<PAGE> 1
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549-1004
FORM 10-Q
x QUARTERLY REPORT PURSUANT TO SECTION 13 OF THE SECURITIES EXCHANGE ACT OF 1934
- -
For the quarterly period ended June 30, 1998
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OF THE SECURITIES EXCHANGE ACT OF 1934
- -
For the transition period from to
Commission file number 0-21485
SUPERIOR CONSULTANT HOLDINGS CORPORATION
(exact name of registrant as specified in its charter)
STATE OF DELAWARE 38-3306717
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
4000 Town Center, Suite 1100 Southfield, Michigan 48075
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (248) 386-8300
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
As of August 12, 1998 10,285,558 shares of the registrant's common stock (par
value $.01) were outstanding.
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SUPERIOR CONSULTANT HOLDINGS CORPORATION
QUARTER ENDED JUNE 30, 1998
INDEX
<TABLE>
<CAPTION>
PART I - FINANCIAL INFORMATION PAGE NO.
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<S> <C> <C>
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of June 30, 1998 and December 31,
1997 (unaudited) 3
Condensed Consolidated Statements of Earnings for the three and six months
ended June 30, 1998 and 1997 (unaudited) 4
Condensed Consolidated Statements of Cash Flows for the six months ended June
30, 1998 and 1997 (unaudited) 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations 9
Item 3. Quantitative and Qualitative Disclosure About Market Risk Sensitive
Instruments 14
PART II - OTHER INFORMATION
Item 2. Changes In Securities And Use Of Proceeds 15
Item 4. Submission of Matters to a Vote of Security Holders 17
Item 5. Other Information 17
Item 6. Exhibits and Reports on Form 8-K 17
SIGNATURES 18
</TABLE>
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SUPERIOR CONSULTANT HOLDINGS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1998 1997
--------- ------------
ASSETS
<S> <C> <C>
Current assets
Cash $ 1,162 $ 2,795
Short-term investments 67,756 84,458
Accounts receivable, net 25,282 18,464
Accrued interest receivable and prepaid expenses 1,998 1,589
Deferred income taxes 389 352
--------- ---------
Total current assets 96,587 107,658
Property and equipment, net 11,071 6,915
Goodwill, net 11,550 4,711
Equity investment in EMPOWER 4,506 --
Other long term assets 102 117
--------- ---------
Total Assets $ 123,816 $ 119,401
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Current portion of long-term debt $ -- $ 91
Accounts payable 1,229 3,061
Accrued liabilities 5,302 5,016
Deferred revenue 1,045 1,597
Income taxes payable 114 261
--------- ---------
Total current liabilities 7,690 10,026
Long-term debt 66 98
Deferred income taxes 510 350
Deferred performance bonuses 564 564
Stockholders' equity
Preferred stock; authorized, 1,000,000 shares of
$.01 par value; no shares issued or outstanding -- --
Common stock; authorized, 30,000,000 shares of
$.01 par value; issued and outstanding, 10,283,338 as of
June 30, 1998 and 10,208,024 as of December 31, 1997 103 102
Additional paid-in capital 107,820 105,632
Retained earnings 7,742 3,308
Stockholders' notes receivable (679) (679)
--------- ---------
Total stockholders' equity 114,986 108,363
--------- ---------
Total Liabilities and Stockholders' Equity $ 123,816 $ 119,401
========= =========
</TABLE>
See notes to condensed consolidated financial statements.
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SUPERIOR CONSULTANT HOLDINGS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------- --------------------
1998 1997 1998 1997
(RESTATED) (RESTATED)
------- -------- ------- -------
<S> <C> <C> <C> <C>
Revenues $28,350 $18,267 $52,180 $34,811
Operating costs and expenses
Cost of services 14,747 9,315 26,814 17,777
Selling, general and administrative expenses 11,159 7,700 20,565 14,467
------- ------- ------- -------
Total operating costs and expenses 25,906 17,015 47,379 32,244
------- ------- ------- -------
Earnings from operations 2,444 1,252 4,801 2,567
Other income, principally interest income 1,375 409 2,622 917
------- ------- ------- -------
Earnings before income taxes 3,819 1,661 7,423 3,484
Income taxes 1,485 666 2,989 1,368
------- ------- ------- -------
Net earnings $ 2,334 $ 995 $ 4,434 $ 2,116
======= ======= ======= =======
Net earnings per share - basic $ 0.23 $ 0.12 $ 0.43 $ 0.26
======= ======= ======= =======
Net earnings per share - diluted $ 0.22 $ 0.12 $ 0.42 $ 0.25
======= ======= ======= =======
Weighted average number of common and
common equivalent shares outstanding - basic 10,260 8,231 10,236 8,201
======= ======= ======= =======
Weighted average number of common and
common equivalent shares outstanding - diluted 10,609 8,375 10,530 8,342
======= ======= ======= =======
</TABLE>
See notes to condensed consolidated financial statements.
