Back to GetFilings.com

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549

FORM 10-K

Commission file number: 000-23651

        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 ý    No o

        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. ý

        Indicate by check mark if the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Securities Exchange Act of 1934, as amended). Yes ý    No o

        The aggregate market value of the Registrant's voting and non-voting common equity held by non-affiliates of the Registrant at June 27, 2003 was approximately $83,551,277 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.

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 April 23, 2004, either as part of Registrant's Proxy Statement for its 2004 Annual Meeting of Stockholders or as an amendment to this Form 10-K.

TABLE OF CONTENTS

i

PART I

Cautionary Statement

        This report contains forward-looking statements which include, but are not limited to, statements regarding (i) the prospective growth and profitability of our business and (ii) our anticipated revenues, earnings per share and other operating results. These forward-looking statements involve known and unknown risks which may cause our actual results and performance to be materially different from the future results and performance stated or implied by the forward looking statements. Some of the risks investors should consider include the following: (a) the unpredictable nature of our pipeline of potential business and of negotiations with clients on new outsourcing and other engagements, resulting in uncertainty as to whether and when we will enter into new agreements and whether those agreements will be on terms favorable to us; (b) the unpredictable nature of the business of our clients and the markets that they serve, which could result in clients canceling, modifying or delaying current or prospective engagements with us; (c) the importance of our personnel to our operations, including whether we can attract and retain qualified personnel and keep those personnel utilized on client engagements in order to achieve projected growth, revenues and earnings; (d) our ability to deliver services from a global operations base, including India, Vietnam and Europe; and (e) other risk factors referenced in this report.

        These forward-looking statements are based on our current expectations, estimates and projections about our industry, management's beliefs, and certain assumptions made by us. Words such as "anticipates," "expects," "intends," "plans," "believes," "seeks," "estimates," "may," "will" and variations of these words or similar expressions are intended to identify forward-looking statements. In addition, any statements that refer to expectations, projections, or other characterizations of future events or circumstances, including any underlying assumptions, are forward-looking statements. These statements are not guarantees of future performance and are subject to certain risks, uncertainties and assumptions that are difficult to predict. Therefore, our actual results could differ materially and adversely from those expressed in any forward-looking statements.

        The section entitled "Risks Relating to our Business" set forth at the end of Part I, Item 1 of this report and the "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Part II, Item 7 of this report discuss the material risk factors that may affect our business, results of operations and financial condition. You should carefully consider those risks, in addition to the other information in this report before deciding to invest in us or to maintain or increase your investment. This cautionary statement and others made in this report should be read as being applicable to all related forward-looking statements wherever they appear in this report. We undertake no obligation to revise or update publicly any forward-looking statements for any reason.

ITEM 1.    BUSINESS

General

        We provide outsourcing, consulting, systems implementation and integration, and research services primarily for healthcare, pharmaceutical, and other life sciences organizations throughout North America, Europe, and Asia. Through combinations of onsite, offsite, and offshore outsourced services, we provide low cost, high quality offerings to improve our client's performance. Our consulting and integration services increase clients' operations effectiveness through improved uses of information technology, resulting in reduced costs, improved customer service, enhanced quality of patient care, and more rapid introduction of new pharmaceutical compounds. We apply industry knowledge and operations improvement skills combined with advanced information technologies, to make improvements in healthcare delivery, healthcare financing and administration, health maintenance and new drug development and commercialization. Through our services, we offer industry-specific expertise to objectively evaluate, select, develop, implement and manage information systems, networks and

1

applications. Our employees possess expertise in clinical, financial, and administrative processes, information technologies, and applications. We provide this expertise to our clients through domain- specific products and by assembling multi-disciplinary teams that provide comprehensive services across the principal services of outsourcing, consulting, systems implementation, and integration. Our employees are supported by internal research and a centralized information system that provides access to current industry information and project methodologies, experiences, models, and tools. We believe that our success is attributable to strong relationships with industry leading clients, our industry and technical expertise, our high quality and cost effective delivery model, a professional environment that fosters employee recruitment and retention, and the depth and breadth of our services. We were organized in 1980 as a California corporation, and in February 1998, we reincorporated as a Delaware corporation.

Clients and Services

        Our clients include integrated delivery networks, or IDNs, health plans, acute care centers, academic medical centers, physician organizations, governmental agencies, pharmaceutical companies, biotech companies and other organizations. We have worked for many of the pharmaceutical and life sciences companies listed in Fortune's Global 500, 16 of the top 20 U.S. managed care firms, 17 of the top 20 U.S. IDNs, and the two largest U.S government healthcare IDNs. Our revenue mix from our major client segments in 2003 was:

•

Health delivery organizations (hospitals, IDNs, academic medical centers, clinics, physician organizations, associations)—64% (includes outsourcing clients)



•

Pharmaceutical, biotech and other life sciences related organizations—18%



•

Health plans (Blue Cross Blue Shield organizations, insurance companies, specialty physician organizations, regional and national HMOs)—10%



•

U.S. Federal Government healthcare agencies (e.g. Department of Defense, Department of Health and Human Services, and Department of Veterans Affairs)—3%



•

Other industries—5%

        Our principal services consist of outsourcing, consulting, systems implementation and integration. We believe that our clients' overall operations effectiveness is dependent upon solid business strategy and the implementation of improved business processes supported by information management. We also believe that these elements are interdependent and therefore must be integrated in order to be successful. We offer our clients an integrated approach through multi-disciplinary teams with expertise across these areas. In certain of our businesses, we also offer proprietary software products that are designed to optimize other client systems or processes. In our consulting and systems integration practice, we are typically engaged on a project basis and assemble client teams from one or more services to match the expertise and service offerings with the overall objectives required by each client and engagement. Many client engagements involve multiple assignments. We may assemble several client teams to serve the needs of a single client. We provide services at the client site to senior-level management and other personnel within the client organization. In our outsourcing practice, we typically are engaged on a multi-year basis. Our services include full information technology outsourcing, process and application outsourcing, and discreet functional outsourcing such as "call center" or "help desk" services.

        In 2003, we provided our services through three business units—Healthcare (which includes health delivery, health plans, government healthcare, and technology services); Outsourcing; and Life Sciences. Please refer to Note M of our consolidated financial statements and related notes included with this annual report for a description, by business unit and by geographic segment, of certain financial information for the last three fiscal years.

2

Healthcare Business Unit

        The Healthcare business unit is comprised of four practice units: health delivery, health plans, government healthcare, and technology services. In 2003, the healthcare business unit accounted for approximately $113.2 million, or 42% of our consolidated net revenues.

Health Delivery

        The healthcare industry continues to experience significant pressures for change and improvement. Rising costs for clinical and other personnel, new technologies and drugs, plus a growing patient population have created new demands for cost management solutions that do not sacrifice quality of care. More sophisticated consumers are acquiring knowledge about healthcare options through media and the internet and are demanding more service and convenience. Government regulations are increasing the need for new technology while, at the same time, capital budgets are strained. We believe that healthcare organizations must all respond by offering measurable quality and service improvements, while remaining competitive from a cost standpoint.

        Since our inception in 1980, we have served hundreds of healthcare delivery clients, including hospitals, IDNs, health trusts, academic medical centers, clinics, physician organizations, home healthcare companies, skilled nursing facilities, and related providers. Our focus on developing and implementing integrated solutions enables clients to achieve market differentiation, improve customer service and quality, manage cost and supply chains more efficiently, and optimize their information systems and processes.

        Our expertise includes business and clinical process improvement, care/disease management, clinical transformation, patient safety and computerized physician order entry (CPOE), enterprise resource planning (ERP), revenue cycle management, and clinical system implementation and integration services. This includes application management and hosting services, which can be provided onsite, offsite, and offshore. We also help our clients with strategic systems planning and optimization of their information technology (IT) investments, including IT services-management, systems selections, disaster recovery, digital imaging, and data management strategies interwoven with process improvement techniques. Our key vendor relationships include Cerner, EPIC, Eclipsys, Siemens, Lawson, SeeBeyond, and Medical Information Technology, Inc. (MEDITECH). Additionally, we assist clients through a full range of Health Insurance Portability and Accountability Act (HIPAA) compliance services.

        From front end strategy and assessments to integration and implementation, to back-end operations, we provide the depth and breadth of expertise to address clients' specific clinical, financial, operational, and technical needs, bringing teams of experienced professionals who have solved similar problems many times before.

Health Plans

        To remain competitive, we believe health plans must continuously look at ways to reduce medical and administrative costs, improve customer service, enhance benefit plan features, and build market share. We provide our clients with specialists with expertise in a wide range of health plan operations, program management, and health plan information systems.

        We seek to improve health plan performance with integrated solutions that link our clients' strategy, processes, technology, and people to healthcare providers, consumers, and purchasers. Our services focus on business results, with the objective of helping clients realize benefits sooner and achieve measurable results, including market differentiation and cost savings through a variety of consulting and technology services. We assist clients with business process design, business process and operations improvement, strategic and tactical planning, core systems selection, replacement and

3

consolidation, enterprise portal development, enterprise information management, enterprise architecture planning, and technology infrastructure and staff augmentation. Our regulatory compliance services range from HIPAA readiness assessment to planning, requirements definition remediation, and testing.

        We help clients optimize core health plan processes such as claims administration, provider contracting and reimbursement, servicing members, and reporting. We identify and implement supporting information management solutions. We provide strategy, design, and implementation expertise in IT and customer service call center and messaging services optimization. We offer business continuity and disaster recovery planning. We also assist health plans in systems implementation across all these areas, while applying process redesign techniques to ensure that clients maximize the benefits from their IT investments.

        We have in depth knowledge of several core administrative information technology systems including QMACS and Trizetto Facets. Our knowledge of these systems as well as related ancillary systems improves time to benefit for system implementations and operations improvement engagements.

Government Healthcare

        We believe that government agencies need to improve access to and delivery of health care, refine administrative and financial processes, reduce overall operating costs, and enhance the quality and delivery of information. Like private sector businesses, the government faces additional challenges such as limited access to highly trained clinicians, support personnel, and IT specialists.

