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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
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(MARK ONE)
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED: DECEMBER 31, 1998, OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 0-21485
SUPERIOR CONSULTANT HOLDINGS CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE
(State or other jurisdiction of
incorporation or organization)
4000 TOWN CENTER, SUITE 1100, SOUTHFIELD, MICHIGAN
(Address of principal executive offices)
38-3306717
(I.R.S. Employer Identification No.)
48075
(Zip Code)
Registrant's telephone number, including area code: (248) 386-8300
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities pursuant to Section 12(g) of the Act:
COMMON STOCK, PAR VALUE $.01 PER SHARE
(TITLE OF CLASS)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filings requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of voting stock held by non-affiliates of the
registrant based upon the closing sale price of the stock as reported on the
Nasdaq National Market on March 25, 1999 was $153,312,720.
At March 25, 1999, 10,358,259 shares of the registrant's Common Stock were
outstanding.
DOCUMENT INCORPORATED BY REFERENCE
The registrant's definitive proxy statement for the annual meeting of
stockholders, estimated to be held in May 1999, expected to be filed with the
Commission not later than April 9, 1999, is incorporated by reference into Part
III of this Form 10-K.
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PART I
ITEM 1. BUSINESS
SUMMARY
Superior Consultant Holdings Corporation (the "Company"), through its
wholly-owned subsidiary, Superior Consultant Company, Inc. ("Superior"), is a
national healthcare consulting firm that provides a wide range of information
technology ("IT") consulting and strategic and operations management consulting
services to a broad cross-section of healthcare industry participants and
healthcare information system vendors. Superior uses its in-depth institutional
knowledge and nationally deployed group of experienced consultants to help
clients plan and execute business strategies. Superior's comprehensive continuum
of solutions includes: strategic planning and operations management consulting;
financial performance; facilities planning; information systems planning,
implementation and integration; data warehousing; interim management; facilities
planning; and varied levels of information systems outsourcing.
The Company's wholly-owned subsidiary, Enterprise Consulting Group, Inc.
("Enterprise"), assists clients in various industries with network and
telecommunication design and acquisition; enterprise messaging; intranet and web
strategies; workgroup consulting; remote network administration and outsourcing;
and software and application development solutions.
The term "Company" as used herein refers collectively to the Company
together with its two principal operating subsidiaries: Superior and Enterprise.
The Company serves clients across a broad cross-section of the healthcare
industry. From January 1, 1997 through December 31, 1998, the Company provided
services to over 790 healthcare clients on over 3,025 engagements. The Company
believes that its established record of long-term relationships, in-depth
knowledge of its clients' needs, and its continually expanding range of service
offerings endow the Company with significant advantages over its competitors in
marketing additional services and winning new engagements. The Company's goal is
to be the preferred, if not sole, provider of a broad range of solutions for
each of its clients.
INDUSTRY BACKGROUND
General
The United States healthcare industry is undergoing rapid, profound change.
In recent years, healthcare expenditures have increased at approximately twice
the rate of inflation and are expected to exceed $1.2 trillion in 1999,
according to a Health Care Financing Administration ("HCFA") report on the
healthcare industry. The Company believes that the effects of the Balanced
Budget Act ("BBA"), slowed growth of Medicare payments and the aging of the U.S.
population will result in continued dramatic change in the healthcare industry.
Healthcare providers today face external and internal pressures to meet the
competitive demands of the marketplace, comply with increasing government
regulations, and cope with the financial realities of managed care. These
challenges, combined with increased demands on capital resources, are forcing
healthcare providers to seek new ways to structure and manage their
organizations and deliver services. In the past, the financial risk of
healthcare delivery was absorbed principally by third-party payors, and
providers did not focus on cost containment. Today, through managed care
arrangements and provider capitation (under which providers are paid an annual
fixed fee per individual to deliver all healthcare services required by that
individual), the economic risk of healthcare delivery is shifting from payors to
providers. To manage this risk, providers must enhance their understanding of
treatment costs, variability of costs and cost control, redesign their
facilities and restructure their processes, operations and organizations to
enhance efficiency and accountability. Providers must achieve each of these
objectives, while at the same time striving to maintain or increase quality and
consistency in healthcare delivery.
The shifting of risk from payor to provider has also encouraged and
accelerated consolidation among healthcare providers. In order to achieve
economies of scale, operating efficiencies, and enhanced contracting
capabilities, many healthcare organizations such as hospitals, primary care and
multi-specialty physician
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groups, laboratories, pharmacies, home health services and nursing homes are
integrating horizontally and vertically to create integrated delivery networks
("IDNs"). The goal of IDNs is to deliver comprehensive healthcare in a
cost-effective manner and accordingly, their success is dependent, in part, on
effectively managing and delivering information to the caregivers. As industry
consolidation and IDN formations create larger and increasingly far-reaching
healthcare organizations, and as the demand for information services is
increasingly required to cross multiple points of care, IDNs must place greater
focus on information management and business process solutions to control costs,
demonstrate quality, measure performance, predict outcomes, and increase
efficiency. In similar efforts to economize, other organizations are downsizing
and divesting in the areas of personnel, operations, and facilities.
Information Technology
The increased demand for tools to collect, analyze and interpret clinical,
operational and financial information rapidly, flexibly, and in a technological
framework that supports today's diverse healthcare environment is intensifying
the reliance of the healthcare industry on IT solutions. As a result, the
healthcare industry is rapidly increasing its spending for IT. Healthcare IT
spending is being driven not only by the heightened need for better management
information systems, but also continued price-performance improvements in
hardware and software, the ability to develop increasingly user-friendly
software applications and the emergence of better application development tools.
The healthcare IT environment has grown increasingly complex, costly and
burdensome as a result of the challenges of deploying new technology,
maintaining older systems, and meeting staffing requirements in a market with an
insufficient pool of qualified IT professionals. At the same time, external
economic factors have forced organizations to focus on their primary
competencies and trim work forces. The Company believes that healthcare
participants will continue to turn to outside consultants, external management
of internal information systems and full outsourcing arrangements with
technology leaders as a means of coping with the financial and technical demands
of information systems management. The Company believes this dynamic is also
occurring across other industries as organizations look to external management
and outsourcing of their information systems in order to remain focused on their
primary businesses.
Consulting
The changing business environment has also produced an evolving range of
strategic and operating options for healthcare entities, many of which are
unfamiliar to an industry that had long operated under a non-aligned, third
party payor environment. In response, healthcare participants are formulating
and implementing new strategies and tactics, including redesigning business
processes and workflows, acquiring better technology and adopting or remodeling
customer service and marketing programs. The Company believes that healthcare
participants will continue to turn to outside consultants to assist in this
process for several reasons: the pace of change is eclipsing their own internal
resources and capacity to identify, evaluate and implement the full range of
options; consultants enable healthcare participants to develop better solutions
in shorter time frames; and purchasing consulting expertise can be more cost
effective. By employing outside expertise, healthcare providers can often
improve their ability to compete by more rapidly deploying new processes.
The healthcare consulting industry is highly fragmented and consists
primarily of: (i) larger systems integration firms, including the consulting
divisions of the national accounting firms, which offer healthcare consulting as
one of their specialty areas; (ii) healthcare information systems vendors that
focus on services relating to the software solutions they offer; (iii)
healthcare consulting firms, many of which focus on selected specialty areas,
such as strategic planning or vendor-specific implementation; and (iv) large
general management consulting firms that do not specialize in healthcare
consulting and/or offer systems implementation. Increasingly, the competitive
advantage in healthcare consulting will be gained by those consulting firms
which (i) are able to marshal the necessary expertise and resources to offer
comprehensive skill sets to clients; (ii) have the strength and consistency to
advise clients along the entire service continuum (from strategy to selection to
implementation to operation); (iii) offer the flexibility to meet the challenges
of the rapidly changing healthcare and IT industries; and (iv) have the ability
to recruit, retain, educate and deploy a diverse, experienced set of personnel.
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THE SUPERIOR SOLUTION
Superior uses its intellectual capital, in-depth institutional knowledge of
healthcare delivery systems, and nationally deployed group of experienced
consultants to help clients plan and execute business strategies. Superior
offers its clients a continuum of solutions, ranging from strategic planning and
operations management consulting, to information system planning, implementation
and integration, to interim management and outsourcing. For each client and
engagement, Superior structures a project team that understands the complexities
of the healthcare environment for that particular client and can concurrently
address the management and technical ramifications of change and improvement. In
structuring an engagement, Superior does not impose any preordained program on
its clients. Rather, utilizing the professional judgment derived from their
years of experience, Superior's consultants work in concert with each client to
develop custom-tailored solutions. As each client relationship evolves,
Superior's professionals add their experiences to Superior's proprietary
databases to accumulate a detailed and intimate understanding of each client and
its specific needs. Superior's nationally deployed professionals are aided by
instant access, via the Company's proprietary information and communication
system, to its knowledge and client resource databases, and to collaboration
with colleagues. This unified team approach helps to ensure high quality,
consistent and geographically seamless client service.
Superior's services integrate many diverse facets and constituencies of the
healthcare industry. Through its strategic consulting, Superior brings together
the healthcare and business relationships required to establish and maintain
efficient and collaborative healthcare delivery networks. Through its operations
management consulting, Superior links and optimizes the contributions of
clinical, information and management personnel. Through its information systems
implementation and integration consulting, Superior forges a value-added link
between healthcare information systems vendors and their customers by helping
each group maximize the potential of existing technology. Superior also provides
a bridge between existing and emerging technologies by supplying vendors with
needed knowledge to develop innovations focused on the changing needs of the
marketplace and by assisting healthcare industry participants to assess the
relative merits and risks of selecting and implementing new technologies. This
enables Superior to help its clients take advantage of the opportunities
presented by emerging technologies such as the internet and intranets, local and
wide area communication networks, telehealth and document imaging solutions.
In addition, Superior offers a unique and flexible program of outsourcing
services ranging from interim management, to personnel acquisition and
facilities management, to remote network administration (via NetLinc(TM)
Services), to total outsourcing. Superior's Capitated Consulting(TM) outsourcing
program enables healthcare providers to simplify their management agenda,
improve their return on information systems investment, and strengthen their
technology management by ensuring client access to Superior's skilled technical
labor pool and knowledge repositories.
To assist its clients in achieving the optimal strategic, operational
and/or IT solution for their business needs, Superior implements solutions that
are unbiased toward specific organizations including hardware and software
vendors. Superior offers an objective assessment of the advantages and
disadvantages of each particular strategic, operational and/or IT solution,
including packaged software applications, platforms and operating systems.
Through its unbiased solutions, Superior can take a flexible approach to its
clients' business problems and provide them with the best solution.
SERVICES
Superior offers its clients comprehensive healthcare consulting services,
from visioning, to strategy, to selection of appropriate solutions, to
implementation, ongoing management and outsourcing. Superior offers
custom-tailored solutions based on an assessment of each client's needs.
Superior offers services in the following broadly defined categories:
Information Technology Consulting. Superior provides high quality services
in developing long term IT strategy through selection of technology and
products, systems implementation, integration and management,
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and contract negotiation. While Superior's consultants have a wide variety of
skills, the majority have concentrated capabilities in the IT area. This
expertise is derived from a combination of work for Superior clients as well as
experience gained prior to joining Superior and includes evaluation,
implementation, operational or other experience with one or more established and
emerging healthcare information systems or technologies offered by over 100
information system vendors.
Management Consulting. Superior's management consulting services include
strategy development and business planning, operations and financial performance
services, facility planning, health information management and imaging, and
post-acute services. A recently developed, comprehensive consulting service,
RAPIDS(TM) (Resource Allocation Planning for Integrated Delivery Systems), helps
healthcare systems reallocate scarce resources to improve their bottom lines by
evaluating the balance between quality of care, customer service, provider
productivity, ongoing operational efficiency, and initial and long-term capital
costs.
Information Technology Outsourcing. Superior's flexible, Capitated
Consulting program enables healthcare providers to simplify their management
agenda, improve their return on information systems investment and strengthen
their technology management by ensuring client access to Superior's skilled
labor pool. Superior's outsourcing program offers the client an array of
services, functions and economic elements that can be tailored to the specific
client program/agenda, including IT management, IT planning and budgeting,
applications support, applications implementation, IT operations, network and
financial management and risk sharing.
Operations Consulting. Superior provides business process workflows and
operations improvement as methods to help clients eliminate organizational
redundancy, reduce cost and implement changes in the areas of patient care,
post-acute care, administrative services, clinical resource allocation, quality
management, finance, physician support and nursing. Superior can provide
executive and staff education, interim management and operational assistance.
In order to offer its clients a depth of proficiency and experience
Superior organizes its services by its 28 national practice areas which work
together synergistically to serve its clients, many of whom have consulting
needs in multiple areas. The national practice areas operate in conjunction with
Superior's client service executives who coordinate how Superior's specialty
areas can work together to achieve optimum productivity and cost effectiveness.
Superior has developed methodologies for delivering these skills in a
consistent, coordinated manner, either as a full project team, a joint
client-consultant or joint vendor-consultant project team, through selected
individual expertise or as part of a seminar or workshop.
