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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED: DECEMBER 31, 1997, OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ______ TO ______
COMMISSION FILE NUMBER 0-21485
SUPERIOR CONSULTANT
HOLDINGS CORPORATION
(Exact name of registrant as specified in its charter)
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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)
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Registrant's telephone number, including area code: (248) 386-8300
Securities registered pursuant to Section 12(b) of the Act: None
Securities pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per Share
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filings requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of voting stock held by non-affiliates of the
registrant based upon the closing sale price of the stock as reported on the
Nasdaq National Market on March 25, 1998 was $205,044,898.
At March 25, 1998, 10,220,464 shares of the registrant's Common Stock were
outstanding.
DOCUMENT INCORPORATED BY REFERENCE
The registrant's definitive proxy statement for the annual meeting of
stockholders, estimated to be held in May 1998, expected to be filed with the
Commission not later than April 10, 1998, is incorporated by reference into Part
III of this Form 10-K.
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PART I
ITEM 1. BUSINESS
SUMMARY
Superior Consultant Holdings Corporation (the "Company"), through its
wholly owned subsidiary, Superior Consultant Company, Inc. ("Superior"), is a
national healthcare consulting firm that provides a wide range of information
technology ("IT") consulting and strategic and operations management consulting
services to a broad cross-section of healthcare industry participants and
healthcare information system vendors. Superior uses its in-depth institutional
knowledge and nationally deployed group of experienced consultants to help
clients plan and execute business strategies. Superior's comprehensive continuum
of solutions includes: strategic planning and operations management consulting;
information systems planning, implementation and integration; and interim
management and outsourcing.
Superior's wholly-owned subsidiary, Enterprise Consulting Group, Inc.
("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 term "Company" as used herein refers collectively to the Company
together with its wholly owned subsidiaries: Superior and Enterprise.
The Company serves clients across a broad cross-section of the healthcare
industry. From January 1, 1996 through December 31, 1997, the Company provided
services to over 455 healthcare clients on over 1,880 engagements. The Company
believes that its long-term relationships, in-depth knowledge of its clients'
needs and its broad range of services provide it with significant advantages
over its competitors in marketing additional services and winning new
engagements. In each of the last three completed fiscal years, the Company's
revenues from clients served in the prior year exceeded 80% of total revenues.
The Company's goal is to be the preferred, if not sole, provider of a broad
range of solutions for each of its clients.
INDUSTRY BACKGROUND
General
The United States healthcare industry is undergoing rapid, profound change.
In recent years, healthcare expenditures have increased at approximately twice
the rate of inflation and are expected to have exceeded $1.2 trillion in 1997,
according to a Healthcare Financing Administration report on the healthcare
industry. The Company believes that the consolidation of healthcare systems and
the aging of the U.S. population should result in continued dramatic change in
the healthcare industry. Healthcare providers today face external and internal
pressures to meet the competitive demands of the marketplace, comply with
increasing government regulations and cope with the advent of managed care.
These challenges, combined with increased demands on capital resources, are
forcing healthcare providers to seek new ways to structure and manage their
organizations and deliver services. In the past, the financial risk of
healthcare delivery was absorbed principally by third-party payors, and
providers did not focus on cost containment. Today, through managed care
arrangements and provider capitation (under which providers are paid an annual
fixed fee per individual to deliver all healthcare services required by that
individual), the economic risk of healthcare delivery is shifting from payors to
providers. In order to manage this risk, providers must enhance their
understanding of treatment costs, variability of costs and cost control and must
restructure their processes and organizations to enhance efficiency and
accountability. Providers must achieve each of these objectives, while at the
same time continuing to demonstrate increasing quality and consistency in
healthcare delivery.
The shifting of risk from payor to provider has also encouraged and
accelerated consolidation among healthcare providers. In order to achieve
economies of scale, operating efficiencies, and enhanced contracting
capabilities, healthcare organizations such as hospitals, primary care and
multi-specialty physician groups, laboratories, pharmacies, home health services
and nursing homes are integrating horizontally and vertically to create IDNs.
The goal of IDNs is to deliver comprehensive healthcare in a cost-effective
manner and accordingly, their success is dependent in part on effectively
managing and delivering information to the
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caregivers. As industry consolidation and IDN formations create larger and
increasingly far-reaching healthcare organizations, and as the demand for
information services is increasingly required to cross multiple points of care,
IDNs must place greater focus on information management and business process
solutions to control costs, demonstrate quality, measure performance, predict
outcomes and increase efficiency.
Information Technology
The increased demand for tools to collect, analyze and interpret clinical,
operational and financial information rapidly, flexibly and in a technological
framework that supports today's diverse healthcare environment is intensifying
the reliance of the healthcare industry on IT solutions. As a result, the
healthcare industry is rapidly increasing its spending for IT. Healthcare IT
spending is being driven not only by the heightened need for better management
information systems, but also continued price-performance improvements in
hardware and software, the ability to develop increasingly user-friendly
software applications and the emergence of better application development tools.
The healthcare IT environment has grown increasingly complex, costly and
burdensome as a result of the challenges of deploying new technology,
maintaining older systems and meeting staffing requirements in a market with an
insufficient pool of qualified IT professionals. At the same time, external
economic factors have forced organizations to focus on core competencies and
trim work forces. The Company believes that healthcare participants will
continue to turn to outside consultants, external management of internal
information systems and full outsourcing as a means of coping with the financial
and technical demands of information systems management. The Company believes
this dynamic is also occurring across other industries as organizations look to
external management and outsourcing of their information systems in order to
remain focused on their core businesses.
Consulting
The changing business environment has also produced an evolving range of
strategic and operating options for healthcare entities, many of which are
unfamiliar to an industry that had long operated under a non-aligned, third
party payor environment. In response, healthcare participants are formulating
and implementing new strategies and tactics, including redesigning business
processes and workflows, acquiring better technology and adopting or remodeling
customer service and marketing programs. The Company believes that healthcare
participants will continue to turn to outside consultants to assist in this
process for several reasons: the pace of change is eclipsing their own internal
resources and capacity to identify, evaluate and implement the full range of
options; consultants enable them to develop better solutions in shorter time
frames; and purchasing consulting expertise can be more cost effective. By
employing outside expertise, healthcare providers can often improve their
ability to compete by more rapidly deploying new processes.
The healthcare consulting industry is highly fragmented and consists
primarily of: (i) larger systems integration firms, including the consulting
divisions of the national accounting firms, which offer healthcare as one of
their specialty areas; (ii) healthcare information systems vendors which focus
on services relating to the software solutions they offer; (iii) healthcare
consulting firms, many of whom focus on selected specialty areas, such as
strategic planning or vendor-specific implementation; and (iv) large general
management consulting firms that do not specialize in healthcare consulting
and/or offer systems implementation. Increasingly, the competitive advantage in
healthcare consulting will be gained by those consulting firms which (i) are
able to marshal the necessary expertise and resources to offer comprehensive
skill sets to clients; (ii) have the strength and consistency of advice along
the entire service continuum (from strategy to selection to implementation);
(iii) offer the flexibility to meet the challenges of the rapidly changing
healthcare and IT industries; and (iv) have the ability to recruit, educate and
deploy a diverse set of personnel.
THE SUPERIOR SOLUTION
Superior uses its in-depth institutional knowledge of healthcare delivery
systems and nationally deployed group of experienced consultants to help clients
plan and execute business strategies. Superior offers its clients a continuum of
solutions, ranging from strategic planning and operations management consulting,
to
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information system planning, implementation and integration, to interim
management and outsourcing. For each client and engagement Superior structures a
project team that understands the complexities of the healthcare environment for
that particular client and can concurrently address the management and technical
ramifications of change and improvement. In structuring an engagement, Superior
does not impose any preordained program on its clients. Rather, utilizing the
professional judgment derived from their years of experience, Superior's
consultants work in concert with each client to develop custom-tailored
solutions. As each client relationship evolves, Superior's professionals add
their experiences to Superior's proprietary databases to accumulate a detailed
and intimate understanding of each client and its specific needs. Superior's
nationally deployed professionals are aided by instant access, via its
proprietary information and communication system, to its knowledge and client
resource databases and to collaboration with colleagues. This unified team
approach helps to ensure high quality, consistent and geographically seamless
client service.
Superior's services integrate many diverse facets and constituencies of the
healthcare industry. Through its strategic consulting, Superior brings together
the healthcare and business relationships required to establish and maintain
efficient and collaborative healthcare delivery networks. Through its operations
management consulting, Superior links the needs and optimizes the contributions
of clinical, information and management personnel. Through its value-added
information systems implementation and integration consulting, Superior forges a
link between healthcare information systems vendors and their customers by
helping each group maximize the potential of existing technology. Superior also
provides a bridge between existing and emerging technologies by supplying
vendors with needed knowledge to develop innovations focused on the changing
needs of the marketplace and by assisting healthcare industry participants to
assess the relative merits and risks of selecting and implementing new
technologies. This enables Superior to help its clients take advantage of the
opportunities presented by emerging technologies such as the internet and
intranet, local and wide area communication networks, telemedicine and document
imaging solutions.
In addition, Superior offers a flexible program of outsourcing services
ranging from interim management to personnel acquisition and facilities
management to total outsourcing. Superior's Capitated Consulting/outsourcing
program enables healthcare providers to simplify their management agenda,
improve their return on information systems investment and strengthen their
technology management by ensuring client access to Superior's skilled technical
labor pool.
To assist its clients in achieving the optimal strategic, operational
and/or IT solution for their business needs, Superior implements solutions that
are unbiased toward specific organizations including hardware and software
vendors. Superior offers an objective assessment of the advantages and
disadvantages of each particular strategic, operational and/or IT solution,
including packaged software applications, platforms and operating systems.
Through its unbiased solutions, Superior can take a flexible approach to its
clients' business problems and provide them with the best solution.
SERVICES
Superior offers its clients comprehensive healthcare consulting services,
from visioning, to strategy, to selection of appropriate solutions, to
implementation, on-going management and outsourcing. Superior offers
custom-tailored solutions based on an assessment of each client's needs.
Superior offers services in the following broadly defined categories:
Information Technology Consulting. Superior provides high quality services
in developing long term IT strategy through selection of technology and
products, systems implementation, integration and management, and contract
negotiation. While Superior's consultants have a wide variety of skills, the
majority have concentrated capabilities in the IT area. This expertise is
derived from a combination of work for Superior clients as well as experience
gained prior to joining Superior and includes evaluation, implementation,
operational or other experience with one or more established and emerging
healthcare information systems or technologies offered by over 100 information
system vendors.
Management Consulting. Superior's management consulting services include
focus areas such as strategic planning, analysis of current industry and
competitive conditions, integration services, formation of physician-hospital
alliances, mergers and affiliations, multi-specialty group practice formation,
facility
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planning, practice valuations and acquisitions, IDN formation, financial advice
and establishment of managed care organizations.
Information Technology Outsourcing. Superior's flexible Capitated
Consulting program enables healthcare providers to simplify their management
agenda, improve their return on information systems investment and strengthen
their technology management by ensuring client access to Superior's skilled
labor pool. Superior's outsourcing program offers the client an array of
services, functions and economic elements which can be tailored to the specific
client program/agenda, including IT management, IT planning and budgeting,
applications support, applications implementation, IT operations, network and
financial management and risk sharing.
Operations Consulting. Superior provides business process workflows and
operations improvement as methods to help clients eliminate organizational
redundancy, reduce cost and implement changes in the areas of patient care,
post-acute care, administrative services, clinical resource allocation, quality
management, finance, physician support and nursing. Superior can provide
executive and staff education. interim management and operational assistance.
In order to offer its clients a depth of proficiency and experience
Superior organizes its services by its 22 National Practice Areas which work
together synergistically to serve its clients, many of whom have consulting
needs in multiple areas. The National Practice Areas operate in conjunction with
Superior's client relationship executives who coordinate how Superior's
specialty areas can work together to achieve optimum productivity and cost
effectiveness. Superior has developed methodologies for delivering these skills
in a consistent, coordinated manner, either as a full project team, a joint
client-consultant or joint vendor-consultant project team, selected expertise or
as part of a seminar or workshop.
