**UNITED STATES****SECURITIES AND EXCHANGECOMMISSION**

**Washington, DC  20549**

 

----

 

**FORM 10-Q**

**(Mark One)**

 

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

 

**For the quarterly period endedSeptember 27, 2002,**

 

**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**

 

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| **First Consulting Group, Inc.**                                                    |
|-------------------------------------------------------------------------------------|
| (Exact  name of registrant as specified in its charter)                             |
|                                                                                |
| **Delaware**                                                                        |   | **95-3539020** |
| (State  or other jurisdiction of  incorporation or organization)                    |   | (I.R.S.  Employer  Identification No.) |
|                                                                                |   |   |
| **111 W.  Ocean Blvd., 4th Floor, Long Beach, CA  90802**                      |
| (Address  of principal executive offices including zip code)                        |
|                                                                                |   |   |
| **(562)  624-5200**                                                                 |
| (Registrant’s  telephone number, including area code)                          |
|                                                                                |
|                                                                                |
| (Former  name, former address and former fiscal year, if changed since last report) |

 

Indicate by check markwhether the registrant (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or such shorter period that the registrant was required to file suchreports), and (2) has been subject to such filing requirements for the past 90days.  Yes  ý              No  o

 

Indicate the number ofshares outstanding of each of the issuer’s classes of common stock, as of thelatest practicable date.

 

| **Common  Stock, $.001 par value** |   | **24,089,303**                     |
|------------------------------------|--------|------------------------------------|
| (Class)                            |   | (Outstanding  at October 25, 2002) |

 

 

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**First ConsultingGroup, Inc.**

**Table of Contents**

 
| COVER PAGE                                                         |
|--------------------------------------------------------------------|
|                                                               |
| TABLE  OF CONTENTS                                                 |
|                                                               |
| PART I.       FINANCIAL  INFORMATION |
|                                                               |
|                                                               | ITEM 1.   FINANCIAL STATEMENTS AND NOTES (UNAUDITED) |
|                                                               |   |   |
|                                                               |   | Consolidated Balance Sheets as of September 27, 2002 and December 28,  2001 |
|                                                               |   |   |
|                                                               |   | Consolidated Statements of Operations for  the three and nine month periods ended  September 27, 2002 and September 30, 2001 |
|                                                               |   |   |
|                                                               |   | Condensed Consolidated Statements of Cash  Flows for the nine months ended  September 27, 2002 and September 30, 2001 |
|                                                               |   |   |
|                                                               |   | 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                                                         |
|                                                               |   |
| CERTIFICATIONS                                                     |
|                                                               |   |
| EXHIBIT INDEX                                                      |

 

2

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**PARTI.  FINANCIAL INFORMATION**

 

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

 

**First Consulting Group, Inc. andSubsidiaries**

 

 

**ConsolidatedBalance Sheets**

**(in thousands)**

 
|                                                                                                                                 |   | **September  27,  2002** |       | **December  28,  2001** |       |
|--------------------------------------------------------------------------------------------------------------------------------------|--------|--------------------------|------------|-------------------------|------------|
|                                                                                                                                 |   | **(unaudited)**          |       |                    |       |
| **ASSETS**                                                                                                                           |   |                     |       |                    |       |
| Current Assets                                                                                                                       |   |                     | ** ** |                    | ** ** |
| Cash and cash equivalents                                                                                                            |   | $                        | 43,126     |                    | $          | 32,499 |   |
| Short-term investments                                                                                                               |   | 17,683                   |       | 19,410                  |       |
| Accounts receivable, less allowance of $2,169 and $2,740 in the periodsended September 27, 2002 and  December 28, 2001, respectively |   | 26,481                   |       | 34,657                  |       |
| Unbilled receivables                                                                                                                 |   | 20,261                   |       | 13,963                  |       |
| Deferred income taxes, net                                                                                                           |   | 7,655                    |       | 7,834                   |       |
| Prepaid expenses and other current assets                                                                                            |   | 1,997                    |       | 1,571                   |       |
| Total current assets                                                                                                                 |   | 117,203                  |       | 109,934                 |       |
|                                                                                                                                 |   |                     |       |                    |       |
| Notes receivable – stockholders                                                                                                 |   | 763                      |       | 753                     |       |
| Long-term investments                                                                                                                |   | 3,279                    |       | 1,200                   |       |
| Property and equipment                                                                                                               |   |                     |       |                    |       |
| Furniture, equipment, and leasehold improvements                                                                                     |   | 7,695                    |       | 8,033                   |       |
| Information systems equipment                                                                                                        |   | 20,635                   |       | 26,838                  |       |
|                                                                                                                                 |   | 28,330                   |       | 34,871                  |       |
| Less accumulated depreciation and amortization                                                                                       |   | 19,366                   |       | 24,237                  |       |
|                                                                                                                                 |   | 8,964                    |       | 10,634                  |       |
|                                                                                                                                 |   |                     |       |                    |       |
| Other assets                                                                                                                         |   |                     |       |                    |       |
| Executive benefit trust                                                                                                              |   | 6,565                    |       | 6,246                   |       |
| Unbilled long-term receivables                                                                                                       |   | 8,644                    |       | 10,250                  |       |
| Deferred income taxes                                                                                                                |   | 2,500                    |       | 2,433                   |       |
| Goodwill, net                                                                                                                        |   | 3,577                    |       | 3,587                   |       |
| Other                                                                                                                                |   | 402                      |       | 392                     |       |
|                                                                                                                                 |   | 21,688                   |       | 22,908                  |       |
| Total assets                                                                                                                         |   | $                        | 151,897    |                    | $          | 145,429 |   |

 

See accompanying notes.

 

3

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|                                                                                                                                                                                            |   | **September  27,  2002** |       | **December  28,  2001** |       |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------------------------|------------|-------------------------|------------|
|                                                                                                                                                                                            |   | **(unaudited)**          |       |                    |       |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                                                                                                   |   |                     |       |                    |       |
| Current liabilities                                                                                                                                                                             |   |                     | ** ** |                    | ** ** |
| Accounts payable                                                                                                                                                                                |   | $                        | 2,526      |                    | $          | 1,723 |   |
| Accrued liabilities                                                                                                                                                                             |   | 14,414                   |       | 11,989                  |       |
| Accrued restructuring                                                                                                                                                                           |   | 6,999                    |       | 6,076                   |       |
| Accrued vacation                                                                                                                                                                                |   | 6,937                    |       | 6,453                   |       |
| Accrued incentive compensation                                                                                                                                                                  |   | 1,874                    |       | 4,280                   |       |
| Customer advances                                                                                                                                                                               |   | 5,416                    |       | 5,259                   |       |
| Total current liabilities                                                                                                                                                                       |   | 38,166                   |       | 35,780                  |       |
| Non-current liabilities                                                                                                                                                                         |   |                     |       |                    |       |
| Supplemental executive retirement plan                                                                                                                                                          |   | 6,718                    |       | 6,510                   |       |
| Minority interest                                                                                                                                                                               |   | 1,749                    |       | 863                     |       |
| Total non-current liabilities                                                                                                                                                                   |   | 8,467                    |       | 7,373                   |       |
| Commitments and contingencies                                                                                                                                                                   |   | —                   |       | —                  |       |
| Stockholders’ equity                                                                                                                                                                       |   |                     |       |                    |       |
| Preferred Stock, $.001 par value; 9,500,000 shares authorized, no  shares issued and outstanding                                                                                                |   | —                   |       | —                  |       |
| Common Stock, $.001 par value; 50,000,000 shares authorized,  24,079,271 shares issued and outstanding at September 27, 2002 and 23,715,719  shares issued and outstanding at December 28, 2001 |   | 24                       |       | 24                      |       |
| Additional paid-in capital                                                                                                                                                                      |   | 92,229                   |       | 90,215                  |       |
| Retained earnings                                                                                                                                                                               |   | 15,957                   |       | 15,895                  |       |
| Deferred compensation-stock incentive agreements                                                                                                                                                |   | (686                     | )          | (1,134                  | )          |
| Notes receivable-stockholders                                                                                                                                                                   |   | (1,498                   | )          | (1,780                  | )          |
| Accumulated other comprehensive loss                                                                                                                                                            |   | (762                     | )          | (944                    | )          |
| Total stockholders’ equity                                                                                                                                                                 |   | 105,264                  |       | 102,276                 |       |
| Total liabilities and stockholders’ equity                                                                                                                                                 |   | $                        | 151,897    |                    | $          | 145,429 |   |

 

See accompanying notes.

 

4

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**First Consulting Group, Inc. andSubsidiaries**

** **

**Consolidated Statements of Operations(Unaudited)**

**(in thousands, exceptper share data)**

 
|                                          |   | **Three  Months Ended**  |   | **Nine  Months Ended**   |   |
|-----------------------------------------------|--------|--------------------------|--------|--------------------------|--------|
|                                          |   | **September  27,  2002** |   | **September  30,  2001** |   | **September  27,  2002** |   | **September  30,  2001** |   |
|                                          |   |                     |   |                     |   |   |   |   |   |
| Revenue before reimbursements                 |   | $                        | 69,606 |                     | $      | 65,732 |   | $ | 199,081 |   | $ | 202,238 |   |
| Out of pocket reimbursements                  |   | 3,487                    |   | 4,054                    |   | 11,301 |   | 13,352 |   |
| Total revenue                                 |   | 73,093                   |   | 69,786                   |   | 210,382 |   | 215,590 |   |
|                                          |   |                     |   |                     |   |   |   |   |   |
| Cost of services before reimbursable expenses |   | 45,762                   |   | 40,499                   |   | 127,644 |   | 126,446 |   |
| Out of pocket reimbursable expenses           |   | 3,487                    |   | 4,054                    |   | 11,301 |   | 13,352 |   |
| Total cost of services                        |   | 49,249                   |   | 44,553                   |   | 138,945 |   | 139,798 |   |
|                                          |   |                     |   |                     |   |   |   |   |   |
| Gross profit                                  |   | 23,844                   |   | 25,233                   |   | 71,437 |   | 75,792 |   |
|                                          |   |                     |   |                     |   |   |   |   |   |
| Selling expenses                              |   | 7,079                    |   | 7,861                    |   | 20,912 |   | 23,858 |   |
| General and administrative expenses           |   | 13,471                   |   | 15,592                   |   | 42,953 |   | 49,878 |   |
| Restructuring, severance and impairment costs |   | —                   |   | —                   |   | 7,818 |   | 4,349 |   |
| Income (loss) from operations                 |   | 3,294                    |   | 1,780                    |   | (246 | ) | (2,293 | ) |
| Other income                                  |   |                     |   |                     |   |   |   |   |   |
| Interest income, net                          |   | 240                      |   | 434                      |   | 692 |   | 1,144 |   |
| Other expense, net                            |   | (233                     | )      | (209                     | )      | (340 | ) | (449 | ) |
| Income (loss) before income taxes             |   | 3,301                    |   | 2,005                    |   | 106 |   | (1,598 | ) |
| Provision (benefit) for income taxes          |   | 1,390                    |   | 842                      |   | 44 |   | (671 | ) |
| Net income (loss)                             |   | $                        | 1,911  |                     | $      | 1,163 |   | $ | 62 |   | $ | (927 | ) |
| Basic net income (loss) per share             |   | $                        | 0.08   |                     | $      | 0.05 |   | $ | 0.00 |   | $ | (0.04 | ) |
| Diluted net income (loss) per share           |   | $                        | 0.08   |                     | $      | 0.05 |   | $ | 0.00 |   | $ | (0.04 | ) |
| Weighted average shares used in computing:    |   |                     |   |                     |   |   |   |   |   |
| Basic net income (loss) per share             |   | 24,074                   |   | 23,609                   |   | 23,976 |   | 23,526 |   |
| Diluted net income (loss) per share           |   | 24,535                   |   | 24,299                   |   | 24,826 |   | 23,526 |   |

 

See accompanying notes.