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SUPERIOR CONSULTANT HOLDINGS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
------------------------
1998 1997
(RESTATED)
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net earnings $ 4,434 $ 2,116
Adjustments to reconcile net earnings
to net cash provided by (used in) operating activities:
Depreciation and amortization 1,010 554
Bad debt expense 129 380
Deferred income taxes 123 (168)
Changes in operating assets and liabilities:
Accounts receivable (5,193) (1,526)
Accrued interest receivable and prepaid expenses (409) (359)
Other long-term assets 15 189
Accounts payable (1,832) (394)
Accrued liabilities, deferred bonuses and compensation 286 540
Deferred revenue (552) (65)
Income taxes payable (147) (705)
-------- --------
Net cash provided by (used in) operating activities (2,136) 562
Cash flows from investing activities:
Equity investment in Empower (4,506) --
Purchase of Lincoln (1,228) --
Purchase of NSD (5,021) --
Purchase of Novum (312) --
Purchase of The Kaufman Group (462) (3,457)
Purchases of property and equipment (4,881) (1,955)
-------- --------
Net cash used in investing activities (16,410) (5,412)
Cash flows from financing activities:
Exercise of stock options 354 --
Costs of follow on offering (20) --
Proceeds from line of credit, net -- 275
Repayments of long-term debt (123) (33)
-------- --------
Net cash provided by financing activities 211 242
-------- --------
Net decrease in cash (18,335) (4,608)
Cash and cash equivalents, beginning of period 87,253 36,795
-------- --------
Cash and cash equivalents, end of period $ 68,918 $ 32,187
======== ========
Supplemental disclosure of cash flow information:
Interest expense $ 14 $ 69
Income tax payments $ 3,766 $ 2,393
Non-cash acquisition costs (Issuance of common
stock for Novum) $ 138 $ --
Non-cash acquisition costs (Issuance of common
stock for Lincoln) $ 1,716 $ --
</TABLE>
See notes to condensed consolidated financial statements.
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SUPERIOR CONSULTANT HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
JUNE 30, 1998
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements
have been prepared pursuant to the rules of the Securities and Exchange
Commission for quarterly reports on Form 10-Q. Accordingly, they do not include
all of the information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management, all
adjustments (consisting of normal recurring accruals and estimated provisions
for bonus and profit-sharing arrangements) considered necessary for a fair
presentation have been included. Operating results for the three-month and
six-month periods ended June 30, 1998 are not necessarily indicative of the
results that may be expected for the year ended December 31, 1998.
These financial statements should be read in conjunction with the
Company's audited consolidated financial statements and notes thereto included
in the Company's 1997 annual report on Form 10-K filed by the Company with the
Securities and Exchange Commission on March 31, 1998.
In July and August 1997, the Company acquired the outstanding stock of
two entities, in exchange for shares of the Company's common stock. These
transactions were accounted for as poolings of interests and, accordingly, the
Company's financial statements for the three-month and six-month periods ended
June 30, 1997 have been restated to include the results of the acquired
entities.
NOTE 2 - NET EARNINGS PER SHARE
On December 31, 1997, the Company adopted Statement of Financial
Accounting Standard No. 128, Earnings Per Share. As required by SFAS 128, EPS
for the three-month and six-month periods ended June 30, 1997 have been restated
to conform to its provisions. The Company's basic net earnings per share amounts
have been computed by dividing net earnings by the weighted average number of
outstanding common shares. The Company's diluted net earnings per share is
computed by dividing net earnings by the weighted average number of outstanding
common shares and common share equivalents relating to stock options, when
dilutive.