Set forth below is a list of the healthcare consulting services and skills
offered by Company:
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CATEGORY DESCRIPTION OF SERVICES
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INFORMATION TECHNOLOGY CONSULTING - Strategic information system planning, budgeting,
development and implementation
- Systems and departmental audits and assessments
- Interim management and facilities management
- Executive Planning Systems (EPS)
- Executive and technical education and end user training
- Legacy system maximization
- Unbiased product selection and vendor negotiation
- Applications testing and quality assurance
- System implementation and integration, including products of
SMS, Cerner, HBOC, MEDITECH and others
- Network and client-server planning and design
- Imaging system feasibility studies, design and
implementation
STRATEGIC AND OPERATIONS
MANAGEMENT CONSULTING - Case management program development and implementation
- Strategic and tactical planning
- Collaboration strategies, mergers, acquisitions and
affiliations
- Executive and departmental interim management
- Operational and executive assessment
- Re-engineering and business process improvement and redesign
- Project management
- State and local comparative data analysis/benchmarking
- Decision Support and Executive Information Systems (DSS/EIS)
- Computerized patient record (CPR) planning and
implementation
- Productivity and quality improvement
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CATEGORY DESCRIPTION OF SERVICES
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- Payor and customer surveys and profiles
- Market and competitive landscape research and analysis
- Facility Planning and programming
- Post-acute care services
- Clinical resource allocation
- Clinical program planning
- Market and financial feasibility assessment
- Cardiology services
- Disease management
OUTSOURCING - IT planning, budgeting and management
- Operations and management staffing and resources
- Project management
- Applications implementation
- Data center operations
INTEGRATED DELIVERY NETWORK (IDN)
CONSULTING - IDN planning and development
- Managed care seminars, executive education and retreats
- Managed care organization development and management of
physician partnerships, PHOs and MSOs
- Transaction and valuation services
- Network formation planning
- Market analysis and business planning
- Managed care contracting strategies
- Insurance company partner selection
- Community health information network planning and
development
- Capitation and risk contracting
- Case management/utilization management
- Managed care systems assessment, evaluation and
implementation
- Medicare and Medicaid risk contracting
- Purchasing and Materials Management
- System Implementation
HEALTH INFORMATION MANAGEMENT
CONSULTING - Medical Records Department review/ utilization review
- Health information network planning and development
- Clinical data repositories/longitudinal patient records
- Interim management
- Coding and grouping
FINANCIAL CONSULTING - Revenue enhancement
- Business Office review
- Revenue cycle management/cash acceleration
- Interim management
- System implementation support
- Accounts management, including admissions, billing and
collections
- Reimbursement analysis/ charge capture analysis
- Diagnostic review
- Capital and financial planning
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CATEGORY DESCRIPTION OF SERVICES
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CLINICAL CONSULTING - Patient care and nursing care system design
- Clinical systems implementation
- Patient-focused care planning
- Clinical workflow analysis and reengineering
- Information systems selection and implementation
- Interim management
- Clinical benchmarking
- Quality measurement and outcomes management
- Clinical protocol and pathway development
- Departmental operations analysis
- Redefining nursing and ancillary services
- Post-acute care services
- Laboratory operation/information management consulting
services
- JCAHO compliance
AMBULATORY PRACTICE MANAGEMENT
CONSULTING - Ambulatory care strategic planning
- Operations assessment and re-engineering
- Systems selection and implementation
- Practice revenue analysis
- Facilities management
- Integration strategies
- Communications linkage
PHYSICIAN SERVICES - Primary care network development
- Medical staff strategic planning
- Multi-specialty group practice formation
- PHO restructuring
- MSO development and improvement
- IPA development/restructure
- Physician practice merger and acquisition
- Financial modeling, budgeting and financial performance
improvement
- Practice valuations and appraisals
- Management team education and development
- Physician group practice formation, restructuring and
improvement
- Physician group practice formation, restructuring and
improvement
- Physician group practice formation, restructuring and
improvement
- Managed care and market research
- Proprietary health plan development
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ENTERPRISE CONSULTING GROUP
Enterprise, founded in 1993, is a professional consulting organization
providing solutions to medium and large companies across a wide array of
industries. Enterprise complements and augments Superior through its emphasis on
information and collaborative technologies. Enterprise leverages strategic
technology partnerships with vendors such as IBM, Microsoft, Netscape, and Lotus
to provide effective services in the following broadly defined categories:
Network and Telecommunications Consulting. Enterprise develops strategic
plans utilizing its consultants' technical expertise in the areas of network
architecture planning, PBX systems, call centers, computer to telephony
integration, voicemail systems, integrated voice response, wide area network
design, local area networks, high speed networking and alternative local area
exchange carriers.
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Enterprise Messaging, Intranet and Web Strategies. Enterprise focuses on
internal web and intranet strategies combining software integration tools along
with web standards from Microsoft, Lotus, and Netscape to meet the needs of its
clients. Enterprise's planning, design, acquisition and integration services
include assessment and planning for large corporate e-mail rollouts, including
migration strategies, international e-mail backbone and infrastructure design.
Workgroup and Groupware Design and Development. Enterprise's workgroup and
groupware services are based on the strategic and effective integration of
workflow design and process engineering and groupware application development in
the workplace. Working in concert with its technology partners, including
Microsoft, Lotus, Netscape and IBM, Enterprise can achieve complete turn-key
solutions allowing its clients to effectively collaborate with its suppliers,
vendors and partners utilizing groupware and web-based technologies.
Enterprise's work with Lotus Notes/Domino groupware solutions places it in the
top tier of Lotus-designated Business Partners leveraging product sales and
number of certified professionals, qualifying Enterprise for designation as a
Premium Lotus Business Partner in 1995, 1996 and 1997. Enterprise is also an IBM
BESTeam Member, Microsoft Solutions Provider and Netscape Affiliate Plus
Partner.
Software and Application Development. Enterprise application design
consultants are skilled in a variety of applications and applications toolsets,
including Lotus Notes, Sybase, C++, Power Builder and Visual Basic. The focus is
on the development of both collaborative applications to support the groupware
services and on user interface tools developing and creating knowledge-based
executive information systems and high-end user application interfaces.
Corporate Facilities Technology Design and Relocation. Enterprise provides
technology design services for organizations designing and building new
headquarters and facilities for clients, including infrastructure design,
cabling systems, right of way, site planning, multimedia for audiovisual, video
teleconferencing, voice and data communication systems.
Enterprise's turnkey approach to serving its clients has enabled it to grow
its business both by adding new clients and by attracting repeat business from
its current base of clients. Since its inception in 1993, Enterprise has served
over 275 clients primarily in the manufacturing, finance, healthcare, and
service industries. In 1997 Enterprise accounted for 8.3% of the Company's
revenues.
DEVELOPMENTS IN 1997
In pursuit of its growth strategies, in 1997 the Company entered into three
multi-year IT outsourcing agreements and acquired three companies which had
combined aggregate revenue of approximately $20.1 million in calendar year 1996.
Outsourcings
- In January 1997, Superior entered into a five-year outsourcing agreement
with a client, Zieger Healthcare Corporation ("Zieger"). Under the
agreement with Zieger, Superior assumed responsibility for the
information systems function, including planning, project management,
"just-in-time" opportunities and data center operations, for Botsford
General Hospital in Farmington Hills, Michigan ("Botsford"). Superior
hired most of Botsford's existing IT staff who now serve Botsford or
other clients of the Company.
- In March 1997, Superior entered into a five-year outsourcing agreement
with The Detroit Medical Center ("Detroit Medical"), an existing client.
The agreement with Detroit Medical encompasses a wide array of
applications management services, including patient, financial, clinical
and operational projects. A portion of Detroit Medical's IT staff joined
Superior and continue to serve Detroit Medical or other Company clients.
- In September 1997, Superior entered into a comprehensive three-year IT
outsourcing agreement with the Georgetown University Medical Center
("Georgetown"), an existing client which serves the entire Georgetown
academic research clinical enterprise, including the faculty practice
group. Under the Georgetown agreement, Superior will assume
responsibility for Georgetown's IT function, including
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planning, applications, implementation, project management, data center
operations and implementation of a multi-year strategic plan. A majority
of Georgetown's IT staff has joined Superior and will provide service to
Georgetown and other clients of the Company.
Acquisitions
- On March 12, 1997, the Company acquired The Kaufman Group, Inc. ("The
Kaufman Group"), a California-based healthcare consulting business, for
approximately $3.4 million in cash and $1.6 million in Common Stock
(74,590 shares), and a maximum additional payment of $1.5 million payable
over a three year period. The Kaufman Group is a managed care consulting
leader, advising provider organizations on a wide range of matters
including mergers, acquisitions and alliances. The Kaufman Group is
operating as a practice area within Superior's Management Consulting
Division, and its market research, strategy, transaction and valuation
services complement the Company's existing services, broaden its service
offerings and open new opportunities for cross-selling its other
services. The acquisition was accounted for as a purchase.
- On July 29, 1997, Enterprise acquired COMSUL, Ltd. ("COMSUL") for
approximately $7.7 million in Common Stock (240,630 shares). COMSUL
specializes in information systems, telecommunications, and corporate
facilities and organizational design for a wide range of clients and has
offices in New York, California and Texas. COMSUL has become the Network
and Telecommunications Division of Enterprise, enhancing the geographic
reach and scope of its business. The acquisition was accounted for as a
pooling of interests.
- On August 14, 1997, the Company acquired Chi Systems, Inc. ("Chi"), for
approximately $11.2 million in Common Stock (331,509 shares). Chi, based
in Ann Arbor, Michigan, became a practice area within Superior's
Management Consulting Division and has offices in Philadelphia, Chicago
and Denver. Chi's service offerings encompass strategic and business
planning, facility planning and reconfiguration, ambulatory care
planning, operations and quality improvement, clinical program planning,
case management, patient-centered care, post-acute care and quality
outcomes management. The acquisition was accounted for as a pooling of
interests.
EMPLOYEES
The Company believes that one of its key strengths lies in its ability to
attract, develop, motivate and retain a talented, creative and highly skilled
work force of senior-level professionals who are specialists in one or more
areas of healthcare and/or information technology. The Company's consultants are
highly experienced, many of whom have established their credentials as
healthcare executives and senior management of healthcare entities, business
office managers, medical records administrators, nurse administrators, nurses,
laboratory technicians, physician assistants, medical technologists, physicians,
hospital admissions directors, and information management and information
systems technical personnel. As of December 31, 1997, the Company employed over
745 employees, over 545 of whom were consultants.
The Company believes it has a unique corporate culture built upon open
communication across geographic regions and practice areas (fostered by the
Company's electronic hallway) and a motivational and interactive work
environment that features extensive professional development opportunities and
productivity incentives. Through the establishment of its Superior Institute,
the Company's education and training encompasses multiple approaches to
professional development. As part of this effort, the Company provides training
curricula in new trends in healthcare, information technology, business
management and worklife topics. Each consultant is free to choose from a variety
of managerial, technical and personal courses which are designed to provide
sound fundamental principles for each subject. Many of the courses have advanced
editions. These education offerings are delivered through multiple settings
including self-study, group classroom, individual mentorship and case study.
An integral part of the on-going education process at the Company takes
place through its proprietary information and communications system. This allows
the Company's consultants to continue to upgrade their skills while remaining
deployed in the field. In addition, the Company has developed an employee
orientation
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program that features a sophisticated presentation to provide new employees with
a comprehensive understanding of the Company's structure and approach to
consulting. The Company also maintains a formal and active network of former
employees; these alumni provide expertise on projects, introduce the Company to
new client leads, and in several cases have returned to the Company from
experiences elsewhere in the healthcare industry.
SALES AND MARKETING
The Company's business development efforts are based upon a highly
organized, company-wide, consistent approach. All personnel are trained and
reinforced in the Company's marketing methods and philosophy, and are encouraged
to identify, develop and pursue client service opportunities. The Company's
marketing efforts are directed by senior management, practice area leaders. The
strategic service group leaders, who focus on client development strategies,
geographic market penetration and cross-selling clients. Business development is
an integral part of the formal responsibilities at all levels of the Company's
management, including its National Practice Area leaders, and the Company sets
business development goals on both a departmental and individual basis.