 

5

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**First Consulting Group, Inc. andSubsidiaries**

 

**CondensedConsolidated Statements of Cash Flows (Unaudited)**

**(in thousands)**

 
|                                                                                      |   | **Nine  Months Ended**   |   |
|-------------------------------------------------------------------------------------------|--------|--------------------------|--------|
|                                                                                      |   | **September  27,  2002** |   | **September  30,  2001** |   |
| Cash flows from operating activities:                                                     |   |                     |   |   |   |
| Net income (loss)                                                                         |   | $                        | 62     |   | $ | (927 | ) |
| Adjustments to reconcile net income (loss) to net cash provided by  operating activities: |   |                     |   |   |   |
| Depreciation and amortization                                                             |   | 3,890                    |   | 4,684 |   |
| Goodwill amortization                                                                     |   | —                   |   | 1,497 |   |
| Goodwill impairment charges                                                               |   | 2,143                    |   | — |   |
| Provision for bad debts                                                                   |   | (379                     | )      | 450 |   |
| Minority interest                                                                         |   | 405                      |   | 367 |   |
| Other                                                                                     |   | (181                     | )      | 133 |   |
| Changes in assets and liabilities:                                                        |   |                     |   |   |   |
| Accounts receivable                                                                       |   | 9,376                    |   | 5,001 |   |
| Work in process                                                                           |   | (6,298                   | )      | (1,883 | ) |
| Prepaid expenses and other                                                                |   | 1,415                    |   | 2,240 |   |
| Income taxes payable                                                                      |   | —                   |   | (1,741 | ) |
| Deferred income taxes                                                                     |   | 233                      |   | (77 | ) |
| Accounts payable and accrued liabilities                                                  |   | 4,370                    |   | 6,272 |   |
| Accrued restructuring                                                                     |   | 639                      |   | (1,768 | ) |
| Accrued incentive compensation                                                            |   | (2,406                   | )      | 1,622 |   |
| Customer advances                                                                         |   | (47                      | )      | (2,349 | ) |
| Net cash provided by operating activities                                                 |   | 13,222                   |   | 13,521 |   |
| Cash flows from investing activities:                                                     |   |                     |   |   |   |
| Net purchase of investments                                                               |   | (321                     | )      | (1,076 | ) |
| Furniture, equipment, and leasehold improvements                                          |   | (1,987                   | )      | (2,714 | ) |
| Acquisition of business                                                                   |   | (2,656                   | )      | (193 | ) |
| Net cash used for investing activities                                                    |   | (4,964                   | )      | (3,983 | ) |
| Cash flows from financing activities:                                                     |   |                     |   |   |   |
| Principal payments of long-term debt                                                      |   | —                   |   | (132 | ) |
| Proceeds from stock/tax loan payments                                                     |   | 211                      |   | 767 |   |
| Proceeds from issuance of stock                                                           |   | 2,158                    |   | 1,530 |   |
| Net cash provided by financing activities                                                 |   | 2,369                    |   | 2,165 |   |
| Net increase in cash and equivalents                                                      |   | 10,627                   |   | 11,703 |   |
| Cash and equivalents at beginning of period                                               |   | 32,499                   |   | 11,429 |   |
| Cash and equivalents at end of period                                                     |   | $                        | 43,126 |   | $ | 23,132 |   |
|                                                                                      |   |                     |   |   |   |
| Cash paid during the period for:                                                          |   |                     |   |   |   |
| Interest                                                                                  |   | $                        | 32     |   | $ | 19 |   |
| Income taxes                                                                              |   | $                        | 956    |   | $ | 575 |   |

 

Seeaccompanying notes.

 

6

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**Notesto Consolidated Financial Statements**

 

**1.****         ****Basis of Presentation**

 

The consolidated balancesheets of First Consulting Group, Inc. (the “Company”) at September 27, 2002and consolidated statements of operations and condensed consolidated statementsof cash flows for the periods ended September 27, 2002 and September 30, 2001are unaudited.  These financialstatements reflect all adjustments, consisting of only normal recurringadjustments, which, in the opinion of management, are necessary to fairlypresent the financial position of the Company at September 27, 2002 and theresults of operations for the three-month and nine-month periods endedSeptember 27, 2002 and September 30, 2001. The results of operations for the nine months ended September 27, 2002are not necessarily indicative of the results to be expected for the yearending December 27, 2002.  For morecomplete financial information, these financial statements should be read inconjunction with the audited financial statements for the year ended December28, 2001 included in the Company’s Annual Report on Form 10-K.

 

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

 

For purposes of reportingcash flows, cash and cash equivalents include cash and interest-earningdeposits or securities with original maturities of three months or less.  The Company has approximately $17.7 millionin short-term investments and $2.1 million of long-term investments classifiedas available for sale.  Such investmentsare currently held primarily in commercial paper, money market investments andtax-exempt government securities.  Netunrealized gains and losses on investments were not material at September 27,2002.

 

**3.****         ****Net Income (Loss) Per Share**

 

The following represents areconciliation of basic and diluted net income (loss) per share for the threemonth and nine month periods ended September 27, 2002 and September 30, 2001,respectively (amounts rounded to thousands, except per share data):

 
|                                                                       |   | **For the  Three Months Ended  September 27, 2002** |   | **For the  Three Months Ended  September 30, 2001** |   |
|----------------------------------------------------------------------------|--------|-----------------------------------------------------|--------|-----------------------------------------------------|--------|
|                                                                       |   | **Net  Income**                                     |   | **Weighted  Average  Shares**                       |   | **Per Share  Amount** |   | **Net  Income** |   | **Weighted  Average  Shares** |   | **Per Share  Amount** |   |
| Basic EPS:                                                                 |   |                                                |   |                                                |   |   |   |   |   |   |   |   |   |
| Net income available to common stockholders                                |   | $                                                   | 1,911  |                                                | 24,074 |   | $ | 0.08 |   | $ | 1,163 |   | 23,609 |   | $ | 0.05 |   |
| Effect of dilutive options and warrants:                                   |   | —                                              |   | 461                                                 |   | — |   | — |   | 690 |   | — |   |
| Diluted EPS:                                                               |   |                                                |   |                                                |   |   |   |   |   |   |   |   |   |
| Net income available to common   stockholders and assumed conversions |   | $                                                   | 1,911  |                                                | 24,535 |   | $ | 0.08 |   | $ | 1,163 |   | 24,299 |   | $ | 0.05 |   |

 

7

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|                                                                             |   | **For the Nine  Months Ended  September 27, 2002** |   | **For the  Nine Months Ended  September 30, 2001** |   |
|----------------------------------------------------------------------------------|--------|----------------------------------------------------|--------|----------------------------------------------------|--------|
|                                                                             |   | **Net  Income**                                    |   | **Weighted  Average  Shares**                      |   | **Per Share  Amount** |   | **Net Loss** |   | **Weighted  Average  Shares** |   | **Per Share  Amount** |   |
| Basic EPS:                                                                       |   |                                               |   |                                               |   |   |   |   |   |   |   |   |   |
| Net income (loss) available to common stockholders                               |   | $                                                  | 62     |                                               | 23,976 |   | $ | 0.00 |   | $ | (927 | ) | 23,526 |   | $ | (0.04 | ) |
| Effect of dilutive options and warrants:                                         |   | —                                             |   | 850                                                |   | — |   | — |   | — |   | — |   |
| Diluted EPS:                                                                     |   |                                               |   |                                               |   |   |   |   |   |   |   |   |   |
| Net income (loss) available to common  stockholders and assumed conversions |   | $                                                  | 62     |                                               | 24,826 |   | $ | 0.00 |   | $ | (927 | ) | 23,526 |   | $ | (0.04 | ) |

 

For the threemonths ended September  27, 2002 andSeptember 30, 2001, there were 3,012,947 and 2,462,579 anti-dilutiveoutstanding stock options, respectively, excluded from the calculation ofdiluted earnings per share. For the nine months ended September 27, 2002 andSeptember 30, 2001, there were 2,096,255 and 2,570,003 anti-dilutiveoutstanding stock options, respectively, excluded from the calculation ofdiluted earnings per share.

 

**4.****         ****Disclosure of Segment Information**

 

The Company provides segmentreporting at a gross profit level. Selling and general and administrative expense (including corporatefunctions, occupancy related costs, depreciation, professional development,recruiting, and marketing), and fixed assets (primarily computer equipment,furniture, and leasehold improvements) are managed at the corporate level.  The Company currently has threesegments:  Healthcare, Life Sciences andOutsourcing.  The Company’s segments aremanaged on an integrated basis in order to serve clients by assemblingmulti-disciplinary teams, which provide comprehensive services.

