<PAGE> 1
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549-1004
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OF THE SECURITIES EXCHANGE
---- ACT OF 1934
For the quarterly period ended September 30, 1997
OR
---- TRANSITION REPORT PURSUANT TO SECTION 13 OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from to
Commission file number 0-21485
SUPERIOR CONSULTANT HOLDINGS CORPORATION
(exact name of registrant as specified in its charter)
STATE OF DELAWARE 38-3306717
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
4000 Town Center, Suite 1100 Southfield, Michigan 48075
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (248) 386-8300
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
---- ----
As of November 4, 1997, 10,206,464 shares of the registrant's common stock
(par value $.01) were outstanding.
<PAGE> 2
SUPERIOR CONSULTANT HOLDINGS CORPORATION
QUARTER ENDED SEPTEMBER 30, 1997
INDEX
<TABLE>
<CAPTION>
PART I - FINANCIAL INFORMATION PAGE NO.
<S> <C> <C>
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of
September 30, 1997 and December 31, 1996 (unaudited) 3
Condensed Consolidated Statements of Operations for the three and
nine months ended September 30, 1997 and 1996 (unaudited) 4
Condensed Consolidated Statements of Cash Flows for the nine months 5
ended September 30, 1997 and 1996 (unaudited)
Notes to Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition and 9
Results of Operations
Item 3. Quantitative and Qualitative Disclosure About Market Risk Sensitive Instruments 15
PART II - OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds 16
Item 5. Other Information 16
Item 6. Exhibits and Reports on Form 8-K 16
SIGNATURES 17
</TABLE>
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<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SUPERIOR CONSULTANT HOLDINGS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1997 1996
ASSETS (RESTATED)
------ -------------- ------------
<S> <C> <C>
Current assets
Cash $ 707 $ 2,241
Short-term investments 26,026 34,554
Accounts receivable, net 16,758 13,751
Prepaid taxes - 178
Accrued interest receivable and prepaid expenses 1,040 757
-------- --------
Total current assets 44,531 51,481
Property and equipment, net 5,989 3,457
Deferred income taxes 319 560
Goodwill, net 4,795 -
Other long term assets 57 96
-------- --------
Total Assets $ 55,691 $ 55,594
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities
Lines of credit $ - $ 1,298
Current portion of long-term debt 34 79
Accounts payable 3,306 2,915
Accrued liabilities 3,427 4,768
Deferred revenue 1,573 1,703
Income taxes payable 204 705
-------- --------
Total current liabilities 8,544 11,468
Long-term debt 205 1,200
Deferred income taxes - 270
Deferred performance bonuses 580 580
Deferred compensation - 705
Stockholders' equity
Preferred stock; authorized, 1,000,000 shares of
$.01 par value; no shares issued or outstanding - -
Common stock; authorized, 30,000,000 shares of
$.01 par value; issued and outstanding, 8,206,464 as of
September 30, 1997 and 8,131,874 as of December 31, 1996 82 82
Additional paid-in capital 45,051 42,966
Retained earnings (deficit) 1,927 (979)
Stockholders' notes receivable (698) (698)
-------- --------
Total stockholders' equity 46,362 41,371
-------- --------
Total Liabilities and Stockholders' Equity $ 55,691 $ 55,594
======== ========
</TABLE>
See notes to condensed consolidated financial statements.
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SUPERIOR CONSULTANT HOLDINGS CORPORATION AND SUBSIDIARIES
CONDENSEND CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------- ----------------------
1997 1996 1997 1996
(RESTATED) (RESTATED)
-------- ---------- -------- ----------
<S> <C> <C> <C> <C>
Revenues $19,491 $12,625 $53,573 $36,028
Costs and expenses
Cost of services 9,850 6,116 27,047 17,434
Selling, general and administrative expenses 7,517 5,010 21,388 15,068
Executive compensation expense 208 1,673 652 4,273
------- ------- ------- -------
Total costs and expenses 17,575 12,799 49,087 36,775
------- ------- ------- -------
Earnings (loss) from operations 1,916 (174) 4,486 (747)
Other income (expense), principally interest 498 (30) 1,415 (157)
Costs incurred in connection with mergers (692) - (692) -
------- ------- ------- -------
Earnings (loss) before income taxes and extraordinary item 1,722 (204) 5,209 (904)
Income taxes 933 56 2,303 37
------- ------- ------- -------
Net earnings (loss) before extraordinary item 789 (260) 2,906 (941)
Extraordinary gain on early extinguishment of debt,
net of income taxes - - - 366
------- ------- ------- -------
Net earnings (loss) $ 789 $ (260) $ 2,906 $ (575)
======= ======= ======= =======
Net earnings per share $ 0.09 - $ 0.35 -
======= ======= =======
Pro forma earnings data
Earnings (loss) before income taxes and
extraordinary item, as reported $ (204) $ (904)
Adjustment for executive compensation expense 1,408 3,478
------- -------
Earnings before income taxes and extraordinary item 1,204 2,574
Income tax expense 477 1,164
------- -------
Net earnings before extraordinary item 727 1,410
Extraordinary item, net of income taxes - 366
------- -------
Net earnings $ 727 $ 1,776
======= =======
Net earnings before extraordinary item per share $ 0.13 $ 0.26
Extraordinary gain per share - 0.07
------- -------
Net earnings per share $ 0.13 $ 0.33
======= =======
Weighted average number of common
and common equivalent shares outstanding 8,379 5,396 8,304 5,396
======= ======= ======= =======
</TABLE>
See notes to condensed financial statements.