The Company's business development efforts focus primarily on identifying
key decision makers in the healthcare industry, determining the value to be
provided to each potential client and then managing the sales process to
completion through a sophisticated client resource database, developed and
maintained by Enterprise. Each potential client lead is entered into the
database, and that profile is updated for subsequent developments and
information throughout the entire life of the Company's relationship with the
potential client, as well as after a client retains the Company for services. At
any given time, numerous Company professionals are active in the development of
business from either a new or existing client, and the client resource database
enables all Company personnel to access up-to-date information on the Company's
efforts with respect to a client or client prospect, identifies other Company
contacts with that client, and highlights the particular needs expressed by the
client to date.
In addition, the Company relies upon its reputation in the marketplace, the
personal contacts and networking of the Company's professionals, direct industry
marketing programs, trade shows, and the industry presence maintained by Company
professionals to enhance its business development efforts. The Company's
marketing efforts are enhanced by its presence within the healthcare industry by
virtue of its employees' speaking engagements and publications on topics
affecting healthcare. The Company's views on a wide range of healthcare and IT
topics are frequently solicited and quoted for articles in major industry
journals and books. The Company's healthcare consultants have been published
extensively on current and emerging topics in healthcare information and
management and have participated in external speaking engagements and
presentations to industry associations and client audiences across the nation.
The Company operates its healthcare consulting business through a
combination of its national presence, regional relationships and its 22 National
Practice Areas. Each National Practice Area offers a selected variety of the
Company's healthcare consulting services and often two or more of these areas
work synergistically to provide solutions to clients. Each area is managed by a
National Practice Area leader who has profit and loss responsibility for the
specific area and is responsible for its growth. As the Company adds to its
services through internal growth and acquisition, it will evaluate adding new
practice areas or augmenting the services of its existing National Practice
Areas. The Company actively markets the subject-matter expertise of its National
Practice Areas through the focus of its Strategic Services Groups. Each
Strategic Services Group is responsible for developing and enhancing knowledge
of local regulation and market factors, as well as developing and nurturing
knowledge of and relationships with specific client organizations. The Company
then combines the expertise of its National Practice Areas to form solutions
that are responsive to local conditions and of value to specific clients.
The Company provides a compensation system designed to foster an active
focus at all levels within the organization on growth and business development
from a company-wide perspective. Group leaders and other middle management earn
incentive compensation on a quarterly and annual basis based on group and
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company-wide performance goals. Senior management earns incentive-based
compensation based on company-wide performance goals.
COMPETITION
The market for the Company's services is highly fragmented, highly
competitive and is subject to rapid change. The Company believes that it
currently competes principally with systems integration firms, national
consulting firms, including the consulting divisions of the national accounting
firms, information system vendors, service groups of computer equipment
companies, facilities management companies, general management consulting firms
and regional and specialty consulting firms. Many of the Company's competitors
have significantly greater financial, technical and marketing resources than the
Company, generate greater revenues and have greater name recognition than the
Company. Moreover, those competitors that sell or license their own software may
in the future attempt to limit or eliminate the use of third party consultants,
such as the Company, to implement and/or customize such software. In addition,
vendors whose systems may enjoy wide market acceptance and large market share
could enter into exclusive or restrictive agreements with other consulting firms
which could eliminate or substantially reduce the Company's implementation work
for those systems. There are relatively low barriers to entry into the Company's
markets, and the Company has faced and expects to continue to face additional
competition from new entrants into its markets. In addition, combinations and
consolidations in the consulting industry will give rise to larger competitors,
whose relative strengths are impossible to predict. The Company also competes
with its clients' internal resources, particularly where these resources
represent a fixed cost to the client. This internal client competition may
heighten as consolidation of healthcare providers creates organizations large
enough to support internal information management capabilities.
The Company believes that the principal competitive factors in its market
include reputation, highly experienced workforce, industry expertise, full array
of offerings, project management expertise, vendor neutrality, price, quality of
service, responsiveness and speed of implementation and delivery. There can be
no assurance that the Company will be able to compete effectively on pricing or
other requirements with current and future competitors or that competitive
pressures faced by the Company will not cause the Company's revenue or operating
margins to decline or otherwise materially adversely affect its business,
financial condition and results of operations.
INTELLECTUAL PROPERTY AND OTHER PROPRIETARY RIGHTS
The Company's success is in part dependent upon its proprietary internal
information and communications systems, databases, tools and the methods and
procedures that it has developed specifically to serve its clients. In addition,
Enterprise has and will continue to develop proprietary groupware tools and
applications. The Company has no patents; consequently, it relies on a
combination of non-disclosure and other contractual arrangements and copyright,
trademark and trade secret laws to protect its proprietary systems, information,
and procedures. There can be no assurance that the steps taken by the Company to
protect its proprietary rights will be adequate to prevent misappropriation of
such rights or that the Company will be able to detect unauthorized use and take
appropriate steps to enforce its proprietary rights. The Company believes that
its systems and procedures and other proprietary rights do not infringe upon the
proprietary rights of third parties. There can be no assurance, however, that
third parties will not assert infringement claims against the Company in the
future or that any such claims will not require the Company to enter into
materially adverse license arrangements or result in protracted and costly
litigation, regardless of the merits of such claims.
11
<PAGE> 12
EXECUTIVE OFFICERS OF THE REGISTRANT
The Company's executive officers are as follows:
Richard D. Helppie, Jr., age 41, has served as Superior's President and
Chief Executive Officer since he founded Superior in May 1984. Mr. Helppie also
founded Enterprise Consulting Group, Inc. and currently serves as Enterprise's
Chairman and Chief Executive Officer. Mr. Helppie also serves as Chairman and
Chief Executive Officer, and is a Director, of the Company. Mr. Helppie has more
than 22 years of experience in the healthcare and information systems
industries.
Charles O. Bracken, age 48, joined Superior in March 1987 as Executive Vice
President. Mr. Bracken has more than 28 years of experience in the healthcare
and information systems industries. Prior to joining Superior, Mr. Bracken spent
three years as vice president of marketing of a healthcare software firm,
preceded by 10 years of related experience in healthcare information systems
management including positions as Chief Information Officer for single and
multi-hospital corporations.
Robert R. Tashiro, age 42, joined Superior in 1985 as a Systems Consultant.
He was appointed Vice President in 1990, Senior Vice President in 1992 and Chief
Operating Officer in June 1996. Mr. Tashiro has more than 19 years of experience
in the information systems industry and more than 14 years of experience in the
healthcare industry. Prior to joining the Company, Mr. Tashiro served as an
Information Systems Department project manager at Kettering Medical Center.
Prior to that, Mr. Tashiro worked for EDS.
James T. House, age 36, joined Superior in 1988 as its Controller. Since
that time, he has held various positions with the Company and is currently the
Vice President and Chief Financial Officer of Superior the Company.
ITEM 2. PROPERTIES
The Company's headquarters is located in approximately 35,000 square feet
of leased office space in Southfield, Michigan. Superior also leases an
aggregate of approximately 61,500 square feet of additional office space in
Clearwater, Florida; Atlanta, Georgia; Plano, Texas; San Diego, California;
Walnut Creek, California; Ann Arbor, Michigan; Chicago, Illinois; Denver,
Colorado; Philadelphia, Pennsylvania; Houston, Texas; Menlo Park, California;
New York, New York; Pasadena, California; San Francisco, California; Phoenix,
Arizona; and Nashville, Tennessee. The Company believes that its facilities are
adequate for its current needs and that additional facilities can be leased to
meet future needs.
ITEM 3. LEGAL PROCEEDINGS
The Company is not now a party to, and is not aware of, any pending or
threatened litigation that would have a material adverse effect on the Company
and its business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
In October, 1997 the stockholders of the Company approved an amendment to
the Company's Long Term Incentive Plan to increase the maximum number of
additional shares of Common Stock issuable under the plan from 900,000 shares to
2,400,000 shares. Such action was approved by the holders of greater than a
majority of the Company's then outstanding Common Stock, pursuant to written
consent in lieu of a meeting in accordance with Section 228 of the Delaware
General Corporation Law.
12
<PAGE> 13
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
STOCK INFORMATION
PRICE RANGE OF COMMON STOCK
The Company's common stock is traded on the Nasdaq National Market under
the symbol SUPC. The following table shows high and low closing prices as
reported by Nasdaq for the fourth quarter of 1996, commencing October 10, 1996
(the date of the Company's initial public offering) and fiscal year 1997.
<TABLE>
<CAPTION>
FISCAL 1996 HIGH LOW
----------- ---- ---
<S> <C> <C>
Fourth Quarter.............................................. $257/8 $201/2
FISCAL 1997
- ------------------------------------------------------------
First Quarter............................................... 243/4 161/8
Second Quarter.............................................. 367/8 151/4
Third Quarter............................................... 367/8 273/4
Fourth Quarter.............................................. 361/4 283/4
</TABLE>
At March 25, 1998, there were approximately 84 stockholders of record.
The Company has not paid cash dividends to the holders of its Common Stock.
It is the Company's present intention to retain earnings for use in the growth
of the Company's business. Accordingly, the Company does not anticipate that
cash dividends will be paid in the foreseeable future.
13
<PAGE> 14
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following historical financial data as of and for the years ended
December 31, 1993, 1994, 1995, 1996 and 1997 have been derived from the audited
consolidated financial statements of the Company as reported by Grant Thornton
LLP, independent certified public accountants. This information is qualified in
its entirety by reference to the Company's consolidated financial statements and
related notes included elsewhere in this report. All financial information has
been restated to reflect the July 1997 and August 1997 mergers of the Company
with COMSUL, Ltd. and Chi Systems, Inc., respectively.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------------------------------
PRO FORMA
1993 1994 1995 1996 1996(1) 1997(2)
---- ---- ---- ---- --------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA
(RESTATED):
Revenues............................. $28,423 $33,364 $42,494 $51,835 $51,835 $76,895
Cost of services..................... 14,565 14,966 19,730 25,524 25,524 39,260
Selling, general and administrative
expenses........................... 11,208 15,497 18,422 21,891 21,891 30,378
Executive compensation expense(3).... 1,931 2,445 3,730 4,579 1,060 858
------- ------- ------- ------- ------- -------
Earnings (loss) from operations...... 719 456 612 (159) 3,360 6,399
Interest and other (expense)
income............................. 162 (94) (113) 84 84 2,728
Costs incurred in connection with
mergers............................ -- -- -- -- -- (917)
------- ------- ------- ------- ------- -------
Earnings (loss) before income taxes
and extraordinary item............. 881 362 499 (75) 3,444 8,210
Income taxes......................... (28) 7 185 689 1,364 3,625
------- ------- ------- ------- ------- -------
Net earnings (loss) before
extraordinary item................. 909 355 314 (764) 2,080 4,585
Extraordinary gain on early
extinguishment of debt, net of
income taxes....................... -- -- -- 231 231 --
------- ------- ------- ------- ------- -------
Net earnings (loss).................. $ 909 $ 355 $ 314 $ (533) $ 2,311 $ 4,585
======= ======= ======= ======= ======= =======
Net earnings (loss) per
share -- basic..................... $0.20 $0.08 $0.06 $(0.09) $0.38 $0.54
Net earnings (loss) per
share -- diluted................... $0.20 $0.08 $0.06 $(0.09) $0.38 $0.53
Shares used in calculating net
earnings (loss) per
share -- basic..................... 4,554 4,597 5,138 6,014 6,014 8,519
Shares used in calculating net
earnings (loss) per
share -- diluted................... 4,554 4,597 5,162 6,014 6,080 8,670
</TABLE>
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------------------
1993 1994 1995 1996 1997
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA (RESTATED):
Working capital......................... $ 96 $ 435 $ 1,273 $39,962 $97,632
Total assets............................ 7,745 8,910 12,606 55,324 119,401
Total debt.............................. 2,437 2,164 2,110 2,448 189
Total stockholders' equity.............. (977) 648 1,240 41,370 108,363
</TABLE>
- -------------------------
(1) The pro forma statement of operations information for 1996 has been computed
for the pro forma period to adjust the Company's net earnings to (i)
eliminate executive compensation expense for such period in excess of the
amount of executive compensation (including the full amount of potential
bonus) that would have been paid had the executive compensation agreements,
which became effective upon the closing of the Company's initial public
offering in October 1996 ("IPO"), been effective throughout such period; and
(ii) record income taxes, assuming an effective tax rate of 39.6% for the
year ended December 31, 1996, which would have been recorded had Superior
been a C Corporation during such period.