 

The following is a summaryof certain financial information by segment (in thousands):

 

**For the three months ended September 27, 2002:**

 
|                                          |   | **Healthcare** |   | **Life  Sciences** |   | **Outsourcing** |   | **Totals** |   |
|-----------------------------------------------|--------|----------------|--------|--------------------|--------|-----------------|--------|------------|--------|
| Revenue before reimbursements                 |   | $              | 26,699 |               | $      | 16,382          |   | $          | 26,525 |   | $ | 69,606 |   |
|                                          |   |           |   |               |   |            |   |       |   |   |   |   |   |
| Out of pocket reimbursements                  |   | 3,027          |   | 414                |   | 46              |   | 3,487      |   |
|                                          |   |           |   |               |   |            |   |       |   |
| Total revenue                                 |   | 29,726         |   | 16,796             |   | 26,571          |   | 73,093     |   |
|                                          |   |           |   |               |   |            |   |       |   |
| Cost of services before reimbursable expenses |   | 15,237         |   | 8,847              |   | 21,678          |   | 45,762     |   |
|                                          |   |           |   |               |   |            |   |       |   |
| Out of pocket 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                              |   |           |   |               |   |            |   | 7,079      |   |
|                                          |   |           |   |               |   |            |   |       |   |
| General and administrative expenses           |   |           |   |               |   |            |   | 13,471     |   |
|                                          |   |           |   |               |   |            |   |       |   |
| Restructuring, severance and impairment costs |   |           |   |               |   |            |   | —     |   |
|                                          |   |           |   |               |   |            |   |       |   |
| Income from operations                        |   |           |   |               |   |            |   | $          | 3,294  |   |

 

8

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

 
|                                          |   | **Healthcare** |   | **Life  Sciences** |   | **Outsourcing** |   | **Totals** |   |
|-----------------------------------------------|--------|----------------|--------|--------------------|--------|-----------------|--------|------------|--------|
| Revenue before reimbursements                 |   | $              | 30,245 |               | $      | 19,293          |   | $          | 16,194 |   | $ | 65,732 |   |
|                                          |   |           |   |               |   |            |   |       |   |   |   |   |   |
| Out of pocket reimbursements                  |   | 3,509          |   | 498                |   | 47              |   | 4,054      |   |
|                                          |   |           |   |               |   |            |   |       |   |
| Total revenue                                 |   | 33,754         |   | 19,791             |   | 16,241          |   | 69,786     |   |
|                                          |   |           |   |               |   |            |   |       |   |
| Cost of services before reimbursable expenses |   | 17,185         |   | 10,461             |   | 12,853          |   | 40,499     |   |
|                                          |   |           |   |               |   |            |   |       |   |
| Out of pocket reimbursable expenses           |   | 3,509          |   | 498                |   | 47              |   | 4,054      |   |
|                                          |   |           |   |               |   |            |   |       |   |
| Total cost of services                        |   | 20,694         |   | 10,959             |   | 12,900          |   | 44,553     |   |
|                                          |   |           |   |               |   |            |   |       |   |
| Gross profit                                  |   | 13,060         |   | 8,832              |   | 3,341           |   | 25,233     |   |
|                                          |   |           |   |               |   |            |   |       |   |
| Selling expenses                              |   |           |   |               |   |            |   | 7,861      |   |
|                                          |   |           |   |               |   |            |   |       |   |
| General and administrative expenses           |   |           |   |               |   |            |   | 15,592     |   |
|                                          |   |           |   |               |   |            |   |       |   |
| Restructuring, severance and impairment costs |   |           |   |               |   |            |   | —     |   |
|                                          |   |           |   |               |   |            |   |       |   |
| Income from operations                        |   |           |   |               |   |            |   | $          | 1,780  |   |

 

**For the nine months ended September 27, 2002:**

 
|                                          |   | **Healthcare** |   | **Life  Sciences** |   | **Outsourcing** |   | **Totals** |   |
|-----------------------------------------------|--------|----------------|--------|--------------------|--------|-----------------|--------|------------|--------|
| Revenue before reimbursements                 |   | $              | 85,034 |               | $      | 51,914          |   | $          | 62,133 |   | $ | 199,081 |   |
|                                          |   |           |   |               |   |            |   |       |   |   |   |   |   |
| Out of pocket reimbursements                  |   | 9,735          |   | 1,412              |   | 154             |   | 11,301     |   |
|                                          |   |           |   |               |   |            |   |       |   |
| Total revenue                                 |   | 94,769         |   | 53,326             |   | 62,287          |   | 210,382    |   |
|                                          |   |           |   |               |   |            |   |       |   |
| Cost of services before reimbursable expenses |   | 48,611         |   | 29,378             |   | 49,655          |   | 127,644    |   |
|                                          |   |           |   |               |   |            |   |       |   |
| Out of pocket 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                              |   |           |   |               |   |            |   | 20,912     |   |
|                                          |   |           |   |               |   |            |   |       |   |
| General and administrative expenses           |   |           |   |               |   |            |   | 42,953     |   |
|                                          |   |           |   |               |   |            |   |       |   |
| Restructuring, severance and impairment costs |   |           |   |               |   |            |   | 7,818      |   |
|                                          |   |           |   |               |   |            |   |       |   |
| Loss from operations                          |   |           |   |               |   |            |   | $          | (246   | ) |

 

9

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

 
|                                          |   | **Healthcare** |    | **Life  Sciences** |   | **Outsourcing** |   | **Totals** |   |
|-----------------------------------------------|--------|----------------|---------|--------------------|--------|-----------------|--------|------------|--------|
| Revenue before reimbursements                 |   | $              | 102,318 |               | $      | 56,109          |   | $          | 43,811 |   | $ | 202,238 |   |
|                                          |   |           |    |               |   |            |   |       |   |   |   |   |   |
| Out of pocket reimbursements                  |   | 11,792         |    | 1,513              |   | 47              |   | 13,352     |   |
|                                          |   |           |    |               |   |            |   |       |   |
| Total revenue                                 |   | 114,110        |    | 57,622             |   | 43,858          |   | 215,590    |   |
|                                          |   |           |    |               |   |            |   |       |   |
| Cost of services before reimbursable expenses |   | 56,492         |    | 34,970             |   | 34,984          |   | 126,446    |   |
|                                          |   |           |    |               |   |            |   |       |   |
| Out of pocket reimbursable expenses           |   | 11,792         |    | 1,513              |   | 47              |   | 13,352     |   |
|                                          |   |           |    |               |   |            |   |       |   |
| Total cost of services                        |   | 68,284         |    | 36,483             |   | 35,031          |   | 139,798    |   |
|                                          |   |           |    |               |   |            |   |       |   |
| Gross profit                                  |   | 45,826         |    | 21,139             |   | 8,827           |   | 75,792     |   |
|                                          |   |           |    |               |   |            |   |       |   |
| Selling expenses                              |   |           |    |               |   |            |   | 23,858     |   |
|                                          |   |           |    |               |   |            |   |       |   |
| General and administrative expenses           |   |           |    |               |   |            |   | 49,878     |   |
|                                          |   |           |    |               |   |            |   |       |   |
| Restructuring, severance and impairment costs |   |           |    |               |   |            |   | 4,349      |   |
|                                          |   |           |    |               |   |            |   |       |   |
| Loss from operations                          |   |           |    |               |   |            |   | $          | (2,293 | ) |

 

**Outsourcing revenue detail:**

 

In the outsourcing business, revenue beforereimbursements includes revenue related to a major subcontractor on severalprojects.  The breakdown of revenue inoutsourcing is as follows (in thousands):

 
|                          |   | **Three  Months Ended**  |   | **Nine  Months Ended**   |   |
|-------------------------------|--------|--------------------------|--------|--------------------------|--------|
|                          |   | **September  27,  2002** |   | **September  30,  2001** |   | **September  27,  2002** |   | **September  30,  2001** |   |
| Internally generated revenue  |   | $                        | 20,109 |                     | $      | 14,670 |   | $ | 51,209 |   | $ | 40,306 |   |
| Subcontractor revenue         |   | 6,416                    |   | 1,524                    |   | 10,924 |   | 3,505 |   |
|                          |   |                     |   |                     |   |   |   |   |   |
| Revenue before reimbursements |   | $                        | 26,525 |                     | $      | 16,194 |   | $ | 62,133 |   | $ | 43,811 |   |

 

**5.****         ****Comprehensive Income (Loss)**

 

Comprehensive income (loss), net of taxes forthe three months and nine months ended September 27, 2002 and September 30,2001, is as follows (in thousands):

 
|                                                |   | **Three  Months Ended**  |   | **Nine  Months Ended**   |   |
|-----------------------------------------------------|--------|--------------------------|--------|--------------------------|--------|
|                                                |   | **September  27,  2002** |   | **September  30,  2001** |   | **September  27,  2002** |   | **September  30,  2001** |   |
| Net income (loss)                                   |   | $                        | 1,911  |                     | $      | 1,163 |   | $ | 62 |   | $ | (927 | ) |
| Foreign currency translation adjustment, net of tax |   | 188                      |   | (130                     | )      | 198 |   | (273 | ) |
| Unrealized gain (loss) on investments               |   | 9                        |   | (12                      | )      | (16 | ) | 18 |   |
|                                                |   |                     |   |                     |   |   |   |   |   |
| Comprehensive income (loss)                         |   | $                        | 2,108  |                     | $      | 1,021 |   | $ | 244 |   | $ | (1,182 | ) |

 

10

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**6.****         ****Accounts Receivable**

 

At September 27, 2002, theCompany carried a long-term account receivable of approximately $8.6 millionfrom a single client.  The receivablerelates to a major outsourcing contract, and will be collected over a four-yearperiod.

 

Theallowance for doubtful accounts is developed based upon several factorsincluding clients’ credit quality, historical write-off experience and anyknown specific issues or disputes which exist as of the balance sheet date.

 

**7.****         ****Acquisition**

 

On May 31, 2002, the Companyacquired a controlling interest of 52.35% in Codigent Solutions Group, Inc.(CSG), a base provider of value added information technology solutions tohospitals and other healthcare delivery organizations, for $2.6 million.  The CSG acquisition did not have a materialeffect on the Company’s results of operation for the period ended September 27,2002.  The acquisition was accounted forusing the purchase method of accounting and the allocation of the price is asfollows:

 

| Consideration paid   |   |   |      | $       | 2,617,000 |   |
|----------------------|--------|--------|-----------|---------|-----------|--------|
| Book value of equity |   | $      | 1,010,000 |    |      |   |
| Interest purchased   |   | 52.35  | %         |    |      |
| Equity purchased     |   |   |      | 529,000 |      |
| Goodwill             |   |   |      | $       | 2,088,000 |   |
|                      |        |        |           |         |           |        |  |

 

FCG has agreed to acquirethe remaining shares on or about January 2004 for at least $2.4 million for aminimum purchase price of $5.0 million. In addition, the remaining outstanding shareholders may receive up to anadditional $5.0 million in restricted Company stock based on CSG satisfyingrevenue, operating and performance targets during the next 15 months.

