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First Consulting Group 10-Q 2005

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC  20549

 


 

FORM 10-Q

 

(Mark One)

 

  ý

 

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

 

 

 

For the quarterly period ended July 1, 2005

 

 

 

OR

 

 

 

  o

 

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

 

For the transition period from              to              

 

Commission File Number 0-23651

 


 

First Consulting Group, Inc.

(Exact name of registrant as specified in its charter)

 

Delaware

 

95-3539020

(State or other jurisdiction of
incorporation or organization)

 

(I.R.S. Employer
Identification No.)

 

111 W. Ocean Blvd., 4th Floor, Long Beach, CA  90802

(Address of principal executive offices including zip code)

 

(562) 624-5200

(Registrant’s telephone number, including area code)

 

 

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

 

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

 

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

 

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

 

Common Stock, $.001 par value

 

24,462,798

(Class)

 

(Outstanding at July 29, 2005)

 

 



 

First Consulting Group, Inc.

Table of Contents

 

COVER PAGE

 

 

 

TABLE OF CONTENTS

 

 

 

PART I.          FINANCIAL INFORMATION

 

 

 

 

ITEM 1. FINANCIAL STATEMENTS AND NOTES (UNAUDITED)

 

 

 

 

Consolidated Balance Sheets

 

 

 

 

 

Consolidated Statements of Operations

 

 

 

 

 

Condensed Consolidated Statements of Cash Flows

 

 

 

 

 

Notes to Consolidated Financial Statements

 

 

 

 

 

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

 

 

 

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS

 

 

 

 

ITEM 4. CONTROLS AND PROCEDURES

 

 

 

 

PART II. OTHER INFORMATION

 

 

 

 

 

ITEM 1. LEGAL PROCEEDINGS

 

 

 

 

 

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

 

 

 

 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

 

 

 

 

 

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

 

 

 

 

 

ITEM 5. OTHER INFORMATION

 

 

 

 

 

ITEM 6. EXHIBITS

 

 

 

 

SIGNATURES

 

 

 

 

EXHIBIT INDEX

 

 

2



 

PART I.  FINANCIAL INFORMATION

 

Item 1. Financial Statements and Notes (Unaudited)

 

First Consulting Group, Inc. and Subsidiaries

 

Consolidated Balance Sheets

(in thousands, except share and per share data)

 

 

 

July 1,
2005

 

December 31,
2004

 

 

 

(unaudited)

 

 

 

ASSETS

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

13,980

 

$

15,012

 

Short-term investments

 

21,430

 

25,309

 

Accounts receivable, less allowance of $1,317 and $1,401 as of July 1, 2005 and December 31, 2004, respectively

 

21,505

 

26,266

 

Unbilled receivables

 

14,313

 

11,005

 

Deferred income taxes

 

6,057

 

7,869

 

Prepaid expenses and other current assets

 

4,158

 

2,449

 

Other current receivable

 

2,895

 

 

Current assets of discontinued operations

 

 

561

 

Total current assets

 

84,338

 

88,471

 

 

 

 

 

 

 

Property and equipment:

 

 

 

 

 

Furniture, equipment, and leasehold improvements

 

4,628

 

4,144

 

Information systems equipment

 

29,201

 

27,016

 

 

 

33,829

 

31,160

 

Less accumulated depreciation and amortization

 

21,939

 

19,331

 

 

 

11,890

 

11,829

 

 

 

 

 

 

 

Other assets:

 

 

 

 

 

Executive benefit trust

 

9,345

 

9,343

 

Long-term account receivable

 

 

3,806

 

Deferred income taxes

 

 

3,220

 

Goodwill, net

 

18,159

 

17,259

 

Intangibles, net

 

1,748

 

2,437

 

Notes receivable – stockholders

 

406

 

407

 

Long-term investments

 

325

 

325

 

Other

 

3,562

 

3,302

 

 

 

33,545

 

40,099

 

Total assets

 

$

129,773

 

$

140,399

 

 

The accompanying notes are an integral part of these financial statements.

