<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 September 30, 1999
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 November 11, 1999, 10,468,720 shares of the registrant's common stock (par
value $.01) were outstanding.
<PAGE> 2
SUPERIOR CONSULTANT HOLDINGS CORPORATION
QUARTER ENDED SEPTEMBER 30, 1999
INDEX
<TABLE>
<CAPTION>
PART I - FINANCIAL INFORMATION PAGE NO.
---------
<S> <C>
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of September 30, 1999 and December 3
31, 1998 (unaudited)
Condensed Consolidated Statements of Operations for the three and nine months 4
ended September 30, 1999 and 1998 (unaudited)
Condensed Consolidated Statements of Cash Flows for nine months ended 5
September 30, 1999 and 1998 (unaudited)
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of 10
Operations
Item 3. Quantitative and Qualitative Disclosure About Market Risk Sensitive
Instruments 16
PART II - OTHER INFORMATION
Item 5. Other Information 17
Item 6. Exhibits and Reports on Form 8-K
17
SIGNATURES 18
</TABLE>
Page 2
<PAGE> 3
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>
SEPTEMBER 30, DECEMBER 31,
1999 1998
---------------- ------------------
ASSETS
<S> <C> <C>
Current assets
Cash and cash equivalents $ 31,077 $ 51,519
Short-term investments 4,883 -
Accounts receivable, net 42,728 40,324
Accrued interest receivable and prepaid expenses 4,729 1,867
Deferred income taxes 2,176 1,067
---------------- ------------------
Total current assets 85,593 94,777
Property and equipment, net 18,281 16,472
Deferred income taxes 92 -
Goodwill, net 17,362 16,317
Investments 83,483 6,050
Other long-term assets 19 110
---------------- ------------------
Total Assets $ 204,830 $ 133,726
================ ==================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable $ 4,033 $ 4,035
Accrued liabilities 4,765 4,186
Deferred revenue 5,334 2,425
---------------- ------------------
Total current liabilities 14,132 10,646
Long-term debt - 61
Deferred income taxes 27,294 961
Deferred performance bonuses 275 564
Stockholders' equity
Preferred stock; authorized, 1,000,000 shares of
$.01 par value; issued and outstanding, 2,000 as of
September 30, 1999 and December 31, 1998 - -
Common stock; authorized, 30,000,000 shares of
$.01 par value; issued, 10,383,614 as of September 30, 1999
and 10,322,039 as of December 31, 1998 103 103
Additional paid-in capital 113,362 109,113
Accumulated other comprehensive income 39,473 -
Retained earnings 13,118 12,936
Treasury stock - at cost, 85,000 shares as of September 30, 1999
and no shares as of December 31, 1998 (2,269) -
Stockholders' notes receivable (658) (658)
---------------- ------------------
Total stockholders' equity 163,129 121,494
---------------- ------------------
Total Liabilities and Stockholders' Equity $ 204,830 $ 133,726
================ ==================
</TABLE>
See notes to condensed consolidated financial statements.
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SUPERIOR CONSULTANT HOLDINGS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
--------------------------------- -----------------------------
1999 1998 1999 1998
---------------- -------------- --------------- ------------
<S> <C> <C> <C> <C>
Revenues $ 37,584 $ 33,123 $ 119,759 $ 85,303
Operating costs and expenses
Cost of services 24,508 17,686 67,127 44,501
Selling, general and administrative expenses 18,102 12,457 48,652 33,018
Costs incurred in connection with new business initiative - - 4,840 -
---------------- -------------- --------------- ------------
Total operating costs and expenses 42,610 30,143 120,619 77,519
---------------- -------------- --------------- ------------
Earnings (loss) from operations (5,026) 2,980 (860) 7,784
Other income, principally interest income 380 1,122 1,437 3,743
---------------- -------------- --------------- ------------
Earnings (loss) before income taxes (4,646) 4,102 577 11,527
Provision (benefit) for income taxes (1,638) 1,655 395 4,643
---------------- -------------- --------------- ------------
Net earnings (loss) $ (3,008) $ 2,447 $ 182 $ 6,884
================ ============== =============== ============
Net earnings (loss) per share - basic $ (0.29) $ 0.24 $ 0.02 $ 0.67
================ ============== =============== ============
Net earnings (loss) per share - diluted $ (0.29) $ 0.23 $ 0.02 $ 0.65
================ ============== =============== ============
Weighted average number of common and
common equivalent shares outstanding - basic 10,328 10,284 10,346 10,252
================ ============== =============== ============
Weighted average number of common and
common equivalent shares outstanding - diluted 10,388 10,638 10,483 10,564
================ ============== =============== ============
</TABLE>
See notes to condensed consolidated financial statements.
