<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, 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 August 11, 1999, 10,384,739 shares of the registrant's common stock (par
value $.01) were outstanding.
<PAGE> 2
SUPERIOR CONSULTANT HOLDINGS CORPORATION
QUARTER ENDED JUNE 30, 1999
INDEX
PART I - FINANCIAL INFORMATION PAGE NO.
--------
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of June 30,
1999 and December 31, 1998 (unaudited) 3
Condensed Consolidated Statements of Earnings for
the three and six months ended June 30, 1999 and 1998
(unaudited) 4
Condensed Consolidated Statements of Cash Flows for
the six months ended June 30, 1999 and 1998 (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 15
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders 16
Item 5. Other Information 16
Item 6. Exhibits and Reports on Form 8-K 16
SIGNATURES 17
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<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>
JUNE 30, DECEMBER 31,
1999 1998
--------- ------------
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents $ 32,355 $ 51,519
Short-term investments 4,988 -
Accounts receivable, net 46,986 40,324
Accrued interest receivable and prepaid expenses 1,842 1,867
Deferred income taxes 2,043 1,067
--------- ---------
Total current assets 88,214 94,777
Property and equipment, net 17,684 16,472
Goodwill, net 18,001 16,317
Investments 92,452 6,050
Other long-term assets 15 110
--------- ---------
Total Assets $ 216,366 $ 133,726
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable $ 2,368 $ 4,035
Accrued liabilities 6,100 4,186
Deferred revenue 2,469 2,425
Income taxes payable 356 -
--------- ---------
Total current liabilities 11,293 10,646
Long-term debt - 61
Deferred income taxes 30,887 961
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
June 30, 1999 and December 31, 1998 - -
Common stock; authorized, 30,000,000 shares of
$.01 par value; issued and outstanding, 10,380,750 as of
June 30, 1999 and 10,322,039 as of December 31, 1998 104 103
Additional paid-in capital 113,369 109,113
Accumulated other comprehensive income 44,970 -
Retained earnings 16,126 12,936
Stockholders' notes receivable (658) (658)
--------- ---------
Total stockholders' equity 173,911 121,494
--------- ---------
Total Liabilities and Stockholders' Equity $ 216,366 $ 133,726
========= =========
</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,
---------------------- --------------------
1999 1998 1999 1998
-------- ------- ------- -------
<S> <C> <C> <C> <C>
Revenues $ 42,146 $28,350 $82,175 $52,180
Operating costs and expenses
Cost of services 21,870 14,747 42,619 26,814
Selling, general and administrative expenses 15,653 11,159 30,550 20,565
Costs incurred in connection with new business initiative 4,840 - 4,840 -
-------- ------- ------- -------
Total operating costs and expenses 42,363 25,906 78,009 47,379
-------- ------- ------- -------
Earnings (loss) from operations (217) 2,444 4,166 4,801
Other income, principally interest income 579 1,375 1,057 2,622
-------- ------- ------- -------
Earnings before income taxes 362 3,819 5,223 7,423
Income taxes 157 1,485 2,033 2,989
-------- ------- ------- -------
Net earnings $ 205 $ 2,334 $ 3,190 $ 4,434
======== ======= ======= =======
Net earnings per share - basic $ 0.02 $ 0.23 $ 0.31 $ 0.43
======== ======= ======= =======
Net earnings per share - diluted $ 0.02 $ 0.22 $ 0.30 $ 0.42
======== ======= ======= =======
Weighted average number of common and
common equivalent shares outstanding - basic 10,368 10,260 10,357 10,236
======== ======= ======= =======
Weighted average number of common and
common equivalent shares outstanding - diluted 10,517 10,609 10,563 10,530
======== ======= ======= =======
</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,
-------------------------
1999 1998
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net earnings $ 3,190 $ 4,434
Adjustments to reconcile net earnings
to net cash provided by (used in) operating activities:
Depreciation and amortization of property and equipment 3,504 725
Goodwill amortization 632 285
Bad debt expense 599 129
Deferred income taxes (1,661) 123
Non-cash compensation 2,856 -