 

3



 

First Consulting Group, Inc. and Subsidiaries

 

Consolidated Balance Sheets (Continued)

(in thousands, except share and per share data)

 

 

 

July 1,
2005

 

December 31,
2004

 

 

 

(unaudited)

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Accounts payable

 

$

2,715

 

$

2,892

 

Accrued liabilities

 

10,601

 

11,104

 

Accrued restructuring

 

1,475

 

1,800

 

Accrued vacation

 

7,674

 

6,682

 

Accrued incentive compensation

 

1,124

 

1,729

 

Customer advances

 

7,449

 

7,458

 

Current liabilities of discontinued operations

 

58

 

105

 

Total current liabilities

 

31,096

 

31,770

 

Non-current liabilities:

 

 

 

 

 

Accrued restructuring

 

2,481

 

3,220

 

Supplemental executive retirement plan

 

9,300

 

9,094

 

Total non-current liabilities

 

11,781

 

12,314

 

Commitments and contingencies

 

 

 

Stockholders’ equity:

 

 

 

 

 

Preferred Stock, $.001 par value; 9,500,000 shares authorized, no shares issued and outstanding

 

 

 

Series A Junior Participating Preferred Stock, $.001 par value; 500,000 shares authorized, no shares issued and outstanding

 

 

 

Common Stock, $.001 par value; 50,000,000 shares authorized,24,461,258 shares issued and outstanding at July 1, 2005 and 24,826,547 shares issued and outstanding at December 31, 2004

 

24

 

25

 

Additional paid-in capital

 

90,747

 

91,636

 

Retained earnings (deficit)

 

(3,488

)

4,727

 

Deferred compensation-stock incentive agreements

 

(69

)

(107

)

Notes receivable-stockholders

 

(247

)

(286

)

Accumulated other comprehensive income (loss)

 

(71

)

320

 

Total stockholders’ equity

 

86,896

 

96,315

 

Total liabilities and stockholders’ equity

 

$

129,773

 

$

140,399

 

 

The accompanying notes are an integral part of these financial statements.

 

4



 

First Consulting Group, Inc. and Subsidiaries

 

Consolidated Statements of Operations

(in thousands, except per share data)

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

(unaudited)

 

(unaudited)

 

 

 

July 1,
2005

 

June 25,
2004

 

July 1,
2005

 

June 25,
2004

 

Revenues before reimbursements

 

$

67,919

 

$

67,237

 

$

136,063

 

$

132,590

 

Reimbursements

 

3,772

 

4,456

 

7,434

 

8,436

 

Total revenues

 

71,691

 

71,693

 

143,497

 

141,026

 

 

 

 

 

 

 

 

 

 

 

Cost of services before reimbursable expenses

 

47,327

 

44,792

 

95,595

 

89,323

 

Reimbursable expenses

 

3,772

 

4,456

 

7,434

 

8,436

 

Total cost of services

 

51,099

 

49,248

 

103,029

 

97,759

 

 

 

 

 

 

 

 

 

 

 

Gross profit

 

20,592

 

22,445

 

40,468

 

43,267

 

 

 

 

 

 

 

 

 

 

 

Selling expenses

 

7,094

 

7,115

 

13,852

 

14,363

 

General and administrative expenses

 

14,601

 

13,139

 

29,340

 

25,004

 

Income (loss) from operations

 

(1,103

)

2,191

 

(2,724

)

3,900

 

Other income (expense):

 

 

 

 

 

 

 

 

 

Interest income, net

 

210

 

142

 

440

 

344

 

Other expense, net

 

(33

)

(110

)

(33

)

(131

)

Expense for premium on repurchase of stock

 

 

 

 

(1,561

)

Income (loss) from continuing operations before income tax provision

 

(926

)

2,223

 

(2,317

)

2,552

 

Income tax provision

 

6,000

 

975

 

5,361

 

1,810

 

Income (loss) from continuing operations

 

(6,926

)

1,248

 

(7,678

)

742

 

Loss on discontinued operations, net of tax benefit

 

 

(218

)

(537

)

(345

)

Net income (loss)

 

$

(6,926

)

$

1,030

 

$

(8,215

)

$

397

 

 

 

 

 

 

 

 

 

 

 

Basic & diluted net income (loss) per share:

 

 

 

 

 

 

 

 

 

Basic:

 

 

 

 

 

 

 

 

 

Income (loss) from continuing operations

 

$

(0.28

)

$

0.05

 

$

(0.32

)

$

0.03

 

Loss on discontinued operations, net of tax benefit

 

 

(0.01

)

(0.02

)

(0.01

)

Net income (loss) per share

 

$

(0.28

)

$

0.04

 

$

(0.34

)

$

0.02

 

Diluted:

 

 

 

 

 

 

 

 

 

Income (loss) from continuing operations

 

$

(0.28

)

$

0.05

 

$

(0.32

)

$

0.03

 

Loss on discontinued operations, net of tax benefit

 

 

(0.01

)

(0.02

)

(0.01

)

Net income (loss) per share

 

$

(0.28

)

$

0.04

 

$

(0.34

)

$

0.02

 

Weighted average shares used in computing:

 

 

 

 

 

 

 

 

 

Basic net income (loss) per share

 

24,343

 

24,074

 

24,409

 

24,748

 

Diluted net income (loss) per share

 

24,343

 

24,340

 

24,409

 

24,981

 

 

The accompanying notes are an integral part of these financial statements.

