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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED: DECEMBER 31, 2000, 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 38-3306717
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
17570 WEST 12 MILE ROAD, SOUTHFIELD, MICHIGAN 48076
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (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 30, 2001 was $18,900,836.
At March 30, 2001, 11,074,846 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, to be held in June 2001, expected to be filed with the Commission
not later than April 30, 2001, 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") is a leading
provider of Digital Business Transformation(TM) services primarily to the
healthcare industry, connecting online technologies to business processes that
have traditionally been conducted offline. In August 2000, we announced the
implementation of our strategic transition to a consultant advisory, solution
delivery and outsourcing firm while retaining our discrete services and
customer-orientation. We offer all sectors of the healthcare industry with
improved speed-to-value and an integrated suite of advisory, solution-centric
and process improvement consulting services by applying our deep experience with
clinical systems, healthcare operations and workflows and information technology
to the areas of our clients' greatest needs. Our information technology
outsourcing segment offers clients a creative, dynamic services relationship
that helps control runaway IT costs and stabilize labor market dynamics --
including turnover, training and compensation -- while exponentially increasing
information systems team performance. Superior's outsourcing program offers the
client an array of services, functions and economic elements that can be
tailored to specific client needs including IT management, IT planning and
budgeting, applications support, applications implementation, IT operations and
network and financial management.
We target expanding markets focusing on the evolving e-commerce
initiatives in healthcare. As the entire healthcare industry makes this
migration, we assist in preparing our clients to comply with the Health
Insurance Portability and Accountability Act ("HIPAA"). Our major offerings,
which we describe below, are designed to impact our client's profitability and
improve our clients' quality of patient care and the challenges of a complex
HIPAA implementation timetable and the increased regulations that may result
from HIPAA.
In October 2000, we announced a new management team, which has directed
our focus on the fastest growing areas in healthcare information technology. Our
consulting and outsourcing services are delivered through these primary market
offerings:
- Revenue Cycle
- Supply Chain
- IT Excellence
- Compliance
- Digital Trust(TM)
- Patient Safety
- Provider Interaction
- Consumer Interaction
- Employee Interaction
- Connectivity
We conduct our business through our primary operating subsidiary, Superior
Consultant Company, Inc. ("Superior"). The term "Company" as used herein refers
collectively to the Company together with its principal operating subsidiary,
Superior.
We serve clients across a broad cross-section of the healthcare
industry. From January 1, 1999 through December 31, 2000, the Company provided
services to over 1,350 healthcare clients on over 4,600 engagements. Because of
our deep knowledge of healthcare operations and workflow, IT and clinical
systems, we are able to work with clients to enable them to leverage their
existing legacy information system investments and accelerate their return on
those investments by connecting them to Internet and other technologies. We
believe that our long-term relationships, in-depth knowledge of our clients'
needs, strategic partnerships and continually expanding range of service
offerings endow us with significant advantages over our competitors in marketing
additional services and winning new engagements. Because of these assets, we
believe we are uniquely positioned to help healthcare providers bridge
traditional services to the new digital environment and capitalize on the
inherent market, care delivery and efficiency benefits. Our goal is to be the
preferred, if not sole, provider of a broad range of solutions for each of our
clients.
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INDUSTRY BACKGROUND
GENERAL
Healthcare providers today face external and internal pressures to meet
the competitive demands of the marketplace, pursue their strategic initiatives
and comply with increasing government regulations, while also improving their
bottom line. The United States healthcare industry continues to undergo rapid,
profound change. In recent years, healthcare expenditures have increased at
approximately twice the rate of inflation and are expected to exceed $1.4
trillion in 2001, according to a Health Care Financing Administration report on
the healthcare industry. There is a greater emphasis placed on issues of patient
safety and the prevention of medical errors (based on a much-publicized
Institute of Medicine Report), competing on quality in clinical care and IT
innovation, as well as heightened awareness of the urgency to implement digital
security measures and HIPAA compliance strategies. We believe that these
factors, combined with the effects of the Balanced Budget Act, HIPAA, slowed
growth of Medicare payments, the aging of the U.S. population and the growing
acceptance of the Internet spurred by the increasingly vocal demands of
consumers for quality care, will result in continued dramatic change in the
healthcare industry.
HEALTHCARE INFORMATION TECHNOLOGY
The healthcare IT environment is growing increasingly complex and
costly as a result of the challenges inherent in deploying new technology
including use of the Internet, maintaining or integrating older systems and
deploying an IT function capable of meeting new requirements. With all these
pressures, hospitals, health systems and providers have to become more efficient
and operate their business in the most cost effective and productive way. As a
result, we believe that the healthcare industry will continue to increase its
spending for IT solutions. Applying and/or integrating Internet technology to
the care process, as well as other components of healthcare delivery, can enable
organizations to reduce costs through supply chain and clinical efficiencies,
enhance communications with patients, payers and other constituencies, improve
care and streamline activities such as claims processing and eligibility
verification.
With the increased move to the Internet by virtually all segments of
the industry - providers, payers, consumers, health plans, employers, employees
- - all participants have the opportunity to effectively address the
cost-containment pressures of the Balanced Budget Act and to meet the strict
privacy and standards mandates of HIPAA and related regulations that are
expected to affect every segment of the industry as they unfold. Superior's
extensive experience with all major healthcare software vendors along with a
multitude of other applications, enables our company to implement and integrate
"best practices" IT solutions that will improve our clients' performance and
make the most of their existing IT investments.
We believe that healthcare participants will continue to turn to
outside consultants, external management of internal information systems,
application support and full outsourcing arrangements with technology leaders as
a means of coping with the financial and technical demands of information
systems management and Internet integration. Superior responds to these demands
by providing the capability to deliver full, partial or interim outsourcing
solutions - either at the client's facility or off site through state-of-the-art
facilities, thus enabling the client to remain focused on expanding their
primary businesses and avoid related capital outlay.
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 payer environment. In response, healthcare participants are
formulating and implementing new strategies and tactics, including developing
e-commerce abilities and setting their strategy, redesigning business processes
and workflows, acquiring better technology, integrating legacy systems with the
Internet and adopting or remodeling customer service, patient care and marketing
programs. We believe that healthcare participants will continue to turn to
outside consultants to assist in this vast array of initiatives 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 less
time and can be more cost effective. By employing outside expertise, healthcare
providers can often improve their ability to compete by more rapidly deploying
new processes.
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In 2000, the healthcare consulting industry was highly fragmented and
consisted primarily of:
- Larger systems integration firms and Internet consulting firms,
including the consulting divisions of the national accounting
firms, which may or may not have a particular healthcare focus or
offer healthcare consulting as one of several specialty areas;
- Healthcare information systems vendors that focus on services
relating to the software solutions they offer;
- Healthcare consulting firms, many of which focus on selected
specialty areas, such as strategic planning or vendor-specific
implementation; and
- Large general management consulting firms that may or may not
specialize in healthcare consulting and/or do not offer systems
implementation.
Increasingly, the competitive advantage in healthcare consulting will be gained
by those consulting firms which:
- Are able to marshal the necessary expertise and resources to offer
comprehensive skill sets and packaged solutions to clients;
- Have the vision, strength and consistency to advise clients along
the entire service continuum, from strategy to selection to
implementation to operation;
- Offer the flexibility to meet the challenges of the rapidly
changing healthcare, e-commerce and IT environment; and
- Have assets to bring total solutions including offerings which
address the clients' need for market expansion and capital
replacement.
THE SUPERIOR SOLUTION
We specialize in business transformation services that enable clients
to thrive in the information-driven economy by connecting the power and speed of
the online world to their offline processes. Our business and technical
expertise is available through a comprehensive suite of solutions designed to
support, enable, streamline, secure and expedite business and healthcare
delivery processes. We use our intellectual capital, in-depth institutional
knowledge of healthcare delivery systems, expertise in e-commerce and
information technology, strategic alliances and partnerships with digital market
leaders, and nationally deployed group of experienced colleagues to help clients
plan and execute better business strategies. By combining our best practices
with the products and services of our partners, we have constructed repeatable,
pre-packaged solutions which can be implemented quickly and for less cost.
We offer our clients a continuum of solutions, including: strategy
formulation, information technology and e-commerce planning and capital
resources planning; operations and revenue cycle management, supply chain
management, organizational change and business process redesign; information
technology design and construction, applications implementation, information
systems implementation and integration; and IT interim management, application
support and outsourcing. For each client and engagement, we structure a project
team that understands the impact of the changing healthcare environment on that
particular client and can address the management, operational and technical
ramifications of change and improvement. In structuring an engagement, we draw
upon our solutions framework to bring our clients the most efficient, cost
effective solution to meet their needs. As each client relationship evolves, our
professionals add their experiences to our proprietary databases to accumulate a
detailed and intimate understanding of each client and its specific needs. Our
nationally deployed professionals are aided by instant access, via our
proprietary information and communication system, to our knowledge and client
resource databases and to collaboration with colleagues. Our unified team
approach helps to ensure high quality, consistent and geographically seamless
client service.
We have a national focus on promoting the use of electronic information
exchange to address the opportunities and challenges of the healthcare industry.
We provide information technology, as well as strategic and operations
management consulting, pre-packaged solutions and outsourcing services to a
broad cross-section of healthcare industry participants and information systems
vendors. We also assist select companies in various industries, including
healthcare, with network and telecommunication design and acquisition,
enterprise messaging, intranet and web strategies and design, workgroup
consulting, as well as software and application development solutions. We
provide 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 us to help our clients take advantage of the opportunities presented by
technologies such as the Internet and intranets, local and wide area
communication networks and network medicine.
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To assist our clients in achieving the optimal strategic, operational,
e-commerce and/or IT solutions for their business needs, we draw upon our
expertise with the products of a vast array of vendors. Through this in-depth
product knowledge, we are able to fully assess the advantages and disadvantages
of each particular strategic, operational, e-commerce and/or IT solution.
Additionally, through alliances and partnerships, we are able to bring an
aggregation of products and services packaged to suit client needs.
In 1999, we opened a comprehensive, state-of-the-art Solution Center,
developed as part of our enterprise alliance relationship with Microsoft, to
provide clients with education, demonstrations and hands-on experience with
advanced technologies. The Solution Center provides a collaborative environment
where our clients can work alongside our consultants, utilizing all of our
consulting, information technology, systems integration, systems security and
connectivity and outsourcing expertise to develop components or entire
frameworks for managerial and technical solutions to the challenges facing
healthcare organizations, including HIPAA. Providing value both from a business
and a technical perspective, the Solution Center also includes an executive
briefing center where clients can learn about technology trends in healthcare
and develop strategies to implement emerging solutions in their own
organizations. Clients may take advantage of the Solution Center assets through
yearly memberships or at a per diem rate. In addition, Superior provides
technology education to clients at the Solution Center site.
SERVICES
Through our consulting, solution delivery and outsourcing services we
provide all segments of the healthcare industry with the tools and strategies
they need to effectively serve customers, manage patient care and capitalize on
e-commerce and other new technology opportunities. We offer custom-tailored and
packaged solutions based on an assessment of each client's needs. We offer
services in the following broadly defined categories:
REVENUE CYCLE. Management of the revenue cycle--from redesigning business
processes to installing or troubleshooting information systems--designed to
accelerate cash flow and positively affect the client's bottom line. We work
closely with client staff to reduce accounts receivable, re-deploy assets and
improve operational efficiencies.
SUPPLY CHAIN. Streamlining processes, eliminating unnecessary steps and
capitalizing on Web-based technology lead to improvement in clients' operating
margins. Our solutions offer immediate opportunities to improve margins by
allowing clients to analyze purchasing patterns and use the data to manage their
supply utilization costs.
IT EXCELLENCE. Combining our extensive, in-depth experience with all major
software vendors and our familiarity with leading-edge technology, we help
clients implement an IT strategy that enables return on their IT investments by
leveraging current technology and taking advantage of Web-based solutions. We
also offer a full range of IT management services from project management to
interim management of IT departments, to management of discrete operations such
as help desk as well as full IT outsourcing.
COMPLIANCE. We approach compliance as an opportunity -- not just a requirement.
From readiness assessments to strategic planning to implementation, we help
clients seize the opportunities of HIPAA, HCFA, JCAHO, NCQA and others. Our
solutions help clients take advantage of new technologies and processes to
improve compliance and achieve digital proficiency.
DIGITAL TRUST(TM). By integrating our comprehensive methodologies for security /
HIPAA / policy assessment and strategy formulation with pre-built healthcare
policy frameworks and our ComTrust (a Superior subsidiary) managed public key
infrastructure (PKI) solutions, health organizations can securely leverage their
online market strategies, protect their assets and brand image, while
substantially progressing towards HIPAA compliance. This approach to
establishing Digital Trust delivers clients a systematic foundation for issuance
of Digital IDs, authentication, access control, policy development and
education, authorization, auditing, digital signatures for non-repudiation, and
encryption for confidentiality and data integrity.
PATIENT SAFETY. Our integrated solutions are designed to automate, track and
assure the quality of the medication process to dramatically reduce medication
errors -- the most common and costly of medical mistakes. Decision support tools
tap into clients' legacy systems reducing medical mishaps, identifying high-risk
populations and empowering caregivers with the knowledge they need at the point
of care.
PROVIDER INTERACTION. Clear communication among patients, physicians and
caregivers is the bedrock of high-quality care delivery, customer satisfaction,
physician loyalty and efficient processes. Our solutions integrate best-of-breed
components
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and eliminate geographic boundaries. We focus on providing the right information
to the right person at the right time - enhancing quality.
CONSUMER INTERACTION. Combining Internet technology with improved processes, we
help clients meet or exceed the expectations of the healthcare consumer. We work
with clients to design interactive consumer/patient portals that provide
branding, content, scheduling and consumer interaction.
EMPLOYEE INTERACTION. Enhanced communication among employees--and between
employees and employers, physicians, patients and families--leads to better
performance. We provide enterprise portals allowing access to administrative
services and work tools that dramatically lower the costs of managing employees.
CONNECTIVITY. By connecting disparate systems across multiple channels, clients
can link stakeholders inside and outside of their organizations. Based on our
expertise in determining clients' business and technology needs, our solutions
unlock clients' data and connect them to an integrated world.
Our ready-to-market solutions draw on the skills and expertise across
our organization, newly structured into competency centers. By combining these
skills with our best practices, tools and methodologies and the applications and
services of our market-leading alliance partners, we have been able to construct
a broad array of market focused, repeatable solutions with less development time
and faster implementation.
