<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, 2000
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, 2000, 10,474,846 shares of the registrant's common stock (par
value $.01) were outstanding.
<PAGE> 2
SUPERIOR CONSULTANT HOLDINGS CORPORATION AND SUBSIDIARIES
QUARTER ENDED JUNE 30, 2000
INDEX
<TABLE>
<CAPTION>
PART I - FINANCIAL INFORMATION PAGE NO.
--------
<S> <C>
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of June 30, 2000 and December 31, 3
1999 (unaudited)
Condensed Consolidated Statements of Operations for the three and six months 4
ended June 30, 2000 and 1999 (unaudited)
Condensed Consolidated Statements of Cash Flows for the six months ended June 5
30, 2000 and 1999 (unaudited)
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of 9
Operations
Item 3. Quantitative and Qualitative Disclosure About Market Risk
Sensitive Instruments 13
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders 14
Item 6. Exhibits and Reports on Form 8-K 14
SIGNATURES 15
</TABLE>
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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,
2000 1999
---- ----
ASSETS
<S> <C> <C>
Current assets
Cash and cash equivalents $ 21,349 $ 16,691
Short-term investments 9,024 13,908
Accounts receivable, net 27,750 38,728
Accrued interest receivable and prepaid expenses 4,049 3,201
Refundable income taxes 7,847 5,482
--------- ---------
Total current assets 70,019 78,010
Property and equipment, net 20,822 20,695
Goodwill, net 18,860 18,097
Investments 12,882 69,683
Other long-term assets 203 112
--------- ---------
Total Assets $ 122,786 $ 186,597
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Line of credit $ 4,700 $ --
Accounts payable 6,095 6,093
Accrued liabilities 3,322 3,624
Deferred revenue 5,044 6,254
Deferred income taxes 138 228
--------- ---------
Total current liabilities 19,299 16,199
Deferred income taxes 14 19,463
Stockholders' equity
Preferred stock; authorized, 1,000,000 shares of $.01 par value; issued
and outstanding, 2,000 as of June 30, 2000 and December 31, 1999 -- --
Common stock; authorized, 30,000,000 shares of $.01 par value; issued,
10,474,846 as of June 30, 2000 and 10,426,167 as of December 31, 1999 105 104
Additional paid-in capital 115,041 114,174
Accumulated other comprehensive income 224 33,588
Retained earnings (deficit) (8,991) 5,975
Treasury stock - at cost, 85,000 shares as of June 30, 2000 and December
31, 1999 (2,270) (2,270)
Stockholders' notes receivable (636) (636)
--------- ---------
Total stockholders' equity 103,473 150,935
--------- ---------
Total Liabilities and Stockholders' Equity $ 122,786 $ 186,597
========= =========
</TABLE>
See notes to condensed consolidated financial statements.
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SUPERIOR CONSULTANT HOLDINGS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
----------------------- ----------------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues $ 25,495 $ 42,146 $ 53,568 $ 82,175
Operating costs and expenses
Cost of services 21,325 21,870 44,354 42,619
Selling, general and administrative expenses 18,056 15,653 36,426 30,550
Costs incurred in connection with new business initiative -- 4,840 -- 4,840
-------- -------- -------- --------
Total operating costs and expenses 39,381 42,363 80,780 78,009
-------- -------- -------- --------
Earnings (loss) from operations (13,886) (217) (27,212) 4,166
Other income, including realized gains on
sale of investments 414 579 9,754 1,057
-------- -------- -------- --------
Earnings (loss) before income taxes (benefit) (13,472) 362 (17,458) 5,223
Provision for income taxes (benefit) (1,088) 157 (2,492) 2,033
-------- -------- -------- --------
Net earnings (loss) $(12,384) $ 205 $(14,966) $ 3,190
======== ======== ======== ========
Net earnings (loss) per share - basic $ (1.19) $ 0.02 $ (1.44) $ 0.31
======== ======== ======== ========
Net earnings (loss) per share - diluted $ (1.19) $ 0.02 $ (1.44) $ 0.30
======== ======== ======== ========
Weighted average number of common and
common equivalent shares outstanding - basic 10,384 10,368 10,363 10,357
======== ======== ======== ========