Interest on marketable debt security (167) -
Changes in operating assets and liabilities, net of effects from
acquisitions:
Accounts receivable (6,393) (5,193)
Accrued interest receivable and prepaid expenses 100 (409)
Other long-term assets 95 15
Accounts payable (1,667) (1,832)
Accrued liabilities, deferred bonuses and compensation 1,625 286
Deferred revenue 44 (552)
Income taxes payable 356 (147)
-------- --------
Net cash provided by (used in) operating activities 3,113 (2,136)
Cash flows from investing activities:
Investment in WebMD (10,006) -
Investment in marketable debt security (5,686) -
Purchase of businesses (3,219) (11,529)
Purchases of property and equipment (4,706) (4,881)
-------- --------
Net cash used in investing activities (23,617) (16,410)
Cash flows from financing activities:
Exercise of stock options 1,401 354
Costs of follow on offering - (20)
Repayment of long-term debt (61) (123)
-------- --------
Net cash provided by financing activities 1,340 211
-------- --------
Net decrease in cash (19,164) (18,335)
Cash and cash equivalents, beginning of period 51,519 87,253
-------- --------
Cash and cash equivalents, end of period $ 32,355 $ 68,918
======== ========
Supplemental disclosure of cash flow information:
Interest payments $ 26 $ 14
Income tax payments $ 3,232 $ 3,766
Unrealized gain on investment in drkoop.com, net of deferred
income tax liability $ 45,485 $ -
Unrealized loss on investment in marketable debt security,
net of deferred tax asset $ 515 $ -
Non-cash acquisition costs (issuance of common stock
in connection with acquisition) $ - $ 1,854
</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, 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 six month
periods ended June 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.
Effective December 31, 1998, the Company adopted the provisions of
Statement of Financial Accounting Standards No. 130, "Reporting of Comprehensive
Income" (See Note 5).
Effective December 31, 1998, the Company adopted the provisions of
Statement of Financial Accounting Standards No. 131, "Disclosures about Segments
of an Enterprise and Related Information" (See Note 6).
NOTE 2 - COSTS INCURRED IN CONNECTION WITH NEW BUSINESS INITIATIVES
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 fixed assets. 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. This
has 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
is to increase depreciation expense by $1.5 million, and decrease net earnings
by $0.9 million or $0.09 per diluted share, for both the three months and six
months ended June 30, 1999.
In addition, other operating costs were incurred in connection with the
Company's various new business initiatives. Of these costs, a portion, $203,000
in costs of services and $959,000 in selling, general and administrative
expenses were funded by a business partner, and were recorded as a reduction to
expense in the accompanying financial statements.
NOTE 3 - NET EARNINGS PER SHARE
The Company accounts for Earnings Per Share under the rules of
Statement of Financial Accounting Standard No. 128, "Earnings Per Share". 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 and warrants, when dilutive.
The computation of diluted net earnings per share for the three months
ended June 30, 1999 and 1998 includes approximately 149,000 and 349,000 shares
of common stock equivalents, respectively. The computation of diluted net
earnings per share for the six months ended June 30, 1999 and 1998 includes
approximately 206,000 and 294,000 shares of common stock equivalents,
respectively. Options and warrants to purchase approximately 1,297,000 and 6,700
shares of common stock with a weighted average exercise price of $37.14 and
$37.08 were outstanding at June 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.
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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 June 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 June 30, 1999, the Company has recorded its
investment at fair value, resulting in an unrealized gain of approximately
$76,446,000. 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 June 30, 1999.
