FIRST CONSULTING GROUP INC - 10-Q Quarterly Report

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended September 27, 2002,

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

For the transition period from to

Commission File Number 0-23651

First Consulting Group, Inc.
(Exact name of registrant as specified in its charter)

Delaware		95-3539020
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

111 W. Ocean Blvd., 4^th Floor, Long Beach, CA 90802
(Address of principal executive offices including zip code)

(562) 624-5200
(Registrant’s telephone number, including area code)


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

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

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

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

First Consulting Group, Inc.

Table of Contents

COVER PAGE

TABLE OF CONTENTS

PART I. FINANCIAL INFORMATION

	ITEM 1. FINANCIAL STATEMENTS AND NOTES (UNAUDITED)

		Consolidated Balance Sheets as of September 27, 2002 and December 28, 2001

		Consolidated Statements of Operations for the three and nine month periods ended September 27, 2002 and September 30, 2001

		Condensed Consolidated Statements of Cash Flows for the nine months ended September 27, 2002 and September 30, 2001

		Notes to Consolidated Financial Statements

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

	ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS

	ITEM 4. CONTROLS AND PROCEDURES

PART II. OTHER INFORMATION

	ITEM 1. LEGAL PROCEEDINGS

	ITEM 2. CHANGES IN SECURITIES

	ITEM 3. DEFAULTS UPON SENIOR SECURITIES

	ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

	ITEM 5. OTHER INFORMATION

	ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

SIGNATURES

CERTIFICATIONS

EXHIBIT INDEX

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements and Notes (Unaudited)

First Consulting Group, Inc. and Subsidiaries

Consolidated Balance Sheets

(in thousands)

	September 27, 2002		December 28, 2001
	(unaudited)
ASSETS
Current Assets
Cash and cash equivalents	$	43,126	$	32,499
Short-term investments	17,683		19,410
Accounts receivable, less allowance of $2,169 and $2,740 in the periods ended September 27, 2002 and December 28, 2001, respectively	26,481		34,657
Unbilled receivables	20,261		13,963
Deferred income taxes, net	7,655		7,834
Prepaid expenses and other current assets	1,997		1,571
Total current assets	117,203		109,934

Notes receivable – stockholders	763		753
Long-term investments	3,279		1,200
Property and equipment
Furniture, equipment, and leasehold improvements	7,695		8,033
Information systems equipment	20,635		26,838
	28,330		34,871
Less accumulated depreciation and amortization	19,366		24,237
	8,964		10,634

Other assets
Executive benefit trust	6,565		6,246
Unbilled long-term receivables	8,644		10,250
Deferred income taxes	2,500		2,433
Goodwill, net	3,577		3,587
Other	402		392
	21,688		22,908
Total assets	$	151,897	$	145,429

See accompanying notes.

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

See accompanying notes.

First Consulting Group, Inc. and Subsidiaries

Consolidated Statements of Operations (Unaudited)

(in thousands, except per share data)

	Three Months Ended						Nine Months Ended
	September 27, 2002			September 30, 2001			September 27, 2002			September 30, 2001

Revenue before reimbursements	$	69,606		$	65,732		$	199,081		$	202,238
Out of pocket reimbursements	3,487			4,054			11,301			13,352
Total revenue	73,093			69,786			210,382			215,590

Cost of services before reimbursable expenses	45,762			40,499			127,644			126,446
Out of pocket reimbursable expenses	3,487			4,054			11,301			13,352
Total cost of services	49,249			44,553			138,945			139,798

Gross profit	23,844			25,233			71,437			75,792

Selling expenses	7,079			7,861			20,912			23,858
General and administrative expenses	13,471			15,592			42,953			49,878
Restructuring, severance and impairment costs	—			—			7,818			4,349
Income (loss) from operations	3,294			1,780			(246		)	(2,293		)
Other income
Interest income, net	240			434			692			1,144
Other expense, net	(233		)	(209		)	(340		)	(449		)
Income (loss) before income taxes	3,301			2,005			106			(1,598		)
Provision (benefit) for income taxes	1,390			842			44			(671		)
Net income (loss)	$	1,911		$	1,163		$	62		$	(927	)
Basic net income (loss) per share	$	0.08		$	0.05		$	0.00		$	(0.04	)
Diluted net income (loss) per share	$	0.08		$	0.05		$	0.00		$	(0.04	)
Weighted average shares used in computing:
Basic net income (loss) per share	24,074			23,609			23,976			23,526
Diluted net income (loss) per share	24,535			24,299			24,826			23,526

See accompanying notes.

First Consulting Group, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows (Unaudited)

(in thousands)

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

Cash paid during the period for:
Interest	$	32		$	19
Income taxes	$	956		$	575

See accompanying notes.