Weighted average number of common and
common equivalent shares outstanding - diluted 10,384 10,517 10,363 10,563
======== ======== ======== ========
</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,
2000 1999
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net earnings (loss) $(14,966) $ 3,190
Adjustments to reconcile net earnings (loss)
to net cash provided by (used in) operating activities:
Depreciation and amortization of property and equipment 2,893 3,504
Goodwill amortization 762 632
Bad debt expense 763 599
Gain on sale of property and equipment (27) --
Gain on sale of securities (9,033) --
Deferred income taxes (benefit) 3,171 (1,661)
Options issued to non-employees 183 --
Non-cash compensation -- 2,856
Interest income on marketable debt security (167) (167)
Warrants from business partner (59) --
Changes in operating assets and liabilities, 1999 is net of effects
from acquisition:
Accounts receivable 10,215 (6,393)
Accrued interest receivable and prepaid expenses (848) 100
Refundable income taxes (2,365) --
Other long-term assets (91) 95
Accounts payable 2 (1,667)
Accrued liabilities, deferred bonuses and compensation (302) 1,625
Deferred revenue (1,210) 44
Income taxes payable -- 356
-------- --------
Net cash provided by (used in) operating activities (11,079) 3,113
Cash flows from investing activities:
Purchase of investment securities -- (10,006)
Proceeds from sale of investments 14,870 --
Purchase of businesses (871) (3,219)
Purchase of property and equipment (3,177) (4,706)
Proceeds from sale of property and equipment 184 --
-------- --------
Net cash provided by (used in) investing activities 11,006 (17,931)
Cash flows from financing activities:
Proceeds from line of credit 4,700 --
Exercise of stock options 31 1,401
Repayment of long-term debt -- (61)
-------- --------
Net cash provided by financing activities 4,731 1,340
-------- --------
Net increase (decrease) in cash 4,658 (13,478)
Cash and cash equivalents, beginning of period 16,691 45,833
-------- --------
Cash and cash equivalents, end of period $ 21,349 $ 32,355
======== ========
Supplemental disclosure of cash flow information:
Interest payments $ - $ 26
Income tax payments $ 25 $ 3,232
Net unrealized gain (loss) on investments, net of deferred
income taxes $(33,364) $ 44,970
</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, 2000
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, 2000, are not necessarily indicative of the results that
may be expected for the year ended December 31, 2000.
These financial statements should be read in conjunction with the
Company's audited consolidated financial statements and notes thereto included
in the Company's 1999 annual report on Form 10-K filed by the Company with the
Securities and Exchange Commission on March 30, 2000.
Certain 1999 amounts have been reclassified to conform to the
classifications used in 2000.
NOTE 2 - COST FUNDING FROM BUSINESS PARTNER
During the three and six months ended June 30, 2000, operating costs
were incurred in connection with the Company's various new business initiatives.
Of these costs, a portion of costs of services and selling, general and
administrative expenses were funded by a business partner and were recorded as a
reduction to expense. The reduction in cost of services was $232,000 and
$524,000 for the three and six months ended June 30, 2000, respectively, and the
reduction in selling, general and administrative expenses was $493,000 and
$1,201,000 for the three and six months ended June 30, 2000, respectively.
NOTE 3 - NET EARNINGS (LOSS) PER SHARE
The Company accounts for Earnings (Loss) Per Share under the rules of
Statement of Financial Accounting Standard No. 128, "Earnings Per Share". The
Company's basic net earnings (loss) per share amounts have been computed by
dividing net earnings (loss) by the weighted average number of outstanding
common shares. The Company's diluted net earnings (loss) per share is computed
by dividing net earnings (loss) by the weighted average number of outstanding
common shares and common share equivalents relating to stock options, when
dilutive.
