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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, 2002
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.)
17570 West 12 Mile Road, Southfield, Michigan 48076
(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 13, 2002, 10,752,409 shares of the registrant's common stock (par
value $.01) were outstanding, excluding treasury shares.
SUPERIOR CONSULTANT HOLDINGS CORPORATION AND SUBSIDIARIES
QUARTER ENDED JUNE 30, 2002
INDEX
PART I - FINANCIAL INFORMATION PAGE NO.
--------
Item 1. Financial Statements
Consolidated Balance Sheets as of June 30, 2002 and
December 31, 2001 (unaudited) 3
Consolidated Statements of Operations for the three and six months ended
June 30, 2002 and 2001 (unaudited) 4
Consolidated Statements of Cash Flows for the six months ended June 30, 2002
and 2001 (unaudited) 5
Notes to Consolidated Financial Statements (unaudited) 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 16
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders 16
Item 6. Exhibits and Reports on Form 8-K 16
SIGNATURES 17
Page 2
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SUPERIOR CONSULTANT HOLDINGS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)
JUNE 30, DECEMBER 31,
2002 2001
--------- -----------
ASSETS
Current assets
Cash and cash equivalents $ 16,336 $ 16,902
Accounts receivable, net 16,003 14,164
Accrued interest receivable and prepaid expenses 2,732 3,644
Refundable income taxes 307 706
--------- ---------
Total current assets 35,378 35,416
Property and equipment, net 13,814 14,071
Goodwill, net 8,223 8,223
Other long-term assets, net 768 897
--------- ---------
Total Assets $ 58,183 $ 58,607
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Notes payable to bank $ 2,925 $ 2,925
Accounts payable 8,198 8,565
Accrued liabilities, deferred bonuses and compensation 2,511 2,752
Deferred revenue 2,256 2,141
--------- ---------
Total current liabilities 15,890 16,383
Commitments and contingencies (Note 8) -- --
Stockholders' equity
Preferred stock; authorized, 1,000,000 shares of $.01 par value;
no shares issued or outstanding as of June 30, 2002 and
December 31, 2001 -- --
Common stock; authorized, 30,000,000 shares of $.01 par value;
issued and outstanding, 11,101,829 shares as of June 30, 2002
and 11,080,042 shares as of December 31, 2001 111 111
Additional paid-in capital 116,102 116,062
Stockholders' notes receivable (1,536) (1,536)
Treasury stock - at cost, 352,100 shares as of June 30, 2002
and December 31, 2001 (3,270) (3,270)
Accumulated deficit (69,114) (69,143)
--------- ---------
Total stockholders' equity 42,293 42,224
--------- ---------
Total Liabilities and Stockholders' Equity $ 58,183 $ 58,607
========= =========
See notes to consolidated financial statements.
Page 3
SUPERIOR CONSULTANT HOLDINGS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
---------------------------- ----------------------------
2002 2001 2002 2001
-------- -------- -------- --------
Revenue
Revenue before reimbursements (net revenue) $ 22,021 $ 22,115 $ 43,278 $ 43,893
Out-of-pocket reimbursements 2,279 2,882 4,099 6,128
-------- -------- -------- --------
Total revenue 24,300 24,997 47,377 50,021
Operating costs and expenses
Cost of services before reimbursements
(net cost of services) 14,626 14,221 28,816 29,519
Out-of-pocket reimbursements 2,279 2,882 4,099 6,128
-------- -------- -------- --------
Total cost of services 16,905 17,103 32,915 35,647
Selling, general and administrative expenses 8,396 10,825 16,863 21,728
Restructuring charges, net -- 169 -- 169
-------- -------- -------- --------
Total operating costs and expenses 25,301 28,097 49,778 57,544
-------- -------- -------- --------
Loss from operations (1,001) (3,100) (2,401) (7,523)
Other income, net 57 235 129 227
-------- -------- -------- --------
Loss before income tax benefit (944) (2,865) (2,272) (7,296)
Income tax benefit -- -- (2,301) --
-------- -------- -------- --------
Net earnings (loss) $ (944) $ (2,865) $ 29 $ (7,296)
======== ======== ======== ========
Net earnings (loss) per share
Basic $ (0.09) $ (0.26) $ 0.00 $ (0.66)
======== ======== ======== ========
Diluted $ (0.09) $ (0.26) $ 0.00 $ (0.66)
======== ======== ======== ========
Weighted average number of common shares outstanding
Basic 10,748 10,990 10,741 10,990
======== ======== ======== ========
Diluted 10,748 10,990 11,444 10,990
======== ======== ======== ========
See notes to consolidated financial statements.