Set forth below is a list of the healthcare consulting services and skills
offered by the Company:
CATEGORY DESCRIPTION OF SERVICES
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INFORMATION TECHNOLOGY CONSULTING - Strategic information system planning, budgeting,
development and implementation
- Systems and departmental audits and assessments
- Interim management and facilities management
- Data warehousing
- Remote network administration
- Executive Planning Systems (EPS)
- Executive and technical education and end user training
- Legacy system maximization
- Unbiased product selection and vendor negotiation
- Applications testing and quality assurance
- System implementation and integration, including products
of SMS, Cerner, HBOC, MEDITECH and others
- Network and client-server planning and design
- Imaging system feasibility studies, design and
implementation
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CATEGORY DESCRIPTION OF SERVICES
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STRATEGIC AND OPERATIONS MANAGEMENT
CONSULTING - Case management program development and implementation
- Strategic and tactical planning
- Collaboration strategies, mergers, acquisitions and
affiliations
- Executive and departmental interim management
- Operational and executive assessment
- Reengineering and business process improvement and
redesign
- Project management
- State and local comparative data analysis/benchmarking
- Decision Support and Executive Information Systems
(DSS/EIS)
- Computerized patient record (CPR) planning and
implementation
- Productivity and quality improvement
- Payor and customer surveys and profiles
- Market and competitive landscape research and analysis
- Facility planning and programming
- Post-acute care services
- Clinical resource allocation
- Clinical program planning
- Market and financial feasibility assessment
- Cardiology services
- Disease management
OUTSOURCING - IT planning, budgeting and management
- Operations and management staffing and resources
- Project management
- Applications implementation
- Data center operations
- Network monitoring and maintenance
INTEGRATED DELIVERY NETWORK (IDN)
CONSULTING - IDN planning and development
- Managed care seminars, executive education and retreats
- Managed care organization development and management of
physician partnerships, physician hospital organizations
and management services organizations
- Transaction and valuation services
- Network formation planning
- Market analysis and business planning
- Managed care contracting strategies
- Insurance company partner selection
- Community health information network planning and
development
- Capitation and risk contracting
- Base management/utilization management
- Managed care systems assessment, evaluation and
implementation
- Medicare and Medicaid risk contracting
- Purchasing and Materials Management
- System Implementation
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CATEGORY DESCRIPTION OF SERVICES
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HEALTH INFORMATION MANAGEMENT
CONSULTING - Medical Records Department review/utilization review
- Health information network planning and development
- Clinical data repositories/longitudinal patient records
- Interim management
- Coding and grouping
FINANCIAL CONSULTING - Revenue enhancement
- Business Office review
- Revenue cycle management/cash acceleration
- Interim management
- System implementation support
- Accounts management, including admissions, billing and
collections
- Reimbursement analysis/ charge capture analysis
- Diagnostic review
- Capital and financial planning
CLINICAL CONSULTING - Patient care and nursing care system design
- Clinical systems implementation
- Patient-focused care planning
- Clinical workflow analysis and reengineering
- Information systems selection and implementation
- Interim management
- Clinical benchmarking
- Quality measurement and outcomes management
- Clinical protocol and pathway development
- Departmental operations analysis
- Redefining nursing and ancillary services
- Post-acute care services
- Laboratory operation/information management consulting
services
- JCAHO compliance
AMBULATORY PRACTICE MANAGEMENT
CONSULTING - Ambulatory care strategic planning
- Operations assessment and re-engineering
- Systems selection and implementation
- Practice revenue analysis
- Facilities management
- Integration strategies
- Communications linkage
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CATEGORY DESCRIPTION OF SERVICES
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PHYSICIAN SERVICES - Primary care network development
- Medical staff strategic planning
- Multi-specialty group practice formation
- PHO restructuring
- MSO development and improvement
- IPA development/restructure
- Physician practice merger and acquisition
- Financial modeling, budgeting and financial performance
improvement
- Practice valuations and appraisals
- Management team education and development
- Physician group practice formation, restructuring and
improvement
- Managed care and market research
- Proprietary health plan development
ENTERPRISE CONSULTING GROUP
Enterprise, founded in 1993, is a professional consulting organization
providing technology and network solutions to medium and large companies across
a wide array of industries. Enterprise complements and augments Superior through
its emphasis on information networking and collaborative technologies.
Enterprise leverages strategic technology partnerships with vendors such as IBM,
Microsoft, Netscape, and Lotus to provide effective services in the following
broadly defined categories:
Network and Telecommunications Consulting. Enterprise develops strategic
plans utilizing its consultants' technical expertise in the areas of network
architecture planning, PBX systems, call centers, computer to telephone
integration, voicemail systems, integrated voice response, wide area network
design, local area networks, high speed networking and alternative local area
exchange carriers.
Enterprise Messaging, Intranet and Web Strategies. Enterprise focuses on
internal web and intranet strategies combining software integration tools along
with web standards from Microsoft, Lotus, and Netscape to meet the needs of its
clients. Enterprise's planning, design, acquisition and integration services
include assessment and planning for large corporate e-mail rollouts, including
migration strategies, international e-mail backbone and infrastructure design.
Workgroup and Groupware Design and Development. Enterprise's workgroup and
groupware services are based on the strategic and effective integration of
workflow design and process engineering and groupware application development in
the workplace. Working in concert with its technology partners, including
Microsoft, Lotus, Netscape and IBM, Enterprise can achieve complete turn-key
solutions allowing its clients to effectively collaborate with its suppliers,
vendors and partners utilizing groupware and web-based technologies.
Enterprise's work with Lotus Notes/Domino groupware solutions places it in the
top tier of Lotus-designated Business Partners, qualifying, based on product
sales and number of certified professionals, for designation as a Premium Lotus
Business Partner since 1996. Enterprise is also an IBM BESTeam Member, Microsoft
Solutions Provider and Netscape Affiliate Plus Partner.
Software and Application Development. Enterprise's application design
consultants are skilled in a variety of applications and applications toolsets,
including Lotus Notes, Sybase, C++, Power Builder and Visual Basic, ASP,
Activex, Perl, CGI, Access, SQL Server and Oracle. The focus is on the
development of both collaborative applications to support the groupware services
and on user interface tools developing and creating knowledge-based executive
information systems and high-end user application interfaces.
Corporate Facilities Technology Design and Relocation. Enterprise provides
technology design services for organizations designing and building new
headquarters and facilities for clients, including infrastructure design,
cabling systems, right of way, site planning, multimedia for audiovisual, video
teleconferencing, voice and data communication systems.
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Enterprise's turnkey approach to serving its clients has enabled it to grow
its business both by adding new clients and by attracting repeat business from
its current base of clients. Since its inception in 1993, Enterprise has served
over 375 clients primarily in the manufacturing, finance, healthcare, and
service industries. In 1998 Enterprise accounted for 15.3% of the Company's
consolidated revenues.
DEVELOPMENTS IN 1998
In pursuit of its growth strategies, in 1998 the Company entered into five
multi-year IT outsourcing agreements. In addition, the Company acquired seven
companies in 1998 and made a substantial equity investment in drkoop.com, Inc.
Outsourcings
- In April 1998, Superior signed a five-year outsourcing agreement with St.
Francis Hospital and Medical Center (Hartford, Connecticut). Superior
assumed responsibility to provide St. Francis with NetLinc Services,
including support and network performance monitoring.
- In June 1998, Superior signed a five-year outsourcing agreement with JPS
Health Network ("JPS"). Superior assumed responsibility for all network
and help desk support as well as a series of critical information systems
projects addressing JPS' long-range strategic initiatives. The contract
encompasses a wide array of technology initiatives--voice, video, data
and image--and upgrades to the network infrastructure. Superior is
supplying network services management, financial management, personnel
and technological expertise.
- In June 1998, Superior signed an agreement with Georgetown University
Medical Center, adding a two-year contract for NetLinc services to
Superior's existing long-term outsourcing contract. Superior has extended
from simple end-user application support to on-site technician dispatch
and problem tracking to advanced network device diagnostics, control, and
configuration.
- In September 1998, Superior signed a five-year outsourcing agreement with
Central Connecticut Health Alliance. Under the agreement, Superior
assumed responsibility for information systems management; information
systems planning and strategy; financial management; applications
support; computer operations; PC and desktop support; network management,
planning and support; and project services.
- In September 1998, Superior signed a three-year outsourcing agreement
with Saint Mary's Medical Center of Saginaw. Under the agreement,
Superior became responsible for information systems leadership and
application management.
- Since the beginning of 1999, Superior has entered into an additional
outsourcing agreement. On January 12, 1999, Superior and Eisenhower
Medical Center signed a five-year information system outsourcing
agreement. Under the agreement, Superior assumed responsibility for IS
management and leadership in the areas of Planning and Strategy,
Financial Management, Applications Support, Computer Applications, PC and
Desktop Support, Network Management, Help Desk and Project Services.
Acquisitions
During 1998, the Company completed seven acquisitions which strengthened
the Company's existing service capabilities and added new service capabilities,
including remote network administration and data warehousing. The aggregate firm
and potential earnout consideration payable by the Company for these
acquisitions includes the payment of approximately $16.0 million in cash and the
issuance of approximately $16.0 million in shares of Common Stock. All of the
acquisitions were accounted for under the purchase method of accounting and the
results of each acquired business have been included in the Company's
consolidated results of operations since their respective closing dates.
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In addition, in May 1998 the Company made a $4.5 million investment in
convertible preferred stock of Empower Health Corporation, which has recently
changed its name to drkoop.com, Inc. ("drkoop.com") of Austin, Texas.
drkoop.com's mission is to improve the quality of people's lives by empowering
them with personalized healthcare information and enabling electronic
interactions and on-line transactions with the healthcare industry. On October
1, 1998 the Company completed its investment in the preferred stock of
drkoop.com with a cash payment of $1.5 million. The investment was recorded
using the cost method of accounting. In connection with this transaction, Dr. C.
Everett Koop joined the Company's board of directors and Richard D. Helppie, Jr.
joined drkoop.com's board of directors. The Company entered into a five-year
service agreement with drkoop.com to provide software development, systems
integration and implementation, data center management, web hosting, and
operational improvement consulting.
Since the beginning of 1999, the Company has completed an additional
acquisition. On January 15, 1999, Superior acquired assets of the Integration
Services Group ("ISG") of Healthdyne Information Enterprises. ISG provides
strategic, tactical and technical consulting expertise to solve practical
integration problems for healthcare organizations. The purchase price was
approximately $2.2 million in cash and is being recorded using the purchase
method of accounting.
EMPLOYEES
The Company believes that one of its key strengths lies in its ability to
attract, develop, motivate and retain a talented, creative and highly skilled
work force of senior-level professionals who are specialists in one or more
areas of healthcare and/or information technology. The Company's consultants are
highly experienced, and many have established their credentials as healthcare
executives and senior management of healthcare entities, business office
managers, medical records administrators, nurse administrators, nurses,
laboratory technicians, physician assistants, medical technologists, physicians,
hospital admissions directors, and information management and information
systems technical personnel. As of December 31, 1998, the Company employed over
1,250 employees, 1,040 of whom were consultants.
The Company believes it has a unique corporate culture built upon open
communication across geographic regions and practice areas fostered by the
Company's proprietary information and communications system (the "electronic
hallway"), and a motivational and interactive work environment that features
extensive professional development opportunities and productivity incentives.
Through the establishment of its Superior Institute, the Company's education and
training encompasses multiple approaches to professional development. As part of
this effort, the Company provides training curricula in new trends in
healthcare, information technology, business management and worklife topics.
Each consultant may choose from a variety of managerial, technical and personal
courses which are designed to provide sound fundamental principles for each
subject. Many of the courses have advanced editions. These education offerings
are delivered through multiple settings including self-study, group classroom,
individual mentorship and case study.
An integral part of the on-going education process at the Company takes
place through its proprietary electronic hallway system. This allows the
Company's consultants to continue to upgrade their skills while remaining
deployed in the field. In addition, the Company has developed an employee
orientation program that features a sophisticated presentation to provide new
employees with a comprehensive understanding of the Company's structure and
approach to consulting. The Company also maintains a formal and active network
of former employees; these alumni provide expertise on projects, introduce the
Company to new client leads, and in many cases have returned to the Company from
experiences elsewhere in the healthcare industry.
SALES AND MARKETING
The Company's business development efforts are based upon a highly
organized, company-wide, consistent approach. All personnel are trained and
reinforced in the Company's marketing methods and philosophy, and are encouraged
to identify, develop and pursue client service opportunities. The Company's
marketing efforts are directed by senior management and the Company's strategic
services group leaders. The strategic service group leaders focus on client
development strategies, geographic market penetration and
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cross-selling clients. Business development is an integral part of the formal
responsibilities at all levels of the Company's management, including its
national practice area leaders, and the Company sets business development goals
on both a departmental and individual basis.
The Company's business development efforts focus primarily on identifying
key decision makers in the healthcare industry, determining the value to be
provided to each potential client and then managing the sales process to
completion through a sophisticated client resource database, developed and
maintained internally. Each potential client lead is entered into the database,
and that profile is updated for subsequent developments and information
throughout the entire life of the Company's relationship with the potential
client, as well as after a client retains the Company for services. At any given
time, numerous Company professionals are active in the development of business
from either a new or existing client, and the client resource database enables
all Company personnel to access up-to-date information on the Company's efforts
with respect to a client or client prospect, identify other Company contacts
with that client, and highlight the particular needs expressed by the client to
date.
The Company furthers its business development efforts through its
reputation in the marketplace, the personal contacts and networking of the
Company's professionals, direct industry marketing programs, trade shows, and
the industry presence maintained by Company professionals to enhance its
business development efforts. The Company's marketing profile within the
healthcare industry is enhanced by its employees' speaking engagements and
publications on topics affecting healthcare. The Company's views on a wide range
of healthcare and IT topics are frequently solicited and quoted for articles in
major industry journals and books. The Company's healthcare consultants have
been published extensively on current and emerging topics in healthcare
information and management and have participated in external speaking
engagements and presentations to industry associations and client audiences
across the nation.
The Company operates its healthcare consulting business through a
combination of its national presence, regional relationships and its 28 national
practice areas. Each national practice area offers a selected variety of the
Company's healthcare consulting services and often two or more of these areas
work synergistically to provide solutions to clients. Each area is managed by a
national practice area leader who is responsible for achieving performance based
goals for the specific area and is responsible for its growth. As the Company
adds to its services through internal growth and acquisition, it will evaluate
adding new practice areas or augmenting the services of its existing national
practice areas. The Company actively markets the subject-matter expertise of its
national practice areas through the focus of its strategic services groups. Each
strategic services group is responsible for developing and enhancing knowledge
of local regulation and market factors, as well as developing and nurturing
relationships with specific client organizations. The Company then combines the
expertise of its national practice areas to form solutions that are responsive
to local conditions and of value to specific clients.
The Company provides a compensation system designed to foster an active
focus at all levels within the organization on growth and business development
from a company-wide perspective. Management earns incentive compensation on a
quarterly and/or annual basis based on group and company-wide performance goals.