The computation of diluted net earnings per share for the three months
ended June 30, 1998 and 1997 includes approximately 349,000 and 294,000 shares
of common stock equivalents, respectively. The computation of diluted net
earnings per share for the six months ended June 30, 1998 and 1997 includes
approximately 144,000 and 141,000 shares of common stock equivalents,
respectively. Options to purchase approximately 6,700 and 18,400 shares of
common stock with a weighted average exercise price of $37.08 and $35.75 were
outstanding at June 30, 1998 and 1997 respectively, but were excluded from the
computation of common share equivalents because to do so would have been
antidilutive for the periods presented.
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NOTE 3 - BUSINESS ACQUISITIONS
On January 16, 1998, the Company purchased the assets and business of
the Network Services Division ("NSD") of Multimedia Medical Systems, Inc. NSD,
which is located in Burlington, Massachusetts, specializes in software
implementation and networking technology solutions for healthcare organizations.
The purchase price was approximately $5.0 million in cash. The business
combination was recorded using the purchase method of accounting and,
accordingly, the operating results of NSD have been included in the Company's
consolidated financial statements since the date of acquisition. The excess of
the aggregate purchase price over the fair market value of the net assets
acquired of approximately $3.6 million is being amortized over 15 years.
On March 26, 1998, the Company purchased the assets and business of
Novum, Inc. ("Novum") located in Gainesville, Georgia, which specializes in
software applications relating to the healthcare industry. The purchase price
was approximately $670,000, consisting of approximately $312,000 in cash and
approximately $138,000 in newly-issued common stock payable at closing, and an
additional contingent payment of up to a maximum of $220,000 payable in cash and
newly-issued common stock over a three-year period contingent on the achievement
of certain performance benchmarks by the acquired business. The business
combination was recorded using the purchase method of accounting and,
accordingly, the operating results of Novum have been included in the Company's
consolidated financial statements since the date of acquisition. The entire
purchase price has been allocated to goodwill and is being amortized over 15
years.
On April 30, 1998, the Company purchased substantially all of the
business assets of Lincoln Computer Corporation ("Lincoln"), a healthcare
outsourcing business located in Wallingford, Connecticut. The purchase price was
approximately $1.7 million in newly-issued common stock payable at closing, plus
the assumption of approximately $1.2 million in liabilities of the acquired
business, an additional contingent payment of up to a maximum of approximately
$1.3 million in cash and approximately $5.4 million in newly-issued common stock
payable over a three-year period contingent on the achievement of certain
performance benchmarks by the acquired business. The acquisition was recorded
using the purchase method of accounting and, accordingly, the operating results
of Lincoln have been included in the Company's consolidated financial statements
since the date of acquisition. The entire purchase price has been allocated to
goodwill and is being amortized over 15 years.
On May 4, 1998, the Company made a $4.5 million investment in
convertible preferred stock of Empower Health Corporation ("Empower") of Austin,
Texas. Empower's mission is to improve the quality of people's lives by
empowering them with personalized healthcare information and enabling electronic
interactions and online transactions with the healthcare industry. The
investment was recorded using the cost method of accounting.
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NOTE 4 - NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the FASB issued Statement of Financial Accounting
Standards No. 130, Reporting of Comprehensive Income ("SFAS 130"), which
establishes standards for reporting and display of comprehensive income and its
components (revenues, expense, gains, and losses) in a full set of financial
statements. This statement also requires that all items that are required to be
recognized under accounting standards as components of comprehensive income be
reported in a financial statement that is displayed with the same prominence as
other financial statements. This statement will become effective with the full
set of financial statements expected to be filed as of and for the year ended
December 31, 1998. Reclassification of financial statements for earlier periods
provided for comparative purposes is required. The Company does not anticipate
that adoption of SFAS 130 will have a material effect on the consolidated
financial statements.
In June 1997, the FASB issued Statement of Financial Accounting
Standards No. 131, Disclosure about Segments of an Enterprise and Related
Information ("SFAS 131"), which establishes standards for the way that public
business enterprises report information about operating segments in annual
financial statements, and requires that those enterprises report selected
information about operating segments in interim financial reports issued to
stockholders. This statement also establishes standards for related disclosures
about products and services, geographic areas, and major customers. This
statement became effective January 1, 1998 for annual financial statements. This
statement will be applied to interim financial statements in 1999, and will
include comparative information for 1998 interim periods.
