| FIRST CONSULTING GROUP INC ITEM 1A RISK FACTORS 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: • Our ability to achieve and maintain profitability in each of our business segments; • The loss of one or more significant clients in any of our business segments, including any failure to secure renewals for any of our large outsourcing contracts or any early termination of any significant contracts; • Our ability to recruit and retain a new chief executive officer, and the ability of our current management team to effectively manage our operations through a transition in management; • Our ability to realize our deferred tax assets through future pretax earnings; • Use of offsite and offshore resources on our engagements and adoption of a blended-shore delivery model in the healthcare IT industry; • Our ability to leverage and continue to manage through cost reductions made in the fourth quarter of 2005, including reductions in the number of our vice presidents and reductions in our sales force as part of a change in our selling approach in Health Delivery; • The roll-off or completion of significant projects in any of our business segments; • Fluctuations in market demand for our services which affect associate hiring and utilization; • Delays or increased expenses in securing and completing client engagements; • Timing and collection of fees and payments; • The financial performance and credit worthiness of our clients; • Timing of new client engagements in any of our business segments; • Increased competition and pricing pressures; • Budgeting and other capital expenditure decisions of our clients; • Our ability to anticipate changing customer demands and preferences; • Our ability to incorporate the use of variable labor staffing into our projects; 11 ______________________________________________________________________ • 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; • Costs associated with integrating acquired operations; • Costs associated with the disposition of certain assets; • Impairment of goodwill from our acquisitions; • 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; • Service level credits and penalties associated with our outsourcing engagements; • 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; • Impact on our business and clients relating to force majeure events, including recent hurricanes in the Southeast and potential pandemic or epidemic disease; • International currency fluctuations; • Expenses related to the issuance of stock options to our employees; 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 or result in a decrease in our revenues 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 |
| Finally, we reported a net loss for the year ended December 30, 2005 |
| 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 |
| Net revenues from our outsourcing relationships, for the year ended December 30, 2005, represented approximately 46dtta6prca of our consolidated net revenues |
| The substantial majority of these revenues are received from five large outsourcing accounts that signed long-term agreements with us |
| In June 2005, we received a termination for convenience notice from The New York and Presbyterian Hospital, our largest client, and our outsourcing engagement with them terminated effective December 31, 2005 |
| In addition, we entered into a mutual termination agreement with UMass Memorial Health Care on September 30, 2005 and all services under that agreement were completed as of December 30, 2005 |
| We have recently received a one year extension of one of our existing major outsourcing contracts, University of Pennsylvania Health System (UPHS), and that contract is now set to expire in March 2007 |
| During the current extension period, we intend to negotiate in good faith with UPHS on pricing and service levels applicable to the one year extension, and until then, current pricing and service levels apply |
| We currently have no assurances that the contract will be extended past the one year renewal period, and 12 ______________________________________________________________________ UPHS still has the right to terminate the contract for convenience on 180 days notice |
| The loss of any of our remaining three large outsourcing relationships, including a failure to gain renewal of any of these contracts or a longer term renewal at UPHS, could have an adverse impact on our business and results of operations |
| Further, if we are unable to successfully close and implement the new outsourcing relationships that we are pursuing (including the renewal of our existing outsourcing clients, both large and small), our business and results of operations will be adversely impacted |
| We 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 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 revenues |
| If we fail to meet our public market expectations or otherwise experience a shortfall in our net income due to these fluctuations, our business could be adversely affected and the price of our stock may decline |
| In many of our outsourcing engagements, the clients have fully outsourced their information technology staff and functions to us |
| In all of our outsourcing relationships, we generally enter into 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 and profitability from our outsourcing engagements could be significantly reduced if we are unable to satisfy our performance levels or standards, or if we are unable to improve our delivery costs as planned on such engagements |
| Additionally, our outsourcing contracts can be terminated at the convenience of our clients upon the payment of a termination fee |
| In addition, many of 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 |
| In addition, our pricing for many of these agreements generally assume that we can reduce and manage costs so as to achieve desired margins and recoup our investments |
| Any failure by us to effectively reduce and manage costs and/or recover these investments could reduce our outsourcing revenues, which would have a material adverse effect on our financial condition, results of operations, and price of our common stock |
| Our outsourcing engagements may 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 |