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 Six Months
ended June 30, ended June 30,
------------------- -------------------
1999 1998 1999 1998
------- ------ ------- ------
<S> <C> <C> <C> <C>
Net earnings $ 205 $2,334 $ 3,190 $4,434
Other comprehensive income,
net of income tax 44,970 - 44,970 -
------- ------ ------- ------
Total comprehensive income $45,175 $2,334 $48,160 $4,434
======= ====== ======= ======
</TABLE>
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NOTE 6 - SEGMENT FINANCIAL INFORMATION
Through June 30, 1999, the Company had two business and reportable
segments: healthcare consulting and enterprise-wide communications. The
healthcare consulting segment provides information technology, strategic, and
operations management consulting services to a broad cross-section of healthcare
industry participants and information systems vendors. The enterprise-wide
communications segment assists companies in various industries, including
healthcare, with network and telecommunication design and acquisition,
enterprise messaging, intranet and web strategies, workgroup consulting, and
software and application development solutions. The Company evaluates segment
performance and allocates resources based on gross profit.
Information on the Company's operations for the three and six months
ended June 30, 1999 and 1998 is summarized as follows (in thousands:)
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
--------------------------- -------------------------
1999 1998 1999 1998
-------- -------- --------- ---------
<S> <C> <C> <C> <C>
Revenues:
Healthcare consulting $ 37,965 $ 23,574 $ 74,045 $ 43,536
Enterprise-wide communications 4,181 4,776 8,130 8,644
-------- -------- --------- ---------
Consolidated revenues $ 42,146 $ 28,350 $ 82,175 $ 52,180
======== ======== ========= =========
Gross Profit and Income Statement Reconciliation:
Healthcare consulting $ 18,632 $ 11,370 $ 36,343 $ 21,294
Enterprise-wide communications 1,644 2,233 3,213 4,072
-------- -------- --------- ---------
Consolidated gross profit $ 20,276 $ 13,603 $ 39,556 $ 25,366
======== ======== ========= =========
Unallocated:
SG&A expenses $ 15,653 $ 11,159 $ 30,550 $ 20,565
Costs incurred in connection with new business initiative 4,840 - 4,840 -
Other income, principally interest (579) (1,375) (1,057) (2,622)
-------- -------- --------- ---------
Sub-total 19,914 9,784 34,333 17,943
-------- -------- --------- ---------
Consolidated earnings before income taxes $ 362 $ 3,819 $ 5,223 $ 7,423
======== ======== ========= =========
Identifiable assets:
Healthcare consulting $ 56,459 $ 36,545
Enterprise-wide communications 22,802 10,943
Unallocated 137,105 76,328
--------- ---------
Consolidated total assets $ 216,366 $ 123,816
========= =========
</TABLE>
During the three and six months ended June 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.
Unallocated assets consist principally of cash, temporary investments, and
accrued interest receivable and prepaid expenses.
Starting on July 1, 1999 the Company has been reorganized to reflect a
new structure resulting from new business initiatives into systems integration
and e-commerce.
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. It requires that entities recognize all derivatives as either assets
or liabilities in the statement of financial position and measure those
instruments at fair value. If certain conditions are met, a derivative may be
specifically designated as (a) a hedge of the exposure to changes in the fair
value of a recognized asset or liability or an unrecognized firm commitment, (b)
a hedge of the exposure to variable cash flows of a forecasted transaction, or
(c) a hedge of the foreign currency exposure of a net investment in a foreign
operation, an unrecognized firm commitment, an available-for-sale-security, or a
foreign-currency-denominated forecasted transaction. The Company does not
anticipate that adoption of SFAS 133 will have a material effect on the
consolidated financial statements.
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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 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), and Registration
Statement on Form S-3 (File No. 333-70337).
As of June 30, 1999 the Company conducted business in two segments
through its two primary operating subsidiaries, Superior Consultant Company,
Inc. ("Superior") and Enterprise Consulting Group ("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 assisted clients in various
industries with network and telecommunication design and acquisition; enterprise
messaging; intranet and web strategies; workgroup consulting; remote network
administration and outsourcing; and software and application development
solutions.
Starting on July 1, 1999 the Company has been reorganized to reflect a
new structure resulting from new business initiatives into systems integration
and e-commerce. 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 take advantage of 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; the e-commerce market 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. Thus,
we may modify our level of activity in different areas, thereby causing changes
to our segment definition in the future.