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SUPERIOR CONSULTANT HOLDINGS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
1997 1996
(RESTATED)
------------ -------------------
<S> <C> <C>
Cash flows from operating activities:
Net earnings (loss) $ 2,906 ($575)
Adjustments to reconcile net earnings (loss)
to net cash used in operating activities:
Depreciation 872 417
Amortization of goodwill 180 -
Bad debt expense 217 362
Deferred income taxes (29) (77)
Deferred performance bonuses - (448)
Deferred compensation - 659
Changes in operating assets and liabilities:
Accounts receivable (3,224) (5,077)
Accrued interest receivable and prepaid expenses (105) (62)
Other assets 39 10
Accounts payable 391 323
Accrued liabilities (2,046) 3,477
Deferred revenue (130) 523
Income taxes payable (501) -
-------- -------
Net cash used in operating activities (1,430) (468)
Cash flows used in investing activities:
Purchase of The Kaufman Group (3,419) -
Purchases of property and equipment (3,404) (1,174)
-------- -------
Net cash used in investing activities (6,823) (1,174)
Cash flows from financing activities:
Repurchase of common stock (41) (27)
Common stock issued in connection with exercise
of stock options and other 80 28
(Repayment of) proceeds from lines of credit, net (1,298) 864
(Repayment of) proceeds from notes payable (550) 368
Repayment of note payable to stockholder - (61)
Principal payments on stockholders' notes receivable - 14
-------- -------
Net cash (used in) provided by financing activities (1,809) 1,186
-------- -------
Net decrease in cash (10,062) (456)
Cash and cash equivalents, beginning of period 36,795 747
-------- -------
Cash and cash equivalents, end of period $ 26,733 $ 291
======== =======
Supplemental disclosure of cash flow information:
Interest expense $ 117 $ 175
Income tax payments $ 3,141 $ 24
Non-cash conversion of Chi debt to equity $ - $ 479
Non-cash Chi deferred compensation transaction,
net of deferred taxes $ 460 $ -
Non-cash acquisition costs (issuance of common stock
for The Kaufman Group) $ 1,600 $ -
</TABLE>
See notes to condensed consolidated financial statements.
Page 5
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SUPERIOR CONSULTANT HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
SEPTEMBER 30, 1997
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements
have been prepared pursuant to the rules of the Securities and Exchange
Commission for quarterly reports on Form 10-Q. Accordingly, they do not
include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring accruals and
estimated provisions for bonus and profit-sharing arrangements) considered
necessary for a fair presentation have been included. As a result of the
pooling of interest transactions completed in the third quarter, as described
in Note 4 below, all consolidated financial statements and related schedules
presented for the three and nine month periods ended September 30, 1997 and
1996 and as of December 31, 1996 have been restated to include the results of
operations and financial position of COMSUL, Ltd., a California Corporation
("COMSUL") and Chi Systems, Inc., a Michigan Corporation ("Chi"), and all share
quantities and per share amounts have been restated to give effect to the
COMSUL and Chi mergers. Operating results for the three-month and nine-month
periods ended September 30, 1997 are not necessarily indicative of the results
that may be expected for the year ended December 31, 1997.
These financial statements should be read in conjunction with the
Company's audited consolidated financial statements and notes thereto included
in the Company's 1996 annual report on Form 10-K filed by the Company with the
Securities and Exchange Commission on March 31, 1997.
NOTE 2 - PRO FORMA ADJUSTMENTS TO FINANCIAL STATEMENTS
The following pro forma adjustments have been made to the 1996 historical
results of operations to make the presentation more comparable in relation to
1997's actual results:
(a) Elimination of executive compensation expense (including bonuses) in
excess of the amount that would have been paid had the compensation limiting
agreements, for the majority stockholder and two other executive officers,
which became effective concurrent with the closing of the Company's initial
public offering of Common Stock on October 16, 1996 ("IPO"), been effective
throughout such periods.