14
<PAGE> 15
(2) Statement of operations information for fiscal 1997 includes results of The
Kaufman Group, Inc. which was acquired by the Company on March 12, 1997.
(3) Executive compensation expense includes salary and bonuses for Richard D.
Helppie, Jr., Charles O. Bracken and Robert R. Tashiro. The Company has
entered into agreements with these three officers, which were effective upon
the closing of the IPO, through December 31, 1997, which provide them with
annual compensation in the aggregate amount of $1,060,000 comprised of base
salary and bonus compensation based on achievement of certain pre-determined
performance criteria. These limitations did not apply to amounts paid to
these three officers on or prior to the closing of the IPO.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
The Company conducts business through its two primary 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 in developing,
designing, implementing and maintaining groupware and intranet and web based
information systems and solutions, as well as enterprise messaging and custom
applications and legacy systems integration.
The Company derives substantially all of its revenues from fees for
professional services, the substantial 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. The
Company recognizes revenue on fixed fee projects using the percentage of
completion basis. As of December 31, 1997, 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. As
of December 31, 1997, the Company has been awarded three significant contracts
to provide healthcare IT outsourcing 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.
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 impacted
by 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
15
<PAGE> 16
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. Selling, general and
administrative expenses as a percentage of total revenues continues to decrease
as the Company leverages its infrastructure expense across its growing revenue
base.
Historically, executive compensation expense consisted of salaries, formula
bonuses and discretionary bonuses paid to the majority 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 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 $1,060,000 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 Company's IPO.
The pro forma statement of operations data reflects an adjustment for
executive officer compensation for the year ended December 31, 1996 to eliminate
the amount by which key executive compensation paid in such period was 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 period. 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
applicable period.
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 IPO, the Company,
Superior and Enterprise were subject to corporate federal income taxation on a
consolidated basis as Subchapter C corporations.
The Company completed business combinations with COMSUL, Ltd. and Chi
Systems, Inc. in July 1997 and August 1997, respectively. These acquisitions
were accounted for using the pooling of interest method and the financial
information of the Company in this Report has been restated to reflect this
results of these combinations.
Many of the Company's engagements involve projects which are critical to
the operations of its clients' business and which provide benefits that may be
difficult to quantify. The Company is currently engaged in assisting clients in
auditing Year 2000 compliance and taking steps to render information systems
Year 2000 compliant. The year 2000 problem is the result of prior computer
programs being written using two digits, rather than four digits, to define the
applicable year. Any of the client's programs that have time-sensitive software
may recognize a date using "00" as the year 1900 rather than the year 2000. This
could result in major system failure or miscalculations. Additionally, the
Company has assisted and continues to assist its clients in selecting and
implementing software applications for the clients' use in their business. While
the Company is not aware of any existing or potential claims, the occurrence of
Year 2000 related systems failures in the information systems of clients of the
Company could involve the Company in disputes and negatively impact client
relationships, which in turn could have a material adverse effect on the
Company's business, financial condition and results of operations, whether or
not the Company bears any responsibility, legal or otherwise, for the occurrence
of those problems.
16
<PAGE> 17
The pro forma statement of operations data reflects an adjustment to
federal income taxes for the year ended December 31, 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.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, selected
statement of operations data and selected pro forma data expressed as a
percentage of revenues. The trends illustrated in the following table may not
necessarily be indicative of future results.
<TABLE>
<CAPTION>
PERCENTAGE OF REVENUES
--------------------------------
YEAR ENDED DECEMBER 31,
--------------------------------
PRO
FORMA
1995 1996 1996 1997
---- ---- ----- ----
<S> <C> <C> <C> <C>
Revenues................................................... 100.0% 100.0% 100.0% 100.0%
Cost of services........................................... 46.4 49.2 49.2 51.1
Selling, general and administrative expenses............... 43.4 42.2 42.2 39.5
Executive compensation expense............................. 8.8 8.8 2.0 1.1
----- ----- ----- -----
Earnings (loss) from operations............................ 1.4 (0.2) 6.6 8.3
Interest and other (expense) income........................ (0.3) 0.2 0.2 3.5
Cost incurred in connection with mergers................... -- -- -- (1.2)
----- ----- ----- -----
Earnings before income taxes and extraordinary item........ 1.1 -- 6.8 10.6
----- ----- ----- -----
Income taxes............................................... 0.4 1.3 2.6 4.7
----- ----- ----- -----
Net earnings (loss) before extraordinary item.............. 0.7 (1.3) 4.2 5.9
Extraordinary gain on early extinguishment of debt net of
income taxes............................................. -- 0.4 0.4 --
----- ----- ----- -----
Net earnings (loss)........................................ 0.7% (0.9)% 4.6% 5.9%
===== ===== ===== =====
</TABLE>
1997 COMPARED TO 1996
Revenues. Revenues increased by $25.1 million, or 48.3%, to $76.9 for the
year ended December 31, 1997, as compared to $51.8 million for the year ended
December 31, 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 $13.7 million, or 53.8%, to
$39.3 million for the year ended December 31, 1997, as compared to $25.6 million
for the year ended December 31, 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
51.1% for the year ended December 31, 1997, as compared to 49.2% for the year
ended December 31, 1996. This increase is attributable to the increase in the
Company's consultant base which grew by approximately 124% during 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.
17
<PAGE> 18
Selling, general and administrative expenses. Selling, general and
administrative expenses increased by $8.5 million, or 38.8% to $30.4 million for
the year ended December 31, 1997, as compared to $21.9 million for the year
ended December 31, 1996. The increase was due to incentive and other
compensation expenses associated with the addition of key personnel during 1997
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 39.5% from
42.2% for the year ended December 31, 1997. This decrease was 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
$3.7 million to $858,000 for the year ended December 31, 1997, as compared to
$4.6 million for the year ended December 31, 1996. As discussed previously,
prior to the IPO, the Company's historical levels of executive compensation
expense 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 $2.7 million for the year ended
December 31, 1997, primarily due to the interest earned on the investment of the
majority of the net proceeds of approximately $100.0 million from the public
offerings held by the Company in October, 1996 and November, 1997, respectively.
Costs incurred in connection with mergers. The Company incurred
approximately $917,000 of costs in connection with the business acquisitions of
COMSUL and Chi during 1997. These costs consisted primarily of payments for
legal, accounting, and investment banking fees related to the business
acquisitions.
1996 COMPARED TO 1995
Revenues. Revenues increased by $9.3 million, or 22.0%, to $51.8 million
for the year ended December 31, 1996, as compared to $42.5 million for the year
ended December 31, 1995. The revenue growth was attributable primarily to an
increased number of new client assignments.
Cost of services. Cost of services increased by $5.8 million, or 29.4%, to
$25.5 million for the year ended December 31, 1996, as compared to $19.7 million
for the year ended December 31, 1995. The increase was primarily due to the
additional number of consultants required to staff the larger revenue base, as
well as increases in their compensation levels. Cost of services as a percentage
of revenues increased to 49.2% for the year ended December 31, 1996, as compared
to 46.4% for the year ended December 31, 1995. This increase was due to an
increase in compensation levels, with average billing rates remaining relatively
constant. In addition, in 1996 the Company initiated two new national practice
areas, which required both more highly-compensated individuals and produced
lower consultant utilization during start-up.
Selling, general, and administrative expenses. Selling, general and
administrative expenses increased by $3.5 million, or 18.8%, to $21.9 million
for the year ended December 31, 1996, as compared to $18.4 million for the year
ended December 31, 1995. This increase was due primarily to the increase in
incentive and other compensation, as well as higher recruiting and training
expenses consistent with the Company's growth and enhanced marketing efforts to
achieve higher revenue levels. Selling, general and administrative expenses as a
percentage of revenues decreased to 42.2% for the year ended December 31, 1996,
as compared to 43.4% for the year ended December 31, 1995. This decrease was due
to increased operating efficiencies resulting from higher revenue levels.
Executive compensation expense. Executive compensation expense increased by
$849,000 to $4.6 million for the year ended December 31, 1996, as compared to
$3.7 million for the year ended December 31, 1995. 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.
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<PAGE> 19
QUARTERLY RESULTS
The following table sets forth certain unaudited quarterly operating
information for each of the last eight quarters. Results for any previous
quarter are not necessarily indicative of results for any future quarter.
<TABLE>
<CAPTION>
QUARTERS ENDED
---------------------------------------------------------------------------------------
MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31,
1996(1) 1996(1) 1996(1) 1996(1) 1997(1) 1997(1) 1997 1997
-------- -------- --------- -------- -------- -------- --------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues......................... $11,941 $11,995 $13,170 $14,729 $16,544 $18,267 $19,491 $22,593
Cost of services................. 5,710 5,674 6,468 7,672 8,462 9,315 9,850 11,633
Selling, general and
administrative expenses........ 4,828 5,640 5,207 6,216 6,544 7,479 7,517 8,838
Executive compensation expense... 1,436 1,164 1,673 306 223 221 208 206
------- ------- ------- ------- ------- ------- ------- -------
Earnings (loss) from
operations..................... (33) (483) (178) 535 1,315 1,252 1,916 1,916
Interest and other (expense)
income......................... (181) 9 (26) 282 508 409 498 1,313
Cost incurred in connection with
mergers........................ -- -- -- -- -- -- (692) (225)
------- ------- ------- ------- ------- ------- ------- -------
Earnings (loss) before income
taxes and extraordinary item... (214) (474) (204) 817 1,823 1,661 1,722 3,004
Income taxes..................... (32) (124) 69 776 702 666 933 1,324
------- ------- ------- ------- ------- ------- ------- -------
Earnings (loss) before
extraordinary item............. (182) (350) (273) 41 1,121 995 789 1,680
======= ======= ======= ======= ======= ======= ======= =======
Extraordinary gain on early
retirement of debt, net of
income taxes................... -- 231 -- -- -- -- -- --
------- ------- ------- ------- ------- ------- ------- -------
Net earnings (loss).............. $ (182) $ (119) $ (273) $ 41 $ 1,121 $ 995 $ 789 $ 1,680
======= ======= ======= ======= ======= ======= ======= =======
Net earnings (loss) per share --
basic.......................... (.03) (.02) (.05) .01 .14 .12 .10 .18
Net earnings (loss) per share --
diluted........................ (.03) (.02) (.05) .01 .14 .12 .09 .17
Shares used in calculating net
earnings per share basic....... 5,344 5,358 5,359 7,973 8,170 8,231 8,218 9,446
Shares used in calculating net
earnings per share diluted..... 5,344 5,358 5,359 8,060 8,241 8,375 8,419 9,635
Pro forma earnings before income
taxes and extraordinary
item(2)........................ $ 957 $ 425 $ 1,204 $ 858
Pro forma net earnings(2)........ 577 488 728 518
Pro forma net earnings per
share(2) -- basic.............. .11 .09 .14 .06
Pro-forma net earnings per
share -- diluted(2)............ .11 .09 .13 .06
Shares used in calculating pro
forma net earnings per
share -- basic................. 5,344 5,358 5,359 7,973
Shares used in calculating pro
forma net earnings per
share -- diluted............... 5,402 5,417 5,417 8,060
</TABLE>
- -------------------------
(1) Restated to reflect the July 1997 and August 1997 mergers of the Company
with COMSUL, Ltd. and Chi Systems, respectively.
(2) The pro forma statement of operations data reflects an adjustment for
executive officer compensation to eliminate the excess of key executive
compensation paid in such periods over the estimated compensation that would
have been paid under the executive compensation agreements, which became
effective upon the closing of the IPO, through December 31, 1997, as if
these agreements were in place throughout such periods. The pro forma
statement of operations data also reflects an adjustment to federal income
taxes for the year ended December 31, 1996 , after giving effect to
executive officer compensation expense adjustments.