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 June 30, 1999, 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. For outsourcing engagements, the Company recognizes revenue in the
amount billable under the contract, which is typically billable on a monthly
basis. As of June 30, 1999, the Company has been awarded nine significant
contracts to provide healthcare IT outsourcing services. There can be no
assurance that the Company will be able to achieve profit margins on
outsourcing contracts which are consistent with its historical levels of
profitability.
The Company's historical revenue growth is attributable to various
factors, including an increase in the number of projects for existing and new
clients, and expanded geographic presence. In addition, the Company seeks to
increase revenues by expanding its range of
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specialty services. The Company manages its client development efforts
through several strategic services groups, each having specific geographic
responsibility and focus.
The Company's most significant expense is cost of services, which
consists primarily of consultant salaries and benefits. In recent years,
consultant compensation expense has grown faster than consultant billing rates,
resulting in an increase in the Company's cost of services as a percentage of
revenues. The Company has sought to address this issue by adding an additional
variable portion of compensation payable upon the achievement of measurable
performance goals, including practice specific and Company wide revenue and
earnings targets. In addition, the Company has sought to address compensation
expense pressures through increased use of stock options as an overall part of
its compensation package.
The Company's cost of services as a percentage of revenues is also
impacted by its consultant utilization. The Company manages utilization by
monitoring project requirements and timetables. The number of consultants
assigned to a project will vary according to the size, complexity, duration and
demands of the project. Project terminations, completions and scheduling delays
may result in periods when consultants are not fully utilized. An unanticipated
termination of a significant project could cause the Company to experience lower
consultant utilization, resulting in a higher than expected number of unassigned
consultants. In addition, the establishment of new practice areas, lines of
business, hiring of consultants in peak hiring periods and further geographic
expansion could 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 can result in lower consultant
utilization. Variations in consultant utilization would result in quarterly
variability of the Company's cost of services as a percentage of revenues. The
Company's consultants are generally employed on a full-time basis, and therefore
the Company will, in the short run, incur substantially all of its
employee-related costs even during periods of low utilization.
Selling, general and administrative expenses include the costs of
recruiting, continuing education, marketing, facilities, equipment depreciation,
amortization of goodwill and administration, including compensation and
benefits. Selling, general and administrative expenses as a percentage of total
revenues continues to improve as the Company leverages its infrastructure
expense across its growing revenue base.
As of June 30, 1999, the Company recorded its investment in drkoop.com
at its then fair value of $82.4 million. This investment had previously been
recorded at its cost of $6.0 million (see Note 4 on page 7 of this report).
The Company has recorded the difference between fair value and cost, net of
income tax, as other comprehensive income for the three and six months ended
June 30, 1999.
THREE MONTHS ENDED JUNE 30, 1999 COMPARED TO THREE MONTHS ENDED JUNE 30, 1998
Revenues. Revenues in the healthcare consulting segment increased by
$14.4 million, or 61.0%, to $38.0 million for the three months ended June 30,
1999, as compared to $ 23.6 million for the three months ended June 30, 1998.
The revenue increase was due primarily to continued strong growth in core lines
of business, activity from the Company's acquisitions and revenue realized from
the outsourcing contracts consummated after the second quarter of 1998. Revenues
in the enterprise-wide communications segment decreased by $0.6 million, or
12.5%, to $4.2 million for the three months ended June 30, 1999, as compared to
$4.8 million for the three months ended June 30, 1998. The revenue decrease is
attributable to lower consultant utilization in this segment.
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THREE MONTHS ENDED JUNE 30, 1999 COMPARED TO THREE MONTHS ENDED JUNE 30, 1998
(CONTINUED)
Cost of Services. Cost of services in the healthcare consulting segment
increased by $7.1 million, or 58.4%, to $19.3 million for the three months ended
June 30, 1999, as compared to $12.2 million for the three months ended June 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 decreased to 50.9% for the three months ended June
30, 1999, as compared to 51.8% for the three months ended June 30, 1998. Cost of
services in the enterprise-wide communications segment remained consistent for
the three months ended June 30, 1999, as compared to the three months ended June
30, 1998. Cost of services as a percentage of revenue for this segment increased
to 60.7% for the three months ended June 30, 1999, as compared to 53.3% for the
three months ended June 30, 1998. This increase is attributable to lower
consultant utilization in this segment.