 

**8.****         ****Intangible Assets**

 

Effective December 29, 2001,the Company adopted SFAS 141 and SFAS 142. SFAS 141 requires business combinations initiated after June 30, 2001 tobe accounted for using the purchase method of accounting.  It also specifies the types of acquiredintangible assets that are required to be recognized and reported separate fromgoodwill.  SFAS 142 requires thatgoodwill and certain intangibles no longer be amortized, but instead are to bereviewed at least annually for impairment.

 

The following summarizes thenet income (loss) and earnings per share for the three and nine months ended September27, 2002 and September 30, 2001 adjusted to exclude amortization expense, netof taxes (amounts rounded to thousands, except per share data):

 

11

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|                                        |   | **Three  Months Ended**  |   | **Nine  Months Ended**   |   |
|---------------------------------------------|--------|--------------------------|--------|--------------------------|--------|
|                                        |   | **September  27,  2002** |   | **September  30,  2001** |   | **September  27,  2002** |   | **September  30,  2001** |   |
| Net income (loss):                          |   |                     |   |                     |   |   |   |   |   |
| Reported net income (loss)                  |   | $                        | 1,911  |                     | $      | 1,163 |   | $ | 62 |   | $ | (927 | ) |
| Goodwill amortization                       |   | —                   |   | 377                      |   | — |   | 1,121 |   |
| Adjusted net income (loss)                  |   | $                        | 1,911  |                     | $      | 1,540 |   | $ | 62 |   | $ | 194 |   |
| Basic net income (loss) per share:          |   |                     |   |                     |   |   |   |   |   |
| Reported basic net income(loss) per share   |   | $                        | 0.08   |                     | $      | 0.05 |   | $ | 0.00 |   | $ | (0.04 | ) |
| Goodwill amortization                       |   | —                   |   | 0.01                     |   | — |   | 0.05 |   |
| Adjusted basic net income(loss) per share   |   | $                        | 0.08   |                     | $      | 0.06 |   | $ | 0.00 |   | $ | 0.01 |   |
| Diluted net income (loss) per share:        |   |                     |   |                     |   |   |   |   |   |
| Reported diluted net income(loss) per share |   | $                        | 0.08   |                     | $      | 0.05 |   | $ | 0.00 |   | $ | (0.04 | ) |
| Goodwill amortization                       |   | —                   |   | 0.01                     |   | — |   | 0.05 |   |
| Adjusted diluted net income(loss) per share |   | $                        | 0.08   |                     | $      | 0.06 |   | $ | 0.00 |   | $ | 0.01 |   |

 

The changes in the net carry amounts ofgoodwill for the nine months ended September 27, 2002 are as follows (inthousands):

 
|                             |   | **Healthcare** |   | **Life  Sciences** |   | **Outsourcing** |   | **Total** |   |
|----------------------------------|--------|----------------|--------|--------------------|--------|-----------------|--------|-----------|--------|
| Balance as of December 28, 2001  |   | $              | 2,143  |               | $      | 1,444           |   | $         | — |   | $ | 3,587 |   |
| Acquired                         |   | 1,119          |   | 10                 |   | 998             |   | 2,127     |   |
| Impaired                         |   | (2,143         | )      | —             |   | —          |   | (2,143    | )      |
| Currency translation adjustment  |   | —         |   | 6                  |   | —          |   | 6         |   |
| Balance as of September 27, 2002 |   | $              | 1,119  |               | $      | 1,460           |   | $         | 998    |   | $ | 3,577 |   |

 

**9.****         ****Restructuring, severance and impairment costs**

 

During the three months endedSeptember 27, 2002, the Company did not incur a restructuringcharge.  Of the $7.8 million charge thatwas taken in the quarter ended June 28, 2002, approximately $2.7 million wasdisbursed from the $4.0 million accrual for staff reductions and approximately$0.6 million was disbursed from the $3.8 million accrual for facilitydownsizing. FCG also has $2.0 million of facility accruals remaining fromrestructuring charges taken in 2001. The Company plans to complete all of the planned staff reductions duringthe remainder of 2002 or early 2003, and the facility downsizing over the livesof the related leases, some of which extend over the next six years.  The Company cannot assure that the currentestimates for restructuring, severance and impairment costs will not changeduring the implementation and future periods.

 

12

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**10.****       ****Recent Accounting Pronouncement**

 

In June 2002,the FASB issued Statement of Financial Accounting Standards No. 146 (“SFAS146”), “Accounting for Costs Associated with Exit or Disposal Activities.”  SFAS 146 addresses accounting and reportingcosts associated with exit or disposal activities and nullifies Emerging IssuesTask Force (EITF) Issue 94-3, “Liability Recognition for Certain EmployeeTermination Benefits and Other Costs to Exit an Activity.”  This statement requires that a liability fora cost associated with an exit or disposal activity shall be recognized andmeasured initially at its fair value in the period that the liability isincurred.  This statement is effectivefor exit or disposal activities that are initiated after December 31,2002.  The Company is currentlyevaluating the potential impact, if any, that the adoption of SFAS 146 willhave on its consolidated financial position and results of operation.

 

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**Item 2. Management’s Discussion and Analysis of Financial Condition and Resultsof Operations**

 

THE FOLLOWINGMANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OFOPERATIONS CONTAINS FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF THEPRIVATE SECURITIES LITIGATION REFORM ACT OF 1995.  SUCH FORWARD-LOOKING STATEMENTS INVOLVE RISKS AND UNCERTAINTIES,INCLUDING THOSE SET FORTH HEREIN UNDER THE CAPTION “RISKS RELATING TO OURBUSINESS”, AND OTHER REPORTS WE FILE WITH THE SECURITIES AND EXCHANGECOMMISSION.  OUR ACTUAL RESULTS COULDDIFFER MATERIALLY FROM THOSE ANTICIPATED IN THESE FORWARD-LOOKING STATEMENTS.

 

**Overview**

 

We provide servicesprimarily to payors, providers, government agencies, pharmaceutical,biogenetic, and life science companies, and other healthcare organizations inNorth America, Europe and Japan.  Wegenerate substantially all of our revenue from fees for professionalservices.  We typically bill for ourservices on an hourly, fixed-fee or monthly fixed-fee basis as specified by theagreement with a particular client.  Weestablish either standard or target hourly rates for each level of consultantbased on several factors including industry and assignment-related experience,technical expertise, skills and knowledge. For services billed on an hourly basis, fees are determined bymultiplying the amount of time expended on each assignment by the projecthourly rate for the consultant(s) assigned to the engagement.  Fixed fees, including outsourcing fees, areestablished on a per-assignment or monthly basis and are based on severalfactors such as the size, scope, complexity and duration of an assignment andthe number of our people required to complete the assignment.  Actual hourly or fixed fees for anassignment may vary from the standard, target, or historical rates that we havecharged.  For services billed on anhourly basis, we recognize revenue as services are performed.  For services billed on a fixed fee basis, werecognize revenue using the percentage of completion method based either on 1)the amount of time completed on each assignment versus the projected number ofhours required to complete such assignment, or 2) the amount of cost incurredon the assignment versus the estimated total cost to complete theassignment.  Revenue is recorded asincurred at assignment rates net of unplanned adjustments for specificengagements.  Unplanned adjustments torevenue are booked at the time they are known. Provisions are made for estimated uncollectible amounts based on ourexperience.  We may obtain payment inadvance of providing services.  Theseadvances are recorded as customer advances and reflected as a liability on ourbalance sheet.

 

Out of pocket expensesbilled and reimbursed by clients are included in gross revenue, and thendeducted to determine net revenue.  Forpurposes of analysis, all percentages in this discussion are stated as a percentageof net revenue, since we believe that this is the more relevant measure of ourbusiness over time.

 

Cost of services primarilyconsists of the salaries, bonuses and related benefits of client-servingconsultants and subcontractor expenses. Selling expenses primarily consist of the salaries, benefits, travel andother costs of our sales force, as well as marketing and researchexpenses.  General and administrativeexpenses primarily consist of the costs attributable to the support of ourclient-serving professionals, such as: non-billable travel; office space occupancy; information systems;practice support and quality initiatives; salaries and expenses for executivemanagement, financial accounting and administrative personnel; expenses forfirm and business unit governance meetings; recruiting fees and professionaldevelopment and training; and legal and other professional services.  As associate related costs are relativelyfixed, variations in our revenues and operating results can occur as a resultof variations in billing margins and utilization rates of our billableassociates.

 

14

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We routinely review our feesfor services, professional compensation and overhead costs to ensure that ourservices and compensation are competitive within the industry.  In addition, we routinely monitor theprogress of client projects with our clients’ senior management.  Quality of Service Questionnaires are sentto the client after each engagement with the results compiled and reported toour executive management.

 

In connection with sharesissued to certain of our vice presidents in return for interest-free notes, werecognize compensation expense on our consolidated statement ofoperations.  The recurring portion ofour compensation expense relating to stock issuances and the amortization ofdeferred compensation is reflected in our consolidated statements of operationsas general and administrative expense, selling expense, or cost of servicesbased on the function of the employee to whom the charge relates.

 

Our most significantexpenses are our human resource and related salary and benefit expenses.  As of September 27, 2002, approximately 804of our employees are billable consultants. Another 722 employees form our firm’s outsourcing business.  The salaries and benefits of such billableconsultants and outsourcing related employees are recognized in our cost ofservices.  Non-billable employeesalaries and benefits are recognized as a component of either selling orgeneral and administrative expenses.  Approximately 17%, or 313 employees are classified asnon-billable.  Our cost of services as apercentage of revenue is directly related to our consultant utilization, whichis the ratio of total billable hours to available hours in a given period, andthe amount of cost recognized under percentage of completion accounting.  We manage consultant utilization bymonitoring assignment requirements and timetables, available and requiredskills, and available consultant hours per week and per month.  We evaluate our fixed contracts on a monthlybasis using percentage of completion accounting.  Differences in personnel utilization rates can result fromvariations in the amount of non-billed time, which has historically consistedof training time, vacation time, time lost to illness and inclement weather,and unassigned time.  Non-billed timealso includes time devoted to other necessary and productive activities such assales support and interviewing prospective employees.  Unassigned time results from differences in the timing of thecompletion of an existing assignment and the beginning of a newassignment.  In order to reduce andlimit unassigned time, we actively manage personnel utilization by monitoringand projecting estimated engagement start and completion dates and matchingconsultant availability with current and projected client requirements.  The number of consultants staffed on anassignment will vary according to the size, complexity, duration and demands ofthe assignment.  Assignmentterminations, completions, inclement eather, 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. An unanticipated termination of a majoroutsourcing contract could result in a significant reduction in revenue.  In addition, expansion into new markets andthe hiring of consultants in advance of client assignments have resulted andmay continue to result in periods of lower consultant utilization.

