** **

**UNITEDSTATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,DC  20549**

 

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**FORM 10-Q**

 
| **(Mark  One)**                                                                                                                                                                                                            |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                                                                                                                                                                       |
| **ý**                                                                                                                                                                                                                 | **QUARTERLY REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|                                                                                                                                                                                                                       |
| **For the  quarterly period ended September 26, 2003**                                                                                                                                                                     |
|                                                                                                                                                                                                                       |
| **OR**                                                                                                                                                                                                                     |
|                                                                                                                                                                                                                       |   |
| **o**                                                                                                                                                                                                                      | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|                                                                                                                                                                                                                       |
| **For the  transition period  from               to               ** |
|                                                                                                                                                                                                                       |
| **Commission  File Number 0-23651**                                                                                                                                                                                        |
|                                                                                                                                                                                                                       |
|                                                                                                                                                                                                                            |
|                                                                                                                                                                                                                       |
| **First Consulting Group, Inc.**                                                                                                                                                                                           |
| (Exact name of registrant as specified in its charter)                                                                                                                                                                     |
|                                                                                                                                                                                                                       |
| **Delaware**                                                                                                                                                                                                               | **95-3539020** |
| (State or other jurisdiction of  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) has filed all reports required to be filed by Section 13 or 15(d) of theSecurities Exchange Act of 1934 during the preceding 12 months (or such shorterperiod that the registrant was required to file such reports), and (2) has beensubject to such filing requirements for the past 90 days.  Yes ý     Noo

 

Indicate bycheck mark whether the registrant is an accelerated filer (as defined in Rule12b-2 of the Exchange Act).  Yes ý  Noo

 

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** |   | **25,946,072**                    |
|------------------------------------|--------|-----------------------------------|
| (Class)                            |   | (Outstanding at October 24, 2003) |

 

 

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**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 |
|                              |   |
|                              | Consolidated Statements of Operations |
|                              |   |
|                              | Consolidated Statements of Cash Flows |
|                              |   |
|                              | Notes to  Consolidated Financial Statements |
|                              |
|                              | ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF  OPERATIONS |
|                              |   |
|                              | ITEM  3.  QUANTITATIVE AND QUALITATIVE  DISCLOSURES ABOUT MARKET RISKS |
|                              |   |
|                              | ITEM  4.  CONTROLS AND PROCEDURES |
|                              |   |
| 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**.  FINANCIAL INFORMATION

 

## **Item 1**. FinancialStatements and Notes (Unaudited)

 

**FirstConsulting Group, Inc. and Subsidiaries**

 

 

**Consolidated Balance Sheets**

**(inthousands, except share data)**

 

** **
|                                                                                                                                  |   | **September  26,********2003** |       | **December  27,********2002** |       |
|---------------------------------------------------------------------------------------------------------------------------------------|--------|--------------------------------|------------|-------------------------------|------------|
|                                                                                                                                  |   | **(unaudited)**                |       |                          | ** ** |
| **ASSETS**                                                                                                                            |   |                           |       |                          |       |
| Current assets:                                                                                                                       |   |                           | ** ** |                          | ** ** |
| Cash and cash equivalents                                                                                                             |   | $                              | 22,725     |                          | $          | 27,550 |   |
| Short-term investments                                                                                                                |   | 33,742                         |       | 38,796                        |       |
| Accounts receivable, less  allowance of $1,901 and $1,899 in the periodsended September 26, 2003 and December 27,  2002, respectively |   | 23,392                         |       | 36,889                        |       |
| Unbilled receivables                                                                                                                  |   | 14,927                         |       | 13,264                        |       |
| Deferred income taxes                                                                                                                 |   | 6,163                          |       | 6,198                         |       |
| Prepaid expenses and other  current assets                                                                                            |   | 1,894                          |       | 2,110                         |       |
| Total current assets                                                                                                                  |   | 102,843                        |       | 124,807                       |       |
|                                                                                                                                  |   |                           |       |                          |       |
| Notes receivable –  stockholders                                                                                                 |   | 594                            |       | 657                           |       |
| Long-term investments                                                                                                                 |   | 3,219                          |       | 2,200                         |       |
| Property and equipment:                                                                                                               |   |                           |       |                          |       |
| Furniture, equipment, and  leasehold improvements                                                                                     |   | 5,533                          |       | 7,505                         |       |
| Information systems  equipment                                                                                                        |   | 23,532                         |       | 21,123                        |       |
|                                                                                                                                  |   | 29,065                         |       | 28,628                        |       |
| Less accumulated depreciation  and amortization                                                                                       |   | 19,645                         |       | 20,104                        |       |
|                                                                                                                                  |   | 9,420                          |       | 8,524                         |       |
|                                                                                                                                  |   |                           |       |                          |       |
| Other assets:                                                                                                                         |   |                           |       |                          |       |
| Executive benefit trust                                                                                                               |   | 5,818                          |       | 6,059                         |       |
| Long-term account  receivable                                                                                                         |   | 6,189                          |       | 8,059                         |       |
| Deferred income taxes                                                                                                                 |   | 9,018                          |       | 3,147                         |       |
| Goodwill, net                                                                                                                         |   | 15,076                         |       | 3,282                         |       |
| Intangibles, net                                                                                                                      |   | 4,671                          |       | 214                           |       |
| Other                                                                                                                                 |   | 1,474                          |       | 360                           |       |
|                                                                                                                                  |   | 42,246                         |       | 21,121                        |       |
| Total assets                                                                                                                          |   | $                              | 158,322    |                          | $          | 157,309 |   |

 

The accompanying notes are an integral partof these financial statements.

 

3

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|                                                                                                                                                                             |   | **September  26,********2003** |       | **December  27,********2002** |       |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------------------------------|------------|-------------------------------|------------|
|                                                                                                                                                                             |   | **(unaudited)**                |       |                          | ** ** |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                                                                                    |   |                           |       |                          |       |
| Current liabilities:                                                                                                                                                             |   |                           | ** ** |                          | ** ** |
| Accounts payable                                                                                                                                                                 |   | $                              | 2,888      |                          | $          | 1,652 |   |
| Accrued liabilities                                                                                                                                                              |   | 16,935                         |       | 14,660                        |       |
| Accrued restructuring                                                                                                                                                            |   | 8,184                          |       | 7,578                         |       |
| Accrued vacation                                                                                                                                                                 |   | 7,208                          |       | 6,868                         |       |
| Accrued incentive  compensation                                                                                                                                                  |   | 2,081                          |       | 2,328                         |       |
| Customer advances                                                                                                                                                                |   | 6,714                          |       | 7,877                         |       |
| Total current liabilities                                                                                                                                                        |   | 44,010                         |       | 40,963                        |       |
| Non-current liabilities:                                                                                                                                                         |   |                           |       |                          |       |
| Supplemental executive  retirement plan                                                                                                                                          |   | 5,937                          |       | 6,351                         |       |
| Minority interest                                                                                                                                                                |   | 443                            |       | 2,023                         |       |
| Total non-current  liabilities                                                                                                                                                   |   | 6,380                          |       | 8,374                         |       |
| 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, 25,934,536 and 24,073,089 shares issued  and outstanding at September 26, 2003 and December 27, 2002, respectively |   | 26                             |       | 24                            |       |
| Additional paid-in capital                                                                                                                                                       |   | 101,791                        |       | 92,461                        |       |
| Retained earnings                                                                                                                                                                |   | 7,860                          |       | 17,853                        |       |
| Deferred  compensation-stock incentive agreements                                                                                                                                |   | (409                           | )          | (621                          | )          |
| Notes  receivable-stockholders                                                                                                                                                   |   | (732                           | )          | (1,076                        | )          |
| Accumulated other  comprehensive loss                                                                                                                                            |   | (604                           | )          | (669                          | )          |
| Total stockholders’ equity                                                                                                                                                  |   | 107,932                        |       | 107,972                       |       |
| Total liabilities and  stockholders’ equity                                                                                                                                 |   | $                              | 158,322    |                          | $          | 157,309 |   |

 

The accompanying notes are an integral partof these financial statements.

 

4

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**FirstConsulting Group, Inc. and Subsidiaries**

 

### **ConsolidatedStatements of Operations**

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

 
|                                                                                                    |   | **Three  Months Ended** |   | **Nine  Months Ended**  |   |
|---------------------------------------------------------------------------------------------------------|--------|-------------------------|--------|-------------------------|--------|
|                                                                                                    |   | **(unaudited)**         |   | **(unaudited)**         |   |
|                                                                                                    |   | **September  26, 2003** |   | **September  27, 2002** |   | **September  26, 2003** |   | **September  27, 2002** |   |
|                                                                                                    |   |                    |   |                    |   |   |   |   |   |
| Revenues before  reimbursements                                                                         |   | $                       | 65,849 |                    | $      | 69,606 |   | $ | 207,289 |   | $ | 199,081 |   |
| Reimbursements                                                                                          |   | 4,060                   |   | 3,487                   |   | 11,725 |   | 11,301 |   |
| Total revenues                                                                                          |   | 69,909                  |   | 73,093                  |   | 219,014 |   | 210,382 |   |
|                                                                                                    |   |                    |   |                    |   |   |   |   |   |
| Cost of services before  reimbursable expenses                                                          |   | 46,709                  |   | 45,762                  |   | 142,999 |   | 127,644 |   |
| Reimbursable expenses                                                                                   |   | 4,060                   |   | 3,487                   |   | 11,725 |   | 11,301 |   |
| Total cost of services                                                                                  |   | 50,769                  |   | 49,249                  |   | 154,724 |   | 138,945 |   |
|                                                                                                    |   |                    |   |                    |   |   |   |   |   |
| Gross profit                                                                                            |   | 19,140                  |   | 23,844                  |   | 64,290 |   | 71,437 |   |
|                                                                                                    |   |                    |   |                    |   |   |   |   |   |
| Selling expenses                                                                                        |   | 6,702                   |   | 7,079                   |   | 21,670 |   | 20,912 |   |
| General and administrative  expenses                                                                    |   | 15,326                  |   | 13,471                  |   | 46,501 |   | 42,953 |   |
| Restructuring, severance,  and impairment costs                                                         |   | 4,179                   |   | —                  |   | 8,093 |   | 7,818 |   |
| Income (loss) from  operations                                                                          |   | (7,067                  | )      | 3,294                   |   | (11,974 | ) | (246 | ) |
| Other income (expense):                                                                                 |   |                    |   |                    |   |   |   |   |   |
| Interest income, net                                                                                    |   | 232                     |   | 240                     |   | 760 |   | 692 |   |
| Other expense, net                                                                                      |   | (160                    | )      | (233                    | )      | (164 | ) | (340 | ) |
| Income (loss) before  income taxes and cumulative effect of change in accounting principle, net of  tax |   | (6,995                  | )      | 3,301                   |   | (11,378 | ) | 106 |   |
| Income tax (benefit)  expense                                                                           |   | (2,448                  | )      | 1,390                   |   | (3,982 | ) | 44 |   |
| Income (loss) before  cumulative effect of change in accounting principle, net of tax                   |   | (4,547                  | )      | 1,911                   |   | (7,396 | ) | 62 |   |
| Cumulative effect of  change in accounting principle, net of tax                                        |   | —                  |   | —                  |   | (2,597 | ) | — |   |
| Net income (loss)                                                                                       |   | $                       | (4,547 | )                       | $      | 1,911 |   | $ | (9,993 | ) | $ | 62 |   |
|                                                                                                    |   |                    |   |                    |   |   |   |   |   |
| Basic & diluted income  (loss) per share                                                            |   |                    |   |                    |   |   |   |   |   |
| Income (loss) before  cumulative effect of change in accounting principle, net of tax                   |   | $                       | (0.18  | )                       | $      | 0.08 |   | $ | (0.30 | ) | $ | 0.00 |   |
| Cumulative effect of  change in accounting principle, net of tax                                        |   | —                  |   | —                  |   | (0.10 | ) | — |   |
| Net income (loss)                                                                                       |   | $                       | (0.18  | )                       | $      | 0.08 |   | $ | (0.40 | ) | $ | 0.00 |   |
| Weighted average shares used  in computing:                                                             |   |                    |   |                    |   |   |   |   |   |
| Basic income (loss) per  share                                                                          |   | 24,944                  |   | 24,074                  |   | 24,752 |   | 23,976 |   |
| Diluted income (loss) per  share                                                                        |   | 24,944                  |   | 24,535                  |   | 24,752 |   | 24,826 |   |

 

The accompanying notes are an integral partof these financial statements.

 

5

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**FirstConsulting Group, Inc. and Subsidiaries**

 

### **ConsolidatedStatements of Cash Flows**

**(inthousands)**

** **
|                                                                                      |   | **Nine Months  Ended**         |   |
|-------------------------------------------------------------------------------------------|--------|--------------------------------|--------|
|                                                                                      |   | **(unaudited)**                |   |
|                                                                                      |   | **September  26,********2003** |   | **September  27,********2002** |   |
| Cash flows from operating  activities:                                                    |   |                           |   |   |   |
| Net income (loss):                                                                        |   | $                              | (9,993 | ) | $ | 62 |   |
| Adjustments to reconcile  net income (loss) to net cash provided by operating activities: |   |                           |   |   |   |
| Cumulative effect of change  in accounting principle, net of tax                          |   | 2,597                          |   | — |   |
| Depreciation and  amortization                                                            |   | 4,303                          |   | 3,890 |   |
| Goodwill impairment                                                                       |   | —                         |   | 2,143 |   |
| Provision for bad debts,  net of adjustments                                              |   | (20                            | )      | (379 | ) |
| Loss (gain) on sale of  assets                                                            |   | (15                            | )      | (4 | ) |
| Minority interest in net  income (loss) of subsidiaries                                   |   | 88                             |   | 405 |   |
| Compensation from stock  issuances                                                        |   | 128                            |   | 77 |   |
| Interest income on notes  receivable – stockholders                                  |   | (85                            | )      | (254 | ) |
| Changes in assets and  liabilities, excluding effect of acquisitions:                     |   |                           |   |   |   |
| Accounts receivable                                                                       |   | 14,714                         |   | 9,376 |   |
| Unbilled receivables                                                                      |   | (6,494                         | )      | (6,298 | ) |
| Prepaid expenses and other                                                                |   | 239                            |   | 230 |   |
| Long-term account  receivable                                                             |   | 1,230                          |   | 1,185 |   |
| Other assets                                                                              |   | (331                           | )      | (421 | ) |
| Accounts payable                                                                          |   | 1,146                          |   | 736 |   |
| Accrued liabilities                                                                       |   | 3,440                          |   | 2,942 |   |
| Accrued restructuring                                                                     |   | 717                            |   | 639 |   |
| Accrued vacation                                                                          |   | 268                            |   | 484 |   |
| Accrued incentive compensation                                                            |   | (247                           | )      | (2,406 | ) |
| Customer advances                                                                         |   | (1,223                         | )      | (47 | ) |
| Deferred income taxes                                                                     |   | (5,836                         | )      | 233 |   |
| Supplemental executive  retirement plan                                                   |   | (414                           | )      | 208 |   |
| Other                                                                                     |   | 335                            |   | 421 |   |
| Net cash provided by  operating activities:                                               |   | 4,547                          |   | 13,222 |   |
| Cash flows from investing  activities:                                                    |   |                           |   |   |   |
| Proceeds from sale/maturity  of investments                                               |   | 4,035                          |   | (321 | ) |
| Purchase of property and  equipment                                                       |   | (4,160                         | )      | (1,987 | ) |
| Acquisition of businesses,  net of cash acquired                                          |   | (11,155                        | )      | (2,656 | ) |
| Net cash used in investing  activities                                                    |   | (11,280                        | )      | (4,964 | ) |
| Cash flows from financing  activities:                                                    |   |                           |   |   |   |
| Proceeds from issuance of  capital stock, net                                             |   | 1,375                          |   | 2,158 |   |
| Proceeds from notes  receivable and tax loan payments                                     |   | 533                            |   | 211 |   |
| Net cash provided by  financing activities                                                |   | 1,908                          |   | 2,369 |   |
| Net change in cash and cash  equivalents                                                  |   | (4,825                         | )      | 10,627 |   |
| Cash and cash equivalents  at beginning of period                                         |   | 27,550                         |   | 32,499 |   |
| Cash and cash equivalents  at end of period                                               |   | $                              | 22,725 |   | $ | 43,126 |   |
|                                                                                      |   |                           |   |   |   |
| Cash paid during the period  for:                                                         |   |                           |   |   |   |
| Interest                                                                                  |   | $                              | 27     |   | $ | 32 |   |
| Income taxes                                                                              |   | $                              | 311    |   | $ | 956 |   |

 

The accompanying notes are an integral part of these financialstatements.

