<PAGE> 1
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549-1004
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OF THE SECURITIES EXCHANGE ACT OF 1934
- For the quarterly period ended September 30, 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 November 13, 2000, 11,074,846 shares of the registrant's common stock
(par value $.01) were outstanding.
<PAGE> 2
SUPERIOR CONSULTANT HOLDINGS CORPORATION AND SUBSIDIARIES
Quarter Ended September 30, 2000
INDEX
<TABLE>
<CAPTION>
PART I - FINANCIAL INFORMATION PAGE NO.
--------
<S> <C>
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of September 30,
2000 and December 31, 1999 (unaudited) 3
Condensed Consolidated Statements of Operations for the three
and nine months ended September 30, 2000 and 1999 (unaudited) 4
Condensed Consolidated Statements of Cash Flows for the nine
months ended September 30, 2000 and 1999 (unaudited) 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 10
Item 3. Quantitative and Qualitative Disclosure About Market Risk
Sensitive Instruments 17
PART II - OTHER INFORMATION
Item 5. Other Information 18
Item 6. Exhibits and Reports on Form 8-K 18
SIGNATURES 19
</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>
SEPTEMBER 30, DECEMBER 31,
2000 1999
---- ----
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents $ 23,817 $ 16,691
Short-term investments 236 13,908
Accounts receivable, net 21,528 38,728
Accrued interest receivable and prepaid expenses 2,132 3,201
Refundable income taxes 7,886 5,482
Deferred income taxes 51 --
-------- --------
Total current assets 55,650 78,010
Property and equipment, net 19,953 20,695
Goodwill, net 9,094 18,097
Investments 3,038 69,683
Deferred income taxes 654 --
Other long-term assets 232 112
-------- --------
Total Assets $ 88,621 $186,597
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Line of credit $ 4,700 $ --
Accounts payable 7,646 6,093
Accrued liabilities, deferred bonuses and compensation 5,022 3,624
Deferred revenue 3,750 6,254
Deferred income taxes -- 228
-------- -------
Total current liabilities 21,118 16,199
Deferred income taxes -- 19,463
Stockholders' equity
Preferred stock; authorized, 1,000,000 shares of
$.01 par value; issued and outstanding, 2,000 as of
September 30, 2000 and December 31, 1999 -- --
Common stock; authorized, 30,000,000 shares of $.01
par value; issued, 10,474,846 as of September 30, 2000
and 10,426,167 as of December 31, 1999 105 104
Additional paid-in capital 115,068 114,174
Accumulated other comprehensive income (loss) (1,035) 33,588
Retained earnings (deficit) (43,729) 5,975
Treasury stock - at cost, 85,000 shares as of
September 30, 2000 and December 31, 1999 (2,270) (2,270)
Stockholders' notes receivable (636) (636)
-------- --------
Total stockholders' equity 67,503 150,935
-------- --------
Total Liabilities and Stockholders' Equity $ 88,621 $ 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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------- --------------------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues $ 23,312 $ 37,584 $ 76,880 $ 119,759
Operating costs and expenses
Cost of services 18,368 24,508 62,722 67,127
Selling, general and administrative expenses 23,378 18,102 59,804 48,652
Costs incurred in connection with new business initiative -- -- -- 4,840
Restructuring charges 2,322 -- 2,322 --
Impairment of goodwill 10,221 -- 10,221 --
---------- ---------- --------- ---------
Total operating costs and expenses 54,289 42,610 135,069 120,619
---------- ---------- --------- ---------
Loss from operations (30,977) (5,026) (58,189) (860)
Other income (loss), including realized gain (loss)
on sale of investments (3,761) 380 5,993 1,437
---------- ---------- --------- ---------
Earnings (loss) before income taxes (benefit) (34,738) (4,646) (52,196) 577
Provision for income taxes (benefit) -- (1,638) (2,492) 395
---------- ---------- --------- ---------