Page 4
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SUPERIOR CONSULTANT HOLDINGS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
1999 1998
---------------- ------------------
Cash flows from operating activities:
<S> <C> <C>
Net earnings $ 182 $ 6,884
Adjustments to reconcile net earnings
to net cash provided by (used in) operating activities:
Depreciation and amortization of property and equipment 4,711 1,241
Goodwill amortization 978 555
Bad debt expense 1,078 279
Deferred income tax credits (1,736) (384)
Non-cash compensation 2,856 -
Interest on marketable debt security (250) -
Changes in operating assets and liabilities, net of effects
from acquisitions:
Accounts receivable (2,614) (13,370)
Accrued interest receivable and prepaid expenses (2,787) 262
Other long-term assets 91 15
Accounts payable (2) 1,276
Accrued liabilities, deferred bonuses and compensation 290 (704)
Deferred revenue 2,909 (711)
Income taxes payable - 366
---------------- -----------------
Net cash provided by (used in) operating activities 5,706 (4,291)
Cash flows from investing activities:
Investment in WebMD (10,089) -
Investment in drkoop.com - (4,549)
Investment in marketable debt security (5,686) -
Purchase of businesses (2,926) (12,154)
Purchases of property and equipment (6,510) (6,766)
--------------- -----------------
Net cash used in investing activities (25,211) (23,469)
Cash flows from financing activities:
Repurchase of common stock (2,269) -
Cancellation of common shares (58) -
Exercise of stock options 1,451 354
Costs of follow on offering - (22)
Repayment of long-term debt (61) (124)
--------------- -----------------
Net cash provided by (used in) financing activities (937) 208
--------------- -----------------
Net decrease in cash (20,442) (27,552)
Cash and cash equivalents, beginning of period 51,519 87,253
--------------- -----------------
Cash and cash equivalents, end of period $ 31,077 $ 59,701
=============== =================
Supplemental disclosure of cash flow information:
Interest payments $ 26 $ 15
Income tax payments $ 4,138 $ 5,313
Unrealized gain on investment in drkoop.com, net of deferred
income tax liablilty $ 40,100 $ -
Unrealized loss on investment in marketable debt security,
net of deferred tax asset $ 627 $ -
Non-cash acquisition costs (issuance of common stock
in connection with acquisition) $ - $ 1,854
</TABLE>
See notes to condensed consolidated financial statements.
Page 5
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SUPERIOR CONSULTANT HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
SEPTEMBER 30, 1999
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 and nine month
periods ended September 30, 1999 are not necessarily indicative of the results
that may be expected for the year ended December 31, 1999.
These financial statements should be read in conjunction with the
Company's audited consolidated financial statements and notes thereto included
in the Company's 1998 annual report on Form 10-K filed by the Company with the
Securities and Exchange Commission on March 31, 1999.
NOTE 2 - COSTS INCURRED IN CONNECTION WITH NEW BUSINESS INITIATIVES
During the second quarter of 1999, certain one time costs were incurred
in connection with new business initiatives. These costs consisted primarily of
approximately $2.9 million relating to the issuance of warrants and
approximately $1.5 million for accelerated depreciation expense on certain
property and equipment. The warrants were valued using the Black-Scholes model.
In connection with these initiatives, the Company will install
specified types of software in its own operations and personal computers. These
initiatives have shortened the estimated useful life of some of the Company's
software and hardware currently in use. The effect of the change in the
estimated useful life was to increase depreciation expense by $1.5 million, and
decrease net earnings by $0.9 million or $0.09 per diluted share, for the nine
months ended September 30, 1999.
In addition, during the second and third quarters of 1999, other
operating costs were incurred in connection with the Company's various new
business initiatives. Of these costs, a portion of costs of services and
selling, general and administrative expenses was funded by a business partner,
and were recorded as a reduction to expense. The reduction in cost of services
was $239,000 and $442,000 for the three and nine months ended September 30,
1999, respectively, and the reduction in selling, general and administrative
expenses was $599,000 and $1,558,000 for the three and nine months ended
September 30, 1999, respectively.
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NOTE 3 - NET EARNINGS (LOSS) PER SHARE
The Company accounts for Earnings (Loss) Per Share under the rules of
Statement of Financial Accounting Standard No. 128, "Earnings Per Share". The
Company's basic net earnings (loss) per share amounts have been computed by
dividing net earnings (loss) by the weighted average number of outstanding
common shares. The Company's diluted net earnings (loss) per share is computed
by dividing net earnings (loss) by the weighted average number of outstanding
common shares and common share equivalents relating to stock options, when
dilutive.