Notes to Consolidated Financial Statements

1. Basis of Presentation

The consolidated balance sheets of First Consulting Group, Inc. (the “Company”) at September 27, 2002 and consolidated statements of operations and condensed consolidated statements of cash flows for the periods ended September 27, 2002 and September 30, 2001 are unaudited. These financial statements reflect all adjustments, consisting of only normal recurring adjustments, which, in the opinion of management, are necessary to fairly present the financial position of the Company at September 27, 2002 and the results of operations for the three-month and nine-month periods ended September 27, 2002 and September 30, 2001. The results of operations for the nine months ended September 27, 2002 are not necessarily indicative of the results to be expected for the year ending December 27, 2002. For more complete financial information, these financial statements should be read in conjunction with the audited financial statements for the year ended December 28, 2001 included in the Company’s Annual Report on Form 10-K.

2. Investments

For purposes of reporting cash flows, cash and cash equivalents include cash and interest-earning deposits or securities with original maturities of three months or less. The Company has approximately $17.7 million in short-term investments and $2.1 million of long-term investments classified as available for sale. Such investments are currently held primarily in commercial paper, money market investments and tax-exempt government securities. Net unrealized gains and losses on investments were not material at September 27, 2002.

3. Net Income (Loss) Per Share

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

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

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

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

4. Disclosure of Segment Information

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

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

For the three months ended September 27, 2002:

	Healthcare		Life Sciences		Outsourcing		Totals
Revenue before reimbursements	$	26,699	$	16,382	$	26,525	$	69,606

Out of pocket reimbursements	3,027		414		46		3,487

Total revenue	29,726		16,796		26,571		73,093

Cost of services before reimbursable expenses	15,237		8,847		21,678		45,762

Out of pocket reimbursable expenses	3,027		414		46		3,487

Total cost of services	18,264		9,261		21,724		49,249

Gross profit	11,462		7,535		4,847		23,844

Selling expenses							7,079

General and administrative expenses							13,471

Restructuring, severance and impairment costs							—

Income from operations							$	3,294

For the three months ended September 30, 2001:

	Healthcare		Life Sciences		Outsourcing		Totals
Revenue before reimbursements	$	30,245	$	19,293	$	16,194	$	65,732

Out of pocket reimbursements	3,509		498		47		4,054

Total revenue	33,754		19,791		16,241		69,786

Cost of services before reimbursable expenses	17,185		10,461		12,853		40,499

Out of pocket reimbursable expenses	3,509		498		47		4,054

Total cost of services	20,694		10,959		12,900		44,553

Gross profit	13,060		8,832		3,341		25,233

Selling expenses							7,861

General and administrative expenses							15,592

Restructuring, severance and impairment costs							—

Income from operations							$	1,780

For the nine months ended September 27, 2002:

	Healthcare		Life Sciences		Outsourcing		Totals
Revenue before reimbursements	$	85,034	$	51,914	$	62,133	$	199,081

Out of pocket reimbursements	9,735		1,412		154		11,301

Total revenue	94,769		53,326		62,287		210,382

Cost of services before reimbursable expenses	48,611		29,378		49,655		127,644

Out of pocket reimbursable expenses	9,735		1,412		154		11,301

Total cost of services	58,346		30,790		49,809		138,945

Gross profit	36,423		22,536		12,478		71,437

Selling expenses							20,912

General and administrative expenses							42,953

Restructuring, severance and impairment costs							7,818

Loss from operations							$	(246	)

For the nine months ended September 30, 2001:

	Healthcare		Life Sciences		Outsourcing		Totals
Revenue before reimbursements	$	102,318	$	56,109	$	43,811	$	202,238

Out of pocket reimbursements	11,792		1,513		47		13,352

Total revenue	114,110		57,622		43,858		215,590

Cost of services before reimbursable expenses	56,492		34,970		34,984		126,446

Out of pocket reimbursable expenses	11,792		1,513		47		13,352

Total cost of services	68,284		36,483		35,031		139,798

Gross profit	45,826		21,139		8,827		75,792

Selling expenses							23,858

General and administrative expenses							49,878

Restructuring, severance and impairment costs							4,349

Loss from operations							$	(2,293	)

Outsourcing revenue detail:

In the outsourcing business, revenue before reimbursements includes revenue related to a major subcontractor on several projects. The breakdown of revenue in outsourcing is as follows (in thousands):

	Three Months Ended				Nine Months Ended
	September 27, 2002		September 30, 2001		September 27, 2002		September 30, 2001
Internally generated revenue	$	20,109	$	14,670	$	51,209	$	40,306
Subcontractor revenue	6,416		1,524		10,924		3,505

Revenue before reimbursements	$	26,525	$	16,194	$	62,133	$	43,811

5. Comprehensive Income (Loss)

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

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

Comprehensive income (loss)	$	2,108	$	1,021		$	244		$	(1,182	)

6. Accounts Receivable

At September 27, 2002, the Company carried a long-term account receivable of approximately $8.6 million from a single client. The receivable relates to a major outsourcing contract, and will be collected over a four-year period.

