**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,DC  20549**

 

----

 

**FORM 10-Q**

**(Mark One)**

 

| **ý**                                          | **QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE  SECURITIES EXCHANGE ACT OF 1934**  |
|-----------------------------------------------------|-----------------------------------------------------------------------------------------------|
|                                                |                                                                                          |
| **For the  quarterly period ended March 28, 2003,** |
|                                                |
| **OR**                                              |
|                                                |                                                                                          |
| **o**                                               | **TRANSITION REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |

 

**For thetransition period from             to**

 

**CommissionFile 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) |

 

Indicateby check mark whether the registrant (1) has filed all reports required to befiled by Section 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or such shorter period that the registrant was required tofile such reports), and (2) has been subject to such filing requirements forthe past 90 days.  Yes ý       No  o

 

Indicate by check mark whether the registrant is an accelerated filer(as defined in Rule 12b-2 of the Exchange Act).  Yes ý  No o

 

Indicatethe number of shares outstanding of each of the issuer’s classes of commonstock, as of the latest practicable date.

 
| **Common  Stock, $.001 par value** | **24,773,016**                  |
|------------------------------------|---------------------------------|
| (Class)                            | (Outstanding at April 25, 2003) |

 

 

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**FirstConsulting Group, Inc.**

**Table of Contents**

 
| COVER  PAGE                                                       |
|-------------------------------------------------------------------|
|                                                              |
| TABLE OF  CONTENTS                                                |
|                                                              |
| PART  I.      FINANCIAL INFORMATION |
|                                                              |
|                                                              | ITEM 1. FINANCIAL STATEMENTS AND NOTES  (UNAUDITED) |
|                                                              |   |   |
|                                                              |   | Consolidated Balance Sheets  as of March 28, 2003 and December 27, 2002 |
|                                                              |   |   |
|                                                              |   | Consolidated  Statements of Operations for the three month periods ended March 28, 2003 and  March 29, 2002 |
|                                                              |   |   |
|                                                              |   | Condensed  Consolidated Statements of Cash Flows for the three months ended  March 28, 2003 and March 29, 2002 |
|                                                              |   |   |
|                                                              |   | 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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# **Part I.**    Financial Information

 

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

 

**FirstConsulting Group, Inc. and Subsidiaries**

 

### **Consolidated Balance Sheets**

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

 
|                                                                                                                              |   | **March 28,********2003** |       | **December  27,  2002** |       |
|-----------------------------------------------------------------------------------------------------------------------------------|--------|---------------------------|------------|-------------------------|------------|
|                                                                                                                              |   | **(unaudited)**           |       |                    |       |
| **ASSETS**                                                                                                                        |   |                      |       |                    |       |
| Current assets:                                                                                                                   |   |                      | ** ** |                    | ** ** |
| Cash and cash equivalents                                                                                                         |   | $                         | 23,321     |                    | $          | 27,550 |   |
| Short-term investments                                                                                                            |   | 34,873                    |       | 38,796                  |       |
| Accounts receivable, less allowance of $1,769 and  $1,899 in the periodsended  March 28, 2003 and December 27, 2002, respectively |   | 27,369                    |       | 36,889                  |       |
| Unbilled receivables                                                                                                              |   | 15,620                    |       | 13,264                  |       |
| Deferred income taxes                                                                                                             |   | 6,198                     |       | 6,198                   |       |
| Prepaid expenses and other current assets                                                                                         |   | 3,132                     |       | 2,110                   |       |
| Total current assets                                                                                                              |   | 110,513                   |       | 124,807                 |       |
|                                                                                                                              |   |                      |       |                    |       |
| Notes receivable – stockholders                                                                                              |   | 610                       |       | 657                     |       |
| Long-term investments                                                                                                             |   | 2,200                     |       | 2,200                   |       |
| Property and equipment:                                                                                                           |   |                      |       |                    |       |
| Furniture, equipment, and leasehold improvements                                                                                  |   | 7,597                     |       | 7,505                   |       |
| Information systems equipment                                                                                                     |   | 21,176                    |       | 21,123                  |       |
|                                                                                                                              |   | 28,773                    |       | 28,628                  |       |
| Less accumulated depreciation and amortization                                                                                    |   | 18,935                    |       | 20,104                  |       |
|                                                                                                                              |   | 9,838                     |       | 8,524                   |       |
|                                                                                                                              |   |                      |       |                    |       |
| Other assets:                                                                                                                     |   |                      |       |                    |       |
| Executive benefit trust                                                                                                           |   | 5,988                     |       | 6,059                   |       |
| Unbilled long-term receivables                                                                                                    |   | 7,015                     |       | 8,059                   |       |
| Deferred income taxes                                                                                                             |   | 3,147                     |       | 3,147                   |       |
| Goodwill, net                                                                                                                     |   | 13,898                    |       | 3,282                   |       |
| Intangibles, net                                                                                                                  |   | 895                       |       | 214                     |       |
| Other                                                                                                                             |   | 878                       |       | 360                     |       |
|                                                                                                                              |   | 31,821                    |       | 21,121                  |       |
| Total assets                                                                                                                      |   | $                         | 154,982    |                    | $          | 157,309 |   |

 

See accompanying notes.

 

3

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|                                                                                                                                                                                        |   | **March 28,********2003** |       | **December  27,  2002** |       |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|---------------------------|------------|-------------------------|------------|
|                                                                                                                                                                                        |   | **(unaudited)**           |       |                    |       |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                                                                                               |   |                      | ** ** |                    | ** ** |
| Current liabilities:                                                                                                                                                                        |   |                      | ** ** |                    | ** ** |
| Accounts payable                                                                                                                                                                            |   | $                         | 3,112      |                    | $          | 1,652 |   |
| Accrued liabilities                                                                                                                                                                         |   | 10,883                    |       | 14,660                  |       |
| Accrued restructuring                                                                                                                                                                       |   | 6,284                     |       | 7,578                   |       |
| Accrued vacation                                                                                                                                                                            |   | 7,458                     |       | 6,868                   |       |
| Accrued incentive compensation                                                                                                                                                              |   | 1,967                     |       | 2,328                   |       |
| Customer advances                                                                                                                                                                           |   | 7,043                     |       | 7,877                   |       |
| Total current liabilities                                                                                                                                                                   |   | 36,747                    |       | 40,963                  |       |
| Non-current liabilities:                                                                                                                                                                    |   |                      |       |                    |       |
| Supplemental executive retirement plan                                                                                                                                                      |   | 6,179                     |       | 6,351                   |       |
| Minority interest                                                                                                                                                                           |   | 712                       |       | 2,023                   |       |
| Total non-current liabilities                                                                                                                                                               |   | 6,891                     |       | 8,374                   |       |
| Commitments and contingencies                                                                                                                                                               |   | —                    |       | —                  |       |
| Stockholders’ equity:                                                                                                                                                                  |   |                      |       |                    |       |
| Preferred Stock, $.001 par value; 9,500,000 shares  authorized, no shares issued and outstanding                                                                                            |   | —                    |       | —                  |       |
| Series A Junior Participating Preferred Stock,  $.001 par value; 500,000 shares authorized, no shared issued and outstanding                                                                |   | —                    |       | —                  |       |
| Common Stock, $.001 par value; 50,000,000 shares  authorized, 24,816,723 shares issued and outstanding at March 28, 2003 and  24,073,089 shares issued and outstanding at December 27, 2002 |   | 25                        |       | 24                      |       |
| Additional paid-in capital                                                                                                                                                                  |   | 97,383                    |       | 92,461                  |       |
| Retained earnings                                                                                                                                                                           |   | 15,937                    |       | 17,853                  |       |
| Deferred compensation-stock incentive agreements                                                                                                                                            |   | (507                      | )          | (621                    | )          |
| Notes receivable-stockholders                                                                                                                                                               |   | (820                      | )          | (1,076                  | )          |
| Accumulated other comprehensive loss                                                                                                                                                        |   | (674                      | )          | (669                    | )          |
| Total stockholders’ equity                                                                                                                                                             |   | 111,344                   |       | 107,972                 |       |
| Total liabilities and stockholders’ equity                                                                                                                                             |   | $                         | 154,982    |                    | $          | 157,309 |   |

 

See accompanying notes.

 

4

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**FirstConsulting Group, Inc. and Subsidiaries**

 

### **Consolidated Statements ofOperations**

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

 
|                                                                           |   | **Three  Months Ended** |   |
|--------------------------------------------------------------------------------|--------|-------------------------|--------|
|                                                                           |   | **(unaudited)**         |   |
|                                                                           |   | **March 28,  2003**     |   | **March 29,  2002** |   |
|                                                                           |   |                    |   |   |   |
| Revenues before reimbursements                                                 |   | $                       | 70,130 |   | $ | 63,277 |   |
| Reimbursements                                                                 |   | 3,613                   |   | 3,877 |   |
| Total revenues                                                                 |   | 73,743                  |   | 67,154 |   |
|                                                                           |   |                    |   |   |   |
| Cost of services before reimbursable expenses                                  |   | 47,587                  |   | 40,073 |   |
| Reimbursable expenses                                                          |   | 3,613                   |   | 3,877 |   |
| Total cost of services                                                         |   | 51,200                  |   | 43,950 |   |
|                                                                           |   |                    |   |   |   |
| Gross profit                                                                   |   | 22,543                  |   | 23,204 |   |
|                                                                           |   |                    |   |   |   |
| Selling expenses                                                               |   | 7,269                   |   | 6,894 |   |
| General and administrative expenses                                            |   | 14,577                  |   | 14,713 |   |
| Income from operations                                                         |   | 697                     |   | 1,597 |   |
| Other income (expense):                                                        |   |                    |   |   |   |
| Interest income, net                                                           |   | 276                     |   | 208 |   |
| Other income (expense), net                                                    |   | 201                     |   | (57 | ) |
| Income before income taxes                                                     |   | 1,174                   |   | 1,748 |   |
| Provision for income taxes                                                     |   | 493                     |   | 734 |   |
| Income before cumulative effect of change in  accounting principle, net of tax |   | 681                     |   | 1,014 |   |
| Cumulative effect of change in accounting  principle, net of tax of $1,881     |   | (2,597                  | )      | — |   |
| Net income (loss)                                                              |   | $                       | (1,916 | ) | $ | 1,014 |   |
|                                                                           |   |                    |   |   |   |
| Net income (loss)   per share:                                            |   |                    |   |   |   |
| Basic:                                                                         |   |                    |   |   |   |
| Income before cumulative effect of change in  accounting principle, net of tax |   | 0.03                    |   | 0.04 |   |
| Cumulative effect of change in accounting  principle, net of tax               |   | (0.11                   | )      | — |   |
| Net income (loss) per share                                                    |   | $                       | (0.08  | ) | $ | 0.04 |   |
| Diluted:                                                                       |   |                    |   |   |   |
| Income before cumulative effect of change in  accounting principle, net of tax |   | 0.03                    |   | 0.04 |   |
| Cumulative effect of change in accounting  principle, net of tax               |   | (0.11                   | )      | — |   |
| Net income (loss) per share                                                    |   | $                       | (0.08  | ) | $ | 0.04 |   |
| Weighted average shares used in computing:                                     |   |                    |   |   |   |
| Basic net income (loss) per share                                              |   | 24,495                  |   | 23,897 |   |
| Diluted net income (loss) per share                                            |   | 24,648                  |   | 25,166 |   |

 

See accompanying notes.

