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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
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COMMISSION FILE NUMBER: 333-41121
FIRST CONSULTING GROUP, INC.
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(Exact name of Registrant as specified in its charter)
DELAWARE 95-3539020
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
111 W. OCEAN BOULEVARD, 4TH FLOOR, LONG BEACH, CALIFORNIA 90802
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(Address of principal executive offices, including zip code)
(562) 624-5200
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(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
NONE NONE
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(Title of each class) (Name of each exchange on which registered)
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, PAR VALUE $.001 PER SHARE
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(Title of class)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
The aggregate market value of the Registrant's stock held by
non-affiliates of the Registrant at March 1, 2000 was approximately $287,922,771
based on the closing price of such common equity on such date.
Indicate the number of shares outstanding of each of the Registrant's
classes of Common Stock, as of the latest practicable date.
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COMMON STOCK, $.001 PAR VALUE 24,110,177
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(Class) (Outstanding at March 1, 2000)
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DOCUMENTS INCORPORATED BY REFERENCE
Part III of this Form 10-K incorporates by reference information that
will be filed with the Securities and Exchange Commission by May 1, 2000, either
as part of Registrant's Proxy Statement for its 2000 Annual Meeting of
Stockholders or as an amendment to this Form 10-K.
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TABLE OF CONTENTS
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PART I
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ITEM 1. BUSINESS............................................................................................1
- General ........................................................................................1
- Services .......................................................................................1
- Consulting Services.............................................................................2
- Integration Services............................................................................5
- Management Services.............................................................................7
- Service Delivery ...............................................................................8
- Research and Practice Support...................................................................9
- Clients .......................................................................................10
- Sales and Marketing............................................................................10
- International Operations.......................................................................11
- Competition ...................................................................................11
- Limited Protection of Proprietary Information and Procedures...................................12
- Employees .....................................................................................13
- First Ventures ................................................................................13
- Vendor Relationships...........................................................................14
- Risks Relating to the Business of FCG..........................................................15
ITEM 2. PROPERTIES.........................................................................................23
ITEM 3. LEGAL PROCEEDINGS..................................................................................23
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS................................................23
PART II
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ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS...............................24
ITEM 6. SELECTED FINANCIAL DATA............................................................................25
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION...............26
- Overview ......................................................................................26
- Comparison of the Years Ended December 31, 1999 and 1998.......................................28
- Comparison of the Years Ended December 31, 1998 and 1997.......................................29
- Quarterly Financial Results....................................................................30
- Liquidity and Capital Resources................................................................32
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK..........................................33
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA........................................................33
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE...............33
PART III
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ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT.....................................................34
ITEM 11. EXECUTIVE COMPENSATION.............................................................................34
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.....................................34
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.....................................................34
PART IV
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ITEM 14. EXHIBITS, FINANCIAL STATEMENT, SCHEDULES AND REPORTS ON FORM 8-K...................................35
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PART I
ITEM 1. BUSINESS
GENERAL
First Consulting Group, Inc. ("FCG" or the "Company") provides information-based
consulting, integration, and management services for the healthcare,
pharmaceutical, and life sciences industries in North America and Europe. FCG's
services are designed to increase its clients' operations effectiveness through
reduced cost, improved customer service, enhanced quality of patient care and
more rapid introduction of new pharmaceutical compounds. FCG is focused on
transforming the health-related industries. FCG applies deep industry knowledge
and operations improvement skills combined with advanced information
technologies especially including the Internet to make substantial improvements
in healthcare delivery, healthcare financing and administration, health
maintenance and drug research and development. Through its services, FCG offers
industry-specific expertise to objectively evaluate, select, develop, implement
and manage information systems, networks and applications. The Company provides
its services primarily to healthcare delivery organizations, health plans,
government healthcare organizations, pharmaceutical and life sciences
organizations and companies in the region of its systems development centers.
FCG has over 2,000 professionals serving North America and Europe. FCG's
consultants possess extensive expertise in financial, administrative and
clinical processes, information technologies and applications. FCG provides this
expertise to clients by assembling multi-disciplinary teams that provide
comprehensive services across its principal services of consulting, integration,
and management (including outsourcing). FCG's consulting professionals are
supported by internal research and a centralized information system that
provides real-time access to current industry information and project
methodologies, experiences, models and tools. FCG believes that its success is
attributable to its strong relationships with industry leading clients, its
industry and technical expertise, its professional environment that fosters
employee recruitment and retention, and the depth and breadth of its services.
SERVICES
FCG's principal services consist of consulting, integration, and management. The
Company believes that its clients' overall operations effectiveness is dependent
upon solid business strategy and the implementation of improved business
processes supported by information management. Further, the Company believes
that these elements are interdependent and therefore must be integrated in order
to be successful. FCG offers its clients an integrated approach through
multi-disciplinary teams with expertise across these areas. FCG typically is
engaged on a project basis and assembles 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. FCG may assemble several client teams to serve the needs of a
single client. FCG provides its services at the client site to senior-level
management and other personnel within the client organization. In addition, as
part of its FCG Management Services, LLC, a majority owned subsidiary, the
Company also provides information technology (IT) outsourcing services whereby
it hires the IT staff of clients and runs part or all of the IT operations at
the client site.
The Company tailors its services to the specific needs of each of its primary
client segments of health delivery, health plans, government healthcare, and
pharmaceutical and other life sciences organizations. A summary view of the
Company's service offerings is provided in the table below, followed by a
description of each.
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CONSULTING INTEGRATION MANAGEMENT
SERVICES SERVICES SERVICES
(22 % of total 1999 (74% of total 1999 revenue) (4% of total 1999
revenue) revenue)
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- - E-Strategy ADVANCED TECHNOLOGY (26% of total 1999 revenue) - IT Outsourcing
- - IT Strategy - Digital Imaging and PACS Assessment
- - Performance - Security Technologies - Program Management
Improvement - Local Area and Wide Area Networks - Discrete IT
- - Interim IT - Internet, Intranet and E-Commerce Outsourcing
Management - Call Centers and Customer Relationship - Full IT Outsourcing
Management (CRM)
- Back Office and Workstations
- Data Centers
- Help Desks
- Telemedicine Solutions
SYSTEMS DEVELOPMENT (26% of total 1999 revenue)
- Document Management
- E-Pharma/Web/Internet
- Client-Server or n-Tiered Systems
- Data Warehousing
- Application Support and Maintenance
- Validation
IMPLEMENTATION (22% of total 1999 revenue)
- Hospital Information Systems
- Ambulatory and Physician Systems
- Computer-Based Patient Record
- Clinical Data Repository
- Enterprise Resource Planning
- Claims and Benefits Administration
- Customer Relationship Management
- Web-Based Tools and Applications
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CONSULTING SERVICES
FCG's consulting services help clients improve cost management, quality,
service, and drug research and development to obtain differentiation and
competitive advantage. Working within the context of the client's philosophy,
mission, and financial realities, the Company integrates operations
effectiveness and IT into clients' business strategies. FCG combines its
expertise in business strategy, clinical, drug development and operational
processes, the Internet, database, voice and video technologies to construct
integrated solutions. Since FCG is a service provider, the Company works closely
with its clients and third party vendors, including select vendor alliances
where appropriate, to integrate a combination of custom and off-the-shelf
products to maximize the client's investment.
E-STRATEGY SERVICES. The Company's e-strategy services are provided under the
leadership of its practice unit, eHealth@FCG. FCG's e-strategy services provide
business and IT executives with education, insights and strategies to utilize
the power of the Internet to improve their performance. FCG's e-strategy
consultants help clients define new business approaches and strategies, and
operational improvements that are enabled by the Internet or Internet
technologies. The Company's e-health strategy consultants possess
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knowledge of business strategy, marketing, operating processes, and Internet
portals, technologies, and applications. They also draw upon other Internet
and related technology expertise from FCG's Integration Services unit, where
appropriate, to deliver integrated expertise to the client.
FCG's e-strategy services include:
- - Executive visioning
- - Business strategy
- - Planning for e-health initiatives
- - User design
- - Intellectual capital formation
IT STRATEGY SERVICES. The Company's IT strategy services focus on the use of IT
to support business goals, and to leverage the power of the Internet to
transform the way care is delivered and managed, and the way drugs are developed
and marketed. The Company's strategy services are often the entry point for FCG,
involve clients' senior executive management, and often lead to FCG's downstream
provision of integration and management services. The Company's strategy
services consist of:
Strategic Alignment
- IT Strategic Planning and Governance
- Alignment of IT and Process
- Future Focus and Regulatory Requirements
IT Department Operational Excellence
- Fiscal Responsibility
- Infrastructure
- IT Department Processes
- Data Center Operations
- IT Human Resources Management
IT Value Realization
- Performance Measurement
- Business Integration (people, process, technology)
- Change Management
- Application Investment
PERFORMANCE IMPROVEMENT SERVICES. The Company's Performance Improvement services
consist of process redesign to reduce administrative costs, improve clinical and
financial performance, engage and retain patients/members, and improve
accountability and reporting. The Company believes that information management
is a critical component of nearly all process change initiatives and that FCG's
combination of business strategy, process, and information technology expertise
uniquely qualifies it for many of these engagements. In turn, the Company
believes that in order to maximize the value of any IT investment, its clients
must carefully assess the processes supported by IT, and implement changes where
appropriate. Therefore, the Company addresses operational improvements as a
component of nearly all its engagements. In addition, it has identified numerous
discrete, or target areas, where it applies its process improvement expertise to
address fundamental business problems of its clients. The Company's Performance
Improvement services are presently focused primarily on the health delivery,
health plan and government healthcare client types and address the following
areas:
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Reducing Administrative Costs
- - Revenue Cycle Management
- - Financial Decision Support
- - Supply Chain Management
- - Member/Patient Management (scheduling, registration, referrals, inquiries)
- - Claims/Encounter Management
Clinical Performance Improvement
- - Minimize Medical Errors
- - Redesign of Access to Care across the Continuum
- - Care and Disease Management
- - Clinical Performance Measurement/Management Strategies and Implementation
- - Physician Integration and Incentive Strategies
- - Clinical and Operational Data Benchmarking and Decision Support
- - Clinical Resource Management
- - Clinical System Integration and Consolidation
Financial Performance Improvement
- - Revenue Cycle Management
- - Cash Flow Management
- - Patient Accounting
Engaging and Retaining Members/Patients
- - Customer Relationship Management
- - Enrollment, Eligibility and Referral Management
- - Scheduling, Master Member Index and Registration
- - Customer Care - Call Centers
- - Information for Patient Education and Personal Health Management
- - Privacy, Confidentiality and Security
- - Broker/Agent Support Systems
Accountability and Reporting
- - Report Cards
- - Health Insurance Portability and Accountability Act (HIPAA) compliance
- - HCFA Compliance
- - Billing and Reporting
IT MANAGEMENT SERVICES. The Company's IT Management services include the
provision of IT leadership, including director and chief information officer
staffing on an interim or on-going basis. These services are typically provided
for a minimum of a six month commitment in order to support client mergers,
acquisitions, changes in leadership, reorganizations, or other situations where
the client changes its IT leadership. As part of FCG's Executive Management
services, contracted FCG IT leadership provides the client with consulting
services to improve strategic alignment with business goals, improve IT
operational excellence, and value realization. Assigned FCG IT leadership will
call upon other FCG consultants to support the provision of these services. FCG
will utilize tools, frameworks, methodologies and best practices to support
these activities. These services help FCG's clients to obtain immediate,
experienced support for mission critical functions on a full-time basis,
minimizing disruption and ensuring smooth operation in key functional areas.
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INTEGRATION SERVICES
As the health related segments of care delivery, health plans, government
healthcare, and pharmaceuticals consolidate and converge, they face a pressing
need to integrate at the core process level. In order to manage those core
processes, they must be able to integrate information from multiple sources. FCG
provides a range of information technology expertise to support its clients'
needs to design, develop, implement and integrate complex information management
solutions. FCG's integration services include advanced technology services,
systems development, and implementation services. The Company's integration
services enable its clients to achieve performance improvement through improved
cost management, quality, service, and drug research and development.
ADVANCED TECHNOLOGY SERVICES. FCG's advanced technology services include
application and network integration of voice, data, video, and imaging
technologies and systems. The Company evaluates, designs, develops and
implements comprehensive system architectures, infrastructures, interfaces,
databases, applications and networks to address the need for information
integration and dissemination throughout an organization. FCG's network and
application integration services emphasize scalable architectures and systems
that are designed to accommodate an increasing array of functions and features
to address a client's emerging information needs. FCG's integration services
typically involve FCG's procurement and contracting and implementation services
in order to assist the client in acquiring the needed hardware and software and,
in some cases, to install the acquired software as part of the integration plan.
FCG typically provides its advanced technology services on a fixed fee,
per-hour, or fixed-fee per month basis as negotiated in individual client
contracts.
Advanced technology services include:
- Internet, Intranet and E-Commerce
- Telecommunications
- Local (LAN) and wide area networks (WAN)
- Back office and workstations
- Digital imaging and Picture Archiving and Retrieval Systems (PACS)
- Security technologies
- Call centers and customer relationship management (CRM) systems
- Data Centers
- Help Desks
- Telemedicine Solutions
FCG has expertise in working with a wide range of technology vendors across
these areas, such as Century Analysis Inc. (CAI), Cisco Systems, Dell Computer,
Software Technologies Corp. (STC), Microsoft Corporation, Oracle Corporation,
Sybase Inc., and Nortel Baynetworks, Inc.
SYSTEMS DEVELOPMENT SERVICES. The Company's systems development services help
clients develop custom software solutions that support business, clinical or
financial processes to provide competitive advantage. The major component of
FCG's systems development services involves the development of information
systems used in the drug development and regulatory approval processes of
pharmaceutical companies. The Company's services encompass the analysis, design,
development, implementation, and maintenance of information systems used in all
aspects of the drug development and post approval processes. The Company
possesses comprehensive, industry-specific project development methodology,
rapid application development skills, and understanding of leading information
technologies. FCG helps its pharmaceutical and biotechnology clients streamline
the drug development process and improve the effectiveness of their IT
investments. The Company's capabilities also include the integrated validation
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services required to get systems into production. FCG has invested in the
development of a methodology, a library of preprogrammed applications, and
unique, customizable service offerings that provide a common framework for the
definition and delivery of global regulatory document management and submission
applications.
The Company possesses specific domain expertise related to systems development
and implementation across the drug discovery, pre-clinical, clinical, and
regulatory submission phases, as depicted in the table below.
FIRST CONSULTING GROUP SYSTEMS DEVELOPMENT EXPERTISE IN PHARMACEUTICALS
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PRE-CLINICAL AND
DRUG DISCOVERY CLINICAL AREAS CLINICAL APPLICATIONS REGULATORY SUBMISSION
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Genomics and Bioinformatics Business Case and Business Case and Regulatory Document
Requirements Definition Requirements Definition Management: FDA, DAMOS
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Combinatorial Chemistry Pharmacology Product/Vendor Selection Electronic Submission
Preparation
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Compound Registration Toxicology Clinical Data Management Document Imaging
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Sample and Reagent Inventory Vendor Selection Clinical Trials Management Correspondence Tracking
Management
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High Throughput Screening Program Management Electronic Data Capture Dossier Publishing
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LIMS/Assay Decision Support Drug Safety/Adverse System Validation
Events Reporting
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Decision Support Data Warehousing Clinical Supplies and
Labeling
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Clinical Manufacturing
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Case Report Form Imaging
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Project Management
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The Company's software system architects, development managers, and development
staff are trained to address diverse needs including Object Oriented Design
(OOD), distributed systems, client/server or n-tiered systems, web-deployed
transactional systems, custom software solutions, and document management
systems. FCG specializes in the architecture, development, and integration of
client-server systems using a variety of development environments that include
computer-aided design tools, graphical user interfaces (GUI), database
technologies, and operating systems. GUI development platforms include Sybase
PowerBuilder; Microsoft Visual Basic, Access and Visual C++; and Oracle
Designer/2000 and Developer/2000. Database technologies include products from
Oracle, Sybase, and Microsoft. Operating systems include Hewlett-Packard HP/UX,
Compaq OpenVMS, Sun Microsystem Sun/OS and Solaris, Microsoft Windows NT, and
SCO UNIX.
FCG also provides capabilities in Internet, intranet and extranet design and
development. The Company's software development experts design, develop and
implement web-based applications to support customer service, marketing,
research, resource management, decision support or other internal operations. In
addition to the development of new web-based applications, consultants in this
group also build web-based applications to access legacy databases using
languages such as HTML and Java, and a variety of products from Microsoft,
Netscape, Sun Microsystems and Oracle Corporation.
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FCG's systems development professionals also design, build, and integrate
software solutions for document management systems. FCG has extensive expertise
in the documentation requirements of the pharmaceutical regulatory approval
process, as well as the enabling technologies applicable to that process. FCG
customizes packaged software products to support the preparation and submission
of new drug applications, and a variety of multi-national regulatory submission
documents.
FCG has applied its systems development expertise in other industries in
addition to pharmaceutical companies. The Company anticipates performing systems
development engagements for health delivery, health plan, government and other
client types.
IMPLEMENTATION SERVICES. FCG provides implementation services for packaged
software products utilized by healthcare, health plan, pharmaceutical and life
sciences organizations. FCG has implementation expertise in hospital information
systems, computer based patient records, clinical data repositories, ambulatory
and physician systems, enterprise resource planning (ERP), claims and benefits
administration, customer relationship management and web-based tools and
applications.
The Company's services include project management, installation, interface
programming, testing, conversion planning, training services,
post-implementation optimization and follow-up. In providing these services,
FCG draws on its extensive expertise in methodologies, healthcare and
pharmaceutical processes, and information technology to ensure that each
implementation is completed efficiently with minimal disruption to clients'
operations. FCG's implementation specialists emphasize administrative and
clinical process improvement and user training, including technical support
staff training. FCG's specialists are also knowledgeable in the document
requirements of the pharmaceutical regulatory approval process, as well as
the enabling technologies applicable to that process. FCG typically provides
its implementation services on a fixed-fee per month or per-hour basis.
Through its implementation services, FCG believes that it enables its clients
to maximize the value of each application investment. FCG typically assembles
a dedicated, on-site, multi-disciplinary team of consultants to perform each
implementation engagement. This team determines implementation schedules and
budgets with the client. FCG's implementation specialists may also provide
project management, quality assurance or an interface mapping and programming
function through which FCG installs the application and ensures that, once
installed, the application will communicate with other applications and
networks used by the client. This interface mapping and programming function
often requires that FCG develop a considerable amount of additional software
code. Training of client personnel involves all aspects of the system.
FCG believes that its expertise with applications from a wide range of vendors
provides clients with a reliable resource to implement these applications.
MANAGEMENT SERVICES
FCG provides long-term IT management expertise, tailoring its efforts
specifically to the client's culture, strategy, and needs. The Company offers a
wide range of management services including assessment/due diligence, program
management, discrete outsourcing and full IT outsourcing. The Company's
assessment/due diligence service provides clients with a strategic and economic
assessment of the feasibility of outsourcing part or all of its IT function.
This assessment enables senior management to determine the appropriateness of
outsourcing part or all of their IT function, relative to their financial
condition, strategic objectives, internal IT capabilities and overall direction.
FCG also provides its clients with program management services, which involve
the provision of senior management resource(s) for some or all of an
organization's IT projects and functions. This may include for example, the
provision of a Chief Information Officer, Director of Information Systems, or
Manager
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and Director of Networks or Telecommunications. The assigned resource is
employed by FCG and resides at the client site. FCG typically provides its
program management services on a long-term basis (e.g., three years or more), at
a fixed monthly or annual fee.
FCG provides clients with discrete outsourcing which includes the outsourcing
and management of a particular IT function, e.g., help desk or enterprise
network management. Under this arrangement, the employees of the client's
particular function become employees of FCG and continue to work at the client's
site. FCG and the client generally create a service level agreement that defines
its scope of work as part of an overall discrete outsourcing contract. The
client typically retains ownership of its assets and contracts with FCG on a
fixed monthly or annual fee basis.
Under full outsourcing, the Company and its client create a long-term,
multi-year engagement where FCG hires all of the client's IT staff, with FCG
providing complete management of the IT function. The staff continue to provide
the outsourcing services from the client's site, and the client retains
ownership of the related assets, e.g., data center, and all hardware and
software. FCG and the client typically create service level agreements, with the
overall outsourcing contract lasting for three or more years, on an annual fixed
fee basis.
In November 1999, the Company formed FCG Management Services, LLC ("FCGMS"), as
its subsidiary through which FCG will offer outsourcing services to large health
delivery organizations.
Also in November 1999, FCGMS and New York and Presbyterian Hospital, doing
business as NewYork-Presbyterian Hospital ("NYPH"), entered into an information
technology outsourcing agreement pursuant to which FCGMS is managing NYPH's
information technology and telecommunications functions. As part of the
agreement, FCGMS initially leased and subsequently on January 1, 2000 hired 327
of NYPH's employees. Among other provisions, the agreement provides for an
initial seven-year term, subject to the right of the parties to terminate the
agreement prior to the end of the initial term under certain circumstances,
including (i) termination by either party upon material breach of the other
party or (ii) subject to the payment of termination fees by NYPH, by NYPH either
following a change in control of FCGMS or FCG or for convenience at any time
following the third year of the agreement.
The value of FCGMS' agreement with NYPH is estimated to be an aggregate of $228
million over the seven-year initial term, subject to increase or decrease in
that amount depending on the level of services provided by FCGMS to NYPH during
the term of the agreement. Also, in connection with entering into the agreement,
NYPH acquired a 15% interest in FCGMS, with FCG (through its wholly owned
subsidiary, FCG Management Holdings, Inc.) holding the remaining 85% of FCGMS.
See Notes to Consolidated Financial Statements -- Note M for financial
information regarding the Company's business segments.
SERVICE DELIVERY
FCG's services are provided by over 1,380 consultants and 370 outsourcing
associations who collectively have expertise in key healthcare, pharmaceutical,
financial, administrative and clinical processes, information technologies and
applications. FCG believes that its health-related industries focus, information
technology expertise, experienced consultants, and research and practice support
enable its clients to reduce cost, improve customer service, enhance the quality
of patient care, and more rapidly introduce new drug compounds to market.
