreciation, professional development, recruiting,and marketing), and fixed assets (primarily computer equipment, furniture, andleasehold improvements) are managed at the corporate level.  The Company’s segments are managed on anintegrated basis in order to serve clients by assembling multi-disciplinaryteams, which provide comprehensive services.

 

The following is a summary of certain financial informationby segment (in thousands):

 

**For the three months period ended September 30, 2001:**

 

 

 

 

 

 

 

**Management**

 

 

 

 

 

**Healthcare**

 

**Life Sciences**

 

**Services**

 

**Totals**

 

Net revenues

 

$

30,245

 

$

19,293

 

$

16,194

 

**$**

**65,732**

** **

Cost  of services

 

17,185

 

10,461

 

12,853

** **

**40,499**

** **

Gross  profit

 

$

13,060

 

$

8,832

 

$

3,341

** **

**25,233**

** **

Selling  expenses

 

 

** **

 

** **

 

** **

**7,861**

** **

General  & administrative expenses

 

 

** **

 

** **

 

** **

**15,592**

** **

Merger,  restructuring, and severance cost

 

 

** **

 

** **

 

** **

**--**

** **

Income  from operations

 

 

** **

 

** **

 

** **

**$**

**1,780**

** **

 

**For the three months period ended September 30, 2000:**

 

 

 

 

 

 

 

**Management**

 

 

 

 

 

**Healthcare**

 

**Life Sciences**

 

**Services**

 

**Totals**

 

Net revenues

 

$

34,652

 

$

15,343

 

$

10,016

 

**$**

**60,011**

** **

Cost  of services

 

21,881

 

11,031

 

7,633

** **

**40,545**

** **

Gross  profit

 

$

12,771

 

$

4,312

 

$

2,383

** **

**19,466**

** **

Selling  expenses

 

 

** **

 

** **

 

** **

**7,696**

** **

General  & administrative expenses

 

 

** **

 

** **

 

** **

**17,180**

** **

Merger,  restructuring, and severance cost

 

 

** **

 

** **

 

** **

**5,500**

** **

Loss  from operations

 

 

** **

 

** **

 

** **

**$**

**(10,910**

**)**

 

**For the nine months period ended September 30, 2001:**

 

 

 

 

 

 

 

**Management**

 

 

 

 

 

**Healthcare**

 

**Life Sciences**

 

**Services**

 

**Totals**

 

Net revenues

 

$

102,318

 

$

56,109

 

$

43,811

 

**$**

**202,238**

** **

Cost  of services

 

56,492

 

34,970

 

34,984

** **

**126,446**

** **

Gross  profit

 

$

45,826

 

$

21,139

 

$

8,827

** **

**75,792**

** **

Selling  expenses

 

 

** **

 

** **

 

** **

**23,858**

** **

General  & administrative expenses

 

 

** **

 

** **

 

** **

**49,878**

** **

Merger,  restructuring, and severance cost

 

 

** **

 

** **

 

** **

**4,349**

** **

Loss  from operations

 

 

** **

 

** **

 

** **

**$**

**(2,293**

**)**

 

**Forthe nine months period ended September 30, 2000:**

** **

 

 

 

 

 

 

**Management**

 

 

 

 

 

**Healthcare**

 

**Life Sciences**

 

**Services**

 

**Totals**

 

Net revenues

 

$

105,100

 

$

51,203

 

$

30,882

 

**$**

**187,185**

** **

Cost  of services

 

66,722

 

32,720

 

23,854

** **

**123,296**

** **

Gross  profit

 

$

38,378

 

$

18,483

 

$

7,028

** **

**63,889**

** **

Selling  expenses

 

 

** **

 

** **

 

** **

**22,962**

** **

General  & administrative expenses

 

 

** **

 

** **

 

** **

**52,823**

** **

Merger,  restructuring, and severance cost

 

 

** **

 

** **

 

** **

**9,200**

** **

Loss  from operations

 

 

** **

 

** **

 

** **

**$**

**(21,096**

**)**

 

**5.             Comprehensive Income**

 

Comprehensiveincome, net of taxes is as follows: 

 

 

 

**(in thousands)**

 

 

 

**Three Months Ended**

 

**Nine Months Ended**

 

 

 

**September 30**

 

**September 30**

 

 

 

**2001**

** **

**2000**

** **

**2001**

** **

**2000**

** **

Net  income (loss)

 

$

1,163

 

$

(6,178

)

$

(927

)