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ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
Statements included in Management's Discussion and Analysis of
Financial Condition and Results of Operations which are not historical in
nature, are intended to be, and are hereby identified as, "forward looking
statements" for purposes of the safe harbor provided by Section 21E of the
Securities Exchange Act of 1934, as amended by Public Law 104-67.
Forward-looking statements may be identified by words including "anticipate,"
"believe," "intends," "estimates," "expect" and similar expressions. The Company
cautions readers that forward-looking statements, including without limitation,
those relating to the Company's future business prospects, revenues, working
capital, liquidity, and income, are subject to numerous risks and uncertainties
that could cause actual results to differ materially from those indicated in the
forward looking statements, due to several important factors herein identified,
among others, and other risks and factors identified from time to time in the
Company's reports filed with the SEC, including the risk factors identified in
the Company's Registration Statement on Form S-1 (File No. 333-10213),
Registration Statement on Form S-1 (File No. 333-37357) and Registration
Statement on Form S-3 (File No. 333-53339).
The Company conducts business through its two primary operating
subsidiaries, Superior Consultant Company, Inc. ("Superior") and Enterprise
Consulting Group, Inc. ("Enterprise"). Superior is a leading healthcare
consulting firm that provides a wide range of information technology consulting
and strategic and operations management consulting services to a broad
cross-section of healthcare industry participants and healthcare information
system vendors. Enterprise assists clients in various industries in developing,
designing, implementing and maintaining groupware and intranet and web based
information systems and solutions, as well as enterprise messaging and custom
applications and legacy systems integration.
The Company derives substantially all of its revenues from fees for
professional services, the substantial majority of which are billed at
contracted hourly rates. The Company establishes standard billing guidelines
based on the type and level of service offered. Actual billing rates are
established on a project by project basis and may vary from the standard
guidelines. Billings are typically made on a bi-weekly basis to monitor client
satisfaction and manage outstanding accounts receivable balances. Revenue on
time and materials contracts is recognized as the services are provided. A
percentage of the Company's projects are billed on a fixed-fee basis. The
Company recognizes revenue on fixed fee projects using the percentage of
completion basis. As of June 30, 1998, the Company has increased the number and
size of projects billed on a fixed-fee basis. Increased use of fixed-fee
contracts subjects the Company to increased risks, including cost overruns. As
of June 30, 1998, the Company has been awarded four significant contracts to
provide healthcare IT outsourcing services. There can be no assurance that the
Company will be able to achieve profit margins on outsourcing contracts which
are consistent with its historical levels of profitability.
The Company's historical revenue growth is attributable to various
factors, including an increase in the number of projects for existing and new
clients, expanded geographic presence and acquisitions. In addition, the Company
seeks to increase revenues by expanding its range of specialty services. The
Company manages its client development efforts through several strategic
services groups, each having specific geographic responsibility and focus.
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The Company's most significant expense is cost of services, which
consists primarily of consultant salaries and benefits. In recent years,
consultant compensation expense has grown faster than consultant billing rates,
resulting in an increase in the Company's cost of services as a percentage of
revenues. The Company has sought to address this issue by adding an additional
variable portion of compensation payable upon the achievement of measurable
performance goals.
The Company's cost of services as a percentage of revenues is also
impacted by its consultant utilization. The Company manages utilization by
monitoring project requirements and timetables. The number of consultants
assigned to a project will vary according to the size, complexity, duration and
demands of the project. Project terminations, completions and scheduling delays
may result in periods when consultants are not fully utilized. An unanticipated
termination of a significant project could cause the Company to experience lower
consultant utilization, resulting in a higher than expected number of unassigned
consultants. In addition, the establishment of new practice areas and the hiring
of consultants in peak hiring periods have resulted in periods of lower
consultant utilization (and resulting downward pressure on margins) until
project volume increases in these new areas. In the future, the establishment of
new practice areas, as well as further geographic expansion, could from time to
time adversely affect utilization. Variations in consultant utilization result
in quarterly variability of the Company's cost of services as a percentage of
revenues. The Company's consultants are generally employed on a full-time basis,
and therefore the Company will, in the short run, incur substantially all of its
employee-related costs even during periods of low utilization.
Selling, general and administrative expenses include the costs of
recruiting, continuing education, marketing, facilities, equipment depreciation,
goodwill amortization and administration, including compensation and benefits.
Selling, general and administrative expenses as a percentage of total revenues
continues to decrease as the Company leverages its infrastructure expense across
its growing revenue base.
