<PAGE> 1
As filed with the Securities and Exchange Commission on September 29, 1997
Registration No. 333-32735
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------
AMENDMENT NO. 3
TO
FORM S-1
REGISTRATION STATEMENT
under
THE SECURITIES ACT OF 1933
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SPR INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<C> <C> <C>
DELAWARE 7370 36-3932665
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer Identification
incorporation or organization) Classification Code No.) No.)
</TABLE>
2015 SPRING ROAD, SUITE 750, OAK BROOK, ILLINOIS 60523-1874 (630) 990-2040
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(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
ROBERT M. FIGLIULO
CHIEF EXECUTIVE OFFICER
SPR INC.
2015 SPRING ROAD, SUITE 750, OAK BROOK, ILLINOIS 60523-1874 (630) 990-2040
- --------------------------------------------------------------------------------
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
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Copies to:
<TABLE>
<C> <C>
DONALD E. FIGLIULO CHARLES EVANS GERBER
JOHN E. MCGOVERN, JR. WILLIAM M. HOLZMAN
WILDMAN, HARROLD, ALLEN & DIXON NEAL, GERBER & EISENBERG
225 WEST WACKER DRIVE TWO NORTH LASALLE STREET
CHICAGO, ILLINOIS 60606-1229 CHICAGO, ILLINOIS 60602
(312) 201-2000 (312) 269-8000
</TABLE>
APPROXIMATE DATE OF COMMENCEMENT OF THE PROPOSED SALE OF THE SECURITIES TO
THE PUBLIC: As soon as practicable after this Registration Statement becomes
effective.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration number of the earlier effective registration statement for the same
offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
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<PAGE> 2
EXPLANATORY NOTE
Amendment No. 3 to Form S-1 Registration Statement of SPR Inc. is being
filed for the purpose of filing the signed Report of Independent Public
Accountants and the signed Report of Independent Public Accountants on
Supplemental Schedule reflecting consummation of the 1.044-to-1 split of the
Common Stock effected on September 26, 1997.
<PAGE> 3
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS
OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED SEPTEMBER 29, 1997
PROSPECTUS
2,600,000 SHARES
SPR LOGO
COMMON STOCK
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Of the 2,600,000 shares of common stock, par value $.01 per share (the
"Common Stock"), offered hereby (the "Offering"), 1,600,000 shares are being
offered by SPR Inc. ("SPR" or the "Company") and 1,000,000 shares are being
offered by certain stockholders (the "Selling Stockholders"). See "Principal and
Selling Stockholders." The Company will not receive any of the proceeds from the
sale of shares of Common Stock by the Selling Stockholders.
Prior to the Offering, there has been no public market for the Common Stock
of the Company. It is currently estimated that the initial public offering price
will be between $13.00 and $15.00 per share. See "Underwriting" for information
relating to the factors to be considered in determining the initial public
offering price. The Common Stock has been approved for listing on the Nasdaq
National Market under the symbol "SPRI," subject to official notice of issuance.
------------------
SEE "RISK FACTORS" BEGINNING ON PAGE 8 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE COMMON STOCK OFFERED
HEREBY.
------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
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<S> <C> <C> <C> <C>
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<CAPTION>
UNDERWRITING PROCEEDS TO
PRICE TO DISCOUNTS AND PROCEEDS TO SELLING
PUBLIC COMMISSIONS(1) COMPANY(2) STOCKHOLDERS
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<S> <C> <C> <C> <C>
Per Share $ $ $ $
- ------------------------------------------------------------------------------------------------------------------
Total(3) $ $ $ $
==================================================================================================================
</TABLE>
(1) For information regarding indemnification of the Underwriters, see
"Underwriting."
(2) Before deducting expenses estimated at $1.1 million, all of which are
payable by the Company.
(3) Certain Selling Stockholders have granted the Underwriters a 30-day option
to purchase up to 390,000 additional shares of Common Stock solely to cover
over-allotments, if any. See "Underwriting." If such option is exercised in
full, the total Price to Public, Underwriting Discounts and Commissions,
Proceeds to Company and Proceeds to Selling Stockholders will be $ ,
$ , $ and $ , respectively. See "Underwriting" and "Principal
and Selling Stockholders."
------------------
The shares of Common Stock are being offered by the several Underwriters
named herein, subject to prior sale, when, as and if accepted by them and
subject to certain conditions. It is expected that certificates for the shares
of Common Stock offered hereby will be available for delivery on or about
September , 1997 at the office of Smith Barney Inc., 333 West 34th Street, New
York, New York 10001.
------------------
SMITH BARNEY INC. ROBERT W. BAIRD & CO.
INCORPORATED
, 1997
<PAGE> 4
INSIDE FRONT COVER OF PROSPECTUS
The inside front cover is a multicolor graphic and text layout. The following
text appears above the graphics:
"SPR Inc."
[Graphics consist of a man's right fist with index finger extended downward to
touch a computer keyboard. Six beams of light emanate from the point at which
the finger and keyboard meet.]
The following text appears to the right of the graphics:
"Helping companies derive maximum value from existing systems."
The following text appears below the graphics:
" - General Consulting Services
- Outsourcing Services
- Systems Re-engineering
- Century Date Compliance
- Application Management
- Information Delivery Services."
[The SPR logo appears in the lower right corner.]
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK,
INCLUDING OVERALLOTMENT, ENTERING STABILIZING BIDS, EFFECTING SYNDICATE
COVERING TRANSACTIONS AND IMPOSING PENALTY BIDS. FOR A DESCRIPTION OF THESE
ACTIVITIES, SEE "UNDERWRITING."
<PAGE> 5
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by, and should be read
in conjunction with, the more detailed information and the financial statements
and related notes thereto appearing elsewhere in this Prospectus. SPR Inc.
("SPR" or the "Company") is a Delaware corporation organized in connection with
the mergers into it of SPR Chicago Inc., an Illinois corporation ("SPR
Chicago"), Systems & Programming Resources of Tulsa, Inc., an Oklahoma
corporation ("SPR Tulsa"), SPR-Wisconsin, Inc., a Wisconsin corporation ("SPR
Wisconsin"), Systems and Programming Resources, Inc., an Illinois corporation
("Systems Inc."), and Consulting Acquisition, Inc., an Illinois corporation
("DataFlex"). Such mergers are each individually referred to in this Prospectus
as a "Merger" and collectively as the "Mergers." Unless indicated otherwise, the
information contained in this Prospectus: (i) gives retroactive effect to the
Mergers, (ii) assumes a 1.044-to-1 split of the Common Stock effective
immediately prior to consummation of the Offering and (iii) assumes that the
Underwriters' over-allotment option is not exercised. Unless otherwise
indicated, all references to "SPR" or the "Company" refer to SPR Inc. after the
Mergers or to the constituent corporations in the Mergers or their respective
predecessors, as appropriate. See "Certain Transactions."
THE COMPANY
SPR has over 24 years of experience in providing information technology
("IT") services to clients in a variety of industries, including financial
services, healthcare, insurance, manufacturing, oil and gas, transportation and
utilities. The Company focuses its marketing efforts on Fortune 1000 companies
and other large organizations which have complex IT operations and significant
IT budgets. SPR provides these clients with three levels of consulting support
which are distinguished by the degree of responsibility the Company assumes:
strategic planning, project management and implementation. Within this
framework, SPR currently provides outsourcing services through four service
offerings: Systems Re-engineering, Century Date Compliance, Application
Management and Information Delivery Services ("IDS") in addition to providing
General Consulting services. SPR bills its clients on either a time and
materials or a fixed-price basis. The Company believes that this breadth of
service and support fosters long-term client relationships, promotes
cross-selling opportunities and minimizes the Company's dependence upon any
particular service offering or client.
The Company's proprietary service methodologies, Renovation(SM) and
Renovation2000(SM), and its proprietary software analysis tool, CodeVu(SM),
provide SPR with a disciplined approach to fulfill its engagements.
Renovation(SM) and Renovation2000(SM) enable the Company to deliver its service
offerings through a tested and repeatable format. CodeVu(SM) quickly and
accurately provides information concerning client software portfolios. These
proprietary methodologies and software analysis tool, as well as key strategic
alliances with third-party software providers, such as Arbor Software and Micro
Focus, facilitate the development of well-defined tasks and timetables for each
phase of an engagement from strategic planning through implementation.
Many large organizations are outsourcing IT services relating to
mission-critical business systems due to the complex and rapidly changing
technological environment and problems inherent in implementing mass changes to
application systems and their associated data bases. Examples of mass change
include the year 2000 problem (the software glitch that will prevent computers
from properly recognizing dates after the year 1999), the European Union's
expected conversion to the euro currency and the extension of the number of
digits or other characters in zip codes, product codes and account numbers. The
Company believes this outsourcing trend will continue to grow because: (i)
organizations desire to focus their energies on their core business functions;
(ii) organizations must address and resolve the year 2000 and other mass change
problems; (iii) IT solutions are becoming increasingly complex; and (iv)
organizations often lack the IT skills necessary to address their IT needs.
The Company's objective is to become the leading IT service provider to
both new and existing clients. To achieve this objective, the Company has
pursued, and intends to continue to pursue, the following business and growth
strategies:
- Expand Entry-level Training Program. To address the industry-wide
shortage of qualified technical consultants, the Company has implemented
a comprehensive entry-level training program for college
3
<PAGE> 6
graduates with degrees other than in computer science. The Company, in
conjunction with DeVry, Inc., a leading higher education institution
specializing in technology, has developed several additional training
programs to further enhance its consultants' careers and improve their
technical skills. SPR believes that these training programs and its stock
option and stock purchase plans provide the Company with a competitive
advantage in attracting, developing and retaining qualified technical
consultants.
- Continue to Focus on Project Management. The Company will continue to
focus on increasing its mix of project management and strategic planning
engagements. The Company believes that by providing these value-added
services, it gains a competitive advantage in assessing its clients' needs
and anticipating opportunities to provide additional IT services.
- Capitalize on Outsourcing Trend through Century Date Compliance
Expertise. SPR was an early entrant in the year 2000 segment of the
market, completing its first Century Date Compliance engagement in 1993.
The Company's approach to Century Date Compliance provides SPR with the
platform to make unsolicited proposals for additional outsourcing
engagements. The Company believes that its expertise in addressing the
year 2000 problem will not only result in additional engagements, but that
such engagements also will provide SPR with a competitive advantage in
cross-selling additional IT services.
- Develop Additional Virtual Insourcing Centers. As part of its outsourcing
services, in 1996 SPR established its first Virtual Insourcing Center
which enables the Company to provide the full range of its service
offerings in a Company facility rather than at its clients' facilities.
The Company intends to establish additional Virtual Insourcing Centers.
- Focus on Leading Technologies. The Company maintains and continues to
build expertise not only in mainframe applications but also in other high
demand technologies, such as Internet/intranet applications, open
computing systems, object oriented solutions, data warehousing and
relational database management systems. The Company's expertise in these
areas, together with its relationships with software product developers
and research institutions, allow SPR to remain on the leading edge of
technological development.
- Deliver Unbiased Service Offerings. The Company uses Renovation(SM),
Renovation2000(SM) and CodeVu(SM) in conjunction with the best available
third-party application software and productivity tools without regard to
specific third-party vendor relationships. The ability to assess client
systems objectively enables the Company to provide its clients with
technologies that are best suited to their individual needs.
SPR's growth strategies have allowed it to capitalize on the growing demand
for IT services. The Company's revenues increased at a compound annual growth
rate of approximately 37% from 1992 through 1996. From 1995 to 1996, the
Company's revenues increased 42%. More than 80% of the Company's 1996 revenues
were attributable to 56 companies which had been clients for at least the prior
three consecutive years. During 1996, the Company made significant
infrastructure investments, which adversely affected the Company's gross profit
and operating income. Principal among these investments was the development and
implementation of the Company's entry-level training program, which has enabled
the Company to keep pace with the growing demand for its service offerings. For
the first six months of 1997, the Company's revenues increased 51% compared to
the same period in 1996, and its gross margin increased to 38%.
4
<PAGE> 7
THE OFFERING
<TABLE>
<S> <C>
Common Stock Offered Hereby by:
The Company...................................... 1,600,000 shares
The Selling Stockholders......................... 1,000,000 shares
Common Stock to Be Outstanding After the
Offering......................................... 8,067,400 shares(1)
Use of Proceeds.................................... Payment of certain undistributed S corporation
earnings, repayment of debt, fund build-out and
equipping of additional Virtual Insourcing
Centers, expand the Company's entry-level
training program and for general corporate
purposes. See "Use of Proceeds."
Nasdaq National Market Symbol...................... SPRI
</TABLE>
- -------------------------
(1) Excludes (i) 1,044,252 shares of Common Stock reserved for issuance upon
exercise of options granted and to be granted pursuant to the Company's
Combined Incentive and Non-statutory Stock Option Plan (of which options to
purchase 819,216 shares of Common Stock are outstanding at an exercise price
of $7.66 per share); and (ii) 500,000 shares reserved for issuance under the
Company's Employee Stock Purchase Plan. See "Management -- Stock Plans,"
"Description of Capital Stock" and Notes 11 and 15 of Notes to Financial
Statements.
5
<PAGE> 8
SUMMARY FINANCIAL DATA
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
------------------------------------------------------- --------------------------
1992 1993 1994 1995 1996 1996 1997
---- ---- ---- ---- ---- ---- ----
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA(1):
Revenues........................ $9,122 $11,731 $14,797 $ 22,908 $ 32,511 $ 15,087 $ 22,722
Gross profit.................... 2,218 3,393 4,373 7,383 9,224 4,435 8,732
Selling expenses.............. 743 1,012 1,165 2,141 3,046 1,366 2,093
Recruiting expenses........... 290 341 410 777 1,323 612 698
Stock-based compensation...... -- -- 6,510(2) 27,987(2) 12,231(2) 6,720(2) --
General and administrative
expenses.................... 1,015 1,230 1,334 1,642 3,742 1,328 4,102(3)(4)
------ ------- ------- -------- --------- --------- ---------
Total costs and expenses........ 2,048 2,583 9,419 32,547 20,342 10,026 6,893
------ ------- ------- -------- --------- --------- ---------
Operating income (loss)......... 170 810 (5,046)(2) (25,164)(2) (11,118)(2) (5,591)(2) 1,839(4)
Other income (expense).......... 27 6 (57) (109) (71) (22) (101)
------ ------- ------- -------- --------- --------- ---------
Income (loss) before income
taxes......................... 197 816 (5,103)(2) (25,273)(2) (11,189)(2) (5,613)(2) 1,738
Provision for income taxes...... 15 4 75 21 9 -- 1
------ ------- ------- -------- --------- --------- ---------
Net income (loss), as
reported(5)................... $ 182 $ 812 $(5,178)(2) $(25,294)(2) $ (11,198)(2) $ (5,613)(2) $ 1,737
====== ======= ======= ======== ========= ========= =========
Pro forma provision for income
taxes(5)...................... 408 443 694
--------- --------- ---------
Pro forma net income
(loss)(5)..................... $ (11,606) $ (6,056) $ 1,043(4)
========= ========= =========
Pro forma net income (loss) per
share(5)(6)................... $ (1.69) $ (.88) $ .15(4)
========= ========= =========
Weighted average number of
common and common equivalent
shares outstanding(6)......... 6,862,344 6,862,344 6,862,344
</TABLE>
<TABLE>
<CAPTION>
JUNE 30,
1997
--------
(UNAUDITED)
<S> <C>
BALANCE SHEET DATA(1):
Cash...................................................... $ 546
Working capital........................................... 2,140
Total assets.............................................. 8,726
Long-term debt, less current portion...................... 930
Total stockholders' equity................................ 2,823(2)
</TABLE>
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(1) In October 1996, Systems Inc., SPR Chicago, SPR Tulsa, SPR Wisconsin and
DataFlex merged into SPR and, in connection therewith, the stockholders of
such companies received an aggregate of 6,467,191 shares of Common Stock of
SPR. The financial data above has been restated to include the financial
position and results of operations of the respective companies for all
periods presented.
(2) In 1994, Systems Inc. transferred certain assets and liabilities to SPR
Chicago and SPR Wisconsin. Inasmuch as such 1994 transactions were among
family members within a control group, such transactions have been recorded
in the Company's financial statements as if the stockholders of SPR Chicago
and SPR Wisconsin received non-cash, stock-based compensation during 1994,
1995 and 1996 in an amount equal to the increase in the estimated value of
such companies since 1994. This expense is non-recurring subsequent to
October 31, 1996. Such compensation expense is recorded as stock-based
compensation with the corresponding credit included in additional paid-in
capital. Upon conversion of the Company to a C corporation upon closing of
the Offering, the retained deficit of the Company, which includes the
aggregate stock-based compensation expense, will be reclassified and netted
against additional paid-in capital. Excluding such compensation expense, net
income for 1996 and the six months ended June 30, 1996 on a pro forma basis
would have been $0.6 million and $0.7 million, respectively. See "-- Summary
Unaudited Pro Forma Financial Data" and Note 10 of Notes to Financial
Statements.
(3) General and administrative expenses include $0.2 million of expenses related
to the Company's March 1997 proposed initial public offering that was
postponed. Total costs of the March 1997 offering were approximately $0.8
million of which $0.2 million was expensed in the second quarter of 1997 and
$0.6 million will be charged against the proceeds of the Offering.
(4) On June 2, 1997, the Company granted options to purchase 819,216 shares of
Common Stock. General and administrative expenses for the six months ended
June 30, 1997 include approximately $0.4 million of non-cash compensation
expense related to options to purchase 276,725 shares of Common Stock that
are presently exercisable. Excluding the expenses related to these presently
exercisable options, operating income and pro forma net income per share for
the six months ended June 30, 1997 would have been approximately $2.2
million and $0.18, respectively. Over the next five years as the remaining
options vest, the Company will recognize additional non-cash compensation
expense of up to approximately $150,000 per year. See Note 15 of Notes to
Financial Statements.
(5) Prior to the Offering, the Company was an S corporation and was not subject
to Federal and certain state corporate income taxes. The Statement of
Operations Data reflects a pro forma provision for income taxes as if the
Company had been subject to Federal and state corporate income taxes. The
pro forma provision for income taxes represents a combined Federal and state
effective tax rate of 40%. The pro forma provision for income taxes is
computed by multiplying the effective tax rate times the income (loss)
before income taxes adjusted to eliminate the stock-based compensation
expense and subtracting income taxes previously recorded.
(6) Pro forma net income (loss) per share information assumes that 192,012 of
the shares of Common Stock being offered by the Company hereby were
outstanding during the periods presented. This represents the approximate
number of shares of Common Stock which are being offered by the Company
(assuming an initial public offering price of $14.00 per share and after
deducting estimated underwriting discounts and commissions) to fund the
payment to existing stockholders of undistributed S corporation earnings for
the period from November 1, 1996 through the closing date of the Offering
(the "Distribution"). The Company currently estimates that the Distribution
will be $2.5 million.
6
<PAGE> 9
SUMMARY UNAUDITED PRO FORMA FINANCIAL DATA
The Summary Unaudited Pro Forma Financial Data are based on the historical
financial statements of the Company, giving effect to the Offering and to the
pro forma adjustments described in the accompanying notes as if the Offering
occurred as of January 1, 1996 in the case of the Statement of Operations Data
and June 30, 1997 in the case of the Balance Sheet Data. The Unaudited Pro Forma
Financial Data are neither necessarily indicative of the results of operations
which would have been achieved had the Offering occurred on January 1, 1996 nor
are they necessarily indicative of the results of future operations. The
Unaudited Pro Forma Financial Data should be read in conjunction with the
financial statements of the Company included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
PRO FORMA
---------------------------------------------
SIX MONTHS ENDED
JUNE 30,
YEAR ENDED ---------------------
DECEMBER 31, 1996 1996 1997
----------------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues................................................. $32,511 $15,087 $22,722
Operating income......................................... 1,113(1) 1,129(1) 2,209(2)
Net income(3)............................................ 625 664 1,265
Earnings per share....................................... $ .08 $ .08 $ .15
Weighted average number of common and common equivalent
shares outstanding..................................... 8,270 8,270 8,270
</TABLE>
<TABLE>
<CAPTION>
JUNE 30, 1997
---------------------------
ACTUAL AS ADJUSTED(4)
------ --------------
<S> <C> <C>
BALANCE SHEET DATA:
Cash........................................................ $ 546 $15,184(5)
Working capital............................................. 2,140 18,108(5)
Total assets................................................ 8,726 22,724
Long-term debt, less current portion........................ 930 23
Total stockholders' equity.................................. 2,823(6) 19,480(5)(6)
</TABLE>
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(1) In 1994, Systems Inc. transferred certain assets and liabilities to SPR
Chicago and SPR Wisconsin. Inasmuch as such transactions were among family
members within a control group, such transactions have been recorded in the
Company's financial statements as if the stockholders of SPR Chicago and SPR
Wisconsin received non-cash, stock-based compensation during 1994, 1995 and
1996 in an amount equal to the increase in the estimated value of such
companies since 1994. This expense is non-recurring subsequent to October
31, 1996. The Summary Unaudited Pro Forma Financial Data eliminates such
expense from operating income for 1996 and for the six months ended June 30,
1996; accordingly, operating income for 1996 and for the six months ended
June 30, 1996 was increased by $12.2 million and $6.7 million, respectively.
See Note 10 of Notes to Financial Statements.
(2) Options to purchase 276,725 shares of Common Stock vested on June 2, 1997.
As a result, non-cash compensation expense associated with these vested
options of approximately $0.4 million was recorded during the six-month
period ended June 30, 1997. The expense relating to these vested options is
non-recurring subsequent to June 2, 1997. The Summary Unaudited Pro Forma
Financial Data eliminates this expense from operating income for the six
months ended June 30, 1997. However, over the next five years, the Company
will recognize non-cash compensation expense of up to approximately $150,000
per year as options to purchase an additional 542,491 shares vest. See Note
15 of Notes to Financial Statements.
(3) Prior to the Offering, the Company was an S corporation and was not subject
to Federal and certain state corporate income taxes. The Statement of
Operations Data reflects a pro forma provision for income taxes as if the
Company had been subject to Federal and state corporate income taxes for all
periods. The pro forma provision for income taxes represents a combined
Federal and state effective tax rate of 40%.
(4) Adjusted to reflect the application of the estimated net proceeds from the
Offering, estimated to be $19.7 million (assuming an initial public offering
price of $14.00 per share). The proceeds from the Offering will be used to
make the Distribution (see note 4), pay borrowings under a revolving credit
facility and two term notes and for general corporate purposes.
(5) Immediately prior to consummation of the Offering, the Company intends to
make the Distribution. The Company currently estimates that the Distribution
will be $2.5 million.
(6) Upon conversion of the Company to a C corporation at the closing of the
Offering, the Company will record $.6 million in estimated net deferred
income tax liabilities which will reduce retained earnings and increase
liabilities. Retained deficit of the Company (including the stock-based
compensation expense), after recording the estimated Distribution and net
deferred income taxes, will be reclassified and netted against additional
paid-in capital.
7
<PAGE> 10
RISK FACTORS
Prospective purchasers of the Common Stock offered hereby should consider
carefully the risks associated with investing in the Common Stock, including the
principal risk factors set forth below, as well as other information set forth
in this Prospectus.
Need to Attract and Retain Qualified Technical Consultants. The Company's
business involves the delivery of professional services and is very
labor-intensive. The Company's success depends in large part upon its ability to
attract, develop, motivate and retain qualified technical consultants,
particularly project managers and other senior technical personnel. Qualified
technical consultants are in great demand and are likely to remain a limited
resource for the foreseeable future. This demand may enable qualified technical
consultants to command significantly greater compensation than is currently paid
by the Company. There can be no assurance that the Company will be able to
continue to attract and retain a sufficient number of qualified technical
consultants in the future. Historically, the Company has experienced turnover
rates which it believes are consistent with industry norms. The Company's
turnover rate was 31% and 30% for 1995 and 1996, respectively. As competition
for qualified technical consultants increases, there can be no assurance that
the turnover rate experienced by the Company will not increase. The Company's
inability to hire a sufficient number of qualified technical consultants, or a
significant increase in the Company's consultant turnover rate, could have a
material adverse effect on the Company's business, financial condition and
results of operations. See "Business -- Business Strategies."
Management of Growth. The Company's rapid revenue and employee growth has
placed, and could continue to place, significant demands upon its management and
other resources. To manage its growth effectively, the Company will be required
to continue to develop and improve its operational, financial and other internal
systems, as well as its business development capabilities. In addition, the
Company's future success will depend in large part upon its ability to maintain
high rates of consultant utilization, maintain the quality of its services and
integrate and operate the branch offices that were merged into the Company in
October 1996. Moreover, none of the Company's senior management has any
experience managing a public company. The Company's inability to manage its
growth and engagements effectively could have a material adverse effect on the
Company's business, financial condition and results of operations. See "-- Need
to Attract and Retain Qualified Technical Consultants" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
Reliance on Century Date Compliance Engagements. Market demand for Century
Date Compliance services will likely decrease substantially, and eventually
cease, during and after the year 2000. In addition, the Company's growth
strategy is substantially dependent upon leveraging its Century Date Compliance
expertise to obtain other consulting engagements from its Century Date
Compliance clients. If the Company fails to consistently complete Century Date
Compliance engagements to its clients' satisfaction or to procure additional
consulting engagements from such clients any such failures could have a material
adverse effect on the Company's business, financial condition and results of
operations. Revenues from Century Date Compliance engagements were approximately
38% of revenues for the six-month period ended June 30, 1997. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
While several software programs have been developed to assist IT service
professionals in making existing systems year 2000-compliant, the Company is
unaware of any fully-automated solution (a "silver bullet") to the year 2000
problem. There can be no assurance that a silver bullet will not be developed.