$

(11,749

)

Other  comprehensive income (loss), net of tax

 

 

 

 

 

 

 

 

 

Foreign  currency translation loss adjustments

 

(130

)

(711

)

(273

)

(1,076

)

Unrealized  holding gains (losses) on securities

 

(12

)

27

 

18

 

221

 

Less  reclassification adjustment for gains included in net income

 

--

 

--

 

--

 

--

 

Other  comprehensive loss

 

(142

)

(684

)

(255

)

(855

)

Comprehensive  income (loss)

 

**$**

**1,021**

** **

**$**

**(6,862**

**)**

**$**

**(1,182**

**)**

**$**

**(12,604**

**)**

 

**6.             Concentrations of Credit Risk**

 

At September30 2001, FCG carried a long-term account receivable of approximately $10.9million from a single client.  Thereceivable relates to a major outsourcing contract, and will be paid down overa six-year period.  The company also hasa note receivable of approximately $1.8 million from another client that ispast due. Although, no assurance can be given that this client will be able topay in full, the client has paid approximately $1 million during 2001, and FCGbelieves it will ultimately collect the receivable.

 
****
**7.             Transaction with DoghouseEnterprise Subsidiary**

 

On June 29,2001, FCG purchased 2,500,000 shares of Doghouse Enterprises, Inc., a majorityowned subsidiary of FCG (“Doghouse”), from the minority stockholder of Doghousefor aggregate consideration of 132,753 shares of FCG’s common stock valued at$1,067,000 and $500 in cash.  As aresult of the purchase, Doghouse is a wholly owned subsidiary of FCG.

 

On July 1, 2001, Doghouse distributed all of itsassets and assigned all of its employees to FCG.  In connection with thistransaction, FCG assumed the Doghouse 2000 Equity Incentive Plan (the “DHPlan”) and all options granted or available for grant under that plan at anexchange rate of 0.078, or 78 shares of FCG’s common stock for each 1,000shares available for issuance under the DH Plan.  The exchange rate was based on a three-day trading average ofFCG’s common stock following its public announcement of its first fiscalquarter financial results and a per share value for Doghouse as negotiatedbetween FCG and the former minority stockholder of Doghouse.   The total number of shares of FCG’s commonstock available for issuance under the DH Plan is 585,000, of which 341,580 aresubject to outstanding options as of July 1, 2001.  The weighted average exercise price for the options outstanding underthe DH Plan is $9.95 per share.

 

**8.             Recent Accounting Pronouncements**

 

On July 20,2001, the Financial Accounting Standards Board (FASB) issued Statement ofFinancial Accounting Standards (SFAS) 141, *BusinessCombinations*, and SFAS 142, *Goodwilland Intangible Assets*.   SFAS141 is effective for all business combinations completed after June 30,2001.  SFAS 142 is effective for fiscalyears beginning after December 15, 2001; however, certain provisions of thisStatement apply to goodwill and other intangible assets acquired between July1, 2001 and the effective date of SFAS 142. Major provisions of theseStatements and their effective dates for the Company are as follows: 

 

•      All business combinations initiated afterJune 30, 2001 must use the purchase method of accounting. The pooling of interestmethod of accounting is prohibited except for transactions initiated beforeJuly 1, 2001. 

•      Intangible assets acquired in a businesscombination must be recorded separately from goodwill if they arise fromcontractual or other legal rights or are separable from the acquired entity andcan be sold, transferred, licensed, rented or exchanged, either individually oras part of a related contract, asset or liability 

•      Goodwill, as well as intangible assetswith indefinite lives, acquired after June 30, 2001, will not beamortized.  Effective January 1, 2002,all previously recognized goodwill and intangible assets with indefinite liveswill no longer be subject to amortization.

•      Effective January 1, 2002, goodwill andintangible assets with indefinite lives will be tested for impairment annuallyand whenever there is an impairment indicator 

•      All acquired goodwill must be assigned toreporting units for purposes of impairment testing and segment reporting.

 

The Company will continue to amortize goodwill recognized prior to July1, 2001, under its current method until January 1, 2002, at which time annualand quarterly goodwill amortization of $2.0 million and  $0.5 million will no longer be recognized.  By December 31, 2002, the Company will havecompleted a transitional fair value based impairment test of goodwill as ofJanuary 1, 2002.   Impairment losses, ifany, resulting from the transitional testing will be recognized in the quarterended March 31, 2002 as a cumulative effect of a change in accountingprinciple.