COMPETITION
The market for the Company's services is highly fragmented, highly
competitive and is subject to rapid change. The Company believes that it
currently competes principally with systems integration firms, national
consulting firms, including the consulting divisions of the national accounting
firms, information system vendors, service groups of computer equipment
companies, facilities management companies, general management consulting firms
and regional and specialty consulting firms. Many of the Company's competitors
have significantly greater financial, technical and marketing resources than the
Company, generate greater revenues and have greater name recognition than the
Company. Moreover, those competitors that sell or license their own software may
in the future attempt to limit or eliminate the use of third party consultants,
such as the Company, to implement and/or customize such software. In addition,
vendors whose systems may enjoy wide market acceptance and large market share
could enter into exclusive or restrictive agreements with
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other consulting firms which could eliminate or substantially reduce the
Company's implementation work for those systems. There are relatively low
barriers to entry into the Company's markets, and the Company has faced and
expects to continue to face additional competition from new entrants into its
markets. In addition, combinations and consolidations in the consulting industry
will give rise to larger competitors, whose relative strengths are impossible to
predict. The Company also competes with its clients' internal resources,
particularly where these resources represent a fixed cost to the client. This
internal client competition may heighten as consolidation of healthcare
providers creates organizations large enough to support internal information
management capabilities.
The Company believes that the principal competitive factors in its market
include reputation, highly experienced workforce, industry expertise, full array
of offerings, project management expertise, price, quality of service,
responsiveness and speed of implementation and delivery. There can be no
assurance that the Company will be able to compete effectively on pricing or
other requirements with current and future competitors or that competitive
pressures faced by the Company will not cause the Company's revenue or operating
margins to decline or otherwise materially adversely affect its business,
financial condition and results of operations.
INTELLECTUAL PROPERTY AND OTHER PROPRIETARY RIGHTS
The Company's success is in part dependent upon its proprietary internal
information and communications systems, databases, tools and the methods and
procedures that it has developed specifically to serve its clients. In addition,
Enterprise has and will continue to develop proprietary groupware tools and
applications. Through its recent acquisitions, the Company has acquired numerous
development tools and methodologies. The Company has no patents; consequently,
it relies on a combination of non-disclosure and other contractual arrangements
and copyright, trademark and trade secret laws to protect its proprietary
systems, information, and procedures. There can be no assurance that the steps
taken by the Company to protect its proprietary rights will be adequate to
prevent misappropriation of such rights or that the Company will be able to
detect unauthorized use and take appropriate steps to enforce its proprietary
rights. The Company believes that its systems and procedures and other
proprietary rights do not infringe upon the proprietary rights of third parties.
There can be no assurance, however, that third parties will not assert
infringement claims against the Company in the future or that any such claims
will not require the Company to enter into materially adverse license
arrangements or result in protracted and costly litigation, regardless of the
merits of such claims.
EXECUTIVE OFFICERS OF THE REGISTRANT
The Company's executive officers are as follows:
Richard D. Helppie, Jr., age 43, has served as Chief Executive Officer and
Chairman, and as a Director, of the Company since its inception. Prior to
January 1999, Mr. Helppie also served as President of the Company. Mr. Helppie
has served as Superior's President and Chief Executive Officer since he founded
Superior in May 1984. Mr. Helppie also founded Enterprise Consulting Group, Inc.
and currently serves as Enterprise's Chairman, President and Chief Executive
Officer. Mr. Helppie has more than 24 years of experience in the healthcare and
information systems industries.
Charles O. Bracken, age 49, currently serves as Vice Chairman and Executive
Vice President, and is a Director, of the Company. Mr. Bracken joined Superior
in March 1987 and has from that time served as Executive Vice President of
Superior. Mr. Bracken has more than 28 years of experience in the healthcare and
information systems industries. Prior to joining Superior, Mr. Bracken spent
three years as vice president of marketing of a healthcare software firm,
preceded by 10 years of related experience in healthcare information systems
management including positions as Chief Information Officer for single and
multi-hospital corporations.
Robert R. Tashiro, age 43, currently serves as President and Chief
Operating Officer of the Company. Prior to January 1999, Mr. Tashiro served as a
Senior Vice President and Chief Operating Officer of the Company. Mr. Tashiro
joined Superior in 1985 as a Systems Consultant, was appointed Vice President in
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1990, Senior Vice President in 1992 and Chief Operating Officer in June 1996.
Mr. Tashiro has more than 20 years of experience in the information systems
industry and more than 15 years of experience in the healthcare industry.
James T. House, age 37, joined Superior in 1988 as its Controller. Since
that time, he has held various positions with the Company and Superior and
became Vice President in January 1995 and is currently the Vice President and
Chief Financial Officer of Superior and the Company.
ITEM 2. PROPERTIES
The Company's headquarters is located in approximately 35,000 square feet
of leased office space in Southfield, Michigan. Superior also leases an
aggregate of approximately 71,800 square feet of additional office space in
Clearwater, Florida; Atlanta, Georgia; Plano, Texas; San Diego, California; Ann
Arbor, Michigan; Chicago, Illinois; Houston, Texas; New York, New York;
Pasadena, California; San Francisco, California; and Nashville, Tennessee;
Kansas City, Missouri; Burlington, Massachusetts; Wallingford, Connecticut; Simi
Valley, California; Englewood, Colorado; Beaverton, Oregon; Minneapolis,
Minnesota; St. Louis, Missouri; Overland Park, Kansas; Los Angeles, California;
and Pittsburgh, Pennsylvania. The Company has also purchased an approximately
6,200 square foot building in Safety Harbor, Florida, for use as an office and
training facility and a 24,000 square foot building in Southfield, Michigan, for
use as office space. The Company believes that its facilities are adequate for
its current needs and that additional facilities can be leased or acquired to
meet future needs.
ITEM 3. LEGAL PROCEEDINGS
The Company is not now a party to, and is not aware of, any pending or
threatened litigation that would have a material adverse effect on the Company
and its business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Company's 1998 Annual Meeting in May 1998, the stockholders of the
Company approved an amendment to Article VI of the Company's Amended and
Restated Certificate of Incorporation which increased the maximum number of
directors of the Company from nine (9) to fifteen (15). As currently amended,
Article VI now provides that the authorized number of directors shall not be
less than three (3) nor more than fifteen (15), with the exact number within the
range to be fixed by resolution of the Company's board of directors. Such action
was approved by the holders of greater than two-thirds of the Company's then
outstanding Common Stock.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
STOCK INFORMATION
PRICE RANGE OF COMMON STOCK
The Company's common stock is traded on the Nasdaq National Market under
the symbol SUPC. The following table shows high and low closing prices as
reported by Nasdaq for the fourth quarter of 1996, commencing October 10, 1996
(the date of the Company's initial public offering) and fiscal years 1997 and
1998.
HIGH LOW
---- ---
FISCAL 1996
Fourth Quarter.............................................. $25.875 $20.500
FISCAL 1997
First Quarter............................................... 24.750 16.125
Second Quarter.............................................. 36.875 15.250
Third Quarter............................................... 36.875 27.750
Fourth Quarter.............................................. 36.250 28.750
FISCAL 1998
First Quarter............................................... 38.750 27.750
Second Quarter.............................................. 45.500 33.500
Third Quarter............................................... 47.000 30.563
Fourth Quarter.............................................. 43.500 33.688
At March 25, 1999, there were approximately 133 stockholders of record.
The Company has not paid cash dividends to the holders of its Common Stock.
It is the Company's present intention to retain earnings for use in the growth
of the Company's business. Accordingly, the Company does not anticipate that
cash dividends will be paid in the foreseeable future.
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ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following historical financial data as of and for the years ended
December 31, 1994, 1995, 1996, 1997 and 1998 have been derived from the audited
consolidated financial statements of the Company as reported by Grant Thornton
LLP, independent certified public accountants. This information is qualified in
its entirety by reference to the Company's consolidated financial statements and
related notes included elsewhere in this report.
YEARS ENDED DECEMBER 31,
------------------------------------------------------------
PRO FORMA
1994 1995 1996 1996(1) 1997(2) 1998(2)
---- ---- ---- --------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENT OF OPERATIONS DATA:
Revenues................................. $33,364 $42,494 $51,835 51,835 $76,895 $124,746
Cost of services......................... 14,966 19,730 25,524 25,524 39,260 65,026
Selling, general and administrative
expenses............................... 15,497 18,422 21,891 21,891 30,378 47,425
Executive compensation expense(3)........ 2,445 3,730 4,579 1,060 858 908
------- ------- ------- ------- ------- --------
Earnings (loss) from operations.......... 456 612 (159) 3,360 6,399 11,387
Interest and other (expense) income...... (94) (113) 84 84 2,728 4,572
Costs incurred in connection with
mergers................................ -- -- -- -- (917) --
------- ------- ------- ------- ------- --------
Earnings (loss) before income taxes and
extraordinary item..................... 362 499 (75) 3,444 8,210 15,959
Income taxes............................. 7 185 689 1,364 3,625 6,331
------- ------- ------- ------- ------- --------
Earnings (loss) before extraordinary
item................................... 355 314 (764) 2,080 4,585 9,628
Extraordinary gain on early
extinguishment of debt, net of income
taxes.................................. -- -- 231 231 -- --
------- ------- ------- ------- ------- --------
Net earnings (loss)...................... $ 355 $ 314 $ (533) $ 2,311 $ 4,585 $ 9,628
======= ======= ======= ======= ======= ========
Net earnings (loss) per share -- basic... $ 0.08 $ 0.06 $ (0.09) $ 0.38 $ 0.54 $ 0.94
Net earnings (loss) per share --
diluted................................ $ 0.08 $ 0.06 $ (0.09) $ 0.38 $ 0.53 $ 0.91
Shares used in calculating net earnings
(loss) per share -- basic.............. 4,597 5,138 6,014 6,014 8,519 10,266
Shares used in calculating net earnings
(loss) per share -- diluted............ 4,597 5,162 6,014 6,080 8,670 10,580
YEARS ENDED DECEMBER 31,
--------------------------------------------------
1994 1995 1996 1997 1998
---- ---- ---- ---- ----
BALANCE SHEET DATA:
Working capital................................. $ 435 $1,273 $39,962 $ 97,632 $84,131
Total assets.................................... 8,910 12,606 55,324 119,401 133,726
Total debt...................................... 2,164 2,110 2,448 189 61
Total stockholders' equity...................... 648 1,240 41,370 108,363 121,494
- -------------------------
(1) The pro forma statement of operations information for 1996 has been computed
for the pro forma period to adjust the Company's net earnings to (i)
eliminate executive compensation expense for such period in excess of the
amount of executive compensation (including the full amount of potential
bonus) that would have been paid had the executive compensation agreements,
which became effective upon the closing of the Company's initial public
offering in October 1996 ("IPO"), been effective throughout such period; and
(ii) record income taxes, assuming an effective tax rate of 39.6% for the
year ended December 31, 1996, which would have been recorded had Superior
been a C Corporation during such period.
(2) Statement of operations data for fiscal 1997 and fiscal 1998 includes
results of acquired businesses as described in Note 2 to the Company's
consolidated financial statements included elsewhere in this report.
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(3) Executive compensation expense includes salary and bonuses for Richard D.
Helppie, Jr., Charles O. Bracken and Robert R. Tashiro, and reflects
compensation agreements implemented in connection with closing of the IPO.
These compensation agreements did not apply to limit amounts paid to these
three officers on or prior to the closing of the IPO.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
The Company conducts business in two segments through its two primary
operating subsidiaries, Superior and Enterprise. Superior is a leading
healthcare consulting firm that provides a wide range of information technology
consulting and strategic and operations management consulting services to a
broad cross-section of healthcare industry participants and healthcare
information system vendors. Enterprise assists clients in various industries
with network and telecommunication design and acquisition; enterprise messaging;
intranet and web strategies; workgroup consulting; remote network administration
and outsourcing; and software and application development solutions.
The Company derives substantially all of its revenues from fees for
professional services, the substantial majority of which are billed at
contracted hourly rates. The Company establishes standard billing guidelines
based on the type and level of service offered. Actual billing rates are
established on a project by project basis and may vary from the standard
guidelines. Billings are generally made on a bi-weekly basis to monitor client
satisfaction and manage outstanding accounts receivable balances. Revenue on
time and materials contracts is recognized as the services are provided. A
portion of the Company's projects are billed on a fixed-fee basis, typically on
a monthly fee basis. The Company recognizes revenue on fixed fee projects in a
manner similar to the percentage of completion basis. As of December 31, 1998,
the Company has increased the number and size of projects billed on a fixed-fee
basis; however, in 1998, less than ten percent of the Company's revenues were
realized in this manner. Increased use of fixed-fee contracts subjects the
Company to increased risks, including cost overruns. For outsourcing
engagements, the Company recognizes revenue in the amount billable under the
contract, which is typically billable on a monthly basis. As of December 31,
1998, the Company has been awarded eight significant contracts to provide
healthcare IT outsourcing services. There can be no assurance that the Company
will be able to achieve profit margins on outsourcing contracts which are
consistent with its historical levels of profitability.
The Company's historical revenue growth is attributable to various factors,
including an increase in the number of projects for existing and new clients,
and expanded geographic presence. In addition, the Company seeks to increase
revenues by expanding its range of specialty services. The Company manages its
client development efforts through several strategic services groups, each
having specific geographic responsibility and focus.
The Company's most significant expense is cost of services, which consists
primarily of consultant salaries and benefits. In recent years, consultant
compensation expense has grown faster than consultant billing rates, resulting
in an increase in the Company's cost of services as a percentage of revenues.
The Company has sought to address this issue by adding an additional variable
portion of compensation payable upon the achievement of measurable performance
goals, including practice specific and Company wide revenue and earnings
targets. In addition, the Company has sought to address compensation expense
pressures through increased use of stock options as an overall part of its
compensation package.
