ITEM 1. BUSINESS
General
We provide outsourcing, consulting, systems implementation and integration, and research services primarily for healthcare, pharmaceutical, and other life sciences organizations throughout North America, Europe, and Asia. Through combinations of onsite, offsite, and offshore outsourced services, we provide low cost, high quality offerings to improve our client's performance. Our consulting and integration services increase clients' operations effectiveness through improved uses of information technology, resulting in reduced costs, improved customer service, enhanced quality of patient care, and more rapid introduction of new pharmaceutical compounds. We apply industry knowledge and operations improvement skills combined with advanced information technologies, to make improvements in healthcare delivery, healthcare financing and administration, health maintenance and new drug development and commercialization. Through our services, we offer industry-specific expertise to objectively evaluate, select, develop, implement and manage information systems, networks and
applications. Our employees possess expertise in clinical, financial, and administrative processes, information technologies, and applications. We provide this expertise to our clients through domain- specific products and by assembling multi-disciplinary teams that provide comprehensive services across the principal services of outsourcing, consulting, systems implementation, and integration. Our employees are supported by internal research and a centralized information system that provides access to current industry information and project methodologies, experiences, models, and tools. We believe that our success is attributable to strong relationships with industry leading clients, our industry and technical expertise, our high quality and cost effective delivery model, a professional environment that fosters employee recruitment and retention, and the depth and breadth of our services. We were organized in 1980 as a California corporation, and in February 1998, we reincorporated as a Delaware corporation.
Clients and Services
Our clients include integrated delivery networks, or IDNs, health plans, acute care centers, academic medical centers, physician organizations, governmental agencies, pharmaceutical companies, biotech companies and other organizations. We have worked for many of the pharmaceutical and life sciences companies listed in Fortune's Global 500, 16 of the top 20 U.S. managed care firms, 17 of the top 20 U.S. IDNs, and the two largest U.S government healthcare IDNs. Our revenue mix from our major client segments in 2003 was:
•Health delivery organizations (hospitals, IDNs, academic medical centers, clinics, physician organizations, associations)-64% (includes outsourcing clients)
•Pharmaceutical, biotech and other life sciences related organizations-18%
•Health plans (Blue Cross Blue Shield organizations, insurance companies, specialty physician organizations, regional and national HMOs)-10%
•U.S. Federal Government healthcare agencies (e.g. Department of Defense, Department of Health and Human Services, and Department of Veterans Affairs)-3%
•Other industries-5%
Our principal services consist of outsourcing, consulting, systems implementation and integration. We believe that our clients' overall operations effectiveness is dependent upon solid business strategy and the implementation of improved business processes supported by information management. We also believe that these elements are interdependent and therefore must be integrated in order to be successful. We offer our clients an integrated approach through multi-disciplinary teams with expertise across these areas. In certain of our businesses, we also offer proprietary software products that are designed to optimize other client systems or processes. In our consulting and systems integration practice, we are typically engaged on a project basis and assemble client teams from one or more services to match the expertise and service offerings with the overall objectives required by each client and engagement. Many client engagements involve multiple assignments. We may assemble several client teams to serve the needs of a single client. We provide services at the client site to senior-level management and other personnel within the client organization. In our outsourcing practice, we typically are engaged on a multi-year basis. Our services include full information technology outsourcing, process and application outsourcing, and discreet functional outsourcing such as "call center" or "help desk" services.
In 2003, we provided our services through three business units-Healthcare (which includes health delivery, health plans, government healthcare, and technology services); Outsourcing; and Life Sciences. Please refer to Note M of our consolidated financial statements and related notes included with this annual report for a description, by business unit and by geographic segment, of certain financial information for the last three fiscal years.
Healthcare Business Unit
The Healthcare business unit is comprised of four practice units: health delivery, health plans, government healthcare, and technology services. In 2003, the healthcare business unit accounted for approximately $113.2 million, or 42% of our consolidated net revenues.
Health Delivery
The healthcare industry continues to experience significant pressures for change and improvement. Rising costs for clinical and other personnel, new technologies and drugs, plus a growing patient population have created new demands for cost management solutions that do not sacrifice quality of care. More sophisticated consumers are acquiring knowledge about healthcare options through media and the internet and are demanding more service and convenience. Government regulations are increasing the need for new technology while, at the same time, capital budgets are strained. We believe that healthcare organizations must all respond by offering measurable quality and service improvements, while remaining competitive from a cost standpoint.
Since our inception in 1980, we have served hundreds of healthcare delivery clients, including hospitals, IDNs, health trusts, academic medical centers, clinics, physician organizations, home healthcare companies, skilled nursing facilities, and related providers. Our focus on developing and implementing integrated solutions enables clients to achieve market differentiation, improve customer service and quality, manage cost and supply chains more efficiently, and optimize their information systems and processes.
Our expertise includes business and clinical process improvement, care/disease management, clinical transformation, patient safety and computerized physician order entry (CPOE), enterprise resource planning (ERP), revenue cycle management, and clinical system implementation and integration services. This includes application management and hosting services, which can be provided onsite, offsite, and offshore. We also help our clients with strategic systems planning and optimization of their information technology (IT) investments, including IT services-management, systems selections, disaster recovery, digital imaging, and data management strategies interwoven with process improvement techniques. Our key vendor relationships include Cerner, EPIC, Eclipsys, Siemens, Lawson, SeeBeyond, and Medical Information Technology, Inc. (MEDITECH). Additionally, we assist clients through a full range of Health Insurance Portability and Accountability Act (HIPAA) compliance services.
From front end strategy and assessments to integration and implementation, to back-end operations, we provide the depth and breadth of expertise to address clients' specific clinical, financial, operational, and technical needs, bringing teams of experienced professionals who have solved similar problems many times before.
Health Plans
To remain competitive, we believe health plans must continuously look at ways to reduce medical and administrative costs, improve customer service, enhance benefit plan features, and build market share. We provide our clients with specialists with expertise in a wide range of health plan operations, program management, and health plan information systems.
We seek to improve health plan performance with integrated solutions that link our clients' strategy, processes, technology, and people to healthcare providers, consumers, and purchasers. Our services focus on business results, with the objective of helping clients realize benefits sooner and achieve measurable results, including market differentiation and cost savings through a variety of consulting and technology services. We assist clients with business process design, business process and operations improvement, strategic and tactical planning, core systems selection, replacement and
consolidation, enterprise portal development, enterprise information management, enterprise architecture planning, and technology infrastructure and staff augmentation. Our regulatory compliance services range from HIPAA readiness assessment to planning, requirements definition remediation, and testing.
We help clients optimize core health plan processes such as claims administration, provider contracting and reimbursement, servicing members, and reporting. We identify and implement supporting information management solutions. We provide strategy, design, and implementation expertise in IT and customer service call center and messaging services optimization. We offer business continuity and disaster recovery planning. We also assist health plans in systems implementation across all these areas, while applying process redesign techniques to ensure that clients maximize the benefits from their IT investments.
We have in depth knowledge of several core administrative information technology systems including QMACS and Trizetto Facets. Our knowledge of these systems as well as related ancillary systems improves time to benefit for system implementations and operations improvement engagements.
Government Healthcare
We believe that government agencies need to improve access to and delivery of health care, refine administrative and financial processes, reduce overall operating costs, and enhance the quality and delivery of information. Like private sector businesses, the government faces additional challenges such as limited access to highly trained clinicians, support personnel, and IT specialists.
We have provided services to the Department of Defense, the Department of Veterans Affairs, and the Department of Health and Human Services through a series of strategic business and clinical planning efforts, reengineering of clinical and business practices, change management services, and information management/IT assessments, selections and implementations. We have several government-wide contracting vehicles including a General Services Administration Information Technology Professional Services contract and a Management, Organizational and Business Improvement Services contract. We are also a partner on several contract vehicles including D/SIDDOMS III (DoD Systems Integration, Design, Development, Operations and Maintenance Services) Millennia Lite, CIOSP II, Image World, Medicare Managed Care Program Integrity Contractor, and a Blanket Purchase Agreement with the Department of Defense and the Veterans Affairs Central Office in Washington, D.C. From clinical to administrative to financial services, our services to government healthcare parallel those to the private sector. We guide public sector health agencies through business and clinical transformation, customer relationship management, revenue cycle, compliance assessment (independent verification & validation) and planning, information management/information technology strategy, planning and assessments, medical management, and resource management. We are also providing IT solutions to public sector agencies, including architecture assessment & planning, application development, data warehousing, and eHealth technologies including physician-patient messaging and wireless technologies.
Technology Services
Our technology services group delivers advanced technology services to the health delivery, health plan, life sciences, and non-healthcare markets. Our expertise and experience in assisting clients in selecting, implementing, and integrating packaged technology solutions allow our clients to use technologies and software that are already developed. Our services include application and network integration of voice, data, video, and imaging technologies and systems. We evaluate, design, develop, and implement comprehensive system architectures, infrastructures, interfaces, databases, applications, and networks to address the need for information integration and dissemination throughout an
organization. We also perform business continuity services, multi-network integration, desktop system installation and management, server management, capacity planning, and performance analysis. We provide our infrastructure services on a fixed fee, per-hour, or fixed-fee per month basis as negotiated in individual client contracts.
Our enterprise infrastructure services include:
•Network security and disaster recovery
•Information accessibility-mobile computing, wireless, desktop, remote access
•Telecommunications, call centers and customer relationship management (CRM)
•Data management and integration-data architecture, EDI, interface engines
•e-Infrastructure-local and wide area network strategy, architecture, design and implementation
•IT operations-data center, help desk, disaster recovery, interim IT leadership
We have expertise in working with a wide range of technology vendors across these areas, such as:
• Cisco Systems
• Oracle Corporation
• Ascential Software
• SeeBeyond
• Microsoft Corporation
Outsourcing Services Business Unit
We provide IT outsourcing services that include hiring IT staff of clients as our employees and operating part or all of the IT operations either at the client site, offsite in a consolidated data center, or offshore in a development center. Through these services, we provide long-term IT management expertise, tailoring our efforts specifically to the client's culture, strategy, and needs. We offer a wide range of outsourcing services, including assessment/due diligence, program management, discrete outsourcing, application hosting and full IT outsourcing. Our assessment/due diligence service provides clients with a strategic and economic assessment of the feasibility of outsourcing part or all of their IT functions. This assessment enables senior management of the client to determine the appropriateness of outsourcing part or all of their IT functions, relative to their financial condition, strategic objectives, internal IT capabilities and overall direction. Revenues from our outsourcing business unit of $101.9 million for the year ended December 26, 2003, represented approximately 37% of our consolidated net revenues.
Our typical outsourcing engagement is a long-term, multi-year engagement with the client where we hire some or substantially all of the client's IT staff as our employees and we reengineer the client's IT process in an effort to provide improved service and complete management of the IT function at a lower cost. The staff continues to provide the outsourcing services from the client's site, where the client either retains ownership of the related assets (e.g., data center, and all hardware and software) or we provide these services offsite through our Nashville, Tennessee operations center, or a third party infrastructure firm on a subcontracted basis. The aggregate amount of our revenue that was attributed to a single third party infrastructure provider in 2003 and 2002 was approximately $21.4 million and $16.0 million, respectively. We typically create service level agreements with a fixed fee for the level of service specified, and an adjustment in the fee for different levels of service. We also offer program management and discrete outsourcing services to clients on an as needed basis.
As of March 2004, we have seven active outsourcing relationships representing 39 hospitals and other health care facilities. The substantial majority of our outsourcing revenues are received from four large outsourcing accounts that have signed long term agreements with us (University of Pennsylvania Health System, New York Presbyterian Hospital, University Hospitals Health Systems in Cleveland and
UMass Memorial Health Care). In each of these engagements, our clients have fully outsourced their IT staff and functions to us.
Our agreement with New York Presbyterian is a seven-year engagement due to expire in December 2006. We received approximately $33.0 million from this engagement in 2003, or 12.1% of our consolidated net revenues. Our agreement with the University of Pennsylvania Health System is a five-year engagement due to expire in March 2006. We received approximately $21.2 million from this engagement in 2003, or 7.8% of our consolidated net revenues. Our agreement with University Hospitals Health Systems is a five-year engagement due to expire in June 2007. We received approximately $21.9 million from this engagement in 2003, or 8.1% of our consolidated net revenues. Our agreement with UMass Memorial Health Care is a seven-year engagement due to expire in June 2009. We received approximately $13.2 million from this engagement in 2003, or 4.9% of our consolidated net revenues. If any of our significant outsourcing clients were to terminate their agreements with us, our business and financial condition would be materially adversely affected.
In May 2002, we acquired a controlling interest in Codigent Solutions Group, Inc. (renamed FCG Infrastructure Services, Inc. (FCGIS)), a provider of value-added technology solutions for hospitals and other healthcare delivery organizations. In January 2004, we acquired the remaining outstanding interests of FCGIS. FCGIS provides fully functioning infrastructure services and application services for small to medium healthcare facilities. In February 2003, we acquired certain assets of Phyve Corporation, a provider of information security and connectivity software solutions. We believe the acquisition of FCGIS and the assets from Phyve Corporation will enhance the breadth of services we are able to offer our existing and potential outsourcing clients.
In May 2003, we acquired Coactive Systems Corporation, a provider of inbound and outbound call center services, as our initial foundation in the business process outsourcing (BPO) market and are in the process of integrating and enhancing their services. If we are unable to successfully integrate and leverage this acquisition, we may not be able to successfully execute our strategy in this market.
Life Sciences Business Unit
Our Life Sciences practice serves leading pharmaceutical, biotechnology, medical device, and related organizations throughout North America, Europe, and Japan. FCG has served more than half of the top 50 global pharmaceutical companies. Through a broad range of consulting, technology, integration, application development, validation and quality assurance, staff augmentation, and outsourcing services and through software products, we design, develop and maintain the processes and information systems used by life sciences enterprises in all aspects of the drug development and commercialization lifecycle. We seek to help our life sciences clients comply with regulations, reduce costs, improve business processes, increase customer satisfaction, and bring products to market faster. In 2003, our life sciences business accounted for approximately $57.0 million, or 21% of our consolidated net revenues.
We have built deep domain expertise in core functions across the pharmaceutical enterprise: clinical, research and development, manufacturing and commercial operations. Our cross-functional, enterprise solutions have also enabled us to bring added value at the corporate level by helping our clients create a more integrated approach and common processes across their organizations.
Our services are designed around the increasing enterprise need for content management, knowledge management and cross-functional collaboration. A significant part of our Life Sciences business now includes the use of FirstDoc™, a leading enterprise content management (ECM) solution for life sciences organizations, which provides a unifying technology platform to help our clients manage compliance-related data and documents. Built on Documentum, Inc.'s ECM technology platform, FirstDoc has been selected by several leading pharmaceutical companies, many of which are implementing the solution as the ECM standard across their enterprise. In 2003 we dedicated cash and
management resources towards the research and development of our FirstDoc product to enhance its use and functionality to our clients, such that the significant amount of customization which has typically been required to implement FirstDoc can be reduced. We expect to continue such resource dedication in 2004. If we are unable to successfully market and license our FirstDoc product to our clients, or if our product enhancements do not deliver the functionality that we expect, we may not be able to realize the anticipated return on our investments. In addition, our success in this area 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 in this area could force us to alter our products and services or obtain licenses from third parties at significant expense to us.
We build upon Documentum's base functionality by adding specific industry knowledge and business rules to bridge the gap between the technology and the business. We have used our years of integration experience to integrate leading third-party technologies directly into FirstDoc, including imaging, publishing, collaboration, call center management, records management, and data management tools, as well as others. This integrated approach provides a total solution to a business problem, not disparate technical installations.
In February 2003, we acquired Paragon Solutions, Inc. (Paragon). Paragon has software development centers in Atlanta, Georgia, Bangalore, India and Ho Chi Minh City, Vietnam. This offshore/onshore business model provides us with the capability to provide lower cost and high quality software development to our life sciences clients and, over time, our healthcare and outsourcing clients as well. The most common measure of software development quality is the Capability Maturity Model metric (referred to as CMM). There are five CMM levels, and Paragon is currently certified at the highest level, CMM 5. Our acquisition of Paragon provided us a means to implement our global sourcing strategy to provide software development and other IT services to our clients.
