**UNITED STATES**

**SECURITIESAND EXCHANGE COMMISSION**

**Washington, DC  20549**

 

----

 

**FORM 10-Q**

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

 

**For thequarterly period ended June 28, 2002,**

** **

**or**

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

 

**For thetransition period from            to           **

 

**Commission File Number 0-23651**

 

----

**First Consulting Group, Inc.**

(Exact name of registrant as specified in its charter)

 

| **Delaware**                                                    |   | **95-3539020**                        |
|-----------------------------------------------------------------|--------|---------------------------------------|
| (State or other  jurisdiction of incorporation or organization) |   | (I.R.S. Employer  Identification No.) |
|                                                            |   |                                  |
| **111 W. Ocean Blvd. 4th Floor, Long  Beach, CA  90802**   |
| (Address of  principal executive offices including zip code)    |
|                                                            |   |                                  |
| **(562) 624-5200**                                              |
| (Registrant’s  telephone number, including area code)      |

 

----

 

(Former name, former address and former fiscal year,if changed since last report)

 

Indicate by check markwhether the registrant (1) has filed all reports required to be filed by Section13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements for thepast 90 days.  Yes x     No  ̈

 

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

 

| **Common Stock, $.001 par value** |   | **24,070,120**                  |
|-----------------------------------|--------|---------------------------------|
| (Class)                           |   | (Outstanding at  July 26, 2002) |

 

 

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**FirstConsulting Group, Inc.**

**Table ofContents**

 
| COVER PAGE        |
|-------------------|
|              |
| TABLE OF CONTENTS |
|              |
| PART I.           | FINANCIAL INFORMATION |
|              |   |
|              | ITEM  1. | FINANCIAL  STATEMENTS AND NOTES (UNAUDITED) |
|              |   |   |
|              | Consolidated Balance Sheets  as of June 28, 2002 and December 28, 2001 |
|              |   |
|              | Consolidated  Statements of Operations for the three month periods ended June 28, 2002 and  June 30, 2001 and for the six month periods ended June 28, 2002 and June 30,  2001 |
|              |   |
|              | Condensed  Consolidated Statements of Cash Flows for the six month periods ended June  28, 2002 and June 30, 2001 |
|              |   |
|              | Notes to  Consolidated Financial Statements |
|              |   |
|              | ITEM 2. | MANAGEMENT’S  DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
|              |   |
|              | ITEM 3. | QUANTITATIVE  AND QUALITATIVE DISCLOSURES ABOUT   MARKET RISKS |
|              |
| PART II.          | OTHER INFORMATION |
|              |
|              | ITEM 1. | LEGAL PROCEEDINGS |
|              |   |   |
|              | ITEM 2. | CHANGES IN SECURITIES |
|              |   |   |
|              | ITEM 3. | DEFAULTS UPON  SENIOR SECURITIES |
|              |   |   |
|              | ITEM  4. | SUBMISSION  OF MATTERS TO A VOTE OF SECURITY HOLDERS |
|              |   |   |
|              | ITEM 5. | OTHER INFORMATION |
|              |   |   |
|              | ITEM 6. | EXHIBITS AND  REPORTS ON FORM 8-K |
|              |
| SIGNATURES        |
|              |
| Exhibit  Index    |
|                   |  |  |  |

 

2

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**PART I.  FINANCIAL INFORMATION**

 

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

 

**First Consulting Group, Inc. andSubsidiaries**

 

**Consolidated Balance Sheets**

**(in thousands)**

 
|                                                                                                                                                                                        |   | **June 28,  2002** |    | **December  28,  2001** |   |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------------------|---------|-------------------------|--------|
|                                                                                                                                                                                        |   | **(unaudited)**    |    |                    |   |
| **ASSETS**                                                                                                                                                                                  |   |               |    |                    |   |
| Current  assets                                                                                                                                                                             |   |               |    |                    |   |
| Cash  and cash equivalents                                                                                                                                                                  |   | $                  | 38,354  |                    | $      | 32,499 |   |
| Short-term  investments                                                                                                                                                                     |   | 18,712             |    | 19,410                  |   |
| Accounts  receivable, less allowance of $2,270 and $2,740 in the periods ended June 28,  2002 and December 28, 2001, respectively                                                           |   | 29,586             |    | 34,657                  |   |
| Unbilled  receivables                                                                                                                                                                       |   | 18,020             |    | 13,963                  |   |
| Deferred  income taxes, net                                                                                                                                                                 |   | 7,664              |    | 7,834                   |   |
| Prepaid  expenses and other current assets                                                                                                                                                  |   | 3,358              |    | 1,571                   |   |
| Total  current assets                                                                                                                                                                       |   | 115,694            |    | 109,934                 |   |
| Notes  receivable-stockholders                                                                                                                                                              |   | 771                |    | 753                     |   |
| Long-term  investments                                                                                                                                                                      |   | 2,200              |    | 1,200                   |   |
| Property  and equipment                                                                                                                                                                     |   |               |    |                    |   |
| Furniture,  equipment, and leasehold improvements                                                                                                                                           |   | 7,656              |    | 8,033                   |   |
| Information  systems equipment                                                                                                                                                              |   | 22,114             |    | 26,838                  |   |
|                                                                                                                                                                                        |   | 29,770             |    | 34,871                  |   |
| Less  accumulated depreciation and amortization                                                                                                                                             |   | 20,159             |    | 24,237                  |   |
|                                                                                                                                                                                        |   | 9,611              |    | 10,634                  |   |
| Other  assets                                                                                                                                                                               |   |               |    |                    |   |
| Executive  benefit trust                                                                                                                                                                    |   | 6,011              |    | 6,246                   |   |
| Unbilled  long term receivables                                                                                                                                                             |   | 9,207              |    | 10,250                  |   |
| Deferred  income taxes                                                                                                                                                                      |   | 2,550              |    | 2,433                   |   |
| Goodwill,  net                                                                                                                                                                              |   | 3,468              |    | 3,587                   |   |
| Other                                                                                                                                                                                       |   | 371                |    | 392                     |   |
|                                                                                                                                                                                        |   | 21,607             |    | 22,908                  |   |
| Total  assets                                                                                                                                                                               |   | $                  | 149,883 |                    | $      | 145,429 |   |
|                                                                                                                                                                                        |   |               |    |                    |   |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**                                                                                                                                              |   |               |    |                    |   |
| Current liabilities                                                                                                                                                                         |   |               |    |                    |   |
| Accounts  payable                                                                                                                                                                           |   | $                  | 2,406   |                    | $      | 1,723 |   |
| Accrued  liabilities                                                                                                                                                                        |   | 10,580             |    | 11,284                  |   |
| Accrued  restructuring                                                                                                                                                                      |   | 10,323             |    | 6,781                   |   |
| Accrued  vacation                                                                                                                                                                           |   | 7,619              |    | 6,453                   |   |
| Accrued  incentive compensation                                                                                                                                                             |   | 1,645              |    | 4,280                   |   |
| Customer  advances                                                                                                                                                                          |   | 6,753              |    | 5,259                   |   |
| Total  current liabilities                                                                                                                                                                  |   | 39,326             |    | 35,780                  |   |
| Non-current  liabilities                                                                                                                                                                    |   |               |    |                    |   |
| Supplemental  executive retirement plan                                                                                                                                                     |   | 6,842              |    | 6,510                   |   |
| Minority  interest                                                                                                                                                                          |   | 1,561              |    | 863                     |   |
| Total  non-current liabilities                                                                                                                                                              |   | 8,403              |    | 7,373                   |   |
| Commitments  and contingencies                                                                                                                                                              |   | —             |    | —                  |   |
| Stockholders’  equity                                                                                                                                                                  |   |               |    |                    |   |
| Preferred  Stock, $.001 par value; 9,500,000 shares authorized, no shares issued and  outstanding                                                                                           |   | —             |    | —                  |   |
| Series  A Junior Participating Preferred Stock, $.001 par value; 500,000 shares  authorized, no shares issued and outstanding                                                               |   | —             |    | —                  |   |
| Common  Stock, $.001 par value; 50,000,000 shares authorized, 23,978,610 shares  issued and outstanding at June 28, 2002 and 23,715,719 shares issued and  outstanding at December 28, 2001 |   | 24                 |    | 24                      |   |
| Additional  paid-in capital                                                                                                                                                                 |   | 91,788             |    | 90,215                  |   |
| Retained  earnings                                                                                                                                                                          |   | 14,046             |    | 15,895                  |   |
| Deferred  compensation-stock incentive  agreements                                                                                                                                          |   | (1,015             | )       | (1,134                  | )      |
| Notes  receivable-stockholders                                                                                                                                                              |   | (1,730             | )       | (1,780                  | )      |
| Accumulated  other comprehensive loss                                                                                                                                                       |   | (959               | )       | (944                    | )      |
| Total  stockholders’ equity                                                                                                                                                            |   | 102,154            |    | 102,276                 |   |
| Total  liabilities and stockholders’ equity                                                                                                                                            |   | $                  | 149,883 |                    | $      | 145,429 |   |
|                                                                                                                                                                                             |        |                    |         |                         |        |  |  |  |

 

See accompanyingnotes.