The Company's cost of services as a percentage of revenues is also impacted
by its consultant utilization. The Company manages utilization by monitoring
project requirements and timetables. The number of consultants assigned to a
project will vary according to the size, complexity, duration and demands of the
project. Project terminations, completions and scheduling delays may result in
periods when consultants are not fully utilized. An unanticipated termination of
a significant project could cause the Company to experience lower consultant
utilization, resulting in a higher than expected number of unassigned
consultants. In addition, the establishment of new practice areas and the hiring
of consultants in peak hiring periods have resulted in periods of lower
consultant utilization (and resulting downward pressure on margins) until
project volume
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increases in these new areas. In the future, the establishment of new practice
areas, hiring of consultants in peak hiring periods, and further geographic
expansion, could from time to time adversely affect utilization. Variations in
consultant utilization would result in quarterly variability of the Company's
cost of services as a percentage of revenues. The Company's consultants are
generally employed on a full-time basis, and therefore the Company will, in the
short run, incur substantially all of its employee-related costs even during
periods of low utilization.
Selling, general and administrative expenses include the costs of
recruiting, continuing education, marketing, facilities, equipment depreciation,
amortization of goodwill and administration, including compensation and
benefits. Selling, general and administrative expenses as a percentage of total
revenues continues to improve as the Company leverages its infrastructure
expense across its growing revenue base.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, selected
statement of operations data and selected pro forma data expressed as a
percentage of revenues. The trends illustrated in the following table may not
necessarily be indicative of future results.
PERCENTAGE OF REVENUES
YEAR ENDED DECEMBER 31,
--------------------------------------
PRO
FORMA
1996 1996 1997 1998
---- ----- ---- ----
Revenues................................................... 100.0% 100.0% 100.0% 100.0%
Cost of services........................................... 49.2 49.2 51.1 52.1
Selling, general and administrative expenses............... 42.2 42.2 39.2 37.4
Amortization of goodwill................................... -- -- 0.3 0.7
Executive compensation expense............................. 8.8 2.0 1.1 0.7
----- ----- ----- -----
Earnings (loss) from operations............................ (0.2) 6.6 8.3 9.1
Interest and other income.................................. 0.2 0.2 3.5 3.7
Cost incurred in connection with mergers................... -- -- (1.2) --
----- ----- ----- -----
Earnings before income taxes and extraordinary item........ -- 6.8 10.6 12.8
Income taxes............................................... 1.3 2.6 4.7 5.1
----- ----- ----- -----
Net earnings (loss) before extraordinary item.............. (1.3) 4.2 5.9 7.7
Extraordinary gain on early extinguishment of debt net of
income taxes............................................. 0.4 0.4 -- --
----- ----- ----- -----
Net earnings (loss)........................................ (0.9)% 4.6% 5.9% 7.7%
===== ===== ===== =====
1998 COMPARED TO 1997
Revenues. Revenues in the healthcare consulting segment increased by $42.1
million, or 66.3%, to $105.6 million for the year ended December 31, 1998, as
compared to $63.5 million for the year ended December 31, 1997. The revenue
increase was due primarily to continued strong growth in core lines of business,
activity from the Company's acquisitions and revenue realized from five
outsourcing contracts consummated during 1998. Revenues in the enterprise-wide
communications segment increased by $5.7 million, or 42.6%, to $19.1 million for
the year ended December 31, 1998, as compared to $13.4 million for the year
ended December 31, 1997. The revenue increase was due primarily to continued
strong growth in core lines of business, as well as activity from two
acquisitions.
Cost of Services. Cost of services in the healthcare consulting segment
increased by $24.4 million, or 80.5%, to $54.8 million for the year ended
December 31, 1998, as compared to $30.4 million for the year ended December 31,
1997. The increase was due to the additional number of consultants required to
support the larger revenue base, as well as increases in their compensation
levels. Cost of services as a percentage of revenue for the healthcare
consulting segment increased to 51.9% for the year ended December 31, 1998, as
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compared to 47.8% for the year ended December 31, 1997. This increase is
attributable to the increase in the consultant base which grew by approximately
101% during 1998. This resulted in lower consultant utilization during start-up,
which was partially offset by the variable portion of compensation payable to
these consultants, which is contingent upon achievement of performance goals set
by the Company. Cost of services in the enterprise-wide communications segment
increased by $1.3 million, or 14.8%, to $10.2 million for the year ended
December 31, 1998, as compared to $8.9 million for the year ended December 31,
1997. The increase was due to the additional number of consultants required to
support the larger revenue base, as well as increases in their compensation
levels. Cost of services as a percentage of revenue for this segment decreased
to 53.5% for the year ended December 31, 1998, as compared to 66.5% for the year
ended December 31, 1997. This reduction was caused by increases in the average
consultant billing rate and their utilization factor.
Selling, general and administrative expenses. Selling, general and
administrative expenses increased by $17.1 million, or 54.7%, to $48.3 million
for the year ended December 31, 1998, as compared to $31.2 million for the year
ended December 31, 1997. The increase was due to incentive and other
compensation expenses associated with the addition of key personnel, as well as
higher recruiting, marketing and continuing education expenses consistent with
the Company's growth. Selling, general and administrative expenses as a
percentage of revenues decreased to 38.8% from 40.6% primarily due to increased
operating efficiencies resulting from leveraging the Company's infrastructure
expense across its growing revenue base. This reduction in selling, general and
administrative expenses as a percentage of revenues was achieved even though
amortization of goodwill, as a percentage of revenues, increased to 0.7% in 1998
as compared to 0.3% in 1997.
Other income and expense. Other income was $4,572,000 for the year ended
December 31, 1998, as compared to $2,728,000 of other income for the year ended
December 31, 1997. The change was due primarily to interest earned on the
investment of the majority of the net proceeds of approximately $60.3 million
from the public offering held by the Company in November 1997.
1997 COMPARED TO 1996
Revenues. Revenues in the healthcare segment consulting segment increased
by $21.3 million, or 50.6%, to $63.5 million for the year ended December 31,
1997, as compared to $42.2 million for the year ended December 31, 1996. The
revenue increase was due primarily to continued strong growth in core lines of
business, as well as activity from the outsourcing contracts and The Kaufman
Group acquisition that occurred in March 1997. Revenues in the enterprise-wide
communications segment increased by $2.5 million, or 23.2%, to $13.4 million for
the year ended December 31, 1997, as compared to $10.9 million for the year
ended December 31, 1996. The revenue increase was due to strong growth in core
lines of business.
Cost of Services. Cost of services in the healthcare consulting segment
increased by $10.4 million, or 52.3%, to $30.4 million for the year ended
December 31, 1997, as compared to $19.9 million for the year ended December 31,
1996. The increase was due to the hiring of additional consultants required to
support the Company's revenue growth, as well as the costs of services
associated with the outsourcing agreements and the business acquisitions. Cost
of services as a percentage of revenue for the healthcare consulting segment
increased to 47.8% for the year ended December 31, 1997, as compared to 47.3%
for the year ended December 31, 1996. This increase is attributable to the
increase in the consultant base which grew by approximately 54% during 1997.
This resulted in lower consultant utilization during start-up, which was
partially offset by the variable portion of compensation payable to these
consultants, which is contingent upon achievement of measurable performance
goals. Cost of services in the enterprise-wide communications segment increased
by $2.1 million, or 31.3%, to $8.9 million for the year ended December 31, 1997,
as compared to $6.8 million for the year ended December 31, 1996. The increase
was due to the additional number of consultants required to support the larger
revenue base, as well as increases in their compensation levels. Cost of
services as a percentage of revenue for this segment increased to 66.5% for the
year ended December 31, 1997, as compared to 62.4% for the year ended December
31, 1996. This increase is attributable to the increase in the consultant base
which grew by approximately 131% during 1997. This resulted in lower consultant
utilization during start-up, which was partially offset by the variable portion
of compensation payable to these consultants, which is contingent upon
achievement of measurable performance goals.
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Selling, general and administrative expenses. Selling, general and
administrative expenses increased by $4.8 million, or 18.0% to $31.2 million for
the year ended December 31, 1997, as compared to $26.4 million for the year
ended December 31, 1996. The increase was due to incentive and other
compensation expenses associated with the addition of key personnel during 1997
in the areas of business development, outsourcing, and legal services to pursue
the Company's multi-faceted growth strategies, as well as higher recruiting and
training expenses consistent with the Company's growth. Selling, general and
administrative expenses as a percentage of revenues decreased to 40.6% from
51.0% for the year ended December 31, 1996. This decrease was primarily due to
the $3.7 million decrease in executive compensation expense. As discussed
previously, prior to its IPO, the Company's historical levels of executive
compensation expense were related primarily to its status as a Subchapter S
corporation, and executive compensation was related primarily to the Company's
earnings. The decrease in selling, general and administrative expenses as a
percentage of revenues was also attributable to increased operating efficiencies
resulting from leveraging the Company's infrastructure expense across its
growing revenue base.
Other income and expense. Other income was $2.7 million for the year ended
December 31, 1997, primarily due to the interest earned on the investment of the
majority of the net proceeds of approximately $100.0 million from the public
offerings held by the Company in October 1996 and November 1997.
Costs incurred in connection with mergers. The Company incurred
approximately $917,000 of costs in connection with the business acquisitions of
COMSUL and Chi during 1997. These costs consisted primarily of payments for
legal, accounting, and investment banking fees related to the business
acquisitions.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary capital needs have been to fund its acquisitions,
equipment purchases and the growth in working capital required to support its
growth in revenues. The Company believes that the proceeds received from the
Company's IPO, the net proceeds of approximately $60.3 million from the
follow-on offering completed in November 1997, and available credit under its
bank credit facility will be sufficient to finance its working capital and
capital expenditure requirements for the foreseeable future.
At December 31, 1998, the Company had cash and cash equivalents of $51.5
million and working capital of $84.1 million. Working capital at December 31,
1998 represents a decrease of $13.5 million from December 31, 1997 resulting
primarily from business acquisitions, purchases of property and equipment, the
equity investment in drkoop.com and an additional payment made relating to the
March 1997 acquisition of The Kaufman Group required by the purchase agreement.
Currently, the Company's remaining maximum contingency payments relating to its
completed business acquisitions is approximately $13.6 million ($3.2 million in
cash and $10.4 million in common stock) payable over the next three years.
The Company has an unsecured line of credit arrangement at Comerica Bank
N.A. of $3.0 million, which bears interest at the prime rate. As of December 31,
1998, the Company had no amounts outstanding under this line of credit.
Net cash used in operating activities was $6,742,000 for the year ended
December 31, 1998 as compared to cash provided by operations of $681,000 for the
year ended December 31, 1997. The increase in cash used in operations is
primarily due to an increase in accounts receivable, which was partially offset
by higher earnings in the current period.
Net cash of $29.8 million used in investing activities during the year
ended December 31, 1998 consists of the cash portion of the business
acquisitions, additions to property and equipment, the equity investment in
drkoop.com and an additional payment made relating to the March 1997 acquisition
of The Kaufman Group required by the purchase agreement.
Net cash provided by financing activities during the year ended December
31, 1998 was principally the result of the exercise of stock options.
Approximately $19 million in cash was used in acquisitions and the
investment in drkoop.com during 1998. See "Business -- Developments in 1998".
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The Company does not believe that inflation has had a material effect on
the results of its operations in the past three years.
Y2K READINESS
The Year 2000 issue ("Y2K") exists because some computer programs use two
digits rather than four to define the applicable year. For instance, these
programs record the year 1998 as "98." Some date-sensitive software may
interpret the year "00" as 1900 rather than 2000. This could result in a system
failure or miscalculations, causing disruptions of operations, including a
temporary inability to engage in normal business activities.
Readiness
The Company has substantially completed an inventory of its IT systems and
non-IT systems (such as building facilities, voice mail, telephone and other
systems containing embedded microprocessors). The Company expects to complete
its assessment of Y2K readiness and complete its development of Y2K remediation
plans for its mission critical systems by May 1999; to remediate those systems
by June 1999; to complete testing of those systems by July 1999; and to place
those remediated systems in production by July 1999. The phases run concurrently
for different systems. The Company considers a system mission-critical if its
failure would have a material adverse effect on the Company's operations. The
above dates do not include the replacement of certain mission-critical systems
which were scheduled for replacement during 1999 for reasons unrelated to Y2K
readiness. All of these systems are expected to be replaced by September 1999.
The Company's principal mission-critical IT systems are its accounting and
human resources systems, both of which are third-party software applications.
The human resources software is being assessed, remediated and tested by the
software vendor. The accounting software is being upgraded with the vendor-
developed Y2K compliant upgrade. Both the accounting and human resources systems
are expected to be remediated and tested during the second quarter of 1999.
The Company has sought information and assurances from its material
third-party vendors and suppliers regarding their Y2K readiness. The Company
intends to continuously evaluate its vendor and supplier relationships and to
develop contingency plans to mitigate the negative effects on the Company from
the Y2K problems of its suppliers and vendors.
Cost
The Company estimates the cost of its Y2K remediation efforts as follows:
EXPENDITURE TO DATE FUTURE TOTAL
----------- ------- ------ -----
Internal Cost................................. $286,000 $458,000 $ 744,000
External Cost................................. 115,000 422,000 537,000
-------- -------- ----------
Total............................... $401,000 $880,000 $1,281,000
======== ======== ==========
Internal Costs reflect the estimated cost of the time of Company employees
devoted to Y2K remediation. External Costs reflect all other costs, including
non-employee labor, capital expenditures, and other costs. Approximately
$341,000 of external costs are expected to be capitalizable. The "to-date"
expenditures are as of March 18, 1999. The cost of senior management time
devoted to monitoring and managing the Company's Y2K remediation efforts is not
included in the above estimates.
Other Risks
The Company performs Y2K services for certain clients, including assisting
them in identifying and assessing potential Y2K problems. In addition, former,
present and future clients could assert that certain other services performed by
the Company involved or are related to Y2K issues. There can be no assurance
that various third-party software products that the Company has recommended
and/or implemented for its
20
21
clients will all prove to be Y2K compliant. Any Y2K-related failure of critical
client systems or processes that are directly or indirectly connected to systems
or software analyzed, designed, developed, or implemented by the Company (or by
the businesses the Company has acquired or may acquire) may subject the Company
to claims, whether or not the failure is related to the services provided by the
Company. The resolution of such claims, if any, could have a material adverse
effect on the Company.