Set forth below is a list of the healthcare consulting services and
skills offered by the Company through its market solutions:
REVENUE CYCLE - Business process redesign
- Accounts receivable/managed care contract
analysis, improvements and resolution
- Technology benefits realization and
optimization
- Readiness assessment
- Strategy development
- Network assessment implementation
- Custom intranet, extranet portal development
- Digital Trust(TM)
- Application Evaluation
- Application Delivery
SUPPLY CHAIN - Assessment of supply chain improvement
opportunities
- Assessment of supply chain operations
- Assessment of supply chain technology
enablers
- Development of supply chain redesign and
implementation plan
- Implementation assistance
- Business process redesign
- Application Evaluation
- Application Delivery
- Digital Trust(TM)
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IT EXCELLENCE - Strategic information system planning,
budgeting, development and implementation
- Systems and departmental audits and
assessments
- Interim management and facilities
management
- Data Warehousing and Data Mart
- Remote network administration
- Thin client solutions
- Enterprise connectivity initiatives,
including emerging wireless technologies
- Systems pre-implementation assessment and
preparation
- Vendor selection and negotiation
- Applications testing and quality assurance
- Application implementation and integration
including products of SMS, Cerner,
McKesson/HBOC, IDX, MEDITECH and others
- Executive and technical education and
end-user training
- Legacy system maximization
- Technology architecture
- Commerce integration
- Executive planning systems (EPS)
- IT Outsourcing including:
- Help Desk
- IT planning, budgeting and management
- Operations and management staffing
and resources
- Project management
- Applications implementation and
unification
- Data center operations
- Network monitoring and maintenance
- Application service provider
COMPLIANCE - HIPAA Education and Understanding
- GAP Analysis and Impact Assessment
- Strategic Plan for HIPAA Compliance and
Implementing Electronic Commerce
- Business Policy and Process Implementation
- HIPAA Security Audit and Assessment
- HIPAA Implementation and Compliance
Assistance
- Electronic security (Digital Trust(TM))
- Business process redesign
- Compliance (APC, JCAHO, HIPAA, etc.)
assessment and gap analysis
Digital Trust(TM) - Managed Trust Services
- Managed PKI and Certificate Authority
services
- Authentication solutions (biometrics,
smart cards, tokens, etc.)
- Managed identity, authorization and
credentialing services
- Policy Frameworks
- Business and access control policies
- Healthcare Certificate Policy (CP)
and Certification Practice
Statements (CPS)
- Acceptance, subscriber and relying
party policies
- Comprehensive Trust Plan
- Awareness and education
- Assessment (HIPAA, security and
policy)
- External vulnerability analysis
- Trust strategy formulation and
implementation planning
- Program and project management
- Certified Trust Application - Program
- Independent security audit and
channel program for software vendors
- PKI enabling services and SDK for
software vendors
- Technology Services
- PKI implementation
- Directory development and integration
services
- Security architecture planning
- VPN solutions
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PATIENT SAFETY - Technology investments: Vendor selection
and negotiation
- Assessment
- Design and Business Case
- Implementation Support
- Project management
- Clinical/medical staff education
- Technology acquisition and installation
- Operations/workflow improvements
- System integration
- Testing and training
- Job descriptions and recruiting
- Risk/trend reporting
MARKET INTERACTION: - Strategic planning
PROVIDER, CONSUMER - Business process redesign
AND EMPLOYEE - Web portal design and implementation
- Technology Architecture
- Call center
- Voice solutions
- Digital Trust(TM)
- Applications implementation
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CONNECTIVITY - Wireless and thin client services
- Information technology
- Strategic information system planning,
budgeting, development and implementation
- Remote network administration
- Vendor selection and negotiation
- Legacy system maximization
- Technology architecture
- Commerce integration
- Web portal design and implementation
- Call center
- Voice solutions
- Digital Trust(TM)
DEVELOPMENTS IN 2000
In 2000 we continued to encounter the difficult market conditions that
had developed in mid-1999. Driven, we believe, by the impact of the Balanced
Budget Act of 1997, the continuing effect of the slowdown in IT initiatives as
our clients focused on Y2K issues, and exacerbated by the shake out in the
Internet sector, the market reflected reduced demand for many of our services.
The healthcare and technology sectors in which we operate were adversely
impacted by weak demand throughout the year.
In August 2000, we implemented a strategic transition to an advisory
and solution-centric delivery and outsourcing firm in order to improve
speed-to-value and costs paced with benefit realizations by providing an
integrated suite of advisory, solution and process improvement services. In
order to assist in our transition, we made a number of executive changes in
October 2000, including the appointment of Ronald V. Aprahamian to our board of
directors and the election of Mr. Aprahamian as Chairman, succeeding Richard D.
Helppie, Jr., who remains as our Chief Executive Officer. We also appointed
George S. Huntzinger as our President and Chief Operating Officer and Richard R.
Sorensen as our Vice President and Chief Financial Officer. In addition to our
strategic transition and changes in our executive team, there were several
developments in our business which we summarize below:
- In March 2000, we were awarded a five year contract from the U.S.
General Services Administration under which we may provide our
information technology consulting services to any Federal agency or
organization. In connection with the schedule agreement, we will
provide our comprehensive suite of information technology
consulting services to digitally transform the operations of
government clients.
- In June 2000, we entered into a strategic partnership with
VeriSign, Inc., the leading provider of Internet trust services,
and formed ComTrust(TM), an application service provider that we
formed to deliver jointly with VeriSign a broad range of services
to health organizations. ComTrust(TM), our wholly-owned subsidiary,
will enable a broad spectrum of healthcare customers to securely
exchange and manage confidential information over the Internet.
- In August 2000, we reconfigured our workforce to eliminate
overcapacity in areas of reduced market demand. At the same time,
we implemented other measures to reduce our cost of operations.
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- In August 2000, we signed an information systems outsourcing
agreement with Mercy Memorial Hospital Corporation of Monroe,
Michigan. Under this five-year agreement, estimated to yield
revenues of approximately $10 million, we will integrate
professional services and digital technology initiatives to provide
enriched information systems solutions for Mercy Memorial Hospital.
- In December 2000, we signed an agreement with AmeriNet, Inc., the
nation's largest membership-based health care group purchasing
organization, to provide technology consulting, management
consulting and outsourcing services to AmeriNet members. We will
assist AmeriNet and its membership with development and
implementation of a wide range of services for hospital and health
care management organizations as well as development of web-based
strategies for the efficient delivery of their services.
EMPLOYEES
We believe that one of our key strengths lies in our 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, e-commerce and information technology. Our consultants are
highly experienced and many have established their credentials as healthcare
executives and senior management of healthcare entities, senior technical
officers, 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, 2000,
we employed 867 employees, 632 of whom were consultants.
We believe we have a unique corporate culture built upon open
communication across geographic regions and competency centers fostered by our
proprietary information and communications system, which currently runs on a
robust intranet, and a motivational and interactive work environment that
features professional development opportunities and productivity incentives.
Through the establishment of our Superior Institute, our education and training
encompasses multiple approaches to professional development. As part of this
effort, we provide training curricula in new trends in healthcare, information
technology, business management and worklife topics. We offer 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 distance learning, self-study, group classroom, individual mentorship
and case study.
An integral part of the on-going education process at Superior takes
place through our proprietary communications system. This allows our consultants
to continue to upgrade their skills while remaining deployed in the field. In
addition, we have developed an employee orientation program that features a
sophisticated presentation to provide new employees with a comprehensive
understanding of our structure and approach to consulting. We also maintain a
formal and active network of former employees. These alumni provide expertise on
projects, introduce us to new client leads and in many cases have returned to
Superior from experiences elsewhere in the healthcare industry.
SALES AND MARKETING
Our business development efforts are based upon a highly organized,
company-wide, consistent approach. Personnel are trained and reinforced in our
marketing methods and philosophy and are encouraged to identify, develop and
pursue client service opportunities. Today, Superior's senior vice president of
sales and marketing and client partner organization leaders focus intensely on
securing larger and more profitable engagements, client development strategies,
geographic market penetration and cross-selling clients. Business development is
an integral part of the formal responsibilities at all levels of our management,
including competency center leaders, and we set business development goals on
both a departmental and individual basis.
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Our 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 sales program and 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 our relationship with the potential client, as
well as after a client retains Superior for services. At any given time, many of
our professionals are active in the development of business from either a new or
existing client and the client resource database enables our personnel to access
up-to-date information on our efforts with respect to a client or client
prospect, identify other Superior contacts with that client and highlight the
particular needs expressed by the client to date.
We further our business development efforts through our reputation in
the marketplace, the personal contacts and networking of our professionals,
direct industry marketing programs, trade shows, our Internet web site, located
at www.superiorconsultant.com, and the industry presence maintained by our
professionals. Our marketing profile within the healthcare industry is enhanced
by our employees' speaking engagements and publications on topics affecting
healthcare. Our views on a wide range of healthcare and IT topics are frequently
solicited and quoted for articles in major industry journals and books. Our
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 internationally.
We operate our healthcare consulting and outsourcing businesses through
a combination of our national presence, regional relationships and our
competency centers. Each competency center offers a selected variety of our
healthcare consulting services and often two or more of these areas work
synergistically together and with other industry leaders to develop and package
repeatable solutions or market offerings for clients. Each competency center is
managed by a leader who is responsible for achieving performance-based goals for
the specific area and is responsible for its growth. We actively market the
subject-matter expertise of our competency centers through the focus of our
client partner organizations. Each competency center and market offering leader
is responsible for developing and enhancing knowledge of local regulation and
market factors, as well as developing and nurturing relationships with specific
client and partner organizations. This enables us to combine the expertise of
our competency centers to form custom, as well as repeatable packaged solutions
that are responsive to local conditions and of value to specific clients.
We provide a compensation system designed to foster an active focus on
growth and business development at all levels within the organization.
Management earns incentive compensation on a quarterly and/or annual basis based
on group and company-wide performance goals.
COMPETITION
The market for our services is highly fragmented, highly competitive
and is subject to rapid change. We believe that we currently compete principally
with systems integration firms, national consulting firms, including the
consulting divisions of the national accounting firms, outsourcers, Internet
consulting 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 our
competitors have significantly greater financial, technical and marketing
resources than we have, generate greater revenues and have greater name
recognition than we have. 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 Superior, to implement and/or customize such
software. In addition, vendors whose systems may enjoy wide market acceptance
and large market share could enter into exclusive or restrictive agreements with
other consulting firms which could eliminate or substantially reduce our
implementation work for those systems. There are relatively low barriers to
entry into our markets (other than outsourcing) and we have faced and expect to
continue to face additional competition from new entrants into our markets. In
addition, combinations and consolidations in the consulting and outsourcing
industry will give rise to larger competitors, whose relative strengths are
impossible to predict. We also compete with our 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.
We believe that the principal competitive factors in our market include
reputation, size and capital resources, 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 we will be able to compete effectively on pricing or other
requirements with current and future competitors or that competitive pressures
faced by us will not cause our revenue or operating margins to decline or
otherwise materially adversely affect our business, financial condition and
results of operations.
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INTELLECTUAL PROPERTY AND OTHER PROPRIETARY RIGHTS
Our success is in part dependent upon our proprietary internal
information and communications systems, databases, market offerings, best
practices, tools and the methods and procedures that we have developed
specifically to serve our clients. In addition, we have and will continue to
develop proprietary groupware tools and applications. Through acquisitions, we
have acquired numerous development tools and methodologies. We have no patents
and, consequently, we rely on a combination of non-disclosure and other
contractual arrangements and copyright, trademark and trade secret laws to
protect our proprietary systems, information and procedures. There can be no
assurance that the steps taken by us to protect our proprietary rights will be
adequate to prevent misappropriation of such rights or that we will be able to
detect unauthorized use and take appropriate steps to enforce our proprietary
rights. We believe that our 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 us in the future or that any such claims will not require us to enter
into materially adverse license arrangements or result in protracted and costly
litigation, regardless of the merits of such claims.
RISK FACTORS
Some of the information in this report contains forward-looking
statements that involve substantial risks and uncertainties. You can identify
these statements by forward-looking words such as "may," "will," "expect,"
"anticipate," "believe," "estimate," "project," "predict" and "continue" or
similar words. You should read statements that contain these words carefully
because they discuss our future expectations, contain projections of our future
results of operations or of our financial condition or state other
"forward-looking" information. We believe it is important to communicate our
expectations to our investors. However, there will be events in the future that
we are not able to accurately predict or over which we will have no control. The
risk factors listed in this section, as well as any other cautionary language in
this report, provide examples of just a few of the many risks, uncertainties and
events that may cause our actual results to differ materially from the
expectations we describe in our forward-looking statements. You should be aware
that the occurrence of the events described in the following risk factors and
elsewhere in this report, or in our other publicly filed reports which we may
file from time to time, could have a material adverse effect on our business,
operating results and financial condition. In addition, any one or more of the
risks outlined below could have a greater or lesser impact on our business at
any particular point in time and you should not give any greater or lesser
emphasis or weight to any single factor merely by virtue of the order of its
presentation or the depth of its discussion in this report.
VARIABILITY OF QUARTERLY OPERATING RESULTS
We have experienced significant quarterly fluctuations in our operating
results. Variations in our revenues and operating results may continue from
quarter to quarter as a result of a number of factors, including, but not
limited to:
- Fluctuations in sales of our market offerings and in consultant
billing and utilization rates;
- Client and employee retention;
- The failure to secure and deliver new client contracts at the
budgeted rate and the resulting negative impact on utilization of
our consultants;
- Industry spending patterns and market conditions that may affect
adversely the buying decisions of our current and prospective
clients, such as the uncertain level of spending on information
technology after the year 2000 conversion, the impacts of the
Balanced Budget Act of 1997, the recent fallout in Internet
initiatives, the continued consolidation among healthcare provider
entities and the projected reduction in reimbursements available to
healthcare providers;
- The relatively longer sales cycle in obtaining new clients and
larger contracts;
- The number and significance of active client engagements during a
quarter;
- Increased investment by us in new services and other strategic
initiatives;
- The decision of clients to defer commitments on new projects until
after the end of the calendar year or the client's fiscal year;
- Client budgetary cycles and pressures;
- The loss or reduction in scope of significant client relationships;
and
- General economic conditions and adverse developments in the
financial condition of our clients.
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Our existing clients can generally reduce the scope of or cancel their
use of our services without penalty and with little or no notice. If a client
defers, modifies or cancels an engagement or chooses not to retain us for
additional phases of a project, we must be able to rapidly redeploy our
employees to other engagements in order to minimize underutilization of
employees and the resulting harm to our operating results.
Because a substantial percentage of our expenses, particularly
personnel, facilities and technology, are relatively fixed in advance of any
particular quarter, variations in the size or number 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. Given the
possibility of such fluctuations, we believe that comparisons of our results of
operations for preceding quarters are not necessarily meaningful and that you
should not rely upon the results for one quarter as an indication of future
performance. Based on the preceding factors, it is possible that we may
experience a shortfall in revenue or earnings from expected levels or otherwise
fail to meet expectations of securities analysts or the market in general. In
such event, the price of our common stock could be materially adversely
affected.
OUR LONG SALES AND PROJECT DELIVERY CYCLES EXPOSE US TO POTENTIAL
LOSSES
Our sales process for outsourcing and network related projects is often
subject to delays associated with the lengthy approval process that typically
accompanies significant capital expenditures by our clients. During this
process, we expend substantial time, effort and resources marketing our
services, preparing contract proposals and negotiating contracts. Any failure to
obtain a signed contract and receive payment for our services after expending
significant time, effort and resources could materially and adversely affect our
revenues and financial condition.
HEALTHCARE INDUSTRY CONCENTRATION
We derive the substantial majority of our revenues from clients
involved in the healthcare industry. As a result of our focus on healthcare
consulting, our business, financial condition and results of operations are
influenced by conditions affecting this industry, including changing political,
economic and regulatory influences that may affect the procurement practices and
operation of healthcare providers. Current conditions affecting the healthcare
industry and the risks they create include:
- Regulatory Change. The Balanced Budget Act of 1997 has resulted in
substantial limitations on capital expenditures and investments in
the healthcare industry. In addition, many federal and state
legislators have announced that they intend to propose programs to
reform the United States healthcare system at both the federal and
state level and government agencies have intensified efforts to
monitor fraud and abuse in healthcare programs reimbursed by
federal and state agencies. Although these efforts could increase
demand for our services, they could also adversely affect our
clients, result in lower reimbursement rates and change the
environment in which providers operate and could otherwise
adversely affect service providers such as ourselves. The ongoing
impact of the Balanced Budget Act of 1997 on the Company's
healthcare industry clients cannot be predicted with certainty.