Many of the Company's engagements involve projects which are critical
to the operations of its clients' business and which provide benefits that may
be difficult to quantify. The Company is currently engaged in assisting clients
in auditing Year 2000 compliance and taking steps to render information systems
Year 2000 compliant. The year 2000 problem is the result of prior computer
programs being written using two digits, rather than four digits, to define the
applicable year. Any of the client's programs that have time-sensitive software
may recognize a date using "00" as the year 1900 rather than the year 2000. This
could result in major system failure or miscalculations. Additionally, the
Company has assisted and continues to assist its clients in selecting and
implementing software applications for the clients' use in their business. While
the Company is not aware of any existing or potential claims, the occurrence of
Year 2000 related systems failures in the information systems of clients of the
Company could involve the Company in disputes and negatively impact client
relationships, which in turn could have a material adverse effect on the
Company's business, financial condition and results of operations, whether or
not the Company bears any responsibility, legal or otherwise, for the occurrence
of those problems.
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THREE MONTHS ENDED JUNE 30, 1998 COMPARED TO THREE MONTHS ENDED
JUNE 30, 1997
Revenues. Revenues increased by $10.1 million, or 55.2%, to $28.4
million for the three months ended June 30, 1998, as compared to $18.3 million
for the three months ended June 30, 1997. The revenue increase was due primarily
to continued strong growth in core lines of business with the addition of new
clients assignments, activity from the Company's first and second quarter
acquisitions and revenue realized from the April 1998 outsourcing contract
signed with JPS Health Network.
Cost of Services. Cost of services increased by $5.4 million, or 58.3%,
to $14.7 million for the three months ended June 30, 1998, as compared to $9.3
million for the three months ended June 30, 1997. The increase was due to the
additional number of consultants required to support the Company's larger
revenue base, as well as increases in their compensation levels. Cost of
services as a percentage of revenue increased to 52.0% for the three months
ended June 30, 1998, as compared to 51.0% for the three months ended June 30,
1997. This increase was caused by an increase in compensation levels with
average billing rates remaining relatively constant. In addition, the Company's
consultant base grew by approximately 26% during the second quarter of 1998,
which resulted in slightly lower utilization during start-up.
Selling, general and administrative expenses. Selling, general and
administrative expenses increased by $3.5 million, or 44.9%, to $11.2 million
for the three months ended June 30, 1998, as compared to $7.7 million for the
three months ended June 30, 1997. This increase was due to incentive and other
compensation expenses associated with the addition of key personnel, as well as
higher recruiting, continuing education and marketing expenses consistent with
the Company's growth. Selling, general and administrative expenses as a
percentage of revenues decreased to 39.4% from 42.2% primarily due to increased
operating efficiencies resulting from the Company's ongoing efforts to leverage
its infrastructure expense across its growing revenue base.
Other income and expense. Other income was $1,375,000 for the three
months ended June 30, 1998, as compared to $409,000 of other income for the
three months ended June 30, 1997. The change was due primarily to interest
earned on the investment of the majority of the net proceeds of approximately
$60.3 million from the public offering held by the Company in November, 1997.
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SIX MONTHS ENDED JUNE 30, 1998 COMPARED TO SIX MONTHS ENDED
JUNE 30, 1997
Revenues. Revenues increased by $17.4 million, or 49.9%, to $52.2
million for the six months ended June 30, 1998, as compared to $34.8 million for
the six months ended June 30, 1997. The revenue increase was due primarily to
continued strong growth in core lines of business, the Company's first and
second quarter acquisitions and the outsourcing contract signed with JPS Health
Network.
Cost of Services. Cost of services increased by $9.0 million, or 50.8%,
to $26.8 million for the six months ended June 30, 1998, as compared to $17.8
million for the six months ended June 30, 1997. The increase was due to the
additional number of consultants required to support the Company's larger
revenue base, as well as increases in their compensation levels. Cost of
services as a percentage of revenue remained consistent at 51.4% for the six
months ended June 30, 1998, as compared to 51.1% for the six months ended June
30, 1997.