The Company has attempted to include provisions in its client contracts
that disclaim implied warranties, limit express warranties and impose
limitations on the amounts and types of damages for which the Company may be
liable. However, not all past and present client contracts include such
provisions. The Company cannot ensure that it will be able to obtain these
provisions in agreements for future projects, nor can it ensure that these
provisions will prevent past, present or future clients from asserting Y2K
claims against the Company or will protect the Company from, or limit the amount
of the Company's liability for, Y2K claims asserted against the Company.
The Company also may be subjected to Y2K claims arising from services
performed by companies which the Company has acquired or may acquire. These
services may have been performed prior to the acquisition and so would not have
been in the Company's control. The resolution of such claims, if any, could have
a material adverse effect on the Company.
In addition, in many instances the services that the Company provides to
its clients are performed at the client's site, and require the use of the
client's information systems. The Company may be impaired in its ability to
perform services on client systems which are unavailable as a result of a
client's Y2K problems.
The Company will be at risk from external infrastructure failures,
including electrical power, telephone, and transportation, among others.
Investigation and assessment of infrastructures is beyond the scope and
resources of the Company. Among the risks arising from these sources are the
Company's inability to conduct business in its offices or at client sites that
lose electrical power or experience failure of elevator, security, HVAC or other
building systems; down time for billable personnel who are unable to travel to
or from engagement locations if airline or other transportation providers cannot
provide service; and disruption to Company business if telephone or cellular
communication is unavailable.
The Y2K event presents both risks and opportunity for the Company. On the
one hand, there is a risk that clients may delay or cancel purchasing various
services from the Company because financial, technical, management or other
resources of the clients are directed to their own Y2K remediation or Y2K
problems. On the other hand, as economic forces and the Y2K event impose change
on the healthcare market, opportunities exist for the Company to provide
consulting services to its clients to assist them in dealing with the changing
landscape.
There are further forces impacting the health care industry as Y2K
approaches that present additional challenges and opportunities to the Company.
Broad segments of the healthcare provider community face financial stress from
increasing costs, intensified competition and pressure on both revenues and
margins. Financial pressures may be exacerbated by the Balanced Budget Act,
which will reduce the rate of growth in Medicare and Medicaid funds. There are
increasingly frequent reports of healthcare providers announcing negative or
dramatically reduced operating margins for patient care. There have also been
provider bankruptcies and distressed consolidations. Financial instability among
constituents of the Company's client base may cause some clients to defer or
cancel projects that require consulting services, and could adversely affect
some clients' ability to pay. However, changes impacting the healthcare industry
historically have generated new service opportunities for the Company, and the
Company intends to actively pursue such opportunities as may be presented.
Contingency Plans
The Company expects to develop, assess and revise contingency plans on an
ongoing basis throughout 1999 in an effort to mitigate the negative effect of
any internal or external Y2K failure. The Company cannot assure that any
contingency plans will prevent internal or external Y2K failures from having a
material adverse effect on the Company.
21
22
Forward Looking Statements
The estimates regarding the costs of the Company's Y2K efforts, as well as
statements regarding the potential effect of Y2K issues on the Company and the
Company's plans to deal with issues or contingencies raised by Y2K issues, are
forward-looking statements. These statements are subject to a number of risks
and uncertainties, which could cause actual costs, effects or plans to differ
materially from the discussion above. Among these risks or uncertainties are the
following:
- difficulty in successfully identifying, assessing, replacing and testing
all hardware, software and systems which may be affected by Y2K problems
or which may contain microprocessors affected by those problems;
- difficulty in identifying all third parties (including but not limited to
clients, third party suppliers, vendors, and other providers) whose
inability to process Y2K date information may affect the Company;
- the Company's lack of control over and limited knowledge of the Y2K
remediation efforts and Y2K readiness of those third parties;
- the availability, to the Company and material third parties of qualified
professionals to analyze and remedy Y2K problems;
- the difficulty in projecting labor or consulting costs, particularly in
light of the fact that demand for Y2K remediation services will become
more intense as the year 2000 approaches; and
- the effect of general economic conditions on the willingness of third
parties to make the expenditures necessary to address Y2K problems which
may affect the Company.
22
23
QUARTERLY RESULTS
The following table sets forth certain unaudited quarterly operating
information for each of the last eight quarters. Results for any previous
quarter are not necessarily indicative of results for any future quarter.
QUARTERS ENDED
--------------------------------------------------------------------------------
MAR. 31 JUNE 30 SEPT. 30 DEC. 31 MAR. 31 JUNE 30 SEPT. 30 DEC. 31,
1997 1997 1997 1997 1998 1998 1998 1998
------- ------- -------- ------- ------- ------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Revenues............................ $16,544 $18,267 $19,491 $22,593 $23,830 $28,350 $33,123 $39,443
Cost of services.................... 8,462 9,315 9,850 11,633 12,067 14,747 17,686 20,526
Selling, general and administrative
expenses.......................... 6,767 7,700 7,725 9,044 9,406 11,159 12,457 15,311
------- ------- ------- ------- ------- ------- ------- -------
Earnings from operations............ 1,315 1,252 1,916 1,916 2,357 2,444 2,980 3,606
Interest and other income........... 508 409 498 1,313 1,247 1,375 1,122 828
Cost incurred in connection with
mergers........................... -- -- (692) (225) -- -- -- --
------- ------- ------- ------- ------- ------- ------- -------
Earnings before income taxes........ 1,823 1,661 1,722 3,004 3,604 3,819 4,102 4,434
Income taxes........................ 702 666 933 1,324 1,504 1,485 1,655 1,687
------- ------- ------- ------- ------- ------- ------- -------
Net earnings........................ $ 1,121 $ 995 $ 789 $ 1,680 $ 2,100 $ 2,334 $ 2,447 $ 2,747
======= ======= ======= ======= ======= ======= ======= =======
Net earnings per share - basic...... .14 .12 .10 .18 .21 .23 .24 .27
Net earnings per share - diluted.... .14 .12 .09 .17 .20 .22 .23 .26
Shares used in calculating net
earnings per share - basic........ 8,170 8,231 8,218 9,446 10,212 10,260 10,284 10,304
Shares used in calculating net
earnings per share - diluted...... 8,241 8,375 8,419 9,635 10,442 10,609 10,638 10,612
Revenues and operating results fluctuate from quarter to quarter due to
several factors, such as the number and significance of client engagements
commenced and completed during a quarter, delays incurred in connection with a
project, consultant hiring, and utilization. The timing of revenues varies from
quarter to quarter because the Company's sales cycle can be relatively long and
may depend on factors such as the size and scope of assignments, the general
ability of clients to terminate engagements without penalty, and general
economic conditions. In addition, the timing of the establishment of new
practice areas, geographic expansion and the hiring of key individuals can also
have an effect on consultant utilization. Seasonal factors such as vacation
days, total business days in a quarter or the business practices of clients,
such as deferred commitments on new projects until after the end of the calendar
or the client's fiscal year, can cause the Company to experience lower
consultant utilization. Because a significant percentage of the Company's
expenses are relatively fixed, a variation in the number or size of client
assignments or the timing of the initiation or the completion of client
assignments can cause significant variations in operating results from quarter
to quarter. In addition, the Company's annual employees' meeting, which this
year is scheduled for May 1999, can result in lower consultant utilization in
the quarter in which the meeting occurs.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements are annexed to this Report as pages F-2 through
F-19. An index to such statements appears on page F-l.
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
23
24
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item with respect to the directors of the
Company is incorporated by reference from the Company's definitive proxy
statement, expected to be filed with the Commission on or prior to April 9,
1999. Information regarding executive officers is set forth in Part I of this
report.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference from the
Company's definitive proxy statement, expected to be filed with the Commission
on or prior to April 9, 1999.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated by reference from the
Company's definitive proxy statement, expected to be filed with the Commission
on or prior to April 9, 1999.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated by reference from the
Company's definitive proxy statement, expected to be filed with the Commission
on or prior to April 9, 1999.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
The financial statements filed as part of this report are listed in the
accompanying Index to Financial Statements. The exhibits filed as part of this
report are listed in the accompanying Index to Exhibits. The Company will
furnish a copy of any exhibit listed to requesting stockholders upon payment of
the Company's reasonable expenses in furnishing those materials. No reports on
Form 8-K were filed by the Company during the last quarter of the period covered
by this report.
24
25
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION PAGE
- ------- ----------- ----
2.1 Merger Agreement -- Superior................................ (1)
2.2 Merger Agreement -- Unitive................................. (1)
3.1 Amended and Restated Certificate of Incorporation of the
Company, as amended......................................... (*)
3.2 Form of By-Laws of the Company.............................. (2)
4.1 Specimen Common Stock Certificate........................... (2)
10.1 Form of Indemnification Agreement between the Company and
each of its directors and officers.......................... (2)
10.2 Form of Long-Term Incentive Compensation Plan............... (2)
10.3 Amendment to Long-Term Incentive Plan....................... (3)
10.4 Lease dated March 21, 1996 between PMTC Limited Partnership
and Superior................................................ (2)
10.5 Form of Tax Indemnification Agreement....................... (1)
10.6 Compensation Agreement dated January 5, 1998 between Richard
D. Helppie, Jr. and the Company............................. (*)
10.7 Employment Agreement dated January 5, 1998 between Charles
O. Bracken and the Company.................................. (*)
10.8 Employment Agreement dated January 5, 1998 between Robert R.
Tashiro and the Company..................................... (*)
10.9 Employment Agreement dated January 5, 1998 between James T.
House and the Company....................................... (*)
10.10 Employment Agreement dated January 20, 1997 between Richard
Saslow and the Company...................................... (*)
10.11 Promissory Note dated April 20, 1995, executed by Charles O.
Bracken in favor of Superior Consultant Company, Inc........ (1)
10.12 Pledge Agreement dated April 20, 1995, between Charles O.
Bracken and Superior Consultant Company, Inc................ (1)
10.13 Promissory Note dated April 20, 1995, executed by Robert R.
Tashiro in favor of Superior Consultant Company, Inc........ (1)
10.14 Pledge Agreement dated April 20, 1995 between Superior
Consultant Company, Inc. and Robert R. Tashiro.............. (1)
10.15 Plan and Agreement of Merger dated July 28, 1997, among
Superior Consultant Holdings Corporation, CMSL Acquisition
Corp., COMSUL, LTD., and certain shareholders of COMSUL,
LTD......................................................... (4)
10.16 Merger Agreement dated as of August 14, 1997 among Superior
Consultant Holdings Corporation, Chi Acquisition Co., The
Chi Group, Inc. and certain stockholders of the Chi Group,
Inc......................................................... (5)
10.17 Asset Purchase Agreement, dated August 20, 1998 among
Superior Consultant Holdings Corporation, Enterprise
Consulting Group, Inc., Whittaker Corporation and Aviant
Information, Inc............................................ (6)
21.1 Subsidiaries of Superior Consultant Holdings Corporation.... (*)
27.1.. Financial Data Schedules.................................... (*)
- -------------------------
* Filed herewith.
(1) Incorporated by reference from the Registrant's Amendment No. 1 to Form S-1
Registration Statement No. 333-10213 as filed on September 20, 1996.
(2) Incorporated by reference from the Registrant's Form S-1 Registration
Statement No. 333-10213 as filed on August 15, 1996.
(3) Incorporated by reference from the Registrant's Information Statement on
Form 14C as filed on November 7, 1997.
(4) Incorporated by reference from the Registrant's Form 10-Q as filed on August
7, 1997.
(5) Incorporated by reference from the Registrant's Form 8-K as filed on August
28, 1997.
(6) Incorporated by reference from the Registrant's Form 8-K as filed on
September 2, 1998.
25
26
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
SUPERIOR CONSULTANT HOLDINGS
CORPORATION
March 31, 1999 By: /s/ RICHARD D. HELPPIE, JR.
------------------------------------
Richard D. Helppie, Jr.
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
SIGNATURES TITLE DATE
---------- ----- ----
Director March , 1999
- ------------------------------------------------
Reginald M. Ballantyne III
/s/ CHARLES O. BRACKEN Vice Chairman, Executive Vice March 31, 1999
- ------------------------------------------------ President and Director
Charles O. Bracken
/s/ KENNETH S. GEORGE Director March 31, 1999
- ------------------------------------------------
Kenneth S. George
/s/ RICHARD D. HELPPIE, JR. Chief Executive Officer (Principal March 31, 1999
- ------------------------------------------------ Executive Officer) and Director
Richard D. Helppie, Jr.
/s/ JAMES T. HOUSE Chief Financial Officer (Principal March 31, 1999
- ------------------------------------------------ Financial and Accounting Officer)
James T. House
Director March , 1999
- ------------------------------------------------
C. Everett Koop
/s/ BERNARD J. LACHNER Director March 31, 1999
- ------------------------------------------------
Bernard J. Lachner
/s/ DOUGLAS S. PETERS Director March 31, 1999
- ------------------------------------------------
Douglas S. Peters
/s/ RICHARD P. SASLOW Vice President, General Counsel and March 31, 1999
- ------------------------------------------------ Director
Richard P. Saslow
/s/ JOHN L. SILVERMAN Director March 31, 1999
- ------------------------------------------------
John L. Silverman
26
27
ITEM 8. FINANCIAL STATEMENTS
SUPERIOR CONSULTANT HOLDINGS CORPORATION AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
----
Report of Independent Certified Public Accountants.......... F-2
Consolidated Balance Sheets as of December 31, 1997 and
1998...................................................... F-3
Consolidated Statements of Operations for the years ended
December 31, 1996, 1997 and 1998.......................... F-4
Consolidated Statements of Stockholders' Equity for the
years ended December 31, 1996, 1997 and 1998.............. F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 1996, 1997 and 1998.......................... F-6
Notes to Consolidated Financial Statements.................. F-7
F-1
28
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors
Superior Consultant Holdings Corporation
We have audited the accompanying consolidated balance sheets of Superior
Consultant Holdings Corporation (a Delaware corporation) and Subsidiaries as of
December 31, 1997 and 1998, and the related statements of operations,
stockholders' equity and cash flows for each of the three years in the period
ended December 31, 1998. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Superior Consultant Holdings Corporation and Subsidiaries as of December 31,
1997 and 1998, and the results of their consolidated operations and their
consolidated cash flows for each of the three years in the period ended December
31, 1998, in conformity with generally accepted accounting principles.