Moreover, certain companies may elect to replace their existing systems with
year 2000-compliant hardware and software, rather than incur substantial cost in
making their existing systems year 2000-compliant. The development of a silver
bullet or decisions by a significant number of companies to replace their
existing systems with year 2000-compliant hardware and software could have a
material adverse effect on the Company's business, financial condition and
results of operations.
Competition. The highly competitive market for IT services includes a large
number of competitors and is subject to rapid change. The Company believes its
primary competitors include "Big Six" accounting firms, systems consulting and
implementation firms, application software firms, service groups of computer
equipment companies, general management consulting firms and programming
companies. Many of these
8
<PAGE> 11
competitors have significantly greater financial, technical and marketing
resources and greater name recognition than the Company. In addition, the
Company competes with its clients' internal IT personnel. Such competition may
impose additional pricing pressures on the Company. There can be no assurance
that the Company can compete successfully with its existing competitors or with
any new competitors. See "Business -- Competition."
Engagement and Contract Risks. Many of the Company's engagements involve
projects that are critical to the operations of its clients' businesses. The
Company's failure or inability to complete engagements to its clients'
satisfaction could have a material adverse effect on its clients' operations and
could consequently subject the Company to litigation or damage the Company's
reputation, which could have a material adverse effect on the Company's
business, financial condition and results of operations.
Substantially all of the Company's contracts are terminable by the client
on relatively short notice, with or without cause and without penalty. The
unexpected termination by a client of a significant contract could have a
material adverse effect on the Company's consultant utilization rate which, in
turn, could have a material adverse effect on the Company's business, financial
condition and results of operations. In addition, the Company currently is
performing services for several of its significant clients pursuant to oral
agreements or written contracts that are no longer in effect. In the event of a
dispute, the absence of a written and binding agreement limiting the Company's
liability to the client could have a material adverse effect on the Company's
business, financial condition and results of operations. Some of the Company's
contracts give its clients the right in certain circumstances to hire
consultants employed or retained by the Company, and several clients have, in
fact, hired Company consultants in the past. The loss of one or more project
managers or a significant number of qualified technical consultants to the
Company's clients could have a material adverse effect on the Company's
business, financial condition and results of operations. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
The Company is providing Century Date Compliance services to a client which
filed a case under Chapter 11 of the federal Bankruptcy Code in July 1997. As of
June 30, 1997, the Company had a receivable from this client of $422,941 and
recorded a corresponding reserve for doubtful accounts of $422,941. As a result,
there can be no assurance the Company will receive full payment for services it
provides to such client. The Company does not believe that the case will have a
material adverse effect on the Company's financial condition or results of
operations; however, the case is in an early stage and the ultimate outcome is
uncertain. See Note 2 of Notes to Financial Statements.
Fixed-price Engagements. The Company principally bills for its services on
a "time and materials basis;" however, some of the Company's contracts contain a
cap on the amount of fees the Company can charge. The Company occasionally has
entered into fixed-price billing engagements and may in the future enter into
additional engagements billed on a fixed-price basis. The failure of the Company
to complete a fixed-price engagement within budget would expose the Company to
risks associated with cost overruns, which could have a material adverse effect
on the Company's business, financial condition and results of operations. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
Customer Concentration. The Company has derived, and believes that it will
continue to derive, a significant portion of its revenues from a limited number
of large clients. In 1995, 1996 and for the six months ended June 30, 1997, the
Company's largest client accounted for approximately 11%, 16% and 15% of its
revenues, respectively, and its ten largest clients accounted for approximately
51%, 52% and 49% of its revenues, respectively. The volume of work performed for
specific clients varies from year to year. There can be no assurance that a
large client in one year will continue to use the Company's services in a
subsequent year. Furthermore, the Company rarely is the exclusive provider of IT
consulting services to its clients. The loss of any large client could have a
material adverse effect on the Company's business, financial condition and
results of operations. See "Business -- Client Base."
Risks of Branch Expansion. The Company anticipates future growth through
branch expansion, which is dependent upon a number of factors, including, but
not limited to: (i) the ability to cultivate additional business from existing
clients and obtain new clients; (ii) the ability to identify and hire qualified
IT consultants within both new and existing markets; and (iii) the continued
hiring and training of corporate
9
<PAGE> 12
personnel to open and staff additional branch offices. The Company opened its
Dallas branch office in February, 1997. There can be no assurance that any
branch offices which may be opened will be profitable. See "-- Need to Attract
and Retain Qualified Technical Consultants."
Intellectual Property Rights. Software developed by SPR in connection with
a client engagement typically becomes the exclusive property of the client. The
Company holds no patents or registered copyrights and has no present intention
of registering any copyrights or filing any patent applications. Although the
Company believes that its services and the software it develops for its clients
do not infringe upon the intellectual property rights of others and that it has
all rights necessary to utilize the intellectual property employed in its
business, the Company is subject to the risk of litigation alleging infringement
of third-party intellectual property rights. The Company typically agrees to
indemnify its clients against such claims. Any such claims could require the
Company to spend significant sums in litigation, pay damages, develop non-
infringing intellectual property or acquire licenses to the intellectual
property which is the subject of asserted infringement.
The Company relies upon a combination of nondisclosure and other
contractual arrangements and trade secret, copyright and trademark laws to
protect its rights, the rights of third parties from whom the Company licenses
intellectual property and the proprietary rights of its clients. The Company
requires all consultants to sign confidentiality agreements and limits
distribution of proprietary information. There can be no assurance, however,
that the steps taken by the Company will be adequate to deter misappropriation
of proprietary information or that the Company will be able to detect
unauthorized use and take appropriate steps to enforce its intellectual property
rights. See "Business -- Intellectual Property Rights."
Reliance Upon Executive Officers and Key Employees. The success of the
Company is highly dependent upon the efforts and abilities of its executive
officers, particularly Mr. Robert Figliulo, the Company's Chief Executive
Officer. Although all of its executive officers and certain key employees will
enter into employment agreements with the Company which will contain
noncompetition, nondisclosure and nonsolicitation covenants, such agreements do
not guarantee that these individuals will continue their employment with the
Company. The loss of the services of any of these executive officers or key
employees for any reason could have a material adverse effect upon the Company's
business, financial condition and results of operations. See "Management --
Employment Agreements."
Control by Principal Stockholders. After giving effect to the Offering,
members of the Figliulo family, in the aggregate, Michael Fletcher and Rene
Potter will beneficially own approximately 52.7%, 7.5% and 7.0%, respectively,
of the outstanding shares of Common Stock. As a result, such persons
collectively will be able to control the outcome of matters requiring a
stockholder vote, including the election of directors. Such control could
preclude any unsolicited acquisition of the Company and, consequently, adversely
affect the market price of the Common Stock. See "Principal and Selling
Stockholders" and "Description of Capital Stock -- Delaware Law and Certain
Certificate of Incorporation and By-law Provisions; Antitakeover Effects."
Variability of Quarterly Operating Results. The Company's revenues, gross
profit and earnings have fluctuated and, in the future, may fluctuate from
quarter to quarter based on such factors as the number, size and scope of
projects in which the Company is engaged, the contractual terms and degree of
completion of such engagements, any delays incurred in connection with an
engagement, consultant utilization rates, the adequacy of provisions for losses,
the accuracy of estimates of resources required to complete ongoing engagements
and general economic conditions. Unanticipated variations in the number, or
progress toward completion, of the Company's engagements or in consultant
utilization rates may cause significant variations in operating results in any
particular quarter and could result in losses for such quarter. An unanticipated
termination of a major engagement, a client's decision not to proceed to the
stage of the engagement anticipated by the Company or the completion during a
quarter of several major client engagements could leave the Company with
underutilized consultants, which could have a material adverse effect on the
Company's business, financial condition and results of operations. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
10
<PAGE> 13
Employment Liability Risks. The Company generally places its consultants in
the workplaces of other businesses. Risks of such placement include possible
claims of errors and omissions, misuse of client proprietary information,
misappropriation of funds, discrimination and harassment, theft of client
property, other criminal activity or torts and other claims. Although
historically the Company has not experienced any material claims of these types,
there can be no assurance that the Company will not experience such claims in
the future. To reduce its exposure, the Company maintains insurance covering
general liability, workers' compensation claims, errors and omissions and
employer practices liability. There can be no assurance, however, that the
Company's insurance will cover all such claims, or that such insurance coverage
will continue to be available economically in amounts adequate to cover any such
liability or that such coverage will adequately compensate the Company for such
liabilities.
Risks of Licensing Century Date Compliance Methodology. The Company has
entered into a non-exclusive agreement to license its Century Date Compliance
methodology, Renovation2000(SM), and its proprietary software analysis tool,
CodeVu(SM), to an unaffiliated technical services company operating in New York
and other markets where the Company is not currently doing business. The Company
may in the future enter into similar licensing agreements with other third
parties in specific geographic regions in which it does not presently conduct
business. There can be no assurance that such licensees will properly utilize
the Company's methodology or software analysis tool. The failure by licensees to
adhere strictly to SPR's standards in utilizing the Renovation2000(SM)
methodology or CodeVu(SM) in Century Date Compliance engagements could subject
SPR to litigation and harm SPR's reputation thereby resulting in a material
adverse effect on the Company's business, financial condition and results of
operations.
Absence of Prior Public Market; Possible Volatility of Stock Price. Prior
to the Offering, there has not been a public market for the Common Stock and
there can be no assurance that an active trading market will develop or be
sustained after the Offering. The initial public offering price for the Common
Stock offered hereby will be determined by negotiations between the Company and
the representatives of the Underwriters, and may not be indicative of the market
price for the Common Stock after the Offering. See "Underwriting" for a
discussion of factors to be considered in determining the initial public
offering price. There can be no assurance that the market price of the Common
Stock will not decline below the initial public offering price. The Company
believes that variations in the Company's results of operations and other
factors, including general economic conditions, may cause the market price of
the Common Stock to fluctuate significantly. The market price for the Common
Stock may also be affected by the Company's ability to meet analysts'
expectations, and any failure to meet such expectations, even if minor, could
have a material adverse effect on the market price of the Common Stock. In
addition, from time to time in recent years, the securities markets have
experienced significant price and volume fluctuations that have often been
unrelated or disproportionate to the operating performance of particular
companies. Following the Offering, sales or the expectation of sales of
substantial amounts of Common Stock in the public market by the Company or its
stockholders also could adversely affect the prevailing market prices for the
Common Stock. See "Underwriting."
Immediate and Substantial Dilution. The assumed initial public offering
price is substantially higher than the pro forma net tangible book value per
share of Common Stock. Investors purchasing shares of Common Stock in the
Offering will therefore incur immediate and substantial dilution of $11.59 per
share of Common Stock based on an assumed initial public offering price of
$14.00 per share. To the extent outstanding options to purchase Common Stock are
exercised, there will be further dilution. See "Dilution."
Significant Unallocated Net Proceeds. The only specific allocations of the
Company's anticipated net proceeds from the Offering is the payment to existing
stockholders of the Distribution; repayment of certain indebtedness; funding of
additional consultant training; and costs associated with the development and
expansion of off-site service centers (the "Virtual Insourcing Centers"). See
"Business -- Growth Strategies -- Develop Additional Virtual Insourcing
Centers." Accordingly, a substantial majority of the Company's anticipated net
proceeds of the Offering has not been designated for specific uses. The Board of
Directors of the Company will have broad discretion with respect to the use of
such unallocated net proceeds. See "Use of Proceeds."
11
<PAGE> 14
Anti-takeover Provisions. The Company's Certificate of Incorporation and
By-laws and the Delaware General Corporation Law contain certain provisions that
could have the effect of discouraging or making more difficult the acquisition
of the Company by means of a tender offer, a proxy contest or otherwise, even
though such an acquisition might be economically beneficial to the Company's
stockholders. These include provisions under which (i) only the Chairman of the
Board or the President may call meetings of stockholders, and (ii) stockholders
must comply with certain advance notice procedures to nominate candidates for
election as directors of the Company and to submit proposals for consideration
at stockholders' meetings. The ability of the Board of Directors to issue up to
3,000,000 shares of preferred stock, in one or more classes or series, and with
such powers, designations, preferences and relative, participating, optional or
special rights, qualifications, limitations or restrictions as may be determined
by the Board of Directors of the Company, also could make an acquisition of the
Company more difficult. In addition, these provisions may make the removal of
management more difficult, even in cases where such removal would be favorable
to the interests of the Company's stockholders. See "-- Control by Principal
Stockholders," "Management -- Directors and Executive Officers" and "Description
of Capital Stock -- Delaware Law and Certain Certificate of Incorporation and
By-law Provisions; Anti-Takeover Effects."
Benefits to Existing Stockholders. The existing stockholders of the Company
will realize substantial benefits from the Offering, including the creation of a
public market for the Common Stock and an immediate increase in the net tangible
book value of their shares of Common Stock. Moreover, a portion of the Company's
net proceeds from the Offering will be used to make the Distribution to the
existing stockholders. In addition, certain stockholders of the Company intend
to sell an aggregate of 1,000,000 shares of Common Stock in the Offering
(1,390,000 shares if the underwriters' over-allotment option is exercised in
full). The proceeds of such proposed sales (net of estimated underwriting
discounts and commissions) based upon an assumed initial public offering price
of $14.00 per share will significantly exceed the amount paid for such shares by
the Selling Stockholders. See "Use of Proceeds," "Dilution," "Certain
Transactions" and "Principal and Selling Stockholders."
Shares Eligible for Future Sale. Upon completion of the Offering, the
Company will have 8,067,400 shares of Common Stock outstanding, of which the
2,600,000 shares sold pursuant to the Offering will be freely transferable
without restriction or further registration under the Securities Act of 1933, as
amended (the "Securities Act") (other than by an "affiliate" of the Company, as
defined in the Securities Act), and the remaining 5,467,400 shares will be
"restricted securities" under Rule 144 ("Rule 144") promulgated under the
Securities Act. Holders of the restricted shares will be eligible to sell such
shares pursuant to Rule 144 at prescribed times and subject to the manner of
sale, volume, notice and information restrictions of Rule 144. In addition,
1,044,252 shares of Common Stock are reserved for issuance under the Company's
Combined Incentive and Non-statutory Stock Option Plan (the "Option Plan") and
500,000 shares of Common Stock are reserved for issuance under the Company's
Employee Stock Purchase Plan. The Company intends to register under the
Securities Act all of the shares covered by the Option Plan and the Employee
Stock Purchase Plan, which shares upon issuance would become freely tradeable
without restriction. Each of (i) the Company, (ii) all of the Company's
executive officers and directors, and (iii) all stockholders of the Company
owning Common Stock immediately prior to the Offering have agreed not to offer,
sell, contract to sell or otherwise dispose of, any shares of Common Stock or
any securities convertible into or exchangeable or exercisable for Common Stock,
or grant any options or warrants to purchase Common Stock, except in certain
circumstances, for 180 days after the date of this Prospectus without the prior
consent of Smith Barney Inc., which agreements may be waived by Smith Barney
Inc. in its discretion. The current minimum Rule 144 holding period is one year;
accordingly, the 5,467,400 shares of Common Stock which are restricted
securities will be eligible for sale under Rule 144 after the expiration of such
lock-up agreements. Following the Offering, sales or the expectation of sales of
substantial amounts of Common Stock in the public market could adversely affect
the prevailing market price for the Common Stock and the Company's ability to
raise additional capital at a price favorable to the Company. See "Shares
Eligible for Future Sale" and "Underwriting."
12
<PAGE> 15
THE COMPANY
The Company's business was founded in 1973 by Eugene Figliulo as Systems &
Programming Resources, Inc. ("Systems Inc."). During 1994, Systems Inc.
transferred certain assets and liabilities to SPR Chicago, SPR Tulsa, and SPR
Wisconsin, respectively. These entities were organized as S corporations and
owned by the executives primarily responsible for the operations in each of
these locations. SPR Chicago, SPR Tulsa, SPR Wisconsin, Systems Inc. and
DataFlex (an affiliated IT services company in a complementary business) were
merged into the Company upon the Company's formation in October 1996. See
"Certain Transactions."
The Company maintains its principal executive offices at 2015 Spring Road,
Oak Brook, Illinois 60523-1874. Its telephone number is (630) 990-2040. The
Company's World Wide Web address is www.sprinc.com.
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 1,600,000 shares of
Common Stock offered by it hereby (after deducting estimated underwriting
discounts and commissions and estimated offering expenses) are estimated to be
approximately $19.7 million, based upon an assumed initial public offering price
of $14.00 per share of Common Stock.
The principal purposes of the Offering are to increase the Company's equity
capital and financial flexibility, create a public market for the Common Stock,
facilitate future access by the Company to the public equity markets, enhance
the Company's ability to use Common Stock as a means of attracting and retaining
key employees and technical staff, and provide working capital to fund the
Company's growth strategies. See "Business -- Growth Strategies" and "Business
- -- Recruiting and Training."
The Company intends to use a portion of its net proceeds from the Offering
to make the Distribution to existing stockholders of the Company in an amount
equal to the Company's undistributed S corporation earnings for the period from
November 1, 1996 through the closing date of the Offering. The Company currently
estimates that the Distribution will be $2.5 million. See "Certain
Transactions." In addition, the Company intends to use approximately $2.8
million of its net proceeds to pay outstanding indebtedness under a revolving
credit facility and two term notes. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources" for information regarding interest rates, maturities and use of
proceeds of indebtedness.
Approximately $1.0 million of the net proceeds will be used to build-out
and equip additional Virtual Insourcing Centers. See "Business -- Growth
Strategies -- Develop Additional Virtual Insourcing Centers." As of June 30,
1997, the Company had not incurred, or made any commitments to incur,
significant capital expenditures with respect to the additional Virtual
Insourcing Centers.
The Company intends to use the remaining net proceeds for general corporate
purposes, including the expansion of its entry-level training program, working
capital, branch expansion and possible acquisitions of related businesses. The
Company is not currently engaged in any negotiations for the acquisition of any
other business. Pending any of the foregoing uses, the Company intends to invest
the net proceeds in short-term, investment grade securities, certificates of
deposit or direct or guaranteed obligations of the United States government. The
Company will not receive any proceeds from shares of Common Stock sold by the
Selling Stockholders.
DIVIDEND POLICY
Except for the distributions to stockholders to fund their payments of
taxes, the Company has not declared or paid any cash dividends on the Common
Stock. After the Offering, except for the Distribution, the Company expects to
retain any future earnings to finance the operation and expansion of its
business and does not anticipate paying any cash dividends on its Common Stock
in the foreseeable future. Any future determination as to the payment of
dividends will depend upon the results of operations, financial condition,
capital expenditure plans and other obligations of the Company and will be at
the sole discretion of the Company's Board of Directors.
13
<PAGE> 16
CAPITALIZATION
The following table sets forth the Company's long-term indebtedness and
capitalization as of June 30, 1997 and as adjusted to give effect to the sale of
1,600,000 shares of Common Stock offered by the Company (at an assumed initial
public offering price of $14.00 per share) and the application of the estimated
net proceeds therefrom. The information set forth below should be read in
conjunction with the Financial Statements and related Notes thereto contained
elsewhere in this Prospectus and "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
<TABLE>
<CAPTION>
AS OF JUNE 30, 1997
----------------------------
ACTUAL AS ADJUSTED
------ -----------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C>
Current debt................................................ $ 2,103 $ 206
======== ========
Long-term debt, less current maturities..................... 930 23
-------- --------
Stockholders' equity:
Preferred Stock, $.01 par value; 3,000,000 shares
authorized; no shares issued and outstanding........... -- --
Common Stock, $.01 par value; 25,000,000 shares
authorized; 6,467,400 shares issued and outstanding
actual; 8,067,400 shares issued and outstanding as
adjusted............................................... 64(1) 81(1)
Additional paid-in capital.................................. 47,118 66,451(2)
Retained deficit............................................ (44,359) (47,052)(2)
-------- --------
Total stockholders' equity.................................. 2,823 19,480(2)
-------- --------
Total capitalization...................................... $ 3,753 $ 19,503
======== ========
</TABLE>
- -------------------------
(1) Excludes 1,044,252 shares of Common Stock reserved for issuance upon
exercise of options granted or to be granted pursuant to the Option Plan and
500,000 shares of Common Stock reserved for issuance pursuant to the
Employee Stock Purchase Plan. See "Management -- Stock Plans," "Description
of Capital Stock" and Notes 11 and 15 of Notes to Financial Statements.
(2) Immediately prior to closing of the Offering, the Company intends to make
the Distribution. The Company currently estimates that the Distribution will
be $2.5 million. Upon conversion of the Company to a C corporation at the
closing of the Offering, the Company will record approximately $0.6 million
in net deferred income taxes which will reduce retained earnings and
increase liabilities. Retained deficit of the Company (including the
stock-based compensation expense), after recording the estimated
Distribution and deferred income tax liabilities, will be reclassified and
netted against additional paid-in capital in connection with the termination
of the Company's S corporation election.
14
<PAGE> 17
DILUTION
As of June 30, 1997, the Company's net tangible book value was $2,823,413
or $.44 per share of Common Stock. Net tangible book value per share represents
the Company's total net tangible assets less total liabilities divided by the
number of shares of Common Stock outstanding. Without taking into account any
other changes in net tangible book value after June 30, 1997, other than to give
effect to the Company's receipt of its portion of the estimated net proceeds of
the Offering, at an assumed initial public offering price of $14.00 per share,
the payment of the Distribution and the recording of net deferred taxes of
approximately $0.6 million, the pro forma net tangible book value of the Company
on June 30, 1997 would have been $19,479,971 or $2.41 per share. This represents
an immediate increase in net tangible book value to the existing stockholders of
approximately $2.45 per share and an immediate dilution to purchasers of shares
of Common Stock in the Offering of $11.59 per share, as illustrated by the
following:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............. $14.00
Net tangible book value per share as of June 30, 1997..... $ .44
Decrease per share attributable to the Distribution and
deferred taxes(1)...................................... (.48)
Increase per share attributable to new investors.......... 2.45
Pro forma net tangible book value per share after the
Offering(2)............................................... 2.41
------
Net tangible book value per share dilution to new
investors................................................. $11.59
======
</TABLE>
- -------------------------
(1) Includes the Distribution and net deferred taxes of $0.6 million to be
recorded upon conversion of the Company from an S corporation to a C
corporation.
(2) Does not reflect 1,044,252 shares of Common Stock reserved for issuance upon
exercise of options granted or to be granted in the future pursuant to the
Option Plan (of which options to purchase 819,216 shares of Common Stock are
currently outstanding at an exercise price of $7.66 per share).
The following table sets forth, at June 30, 1997, after giving effect to
the Offering, the differences between existing stockholders and new investors
who purchase Common Stock in the Offering at the assumed initial public offering
price of $14.00 per share, with respect to the number of shares purchased from
the Company, the total consideration paid and the average price per share paid:
<TABLE>
<CAPTION>
SHARES PURCHASED(1)(2) TOTAL CONSIDERATION
----------------------- ------------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
------ ------- ------ ------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders........... 6,467,400 80.2% $46,799,536(3) 67.6% $ 7.24(3)
New investors................... 1,600,000 19.8 22,400,000 32.4 14.00
--------- ----- ----------- -----
Total...................... 8,067,400 100.0% $69,199,536 100.0%
========= ===== =========== =====
</TABLE>
- -------------------------
(1) Excludes 1,044,252 shares of Common Stock reserved for issuance upon
exercise of options granted or to be granted pursuant to the Option Plan (of
which options to purchase 819,216 shares of Common Stock are currently
outstanding at an exercise price of $7.66 per share). To the extent such
options are exercised, there will be further dilution to new investors.
(2) The above table is based on ownership as of June 30, 1997. Sales by Selling
Stockholders in the Offering will reduce the number of shares held by
existing stockholders to 5,467,400 shares or 67.8% of the total number of
shares of Common Stock outstanding after the Offering (62.9% if the
Underwriters' over-allotment option is exercised in full), and will increase
the number of shares held by new investors to 2,600,000 shares or 32.2% of
the total number of shares of Common Stock outstanding after the Offering
(37.1% if the Underwriters' over-allotment option is exercised in full). See
"Principal and Selling Stockholders."
(3) Represents the sum of stated capital and additional paid-in capital, which
includes an aggregate of $46.7 million, or $7.23 per share, of non-cash,
stock-based compensation for 1994, 1995 and 1996.