Sales and Marketing
We generate a substantial portion of our revenues from existing clients and client referrals, and we market our services primarily through our vice presidents and account managers. Our vice presidents and account managers seek to develop strong relationships with senior-level information management and other decision-making personnel at leading healthcare and pharmaceutical organizations. We maintain these relationships by striving to successfully complete assignments and exceed clients' expectations. Our vice presidents and practice directors allocate a significant portion of their time to business development and related activities. We also employ account managers and business development associates who are dedicated to business development with potential and existing clients. We are frequently engaged to provide multiple services throughout several phases of a client's IT system lifecycle and related business processes, including strategy, planning, procurement and contracting, implementation, integration, and management. As a result of this involvement, our personnel often develop an in-depth understanding of our clients' business systems and capabilities and develop strong relationships with personnel within the client organization. These relationships provide us with significant opportunities to undertake additional assignments for each client.
In addition to generating assignments from existing clients, we attract new clients through our targeted marketing activities. Our marketing activities include web marketing, public presentations, press releases, publishing of books, articles and white papers, and trade show participation. We also maintain research reports and white papers on our website, along with other company and industry information. Our marketing staff produces a number of sales support tools including presentations, brochures, article reprints, sales kits, descriptions of our services, and case studies.
Research and Knowledge Sharing
Our services and consultants are supported by internal and external research, training, and a centralized information system that provides real-time access to current industry and technology information and project methodologies, experiences, models, and tools. Our principal research and practice support initiatives include: emerging practices group, professional development programs, and Knowledge, Information, Technology Exchange (KITE®).
Emerging Practices Group. The emerging practices group performs industry research and collects, packages, and distributes knowledge regarding emerging trends in the healthcare and pharmaceutical industries, their implications for the industry, and the need for technology support. Examples of topics that the emerging practices group has researched are CPOE, IT value management, clinical performance improvement, patient safety, e-prescribing, and hand held technology. We also provide customized research for product and market strategies, evaluate the commercial potential for new products, and conduct internal and client workshops. The emerging practices group also packages our knowledge for use in client projects and publishes a periodic news summary that is sent to several thousand subscribers.
Professional Development Programs. We have instituted professional development and incentive programs to encourage employee retention and to provide support for the professional growth of all our employees. We provide training to our employees through classroom education, computer-based training, distance learning, and external seminars. We have a program to educate all new employees about our history, culture, and practices. Additionally, we have programs and tools that support knowledge acquisition, skill development, project management, and relationship management.
Knowledge, Information, Technology Exchange (KITE®). Our employees have access to our internal research and to current industry and technology information and project methodologies, experiences, models, and tools through KITE®. KITE® currently houses approximately 34,000 documents that include industry information, service methodologies and tools, benchmarks and best practice information, and other documentation to support our services and consultants. KITE® is updated on a continuous basis with information resulting from each engagement, and by the emerging practices group. We believe that this resource allows our employees to utilize engagement-specific information that improves the quality and content of services delivered to clients while reducing cost of our delivery.
Competition
The market for healthcare outsourcing, consulting, implementation and integration, and research services is intensely competitive, rapidly evolving, and highly fragmented. We have competitors that provide some or all of the same services that we provide. We compete for consulting services with large international multi-industry firms such as Accenture, IBM Business Systems Consulting, Computer Sciences Corporation, and Deloitte & Touche, and regional and specialty consulting firms. In implementation and integration services, we compete with information system vendors such as Cerner, McKesson, Siemens Medical Solutions, and IBM Global Systems; service groups of computer equipment companies; and systems integration companies such as Accenture, SAIC, and Cap Gemini Ernst & Young. In outsourcing we compete with large international companies such as Electronic Data Systems Corporation, Perot Systems Corporation, Cap Gemini Ernst & Young, and Computer Sciences Corporation and other healthcare consulting firms. We also compete with offshore service companies that provide software development, IT consulting, and other integration and maintenance services, such as Wipro Technologies, Cognizant Technology Solutions Corporation, and Tata Technologies Limited. In recent years, our clients' internal information management departments have become a competitor by internally performing more IT related services.
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 us. In addition, as healthcare organizations become larger and more complex, our larger competitors may be better able to serve the needs of such organizations. We may not be able to attract and retain the personnel or dedicate the financial resources necessary to serve these resulting organizations.
We believe that we compete primarily on the basis of our healthcare and life sciences domain expertise and experience, our reputation, quality of our services and our effective use of an onsite, offsite and offshore business model to perform services for our clients that are becoming increasingly price-sensitive. Large IT companies have, in the past, offered consulting services at a substantial discount as an incentive to utilize their implementation services, and software and hardware vendors may provide discounted implementation services for their products. In the future, these competitors may discount such services more frequently or offer such services at no charge. There can be no assurance that we will be able to compete for price-sensitive clients on the basis of our current pricing or cost structure, or that we will be able to continue to lower our prices or costs in order to compete effectively. Many of our competitors are also creating offshore delivery services that may significantly reduce their rates charged to clients. Furthermore, many of our competitors have long-standing business relationships with key personnel at healthcare organizations, which could prevent or delay us from expanding our client base. We believe that we have been able to compete successfully on the basis of the quality and range of our services, and the accumulated expertise of our consultants. However, there is no assurance that we will be able to successfully compete with our current and future competitors. Further, competitive pressures may cause our revenues or operating margins to decline or otherwise materially adversely affect our business, financial condition, and results of operations. Such competitive pressures could further interfere with our ability to successfully compete in the markets for our services.
Limited Protection of Proprietary Information and Procedures
Our ability to compete effectively depends on our ability to protect our proprietary information, including our proprietary methodologies, research, tools, software code, and other information. We rely primarily on a combination of copyright and trade secret laws and confidentiality procedures to protect our intellectual property rights. We request that our consultants and employees sign confidentiality agreements and generally limit access to and distribution of our research, methodologies and software codes. The steps we take to protect our proprietary information may not be adequate to prevent misappropriation. 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. The unauthorized use of our intellectual property could have a material adverse effect on our business, financial condition, or results of operations. We believe that our systems and procedures and other proprietary rights do not infringe upon the proprietary rights of third parties. However, third parties could assert infringement claims against us in the future, and such claims may result in protracted and costly litigation, regardless of the merits of such claims.
Employees
As of December 26, 2003, we had 2,066 employees, 63 of whom were vice presidents with responsibility for service delivery, new business development, client relationships, staff development, and company leadership. We believe that our relationship with our employees is good. We use a variety of techniques to identify and recruit qualified candidates to support our growth including full-time recruiters, an internal employee referral program, advertisements, and professional search firms.
Vendor Relationships
We have established numerous vendor relationships. We believe the formation of these relationships enables us to increase our knowledge of key vendor solutions, obtain appropriate training, education, and certification on key technologies and solutions, and gain advantages from joint marketing approaches where appropriate. In turn, we are able to more rapidly identify and deliver integrated solutions to our clients, based on leading technologies, applications, and solutions.
We have established non-exclusive alliance agreements with software, hardware, and service vendors that market components and solutions to our current and prospective clients. The vendor alliance agreements of which we are a part have provided us with sales leads, marketing assistance revenues, increased publicity, discounted software, specialized training programs, participation in beta software programs, and privileged information about vendors' technical and marketing strategies.
Our relationships range from obtaining education and product/service updates to product implementation training and certification to joint marketing programs. Joint marketing programs typically involve joint account development and marketing, trade shows, marketing through each company's website, and other marketing efforts. Clients generally contract directly with the vendor for purchase of the products.
Other Information
We file with the Securities and Exchange Commission (SEC) our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments to those reports, proxy statements and registration statements. The public may read and copy any materials we file with the SEC at the SEC's Public Reference Room at 450 Fifth Street, N.W., Washington, D.C. 20549. The public may also obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. In addition, the SEC maintains an internet site at http://www.sec.gov that contains reports, proxy and information statements and other information regarding registrants, including us, that file electronically. We also maintain a website located at http://www.fcg.com, and electronic copies of our periodic and current reports, and any amendments to those reports, are available, free of charge, under the "Investors" link on our website as soon as practicable after such material is filed with, or furnished to, the SEC.
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. 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 are realized, our business, financial condition or results of operations 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 and possibly decline.
Our net revenues, 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;
•The roll-off or completion of significant projects 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;
•Use of offsite and offshore resources on our engagements;
•Ability to incorporate use of variable labor staffing into our projects;
•The loss of key personnel and other employees;
•Changes in our, and our competitors', 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;
•Return of fees for work deemed unsatisfactory by a client or claims or litigation resulting from the same;
•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;
•Ability to sublease vacant office space included in previous restructuring charges; 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 unexpectedly 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 receivables (both unbilled and billed). 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. If these or any other variables or unknowns were to cause a shortfall in revenues or earnings or otherwise cause a failure to meet public market expectations, our business could be adversely affected.
We adopted EITF 00-21 in the first quarter of 2003, which affects the way we recognize revenue on long-term outsourcing agreements. The adoption of EITF 00-21 results in separating our outsourcing contracts into multiple elements and separately accounting for each element, rather than accounting for all elements together as a group. As a result, we now recognize revenue from certain service elements of our outsourcing agreements on a straight-line basis over the life of the contract, rather than on a percentage of completion basis. Since we typically incur greater costs and expenses during the early phase of the service elements (which will now have straight-line revenue recognition) than we do in the later years of those elements, we believe our net income will be less during the early stages of our outsourcing engagements. In addition, if we are unable to manage costs as planned in the later stages of an outsourcing engagement, our net income will likewise be negatively impacted. In general, income from our outsourcing contracts will be less stable in the future, since it will be more susceptible to changes in the mix of newer versus older contracts, and to the impact of cost fluctuations from quarter to quarter without a compensating change in revenue. If we fail to meet our public
market expectations or otherwise experience a shortfall in our net income due to these fluctuations, our business could be adversely affected and the price of our stock may decline.
Finally, we reported net losses before the cumulative effect of change in accounting principle for the second, third and fourth quarters of 2003, and we cannot assure you that we will achieve positive earnings in the future. If we are unable to achieve profitability on a quarterly or annual basis, the market price of our common stock could be adversely affected and our financial condition would suffer.
We are dependent on our outsourcing engagements for a significant part of our revenues.
Currently, we have seven significant outsourcing relationships. Net revenues from our outsourcing relationships, for the year ended December 26, 2003, represented approximately 37% of our consolidated net revenues. 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 clients may have a right to terminate the outsourcing contract for cause and have no obligation to pay us any termination fees. Our anticipated revenues 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.
In addition, 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 provide improved service at a lower cost and 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. Any failure by us to recover these investments could reduce our outsourcing revenue which would have a material adverse effect on our financial condition, results of operations, and price of our common stock.
Our outsourcing engagements also 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.
Finally, we anticipate expanding our outsourcing business to perform discrete information technology services for clients. The amount of time and resources required to win client engagements for our outsourcing business is significant, and we may not win the number or type of client engagements that we anticipate. If we fail to meet our objective to secure new outsourcing engagements, or fail to secure new outsourcing engagements on acceptable commercial terms, we will not experience the growth in this business unit that we have anticipated.
In May 2003, we completed the acquisition of Coactive Systems Corporation, a provider of inbound and outbound call center services to the hospital and payer markets. The acquisition represents our entry into the business process outsourcing market (BPO). If we are unable to successfully integrate and leverage this acquisition in the BPO market, we may not be able to successfully execute our strategy in this area. Further, all acquisitions involve risks that could materially and adversely affect our business and operating results. Consequently, we may fail to meet public market expectations and the price of our common stock may decline.
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 our 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.
We could be negatively impacted if we fail to successfully integrate the businesses we acquire.
We have grown, in part, by acquiring complementary businesses that could enhance our capability to serve the healthcare and pharmaceutical industries. For example, we acquired a majority interest in Codigent Solutions Group, Inc. (renamed FCG Infrastructure Services, Inc.) in 2002, and during the first half of 2003, we acquired Paragon Solutions, Inc., Coactive Systems Corporation, and certain assets of Phyve Corporation. All acquisitions involve risks that could materially and adversely affect our business and operating results. These risks include:
•Distracting management from our business;
•Losing key personnel and other employees;
•Losing clients;
•Costs, delays, and inefficiencies associated with integrating acquired operations and personnel;
•The impairment of acquired assets and goodwill; and
•Acquiring the contingent and other liabilities of the businesses we acquire.
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.
We may be negatively impacted if our investments in products and emerging service lines are unsuccessful.
We have publicly announced our strategy to increase our investment in product development, including further investment in FirstDoc™ as well as investment in a physician portal product, FirstGateways™. These investments are in addition to continuing our investments in other emerging service lines. We typically do not capitalize the cost of our product development activities and do not anticipate capitalizing expected investments this year. As a result, our financial results may be adversely impacted by such increased investment in the short term. If such product development activities or investment in our emerging service lines do not result in relevant offerings, we will not achieve desired levels of return on these investments. As a result, our business and results of operations could be adversely affected.
If we are unable to generate additional revenue from our existing clients, our business may be negatively affected.
Our success depends, to a significant extent, on obtaining additional engagements from our existing clients. A substantial portion of our revenues is derived from additional 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 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 assessing and/or implementing 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 professional 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. We must also seek certain employees that are willing to work on a variable or per diem basis. 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 and to offer our services at competitive rates could be impaired and our business would suffer.
The loss of our key client service employees and executive officers could negatively affect us.
Our performance depends on the continued service of our executive officers, senior managers, and key employees. 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:
•Dependence on lateral hiring of consultants;
•Travel demands imposed on our consultants;
•Loss of employees to competitors and clients; and
•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 revenues.
If we are unable to manage shifts in market demand or growth in our business, our business may be negatively impacted.
Our business has historically grown rapidly, and though our overall revenues have remained flat for the past several years, we have experienced growth and increased demand in certain areas of our business. In response to shifts in market demand and in an effort to better align our business with our markets, we restructured our business units and hired persons with appropriate skills, including salespersons, and reduced our workforce in practice areas experiencing less demand. We have also begun to hire employees willing to work on a variable or per diem basis in order to better manage project costs and general and administrative expense associated with underutilized resources. 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. 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 our multiple and international office locations and traveling 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 senior managers to engage in business development activities and their other day-to-day responsibilities. Further, the addition of new employees and offices to offset any 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 revenues from clients in the healthcare industry. As a result, our business and results of operations are influenced by conditions affecting this industry, particularly any 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 industry. Our revenues are, in part, linked to the pharmaceutical industry's research and development and technology expenditures. Should any of the following events occur in the pharmaceutical industry, our business could be negatively affected in a material way:
•Continued adverse changes to the industry's general economic environment;
•Continued consolidation of companies; or
•A decrease in pharmaceutical companies' research and development or 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.
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. Further, in February 2003, we acquired Paragon Solutions, Inc., a U.S. based company with offshore software development centers in India and Vietnam. As a result of this acquisition, we currently have
business operations and employees located in India and Vietnam, as well as our existing employees throughout Europe. If we fail to recruit and retain a sufficient number of qualified employees in each country where we conduct business, our ability to perform our existing services may be impaired and our business could be adversely affected. Our international operations are also 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;
•Uncertainty of labor costs and high turnover rates;
•Unfavorable pricing and price competition;
•Currency fluctuations;
•Recruiting and hiring employees, and other employment issues unique to international operations, including ability to secure work visas for foreign employees in the U.S.;
•Longer payment cycles in some countries and difficulties in collecting international accounts receivable;
•Terrorist attacks;
•Difficulties in enforcing contractual obligations and intellectual property rights;
•Adverse tax consequences;
•Increased costs associated with maintaining international marketing efforts and offices;
•Government regulations and restrictions;
•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 become profitable in our European pharmaceutical services, which may materially adversely affect our financial condition, results of operations, and price for our common stock.
Our acquisition of Paragon Solutions, Inc. provided us a means to implement our 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. Further, our recently acquired international operations in Vietnam and India subject our business to a variety of risks and uncertainties unique to operating businesses in these countries, including the risk factors discussed above.
Any one or all of these factors may cause increased operating costs, lower than anticipated financial performance, and may materially adversely affect our business, financial condition, and results of operations.