/s/ GRANT THORNTON LLP
Detroit, Michigan
February 25, 1999
F-2
29
SUPERIOR CONSULTANT HOLDINGS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
--------------------
1997 1998
---- ----
(IN THOUSANDS)
ASSETS
Current assets
Cash...................................................... $ 2,795 $ 3,985
Short-term investments.................................... 84,458 47,534
Accounts receivable (net of allowance for doubtful
accounts of $692,000 as of December 31, 1997 and
$1,010,000 as of December 31, 1998).................... 18,464 40,324
Accrued interest receivable and prepaid expenses.......... 1,589 1,867
Deferred income taxes..................................... 352 1,067
-------- --------
Total current assets................................. 107,658 94,777
Property and equipment, net................................. 6,915 16,472
Goodwill, net............................................... 4,711 16,317
Equity investment in Empower Health Corporation............. -- 6,050
Other long-term assets...................................... 117 110
-------- --------
Total Assets......................................... $119,401 $133,726
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Current portion of long-term debt......................... $ 91 $ --
Accounts payable.......................................... 3,061 4,035
Accrued liabilities....................................... 5,016 4,186
Deferred revenue.......................................... 1,597 2,425
Income taxes payable...................................... 261 --
-------- --------
Total current liabilities............................ 10,026 10,646
Long-term debt.............................................. 98 61
Deferred income taxes....................................... 350 961
Deferred performance bonuses................................ 564 564
Commitments (Note 12)....................................... -- --
Stockholders' equity
Preferred stock; authorized, 1,000,000 shares of $.01 par
value; issued and outstanding, no shares as of December
31, 1997 and 2,000 as of December 31, 1998............. -- --
Common stock; authorized, 30,000,000 shares of $.01 par
value; issued and outstanding, 10,208,024 as of
December 31, 1997 and 10,322,039 as of December 31,
1998................................................... 102 103
Additional paid-in capital................................ 105,632 109,113
Retained earnings......................................... 3,308 12,936
Stockholders' notes receivable............................ (679) (658)
-------- --------
Total stockholders' equity........................... 108,363 121,494
-------- --------
Total Liabilities and Stockholders' Equity........... $119,401 $133,726
======== ========
The accompanying notes are an integral part of the financial statements.
F-3
30
SUPERIOR CONSULTANT HOLDINGS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31,
---------------------------------------
1996 1997 1998
---- ---- ----
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Revenues................................................... $51,835 $76,895 $124,746
Costs and expenses
Cost of services......................................... 25,524 39,260 65,026
Selling, general and administrative expenses............. 26,470 31,236 48,333
------- ------- --------
Total costs and expenses......................... 51,994 70,496 113,359
------- ------- --------
Earnings (loss) from operations.................. (159) 6,399 11,387
Interest expense........................................... 259 123 --
Other income, principally interest......................... (343) (2,851) (4,572)
Costs incurred in connection with mergers.................. -- 917 --
------- ------- --------
Earnings (loss) before income taxes and
extraordinary item............................. (75) 8,210 15,959
Income taxes............................................... 689 3,625 6,331
------- ------- --------
Earnings (loss) before extraordinary item........ (764) 4,585 9,628
Extraordinary gain on early extinguishment of debt, net of
income taxes of $124..................................... 231 -- --
------- ------- --------
Net earnings (loss).............................. $ (533) $ 4,585 $ 9,628
======= ======= ========
Net earnings (loss) per share
Basic.................................................... $(0.09) $0.54 $0.94
======= ======= ========
Diluted.................................................. $(0.09) $0.53 $0.91
======= ======= ========
Weighted average number of common shares outstanding
Basic.................................................... 6,014 8,519 10,266
======= ======= ========
Diluted.................................................. 6,014 8,670 10,580
======= ======= ========
The accompanying notes are an integral part of the financial statements.
F-4
31
SUPERIOR CONSULTANT HOLDINGS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
PREFERRED STOCK COMMON STOCK ADDITIONAL RETAINED STOCKHOLDERS'
---------------- ---------------- PAID-IN EARNINGS NOTES
SHARES AMOUNT SHARES AMOUNT CAPITAL (DEFICIT) RECEIVABLE TOTAL
------ ------ ------ ------ ---------- --------- ------------- -----
(IN THOUSANDS)
Balance at January 1,
1996................... -- $-- 5,321 $ 53 $ 2,363 $ (447) $(729) $ 1,240
Net loss................. -- -- -- -- -- (533) -- (533)
Issuance of common
stock.................. -- -- 2,738 28 39,642 -- -- 39,670
Exercise of stock
options................ -- -- 61 1 228 -- -- 229
Tax benefit relating to
stock options
exercised.............. -- -- -- -- 249 -- -- 249
Conversion of debt....... -- -- 37 -- 492 -- -- 492
Stock repurchased and
retired................ -- -- (3) -- (51) -- -- (51)
Compensation expense
recognized for fair
value of stock options
granted................ -- -- -- -- 43 -- -- 43
Payment on stockholders'
notes receivable....... -- -- -- -- -- -- 31 31
-- -- ------ ---- -------- ------- ----- --------
Balance at December 31,
1996................... -- -- 8,154 82 42,966 (980) (698) 41,370
Net earnings............. -- -- -- -- -- 4,585 -- 4,585
Issuance of common
stock.................. -- -- 2,000 20 60,263 -- -- 60,283
Shares issued in
connection with
acquisition............ -- -- 75 -- 1,600 -- -- 1,600
Exercise of stock
options................ -- -- 13 -- 110 -- -- 110
Stock repurchased and
retired................ -- -- (34) -- (70) (297) -- (367)
Compensation expense
recognized for fair
value of stock options
granted................ -- -- -- -- 28 -- -- 28
Termination of deferred
compensation plan...... -- -- -- -- 735 -- -- 735
Payment on stockholders'
notes receivable....... -- -- -- -- -- -- 19 19
-- -- ------ ---- -------- ------- ----- --------
Balance at December 31,
1997................... -- -- 10,208 102 105,632 3,308 (679) 108,363
Net earnings............. -- -- -- -- -- 9,628 -- 9,628
Shares issued in
connection with
acquisitions........... 2 -- 72 1 2,582 -- -- 2,583
Exercise of stock
options................ -- -- 42 -- 640 -- -- 640
Tax benefit relating to
stock options
exercised.............. -- -- -- -- 251 -- -- 251
Costs of follow on
offering............... -- -- -- -- (22) -- -- (22)
Compensation expense
recognized for fair
value of stock options
granted................ -- -- -- -- 30 -- -- 30
Payment on stockholders'
notes receivable....... -- -- -- -- -- -- 21 21
-- -- ------ ---- -------- ------- ----- --------
Balance at December 31,
1998................... 2 $-- 10,322 $103 $109,113 $12,936 $(658) $121,494
== == ====== ==== ======== ======= ===== ========
The accompanying notes are an integral part of the financial statements.
F-5
32
SUPERIOR CONSULTANT HOLDINGS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31,
------------------------------
1996 1997 1998
---- ---- ----
(IN THOUSANDS)
Cash flows from operating activities:
Net earnings (loss)....................................... $ (533) $ 4,585 $ 9,628
Adjustments to reconcile net earnings (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization of property and
equipment............................................ 733 1,176 2,382
Goodwill amortization.................................. -- 264 826
Non-cash compensation.................................. 43 28 30
Bad debt expense....................................... 172 594 582
Deferred income taxes (benefits)....................... (209) 288 (104)
Changes in operating assets and liabilities, net of
effects from acquisitions:
Accounts receivable.................................. (4,761) (5,307) (17,400)
Accrued interest receivable and prepaid expenses..... (154) (852) 130
Accounts payable..................................... 874 146 (2,002)
Accrued liabilities, deferred bonuses and
compensation...................................... 1,050 132 (830)
Deferred revenue..................................... 495 (106) 277
Income taxes payable................................. 705 (444) (261)
Other long-term assets............................... (51) 177 --
------- ------- --------
Net cash provided by (used in) operating
activities...................................... (1,636) 681 (6,742)
Cash flows from investing activities:
Purchase of businesses.................................... -- (3,375) (12,824)
Preferred stock investment in Empower..................... -- -- (6,050)
Purchases of property and equipment....................... (2,597) (4,634) (10,880)
Proceeds from sale of property and equipment.............. 18 -- --
------- ------- --------
Net cash used in investing activities............. (2,579) (8,009) (29,754)
Cash flows from financing activities:
(Repayment of) proceeds from lines of credit, net......... 29 (1,298) --
Repayment of note payable to stockholder.................. (156) -- --
Proceeds from long-term debt.............................. 348 -- --
Repayments of long-term debt.............................. (86) (961) (128)
Proceeds from issuance of common stock.................... 39,670 60,283 --
Principal payments on stockholders' notes receivable...... 31 19 21
Exercise of stock options................................. 229 110 640
Tax benefit from exercise of stock options................ 249 -- 251
Stock repurchased......................................... (51) (367) --
Costs of follow on offering............................... -- -- (22)
------- ------- --------
Net cash provided by financing activities......... 40,263 57,786 762
------- ------- --------
Net increase (decrease) in cash and cash equivalents........ 36,048 50,458 (35,734)
Cash and cash equivalents, beginning of period.............. 747 36,795 87,253
------- ------- --------
Cash and cash equivalents, end of period.................... $36,795 $87,253 $ 51,519
======= ======= ========
Supplemental disclosure of cash flow information -- cash
paid for:
Interest.................................................. $ 259 $ 127 $ --
Income taxes.............................................. 35 3,375 6,454
Non-Cash Transactions:
Shares issued in connection with acquisitions............. $ -- $ 1,600 $ 2,583
Liabilities assumed in connection with acquisitions....... -- -- 2,976
Conversion of debt to common stock........................ 492 -- --
Termination of deferred compensation plan................. -- 735 --
The accompanying notes are an integral part of the financial statements.
F-6
33
SUPERIOR CONSULTANT HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
(TABULAR AMOUNTS ARE IN THOUSANDS, EXCEPT SHARE DATA)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
Superior Consultant Holdings Corporation and its wholly-owned subsidiaries. All
material intercompany accounts and transactions have been eliminated.
Business Activities and Reportable Segments
The Company has two business and reportable segments: healthcare
consulting, and enterprise-wide communications. Effective December 31, 1998, the
Company adopted Statement of Financial Accounting Standards (SFAS) No. 131,
"Disclosures about Segments of an Enterprise and Related Information". SFAS 131
requires the Company to report financial and descriptive information about its
operating segments. Operating segments are components about which separate
financial information is available that is evaluated regularly by management in
deciding how to allocate resources and in assessing performance. The adoption of
SFAS 131 did not affect the Company's results of operations or financial
position, but did affect the disclosure of segment information provided below
and in Note 14.
Healthcare Consulting Segment
The healthcare consulting segment provides information technology,
strategic, and operations management consulting services to a broad
cross-section of healthcare industry participants and information systems
vendors.
Enterprise-wide Communications Segment
The enterprise-wide communications segment assists companies in various
industries, including healthcare, with network and telecommunication design and
acquisition, enterprise messaging, intranet and web strategies, workgroup
consulting, and software and application development solutions.
Cash and Cash Equivalents
For purposes of the statement of cash flows, the Company considers all
highly liquid investments purchased with a maturity of three months or less to
be cash equivalents.
Short-Term Investments
The Company's policy is to invest cash in excess of operating requirements
in income producing investments. Short-term investments include commercial paper
and money market accounts stated at cost, which approximates market.
Property and Equipment
Property and equipment are stated at cost. Expenditures for renewals and
improvements that extend the useful life of property and equipment are
capitalized. Expenditures for maintenance and repairs are charged to expense as
incurred.
During its 1996 fourth quarter, the Company changed the method used to
calculate depreciation on new purchases of property and equipment from
accelerated methods (principally the double-declining balance method) to the
straight-line method. The Company believed the straight-line method provided a
better
F-7
34
SUPERIOR CONSULTANT HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
(TABULAR AMOUNTS ARE IN THOUSANDS, EXCEPT SHARE DATA)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
matching of expenses with revenues over the productive life of the assets, as
well as improving the comparability of its financial statements with other
information technology consulting companies. The effect of the change during
1996 decreased the net loss, basic and diluted net loss per share by $58,600,
$0.01 and $0.01, respectively.
Income Taxes
The Company accounts for income taxes using the asset and liability
approach. Deferred income taxes are provided for the differences between the tax
bases of assets or liabilities and their reported amounts in the financial
statements. The tax benefit from the exercise of stock options reduces the
Company's accrued income tax liability and increases additional paid-in capital.
Deferred Bonus
The non-current deferred performance bonuses are payable no later than
March 2000, subject to and contingent upon employees' continued employment on
that date.
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 revenue and expenses during the reporting
period. Actual results could differ from these estimates.
Fair Value of Financial Instruments
The carrying value of the cash and short-term investments approximates
their estimated fair values based upon quoted market prices. The fair value of
stockholders' notes receivable approximate their carrying values based on
current rates for instruments with similar characteristics. Company management
believes the fair value of its investment in Empower exceeds its carrying value,
based on another party's subsequent investment in Empower.
Revenue Recognition
The Company recognizes revenues as services are performed for projects
billed on a time and materials basis. For outsourcing engagements, the Company
recognizes revenue in the amount billable under the contract, which is typically
billable on a monthly basis. On fixed-fee projects, the Company recognizes
revenue in a manner similar to the percentage of completion basis. The Company
periodically reviews long-term contracts to determine whether it is a loss
contract, in which case the loss would be recognized immediately. Deferred
revenue represents collections made in advance of services being performed.