Net earnings (loss) $ (34,738) $ (3,008) $ (49,704) $ 182
========== ========== ========= =========
Net earnings (loss) per share - basic $ (3.34) $ (0.29) $ (4.79) $ 0.02
========== ========== ========= =========
Net earnings (loss) per share - diluted $ (3.34) $ (0.29) $ (4.79) $ 0.02
========== ========== ========= =========
Weighted average number of common and
common equivalent shares outstanding - basic 10,390 10,328 10,372 10,346
========== ========== ========= =========
Weighted average number of common and
common equivalent shares outstanding - diluted 10,390 10,328 10,372 10,483
========== ========== ========= =========
</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>
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------
2000 1999
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net earnings (loss) $ (49,704) $ 182
Adjustments to reconcile net earnings (loss)
to net cash provided by (used in) operating activities:
Depreciation and amortization of property and equipment 4,187 4,711
Goodwill amortization 1,083 978
Impairment of goodwill 10,221 --
Bad debt expense 5,719 1,078
Gain on sale of property and equipment (18) --
Gain on sale of securities (5,349) --
Deferred income taxes (benefit) 3,171 (1,736)
Options issued to non-employees 209 --
Non-cash compensation -- 2,856
Interest income on marketable debt security (239) (250)
Warrants from business partner 29 --
Changes in operating assets and liabilities, 1999 is net of effects
from acquisition:
Accounts receivable 11,481 (2,614)
Accrued interest receivable and prepaid expenses 1,069 (2,787)
Refundable income taxes (2,404) --
Other long-term assets (120) 91
Accounts payable 1,553 (2)
Accrued liabilities, deferred bonuses and compensation 1,398 290
Deferred revenue (2,504) 2,909
-------- --------
Net cash provided by (used in) operating activities (20,218) 5,706
Cash flows from investing activities:
Purchase of investment securities -- (10,089)
Proceeds from sale of investments 27,687 --
Purchase of businesses (1,648) (2,926)
Purchase of property and equipment (3,696) (6,510)
Proceeds from sale of property and equipment 269 --
-------- --------
Net cash provided by (used in) investing activities 22,612 (19,525)
Cash flows from financing activities:
Proceeds from line of credit 4,700 --
Stock repurchased -- (2,269)
Exercise of stock options 32 1,393
Repayment of long-term debt -- (61)
-------- --------
Net cash provided by (used in) financing activities 4,732 (937)
-------- --------
Net increase (decrease) in cash 7,126 (14,756)
Cash and cash equivalents, beginning of period 16,691 45,833
-------- --------
Cash and cash equivalents, end of period $ 23,817 $ 31,077
======== ========
Supplemental disclosure of cash flow information:
Interest payments $ 151 $ 26
Income tax payments $ 25 $ 4,138
Net unrealized gain (loss) on investments, net of deferred
income taxes $(34,623) $ 39,473
</TABLE>
See notes to condensed consolidated financial statements.
Page 5
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SUPERIOR CONSULTANT HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
September 30, 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 nine month
periods ended September 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 nine months ended September 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 $224,000 and
$748,000 for the three and nine months ended September 30, 2000, respectively,
and the reduction in selling, general and administrative expenses was $501,000
and $1,702,000 for the three and nine months ended September 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 nine months
ended September 30, 1999, includes approximately 137,000 shares of common stock
equivalents. Options and warrants to purchase approximately 3,036,000 and
1,423,000 shares of common stock with a weighted average exercise price of
$25.73 and $36.65 were outstanding at September 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.