 

5

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**FirstConsulting Group, Inc. and Subsidiaries**

 

### **Condensed ConsolidatedStatements of Cash Flows**

**(inthousands)**

** **
|                                                                                      |   | **Three  Months Ended** |   |
|-------------------------------------------------------------------------------------------|--------|-------------------------|--------|
|                                                                                      |   | **(unaudited)**         |   |
|                                                                                      |   | **March 28,  2003**     |   | **March 29,  2002** |   |
| Cash flows from operating activities:                                                     |   |                    |   |   |   |
| Net income (loss):                                                                        |   | $                       | (1,916 | ) | $ | 1,014 |   |
| Adjustments to reconcile net income (loss) to net  cash provided by operating activities: |   |                    |   |   |   |
| Cumulative effect of change in accounting  principle, net of tax                          |   | 2,597                   |   | — |   |
| Depreciation and amortization                                                             |   | 1,221                   |   | 1,364 |   |
| Intangible amortization                                                                   |   | 55                      |   | — |   |
| Provision for bad debts, net of adjustments                                               |   | (170                    | )      | 71 |   |
| Loss on sale of assets                                                                    |   | 26                      |   | 9 |   |
| Minority interest in net income (loss)                                                    |   | (199                    | )      | 85 |   |
| Compensation from stock issuances                                                         |   | 33                      |   | 20 |   |
| Interest income on notes receivable – stockholders                                   |   | (34                     | )      | (27 | ) |
| Changes in assets and liabilities, excluding effect  of acquisitions:                     |   |                    |   |   |   |
| Accounts receivable                                                                       |   | 10,686                  |   | 8,010 |   |
| Unbilled receivables                                                                      |   | (7,306                  | )      | (6,330 | ) |
| Prepaid expenses and other                                                                |   | (1,022                  | )      | (537 | ) |
| Unbilled long term receivable                                                             |   | 404                     |   | 388 |   |
| Other assets                                                                              |   | 269                     |   | 106 |   |
| Accounts payable                                                                          |   | 1,448                   |   | 1,388 |   |
| Accrued liabilities                                                                       |   | (3,109                  | )      | (688 | ) |
| Accrued restructuring                                                                     |   | (1,294                  | )      | (1,693 | ) |
| Accrued vacation                                                                          |   | 590                     |   | 639 |   |
| Accrued incentive compensation                                                            |   | (361                    | )      | (718 | ) |
| Customer advances                                                                         |   | (866                    | )      | (665 | ) |
| Supplemental executive retirement plan                                                    |   | (172                    | )      | 138 |   |
| Other                                                                                     |   | 305                     |   | (284 | ) |
| Net cash provided by operating activities:                                                |   | 1,185                   |   | 2,290 |   |
| Cash flows from investing activities:                                                     |   |                    |   |   |   |
| Proceeds from sale/maturity of investments                                                |   | 3,923                   |   | (163 | ) |
| Purchase of property and equipment                                                        |   | (1,471                  | )      | (833 | ) |
| Acquisition of businesses, net of cash acquired                                           |   | (8,952                  | )      | — |   |
| Net cash used in investing activities                                                     |   | (6,500                  | )      | (996 | ) |
| Cash flows from financing activities:                                                     |   |                    |   |   |   |
| Proceeds from issuance of capital stock, net                                              |   | 668                     |   | 1,286 |   |
| Proceeds from notes receivable and tax loan  payments                                     |   | 418                     |   | 120 |   |
| Net cash provided by financing activities                                                 |   | 1,086                   |   | 1,406 |   |
| Net change in cash and cash equivalents                                                   |   | (4,229                  | )      | 2,700 |   |
| Cash and cash equivalents at beginning of period                                          |   | 27,550                  |   | 32,499 |   |
| Cash and cash equivalents at end of period                                                |   | $                       | 23,321 |   | $ | 35,199 |   |
|                                                                                      |   |                    |   |   |   |
| Cash paid during the period for:                                                          |   |                    |   |   |   |
| Interest                                                                                  |   | $                       | 9      |   | $ | 2 |   |
| Income taxes                                                                              |   | $                       | 155    |   | $ | 189 |   |

 

See accompanying notes.

### ** **

6

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### **Notes to ConsolidatedFinancial Statements**

 

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

 

The consolidated balancesheets of First Consulting Group, Inc. (the “Company”) at March 28, 2003 andconsolidated statements of operations and condensed consolidated statements ofcash flows for the periods ended March 28, 2003 and March 29, 2002 areunaudited.  These financial statementsreflect all adjustments, consisting of only normal recurring adjustments,which, in the opinion of management, are necessary to fairly present thefinancial position of the Company at March 28, 2003 and the results ofoperations and cash flows for the three-month periods ended March 28, 2003 andMarch 29, 2002.  The results ofoperations and cash flows for the three months ended March 28, 2003 are notnecessarily indicative of the results to be expected for the year endingDecember 26, 2003.  For more completefinancial information, these financial statements should be read in conjunctionwith the audited financial statements for the year ended December 27, 2002included in the Company’s Annual Report on Form 10-K.

 

**2.***                                     ***Stock****-Based Compensation**

 

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

 

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

 
|                                                                                                                   |   |        |   | **Three Months Ended** |   |
|------------------------------------------------------------------------------------------------------------------------|--------|-------------|--------|------------------------|--------|
|                                                                                                                   |   |        |   | **March 28,  2003**    |   | **March 29,  2002** |   |
| Net income (loss), as reported                                                                                         |   |        |   | $                      | (1,916 | ) | $ | 1,014 |   |
| Deduct: Total stock based employee compensation  expense determined under fair value method for all awards, net of tax |   | (643        | )      | (742                   | )      |
| Pro forma net income (loss)                                                                                            |   |        |   | $                      | (2,559 | ) | $ | 272 |   |
|                                                                                                                   |   |        |   |                   |   |   |   |
| Basic earnings (loss) per share                                                                                        |   | As reported |   | $                      | (0.08  | ) | $ | 0.04 |   |
|                                                                                                                   |   | Pro forma   |   | $                      | (0.10  | ) | $ | 0.01 |   |
|                                                                                                                   |   |        |   |                   |   |   |   |
| Diluted earnings (loss) per share                                                                                      |   | As reported |   | $                      | (0.08  | ) | $ | 0.04 |   |
|                                                                                                                   |   | Pro forma   |   | $                      | (0.10  | ) | $ | 0.01 |   |
|                                                                                                                        |        |             |        |                        |        |  |  |  |  |  |

 

7

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**3.****                                     ****Disclosure of Segment Information**

 

The Company currently has three reportable operating segments:  healthcare (which is the delivery ofconsulting and systems integration (“CSI”) services to health delivery, healthplan, and government clients), life sciences (which is the delivery of CSIservices to pharmaceutical and other life sciences clients), and outsourcing(which is the delivery of information technology outsourcing services toclients).  The Company’s segments aremanaged on an integrated basis in order to serve clients by assemblingmulti-disciplinary teams, which provide comprehensive services.  The amount of CSI revenues attributed toeach segment is accounted for by splitting the revenues on each clientengagement based upon the hourly rates charged to the client for the servicesof each segment.  Costs are nottransferred across segments.

 

The Company evaluates its segments’ performance based on revenues andoperating income.  Selling and generaland administrative expense (including corporate functions, occupancy relatedcosts, depreciation, professional development, recruiting, and marketing), tosome extent, are managed at the corporate level and allocated to each operatingsegment based on either net revenues, actual usage, or other reasonableallocation methods.

 

The following segment information is for the quarters ended March 28,2003 and March 29, 2002 (in thousands):

 

**For the threemonths ended March 28, 2003:**

 
|                                           |   | **Healthcare** |   | **Life  Sciences** |   | **Outsourcing** |   | **Other** |       | **Totals** |       |
|------------------------------------------------|--------|----------------|--------|--------------------|--------|-----------------|--------|-----------|------------|------------|------------|
| Revenues before  reimbursements                |   | $              | 27,699 |               | $      | 17,937          |   | $         | 24,494     |       | $          | — | ** ** | **$** | **70,130** | ** ** |
| Reimbursements                                 |   | 2,813          |   | 456                |   | 344             |   | —    | ** ** | **3,613**  | ** ** |
|                                           |   |           |   |               |   |            |   |      |       |       |       |
| Total revenues                                 |   | 30,512         |   | 18,393             |   | 24,838          |   | —    | ** ** | **73,743** | ** ** |
| Cost of services before  reimbursable expenses |   | 16,383         |   | 9,634              |   | 21,570          |   | —    | ** ** | **47,587** | ** ** |
| Reimbursable expenses                          |   | 2,813          |   | 456                |   | 344             |   | —    | ** ** | **3,613**  | ** ** |
|                                           |   |           |   |               |   |            |   |      |       |       |       |
| Total cost of services                         |   | 19,196         |   | 10,090             |   | 21,914          |   | —    | ** ** | **51,200** | ** ** |
| Gross profit                                   |   | 11,316         |   | 8,303              |   | 2,924           |   | —    | ** ** | **22,543** | ** ** |
| Selling expenses                               |   | 4,402          |   | 2,016              |   | 737             |   | 114       | ** ** | **7,269**  | ** ** |
| General & administrative  expenses         |   | 6,046          |   | 5,320              |   | 2,934           |   | 277       | ** ** | **14,577** | ** ** |
| Income (loss) from  operations                 |   | $              | 868    |               | $      | 967             |   | $         | (747       | )          | $          | (391 | ) | **$** | **697** | ** ** |

 

8

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**For the three months ended March 29,2002:**