        We have provided services to the Department of Defense, the Department of Veterans Affairs, and the Department of Health and Human Services through a series of strategic business and clinical planning efforts, reengineering of clinical and business practices, change management services, and information management/IT assessments, selections and implementations. We have several government-wide contracting vehicles including a General Services Administration Information Technology Professional Services contract and a Management, Organizational and Business Improvement Services contract. We are also a partner on several contract vehicles including D/SIDDOMS III (DoD Systems Integration, Design, Development, Operations and Maintenance Services) Millennia Lite, CIOSP II, Image World, Medicare Managed Care Program Integrity Contractor, and a Blanket Purchase Agreement with the Department of Defense and the Veterans Affairs Central Office in Washington, D.C. From clinical to administrative to financial services, our services to government healthcare parallel those to the private sector. We guide public sector health agencies through business and clinical transformation, customer relationship management, revenue cycle, compliance assessment (independent verification & validation) and planning, information management/information technology strategy, planning and assessments, medical management, and resource management. We are also providing IT solutions to public sector agencies, including architecture assessment & planning, application development, data warehousing, and eHealth technologies including physician-patient messaging and wireless technologies.

Technology Services

        Our technology services group delivers advanced technology services to the health delivery, health plan, life sciences, and non-healthcare markets. Our expertise and experience in assisting clients in selecting, implementing, and integrating packaged technology solutions allow our clients to use technologies and software that are already developed. Our services include application and network integration of voice, data, video, and imaging technologies and systems. We evaluate, design, develop, and implement comprehensive system architectures, infrastructures, interfaces, databases, applications, and networks to address the need for information integration and dissemination throughout an

4

organization. We also perform business continuity services, multi-network integration, desktop system installation and management, server management, capacity planning, and performance analysis. We provide our infrastructure services on a fixed fee, per-hour, or fixed-fee per month basis as negotiated in individual client contracts.

        Our enterprise infrastructure services include:

•

Network security and disaster recovery



•

Information accessibility—mobile computing, wireless, desktop, remote access



•

Telecommunications, call centers and customer relationship management (CRM)



•

Data management and integration—data architecture, EDI, interface engines



•

e-Infrastructure—local and wide area network strategy, architecture, design and implementation



•

IT operations—data center, help desk, disaster recovery, interim IT leadership

        We have expertise in working with a wide range of technology vendors across these areas, such as:

Outsourcing Services Business Unit

        We provide IT outsourcing services that include hiring IT staff of clients as our employees and operating part or all of the IT operations either at the client site, offsite in a consolidated data center, or offshore in a development center. Through these services, we provide long-term IT management expertise, tailoring our efforts specifically to the client's culture, strategy, and needs. We offer a wide range of outsourcing services, including assessment/due diligence, program management, discrete outsourcing, application hosting and full IT outsourcing. Our assessment/due diligence service provides clients with a strategic and economic assessment of the feasibility of outsourcing part or all of their IT functions. This assessment enables senior management of the client to determine the appropriateness of outsourcing part or all of their IT functions, relative to their financial condition, strategic objectives, internal IT capabilities and overall direction. Revenues from our outsourcing business unit of $101.9 million for the year ended December 26, 2003, represented approximately 37% of our consolidated net revenues.

        Our typical outsourcing engagement is a long-term, multi-year engagement with the client where we hire some or substantially all of the client's IT staff as our employees and we reengineer the client's IT process in an effort to provide improved service and complete management of the IT function at a lower cost. The staff continues to provide the outsourcing services from the client's site, where the client either retains ownership of the related assets (e.g., data center, and all hardware and software) or we provide these services offsite through our Nashville, Tennessee operations center, or a third party infrastructure firm on a subcontracted basis. The aggregate amount of our revenue that was attributed to a single third party infrastructure provider in 2003 and 2002 was approximately $21.4 million and $16.0 million, respectively. We typically create service level agreements with a fixed fee for the level of service specified, and an adjustment in the fee for different levels of service. We also offer program management and discrete outsourcing services to clients on an as needed basis.

        As of March 2004, we have seven active outsourcing relationships representing 39 hospitals and other health care facilities. The substantial majority of our outsourcing revenues are received from four large outsourcing accounts that have signed long term agreements with us (University of Pennsylvania Health System, New York Presbyterian Hospital, University Hospitals Health Systems in Cleveland and

5

UMass Memorial Health Care). In each of these engagements, our clients have fully outsourced their IT staff and functions to us.

        Our agreement with New York Presbyterian is a seven-year engagement due to expire in December 2006. We received approximately $33.0 million from this engagement in 2003, or 12.1% of our consolidated net revenues. Our agreement with the University of Pennsylvania Health System is a five-year engagement due to expire in March 2006. We received approximately $21.2 million from this engagement in 2003, or 7.8% of our consolidated net revenues. Our agreement with University Hospitals Health Systems is a five-year engagement due to expire in June 2007. We received approximately $21.9 million from this engagement in 2003, or 8.1% of our consolidated net revenues. Our agreement with UMass Memorial Health Care is a seven-year engagement due to expire in June 2009. We received approximately $13.2 million from this engagement in 2003, or 4.9% of our consolidated net revenues. If any of our significant outsourcing clients were to terminate their agreements with us, our business and financial condition would be materially adversely affected.

        In May 2002, we acquired a controlling interest in Codigent Solutions Group, Inc. (renamed FCG Infrastructure Services, Inc. (FCGIS)), a provider of value-added technology solutions for hospitals and other healthcare delivery organizations. In January 2004, we acquired the remaining outstanding interests of FCGIS. FCGIS provides fully functioning infrastructure services and application services for small to medium healthcare facilities. In February 2003, we acquired certain assets of Phyve Corporation, a provider of information security and connectivity software solutions. We believe the acquisition of FCGIS and the assets from Phyve Corporation will enhance the breadth of services we are able to offer our existing and potential outsourcing clients.

        In May 2003, we acquired Coactive Systems Corporation, a provider of inbound and outbound call center services, as our initial foundation in the business process outsourcing (BPO) market and are in the process of integrating and enhancing their services. If we are unable to successfully integrate and leverage this acquisition, we may not be able to successfully execute our strategy in this market.

Life Sciences Business Unit

        Our Life Sciences practice serves leading pharmaceutical, biotechnology, medical device, and related organizations throughout North America, Europe, and Japan. FCG has served more than half of the top 50 global pharmaceutical companies. Through a broad range of consulting, technology, integration, application development, validation and quality assurance, staff augmentation, and outsourcing services and through software products, we design, develop and maintain the processes and information systems used by life sciences enterprises in all aspects of the drug development and commercialization lifecycle. We seek to help our life sciences clients comply with regulations, reduce costs, improve business processes, increase customer satisfaction, and bring products to market faster. In 2003, our life sciences business accounted for approximately $57.0 million, or 21% of our consolidated net revenues.

        We have built deep domain expertise in core functions across the pharmaceutical enterprise: clinical, research and development, manufacturing and commercial operations. Our cross-functional, enterprise solutions have also enabled us to bring added value at the corporate level by helping our clients create a more integrated approach and common processes across their organizations.

        Our services are designed around the increasing enterprise need for content management, knowledge management and cross-functional collaboration. A significant part of our Life Sciences business now includes the use of FirstDoc™, a leading enterprise content management (ECM) solution for life sciences organizations, which provides a unifying technology platform to help our clients manage compliance-related data and documents. Built on Documentum, Inc.'s ECM technology platform, FirstDoc has been selected by several leading pharmaceutical companies, many of which are implementing the solution as the ECM standard across their enterprise. In 2003 we dedicated cash and

6

management resources towards the research and development of our FirstDoc product to enhance its use and functionality to our clients, such that the significant amount of customization which has typically been required to implement FirstDoc can be reduced. We expect to continue such resource dedication in 2004. If we are unable to successfully market and license our FirstDoc product to our clients, or if our product enhancements do not deliver the functionality that we expect, we may not be able to realize the anticipated return on our investments. In addition, our success in this area depends, in part, on not infringing patents, copyrights, and other intellectual property rights held by others. We do not know whether patents held or patent applications filed by third parties in this area could force us to alter our products and services or obtain licenses from third parties at significant expense to us.

        We build upon Documentum's base functionality by adding specific industry knowledge and business rules to bridge the gap between the technology and the business. We have used our years of integration experience to integrate leading third-party technologies directly into FirstDoc, including imaging, publishing, collaboration, call center management, records management, and data management tools, as well as others. This integrated approach provides a total solution to a business problem, not disparate technical installations.

        In February 2003, we acquired Paragon Solutions, Inc. (Paragon). Paragon has software development centers in Atlanta, Georgia, Bangalore, India and Ho Chi Minh City, Vietnam. This offshore/onshore business model provides us with the capability to provide lower cost and high quality software development to our life sciences clients and, over time, our healthcare and outsourcing clients as well. The most common measure of software development quality is the Capability Maturity Model metric (referred to as CMM). There are five CMM levels, and Paragon is currently certified at the highest level, CMM 5. Our acquisition of Paragon provided us a means to implement our global sourcing strategy to provide software development and other IT services to our clients.

Sales and Marketing

        We generate a substantial portion of our revenues from existing clients and client referrals, and we market our services primarily through our vice presidents and account managers. Our vice presidents and account managers seek to develop strong relationships with senior-level information management and other decision-making personnel at leading healthcare and pharmaceutical organizations. We maintain these relationships by striving to successfully complete assignments and exceed clients' expectations. Our vice presidents and practice directors allocate a significant portion of their time to business development and related activities. We also employ account managers and business development associates who are dedicated to business development with potential and existing clients. We are frequently engaged to provide multiple services throughout several phases of a client's IT system lifecycle and related business processes, including strategy, planning, procurement and contracting, implementation, integration, and management. As a result of this involvement, our personnel often develop an in-depth understanding of our clients' business systems and capabilities and develop strong relationships with personnel within the client organization. These relationships provide us with significant opportunities to undertake additional assignments for each client.

        In addition to generating assignments from existing clients, we attract new clients through our targeted marketing activities. Our marketing activities include web marketing, public presentations, press releases, publishing of books, articles and white papers, and trade show participation. We also maintain research reports and white papers on our website, along with other company and industry information. Our marketing staff produces a number of sales support tools including presentations, brochures, article reprints, sales kits, descriptions of our services, and case studies.