 

15

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**Results of Operations for the Three Months Ended September27, 2002 and September 30, 2001**

 

*Net Revenue. *Net revenue increased to $69.6 million forthe quarter ended September 27, 2002, an increase of 5.9% from $65.7 millionfor the quarter ended September 30, 2001. The increase was due to new outsourcing engagements offset by a declinein healthcare and life sciences work resulting from increased competition anduncertain market conditions. Further, we have a significant client engagementin our life sciences business unit which will be substantially completed in March2003.  If we do not obtain new contractsfrom other clients or follow-up work from this client to offset the revenuebeing generated from that engagement, we could see a further decline in thelife sciences revenue trends. Additionally, a significant part of the recent increase in outsourcingrevenue is revenue we pass through to a major subcontractor on the newengagements.

 

*Total Revenue. *Total revenueincreased to $73.1 million for the quarter ended September 27, 2002, anincrease of 4.7% from $69.8 million for the quarter ended September 30,2001.  The increase was due to newoutsourcing engagements offset by a decline in healthcare and life scienceswork resulting from increased competition and uncertain market conditions.Further, we have a significant client engagement in our life sciences businessunit which will be substantially completed in March 2003.  If we do not obtain new contracts from otherclients or follow-up work from this client to offset the revenue beinggenerated from that engagement, we could see a further decline in the lifesciences revenue trends.  Additionally,a significant part of the recent increase in outsourcing revenue is revenue wepass through to a major subcontractor on the new engagements.

 

*Gross Profit. *Gross profit decreasedto $23.8 million for the quarter ended September 27, 2002, a decrease of 5.5%from $25.2 million for the quarter ended September 30, 2001.  This was due to a significant shift inrevenue mix from healthcare and life sciences to outsourcing, which is at alower margin, partly due to the significant portion of subcontractor revenuewithin our new outsourcing contracts. Gross profit as a percentage of netrevenue decreased from 38.4% for the quarter ended September 30, 2001 to 34.3%for the quarter ended September 27, 2002.

 

*Selling Expenses. *Sellingexpenses decreased to $7.1 million for the quarter ended September 27, 2002, adecrease of 9.9% from $7.9 million for the quarter ended September 30, 2001 dueto staff and cost reductions.  Sellingexpenses as a percentage of net revenue decreased from 12.0% for the quarterended September 30, 2001 to 10.2% for the quarter ended September 27, 2002.

 

*General and Administrative Expenses. *General and administrative expenses decreased to $13.5 million for thequarter ended September 27, 2002, a decrease of 13.6% from $15.6 million forthe quarter ended September 30, 2001. The decrease resulted from cost reductions and the elimination ofgoodwill amortization (See Note 8 of the Notes to Consolidated FinancialStatements).  General and administrativeexpenses as a percentage of net revenue decreased from 23.7% for the quarterended September 30, 2001 to 19.4% for the quarter ended September 27, 2002.

 

*Restructuring, Severance and Impairment Costs. *There were no restructuring, severance and impairment costs for thequarters ended September 30, 2001 and September 27, 2002.

 

*Interest Income, Net. *Interestincome, net of interest expense, decreased to $0.2 million for the quarterended September 27, 2002 from $0.4 million for the quarter ended September 30,2001, due to lower interest rates, despite a higher level of cash andinvestments.  Interest income net ofinterest expense as a percentage of net revenue decreased to 0.3 % for thequarter ended September 27, 2002 from 0.7% for the quarter ended September 30,2001.

 

16

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*Other Expenses, Net*. Other expense stayed constant at $0.2 million for the quarter endedSeptember 27, 2002 compared to the quarter ended September 30, 2001.

 

*Income Taxes. *The provisionfor income taxes of 42% in the quarter ended September 27, 2002 remained thesame as in the quarter ended September 30, 2001.

 

 

**Results of Operations for the Nine Months Ended September 27,2002 and September 30, 2001**

 

*Net Revenue. *Our net revenue decreased to $199.1 millionfor the nine months ended September 27, 2002, a decrease of 1.6% from $202.2million for the nine months ended September 30, 2001.  This was due to a decline in healthcare and life sciences workresulting from increased competition and uncertain market conditions offset bynew outsourcing engagements that began in the second quarter.  Further, we have a significant clientengagement in our life sciences business unit which will be substantiallycompleted in March 2003.  If we do notobtain new contracts from other clients or follow-up work from this client tooffset the revenue being generated from that engagement, we could see a furtherdecline in the life sciences revenue trends. Additionally, a significant part of the recent increase in outsourcingrevenue is revenue we pass through to a major subcontractor on the newengagements.

 

*Total Revenue. *Total revenuedecreased to $210.4 million for the nine months ended September 27, 2002, adecrease of 2.4% from $215.6 million for the nine months ended September 30,2001.  This was due to a decline inhealthcare and life sciences work resulting from increased competition anduncertain market conditions offset by new outsourcing engagements that began inthe second quarter.  Further, we have asignificant client engagement in our life sciences business unit which will besubstantially completed in March 2003. If we do not obtain new contracts from other clients or follow-up workfrom this client to offset the revenue being generated from that engagement, wecould see a further decline in the life sciences revenue trends.  Additionally, a significant part of therecent increase in outsourcing revenue is revenue we pass through to a majorsubcontractor on the new engagements.

 

*Gross Profit. *Gross profitdecreased to $71.4 million for the nine months ended September 27, 2002, adecrease of 5.7% from $75.8 million for the nine months ended September 30,2001.  This was due to a significantshift in revenue mix from healthcare and life sciences to outsourcing, which isat a lower margin, partly due to the significant portion of subcontractorrevenue within our new outsourcing contracts. Gross profit as a percentage of net revenue decreased to 35.9% for thenine months ended September 27, 2002 from 37.5% for the nine months endedSeptember 30, 2001.

 

*Selling Expenses. *Sellingexpenses decreased to $20.9 million for the nine months ended September 27,2002, a decrease of 12.3% from $23.9 million for the nine months endedSeptember 30, 2001 due to staff and cost reductions.  Selling expenses as a percentage of net revenue decreased from11.8% for the nine months ended September 30, 2001 to 10.5% for the nine monthsended September 27, 2002.

 

*General and Administrative Expenses. *General and administrative expenses decreased to $43.0 million for thenine months ended September 27, 2002, a decrease of 13.9% from $49.9 millionfor the nine months ended September 30, 2001. The decrease resulted from cost reductions and the elimination ofgoodwill amortization (See Note 8 of the Notes to Consolidated FinancialStatements).  General and administrativeexpenses as a percentage of net revenue decreased from 24.7% for the nine monthsended September 30, 2001 to 21.6% for the nine months ended September 27, 2002.

 

*Restructuring, Severance and Impairment Costs. *Restructuring, severance and impairment costs were $7.8 million for thenine months ended September 27, 2002 compared to $4.3 million for the nine 

 

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months ended September 30, 2001.  Restructuring severance and impairment costsfor 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. Restructuring severance and impairment costs for the nine months endedSeptember 30, 2001 consisted primarily of $3.7 million of severance costs andapproximately $0.6 million for facility downsizing.

 

*Interest Income, Net. *Interestincome, net of interest expense, decreased to $0.7 million for the nine monthsended September 27, 2002 from $1.1 million for the nine months ended September30, 2001, primarily due to lower interest rates on invested cash.  Interest income net of interest expense as apercentage of net revenue decreased to 0.3% for the nine months ended September27, 2002 from 0.6% for the nine months ended September 30, 2001.

 

*Other Expenses, Net*. Other expense decreased to $0.3 million for the nine months endedSeptember 27, 2002 from $0.4 million for the nine months ended September 30,2001.

 

*Income Taxes.  *The provisionfor income taxes of 42% in the quarter ended September 27, 2002 was consistentwith the benefit of 42% recorded in the quarter ended September 30, 2001.

 

 

**Liquidity and Capital Resources**

 

During the nine months endedSeptember 27, 2002, we generated cash flow from operations of $13.2million.  During the nine months endedSeptember 27, 2002, we used cash flow of approximately $2.6 million toacquire a controlling interest in Codigent Solutions Group, Inc. (see Note 7 ofthe Notes to Consolidated Financial Statements) and approximately $2.0 millionto purchase property and equipment, including computer and related equipmentand office furniture.  At September 27,2002, we had cash and investments available for sale of $62.9 million comparedto $51.9 million at December 28, 2001.

 

We have a revolving line ofcredit, under which we are allowed to borrow up to $10.0 million at an interestrate of the prevailing prime rate with an expiration of May 1, 2003.  There was no outstanding balance under theline of credit at September 27, 2002.

 

Management believes that ourexisting cash and investments together with funds generated from operationswill be sufficient to meet operating requirements for the next twelvemonths.  Our cash and investments areavailable for strategic investments, mergers and acquisitions, and otherpotential large-scale cash needs that may arise,including $2.4 million in cash thatwill be spent on our about January 2004 to purchase the remaining shares of FCGInfrastructure Services, Inc. (formerly Codigent Solutions Group, Inc.) that wedo not already own.

 

 

**Risks Relating to Our Business**

 

Before deciding to invest inus or to maintain or increase your investment, you should carefully considerthe risks described below, in addition to the other information contained inthis report and in our other filings with the SEC.  The risks and uncertainties described below are not the only onesfacing our company.  Additional risksand uncertainties not presently known to us or that we currently deemimmaterial may also affect our business operations.  If any of these risks actually occur, our business, financialcondition or results of operation could be seriously harmed.  In that event, the market price for ourcommon stock could decline and you may lose all or part of your investment.

 

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*Many factors may cause our net revenues, operating resultsand cash flows to fluctuate.*

 

Our net revenue, operatingresults and cash flows may fluctuate significantly because of a number offactors, many of which are outside of our control.  These factors may include:

 

•                  The loss of one or more significant clientsin any of our business segments;

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

•                  Delays or increased expenses in securing andcompleting client engagements;

•                  Timing and collection of fees and payments;

•                  Timing of new client engagements in any ofour business segments;

•                  Increased competition and pricing pressures;

•                  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 costs ofintegrating acquired operations;

•                  Variability in the number of billable days ineach quarter;

•                  The write-off of client billings;

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

•                  Availability of foreign net operating lossesand other credits against our earnings;

•                  International currency fluctuations; and

•                  The fixed nature of a substantial portion ofour expenses, particularly personnel and related costs, depreciation, officerent and occupancy costs.