Reduced revenues to the healthcare industry could adversely affect
service providers like us.
- HIPAA Implementation. Many of our clients use our services as part
of their effort to bring themselves into compliance with HIPAA. If
the implementation of HIPAA is delayed or cancelled, there may be
less demand for our HIPAA compliance services. Although we believe
that our clients will continue to demand security and privacy and
other digital solutions even if HIPAA is delayed or not implemented
at all, without the need to comply with HIPAA our clients may delay
or cancel their privacy and security and other digital activities,
which would adversely affect our business.
- Cost Pressure. Large private purchasers of healthcare services are
placing increasing cost pressure on providers. Healthcare providers
have and may continue to react to these cost pressures and other
uncertainties by curtailing or deferring investments, including
investments in our services.
- Industry Consolidation. Many healthcare providers are consolidating
to create larger healthcare delivery organizations and are forming
affiliations for purchasing products and services. These
consolidations and affiliations reduce the number of potential
customers for our services and the increased bargaining power of
these organizations could lead to reductions in the amounts paid
for our services. In addition, this
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consolidation is likely to result in the acquisition of certain of
our clients and such clients may scale back or terminate their
relationship with us following their acquisition.
The impact of these developments in the healthcare industry is
difficult to predict and could have a material adverse effect on our business.
RISK OF NEW BUSINESS INITIATIVES
We intend to continue to evaluate opportunities for strategic
affiliations with alliance partners and investments in solution sets and
expanded outsourcing including e-commerce and other web based initiatives
focused on the healthcare industry. There is no assurance that our investment in
any particular venture will yield any investment return or produce any
appreciable amount of services revenue. We are presently holding an e-commerce
investment for strategic purposes and there can be no assurance that we will
ultimately be able to sell this investment at a profit.
In addition to our strategic investments, we are making significant
investments in directing significant portions of our internal business toward
the provision of e-commerce services. We believe that the market developing for
e-commerce and systems integration services markets will require a different set
of skills and capabilities from traditional information technology services. In
contrast to traditional information technology, e-commerce and system
integration services combine Internet application development skills with
business intelligence and strategy focused on the client and its customers. We
cannot be certain that a viable market for e-commerce will emerge or be
sustainable. If a viable and sustainable market for our e-commerce services does
not develop, our growth could be negatively affected. Even if an e-commerce
market develops, we may not be able to differentiate our services from those of
our competitors. If we do not differentiate our services, our revenue growth and
operating margins may decline.
PROJECT RISKS
Many of our engagements involve projects which are critical to the
operations of our clients' business and which provide benefits that may be
difficult to measure. Our inability to meet a client's expectations in the
performance of our services could damage our reputation and adversely affect our
ability to attract new business. In addition, we could incur substantial costs
and expend significant resources correcting errors in our work and could
possibly become liable for damages caused by such errors. A negative impact on
client relationships could adversely affect our business whether or not we bear
any responsibility, legal or otherwise, for the occurrence of those problems.
OUTSOURCING RISKS
We provide healthcare IT outsourcing solutions which include interim
management, personnel acquisition and facilities management and/or the transfer
of a client's information system assets--hardware/software and human
resources--from an internal business function to an outsourced service. To
implement our outsourcing program, we are required to make substantial
investments in capital assets and personnel for certain outsourcing contracts.
We may also be dependent upon our ability to hire and retain some or all of an
outsourcing client's former IT staff in order to provide appropriate service
levels. The recent increase in government scrutiny of provider reimbursement
practices could also adversely affect the provision of outsourcing services and
its profitability. We cannot predict whether we will in each instance be able to
either assess accurately the investment required for an outsourcing contract or
negotiate and perform any of our outsourcing contracts in a profitable manner.
Competitors have and we anticipate that competitors will continue to increase
their focus on this market. This increased focus has to date and may continue to
adversely affect our ability to obtain new outsourcing contracts as well as the
profitability of any such contracts. In addition, our ability to perform
adequately under our outsourcing agreements could adversely affect our ability
to obtain future consulting engagements from these or other clients.
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FIXED PRICE CONTRACTS
As a result of our obtaining additional outsourcing contracts, the
nature of the practices of certain acquired companies and the introduction and
sales of repeatable, pre-packaged solutions, an increasing portion of our
projects are billed on a fixed-fee basis as opposed to time and materials. Our
inability to estimate accurately the resources and related expenses required for
a fixed-fee project or failure to complete our contractual obligations in a
manner consistent with the project plan upon which our fixed-fee contract was
based could adversely affect our business.
RECRUITMENT AND RETENTION OF PROFESSIONAL STAFF
Our business involves the delivery of professional services and is
labor-intensive. Our success depends in large part upon our ability to attract,
develop, motivate and retain highly skilled consultants. Other consulting firms,
healthcare providers and other healthcare industry participants, health
information systems vendors, clients, systems integrators and many other
enterprises compete with us for employees with the skills required to perform
the services we offer. We may not be able to attract and retain a sufficient
number of highly skilled employees in the future and we may not continue to be
successful in training, retaining and motivating employees. The loss of a
significant number of consultants and/or our inability to hire a sufficient
number of qualified consultants would adversely affect our ability to secure,
service and complete client engagements and could have an adverse effect on our
business.
MANAGEMENT OF COST REDUCTION PROGRAMS
Our recently implemented cost reduction program depends upon our
ability to continue to eliminate non-labor costs such as excess office space and
equipment. If we are unable to implement these reductions in a timely manner,
our operating expenses could be unsupported by revenues.
MANAGEMENT OF GROWTH
We intend to identify opportunities to continue to expand our
geographic presence, industry expertise and technical scope through strategic
acquisitions and alliances with companies that provide additional and
complementary products, services or skills or have strategic client
relationships. We may not be able to identify suitable acquisition candidates
or, if identified, we may not be able to acquire such companies on suitable
terms. Moreover, many other companies are competing for acquisition candidates,
which could increase the price of acquisition targets and decrease the number of
attractive companies available for acquisition. Acquisitions also involve a
number of special risks, including:
- Adverse effects on our reported operating results including
increased goodwill amortization and interest expense;
- Diversion of management attention;
- Risks associated with unanticipated problems, liabilities or
contingencies;
- Difficulties related to the integration and management of the
acquired business;
- Risks of entering markets in which we have limited or no direct
expertise; and
- The potential loss of key employees of the acquired companies.
In addition, acquisitions may require us to spend significant funds. An
acquisition may not result in long-term benefits and management may not be able
to manage effectively the resulting business. The occurrence of some or all of
the events described in these risks could have a material adverse effect on our
business.
In May 1999 we entered into a strategic alliance with Microsoft
Corporation under which Microsoft and the Company will advance the Microsoft
enterprise products and solutions as the premier information management platform
for the healthcare industry. In furtherance of this alliance, we have and will
continue to make substantial investments and financial commitments for software
licenses, facilities development and recruitment and training of personnel.
There is no assurance we will be successful in our efforts to recruit and train
necessary personnel, nor as to how rapidly, if at all, we will be able to deploy
these newly trained personnel in billable engagements. Additionally, there can
be no assurance as to what extent the Microsoft platform will be embraced by the
healthcare community. The lack of such acceptance could materially and adversely
affect the Company's return on these investments.
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CLIENT CONCENTRATION
We derive a significant portion of our revenues from a relatively
limited number of clients. For example, during 1999 and 2000 our five largest
clients accounted for approximately 26.4% and 30.5%, respectively, of our
revenues. Three of our top five clients in 1999 were also among our five largest
clients during 2000. Except for our outsourcing contracts, which typically are
for more than one year, clients engage us on an assignment-by-assignment basis
and a client can generally terminate an assignment at any time without penalty.
In addition, the level of our consulting services required by any individual
client can diminish over the life of its relationship with us and we cannot give
any assurance that we will be successful in establishing relationships with new
clients as this occurs. Moreover, we cannot give any assurance that our existing
clients will continue to engage us for additional projects or do so at the same
revenue level. The loss of any significant client or significant contract (such
as a large outsourcing agreement) could also adversely affect our business. For
example, the recent acquisition of our client Georgetown University Medical
Center ("GUMC") by MedStar, has resulted in a significant reduction of our
services to GUMC effective March 1, 2001.
VENDOR SYSTEMS CONCENTRATION
The healthcare industry can choose among numerous healthcare
information systems solutions. Vendors of these products come into and out of
favor depending on a variety of factors. Although our consultants have expertise
with the information systems developed by numerous healthcare information system
vendors, we have historically experienced periodic revenue concentration from
client projects involving the products of an evolving but relatively small group
of vendors. We believe that this concentration generally reflects the current
preference of the healthcare industry participants that we serve for these
vendors. Should any one or more of these vendors (or any other vendors with
whose products we have substantial involvement) lose favor in the healthcare
industry, we would be required to refocus our efforts on alternative information
systems products of other vendors. The loss of a major portion of our business
with respect to any one of these vendors could adversely affect our business.
DEPENDENCE ON ALLIANCE PARTNERS
We have formed alliances and partnerships with various healthcare
product and service vendors, combining their applications and services with our
best practices to bring pre-packaged solutions to our clients. Should any one or
more of these alliance partners lose favor in the healthcare industry, we would
be required to refocus our efforts on alternative products and services of other
vendors. The loss of a major portion of our solution sales with respect to any
one of these vendors could adversely affect our business.
DEPENDENCE ON SENIOR MANAGEMENT
Our success is highly dependent upon the efforts, abilities and
business generation capabilities of our senior management team, including our
most senior executive officers: Ronald V. Aprahamian, Chairman; Richard D.
Helppie, Jr., Chief Executive Officer; George S. Huntzinger, President and Chief
Operating Officer; and Charles O. Bracken, Executive Vice President. Although we
manage client relationships at many levels, the loss of the services of any of
these key executives for any reason could adversely affect our business.
Moreover, certain client and industry relationships and areas of expertise
depend on the efforts, abilities and business generation capabilities of other
members of our management team. The loss of any of these management team members
could adversely affect our business.
COMPETITION
The market for our services is highly fragmented, highly competitive
and is subject to rapid change. We believe that we currently compete principally
with a variety of market segments, including:
- systems integration firms;
- national consulting firms, including the consulting divisions of
large accounting firms;
- general management consulting firms;
- regional and specialty consulting firms;
- internet development and e-commerce firms;
- information system vendors;
- service groups of computer equipment companies;
- facilities management companies; and
- outsourcing firms.
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Many of our competitors have significantly greater financial, technical
and marketing resources, generate greater revenues and have greater name
recognition than we do. 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 ourselves, to implement and/or customize such
software. In addition, vendors whose systems may enjoy wide market acceptance
and large market share could enter into exclusive or restrictive agreements with
other consulting firms which could eliminate or substantially reduce our
implementation work for those systems. Entry barriers into our markets are
relatively low and we have faced and expect to face additional competition from
new entrants into the healthcare consulting industry. In addition, combinations
and consolidations in the consulting industry will give rise to larger
competitors whose relative strengths are impossible to predict. We also compete
with our 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 more sophisticated internal information management
capabilities. Our inability to compete effectively with current and future
competitors and competitive pressures facing us (including wage pressures as the
consultant labor market tightens) may reduce our revenue or operating margins or
otherwise adversely affect our business.
LIMITED PROTECTION OF PROPRIETARY SYSTEMS AND PROCEDURES
Our success depends in part upon our information and communication
systems, databases, market offerings, best practices, tools and the methods and
procedures that we have developed specifically to serve our clients. In
addition, our enterprise-wide communications segment has and will continue to
develop groupware tools and applications. Because we have no patents or
registered copyrights, we rely on a combination of nondisclosure and other
contractual arrangements and copyright, trademark and trade secret laws to
protect our proprietary systems, information and procedures. We can offer no
assurance that the steps we have taken to protect these rights will be adequate
to prevent theft or detect unauthorized use and we may not take appropriate
steps to enforce our proprietary rights. We believe that our systems and
procedures and other proprietary rights do not infringe upon the rights of third
parties. However, if a party sues us in the future claiming that our business or
systems infringe on their intellectual property, we may have to enter into
expensive litigation regardless of the merits of such claims.
INFLUENCE OF PRINCIPAL STOCKHOLDER
Our principal stockholder and Chief Executive Officer, Richard D.
Helppie, Jr., beneficially owns approximately 30.7% of our outstanding shares of
common stock. As a result, Mr. Helppie will retain the voting power to exercise
significant influence over the outcome of matters requiring a stockholder vote,
including the election of directors and the approval of significant corporate
matters. In addition, several executive officers and directors, including
Messrs. Helppie and Aprahamian, have filed a Report on Schedule 13D, as amended,
disclosing their intention to purchase shares of our Common Stock in the open
market from time to time using a common broker. Although the members of this
"group" have disclaimed any agreement or understanding to vote or otherwise act
in concert with respect to their respective shares, we have no assurance that
they would not act together and we presume that their interests would be aligned
on any number of matters that might affect the Company. The beneficial ownership
attributed to this group, as of March 5, 2001, the date of the latest amendment,
was approximately 43.4%. Concentrations of control could adversely affect the
market price of the common stock or could delay or prevent a change in control.
STOCK PRICE VOLATILITY
The trading price of our common stock has fluctuated widely. In
addition, in recent years the stock market has experienced extreme price and
volume fluctuations. The overall market and the price of our common stock may
continue to fluctuate greatly in the future.
Our common stock has been publicly traded since our initial public
offering of common stock to the public in 1996. In 2000, the sale price ranged
from a low of $1.25 per share to a high of $20.875 per share. The market price
of our common stock could continue to fluctuate substantially due to a variety
of factors, including, but not limited to:
- Quarterly fluctuations in results of operations;
- Announcements concerning material outsourcing contracts and other
material engagements;
- Changes in the healthcare and IT consulting environments;
- Announcement and market acceptance of acquisitions;
- Adverse circumstances affecting the introduction or market
acceptance of new solutions and services we might offer in the
future;
- Announcements of key developments by competitors;
- Changes in earnings estimates by analysts;
- Sales of common stock by existing holders;
- General economic or market conditions; and
- Loss of key personnel.
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The market price for our common stock has and could also be affected by
our ability to meet analysts' expectations. Failure to meet such expectations,
has had in the past and could in the future, have a material adverse effect on
the market price of our common stock. In addition, the stock market is subject
to extreme price and volume fluctuations. This volatility has had a significant
effect on the market prices of securities issued by many companies for reasons
unrelated to the operating performance of these companies. In the past,
following periods of volatility in the market price of a company's securities,
securities class action litigation has often been instituted against such a
company. If similar litigation were instituted against us, it could result in
substantial costs and a diversion of our management's attention and resources,
which could have an adverse effect on our business, operating results and
financial condition.