 

3

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**First Consulting Group, Inc. andSubsidiaries**

 

**Consolidated Statements of Operations(Unaudited)**

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

 
|                                               |   | **Three Months Ended** |   | **Six Months Ended** |   |
|----------------------------------------------------|--------|------------------------|--------|----------------------|--------|
|                                               |   | **June 28,  2002**     |   | **June 30,  2001**   |   | **June 28,  2002** |   | **June 30,  2001** |   |
| Revenue before  reimbursements                     |   | $                      | 66,198 |                 | $      | 66,206 |   | $ | 129,475 |   | $ | 136,506 |   |
| Out of pocket  reimbursements                      |   | 3,937                  |   | 4,312                |   | 7,814 |   | 9,298 |   |
| Total revenue                                      |   | 70,135                 |   | 70,518               |   | 137,289 |   | 145,804 |   |
|                                               |   |                   |   |                 |   |   |   |   |   |
| Cost of services  before reimbursable expenses     |   | 41,809                 |   | 42,094               |   | 81,882 |   | 85,947 |   |
| Out of pocket  reimbursable expenses               |   | 3,937                  |   | 4,312                |   | 7,814 |   | 9,298 |   |
| Total cost of  services                            |   | 45,746                 |   | 46,406               |   | 89,696 |   | 95,245 |   |
|                                               |   |                   |   |                 |   |   |   |   |   |
| Gross profit                                       |   | 24,389                 |   | 24,112               |   | 47,593 |   | 50,559 |   |
|                                               |   |                   |   |                 |   |   |   |   |   |
| Selling expenses                                   |   | 6,939                  |   | 8,138                |   | 13,833 |   | 15,997 |   |
| General and  administrative expenses               |   | 14,769                 |   | 16,884               |   | 29,482 |   | 34,286 |   |
| Restructuring,  severance and impairment costs     |   | 7,818                  |   | 4,349                |   | 7,818 |   | 4,349 |   |
| Loss from  operations                              |   | (5,137                 | )      | (5,259               | )      | (3,540 | ) | (4,073 | ) |
| Other income                                       |   |                   |   |                 |   |   |   |   |   |
| Interest income,  net                              |   | 244                    |   | 299                  |   | 452 |   | 710 |   |
| Other expense,  net                                |   | (50                    | )      | (179                 | )      | (107 | ) | (240 | ) |
| Loss before  income taxes                          |   | (4,943                 | )      | (5,139               | )      | (3,195 | ) | (3,603 | ) |
| Benefit for  income taxes                          |   | (2,080                 | )      | (2,158               | )      | (1,346 | ) | (1,513 | ) |
| Net loss                                           |   | $                      | (2,863 | )                    | $      | (2,981 | ) | $ | (1,849 | ) | $ | (2,090 | ) |
| Basic net loss  per share                          |   | $                      | (0.12  | )                    | $      | (0.13 | ) | $ | (0.08 | ) | $ | (0.09 | ) |
| Diluted net loss  per share                        |   | $                      | (0.12  | )                    | $      | (0.13 | ) | $ | (0.08 | ) | $ | (0.09 | ) |
| Shares used in  computing basic net loss per share |   | 23,957                 |   | 23,397               |   | 23,927 |   | 23,485 |   |
| Shares used in  diluted net loss per share         |   | 23,957                 |   | 23,397               |   | 23,927 |   | 23,485 |   |

 

See accompanyingnotes.

 

4

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**First Consulting Group, Inc. andSubsidiaries**

 

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

**(in thousands)**

 
|                                              |   | **Six Months  Ended** |   |
|---------------------------------------------------|--------|-----------------------|--------|
|                                              |   | **June 28,  2002**    |   | **June 30,  2001** |   |
| Cash  flows from operating activities:            |   |                  |   |   |   |
| Net  loss                                         |   | $                     | (1,849 | ) | $ | (2,090 | ) |
| Adjustments  to reconcile net loss                |   | 2,435                 |   | 4,571 |   |
| Change  in assets and liabilities                 |   | 7,767                 |   | 4,114 |   |
| Net  cash provided by operating activities        |   | 8,353                 |   | 6,595 |   |
| Cash  flows from investing activities:            |   |                  |   |   |   |
| Net  purchase of investments                      |   | (271                  | )      | (427 | ) |
| Furniture,  equipment, and leasehold improvements |   | (1,368                | )      | (1,776 | ) |
| Acquisition  of business                          |   | (2,617                | )      | (114 | ) |
| Net  cash used for investing activities           |   | (4,256                | )      | (2,317 | ) |
| Cash  flows from financing activities:            |   |                  |   |   |   |
| Principal  payments of long-term debt             |   | —                |   | (145 | ) |
| Proceeds  from stock/tax loan payments            |   | 185                   |   | 524 |   |
| Proceeds  from issuance of stock                  |   | 1,573                 |   | 1,381 |   |
| Net  cash provided by financing activities        |   | 1,758                 |   | 1,760 |   |
| Net  increase in cash and equivalents             |   | 5,855                 |   | 6,038 |   |
| Cash  and equivalents at beginning of period      |   | 32,499                |   | 11,429 |   |
| Cash  and equivalents at end of period            |   | $                     | 38,354 |   | $ | 17,467 |   |
|                                              |   |                  |   |   |   |
| Cash  paid during the period for:                 |   |                  |   |   |   |
| Interest                                          |   | $                     | 14     |   | $ | 12 |   |
| Income  taxes                                     |   | $                     | 189    |   | $ | 211 |   |

 

See accompanyingnotes.

 

5

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**Notes to Consolidated FinancialStatements**

 

 

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

 

The consolidated balancesheet of First Consulting Group, Inc. (the “Company”) at June 28, 2002 andconsolidated statements of operations and condensed consolidated statements ofcash flows for the periods ended June 28, 2002 and June 30, 2001 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 June 28, 2002 and the results ofoperations for the three month periods and six-month periods ended June 28,2002 and June 30, 2001.  The results ofoperations for the six months ended June 28, 2002 are not necessarilyindicative of the results to be expected for the year ending December 27,2002.  For more complete financialinformation, these financial statements should be read in conjunction with theaudited financial statements for the year ended December 28, 2001 included inthe Company’s Annual Report on Form 10-K.

 

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

 

For purposes of reportingcash flows, cash and cash equivalents include cash and interest-earningdeposits or securities with original maturities of three months or less. TheCompany has approximately $18.7 million in short-term investments and $1.0million of long-term investments classified as available for sale.  Such investments are currently heldprimarily in commercial paper, money market investments and tax-exemptgovernment securities.  Net unrealizedgains and losses on investments were not material at June 28, 2002.

 

**3.****            ****Net Loss Per Share**

 

The following representsa reconciliation of basic and diluted net loss per share for the three monthand six periods ended June 28, 2002 and June 30, 2001, respectively (amountsrounded to thousands, except per share data):

 
|                                                               |   | **For the  Three Months Ended  June 28, 2002** |   | **For the  Three Months Ended  June 30, 2001** |   |
|--------------------------------------------------------------------|--------|------------------------------------------------|--------|------------------------------------------------|--------|
|                                                               |   | **Net Loss**                                   |   | **Weighted  Average  Shares**                  |   | **Per share  amount** |   | **Net Loss** |   | **Weighted  Average  Shares** |   | **Per share  amount** |   |
| Basic  EPS:                                                        |   |                                           |   |                                           |   |   |   |   |   |   |   |   |   |
| Net  loss available to common stockholders                         |   | $                                              | (2,863 | )                                              | 23,957 |   | $ | (0.12 | ) | $ | (2,981 | ) | 23,397 |   | $ | (0.13 | ) |
| Effect  of dilutive options and warrants:                          |   | —                                         |   | —                                         |   | — |   | — |   | — |   | — |   |
| Diluted  EPS:                                                      |   |                                           |   |                                           |   |   |   |   |   |   |   |   |   |
| Net  loss available to common stockholders and assumed conversions |   | $                                              | (2,863 | )                                              | 23,957 |   | $ | (0.12 | ) | $ | (2,981 | ) | 23,397 |   | $ | (0.13 | ) |

 

6

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|                                                               |   | **For the  Six Months Ended  June 28, 2002** |   | **For the  Six Months Ended  June 30, 2001** |   |
|--------------------------------------------------------------------|--------|----------------------------------------------|--------|----------------------------------------------|--------|
|                                                               |   | **Net Loss**                                 |   | **Weighted  Average  Shares**                |   | **Per share  amount** |   | **Net Loss** |   | **Weighted  Average  Shares** |   | **Per share  amount** |   |
| Basic  EPS:                                                        |   |                                         |   |                                         |   |   |   |   |   |   |   |   |   |
| Net  loss available to common stockholders                         |   | $                                            | (1,849 | )                                            | 23,927 |   | $ | (0.08 | ) | $ | (2,090 | ) | 23,485 |   | $ | (0.09 | ) |
| Effect  of dilutive options and warrants:                          |   | —                                       |   | —                                       |   | — |   | — |   | — |   | — |   |
| Diluted  EPS:                                                      |   |                                         |   |                                         |   |   |   |   |   |   |   |   |   |
| Net  loss available to common stockholders and assumed conversions |   | $                                            | (1,849 | )                                            | 23,927 |   | $ | (0.08 | ) | $ | (2,090 | ) | 23,485 |   | $ | (0.09 | ) |

 

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

 

The Company provides segment reporting at a gross margin level. Sellingand general and administrative expense (including corporate functions,occupancy related costs, depreciation, professional development, recruiting,and marketing), and fixed assets (primarily computer equipment, furniture, andleasehold improvements) are managed at the corporate level.  The Company currently has three segments:Healthcare, Life Sciences and Outsourcing. The Company’s segments are managed on an integrated basis in order toserve clients by assembling multi-disciplinary teams, which providecomprehensive services.