 

5



 

First Consulting Group, Inc. and Subsidiaries

 

Condensed Consolidated Statements of Cash Flows

(in thousands)

 

 

 

Six Months Ended

 

 

 

(unaudited)

 

 

 

July 1,
2005

 

June 25,
2004

 

Cash flows from operating activities:

 

 

 

 

 

Net income (loss):

 

$

(8,215

)

$

397

 

Adjustments to reconcile net income (loss) to net cash provided by operating activities:

 

 

 

 

 

Depreciation and amortization

 

3,107

 

2,309

 

Deferred income tax provision

 

5,032

 

1,353

 

Premium on capital stock repurchase

 

 

1,561

 

Intangibles amortization

 

689

 

840

 

Writedown of investment

 

 

50

 

Provision for bad debts, net of adjustments

 

 

16

 

Loss on sale of assets

 

2

 

31

 

Minority interest in net loss of subsidiaries

 

 

(14

)

Compensation from stock issuances

 

38

 

56

 

Interest income on notes receivable – stockholders

 

(39

)

(31

)

Changes in assets and liabilities, excluding effect of acquisitions:

 

 

 

 

 

Accounts receivable

 

4,761

 

3,322

 

Unbilled receivables

 

(3,308

)

(2,068

)

Prepaid expenses and other

 

(1,709

)

(1,585

)

Current assets of discontinued operations

 

561

 

 

Other current receivable

 

458

 

 

Long-term account receivable

 

453

 

1,049

 

Other assets

 

(260

)

(1,058

)

Accounts payable

 

(177

)

300

 

Accrued liabilities

 

(503

)

54

 

Current liabilities of discontinued operations

 

(47

)

 

Accrued restructuring

 

(1,064

)

(3,049

)

Accrued vacation

 

992

 

378

 

Accrued incentive compensation

 

(605

)

294

 

Customer advances

 

(9

)

(1,961

)

Supplemental executive retirement plan

 

204

 

362

 

Other

 

(144

)

41

 

Net cash provided by operating activities:

 

217

 

2,647

 

Cash flows from investing activities:

 

 

 

 

 

Proceeds from sale/maturity of investments

 

3,879

 

10,736

 

Purchase of property and equipment

 

(3,197

)

(3,878

)

Acquisition of businesses, net of cash acquired

 

 

(2,383

)

Net cash provided by investing activities

 

682

 

4,475

 

Cash flows from financing activities:

 

 

 

 

 

Proceeds from issuance of capital stock, net

 

807

 

760

 

Proceeds from notes receivable and tax loan payments

 

12

 

50

 

Capital stock repurchase

 

(2,530

)

(14,773

)

Net cash used in financing activities

 

(1,711

)

(13,963

)

Effect of exchange rate changes on cash and cash equivalents

 

(220

)

66

 

Net change in cash and cash equivalents

 

(1,032

)

(6,775

)

Cash and cash equivalents at beginning of period

 

15,012

 

26,826

 

Cash and cash equivalents at end of period

 

$

13,980

 

$

20,051

 

 

 

 

 

 

 

Cash paid during the period for:

 

 

 

 

 

Interest

 

$

51

 

$

11

 

Income taxes

 

$

278

 

$

636

 

 

The accompanying notes are an integral part of these financial statements.

 

6



 

Notes to Consolidated Financial Statements

 

Note 1                                                             Accounting Policies

 

Basis of Presentation

 

The accompanying consolidated balance sheet of First Consulting Group, Inc. (the “Company” or “FCG”) at July 1, 2005 and consolidated statements of operations and condensed consolidated statements of cash flows for the periods ended July 1, 2005 and June 25, 2004 are unaudited.  These financial statements reflect all adjustments, consisting of only normal recurring adjustments, which, in the opinion of management, are necessary to fairly present the financial position of the Company at July 1, 2005 and the results of operations for the three-month and six-month periods ended July 1, 2005 and June 25, 2004.  The results of operations and cash flows for the six-month period ended July 1, 2005 are not necessarily indicative of the results to be expected for the year ending December 30, 2005.  For more complete financial information, these financial statements should be read in conjunction with the audited financial statements for the year ended December 31, 2004 included in the Company’s Annual Report on Form 10-K.  Certain reclassifications have been made to the 2004 financial statements to conform to the 2005 presentation.

 

Principles of Consolidation

 

The consolidated financial statements include the accounts of the Company and its subsidiaries.  All material intercompany accounts and transactions have been eliminated.