IMPACT OF ANTI-TAKEOVER PROVISIONS ON OUR STOCK PRICE
Our certificate of incorporation and by-laws and the Delaware General
Corporation Law include provisions that may be deemed to have antitakeover
effects and may delay, defer or prevent a takeover attempt that stockholders
might consider in their best interests. Our board of directors is divided into
three classes, each of which is elected for staggered, three-year terms. Our
by-laws contain provisions under which only the chairman of the board, a
majority of the board of directors or stockholders owning at least 50% of our
capital stock may call meetings of stockholders and which require certain
advance notice procedures for nominating candidates for election to the board of
directors. Our board of directors is empowered to issue up to 1,000,000 shares
of preferred stock and to determine the price, rights, preferences and
privileges of such shares, without any further stockholder action. The existence
of this "blank-check" preferred stock could make more difficult or discourage an
attempt to obtain control of the Company by means of a tender offer, merger,
proxy contest or otherwise. In addition, this "blank check" preferred stock and
an issuance thereof, may have an adverse effect on the market price of our
common stock. Furthermore, we are subject to the antitakeover provisions of
Section 203 of the Delaware General Corporation Law that prohibit us from
engaging in a "business combination" with an "interested stockholder" for a
period of three years after the date of the transaction in which the person
first becomes an "interested stockholder," unless the business combination is
approved in a prescribed manner. The application of Section 203 and certain
other provisions of the certificate of incorporation could also have the effect
of delaying or preventing a change of control of the Company, which could
adversely affect the market price of our common stock.
EXECUTIVE OFFICERS OF THE REGISTRANT
Our executive officers are as follows:
Richard D. Helppie, Jr., age 45, has served as our Chief Executive
Officer since he founded Superior in 1984. He served as our President and CEO
from May 1984 to January 1999, and as Chairman from May 1984 to October 2000.
Mr. Helppie currently serves as a Director of the Company. Mr. Helppie has more
than 26 years of experience in the healthcare and information systems
industries.
George S. Huntzinger, age 51, has served as our President and Chief
Operating Officer since October 2000. Previously, Mr. Huntzinger served in
senior management roles for several healthcare organizations, including a
12-year term as president of CSC Healthcare. He is a member of numerous national
organizations and associations and previously sat on the boards of several
healthcare and financial organizations and has served the healthcare industry
for over 30 years.
Charles O. Bracken, age 51, has served as a Director since January 1,
1999 and has served as our Executive Vice President since joining Superior in
March 1987. Mr. Bracken has more than 29 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 information 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.
Richard R. Sorensen, age 44, has provided his financial expertise to
us in an advisory capacity since our inception in 1984. He joined us as
Controller in August of 1998 and became Chief Financial Officer in October
2000. Previously, he
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served as an audit partner with Plante & Moran, LLP. He is a Certified Public
Accountant.
ITEM 2. PROPERTIES
Our headquarters is located in approximately 24,000 square feet of
owned office space in Southfield, Michigan. We also lease an aggregate of
approximately 196,000 square feet of additional office space in Alpharetta,
Georgia; Atlanta, Georgia; Plano, Texas; San Diego, California; Woodland Hills,
California; Southfield, Michigan; Ann Arbor, Michigan; Chicago, Illinois;
Nashville, Tennessee; Kansas City, Missouri; Cheshire, Connecticut; Englewood,
Colorado; Minneapolis, Minnesota; and Pittsburgh, Pennsylvania. We have also
purchased an approximately 6,200 square foot building in Safety Harbor, Florida,
for use as an office and training facility. After giving effect to space
reductions from our recent restructuring, we believe that our facilities are
adequate for our current needs and that additional facilities can be leased or
acquired to meet future needs. We are currently consolidating offices and have
undertaken an initiative to sublet our office space in Los Angeles, California,
Kansas City, Missouri and Southfield, Michigan.
ITEM 3. LEGAL PROCEEDINGS
We are party to litigation from time to time. However, we are not now
a party to, and are not aware of, any pending or threatened litigation that we
currently anticipate would have a material adverse effect on our company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our 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 fiscal years 1999 and 2000.
FISCAL 1999
First Quarter.................................... 47.250 26.188
Second Quarter................................... 39.500 21.625
Third Quarter.................................... 29.750 11.063
Fourth Quarter................................... 16.188 10.625
FISCAL 2000
First Quarter.................................... 20.875 13.625
Second Quarter................................... 18.000 3.750
Third Quarter.................................... 4.813 1.813
Fourth Quarter................................... 3.938 1.250
At March 30, 2001, we had approximately 108 stockholders of record.
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We have not paid cash dividends to the holders of our Common Stock. It
is our present intention to retain earnings for use in the growth of our
business. Accordingly, we do not anticipate that cash dividends will be paid in
the foreseeable future.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
You should read the following selected financial data in conjunction
with our financial statements, the related notes and "Management's Discussion
and Analysis of Financial Condition and Results of Operations," included
elsewhere in this report. The selected financial data as of December 31, 1998,
1999 and 2000 have been derived from our audited financial statements included
elsewhere in this report. The selected financial data as of December 31, 1996
and 1997 have been derived from our audited financial statements not included
elsewhere in this report.
YEAR ENDED DECEMBER 31,
------------------------------------------------------------------------
PRO FORMA
1996 1996(1) 1997(2) 1998(2) 1999(2) 2000
--------- --------- --------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENT OF OPERATIONS DATA:
Revenues ............................................ $ 51,835 $ 51,835 $ 76,895 $ 124,746 $ 149,349 $ 99,237
Cost of services .................................... 25,524 25,524 39,260 65,026 91,714 77,674
Selling, general and administrative expenses ........ 21,891 21,891 30,378 47,425 64,590 72,320
Costs incurred in connection with new
business initiative ............................... -- -- -- -- 4,840 --
Restructuring charges ............................... -- -- -- -- -- 4,165
Impairment of goodwill .............................. -- -- -- -- -- 10,221
Executive compensation expense (3) .................. 4,579 1,060 858 908 1,007 958
--------- --------- --------- --------- --------- ---------
Earnings (loss) from operations ..................... (159) 3,360 6,399 11,387 (12,802) (66,101)
Other income, net ................................... 84 84 2,728 4,572 1,874 6,056
Costs incurred in connection with mergers ........... -- -- (917) -- -- --
--------- --------- --------- --------- --------- ---------
Earnings (loss) before income taxes and
extraordinary item ................................ (75) 3,444 8,210 15,959 (10,928) (60,045)
Provision (benefit) for income taxes ................ 689 1,364 3,625 6,331 (3,967) (2,492)
--------- --------- --------- --------- --------- ---------
Earnings (loss) before extraordinary item ........... (764) 2,080 4,585 9,628 (6,961) (57,553)
Extraordinary gain on early extinguishment of
debt, net of income taxes ........................ 231 231 -- -- -- --
--------- --------- --------- --------- --------- ---------
Net earnings (loss) ................................. $ (533) $ 2,311 $ 4,585 $ 9,628 $ (6,961) $ (57,553)
========= ========= ========= ========= ========= =========
Net earnings (loss) per share - basic ............... $ (0.09) $ 0.38 $ 0.54 $ 0.94 $ (0.67) $ (5.48)
Net earnings (loss) per share - diluted ............. $ (0.09) $ 0.38 $ 0.53 $ 0.91 $ (0.67) $ (5.48)
Shares used in calculating net
earnings (loss) per share - basic ................ 6,014 6,014 8,519 10,266 10,340 10,511
Shares used in calculating net
earnings (loss) per share - diluted .............. 6,014 6,080 8,670 10,580 10,340 10,511
YEAR ENDED DECEMBER 31,
------------------------------------------------------------------------
BALANCE SHEET DATA: 1996 1997 1998 1999 2000
------------ ------------ ----------- ------------ -----------
Working capital............................. $ 39,962 $ 97,632 $ 78,445 $ 61,811 $ 29,622
Total assets................................ 55,324 119,401 133,726 186,597 78,632
Total debt.................................. 2,448 189 61 - 5,125
Total stockholders' equity.................. 41,370 108,363 121,494 150,935 58,340
(1) The pro forma statement of operations information for 1996 has been computed
for the pro forma period to adjust our net earnings to 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 to record income taxes
assuming an effective tax rate of 39.6% for the year ended December 31,
1996, which would have been recorded had we been a C Corporation during such
period.
(2) Statement of operations data for fiscal 1997, 1998 and 1999 includes results
of acquired businesses as described in Note 2 to our consolidated financial
statements included elsewhere in this report.
(3) Executive compensation expense includes salary and bonuses for Richard D.
Helppie, Jr., Charles O. Bracken and Robert R. Tashiro, our former
president, and reflects compensation agreements implemented in connection
with closing of our IPO. These compensation agreements did not apply to
limit amounts paid to these three officers on or prior to the closing of the
IPO.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
We conduct our business in two segments through our primary operating
subsidiary, Superior Consultant Company, Inc. ("Superior"). We are a leading
provider of Digital Business Transformation(TM) services primarily to the
healthcare industry, connecting online technologies to business processes that
have traditionally been conducted offline. We provide all sectors of the
industry with an integrated suite of advisory, solution-centric and process
improvement consulting services and information technology outsourcing.
Prior to October 1, 2000, we were organized into the three business
segments of consulting, outsourcing and e-health. Effective October 1, 2000 we
organized into the two business segments of consulting and outsourcing. The
consulting segment provides information technology, as well as strategic and
operations management consulting, solutions and application support to a broad
cross-section of healthcare industry participants and information systems
vendors. We also assist clients to leverage the power, speed and value of
Internet technologies to achieve efficiencies in business and operations,
realize measurable return on investment, connect with consumers, physicians and
trading partners and provide total solutions in business-to-business and
business-to-consumer e-commerce. From strategic planning and go-to-market
strategies to Internet enabling and development, integration and implementation,
we assist our clients to achieve supply chain efficiencies, accelerate revenue
and manage clinical content. The outsourcing segment helps healthcare providers
simplify their management agendas, improve their return on information systems
investment and strengthen their technology management by ensuring client access
to an outsourcer's ability to deliver higher quality at lower cost and help them
avoid certain capital expenses. The outsourcing segment 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.
During 1999 and 2000, we continued to expand our e-commerce, solution
sales and systems integration capabilities. As healthcare and other sectors move
increasingly to Internet and web-based technologies and applications and as we
continue to innovate services and solutions to develop and capitalize on this
growing market, we will incur risks related to our participation in such
untested opportunities, markets and quickly evolving lines of business. Such
risks can include, but are not limited to, new and unforeseen technologies
superseding development of the Internet and/or the systems integration platforms
in which we invest; the e-commerce and/or systems integration markets taking
turns not foreseen by us and adverse to the positioning and investments
undertaken by us; slowness of traditional healthcare clients to adopt new
technologies; and increased competition for consultant talent in the e-commerce
field, increasing our cost of providing services.
We derive a substantial portion of our revenues from fees for
professional services. We establish 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 for
time and materials engagements are generally contracted to be 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. Billings for fixed-fee projects and pre-packaged
solution sales are billed by deliverable or on a periodic basis, generally
monthly. We recognize revenue on fixed fee projects in a manner similar to the
percentage of completion basis. Increased use of fixed-fee contracts subjects us
to increased risks, including cost overruns. For outsourcing engagements, we
recognize revenue in the amount billable under the contract, which is typically
billable on a monthly basis. As of December 31, 2000, we have seven significant
contracts to provide healthcare IT outsourcing services. In addition, we provide
help desk and call center support, typically billable on a per seat per month
basis. There can be no assurance that we will be able to achieve profit margins
on outsourcing and support contracts which are consistent with our historical
levels of profitability. In our consulting segment, we also derive revenues from
fees generated from our Digital Business Transformation(TM) partnerships. This
revenue is generally recognized ratably over the life of the contract.
We seek to increase revenue through various means, including an
increase in the number of projects for existing and new clients and expanded
geographic presence. In addition, we seek to increase revenues by expanding our
range of specialty services with a focus on opportunities arising from the
demand for Internet, system security and HIPAA expertise. We manage our client
development efforts through client partner organizations having specific
geographic responsibility and focus.
Our 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 our cost of
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services as a percentage of revenues. This trend may or may not continue
depending on whether competition for recruiting and retaining skilled
consultants intensifies, particularly in the area of e-commerce services. We
have sought to address this issue by adding an additional variable portion of
compensation payable upon the achievement of measurable performance goals. In
addition, we have sought to address compensation expense pressures through
increased use of stock options as an overall part of our compensation package.
These efforts have been hampered by the impact of our current stock price.
Our cost of services as a percentage of revenues is also impacted by
our consultant utilization. We attempt to optimize 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 have and can
result in periods when consultants are not fully utilized. An unanticipated
termination of a significant project has and can cause us to experience lower
consultant utilization, resulting in a higher than expected number of unassigned
consultants.
During 2000, the healthcare industry experienced a slow-down in
consulting expenditures as fiscal constraints imposed by factors such as the
Balanced Budget Act and lingering Y2K transition effects combined forces to
dampen overall industry demand for new IT service consulting projects. These
factors were coupled with a lengthening in the outsourcing sales cycle.
Furthermore, the Balanced Budget Act continues to adversely affect the financial
stability of our clients and may impact their ability to pay for professional
services rendered.
In addition, our establishment of new competency centers, services and
market offerings and hiring of consultants in peak hiring periods have and can
from time to time adversely affect utilization. For example, we intend to grow
our e-commerce services to capture increased client demand expected to occur in
this area and this growth will impact utilization as this new area comes online.
Also, seasonal factors, such as vacation days and total business days in a
quarter, as well as the timing of our annual employees' meeting have and can
result in lower consultant utilization. Variations in market offering solution
sales and consultant utilization can also result in quarterly variability of our
cost of services as a percentage of revenues. Our consultants are generally
employed on a full-time basis and therefore we will, in the short run, incur
substantially all of our employee-related costs even during periods of low
utilization, as the majority of employment costs of these personnel are fixed.
Selling, general and administrative expenses include the costs of
recruiting, training and re-training, continuing education, marketing,
facilities, administration, including compensation and benefits, outside
professional fees, charges related to the accounts receivable allowance,
litigation and claims, equipment depreciation and amortization of goodwill.
During the year ended December 31, 2000, as compared with the year
ended December 31, 1999, we experienced a decline in demand for our services.
During the year ended December 31, 2000, we implemented a restructuring plan,
which was endorsed by our Board of Directors. The restructuring plan was aimed
at improving future overall financial performance through operating cost
reductions and the optimization of our work force. As a result of the
restructuring plan, we reduced quarterly operating expenses by $13.3 million
from the third quarter of 2000 to the fourth quarter of 2000 and additional
reductions are expected in 2001. We incurred one-time restructuring charges of
approximately $4.2 million during the year ended December 31, 2000.
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RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, selected
statement of operations 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,
1998 1999 2000
---- ---- ----
Revenues...................................................... 100.0% 100.0% 100.0%
Cost of services.............................................. 52.1% 61.4% 78.3%
Selling, general and administrative expenses.................. 37.4% 42.4% 71.6%
Amortization of goodwill...................................... 0.7% 0.9% 1.2%
Costs incurred in connection with new business initiative..... 0.0% 3.2% 0.0%
Restructuring charges......................................... 0.0% 0.0% 4.2%
Impairment of goodwill........................................ 0.0% 0.0% 10.3%
Executive compensation expense................................ 0.7% 0.7% 1.0%
-------- ------- --------
Earnings (loss) from operations............................... 9.1% (8.6%) (66.6%)
Other income, net............................................. 3.7% 1.3% 6.1%
-------- ------- --------
Earnings (loss) before income taxes........................... 12.8% (7.3%) (60.5%)
Provision (benefit) for income taxes.......................... 5.1% (2.6%) (2.5%)
-------- ------- --------
Net earnings (loss)........................................... 7.7% (4.7%) (58.0%)
======== ======= ========
2000 COMPARED TO 1999
Revenues. Revenues in the consulting segment decreased by $60.7
million, or 54.2%, to $51.2 million for the year ended December 31, 2000, as
compared to $111.9 million for the year ended December 31, 1999. The revenue
decrease was due primarily to lower consultant headcount and a decline in demand
for this segment's services due to the weaker healthcare and technology markets.