 
****
**ITEM 2.****                  MANAGEMENT’S DISCUSSION ANDANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

 

THE FOLLOWINGMANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OFOPERATIONS CONTAINS FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF THEPRIVATE 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 THEBUSINESS OF FCG” IN THE COMPANY'S ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDEDDECEMBER 31, 2000, AND SUBSEQUENT REPORTS FILED WITH THE SECURITIES ANDEXCHANGE COMMISSION.  FCG’S ACTUALRESULTS COULD DIFFER MATERIALLY FROM THOSE ANTICIPATED IN THESE FORWARD-LOOKINGSTATEMENTS. 

 

**Overview**

** **

FCG provides services to payors, providers, governmentagencies, pharmaceutical, biogenetic, and life science companies, and otherhealthcare organizations in North America and Europe. FCG generatessubstantially all of its revenue from fees for professional services. FCGtypically bills for its services on an hourly, fixed-fee or monthly fixed-feebasis as specified by the agreement with a particular client. FCG establisheseither standard or target hourly rates for each level of consultant based onseveral factors including industry and assignment-related experience, technicalexpertise, skills and knowledge. For services billed on an hourly basis, feesare determined by multiplying the amount of time expended on each assignment bythe hourly rate for the consultant(s) assigned to the engagement. Fixed feesare established 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 consultants required to complete the assignment. Actual hourly orfixed fees for an assignment may vary from the standard, target, or historicalrates charged by FCG. For services billed on an hourly basis, FCG recognizesrevenue as services are performed. For services billed on a fixed fee basis, FCGrecognizes revenue using the percentage of completion method based either on 1)the amount of time completed on each assignment versus the projected number ofhours required to complete such assignment, or 2) the amount of cost incurredon the assignment versus the total projected cost to complete the assignment.Revenue is recorded as incurred at assignment rates net of unplannedadjustments for specific engagements. Unplanned adjustments to revenue arebooked at the time they are known. Out-of-pocket expenses are billed to andreimbursed by clients and offset against expenses incurred and are not includedin recognized revenues. Provisions are made for estimated uncollectible amountsbased on the Company’s experience. FCG may obtain payment in advance ofproviding services. These advances are recorded as deferred revenue andreflected as a liability on FCG's balance sheet.

 

Cost of services primarilyconsists of the salaries, bonuses and related benefits of client-servingconsultants and subcontractor expenses. General and administrative expensesprimarily consist of the costs attributable to the development of the businessand the support of the client-serving professionals, such as: non-billabletravel; office space occupancy; investments in FCG's information systems,research and practice support and quality initiatives; salaries and expensesfor executive management, financial, accounting and administrative personnel;expenses for firm and business unit governance meetings; recruiting fees andprofessional development and training; and marketing, legal and otherprofessional services. As associate related costs are relatively fixed,variations in FCG’s revenues and operating results can occur as a result ofvariations in billing margins and utilization rates of its billableassociates.  The Company routinelyreviews its fees for services, professional compensation and overhead costs toensure that its services and compensation are competitive within the industry.  In addition, FCG routinely monitors theprogress of client projects with its clients’ senior management. Quality ofService Questionnaires are sent to the client after each engagement with theresults compiled and reported to FCG executive management.FCG's most significant expenses are its human resource and related salary andbenefit expenses. As of September 30, 2001, approximately 52% or 968 of FCG's1,870 employees are consultants. Another 529 employees form the firm's outsourcing business.  The salaries and benefits of such billableconsultants and outsourcing related employees are recognized in FCG’s cost ofservices.  Non-billable employeesalaries and benefits are recognized as a component of general andadministrative expenses.  Approximately20%, or 373 employees are classified as non-billable. FCG's cost of services asa percentage of revenue is directly related to its consultant utilization,which is the ratio of total billable hours to available hours in a givenperiod, and the amount of cost recognized under percentage of completionaccounting. FCG manages consultant utilization by monitoring assignmentrequirements and timetables, available and required skills, and availableconsultant hours per week and per month. Differences in personnel utilizationrates can result from variations in the amount of non-billed time, which hashistorically consisted of training time, vacation and holiday time, time lostto illness and inclement weather and unassigned time. Non-billed time alsoincludes time devoted to other necessary and productive activities such assales support and interviewing prospective employees. Unassigned time resultsfrom differences in the timing of the completion of an existing assignment andthe beginning of a new assignment. In order to reduce and limit unassigned time,FCG actively manages personnel utilization by monitoring and projectingestimated engagement start and completion dates and matching consultantavailability with current and projected client requirements. The number ofconsultants 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 inwhich consultants are not optimally utilized. An unanticipated termination of asignificant assignment or an overall lengthening of the sales cycle couldresult in a higher than expected number of unassigned consultants and couldcause FCG to experience lower margins. In addition, the opening of new offices,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.

