<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 March 31, 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 May 6, 1999, 10,363,059 shares of the registrant's common stock (par value
$.01) were outstanding.
<PAGE> 2
SUPERIOR CONSULTANT HOLDINGS CORPORATION
QUARTER ENDED MARCH 31, 1999
INDEX
<TABLE>
<CAPTION>
PART I - FINANCIAL INFORMATION PAGE NO.
---------
<S> <C> <C>
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of March 31, 1999 and 3
December 31, 1998 (unaudited)
Condensed Consolidated Statements of Earnings for the three 4
months ended March 31, 1999 and 1998 (unaudited)
Condensed Consolidated Statements of Cash Flows for the three 5
months ended March 31, 1999 and 1998 (unaudited)
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition and 8
Results of Operations
Item 3. Quantitative and Qualitative Disclosure About Market Risk Sensitive
Instruments 13
PART II - OTHER INFORMATION
Item 5. Other Information 14
Item 6. Exhibits and Reports on Form 8-K 14
SIGNATURES 15
</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 PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1999 1998
-------------- ---------------
ASSETS
<S> <C> <C>
Current assets
Cash $ 2,951 $ 3,985
Short-term investments 43,282 47,534
Accounts receivable, net 45,950 40,324
Accrued interest receivable and prepaid expenses 2,307 1,867
Deferred income taxes 847 1,067
-------------- ---------------
Total current assets 95,337 94,777
Property and equipment, net 17,469 16,472
Goodwill, net 18,043 16,317
Equity investment 6,000 6,050
Other long-term assets 110 110
-------------- ---------------
Total Assets $ 136,959 $ 133,726
============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable $ 3,754 $ 4,035
Accrued liabilities 4,435 4,186
Deferred revenue 923 2,425
Income taxes payable 1,181 -
-------------- ---------------
Total current liabilities 10,293 10,646
Long-term debt - 61
Deferred income taxes 1,078 961
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 - -
March 31, 1999 and December 31, 1998
Common stock; authorized, 30,000,000 shares of
$.01 par value; issued and outstanding, 10,360,259 as of
March 31, 1999 and 10,322,039 as of December 31, 1998 104 103
Additional paid-in capital 109,946 109,113
Retained earnings 15,921 12,936
Stockholders' notes receivable (658) (658)
-------------- ---------------
Total stockholders' equity 125,313 121,494
-------------- ---------------
Total Liabilities and Stockholders' Equity $ 136,959 $ 133,726
============== ===============
</TABLE>
See notes to condensed consolidated financial statements.
Page 3
<PAGE> 4
SUPERIOR CONSULTANT HOLDINGS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
----------------------------
1999 1998
------------- ------------
<S> <C> <C>
Revenues $ 40,029 $ 23,830
Operating costs and expenses
Cost of services 20,749 12,067
Selling, general and administrative expenses 14,897 9,406
------------- ------------
Total operating costs and expenses 35,646 21,473
------------- ------------
Earnings from operations 4,383 2,357
Other income, principally interest income 478 1,247
------------- ------------
Earnings before income taxes 4,861 3,604
Income taxes 1,876 1,504
------------- ------------
Net earnings $ 2,985 $ 2,100
============= ============
Net earnings per share - basic $ 0.29 $ 0.21
============= ============
Net earnings per share - diluted $ 0.28 $ 0.20
============= ============
Weighted average number of common and
common equivalent shares outstanding - basic 10,347 10,212
============= ============
Weighted average number of common and
common equivalent shares outstanding - diluted 10,609 10,442
============= ============
</TABLE>
See notes to condensed consolidated financial statements.