Selling, general and administrative expenses. Selling, general and
administrative expenses increased by $6.1 million, or 42.2%, to $20.6 million
for the six months ended June 30, 1998, as compared to $14.5 million for the six
months ended June 30, 1997. This increase was due to incentive and other
compensation expenses associated with the addition of key personnel, as well as
higher recruiting, marketing and continuing education expenses consistent with
the Company's growth. Selling, general and administrative expenses as a
percentage of revenues decreased to 39.4% from 41.6% primarily due to increased
operating efficiencies resulting from leveraging the Company's infrastructure
expense across its growing revenue base and the successful integration of the
Company's first and second quarter acquisitions.
Other income and expense. Other income was $2,622,000 for the six
months ended June 30, 1998, as compared to $917,000 of other income for the six
months ended June 30, 1997. The change was due primarily to interest earned on
the investment of the majority of the net proceeds of approximately $60.3
million from the public offering held by the Company in November, 1997.
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LIQUIDITY AND CAPITAL RESOURCES
The Company's primary capital needs have been to fund the growth in
working capital required to support its growth in revenues. Prior to the
Company's Initial Public Offering ("IPO") in October, 1996, the Company's
primary source of liquidity was cash flow from operations. The Company believes
that the proceeds received from the Company's IPO, the net proceeds of
approximately $60.3 million from the follow-on offering completed in November
1997, and available credit under its bank credit facility will be sufficient to
finance its working capital and capital expenditure requirements for at least
the next 12 months.
At June 30, 1998, the Company had cash and cash equivalents of $68.9
million and working capital of $88.9 million. Working capital at June 30, 1998
represents a decrease of $8.7 million from December 31, 1997 resulting primarily
from the first and second quarter acquisitions of NSD, Novum, and Lincoln,
purchases of property and equipment, the equity investment in Empower and an
additional payment made relating to the March 1997 acquisition of The Kaufman
Group required by the purchase agreement. Currently, the Company's remaining
contingency payable relating to The Kaufman Group purchase agreement is
approximately $1.0 million payable over the next two years.
The Company has an unsecured line of credit arrangement at Comerica
Bank N.A. of $3.0 million, which bears interest at the prime rate. As of June
30, 1998, the Company had no amounts outstanding under this line of credit.
Net cash used in operating activities for the six months ended June 30,
1998 was $2,136,000, compared with net cash provided by operations of $562,000
for the six months ended June 30, 1997. The increase in cash used in operations
is primarily due to an increase in accounts receivable and a decrease in
accounts payable; which was partially offset by higher earnings in the current
period.
Net cash of $16.4 million used in investing activities during the six
months ended June 30, 1998 consists of the acquisitions of NSD, Novum and
Lincoln, additions to property and equipment, the equity investment in Empower
and an additional payment made relating to the March 1997 acquisition of The
Kaufman Group required by the purchase agreement. Currently, the Company's
remaining contingency payable relating to this purchase agreement is
approximately $1.0 million payable over the next two years.
Net cash provided by financing activities during the six months ended
June 30,1998, was principally the result of proceeds received from the exercise
of stock options.
On April 30, 1998, the Company purchased substantially all of the
business assets of Lincoln, a healthcare outsourcing business located in
Wallingford, Connecticut. The purchase price was approximately $1.7 million in
newly-issued common stock payable at closing, plus the assumption of
approximately $1.2 million in liabilities of the acquired business, an
additional contingent payment of up to a maximum of approximately $1.3 million
in cash and approximately $5.4 million in newly-issued common stock payable over
a three-year period contingent on the achievement of certain performance
benchmarks by the acquired business. The acquisition was recorded using the
purchase method of accounting.
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LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
On May 4, 1998, the Company made a $4.5 million investment in
convertible preferred stock of Empower of Austin, Texas. Empower's mission is to
improve the quality of people's lives by empowering them with personalized
healthcare information and enabling electronic interactions and online
transactions with the healthcare industry. The investment was recorded using
the cost method of accounting.
The Company does not believe that inflation has had a material effect
on the results of its operations in the past three years.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK SENSITIVE
INSTRUMENTS
The Company currently does not invest excess funds in derivative
financial instruments or other market rate sensitive instruments.
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PART II - OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(c)
On April 30, 1998, the Company issued approximately 48,381 shares of
its common stock in connection with the acquisition of substantially all of the
business assets of Lincoln (valued at approximately $1.7 million based on a
market trading average over a 20-day period ending immediately prior to the
consummation of the transaction). The shares were issued to certain shareholders
of Lincoln as "restricted securities" pursuant to Section 4(2) of the
Securities Act of 1933, as amended, in privately negotiated transactions not
constituting public offerings.