 

One or more ofthe foregoing factors may cause our operating expenses to be relatively highduring any given period.  In addition,we bill certain of our services on a fixed-price basis, and any assignmentdelays or expenditures of time beyond that projected for the assignment couldresult in write-offs of client billings. Significant write-offs could materially adversely affect our business,financial condition and results of operations. Our business also has significant collection risks.  If we are unable to collect our receivablesin a timely manner, our business and financial condition could also suffer. In addition, we are expecting to complete alarge client engagement in our life sciences business unit in March 2003.  During the quarter ended September 27, 2002,this client engagement accounted for approximately 6% of our net revenue, andapproximately 25% of our net revenue from the life sciences business unit. Ifthese or any other variables or unknowns were to cause a shortfall in revenueor earnings or otherwise cause a failure to meet public marketexpectations, our business could be adversely affected.

 

Finally, wehave reported net losses in the past, and we cannot assure you that we willcontinue to achieve positive earnings in the future.  If we are unable to maintain our profitability on a quarterly orannual basis, the market price of our common stock could be adversely affectedand our financial condition would suffer.

 

*Our outsourcing engagements comprise a significant part of ourrevenues.*

 

Ouroutsourcing agreements require that we invest significant amounts of time andresources in order to win the engagement, transition the client’s informationtechnology department to our management and complete the initial transformationof our client’s information technology functioning to meet agreed-upon servicelevels.  Often, we recover thisinvestment through payments over the life of the outsourcing agreement.  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 

 

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and we may be unable to recoverour investments.  In the case of ouroutsourcing agreement with the New York Presbyterian Hospital, this investmentamounts to almost $8.6 million, which we will recover on a pro rata basis overthe remaining term of that agreement. The term of the New York Presbyterian Hospital contract is due to expirein December 2006.  Any failure by us torecover these investments may have a material adverse effect on our financialcondition, results of operations and price of our common stock.

 

Currently, wehave six active outsourcing relationships. Revenues from such outsourcing relationships,as of the quarter ended September 27, 2002, represented approximately 38% ofour net revenue.  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, including detailedservice level agreements, which establish performance levels and standards forour services.  If we fail to meet theseperformance levels or standards, our clients may receive monetary service levelcredits from us or, if we experience persistent failures, our client may have aright to terminate the outsourcing contract for cause and have no obligation topay us any termination fees.  As aresult, our anticipated revenue from our outsourcing engagements could be significantlyreduced if we are unable to satisfy our performance levels or standards.  Additionally, our outsourcing contracts canbe terminated at the convenience of our clients upon the payment of atermination fee.

 

Finally, ouroutsourcing engagements typically require that we hire part or all of aclient’s information technology personnel. We cannot assure you that we will be able to retain these individuals,and effectively hire additional personnel as needed to meet the obligations ofour contract.  Any failure by us toretain these individuals or otherwise satisfy our contractual obligations couldhave a material adverse effect on the profitability of our outsourcing businessand our reputation as an information technology services outsourcing provider.

 

*The length of time required to engage a client and to complete anassignment may be unpredictable and could negatively impact our net revenuesand operating results.*

 

The timing ofsecuring our client engagements and service fulfillment is difficult to predictwith any degree of accuracy.  Priorengagement cycles are not necessarily an indication of the timing of futureclient engagements or revenues.  Thelength of time required to secure a new client engagement or complete anassignment often depends on factors outside our control, including:

 

•                  Existinginformation systems at the client site;

•                  Changes or theanticipation of changes in the regulatory environment affecting healthcare andpharmaceutical organizations;

•                  Changes in themanagement or ownership of the client;

•                  Budgetary cyclesand constraints;

•                  Changes in theanticipated scope of engagements;

•                  Availability ofpersonnel and other resources; and

•                  Consolidation inthe healthcare and pharmaceutical industries.

 

Prior toclient engagements, we typically spend a substantial amount of time andresources (1) identifying strategic or business issues facing the client, (2)defining engagement objectives, (3) gathering information, (4) preparingproposals, and (5) negotiating contracts. Our failure to procure an engagement after spending such time andresources could materially adversely affect our business, financial condition 

 

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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 operating results andfinancial condition during any given period. Further, our outsourcing business has very long sales and contract leadtimes, requiring us to spend a substantial amount of time and resources inattempting to secure each outsourcing engagement.  We cannot predict whether the investment of time and resourceswill result in a new outsourcing engagement or, if the engagement is secured,that the engagement will be on terms favorable to us.

 

*If we are unable to generate additionalrevenue from our existing clients, our business may be negatively affected.*

 

Our successdepends on obtaining additional engagements from our existing clients.  A substantial portion of our revenue isderived from 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 materially fail to generate additionalrevenues from our existing clients it may materially adversely affect our businessand financial condition.

 

*If we fail to meet client expectations in the performance of ourservices, our business could suffer.*

 

Our servicesoften involve 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 reputation in thehealthcare and pharmaceutical industries and adversely affect our ability toattract and retain clients.  If a clientis not satisfied with our services, we will generally spend additional humanand other resources 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, inthe course of providing our services, we will often recommend the use ofsoftware and hardware products.  Theseproducts may not perform as expected or contain defects.  If this occurs, our reputation could bedamaged and we could be subject to liability. We attempt contractually to limit our exposure to potential liabilityclaims; however, such limitations may not be effective.  A successful liability claim brought againstus may adversely affect our reputation in the healthcare and pharmaceuticalindustries and could have a material adverse effect on our business orfinancial condition.  Although we maintainliability insurance, such insurance may not provide adequate coverage forsuccessful claims against us.

 

*We may be unable to attract and retain a sufficient number of qualifiedemployees.*

 

Our businessis labor-intensive and requires highly skilled employees.  Most of our consultants possess extensiveexpertise in the healthcare, insurance, pharmaceutical, information technologyand consulting fields.  To serve agrowing client base, we must continue to recruit and retain qualified personnelwith expertise in each of these areas. Competition for such personnel is intense and we compete for suchpersonnel with management consulting firms, healthcare and pharmaceuticalorganizations, software firms and other businesses.  Many of these entities have substantially greater financial andother resources than we do, or can offer more attractive compensation packagesto candidates, including salary, bonuses, stock and stock options.  If we are unable to recruit and retain asufficient number of qualified personnel to serve existing and new clients, ourability to expand our client base or services could be impaired and ourbusiness would suffer.

 

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*The loss of our vice presidents and executive officers could negativelyaffect us*

 

Ourperformance depends on the continued service of our vice presidents, executiveofficers and senior managers.  Inparticular, we depend on such persons to secure new clients and engagements andto manage our business and affairs.  Theloss of such persons could result in the disruption of our business and couldhave a material adverse effect on our business and results of operations.  We have not entered into long-termemployment contracts with any of our employees and do not maintain key employeelife insurance.

 

*Continued or increased employee turnover could negatively affect ourbusiness.*

 

We haveexperienced employee turnover as a result of (1) dependence on lateral hiringof consultants, (2) travel demands imposed on our consultants, (3) loss ofemployees to competitors and clients; and (4) reductions in force in ourbusiness units as certain areas of our business have seen less demand.  Continued or increased employee turnovercould materially adversely affect our business and results of operations.  In addition, many of our consultants developstrong business relationships with our clients.  We depend on these relationships to generate additionalassignments and engagements.  The lossof a substantial number of consultants could erode our client base and decreaseour revenue.

 

*If we are unable to manage shifts in market demand, growth in ourbusiness or our restructured business units, our business may be negativelyimpacted.*

 

Our businesshas historically grown rapidly, and though our overall revenues have remainedflat for the past several years, we have experienced growth and increaseddemand in certain areas of our business. In response to shifts in market demand and in an effort to better alignour business with our markets, we have restructured our business units in recentquarters.  This restructuring hasincluded hiring persons with appropriate skills, including salespersons, andreductions in force in practice areas experiencing less demand.  These market conditions and restructuringefforts have placed new and increased demands on our management personnel.  It has also placed significant andincreasing demands on our financial, technical and operational resources and onour information systems.  We have alsorecently added sales force and have reorganized our selling resources; howeverthere can be no assurance that such efforts will increase our saleseffectiveness.  If we are unable tomanage growth effectively or if we experience business disruptions due toshifts in market demand, or growth or restructuring, our operating results willsuffer.  To manage any future growth, wemust extend our financial reporting and information management systems to agrowing number of offices and employees, and develop and implement new proceduresand controls to accommodate new operations, services and clients.  Increasing operational and administrativedemands may make it difficult for our vice presidents to engage in businessdevelopment activities and their other day-to-day responsibilities.  Further, the addition of new employees andoffices to offset such increasing demands may impair our ability to maintainour service 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 pharmaceutical industries couldnegatively impact our revenues.*

 

We derive asubstantial portion of our revenue from clients in the healthcareindustry.  As a result, our business andresults of operations are influenced by conditions affecting this industry,particularly current trends towards consolidation among healthcare andpharmaceutical organizations.  Suchconsolidation may reduce the number of existing and potential clients for ourservices.  In addition, 

 

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the resulting organizationscould have greater bargaining power, which could erode the current pricingstructure for our services.  Thereduction in the size of our target market or our failure to maintain our pricinggoals could have a material adverse effect on our business and financialcondition.  Finally, each of the marketswe serve is highly 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 substantialportion of our revenues has also come from companies in the pharmaceuticalbusiness.  Our revenues are, in part,linked to the pharmaceutical industry’s research and developmentexpenditures.  Should any of thefollowing events occur in the pharmaceutical industry, our business could benegatively affected in a material way:

 

•                  Adverse changesto the industry’s general economic environment;

•                  Continued consolidationof companies; or

•                  A decrease inresearch and development expenditures or pharmaceutical companies’ technologyexpenditures.

 

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 companies outsource to our competitors.  If this outsourcing trend slows down orstops, or if pharmaceutical companies direct their business away from us, ourfinancial condition and results of operations could be impacted in a materiallyadverse way.

 

*We could be negatively impacted if we fail to successfully integratethe businesses we acquire.*

 

We intend togrow, in part, by acquiring complementary professional practices within thehealthcare and pharmaceutical industries. All acquisitions involve risks that could materially and adverselyaffect our business and operating results.  These risks include (1) distracting management from our business,(2) losing key personnel and other employees, (3) losing clients, (4) costs,delays and inefficiencies associated with integrating acquired operations andpersonnel, and (5) the impairment of acquired assets and goodwill.  In addition, acquired businesses may notenhance our services, provide us with increased client opportunities or resultin the growth that we anticipate. Furthermore, integrating acquired operations is a complex, time-consumingand expensive process.  Combiningacquired operations with us may result in lower overall operating margins,greater stock price volatility and quarterly earnings fluctuations.  Cultural incompatibilities, careeruncertainties and other factors associated with such acquisitions may alsoresult in the loss of employees and clients. Failing to acquire and successfully integrate complementary practices,or failing to achieve the business synergies that we anticipate, couldmaterially adversely affect our business and results of operations.