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<PAGE> 7
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. The decrease in accumulated other comprehensive income is a
result of the significant decrease in the market value of the Company's
investments, as well as the sale of the Company's debt securities and holdings
of drkoop.com and Healtheon/WebMD common stock during the nine months ended
September 30, 2000. Total comprehensive income (loss) is summarized as follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------- -------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net earnings (loss) $ (34,738) $ (3,008) $ (49,704) $ 182
Other comprehensive income (loss), net of tax:
Unrealized holding gains (losses) on securities
arising during the period (3,484) (5,497) (36,814) 39,473
Less: reclassification adjustment for realized
losses on securities included in net loss (2,225) -- (2,191) --
--------- -------- --------- ---------
Other comprehensive income (loss), net of tax (1,259) (5,497) (34,623) 39,473
--------- -------- --------- ---------
Total comprehensive income (loss) $ (35,997) $ (8,505) $ (84,327) $ 39,655
========= ======== ========= =========
</TABLE>
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.
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NOTE 5 - SEGMENT FINANCIAL INFORMATION (Continued)
Information on the Company's operations for the three and nine months
ended September 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 Nine Months Ended
September 30, September 30,
------------- -------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues
Consulting $ 10,291 $ 28,147 $ 35,640 $ 91,048
Outsourcing 6,754 9,229 21,207 28,503
e-Health 6,267 208 20,033 208
----------- ----------- ----------- -----------
Consolidated revenues $ 23,312 $ 37,584 $ 76,880 $ 119,759
=========== =========== =========== ===========
Gross Profit and Statement of Operations Reconciliation
Consulting $ 3,299 $ 10,740 $ 11,407 $ 44,034
Outsourcing 1,460 2,544 5,350 8,806
e-Health 185 (208) (2,599) (208)
----------- ----------- ----------- -----------
Consolidated gross profit 4,944 13,076 14,158 52,632
Unallocated:
SG&A expenses 23,378 18,102 59,804 48,652
Costs incurred in connection with new business
initiative -- -- -- 4,840
Restructuring charges 2,322 -- 2,322 --
Impairment of goodwill 10,221 -- 10,221 --
Other (income) loss, including realized (gain)
loss on sale of investments 3,761 (380) (5,993) (1,437)
----------- ----------- ----------- -----------
Subtotal 39,682 17,722 66,354 52,055
----------- ----------- ----------- -----------
Consolidated earnings (loss) before income
taxes (benefit) $ (34,738) $ (4,646) $ (52,196) $ 577
=========== =========== =========== ===========
</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 nine months ended September 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 training,
information technology, accounting and finance, facilities, marketing, legal,
senior management and other SG&A functions are combined into the unallocated
SG&A expenses.
NOTE 6 - INCOME TAXES
The income tax benefit for the three and nine months ended September
30, 2000, does not approximate the federal statutory tax rate, primarily due to
the provision of a valuation allowance of approximately $11.9 million
established during 2000. At September 30, 2000, the Company has a net operating
loss carryforward for federal income tax purposes of approximately $31.7
million, which expires in 2020.
Page 8
<PAGE> 9
NOTE 7 - LINE OF CREDIT
During September 2000, the Company amended its line of credit
arrangement with Comerica Bank N.A. decreasing the maximum available borrowings
from $25.0 million to $15.0 million, subject to qualifying accounts receivable.
The Company is obligated to pay a commitment fee of 0.20% per annum of any
unused portion of the line of credit, which is available through March 31, 2002.
The line of credit bears interest at the bank's prime rate (effective rate of
9.50% at September 30, 2000). The loan agreement contains affirmative and
negative covenants including requirements to satisfy certain financial tests as
of the end of each month and maintain certain liquidity levels as of the end of
each fiscal quarter. In October 2000, the Company obtained a waiver from the
bank in connection with a technical default that existed on September 30, 2000,
of a covenant requiring achievement of specified operating results. Based on
provisions of the loan agreement, the Company was eligible to borrow
approximately $14.0 million on the line of credit at September 30, 2000. As of
September 30, 2000, the Company had $4.7 million outstanding under the
agreement.
NOTE 8 - RESTRUCTURING CHARGES
In the third quarter of 2000, the Company recorded $2.3 million of
restructuring charges primarily associated with the implementation of the
Company's restructuring plan in August 2000. The restructuring charges consist
primarily of severance costs related to a reduction in workforce of
approximately 300 employees, the write-off of fixed assets relating to the
office closures and reduction in workforce, closing of various office facilities
and other restructuring charges. The restructuring plan is aimed at improving
future overall financial performance through operating cost reductions and the
optimization of the Company's workforce.