The computation of diluted net earnings (loss) per share for the three
months ended September 30, 1999 and 1998 includes approximately 60,000 and
354,000 shares of common stock equivalents, respectively. The computation of
diluted net earnings per share for the nine months ended September 30, 1999 and
1998 includes approximately 137,000 and 312,000 shares of common stock
equivalents, respectively. Options and warrants to purchase approximately
1,423,000 and 47,400 shares of common stock with a weighted average exercise
price of $36.65 and $41.72 were outstanding at September 30, 1999 and 1998
respectively, but were excluded from the computation of common share equivalents
because to do so would have been antidilutive for the periods presented.
NOTE 4 - BUSINESS ACQUISITION AND INVESTMENTS
Effective January 1, 1999, the Company purchased substantially all of
the business assets of the Integration Services Group ("ISG") of Healthdyne
Information Enterprises. ISG, which is located in Marietta, Georgia, specializes
in strategic, tactical and technical consulting for healthcare organizations.
The purchase price was approximately $2.2 million in cash. The business
combination was recorded using the purchase method of accounting and,
accordingly, the operating results of ISG 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 is being amortized over 15 years.
On May 20, 1999, the Company made a $10.0 million investment in
preferred stock of WebMD of Atlanta, Georgia. WebMD offers a comprehensive suite
of internet-based services and information for physicians, as well as healthcare
information services and online communities for consumers. The investment was
recorded using the cost method of accounting.
In 1998, the Company invested $6.0 million in drkoop.com, an internet
start-up company, and recorded its investment at cost. During the quarter ended
June 30, 1999, drkoop.com completed its initial public offering, providing a
readily determinable fair value of the Company's investment in drkoop.com's
stock. The Company's investment is restricted by a lock-up agreement, which
expires in December 1999. Further, the Company's investment was issued without
registration and its resale is governed by Rule 144 of the Securities and
Exchange Commission. Based on drkoop.com's trading volume since its IPO, the
Company believes that its entire investment is reasonably expected to qualify
for sale prior to September 30, 2000. Therefore, the Company's investment in
drkoop.com is subject to the accounting guidelines of Statement of Financial
Accounting Standard No. 115, "Accounting for Certain Investments in Debt and
Equity Securities", and as of September 30, 1999, the Company has recorded its
investment at fair value, resulting in a substantial unrealized gain. The
Company's belief that its entire investment is reasonably expected to qualify
for sale within one year, notwithstanding the Rule 144 limitations, is a
significant accounting estimate that if changed, could be material to the
consolidated financial statements.
The Company owns approximately 14% of drkoop.com's outstanding common
stock as of September 30, 1999.
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NOTE 5 - OTHER COMPREHENSIVE INCOME
Other comprehensive income includes net unrealized gains and losses on
investments in marketable equity and debt securities, primarily from the
Company's investment in drkoop.com. Total comprehensive income is summarized as
follows:
<TABLE>
<CAPTION>
Three Months Nine Months
ended September 30, ended September 30,
------------------- -------------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net earnings (loss) $ (3,008) $ 2,447 $ 182 $ 6,884
Other comprehensive income
(loss), net of income tax (5,497) - 39,473 -
------------ ------------ ----------- -----------
Total comprehensive income (loss) $ (8,505) $ 2,447 $ 39,655 $ 6,884
============ ============ =========== ===========
</TABLE>
NOTE 6 - SEGMENT FINANCIAL INFORMATION
For the third quarter ended September 30, 1999, the Company had three
business and reportable segments: healthcare consulting, enterprise-wide
communications and e-commerce / systems integration. Prior to July 1, 1999, the
Company only reported two segments: healthcare consulting and enterprise-wide
communications. As previously disclosed in the Company's second quarter 1999
Form 10-Q, the Company was restructured beginning July 1, 1999 to reflect its
new business initiatives in e-commerce / systems integration. The healthcare
consulting segment provides information technology, as well as strategic and
operations management consulting and outsourcing services to a broad
cross-section of healthcare industry participants and information systems
vendors. The enterprise-wide communications segment assists companies in various
industries, including healthcare, with network and telecommunication design and
acquisition, enterprise messaging, intranet and web strategies, workgroup
consulting, as well as software and application development solutions. The
e-commerce / systems integration segment has a national focus on promoting the
use of electronic information exchange to address the opportunities and
challenges of the health care industry. The e-commerce / systems integration
segment assists hospitals, payors, physician networks, internet based healthcare
companies, and ancillary healthcare providers in developing and implementing
strategic business objectives as they relate to e-commerce / systems integration
and the efficient use of the internet in healthcare. The Company evaluates
segment performance and allocates resources based on gross profit.