 

Stock-Based Compensation

 

The Company accounts for stock-based employee compensation using the intrinsic value method as prescribed by APB Opinion No. 25, “Accounting for Stock Issued to Employees,” and has adopted the disclosure provisions of Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation” (“SFAS No. 123”), and Statement of Financial Accounting Standards No. 148, “Accounting for Stock-Based Compensation – Transition and Disclosure – an amendment of SFAS No. 123” (“SFAS No. 148”).  SFAS No. 123 requires pro forma disclosures of net income (loss) and net income (loss) per share as if the fair value method of accounting for stock-based awards had been applied. Under the fair value method, compensation cost is recorded based on the value of the award at the grant date and is recognized over the service period.

 

The following table presents the pro forma net income (loss) had compensation costs been determined using the fair value at the date of grant for awards under the plan in accordance with SFAS No. 123 (in thousands, except per share data):

 

7



 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

July 1,
2005

 

June 25,
2004

 

July 1,
2005

 

June 25,
2004

 

 

 

 

 

 

 

 

 

 

 

Net income (loss), as reported

 

$

(6,926

)

$

1,030

 

$

(8,215

)

$

397

 

Deduct:

Total stock based employee compensation expense determined under fair value method for all awards, net of tax

 

(439

)

(383

)

(680

)

(836

)

Add:

Amount of such stock-based expense included in net income (loss)

 

 

 

 

 

Pro forma net income (loss)

 

$

(7,365

)

$

647

 

$

(8,895

)

$

(439

)

 

 

 

 

 

 

 

 

 

 

Basic income (loss) per share

As reported

 

$

(0.28

)

$

0.04

 

$

(0.34

)

$

0.02

 

 

Pro forma

 

$

(0.30

)

$

0.03

 

$

(0.36

)

$

(0.02

)

 

 

 

 

 

 

 

 

 

 

Diluted income (loss) per share

As reported

 

$

(0.28

)

$

0.04

 

$

(0.34

)

$

0.02

 

 

Pro forma

 

$

(0.30

)

$

0.03

 

$

(0.36

)

$

(0.02

)

 

Basic and Diluted Net Income (Loss) Per Share

 

Basic net income (loss) per share is based upon the weighted average number of common shares outstanding.  Diluted net income per share is based on the assumption that stock options were exercised.  Dilution is computed by applying the treasury stock method. Under this method, options are assumed to be exercised at the beginning of the period (or at the time of issuance, if later), and as if funds obtained by the Company from such exercise were used by the Company to purchase common stock at the average market price during the period. Stock options are not considered when computing diluted net loss per share as they are considered anti-dilutive.

 

The following represents a reconciliation of basic and diluted net loss per share for the three months and six months ended July 1, 2005 and June 25, 2004 (in thousands, except per share data):

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

July 1,
2005

 

June 25,
2004

 

July 1,
2005

 

June 25,
2004

 

Income (loss) from continuing operations

 

$

(6,926

)

$

1,248

 

$

(7,678

)

$

742

 

Loss on discontinued operations, net of tax benefit

 

 

(218

)

(537

)

(345

)

Net income (loss)

 

$

(6,926

)

$

1,030

 

$

(8,215

)

$

397

 

 

 

 

 

 

 

 

 

 

 

Basic weighted average number of shares outstanding

 

24,343

 

24,074

 

24,409

 

24,748

 

Effect of dilutive options and contingent shares

 

 

266

 

 

233

 

Diluted weighted average number of shares outstanding

 

24,343

 

24,340

 

24,409

 

24,981

 

 

 

 

 

 

 

 

 

 

 

Basic per share:

 

 

 

 

 

 

 

 

 

Income (loss) from continuing operations

 

$

(0.28

)

$

0.05

 

$

(0.32

)

$

0.03

 

Loss on discontinued operations, net of tax benefit

 

 

(0.01

)

(0.02

)

(0.01

)

Net income (loss) per share

 

$

(0.28

)

$

0.04

 

$

(0.34

)

$

0.02

 

 

 

 

 

 

 

 

 

 

 

Diluted per share:

 

 

 

 

 

 

 

 

 

Income (loss) from continuing operations

 

$

(0.28

)

$

0.05

 

$

(0.32

)

$

0.03

 

Loss on discontinued operations, net of tax benefit

 

 

(0.01

)

(0.02

)

(0.01

)

Net income (loss) per share

 

$

(0.28

)

$

0.04

 

$

(0.34

)

$

0.02

 

 

8



 

For the three months ended July 1, 2005 and June 25, 2004, there were 5,218,823 and 4,417,995 anti-dilutive outstanding stock options, respectively, excluded from the calculation of diluted loss per share.  For the six months ended July 1, 2005 and June 25, 2004, there were 5,231,175 and 4,830,016 anti-dilutive outstanding stock options, respectively, excluded from the calculation of diluted loss per share.