7

Research and Knowledge Sharing

        Our services and consultants are supported by internal and external research, training, and a centralized information system that provides real-time access to current industry and technology information and project methodologies, experiences, models, and tools. Our principal research and practice support initiatives include: emerging practices group, professional development programs, and Knowledge, Information, Technology Exchange (KITE®).

        Emerging Practices Group.    The emerging practices group performs industry research and collects, packages, and distributes knowledge regarding emerging trends in the healthcare and pharmaceutical industries, their implications for the industry, and the need for technology support. Examples of topics that the emerging practices group has researched are CPOE, IT value management, clinical performance improvement, patient safety, e-prescribing, and hand held technology. We also provide customized research for product and market strategies, evaluate the commercial potential for new products, and conduct internal and client workshops. The emerging practices group also packages our knowledge for use in client projects and publishes a periodic news summary that is sent to several thousand subscribers.

        Professional Development Programs.    We have instituted professional development and incentive programs to encourage employee retention and to provide support for the professional growth of all our employees. We provide training to our employees through classroom education, computer-based training, distance learning, and external seminars. We have a program to educate all new employees about our history, culture, and practices. Additionally, we have programs and tools that support knowledge acquisition, skill development, project management, and relationship management.

        Knowledge, Information, Technology Exchange (KITE®).    Our employees have access to our internal research and to current industry and technology information and project methodologies, experiences, models, and tools through KITE®. KITE® currently houses approximately 34,000 documents that include industry information, service methodologies and tools, benchmarks and best practice information, and other documentation to support our services and consultants. KITE® is updated on a continuous basis with information resulting from each engagement, and by the emerging practices group. We believe that this resource allows our employees to utilize engagement-specific information that improves the quality and content of services delivered to clients while reducing cost of our delivery.

Competition

        The market for healthcare outsourcing, consulting, implementation and integration, and research services is intensely competitive, rapidly evolving, and highly fragmented. We have competitors that provide some or all of the same services that we provide. We compete for consulting services with large international multi-industry firms such as Accenture, IBM Business Systems Consulting, Computer Sciences Corporation, and Deloitte & Touche, and regional and specialty consulting firms. In implementation and integration services, we compete with information system vendors such as Cerner, McKesson, Siemens Medical Solutions, and IBM Global Systems; service groups of computer equipment companies; and systems integration companies such as Accenture, SAIC, and Cap Gemini Ernst & Young. In outsourcing we compete with large international companies such as Electronic Data Systems Corporation, Perot Systems Corporation, Cap Gemini Ernst & Young, and Computer Sciences Corporation and other healthcare consulting firms. We also compete with offshore service companies that provide software development, IT consulting, and other integration and maintenance services, such as Wipro Technologies, Cognizant Technology Solutions Corporation, and Tata Technologies Limited. In recent years, our clients' internal information management departments have become a competitor by internally performing more IT related services.

8

        Many of our competitors have significantly greater financial, human, and marketing resources than us. As a result, such competitors may be able to respond more quickly to new or emerging technologies and changes in customer demands, or to devote greater resources to the development, promotion, sale, and support of their products and services than us. In addition, as healthcare organizations become larger and more complex, our larger competitors may be better able to serve the needs of such organizations. We may not be able to attract and retain the personnel or dedicate the financial resources necessary to serve these resulting organizations.

        We believe that we compete primarily on the basis of our healthcare and life sciences domain expertise and experience, our reputation, quality of our services and our effective use of an onsite, offsite and offshore business model to perform services for our clients that are becoming increasingly price-sensitive. Large IT companies have, in the past, offered consulting services at a substantial discount as an incentive to utilize their implementation services, and software and hardware vendors may provide discounted implementation services for their products. In the future, these competitors may discount such services more frequently or offer such services at no charge. There can be no assurance that we will be able to compete for price-sensitive clients on the basis of our current pricing or cost structure, or that we will be able to continue to lower our prices or costs in order to compete effectively. Many of our competitors are also creating offshore delivery services that may significantly reduce their rates charged to clients. Furthermore, many of our competitors have long-standing business relationships with key personnel at healthcare organizations, which could prevent or delay us from expanding our client base. We believe that we have been able to compete successfully on the basis of the quality and range of our services, and the accumulated expertise of our consultants. However, there is no assurance that we will be able to successfully compete with our current and future competitors. Further, competitive pressures may cause our revenues or operating margins to decline or otherwise materially adversely affect our business, financial condition, and results of operations. Such competitive pressures could further interfere with our ability to successfully compete in the markets for our services.

Limited Protection of Proprietary Information and Procedures

        Our ability to compete effectively depends on our ability to protect our proprietary information, including our proprietary methodologies, research, tools, software code, and other information. We rely primarily on a combination of copyright and trade secret laws and confidentiality procedures to protect our intellectual property rights. We request that our consultants and employees sign confidentiality agreements and generally limit access to and distribution of our research, methodologies and software codes. The steps we take to protect our proprietary information may not be adequate to prevent misappropriation. In addition, the laws of certain countries do not protect or enforce proprietary rights to the same extent, as do the laws of the United States. The unauthorized use of our intellectual property could have a material adverse effect on our business, financial condition, or results of operations. We believe that our systems and procedures and other proprietary rights do not infringe upon the proprietary rights of third parties. However, third parties could assert infringement claims against us in the future, and such claims may result in protracted and costly litigation, regardless of the merits of such claims.

Employees

        As of December 26, 2003, we had 2,066 employees, 63 of whom were vice presidents with responsibility for service delivery, new business development, client relationships, staff development, and company leadership. We believe that our relationship with our employees is good. We use a variety of techniques to identify and recruit qualified candidates to support our growth including full-time recruiters, an internal employee referral program, advertisements, and professional search firms.

9

Vendor Relationships

        We have established numerous vendor relationships. We believe the formation of these relationships enables us to increase our knowledge of key vendor solutions, obtain appropriate training, education, and certification on key technologies and solutions, and gain advantages from joint marketing approaches where appropriate. In turn, we are able to more rapidly identify and deliver integrated solutions to our clients, based on leading technologies, applications, and solutions.

        We have established non-exclusive alliance agreements with software, hardware, and service vendors that market components and solutions to our current and prospective clients. The vendor alliance agreements of which we are a part have provided us with sales leads, marketing assistance revenues, increased publicity, discounted software, specialized training programs, participation in beta software programs, and privileged information about vendors' technical and marketing strategies.

        Our relationships range from obtaining education and product/service updates to product implementation training and certification to joint marketing programs. Joint marketing programs typically involve joint account development and marketing, trade shows, marketing through each company's website, and other marketing efforts. Clients generally contract directly with the vendor for purchase of the products.

Other Information

        We file with the Securities and Exchange Commission (SEC) our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments to those reports, proxy statements and registration statements. The public may read and copy any materials we file with the SEC at the SEC's Public Reference Room at 450 Fifth Street, N.W., Washington, D.C. 20549. The public may also obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. In addition, the SEC maintains an internet site at http://www.sec.gov that contains reports, proxy and information statements and other information regarding registrants, including us, that file electronically. We also maintain a website located at http://www.fcg.com, and electronic copies of our periodic and current reports, and any amendments to those reports, are available, free of charge, under the "Investors" link on our website as soon as practicable after such material is filed with, or furnished to, the SEC.

Risks Relating to Our Business

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

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

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

•

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



•

The roll-off or completion of significant projects in any of our business segments;



•

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



•

Delays or increased expenses in securing and completing client engagements;

10

•

Timing and collection of fees and payments;



•

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



•

Increased competition and pricing pressures;



•

Use of offsite and offshore resources on our engagements;



•

Ability to incorporate use of variable labor staffing into our projects;



•

The loss of key personnel and other employees;



•

Changes in our, and our competitors', business strategy, pricing and billing policies;



•

The timing of certain general and administrative expenses;



•

Completing acquisitions and the costs of integrating acquired operations;



•

Variability in the number of billable days in each quarter;



•

The write-off of client billings;



•

Return of fees for work deemed unsatisfactory by a client or claims or litigation resulting from the same;



•

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



•

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



•

International currency fluctuations;



•

Ability to sublease vacant office space included in previous restructuring charges; and



•

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

        One or more of the foregoing factors may cause our operating expenses to be unexpectedly high during any given period. In addition, we bill certain of our services on a fixed-price basis, and any assignment delays or expenditures of time beyond that projected for the assignment could result in write-offs of client receivables (both unbilled and billed). Significant write-offs could materially adversely affect our business, financial condition, and results of operations. Our business also has significant collection risks. If we are unable to collect our receivables in a timely manner, our business and financial condition could also suffer. If these or any other variables or unknowns were to cause a shortfall in revenues or earnings or otherwise cause a failure to meet public market expectations, our business could be adversely affected.

        We adopted EITF 00-21 in the first quarter of 2003, which affects the way we recognize revenue on long-term outsourcing agreements. The adoption of EITF 00-21 results in separating our outsourcing contracts into multiple elements and separately accounting for each element, rather than accounting for all elements together as a group. As a result, we now recognize revenue from certain service elements of our outsourcing agreements on a straight-line basis over the life of the contract, rather than on a percentage of completion basis. Since we typically incur greater costs and expenses during the early phase of the service elements (which will now have straight-line revenue recognition) than we do in the later years of those elements, we believe our net income will be less during the early stages of our outsourcing engagements. In addition, if we are unable to manage costs as planned in the later stages of an outsourcing engagement, our net income will likewise be negatively impacted. In general, income from our outsourcing contracts will be less stable in the future, since it will be more susceptible to changes in the mix of newer versus older contracts, and to the impact of cost fluctuations from quarter to quarter without a compensating change in revenue. If we fail to meet our public

11

market expectations or otherwise experience a shortfall in our net income due to these fluctuations, our business could be adversely affected and the price of our stock may decline.

        Finally, we reported net losses before the cumulative effect of change in accounting principle for the second, third and fourth quarters of 2003, and we cannot assure you that we will achieve positive earnings in the future. If we are unable to achieve profitability on a quarterly or annual basis, the market price of our common stock could be adversely affected and our financial condition would suffer.

We are dependent on our outsourcing engagements for a significant part of our revenues.