15
<PAGE> 18
SELECTED FINANCIAL DATA
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
The following selected financial data should be read in conjunction with
the Financial Statements of the Company and notes thereto. The Statement of
Operations Data and Balance Sheet Data for, and as of, the end of each of the
years in the four year period ended December 31, 1996 are derived from the
audited Financial Statements of the Company and included herein in reliance upon
the report of Arthur Andersen LLP as experts in auditing and accounting. The
Statement of Operations Data and Balance Sheet Data for, and as of, the year
ending December 31, 1992 and the six months ended June 30, 1996 and 1997, have
been derived from the unaudited financial statements of the Company and in the
opinion of management include all adjustments (consisting of normal and
recurring adjustments) which are necessary to present fairly the results of
operations and financial position of the Company for the period and at the date
presented.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
------------------------------------------------------- ------------------------
1992 1993 1994 1995 1996 1996 1997
---- ---- ---- ---- ---- ---- ----
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:(1)
Revenues...................... $9,122 $11,731 $14,797 $ 22,908 $ 32,511 $ 15,087 $ 22,722
Cost of services.............. 6,904 8,338 10,424 15,525 23,287 10,652 13,990
------ ------- ------- -------- --------- --------- ---------
Gross profit.................. 2,218 3,393 4,373 7,383 9,224 4,435 8,732
Costs and expenses:
Selling..................... 743 1,012 1,165 2,141 3,046 1,366 2,093
Recruiting.................. 290 341 410 777 1,323 612 698
Stock-based compensation.... -- -- 6,510(2) 27,987(2) 12,231(2) 6,720(2) --
General and
administrative............ 1,015 1,230 1,334 1,642 3,742 1,328 4,102(3)(4)
------ ------- ------- -------- --------- --------- ---------
Total costs and expenses...... 2,048 2,583 9,419 32,547 20,342 10,026 6,893
------ ------- ------- -------- --------- --------- ---------
Operating income (loss)....... 170 810 (5,046)(2) (25,164)(2) (11,118)(2) (5,591)(2) 1,839(4)
Other income (expense)........ 27 6 (57) (109) (71) (22) (101)
------ ------- ------- -------- --------- --------- ---------
Income (loss) before income
taxes....................... 197 816 (5,103)(2) (25,273)(2) (11,189)(2) (5,613)(2) 1,738
Provision for income taxes.... 15 4 75 21 9 -- 1
------ ------- ------- -------- --------- --------- ---------
Net income (loss), as
reported(5)................. $ 182 $ 812 $(5,178)(2) $(25,294)(2) $ (11,198)(2) $ (5,613)(2) $ 1,737
====== ======= ======= ======== ========= ========= =========
Pro forma provision for income
taxes(5).................... 408 443 694
--------- --------- ---------
Pro forma net income
(loss)(5)................... $ (11,606) $ (6,056) $ 1,043(4)
========= ========= =========
Pro forma net income (loss)
per share(5)(6)............. $ (1.69) $ (.88) $ .15(4)
========= ========= =========
Weighted average number of
common and common equivalent
shares outstanding(6)....... 6,862,344 6,862,344 6,862,344
BALANCE SHEET DATA (AT END OF
PERIOD)(1):
Cash.......................... $ 298 $ 289 $ 1,083 $ 1,109 $ 356 $ 502 $ 546
Working capital............... 1,098 1,771 1,674 2,370 1,194 2,112 2,140
Total assets.................. 1,670 2,418 3,573 5,584 7,131 5,500 8,726
Long-term debt, less current
portion..................... -- -- 1,841 704 206 397 930
Total stockholders' equity.... 1,149 1,954 326 2,275 2,507 2,757 2,823
</TABLE>
- ---------------
(1) In October 1996, Systems Inc., SPR Chicago, SPR Tulsa, SPR Wisconsin and
DataFlex merged into SPR and, in connection therewith, the stockholders of
such companies received an aggregate of 6,467,191 shares of Common Stock of
SPR. The financial data above has been restated to include the financial
position and results of operations of the respective companies for all
periods presented.
16
<PAGE> 19
(2) In 1994, Systems Inc. transferred certain assets and liabilities to SPR
Chicago and SPR Wisconsin. Inasmuch as such 1994 transactions were among
family members within a control group, such transactions have been recorded
in the Company's financial statements as if the stockholders of SPR Chicago
and SPR Wisconsin received non-cash, stock-based compensation during 1994,
1995 and 1996 in an amount equal to the increase in the estimated value of
such companies since 1994. This expense is non-recurring subsequent to
October 31, 1996. Such compensation expense is recorded as stock-based
compensation with the corresponding credit included in additional paid-in
capital. Upon conversion of the Company to a C corporation upon closing of
the Offering, the retained deficit of the Company, which includes the
aggregate stock-based compensation expense, will be reclassified and netted
against additional paid-in capital. Excluding such compensation expense, net
income for 1996 and the six months ended June 30, 1996 on a pro forma basis
would have been $0.6 million and $0.7 million, respectively. See "Prospectus
Summary -- Summary Unaudited Pro Forma Financial Data" and Note 10 of Notes
to Financial Statements.
(3) General and administrative expenses include $0.2 million of expenses related
to the Company's March 1997 proposed initial public offering that was
postponed. Total costs of the March 1997 offering were approximately $0.8
million of which $0.2 million was expensed in the second quarter of 1997 and
$0.6 million will be charged against the proceeds of the Offering.
(4) On June 2, 1997, the Company granted options to purchase 819,216 shares of
Common Stock. General and administrative expenses for the six months ended
June 30, 1997 include approximately $0.4 million of non-cash compensation
expense related to options to purchase 276,275 shares of Common Stock that
are presently exercisable. Excluding the expense related to these presently
exercisable options, operating income and pro forma net income per share for
the six months ended June 30, 1997 would have been approximately $2.2
million and $0.18, respectively. Over the next five years as the remaining
options vest, the Company will recognize additional non-cash compensation
expense of up to approximately $150,000 per year. See Note 15 of Notes to
Financial Statements.
(5) Prior to the Offering, the Company was an S corporation and was not subject
to Federal and certain state corporate income taxes. The Statement of
Operations Data reflects a pro forma provision for income taxes as if the
Company had been subject to Federal and state corporate income taxes for
1996 and the six months ended June 30, 1997. The pro forma provision for
income taxes represents a combined Federal and state effective tax rate of
40%. The pro forma provision for income taxes is computed by multiplying the
effective tax rate times the income (loss) before income taxes adjusted to
eliminate the stock-based compensation expense and subtracting income taxes
previously recorded.
(6) Pro forma net income (loss) per share information assumes that 192,012 of
the shares of Common Stock being offered by the Company hereby were
outstanding during the periods indicated. This represents the approximate
number of shares of Common Stock which are being offered by the Company
(assuming an initial public offering price of $14.00 per share and after
deducting estimated underwriting discounts and commissions) to enable the
Company to make the Distribution. The Company currently estimates that the
Distribution will be $2.5 million.
17
<PAGE> 20
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
INTRODUCTION
The following section of the Prospectus, Management's Discussion and
Analysis of Financial Condition and Results of Operations, contains certain
forward-looking statements that involve substantial risks and uncertainties.
"Expect," "believe" and similar expressions, as they relate to the Company or
its management, are intended to identify such forward-looking statements. The
Company's actual results, performance or achievements could differ materially
from the results, performance or achievements expressed in, or implied by, these
forward-looking statements. Factors that could cause or contribute to such
differences include those discussed in "Risk Factors."
COMPANY OVERVIEW
The Company was founded in 1973 and derives its revenues from providing IT
consulting services. SPR principally bills its clients on a "time and materials
basis" and revenues are recognized as services are provided. The Company has
occasionally entered into fixed-price billing engagements and may enter into
more such engagements in the future. Typically, the Company bills for its
services on a biweekly basis to monitor client satisfaction and to manage its
outstanding accounts receivable balances. The Company's cost of services
consists primarily of consultant compensation and related expenses. Accordingly,
the Company's financial performance is substantially affected by billing margins
(billable hourly rate less consultant hourly cost) and consultant utilization
rates (the ratio of hours billed to total available hours).
Historically, SPR has maintained its billing margins by increasing its
hourly rates to offset increases in its consulting staff costs. The Company
manages its billing margins by establishing a target billing rate for each
consultant; however, actual billing rates may be higher or lower than the target
billing rates depending upon competitive pressures and market conditions. Hourly
billing rate increases are generally implemented by the Company based upon
market conditions, consultant skill levels and the terms of its engagements.
To date, the Company believes that it has effectively managed its
consultant utilization rates. Fluctuations in consultant utilization rates
result from variations in the amount of unassigned time, which historically has
consisted of training, vacation, sick and holiday time and time spent on
administrative support activities while between engagements. In order to reduce
unassigned time, the Company actively manages the terms of its engagements and
matches available consultants based upon client requirements. In addition, the
number of new consultant training programs and the amount of time it takes to
assign the newly trained consultants vary, thereby affecting the Company's
consultant utilization rates from period to period.
The Company believes that its business and growth strategies are primarily
dependent upon the availability of qualified technical consultants. To address
the shortage of qualified technical consultants, the Company has developed a
three-year training program targeted at college graduates with degrees other
than computer science. The initial seven-week entry-level course specifically
focuses on Century Date Compliance, while advanced course modules concentrate on
the Company's other service offerings. The individuals enrolled in the
entry-level training course are paid a salary commensurate with the salary paid
to computer science graduates. Since the commencement of the entry-level
training program on February 15, 1996, 84 individuals have entered and
successfully completed entry-level training. The Company incurred approximately
$1.3 million in expenses attributable to the training program in 1996, all of
which have been expensed as incurred. These expenses adversely affected gross
profit and operating income in 1996. Employees who complete the entry-level
course and are placed on customer engagements generate significantly higher
gross margins than the Company's more experienced consultants. The margins for
employees who complete the entry-level training program are higher because their
cost relative to their billing rate is less than the more experienced
consultants. The Company believes that these higher margins are sufficient to
fund additional training classes on a regular basis while increasing overall
corporate profitability. The Company intends to conduct additional training
classes on a regular basis.
In 1994, Systems Inc. transferred certain assets and liabilities to SPR
Chicago and SPR Wisconsin. Inasmuch as such 1994 transactions were among family
members within a control group, such transactions have been recorded in the
Company's financial statements as if the stockholders of SPR Chicago and SPR
Wisconsin received noncash, stock-based compensation during 1994, 1995 and 1996.
This compensation expense was allocated to each such period based upon the
increase in the estimated fair market value of SPR
18
<PAGE> 21
Chicago and SPR Wisconsin during the respective periods. Compensation expense
was calculated as follows: (i) multiply the number of shares of Common Stock
owned by the former stockholders of SPR Chicago and SPR Wisconsin by the
estimated market value per share of the Company (which was estimated at $15.00
per share in 1994 and 1995 and $14.00 per share in 1996); (ii) then subtract the
payments made by SPR Chicago and SPR Wisconsin to Systems Inc. on the notes
issued in connection with the 1994 transactions; (iii) then subtract the value
of the shares received by the stockholders of SPR Chicago and SPR Wisconsin
attributable to such stockholders' interests in Systems Inc. and DataFlex. This
expense is non-recurring subsequent to October 31, 1996. The pro forma financial
data eliminates such expense from operating income for 1996 and for the six
months ended June 30, 1996; accordingly, operating income was increased by $12.2
million in 1996 and $6.7 million for the six months ended June 30, 1996. Upon
the conversion of the Company to a C corporation at closing of the Offering, the
retained deficit of the Company, which includes the aggregate stock-based
compensation expense, will be reclassified and netted against additional paid-in
capital. See "Summary Unaudited Pro Forma Financial Data."
On June 2, 1997, the Company granted options to purchase 819,216 shares of
Common Stock at an exercise price of $7.66 per share, of which options to
purchase 276,725 shares vested immediately. As a result, non-cash compensation
expense related to these vested options of approximately $0.4 million was
recorded for the six-month period ended June 30, 1997. The expense related to
these vested options is non-recurring subsequent to June 30, 1997. However, over
the next five years, the Company will recognize non-cash compensation expense of
up to approximately $150,000 per year as additional options to purchase 542,491
shares of Common Stock vest. See Note 15 of Notes to Financial Statements.
RESULTS OF OPERATIONS
The following table sets forth selected statements of operations data as a
percentage of revenues for the periods indicated:
<TABLE>
<CAPTION>
PERCENTAGE OF REVENUE
------------------------------------------------
SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED JUNE 30,
-------------------------- ---------------
1994 1995 1996 1996 1997
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Revenues.................................................... 100% 100% 100% 100% 100%
Cost of services............................................ 70 68 72 71 62
--- ---- --- --- ---
Gross profit............................................ 30 32 28 29 38
Costs and expenses:
Selling................................................... 8 9 9 9 9
Recruiting................................................ 3 3 4 4 3
Stock-based compensation(1)............................... 44 122 38 44 --
General and administrative................................ 9 7 11 9 18(2)
--- ---- --- --- ---
Total costs and expenses................................ 64 141 62 66 30
--- ---- --- --- ---
Operating income (loss)(1).................................. (34) (109) (34) (37) 8(2)
Provision for income taxes.................................. 1 -- -- -- --
--- ---- --- --- ---
Net income (loss)(1)........................................ (35)% (109)% (34)% (37)% 8%(2)
=== ==== === === ===
</TABLE>
- -------------------------
(1) In 1994, Systems Inc. transferred certain assets and liabilities to SPR
Chicago and SPR Wisconsin. Inasmuch as such transactions were among family
members within a control group, such transactions have been recorded in the
Company's financial statements as if the stockholders of SPR Chicago and SPR
Wisconsin received non-cash, stock-based compensation during 1994, 1995 and
1996, in an amount equal to the increase in the estimated value of such
companies since 1994. This expense is non-recurring subsequent to October
31, 1996. The Summary Unaudited Pro Forma Financial Data eliminates such
expense from operating income for the year ended December 31, 1996 and for
the six months ended June 30, 1996; accordingly, operating income for 1996
and the six months ended June 30, 1996 was increased by $12.2 million and
$6.7 million, respectively. See Note 10 of Notes to Financial Statements.
(2) General and administrative expenses include bad debt expense of
approximately $0.5 million relating primarily to a retail customer which
recently filed for Chapter 11 bankruptcy and $0.2 million of expenses
related to the Company's March 1997 proposed initial public offering that
was postponed. General and administrative expenses also include non-cash
compensation expense of approximately $0.4 million related to the grant of
options.
19
<PAGE> 22
SIX MONTHS ENDED JUNE 30, 1997 COMPARED TO SIX MONTHS ENDED JUNE 30, 1996
Revenues. Revenues increased 51% to $22.7 million in the first six months
of 1997 from $15.1 million in the comparable 1996 period. This increase was
primarily the result of revenue generated by the consultants who completed the
entry-level training program in 1996 and of an increased number of engagements
for both new and existing clients. A higher proportion of these engagements were
for strategic planning and assessment for Century Date Compliance engagements,
which yield higher billing rates. Revenues from Century Date Compliance
engagements increased to $8.7 million in the first six months of 1997 from $2.1
million in the comparable 1996 period.
Gross Profit. Gross profit consists of revenues less cost of services,
which includes consultant salaries, benefits and travel expenses. Gross profit
increased 97% to $8.7 million in the first six months of 1997 from $4.4 million
in the comparable 1996 period. Gross profit as a percentage of revenues
increased to 38% in the first six months of 1997 from 29% in the comparable 1996
period. The increase in gross profit was primarily attributable to higher
billing rates and a higher billing-to-consultant cost ratio (which is revenues
divided by consultant cost). The higher billing rates were realized as a result
of the increase in project management engagements and the higher billing ratio
was attributable primarily to the placement of consultants who completed the
entry-level training program in 1996.
Selling Expenses. Selling expenses include the salaries, benefits,
commissions, bonuses, travel, entertainment and other direct costs associated
with the Company's direct sales force. Selling expenses increased 53% to $2.1
million in the first six months of 1997 from $1.4 million in the comparable 1996
period. This increase was primarily the result of increased commissions
attributable to the 51% increase in sales over the comparable period. The
Company's selling expenses as a percentage of revenues were 9% in both the first
six months of 1997 and in the comparable 1996 period.
Recruiting Expenses. Recruiting expenses consist of costs related to hiring
new personnel, which include the salaries, benefits, bonuses and other direct
costs of the in-house recruiters, consultant relocation fees, recruiters' travel
expenses, and advertising costs. The Company hired 160 consultants during the
first six months of 1997 compared to 149 in the first six months of 1996.
Recruiting expenses increased to $0.7 million in the first six months of 1997
from $0.6 million in the comparable 1996 period. Total recruiting costs per hire
increased to approximately $4,400 in the first six months of 1997 from
approximately $4,100 in the comparable 1996 period.
Stock-based Compensation Expense. Stock-based compensation expense consists
of non-cash expense resulting from the financial statement treatment of the 1994
transfers by Systems Inc. of certain of its assets and liabilities to SPR
Chicago and SPR Wisconsin. The stock-based compensation expense was allocated to
each period based upon the increase in the estimated fair market value of SPR
Chicago and SPR Wisconsin. The increase in the estimated fair market value of
SPR Chicago and SPR Wisconsin for the periods presented was based primarily upon
SPR Chicago's and SPR Wisconsin's revenue growth over such periods. The expense
is non-recurring subsequent to October 31, 1996. Stock-based compensation
expense allocated to the six months ended June 30, 1996 was $6.7 million.
General and Administrative Expenses. General and administrative expenses
include salaries and benefits of management and support staff, leased facilities
cost, training, travel expenses related to general and administrative matters,
outside professional fees, depreciation and all other corporate costs. General
and administrative expenses increased 209% to $4.1 million in the first six
months of 1997 from $1.3 million in the comparable 1996 period. This increase
was primarily attributable to six additional employees, general salary and
management bonus increases, non-cash compensation expense of approximately $0.4
million related to the grant of options on June 2, 1997, bad debt expense of
approximately $0.5 million relating primarily to a client which recently filed
for Chapter 11 bankruptcy and $0.2 million in expenses relating to the Company's
March 1997 proposed initial public offering that was postponed. Total costs of
the March 1997 offering were approximately $0.8 million, of which $0.2 million
was expensed in the second quarter of 1997 and $0.6 million was deferred and
will be charged against the proceeds of the Offering. Additional factors
contributing to this increase include increased rent relating to new office
space in Wisconsin, increased depreciation, increased professional fees and
training costs associated primarily with outside instructors.
20
<PAGE> 23
1996 COMPARED TO 1995
Revenues. Revenues increased 42% to $32.5 million in 1996 from $22.9
million in 1995. This increase was primarily the result of an increased number
of engagements for both new and existing clients. A higher proportion of these
engagements were for strategic planning and assessment for Century Date
Compliance engagements, which yield higher billing rates. Revenues from Century
Date Compliance engagements increased to $9.0 million in 1996 from $0.6 million
in 1995.
Gross Profit. Gross profit increased 25% to $9.2 million in 1996 from $7.4
million in 1995. Gross profit as a percentage of revenues decreased to 28% in
1996 from 32% in 1995. The decrease in gross profit was primarily attributable
to salaries and benefits of trainees enrolled in the entry-level training
program, and the subsequent delay in the assignment of these individuals to
billable engagements. This resulted in an increase in expenses of approximately
$0.8 million without any increase in revenues. In addition, the Company hired 20
project managers (an increase of 200% from 1995) to satisfy anticipated demand
for the Company's services. The Company's operating income for the year ended
December 31, 1996 was adversely affected by the large number of project managers
hired during such period and the amount of time these project managers devoted
to enhancing the Company's proprietary methodologies and performing marketing
and administrative activities. The Company believes that operating income should
continue to improve as these project managers devote more time to billable
engagements.
Selling Expenses. Selling expenses increased 42% to $3.0 million in 1996
from $2.1 million in 1995. This increase was primarily the result of increased
commissions attributable to the 42% increase in sales over 1995. The Company's
selling expenses, as a percentage of revenues, were 9% in 1996 and 1995.
Recruiting Expenses. The Company hired 292 consultants during 1996 compared
to 254 in 1995. Recruiting expenses increased 70% to $1.3 million in 1996 from
$0.8 million in 1995. The Company employed on average 4 more recruiters in 1996
than in 1995 to handle the increased hiring activity. As a result of such
additions, total recruiting costs per hire increased to approximately $4,500 in
1996 from approximately $3,100 in 1995.
Stock-based Compensation Expense. Stock-based compensation expense
allocated to 1996 was $12.2 million compared to $28.0 million allocated to 1995.
General and Administrative Expenses. General and administrative expenses
increased 128% to $3.7 million in 1996 from $1.6 million in 1995. This increase
was primarily attributable to hiring eight additional employees, increased rent
relating to new office space in Chicago and Wisconsin, increased depreciation,
training costs associated primarily with outside instructors and initial
staffing of the IDS business unit, including the reclassification of certain
employee salaries from cost of services and selling expenses to reflect the
change in responsibilities of these employees.
1995 COMPARED TO 1994
Revenues. Revenues increased 55% to $22.9 million in 1995 from $14.8
million in 1994. The increase was primarily the result of an increased demand
for the Company's services from both new and existing clients and a continuing
shift from contract programming to project management engagements yielding
higher billing rates. Revenues from Century Date Compliance engagements
increased to $0.6 million in 1995 from an immaterial amount in 1994.
Gross Profit. Gross profit increased 69% to $7.4 million in 1995 from $4.4
million in 1994 and, as a percentage of revenues, increased to 32% of revenues
in 1995 from 30% in 1994. This increase resulted from higher billing rates
without commensurate increases in consultant hourly costs resulting from the
shift from contract programming to project management and the completion of two
out-of-town engagements in 1994 in which per diem expenses were paid to
consultants but not passed through to clients. Out-of-town expenses, such as
travel expenses, generally are passed through to the Company's clients; however,
in the case of these two engagements, the Company agreed to bear such expenses
and recorded this expense as cost of services in 1994.
21
<PAGE> 24
Selling Expenses. Selling expenses increased 84% to $2.1 million in 1995
from $1.2 million in 1994. This increase was primarily the result of increased
commissions due to a 55% increase in sales in 1995 over 1994. In addition, the
Company hired four additional salespersons in 1995.
Recruiting Expenses. Recruiting expenses increased 89% to $0.8 million in
1995 from $0.4 million in 1994. This increase was the result of hiring seven
additional recruiters to expand hiring activity required by the increased demand
for the Company's service offerings. The Company hired 254 consultants in 1995
compared to 168 in 1994. As a result of hiring the additional recruiters, total
recruiting costs per hire increased to approximately $3,100 in 1995 from
approximately $2,400 in 1994.
Stock-based Compensation Expense. Stock-based compensation expense
allocated to 1995 was $28.0 million compared to $6.5 million allocated to 1994.
General and Administrative Expenses. General and administrative expenses
increased 23% to $1.6 million in 1995 from $1.3 million in 1994. This increase
was primarily due to management salary and bonus increases, the hiring of a
Director of Human Resources, four general office staff employees and an increase
in depreciation. General and administrative expenses as a percentage of revenues
decreased to 7% in 1995 from 9% in 1994 as a result of the rapid growth in
revenues.
UNAUDITED QUARTERLY RESULTS
The following tables set forth certain unaudited quarterly data for the
periods shown:
<TABLE>
<CAPTION>
1995 QUARTER ENDED 1996 QUARTER ENDED 1997 QUARTER ENDED
------------------------------------- ------------------------------------- --------------------
MAR. 31 JUNE 30 SEP. 30 DEC. 31 MAR. 31 JUNE 30 SEP. 30 DEC. 31 MAR. 31 JUNE 30
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues................... $4.5 $5.3 $6.3 $6.8 $7.4 $7.6 $8.4 $9.1 $10.5 $12.2
Gross profit............... 1.4 1.7 2.1 2.2 2.3 2.1 2.6 2.2 3.8 4.9
</TABLE>
Operating results fluctuate based upon the timing of service offering
expansion activities, the hiring and training of consultants, the initiation and
completion of engagements, the timing of corporate expenditures and the number
of billable days in a quarter.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its growth principally through cash flows from
operations. The Company's primary source of liquidity is the collection of its
accounts receivable. Accounts receivable have grown as the Company's operations
have grown. Receivables have remained constant at 43 days of revenues at June
30, 1997 and December 31, 1996, down from 45 days of revenues at December 31,
1995. The Company continues to work with its clients to attempt to shorten
receivable cycles on a case-by-case basis. Except for a customer which recently
filed for Chapter 11 bankruptcy from which the Company had a receivable of
approximately $.4 million at June 30, 1997 and recorded a corresponding reserve
for doubtful accounts of approximately $.4 million, the Company has no
collection problems with any of its major customers.
The Company's ten largest clients accounted for approximately 51%, 52% and
49% of its revenues in 1995, 1996 and the six months ended June 30, 1997,
respectively. The volume of work performed for specific clients varies from year
to year. There can be no assurance that a large client in one year will continue
to use the Company's services in a subsequent year. Furthermore, the Company
rarely is the exclusive provider of IT consulting services to its clients. The
loss of any large client could have a material adverse effect on the Company's
business.
Net cash flow provided by operating activities, primarily to fund the
growth in accounts receivable, totaled $0.7 million, $1.6 million and $1.3
million for the years ended December 31, 1996, 1995, and 1994, respectively, and
totaled $1.5 million and $0.9 million for the six months ended June 30, 1997 and
1996, respectively. The decrease from 1995 to 1996 in net cash flow provided by
operating activities was primarily a result of the decrease in net income
adjusted for non-cash stock-based compensation from approximately $2.7 million
in 1995 to $1.0 million in 1996. Net cash (used in) the Company's investing
activities, primarily to fund capital expenditures, totaled ($0.9 million),
($0.1 million) and ($0.2 million) for the years ended
22
<PAGE> 25
December 31, 1996, 1995, and 1994, respectively, and totaled ($0.3 million) and
($0.4 million) for the six months ended June 30, 1997 and 1996, respectively.
Net cash (used in) financing activities consisting primarily of payments on a
note payable to Eugene Figliulo and dividend distributions to stockholders to
fund their payment of taxes due on S corporation income totaled ($0.5 million),
($1.5 million) and ($0.4 million) for the years ended December 31, 1996, 1995
and 1994, respectively, and totaled ($1.0 million) and ($1.1 million) for the
six months ended June 30, 1997 and 1996, respectively.