 

Use of Estimates

 

In preparing financial statements in conformity with accounting principles generally accepted in the United States of America, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.  On an on-going basis, the Company evaluates its estimates, including those related to revenue recognition, valuation of goodwill and long-lived and intangible assets, accrued liabilities, income taxes including the amount of tax asset valuation allowance required, restructuring costs, litigation and disputes, and the allowance for doubtful accounts.

 

The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources.  The Company’s actual results may differ from its estimates.

 

One particular significant estimate is the amount of realizability of the Company’s deferred tax assets, and the necessary amount of related valuation allowance.  Based on the Company’s recent historical performance and in accordance with SFAS 109, the Company has increased its deferred tax asset valuation allowance by $6.0 million during the second quarter of fiscal year 2005.  This does not, in any way, limit the Company’s ability to use its deferred tax assets, primarily loss carryforwards, to offset income earned in the future.  As well as not being subject to taxation, a significant amount (approximately $20 million) of any future pretax income will not require a tax provision in the income statement.

 

After application of the $6.0 million valuation allowance in the second quarter, the Company has remaining net deferred tax assets at July 1, 2005 of approximately $6.0 million, reflecting the benefit of various temporary tax differences, which are replenished every year. To the extent that current year activity for these temporary differences results in a taxable loss, the Company’s net operating loss carryforwards would increase, and additional valuation allowance may be required. Realization of the currently recorded deferred tax assets is dependent on generating sufficient taxable income in the forseeable future. Although realization is not assured, management believes it is more likely than not that all of the net deferred tax asset will be realized.

 

Cash and Cash Equivalents

 

For purposes of reporting, cash and cash equivalents include cash and interest-earning deposits or securities with original maturities of three months or less.

 

Note 2                                                             Investments

 

At July 1, 2005, the Company had approximately $21.4 million in short-term investments.  Such investments were held primarily in commercial paper, money market investments, and tax-exempt government securities.  Net unrealized gains and losses on investments were immaterial at July 1, 2005.  Additionally, the Company had $325,000 of non-marketable equity investments, valued at the lower of cost or estimated fair value, which were included in long-term investments.

 

Note 3                                                             Other Current Receivable

 

At July 1, 2005, the Company carried an other current receivable of approximately $2.9 million from a single client.  The receivable is related to an outsourcing contract and was originally scheduled to be collected over the next 18 months; however, due to the early termination of the contract for convenience by the client, it is now scheduled to be received in full by December 31, 2005.

 

9



 

Note 4                                                             Business Acquisitions

 

FCG Infrastructure Services (FCGIS)

 

On May 31, 2002, the Company acquired a controlling interest of 52.35% in Codigent Solutions Group, Inc., renamed FCG Infrastructure Services, Inc. (FCGIS), a provider of value added information technology solutions to hospitals and other healthcare delivery organizations, for $2.6 million in cash.  On January 30, 2004, the Company purchased the remaining 47.65% minority interest in FCGIS from five remaining individual stockholders for approximately $2.4 million in cash.  Additionally, the Company deposited 591,328 shares of FCG common stock into an escrow account, with one-fourth of such shares to be released to those same stockholders in four separate increments upon successful fulfillment by FCGIS of certain revenue and profitability targets for the six-month periods ended June 25, 2004, December 31, 2004, July 1, 2005, and December 30, 2005.  If such targets were not fulfilled for any of the six-month periods, the shares in escrow for that period would revert to FCG.

 

The acquisition was accounted for using the purchase method of accounting and the allocation of the $5.0 million non-contingent purchase price (net of cash acquired of $392,000) is as follows (in thousands):

 

Accounts receivable

 

$

784

 

Fixed assets and software

 

557

 

Intangible assets

 

604

 

Goodwill

 

3,254

 

Accrued liabilities

 

(397

)

Assumed long-term debt

 

(194

)

Net assets acquired

 

$

4,608

 

 

The $3.9 million of excess over book value was allocated between goodwill and intangible assets of $3.3 million and $0.6 million, respectively.  Such amounts are non-deductible for tax purposes.

 

For the six-month periods ended June 25, 2004 and December 31, 2004, FCGIS met the revenue and profitability targets, and 295,664 contingent shares were released to the former FCGIS stockholders, thus adding $1.8 million to goodwill.  In February 2005, the Company negotiated an early conclusion to its escrow agreement related to shares of common stock issued in the purchase of FCGIS, where half of the remaining 295,664 shares in escrow were released and the other half were forfeited back to the Company.  The shares released further increased goodwill by another $900,000 to a total of $6.1 million of goodwill related to the acquisition.