If we do not compete effectively in the healthcare and pharmaceutical information services industries, our business will 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), Cap Gemini Ernst & Young, IBM Global Consulting Services, Wipro Technologies, and Accenture.
In integration and co-management services, we compete with:
•Information system vendors such as McKesson, Siemens Medical Solutions, Cerner Corporation, and IBM Global Systems;
•Service groups of computer equipment companies;
•Systems integration companies such as Electronic Data Systems Corporation, Perot Systems Corporation, SAIC, Cap Gemini Ernst & Young, and Computer Sciences Corporation;
•Clients' internal information management departments;
•Other healthcare consulting firms; and
•Other pharmaceutical consulting firms such as Accenture, Cap Gemini Ernst & Young, and Computer Sciences Corporation's consulting division.
In e-health and e-commerce related services, we compete with the traditional competitors outlined above, as well as newer internet product and service companies. We also compete with companies that provide software development, information technology consulting, and other integration and maintenance services, such as Wipro Technologies, 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. If we are unable to realize the perceived cost benefits of our recently implemented global sourcing 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 software and hardware vendors. For example, our life sciences business unit is highly dependent upon a non-exclusive relationship with Documentum, Inc., a vendor of document management software applications with which we integrate our FirstDoc™ solution. We believe that our relationship with vendors are important to our 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 these vendors, or fail to establish additional new relationships, our business could be materially adversely affected.
Our relationships with 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.
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 (i.e. in the area of enterprise content management) 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 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 domestic or international air travel is significantly reduced or halted, 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. Finally, government regulations, particularly HIPAA, may require our clients to impose additional contractual responsibilities on us, which may make it more costly to perform certain of our engagements and subject us to increased risk in the performance of these engagements, including immediate termination of an engagement.
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 and have business operations in Europe, India and Vietnam. 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.
Our management may be able to exercise control over matters requiring stockholder approval.
Our current officers, directors, and other affiliates beneficially own approximately 24.2% of our outstanding shares of common stock and approximately 36.2% 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 9,500,000 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 up to 500,000 shares of our Series A Junior Participating 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 2.
ITEM 2. PROPERTIES
Our headquarters is located in Long Beach, California in approximately 18,000 square feet of leased office space. The facility accommodates executive, information technology, administration, and support personnel. We lease approximately 22,000 square feet in Wayne, Pennsylvania, which houses some of our software development services employees in addition to a portion of our practice support staff. We also have a dedicated data center supporting our outsourcing business activities in approximately 24,000 square feet in Nashville, Tennessee. We have an additional 16 leases for smaller local offices in the United States and Europe, 6 of which are currently subleased to others, or are in the process of being marketed for sublease. Since the completion of our acquisition of Paragon Solutions, Inc. in February 2003, we have additional leases for office space in Atlanta, Georgia, Bangalore, India, and Ho Chi Minh City, Vietnam. Except for our office space located in Wayne,
Pennsylvania, which is predominantly dedicated to our life sciences business unit, our other office locations are used by all of our business units. Overall, our properties are suitable and adequate for our needs.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
From time to time, we may be involved in claims or litigation that arise in the normal course of business. We are not currently a party to any legal proceedings, which, if decided adversely to us, would have a material adverse effect on our business, financial condition, or results of operations.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the fourth quarter of 2003, no matters were submitted to a vote of the stockholders.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Since February 13, 1998, our common stock has been quoted on the Nasdaq National Market under the symbol "FCGI." The table below sets forth, for the quarters indicated, the reported high and low sale prices of our common stock reported on the Nasdaq National Market.
As of March 1, 2004, there were approximately 335 record holders of our common stock. We have never paid cash dividends on our common stock and presently intend to continue to retain our earnings for use in our business.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
The following selected historical consolidated financial information as of December 26, 2003 and December 27, 2002 and for each of the years ended December 26, 2003, December 27, 2002, and December 28, 2001, has been derived from and should be read in conjunction with our consolidated financial statements and related notes thereto included elsewhere in this report. The selected historical consolidated financial information as of December 28, 2001, December 31, 2000 and December 31,
and for the years ended December 31, 2000 and December 31, 1999, have been derived from our audited consolidated financial statements, which are not included in this report.
We changed our accounting for our outsourcing contracts with the adoption of EITF 00-21, "Accounting for Revenue Arrangements with Multiple Deliverables," in the first quarter of 2003. Please refer to Note A of our consolidated financial statements and related notes thereto and our "Management's Discussion and Analysis of Financial Condition and Results of Operations," both included in this annual report on Form 10-K, for a quantitative and qualitative description of the effects of EITF 00-21 on our financial results for the fiscal year ended December 26, 2003.
ITEM 7.
ITEM 7. 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 IN ITEM 1 OF THIS REPORT 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 providers, payors, government agencies, pharmaceutical, biogenetic, and other healthcare organizations in North America, Europe, and Asia. We generate substantially all of our revenues from fees for information technology outsourcing services, and 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. For services billed on an hourly basis, in our consulting and systems integration businesses ("CSI"), composed of our healthcare and life sciences business units, 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, the number of our employees required to complete the assignment, and the volume of transactions or interactions. Revenues are generally recognized related to the level of services performed, the amount of cost incurred on the assignment versus the estimated total cost to complete the assignment, or on a straight-line basis over the period of performance of service. Additionally, we have recently been licensing an increased amount of our software products, generally in conjunction with the customization and implementation of such software products. Revenues from our software licensing were greater than 1% of our total revenues in fiscal year 2003, and we expect our software licensing revenues to grow in absolute dollars during our 2004 fiscal year.
Provisions are made for estimated uncollectible amounts based on our historical 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 total revenues, and then deducted to determine net revenues. For purposes of analysis, all percentages in this discussion are stated as a percentage of net revenues, since we believe that this is the more relevant measure of our business.
Cost of services primarily consists of the salaries, bonuses, and related benefits of client-serving consultants and outsourcing associates, and subcontractor expenses. Selling expenses primarily consist of
the salaries, benefits, travel, and other costs of our sales force, as well as marketing and market 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, salaries and expenses for executive management, financial accounting and administrative personnel, expenses for firm and business unit governance meetings, recruiting fees, professional development and training, and legal and other professional services. As associate related costs are relatively fixed in the short term, variations in our revenues and operating results in our CSI business can occur as a result of variations in billing margins and utilization rates of our billable associates.
Our most significant expenses are our human resource and related salary and benefit expenses. As of December 26, 2003, approximately 1,058 of our 2,066 employees are billable consultants. Another 697 employees are part of our outsourcing business. The salaries and benefits of such billable consultants and outsourcing related employees are recognized in our cost of services. Most non-billable employee salaries and benefits are recognized as a component of either selling or general and administrative expenses. Approximately 15% of our workforce, or 311 employees, are classified as non-billable. Our cost of services as a percentage of revenues is directly related to several factors, including, but not limited to:
•Our consultant utilization, which is the ratio of total billable hours to available hours in a given period;
•The amount and timing of cost incurred;
•Our ability to control costs on our outsourcing projects;
•The billed rate on time and material contracts; and
•The estimated cost to complete our non-outsourcing fixed price contracts.
We evaluate our non-outsourcing fixed price contracts on an ongoing basis by estimating the cost to complete the assignment. We then recognize revenues to achieve a constant margin over the remaining term of the engagement. We have changed our accounting for outsourcing contracts with the adoption of EITF 00-21, "Accounting for Revenue Arrangements with Multiple Deliverables," in the first quarter of 2003. Under our outsourcing contracts, a significant portion of our revenues are fixed and allocated over the contract on a straight-line basis, as we are required to provide a specified level of services subject to certain performance measurements. Also, certain revenues may fluctuate under the contracts based on the volume of transactions we process or other measurements of service provided. If we incur higher costs to provide the required services or receive less revenue due to reduced transaction volumes or penalties associated with service level failures, our gross profit can be negatively impacted.
In our CSI business, we manage consultant utilization by monitoring assignment requirements and timetables, available and required skills, and available consultant hours per week and per month. 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 weather, 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. In addition, entry into new market areas and the hiring of consultants in advance of client assignments have resulted and may continue to result in periods of lower consultant utilization.
In response to competition and continued pricing and rate pressures, we have recently implemented a global sourcing strategy into our business operations, which includes the deployment of offshore resources as well as resources that perform services remote from the client site. We have also begun to incorporate larger numbers of variable cost or per diem staff in some of our projects. We expect these strategies to result in improved cost of services through a combination of lower cost attributable to offshore resources and higher leverage of resources that perform services offsite or on a variable cost basis. To the extent we pass through reduced costs to our clients related to offshore resources, the global sourcing strategy may result in lower revenues on a per engagement basis. However, we expect to offset this potential revenue impact with improved competitive positioning in our markets. Several of our competitors employ both global sourcing and variable staffing strategies 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. If we are unable to realize the perceived cost benefits of our recently implemented strategies or if we are unable to receive high quality services from foreign employees, variable staff employees or subcontractors, our business may be adversely impacted and we may not be able to compete effectively.
Comparison of the Years Ended December 26, 2003 and December 27, 2002
Revenues. Our net revenues increased to $272.1 million for the year ended December 26, 2003, an increase of 1.5% from $268.0 million for the year ended December 27, 2002. Our total revenues increased to $287.7 million for the year ended December 26, 2003, an increase of 1.8% from $282.7 million for the year ended December 27, 2002. Approximately $11.9 million of the increase was primarily due to revenues generated by our acquired companies and another $12.6 million due to the full year impact of two outsourcing contracts that began in mid-2002 and revenue from another outsourcing contract which began in late 2003. These increases were offset by a significant decline in our life sciences business unit's revenues (excluding revenues generated from the Paragon Solutions, Inc. acquisition), which was caused by the completion of a significant engagement in mid-2003 and by several other contracts that concluded throughout 2003 as a result of the decline in the custom software development market for life science businesses. We are addressing the market shift by enhancing our FirstDoc suite of software products, so that the level of necessary custom software development for our clients is reduced. Additionally, in the healthcare business unit, we have not been able to replace expiring health plan contracts and have thus experienced a decline in these revenues as well. If we are unable to obtain new engagements and/or additional work, we could see a further decline in revenues for both the life sciences and the healthcare business units in 2004.
Cost of Services. Cost of services before reimbursable expenses increased to $186.9 million for the year ended December 26, 2003, an increase of 8.9% from $171.7 million for the year ended December 27, 2002. Approximately $6.1 million of the increase is due to the costs of services from our recent acquisitions and another $14.0 million from the new outsourcing contracts, offset by a reduction in staff primarily in our life sciences business unit.
Gross Profit. Gross profit decreased to $85.2 million for the year ended December 26, 2003, a decrease of 11.5% from $96.3 million for the year ended December 27, 2002. The decrease is primarily due to the change in our revenue mix from life sciences and healthcare to outsourcing, which generally earns a lower gross profit. This decrease is also attributable to the rapid revenue decline in life sciences, and the delay in personnel reductions when the significant life sciences engagement and several smaller healthcare engagements were completed as discussed above. Further, we believe our gross profit in outsourcing was negatively impacted to a small degree by our implementation of
EITF 00-21 (see Critical Accounting Policies and Estimates-Revenue Recognition and Unbilled Receivables). Offsetting these declines was $5.8 million of gross profit generated by our acquisitions. Gross profit, as a percentage of net revenues, decreased from 35.9% for the year ended December 27, 2002 to 31.3% for the year ended December 26, 2003, due to the factors discussed above.
Selling Expenses. Selling expenses decreased to $27.7 million for the year ended December 26, 2003, a decrease of 1.2% from $28.0 million for the year ended December 27, 2002. The decrease is primarily due to reductions in our sales force offset by the selling expenses of $1.4 million which were incurred by Paragon. Selling expenses, as a percentage of net revenues, decreased slightly from 10.4% for the year ended December 27, 2002 to 10.2% for the year ended December 26, 2003.
General and Administrative Expenses. General and administrative expenses increased to $60.2 million for the year ended December 26, 2003, an increase of 4.7% from $57.5 million for the year ended December 27, 2002. The increase was primarily due to general and administrative expenses from our acquired companies of $6.2 million, as well as investments in software product development and related technologies in life sciences and in the Patient Safety Institute. General and administrative expenses, as a percentage of net revenues, increased from 21.4% for the year ended December 27, 2002 to 22.1% for the year ended December 26, 2003. A combination of acquisition integration initiatives and other cost reductions reduced our general and administrative expenses substantially in the last quarter of the year, and we expect our general and administrative expenses to decline in 2004.
Restructuring, Severance, and Impairment Costs. Restructuring, severance, and impairment costs were $11.7 million for the year ended December 26, 2003 compared to $7.8 million for the year ended December 27, 2002. Restructuring, severance, and impairment costs for the year ended December 26, 2003 included approximately $6.5 million of severance costs related to staff reductions and $5.2 million for facility downsizing and fixed asset write-downs.
Interest Income, Net. Interest income, net of interest expenses, increased slightly to $1.0 million for the year ended December 26, 2003 compared to $0.9 million for the year ended December 27, 2002. Interest income, net of interest expense, as a percentage of net revenues, increased from 0.3% for the year ended December 27, 2002 to 0.4% for the year ended December 26, 2003.
Other Expenses, Net. Other expenses decreased from $0.6 million for the year ended December 27, 2002 to $0.4 million for the year ended December 26, 2003 due primarily to the buy-out of our minority interest partners in FCG Management Services, LLC resulting in the elimination of this expense as of the beginning of the fourth quarter of fiscal year 2003. Further, we purchased the remaining minority interest in FCG Infrastructure Services, Inc. in January 2004, and as a result, we will incur minimal minority interest expense in the 2004 fiscal year.
Income Taxes. Our provision for taxes for the year ended December 26, 2003 of $0.6 million consisted of a tax benefit of $4.9 million related to our $13.8 million of pretax losses, offset by a deferred tax asset valuation allowance of $5.5 million taken due to the uncertainty of our ability to realize the full amount of our deferred tax assets (see Critical Accounting Policies and Estimates-Deferred Income Taxes). The benefit rate of 35.6%, excluding the valuation allowance, compared to a provision rate for the year ended December 27, 2002 of 42.0%. The benefit rate in fiscal year 2003 was lower than the provision rate in the prior year due to the existence of certain non-deductible expenses.
Comparison of the Years Ended December 27, 2002 and December 28, 2001
Revenues. Our net revenues increased to $268.0 million for the year ended December 27, 2002, an increase of 0.4% from $266.9 million for the year ended December 28, 2001. The increase was due to two new outsourcing engagements that commenced in the second quarter of 2002 offset by a decline in our healthcare and life sciences work resulting from increased competition and difficult market
conditions. Our total revenues decreased to $282.7 million for the year ended December 27, 2002, a decrease of 0.5% from $284.1 million for the year ended December 28, 2001. The decrease was primarily due to lower reimbursable expenses for our healthcare and life sciences businesses resulting from the declines in their revenues, which require the most travel. Partially offsetting this decline is the increase in net revenues.
Cost of Services. Cost of services increased to $171.7 million for the year ended December 27, 2002, an increase of 3.0% from $166.6 million for the year ended December 28, 2001. The increase was attributable to an increase in the outsourcing staff and subcontractors related to additional outsourcing contracts, partially offset by a decline in the number of consultants in the healthcare and life sciences business units. In the outsourcing business, we employ a major subcontractor on three of our largest contracts. Revenues related to the major subcontracting relationships were $16.0 million and $5.5 million for the years ended December 27, 2002 and December 28, 2001, respectively.
Gross Profit. Gross profit decreased to $96.3 million for the year ended December 27, 2002, a decrease of 3.9% from $100.3 million for the year ended December 28, 2001. This was due to a significant shift in revenue mix from our healthcare and life sciences business units to our outsourcing business unit, which is at a lower margin. Gross profit as a percentage of net revenues decreased from 37.6% for the year ended December 28, 2001 to 35.9% for the year ended December 27, 2002. Our gross profit percentage in healthcare and life sciences increased from 42.6% to 43.9% due to improved consultant utilization and lower revenue writedowns, while our outsourcing gross profit percentage declined from 20.5% to 19.7% due to the higher proportion of subcontractor revenues within our outsourcing revenues.