Revenues in the outsourcing segment decreased by $8.8 million, or 23.9%, to
$28.0 million for the year ended December 31, 2000, as compared to $36.8 million
for the year ended December 31, 1999. The revenue decrease was primarily
attributable to lower consultant utilization in this segment due to our decision
to withdraw from an outsourcing agreement as a result of the client's decision
in 1999 to compete against us in the local outsourcing market, which was
partially offset by two new outsourcing agreements signed during 2000. Revenues
in the e-Health segment increased by $19.3 million to $20.0 million for the year
ended December 31, 2000, as compared to $0.7 million for the year ended December
31, 1999. The e-Health segment was not established until the third quarter of
1999, did not become fully operational until 2000 and was reorganized into the
consulting segment in October, 2000.
Cost of Services. Cost of services in the consulting segment decreased
by $31.6 million, or 48.4%, to $33.8 million for the year ended December 31,
2000, as compared to $65.4 million for the year ended December 31, 1999. The
decrease was due primarily to adjustments we made to optimize our work force
through the redeployment of staff to the e-Health segment and consultant
reductions. Cost of services as a percentage of revenues for the consulting
segment increased to 65.9% for the year ended December 31, 2000, as compared to
58.5% for the year ended December 31, 1999. The increase was attributable to
lower consultant utilization and a lower revenue base for this segment. Cost of
services in the outsourcing segment decreased by $4.3 million, or 16.8%, to
$21.3 million for the year ended December 31, 2000, as compared to $25.6 million
for the year ended December 31, 1999. The decrease was primarily the result of
reduced consultant compensation expenses in this segment. Cost of services as a
percentage of revenues for the outsourcing segment increased to 76.0% for the
year ended December 31, 2000, as compared to 69.5% for the year ended December
31, 1999. The increase is primarily attributable to the development of
additional capacity within outsourcing to capitalize on anticipated future
demand and lower consultant utilization in this segment. Cost of services in the
e-Health segment increased by $21.9 million to $22.6 million for the year ended
December 31, 2000, as compared to $0.7 million for the year ended December 31,
1999. The increase is primarily due to the redeployment of staff from the
consulting segment as a result of our continued pursuit to gain market share in
the e-Health sector. Cost of services as a percentage of revenues for the
e-Health segment increased to 113.0% for the year ended December 31, 2000, as
compared to 103.6% for the year ended December 31, 1999. The increase is
attributable to lower consultant utilization. Effective October 1, 2000, the
e-Health segment was reorganized into the consulting segment.
Selling, general and administrative expenses. Selling, general and
administrative expenses increased by $7.7 million, or 11.7%, to $73.3 million
for the year ended December 31, 2000, as compared to $65.6 million for the year
ended December 31, 1999. The increase was due to charges related to the accounts
receivable allowance, primarily for specifically identified clients and
amounts, litigation and claims, as well as increased
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facility expenses. Selling, general and administrative expenses as a percentage
of revenues increased to 73.8% from 43.9%. The increase was due to the
additional charges discussed above, as well as a lower revenue base than
anticipated.
Restructuring charges. We incurred approximately $4.2 million of
restructuring charges in connection with the implementation of a restructuring
plan during the year ended December 31, 2000. The restructuring charges
consisted primarily of severance costs related to a reduction in workforce, the
write-off of property and equipment and the closing of various office
facilities. The restructuring plan was aimed at improving future overall
financial performance through operating cost reductions and the optimization of
our workforce. See Note 10 of our 2000 Consolidated Financial Statements, "Costs
Incurred in Connection with New Business Initiative and Restructuring," for
further details on the components of the restructuring charges.
Impairment of goodwill. During the year ended December 31, 2000, as a
result of management's strategic review of our operations, including relevant
cash flows, estimated future operating results, industry trends and other
available information, it was determined that the carrying value of goodwill
exceeded its current fair value. The current fair value of goodwill was
determined using estimated discounted future cash flows. During the year ended
December 31, 2000, we recorded a non-cash impairment loss of approximately $10.2
million to write down the carrying value of goodwill.
Other income and expense. Other income was $6.1 million for the year
ended December 31, 2000, as compared to $1.9 million for the year ended December
31, 1999. The increase was primarily due to the $5.2 million net gain recognized
on the sale of investment securities during the year ended December 31, 2000. We
received proceeds of $27.9 million from the sale of our debt securities,
5,172,930 shares of drkoop.com, 331,541 shares of Healtheon/WebMD and 63,500
shares of Neoforma.com common stock.
1999 COMPARED TO 1998
Revenues. Revenues in the consulting segment increased by $12.8
million, or 12.9%, to $111.9 million for the year ended December 31, 1999, as
compared to $99.1 million for the year ended December 31, 1998. The revenue
increase was due primarily to continued growth in core lines of business and
activity from our acquisitions. Revenues in the outsourcing segment increased by
$11.1 million, or 43.3%, to $36.8 million for the year ended December 31, 1999,
as compared to $25.7 million for the year ended December 31, 1998. The revenue
increase was due primarily to revenue realized from the outsourcing contracts
consummated after the second quarter of 1998. Revenues in the e-Health segment
were $0.7 million for the year ended December 31, 1999. The e-Health segment was
not established until late 1999 and had minimal activity.
Cost of Services. Cost of services in the consulting segment increased
by $17.1 million, or 35.6%, to $65.4 million for the year ended December 31,
1999, as compared to $48.3 million for the year ended December 31, 1998. 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 revenues for the consulting segment increased to
58.5% for the year ended December 31, 1999, as compared to 48.7% for the year
ended December 31, 1998. The increase was attributable to lower consultant
utilization for this segment. Cost of services in the outsourcing segment
increased by $8.8 million, or 52.5%, to $25.6 million for the year ended
December 31, 1999, as compared to $16.8 million for the year ended December 31,
1998. The increase was due to higher compensation expenses in this segment. Cost
of services as a percentage of revenues for this segment increased to 69.5% for
the year ended December 31, 1999, as compared to 65.3% for the year ended
December 31, 1998. The increase is attributable to lower consultant utilization
in this segment. Cost of services in the e-Health segment were $0.7 million for
the year ended December 31, 1999. The e-Health segment was not established until
late 1999 and had minimal activity.
Selling, general and administrative expenses. Selling, general and
administrative expenses increased by $17.3 million, or 35.7%, to $65.6 million
for the year ended December 31, 1999, as compared to $48.3 million for the year
ended December 31, 1998. The increase was due to incentive and other
compensation expenses associated with the addition of key personnel, as well as
higher recruiting, marketing, outside professional fees, costs associated with
investment and acquisition activities, continuing education and training
expenses relating to the new lines of business. Selling, general and
administrative expenses as a percentage of revenues increased to 43.9% from
38.7%. The increase was due to the launch of new lines of business, higher
recruiting, marketing and outside professional fee expenses, as well as a lower
revenue base than anticipated. In addition, goodwill amortization as a
percentage of revenues increased to 0.9% in 1999, as compared to 0.7% in 1998.
Costs incurred in connection with new business initiative. We incurred
approximately $4.8 million of costs in connection with the start-up of a new
business initiative, of which approximately $4.4 million were non-cash charges
primarily
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related to the issuance of warrants. See Note 10 of our 2000 Consolidated
Financial Statements, "Costs Incurred in Connection with New Business Initiative
and Restructuring," for a description of the costs incurred.
Other income and expense. Other income was $1.9 million for the year
ended December 31, 1999, as compared to $4.6 million of other income for the
year ended December 31, 1998. The change was due to reduced interest earned on
our short-term investments. Our short-term investments were lower as of December
31, 1999, in comparison to December 31, 1998, due primarily to acquisitions,
equity investments and additions to property and equipment.
LIQUIDITY AND CAPITAL RESOURCES
During the year ended December 31, 2000, as compared with the year
ended December 31, 1999, we experienced a decline in demand for our services.
During the year ended December 31, 2000, we implemented a restructuring plan,
which was endorsed by our Board of Directors. In connection with the
restructuring plan, we have undertaken various actions to reduce our cost
structure, improve our competitiveness and restore sustainable profitability. As
a result, we recorded restructuring charges of approximately $4.2 million during
the year ended December 31, 2000. The restructuring charges consisted primarily
of severance costs related to a reduction in workforce, the write-off of
property and equipment and the closing of various office facilities. The vast
majority of the restructuring expenses were paid in fiscal 2000, however, we
currently anticipate one-time cash outflows associated with the implementation
of the restructuring plan of approximately $480,000 during 2001, which are
included in accrued liabilities as of December 31, 2000.
Our primary capital needs have been, and will be, to fund our
e-commerce, solution sales and systems integration initiatives, capital
expenditures and investments. We believe after giving effect to the
restructuring plan and assuming revenue consistent with current levels, that our
current cash and cash equivalents, equity investment, cash generated from
operations, plus available credit under our bank credit facility, will be
sufficient to finance our working capital and capital expenditure requirements
for at least the next twelve months.
At December 31, 2000, we had cash and cash equivalents of $20.8 million
and working capital of $29.6 million, as compared with cash and cash equivalents
of $16.7 million and working capital of $61.8 million at December 31, 1999.
Currently, our remaining maximum contingency payments relating to our completed
business acquisitions total approximately $6.5 million ($1.7 million in cash and
$4.8 million in common stock) payable during the year ended December 31, 2001.
We own common stock in Neoforma.com, Inc., a publicly traded company. During
October 2000, our investment in Neoforma.com became eligible for sale under Rule
144.
As of December 31, 2000, we had a line of credit arrangement at
Comerica Bank N.A. allowing for borrowings of up to $15.0 million, based on
qualifying accounts receivable. Based on the eligibility provisions in the loan
agreement, we could have borrowed $11.9 million on the line of credit as of
December 31, 2000; $5.1 million was outstanding. Borrowings bear interest at the
greater of the prime rate or 1% plus the Federal funds effective rate. The
effective interest rate at December 31, 2000, was 9.5%. The line is
collateralized by accounts receivable and any deposits held by the bank. We did
not meet a certain financial operating covenant as of December 31, 2000.
Subsequent to December 31, 2000, the credit agreement was amended to waive the
covenant default as of December 31, 2000, modify the financial covenants for
2001 and reduce the amount of the line of credit to $8,000,000.
Net cash used in operations was $23.9 million for the year ended
December 31, 2000, as compared to net cash provided by operations of $0.5
million for the year ended December 31, 1999. The increase in net cash used in
operations was primarily due to the net operating loss excluding the impairment
of goodwill, bad debt expense, write-off of property and equipment and the
gain on sale of investment securities; which was partially offset by a reduction
in accounts receivable.
Net cash of $22.9 million provided by investing activities during the
year ended December 31, 2000, consists of proceeds from the sale of investment
securities and property and equipment less additions to property and equipment
and contingency payments made relating to prior acquisitions as required by the
applicable purchase agreements. As of March 30, 2001, the investment in
Neoforma.com has a cost basis of $4.7 million and a market value of $1.0
million.
Net cash of $5.2 million provided by financing activities during the
year ended December 31, 2000, consists primarily of proceeds received on our
line of credit.
We do not believe that inflation has had a material effect on the
results of our operations.
QUARTERLY RESULTS
The following table sets forth certain unaudited quarterly operating
information for each of the last eight quarters.
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QUARTER ENDED
MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31,
1999 1999 1999 1999 2000 2000 2000 2000
---- ---- ---- ---- ---- ---- ---- ----
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Revenues.................................... $ 40,029 $42,146 $37,584 $ 29,590 $ 28,073 $ 25,495 $23,312 $22,357
Cost of services............................ 20,749 21,870 24,508 24,587 23,029 21,325 18,368 14,952
Selling, general and administrative
expenses................................. 14,897 15,653 18,102 16,945 18,370 18,056 23,378 13,474
Costs incurred in connection with
new business initiative.................. - 4,840 - - - - - -
Restructuring charges....................... - - - - - - 2,322 1,843
Impairment of goodwill...................... - - - - - - 10,221 -
-------- ------- ------- -------- -------- -------- ------- -------
Earnings (loss) from operations............. 4,383 (217) (5,026) (11,942) (13,326) (13,886) (30,977) (7,912)
Other income, net........................... 478 579 380 437 9,340 414 (3,761) 63
-------- ------- ------- -------- -------- -------- ------- -------
Earnings (loss) before income taxes......... 4,861 362 (4,646) (11,505) (3,986) (13,472) (34,738) (7,849)
Provision (benefit) for income taxes........ 1,876 157 (1,638) (4,362) (1,404) (1,088) - -
-------- ------- ------- -------- -------- -------- ------- -------
Net earnings (loss)......................... $ 2,985 $ 205 $(3,008) $ (7,143) $ (2,582) $(12,384) $(34,738) $(7,849)
======== ======= ======= ======== ======== ======== ======== =======
Net earnings (loss) per share -basic........ $ 0.29 $ 0.02 $ (0.29) $ (0.69) $ (0.25) $ (1.19) $ (3.34) $ (0.72)
Net earnings (loss) per share -diluted...... $ 0.28 $ 0.02 $ (0.29) $ (0.69) $ (0.25) $ (1.19) $ (3.34) $ (0.72)
Shares used in calculating net
earnings (loss) per share - basic........ 10,347 10,368 10,328 10,317 10,342 10,384 10,390 10,925
Shares used in calculating net
earnings (loss) per share - diluted...... 10,609 10,517 10,328 10,317 10,342 10,384 10,390 10,925
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, fluctuations in sales of our market offerings, slow adoption rate of
new solutions, consultant hiring and utilization. The timing of revenues varies
from quarter to quarter because our 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, long sales cycles for
outsourcing engagements and general economic conditions. In addition, the timing
of the establishment of new competency centers, market offerings, 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 us to experience lower consultant utilization. Because a
significant percentage of our 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.
As a result of the factors above, period to period comparison of our
revenues and operating results may not be meaningful. You should not rely on
these comparisons as indicators of future performance as no assurances can be
given that quarterly results will not fluctuate, causing a material adverse
effect on our operating results and financial conditions.
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-17. An index to such statements appears on page F-l.
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
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PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
We are incorporating the information required by this item with respect
to the our directors by reference from our definitive proxy statement, which we
expect to file with the Commission on or prior to April 30, 2001. We have set
forth information regarding executive officers in Part I of this report.
ITEM 11. EXECUTIVE COMPENSATION
We are incorporating the information required by this item by reference
from our definitive proxy statement, which we expect to file with the Commission
on or prior to April 30, 2001.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
We are incorporating the information required by this item by reference
from our definitive proxy statement, which we expect to file with the Commission
on or prior to April 30, 2001.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
We are incorporating the information required by this item by reference
from our definitive proxy statement, which we expect to file with the Commission
on or prior to April 30, 2001.
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.