 

Additionally, on February 23, 2005, the Company repurchased most of the stock which had been previously and currently released from escrow for its current fair market value.  A total of 422,018 shares were repurchased for approximately $2.5 million in cash.  The repurchased shares were subsequently cancelled.

 

Note 5                                                             Goodwill and Intangible Assets

 

Goodwill is evaluated for impairment annually, pursuant to SFAS 142, or if an event occurs or circumstances change that may reduce the fair value of the reporting unit below its book value. The impairment test is conducted at the reporting unit level by comparing the fair value of the reporting unit with its carrying value. Fair value is determined by using a market approach valuation model based on revenue multiples or a discounted cash flow approach.  The Company uses various assumptions in the valuation, such as discount rates, and comparable company analysis in performing these valuations.  If the

 

10



 

carrying value exceeds the fair value, goodwill may be impaired. If this occurs, the fair value of the reporting unit is then allocated to its assets and liabilities in a manner similar to a purchase price allocation in order to determine the implied fair value of the reporting unit goodwill. This implied fair value is then compared with the carrying amount of the reporting unit goodwill, and if it is less, the Company would then recognize an impairment loss.  In addition, the Company evaluates intangible assets with definite lives pursuant to SFAS 142, to determine whether adjustment to these amounts or estimated useful lives are required based on current events and circumstances.

 

In the first quarter of 2005, the Company reorganized its business segments.  In accordance with SFAS 142, the goodwill formerly attributed to the Meditech Service Center segment was divided between the Health Delivery Services and Health Delivery Outsourcing segments based on the relative fair values of parts of the previous Meditech Service Center being reorganized into those business units, and is shown historically on this restated basis in the following schedule.

 

The changes in the net carrying amounts of goodwill for the six months ended July 1, 2005 are as follows (in thousands):

 

 

 

Health
Delivery
Services

 

Health
Delivery
Outsourcing

 

Life
Sciences

 

Government
& Technology
Services

 

Other

 

Total

 

Balance as of December 26, 2003

 

$

1,051

 

$

3,228

 

$

1,477

 

$

8,260

 

$

1,442

 

$

15,458

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Acquired

 

1,701

 

1,538

 

 

 

 

3,239

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Impaired

 

 

 

 

 

(1,442

)

(1,442

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Currency translation adjustment

 

 

 

4

 

 

 

4

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance as of December 31, 2004

 

2,752

 

4,766

 

1,481

 

8,260

 

 

17,259

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Acquired

 

473

 

427

 

 

 

 

900

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance as of July 1, 2005

 

$

3,225

 

$

5,193

 

$

1,481

 

$

8,260

 

$

 

$

18,159

 

 

The $900,000 of additional goodwill in the first quarter of 2005 relates to a final earn out payment to the previous owners of a business which was the substantial portion of the Meditech Service Center segment (see Note 4 of Notes to Consolidated Financial Statements).

 

As of July 1, 2005, the Company had the following acquired intangible assets recorded (in thousands):

 

11



 

 

 

Software and
Software
Development

 

Customer
Related

 

Non-Compete
Agreements

 

Total

 

Balance as of December 26, 2003

 

$

763

 

$

2,858

 

$

179

 

$

3,800

 

 

 

 

 

 

 

 

 

 

 

Acquired

 

 

300

 

 

300

 

 

 

 

 

 

 

 

 

 

 

Amortization

 

(543

)

(981

)

(139

)

(1,663

)

 

 

 

 

 

 

 

 

 

 

Balance as of December 31, 2004

 

220

 

2,177

 

40

 

2,437

 

 

 

 

 

 

 

 

 

 

 

Amortization

 

(132

)

(517

)

(40

)

(689

)

 

 

 

 

 

 

 

 

 

 

Balance as of July 1, 2005

 

$

88

 

$

1,660

 

$

 

$

1,748

 

 

 

 

 

 

 

 

 

 

 

Amortization Period in Years

 

2 -3

 

2 -4

 

2 -3

 

 

 

 

The following table summarizes the estimated remaining annual pretax amortization expense for these assets (in thousands):

 

Fiscal Year

 

 

 

2005 (remainder of year)

 

$

520

 

2006

 

772

 

2007

 

456

 

Total

 

$

1,748

 

 

Note 6                                                             Restructuring, Severance, and Impairment Costs

 

At July 1, 2005, the Company had approximately $4.0 million in restructuring accrual which related to restructuring, severance, and impairment costs incurred in the prior years, primarily in the Life Sciences segment.  The remaining accrual entirely consists of costs related to vacated leases, net of estimated sublease payments.