        Currently, we have seven significant outsourcing relationships. Net revenues from our outsourcing relationships, for the year ended December 26, 2003, represented approximately 37% of our consolidated net revenues. The substantial majority of these revenues are received from four large outsourcing accounts that have signed long term agreements with us. However, the loss of any of our outsourcing relationships would have a material impact on our business and results of operations. In each of these engagements, the clients have fully outsourced their information technology staff and functions to us. In all of our outsourcing relationships, we generally enter into additional agreements, including detailed service level agreements, which establish performance levels and standards for our services. If we fail to meet these performance levels or standards, our clients may receive monetary service level credits from us or, if we experience persistent failures, our clients may have a right to terminate the outsourcing contract for cause and have no obligation to pay us any termination fees. Our anticipated revenues from our outsourcing engagements could be significantly reduced if we are unable to satisfy our performance levels or standards. Additionally, our outsourcing contracts can be terminated at the convenience of our clients upon the payment of a termination fee.

        In addition, our outsourcing agreements require that we invest significant amounts of time and resources in order to win the engagement, transition the client's information technology department to our management, and complete the initial transformation of our client's information technology functioning to provide improved service at a lower cost and meet agreed-upon service levels. Often, we recover this investment through payments over the life of the outsourcing agreement. If we are unable to achieve agreed-upon service levels or otherwise breach the terms of our outsourcing agreements, the clients may have rights to terminate our agreements for cause and we may be unable to recover our investments. Any failure by us to recover these investments could reduce our outsourcing revenue which would have a material adverse effect on our financial condition, results of operations, and price of our common stock.

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

        Finally, we anticipate expanding our outsourcing business to perform discrete information technology services for clients. The amount of time and resources required to win client engagements for our outsourcing business is significant, and we may not win the number or type of client engagements that we anticipate. If we fail to meet our objective to secure new outsourcing engagements, or fail to secure new outsourcing engagements on acceptable commercial terms, we will not experience the growth in this business unit that we have anticipated.

12

        In May 2003, we completed the acquisition of Coactive Systems Corporation, a provider of inbound and outbound call center services to the hospital and payer markets. The acquisition represents our entry into the business process outsourcing market (BPO). If we are unable to successfully integrate and leverage this acquisition in the BPO market, we may not be able to successfully execute our strategy in this area. Further, all acquisitions involve risks that could materially and adversely affect our business and operating results. Consequently, we may fail to meet public market expectations and the price of our common stock may decline.

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

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

•

Existing information systems at the client site;



•

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



•

Changes in the management or ownership of the client;



•

Budgetary cycles and constraints;



•

Changes in the anticipated scope of engagements;



•

Availability of personnel and other resources; and



•

Consolidation in the healthcare and pharmaceutical industries.

        Prior to client engagements, we typically spend a substantial amount of time and resources (1) identifying strategic or business issues facing the client, (2) defining engagement objectives, (3) gathering information, (4) preparing proposals, and (5) negotiating contracts. Our failure to procure an engagement after spending such time and resources could materially adversely affect our business, financial condition, and results of operations. We may also be required to hire new consultants before securing a client engagement. If clients defer committing to new assignments for any length of time or for any reason we could be required to maintain a significant number of under-utilized consultants which could adversely affect our operating results and financial condition during any given period. Further, our outsourcing business has very long sales and contract lead times, requiring us to spend a substantial amount of time and resources in attempting to secure each outsourcing engagement. We cannot predict whether the investment of time and resources will result in a new outsourcing engagement or, if the engagement is secured, that the engagement will be on terms favorable to us.

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

        We have grown, in part, by acquiring complementary businesses that could enhance our capability to serve the healthcare and pharmaceutical industries. For example, we acquired a majority interest in Codigent Solutions Group, Inc. (renamed FCG Infrastructure Services, Inc.) in 2002, and during the first half of 2003, we acquired Paragon Solutions, Inc., Coactive Systems Corporation, and certain assets of Phyve Corporation. All acquisitions involve risks that could materially and adversely affect our business and operating results. These risks include:

•

Distracting management from our business;



•

Losing key personnel and other employees;

13

•

Losing clients;



•

Costs, delays, and inefficiencies associated with integrating acquired operations and personnel;



•

The impairment of acquired assets and goodwill; and



•

Acquiring the contingent and other liabilities of the businesses we acquire.

        In addition, acquired businesses may not enhance our services, provide us with increased client opportunities, or result in the growth that we anticipate. Furthermore, integrating acquired operations is a complex, time-consuming, and expensive process. Combining acquired operations with us may result in lower overall operating margins, greater stock price volatility, and quarterly earnings fluctuations. Cultural incompatibilities, career uncertainties, and other factors associated with such acquisitions may also result in the loss of employees and clients. Failing to acquire and successfully integrate complementary practices, or failing to achieve the business synergies that we anticipate, could materially adversely affect our business and results of operations.

We may be negatively impacted if our investments in products and emerging service lines are unsuccessful.

        We have publicly announced our strategy to increase our investment in product development, including further investment in FirstDoc™ as well as investment in a physician portal product, FirstGateways™. These investments are in addition to continuing our investments in other emerging service lines. We typically do not capitalize the cost of our product development activities and do not anticipate capitalizing expected investments this year. As a result, our financial results may be adversely impacted by such increased investment in the short term. If such product development activities or investment in our emerging service lines do not result in relevant offerings, we will not achieve desired levels of return on these investments. As a result, our business and results of operations could be adversely affected.

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

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

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

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

        Further, in the course of providing our services, we will often recommend the use of software and hardware products. These products may not perform as expected or contain defects. If this occurs, our reputation could be damaged and we could be subject to liability. We attempt contractually to limit our exposure to potential liability claims; however, such limitations may not be effective. A successful liability claim brought against us may adversely affect our reputation in the healthcare and

14

pharmaceutical industries and could have a material adverse effect on our business or financial condition. Although we maintain professional liability insurance, such insurance may not provide adequate coverage for successful claims against us.

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

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

The loss of our key client service employees and executive officers could negatively affect us.

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

Continued or increased employee turnover could negatively affect our business.

        We have experienced employee turnover as a result of:

•

Dependence on lateral hiring of consultants;



•

Travel demands imposed on our consultants;



•

Loss of employees to competitors and clients; and



•

Reductions in force in our business units as certain areas of our business have seen less demand.

        Continued or increased employee turnover could materially adversely affect our business and results of operations. In addition, many of our consultants develop strong business relationships with our clients. We depend on these relationships to generate additional assignments and engagements. The loss of a substantial number of consultants could erode our client base and decrease our revenues.

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

        Our business has historically grown rapidly, and though our overall revenues have remained flat for the past several years, we have experienced growth and increased demand in certain areas of our business. In response to shifts in market demand and in an effort to better align our business with our markets, we restructured our business units and hired persons with appropriate skills, including salespersons, and reduced our workforce in practice areas experiencing less demand. We have also begun to hire employees willing to work on a variable or per diem basis in order to better manage project costs and general and administrative expense associated with underutilized resources. These market conditions and restructuring efforts have placed new and increased demands on our

15

management personnel. It has also placed significant and increasing demands on our financial, technical and operational resources, and on our information systems. If we are unable to manage growth effectively or if we experience business disruptions due to shifts in market demand, or growth or restructuring, our operating results will suffer. To manage any future growth, we must extend our financial reporting and information management systems to our multiple and international office locations and traveling employees, and develop and implement new procedures and controls to accommodate new operations, services and clients. Increasing operational and administrative demands may make it difficult for our senior managers to engage in business development activities and their other day-to-day responsibilities. Further, the addition of new employees and offices to offset any increasing demands may impair our ability to maintain our service delivery standards and corporate culture. In addition, we have in the past changed, and may in the future change, our organizational structure and business strategy. Such changes may result in operational inefficiencies and delays in delivering our services. Such changes could also cause a disruption in our business and could cause a material adverse effect on our financial condition and results of operations.

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

        We derive a substantial portion of our revenues from clients in the healthcare industry. As a result, our business and results of operations are influenced by conditions affecting this industry, particularly any trends towards consolidation among healthcare and pharmaceutical organizations. Such consolidation may reduce the number of existing and potential clients for our services. In addition, the resulting organizations could have greater bargaining power, which could erode the current pricing structure for our services. The reduction in the size of our target market or our failure to maintain our pricing goals could have a material adverse effect on our business and financial condition. Finally, each of the markets we serve is highly dependent upon the health of the overall economy. Our clients in each of these markets have experienced significant cost increases and pressures in recent years. Our services are targeted at relieving these cost pressures; however, any continuation or acceleration of current market conditions could greatly impact our ability to secure or retain engagements, the loss of which could have a material adverse effect on our business and financial condition.

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

•

Continued adverse changes to the industry's general economic environment;



•

Continued consolidation of companies; or



•

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

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

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

        We are subject to many risks as a result of the services we provide to our international clients or services we may provide through subcontractors or employees that are located outside of the U.S. Further, in February 2003, we acquired Paragon Solutions, Inc., a U.S. based company with offshore software development centers in India and Vietnam. As a result of this acquisition, we currently have

16

business operations and employees located in India and Vietnam, as well as our existing employees throughout Europe. If we fail to recruit and retain a sufficient number of qualified employees in each country where we conduct business, our ability to perform our existing services may be impaired and our business could be adversely affected. Our international operations are also subject to a variety of risks, including:

•

Difficulties in creating international market demand for our services;



•

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



•

Uncertainty of labor costs and high turnover rates;



•

Unfavorable pricing and price competition;



•

Currency fluctuations;



•

Recruiting and hiring employees, and other employment issues unique to international operations, including ability to secure work visas for foreign employees in the U.S.;



•

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



•

Terrorist attacks;



•

Difficulties in enforcing contractual obligations and intellectual property rights;



•

Adverse tax consequences;



•

Increased costs associated with maintaining international marketing efforts and offices;



•

Government regulations and restrictions;



•

Adverse changes in regulatory requirements; and



•

Economic or political instability.

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

        Our acquisition of Paragon Solutions, Inc. provided us a means to implement our global sourcing strategy to provide software development and other information technology services to our clients. If we are unable to realize perceived cost benefits of such a strategy or if we are unable to receive high quality services from foreign employees or subcontractors, our business may be adversely impacted. Further, our recently acquired international operations in Vietnam and India subject our business to a variety of risks and uncertainties unique to operating businesses in these countries, including the risk factors discussed above.