### ** **

6

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### **Notes**to Consolidated Financial Statements

 

**1.****                                     ****Accounting Policies**

 

*Basis ofPresentation*

 

The consolidated balance sheet of First Consulting Group, Inc. (the“Company”) at September 26, 2003 and consolidated statements of operations andconsolidated statements of cash flows for the periods ended September 26, 2003and September 27, 2002 are unaudited. These financial statements reflect all adjustments, consisting of onlynormal recurring adjustments, which, in the opinion of management, arenecessary to fairly present the financial position of the Company at September26, 2003, the results of operations for the three month and nine month periodsended September 26, 2003 and September 27, 2002 and the cash flows for the ninemonth periods ended September 26, 2003 and September 27, 2002.  The results of operations and cash flows forthe nine months ended September 26, 2003 are not necessarily indicative of theresults to be expected for the year ending December 26, 2003.  For more complete financial information,these financial statements should be read in conjunction with the auditedfinancial statements for the year ended December 27, 2002 included in theCompany’s Annual Report on Form 10-K.

 

*Principlesof Consolidation*

 

The consolidated financial statements include the accounts of FirstConsulting Group, Inc. and its subsidiaries. All material intercompany accounts and transactions have beeneliminated.

 

*Stock**-Based Compensation*

 

The Companyaccounts for stock-based employee compensation as prescribed by APB OpinionNo. 25, “Accounting for StockIssued to Employees,” and has adopted the disclosure provisions ofStatement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation”**(“SFAS No. 123”), and Statement of FinancialAccounting Standards No. 148, “Accountingfor Stock-Based Compensation – Transition and Disclosure – an amendment of SFASNo. 123”**(“SFAS No.148”).  SFAS No. 123 requires proforma disclosures of net income (loss) and net income (loss) per share as ifthe fair value based method of accounting for stock-based awards had beenapplied. Under the fair value based method, compensation cost is recorded basedon the value of the award at the grant date and is recognized over the serviceperiod.

 

The followingtable presents pro forma net income (loss) had compensation costs beendetermined on the fair value at the date of grant for awards under the plan inaccordance with SFAS No. 123 (in thousands, except per share data):

 
|                                                                                                                              |   | **Three  Months Ended** |   | **Nine  Months Ended**  |   |
|-----------------------------------------------------------------------------------------------------------------------------------|--------|-------------------------|--------|-------------------------|--------|
|                                                                                                                              |   | **September  26, 2003** |   | **September  27, 2002** |   | **September  26, 2003** |   | **September  27, 2002** |   |
| Net income (loss), as  reported                                                                                                   |   | $                       | (4,547 | )                       | $      | 1,911 |   | $ | (9,993 | ) | $ | 62 |   |
| Deduct: Total stock based  employee compensation expense determined under fair value method for all  awards, net of tax           |   | (274                    | )      | (477                    | )      | (1,676 | ) | (2,197 | ) |
| Pro forma net income  (loss)                                                                                                      |   | $                       | (4,821 | )                       | $      | 1,434 |   | $ | (11,669 | ) | $ | (2,135 | ) |
|                                                                                                                              |   |                    |   |                    |   |   |   |   |   |
| Basic & diluted income  (loss) per  share            As  reported |   | $                       | (0.18  | )                       | $      | 0.08 |   | $ | (0.40 | ) | $ | 0.00 |   |
| Pro forma                                                                                                                         |   | $                       | (0.19  | )                       | $      | 0.06 |   | $ | (0.47 | ) | $ | (0.09 | ) |

 

7

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*Basic andDiluted Net Income (Loss) Per Share*

 

Basic netincome (loss) per share is based upon the weighted average number of commonshares outstanding.  Diluted net incomeper share is based on the assumption that stock options were converted orexercised. Dilution is computed by applying the treasury stock method. Underthis method, options are assumed to be exercised at the beginning of the period(or at the time of issuance, if later), and as if funds obtained thereby wereused to purchase common stock at the average market price during the period.Stock options are not considered when computing diluted net loss per share asthey are considered anti-dilutive.

 

The following represents a reconciliation of basic and diluted netincome (loss) per share for the three month and nine month periods endedSeptember 26, 2003 and September 27, 2002 (in thousands, except per sharedata):

 
|                                                             |   | **Three  Months Ended** |   | **Nine  Months Ended**  |   |
|------------------------------------------------------------------|--------|-------------------------|--------|-------------------------|--------|
|                                                             |   | **September  26, 2003** |   | **September  27, 2002** |   | **September  26, 2003** |   | **September  27, 2002** |   |
|                                                             |   |                    |   |                    |   |   |   |   |   |
| Income (loss) before  cumulative effect, net of tax              |   | $                       | (4,547 | )                       | $      | 1,911 |   | $ | (7,396 | ) | $ | 62 |   |
| Cumulative effect of  change in accounting principle, net of tax |   | —                  |   | —                  |   | 2,597 |   | — |   |
| Net income (loss)                                                |   | $                       | (4,547 | )                       | $      | 1,911 |   | $ | (9,993 | ) | $ | 62 |   |
|                                                             |   |                    |   |                    |   |   |   |   |   |
| Basic & diluted income  (loss) per share:                    |   |                    |   |                    |   |   |   |   |   |
| Income (loss) before  cumulative effect, net of tax              |   | $                       | (0.18  | )                       | $      | 0.08 |   | $ | (0.30 | ) | $ | 0.00 |   |
| Cumulative effect of  change in accounting principle, net of tax |   | —                  |   | —                  |   | (0.10 | ) | — |   |
| Net income (loss) per share                                      |   | $                       | (0.18  | )                       | $      | 0.08 |   | $ | (0.40 | ) | $ | 0.00 |   |
|                                                             |   |                    |   |                    |   |   |   |   |   |
| Basic weighted number of  shares outstanding                     |   | 24,944                  |   | 24,074                  |   | 24,752 |   | 23,976 |   |
| Effect of dilutive options  and warrants                         |   | —                  |   | 461                     |   | — |   | 850 |   |
| Diluted weighted number of  shares outstanding                   |   | 24,944                  |   | 24,535                  |   | 24,752 |   | 24,826 |   |

 

 

*Use ofEstimates*

* *

In preparing financial statements inconformity with accounting principles generally accepted in the United States,management is required to make estimates and assumptions that affect thereported amounts of assets and liabilities, the disclosure of contingent assetsand liabilities at the date of the financial statements, and the reportedamounts of revenues and expenses during the reporting period. Actual resultscould differ from those estimates.  Onan on-going basis, the Company evaluates its estimates, including those relatedto revenue recognition, valuation of goodwill and long-lived and intangibleassets, accrued liabilities, income taxes including the potential need for atax asset valuation allowance, restructuring costs, litigation and disputes,and the allowance for doubtful accounts. The Company uses significant estimates in the calculation of its incometax benefit by estimating that it will have sufficient future taxable income torealize its deferred tax assets in full and does not need to record a valuationallowance at this time.  However, there canbe no assurances that the Company’s taxable income will be sufficient torealize such deferred tax assets and the Company will continue to evaluate thepotential need for a valuation allowance on an ongoing basis.

 

8

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The Companybases its estimates on historical experience and on various other assumptionsthat are believed to be reasonable under the circumstances, the results ofwhich form the basis for making judgments about the carrying values of assetsand liabilities that are not readily apparent from other sources.  The Company’s actual results may differ fromits estimates.

* *

*RecentAccounting Pronouncement*

 

In June 2002,the Financial Accounting Standards Board (“FASB”) issued SFAS No. 146,“Accounting for Costs Associated with Exit or Disposal Activities.”  SFAS No. 146 addresses accounting andreporting costs associated with exit or disposal activities and nullifiesEmerging Issues Task Force (EITF) Issue 94-3, “Liability Recognition forCertain Employee Termination Benefits and Other Costs to Exit anActivity.”  SFAS No. 146 requires that aliability for a cost associated with an exit or disposal activity shall berecognized and measured initially at its fair value in the period that theliability is incurred.  SFAS No. 146 iseffective for exit or disposal activities that are initiated after December 31,2002.  SFAS No. 146 affected the Company’srestructuring charges in the second and third quarters of fiscal year 2003, asit accrued only severance related to employees terminated during the quarter,and not any severance related to planned future actions.  As a result, the Company will recordadditional severance costs as incurred in the fourth quarter of 2003.

 

In November 2002, the EITF reached aconsensus on Issue 00-21, titled “Accounting for Revenue Arrangements withMultiple Deliverables,” which addresses how to account for arrangements thatinvolve the delivery or performance of multiple products, services, and/orrights to use assets.  Revenuearrangements with multiple deliverables are divided into separate units ofaccounting if the deliverables in the arrangement meet the following criteria:(1) the delivered item has value to the customer on a standalone basis;(2) there is objective and reliable evidence of the fair value ofundelivered items; and (3) delivery of any undelivered item is probable.  Arrangement consideration should beallocated among the separate units of accounting based on their relative fairvalues, with the amount allocated to the delivered item being limited to theamount that is not contingent on the delivery of additional items or meetingother specified performance conditions. The new standard was required to be adopted for all new applicablerevenue arrangements no later than the third quarter of 2003.  Early adoption was permitted and the Companyadopted the new standard as of the beginning of 2003.  In addition, the Company adopted the new standard to all existingoutsourcing arrangements impacted by EITF 00-21 and recorded the resultingcumulative effect as a change in accounting principle.  The non-cash charge, net of tax, was $2.6million, or $0.11 per share, which was recorded in the first quarter of2003.  At September 26, 2003, the pershare charge equates to $0.10 due to the increase in the number of sharesoutstanding.

 

In November 2002, the FASB issuedInterpretation No. 45 (“FIN 45”), “Guarantor’s Accounting and DisclosureRequirements for Guarantees, Including Indirect Guarantees and Indebtedness ofOthers.” FIN 45 elaborates on the disclosures to be made by the guarantor inits interim and annual financial statements about its obligations under certainguarantees that it has issued.  It alsorequires that a guarantor recognize, at the inception of a guarantee, aliability for the fair value of the obligation undertaken in issuing theguarantee. The initial recognition and measurement provisions of thisinterpretation are applicable on a prospective basis to guarantees issued ormodified after December 31, 2002; while the provisions of the disclosurerequirements are effective for financial statements of interim or annualreports ending after December 15, 2002. At September 26, 2003, the Company had no guarantees outstanding.

 

In December 2002, the FASB issued SFASNo. 148, “Accounting for Stock-Based Compensation-Transition andDisclosure.” SFAS No. 148 amends SFAS No. 123, “Stock-Based Compensation,”to provide alternative methods of transition for a voluntary change to the fairvalue based method of accounting for stock-based employee compensation. Inaddition, SFAS No. 148 amends the

 

9

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disclosure requirements of SFAS No. 123 to require prominentdisclosures in both annual and interim financial statements about the method ofaccounting for stock-based employee compensation and the effect of the methodused on reported results.  Thedisclosure provisions of SFAS No. 148 are effective for fiscal years endingafter December 15, 2002.  At thistime, the Company intends to continue to account for stock-based compensationto its associates using the methods prescribed by Accounting PrinciplesBulletin (APB) Opinion No. 25, and related interpretations.  The Company has made certain disclosuresrequired by SFAS No. 148 in our Notes to Consolidated Financial Statements.

 

In January 2003, the FASB issuedInterpretation No. 46, “Consolidation of Variable Interest Entities” (“FIN 46”)which changes the criteria by which one company includes another entity in itsconsolidated financial statements. FIN 46 requires a variable interest entityto be consolidated by a company if that company is subject to a majority of therisk of loss from the variable interest entity’s activities or entitled toreceive a majority of the entity’s residual returns or both. The consolidationrequirements of FIN 46 apply immediately to variable interest entities createdafter January 31, 2003, and apply in the first fiscal period beginning afterJune 15, 2003, for variable interest entities created prior to February 1,2003.  The Company has not entered intoany transactions or other arrangements which it believes would be consideredvariable interest entities.

 

In May 2003, the FASB issued SFASNo. 150, “Accounting for Certain Financial Instruments with Characteristics ofboth Liabilities and Equity.”  SFAS No.150 establishes standards for how an issuer classifies and measures certainfinancial instruments with characteristics of both liabilities and equity.  It requires that an issuer classify afinancial instrument that is within its scope as a liability (or an asset insome circumstances).  Many of theseinstruments were previously classified as equity.  The guidance in SFAS No. 150 is generally effective for allfinancial instruments entered into or modified after May 31, 2003, andotherwise is effective at the beginning of the first interim period beginningafter June 15, 2003.  The Company doesnot believe that the adoption of SFAS No. 150 will have a material impact onits consolidated financial statements.

 

**2.****                                     ****Investments**

 

For purposes of reporting, cash and cash equivalents include cash andinterest-earning deposits or securities with original maturities of threemonths or less.  At September 26, 2003,the Company has approximately $33.7 million in short-term investments and $2.0million of long-term investments classified as available for sale.  Such investments are currently held primarilyin commercial paper, money market investments, and tax-exempt governmentsecurities.  Net unrealized gains andlosses on investments were not material at September 26, 2003.  Additionally, the Company has $1.2 millionof non-marketable equity investments, valued at the lower of cost or estimatedfair value, which are included in long-term investments.

 

**3.****                                     ****Long-Term Account Receivable**

 

At September 26, 2003, the Company carried a long-term accountreceivable of approximately $6.2 million from a single client.  The receivable relates to a majoroutsourcing contract and will be collected over the next three years.

 

**4.****                                     ****Business Acquisitions**

 

Businessesacquired through September 26, 2003, were accounted for in accordance with SFASNo. 141 (Business Combinations) and are included in the consolidated financialstatements from the date of acquisition. Pro forma results of operations have not been presented because theeffects of these acquisitions were not material on either an individual oraggregate basis.

 

10

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**ParagonSolutions, Inc.**

 

On February 12, 2003, the Company acquired100% of Paragon Solutions, Inc., a U.S. based provider of onshore and offshoresoftware development services which is now part of the life sciences segment.The Company initially issued 600,500 unregistered shares of common stock andpaid cash consideration of approximately $0.2 million to Paragon shareholderswho elected cash payment.  Since theacquisition, the Company has recovered 39,285 shares of its unregistered commonstock from an escrow account to compensate it for certain undisclosedliabilities and expenses of Paragon. The Company also agreed to reserve an additional 49,540 shares of itscommon stock for issuance upon the exercise of options that were initiallyissued under Paragon’s stock incentive plans. Based upon a purchase price allocation analysis performed by anindependent outside appraisal firm, intangible assets of approximately $1.0million, related to contracts and agreements not to compete, and goodwill ofapproximately $8.3 million have been recorded. In connection with the acquisition, the Company immediately repaid $7.7million of debt assumed from Paragon. Additionally, the Company acquired approximately $0.4 million of cash aspart of the acquisition.