Selling Expenses. Selling expenses decreased to $28.0 million for the year ended December 27, 2002, a decrease of 8.6% from $30.6 million for the year ended December 28, 2001 due to staff and cost reductions. Selling expenses as a percentage of net revenues decreased from 11.5% for the year ended December 28, 2001 to 10.4% for the year ended December 27, 2002.
General and Administrative Expenses. General and administrative expenses decreased to $57.5 million for the year ended December 27, 2002, a decrease of 14.9% from $67.5 million for the year ended December 28, 2001, due to cost reductions and the elimination of $2.0 million of goodwill amortization. Additionally, fiscal year 2001 general and administrative expense included a $2.1 million bad debt writeoff. General and administrative expenses as a percentage of net revenues decreased from 25.3% for the year ended December 28, 2001 to 21.4% for the year ended December 27, 2002, due to the reduction in costs.
Restructuring, Severance, and Impairment Charges. Restructuring, severance, and impairment charges were $7.8 million for the year ended December 27, 2002, compared to $13.5 million for the year ended December 28, 2001. Restructuring, severance, and impairment charges for the year ended December 27, 2002 included approximately $4.0 million of severance costs related to a reduction in staff of approximately 153 people, and approximately $3.8 million related to facility downsizing. Restructuring, severance, and impairment charges for the year ended December 28, 2001 consisted of $6.4 million of severance costs, approximately $3.1 million related to facility downsizing, and $4.0 million for the impairment of goodwill related to the restructuring of our technology services group within our healthcare business unit.
Interest Income, Net. Interest income, net of interest expense, decreased to $0.9 million for the year ended December 27, 2002 from $1.4 million for the year ended December 28, 2001. Despite our invested cash balances being somewhat higher, interest income was reduced due to lower interest rates. Interest income net of interest expense as a percentage of net revenues decreased to 0.3% for the year ended December 27, 2002 from 0.5% for the year ended December 28, 2001.
Other Expense, Net. Other expense decreased slightly to $0.6 million for the year ended December 27, 2002 compared to $0.7 million for the year ended December 28, 2001.
Income Taxes. The provision for income taxes was 42% for the year ended December 27, 2002, compared to a 35.3% benefit reported for the year ended December 28, 2001. The benefit rate in the prior year was reduced due to the nondeductibility of a portion of the goodwill impairment taken in that year.
Quarterly Financial Results
The following tables set forth certain unaudited statements of operations data for the eight quarters ended December 26, 2003, as well as such data expressed as a percentage of our net revenues for the periods indicated. This data has been derived from unaudited financial statements that, in the opinion of our management, include all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation of such information when read in conjunction with our annual audited consolidated financial statements and the notes thereto. The operating results for any quarter are not necessarily indicative of the results for any future period.
Unaudited Quarterly Statements of Operations
(in thousands, except per share data)
Unaudited Quarterly Statements of Operations
(in thousands, except per share data)
As a Percentage of Net Revenues
A substantial portion of our expenses, particularly depreciation, office rent, and occupancy costs, and, in the short run, personnel and related costs are relatively fixed. Our quarterly operating results may vary significantly in the future depending on a number of factors, many of which are outside our control. These factors may include, but are not limited to:
•The reduction in size, delay in commencement, interruption, or termination of one or more significant engagements or assignments;
•Fluctuations in consultant hiring and utilization;
•The use of offsite and offshore resources on our engagements;
•The ability to incorporate use of variable labor staffing into our projects;
•The loss of key personnel and other employees;
•The loss of one or more significant clients in any of our business segments;
•The unpredictability of engaging new clients and additional assignments from existing clients;
•Increased competition and pricing pressures;
•Timing and collection of fees and payments;
•Write-offs of client billings;
•Consolidation of, and subsequent reduction in the number of, healthcare providers;
•The number, timing, and contractual terms of significant client engagements;
•Fluctuations in market demand for our services, consultant hiring, and utilization;
•Delays or increased expenses incurred in connection with existing assignments;
•Variations in the timing of expenses;
•Changes in pricing policies by us or our competitors;
•Changes in our business strategies;
•Variability in the number of business days within a quarter;
•The timing of certain general and administrative expenses; and
•International currency fluctuations.
Due to the foregoing factors, quarterly revenues and operating results are not predictable with any significant degree of accuracy. In particular, the timing between initial client contract and fulfillment of the criteria necessary for revenue recognition can be lengthy and unpredictable, and revenues in any given quarter can be materially adversely affected as a result of such unpredictability. Business practices of clients, such as deferring commitments on new assignments until after the end of fiscal periods, could require us to maintain a significant number of under-utilized consultants, which could have a material adverse effect on our business, financial condition, and results of operations.
We typically experience a lower number of billable days in certain quarters of the year, particularly the fourth quarter when many of our employees typically take vacation during the December holidays. In fiscal year 2004, we will have an extra week in the fourth quarter due to our fiscal calendar. Variability in the number of billable days may also result from other factors such as vacation days, sick time, paid and unpaid leave, inclement weather, and holidays, all of which could produce variability in our revenues and costs. In the event of any downturn in potential clients' businesses or the economy in general, planned utilization of our services may be deferred or canceled, which could have a material adverse effect on our business, financial condition, and results of operations. Based on the preceding
factors, we may experience a shortfall in revenues or earnings from expected levels or otherwise fail to meet expectations of securities analysts or the market in general, which could have a material adverse effect on the market price of our common stock.
Liquidity and Capital Resources
During the year ended December 26, 2003, we generated cash flow from operations of $9.4 million. During the year ended December 26, 2003, we used approximately $11.2 million to acquire three companies (see Note I of the Notes to Consolidated Financial Statements) and $5.0 million of cash to purchase property and equipment, primarily computer and related equipment. We also used $1.86 million to purchase the 4.9% minority interest that the University of Pennsylvania Health System had in FCG Management Services, LLC. At December 26, 2003, we had cash and marketable investments available for sale of $62.6 million, compared to $67.3 million at December 27, 2002.
We have a revolving line of credit, under which we are allowed to borrow up to $7.0 million at an interest rate of the prevailing prime rate with an expiration of May 1, 2004. There was no outstanding balance under the line of credit at December 26, 2003. Due to our net loss at December 26, 2003, we are out of compliance with certain bank covenants contained in the line of credit agreement. However, we received a waiver for such non-compliance subsequent to our fiscal year end.
On October 1, 2003, we entered into an unsecured loan agreement with White Plains Hospital Center requiring us to provide interest free financing of up to $4.08 million if our system implementation at the hospital results in an increase in the hospital's accounts receivable balance or days outstanding during a 150-day period following the completion of the system implementation. Any amounts borrowed during this 150-day period are payable 90 days after the borrowing date. We do not currently expect to make any loans under this agreement until early 2005, if at all. Since our loans are unsecured, we cannot guarantee that the hospital will repay our loans on a timely basis, if at all. If our loans are not repaid or repaid in a timely manner, our financial condition would be impacted negatively.
On February 27, 2004, we purchased 1,962,400 shares of common stock and 32,000 in-the-money options from David S. Lipson, a member of our board of directors, for a total purchase price of $15.1 million. In connection with the transaction, Mr. Lipson resigned from our board of directors and repaid indebtedness to us of $328,311. Our net cash payment to Mr. Lipson in the transaction was $14.8 million.
As of December 26, 2003, the following table summarizes our contractual and other commitments (in thousands):
Management believes that our existing cash and investments, together with funds generated from operations, will be sufficient to meet operating requirements for at least the next twelve months. Our cash and investments are available for capital expenditures (which are projected at approximately $7.0 million for 2004), strategic investments, mergers and acquisitions, and other potential large-scale cash needs that may arise, including $2.4 million in cash that was paid on January 30, 2004 to purchase
the remaining 47.65% minority interest in FCG Infrastructure Services, Inc. (formerly Codigent Solutions Group, Inc.) that we did not already own.
Critical Accounting Policies and Estimates
The foregoing discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates, including those related to revenue recognition, cost to complete client engagements, valuation of goodwill and long-lived and intangible assets, accrued liabilities, income taxes, restructuring costs, idle facilities, litigation and disputes, and the allowance for doubtful accounts. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Our actual results may differ from our estimates and we do not assume any obligation to update any forward-looking information.
We believe the following critical accounting policies reflect our more significant assumptions and estimates used in the preparation of our consolidated financial statements.
Revenue Recognition, Accounts Receivable, and Unbilled Receivables
Revenues are derived primarily from information technology outsourcing services, consulting, and systems integration. Revenues are recognized on a time-and-materials, level-of-effort, percentage-of-completion, or straight-line basis. Before revenues are recognized, the following four criteria must be met: (a) persuasive evidence of an arrangement exists; (b) delivery has occurred or services rendered; (c) the fee is fixed and determinable; and (d) collectibility is reasonably assured. We determine if the fee is fixed and determinable and collectibility is reasonably assured based on our judgments regarding the nature of the fee charged for services rendered and products delivered and the collectibility of those fees. Arrangements range in length from less than one year to seven years. The longer-term arrangements are generally level-of-effort or fixed price arrangements.
Revenues from time-and-materials arrangements are generally recognized based upon contracted hourly billing rates as the work progresses. Revenues from level-of-effort arrangements are recognized based upon a fixed price for the level of resources provided. Revenues from fixed fee arrangements for consulting and systems integration work are generally recognized on a rate per hour or percentage-of-completion basis. We maintain, for each of our fixed fee contracts, estimates of total revenue and cost over the contract term. For purposes of periodic financial reporting on the fixed price consulting and system integration contracts, we accumulate total actual costs incurred to date under the contract. The ratio of those actual costs to our then-current estimate of total costs for the life of the contract is then applied to our then-current estimate of total revenues for the life of the contract to determine the portion of total estimated revenues that should be recognized. We follow this method because reasonably dependable estimates of the revenues and costs applicable to various stages of a contract can be made.
Revenues recognized on fixed price consulting and system integration contracts are subject to revisions as the contract progresses to completion. If we do not accurately estimate the resources required or the scope of the work to be performed, do not complete our projects within the planned periods of time, or do not satisfy our obligations under the contracts, then profit may be significantly and negatively affected or losses may need to be recognized. Revisions in our contract estimates are reflected in the period in which the determination is made that facts and circumstances dictate a
change of estimate. Favorable changes in estimates result in additional revenues recognized, and unfavorable changes in estimates result in a reduction of recognized revenues. Provisions for estimated losses on individual contracts are made in the period in which the loss first becomes known. Some contracts include incentives for achieving either schedule targets, cost targets, or other defined goals. Revenues from incentive type arrangements are recognized when it is probable they will be earned.
As of the beginning of fiscal year 2003, we adopted EITF 00-21, "Accounting for Revenue Arrangements with Multiple Deliverables," which addresses how to account for arrangements that involve the delivery or performance of multiple products, services, and/or rights to use assets. Revenue arrangements with multiple deliverables are divided into separate units of accounting if the deliverables in the arrangement meet the following criteria: (1) the delivered item has value to the customer on a stand-alone basis; (2) there is objective and reliable evidence of the fair value of undelivered items; and (3) delivery of any undelivered item is probable. Arrangement consideration is allocated among the separate units of accounting based on their relative fair values, with the amount allocated to the delivered item being limited to the amount that is not contingent on the delivery of additional items or meeting other specified performance conditions. We have created separate units of accounting on our existing outsourcing contracts based on the above criteria and will evaluate each future contract based on the same criteria. Generally, we have separated certain elements of our initial contract stages, where new systems are implemented and/or processes are reengineered into a new operating environment, from the ongoing operations of the contract. The primary impact of the adoption of this standard is that our ongoing contract operations, which constitute the vast majority of the revenues from outsourcing contracts, are now recorded on a straight-line basis over the life of the contract instead of on a percentage-of-completion basis in proportion to costs incurred. In general, we will report lower margins on existing contracts in the early years of a contract and anticipate reporting increased margins in the later years of a contract; however, no assurances can be made in that regard. The new method is no longer based on a consistent gross profit over the life of a contract. We will likely experience greater volatility of outsourcing earnings as contract revenues remain level and contract costs move up or down, or shift from one quarter to another.
On certain contracts, or elements of contracts, costs are incurred subsequent to the signing of the contract, but prior to the rendering of service and associated recognition of revenue. Where such costs are incurred and realization of those costs is either paid for upfront or guaranteed by the contract, those costs are deferred and later expensed over the period of recognition of the related revenue. At December 26, 2003, we had deferred $160,000 of such deferred costs.
As part of our on-going operations to provide services to our customers, incidental expenses, which are generally reimbursable under the terms of the contracts, are billed to customers. These expenses are recorded as both revenues and direct cost of services in accordance with the provisions of EITF 01-14, "Income Statement Characterization of Reimbursements Received for "Out-of-Pocket" Expenses Incurred," and include expenses such as airfare, mileage, hotel stays, out-of-town meals, and telecommunication charges.
Unbilled receivables represent revenues recognized for services performed that were not billed at the balance sheet date. The majority of these amounts are billed in the subsequent month. Unbillable amounts arising from contracts occur when revenues recognized exceed allowable billings in accordance with the contractual agreements. As of December 26, 2003, we had unbillable revenues included in current unbilled receivables of approximately $1.2 million, which were generally expected to be billed in the following year. In addition, we had a long-term account receivable at December 26, 2003, and December 27, 2002 of $5.8 million and $8.0 million, respectively, on a single major outsourcing contract with a term of seven years. The long-term receivable will be billed and collected over the remaining three years of the contract through contractual billings that will exceed the amounts to be earned as revenues.
Customer advances are comprised of payments from customers for which services have not yet been performed or prepayments against work in process. These unearned revenues are deferred and recognized as future contract costs are incurred and as contract services are rendered.
Allowance for Doubtful Accounts
We maintain an allowance for doubtful accounts for estimated losses resulting from the inability of our clients to make required payments. If the financial condition of our clients were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required. Management analyzes account receivables and historical bad debt, customer concentrations, credit worthiness, past collection experience, current economic trends, and changes in our customer payment terms when evaluating the adequacy of doubtful accounts.
Deferred Income Taxes
We account for income taxes in accordance with SFAS No. 109, "Accounting for Income Taxes," which requires recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns. Our net deferred tax assets have historically consisted primarily of the tax benefit related to restructuring costs for facility closures, supplemental executive retirement plan contributions, and other accrued liabilities such as accrued vacation pay, which are not deductible for tax purposes until paid. During fiscal year 2003, we have generated additional deferred tax assets for net operating loss carryforwards which were created by our pretax losses combined with the fact that we are outside the period it is allowable to carry back losses, and also for additional deferred tax assets related to the cumulative effect of our change in revenue recognition method on our outsourcing contracts. We use significant estimates in determining what portion of our deferred tax asset is more likely than not to be realized. Based on those estimates and taking into account our recent history of cumulative losses, we recorded a valuation allowance of $5.5 million in the fourth quarter of fiscal year 2003. Together with a full valuation allowance of $5.5 million we had already taken against the net operating loss carryforwards of companies we had acquired earlier in the year, we have a valuation allowance of $11.0 million against a total deferred tax asset of $21.6 million. Based on our belief that it is more likely than not that future taxable income will be sufficient to realize the remaining $10.6 million of deferred tax assets, we have not recorded a valuation allowance against those assets. However, there is no guarantee that our taxable income will be sufficient to realize such remaining net deferred tax assets, and we will continue to evaluate the potential need for an additional valuation allowance on an ongoing basis. Additionally, if the realization of a greater amount of our deferred tax assets in the future is considered more likely than not, we will reverse all or a portion of the existing valuation allowance at that time.
Goodwill and Intangible Assets
Under SFAS No 142, we no longer amortize our goodwill and are required to complete an annual impairment testing during the fourth quarter of each year. We believe that the accounting assumptions and estimates related to the annual goodwill impairment testing are critical because these can change from period to period. The impairment test requires us to forecast our future cash flows, which involves significant judgment. Our operating results have been negatively impacted by the worldwide economic conditions. Accordingly, if our expectations of future operating results change, or if there are changes to other assumptions, our estimate of the fair value of our reporting units could change significantly resulting in a goodwill impairment charge, which could have a significant impact on our consolidated financial statements. As of December 26, 2003, we have $15.5 million of goodwill and $3.8 million of intangible assets recorded on our balance sheet (see Note A of the Notes to Consolidated Financial Statements).