The Company periodically has supplemented cash generated by operations with
term loans and short-term borrowings under lines of credit. The proceeds from a
$0.3 million term note funded furniture and equipment purchases for the
Company's Chicago facility. The term note matures on December 31, 2000, bears
interest at 9% per annum, with principal and interest payable monthly, and is
secured by certain accounts receivable and other assets. As of June 30, 1997,
this term note had an outstanding balance of $0.2 million. The Company intends
to pay this term note with part of the net proceeds from the Offering.
The Company had a note payable to a stockholder that was due in August
1997. This note had an outstanding balance of $.2 million as of June 30, 1997
and was repaid in full in August 1997.
Due to the significant growth the Company has experienced, two lines of
credit were established in 1996. These lines of credit provided for maximum
borrowings of $2.5 million and were limited based upon a percentage of eligible
accounts receivable. On December 31, 1996 there was $1.3 million outstanding on
the lines. Interest rates on the lines of credit were at each of the respective
bank's prime rate and were collateralized by certain assets including accounts
receivable. In May 1997, one of the lines expired and the Company replaced the
other line.
The Company entered into a loan agreement in June 1997 which provides for
both a revolving credit facility and a term loan facility. Both the revolving
loan facility and the term loan facility are secured by certain accounts
receivable and other assets. The loan agreement contains certain restrictions,
prohibiting, among other things, additional indebtedness without the lender's
consent. The loan agreement also contains certain covenants, including, among
others, a requirement that the Company maintain a cash flow coverage ratio, as
defined, of not less than 1.1 to 1. The revolving credit facility allows SPR to
borrow up to the lesser of (i) $2.0 million or (ii) the borrowing base, as
defined, in each case less the undrawn face amount of any letters of credit
issued on behalf of the Company. Interest is at the lender's prime rate (8.5% at
June 30, 1997). The revolving credit facility matures in March 1998. As of June
30, 1997, the Company's outstanding balance in the revolving credit facility was
$1.6 million, all of which had been used for general corporate purposes.
The term loan facility provides for maximum borrowings of $2.0 million for
use for certain purposes. Interest on the term loan facility is payable
quarterly at 1% over the lender's prime rate (9.5% at June 30, 1997). In
addition, installments of principal in the amount of $62,500 are payable
quarterly commencing in September 1997. Within 30 days of the end of each
calendar quarter, the Company is required to pay a portion of the principal
amount of the term note then outstanding in an amount equal to 40% of the excess
cash flow, as defined, during such calendar quarter. The term loan facility
matures in March 1999. SPR borrowed approximately $1.0 million on the term loan
facility to make distributions to stockholders to fund their payments of taxes,
all of which was outstanding on June 30, 1997.
The Company believes that cash flow from operations, the net proceeds of
the Offering and available borrowings will be sufficient to meet its operating
needs and capital expenditures for the foreseeable future.
23
<PAGE> 26
BUSINESS
COMPANY OVERVIEW
SPR has over 24 years of experience in providing IT services to clients in
a variety of industries, including financial services, healthcare, insurance,
manufacturing, oil and gas, transportation and utilities. The Company focuses
its marketing efforts on Fortune 1000 companies and other large organizations
which have complex IT operations and significant IT budgets. SPR's objective is
to become the leading IT services provider to both new and existing clients. SPR
provides its clients with three levels of consulting support which are
distinguished by the degree of responsibility the Company assumes: strategic
planning, project management and implementation. Within this framework, SPR
currently provides outsourcing services through four service offerings: Systems
Re-engineering, Century Date Compliance, Application Management and Information
Delivery Services ("IDS") in addition to providing General Consulting services.
SPR bills its clients on either a time and materials or a fixed-price basis. The
Company believes that this breadth of service and support fosters long-term
client relationships, promotes cross-selling opportunities and minimizes the
Company's dependence upon any particular service offering or client.
The Company currently has four branch offices located in Chicago, Tulsa,
Milwaukee and Dallas and 467 IT consulting professionals, including 44 project
managers and 36 independent contractors. The number of consultants employed or
retained by the Company as of June 30, 1997 was 15% greater than at the end of
1996. The Company has made, and intends to continue to make, significant
investments in its systems infrastructure, recruiting organization, training
programs and marketing initiatives in an effort to sustain growth. SPR intends
to leverage these investments, as well as its operating expertise, by opening
additional branch offices.
SPR has capitalized on the growing demand for IT services. The Company's
revenues have increased at a compound annual growth rate of approximately 37%
from 1992 through 1996. From 1995 to 1996, the Company's revenues increased 42%.
More than 80% of the Company's revenues in 1996 were attributable to 56
companies which had been clients for at least the prior three consecutive years.
For the first six months of 1997, the Company's revenues increased 51% compared
to the same period in 1996 and its gross margin increased to 38%.
INDUSTRY OVERVIEW
Dataquest Incorporated estimated total expenditures for professional IT
services in the United States were $54.1 billion in 1996. Dataquest also
estimates that the professional IT services market, consisting of consulting and
education, systems integration and development and systems management services,
will reach $79.6 billion by 1999. This represents a compound annual growth rate
of approximately 14% between 1997 and 1999.
The Company's experience is that many large organizations find it
increasingly difficult and costly to internally maintain their existing systems.
Management believes that over 75% of existing mainframe and mid-range systems
will still be in operation seven to ten years from now as businesses will
continue to require massive data storage capabilities and tremendous processing
power, which are most efficiently provided by mainframe technology. As providers
of IT services focus more on the client/server segment of the market, however,
fewer professionals possess the skills necessary to support and maintain
existing mainframe and mid-range systems. The Company believes these factors
provide it with a substantial growth opportunity within the IT services
industry.
In addition, the Company believes that clients will continue to maintain
and improve their existing systems because: (i) existing systems represent an
enormous investment which may prove too risky and expensive to completely
replace; (ii) mainframe computing is increasingly being utilized in new ways as
Internet/intranet technologies develop; (iii) existing systems are critical to
the functioning of clients' businesses as they contain vital business
information needed to build replacement systems; and (iv) regardless of which
front-end computing platform is utilized, clients still need to access data
resident in mainframe computers.
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The Company also is capitalizing on the substantial growth opportunity
created by problems inherent in implementing mass changes to application systems
and their associated data bases. Examples of mass change include the European
Union's expected conversion to the euro currency, the extension of the number of
digits and other characters in zip codes, product codes and account numbers and,
especially, the year 2000 problem, the software glitch that will prevent
computers from properly recognizing dates after the year 1999. Coding 19YY as YY
eliminated two characters from each date reference thereby preserving
substantial amounts of disk storage and memory. A date shown as YY/MM/DD
provides many calculation options within a system, such as age, interest
computations, inventory, materials planning, shelf life, shipping dates and
billing. The problem with this programming format is that in the year 2000, when
YY=00, none of the calculations will work properly. If corrections are not made
prior to January 1, 2000, computer systems may fail which could cause businesses
to stop functioning properly. This abbreviated date-coding format is prevalent
in core, mission-critical systems, which comprise millions of lines of computer
code in existing systems. The data used and generated by these systems are
heavily integrated into multiple files and databases. This data integration
typically results in thousands of interfaces, each of which must be analyzed,
changed and tested to correct the problem, while minimizing the impact on
ongoing operations. Capers Jones estimates the cost in the United States to
correct the year 2000 problem associated with software and databases to be $130
billion. In addition, Gartner Group, Inc. projects that by the end of 1997 only
20% of all systems in the world will be year 2000-compliant, and only 50% of
such systems will be year 2000-compliant by the end of 1999.
BUSINESS STRATEGIES
The Company's objective is to become the leading IT service provider to
both new and existing clients. To achieve this objective, the Company has
pursued, and intends to continue to pursue, the following business strategies:
EXPAND ENTRY-LEVEL TRAINING PROGRAM TO ATTRACT, DEVELOP AND RETAIN
QUALIFIED TECHNICAL CONSULTANTS. The Company currently employs 21 full-time
recruiters: eight in Chicago, seven in Tulsa, five in Milwaukee and one in
Dallas. Over the past 24 years, the Company has developed and refined an
internal recruiting database which facilitates rapid identification of
consultant candidates based upon skill and geographic location. To address the
shortage of qualified technical consultants, the Company has developed a
three-year training program. This program, targeted at college graduates with
degrees other than computer science, begins with a seven-week entry-level course
specifically focused on Century Date Compliance. The Company, in conjunction
with DeVry, Inc., has developed several other training courses to enable its
consultants to enhance their careers and to improve their technical skills. See
"-- Recruiting and Training." The Company believes its training program,
together with its comprehensive employee welfare plans and the Option Plan and
the Employee Stock Purchase Plan, provide the Company with a competitive
advantage in attracting, developing and retaining qualified technical
consultants. See "Management -- Stock Plans."
CONTINUE TO FOCUS ON PROJECT MANAGEMENT TO DELIVER VALUE-ADDED IT
SOLUTIONS. In recent years, the Company has shifted its focus from general
consulting engagements such as contract programming to outsourcing engagements
focusing on project management and strategic planning engagements such as
Century Date Compliance, Systems Re-engineering, Application Management and IDS.
The Company believes that by providing such value-added services it develops
in-depth knowledge of its clients' existing systems and gains a competitive
advantage in assessing its clients' needs with respect to emerging technologies
and anticipating opportunities to provide additional IT services.
FOCUS ON LEADING TECHNOLOGIES. The Company maintains and continues to build
expertise not only in mainframe applications but also in other high demand
technologies, such as Internet/intranet applications, open computing systems,
object oriented solutions, data warehousing and relational database management
systems. SPR has developed, and intends to continue developing, relationships
with software product developers and research institutions to remain on the
leading edge of technological development and to provide its clients with
technologies that are best suited to their individual needs.
DELIVER UNBIASED SERVICE OFFERINGS UTILIZING DISCIPLINED METHODOLOGIES. The
Company works closely with its clients' IT personnel from the strategic planning
phase through the completion of an engagement. To
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increase productivity and efficiency, the Company has developed specific
proprietary service methodologies, Renovation(SM) and Renovation2000(SM), and a
proprietary software analysis tool, CodeVu(SM). See "-- Proprietary Service
Methodologies and Software Analysis Tool." In implementing its methodologies,
the Company utilizes the best available third-party application software and
productivity tools without regard to specific third-party vendor relationships,
thereby avoiding the bias resulting from promoting third-party products. The
Company is capable, therefore, of offering its clients an objective assessment
of the advantages and disadvantages of the latest packaged software
applications, platforms, operating systems and productivity tools.
GROWTH STRATEGIES
Historically, the Company has grown by developing new service offerings and
expanding its client base. The Company may also pursue growth through selected
geographic branch expansion and strategic acquisitions. Management believes that
its strategies have positioned the Company to achieve continued growth in
revenues and earnings. Key elements of the Company's growth strategies include
the following:
CAPITALIZE ON OUTSOURCING TREND THROUGH CENTURY DATE COMPLIANCE
EXPERTISE. SPR was an early entrant into the year 2000 segment of the market,
completing its first Century Date Compliance engagement in 1993. The Company
expects that its expertise in this industry segment will result in additional
Century Date Compliance engagements as the year 2000 approaches. To date, the
Company has found that many of its clients request the Company not only to
evaluate their Century Date Compliance needs, but also to assess functional and
technical quality in their application portfolios and develop strategies for
improvement. As a result of its Century Date Compliance engagements, SPR expects
to be strategically positioned to provide additional IT services to clients who
have already entrusted their core, mission-critical systems to SPR.
DEVELOP ADDITIONAL VIRTUAL INSOURCING CENTERS. In order to capitalize on
the corporate trend towards outsourcing, the Company established its first
Virtual Insourcing Center in the third quarter of 1996. Virtual Insourcing
Centers augment the Company's Application Management service offering and are
logical extensions of the Company's Systems Re-engineering, Century Date
Compliance and General Consulting service offerings. See "-- Service Offerings."
The Company intends to establish additional Virtual Insourcing Centers. Equipped
with a variety of computer hardware, software and networking technologies and
systems, these centers enable the Company to provide the full range of its
service offerings in a Company facility rather than at its clients' facilities.
The Virtual Insourcing Centers also enable the Company to assume off-site
project management responsibilities and to complete Century Date Compliance and
Systems Re-engineering and Application Management engagements without
interrupting its clients' businesses. In addition, Virtual Insourcing Centers
allow the Company to implement the testing phases of its Renovation(SM) and
Renovation2000(SM) methodologies seven days a week, rather than only on weekends
when clients are not utilizing their systems.
DEVELOP AND EXPAND ADDITIONAL CLIENT SERVICES. The Company believes there
are substantial opportunities for increasing revenues by developing and
expanding services offered to existing and prospective clients. In response to
client needs, SPR implemented its IDS service offering in the third quarter of
1995. IDS was introduced to provide end-users access to data locked within
existing systems. By incorporating technologies such as data warehousing,
on-line analytical processing ("OLAP"), data mining and the Internet/intranet,
IDS helps bridge the gap between modern technologies and existing systems.
LEVERAGE EXISTING CLIENT BASE. The Company intends to continue building
long-term client relationships. Its record of customer satisfaction and expanded
service offerings have contributed to the Company's ability to increase the
revenues generated from existing clients. The Company derived more than 80% of
its revenues in 1996 from 56 clients to which it had provided IT services in at
least the prior three consecutive years. The Company intends to further
penetrate its existing client base by providing additional service offerings.
EXPAND GEOGRAPHIC PRESENCE. Geographic expansion will be driven primarily
by the growing need to service existing clients' divisions or affiliates in new
geographic locations. The Company opened a Dallas branch in February, 1997. The
Company also may pursue strategic acquisitions either to expand its geographic
presence or to complement and further diversify its existing service offerings.
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SERVICE OFFERINGS
Since its inception, the Company has provided technical personnel to
augment its clients' internal IT departments. Over the past several years,
however, the Company has focused its efforts on providing higher-end service
offerings. The Company provides its clients with three levels of consulting
support which are distinguished by the degree of responsibility the Company
assumes: strategic planning, project management and implementation. Within this
framework, SPR currently provides outsourcing services through four service
offerings: Systems Re-engineering, Century Date Compliance, Application
Management and IDS in addition to providing General Consulting services. The
amount of responsibility assumed by the Company generally depends upon a
client's in-house capabilities and desire to outsource IT functions. Based upon
client needs, SPR can provide strategic planning, project management or
implementation either at its clients' facilities or off-site at SPR's Virtual
Insourcing Centers. See "-- Growth Strategies -- Develop Additional Virtual
Insourcing Centers." SPR employs proven proprietary service methodologies and
software analysis tools to deliver these services. See "-- Proprietary Service
Methodologies and Software Analysis Tool." SPR bills its clients on either a
time and materials or fixed-price basis.
[GRAPHICS REGARDING THE COMPANY'S SERVICE OFFERINGS]
GENERAL CONSULTING. General Consulting consists of providing technical
personnel with expertise in a wide variety of skills and disciplines to augment
clients' internal IT departments. Clients' IT departments often require advice
and programming skills without the full range of project management support.
General Consulting consists of staff augmentation principally for maintenance
and development of client/server and mainframe environments.
SYSTEMS RE-ENGINEERING. Systems Re-engineering consists of software
portfolio analysis and assessment, code stabilization, code modularization,
language upgrades or conversions, business specification extraction and system
documentation. The Company re-engineers existing systems to create more
manageable and functional applications and transitions existing systems to
distributed client/server and networking systems. This service offering allows
the Company's clients to leverage their investments in existing systems through
analysis, improvement, redesign and reuse of applications.
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CENTURY DATE COMPLIANCE. Century Date Compliance consists of retrofitting
existing systems to address the date-coding problem that will be caused by the
year 2000. Century Date Compliance services include high-level organizational
assessment of a client's software portfolio and organizational readiness,
engagement planning and management and implementation. See "-- Industry
Overview."
APPLICATION MANAGEMENT. Application Management consists of providing the
management, systems maintenance and support of all or part of clients' existing
IT applications. Using proprietary and third-party service methodologies and
tools, the Company provides transition planning, engagement management, program
maintenance and testing, production support and system improvements.
INFORMATION DELIVERY SERVICES. IDS consists of accessing, analyzing and
managing data which currently resides in existing systems. The Company uses its
expertise with existing systems and emerging technologies to provide its clients
with the ability to retrieve and utilize data resident in existing systems which
would otherwise be inaccessible. Services provided within IDS include
information harvesting, information analysis and information publishing, which
incorporate technologies such as OLAP and the Internet/intranet.
PROPRIETARY SERVICE METHODOLOGIES AND SOFTWARE ANALYSIS TOOL
The Company's proprietary service methodologies, Renovation(SM) and
Renovation2000(SM), and its proprietary software analysis tool, CodeVu(SM),
provide SPR with a disciplined approach to fulfill its engagements.
Renovation(SM) and Renovation2000(SM) enable the Company to deliver its service
offerings through a tested and repeatable format. CodeVu(SM) quickly and
accurately provides information concerning client software portfolios. These
service methodologies coupled with the software analysis tool, as well as key
strategic alliances with third-party software providers, such as Arbor Software
and Micro Focus, facilitate the development of well-defined tasks and timetables
for each phase of an engagement from strategic planning through implementation.
RENOVATION(SM). Renovation(SM) was first used by the Company in 1988 for
Systems Re-engineering engagements. The methodology employs a four phase
approach: assessment, improvement, transformation and preservation. In the
assessment phase, the system is analyzed for architectural deficiencies and a
strategy is developed for correcting these deficiencies and transforming the
existing architecture. In the improvement phase, commercially available tools
and internally developed techniques are applied to implement the strategy
developed in the assessment phase. In the transformation phase, the newly
re-engineered system is transformed into a new architectural paradigm. In the
preservation phase, quality assurance procedures are developed. These procedures
are designed to help prevent the degradation of the system after the Systems Re-
engineering process is complete, thereby protecting the client's investment in
its existing systems.
RENOVATION2000(SM). Renovation2000(SM) is SPR's methodology for Century
Date Compliance engagements. This methodology employs a repeatable process
which, in conjunction with the best available third-party application software
and productivity tools, analyzes, locates and retrofits all programs and data
affected by the absence of a century date field to permit processing of dates
after 1999. This methodology enables the Company to capture information allowing
the refinement of the process and the preparation of estimates and schedules
throughout the engagement.
CODEVU(SM). CodeVu(SM), which runs on mainframe and personal computing
platforms, analyzes source code and provides quantitative information at the
program and system level. CodeVu(SM) provides insight regarding the technical
quality of the source code, identifies programs that are the most costly to
maintain and represent the highest risk and identifies and locates potential
problems hidden within the code. This tool has been used successfully by the
Company in a large number of engagements including Systems Re-engineering,
Century Date Compliance and Application Management. CodeVu(SM) is often
integrated into client environments to assist with the maintenance and
preservation of source code.
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RECRUITING AND TRAINING
The Company employs 21 full time recruiters, including three recruiting
managers, who are responsible for recruiting and establishing relationships with
qualified technical personnel. Technical personnel meeting the Company's
standards are added to a computerized database. Recruiting managers maintain
regular contact with technical personnel, monitor their availability and changes
in skill levels and update the database, which has been maintained for over 24
years. See "Risk Factors -- Need to Attract and Retain Qualified Technical
Consultants."
In the first quarter of 1996, the Company implemented a three-year training
program to address the current shortage of available technical consultants for
its Century Date Compliance engagements. The Company actively recruits college
graduates with degrees other than in computer science, such as music,
mathematics and philosophy. Based upon its experience with graduates of the
entry-level portion of the training program, the Company believes such
individuals have the aptitude to develop the requisite systems and programming
skills. The Company enrolls these individuals in an intensive seven-week
entry-level training course. Upon completion of training, the Company places
these individuals on Century Date Compliance engagements, where they work under
the supervision of experienced consultants. The Company enters into employment
agreements with these individuals, whereby the consultants agree to reimburse
the Company for some or all of the cost of their training if they leave the
Company within four to six years. Since the commencement of this entry-level
training course on February 15, 1996, 84 individuals have entered and
successfully completed training. The Company intends to continue to conduct
additional training classes on a regular basis. The Company has developed
additional training courses in conjunction with DeVry, Inc., a leading higher
education institution specializing in technology. These courses offer SPR's
consultants advanced training in information technologies. By participating in
these advanced training courses, the Company's consultants can attain
certification from DeVry and earn credits toward both a master's degree in
information technology and an MBA.
MARKETING AND SALES
SPR marketing representatives are assigned to a limited number of accounts
in order to develop an in-depth understanding of each client's individual needs
and to build long-term client relationships. These representatives are
responsible for providing highly responsive service and ensuring that the
Company's service offerings achieve client objectives. In many instances, a
portion of SPR's marketing activity is carried out by senior Company executives.
The Company employs a variety of business development and marketing
techniques to communicate directly with current and prospective clients,
including (i) various print and direct mail advertisements, (ii) participation
in print and live interviews, roundtable discussions and seminars, and (iii) a
World Wide Web site (www.sprinc.com). In addition, the Company believes that its
Chief Executive Officer and Chairman is recognized as an expert concerning the
year 2000 problem. He has participated, often with other service providers,
research organizations and productivity tool and hardware companies, in print,
television and live interviews and seminars concerning this problem. The Company
believes these activities promote greater client awareness and enhance the SPR
brand name.
CLIENT BASE
The Company serves clients in a diverse range of industries thereby
mitigating cyclical effects of any one industry or market. The Company derives
an additional level of diversification from certain of its clients. Different
operating divisions of a given client may utilize any one or several services
offered by SPR, which helps mitigate the risk of customer concentration. During
1996 and for the six months ended June 30, 1997, SPR's ten largest clients
accounted for approximately 52% and 49% of the Company's revenues, respectively,
and Allstate Insurance Company accounted for approximately 16% and 15% of its
revenues, respectively.
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The following table shows selected clients, categorized by industry group,
for which the Company provided services in 1996. Revenues derived from any
particular client engagement vary from year to year. The clients listed below
represented approximately 56%, 45% and 41% of the Company's total revenues for
1996, 1995 and 1994, respectively.
FINANCIAL SERVICES
Comdisco, Inc.
First Data Corporation Oil Card Services
Firstar Information Services Corporation
Stein Roe & Farnham Incorporated
Trans Union
INSURANCE
Allstate Insurance Company
CUNA Mutual Group
Guaranty National Insurance Companies
Kemper National Insurance
The Lincoln National Life Insurance Company
Wausau Insurance
OIL & GAS
Chevron Information Technology Company
Citgo Petroleum Corporation
MAPCO
Oxy USA Inc.
HEALTHCARE
Baxter Healthcare Corporation
G E Medical Systems
G.D. Searle & Co.
MANUFACTURING
Case Corporation
Dowell Schlumberger Company
Nalco Chemical Company
Navistar International Transportation Corp.
The Williams Companies
Cessna Aircraft Company
TRANSPORTATION
Chicago Transit Authority
General Electric Railcar Services Corporation
Sabre Group Holdings, Inc.
OTHER INDUSTRIES
Kraft Foods
Lands' End
Manpower International Incorporated
The Peoples Gas, Light and Coke Company
Sears, Roebuck and Co.
Spiegel, Inc.
State of Wisconsin
Sun Company Inc.
United Video, Inc.
WorldCom
EMPLOYEES
As of June 30, 1997, the Company had 467 IT consulting professionals, of
whom 431 were employees and 36 were independent contractors. Of these IT
consulting professionals, 44 were project managers. As of such date, the Company
had 495 employees: 241, 138, 114 and 2 in Chicago, Tulsa, Milwaukee and Dallas,
respectively.
The Company has three categories of IT consultants: salaried employees,
associate employees and independent contractors. Salaried employees are
full-time employees of the Company and are eligible for all benefits offered by
the Company. Associate employees are eligible for the same benefits offered to
salaried employees but are paid on an hourly basis and, as such, are not
entitled to paid time off in the form of sick days, personal days or vacation.
Approximately 80% of the Company's IT consultants are salaried employees and 12%
are associate employees. Independent contractors are not employees of the
Company, but are paid on an hourly basis and are not entitled to any benefits
offered to Company employees. Approximately 8% of the Company's IT consultants
are independent contractors.
The Company is not a party to any collective bargaining agreements and
considers its relationships with its employees to be good.
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COMPETITION
The market for IT professional services is intensely competitive on local
and national levels, and the Company competes frequently with a variety of
companies for both the same clients and qualified technical consultants. These
companies include: "Big Six" accounting firms, systems consulting and
implementation firms, application software firms, service groups of computer
equipment companies, general management consulting firms and programming
companies. The Company considers large organizations with complex IT needs to be
among its primary clients. Within a given market, there are a limited number of
such potential clients, some of which have designated only certain IT
professional services companies as approved providers of IT professional
services. Primary competitive factors for obtaining and retaining clients
include price, quality of services, technical expertise and responsiveness to
client needs. The primary competitive factors in attracting and retaining
qualified candidates as consultants are competitive compensation arrangements
and consistent exposure to high quality and varied engagements.
Several of the Company's competitors are substantially larger than the
Company and have greater financial and other resources. Many of such competitors
have also been in business longer than the Company and have significantly
greater name recognition throughout the United States, including the geographic
areas in which the Company operates and into which it may expand. In addition,
such competitors are able to meet a broader range of a client's IT consulting
needs and serve a broader geographic range than the Company, which permits such
competitors to better serve national accounts. Although the Company believes
that it competes, and will continue to compete, favorably with existing and
future competitors, there can be no assurance that the Company will continue to
do so. See "Risk Factors -- Competition" and "Risk Factors -- Need to Attract
and Retain Qualified Technical Consultants."