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

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

        The market for healthcare and pharmaceutical information technology consulting is very competitive. We have competitors that provide some or all of the services we provide. For example, in

17

strategic consulting services, we compete with international, regional, and specialty consulting firms such as Bearing Point (formerly KPMG Consulting), Cap Gemini Ernst & Young, IBM Global Consulting Services, Wipro Technologies, and Accenture.

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

•

Information system vendors such as McKesson, Siemens Medical Solutions, Cerner Corporation, and IBM Global Systems;



•

Service groups of computer equipment companies;



•

Systems integration companies such as Electronic Data Systems Corporation, Perot Systems Corporation, SAIC, Cap Gemini Ernst & Young, and Computer Sciences Corporation;



•

Clients' internal information management departments;



•

Other healthcare consulting firms; and



•

Other pharmaceutical consulting firms such as Accenture, Cap Gemini Ernst & Young, and Computer Sciences Corporation's consulting division.

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

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

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

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

        We have a number of relationships with software and hardware vendors. For example, our life sciences business unit is highly dependent upon a non-exclusive relationship with Documentum, Inc., a vendor of document management software applications with which we integrate our FirstDoc™ solution. We believe that our relationship with vendors are important to our sales, marketing, and support activities. We often are engaged by vendors or their customers to implement or integrate vendor products based on our relationship with a particular vendor. If we fail to maintain our relationships with these vendors, or fail to establish additional new relationships, our business could be materially adversely affected.

18

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

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

We may infringe the intellectual property rights of third parties.

        Our success depends, in part, on not infringing patents, copyrights, and other intellectual property rights held by others. We do not know whether patents held or patent applications filed by third parties (i.e. in the area of enterprise content management) may force us to alter our methods of business and operation or require us to obtain licenses from third parties. If we attempt to obtain such licenses, we do not know whether we will be granted licenses or whether the terms of those licenses will be fair or acceptable to us. Third parties may assert infringement claims against us in the future. Such claims may result in protracted and costly litigation, penalties, and fines that could adversely affect our business regardless of the merits of such claims.

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

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

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

        The healthcare and pharmaceutical industries are subject to regulatory and technological changes that may affect the procurement practices and operations of healthcare and pharmaceutical organizations. During the past several years, the healthcare and pharmaceutical industries have been subject to an increase in governmental regulation and reform proposals. These reforms could increase governmental involvement in the healthcare and pharmaceutical industries, lower reimbursement rates or otherwise change the operating environment of our clients. Also, certain reforms that create potential work for us could be delayed or cancelled. Healthcare and pharmaceutical organizations may react to these situations by curtailing or deferring investments, including those for our services. In addition, if we are unable to maintain our skill and expertise in light of regulatory or technological changes, our services may not be marketable to our clients and we could lose existing clients or future engagements. Finally, government regulations, particularly HIPAA, may require our clients to impose additional contractual responsibilities on us, which may make it more costly to perform certain of our engagements and subject us to increased risk in the performance of these engagements, including immediate termination of an engagement.

19

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

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

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

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

        Our current officers, directors, and other affiliates beneficially own approximately 24.2% of our outstanding shares of common stock and approximately 36.2% on a fully diluted basis. As a result, our existing management, if acting together, may be able to exercise control over or significantly influence matters requiring stockholder approval, including the election of directors, mergers, consolidations, sales of all or substantially all of our assets, issuance of additional shares of stock, and approval of new stock and option plans.

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

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

•

Our performance and prospects;



•

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



•

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



•

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



•

General financial and other market conditions; and



•

Domestic and international economic conditions.

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

20

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

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

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

        Our board of directors has the authority to issue up to 9,500,000 shares of undesignated preferred stock, to determine the powers, preferences, and rights and the qualifications, limitations, or restrictions granted to or imposed upon any unissued series of undesignated preferred stock and to fix the number of shares constituting any series and the designation of such series, without any further vote or action by our stockholders. The preferred stock could be issued with voting, liquidation, dividend, and other rights superior to the rights of our common stock. Furthermore, any preferred stock may have other rights, including economic rights, senior to our common stock, and as a result, the issuance of any preferred stock could depress the market price of our common stock.

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

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

        In 1999, our board of directors adopted a share purchase rights plan that is intended to protect our stockholders' interests in the event we are confronted with coercive takeover tactics. Pursuant to the stockholders rights plan, we distributed "rights" to purchase up to 500,000 shares of our Series A Junior Participating Preferred Stock. Under some circumstances, these rights become the rights to purchase shares of our common stock or securities of an acquiring entity at one-half the market value. The rights are not intended to prevent our takeover, rather they are designed to deal with the possibility of unilateral actions by hostile acquirers that could deprive our board of directors and stockholders of their ability to determine our destiny and obtain the highest price for our common stock.

ITEM 2.    PROPERTIES

        Our headquarters is located in Long Beach, California in approximately 18,000 square feet of leased office space. The facility accommodates executive, information technology, administration, and support personnel. We lease approximately 22,000 square feet in Wayne, Pennsylvania, which houses some of our software development services employees in addition to a portion of our practice support staff. We also have a dedicated data center supporting our outsourcing business activities in approximately 24,000 square feet in Nashville, Tennessee. We have an additional 16 leases for smaller local offices in the United States and Europe, 6 of which are currently subleased to others, or are in the process of being marketed for sublease. Since the completion of our acquisition of Paragon Solutions, Inc. in February 2003, we have additional leases for office space in Atlanta, Georgia, Bangalore, India, and Ho Chi Minh City, Vietnam. Except for our office space located in Wayne,

21

Pennsylvania, which is predominantly dedicated to our life sciences business unit, our other office locations are used by all of our business units. Overall, our properties are suitable and adequate for our needs.

ITEM 3.    LEGAL PROCEEDINGS

        From time to time, we may be involved in claims or litigation that arise in the normal course of business. We are not currently a party to any legal proceedings, which, if decided adversely to us, would have a material adverse effect on our business, financial condition, or results of operations.

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

        During the fourth quarter of 2003, no matters were submitted to a vote of the stockholders.

22

PART II

ITEM 5.    MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

        Since February 13, 1998, our common stock has been quoted on the Nasdaq National Market under the symbol "FCGI." The table below sets forth, for the quarters indicated, the reported high and low sale prices of our common stock reported on the Nasdaq National Market.

        As of March 1, 2004, there were approximately 335 record holders of our common stock. We have never paid cash dividends on our common stock and presently intend to continue to retain our earnings for use in our business.

ITEM 6.    SELECTED FINANCIAL DATA

        The following selected historical consolidated financial information as of December 26, 2003 and December 27, 2002 and for each of the years ended December 26, 2003, December 27, 2002, and December 28, 2001, has been derived from and should be read in conjunction with our consolidated financial statements and related notes thereto included elsewhere in this report. The selected historical consolidated financial information as of December 28, 2001, December 31, 2000 and December 31,

23

1999 and for the years ended December 31, 2000 and December 31, 1999, have been derived from our audited consolidated financial statements, which are not included in this report.

24

        We changed our accounting for our outsourcing contracts with the adoption of EITF 00-21, "Accounting for Revenue Arrangements with Multiple Deliverables," in the first quarter of 2003. Please refer to Note A of our consolidated financial statements and related notes thereto and our "Management's Discussion and Analysis of Financial Condition and Results of Operations," both included in this annual report on Form 10-K, for a quantitative and qualitative description of the effects of EITF 00-21 on our financial results for the fiscal year ended December 26, 2003.

ITEM 7.    MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

        THE FOLLOWING MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS CONTAINS FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995. SUCH FORWARD-LOOKING STATEMENTS INVOLVE RISKS AND UNCERTAINTIES, INCLUDING THOSE SET FORTH IN ITEM 1 OF THIS REPORT UNDER THE CAPTION "RISKS RELATING TO OUR BUSINESS," AND OTHER REPORTS WE FILE WITH THE SECURITIES AND EXCHANGE COMMISSION. OUR ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE ANTICIPATED IN THESE FORWARD-LOOKING STATEMENTS.

Overview

        We provide services primarily to providers, payors, government agencies, pharmaceutical, biogenetic, and other healthcare organizations in North America, Europe, and Asia. We generate substantially all of our revenues from fees for information technology outsourcing services, and professional services.

        We typically bill for our services on an hourly, fixed-fee, or monthly fixed-fee basis as specified by the agreement with a particular client. For services billed on an hourly basis, in our consulting and systems integration businesses ("CSI"), composed of our healthcare and life sciences business units, fees are determined by multiplying the amount of time expended on each assignment by the project hourly rate for the consultant(s) assigned to the engagement. Fixed fees, including outsourcing fees, are established on a per-assignment or monthly basis and are based on several factors such as the size, scope, complexity and duration of an assignment, the number of our employees required to complete the assignment, and the volume of transactions or interactions. Revenues are generally recognized related to the level of services performed, the amount of cost incurred on the assignment versus the estimated total cost to complete the assignment, or on a straight-line basis over the period of performance of service. Additionally, we have recently been licensing an increased amount of our software products, generally in conjunction with the customization and implementation of such software products. Revenues from our software licensing were greater than 1% of our total revenues in fiscal year 2003, and we expect our software licensing revenues to grow in absolute dollars during our 2004 fiscal year.

        Provisions are made for estimated uncollectible amounts based on our historical experience. We may obtain payment in advance of providing services. These advances are recorded as customer advances and reflected as a liability on our balance sheet.

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

        Cost of services primarily consists of the salaries, bonuses, and related benefits of client-serving consultants and outsourcing associates, and subcontractor expenses. Selling expenses primarily consist of

25

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

        Our most significant expenses are our human resource and related salary and benefit expenses. As of December 26, 2003, approximately 1,058 of our 2,066 employees are billable consultants. Another 697 employees are part of our outsourcing business. The salaries and benefits of such billable consultants and outsourcing related employees are recognized in our cost of services. Most non-billable employee salaries and benefits are recognized as a component of either selling or general and administrative expenses. Approximately 15% of our workforce, or 311 employees, are classified as non-billable. Our cost of services as a percentage of revenues is directly related to several factors, including, but not limited to:

•

Our consultant utilization, which is the ratio of total billable hours to available hours in a given period;



•

The amount and timing of cost incurred;



•

Our ability to control costs on our outsourcing projects;



•

The billed rate on time and material contracts; and



•

The estimated cost to complete our non-outsourcing fixed price contracts.