The restructuring charges recorded as of September 30, 2000, are
summarized as follows in thousands:
<TABLE>
<S> <C>
Severance costs $1,615
Write-off of fixed assets 513
Closing of various office facilities 103
Other 91
------
Total restructuring charges $2,322
======
</TABLE>
At September 30, 2000, approximately $680,000 of restructuring costs,
primarily related to severance, are included in accrued liabilities. The Company
currently anticipates approximately $505,000 of these costs will be paid during
the fourth quarter of 2000 and $175,000 during 2001.
NOTE 9 - IMPAIRMENT OF GOODWILL
As a result of management's strategic review of the Company's
operations, including relevant cash flows, estimated future operating results,
trends and other available information, it was determined that the carrying
value of goodwill exceeded its current fair value as of September 30, 2000. The
current fair value of goodwill was determined using estimated discounted future
cash flows. During the quarter ended September 30, 2000, the Company recorded a
non-cash impairment loss of approximately $10.2 million to write down the
carrying value of goodwill.
NOTE 10 - CONTINGENCIES
The Company is party to litigation matters and claims which are normal
in the course of its operations and while the results of litigation and claims
cannot be predicted with certainty, management believes that upon final
resolution, any impact to the Company beyond that provided for at September 30,
2000, would not be material to the Company's consolidated financial position.
Page 9
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ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
Statements included in Management's Discussion and Analysis of
Financial Condition and Results of Operations, which are not historical in
nature, are intended to be, and are hereby identified as "forward looking
statements" for purposes of the safe harbor provided by Section 21E of the
Securities Exchange Act of 1934, as amended by Public Law 104-67.
Forward-looking statements may be identified by words including "anticipate,"
"believe," "intends," "estimates," "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: developments concerning significant client assignments, consultant
utilization rates, recruiting and new business solicitation efforts, regulatory
changes and other factors affecting the financial constraints on the Company's
clients, the ability to integrate acquisitions in an effective basis, 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.
10
<PAGE> 11
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 September 30, 2000, the Company has seven 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 also derives
revenues from fees generated from its Digital Business Transformation(TM)
partnerships. This revenue is generally recognized ratably over the life of the
contract.
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 client partner organizations 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 nine months of 2000 coupled with a lengthening in the outsourcing
sales cycle. Furthermore, the Balanced Budget Act continues to adversely affect
the financial stability of our clients and may impact their ability to pay for
professional services rendered.
In addition, the Company's establishment of new competency centers,
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, charges related to the accounts receivable allowance,
litigation and claims, equipment depreciation and amortization of
goodwill.
Page 11
<PAGE> 12
During the nine months ended September 30, 2000, as compared with the
nine months ended September 30, 1999, the Company experienced a decline in
demand for its services. Effective August 4, 2000, the Company implemented a
restructuring plan, which was endorsed by the Company's Board of Directors. The
restructuring plan is designed to improve overall financial performance through
operating cost reductions and the reduction of the Company's work force. The
restructuring plan included the elimination of approximately $11.0 million in
quarterly operating costs and a reduction in ongoing quarterly cash requirements
of approximately $10.0 million.
Page 12
<PAGE> 13
THREE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO THREE MONTHS ENDED
SEPTEMBER 30, 1999
Revenues.
Consulting. Revenues in this segment decreased by $17.8
million, or 63.4%, to $10.3 million for the three months ended
September 30, 2000, as compared to $28.1 million for the three months
ended September 30, 1999. The revenue decrease was primarily due to
lower consultant headcount and a decline in demand for this segment's
services.