Page 4
<PAGE> 5
SUPERIOR CONSULTANT HOLDINGS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
---------------------------------
1999 1998
------------ -------------
<S> <C> <C>
Cash flows from operating activities:
Net earnings $ 2,985 $ 2,100
Adjustments to reconcile net earnings
to net cash used in operating activities:
Depreciation and amortization of property and equipment 977 356
Goodwill amortization 295 118
Bad debt expense 394 21
Deferred income taxes 337 139
Changes in operating assets and liabilities, net of effects
from acquisitions:
Accounts receivable (5,152) (3,399)
Accrued interest receivable and prepaid expenses (365) 224
Other long-term assets - 15
Accounts payable (281) 874
Accrued liabilities, deferred bonuses and compensation (40) (1,743)
Deferred revenue (1,502) (493)
Income taxes payable 1,181 713
------------ -------------
Net cash used in operating activities (1,171) (1,075)
Cash flows from investing activities:
Purchase of businesses (2,924) (5,912)
Purchases of property and equipment (1,964) (2,507)
------------ -------------
Net cash used in investing activities (4,888) (8,419)
Cash flows from financing activities:
Repayment of lines of credit, net - (91)
Exercise of stock options 834 181
Costs of follow on offering - (17)
Repayment of long-term debt (61) (5)
------------ -------------
Net cash provided by financing activities 773 68
------------ -------------
Net decrease in cash (5,286) (9,426)
Cash and cash equivalents, beginning of period 51,519 87,253
------------ -------------
Cash and cash equivalents, end of period $ 46,233 $ 77,827
============ =============
Supplemental disclosure of cash flow information:
Interest payments $ 26 $ 14
Income tax payments $ 257 $ 320
Non-cash acquisition costs (issuance of common stock
in connection with acquisition) $ - $ 138
</TABLE>
See notes to condensed consolidated financial statements.
Page 5
<PAGE> 6
SUPERIOR CONSULTANT HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
MARCH 31, 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-month period
ended March 31, 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. 131, "Disclosures about Segments of an
Enterprise and Related Information" (See Note 4).
NOTE 2 - 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, when dilutive.
The computation of diluted net earnings per share for the three months
ended March 31, 1999 and 1998 includes approximately 287,000 and 230,000 shares
of common stock equivalents, respectively. Options to purchase approximately
945,000 and 42,000 shares of common stock with a weighted average exercise price
of $38.49 and $36.18 were outstanding at March 31, 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 3 - BUSINESS ACQUISITION
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.
Page 6
<PAGE> 7
NOTE 4 - SEGMENT FINANCIAL INFORMATION
The Company has 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 on
gross profit.
Information on the Company's operations for the three months ended
March 31, 1999 and 1998 is summarized as follows (in thousands:)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
---------------------------
1999 1998
---- ----
<S> <C> <C>
Revenues:
Healthcare consulting $ 36,080 $ 19,962
Enterprise-wide communications 3,949 3,868
------------ ------------
Consolidated revenues $ 40,029 $ 23,830
============ ============
Gross Profit and Income Statement Reconciliation:
Healthcare consulting $ 17,711 $ 9,924
Enterprise-wide communications 1,569 1,839
------------ ------------
Consolidated gross profit $ 19,280 $ 11,763
============ ============
Unallocated:
SG&A expenses $ 14,897 $ 9,406
Other income, principally interest (478) (1,247)
------------ ------------
Sub-total 14,419 8,159
------------ ------------
Consolidated earnings before income taxes $ 4,861 $ 3,604
============ ============
Identifiable assets:
Healthcare consulting $ 62,446 $ 29,642
Enterprise-wide communications 17,469 7,953
Unallocated 57,044 83,600
------------ ------------
Consolidated total assets $ 136,959 $ 121,195
============ ============
</TABLE>
During the three months ended March 31, 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.
Page 7
<PAGE> 8
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).
The Company conducts 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 assists clients in various industries with network
and telecommunication design and acquisition; enterprise messaging; intranet and
web strategies; workgroup consulting; remote network administration and
outsourcing; and software and application development solutions.
The Company derives substantially all of its revenues from fees for
professional services, the 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 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 March 31, 1999, the Company has increased
the number and size of projects billed on a fixed-fee basis; however, in 1998,
less than ten percent of the Company's revenues were realized in this manner.
Increased use of fixed-fee contracts subjects the Company to increased risks,
including cost overruns. For outsourcing engagements, the Company recognizes
revenue in the amount billable under the contract, which is typically billable
on a monthly basis. As of March 31, 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 specialty services. The Company
manages its client development efforts through several strategic services
groups, each having specific geographic responsibility and focus.
Page 8
<PAGE> 9
The Company's most significant expense is cost of services, which
consists primarily of consultant salaries and benefits. In recent years,
consultant compensation expense has grown faster than consultant billing rates,
resulting in an increase in the Company's cost of services as a percentage of
revenues. The Company has sought to address this issue by adding an additional
variable portion of compensation payable upon the achievement of measurable
performance goals, including practice specific and Company wide revenue and
earnings targets. In addition, the Company has sought to address compensation
expense pressures through increased use of stock options as an overall part of
its compensation package.