        We evaluate our non-outsourcing fixed price contracts on an ongoing basis by estimating the cost to complete the assignment. We then recognize revenues to achieve a constant margin over the remaining term of the engagement. We have changed our accounting for outsourcing contracts with the adoption of EITF 00-21, "Accounting for Revenue Arrangements with Multiple Deliverables," in the first quarter of 2003. Under our outsourcing contracts, a significant portion of our revenues are fixed and allocated over the contract on a straight-line basis, as we are required to provide a specified level of services subject to certain performance measurements. Also, certain revenues may fluctuate under the contracts based on the volume of transactions we process or other measurements of service provided. If we incur higher costs to provide the required services or receive less revenue due to reduced transaction volumes or penalties associated with service level failures, our gross profit can be negatively impacted.

        In our CSI business, we manage consultant utilization by monitoring assignment requirements and timetables, available and required skills, and available consultant hours per week and per month. Differences in personnel utilization rates can result from variations in the amount of non-billed time, which has historically consisted of training time, vacation time, time lost to illness and inclement weather, and unassigned time. Non-billed time also includes time devoted to other necessary and productive activities such as sales support and interviewing prospective employees. Unassigned time results from differences in the timing of the completion of an existing assignment and the beginning of a new assignment. In order to reduce and limit unassigned time, we actively manage personnel utilization by monitoring and projecting estimated engagement start and completion dates and matching consultant availability with current and projected client requirements. The number of consultants staffed on an assignment will vary according to the size, complexity, duration, and demands of the assignment. Assignment terminations, completions, inclement weather, and scheduling delays may result in periods in which consultants are not optimally utilized. An unanticipated termination of a significant

26

assignment or an overall lengthening of the sales cycle could result in a higher than expected number of unassigned consultants and could cause us to experience lower margins. In addition, entry into new market areas and the hiring of consultants in advance of client assignments have resulted and may continue to result in periods of lower consultant utilization.

        In response to competition and continued pricing and rate pressures, we have recently implemented a global sourcing strategy into our business operations, which includes the deployment of offshore resources as well as resources that perform services remote from the client site. We have also begun to incorporate larger numbers of variable cost or per diem staff in some of our projects. We expect these strategies to result in improved cost of services through a combination of lower cost attributable to offshore resources and higher leverage of resources that perform services offsite or on a variable cost basis. To the extent we pass through reduced costs to our clients related to offshore resources, the global sourcing strategy may result in lower revenues on a per engagement basis. However, we expect to offset this potential revenue impact with improved competitive positioning in our markets. Several of our competitors employ both global sourcing and variable staffing strategies to provide software development and other information technology services to their clients, while at the same time reducing their cost structure and improving the quality of services they provide. If we are unable to realize the perceived cost benefits of our recently implemented strategies or if we are unable to receive high quality services from foreign employees, variable staff employees or subcontractors, our business may be adversely impacted and we may not be able to compete effectively.

Comparison of the Years Ended December 26, 2003 and December 27, 2002

        Revenues.    Our net revenues increased to $272.1 million for the year ended December 26, 2003, an increase of 1.5% from $268.0 million for the year ended December 27, 2002. Our total revenues increased to $287.7 million for the year ended December 26, 2003, an increase of 1.8% from $282.7 million for the year ended December 27, 2002. Approximately $11.9 million of the increase was primarily due to revenues generated by our acquired companies and another $12.6 million due to the full year impact of two outsourcing contracts that began in mid-2002 and revenue from another outsourcing contract which began in late 2003. These increases were offset by a significant decline in our life sciences business unit's revenues (excluding revenues generated from the Paragon Solutions, Inc. acquisition), which was caused by the completion of a significant engagement in mid-2003 and by several other contracts that concluded throughout 2003 as a result of the decline in the custom software development market for life science businesses. We are addressing the market shift by enhancing our FirstDoc suite of software products, so that the level of necessary custom software development for our clients is reduced. Additionally, in the healthcare business unit, we have not been able to replace expiring health plan contracts and have thus experienced a decline in these revenues as well. If we are unable to obtain new engagements and/or additional work, we could see a further decline in revenues for both the life sciences and the healthcare business units in 2004.

        Cost of Services.    Cost of services before reimbursable expenses increased to $186.9 million for the year ended December 26, 2003, an increase of 8.9% from $171.7 million for the year ended December 27, 2002. Approximately $6.1 million of the increase is due to the costs of services from our recent acquisitions and another $14.0 million from the new outsourcing contracts, offset by a reduction in staff primarily in our life sciences business unit.

        Gross Profit.    Gross profit decreased to $85.2 million for the year ended December 26, 2003, a decrease of 11.5% from $96.3 million for the year ended December 27, 2002. The decrease is primarily due to the change in our revenue mix from life sciences and healthcare to outsourcing, which generally earns a lower gross profit. This decrease is also attributable to the rapid revenue decline in life sciences, and the delay in personnel reductions when the significant life sciences engagement and several smaller healthcare engagements were completed as discussed above. Further, we believe our gross profit in outsourcing was negatively impacted to a small degree by our implementation of

27

EITF 00-21 (see Critical Accounting Policies and Estimates—Revenue Recognition and Unbilled Receivables). Offsetting these declines was $5.8 million of gross profit generated by our acquisitions. Gross profit, as a percentage of net revenues, decreased from 35.9% for the year ended December 27, 2002 to 31.3% for the year ended December 26, 2003, due to the factors discussed above.

        Selling Expenses.    Selling expenses decreased to $27.7 million for the year ended December 26, 2003, a decrease of 1.2% from $28.0 million for the year ended December 27, 2002. The decrease is primarily due to reductions in our sales force offset by the selling expenses of $1.4 million which were incurred by Paragon. Selling expenses, as a percentage of net revenues, decreased slightly from 10.4% for the year ended December 27, 2002 to 10.2% for the year ended December 26, 2003.

        General and Administrative Expenses.    General and administrative expenses increased to $60.2 million for the year ended December 26, 2003, an increase of 4.7% from $57.5 million for the year ended December 27, 2002. The increase was primarily due to general and administrative expenses from our acquired companies of $6.2 million, as well as investments in software product development and related technologies in life sciences and in the Patient Safety Institute. General and administrative expenses, as a percentage of net revenues, increased from 21.4% for the year ended December 27, 2002 to 22.1% for the year ended December 26, 2003. A combination of acquisition integration initiatives and other cost reductions reduced our general and administrative expenses substantially in the last quarter of the year, and we expect our general and administrative expenses to decline in 2004.

        Restructuring, Severance, and Impairment Costs.    Restructuring, severance, and impairment costs were $11.7 million for the year ended December 26, 2003 compared to $7.8 million for the year ended December 27, 2002. Restructuring, severance, and impairment costs for the year ended December 26, 2003 included approximately $6.5 million of severance costs related to staff reductions and $5.2 million for facility downsizing and fixed asset write-downs.

        Interest Income, Net.    Interest income, net of interest expenses, increased slightly to $1.0 million for the year ended December 26, 2003 compared to $0.9 million for the year ended December 27, 2002. Interest income, net of interest expense, as a percentage of net revenues, increased from 0.3% for the year ended December 27, 2002 to 0.4% for the year ended December 26, 2003.

        Other Expenses, Net.    Other expenses decreased from $0.6 million for the year ended December 27, 2002 to $0.4 million for the year ended December 26, 2003 due primarily to the buy-out of our minority interest partners in FCG Management Services, LLC resulting in the elimination of this expense as of the beginning of the fourth quarter of fiscal year 2003. Further, we purchased the remaining minority interest in FCG Infrastructure Services, Inc. in January 2004, and as a result, we will incur minimal minority interest expense in the 2004 fiscal year.

        Income Taxes.    Our provision for taxes for the year ended December 26, 2003 of $0.6 million consisted of a tax benefit of $4.9 million related to our $13.8 million of pretax losses, offset by a deferred tax asset valuation allowance of $5.5 million taken due to the uncertainty of our ability to realize the full amount of our deferred tax assets (see Critical Accounting Policies and Estimates—Deferred Income Taxes). The benefit rate of 35.6%, excluding the valuation allowance, compared to a provision rate for the year ended December 27, 2002 of 42.0%. The benefit rate in fiscal year 2003 was lower than the provision rate in the prior year due to the existence of certain non-deductible expenses.

Comparison of the Years Ended December 27, 2002 and December 28, 2001

        Revenues.    Our net revenues increased to $268.0 million for the year ended December 27, 2002, an increase of 0.4% from $266.9 million for the year ended December 28, 2001. The increase was due to two new outsourcing engagements that commenced in the second quarter of 2002 offset by a decline in our healthcare and life sciences work resulting from increased competition and difficult market

28

conditions. Our total revenues decreased to $282.7 million for the year ended December 27, 2002, a decrease of 0.5% from $284.1 million for the year ended December 28, 2001. The decrease was primarily due to lower reimbursable expenses for our healthcare and life sciences businesses resulting from the declines in their revenues, which require the most travel. Partially offsetting this decline is the increase in net revenues.

        Cost of Services.    Cost of services increased to $171.7 million for the year ended December 27, 2002, an increase of 3.0% from $166.6 million for the year ended December 28, 2001. The increase was attributable to an increase in the outsourcing staff and subcontractors related to additional outsourcing contracts, partially offset by a decline in the number of consultants in the healthcare and life sciences business units. In the outsourcing business, we employ a major subcontractor on three of our largest contracts. Revenues related to the major subcontracting relationships were $16.0 million and $5.5 million for the years ended December 27, 2002 and December 28, 2001, respectively.

        Gross Profit.    Gross profit decreased to $96.3 million for the year ended December 27, 2002, a decrease of 3.9% from $100.3 million for the year ended December 28, 2001. This was due to a significant shift in revenue mix from our healthcare and life sciences business units to our outsourcing business unit, which is at a lower margin. Gross profit as a percentage of net revenues decreased from 37.6% for the year ended December 28, 2001 to 35.9% for the year ended December 27, 2002. Our gross profit percentage in healthcare and life sciences increased from 42.6% to 43.9% due to improved consultant utilization and lower revenue writedowns, while our outsourcing gross profit percentage declined from 20.5% to 19.7% due to the higher proportion of subcontractor revenues within our outsourcing revenues.