Outsourcing. Revenues in this segment decreased by $2.4
million, or 26.8%, to $6.8 million for the three months ended September
30, 2000, as compared to $9.2 million for the three months ended
September 30, 1999. The decrease is primarily attributable to lower
consultant utilization in this segment resulting from the Company's
decision in 1999 to withdraw from an outsourcing agreement as a result
of the client's decision to compete against the Company in the local
outsourcing market, which was partially offset by two new outsourcing
agreements signed during 2000.
e-Health. Revenues in this segment increased by $6.1 million
to $6.3 million for the three months ended September 30, 2000, as
compared to $0.2 million for the three months ended September 30, 1999.
The e-Health segment did not become fully operational until 2000,
therefore the activity during the third quarter of 1999 was minimal.
Cost of Services.
Consulting. Cost of services in this segment decreased by
$10.4 million, or 59.8%, to $7.0 million for the three months ended
September 30, 2000, as compared to $17.4 million for the three months
ended September 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 67.9%
for the three months ended September 30, 2000, as compared to 61.8% for
the three months ended September 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
$1.4 million, or 20.8%, to $5.3 million for the three months ended
September 30, 2000, as compared to $6.7 million for the three months
ended September 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 78.4%
for the three months ended September 30, 2000, as compared to 72.4% for
the three months ended September 30, 1999. The increase is primarily
attributable to the development of additional capacity within
outsourcing to capitalize on anticipated future demand and lower
consultant utilization in this segment.
e-Health. Cost of services in this segment increased by $5.7
million to $6.1 million for the three months ended September 30, 2000,
as compared to $0.4 million for the three months ended September 30,
1999. The increase is primarily attributable to the redeployment of
staff from the Consulting segment as a result of 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 decreased to 97.0%
for the three months ended September 30, 2000, as compared to 200.0%
for the three months ended September 30, 1999. The reduction was the
result of the e-Health segment not becoming fully operational until
2000, therefore the activity during the third quarter of 1999 was
minimal.
Page 13
<PAGE> 14
THREE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO THREE MONTHS ENDED
SEPTEMBER 30, 1999 (Continued)
Selling, general and administrative expenses. Selling, general
and administrative expenses increased by $5.3 million, or 29.1%, to
$23.4 million for the three months ended September 30, 2000, as
compared to $18.1 million for the three months ended September 30,
1999. The increase was primarily due to charges related to the accounts
receivable allowance, litigation and claims. Selling, general and
administrative expenses as a percentage of revenues increased to 100.3%
from 48.2%. The increase was due to the additional charges discussed
above, as well as a lower revenue base than anticipated.
Restructuring charges. The Company incurred approximately $2.3
million of restructuring charges primarily associated with the
implementation of the Company's restructuring plan in August 2000. The
restructuring charges consist primarily of severance costs related to
the reduction in workforce, the write-off of fixed assets, closing of
various office facilities and other restructuring charges. The
restructuring plan was aimed at improving future overall financial
performance through operating cost reductions and the optimization of
the Company's workforce. Refer to Note 8 ("Restructuring Charges") of
the Notes to Condensed Consolidated Financial Statements for further
details on the components of the restructuring charges.
Impairment of goodwill. As a result of management's strategic
review of the Company's operations, including relevant cash flows,
estimated future operating results, trends and other available
information, it was determined that the carrying value of goodwill
exceeded its current fair value as of September 30, 2000. The current
fair value of goodwill was determined using estimated discounted future
cash flows. During the quarter ended September 30, 2000, the Company
recorded a non-cash impairment loss of approximately $10.2 million to
write down the carrying value of goodwill.
Other income (loss). Other income (loss) decreased to a loss
of $3.8 million for the three months ended September 30, 2000, as
compared to other income of $0.4 million for the three months ended
September 30, 1999. The decrease was primarily due to the $3.7 million
net loss recognized on the sale of investments during the third quarter
of 2000. The Company received proceeds of $12.8 million from the sale
of its debt securities, 4,075,430 shares of drkoop.com and 181,541
shares of Healtheon/WebMD common stock.