(b) Computation of federal income taxes assuming an effective tax rate
of 39.6% for the three and nine months ended September 30, 1996, which would
have been recorded had one of the Company's subsidiaries, Superior Consultant
Company, Inc., been a C corporation and after eliminating the executive
compensation expense in (a).
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NOTE 3 - NET EARNINGS PER SHARE
Net earnings per share is computed based on the weighted average number of
shares of Common Stock outstanding during the respective periods, and includes
the dilutive effect of unexercised stock options using the treasury stock
method.
NOTE 4 - BUSINESS ACQUISITIONS
Effective March 12, 1997, the Company purchased a healthcare consulting
business in California, The Kaufman Group, for $3.2 million in cash, $1.6
million of newly-issued Common Stock (74,590 shares), and a maximum additional
payment of $1.45 million in cash over a three-year period. The acquisition
has been recorded using the purchase method of accounting. The entire purchase
price has been allocated to goodwill and will be amortized over 15 years.
Reference is made to the Stock Purchase Agreement, a copy of which was filed
with the Company's Form 8-K on March 26, 1997.
On July 29, 1997, the Company completed a business combination with
COMSUL, which specializes in information systems, telecommunications, and
corporate facilities and organizational design for a wide range of clients. The
business of COMSUL has been combined with the business of one of the Company's
wholly-owned subsidiaries, Enterprise Consulting Group, ("Enterprise", formerly
"Unitive Corporation"). The acquisition has been recorded as a pooling of
interests, with the issuance of 240,630 shares of the Company's Common Stock
having a value of approximately $7.7 million based on a market trading average
over a period ending immediately prior to the first public announcement of the
transaction on June 24, 1997. Reference is made to the Plan and Agreement of
Merger, a copy of which was filed with the Company's Quarterly Form 10-Q for the
period ended June 30, 1997.
On August 14, 1997, the Company completed a business combination with Chi,
of Ann Arbor, Michigan, which specializes in strategic, operational, and
facility planning consulting to the healthcare industry. The business of Chi
has been combined with the business of one of the Company's wholly-owned
subsidiaries, Superior Consultant Company, Inc. ("Superior"). The acquisition
has been recorded as a pooling of interests, with the issuance of 331,509
shares of the Company's Common Stock having a value of approximately $11.2
million based on a market trading average over a 20 day period ending two days
prior to the consummation of the transaction. Reference is made to the Plan
and Agreement of Merger, a copy of which was filed with the Company's Form 8-K
on August 28, 1997.
Page 7
<PAGE> 8
As a result of the pooling of interests transactions with COMSUL and Chi,
the separate results of the combining enterprises for the six months ended June
30, 1997, the end of the interim period nearest the dates the acquisitions were
consummated, and the nine months ended September 30, 1996 are as follows (in
000's):
<TABLE>
<CAPTION>
Six months ended Nine months ended
June 30, 1997 September 30, 1997
---------------- ------------------
<S> <C> <C>
Revenues:
- ---------
Superior Consultant Holdings Corporation, as reported $25,974 $25,502
COMSUL 4,079 4,666
Chi 4,029 5,860
------- -------
$34,082 $36,028
======= =======
Extraordinary Item:
- -------------------
Superior Consultant Holdings Corporation, as reported - -
COMSUL - -
Chi - $ 366
------- -------
$ 0 $ 366
======= =======
Net earnings (loss):
- --------------------
Superior Consultant Holdings Corporation, as reported $ 2,178 ($985)
COMSUL (191) 354
Chi 130 56
------- -------
$ 2,117 ($575)
======= =======
</TABLE>
NOTE 5 - SUBSEQUENT EVENT
On October 4, 1997, the Company filed a registration statement on Form S-1
(File No. 333-37357) with respect to the public offering of two million shares
of the Company's common stock, par value $0.01 per share ("Common Stock") to be
issued and sold by the Company and one million outstanding shares of Common
Stock to be sold by certain stockholders. On November 4, 1997, the Company
closed this public offering with an underwriting syndicate led by Donaldson,
Lufkin & Jenrette Securities Corporation, William Blair & Company, L.L.C. and
Jefferies & Company, Inc. The shares were sold at a price to the public of $32
per share and the two million shares sold by the Company resulted in net
proceeds of approximately $60.5 million, after underwriters' discounts and
estimated offering expenses.
NOTE 6 - NEW ACCOUNTING PRONOUNCEMENT
Statement of Financial Accounting Standards No. 128, Earnings per Share,
was issued in February 1997. The Company will be required to adopt the new
standard for the year and quarter ended December 31, 1997. Early adoption of
this standard is not permitted. The primary requirements of this standard are:
(i) replacement of primary earnings per share with basic earnings per share,
which eliminates the dilutive effective of options and warrants; (ii) use of an
average share price in applying the treasury method to compute dilution for
options and warrants for diluted earnings per share; and (iii) disclosure
reconciling the numerator and denominator of earnings per share calculations.