To ensure client satisfaction, FCG typically assigns a client service or account
executive to its clients. The client service or account executive's primary
responsibility is to establish and maintain long-term
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relationships with clients. This individual regularly communicates with the
client to ensure client satisfaction and is also responsible for billing
decisions on each assignment. For client engagements with multiple
independent assignments, FCG assigns a delivery service executive or program
manager to each assignment. A delivery service executive has specific
technology, process or service line expertise and is responsible for
supervising the daily functions of the client team and for ensuring that the
team's progress is consistent with the client's objectives and schedule. FCG
measures every client's satisfaction through a client satisfaction survey
completed at six-month intervals during the engagement and again at the
conclusion of each assignment.
FCG employs consultants whose individual expertise combines healthcare delivery,
health plan, pharmaceutical, information technology and consulting skills. FCG's
consultants collectively have developed healthcare and pharmaceutical-specific
expertise in key areas such as financial, administrative and clinical processes,
care management, clinical decision support, health plan operations, medical and
utilization management, outcomes and performance management, physician practice
management, ambulatory care, drug research and development, drug regulatory
submission, and privacy and confidentiality protection. FCG's consultants also
have expertise in implementing, integrating and developing a wide range of
information technology and management systems. These systems include packaged
software applications, client/server and object-oriented computing technologies,
data repositories and data warehousing, electronic commerce and electronic data
imaging, networking, web technologies, telemedicine, document management,
security, and disaster recovery. FCG has expanded its recruiting efforts to
attract and retain the breadth and depth of skills and expertise necessary to
compete successfully in the healthcare and pharmaceutical consulting industries.
RESEARCH AND PRACTICE SUPPORT
FCG's services and consultants are supported by internal 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. FCG's principal research and practice support initiatives
include the Emerging Practices Group, Professional Development Programs, the
Scottsdale Informatics Institute, and Knowledge and Information Technology
Exchange (KITE-Registered Trademark-).
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. Examples of topics that
the Emerging Practices Group has researched are the Health Insurance Portability
and Accountability Act (HIPAA), information technology value management,
clinical performance improvement and medical errors, e-health, and health
related industry trends and the implications for IT. FCG documents research
findings, conducts internal and client workshops on these topics, and makes the
research available for use in its client engagements. The Emerging Practices
Group also publishes a periodic news summary that appears on the Company's web
site.
PROFESSIONAL DEVELOPMENT AND INCENTIVE PROGRAMS. FCG has instituted several
professional development and incentive programs to encourage employee retention
and to provide support for the professional growth of all its employees. FCG
provides training to its employees through an annual four-day educational
retreat, as well as ongoing classroom education, computer-based training,
distance learning and external seminars. FCG has programs to educate all new
employees about the history, culture, and practices of FCG. All employees are
required to establish an annual professional development plan for knowledge
acquisition, skill development, leadership assessment and training, project
management and relationship management.
SCOTTSDALE INSTITUTE. FCG provides program management, research and advisory
support to the Scottsdale Informatics Institute. The Scottsdale Informatics
Institute is a membership organization composed of
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approximately 30 healthcare organizations across the United States, typically
represented by their Chief Executive Officers, Chief Operating Officers and
Chief Information Officers. Membership is by invitation only. The Scottsdale
Institute provides its members with a cost-sharing vehicle for information
exchange, problem solving and learning related to improving performance
through information management. The Emerging Practices Group performs guided
research projects in collaboration with groups of three to five Scottsdale
Institute member organizations that share common characteristics and
information management needs. The Emerging Practices Group delivers research
reports and tools to member organizations in areas such as management
techniques, organizational models, benchmarking and best practices,
methodologies, plans, and vendor information. This enables members to more
efficiently utilize information technology for performance improvement. In
turn, it helps FCG to develop practical, applied solutions to problems of
leading healthcare organizations and to anticipate service needs of the
broader market.
KNOWLEDGE AND INFORMATION TECHNOLOGY EXCHANGE (KITE-Registered Trademark-).
FCG's personnel have access to FCG's internal research and to current
industry and technology information and project methodologies, experiences,
models and tools through KITE-Registered Trademark-. KITE-Registered
Trademark- currently houses over 20,000 documents that include industry
information, service methodologies and tools, benchmarks and best practice
information, and other documentation to support FCG's services and
consultants. KITE-Registered Trademark- is updated on a continuous basis with
information resulting from each engagement, by the Emerging Practices Group.
FCG believes that this resource allows its consultants to utilize
engagement-specific information that improves the quality and content of
services delivered to clients while reducing cost of delivery.
CLIENTS
In 1999, FCG provided services to clients primarily in the healthcare,
pharmaceutical and life sciences industries in North America and Europe. FCG's
clients include leading integrated delivery networks, health plans, acute care
centers, academic medical centers, physician organization, governmental
agencies, pharmaceutical companies, biotech companies and other organizations.
The Company's revenue mix from its major clients in 1999 was:
- Health Delivery Organizations (hospitals, integrated delivery
networks, academic medical centers, clinics, physician organizations,
associations, - use categories from CAST) - 46%
- Pharmaceutical, Biotech and other life sciences related
organizations - 23%
- Health Plans (Blue Cross Blue Shield organizations, Insurance Companies,
Specialty Physician Organizations, Regional and National HMOs) - 17%
- U.S. Federal Government Healthcare Agencies (e.g. Department of Defense,
Department of Health and Human Services, and Department of Veterans
Affairs) - 4%
- Organizations outside of the health-related industries - 10%
Please see "Risks Relating to the Business of FCG" below for a discussion of
risks associated with engaging and maintaining clients.
SALES AND MARKETING
FCG generates a substantial portion of its revenue from existing clients and
client referrals and markets its services primarily through its vice presidents
and account executives. FCG's vice presidents and account executives develop
strong relationships with senior-level information management and other
decision-making personnel at leading healthcare and pharmaceutical
organizations. FCG maintains these relationships by successfully completing
assignments and exceeding clients' expectations. In particular, FCG believes
that by successfully completing strategic plans for new and existing clients, it
will have
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significant opportunities to offer implementation and integration services to
these clients. FCG has demonstrated that this strategy leads to expanded
opportunities with its clients and referrals to new clients. In providing its
services, FCG obtains an in-depth understanding of its client's processes and
internal information technology and business strategies. Through this
understanding, FCG plans to provide performance improvement services to a
greater portion of its client base. Performance improvement services involve
assessing, designing and improving financial, administrative, clinical, and
drug development processes. FCG's vice presidents and practice directors
allocate a significant portion of their time to business development and
related activities. FCG also employs account executives and business
development directors who are dedicated to business development with
potential and existing clients.
FCG is frequently engaged to provide multiple services throughout several phases
of a client's information technology system lifecycle, including strategy,
planning, procurement and contracting, implementation, integration and
management. As a result of this involvement, FCG's personnel often develop an
in-depth understanding of the client's business systems and capabilities and
develop strong relationships with personnel within the client organization.
These relationships provide FCG with significant opportunities to undertake
additional assignments for each client.
In addition to generating assignments from existing clients, FCG attracts new
clients through its targeted marketing activities. FCG's marketing activities
include public presentations, press releases, publishing of books, articles and
white papers, and trade show participation. FCG also maintains research reports
and white papers on its web site, along with other company and industry
information. FCG's marketing staff produces a number of sales support tools
including presentations, brochures, article reprints, sales kits, descriptions
of FCG's services and case studies. The Company is also in the implementation
stage of a company-wide contact management and forecasting system. Please see
"Risks Relating to the Business of FCG" below for a discussion of risks
associated with FCG's sales and marketing efforts.
INTERNATIONAL OPERATIONS
FCG has provided its consulting, integration, and co-management services to
clients in Canada, Germany, France, Austria, Switzerland, Republic of Ireland,
Mexico and the United Kingdom, and maintains offices in Dublin, Republic of
Ireland, Toronto, Canada, Frankfurt, Germany and London, Leeds, and Belfast,
United Kingdom. In December 1999, the Company completed an acquisition of Activa
Systems, a U.K. based consulting firm specializing in document management
systems based on Documentum, Inc. The Company believes that its acquisition of
Activa will enable it to better meet pharmaceutical companies' demand for
multi-national document management consulting services, improving FCG's position
in this segment. The Company will continue to explore ways to expand its
capabilities in the provision of integration services for pharmaceutical and
other life sciences organizations in Europe. Please see "Risks Relating to the
Business of FCG" below for a discussion of risks associated with FCG's
international operations.
COMPETITION
The market for healthcare consulting, integration, and management services is
intensely competitive, rapidly evolving and highly fragmented. The Company has
competitors that provide some or all of the services provided by the Company.
The Company competes for consulting services with international consulting
firms, regional and specialty consulting firms, and the consulting groups of
international accounting firms such as KPMG LLP, Ernst & Young LLP, Deloitte &
Touche LLP, PricewaterhouseCoopers, LLP, and Andersen Consulting. In its
integration and co-management services, the Company competes with information
system vendors such as HBO & Company, Inc., Shared Medical Systems Corporation
and Integrated Systems Solution Corporation, a division of International
Business
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Machines Corporation; service groups of computer equipment companies;
systems integration companies such as Electronic Data Systems Corporation, Perot
Systems Corporation, SAIC, CAP Gemini America, Inc. and Computer Sciences
Corporation; clients' internal information management departments; and other
healthcare consulting firms such as DAOU Systems, Inc. and Superior Consultant
Holdings Corporation. In e-health and e-commerce related services the Company
competes with the traditional competitors outlined above, as well as newer
Internet product and service companies such as Razorfish, Scient, TriZetto, and
Viant. Many of the Company's competitors have significantly greater financial,
human and marketing resources than the Company. 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 the Company. In
addition, as healthcare organizations become larger and more complex, the
Company's larger competitors may be better able to serve the needs of such
organizations. The Company may not be able to attract and retain the personnel
or to dedicate the financial resources necessary to serve these resulting
organizations.
The Company believes that it competes primarily on the basis of its expertise,
reputation and quality of its services; however, its clients may become
increasingly price-sensitive as competitive pricing pressures increase. Large
information technology 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. These competitors may in the future
discount such services more frequently or offer such services at no charge.
There can be no assurance that the Company will be able to compete for
price-sensitive clients on the basis of its current pricing or cost structure,
or that the Company will be able to lower its prices or costs in order to
compete effectively. Furthermore, many of the Company's competitors have
long-standing business relationships with key personnel at healthcare
organizations, which could prevent or delay the Company from expanding its
client base. The Company believes that it has been able to compete successfully
on the basis of the quality and range of its services and the accumulated
expertise of its consultants. However, the Company may not be able to compete
effectively with current and future competitors or competitive pressures faced
by the Company may cause the Company's revenue or operating margins to decline
or otherwise materially adversely affect FCG's business, financial condition and
results of operations. Please see "Risks Relating to the Business of FCG" below
for a discussion of additional risks associated with FCG's ability to compete in
its markets.
LIMITED PROTECTION OF PROPRIETARY INFORMATION AND PROCEDURES
The Company's ability to compete effectively depends on its ability to protect
its proprietary information, including its proprietary methodologies, research,
tools, software code and other information. The Company relies primarily on a
combination of copyright and trade secret laws and confidentiality procedures to
protect its intellectual property rights. The Company requests that its
consultants and employees sign confidentiality agreements and generally limits
access to and distribution of its research, methodologies and software codes.
The steps taken by the Company to protect its proprietary information may not be
adequate to prevent its 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 the Company's
intellectual property could have a material adverse effect on the Company's
business, financial condition or results of operations. The Company believes
that its 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 the Company in the future, and such claims
may result in protracted and costly litigation, regardless of the merits of such
claims.
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EMPLOYEES
As of December 31, 1999, FCG had 1,715 employees, 89 of whom were vice
presidents. At this time, FCG also had 327 leased employees as part of its
outsourcing agreement with NYPH; effective January 1, 2000, these became FCG
employees.
FCG's vice presidents are all FCG stockholders. They are responsible for service
delivery, new business development, client relationships, staff development, and
company leadership.
FCG believes that its relationship with its employees is good. The Company
periodically surveys its employees regarding satisfaction and areas for
improvement. The Company's two surveys during 1999, conducted in the first and
third quarters, indicated that, on average, 78% of FCG employees believed that
"FCG is a great place to work."
The Company uses a variety of techniques to identify and recruit qualified
candidates to support its growth. The Company employs full time recruiters
dedicated to the recruitment and hiring of personnel. One of the Company's most
successful sources of new hires is the StarQuest, or internal employee referral
program, which encourages employees to recommend or refer qualified candidates
for employment with the Company, and rewards referring employees with referral
bonuses. In 1999, 40% of new hires came from the StarQuest program. The Company
also places advertisements in various newspapers and uses professional search
firms to identify candidates for hire. The Company participates in job fairs,
and sponsors independent recruiting events, such as open houses and free
technical seminars. Please see "Risks Relating to the Business of FCG" below for
a discussion of risks associated with attracting and retaining qualified
employees.
FIRST VENTURES
In 1999, the Company announced the First Ventures Healthcare and Life Sciences
Investment Fund as a venture capital fund with the purpose of making investments
in growing private companies that develop technology that will make a difference
in the way healthcare is delivered, paid for, and consumed. Initially, FCG has
committed to investing up to $15 million in First Ventures. First Ventures is
focused on early to middle stage companies providing information technology,
products, or services to the health-related industries: health delivery
organizations, health plans, pharmaceutical, biotechnology, and other life
sciences organizations. First Ventures does not plan to make "seed investments"
to fund new start ups and seeks companies with an established product or
service. First Ventures targets companies with superior and innovative
management and new products and services that have the potential to provide
"breakthrough" solutions to the health related industries.
First Ventures utilizes FCG's expertise and relationships in the health related
and technology industries to help identify and evaluate investment
opportunities. First Ventures evaluates potential investment opportunities
primarily based on their merits as a financial investment. Among the factors
that First Ventures considers are the product or service potential, competition,
business plan viability, quality of management, expected financial performance
and fit versus the types of companies that First Ventures is targeting. In
addition to making an equity or debt investment, First Ventures and FCG will
evaluate the potential of the portfolio company as an FCG alliance partner. FCG
also anticipates the provision of management, technology, consulting and health
related industries expertise to assist First Ventures' portfolio companies in
their development.
First Ventures intends to invest between $1 and $5 million in each of its
portfolio companies, potentially over several rounds of investment. The Company
expects potential investment candidates to be raising
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funds from institutions, and to be serving a large enough market in order for
FCG to exit its investment within one to five years.
VENDOR RELATIONSHIPS
FCG has established numerous vendor relationships through its vendor alliance
program. The Company believes the formation of these relationships enables it to
increase its 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, FCG is
able to more rapidly identify and deliver integrated solutions to its clients,
based on leading technologies, applications and solutions.
The Company has established non-exclusive alliance agreements with software,
hardware, and services vendors that market components and solutions to FCG's
current and prospective clients. In 1999, FCG increased the number of formalized
relationships with vendors. The vendor alliance programs of which FCG is a part
have provided FCG 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.
The Company's 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, development of collateral, marketing through each
company's web site, and other marketing efforts. Clients generally contract
directly with the vendor for purchase of the products. FCG currently maintains
relationships with the vendors depicted below:
Ardent Health System Design (HSD)
API Healthvision
Business Engine, Inc. IDX
Business Objects Input Software
Cerner Kofax
Channel Point Laufenberg
Cisco Systems Lawson
Clinarium, Inc. MedicaLogic
Confer Software Microsoft
CrossCom MicroStrategy
Dell NEON
Documentum, Inc. Onyx Software
Domain Pharma Oracle/Oracle Clinical
Eclipsys Oxford Molecular Group
Electronic Submission Publishing Systems PeopleSoft
Epic Rational
eResearch Technology Siemens - UK
Erisco Shared Medical Systems (SMS)
FileNet SiteWorks
HBOC Software Technologies Corporation
Healtheon/WebMD Spotfire
Please see "Risks Relating to the Business of FCG" below for a discussion of
risks associated with establishing and maintaining vendor alliances.
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RISKS RELATING TO THE BUSINESS OF FCG
THERE ARE VARIOUS FACTORS WHICH MAY CAUSE FCG'S NET REVENUES AND OPERATING
RESULTS TO FLUCTUATE. FCG's net revenue and operating results may fluctuate
significantly because of a number of factors, many of which are outside FCG's
control. These factors may include:
- Losing key personnel and other employees
- Losing one or more significant clients
- Consummating an acquisition
- Costs of integrating acquired operations
- Timing and collection of payments and new client engagements
- Delays in securing and completing client engagements
- Fluctuations in market demand for FCG's services, consultant hiring and
utilization
- Variability in the number of billable days in each quarter
- Availability of foreign net operating losses and other credits against
FCG's earnings
- Increased competition and pricing pressures
- Changes in business strategy, pricing and billing policies of FCG and its
competitors
- International currency fluctuations
- Timing of certain general and administrative expenses
A substantial portion of FCG's expenses, particularly personnel and related
costs, depreciation, office rent and occupancy costs, are relatively fixed. One
or more of the foregoing factors may cause FCG's operating expenses to be
disproportionately high during any given period. In addition, FCG bills certain
of its services on a fixed-price basis, and any assignment delays or
expenditures of time beyond that projected for the assignment could result in
write-offs of client billings. Significant write-offs could materially adversely
effect FCG's business, financial condition and results of operations. Based on
the preceding factors, FCG may experience a shortfall in revenue or earnings or
otherwise fail to meet public market expectations, which could materially
adversely effect FCG's business, financial condition and the market price of the
FCG Common Stock.
THE LENGTH OF TIME REQUIRED TO ENGAGE A CLIENT AND TO COMPLETE AN ASSIGNMENT MAY
BE UNPREDICTABLE AND COULD NEGATIVELY IMPACT FCG'S NET REVENUES AND OPERATING
RESULTS. The timing of client engagements and service fulfillment is not
predictable with any degree of accuracy. Prior engagement cycles are not
necessarily an indication of the timing of future client engagements or
revenues.
Prior to client engagements, FCG typically spends 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. FCG may be required to hire new
consultants before securing a client engagement. Clients may defer committing to
new assignments for any length of time and for any reason. Such deferrals could
require FCG to maintain a significant number of under-utilized consultants
during any given period. In addition, failing to procure an engagement after
spending such time and resources could materially adversely effect FCG's
business, financial condition and results of operations.
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This is particularly true for FCG's outsourcing business through its subsidiary,
FCG Management Services, LLC. The outsourcing business has very long lead times,
requiring FCG to spend a substantial amount of time and resources in attempting
to secure an outsourcing engagement. FCG 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 FCG.
The length of time required to complete an assignment often depends on factors
outside FCG's 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
- Availability of personnel and other resources
- Consolidation in the healthcare and pharmaceutical industries
IF FCG IS UNABLE TO GENERATE ADDITIONAL REVENUE FROM ITS EXISTING CLIENTS, FCG'S
BUSINESS MAY BE NEGATIVELY AFFECTED. FCG's success depends on obtaining
additional engagements from its existing clients. A substantial portion of FCG's
revenues are derived from services provided to its existing clients. The loss of
a small number of clients may result in a material decline in revenues and cause
FCG to fail to meet public market expectations of its financial performance and
operating results. Any material failure on the part of FCG to generate
additional revenues from its existing clients may materially adversely effect
FCG's business, financial condition and results of operations.
IF FCG FAILS TO MEET CLIENT EXPECTATIONS IN THE PERFORMANCE OF ITS SERVICES,
FCG'S BUSINESS COULD SUFFER. FCG's services often involve complex information
systems and software, which are critical to the clients' operations. FCG's
failure to meet client expectations in the performance of its services,
including the quality, cost and timeliness of FCG's services, may damage FCG's
reputation in the healthcare and pharmaceutical industries and adversely affect
its ability to attract and retain clients. If a client is not satisfied with
FCG's services, FCG will generally spend additional human and other resources at
its own expense to ensure client satisfaction. Such expenditures will typically
result in a lower margin on such engagements and could materially adversely
effect FCG's business, financial condition and results of operations.
In the course of providing its services, FCG will often recommend the use of
other software and hardware products. These products may not perform as expected
or contain defects. If this occurs, FCG's reputation could be damaged and it
could be subject to liability. FCG attempts to limit its exposure to potential
liability claims. Such limitations may not be effective. A successful liability
claim brought against FCG may adversely affect FCG's reputation in the
healthcare and pharmaceutical industries and could have a material adverse
effect on FCG's business, financial condition and results of operations.
Although FCG maintains liability insurance, such insurance may not provide
adequate coverage for successful claims against FCG.
FCG's outsourcing activities entail significant engagements in which FCG will
commit to specific service level agreements that define FCG's responsibilities
over the contracted period. Any failure on the part of FCG to meet contracted
service levels may result in financial penalty or default of the contract, and
may have a material adverse effect on FCG. FCG's outsourcing engagements are
typically performed on a
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fixed price basis where FCG hires part or all of a client's IT personnel.
There can be no assurance that FCG will be able to retain these individuals,
and effectively hire additional personnel as needed to meet the obligations
of its contract. FCG's ability to achieve profitability in its outsourcing
activities is dependent upon the accuracy of its forecasting and its ability
to deliver the contracted scope of services within the constraints of the
fixed price contract. Any failure by FCG in these areas may have a material
adverse effect on the profitability of its outsourcing business.
FCG MAY BE UNABLE TO ATTRACT AND RETAIN A SUFFICIENT NUMBER OF QUALIFIED
EMPLOYEES. FCG's business is labor-intensive and requires highly skilled
employees. Most of FCG's consultants possess extensive expertise in healthcare,
insurance, pharmaceutical, information technology and consulting fields. To
serve a growing client base, FCG must continue to recruit and retain qualified
personnel with expertise in each of these areas. Competition for such personnel
is intense. FCG competes for such personnel with management consulting firms,
healthcare and pharmaceutical organizations, software firms, "dot com
businesses" and other businesses. Many of these entities have substantially
greater financial and other resources than FCG or can offer more attractive
compensation packages to candidates, including salary, bonuses, stock and stock
options. FCG may not be able to recruit and retain a sufficient number of
qualified personnel to serve existing and new clients. If FCG fails to recruit
and retain a sufficient number of qualified personnel, FCG's ability to expand
its client base or services could be impaired and FCG's business, financial
condition and results of operations could be adversely effected.
THE LOSS OF FCG'S VICE PRESIDENTS AND EXECUTIVE OFFICERS COULD NEGATIVELY AFFECT
FCG. FCG's performance depends on the continued service of its vice presidents,
executive officers and senior managers. In particular, FCG depends on such
persons to secure new clients and engagements and to manage the business and
affairs of FCG. The loss of such persons could result in disruption of FCG's
business, stock price volatility and could have a material adverse effect on
FCG's business, financial condition and results of operations. FCG has not
entered into long-term employment contracts with any of its employees and does
not maintain key employee life insurance.