 

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

 

**For thequarter ended June 28, 2002:**

 
|                                           |   | **Healthcare** |   | **Life Sciences** |       | **Outsourcing** |       | **Totals** |       |
|------------------------------------------------|--------|----------------|--------|-------------------|------------|-----------------|------------|------------|------------|
| Revenue before reimbursements                  |   | $              | 29,492 |              | $          | 18,011          |       | $          | 18,695     |   | **$** | **66,198** |   |
|                                           |   |           |   |              |       |            |       |       |       |
| Out of pocket reimbursements                   |   | 3,415          |   | 463               |       | 59              | ** ** | **3,937**  | ** ** |
|                                           |   |           |   |              |       |            |       |       |       |
| Total revenue                                  |   | 32,907         |   | 18,474            |       | 18,754          | ** ** | **70,135** | ** ** |
|                                           |   |           |   |              |       |            |       |       |       |
| Cost of services before reimbursable expenses  |   | 16,976         |   | 9,905             |       | 14,928          | ** ** | **41,809** | ** ** |
|                                           |   |           |   |              |       |            |       |       |       |
| Out of pocket reimbursable expenses            |   | 3,415          |   | 463               |       | 59              | ** ** | **3,937**  | ** ** |
|                                           |   |           |   |              |       |            |       |       |       |
| Total cost of services                         |   | 20,391         |   | 10,368            |       | 14,987          | ** ** | **45,746** | ** ** |
|                                           |   |           |   |              |       |            |       |       |       |
| Gross profit                                   |   | 12,516         |   | 8,106             |       | 3,767           | ** ** | **24,389** | ** ** |
|                                           |   |           |   |              |       |            |       |       |       |
| Selling expenses                               |   |           |   |              | ** ** |            | ** ** | **6,939**  | ** ** |
|                                           |   |           |   |              |       |            |       |       |       |
| General & administrative expenses          |   |           |   |              | ** ** |            | ** ** | **14,769** | ** ** |
|                                           |   |           |   |              |       |            |       |       |       |
| Restructuring,  severance and impairment costs |   |           |   |              | ** ** |            | ** ** | **7,818**  | ** ** |
|                                           |   |           |   |              |       |            |       |       |       |
| Loss from operations                           |   |           |   |              | ** ** |            | ** ** | **$**      | **(5,137** | **)** |
|                                                |        |                |        |                   |            |                 |            |            |            |  |  |  |  |

 

7

----

 

**For thequarter ended June 30, 2001:**

 
|                                           |   | **Healthcare** |   | **Life Sciences** |       | **Outsourcing** |       | **Totals** |       |
|------------------------------------------------|--------|----------------|--------|-------------------|------------|-----------------|------------|------------|------------|
| Revenue before reimbursements                  |   | $              | 33,434 |              | $          | 17,001          |       | $          | 15,771     |   | **$** | **66,206** |   |
|                                           |   |           |   |              |       |            |       |       |       |
| Out of pocket reimbursements                   |   | 3,854          |   | 458               |       | —          | ** ** | **4,312**  | ** ** |
|                                           |   |           |   |              |       |            |       |       |       |
| Total revenue                                  |   | 37,288         |   | 17,459            |       | 15,771          | ** ** | **70,518** | ** ** |
|                                           |   |           |   |              |       |            |       |       |       |
| Cost of services before reimbursable expenses  |   | 17,928         |   | 11,207            |       | 12,959          | ** ** | **42,094** | ** ** |
|                                           |   |           |   |              |       |            |       |       |       |
| Out of pocket reimbursable expenses            |   | 3,854          |   | 458               |       | —          | ** ** | **4,312**  | ** ** |
|                                           |   |           |   |              |       |            |       |       |       |
| Total cost of services                         |   | 21,782         |   | 11,665            |       | 12,959          | ** ** | **46,406** | ** ** |
|                                           |   |           |   |              |       |            |       |       |       |
| Gross profit                                   |   | 15,506         |   | 5,794             |       | 2,812           | ** ** | **24,112** | ** ** |
|                                           |   |           |   |              |       |            |       |       |       |
| Selling expenses                               |   |           |   |              | ** ** |            | ** ** | **8,138**  | ** ** |
|                                           |   |           |   |              |       |            |       |       |       |
| General & administrative expenses          |   |           |   |              | ** ** |            | ** ** | **16,884** | ** ** |
|                                           |   |           |   |              |       |            |       |       |       |
| Restructuring,  severance and impairment costs |   |           |   |              | ** ** |            | ** ** | **4,349**  | ** ** |
|                                           |   |           |   |              |       |            |       |       |       |
| Loss from operations                           |   |           |   |              | ** ** |            | ** ** | **$**      | **(5,259** | **)** |
|                                                |        |                |        |                   |            |                 |            |            |            |  |  |  |  |

 

 

**For thesix months ended June 28, 2002:**

 
|                                           |   | **Healthcare** |   | **Life Sciences** |       | **Outsourcing** |       | **Totals**  |       |
|------------------------------------------------|--------|----------------|--------|-------------------|------------|-----------------|------------|-------------|------------|
| Revenue before reimbursements                  |   | $              | 58,335 |              | $          | 35,532          |       | $           | 35,608     |   | **$** | **129,475** |   |
|                                           |   |           |   |              |       |            |       |        |       |
| Out of pocket reimbursements                   |   | 6,708          |   | 998               |       | 108             | ** ** | **7,814**   | ** ** |
|                                           |   |           |   |              |       |            |       |        |       |
| Total revenue                                  |   | 65,043         |   | 36,530            |       | 35,716          | ** ** | **137,289** | ** ** |
|                                           |   |           |   |              |       |            |       |        |       |
| Cost of services before reimbursable expenses  |   | 33,374         |   | 20,531            |       | 27,977          | ** ** | **81,882**  | ** ** |
|                                           |   |           |   |              |       |            |       |        |       |
| Out of pocket reimbursable expenses            |   | 6,708          |   | 998               |       | 108             | ** ** | **7,814**   | ** ** |
|                                           |   |           |   |              |       |            |       |        |       |
| Total cost of services                         |   | 40,082         |   | 21,529            |       | 28,085          | ** ** | **89,696**  | ** ** |
|                                           |   |           |   |              |       |            |       |        |       |
| Gross profit                                   |   | 24,961         |   | 15,001            |       | 7,631           | ** ** | **47,593**  | ** ** |
|                                           |   |           |   |              |       |            |       |        |       |
| Selling expenses                               |   |           |   |              | ** ** |            | ** ** | **13,833**  | ** ** |
|                                           |   |           |   |              |       |            |       |        |       |
| General & administrative expenses          |   |           |   |              | ** ** |            | ** ** | **29,482**  | ** ** |
|                                           |   |           |   |              |       |            |       |        |       |
| Restructuring,  severance and impairment costs |   |           |   |              | ** ** |            | ** ** | **7,818**   | ** ** |
|                                           |   |           |   |              |       |            |       |        |       |
| Loss from operations                           |   |           |   |              | ** ** |            | ** ** | **$**       | **(3,540** | **)** |
|                                                |        |                |        |                   |            |                 |            |             |            |  |  |  |  |

 

8

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**For thesix months ended June 30, 2001:**

 
|                                           |   | **Healthcare** |       | **Life Sciences** |       | **Outsourcing** |       | **Totals**  |       |
|------------------------------------------------|--------|----------------|------------|-------------------|------------|-----------------|------------|-------------|------------|
| Revenue before reimbursements                  |   | $              | 72,073     |              | $          | 36,816          |       | $           | 27,617     | ** ** | **$** | **136,506** | ** ** |
|                                           |   |           |       |              |       |            |       |        |       |
| Out of pocket reimbursements                   |   | 8,283          |       | 1,015             |       | —          | ** ** | **9,298**   | ** ** |
|                                           |   |           |       |              |       |            |       |        |       |
| Total revenue                                  |   | 80,356         |       | 37,831            |       | 27,617          | ** ** | **145,804** | ** ** |
|                                           |   |           |       |              |       |            |       |        |       |
| Cost of services before reimbursable expenses  |   | 39,307         |       | 24,509            |       | 22,131          | ** ** | **85,947**  | ** ** |
|                                           |   |           |       |              |       |            |       |        |       |
| Out of pocket reimbursable expenses            |   | 8,283          |       | 1,015             |       | —          | ** ** | **9,298**   | ** ** |
|                                           |   |           |       |              |       |            |       |        |       |
| Total cost of services                         |   | 47,590         |       | 25,524            |       | 22,131          | ** ** | **95,245**  | ** ** |
|                                           |   |           |       |              |       |            |       |        |       |
| Gross profit                                   |   | 32,766         |       | 12,307            |       | 5,486           | ** ** | **50,559**  | ** ** |
|                                           |   |           |       |              |       |            |       |        |       |
| Selling expenses                               |   |           | ** ** |              | ** ** |            | ** ** | **15,997**  | ** ** |
|                                           |   |           |       |              |       |            |       |        |       |
| General & administrative expenses          |   |           | ** ** |              | ** ** |            | ** ** | **34,286**  | ** ** |
|                                           |   |           |       |              |       |            |       |        |       |
| Restructuring,  severance and impairment costs |   |           | ** ** |              | ** ** |            | ** ** | **4,349**   | ** ** |
|                                           |   |           |       |              |       |            |       |        |       |
| Loss from operations                           |   |           |       |              | ** ** |            | ** ** | **$**       | **(4,073** | **)** |
|                                                |        |                |            |                   |            |                 |            |             |            |  |  |  |  |