Revenues and operating results fluctuate from quarter to quarter due to
several factors, such as the number and significance of client engagements
commenced and completed during a quarter, delays incurred in
19
<PAGE> 20
connection with a project, consultant hiring, and utilization. The timing of
revenues varies from quarter to quarter because the Company's sales cycle can be
relatively long and may depend on factors such as the size and scope of
assignments, the general ability of clients to terminate engagements without
penalty, and general economic conditions. In addition, the timing of the
establishment of new practice areas, geographic expansion and the hiring of key
individuals can also have an effect on consultant utilization. Seasonal factors
such as vacation days, total business days in a quarter or the business
practices of clients, such as deferred commitments on new projects until after
the end of the calendar or the client's fiscal year, can cause the Company to
experience lower consultant utilization. Because a significant percentage of the
Company's expenses are relatively fixed, a variation in the number or size of
client assignments or the timing of the initiation or the completion of client
assignments can cause significant variations in operating results from quarter
to quarter. In addition, the Company's annual employees' meeting, which is
scheduled for May 1998, can result in lower consultant utilization in the
quarter in which the meeting occurs.
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
$60.3 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 $60.3 million after underwriter's discount and 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 December 31, 1997, the Company had cash and cash equivalents of $87.3
million and working capital of $97.6 million. Working capital at December 31,
1997 represents an increase of $57.7 million from December 31, 1996 resulting
primarily from the proceeds of the follow-on offering in November, 1997,
partially offset by the purchases of property and equipment and the acquisition
of The Kaufman Group in March, 1997.
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
December 31, 1997, the Company had no amounts outstanding under this line of
credit.
Net cash provided by operating activities for the year ended December 31,
1997 was $681,000, compared with net cash used in operations of $1,636,000 for
the year ended December 31, 1996. The increase in cash provided by operations is
primarily due to higher earnings in the current period.
Net cash in investing activities of $8.0 million during the year ended
December 31, 1997 consists of additions to property and equipment and the
acquisition of The Kaufman Group.
Net cash provided by financing activities during the year ended December
31, 1997 was principally the result of the proceeds received from the issuance
of common stock in connection with the follow-on offering, partially offset by
the 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 year
ended December 31, 1996 was primarily due to the proceeds received from the
issuance of common stock in connection with the IPO.
Effective March 12, 1997, the Company purchased The Kaufman Group, a
healthcare consulting business based in California for approximately $3.4
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.
20
<PAGE> 21
Effective January 16, 1998, the Company purchased the Network Services
Division of Multimedia Medical Systems, Inc., a software and networking
technology solutions business based in Massachusetts, for approximately $5.2
million in cash.
The Company does not believe that inflation has had a material effect on
the results of its operations in the past three years.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements are annexed to this Report as pages F-2 through
F-17. An index to such materials appears on page F-l.
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item with respect to the directors of the
Company is incorporated by reference from the Company's definitive proxy
statement, expected to be filed with the Commission on or prior to April 10,
1998. Information regarding executive officers is set forth in Part I of this
report.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference from the
Company's definitive proxy statement, expected to be filed with the Commission
on or prior to April 10, 1998.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated by reference from the
Company's definitive proxy statement, expected to be filed with the Commission
on or prior to April 10, 1998.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated by reference from the
Company's definitive proxy statement, expected to be filed with the Commission
on or prior to April 10, 1998.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
The financial statements filed as part of this report are listed in the
accompanying Index to Financial Statements. The exhibits filed as part of this
report are listed in the accompanying Index to Exhibits. The Company will
furnish a copy of any exhibit listed to requesting stockholders upon payment of
the Company's reasonable expenses in furnishing those materials. No reports on
Form 8-K were filed by the Company during the last quarter of the period covered
by this report.
21
<PAGE> 22
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION PAGE
- ------- ----------- ----
<S> <C> <C>
2.1. Merger Agreement -- Superior................................ (2)
2.2. Merger Agreement -- Unitive................................. (2)
3.1. Form of Amended and Restated Certificate of Incorporation of (1)
the Company.................................................
3.2. Form of By-Laws of the Company.............................. (1)
4.1. Specimen Common Stock Certificate........................... (1)
10.1. Form of Indemnification Agreement between the Company and (1)
each of its directors and officers..........................
10.2. Form of Long-Term Incentive Compensation Plan............... (1)
10.3. Amendment to Long-Term Incentive Plan....................... (6)
10.4. Lease dated March 21, 1996 between PMTC Limited Partnership (1)
and Superior................................................
10.5. Form of Tax Indemnification Agreement....................... (2)
10.6. Employment Agreement dated December 8, 1995, between (2)
Superior Consultant Company, Inc. and Charles O. Bracken,
and related 1997 Executive Vice President Bonus Plan........
10.7. Employment Agreement dated December 8, 1995 between Superior (2)
Consultant Company, Inc. and Robert R. Tashiro, and related
1997 Vice President Bonus Plan..............................
10.8. Employment Agreement dated December 27, 1995, between (2)
Superior Consultant Company, Inc. and James T. House, and
related 1997 Vice President Bonus Plan......................
10.12. Promissory Note dated April 20, 1995, executed by Charles O. (2)
Bracken in favor of Superior Consultant Company, Inc........
10.13. Pledge Agreement dated April 20, 1995, between Charles O. (2)
Bracken and Superior Consultant Company, Inc................
10.14. Promissory Note dated April 20, 1995, executed by Robert R. (2)
Tashiro in favor of Superior Consultant Company, Inc........
10.15. Pledge Agreement dated April 20, 1995 between Superior (2)
Consultant Company, Inc. and Robert R. Tashiro..............
10.16 Stock Purchase Agreement, dated March 12, 1997 among (3)
Superior Consultant Holdings Corporation, Superior
Consultant Company, Inc., The Kaufman Group, Inc., Nathan S.
Kaufman and Thomas S. Kumura................................
10.17 Plan and Agreement of Merger dated July 28, 1997, among (4)
Superior Consultant Holdings Corporation, CMSL Acquisition
Corp., COMSUL, LTD., and certain shareholders of COMSUL,
LTD.........................................................
10.18 Merger Agreement dated as of August 14, 1997 among Superior (5)
Consultant Holdings Corporation, Chi Acquisition Co., The
Chi Group, Inc. and certain stockholders of the Chi Group,
Inc.........................................................
21.1. Subsidiaries of Superior Consultant Holdings Corporation.... (7)
27.1 Financial Data Schedules.................................... *
</TABLE>
- -------------------------
* Filed herewith.
(1) Incorporated by reference from the Registrant's Form S-1 Registration
Statement No. 333-10213 as filed on August 15, 1996.
(2) Incorporated by reference from the Registrant's Amendment No. 1 to Form S-1
Registration Statement No. 333-10213 as filed on September 20, 1996.
(3) Incorporated by reference from the Registrant's Form 8-K as filed on March
26, 1997.
(4) Incorporated by reference from the Registrant's Form 10-Q as filed on August
7, 1997.
(5) Incorporated by reference from the Registrant's Form 8-K as filed on August
28, 1997.
(6) Incorporated by reference from the Registrant's Information Statement on
Form 14C as filed on November 7, 1997.
(7) Incorporated by reference from the Registrant's Form S-1 Registration
Statement No. 333-37357 as filed on October 7, 1997.
22
<PAGE> 23
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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
March 31, 1998 By: /s/ RICHARD D. HELPPIE, JR.
------------------------------------
Richard D. Helppie, Jr.
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURES TITLE DATE
---------- ----- ----
<C> <S> <C>
/s/ REGINALD M. BALLANTYNE III Director March 31, 1998
- ------------------------------------------------
Reginald M. Ballantyne III
/s/ KENNETH S. GEORGE Director March 31, 1998
- ------------------------------------------------
Kenneth S. George
/s/ RICHARD D. HELPPIE, JR. President, Chief Executive Officer March 31, 1998
- ------------------------------------------------ (Principal Financial Officer) and
Richard D. Helppie, Jr. Director
/s/ JAMES T. HOUSE Chief Financial Officer March 31, 1998
- ------------------------------------------------ (Principal Financial and Accounting
James T. House Officer)
/s/ BERNARD J. LACHNER Director March 31, 1998
- ------------------------------------------------
Bernard J. Lachner
/s/ DOUGLAS S. PETERS Director March 31, 1998
- ------------------------------------------------
Douglas S. Peters
/s/ RICHARD P. SASLOW Vice President, General Counsel and March 31, 1998
- ------------------------------------------------ Director
Richard P. Saslow
/s/ JOHN L. SILVERMAN Director March 31, 1998
- ------------------------------------------------
John L. Silverman
</TABLE>
23
<PAGE> 24
ITEM 8. FINANCIAL STATEMENTS
SUPERIOR CONSULTANT HOLDINGS CORPORATION AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Certified Public Accountants.......... F-2
Consolidated Balance Sheets as of December 31, 1996 and
1997...................................................... F-3
Consolidated Statements of Operations for the years ended
December 31, 1995, 1996 and 1997.......................... F-4
Consolidated Statements of Stockholders' Equity for the
years ended December 31, 1995, 1996 and 1997.............. F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 1995, 1996 and 1997.......................... F-6
Notes to Consolidated Financial Statements.................. F-7
</TABLE>
F-1
<PAGE> 25
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors
Superior Consultant Holdings Corporation
We have audited the accompanying consolidated balance sheets of Superior
Consultant Holdings Corporation (a Delaware corporation) and Subsidiaries as of
December 31, 1996 and 1997, and the related statements of operations,
stockholders' equity and cash flows for each of the three years in the period
ended December 31, 1997. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Superior Consultant Holdings Corporation and Subsidiaries as of December 31,
1996 and 1997, and the results of their consolidated operations and their
consolidated cash flows for each of the three years in the period ended December
31, 1997, in conformity with generally accepted accounting principles.