The computation of diluted net earnings per share for the three and six
months ended June 30, 1999, includes approximately 149,000 and 206,000 shares of
common stock equivalents, respectively. Options and warrants to purchase
approximately 2,149,000 and 1,297,000 shares of common stock with a weighted
average exercise price of $31.88 and $37.14 were outstanding at June 30, 2000
and 1999, respectively, but were excluded from the computation of common share
equivalents because to do so would have been antidilutive for the periods
presented.
NOTE 4 - OTHER COMPREHENSIVE INCOME (LOSS)
Other comprehensive income (loss) includes net unrealized gains and
losses on investments in marketable equity and debt securities, primarily from
the Company's investments in drkoop.com, Inc., Healtheon/WebMD Corporation and
Neoforma.com, Inc. Total comprehensive income (loss) is summarized as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------- --------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net earnings (loss) $(12,384) $ 205 $(14,966) $ 3,190
Other comprehensive income
(loss), net of income tax (10,951) 44,970 $(33,364) 44,970
-------- ------- -------- -------
Total comprehensive income (loss) $(23,335) $45,175 $(48,330) $48,160
======== ======= ======== =======
</TABLE>
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NOTE 5 - SEGMENT FINANCIAL INFORMATION
The Company conducts its business in three segments through its primary
operating subsidiary, Superior Consultant Company, Inc. ("Superior"). Effective
January 1, 2000, the Company organized into the business segments of consulting,
outsourcing and e-Health. The consulting segment provides information
technology, as well as strategic and operations management consulting and
application support to a broad cross-section of healthcare industry participants
and information systems vendors. The outsourcing segment helps healthcare
providers simplify their management agendas, improve their return on information
systems investment and strengthen their technology management by ensuring client
access to Superior's skilled labor pool. The outsourcing segment offers the
client an array of services, functions and economic elements that can be
tailored to the specific client program/agenda, including IT management, IT
planning and budgeting, applications support, applications implementation, IT
operations, network and financial management and risk sharing. The e-Health
segment works to leverage the power, speed and value of Internet technologies to
achieve efficiencies in business and operations, realize measurable return on
investment, connect with consumers, physicians and trading partners and provide
total solutions in business-to-business and business-to-consumer e-commerce.
From strategic planning and go-to-market strategies to Internet enabling and
development, integration and implementation, Superior assists its clients to
achieve supply chain efficiencies, accelerate revenue and manage clinical
content. The Company evaluates segment performance and allocates resources based
on gross profit. Intrasegment services are provided at cost.
Information on the Company's operations for the three and six months
ended June 30, 2000 and 1999, is summarized as follows in thousands. Amounts for
1999 have been reclassified to conform to the classifications used in 2000:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------- --------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues
Consulting $ 11,898 $ 32,472 $ 25,349 $ 62,901
Outsourcing 7,334 9,674 14,453 19,274
e-Health 6,263 -- 13,766 --
-------- -------- -------- --------
Consolidated revenues $ 25,495 $ 42,146 $ 53,568 $ 82,175
======== ======== ======== ========
Gross Profit and Statement of Operations Reconciliation
Consulting $ 4,626 $ 17,706 $ 8,108 $ 33,294
Outsourcing 1,888 2,570 3,890 6,262
e-Health (2,344) -- (2,784) --
-------- -------- -------- --------
Consolidated gross profit 4,170 20,276 9,214 39,556
Unallocated:
SG&A expenses 18,056 15,653 36,426 30,550
Costs incurred in connection with new business
initiative -- 4,840 -- 4,840
Other income, including realized gains on sale of
investments (414) (579) (9,754) (1,057)
-------- -------- -------- --------
Subtotal 17,642 19,914 26,672 34,333
-------- -------- -------- --------
Consolidated earnings (loss) before income taxes
(benefit) $(13,472) $ 362 $(17,458) $ 5,223
======== ======== ======== ========
</TABLE>
The Company does not evaluate assets and capital expenditures on a
segment basis, and accordingly, such information is not provided.
During the three and six months ended June 30, 2000 and 1999, 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 the unallocated SG&A expenses.
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NOTE 6 - INCOME TAXES
The income tax benefit for the three and six months ended June 30,
2000, does not approximate the federal statutory tax rate, primarily due to the
provision of a valuation allowance of approximately $3.2 million during the
three months ended June 30, 2000.