 

9

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**5.**             **ComprehensiveLoss**

 

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

 

For the quarter ended June 28, 2002:

 
| **Net Loss** |   | **Currency  Translation Gain** |   | **Unrealized  (Loss) on Investments** |   | **Comprehensive  Loss** |   |
|--------------|--------|--------------------------------|--------|---------------------------------------|--------|-------------------------|--------|
| $            | (2,863 | )                              | $      | 171                                   |   | $                       | (12    | ) | $ | (2,704 | ) |
|              |        |                                |        |                                       |        |                         |        |  |  |  |  |

 

 

For the quarter ended June 30, 2001:

 
| **Net Loss** |   | **Currency  Translation** |   | **Unrealized  (Loss) on Investments** |   | **Comprehensive  Loss** |   |
|--------------|--------|---------------------------|--------|---------------------------------------|--------|-------------------------|--------|
| $            | (2,981 | )                         | $      | —                                |   | $                       | (12    | ) | $ | (2,993 | ) |
|              |        |                           |        |                                       |        |                         |        |  |  |  |  |

 

 

For the six months ended June 28, 2002:

 
| **Net Loss** |   | **Currency  Translation Gain** |   | **Unrealized  (Loss) on Investments** |   | **Comprehensive  Loss** |   |
|--------------|--------|--------------------------------|--------|---------------------------------------|--------|-------------------------|--------|
| $            | (1,849 | )                              | $      | 10                                    |   | $                       | (25    | ) | $ | (1,864 | ) |
|              |        |                                |        |                                       |        |                         |        |  |  |  |  |

 

 

For the six months ended June 30, 2001:

 
| **Net Loss** |   | **Currency  Translation (Loss)** |   | **Unrealized  Gain on Investments** |   | **Comprehensive  Loss** |   |
|--------------|--------|----------------------------------|--------|-------------------------------------|--------|-------------------------|--------|
| $            | (2,090 | )                                | $      | (142                                | )      | $                       | 30     |   | $ | (2,202 | ) |
|              |        |                                  |        |                                     |        |                         |        |  |  |  |  |

 

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

 

At June 28, 2002, the Company carried a long-termaccount receivable of approximately $9.2 million from a single client.  The receivable relates to a majoroutsourcing contract, and will be paid over a five-year period.

 

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

 

**7.****                                      Acquisition**

 

On May 31, 2002, the Company acquired a controllinginterest of 52.35% in Codigent Solution Group, Inc. (CSG), a base provider ofvalue added information technology solutions to hospitals and other healthcaredelivery organizations, for $2.6 million. The CSG acquisition did not have a material effect on the Company’sresults of operation for June 2002.   The acquisition was accounted for using the purchase method ofaccounting and the allocation of the price is as follows:

 
| Consideration paid    |   |   |      | $       | 2,617,000 |   |
|-----------------------|--------|--------|-----------|---------|-----------|--------|
| Book value of  equity |   | $      | 1,151,000 |    |      |   |
| Interest  purchased   |   | 52.35  | %         |    |      |
| Equity purchased      |   |   |      | 603,000 |      |
| Goodwill              |   |   |      | $       | 2,014,000 |   |
|                       |        |        |           |         |           |        |  |

 

10

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FCG has agreed to acquire the remaining shares on orabout January 2004 for at least $2.4 million for a minimum purchase price of$5.0 million.  In addition, theremaining outstanding shareholders may receive up to an additional $5.0 millionin restricted Company stock based on CSG satisfying revenue, operating andperformance targets during the next 18 months.

 

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

 

Effective December 29, 2001, the Company adopted SFAS141 and SFAS 142. SFAS 141 requires business combinations initiated after June30, 2001 to be accounted for using the purchase method of accounting. It alsospecifies the types of acquired intangible assets that are required to berecognized and reported separate from goodwill.  SFAS 142 requires that goodwill and certain intangibles no longerbe amortized, but instead are to be reviewed at least annually for impairment.

 

Net loss and loss per share for the first quarterended June 28, 2002 and June 30, 2001 adjusted to exclude amortization expense(net of taxes) are as follows (amounts rounded to thousands, except per sharedata):

 
|                             |   | **Three  Months Ended** |   | **Six Months  Ended** |   |
|----------------------------------|--------|-------------------------|--------|-----------------------|--------|
|                             |   | **June 28,****2002**    |   | **June 30,****2001**  |   | **June 28,****2002** |   | **June 30,  2001** |   |
| Net loss:                        |   |                    |   |                  |   |   |   |   |   |
| Reported net  loss               |   | $                       | (2,863 | )                     | $      | (2,981 | ) | $ | (1,849 | ) | $ | (2,090 | ) |
| Goodwill  amortization           |   | —                  |   | 366                   |   | — |   | 744 |   |
| Adjusted net  loss               |   | $                       | (2,863 | )                     | $      | (2,615 | ) | $ | (1,849 | ) | $ | (1,346 | ) |
| Basic loss per  share:           |   |                    |   |                  |   |   |   |   |   |
| Reported basic  loss per share   |   | $                       | (0.12  | )                     | $      | (0.13 | ) | $ | (0.08 | ) | $ | (0.09 | ) |
| Goodwill  amortization           |   | —                  |   | 0.02                  |   | — |   | 0.03 |   |
| Adjusted basic  loss per share   |   | $                       | (0.12  | )                     | $      | (0.11 | ) | $ | (0.08 | ) | $ | (0.06 | ) |
| Diluted loss per  share:         |   |                    |   |                  |   |   |   |   |   |
| Reported diluted  loss per share |   | $                       | (0.12  | )                     | $      | (0.13 | ) | $ | (0.08 | ) | $ | (0.09 | ) |
| Goodwill  amortization           |   | —                  |   | 0.02                  |   | — |   | 0.03 |   |
| Adjusted diluted  loss per share |   | $                       | (0.12  | )                     | $      | (0.11 | ) | $ | (0.08 | ) | $ | (0.06 | ) |

 

11

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|                             |   | **The  Healthcare  Group** |   | **Life  Sciences** |   | **Outsourcing** |   | **Total** |   |
|----------------------------------|--------|----------------------------|--------|--------------------|--------|-----------------|--------|-----------|--------|
| **Costs:**                       |   |                       |   |               |   |            |   |      |   |
| Balance as of  December 28, 2001 |   | $                          | 3,523  |               | $      | 2,276           |   | $         | — |   | $ | 5,799 |   |
| Acquired                         |   | 1,088                      |   | 10                 |   | 926             |   | 2,024     |   |
| Disposed                         |   | 3,523                      |   | —             |   | —          |   | 3,523     |   |
| Balance as of  June 28, 2002     |   | $                          | 1,088  |               | $      | 2,286           |   | $         | 926    |   | $ | 4,300 |   |
|                             |   |                       |   |               |   |            |   |      |   |
| **Accumulated  Amortization:**   |   |                       |   |               |   |            |   |      |   |
| Balance as of  December 28, 2001 |   | $                          | 1,380  |               | $      | 832             |   | $         | — |   | $ | 2,212 |   |
| Acquired                         |   | —                     |   | —             |   | —          |   | —    |   |
| Disposed                         |   | 1,380                      |   | —             |   | —          |   | 1,380     |   |
| Balance as of  June 28, 2002     |   | $                          | — |               | $      | 832             |   | $         | — |   | $ | 832 |   |
| Net Balance as  of June 28, 2002 |   | $                          | 1,088  |               | $      | 1,454           |   | $         | 926    |   | $ | 3,468 |   |

 

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

 

During the quarter ended June 28, 2002, the Company incurred arestructuring charge of $7.8 million consisting of $4.0 million in severancefor the reduction of staff and $3.8 million in facility costs for facilitydownsizing.  The reductions in staffconsisted of approximately 150 associates. As of June 28, 2002, the entire charge of $7.8 million and a prior yearrestructuring balance of $2.5 million, primarily for facility downsizing, hadyet to be incurred in cash.   TheCompany plans to complete all of the planned staff reductions during theremainder of 2002, and the facility downsizing over the lives of the relatedleases, some of which extend over the next six years.   The Company cannot assure that the current estimates forrestructuring, severance and impairment costs will not change during theimplementation and future periods.