 

The followingtable summarizes the estimated fair values of assets acquired and liabilitiesassumed as of February 12, 2003 in connection with the Paragon acquisition (inthousands):

 

| Accounts receivable              |   | $      | 996    |   |
|----------------------------------|--------|--------|--------|--------|
| Other assets                     |   | 1,212  |   |
| Property and equipment,  net     |   | 1,096  |   |
| Goodwill                         |   | 8,287  |   |
| Intangible assets                |   | 990    |   |
| Accrued liabilities              |   | (1,543 | )      |
| Assumed debt including  interest |   | (7,695 | )      |
| Net assets acquired              |   | 3,343  |   |
| Value of stock issued            |   | 3,057  |   |
| Cash consideration               |   | $      | 286    |   |

 

**PhyveCorporation**

 

On February20, 2003, the Company acquired the information security and connectivitysoftware solution operations of Phyve Corporation for $1.4 million incash.  The following table summarizesthe estimated fair values of assets acquired in connection with thisacquisition (in thousands):

 

| Intangible software          |   | $   | 736    |   |
|------------------------------|--------|-----|--------|--------|
| Property and equipment,  net |   | 229 |   |
| Goodwill                     |   | 387 |   |
| Cash consideration           |   | $   | 1,352  |   |

 

**CoactiveSystems Corporation**

 

On May 30, 2003, the Company acquired 100% of Coactive SystemsCorporation (Coactive) as an entry into the Business Process Outsourcingmarket.  Coactive provides call centerservices and builds software customized for hospitals, health plans, and otherhealthcare organizations.  The Companypaid $0.6 million in cash to the shareholders of Coactive in the merger.  In connection with the acquisition, theCompany immediately repaid $1.5 million of debt assumed from Coactive.

 

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The followingtable summarizes the estimated fair values of assets acquired and liabilitiesassumed as of May 30, 2003 in connection with the Coactive acquisition (inthousands):

 

| Accounts receivable, net         |   | $      | 201    |   |
|----------------------------------|--------|--------|--------|--------|
| Intangible software              |   | 441    |   |
| Other assets                     |   | 218    |   |
| Property and equipment,  net     |   | 106    |   |
| Goodwill                         |   | 1,413  |   |
| Accrued liabilities              |   | (226   | )      |
| Assumed debt including  interest |   | (1,523 | )      |
| Cash consideration               |   | $      | 630    |   |

 

 

**MinorityInterest Buy-out**

 

On September 17, 2003, the Company acquired the 4.9% outstandingminority interest of FCG Management Services (FCGMS) from the University ofPennsylvania Health Systems (UPHS) for $1.86 million in cash.  Since the minority interest had been subjectto a put and call arrangement, the Company had been accounting for it as asales incentive and amortizing it over the life of the UPHS contract term as areduction of revenues in accordancewith EITF 01-9, “Accounting for Consideration Given by a Vendor to a Customer”.  Since the put and call arrangement wasextinguished early by the agreement of the parties, the unamortized amount of$0.6 million was recorded as a reduction of revenue in the third quarter of2003.

 

On September 26, 2003, the Company acquired the 15.0% outstandingminority interest of FCGMS from New York Presbyterian Hospital (NYPH).  The transaction was accounted for as apurchase of minority interest in accordance with SFAS No. 141 “BusinessCombinations” in the third quarter of 2003. In consideration for NYPH’s 15.0% interest in FCGMS, the Company issued1,000,000 unregistered shares of its common stock.  Based upon a preliminary purchase price allocation,goodwill of approximately $1.8 million and intangible assets of $2.7 millionhave been recorded.  Due to the recentclosing date of the buyout, the purchase price allocations are tentative andsubject to final purchase price valuation analysis.

 

As a result of the two transactions notedabove, the Company now owns 100% of FCGMS.

 

**5.****                                     ****Goodwill and Intangible Assets**

 

In accordance with SFAS No. 142, theCompany annually evaluates in the fourth fiscal quarter goodwill and intangibleassets for impairment, as well as the related amortization periods forintangibles with definite lives, to determine whether adjustments to theseamounts or estimated useful lives are required based on current events andcircumstances.  The evaluation is basedon the Company’s projection of the future operating cash flows of theunderlying assets combined with market valuation approaches. Significantestimates and assumptions were used in assessing the fair value of reportingunits.  These estimates and assumptionsincluded future cash flows, growth rates, discount rates, weighted average costof capital, and estimates of market valuation for each of the reporting units.

 

12

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The changes in the net carrying amounts of goodwill for the nine monthsended September 26, 2003 are as follows (in thousands):

 
|                                     |   | **Healthcare** |   | **Life  Sciences** |   | **Outsourcing** |   | **Total** |   |
|------------------------------------------|--------|----------------|--------|--------------------|--------|-----------------|--------|-----------|--------|
| Balance as of December 27,  2002         |   | $              | 827    |               | $      | 1,468           |   | $         | 987    |   | $ | 3,282 |   |
| Acquired                                 |   | —         |   | 10,193             |   | 430             |   | 10,623    |   |
| Currency translation  adjustment         |   | —         |   | (7                 | )      | —          |   | (7        | )      |
| Balance as of March 28,  2003            |   | 827            |   | 11,654             |   | 1,417           |   | 13,898    |   |
| Acquired                                 |   | —         |   | —             |   | 1,370           |   | 1,370     |   |
| Adjustment to purchase  price allocation |   | —         |   | (916               | )      | (200            | )      | (1,116    | )      |
| Currency translation  adjustment         |   | —         |   | 15                 |   | —          |   | 15        |   |
| Balance as of June 27,  2003             |   | 827            |   | 10,753             |   | 2,587           |   | 14,167    |   |
| Acquired                                 |   | —         |   | —             |   | 1,905           |   | 1,905     |   |
| Adjustment to purchase  price allocation |   | —         |   | (990               | )      | —          |   | (990      | )      |
| Currency translation adjustment          |   | —         |   | (6                 | )      | —          |   | (6        | )      |
| Balance as of September  26, 2003        |   | $              | 827    |               | $      | 9,757           |   | $         | 4,492  |   | $ | 15,076 |   |

 

As of September 26, 2003,the Company had the following acquired intangible assets recorded (inthousands):

 
| **Amortized Intangible Assets** |   | **Gross  Carrying  Amount** |   | **Accumulated  Amortization** |   | **Net********Carrying  Amount** |   | **Amortization********Period in********Years** |   |
|---------------------------------|--------|-----------------------------|--------|-------------------------------|--------|---------------------------------|--------|------------------------------------------------|--------|
| Software                        |   | $                           | 736    |                          | $      | (234                            | )      | $                                              | 502    |   | 2 |   |
| Customer based                  |   | 3,841                       |   | (289                          | )      | 3,552                           |   | 3 - 4                                          |   |
| Non-compete agreements          |   | 400                         |   | (180                          | )      | 220                             |   | 2 - 3                                          |   |
| Software development            |   | 441                         |   | (44                           | )      | 397                             |   | 2                                              |   |
| Total                           |   | $                           | 5,418  |                          | $      | (747                            | )      | $                                              | 4,671  |   |   |   |

 

The following tablesummarizes the estimated annual pretax amortization expense for these assets(in thousands):

 

| **Fiscal Year** |   |   | ** ** |
|-----------------|--------|--------|------------|
| 2003            |   | $      | 1,080      |   |
| 2004            |   | 1,697  |       |
| 2005            |   | 1,127  |       |
| 2006            |   | 884    |       |
| 2007            |   | 540    |       |
| Total           |   | $      | 5,328      |   |

 

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**6.****                                     ****Restructuring, Severance, and Impairment Costs**

 

In the second quarter of 2002, the Companyincurred a restructuring charge of $7.8 million consisting of $4.0 million inseverance for the reduction of staff and $3.8 million in facility costs due tofacility downsizing.  At September 26,2003, there was a balance of $4.9 million which primarily relates to vacatedleases remaining from this and previous restructurings.  The restructuring was accounted for inaccordance with EITF 94-3 and SAB 100.

 

In the second quarter of 2003, the Company incurred a restructuringcharge of $3.9 million consisting of $0.7 million in severance for thereduction of staff and $3.2 million in facility costs and fixed assetwrite-downs due to facility downsizing. At September 26, 2003, there was a balance of $1.7 million of accruedliabilities which primarily relates to vacated leases remaining from thisrestructuring.  Due to these facilitiesbeing located in the same premises of prior vacated facilities and theinterdependency of subleasing one or more areas, the separate calculation ofwhat portion of the charge relates to newly versus previously vacated space issubjective, and therefore not presented. Payments on lease obligations are scheduled to continue until 2008.  Market conditions and the ability tosublease these properties may affect the ultimate charge related to the leaseobligations.  Any potential recovery oradditional charge may affect amounts reported in future periods.

 

In the third quarter of 2003, the Companyincurred a restructuring charge of $4.2 million consisting of $3.6 million inseverance for the reduction of staff and $0.6 million in facility costs andfixed asset write-downs due to facility downsizing.  The $3.6 million severance charge represents 77 employeesterminated during the quarter ended September 26, 2003.  The unpaid portion in the amount of $1.1million relating to this charge will be paid in the fourth quarter of2003.  The facility costs and fixedasset write-down of $0.6 million includes a charge for newly vacatedfacilities.  Restructuring charges in2003 have been accounted for in accordance with SFAS 146.

 

The restructuring liabilityfor the nine months ended September 26, 2003 is summarized as follows (inthousands):

 
|                                   |   | **Employee  Related Costs** |   | **Facilities/Other  Related Costs** |   | **Total** |   |
|----------------------------------------|--------|-----------------------------|--------|-------------------------------------|--------|-----------|--------|
| Reserve  balance at December 27, 2002  |   | $                           | 1,093  |                                | $      | 6,485     |   | $ | 7,578 |   |
| Amounts  paid, net of adjustments      |   | (4,296                      | )      | (3,191                              | )      | (7,487    | )      |
| Restructuring  charge                  |   | 4,302                       |   | 3,791                               |   | 8,093     |   |
| Reserve  balance at September 26, 2003 |   | $                           | 1,099  |                                | $      | 7,085     |   | $ | 8,184 |   |

 

**7.****                                     ****Comprehensive Income (Loss)**

 

Comprehensive income (loss),net of taxes, for the three months and nine months ended September 26, 2003 andSeptember 27, 2002 is as follows (in thousands):

 
|                                                 |   | **Three  Months Ended**        |   | **Nine  Months Ended**         |   |
|------------------------------------------------------|--------|--------------------------------|--------|--------------------------------|--------|
|                                                 |   | **September  26,********2003** |   | **September  27,********2002** |   | **September  26,********2003** |   | **September  27,********2002** |   |
| Net income (loss)                                    |   | $                              | (4,547 | )                              | $      | 1,911 |   | $ | (9,993 | ) | $ | 62 |   |
| Foreign currency  translation adjustment, net of tax |   | (82                            | )      | 188                            |   | 23 |   | 198 |   |
| Unrealized gain (loss) on  investments               |   | 6                              |   | 9                              |   | 42 |   | (16 | ) |
| Comprehensive income  (loss)                         |   | $                              | (4,623 | )                              | $      | 2,108 |   | $ | (9,928 | ) | $ | 244 |   |

 

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**8.****                                     ****Cumulative Effect ofChange in Accounting Principle**

 

EffectiveDecember 28, 2002, the Company adopted EITF 00-21 “Accounting for RevenueArrangements with Multiple Deliverables,” which addresses how to account forarrangements that involve the delivery or performance of multiple products,services, and/or rights to use assets. Revenue arrangements with multiple deliverables are divided intoseparate units of accounting if the deliverables in the arrangement meet thefollowing criteria: (1) the delivered item has value to the customer on astandalone basis; (2) there is objective and reliable evidence of the fairvalue of undelivered items; and (3) delivery of any undelivered item isprobable.  Arrangement considerationshould be allocated among the separate units of accounting based on theirrelative fair values, with the amount allocated to the delivered item beinglimited to the amount that is not contingent on the delivery of additionalitems or meeting other specified performance conditions.  The new standard is required to be adoptedfor all new applicable revenue arrangements no later than the third quarter of2003.  Early adoption is permitted andthe Company adopted the new standard as of the beginning of the first quarterof 2003.  In addition, the Company haselected to apply the new standard to all existing outsourcing arrangementsimpacted by EITF 00-21 and record to earnings the resulting cumulative effectas a change in accounting principle. The adoption of EITF 00-21 resulted in a non-cash charge, net of tax, of$2.6 million, or $0.11 per share, in the first quarter of 2003.  At September 26, 2003, the per share chargeequates to $0.10 due to the increase in the number of shares outstanding.

 

The followingtable illustrates the effect on net income (loss) and income (loss) per shareas if the change in accounting principle had been adopted in prior periods (inthousands, except per share data):

 
|                                                            |   | **Three  Months Ended** |   | **Nine  Months Ended**  |   |
|-----------------------------------------------------------------|--------|-------------------------|--------|-------------------------|--------|
|                                                            |   | **September  26, 2003** |   | **September  27, 2002** |   | **September  26, 2003** |   | **September  27, 2002** |   |
| Income (loss) before  cumulative effect, as reported            |   | $                       | (4,547 | )                       | $      | 1,911 |   | $ | (7,396 | ) | $ | 62 |   |
| Pro forma effect of change  in accounting principle, net of tax |   | —                  |   | (50                     | )      | — |   | (1,059 | ) |
| Pro forma net income  (loss)                                    |   | $                       | (4,547 | )                       | $      | 1,861 |   | $ | (7,396 | ) | $ | (997 | ) |
|                                                            |   |                    |   |                    |   |   |   |   |   |
| Basic & diluted net  income (loss) per share                |   |                    |   |                    |   |   |   |   |   |
| Income (loss) before  cumulative effect – as reported      |   | $                       | (0.18  | )                       | $      | 0.08 |   | $ | (0.30 | ) | $ | 0.00 |   |
| Pro forma effect of change  in accounting principle, net of tax |   | —                  |   | $                       | 0.00   |   | — |   | $ | (0.04 | ) |
| Pro forma net income  (loss) per share                          |   | $                       | (0.18  | )                       | $      | 0.08 |   | $ | (0.30 | ) | $ | (0.04 | ) |

 

 

**9.****                                     ****Disclosure of Segment Information**

 

The Companycurrently has three reportable operating segments:  healthcare (which is the delivery of consulting and systems integration(“CSI”) services to health delivery, health plan, and government clients), lifesciences (which is the delivery of CSI services to pharmaceutical and otherlife sciences clients), and outsourcing (which is the delivery of informationtechnology and business process outsourcing services to clients).  The Company’s segments are managed on anintegrated basis in order to serve clients by assembling multi-disciplinaryteams, which provide comprehensive services. The amount of revenues attributed to each segment is accounted for bysplitting the revenues on each client engagement based upon the hourly ratescharged to the client for the services of each segment.  Costs are not transferred across segments.

 

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The Company evaluates its segments’performance based on revenues and operating income.  Selling and general and administrative expenses (includingcorporate functions, occupancy related costs, depreciation, professionaldevelopment, recruiting, and marketing), to some extent, are managed at thecorporate level and allocated to each operating segment based on either netrevenues, actual usage, or other reasonable allocation methods.  Total assets have not been disclosed bysegment as the allocation of assets by segment is not practical.