** **
|                                          |   | **Healthcare** |   | **Life  Sciences** |   | **Outsourcing** |   | **Other** |       | **Totals** |       |
|-----------------------------------------------|--------|----------------|--------|--------------------|--------|-----------------|--------|-----------|------------|------------|------------|
| Revenues before reimbursements                |   | $              | 28,843 |               | $      | 17,521          |   | $         | 16,913     |       | $          | — |   | **$** | **63,277** |   |
| Reimbursements                                |   | 3,292          |   | 536                |   | 49              |   | —    | ** ** | **3,877**  | ** ** |
|                                          |   |           |   |               |   |            |   |      |       |       |       |
| Total revenues                                |   | 32,135         |   | 18,057             |   | 16,962          |   | —    | ** ** | **67,154** | ** ** |
| Cost of services before reimbursable expenses |   | 16,398         |   | 10,626             |   | 13,049          |   | —    | ** ** | **40,073** | ** ** |
| Reimbursable expenses                         |   | 3,292          |   | 536                |   | 49              |   | —    | ** ** | **3,877**  | ** ** |
|                                          |   |           |   |               |   |            |   |      |       |       |       |
| Total cost of services                        |   | 19,690         |   | 11,162             |   | 13,098          |   | —    | ** ** | **43,950** | ** ** |
| Gross profit                                  |   | 12,445         |   | 6,895              |   | 3,864           |   | —    | ** ** | **23,204** | ** ** |
| Selling expenses                              |   | 3,226          |   | 2,226              |   | 1,073           |   | 369       | ** ** | **6,894**  | ** ** |
| General & administrative expenses         |   | 6,412          |   | 4,839              |   | 2,271           |   | 1,191     | ** ** | **14,713** | ** ** |
| Income (loss) from operations                 |   | $              | 2,807  |               | $      | (170            | )      | $         | 520        |       | $          | (1,560 | ) | **$** | **1,597** | ** ** |

 

**Detail of Outsourcing revenues:**

 

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

 

|                           |   | **Three  Months Ended** |   |
|--------------------------------|--------|-------------------------|--------|
|                           |   | **March 28,  2003**     |   | **March 29,  2002** |   |
| Internally  generated revenues |   | $                       | 19,679 |   | $ | 15,268 |   |
| Subcontractor revenues         |   | 4,815                   |   | 1,645 |   |
|                           |   |                    |   |   |   |
| Revenues before reimbursements |   | $                       | 24,494 |   | $ | 16,913 |   |

 

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

 

The following represents areconciliation of basic and diluted net income (loss) per share (in thousands,except per share data):

 
|                                                            |   | **Three Months  Ended** |   |
|-----------------------------------------------------------------|--------|-------------------------|--------|
|                                                            |   | **March 28,  2003**     |   | **March 29,  2002** |   |
|                                                            |   |                    |   |   |   |
| Income before cumulative effect, net of tax                     |   | $                       | 681    |   | $ | 1,014 |   |
| Cumulative effect of change in accounting principle, net of tax |   | (2,597                  | )      | — |   |
| Net income (loss)                                               |   | $                       | (1,916 | ) | $ | 1,014 |   |
|                                                            |   |                    |   |   |   |
| Basic weighted average number of shares outstanding             |   | 24,495                  |   | 23,897 |   |
| Effect of dilutive options and warrants                         |   | 153                     |   | 1,269 |   |
| Diluted weighted average number of shares outstanding           |   | 24,648                  |   | 25,166 |   |
|                                                            |   |                    |   |   |   |
| Basic per share:                                                |   |                    |   |   |   |
| Income before cumulative effect, net of tax                     |   | $                       | 0.03   |   | $ | 0.04 |   |
| Cumulative effect of change in accounting principle, net of tax |   | (0.11                   | )      | — |   |
| Net income (loss) per share                                     |   | $                       | (0.08  | ) | $ | 0.04 |   |
|                                                            |   |                    |   |   |   |
| Diluted per share:                                              |   |                    |   |   |   |
| Income before cumulative effect, net of tax                     |   | $                       | 0.03   |   | $ | 0.04 |   |
| Cumulative effect of change in accounting principle, net of tax |   | (0.11                   | )      | — |   |
| Net income (loss) per share                                     |   | $                       | (0.08  | ) | $ | 0.04 |   |

 

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For the three months endedMarch 28, 2003 and March 29, 2002, there were 4,260,733 and 1,129,756anti-dilutive outstanding stock options, respectively, excluded from thecalculation of diluted earnings per share.

 

**5.****                                     ****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 $34.9 millionin short-term investments and $1.0 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 March 28, 2003.  Additionally, the Company has $1.2 millionof non marketable equity investments, valued at the lower of cost or estimatedfair value, which are included in long-term investments.

 

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

 

At March 28, 2003, theCompany carried a long-term account receivable of approximately $7.0 millionfrom a single client.  The receivablerelates to a major outsourcing contract, and will be collected over a four-yearperiod.

 

The allowance for doubtfulaccounts is developed based upon several factors including clients’ creditquality, historical write-off experience and any known specific issues ordisputes which exist as of the balance sheet date.

 

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**7.****                                     ****Business Acquisitions**

 

Businessesacquired through March 28, 2003, were accounted for under the purchase methodof accounting and are included in the consolidated financial statements fromthe date of acquisition.

 

**Paragon Solutions, Inc.**

 

On February12, 2003, the Company acquired 100% of Paragon Solutions, Inc., a U.S. basedprovider of onshore and offshore software development services which is nowpart of the life sciences segment. The Company issued 600,500 unregisteredshares of common stock and paid cash consideration of approximately $0.2million to their shareholders that elected cash payment.  The Company also agreed to reserve anadditional 49,540 shares of its common stock for issuance upon the exercise ofoptions that were initially issued under Paragon’s stock incentive plans.  Based upon a preliminary purchase priceallocation, goodwill of approximately $10.2 million has been recorded.  Due to the recent closing date, the purchaseprice allocations are tentative and subject to final purchase price valuationanalysis.  In connection with theacquisition, the Company immediately repaid $7.7 million of debt assumed fromParagon.  Additionally, the Companyacquired approximately $0.4 million of cash as part of the acquisition.

 

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

 

| Accounts receivable             |   | $      | 996    |   |
|---------------------------------|--------|--------|--------|--------|
| Other assets                    |   | 1,185  |   |
| Property and equipment, net     |   | 1,096  |   |
| Goodwill                        |   | 10,193 |   |
| Accrued liabilities             |   | (1,299 | )      |
| Assumed debt including interest |   | (7,695 | )      |
| Net assets acquired             |   | 4,476  |   |
| Value of stock issued           |   | 4,254  |   |
| Cash consideration              |   | $      | 222    |   |

 

**Phyve Corporation**

 

On February20, 2003, the Company acquired certain assets of Phyve Corporation, a providerof information security and connectivity software solutions, for $1.4 millionin cash.  The following table summarizesthe estimated fair values of assets acquired in connection with thisacquisition (in thousands):

 

| Intangible software         |   | $   | 736    |   |
|-----------------------------|--------|-----|--------|--------|
| Property and equipment, net |   | 229 |   |
| Goodwill                    |   | 430 |   |
| Cash consideration          |   | $   | 1,395  |   |

 

**8.****                                     ****Goodwill and Intangible Assets**

 

EffectiveDecember 29, 2001, the Company adopted Statement of Financial AccountingStandards No. 142 (“SFAS No. 142”). SFAS No. 142 requires that goodwill and certain intangibles no longer beamortized, but instead are to be reviewed at least annually for impairment or if anevent occurs

 

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orcircumstances change that may reduce the fair value of the reporting unit belowits book value. The impairment test is conducted at the reporting unit level bycomparing the fair value of the reporting unit with its carrying value.  Prior to the adoption of SFAS No. 142,goodwill was amortized over the estimated useful life.

 

SFASNo. 142 requires the Company to evaluate its existing intangible assets andgoodwill that are acquired in a prior purchase business combination and to makeany necessary reclassifications for recognition apart from goodwill.  The Company evaluates goodwill andintangible assets for impairment, as well as the related amortization periodsfor intangibles with definite lives, to determine whether adjustments to theseamounts or estimated useful lives are required based on current events andcircumstances. The evaluation is based on the Company’s projection of the futureoperating cash flows of the underlying assets combined with market valuationapproaches. Significant estimates and assumptions were used in assessing thefair value of reporting units.  Theseestimates and assumptions included future cash flows, growth rates, discountrates, weighted average cost of capital, and estimates of market valuation foreach of the reporting units.

 

The changes in the netcarrying amounts of goodwill for the three months ended March 28, 2003 are asfollows (in thousands):

 
|                            |   | **Healthcare** |   | **Life  Sciences** |   | **Outsourcing** |   | **Total** |   |
|---------------------------------|--------|----------------|--------|--------------------|--------|-----------------|--------|-----------|--------|
| Balance as of December 27, 2002 |   | $              | 827    |               | $      | 1,468           |   | $         | 987    |   | $ | 3,282 |   |
| Acquired                        |   | —         |   | 10,193             |   | 430             |   | 10,623    |   |
| Currency translation adjustment |   | —         |   | (7                 | )      | —          |   | (7        | )      |
| Balance as of March 28, 2003    |   | $              | 827    |               | $      | 11,654          |   | $         | 1,417  |   | $ | 13,898 |   |

 

As of March 28, 2003, theCompany had the following acquired intangible assets recorded (in thousands):

 
| **Amortized Intangible Assets** |   | **Gross  Carrying  Amount** |   | **Accumulated  Amortization** |   | **Net********Carrying  Amount** |   |
|---------------------------------|--------|-----------------------------|--------|-------------------------------|--------|---------------------------------|--------|
| Software  (Phyve)               |   | $                           | 736    |                          | $      | (30                             | )      | $ | 706 |   |
| Customer based (FCGIS)          |   | $                           | 304    |                          | $      | (115                            | )      | $ | 189 |   |

 

The following tablesummarizes the future estimated amortization expense for these assets (inthousands):

 

| **Fiscal Year** |   |   |   |
|-----------------|--------|--------|--------|
| 2003            |   | $      | 309    |   |
| 2004            |   | 325    |   |
| 2005            |   | 286    |   |
| 2006            |   | 30     |   |
|            |   | $      | 950    |   |

 

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

 

The company did not incurany restructuring, severance, and impairment costs in the first quarter of 2003or 2002. However, there are still accrued liabilities primarily related toabandoned leases remaining from a restructuring in June, 2002.  Payments on lease obligations are scheduledto continue

 

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until 2008. Market conditions and the ability to sublease these properties mayaffect the ultimate charge related to the lease obligations.  Any potential recovery or additional chargemay affect amounts reported in future periods.

 

The restructuring liabilityfor the quarter ended March 28, 2003 is summarized as follows (in thousands):

** **
|                                 |   | **Employee  Related Costs** |   | **Facilities/Other  Related Costs** |   | **Total** |   |
|--------------------------------------|--------|-----------------------------|--------|-------------------------------------|--------|-----------|--------|
| Reserve balance at December 27, 2002 |   | $                           | 1,093  |                                | $      | 6,485     |   | $ | 7,578 |   |
| Amounts utilized, net                |   | (252                        | )      | (1,042                              | )      | (1,294    | )      |
| Reserve balance at March 28, 2003    |   | $                           | 841    |                                | $      | 5,443     |   | $ | 6,284 |   |

 

The remaining$0.8 million of employee-related costs primarily relate to approximately 30employees planned to be severed in the second quarter of 2003 in the Company’slife science business unit upon the planned completion of a major project.