 

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**ITEM2.****                                                     MANAGEMENT’S DISCUSSION AND ANALYSIS OFFINANCIAL 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-LOOKINGSTATEMENTS INVOLVE RISKS AND UNCERTAINTIES, INCLUDING THOSE SET FORTH HEREINUNDER THE CAPTION “RISKS RELATING TO OUR BUSINESS”, AND OTHER REPORTS WE FILEWITH THE SECURITIES AND EXCHANGE COMMISSION. OUR ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE ANTICIPATED IN THESEFORWARD-LOOKING STATEMENTS.

 

## **Overview**

 

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

 

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

 

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

 

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

 

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

 

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

 

Our most significant expenses are our human resourceand related salary and benefit expenses. As of June 28, 2002, approximately 834of our employees are billable consultants. Another 688 employees form our firm’soutsourcing business. The salaries and benefits of such billable consultantsand outsourcing related employees are recognized in our cost of services.  Non-billable employee salaries and benefitsare recognized as a component of either selling or general and administrativeexpenses.  Approximately 18.7%, or 353employees are classified as non-billable. Our cost of services as a percentageof revenue is directly related to our consultant utilization, which is the ratioof total billable hours to available hours in a given period, and the amount ofcost recognized under percentage of completion accounting. We manage consultantutilization by monitoring assignment requirements and timetables, available andrequired skills, and available consultant hours per week and per month. Weevaluate our fixed contracts on a monthly basis using percentage of completionaccounting.  Differences in personnelutilization rates can result from variations in the amount of non-billed time,which has historically consisted of training time, vacation time, time lost toillness and inclement weather and unassigned time. Non-billed time alsoincludes time devoted to other necessary and productive activities such assales support and interviewing prospective employees.  Unassigned time results from differences in the timing of thecompletion of an existing assignment and the beginning of a new assignment. Inorder to reduce and limit unassigned time, we actively manage personnelutilization by monitoring and projecting estimated engagement start andcompletion dates and matching consultant availability with current andprojected client requirements. The number of consultants staffed on anassignment will vary according to the size, complexity, duration and demands ofthe assignment. Assignment terminations, completions, inclement weather, andscheduling delays may result in periods in which consultants are not optimallyutilized. An unanticipated termination of a significant assignment or anoverall lengthening of the sales cycle could result in a higher than expectednumber of unassigned consultants and could cause us to experience lowermargins. In addition, expansion into new markets and the hiring of consultantsin advance of client assignments have resulted and may continue to result inperiods of lower consultant utilization.

 

 

**Results of Operations for the ThreeMonths Ended June 28, 2002 and June 30, 2001**

 

*Net Revenue*.  Net revenue of $66.2 million for the quarterended June 28, 2002 was consistent

 

14

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with the quarter ended June 30, 2001. This was due to a decline in billable hours and lower pricing resultingfrom increased competition and economical uncertainties in the healthcare andlife science markets offset by new outsourcing engagements.

 

*Total Revenue*.  Total revenue decreased to $70.1 million forthe quarter ended June 28, 2002, a decrease of 0.5% from $70.5 million for thequarter ended June 30, 2001.  Thedecrease is due to a decline in billable hours, lower pricing and a decline inhealthcare revenue, which generally requires the most reimbursable travelexpense, offset by new outsourcing revenue.

 

*Gross Profit*.  Gross profit increased to $24.4 million forthe quarter ended June 28, 2002, an increase of 1.1% from $24.1 million for thequarter ended June 30, 2001.  This wasdue to increased utilization of staff resulting in better margins in lifesciences, and higher margin on outsourcing contracts offset by a decline inhealthcare pricing.  Gross profit as apercentage of net revenue increased to 36.8% for the quarter ended June 28,2002 from 36.4% for the quarter ended June 30, 2001.

 

*Selling Expenses.* Selling expenses decreased to $6.9 millionfor the quarter ended June 28, 2002, a decrease of 14.7% from $8.1 million forthe quarter ended June 30, 2001 due to staff reductions.  Selling expenses as a percentage of netrevenue decreased from 12.3% for the quarter ended June 30, 2001 to 10.5% forthe quarter ended June 28, 2002.

 

*General and Administrative Expenses.* General andadministrative expenses decreased to $14.8 million for the quarter ended June28, 2002, a decrease of 12.5% from $16.9 million for the quarter ended June 30,2001.  The decrease resulted from costreductions we made and the elimination of goodwill amortization (See Note 8 ofthe Notes to Consolidated Financial Statements).  General and administrative expenses as a percentage of netrevenue decreased from 25.5% for the quarter ended June 30, 2001 to 22.3% for thequarter ended June 28, 2002.

 

*Restructuring, Severance andImpairment Costs.*Restructuring,severance and impairment costs were $7.8 million for the quarter ended June 28,2002 compared to $4.3 million for the quarter ended June 30, 2001.Restructuring, severance and impairment costs for the quarter ended June 28,2002 included approximately $4.0 million of severance costs related to staffreductions and approximately $3.8 million for facility downsizing.  Restructuring severance and impairment costsfor the quarter ended June 30, 2001 consisted primarily of $3.7 million ofseverance costs and approximately $0.5 million for facility downsizing.

 

*Interest Income, Net.*Interest income, net of interest expense, decreased to $0.2 million for thequarter ended June 28, 2002 from $0.3 million for the quarter ended June 30,2001, due to lower interest rates, despite a higher level of cash andinvestments.  Interest income net ofinterest expense as a percentage of net revenue decreased slightly to 0.4% forthe quarter ended June 28, 2002 from 0.5% for the quarter ended June 30, 2001.

 

*Other Expense, Net.*  Other expense decreased to $0.1 million forthe quarter ended June 28, 2002 from $0.2 million for the quarter ended June30, 2001.

 

*Income Taxes.* The benefit for income taxes of 42% in thequarter ended June 28, 2002 remained the same as in the quarter ended June 30,2001.

 

15

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**Results of Operations for the Six Months Ended June 28, 2002and June 30, 2001**

 

*Net Revenue*.  Our net revenue decreased to $129.5 millionfor the six months ended June 28, 2002, a decrease of 5.2% from $136.5 millionfor the six months ended June 30, 2001.  This was due to a significant decline in billable hours and lowerpricing resulting from increased competition and economic uncertaintiesprimarily in the healthcare market partially offset by additional outsourcingengagements.

 

*Total Revenue*.  Total revenue decreased to $137.3 millionfor the six months ended June 28, 2002, a decrease of 5.8% from $145.8 millionfor the six months ended June 30, 2001.  This was due to a decline in billable hours and lower pricing resultingfrom increased competition and economic uncertainties primarily in thehealthcare market partially offset by additional outsourcing engagements.

 

*Gross Profit*.  Gross profit decreased to $47.6 million forthe six months ended June 28, 2002, a decrease of 5.9% from $50.6 million forthe six months ended June 30, 2001.  Thedecrease was due to a significant decline in both billable hours and pricingcaused by the economic uncertainty and competition in healthcare, partiallyoffset by an increase in outsourcing revenues and margins and better lifescience utilization due to headcount reductions.  Gross profit as a percentage of net revenue decreased to 36.8%for the six months ended June 28, 2002 from 37.0% for the six months ended June30, 2001.

 

*Selling Expenses.* Selling expenses decreased to $13.8 millionfor the six months ended June 28, 2002, a decrease of 13.5% from $16.0 millionfor the six months ended June 30, 2001. Selling expenses as a percentage of net revenue decreased from 11.7% forthe six months ended June 30, 2001 to 10.7% for the six months ended June 28,2002 due to cost reductions.

 

*General and Administrative Expenses.* General andadministrative expenses decreased to $29.5 million for the six months endedJune 28, 2002, a decrease of 14.0% from $34.3 million for the six months endedJune 30, 2001. General and administrative expenses as a percentage of netrevenue decreased from 25.1% for the six months ended June 30, 2001 to 22.8%for the six months ended June 28, 2002, due to the reduction in costs.

 

*Restructuring, Severance andImpairment Costs. *Restructuring,severance and impairment costs were $7.8 million for the six months ended June28, 2002 compared to $4.3 million for the six months ended June 30, 2001.  Restructuring severance and impairment costsfor the six months ended June 28, 2002 included approximately $4.0 million ofseverance costs related to staff reductions and approximately $3.8 million forfacility downsizing.  Restructuringseverance and impairment costs for the six months ended June 30, 2001 consistedprimarily of $3.7 million of severance costs and approximately $0.5 million forfacility downsizing.

 

*Interest Income, Net.*  Interest income, net of interest expense,decreased to $0.5 million for the six months ended June 28, 2002 from $0.7million for the six months ended June 30, 2001, primarily due to lower interestrates on invested cash. Interest income net of interest expense as a percentageof net revenue decreased to 0.3% for the six months ended June 28, 2002 from0.5% for the six months ended June 30, 2001.

 

*OtherExpense, Net. *Otherexpense decreased to $0.1 million for the six months ended June 28, 2002 from$0.2 million for the six months ended June 30, 2001.