 

The followingsegment information is for the three month and nine month periods endedSeptember 26, 2003 and September 27, 2002 (in thousands):

 

**For the three months ended September 26, 2003:**

** **
|                                            |   | **Healthcare** |   | **Life  Sciences** |   | **Outsourcing** |   | **Other** |       | **Totals** |       |
|-------------------------------------------------|--------|----------------|--------|--------------------|--------|-----------------|--------|-----------|------------|------------|------------|
| Revenues  before reimbursements                 |   | $              | 28,667 |               | $      | 12,162          |   | $         | 25,020     |       | $          | — | ** ** | **$** | **65,849** | ** ** |
| Reimbursements                                  |   | 3,323          |   | 336                |   | 401             |   | —    | ** ** | **4,060**  | ** ** |
| Total  revenues                                 |   | 31,990         |   | 12,498             |   | 25,421          |   | —    | ** ** | **69,909** | ** ** |
| Cost  of services before reimbursable expenses  |   | 16,995         |   | 8,597              |   | 21,117          |   | —    | ** ** | **46,709** | ** ** |
| Reimbursable  expenses                          |   | 3,323          |   | 336                |   | 401             |   | —    | ** ** | **4,060**  | ** ** |
| Total  cost of services                         |   | 20,318         |   | 8,933              |   | 21,518          |   | —    | ** ** | **50,769** | ** ** |
| Gross  profit                                   |   | 11,672         |   | 3,565              |   | 3,903           |   | —    | ** ** | **19,140** | ** ** |
| Selling  expenses                               |   | 3,736          |   | 2,387              |   | 389             |   | 190       | ** ** | **6,702**  | ** ** |
| General  & administrative expenses          |   | 6,213          |   | 5,363              |   | 3,576           |   | 174       | ** ** | **15,326** | ** ** |
| Restructuring,  severance, and impairment costs |   | 634            |   | 2,295              |   | —          |   | 1,250     | ** ** | **4,179**  | ** ** |
| Income  (loss) from operations                  |   | $              | 1,089  |               | $      | (6,480          | )      | $         | (62        | )          | $          | (1,614 | ) | **$** | **(7,067** | **)** |

 

**For the threemonths ended September 27, 2002:**

 
|                                            |   | **Healthcare** |   | **Life  Sciences** |   | **Outsourcing** |   | **Other** |       | **Totals** |       |
|-------------------------------------------------|--------|----------------|--------|--------------------|--------|-----------------|--------|-----------|------------|------------|------------|
| Revenues  before reimbursements                 |   | $              | 26,699 |               | $      | 16,382          |   | $         | 26,525     |       | $          | — | ** ** | **$** | **69,606** | ** ** |
| Reimbursements                                  |   | 3,027          |   | 414                |   | 46              |   | —    | ** ** | **3,487**  | ** ** |
| Total  revenues                                 |   | 29,726         |   | 16,796             |   | 26,571          |   | —    | ** ** | **73,093** | ** ** |
| Cost  of services before reimbursable expenses  |   | 15,237         |   | 8,847              |   | 21,678          |   | —    | ** ** | **45,762** | ** ** |
| Reimbursable  expenses                          |   | 3,027          |   | 414                |   | 46              |   | —    | ** ** | **3,487**  | ** ** |
| Total  cost of services                         |   | 18,264         |   | 9,261              |   | 21,724          |   | —    | ** ** | **49,249** | ** ** |
| Gross  profit                                   |   | 11,462         |   | 7,535              |   | 4,847           |   | —    | ** ** | **23,844** | ** ** |
| Selling  expenses                               |   | 3,735          |   | 2,377              |   | 919             |   | 48        | ** ** | **7,079**  | ** ** |
| General  & administrative expenses          |   | 5,955          |   | 4,703              |   | 2,587           |   | 226       | ** ** | **13,471** | ** ** |
| Restructuring,  severance, and impairment costs |   | —         |   | —             |   | —          |   | —    |       | —     |       |
| Income  (loss) from operations                  |   | $              | 1,772  |               | $      | 455             |   | $         | 1,341      |       | $          | (274 | ) | **$** | **3,294** | ** ** |

 

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**For the nine months ended September 26, 2003:**

** **
|                                            |   | **Healthcare** |   | **Life  Sciences** |   | **Outsourcing** |   | **Other** |       | **Totals**  |       |
|-------------------------------------------------|--------|----------------|--------|--------------------|--------|-----------------|--------|-----------|------------|-------------|------------|
| Revenues  before reimbursements                 |   | $              | 86,554 |               | $      | 45,135          |   | $         | 75,600     |        | $          | — | ** ** | **$** | **207,289** | ** ** |
| Reimbursements                                  |   | 9,490          |   | 1,069              |   | 1,166           |   | —    | ** ** | **11,725**  | ** ** |
| Total  revenues                                 |   | 96,044         |   | 46,204             |   | 76,766          |   | —    | ** ** | **219,014** | ** ** |
| Cost  of services before reimbursable expenses  |   | 50,611         |   | 27,802             |   | 64,586          |   | —    | ** ** | **142,999** | ** ** |
| Reimbursable  expenses                          |   | 9,490          |   | 1,069              |   | 1,166           |   | —    | ** ** | **11,725**  | ** ** |
| Total  cost of services                         |   | 60,101         |   | 28,871             |   | 65,752          |   | —    | ** ** | **154,724** | ** ** |
| Gross  profit                                   |   | 35,943         |   | 17,333             |   | 11,014          |   | —    | ** ** | **64,290**  | ** ** |
| Selling  expenses                               |   | 12,453         |   | 6,975              |   | 1,589           |   | 653       | ** ** | **21,670**  | ** ** |
| General  & administrative expenses          |   | 19,170         |   | 16,521             |   | 9,573           |   | 1,237     | ** ** | **46,501**  | ** ** |
| Restructuring,  severance, and impairment costs |   | 599            |   | 6,278              |   | —          |   | 1,216     | ** ** | **8,093**   | ** ** |
| Income  (loss) from operations                  |   | $              | 3,721  |               | $      | (12,441         | )      | $         | (148       | )           | $          | (3,106 | ) | **$** | **(11,974** | **)** |

 

 

**For the ninemonths ended September 27, 2002:**

 
|                                            |   | **Healthcare** |   | **Life  Sciences** |   | **Outsourcing** |   | **Other** |       | **Totals**  |       |
|-------------------------------------------------|--------|----------------|--------|--------------------|--------|-----------------|--------|-----------|------------|-------------|------------|
| Revenues  before reimbursements                 |   | $              | 85,034 |               | $      | 51,914          |   | $         | 62,133     |        | $          | — | ** ** | **$** | **199,081** | ** ** |
| Reimbursements                                  |   | 9,735          |   | 1,412              |   | 154             |   | —    | ** ** | **11,301**  | ** ** |
| Total  revenues                                 |   | 94,769         |   | 53,326             |   | 62,287          |   | —    | ** ** | **210,382** | ** ** |
| Cost  of services before reimbursable expenses  |   | 48,611         |   | 29,378             |   | 49,655          |   | —    | ** ** | **127,644** | ** ** |
| Reimbursable  expenses                          |   | 9,735          |   | 1,412              |   | 154             |   | —    | ** ** | **11,301**  | ** ** |
| Total  cost of services                         |   | 58,346         |   | 30,790             |   | 49,809          |   | —    | ** ** | **138,945** | ** ** |
| Gross  profit                                   |   | 36,423         |   | 22,536             |   | 12,478          |   | —    | ** ** | **71,437**  | ** ** |
| Selling  expenses                               |   | 10,214         |   | 6,949              |   | 2,958           |   | 791       | ** ** | **20,912**  | ** ** |
| General  & administrative expenses          |   | 19,678         |   | 14,643             |   | 7,237           |   | 1,395     | ** ** | **42,953**  | ** ** |
| Restructuring,  severance, and impairment costs |   | 1,837          |   | 5,866              |   | —          |   | 115       | ** ** | **7,818**   | ** ** |
| Income  (loss) from operations                  |   | $              | 4,694  |               | $      | (4,922          | )      | $         | 2,283      |        | $          | (2,301 | ) | **$** | **(246** | **)** |

 

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**Detail ofOutsourcing Revenues:**

 

Outsourcing revenues beforereimbursements include revenues related to a major subcontractor on severalprojects.  The breakdown of revenue inoutsourcing is as follows (in thousands):

 
|                            |   | **Three  Months Ended**        |   | **Nine  Months Ended**         |   |
|---------------------------------|--------|--------------------------------|--------|--------------------------------|--------|
|                            |   | **September  26,********2003** |   | **September  27,********2002** |   | **September  26,********2003** |   | **September  27,********2002** |   |
| Internally generated revenues   |   | $                              | 19,475 |                           | $      | 20,109 |   | $ | 59,379 |   | $ | 51,209 |   |
| Subcontractor revenues          |   | 5,545                          |   | 6,416                          |   | 16,221 |   | 10,924 |   |
| Revenues before  reimbursements |   | $                              | 25,020 |                           | $      | 26,525 |   | $ | 75,600 |   | $ | 62,133 |   |

** **

 

**10.****                              ****Line of Credit**

 

The Companyhas a revolving line of credit, under which it is allowed to borrow up to $7.0million at an interest rate of the prevailing prime rate with an expiration ofMay 1, 2004.  There was no outstandingbalance under the line of credit at September 26, 2003.  Due to a net loss at September 26, 2003, theCompany is out of compliance with certain bank covenants contained in the lineof credit agreement.  However, theCompany received a waiver for such non-compliance and is renegotiating the lineof credit agreement to implement less restrictive covenants.  While the Company believes it cansuccessfully renegotiate its line of credit, there is no assurance that thiswill be accomplished.

 

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**Item 2****.****           Management’s Discussion and Analysis ofFinancial Condition and Results of Operations**

 

THE FOLLOWING MANAGEMENT’S DISCUSSION ANDANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS CONTAINSFORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF THE PRIVATE SECURITIESLITIGATION REFORM ACT OF 1995.  SUCH FORWARD-LOOKINGSTATEMENTS INVOLVE RISKS AND UNCERTAINTIES, INCLUDING THOSE SET FORTH HEREINUNDER THE CAPTION “RISKS RELATING TO OUR BUSINESS,” AND OTHER REPORTS WE FILEWITH THE SECURITIES AND EXCHANGE COMMISSION. OUR ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE ANTICIPATED INTHESE FORWARD-LOOKING STATEMENTS.

 

**Overview**

 

We provide services primarily to providers,payors, government agencies, pharmaceutical, biogenetic, and other healthcareorganizations in North America, Europe, and Asia.  We generate substantially all of our revenues from fees forprofessional services and information technology outsourcing services.  We typically bill for our services on anhourly, fixed-fee, or monthly fixed-fee basis as specified by the agreementwith a particular client.  In ourconsulting and systems integration businesses (“CSI”), the healthcare and lifesciences business units, we establish either standard or target hourly ratesfor each level of consultant based on several factors, including industry andassignment-related experience, 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, thenumber of our employees required to complete the assignment, and the volume oftransactions or interactions.  Actualhourly or fixed fees for an assignment may vary from the standard, target, orhistorical rates that we have charged. Revenues are generally recognized related to the level of servicesperformed based upon the amount of time completed on each assignment versus theprojected number of hours required to complete such assignment, the amount ofcost incurred on the assignment versus the estimated total cost to complete theassignment, or on a straight-line basis over the period of performance ofservice.  Provisions are made forestimated uncollectible amounts based on our historical experience.  We may obtain payment in advance ofproviding services.  These advances arerecorded as customer advances and reflected as a liability on our balancesheet.

 

Out-of-pocket expenses billed and reimbursedby clients are included in total revenues, and then deducted to determine netrevenues.  For purposes of analysis, allpercentages in this discussion are stated as a percentage of net revenues,since we believe that this is the more relevant measure of our business.

 

Cost of services primarily consists of thesalaries, bonuses, and related benefits of client-serving consultants andoutsourcing associates, and subcontractor expenses.  Selling expenses primarily consist of the salaries, benefits,travel, and other costs of our sales force, as well as marketing and marketresearch expenses.  General andadministrative expenses primarily consist of the costs attributable to thesupport of our client-serving professionals, such as: non-billable travel;office space occupancy; information systems; salaries and expenses forexecutive management, financial accounting and administrative personnel;expenses for firm and business unit governance meetings; recruiting fees;professional development and training; and legal and other professionalservices.  As associate related costsare relatively fixed in the short term, variations in our revenues andoperating results in our CSI business can occur as a result of variations inbilling margins and utilization rates of our billable associates.

 

Our most significant expenses are our humanresource and related salary and benefit expenses.  As of September 26, 2003, approximately 1,044 of our employeesare billable consultants.  Another 606employees are part of our firm’s outsourcing business.  The salaries and benefits of such billable

 

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consultants and outsourcing related employees are recognized in ourcost of services.  Most non-billableemployee salaries and benefits are recognized as a component of either sellingor general and administrative expenses. Approximately 20.6% of our workforce, or 427 employees, are classifiedas non-billable.  Our cost of servicesas a percentage of revenues is directly related to several factors, including,but not limited to, our consultant utilization, which is the ratio of totalbillable hours to available hours in a given period, the amount and timing ofcost incurred, our ability to control costs on our outsourcing projects, thebilled rate on time and material contracts, and the estimated cost to completeour non-outsourcing fixed price contracts. We evaluate our non-outsourcing fixed price contracts on a monthly basisby estimating the cost to complete the assignment.  We then recognize revenues to achieve a constant margin over theremaining term of the engagement.  Wehave changed our accounting for outsourcing contracts with the adoption of EITF00-21, “Accounting for Revenue Arrangements with Multiple Deliverables,” in thefirst quarter of fiscal year 2003. Under our outsourcing contracts, a significant portion of our revenuesare fixed and allocated over the contract on a straight-line basis, as we arerequired to provide a specified level of services subject to certainperformance measurements.  Also, certainrevenues may fluctuate under the contracts based on the volume of transactionswe process or other measurements of service provided.  If we incur higher costs to provide the required services orreceive less revenue due to reduced transaction volumes or penalties associatedwith service level failures, our gross profit can be negatively impacted.

 

In our CSIbusiness, we manage consultant utilization by monitoring assignmentrequirements and timetables, available and required skills, and availableconsultant hours per week and per month. Differences in personnel utilization rates can result from variations inthe amount of non-billed time, which has historically consisted of trainingtime, vacation time, time lost to illness and inclement weather, and unassignedtime.  Non-billed time also includestime devoted to other necessary and productive activities such as sales supportand interviewing 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 to reduce and limit unassignedtime, we actively manage personnel utilization by monitoring and projectingestimated engagement start and completion dates and matching consultantavailability with current and projected client requirements.  The number of consultants staffed on anassignment will vary according to the size, complexity, duration, and demandsof the assignment.  Assignmentterminations, completions, inclement weather, and scheduling delays may resultin periods in which 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 us to experience lower margins. In addition, expansion into new markets and the hiring of consultants inadvance of client assignments have resulted and may continue to result inperiods of lower consultant utilization.

 

In response to competition and continued pricing and rate pressures, wehave recently implemented a global sourcing strategy into our business operations,which includes the deployment of offshore resources as well as resources thatperform services remote from the client site. We expect this strategy to result in improved cost of services through acombination of lower cost attributable to offshore resources and higherleverage of resources that perform services offsite.  To the extent we pass through reduced costs to our clients, theglobal sourcing strategy may result in lower revenues on a per engagementbasis. However, we expect to offset this potential revenue impact with improvedcompetitive positioning in our markets. Several of our competitors employ a global sourcing strategy to providesoftware development and other information technology services to theirclients, while at the same time reducing their cost structure and improving thequality of services they provide.  If weare unable to realize the perceived cost benefits of our recently implementedglobal sourcing strategy or if we are unable to receive high quality servicesfrom foreign employees or subcontractors, our business may be adverselyimpacted and we may not be able to compete effectively.