 

FCG's effective tax ratehas varied from period to period due to differences between book and taxdeductions associated with certain non-deductible operating expenses, includingcertain compensation expenses, goodwill amortization, and merger relatedactivities. 

 

**Results of operationsfor the three months ended September 2001 and 2000**

 

*Net Revenue*. The Company’s net revenue increased to $65.7 million for the quarterended September 30, 2001, an increase of 9.5% from $60.0 million for thequarter ended September 30, 2000.  Thisincrease was due to growth in outsourcing and life sciences revenues, partiallyoffset by a decline in the health plan market.

 

*Cost of Services*.  Cost of services remained constant at $40.5 million for thequarter ended September 30, 2001, compared to the quarter ended September 30,2000.  Cost of services as a percentageof revenue decreased to 61.6% for the quarter ended September 30, 2001 from67.6% for the quarter ended September 30, 2000, primarily due to an increase ingross margin in the life sciences area.*                Selling Expenses.* Selling expenses increased to $7.9 millionfor the quarter ended September 30, 2001, an increase of 2.1% from $7.7 millionfor the quarter ended September 30, 2000. Selling expenses as a percentage of revenue decreased to 12.0% for thequarter ended September 30, 2001 from 12.8% for quarter end September 30, 2000.

 

*General and Administrative Expenses.* General and administrative expenses decreasedto $15.6 million for the quarter ended September 30, 2001, a decrease of 9.2%from $17.2 million for the quarter ended September 30, 2000 due to costcontainment efforts. General and administrative expenses as a percentage ofrevenue decreased from 28.6% for the quarter ended September 30, 2000 to 23.7%for the quarter ended September 30, 2001, due to the reduction in costscombined with the leveraging effect of the higher level of revenue.

 

*Merger, Restructuring and Severance Costs. *Therewere no merger, restructuring, and severance costs for the quarter endedSeptember 30, 2001, while there were $5.5 million of such costs for the quarterended September 30, 2000.  Those costswere associated with separating approximately 60 employees, consolidating andresizing selected offices, and closing the European healthcare operations.

 

*Interest Income, Net.* Interest income, net ofinterest expense, decreased to $0.4 million for the quarter ended September 30,2001 from $0.5 million for the quarter ended September 30, 2000, primarily dueto lower interest rates on invested cash. Interest income net of interest expense as a percentage of revenuedecreased to 0.7% for the quarter ended September 30, 2001 from 0.8% for thequarter ended September 30, 2000.

 

*Other Income (Expense) Net.*  Other expense stayed constant at $0.2million for the quarter ended September 30, 2001 compared to the quarter endedSeptember 30, 2000.   

* *

*Income Taxes.*The benefit for income taxes of 42.0% in the quarter endedSeptember 30, 2001 was essentially constant compared to the 41.7% reported forthe quarter ended September 30, 2000.

 

**Results of operationsfor the nine months ended September 2001 and 2000**

 

*Net Revenue*. The Company’s net revenue increased to $202.2 million for the ninemonths ended September 30, 2001, an increase of 8.0% from $187.2 million forthe nine months ended September 30, 2000. This increase was primarily due to growth in outsourcing revenues.

 

*Cost of Services*.  Cost of services increased to $126.4 million for the nine monthsended September 30, 2001, an increase of 2.6% from $123.3 million for the ninemonths ended September 30, 2000.  Theincrease was attributable to an increase in the outsourcing staff related tothe increase in outsourcing revenue, partially offset by a decline in thenumber of consultants in the other business units.  Cost of services as a percentage of revenue decreased to 62.5%for the nine months ended September 30, 2001 from 65.9% for the nine monthsended September 30, 2000.  This decreasewas due to higher consultant utilization.

* *

*Selling Expenses.* Selling expenses increased to $23.9 million for the nine monthsended September 30, 2001, an increase of 3.9% from $23.0 million for the ninemonths ended September 30, 2000. Selling expenses as a percentage of revenue decreased slightly from12.3% for the nine months ended September 30, 2000 to 11.8% for the nine monthsended September 30, 2001.