Recent Accounting Pronouncements
See Note A of the Notes to the Consolidated Financial Statements for a discussion on recent accounting pronouncements.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our financial instruments include cash and cash equivalents (i.e., short-term and long-term cash investments), accounts receivable, unbilled receivables, accounts payable, and a revolving line of credit. Only the cash and cash equivalents which totaled $62.6 million at December 26, 2003 present us with market risk exposure resulting primarily from changes in interest rates. Based on this balance, a change of one percent in the interest rate would cause a change in interest income for the annual period of approximately $0.6 million. Our objective in maintaining these investments is the flexibility obtained in having cash available for payment of accrued liabilities and acquisitions.
Our borrowings are primarily dependent upon the prevailing prime rate. As of December 26, 2003, we had no borrowings under our revolving line of credit and an available borrowing capacity of $7.0 million. See "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations-Liquidity and Capital Resources." The estimated fair value of borrowings under the revolving line is expected to approximate its carrying value.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Our annual consolidated financial statements are included in Item 15 of this report.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A.
ITEM 9A. CONTROLS AND PROCEDURES
We maintain disclosure controls and procedures 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 for timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Our disclosure controls and procedures are designed to provide a reasonable level of assurance of reaching our desired disclosure control objectives.
As required by SEC Rule 13a-15(b), we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the quarter covered by this report. Based on the foregoing, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective, and were operating at the reasonable assurance level.
There has been no change in our internal controls over financial reporting during our most recent fiscal quarter or fiscal year that has materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting.
As part of our year end audit reviews, we identified no material weaknesses in internal controls, but did identify one item that is considered a significant deficiency in internal controls.
Item: Lack of a control log and routine monitoring of the log for access to our systems.
Comment: We have implemented necessary controls to remediate any potential for a significant deficiency on a continuing basis. We believe the potential deficiency has not adversely affected, and is not reasonably likely to adversely affect, our ability to record, process, summarize and report financial information.
We have disclosed this item to our external auditors and the Audit Committee of our board of directors.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT
The information required by this item is incorporated by reference to material that will be filed with the Securities and Exchange Commission by April 23, 2004, either as part of our Proxy Statement for our 2004 Annual Meeting of Stockholders or as an amendment to this Form 10-K.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference to material that will be filed with the Securities and Exchange Commission by April 23, 2004 either as part of our Proxy Statement for our 2004 Annual Meeting of Stockholders or as an amendment to this Form 10-K.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated by reference to material that will be filed with the Securities and Exchange Commission by April 23, 2004, either as part of our Proxy Statement for our 2004 Annual Meeting of Stockholders or as an amendment to this Form 10-K.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated by reference to material that will be filed with the Securities and Exchange Commission by April 23, 2004, either as part of our Proxy Statement for our 2004 Annual Meeting of Stockholders or as an amendment to this Form 10-K.
ITEM 14.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES.
The information required by this item is incorporated by reference to material that will be filed with the Securities and Exchange Commission by April 23, 2004, either as part of our Proxy Statement for our 2004 Annual Meeting of Stockholders or as an amendment to this Form 10-K.
PART IV
ITEM 15.
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
FIRST CONSULTING GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
The accompanying notes are an integral part of these statements.
FIRST CONSULTING GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
The accompanying notes are an integral part of these statements.
FIRST CONSULTING GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY-
For the Three Years Ended December 26, 2003, December 27, 2002, and December 28, 2001
(in thousands)
The accompanying notes are an integral part of these statements.
FIRST CONSULTING GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
The accompanying notes are an integral part of these statements.
FIRST CONSULTING GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(in thousands)
The accompanying notes are an integral part of these statements.
FIRST CONSULTING GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A-DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Business
First Consulting Group, Inc. and its subsidiaries (the "Company") is a provider of information technology outsourcing and consulting services primarily for healthcare providers, payors, other healthcare organizations, and pharmaceutical/life science firms. The Company's services are designed to assist its clients in increasing operations effectiveness by reducing cost, improving customer service, and enhancing the quality of patient care. The Company provides this expertise to clients by assembling multi-disciplinary teams that provide comprehensive services. The Company's services and consultants are supported by internal research and a centralized information system, which provides real-time access to current industry and technology information, project methodologies, experiences, and tools.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company. All material intercompany accounts and transactions have been eliminated. In fiscal year 2001, the Company changed its fiscal year from a calendar year to a 52 or 53 week period ending on the last Friday of December.
Stock-Based Compensation
The Company accounts for stock-based employee compensation as prescribed by APB Opinion No. 25, "Accounting for Stock Issued to Employees," and has adopted the disclosure provisions of Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS No. 123"), and Statement of Financial Accounting Standards No. 148, "Accounting for Stock-Based Compensation-Transition and Disclosure-an amendment of SFAS No. 123" ("SFAS No. 148"). SFAS No. 123 requires pro forma disclosures of net income (loss) and net income (loss) per share as if the fair value based method of accounting for stock-based awards had been applied. Under the fair value based method, compensation cost is recorded based on the value of the award at the grant date and is recognized over the service period.
The following table presents pro forma net income (loss) had compensation costs been determined on the fair value at the date of grant for awards under the plan in accordance with SFAS 123. (in thousands, except per share data):
The fair value of the options granted under the plan in 2003, 2002, and 2001 calculated using the Black-Scholes pricing model were $5.74, $5.57, and $5.20 per share, respectively. The following assumptions were used in the Black-Scholes pricing model: expected dividend yield 0%, risk-free interest rate ranging from 2.75% to 7.5%, expected volatility factor of 1.0, and an expected life ranging from six to seven years. Pro forma net income (loss) reflects only options granted on or after January 1, 1995, and excludes the effect of a volatility assumption prior to the Company becoming publicly traded. Therefore, the full impact of calculating compensation expense for stock options under SFAS 123 is not reflected in the pro forma net income (loss) amounts presented above because compensation expense is reflected over the options' vesting period, and compensation expense for options granted prior to January 1, 1995 is not considered.
With regard to certain options or stock issued prior to the initial public offering, the Company recorded a charge to deferred compensation when it granted options to officers or employees at an exercise price which was less than the fair market value of such shares. Amounts recorded as deferred compensation are amortized over the appropriate service period based upon the original vesting schedule for such grants (generally ten years). Due to an acceleration of vesting which occurred on certain of these shares, a charge of $500,000 was taken in fiscal year 2000 to allow for shares which would have otherwise expired unexercised. For the years ended December 26, 2003, December 27, 2002, and December 28, 2001, compensation expense recognized for stock-based employee compensation related to the grant of below market options was $85,000, $41,000, and $194,000 respectively.
Basic and Diluted Net Income (Loss) Per Share
Basic net income (loss) per share is based upon the weighted average number of common shares outstanding. Diluted net income (loss) per share is based on the assumption that stock options were converted or exercised. Dilution is computed by applying the treasury stock method. Under this method, options are assumed to be exercised at the beginning of the period (or at the time of issuance, if later), and as if funds obtained thereby were used to purchase common stock at the average market price during the period. Stock options are not considered when computing diluted net loss per share as they are considered anti-dilutive.
The following represents a reconciliation of basic and diluted net income (loss) per share for the years ended December 26, 2003, December 27, 2002, and December 28, 2001 (in thousands, except per share data):
The effect of dilutive options excludes 4,770,664 anti-dilutive options with exercise prices ranging from $0.72 to $27.75 per share in 2003, 2,745,074 anti-dilutive options with exercise prices ranging from $8.51 to $27.75 per share in 2002, and 4,823,850 anti-dilutive options with exercise prices ranging from $0.82 to $27.75 per share in 2001.
Use of Estimates
In preparing financial statements in conformity with accounting principles generally accepted in the United States of America, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. On an on-going basis, the Company evaluates its estimates, including those related to revenue recognition, valuation of goodwill and long-lived and intangible assets, accrued liabilities, deferred income tax asset valuation allowances, restructuring costs, litigation and disputes, and the allowance for doubtful accounts.
The Company uses significant estimates in the calculation of its income tax benefit by estimating whether it will have sufficient future taxable income to realize its deferred tax assets. There can be no assurances that the Company's taxable income will be sufficient to realize such deferred tax assets and the Company will continue to evaluate its valuation allowance on an ongoing basis.
The Company maintains an allowance for doubtful accounts for estimated losses resulting from an inability of clients to make required payments. This allowance is based on account receivables, historical collection experience, current economic trends, and changes in the customer payment terms.
Cash and Cash Equivalents
The Company considers all highly liquid debt instruments purchased with an original maturity of three months or less to be cash equivalents.
Property and Equipment
Property and equipment are stated at cost. Depreciation and amortization are provided on a straight-line basis in amounts sufficient to relate the cost of depreciable assets to operations over their estimated service lives, which are three to five years for information systems equipment, and three to ten years for furniture and equipment. Leasehold improvements are amortized over the lives of the respective leases or the service lives of the improvements, whichever are shorter.
Upon sale or retirement of property and equipment, the costs and related accumulated depreciation are eliminated from the accounts, and any gain or loss on such disposition is reflected in the consolidated statements of operations. Expenditures for repairs and maintenance are charged to operations as incurred.
Revenue Recognition, Accounts Receivable, and Unbilled Receivables
Revenues are derived primarily from information technology outsourcing services, consulting, and systems integration. Revenues are recognized on a time-and-materials, level-of-effort, percentage-of-completion, or straight-line basis. Before revenues are recognized, the following four criteria must be met: (a) persuasive evidence of an arrangement exists; (b) delivery has occurred or services rendered; (c) the fee is fixed and determinable; and (d) collectibility is reasonably assured. The Company determines if the fee is fixed and determinable and collectibility is reasonably assured based on its judgments regarding the nature of the fee charged for services rendered and products delivered and the collectibility of those fees. Arrangements range in length from less than one year to seven years. The longer-term arrangements are generally level-of-effort or fixed price arrangements.
Revenues from time-and-materials arrangements are generally recognized based upon contracted hourly billing rates as the work progresses. Revenues from level-of-effort arrangements are recognized based upon a fixed price for the level of resources provided. Revenues from fixed fee arrangements for consulting and systems integration work are generally recognized on a rate per hour or percentage-of-completion basis. The Company maintains, for each of its fixed fee contracts, estimates of total revenue and cost over the contract term. For purposes of periodic financial reporting on the fixed price consulting and system integration contracts, the Company accumulates total actual costs incurred to date under the contract. The ratio of those actual costs to its then-current estimate of total costs for the life of the contract is then applied to its then-current estimate of total revenues for the life of the contract to determine the portion of total estimated revenues that should be recognized. The Company follows this method because reasonably dependable estimates of the revenues and costs applicable to various stages of a contract can be made.
Revenues recognized on fixed price consulting and system integration contracts are subject to revisions as the contract progresses to completion. If the Company does not accurately estimate the resources required or the scope of the work to be performed, does not complete its projects within the planned periods of time, or does not satisfy its obligations under the contracts, then profit may be significantly and negatively affected or losses may need to be recognized. Revisions in the Company's contract estimates are reflected in the period in which the determination is made that facts and circumstances dictate a change of estimate. Favorable changes in estimates result in additional revenues recognized, and unfavorable changes in estimates result in a reduction of recognized revenues. Provisions for estimated losses on individual contracts are made in the period in which the loss first becomes known. Some contracts include incentives for achieving either schedule targets, cost targets, or other defined goals. Revenues from incentive type arrangements are recognized when it is probable they will be earned.
As of the beginning of fiscal year 2003, the Company adopted EITF 00-21, "Accounting for Revenue Arrangements with Multiple Deliverables," which addresses how to account for arrangements that involve the delivery or performance of multiple products, services, and/or rights to use assets. Revenue arrangements with multiple deliverables are divided into separate units of accounting if the deliverables in the arrangement meet the following criteria: (1) the delivered item has value to the customer on a stand-alone basis; (2) there is objective and reliable evidence of the fair value of undelivered items; and (3) delivery of any undelivered item is probable. Arrangement consideration is allocated among the separate units of accounting based on their relative fair values, with the amount allocated to the delivered item being limited to the amount that is not contingent on the delivery of additional items or meeting other specified performance conditions. The Company has created separate units of accounting on its existing outsourcing contracts based on the above criteria and will evaluate each future contract based on the same criteria. Generally, the Company has separated certain elements of its initial contract stages, where new systems are implemented and/or processes are reengineered into a new operating environment, from the ongoing operations of the contract. The primary impact of the adoption of this standard is that the Company's ongoing contract operations, which constitute the vast majority of the revenues from outsourcing contracts, are now recorded on a straight-line basis over the life of the contract instead of on a percentage-of-completion basis in proportion to costs incurred. In general, the Company will report lower margins on existing contracts in the early years of a contract and anticipate reporting increased margins in the later years of a contract; however, no assurances can be made in that regard. The new method is no longer based on a consistent gross profit over the life of a contract. The Company will likely experience greater volatility of outsourcing earnings as contract revenues remain level and contract costs move up or down, or shift from one quarter to another.
On certain contracts, or elements of contracts, costs are incurred subsequent to the signing of the contract, but prior to the rendering of service and associated recognition of revenue. Where such costs
are incurred and realization of those costs is either paid for upfront or guaranteed by the contract, those costs are deferred and later expensed over the period of recognition of the related revenue. At December 26, 2003, the Company had deferred $160,000 of such deferred costs.
As part of the Company's on-going operations to provide services to its customers, incidental expenses, which are generally reimbursable under the terms of the contracts, are billed to customers. These expenses are recorded as both revenues and direct cost of services in accordance with the provisions of EITF 01-14, "Income Statement Characterization of Reimbursements Received for "Out-of-Pocket" Expenses Incurred," and include expenses such as airfare, mileage, hotel stays, out-of-town meals, and telecommunication charges.
Unbilled receivables represent revenues recognized for services performed that were not billed at the balance sheet date. The majority of these amounts are billed in the subsequent month. Unbillable amounts arising from contracts occur when revenues recognized exceed allowable billings in accordance with the contractual agreements. As of December 26, 2003, the Company had unbillable revenues included in current unbilled receivables of approximately $1.2 million, which were generally expected to be billed in the following year. In addition, the Company had a long-term account receivable at December 26, 2003, and December 27, 2002 of $5.8 million and $8.0 million, respectively, on a single major outsourcing contract with a term of seven years. The long-term receivable will be billed and collected over the remaining three years of the contract through contractual billings that will exceed the amounts to be earned as revenues.
Customer advances are comprised of payments from customers for which services have not yet been performed or prepayments against work in process. These unearned revenues are deferred and recognized as future contract costs are incurred and as contract services are rendered.
Income Taxes
The Company accounts for income taxes on the liability method, under which deferred tax liabilities (assets) are determined based on the differences between the financial statement and tax basis of assets and liabilities as measured by the enacted tax rates which will be in effect when these differences reverse. Deferred tax expense (benefit) is equal to the change in the deferred tax liability (asset) from the beginning to the end of the year. A current tax asset or liability is recognized for the estimated taxes refundable or payable for the current year.
Other Income/Expense
Other expenses, shown net in the accompanying statements of operations, primarily consist of the elimination of net income related to minority interests in consolidated subsidiaries. For the year ended December 26, 2003, such minority interests consist of certain minority partners' 19.9% interest in FCGMS, the Company's Health Delivery information technology outsourcing business, through September 26, 2003, and 47.65% interest in FCG Infrastructure Services, Inc. (formerly Codigent Solutions Group).
Credit Risks
Financial instruments that subject the Company to concentrations of credit risks consist primarily of cash and cash equivalents and billed and unbilled accounts receivable. The Company's clients are primarily involved in the healthcare and pharmaceutical industries. Concentrations of credit risk with respect to billed and unbilled accounts receivable are mitigated, to some degree, based upon the Company's credit evaluation process and the nature of its clients.
The healthcare and life sciences industries may be affected by economic factors which may impact accounts receivable. In addition, the Company had a long-term account receivable at December 26,
of $5.8 million on a single outsourcing contract, which will be paid down over a three year period. Management does not believe that any single customer or geographic area represents significant credit risk.