        Selling Expenses.    Selling expenses decreased to $28.0 million for the year ended December 27, 2002, a decrease of 8.6% from $30.6 million for the year ended December 28, 2001 due to staff and cost reductions. Selling expenses as a percentage of net revenues decreased from 11.5% for the year ended December 28, 2001 to 10.4% for the year ended December 27, 2002.

        General and Administrative Expenses.    General and administrative expenses decreased to $57.5 million for the year ended December 27, 2002, a decrease of 14.9% from $67.5 million for the year ended December 28, 2001, due to cost reductions and the elimination of $2.0 million of goodwill amortization. Additionally, fiscal year 2001 general and administrative expense included a $2.1 million bad debt writeoff. General and administrative expenses as a percentage of net revenues decreased from 25.3% for the year ended December 28, 2001 to 21.4% for the year ended December 27, 2002, due to the reduction in costs.

        Restructuring, Severance, and Impairment Charges.    Restructuring, severance, and impairment charges were $7.8 million for the year ended December 27, 2002, compared to $13.5 million for the year ended December 28, 2001. Restructuring, severance, and impairment charges for the year ended December 27, 2002 included approximately $4.0 million of severance costs related to a reduction in staff of approximately 153 people, and approximately $3.8 million related to facility downsizing. Restructuring, severance, and impairment charges for the year ended December 28, 2001 consisted of $6.4 million of severance costs, approximately $3.1 million related to facility downsizing, and $4.0 million for the impairment of goodwill related to the restructuring of our technology services group within our healthcare business unit.

        Interest Income, Net.    Interest income, net of interest expense, decreased to $0.9 million for the year ended December 27, 2002 from $1.4 million for the year ended December 28, 2001. Despite our invested cash balances being somewhat higher, interest income was reduced due to lower interest rates. Interest income net of interest expense as a percentage of net revenues decreased to 0.3% for the year ended December 27, 2002 from 0.5% for the year ended December 28, 2001.

29

        Other Expense, Net.    Other expense decreased slightly to $0.6 million for the year ended December 27, 2002 compared to $0.7 million for the year ended December 28, 2001.

        Income Taxes.    The provision for income taxes was 42% for the year ended December 27, 2002, compared to a 35.3% benefit reported for the year ended December 28, 2001. The benefit rate in the prior year was reduced due to the nondeductibility of a portion of the goodwill impairment taken in that year.

Quarterly Financial Results

        The following tables set forth certain unaudited statements of operations data for the eight quarters ended December 26, 2003, as well as such data expressed as a percentage of our net revenues for the periods indicated. This data has been derived from unaudited financial statements that, in the opinion of our management, include all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation of such information when read in conjunction with our annual audited consolidated financial statements and the notes thereto. The operating results for any quarter are not necessarily indicative of the results for any future period.

30

Unaudited Quarterly Statements of Operations
(in thousands, except per share data)

31

Unaudited Quarterly Statements of Operations
(in thousands, except per share data)

32

As a Percentage of Net Revenues

33

        A substantial portion of our expenses, particularly depreciation, office rent, and occupancy costs, and, in the short run, personnel and related costs are relatively fixed. Our quarterly operating results may vary significantly in the future depending on a number of factors, many of which are outside our control. These factors may include, but are not limited to:

•

The reduction in size, delay in commencement, interruption, or termination of one or more significant engagements or assignments;



•

Fluctuations in consultant hiring and utilization;



•

The use of offsite and offshore resources on our engagements;



•

The ability to incorporate use of variable labor staffing into our projects;



•

The loss of key personnel and other employees;



•

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



•

The unpredictability of engaging new clients and additional assignments from existing clients;



•

Increased competition and pricing pressures;



•

Timing and collection of fees and payments;



•

Write-offs of client billings;



•

Consolidation of, and subsequent reduction in the number of, healthcare providers;



•

The number, timing, and contractual terms of significant client engagements;



•

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



•

Delays or increased expenses incurred in connection with existing assignments;



•

Variations in the timing of expenses;



•

Changes in pricing policies by us or our competitors;



•

Changes in our business strategies;



•

Variability in the number of business days within a quarter;



•

The timing of certain general and administrative expenses; and



•

International currency fluctuations.

        Due to the foregoing factors, quarterly revenues and operating results are not predictable with any significant degree of accuracy. In particular, the timing between initial client contract and fulfillment of the criteria necessary for revenue recognition can be lengthy and unpredictable, and revenues in any given quarter can be materially adversely affected as a result of such unpredictability. Business practices of clients, such as deferring commitments on new assignments until after the end of fiscal periods, could require us to maintain a significant number of under-utilized consultants, which could have a material adverse effect on our business, financial condition, and results of operations.

        We typically experience a lower number of billable days in certain quarters of the year, particularly the fourth quarter when many of our employees typically take vacation during the December holidays. In fiscal year 2004, we will have an extra week in the fourth quarter due to our fiscal calendar. Variability in the number of billable days may also result from other factors such as vacation days, sick time, paid and unpaid leave, inclement weather, and holidays, all of which could produce variability in our revenues and costs. In the event of any downturn in potential clients' businesses or the economy in general, planned utilization of our services may be deferred or canceled, which could have a material adverse effect on our business, financial condition, and results of operations. Based on the preceding

34

factors, we may experience a shortfall in revenues or earnings from expected levels or otherwise fail to meet expectations of securities analysts or the market in general, which could have a material adverse effect on the market price of our common stock.

Liquidity and Capital Resources

        During the year ended December 26, 2003, we generated cash flow from operations of $9.4 million. During the year ended December 26, 2003, we used approximately $11.2 million to acquire three companies (see Note I of the Notes to Consolidated Financial Statements) and $5.0 million of cash to purchase property and equipment, primarily computer and related equipment. We also used $1.86 million to purchase the 4.9% minority interest that the University of Pennsylvania Health System had in FCG Management Services, LLC. At December 26, 2003, we had cash and marketable investments available for sale of $62.6 million, compared to $67.3 million at December 27, 2002.

        We have a revolving line of credit, under which we are allowed to borrow up to $7.0 million at an interest rate of the prevailing prime rate with an expiration of May 1, 2004. There was no outstanding balance under the line of credit at December 26, 2003. Due to our net loss at December 26, 2003, we are out of compliance with certain bank covenants contained in the line of credit agreement. However, we received a waiver for such non-compliance subsequent to our fiscal year end.

        On October 1, 2003, we entered into an unsecured loan agreement with White Plains Hospital Center requiring us to provide interest free financing of up to $4.08 million if our system implementation at the hospital results in an increase in the hospital's accounts receivable balance or days outstanding during a 150-day period following the completion of the system implementation. Any amounts borrowed during this 150-day period are payable 90 days after the borrowing date. We do not currently expect to make any loans under this agreement until early 2005, if at all. Since our loans are unsecured, we cannot guarantee that the hospital will repay our loans on a timely basis, if at all. If our loans are not repaid or repaid in a timely manner, our financial condition would be impacted negatively.

        On February 27, 2004, we purchased 1,962,400 shares of common stock and 32,000 in-the-money options from David S. Lipson, a member of our board of directors, for a total purchase price of $15.1 million. In connection with the transaction, Mr. Lipson resigned from our board of directors and repaid indebtedness to us of $328,311. Our net cash payment to Mr. Lipson in the transaction was $14.8 million.

        As of December 26, 2003, the following table summarizes our contractual and other commitments (in thousands):

        Management believes that our existing cash and investments, together with funds generated from operations, will be sufficient to meet operating requirements for at least the next twelve months. Our cash and investments are available for capital expenditures (which are projected at approximately $7.0 million for 2004), strategic investments, mergers and acquisitions, and other potential large-scale cash needs that may arise, including $2.4 million in cash that was paid on January 30, 2004 to purchase

35

the remaining 47.65% minority interest in FCG Infrastructure Services, Inc. (formerly Codigent Solutions Group, Inc.) that we did not already own.

Critical Accounting Policies and Estimates

        The foregoing discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates, including those related to revenue recognition, cost to complete client engagements, valuation of goodwill and long-lived and intangible assets, accrued liabilities, income taxes, restructuring costs, idle facilities, litigation and disputes, and the allowance for doubtful accounts. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Our actual results may differ from our estimates and we do not assume any obligation to update any forward-looking information.

        We believe the following critical accounting policies reflect our more significant assumptions and estimates used in the preparation of our consolidated financial statements.

Revenue Recognition, Accounts Receivable, and Unbilled Receivables

        Revenues are derived primarily from information technology outsourcing services, consulting, and systems integration. Revenues are recognized on a time-and-materials, level-of-effort, percentage-of-completion, or straight-line basis. Before revenues are recognized, the following four criteria must be met: (a) persuasive evidence of an arrangement exists; (b) delivery has occurred or services rendered; (c) the fee is fixed and determinable; and (d) collectibility is reasonably assured. We determine if the fee is fixed and determinable and collectibility is reasonably assured based on our judgments regarding the nature of the fee charged for services rendered and products delivered and the collectibility of those fees. Arrangements range in length from less than one year to seven years. The longer-term arrangements are generally level-of-effort or fixed price arrangements.

        Revenues from time-and-materials arrangements are generally recognized based upon contracted hourly billing rates as the work progresses. Revenues from level-of-effort arrangements are recognized based upon a fixed price for the level of resources provided. Revenues from fixed fee arrangements for consulting and systems integration work are generally recognized on a rate per hour or percentage-of-completion basis. We maintain, for each of our fixed fee contracts, estimates of total revenue and cost over the contract term. For purposes of periodic financial reporting on the fixed price consulting and system integration contracts, we accumulate total actual costs incurred to date under the contract. The ratio of those actual costs to our then-current estimate of total costs for the life of the contract is then applied to our then-current estimate of total revenues for the life of the contract to determine the portion of total estimated revenues that should be recognized. We follow this method because reasonably dependable estimates of the revenues and costs applicable to various stages of a contract can be made.