 

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**Results ofOperations for the Three Months Ended September 26, 2003 and September 27, 2002**

 

*Revenues. *Our net revenues decreased to $65.8 million for the quarter endedSeptember 26, 2003, a decrease of 5.4% from $69.6 million for the quarter endedSeptember 27, 2002.  Our total revenuesdecreased to $69.9 million for the quarter ended September 26, 2003, a decreaseof 4.4% from $73.1 million for the quarter ended September 27, 2002.  The decrease was primarily due to asignificant decline in life sciences business unit revenues.  Life sciences business unit revenue declinedby $4.2 million and the decline would have been $7.0 million excluding theacquisition of Paragon Solutions, Inc. Additionally, our outsourcing business unit revenue declined slightlydue to lower subcontractor pass throughs. Although our healthcare business unit revenue increased, we have somecontracts in the health plan sector of that business which will be concludingover the remainder of 2003.  If we areunable to compensate for the revenue loss of these contracts with new orfollow-on engagements, we may experience a decline in revenues in thehealthcare business unit.

 

*Cost ofServices. *Cost of services before reimbursable expensesincreased to $46.7 million for the quarter ended September 26, 2003, anincrease of 2.1% from $45.8 million for the quarter ended September 27,2002.  The increase is primarily due tothe costs of services from our recent acquisitions, partially offset by areduction in staff in our life sciences business unit.

 

*Gross Profit. *Gross profit decreased to $19.1 millionfor the quarter ended September 26, 2003, a decrease of 19.7% from $23.8million for the quarter ended September 27, 2002.  The decrease is primarily due to the major revenue decline in ourlife sciences business unit, as we did not reduce costs as quickly as thedecline in our revenues.  Gross profit,as a percentage of net revenues, decreased from 34.3% for the quarter endedSeptember 27, 2002 to 29.1% for the quarter ended September 26, 2003, due tothe factors discussed above.

 

*SellingExpenses. *Selling expenses decreased to $6.7 millionfor the quarter ended September 26, 2003, a decrease of 5.3% from $7.1 millionfor the quarter ended September 27, 2002. The decrease is primarily due to recent reductions in our sales force.  Selling expenses, as a percentage of net revenues,remained constant at 10.2% for the quarter ended September 26, 2003 compared tothe quarter ended September 27, 2002.

 

*Generaland Administrative Expenses. *General and administrative expenses increasedto $15.3 million for the quarter ended September 26, 2003, an increase of 13.8%from $13.5 million for the quarter ended September 27, 2002.  The increase was primarily due to generaland administrative expenses from our recently acquired companies, and investmentsin software product development in life sciences and in the Patient SafetyInstitute and related technologies. General and administrative expenses, as a percentage of net revenues,increased from 19.4% for the quarter ended September 27, 2002 to 23.3% for thequarter ended September 26, 2003.  Ourgeneral and administrative expenses declined by $1.3 million compared to thequarter ended June 27, 2003.  We areplanning to continue our significant cost reduction efforts and we expect thatour general and administrative expenses will decline during the next severalquarters.

 

*Restructuring, Severance, and Impairment Costs. *Restructuring,severance, and impairment costs were $4.2 million for the three months endedSeptember 26, 2003 compared to zero for the three months ended September 27,2002.  Restructuring, severance, andimpairment costs for the three months ended September 26, 2003 includedapproximately $3.6 million of severance costs related to staff reductions and$0.6 million for facility downsizing and fixed asset write-downs.  We expect to incur additional restructuringcharges in the fourth quarter of fiscal year 2003 as we reduce additional staffand general and administrative expenses from our healthcare and life sciencesbusiness units.

 

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*Interest Income, Net. *Interestincome, net of interest expenses, remained constant at $0.2 million for thequarter ended September 26, 2003 compared to the quarter ended September 27,2002.  Interest income, net of interestexpense, as a percentage of net revenues, increased from 0.3% for the quarterended September 27, 2002 to 0.4% for the quarter ended September 26, 2003.

 

*OtherExpenses, Net*.  Other expense remained constant at $0.2million for the quarter ended September 26, 2003 compared to the quarter endedSeptember 27, 2002.

 

*IncomeTaxes. *The benefit for income taxes was 35% for thequarter ended September 26, 2003, compared to a provision rate of 42% in thequarter ended September 27, 2002.  Thebenefit rate is lower than the previous provision rate due to the existence ofcertain non-deductible expenses.

 

**Resultsof Operations for the Nine Months Ended September 26, 2003 and September 27,2002**

 

*Revenues*.  Our net revenues increased to $207.3 millionfor the nine months ended September 26, 2003, an increase of 4.1% from $199.1million for the nine months ended September 27, 2002.  Total revenues increased to $219.0 million for the nine monthsended September 26, 2003, an increase of 4.1% from $210.4 million for the ninemonths ended September 27, 2002.  Theincreases were primarily due to revenues from our acquisitions and from twooutsourcing contracts that began mid-2002. These increases were partiallyoffset by the significant decline in our life sciences business unit revenues(excluding revenues from our acquisition of Paragon Solutions, Inc.).  We completed a significant client engagementin March 2003 in our life sciences business unit and have been unable toreplace that revenue with new engagements. If we do not obtain new engagements and/or additional work from this orother clients, we could see a further decline in revenues in our life sciencesbusiness unit.  Additionally, we havesome contracts in the health plan sector of our healthcare business unit whichwill be concluding over the remainder of 2003. If we are unable to replace these contracts with new or follow-onengagements, we could see a decline in revenues in our healthcare business unitas well.

 

*Cost of Services. *Cost of services before reimbursable expensesincreased to $143.0 million for the nine months ended September 26, 2003, anincrease of 12.0% from $127.6 million for the nine months ended September 27,2002.  The increase is primarily due tothe costs of services of the outsourcing engagements that began in mid-2002 andcosts of services from our recent acquisitions, partially offset by a reductionin staff in our life sciences business unit.

 

*Gross Profit*.  Gross profit decreased to $64.3 million forthe nine months ended September 26, 2003, a decrease of 10.0% from $71.4million for the nine months ended September 27, 2002 primarily due to thedecline in revenues, as well as the change in our revenue mix from lifesciences revenues to outsourcing business unit revenues, which are generally ata lower gross profit.  Additionally,gross profit in our life sciences business unit declined as we did not reducecosts as quickly as the decline in our revenues. Gross profit, as a percentageof net revenues, decreased to 31.0% for the nine months ended September 26, 2003from 35.9% for the nine months ended September 27, 2002, due to the factorsdiscussed above and lower gross profit percentages on our outsourcing contractscompared to the prior year.  This lowergross profit in our outsourcing business unit is related to the higherproportion of subcontractors in our more recent contracts, and cost overruns oncertain outsourcing contracts in the first quarter of fiscal year 2003.

* *

*Selling Expenses.* Selling expenses increased to $21.7 millionfor the nine months ended September 26, 2003, an increase of 3.6% from $20.9million for the nine months ended September 27, 2002.  The increase is primarilydue to selling costs added by the acquisition of Paragon Solutions, Inc. and anincrease in salespeople for our healthcare business unit.  Selling expenses, as a percentage of netrevenues, remained constant at 10.5% for the nine months ended September 26,2003 compared to the nine months ended September 27, 2002.

 

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*General and Administrative Expenses.* General and administrative expenses increasedto $46.5 million for the nine months ended September 26, 2003, an increase of8.3% from $43.0 million for the nine months ended September 27, 2002.  The increase is primarily due to costs from our recently acquired companies and investmentswe are making in software product development in our life sciences businessunit, the Patient Safety Institute and related technologies.  Generaland administrative expenses, as a percentage of net revenues, increased from21.6% for the nine months ended September 27, 2002 to 22.4% for the nine monthsended September 26, 2003.

 

*Restructuring, Severance, and ImpairmentCosts. *Restructuring,severance, and impairment costs were $8.1 million for the nine months endedSeptember 26, 2003 compared to $7.8 million for the nine months ended September27, 2002.  Restructuring, severance andimpairment costs for the nine months ended September 26, 2003 included approximately$4.3 million of severance costs related to staff reductions and approximately$3.8 million for facility downsizing and fixed asset write-downs.  Restructuring, severance, and impairmentcosts for the nine months ended September 27, 2002 included approximately $4.0million of severance costs related to staff reductions and approximately $3.8million for facility downsizing.  Weexpect to incur additional severance costs in the fourth quarter of fiscal year2003 as we reduce additional staff and general and administrative expense fromour healthcare and life sciences business units.

 

*Interest Income, Net.*  Interest income, net of interest expenses,increased to $0.8 million for the nine months ended September 26, 2003 from$0.7 million for the nine months ended September 27, 2002.  Interest income, net of interest expenses,as a percentage of net revenues increased from 0.3% for the nine months endedSeptember 27, 2002 to 0.4% for the nine months ended September 26, 2003.

 

*Other Expenses, Net.* Other expense decreased to $0.2 million forthe nine months ended September 26, 2003 from $0.3 million for the nine monthsended September 27, 2002.  The decreaseis primarily due to a reduction in minority interest expense.

 

*Income Taxes.* The benefit for income taxes was 35% for thenine months ended September 26, 2003 compared to a provision rate of 42% forthe nine months ended September 27, 2002. The benefit rate is lower than the provision rate due to the existenceof certain non-deductible expenses.

 

*CumulativeEffect of Change in Accounting Principle*.  InNovember 2002, the EITF reached a consensus on Issue 00-21, titled “Accountingfor Revenue Arrangements with Multiple Deliverables,”  which addresses how to account for arrangements that involve thedelivery or performance of multiple products, services, and/or rights to useassets.  The new standard was requiredto be adopted for applicable revenue arrangements no later than the thirdquarter of 2003.  Early adoptionwas permitted, and we adopted the new standard as of the beginning of2003.  In addition, we elected to applythe new standard to all existing outsourcing arrangements impacted by EITF00-21 and recorded to earnings in the first quarter of 2003 the resultingcumulative effect as a change in accounting principle.  We recorded a non-cash charge, net of tax,of $2.6 million, or $0.11 per share, in the first quarter of 2003.  At September 26, 2003, the per share chargeequates to $0.10 due to the increase in the number of shares outstanding.

 

**Liquidityand Capital Resources**

 

During the nine months ended September 26, 2003, we generated cash flowfrom operations of $4.5 million.  Duringthe nine months ended September 26, 2003, we used approximately $11.2 millionto acquire three companies (see Note 4 of the Notes to Consolidated Financial Statements)and $4.2 million of cash to purchase property and equipment, including computerand related equipment, and office furniture. We also used $1.86 million during the quarter ended September 26, 2003to purchase the 4.9%

 

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minority interest that the University of Pennsylvania Health System hadin FCG Management Services, LLC.  AtSeptember 26, 2003, we had cash and investments available for sale of $58.5million compared to $67.3 million at December 27, 2002.

 

We have a revolving line of credit, under which we are allowed toborrow up to $7.0 million at an interest rate of the prevailing prime rate withan expiration of May 1, 2004.  There wasno outstanding balance under the line of credit at September 26, 2003.  Due to our net loss at September 26, 2003,we are out of compliance with certain bank covenants contained in the line ofcredit agreement.  However, we receiveda waiver for such non-compliance and we are renegotiating our line of credit agreementto implement less restrictive covenants. While we believe we can renegotiate the line of credit agreement, thereis no assurance that this will be successfully accomplished.

 

Managementbelieves that our existing cash and investments, together with funds generatedfrom operations, will be sufficient to meet operating requirements for at leastthe next twelve months.  Our cash andinvestments are available for capital expenditures (which are projected at approximately$6.0 million for 2003, $4.2 million of which was spent during the nine monthsended September 26, 2003), strategic investments, mergers and acquisitions, andother potential large-scale cash needs that may arise, including $2.4million in cash that is expected to be spent on or about January 2004 topurchase the remaining 47.65% minority interest in FCG Infrastructure Services(formerly Codigent Solutions Group, Inc.) that we do not already own.

 

On October 1, 2003, we entered into a letter agreement with each ofNorthern Westchester Hospital Center, Lawrence Hospital Center and PhelpsMemorial Hospital Center obligating us to reimburse such hospitals for theirinterest expense incurred on third party lines of credit if our systemimplementation at the hospitals results in an increase in the hospitals’accounts receivable days outstanding during a 120-day period after thecompletion of the system implementation. Under these letter agreements, we are only obligated to reimburse actualinterest charges (which cannot exceed the prime rate plus 2%) on principalamounts borrowed by the hospitals, up to a maximum principal amount ofapproximately $6.7 million in the aggregate, for a 120-day period.  We do not currently expect to incur anyexpense in connection with these letter agreements until early 2005, if at all.

 

OnOctober 1, 2003, we also entered into an unsecured loan agreement with WhitePlains Hospital Center requiring us to provide interest free financing of up to$4.08 million if our system implementation at the hospital results in anincrease in the hospital’s accounts receivable balance or days outstandingduring a 150-day period following the completion of the systemimplementation.  Any amounts borrowedduring this 150-day period are payable 90 days after the borrowing date.  We do not currently expect to make any loansunder this agreement until early 2005, if at all.  Since our loans are unsecured, we cannot guarantee that thehospital will repay our loans on a timely basis, if at all.  If our loans are not repaid or repaid in a timelymanner, our financial condition would be impacted negatively.

 

The following table summarizes our contractual and other commitments(in thousands):

 
|                         |   | **Payments Due by Period** |   |
|------------------------------|--------|----------------------------|--------|
| **Contractual  Obligations** |   | **Total**                  |   | **Less than 1  Year** |   | **1 - 3 Years** |   | **4 -5 Years** |   | **After 5 Years** |   |
| Operating Leases             |   | $                          | 24,130 |   | $ | 5,597 |   | $ | 9,532 |   | $ | 6,463 |   | $ | 2,538 |   |
| Purchase Obligations         |   | 774                        |   | 310 |   | 464 |   | — |   | — |   |
|                         |   | $                          | 24,904 |   | $ | 5,907 |   | $ | 9,996 |   | $ | 6,463 |   | $ | 2,538 |   |

 

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**CriticalAccounting Policies and Estimates**

 

The foregoingdiscussion and analysis of our financial condition and results of operations isbased upon our consolidated financial statements, which have been prepared inaccordance with accounting principles generally accepted in the UnitedStates.  The preparation of thesefinancial statements requires us to make estimates and assumptions that affectthe reported amounts of assets, liabilities, revenues and expenses, and relateddisclosure of contingent assets and liabilities.  On an on-going basis, we evaluate our estimates, including thoserelated to revenue recognition, cost to complete client engagements, valuationof goodwill and long-lived and intangible assets, accrued liabilities, incometaxes, restructuring costs, idle facilities, litigation and disputes, and theallowance for doubtful accounts.  Webase our estimates on historical experience and on various other assumptionsthat we believe to be reasonable under the circumstances, the results of whichform the basis for making judgments about the carrying value of assets andliabilities that are not readily apparent from other sources.  Our actual results may differ from ourestimates and we do not assume any obligation to update any forward-lookinginformation.

 

We believe thefollowing critical accounting policies reflect our more significant assumptionsand estimates used in the preparation of our consolidated financial statements.

 

***Revenue Recognition and Unbilled Receivables***

 

Revenues arederived primarily from consulting, systems integration, and informationtechnology outsourcing services. Revenues are recognized on a time-and-materials, level-of-effort,percentage-of-completion, or straight-line basis.  Before revenues are recognized, the following four criteria mustbe met: (a) persuasive evidence of an arrangement exists; (b) delivery hasoccurred or services rendered; (c) the fee is fixed and determinable; and (d)collectibility is reasonably assured. We determine if the fee is fixed and determinable and collectibility isreasonably assured based on our judgments regarding the nature of the feecharged for services rendered and products delivered and the collectibility ofthose fees.  Arrangements range inlength from less than one year to seven years. The longer-term arrangements are generally level-of-effort or fixedprice arrangements.