The Company's cash equivalents consist primarily of short-term money market deposits. The Company has deposited its cash equivalents with reputable financial institutions, from which the Company believes the risk of loss to be remote. The Company principally maintains its cash balances in financial institutions located in Long Beach, California, Atlanta, Georgia, and Philadelphia, Pennsylvania. These balances are insured by the Federal Deposit Insurance Corporation up to $100,000. At December 26, 2003, the Company had balances in these three institutions in excess of the insured amounts of approximately $4.4 million, $0.5 million and $0.3 million, respectively. The Company has not experienced any losses in such accounts and believes it is not exposed to any significant credit risk on its cash and cash equivalents.
Fair Value of Financial Instruments
Management believes the fair value of financial instruments approximates their carrying amounts. The carrying value of cash and cash equivalents, accounts receivable, accounts payable, and certain other liabilities approximate their estimated fair values due to the short-term nature of these instruments. Investments available for sale are carried at fair value. Management believes the fair values of stockholders' notes receivable approximate their carrying values based on current rates for instruments with similar characteristics.
The Company accounts for its marketable equity securities in accordance with SFAS 115, "Accounting for Certain Investments in Debt and Equity Securities." Management determines the appropriate classification of marketable equity securities at the time of purchase and re-evaluates such designation at each balance sheet date. All marketable equity securities held by the Company have been classified as available-for-sale and are carried at fair value, with unrealized holding gains and losses, net of taxes, reported as a component of accumulated other comprehensive loss on the consolidated balance sheets. Realized gains and losses are recorded based on the specific identification method.
Goodwill & Intangible Assets
Effective December 29, 2001, the Company adopted SFAS 141 and SFAS 142. SFAS 142 requires that goodwill and certain intangibles no longer be amortized, but instead are to be reviewed at least annually for impairment. Prior to the adoption of SFAS 141, goodwill was amortized over the estimated useful life.
Goodwill is evaluated for impairment annually, or if an event occurs or circumstances change that may reduce the fair value of the reporting unit below its book value. The impairment test is conducted at the reporting unit level by comparing the fair value of the reporting unit with its carrying value. Fair value is primarily determined by using a market approach valuation model based on multiples of revenue. If the carrying value exceeds the fair value, goodwill may be impaired. If this occurs, the fair value of the reporting unit is then allocated to its assets and liabilities in a manner similar to a purchase price allocation in order to determine the implied fair value of the reporting unit goodwill. This implied fair value is then compared with the carrying amount of the reporting unit goodwill, and if it is less, the Company would then recognize an impairment loss. In addition, the Company evaluates intangible assets with definite lives to determine whether adjustment to these amounts or estimated useful lives are required based on current events and circumstances.
The following summarizes the net income (loss) and earnings (loss) per share for the years ended December 26, 2003, December 27, 2002, and December 28, 2001, adjusted to exclude amortization expense of goodwill, net of taxes (in thousands, except per share data):
The changes in the net carrying amounts of goodwill for the years ended December 27, 2002 and December 26, 2003 are as follows (in thousands):
As of December 26, 2003, the Company had the following acquired intangible assets recorded (in thousands):
The following table summarizes the estimated annual pretax amortization expense for these assets (in thousands):
Foreign Currency Translation
Assets and liabilities of the Company's foreign affiliates are translated at current exchange rates, while revenues and expenses are translated at average rates prevailing during the year. Translation adjustments are reported as a component of other comprehensive income.
Reclassifications
Certain reclassifications have been made to the 2002 financial statements to conform to the 2003 presentation.
Recent Accounting Pronouncements
In June 2002, the Financial Accounting Standards Board ("FASB") issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities." SFAS No. 146 addresses accounting 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." SFAS No. 146 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. SFAS No. 146 is effective for exit or disposal activities that are initiated after December 31, 2002. SFAS No. 146 affected the Company's restructuring charges in the second, third, and fourth quarters of fiscal year 2003, as it accrued only severance related to employees terminated during the quarter, and not any severance related to planned future actions.
In November 2002, the EITF reached a consensus on Issue 00-21, titled "Accounting for Revenue Arrangements with Multiple Deliverables," which addresses how to account for arrangements that involve the delivery or performance of multiple products, services, and/or rights to use assets. Revenue arrangements with multiple deliverables are divided into separate units of accounting if the deliverables in the arrangement meet the following criteria: (1) the delivered item has value to the customer on a standalone basis; (2) there is objective and reliable evidence of the fair value of undelivered items; and (3) delivery of any undelivered item is probable. Arrangement consideration should be allocated among the separate units of accounting based on their relative fair values, with the amount allocated to the delivered item being limited to the amount that is not contingent on the delivery of additional items or meeting other specified performance conditions. The new standard was required to be adopted for all new applicable revenue arrangements no later than the third quarter of 2003.
The Company elected to apply the new standard to all existing outsourcing arrangements impacted by EITF 00-21 and record to earnings the resulting cumulative effect as a change in accounting principle. The adoption of EITF 00-21 resulted in a non-cash charge, net of tax, of $2.6 million, or $0.11 per share, in the first quarter of 2003.
The following table illustrates the effect on net income (loss) and net income (loss) per share as if the change in accounting principle had been adopted in the prior years (in thousands, except per share data):
In November 2002, the FASB issued Interpretation No. 45 ("FIN 45"), "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees and Indebtedness of Others." FIN 45 elaborates on the disclosures to be made by the guarantor in its interim and annual financial statements about its obligations under certain guarantees that it has issued. It also requires that a guarantor recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. The initial recognition and measurement provisions of this interpretation are applicable on a prospective basis to guarantees issued or modified after December 31, 2002; while the provisions of the disclosure requirements are effective for financial statements of interim or annual reports ending after December 15, 2002. At December 26, 2003, the Company had no guarantees outstanding.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based Compensation-Transition and Disclosure." SFAS No. 148 amends SFAS No. 123, "Stock-Based Compensation," to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, SFAS No. 148 amends the disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. The disclosure provisions of SFAS No. 148 are effective for fiscal years ending after December 15, 2002. At this time, the Company intends to continue to account for stock-based compensation to its associates using the methods prescribed by Accounting Principles Bulletin (APB) Opinion No. 25, and related interpretations. The Company has made certain disclosures required by SFAS No. 148 in its Notes to Consolidated Financial Statements.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of Variable Interest Entities" ("FIN 46") which changes the criteria by which one company includes another entity in its consolidated financial statements. FIN 46 requires a variable interest entity to be consolidated by a company if that company is subject to a majority of the risk of loss from the variable interest entity's activities or entitled to receive a majority of the entity's residual returns or both. The consolidation requirements of FIN 46 apply immediately to variable interest entities created after January 31, 2003, and apply in the first fiscal period beginning after June 15, 2003, for variable interest entities created prior to February 1, 2003. The Company has not entered into any transactions or other arrangements which it believes would be considered variable interest entities.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity." SFAS No. 150 establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. It
requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances). Many of these instruments were previously classified as equity. The guidance in SFAS No. 150 is generally effective for all financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. The Company does not believe that the adoption of SFAS No. 150 will have a material impact on its consolidated financial statements.
In December 2003, the Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin No. 104 (SAB 104), "Revenue Recognition", which supersedes SAB 101, "Revenue Recognition in Financial Statements." SAB 104's primary purpose is to rescind the accounting guidance contained in SAB 101 related to multiple-element revenue arrangements that was superseded as a result of the issuance of EITF 00-21, "Accounting for Revenue Arrangements with Multiple Deliverables" and to rescind the SEC's related "Revenue Recognition in Financial Statements Frequently Asked Questions and Answers" issued with SAB 101 that had been codified in SEC Topic 13, "Revenue Recognition." While the wording of SAB 104 has changed to reflect the issuance of EITF 00-21, the revenue recognition principles of SAB 101 remain largely unchanged by the issuance of SAB 104, which was effective upon issuance. The adoption of SAB 104 did not have a material effect on the Company's financial position or results of operations.
NOTE B-INVESTMENTS
For purposes of reporting, cash and cash equivalents include cash and interest-earning deposits or securities with original maturities of three months or less. At December 26, 2003, the Company has $33.8 million in short-term investments and $2.0 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. Additionally, the Company has $1.2 million of non-marketable equity investments, valued at the lower of cost or estimated fair value, which are included in long-term investments. Available-for-sale securities are measured at fair value, with net unrealized gains and losses reported in equity as a component of other comprehensive income. The amortized cost, unrealized gains and losses, and fair values of the Company's available-for-sale securities (which are marketable fixed income securities) held at December 26, 2003 and December 27, 2002 are summarized as follows: (in thousands)
The following table lists the maturities of fixed income securities held at December 26, 2003: (in thousands)
NOTE C-INCOME TAXES
The Company has established a valuation allowance against its deferred tax assets due to the uncertainty surrounding the realization of such assets. Management periodically evaluates the recoverability of the deferred tax assets. At such a time as it is determined that it is more likely than not that the deferred tax assets are realizable, the valuation allowance will be reduced.
The provision for income taxes consists of the following (in thousands):
Deferred tax assets and deferred tax liabilities consist of the following (in thousands):
As a result of the following items, the total provision for income taxes was different from the amount computed by applying the statutory U.S. federal income tax rate to earnings before income taxes:
As of December 26, 2003, the Company has net operating loss carryforwards for federal and state purposes of approximately $14.0 million and $11.1 million, respectively. The net operating loss carryforwards for federal purposes begin expiring in 2022, and the net operating loss carryforwards for state purposes begin expiring in 2010.
On February 12, 2003, the Company acquired Paragon Solutions, Inc. At the date of the acquisition, in addition to net operating loss carryforwards noted above, Paragon Solutions, Inc. had federal and state net operating losses of approximately $11.5 million. The net operating losses will begin to expire in 2018 for federal purposes and in 2013 for state purposes.
Paragon Solutions, Inc. has foreign subsidiaries in India and Vietnam. For tax purposes, these two entities report their earnings separately in India and Vietnam where they operate. Based on the fact that the foreign entities have been granted tax holidays by the Indian and Vietnamese tax authorities and that both Indian and Vietnamese subsidiaries' pre-tax income is immaterial, no tax provision has been made for the Vietnam and India operations. The tax holidays will expire in 2005 for Vietnam and 2008 for India.
On May 30, 2003, the Company acquired Coactive Systems Corporation. At the date of the acquisition, Coactive Systems Corporation had federal and state net operating losses of approximately $2.1 million. Its net operating losses will begin to expire in 2019 for federal purposes and in 2014 for state purposes.
The utilization of net operating losses of the subsidiaries acquired during the year may be subject to substantial limitations due to the ownership change limitations under the provisions of Internal Revenue Code Section 382 and similar state provisions. Realization of any of these is uncertain and the Company has not ascribed any value to them.
NOTE D-NOTES RECEIVABLE-STOCKHOLDERS
Notes receivable from stockholders consist of loans provided to corporate officers ("officers") at the level of vice president and above for the purchase of shares of common stock. Under a 1994 plan, through November 2000, the Company required each of its officers to purchase and hold a specific minimum number of shares of common stock. In December 2000, the Company eliminated its requirement that all vice presidents purchase and hold shares of FCG common stock, based on legal and other factors including a lawsuit by a former employee alleging that such requirement was not legally permissible. Certain officers elected to retain the shares they had acquired under the Plan prior to December 2000 and continue to be obligated under the related promissory note.
Notes received in exchange for common stock were classified as a reduction of stockholders' equity. In addition, prior to the Company's initial public offering in February 1998, the Company provided certain officers with notes to cover the taxes related to the exercise of below-market stock options. Such notes were classified as a non-current asset. At December 31, 1997, all below market stock options had been exercised and no below market options have been issued since.
Notes are non-interest bearing and have been discounted using imputed annual interest rates from 4.94% to 6.36%. The notes are secured by each officer's holdings of FCG common stock and are full-recourse. All loans are due in ten years. In addition, the Company generally requires participants to pay, each year, the greater of 10% of the original loan amount or 50% of the after tax amount of any annual bonus received by them to repay outstanding amounts of the notes. Stockholders' notes receivable received in exchange for common stock were $672,000 and $1,454,000 as of December 26, 2003 and December 27, 2002, respectively. Discount for imputed interest on these notes receivable was $184,000 and $378,000 as of December 26, 2003 and December 27, 2002, respectively. Amortization of deferred compensation resulting from discounting the face value of non-interest bearing notes issued to the Company by its officers for the purchase of shares of common stock was $75,000 and $65,000 for the years ended December 26, 2003 and December 27, 2002, respectively. Stockholders' notes receivable related to advances to officers for payment of taxes associated with stock option exercises were $462,000 and $707,000 as of December 26, 2003 and December 27, 2002, respectively. Discount for imputed interest on these notes receivable was $30,000 at December 26, 2003, and $50,000 as of December 27, 2002.
At December 26, 2003, there were 11 remaining promissory notes secured by 1,161,248 shares of FCG common stock. The promissory notes are due in full at various dates in 2005 through 2007, with the exception of one note where the final installment is due in June 2010. During fiscal year 2003, the Company permitted certain officers to use 75,393 shares of FCG common stock at current market value to pay off $378,000 of these loans. The shares used to pay loan amounts are retired upon completion of the payment.
NOTE E-SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN
On January 1, 1994, the Company adopted the Supplemental Executive Retirement Plan (the "SERP"). The SERP was amended on January 1, 1996, July 1, 1998, and December 16, 2003. The SERP is administered by the Board of Directors or a committee appointed by the Board of Directors. Each of the Company's vice presidents participates in the SERP. The Board of Directors or a committee appointed by the Board of Directors may also designate other officers for participation in the compensation reduction portion of the SERP.
Participants may make fully vested compensation reduction contributions to the SERP, subject to a maximum deferral of 50% of annual base salary and 100% bonus or incentive pay. The Company may make a voluntary "FCG contribution" for any year in an amount determined by the Board to the account of SERP participants. FCG contributions vest 25% for each year of service as a vice president after the first year, resulting in full vesting after five years of such service, provided that FCG
contributions fully vest upon a change in control of the Company or upon a participant's death, disability, or attainment of age 65. Company contributions to the SERP were $600,000, $870,000, and $400,000 for the years ended December 26, 2003, December 27, 2002, and December 28, 2001, respectively.
The contributions to the SERP are invested by the Company in variable life insurance contracts. Management believes that the participants' account balance, cash surrender value of life insurance, and death benefits will be sufficient to satisfy the Company's obligations under the SERP.
NOTE F-RESTRUCTURING, SEVERANCE AND IMPAIRMENT CHARGES
Restructuring, severance, and impairment costs of $11,681,000, $7,818,000, and $13,511,000 were incurred in 2003, 2002, and 2001, respectively. The costs incurred in 2003 included severance costs of $6.5 million for a reduction in staff of 153 people and facility downsizing of $5.2 million primarily related to the significant decline in the Company's Life Science business due to the reduction in custom software development services purchased by pharmaceutical clients. The costs incurred in 2002 included severance costs of $4.0 million related to a reduction in staff of 153 people and facility downsizing of $3.8 million due to the reorganization of the Life Sciences business unit and consolidation of the Company's software development centers into one organization. The costs incurred in 2001 included severance costs of $6.4 million related to a reduction in staff of approximately 250 people, facility downsizing of $3.1 million, and the impairment of $4.0 million of goodwill related to the restructuring of the technology services group within the healthcare business unit.
The restructuring liability activity through December 26, 2003 is summarized as follows (in thousands):
NOTE G-COMMITMENTS AND CONTINGENCIES
The Company leases its office facilities, certain office space, and living accommodations for consultants on short-term projects under operating leases that expire at various dates through 2009. At
December 26, 2003, the Company was obligated under non-cancelable operating leases, net of subleases in the amount of $3.2 million, with future minimum rentals as follows (in thousands):
Rent expense aggregated $5,517,000, $6,102,000, and $6,553,000 for the years ended December 26, 2003, December 27, 2002, and December 28, 2001 respectively.
The Company is involved in various legal actions arising in the normal course of business. Management is of the opinion that the outcome of these matters will not have a material adverse effect on the Company's financial position or results of operation.