CONTINUED OR INCREASED EMPLOYEE TURNOVER COULD NEGATIVELY AFFECT FCG'S BUSINESS.
FCG has experienced employee turnover as a result of (1) dependence on lateral
hiring of consultants, (2) travel demands imposed on its consultants, (3) loss
of employees to competitors and clients, and (4) the growth in the number of
"dot com" and other internet-related companies. Continued or increased employee
turnover could materially adversely affect FCG's business, financial condition
and results of operations. In addition, many of FCG's consultants develop strong
business relationships with FCG's clients. FCG depends on these relationships to
generate additional assignments and engagements. The loss of a substantial
number of consultants could erode FCG's client base and decrease FCG's revenue.
IF FCG IS UNABLE TO MANAGE ITS GROWTH, ITS BUSINESS MAY BE NEGATIVELY IMPACTED.
FCG's business has grown rapidly in recent years. This growth has placed new and
increased demands on FCG's vice presidents and other management personnel. This
growth has also placed significant and increasing demands on FCG's financial,
technical and operational resources and on its information systems. To manage
any future growth, FCG must (1) extend its financial reporting and information
management systems to a growing number of offices and employees, and (2) develop
and implement new procedures and controls to accommodate new operations,
services and clients. Increasing operational and administrative demands may make
it difficult for FCG's vice presidents to engage in business development
activities. Adding a significant number of new employees and offices may also
impair FCG's ability to maintain its service delivery standards and corporate
culture. In addition, FCG has in the past changed, and may in the future change,
its organizational structure and business strategy. Such changes may result in
operational inefficiencies and delays in delivering FCG's services. Such changes
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could also cause a disruption in FCG's business and could have a material
adverse effect on FCG's business, financial condition and results of operations.
If FCG fails to effectively manage its growth, FCG's business, financial
condition and results of operations could be adversely affected.
FCG'S FAILURE TO ACQUIRE AND SUCCESSFULLY INTEGRATE THE BUSINESSES FCG ACQUIRES
COULD NEGATIVELY IMPACT FCG. FCG intends to grow, in part, by acquiring
complementary professional practices within the healthcare and pharmaceutical
industries. In 1998, FCG completed three acquisitions; in 1999, FCG completed
two more acquisitions. Integrating acquired operations is a complex,
time-consuming and expensive process. All acquisitions involve risks that could
materially and adversely effect FCG's business and operating results. These
risks include (1) distracting management from the business of FCG, (2) losing
key personnel and other employees, (3) losing clients, (4) costs, delays and
inefficiencies associated with integrating acquired operations and personnel,
and (5) amortizing the cost of acquired assets and goodwill. Acquired businesses
may not enhance FCG's services, provide FCG with increased client opportunities
or result in growth. Combining acquired operations with FCG 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 result in the loss of employees and
clients. Failing to acquire and successfully integrate complementary practices
could materially adversely effect FCG's business, financial condition and
results of operations.
FCG'S INTERNATIONAL OPERATIONS CREATE SPECIALIZED RISKS THAT CAN NEGATIVELY
AFFECT FCG. FCG provides its services to international clients. Expanding into
international markets will require FCG to (1) spend a significant amount of
management, human and financial resources, (2) hire additional personnel, and
(3) establish international offices. FCG may be unable to recruit and retain a
sufficient number of qualified consultants in each country in which it intends
to conduct its business. If FCG fails to recruit and retain qualified employees,
FCG's ability to expand internationally may be impaired and FCG's business,
financial condition and results of operations could be adversely effected. FCG's
international operations are subject to a variety of risks, including:
- Difficulties in creating international market demand for FCG's services
- Difficulties and costs of tailoring FCG's services to each individual
country's healthcare and pharmaceutical market needs
- Unfavorable pricing and price competition
- Currency fluctuations
- Longer payment cycles in some countries and difficulties in collecting
international accounts receivables
- Difficulties in enforcing contractual obligations and intellectual
property rights
- Adverse tax consequences
- Increased costs associated with maintaining international marketing
efforts and offices
- Adverse changes in regulatory requirements
- Economic instability
Any one or all of these factors may cause increased operating costs, lower than
anticipated financial performance and may materially adversely effect FCG's
business, financial condition and results of operations.
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IF FCG DOES NOT COMPETE EFFECTIVELY IN THE HEALTHCARE AND PHARMACEUTICAL
INFORMATION SERVICES INDUSTRIES, THEN ITS BUSINESS MAY BE NEGATIVELY IMPACTED.
The market for healthcare and pharmaceutical information technology consulting
is very competitive. FCG has competitors that provide some or all of the
services provided by FCG. In strategic consulting services, FCG competes with
(1) international consulting firms, (2) regional and specialty consulting firms
and (3) the consulting groups of international accounting firms such as KPMG
LLP, Ernst & Young LLP, Deloitte & Touche LLP, PricewaterhouseCoopers, LLP and
Andersen Consulting. In integration and co-management services, FCG competes
with (1) information system vendors such as HBO & Company, Inc., Shared Medical
Systems Corporation and Integrated Systems Solution Corporation, a division of
International Business Machines Corporation, (2) service groups of computer
equipment companies, (3) systems integration companies such as Electronic Data
Systems Corporation, Perot Systems Corporation, CAP Gemini America, Inc. and
Computer Sciences Corporation, (4) clients' internal information management
departments, (5) other healthcare consulting firms such as DAOU Systems Inc. and
Superior Consultant Holdings Corporation and (6) other pharmaceutical consulting
firms such as Andersen Consulting, Technology Solutions Corporation, Cap Gemini
America, Computer Sciences Corporation's consulting division, and Cambridge
Technology Partners, Inc. In e-health and e-commerce related services, FCG
competes with the traditional competitors outlined above, as well as newer
Internet product and service companies such as Razorfish, Scient, TriZetto, and
Viant.
Many of FCG's competitors have significantly greater financial, human and
marketing resources than FCG. 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 FCG. In addition, as healthcare
organizations become larger and more complex, FCG's larger competitors may be
better able to serve the needs of such organizations. FCG may be unable to
compete effectively with current and future competitors. Competitive pressures
may cause FCG's revenue or operating margins to decline or otherwise materially
adversely effect its business, financial condition and results of operations.
IF FCG FAILS TO ESTABLISH AND MAINTAIN RELATIONSHIPS WITH VENDORS OF SOFTWARE
AND HARDWARE PRODUCTS, IT COULD HAVE A NEGATIVE EFFECT ON FCG'S ABILITY TO
SECURE ENGAGEMENTS. FCG has a number of relationships with vendors. For example,
FCG has established a non-exclusive partnership arrangement with Documentum,
Inc. Documentum markets document management software applications largely to the
pharmaceutical industry. FCG believes that its relationships with this vendor
and others are important to its sales, marketing, and support activities. FCG
often is engaged by vendors or their customers to implement or integrate vendor
products based on FCG's relationship with that vendor. If FCG fails to maintain
its relationships with Documentum and other vendors or fails to establish
additional new relationships, FCG's business could be materially adversely
effected.
FCG'S RELATIONSHIPS WITH AND INVESTMENTS IN VENDORS OF SOFTWARE AND HARDWARE
PRODUCTS COULD HAVE A NEGATIVE IMPACT ON FCG'S ABILITY TO SECURE CONSULTING
ENGAGEMENTS. FCG's growing number of relationships with software and hardware
vendors could result in clients perceiving that FCG is not independent from
those software and hardware vendors. FCG's ability to secure assessment and
other consulting engagements is often dependent, in part, on FCG being
independent of software and hardware solutions that FCG may review, analyze or
recommend to clients. If clients believe that FCG is not independent of those
software and hardware vendors, clients may not engage FCG for certain consulting
engagements relating to those vendors, which could materially adversely effect
FCG's business, financial condition and results of operations.
This is particularly true since FCG announced the formation of its First
Ventures venture capital fund. First Ventures has made its initial investment in
Confer Software, Inc., a software vendor, and will invest in other companies
during 2000 and beyond. Any of First Ventures' investments may be in software or
19
<PAGE>
hardware vendors who sell and license products to healthcare, pharmaceutical and
other companies that may be FCG clients. If clients believe that FCG is not
independent of the companies that First Ventures invests in, clients may not
engage FCG for certain consulting engagements relating to those companies, which
could materially adversely effect FCG's business, financial condition and
results of operations.
FCG MAY EXPERIENCE LOSSES IN ITS INVESTMENTS IN FIRST VENTURES. FCG has
committed up to $15 million to invest through First Ventures, its venture
capital fund formed in 1999. First Ventures invests in early-stage companies
with limited capitalization and no public market for their shares. Many of these
companies have never earned profits or, in some cases, realized any revenues on
sales of products or services. FCG is not assured that these companies will be
successful or that FCG will earn any returns on its investments, and could
suffer a loss of its entire investment in First Ventures. Even if the companies
in which First Ventures invests are successful, FCG is not assured that it will
be able to sell its shares in those companies or otherwise realize any value in
the investments, or that any sale will be on terms favorable to First Ventures
and FCG. If FCG experiences investment losses in First Ventures, this could
materially adversely effect FCG's business, financial condition and results of
operations.
THE DISRUPTION OR FAILURE OF COMPUTER PROGRAMS AND SYSTEMS DUE TO THEIR
INABILITY TO PROCESS DATE/TIME INFORMATION BETWEEN THE TWENTIETH AND
TWENTY-FIRST CENTURIES MAY CAUSE AN INTERRUPTION IN AND NEGATIVELY IMPACT FCG'S
business. Many existing computer programs and systems, including those used by
FCG's clients and those assessed, implemented and integrated by FCG consultants
on behalf of clients, use only two digits to identify the year in the date
field. These programs may be unable to process date/time information between the
twentieth and twenty-first centuries. This inability could cause the disruption
or failure of such computer systems (the "Y2K Problem"). Clients who experience
Y2K Problems may divert resources otherwise available for new consulting
projects to remediation of Y2K Problems, thus reducing FCG's opportunity to
obtain new business. In addition, clients may attempt to file claims against
software and hardware vendors who sold or licensed, and service firms, such as
FCG, who assessed, recommended, implemented or integrated, software or hardware
with Y2K Problems. Such claims may result in protracted and costly litigation,
penalties and fines, regardless of the merits of such claims. Any of the
foregoing could have a material adverse effect on FCG's business, financial
condition and results of operations.
IF FCG FAILS TO KEEP PACE WITH REGULATORY AND TECHNOLOGICAL CHANGES, THEN FCG'S
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 FCG's clients. Healthcare
and pharmaceutical organizations may react to these proposals by curtailing or
deferring investments, including those for FCG's services. FCG cannot predict
with any certainty what impact, if any, such legislative reforms could have on
its business.
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, FCG could experience a decrease in demand
for its services. Any material decrease in demand would materially adversely
effect FCG's business, financial condition and results of operations.
CHANGES IN THE HEALTHCARE AND PHARMACEUTICAL INDUSTRIES COULD NEGATIVELY
IMPACT FCG'S REVENUES. FCG derives a substantial portion of all of its
revenue from clients in the healthcare industry. As a result, FCG's business,
financial condition and results of operations are influenced by conditions
affecting this industry, particularly current trends towards consolidation
among healthcare and pharmaceutical
20
<PAGE>
organizations. Such consolidation may reduce the number of existing and
potential clients for FCG's services. In addition, the resulting
organizations could have greater bargaining power, which could erode the
current pricing structure for FCG's services. The reduction in the size of
FCG's target market or the failure of FCG to maintain its pricing strategies
could have a material adverse effect on FCG's business, financial condition
and results of operations.
A substantial portion of FCG's revenues has come from companies in the
pharmaceutical business. FCG's revenues are, in part, linked to the
pharmaceutical industry's research and development expenditures. Should any of
the following events occur in the pharmaceutical industry, FCG's business could
be negatively affected in a material way:
- The industry's general economic environment changes adversely
- Companies continue to consolidate
- Research and development expenditures or pharmaceutical companies'
expenditures on technology in general decrease
A trend in the pharmaceutical industry is for companies to "outsource" either
large information technology-dependent projects or their information systems
staffing requirements. Outsourcing means that, rather than utilize its own
employees, a company contracts with a third party to undertake an entire project
or to provide technical personnel to augment their own staff. FCG benefits when
pharmaceutical companies outsource to FCG, but may lose significant future
business when pharmaceutical companies outsource to FCG's competitors. If this
outsourcing trend slows down or stops, or if pharmaceutical companies direct
their business away from FCG, FCG financial condition and results of operations
could be impacted in a materially adverse way.
FCG MAY BE UNABLE TO EFFECTIVELY PROTECT ITS PROPRIETARY INFORMATION AND
PROCEDURES. FCG must protect its proprietary information, including its
proprietary methodologies, research, tools, software code and other information.
To do this, FCG relies on a combination of copyright and trade secret laws and
confidentiality procedures to protect its intellectual property. These steps may
not protect FCG's 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. FCG is currently providing its services to
clients in international markets. FCG's 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 FCG's intellectual property could have a
material adverse effect on FCG's business, financial condition or results of
operations.
FCG MAY INFRINGE THE INTELLECTUAL PROPERTY RIGHTS OF THIRD PARTIES. FCG's
success depends, in part, on not infringing patents, copyrights and other
intellectual property rights held by others. FCG does not know whether patents
held or patent applications filed by third parties may force FCG to alter its
methods of business and operation or require FCG to obtain licenses from third
parties. If FCG attempts to obtain such licenses, FCG does not know whether it
will be granted licenses or whether the terms of those licenses will be fair or
acceptable to FCG. Third parties may assert infringement claims against FCG in
the future. Such claims may result in protracted and costly litigation,
penalties and fines, regardless of the merits of such claims.
FCG'S MANAGEMENT MAY BE ABLE TO EXERCISE CONTROL OVER MATTERS REQUIRING
STOCKHOLDER APPROVAL. FCG's current officers, directors, and others
affiliated with FCG beneficially own approximately 55%, of the outstanding
shares of FCG Common Stock. As a result, FCG's existing management, if acting
together, may be able to exercise control over or significantly influence
matters requiring stockholder
21
<PAGE>
approval, including the election of directors, mergers, consolidations, sales
of all or substantially all of the assets of FCG, issuance of additional
shares of stock, and approval of new stock and option plans.
22
<PAGE>
ITEM 2. PROPERTIES
FCG's headquarters is located in approximately 28,000 square feet of leased
office space in Long Beach, California. FCG leases approximately 90,000
square feet in Wayne, Pennsylvania, which houses the majority FCG's software
development services employees plus a portion of FCG's practice support
staff. FCG also has an additional 25 leases for local offices throughout the
United States and in Canada, the United Kingdom, Ireland and Germany. Overall,
FCG's properties are suitable and adequate for FCG's needs.
ITEM 3. LEGAL PROCEEDINGS
From time to time, FCG may be involved in claims or litigation that arise in the
normal course of business. FCG is not currently a party to any legal proceedings
which, if decided adversely to FCG, would have a material adverse effect on
FCG's business, financial condition or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the fourth quarter of 1999, no matters were submitted to a vote of the
stockholders.
23
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
Since February 13, 1998, FCG Common Stock has been quoted on Nasdaq under the
symbol "FCGI." The table below sets forth, for the quarters indicated, the
reported high and low sale prices of FCG Common Stock reported on the Nasdaq
National Market.
<TABLE>
<CAPTION>
FCG COMMON STOCK
-------------------------------------
1998 HIGH LOW
---- ----------------- -----------------
<S> <C> <C>
First Quarter................................ $20.88 $17.50
Second Quarter............................... 29.13 18.50
Third Quarter................................ 29.00 13.88
Fourth Quarter............................... 24.13 8.75
1999
----
First Quarter................................ $25.00 $10.06
Second Quarter............................... 18.00 6.75
Third Quarter................................ 16.75 9.00
Fourth Quarter............................... 17.06 7.88
</TABLE>
As of March 1, 2000, there were approximately 399 record holders of FCG Common
Stock. Other than dividends previously paid by an acquired company to its
individual owner, FCG has never paid cash dividends on its Common Stock and
presently intends to continue to retain its earnings for use in the businesses.
24
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
The following selected historical consolidated financial information of FCG as
of December 31, 1998 and 1999 and for each of the years ended December 31, 1997,
1998 and 1999, has been derived from and should be read in conjunction with the
consolidated financial statements of FCG and related notes thereto included
elsewhere in this Report. The selected historical consolidated financial
information of FCG as of December 31, 1995, 1996 and 1997 and for the years
ended December 31, 1995 and December 31, 1996, have been derived from the
audited consolidated financial statements of FCG, which are not included in this
Report.
On September 9, 1998 the merger agreement in its definitive form with Integrated
Systems Consulting Group, Inc. ("ISCG") was executed and jointly announced. On
December 18, 1998, FCG completed its merger with ISCG. In December 1998, FCG
also completed a merger with Pareto Consulting Ltd. ("Pareto"). The mergers were
accounted for as poolings of interests and all prior period consolidated
financial data presented herein has been restated to include the combined
results of the acquisitions as though they had always been part of FCG.
<TABLE>
<CAPTION>
(In Thousands, Except Per Share Data) YEARS ENDED DECEMBER 31
--------------------------------------------------------------
1999 1998 1997 1996 1995
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Net revenue ......................................... $ 237,563 $ 196,290 $ 137,121 $ 98,412 $ 70,796
Cost of services .................................... 148,793 110,836 80,191 59,454 40,197
---------- ---------- ---------- ---------- ----------
Gross profit ............................... 88,770 85,454 56,930 38,958 30,599
General and administrative expenses ................. 69,312 63,290 44,554 32,387 23,198
Merger, restructuring and severance costs ........... 3,550 6,041 -- -- --
Compensation expenses related to stock issuances .... -- -- 6,060 588 385
---------- ---------- ---------- ---------- ----------
Income from operations ..................... 15,908 16,123 6,316 5,983 7,016
Interest income (expense), net ...................... 2,601 2,307 392 396 (33)
Other income, net ................................... 3,941 55 119 44 18
---------- ---------- ---------- ---------- ----------
Income before income taxes ................. 22,450 18,485 6,827 6,423 7,001
Provision for income taxes .......................... 7,643 10,234 4,488 2,797 2,815
---------- ---------- ---------- ---------- ----------
Net income ................................. $ 14,807 $ 8,251 $ 2,339 $ 3,626 $ 4,186
========== ========== ========== ========== ==========
Basic net income per share .......................... $ 0.63 $ 0.38 $ 0.14 $ 0.26 $ 0.36
Diluted net income per share ........................ $ 0.61 $ 0.36 $ 0.13 $ 0.23 $ 0.34
Shares used in computing basic net income
per share ........................................ 23,416 21,567 16,234 14,142 11,578
Shares used in computing diluted net
income per share .................................... 24,231 23,010 17,471 15,505 12,451
Balance Sheet Data (at end of period):
Cash and cash equivalents ........................... $ 29,674 $ 20,737 $ 12,187 $ 9,595 $ 5,215
Total assets ........................................ 144,061 130,461 59,294 45,084 29,674
Long-term debt ...................................... 146 238 262 2,692 3,362
Total stockholders' equity .......................... 114,907 92,586 27,080 21,614 7,039
</TABLE>
25
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION
The following discussion and analysis should be read in conjunction with
"Selected Financial Data" and the consolidated financial statements and notes
thereto contained elsewhere in this Report. Except for the historical
information contained herein, the discussion in this Report contains certain
forward-looking statements that involve risks and uncertainties, such as
statements of FCG's plans, objectives, expectations and intentions. The
cautionary statements made in this Report should be read as being applicable to
all related forward-looking statements wherever they appear in this prospectus.
FCG's actual results could differ materially from those discussed here. Factors
that could cause or contribute to such differences include those discussed in
this section and the section entitled "Risks Relating to the Business of FCG" as
well as those discussed elsewhere in this Report.
OVERVIEW
FCG provides services primarily to payors, providers, government agencies,
pharmaceutical, biogenetic, and life science companies, and other healthcare
organizations in North America and Europe. FCG generates substantially all of
its revenue from fees for professional services. FCG typically bills for its
services on an hourly, fixed-fee or monthly fixed-fee basis as specified by the
agreement with a particular client. FCG establishes either standard or target
hourly rates for each level of consultant based on several factors including
industry and assignment-related experience, technical expertise, skills and
knowledge. For services billed on an hourly basis, fees are determined by
multiplying the amount of time expended on each assignment by the project hourly
rate for the consultant(s) assigned to the engagement. Fixed fees are
established on a per-assignment or monthly basis and are based on several
factors such as the size, scope, complexity and duration of an assignment and
the number of consultants required to complete the assignment. Actual hourly or
fixed fees for an assignment may vary from the standard, target, or historical
rates charged by FCG. For services billed on an hourly basis, FCG recognizes
revenue as services are performed. For services billed on a fixed fee basis, FCG
recognizes revenue using the percentage of completion method based either on 1)
the amount of time completed on each assignment versus the projected number of
hours required to complete such assignment, or 2) the amount of cost incurred on
the assignment versus the projected total cost to complete the assignment.
Revenue is recorded as incurred at assignment rates net of unplanned adjustments
for specific engagements. Unplanned adjustments to revenue are booked at the
time they are known. Out-of-pocket expenses are billed to and reimbursed by
clients and offset against expenses incurred and are not included in recognized
revenues. Provisions are made for estimated uncollectible amounts based on the
Company's experience. FCG may obtain payment in advance of providing services.
These advances are recorded as deferred revenue and reflected as a liability on
FCG's balance sheet.
Cost of services primarily consists of the salaries, bonuses and related
benefits of client-serving consultants and subcontractor expenses. General and
administrative expenses primarily consist of the costs attributable to the
development of the business and the support of its client-serving professionals,
such as: non-billable travel; office space occupancy; investments in FCG's
information systems, research and practice support and quality initiatives;
salaries and expenses for executive management, financial accounting and
administrative personnel; expenses for firm, client type, and service line
governance meetings; recruiting fees and professional development and training;
and marketing, legal and other professional services. As associate related costs
are relatively fixed, variations in FCG's revenues and operating results can
occur as a result of variations in billing margins and utilization rates of its
billable associates.
26
<PAGE>
The Company routinely reviews its fees for services, professional compensation
and overhead costs to ensure that its services and compensation are competitive
within the industry. In addition, FCG routinely monitors the progress of client
projects with its clients' senior management. Quality of Service Questionnaires
are sent to the client after each engagement with the results compiled and
reported to FCG executive management.