 

*Income Taxes.* The benefit for income taxes of 42% in thequarter ended June 28, 2002 remained the same as in the quarter ended June 30,2001.

 

16

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**Liquidity and Capital Resources**

 

During the sixmonths ended June 28, 2002, we generated cash flow from operations of $8.4million.  During the six months endedJune 28, 2002, we used cash flow of approximately $2.6 million to acquire acontrolling interest in Codigent Solutions Group, Inc. (See Note 7 of the Notesto Consolidated Financial Statements) and approximately $1.4 million topurchase property and equipment, including computer and related equipment andoffice furniture, while depreciation and amortization expense was approximately$2.6 million.  At June 28, 2002, we hadcash and investments available for sale of $58.1 million compared to $51.9million at December 28, 2001.

 

We have arevolving line of credit, under which we are allowed to borrow up to $10.0million at an interest rate of the prevailing prime rate with an expirationdate of May 1, 2003.  There was nooutstanding balance under the line of credit at June 28, 2002.

 

Managementbelieves that our existing cash and investments together with funds generatedfrom operations will be sufficient to meet operating requirements for the nexttwelve months.  Our cash and investmentsare available for strategic investments, mergers and acquisitions, and otherpotential large-scale cash needs that may arise.

 

## **Risks Relating to OurBusiness**

 

Before deciding to invest in us or to maintain orincrease your investment, you should carefully consider the risks describedbelow, in addition to the other information contained in this report and in ourother filings with the SEC. The risks and uncertainties described below are notthe only ones facing our company. Additional risks and uncertainties notpresently known to us or that we currently deem immaterial may also affect ourbusiness operations. If any of these risks actually occur, our business,financial condition or results of operation could be seriously harmed. In thatevent, the market price for our common stock could decline and you may lose allor part of your investment.

 

*Many factors may cause our net revenues, operatingresults and cash flows to fluctuate*.

 

Our net revenue, operating results and cash flows mayfluctuate significantly because of a number of factors, many of which areoutside 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 or 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-offof client billings;

 

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•                  Entry intofixed price 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; and

•                  The fixednature of a substantial portion of our expenses, particularly personnel andrelated costs, depreciation, office rent and occupancy costs.

 

One or more of the foregoing factors may cause ouroperating expenses to be relatively high during any given period.  In addition, we bill certain of our serviceson a fixed-price basis, and any assignment delays or expenditures of timebeyond that projected for the assignment could result in write-offs of clientbillings.  Significant write-offs couldmaterially adversely affect our business, financial condition and results ofoperations.  In addition, our businesshas significant collection risks.  If weare unable to collect our receivables in a timely manner, our business andfinancial condition could also suffer. If this or any other variables or unknowns were to cause a shortfall inrevenue or earnings or otherwise cause a failure to meet public marketexpectations, our business, could be adversely affected.

 

Finally, we have reported net losses in the past, andwe cannot assure you that we will continue to achieve positive earnings in thefuture.  If we are unable to maintainour profitability on a quarterly or annual basis, the market price of ourcommon stock could be adversely affected and our financial condition wouldsuffer.

 

*The length of time required to engage a client and tocomplete an assignment may be unpredictable and could negatively impact our netrevenues and operating results.*

 

The timing of securing our client engagements andservice fulfillment is not predictable with any degree of accuracy.  Prior engagement cycles are not necessarilyan indication of the timing of future client engagements or revenues.  The length of time required to secure a newclient engagement or complete an assignment often depends on factors outsideour 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;

•                  Budgetarycycles and constraints;

•                  Changes in theanticipated scope of engagements;

•                  Availability ofpersonnel and other resources; and

•                  Consolidationin the healthcare and pharmaceutical industries.

 

Prior to client engagements, we typically spend asubstantial amount of time and resources (1) identifying strategic or businessissues facing the client, (2) defining engagement objectives, (3) gatheringinformation, (4) preparing proposals, and (5) negotiating contracts.  Our failure to procure an engagement afterspending such time and resources could materially adversely affect ourbusiness, financial condition and results of operations.  We may also be required to hire newconsultants before securing a client engagement.  If clients defer committing to new assignments for any length oftime or for any reason we could be required to maintain a significant number ofunder-utilized consultants which could adversely affect operating results andfinancial condition during any given period. Further, our outsourcing business has very long sales and contract leadtimes, requiring us to spend a substantial amount of time and resources inattempting to secure each outsourcing engagement.  We cannot predict 

 

18

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whether theinvestment of time and resources will result in a new outsourcing engagementor, if the engagement is secured, that the engagement will be on termsfavorable to us.

 

*If we are unable to generate additional revenue fromour existing clients, our business may be negatively affected.*

 

Our success depends on obtaining additionalengagements from our existing clients. A substantial portion of our revenue is derived from services providedto our existing clients.  The loss of asmall number of clients may result in a material decline in revenues and causeus to fail to meet public market expectations of our financial performance andoperating results.  If we materiallyfail to generate additional revenues from our existing clients it maymaterially adversely affect our business and financial condition.

 

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

 

Our services often involve complex information systemsand software, 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, in the course of providing our services, wewill often recommend the use of software and hardware products.  These products may not perform as expectedor contain defects.  If this occurs, ourreputation could be damaged and we could be subject to liability.  We attempt contractually to limit ourexposure to potential liability claims; however, such limitations may not beeffective.  A successful liability claimbrought against us may adversely affect our reputation in the healthcare and pharmaceuticalindustries and could have a material adverse effect on our business orfinancial condition.  Although wemaintain liability insurance, such insurance may not provide adequate coveragefor successful claims against us.

 

*Our outsourcing engagements comprise a significantpart of our revenues.*

 

Our outsourcing agreements require that we investsignificant amounts of time and resources in order to win the engagement,transition the client’s information technology department to our management andcomplete the initial transformation of our client’s information technologyfunctioning to meet agreed-upon service levels.  Often, we recover this investment through payments over the lifeof the outsourcing agreement.  If we areunable to achieve agreed-upon service levels or otherwise breach the terms ofour outsourcing agreements, the clients may have rights to terminate ouragreements for cause and we may be unable to recover our investments.  In the case of our outsourcing agreementwith the New York Presbyterian Hospital, this investment amounts to almost $10million, which we will recover on a pro rata basis over the remaining term ofthat agreement.  The term of the NewYork Presbyterian Hospital contract is due to expire in December 2006.  Any failure by us to recover theseinvestments may have a material adverse effect on our financial condition,results of operations and price of our common stock.

 

Currently, we have among our active accounts,outsourcing relationships with New York Presbyterian and the University ofPennsylvania Health System.  Ouragreement with New York Presbyterian is a seven-year engagement due to expirein December 2006.  We receivedapproximately 

 

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$31.5 million from this engagement in 2001, or 12% of our consolidatedrevenue.  Our agreement with theUniversity of Pennsylvania Hospital System is a six-year engagement due toexpire in December 2006.  We receivedapproximately $19.4 million from this engagement in 2001, or 7% of ourconsolidated revenue. In both of these engagements, the clients have fullyoutsourced their Information Technology staff and functions to us.  In all of our outsourcing relationships, wegenerally enter into additional agreements, including detailed service levelagreements, which establish performance levels and standards for ourservices.  If we fail to meet theseperformance levels or standards, our clients may receive monetary service levelcredits from us or, if we experience persistent failures, our client may have aright to terminate the outsourcing contract for cause and have no obligation topay us any termination fees.  As aresult, our anticipated revenue from our outsourcing engagements could 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.

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

 

*We may be unable to attract and retain a sufficientnumber of qualified employees.*

 

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

 

*The loss of our vice presidents and executive officerscould negatively affect us.*

 

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

* *

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

 

We have experienced employee turnover as a result of(1) dependence on lateral hiring of consultants, (2) travel demands imposed onour consultants, (3) loss of employees to competitors and clients; and (4)reductions in force in our business units as certain areas of our business haveseen less demand.  Continued orincreased employee turnover could materially adversely affect our business andresults of operations.  In addition,many of our consultants develop strong business relationships with our 

 

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clients.  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 revenue.

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

 

Our business has historically grown rapidly, andthough our overall revenues have remained flat for the past several quarters,we have experienced growth and increased demand in certain areas of ourbusiness.  In response to shifts inmarket demand and in an effort to better align our business with our markets,we have restructured our business units in recent quarters.  This restructuring has included hiringpersons with appropriate skills and reductions in force in practice areasexperiencing less demand.  These marketconditions and restructuring efforts have placed new and increased demands onour vice presidents and other 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, our growth or restructuring, our operating results willsuffer.   To manage any future growth,we must (1) extend our financial reporting and information management systemsto a growing number of offices and employees, and (2) develop and implement newprocedures and controls to accommodate new operations, services and clients.  Increasing operational and administrativedemands may make it difficult for our vice presidents to engage in businessdevelopment activities and their other day-to-day responsibilities.  Further, the addition of new employees andoffices to offset such increasing demands may impair our ability to maintainour service delivery standards and corporate culture.  In addition, we have in the past changed, and may in the futurechange, our organizational structure and business strategy.  Such changes may result in operational inefficienciesand delays in delivering our services. Such changes could also cause a disruption in our business and couldcause a material adverse effect on our financial condition and results ofoperations.