 

**10.****                              ****Comprehensive Income (Loss)**

 

Comprehensive income (loss),net of taxes, is as follows (in thousands):

 

|                                                |   | **Three  Months Ended** |   |
|-----------------------------------------------------|--------|-------------------------|--------|
|                                                |   | **March 28,  2003**     |   | **March 29,  2002** |   |
| Net  income (loss)                                  |   | $                       | (1,916 | ) | $ | 1,014 |   |
| Foreign currency translation adjustment, net of tax |   | 5                       |   | (161 | ) |
| Unrealized loss on investments                      |   | (10                     | )      | (13 | ) |
| Comprehensive income (loss)                         |   | $                       | (1,921 | ) | $ | 840 |   |

 

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

 

EffectiveDecember 28, 2002, the Company adopted Emerging Issues Task Force (EITF) Issue00-21 “Accounting for Revenue Arrangements with Multiple Deliverables,” whichaddresses how to account for arrangements that involve the delivery orperformance of multiple products, services, and/or rights to use assets.  Revenue arrangements with multiple deliverablesare divided into separate units of accounting if the deliverables in thearrangement meet the following criteria: (1) the delivered item has valueto the customer on a standalone basis; (2) there is objective and reliableevidence of the fair value of undelivered items; and (3) delivery of anyundelivered item is probable. Arrangement consideration should be allocated among the separate unitsof accounting based on their relative fair values, with the amount allocated tothe delivered item being limited to the amount that is not contingent on thedelivery of additional items or meeting other specified performanceconditions.  The new standard isrequired to be adopted for all new applicable revenue arrangements no laterthan the third quarter of 2003.  Earlyadoption is permitted and the Company has elected to adopt the new standard asof the beginning of the first quarter of 2003. In addition, the Company has elected to apply the new standard to allexisting outsourcing arrangements impacted by EITF 00-21 and record to earningsthe resulting cumulative effect as a change in accounting principle.  The adoption of EITF Issue 00-21 resulted ina non-cash charge, net of tax, of $2.6 million, or $0.11 per share, in thefirst quarter of 2003.

 

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The followingtable illustrates the effect on net income and earnings per share as if thechange in accounting principle had been adopted in prior periods (in thousands,except per share data):

 
|                                                           |   | **Three  Months Ended** |   |
|----------------------------------------------------------------|--------|-------------------------|--------|
|                                                           |   | **March 28,  2003**     |   | **March 29,  2002** |   |
| Income  before cumulative effect– as reported             |   | $                       | 681    |   | $ | 1,014 |   |
| Pro forma effect of change in accounting principle, net of tax |   | —                  |   | (576 | ) |
| Pro forma net income                                           |   | $                       | 681    |   | $ | 438 |   |
|                                                           |   |                    |   |   |   |
| Net income (loss) per share:                                   |   |                    |   |   |   |
| Basic:                                                         |   |                    |   |   |   |
| Income before cumulative effect– as reported              |   | $                       | 0.03   |   | $ | 0.04 |   |
| Pro forma effect of change in accounting principle, net of tax |   | —                  |   | (0.02 | ) |
| Pro forma net income per share                                 |   | $                       | 0.03   |   | $ | 0.02 |   |
|                                                           |   |                    |   |   |   |
| Diluted:                                                       |   |                    |   |   |   |
| Income before cumulative effect– as reported              |   | 0.03                    |   | 0.04 |   |
| Pro forma effect of change in accounting principle, net of tax |   | —                  |   | (0.02 | ) |
| Pro forma net income per share                                 |   | $                       | 0.03   |   | $ | 0.02 |   |

 

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**Item2****.  Management’sDiscussion and Analysis of Financial Condition and Results of Operations**

 

THE FOLLOWINGMANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OFOPERATIONS CONTAINS FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF THEPRIVATE SECURITIES LITIGATION REFORM ACT OF 1995.  SUCH FORWARD-LOOKING STATEMENTS INVOLVE RISKS AND UNCERTAINTIES,INCLUDING THOSE SET FORTH HEREIN 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 provideservices primarily to providers, payors, government agencies, pharmaceutical,biogenetic, and other healthcare organizations in North America, Europe, andAsia.  We generate substantially all ofour revenues from fees for professional services and information technologyoutsourcing services.  We typically billfor our services on an hourly, fixed-fee, or monthly fixed-fee basis asspecified by the agreement with a particular client.  In our consulting and systems integration businesses (“CSI”), thehealthcare and life sciences business units, we establish either standard ortarget hourly rates for each level of consultant based on several factors,including industry and assignment-related experience, technical expertise,skills and knowledge.  For servicesbilled on an hourly basis, fees are determined by multiplying the amount oftime expended on each assignment by the project hourly rate for the consultant(s)assigned to the engagement.  Fixed fees,including outsourcing fees, are established on a per-assignment or monthlybasis and are based on several factors such as the size, scope, complexity andduration of an assignment, the number of our employees required to complete theassignment, and the volume of transactions or interactions.  Actual hourly or fixed fees for anassignment may vary from the standard, target, or historical rates that we havecharged.  Revenues are generallyrecognized related to the level of services performed based upon the amount oftime completed on each assignment versus the projected number of hours requiredto complete such assignment, or the amount of cost incurred on the assignmentversus the estimated total cost to complete the assignment.  Provisions are made for estimateduncollectible amounts based on our experience. We may obtain payment in advance of providing services.  These advances are recorded as customeradvances and reflected as a liability on our balance sheet.

 

Out-of-pocketexpenses billed and reimbursed by clients are included in total revenues, andthen deducted to determine net revenues. For purposes of analysis, all percentages in this discussion are statedas a percentage of net revenues, since we believe that this is the more relevantmeasure of our business over time.

 

Cost ofservices primarily consists of the salaries, bonuses, and related benefits ofclient-serving consultants and outsourcing associates, and subcontractorexpenses.  Selling expenses primarilyconsist of the salaries, benefits, travel, and other costs of our sales force,as well as marketing and research expenses. General and administrative expenses primarily consist of the costsattributable to the support of our client-serving professionals, such as:non-billable travel; office space occupancy; information systems; salaries andexpenses for executive management, financial accounting and administrativepersonnel; expenses for firm and business unit governance meetings; recruitingfees; professional development and training; and legal and other professionalservices.  As associate related costsare relatively fixed in the short term, variations in our revenues andoperating results in our CSI business can occur as a result of variations inbilling margins and utilization rates of our billable associates.

 

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Our mostsignificant expenses are our human resource and related salary and benefitexpenses.  As of March 28, 2003,approximately 1,006 of our employees are billable consultants.  Another 659 employees form our firm’soutsourcing business.  The salaries andbenefits of such billable consultants and outsourcing related employees arerecognized in our cost of services. Non-billable employee salaries and benefits are recognized as acomponent of either selling or general and administrative expenses.  Approximately 18.6% of our workforce, or 381employees, are classified as non-billable. Our cost of services as a percentage of revenues is directly related toseveral factors, including, but not limited to, our consultant utilization,which is the ratio of total billable hours to available hours in a givenperiod, the amount and timing of cost incurred, our ability to control costs onour outsourcing projects, the billed rate on time and material contracts, andthe estimated cost to complete our non-outsourcing fixed price contracts.  We evaluate our non-outsourcing fixed pricecontracts on a monthly basis by estimating the cost to complete theassignment.  We then recognize revenuesto achieve a constant margin over the remaining term of the engagement.  We have changed our accounting foroutsourcing contracts with the adoption of EITF 00-21 “Accounting for RevenueArrangements with Multiple Deliverables,” in the first quarter of fiscal year2003.  Under our outsourcing contracts,a significant portion of our revenues are fixed and allocated over the contracton a straight-line basis, and we are required to provide a specified level ofservices subject to certain performance measurements.  Also, certain revenues may fluctuate under the contracts based onthe volume of transactions we process or other measurements of serviceprovided.  If we incur higher costs toprovide the required services or receive less revenue due to reducedtransaction volumes, our gross margin can be negatively impacted.

 

In our CSIbusiness, we manage consultant utilization by monitoring assignmentrequirements and timetables, available and required skills, and availableconsultant hours per week and per month.  Differences in personnel utilization rates can result from variations inthe amount of non-billed time, which has historically consisted of trainingtime, vacation time, time lost to illness and inclement weather, and unassignedtime.  Non-billed time also includestime devoted to other necessary and productive activities such as sales supportand interviewing prospective employees. Unassigned time results from differences in the timing of the completionof an existing assignment and the beginning of a new assignment.  In order to reduce and limit unassignedtime, we actively manage personnel utilization by monitoring and projectingestimated engagement start and completion dates and matching consultantavailability with current and projected client requirements.  The number of consultants staffed on anassignment will vary according to the size, complexity, duration, and demandsof the assignment.  Assignment terminations,completions, inclement weather, and scheduling delays may result in periods inwhich consultants are not optimally utilized. An unanticipated termination of a significant assignment or an overalllengthening of the sales cycle could result in a higher than expected number ofunassigned consultants and could cause us to experience lower margins. Inaddition, expansion into new markets and the hiring of consultants in advanceof client assignments have resulted and may continue to result in periods oflower consultant utilization.  Finally,an unanticipated termination of a major outsourcing contract could result in asignificant reduction in revenues.  InMay 2003, we received a letter from our significant outsourcing client inCleveland, Ohio alleging breach of the terms of our contract.  The letter alleges failure to meet certainservice levels in consecutive months and delinquency of certain transitionservices deliverables.  The client hasrequested that we present a plan for remediation of the alleged failures anddelinquencies and we expect to address the client's issues in an acceptablemanner.  However, we cannot be certainthat such plan will cure our alleged breaches or that such client will notterminate their agreement with us.

 

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**Results of Operations for the Three Months Ended March 28,2003 and March 29, 2002**

 

*Revenues. *Our net revenues increased to $70.1 millionfor the quarter ended March 28, 2003, an increase of 10.8% from $63.3 millionfor the quarter ended March 29, 2002. Our total revenues increased to $73.7 million for the quarter endedMarch 28, 2003, an increase of 9.8% from $67.2 million for the quarter endedMarch 29, 2002.  The increases wereprimarily due to new outsourcing engagements which began in mid-2002, and $2.7million of revenue generated from our acquisition of Codigent Solutions Group,Inc. in May 2002, and Paragon Solutions, Inc., in mid-February 2003.  This increase was offset by a decline inhealthcare and life sciences revenues, exclusive of the acquisitions, resultingfrom delays in key provider contracts and continued uncertain marketconditions.  In addition, we began theroll-off from a significant client engagement in our life sciences businessunit in March 2003.  If we do not obtainnew engagements and/or follow-up work from this or other clients, we could seea further revenue decline in the life sciences business unit.