In connection with the ASOP and certain non-qualified stock options granted to
FCG's vice presidents prior to 1998, FCG recognizes compensation expense on its
consolidated statement of operations. The recurring portion of FCG's
compensation expense relating to stock issuances and the amortization of
deferred compensation is reflected in FCG's consolidated statements of
operations as general and administrative expenses or cost of services based on
the function of the employee to whom the charge relates. Since 1998, FCG has
granted all stock options at fair market value. In connection with the ASOP, FCG
matches employee 401(k) contributions with shares of FCG Common Stock based on
the fair market value of the shares.
FCG's most significant expenses are its human resource and related salary and
benefit expenses. As of December 31, 1999, approximately 68% or 1,380 of FCG's
2,042 employees (of which 327 are leased as part of an outsourcing transaction
and who became employees on January 1, 2000) are billable consultants. Another
370 employees form the firm's outsourcing business. The salaries and benefits of
such billable consultants and outsourcing related employees are recognized in
FCG's cost of services. Non-billable employee salaries and benefits are
recognized as a component of general and administrative expenses. Approximately
14%, or 292 employees are classified as non-billable. FCG's cost of services as
a percentage of revenue is directly related to its consultant utilization, which
is the ratio of total billable hours to available hours in a given period, and
the amount of cost recognized under percentage of completion accounting. FCG
manages consultant utilization by monitoring assignment requirements and
timetables, available and required skills, and available consultant hours per
week and per month. FCG evaluates its fixed contracts on a monthly basis using
percentage of completion accounting. Differences in personnel utilization rates
can result from variations in the amount of non-billed time, which has
historically consisted of training time, vacation and holiday 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, FCG actively
manages 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 FCG to experience lower margins. In
addition, the opening of new offices, expansion into new markets, and the hiring
of consultants in advance of client assignments have resulted and may continue
to result in periods of lower consultant utilization.
FCG's effective tax rate has varied from period to period due to non-deductible
losses from FCG's foreign operations and differences between book and tax
deductions associated with certain non-deductible operating expenses, including
certain compensation expenses related to the ASOP, and merger, restructuring and
severance related activities. The Company believes that its tax rate has
normalized around the 41.5% rate level.
27
<PAGE>
COMPARISON OF THE YEARS ENDED DECEMBER 31, 1999 AND 1998
NET REVENUE. FCG's net revenue increased to $237.6 million for the year ended
December 31, 1999, an increase of 21.0% over the $196.3 million for the year
ended December 31, 1998. This increase was primarily attributable to an increase
in revenue from FCG's business service lines including application development,
integration services, implementation services, and outsourcing management
services.
COST OF SERVICES. Cost of services increased to $148.8 million for the year
ended December 31, 1999, an increase of 34.2% over the $110.8 million for the
year ended December 31, 1998. The increase was primarily attributable to an
increase in the number of client-serving consultants and outsourcing employees
hired during the period to respond to the Company's growth. Cost of services as
a percentage of revenue increased to 62.6% for the year ended December 31, 1999
from 56.5% for the year ended December 31, 1998. This increase was primarily
attributable to decreased consultant utilization and corresponding revenue
shortfall experienced in the second half of 1999 caused primarily by industry
uncertainties surrounding Y2K.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased to $69.3 million for the year ended December
31, 1999, an increase of 9.5% over the $63.3 million for the year ended December
31, 1998. General and administrative expenses as a percentage of revenue
decreased to 29.2% for the year ended December 31, 1999 from 32.2% for the year
ended December 31, 1998. This decrease was primarily attributable to the firm's
conscious efforts to reduce certain non-client related expenses. Selling,
general, and administrative expenses are principally expenses to support FCG's
investment in attaining new client work, recruiting new employees, governing
costs associated with the practice and firm, enhancing internal professional
development and training, and supporting the firms infrastructure.
MERGER, RESTRUCTURING, AND SEVERANCE COSTS. Merger, restructuring, and severance
costs decreased to $3.6 million for the year ended December 31, 1999 from $6.0
million for the year ended December 31, 1998. The costs incurred during 1999
were primarily attributable to restructuring and severance costs associated with
rationalizing capacity requirements in Europe, and secondarily separation costs
associated with the merger between FCG and ISCG in December 1998. The costs
incurred in 1998 were primarily attributable to the merger between FCG and ISCG,
and secondarily, the costs as a result of the termination of a potential
business combination contemplated by ISCG prior to the merger between FCG and
ISCG.
INTEREST INCOME, NET. Interest income, net of interest expense, increased to
$2.6 million for the year ended December 31, 1999 from $2.3 million for the year
ended December 31, 1998. Interest income net of interest expense as a percentage
of revenue slightly decreased to 1.1% for the year ended December 31, 1999 from
1.2% for the year ended December 31, 1998.
OTHER INCOME. Other income increased to $3.9 million for the year ended December
31, 1999 from $55,000 for the year ended December 31, 1998. This increase was
primarily attributable to the receipt of net proceeds from a life insurance
policy for former Co-founder, Chairman and CEO James A. Reep, who passed away
from lung cancer in April 1999. Other income was negligible in the prior year.
INCOME TAXES. Income taxes as a percentage of income before income taxes
decreased to 34.0% for the year ended December 31, 1999 from 55.4% for the year
ended December 31, 1998 primarily due to the effect of the other income in the
current year from the life insurance proceeds noted above not being taxable
income, thus lowering the effective tax rate for the year, while there had been
certain nondeductible expenses related to the European operations which had
caused a higher rate in 1998.
28
<PAGE>
COMPARISON OF THE YEARS ENDED DECEMBER 31, 1998 AND 1997
NET REVENUE. FCG's net revenue increased to $196.3 million for the year ended
December 31, 1998, an increase of 43.2% over the $137.1 million for the year
ended December 31, 1997. This increase was primarily attributable to an increase
in revenue from FCG's business service lines including application development,
integration services, implementation services, and operations effectiveness.
COST OF SERVICES. Cost of services increased to $110.8 million for the year
ended December 31, 1998, an increase of 38.2% over the $80.2 million for the
year ended December 31, 1997. The increase was primarily attributable to an
increase in the number of client-serving consultants hired during the period to
respond to the Company's growth. Cost of services as a percentage of revenue
decreased to 56.5% for the year ended December 31, 1998 from 58.5% for the year
ended December 31, 1997. This decrease was primarily attributable to increased
realization of standard and target fees.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased to $63.3 million for the year ended December
31, 1998, an increase of 42.1% over the $44.6 million for the year ended
December 31, 1997. General and administrative expenses as a percentage of
revenue decreased slightly to 32.2% for the year ended December 31, 1998 from
32.5% for the year ended December 31, 1997. These expenses are principally
related to increases in administrative expenses to support FCG's growth and
increased consulting capacity. The dollar increase reflects the Company's
continued emphasis on its investment in recruiting, professional development and
training, and geographical expansion to support the growth of its business.
MERGER RELATED COSTS. Merger related costs increased to $6.0 million for the
year ended December 31, 1998 from zero for the year ended December 31, 1997.
This increase was primarily attributable to costs incurred in connection with
the merger between FCG and ISCG, and secondarily, the costs as a result of the
termination of a potential business combination contemplated by ISCG prior to
the merger between FCG and ISCG.
COMPENSATION EXPENSES RELATED TO STOCK ISSUANCES. Compensation expenses related
to stock issuances decreased to zero for the year ended December 31, 1998 from
$6.1 million for the year ended December 31, 1997. This decrease was
attributable to the discontinuance of certain compensatory stock and option
issuances.
INTEREST INCOME, NET. Interest income, net of interest expense, increased to
$2.3 million for the year ended December 31, 1998 from $392,000 for the year
ended December 31, 1997. Interest income net of interest expense as a percentage
of revenue increased to 1.2% for the year ended December 31, 1998 from 0.3% for
the year ended December 31, 1997. This increase was primarily attributable to
the investment of net proceeds from FCG's initial public offering in February
1998.
INCOME TAXES. Income taxes as a percentage of income before income taxes
decreased to 55.4% for the year ended December 31, 1998 from 65.7% for the year
ended December 31, 1997 due to a reduction in certain non-deductible
compensation related expenses partly offset by certain non-deductible merger
related costs in the current period.
29
<PAGE>
QUARTERLY FINANCIAL RESULTS
The following table sets forth certain unaudited statements of operations data
for the eight quarters ended December 31, 1999, as well as such data expressed
as a percentage of the Company's net revenue for the periods indicated. This
data has been derived from unaudited financial statements that, in the opinion
of the Company's management, include all adjustments (consisting only of normal
recurring adjustments) necessary for a fair presentation of such information
when read in conjunction with the Company's 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)
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
1999
Net revenue ................................. $ 58,864 $ 60,919 $ 61,411 $ 56,369
Cost of services ............................ 35,144 36,969 37,697 38,983
---------- ---------- ---------- ----------
Gross profit ......................... 23,720 23,950 23,714 17,386
General and administrative expenses ......... 17,680 17,531 17,061 17,040
Merger, restructuring and severance costs ... 110 1,718 -- 1,722
---------- ---------- ---------- ----------
Income (loss) from operations ........ 5,930 4,701 6,653 (1,376)
Interest income (expense), net .............. 600 602 654 745
Other income, net ........................... 22 3,875 19 25
---------- ---------- ---------- ----------
Income (loss) before income taxes .... 6,552 9,178 7,326 (606)
Provision for income taxes .................. 2,818 2,288 2,789 (252)
---------- ---------- ---------- ----------
Net income (loss) .................... $ 3,734 $ 6,890 $ 4,537 $ (354)
========== ========== ========== ==========
Diluted net income (loss) per share ......... $ 0.16 $ 0.29 $ 0.19 $ (.01)
========== ========== ========== ==========
1998
Net revenue ................................. $ 43,569 $ 47,792 $ 51,082 $ 53,847
Cost of services ............................ 25,489 26,589 28,550 30,208
---------- ---------- ---------- ----------
Gross profit ......................... 18,080 21,203 22,532 23,639
General and administrative expenses ......... 13,811 15,373 16,433 17,673
Merger related costs ........................ -- -- 486 5,555
---------- ---------- ---------- ----------
Income from operations ............... 4,269 5,830 5,613 411
Interest income (expense), net .............. 423 545 593 746
Other income, net ........................... 27 8 13 7
---------- ---------- ---------- ----------
Income before income taxes ........... 4,719 6,383 6,219 1,164
Provision for income taxes .................. 1,927 3,048 2,848 2,411
---------- ---------- ---------- ----------
Net income (loss) .................... $ 2,792 $ 3,335 $ 3,371 $ (1,247)
========== ========== ========== ==========
Diluted net income (loss) per share ......... $ 0.13 $ 0.14 $ 0.14 $ (0.06)
========== ========== ========== ==========
</TABLE>
30
<PAGE>
PERCENTAGE OF NET REVENUE
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
1999
Net revenue ........................................... 100.0% 100.0% 100.0% 100.0%
Cost of services ...................................... 59.7 60.7 61.4 69.2
---------- ---------- ---------- ----------
Gross profit ................................... 40.3 39.3 38.6 30.8
General and administrative expenses ................... 30.0 28.8 27.8 30.2
Merger, restructuring and severance costs ............. 0.2 2.8 0.0 3.0
---------- ---------- ---------- ----------
Income (loss) from operations .................. 10.1 7.7 10.8 (2.4)
Interest income (expense), net ........................ 1.0 1.0 1.1 1.3
Other income, net ..................................... 0.0 6.4 0.0 0.0
---------- ---------- ---------- ----------
Income (loss) before income taxes .............. 11.1 15.1 11.9 (1.1)
Provision for income taxes ............................ 4.8 3.8 4.5 (.5)
---------- ---------- ---------- ----------
Net income (loss) .............................. 6.3% 11.3% 7.4% (.6%)
========== ========== ========== ==========
1998
Net revenue ........................................... 100.0% 100.0% 100.0% 100.0%
Cost of services ...................................... 58.5 55.6 55.9 56.1
---------- ---------- ---------- ----------
Gross profit ................................... 41.5 44.4 44.1 43.9
General and administrative expenses ................... 31.7 32.2 32.2 32.8
Merger related costs .................................. 0.0 0.0 1.0 10.3
---------- ---------- ---------- ----------
Income from operations ......................... 9.8 12.2 11.0 0.8
Interest income (expense), net ........................ 1.0 1.1 1.2 1.4
Other income, net ..................................... 0.1 0.0 0.0 0.0
---------- ---------- ---------- ----------
Income before income taxes ..................... 10.8 13.4 12.2 2.2
Provision for income taxes ............................ 4.4 6.4 5.6 4.5
---------- ---------- ---------- ----------
Net income (loss) .............................. 6.4% 7.0% 6.6% (2.3%)
========== ========== ========== ==========
</TABLE>
A substantial portion of the Company's expenses, particularly depreciation,
office rent and occupancy costs, and, in the short run, personnel and related
costs are relatively fixed. Certain client-reimbursable costs are offset against
expenses incurred, and are not included in recognized revenues. The Company's
quarterly operating results may vary significantly in the future depending on a
number of factors, many of which are outside the control of the Company. These
factors may include: 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 loss of personnel; the
loss of one or more significant clients; the unpredictability of engaging new
clients and additional assignments from existing clients; increased competition;
write-offs of client billings; consolidation of, and subsequent reduction in the
number of, healthcare providers; pricing pressure; the number, timing and
contractual terms of significant client engagements; market demand for the
Company's services; delays or increased expenses incurred in connection with
existing assignments; changes in pricing policies by the Company or its
competitors; changes in the Company's business strategies; variability in the
number of business days within a quarter; and international currency
fluctuations. Due to the foregoing factors, quarterly revenue and operating
results are not predictable with any significant degree of accuracy. In
particular, the timing between initial
31
<PAGE>
client contract and fulfillment of the criteria necessary for revenue
recognition can be lengthy and unpredictable, and revenue 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 the Company to maintain a significant number of under-utilized
consultants, which could have a material adverse effect on the Company's
business, financial condition, and results of operations.
The Company typically experiences a lower number of billable days in the second
and fourth quarters of every year. The Company requires attendance at an annual
meeting of nearly two-thirds of its employees in the second quarter of every
year and encourages its employees to take vacation during the December holidays.
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 the Company's revenue and
costs. In the event of any downturn in potential clients' businesses or the
economy in general, planned utilization of the Company's services may be
deferred or canceled, which could have a material adverse effect on the
Company's business, financial condition and results of operations. Based on the
preceding factors, the Company may experience a shortfall in revenue 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 the Common Stock.
LIQUIDITY AND CAPITAL RESOURCES
During the year ended December 31, 1999, the Company generated cash flow from
operations of $5.7 million. During the year ended December 31, 1999, the Company
used cash flow of approximately $9.6 million to purchase property and equipment,
including computer and related equipment and office furniture. Depreciation and
amortization expense for the year ended December 31, 1999 was approximately $6.8
million. During the year ended December 31, 1999, the Company generated cash
flow of $4.0 million from financing activities. At December 31, 1999, the
Company had working capital of $72.0 million and long-term investments of $17.1
million. At December 31, 1998, the Company had working capital of $66.9 million
and long-term investments of $5.6 million. The primary reason for the increase
in working capital and long-term investments was the net revenue earned during
the year. Essentially all of the $44.7 million of proceeds from FCG's IPO in
February 1998 were retained as cash or investments at December 31, 1999.
The Company had a $9,000,000 revolving line of credit, which is available
through May 1, 2000, at the bank's prevailing prime rate. The Company has a note
payable to the bank with a remaining balance of $182,000 at December 31, 1999.
The note bears interest at the bank's prime rate plus 0.5% and is payable in
monthly installments of $4,000 plus interest with the last installment due July
1, 2003. All borrowings under the Company's credit facilities are secured by the
Company's accounts receivable and other rights to payment, general intangibles
and equipment. The line of credit agreement provides that the Company must
satisfy certain covenants and restrictions. Due to the loss incurred in the
fourth quarter of 1999, the Company was in noncompliance with one of these
covenants, and received a waiver of compliance subsequent to year-end.
32
<PAGE>
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Not applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Company's annual consolidated financial statements are included in Item 14
of this Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
33
<PAGE>
PART III
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 May 1, 2000,
either as part of FCG's Proxy Statement for its 2000 Annual Meeting or as an
amendment to this Form 10-K.
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 May 1, 2000,
either as part of FCG's Proxy Statement for its 2000 Annual Meeting or as an
amendment to this Form 10-K.
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 May 1, 2000,
either as part of FCG's Proxy Statement for its 2000 Annual Meeting or as an
amendment to this Form 10-K.
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 May 1, 2000,
either as part of FCG's Proxy Statement for its 2000 Annual Meeting or as an
amendment to this Form 10-K.
34
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT, SCHEDULES AND REPORTS ON FORM 8-K
<TABLE>
<CAPTION>
(a) (1) The following financial statements are filed as part of this Annual Report on Form 10-K:
Page
----
<S> <C>
- Consolidated Balance Sheets-- December 31, 1999 and December 31, 1998...................................36
- Consolidated Statements of Operations -- Years Ended
December 31, 1999, 1998 and 1997........................................................................37
- Consolidated Statement of Changes in Stockholders' Equity --
For the Three Years Ended December 31, 1999, 1998 and 1997..............................................38
- Consolidated Statements of Cash Flows -- Years Ended
December 31, 1999, 1998 and 1997........................................................................39
- Consolidated Statements of Comprehensive Income -- Years Ended
December 31, 1999, 1998 and 1997........................................................................40
- Notes to Consolidated Financial Statements..............................................................41
- Reports of Independent Certified Public Accountants.....................................................62
(2) The following financial statements schedule for the years ended
December 31, 1999 and 1998, read in conjunction with the financial
statements of First Consulting Group, Inc., is filed as part of
this Annual Report on Form 10-K.
- Schedule II -- Valuation and Qualifying Accounts........................................................64
</TABLE>
Schedules other than that listed above have been omitted since
they are either not required, not applicable, or because the
information required is included in the financial statements or
the notes thereto.
(3) The exhibits listed in the Index to Exhibits hereof are attached
hereto or incorporated herein by reference and filed as apart of
this Report.
(b) Reports on Form 8-K.
FCG filed a current report on Form 8-K dated November 8, 1999, announcing
FCG's outsourcing agreement with New York Presbyterian Hospital. In
addition, FCG filed a current report on Form 8-K dated December 9, 1999,
announcing adoption by FCG of a share purchase rights plan.