(d)
On October 9, 1996, the Company's Registration Statement on Form S-1
File No. 333-10213 was declared effective by the Securities and Exchange
Commission (the "IPO Registration Statement"). The IPO Registration Statement
registered a total of 2,723,623 shares of Common Stock issued and sold by the
Company and a total of 151,377 shares of Common Stock sold by certain
shareholders of the Company (collectively, the "Offering"). All of the shares
covered by the Registration Statement were sold upon termination of the Offering
on October 16, 1996 to an underwriting syndicate managed by William Blair &
Company, L.L.C., Donaldson, Lufkin & Jenrette Securities Corporation and
Jefferies and Company, Inc. The shares sold by the Company were sold at an
aggregate price of $43,577,968, netting $40,527,510 to the Company after
underwriters' discount of $3,050,458. The shares sold by the selling
shareholders were sold at an aggregate price of $2,422,032, netting $2,252,490
to the selling shareholders after underwriters' discount of $169,542. From the
effective date of the Registration Statement, the Company has incurred
approximately $994,233 in expenses in addition to the underwriters' discount
described above in connection with the registration, offering, issuance and sale
of the shares in the Offering, netting estimated proceeds from the Offering to
the Company of approximately $39.5 million.
Page 15
<PAGE> 16
(d) (Continued)
None of such expenses were paid to any officer, director or 10% or
greater stockholder of the Company or and affiliate of any such persons. Since
the effective date of the Registration Statement, the Net Proceeds have been
applied to the following uses in the following estimated amounts:
Construction of buildings and facilities: $ --------
---------------
Purchase and installation of equipment: $ 10,460,000
---------------
Purchase and improvement of real estate: $ 1,729,000
----------------
Acquisitions of other business (es): $ 14,904,000
---------------
Repayment of indebtedness: $ 2,834,000
----------------
Working Capital: $ --------
----------------
Temporary Investment: $ 5,926,000
---------------
Payment of accrued compensation: $ 3,680,000
---------------
The temporary investments specified above have consisted primarily of short-term
commercial paper. Except for payment of accrued compensation at the time of the
IPO in the amount of $3,509,000, none of the payments of proceeds mentioned
above were paid to any officer, director or 10% or greater stockholder of the
Company or and affiliate of any such persons.
Page 16
<PAGE> 17
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On May 13, 1998 the Company held its annual meeting of stockholders.
Stockholders of the Company voted in favor of the election of Reginald M.
Ballantyne III, Kenneth S. George and John L. Silverman to the Company's board
of directors. Messrs. Ballantyne, George and Silverman were each elected to
serve a three-year term expiring at the Company's annual meeting in 2001. In the
election of Mr. Ballantyne, 9,325,401 total votes were cast in favor and 1,437
votes were cast against or withheld. In addition, there were 0 abstentions
and 0 broker non-voters. In the election of Mr. George, 9,325,441 total
votes were cast in favor and 1,397 votes were cast against or withheld. In
addition, there were 0 abstentions and 0 broker non-voters. In the
election of Mr. Silverman, 9,325,441 total votes were cast in favor and 1,397
votes were cast against or withheld. In addition, there were 0 abstentions
and 0 broker non-voters. On May 13, 1998, the board of directors appointed
C. Everett Koop as a director of the Company with a term continuing until 1999.
In addition to Messrs. Ballantyne, George, Silverman and Koop, the other
directors serving on the Company's eight-person board of directors are Richard
Helppie, Jr. and Richard Saslow (each with terms continuing until 1999) and
Douglas Peters and Bernard Lachner (each with terms continuing until 2000). At
the same meeting, stockholders of the Company also voted in favor of an
amendment to Article VI of the Company's Amended and Restated Certificate of
Incorporation which increased the maximum number of directors of the Company
from nine (9) to fifteen (15). As currently amended, Article VI now provides
that the authorized number of directors shall be not less than three (3) nor
more than (15), with the exact number within the range to be fixed by resolution
of the Company's board of directors. The affirmative vote of two-thirds of the
outstanding shares of the Company was required to approve this amendment. In the
vote for the amendment, 9,255,921 total votes were cast in favor and 70,917
votes were cast against or withheld. In addition, there were 0 abstentions
and 0 broker non-voters.