The Company plans to adopt this statement when required. The effect of applying
this standard is not expected to be significant.
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ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
Statements included in Management's Discussion and Analysis of Financial
Condition and Results of Operations which are not historical in nature, are
intended to be, and are hereby identified as, "forward looking statements" for
purposes of the safe harbor provided by Section 21E of the Securities Exchange
Act of 1934, as amended by Public Law 104-67. Forward-looking statements may
be identified by words including "anticipate," "believe," "intends,"
"estimates," "expect" and similar expressions. The Company cautions readers
that forward-looking statements, including without limitation, those relating
to the Company's future business prospects, revenues, working capital,
liquidity, and income, are subject to numerous risks and uncertainties that
could cause actual results to differ materially from those indicated in the
forward looking statements, due to several important factors herein identified,
among others, and other risks and factors identified from time to time in the
Company's reports filed with the SEC, including the risk factors identified in
the Company's Registration Statement on Form S-1 (File No. 333-10213) and
Registration Statement on Form S-1 (File No. 333-37357).
The Company conducts business through its two wholly-owned operating
subsidiaries, Superior and Enterprise. Superior is a leading healthcare
consulting firm that provides a wide range of information technology consulting
and strategic and operations management consulting services to a broad
cross-section of healthcare industry participants and healthcare information
system vendors. Enterprise assists clients in various industries with network
and telecommunication design and acquisition, enterprise messaging, intranet
and web strategies, workgroup consulting, and software and application
development solutions.
The Company derives substantially all of its revenues from fees for
professional services, the majority of which are billed at contracted hourly
rates. The Company establishes standard billing guidelines based on the type
and level of service offered. Actual billing rates are established on a project
by project basis and may vary from the standard guidelines. Billings are
typically made on a bi-weekly basis to monitor client satisfaction and manage
outstanding accounts receivable balances. Revenue on time and materials
contracts is recognized as the services are provided. A percentage of the
Company's projects are billed on a fixed-fee basis, which is distinguishable
from the Company's general method of billing on a time and materials basis. The
Company recognizes revenue on fixed fee projects using the percentage of
completion basis. As a result of the Company's success in obtaining outsourcing
contracts and the nature of the practices of certain recently acquired
companies, the Company has increased the number and size of projects billed on
a fixed-fee basis. Increased use of fixed-fee contracts subjects the Company to
increased risks, including cost overruns.
To date in 1997, the Company has been awarded three significant contracts
to provide healthcare IT outsourcing services. Each of the outsourcing
agreements is for a fixed initial term of between three to five years with
opportunities for flexible project commitments beyond the initial scope and
term. Under each agreement, the Company is paid a fixed base amount per period
in return for its commitment to provide a specified type and amount of IT
management and operations services. There can be no assurance that the Company
will be able to achieve profit margins on outsourcing contracts which are
consistent with its historical levels of profitability.
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<PAGE> 10
The Company's historical revenue growth is attributable to various
factors, including an increase in the number of projects for existing and new
clients, and expanded geographic presence. In addition, the Company seeks to
increase revenues by expanding its range of specialty services. The Company
manages its client development efforts through several strategic services
groups, each having specific geographic responsibility and focus.
The Company's most significant expense is cost of services, which consists
primarily of consultant salaries and benefits. In recent years, consultant
compensation expense has grown faster than consultant billing rates, resulting
in an increase in the Company's cost of services as a percentage of revenues.
The Company has sought to address this issue by adding an additional variable
portion of compensation payable upon the achievement of measurable performance
goals.
The Company's cost of services as a percentage of revenues is also related
to its consultant utilization. The Company manages utilization by monitoring
project requirements and timetables. The number of consultants assigned to a
project will vary according to the size, complexity, duration and demands of
the project. Project terminations, completions and scheduling delays may result
in periods when consultants are not fully utilized. An unanticipated
termination of a significant project could cause the Company to experience
lower consultant utilization, resulting in a higher than expected number of
unassigned consultants. In addition, the establishment of new practice areas
and the hiring of consultants in peak hiring periods have resulted in periods
of lower consultant utilization (and resulting downward pressure on margins)
until project volume increases in these new areas. In the future, the
establishment of new practice areas, as well as further geographic expansion,
could from time to time adversely affect utilization. Variations in consultant
utilization would result in quarterly variability of the Company's cost of
services as a percentage of revenues. The Company's consultants are generally
employed on a full-time basis, and therefore the Company will, in the short
run, incur substantially all of its employee- related costs even during periods
of low utilization.