The Company's cost of services as a percentage of revenues is also
impacted by its consultant utilization. The Company manages utilization by
monitoring project requirements and timetables. The number of consultants
assigned to a project will vary according to the size, complexity, duration and
demands of the project. Project terminations, completions and scheduling delays
may result in periods when consultants are not fully utilized. An unanticipated
termination of a significant project could cause the Company to experience lower
consultant utilization, resulting in a higher than expected number of unassigned
consultants. In addition, the establishment of new practice areas and the hiring
of consultants in peak hiring periods have resulted in periods of lower
consultant utilization (and resulting downward pressure on margins) until
project volume increases in these new areas. In the future, the establishment of
new practice areas, hiring of consultants in peak hiring periods, and further
geographic expansion, could from time to time adversely affect utilization.
Variations in consultant utilization would result in quarterly variability of
the Company's cost of services as a percentage of revenues. The Company's
consultants are generally employed on a full-time basis, and therefore the
Company will, in the short run, incur substantially all of its employee-related
costs even during periods of low utilization.
Selling, general and administrative expenses include the costs of
recruiting, continuing education, marketing, facilities, equipment depreciation,
amortization of goodwill and administration, including compensation and
benefits. Selling, general and administrative expenses as a percentage of total
revenues continues to improve as the Company leverages its infrastructure
expense across its growing revenue base.
THREE MONTHS ENDED MARCH 31, 1999 COMPARED TO THREE MONTHS ENDED
MARCH 31, 1998
Revenues. Revenues in the healthcare consulting segment increased by
$16.1 million, or 80.7%, to $ 36.1 million for the three months ended March 31,
1999, as compared to $ 20.0 million for the three months ended March 31, 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 first quarter of 1998. Revenues
in the enterprise-wide communications segment increased slightly for the three
months ended March 31, 1999 compared to 1998.
Cost of Services. Cost of services in the healthcare consulting segment
increased by $8.3 million, or 83.0%, to $18.4 million for the three months ended
March 31, 1999, as compared to $10.1 million for the three months ended March
31, 1998. The increase was due to the additional number of consultants required
to support the larger revenue base, as well as increases in their compensation
levels. Cost of services as a percentage of revenue for the healthcare
consulting segment increased to 50.9% for the three months ended March 31, 1999,
as compared to 50.3% for the three months ended March 31, 1998. Cost of services
in the enterprise-wide communications segment increased by $0.4 million, or
17.3%, to $2.4 million for the three months ended March 31, 1999, as compared to
$2.0 million for the three months ended March 31, 1998. The increase was due to
the additional number of consultants required to support the larger revenue
base, as well as increases in their compensation levels. Cost of services as a
percentage of revenue for this segment increased to 59.3% for the three months
ended March 31, 1999, as compared to 52.5% for the three months ended March 31,
1998. This increase is attributable to an increase in compensation levels while
average billing rates remained relatively consistent.
Page 9
<PAGE> 10
THREE MONTHS ENDED MARCH 31, 1999 COMPARED TO THREE MONTHS ENDED
MARCH 31, 1998 (CONTINUED)
Selling, general and administrative expenses. Selling, general and
administrative expenses increased by $5.5 million, or 58.4%, to $14.9 million
for the three months ended March 31, 1999, as compared to $9.4 million for the
three months ended March 31, 1998. The increase was due to incentive and other
compensation expenses associated with the addition of key personnel, as well as
higher recruiting, marketing 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 39.5% primarily due to increased
operating efficiencies resulting from leveraging the Company's infrastructure
expense across its growing revenue base. This reduction in selling, general and
administrative expenses as a percentage of revenues was achieved even though
amortization of goodwill, as a percentage of revenues, increased to 0.7%, from
0.5% for the three months ended March 31, 1999 and 1998, respectively.
Other income and expense. Other income was $478,000 for the three months ended
March 31, 1999, as compared to $1,247,000 of other income for the three months
ended March 31, 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 March 31, 1999, in comparison to March 31, 1998, due primarily to
acquisitions and additions to property and equipment.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary capital needs have been to fund its acquisitions,
equipment purchases and the growth in working capital required to support its
growth in revenues. The Company believes that its current cash and cash
equivalents, 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 March 31, 1999, the Company had cash and cash equivalents of $46.2
million and working capital of $85.0 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 $13.2 million ($2.8 million in cash and $10.4
million in common stock) payable over the next three years.
The Company has an unsecured line of credit arrangement at Comerica Bank
N.A. of $3.0 million, which bears interest at the prime rate of 7.75% as of
March 31, 1999. As of March 31, 1999, the Company had no amounts outstanding
under this line of credit.