Information on the Company's operations for the three and nine months
ended September 30, 1999 and 1998 is summarized as follows (in thousands:)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
----------------------------------- -------------------------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues:
Healthcare consulting $ 34,102 $ 28,640 $ 108,147 $ 72,176
Enterprise-wide communications 3,274 4,483 11,404 13,127
e-commerce / systems integration 208 - 208 -
============== =============== ============= ==============
Consolidated revenues $ 37,584 $ 33,123 $ 119,759 $ 85,303
============== =============== ============= ==============
Gross Profit (Loss) and Income Statement
Reconciliation:
Healthcare consulting $ 12,660 $ 13,832 $ 49,003 $ 35,125
Enterprise-wide communications 624 1,605 3,837 5,677
e-commerce / systems integration (208) - (208) -
============== =============== ============= ==============
Consolidated gross profit $ 13,076 $ 15,437 $ 52,632 $ 40,802
============== =============== ============= ==============
Unallocated:
SG&A expenses $ 18,102 $ 12,457 $ 48,652 $ 33,018
Costs incurred in connection with new business
initiative - - 4,840 -
Other income, principally interest (380) (1,122) (1,437) (3,743)
-------------- --------------- ------------- --------------
Sub-total 17,722 11,335 52,055 29,275
-------------- --------------- ------------- --------------
Consolidated earnings (loss) before income taxes $ (4,646) $ 4,102 $ 577 $ 11,527
============== =============== ============= ==============
</TABLE>
During the three and nine months ended September 30, 1999 and 1998,
there were no intercompany sales and there was no change in the basis of
measurement of group earnings or loss.
The Company's reportable segments are business units that offer and
provide different services through different means. The Company's recruiting,
training, information technology, merger and acquisition, accounting, finance
and senior management functions are combined into unallocated SG&A expenses.
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NOTE 7 - NEW ACCOUNTING PRONOUNCEMENT
The Financial Accounting Standards Board has issued Statement of
Financial Accounting Standards No. 133, Derivative Instruments and Hedging
Activities ("SFAS 133"), which is effective for fiscal years beginning after
June 15, 2000. This statement establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded in
other contracts, (collectively referred to as derivatives) and for hedging
activities. The Company does not anticipate that adoption of SFAS 133 will have
a material effect on the consolidated financial statements.
NOTE 8 - SUBSEQUENT EVENT
On October 19, 1999, the Company made a $5.0 million investment in
convertible preferred stock of Neoforma.com of Santa Clara, California.
Neoforma.com is a leading provider of business-to-business e-commerce services
in the healthcare marketplace. The investment was recorded using the cost method
of accounting.
Page 9
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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, income, and Year 2000 issues 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,
without limitation, the risk factors identified in the Company's Registration
Statement Form S-3 (File No. 333-53339), and Registration Statement on Form S-3
(File No. 333-70337).
For the third quarter ended September 30, 1999, the Company conducted
business in three segments through its primary operating subsidiary, Superior
Consultant Company, Inc. ("Superior"). Superior is a leading provider of Digital
Business TransformationTM services to the healthcare industry. Superior's
services assist clients to compete in the information driven economy. Through
consulting, outsourcing, systems integration and e-commerce services, Superior
provides all segments of the healthcare and other industries with the tools and
strategies needed to effectively serve customers and capitalize on e-commerce
opportunities. The healthcare consulting segment provides information
technology, as well as strategic and operations management consulting and
outsourcing services to a broad cross-section of healthcare industry
participants and information systems vendors. The enterprise-wide communications
segment assists companies in various industries, including healthcare, with
network and telecommunication design and acquisition, enterprise messaging,
intranet and web strategies, workgroup consulting, as well as software and
application development solutions. The e-commerce / systems integration segment,
which was established effective July 1, 1999, has a national focus on promoting
the use of electronic information exchange to address the opportunities and
challenges of the health care industry. The e-commerce / systems integration
segment assists hospitals, payors, physician networks, internet based healthcare
companies, and ancillary healthcare providers in developing and implementing
strategic business objectives as they relate to e-commerce / systems integration
and the efficient use of the internet in healthcare.
As of July 1, 1999, the Company was restructured as a result of
the new business initiatives into e-commerce and systems integration. As
healthcare and other sectors move increasingly to internet and web based
technologies and applications, and as the Company continues to innovate services
and solutions to develop and capitalize on this growing market, the Company will
incur risks related to its participation in such untested opportunities in
markets and quickly evolving lines of business. Such risks can include, but are
not limited to, new and unforeseen technologies superceding development of the
internet and/or the systems integration platforms in which the Company invests;
the e-commerce and/or systems integration markets taking turns not foreseen by
the Company and adverse to the positioning and investments undertaken by the
Company; and increased competition for consultant talent in the e-commerce field
increasing the Company's cost of providing services.
The Company derives substantially all of its revenues from fees for
professional services, the majority of which are billed at contracted hourly
rates. The Company establishes standard billing guidelines based on the type and
level of service offered. Actual billing rates are established on a project by
project basis and may vary from the standard guidelines. Billings are generally
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. A portion of the Company's
projects are billed on a fixed-fee basis, typically on a monthly fee basis. The
Company recognizes revenue on fixed fee projects in a manner similar to the
percentage of completion basis. As of September 30, 1999, the Company has
increased the number of projects billed on a fixed-fee basis. Increased use of
fixed-fee contracts subjects the Company to increased risks, including cost
overruns. For outsourcing engagements, the Company recognizes revenue in the
amount billable under the contract, which is typically billable on a monthly
basis. As of September 30, 1999, the Company has seven 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.