NOTE 7 - LINE OF CREDIT
The Company has a line of credit arrangement at Comerica Bank N.A. of
$25.0 million collateralized by accounts receivable and equity investments in
public securities of the Company. The Company is required to maintain certain
liquidity levels as of the end of each quarter. Based on provisions of the
loan agreement, the Company would have been eligible to borrow approximately
$14.9 million on the line of credit at June 30, 2000. The line of credit bears
interest at 0.25% to 0.50% below the bank's prime rate (effective rate of 9.50%
at June 30, 2000). As of June 30, 2000, the Company had $4.7 million outstanding
under the agreement. At June 30, 2000, the Company was in violation of
a covenant requiring achievement of specified operating results. The Company has
obtained a waiver from the bank with respect to such default and is currently
renegotiating the line of credit agreement to revise the covenant, which caused
the default.
NOTE 8 - SUBSEQUENT EVENT
During the six months ended June 30, 2000,as compared with the six
months ended June 30, 1999, the Company experienced a decline in demand for its
services. Effective August 4, 2000, the Company implemented a strategic
transition plan ("the transition plan"), which was endorsed by the Company's
Board of Directors. The transition plan is designed to improve overall financial
performance through operating cost reductions and the optimization of the
Company's work force. The transition plan is intended to eliminate at least
$9.0 million in quarterly operating costs.
Page 8
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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," "promises," "expect" and similar expressions.
This discussion and analysis contains forward-looking statements relating to
future financial results or business expectations. Business plans may change as
circumstances warrant. Actual results may differ materially as a result of
factors over which the Company has no control. Such factors include, but are
not limited to: acquisitions under consideration, the ability to integrate
acquisitions on a timely basis, significant client assignments, recruiting and
new business solicitation efforts, regulatory changes and other factors
affecting the financial constraints on the Company's clients, economic factors
specific to healthcare and general economic conditions. These risk factors and
additional information are included in the Company's reports on file with the
Securities and Exchange Commission.
The Company conducts its business in three segments through its primary
operating subsidiary, Superior Consultant Company, Inc. ("Superior"). Superior
is a leading provider of Digital Business Transformation(TM) services to the
healthcare industry, connecting online technologies to business processes that
have traditionally been conducted offline. The Company provides healthcare
enterprises with comprehensive end-to-end technology solutions that incorporate
brand management, business-to-business (B2B) and business-to-consumer (B2C)
e-commerce, as well as multi-disciplinary e-health business solutions. Effective
January 1, 2000, the Company organized into the business segments of consulting,
outsourcing and e-Health. The consulting segment provides information
technology, as well as strategic and operations management consulting and
application support to a broad cross-section of healthcare industry participants
and information systems vendors. The outsourcing segment helps healthcare
providers simplify their management agendas, improve their return on information
systems investment and strengthen their technology management by ensuring client
access to Superior's skilled labor pool. The outsourcing segment offers the
client an array of services, functions and economic elements that can be
tailored to the specific client program/agenda, including IT management, IT
planning and budgeting, applications support, applications implementation, IT
operations, network and financial management and risk sharing. The e-Health
segment assists clients to leverage the power, speed and value of Internet
technologies to achieve efficiencies in business and operations, realize
measurable return on investment, connect with consumers, physicians and trading
partners and provide total solutions in business-to-business and
business-to-consumer e-commerce. From strategic planning and go-to-market
strategies to Internet enabling and development, integration and implementation,
Superior assists its clients to achieve supply chain efficiencies, accelerate
revenue and manage clinical content.
During 1999 and 2000, the Company continued to expand its e-Health,
e-commerce and systems integration areas. As healthcare and other sectors move
increasingly to Internet and web-based technologies and applications and as the
Company continues to innovate services and solutions to develop and capitalize
on this growing market, the Company will incur risks related to its
participation in such untested opportunities in markets and quickly evolving
lines of business. Such risks can include, but are not limited to, new and
unforeseen technologies superseding development of the Internet and/or the
systems integration platforms in which the Company invests; the e-commerce
and/or systems integration markets taking turns not foreseen by the Company and
adverse to the positioning and investments undertaken by the Company; slowness
of traditional healthcare clients to adopt new technologies; and
increased competition for consultant talent in the e-commerce field, increasing
the Company's cost of providing services.