 

*Our international operations create specialized risks that cannegatively affect us.*

 

We are subjectto many risks as a result of the services we provide to our internationalclients or services we may provide through subcontractors or employees that arelocated outside of the U.S.   Forexample, if we fail to recruit and retain a sufficient number of qualifiedemployees in each country where we conduct business, or do not employsubcontractors or employees that allow us to realize the cost efficiencies andquality of global sourcing, our ability to expand internationally or performour existing services may be impaired and our business could be adverselyaffected.  Our international operationsare subject to a variety of risks, including:

 

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•                  Difficulties increating international market demand for our services;

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

•                  Unfavorablepricing and price competition;

•                  Currencyfluctuations;

•                  Recruiting andhiring employees, and other employment issues unique to internationaloperations;

•                  Longer paymentcycles in some countries and difficulties in collecting international accountsreceivables;

•                  Difficulties inenforcing contractual obligations and intellectual property rights;

•                  Adverse taxconsequences;

•                  Increased costsassociated with maintaining international marketing efforts and offices;

•                  Adverse changesin regulatory requirements; and

•                  Economic orpolitical instability.

 

We have beenperforming services in Europe for international clients for several years. Weceased performing healthcare consulting services for European clients in 2000,but continue to provide our services in Europe to pharmaceutical clients.  We cannot assure you that we will be able tomaintain profitability in our European pharmaceutical services, which maymaterially adversely affect our financial condition, results of operations andprice for our common stock.

 

We expect to employ a globalsourcing strategy to provide software development and other informationtechnology services to our clients.  Ifwe are unable to realize perceived cost benefits of such a strategy or if we areunable to receive high quality services from foreign employees orsubcontractors, our business may be adversely impacted.

 

Any one or allof these factors may cause increased operating costs, lower than anticipatedfinancial performance and may materially adversely affect our business,financial condition and results of operations.

 

*If we do not compete effectively in the healthcare and pharmaceuticalinformation services industries, then our business may be negatively impacted.*

 

The market forhealthcare and pharmaceutical information technology consulting is verycompetitive.  We have competitors thatprovide some or all of the services we provide.  For example, in strategic consulting services, we compete withinternational, regional, and specialty consulting firms such as Bearing Point(formerly KPMG Consulting), CapGemini Ernst & Young, IBM Global ConsultingServices, Wipro Technologies, and Deloitte Consulting.

 

In integration andco-management services, we compete with:

 

•                  Informationsystem vendors such as McKesson/HBOC, Siemens Medical Solutions and IBM GlobalSystems,

 

•                  Service groupsof computer equipment companies,

 

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

 

•                  Clients’internal information management departments,

 

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•                  Other healthcareconsulting firms, and

 

•                  Otherpharmaceutical consulting firms such as Accenture, CapGemini Ernst & Youngand Computer Sciences Corporation’s consultingdivision.

 

In e-healthand e-commerce related services, we compete with the traditional competitorsoutlined above, as well as newer Internet product and service companies.  We also compete with companies that providesoftware development, IT consulting, and other integration and maintenanceservices, such as Cognizant Technology Solutions Corporation, and TataTechnologies Limited.

 

Several of our competitorsemploy a global sourcing strategy to provide software development and otherinformation technology services to their clients, while at the same timereducing their cost structure and improving the quality of services theyprovide.  Although we intend to executea global sourcing strategy, if we are unable to realize the perceived costbenefits of such 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 ourcompetitors have significantly greater financial, human and marketing resourcesthan us.  As a result, such competitorsmay be able to respond more quickly to new or emerging technologies and changesin customer demands, 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 toserve the needs of such organizations. If we do not compete effectively with current and future competitors, wemay be unable to secure new and renewed client engagements, or we may berequired to reduce our rates in order to compete effectively.  This could result in a reduction in our revenues,resulting in lower earnings or operating losses, and otherwise materiallyadversely affecting our business, financial condition and results ofoperations.

 

*If we fail to establish and maintain relationships with vendors ofsoftware and hardware products it could have a negative effect on our abilityto secure engagements.*

 

We have anumber of relationships with vendors. For example, we have established a non-exclusive partnership arrangementwith Documentum, Inc.  Documentummarkets document management software applications largely to the pharmaceuticalindustry.  We believe that ourrelationship with this vendor and others are important to ours sales,marketing, and support activities.  Weoften are engaged by vendors or their customers to implement or integratevendor products based on our relationship with a particular vendor.  If we fail to maintain our relationshipswith Documentum and other vendors, or fail to establish additional newrelationships, our business could be materially adversely affected.

 

*Our relationships with and investments in vendors of software andhardware products could have a negative impact on our ability to secureconsulting engagements.*

 

Our growingnumber of relationships with software and hardware vendors could result inclients perceiving that we are not independent from those software and hardwarevendors.  Our ability to secureassessment and other consulting engagements is often dependent, in part, on ourbeing independent of software and hardware solutions that we may review,analyze or recommend to clients.  Ifclients believe that we are not independent of those software and hardwarevendors, clients may not engage us for certain consulting engagements relatingto those vendors, which could reduce our revenues and materially adverselyaffect our business.

 

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*Our business is highly dependent on the availability of businesstravel.*

 

Ourconsultants and service providers often reside or work in cities or otherlocations that require them to travel to a client’s site to perform and executethe client’s project.  As a result ofthe September 11, 2001 terrorist attacks, air travel has become moretime-consuming to business travelers due to increased security, flight delays,reduced flight schedules and other variables. If efficient and cost effective air travel becomes unavailable to ourconsultants and other employees, or if air travel is halted in the UnitedStates, we may be unable to satisfactorily perform our client engagements on atimely 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 and technological changes, ourbusiness could be materially adversely affected.*

 

The healthcareand pharmaceutical industries are subject to regulatory and technologicalchanges that may affect the procurement practices and operations of healthcareand pharmaceutical organizations. During the past several years, the healthcare and pharmaceuticalindustries have been subject to an increase in governmental regulation andreform proposals.  These reforms couldincrease governmental involvement in the healthcare and pharmaceuticalindustries, lower reimbursement rates or otherwise change the operatingenvironment of our clients.  Also,certain reforms that create potential work for us could be delayed orcancelled.  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.

 

Technologicalchange in the network and application markets has created high demand forconsulting, implementation and integration services.  If the pace of technological change were to diminish, we couldexperience a decrease in demand for our services.  Any material decrease in demand would materially adversely affectour business, financial condition and results of operations.

 

*We may be unable to effectively protect our proprietary information andprocedures.*

 

We mustprotect our proprietary information, including our proprietary methodologies,research, tools, software code and other information.  To do this, we rely on a combination of copyright and tradesecret laws and confidentiality procedures to protect our intellectualproperty.  These steps may not protectour proprietary information.  In addition,the laws of certain countries do not protect or enforce proprietary rights tothe same extent, as do the laws of the United States.  We are currently providing our services to clients ininternational markets.  Our proprietaryinformation may not be protected to the same extent as provided under the lawsof the United States, if at all.  Theunauthorized use of our intellectual property could have a material adverseeffect on our business, financial condition or results of operations.

 

*We may infringe the intellectual property rights of third parties.*

 

Our successdepends, in part, on not infringing patents, copyrights and other intellectualproperty rights held by others.  We donot know whether patents held or patent applications filed by third parties mayforce us to alter our methods of business and operation or require us to obtainlicenses from third parties.  If weattempt to obtain such licenses, we do not know whether we will be grantedlicenses or whether the terms of those licenses will be fair or acceptable tous.  Third parties may assertinfringement 

 

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claims against us in thefuture.  Such claims may result inprotracted and costly litigation, penalties and fines that could adverselyaffect our business regardless of the merits of such claims.

 

*Our management may be able to exercise control over matters requiringstockholder approval.*

 

Our currentofficers, directors, and other affiliates beneficially own approximately 38% ofour outstanding shares of common stock and approximately 48% on a fully dilutedbasis.  As a result, our existingmanagement, if acting together, may be able to exercise control over orsignificantly influence matters requiring stockholder approval, including theelection of directors, mergers, consolidations, sales of all or substantially allof our assets, issuance of additional shares of stock and approval of new stockand option plans.

 

*The price of our common stock may be adversely affected by marketvolatility.*

 

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

 

•                  Our performanceand prospects;

 

•                  The depth andliquidity of the market for our common stock;

 

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

 

•                  Changes inearnings estimates or buy/sell recommendations by analysts;

 

•                  Generalfinancial and other market conditions; and

 

•                  Domestic andinternational economic conditions.

 

In addition,public stock markets have experienced extreme price and trading volumevolatility.  This volatility hassignificantly affected the market prices of securities of many companies forreasons frequently unrelated to or disproportionately impacted by the operatingperformance of these companies.  Thesebroad market fluctuations may adversely affect the market price of our commonstock.  As a result, we may be unable toraise capital or use our stock to acquire businesses on attractive terms andinvestors may be unable to resell their shares of our common stock at or abovetheir purchase price.  Further, if research analysts stop coveringour company or reduce their expectations of us, our stock price could declineor the liquidity of our common stock may be adversely impacted, which couldcreate difficulty for investors to resell their shares of our common stock.

 

*If our stock price is volatile, we may become subject to securitieslitigation, which is expensive and could result in a diversion of resources.*

 

If our stockprice experiences periods of volatility, our security holders may initiatesecurities class action litigation against us. If we become involved in this type of litigation it could be veryexpensive and divert our management’s attention and resources, which couldmaterially and adversely affect our business and financial condition.

 

*Our charter documents, Delaware law and stockholders rights plan willmake it more difficult to acquire us and may discourage take-over attempts andthus depress the market price of our common stock.*

 

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Our board ofdirectors has the authority to issue up to 10,000,000 shares of undesignatedpreferred stock, to determine the powers, preferences and rights and thequalifications, limitations or restrictions granted to or imposed upon anyunissued series of undesignated preferred stock and to fix the number of sharesconstituting any series and the designation of such series, without any furthervote or action by our stockholders.  Thepreferred stock could be issued with voting, liquidation, dividend and otherrights superior to the rights 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 incorporation eliminates the right of stockholders to actwithout a meeting and does not provide cumulative voting for the election ofdirectors.  Our certificate ofincorporation also provides for a classified board of directors.  The ability of our board of directors toissue preferred stock and these other provisions of our certificate ofincorporation and bylaws may have the effect of deterring hostile takeovers ordelaying changes in control or management.