NOTE H-STOCK OPTIONS
On August 22, 1997, the Board adopted the 1997 Equity Incentive Plan (the "1997 Equity Plan") and the 1997 Non-Employee Directors' Stock Option Plan (the "1997 Directors' Plan"). In June 2000, the stockholders approved an amendment to increase the number of shares issuable under the 1997 Equity Plan to 4,500,000 shares, and in June 2001, the stockholders approved an amendment to increase the number of shares issuable under the 1997 Equity Plan to 5,250,000. Stock awards issued under the 1997 Equity Plan generally vest over a four or five-year term from the date of grant. Under the 1997 Equity Plan, the Company granted employees 857,250, 1,459,000, and 570,250 options to purchase common stock at an exercise price equal to the market price of common stock on the date of grant in the years ended December 26, 2003, December 27, 2002, and December 28, 2001, respectively. As of December 26, 2003, December 27, 2002, and December 28, 2001, 2,191,688, 1,726,700, and 1,449,962 options were exercisable, respectively. The Company had no stock appreciation rights issued or outstanding for the years ended December 26, 2003 and December 27, 2002.
The 1997 Directors' Plan provides for non-discretionary stock option grants to directors of the Company who are not employed by the Company or an affiliate. Each person who, on the date of adoption of the 1997 Directors' Plan, was then a non-employee director of the Company automatically received an option to purchase 20,000 shares of common stock. Each person thereafter elected as a non-employee director receives an option to purchase 4,000 shares of common stock when first elected. On January 1 of each year, each person who is a non-employee director is automatically granted an additional option to purchase 4,000 shares of common stock. All options issued under the 1997 Directors' Plan have an exercise price equal to the market price of common stock on the date of grant and expire ten years after the date of grant. The initial 20,000 share grants vest over five years following the date of grant; all 4,000 share grants vest over the 12 months following the date of grant. Under the plan, in the years ended December 26, 2003, December 27, 2002, and December 28, 2001, respectively, the Company granted 32,000, 32,000, and 32,000 options to purchase common stock at an exercise price equal to the market price of the common stock on date of grant. These options vest over the twelve months following the date of grant. As of December 26, 2003, 222,928 of these options are exercisable.
Under the Company's amended 1989 Stock Option Plan (a plan carried over from the Company's 1998 merger with ISCG), the Company may grant incentive stock options to employees and
nonqualified stock options to employees and directors. All options are granted at not less than fair market value at the date of grant, vest over 5 years and generally expire ten years from the date of grant. The number of shares of common stock authorized for issuance under the plan is 1,270,500 shares. Under the plan, the Company granted employees no stock options in the fiscal years ended December 26, 2003, December 27, 2002, or December 28, 2001. As of December 26, 2003, December 27, 2002, and December 28, 2001, 155,577, 257,472 and 259,558 of the options were exercisable, respectively.
On August 4, 1999, the Company's Board of Directors adopted the 1999 Non-Officer Equity Incentive Plan (the "1999 Non-Officer Plan"). The Plan authorizes the issuance of up to 1,000,000 shares of common stock pursuant to nonstatutory stock options, stock bonuses, rights to purchase restricted stock, and stock appreciation rights to employees who are not officers of the Company. Stock options granted under the Plan are granted at fair market value of FCG common stock as of the date of grant, and generally vest over four or five years, and expire ten years following the date of grant. Under the Plan, the Company granted non-officer employees 25,500 and 902,200 options to purchase common stock at an exercise price equal to the market price of the common stock on the date of grant in the years ended December 28, 2001, and December 31, 2000 respectively. There were no such options granted in the years ended December 26, 2003 or December 27, 2002. As of December 26, 2003, December 27, 2002, and December 28, 2001, a total of 401,139, 376,028, and 285,737 of the options under the 1999 Non-Officer Plan were exercisable, respectively.
In May 2000, the Board of FCG Doghouse ("FCGDH"), then a 94% owned subsidiary of FCG, adopted the FCG Doghouse Equity Incentive Plan (the "DH Plan") and authorized the issuance of up to 7,500,000 shares. Stock awards issued under the DH Plan vest over four years from the date of grant. Under the DH Plan, the Company granted employees 4,707,018 options to purchase common stock at an exercise price equal to the appraised value ($0.78 per share) of FCGDH common stock on the date of grant in the year ended December 31, 2000. On July 1, 2001, Doghouse distributed all of its assets and assigned all of its employees to the Company. In connection with this transaction, the Company assumed the DH Plan and all options granted or available for grant under that plan at an exchange rate of 0.078, or 78 shares of the Company's common stock for each 1,000 shares available for issuance under the DH Plan. The exchange rate was based on a three-day trading average of the Company's common stock following its public announcement of its first fiscal quarter financial results and a per share value for Doghouse as negotiated between the Company and the former minority stockholder of Doghouse. The total number of shares of the Company's common stock available for issuance under the DH Plan is 585,000. As of December 26, 2003, December 27, 2002, and December 28, 2001, a total of 68,916, 148,451, and 103,450 of the options under the DH Plan were exercisable, respectively.
In February 2003, the Company assumed the Paragon Solutions, Inc. Incentive Stock Plan (the "Paragon Plan") and all options then outstanding under the Paragon Plan. Each option the Company assumed is exercisable into the Company's common stock upon the same terms and conditions as under the Paragon Plan, except that (i) the number of shares of the Company's common stock subject to each Paragon Plan option was determined by multiplying the number of shares of Paragon common stock subject to the Paragon option immediately prior to the effective time of the acquisition by 0.5014 and (ii) the per share exercise price of the assumed option was determined by dividing the per share exercise price in effect immediately prior to the effective time of the Paragon acquisition under the Paragon Plan option by 0.5014. As a result of the assumption of the Paragon Plan, a total of 49,540 shares of the Company's common stock were reserved for issuance under the Paragon Plan. Option awards under the Paragon Plan generally vest over a four year period, subject to certain acceleration provisions that applied upon the closing of the Company's acquisition of Paragon. No further option grants were made, or are expected to be made, under the Paragon Plan after the closing of the
acquisition. As of December 26, 2003, a total of 30,876 of the options were exercisable under the Paragon Plan.
A summary of stock option transactions is as follows:
At December 26, 2003, December 27, 2002, and December 28, 2001, 3,071,138, 2,720,326, and 2,164,251 options were exercisable, respectively, at weighted average exercise prices of $8.73, $9.04, and $9.13, respectively. The following table summarizes information about stock options outstanding at December 26, 2003:
NOTE I-BUSINESS COMBINATIONS
Codigent Solutions Group, Inc.
On May 31, 2002, the Company acquired a controlling interest of 52.35% in Codigent Solutions Group, Inc., renamed FCG Infrastructure Services, Inc. (FCGIS), a provider of value added information technology solutions to hospitals and other healthcare delivery organizations, for
$2.6 million. The acquisition was accounted for using the purchase method of accounting and the allocation of the price is as follows (in thousands):
The $2.1 million of excess over book value has been allocated between goodwill and intangible assets of $1.6 million and $0.5 million, respectively.
Paragon Solutions, Inc.
On February 12, 2003, the Company acquired 100% of the equity of Paragon Solutions, Inc. (Paragon), a U.S. based provider of onshore and offshore software development services which became part of the life sciences segment. The Company initially issued 600,500 unregistered shares of common stock and paid cash consideration of approximately $0.2 million to Paragon shareholders who elected cash payment. Since the acquisition, the Company has recovered 39,285 shares of its unregistered common stock from an escrow account to compensate it for certain undisclosed liabilities and expenses of Paragon. The Company also agreed to reserve an additional 49,540 shares of its common stock for issuance upon the exercise of options that were initially issued under Paragon's stock incentive plans. Based upon a purchase price allocation analysis performed by an independent outside appraisal firm, intangible assets of approximately $1.0 million, related to contracts and agreements not to compete, and approximately $8.3 million of goodwill have been recorded. In connection with the acquisition, the Company immediately repaid $7.7 million of debt assumed from Paragon. Additionally, the Company acquired approximately $0.4 million of cash as part of the acquisition.
The following table summarizes the estimated fair values of assets acquired and liabilities assumed as of February 12, 2003 in connection with the Paragon acquisition (in thousands):
Phyve Corporation
On February 20, 2003, the Company acquired the information security and connectivity software solution assets of Phyve Corporation for $1.4 million in cash. The following table summarizes the estimated fair values of assets acquired in connection with this acquisition (in thousands):
Coactive Systems Corporation
On May 30, 2003, the Company acquired 100% of the equity of Coactive Systems Corporation (Coactive) as an entry into the Business Process Outsourcing market. Coactive provides call center services and builds software customized for hospitals, health plans, and other healthcare organizations. The Company paid $0.6 million in cash to the shareholders of Coactive in the merger. In connection with the acquisition, the Company immediately repaid $1.5 million of debt assumed from Coactive.
The following table summarizes the estimated fair values of assets acquired and liabilities assumed as of May 30, 2003 in connection with the Coactive acquisition (in thousands):
The accounts of FCG Infrastructure Services, Inc., Paragon Solutions, Inc., Phyve Corporation, and Coactive Systems Corporation have been included in the accompanying financial statements for the period from their respective purchase dates through December 26, 2003. Pro forma information as if these acquisitions had occurred on January 1, 2001 has not been provided since such pro forma results do not differ materially from those reported in the accompanying financial statements.
Minority Interest Buy-out
On September 17, 2003, the Company acquired the 4.9% outstanding minority interest in FCG Management Services (FCGMS) held by the University of Pennsylvania Health Systems (UPHS) for $1.86 million in cash. Since the minority interest had been subject to a put and call arrangement, the Company had been accounting for it as a sales incentive and amortizing it over the life of the UPHS outsourcing contract term as a reduction of revenues in accordance with EITF 01-9, "Accounting for Consideration Given by a Vendor to a Customer". Since the put and call arrangement was extinguished early by the agreement of the parties, the unamortized amount of $0.6 million was recorded as a reduction of revenue in the third quarter of 2003.
On September 26, 2003, the Company acquired the 15.0% outstanding minority interest in FCGMS held by New York Presbyterian Hospital (NYPH). The transaction was accounted for as a purchase of minority interest in accordance with SFAS No. 141 "Business Combinations" in the third quarter of 2003. In consideration for NYPH's 15.0% interest in FCGMS, the Company issued 1,000,000 unregistered shares of its common stock. Of the approximately $5.1 million purchase price, approximately $0.5 million was applied to the existing minority interest liability on the Company's balance sheet. Based upon a purchase price allocation performed by an independent outside appraisal firm, intangible assets of approximately $2.3 million related to contracts, and goodwill of approximately $2.3 million were recorded.
As a result of the two transactions noted above, the Company and its subsidiaries now own 100% of FCGMS.
NOTE J-SHARE PURCHASE RIGHTS PLAN
In November 1999, the Company adopted a Share Purchase Rights Plan (the "Plan"). Terms of the Plan provide for a dividend distribution of one preferred share purchase right (a "Right") for each outstanding share of common stock as of December 10, 1999. Each Right, when exercisable, entitles the registered holder to purchase from the Company one one-hundredth of a share of Series A Junior Participating Preferred Stock, par value $.001 per share (the "Preferred Shares"), at a price of $50.00 per one one-hundredth of a Preferred Share.
Upon the occurrence of (i) a public announcement that a person, entity, or affiliated group has acquired beneficial ownership of 15% or more of the outstanding Common Shares (an "Acquiring Person") or (ii) generally 10 business days following the commencement of, or announcement of an intention to commence, a tender offer or exchange offer the consummation of which would result in any person or entity becoming an Acquiring Person, the Rights become exercisable. At that time, each holder of a Right, other than Rights beneficially owned by the Acquiring Person (which are void), will for a 60-day period have the right to receive upon exercise that number of shares of Company common stock having a market value of two times the exercise price of the Right. If the Company is acquired in a merger or other business combination transaction or 50% or more of its consolidated assets or earning power are sold to an Acquiring Person, its associates or affiliates, each holder of a Right will thereafter have the right to receive, upon the exercise thereof at the then current exercise price of the Right, that number of shares of common stock of the acquiring company which at the time of such transaction will have a market value of two times the exercise price of the Right.
The Rights generally may be redeemed by the Company at a price of $0.001 per Right, and the Rights expire on November 22, 2009. The terms of the Rights may be amended by the Board of Directors of the Company without the consent of the holders of the Rights, except that after the rights have been distributed, no such amendment may adversely affect the interest of the holders of the Rights excluding the interests of an Acquiring Person. Until a Right is exercised, the holder thereof, as such, will have no rights as a stockholder of the Company, including, without limitation, the right to vote or to receive dividends.
The Rights have certain anti-takeover effects. The Rights will cause substantial dilution to a person or group that attempts to acquire the Company on terms not approved by the Company's Board of Directors. The Rights should not interfere with any merger or other business combination approved by the Board of Directors since the Rights may be amended to permit such acquisition or redeemed by the Company at $0.001 per Right prior to the earliest of (i) the time that a person or group has acquired beneficial ownership of 15% or more of the Common Shares or (ii) the final expiration date of the Rights.
NOTE K-ASSOCIATE 401(K) AND STOCK PURCHASE PLANS
Under FCG's 401(k) plan ("401(k) Plan"), participants may elect to reduce their current compensation by up to the lesser of 15% of such compensation or the statutorily prescribed annual limit ($12,000 in 2003, $11,000 in 2002, and $10,500 in 2001) and have the amount of such reduction contributed to the 401(k) Plan. In addition, the Company may make contributions to the 401(k) Plan on behalf of participants. Company contributions may be matching contributions allocated based on each participant's compensation reduction contributions, discretionary profit sharing contributions allocated based on each participant's compensation, or allocated to some or all participants on a per capita basis.
The 401(k) Plan is intended to qualify under Section 401 of the Internal Revenue Code of 1986, as amended, so that contributions by employees or by the Company to the 401(k) Plan, and income earned thereon are not taxable until withdrawn and so that contributions by the Company, if any, will be deductible by the Company when made. Participants become vested in company contributions under two graded vesting schedules, so that matching and per capita contributions are fully vested after five years of service and profit sharing contributions are fully vested after seven years of service.
The Company allows its employees to individually determine whether they want to receive Company contributions in FCG stock or in cash. For those employees who choose to receive stock, the Company makes its matching contributions in cash, and the 401(k) Plan uses the cash to purchase FCG stock on the open market. Compensation expense for the 401(k) match was approximately $5.5 million, $5.4 million, and $5.7 million for the years ended December 26, 2003, December 27, 2002, and December 28, 2001, respectively.
Under the Company's Associate Stock Purchase Plan (the "ASPP"), employees can elect to have between 1% and 10% of their earnings withheld and later used to purchase these shares. The purchase price under the ASPP is generally a 15% discount from the lesser of the market price on the beginning or purchase date of the offering periods under the ASPP. In 2001, the Company's stockholders approved an increase to the number of authorized shares issuable under the ASPP to 1,000,000 and, in 2002, the stockholders approved an increase in the number of authorized shares issuable under the ASPP to 2,250,000. The Company has issued 152,921, 255,483, and 277,109 shares to employees under the ASPP in fiscal years 2001, 2002, and 2003, respectively. As of December 26, 2003, there were 1,224,666 authorized but unissued shares in the ASPP.
NOTE L-NOTES PAYABLE
The Company has a revolving line of credit, under which it is allowed to borrow up to $7.0 million at an interest rate of the prevailing prime rate with an expiration of May 1, 2004. There was no outstanding balance under the line of credit at December 26, 2003 or December 27, 2002. Due to the Company's net loss at December 26, 2003, it was out of compliance with certain bank covenants contained in the line of credit agreement. However, the Company received a waiver for such non-compliance subsequent to year end.
NOTE M-SEGMENT INFORMATION
In 2003, the Company had three reportable operating segments: healthcare (the delivery of consulting and systems integration services to health delivery, health plan, and government clients), life sciences (the delivery of consulting and systems integration services to pharmaceutical and other life sciences clients), and outsourcing (the delivery of outsourcing services to clients). The Company's segments were managed on an integrated basis in order to serve clients by assembling multi-disciplinary teams, which provide comprehensive services. The amount of revenues attributed to each segment is accounted for by splitting the revenues on each client engagement based upon the hourly rates charged to the client for the services of each segment. Costs are not transferred across segments.