 

*Cost of Services. *Cost ofservices before reimbursable expenses increased to $47.6 million for thequarter ended March 28, 2003, an increase of 18.8% from $40.1 million for thequarter ended March 29, 2002.  Theincrease was primarily due to the costs of services of our new outsourcingengagements,  additional costs ofservices of our recent acquisitions, and severance costs, partially offset by areduction in staff in our life sciences business unit.

 

*Gross Profit. *Gross profit decreased to $22.5 millionfor the quarter ended March 28, 2003, a decrease of 2.8% from $23.2 million forthe quarter ended March 29, 2002.  Thedecrease was primarily due to a reduced gross margin in our outsourcingbusiness unit, which resulted from two factors.  First, we had two outsourcing contracts which began in mid-2002that are still in their early stages of operation.  Our outsourcing contracts tend to have higher costs in the earlystages as compared to the later stages, and because revenue is recorded on astraight-line basis, the margins are lower. Second, we had a cost overrun on another outsourcing contract.  We expect these reduced margins inoutsourcing to continue, but to a decreasing degree over the next severalquarters.  Gross profit as a percentageof net revenue decreased from 36.7% for the quarter ended March 29, 2002 to32.1% for the quarter ended March 28, 2003, due to the factors discussed aboveand the significant shift in revenue mix from healthcare and life sciences tooutsourcing, which is a lower margin business.

 

*Selling Expenses. *Sellingexpenses increased to $7.3 million for the quarter ended March 28, 2003, anincrease of 5.5% from $6.9 million for the quarter ended March 29, 2002primarily due to an increase in the size of our sales force in the healthcarebusiness unit.  We expected to betterleverage these expenses for the quarter ended March 28, 2003, but had somelarge projects delayed from signing into the second quarter of 2003.  Selling expenses as a percentage of netrevenue decreased from 10.9% for the quarter ended March 29, 2002 to 10.4% forthe quarter ended March 28, 2003.

 

*General and Administrative Expenses. *General and administrative expenses decreased to $14.6 million for thequarter ended March 28, 2003, a decrease of 0.9% from $14.7 million for thequarter ended March 29, 2002.  Thedecrease resulted from cost reductions, offset by $1.2 million of general andadministrative expenses related to our recently acquired companies.  General and administrative expenses as apercentage of net revenues decreased from 23.3% for the quarter ended March 29,2002 to 20.8% for the quarter ended March 28, 2003.

 

*Interest Income, Net. *Interestincome, net of interest expense, increased to $0.3 million for the quarterended March 28, 2003 from $0.2 million for the quarter ended March 29,2002.  Interest income net of interestexpense as a percentage of net revenue increased to 0.4 % for the quarter endedMarch 28, 2003 from 0.3% for the quarter ended March 29, 2002.

 

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*Other Income (Expense), Net*. Other income increased to $0.2 million for the quarter ended March 28,2003 compared to an expense of $0.1 million for the quarter ended March 29,2002.  The income in the current quarteris due to the 19.9% minority interest in the loss incurred during the firstquarter by the subsidiary which contains the majority of FCG’s outsourcingbusiness.

 

*Income Taxes. *The provisionfor income taxes of 42% in the quarter ended March 28, 2003 remained the sameas in the quarter ended March 29, 2002.

 

*Cumulative Effect of Change in Accounting Principle*.  InNovember 2002, the Emerging Issues Task Force (EITF) reached a consensus onIssue 00-21, titled “Accounting for Revenue Arrangements with MultipleDeliverables,”  which addresses how toaccount for arrangements that involve the delivery or performance of multipleproducts, services, and/or rights to use assets.  The new standard is required to be adopted for all new applicablerevenue arrangements no later than the third quarter of 2003.  Early adoption is permitted and wehave elected to adopt the new standard as of the beginning of the first quarterof 2003.  In addition, we have electedto apply the new standard to all existing outsourcing arrangements impacted byEITF 00-21 and record to earnings the resulting cumulative effect as a changein accounting principle.  We haverecorded a non-cash charge, net of tax, of $2.6 million, or $0.11 per share, inthe first quarter of 2003.

 

**Liquidity and Capital Resources**

 

During the three monthsended March 28, 2003, we generated cash flow from operations of $1.2million.  During the three months endedMarch 28, 2003, we used approximately $7.5 million of cash, net of cashacquired, to acquire Paragon Solutions, Inc. which included repayment of itsdebt obligations, approximately $1.4 million of cash to acquire certain assetsof Phyve Corporation (see Note 7 of the Notes to Consolidated FinancialStatements), and approximately $1.5 million of cash to purchase property andequipment, including computer and related equipment, and office furniture.  At March 28, 2003, we had cash andinvestments available for sale of $59.2 million compared to $67.3 million atDecember 27, 2002.

 

We have a revolving line ofcredit, under which we are allowed to borrow up to $7.0 million at an interestrate of the prevailing prime rate with an expiration of May 1, 2004.  There was no outstanding balance under theline of credit at March 28, 2003.

 

Management believes that ourexisting cash and investments, together with funds generated from operations,will be sufficient to meet operating requirements for the next twelvemonths.  Our cash and investments areavailable for capital expenditures (which are budgeted at $7.5 million for2003, $1.5 million of which was spent during the three months ended March 28,2003), strategic investments, mergers and acquisitions, and other potentiallarge-scale cash needs that may arise, including $2.4 million in cashthat will be spent on or about January 2004 to purchase the remaining 47.65%minority interest in FCG Infrastructure Services (formerly Codigent SolutionsGroup, Inc.) that we do not already own.

 

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## **Critical Accounting Policies and Estimates**

 

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

 

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

 

***Revenue Recognitionand Unbilled Receivables***

 

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

 

Revenues fromtime-and-materials arrangements are generally recognized based upon contractedhourly billing rates as the work progresses. Revenues from level-of-effort arrangements are based upon a fixed pricefor the level or resources provided. Revenues from fixed fee arrangements for consulting and systemsintegration work are generally recognized on a percentage-of-completion basis.  We maintain, for each of our fixed feecontracts, estimates of total revenue and cost over the contract term. Forpurposes of periodic financial reporting on the percentage of completioncontracts, we accumulate total actual costs incurred to date under thecontract. The ratio of those actual costs to our then-current estimate of totalcosts for the life of the contract is then applied to our then-current estimateof total revenues for the life of the contract to determine the portion oftotal estimated revenues that should be recognized. We follow this methodbecause reasonably dependable estimates of the revenues and costs applicable tovarious stages of a contract can be made.

 

Revenuesrecognized on fixed price contracts are subject to revisions as the contractprogresses to completion.  If we do notaccurately estimate the resources required or the scope of the work to beperformed, do not complete our projects within the planned periods of time, ordo not satisfy our obligations under the contracts, then profit may besignificantly and negatively affected or losses may need to be recognized.  Revisions in our contract estimates arereflected in the period in which the determination is made that facts andcircumstances dictate a change of estimate. Favorable changes in estimatesresult in additional revenues recognized, and unfavorable changes in estimatesresult in a reduction of recognized revenues. Provisions for estimated losseson individual contracts are made in the

 

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period in which the loss firstbecomes known.  Some contracts includeincentives for achieving either schedule targets, cost targets, or otherdefined goals.  Revenues from incentivetype arrangements are recognized when it is probable they will be earned.

 

As of the beginning offiscal year 2003, we adopted EITF Issue 00-21, titled “Accounting for RevenueArrangements with Multiple Deliverables,” which addresses how to account forarrangements that involve the delivery or performance of multiple products,services, and/or rights to use assets. Revenue arrangements with multiple deliverables are divided intoseparate units of accounting if the deliverables in the arrangement meet thefollowing criteria: (1) the delivered item has value to the customer on astand-alone basis; (2) there is objective and reliable evidence of the fairvalue of undelivered items; and (3) delivery of any undelivered item isprobable.  Arrangement considerationshould be allocated among the separate units of accounting based on theirrelative fair values, with the amount allocated to the delivered item beinglimited to the amount that is not contingent on the delivery of additionalitems or meeting other specified performance conditions.  We have created separate units ofaccounting on our existing outsourcing contracts based on the above criteriaand will do so on our future contracts. Generally, we have separated certain elements of our initial contractstages, where processes are reengineered into a new operating environment, fromthe ongoing operations of the contract. The primary impact of the adoption of this new standard will be that ourongoing contract operations, which constitute the vast majority of the revenuesfrom outsourcing contracts, will be recorded on a straight-line basis over thelife of the contract instead of on a percentage-of-completion basis inproportion to costs incurred.  Ingeneral, we will report lower margins on existing contracts in the early yearsof a contract and anticipate reporting increased margins in the later years ofa contract; however, no assurances can be made in that regard.  The new method will no longer be based on aconsistent margin over the life of a contract. We will likely experience greater volatility of outsourcing earnings ascontract revenues remain level and contract costs move up or down, or shiftfrom one quarter to another.

 

Aspart of our on-going operations to provide services to our customers,incidental expenses, which are generally reimbursable under the terms of thecontracts, are billed to customers. These expenses are recorded as bothrevenues and direct cost of services in accordance with the provisions of EITF01-14, “Income Statement Characterization of Reimbursements Received for‘Out-of-Pocket’ Expenses Incurred,” and include expenses such as airfare,mileage, hotel stays, out-of-town meals, and telecommunication charges.

 

Unbilledreceivables represent revenues recognized for services performed that were notbilled at the balance sheet date.  Themajority of these amounts are billed in the subsequent month. Unbilled amountsarising from contracts occur when revenues recognized exceed allowable billingsin accordance with the contractual agreements. As of March 28, 2003, we had unbillable revenues included in currentunbilled receivables of approximately $1.3 million, which were expected to bebilled in the following quarter.  Inaddition, we had long-term unbilled receivables at March 28, 2003, and March29, 2002 of $7.0 million and $9.9 million, respectively, on a single majoroutsourcing contract with a term of seven years.  The long-term receivable will be billed and collected over theremaining four years of the contract through contractual billings that willexceed the amounts to be earned as revenues.

 

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

 

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***Allowance forDoubtful Accounts***

 

We maintain anallowance for doubtful accounts for estimated losses resulting from theinability of our clients to make required payments. If the financial conditionof our clients were to deteriorate, resulting in an impairment of their abilityto make payments, additional allowances may be required.   Management specifically analyzes accountreceivables and historical bad debt, customer concentrations, creditworthiness, past collection experience, current economic trends, and changes inour customer payment terms when evaluating the adequacy of doubtful accounts.