INTELLECTUAL PROPERTY RIGHTS
Software developed by SPR in connection with a client engagement typically
becomes the exclusive property of the client. The Company relies upon a
combination of nondisclosure and other contractual arrangements and trade
secret, copyright and trademark laws to protect its proprietary rights, the
rights of third parties from whom the Company licenses intellectual property and
the proprietary rights of its clients. The Company enters into confidentiality
agreements with its consultants in an effort to prevent the distribution of
proprietary information. See "Risk Factors -- Intellectual Property Rights."
SPR(SM), Renovation(SM), Renovation2000(SM), CodeVu(SM) and the SPR logo
are service marks of the Company. The Company holds no patents or registered
copyrights, and has no present intention of registering any copyright or filing
any patent applications. See "-- Propriety Service Methodologies and Software
Analysis Tool."
PROPERTY
SPR leases its principal executive offices, which are located at 2015
Spring Road, Oak Brook, Illinois 60523-1874, and also leases facilities in
Tulsa, Oklahoma and Milwaukee, Wisconsin. These leases expire on January 21,
2002, May 31, 2004 and May 31, 2001, respectively. The Company also leases space
in Oak Brook, Illinois to house a Virtual Insourcing Center. This lease expires
on August 31, 2002. The Company believes it has adequate space to conduct its
current business. The Company anticipates, however, that additional space will
be required as business expands but believes that it will be able to obtain
suitable space as needed. See Note 5 of Notes to Financial Statements.
LEGAL PROCEEDINGS
The Company is not involved in any material legal proceedings.
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The directors and executive officers of the Company, and their ages and
positions as of September 1, 1997, are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Executive Officers and Directors
Robert M. Figliulo................... 43 Chief Executive Officer and Chairman of
the Board of Directors
Michael J. Fletcher.................. 42 Executive Vice President, General Manager
--Tulsa and Director
David A. Figliulo.................... 36 Executive Vice President and Director
Stephen J. Tober..................... 32 Executive Vice President -- Finance and
Business Development
Stephen T. Gambill................... 46 Chief Financial Officer
Ronald L. Taylor(1).................. 53 Director
Sydnor W. Thrift, Jr.(2)............. 68 Director
David P. Yeager(1)(2)................ 44 Director
</TABLE>
- -------------------------
(1) Member of the Audit Committee of the Board of Directors.
(2) Member of the Compensation Committee of the Board of Directors.
Directors hold office for one year and until their successors are elected
and qualified. Executive officers of the Company are appointed by, and serve at
the direction of, the Board of Directors. Unless otherwise stated, the directors
and executive officers listed below have held their positions with SPR listed in
the above table since October 31, 1996 and have held the positions described
below with the Company's predecessors for the periods indicated.
Robert M. Figliulo served as Chief Executive Officer and Chairman of SPR
since June 1997 and previously served as President and Chairman of the Company
and SPR Chicago. Since joining the Company in May 1976, Mr. Figliulo has held
numerous positions, including Programmer, Analyst, Account Manager, General
Manager of both the Tulsa and Chicago offices and Vice President of Marketing.
Mr. Figliulo received a Masters in Business Administration from the University
of Chicago in 1987. Mr. Figliulo is the brother of David Figliulo and the son of
Eugene Figliulo.
Michael J. Fletcher served as President of SPR Tulsa since September 1994.
Mr. Fletcher joined SPR in 1986 as a Recruiter in the Chicago office and since
that time has held a variety of positions in both the Tulsa and Chicago offices
including Branch Manager of the Tulsa office, Field Support Representative and
Technical Manager. Prior to joining SPR, Mr. Fletcher worked in the staffing
support and personnel recruiting industry.
David A. Figliulo served as Vice President of SPR Chicago since January
1994. Since joining the Company in July 1989, Mr. Figliulo has served as an
Account Manager and as the Vice President of Sales in the Company's Chicago
office. Prior to joining the Company, Mr. Figliulo worked as an Account Manager
for Baxter Healthcare, an international pharmaceutical company, in the Oxygen
Systems Division and was recognized as the division's top salesman in the United
States in 1987, 1988 and 1989. Mr. Figliulo is the brother of Robert Figliulo
and the son of Eugene Figliulo.
Stephen J. Tober served as Executive Vice President -- Finance and Business
Development since June 1997. Prior to joining the Company, Mr. Tober worked in
the investment banking division of Smith Barney Inc. from 1995 through 1997.
From 1991 through 1995 Mr. Tober worked in the corporate finance group of the
law firm Latham & Watkins. Mr. Tober received a J.D. degree from the University
of Virginia School of Law in 1991 and a B.A. degree from Amherst College in
1987.
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Stephen T. Gambill served as Chief Financial Officer since July 1996. From
1982 through July 1996, Mr. Gambill, a certified public accountant, held various
financial management positions within Natural Gas Pipeline Company of America, a
large natural gas pipeline, and most recently served as its Director of
Accounting. Prior to 1982, Mr. Gambill held various auditing positions with the
public accounting firms of Coopers and Lybrand and Deloitte, Haskins & Sells.
Mr. Gambill received a Masters in Business Administration degree from the
University of Chicago in 1987.
Ronald L. Taylor has served since 1987 as a director, President and Chief
Operating Officer of DeVry, Inc., one of the largest publicly-owned,
degree-granting, higher education companies in North America. Mr. Taylor
co-founded Keller Graduate School of Management and was, from 1973 to 1987, its
President and Chief Operating Officer. Mr. Taylor received a Masters in Business
Administration degree from Stanford University in 1971.
Sydnor W. Thrift, Jr. has served as Director of Player Development for the
Baltimore Orioles professional baseball team since November 1994. From November
1991 through October 1994, Mr. Thrift served as the Assistant General Manager
for the Chicago Cubs professional baseball team. From January 1991 through
October 1991, Mr. Thrift served as a consultant to three professional baseball
teams: the San Francisco Giants, the Los Angeles Dodgers and the New York Mets.
David P. Yeager has served as Vice Chairman of the Board of Directors of
Hub Group, Inc., the largest intermodal marketing company in the United States,
since January 1992. Mr. Yeager has also served as Chief Executive Officer of Hub
Group, Inc. since March 1995 and was President of Hub Group, Inc. from October
1985 through December 1991. Mr. Yeager received a Masters in Business
Administration degree from the University of Chicago in 1987.
BOARD COMMITTEES
In October 1996, the Board of Directors established a Compensation
Committee consisting of Messrs. Thrift and Yeager and an Audit Committee
consisting of Messrs. Taylor and Yeager. The Compensation Committee makes
recommendations to the Board of Directors concerning compensation of the
Company's directors, officers and employees. The Compensation Committee also
oversees and administers the Employee Stock Purchase Plan and the Option Plan.
The Audit Committee reviews the results and scope of audits and other services
provided by the Company's independent auditors and monitors and reviews the
Company's financial policies and internal control procedures.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Prior to the Mergers, none of SPR Chicago, SPR Tulsa or SPR Wisconsin had a
compensation committee or any other committee of their respective boards of
directors performing similar functions. Decisions concerning compensation of
executive officers were made by the boards of directors of each of the
respective companies, subject to certain limitations, such as maximum
compensation thresholds, imposed by Systems Inc. See "Certain Transactions." Mr.
Robert Figliulo and Mr. David Figliulo, former executive officers and directors
of SPR Chicago, determined their 1996 compensation. Mr. Fletcher and Ms. Potter,
former executive officers and directors of SPR Tulsa, determined their 1996
compensation. Mr. John Figliulo, the sole officer and director of SPR Wisconsin,
determined his 1996 compensation.
DIRECTOR COMPENSATION
Directors who are not employees of the Company receive $1,000 for each
board meeting attended and $500 for each committee meeting attended on a date
other than a date on which the board meets and are reimbursed for their
reasonable out-of-pocket expenses incurred in attending board and committee
meetings. These directors are also entitled to receive stock options under the
Option Plan for serving on the Board of Directors. See "Management -- Stock
Plans." Employee directors do not receive additional compensation for serving on
the Board of Directors.
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<PAGE> 36
EXECUTIVE COMPENSATION
Summary Compensation Table
The following table sets forth certain information with respect to the
annual and long-term compensation of the Company's President and the other two
executive officers who earned in excess of $100,000 in salary and bonus for the
year ended December 31, 1996 (the "Named Executive Officers").
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
----------------------- ALL OTHER
NAME AND PRINCIPAL POSITION SALARY BONUS COMPENSATION
--------------------------- ------ ----- ------------
<S> <C> <C> <C>
Robert M. Figliulo....................................... $140,000 $110,315(1) $500(2)
Chief Executive Officer and
Chairman of the Board of Directors
Michael J. Fletcher...................................... 108,039 98,937(3) 500(2)
Executive Vice President, General Manager-Tulsa and
Director
David A. Figliulo........................................ 100,000 72,289(4) 500(2)
Executive Vice President and Director
</TABLE>
- -------------------------
(1) Includes $5,621 of automobile lease payments made by the Company.
(2) Represents $500 in matching payments under the Company's 401(k) plan.
(3) Includes $5,664 of automobile lease payments made by the Company.
(4) Includes $8,999 of automobile lease payments made by the Company.
EMPLOYMENT AGREEMENTS
The Company has entered into substantially identical employment agreements
with Robert Figliulo, David Figliulo, Michael Fletcher, Stephen Tober, Rene
Potter and Stephen Gambill. The agreements provide that upon termination of
employment by the Company, other than for Cause (as defined in the agreements),
death or retirement, the Company shall pay the executive an amount equal to no
more than the executive's annual base compensation in effect at the time of
termination. The agreements also generally provide that in the event of a Change
in Control (as defined in the agreements) and the occurrence of certain events,
and to the extent deductible under then applicable tax laws, the Company shall
pay the executive a payment equal to the sum of (i) the executive's most recent
base annual compensation and annual bonus for the fiscal year prior to the date
of the Change in Control, plus (ii) the cash value of the insurance protection
(including dependent coverage) then in effect with respect to the Company's
health insurance plan, based upon the cost of such insurance to the Company for
a 12-month period following the Change in Control date. The agreements also
contain noncompetition, nonsolicitation and nondisclosure covenants.
STOCK PLANS
Employee Stock Purchase Plan. The Company has reserved an aggregate of
500,000 shares of Common Stock for issuance under the Company's Employee Stock
Purchase Plan (the "Purchase Plan"). The Purchase Plan is intended to qualify
under Section 423 of the Internal Revenue Code of 1986, as amended (the "Code"),
and will permit eligible employees of the Company to purchase Common Stock
through payroll deductions of up to 20% of their total cash compensation;
provided that employees may be prohibited from purchasing more than $25,000
worth of stock in any calendar year. The Purchase Plan has two six-month
offering periods, beginning on January 1 and July 1 of each year, with the first
offering period commencing on the date of this Prospectus. The purchase price of
Common Stock purchased under the Purchase Plan shall be the lesser of (i) 85% of
the fair market value of the Common Stock (as calculated pursuant to the
Purchase Plan) on the first day of an offering period or (ii) 85% of the fair
market value of the Common Stock on the last day of an offering period. The
Purchase Plan is administered by the Compensation Committee of the Board of
Directors. The Board of Directors is authorized to amend or terminate the
Purchase Plan at any time. However, the Board of Directors may not, without
stockholder approval, modify the Purchase Plan if stockholder approval of the
amendment is
34
<PAGE> 37
required for the Purchase Plan to continue to comply with the requirements of
Rule 16b-3 under the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), or Section 423 of the Code.
Combined Incentive and Non-statutory Stock Option Plan. The Company has
reserved an aggregate of 1,044,252 shares of Common Stock for issuance under the
Option Plan, which may be granted to employees, officers and directors of the
Company. The Option Plan is administered by the Compensation Committee of the
Board of Directors. The Compensation Committee provides for awards of
Non-statutory Stock Options ("NQSOs") and Incentive Stock Options ("ISOs") to
purchase shares of Common Stock and stock appreciation rights ("SARs"), provided
that any director who is not an employee of the Company may not be awarded an
ISO. The Option Plan limits the aggregate fair market value of the shares of
Common Stock with respect to which ISOs are exercisable for the first time in
any calendar year to $100,000. No such annual limitation applies to NQSO grants
under the Option Plan.
The exercise price for options and SARs may be paid: (i) in cash; (ii) by
surrendering shares already owned by the optionee; or (iii) if the Compensation
Committee so determines, by instructing a broker to sell enough of the
optionee's exercised shares to deliver to the Company sufficient sales proceeds
to pay the exercise price. The exercise price per share of Common Stock may not
be less than 85% (100% in the case of an ISO) of the fair market value of the
Common Stock (as calculated pursuant to the Option Plan) on the date the stock
option is granted. The base value of an SAR will equal not less than 85% of the
market value of a share of Common Stock on the grant date. Option agreements
covering options and SARs to be granted under the Option Plan will generally
provide that such options and SARs will be exercisable within fifteen years from
the date of grant (ten years in the case of ISOs) and will generally vest in
annual installments as determined by the Compensation Committee. In the case of
any eligible employee who owns or is deemed to own stock possessing more than
10% of the total combined voting power of all classes of stock of the Company,
the exercise price of any ISOs granted under the Option Plan may not be less
than 110% of the fair market value of the Common Stock on the date of grant and
the exercise period may not exceed five years from the date of grant.
The Board of Directors can terminate or amend the Option Plan at any time,
except that no such action generally will be able to adversely affect any right
or obligation regarding any awards previously made under the Option Plan without
the consent of the recipient. In addition, no amendment may be effective without
the prior approval of stockholders, if such approval is required for the Option
Plan to continue to comply with applicable regulations of the Code and the
Securities and Exchange Commission (the "Commission"). In the event of any
changes in the capital structure of the Company, such as a stock dividend or
stock split, the Board of Directors must make equitable adjustments to
outstanding unexercised awards and to the provisions of the Option Plan to
reflect any increase or decrease in the number of issued shares of Common Stock.
If the Company becomes a party to a merger, reorganization, liquidation or
similar transaction, the Board of Directors may make such arrangements it deems
advisable regarding outstanding awards, such as substituting new awards for
outstanding awards, assuming outstanding awards or terminating or paying for
outstanding awards.
On June 2, 1997 options to purchase 819,216 shares of Common Stock at an
exercise price of $7.66 per share were granted to certain employees (other than
the Named Executive Officers) and outside directors under the Option Plan, of
which options to purchase 276,725 shares of Common Stock are presently
exercisable.
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<PAGE> 38
CERTAIN TRANSACTIONS
The Company's business was started in 1973 by Systems Inc., which was
founded by Eugene Figliulo. By 1993, all the stock of Systems Inc. was owned by
Eugene Figliulo, his eight children and a nephew of Eugene Figliulo.
During the years ended December 31, 1994, 1995 and 1996, and during the six
months ended June 30, 1997, the Company made distributions of $80,955, $744,559,
$800,663 and $1,803,900, respectively, to its stockholders to enable them to pay
income taxes attributable to S corporation income of the Company for such
periods.
In 1992 and 1993, Systems Inc. and DataFlex made loans to Eugene Figliulo
in the original principal amounts of $589,770 and $100,000, respectively. Such
loans are evidenced by separate unsecured promissory notes and bear interest at
6% per annum. As of December 31, 1996, the Systems Inc. note was paid in full.
As of June 30, 1997, the entire unpaid principal balance plus accrued interest
due on the DataFlex note was outstanding. The DataFlex note plus accrued
interest is expected to be paid with a portion of the proceeds of this Offering
payable to Mr. Figliulo.
In 1995 and 1996, SPR Chicago made two unsecured loans to Robert Figliulo
in the principal amounts of $39,500 and $4,385, respectively. These loans are
evidenced by separate demand promissory notes and bear interest at 7% per annum.
In January 1997, the Company made an unsecured loan to Robert Figliulo in the
principal amount of $80,000. This loan is evidenced by a demand promissory note
and bears interest at 7% per annum. As of June 30, 1997, the aggregate unpaid
principal balance plus accrued interest on these three notes was $132,421.
During 1994, Systems Inc. transferred certain of its assets and liabilities
in Chicago, Tulsa and Milwaukee to three S corporations organized by the
executives primarily responsible for operations in each of those respective
locations. SPR Chicago, all of whose stock was owned by Robert Figliulo and
David Figliulo, acquired the Chicago operations. SPR Tulsa, all of whose stock
was owned by Michael Fletcher and Rene Potter (neither of whom is related to the
Figliulo family), acquired the Tulsa operations. SPR Wisconsin, all of whose
stock was owned by John Figliulo, acquired the Milwaukee operations. Systems
Inc. retained the trademark "SPR" and licensed it to each of these new
corporations for use in their respective geographic areas. Also in 1994, Systems
Inc. redeemed all of Eugene Figliulo's stock for an installment note in the
principal amount of $2,881,266, bearing interest at a rate of 6.75% per annum (
the "Redemption Note"). The Redemption Note has been paid in full.
In connection with the transfers of assets and liabilities, SPR Chicago,
SPR Tulsa and SPR Wisconsin delivered to Systems Inc. notes in the principal
amounts of $1,350,133, $1,613,045 and $1,239,765, respectively (the "Acquisition
Notes"). Each such note was payable in monthly installments of principal and
interest. In addition, each corporation agreed to make an additional contingent
payment to Systems Inc. in the event certain "capital events" occurred prior to
the one year anniversary after the final payment is made on its respective note.
The loan agreements restricted borrowings, capital expenditures, amounts of
compensation payable to directors, officers and key employees, sales of assets,
mergers and certain other business transactions; and the notes were
collateralized by the stock of the respective company and substantially all its
assets. As of the effective date of the Mergers, an aggregate of $3,266,947 plus
accrued interest was outstanding on the Acquisition Notes. The Acquisition Notes
were cancelled by operation of law in the Mergers.
SPR Chicago was reincorporated as a Delaware corporation upon the formation
of SPR and the Merger of SPR Chicago into SPR in October 1996. In the Merger,
Robert Figliulo and David Figliulo each received 1,542,270 shares of Common
Stock. Also in October 1996: (i) SPR Tulsa was merged into SPR and Michael
Fletcher and Rene Potter each received 603,130 shares of Common Stock in the
Merger; (ii) SPR Wisconsin was merged into SPR and John Figliulo received
482,650 shares of Common Stock in the Merger; and (iii) Systems Inc. and
DataFlex were merged into SPR. Each stockholder of Systems Inc. and DataFlex
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<PAGE> 39
received in the Mergers the aggregate number of shares of Common Stock set forth
opposite their respective names below:
<TABLE>
<CAPTION>
NAME SHARES
---- ------
<S> <C>
Eugene Figliulo............................................. 74,857
Robert Figliulo............................................. 190,457
David Figliulo.............................................. 190,457
John Figliulo............................................... 190,457
Stephen Figliulo............................................ 190,457
Donald Figliulo............................................. 190,457
Mark Figliulo............................................... 190,457
James Figliulo.............................................. 190,457
Jeanne Young................................................ 190,457
Michael Cymbala............................................. 95,229
---------
Total.................................................. 1,693,742
=========
</TABLE>
Each of the Company's existing stockholders will receive cash from the net
proceeds of the Offering in an amount equal to the Company's undistributed S
corporation income prior to the closing of the Offering. Such distributions are
estimated to be as follows:
<TABLE>
<CAPTION>
NAME AMOUNT
---- ------
<S> <C>
Eugene Figliulo............................................. $ 27,200
Robert Figliulo............................................. 610,063
David Figliulo.............................................. 610,063
John Figliulo............................................... 261,801
Stephen Figliulo............................................ 80,896
Donald Figliulo............................................. 80,896
James Figliulo.............................................. 80,896
Mark Figliulo............................................... 80,896
Jeanne Young................................................ 80,223
Michael Cymbala............................................. 40,448
Michael Fletcher............................................ 272,636
Rene Potter................................................. 272,636
Stephen Gambill............................................. 1,346
----------
Total.................................................. $2,500,000
==========
</TABLE>
Prior to the closing date of the Offering, the Company intends to enter
into a tax indemnity agreement with each of its current stockholders which
provides, among other things, that the Company will indemnify such stockholders
against additional income taxes resulting from adjustments made (as a result of
a final determination made by a competent tax authority) to the taxable income
reported by the Company as an S corporation for periods prior to the Offering,
but only to the extent those adjustments result in a decrease in income taxes
otherwise payable by the Company as a C corporation for periods after the
Offering.
Prior to the closing date of the Offering, the Company intends to enter
into a noncompetition, nonsolicitation and confidentiality agreement with John
Figliulo precluding him from competing with the Company for a period of one year
after the closing date of the Offering.
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<PAGE> 40
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of the Common Stock as of September 1, 1997, as adjusted to reflect
the sale of the shares offered hereby, by (i) each person known by the Company
to own beneficially more than 5% of the Common Stock, (ii) each of the Company's
Directors, (iii) each of the Company's Executive Officers, (iv) each of the
Selling Stockholders, and (v) all Directors and Executive Officers of the
Company as a group. Each person or entity named below has an address in care of
the Company's principal executive offices. The Company believes that the
beneficial owners of the Common Stock listed below, based on information
furnished by such owners, have sole voting and investment power with respect to
such shares.
<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP BENEFICIAL OWNERSHIP
PRIOR TO OFFERING NUMBER OF AFTER OFFERING(1)
--------------------- SHARES OFFERED ---------------------
NAME SHARES PERCENT HEREBY SHARES PERCENT
---- ------ ------- -------------- ------ -------
<S> <C> <C> <C> <C> <C>
Robert M. Figliulo(2)....................... 1,732,831 26.8 0 1,732,831 21.5
David A. Figliulo(3)........................ 1,732,831 26.8 0 1,732,831 21.5
Michael J. Fletcher......................... 603,130 9.3 0 603,130 7.5
Stephen J. Tober(4)......................... 245,399 3.7 0 245,399 3.0
Stephen T. Gambill.......................... 5,221 * 0 5,221 *
Ronald L. Taylor(4)......................... 10,442 * 0 10,442 *
Sydnor W. Thrift, Jr.(4).................... 10,442 * 0 10,442 *
David P. Yeager(4).......................... 10,442 * 0 10,442 *
John Figliulo(5)............................ 673,107 10.4 336,554 336,553 4.2
Rene M. Potter.............................. 603,130 9.3 38,589 564,541 7.0
James Figliulo.............................. 190,457 2.9 100,000 90,457 1.1
Stephen Figliulo............................ 190,457 2.9 100,000 90,457 1.1
Donald Figliulo............................. 190,457 2.9 100,000 90,457 1.1
Mark Figliulo............................... 190,457 2.9 100,000 90,457 1.1
Jeanne Young................................ 185,236 2.9 100,000 85,236 1.1
Michael Cymbala............................. 95,229 1.5 50,000 45,229 *
Eugene Figliulo............................. 74,857 1.2 74,857 0 *
All Directors and Executive Officers as a
Group (8 persons)......................... 4,350,738 64.5 0 4,350,738 52.1
</TABLE>
- -------------------------
* Less than 1%.
(1) If the Underwriters' over-allotment option is exercised in full, the
following stockholders of the Company will sell pursuant to such option the
number of shares of Common Stock following their names and, after the
Offering, will beneficially own the number and percentage of shares of
Common Stock following their names:
<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP
AFTER OFFERING
-----------------------
SHARES TO NUMBER OF
NAME BE SOLD SHARES PERCENT
---- --------- --------- -------
<S> <C> <C> <C>
Robert M. Figliulo.......................................... 146,250 1,586,581(2) 19.7
David A. Figliulo........................................... 146,250 1,586,581(3) 19.7
Michael J. Fletcher......................................... 68,250 534,880 6.6
Rene M. Potter.............................................. 29,250 535,291 6.6
</TABLE>
(2) Includes 372,947 shares owned by the Robert M. Figliulo 1997 Grantor
Retained Annuity Trust, for which Robert M. Figliulo serves as sole trustee
and has sole investment and voting discretion.
(3) Includes 372,947 shares owned by the David A. Figliulo 1997 Grantor Retained
Annuity Trust, for which David A. Figliulo serves as the sole trustee and
has sole investment and voting discretion.
(4) Consists of shares subject to an option granted under the Option Plan that
is exercisable within 60 days. Such shares are deemed outstanding for
computing the percentage beneficially owned by the person holding such
options, but are not deemed outstanding for computing the percentage
beneficially owned by any other person.
(5) John Figliulo was the President, sole stockholder and sole director of SPR
Wisconsin prior to the Mergers.
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<PAGE> 41
DESCRIPTION OF CAPITAL STOCK
GENERAL
The following brief description of the Company's capital stock does not
purport to be complete and is subject in all respects to applicable Delaware law
and to the provisions of the Certificate of Incorporation and By-laws, copies of
which have been filed as exhibits to the Registration Statement on Form S-1 of
which this Prospectus is a part and to which exhibits reference is hereby made.
The authorized capital stock of the Company consists of 25,000,000 shares
of Common Stock, $.01 par value per share, and 3,000,000 shares of Preferred
Stock, $.01 par value per share. Immediately following consummation of the
Offering, there will be 8,067,400 shares of Common Stock outstanding, no shares
of Preferred Stock outstanding and 819,216 shares of Common Stock will be
issuable upon exercise of outstanding options (276,725 of which are presently
exercisable).
COMMON STOCK
Holders of Common Stock are entitled to one vote per share on all matters
to be voted upon by stockholders, including the election of directors. There are
no cumulative voting rights for the election of directors.