Selling, general and administrative expenses include the costs of
recruiting, continuing education, marketing, facilities, equipment
depreciation, and administration, including compensation and benefits. The
Company incurred increased rent associated with the Company's move in the third
quarter of 1996 to larger headquarters to accommodate its growth.
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Prior to the IPO, executive compensation expense consisted of salaries,
formula bonuses and discretionary bonuses paid to the principal stockholder and
two other key executives. The Company's historical levels of executive
compensation were related primarily to the Company's status as a Subchapter S
Corporation and period to period increases in executive compensation expense
were related primarily to the Company's period to period earnings growth. The
Company has entered into agreements with these individuals effective upon the
closing of the IPO through December 31, 1997, which provide maximum annual
compensation in an aggregate amount of approximately $1.1 million for these
three key executives, comprised of base salary and bonus amounts to be awarded
based on the attainment of certain financial performance criteria. The
foregoing compensation arrangements for these three officers did not apply to
amounts paid on or prior to the closing of the IPO. The pro forma statement of
operations data reflects an adjustment for executive officer compensation for
the three and nine months ended September 30, 1996 to eliminate the amounts by
which key executive compensation paid in these periods were in excess of the
estimated compensation that would have been paid under the executive
compensation agreements adopted in October 1996, as if such agreements were in
place throughout such periods. The estimated amount payable under the executive
compensation agreements was calculated by assuming the payment to the executive
officers of their base salaries plus 100% of their potential bonus for the
year.
From January 1, 1987 to October 9, 1996 Superior was treated as a
Subchapter S Corporation for federal income tax purposes under Subchapter S of
the Internal Revenue Code and for certain state income tax purposes. As a
result, substantially all of the income of Superior during this period was
taxed directly to its stockholders rather than Superior. In addition, prior to
January 1, 1995, Enterprise was taxed as a Subchapter S Corporation and
thereafter as a Subchapter C Corporation. Following the closing of the
Company's initial public offering, the Company, Superior and Enterprise were
subject to corporate federal income taxation on a consolidated basis as
Subchapter C Corporations.
The pro forma statement of operations data reflects an adjustment to
federal income taxes for the three and nine months ended September 30, 1996,
assuming Superior had been operating as a C Corporation during such period, and
reflects an effective tax rate of 39.6%, after giving effect to the executive
officer compensation expense adjustments.
In connection with the termination of Superior's S Corporation status, in
the fourth quarter of 1996 the Company recorded deferred income taxes of
approximately $130,000 in accordance with Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes." This income tax expense was
in addition to income tax expense otherwise incurred in such quarter and was
incurred upon termination of the Company's S Corporation status.
As a result of the pooling of interest transactions completed in the third
quarter, as described in Note 4, all condensed consolidated financial
statements and related schedules presented for the three and nine month periods
ended September 30, 1997 and 1996 and as of December 31, 1996 have been
restated to include the results of operations and financial position of COMSUL
and Chi, and all share quantities and per share amounts have been restated to
give effect to the COMSUL and Chi mergers.
Page 11
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THREE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 1996 (RESTATED)
Revenues. Revenues increased by $6.9 million, or 54.4%, to $19.5
million for the three months ended September 30, 1997, as compared to $12.6
million for the three months ended September 30, 1996. The revenue increase
was due primarily to continued strong growth in core lines of business, as well
as activity from the outsourcing contracts and The Kaufman Group acquisition
that occurred in March 1997.
Cost of Services. Cost of services increased by $3.7 million, or 61.1%,
to $9.9 million for the three months ended September 30, 1997, as compared to
$6.2 million for the three months ended September 30, 1996. The increase was
due to the hiring of additional consultants required to support the Company's
revenue growth, as well as the costs of services associated with the
outsourcing agreements and The Kaufman Group acquisition. Cost of services as a
percentage of revenue increased to 50.5% for the three months ended September
30, 1997, as compared to 48.4% for the three months ended September 30, 1996.
This increase was due to an increase in compensation levels, with average
billing rates remaining relatively constant. In addition, the Company's
consultant base grew by approximately 24% during the third quarter of 1997
which resulted in slightly lower utilization during this peak hiring period.
Selling, general and administrative expenses. Selling, general and
administrative expenses increased by $2.5 million, or 50.0%, to $7.5 million
for the three months ended September 30, 1997, as compared to $5.0 million for
the three months ended September 30, 1996. This increase was due to incentive
and other compensation expenses associated with the addition of key personnel
during the first and second quarters in the areas of business development,
outsourcing, and legal services to pursue the Company's multi-faceted growth
strategies, as well as higher recruiting and continuing education expenses
consistent with the Company's growth. Selling, general and administrative
expenses as a percentage of revenues decreased to 38.6% from 39.7% primarily
due to increased operating efficiencies resulting from leveraging the Company's
infrastructure expense across its growing revenue base.