 

Revenues fromtime-and-materials arrangements are generally recognized based upon contractedhourly billing rates as the work progresses. Revenues from level-of-effort arrangements are recognized based upon afixed price for the level or resources provided.  Revenues from fixed fee arrangements for consulting and systemsintegration work are generally recognized on a percentage-of-completionbasis.  We maintain, for each of ourfixed fee contracts, estimates of total revenue and cost over the contractterm. For purposes of periodic financial reporting on the fixed priceconsulting and system integration contracts, we accumulate total actual costsincurred to date under the contract. The ratio of those actual costs to ourthen-current estimate of total costs for the life of the contract is thenapplied to our then-current estimate of total revenues for the life of thecontract to determine the portion of total estimated revenues that should berecognized. We follow this method because reasonably dependable estimates ofthe revenues and costs applicable to various stages of a contract can be made.

 

Revenuesrecognized on fixed price consulting and system integration contracts aresubject to revisions as the contract progresses to completion.  If we do not accurately estimate theresources required or the scope of the work to be performed, do not completeour projects within the planned periods of time, or do not satisfy our obligationsunder the contracts, then profit may be significantly and negatively affectedor losses may need to be recognized. Revisions in our contract estimates are reflected in the period in whichthe determination is made that facts and circumstances dictate a change ofestimate. Favorable changes in estimates result in additional revenuesrecognized, and unfavorable changes in estimates result in a reduction ofrecognized revenues. Provisions for estimated losses on individual contractsare made in the period in which the loss first becomes known.  Some contracts include

 

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incentives for achieving either schedule targets, cost targets, orother defined goals.  Revenues fromincentive type arrangements are recognized when it is probable they will beearned.

 

As of the beginning of fiscal year 2003, we adopted EITF 00-21,“Accounting for Revenue Arrangements with Multiple Deliverables,” whichaddresses how to account for arrangements that involve the delivery orperformance of multiple products, services, and/or rights to use assets.  Revenue arrangements with multipledeliverables are divided into separate units of accounting if the deliverablesin the arrangement meet the following criteria: (1) the delivered item hasvalue to the customer on a stand-alone basis; (2) there is objective andreliable evidence of the fair value of undelivered items; and (3) delivery ofany undelivered item is probable. Arrangement consideration should be allocated among the separate unitsof accounting based on their relative fair values, with the amount allocated tothe delivered item being limited to the amount that is not contingent on thedelivery of additional items or meeting other specified performance conditions.  We have created separate units ofaccounting on our existing outsourcing contracts based on the above criteriaand will do so on our future contracts. Generally, we have separated certain elements of our initial contractstages, where processes are reengineered into a new operating environment, fromthe ongoing operations of the contract. The primary impact of the adoption of this standard is that our ongoingcontract operations, which constitute the vast majority of the revenues fromoutsourcing contracts, will be recorded on a straight-line basis over the lifeof the contract instead of on a percentage-of-completion basis in proportion tocosts incurred.  In general, we willreport lower margins on existing contracts in the early years of a contract andanticipate reporting increased margins in the later years of a contract;however, no assurances can be made in that regard.  The new method will no longer be based on a consistent grossprofit over the life of a contract.  Wewill likely experience greater volatility of outsourcing earnings as contractrevenues remain level and contract costs move up or down, or shift from onequarter to another.

 

As part of our on-going operationsto provide services to our customers, incidental expenses, which are generallyreimbursable under the terms of the contracts, are billed to customers. Theseexpenses are recorded as both revenues and direct cost of services inaccordance with the provisions of EITF 01-14, “Income StatementCharacterization of Reimbursements Received for ‘Out-of-Pocket’ ExpensesIncurred,” and include expenses such as airfare, mileage, hotel stays,out-of-town meals, and telecommunication charges.

 

Unbilledreceivables represent revenues recognized for services performed that were notbilled at the balance sheet date.  Themajority of these amounts are billed in the subsequent month. Unbillableamounts arising from contracts occur when revenues recognized exceed allowablebillings in accordance with the contractual agreements.  As of September 26, 2003, we had unbillablerevenues included in current unbilled receivables of approximately $0.4million, which were generally expected to be billed in the followingquarter.  In addition, we had long-termunbilled receivables at September 26, 2003, and September 27, 2002 of $6.2million and $8.1 million, respectively, on a single major outsourcing contractwith a term of seven years.  Thelong-term receivable will be billed and collected over the remaining threeyears of the contract through contractual billings that will exceed the amountsto be earned as revenues.

 

Customer advances comprise payments fromcustomers for which services have not yet been performed or prepayments againstwork in process. These unearned revenues are deferred and recognized as futurecontract costs are incurred and as contract services are rendered.

 

***Allowance for Doubtful Accounts***

 

We maintain an allowance for doubtfulaccounts for estimated losses resulting from the inability of our clients tomake required payments. If the financial condition of our clients were todeteriorate, resulting in an impairment of their ability to make payments,additional allowances may be required. Management analyzes account receivables and historical bad debt, customerconcentrations, credit

 

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worthiness, past collection experience, current economic trends, andchanges in our customer payment terms when evaluating the adequacy of doubtfulaccounts.

 

***Deferred Income Taxes***

 

We account forincome taxes in accordance with SFAS No. 109, “Accounting for Income Taxes,”which requires recognition of deferred tax assets and liabilities for theexpected future tax consequences of events that have been included in thefinancial statements or tax returns. Our net deferred tax assets have historically consisted primarily of thetax benefit related to restructuring costs for facility closures, supplementalexecutive retirement plan contributions, and other accrued liabilities such asaccrued vacation pay, which are not deductible for tax purposes untilpaid.  During fiscal year 2003, we havegenerated additional deferred tax assets for net operating loss carryforwardsresulting from the losses we are incurring, caused in part by the cumulativeeffect of our change in revenue recognition method on our outsourcingcontracts.  The Company uses significant estimates in thecalculation of its income tax benefit by estimating that it will havesufficient future taxable income to realize its deferred tax assets in full anddoes not need to record a valuation allowance at this time.  Based on our belief that it is more likely than notthat future taxable income will be sufficient to realize the deferred taxassets, we have not recorded a valuation allowance against our deferred taxasset.  However, there is no guaranteethat our taxable income will be sufficient to realize such deferred tax assets,so we will continue to evaluate the potential need for a valuation allowance onan ongoing basis.

*** ***

***Goodwill and Intangible Assets***

 

Under SFAS No 142, we nolonger amortize our goodwill and are required to complete an annual impairmenttesting the fourth quarter of each year. We believe that the accounting assumptions and estimates related to theannual goodwill impairment testing are critical because these can change fromperiod to period.  The impairment testrequires us to forecast our future cash flows, which involves significantjudgment.  Our operating results havebeen negatively impacted by the worldwide economic conditions.  Accordingly, if our expectations of futureoperating results change, or if there are changes to other assumptions, ourestimate of the fair value of our reporting units could change significantlyresulting in a goodwill impairment charge, which could have a significantimpact on our consolidated financial statements.  As of September 26, 2003, we have $15.1 million of goodwill and$4.7 million of intangible assets recorded on our balance sheet (see Note5 of the Notes to Consolidated Financial Statements).

*** ***

***Recent AccountingPronouncements***

 

See Note 1 ofthe Notes to the Consolidated Financial Statements for a discussion on recentaccounting pronouncements.

 

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**RisksRelating to Our Business**

 

Beforedeciding to invest in us or to maintain or increase your investment, you shouldcarefully consider the risks described below, in addition to the otherinformation contained in this report. The risks and uncertainties described below are not the only ones facingour company.  Additional risks anduncertainties not presently known to us or that we currently deem immaterialmay also affect our business operations. If any of these risks are realized, our business, financial condition orresults of operations could be seriously harmed.  In that event, the market price for our common stock coulddecline and you may lose all or part of your investment.

 

*Many factors may cause our net revenues, operating results and cashflows to fluctuate and possibly decline.*

 

Our net revenues, operating results, and cashflows may fluctuate significantly because of a number of factors, many of whichare outside of our control.  Thesefactors may include:

 

•                  The loss of one or more significantclients in any of our business segments;

•                  The roll-off or completion ofsignificant projects in any of our business segments;

•                  Fluctuations in market demand for ourservices, consultant hiring, and utilization;

•                  Delays or increased expenses insecuring and completing client engagements;

•                  Timing and collection of fees andpayments;

•                  Timing of new client engagements inany of our business segments;

•                  Increased competition and pricingpressures;

•                  Use of offsite and offshore resourceson our engagements;

•                  The loss of key personnel and otheremployees;

•                  Changes in our, and our competitor’s,business strategy, pricing and billing policies;

•                  The timing of certain general andadministrative expenses;

•                  Completing acquisitions and the costsof integrating acquired operations;

•                  Variability in the number of billabledays in each quarter;

•                  The write-off of client billings;

•                  Return of fees for work deemedunsatisfactory by a client or claims or litigation resulting from the same;

•                  Entry into fixed price engagementsand engagements where some fees are contingent upon the client realizing acertain return on investment for a project;

•                  Availability of foreign net operatinglosses and other credits against our earnings;

•                  International currency fluctuations;

•                  Ability to sublease vacant officespace included in previous restructuring charges; and

•                  The fixed nature of a substantialportion of our expenses, particularly personnel and related costs,depreciation, office rent, and occupancy costs.

 

One or more of the foregoing factors may cause our operating expensesto be unexpectedly high during any given period.  In addition, we bill certain of our services on a fixed-pricebasis, and any assignment delays or expenditures of time beyond that projectedfor the assignment could result in write-offs of client receivables (bothunbilled and billed).  Significantwrite-offs could materially adversely affect our business, financial condition,and results of operations.  Our businessalso has significant collection risks. If we are unable to collect our receivables in a timely manner, ourbusiness and financial condition could also suffer.  If these or any other variables or unknowns were to cause ashortfall in revenues or earnings or otherwise cause a failure to meet publicmarket expectations, our business could be adversely affected.

 

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Further, we adopted EITF 00-21 in the firstquarter of 2003, which affects the way we recognize revenue on long-termoutsourcing agreements. The adoption of EITF 00-21 results in separating ouroutsourcing contracts into multiple elements and separately accounting for eachelement, rather than accounting for all elements together as a group.  As a result, we now recognize revenue fromcertain service elements of our outsourcing agreements on a straight-line basisover the life of the contract, rather than on a percentage of completionbasis.  Since we typically incur greatercosts and expenses during the early phase of the service elements (which willnow have straight-line revenue) than we do in the later years of thoseelements, we believe our net income will be less during the early stages of ouroutsourcing engagements.  In addition,if we are unable to manage costs as planned in the later stages of anoutsourcing engagement, our net income will likewise be negativelyimpacted.  In general, income from ouroutsourcing contracts will be less stable in the future, since it will be moresusceptible to changes in the mix of newer versus older contracts, and to theimpact of cost fluctuations from quarter to quarter without a compensatingchange in revenue.  If we fail to meetour public market expectations or otherwise experience a shortfall in our netincome due to these fluctuations, our business could be adversely affected andthe price of our stock may decline.

 

Finally, we reported net losses for thesecond quarter and third quarter of 2003, and we cannot assure you that we willachieve positive earnings in the future. If we are unable to achieve profitability on a quarterly or annualbasis, the market price of our common stock could be adversely affected and ourfinancial condition would suffer.

 

*Our outsourcing engagements comprise asignificant part of our revenues.*

 

Our outsourcing agreements require that weinvest significant amounts of time and resources in order to win theengagement, transition the client’s information technology department to ourmanagement, and complete the initial transformation of our client’s informationtechnology functioning to provide improved service at a lower cost and meetagreed-upon service levels.  Often, werecover this investment through payments over the life of the outsourcingagreement.  If we are unable to achieve agreed-uponservice levels or otherwise breach the terms of our outsourcing agreements, theclients may have rights to terminate our agreements for cause and we may beunable to recover our investments.  Anyfailure by us to recover these investments may have a material adverse effecton our financial condition, results of operations, and price of our commonstock.

 

Currently, we have seven active outsourcingrelationships. Net revenues from such outsourcing relationships, as of thequarter ended September 26, 2003, represented approximately 39% of ourconsolidated net revenues.  The substantialmajority of these revenues are received from four large outsourcing accountsthat have signed long term agreements with us. However, the loss of any of our outsourcing relationships would have amaterial impact on our business and results of operations.  In each of these engagements, the clientshave fully outsourced their information technology staff and functions to us.  In all of our outsourcingrelationships, we generally enter into additional agreements, includingdetailed service level agreements, which establish performance levels andstandards for our services.  If we failto meet these performance levels or standards, our clients may receive monetaryservice level credits from us or, if we experience persistent failures, ourclients may have a right to terminate the outsourcing contract for cause andhave no obligation to pay us any termination fees.  Our anticipated revenues from our outsourcing engagements couldbe significantly reduced if we are unable to satisfy our performance levels orstandards.  Additionally, ouroutsourcing contracts can be terminated at the convenience of our clients uponthe payment of a termination fee.

 

Our outsourcing engagements typically requirethat we hire part or all of a client’s information technology personnel.  We cannot assure you that we will be able toretain these individuals, and effectively hire additional personnel as neededto meet the obligations of our contract. Any failure by us to retain these individuals or otherwise satisfy ourcontractual obligations could have a material adverse

 

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effect on the profitability of our outsourcing business and ourreputation as an information technology services outsourcing provider.

 

Finally, we have publicly announced our intentions to expand ouroutsourcing business and perform our information technology outsourcingservices for other potential clients. We anticipate expanding our outsourcing business to perform discreteinformation technology services for clients. The amount of time and resources required to win client engagements forour outsourcing business is significant, and we may not win the number or typeof client engagements that we anticipate. If we fail to meet our objective to secure new outsourcing engagements,or fail to secure new outsourcing engagements on acceptable commercial terms,we will not experience the growth in this business unit that we haveanticipated.

 

In May 2003, we completed the acquisition of a company that provides inboundand outbound call center services to the hospital and payer markets.  The acquisition represents our entry intothe business process outsourcing market (BPO). If we are unable to successfully integrate and leverage this acquisitionin the BPO market, we may not be able to successfully execute our strategy inthis area.  Further, all acquisitionsinvolve risks that could materially and adversely affect our business andoperating results.  Consequently, we mayfail to meet public market expectations and the price of our common stock maydecline.

 

*The length of time required to engage aclient and to complete an assignment may be unpredictable and could negativelyimpact our net revenues and operating results.*

 

The timing of securing our client engagementsand service fulfillment is difficult to predict with any degree ofaccuracy.  Prior engagement cycles arenot necessarily an indication of the timing of future client engagements orrevenues.  The length of time requiredto secure a new client engagement or complete an assignment often depends onfactors outside our control, including:

 

•                  Existing information systems at theclient site;

•                  Changes or the anticipation ofchanges in the regulatory environment affecting healthcare and pharmaceuticalorganizations;

•                  Changes in the management orownership of the client;

•                  Budgetary cycles and constraints;

•                  Changes in the anticipated scope ofengagements;

•                  Availability of personnel and otherresources; and

•                  Consolidation in the healthcare andpharmaceutical industries.

 

Prior to client engagements, we typicallyspend a substantial amount of time and resources (1) identifying strategic orbusiness issues facing the client, (2) defining engagement objectives, (3)gathering information, (4) preparing proposals, and (5) negotiatingcontracts.  Our failure to procure anengagement after spending such time and resources could materially adverselyaffect our business, financial condition, and results of operations.  We may also be required to hire newconsultants before securing a client engagement.  If clients defer committing to new assignments for any length oftime or for any reason we could be required to maintain a significant number ofunder-utilized consultants which could adversely affect our operating resultsand financial condition during any given period.  Further, our outsourcing business has very long sales andcontract lead times, requiring us to spend a substantial amount of time andresources in attempting to secure each outsourcing engagement.  We cannot predict whether the investment oftime and resources will result in a new outsourcing engagement or, if theengagement is secured, that the engagement will be on terms favorable to us.