Holders of Common Stock are entitled to receive such dividends as may be
declared from time to time by the Board of Directors out of funds legally
available therefor after payment of dividends required to be paid on outstanding
Preferred Stock, if any. See "Dividend Policy." Holders of Common Stock are
entitled to share ratably in the net assets of the Company upon liquidation
after payment or provision for all liabilities and any preferential liquidation
rights of any preferred stock then outstanding.
Holders of Common Stock have no preemptive rights to purchase shares of
capital stock of the Company. Shares of Common Stock are not subject to any
redemption provisions and are not convertible into any other securities of the
Company. All outstanding shares of Common Stock are, and the shares of Common
Stock to be issued pursuant to the Offering will be, upon payment therefor, duly
authorized, validly issued, fully paid and non-assessable.
Prior to the Offering, there has been no public market for the Common
Stock. The Common Stock has been approved for listing on the Nasdaq National
Market under the symbol "SPRI."
PREFERRED STOCK
The Board of Directors is authorized without stockholder action to adopt
resolutions to issue up to 3,000,000 shares of Preferred Stock, in one or more
series, with such powers, designations, preferences and relative, participating,
optional or other special rights, qualifications, limitations or restrictions as
will be set forth in such resolutions. The holders of Preferred Stock will have
no preemptive rights (unless otherwise provided in the applicable certificate of
designation). Such Preferred Stock may have voting or other rights which could
adversely affect the rights of holders of the Common Stock. In addition, the
issuance of Preferred Stock, while providing flexibility in connection with
possible acquisitions and other corporate purposes, could, under certain
circumstances, make it more difficult for a third-party to gain control of the
Company, discourage bids for the Common Stock at a premium or otherwise
adversely affect the market price of the Common Stock. The Company has no
current plans to issue any shares of Preferred Stock.
DELAWARE LAW AND CERTAIN CERTIFICATE OF INCORPORATION AND BY-LAW PROVISIONS;
ANTI-TAKEOVER EFFECTS
The Company will be subject to the provisions of Section 203 of the
Delaware General Corporation Law (the "DGCL") upon consummation of this
Offering. Subject to certain exceptions, Section 203 prohibits a publicly held
Delaware corporation from engaging in a "business combination" with an
"interested stockholder" for a period of three years after the date of the
transaction in which the person became an interested stockholder, unless the
interested stockholder attained such status with the approval of the Board of
Directors or the business combination is approved in a prescribed manner, or
certain other conditions are satisfied. A
39
<PAGE> 42
"business combination" includes mergers, asset sales and other transactions
resulting in a financial benefit to the interested stockholder. Subject to
certain exceptions, an "interested stockholder" is a person who, together with
affiliates and associates, owns, or within three years did own, 15% or more of
the corporation's voting stock.
The Company's By-laws provide that for nominations for the Board of
Directors or for other business to be properly brought by a stockholder before
an annual meeting of stockholders, the stockholder must first have given timely
notice thereof in writing to the Secretary of the Company. To be timely, a
notice must be delivered not less than 60 days nor more than 90 days prior to
the first anniversary of the preceding year's annual meeting. The notice must
contain, among other things, certain information about the stockholder
delivering the notice and, as applicable, background information about each
nominee or a description of the proposed business to be brought before the
meeting. The Company's By-laws provide that any director may be removed only for
cause upon the affirmative vote of at least 66% of the shares entitled to vote
for the election of directors.
The Company's By-laws provide that special meetings of stockholders may be
called only by the Chairman of the Board of Directors or the Chief Executive
Officer of the Company. These provisions could have the effect of delaying until
the next annual stockholders meeting stockholder actions which are favored by
the holders of a majority of the outstanding voting securities of the Company.
The existence of unissued Preferred Stock enables the Board of Directors to
render more difficult or to discourage an attempt to obtain control of the
Company by means of a tender offer, proxy contest, merger or otherwise, thereby
protecting the continuity of the Company's management. The issuance of Preferred
Stock pursuant to the Board of Directors' authority described above may
adversely affect the rights of the holders of Common Stock. For example,
Preferred Stock issued by the Company may rank prior to the Common Stock as to
dividend rights, liquidation preference or both, may have full or limited voting
rights and may be convertible into shares of Common Stock. Accordingly, the
issuance of Preferred Stock may discourage bids for the Common Stock or may
otherwise adversely affect the market price of the Common Stock.
The foregoing provisions could have the effect of making it more difficult
for a third-party to acquire, or of discouraging a third-party from acquiring
control of the Company.
LIMITATION OF LIABILITY AND INDEMNIFICATION
The Company's Certificate of Incorporation contains certain provisions
permitted under the DGCL, relating to the liability of directors. These
provisions eliminate a director's personal liability for monetary damages
resulting from a breach of fiduciary duty, except in certain circumstances
involving certain wrongful acts, such as: (i) for any breach of the director's
duty of loyalty to the Company or its stockholders; (ii) for acts or omissions
not in good faith or which involve intentional misconduct or a knowing violation
of law; (iii) under Section 174 of the DGCL; or (iv) for any transaction from
which the director derives an improper personal benefit. These provisions do not
limit or eliminate the rights of the Company or any stockholder to seek
non-monetary relief, such as an injunction or rescission, in the event of a
breach of a director's fiduciary duty. These provisions will not alter a
director's liability under federal securities laws. The Company's Certificate of
Incorporation and By-laws also contain provisions indemnifying the directors and
officers of the Company to the fullest extent permitted by the DGCL. The Company
believes that these provisions will assist the Company in attracting and
retaining qualified individuals to serve as directors and officers.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is First Chicago
Trust Company of New York.
40
<PAGE> 43
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the Offering, the Company will have 8,067,400 shares of
Common Stock outstanding, assuming no exercise of options expected to be
outstanding and exercisable. The shares sold in the Offering will be freely
tradeable without restriction or limitation under the Securities Act, except for
any such shares acquired by "affiliates" of the Company, as such term is defined
under the Securities Act ("Affiliates"), which shares may generally only be sold
in compliance with the limitations of Rule 144 described below.
The remaining 5,467,400 shares of Common Stock (the "Restricted Shares")
constitute restricted securities under Rule 144 and were issued or sold by the
Company in private transactions and may be publicly sold only if registered
under the Securities Act or sold in accordance with an applicable exemption from
registration, such as Rule 144. The Company and all executive officers,
directors and stockholders of the Company have agreed with the Underwriters not
to offer, sell contract to sell or otherwise dispose, or contract to dispose, of
any shares of Common Stock or any securities convertible into or exercisable or
exchangeable for Common Stock, or grant any options or warrants to purchase
Common Stock, except in certain circumstances, for a period of 180 days after
the date of this Prospectus (the "Lock-up Period") without the prior written
consent of Smith Barney Inc. Upon the expiration of the Lock-up Period (or
earlier with the consent of Smith Barney Inc.), all of the Restricted Shares
will become eligible for sale subject to the restrictions of Rule 144.
In general, under Rule 144, a person (or persons whose shares are
aggregated) who has beneficially owned Restricted Shares for at least one year,
including a person who may be deemed an Affiliate of the Company, is entitled to
sell within any three-month period a number of shares of Common Stock that does
not exceed the greater of 1% of the then outstanding shares of Common Stock
(approximately 80,674 shares after giving effect to the Offering) and the
average weekly reported trading volume of the Common Stock as reported through
the Nasdaq National Market during the four calendar weeks preceding the sale.
Sales under Rule 144 are subject to certain restrictions relating to manner of
sale, notice and the availability of current public information about the
Company. In addition, under Rule 144(k), a person who has not been an Affiliate
of the Company at any time 90 days preceding a sale, and who has beneficially
owned shares of Common Stock for at least two years, would be entitled to sell
such shares without regard to the volume limitations, manner of sale provisions
or notice or other requirements of Rule 144.
Options to purchase a total of 819,216 shares of Common Stock at an
exercise price of $7.66 per share are presently outstanding, of which 276,725
are presently exercisable. An additional 225,036 shares of Common Stock will be
available for future options grants under the Option Plan. An additional 500,000
shares of Common Stock will be available for issuance under the Employee Stock
Purchase Plan. See "Management -- Stock Plans." Rule 701 under the Securities
Act provides that shares of Common Stock acquired on the exercise of outstanding
options may be resold by persons other than Affiliates, beginning 90 days after
the date of this Prospectus, subject only to the manner of sale provisions of
Rule 144, and by Affiliates beginning 90 days after the date of this Prospectus,
subject to all provisions of Rule 144 except its one-year minimum holding
period. The Company intends to register on a registration statement or
statements on Form S-8 the shares of Common Stock to be issued under the Option
Plan and the Purchase Plan.
Prior to the Offering there has been no public market for the Common Stock
and any sale of substantial amounts of Common Stock in the open market may
adversely affect the market price of the Common Stock offered hereby.
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<PAGE> 44
UNDERWRITING
Upon the terms and subject to the conditions contained in the Underwriting
Agreement dated the date hereof, each of the underwriters named below (the
"Underwriters"), for whom Smith Barney Inc. and Robert W. Baird & Co.
Incorporated are acting as representatives (the "Representatives"), has
severally agreed to purchase, and the Company and the Selling Stockholders have
agreed to sell to each such Underwriter, the number of shares of Common Stock
set forth opposite the name of such Underwriter.
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SHARES
----------- ---------
<S> <C>
Smith Barney Inc. ...........................
Robert W. Baird & Co. Incorporated...........
NUMBER OF
UNDERWRITER SHARES
----------- ---------
---------
Total...................................... 2,600,000
=========
</TABLE>
The Underwriting Agreement provides that the obligations of the several
Underwriters to pay for and accept delivery of the shares are subject to
approval of certain legal matters by counsel and to certain other conditions.
The Underwriters are obligated to take and pay for all shares of Common Stock
offered hereby (other than those covered by the over-allotment option described
below) if any such shares are taken.
The Underwriters initially propose to offer a portion of the shares
directly to the public at the initial public offering price set forth on the
cover page of this Prospectus and a portion of the shares to certain dealers at
a price which represents a concession not in excess of $ per share below the
public offering price. The Underwriters may allow, and such dealers may reallow,
a concession not in excess of $ per share to certain other dealers. After
the initial public offering of the shares to the public, the public offering
price and such concessions may be changed by the Underwriters. The
Representatives of the Underwriters have advised the Company that the
Underwriters do not intend to confirm the sale of any shares to any accounts
over which they exercise discretionary authority.
Certain of the Selling Stockholders have granted the Underwriters an
option, exercisable for 30 calendar days from the date of this Prospectus, to
purchase up to 390,000 additional shares of Common Stock at the initial offering
price set forth on the cover page of this Prospectus, less the underwriting
discounts and commissions. The Underwriters may exercise such option solely for
the purpose of covering over-allotments, if any, in connection with the
Offering. To the extent such option is exercised, each Underwriter will be
obligated, subject to certain conditions, to purchase approximately the same
percentage of such additional shares as the number of shares set forth opposite
each Underwriter's name above bears to the total number of shares listed above.
The Underwriters have reserved up to 130,000 shares of the Common Stock
offered hereby for sale at the initial public offering price to certain
employees, consultants and other persons associated with the Company. The number
of shares of Common Stock available for sale to the general public will be
reduced to the extent such persons purchase such reserved shares. Any reserved
shares not so purchased will be offered by the Underwriters to the general
public on the same basis as the other shares offered hereby.
The Company and all of its directors, executive officers and stockholders
have agreed not to offer, sell, contract to sell or otherwise dispose, or
contract to dispose, of any shares of Common Stock or any securities convertible
into or exercisable or exchangeable for Common Stock, or grant any options or
warrants to
42
<PAGE> 45
purchase Common Stock, except in certain circumstances, for a period of 180 days
after the date of this Prospectus without the prior written consent of Smith
Barney Inc.
Prior to the Offering, there has been no public market for the Common
Stock. The initial public offering price of the shares will be negotiated among
the Company, the Selling Stockholders and the Representatives. Among the factors
expected to be considered in determining the initial public offering price are
the history of and prospects for the Company's business and the industry in
which it competes, an assessment of the Company's management and the present
state of the Company's development, the Company's past and present revenues and
earnings, the prospects for growth of the Company's revenues and earnings, the
current state of the U.S. economy, the current level of economic activity in the
industry in which the Company competes and in related or comparable industries
and currently prevailing conditions in the securities markets, including current
valuations of publicly traded companies which are considered comparable to the
Company.
The Company, the Selling Stockholders and the Underwriters have agreed to
indemnify each other against certain liabilities, including liabilities under
the Securities Act.
In connection with this offering and in compliance with applicable law, the
Underwriters may overallot (i.e., sell more Common Stock than the total amount
shown on the list of Underwriters and participations which appears above) and
may effect transactions which stabilize, maintain or otherwise affect the market
price of the Common Stock at levels above those which might otherwise prevail in
the open market. Such transactions may include placing bids for the Common Stock
or effecting purchases of the Common Stock for the purpose of pegging, fixing or
maintaining the price of the Common Stock or for the purpose of reducing a
syndicate short position created in connection with the Offering. A syndicate
short position may be covered by exercise of the option described above rather
than by open market purchases. In addition, the contractual arrangements among
the Underwriters include a provision whereby, if, prior to termination of price
and trading restrictions, the Representatives purchase Common Stock in the open
market for the account of the underwriting syndicate and the securities
purchased can be traced to a particular Underwriter or member of the selling
group, the underwriting syndicate may require the Underwriter or selling group
member in question to purchase the Common Stock in question at the cost price to
the syndicate or may recover from (or decline to pay to) the Underwriter or
selling group member in question, the selling concession applicable to the
securities in question. The Underwriters are not required to engage in any of
these activities and any such activities, if commenced, may be discontinued at
any time.
LEGAL MATTERS
The validity of the issuance of the shares of Common Stock offered hereby
will be passed upon for the Company by Wildman, Harrold, Allen & Dixon, Chicago,
Illinois. Donald E. Figliulo, the owner of shares of Common Stock and a Selling
Stockholder, is a partner of Wildman, Harrold, Allen & Dixon. Certain legal
matters will be passed upon for the Underwriters by Neal, Gerber & Eisenberg,
Chicago, Illinois.
EXPERTS
The Financial Statements and Schedule of the Company as of December 31,
1996 and 1995, and for each of the years in the three-year period ended December
31, 1996 included herein and elsewhere in the Registration Statement, have been
audited by Arthur Andersen LLP, independent public accountants, as indicated in
their report thereto, and are included in reliance upon the authority of said
firm as experts in accounting and auditing.
CHANGE IN ACCOUNTANTS
Prior to September 9, 1996 Arthur Andersen LLP served as independent public
accountants for SPR Wisconsin, SPR Tulsa, DataFlex and Systems Inc. and Ernst &
Young LLP served as independent public accountants for SPR Chicago. In
connection with the Offering, the Board of Directors of the Company on September
9, 1996 dismissed Ernst & Young LLP and selected Arthur Andersen LLP to serve as
independent
43
<PAGE> 46
public accountants for the Company and to render an opinion on the financial
statements included in this Prospectus, including the financial statements of
SPR Chicago. The Company informed Ernst & Young LLP of its dismissal on
September 9, 1996. The former auditors' report on SPR Chicago's financial
statements for the period from January 14, 1994 to December 31, 1994 and for the
year ended December 31, 1995 is not included in this Prospectus. During the
period from January 14, 1994 to December 31, 1994 and for the year ended
December 31, 1995, Ernst & Young LLP's report on the financial statements of SPR
Chicago did not contain an adverse opinion, disclaimer of opinion, qualification
or modification as to uncertainty, audit scope or accounting principles. There
were no disagreements with Ernst & Young LLP on any matter of accounting
principles or practices, financial statement disclosure, or auditing scope or
procedures from January 14, 1994 through September 9, 1996 or with respect to
SPR Chicago's financial statements.
The Company has requested Ernst & Young LLP to furnish it a letter
addressed to the Commission stating whether it agrees with the above comments. A
copy of that letter dated August 1, 1997 is filed as an exhibit to the
Registration Statement of which this Prospectus is a part.
The Company consulted Arthur Andersen LLP and did not consult Ernst & Young
LLP regarding the application of the Commission's accounting principles to the
transactions described under "The Company" and the type of audit opinion that
would be rendered on the Company's financial statements included in this
Prospectus, which consultations were the subject of written and oral advice.
ADDITIONAL INFORMATION
The Company has filed with the Commission a Registration Statement on Form
S-1 under the Securities Act with respect to the Common Stock offered hereby.
This Prospectus, which is part of the Registration Statement, does not contain
all of the information set forth in the Registration Statement, certain parts of
which are omitted in accordance with the rules and regulations of the
Commission. For further information with respect to the Company and the Common
Stock, reference is hereby made to the Registration Statement, including the
exhibits and schedules thereto. Statements contained in this Prospectus as to
the contents of any contract, agreement or any other document referred to are
not necessarily complete, and in each instance reference is made to the copy of
such contract, agreement or other document filed as an exhibit to the
Registration Statement, each such statement being qualified in all respects by
such reference. The Registration Statement, including the exhibits and schedules
thereto, may be inspected without charge at the Commission's principal office at
450 Fifth Street, N.W., Washington, D.C. 20549, and at the Commission's Regional
Offices at Seven World Trade Center, Suite 1300, New York, New York 10048 and
500 West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of such
materials may be obtained from the public reference section of the Commission at
its Washington address upon payment of the prescribed fee. In addition, the
Commission maintains a World Wide Web site on the Internet at www.sec.gov that
contains reports, proxy and information statements and other information
regarding registrants that file electronically with the Commission.
The Company intends to furnish its stockholders with annual reports
containing audited financial statements and an opinion thereon expressed by
independent auditors and may furnish its stockholders with quarterly reports for
the first three quarters of each year containing unaudited summary financial
information.
44
<PAGE> 47
SPR INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Public Accountants.................... F-2
Balance Sheets as of December 31, 1995 and 1996 and June 30,
1997 (unaudited) and June 30, 1997 (unaudited pro
forma).................................................... F-3
Statements of Operations for the years ended December 31,
1994, 1995 and 1996 and for the six months ended June 30,
1996 (unaudited) and 1997 (unaudited)..................... F-4
Statements of Stockholders' Equity for the years ended
December 31, 1994, 1995 and 1996 and for the six months
ended June 30, 1997 (unaudited)........................... F-5
Statements of Cash Flows for the years ended December 31,
1994, 1995 and 1996 and for the six months ended June 30,
1996 (unaudited) and 1997 (unaudited)..................... F-6
Notes to Financial Statements............................... F-7
</TABLE>
F-1
<PAGE> 48
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders of SPR Inc.:
We have audited the accompanying balance sheets of SPR INC. (a Delaware
corporation) as of December 31, 1995 and 1996 and the related statements of
operations, stockholders' equity and cash flows for each of the three years in
the period ended December 31, 1996. 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 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 financial statements referred to above present fairly,
in all material respects, the financial position of SPR Inc. as of December 31,
1995 and 1996, and the results of its operations and its cash flows for each of
the three years in the period ended December 31, 1996, in conformity with
generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Chicago, Illinois
January 23, 1997 (except with
respect to the matters
discussed in Notes 14 and 15,
as to which the date is
March 5, 1997 and with respect
to the matter discussed in Note 16,
as to which the date is
September 26, 1997.)
F-2
<PAGE> 49
SPR INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, PRO FORMA
--------------------------- JUNE 30, 1997
1995 1996 JUNE 30, 1997 (NOTE 13)
---- ---- ------------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash............................................. $ 1,108,506 $ 356,179 $ 546,045 $ 546,045
Accounts receivable, net of allowance for
doubtful accounts of $31,900, $74,399, and
$568,340 at December 31, 1995 and 1996 and June
30, 1997, respectively......................... 3,096,220 4,272,655 5,265,057 5,265,057
Notes receivable -- related parties, current
portion........................................ 325,981 181,245 260,385 260,385
Notes receivable -- other........................ 75,000 -- -- --
Prepaid expenses and other....................... 369,024 801,661 1,040,708 1,040,708
------------ ------------ ------------ ----------
Total current assets......................... 4,974,731 5,611,740 7,112,195 7,112,195
------------ ------------ ------------ ----------
Property and equipment:
Leasehold improvements........................... 8,278 111,318 116,761 116,761
Computer equipment and software.................. 391,204 1,043,782 1,252,798 1,252,798
Office furniture and equipment................... 153,188 672,105 739,127 739,127
------------ ------------ ------------ ----------
552,670 1,827,205 2,108,686 2,108,686
Less -- accumulated depreciation and
amortization................................. (59,818) (308,046) (494,892) (494,892)
------------ ------------ ------------ ----------
Property and equipment, net.................. 492,852 1,519,159 1,613,794 1,613,794
------------ ------------ ------------ ----------
Notes receivable -- related parties, net of
current portion................................ 115,946 -- -- --
------------ ------------ ------------ ----------
Total assets................................. $ 5,583,529 $ 7,130,899 $ 8,725,989 $8,725,989
============ ============ ============ ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Line of credit and revolving loan................ $ -- $ 1,300,000 $ 1,600,000 $1,600,000
Current portion of term loan..................... -- -- 250,000 250,000
Current portion of term note..................... -- 44,967 46,722 46,722
Current portion of note payable -- related
party.......................................... 1,200,000 641,266 161,266 161,266
Current portion of capital lease obligations..... 45,683 64,094 45,190 45,190
Accounts payable................................. 402,626 959,492 1,192,776 1,192,776
Dividends payable................................ -- -- -- 2,500,000
Accrued expenses:
Salaries, commissions, and withholding taxes... 554,796 982,885 1,078,001 1,078,001
Other.......................................... 401,882 424,620 598,190 598,190
Deferred income taxes............................ -- -- -- 356,400
------------ ------------ ------------ ----------
Total current liabilities.................... 2,604,987 4,417,324 4,972,145 7,828,545
------------ ------------ ------------ ----------
Long-term liabilities:
Term loan, net of current portion................ -- -- 760,000 760,000
Term note, net of current portion................ -- 171,038 147,610 147,610
Note payable -- related party, net of current
portion........................................ 641,266 -- -- --
Capital lease obligations, net of current
portion........................................ 62,693 35,189 22,821 22,821
Deferred income taxes............................ -- -- -- 219,042
------------ ------------ ------------ ----------
Total long-term liabilities.................. 703,959 206,227 930,431 1,149,473
------------ ------------ ------------ ----------
Stockholders' equity:
Common stock, $.01 par, 13,000,000 shares
authorized, 6,467,400 shares issued and
outstanding.................................... 64,674 64,674 64,674 64,674
Preferred stock, $.01 par, 3,000,000 shares
authorized, no shares issued and outstanding... -- -- -- --
Additional paid-in capital....................... 34,503,777 46,734,862 47,118,256 (316,703)
Retained deficit................................. (32,293,868) (44,292,188) (44,359,517) --
------------ ------------ ------------ ----------
Total stockholders' equity................... 2,274,583 2,507,348 2,823,413 (252,029)
------------ ------------ ------------ ----------
Total liabilities and stockholders' equity... $ 5,583,529 $ 7,130,899 $ 8,725,989 $8,725,989
============ ============ ============ ==========
</TABLE>
The accompanying notes to financial statements are an integral part of these
balance sheets.