Executive compensation expense. Executive compensation expense
decreased by $1,465,000 to $208,000 for the three months ended September 30,
1997, as compared to $1,673,000 for the three months ended September 30, 1996.
As discussed previously, prior to the IPO, the Company's historical levels of
executive compensation were related primarily to the Company's status as a
Subchapter S corporation and executive compensation expense was related
primarily to the Company's earnings.
Other income and expense. Other income was $498,000 for the three months
ended September 30, 1997, as compared to $30,000 of other expense for the three
months ended September 30, 1996. The change was due primarily to interest
earned on the investment of the majority of the net proceeds of approximately
$39.7 million from the IPO in October, 1996.
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THREE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO THREE MONTHS ENDED
SEPTEMBER 30, 1996 (RESTATED) (Continued)
Costs incurred in connection with mergers. The Company incurred
approximately $692,000 of costs in connection with the business acquisitions
of COMSUL and Chi during the third quarter of 1997. These costs consisted
primarily of payments for legal, accounting and investment banking fees related
to the business acquisitions. The Company expects to incur approximately
$200,000 of additional costs during the final quarter of 1997 in connection
with the business acquisitions of COMSUL and Chi, relating primarily to
additional legal and accounting fees.
NINE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30, 1996 (RESTATED)
Revenues. Revenues increased by $17.6 million, or 48.7%, to $53.6
million for the nine months ended September 30, 1997, as compared to $36.0
million for the nine months ended September 30, 1996. The revenue increase was
due primarily to continued strong growth in core lines of business, as well as
activity from the outsourcing contracts and The Kaufman Group acquisition that
occurred in March 1997. In addition, the Company experienced growth from its
expanded geographic presence resulting from the mergers with The Kaufman Group,
COMSUL and Chi.
Cost of Services. Cost of services increased by $9.6 million, or 55.1%, to
$27.0 million for the nine months ended September 30, 1997, as compared to
$17.4 million for the nine months ended September 30, 1996. The increase was
due to the hiring of additional consultants required to support the Company's
revenue growth, as well as the costs of services associated with the
outsourcing agreements and the business acquisitions. Cost of services as a
percentage of revenue increased to 50.5% for the nine months ended September
30, 1997, as compared to 48.4% for the nine months ended September 30, 1996.
This increase is attributable to the increase in the Company's consultant base
which grew by approximately 64% during the first nine months of 1997. This
resulted in lower consultant utilization during start-up, which was partially
offset by the variable portion of compensation payable to these consultants,
which is contingent upon achievement of measurable performance goals.
Selling, general and administrative expenses. Selling, general and
administrative expenses increased by $6.3 million, or 41.9%, to $21.4 million
for the nine months ended September 30,1997, as compared to $15.1 million for
the nine months ended September 30, 1996. This increase was due to incentive
and other compensation expenses associated with the addition of key personnel
during the first and second quarters in the areas of business development,
outsourcing, and legal services to pursue the Company's multi-faceted growth
strategies, as well as higher recruiting and training expenses consistent with
the Company's growth. Selling, general and administrative expenses as a
percentage of revenues decreased to 39.9% from 41.8% primarily due to increased
operating efficiencies resulting from leveraging the Company's infrastructure
expense across its growing revenue base.
Page 13
<PAGE> 14
NINE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30, 1996 (RESTATED) (Continued)
Executive compensation expense. Executive compensation expense decreased
by $3,621,000 to $652,000 for the nine months ended September 30, 1997, as
compared to $4,273,000 for the nine months ended September 30, 1996. As
discussed previously, prior to the IPO, the Company's historical levels of
executive compensation were related primarily to the Company's status as a
Subchapter S corporation and executive compensation expense was related
primarily to the Company's earnings.
Other Income and expense. Other income was $1,415,000 for the nine months
ended September 30, 1997, primarily due to the interest earned on the
investment of the majority of the net proceeds of approximately $39.7 million
from the IPO in October, 1996. Other expense was $157,000 for the nine months
ended September 30, 1996, principally due to interest expense on the Company's
lines of credit.
Costs incurred in connection with mergers. The Company incurred
approximately $692,000 of costs in connection with the business acquisitions
of COMSUL and Chi during the third quarter of 1997. These costs consisted
primarily of payments for legal, accounting, and investment banking fees
related to the business acquisitions. The Company expects to incur
approximately $200,000 of additional costs during the final quarter of 1997 in
connection with the business acquisitions of COMSUL and Chi, relating primarily
to additional legal and accounting fees.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary capital needs have been to fund the growth in
working capital required to support its growth in revenues. Prior to the
Company's IPO, the Company's primary source of liquidity was cash flow from
operations. The Company believes that funds generated from operations, together
with the proceeds received from the Company's IPO, the net proceeds of
approximately $60.5 million from the second public offering completed in
November 1997, and available credit under its bank credit facility will be
sufficient to finance its working capital and capital expenditure requirements
for at least the next 12 months.