 

The restructuring liability activity through July 1, 2005 is summarized as follows (in thousands):

 

 

 

Facilities/Other
Related Costs

 

Accrual balance at December 31, 2004

 

$

5,020

 

Cash payments

 

(1,064

)

Accrual balance at July 1, 2005

 

$

3,956

 

 

12



 

Note 7                                                             Comprehensive Income (Loss)

 

Comprehensive income (loss), net of taxes, for the three months and six months ended July 1, 2005 and June 25, 2004, is as follows (in thousands):

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

July 1,
2005

 

June 25,
2004

 

July 1,
2005

 

June 25,
2004

 

Net income (loss)

 

$

(6,926

)

$

1,030

 

$

(8,215

)

$

397

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustment

 

(290

)

29

 

(390

)

111

 

Unrealized gain (loss) on investments

 

(1

)

(11

)

(1

)

(1

)

Other comprehensive income (loss), net of tax

 

(291

)

18

 

(391

)

110

 

 

 

 

 

 

 

 

 

 

 

Comprehensive income (loss)

 

$

(7,217

)

$

1,048

 

$

(8,606

)

$

507

 

 

Note 8                                                             Discontinued Operations

 

On December 7, 2004, the Company’s Board of Directors approved a plan to sell and exit its clinical and non-clinical Call Center Services (CCS) operation due to recurring losses.  On February 2, 2005, the Company executed a definitive agreement with the MPB Group, LLC, d/b/a The Beryl Companies.  FCG will receive 12 monthly payments totaling $150,000 for selected customer contracts. The disposal plan consisted primarily of the termination of normal CCS activity, calculation of termination benefits for the existing CCS employees, termination of a lease agreement, abandonment of property and equipment, collection of accounts receivable, and settlement of liabilities.

 

In accordance with SFAS 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” this disposal represents a discontinued operation.  Accordingly, the accompanying consolidated financial statements and notes reflect the results of operations and financial position of the CCS division as a discontinued operation for all periods presented.

 

A summary of results for CCS for the six months ended July 1, 2005 included revenues of $631,000 and a pre-tax loss of $866,000 which related to the sales, operation, and wind-down of the business.  The pre-tax loss, net of a 38% tax benefit, resulted in a net loss of $537,000, compared to a loss of $345,000, net of a 38% tax benefit for the six months ended June 25, 2004.  The fiscal year 2005 net loss included $276,000 related to severance costs for the remaining staff of 37 people.  Further, in accordance with SFAS 146, “Accounting for Costs Associated with Exit or Disposal Activities”, the Company recorded an accrual for the remaining lease payments on the CCS leased property in the amount of $89,000.

 

Note 9                                                             Disclosure of Segment Information

 

In the first quarter of 2005, the Company reorganized its previous segment reporting in accordance with SFAS 131 and had the following changes in its reporting:

 

                  The Meditech Service Center segment has been split between Health Delivery Services and Health Delivery Outsourcing.  An insignificant portion of the Meditech Service Center has also been included in the Software Products segment;

                  The Health Delivery Services (previously Health Delivery) and Health Delivery Outsourcing segments, while still reported separately, are now combined with a common sales group, Health Delivery Sales into a total Health Delivery segment;

 

13



 

                  The Government and Technology Services (GTS) segment has been created by combining FCG Software Services, formerly named Paragon Solutions, Inc. (our software development business) and Technology Staffing Services groups, which used to be included within Other Business, with the government healthcare business unit, which used to be part of Health Delivery;

                  Software Products (SWP) has been created by adding the Cyberview product that used to be in the Meditech Service Center segment to the existing SWP business line, which used to be included within Other Business, and primarily involves the FirstGateways product.

 

For fiscal year 2005, the Company has the following six reportable operating segments:

 

                  Health Delivery Services - the delivery of consulting and systems integration services to health delivery clients;

                  Health Delivery Outsourcing - the delivery of outsourcing services to health delivery clients;

                  Life Sciences - the delivery of consulting and systems integration services to pharmaceutical and other life sciences clients;

                  Health Plan - the delivery of consulting and systems integration services to health plan clients;

                  Government and Technology Services - the delivery of consulting services to government clients, the delivery of blended offshore software development, and the delivery of technology staff augmentation services; and

                  Software Products - the delivery of solutions involving the use of software to health delivery clients.

 

Additionally, the Company has three shared service centers that provide services to multiple business segments.  These shared service centers include FCG India, Integration Services, and Infrastructure Services.   The costs of these services are internally billed and reported in the individual business segments as cost of services at a standard transfer cost.