F-3
<PAGE> 50
SPR INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
----------------------------------------- -------------------------
1994 1995 1996 1996 1997
---- ---- ---- ---- ----
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues..................... $14,797,259 $ 22,907,928 $ 32,510,743 $15,086,778 $22,722,427
Cost of services............. 10,424,690 15,525,198 23,287,234 10,651,784 13,990,202
----------- ------------ ------------ ----------- -----------
Gross profit................. 4,372,569 7,382,730 9,223,509 4,434,994 8,732,225
Costs and expenses:
Selling.................... 1,165,141 2,141,374 3,046,045 1,365,913 2,093,407
Recruiting................. 409,938 776,651 1,323,105 611,702 697,990
Stock-based compensation... 6,509,750 27,986,681 12,231,085 6,720,000 --
General and administrative
expenses................ 1,334,175 1,642,112 3,741,574 1,328,792 4,102,320
----------- ------------ ------------ ----------- -----------
Total costs and
expenses.............. 9,419,004 32,546,818 20,341,809 10,026,407 6,893,717
----------- ------------ ------------ ----------- -----------
Operating income (loss)...... (5,046,435) (25,164,088) (11,118,300) (5,591,413) 1,838,508
Other income (expense):
Interest expense........... (88,065) (160,484) (122,862) (47,546) (109,366)
Interest income............ 55,520 51,477 39,329 17,756 8,914
Other, net................. (24,136) -- 13,176 7,922 --
----------- ------------ ------------ ----------- -----------
Total other income
(expense)............. (56,681) (109,007) (70,357) (21,868) (100,452)
----------- ------------ ------------ ----------- -----------
Income (loss) before income
taxes...................... (5,103,116) (25,273,095) (11,188,657) (5,613,281) 1,738,056
Income taxes................. 75,123 20,788 9,000 -- 1,485
----------- ------------ ------------ ----------- -----------
Net income (loss)............ $(5,178,239) $(25,293,883) $(11,197,657) $(5,613,281) $ 1,736,571
=========== ============ ============ =========== ===========
Pro forma income data
(unaudited):
Net income (loss) as
reported................ $(5,178,239) $(25,293,883) $(11,197,657) $(5,613,281) $ 1,736,571
Pro forma adjustment to
recognize "C"
Corporation provision
for income taxes........ 487,531 1,064,646 407,971 442,688 693,737
----------- ------------ ------------ ----------- -----------
Pro forma net income
(loss).................. $(5,665,770) $(26,358,529) $(11,605,628) $(6,055,969) $ 1,042,834
=========== ============ ============ =========== ===========
Pro forma net income (loss)
per share............... $ (.83) $ (3.84) $ (1.69) $ (.88) $ .15
=========== ============ ============ =========== ===========
Pro forma weighted average
number of common and
common equivalent shares
outstanding............. 6,862,344 6,862,344 6,862,344 6,862,344 6,862,344
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
F-4
<PAGE> 51
SPR INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL RETAINED TOTAL
------------------- PAID-IN EARNINGS STOCKHOLDERS'
SHARES AMOUNT CAPITAL (DEFICIT) EQUITY
------ ------ ---------- --------- -------------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1993........ 6,885,101 $68,851 $ 40,399 $ 1,847,804 $ 1,957,054
Net loss.......................... -- -- -- (5,178,239) (5,178,239)
Distributions..................... -- -- -- (80,955) (80,955)
Stock purchased and cancelled..... (417,701) (4,177) (33,053) (2,844,036) (2,881,266)
Stock-based compensation.......... -- -- 6,509,750 -- 6,509,750
--------- ------- ----------- ------------ ------------
Balance at December 31, 1994........ 6,467,400 64,674 6,517,096 (6,255,426) 326,344
Net loss.......................... -- -- -- (25,293,883) (25,293,883)
Distributions..................... -- -- -- (744,559) (744,559)
Stock-based compensation.......... -- -- 27,986,681 -- 27,986,681
--------- ------- ----------- ------------ ------------
Balance at December 31, 1995........ 6,467,400 64,674 34,503,777 (32,293,868) 2,274,583
Net loss.......................... -- -- -- (11,197,657) (11,197,657)
Distributions..................... -- -- -- (800,663) (800,663)
Stock-based compensation.......... -- -- 12,231,085 -- 12,231,085
--------- ------- ----------- ------------ ------------
Balance at December 31, 1996........ 6,467,400 64,674 46,734,862 (44,292,188) 2,507,348
Net income........................ -- -- -- 1,736,571 1,736,571
Distributions..................... -- -- -- (1,803,900) (1,803,900)
Grant of stock options............ -- -- 383,394 -- 383,394
--------- ------- ----------- ------------ ------------
Balance at June 30, 1997
(unaudited)....................... 6,467,400 $64,674 $47,118,256 $(44,359,517) $ 2,823,413
========= ======= =========== ============ ============
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
F-5
<PAGE> 52
SPR INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
----------------------------------------- -------------------------
1994 1995 1996 1996 1997
---- ---- ---- ---- ----
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating
activities:
Net income (loss) for the
period.......................... $(5,178,239) $(25,293,883) $(11,197,657) $(5,613,281) $ 1,736,571
Adjustments to reconcile net
income (loss) to net cash
provided by operating
activities:
Depreciation and amortization... 20,810 51,259 252,215 112,506 186,847
Expense related to grant of
stock options................. -- -- -- -- 383,394
Stock-based compensation........ 6,509,750 27,986,681 12,231,085 6,720,000 --
Loss on sale of property and
equipment..................... 27,409 -- -- 2,349 --
Increase in accounts
receivable.................... (106,315) (1,623,833) (1,176,435) (428,111) (992,402)
Increase in prepaid expenses and
other......................... (69,429) (225,640) (432,637) 200,489 (318,187)
Increase in accounts payable.... 5,022 300,537 556,866 (78,292) 233,284
Increase in accrued expenses.... 137,729 373,047 450,827 14,696 268,685
----------- ------------ ------------ ----------- -----------
Net cash provided by operating
activities...................... 1,346,737 1,568,168 684,264 930,356 1,498,192
----------- ------------ ------------ ----------- -----------
Cash flows from investing
activities:
Purchases of property and
equipment....................... (62,467) (332,721) (1,238,595) (664,033) (281,482)
(Increase) decrease in notes
receivable -- related parties... (89,035) 338,773 260,682 253,694 --
(Increase) decrease in notes
receivable -- other............. -- (75,000) 75,000 -- --
----------- ------------ ------------ ----------- -----------
Net cash used in investing
activities...................... (151,502) (68,948) (902,913) (410,339) (281,482)
----------- ------------ ------------ ----------- -----------
Cash flows from financing
activities:
Payments on note payable --
related party................... (320,000) (720,000) (1,200,000) (720,000) (480,000)
Distributions..................... (80,955) (744,559) (800,663) (624,223) (1,803,900)
Payments on capital lease
obligations..................... -- (9,183) (49,020) (22,400) (31,271)
Borrowings on term note payable... -- -- 250,000 250,000 --
Payments on term note payable..... -- -- (33,995) (10,014) (21,673)
Net borrowings on line of credit
and term loan................... -- -- 1,300,000 -- 1,310,000
----------- ------------ ------------ ----------- -----------
Net cash used in financing
activities...................... (400,955) (1,473,742) (533,678) (1,126,637) (1,026,844)
----------- ------------ ------------ ----------- -----------
Net increase (decrease) in cash... 794,280 25,478 (752,327) (606,620) 189,866
Cash, beginning of period........... 288,748 1,083,028 1,108,506 1,108,506 356,179
----------- ------------ ------------ ----------- -----------
Cash, end of period................. $ 1,083,028 $ 1,108,506 $ 356,179 $ 501,886 $ 546,045
=========== ============ ============ =========== ===========
Supplemental disclosure of cash
payments made for:
Interest.......................... $ 68,677 $ 143,148 $ 135,792 $ 55,230 $ 108,471
Income taxes...................... 964 72,087 9,000 2,752 1,485
=========== ============ ============ =========== ===========
Supplemental disclosure of noncash
investing and financing
activities:
Investment in equipment through
issuance of capitalized lease
obligations..................... -- $ 117,559 $ 39,926 $ -- $ --
Stock purchased through issuance
of note payable................. 2,881,266 -- -- -- --
=========== ============ ============ =========== ===========
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
F-6
<PAGE> 53
SPR INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1 -- BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
(a) Business -- SPR Inc. (the Company) provides information technology
services to clients in a variety of industry groups including financial
services, healthcare, insurance, manufacturing, oil and gas, transportation and
utilities. The Company provides its clients with three levels of consulting
support which are distinguished by the degree of responsibility the Company
assumes: strategic planning, project management and implementation. Within this
framework, SPR currently provides outsourcing services through four service
offerings: Systems Re-engineering, Century Date Compliance, Application
Management and Information Delivery Services ("IDS") in addition to providing
General Consulting services.
(b) Interim Financial Information -- The unaudited balance sheet as of June
30, 1997, the unaudited statement of stockholders' equity for the six months
ended June 30, 1997 and the unaudited statements of operations and cash flows
for the six months ended June 30, 1996 and 1997 include, in the opinion of
management, all adjustments (consisting of normal and recurring adjustments)
necessary to present fairly the Company's financial position, results of
operations and cash flows. Operating results for the six months ended June 30,
1997 are not necessarily indicative of the results which may be expected for the
year ending December 31, 1997. The information included in these Notes to
Financial Statements relating to the six months ended June 30, 1996 and 1997 is
unaudited.
(c) Basis of Presentation -- SPR Inc. was formed on October 29, 1996.
During October, 1996, Systems and Programming Resources, Inc., Systems &
Programming Resources of Tulsa, Inc., SPR-Wisconsin, Inc., SPR Chicago Inc., and
Consulting Acquisition, Inc. (d.b.a. DataFlex) merged into SPR Inc. at which
time the stockholders of such companies received an aggregate of 6,467,191
shares of common stock of SPR Inc. Systems and Programming Resources, Inc.,
SPR-Wisconsin, Inc., SPR Chicago Inc., Consulting Acquisition, Inc. and SPR Inc.
are under common ownership and control and are accounted for at historical cost
as a reorganization of entities under common control (similar to the pooling of
interests method of accounting). The merger of Systems & Programing Resources of
Tulsa, Inc. into SPR Inc. was accounted for using the pooling of interests
method of accounting. All intercompany transactions and balances have been
eliminated. The accompanying financial statements of the Company have been
prepared to give retroactive effect to the merger.
(d) Accounts Receivable -- Accounts receivable include fees and expenses
for services rendered prior to year end which were billed subsequent to year
end. Amounts relating to such fees and expenses included in accounts receivable
are $613,722, $919,956 and $1,405,052 at December 31, 1995 and 1996 and June 30,
1997, respectively.
(e) Prepaid Expenses and Other -- Prepaid expenses and other includes
$477,653 and $640,801 in Initial Public Offering-related costs at December 31,
1996 and June 30, 1997, respectively.
(f) Revenue Recognition -- Revenues are recognized as the related services
are performed. Clients are generally billed on a time and materials basis. In
June, 1997 the Company entered into a significant fixed-price billing
engagement. Services on this engagement commenced in July, 1997. Revenues and
related costs for this engagement will be recognized using the percentage of
completion method of accounting.
(g) Property and Equipment -- Property and equipment are stated at cost.
Expenditures for repair and maintenance are charged to expense as incurred.
Depreciation and amortization are computed using the
F-7
<PAGE> 54
SPR INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
straight-line method. The estimated useful lives used in computing depreciation
and amortization for financial statement purposes are as follows:
<TABLE>
<CAPTION>
ASSET DESCRIPTION ASSET LIFE
----------------- ----------
<S> <C>
Leasehold improvements........................ Shorter of lease term or estimated
useful life of the asset
Computer equipment and software............... 5 years
Office furniture and equipment................ 5 to 7 years
</TABLE>
(h) Distributions -- Distributions are recorded when declared by the Board
of Directors.
(i) 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
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
(j) Income Taxes -- The Company elected to be taxed as an S corporation for
Federal and certain state income tax purposes. By this election, income of the
Company is taxable to the stockholders.
Upon completion of the initial public offering (the Offering) and effective
termination of the S corporation election, net deferred income tax liabilities
and income tax expense will be recorded for taxable temporary differences
existing at the time of change in tax status. Income for Federal income tax
purposes was recognized on the cash basis of accounting and, prior to the
Offering, the Company will change to the accrual basis of accounting. If the
effective date of the Offering had been June 30, 1997, net deferred income tax
liabilities and income tax expenses of approximately $575,440 would have been
recorded. Deferred income taxes will be recorded under the asset and liability
method of accounting for income taxes which requires the recognition of deferred
income taxes based upon the tax consequences of "temporary differences" by
applying enacted statutory tax rates applicable to future years to differences
between the financial statements carrying amounts and the tax basis of existing
assets and liabilities. As of June 30, 1997, net deferred income tax liabilities
would have consisted of the following:
<TABLE>
<S> <C>
Change in tax accounting methods (cash to accrual).......... $712,800
Fixed assets................................................ 16,000
Stock options............................................... (153,360)
--------
Total net deferred income tax liabilities.............. $575,440
========
</TABLE>
Additional paid-in capital and retained earnings (deficit) will be adjusted
to reflect the capitalization of retained earnings (deficit) to additional
paid-in capital upon the conversion of the Company to a C corporation.
The Company intends to enter into a tax indemnity agreement with each of
its current stockholders which provides, among other things, that the Company
will indemnify such stockholders against additional income taxes resulting from
adjustments made (as a result of a final determination made by a competent tax
authority) to the taxable income reported by the Company as an S corporation for
periods prior to the Offering, but only to the extent those adjustments result
in a decrease in income taxes otherwise payable by the Company as a C
corporation for periods after the Offering.
(k) Pro forma net income (loss) per share -- Pro forma net income (loss)
per share is computed based upon the weighted average number of shares and
common share equivalents outstanding during each period. Pro forma per share
information assumes that 192,012 of the shares of Common Stock being offered by
the Company were outstanding during the periods indicated. This represents the
approximate number of shares of
F-8
<PAGE> 55
SPR INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Common Stock which are being offered by the Company (assuming an initial public
offering price of $14.00 per share and after deducting estimated underwriting
discounts and commissions) to fund the payment of certain undistributed S
corporation earnings. The Company currently estimates that the dividend will be
$2,500,000.
Pursuant to Securities and Exchange Commission Staff Accounting Bulletin
No. 83, common equivalent shares issued during the twelve months immediately
preceding the offering date (using the treasury stock method and an assumed
initial public offering price of $14.00 per share) have been included in the
calculation of common and common equivalent shares as if they were outstanding
for all periods presented.
NOTE 2 -- CONCENTRATION OF CREDIT RISK
The Company's financial instruments that are exposed to concentrations of
credit risk consist of accounts receivable.
During 1997 the Company began performing services for a client which
recently filed for Chapter 11 bankruptcy. The Company has recorded a reserve for
doubtful accounts of approximately $400,000 related to receivables from this
customer at June 30, 1997. The Company is continuing to perform services for
this customer.
The Company's customers are predominantly in the Midwest, with the majority
of customers located in Chicago, Tulsa, Milwaukee and Dallas. One customer in
the insurance industry accounted for approximately 11%, 16% and 15% of revenues
for the years ended December 31, 1995 and 1996 and for the six months ended June
30, 1997, respectively. The Company reviews a customer's credit history before
extending credit. In addition, the Company routinely assesses the financial
strength of its customers and, as a consequence, believes that its accounts
receivable credit risk is limited. The Company has no off balance sheet credit
risk.
NOTE 3 -- NOTES RECEIVABLE FROM RELATED PARTIES
Notes receivable consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
------------------- --------
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
Stockholder notes receivable, unsecured, payable on demand,
interest at 7%............................................ $ 42,233 $ 44,745 $123,885
Stockholder notes receivable, unsecured, payable on demand,
interest at 6%............................................ 399,694 100,000 100,000
Stockholder note receivable, unsecured, payable on demand,
interest at prime plus 1%................................. -- 36,500 36,500
-------- -------- --------
Total notes receivable from related parties................. 441,927 181,245 260,385
Less--current portion....................................... 325,981 181,245 260,385
-------- -------- --------
$115,946 $ -- $ --
======== ======== ========
</TABLE>
NOTE 4 -- LINES OF CREDIT AND LONG-TERM DEBT
As of December 31, 1996, the Company had line of credit agreements that
allowed for maximum borrowings of $2,500,000 and were limited based upon a
percentage of eligible accounts receivable, as defined. Interest was at the
applicable bank's prime rate. Borrowings were collateralized by certain assets
including accounts receivable. One agreement provided for maximum borrowings of
$2,000,000 and expired in May, 1997. Another line of credit agreement which
provided for maximum borrowings of $500,000 was cancelled in
F-9
<PAGE> 56
SPR INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
May, 1997. There were no borrowings outstanding as of December 31, 1995. At
December 31, 1996, borrowings outstanding were $1,300,000.
In June, 1997, the Company entered into a loan agreement which provides for
a revolving loan facility and a term loan facility. The revolving loan facility
allows for maximum borrowings of the lesser of (a) $2,000,000 less the undrawn
face amount of letters of credit or (b) the borrowing base, as defined, less the
undrawn face amount of letters of credit. Interest is at the bank's prime rate
(8.5% at June 30, 1997). The revolving loan facility matures in March, 1998. The
term loan facility provides for maximum borrowings of $2,000,000 for use for
certain purposes. Interest is payable quarterly at the prime rate plus 1% (9.5%
at June 30, 1997). Installments of principal in the amount of $62,500 are
payable quarterly, commencing September, 1997. Within 30 days of the end of each
calender quarter, the Company is required to pay a portion of the principal
amount of the term note then outstanding in an amount equal to 40% of the excess
cash flow, as defined, during such calendar quarter. A final balloon payment is
due March, 1999. Substantially all assets of the Company are collateral for
borrowings under these two facilities. The loan agreement contains certain
restrictions, prohibiting, among other things, additional indebtedness without
the lender's consent. The loan agreement contains certain covenants including,
among others, a requirement of a cash flow coverage ratio of not less than 1.1
to 1. The balances outstanding at June 30, 1997 were $1,600,000 on the revolving
loan and $1,010,000 on the term loan.
Fair value of debt approximates book value at the balance sheet dates.
Long-term and related party debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
--------------------- ----------
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
Term loan.................................................. $ -- $ -- $1,010,000
Note payable to stockholder, unsecured, due August, 1997,
payable in monthly installments of $80,000 plus interest
at 6.75%................................................. 1,841,266 641,266 161,266
Term note payable, due December 31, 2000, payable in
monthly installments of $5,190, including interest at 9%,
collateralized by certain accounts receivable and other
assets................................................... -- 216,005 194,332
Capital lease obligations, collateralized by certain
equipment, personally guaranteed by a stockholder,
interest rates ranging from 7.75% to 8%.................. 108,376 99,283 68,011
---------- -------- ----------
Total long-term debt....................................... 1,949,642 956,554 1,433,609
Less--current maturities................................... 1,245,683 750,327 503,178
---------- -------- ----------
$ 703,959 $206,227 $ 930,431
========== ======== ==========
</TABLE>
The aggregate maturities for long-term and related party debt are as
follows:
<TABLE>
<S> <C>
Remainder of 1997........................................... $ 342,380
1998........................................................ 325,472
1999........................................................ 697,031
2000........................................................ 68,726
----------
Total long term-debt........................................ $1,433,609
==========
</TABLE>
NOTE 5 -- LEASE AGREEMENTS
The Company leases its office facilities under operating lease agreements
which expire at various times through 2004. In addition, the Company leases
certain equipment under operating lease agreements.
F-10
<PAGE> 57
SPR INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
In addition to the minimum future rental payments, the Company is obligated
to pay certain operating expenses relating to leased properties which are
included in rent expense. Total rent expense under operating leases was
approximately $89,594, $135,167, $383,746, $186,663 and $249,828 for the years
ended December 31, 1994, 1995 and 1996 and for the six months ended June 30,
1996 and 1997, respectively.
The following is a schedule of minimum future rental payments required
under the operating leases:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31,
- ------------------------
<S> <C>
1997................................................. $ 352,066
1998................................................. 418,185
1999................................................. 427,117
2000................................................. 486,508
2001................................................. 442,630
Thereafter........................................... 421,914
----------
Total minimum payments required............................. $2,548,420
==========
</TABLE>
NOTE 6 -- 401(K) PROFIT-SHARING PLAN
The Company has a contributory 401(k) profit-sharing plan (the Plan)
covering substantially all full-time employees with a service period greater
than 90 days. The Plan allows participants to contribute up to 15% of their
total compensation on a pretax basis, up to a specified amount. The Company is
required to contribute annually one-fourth of the first $2,000 of the
participants' contribution, up to a maximum of $500 per participant. The total
Company contribution was approximately $21,375, $27,202, $66,865, $47,050 and
$82,086 for the years ended December 31, 1994, 1995 and 1996 and for the six
months ended June 30, 1996 and 1997, respectively.
NOTE 7 -- LICENSE AGREEMENT
In October, 1995, the Company entered into a nonexclusive agreement with an
unaffiliated technical services company operating in New York and other markets
where the Company is not currently doing business, whereby the Company licenses
its Century Date Compliance methodology, Renovation 2000(SM), and its software
analysis tool, Code Vu(SM). In contracts involving Century Date Compliance in
which the unaffiliated company is the prime contractor and the engagement is not
handled as a joint venture the unaffiliated company is obligated to pay SPR Inc.
a license fee ranging from 4% to 9% of revenues. For the year ended December 31,
1996, the Company was paid approximately $18,000. For the six months ended June
30, 1997, the Company recorded $12,289 in license fees.
NOTE 8 -- COMMITMENTS AND CONTINGENCIES
Letter of Credit -- The Company had letters of credit of $119,500 and
$100,000 at December 31, 1996 and June 30, 1997 as security for a lease
agreement. The letter of credit is renewable each year.
NOTE 9 -- BUSINESS COMBINATION
During October, 1996, SPR Inc. acquired by merger all the common stock of
Systems & Programming Resources of Tulsa, Inc. in exchange for 1,206,259 shares
of SPR Inc.'s common stock. This company provided information technology
services to clients in a variety of industry groups. The transaction was
accounted for as a pooling of interests, and accordingly, the financial
statements for all periods presented have
F-11
<PAGE> 58
SPR INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
been restated to include the accounts of this company. Revenues and net income,
net of intercompany eliminations of the separate companies for the periods
preceding the acquisition were:
<TABLE>
<CAPTION>
SPR INC. INCLUDING
SYSTEMS AND PROGRAMMING SYSTEMS &
RESOURCES, INC., SPR-WISCONSIN, INC., PROGRAMMING
SPR CHICAGO INC. AND DATAFLEX RESOURCES OF TULSA, INC.
------------------------------------- ------------------------
<S> <C> <C>
Ten months ended October 31, 1996
Revenues.................................... $ 18,447,117 $8,128,336
Net income (loss), net of intercompany
eliminations............................. (11,265,184) 541,651
Year ended December 31, 1995
Revenues.................................... 16,097,512 6,810,416
Net income (loss), net of intercompany
eliminations............................. (26,042,094) 748,211
Year ended December 31, 1994
Revenues.................................... 13,878,339 918,920
Net loss, net of intercompany
eliminations............................. (5,166,141) (12,098)
</TABLE>
NOTE 10 -- STOCK-BASED COMPENSATION
Systems and Programming Resources, Inc. entered into a series of
transactions with stockholders/ employees from January, 1994 through October,
1996. Certain assets and certain liabilities were transferred to SPR Chicago
Inc. and SPR-Wisconsin, Inc. during 1994 that were subsequently transferred to
SPR Inc. in 1996. Because the transactions were among family members within a
control group, the stockholders of SPR Chicago Inc. and SPR-Wisconsin, Inc. were
effectively granted a variable compensation arrangement that is measured by the
increase in the estimated value of these companies (as determined by management)
since 1994. Compensation expense was calculated as follows: 1) multiply the
number of shares of Common Stock owned by the former stockholders of SPR Chicago
Inc. and SPR-Wisconsin, Inc. by the estimated market value per share of the
Company (which was estimated at $15.00 per share in 1994 and 1995 and $14.00 per
share in 1996); 2) then subtract the payments made by SPR Chicago Inc. and
SPR-Wisconsin, Inc. to the Company on the original acquisition notes; 3) then
subtract the value of the shares received by the stockholders of SPR Chicago
Inc. and SPR-Wisconsin, Inc. attributable to such stockholders' interests in
Consulting Acquisition, Inc. and Systems and Programming Resources, Inc.
Compensation expense was allocated to each period presented based on the
increase in the estimated market values of SPR Chicago Inc. and SPR-Wisconsin,
Inc. which was determined primarily based on revenue growth of each of the
respective companies. The estimated increase in value of SPR-Wisconsin, Inc.
from 1994 to 1995 was 73.75% and from 1995 to 1996 was 26.25%. The estimated
increase in value of SPR Chicago Inc. during 1994 was 14.69%, from 1994 to 1995
was 52.55% and from 1995 to 1996 was 32.76%. The final measurement occurred when
the relative ownership interests in SPR Inc. were determined in October, 1996.
The ownership interests of the former stockholders of SPR Chicago Inc. and
SPR-Wisconsin, Inc. is collectively 63.99% of the Company. Compensation expense
relating to this arrangement is recorded in the accompanying statements of
operations as stock-based compensation with the corresponding credit included in
additional paid-in-capital.
NOTE 11 -- STOCK PLANS
DESCRIPTION
In November, 1996, the Company adopted an Employee Stock Purchase Plan and
a Combined Incentive and Non-statutory Stock Option Plan. 500,000 shares of
common stock are reserved for issuance under the Employee Stock Purchase Plan
and 1,044,252 shares of common stock are reserved for issuance under the
F-12
<PAGE> 59
SPR INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Combined Incentive and Non-statutory Stock Option Plan. On December 31, 1996,
options to purchase an aggregate of 461,559 shares of common stock were granted
at an exercise price of $13.41 per share. Subsequent to December 31, 1996 the
Company cancelled all 461,559 outstanding options and granted 819,216 new
options (see Note 15). The Employee Stock Purchase Plan will permit eligible
employees who have completed five full calendar months of service to purchase
common stock through payroll deductions of up to 20% of their total cash
compensation provided that no employee may purchase more than $25,000 worth of
stock in any calendar year. The purchase price shall be the lesser of 85% of the
market value of the common stock on the first or last day of the offering
period, as defined.
The Combined Incentive and Non-statutory Stock Option Plan provides that
awards may be granted to employees, officers and directors of the Company.
Awards may consist of non-statutory stock options and incentive stock options to
purchase shares of common stock and stock appreciation rights (SARs). Incentive
stock options (ISOs) generally vest over a five year period at the rate of 20%
per year. The exercise price per share of common stock may not be less than 85%
(100% in the case of an ISO) of the fair market value of the common stock on the
date the option is granted. Options and SARs granted under the option plan must
generally be exercised within fifteen years from the date of grant (ten years in
the case of ISOs). In the case of any eligible employee who owns stock
possessing more than 10% of the voting power of stock, the exercise price of any
ISOs granted may not be less than 110% of the fair market value of the common
stock on the date of grant and the exercise period may not exceed five years
from the date of grant.