ITEM 5. OTHER INFORMATION
On April 30, 1998, the Company purchased substantially all of the
business assets of Lincoln, a healthcare outsourcing business located in
Wallingford, Connecticut. The purchase price was approximately $1.7 million in
newly-issued common stock payable at closing, plus the assumption of
approximately $1.2 million in liabilities of the acquired business, and an
additional contingent payment of up to a maximum of approximately $1.3 million
in cash and approximately $5.4 million in newly-issued common stock payable over
a three year period contingent on the achievement of certain performance
benchmarks by the acquired business. The acquisition was recorded using the
purchase method of accounting.
On May 4, 1998, the Company made a $4.5 million investment in
convertible preferred stock of Empower of Austin, Texas. Empower's mission is to
improve the quality of people's lives by empowering them with personalized
healthcare information and enabling electronic interactions and online
transactions with the healthcare industry. The investment was recorded using the
cost method of accounting.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
27.1* Financial Data Schedule for the Second Quarter ended June 30,
1998
27.2* Financial Data Schedule for the Second Quarter ended June 30,
1997
(b) None
- -------------------------------
* Filed herewith
Page 17
<PAGE> 18
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Superior Consultant Holdings Corporation
Date: August 12, 1998 By: /s/ Richard D. Helppie, Jr.
- ---------------------- ---------------------------------
Richard D. Helppie, Jr,
President, Chief Executive Officer
(Principal Executive Officer)
Date: August 12, 1998 By: /s/ James T. House
- ---------------------- ----------------------------------
James T. House
Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
Page 18
<PAGE> 19
Exhibit Index
-------------
<TABLE>
<CAPTION>
Exhibit No. Description
- ----------- -----------
<S> <C>
27.1* Financial Data Schedule
27.2* Financial Data Schedule (Restated)
</TABLE>
- -----------
* Filed herewith
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM (A)
FINANCIAL STATEMENT FOR THE 2ND QUARTER ENDED JUNE 30, 1998 CONTAINED IN THE
COMPANY'S FORM 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH (B)
REPORT ON FORM 10-Q.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> JUN-30-1998
<CASH> 68,918
<SECURITIES> 0
<RECEIVABLES> 26,023
<ALLOWANCES> (741)
<INVENTORY> 0
<CURRENT-ASSETS> 96,587
<PP&E> 15,908
<DEPRECIATION> (4,837)
<TOTAL-ASSETS> 123,816
<CURRENT-LIABILITIES> 7,690
<BONDS> 0
0
0
<COMMON> 103
<OTHER-SE> 114,883
<TOTAL-LIABILITY-AND-EQUITY> 123,816
<SALES> 52,180
<TOTAL-REVENUES> 52,180
<CGS> 0
<TOTAL-COSTS> 26,814
<OTHER-EXPENSES> 20,565
<LOSS-PROVISION> 129
<INTEREST-EXPENSE> 14
<INCOME-PRETAX> 7,423
<INCOME-TAX> 2,989
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,434
<EPS-PRIMARY> .43
<EPS-DILUTED> .42
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FINANCIAL
STATEMENTS FOR THE 2ND QTR ENDED 6/30/97 CONTAINED IN THE COMPANY'S FORM 10-Q
(RESTATED) AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH REPORT ON FORM
10-Q.
</LEGEND>
<RESTATED>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 32,187
<SECURITIES> 0
<RECEIVABLES> 15,416
<ALLOWANCES> (519)
<INVENTORY> 0
<CURRENT-ASSETS> 48,320
<PP&E> 8,444
<DEPRECIATION> (3,489)
<TOTAL-ASSETS> 58,646
<CURRENT-LIABILITIES> 11,198
<BONDS> 0
0
0
<COMMON> 82
<OTHER-SE> 44,916
<TOTAL-LIABILITY-AND-EQUITY> 58,646
<SALES> 34,811
<TOTAL-REVENUES> 34,811
<CGS> 0
<TOTAL-COSTS> 17,777
<OTHER-EXPENSES> 14,467
<LOSS-PROVISION> 380
<INTEREST-EXPENSE> 69
<INCOME-PRETAX> 3,484
<INCOME-TAX> 1,368
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,116
<EPS-PRIMARY> 0.26
<EPS-DILUTED> 0.25
</TABLE>