* *

*Changes in the healthcare and pharmaceutical industriescould negatively impact our revenues.*

 

We derive a substantial portion of our revenue fromclients in the healthcare industry.  Asa result, our business and results of operations are influenced by conditionsaffecting this industry, particularly current trends towards consolidationamong healthcare and pharmaceutical organizations.  Such consolidation may reduce the number of existing andpotential clients for our services.  Inaddition, the resulting organizations could have greater bargaining power,which could erode the current pricing structure for our services.  The reduction in the size of our targetmarket or our failure to maintain our pricing goals could have a materialadverse effect on our business and financial condition.  Finally, each of the marketswe serve is highly dependent upon thehealth of the overall economy.  Ourclients in each of these markets have experienced significant cost increasesand pressures in recent years.  Ourservices are targeted at relieving these cost pressures; however, anycontinuation or acceleration of current market conditions could greatly impactour ability to secure or retain engagements, the loss of which could have amaterial adverse effect on our business and financial condition.

 

A substantial portion of our revenues has also come from companies inthe pharmaceutical business.  Ourrevenues are, in part, linked to the pharmaceutical industry’s research anddevelopment expenditures.  Should any ofthe following events occur in the pharmaceutical industry, our business couldbe negatively affected in a material way:

 

•                  Adversechanges to the industry’s general economic environment;

 

•                  Continuedconsolidation of companies; or

 

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

 

A trend in thepharmaceutical industry is for companies to “outsource” either largeinformation technology-dependent projects or their information systems staffingrequirements.  We benefit whenpharmaceutical companies outsource to us, but may lose significant futurebusiness when pharmaceutical companies outsource to our competitors.  If this outsourcing trend slows down orstops, or if pharmaceutical companies direct their business away from us, ourfinancial condition and results of operations could be impacted in a materiallyadverse way.

 

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

 

We intend to grow, in part, by acquiring complementaryprofessional practices within the healthcare and pharmaceuticalindustries.  All acquisitions involverisks that could materially and adversely affect our business and operatingresults.  These risks include (1)distracting management from our business, (2) losing key personnel and otheremployees, (3) losing clients, (4) costs, delays and inefficiencies associatedwith integrating acquired operations and personnel, and (5) the impairment ofacquired assets and goodwill.  Inaddition, acquired businesses may not enhance our services, provide us withincreased client 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.

 

*Our international operations create specialized risksthat can negatively affect us.*

 

We are subject to many risks as a result of theservices we provide to our international clients.  For example, if we fail to recruit and retain a sufficient numberof qualified employees in each country where we conduct business, our abilityto expand internationally or perform our existing services may be impaired andour business could be adversely effected. Our international operations are subject to a variety of risks, including:

 

•                  Difficulties increating international market demand for our services;

 

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

 

•                  Unfavorablepricing and price competition;

 

•                  Currencyfluctuations;

 

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

 

•                  Difficulties inenforcing contractual obligations and intellectual property rights;

 

•                  Adverse taxconsequences;

 

•                  Increased costsassociated with maintaining international marketing efforts and offices;

 

•                  Adverse changesin regulatory requirements; and

 

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•                  Economicinstability.

 

In addition, we have been performing services inEurope for international clients for several years, and we have not yet beenprofitable in providing those services. We recently ceased performing healthcare consulting services in Europe,although we will continue to provide our services in Europe to ourpharmaceutical clients.  We cannotassure you that we will be able to achieve profitability in our Europeanpharmaceutical services, which may materially adversely affect our financialcondition, results of operations and price for our common stock.

 

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

 

*If we do not compete effectively inthe healthcare and pharmaceutical information services industries, then ourbusiness may be negatively impacted.*

 

The market for healthcare and pharmaceuticalinformation technology consulting is very competitive.  We have competitors that provide some or allof the services we provide.  Forexample, in strategic consulting services, we compete with internationalconsulting firms, regional and specialty consulting firms and the consultinggroups of international accounting firms such as KPMG Consulting, Cap Gemini Ernst& Young, Deloitte & Touche LLP, and Pricewaterhouse Coopers.

 

In integration and co-management services, we compete with:

 

•                  Information system vendors such as McKesson/HBOC, Siemens MedicalSolutions and IBM Global Systems,

 

•                  Service groups of computer equipment companies,

 

•                  Systems integration companies such as Electronic Data SystemsCorporation, Perot Systems Corporation, SAIC, Cap Gemini Ernst & Young andComputer Sciences Corporation,

 

•                  Clients’ internal information management departments,

 

•                  Other healthcare consulting firms, and

 

•                  Other pharmaceutical consulting firms such as Accenture, Cap GeminiErnst & Young and Computer Sciences Corporation’s consulting division.

 

In e-health and e-commerce related services, we compete with thetraditional competitors outlined above, as well as newer Internet product andservice companies.

 

Many of our competitors have significantly greater financial, human andmarketing resources than us.  As aresult, such competitors may be able to respond more quickly to new or emergingtechnologies and changes in customer demands, or to devote greater resources tothe development, promotion, sale, and support of their products and servicesthan we do.  In addition, as healthcareorganizations become larger and more complex, our larger competitors may bebetter able to serve the needs of such organizations.  If we do not compete effectively with current and futurecompetitors, we may be unable to secure new and renewed client engagements, orwe may be required to reduce our rates in order to compete effectively.

 

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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 relationshipswith vendors of software and hardware products, it could have a negative effecton our ability to secure engagements.*

 

We have a number of relationships with vendors.  For example, we have established anon-exclusive partnership arrangement with Documentum, Inc.  Documentum markets document managementsoftware applications largely to the pharmaceutical industry.  We believe that our relationship with thisvendor and others are important to our sales, marketing, and supportactivities.  We often are engaged byvendors or their customers to implement or integrate vendor products based onour 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 and investments in vendors ofsoftware and hardware products could have a negative impact on our ability tosecure consulting engagements.*

 

Our growing number of relationships with software andhardware vendors could result in clients perceiving that we are not independentfrom those software and hardware vendors. Our ability to secure assessment and other consulting engagements isoften dependent, in part, on our being independent of software and hardwaresolutions that we may review, analyze or recommend to clients.  If clients believe that we are notindependent of those software and hardware vendors, clients may not engage usfor certain consulting engagements relating to those vendors, which couldreduce our revenues and materially adversely affect our business.

* *

*Our business is highly dependent on the availabilityof business travel.*

 

Our consultants and service providers often reside orwork in cities or other locations that require them to travel to a client’ssite to perform and execute the client’s project.  As a result of the September 11, 2001 terrorist attacks, airtravel has become more time-consuming to business travelers due to increasedsecurity, flight delays, reduced flight schedules and other variables.  If efficient and cost effective air travelbecomes unavailable to our consultants and other employees, or if air travel ishalted in the United States, 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 andtechnological changes, our business could be materially adversely affected.*

 

The healthcare and pharmaceutical industries aresubject to regulatory and technological changes that may affect the procurementpractices and operations of healthcare and pharmaceutical organizations.  During the past several years, the healthcareand pharmaceutical industries have been subject to an increase in governmentalregulation and reform proposals.  Thesereforms could increase governmental involvement in the healthcare andpharmaceutical industries, lower reimbursement rates or otherwise change theoperating environment of our clients. Also, certain reforms that create potential work for us could be delayedor cancelled. Healthcare and pharmaceutical organizations may react to thesesituations by curtailing or deferring investments, including those for ourservices.  In addition, if we are unableto maintain our skill and expertise in light of regulatory or technologicalchanges, our services may not be marketable to our clients and we could loseexisting clients or future engagements.

 

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Technological change in the network and applicationmarkets has created high demand for consulting, implementation and integrationservices.  If the pace of technologicalchange were to diminish, we could experience a decrease in demand for ourservices.  Any material decrease indemand would materially adversely affect our business, financial condition andresults of operations.

* *

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

 

We must protect our proprietary information, includingour proprietary methodologies, research, tools, software code and otherinformation.  To do this, we rely on acombination of copyright and trade secret laws and confidentiality proceduresto protect our intellectual property.  Thesesteps may not protect our proprietary information.  In addition, the laws of certain countries do not protect orenforce proprietary rights to the same extent, as do the laws of the UnitedStates.  We are currently providing ourservices to clients in international markets. Our proprietary information may not be protected to the same extent asprovided under the laws of the United States, if at all.  The unauthorized use of our intellectualproperty could have a material adverse effect on our business, financialcondition or results of operations.

* *

*We may infringe the intellectual property rights ofthird parties.*

 

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

*** ***

***Our management may be able toexercise control over matters requiring stockholder approval.***

** **

**Our current officers, directors,and other affiliates beneficially own approximately 49% of our outstandingshares of common stock.  As a result,our existing management, if acting together, may be able to exercise controlover or significantly influence matters requiring stockholder approval,including the election of directors, mergers, consolidations, sales of all orsubstantially all of our assets, issuance of additional shares of stock andapproval of new stock and option plans.**

*** ***

***The price of our common stock maybe adversely affected by market volatility.***

** **

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

 

•                  ourperformance and prospects;

 

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

 

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

 

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

 

•                  generalfinancial and other market conditions; and

 

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•                  domesticand international economic conditions.