Net cash used in operations was $1,171,000 for the three months ended
March 31, 1999 as compared to cash used in operations of $1,075,000 for the
three months ended March 31, 1998. The increase in cash used in operations is
primarily due to an increase in accounts receivable, which was partially offset
by higher earnings, depreciation and goodwill amortization in the current
period.
Net cash of $4,888,000 used in investing activities during the three
months ended March 31, 1999 consists of the business acquisition, 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 three months ended
March 31, 1999 was principally the result of the exercise of stock options.
On January 1, 1999, the Company purchased substantially all of the
business assets of ISG. 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.
The Company does not believe that inflation has had a material effect on
the results of its operations.
Page 10
<PAGE> 11
Y2K READINESS
The Year 2000 issue ("Y2K") exists because some computer programs use
two digits rather than four to define the applicable year. For instance, these
programs record the year 1998 as "98." Some date-sensitive software may
interpret the year "00" as 1900 rather than 2000. This could result in a system
failure or miscalculations, causing disruptions of operations, including a
temporary inability to engage in normal business activities.
Readiness
The Company has substantially completed an inventory of its IT systems
and non-IT systems (such as building facilities, voice mail, telephone and other
systems containing embedded microprocessors). The Company expects to complete
its assessment of Y2K readiness and complete its development of Y2K remediation
plans for its mission critical systems in May 1999; to remediate those systems
in June 1999; to complete testing of those systems in July 1999; and to place
those remediated systems in production in July 1999. The phases run concurrently
for different systems. The Company considers a system mission-critical if its
failure would have a material adverse effect on the Company's operations. The
above dates do not include the replacement of certain mission-critical systems
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 is being assessed, remediated and
tested by the software vendor. The accounting software will be upgraded with the
vendor-developed Y2K compliant upgrade. Both the accounting and human resources
systems are expected to be remediated and tested during June and July of 1999.
The Company has sought information and assurances from its material
third-party vendors and suppliers regarding their Y2K readiness. The Company
intends to continuously evaluate its vendor and supplier relationships and to
develop contingency plans to mitigate the negative effects on the Company from
the Y2K problems of its suppliers and vendors.
Cost
The Company estimates the cost of its Y2K remediation efforts as
follows:
<TABLE>
<CAPTION>
EXPENDITURE TO DATE FUTURE TOTAL
----------- ------- ------ -----
<S> <C> <C> <C>
Internal Cost.. $446,000 $324,000 $ 770,000
External Cost.. 193,000 318,000 511,000
-------- -------- ----------
Total........... $639,000 $642,000 $1,281,000
======== ======== ==========
</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 $359,000 of external costs are expected to be capitalizable. The
"to-date" expenditures were incurred through March 31, 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.
Page 11
<PAGE> 12
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 airline or other transportation providers cannot
provide service; and disruption to Company business if telephone or cellular
communication is unavailable.
The Y2K event presents both risks and opportunity for the Company. On
the one hand, there is a risk that clients may delay or cancel purchasing
various services from the Company because financial, technical, management or
other resources of the clients are directed to their own Y2K remediation or Y2K
problems. On the other hand, as economic forces and the Y2K event impose change
on the healthcare market, opportunities exist for the Company to provide
consulting services to its clients to assist them in dealing with the changing
landscape.
There are further forces impacting the health care industry as Y2K
approaches that present additional challenges and opportunities to the Company.
Broad segments of the healthcare provider community face financial stress from
increasing costs, intensified competition and pressure on both revenues and
margins. Financial pressures may be exacerbated by the Balanced Budget Act,
which will reduce the rate of growth in Medicare and Medicaid funds. There are
increasingly frequent reports of healthcare providers announcing negative or
dramatically reduced operating margins for patient care. There have also been
provider bankruptcies and distressed consolidations. Financial instability among
constituents of the Company's client base may cause some clients to defer or
cancel projects that require consulting services, and could adversely affect
some clients' ability to pay. However, changes impacting the healthcare industry
historically have generated new service opportunities for the Company, and the
Company intends to actively pursue such opportunities as may be presented.
Page 12
<PAGE> 13
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 13
<PAGE> 14
PART II - OTHER INFORMATION
ITEM 5. OTHER INFORMATION
Effective January 1, 1999, the Company purchased substantially all of
the business assets of ISG. 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.