On November 4, 1997, the Company closed its sale of 2,000,000 shares of
its Common Stock at a price of $32 per share. The net proceeds to the Company,
totaling approximately $60.5 million after underwriters' discount and estimated
offering expenses, will be used for expansion of existing operations,
including outsourcing, development of new service offerings, possible
acquisitions of related businesses and general corporate purposes, including
working capital.
At September 30, 1997, the Company had cash and cash equivalents of $26.7
million and working capital of $36.0 million. Working capital at September 30,
1997 represents a decrease of $4.0 million from December 31, 1996 resulting
primarily from purchases of property and equipment and the acquisition of The
Kaufman Group in March, 1997.
Page 14
<PAGE> 15
LIQUIDITY AND CAPITAL RESOURCES (Continued)
The Company has an unsecured line of credit arrangement at Comerica Bank
N.A. of $3.0 million, which bears interest at the current prime rate. As of
September 30, 1997, the Company had no amounts outstanding under this line of
credit.
Net cash used in operating activities for the nine months ended September
30, 1997 was $1,430,000, compared with net cash used in operations of $468,000
for the nine months ended September 30, 1996. The increase in cash used in
operations is primarily due to decreases in accrued liabilities and income
taxes payable; partially offset by higher earnings before depreciation and
goodwill in the current period.
Net cash used in investing activities of $6.8 million during the nine
months ended September 30, 1997 consists of additions to property and equipment
and the acquisition of The Kaufman Group.
Net cash used in financing activities during the nine months ended
September 30, 1997 was principally the result of repayments on the Company's
lines of credit and the repayment of COMSUL and Chi notes payable. Net cash
provided by financing activities during the nine months ended September 30,
1996 was primarily due to borrowings on the Company's lines of credit to fund
operations.
Effective March 12, 1997, the Company purchased The Kaufman Group, a
healthcare consulting business based in California for approximately $3.2
million in cash, $1.6 million of Common Stock (74,590 shares), and a maximum
additional payment of $1.5 million payable in cash over a three-year period.
The Company does not believe that inflation has had a material effect on
the results of its operations in the past three years.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK SENSITIVE
INSTRUMENTS
The Company currently does not invest excess funds in derivative financial
instruments or other market rate sensitive instruments for the purpose of
managing its foreign currency exchange rate risk or for any other purpose.
Page 15
<PAGE> 16
PART II - OTHER INFORMATION
Item 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(c)
On July 29, 1997, the Company issued 240,630 shares of its Common Stock in
connection with the acquisition of COMSUL (valued at approximately $7.7 million
based on a market trading average over a 20 day period ending immediately prior
to the first public announcement of the transaction). On August 14, 1997, the
Company issued 331,509 shares of its Common Stock in connection with the
acquisition of Chi (valued at approximately $11.2 million based on a market
trading average over a 20 day period ending immediately prior to the
consummation of the transaction). The shares were issued to the shareholders of
COMSUL and Chi, respectively, as "restricted shares" pursuant to Section 4(2)
of the Securities Act of 1933, as amended, in privately negotiated transactions
not constituting public offerings.
(d)
On October 9, 1996, the Company's Registration Statement on Form S-1 (File
No. 333-10213 was declared effective by the Securities and Exchange Commission
(the "IPO Registration Statement"). The IPO Registration Statement registered
a total of 2,723,623 shares of Common Stock issued and sold by the Company and
a total of 151,377 shares of Common Stock sold by certain stockholders of the
Company (collectively, the "Offering"). All of the shares covered by the
Registration Statement were sold upon termination of the Offering on October
16, 1996 to an underwriting syndicate managed by William Blair & Company,
L.L.C., Donaldson, Lufkin & Jenrette Securities Corporation and Jefferies and
Company, Inc. The shares sold by the Company were sold at an aggregate price
of $43,577,968, netting $40,527,510 to the Company after underwriters' discount
of $3,050,458. The shares sold by the selling stockholders were sold at an
aggregate price of $2,422,032, netting $2,252,490 to the selling stockholders
after underwriters' discount of $169,542. From the effective date of the
Registration Statement, the Company has incurred approximately $994,233 in
expenses in addition to the underwriters' discount described above in
connection with the registration, offering, issuance and sale of the shares in
the Offering, netting estimated proceeds from the Offering to the Company of
approximately $39.5 million. None of such expenses were paid to any officer,
director or 10% or greater stockholder of the Company or and affiliate of any
such persons. Since the effective date of the Registration Statement, the Net
Proceeds have been applied to the following uses in the following estimated
amounts:
Construction of buildings and facilities: $ -----
----------------
Purchase and installation of equipment: $ 4,349,000
----------------
Purchase and improvement of real estate: $ -----
----------------
Acquisitions of other business(es): $ 3,227,000
----------------
Repayment of indebtedness: $ 2,833,779
----------------
Working Capital: $ 373,667
----------------
Temporary Investment: $ 25,070,245
----------------
Payment of accrued compensation: $ 3,679,586
----------------
The temporary investments specified above have consisted primarily of short
term commercial paper. Except for payment of accrued compensation at the time
of the Offering in the amount of $3,509,425, none of the payments of proceeds
mentioned above were paid to any officer, director or 10% or greater
stockholder of the Company or and affiliate of any such persons.