 

**In addition, public stock marketshave experienced extreme price and trading volume volatility.  This volatility has significantly affectedthe market prices of securities of many companies for reasons frequentlyunrelated to or disproportionately impacted by the operating performance ofthese companies.  These broad marketfluctuations may adversely affect the market price of our common stock.  As a result, we may be unable to raisecapital 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.**

 

***If our stock price is volatile, wemay become subject to securities litigation, which is expensive and couldresult in a diversion of resources.***

 

**If our stock price experiencesperiods of volatility, our security holders may initiate securities classaction litigation against us.  If webecome involved in this type of litigation it could be very expensive anddivert our management’s attention and resources, which could materially andadversely affect our business and financial condition.**

** **

***Our charter documents, Delawarelaw and stockholders rights plan will make it more difficult to acquire us andmay discourage take-over attempts and thus depress the market price of ourcommon stock.***

** **

**Our board of directors has the authority to issue up to10,000,000 shares of undesignated preferred stock, to determine the powers,preferences and rights and the qualifications, limitations or restrictionsgranted to or imposed upon any unissued series of undesignated preferred stockand to fix the number of shares constituting any series and the designation ofsuch series, without any further vote or action by our stockholders.  The preferred stock could be issued withvoting, liquidation, dividend and other rights superior to the rights of ourcommon stock.  Furthermore, anypreferred stock may have other rights, including economic rights, senior to ourcommon stock, and as a result, the issuance of any preferred** stock could depress themarket price of our common stock.

** **

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

** **

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

 

In 1999, our board ofdirectors adopted a share purchase rights plan that is intended to protect ourstockholders’ interests in the event we are confronted with coercive takeovertactics.  Pursuant to the stockholdersrights plan, we distributed “rights” to purchase shares of a newly created seriesof preferred stock.  Under some circumstancesthese rights become the rights to purchase shares of our common stock orsecurities of an acquiring entity at one-half the market value.  The rights are not intended to prevent ourtakeover, rather they are designed to deal with the possibility of unilateralactions by hostile acquirers that could deprive our board of directors andstockholders of their ability to determine our destiny and obtain the highestprice for our common stock.

 

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**ITEM3.****                                                     QUANTITATIVE AND QUALITATIVEDISCLOSURES ABOUT MARKET RISKS**

 

  None.

 

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**PART II.  OTHER INFORMATION**

 

**Item1.    Legal Proceedings****.**

 

None.

 

**Item2.   Changes in Securities****.**

 

(a)  On June10, 2002, we granted to David S. Lipson, a director of the company, anextension on certain demand and piggyback registration rights he originallyreceived in connection with our acquisition of ISCG in December 1999.  Mr. Lipson was the founder and chiefexecutive officer of ISCG.  The originalterm of the registration rights was 18 months from December 1999 and we havesubsequently granted extensions on the expiration date.  Mr. Lipson’s demand registration rightsallow him to request that FCG, on not more than one occasion, file aregistration statement to allow him to sell in an underwritten offering any orall of his shares of common stock.  Mr.Lipson’s piggyback registration rights allow him to include all or a portion ofhis shares in an underwritten public offering of shares by the company, subjectto underwriter cutback if the underwriters determine that the marketing of thecompany’s offering of primary shares would be impacted by the participation ofa secondary seller such as Mr. Lipson. The terms of the registration rights agreement allow us to delay filinga registration upon exercise by Mr. Lipson of his demand registration rights ifsuch filing would be detrimental to us or if such request is made in a closedwindow period under our insider trading policy.  Under this most recent extension, Mr. Lipson’s registrationrights expire on June 18, 2003.  Mr.Lipson beneficially owns 2,088,402 shares of our common stock as of June 28,2002.

 

(c)  Sales ofUnregistered Securities.  On May 31,2002, we acquired 52.35% of the outstanding shares of Codigent Solutions Group,Inc. for approximately $2.6 million in cash. The acquisition agreements provided that we will purchase the remainingshares of Codigent Solutions Group, Inc. on or about January 30, 2004, forapproximately $2.4 million in cash.  Inaddition, we may issue up to $5.0 million in restricted shares of our commonstock at the subsequent closing if Codigent Solutions Group, Inc. satisfiescertain revenue, operating and performance targets.  The number of shares of our restricted common stock to be issuedin January 2004, if any, will be based on the average closing price of ourcommon stock on the Nasdaq National Market for the ten days preceeding suchsubsequent closing.  The shares to beissued, if any, are exempt from the registration requirements of the SecuritiesAct of 1933, as amended, pursuant to Section 4(2) of such Act and Rule 506promulgated thereunder.

 

**Item 3.    Defaults Upon Senior Securities**

 

None.

 

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

 

We held our 2002 Annual Meeting of Stockholders onJune 25, 2002. The stockholders elected the Board’s nominees as directorsto serve three-year terms expiring at the 2005 Annual Meeting of Stockholdersby the votes indicated: 

 

| **Nominee**               |   | **Votes in  Favor** |   | **Votes  Against** |   | **Abstentions** |   |
|---------------------------|--------|---------------------|--------|--------------------|--------|-----------------|--------|
| Steven  Heck              |   | 18,021,346          |   | 741,616            |   | 0               |   |
| Steven  E. Olson          |   | 18,083,563          |   | 679,399            |   | 0               |   |
| F.  Richard Nichol, Ph.D. |   | 18,014,204          |   | 748,758            |   | 0               |   |

 

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The stockholders also ratified our selection of GrantThornton LLP as our independent auditors for the year ending December 27, 2002,with 18,182,230 votes cast in favor, 483,137 votes cast against and 97,594votes abstaining from the proposal. There was also 1 broker non-vote.

 

**Item 5.     Other Information**

 

On May 31, 2002, we acquired 52.35% of the outstandingshares of Codigent Solutions Group, Inc., a base provider of value addedinformation technology solutions to hospitals and other healthcare deliveryorganizations, for approximately $2.6 million in cash.  The acquisition agreements provided that wewill purchase the remaining shares of Codigent Solutions Group, Inc. on orabout January 30, 2004, for approximately $2.4 million in cash.  In addition, we may issue up to $5.0 millionin restricted shares of our common stock at the subsequent closing if CodigentSolutions Group, Inc. satisfies certain revenue, operating and performancetargets.  The number of shares of ourrestricted common stock to be issued in January 2004, if any, will be based onthe average closing price of our common stock on the Nasdaq National Market forthe ten days preceding such subsequent closing.  The acquisition was accounted for using the purchase method ofaccounting.

 

**Item 6. Exhibits and Reports on Form8-K**

 

(a) Exhibits

 
| **Item** |   | **Description**                                                                    |
|----------|--------|------------------------------------------------------------------------------------|
| 3.1 (1)  |   | Certificate of  Incorporation of the Company.                                      |
| 3.2 (2)  |   | Certificate of  Designation of Series A Junior Participating Preferred Stock       |
| 3.3 (3)  |   | Bylaws of the Company.                                                             |
| 4.1 (4)  |   | Specimen Common Stock  Certificate.                                                |
| 10.1 (5) |   | First Consulting Group,  Inc. Associate 401(k) and Stock Ownership Plan            |
| 10.2 (6) |   | Letter Agreement with  David S. Lipson regarding extension of registration rights. |
| 11.1 (7) |   | Statement of  computation of per share earnings.                                   |

 

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

 

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

 

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

 

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

 

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

 

(6)                                  Filedwith this Form 10-Q as Exhibit 10.2.

 

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

 

 

(b)           Reports on Form 8-K

 

None.

 

30

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**SIGNATURES**

 

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

 
|                        | FIRST CONSULTING GROUP,  INC.                                                                          |
|-----------------------------|--------------------------------------------------------------------------------------------------------|
|                        |                                                                                                   |
| Date:  August 12, 2002 | /s/ LUTHER J. NUSSBAUM                                                                                 |
|                        | Luther J. Nussbaum  Chairman and Chief Executive Officer                                               |
|                        |                                                                                                   |
| Date:  August 12, 2002 | /s/ WALTER J. McBRIDE                                                                                  |
|                        | Walter J. McBride  Executive Vice President and Chief Financial Officer  (Principal Financial Officer) |

 

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**ExhibitIndex**

 
| **Item** |   | **Description**                                                                    |
|----------|--------|------------------------------------------------------------------------------------|
| 3.1 (1)  |   | Certificate of  Incorporation of the Company.                                      |
| 3.2 (2)  |   | Certificate of  Designation of Series A Junior Participating Preferred Stock       |
| 3.3 (3)  |   | Bylaws of the Company.                                                             |
| 4.1 (4)  |   | Specimen Common Stock  Certificate.                                                |
| 10.1 (5) |   | First Consulting Group,  Inc. Associate 401(k) and Stock Ownership Plan.           |
| 10.2 (6) |   | Letter Agreement with  David S. Lipson regarding extension of registration rights. |
| 11.1 (7) |   | Statement of  computation of per share earnings.                                   |

 

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

 

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

 

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

 

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

 

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

 

(6)                                  Filedwith this Form 10-Q as Exhibit 10.2.

 

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

 

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