*** ***

***Goodwill and Intangible Assets***

 

Effective December 29,2001, we adopted SFAS No. 142, “Goodwill and Other IntangibleAssets.”  Under SFAS No 142, we will nolonger amortize our goodwill and will be required to complete an annualimpairment test.  We believe that theaccounting assumptions and estimates related to the annual goodwill impairmenttesting are critical because these can change from period to period.  The impairment test requires us to forecastour future cash flows, which requires significant judgment.  Our operating results have been negativelyimpacted by the worldwide economic conditions.   Accordingly, if our expectations of future operating resultschange, or if there are changes to other assumptions, our estimate of the fairvalue of our reporting units could change significantly resulting in a goodwillimpairment charge, which could have a significant impact on our consolidatedfinancial statements.  As of March 28,2003, we have $13.7 million of goodwill and $0.9 million ofintangible assets recorded on our balance sheet.  See Note 8 of the Notes to Consolidated Financial Statements.

*** ***

***Recent Accounting Pronouncements***

 

In June 2002,the Financial Accounting Standards Board (“FASB”) issued SFAS No. 146,“Accounting for Costs Associated with Exit or Disposal Activities.”  SFAS No. 146 addresses accounting andreporting costs associated with exit or disposal activities and nullifies EITFIssue 94-3, “Liability Recognition for Certain Employee Termination Benefitsand Other Costs to Exit an Activity.” SFAS No. 146 requires that a liability for a cost associated with an exitor disposal activity shall be recognized and measured initially at its fairvalue in the period that the liability is incurred.  SFAS No. 146 is effective for exit or disposal activities thatare initiated after December 31, 2002. SFAS No. 146 did not have a material impact on our consolidatedfinancial statements.

 

In November2002, the EITF reached a consensus on Issue 00-21, titled “Accounting forRevenue Arrangements with Multiple Deliverables,” which addresses how toaccount for arrangements that involve the delivery or performance of multipleproducts, services, and/or rights to use assets.  Revenue arrangements with multiple deliverables are divided intoseparate units of accounting if the deliverables in the arrangement meet thefollowing criteria: (1) the delivered item has value to the customer on astandalone basis; (2) there is objective and reliable evidence of the fairvalue of undelivered items; and (3) delivery of any undelivered item isprobable.  Arrangement considerationshould be allocated among the separate units of accounting based on theirrelative fair values, with the amount allocated to the delivered item beinglimited to the amount that is not contingent on the delivery of additionalitems or meeting other specified performance conditions.  The new standard is required to be adoptedfor all new applicable revenue arrangements no later than the third quarter of2003.  Early adoption is permitted andwe have elected to adopt the new standard as of the beginning of the firstquarter of 2003.  In addition, we haveelected to apply the new standard to all existing outsourcing arrangementsimpacted by EITF 00-21 and record to earnings the resulting cumulative effectas a change in accounting principle.  Webelieve that this voluntary adoption for existing contracts provides greatertransparency into the performance of our multiple deliverable arrangements. Wehave recorded a non-cash charge, net of tax, of $2.6 million,

 

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or $0.11 per share, in thefirst quarter of 2003.

 

InNovember 2002, the FASB issued Interpretation No. 45 (“FIN 45”), “Guarantor’sAccounting and Disclosure Requirements for Guarantees, Including IndirectGuarantees and Indebtedness of Others.” FIN 45 elaborates on the disclosures tobe made by the guarantor in its interim and annual financial statements aboutits obligations under certain guarantees that it has issued.  It also requires that a guarantor recognize,at the inception of a guarantee, a liability for the fair value of theobligation undertaken in issuing the guarantee. The initial recognition andmeasurement provisions of this interpretation are applicable on a prospectivebasis to guarantees issued or modified after December 31, 2002; while theprovisions of the disclosure requirements are effective for financialstatements of interim or annual reports ending after December 15, 2002.  At March 28, 2003, we had no guaranteesoutstanding.

 

In December2002, the FASB issued SFAS No. 148, “Accounting for Stock-BasedCompensation -Transition and Disclosure.” SFAS No. 148 amends SFASNo. 123, “Stock-Based Compensation,” to provide alternative methods oftransition for a voluntary change to the fair value based method of accountingfor stock-based employee compensation. In addition, SFAS No. 148 amends thedisclosure requirements of SFAS No. 123 to require prominent disclosuresin both annual and interim financial statements about the method of accountingfor stock-based employee compensation and the effect of the method used onreported results.  The disclosureprovisions of SFAS No. 148 are effective for fiscal years ending afterDecember 15, 2002.  At this time,we intend to continue to account for stock-based compensation to our associatesusing the methods prescribed by Accounting Principles Bulletin (APB) OpinionNo. 25, and related interpretations.  Wehave made certain disclosures required by SFAS No. 148 in our Notes toConsolidated Financial Statements.

 

InJanuary 2003, the FASB issued Interpretation No. 46, “Consolidation of VariableInterest Entities” (“FIN 46”) which changes the criteria by which one companyincludes another entity in its consolidated financial statements. FIN 46requires a variable interest entity to be consolidated by a company if that companyis subject to a majority of the risk of loss from the variable interestentity’s activities or entitled to receive a majority of the entity’s residualreturns or both. The consolidation requirements of FIN 46 apply immediately tovariable interest entities created after January 31, 2003, and apply in thefirst fiscal period beginning after June 15, 2003, for variable interestentities created prior to February 1, 2003. We have not entered into any transactions or other arrangements which webelieve would be considered variable interest entities.

 

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**Risks Relating to Our Business**

 

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

 

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

 

Our netrevenues, operating results, and cash flows may fluctuate significantly becauseof a number of factors, many of which are outside of our control.  These factors may include:

 

•                  The loss of oneor more significant clients in any of our business segments;

•                  Fluctuations inmarket demand for our services, consultant hiring, and utilization;

•                  Delays orincreased expenses in securing and completing client engagements;

•                  Timing andcollection of fees and payments;

•                  Timing of newclient engagements in any of our business segments;

•                  Increasedcompetition and pricing pressures;

•                  The loss of keypersonnel and other employees;

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

•                  The timing ofcertain general and administrative expenses;

•                  Completingacquisitions and the costs of integrating acquired operations;

•                  Variability inthe number of billable days in each quarter;

•                  The write-off ofclient billings;

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

•                  Entry into fixedprice engagements and engagements where some fees are contingent upon theclient realizing a certain return on investment for a project;

•                  Availability offoreign net operating losses and other credits against our earnings;

•                  Internationalcurrency fluctuations;

•                  Ability tosublease vacant office space included in previous restructuring charges; and

•                  The fixed natureof a substantial portion of our expenses, particularly personnel and relatedcosts, depreciation, office rent, and occupancy costs.

 

One or more ofthe foregoing factors may cause our operating expenses to be unexpectedly 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 receivables (both unbilled and billed).  Significant write-offs could materiallyadversely affect our business, financial condition, and results ofoperations.  Our business also hassignificant collection risks.  If we areunable to collect our receivables in a timely manner, our business andfinancial condition could also suffer. In addition, we began the roll-off of our resources from a large clientengagement in our life sciences business unit during the first quarter of 2003,and we expect the engagement to be substantially completed at the end of thesecond quarter of 2003.  During thequarter ended March 28, 2003, this client engagement accounted forapproximately 7% of our net revenues, and approximately 26% of our net revenuesfrom the life sciences business unit. Even if we are able to secure new clientengagements in our life sciences business unit, our revenues will be negativelyimpacted by the

 

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completion of this large clientengagement.  If these or any othervariables or unknowns were to cause a shortfall in revenues or earnings orotherwise cause a failure to meet public market expectations, our businesscould be adversely affected.

 

Further, weadopted Emerging Issues Task Force Issue 00-21, “EITF 00-21” in the firstquarter of 2003, which affects the way we recognize revenue on long-termoutsourcing agreements. The adoption of EITF 00-21 results in separating ouroutsourcing contracts into multiple elements and separately accounting for eachelement, rather than accounting for all elements together as a group.  As a result, we now recognize revenue fromcertain service elements of our outsourcing agreements on a straight-line basisover the life of the contract, rather than on a percentage of completionbasis.  Since we typically incur greatercosts and expenses during the early phase of the service elements (which willnow have straight-line revenue) than we do in the later years of thoseelements, we believe our net income will be less during the early stages of ouroutsourcing engagements.  In addition,if we are unable to manage costs as planned in the later stages of anoutsourcing engagement, our net income will likewise be negatively impacted.  We adopted this accounting principle on acumulative catch-up basis, which resulted in a non-cash charge to our netincome in the first fiscal quarter of 2003 of approximately $2.6 million, netof tax, or $0.11 per share.  In general,income from our outsourcing contracts will be less stable in the future, sinceit will be more susceptible to changes in the mix of newer versus oldercontracts, and to the impact of cost fluctuations from quarter to quarterwithout a compensating change in revenue. If we fail to meet our public market expectations or otherwiseexperience a shortfall in our net income due to these fluctuations, ourbusiness could be adversely affected and the price of our stock may decline.

 

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 initialtransformation of our client’s information technology functioning to provideimproved service at a lower cost and meet agreed-upon service levels.  Often, we recover this investment through paymentsover the life of the outsourcing agreement. If we are unable to achieve agreed-upon service levels or otherwisebreach the terms of our outsourcing agreements, the clients may have rights toterminate our agreements for cause and we may be unable to recover ourinvestments.  In the case of ouroutsourcing agreement with the New York Presbyterian Hospital, this investmentamounts to almost $7.0 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. Net revenues from such outsourcingrelationships, as of the quarter ended March 28, 2003, representedapproximately 34% of our consolidated net revenues.  The substantial majority of these revenues are received from fourlarge outsourcing accounts that have signed long term agreements with us.  However, the loss of any of our outsourcingrelationships would have a material impact on our business and results ofoperations.  In each of theseengagements, the clients have fully outsourced their information technologystaff and functions to us.  Inall of our outsourcing relationships, we generally enter into additionalagreements, including detailed service level agreements, which establishperformance levels and standards for our services.  If we fail to

 

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meet these performance levelsor standards, our clients may receive monetary service level credits from usor, if we experience persistent failures, our clients may have a right toterminate the outsourcing contract for cause and have no obligation to pay usany termination fees.  In May 2003, wereceived a letter from our significant outsourcing client in Cleveland, Ohioalleging breach of the terms of our contract. The letter alleges failure to meet certain service levels in consecutivemonths and delinquency of certain transition services deliverables.  The client has requested that we present aplan for remediation of the alleged failures and delinquencies, but we cannotbe certain that such plan will cure our alleged breaches or that such clientwill not terminate their agreement with us. Our anticipated revenues from our outsourcing engagements could besignificantly reduced if we are unable to satisfy our performance levels orstandards.  Additionally, ouroutsourcing contracts can be terminated at the convenience of our clients uponthe payment of a termination fee.

 

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.