Stock-Based Compensation
For options granted to employees, the Company follows the provisions of
Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to
Employees, and accordingly, recognizes no compensation expense for these option
grants. For options to non-employees, the Company follows the provisions of
F-8
35
SUPERIOR CONSULTANT HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
(TABULAR AMOUNTS ARE IN THOUSANDS, EXCEPT SHARE DATA)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based
Compensation ("SFAS 123"), and accordingly, recognizes expense using a fair
market value method for these option grants.
Comprehensive Income
Effective January 1, 1998, the Company adopted the provisions of Statement
of Financial Accounting Standards No. 130, Reporting of Comprehensive Income
("SFAS 130"), which establishes standards for reporting and display of
comprehensive income and its components in a full set of financial statements.
SFAS 130 also requires that all items that are required to be recognized under
accounting standards as components of comprehensive income be reported in a
financial statement that is displayed with the same prominence as other
financial statements. The Company has no components of other comprehensive
income in each of the three years ended December 31, 1998.
2. ACQUISITIONS
The following table summarizes business combinations completed in the years
ending December 31, 1997 and 1998:
PURCHASE COMMON SHARES METHOD OF
ENTITY NAME SEGMENT DATE PRICE ISSUED ACCOUNTING
----------- ------- ---- -------- ------------- ----------
1997:
The Kaufman Group............... Healthcare March 1997 $ 5.0 million 74,590 Purchase
Consulting
COMSUL, Ltd. ................... Enterprise July 1997 $ 7.7 million 240,630 Pooling
Chi Systems, Inc. .............. Healthcare August 1997 $11.2 million 331,509 Pooling
Consulting
1998:
Network Services Division....... Enterprise January 1998 $ 5.0 million -- Purchase
Novum, Inc. .................... Healthcare March 1998 $ .5 million 3,805 Purchase
Consulting
Lincoln Computer Corporation.... Healthcare April 1998 $ 2.9 million 48,381 Purchase
Consulting
Aviant Information, Inc. ....... Enterprise August 1998 $ 5.1 million -- Purchase
Clark Information Services,
Inc. ......................... Healthcare November 1998 $ 1.5 million 13,333 Purchase
Consulting
ACA Holding, Inc. .............. Healthcare December 1998 $ 2.6 million 6,328 common and Purchase
Consulting 2,000 convertible
preferred
Health Forecasting Group........ Healthcare December 1998 $ .3 million -- Purchase
Consulting
The Company's financial statements for the periods prior to the pooling of
interests transactions with COMSUL and Chi were restated. In connection with the
COMSUL and Chi acquisitions, merger-related
F-9
36
SUPERIOR CONSULTANT HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
(TABULAR AMOUNTS ARE IN THOUSANDS, EXCEPT SHARE DATA)
2. ACQUISITIONS -- (CONTINUED)
charges of $917,000 were incurred. Certain details of the results of operations
of the previously separate companies for the six months ended June 30, 1997 are
as follows:
SUPERIOR COMSUL CHI COMBINED
-------- ------ --- --------
Revenues................................................ $25,974 $4,079 $4,758 $34,811
Net earnings (loss)..................................... 2,245 (329) 200 2,116
The Kaufman acquisition was recorded at a fair value of $5.0 million ($3.4
million in cash and $1.6 million in common stock), including goodwill of
approximately $5.0 million which is amortized on a straight-line basis over 15
years. During 1998, the Company made a contingent cash payment of $450,000 plus
interest; and there is a maximum additional cash payment of approximately $1.0
million payable over the next two years.
The Network Services Division of Multimedia Medical Systems, Inc.
specialized in software implementation and networking technology solutions for
healthcare organizations. The NSD acquisition was recorded at a fair value of
$5.0 million (all cash), including goodwill of $3.2 million which is being
amortized on a straight-line basis over 15 years.
Novum specialized in software applications relating to the healthcare
industry. The Novum acquisition was recorded at a fair value of $.5 million ($.3
million in cash and $.2 million in common stock), including goodwill of $.5
million which is being amortized on a straight-line basis over 15 years. There
is also a maximum contingent payment of approximately $.2 million payable in
cash and common stock over a three-year period.
Lincoln specialized in healthcare consulting. The Lincoln acquisition was
recorded at a fair value of $2.9 million ($.6 million in cash, $.6 million in
assumed liabilities and $1.7 million in common stock), including goodwill of
$1.7 million which is being amortized on a straight-line basis over 15 years.
There is also a maximum contingent payment of approximately $6.7 million ($1.3
million in cash and $5.4 million in common stock) payable over a three-year
period.
Aviant specialized in systems integration, including project management,
complex network design planning, simulation, implementation and support. The
Aviant acquisition was recorded at a fair value of $5.1 million (all cash),
including goodwill of $3.1 million which is being amortized over 15 years.
Clark specialized in data warehouse design and Year 2000 business risk
assessment. The Clark acquisition was recorded at a fair value of $1.5 million
($1.0 million in cash and $.5 million in common stock), including goodwill of
$1.5 million which is being amortized over 15 years. There is also a maximum
contingent payment of $2.7 million ($.8 million in cash and $1.9 million in
common stock) payable over a two-year period.
ACA specialized in management and operational consulting to healthcare
providers. The ACA acquisition was recorded at a fair value of $2.6 million
($2.4 million in assumed liabilities and $.2 million in common stock), including
goodwill of $1.8 million which is being amortized over 15 years. The Company
also issued 2,000 shares of preferred stock, contingently convertible into a
maximum of $3.0 million in additional common shares over a two-year period. The
preferred stock has a liquidation preference of $1 per share, and voting rights
determined by a formula with a floor of 21 votes per share.
F-10
37
SUPERIOR CONSULTANT HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
(TABULAR AMOUNTS ARE IN THOUSANDS, EXCEPT SHARE DATA)
2. ACQUISITIONS -- (CONTINUED)
Health Forecasting Group specialized in management consulting to healthcare
providers. The Health Forecasting Group acquisition was recorded at a fair value
of $250,000 (all cash) all of which is goodwill being amortized over 5 years.
The following unaudited pro forma summary presents the results of
operations as though the Company and its acquired businesses accounted for using
the purchase method had combined as of January 1, 1997 and 1998, respectively.
YEAR ENDED DECEMBER 31,
-----------------------
1997 1998
---- ----
(UNAUDITED)
Revenues............................................... $117,322 $137,385
Net earnings........................................... 1,364 7,485
Net earnings per share
Basic................................................ 0.16 0.73
Diluted.............................................. 0.16 0.71
The above amounts are based upon certain assumptions and estimates which
the Company believes are reasonable. The pro forma results do not necessarily
reflect the results of operations as they would have been if the companies had
constituted a single entity during such years and is not necessarily indicative
of results which may be obtained in the future.
During 1998, the Company paid $6 million for a preferred stock investment
in Empower Health Corporation, a start-up entity. The preferred stock is
convertible into a number of shares of common stock representing a maximum of
19% of the aggregate equity interest in Empower. In addition, Superior and
Empower share two common Board members.
3. ALLOWANCE FOR DOUBTFUL ACCOUNTS
A summary of activity in connection with the allowance for doubtful
accounts follows:
YEAR ENDED DECEMBER 31,
------------------------------
1996 1997 1998
---- ---- ----
Allowance for doubtful accounts at beginning of
year............................................ $ 456 $ 478 $ 692
Write-offs........................................ (150) (380) (264)
Charged to bad debt expense....................... 172 594 582
----- ----- ------
Allowance for doubtful accounts at end of year.... $ 478 $ 692 $1,010
===== ===== ======
F-11
38
SUPERIOR CONSULTANT HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
(TABULAR AMOUNTS ARE IN THOUSANDS, EXCEPT SHARE DATA)
4. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
DECEMBER 31, RANGE OF
--------------------- USEFUL
1997 1998 LIVES
---- ---- --------
Office furniture and equipment.............. $ 3,469 $ 4,121 5-7 Years
Computer equipment.......................... 5,971 12,909 5-7 Years
Computer software........................... 932 2,131 5-7 Years
Buildings and leasehold improvements........ 688 3,753 40 Years
------- -------
11,060 22,914
Less: accumulated depreciation and
amortization......................... (4,145) (6,442)
------- -------
Property and equipment, net................. $ 6,915 $16,472
======= =======
5. GOODWILL
Goodwill represents the excess of the purchase price over the net assets
acquired in connection with the Company's acquisitions, and consists of the
following:
DECEMBER 31,
-----------------
1997 1998
---- ----
Goodwill.................................................... $4,975 $17,407
Less: accumulated amortization............................ (264) (1,090)
------ -------
Goodwill, net............................................... $4,711 $16,317
====== =======
The Company monitors events and changes in circumstances that could
indicate the carrying amount of goodwill may not be recovered. When events or
changes in circumstances are present that indicate the carrying amount of an
intangible asset may not be recoverable, the Company assesses the recoverability
by determining whether the carrying value of such asset will be recoverable
through the future cash flows expected from the use of the asset and its
eventual disposition.
6. DEBT AND EARLY DEBT EXTINGUISHMENT
The Company has a line of credit with a bank which allows borrowings of up
to $3.0 million, due on demand, with no scheduled maturity date. Borrowings bear
interest at the bank's prime rate and are collateralized by all assets of the
Company. At December 31, 1997 and 1998, there were no amounts outstanding on
this line.
Chi and COMSUL had debt existing at the time of their mergers with the
Company. Substantially all this debt was repaid after their respective mergers
during 1997.
In June 1996, Chi paid bank debt and accrued interest for approximately
$355,000 less than the amount owed. This early debt extinguishment has been
recorded as an extraordinary item in the accompanying statement of operations,
net of income taxes of approximately $124,000.
F-12
39
SUPERIOR CONSULTANT HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
(TABULAR AMOUNTS ARE IN THOUSANDS, EXCEPT SHARE DATA)
7. ACCRUED LIABILITIES
Accrued liabilities consist of the following:
DECEMBER 31,
----------------
1997 1998
---- ----
Payroll and withholding taxes............................... $2,108 $1,403
Commissions................................................. 67 11
Profit sharing.............................................. 420 422
Bonuses..................................................... 2,421 2,350
------ ------
Total accrued liabilities......................... $5,016 $4,186
====== ======
8. STOCK OPTIONS
Effective September 1, 1996, the Company adopted its Long-Term Incentive
Plan (the Plan). Pursuant to the Plan, a maximum of 900,000 shares of common
stock were reserved for the granting of incentive, nonstatutory or formula
options, restricted stock grants and other equity based compensation. The
options, other than the director formula options, may have terms not exceeding
ten years when granted. The exercise price of each incentive option equals the
market price of the Company's stock on the date of grant. Effective December 1,
1997, the Company increased the maximum number of reserved shares in the Plan to
2,400,000.
Had compensation cost for the Plan been determined based on the fair value
of all the options at the grant dates consistent with SFAS 123, the Company
would have reported the pro forma amounts as follows:
YEAR ENDED DECEMBER 31,
-------------------------
1996 1997 1998
---- ---- ----
Pro forma net earnings (loss)......................... $(664) $4,085 $7,993
Pro forma net earnings (loss) per share
Basic............................................... (0.11) 0.48 0.78
Diluted............................................. (0.11) 0.47 0.76
For purposes of pro forma disclosures, the estimated fair value of the
stock options are amortized to expense over the options' vesting period. The
fair value of these stock options was estimated at the date of grant using a
Black-Scholes option pricing model with the following weighted-average
assumptions:
YEAR ENDED
DECEMBER 31,
--------------------
1996 1997 1998
---- ---- ----
Risk free interest rate..................................... 6.4% 6.38% 4.63%
Dividend yield.............................................. 0% 0% 0%
Volatility factor........................................... .52 .53 .52
Expected option term life in years.......................... 5.0 5.0 5.0
F-13
40
SUPERIOR CONSULTANT HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
(TABULAR AMOUNTS ARE IN THOUSANDS, EXCEPT SHARE DATA)
8. STOCK OPTIONS -- (CONTINUED)
A summary of the status of the Company's options as of December 31, 1996,
1997 and 1998, and changes during the years ending on those dates, is presented
below:
1996 1997 1998
------------------ ------------------ ------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
SHARES EXERCISE SHARES EXERCISE SHARES EXERCISE
(000) PRICE (000) PRICE (000) PRICE
------ -------- ------ -------- ------ --------
Outstanding at beginning of year............ 74 $ 2.55 248 $16.00 548 $21.43
Granted..................................... 235 $16.00 341 $24.07 638 $26.91
Exercised................................... (61) $ 3.40 (13) $ 9.83 (42) $15.19
Forfeited................................... -- -- (28) $ 9.60 (38) $32.75
--- --- -----
Outstanding at year-end..................... 248 $16.00 548 $21.43 1,106 $27.57
Options exercisable at year-end............. 30 $13.24 113 $19.01 188 $16.37
Weighted-average fair value of options
granted during the year................... 235 $ 8.75 341 $18.92 638 $16.26
The following information applies to options outstanding at December 31,
1998:
NUMBER WEIGHTED-AVERAGE WEIGHTED-AVERAGE
RANGE OF EXERCISE PRICES OUTSTANDING EXERCISE PRICE REMAINING LIFE
------------------------ ----------- ---------------- ----------------
$10.31 -- $24.75..................... 411 $19.69 4.46 years
$28.00 -- $35.75..................... 528 $30.19 4.75 years
$36.00 -- $41.72..................... 167 $38.73 4.86 years
-----
1,106
=====
9. INCOME TAXES
The income tax provision consists of the following:
YEAR ENDED DECEMBER 31,
-------------------------
1996 1997 1998
---- ---- ----
Current federal income taxes.......................... $ 640 $3,071 $5,339
Deferred federal income taxes......................... (209) 288 (104)
Current state income taxes............................ 32 289 845
Tax benefit from exercise of stock options credited
directly to additional paid-in capital.............. 249 -- 251
Investment tax credits................................ (23) (23) --
----- ------ ------
$ 689 $3,625 $6,331
===== ====== ======
F-14
41
SUPERIOR CONSULTANT HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
(TABULAR AMOUNTS ARE IN THOUSANDS, EXCEPT SHARE DATA)
9. INCOME TAXES -- (CONTINUED)
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at December 31
are as follows:
1997 1998
---- ----
Deferred tax assets:
Deferred compensation..................................... $705 $ 362
Allowance for bad debts................................... 235 343
Deferred revenue.......................................... 30 709
---- ------
Total deferred tax assets.............................. 970 1,414
Deferred tax liabilities:
Change from cash to accrual basis of tax accounting....... 628 385
Depreciation.............................................. 340 923
---- ------
Total deferred tax liabilities......................... 968 1,308
---- ------
Total net deferred tax asset........................... $ 2 $ 106
==== ======
A reconciliation of the provision for income taxes follows:
YEAR ENDED DECEMBER 31,
------------------------
1996 1997 1998
---- ---- ----
Expected expense at the statutory rate................. $(26) $2,791 $5,426
Effect of S Corporation election (terminated in
1996)................................................ 664 -- --
Permanent differences; expenses recognized for book,
not tax.............................................. 31 218 308
Merger costs........................................... -- 312 --
State income taxes, net of federal income tax
benefit.............................................. 21 191 558
Investment tax credits and other....................... (1) 113 39
---- ------ ------
Total income taxes................................... $689 $3,625 $6,331
==== ====== ======
10. PROFIT-SHARING AND DEFERRED COMPENSATION PLAN
The Company has a profit-sharing plan which qualifies under Section 401(a)
of the Internal Revenue Code. Eligible employees may contribute up to the
maximum allowable under tax regulations. Company contributions are fully
discretionary. Profit sharing expense was $450,000, $420,000 and $422,000 for
the years ended December 31, 1996, 1997 and 1998, respectively.