27
28
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION PAGE
- ------ ----------- ----
3.1 Amended and Restated Certificate of Incorporation of the Company,
as amended (7)
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 Second Amendment to Long-Term Incentive Plan (8)
10.5 Lease dated March 21, 1996 between PMTC Limited Partnership and Superior (2)
10.6 Form of Tax Indemnification Agreement (1)
10.7 Compensation Agreement dated January 5, 1998 between Richard D. Helppie,
Jr. and the Company (7)
10.8 Employment Agreement dated January 5, 1998 between Charles O. Bracken
and the Company (7)
10.9 Employment Agreement dated January 20, 1997 between Richard P. Saslow and
the Company (7)
10.10 Employment Agreement dated October 11, 2001 between George S. Huntzinger
and the Company (*)
10.11 Employment Agreement dated October 11, 2001 between Steven H. Smith and
the Company (*)
10.12 Employment Agreement dated August 10, 1998, as amended January 7, 2001,
between Richard R. Sorensen and the Company (*)
10.13 Resignation and Separation Agreement dated December 1, 2000, between
James T. House and the Company (*)
10.14 Promissory Note dated April 20, 1995, executed by Charles O. Bracken in
favor of the Company (1)
10.15 Pledge Agreement dated April 20, 1995, between Charles O. Bracken and
the Company (1)
10.16 Stock Purchase Agreement dated October 11, 2000, between Ronald V. Aprahamian and
the Company (9)
10.17 Promissory Note dated October 11, 2000, executed by Ronald V. Aprahamian in
favor of the Company (9)
28
29
EXHIBIT
NUMBER DESCRIPTION PAGE
- ------ ----------- ----
10.18 Pledge Agreement dated October 11, 2000, between Ronald V. Aprahamian and
the Company (9)
10.19 Stock Purchase Agreement dated October 11, 2000, between George S. Huntzinger and
the Company (9)
10.20 Promissory Note dated October 11, 2000, executed by George S. Huntzinger in
favor of the Company (9)
10.21 Pledge Agreement dated October 11, 2000, between George S. Huntzinger and
the Company (9)
10.22 Stock Purchase Agreement dated October 11, 2000, between Steven H. Smith and
the Company (9)
10.23 Promissory Note dated October 11, 2000, executed by Steven H. Smith in
favor of the Company (9)
10.24 Pledge Agreement dated October 11, 2000, between Steven H. Smith and
the Company (9)
10.25 Plan and Agreement of Merger dated July 28, 1997, among the Company,
CMSL Acquisition Corp., COMSUL, LTD., and certain shareholders
of COMSUL, LTD (4)
10.26 Merger Agreement dated as of August 14, 1997 among the Company,
Chi Acquisition Co., The Chi Group, Inc. and certain stockholders
of the Chi Group, Inc. (5)
10.27 Asset Purchase Agreement, dated August 20, 1998 among the Company
Enterprise Consulting Group, Inc., Whittaker Corporation and
Aviant Information, Inc. (6)
10.28 Amended and Restated Credit Agreement, dated September 12, 2000, between
the Company and Comerica Bank (*)
10.29 First Amendment to Amended and Restated Credit Agreement, dated
October 26, 2000, between the Company and Comerica Bank (*)
10.30 Second Amendment to Amended and Restated Credit Agreement, dated
March 23, 2001, between the Company and Comerica Bank (*)
21.1 Subsidiaries of Superior Consultant Holdings Corporation (7)
* 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.
29
30
(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.
(7) Incorporated by reference from the Registrant's Form 10-K as filed on
March 31, 1999.
(8) Incorporated by reference from the Registrant's Information Statement on
Form 14A as filed April 9, 1999.
(9) Incorporated by reference from the Schedule 13D filed with respect to
the Company's securities on November 13, 2000.
30
31
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
April 2, 2001 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
/s/ RONALD V. APRAHAMIAN Chairman April 2, 2001
- ---------------------------------
Ronald V. Aprahamian
/s/ REGINALD M. BALLANTYNE III Director April 2, 2001
- ---------------------------------
Reginald M. Ballantyne III
/s/ CHARLES O. BRACKEN Director and Executive April 2, 2001
- --------------------------------- Vice President
Charles O. Bracken
/s/ KENNETH S. GEORGE Director April 2, 2001
- ---------------------------------
Kenneth S. George
/s/ RICHARD D. HELPPIE, JR. Chief Executive Officer April 2, 2001
- --------------------------------- (Principal Executive
Richard D. Helppie, Jr. Officer) and Director
/s/ BERNARD J. LACHNER Director April 2, 2001
- ---------------------------------
Bernard J. Lachner
/s/ DOUGLAS S. PETERS Director April 2, 2001
- ---------------------------------
Douglas S. Peters
/s/ RICHARD P. SASLOW Vice President, General April 2, 2001
- --------------------------------- Counsel and Director
Richard P. Saslow
/s/ JOHN L. SILVERMAN Director April 2, 2001
- ---------------------------------
John L. Silverman
/s/ RICHARD R. SORENSEN Chief Financial Officer April 2, 2001
- --------------------------------- (Principal Financial and
Richard R. Sorensen Accounting Officer)
31
32
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, 1999 and 2000........... F-3
Consolidated Statements of Operations for the years
ended December 31, 1998, 1999 and 2000................................. F-4
Consolidated Statements of Stockholders' Equity for the years ended
December 31, 1998, 1999 and 2000....................................... F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 1998, 1999 and 2000....................................... F-6
Notes to Consolidated Financial Statements............................. F-7
F-1
33
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, 1999 and 2000, and the related statements of operations,
stockholders' equity and cash flows for each of the three years in the period
ended December 31, 2000. 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 auditing standards generally
accepted in the United States of America. 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,
1999 and 2000, and the results of their consolidated operations and their
consolidated cash flows for each of the three years in the period ended December
31, 2000, in conformity with accounting principles generally accepted in the
United States of America.
/s/GRANT THORNTON LLP
Southfield, Michigan
February 26, 2001
F-2
34
SUPERIOR CONSULTANT HOLDINGS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31,
----------------------
ASSETS 1999 2000
-------- -------
(In thousands)
Current assets
Cash and cash equivalents................................................................. $ 16,691 $20,825
Short-term investments.................................................................... 13,908 -
Accounts receivable, net.................................................................. 38,728 19,474
Accrued interest receivable and prepaid expenses.......................................... 3,201 3,516
Refundable income taxes................................................................... 5,482 6,099
------- -------
Total current assets......................................................... 78,010 49,914
Property and equipment, net................................................................... 20,695 17,239
Goodwill, net................................................................................. 18,097 8,973
Investments................................................................................... 69,683 664
Deferred income taxes......................................................................... - 1,615
Other long-term assets........................................................................ 112 227
-------- -------
Total Assets................................................................. $186,597 $78,632
======== =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Notes payable to bank..................................................................... $ - $ 5,125
Accounts payable.......................................................................... 6,093 7,629
Accrued liabilities....................................................................... 3,624 3,773
Deferred revenue.......................................................................... 6,254 3,765
Deferred income taxes..................................................................... 228 -
-------- -------
Total current liabilities.................................................... 16,199 20,292
Deferred income taxes......................................................................... 19,463 -
Commitments and contingencies (Note 15)....................................................... - -
Stockholders' equity
Preferred stock; authorized, 1,000,000 shares of $.01 par value; issued and outstanding,
2,000 shares as of December 31, 1999 and 1,000 shares as of December 31, 2000.......... - -
Common stock; authorized, 30,000,000 shares of $.01 par value; issued, 10,426,167
shares as of December 31, 1999 and 11,074,846 shares as of December 31, 2000........... 104 111
Additional paid-in capital................................................................ 114,174 116,003
Stockholders' notes receivable............................................................ (636) (1,553)
Accumulated other comprehensive income (loss)............................................. 33,588 (2,373)
Treasury stock - at cost; 85,000 shares as of December 31, 1999 and 2000.................. (2,270) (2,270)
Retained earnings (deficit)............................................................... 5,975 (51,578)
-------- -------
Total stockholders' equity................................................... 150,935 58,340
-------- -------
Total Liabilities and Stockholders' Equity................................... $186,597 $78,632
======== =======
The accompanying notes are an integral part of the financial statements.
F-3
35
SUPERIOR CONSULTANT HOLDINGS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended December 31,
------------------------------------
1998 1999 2000
-------- -------- -------
(In thousands, except per share data)
Revenues............................................................ $124,746 $149,349 $ 99,237
Operating costs and expenses
Cost of services................................................ 65,026 91,714 77,674
Selling, general and administrative expenses.................... 48,333 65,597 73,278
Costs incurred in connection with new business initiative....... - 4,840 -
Restructuring charges........................................... - - 4,165
Impairment of goodwill.......................................... - - 10,221
-------- -------- --------
Total operating costs and expenses......................... 113,359 162,151 165,338
-------- -------- --------
Earnings (loss) from operations............................ 11,387 (12,802) (66,101)
Other income, net................................................... 4,572 1,874 6,056
-------- -------- --------
Earnings (loss) before income taxes........................ 15,959 (10,928) (60,045)
Provision (benefit) for income taxes................................ 6,331 (3,967) (2,492)
-------- -------- --------
Net earnings (loss)........................................ $ 9,628 $ (6,961) $(57,553)
======== ======== ========
Net earnings (loss) per share
Basic........................................................... $ 0.94 $ (0.67) $ (5.48)
======== ======== ========
Diluted......................................................... $ 0.91 $ (0.67) $ (5.48)
======== ======== ========
Weighted average number of common shares outstanding
Basic........................................................... 10,266 10,340 10,511
======== ======== ========
Diluted......................................................... 10,580 10,340 10,511
======== ======== ========
The accompanying notes are an integral part of the financial statements.
F-4
36
SUPERIOR CONSULTANT HOLDINGS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Preferred Stock Common Stock Additional Stockholders' Treasury
--------------- --------------- Paid-In Notes Stock
Shares Amount Shares Amount Capital Receivable Amount
------ ------- ------ ------ ---------- ------------ --------
(In thousands)
Balance at January 1, 1998 ............................. -- $ -- 10,208 $ 102 $ 105,632 $ (679) $ --
Net earnings and total comprehensive income ............ -- -- -- -- -- -- --
Shares issued in connection with acquisitions .......... 2 -- 72 1 2,582 -- --
Exercise of stock options .............................. -- -- 42 -- 640 -- --
Tax benefit relating to stock options exercised ........ -- -- -- -- 251 -- --
Costs of follow on offering ............................ -- -- -- -- (22) -- --
Compensation expense recognized for fair
value of stock options granted .................... -- -- -- -- 30 -- --
Payment on stockholders' notes receivable .............. -- -- -- -- -- 21 --
---- ------ ------- ------ --------- ------- -------
Balance at December 31, 1998 ........................... 2 -- 10,322 103 109,113 (658) --
Net loss ............................................... -- -- -- -- -- -- --
Net unrealized gain on investment securities ........... -- -- -- -- -- -- --
---- ------ ------- ------ --------- ------- -------
Total comprehensive income .........................
Shares issued in connection with acquisitions .......... -- -- 46 -- 640 -- --
Exercise of stock options .............................. -- -- 58 1 1,253 -- --
Tax benefit relating to stock options exercised ........ -- -- -- -- 160 -- --
Expense recognized for fair value of stock options
and warrants granted .............................. -- -- -- -- 3,008 -- --
Purchase of 85,000 shares of treasury stock ............ -- -- -- -- -- -- (2,270)
Payment on stockholders' notes receivable .............. -- -- -- -- -- 22 --
---- ------ ------- ------ --------- ------- -------
Balance at December 31, 1999 ........................... 2 -- 10,426 104 114,174 (636) (2,270)
Net loss ............................................... -- -- -- -- -- -- --
Net unrealized loss on investment securities ........... -- -- -- -- -- -- --
---- ------ ------- ------ --------- ------- -------
Total comprehensive loss ...........................
Issuance of common stock ............................... -- -- 600 6 917 (917) --
Shares issued (cancelled) in connection with acquisition (1) -- 47 1 652 -- --
Exercise of stock options .............................. -- -- 2 -- 32 -- --
Expense recognized for fair value of stock options and
warrants granted ................................... -- -- -- -- 228 -- --
---- ------ ------- ------ --------- ------- -------
Balance at December 31, 2000 ........................... 1 $ -- 11,075 $ 111 $ 116,003 $(1,553) $(2,270)
==== ====== ======= ====== ========= ======= =======
Accumulated
Retained Other
Earnings Comprehensive
(Deficit) Income (Loss) Total
--------- ------------- --------
(In thousands)
Balance at January 1, 1998 ............................. $ 3,308 $ -- $ 108,363
Net earnings and total comprehensive income ............ 9,628 -- 9,628
Shares issued in connection with acquisitions .......... -- -- 2,583
Exercise of stock options .............................. -- -- 640
Tax benefit relating to stock options exercised ........ -- -- 251
Costs of follow on offering ............................ -- -- (22)
Compensation expense recognized for fair
value of stock options granted .................... -- -- 30
Payment on stockholders' notes receivable .............. -- -- 21
---------- --------- ---------
Balance at December 31, 1998 ........................... 12,936 -- 121,494
Net loss ............................................... (6,961) -- (6,961)
Net unrealized gain on investment securities ........... -- 33,588 33,588
---------- --------- ---------
Total comprehensive income ......................... 26,627
Shares issued in connection with acquisitions .......... -- -- 640
Exercise of stock options .............................. -- -- 1,254
Tax benefit relating to stock options exercised ........ -- -- 160
Expense recognized for fair value of stock options
and warrants granted .............................. -- -- 3,008
Purchase of 85,000 shares of treasury stock ............ -- -- (2,270)
Payment on stockholders' notes receivable .............. -- -- 22
---------- --------- ---------
Balance at December 31, 1999 ........................... 5,975 33,588 150,935
Net loss ............................................... (57,553) -- (57,553)
Net unrealized loss on investment securities ........... -- (35,961) (35,961)
---------- --------- ---------
Total comprehensive loss ........................... (93,514)
Issuance of common stock ............................... -- -- 6
Shares issued (cancelled) in connection with acquisition -- -- 653
Exercise of stock options .............................. -- -- 32
Expense recognized for fair value of stock options and
warrants granted ................................... -- -- 228
---------- --------- ---------
Balance at December 31, 2000 ........................... $ (51,578) $ (2,373) $ 58,340
========== ========= =========
The accompanying notes are an integral part of the financial statements.