Selling, general and administrative expenses. Selling, general and
administrative expenses increased by $4.5 million, or 40.3%, to $15.7 million
for the three months ended June 30, 1999, as compared to $11.2 million for the
three months ended June 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 and continuing education expenses consistent with
the Company's growth. Selling, general and administrative expenses as a
percentage of revenues decreased to 37.1% from 39.4% primarily due to increased
operating efficiencies resulting from leveraging the Company's infrastructure
expense across its growing revenue base. This reduction in selling, general and
administrative expenses as a percentage of revenues was achieved even though
amortization of goodwill, as a percentage of revenues, increased to 0.8%, from
0.6% for the three months ended June 30, 1999 and 1998, respectively.
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 $579,000 for the three
months ended June 30, 1999, as compared to $1,375,000 of other income for the
three months ended June 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 June 30, 1999, in comparison to June 30, 1998, due primarily to
acquisitions and additions to property and equipment.
SIX MONTHS ENDED JUNE 30, 1999 COMPARED TO SIX MONTHS ENDED JUNE 30, 1998
Revenues. Revenues in the healthcare consulting segment increased by
$30.5 million, or 70.1%, to $ 74.0 million for the six months ended June 30,
1999, as compared to $ 43.5 million for the six months ended June 30, 1998. The
revenue increase was due primarily to continued strong growth in core lines of
business, activity from the Company's acquisitions and revenue realized from the
outsourcing contracts consummated after the second quarter of 1998. Revenues in
the enterprise-wide communications segment decreased by $0.5 million, or 6.0%,
to $8.1 million for the six months ended June 30, 1999, as compared to $8.6
million for the six months ended June 30, 1998. The revenue decrease is
attributable to slightly lower consultant utilization in this segment.
Page 11
<PAGE> 12
SIX MONTHS ENDED JUNE 30, 1999 COMPARED TO SIX MONTHS ENDED JUNE 30, 1998
(CONTINUED)
Cost of Services. Cost of services in the healthcare consulting segment
increased by $15.5 million, or 69.5%, to $37.7 million for the six months ended
June 30, 1999, as compared to $22.2 million for the six months ended June 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 decreased to 50.9% for the six months ended June 30, 1999, as
compared to 51.1% for the six months ended June 30, 1998. Cost of services in
the enterprise-wide communications segment increased by $0.3 million, or 7.6%,
to $4.9 million for the six months ended June 30, 1999, as compared to $4.6
million for the six months ended June 30, 1998. The increase was due to slightly
lower consultant utilization in the enterprise-wide communications segment. Cost
of services as a percentage of revenue for this segment increased to 60.5% for
the six months ended June 30, 1999, as compared to 52.9% for the six months
ended June 30, 1998. This increase is attributable to slightly lower consultant
utilization in this segment.
Selling, general and administrative expenses. Selling, general and
administrative expenses increased by $10.0 million, or 48.6%, to $30.6 million
for the six months ended June 30, 1999, as compared to $20.6 million for the six
months ended June 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 and continuing education expenses consistent with
the Company's growth. Selling, general and administrative expenses as a
percentage of revenues decreased to 37.2% from 39.4% primarily due to increased
operating efficiencies resulting from leveraging the Company's infrastructure
expense across its growing revenue base. This reduction in selling, general and
administrative expenses as a percentage of revenues was achieved even though
amortization of goodwill, as a percentage of revenues, increased to 0.8%, from
0.5% for the six months ended June 30, 1999 and 1998, respectively.
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 $1,057,000 for the six
months ended June 30, 1999, as compared to $2,622,000 of other income for the
six months ended June 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 June 30, 1999, in comparison to June 30, 1998, due primarily to
acquisitions 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 system integration and
e-commerce 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 the foreseeable
future.