Prior to its merger with the Company, Chi had a non-qualified deferred
compensation plan covering selected executives, all of whom were stockholders.
Expense recognized under the plan was approximately $88,000 and $30,000 for the
years ended December 31, 1996 and 1997, respectively. In connection with Chi's
merger with the Company in August 1997, the plan was terminated, and the then
existing liability has been reflected as an increase to additional paid-in
capital.
11. NET EARNINGS (LOSS) PER SHARE
On December 31, 1997, the Company adopted SFAS 128, Earnings Per Share. All
current and prior year earnings (loss) per share data conform to the provisions
of SFAS 128.
F-15
42
SUPERIOR CONSULTANT HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
(TABULAR AMOUNTS ARE IN THOUSANDS, EXCEPT SHARE DATA)
11. NET EARNINGS (LOSS) PER SHARE -- (CONTINUED)
The loss per share for the year ended December 31, 1996 is comprised of the
following:
Basic and diluted net earnings (loss) per share
Loss before extraordinary item............................ $(0.13)
Extraordinary item........................................ 0.04
------
Net loss.......................................... $(0.09)
======
Earnings per common share ("EPS") data were computed as follows:
YEAR ENDED DECEMBER 31,
---------------------------------
1996 1997 1998
---- ---- ----
Basic EPS:
Net earnings (loss)........................... $ (533) $4,585 $ 9,628
Weighted-average common shares outstanding.... 6,014 8,519 10,266
Basic earnings (loss) per share....... $(0.09) $ 0.54 $ 0.94
====== ====== =======
Diluted EPS:
Net earnings (loss)........................... $ (533) $4,585 $ 9,628
Weighted-average common shares outstanding.... 6,014 8,519 10,266
Dilutive effect of stock options.............. -- 151 314
------ ------ -------
Weighted-average shares assuming dilution..... 6,014 8,670 10,580
Diluted earnings (loss) per share..... $(0.09) $ 0.53 $ 0.91
====== ====== =======
Options to purchase approximately 86,000, 77,000 and 114,000 shares of
common stock with a weighted average exercise price $5.14, $25.64 and $39.97
were outstanding at December 31, 1996, 1997 and 1998, respectively, but were
excluded from the computation of common share equivalents because to do so would
have been antidilutive for the periods presented.
12. COMMITMENTS
The Company leases its office facilities, certain equipment and vehicles
under lease agreements classified as operating leases. Future minimum lease
payments under such noncancelable operating leases as of December 31, 1998 are
summarized as follows:
RELATED ALL SUBLEASE
PARTY OTHER INCOME TOTAL
------- ----- -------- -----
Years ending December 31:
1999...................................... $ 532 $2,208 $ (69) $ 2,671
2000...................................... 532 1,696 (69) 2,159
2001...................................... 532 1,241 (29) 1,744
2002...................................... 532 962 -- 1,494
2003...................................... 532 823 -- 1,355
Thereafter................................ 1,286.. 67 -- 1,353
------ ------ ----- -------
Total future minimum lease payments....... $3,946.. $6,997 $(167) $10,776
====== ====== ===== =======
F-16
43
SUPERIOR CONSULTANT HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
(TABULAR AMOUNTS ARE IN THOUSANDS, EXCEPT SHARE DATA)
12. COMMITMENTS -- (CONTINUED)
Net rent expense amounted to approximately $934,000, $1,614,000 and
$2,751,000 for the years ended December 31, 1996, 1997 and 1998, respectively,
and has been included in selling, general and administrative expenses in the
accompanying statements of operations.
In connection with its initial public offering in October 1996, the Company
entered into a tax indemnification agreement with three shareholders which
provides for, among other things, the indemnification of each such shareholder
for any losses or liabilities with respect to any additional taxes (including
interest, penalties and legal fees), and the repayment to the Company of any
amounts received as refunds resulting from operations during the period in which
it was an S Corporation. Management believes that the Company's maximum exposure
pursuant to this agreement is not material.
13. RELATED PARTY TRANSACTIONS
The Company leases an office facility from an entity partially owned by two
stockholders. Net rent expense for this lease amounted to approximately
$282,000, $400,000 and $463,000 for the years ended December 31, 1996, 1997 and
1998, respectively.
During 1995, Superior issued 658,833 shares of its common stock to two
stockholders in exchange for two promissory notes totaling $750,000, and the
cancellation of outstanding stock options. The notes bear interest at 7.7% per
annum and require annual payments totaling $75,000. Interest income on these
notes totaled approximately $58,000, $56,000 and $54,000 for the years ended
December 31, 1996, 1997 and 1998, respectively.
In 1996, the Company converted a $300,000 note payable and accrued interest
to a stockholder, along with accrued interest thereon, to equity through the
issuance of approximately 37,000 common shares.
During the years ended December 31, 1997 and 1998, the Company chartered
aircraft from a company owned by an officer/stockholder, at a total cost of
approximately $224,000 and $662,000, respectively.
During the year ended December 31, 1998, the Company recognized revenue of
approximately $1.5 million from Empower Health Corporation, in which it has an
equity interest and common Board members.
14. SEGMENT FINANCIAL INFORMATION
See Note 1 for a description of the Company's segments. The Company's
reportable segments are business units that offer and provide different services
through different means. The Company's recruiting, training, information
technology, merger and acquisition, accounting, finance and senior management
functions are combined into the unallocated SG&A expenses. Unallocated assets
consist principally of cash, temporary investments, and accrued interest
receivable and prepaid expenses.
F-17
44
SUPERIOR CONSULTANT HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
(TABULAR AMOUNTS ARE IN THOUSANDS, EXCEPT SHARE DATA)
14. SEGMENT FINANCIAL INFORMATION -- (CONTINUED)
The Company evaluates segment performance and allocates resources based on
gross profit. Intrasegment services are provided at cost. The accounting
policies of the reportable segments are the same as those described in the
summary of significant accounting policies in Note 1.
YEAR ENDED DECEMBER 31,
--------------------------------
1996 1997 1998
---- ---- ----
Revenues:
Healthcare consulting..................................... $ 42,169 $ 63,509 $105,644
Enterprise-wide communications............................ 10,869 13,396 19,102
-------- -------- --------
Subtotal.......................................... 53,038 76,905 124,746
Intrasegment elimination -- enterprise-wide
communications......................................... (1,203)_ (10) --
-------- -------- --------
Consolidated revenues............................. $ 51,835 $ 76,895 $124,746
======== ======== ========
Gross Profit and Income Statement Reconciliation:
Healthcare consulting..................................... $ 22,226 $ 33,143 $ 50,838
Enterprise-wide communications............................ 4,085 4,492 8,882
-------- -------- --------
Consolidated gross profit......................... 26,311 37,635 59,720
Unallocated:
SG&A expenses.......................................... 26,470 31,236 48,333
Interest expense....................................... 259 123 --
Other income, principally interest..................... (343) (2,851) (4,572)
Merger expenses........................................ -- 917 --
-------- -------- --------
Subtotal.......................................... 26,386 29,425 43,761
-------- -------- --------
Consolidated earnings (loss) before income taxes
and extraordinary item.......................... $ (75) $ 8,210 $ 15,959
======== ======== ========
Depreciation and amortization:
Healthcare consulting..................................... $ 220 $ 484 $ 1,493
Enterprise-wide communications............................ 513 956 1,715
-------- -------- --------
Consolidated depreciation and amortization........ $ 733 $ 1,440 $ 3,208
======== ======== ========
Identifiable assets:
Healthcare consulting..................................... $ 13,284 $ 21,975 $ 63,899
Enterprise-wide communications............................ 4,218 8,232 15,374
Unallocated............................................... 37,822 89,194 54,453
-------- -------- --------
Consolidated total assets......................... $ 55,324 $119,401 $133,726
======== ======== ========
Expenditures for long-term assets:
Healthcare consulting..................................... $ 228 $ 5,605 $ 14,075
Enterprise-wide communications............................ 929 3,316 16,261
-------- -------- --------
$ 1,157 $ 8,921 $ 30,336
======== ======== ========
F-18
45
SUPERIOR CONSULTANT HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
(TABULAR AMOUNTS ARE IN THOUSANDS, EXCEPT SHARE DATA)
15. YEAR 2000 UNCERTAINTY
The Year 2000 issue relates to limitations in computer systems and
applications that may prevent proper recognition of the Year 2000. The potential
effect of the Year 2000 issue on the Company and its business partners will not
be fully determinable until the Year 2000 and thereafter. If Year 2000
modifications are not properly completed either by the Company or entities with
which the Company conducts business, the Company's revenues and financial
condition could be adversely impacted.
16. SUBSEQUENT EVENT
Effective January 1, 1999, the Company purchased the Integration Services
Group of Healthdyne Information Enterprises, which provides strategic, tactical
and technical consulting regarding integration issues for healthcare
organizations. The purchase price was approximately $2.2 million in cash and
will be recorded using the purchase method of accounting.
F-19
46
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION PAGE
- ------- ----------- ----
2.1 Merger Agreement -- Superior................................ (1)
2.2 Merger Agreement -- Unitive................................. (1)
3.1 Amended and Restated Certificate of Incorporation of the
Company, as amended......................................... (*)
3.2 Form of By-Laws of the Company.............................. (2)
4.1 Specimen Common Stock Certificate........................... (2)
10.1 Form of Indemnification Agreement between the Company and
each of its directors and officers.......................... (2)
10.2 Form of Long-Term Incentive Compensation Plan............... (2)
10.3 Amendment to Long-Term Incentive Plan....................... (3)
10.4 Lease dated March 21, 1996 between PMTC Limited Partnership
and Superior................................................ (2)
10.5 Form of Tax Indemnification Agreement....................... (1)
10.6 Compensation Agreement dated January 5, 1998 between Richard
D. Helppie, Jr. and the Company............................. (*)
10.7 Employment Agreement dated January 5, 1998 between Charles
O. Bracken and the Company.................................. (*)
10.8 Employment Agreement dated January 5, 1998 between Robert R.
Tashiro and the Company..................................... (*)
10.9 Employment Agreement dated January 5, 1998 between James T.
House and the Company....................................... (*)
10.10 Employment Agreement dated January 20, 1997 between Richard
Saslow and the Company...................................... (*)
10.11 Promissory Note dated April 20, 1995, executed by Charles O.
Bracken in favor of Superior Consultant Company, Inc........ (1)
10.12 Pledge Agreement dated April 20, 1995, between Charles O.
Bracken and Superior Consultant Company, Inc................ (1)
10.13 Promissory Note dated April 20, 1995, executed by Robert R.
Tashiro in favor of Superior Consultant Company, Inc........ (1)
10.14 Pledge Agreement dated April 20, 1995 between Superior
Consultant Company, Inc. and Robert R. Tashiro.............. (1)
10.15 Plan and Agreement of Merger dated July 28, 1997, among
Superior Consultant Holdings Corporation, CMSL Acquisition
Corp., COMSUL, LTD., and certain shareholders of COMSUL,
LTD......................................................... (4)
10.16 Merger Agreement dated as of August 14, 1997 among Superior
Consultant Holdings Corporation, Chi Acquisition Co., The
Chi Group, Inc. and certain stockholders of the Chi Group,
Inc......................................................... (5)
10.17 Asset Purchase Agreement, dated August 20, 1998 among
Superior Consultant Holdings Corporation, Enterprise
Consulting Group, Inc., Whittaker Corporation and Aviant
Information, Inc............................................ (6)
21.1 Subsidiaries of Superior Consultant Holdings Corporation.... (*)
27.1.. Financial Data Schedules.................................... (*)
- -------------------------
* Filed herewith.
(1) Incorporated by reference from the Registrant's Amendment No. 1 to Form S-1
Registration Statement No. 333-10213 as filed on September 20, 1996.
(2) Incorporated by reference from the Registrant's Form S-1 Registration
Statement No. 333-10213 as filed on August 15, 1996.
(3) Incorporated by reference from the Registrant's Information Statement on
Form 14C as filed on November 7, 1997.
(4) Incorporated by reference from the Registrant's Form 10-Q as filed on August
7, 1997.
(5) Incorporated by reference from the Registrant's Form 8-K as filed on August
28, 1997.
(6) Incorporated by reference from the Registrant's Form 8-K as filed on
September 2, 1998.