 

Finally, wehave publicly announced our intentions to expand our outsourcing business andperform our information technology outsourcing services for other potentialclients.  We anticipate expanding ouroutsourcing business to perform discrete information technology services forclients.  The amount of time andresources required to win client engagements for our outsourcing business issignificant, and we may not win the number or type of client engagements thatwe anticipate.  If we fail to meet ourobjective to secure new outsourcing engagements, or fail to secure newoutsourcing engagements on acceptable commercial terms, we will not experiencethe growth in this business unit that we have anticipated.  We have also publicly announced ourintention to enter into the business process outsourcing market (BPO) throughacquisition.  If we are unable tosuccessfully identify, acquire, and integrate an acquisition in the BPO spaceon commercially reasonable terms, we may not be able to successfully executeour strategy in this market.  Further,all acquisitions involve risks that could materially and adversely affect ourbusiness and operating results. Consequently, we may fail to meet public market expectations and theprice of our common stock may decline.

 

*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.

 

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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,and results of operations.  We may alsobe required to hire new consultants before securing a client engagement.  If clients defer committing to newassignments for any length of time or for any reason we could be required tomaintain a significant number of under-utilized consultants which couldadversely affect our operating results and financial condition during any givenperiod.  Further, our outsourcingbusiness has very long sales and contract lead times, requiring us to spend asubstantial amount of time and resources in attempting to secure eachoutsourcing engagement.  We cannotpredict whether the investment of time and resources will result in a newoutsourcing engagement or, if the engagement is secured, that the engagementwill be on terms favorable to us.

 

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

 

We intend togrow, in part, by acquiring complementary businesses that could enhance ourcapability to serve the healthcare and pharmaceutical industries.  For example, in May 2002, we acquired amajority interest in Codigent Solutions Group, Inc. (now known as FCG InfrastructureServices, Inc.) and in February 2003, we acquired Paragon Solutions, Inc. andcertain assets of Phyve Corporation. All acquisitions involve risks that couldmaterially and adversely affect our business and operating results.  These risks include:

 

•                  Distractingmanagement from our business;

•                  Losing keypersonnel and other employees;

•                  Losing clients;

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

•                  The impairmentof acquired assets and goodwill; and

•                  Acquiring thecontingent and other liabilities of the businesses we acquire

 

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

 

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

 

Our successdepends, to a significant extent, on obtaining additional engagements from ourexisting clients.  A substantial portionof our revenues is derived from additional services provided to our existingclients.  The loss of a small number ofclients may result in a material decline in revenues and cause us to fail tomeet public market expectations of our financial performance and operatingresults.  If we fail to generateadditional revenues from our existing clients it may materially adverselyaffect our business and financial condition.

 

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

 

Our servicesoften involve assessing and/or implementing complex information systems andsoftware, which are critical to our clients’ operations.  Our failure to meet client expectations inthe performance of our services, including the quality, cost and timeliness ofour services, may damage our reputation in the healthcare and pharmaceuticalindustries and adversely affect our ability to attract and retain clients.  If a client is not satisfied with ourservices, we will generally spend additional human and other resources at ourown expense to ensure client satisfaction. Such expenditures will typically result in a lower margin on suchengagements and could materially adversely affect our business, financialcondition, 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 maintainprofessional liability insurance, such insurance may not provide adequatecoverage for successful 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.

 

*The loss of our key client service employees and executive officerscould negatively affect us*

 

Ourperformance depends on the continued service of our executive officers, seniormanagers, and key employees.  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:

 

•                  Dependence onlateral hiring of consultants;

•                  Travel demandsimposed on our consultants;

•                  Loss ofemployees to competitors and clients; and

•                  Reductions inforce in our business units as certain areas of our business have seen lessdemand.

 

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

 

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

 

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 restructured our business units and hiredpersons with appropriate skills, including salespersons, and reduced ourworkforce in practice areas experiencing less demand.  These market conditions and restructuring efforts have placed newand increased demands on our management personnel.  It has also placed significant and increasing demands on ourfinancial, technical and operational resources, and on our informationsystems.  If we are unable to managegrowth effectively or if we experience business disruptions due to shifts inmarket demand, or growth or restructuring, our operating results willsuffer.  To manage any future growth, wemust extend our financial reporting and information management systems to ourmultiple and international office locations and traveling employees, anddevelop and implement new procedures and controls to accommodate newoperations, services and clients. Increasing operational and administrative demands may make it difficultfor our senior managers to engage in business development activities and theirother day-to-day responsibilities. Further, the addition of new employees and offices to offset anyincreasing demands may impair our ability to maintain our service deliverystandards and corporate culture.  Inaddition, we have in the past changed, and may in the future change, ourorganizational structure and business strategy.  Such changes may result in operational inefficiencies and delaysin delivering our services.  Suchchanges could also cause a disruption in our business and could cause amaterial adverse effect on our financial condition and results of operations.

 

*Changes in the healthcare and pharmaceutical industries couldnegatively impact our revenues.*

 

We derive asubstantial portion of our revenues 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, the resultingorganizations could have greater bargaining power, which could erode thecurrent pricing structure for our services. The reduction in the size of our target market or our failure tomaintain our pricing goals could have a material adverse effect on our businessand financial condition.  Finally, eachof the markets we serve is highly dependent upon the health of the overalleconomy.  Our clients in each of thesemarkets have experienced significant cost increases and pressures in recentyears.  Our services are targeted atrelieving these cost pressures; however, any continuation or acceleration ofcurrent market conditions could greatly impact our ability to secure or retainengagements, the loss of which could have a material adverse effect on ourbusiness and financial condition.

 

A substantialportion of our revenues has also come from companies in the pharmaceuticalindustry.  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:

 

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

•                  Continued consolidationof companies; or

 

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•                  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.

 

*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.   Further,in February 2003, we acquired Paragon Solutions, Inc., a U.S. based companywith offshore software development centers in India and Vietnam.  As a result of this acquisition, wecurrently have business operations and employees located in India and Vietnam,as well as our existing employees throughout Europe and Japan.  If we fail to recruit and retain asufficient number of qualified employees in each country where we conductbusiness, our ability to expand internationally or perform our existingservices may be impaired and our business could be adversely affected.  Our international operations are alsosubject to a variety of risks, including:

 

•                  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 international operations;

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

•                  Terroristattacks;

•                  Difficulties inenforcing contractual obligations and intellectual property rights;

•                  Adverse taxconsequences;

•                  Increased costsassociated with maintaining international marketing efforts and offices;

•                  Governmentregulations and restrictions;

•                  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 establishedour first life sciences branch office in Japan in January 2003.  We cannot assure you that our newlyestablished office in Japan will grow successfully, if at all.  If we cannot grow our practice, we may notbe able to recoup or realize a return on our initial investments in that marketand our financial condition and results of operations may be adverselyaffected.

 

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Ouracquisition of Paragon Solutions, Inc. provided us a means to implement ourglobal sourcing 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 weare unable to receive high quality services from foreign employees orsubcontractors, our business may be adversely impacted. Further, our recentlyacquired international operations in Vietnam and India subject our business toa variety of risks and uncertainties unique to operating businesses in thesecountries, including the risk factors discussed above.

 

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, our business will 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), Cap Gemini Ernst & Young, IBM Global ConsultingServices, Wipro Technologies, and Accenture.

 

In integrationand co-management services, we compete with:

 

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

•                  Service groupsof computer equipment companies,

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

•                  Clients’internal information management departments,

•                  Other healthcareconsulting firms, and

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

 

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, information technology consulting, and other integrationand maintenance services, such as Wipro Technologies, Cognizant TechnologySolutions Corporation, and Tata Technologies Limited.

 

Several of ourcompetitors employ a global sourcing strategy to provide software developmentand other information technology services to their clients, while at the sametime reducing their cost structure and improving the quality of services theyprovide.  If we are unable to realizethe perceived cost benefits of our recently implemented global sourcingstrategy or if we are unable to receive high quality services from foreignemployees or subcontractors, our business may be adversely impacted and we maynot be able to compete effectively.

 

Many of ourcompetitors have significantly greater financial, human, and marketingresources than us.  As a result, suchcompetitors may be able to respond more quickly to new or emerging technologiesand changes in customer demands, or to devote greater resources to thedevelopment, promotion, sale, and support of their products and services thanwe do.  In addition, as healthcare

 

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organizations become larger andmore complex, our larger competitors may be better able to serve the needs ofsuch organizations.  If we do notcompete effectively with current and future competitors, we may be unable tosecure new and renewed client engagements, or we may be required to reduce ourrates in order to compete effectively. This could result in a reduction in our revenues, resulting in lowerearnings or operating losses, and otherwise materially adversely affecting ourbusiness, financial condition, and results of operations.

 

*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 our sales, marketing,and support activities.  We often areengaged by vendors or their customers to implement or integrate vendor productsbased on our relationship with a particular vendor.  If we fail to maintain our relationships with Documentum and othervendors, or fail to establish additional new relationships, our business couldbe materially adversely affected.

 

*Our relationships with vendors of software and hardware products couldhave a negative impact on our ability to secure consulting 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 hardware vendors,clients may not engage us for certain consulting engagements relating to thosevendors, which could reduce our revenues and materially adversely affect ourbusiness.

 

*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. In addition, the financial health and viability of major U.S. carriershas recently become very questionable. If efficient and cost effective air travel becomes unavailable to ourconsultants and other employees, or if domestic or international air travel issignificantly reduced or halted, we may be unable to satisfactorily perform ourclient engagements on a timely basis, which could have a materially adverseimpact on our business.  Further, if ourconsultants or other employees refuse to utilize air travel to perform theirjob functions for any reason, our business and reputation would be negativelyaffected.

 

*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

 

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could be delayed or cancelled.  Healthcare and pharmaceutical organizationsmay react to these situations by curtailing or deferring investments, includingthose for our services.  In addition, ifwe are unable to maintain our skill and expertise in light of regulatory ortechnological changes, our services may not be marketable to our clients and wecould lose existing clients or future engagements.  Finally, government regulations, particularly HIPAA, may requireour clients to impose additional contractual responsibilities on us, which maymake it more costly to perform certain of our engagements and subject us toincreased risk in the performance of these engagements, including immediatetermination of an engagement.

 

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 ofcopyright and trade secret laws and confidentiality procedures to protect ourintellectual property.  These steps maynot protect our proprietary information. In addition, the laws of certain countries do not protect or enforceproprietary rights to the same extent, as do the laws of the UnitedStates.  We are currently providing ourservices to clients in international markets and have business operations inEurope, Japan, India and Vietnam.  Ourproprietary information may not be protected to the same extent as providedunder the laws of the United States, if at all.  The unauthorized use of our intellectual property could have amaterial adverse effect on our business, financial condition, or results ofoperations.

 

*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 claims against us in the future. Such claims may result in protracted and costly litigation, penalties,and fines that could adversely affect our business regardless of the merits ofsuch claims.