At June 30, 1999, the Company had cash and cash equivalents of $32.4
million and working capital of $76.9 million, which is comparable 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 is approximately $13.0 million ($2.8 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 7.75% as of
June 30, 1999. As of June 30, 1999, the Company had no amounts outstanding under
this line of credit.
Net cash provided by operations was $3,113,000 for the six months ended
June 30, 1999 as compared to cash used in operations of $2,136,000 for the six
months ended June 30, 1998. The increase in cash provided by operations is
primarily due to increases in non-cash expenses and accrued liabilities.
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<PAGE> 13
Net cash of $23.6 million used in investing activities during the six
months ended June 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 provided by financing activities during the six months ended
June 30, 1999 and 1998, was principally the result of 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 an inventory of its IT systems and non-IT
systems (such as building facilities, voice mail, telephone and other systems
containing embedded microprocessors). The Company has completed the assessment
and remediation phases of for all mission critical systems. The Company expects
to complete mission critical systems testing and to place remediated systems in
production in August 1999. The phases have run concurrently for different
systems. The Company considers a system mission-critical if its failure would
have a material adverse effect on the Company's operations. The above dates do
not include the replacement of certain mission-critical systems that were
scheduled for replacement during 1999 for reasons unrelated to Y2K readiness.
The Company expects to replace all of these systems by September 1999.
The Company's principal mission-critical IT systems are its accounting
and human resources systems, both of which are third-party software
applications. The human resources software 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 were tested in July of 1999.
Project plan dates and estimates are as of July 26, 1999, and do not
take into account work that was made in between that date and the filing date of
this report.
The Company has sought information and assurances from its material
third-party vendors and suppliers regarding their Y2K readiness. The Company
intends to continuously evaluate its vendor and supplier relationships and to
develop contingency plans to mitigate the negative effects on the Company from
the Y2K problems of its suppliers and vendors.
Cost
The Company estimates the cost of its Y2K remediation efforts as
follows:
<TABLE>
<CAPTION>
EXPENDITURE TO DATE FUTURE TOTAL
- ---------------- ----------- --------- ----------
<S> <C> <C> <C>
Internal Cost... $ 643,000 $ 183,000 $ 826,000
External Cost... 349,000 191,000 540,000
----------- --------- ----------
Total........... $ 992,000 $ 374,000 $1,366,000
=========== ========= ==========
</TABLE>
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<PAGE> 14
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 $349,000 of external costs are expected to be capitalizable. The
"to-date" expenditures were incurred through June 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 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 disruption to Company business if telephone or cellular communication is
unavailable.
The Y2K event presents both risks and opportunity for the Company. On
the one hand, there is a risk that clients may delay or cancel purchasing
various services from the Company because financial, technical, management or
other resources of the clients are directed to their own Y2K remediation or Y2K
problems. On the other hand, as economic forces and the Y2K event impose change
on the healthcare market, opportunities exist for the Company to provide
consulting services to its clients to assist them in dealing with the changing
landscape.
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<PAGE> 15
There are further forces impacting the health care industry as Y2K
approaches that present additional challenges and opportunities to the Company.
Broad segments of the healthcare provider community face financial stress from
increasing costs, intensified competition and pressure on both revenues and
margins. Financial pressures may be exacerbated by the Balanced Budget Act of
1997, which will reduce the rate of growth in Medicare and Medicaid funds. There
are increasingly frequent reports of healthcare providers announcing negative or
dramatically reduced operating margins for patient care. There have also been
provider bankruptcies and distressed consolidations. Financial instability among
constituents of the Company's client base may cause some clients to defer or
cancel projects that require consulting services, and could adversely affect
some clients' ability to pay. However, changes impacting the healthcare industry
historically have generated new service opportunities for the Company, and the
Company intends to actively pursue such opportunities as may be presented.
Contingency Plans
The Company expects to develop, assess and revise contingency plans on
an ongoing basis throughout 1999 in an effort to mitigate the negative effect of
any internal or external Y2K failure. The Company cannot assure that any
contingency plans will prevent internal or external Y2K failures from having a
material adverse effect on the Company.