| 13 ______________________________________________________________________ Finally, we continue to pursue the outsourcing of 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 that we have anticipated |
| We have experienced a material weakness in our internal controls |
| If we fail to maintain an effective system of internal controls, we may not be able to accurately report our financial results and our management may not be able to provide its report on the effectiveness of our internal controls as required by the Sarbanes-Oxley Act of 2002 |
| Management and our independent registered public accounting firm have identified a material weakness regarding our internal control over financial reporting |
| The Public Company Accounting Oversight Board’s Auditing Standard Nodtta 2 defines a material weakness as a significant deficiency, or combination of significant deficiencies, that results in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected |
| As a result of the material weakness, our Chief Executive Officer and Chief Financial Officer concluded that, as of December 30, 2005, the end of the period covered by this report, our disclosure controls and procedures were not effective to ensure that information required to be disclosed in the reports we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms |
| Our material weakness relates to our internal control over our financial reporting |
| The material weakness is described in detail in “Item 9A Controls and Procedures |
| ” As a result, we are not able to conclude that our internal controls over financial accounting and reporting were effective as of December 30, 2005, which resulted in the inability of our external auditors to deliver an unqualified report on our internal controls |
| Inferior internal controls could also cause investors to lose confidence in our reported financial information, which could have a negative effect on the trading price of our securities |
| The efficacy of the steps we have taken to date and the steps we are still in the process of taking to improve the reliability of our financial statements is subject to continued management review supported by confirmation and testing by our internal auditors, as well as audit committee oversight |
| We cannot be certain that these measures will ensure that we implement and maintain adequate controls over our financial processes and reporting in the future |
| Any failure to implement required new or improved controls, or difficulties encountered in their implementation could harm our operating results or cause us to fail to meet our reporting obligations |
| In addition, we cannot assure you that we will not in the future identify further material weaknesses or significant deficiencies in our internal control over financial reporting that we have not discovered to date |
| 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 associates 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 associates 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 may be negatively impacted if our investments in products and emerging service lines are unsuccessful |
| We have invested in product development, including FirstDoc^® and FirstGateways^TM These investments are in addition to continuing our investments in other emerging service lines and products and to date, the investments have not generated significant returns |
| As a result, our financial results may continue to be adversely impacted by product investment |
| If such product development activities or investment in our emerging service lines do not result in relevant offerings and sales, we will not achieve desired levels of return on these investments |
| As a result, our business and results of operations could be adversely affected |
| 14 ______________________________________________________________________ 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, a reduction in the number of engagements with these clients, or the failure to secure renewals from any of our outsourcing 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, financial condition, and results of operations |
| If we fail to meet client expectations in the performance of our services, our business could suffer |
| Our services often involve assessing and/or implementing complex information systems and software, which are critical to our clients’ operations |
| Our failure to meet client expectations in the performance of our services, including the quality, cost, and timeliness of our services, may damage our reputation in the healthcare and pharmaceutical industries and adversely affect our ability to attract and retain clients |
| If a client is not satisfied with our services, we will generally spend additional human and other resources at our own expense to ensure client satisfaction |
| Such expenditures will typically result in a lower margin on such engagements and could materially adversely affect our business, financial condition, and results of operations |
| Further, in the course of providing our services, we will often recommend the use of software and hardware products |
| These products may not perform as expected or contain defects |
| If this occurs, our reputation could be damaged and we could be subject to liability |
| We attempt contractually to limit our exposure to potential liability claims; however, such limitations may not be effective |
| A successful liability claim brought against us may adversely affect our reputation in the healthcare and pharmaceutical industries and could have a material adverse effect on our business, financial condition, and results of operations |
| Although we maintain professional liability insurance, such insurance may not provide adequate coverage for successful claims against us |
| 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 US We have business operations and employees located in India, Vietnam, and throughout Europe |