 

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

 

Our currentofficers, directors, and other affiliates beneficially own approximately 35% ofour outstanding shares of common stock and approximately 47% 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 substantiallyall of our assets, issuance of additional shares of stock and approval of newstock and 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:

 

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•                  Our performanceand prospects;

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

•                  An increase inthe number of outstanding shares of our common stock due to issuances inconnection with our recent acquisitions;

•                  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, ifresearch analysts stop covering our company or reduce their expectations of us,our stock price could decline or the liquidity of our common stock may beadversely impacted, which could create difficulty for investors to resell theirshares 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.*

 

Our board ofdirectors has the authority to issue up to 9,500,000 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 of incorporationand bylaws may have the effect of deterring hostile takeovers or delayingchanges 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.

 

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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 up to 500,000shares of our Series A Junior Participating Preferred Stock  Under some circumstances these rights becomethe rights to purchase shares of our common stock or securities of an acquiringentity at one-half the market value. The rights are not intended to prevent our takeover, rather they aredesigned to deal with the possibility of unilateral actions by hostileacquirers that could deprive our board of directors and stockholders of theirability to determine our destiny and obtain the highest price for our commonstock.

 

## **Item 3**.  Quantitative and Qualitative Disclosuresabout Market Risks

 

Our financialinstruments include cash and cash equivalents (i.e., short-term and long-termcash investments), accounts receivable, unbilled receivables, accounts payable,and a revolving line of credit.  Onlythe cash and cash equivalents and short-term investments which totaled $59.2million at March 28, 2003 present us with market risk exposure resultingprimarily from changes in interest rates. Based on this balance, a change of one percent in the interest ratewould cause a change in interest income for the annual period of approximately$0.6 million.  Our objective inmaintaining these investments is the flexibility obtained in having cashavailable for payment of accrued liabilities and acquisitions.

 

Our borrowingsare primarily dependent upon the prevailing prime rate.  As of March 28, 2003, we had no borrowingsunder our revolving line of credit and an available borrowing capacity of $7.0million.  See “Item 2. Management’sDiscussion and Analysis of Financial Condition and Results of Operations-Liquidity and Capital Resources.”  Theestimated fair value of borrowings under the revolving line is expected toapproximate its carrying value.

 

## **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 only reasonableassurance of achieving the desired control objectives, and managementnecessarily was required to apply its judgment in evaluating the cost-benefitrelationship of possible controls and procedures.

 

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.

 

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*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 theirevaluation. There were no significant deficiencies or material weaknesses, andtherefore no corrective actions were taken.

# ** **

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# **Part II. Other Information**

 

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

 

On February 19, 2003, wefiled a complaint against Siteworks, LLC for breach of contract.  The claim was filed in the United StatesDistrict Court, Eastern District of Pennsylvania.  We sought to recover fees and expenses totaling approximately$2.8 million for software development services provided to Siteworks during2000 through 2002.  Prior to our filingof the lawsuit, Siteworks had delivered correspondence to us, in January andFebruary 2003, alleging various failures by us and concealment of such failuresin the performance of the contract.  Inits correspondence, Siteworks alleged that it believed it could recovercompensatory, consequential, and punitive damages from us.  Effective April 11, 2003, we settled ourlawsuit against Siteworks.  We enteredinto mutual release of claims with Siteworks and do not expect the settlementto have a material effect on our financial condition or results of operations.

 

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

 

(c) Sales of UnregisteredSecurities. On February 12, 2003, we acquired Paragon Solutions, Inc. in amerger transaction for an aggregate purchase price of approximately $4.2million.  We issued 600,500 unregisteredshares of our common stock and approximately $0.2 million in cash in the mergerto the Paragon stockholders.  The sharesof common stock we issued are exempt from the registration requirements of theSecurities Act of 1933, as amended, pursuant to Section 4(2) of such Act andRule 506 promulgated thereunder.  Wealso agreed to reserve an additional 49,216 shares of our common stock forissuance upon the exercise of options that were initially issued underParagon’s stock incentive plans and assumed by us in the acquisition, and wehave filed a registration statement on Form S-8 to register for resale sharesissued upon exercise of these stock options. After the effect of the exchange ratio, the stock options that wereassumed in connection with the acquisition remain subject to the terms andconditions of the original option grant.

 

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

 

None.

 

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

 

None.

 

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

 

None.

 

## **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                                                        |

 

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| 4.1(4)  |   | Specimen Common Stock  Certificate                                        |
|---------|--------|---------------------------------------------------------------------------|
| 11.1(5) |   | Statement of computation  of per share earnings                           |
| 99.1    |   | Certifications pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002 |

 

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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)          SeeNote 4 to Consolidated Financial Statements, “Net Income (Loss) Per Share.”

 

 

(b)         Reportson Form 8-K

 

(1)          Form 8-K filed on January 13, 2003 reporting Michael J. Puntoriero’sappointment as our  Executive VicePresident and Chief Financial Officer (Items 5 and 7).

 

(2)          Form 8-K filed on January 30, 2003 announcing the execution of ourmerger agreement to acquire Paragon Solutions, Inc. (Item 5).

 

(3)          Form 8-K filed on February 13, 2003 reporting the completion of ouracquisition of Paragon Solutions, Inc. and providing the press releaseannouncing our fourth quarter and fiscal year 2002 financial results (Items 5and 7).

 

(4)          Form 8-K filed on February 27, 2003 reporting the appointment ofMichael P. Downey to our Board of Directors and Audit Committee, theappointment of Guy L. Scalzi as our Senior Vice President and General Managerof our Outsourcing business unit, and the adoption of a Rule 10b5-1 sales planby Fatima J. Reep, one of our Directors (Items 5 and 7).

 

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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:  May 12, 2003 | /s/ LUTHER  J. NUSSBAUM               |   |
|                     | Luther J.  Nussbaum                   |
|                     | Chairman and  Chief Executive Officer |
|                     |                                  |
|                     |                                  |
| Date:  May 12, 2003 | /s/ MICHAEL  J. PUNTORIERO            |   |
|                     | Michael J.  Puntoriero                |
|                     | Executive  Vice President and Chief   |
|                     | Financial  Officer                    |
|                     | (Principal  Financial Officer)        |
|                          |                                       |  |  |

# ** **

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# **CERTIFICATIONS**

 

I,Michael J. Puntoriero, certify that:

 

1. I have reviewed this quarterly report on Form 10-Q of First ConsultingGroup, Inc.;

 

2. Based on my knowledge, this quarterly report does not contain any untruestatement of a material fact or omit to state a material fact necessary to makethe statements made, in light of the circumstances under which such statementswere made, not misleading with respect to the period covered by this quarterlyreport;

 

3. Based on my knowledge, the financial statements, and other financialinformation included in this quarterly report, fairly present in all materialrespects the financial condition, results of operations and cash flows of theregistrant as of, and for, the periods presented in this quarterly report;

 

4. The registrant’s other certifying officers and I are responsible forestablishing and maintaining disclosure controls and procedures (as defined inExchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

 

a) designed such disclosurecontrols and procedures to ensure that material information relating to theregistrant, including its consolidated subsidiaries, is made known to us byothers within those entities, particularly during the period in which thisquarterly report is being prepared;

 

b) evaluated the effectiveness ofthe registrant’s disclosure controls and procedures as of a date within 90 daysprior to the filing date of this quarterly report (the “Evaluation Date”); and

 

c) presented in this quarterlyreport our conclusions about the effectiveness of the disclosure controls andprocedures based on our evaluation as of the Evaluation Date;

 

5. The registrant’s other certifying officers and I have disclosed, basedon our most recent evaluation, to the registrant’s auditors and the auditcommittee of the registrant’s board of directors (or persons performing theequivalent function):

 

a) all significant deficiencies in the design or operation of internalcontrols which could adversely affect the registrant’s ability to record,process, summarize and report financial data and have identified for theregistrant’s auditors any material weaknesses in internal controls; and

 

b) any fraud, whether or notmaterial, that involves management or other employees who have a significantrole in the registrant’s internal controls; and

 

6. The registrant’s other certifying officers and I have indicated in thisquarterly report whether or not there were significant changes in internalcontrols or in other factors that could significantly affect internal controlssubsequent to the date of our most recent evaluation, including any correctiveactions with regard to significant deficiencies and material weaknesses.

 
| Date: May 12, 2003                                    |
|-------------------------------------------------------|
|                                                  |
|                                                  |
| /s/ Michael J.  Puntoriero                            |   |
| Michael J. Puntoriero                                 |
| Executive Vice President and  Chief Financial Officer |
|                                                  |

 

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I,Luther J. Nussbaum, certify that:

 

1. I have reviewed this quarterly report on Form 10-Q of First ConsultingGroup, Inc.;

 

2. Based on my knowledge, this quarterly report does not contain any untruestatement of a material fact or omit to state a material fact necessary to makethe statements made, in light of the circumstances under which such statementswere made, not misleading with respect to the period covered by this quarterlyreport;

 

3. Based on my knowledge, the financial statements, and other financialinformation included in this quarterly report, fairly present in all materialrespects the financial condition, results of operations and cash flows of theregistrant as of, and for, the periods presented in this quarterly report;

 

4. The registrant’s other certifying officers and I are responsible forestablishing and maintaining disclosure controls and procedures (as defined inExchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

 

a) designed such disclosurecontrols and procedures to ensure that material information relating to theregistrant, including its consolidated subsidiaries, is made known to us byothers within those entities, particularly during the period in which thisquarterly report is being prepared;

 

b) evaluated the effectiveness ofthe registrant’s disclosure controls and procedures as of a date within 90 daysprior to the filing date of this quarterly report (the “Evaluation Date”); and

 

c) presented in this quarterlyreport our conclusions about the effectiveness of the disclosure controls andprocedures based on our evaluation as of the Evaluation Date;

 

5. The registrant’s other certifying officers and I have disclosed, basedon our most recent evaluation, to the registrant’s auditors and the auditcommittee of the registrant’s board of directors (or persons performing theequivalent function):

 

a) all significant deficiencies in the design or operation of internalcontrols which could adversely affect the registrant’s ability to record,process, summarize and report financial data and have identified for theregistrant’s auditors any material weaknesses in internal controls; and

 

b) any fraud, whether or notmaterial, that involves management or other employees who have a significantrole in the registrant’s internal controls; and

 

6. The registrant’s other certifying officers and I have indicated in thisquarterly report whether or not there were significant changes in internalcontrols or in other factors that could significantly affect internal controlssubsequent to the date of our most recent evaluation, including any correctiveactions with regard to significant deficiencies and material weaknesses.

 
| Date: May 12, 2003                    |
|---------------------------------------|
|                                  |
|                                  |
| /s/ Luther J. Nussbaum                |   |
| Luther J. Nussbaum                    |
| Chairman and 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                                           |   |
| 11.1(5)  |   | Statement of computation  of per share earnings                              |   |
| 99.1     |   | Certifications pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002    |   |

 

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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)          SeeNote 4 to Consolidated Financial Statements, “Net Income (Loss) Per Share.”

 

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