/s/ GRANT THORNTON LLP
Detroit, Michigan
February 25, 1998
F-2
<PAGE> 26
SUPERIOR CONSULTANT HOLDINGS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1996
(RESTATED) 1997
---------- ----
(IN THOUSANDS)
<S> <C> <C>
ASSETS
Current assets
Cash...................................................... $ 2,241 $ 2,795
Short-term investments.................................... 34,554 84,458
Accounts receivable (net of allowance for doubtful
accounts of $478,000 as of December 31, 1996 and
$692,000 as of December 31, 1997)...................... 13,751 18,464
Accrued interest receivable and prepaid expenses.......... 737 1,589
Deferred income taxes..................................... 148 352
------- --------
Total current assets................................... 51,431 107,658
Property and equipment, net................................. 3,457 6,915
Deferred income taxes....................................... 142 --
Goodwill, net............................................... -- 4,711
Other long-term assets...................................... 294 117
------- --------
Total Assets........................................... $55,324 $119,401
======= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Lines of credit........................................... $ 1,298 $ --
Current portion of long-term debt......................... 79 91
Accounts payable.......................................... 2,915 3,061
Accrued liabilities....................................... 4,769 5,016
Deferred revenue.......................................... 1,703 1,597
Income taxes payable...................................... 705 261
------- --------
Total current liabilities.............................. 11,469 10,026
Long-term debt.............................................. 1,071 98
Deferred income taxes....................................... -- 350
Deferred performance bonuses................................ 580 564
Deferred compensation....................................... 834 --
Commitments (Note 12)....................................... -- --
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, 8,153,599 as of December
31, 1996 and 10,208,024 as of December 31, 1997........ 82 102
Additional paid-in capital................................ 42,966 105,632
Retained earnings (deficit)............................... (980) 3,308
Stockholders' notes receivable............................ (698) (679)
------- --------
Total stockholders' equity............................. 41,370 108,363
------- --------
Total Liabilities and Stockholders' Equity............. $55,324 $119,401
======= ========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-3
<PAGE> 27
SUPERIOR CONSULTANT HOLDINGS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------
1995 1996
(RESTATED) (RESTATED) 1997
---------- ---------- ----
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Revenues.................................................... $42,494 $51,835 $76,895
Costs and expenses
Cost of services.......................................... 19,730 25,524 39,260
Selling, general and administrative expenses.............. 18,422 21,891 30,378
Executive compensation expense............................ 3,730 4,579 858
------- ------- -------
Total costs and expenses............................... 41,882 51,994 70,496
------- ------- -------
Earnings (loss) from operations........................ 612 (159) 6,399
Interest expense............................................ 230 259 123
Other income, principally interest.......................... (117) (343) (2,851)
Costs incurred in connection with mergers................... -- -- 917
------- ------- -------
Earnings (loss) before income taxes and extraordinary
item................................................. 499 (75) 8,210
Income taxes................................................ 185 689 3,625
------- ------- -------
Earnings (loss) before extraordinary item.............. 314 (764) 4,585
Extraordinary gain on early extinguishment of debt, net of
income taxes of $124...................................... -- 231 --
------- ------- -------
Net earnings (loss).................................... $ 314 $ (533) $ 4,585
======= ======= =======
Net earnings (loss) per share
Basic..................................................... $0.06 $(0.09) $0.54
======= ======= =======
Diluted................................................... $0.06 $(0.09) $0.53
======= ======= =======
Weighted average number of common shares outstanding
Basic..................................................... 5,138 6,014 8,519
======= ======= =======
Diluted................................................... 5,162 6,014 8,670
======= ======= =======
Pro forma earnings data (unaudited)
(Loss) before income taxes and extraordinary item, as
reported............................................... $ (75)
Adjustment for executive compensation expense............. 3,519
-------
Pro forma earnings before income taxes and extraordinary
item................................................... 3,444
Pro forma income tax expense.............................. 1,364
-------
Pro forma earnings before extraordinary item.............. 2,080
Extraordinary item, net of income taxes of $124........... 231
-------
Pro forma net earnings.................................... $ 2,311
=======
Pro forma net earnings per share
Basic..................................................... $0.38
=======
Diluted................................................... $0.38
=======
Pro forma weighted average number of common shares
outstanding
Basic..................................................... 6,014
=======
Diluted................................................... 6,080
=======
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-4
<PAGE> 28
SUPERIOR CONSULTANT HOLDINGS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL RETAINED STOCKHOLDERS'
--------------- PAID-IN EARNINGS NOTES
SHARES AMOUNT CAPITAL (DEFICIT) RECEIVABLE TOTAL
------ ------ ---------- --------- ------------- -----
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1995 (restated)... 4,598 $ 46 $ 1,363 $ (761) $ -- $ 648
Net earnings............................ -- -- -- 314 -- 314
Issuance of common stock................ 720 7 982 -- (764) 225
Exercise of stock options............... 3 -- 18 -- -- 18
Payment on stockholders' notes
receivable............................ -- -- -- -- 35 35
------ ---- -------- ------ ----- --------
Balance at December 31, 1995
(restated)............................ 5,321 53 2,363 (447) (729) 1,240
Net loss................................ -- -- -- (533) -- (533)
Issuance of common stock................ 2,738 28 39,642 -- -- 39,670
Conversion of debt...................... 37 -- 492 -- -- 492
Payment on stockholders' notes
receivable............................ -- -- -- -- 31 31
Tax benefit relating to stock options
exercised............................. -- -- 249 -- -- 249
Exercise of stock options............... 61 1 228 -- -- 229
Stock repurchased and retired........... (3) -- (51) -- -- (51)
Compensation expense recognized for fair
value of stock options granted........ -- -- 43 -- -- 43
------ ---- -------- ------ ----- --------
Balance at December 31, 1996
(restated)............................ 8,154 82 42,966 (980) (698) 41,370
Net earnings............................ -- -- -- 4,585 -- 4,585
Issuance of common stock................ 2,000 20 60,263 -- -- 60,283
Shares issued in connection with
acquisition........................... 75 -- 1,600 -- -- 1,600
Payment on stockholders' notes
receivable............................ -- -- -- -- 19 19
Exercise of stock options............... 13 -- 110 -- -- 110
Stock repurchased and retired........... (34) -- (70) (297) -- (367)
Compensation expense recognized for fair
value of stock options granted........ -- -- 28 -- -- 28
Termination of deferred compensation
plan.................................. -- -- 735 -- -- 735
------ ---- -------- ------ ----- --------
Balance at December 31, 1997............ 10,208 $102 $105,632 $3,308 $(679) $108,363
====== ==== ======== ====== ===== ========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-5
<PAGE> 29
SUPERIOR CONSULTANT HOLDINGS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------
1995 1996
(RESTATED) (RESTATED) 1997
---------- ---------- ----
(IN THOUSANDS)
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings (loss)....................................... $ 314 $ (533) $ 4,585
Adjustments to reconcile net earnings (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization.......................... 579 733 1,440
Non-cash compensation.................................. 225 43 28
Bad debt expense....................................... 355 172 594
Loss on sale of assets................................. 47 -- --
Deferred income taxes.................................. 150 (209) 288
Changes in operating assets and liabilities:
Accounts receivable.................................. (2,956) (4,761) (5,307)
Accrued interest receivable and prepaid expenses..... (384) (154) (852)
Accounts payable..................................... 758 874 146
Accrued liabilities, deferred bonuses and
compensation...................................... 2,030 1,050 132
Deferred revenue..................................... 40 495 (106)
Income taxes payable................................. -- 705 (444)
Other long-term assets............................... (3) (51) 177
------- ------- -------
Net cash provided by (used in) operating
activities...................................... 1,155 (1,636) 681
Cash flows from investing activities:
Purchase of The Kaufman Group............................. -- -- (3,375)
Purchases of property and equipment....................... (1,106) (2,597) (4,634)
Proceeds from sale of property and equipment.............. -- 18 --
------- ------- -------
Net cash used in investing activities............. (1,106) (2,579) (8,009)
Cash flows from financing activities:
(Repayment of) proceeds from lines of credit, net......... (26) 29 (1,298)
Proceeds from notes payable to stockholder................ 200 -- --
Repayment of note payable to stockholder.................. (49) (156) --
Proceeds from long-term debt.............................. 70 348 --
Repayments of long-term debt.............................. (98) (86) (961)
Proceeds from issuance of common stock.................... -- 39,670 60,283
Principal payments on stockholders' notes receivable...... 35 31 19
Exercise of stock options................................. 18 229 110
Tax benefit from exercise of stock options................ -- 249 --
Stock repurchased......................................... -- (51) (367)
------- ------- -------
Net cash provided by financing activities......... 150 40,263 57,786
------- ------- -------
Net increase in cash and cash equivalents................... 199 36,048 50,458
Cash and cash equivalents, beginning of period.............. 548 747 36,795
------- ------- -------
Cash and cash equivalents, end of period.................... $ 747 $36,795 $87,253
======= ======= =======
Supplemental disclosure of cash flow information -- cash
paid for:
Interest.................................................. $ 231 $ 259 $ 127
Income taxes.............................................. 40 35 3,375
Non Cash Transactions:
Conversion of debt to common stock........................ $ -- $ 492 $ --
Shares issued in connection with acquisition.............. -- -- 1,600
Termination of deferred compensation plan................. -- -- 735
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-6
<PAGE> 30
SUPERIOR CONSULTANT HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
(TABULAR AMOUNTS ARE IN THOUSANDS, EXCEPT SHARE DATA)
1. BUSINESS ACTIVITIES AND ORGANIZATION
The Company 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.
The Company also assists clients to develop, design, implement and maintain
groupware and intranet and web-based information systems and solutions. The
Company operates in one business segment.
Organization
In October 1996, the Company completed an initial public offering ("IPO")
of its common stock, whereby 2,723,623 shares (including the over allotment
option granted to the underwriters) of common stock were sold at $16 per share,
resulting in net proceeds to the Company of approximately $39.7 million, after
underwriting discounts and other expenses of the offering. On November 4, 1997,
the Company completed a follow-on offering of its common stock whereby 2,000,000
shares were issued by the Company (and 1,000,000 outstanding shares were sold by
certain stockholders) at $32 per share, resulting in net proceeds to the Company
of approximately $60.3 million, after underwriting discounts and other expenses
of the offering.
Prior to the IPO, there were two operating companies which were
majority-owned by an individual. In connection with the IPO, a corporate
reorganization was consummated whereby the two operating companies became
wholly-owned subsidiaries of the newly-formed parent company. This transaction
was a reorganization of entities under common control and accounted for in a
manner similar to a pooling of interests.
On March 12, 1997, the Company acquired The Kaufman Group, Inc. ("The
Kaufman Group"), a California-based healthcare consulting business, for
approximately $3.4 million in cash and 74,590 shares of common stock. In
addition, there is a maximum additional cash payment of approximately $1.5
million payable over a three-year period, which will be accounted for as
additional purchase price. The acquisition was accounted for as a purchase in
accordance with Accounting Principles Board Opinion No. 16 and, accordingly, the
purchase price has been allocated to the assets acquired based on the estimated
fair values at the date of acquisition. The operating results of The Kaufman
Group are included in the Company's consolidated income statement from the date
of acquisition. Goodwill of approximately $5.0 million resulted from the
transaction, which is being amortized over fifteen years on a straight-line
basis.
The following unaudited pro forma summary presents the results of
operations as though the Company and The Kaufman Group had combined as of
January 1, 1996 and 1997, respectively.
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
------------------
1996 1997
---- ----
<S> <C> <C>
Revenues................................................... $56,040 $77,896
Earnings before extraordinary item......................... 45 4,532
Net earnings............................................... 276 4,532
Net earnings per share
Basic.................................................... $0.05 $0.53
Diluted.................................................. $0.05 $0.52
Pro forma earnings before extraordinary item............... 2,807 --
Pro forma net earnings..................................... 3,038 --
Pro forma net earnings per share
Basic.................................................... $0.51 $--
Diluted.................................................. $0.50 $--
</TABLE>
F-7
<PAGE> 31
SUPERIOR CONSULTANT HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
1. BUSINESS ACTIVITIES AND ORGANIZATION (CONTINUED)
The above amounts are based upon certain assumptions and estimates which
the Company believes are reasonable. The pro forma results do not necessarily
reflect the results of operations as they would have been if the companies had
constituted a single entity during such periods and is not necessarily
indicative of results which may be obtained in the future.
On July 29, 1997, the Company acquired the outstanding stock of COMSUL,
Ltd. ("COMSUL") in exchange for 240,630 shares of Company common stock in a
transaction valued at approximately $7.7 million. COMSUL, based in Houston,
Texas, specializes in information systems, telecommunications, and corporate
facilities and organizational design for a wide range of clients. The
transaction was accounted for as a pooling of interests and, accordingly, the
Company's financial statements for the periods prior to the merger have been
restated to included the results for COMSUL for all periods presented.
On August 14, 1997, the Company acquired the outstanding stock of Chi
Systems, Inc. ("Chi") in exchange for 331,509 shares of Company common stock in
a transaction valued at approximately $11.2 million. Chi, based in Ann Arbor,
Michigan, offers strategic, operational, and facility planning consulting to the
healthcare industry. The transaction was accounted for as a pooling of interests
and, accordingly, the Company's financial statements for the periods prior to
the merger have been restated to include the results for Chi for all periods
presented.
Certain details of the results of operations of the previously separate
companies for the period prior to the mergers (six months ended June 30, 1997)
are as follows:
<TABLE>
<CAPTION>
SIX MONTHS
ENDED JUNE 30, 1997
-------------------
<S> <C>
Revenues:
Superior.................................................. $25,974
COMSUL.................................................... 4,079
Chi....................................................... 4,758
-------
Combined............................................... $34,811
=======
Net earnings (loss):
Superior.................................................. $ 2,245
COMSUL.................................................... (329)
Chi....................................................... 200
-------
Combined............................................... $ 2,116
=======
</TABLE>
In connection with the acquisitions of COMSUL and Chi, merger related
charges of approximately $917,000 were incurred.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
Superior Consultant Holdings Corporation and its wholly-owned subsidiaries. All
material intercompany accounts and transactions have been eliminated.
F-8
<PAGE> 32
SUPERIOR CONSULTANT HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Short-Term Investments
The Company's policy is to invest cash in excess of operating requirements
in income producing investments. Short-term cash investments at December 31,
1996 and 1997 include commercial paper and money market accounts stated at cost,
which approximates market.