Effective May 6, 1999, the Company announced a strategic alliance with
Microsoft Corporation ("Microsoft"). The alliance is intended to accelerate the
adoption of line-of-business health-care solutions, including e-commerce, data
warehousing, enterprise resource planning (ERP) and enterprise infrastructure
solutions based on the Microsoft(R) platform and is intended to generate
opportunities from consulting revenues for the Company. In connection with this
agreement, the Company granted Microsoft warrants to purchase a maximum of
300,000 shares at the exercise price of $33.35 a share.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
NONE
27* Financial Data Schedule for the Quarter Ended March 31, 1999
99.5* Press Release dated May 6, 1999
(b) Form 8-K
NONE
- ------------------------
* Filed herewith
Page 14
<PAGE> 15
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: May 14,1999 By: /s/ Richard D. Helppie
- ---------------- --------------------------
Richard D. Helppie
President, Chief Executive Officer
(Principal Executive Officer)
Date: May 14,1999 By: /s/ James T. House
- ----------------- ----------------------
James T. House
Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
Page 15
<PAGE> 16
EXHIBIT INDEX
-------------
Exhibit No. Description
- ----------- -----------
27 Financial Data Schedule
99.5 Press Release dated May 6, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FINANCIAL
STATEMENTS FOR THE QUARTER ENDED 3/31/99 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> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 46,233
<SECURITIES> 0
<RECEIVABLES> 47,328
<ALLOWANCES> (1,378)
<INVENTORY> 0
<CURRENT-ASSETS> 95,337
<PP&E> 24,971
<DEPRECIATION> (7,502)
<TOTAL-ASSETS> 136,959
<CURRENT-LIABILITIES> 10,293
<BONDS> 0
0
0
<COMMON> 104
<OTHER-SE> 125,209
<TOTAL-LIABILITY-AND-EQUITY> 136,959
<SALES> 40,029
<TOTAL-REVENUES> 40,029
<CGS> 0
<TOTAL-COSTS> 20,749
<OTHER-EXPENSES> 14,897
<LOSS-PROVISION> 394
<INTEREST-EXPENSE> 49
<INCOME-PRETAX> 4,861
<INCOME-TAX> 1,876
<INCOME-CONTINUING> 2,985
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,985
<EPS-PRIMARY> 0.29
<EPS-DILUTED> 0.28
</TABLE>
<PAGE> 1
EXHIBIT 99.5
FOR IMMEDIATE RELEASE
MICROSOFT AND SUPERIOR CONSULTANT HOLDINGS
FORM ALLIANCE TO DELIVER END-TO-END ENTERPRISE
SOLUTIONS FOR HEALTH-CARE INDUSTRY
HEALTH-CARE ORGANIZATIONS TO BENEFIT FROM INTEGRATED SOLUTIONS FOR
E-COMMERCE, DATA WAREHOUSING, ENTERPRISE RESOURCE PLANNING AND
ENTERPRISE INFRASTRUCTURE
SOUTHFIELD, MICH., AND REDMOND, WASH. - MAY 6, 1999 - Superior Consultant
Holdings Corp. (Nasdaq "SUPC"), a leading provider of consulting, systems
integration, outsourcing and Internet solutions for the health-care industry,
and Microsoft Corp. today announced a strategic alliance to accelerate the
adoption of line-of-business health-care solutions, including e-commerce, data
warehousing, enterprise resource planning (ERP) and enterprise infrastructure
solutions based on the Microsoft(R) platform.
Microsoft and Superior will collaborate with clients and software vendors to
deliver integrated solutions quickly and cost-effectively. These solutions will
benefit hospitals, health plans, pharmaceutical companies, physician groups,
consumers and integrated delivery networks (IDNs). To develop and deliver these
new solutions, Superior and Microsoft plan to train and certify more than 500
consultants and open four client Solution Centers. In addition, Superior will
internally standardize on the Microsoft platform across 4,000 desktops and the
BackOffice(R) family of products over the next three years. This standardization
includes deployment of the Windows(R) 2000, Windows 98 and Windows 2000
Professional operating systems, Microsoft SQL Server(tm), Microsoft Site Server,
Office, Microsoft Internet Explorer and Microsoft Exchange for global messaging
and collaboration.
"The alliance between Microsoft and Superior Consultant Holdings is
representative of our commitment to the health-care industry," said Charles
Stevens, vice president of the Application Developers Customer Unit at
Microsoft. "Superior's comprehensive experience and knowledge of the health-care
industry will enable health-care customers to develop, optimize and deploy
solutions on the Microsoft platform. This alliance will create price and
performance advantages and improve business processes."