 

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*We could be negatively impacted if we fail tosuccessfully integrate the businesses we acquire.*

 

We have grown, in part, by acquiringcomplementary businesses that could enhance our capability to serve thehealthcare and pharmaceutical industries. For example, in May 2002, we acquired a majority interest in CodigentSolutions Group, Inc. (now known as FCG Infrastructure Services, Inc.) andduring the first half of 2003, we acquired Paragon Solutions, Inc., CoactiveSystems Corporation,  and certain assetsof Phyve Corporation. All acquisitions involve risks that could materially andadversely affect our business and operating results.  These risks include:

 

•                  Distractingmanagement from our business;

•                  Losingkey personnel and other employees;

•                  Losingclients;

•                  Costs,delays, and inefficiencies associated with integrating acquired operations andpersonnel;

•                  Theimpairment of acquired assets and goodwill; and

•                  Acquiringthe contingent and other liabilities of the businesses we acquire

 

In addition,acquired businesses may not enhance our services, provide us with increasedclient opportunities, or result in the growth that we anticipate.  Furthermore, integrating acquired operationsis a complex, time-consuming, and expensive process.  Combining acquired operations with us may result in lower overalloperating margins, greater stock price volatility, and quarterly earningsfluctuations.  Culturalincompatibilities, career uncertainties, and other factors associated with suchacquisitions may also result in the loss of employees and clients.  Failing to acquire and successfullyintegrate complementary practices, or failing to achieve the business synergiesthat we anticipate, could materially adversely affect our business and resultsof operations.

 

*We may be negatively impacted if investments in products and emergingservice lines are unsuccessful.*

 

We have publicly announced our strategy toincrease our investment in product development, particularly in our lifesciences business unit, in addition to continuing our investments in emergingservice lines.  We typically do notcapitalize the cost of our product development activities and do not anticipatecapitalizing expected investments.  As aresult, our financial results may be adversely impacted by such increased investmentin the short term.  If such productdevelopment activities or investment in our emerging service lines do notresult in relevant offerings, we will not achieve desired levels of return onthese investments.  As a result, ourbusiness and results of operations could be adversely affected.

 

*If we are unable to generate additional revenue from our existingclients, our business may be negatively affected.*

 

Our success depends, to a significant extent,on obtaining additional engagements from our existing clients.  A substantial portion of our revenues isderived from additional services provided to our existing clients.  The loss of a small number of clients mayresult in a material decline in revenues and cause us to fail to meet publicmarket expectations of our financial performance and operating results.  If we fail to generate additional revenuesfrom our existing clients it may materially adversely affect our business andfinancial condition.

 

 

*If we fail to meet client expectations in theperformance of our services, our business could suffer.*

 

Our services often involve assessing and/orimplementing complex information systems and software, which are critical toour clients’ operations.  Our failure tomeet client expectations in the performance of our services, including thequality, cost and timeliness of our services, may damage our

 

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reputation in the healthcare andpharmaceutical industries and adversely affect our ability to attract andretain clients.  If a client is notsatisfied with our services, we will generally spend additional human and otherresources at our own expense to ensure client satisfaction.  Such expenditures will typically result in alower margin on such engagements and could materially adversely affect ourbusiness, financial condition, and results of operations.

 

Further, in the course of providing ourservices, we will often recommend the use of software and hardwareproducts.  These products may notperform as expected or contain defects. If this occurs, our reputation could be damaged and we could be subjectto liability.  We attempt contractuallyto limit our exposure to potential liability claims; however, such limitationsmay not be effective.  A successfulliability claim brought against us may adversely affect our reputation in thehealthcare and pharmaceutical industries and could have a material adverseeffect on our business or financial condition. Although we maintain professional liability insurance, such insurancemay not provide adequate coverage for successful claims against us.

 

*We may be unable to attract and retain asufficient number of qualified employees.*

 

Our business is labor-intensive and requireshighly skilled employees.  Most of ourconsultants possess extensive expertise in the healthcare, insurance,pharmaceutical, information technology and consulting fields.  To serve a growing client base, we mustcontinue to recruit and retain qualified personnel with expertise in each ofthese areas.  Competition for suchpersonnel is intense and we compete for such personnel with managementconsulting firms, healthcare and pharmaceutical organizations, software firms,and other businesses.  Many of theseentities have substantially greater financial and other resources than we do,or can offer more attractive compensation packages to candidates, includingsalary, bonuses, stock, and stock options. If we are unable to recruit and retain a sufficient number of qualifiedpersonnel to serve existing and new clients, our ability to expand our clientbase or services could be impaired and our business would suffer.

 

*The loss of our key client service employeesand executive officers could negatively affect us*

 

Our performance depends on the continuedservice of our executive officers, senior managers, and key employees.  In particular, we depend on such persons tosecure new clients and engagements and to manage our business and affairs.  The loss of such persons could result in thedisruption of our business and could have a material adverse effect on ourbusiness and results of operations.  Wehave not entered into long-term employment contracts with any of our employeesand do not maintain key employee life insurance.

 

*Continued or increased employee turnover couldnegatively affect our business.*

 

We have experienced employee turnover as aresult of:

 

•                  Dependenceon lateral hiring of consultants;

•                  Traveldemands imposed on our consultants;

•                  Lossof employees to competitors and clients; and

•                  Reductionsin force in our business units as certain areas of our business have seen lessdemand.

 

Continued orincreased employee turnover could materially adversely affect our business andresults of operations.  In addition,many of our consultants develop strong business relationships with ourclients.  We depend on theserelationships to generate additional assignments and engagements.  The loss of a substantial number ofconsultants could erode our client base and decrease our revenues.

 

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*If we are unable to manage shifts in marketdemand or growth in our business, our business may be negatively impacted.*

 

Our business has historically grown rapidly,and though our overall revenues have remained flat for the past several years,we have experienced growth and increased demand in certain areas of ourbusiness.  In response to shifts inmarket demand and in an effort to better align our business with our markets,we restructured our business units and hired persons with appropriate skills,including salespersons, and reduced our workforce in practice areasexperiencing less demand.  These marketconditions and restructuring efforts have placed new and increased demands onour management personnel.  It has alsoplaced significant and increasing demands on our financial, technical andoperational resources, and on our information systems.  If we are unable to manage growtheffectively or if we experience business disruptions due to shifts in marketdemand, or growth or restructuring, our operating results will suffer.  To manage any future growth, we must extendour financial reporting and information management systems to our multiple andinternational office locations and traveling employees, and develop andimplement new procedures and controls to accommodate new operations, servicesand clients.  Increasing operational andadministrative demands may make it difficult for our senior managers to engagein business development activities and their other day-to-day responsibilities.  Further, the addition of new employees andoffices to offset any increasing demands may impair our ability to maintain ourservice delivery standards and corporate culture.  In addition, we have in the past changed, and may in the futurechange, our organizational structure and business strategy.  Such changes may result in operationalinefficiencies and delays in delivering our services.  Such changes could also cause a disruption in our business andcould cause a material adverse effect on our financial condition and results ofoperations.

 

*Changes in the healthcare and pharmaceuticalindustries could negatively impact our revenues.*

 

We derive a substantial portion of ourrevenues from clients in the healthcare industry.  As a result, our business and results of operations areinfluenced by conditions affecting this industry, particularly current trendstowards consolidation among healthcare and pharmaceutical organizations.  Such consolidation may reduce the number ofexisting and potential clients for our services.  In addition, the resulting organizations could have greaterbargaining power, which could erode the current pricing structure for ourservices.  The reduction in the size ofour target market or our failure to maintain our pricing goals could have amaterial adverse effect on our business and financial condition.  Finally, each of the markets we serve ishighly dependent upon the health of the overall economy.  Our clients in each of these markets haveexperienced significant cost increases and pressures in recent years.  Our services are targeted at relieving thesecost pressures; however, any continuation or acceleration of current marketconditions could greatly impact our ability to secure or retain engagements,the loss of which could have a material adverse effect on our business andfinancial condition.

 

A substantial portion of our revenues hasalso come from companies in the pharmaceutical industry.  Our revenues are, in part, linked to thepharmaceutical industry’s research and development expenditures.  Should any of the following events occur inthe pharmaceutical industry, our business could be negatively affected in amaterial way:

 

•                  Continuedadverse changes to the industry’s general economic environment;

•                  Continuedconsolidation of companies; or

•                  Adecrease in research and development expenditures or pharmaceutical companies’technology expenditures.

 

A trend in thepharmaceutical industry is for companies to “outsource” either largeinformation technology-dependent projects or their information systems staffingrequirements.  We benefit whenpharmaceutical companies outsource to us, but may lose significant futurebusiness when pharmaceutical

 

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companies outsource to our competitors.  If this outsourcing trend slows down or stops, or ifpharmaceutical companies direct their business away from us, our financialcondition and results of operations could be impacted in a materially adverseway.

 

*Our international operations createspecialized risks that can negatively affect us.*

 

We are subject to many risks as a result ofthe services we provide to our international clients or services we may providethrough subcontractors or employees that are located outside of the U.S.  Further, in February 2003, we acquiredParagon Solutions, Inc., a U.S. based company with offshore softwaredevelopment centers in India and Vietnam. As a result of this acquisition, we currently have business operationsand employees located in India and Vietnam, as well as our existing employeesthroughout Europe.  If we fail torecruit and retain a sufficient number of qualified employees in each countrywhere we conduct business, our ability to perform our existing services may beimpaired and our business could be adversely affected.  Our international operations are alsosubject to a variety of risks, including:

 

•                  Difficultiesin creating international market demand for our services;

•                  Difficultiesand costs of tailoring our services to each individual country’s healthcare andpharmaceutical market needs;

•                  Uncertaintyof cost of labor and high turnover rates;

•                  Unfavorablepricing and price competition;

•                  Currencyfluctuations;

•                  Recruitingand hiring employees, and other employment issues unique to internationaloperations, including ability to secure work visas for foreign employees in theU.S.;

•                  Longerpayment cycles in some countries and difficulties in collecting internationalaccounts receivable;

•                  Terroristattacks;

•                  Difficultiesin enforcing contractual obligations and intellectual property rights;

•                  Adversetax consequences;

•                  Increasedcosts associated with maintaining international marketing efforts and offices;

•                  Governmentregulations and restrictions;

•                  Adversechanges in regulatory requirements; and

•                  Economicor political instability.

 

We have been performing services in Europefor international clients for several years. We ceased performing healthcareconsulting services for European clients in 2000, but continue to provide ourservices in Europe to pharmaceutical clients. We cannot assure you that we will be able to maintain profitability inour European pharmaceutical services, which may materially adversely affect ourfinancial condition, results of operations, and price for our common stock.

 

Our acquisition of Paragon Solutions, Inc. provided us a means toimplement our global sourcing strategy to provide software development andother information technology services to our clients.  If we are unable to realize perceived cost benefits of such astrategy or if we are unable to receive high quality services from foreignemployees or subcontractors, our business may be adversely impacted. Further,our recently acquired international operations in Vietnam and India subject ourbusiness to a variety of risks and uncertainties unique to operating businessesin these countries, including the risk factors discussed above.

 

Any one or all of these factors may cause increased operating costs,lower than anticipated financial performance, and may materially adverselyaffect our business, financial condition, and results of operations.

 

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*If we do not compete effectively in thehealthcare and pharmaceutical information services industries, our businesswill be negatively impacted.*

 

The market for healthcare and pharmaceuticalinformation technology consulting is very competitive.  We have competitors that provide some or allof the services we provide.  Forexample, in strategic consulting services, we compete with international,regional, and specialty consulting firms such as Bearing Point (formerly KPMGConsulting), Cap Gemini Ernst & Young, IBM Global Consulting Services,Wipro Technologies, and Accenture.

 

In integrationand co-management services, we compete with:

 

•                  Informationsystem vendors such as McKesson, Siemens Medical Solutions, Cerner Corporation,and IBM Global Systems,

•                  Servicegroups of computer equipment companies,

•                  Systemsintegration companies such as Electronic Data Systems Corporation, PerotSystems Corporation, SAIC, Cap Gemini Ernst & Young, and Computer SciencesCorporation,

•                  Clients’internal information management departments,

•                  Otherhealthcare consulting firms, and

•                  Otherpharmaceutical consulting firms such as Accenture, Cap Gemini Ernst &Young, and Computer Sciences Corporation’s consulting division.

 

In e-health and e-commerce related services,we compete with the traditional competitors outlined above, as well as newerinternet product and service companies. We also compete with companies that provide software development,information technology consulting, and other integration and maintenanceservices, such as Wipro Technologies, Cognizant Technology SolutionsCorporation, and Tata Technologies Limited.

 

Several of our competitors employ a global sourcing strategy to providesoftware development and other information technology services to theirclients, while at the same time reducing their cost structure and improving thequality of services they provide.  If weare unable to realize the perceived cost benefits of our recently implementedglobal sourcing strategy or if we are unable to receive high quality servicesfrom foreign employees or subcontractors, our business may be adverselyimpacted and we may not be able to compete effectively.

 

Many of our competitors have significantlygreater financial, human, and marketing resources than us.  As a result, such competitors may be able torespond more quickly to new or emerging technologies and changes in customerdemands, or to devote greater resources to the development, promotion, sale,and support of their products and services than we do.  In addition, as healthcare organizationsbecome larger and more complex, our larger competitors may be better able to servethe needs of such organizations.  If wedo not compete effectively with current and future competitors, we may beunable to secure new and renewed client engagements, or we may be required toreduce our rates in order to compete effectively.  This could result in a reduction in our revenues, resulting inlower earnings or operating losses, and otherwise materially adverselyaffecting our business, financial condition, and results of operations.

 

*If we fail to establish and maintainrelationships with vendors of software and hardware products, it could have anegative effect on our ability to secure engagements.*

 

We have a number of relationships withsoftware and hardware vendors.  Forexample, our life sciences business unit is highly dependent upon a non-exclusiverelationship with Documentum, Inc., a vendor of document management softwareapplications with which we integrate our FirstDoc TM solution.  We believe that our relationship withvendors are important to our sales, marketing, and support activities.

 

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We often are engaged by vendors or their customers to implement orintegrate vendor products based on our relationship with a particularvendor.  If we fail to maintain ourrelationships with these vendors, or fail to establish additional newrelationships, our business could be materially adversely affected.

 

*Our relationships with vendors of softwareand hardware products could have a negative impact on our ability to secureconsulting engagements.*

 

Our growing number of relationships withsoftware and hardware vendors could result in clients perceiving that we arenot independent from those software and hardware vendors.  Our ability to secure assessment and otherconsulting engagements is often dependent, in part, on our being independent ofsoftware and hardware solutions that we may review, analyze or recommend toclients.  If clients believe that we arenot independent of those software and hardware vendors, clients may not engageus for certain consulting engagements relating to those vendors, which couldreduce our revenues and materially adversely affect our business.

 

*Our business is highly dependent on theavailability of business travel.*

 

Our consultants and service providers oftenreside or work in cities or other locations that require them to travel to aclient’s site to perform and execute the client’s project.  As a result of the September 11, 2001terrorist attacks, air travel has become more time-consuming to businesstravelers due to increased security, flight delays, reduced flight schedules,and other variables.  If efficient andcost effective air travel becomes unavailable to our consultants and otheremployees, or if domestic or international air travel is significantly reducedor halted, we may be unable to satisfactorily perform our client engagements ona timely basis, which could have a materially adverse impact on ourbusiness.  Further, if our consultantsor other employees refuse to utilize air travel to perform their job functionsfor any reason, our business and reputation would be negatively affected.