The allowance for doubtful accounts is developed based upon several factors including clients’ credit quality, historical write-off experience and any known specific issues or disputes which exist as of the balance sheet date.

7. Acquisition

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

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

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

8. Intangible Assets

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

The following summarizes the net income (loss) and earnings per share for the three and nine months ended September 27, 2002 and September 30, 2001 adjusted to exclude amortization expense, net of taxes (amounts rounded to thousands, except per share data):

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

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

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

9. Restructuring, severance and impairment costs

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

10. Recent Accounting Pronouncement

In June 2002, the FASB issued Statement of Financial Accounting Standards No. 146 (“SFAS 146”), “Accounting for Costs Associated with Exit or Disposal Activities.” SFAS 146 addresses accounting and reporting costs associated with exit or disposal activities and nullifies Emerging Issues Task Force (EITF) Issue 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity.” This statement requires that a liability for a cost associated with an exit or disposal activity shall be recognized and measured initially at its fair value in the period that the liability is incurred. This statement is effective for exit or disposal activities that are initiated after December 31, 2002. The Company is currently evaluating the potential impact, if any, that the adoption of SFAS 146 will have on its consolidated financial position and results of operation.

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

THE FOLLOWING MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS CONTAINS FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995. SUCH FORWARD-LOOKING STATEMENTS INVOLVE RISKS AND UNCERTAINTIES, INCLUDING THOSE SET FORTH HEREIN UNDER THE CAPTION “RISKS RELATING TO OUR BUSINESS”, AND OTHER REPORTS WE FILE WITH THE SECURITIES AND EXCHANGE COMMISSION. OUR ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE ANTICIPATED IN THESE FORWARD-LOOKING STATEMENTS.

Overview

We provide services primarily to payors, providers, government agencies, pharmaceutical, biogenetic, and life science companies, and other healthcare organizations in North America, Europe and Japan. We generate substantially all of our revenue from fees for professional services. We typically bill for our services on an hourly, fixed-fee or monthly fixed-fee basis as specified by the agreement with a particular client. We establish either standard or target hourly rates for each level of consultant based on several factors including industry and assignment-related experience, technical expertise, skills and knowledge. For services billed on an hourly basis, fees are determined by multiplying the amount of time expended on each assignment by the project hourly rate for the consultant(s) assigned to the engagement. Fixed fees, including outsourcing fees, are established on a per-assignment or monthly basis and are based on several factors such as the size, scope, complexity and duration of an assignment and the number of our people required to complete the assignment. Actual hourly or fixed fees for an assignment may vary from the standard, target, or historical rates that we have charged. For services billed on an hourly basis, we recognize revenue as services are performed. For services billed on a fixed fee basis, we recognize revenue using the percentage of completion method based either on 1) the amount of time completed on each assignment versus the projected number of hours required to complete such assignment, or 2) the amount of cost incurred on the assignment versus the estimated total cost to complete the assignment. Revenue is recorded as incurred at assignment rates net of unplanned adjustments for specific engagements. Unplanned adjustments to revenue are booked at the time they are known. Provisions are made for estimated uncollectible amounts based on our experience. We may obtain payment in advance of providing services. These advances are recorded as customer advances and reflected as a liability on our balance sheet.

Out of pocket expenses billed and reimbursed by clients are included in gross revenue, and then deducted to determine net revenue. For purposes of analysis, all percentages in this discussion are stated as a percentage of net revenue, since we believe that this is the more relevant measure of our business over time.

Cost of services primarily consists of the salaries, bonuses and related benefits of client-serving consultants and subcontractor expenses. Selling expenses primarily consist of the salaries, benefits, travel and other costs of our sales force, as well as marketing and research expenses. General and administrative expenses primarily consist of the costs attributable to the support of our client-serving professionals, such as: non-billable travel; office space occupancy; information systems; practice support and quality initiatives; salaries and expenses for executive management, financial accounting and administrative personnel; expenses for firm and business unit governance meetings; recruiting fees and professional development and training; and legal and other professional services. As associate related costs are relatively fixed, variations in our revenues and operating results can occur as a result of variations in billing margins and utilization rates of our billable associates.