 

The Company evaluates its segments’ performance based on revenues and operating income.  Certain selling and general and administrative expenses (including corporate functions, occupancy related costs, depreciation, professional development, recruiting, and marketing), are managed at the corporate level and allocated to each operating segment based on either net revenues and/or actual usage.  The Company does not manage or track most assets by segment.  As a result, interest and other charges are not included in the tables below.

 

The following segment information is for the three months and six months ended July 1, 2005 and June 25, 2004 (in thousands):

 

14



 

For the three months ended July 1, 2005:

  (in thousands)

 

 

 

Health
Delivery
Services

 

Health
Delivery
Sales

 

Health
Delivery
Outsourcing

 

Health
Delivery
Total

 

Life
Sciences

 

Health
Plan

 

Government
&
Technology
Services

 

Software
Products

 

Other

 

Totals

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenues before reimbursements

 

$

17,097

 

$

 

$

28,659

 

$

45,756

 

$

8,844

 

$

4,121

 

$

8,605

 

$

593

 

$

 

$

67,919

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Reimbursements

 

2,532

 

 

238

 

2,770

 

224

 

546

 

200

 

32

 

 

3,772

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total revenues

 

19,629

 

 

28,897

 

48,526

 

9,068

 

4,667

 

8,805

 

625

 

 

71,691

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of services before reimbursable expenses

 

10,531

 

 

24,743

 

35,274

 

4,751

 

3,144

 

4,742

 

976

 

(1,560

)

47,327

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Reimbursable expenses

 

2,532

 

 

238

 

2,770

 

224

 

546

 

200

 

32

 

 

3,772

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total cost of services

 

13,063

 

 

24,981

 

38,044

 

4,975

 

3,690

 

4,942

 

1,008

 

(1,560

)

51,099

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross profit

 

6,566

 

 

3,916

 

10,482

 

4,093

 

977

 

3,863

 

(383

)

1,560

 

20,592

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Selling expenses

 

1,189

 

1,427

 

516

 

3,132

 

1,879

 

606

 

858

 

132

 

487

 

7,094

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

General & administrative expenses

 

3,148

 

 

3,179

 

6,327

 

2,265

 

840

 

1,740

 

415

 

3,014

 

14,601

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) from operations

 

$

2,229

 

$

(1,427

)

$

221

 

$

1,023

 

$

(51

)

$

(469

)

$

1,265

 

$

(930

)

$

(1,941

)

$

(1,103

)

 

For the three months ended June 25, 2004:

  (in thousands)

 

 

 

Health
Delivery
Services

 

Health
Delivery
Sales

 

Health
Delivery
Outsourcing

 

Health
Delivery
Total

 

Life
Sciences

 

Health
Plan

 

Government
&
Technology
Services

 

Software
Products

 

Other

 

Totals

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenues before reimbursements

 

$

18,682

 

$

 

$

27,580

 

$

46,262

 

$

9,230

 

$

3,642

 

$

7,834

 

$

267

 

$

2

 

$

67,237

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Reimbursements

 

2,570

 

 

144

 

2,714

 

260

 

692

 

172

 

63

 

555

 

4,456

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total revenues

 

21,252

 

 

27,724

 

48,976

 

9,490

 

4,334

 

8,006

 

330

 

557

 

71,693

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of services before reimbursable expenses

 

9,791

 

 

22,568

 

32,359

 

5,336

 

2,659

 

4,576

 

609

 

(747

)

44,792

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Reimbursable expenses

 

2,570

 

 

144

 

2,714

 

260

 

692

 

172

 

63

 

555

 

4,456

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total cost of services

 

12,361

 

 

22,712

 

35,073

 

5,596

 

3,351

 

4,748

 

672

 

(192

)

49,248

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross profit

 

8,891

 

 

5,012

 

13,903

 

3,894

 

983

 

3,258

 

(342

)

749

 

22,445

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Selling expenses

 

1,147

 

1,235

 

593

 

2,975

 

2,527

 

857

 

734

 

74

 

(52

)

7,115

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

General & administrative expenses

 

2,688

 

 

2,561

 

5,249

 

2,940

 

644

 

1,652

 

175

 

2,479

 

13,139

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) from operations

 

$

5,056

 

$

(1,235

)

$

1,858

 

$

5,679

 

$

(1,573

)

$

(518

)

$

872

 

$

(591

)

$

(1,678

)

$

2,191

 

 

15



 

For the six months ended July 1, 2005:

  (in thousands)

 

 

 

Health
Delivery
Services

 

Health
Delivery
Sales

 

Health
Delivery
Outsourcing

 

Health
Delivery
Total

 

Life
Sciences

 

Health
Plan

 

Government
&
Technology
Services

 

Software
Products

 

Other

 

Totals