F-5
37
SUPERIOR CONSULTANT HOLDINGS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31,
---------------------------------------
1998 1999 2000
-------- --------- --------
(In thousands)
Cash flows from operating activities:
Net earnings (loss).......................................................... $ 9,628 $ (6,961) $(57,553)
Adjustments to reconcile net earnings (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization of property and equipment................ 2,382 5,817 5,290
Goodwill amortization.................................................. 826 1,338 1,203
Impairment of goodwill................................................. - - 10,221
Options and warrants issued to non-employees........................... 30 3,008 228
Bad debt expense....................................................... 582 927 6,378
Loss (gain) on sale of property and equipment.......................... - 180 (85)
Restructuring charge - write-off of property and equipment............. - - 2,356
Gain on sale of investment securities.................................. - - (5,161)
Interest income on marketable debt security............................ - (323) (239)
Warrants from business partner......................................... - (29) 29
Deferred income taxes (benefits)....................................... (104) (3,065) 3,171
Changes in operating assets and liabilities, 1998 and 1999 are
net of effects from acquisitions:
Accounts receivable............................................. (17,400) 1,539 12,876
Accrued interest receivable and prepaid expenses................ 130 (1,259) (1,090)
Refundable income taxes......................................... - (5,322) (617)
Other long-term assets.......................................... - (2) (115)
Accounts payable................................................ (2,002) 1,984 1,536
Accrued liabilities, deferred bonuses and compensation.......... (830) (1,200) 149
Deferred revenue................................................ 277 3,829 (2,489)
Income taxes payable............................................ (10) - -
-------- --------- --------
Net cash provided by (used in) operating activities............. (6,491) 461 (23,912)
Cash flows from investing activities:
Purchase of businesses....................................................... (12,824) (3,235) (873)
Purchase of investment securities............................................ (11,736) (15,103) -
Proceeds from sale of investment securities.................................. - - 27,861
Purchase of property and equipment........................................... (10,880) (10,210) (4,382)
Proceeds from sale of property and equipment................................. - - 277
-------- --------- --------
Net cash provided by (used in) investing activities............. (35,440) (28,548) 22,883
Cash flows from financing activities:
Net borrowings under line of credit.......................................... - - 5,125
Repayments of long-term debt................................................. (128) (61) -
Proceeds from issuance of common stock....................................... - - 6
Principal payments on stockholders' notes receivable......................... 21 22 -
Exercise of stock options.................................................... 640 1,254 32
Stock repurchased............................................................ - (2,270) -
Costs of follow on offering.................................................. (22) - -
-------- --------- --------
Net cash provided by (used in) financing activities............. 511 (1,055) 5,163
-------- --------- --------
Net increase (decrease) in cash and cash equivalents............................. (41,420) (29,142) 4,134
Cash and cash equivalents, beginning of period................................... 87,253 45,833 16,691
-------- --------- --------
Cash and cash equivalents, end of period......................................... $ 45,833 $ 16,691 $ 20,825
======== ========= ========
Supplemental disclosure of cash flow information - cash paid for income taxes... $ 6,454 $ 4,110 $ 25
Non-Cash Transactions:
Shares issued in connection with acquisitions................................ $ 2,583 $ 640 $ 653
Liabilities assumed in connection with acquisitions.......................... 2,976 - -
Net unrealized gain (loss) on investments, net of deferred income taxes...... - 33,588 (35,961)
Tax benefit from exercise of stock options................................... 251 160 -
The accompanying notes are an integral part of the financial statements.
F-6
38
SUPERIOR CONSULTANT HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1999 AND 2000
(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.
Investments in affiliates in which the Company has the ability to exercise
significant influence, but not control, are accounted for under the equity
method of accounting. All material intercompany accounts and transactions have
been eliminated.
Business Activities and Reportable Segments
Prior to October 1, 2000, the Company was organized into the three business
segments of consulting, outsourcing and e-health. Effective October 1, 2000, the
Company organized into the two business segments of consulting and outsourcing.
The consulting segment provides information technology, as well as strategic and
operations management consulting, solutions and application support to a broad
cross-section of healthcare industry participants and information systems
vendors. Through its e-Health (now consulting) segment, the Company also assists
clients to leverage the power, speed and value of Internet technologies to
achieve efficiencies in business and operations, realize measurable return on
investment, connect with consumers, physicians and trading partners and provide
total solutions in business-to-business and business-to-consumer e-commerce. The
outsourcing segment helps healthcare providers simplify their management
agendas, improve their return on information systems investment and strengthen
their technology management by ensuring client access to an outsourcer's ability
to deliver higher quality at lower cost and help them avoid certain capital
expenses. The outsourcing segment 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.
Cash and Cash Equivalents
For purposes of the statement of cash flows, the Company considers all
highly liquid investments purchased with a maturity of three months or less to
be cash equivalents.
Property and Equipment
Property and equipment are stated at cost. Expenditures for renewals and
improvements that extend the useful life of property and equipment are
capitalized. Expenditures for maintenance and repairs are charged to expense as
incurred. Depreciation is provided over the estimated useful lives of
depreciable assets using the straight-line method.
Investment Securities
The Company follows Statement of Financial Accounting Standards No. 115,
Accounting for Certain Investments in Debt and Equity Securities. Under
Statement No. 115, debt and marketable equity securities must be classified in
one of three categories: trading, available-for-sale, or held to maturity. A
decline in the market value of an available-for-sale security below cost that is
deemed other than temporary would be charged to earnings and result in the
establishment of a new cost basis for the security. Realized gains and losses
are determined on the specific identification method and reflected in earnings.
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. This method also requires the recognition of future tax benefits
such as net operating loss carryforwards, to the extent that realization of such
benefits is more likely than not. The tax benefit from the exercise of certain
stock options reduces the Company's accrued income tax liability and increases
additional paid-in capital.
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.
F-7
39
SUPERIOR CONSULTANT HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
FOR THE YEARS ENDED DECEMBER 31, 1998, 1999 AND 2000
(TABULAR AMOUNTS ARE IN THOUSANDS, EXCEPT SHARE DATA)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Fair Value of Financial Instruments
The carrying value of the cash equivalents and the investment in
Neoforma.com, Inc., 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.
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. On fixed-fee
projects and pre-packaged solution sales, the Company recognizes revenue in a
manner similar to the percentage of completion basis. The Company periodically
reviews long-term contracts to identify any loss contracts, in which case any
loss would be recognized immediately. Deferred revenue represents collections
made in advance of services being performed.
Stock-Based Compensation
For options granted to employees and Board members, 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 and warrants to non-employees, the Company
follows the provisions of Statement of Financial Accounting Standards No. 123,
Accounting for Stock-Based Compensation ("SFAS 123"), and accordingly,
recognizes expense using a fair market value method.
Comprehensive Income (Loss)
Effective January 1, 1998, the Company adopted the provisions of Statement
of Financial Accounting Standards No. 130, Reporting of Comprehensive Income,
which establishes standards for reporting and display of comprehensive income
and its components in a full set of financial statements. Comprehensive income
(loss), which is included as a component of stockholders' equity, includes net
unrealized gains and losses on investments in marketable equity and debt
securities, primarily from the Company's investments in drkoop.com, Inc.,
Healtheon/WebMD Corporation and Neoforma.com, Inc. The decrease during 2000 in
accumulated other comprehensive income (loss) is a result of the significant
decrease in the market value of the Company's investments, as well as the sale
of the Company's entire holdings of debt securities, drkoop.com and
Healtheon/WebMD common stock and a portion of its holdings of Neoforma.com
common stock.
Total comprehensive income (loss) is summarized as follows:
Year Ended December 31,
------------------------------
1998 1999 2000
------ ------- -------
Net earnings (loss)........................................ $9,628 $(6,961) $(57,553)
Other comprehensive income (loss), net of tax:
Unrealized holding gains (losses) on securities
arising during the period............................ - 33,588 (39,032)
Less: reclassification adjustment for realized
losses on securities included in net loss,
net of tax benefit of $2,091,000..................... - - (3,071)
------ ------- --------
Other comprehensive income (loss), net of tax.............. - 33,588 (35,961)
------ ------- --------
Total comprehensive income (loss).......................... $9,628 $26,627 $(93,514)
====== ======= ========
New Accounting Pronouncements
The Financial Accounting Standards Board has issued Statements of Financial
Accounting Standards Nos. 133, 137, and 138, all of which provide guidance on
derivative instruments and hedging activities. As the Company does not currently
participate in any activity involving derivatives or hedging, the Company
anticipates that adoption of these statements will not have a material effect on
its consolidated financial statements.
F-8
40
SUPERIOR CONSULTANT HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
FOR THE YEARS ENDED DECEMBER 31, 1998, 1999 AND 2000
(TABULAR AMOUNTS ARE IN THOUSANDS, EXCEPT SHARE DATA)
2. ACQUISITIONS AND GOODWILL IMPAIRMENT
The following table summarizes business combinations completed in the years
ending December 31, 1998 and 1999, all of which were accounted for using the
purchase method within the consulting segment:
Purchase Common
Entity Name Date Price Shares Issued
- ------------------------------------------- ----------- ------------- -------------
1998:
Network Services Division of Multimedia
Medical Systems, Inc................... January 1998 $ 4.9 million -
Novum, Inc................................. March 1998 $ .6 million 4,363
Lincoln Computer Corporation............... April 1998 $ 3.1 million 51,270
Aviant Information, Inc.................... August 1998 $ 5.2 million -
Clark Information Services, Inc............ November 1998 $ 2.5 million 55,886
6,328 common
and 2,000
convertible
ACA Holding, Inc........................... December 1998 $ 2.6 million preferred
Health Forecasting Group................... December 1998 $ .3 million -
1999:
Integration Services Group of Healthdyne
Information Enterprises................ January 1999 $ 2.2 million -
In connection with its acquisitions, the Company has recorded goodwill
totaling $12,432,000, $3,118,000 and $2,300,000 during the years ended December
31, 1998, 1999 and 2000, respectively. All goodwill is amortized on a
straight-line basis over 15 years. Certain acquisitions have contingent payment
provisions. As of December 31, 2000, the maximum remaining contingent payments
total approximately $6.5 million ($1.7 million payable in cash and $4.8 million
in common stock).
In December 1998, in connection with an acquisition, the Company issued
2,000 shares of preferred stock, contingently convertible into a maximum of $3.0
million in additional common shares in 2001. 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. During the year ended December 31,
2000, 1,000 shares of the preferred stock were cancelled.
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, 1998.
1998
--------
Revenues......................... $137,385
Net earnings..................... 7,485
Net earnings per share
Basic......................... 0.73
Diluted....................... 0.71
F-9
41
SUPERIOR CONSULTANT HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
FOR THE YEARS ENDED DECEMBER 31, 1998, 1999 AND 2000
(TABULAR AMOUNTS ARE IN THOUSANDS, EXCEPT SHARE DATA)
2. ACQUISITIONS AND GOODWILL IMPAIRMENT (CONTINUED)
The above amounts are based upon certain assumptions and estimates which
the Company believes are reasonable. The pro forma results do not necessarily
reflect the results of operations as they would have been if the companies had
constituted a single entity during 1998.
During the year ended December 31, 2000 as a result of management's
strategic review of the Company's operations, including relevant cash flows,
estimated future operating results, industry trends and other available
information, it was determined that the carrying value of goodwill exceeded its
current fair value. The current fair value of goodwill was determined using
estimated discounted future cash flows. During the year ended December 31, 2000,
the Company recorded a non-cash impairment loss of approximately $10.2 million
to write down the carrying value of goodwill.
3. INVESTMENTS
Securities classified as available-for-sale under Statement No. 115 are
summarized as follows:
Gross Gross
Unrealized Unrealized
Holding Holding Market
December 31, 1999: Cost Gains Losses Value
----------------- -------- --------- --------- -------
U.S. Government Securities maturing after 10 years
(cost includes accrued interest).................... $ 6,009 $ - $(1,323) $ 4,686
Common Stock
drkoop.com.......................................... 6,000 55,429 - 61,429
Healtheon/WebMD..................................... 10,089 2,344 - 12,433
-------- --------- -------- --------
$ 22,098 $57,773 $(1,323) $78,548
======== ========= ======= =======
December 31, 2000:
-----------------
Common stock - Neoforma.com............................ $ 4,652 $ - $(3,988) $ 664
========= ========= ======= =======
As of December 31, 1999, the excess of market value over cost of
$56,450,000, less deferred taxes of $22,862,000, was credited to the separate
component of stockholder's equity called "accumulated other comprehensive
income (loss)."
As of December 31, 2000, the excess of cost over market value of
$3,988,000, less the deferred tax benefit of $1,615,000, was charged to
"accumulated other comprehensive income (loss)."
In October 1999, the Company invested $5 million in Neoforma.com, a private
company, and recorded its investment at cost at December 31, 1999. In January
2000, Neoforma.com completed its IPO, providing a readily determinable fair
value of the Company's investment in Neoforma.com's stock. The Company sold a
portion of its Neoforma.com stock during 2000, as well as all its drkoop.com
stock, Healtheon/WebMD stock and U.S. Government Securities.
4. ALLOWANCE FOR DOUBTFUL ACCOUNTS
A summary of activity in connection with the allowance for doubtful
accounts follows:
Year Ended December 31,
---------------------------
1998 1999 2000
------ ------ ------
Allowance for doubtful accounts at beginning of year... $ 692 $1,010 $1,750
Write-offs............................................. (264) (187) (1,753)
Charged to bad debt expense............................ 582 927 6,378
------- ------ ------
Allowance for doubtful accounts at end of year......... $ 1,010 $1,750 $6,375
======= ======= =======
F-10
42
SUPERIOR CONSULTANT HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
FOR THE YEARS ENDED DECEMBER 31, 1998, 1999 AND 2000
(TABULAR AMOUNTS ARE IN THOUSANDS, EXCEPT SHARE DATA)
5. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
December 31, Range of
------------------ Useful
1999 2000 Lives
------- ------- --------
Office furniture and equipment............................. $ 6,035 $ 6,166 5-7 Years
Computer equipment......................................... 16,815 9,128 3-5 Years
Computer software.......................................... 3,230 4,427 3-5 Years
Buildings.................................................. 3,799 3,766 40 Years
Leasehold improvements..................................... 2,420 3,291 2-7 Years
------ -------
32,299 26,778
Less: accumulated depreciation and amortization...... (12,002) (9,937)
Land....................................................... 398 398
------- -------
Property and equipment, net................................ $20,695 $17,239
======= =======
6. GOODWILL
Goodwill consists of the following:
December 31,
----------------------
1999 2000
------- -------
Goodwill.................................. $20,525 $12,604
Less: accumulated amortization....... (2,428) (3,631)
------- -------
Goodwill, net............................. $18,097 $ 8,973
======= =======
7. DEBT
At December 31, 1999, the Company had a line of credit with a bank which
allowed borrowings of up to $3.0 million, due on demand, with no scheduled
maturity date. At December 31, 1999, there were no amounts outstanding on this
line.
At December 31, 2000, the Company has a line of credit with a bank allowing
for borrowings of up to $15,000,000, based on qualifying accounts receivable.
Based on the eligibility provisions in the loan agreement, the Company could
have borrowed $11,900,000 on the line of credit as of December 31, 2000;
$5,125,000 was outstanding. Borrowings under the line mature in March 2002.
Borrowings bear interest at the greater of the prime rate or 1% plus the Federal
funds effective rate. The effective interest rate at December 31, 2000 was 9.5%.
The weighted average interest rate as of December 31, 2000 was 9.5%. The line is
collateralized by accounts receivable and any deposits held by the bank. There
are no compensating balance requirements. The loan agreement contains covenants,
including financial ratios concerning liquidity, working capital and operating
results. The Company did not meet a certain financial operating covenant as of
December 31, 2000. Subsequent to December 31, 2000, the credit agreement was
amended to waive the covenant default as of December 31, 2000.
8. ACCRUED LIABILITIES
Accrued liabilities consist of the following:
December 31,
-------------------
1999 2000
------ ------
Payroll and withholding taxes.............. $2,036 $2,317
Commissions................................ - 433
Bonuses.................................... 1,588 1,023
------ ------
Total accrued liabilities....... $3,624 $3,773
====== ======
F-11
43
SUPERIOR CONSULTANT HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
FOR THE YEARS ENDED DECEMBER 31, 1998, 1999 AND 2000
(TABULAR AMOUNTS ARE IN THOUSANDS, EXCEPT SHARE DATA)
9. STOCK OPTIONS AND WARRANTS
Pursuant to the Company's Long-Term Incentive Plan, a maximum of 4,000,000
shares of common stock are reserved for the granting of incentive, nonstatutory
or formula options, restricted stock grants and other equity based compensation.
The options, other than the director formula options, may have terms not
exceeding ten years when granted. The exercise price of each option equals the
market price of the Company's stock on the date of grant.