 
**
*General and Administrative Expenses.* General andadministrative expenses decreased to $49.9 million for the nine months endedSeptember 30, 2001, a decrease of 5.6% from $52.8 million for the nine monthsended September 30, 2000, due to cost containment efforts. General andadministrative expenses as a percentage of revenue decreased from 28.2% for thenine months ended September 30, 2000 to 24.7% for the nine months endedSeptember 30, 2001, due to the reduction in costs combined with the leveragingeffect of the higher level of revenue.

 

*Merger, Restructuring and Severance Costs. *Merger, restructuring and severancecosts were $4.3 million for the nine months ended September 30, 2001 comparedto $9.2 million for the nine months ended September 30, 2000.  Merger, restructuring and severance costsfor the nine months ended September 30, 2001 included approximately $3.7million of severance costs related to a reduction in staff of approximately 145people with the remainder related to facility downsizing.  Merger, restructuring and severance costsfor the nine months ended September 30, 2000 consisted primarily of severancecosts related to a reduction in the U.S. workforce, costs for consolidating andresizing selected offices and costs associated with the closing of the Europeanhealthcare operations.

 

*Interest Income, Net. *Interest income, net of interest expense,decreased to $1.1 million for the nine months ended September 30, 2001 from$1.8 million for the nine months ended September 30, 2000, primarily due tolower interest rates on invested cash. Interest income net of interest expenseas a percentage of revenue decreased to 0.6% for the nine months endedSeptember 30, 2001 from 1.0% for the nine months ended September 30, 2000.

 

*Other Income (Expense), Net.*  Other expense increased to $0.4 million forthe nine months ended September 30, 2001 compared to $0.3 million for the ninemonths ended September 30, 2000.   

* *

*Income Taxes.* The benefit for income taxes of 42.0% for the nine months endedSeptember 30, 2001, increased slightly from the 40.0% reported for the ninemonths ended September 30, 2000.

 

**Liquidity and CapitalResources**

** **

During the ninemonths ended September 30, 2001, the Company generated cash flow fromoperations of $13.5 million.  During thenine months ended September 30, 2001, the Company used cash flow ofapproximately $2.7 million to purchase property and equipment, includingcomputer and related equipment and office furniture, while depreciation andamortization expense was approximately $6.2 million. At September 30, 2001, theCompany had cash and investments available for sale of $42.6 million comparedto $29.8 million at December 31, 2000.

 

The Company has arevolving line of credit, under which it is allowed to borrow up to $10.0million at an interest rate of the prevailing prime rate with an expirationdate of May 1, 2002.  There was nooutstanding balance under the line of credit at September 30, 2001.

 

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

 
****
**PART III****.  OTHER INFORMATION**

** **

**Item 1****.   Legal Proceedings.**

 

None.

 

**Item 2****.   Changes in Securities.**

** **

None.

 

**Item 3****.   Defaults Upon Senior Securities.**

** **

None.

 

**Item 4****.   Submission of Matters to a Vote of SecurityHolders.**

 

None.

 

**Item 5****.   Other Information.**

** **

*Change in Fiscal Year*- In November, 2001, FCG made a determination to change its fiscal year from acalendar year to a 52 or 53 week period ending on the last Friday ofDecember.  As a result, FCG's currentfiscal year will end on Friday, December 28, 2001.

 

**Item 6****.  Exhibits andReports 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.

 

(1)           Incorporated by reference to Exhibit3.1 to FCG's Form S-1 Registration Statement (No. 333-41121) originally filedon November 26, 1997 (the "Form S-1").   

 

(2)           Incorporated by reference to Exhibit99.1 to FCG’s Current Report on Form 8-K dated December 9, 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.

 

**SIGNATURES**

** **

Pursuant to the requirements of the Securities and Exchange Act of1934, the registrant has duly caused this report to be signed in its behalf bythe undersigned thereunto duly authorized.

 

 

FIRST CONSULTING GROUP, INC.

 

 

Date:  November 13, 2001

LUTHER J. NUSSBAUM

 

Luther J. Nussbaum Chairman and Chief Executive Officer

 

 

Date:  November 13, 2001

WALTER J. McBRIDE

 

Walter J. McBride Executive Vice President,  Practice Support and Chief Financial Officer (Principal Financial Officer)

 

**Exhibit Index**

 

**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.

27.1

 

Financial Data Schedule.

 

(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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