35
<PAGE>
FIRST CONSULTING GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In Thousands, Except Share Data)
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
-----------------------
1999 1998
---------- ----------
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents ......................................................... $ 29,674 $ 20,737
Short-term investments ............................................................ 3,726 27,168
Accounts receivable, less allowance of $2,064 and $1,449 in 1999 and 1998,
respectively ...................................................................... 42,315 36,955
Work in process ................................................................... 15,737 13,185
Prepaid expenses and other current assets ......................................... 2,562 2,565
---------- ----------
Total current assets ........................................................ 94,014 100,610
Notes receivable - stockholders (Note E) ................................................. 1,888 1,803
Long-term investments .................................................................... 17,096 5,644
Property and equipment
Furniture, equipment, and leasehold improvements .................................. 7,550 5,418
Information systems equipment ..................................................... 24,723 17,528
---------- ----------
32,273 22,946
Less accumulated depreciation and amortization ........................................... 17,283 11,932
---------- ----------
14,990 11,014
Other assets
Executive benefit trust (Note G) .................................................. 6,832 3,709
Deferred income taxes ............................................................. 2,105 763
Goodwill, net ..................................................................... 6,478 6,134
Other ............................................................................. 658 784
---------- ----------
16,073 11,390
---------- ----------
Total assets ................................................................ $ 144,061 $ 130,461
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Current portion of long-term debt (Note C) ........................................ $ 54 $ 67
Accounts payable .................................................................. 874 2,150
Accrued liabilities ............................................................... 6,516 8,090
Accrued vacation .................................................................. 4,668 2,655
Accrued bonuses ................................................................... 4,432 3,149
Deferred revenue .................................................................. 722 491
Customer advances ................................................................. 2,592 2,416
Income taxes payable .............................................................. 2,180 8,355
Deferred income taxes (Note D) .................................................... 11 6,318
---------- ----------
Total current liabilities ................................................... 22,049 33,691
Non-current liabilities
Long-term debt, net of current portion (Note C) ................................... 146 238
Supplemental executive retirement plan (Note G) ................................... 6,959 3,946
---------- ----------
Total non-current liabilities ............................................... 7,105 4,184
Commitments and contingencies (Note K) ................................................... -- --
Stockholders' equity
Preferred stock, $.001 par value; 9,500,000 shares authorized, no shares
issued and outstanding ............................................................ -- --
Series A Junior Participating Preferred Stock, $.001 par value; 500,000
shares authorized, no shares issued and outstanding ............................. -- --
Common Stock, $.001 par value; 50,000,000 shares authorized, 23,943,092 and
22,600,773 shares issued and outstanding at December 31, 1999 and 1998,
respectively .................................................................... 24 23
Additional paid in capital ........................................................ 99,993 83,611
Retained earnings ................................................................. 36,657 21,850
Deferred compensation - stock incentive agreements (Notes A and H) ................ (5,495) (4,058)
Unearned ASOP shares (Note I) ..................................................... -- (739)
Notes receivable - stockholders (Note E) .......................................... (16,197) (8,181)
Accumulated other comprehensive income ............................................ (75) 80
---------- ----------
Total stockholders' equity .................................................. 114,907 92,586
---------- ----------
Total liabilities and stockholders' equity .................................. $ 144,061 $ 130,461
========== ==========
</TABLE>
- --------------------------------------------------------------------------------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
36
<PAGE>
CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands, Except Per Share Data)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
Net revenue ............................................. $ 237,563 $ 196,290 $ 137,121
Cost of services ........................................ 148,793 110,836 80,191
---------- ---------- ----------
Gross profit .............................. 88,770 85,454 56,930
General and administrative expenses ..................... 69,312 63,290 44,554
Merger, restructuring and severance costs ............... 3,550 6,041 --
Compensation expenses related to stock issuances (Note H) -- -- 6,060
---------- ---------- ----------
Income from operations .................... 15,908 16,123 6,316
---------- ---------- ----------
Other income
Interest income .................................. 2,648 2,381 706
Interest expense ................................. (47) (74) (314)
Other income, net ................................ 3,941 55 119
---------- ---------- ----------
Income before income taxes ................ 22,450 18,485 6,827
Provision for income taxes .............................. 7,643 10,234 4,488
---------- ---------- ----------
Net income ................................ $ 14,807 $ 8,251 $ 2,339
========== ========== ==========
Basic net income per share .............................. $ 0.63 $ 0.38 $ 0.14
========== ========== ==========
Shares used in computing basic net income per share ..... 23,416 21,567 16,234
Diluted net income per share ............................ $ 0.61 $ 0.36 $ 0.13
========== ========== ==========
Shares used in computing diluted net income per share ... 24,231 23,010 17,471
</TABLE>
- --------------------------------------------------------------------------------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
37
<PAGE>
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY--
FOR THE THREE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(In Thousands)
<TABLE>
<CAPTION>
COMMON STOCK OTHER
----------------------- RETAINED COMPREHENSIVE
SHARES AMOUNT APIC EARNINGS INCOME
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1997 17,948 $ 18 $ 24,205 $ 12,295 $ 29
Redemption of Common Stock (64) -- (305) -- --
Issuance of Common Stock under
the RSAs 1,347 1 4,898 -- --
Compensation recognized under
the RSAs -- -- -- -- --
Common Stock released under the
ASOP -- -- 3,990 -- --
Interest income on stockholders'
notes receivable -- -- -- -- --
Issuance of new Common Stock to
the ASOP 64 -- 305 -- --
Increase of put obligation -- -- -- -- --
Excess income tax benefits
attributed to exercised stock
options -- -- 395 -- --
Exercise of stock options -- -- 42 -- --
Issuance of Common Stock in
public offering -- -- -- -- --
Net income -- -- -- 2,339 --
Foreign currency translation
adjustments -- -- -- -- 2
Payment of distributions to
shareholders of predecessor
companies prior to acquisition -- -- -- (915) --
---------- ---------- ------------ ------------ ---------
BALANCE, DECEMBER 31, 1997 19,295 19 33,530 13,719 31
Issuance of Common Stock under
the RSAs 362 -- 5,093 -- --
Compensation recognized under
the RSAs -- -- -- -- --
Common Stock released under the
ASOP -- -- 560 -- --
Interest income on stockholders'
notes receivable -- -- -- -- --
Elimination of put obligation -- -- -- -- --
Excess income tax benefits
attributed to exercised stock
options -- -- 26 -- --
Exercise of stock options -- -- 260 -- --
Issuance of Common Stock in
public offering 3,802 4 44,696 -- --
Cancellation of treasury stock (859) -- (554) -- --
Net income -- -- -- 8,251 --
Unrealized gain on securities -- -- -- -- 71
Foreign currency translation
adjustments -- -- -- -- (22)
Payment of distributions to
shareholders of predecessor
companies prior to acquisition -- -- -- (120) --
---------- ---------- ------------ ------------ ---------
BALANCE, DECEMBER 31, 1998 22,601 23 83,611 21,850 80
Issuance of Common Stock under
the RSAs 574 -- 9,481 -- --
Compensation recognized under
the RSAs -- -- -- -- --
Common Stock released under the
ASOP -- -- 2,938 -- --
Interest income on stockholders'
notes receivable -- -- -- -- --
Excess income tax benefits
attributed to exercised stock
options -- -- 267 -- --
Exercise of stock
options/warrants 768 1 3,696 -- --
Net income -- -- -- 14,807 --
Unrealized loss on securities -- -- -- -- (203)
Foreign currency translation
adjustments -- -- -- -- 48
---------- ---------- ------------ ------------ ---------
BALANCE, DECEMBER 31, 1999 23,943 $ 24 $ 99,993 $ 36,657 $ (75)
========== ========== ============ ============ =========
<CAPTION>
UNEARNED NOTES
DEFERRED ASOP RECEIVABLE- PUT TREASURY
COMPENSATION SHARES STOCKHOLDERS OBLIGATION STOCK TOTAL
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1997 $ (2,333) $ (3,225) $ (2,043) $ (6,658) $ (674) $ 21,614
Redemption of Common Stock -- -- -- -- -- (305)
Issuance of Common Stock under
the RSAs (1,847) -- (2,825) -- -- 227
Compensation recognized under
the RSAs 545 -- -- -- -- 545
Common Stock released under the
ASOP -- 2,677 -- -- -- 6,667
Interest income on stockholders'
notes receivable -- -- (266) -- -- (266)
Issuance of new Common Stock to
the ASOP -- (305) -- -- -- --
Increase of put obligation -- -- -- (3,307) -- (3,307)
Excess income tax benefits
attributed to exercised stock
options -- -- -- -- -- 395
Exercise of stock options -- -- -- -- 42 84
Issuance of Common Stock in
public offering -- -- -- -- -- --
Net income -- -- -- -- -- 2,339
Foreign currency translation
adjustments -- -- -- -- -- 2
Payment of distributions to
shareholders of predecessor
companies prior to acquisition -- -- -- -- -- (915)
------------ ------------ ------------ ------------ ------------ ------------
BALANCE, DECEMBER 31, 1997 (3,635) (853) (5,134) (9,965) (632) 27,080
Issuance of Common Stock under
the RSAs (1,158) -- (2,698) -- -- 1,237
Compensation recognized under
the RSAs 735 -- -- -- -- 735
Common Stock released under the
ASOP -- 114 -- -- -- 674
Interest income on stockholders'
notes receivable -- -- (349) -- -- (349)
Elimination of put obligation -- -- -- 9,965 -- 9,965
Excess income tax benefits
attributed to exercised stock
options -- -- -- -- -- 26
Exercise of stock options -- -- -- -- 78 338
Issuance of Common Stock in
public offering -- -- -- -- -- 44,700
Cancellation of treasury stock -- -- -- -- 554 --
Net income -- -- -- -- -- 8,251
Unrealized gain on securities -- -- -- -- -- 71
Foreign currency translation
adjustments -- -- -- -- -- (22)
Payment of distributions to
shareholders of predecessor
companies prior to acquisition -- -- -- -- -- (120)
------------ ------------ ------------ ------------ ------------ ------------
BALANCE, DECEMBER 31, 1998 (4,058) (739) (8,181) -- -- 92,586
Issuance of Common Stock under
the RSAs (2,516) -- (7,148) -- -- (183)
Compensation recognized under
the RSAs 1,079 -- -- -- -- 1,079
Common Stock released under the
ASOP -- 739 -- -- -- 3,677
Interest income on stockholders'
notes receivable -- -- (868) -- -- (868)
Excess income tax benefits
attributed to exercised stock
options -- -- -- -- -- 267
Exercise of stock
options/warrants -- -- -- -- -- 3,697
Net income -- -- -- -- -- 14,807
Unrealized loss on securities -- -- -- -- -- (203)
Foreign currency translation
adjustments -- -- -- -- -- 48
------------ ------------ ------------ ------------ ------------ ------------
BALANCE, DECEMBER 31, 1999 $ (5,495) $ -- $ (16,197) $ -- $ -- $ 114,907
============ ============ ============ ============ ============ ============
</TABLE>
- --------------------------------------------------------------------------------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
38
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income .................................................................. $ 14,807 $ 8,251 $ 2,339
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization .......................................... 5,709 5,650 3,796
Goodwill Amortization .................................................. 1,102 -- --
Provision for bad debts ................................................ 615 637 417
Deferred income taxes .................................................. (7,649) (657) 1,492
Loss on sale of assets ................................................. (66) 183 16
Compensation from stock issuances ...................................... 4,146 1,409 8,093
Interest income on notes receivable - stockholders ..................... (981) (455) (266)
Change in assets and liabilities:
Accounts receivable .................................................... (5,520) (16,562) (7,354)
Work in process ........................................................ (2,552) (5,007) (913)
Prepaid expenses and other current assets .............................. 3 (1,253) 477
Income tax receivable .................................................. -- 1,114 (1,114)
Other assets ........................................................... 126 (471) 656
Accounts payable ....................................................... (1,276) 426 (1,378)
Accrued liabilities .................................................... (1,061) 4,560 1,071
Accrued vacation ....................................................... 2,013 732 360
Accrued bonuses ........................................................ 1,283 2,240 (195)
Deferred revenue ....................................................... 231 71 391
Customer advances ...................................................... 176 451 1,965
Income tax payable ..................................................... (5,331) 7,118 412
Supplemental executive retirement plan ................................. (110) 237 --
Other .................................................................. 31 (22) 228
---------- ---------- ----------
Net cash provided by operating activities ........................... 5,696 8,652 10,493
---------- ---------- ----------
Cash flows from investing activities:
Issuance of notes receivable ................................................ (300) (18) (2,554)
Payments on notes receivable ................................................ 221 906 1,232
Purchase of investments ..................................................... (138,581) (539,176) (10,414)
Proceeds from sale/maturity of investments .................................. 150,368 507,036 12,350
Purchase of property and equipment .......................................... (9,619) (7,098) (5,261)
Acquisition of business, net of cash acquired ............................... (2,803) (3,905) (1,894)
Proceeds from disposals of property and equipment ........................... -- 19 --
---------- ---------- ----------
Net cash used in investing activities ............................... (714) (42,236) (6,541)
Cash flows from financing activities:
Net borrowings (payments) on line of credit ................................. -- (2,000) 2,000
Proceeds from issuance of long-term debt .................................... -- 44 147
Principal payments on long-term debt ........................................ (105) (872) (2,681)
Proceeds from issuance of capital stock ..................................... 3,452 45,082 89
Distributions to shareholders of acquired companies ......................... -- (120) (915)
Proceeds from sale of forfeited ASOP shares ................................. 608 -- --
---------- ---------- ----------
Net cash provided by (used in) financing activities ................. 3,955 42,134 (1,360)
========== ========== ==========
Net change in cash and cash equivalents ............................. 8,937 8,550 2,592
Cash and cash equivalents at beginning of period ................................. 20,737 12,187 9,595
---------- ---------- ----------
Cash and cash equivalents at end of period ....................................... $ 29,674 $ 20,737 $ 12,187
========== ========== ==========
Cash paid during the period for:
Interest .................................................................... $ 46 $ 95 $ 313
Income taxes ................................................................ $ 20,185 $ 3,372 $ 2,527
</TABLE>
- --------------------------------------------------------------------------------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
39
<PAGE>
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In Thousands)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
Net income ...................................................... $ 14,807 $ 8,251 $ 2,339
Other comprehensive income, net of tax
Foreign currency translation adjustments .................. 48 (22) 2
Unrealized holding gains on securities during period: ..... (203) 71 --
Less reclassification adjustment for gains included
in net income ..................................... -- -- --
---------- ---------- ----------
Other comprehensive income ........................ (155) 49 2
---------- ---------- ----------
Comprehensive income .............................. $ 14,652 $ 8,300 $ 2,341
========== ========== ==========
</TABLE>
- --------------------------------------------------------------------------------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
40
<PAGE>
FIRST CONSULTING GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS
First Consulting Group, Inc. and its subsidiaries (the "Company") is a leading
provider of information technology and other 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 across its four principal services: consulting, software
implementation, network and application integration and co-management 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.
1. PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of First
Consulting Group, Inc. and its subsidiaries. All material intercompany accounts
and transactions have been eliminated.
2. 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.
3. 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 is shorter.
4. WORK IN PROCESS
Work in process represents the recognized net revenue for services
performed that had not been billed to clients at the balance sheet date. Such
amounts are billed as project requisites are met.
5. 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 bases 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.
41
<PAGE>
6. PUT OBLIGATIONS
Prior to the Company's February, 1998 initial public offering, the
stockholders of the Company, including the Associate 401(k) and Stock Ownership
Plan ("ASOP"), had the ability to require the Company to repurchase their shares
upon the occurrence of certain conditions, which were outside the control of the
Company (see Notes H and I). As such, the Company reflected estimated
obligations related to these repurchase commitments outside of equity in the
accompanying financial statements for 1997.
7. REVENUE RECOGNITION
The Company generates substantially all of its revenue from fees for
professional services. The Company typically bills for its services on an
hourly, fixed-fee or fixed-fee per month basis. For services billed on an hourly
basis, the Company recognizes revenue as services are performed. For services
billed on a fixed-fee or fixed-fee per month basis, the Company recognizes
revenue using the percentage of completion method. Revenue is recorded as
incurred at assignment rates net of any adjustments due to specific engagement
situations.
8. 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 123,
ACCOUNTING FOR STOCK-BASED COMPENSATION ("SFAS 123"). SFAS 123 requires pro
forma disclosures of net income and net income 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. See Note F
below.
9. BASIC AND DILUTED NET INCOME PER SHARE
Basic net income per share is based upon the weighted average number of
common shares outstanding. Diluted net income per share is based on the
assumption that convertible shares and stock options were converted or
exercised. Dilution is computed by applying the treasury stock method. Under
this method, options and warrants 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. ASOP shares that have not been committed to be released are not
treated as outstanding when determining the weighted average number of shares
for either basic or diluted net income per share. All share and per share data
amounts have been adjusted to reflect a four-for-one stock split in January
1998.
10. CREDIT RISKS
Financial instruments that subject the Company to concentrations of credit
risks consist primarily of 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 limited due to the Company's credit evaluation process
and the nature of its clients. Historically, the Company has not incurred
significant credit-related losses.
42
<PAGE>
11. 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
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 notes payable and stockholders' notes
receivable approximate their carrying values based on current rates for
instruments with similar characteristics.
12. GOODWILL
Goodwill and other intangibles are amortized on a straight-line basis over
periods estimated to be benefited, generally five to ten years. Accumulated
amortization, at December 31, 1999 and 1998, was $1,361,000 and $807,000,
respectively. The Company periodically assesses the recoverability of the cost
of its goodwill based on a review of projected undiscounted cash flows of the
related operating entities.
13. DEFERRED COMPENSATION -- STOCK INCENTIVE AGREEMENTS
In accordance with APB Opinion No. 25, ACCOUNTING FOR STOCK ISSUED TO
EMPLOYEES, with regard to certain stock issued prior to the initial public
offering, the Company recorded a charge to deferred compensation when it granted
options or sold stock 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
vesting schedule for such grants (generally ten years).
14. USE OF ESTIMATES
In preparing financial statements in conformity with generally accepted
accounting principles, 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.
15. FOREIGN CURRENCY TRANSLATION
Assets and liabilities of the Company's foreign affiliates are translated
at current exchange rates, while revenue and expenses are translated at average
rates prevailing during the year. Translation adjustments are reported as a
component of other comprehensive income.
16. RECLASSIFICATIONS
Certain reclassifications have been made to the 1998 and 1997 financial
statements to conform to the 1999 presentation.
17. OTHER INCOME
Other income in 1999 primarily consists of the proceeds from a life
insurance policy.
43
<PAGE>
NOTE B -- BUSINESS COMBINATIONS
In December 1998, FCG completed a merger with Integrated Systems Consulting
Group, Inc. ("ISCG"), by exchanging approximately 6,240,000 shares of its Common
Stock for all of the Common Stock of ISCG. Each share of ISCG was exchanged for
.77 of one share of FCG Common Stock. In addition, outstanding ISCG employee
stock options were converted at the same exchange factor into options to
purchase approximately 633,000 shares of FCG Common Stock. In December 1998, FCG
also completed a merger with Pareto Consulting Ltd. ("Pareto"), by exchanging
147,531 shares of FCG Common Stock for all of the shares of Pareto.
The mergers with ISCG and Pareto have been accounted for as poolings of
interests. Accordingly, all prior period consolidated financial statements
presented have been restated to include the combined results of operations,
financial position and cash flows of ISCG and Pareto as though they had always
been a part of FCG.
Prior to the merger, Pareto's fiscal year ended on April 30. In recording the
business combination, Pareto's prior period financial statements have been
restated to a year ended December 31, to conform to FCG's fiscal year-end.
Certain immaterial adjustments and reclassifications were made to the ISCG and
Pareto financial statements to conform to FCG's presentations. The results of
operations for the separate companies and the combined amounts presented in the
consolidated financial statements are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
(In thousands) 1998 1997
--------- ---------
<S> <C> <C>
Net revenue
FCG ........................... $ 130,714 $ 91,570
ISCG .......................... 62,976 43,178
Pareto ........................ 2,600 2,373
--------- ---------
Combined ............. $ 196,290 $ 137,121
Net income
FCG ........................... $ 5,972 $ (1,534)
ISCG .......................... 2,095 3,513
Pareto ........................ 184 360
--------- ---------
Combined ............. $ 8,251 $ 2,339
</TABLE>
In connection with the mergers, the Company recorded in the fourth quarter of
1998 a charge to operating expenses of $5.6 million for direct and other
merger-related costs. Merger-related costs consisted primarily of fees for
investment bankers, attorneys, accountants, financial printing, other related
transaction costs, and exit costs. At December 31, 1999, all of these costs had
been paid.
44
<PAGE>
NOTE B -- BUSINESS COMBINATIONS (CONTINUED)
ACTIVA
In December 1999, the Company acquired certain assets and the business of Activa
Systems Limited (Activa) for $770,000 in cash. Activa is a provider of
Documentum-based controlled document solutions serving the pharmaceutical
industry based in Wales, which has 13 employees and reported approximately
$800,000 in revenue in 1999. This acquisition was accounted for using the
purchase method of accounting. The fair value of the identifiable assets
acquired was $70,000. The remainder of the purchase price was allocated to
goodwill.
SDC
In February 1999, the Company acquired the business of SDC Consulting (SDC) for
$2,000,000 in cash. SDC is a healthcare management consulting firm located in
Leeds, England. At the time of its acquisition by the Company, SDC had 11
employees and reported revenues of approximately $2,300,000 in 1998. The
acquisition was accounted for using the purchase method of accounting. The fair
value of the identifiable assets acquired was zero, so the entire purchase price
was allocated to goodwill.
WAVEFRONT
In February 1998, the Company acquired all of the outstanding shares of capital
stock of WaveFront Consulting, Inc. ("WaveFront") for an initial cash payment of
$3,650,000, plus conditional payments based upon future operating income.
WaveFront is an information technology consulting firm located in Vienna,
Virginia, specializing in providing distributed computing solutions, including
client/server and internet development, principally in the telecommunications
industry. WaveFront had 30 employees and reported revenues of $2.8 million for
the year ended December 31, 1997. This acquisition was accounted for using the
purchase method of accounting. The fair value of the identifiable net assets
acquired was approximately $300,000. The remainder of the purchase price
including the conditional payments has been and will be allocated to goodwill.
GREENHALGH
In January 1998, the Company acquired all of the outstanding shares of
Greenhalgh and Company Limited for $220,000 in cash and 36,300 shares of FCG
Common Stock valued at $287,000. Greenhalgh is an information systems consulting
firm located in Macclesfield, England, which reported $1.4 million in revenue in
1997. This acquisition was accounted for using the purchase method of
accounting. The fair value of the identifiable net liabilities acquired was
approximately $100,000. The purchase price together with this acquired liability
was allocated to goodwill.
CUTTING EDGE
In April 1997, the Company completed the acquisition of the assets and certain
liabilities of Cutting Edge Computer Solutions, Inc. ("Cutting Edge") for cash.
Cutting Edge is an information services consulting firm with primary offices in
Malvern, Pennsylvania, and Alexandria, Virginia, that specializes in the design
and development of business software using client/server, relational database,
and internet and intranet technologies. Cutting Edge had 26 employees and
reported revenues of $2.2 million in calendar
45
<PAGE>
year 1996. This acquisition was accounted for using the purchase method of
accounting. The fair value of the identifiable net assets acquired was
approximately $400,000. The remainder of the $1.9 million purchase price was
allocated to goodwill.
The accounts of Activa, SDC, WaveFront, Greenhalgh and Cutting Edge have been
included in the accompanying financial statements for the period from their
respective purchase dates through December 31, 1999. Pro forma information as if
these acquisitions had occurred on January 1, 1997 have not been provided since
such pro forma results do not differ materially from those reported in the
accompanying financial statements.
46
<PAGE>
NOTE C -- NOTES PAYABLE
The Company has a $9,000,000 revolving line of credit which is available through
May 1, 2000, at the bank's prevailing prime rate. The balance outstanding on
this line of credit was zero at December 31, 1999 and 1998. Borrowings on the
line are collaterized by all of the Company's deposit accounts, accounts
receivable and equipment. Under the line of credit agreement, the Company is
required to pay a fee equal to 0.2% per annum on the average daily-unused
balance and maintain selected financial ratios. Due to the loss incurred in the
fourth quarter of 1999, the Company was in noncompliance with one of these
covenants, and received a waiver of compliance subsequent to year-end.
Long-term debt is summarized as follows (in thousands):
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
--------------------
1999 1998
-------- --------
<S> <C> <C>
Note payable to bank ................... $ 182 $ 240
Other note payable ..................... 18 65
-------- --------
200 305
Less current portion ................... 54 67
-------- --------
Non-current portion .................... $ 146 $ 238
======== ========
</TABLE>
The note payable to bank is collateralized by all deposit accounts, accounts
receivable, and equipment of the Company and by unreleased ASOP shares (see Note
I). The note bears interest at the bank's prime rate (8.25% and 7.75% at
December 31, 1999 and 1998, respectively) plus 0.5%. The note is payable in
monthly installments of $4,000 plus interest with the last installment due
July 1, 2003.