ACTIVITY
Stock option activity for the Company's Combined Incentive and
Non-statutory Stock Option Plan for the year ended December 31, 1996 and the six
months ended June 30, 1997 is as follows:
<TABLE>
<CAPTION>
INCENTIVE STOCK WEIGHTED NON-STATUTORY WEIGHTED
OPTIONS AVERAGE STOCK OPTIONS AVERAGE
----------------- EXERCISE ---------------- EXERCISE
SHARES PRICE PRICE SHARES PRICE PRICE
------ ----- -------- ------ ----- --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding as of December 31, 1995.... -- $ -- $ -- -- $ -- $ --
======== =======
Granted.............................. 430,232 13.41 13.41 31,327 13.41 13.41
Exercised............................ -- -- -- -- -- --
Cancelled............................ -- -- -- -- -- --
-------- -------
Outstanding as of December 31, 1996.... 430,232 13.41 13.41 31,327 13.41 13.41
======== =======
Stock options exercisable at December
31, 1996............................. -- 31,327
======== =======
Cancelled............................ (430,232) $13.41 $13.41 (31,327) $13.41 $13.41
Granted.............................. 430,232 11.49 11.49 31,327 11.49 11.49
Cancelled............................ (430,232) 11.49 11.49 (31,327) 11.49 11.49
Granted.............................. -- -- -- 819,216 7.66 7.66
Exercised............................ -- -- -- -- -- --
-------- -------
Outstanding as of June 30, 1997........ -- -- -- 819,216 7.66 7.66
======== =======
Stock options exercisable at June 30,
1997................................. -- 276,725
======== =======
</TABLE>
ACCOUNTING
The Company currently utilizes Accounting Principles Board Opinion No. 25
in its accounting for stock options. In October, 1995, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards No. 123
("Statement 123"), "Accounting for Stock-based Compensation." The accounting
method as provided in the pronouncement is not required to be adopted; however,
it is encouraged.
F-13
<PAGE> 60
SPR INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
The Company is not adopting the accounting provisions of Statement 123. Had the
Company accounted for its stock options in accordance with Statement 123 and
assuming the Company had converted to a "C" corporation, pro forma net income
(loss) and pro forma net income (loss) per share would have been approximately
($11,725,328) and ($1.69) for the year ended December 31, 1996, and $764,654 and
$.11 for the six months ended June 30, 1997, respectively. The pro forma
disclosure is not likely to be indicative of pro forma results which may be
expected in future years because of the fact that options vest over several
years, compensation expense is recognized as the options vest and additional
awards may also be granted.
For purposes of determining the pro forma effect of these options, the fair
value of each option is estimated on the date of grant based on the
Black-Scholes option pricing model assuming among other things, no dividend
yield, expected volatility of 41%, risk free interest rates between 6.11% and
6.52% and expected life of 5.0 years.
The weighted average fair value of options granted under the Company's
Combined Incentive and Non-Statutory Stock Option Plan for the periods ended
December 31, 1996 and the six months ended June 30, 1997 was $6.65 and $4.71,
respectively. As of December 31, 1996 and as of June 30, 1997 the remaining
contractual life of all options was approximately ten to fifteen years.
NOTE 12 -- RELATED PARTY TRANSACTION
The Company paid approximately $22,000, $56,000, $80,000, $21,814 and
$108,907 during 1994, 1995 and 1996, and for the six months ended June 30, 1996
and 1997, respectively, in fees to a law firm having a partner who is a
stockholder of the Company and who is a brother of certain executive officers of
the Company.
NOTE 13 -- SUBSEQUENT EVENTS AND PRO FORMA FINANCIAL DATA
The pro forma net income and net income per share includes a provision for
federal and state income taxes as if the Company had been a C corporation. The
effective income tax rate of 40% reflects the combined federal and state income
taxes.
The Company will convert to a C corporation in connection with the
completion of the Offering resulting in the recording of approximately $575,440
in net deferred income tax liabilities, as discussed in Note 1(j). Prior to
consummation of the Offering, the Company intends to make a distribution to its
existing stockholders of the Company's undistributed S corporation earnings for
the period from November 1, 1996 through the Closing of the Offering (the
"Distribution"). The Company currently estimates the Distribution will be
$2,500,000. Retained earnings (deficit) of the Company (which includes the
aggregate stock-based compensation expense), after recording the Distribution
and deferred income taxes, will be reclassified to additional paid-in capital in
connection with the termination of the Company's S corporation election. The
unaudited pro forma Balance Sheet gives effect to these items. No other
contemplated transactions in connection with the Offering are included in the
unaudited pro forma Balance Sheet information.
NOTE 14 -- SUBSEQUENT EVENT -- AUTHORIZED STOCK
On February 24, 1997, the Company increased the number of authorized common
shares to 25,000,000.
NOTE 15 -- SUBSEQUENT EVENT -- STOCK OPTIONS
On March 5, 1997 the Company cancelled the options to purchase an aggregate
of 461,559 shares of common stock that were granted on December 31, 1996 at an
exercise price of $13.41 per share and granted options to purchase an aggregate
of 461,559 shares of common stock at an exercise price of $11.49 per share. On
June 2, 1997 the Company cancelled the options to purchase an aggregate of
461,559 shares of Common Stock that were granted on March 5, 1997. Also on June
2, 1997, the Company's Board of Directors and
F-14
<PAGE> 61
SPR INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
stockholders approved the adoption of the SPR Inc. Amended and Restated Combined
Incentive and Non-statutory Stock Option Plan to provide for the increase to
1,044,252 from 835,400 of the number of shares of common stock reserved for
issuance upon the exercise of incentive and non-statutory stock options. The
Company granted options to purchase 819,216 shares of common stock at an
exercise price of $7.66 per share to certain employees and directors on June 2,
1997. Of these outstanding options, 276,725 are non-statutory stock options
which are presently exercisable and 542,491 are non-statutory stock options
which generally vest over a five year period at a rate of 20% per year.
Subsequently, the Company determined that the exercise price of $7.66 was $1.34
per share below the fair market value of the common stock on June 2, 1997. As a
result, the Company recognized non-cash compensation expense of $383,394 for the
six-month period ended June 30, 1997, which amount is included in general and
administrative expenses in the accompanying statements of operations. Over the
next five years, as the remaining 542,491 options vest, the Company will
recognize additional non-cash compensation expense of up to approximately
$714,000 (or up to approximately $150,000 per year).
NOTE 16 -- SUBSEQUENT EVENT -- STOCK SPLIT
On September 26, 1997 the Company's Board of Directors approved a
1.044-to-1 split of the Company's common stock in the form of a stock dividend
effective immediately prior to the Offering contemplated hereby. All common
stock and per share amounts have been adjusted retroactively to give effect to
this stock split.
F-15
<PAGE> 62
INSIDE BACK COVER OF PROSPECTUS
The inside back cover is a multicolor graphic and text layout. The following
text appears above the graphics:
"SPR SERVICE OFFERINGS."
[Graphics consist of a flow diagram depicting SPR's blend of three levels of
consulting support into the Company's service offerings.]
The following text appears below the graphics:
"SPR has over 24 years of experience in providing information technology
services to clients in a variety of industries, including financial services,
healthcare, insurance, manufacturing, oil and gas, transportation and
utilities. Today, SPR provides these clients with IT services by blending
three levels of consulting support into four Outsourcing Services - Systems
Re-engineering, Century Date Compliance, Application Management and Information
Delivery Services - in addition to General Consulting Services. This blend of
consulting support enables SPR to design customized, comprehensive solutions
for maintaining, improving and transitioning existing systems.
"SPR delivers these customized solutions through a combination of experienced
people, using automated software tools, following an established methodology.
When applied with their service offerings, this formula enables SPR to deliver
high quality, innovative solutions designed to help companies derive maximum
value from their existing systems."
[Graphics consist of map of the United States with spotlights emanating from
Chicago, Milwaukee, Tulsa and Dallas the four cities in which SPR offices are
currently located]
The following text appears at the right of the graphics:
SPR services the Midwest with offices located in:
Chicago, Illinois
Milwaukee, Wisconsin
Tulsa, Oklahoma
Dallas, Texas
For more information, visit SPR's web site at www.sprinc.com
[The Company's logo inside a triangle containing the words "People,"
"Methodology" and "Tools" appears in the lower right corner of the page below a
page curl.]
<PAGE> 63
======================================================
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFER CONTAINED HEREIN, AND, IF GIVEN OR MADE,
SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY, ANY OF THE SELLING STOCKHOLDERS OR ANY OF THE
UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER OF ANY SECURITIES
OTHER THAN THOSE TO WHICH IT RELATES OR AN OFFER TO SELL, OR A SOLICITATION OF
AN OFFER TO BUY, THOSE TO WHICH IT RELATES IN ANY STATE TO ANY PERSON TO WHOM IT
IS NOT LAWFUL TO MAKE SUCH OFFER IN SUCH STATE. THE DELIVERY OF THIS PROSPECTUS
AT ANY TIME DOES NOT IMPLY THAT THE INFORMATION HEREIN IS CORRECT AS OF ANY TIME
SUBSEQUENT TO ITS DATE.
------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.................... 3
Risk Factors.......................... 8
The Company........................... 13
Use of Proceeds....................... 13
Dividend Policy....................... 13
Capitalization........................ 14
Dilution.............................. 15
Selected Financial Data............... 16
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 18
Business.............................. 24
Management............................ 32
Certain Transactions.................. 36
Principal and Selling Stockholders.... 38
Description of Capital Stock.......... 39
Shares Eligible for Future Sale....... 41
Underwriting.......................... 42
Legal Matters......................... 43
Experts............................... 43
Change in Accountants................. 43
Additional Information................ 44
Index to Financial Statements......... F-1
</TABLE>
------------------
UNTIL , 1997 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT PARTICIPATING
IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN
ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS
UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
======================================================
======================================================
2,600,000 SHARES
SPR INC.
COMMON STOCK
SPR LOGO
------------
PROSPECTUS
, 1997
------------
SMITH BARNEY INC.
ROBERT W. BAIRD & CO.
INCORPORATED
======================================================
<PAGE> 64
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
Set forth below is an estimate of the approximate amount of fees and
expenses (other than underwriting commissions and discounts) payable by the
Company in connection with the issuance and distribution of the Common Stock
pursuant to the Prospectus contained in this Registration Statement.
<TABLE>
<S> <C>
Securities and Exchange Commission registration fee......... $ 14,000
Legal fees and expenses..................................... 335,000
Accountants' fees and expenses.............................. 310,000
Printing expenses........................................... 132,000
Nasdaq National Market listing fee.......................... 40,000
Transfer Agent and Registrar fees and expenses.............. 15,000
NASD filing fee............................................. 5,000
Blue Sky fees and expenses.................................. 5,000
Directors' and officers' insurance fees and expenses........ 100,000
Miscellaneous expenses...................................... 144,000
----------
Total.................................................. $1,100,000
==========
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Registrant, being incorporated under the General Corporation Law of the
State of Delaware (the "DGCL"), is empowered by Section 145 of the DGCL, subject
to the procedures and limitations stated therein, to indemnify any person
against expenses (including attorneys' fees), judgments, fines and amounts paid
in settlement actually and reasonably incurred by him or her in connection with
any threatened, pending or completed action, suit or proceeding to which such
person is made a party or threatened to be made a party by reason of the fact
that he or she is or was a director, officer, employee or agent of the
corporation, or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise. Section 145 provides that indemnification
pursuant to its provisions is not exclusive of other rights of indemnification
to which a person may be entitled under any By-Law, agreement, vote of
stockholders or disinterested directors or otherwise.
The Company's Certificate of Incorporation and By-laws contain provisions
that require the Company to indemnify its Directors and officers to the fullest
extent permitted by Delaware law.
Article Ninth of the Registrant's Certificate of Incorporation eliminates,
to the fullest extent permitted by paragraph (7) of subsection (b) of Section
102 of the DGCL, as the same may be amended or supplemented, or any
corresponding provision of the DGCL, the personal liability of directors. That
paragraph allows corporations incorporated under the DGCL to eliminate the
personal liability of a director to the corporation or its stockholders for
monetary damages for a breach of fiduciary duty as a director. However, that
paragraph does not allow corporations to limit the liability of a director: (i)
for any breach of his or her duty of loyalty to the corporation or its
stockholders, (ii) for acts or omission not in good faith or which involve
intentional misconduct or a knowing violations of law, (iii) for unlawful
payment of a dividend or unlawful stock purchase or redemption or (iv) for any
transaction for which the director derived an improper personal benefit.
The Company is in the process of procuring liability insurance for its
directors and officers.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
Set forth below is information as to securities of the Registrant and its
predecessors issued or sold by the Registrant and its predecessors since January
1, 1994 that were not registered under the Securities Act of 1933, as amended
(the "Securities Act"). No underwriters were involved, and there were no
underwriting
II-1
<PAGE> 65
discounts or commissions. The share numbers set forth below do not reflect the
1.044-to-1 split of the Common Stock to be effected immediately prior to
consummation of the Offering.
On January 14, 1994, 500 shares of common stock of SPR Chicago Inc. ("SPR
Chicago") were issued to each of Robert Figliulo and David Figliulo in
connection with the incorporation of SPR Chicago, to which the Chicago
operations of Systems and Programming Resources, Inc. ("Systems Inc.") were
transferred. In connection with this transfer, SPR Chicago delivered to Systems
Inc. a $1.4 million promissory note. These issuances were made pursuant to the
exemption from registration provided by Section 4(2) of the Securities Act.
On August 15, 1994, 1,000 shares of common stock of SPR-Wisconsin, Inc.
("SPR Wisconsin") were issued to John Figliulo in connection with the
incorporation of SPR Wisconsin, to which the Wisconsin operations of Systems
Inc. were transferred. In connection with this transfer, SPR Wisconsin delivered
to Systems Inc. a $1.2 million promissory note. These issuances were made
pursuant to the exemption from registration provided by Section 4(2) of the
Securities Act.
On September 8, 1994, 500 shares of common stock of Systems and Programming
Resources of Tulsa, Inc. ("SPR Tulsa") were issued to each of Michael Fletcher
and Rene Potter in connection with the incorporation of SPR Tulsa, to which the
Tulsa operations of Systems Inc. were transferred. In connection with this
transfer, SPR Tulsa delivered to Systems Inc. a $1.6 million promissory note.
These issuances were made pursuant to the exemption from registration provided
by Section 4(2) of the Securities Act.
Upon the Registrant's formation on October 29, 1996, each of Robert
Figliulo and David Figliulo received 100 shares of the Registrant's Common Stock
for nominal consideration. These issuances were pursuant to the exemption from
registration provided by Section 4(2) of the Securities Act.
On October 30, 1996, in connection with the Merger of SPR Chicago into the
Registrant as described in the Registration Statement, 1,476,914 shares of
Common Stock of the Registrant were issued to each of Robert Figliulo and David
Figliulo in exchange for all their shares of SPR Chicago common stock. On
October 31, 1996, in connection with the Mergers of Systems Inc., Consulting
Acquisition, Inc., SPR Wisconsin and SPR Tulsa as described in the Registration
Statement, 3,239,306 shares of Common Stock of the Registrant were issued to
nine members of the Figliulo family, Michael Cymbala, Michael Fletcher and Rene
Potter in exchange for all their shares of common stock of each of the merged
entities. All of these issuances were pursuant to the exemption from
registration provided by Section 4(2) of the Securities Act.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULE
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------- -----------
<C> <S>
1.1 Form of Underwriting Agreement.*
2.1 Agreement of Merger dated October 30, 1996 between the
Registrant and SPR Chicago Inc.*
2.2 Agreement of Merger dated October 31, 1996 among the
Registrant, Consulting Acquisition, Inc. and Systems and
Programming Resources, Inc.*
2.3 Agreement of Merger dated October 31, 1996 between the
Registrant and Systems and Programming Resources of Tulsa,
Inc.*
2.4 Agreement of Merger dated October 31, 1996 between the
Registrant and SPR-Wisconsin, Inc.*
3.1 Certificate of Incorporation of the Registrant.*
3.1.1 Certificate of Amendment of Certificate of Incorporation.*
3.2 By-laws of the Registrant.*
4.1 Description of specimen stock certificate representing
Common Stock.*
5.1 Opinion of Wildman, Harrold, Allen & Dixon.*
10.1.1 Management Employment Agreement dated as of June 2, 1997
between the Registrant and Robert M. Figliulo.*
</TABLE>
II-2
<PAGE> 66
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------- -----------
<C> <S>
10.1.2 Management Employment Agreement dated as of June 2, 1997
between the Registrant and David A. Figliulo.*
10.1.3 Management Employment Agreement dated as of June 2, 1997
between the Registrant and Stephen J. Tober.*
10.1.4 Management Employment Agreement dated as of June 2, 1997
between the Registrant and Stephen T. Gambill.*
10.1.5 Management Employment Agreement dated as of June 2, 1997
between the Registrant and Michael J. Fletcher.*
10.1.6 Management Employment Agreement dated as of June 2, 1997
between the Registrant and Rene Potter.*
10.4 Amended and Restated Combined Incentive and Non-statutory
Stock Option Plan.*
10.5 Revised form of Employee Stock Purchase Plan.*
10.6 Lease for 2015 Spring Road, Oak Brook, Illinois.*
10.7 Lease for 400 Mid-Continent Tower, Tulsa, Oklahoma.*
10.7.1 Third Amendment to Lease for 400 Mid-Continent Tower, Tulsa,
Oklahoma.*
10.8 Lease for 100 East Wisconsin Avenue, Milwaukee, Wisconsin.*
10.9 Sublease for 815 Commerce Drive, Oak Brook, Illinois.*
10.11 Form of Tax Indemnity Agreement.*
16.1 Consent of Ernst & Young LLP.*
23.1 Consent of Arthur Andersen LLP.
23.2 Consent of Wildman, Harrold, Allen & Dixon (contained in its
opinion filed as Exhibit 5.1 hereto).*
24.1 Powers of Attorney.*
27.1 Financial Data Schedule.*
</TABLE>
- -------------------------
* Previously filed.
(b) Financial Statement Schedule:
Report of Independent Auditors
Schedule II: Valuation and Qualifying Accounts
All other schedules for which provision is made in the applicable
accounting regulations of the Securities and Exchange Commission are not
required under the related instructions or are inapplicable, and therefore have
been omitted.
ITEM 17. UNDERTAKINGS.
The Registrant hereby undertakes:
(1) To provide to the Underwriters at the closing specified in the
Underwriting Agreement, certificates in such denominations and registered
in such names as required by the Underwriters to permit prompt delivery to
each purchaser.
(2) That, insofar as indemnification for liabilities arising under the
Securities Act of 1933 (the "Act") may be permitted to directors, officers
and controlling persons of the Registrant pursuant to the foregoing
provisions, or otherwise, the Registrant has been advised that in the
opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Registrant of expenses incurred
or paid by a director, officer or controlling person of the Registrant in
the successful defense of any action, suit or proceeding) is asserted by
such director,
II-3
<PAGE> 67
officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the
matter had been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Act and will be governed by the
final adjudication of such issue.
(3) That, for purposes of determining any liability under the Act, the
information omitted from the form of Prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form
of Prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) of
497(h) under the Act shall be deemed to be part of this Registration
Statement as of the time it was declared effective.
(4) That, for the purpose of determining any liability under the Act,
each post-effective amendment that contains a form of prospectus shall be
deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-4
<PAGE> 68
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment No. 3 to Registration Statement to be signed on
its behalf by the undersigned, thereunto duly authorized in Chicago, Illinois on
September 29, 1997.
SPR INC.
By: /s/ ROBERT M. FIGLIULO
------------------------------------
Robert M. Figliulo
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 3 to Registration Statement has been duly signed by the following persons in
the capacities indicated on September 29, 1997.
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<C> <S>
/s/ ROBERT M. FIGLIULO Chief Executive Officer and Chairman of the Board of
- --------------------------------------------- Directors (Principal Executive Officer)
Robert M. Figliulo
/s/ STEPHEN J. TOBER Executive Vice President, Finance and Business
- --------------------------------------------- Administration (Principal Financial Officer)
Stephen J. Tober
/s/ STEPHEN T. GAMBILL Chief Financial Officer (Principal Accounting
- --------------------------------------------- Officer)
Stephen T. Gambill
* Executive Vice President, General Manager -- Tulsa
- --------------------------------------------- and Director
Michael J. Fletcher
/s/ DAVID A. FIGLIULO Executive Vice President and Director
- ---------------------------------------------
David A. Figliulo
* Director
- ---------------------------------------------
Ronald L. Taylor
* Director
- ---------------------------------------------
Sydnor W. Thrift, Jr.
* Director
- ---------------------------------------------
David P. Yeager
*By: /s/ STEPHEN T. GAMBILL
---------------------------------------
Stephen T. Gambill
Attorney-in-fact
</TABLE>
II-5
<PAGE> 69
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON SUPPLEMENTAL SCHEDULE
To the Stockholders of SPR Inc.:
We have audited in accordance with generally accepted auditing standards,
the financial statements of SPR Inc. included in this registration statement and
have issued our report thereon dated January 23, 1997 (except with respect to
the matters discussed in Notes 14 and 15, as to which the date is March 5, 1997,
and the matter discussed in Note 16, as to which the date is September 26,
1997). Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule listed in the index in Item
16(b) is the responsibility of the Company's management and is presented for
purposes of complying with the Securities and Exchange Commission's rules and is
not part of the basic financial statements. The schedule has been subjected to
the auditing procedures applied in the audit of the basic financial statements
and, in our opinion, fairly states in all material respects the financial data
required to be set forth therein in relation to the basic financial statements
taken as a whole.
ARTHUR ANDERSEN LLP
Chicago, Illinois
January 23, 1997
S-1
<PAGE> 70
SCHEDULE II
SPR INC.
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO BALANCE AT
BEGINNING COSTS AND END OF
DESCRIPTION(1) OF YEAR EXPENSES DEDUCTIONS(1) YEAR
-------------- ---------- ---------- ------------- ----------
<S> <C> <C> <C> <C>
For the year ended December 31, 1994:
Allowance for doubtful accounts................. $75,153 $ 20,000 $ 6,000 $ 89,153
For the year ended December 31, 1995:
Allowance for doubtful accounts................. $89,153 $(28,753) $28,500 $ 31,900
For the year ended December 31, 1996:
Allowance for doubtful accounts................. $31,900 $ 45,000 $ 2,501 $ 74,399
For the six months ended June 30, 1997:
Allowance for doubtful accounts (unaudited)..... $74,399 $493,941 -- $568,340
</TABLE>
- -------------------------
(1) Bad debts written off.
S-2
<PAGE> 71
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------- -----------
<C> <S>
1.1 Form of Underwriting Agreement.*
2.1 Agreement of Merger dated October 30, 1996 between the
Registrant and SPR Chicago Inc.*
2.2 Agreement of Merger dated October 31, 1996 among the
Registrant, Consulting Acquisition, Inc. and Systems and
Programming Resources, Inc.*
2.3 Agreement of Merger dated October 31, 1996 between the
Registrant and Systems and Programming Resources of Tulsa,
Inc.*
2.4 Agreement of Merger dated October 31, 1996 between the
Registrant and SPR-Wisconsin, Inc.*
3.1 Certificate of Incorporation of the Registrant.*
3.1.1 Certificate of Amendment of Certificate of Incorporation.*
3.2 By-laws of the Registrant.*
4.1 Description of specimen stock certificate representing
Common Stock.*
5.1 Opinion of Wildman, Harrold, Allen & Dixon.*
10.1.1 Management Employment Agreement dated as of June 2, 1997
between the Registrant and Robert M. Figliulo.*
10.1.2 Management Employment Agreement dated as of June 2, 1997
between the Registrant and David A. Figliulo.*
10.1.3 Management Employment Agreement dated as of June 2, 1997
between the Registrant and Stephen J. Tober.*
10.1.4 Management Employment Agreement dated as of June 2, 1997
between the Registrant and Stephen T. Gambill.*
10.1.5 Management Employment Agreement dated as of June 2, 1997
between the Registrant and Michael J. Fletcher.*
10.1.6 Management Employment Agreement dated as of June 2, 1997
between the Registrant and Rene Potter.*
10.4 Amended and Restated Combined Incentive and Non-statutory
Stock Option Plan.*
10.5 Revised form of Employee Stock Purchase Plan.*
10.6 Lease for 2015 Spring Road, Oak Brook, Illinois.*
10.7 Lease for 400 Mid-Continent Tower, Tulsa, Oklahoma.*
10.7.1 Third Amendment to Lease for 400 Mid-Continent Tower, Tulsa,
Oklahoma.*
10.8 Lease for 100 East Wisconsin Avenue, Milwaukee, Wisconsin.*
10.9 Sublease for 815 Commerce Drive, Oak Brook, Illinois.*
10.11 Form of Tax Indemnity Agreement.*
16.1 Consent of Ernst & Young LLP.*
23.1 Consent of Arthur Andersen LLP.
23.2 Consent of Wildman, Harrold, Allen & Dixon (contained in its
opinion filed as Exhibit 5.1 hereto).*
24.1 Powers of Attorney.*
27.1 Financial Data Schedule.*
</TABLE>
- -------------------------
* Previously filed.
<PAGE> 72
(b) Financial Statement Schedule:
Report of Independent Auditors
Schedule II: Valuation and Qualifying Accounts
All other schedules for which provision is made in the applicable
accounting regulations of the Securities and Exchange Commission are not
required under the related instructions or are inapplicable, and therefore have
been omitted.
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our
report, which contained a captioned opinion dated January 23, 1997 (except
with respect to the matters discussed in Notes 14 and 15, as to which the date
is March 5, 1997 and with respect to the matter discussed in Note 16, as to
which the date is September 26, 1997) and to all references to our Firm
included in or made a part of this registration statement.
/s/ Arthur Andersen LLP
ARTHUR ANDERSEN LLP
Chicago, Illinois
September 29, 1997