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The Company's historical revenue growth is attributable to various
factors, including an increase in the number of projects for existing and new
clients, and expanded geographic presence. In addition, the Company seeks to
increase revenues by expanding its range of specialty services. The Company
manages its client development efforts through several strategic services
groups, each having specific geographic responsibility and focus.
The Company's most significant expense is cost of services, which
consists primarily of consultant salaries and benefits. In recent years,
consultant compensation expense has grown faster than consultant billing rates,
resulting in an increase in the Company's cost of services as a percentage of
revenues. The Company foresees this trend continuing as competition for
recruiting and retaining skilled consultants intensifies, particularly in the
area of e-commerce services. The Company has sought to address this issue by
adding an additional variable portion of compensation payable upon the
achievement of measurable performance goals, including practice specific and
Company wide revenue and earnings targets. In addition, the Company has sought
to address compensation expense pressures through increased use of stock options
as an overall part of its compensation package. These efforts have been hampered
recently by the impact of the Company's current market price.
The Company's cost of services as a percentage of revenues is also
impacted by its consultant utilization. The Company attempts 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 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, lines of business, hiring of consultants in
peak hiring periods and further geographic expansion have and can from time to
time adversely affect utilization. Also, seasonal factors, such as vacation days
and total business days in a quarter, as well as the timing of the annual
employees' meeting have and can result in lower consultant 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, as the majority of employment
costs of these personnel are fixed.
Selling, general and administrative expenses include the costs of
recruiting, continuing education, marketing, facilities, administration,
including compensation and benefits, outside professional fees, equipment
depreciation and amortization of goodwill.
As of September 30, 1999, the Company recorded its investment in
drkoop.com at its then fair value of $73.4 million. The Company has recorded the
difference between fair value and cost, net of income tax, as other
comprehensive income for the three and nine months ended September 30, 1999.
During the three months ended September 30, 1999, as compared with the
three months ended September 30, 1998, the Company experienced slower revenue
growth than anticipated, attributable to a decline in demand for consulting
services, coupled with client reluctance to begin large initiatives in the late
stages of 1999. The Company has addressed this late 1999 phenomena by reducing
cost of services expense by an estimated $1.5 million for the fourth quarter of
1999. Additionally, the Company has trimmed SG&A costs, with anticipated fourth
quarter 1999 savings of $275,000. These savings were made with great care to
optimize the Company's work force, sustain client relationships and ensure the
Company's ability to pursue its growth strategies.
Page 11
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THREE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO THREE MONTHS ENDED
SEPTEMBER 30, 1998
Revenues. Revenues in the healthcare consulting segment increased by
$5.5 million, or 19.1%, to $34.1 million for the three months ended September
30, 1999, as compared to $28.6 million for the three months ended September 30,
1998. The revenue increase was due primarily to continued growth in core lines
of business, activity from the Company's acquisitions and revenue realized from
the outsourcing contracts consummated after the second quarter of 1998. Revenues
in the enterprise-wide communications segment decreased by $1.2 million, or
27.0%, to $3.3 million for the three months ended September 30, 1999, as
compared to $4.5 million for the three months ended September 30, 1998. The
revenue decrease is attributable to lower consultant utilization for this
segment. Revenues from the e-commerce / systems integration segment for the
three months ended September 30, 1999 were $0.2 million.
Cost of Services. Cost of services in the healthcare consulting
segment increased by $6.6 million, or 44.6%, to $21.4 million for the three
months ended September 30, 1999, as compared to $14.8 million for the three
months ended September 30, 1998. The increase was due primarily to the
additional number of consultants required to support the larger revenue base, as
well as increases in their compensation levels. Cost of services as a percentage
of revenue for the healthcare consulting segment increased to 62.9% for the
three months ended September 30, 1999, as compared to 51.7% for the three months
ended September 30, 1998. The increase is attributable to lower consultant
utilization for this segment. Cost of services in the enterprise-wide
communications segment decreased by $0.2 million, or 6.9%, to $2.7 million for
the three months ended September 30, 1999, as compared to $2.9 million for the
three months ended September 30, 1998. The decrease was due primarily to the
transfer of consultants to the e-commerce / systems integration line of
business. Cost of services as a percentage of revenue for this segment increased
to 80.9% for the three months ended September 30, 1999, as compared to 64.2% for
the three months ended September 30, 1998. The increase is attributable to lower
consultant utilization in this segment. Cost of services in the e-commerce /
systems integration segment were $0.4 million for the three months ended
September 30, 1999.