47
<PAGE>
NOTE D -- INCOME TAXES
The provision for income taxes consists of the following (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
Current:
Federal ........................... $ 12,236 $ 8,829 $ 2,604
State ............................. 3,056 1,990 252
Foreign ........................... -- 72 140
---------- ---------- ----------
Total current ................. 15,292 10,891 2,996
Deferred:
Federal ........................... (6,133) (510) 1,207
State ............................. (1,516) (147) 285
---------- ---------- ----------
Total deferred ................ (7,649) (657) 1,492
========== ========== ==========
Provision for income taxes ............. $ 7,643 $ 10,234 $ 4,488
========== ========== ==========
</TABLE>
Temporary differences consist of the following (in thousands):
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
-------------------------
1999 1998
---------- ----------
<S> <C> <C>
Deferred tax assets:
Depreciation ........................................................ $ 487 $ --
Bad debts ........................................................... 791 609
Supplemental executive retirement plan contributions ................ 2,992 1,510
Accrued liabilities ................................................. 2,565 1,752
Other ............................................................... 409 572
---------- ----------
Total current deferred tax assets .......................... 7,244 4,443
Deferred tax liabilities:
Accrual to cash basis adjustment .................................... 3,586 2,727
Work in process ..................................................... -- 6,134
Stock based compensation ............................................ 554 966
Inside buildup on life insurance .................................... 832 --
Other ............................................................... 178 171
---------- ----------
Total deferred tax liabilities .................................. 5,150 9,998
---------- ----------
Total net deferred tax assets (liabilities) ................ $ 2,094 $ (5,555)
========== ==========
The balance sheet classifications of deferred taxes are as follows:
Current deferred liability........................................... $ (11) $ (6,318)
Non-current deferred asset .......................................... 2,105 763
---------- ----------
Total net deferred tax assets (liabilities)................. $ 2,094 $ (5,555)
========== ==========
</TABLE>
48
<PAGE>
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:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------
1999 1998 1997
----- ----- -----
<S> <C> <C> <C>
Federal income tax at statutory rate ............................ 35.0% 35.0% 35.0%
Changes due to:
State franchise tax, net of federal income tax benefit ..... 4.4 5.9 2.1
Acquisition costs .......................................... -- 9.2 --
ASOP ....................................................... 3.2 1.3 23.4
Foreign losses without tax benefit ......................... -- 1.6 --
Meals and entertainment .................................... 1.1 1.1 2.4
Tax exempt interest ........................................ (1.5) (1.9) --
Life insurance proceeds .................................... (5.8) -- --
Other ...................................................... (2.2) 3.2 2.9
----- ----- -----
34.2% 55.4% 65.8%
===== ===== =====
</TABLE>
NOTE E -- NOTES RECEIVABLE - STOCKHOLDERS
Notes receivable from stockholders consist primarily of loans provided to
corporate officers ("officers") at the level of vice president and above for the
purchase of shares of Common Stock (see Note H). Notes received in exchange for
Common Stock have been classified as a reduction of stockholders' equity. In
addition, prior to the Company's initial public offering in February 1998, the
Company provided such officers with notes to cover the exercise price and
associated taxes related to the exercise of stock options. 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. Prior to the initial public offering, the notes were issued on
a non-recourse basis. For notes issued subsequent to the offering, any loan
amounts in excess of the value of the stock securing the notes are 70% recourse
to the borrower.
All loans are due in ten years. In addition, the Company generally requires
participants to pay, each year, the greater of 10% of the outstanding amounts 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 $20,657,000 and $10,898,000 as of December 31,
1999 and 1998, respectively. Discount for imputed interest on these notes
receivable was $4,460,000 and $2,717,000 as of December 31, 1999 and 1998,
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 $868,000 and $349,000
for the years ended December 31, 1999 and 1998, respectively. Stockholders'
notes receivable related to advances to officers for payment of taxes associated
with stock option exercises were $2,341,000 and $2,372,000 as of December 31,
1999 and 1998, respectively. Discount for imputed interest on these notes
receivable was $453,000 and $569,000 as of December 31, 1999 and 1998,
respectively.
49
<PAGE>
NOTE F -- STOCK OPTIONS
A summary of stock option transactions is as follows:
<TABLE>
<CAPTION>
OPTION WEIGHTED AVERAGE
SHARE EXERCISE PRICE
- ---------------------------------------------------------------------------
<S> <C> <C>
OUTSTANDING AT JANUARY 1, 1997 1,243,337 1.70
Granted 1,628,556 7.35
Exercised (897,236) 1.16
Canceled (235,263) 9.85
- ---------------------------------------------------------------------------
OUTSTANDING AT DECEMBER 31, 1997 1,739,394 6.07
Granted 950,538 16.12
Exercised (133,446) 2.95
Canceled (255,461) 10.16
- ---------------------------------------------------------------------------
OUTSTANDING AT DECEMBER 31, 1998 2,301,025 9.95
Granted 2,570,667 12.37
Exercised (248,724) 4.80
Canceled (479,376) 12.78
- ---------------------------------------------------------------------------
OUTSTANDING AT DECEMBER 31, 1999 4,143,592 $11.43
- ---------------------------------------------------------------------------
</TABLE>
At December 31, 1999, 1998 and 1997, 613,015, 419,096 and 160,358 options were
exercisable, respectively at weighted average exercise prices of $8.72, $5.37
and $2.61, respectively. In March 1997, the Company modified the terms of
certain non-vested stock options granted in January 1997 by decreasing the
exercise price from $17.21 to $13.96. The following table summarizes information
about stock options outstanding at December 31, 1999:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-------------------------------------------------- -------------------------------
WEIGHTED WEIGHTED
WEIGHTED AVERAGE AVERAGE AVERAGE
RANGE OF EXERCISE NUMBER REMAINING EXERCISE NUMBER EXERCISE
PRICE OUTSTANDING CONTRACTUAL LIFE PRICE EXERCISABLE PRICE
- --------------------------------------------------------------------------------- -------------------------------
<S> <C> <C> <C> <C> <C>
$ .07 to $ 4.32 97,274 5.26 Years $ 3.24 45,312 $ 3.14
4.76 528,167 7.12 Years 4.76 241,071 4.76
5.50 to 9.50 694,326 8.71 Years 8.25 142,137 7.35
9.69 to 12.00 1,439,746 9.49 Years 10.82 5,572 11.56
12.13 to 19.81 1,006,489 7.74 Years 14.60 135,823 15.17
20.50 to 27.75 377,590 8.27 Years 22.55 43,100 24.53
- --------------------------------------------------------------------------------- -------------------------------
$ .07 to $27.75 4,143,592 8.42 Years $11.43 613,015 $ 9.00
- --------------------------------------------------------------------------------- -------------------------------
</TABLE>
50
<PAGE>
The Company applies Accounting Principles Board Opinion No. 25, ACCOUNTING FOR
STOCK ISSUED TO EMPLOYEES, and related interpretations in accounting for the
plan. Accordingly, no compensation expense has been recognized for options
granted. Had compensation expense for the Company been consistent with the
methodology prescribed under Statement of Financial Accounting Standards No.
123, ACCOUNTING FOR STOCK-BASED COMPENSATION, (SFAS 123), the Company's net
income and net income per share would have been reduced to the pro forma amounts
indicated below (in thousands, except per share data):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-------------------------------------------
1999 1998 1997
--------- --------- --------
<S> <C> <C> <C>
Net Income As reported $14,807 $ 8,251 $2,340
Pro forma 7,475 6,498 1,583
Basic earnings per share As reported .63 .38 .14
Pro forma .32 .30 .10
Diluted earnings per share As reported .61 .36 .13
Pro forma .31 .28 .09
</TABLE>
The fair value of the options granted under the plan in 1999, 1998 and 1997
calculated using the Black-Scholes pricing model were $8.30, $6.94 and $2.60 per
share, respectively. The following assumptions were used in the Black-Scholes
pricing model: expected dividend yield 0%, risk-free interest rate ranging from
5.5% to 7.18%, expected volatility factor of 1.0 for 1999, 0.5 for 1998 and zero
to 0.6 for 1997, and an expected life ranging from six to seven years. Pro forma
net income 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
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.
For the year ended December 31, 1999, 1998 and 1997, compensation expense
recognized in income for stock-based employee compensation related to the grant
of options was $214,000, $251,000 and $278,000 respectively.
NOTE G -- 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 and on July 1, 1998.
The SERP is administered by the Board of Directors or a committee appointed by
the Board of Directors.
Participants in the SERP are those officers who are eligible to participate in
the 1994 Plan and who are selected by the Board of Directors or a committee
appointed by the Board of Directors to participate. 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.
Participation is conditioned on the submission of a completed enrollment form.
SERP participation terminates when a participant ceases to be a stockholder of
the Company, provided that a former stockholder who continues as an officer may
continue to participate in the compensation reduction portion of the SERP.
51
<PAGE>
Participants may make fully vested compensation reduction contributions to the
SERP, subject to a maximum deferral of 10% of annual base salary. 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 10% for
each year of service (with up to five years service credit for participants who
were vice presidents on January 1, 1994), 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
$1,198,000, $726,000 and $493,000 for the years ended December 31, 1999, 1998,
and 1997, 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 H -- STOCK INCENTIVE AGREEMENTS
1994 RESTRICTED STOCK PLAN AND AGREEMENTS
On December 15, 1997, the Board of Directors adopted an amendment to the 1994
Restricted Stock Plan (as amended the "1994 Plan") and Restricted Stock
Agreement ("RSA"). The stockholders approved the 1994 Plan and RSAs on January
15, 1998. The 1994 Plan provides a mechanism for the purchase and sale of Common
Stock by its vice presidents. The 1994 Plan is administered by the Company's
Board of Directors or a committee appointed by the Board.
Under the 1994 Plan, the Company has entered into RSAs with each of its
officers. The 1994 Plan and RSAs provide that each person, upon becoming an
officer of the Company, must purchase and hold a specific minimum number of
shares of Common Stock. Officers at Levels I and II are required to purchase and
hold that number of shares equal to one times the officer's base salary divided
by the then-current fair value of the Common Stock. Officers at Levels III and
IV are required to purchase and hold that number of shares equal to two times
the officer's base salary divided by the then-current fair value of the Common
Stock, which, prior to the completion of the Company's initial public offering
in February, 1998, was determined by reference to a report prepared for the
Company by an independent valuation firm.
For RSAs executed prior to the IPO, shares purchased under such RSAs are subject
to a 10-year vesting period beginning the date upon which an individual becomes
an officer and vest annually upon the completion of each year of service.
Automatic acceleration of vesting occurs upon death or permanent disability of
an officer and upon certain changes in ownership of the Company. Acceleration of
vesting also occurs once the officer attains the age of 59 and has held the
shares for at least three years. Shares purchased after the IPO date are fully
vested upon purchase.
Under the terms of the pre-IPO RSAs, the Company retains a repurchase right with
respect to unvested shares, unless such termination is due to death, disability
or changes in control of the Company. Pursuant to this right, the Company may
repurchase unvested shares at the original issuance price plus a growth factor.
The growth factor is equal to the average interest rate compounded quarterly
which the Company pays to a commercial lending institution in a calendar quarter
(the "Growth Factor"). In the event the Company has no borrowings for a
particular quarter, then the growth factor shall be the prime rate on the
52
<PAGE>
first day of the quarter, as announced in the Wall Street Journal or if the
Wall Street Journal discontinues such announcements, then it shall be the
prime rate as announced by Bank of America.
Shares acquired under RSAs are nontransferable, with the exception of transfers
for certain estate planning and charitable gift purposes. The Company may also
repurchase vested shares from a departing officer if he or she competes with the
Company and/or profits from the sale of Common Stock within six months of such
competition. An officer may also sell unencumbered shares of Common Stock on the
public market, subject to continuing to satisfy the minimum shareholding
requirements.
Pre-IPO officers paid the purchase price of the shares by means of non-recourse
and non-interest bearing promissory notes, which notes are secured by the shares
of stock held by such officers. For RSAs executed after IPO, the shares are paid
for with a non-interest bearing promissory note secured by the shares of stock
held by the officer, which has recourse against the officer's personal assets
for 70% of the outstanding balance in excess of the value of the security. The
shares are fully vested upon their purchase, but are held by the Company as
collateral against the associated loan.
All RSAs also contain non-competition and non-solicitation provisions which
apply generally to the officer's employment with the Company and which continue
to bind the officer even after repurchase of all shares by the Company;
provided, however, that such provisions may be superseded by an employment
agreement entered into between the Company and the officer.
NON-QUALIFIED STOCK OPTION AGREEMENT
Effective January 1, 1996, and restated January 1, 1997, the Company executed
and adopted a non-qualified stock option agreement for certain officers. The
principal terms of the agreement provided that for each share of stock purchased
at fair market value, the stockholder was granted one exercisable stock option
which allowed the stockholder to purchase additional shares at a price below the
fair market value of the Common Stock. During 1997 and 1996, 215,176 and 366,168
shares, respectively, were granted under the provisions of the agreement and
stockholders exercised options on 364,728 and 127,416 shares of Common Stock,
respectively. Deferred compensation of $512,000 and $737,000 was recorded for
the years ended December 31, 1997 and 1996, respectively, related to the
granting of options under this agreement. Compensation expense related to the
amortization of the deferred compensation on these options approximated $95,000,
$125,000 and $145,000 for the years ended December 31, 1999, 1998 and 1997,
respectively.
Effective December 19, 1995, the Company executed and adopted a non-qualified
stock option agreement for certain vice presidents. The principal terms of the
agreement provided that for each share of stock purchased at fair market value
of the Common Stock, the stockholder was granted two exercisable stock options
which allow the stockholder to purchase additional shares at approximately 20%
of the fair market value of the Common Stock. During 1995, 1,279,440 stock
options were granted under the provisions of the agreement and vice presidents
exercised options for 733,008 shares of Common Stock. Compensation expense
related to these options approximated $119,000, $126,000 and $134,000 for the
years ended December 31, 1999, 1998 and 1997, respectively. At December 31,
1997, all below market stock options had been exercised and no below market
options have been issued since.
53
<PAGE>
OTHER EQUITY PLANS
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). On January 15, 1998, the stockholders approved the plans,
authorizing issuance of up to 1,600,000 shares of FCG Common Stock under the
1997 Equity Plan and 200,000 shares of FCG Common Stock under the 1997
Directors' Plan. On February 26, 1999, the stockholders approved amendments to
the plans to increase the authorized number of shares issuable under such plans
to 3,500,000 shares for the 1997 Equity Plan and 300,000 shares for the 1997
Directors' Plan.
Stock awards issued under the 1997 Equity Plan vest over a ten-year term from
the date of grant. Under the 1997 Equity Plan, the Company granted employees
2,115,883, 532,217 and 945,400 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 31, 1999, 1998 and 1997, respectively. As of December 31,
1999 and 1998, 486,323 and 231,538 of these options were exercisable,
respectively. The Company had no stock appreciation rights issued or outstanding
for the years ended December 31, 1999 and 1998.
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 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 1999, 1998 and 1997, respectively, the Company granted 32,000,
20,000 and 84,000 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 a
ten-year term from date of grant.
Under the Company's amended 1989 Stock Option Plan (a plan carried over from
ISCG subsequent to the merger), 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 and
generally expire ten years from the date of grant. Options granted prior to July
25, 1996 generally vest at a rate of 20% per annum beginning on the second
anniversary of the grant date. Options granted on or after July 25, 1996
generally vest ratably over a five-year period. In 1997, ISCG's Board of
Directors amended this plan with subsequent stockholder approval, to increase
the number of shares of Common Stock authorized for issuance under the plan from
962,500 to 1,270,500 shares. Under the plan, the Company granted employees
422,784, 191,091 and 383,980 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 31, 1999, 1998 and 1997, respectively. As of December 31,
1999, 1998 and 1997, 126,692, 187,548 and 160,358 of the options were
exercisable, respectively.
54
<PAGE>
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 vest over five years and expire ten years
following the date of grant. Under the Plan, the Company granted non-officer
employees 271,650 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 year ended
December 31, 1999. As of December 31, 1999, none of the options were
exercisable.
NOTE I -- ASSOCIATE 401(K) AND STOCK OWNERSHIP PLAN
Under the ASOP, participants may elect to reduce their current compensation by
up to the lesser of 15% of such compensation or the statutorily prescribed
annual limit ($10,000 in 1999 and 1998, and $9,500 in 1997) and have the amount
of such reduction contributed to the ASOP. In addition, the Company may make
contributions to the ASOP 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 "first share contributions"
allocated to some or all participants on a per capita basis.
The ASOP 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
ASOP, 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 first share contributions are fully
vested after five years of service and profit sharing contributions are fully
vested after seven years of service. The ASOP is a leveraged employee stock
ownership plan. The ASOP borrowed $4.0 million from a third-party financial
institution (the "ASOP loan") to purchase 1,429,848 shares of Common Stock in
1995. The shares of Common Stock so purchased were placed in a suspense account
under the ASOP from which they are released and allocated to participants'
accounts as the ASOP loan is repaid. Any or all company contributions may be
used to repay the ASOP loan.
The Company reports in its Statement of Financial Position the debt of the ASOP
and unearned ASOP shares, which is the original cost basis of the ASOP shares
pledged as collateral for the debt. As shares are committed to be released, the
Company credits unearned ASOP shares based on the cost of the shares to the
ASOP. The Company records compensation expense based on the fair market value of
the shares committed to be released. The difference between the fair value of
shares committed to be released and the cost of those shares to the ASOP is
either charged or credited to stockholders' equity accounts, as applicable.
Compensation expense for the 401(k) match and the ASOP was approximately $3.3
million, $1.6 million, and $2.4 million for the years ended December 31, 1999,
1998 and 1997, respectively. The Company's practice is to net unvested shares
forfeited by terminated employees against the current year 401(k) match. Had the
Company not had these forfeitures, the compensation expense would have been
approximately $4.2 million and $2.7 million in 1999 and 1998, respectively.
In 1996, the Company made matching contributions and first share contributions
to the ASOP sufficient to provide a 50% matching contribution and a first share
contribution of 200 shares of company stock for
55
<PAGE>
each participant who was employed by the Company on January 1, 1996 or became
employed by the Company thereafter. In consideration for employees allowing
the Company to make a plan modification to the current ASOP plan, the Company
committed to release 1,000 shares of Common Stock to each participant in the
ASOP as of November 26, 1997 (568,000 shares in the aggregate). This
commitment resulted in a charge to compensation expense of approximately $4.2
million in the fourth quarter of 1997. Such amount is included in
compensation expenses related to stock issuances in the accompanying
financial statements. The committed shares are released to participant
accounts to the extent that shares distributed to an individual do not exceed
certain Internal Revenue Service section limitations.
The ASOP shares were as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
Allocated shares ............................ 1,469,430 1,309,223 1,308,104
Unreleased shares ........................... -- 248,393 281,440
---------- ---------- ----------
Total ASOP shares ...................... 1,469,430 1,557,616 1,589,544
Fair market value of unreleased shares ...... $ -- $5,092,000 $2,520,000
</TABLE>
As of December 31, 1999, the Company had exhausted the original pool of ASOP
shares. In order to make its matching contribution for the quarter ended
December 31, 1999, as well as allocating the final 27,294 unreleased shares from
the original pool, the Company contributed (and allocated) 67,096 newly-issued
shares.
Prior to the IPO, upon the cessation of employment of an employee, the Company
paid the employee the fair market value of his or her vested shares of Common
Stock previously allocated to such employee under the ASOP. The fair market
value of Common Stock was determined by an independent valuation firm. Since the
ultimate funding of this obligation rested with the Company, the Company had
recorded the potential future obligation to repurchase such securities outside
of permanent equity (see also Note H). Subsequent to the Company's closing of
the IPO, upon the cessation of employment of an employee, the Company releases
his or her vested ASOP shares to the employee. Since such released shares of
Common Stock held by the ASOP are tradable on an established exchange, recording
of a potential future repurchase obligation outside of permanent equity ceased
in February 1998.
NOTE J -- CONCENTRATION OF CREDIT RISK
The Company maintains its cash balances in financial institutions located in
Long Beach, California and Philadelphia, Pennsylvania. These balances are
insured by the Federal Deposit Insurance Corporation up to $100,000. At December
31, 1999, the Company had balances in excess of the insured amount of
approximately $0.6 million and $14.1 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.
56
<PAGE>
NOTE K -- 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 2012. At December 31, 1999, the Company was
obligated under non-cancelable operating leases with future minimum rentals as
follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31,
------------------------
<S> <C>
2000 ....................... 5,321
2001 ....................... 5,193
2002 ....................... 5,142
2003 ....................... 4,318
2004 ....................... 2,562
2005 and Beyond ................. 3,821
-------
$26,357
=======
</TABLE>
Rent expense aggregated $5,244,000, $4,276,000 and $3,644,000 for the years
ended December 31, 1999, 1998 and 1997, 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 L -- 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 net unrealized holding loss increased $203,000 in 1999. The
amortized cost, unrealized gains and losses, and fair values of the Company's
available-for-sale securities (all of which are debt securities) held at
December 31, 1999 and 1998 are summarized as follows:
<TABLE>
<CAPTION>
GROSS GROSS
UNREALIZED UNREALIZED ESTIMATED
AMORTIZED COST GAINS LOSSES FAIR VALUE
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
1999........................................ $19,954,000 -- $132,000 $19,822,000
1998........................................ $32,690,000 $122,000 -- $32,812,000
</TABLE>
The following table lists the maturities of debt securities held at December 31,
1999:
<TABLE>
<CAPTION>
AMORTIZED COST ESTIMATED FAIR VALUE
------------------------------- -------------------------------
<S> <C> <C>
Due in one year or less..................... $ 3,737,000 $ 3,726,000
Due after one year through five years....... 16,217,000 16,096,000
------------------------------- -------------------------------
$19,954,000 $19,822,000
=============================== ===============================
</TABLE>
57
<PAGE>
NOTE M -- DISCLOSURE OF SEGMENT INFORMATION
The Company has the following three reportable segments: North America
consulting, North America integration, and international services. The
consulting services consist of strategic planning, operations effectiveness,
procurement and contracting, and general consulting. The integration services
include implementation of packaged vendor software, design and development of
comprehensive system architectures, infrastructures, interfaces, databases,
applications and networks to address the need for information integration and
dissemination throughout a client's organization. International primarily
represents services provided in the United Kingdom and parts of continental
Europe and includes a blend of consulting and integration services.
The accounting policies used to develop segment information correspond to those
described in the summary of significant accounting policies. The Company manages
segment reporting at a gross margin level. Selling, general and administrative
expenses (including corporate functions, occupancy related costs, depreciation,
professional development, recruiting, and marketing), and fixed assets
(primarily computer equipment, furniture, and leasehold improvements) are
managed at the corporate level separately from the segments. The Company's
segments are managed on an integrated basis in order to serve clients by
assembling multi-disciplinary teams, which provide comprehensive services across
its principal services.
The following information about the segments is for the years ended December 31,
1999 and 1998:
<TABLE>
<CAPTION>
NORTH AMERICA NORTH AMERICA
1999 CONSULTING INTEGRATION EUROPE ALL OTHER TOTALS
- --------------------------------------- ------------- ------------- ------- --------- ---------
<S> <C> <C> <C> <C> <C>
Net revenues........................... $48,504 $173,167 $7,611 $8,281 $237,563
Cost of services....................... 32,617 100,775 8,031 7,370 148,793
------------- ------------- ------- --------- ---------
Gross profit........................... $15,877 $ 72,392 $ (420) $ 911 88,770
Selling, general & administrative................................................................... 69,312
Merger, restructuring and severance costs........................................................... 3,550
---------
Income from operations.............................................................................. $ 15,908
=========
<CAPTION>
NORTH AMERICA NORTH AMERICA
1998 CONSULTING INTEGRATION EUROPE ALL OTHER TOTALS
- --------------------------------------- ------------- ------------- ------ --------- --------
<S> <C> <C> <C> <C> <C>
Net revenues........................... $50,079 $139,105 $6,544 $ 562 $196,290
Cost of services....................... 28,702 76,196 5,748 190 110,836
------------- ------------- ------ --------- --------
Gross profit........................... $21,377 $ 62,909 $ 796 $ 372 85,454
Selling, general & administrative................................................................... 63,290
Merger related costs................................................................................ 6,041
--------
Income from operations.............................................................................. $ 16,123
========
</TABLE>
58
<PAGE>
Comparable segment information for the year ended December 31, 1997 was not
practicable to include due to changes in the organization structure.