"Health-care organizations are demanding end-to-end enterprise solutions to help
them reduce expenses, improve clinical quality and customer service, and advance
their mission," said Richard D. Helppie, chairman and CEO of Superior. "From our
position as a known innovator in the health-care industry, we view this
relationship as a means to deliver a reliable, scalable IT infrastructure that
will help our clients meet their cost, quality and operational initiatives. In
addition, it will provide developers and health-care clients with the knowledge
and tools they need to build cost-effective solutions on the Microsoft
platform."
Skills Certification and Client Solution Centers Supporting the commitments in
the key customer segments of the alliance, Superior will build on its existing
cadre of certified developers and will train and certify a team of more than 500
Microsoft Certified Systems Engineers (MCSEs) and Microsoft Certified Solution
Developers (MCSDs). These trained consultants will be certified on Microsoft SQL
Server 7.0 and Site Server and will assist organizations in developing
commerce-enabled business applications. Superior will also open four Client
Solution Centers that will allow software developers, integrators and
health-care organizations to develop and test the scalability and performance of
the Microsoft platform and technologies such as ActiveX(R) for Healthcare. These
centers will be located in Seattle, Atlanta, Detroit and Los Angeles.
<PAGE> 2
ACTIVEX FOR HEALTHCARE
ActiveX is a multilevel standard designed to provide interoperability between
applications and systems across desktop PCs, servers, networks and legacy
systems. Using Microsoft ActiveX for Healthcare, Superior will enable clients
and software vendors to create solutions that plug and play. This architecture
will result in lower cost and more reliable interoperability.
LINE-OF-BUSINESS SOLUTIONS FOR HEALTH CARE
Microsoft and Superior will work together on the rollout of specific technology
and service solution packages based on the Microsoft platform in the following
areas:
* Electronic commerce. Superior will deploy best-of-class e-commerce
solutions, helping clients take advantage of the price and performance
benefits of a secure Internet environment for business solutions.
Health-care organizations will soon be able to deploy advanced
architectures to create new e-commerce opportunities with their
customers and partners.
* Data warehousing. With significant resources and expertise in data
warehousing, Superior will deploy an enterprise data warehouse
architecture and tool set based on the Microsoft platform. These
business intelligence solutions will help organizations optimize
business and clinical decisions at the lowest possible cost while
leveraging their existing IT investments. They will also allow
organizations to fully utilize the speed, scalability and enterprise
capabilities of Microsoft SQL Server 7.0.
* ERP. Utilizing Superior's enterprise services, the Microsoft platform
and additional third-party health-care products, Microsoft and Superior
will deliver leading software vendor ERP solutions that include
customer management, supply chain, fixed assets, payroll, and accounts
receivable and payable applications. Microsoft, Superior and ERP
vendors will collaborate to offer packaged solutions that can
consistently be deployed in a client's business to achieve maximum
results.
* Enterprise infrastructure. Superior will create and deploy an
integrated enterprise infrastructure based on the Microsoft platform.
This infrastructure will provide enhanced productivity for thousands of
health-care organizations. Within the next 36 months, Microsoft and
Superior intend to reach more than 1 million unique users to deliver a
scalable, reliable, cost-effective and common infrastructure.
"Together with Microsoft, our pledge is to work with health-care organizations
and leading software vendors to provide scalable, reliable solutions that are
cost-efficient and allow our clients to harness the power of the Internet,"
Helppie said.
ABOUT SUPERIOR CONSULTANT HOLDINGS
Superior Consultant Holdings is a national consulting firm comprising two
subsidiaries: Superior Consultant Company Inc. (established in 1984) offers a
full array of strategic, managerial, operational and technical services to all
segments of the health-care industry; and Enterprise Consulting Group
(established in 1993) extends its service offerings to clients across a wide
range of industries in the development, design, implementation and maintenance
of communications technologies, groupware and intranet and Internet information
systems and solutions.
ABOUT MICROSOFT
Founded in 1975, Microsoft (Nasdaq "MSFT") is the worldwide leader in software
for personal computers. The company offers a wide range of products and services
for business and personal use, each designed with the mission of making it
easier and more enjoyable for people to take advantage of the full power of
personal computing every day.
================================================================================
<PAGE> 3
Microsoft, BackOffice, Windows and ActiveX are either registered trademarks or
trademarks of Microsoft Corp. in the United States and/or other countries.
Other product and company names herein may be trademarks of their respective
owners.