Cash and Cash Equivalents
For purposes of the statement of cash flows, the Company considers all
highly liquid investments purchased with a maturity of three months or less to
be cash equivalents.
Property and Equipment
Property and equipment are stated at cost. Expenditures for renewals and
improvements that extend the useful life of property and equipment are
capitalized. Expenditures for maintenance and repairs are charged to expense as
incurred.
During its 1996 fourth quarter, the Company changed the method used to
calculate depreciation on new purchases of property and equipment from
accelerated methods (principally the double-declining balance method) to the
straight-line method. The Company believed the straight-line method provided a
better matching of expenses with revenues over the productive life of the
assets, as well as improving the comparability of its financial statements with
other information technology consulting companies. The effect of the change
during 1996 decreased the net loss, basic and diluted net loss per share by
$58,600, $0.01 and $0.01, respectively and increased pro forma net earnings, pro
forma basic and diluted net earnings per share by $58,600, $0.01 and $0.01,
respectively. The effect of the change was not material to any individual
quarter during 1996.
Income Taxes
The two operating companies were taxed under Subchapter S of the Internal
Revenue Code, one through 1994 and the other until the Company's IPO in October
1996. As a result of the Subchapter S elections, federal income taxes were
payable personally by the stockholders. Accordingly, the 1995 and 1996
consolidated statements of operations do not include full provisions for federal
income taxes. A pro forma provision for income taxes is presented as if the
consolidated Company was taxed as a C Corporation for the year ended December
31, 1996.
Taxes on earnings, including pro forma calculations and the impact of
deferred income taxes as a result of termination of the Subchapter S election,
are accounted for under the liability method pursuant to Statement of Financial
Accounting Standards No. 109, Accounting for Income Taxes. Deferred income tax
expense recorded in the fourth quarter of 1996 as a result of the termination of
the Subchapter S election totalled approximately $130,000.
Deferred Bonus
Of the non-current deferred performance bonuses, approximately $174,000 are
payable no later than March 1999, and approximately $390,000 are payable no
later than March 2000, subject to and contingent upon employees' continued
employment on those dates.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and
F-9
<PAGE> 33
SUPERIOR CONSULTANT HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenue and expenses during
the reporting period. Actual results could differ from these estimates.
Fair Value of Financial Instruments
Management believes the fair value of financial instruments approximates
their carrying amounts. The carrying value of the cash and short-term
investments approximates their estimated fair values based upon quoted market
prices. Management believes the fair value of stockholders' notes receivable
approximate their carrying values based on current rates for instruments with
similar characteristics.
Revenue Recognition
The Company recognizes revenues as services are performed for projects
billed on a time and materials basis. On fixed-fee projects, the Company
recognizes revenue using the percentage of completion basis. Deferred revenue
represents billings and collections made in advance of services being performed.
Earnings Per Share
Effective December 31, 1997, the Company adopted the provisions of
Statement of Financial Accounting Standards No. 128, Earnings Per Share ("SFAS
128"), which (i) replaces the presentation of primary earnings per share (EPS)
with a presentation of basic EPS; (ii) requires dual presentation of basic and
diluted EPS on the face of the consolidated statements of operations regardless
of whether basic and diluted EPS are the same; and (iii) requires a
reconciliation of the numerator and denominator used in computing basic and
diluted EPS. Basic EPS excludes dilution and is computed by dividing income
available to common stockholders by the weighted-average number of common shares
outstanding for the period. Diluted EPS reflects the potential dilution that
could occur if securities or other contracts to issue common stock were
exercised or converted into common stock or resulted in the issuance of common
stock that then shared in the earnings of the entity. In accordance with the
provisions of SFAS 128, The Company has restated all prior period EPS data
presented.
Stock-Based Compensation
For options granted to employees, the Company follows the provisions of
Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to
Employees. For options to non-employees, the Company follows the provisions of
Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based
Compensation ("SFAS 123").
New Financial Accounting Standards
In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 130, Reporting of Comprehensive Income ("SFAS 130"), which establishes
standards for reporting and display of comprehensive income and its components
(revenues, expense, gains, and losses) in a full set of financial statements.
This statement also requires that all items that are required to be recognized
under accounting standards as components of comprehensive income be reported in
a financial statement that is displayed with the same prominence as other
financial statements. This statement will be effective beginning January 1,
1998. Reclassification of financial statements for earlier periods provided for
comparative purposes is required. The Company does not anticipate that adoption
of SFAS 130 will have a material effect on the consolidated financial
statements.
F-10
<PAGE> 34
SUPERIOR CONSULTANT HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 131, Disclosure about Segments of an Enterprise and Related Information
("SFAS 131"), which establishes standards for the way that public business
enterprises report information about operating segments in annual financial
statements, and requires that those enterprises report selected information
about operating segments in interim financial reports issued to stockholders.
This statement also establishes standards for related disclosures about products
and services, geographic areas, and major customers. This statement will be
effective beginning January 1, 1998. In the initial year of adoption,
comparative information for earlier years is to be restated. The Company has not
yet determined the impact on current segment groupings.
3. ALLOWANCE FOR DOUBTFUL ACCOUNTS
A summary of activity in connection with the allowance for doubtful
accounts follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
Allowance for doubtful accounts at beginning of year... $ 291 $ 456 $ 478
Write-offs............................................. (190) (150) (380)
Charged to bad debt expense............................ 355 172 594
----- ----- -----
Allowance for doubtful accounts at end of year......... $ 456 $ 478 $ 692
===== ===== =====
</TABLE>
4. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31, RANGE OF
------------------ USEFUL
1996 1997 LIVES
---- ---- --------
<S> <C> <C> <C>
Office equipment................................. $ 2,590 $ 3,469 5-7 Years
Computer equipment............................... 3,214 5,971 5-7 Years
Office machines.................................. 847 932 5-7 Years
Condominiums..................................... 256 280 40 Years
Leasehold improvements........................... 207 408 7 Years
------- -------
7,114 11,060
Less: accumulated depreciation.............. (3,657) (4,145)
------- -------
Property and equipment, net...................... $ 3,457 $ 6,915
======= =======
</TABLE>
5. GOODWILL
Goodwill at December 31, 1997 represents the excess of the purchase price
over the net assets acquired in connection with the Company's purchase of The
Kaufman Group of $4,975,000, less accumulated amortization of $264,000. The
asset is being amortized on a straight-line basis over fifteen years.
The Company monitors events and changes in circumstances that could
indicate the carrying amount of the goodwill may not be recovered. When events
or changes in circumstances are present that indicate the carrying amount of the
intangible asset may not be recoverable, the Company assesses the recoverability
by determining whether the carrying value of such asset will be recoverable
through the future cash flows expected from the use of the asset and its
eventual disposition.
F-11
<PAGE> 35
SUPERIOR CONSULTANT HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
6. DEBT AND EARLY DEBT EXTINGUISHMENT
The Company has a line of credit with a bank which allows borrowings of up
to $3.0 million, due on demand, with no scheduled maturity date. Borrowings bear
interest at the bank's prime rate and are collateralized by all assets of the
Company. At December 31, 1996 and December 31, 1997, there were no amounts
outstanding on this line.
Chi and COMSUL had debt existing at December 31, 1996 and at the time of
their acquisition by the Company. Substantially all this debt was repaid after
their respective mergers during 1997.
In June 1996, Chi paid bank debt and accrued interest for approximately
$355,000 less than the amount owed. This early debt extinguishment has been
recorded as an extraordinary item in the accompanying statement of operations,
net of income taxes of approximately $124,000.
7. ACCRUED LIABILITIES
Accrued liabilities consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------
1996 1997
---- ----
<S> <C> <C>
Payroll and withholding taxes............................... $1,899 $2,108
Commissions................................................. 1,092 67
Profit sharing.............................................. 848 420
Bonuses..................................................... 930 2,421
------ ------
Total accrued liabilities.............................. $4,769 $5,016
====== ======
</TABLE>
8. STOCK OPTIONS
In June 1987, the Company adopted the 1987 Key Employees' Stock Option Plan
(the old plan) under which incentive and non-statutory stock options could be
granted to officers and other employees. The old plan was terminated in 1996.
Effective September 1, 1996, the Company adopted its Long-Term Incentive
Plan (the Plan). Pursuant to the Plan, a maximum of 900,000 shares of common
stock were reserved for the granting of incentive, nonstatutory or formula
options, restricted stock grants and other equity based compensation. The
options, other than the director formula options may have terms not exceeding
ten years when granted. The exercise price of each option equals the market
price of the Company's stock on the date of grant. Effective December 1, 1997,
the Company increased the maximum number of reserved shares in the Plan to
2,400,000.
The fair value of each option is estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted-average
assumptions for grants in 1995 and 1996: dividend yield of 0%, expected
volatility of 52%, risk-free interest rate of 6.4%, and expected life of 5
years. The assumptions for grants in 1997 are: dividend yield of 0%, expected
volatility of 53%, risk-free interest rate of 6.38%, and expected life of 5
years. For the years ended December 31, 1996 and 1997, compensation expense of
approximately $43,000 and $28,000, respectively, was recognized for the fair
value of stock options granted to non-employees.
F-12
<PAGE> 36
SUPERIOR CONSULTANT HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
8. STOCK OPTIONS (CONTINUED)
Had compensation cost for the Plans been determined based on the fair value
of all the options at the grant dates consistent with SFAS 123, the Company's
would have reported the pro forma amounts as follows.
<TABLE>
<CAPTION>
1996
PRO
1995 1996 FORMA 1997
---- ---- ----- ----
<S> <C> <C> <C> <C>
Net earnings (loss)
As reported............................................... $ 314 $ (533) $2,311 $4,585
Pro forma................................................. 313 (664) 2,180 4,085
Net earnings (loss) per share -- basic
As reported............................................... 0.06 (0.09) 0.38 0.54
Pro forma................................................. 0.06 (0.11) 0.36 0.48
Net earnings (loss) per share -- diluted
As reported............................................... 0.06 (0.09) 0.38 0.53
Pro forma................................................. 0.06 (0.11) 0.36 0.47
</TABLE>
A summary of the status of the Company's options as of December 31, 1995,
1996 and 1997, and changes during the years ending on those dates, is presented
below:
<TABLE>
<CAPTION>
1995 1996 1997
------------------ ------------------ ------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
SHARES EXERCISE SHARES EXERCISE SHARES EXERCISE
(000) PRICE (000) PRICE (000) PRICE
------ -------- ------ -------- ------ --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year............ 726 $2.55 74 $ 2.55 248 $16.00
Granted..................................... 7 $7.25 235 $16.00 341 $24.07
Exercised................................... (3) $6.26 (61) $ 3.40 (13) $ 9.83
Forfeited................................... (656) $2.41 -- -- (28) $ 9.60
---- ---- ------
Outstanding at year-end..................... 74 $2.55 248 $16.00 548 $21.43
Options exercisable at year-end............. 9 $6.80 30 $13.24 113 $19.01
Weighted-average fair value of options
granted during the year................... 7 $4.65 235 $ 8.75 341 $18.92
</TABLE>
The following information applies to options outstanding at December 31,
1997:
<TABLE>
<S> <C>
Number outstanding.......................................... 548,328
Range of exercise prices.................................... $10.31 - $37.75
Weighted-average exercise price............................. $21.43
Weighted-average remaining contractual life................. 4.75 years
</TABLE>
F-13
<PAGE> 37
SUPERIOR CONSULTANT HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
9. INCOME TAXES
The historical income tax provision consists of the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
Current federal income taxes........................... $ 215 $ 640 $3,071
Deferred federal income taxes.......................... 270 (209) 288
Current state income taxes............................. -- 32 289
Tax benefit from exercise of stock options credited
directly to additional paid-in capital............... -- 249 --
Investment tax credits................................. -- (23) (23)
Benefit of operating loss carryforward................. (180) -- --
Adjustment of beginning of year valuation allowance to
zero................................................. (120) -- --
----- ----- ------
$ 185 $ 689 $3,625
===== ===== ======
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at December 31
are as follows:
<TABLE>
<CAPTION>
1996 1997
---- ----
<S> <C> <C>
Deferred tax assets:
Deferred compensation..................................... $1,067 $705
Allowance for bad debts................................... 143 235
Deferred revenue.......................................... 79 30
------ ----
Total deferred tax assets.............................. 1,289 970
Deferred tax liabilities:
Change from cash to accrual basis of tax accounting....... 873 628
Depreciation.............................................. 105 340
Other..................................................... 21 --
------ ----
Total deferred tax liabilities......................... 999 968
------ ----
Total net deferred tax asset........................... $ 290 $ 2
====== ====
</TABLE>
F-14
<PAGE> 38
SUPERIOR CONSULTANT HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
9. INCOME TAXES (CONTINUED)
A reconciliation of the provision for income taxes follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------
1996
PRO
1995 1996 FORMA 1997
---- ---- ----- ----
<S> <C> <C> <C> <C>
Expected expense at the statutory rate.......... $ 170 $(26) $1,171 $2,791
Effect of S Corporation election................ 83 415 -- --
Permanent differences; expenses recognized for
book, not tax................................. 66 31 55 218
Merger costs.................................... -- -- -- 312
Tax benefit from exercise of stock options
credited directly to additional paid-in
capital....................................... -- 249 -- --
State income taxes.............................. -- 32 138 289
Investment tax credits.......................... -- (23) -- (23)
Adjustment of beginning of year valuation
allowance to zero............................. (120) -- -- --
Other........................................... (14) 11 -- 38
----- ---- ------ ------
Total income taxes............................ $ 185 $689 $1,364 $3,625
===== ==== ====== ======
</TABLE>
10. PROFIT-SHARING AND DEFERRED COMPENSATION PLAN
The Company has a profit-sharing plan which qualifies under Section 401(k)
of the Internal Revenue Code. Eligible employees may contribute up to the
maximum allowable under tax regulations. Company contributions are fully
discretionary. Profit sharing expense was $450,000, $450,000, and $420,000 for
the years ended December 31, 1995, 1996 and 1997, respectively.