The amount of revenue attributed to each segment is accounted for by splitting
the revenue 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.
NOTE N -- NET INCOME PER SHARE
The following represents a reconciliation of basic and diluted net income per
share (amounts rounded to thousands except per share data):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------
1999 1998 1997
------- ------ ------
<S> <C> <C> <C>
Net income.................................................. $14,807 $8,251 $2,339
Basic shares................................................ 23,416 21,567 16,234
Effect of dilutive options and warrants............ 815 1,443 1,237
------- ------ ------
Diluted shares.............................................. 24,231 23,010 17,471
======= ====== ======
Net income per common share:
Basic.............................................. $0.63 $0.38 $0.14
Diluted............................................ $0.61 $0.36 $0.13
</TABLE>
The effect of dilutive options and warrants excludes approximately 1,224,000
antidilutive options with exercise prices ranging from $12.69 to $27.75 per
share in 1999, 112,000 antidilutive options with exercise prices ranging from
$16.07 to $27.75 per share in 1998, and 53,000 antidilutive options with
exercise prices ranging from $7.45 to $19.81 per share in 1997.
NOTE O -- MERGER, RESTRUCTURING, AND SEVERANCE COSTS
Merger, restructuring, and severance costs of $3,550,000 and $6,041,000 were
incurred in 1999 and 1998, respectively. The costs incurred during 1999 were
primarily attributable to restructuring and severance associated with
rationalizing capacity requirements in Europe, and secondarily separation costs
associated with the merger between FCG and ISCG in December 1998. The costs
incurred in 1998 were primarily attributable to the definitive merger agreement
between FCG and ISCG, and secondarily, the costs as a result of the termination
of a potential business combination contemplated by ISCG prior to the definitive
merger agreement between FCG and ISCG. At December 31, 1999, $1,530,000 of the
restructuring costs remained to be paid. These primarily consisted of severance
and the cost of a facility closure in the U.K.
59
<PAGE>
NOTE P -- 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.
60
<PAGE>
NOTE Q -- UNAUDITED QUARTERLY FINANCIAL DATA
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
(In Thousands, Except Per Share Data) QUARTER QUARTER QUARTER QUARTER
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
1999
Net revenue.......................................... $58,864 $60,919 $61,411 $56,369
Cost of services..................................... 35,144 36,969 37,697 38,983
--------- --------- --------- ---------
Gross profit................................. 23,720 23,950 23,714 17,386
General and administrative expenses.................. 17,680 17,531 17,061 17,040
Merger, restructuring and severance costs............ 110 1,718 - 1,722
--------- --------- --------- ---------
Income from operations....................... 5,930 4,701 6,653 (1,376)
Interest income (expense), net....................... 600 602 654 745
Other income, net.................................... 22 3,875 19 25
--------- --------- --------- ---------
Income before income taxes................... 6,552 9,178 7,326 (606)
Provision for income taxes........................... 2,818 2,288 2,789 (252)
--------- --------- --------- ---------
Net income (loss)............................ $3,734 $6,890 $4,537 $(354)
========= ========= ========= =========
Diluted net income (loss) per share $ 0.16 $ 0.29 $ 0.19 $ (0.01)
========= ========= ========= =========
1998
Net revenue.......................................... $43,569 $47,792 $51,082 $53,847
Cost of services..................................... 25,489 26,589 28,550 30,208
--------- --------- --------- ---------
Gross profit................................. 18,080 21,203 22,532 23,639
General and administrative expenses.................. 13,811 15,373 16,433 17,673
Merger related costs................................. - - 486 5,555
--------- --------- --------- ---------
Income (loss) from operations................ 4,269 5,830 5,613 411
Interest income (expense), net....................... 423 545 593 746
Other income, net.................................... 27 8 13 7
--------- --------- --------- ---------
Income (loss) before income taxes............ 4,719 6,383 6,219 1,164
Provision for income taxes........................... 1,927 3,048 2,848 2,411
--------- --------- --------- ---------
Net income (loss)............................ $2,792 $3,335 $3,371 $(1,247)
========= ========= ========= =========
Diluted net income (loss) per share $ 0.13 $ 0.14 $ 0.14 $ (0.06)
========= ========= ========= =========
</TABLE>
61
<PAGE>
FIRST CONSULTING GROUP, INC. AND SUBSIDIARIES
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 its subsidiaries as of December 31, 1999 and 1998, and the
related consolidated statements of operations, comprehensive income,
stockholders' equity, and cash flows for each of the three years in the period
ended December 31, 1999. In connection with our audits of the consolidated
financial statements, we have also audited the financial statement schedule as
listed in the accompanying index. These financial statements and schedule are
the responsibility of the Company's management. Our responsibility is to express
an opinion on the financial statements and schedule based on our audits. The
consolidated financial statements give retroactive effect to the 1998 merger of
First Consulting Group, Inc. and Integrated Systems Consulting Group, Inc.,
which has been accounted for as a pooling-of-interests as described in Note B to
the consolidated financial statements. We did not audit the consolidated
financial statements of Integrated Systems Consulting Group, Inc. for the year
ended December 31, 1997, which were combined with First Consulting Group, Inc.'s
statements for the year ended December 31, 1997, and reflect net revenues of
$43,178,000 and net earnings of $3,513,000. Those financial statements were
audited by other auditors whose report has been furnished to us, and our
opinion, insofar as it relates to the amounts included for Integrated Systems
Consulting Group, Inc., is based solely on the report of such other auditors.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the
audits 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 and the reports of the other
auditors provide a reasonable basis for our opinion.
In our opinion, based on our audits and the report of the other auditors, 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 31, 1999 and 1998, and the
consolidated results of their operations and their consolidated cash flows for
each of the three years in the period ended December 31, 1999, in conformity
with accounting principles generally accepted in the United States. Also, in our
opinion, the related financial statement 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.
/s/ GRANT THORNTON LLP
Irvine, California
February 11, 2000
62
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Integrated Systems Consulting Group, Inc.
We have audited the consolidated statements of operations, stockholders'
equity, and cash flows of Integrated Systems Consulting Group, Inc. and
subsidiaries for the year ended December 31, 1997 (not separately presented
herein). In connection with our audit of these consolidated financial
statements, we have also audited the related financial statement schedule
(not separately presented herein). These consolidated financial statements
and financial statement schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and financial statement schedule based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. 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 audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the results of operations of
Integrated Systems Consulting Group, Inc. and subsidiaries and their cash
flows for the year ended December 31, 1997 in conformity with generally
accepted accounting principles. Also, in our opinion, the related financial
statement 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.
/s/ KPMG LLP
Philadelphia, Pennsylvania
January 23, 1998, except as to note 14, which is as of February 27, 1998
63
<PAGE>
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
(In Thousands)
<TABLE>
<CAPTION>
BALANCE AT PROVISION ACCOUNTS BALANCE AT END
FOR THE YEAR BEGINNING OF CHARGED TO WRITTEN OF
ENDED DECEMBER 31 DESCRIPTION PERIOD INCOME OFF PERIOD
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1999 Accounts receivable allowance $1,449 $ 842 $ (227) $2,064
1998 Accounts receivable allowance $ 812 $ 961 $ (324) $1,449
1997 Accounts receivable allowance $ 279 $ 750 $ (217) $ 812
</TABLE>
64
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, FCG has duly caused this Report to be signed on its behalf by the
undersigned, thereunto duly authorized.
By: /s/ LUTHER J. NUSSBAUM
--------------------------
Luther J. Nussbaum,
Chief Executive Officer
Date: March 28, 2000
KNOW ALL PERSONS BY THESE PRESENTS, that each of the persons whose signature
appears below hereby constitutes and appoints Luther J. Nussbaum and Thomas A.
Reep, 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 behalf of FCG in the capacities and
on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- -------------------------- ------------------------------------------- --------------
<S> <C> <C>
/s/ LUTHER J. NUSSBAUM Chief Executive Officer and Chairman of the
- -------------------------- Board (Principal Executive Officer) March 28, 2000
Luther J. Nussbaum
/s/ THOMAS A. REEP Chief Financial Officer and Vice President
- -------------------------- (Principal Financial Officer) March 28, 2000
Thomas A. Reep
/s/ PHILIP H. OCKELMANN Controller
- -------------------------- (Principal Accounting Officer) March 28, 2000
Philip H. Ockelmann
/s/ DONALD R. CALDWELL
- -------------------------- Director March 28, 2000
Donald R. Caldwell
/s/ STEVEN HECK
- -------------------------- Director March 28, 2000
Steven Heck
/s/ STEVEN LAZARUS
- -------------------------- Director March 28, 2000
Steven Lazarus
<PAGE>
<CAPTION>
SIGNATURE TITLE DATE
- -------------------------- ------------------------------------------- --------------
<S> <C> <C>
/s/ DAVID S. LIPSON
- -------------------------- Director March 28, 2000
David S. Lipson
/s/ STANLEY R. NELSON
- -------------------------- Director March 28, 2000
Stanley R. Nelson
/s/ STEPHEN E. OLSON
- -------------------------- Director March 28, 2000
Stephen E. Olson
/s/ SCOTT S. PARKER
- -------------------------- Director March 28, 2000
Scott S. Parker
/s/ FATIMA J. REEP
- -------------------------- Director March 28, 2000
Fatima J. Reep
/s/ JACK O. VANCE
- -------------------------- Director March 28, 2000
Jack O. Vance
</TABLE>
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT
-------
<S> <C>
2.1.1 Agreement and Plan of Merger and Reorganization dated as of
September 9, 1998, by and among FCGFCG, Foxtrot Acquisition
Sub, Inc., a Delaware corporation and a wholly-owned
subsidiary of FCGFCG, 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 (the "First Form 8-K")).
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 Second Amended and Restated Associate 401(k) and Stock
Ownership Plan (incorporated by reference to Exhibit 10.4 to
FCG's Form S-1).
10.5 First Amendment to the Second Amended and Restated Associate
401(k) and Stock Ownership Plan (incorporated by reference to
Exhibit 10.5 to FCG's Form S-1).
<PAGE>
10.6 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")).
10.6.1 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).
10.7 Supplemental Executive Retirement Plan (incorporated by
reference to Exhibit 10.7 to FCG's Form S-1).
10.8 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).
10.9 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).
10.10 Credit Agreement between FCG and Wells Fargo Bank, dated
December 18, 1997 (incorporated by reference to Exhibit 10.10
to FCG's Form S-1).
10.11 FCG 2000 Associate Stock Purchase Plan.
10.11.1 FCG 2000 Associate Stock Purchase Plan Offering adopted
October 26, 1999.
10.12 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 dated November 8, 1999 (the "November 8.
1999 Form 8-K")).
10.12.1 FCGMS Unit Purchase Agreement dated November 8, 1999 between
FCGMS and NYPH (incorporated by reference to Exhibit 99.2 to
FCG's November 8, 1999 Form 8-K).
10.12.2 Investor Rights Agreement dated November 8, 1999, among FCGMS,
FCG Management Holdings, Inc. and NYPH (incorporated by
reference to Exhibit 99.3 to FCG's November 8, 1999 Form 8-K).
10.12.3 Amended and Restated Operating Agreement of FCGMS
(incorporated by reference to Exhibit 99.4 to FCG's November
8, 1999 Form 8-K).
10.13 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 Current Report).
10.13.1 Form of Rights Certificate (incorporated by reference to
Exhibit 99.4 to FCG's December 9, 1999 Current Report).
11.1 Statement of Computation of Earnings (Loss) per Share for FCG
(contained in "Notes to Consolidated Financial Statements -
Note N - Net Income Per Share" of this Report).
21.1 Subsidiaries of FCG.
23.1 Consent of Grant Thornton LLP.
23.2 Consent of KPMG LLP.
24.1 Power of Attorney (contained on the signature page of this
Report).
27.1 Financial Data Schedule.
</TABLE>
<PAGE>
EXHIBIT 10.11
FIRST CONSULTING GROUP, INC.
2000 ASSOCIATE STOCK PURCHASE PLAN
APPROVED BY THE BOARD OF DIRECTORS OCTOBER 26, 1999
APPROVED BY STOCKHOLDERS _________________
1. PURPOSE.
(a) The purpose of this 2000 Associate Stock Purchase Plan (the "Plan") is
to provide a means by which associates of First Consulting Group, Inc. (the
"Company") and its Affiliates, as defined in Subsection 1(b), which are
designated as provided in Subsection 2(b), may be given an opportunity to
purchase common stock of the Company (the "Common Stock").
(b) The word "Affiliate" as used in the Plan means any parent corporation
or subsidiary corporation of the Company, as those terms are defined in Sections
424(e) and (f), respectively, of the Internal Revenue Code of 1986, as amended
(the "Code").
(c) The Company, by means of the Plan, seeks to retain the services of its
associates, to secure and retain the services of new associates, and to provide
incentives for such persons to exert maximum efforts for the success of the
Company.
(D) The Company intends that the rights to purchase stock of the Company
granted under the Plan be considered options issued under an "employee stock
purchase plan" as that term is defined in Section 423(b) of the Code.
2. ADMINISTRATION.
(a) The Plan shall be administered by the Board of Directors (the "Board")
of the Company unless and until the Board delegates administration to a
Committee, as provided in Subsection 2(c). Whether or not the Board has
delegated administration, the Board shall have the final power to determine all
questions of policy and expediency that may arise in the administration of the
Plan.
(b) The Board shall have the power, subject to, and within the limitations
of, the express provisions of the Plan:
(i) To determine when and how rights to purchase stock of the Company
shall be granted and the provisions of each offering of such rights (which need
not be identical).
(ii) To designate from time to time which Affiliates of the Company
shall be eligible to participate in the Plan.
(iii) To construe and interpret the Plan and rights granted under it,
and to establish, amend and revoke rules and regulations for its administration.
The Board, in the
1.
<PAGE>
exercise of this power, may correct any defect, omission or inconsistency in the
Plan, in a manner and to the extent it shall deem necessary or expedient to make
the Plan fully effective.
(iv) To amend the Plan as provided in Section 13.
(v) To terminate or suspend the Plan as provided in Section 15.
(vi) Generally, to exercise such powers and to perform such acts as
the Board deems necessary or expedient to promote the best interests of the
Company and its Affiliates and to carry out the intent that the Plan be treated
as an "employee stock purchase plan" within the meaning of Section 423 of the
Code.
(c) The Board may delegate administration of the Plan to a Committee
composed of not fewer than two (2) members of the Board (the "Committee"). If
administration is delegated to a Committee, the Committee shall have, in
connection with the administration of the Plan, the powers theretofore possessed
by the Board, subject, however, to such resolutions, not inconsistent with the
provisions of the Plan, as may be adopted from time to time by the Board. The
Board may abolish the Committee at any time and revest in the Board the
administration of the Plan.
3. SHARES SUBJECT TO THE PLAN.
(a) Subject to the provisions of Section 12 relating to adjustments upon
changes in stock, the stock that may be sold pursuant to rights granted under
the Plan shall not exceed in the aggregate five hundred thousand (500,000)
shares of Common Stock. If any right granted under the Plan shall for any reason
terminate without having been exercised, the Common Stock not purchased under
such right shall again become available for the Plan.
(b) The stock subject to the Plan may be unissued shares or reacquired
shares, bought on the market or otherwise.
4. GRANT OF RIGHTS; OFFERING.
The Board or the Committee may from time to time grant or provide for the
grant of rights to purchase Common Stock of the Company under the Plan to
eligible associates (an "Offering") on a date or dates (the "Offering Date(s)")
selected by the Board or the Committee. Each Offering shall be in such form and
shall contain such terms and conditions as the Board or the Committee shall deem
appropriate, which shall comply with the requirements of Section 423(b)(5) of
the Code that all associates granted rights to purchase stock under the Plan
shall have the same rights and privileges. The terms and conditions of an
Offering shall be incorporated by reference into the Plan and treated as part of
the Plan. The provisions of separate Offerings need not be identical, but each
Offering shall include (through incorporation of the provisions of this Plan by
reference in the document comprising the Offering or otherwise) the period
during which the Offering shall be effective, which period shall not exceed
twenty-seven (27) months beginning with the Offering Date, and the substance of
the provisions contained in Sections 5 through 8, inclusive.
2.
<PAGE>
5. ELIGIBILITY.
(a) Rights may be granted only to associates of the Company or, as the
Board or the Committee may designate as provided in Subsection 2(c), to
associates of any Affiliate of the Company. Except as provided in Subsection
5(b), an associate of the Company or any Affiliate shall not be eligible to be
granted rights under the Plan unless, on the Offering Date, such associate has
been in the employ of the Company or any Affiliate for such continuous period
preceding such grant as the Board or the Committee may require, but in no event
shall the required period of continuous employment be greater than two (2)
years. In addition, unless otherwise determined by the Board or the Committee
and set forth in the terms of the applicable Offering, no associate of the
Company or any Affiliate shall be eligible to be granted rights under the Plan,
unless, on the Offering Date, such associate's customary employment with the
Company or such Affiliate is for at least twenty (20) hours per week and at
least five (5) months per calendar year. The Company, in its sole discretion,
may exclude from participation in the Plan associates of the Company or any
Affiliate of the Company who reside and/or perform services in certain specific
jurisdictions if the laws of those jurisdictions make participation in the Plan
impractical.
(b) The Board or the Committee may provide that each person who, during the
course of an Offering, first becomes an eligible associate of the Company or
designated Affiliate will, on a date or dates specified in the Offering which
coincides with the day on which such person becomes an eligible associate or
occurs thereafter, receive a right under that Offering, which right shall
thereafter be deemed to be a part of that Offering. Such right shall have the
same characteristics as any rights originally granted under that Offering, as
described herein, except that:
(i) the date on which such right is granted shall be the "Offering
Date" of such right for all purposes, including determination of the exercise
price of such right;
(ii) the period of the Offering with respect to such right shall begin
on its Offering Date and end coincident with the end of such Offering; and
(iii) the Board or the Committee may provide that if such person first
becomes an eligible associate within a specified period of time before the end
of the Offering, he or she will not receive any right under that Offering.
(c) No associate shall be eligible for the grant of any rights under the
Plan if, immediately after any such rights are granted, such associate owns
stock possessing five percent (5%) or more of the total combined voting power or
value of all classes of stock of the Company or of any Affiliate. For purposes
of this Subsection 5(c), the rules of Section 424(d) of the Code shall apply in
determining the stock ownership of any associate, and stock which such associate
may purchase under all outstanding rights and options shall be treated as stock
owned by such associate.
(d) An eligible associate may be granted rights under the Plan only if such
rights, together with any other rights granted under "employee stock purchase
plans" of the Company
3.
<PAGE>
and any Affiliates, as specified by Section 423(b)(8) of the Code, do not permit
such associate's rights to purchase stock of the Company or any Affiliate to
accrue at a rate which exceeds twenty-five thousand dollars ($25,000) of fair
market value of such stock (determined at the time such rights are granted) for
each calendar year in which such rights are outstanding at any time.
(e) Officers of the Company and any designated Affiliate shall be eligible
to participate in Offerings under the Plan; PROVIDED, HOWEVER, that the Board
may provide in an Offering that certain associates who are highly compensated
employees within the meaning of Section 423(b)(4)(D) of the Code shall not be
eligible to participate.
6. RIGHTS; PURCHASE PRICE.
(a) On each Offering Date, each eligible associate, pursuant to an Offering
made under the Plan, shall be granted the right to purchase up to the number of
shares of Common Stock of the Company purchasable with a percentage designated
by the Board or the Committee not exceeding ten percent (10%) of such
associate's Earnings (as defined in Subsection 7(a)) during the period which
begins on the Offering Date (or such later date as the Board or the Committee
determines for a particular Offering) and ends on the date stated in the
Offering, which date shall be no later than the end of the Offering. In
addition, the Board or the Committee may specify a maximum dollar amount that
each associate may use to purchase shares during any Offering made under the
Plan. The Board or the Committee shall establish one or more dates during an
Offering (the "Purchase Date(s)") on which rights granted under the Plan shall
be exercised and purchases of Common Stock carried out in accordance with such
Offering.
(b) In connection with each Offering made under the Plan, the Board or the
Committee may specify a maximum number of shares that may be purchased by any
associate as well as a maximum aggregate number of shares that may be purchased
by all eligible associates pursuant to such Offering. In addition, in connection
with each Offering that contains more than one Purchase Date, the Board or the
Committee may specify a maximum aggregate number of shares which may be
purchased by all eligible associates on any given Purchase Date under the
Offering. If the aggregate purchase of shares upon exercise of rights granted
under the Offering would exceed any such maximum aggregate number, the Board or
the Committee shall make a pro rata allocation of the shares available in as
nearly a uniform manner as shall be practicable and as it shall deem to be
equitable.
(c) The purchase price of stock acquired pursuant to rights granted under
the Plan shall be not less than the lesser of:
(i) an amount equal to eighty-five percent (85%) of the fair market
value of the stock on the Offering Date; or
(ii) an amount equal to eighty-five percent (85%) of the fair market
value of the stock on the Purchase Date.
4.
<PAGE>
7. PARTICIPATION; WITHDRAWAL; TERMINATION.
(a) An eligible associate may become a participant in the Plan
pursuant to an Offering by delivering a participation agreement to the Company
within the time specified in the Offering, in such form as the Company provides.
Each such agreement shall authorize payroll deductions of up to the maximum
percentage specified by the Board or the Committee of such associate's Earnings
during the Offering. "Earnings" is defined as an associate's wages (including
amounts thereof elected to be deferred by the associate, that would otherwise
have been paid, under any arrangement established by the Company that is
intended to comply with Section 125, Section 401(k), Section 402(h) or Section
403(b) of the Code or that provides non-qualified deferred compensation), which
shall include overtime pay, but shall exclude bonuses, incentive pay,
commissions, profit sharing or other remuneration paid directly to the
associate, the cost of employee benefits paid for by the Company or an
Affiliate, education or tuition reimbursements, imputed income arising under any
group insurance or benefit program, traveling expenses, business and moving
expense reimbursements, income received in connection with stock options,
contributions made by the Company or an Affiliate under any employee benefit
plan, and similar items of compensation, as determined by the Board or the
Committee. The payroll deductions made for each participant shall be credited to
an account for such participant under the Plan and shall be deposited with the
general funds of the Company. A participant may reduce (including to zero) or
increase such payroll deductions, and an eligible associate may begin such
payroll deductions, after the beginning of any Offering only as provided for in
the Offering. A participant may make additional payments into his or her account
only if specifically provided for in the Offering and only if the participant
has not had the maximum permitted amount withheld during the Offering.