Forward Looking Statements
The estimates regarding the costs of the Company's Y2K efforts, as well
as statements regarding the potential effect of Y2K issues on the Company and
the Company's plans to deal with issues or contingencies raised by Y2K issues,
are forward-looking statements. These statements are subject to a number of
risks and uncertainties, which could cause actual costs, effects or plans to
differ materially from the discussion above. Among these risks or uncertainties
are the following:
- difficulty in successfully identifying, assessing, replacing and testing
all hardware, software and systems which may be affected by Y2K problems
or which may contain microprocessors affected by those problems;
- difficulty in identifying all third parties (including but not limited
to clients, third party suppliers, vendors, and other providers) whose
inability to process Y2K date information may affect the Company;
- the Company's lack of control over and limited knowledge of the Y2K
remediation efforts and Y2K readiness of those third parties;
- the availability, to the Company and material third parties of qualified
professionals to analyze and remedy Y2K problems;
- the difficulty in projecting labor or consulting costs, particularly in
light of the fact that demand for Y2K remediation services will increase
as the year 2000 approaches; and
- the effect of general economic conditions on the willingness of third
parties to make the expenditures necessary to address Y2K problems which
may affect the Company.
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.
Page 15
<PAGE> 16
PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On May 6, 1999 the Company held its annual meeting of stockholders.
Stockholders of the Company voted in favor of the election of Richard D.
Helppie, C. Everett Koop and Richard P. Saslow to the Company's board of
directors. Messrs. Helppie, Koop and Saslow were each elected to serve a
three-year term expiring at the Company's annual meeting in 2002. In the
election of Mr. Helppie, 8,551,116 votes were cast in favor and 148,974 votes
were cast against or withheld. In addition, there were 0 abstentions and 0
broker non-voters. In the election of Mr. Koop, 8,549,116 total votes were cast
in favor and 150,974 votes were cast against or withheld. In addition, there
were 0 abstentions and 0 broker non-voters. In the election of Mr. Saslow,
8,550,116 total votes were cast in favor and 149,974 votes were cast against or
withheld. In addition, there were 0 abstentions and 0 broker non-voters.
At the same meeting, stockholders of the Company also voted in favor of
an amendment to the Long Term Incentive Plan that increased the number of shares
available for grants to 4,000,000 shares. In the vote for the amendment,
5,342,461 total votes were cast in favor and 2,649,296 votes were cast against
or withheld. In addition, there were 0 abstentions and 708,333 broker
non-voters.
ITEM 5. OTHER INFORMATION
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.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
NONE
27* Financial Data Schedule for the six months Ended June 30, 1999
(b) Form 8-K
NONE
- ------------------------
* Filed herewith
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<PAGE> 17
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 16,1999 By: /s/ Richard D. Helppie
--------------------------------------
Richard D. Helppie
President, Chief Executive Officer
(Principal Executive Officer)
Date: August 16,1999 By: /s/ James T. House
--------------------------------------
James T. House
Vice President and Chief Financial
Officer
(Principal Financial and Accounting
Officer)
Page 17
<PAGE> 18
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 SIX MONTHS ENDED JUNE 30, 1999 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> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 32,355
<SECURITIES> 4,988
<RECEIVABLES> 48,489
<ALLOWANCES> (1,503)
<INVENTORY> 0
<CURRENT-ASSETS> 88,214
<PP&E> 27,352
<DEPRECIATION> (9,668)
<TOTAL-ASSETS> 216,366
<CURRENT-LIABILITIES> 11,293
<BONDS> 0
0
0
<COMMON> 104
<OTHER-SE> 173,807
<TOTAL-LIABILITY-AND-EQUITY> 216,366
<SALES> 82,175
<TOTAL-REVENUES> 82,175
<CGS> 0
<TOTAL-COSTS> 42,619
<OTHER-EXPENSES> 35,390
<LOSS-PROVISION> 599
<INTEREST-EXPENSE> 38
<INCOME-PRETAX> 5,223
<INCOME-TAX> 2,033
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,190
<EPS-BASIC> $0.31
<EPS-DILUTED> $0.30
</TABLE>