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

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

Our most significant expenses are our human resource and related salary and benefit expenses. As of September 27, 2002, approximately 804 of our employees are billable consultants. Another 722 employees form our firm’s outsourcing business. The salaries and benefits of such billable consultants and outsourcing related employees are recognized in our cost of services. Non-billable employee salaries and benefits are recognized as a component of either selling or general and administrative expenses. Approximately 17%, or 313 employees are classified as non-billable. Our cost of services as a percentage of revenue is directly related to our consultant utilization, which is the ratio of total billable hours to available hours in a given period, and the amount of cost recognized under percentage of completion accounting. We manage consultant utilization by monitoring assignment requirements and timetables, available and required skills, and available consultant hours per week and per month. We evaluate our fixed contracts on a monthly basis using percentage of completion accounting. Differences in personnel utilization rates can result from variations in the amount of non-billed time, which has historically consisted of training time, vacation time, time lost to illness and inclement weather, and unassigned time. Non-billed time also includes time devoted to other necessary and productive activities such as sales support and interviewing prospective employees. Unassigned time results from differences in the timing of the completion of an existing assignment and the beginning of a new assignment. In order to reduce and limit unassigned time, we actively manage personnel utilization by monitoring and projecting estimated engagement start and completion dates and matching consultant availability with current and projected client requirements. The number of consultants staffed on an assignment will vary according to the size, complexity, duration and demands of the assignment. Assignment terminations, completions, inclement eather, and scheduling delays may result in periods in which consultants are not optimally utilized. An unanticipated termination of a significant assignment or an overall lengthening of the sales cycle could result in a higher than expected number of unassigned consultants and could cause us to experience lower margins. An unanticipated termination of a major outsourcing contract could result in a significant reduction in revenue. In addition, expansion into new markets and the hiring of consultants in advance of client assignments have resulted and may continue to result in periods of lower consultant utilization.

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

Net Revenue. Net revenue increased to $69.6 million for the quarter ended September 27, 2002, an increase of 5.9% from $65.7 million for the quarter ended September 30, 2001. The increase was due to new outsourcing engagements offset by a decline in healthcare and life sciences work resulting from increased competition and uncertain market conditions. Further, we have a significant client engagement in our life sciences business unit which will be substantially completed in March 2003. If we do not obtain new contracts from other clients or follow-up work from this client to offset the revenue being generated from that engagement, we could see a further decline in the life sciences revenue trends. Additionally, a significant part of the recent increase in outsourcing revenue is revenue we pass through to a major subcontractor on the new engagements.

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

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

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

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

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

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

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

Income Taxes. The provision for income taxes of 42% in the quarter ended September 27, 2002 remained the same as in the quarter ended September 30, 2001.

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

Net Revenue. Our net revenue decreased to $199.1 million for the nine months ended September 27, 2002, a decrease of 1.6% from $202.2 million for the nine months ended September 30, 2001. This was due to a decline in healthcare and life sciences work resulting from increased competition and uncertain market conditions offset by new outsourcing engagements that began in the second quarter. Further, we have a significant client engagement in our life sciences business unit which will be substantially completed in March 2003. If we do not obtain new contracts from other clients or follow-up work from this client to offset the revenue being generated from that engagement, we could see a further decline in the life sciences revenue trends. Additionally, a significant part of the recent increase in outsourcing revenue is revenue we pass through to a major subcontractor on the new engagements.

Total Revenue. Total revenue decreased to $210.4 million for the nine months ended September 27, 2002, a decrease of 2.4% from $215.6 million for the nine months ended September 30, 2001. This was due to a decline in healthcare and life sciences work resulting from increased competition and uncertain market conditions offset by new outsourcing engagements that began in the second quarter. Further, we have a significant client engagement in our life sciences business unit which will be substantially completed in March 2003. If we do not obtain new contracts from other clients or follow-up work from this client to offset the revenue being generated from that engagement, we could see a further decline in the life sciences revenue trends. Additionally, a significant part of the recent increase in outsourcing revenue is revenue we pass through to a major subcontractor on the new engagements.

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

Selling Expenses. Selling expenses decreased to $20.9 million for the nine months ended September 27, 2002, a decrease of 12.3% from $23.9 million for the nine months ended September 30, 2001 due to staff and cost reductions. Selling expenses as a percentage of net revenue decreased from 11.8% for the nine months ended September 30, 2001 to 10.5% for the nine months ended September 27, 2002.

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

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

months ended September 30, 2001. Restructuring severance and impairment costs for the nine months ended September 27, 2002 included approximately $4.0 million of severance costs related to staff reductions and approximately $3.8 million for facility downsizing. Restructuring severance and impairment costs for the nine months ended September 30, 2001 consisted primarily of $3.7 million of severance costs and approximately $0.6 million for facility downsizing.

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

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

Income Taxes. The provision for income taxes of 42% in the quarter ended September 27, 2002 was consistent with the benefit of 42% recorded in the quarter ended September 30, 2001.

Liquidity and Capital Resources

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

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

Management believes that our existing cash and investments together with funds generated from operations will be sufficient to meet operating requirements for the next twelve months. Our cash and investments are available for strategic investments, mergers and acquisitions, and other potential large-scale cash needs that may arise, including $2.4 million in cash that will be spent on our about January 2004 to purchase the remaining shares of FCG Infrastructure Services, Inc. (formerly Codigent Solutions Group, Inc.) that we do not already own.