Page 14
<PAGE> 15
NINE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30, 1999
Revenues.
Consulting. Revenues in this segment decreased by $55.4
million, or 60.9%, to $35.6 million for the nine months ended September
30, 2000, as compared to $91.0 million for the nine months ended
September 30, 1999. The revenue decrease was primarily due to lower
consultant headcount and a decline in demand for this segment's
services.
Outsourcing. Revenues in this segment decreased by $7.3
million, or 25.6%, to $21.2 million for the nine months ended September
30, 2000, as compared to $28.5 million for the nine months ended
September 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 in 1999 to compete against the Company in the local
outsourcing market, which was partially offset by two new outsourcing
agreements signed during 2000.
e-Health. Revenues in this segment increased by $19.8 million
to $20.0 million for the nine months ended September 30, 2000, as
compared to $0.2 million for the nine months ended September 30, 1999.
The e-Health segment was not established until the third quarter of
1999 and did not become fully operational until 2000.
Cost of Services.
Consulting. Cost of services in this segment decreased by
$22.8 million, or 48.5%, to $24.2 million for the nine months ended
September 30, 2000, as compared to $47.0 million for the nine months
ended September 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 nine months ended September 30, 2000, as compared to 51.6% for
the nine months ended September 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
$3.8 million, or 19.5%, to $15.9 million for the nine months ended
September 30, 2000, as compared to $19.7 million for the nine months
ended September 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 74.8%
for the nine months ended September 30, 2000, as compared to 69.1% for
the nine months ended September 30, 1999. The increase is primarily
attributable to the development of additional capacity within
outsourcing to capitalize on anticipated future demand and lower
consultant utilization in this segment.
e-Health. Cost of services in this segment increased by $22.2
million to $22.6 million for the nine months ended September 30, 2000,
as compared to $0.4 million for the nine months ended September 30,
1999. The increase is primarily attributable to the redeployment of
staff from the Consulting segment as a result of 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 decreased to
113.0% for the nine months ended September 30, 2000, as compared to
200.0% for the nine months ended September 30, 1999. The reduction was
the result of the e-Health segment not becoming fully operational until
2000, therefore the activity during 1999 was minimal.
Page 15
<PAGE> 16
NINE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30, 1999 (Continued)
Selling, general and administrative expenses. Selling, general
and administrative expenses increased by $11.1 million, or 22.9%, to
$59.8 million for the nine months ended September 30, 2000, as compared
to $48.7 million for the nine months ended September 30, 1999. The
increase was due to charges related to the accounts receivable
allowance, litigation and claims during the third quarter of 2000, as
well as increased recruiting, training and re-training expenses
relating to the new lines of business and higher outside professional
fees, continuing education and compensation expenses. Selling, general
and administrative expenses as a percentage of revenues increased to
77.8% from 40.6%. The increase was due to the additional charges
discussed above during the third quarter of 2000, as well as the
investment in new lines of business, higher outside professional fees,
continuing education and compensation expenses, as well as a lower
revenue base than anticipated.
Restructuring charges. The Company incurred approximately $2.3
million of restructuring charges primarily associated with the
implementation of the Company's restructuring plan in August 2000. The
restructuring charges consist primarily of severance costs related to
the reduction in workforce, the write-off of fixed assets, closing of
various office facilities and other restructuring charges. The
restructuring plan was aimed at improving future overall financial
performance through operating cost reductions and the optimization of
the Company's workforce. Refer to Note 8 ("Restructuring Charges") of
the Notes to Condensed Consolidated Financial Statements for further
details on the components of the restructuring charges.
Impairment of goodwill. As a result of management's strategic
review of the Company's operations, including relevant cash flows,
estimated future operating results, trends and other available
information, it was determined that the carrying value of goodwill
exceeded its current fair value as of September 30, 2000. The current
fair value of goodwill was determined using estimated discounted future
cash flows. During the quarter ended September 30, 2000, the Company
recorded a non-cash impairment loss of approximately $10.2 million to
write down the carrying value of goodwill.