(b) At any time during an Offering, a participant may terminate his or
her payroll deductions under the Plan and withdraw from the Offering by
delivering to the Company a notice of withdrawal in such form as the Company
provides. Such withdrawal may be elected at any time prior to the end of the
Offering except as provided by the Board or the Committee in the Offering. Upon
such withdrawal from the Offering by a participant, the Company shall distribute
to such participant all of his or her accumulated payroll deductions (reduced to
the extent, if any, such deductions have been used to acquire stock for the
participant) under the Offering, without interest, and such participant's
interest in that Offering shall be automatically terminated. A participant's
withdrawal from an Offering will have no effect upon such participant's
eligibility to participate in any other Offerings under the Plan but such
participant will be required to deliver a new participation agreement in order
to participate in subsequent Offerings under the Plan.
(c) Rights granted pursuant to any Offering under the Plan shall
terminate immediately upon cessation of any participating associate's employment
with the Company and any designated Affiliate, for any reason, and the Company
shall distribute to such terminated associate all of his or her accumulated
payroll deductions (reduced to the extent, if any, such deductions have been
used to acquire stock for the terminated associate), under the Offering, without
interest.
5.
<PAGE>
(d) Rights granted under the Plan shall not be transferable by a
participant otherwise than by will or the laws of descent and distribution, or
by a beneficiary designation as provided in Section 14 and, otherwise during his
or her lifetime, shall be exercisable only by the person to whom such rights are
granted.
8. EXERCISE.
(a) On each Purchase Date specified therefor in the relevant Offering, each
participant's accumulated payroll deductions and other additional payments
specifically provided for in the Offering (without any increase for interest)
will be applied to the purchase of whole shares of stock of the Company, up to
the maximum number of shares permitted pursuant to the terms of the Plan and the
applicable Offering, at the purchase price specified in the Offering. No
fractional shares shall be issued upon the exercise of rights granted under the
Plan. The amount, if any, of accumulated payroll deductions remaining in each
participant's account after the purchase of shares which is less than the amount
required to purchase one share of stock on the final Purchase Date of an
Offering shall be held in each such participant's account for the purchase of
shares under the next Offering under the Plan, unless such participant withdraws
from such next Offering, as provided in Subsection 7(b), or is no longer
eligible to be granted rights under the Plan, as provided in Section 5, in which
case such amount shall be distributed to the participant after such final
Purchase Date, without interest. The amount, if any, of accumulated payroll
deductions remaining in any participant's account after the purchase of shares
which is equal to the amount required to purchase whole shares of stock on the
final Purchase Date of an Offering shall be distributed in full to the
participant after such Purchase Date, without interest.
(b) No rights granted under the Plan may be exercised to any extent unless
the shares to be issued upon such exercise under the Plan (including rights
granted thereunder) are covered by an effective registration statement pursuant
to the Securities Act of 1933, as amended (the "Securities Act") and the Plan is
in material compliance with all applicable state, foreign and other securities
and other laws applicable to the Plan. If on a Purchase Date in any Offering
hereunder the Plan is not so registered or in such compliance, no rights granted
under the Plan or any Offering shall be exercised on such Purchase Date, and the
Purchase Date shall be delayed until the Plan is subject to such an effective
registration statement and such compliance, except that the Purchase Date shall
not be delayed more than twelve (12) months and the Purchase Date shall in no
event be more than twenty-seven (27) months from the Offering Date. If on the
Purchase Date of any Offering hereunder, as delayed to the maximum extent
permissible, the Plan is not registered and in such compliance, no rights
granted under the Plan or any Offering shall be exercised and all payroll
deductions accumulated during the Offering (reduced to the extent, if any, such
deductions have been used to acquire stock) shall be distributed to the
participants, without interest.
9. COVENANTS OF THE COMPANY.
(a) During the terms of the rights granted under the Plan, the Company
shall keep available at all times the number of shares of stock required to
satisfy such rights.
6.
<PAGE>
(b) The Company shall seek to obtain from each federal, state, foreign or
other regulatory commission or agency having jurisdiction over the Plan such
authority as may be required to issue and sell shares of stock upon exercise of
the rights granted under the Plan. If, after reasonable efforts, the Company is
unable to obtain from any such regulatory commission or agency the authority
which counsel for the Company deems necessary for the lawful issuance and sale
of stock under the Plan, the Company shall be relieved from any liability for
failure to issue and sell stock upon exercise of such rights unless and until
such authority is obtained.
10. USE OF PROCEEDS FROM STOCK.
Proceeds from the sale of stock pursuant to rights granted under the Plan
shall constitute general funds of the Company.
11. RIGHTS AS A STOCKHOLDER.
A participant shall not be deemed to be the holder of, or to have any of
the rights of a holder with respect to, any shares subject to rights granted
under the Plan unless and until the participant's shareholdings acquired upon
exercise of rights under the Plan are recorded in the books of the Company.
12. ADJUSTMENTS UPON CHANGES IN STOCK.
(a) If any change is made in the stock subject to the Plan, or subject to
any rights granted under the Plan, due to a change in corporate capitalization
and without the receipt of consideration by the Company (through
reincorporation, stock dividend, stock split, reverse stock split, combination
or reclassification of shares), the Plan will be appropriately adjusted in the
class(es) and maximum number of securities subject to the Plan pursuant to
subsection 3(a), and the outstanding rights will be appropriately adjusted in
the class(es) and number of securities and price per share of stock subject to
such outstanding rights. Such adjustments shall be made by the Board, the
determination of which shall be final, binding and conclusive.
(b) In the event of: (1) a dissolution, liquidation or sale of all or
substantially all of the assets of the Company, (2) a merger or consolidation in
which the Company is not the surviving corporation, or (3) a reverse merger in
which the Company is the surviving corporation but the shares of Common Stock
outstanding immediately preceding the merger are converted by virtue of the
merger into other property, whether in the form of securities, cash or
otherwise, then any surviving corporation may assume outstanding rights or
substitute similar rights for those under the Plan. In the event that no
surviving corporation assumes such outstanding rights or substitutes similar
rights therefor, participants' accumulated payroll deductions will be used to
purchase Common Stock immediately prior to the transaction described above and
the participants' rights under the ongoing Offering terminated immediately
following such purchase.
13. AMENDMENT OF THE PLAN.
(a) The Board at any time, and from time to time, may amend the Plan.
However, except as provided in Section 12 relating to adjustments upon changes
in stock, no amendment
7.
<PAGE>
shall be effective unless approved by the stockholders of the Company within
twelve (12) months before or after the adoption of the amendment, where the
amendment will:
(i) Increase the number of shares reserved for rights under the Plan;
(ii) Modify the provisions as to eligibility for participation in the
Plan (to the extent such modification requires stockholder approval in order for
the Plan to obtain employee stock purchase plan treatment under Section 423 of
the Code or to comply with the requirements of Rule 16b-3 promulgated under the
Securities Exchange Act of 1934, as amended ("Rule 16b-3")); or
(iii) Modify the Plan in any other way if such modification requires
stockholder approval in order for the Plan to obtain employee stock purchase
plan treatment under Section 423 of the Code or to comply with the requirements
of Rule 16b-3.
It is expressly contemplated that the Board may amend the Plan in any respect
the Board deems necessary or advisable to provide eligible associates with the
maximum benefits provided or to be provided under the provisions of the Code and
the regulations promulgated thereunder relating to employee stock purchase plans
and/or to bring the Plan and/or rights granted under it into compliance
therewith.
(b) Rights and obligations under any rights granted before amendment of the
Plan shall not be impaired by any amendment of the Plan, except with the consent
of the person to whom such rights were granted, or except as necessary to comply
with any laws or governmental regulations, or except as necessary to ensure that
the Plan and/or rights granted under the Plan comply with the requirements of
Section 423 of the Code.
14. DESIGNATION OF BENEFICIARY.
(a) A participant may file a written designation of a beneficiary who is to
receive any shares and cash, if any, from the participant's account under the
Plan in the event of such participant's death subsequent to the end of an
Offering but prior to delivery to the participant of such shares and cash. In
addition, a participant may file a written designation of a beneficiary who is
to receive any cash from the participant's account under the Plan in the event
of such participant's death during an Offering.
(b) Such designation of beneficiary may be changed by the participant at
any time by written notice. In the event of the death of a participant and in
the absence of a beneficiary validly designated under the Plan who is living at
the time of such participant's death, the Company shall deliver such shares
and/or cash to the executor or administrator of the estate of the participant,
or if no such executor or administrator has been appointed (to the knowledge of
the Company), the Company, in its sole discretion, may deliver such shares
and/or cash to the spouse or to any one or more dependents or relatives of the
participant, or if no spouse, dependent or relative is known to the Company,
then to such other person as the Company may designate.
8.
<PAGE>
15. TERMINATION OR SUSPENSION OF THE PLAN.
(a) The Board in its discretion, may suspend or terminate the Plan at any
time. No rights may be granted under the Plan while the Plan is suspended or
after it is terminated.
(b) Rights and obligations under any rights granted while the Plan is in
effect shall not be altered or impaired by suspension or termination of the
Plan, except as expressly provided in the Plan or with the consent of the person
to whom such rights were granted, or except as necessary to comply with any laws
or governmental regulation, or except as necessary to ensure that the Plan
and/or rights granted under the Plan comply with the requirements of Section 423
of the Code.
(c) Notwithstanding the foregoing, the Plan shall terminate and no rights
may be granted under the Plan after the tenth anniversary of the Effective Date.
16. EFFECTIVE DATE OF PLAN.
The Plan shall become effective simultaneously with the effectiveness
of the Company's registration statement under the Securities Act with respect to
the initial public offering of shares of the Company's Common Stock (the
"Effective Date"), but no rights granted under the Plan shall be exercised
unless and until the Plan has been approved by the stockholders of the Company
within twelve (12) months before or after the date the Plan is adopted by the
Board, which date may be prior to the Effective Date.
9.
<PAGE>
EXHIBIT 10.11.1
FIRST CONSULTING GROUP, INC.
2000 ASSOCIATE STOCK PURCHASE PLAN OFFERING
ADOPTED OCTOBER 26, 1999
1. GRANT; OFFERING DATE.
(a) The Board of Directors of First Consulting Group, Inc. (the "Company"),
pursuant to the Company's 2000 Associate Stock Purchase Plan (the "Plan"),
hereby authorizes the grant of rights to purchase shares of the common stock of
the Company ("Common Stock") to all eligible associates (an "Offering"). The
first Offering shall begin on January 1, 2000 and end on December 31, 2001 (the
"Initial Offering"). Thereafter, Offerings shall begin every two years on
January 1, beginning with January 1, 2002. Each such Offering shall have a term
of two (2) years. For example, the Offering that begins on January 1, 2002, will
end on December 31, 2003. The first day of an Offering is that Offering's
"Offering Date." If an Offering Date falls on a day during which the Common
Stock is not actively traded, then the Offering Date shall be the next
succeeding day during which the Common Stock is actively traded.
(b) Prior to the commencement of any Offering, the Board of Directors (or
the Committee described in Subsection 2(c) of the Plan, if any) may change any
or all terms of such Offering and any subsequent Offerings and may determine
that such Offerings shall not occur. The granting of rights pursuant to each
Offering hereunder shall occur on each respective Offering Date unless, prior to
such date (a) the Board of Directors (or such Committee) determines that such
Offering shall not occur, or (b) no shares remain available for issuance under
the Plan in connection with the Offering.
2. ELIGIBLE ASSOCIATES.
All regular full time associates of the Company and each of its Affiliates
(as defined in the Plan) (collectively, the "Eligible Associates") shall be
granted rights to purchase Common Stock under each Offering on the Offering Date
of such Offering provided that each such associate otherwise meets the
employment requirements of Subsection 5(a) of the Plan. Notwithstanding the
foregoing, the following associates shall NOT be Eligible Associates or be
granted rights under an Offering: (i) part-time, temporary or seasonal
associates whose customary employment is less than twenty (20) hours per week or
less than five (5) months per calendar year and (ii) 5% stockholders (including
ownership through unexercised options) described in Subsection 5(c) of the Plan.
In addition, the Company may, in its sole discretion, exclude from participation
in the Offering associates who reside and/or perform services for the Company or
an Affiliate in certain specific jurisdictions if the laws of such jurisdictions
make participation in the Offering impractical.
Each person who first becomes an Eligible Associate during any Offering
shall be granted a right to purchase Common Stock under such Offering on the
next January 1 or July 1 during such Offering, which right shall thereafter be
deemed to be a part of such Offering. Such
1.
<PAGE>
right shall have the same characteristics as any rights originally granted under
the Offering except that:
(a) the date on which such right is granted shall be the "Offering Date" of
such right for all purposes, including determination of the exercise price of
such right; and
(b) the Offering for such right shall begin on its Offering Date and end
coincident with the ongoing Offering.
3. RIGHTS.
(a) Subject to the limitations contained herein and in the Plan, on each
Offering Date each Eligible Associate shall be granted the right to purchase the
number of shares of Common Stock purchasable with the deductions that have been
made from the Eligible Associate's pay during the six (6) month period preceding
the Offering Date.
(b) The maximum number of shares that may be purchased by an eligible
associate on a Purchase Date shall not exceed five thousand (5,000) shares. The
maximum aggregate number of shares available to be purchased by all Eligible
Associates under an Offering shall be the number of shares remaining available
under the Plan on the Offering Date. If the aggregate purchase of shares of
Common Stock upon exercise of rights granted under the Offering would exceed the
maximum aggregate number of shares available, the Board shall make a pro rata
allocation of the shares available in a uniform and equitable manner.
(c) Notwithstanding the foregoing, as required under Section 423 of the
Code, no associate shall be granted an option under the Plan which permits such
associate's right to purchase stock under this Plan and all other employee stock
purchase plans (described in Section 423 of the Code) of the Company to accrue
at a rate which exceeds twenty five thousand dollars ($25,000) of fair market
value of such stock (determined at the time such option is granted) for each
calendar year in which such option is outstanding at any time.
4. PURCHASE PRICE.
The purchase price of the Common Stock under the Offering shall be the
lesser of eighty-five percent (85%) of the fair market value of the Common Stock
on the Offering Date or eighty-five percent (85%) of the fair market value of
the Common Stock on the Purchase Date. Notwithstanding the foregoing, for the
Offering that commences on January 1, 2000, the purchase price of the Common
Stock under the Offering shall be the lesser of (i) eighty-five percent (85%) of
the fair market value of the Common Stock on the date on which the stockholders
of the Company approve the adoption of the Plan, or (ii) eighty-five percent
(85%) of the fair market value of the Common Stock on the Purchase Date.
5. PARTICIPATION.
(a) Except as otherwise provided herein or in the Plan, an Eligible
Associate may elect to participate in an Offering only as of the beginning of
the Offering; PROVIDED, HOWEVER, that associates who first become Eligible
Associates during an Offering may elect to participate in that Offering as of
the day after the first Purchase Date that occurs after they become Eligible
2.
<PAGE>
Associates. An Eligible Associate shall become a participant in the Plan by
delivering an agreement authorizing payroll deductions. Such deductions shall be
made each pay period and must be in whole percentages not to exceed ten percent
(10%) of Earnings; PROVIDED THAT no Eligible Associate shall be permitted to
authorize deductions in excess of ten thousand dollars ($10,000) per calendar
year. The agreement shall be made on such enrollment form as the Company or a
designated Affiliate provides and must be delivered to the Company or designated
Affiliate before the Offering Date to be effective for such Offering, unless a
later time for filing the enrollment form is set by the Company for all Eligible
Associates with respect to a given Offering Date. As to the Initial Offering,
the time for filing an enrollment form and commencing participation for
individuals who are Eligible Associates on the Offering Date for the Initial
Offering shall be determined by the Company and communicated to such Eligible
Associates. A participant may not make additional contributions under the Plan.
(b) A participant may increase or reduce (including to zero) his or her
participation level as of any July 1 or January 1 during an Offering. Any such
change in participation shall be made by delivering a notice to the Company or a
designated Affiliate in such form and at such time as the Company provides. In
addition, a participant may withdraw from an Offering and receive his or her
accumulated payroll deductions from the Offering (reduced to the extent, if any,
such deductions have been used to acquire Common Stock for the Participant on
any prior Purchase Dates), without interest, at any time prior to the end of the
Offering, excluding the fifteen (15) day period immediately preceding the
Purchase Date, by delivering a withdrawal notice to the Company or designated
Affiliate in such form as the Company of designated Affiliate provides. A
participant who has withdrawn from an Offering shall not again participate in
such Offering but may participate in subsequent Offerings under the Plan by
submitting a new participation agreement in accordance with the terms thereof.
6. PURCHASES.
Subject to the limitations contained herein, on each Purchase Date, each
participant's accumulated payroll deductions (without any increase for interest)
shall be applied to the purchase of whole shares of Common Stock, up to the
maximum number of shares permitted under the Plan and the Offering. "Purchase
Date" shall be defined as June 30, 2000, and each June 30 and December 31
thereafter. If a Purchase Date falls on a day during which the Common Stock is
not actively traded then the Purchase Date shall be the nearest prior day on
which the Common Stock is actively traded.
7. NOTICES AND FORMS.
Any forms, notices or agreements provided for in the Offering or the Plan
shall be given in writing, in a form provided by the Company, and unless
specifically provided for in the Plan or this Offering shall be deemed
effectively given upon receipt or, in the case of notices and agreements
delivered by the Company, five (5) days after deposit in the United States mail,
postage prepaid. In addition, the Company may from time to time deliver certain
forms and notices to Eligible Associates electronically or require that certain
forms and notices be delivered to the Company electronically, with delivery
deemed effectively given upon receipt.
3.
<PAGE>
8. EXERCISE CONTINGENT ON STOCKHOLDER APPROVAL.
The rights granted under an Offering are subject to the approval of the
Plan by the stockholders of the Company as required for the Plan to obtain
employee stock purchase plan treatment under Section 423 of the Code or to
comply with the requirements of Rule 16b-3 promulgated under the Securities
Exchange Act of 1934, as amended.
9. OFFERING SUBJECT TO PLAN.
Each Offering is subject to all the provisions of the Plan, and its
provisions are hereby made a part of the Offering, and is further subject to all
interpretations, amendments, rules and regulations which may from time to time
be promulgated and adopted pursuant to the Plan. In the event of any conflict
between the provisions of an Offering and those of the Plan (including
interpretations, amendments, rules and regulations which may from time to time
be promulgated and adopted pursuant to the Plan), the provisions of the Plan
shall control.
4.
<PAGE>
EXHIBIT 21.1
FIRST CONSULTING GROUP, INC.
ACTIVE SUBSIDIARIES
as of February 29, 2000
<TABLE>
<CAPTION>
# Name Incorporation Other Name(s)
- - ---- ------------- -------------
<C> <S> <C> <C>
1. First Consulting Group, Inc. Delaware
2. FCG Management Holdings, Inc. Delaware
3. FCG Management Services, LLC Delaware
4. FCG CSI, Inc. Delaware First Consulting Group; formerly ISCG,
Inc. and Integrated Systems Consulting
Group
5. FCG Investment Company, Inc. Delaware
6. FCG Ventures, Inc. Delaware
7. First Consulting Group GmbH Germany
8. First Consulting (Ireland) Limited Ireland
9. First Consulting Group, B.V. Netherlands
10. First Consulting Group (UK) Limited United Kingdom Formerly Greenhalgh Company Limited
11. First Consulting Group Company Canada
</TABLE>
<PAGE>
EXHIBIT 23.1
CONSENT OF GRANT THORNTON, LLP, INDEPENDENT ACCOUNTANTS
We have issued our report dated February 11, 2000, accompanying the
consolidated financial statements and schedules included in the Annual Report
of First Consulting Group, Inc. on Form 10-K for the year ended December 31,
2000. We hereby consent to the incorporation by reference of said reports in
the Registration Statements of First Consulting Group, Inc. on Forms S-8
(File No. 333-55981, effective June 4, 1998, and File No. 333-69991,
effective December 31, 1998).
/s/ GRANT THORNTON LLP
Irvine, California
March 28, 2000
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors
First Consulting Group, Inc.
We consent to the use of our report dated January 23, 1998, except as to note
14, which is as of February 27, 1998, with respect to the consolidated
statements of operations, shareholders' equity and cash flows of Integrated
Systems Consulting Group, Inc. for the year ended December 31, 1997 and
related schedule (not separately presented herein), which report appears in
the annual report on Form 10-K of First Consulting Group, Inc. for the year
ended December 31, 1999. We also consent to incorporation by reference of
such report in the registration statements (Nos. 333-55981, 333-69991) on Form
S-8 of First Consulting Group, Inc.
/s/ KPMG LLP
Philadelphia, Pennsylvania
March 28, 2000
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL DATA EXTRACTED FROM THE CONSOLIDATED
BALANCE SHEETS, STATEMENTS OF OPERATIONS AND STATEMENTS OF CASH FLOWS INCLUDED
IN FCG'S FORM 10-K FOR THE PERIOD ENDED DECEMBER 31, 1999 AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS AND NOTES THERETO.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 29,674,000
<SECURITIES> 3,726,000
<RECEIVABLES> 44,379,000
<ALLOWANCES> (2,064,000)
<INVENTORY> 15,737,000
<CURRENT-ASSETS> 94,014,000
<PP&E> 32,273,000
<DEPRECIATION> 17,283,000
<TOTAL-ASSETS> 144,061,000
<CURRENT-LIABILITIES> 22,049,000
<BONDS> 0
0
0
<COMMON> 24,000
<OTHER-SE> 114,883,000
<TOTAL-LIABILITY-AND-EQUITY> 144,061,000
<SALES> 237,563,000
<TOTAL-REVENUES> 237,563,000
<CGS> 148,793,000
<TOTAL-COSTS> 72,862,000
<OTHER-EXPENSES> (3,941,000)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (2,601,000)
<INCOME-PRETAX> 22,450,000
<INCOME-TAX> 7,643,000
<INCOME-CONTINUING> 14,807,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 14,807,000
<EPS-BASIC> 0.63
<EPS-DILUTED> 0.61
</TABLE>