| Our international operations are subject to a variety of risks, including: • Increasing and uncertain labor costs and high turnover rates; • Difficulties in creating market demand for our offshore services based on perceived quality issues and potential political risk; • Difficulties in enforcing contractual obligations and intellectual property rights; • Difficulties in creating international market demand for our other services; • Unfavorable pricing and price competition; • Difficulties and costs of tailoring our services to each individual country’s healthcare and pharmaceutical market needs; • 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 US; 15 ______________________________________________________________________ • Changes in availability of, and requirements for, the types of work visas we may seek for our foreign employees working in the US; • Restrictions on travel or other work conditions imposed by foreign governments; • Additional costs, including income tax equalization, associated with foreign employees coming to work in the US; • Longer payment cycles in some countries and difficulties in collecting international accounts receivable; • Terrorist attacks or armed hostilities; • 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 perform services in Europe for our international pharmaceutical clients |
| We cannot assure you that we will be able to be profitable in our European operations, which may materially adversely affect our financial condition, results of operations, and price for our common stock |
| Our acquisition of Paragon Solutions, Inc |
| (now FCG Software Services) in 2003 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 international operations in Vietnam and India subject our business to a variety of risks and uncertainties unique to operating businesses in these countries, including the risk factors discussed above |
| Any one or all of these factors may cause increased operating costs, lower than anticipated financial performance, and may materially adversely affect our business, financial condition, and results of operations |
| If we do not compete effectively in the healthcare and pharmaceutical information services industries, our business will be negatively impacted |
| The market for healthcare and pharmaceutical information technology consulting is very competitive |
| We have competitors that provide some or all of the services we provide |
| For example, in strategic consulting services, we compete with international, regional, and specialty consulting firms such as Bearing Point (formerly KPMG Consulting), Deloitte Consulting, IBM Global Services, Wipro Technologies, and Accenture |
| In integration and co-management services, we compete with: • Information system vendors such as Epic Systems, Eclipsys, Meditech, Cerner Corporation, and General Electric Healthcare; • Service groups of computer equipment companies; • Systems integration companies such as Affiliated Computer Services (“ACS”), Electronic Data Systems Corporation, Perot Systems Corporation, Infosys, Cognizant Technology Solutions Corporation, and Computer Sciences Corporation; • Clients’ internal information management departments; • Other consulting firms such as Accenture, and Computer Sciences Corporation’s consulting division; and • Other healthcare and pharmaceutical consulting and outsourcing firms |
| 16 ______________________________________________________________________ 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 outsourcing, and other integration and maintenance services, such as Wipro Technologies, Infosys, 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 affect our business, financial condition, and results of operations |
| Our business is labor-intensive and requires highly skilled employees |
| Many of our associates 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 who 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, longer or delayed sales cycles, 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 |
| On November 3, 2005, Luther J Nussbaum resigned from his position of Chairman of the Board, Chief Executive Officer, and member of our Board of Directors |
| Steven Heck, our President, 17 ______________________________________________________________________ has been named as interim Chief Executive Officer, effective on the same date |
| In addition, Douglas G Bergeron, a current independent member of the Board of Directors, has been named Chairman of the Board |
| The Board of Directors has initiated a search for a new chief executive officer |
| If we are unable to recruit and retain a new chief executive officer, or if our current management team is unable to effectively manage and maintain our business through the transition in management, our business could be adversely impacted |
| Continued or increased employee turnover could negatively affect our business |
| We have experienced employee turnover as a result of: • Dependence on lateral hiring of associates; • Travel demands imposed on our associates; • Loss of employees to competitors and clients; and • Reductions in force as certain areas of our business have seen less demand |
| Continued or increased employee turnover could materially adversely affect our business, financial condition, and results of operations |
| In addition, many of our associates 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 associates could erode our client base and decrease our revenues, and could adversely impact our ability to meet contractual obligations to clients |
| 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, and though our overall revenues have remained flat for the past several years, we have experienced growth 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 organization and hired persons with appropriate skills, including salespersons, and reduced our workforce in practice areas experiencing less demand |
| We have also hired employees willing to work on a variable or per diem basis in order to better manage project costs and general and administrative expenses associated with underutilized resources |
| These market conditions and restructuring efforts have placed new and increased demands on our management personnel |
| They have 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 |
| 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 |
| 18 ______________________________________________________________________ Changes in the healthcare and pharmaceutical industries or the economy in general could negatively impact our revenues |