Selling, general and administrative expenses. Selling, general and
administrative expenses increased by $5.6 million, or 45.3%, to $18.1 million
for the three months ended September 30, 1999, as compared to $12.5 million for
the three months ended September 30, 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 48.2% from
37.6%. 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.
Other income and expense. Other income was $0.4 million for the three
months ended September 30, 1999, as compared to $1.1 million of other income for
the three months ended September 30, 1998. The change was due to reduced
interest earned on the Company's short-term investments. The Company's
short-term investments were lower as of September 30, 1999, in comparison to
September 30, 1998, due primarily to acquisitions, equity investments and
additions to property and equipment.
NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30, 1998
Revenues. Revenues in the healthcare consulting segment increased by
$36.0 million, or 49.8%, to $108.1 million for the nine months ended September
30, 1999, as compared to $72.1 million for the nine months ended September 30,
1998. The revenue increase was due primarily to continued growth in core lines
of business, activity from the Company's acquisitions and revenue realized from
the outsourcing contracts consummated after the second quarter of 1998. Revenues
in the enterprise-wide communications segment decreased by $1.7 million, or
13.1%, to $11.4 million for the nine months ended September 30, 1999, as
compared to $13.1 million for the nine months ended September 30, 1998. The
revenue decrease is attributable to lower consultant utilization for this
segment. Revenues from the e-commerce / systems integration segment for the nine
months ended September 30, 1999 were $0.2 million.
Page 12
<PAGE> 13
NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30, 1998 (CONTINUED)
Cost of Services. Cost of services in the healthcare consulting segment
increased by $22.0 million, or 59.3%, to $59.1 million for the nine months ended
September 30, 1999, as compared to $37.1 million for the nine months ended
September 30, 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 revenue for the
healthcare consulting segment increased to 54.7% for the nine months ended
September 30, 1999, as compared to 51.3% for the nine months ended September 30,
1998. The increase is attributable to lower consultant utilization for this
segment. Cost of services in the enterprise-wide communications segment
increased by $0.1 million, or 1.6%, to $7.6 million for the nine months ended
September 30, 1999, as compared to $7.5 million for the nine months ended
September 30, 1998. Cost of services as a percentage of revenue for this segment
increased to 66.4% for the nine months ended September 30, 1999, as compared to
56.8% for the nine months ended September 30, 1998. The increase is attributable
to lower consultant utilization in this segment. Cost of services in the
e-commerce / systems integration segment were $0.4 million for the three months
ended September 30, 1999.
Selling, general and administrative expenses. Selling, general and
administrative expenses increased by $15.6 million, or 47.3%, to $48.7 million
for the nine months ended September 30, 1999, as compared to $33.1 million for
the nine months ended September 30, 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 40.6% 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.
Costs incurred in connection with new business initiatives. The Company
incurred approximately $4.8 million of costs in connection with the start-up of
new business initiatives, of which approximately $4.4 million were non-cash
charges. (See Note 2 of the condensed consolidated financial statements of this
report)
Other income and expense. Other income was $1.4 million for the nine
months ended September 30, 1999, as compared to $3.7 million of other income for
the nine months ended September 30, 1998. The change was due to reduced interest
earned on the Company's short-term investments. The Company's short-term
investments were lower as of September 30, 1999, in comparison to September 30,
1998, due primarily to acquisitions, equity investments and additions to
property and equipment.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary capital needs have been and will be to fund its
acquisitions, equity investments, equipment purchases and e-commerce and systems
integration initiatives. The Company believes that its current cash and cash
equivalents, marketable securities, cash generated from operations, plus
available credit under its bank credit facility will be sufficient to finance
its working capital and capital expenditure requirements for at least the next
twelve months.
At September 30, 1999, the Company had cash and cash equivalents of
$31.1 million and working capital of $71.5 million, as compared with working
capital of $84.1 million at December 31, 1998. Currently, the Company's
remaining maximum contingency payments relating to its completed business
acquisitions total approximately $12.9 million ($2.7 million in cash and $10.2
million in common stock) payable over the next three years.
The Company has an unsecured line of credit arrangement at Comerica
Bank N.A. of $3.0 million, which bears interest at the prime rate of 8.25% as of
September 30, 1999. In November 1999, the Company increased its line of credit
to $25.0 million, bearing interest at 0.25% to 0.50% below the bank's prime
rate. As of September 30, 1999, and at the time the line of credit was modified,
the Company had no amounts outstanding under either agreement.
Page 13
<PAGE> 14
During the third quarter ended September 30, 1999, The Company used
$2.3 million to acquire 85,000 shares of common stock for treasury, at an
average price per share of $26.71, under the Company's stock repurchase program
announced in July 1999. The Company has remaining Board authorization to
purchase up to 915,000 additional shares.