Other income (loss). Other income was $6.0 million for the
nine months ended September 30, 2000, as compared to $1.4 million for
the nine months ended September 30, 1999. The increase was primarily
due to the $5.3 million net gain recognized on the sale of investments
during the nine months ended September 30, 2000. The Company received
proceeds of $27.7 million from the sale of its debt securities,
5,172,930 shares of drkoop.com and 331,541 shares of Healtheon/WebMD
common stock.
Page 16
<PAGE> 17
LIQUIDITY AND CAPITAL RESOURCES
During the nine months ended September 30, 2000, as compared with the
nine months ended September 30, 1999, the Company experienced a decline in
demand for its services. Effective August 4, 2000, the Company implemented a
restructuring plan, which was endorsed by the Company's Board of Directors. In
connection with the restructuring plan, the Company has undertaken various
actions to reduce its cost structure, improve its competitiveness and restore
sustainable profitability. As a result, the Company recorded restructuring
charges of $2.3 million for the three and nine months ended September 30, 2000.
The restructuring charges consist primarily of severance costs related to the
reduction in workforce, the write-off of fixed assets, closing of various office
facilities and other restructuring charges. The Company currently anticipates
one-time cash outflows associated with the implementation of the restructuring
plan of approximately $505,000 in the fourth quarter of 2000 and $175,000 during
2001, which are included in accrued liabilities as of September 30, 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 restructuring plan
and assuming revenue consistent with current levels, that its current cash and
cash equivalents, equity investment, cash generated from operations, plus
available credit under its bank credit facility, will be sufficient to finance
its working capital and capital expenditure requirements for at least the next
twelve months.
At September 30, 2000, the Company had cash and cash equivalents of
$23.8 million and working capital of $34.5 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 $6.5 million ($1.7
million in cash and $4.8 million in common stock) payable over the next two
years. The Company owns common stock in Neoforma.com, Inc., a publicly traded
company. During October 2000, the Company's investment in Neoforma.com became
eligible for sale under Rule 144.
The Company has a line of credit arrangement at Comerica Bank N.A. of
$15.0 million subject to qualifying accounts receivable of the Company. The
Company is obligated to pay a commitment fee of 0.20% per annum of any unused
portion of the line of credit. The line of credit bears interest at the bank's
prime rate (effective rate of 9.50% at September 30, 2000). Based on provisions
of the loan agreement, the Company was eligible to borrow approximately $14.0
million on the line of credit at September 30, 2000. As of September 30, 2000,
the Company had $4.7 million outstanding under the agreement.
Net cash used in operations was $20.2 million for the nine months ended
September 30, 2000, as compared to net cash provided by operations of $5.7
million for the nine months ended September 30, 1999. The increase in net cash
used in operations was due primarily to the net operating loss excluding the
impairment of goodwill, increase in bad debt expense and the gain on sale of
investments; which was partially offset by a reduction in accounts receivable.
Net cash of $22.6 million provided by investing activities during the
nine months ended September 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. As of November 13, 2000, the investment in
Neoforma.com has a cost basis and market value of $4.7 million and $1.8 million,
respectively.
Net cash of $4.7 million provided by financing activities during the
nine months ended September 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.