| We derive a substantial portion of our revenues from clients in the healthcare industry |
| As a result, our business, financial condition, 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 and decrease our revenues |
| 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, financial condition, and results of operations |
| 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 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 staff |
| We benefit when pharmaceutical companies outsource to us, but may lose significant future business when pharmaceutical companies outsource to our competitors |
| If this outsourcing trend slows down or stops, or if pharmaceutical companies direct their business away from us, our financial condition and results of operations could be impacted in a materially adverse way |
| We could be negatively impacted if we fail to successfully integrate the businesses we acquire |
| We have grown, in part, by acquiring complementary businesses that could enhance our capability to serve the healthcare and pharmaceutical industries |
| All acquisitions involve risks that could materially and adversely affect our business and operating results |
| These risks include: • Distracting management from our business; • Losing key personnel and other employees; • Losing clients; • Costs, delays, and inefficiencies associated with integrating acquired operations and personnel; • The impairment of acquired assets and goodwill; • Acquiring the contingent and other liabilities of the businesses we acquire; and • Not realizing the intended or expected benefits of the acquisitions |
| 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 |
| 19 ______________________________________________________________________ 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 or other anticipated benefits, could materially adversely affect our business 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 is highly dependent upon a non-exclusive relationship with EMC Documentum, a vendor of document management software applications with which we integrate our FirstDoc^® solution |
| We often are engaged by vendors or their customers to implement or integrate vendor products based on our relationship with a particular vendor |
| In addition, our clients may request that we host or operate a vendor application as part of a hosting or outsourcing relationship, which may require the consent or cooperation of the vendor |
| As a result, we believe that our relationships with vendors are important to our operations, including our sales, marketing, and support activities |
| If we fail to maintain our relationships with these vendors, or fail to establish additional new relationships, our business could be materially adversely affected |
| Our relationships with vendors of software and hardware products could have a negative impact on our ability to secure consulting engagements |
| Our growing number of relationships with software and hardware vendors could result in clients perceiving that we are not independent from those software and hardware vendors |
| Our ability to secure assessment and other consulting engagements is often dependent, in part, on our being independent of software and hardware solutions that we may review, analyze, or recommend to clients |
| If clients believe that we are not independent of those software and hardware vendors, clients may not engage us for certain consulting engagements relating to those vendors, which could reduce our revenues and materially adversely affect our business |
| We may infringe the intellectual property rights of third parties |
| Our success depends, in part, on not infringing patents, copyrights, and other intellectual property rights held by others |
| We do not know whether patents held or patent applications filed by third parties 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, judgments, and fines that could adversely affect our business regardless of the merits of such claims |
| 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 20 ______________________________________________________________________ maintain our skill and expertise in light of regulatory or technological changes, our services may not be marketable to our clients and we could lose existing clients or future engagements |
| Finally, government regulations, particularly HIPAA, may require our clients to impose additional contractual responsibilities on us, which may make it more costly to perform certain of our engagements and subject us to increased risk in the performance of these engagements, including immediate termination of an engagement |
| Technological change in the network and application markets has created high demand for consulting, implementation, and integration services |
| If the pace of technological change were to diminish, we could experience a decrease in demand for our services |
| Any material decrease in demand would materially adversely affect our business, financial condition, and results of operations |
| We may be unable to effectively protect our proprietary information and procedures |
| We must protect our proprietary information, including our proprietary methodologies, research, tools, software code, and other information |
| To do this, we rely on a combination of copyright and trade secret laws and confidentiality procedures to protect our intellectual property |
| These steps may not protect our proprietary information |
| In addition, the laws of certain foreign 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 |
| 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 dlra29dtta13 and as low as dlra3dtta63 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; • Domestic and international economic conditions; and • The other risks related to our business discussed above |
| 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 |
| 21 ______________________________________________________________________ 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 9cmam500cmam000 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 rights agreement 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 500cmam000 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 |