Risks Relating to Our Business

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

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

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

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

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

• Delays or increased expenses in securing and completing client engagements;

• Timing and collection of fees and payments;

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

• Increased competition and pricing pressures;

• The loss of key personnel and other employees;

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

• The timing of certain general and administrative expenses;

• Completing acquisitions and the costs of integrating acquired operations;

• Variability in the number of billable days in each quarter;

• The write-off of client billings;

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

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

• International currency fluctuations; and

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

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

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

Our outsourcing engagements comprise a significant part of our revenues.

Our outsourcing agreements require that we invest significant amounts of time and resources in order to win the engagement, transition the client’s information technology department to our management and complete the initial transformation of our client’s information technology functioning to meet agreed-upon service levels. Often, we recover this investment through payments over the life of the outsourcing agreement. If we are unable to achieve agreed-upon service levels or otherwise breach the terms of our outsourcing agreements, the clients may have rights to terminate our agreements for cause

and we may be unable to recover our investments. In the case of our outsourcing agreement with the New York Presbyterian Hospital, this investment amounts to almost $8.6 million, which we will recover on a pro rata basis over the remaining term of that agreement. The term of the New York Presbyterian Hospital contract is due to expire in December 2006. Any failure by us to recover these investments may have a material adverse effect on our financial condition, results of operations and price of our common stock.

Currently, we have six active outsourcing relationships. Revenues from such outsourcing relationships, as of the quarter ended September 27, 2002, represented approximately 38% of our net revenue. The substantial majority of these revenues are received from four large outsourcing accounts that have signed long term agreements with us. However, the loss of any of our outsourcing relationships would have a material impact on our business and results of operations. In each of these engagements, the clients have fully outsourced their information technology staff and functions to us. In all of our outsourcing relationships, we generally enter into additional agreements, including detailed service level agreements, which establish performance levels and standards for our services. If we fail to meet these performance levels or standards, our clients may receive monetary service level credits from us or, if we experience persistent failures, our client may have a right to terminate the outsourcing contract for cause and have no obligation to pay us any termination fees. As a result, our anticipated revenue from our outsourcing engagements could be significantly reduced if we are unable to satisfy our performance levels or standards. Additionally, our outsourcing contracts can be terminated at the convenience of our clients upon the payment of a termination fee.

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

The length of time required to engage a client and to complete an assignment may be unpredictable and could negatively impact our net revenues and operating results.

The timing of securing our client engagements and service fulfillment is difficult to predict with any degree of accuracy. Prior engagement cycles are not necessarily an indication of the timing of future client engagements or revenues. The length of time required to secure a new client engagement or complete an assignment often depends on factors outside our control, including:

• Existing information systems at the client site;

• Changes or the anticipation of changes in the regulatory environment affecting healthcare and pharmaceutical organizations;

• Changes in the management or ownership of the client;

• Budgetary cycles and constraints;

• Changes in the anticipated scope of engagements;

• Availability of personnel and other resources; and

• Consolidation in the healthcare and pharmaceutical industries.

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

and results of operations. We may also be required to hire new consultants before securing a client engagement. If clients defer committing to new assignments for any length of time or for any reason we could be required to maintain a significant number of under-utilized consultants which could adversely affect operating results and financial condition during any given period. Further, our outsourcing business has very long sales and contract lead times, requiring us to spend a substantial amount of time and resources in attempting to secure each outsourcing engagement. We cannot predict whether the investment of time and resources will result in a new outsourcing engagement or, if the engagement is secured, that the engagement will be on terms favorable to us.

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

Our success depends on obtaining additional engagements from our existing clients. A substantial portion of our revenue is derived from services provided to our existing clients. The loss of a small number of clients may result in a material decline in revenues and cause us to fail to meet public market expectations of our financial performance and operating results. If we materially fail to generate additional revenues from our existing clients it may materially adversely affect our business and financial condition.

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

Our services often involve complex information systems and software, which are critical to our clients’ operations. Our failure to meet client expectations in the performance of our services, including the quality, cost and timeliness of our services, may damage our reputation in the healthcare and pharmaceutical industries and adversely affect our ability to attract and retain clients. If a client is not satisfied with our services, we will generally spend additional human and other resources at our own expense to ensure client satisfaction. Such expenditures will typically result in a lower margin on such engagements and could materially adversely affect our business, financial condition and results of operations.

Further, in the course of providing our services, we will often recommend the use of software and hardware products. These products may not perform as expected or contain defects. If this occurs, our reputation could be damaged and we could be subject to liability. We attempt contractually to limit our exposure to potential liability claims; however, such limitations may not be effective. A successful liability claim brought against us may adversely affect our reputation in the healthcare and pharmaceutical industries and could have a material adverse effect on our business or financial condition. Although we maintain liability insurance, such insurance may not provide adequate coverage for successful claims against us.

We may be unable to attract and retain a sufficient number of qualified employees.

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

The loss of our vice presidents and executive officers could negatively affect us

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

Continued or increased employee turnover could negatively affect our business.