Page 17
<PAGE> 18
PART II - OTHER INFORMATION
Item 5. Other Information
On October 11, 2000, the Company's Board of Directors appointed Ronald
V. Aprahamian to the Board of Directors and elected him Chairman, succeeding
Richard D. Helppie, Jr. Mr. Helppie remains Chief Executive Officer and a
Director of the Company. Mr. Aprahamian was previously Chairman and Chief
Executive Officer of Compucare and The Compucare Company. Also on that date,
Charles O. Bracken announced his resignation as Vice-Chairman of the Board of
Directors. Mr. Bracken remains an Executive Vice President and Director of the
Company. Also on that date, Robert R. Tashiro announced his retirement from the
Company and resigned his position as President and Chief Operating Officer and
George S. Huntzinger was appointed as Mr. Tashiro's successor. Mr. Tashiro will
continue to advise the Company on a consulting basis. Mr. Huntzinger was
previously managing partner of DKI Consulting, Inc. and formerly President of
CSC Healthcare. James T. House resigned as the Company's Vice President and
Chief Financial Officer on October 11, 2000, and Richard R. Sorensen was named
interim Chief Financial Officer. Mr. House intends to remain with the Company in
an advisory capacity until November 30, 2000. On October 26, 2000, the Board of
Directors elected Mr. Sorensen as Vice President and Chief Financial Officer.
Mr. Sorensen was previously Corporate Controller of the Company. The Company
also appointed Steven H. Smith as an Executive Vice President. Mr. Smith was
previously Co-founder and Vice-Chairman of Transnational Security Group and
President of Summit Group Holdings.
In connection with their appointments, each of Aprahamian, Huntzinger
and Smith purchased from the Company 200,000 shares of Common Stock (the
"Shares") at the price of $1.5377 per share pursuant to Subscription and
Securities Purchase Agreements dated as of October 11, 2000, (the "Purchase
Agreement") by and between each of Aprahamian, Huntzinger and Smith and the
Company. Of the total purchase price of $307,540 paid by each of Aprahamian,
Huntzinger and Smith, each paid $2,000 in cash from personal funds and executed
and delivered a Promissory Note (the "Promissory Note") to the Issuer in the
principal amount of $305,540, with interest accruing annually at the rate of
9.5%. The principal and accrued and unpaid interest is payable upon the first
to occur of the following: (i) termination of the borrower's employment with
the Company if such termination occurs on or before October 11, 2001; (ii)
October 11, 2002; or (iii) a Change of Control of the Company, as defined in
the Purchase Agreement. Each Promissory Note is secured by the Shares under a
Pledge Agreement dated as of October 11, 2000, (the "Pledge Agreement") by and
between each of Aprahamian, Huntzinger and Smith and the Company.
Under the Purchase Agreement, each of Aprahamian, Huntzinger and Smith
may not sell, transfer, convey, exchange, give, assign, pledge, encumber or
otherwise dispose of all or a portion of any interest in the Shares until the
passage of the time period specified below:
Number of Shares Date Restrictions Lapse
---------------- -----------------------
50,000 January 11, 2001
50,000 April 11, 2001
50,000 July 11, 2001
50,000 October 11, 2001
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
10.1 Aprahamian Purchase Agreement(1)
10.2 Aprahamian Promissory Note(1)
10.3 Aprahamian Pledge Agreement(1)
10.4 Huntzinger Purchase Agreement(1)
10.5 Huntzinger Promissory Note(1)
10.6 Huntzinger Pledge Agreement(1)
10.7 Smith Purchase Agreement(1)
10.8 Smith Promissory Note(1)
10.9 Smith Pledge Agreement(1)
27* Financial Data Schedule for the Third Quarter Ended September 30, 2000
(b) Form 8-K
NONE
------------------------
* Filed herewith
(1) Incorporated by reference to the Schedule 13D filed on November 13, 2000
by Ronald V. Aprahamian, et al.
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<PAGE> 19
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Superior Consultant Holdings Corporation
Date: November 14, 2000 /s/ Richard D. Helppie, Jr.
----------------------- ----------------------------------------
Richard D. Helppie, Jr.
Chief Executive Officer
(Principal Executive Officer)
Date: November 14, 2000 /s/ Richard R. Sorensen
----------------------- ----------------------------------------
Richard R. Sorensen
Chief Financial Officer
(Principal Financial and Accounting Officer)
Page 19
<PAGE> 20
Exhibit Index
-------------
<TABLE>
<CAPTION>
Exhibit No. Description
----------- -----------
<S> <C>
27 Financial Data Schedule
</TABLE>