Net cash provided by operations was $5.7 million for the nine months
ended September 30, 1999 as compared to cash used in operations of $4.3 million
for the nine months ended September 30, 1998. The increase in cash provided by
operations is primarily due to an increase in non-cash expenses and deferred
revenue, partially offset by increases in accounts receivable and prepaid
expenses.
Net cash of $25.2 million used in investing activities during the nine
months ended September 30, 1999 consists of the business acquisition, the equity
investment in WebMD, an investment in a marketable debt security, additions to
property and equipment and additional payments made relating to prior
acquisitions as required by the applicable purchase agreements.
Net cash used in financing activities was $0.9 million during the nine
months ended September 30, 1999 as compared to cash provided by financing
activities of $0.2 million for the nine months ended September 30, 1998. The
increase in cash used in financing activities is primarily due to the repurchase
of common stock, partially offset by the exercise of stock options.
On May 20, 1999, the Company made a $10.0 million investment in
preferred stock of WebMD of Atlanta, Georgia. WebMD offers a comprehensive suite
of internet-based services and information for physicians, as well as healthcare
information services and online communities for consumers. 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.
Y2K READINESS
The Year 2000 issue ("Y2K") exists because some computer programs use
two digits rather than four to define the applicable year. For instance, these
programs record the year 1998 as "98." Some date-sensitive software may
interpret the year "00" as 1900 rather than 2000. This could result in a system
failure or miscalculations, causing disruptions of operations, including a
temporary inability to engage in normal business activities.
Readiness
The Company has completed the Y2K remediation (including testing and
production) of all mission critical systems with the limited exception noted in
the following paragraph. The Company considers a system mission-critical if its
failure would have a material adverse effect on the Company's operations.
Some remediation work was deferred until the fourth quarter of calendar
year 1999 at two mission critical satellite offices as a result of anticipated
office relocations, construction and/or renovations. The Company anticipates
completing all mission-critical remediation activities at those two offices
during the fourth quarter. The Company has also established contingency plans to
allow all mission critical functions to continue even if the remediation
activities at those satellite offices are not completed by year end.
The Company's principal mission-critical IT systems are its accounting
and human resources systems, both of which are third-party software
applications. The human resources software was assessed, remediated and tested
by the software vendor. The accounting software was upgraded to the
vendor-developed Y2K compliant upgrade. Both the accounting and human resources
systems tested compliant.
The Company has sought information and assurances from its material
third-party vendors and suppliers regarding their Y2K readiness. The Company
intends to continuously evaluate its vendor and supplier relationships and has
developed contingency plans to mitigate the negative effects on the Company from
the Y2K problems of its suppliers and vendors.
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<PAGE> 15
Cost
The Company estimates the cost of its Y2K remediation efforts as
follows:
<TABLE>
<CAPTION>
EXPENDITURE TO DATE FUTURE TOTAL
---------------- ---------- ----------- -----------
<S> <C> <C> <C>
Internal Cost..... $ 744,000 $ 57,000 $ 801,000
External Cost..... 409,000 184,000 593,000
----------- ---------- -----------
Total............ $ 1,153,000 $ 241,000 $ 1,394,000
=========== ========== ===========
</TABLE>
Internal costs reflect the estimated cost of the time of Company
employees devoted to Y2K remediation. External Costs reflect all other costs,
including non-employee labor, capital expenditures, and other costs.
Approximately $361,000 of external costs is expected to be capitalizable. The
"to-date" expenditures were incurred through September 30, 1999. The cost of
senior management time devoted to monitoring and managing the Company's Y2K
remediation efforts is not included in the above estimates.
Other Risks
The Company performs Y2K services for certain clients, including
assisting them in identifying and assessing potential Y2K problems. In addition,
former, present and future clients could assert that certain other services
performed by the Company involved or are related to Y2K issues. There can be no
assurance that various third-party software products that the Company has
recommended and/or implemented for its clients will all prove to be Y2K
compliant. Any Y2K-related failure of critical client systems or processes that
are directly or indirectly connected to systems or software analyzed, designed,
developed, or implemented by the Company (or by the businesses the Company has
acquired or may acquire) may subject the Company to claims, whether or not the
failure is related to the services provided by the Company. The resolution of
such claims, if any, could have a material adverse effect on the Company.
The Company has attempted to include provisions in its client contracts
that disclaim implied warranties, limit express warranties and impose
limitations on the amounts and types of damages for which the Company may be
liable. However, not all past and present client contracts include such
provisions. The Company cannot ensure that it will be able to obtain these
provisions in agreements for future projects, nor can it ensure that these
provisions will prevent past, present or future clients from asserting Y2K
claims against the Company or will protect the Company from, or limit the amount
of the Company's liability for, Y2K claims asserted against the Company.