We have experienced employee turnover as a result of (1) dependence on lateral hiring of consultants, (2) travel demands imposed on our consultants, (3) loss of employees to competitors and clients; and (4) reductions in force in our business units as certain areas of our business have seen less demand. Continued or increased employee turnover could materially adversely affect our business and results of operations. In addition, many of our consultants develop strong business relationships with our clients. We depend on these relationships to generate additional assignments and engagements. The loss of a substantial number of consultants could erode our client base and decrease our revenue.

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

Our business has historically grown rapidly, and though our overall revenues have remained flat for the past several years, we have experienced growth and increased demand in certain areas of our business. In response to shifts in market 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 hiring persons with appropriate skills, including salespersons, and reductions in force in practice areas experiencing less demand. These market conditions and restructuring efforts have placed new and increased demands on our management personnel. It has also placed significant and increasing demands on our financial, technical and operational resources and on our information systems. We have also recently added sales force and have reorganized our selling resources; however there can be no assurance that such efforts will increase our sales effectiveness. If we are unable to manage growth effectively or if we experience business disruptions due to shifts in market demand, or growth or restructuring, our operating results will suffer. To manage any future growth, we must extend our financial reporting and information management systems to a growing number of offices and employees, and develop and implement new procedures and controls to accommodate new operations, services and clients. Increasing operational and administrative demands may make it difficult for our vice presidents to engage in business development activities and their other day-to-day responsibilities. Further, the addition of new employees and offices to offset such increasing demands may impair our ability to maintain our service delivery standards and corporate culture. In addition, we have in the past changed, and may in the future change, our organizational structure and business strategy. Such changes may result in operational inefficiencies and delays in delivering our services. Such changes could also cause a disruption in our business and could cause a material adverse effect on our financial condition and results of operations.

Changes in the healthcare and pharmaceutical industries could negatively impact our revenues.

We derive a substantial portion of our revenue from clients in the healthcare industry. As a result, our business and results of operations are influenced by conditions affecting this industry, particularly current trends towards consolidation among healthcare and pharmaceutical organizations. Such consolidation may reduce the number of existing and potential clients for our services. In addition,

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 target market or our failure to maintain our pricing goals could have a material adverse effect on our business and financial condition. Finally, each of the markets we serve is highly dependent upon the health of the overall economy. Our clients in each of these markets have experienced significant cost increases and pressures in recent years. Our services are targeted at relieving these cost pressures; however, any continuation or acceleration of current market conditions could greatly impact our ability to secure or retain engagements, the loss of which could have a material adverse effect on our business and financial condition.

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

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

• Continued consolidation of companies; or

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

A trend in the pharmaceutical industry is for companies to “outsource” either large information technology-dependent projects or their information systems staffing requirements. We benefit when pharmaceutical companies outsource to us, but may lose significant future business when pharmaceutical companies outsource to our competitors. If this outsourcing trend slows down or stops, or if pharmaceutical companies direct their business away from us, our financial condition and results of operations could be impacted in a materially adverse way.

We could be negatively impacted if we fail to successfully integrate the businesses we acquire.

We intend to grow, in part, by acquiring complementary professional practices within the healthcare and pharmaceutical industries. All acquisitions involve risks that could materially and adversely affect our business and operating results. These risks include (1) distracting management from our business, (2) losing key personnel and other employees, (3) losing clients, (4) costs, delays and inefficiencies associated with integrating acquired operations and personnel, and (5) the impairment of acquired assets and goodwill. In addition, acquired businesses may not enhance our services, provide us with increased client opportunities or result in the growth that we anticipate. Furthermore, integrating acquired operations is a complex, time-consuming and expensive process. Combining acquired operations with us may result in lower overall operating margins, greater stock price volatility and quarterly earnings fluctuations. Cultural incompatibilities, career uncertainties and other factors associated with such acquisitions may also result in the loss of employees and clients. Failing to acquire and successfully integrate complementary practices, or failing to achieve the business synergies that we anticipate, could materially adversely affect our business and results of operations.

Our international operations create specialized risks that can negatively affect us.

We are subject to many risks as a result of the services we provide to our international clients or services we may provide through subcontractors or employees that are located outside of the U.S. For example, if we fail to recruit and retain a sufficient number of qualified employees in each country where we conduct business, or do not employ subcontractors or employees that allow us to realize the cost efficiencies and quality of global sourcing, our ability to expand internationally or perform our existing services may be impaired and our business could be adversely affected. Our international operations are subject to a variety of risks, including:

• Difficulties in creating international market demand for our services;

• Difficulties and costs of tailoring our services to each individual country’s healthcare and pharmaceutical market needs;

• Unfavorable pricing and price competition;

• Currency fluctuations;

• Recruiting and hiring employees, and other employment issues unique to international operations;

• Longer payment cycles in some countries and difficulties in collecting international accounts receivables;

• Difficulties in enforcing contractual obligations and intellectual property rights;

• Adverse tax consequences;

• Increased costs associated with maintaining international marketing efforts and offices;

• Adverse changes in regulatory requirements; and

• Economic or political instability.