Had compensation cost 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,
----------------------------
1998 1999 2000
------ ------ --------
Pro forma net earnings (loss)............. $7,993 $(11,929) $(67,925)
Pro forma net earnings (loss) per share
Basic.................................. 0.78 (1.15) (6.46)
Diluted................................ 0.76 (1.15) (6.46)
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,
----------------------------
1998 1999 2000
------ ------ ------
Risk free interest rate..................... 4.63% 6.14% 5.81%
Dividend yield.............................. 0% 0% 0%
Volatility factor........................... .52 .75 .92
Expected option term life in years.......... 5.0 5.0 5.0
A summary of the status of the Company's options and warrants as of
December 31, 1998, 1999 and 2000, and changes during the years then ended, is
presented below:
1998 1999 2000
---------------- ------------------ -----------------
Weighted Weighted Weighted
Average Average Average
Shares Exercise Shares Exercise Shares Exercise
(000) Price (000) Price (000) Price
------ -------- ------ -------- ------ --------
Outstanding at beginning of year........................ 548 $21.43 1,106 $27.57 2,311 $32.13
Granted................................................. 638 $26.91 1,454 $34.82 1,308 $11.97
Exercised............................................... (42) $15.19 (58) $21.59 (2) $16.00
Forfeited............................................... (38) $32.75 (191) $31.55 (693) $24.91
---- ----- -----
Outstanding at year-end................................. 1,106 $27.57 2,311 $32.13 2,924 $24.42
Exercisable at year-end................................. 188 $16.37 2 $10.31 1,184 $30.53
Weighted-average fair value of grants during the year... 638 $16.26 1,454 $20.50 1,308 $ 8.80
The following information applies to options and warrants outstanding at
December 31, 2000:
Number Weighted-Average Weighted-Average
Range of Exercise Prices Outstanding Exercise Price Remaining Life
------------------------ ----------- --------------- ---------------
$ 1.75 - $10.31............. 199 $ 2.33 3.92 years
$11.75 - $24.75............. 1,227 $15.40 3.05 years
$28.00 - $35.75............. 785 $31.45 2.17 years
$36.00 - $45.13............. 713 $38.39 2.71 years
-----
2,924
=====
F-12
44
SUPERIOR CONSULTANT HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
FOR THE YEARS ENDED DECEMBER 31, 1998, 1999 AND 2000
(TABULAR AMOUNTS ARE IN THOUSANDS, EXCEPT SHARE DATA)
10. COSTS INCURRED IN CONNECTION WITH NEW BUSINESS INITIATIVE AND RESTRUCTURING
In May 1999, the Company entered into an alliance agreement with a business
partner and incurred certain one-time costs. These costs consist of:
Issuance of warrants............................ $2,856
Additional depreciation expense due
to change in estimated useful lives.......... 1,507
Bonuses......................................... 477
------
$4,840
=======
The fair value of the warrants was calculated at the date of grant using a
Black-Scholes pricing model with the following assumptions: risk-free interest
rate of 5%, dividend yield of 0%, volatility factor of 42%, and expected term of
5 years.
The Company agreed to install specified types of software in its own
operations and personal computers. As a result, the estimated useful lives of
certain software and hardware in use at the time the alliance agreement was
signed were shortened. The effect of the change was to increase the net loss for
the year ended December 31, 1999 by $933,000 or $0.09 per basic and diluted
share.
In addition, during the years ended December 31, 1999 and 2000, the Company
incurred other operating costs in connection with execution of the alliance
agreement commitments. A portion of these costs was funded by the business
partner, and was recorded as a reduction to expense. The reduction in cost of
services and selling, general and administrative expense for the year ended
December 31, 1999 was $700,000 and $2,549,000, respectively. The reduction in
cost of services and selling, general and administrative expense for the year
ended December 31, 2000 was $748,000 and $1,702,000, respectively.
The Company implemented a restructuring plan during the year ended December
31, 2000 in response to negative operating results, cash flows, and industry
trends. The resulting restructuring charges consist primarily of severance costs
related to a reduction in workforce (approximately 300 employees), the write-off
of property and equipment and the closing of various office facilities. The
restructuring plan was aimed at improving future overall financial performance
through operating cost reductions and the optimization of the Company's
workforce.
The restructuring charges are summarized as follows:
Severance costs.................................. $1,615
Write-off of property and equipment.............. 2,356
Closing of various office facilities............. 103
Other............................................ 91
------
$4,165
======
At December 31, 2000, approximately $480,000 of restructuring costs, primarily
related to severance, are included in accrued liabilities. The Company
anticipates these costs will be paid during 2001.
11. OTHER INCOME
Other income (expense) consists of the following:
Year Ended December 31,
-----------------------
1998 1999 2000
------ ------ -----
Interest income.............................. $4,620 $1,939 $1,665
Net realized gain on sale of investments..... - - 5,161
Interest expense............................. - (39) (289)
Sundry....................................... (48) (26) (481)
------ ------ -----
$4,572 $1,874 $6,056
====== ====== ======
F-13
45
SUPERIOR CONSULTANT HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
FOR THE YEARS ENDED DECEMBER 31, 1998, 1999 AND 2000
(TABULAR AMOUNTS ARE IN THOUSANDS, EXCEPT SHARE DATA)
12. INCOME TAXES
The income tax provision (benefit) consists of the following:
Year Ended December 31,
-------------------------
1998 1999 2000
------ -------- -------
Current federal income taxes (benefit)................... $5,339 $ (517) $ (5,417)
Deferred federal income taxes............................ (104) (2,557) (14,649)
Current state income taxes............................... 845 (545) (243)
Deferred state income taxes.............................. - (508) (2,800)
Tax benefit from exercise of stock options credited
directly to additional paid-in capital................ 251 160 -
Valuation allowance...................................... - - 20,617
------ -------- -------
$6,331 $(3,967) $ (2,492)
====== ======= ========
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:
1999 2000
------- -------
Deferred tax assets:
Deferred compensation..................................... $ 183 $ 496
Allowance for bad debts................................... 709 2,582
Deferred revenue.......................................... 2,533 1,525
Options and warrants issued to non-employees.............. 1,230 1,323
Investment in debt security............................... 536 -
Other..................................................... 62 598
Investment in Neoforma.com................................ - 1,615
Impairment of goodwill.................................... - 4,140
Net operating loss carryforward........................... - 11,571
-------- --------
Total deferred tax assets............................. 5,253 23,850
Deferred tax liabilities:
Change from cash to accrual basis of tax accounting....... (229) -
Depreciation.............................................. (1,303) (1,607)
Investment in drkoop.com.................................. (22,449) -
Investment in Healtheon/WebMD............................. (949) -
Other..................................................... (14) (11)
------- -------
Total deferred tax liabilities........................ (24,944) (1,618)
Deferred tax asset valuation allowance................ - (20,617)
------- -------
Total net deferred tax (liability) asset.............. $(19,691) $ 1,615
======== ========
A reconciliation of the provision for income taxes follows:
Year Ended December 31,
-----------------------------
1998 1999 2000
------ ------ -------
Expected expense (benefit) at the statutory rate.............. $5,426 $(3,716) $(20,415)
Permanent differences; expenses recognized for book, not tax 308 402 349
State income taxes (benefit), net of federal income taxes..... 558 (688) (3,043)
Change in valuation allowance................................. - - 20,617
Investment tax credits and other.............................. 39 35 -
------ ------- --------
Total income taxes (benefit).............................. $6,331 $(3,967) $ (2,492)
====== ======= ========
The Company has a net operating loss carryforward of approximately $28,600,000
which expires in 2020.
F-14
46
SUPERIOR CONSULTANT HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
FOR THE YEARS ENDED DECEMBER 31, 1998, 1999 AND 2000
(TABULAR AMOUNTS ARE IN THOUSANDS, EXCEPT SHARE DATA)
13. 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 $422,000 for the year ended December
31, 1998. There were no contributions made during the years ended December 31,
1999 and 2000.
14. NET EARNINGS (LOSS) PER SHARE
Earnings (loss) per common share ("EPS") data were computed as follows:
Year Ended December 31,
------------------------
1998 1999 2000
------ ------ ------
Basic EPS:
Net earnings (loss)................................. $ 9,628 $ (6,961) $(57,553)
Weighted-average common shares outstanding.......... 10,266 10,340 10,511
-------- -------- --------
Basic earnings (loss) per share..................... $ 0.94 $ (0.67) $ (5.48)
======== ======== ========
Diluted EPS:
Net earnings (loss)................................. $ 9,628 $ (6,961) $(57,553)
Weighted-average common shares outstanding.......... 10,266 10,340 10,511
Dilutive effect of stock options.................... 314 - -
-------- -------- --------
Weighted-average shares assuming dilution........... 10,580 10,340 10,511
Diluted earnings (loss) per share................... $ 0.91 $ (0.67) $ (5.48)
======== ======== ========
Options and warrants to purchase approximately 114,000, 2,311,000 and
2,924,000 shares of common stock with a weighted average exercise price of
$39.97, $32.13 and $24.42 were outstanding at December 31, 1998, 1999 and 2000,
respectively, but were excluded from the computation of common share equivalents
because to do so would have been antidilutive for the periods presented.
15. COMMITMENTS AND CONTINGENCIES
The Company leases 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, 2000 are summarized
as follows:
Related All Sublease
Year ending December 31: Party Other Income Total
------------------------- -------- -------- --------- --------
2001................................... $ 548 $ 5,116 $(456) $ 5,208
2002................................... 548 4,502 (289) 4,761
2003................................... 548 3,345 (82) 3,811
2004................................... 548 2,348 (55) 2,841
2005................................... 548 2,071 - 2,619
Thereafter............................. 228 1,104 - 1,332
------ -------- ------ -------
Total future minimum lease payments.... $2,968 $18,486 $(882) $20,572
====== ======== ====== ========
Net rent expense amounted to approximately $2,751,000, $3,566,000 and
$5,032,000 for the years ended December 31, 1998, 1999, and 2000, respectively,
and has been included in selling, general and administrative expenses in the
accompanying statements of operations. The rent expense was offset by sublease
income of approximately $196,000 and $444,000 for the years ended December 31,
1999 and 2000, respectively.
F-15
47
SUPERIOR CONSULTANT HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
FOR THE YEARS ENDED DECEMBER 31, 1998, 1999 AND 2000
(TABULAR AMOUNTS ARE IN THOUSANDS, EXCEPT SHARE DATA)
15. COMMITMENTS AND CONTINGENCIES (CONTINUED)
Commencing July 1, 2001, Superior is required to pay a business partner a
royalty of approximately 3.4% of a certain portion of its systems integration
revenue. The royalty, up to a cumulative maximum amount of $11,300,000, will be
payable in the years the related revenue is recognized. In addition, as of
December 31, 2000 the Company has agreed to contribute a minimum of $500,000
over the next two years to a joint marketing fund.
The Company is involved in various legal proceedings, including client and
employment matters of a nature considered normal to its business. The Company
accrues for amounts related to these legal matters if it is probable that a
liability has been incurred and an amount is reasonably estimable. In the
opinion of the Company, although the outcome of any legal proceedings cannot be
predicted with certainty, the ultimate liability of the Company in connection
with its legal proceedings will not have a material adverse effect on the
Company's financial position but could be material to the results of operations
in any one accounting period.
16. RELATED PARTY TRANSACTIONS
The Company leases an office facility from an entity partially owned by two
stockholders. Net rent expense for this lease was approximately $463,000,
$469,000 and $470,000 for the years ended December 31, 1998, 1999 and 2000,
respectively. The rent expense was offset by sublease income of approximately
$69,000 for the years ended December 31, 1999 and 2000.
During 2000, the Company sold 600,000 shares of its common stock for fair
market value to three newly-hired executives, in exchange for cash and
promissory notes. The notes total $916,620, bear interest at 9.5% per annum and
require payment of all accrued interest and principal in October 2002. During
1995, Superior issued 658,833 shares of its common stock to two stockholders in
exchange for promissory notes totaling $750,000, and the cancellation of
outstanding stock options. The notes bear interest at 7.7% per annum and require
periodic cash payments. Interest income on all notes totaled approximately
$54,000, $53,000 and $70,000 for the years ended December 31, 1998, 1999 and
2000, respectively.
The Company charters aircraft from an entity owned by an
officer/stockholder. Payments to the entity were approximately $662,000,
$605,000 and $260,000 for the years ended December 31, 1998, 1999 and 2000,
respectively.
During the years ended December 31, 1998, 1999 and 2000, the Company
recognized revenue of approximately $1,500,000, $1,100,000 and $4,100,000,
respectively, from entities in which it had an equity interest. Included in
accounts receivable at December 31, 2000, is approximately $1,020,000 due from
one of the entities in which it has an equity interest.
17. 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 training, information technology,
accounting and finance, facilities, marketing, legal, senior management and
other SG&A functions are combined into the unallocated SG&A expenses.
Unallocated assets consist principally of cash, accrued interest receivable,
prepaid expenses and investment securities.
F-16
48
SUPERIOR CONSULTANT HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
FOR THE YEARS ENDED DECEMBER 31, 1998, 1999 AND 2000
(TABULAR AMOUNTS ARE IN THOUSANDS, EXCEPT SHARE DATA)
17. 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. Segment information for
1998 and 1999 have been restated to conform to the current year segments.
Year Ended December 31,
---------------------------------
1998 1999 2000
-------- -------- ---------
Revenues:
Consulting................................................ $ 99,078 $111,860 $ 51,209
Outsourcing............................................... 25,668 36,795 27,995
e-Health.................................................. - 694 20,033
-------- -------- --------
Consolidated revenues............................... $124,746 $149,349 $ 99,237
======== ======== ========
Gross Profit and Statement of Operations Reconciliation:
Consulting................................................ $ 50,816 $ 46,433 $ 17,442
Outsourcing............................................... 8,904 11,227 6,720
e-Health.................................................. - (25) (2,599)
-------- -------- --------
Consolidated gross profit........................... $ 59,720 $ 57,635 $21,563
======== ======== ========
Unallocated:
SG&A expenses............................................. $ 48,333 $ 65,597 $ 73,278
Costs incurred in connection with new
business initiative.................................... - 4,840 -
Restructuring charges..................................... - - 4,165
Impairment of goodwill.................................... - - 10,221
Other income, net......................................... (4,572) (1,874) (6,056)
-------- -------- --------
Subtotal............................................ 43,761 68,563 81,608
-------- -------- --------
Consolidated earnings (loss) before income taxes.... $ 15,959 $(10,928) $(60,045)
======== ======== ========
Depreciation and amortization:
Consulting................................................ $ 3,107 $ 6,837 $ 6,216
Outsourcing............................................... 101 318 277
-------- -------- --------
Consolidated depreciation and amortization.......... $ 3,208 $ 7,155 $ 6,493
======== ======== ========
Identifiable assets:
Consulting................................................ $ 62,603 $ 65,487 $ 33,857
Outsourcing............................................... 10,510 11,853 7,898
e-Health.................................................. - 180 3,931
Unallocated............................................... 60,613 109,077 32,946
-------- -------- --------
Consolidated total assets........................... $133,726 $186,597 $ 78,632
======== ======== ========
Expenditures for long-term assets:
Consulting................................................ $ 28,627 $ 13,172 $ 4,793
Outsourcing............................................... 1,709 273 792
-------- -------- --------
$ 30,336 $ 13,445 $ 5,585
======== ======== ========
F-17