The Company also may be subjected to Y2K claims arising from services
performed by companies which the Company has acquired or may acquire. These
services may have been performed prior to the acquisition and so would not have
been in the Company's control. The resolution of such claims, if any, could have
a material adverse effect on the Company.
In addition, in many instances the services that the Company provides
to its clients are performed at the client's site, and require the use of the
client's information systems. The Company may be impaired in its ability to
perform services on client systems that are unavailable as a result of a
client's Y2K problems.
The Company has been and probably will be affected by clients'
reluctance to begin large initiatives in late 1999, due to clients' focus on
minimizing their own Y2K risks. This reluctance could have a material adverse
effect on the Company.
The Company will be at risk from external infrastructure failures,
including electrical power, telephone, and transportation, among others.
Investigation and assessment of infrastructures is beyond the scope and
resources of the Company. Among the risks arising from these sources are the
Company's inability to conduct business in its offices or at client sites that
lose electrical power or experience failure of elevator, security, HVAC or other
building systems; down time for billable personnel who are unable to travel to
or from engagement locations if transportation providers cannot provide service;
and major disruptions to Company business if telephone or cellular communication
is unavailable.
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<PAGE> 16
Contingency Plans
The Company has developed, and continues to assess and revise
contingency plans on an ongoing basis throughout 1999 in an effort to mitigate
the negative effect of any internal or external Y2K failure. The Company cannot
assure that any contingency plans will prevent internal or external Y2K failures
from having a material adverse effect on the Company.
Forward Looking Statements
The estimates regarding the costs of the Company's Y2K efforts, as well
as statements regarding the potential effect of Y2K issues on the Company and
the Company's plans to deal with issues or contingencies raised by Y2K issues,
are forward-looking statements. These statements are subject to a number of
risks and uncertainties, which could cause actual costs, effects or plans to
differ materially from the discussion above. Among these risks or uncertainties
are the following:
- difficulty in successfully identifying, assessing, replacing and
testing all hardware, software and systems which may be affected by Y2K
problems or which may contain microprocessors affected by those
problems;
- difficulty in identifying all third parties (including but not limited
to clients, third party suppliers, vendors, and other providers) whose
inability to process Y2K date information may affect the Company;
- the Company's lack of control over and limited knowledge of the Y2K
remediation efforts and Y2K readiness of those third parties;
- the availability, to the Company and material third parties
of qualified professionals to analyze and remedy Y2K problems;
- the risk that clients may delay or cancel purchasing services from the
Company because financial, technical, management or other resources of
the clients are directed to their own Y2K remediation or Y2K problems.;
and
- the effect of general economic conditions on the willingness of third
parties to make the expenditures necessary to address Y2K problems
which may affect the Company.
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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<PAGE> 17
PART II - OTHER INFORMATION
ITEM 5. OTHER INFORMATION
On October 19, 1999, the Company made a $5.0 million investment in
convertible preferred stock of Neoforma.com of Santa Clara, California.
Neoforma.com is a leading provider of business-to-business e-commerce services
in the healthcare marketplace. The investment was recorded using the cost method
of accounting.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
NONE
27* Financial Data Schedule for the Third Quarter Ended September
30, 1999
(b) Form 8-K
NONE
- ------------------------
* Filed herewith
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<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: November 15, 1999 By: Richard D. Helppie
- ----------------------- ----------------------
Chairman, Chief Executive Officer
(Principal Executive Officer)
Date: November 15, 1999 By: James T. House
- ----------------------- ------------------
Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
Page 18
<PAGE> 19
Exhibit Index
Exhibit No. Description
- ----------- -----------
27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FINANCIAL
STATEMENTS FOR THE QUARTER ENDED 9/30/99 CONTAINED IN THE COMPANY'S FORM 10-Q
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH REPORT ON FORM 10-Q
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JUL-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 35,960
<SECURITIES> 0
<RECEIVABLES> 44,665
<ALLOWANCES> (1,937)
<INVENTORY> 0
<CURRENT-ASSETS> 85,593
<PP&E> 29,156
<DEPRECIATION> (10,875)
<TOTAL-ASSETS> 204,830
<CURRENT-LIABILITIES> 14,132
<BONDS> 0
0
0
<COMMON> 103
<OTHER-SE> 163,026
<TOTAL-LIABILITY-AND-EQUITY> 204,830
<SALES> 37,584
<TOTAL-REVENUES> 37,584
<CGS> 0
<TOTAL-COSTS> 24,508
<OTHER-EXPENSES> 18,102
<LOSS-PROVISION> 480
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (4,646)
<INCOME-TAX> (1,638)
<INCOME-CONTINUING> (3,008)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,008)
<EPS-BASIC> (0.29)
<EPS-DILUTED> (0.29)
</TABLE>