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

We expect to employ a global sourcing strategy to provide software development and other information technology services to our clients. If we are unable to realize perceived cost benefits of such a strategy or if we are unable to receive high quality services from foreign employees or subcontractors, our business may be adversely impacted.

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

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

The market for healthcare and pharmaceutical information technology consulting is very competitive. We have competitors that provide some or all of the services we provide. For example, in strategic consulting services, we compete with international, regional, and specialty consulting firms such as Bearing Point (formerly KPMG Consulting), CapGemini Ernst & Young, IBM Global Consulting Services, Wipro Technologies, and Deloitte Consulting.

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

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

• Service groups of computer equipment companies,

• Systems integration companies such as Electronic Data Systems Corporation, Perot Systems Corporation, SAIC, CapGemini Ernst & Young and Computer Sciences Corporation,

• Clients’ internal information management departments,

• Other healthcare consulting firms, and

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

In e-health and e-commerce related services, we compete with the traditional competitors outlined above, as well as newer Internet product and service companies. We also compete with companies that provide software development, IT consulting, and other integration and maintenance services, such as Cognizant Technology Solutions Corporation, and Tata Technologies Limited.

Several of our competitors employ a global sourcing strategy to provide software development and other information technology services to their clients, while at the same time reducing their cost structure and improving the quality of services they provide. Although we intend to execute a global sourcing strategy, if we are unable to realize the perceived cost benefits of such strategy or if we are unable to receive high quality services from foreign employees or subcontractors, our business may be adversely impacted and we may not be able to compete effectively.

Many of our competitors have significantly greater financial, human and marketing resources than us. As a result, such competitors may be able to respond more quickly to new or emerging technologies and changes in customer demands, or to devote greater resources to the development, promotion, sale, and support of their products and services than we do. In addition, as healthcare organizations become larger and more complex, our larger competitors may be better able to serve the needs of such organizations. If we do not compete effectively with current and future competitors, we may be unable to secure new and renewed client engagements, or we may be required to reduce our rates in order to compete effectively. This could result in a reduction in our revenues, resulting in lower earnings or operating losses, and otherwise materially adversely affecting our business, financial condition and results of operations.

If we fail to establish and maintain relationships with vendors of software and hardware products it could have a negative effect on our ability to secure engagements.

We have a number of relationships with vendors. For example, we have established a non-exclusive partnership arrangement with Documentum, Inc. Documentum markets document management software applications largely to the pharmaceutical industry. We believe that our relationship with this vendor and others are important to ours sales, marketing, and support activities. We often are engaged by vendors or their customers to implement or integrate vendor products based on our relationship with a particular vendor. If we fail to maintain our relationships with Documentum and other vendors, or fail to establish additional new relationships, our business could be materially adversely affected.

Our relationships with and investments in vendors of software and hardware products could have a negative impact on our ability to secure consulting engagements.

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

Our business is highly dependent on the availability of business travel.

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

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

The healthcare and pharmaceutical industries are subject to regulatory and technological changes that may affect the procurement practices and operations of healthcare and pharmaceutical organizations. During the past several years, the healthcare and pharmaceutical industries have been subject to an increase in governmental regulation and reform proposals. These reforms could increase governmental involvement in the healthcare and pharmaceutical industries, lower reimbursement rates or otherwise change the operating environment of our clients. Also, certain reforms that create potential work for us could be delayed or cancelled. Healthcare and pharmaceutical organizations may react to these situations by curtailing or deferring investments, including those for our services. In addition, if we are unable to maintain our skill and expertise in light of regulatory or technological changes, our services may not be marketable to our clients and we could lose existing clients or future engagements.

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

We may be unable to effectively protect our proprietary information and procedures.

We must protect our proprietary information, including our proprietary methodologies, research, tools, software code and other information. To do this, we rely on a combination of copyright and trade secret laws and confidentiality procedures to protect our intellectual property. These steps may not protect our proprietary information. In addition, the laws of certain countries do not protect or enforce proprietary rights to the same extent, as do the laws of the United States. We are currently providing our services to clients in international markets. Our proprietary information may not be protected to the same extent as provided under the laws of the United States, if at all. The unauthorized use of our intellectual property could have a material adverse effect on our business, financial condition or results of operations.

We may infringe the intellectual property rights of third parties.

Our success depends, in part, on not infringing patents, copyrights and other intellectual property rights held by others. We do not know whether patents held or patent applications filed by third parties may force us to alter our methods of business and operation or require us to obtain licenses from third parties. If we attempt to obtain such licenses, we do not know whether we will be granted licenses or whether the terms of those licenses will be fair or acceptable to us. Third parties may assert infringement

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

Our management may be able to exercise control over matters requiring stockholder approval.