Prior to its merger with the Company, Chi had a non-qualified deferred
compensation plan covering selected executives, all of whom were stockholders.
Expense recognized under the plan was approximately $83,000, $88,000 and $30,000
for the years ended December 31, 1995, 1996 and 1997, respectively. In
connection with Chi's merger with the Company in August 1997, the plan was
terminated, and the then existing liability has been reflected as an increase to
additional paid-in capital.
11. NET EARNINGS (LOSS) PER SHARE
On December 31, 1997, the Company adopted SFAS 128, Earnings Per Share. As
required by SFAS 128, all current and prior year earnings (loss) per share data
have been restated to conform to the provisions of SFAS 128.
Earnings (loss) per share for the year ended December 31, 1996 is comprised
of the following:
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA
---------- ---------
<S> <C> <C>
Basic and diluted net earnings (loss) per share
Earnings (loss) before extraordinary item................ $(0.13) $0.34
Extraordinary item....................................... 0.04 0.04
------ -----
Net earnings (loss)...................................... $(0.09) $0.38
</TABLE>
The Company's basic net earnings (loss) per share amounts have been
computed by dividing net earnings (loss) by the weighted average number of
outstanding common shares. The Company's diluted net earnings
F-15
<PAGE> 39
SUPERIOR CONSULTANT HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
11. NET EARNINGS (LOSS) PER SHARE (CONTINUED)
(loss) per share is computed by dividing net earnings (loss) by the weighted
average number of outstanding common shares and common share equivalents
relating to stock options, when dilutive.
The computation of historical diluted net earnings per share for the years
ended December 31, 1995 and 1997 includes approximately 24,000 and 151,000
shares of common stock equivalents, respectively. The computation of pro forma
diluted net earnings per share for the year ended December 31, 1996 includes
approximately 66,000 shares of common stock equivalents.
For historical EPS, options to purchase approximately 36,000, 86,000 and
77,000 shares of common stock with a weighted average exercise price of $4.04,
$5.14, and $25.64 were outstanding at December 31, 1995, 1996 and 1997,
respectively, but were excluded from the computation of common share equivalents
because to do so would have been antidilutive for the periods presented.
12. COMMITMENTS
The Company leases its office facilities, certain equipment and vehicles
under lease agreements classified as operating leases. Future minimum lease
payments under such noncancelable operating leases as of December 31, 1997 are
summarized as follows:
<TABLE>
<CAPTION>
RELATED ALL SUBLEASE
PARTY OTHER INCOME TOTAL
------- ----- -------- -----
<S> <C> <C> <C> <C>
Years ending December 31:
1998................................................... $ 526 $1,022 $ (69) $1,479
1999................................................... 526 855 (69) 1,312
2000................................................... 526 523 (69) 980
2001................................................... 526 450 (29) 947
2002................................................... 526 363 -- 889
Thereafter............................................. 1,798 372 -- 2,170
------ ------ ----- ------
Total future minimum lease payments.................... $4,428 $3,585 $(236) $7,777
====== ====== ===== ======
</TABLE>
Net rent expense amounted to approximately $868,000, $934,000 and
$1,614,000 for the years ended December 31, 1995, 1996 and 1997, respectively,
and has been included in selling, general and administrative expenses in the
accompanying statements of operations.
In connection with its IPO, the Company entered into a tax indemnification
agreement with three shareholders which provides for, among other things, the
indemnification of each such shareholder for any losses or liabilities with
respect to any additional taxes (including interest, penalties and legal fees),
and the repayment to the Company of any amounts received as refunds resulting
from operations during the period in which it was an S Corporation. Management
believes that the Company's maximum exposure pursuant to this agreement is not
material.
13. RELATED PARTY TRANSACTIONS
The Company had an unsecured note payable to the trust of the majority
stockholder which matured in August 1996, and bore interest at 8.75% per annum.
The Company leases an office facility from an entity partially owned by two
stockholders. Net rent expense for this lease amounted to approximately
$272,000, $282,000 and $400,000 for the years ended December 31, 1995, 1996 and
1997, respectively.
F-16
<PAGE> 40
SUPERIOR CONSULTANT HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
13. RELATED PARTY TRANSACTIONS (CONTINUED)
During 1995, Superior issued 658,833 shares of its common stock to two
stockholders in exchange for two promissory notes totaling $750,000, and the
cancellation of outstanding stock options. The notes bear interest at 7.7% per
annum and require annual payments totaling $75,000. Interest income on these
notes totaled approximately $40,000, $58,000 and $56,000 for the years ended
December 31, 1995, 1996 and 1997, respectively. The Company has recorded
compensation expense and a related increase to additional paid-in capital of
$225,000 for the year ended December 31, 1995 representing the difference
between the estimated market value of the common stock at the date of issuance
and its selling price.
In 1996, the Company converted a $300,000 note payable to a stockholder,
along with accrued interest thereon, to equity through the issuance of
approximately 37,000 common shares.
During the years ended December 31, 1996 and 1997, the Company chartered
aircraft from a company owned by an officer/stockholder, at a total cost of
approximately $36,000 and $224,000, respectively.
14. MAJOR CUSTOMERS
During the year ended December 31, 1995, the Company derived approximately
13% of its revenues from a single customer. As of December 31, 1995, accounts
receivable from a single customer comprised 15% of total assets. As of and for
the years ended December 31, 1996 and 1997, no single customer comprised over
10% of the Company's accounts receivable or revenue.
15. PRO FORMA ADJUSTMENTS TO FINANCIAL STATEMENTS (UNAUDITED)
The following pro forma adjustments have been made to the 1996 historical
results of operations to make the presentation more comparable in relation to
future periods.
(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 IPO in October 1996, been effective throughout
such period.
(b) Computation of federal income taxes assuming effective tax rate of
39.6% for the year ended December 31, 1996 which would have been
recorded had Superior been a C Corporation and after eliminating the
executive compensation expense in (a).
16. SUBSEQUENT EVENT
On January 16, 1998, the Company purchased the assets and business of the
Network Services Division ("NSD") of Multimedia Medical Systems, Inc. NSD, which
is located in Burlington, Massachusetts, specializes in software implementation
and networking technology solutions for healthcare organizations. The purchase
price was approximately $5.2 million in cash. The business combination will be
recorded using the purchase method of accounting.
F-17
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM (A) AUDITED
FINANCIAL STATEMENTS FOR THE YEAR ENDED 12/31/95 CONTAINED IN THE COMPANY'S FORM
10-K (RESTATED) AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH (B) REPORT
ON FORM 10-K (RESTATED).
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> DEC-31-1995
<CASH> 747
<SECURITIES> 0
<RECEIVABLES> 9,618
<ALLOWANCES> (456)
<INVENTORY> 0
<CURRENT-ASSETS> 10,492
<PP&E> 4,535
<DEPRECIATION> (2,924)
<TOTAL-ASSETS> 12,606
<CURRENT-LIABILITIES> 9,219
<BONDS> 0
0
0
<COMMON> 82
<OTHER-SE> 1,158
<TOTAL-LIABILITY-AND-EQUITY> 12,606
<SALES> 42,494
<TOTAL-REVENUES> 42,494
<CGS> 0
<TOTAL-COSTS> 19,730
<OTHER-EXPENSES> 22,152
<LOSS-PROVISION> 355
<INTEREST-EXPENSE> 230
<INCOME-PRETAX> 499
<INCOME-TAX> 185
<INCOME-CONTINUING> 314
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 314
<EPS-PRIMARY> $0.07
<EPS-DILUTED> $0.07
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM (A) AUDITED
FINANCIAL STATEMENTS FOR THE YEAR ENDED 12/31/96 CONTAINED IN THE COMPANY'S FORM
10-K (RESTATED) AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH (B) REPORT
ON FORM 10-K (RESTATED).
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 36,795
<SECURITIES> 0
<RECEIVABLES> 14,229
<ALLOWANCES> (478)
<INVENTORY> 0
<CURRENT-ASSETS> 51,431
<PP&E> 7,114
<DEPRECIATION> 3,657
<TOTAL-ASSETS> 55,324
<CURRENT-LIABILITIES> 11,469
<BONDS> 0
0
0
<COMMON> 82
<OTHER-SE> 41,288
<TOTAL-LIABILITY-AND-EQUITY> 55,324
<SALES> 51,835
<TOTAL-REVENUES> 51,835
<CGS> 0
<TOTAL-COSTS> 25,524
<OTHER-EXPENSES> 26,470
<LOSS-PROVISION> 172
<INTEREST-EXPENSE> 259
<INCOME-PRETAX> (75)
<INCOME-TAX> 689
<INCOME-CONTINUING> (764)
<DISCONTINUED> 0
<EXTRAORDINARY> 231
<CHANGES> 0
<NET-INCOME> (533)
<EPS-PRIMARY> $0.38<F1>
<EPS-DILUTED> $0.38<F1>
<FN>
<F1>EPS IS BASED ON PRO FORMA NET EARNINGS OF $2,311,000
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM (A) AUDITED
FINANCIAL STATEMENTS FOR THE YEAR ENDED 12/31/97 CONTAINED IN THE COMPANY'S FORM
10-K AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH (B) REPORT ON FORM
10-K.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
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<SECURITIES> 0
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<ALLOWANCES> (692)
<INVENTORY> 0
<CURRENT-ASSETS> 107,658
<PP&E> 11,060
<DEPRECIATION> 4,145
<TOTAL-ASSETS> 119,401
<CURRENT-LIABILITIES> 10,026
<BONDS> 0
0
0
<COMMON> 102
<OTHER-SE> 108,261
<TOTAL-LIABILITY-AND-EQUITY> 119,401
<SALES> 76,895
<TOTAL-REVENUES> 76,895
<CGS> 0
<TOTAL-COSTS> 39,260
<OTHER-EXPENSES> 31,236
<LOSS-PROVISION> 594
<INTEREST-EXPENSE> 123
<INCOME-PRETAX> 8,210
<INCOME-TAX> 3,625
<INCOME-CONTINUING> 4,585
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,585
<EPS-PRIMARY> $0.54
<EPS-DILUTED> $0.53
</TABLE>