The Company derives a substantial portion of its revenues from fees for
professional services. 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, often on a
monthly payment schedule. The Company recognizes revenue on fixed fee projects
in a manner similar to the percentage of completion 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, 2000, the Company has six significant contracts to provide
healthcare IT outsourcing services. In addition, the Company provides help desk
and call center support, typically billable on a per seat per month basis. There
can be no assurance that the Company will be able to achieve profit margins on
outsourcing and support contracts which are consistent with its historical
levels of profitability. In e-Health, the Company derives revenues from fees
generated from its Digital Business Transformation(TM) partnerships. This
revenue is generally recognized ratably over the life of the contract.
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The Company seeks to grow revenue through various means, 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 with a focus on opportunities arising
from the demand for Internet expertise. The Company manages its client
development efforts through several strategic services groups, each having
specific geographic responsibility and focus.
The Company's most significant expense is cost of services, which
consists primarily of consultant salaries and benefits. In recent years,
consultant compensation expense has grown faster than consultant billing rates,
resulting in an increase in the Company's cost of services as a percentage of
revenues. The Company foresees this trend continuing as competition for
recruiting and retaining skilled consultants intensifies, particularly in the
area of e-commerce services. The Company has sought to address this issue by
adding an additional variable portion of compensation payable upon the
achievement of measurable performance goals. In addition, the Company has sought
to address compensation expense pressures through increased use of stock options
as an overall part of its compensation package. These efforts have been hampered
by the impact of the Company's current stock price.
The Company's cost of services as a percentage of revenues is also
impacted by its consultant utilization. The Company attempts to optimize
utilization by monitoring project requirements and timetables. The number of
consultants assigned to a project will vary according to the size, complexity,
duration and demands of the project. Project terminations, completions and
scheduling delays have and can result in periods when consultants are not fully
utilized. An unanticipated termination of a significant project has and can
cause the Company to experience lower consultant utilization, resulting in a
higher than expected number of unassigned consultants. During 1999, the
healthcare industry experienced a slow-down in consulting expenditures as fiscal
constraints imposed by factors such as the Balanced Budget Act and Y2K
transition concerns combined forces to dampen overall industry demand for new IT
service consulting projects. The Company continued to experience a decline in
demand as these factors continued during the first half of 2000 coupled with a
lengthening in the outsourcing sales cycle.
In addition, the Company's establishment of new practice areas, lines
of business and hiring of consultants in peak hiring periods have and can from
time to time adversely affect utilization. For example, the Company intends to
grow its e-Health segment to capture increased client demand expected to occur
in this area and this growth will impact utilization as these new areas come
online. Also, seasonal factors, such as vacation days and total business days in
a quarter, as well as the timing of the annual employees' meeting have and can
result in lower consultant utilization. Variations in consultant utilization
result in quarterly variability of the Company's cost of services as a
percentage of revenues. The Company's consultants are generally employed on a
full-time basis and therefore the Company will, in the short run, incur
substantially all of its employee-related costs even during periods of low
utilization, as the majority of employment costs of these personnel are fixed.
Selling, general and administrative expenses include the costs of
recruiting, training and re-training, continuing education, marketing,
facilities, administration, including compensation and benefits, outside
professional fees, equipment depreciation and amortization of goodwill.
During the six months ended June 30, 2000, as compared with the six
months ended June 30, 1999, the Company experienced a decline in demand for its
services. Effective August 4, 2000, the Company implemented a strategic
transition plan ("the transition plan"), which was endorsed by the Company's
Board of Directors. The transition plan is designed to improve overall
financial performance through operating cost reductions and the optimization of
the Company's work force. The transition plan is designed to eliminate at
least $9.0 million in quarterly operating costs.