 

*If we fail to keep pace with regulatory andtechnological changes, our business could be materially adversely affected.*

 

The healthcare and pharmaceutical industries are subject to regulatoryand technological changes that may affect the procurement practices andoperations of healthcare and pharmaceutical organizations.  During the past several years, thehealthcare and pharmaceutical industries have been subject to an increase ingovernmental regulation and reform proposals. These reforms could increase governmental involvement in the healthcareand pharmaceutical industries, lower reimbursement rates or otherwise changethe operating environment of our clients. Also, certain reforms that create potential work for us could be delayedor cancelled.  Healthcare andpharmaceutical organizations may react to these situations by curtailing ordeferring investments, including those for our services.  In addition, if we are unable to maintainour skill and expertise in light of regulatory or technological changes, ourservices may not be marketable to our clients and we could lose existingclients or future engagements.  Finally,government regulations, particularly HIPAA, may require our clients to imposeadditional contractual responsibilities on us, which may make it more costly toperform certain of our engagements and subject us to increased risk in theperformance of these engagements, including immediate termination of anengagement.

 

Technological change in the network andapplication markets has created high demand for consulting, implementation, andintegration services.  If the pace oftechnological change were to diminish, we could experience a decrease in demandfor our services.  Any material decreasein demand would materially adversely affect our business, financial condition,and results of operations.

 

*We may be unable to effectively protect ourproprietary information and procedures.*

 

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We must protect our proprietary information,including our proprietary methodologies, research, tools, software code, andother information.  To do this, we relyon a combination of copyright and trade secret laws and confidentialityprocedures to protect our intellectual property.  These steps may not protect our proprietary information.  In addition, the laws of certain countriesdo not protect or enforce proprietary rights to the same extent, as do the lawsof the United States.  We are currentlyproviding our services to clients in international markets and have businessoperations in Europe, India and Vietnam. Our proprietary information may not be protected to the same extent asprovided under the laws of the United States, if at all.  The unauthorized use of our intellectualproperty could have a material adverse effect on our business, financialcondition, or results of operations.

 

*We may infringe the intellectual propertyrights of third parties.*

 

Our success depends, in part, on notinfringing patents, copyrights, and other intellectual property rights held byothers.  We do not know whether patentsheld or patent applications filed by third parties may force us to alter ourmethods of business and operation or require us to obtain licenses from thirdparties.  If we attempt to obtain suchlicenses, we do not know whether we will be granted licenses or whether theterms of those licenses will be fair or acceptable to us.  Third parties may assert infringement claimsagainst us in the future.  Such claimsmay result in protracted and costly litigation, penalties, and fines that couldadversely affect our business regardless of the merits of such claims.

 

*Our management may be able to exercisecontrol over matters requiring stockholder approval.*

 

Our current officers, directors, and otheraffiliates beneficially own approximately 32% of our outstanding shares ofcommon stock and approximately 42% on a fully diluted basis.  As a result, our existing management, ifacting together, may be able to exercise control over or significantlyinfluence matters requiring stockholder approval, including the election ofdirectors, mergers, consolidations, sales of all or substantially all of ourassets, issuance of additional shares of stock, and approval of new stock andoption plans.

 

*The price of our common stock may beadversely affected by market volatility.*

 

The trading price of our common stockfluctuates significantly.  Since ourcommon stock began trading publicly in February 1998, the reported sale priceof our common stock on the Nasdaq National Market has been as high as $29.13and as low as $3.63 per share.  Thisprice may be influenced by many factors, including:

 

•                  Ourperformance and prospects;

•                  Thedepth and liquidity of the market for our common stock;

•                  Anincrease in the number of outstanding shares of our common stock due toissuances in connection with our recent acquisitions;

•                  Investorperception of us and the industries in which we operate;

•                  Changesin earnings estimates or buy/sell recommendations by analysts;

•                  Generalfinancial and other market conditions; and

•                  Domesticand international economic conditions.

 

In addition, public stock markets have experienced extreme price andtrading volume volatility.  This volatilityhas significantly affected the market prices of securities of many companiesfor reasons frequently unrelated to or disproportionately impacted by theoperating performance of these companies. These broad market fluctuations may adversely affect the market price ofour common stock.  As a result, we maybe unable to raise capital or use our stock to acquire businesses on attractiveterms and investors may be unable to resell their shares of our common stock ator above their purchase price.  Further,if research analysts stop covering our company or reduce their expectations ofus, our stock price could

 

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decline or the liquidity of our common stock may be adversely impacted,which could create difficulty for investors to resell their shares of ourcommon stock.

 

*If our stock price is volatile, we may becomesubject to securities litigation, which is expensive and could result in adiversion of resources.*

 

If our stock price experiences periods of volatility,our security holders may initiate securities class action litigation againstus.  If we become involved in this typeof litigation it could be very expensive and divert our management’s attentionand resources, which could materially and adversely affect our business andfinancial condition.

 

*Our charter documents, Delaware law andstockholders rights plan will make it more difficult to acquire us and maydiscourage take-over attempts and thus depress the market price of our commonstock.*

 

Our board of directors has the authority toissue up to 9,500,000 shares of undesignated preferred stock, to determine thepowers, preferences, and rights and the qualifications, limitations, orrestrictions granted to or imposed upon any unissued series of undesignatedpreferred stock and to fix the number of shares constituting any series and thedesignation of such series, without any further vote or action by ourstockholders.  The preferred stock couldbe issued with voting, liquidation, dividend, and other rights superior to therights of our common stock. Furthermore, any preferred stock may have other rights, includingeconomic rights, senior to our common stock, and as a result, the issuance ofany preferred stock could depress the market price of our common stock.

 

In addition, our certificate of incorporationeliminates the right of stockholders to act without a meeting and does notprovide cumulative voting for the election of directors.  Our certificate of incorporation alsoprovides for a classified board of directors. The ability of our board of directors to issue preferred stock and theseother provisions of our certificate of incorporation and bylaws may have theeffect of deterring hostile takeovers or delaying changes in control ormanagement.

 

We are also subject to the provisions ofSection 203 of the Delaware General Corporation Law, which could delay orprevent a change in control of us, impede a merger, consolidation, or otherbusiness combination involving us or discourage a potential acquirer frommaking a tender offer or otherwise attempting to obtain control.  Any of these provisions, which may have theeffect of delaying or preventing a change in control, could adversely affectthe market value of our common stock.

 

In 1999, our board of directors adopted a share purchase rights planthat is intended to protect our stockholders’ interests in the event we areconfronted with coercive takeover tactics. Pursuant to the stockholders rights plan, we distributed “rights” topurchase up to 500,000 shares of our Series A Junior Participating PreferredStock.  Under some circumstances, theserights become the rights to purchase shares of our common stock or securitiesof an acquiring entity at one-half the market value.  The rights are not intended to prevent our takeover, rather theyare designed to deal with the possibility of unilateral actions by hostileacquirers that could deprive our board of directors and stockholders of theirability to determine our destiny and obtain the highest price for our commonstock.

 

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## **Item 3**.           Quantitative andQualitative Disclosures about Market Risks

 

Our financial instruments include cash andcash equivalents (i.e., short-term and long-term cash investments), accountsreceivable, unbilled receivables, accounts payable, and a revolving line ofcredit.  Only the cash and cashequivalents and investments which totaled $58.5 million at September 26, 2003present us with market risk exposure resulting primarily from changes ininterest rates.  Based on this balance,a change of one percent in the interest rate would cause a change in interestincome for the annual period of approximately $0.6 million.  Our objective in maintaining theseinvestments is the flexibility obtained in having cash available for payment ofaccrued liabilities and acquisitions.

 

Our borrowings are primarily dependent uponthe prevailing prime rate.  As ofSeptember 26, 2003, we had no borrowings under our revolving line of credit andan available borrowing capacity of $7.0 million.  See “Item 2. Management’s Discussion and Analysis of FinancialCondition and Results of Operations- Liquidity and Capital Resources.”  The estimated fair value of borrowings underthe revolving line is expected to approximate its carrying value.

 

## **Item 4**.           Controls andProcedures

 

We maintain disclosure controls andprocedures that are designed to ensure that information required to bedisclosed in our Exchange Act reports is recorded, processed, summarized andreported within the time periods specified in the Securities and ExchangeCommission’s rules and forms, and that such information is accumulated andcommunicated to our management, including our Chief Executive Officer and ChiefFinancial Officer, as appropriate, to allow for timely decisions regardingrequired disclosure. In designing and evaluating the disclosure controls andprocedures, management recognizes that any controls and procedures, no matterhow well designed and operated, can provide only reasonable assurance ofachieving the desired control objectives, and management is required to applyits judgment in evaluating the cost-benefit relationship of possible controlsand procedures.

 

As required by SEC Rule 13a-15(b), we carriedout an evaluation, under the supervision and with the participation of ourmanagement, including our Chief Executive Officer and our Chief FinancialOfficer, of the effectiveness of the design and operation of our disclosurecontrols and procedures as of the end of the quarter covered by this report.Based on the foregoing, our Chief Executive Officer and Chief Financial Officerconcluded that our disclosure controls and procedures were effective at thereasonable assurance level.

 

There has beenno change in our internal controls over financial reporting during our mostrecent fiscal quarter that has materially affected, or is reasonably likely tomaterially affect, our internal controls over financial reporting.

 

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# **PART II**.  OTHER INFORMATION

 

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

 

None.

 

## **Item 2.**           Changes inSecurities.

 

(c) Sales of Unregistered Securities.  On September 26, 2003, wepurchased the 15% minority interest of FCG Management Services, LLC held byNYPH for 1.0 million shares of unregistered FCG common stock.  The closing price of FCG common stock onSeptember 26, 2003 was $5.10 per share, and the aggregate consideration paidfor NYPH’s 15% minority interest on such date was $5.1 million.  The shares that were issued are exempt fromthe registration requirements of the Securities Act of 1933, as amended,pursuant to Section 4(2) of such Act and Rule 506 promulgated thereunder.  In connection with our issuance of1.0 million shares of FCG common stock to New York Presbyterian Hospital (NYPH)for the purchase of its 15% minority interest in FCG Management Services, LLC,NYPH contractually agreed not to sell such FCG common stock until January 1,2007.  After such date, the FCG commonstock issued to NYPH will be subject to the resale restrictions established for“affiliates” under Rule 144(k).

 

## **Item 3.**           Defaults UponSenior Securities.

 

None.

 

**Item 4.****           Submission of Matters to a Voteof Security Holders**

 

None.

 

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

 

None.

 

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## **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                                                                                                                                     |
| 10.1     |   | Letter Agreement by and between the Company and Northern Westchester  Hospital Center dated October 1, 2003 regarding the reimbursement of certain  interest expenses |
| 10.2     |   | Letter Agreement by and between the Company and Phelps Memorial  Hospital Center dated October 1, 2003 regarding the reimbursement of certain  interest expenses      |
| 10.3     |   | Letter Agreement by and between the Company and Lawrence Hospital  Center dated October 1, 2003 regarding the reimbursement of certain interest  expenses             |
| 10.4     |   | Loan Agreement by and between the Company and White Plains Hospital  Center dated October 1, 2003                                                                     |
| 10.5     |   | Stock Purchase Agreement dated September 17, 2003 by and between FCG  Management Services, LLC and The Trustees of the University of Pennsylvania                     |
| 10.6     |   | Stock Purchase Agreement dated September 26, 2003 by and between the  Company and New York Presbyterian Hospital                                                      |
| 11.1(5)  |   | Statement of computation of per share earnings                                                                                                                        |
| 31.1     |   | Certification of Chief Executive Officer                                                                                                                              |
| 31.2     |   | Certification of Chief Financial Officer                                                                                                                              |
| 32.1     |   | Certifications pursuant to Section 906 of the Sarbanes-Oxley Act of  2002                                                                                             |

 

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(1)          Incorporated byreference to Exhibit 3.1 to FCG’s Form S-1 Registration Statement (No.333-41121) originally filed on November 26, 1997 (the “Form S-1”).

 

(2)          Incorporated byreference to Exhibit 99.1 to FCG’s Current Report on Form 8-K dated December 9,1999.

 

(3)          Incorporated byreference to Exhibit 3.3 to FCG’s Form S-1.

 

(4)          Incorporated byreference to Exhibit 4.1 to FCG’s Form S-1.

 

(5)          See Note 1 toConsolidated Financial Statements, “Accounting Policies – Basic and Diluted NetIncome (Loss) Per Share.”

 

(b)         Reports on Form 8-K

 

(1)  Form 8-Kfiled on July 24, 2003, furnishing a press release announcing our financialresults for the second quarter of 2003 (Items 7 and 9).

 

(2)  Form 8-Kfiled on September 11, 2003 furnishing a press release announcing our certainorganizational changes (Items 7 and 9).

 

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# **SIGNATURES**

 

Pursuant to the requirements of theSecurities and Exchange Act of 1934, the registrant has duly caused this reportto be signed in its behalf by the undersigned thereunto duly authorized.

 
|                           | FIRST CONSULTING GROUP, INC.                          |
|--------------------------------|-------------------------------------------------------|
|                           |                                                  |
|                           |                                                  |
| Date:   November 10, 2003 | /s/ LUTHER J. NUSSBAUM                                |   |
|                           | Luther J. Nussbaum                                    |
|                           | Chairman and Chief Executive Officer                  |
|                           |                                                  |
|                           |                                                  |
| Date:   November 10, 2003 | /s/ WALTER J. MCBRIDE                                 |   |
|                           | Walter J. McBride                                     |
|                           | Executive Vice President and Chief  Financial Officer |
|                           | (Principal Financial Officer)                         |
|                                |                                                       |  |  |

 

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# **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                                                                                                                                     |
| 10.1     |   | Letter Agreement by and between the Company and Northern Westchester  Hospital Center dated October 1, 2003 regarding the reimbursement of certain  interest expenses |
| 10.2     |   | Letter Agreement by and between the Company and Phelps Memorial  Hospital Center dated October 1, 2003 regarding the reimbursement of certain  interest expenses      |
| 10.3     |   | Letter Agreement by and between the Company and Lawrence Hospital  Center dated October 1, 2003 regarding the reimbursement of certain interest  expenses             |
| 10.4     |   | Loan Agreement by and between the Company and White Plains Hospital  Center dated October 1, 2003                                                                     |
| 10.5     |   | Stock Purchase Agreement dated September 17, 2003 by and between FCG  Management Services, LLC and The Trustees of the University of Pennsylvania                     |
| 10.6     |   | Stock Purchase Agreement dated September 26, 2003 by and between the  Company and New York Presbyterian Hospital                                                      |
| 11.1 (5) |   | Statement of computation of per share earnings                                                                                                                        |
| 31.1     |   | Certification of Chief Executive Officer                                                                                                                              |
| 31.2     |   | Certification of Chief Financial Officer                                                                                                                              |
| 32.1     |   | Certifications pursuant to Section 906 of the Sarbanes-Oxley Act of  2002                                                                                             |

 

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(1)          Incorporated byreference to Exhibit 3.1 to FCG’s Form S-1 Registration Statement (No.333-41121) originally filed on November 26, 1997 (the “Form S-1”).

 

(2)          Incorporated byreference to Exhibit 99.1 to FCG’s Current Report on Form 8-K dated December 9,1999.

 

(3)          Incorporated byreference to Exhibit 3.3 to FCG’s Form S-1.

 

(4)          Incorporated byreference to Exhibit 4.1 to FCG’s Form S-1.

 

(5)          See Note 1 toConsolidated Financial Statements, “Accounting Policies – Basic and Diluted NetIncome (Loss) Per Share.”

 

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