Item 5. Other Information
On August 14, 1997, the Company completed a business combination with Chi,
of Ann Arbor, Michigan, which specializes in strategic, operational, and
facility planning consulting to the healthcare industry. The business of Chi
has been combined with the business of one of the Company's wholly-owned
subsidiaries, Superior. The acquisition has been recorded as a pooling of
interests, with the issuance of 331,509 shares of the Company's Common Stock
having a value of approximately $11.2 million based on a market trading average
over a 20 day period ending two days prior to the consummation of the
transaction. Reference is made to the Plan and Agreement of Merger, a copy of
which was filed with the Company's Form 8-K on August 28, 1997.
On October 4, 1997, the Company filed a registration statement on Form S-1
(File No. 333-37357) with respect to the public offering of two million shares
of the Company's common stock, par value $0.01 per share ("Common Stock") to be
issued and sold by the Company and one million outstanding shares of Common
Stock to be sold by certain stockholders. On November 4, 1997, the Company
closed this public offering with an underwriting syndicate led by Donaldson,
Lufkin & Jenrette Securities Corporation, William Blair & Company, L.L.C. and
Jefferies & Company, Inc. The shares were sold at a price to the public of $32
per share and the two million shares sold by the Company resulted in net
proceeds of approximately $60.5 million, after underwriters' discounts and
estimated offering expenses.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
10.18 Plan and Agreement of Merger, dated August 14, 1997, among
Superior Consultant Holdings Corporation, A Delaware Corporation, Chi
Acquisition Co., A Delaware Corporation, The Chi Group, Inc., A
Delaware Corporation, and certain shareholders of the Chi Group, Inc. (1)
27* Financial Data Schedule for the Third Quarter ended
September 30, 1997
99.3 Press Release dated August 15, 1997 (1)
(b) Form 8-K
The Company filed a Current Report on Form 8-K, dated August 28, 1997
announcing the acquisition by the Company's wholly-owned subsidiary,
Superior Consultant Company, Inc., of all the outstanding securities of
the Chi Group Inc., a healthcare consulting corporation organized under
the laws of Delaware.
_______________________________
* Filed herewith
(1) Incorporated by reference from the Company's Form 8-K as filed with the
Securities and Exchange Commission on August 28, 1997.
Page 16
<PAGE> 17
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Superior Consultant Holdings Corporation
Date November 14, 1997 By: /s/ Richard D. Helppie, Jr.
----------------- -------------------------------
Richard D. Helppie, Jr,
President, Chief Executive Officer
(Principal Executive Officer)
Date November 14, 1997 By: /s/ James T. House
----------------- ----------------------
James T. House
Vice President and Chief Financial
Officer
(Principal Financial and Accounting
Officer)
Page 17
<PAGE> 18
INDEX TO EXHIBITS
EXHIBIT NO. DESCRIPTION
- ----------- -----------
10.18 Plan and Agreement of Merger, dated August 14, 1997, among
Superior Consultant Holdings Corporation, A Delaware Corporation, Chi
Acquisition Co., A Delaware Corporation, The Chi Group, Inc., A Delaware
Corporation, and certain shareholders of the Chi Group, Inc. (1)
27* Financial Data Schedule for the Third Quarter ended
September 30, 1997
99.3 Press Release dated August 15, 1997 (1)
- ----------------------------------
* Filed herewith
(1) Incorporated by reference from the Company's Form 8-K as filed with the
Securities and Exchange Commission on August 28, 1997.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM UNAUDITED
FINANCIAL STATEMENTS FOR THE 3RD QUARTER ENDED 9/30/97 CONTAINED IN THE
COMPANY'S FORM 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH REPORT
ON FORM 10-Q.
</LEGEND>
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