Page 10
<PAGE> 11
THREE MONTHS ENDED JUNE 30, 2000 COMPARED TO THREE MONTHS ENDED JUNE 30, 1999
Revenues.
Consulting. Revenues in this segment decreased by $20.6
million, or 63.4%, to $11.9 million for the three months ended June 30,
2000, as compared to $32.5 million for the three months ended June 30,
1999. The revenue decrease was due to lower consultant utilization for
this segment.
Outsourcing. Revenues in this segment decreased by $2.4
million, or 24.2%, to $7.3 million for the three months ended June 30,
2000, as compared to $9.7 million for the three months ended June 30,
1999. The decrease is primarily attributable to lower consultant
utilization in this segment resulting from the Company's decision to
withdraw from an outsourcing agreement as a result of the client's
decision to compete against the Company in the local outsourcing
market.
e-Health. Revenues in this segment were $6.3 million for the
three months ended June 30, 2000. The Company did not have an e-Health
segment during the three months ended June 30, 1999.
Cost of Services.
Consulting. Cost of services in this segment decreased by $7.5
million, or 50.8%, to $7.3 million for the three months ended June 30,
2000, as compared to $14.8 million for the three months ended June 30,
1999. The decrease was due primarily to adjustments the Company made to
optimize its work force through the redeployment of staff to the
e-Health segment and consultant reductions. Cost of services as a
percentage of revenue for this segment increased to 61.1% for the three
months ended June 30, 2000, as compared to 45.5% for the three months
ended June 30, 1999. The increase is attributable to lower consultant
utilization and a lower revenue base for this segment.
Outsourcing. Cost of services in this segment decreased by
$1.7 million, or 23.3%, to $5.4 million for the three months ended June
30, 2000, as compared to $7.1 million for the three months ended June
30, 1999. The decrease is primarily attributable to lower consultant
compensation expenses in this segment. Cost of services as a
percentage of revenue for this segment increased to 74.3% for the
three months ended June 30, 2000, as compared to 73.4% for the three
months ended June 30, 1999. The increase is primarily attributable to
the development of additional capacity within outsourcing to
capitalize on future demand and lower consultant utilization in this
segment.
e-Health. Cost of services in this segment were $8.6 million
for the three months ended June 30, 2000. These costs consisted
primarily of compensation expenses associated with the Company's
continued pursuit to gain market share in the e-Health sector. Cost of
services as a percentage of revenue for this segment was 137.4% for the
three months ended June 30, 2000.
Selling, general and administrative expenses. Selling, general
and administrative expenses increased by $2.4 million, or 15.4%, to
$18.1 million for the three months ended June 30, 2000, as compared to
$15.7 million for the three months ended June 30, 1999. The increase
was due to recruiting and training expenses relating to the new lines
of business, as well as higher marketing, outside professional fees,
continuing education, re-training and compensation expenses. Selling,
general and administrative expenses as a percentage of revenues
increased to 70.8% from 37.1%. The increase was due to the investment
in new lines of business, higher recruiting, training, marketing,
re-training and outside professional fee expenses, as well as a lower
revenue base than anticipated.
Other income and expense. Other income was $414,000 for the
three months ended June 30, 2000, as compared to $579,000 for the three
months ended June 30, 1999. The decrease 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, 2000, in comparison to
June 30, 1999, due primarily to the significant decrease in revenue and
the consistency of cost of services and the increase in selling,
general and administrative expenses for the three months ended June 30,
2000, as compared to the three months ended June 30, 1999.
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<PAGE> 12
SIX MONTHS ENDED JUNE 30, 2000 COMPARED TO SIX MONTHS ENDED JUNE 30, 1999
Revenues.
Consulting. Revenues in this segment decreased by $37.6
million, or 59.7%, to $25.3 million for the six months ended June 30,
2000, as compared to $62.9 million for the six months ended June 30,
1999. The revenue decrease was due to lower consultant utilization for
this segment.