        Revenues recognized on fixed price consulting and system integration contracts are subject to revisions as the contract progresses to completion. If we do not accurately estimate the resources required or the scope of the work to be performed, do not complete our projects within the planned periods of time, or do not satisfy our obligations under the contracts, then profit may be significantly and negatively affected or losses may need to be recognized. Revisions in our contract estimates are reflected in the period in which the determination is made that facts and circumstances dictate a

36

change of estimate. Favorable changes in estimates result in additional revenues recognized, and unfavorable changes in estimates result in a reduction of recognized revenues. Provisions for estimated losses on individual contracts are made in the period in which the loss first becomes known. Some contracts include incentives for achieving either schedule targets, cost targets, or other defined goals. Revenues from incentive type arrangements are recognized when it is probable they will be earned.

        As of the beginning of fiscal year 2003, we adopted EITF 00-21, "Accounting for Revenue Arrangements with Multiple Deliverables," which addresses how to account for arrangements that involve the delivery or performance of multiple products, services, and/or rights to use assets. Revenue arrangements with multiple deliverables are divided into separate units of accounting if the deliverables in the arrangement meet the following criteria: (1) the delivered item has value to the customer on a stand-alone basis; (2) there is objective and reliable evidence of the fair value of undelivered items; and (3) delivery of any undelivered item is probable. Arrangement consideration is allocated among the separate units of accounting based on their relative fair values, with the amount allocated to the delivered item being limited to the amount that is not contingent on the delivery of additional items or meeting other specified performance conditions. We have created separate units of accounting on our existing outsourcing contracts based on the above criteria and will evaluate each future contract based on the same criteria. Generally, we have separated certain elements of our initial contract stages, where new systems are implemented and/or processes are reengineered into a new operating environment, from the ongoing operations of the contract. The primary impact of the adoption of this standard is that our ongoing contract operations, which constitute the vast majority of the revenues from outsourcing contracts, are now recorded on a straight-line basis over the life of the contract instead of on a percentage-of-completion basis in proportion to costs incurred. In general, we will report lower margins on existing contracts in the early years of a contract and anticipate reporting increased margins in the later years of a contract; however, no assurances can be made in that regard. The new method is no longer based on a consistent gross profit over the life of a contract. We will likely experience greater volatility of outsourcing earnings as contract revenues remain level and contract costs move up or down, or shift from one quarter to another.

        On certain contracts, or elements of contracts, costs are incurred subsequent to the signing of the contract, but prior to the rendering of service and associated recognition of revenue. Where such costs are incurred and realization of those costs is either paid for upfront or guaranteed by the contract, those costs are deferred and later expensed over the period of recognition of the related revenue. At December 26, 2003, we had deferred $160,000 of such deferred costs.

        As part of our on-going operations to provide services to our customers, incidental expenses, which are generally reimbursable under the terms of the contracts, are billed to customers. These expenses are recorded as both revenues and direct cost of services in accordance with the provisions of EITF 01-14, "Income Statement Characterization of Reimbursements Received for "Out-of-Pocket" Expenses Incurred," and include expenses such as airfare, mileage, hotel stays, out-of-town meals, and telecommunication charges.

        Unbilled receivables represent revenues recognized for services performed that were not billed at the balance sheet date. The majority of these amounts are billed in the subsequent month. Unbillable amounts arising from contracts occur when revenues recognized exceed allowable billings in accordance with the contractual agreements. As of December 26, 2003, we had unbillable revenues included in current unbilled receivables of approximately $1.2 million, which were generally expected to be billed in the following year. In addition, we had a long-term account receivable at December 26, 2003, and December 27, 2002 of $5.8 million and $8.0 million, respectively, on a single major outsourcing contract with a term of seven years. The long-term receivable will be billed and collected over the remaining three years of the contract through contractual billings that will exceed the amounts to be earned as revenues.

37

        Customer advances are comprised of payments from customers for which services have not yet been performed or prepayments against work in process. These unearned revenues are deferred and recognized as future contract costs are incurred and as contract services are rendered.

Allowance for Doubtful Accounts

        We maintain an allowance for doubtful accounts for estimated losses resulting from the inability of our clients to make required payments. If the financial condition of our clients were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required. Management analyzes account receivables and historical bad debt, customer concentrations, credit worthiness, past collection experience, current economic trends, and changes in our customer payment terms when evaluating the adequacy of doubtful accounts.

Deferred Income Taxes

        We account for income taxes in accordance with SFAS No. 109, "Accounting for Income Taxes," which requires recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns. Our net deferred tax assets have historically consisted primarily of the tax benefit related to restructuring costs for facility closures, supplemental executive retirement plan contributions, and other accrued liabilities such as accrued vacation pay, which are not deductible for tax purposes until paid. During fiscal year 2003, we have generated additional deferred tax assets for net operating loss carryforwards which were created by our pretax losses combined with the fact that we are outside the period it is allowable to carry back losses, and also for additional deferred tax assets related to the cumulative effect of our change in revenue recognition method on our outsourcing contracts. We use significant estimates in determining what portion of our deferred tax asset is more likely than not to be realized. Based on those estimates and taking into account our recent history of cumulative losses, we recorded a valuation allowance of $5.5 million in the fourth quarter of fiscal year 2003. Together with a full valuation allowance of $5.5 million we had already taken against the net operating loss carryforwards of companies we had acquired earlier in the year, we have a valuation allowance of $11.0 million against a total deferred tax asset of $21.6 million. Based on our belief that it is more likely than not that future taxable income will be sufficient to realize the remaining $10.6 million of deferred tax assets, we have not recorded a valuation allowance against those assets. However, there is no guarantee that our taxable income will be sufficient to realize such remaining net deferred tax assets, and we will continue to evaluate the potential need for an additional valuation allowance on an ongoing basis. Additionally, if the realization of a greater amount of our deferred tax assets in the future is considered more likely than not, we will reverse all or a portion of the existing valuation allowance at that time.

Goodwill and Intangible Assets

        Under SFAS No 142, we no longer amortize our goodwill and are required to complete an annual impairment testing during the fourth quarter of each year. We believe that the accounting assumptions and estimates related to the annual goodwill impairment testing are critical because these can change from period to period. The impairment test requires us to forecast our future cash flows, which involves significant judgment. Our operating results have been negatively impacted by the worldwide economic conditions. Accordingly, if our expectations of future operating results change, or if there are changes to other assumptions, our estimate of the fair value of our reporting units could change significantly resulting in a goodwill impairment charge, which could have a significant impact on our consolidated financial statements. As of December 26, 2003, we have $15.5 million of goodwill and $3.8 million of intangible assets recorded on our balance sheet (see Note A of the Notes to Consolidated Financial Statements).

38

Recent Accounting Pronouncements

        See Note A of the Notes to the Consolidated Financial Statements for a discussion on recent accounting pronouncements.

ITEM 7A.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

        Our financial instruments include cash and cash equivalents (i.e., short-term and long-term cash investments), accounts receivable, unbilled receivables, accounts payable, and a revolving line of credit. Only the cash and cash equivalents which totaled $62.6 million at December 26, 2003 present us with market risk exposure resulting primarily from changes in interest rates. Based on this balance, a change of one percent in the interest rate would cause a change in interest income for the annual period of approximately $0.6 million. Our objective in maintaining these investments is the flexibility obtained in having cash available for payment of accrued liabilities and acquisitions.

        Our borrowings are primarily dependent upon the prevailing prime rate. As of December 26, 2003, we had no borrowings under our revolving line of credit and an available borrowing capacity of $7.0 million. See "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations-Liquidity and Capital Resources." The estimated fair value of borrowings under the revolving line is expected to approximate its carrying value.

ITEM 8.    FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

        Our annual consolidated financial statements are included in Item 15 of this report.

ITEM 9.    CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

        None.

ITEM 9A.    CONTROLS AND PROCEDURES

        We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized, and reported within the time periods specified in the Securities and Exchange Commission's rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow for timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Our disclosure controls and procedures are designed to provide a reasonable level of assurance of reaching our desired disclosure control objectives.

39

        As required by SEC Rule 13a-15(b), we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the quarter covered by this report. Based on the foregoing, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective, and were operating at the reasonable assurance level.

        There has been no change in our internal controls over financial reporting during our most recent fiscal quarter or fiscal year that has materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting.

        As part of our year end audit reviews, we identified no material weaknesses in internal controls, but did identify one item that is considered a significant deficiency in internal controls.

        Item: Lack of a control log and routine monitoring of the log for access to our systems.

        Comment: We have implemented necessary controls to remediate any potential for a significant deficiency on a continuing basis. We believe the potential deficiency has not adversely affected, and is not reasonably likely to adversely affect, our ability to record, process, summarize and report financial information.

        We have disclosed this item to our external auditors and the Audit Committee of our board of directors.

PART III

ITEM 10.    DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT

        The information required by this item is incorporated by reference to material that will be filed with the Securities and Exchange Commission by April 23, 2004, either as part of our Proxy Statement for our 2004 Annual Meeting of Stockholders or as an amendment to this Form 10-K.

ITEM 11.    EXECUTIVE COMPENSATION

        The information required by this item is incorporated by reference to material that will be filed with the Securities and Exchange Commission by April 23, 2004 either as part of our Proxy Statement for our 2004 Annual Meeting of Stockholders or as an amendment to this Form 10-K.

ITEM 12.    SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

        The information required by this item is incorporated by reference to material that will be filed with the Securities and Exchange Commission by April 23, 2004, either as part of our Proxy Statement for our 2004 Annual Meeting of Stockholders or as an amendment to this Form 10-K.

ITEM 13.    CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

        The information required by this item is incorporated by reference to material that will be filed with the Securities and Exchange Commission by April 23, 2004, either as part of our Proxy Statement for our 2004 Annual Meeting of Stockholders or as an amendment to this Form 10-K.

ITEM 14.    PRINCIPAL ACCOUNTING FEES AND SERVICES.

        The information required by this item is incorporated by reference to material that will be filed with the Securities and Exchange Commission by April 23, 2004, either as part of our Proxy Statement for our 2004 Annual Meeting of Stockholders or as an amendment to this Form 10-K.

40

PART IV

ITEM 15.    EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

41

FIRST CONSULTING GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(in thousands, except share data)