The Company evaluated its segments' performance based on revenues and operating income. Selling and general and administrative expense (including corporate functions, occupancy related costs, depreciation, professional development, recruiting, and marketing), to some extent, were managed at the corporate level and allocated to each operating segment based on either net revenues and/or actual usage.
The following segment information is for the years ended December 26, 2003, December 27, 2002, and December 28, 2001. Fiscal year 2003 and 2002 expenses are broken out by segment through the income from operations line. It was impractical to restate the 2001 year on a similar basis. Fiscal year 2001 data is comparable to 2002 and 2003 at the gross profit level.
(in thousands):
The Company offers its services primarily in the United States and through subsidiaries in Europe and Asia. The following table reflects revenues and long-lived asset information by geographic segment (in thousands):
For the years ended December 26, 2003, December 27, 2002, and December 28, 2001, the Company did not generate revenues from any single foreign country that were significant to the Company's consolidated net revenues.
The Company earned greater than 10% of revenues from one outsourcing client for the years ended December 26, 2003, December 27, 2002, and December 28, 2001. Revenues from this client comprised 12%, or $33.0 million of total revenues in 2003, 12%, or $32.8 million of total revenues in 2001, and 11%, or $31.6 million of total revenues in 2001.
NOTE N-UNAUDITED QUARTERLY FINANCIAL DATA
In the fourth quarter of 2003, the Company reported a $3.6 million charge for restructuring, severance, and impairment charges. Additionally, the Company recorded a $5.5 million deferred tax asset valuation allowance.
NOTE O-SUBSEQUENT EVENTS
On February 27, 2004, the Company purchased 1,962,400 shares of common stock and 32,000 in-the-money options from David S. Lipson, a member of the Company's board of directors, for a total purchase price of $15.1 million. In connection with the transaction, Mr. Lipson resigned from the Company's board of directors and repaid indebtedness to the Company of $328,311. The Company's net cash payment to Mr. Lipson in the transaction was $14.8 million.
On January 30, 2004, the Company purchased the remaining 47.65% minority interest in FCGIS from five remaining individual shareholders for approximately $2.4 million in cash. Additionally, the Company deposited 591,328 shares of FCG Common Stock to an escrow account, with one-fourth of such shares to be released to those same shareholders in four separate increments upon successful fulfillment by FCGIS of certain revenue and profitability targets for the six month periods ended June 26, 2004, December 31, 2004, July 1, 2005, and December 30, 2005. If such targets are not fulfilled for any six month period, the shares in escrow for that period will revert to FCG.
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
First Consulting Group, Inc.
We have audited the accompanying consolidated balance sheets of First Consulting Group, Inc. and subsidiaries as of December 26, 2003 and December 27, 2002, and the related consolidated statements of operations, comprehensive income (loss), changes in stockholders' equity, and cash flows for each of the three years ended December 26, 2003, December 27, 2002, and December 28, 2001. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of First Consulting Group, Inc. and subsidiaries as of December 26, 2003 and December 27, 2002, and the consolidated results of its operations and its consolidated cash flows for each of the three years ended December 26, 2003, December 27, 2002, and December 28, 2001, in conformity with accounting principles generally accepted in the United States of America. We have also audited Schedule II of First Consulting Group, Inc. and subsidiaries for each of the three years ended December 26, 2003, December 27, 2002, and December 28, 2001. In our opinion, this schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
As discussed in Note A to the financial statements, the Company changed its method of accounting for outsourcing arrangements and its method of accounting for exit or disposal activities in 2003.
/s/ GRANT THORNTON LLP
Los Angeles, California
February 18, 2004 (except for Note O,
as to which the date is February 27, 2004)
SCHEDULE II-VALUATION AND QUALIFYING ACCOUNTS
(in thousands)
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, we have duly caused this Report to be signed on our behalf by the undersigned, thereunto duly authorized.
By:
/s/ LUTHER J. NUSSBAUM Luther J. Nussbaum,
Chief Executive Officer
Date: March 17, 2004
KNOW ALL PERSONS BY THESE PRESENTS, that each of the persons whose signature appears below hereby constitutes and appoints Luther J. Nussbaum and Walter J. McBride, each of them acting individually, as his attorney-in-fact, each with the full power of substitution, for him in any and all capacities, to sign any and all amendments to this Annual Report on Form 10-K, and to file the same, with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming our signatures as they may be signed by our said attorney-in-fact and any and all amendments to this Annual Report on Form 10-K.
Pursuant to the requirement of the Securities Exchange Act of 1934, this Report has been signed by the following persons on our behalf in the capacities and on the dates indicated.
Signature
Title
Date
/s/ LUTHER J. NUSSBAUM Luther J. Nussbaum
Chief Executive Officer and Chairman of the Board (Principal Executive Officer)
March 17, 2004
/s/ WALTER J. MCBRIDE Walter J. McBride
Executive Vice President and Chief Financial Officer (Principal Financial Officer)
March 17, 2004
/s/ PHILIP H. OCKELMANN Philip H. Ockelmann
Vice President and Controller (Principal Accounting Officer)
March 17, 2004
/s/ MICHAEL P. DOWNEY Michael P. Downey
Director
March 17, 2004
/s/ STEVEN HECK Steven Heck
Director
March 17, 2004
/s/ STEVEN LAZARUS Steven Lazarus
Director
March 17, 2004
/s/ STANLEY R. NELSON Stanley R. Nelson
Director
March 17, 2004
/s/ F. RICHARD NICHOL F. Richard Nichol
Director
March 17, 2004
/s/ STEPHEN E. OLSON Stephen E. Olson
Director
March 17, 2004
/s/ FATIMA J. REEP Fatima J. Reep
Director
March 17, 2004
/s/ JACK O. VANCE Jack O. Vance
Director
March 17, 2004
INDEX TO EXHIBITS
EXHIBIT
NUMBER
EXHIBIT
2.1.1
Agreement and Plan of Merger and Reorganization dated as of September 9, 1998, by and among FCG, Foxtrot Acquisition Sub, Inc., a Delaware corporation and a wholly-owned subsidiary of FCG, and Integrated Systems Consulting Group, Inc., a Pennsylvania corporation ("ISCG") (incorporated by reference to Exhibit 99.1 of FCG's Current Report on Form 8-K filed on September 22, 1998.
2.1.2
First Amendment to Agreement and Plan of Merger and Reorganization dated as of November 11, 1998 (incorporated by reference to Exhibit 99.1 of FCG's Current Report on Form 8-K filed on November 12, 1998) (See Appendix A-1 to the Report).
3.1
Certificate of Incorporation of FCG (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")).
3.2
Certificate of Designation of Series A Junior Participating Preferred Stock (incorporated by reference to Exhibit 99.1 to FCG's Current Report on Form 8-K dated December 9, 1999 (the "December 9, 1999 Form 8-K")).
3.3
Bylaws of FCG (incorporated by reference to Exhibit 3.3 to FCG's Form S-1).
4.1
Specimen Common Stock certificate (incorporated by reference to Exhibit 4.1 to FCG's Form S-1).
10.1
*
1997 Equity Incentive Plan (incorporated by reference to Exhibit 10.1 to FCG's Form S-1).
10.1.1
*
Form of Incentive Stock Option between FCG and its employees, directors, and consultants (incorporated by reference to Exhibit 10.1.1 to FCG's Form S-1).
10.1.2
*
Form of Non-Statutory Stock Option between FCG and its employees, directors, and consultants (incorporated by reference to Exhibit 10.1.2 to FCG's Form S-1).
10.1.3
*
Form of Non-Statutory Stock Option (United Kingdom) between FCG and its United Kingdom resident employees, directors, and consultants (incorporated by reference to Exhibit 10.1.3 to FCG's Form S-1).
10.2
*
1997 Non-Employee Directors' Stock Option Plan (incorporated by reference to Exhibit 10.2 to FCG's Form S-1).
10.2.1
*
Form of Non-Statutory Stock Option (Initial Option-Continuing Non-Employee Directors) between FCG its continuing non-employee directors (incorporated by reference to Exhibit 10.2.1 to FCG's Form S-1).
10.2.2
*
Form of Non-Statutory Stock Option (Initial Option-New Non-Employee Directors) between FCG and its non-employee directors (incorporated by reference to Exhibit 10.2.2 to FCG's Form S-1).
10.2.3
*
Form of Non-Statutory Stock Option (Annual Option) between FCG and its non-employee directors (incorporated by reference to Exhibit 10.2.3 to FCG's Form S-1).
10.3
*
1994 Restricted Stock Plan, as amended (incorporated by reference to Exhibit 10.3 to FCG's Form S-1).
10.3.1
*
Form of Amended and Restated Restricted Stock Agreement between FCG and its executive officers (incorporated by reference to Exhibit 10.3.1 to FCG's Form S-1).
10.3.2
*
Form of Loan and Pledge Agreement between FCG and its vice presidents (incorporated by reference to Exhibit 10.3.2 to FCG's Form S-1).
10.3.3
*
Form of Secured Promissory Note (Non-Recourse) between FCG and its vice presidents (incorporated by reference to Exhibit 10.3.3 to FCG's Form S-1).
10.4
*
1999 Non-Officer Equity Incentive Plan (incorporated by reference to Exhibit 99.6 to FCG's Form S-8 Registration Statement originally filed on March 29, 2000 (the "Form S-8")).
10.4.1
*
Form of Non-Qualified Stock Option Agreement between FCG and its non-officer employees (incorporated by reference to Exhibit 99.7 to FCG's Form S-8).
10.5
*
Supplemental Executive Retirement Plan (incorporated by reference to Exhibit 10.7 to FCG's Form S-1).
10.6
*
Form of Indemnity Agreement between FCG and its directors and executive officers (incorporated by reference to Exhibit 10.8 to FCG's Form S-1).
10.7
Lease, dated as of October 3, 1996, between FCG and Landmark Square Associates, L.P. for FCG's principal executive offices in Long Beach, CA (incorporated by reference to Exhibit 10.9 to FCG's Form S-1).
10.7.1
Amendment to Office Lease, between FCG and Trizec Realty, Inc. dated September 16. 2003.
10.8
Credit Agreement between FCG and Wells Fargo Bank, National Association dated May 1, 2003.
10.9
*
FCG 2000 Associate Stock Purchase Plan (incorporated by reference to Exhibit 10.10 to FCG's Annual Report on Form 10-K filed March 29, 2000).
10.9.1
*
FCG 2000 Associate Stock Purchase Plan Offering adopted October 26, 1999, as amended (incorporated by reference to Exhibit 10.11.1 to FCG's Annual Report on Form 10-K filed March 28, 2002).
10.10
Master Information Technology Services Agreement dated November 1, 1999, between FCG Management Services, LLC ("FCGMS") and New York and Presbyterian Hospital ("NYPH") (incorporated by reference to Exhibit 99.1 to FCG's Current Report on Form 8-K filed on November 8, 1999).
10.11
Rights Agreement dated as of November 22, 1999 among First Consulting Group, Inc. and American Stock Transfer & Trust Company (incorporated by reference to Exhibit 99.3 to FCG's December 9, 1999 Form 8-K).
10.11.1
Form of Rights Certificate (incorporated by reference to Exhibit 99.4 to FCG's December 9, 1999 Form 8-K).
10.12
Master Information Services Agreement dated January 23, 2001, between FCG Management Services, LLC and the Trustees of the University Of Pennsylvania, a non-profit corporation incorporated under the laws of Pennsylvania, owner and operator of the University of Pennsylvania Health System and its Affiliates (incorporated by reference to Exhibit 99.1 to FCG's Current Report on Form 8-K, filed on March 7, 2001).
10.13
Doghouse Enterprises, Inc. 2000 Equity Incentive Plan (incorporated by reference to Exhibit 10.18 of FCG's Annual Report on Form 10-K filed March 28, 2002).
10.13.1
Doghouse Enterprises, Inc. 2000 Equity Incentive Plan form of Stock Option Agreement (Incentive Stock Option or Nonstatutory Stock Option) (incorporated by reference to Exhibit 10.18.1 of FCG's Annual Report on Form 10-K filed March 28, 2002).
10.14
First Consulting Group, Inc. Associate 401(k) and Stock Ownership Plan (incorporated by reference to Exhibit 10.1 of FCG's Quarterly Report on Form 10-Q filed August 12, 2002).
10.15
Letter Agreement with David S. Lipson regarding extension of registration rights (incorporated by reference to Exhibit 10.2 of FCG's Quarterly Report on Form 10-Q filed August 12, 2002).
10.16
Consulting Agreement dated September 1, 2002 between FCG CSI, Inc. dba First Consulting Group and Nichol Clinical Technologies Corp (incorporated by reference to Exhibit 10.1 of FCG's Quarterly Report on Form 10-Q filed November 11, 2002).
10.17
Lease agreement between WHTR Real Estate Limited Partnership, as landlord, and Integrated Systems Consulting Group, Inc. (acquired by Registrant), as tenant dated May 1998, as amended (incorporated by reference to Exhibit 10.22 of FCG's Annual Report on Form 10-K filed March 26, 2003).
10.18
Letter Agreement dated December 20, 2002 between the Company and First Ticket Travel, Inc. (incorporated by reference to Exhibit 10.23 of FCG's Annual Report on Form 10-K filed March 26, 2003).
10.19
*
Integrated Systems Consulting Group, Inc. Amended and Restated Stock Option Plan (incorporated by reference to Exhibit 10.24 of FCG's Annual Report on Form 10-K filed March 26, 2003).
10.20.1
*
Form of Incentive Stock Option Grant Agreement (incorporated by reference to Exhibit 10.24.1 of FCG's Annual Report on Form 10-K filed March 26, 2003).
10.20.2
*
Form of Non-Qualified Stock Option Grant Agreement (incorporated by reference to Exhibit 10.24.2 of FCG's Annual Report on Form 10-K filed March 26, 2003).
10.21
Lease Agreement by and between Nashville Urban Partners 2000 II, LLC and Codigent Solutions Group, Inc. dated April 10, 2002.
10.22
*
Paragon Solutions, Inc. Incentive Stock Plan.
10.22.1
*
Paragon Solutions, Inc. Incentive Stock Plan-Incentive Stock Option Agreement.
10.22.2
*
Paragon Solutions, Inc. Incentive Stock Plan-Non-Qualified Stock Option Agreement.
10.23
*
Paragon Solutions, Inc. Non-Employee Director Stock Option Plan.
10.23.1
*
Paragon Solutions, Inc. Non-Employee Director Stock Option Plan-Stock Option Agreement.
10.24
*
Severance Agreement dated September 10, 2003 by and between FCG and Michael Puntoriero.
10.25
*
Severance Agreement dated September 10, 2003 by and between FCG and Roy Ziegler.
11.1
Statement of Computation of Earnings (Loss) per Share for FCG (contained in "Notes to Consolidated Financial Statements-Note A-Description of Business and Summary of Significant Accounting Policies-Basic and Diluted Net Income (Loss) Per Share" of this Report).
14.1
First Consulting Group, Inc. Code of Business Conduct and Ethics dated August 1, 2003.
21.1
Subsidiaries of FCG.
23.1
Consent of Grant Thornton LLP.
24.1
Power of Attorney (contained on the signature page of this Report).
31.1
Rule 13a-14(a)/Rule 15d-14(a) Certifications.
32.1
Section 1350 Certifications.
*Management contract, compensation plan
PART I
ITEM 1. BUSINESS
ITEM 2. PROPERTIES
ITEM 3. LEGAL PROCEEDINGS
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
ITEM 6. SELECTED FINANCIAL DATA
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Unaudited Quarterly Statements of Operations (in thousands, except per share data)
Unaudited Quarterly Statements of Operations (in thousands, except per share data)
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
ITEM 9A. CONTROLS AND PROCEDURES
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT
ITEM 11. EXECUTIVE COMPENSATION
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
FIRST CONSULTING GROUP, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (in thousands, except share data)
FIRST CONSULTING GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share data)
FIRST CONSULTING GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY- For the Three Years Ended December 26, 2003, December 27, 2002, and December 28, 2001 (in thousands)
FIRST CONSULTING GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands)
FIRST CONSULTING GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (in thousands)
FIRST CONSULTING GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
SCHEDULE II-VALUATION AND QUALIFYING ACCOUNTS (in thousands)
SIGNATURES
INDEX TO EXHIBITS