Outsourcing. Revenues in this segment decreased by $4.8
million, or 25.0%, to $14.5 million for the six months ended June 30,
2000, as compared to $19.3 million for the six months ended June 30,
1999. The decrease is primarily attributable to lower consultant
utilization in this segment resulting from the Company's decision to
withdraw from an outsourcing agreement as a result of the client's
decision to compete against the Company in the local outsourcing
market.
e-Health. Revenues in this segment were $13.8 million for the
six months ended June 30, 2000. The Company did not have an e-Health
segment during the six months ended June 30, 1999.
Cost of Services.
Consulting. Cost of services in this segment decreased by
$12.4 million, or 41.8%, to $17.2 million for the six months ended June
30, 2000, as compared to $29.6 million for the six months ended June
30, 1999. The decrease was due primarily to adjustments the Company
made to optimize its work force through the redeployment of staff to
the e-Health segment and consultant reductions. Cost of services as a
percentage of revenue for this segment increased to 68.0% for the six
months ended June 30, 2000, as compared to 47.1% for the six months
ended June 30, 1999. The increase is attributable to lower consultant
utilization and a lower revenue base for this segment.
Outsourcing. Cost of services in this segment decreased by
$2.4 million, or 18.8%, to $10.6 million for the six months ended June
30, 2000, as compared to $13.0 million for the six months ended June
30, 1999. The decrease is primarily attributable to lower consultant
compensation expenses in this segment. Cost of services as a percentage
of revenue for this segment increased to 73.1% for the six months ended
June 30, 2000, as compared to 67.5% for the six months ended June 30,
1999. The increase is primarily attributable to the development of
additional capacity within outsourcing to capitalize on future demand
and lower consultant utilization in this segment.
e-Health. Cost of services in this segment were $16.6 million
for the six months ended June 30, 2000. These costs consisted primarily
of compensation expenses associated with the Company's continued
pursuit to gain market share in the e-Health sector. Cost of services
as a percentage of revenue for this segment was 120.2% for the six
months ended June 30, 2000.
Selling, general and administrative expenses. Selling, general
and administrative expenses increased by $5.8 million, or 19.2%, to
$36.4 million for the six months ended June 30, 2000, as compared to
$30.6 million for the six months ended June 30, 1999. The increase was
due to recruiting and training expenses relating to the new lines of
business, as well as higher marketing, outside professional fees,
continuing education, re-training and compensation expenses. Selling,
general and administrative expenses as a percentage of revenues
increased to 68.0% from 37.2%. The increase was due to the investment
in new lines of business, higher recruiting, training, marketing,
re-training and outside professional fee expenses, as well as a lower
revenue base than anticipated.
Other income and expense. Other income was $9.8 million for
the six months ended June 30, 2000, as compared to $1.1 million for the
six months ended June 30, 1999. The increase was due to the gains
realized on the sale of investments during the first and second quarter
of 2000, in which the Company received proceeds of $14.9 million from
the sale of 1,097,500 and 150,000 shares of drkoop.com and
Healtheon/WebMD common stock, respectively.
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LIQUIDITY AND CAPITAL RESOURCES
During the six months ended June 30, 2000, as compared with the six
months ended June 30, 1999, the Company experienced a decline in demand for its
services. Effective August 4, 2000, the Company implemented a strategic
transition plan, which was endorsed by the Company's Board of Directors. The
transition plan is designed to improve overall financial performance through
operating cost reductions and the optimization of the Company's work force. The
transition plan is intended to eliminate at least $9.0 million in quarterly
operating costs. It is currently estimated that one time cash charges
associated with implementing the transition plan will range from $1.0 to $2.0
million in the third quarter of 2000.
The Company's primary capital needs have been, and will be, to fund its
e-commerce and systems integration initiatives, capital expenditures and
investments. The Company believes after giving effect to the transition plan,
that its current cash and cash equivalents, marketable securities, cash
generated from operations, plus available credit under its bank credit facility,
will be sufficient to finance its working capital and capital expenditure
requirements for at least the next twelve months.
At June 30, 2000, the Company had cash and cash equivalents of $21.3
million and working capital of $50.7 million, as compared with cash and cash
equivalents of $16.7 and working capital of $61.8 million at December 31, 1999.