Our current officers, directors, and other affiliates beneficially own approximately 38% of our outstanding shares of common stock and approximately 48% on a fully diluted basis. As a result, our existing management, if acting together, may be able to exercise control over or significantly influence matters requiring stockholder approval, including the election of directors, mergers, consolidations, sales of all or substantially all of our assets, issuance of additional shares of stock and approval of new stock and option plans.

The price of our common stock may be adversely affected by market volatility.

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

• Our performance and prospects;

• The depth and liquidity of the market for our common stock;

• Investor perception of us and the industries in which we operate;

• Changes in earnings estimates or buy/sell recommendations by analysts;

• General financial and other market conditions; and

• Domestic and international economic conditions.

In addition, public stock markets have experienced extreme price and trading volume volatility. This volatility has significantly affected the market prices of securities of many companies for reasons frequently unrelated to or disproportionately impacted by the operating performance of these companies. These broad market fluctuations may adversely affect the market price of our common stock. As a result, we may be unable to raise capital or use our stock to acquire businesses on attractive terms and investors may be unable to resell their shares of our common stock at or above their purchase price. Further, if research analysts stop covering our company or reduce their expectations of us, our stock price could decline or the liquidity of our common stock may be adversely impacted, which could create difficulty for investors to resell their shares of our common stock.

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

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

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

Our board of directors has the authority to issue up to 10,000,000 shares of undesignated preferred stock, to determine the powers, preferences and rights and the qualifications, limitations or restrictions granted to or imposed upon any unissued series of undesignated preferred stock and to fix the number of shares constituting any series and the designation of such series, without any further vote or action by our stockholders. The preferred stock could be issued with voting, liquidation, dividend and other rights superior to the rights of our common stock. Furthermore, any preferred stock may have other rights, including economic rights, senior to our common stock, and as a result, the issuance of any preferred stock could depress the market price of our common stock.

In addition, our certificate of incorporation eliminates the right of stockholders to act without a meeting and does not provide cumulative voting for the election of directors. Our certificate of incorporation also provides for a classified board of directors. The ability of our board of directors to issue preferred stock and these other provisions of our certificate of incorporation and bylaws may have the effect of deterring hostile takeovers or delaying changes in control or management.

We are also subject to the provisions of Section 203 of the Delaware General Corporation Law, which could delay or prevent a change in control of us, impede a merger, consolidation or other business combination involving us or discourage a potential acquirer from making a tender offer or otherwise attempting to obtain control. Any of these provisions, which may have the effect of delaying or preventing a change in control, could adversely affect the market value of our common stock.

In 1999, our board of directors adopted a share purchase rights plan that is intended to protect our stockholders’ interests in the event we are confronted with coercive takeover tactics. Pursuant to the stockholders rights plan, we distributed “rights” to purchase shares of a newly created series of preferred stock. Under some circumstances these rights become the rights to purchase shares of our common stock or securities of an acquiring entity at one-half the market value. The rights are not intended to prevent our takeover, rather they are designed to deal with the possibility of unilateral actions by hostile acquirers that could deprive our board of directors and stockholders of their ability to determine our destiny and obtain the highest price for our common stock.

Item 3. Quantitative and Qualitative Disclosures about Market Risks

None.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

We maintain disclosure controls and procedures (as defined in Securities Exchange Act 1934 (the “Exchange Act”) Rules 13a-14(c) and 15d-14(c)) that are designed to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

Within 90 days prior to the date of this quarterly report, we carried out an evaluation, under the supervision and with the participation of management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures. Based on the foregoing, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective.

Changes in Internal Controls

There have not been any significant changes in our internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation. There were no significant deficiencies or material weaknesses, and therefore no corrective actions were taken.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings.

None.

Item 2. Changes in Securities.

None.

Item 3. Defaults Upon Senior Securities.

None.

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

None.

Item 5. Other Information.

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

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

(a) Exhibits

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

(1) Incorporated by 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) Incorporated by reference to Exhibit 99.1 to FCG’s Current Report on Form 8-K dated December 9, 2000.

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

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

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

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

(b) Reports on Form 8-K

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

SIGNATURES

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

	FIRST CONSULTING GROUP, INC.


Date: November 11, 2002	/s/ LUTHER J. NUSSBAUM
	Luther J. Nussbaum
	Chairman and Chief Executive Officer


Date: November 11, 2002	/s/ WALTER J. McBRIDE
	Walter J. McBride
	Executive Vice President and Chief Financial Officer (Principal Financial Officer)

CERTIFICATIONS

I, Walter J. McBride, certify that:

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

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

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

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

a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

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

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

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

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

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

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

Date: November 11, 2002

/s/ Walter J. McBride
Walter J. McBride Chief Financial Officer

I, Luther J. Nussbaum, certify that:

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

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

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

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

Date: November 11, 2002

/s/ Luther J. Nussbaum
Luther J. Nussbaum Chief Executive Officer

EXHIBIT INDEX

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

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

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

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

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

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