 

We are alsosubject to the provisions of Section 203 of the Delaware General CorporationLaw, which could delay or prevent a change in control of us, impede a merger,consolidation or other business combination involving us or discourage apotential acquirer from making a tender offer or otherwise attempting to obtaincontrol.  Any of these provisions, whichmay have the effect of delaying or preventing a change in control, couldadversely affect the market value of our common stock.

 

In 1999, ourboard of directors adopted a share purchase rights plan that is intended toprotect our stockholders’ interests in the event we are confronted withcoercive takeover tactics.  Pursuant tothe stockholders rights plan, we distributed “rights” to purchase shares of anewly created series of preferred stock. Under some circumstances these rights become the rights to purchaseshares of our common stock or securities of an acquiring entity at one-half themarket value.  The rights are notintended to prevent our takeover, rather they are designed to deal with thepossibility of unilateral actions by hostile acquirers that could deprive ourboard of directors and stockholders of their ability to determine our destinyand obtain the highest price for our common stock.

 

**Item 3. Quantitative and Qualitative Disclosures about Market Risks**

 

None.

 

**Item 4. Controls and Procedures**

 

*Evaluation of Disclosure Controls andProcedures*

 

We maintaindisclosure controls and procedures (as defined in Securities Exchange Act 1934(the “Exchange Act”) Rules 13a-14(c) and 15d-14(c)) that are designed to ensurethat information required to be disclosed in our Exchange Act reports isrecorded, processed, summarized and reported within the time periods specifiedin the Securities and Exchange Commission’s rules and forms, and that suchinformation is accumulated and communicated to our management, including ourChief Executive Officer and Chief Financial Officer, as appropriate, to allowtimely decisions regarding required disclosure. In designing and evaluating thedisclosure controls and procedures, management recognized that any controls andprocedures, no matter how well designed and operated, can provide onlyreasonable assurance of achieving the desired control objectives, andmanagement necessarily was required to apply its judgment in evaluating thecost-benefit relationship of possible controls and procedures.

 

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Within 90 daysprior to the date of this quarterly report, we carried out an evaluation, underthe supervision and with the participation of management, including our ChiefExecutive Officer and Chief Financial Officer, of the effectiveness of thedesign and operation of our disclosure controls and procedures. Based on theforegoing, our Chief Executive Officer and Chief Financial Officer concludedthat our disclosure controls and procedures were effective.

 

*Changes in Internal Controls*

 

There have notbeen any significant changes in our internal controls or in other factors thatcould significantly affect these controls subsequent to the date of their evaluation.There were no significant deficiencies or material weaknesses, and therefore nocorrective actions were taken.

 

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**PART II. OTHER INFORMATION**

 

**Item 1. Legal Proceedings.**

 

None.

 

**Item 2. Changes in Securities.**

 

None.

 

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

 

None.

 

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

 

None.

 

**Item 5. Other Information.**

 

Effective September 1, 2002,we entered into a six-month consulting agreement with Nichol ClinicalTechnologies Corp, whose principal is F. Richard Nichol, Ph.D., a member of ourboard of directors. Under the agreement, which is an extension of a previousconsulting relationship with Dr. Nichol, Nichol Clinical Technologies willprovide consulting services to our Life Sciences business unit in the generalarea of strategic sales services. We are obligated to pay approximately $12,000per month for such consulting services.

 

**Item 6. Exhibits and Reports on Form 8-K.**

 

(a)          Exhibits

 
| **Item** |   | **Description**                                                                                                                        |
|----------|--------|----------------------------------------------------------------------------------------------------------------------------------------|
| 3.1(1)   |   | Certificate of  Incorporation of the Company                                                                                           |
| 3.2(2)   |   | Certificate of Designation  of Series A Junior Participating Preferred Stock                                                           |
| 3.3(3)   |   | Bylaws of the Company                                                                                                                  |
| 4.1(4)   |   | Specimen Common Stock  Certificate                                                                                                     |
| 10.1(5)  |   | Consulting Agreement dated  September 1, 2002 between FCG CSI, Inc. dba First Consulting Group and Nichol  Clinical Technologies Corp. |
| 11.1(6)  |   | Statement of computation  of per share earnings                                                                                        |

 

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

 

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

 

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

 

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

 

 

30

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(5)     Filedwith this Form 10-Q as Exhibit 10.1.

 

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

 

(b)         Reportson Form 8-K

 

(1) Form 8-Kfiled on August 12, 2002 containing the certifications as required by 18 U.S.C.Section 1350, as created by Section 906 of the Sarbanes-Oxley Act of 2002.

 

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**SIGNATURES**

 

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

 
|                          | FIRST  CONSULTING GROUP, INC.                                                         |
|-------------------------------|---------------------------------------------------------------------------------------|
|                          |                                                                                  |
|                          |                                                                                  |
| Date:  November 11, 2002 | /s/ LUTHER  J. NUSSBAUM                                                               |   |
|                          | Luther J.  Nussbaum                                                                   |
|                          | Chairman and  Chief Executive Officer                                                 |
|                          |                                                                                  |
|                          |                                                                                  |
| Date:  November 11, 2002 | /s/ WALTER  J. McBRIDE                                                                |   |
|                          | Walter J.  McBride                                                                    |
|                          | Executive  Vice President and Chief  Financial Officer  (Principal Financial Officer) |

 

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**CERTIFICATIONS**

 

I,Walter J. McBride, certify that:

 

1.  I have reviewed this quarterly report onForm 10-Q of First Consulting Group, Inc.;

 

2.  Based on my knowledge, this quarterly reportdoes not contain any untrue statement of a material fact or omit to state amaterial fact necessary to make the statements made, in light of thecircumstances under which such statements were made, not misleading withrespect to the period covered by this quarterly report;

 

3.  Based on my knowledge, the financialstatements, and other financial information included in this quarterly report,fairly present in all material respects the financial condition, results ofoperations and cash flows of the registrant as of, and for, the periodspresented in this quarterly report;

 

4.  The registrant’s other certifying officersand I are responsible for establishing and maintaining disclosure controls andprocedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for theregistrant and we have:

 

a)designed such disclosure controls and procedures to ensure that materialinformation relating to the registrant, including its consolidatedsubsidiaries, is made known to us by others within those entities, particularlyduring the period in which this quarterly report is being prepared;

 

b)evaluated the effectiveness of the registrant’s disclosure controls andprocedures as of a date within 90 days prior to the filing date of thisquarterly report (the “Evaluation Date”); and

 

c)presented in this quarterly report our conclusions about the effectiveness ofthe disclosure controls and procedures based on our evaluation as of theEvaluation Date;

 

5.  The registrant’s other certifying officersand I have disclosed, based on our most recent evaluation, to the registrant’sauditors and the audit committee of the registrant’s board of directors (orpersons performing the equivalent function):

 

a) allsignificant deficiencies in the design or operation of internal controls whichcould adversely affect the registrant’s ability to record, process, summarizeand report financial data and have identified for the registrant’s auditors anymaterial weaknesses in internal controls; and

 

b) anyfraud, whether or not material, that involves management or other employees whohave a significant role in the registrant’s internal controls; and

 

6.  The registrant’s other certifying officersand I have indicated in this quarterly report whether or not there weresignificant changes in internal controls or in other factors that could significantlyaffect internal controls subsequent to the date of our most recent evaluation,including any corrective actions with regard to significant deficiencies andmaterial weaknesses.

 
| Date: November 11, 2002                    |
|--------------------------------------------|
|                                       |
| /s/ Walter J. McBride                      |   |
| Walter J. McBride  Chief Financial Officer |

 

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I,Luther J. Nussbaum, certify that:

 

1.  I have reviewed this quarterly report onForm 10-Q of First Consulting Group, Inc.;

 

2.  Based on my knowledge, this quarterly reportdoes not contain any untrue statement of a material fact or omit to state amaterial fact necessary to make the statements made, in light of thecircumstances under which such statements were made, not misleading withrespect to the period covered by this quarterly report;

 

3.  Based on my knowledge, the financialstatements, and other financial information included in this quarterly report,fairly present in all material respects the financial condition, results ofoperations and cash flows of the registrant as of, and for, the periodspresented in this quarterly report;

 

4.  The registrant’s other certifying officersand I are responsible for establishing and maintaining disclosure controls andprocedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for theregistrant and we have:

 

a)designed such disclosure controls and procedures to ensure that materialinformation relating to the registrant, including its consolidatedsubsidiaries, is made known to us by others within those entities, particularlyduring the period in which this quarterly report is being prepared;

 

b)evaluated the effectiveness of the registrant’s disclosure controls andprocedures as of a date within 90 days prior to the filing date of thisquarterly report (the “Evaluation Date”); and

 

c)presented in this quarterly report our conclusions about the effectiveness ofthe disclosure controls and procedures based on our evaluation as of theEvaluation Date;

 

5.  The registrant’s other certifying officersand I have disclosed, based on our most recent evaluation, to the registrant’sauditors and the audit committee of the registrant’s board of directors (orpersons performing the equivalent function):

 

a) allsignificant deficiencies in the design or operation of internal controls whichcould adversely affect the registrant’s ability to record, process, summarizeand report financial data and have identified for the registrant’s auditors anymaterial weaknesses in internal controls; and

 

b) anyfraud, whether or not material, that involves management or other employees whohave a significant role in the registrant’s internal controls; and

 

6.  The registrant’s other certifying officersand I have indicated in this quarterly report whether or not there weresignificant changes in internal controls or in other factors that couldsignificantly affect internal controls subsequent to the date of our mostrecent evaluation, including any corrective actions with regard to significantdeficiencies and material weaknesses.

 
| Date: November 11, 2002                     |
|---------------------------------------------|
|                                        |
| /s/ Luther J. Nussbaum                      |   |
| Luther J. Nussbaum  Chief Executive 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(5)  |   | Consulting Agreement dated  September 1, 2002 between FCG CSI, Inc. dba First Consulting Group and Nichol  Clinical Technologies Corp. |
| 11.1(6)  |   | Statement of computation  of per share earnings                                                                                        |

 

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

 

(2)     Incorporatedby reference to Exhibit 99.1 to FCG’s Current Report on Form 8-K dated December9, 1999.

 

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

 

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

 

(5)     Filedwith this Form 10-Q as Exhibit 10.1.

 

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

 

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