Currently, the Company's remaining maximum contingency payments relating to its
completed business acquisitions total approximately $6.4 million ($1.2 million
in cash and $5.2 million in common stock) payable over the next two years. The
Company owns common stock in three publicly traded companies: drkoop.com, Inc.,
Healtheon/WebMD Corporation and Neoforma.com, Inc. Liquidity of the Company's
investment in drkoop.com is subject to volume restrictions under Rule 144. In
addition, the Company's investment in Neoforma.com is restricted by a lock-up
agreement, which expires in July 2000 and will not become eligible for sale
under Rule 144 until October 2000.
The Company has a line of credit arrangement at Comerica Bank N.A. of
$25.0 million collateralized by accounts receivable and equity investments in
public securities of the Company. Based on provisions of the loan agreement, the
Company would have been eligible to borrow approximately $14.9 million on the
line of credit at June 30, 2000. The line of credit bears interest at 0.25% to
0.50% below the bank's prime rate (effective rate of 9.50% at June 30, 2000). As
of June 30, 2000, the Company had $4.7 million outstanding under the agreement.
At June 30, 2000, the Company was in violation of a covenant requiring
achievement of specified operating results. The Company has obtained a waiver
from the bank with respect to such default and is currently renegotiating the
line of credit agreement to revise the covenant, which caused the default. It
is anticipated that the renegotiation may result in a reduction in the amount
of the line of credit and/or an increase in the interest rate on the line up to
the bank's prime rate.
Net cash used in operations was $11.1 million for the six months ended
June 30, 2000, as compared to net cash provided by operations of $3.1 million
for the six months ended June 30, 1999. The increase in net cash used in
operations was due primarily to the net operating loss excluding the gains on
sale of investments; which was partially offset by a reduction in accounts
receivable.
Net cash of $11.0 million provided by investing activities during the
six months ended June 30, 2000, consists of proceeds from the sale of
investments and property and equipment less additions to property and equipment
and contingent payments made relating to prior acquisitions as required by the
applicable purchase agreements. The investments in the debt security,
drkoop.com, Healtheon/WebMD and Neoforma.com have a cost basis of $12.8
million and a combined market value of $9.1 million as of August 11, 2000.
Net cash of $4.7 million provided by financing activities during the
six months ended June 30, 2000, was from the proceeds received on the Company's
line of credit.
The Company does not believe that inflation has had a material effect
on the results of its operations.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK SENSITIVE
INSTRUMENTS
The Company currently does not invest excess funds in derivative
financial instruments or other market rate sensitive instruments.
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PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On June 8, 2000, the Company held its annual meeting of stockholders.
Stockholders of the Company voted in favor of the election of Charles O.
Bracken, Bernard J. Lachner and Douglas S. Peters to the Company's Board of
Directors. Messrs. Bracken, Lachner and Peters were each elected to serve a
three-year term expiring at the Company's 2003 Annual Meeting. In the election
of Mr. Bracken, 9,231,181 votes were cast in favor and 14,310 votes were cast
against or withheld. In addition, there were 0 abstentions and 0 broker
non-voters. In the election of Mr. Lachner, 9,225,705 votes were cast in favor
and 19,786 votes were cast against or withheld. In addition, there were 0
abstentions and 0 broker non-voters. In the election of Mr. Peters, 9,231,341
votes were cast in favor and 14,150 votes were cast against or withheld. In
addition, there were 0 abstentions and 0 broker non-voters.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
27* Financial Data Schedule for the Second Quarter Ended June 30, 2000
(b) Form 8-K
NONE
------------------------
* Filed herewith
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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 14, 2000 /s/ Richard D. Helppie, Jr.
--------------------- -----------------------------------------
Richard D. Helppie, Jr.
Chairman, Chief Executive Officer
(Principal Executive Officer)
Date: August 14, 2000 /s/ James T. House
--------------------- -----------------------------------------
James T. House
Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
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Exhibit Index
Exhibit No. Description
27 Financial Data Schedule