Page 4
SUPERIOR CONSULTANT HOLDINGS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
SIX MONTHS ENDED JUNE 30,
---------------------------------------
2002 2001
------------- ------------
Cash flows from operating activities:
Net earnings (loss) $ 29 $ (7,296)
Adjustments to reconcile net earnings (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization of property and equipment 2,115 2,054
Goodwill amortization -- 375
Bad debt expense 47 200
Restructuring charge - write-off of leasehold improvements -- 305
Other (50) --
Changes in operating assets and liabilities:
Accounts receivable (1,886) (552)
Accrued interest receivable and prepaid expenses 912 1,094
Refundable income taxes 420 5,155
Accounts payable (367) (2,114)
Accrued liabilities, deferred bonuses and compensation (241) (208)
Deferred revenue 115 133
-------- --------
Net cash provided by (used in) operating activities 1,094 (854)
Cash flows from investing activities:
Purchase of property and equipment (1,729) (1,362)
Change in other long-term assets -- (412)
-------- --------
Net cash used in investing activities (1,729) (1,774)
Cash flows from financing activities:
Repayment of line of credit -- (2,200)
Principal payments on stockholders' notes receivable -- 9
Exercise of stock options 69 --
-------- --------
Net cash provided by (used in) financing activities 69 (2,191)
-------- --------
Net decrease in cash and cash equivalents (566) (4,819)
Cash and cash equivalents, beginning of period 16,902 20,825
-------- --------
Cash and cash equivalents, end of period $ 16,336 $ 16,006
======== ========
Supplemental disclosure of cash flow information:
Interest payments $ 73 $ 188
Unrealized gain on investment, net of deferred income taxes $ -- $ 18
See notes to consolidated financial statements.
Page 5
SUPERIOR CONSULTANT HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
JUNE 30, 2002
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited 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, 2002, are not necessarily indicative of the results that may be expected for
the year ended December 31, 2002.
These financial statements should be read in conjunction with the
Company's audited consolidated financial statements and notes thereto included
in the Company's 2001 annual report on Form 10-K filed by the Company with the
Securities and Exchange Commission on April 1, 2002.
Certain reclassifications were made to the six months ended June 30,
2001, unaudited consolidated financial statements to conform to the six months
ended June 30, 2002 presentation.
NOTE 2 - NET EARNINGS (LOSS) PER SHARE
The Company accounts for Earnings (Loss) Per Share under the rules of
Statement of Financial Accounting Standards 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 common shares
outstanding during the period. Diluted net earnings (loss) per share has been
computed by dividing net earnings (loss) by the weighted average number of
common shares outstanding and the dilutive effect of common shares potentially
issuable upon the exercise of stock options and warrants ("common share
equivalents") during the period.
The computation of diluted net earnings (loss) per share for the six
months ended June 30, 2002, includes approximately 703,000 common share
equivalents. Options and warrants to purchase approximately 2,135,000 and
3,808,000 shares of common stock with a weighted average exercise price of
$20.96 and $18.92 were outstanding at June 30, 2002 and 2001, respectively, but
were excluded from the computation of diluted net earnings (loss) per share
because to do so would have been antidilutive for the periods presented.
NOTE 3 - COMPREHENSIVE INCOME (LOSS)
Comprehensive income (loss), which is included as a component of
stockholders' equity, includes unrealized gains and losses on investments in
marketable equity securities. The Company sold its remaining holdings of
marketable equity securities during the year ended December 31, 2001. Total
comprehensive income (loss) is summarized as follows (in thousands):
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------ -------------------------
2002 2001 2002 2001
---------- -------- -------- ----------
Net earnings (loss) $ (944) $(2,865) $ 29 $(7,296)
Other comprehensive income (loss), net of tax:
Unrealized holding gains (losses) on securities
arising during the period -- (164) -- 18
------- ------- ------- -------
Other comprehensive income (loss), net of tax -- (164) -- 18
------- ------- ------- -------
Total comprehensive income (loss) $ (944) $(3,029) $ 29 $(7,278)
======= ======= ======= =======
Page 6
NOTE 4 - SEGMENT FINANCIAL INFORMATION
The Company is organized into the two business segments of consulting
and outsourcing. The consulting segment provides information technology, as well
as strategic and operations management consulting, solutions, 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 taking on
responsibility for managing and operating all or part of the client's
information technology functions. The Company deploys specialized resources to
deliver higher quality at lower cost and helps clients avoid or reduce certain
capital expenses. The Company evaluates segment performance and allocates
resources based on gross profit. Intrasegment services are provided at cost.
Pursuant to the provisions of the Financial Accounting Standards Board
Staff Announcement Topic No. D-103, "Income Statement Characterization of
Reimbursements Received for Out-of-Pocket Expenses Incurred," the Company's
reported revenue and cost of services include reimbursements received for
out-of-pocket expenses incurred. Amounts for 2001 have been restated to conform
to this change in classification, which has no effect on current or previously
reported margins or net earnings (loss). Due to the nature of the Company's
business, a majority of the reimbursable out-of-pocket expenses are incurred on
traditional consulting engagements.
Financial information for the Company's operations for the three and six months
ended June 30, 2002 and 2001 is as follows (in thousands):
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------ ------------------------
2002 2001 2002 2001
------------- ---------- ------------ ----------
Revenue:
Consulting:
Revenue before reimbursements (net revenue) $ 14,197 $ 14,950 $ 27,676 $ 30,663
Out-of-pocket reimbursements 2,140 2,451 3,809 5,070
-------- -------- -------- --------
Total consulting revenue 16,337 17,401 31,485 35,733
Outsourcing:
Revenue before reimbursements (net revenue) 7,824 7,165 15,602 13,230
Out-of-pocket reimbursements 139 431 290 1,058
-------- -------- -------- --------
Total outsourcing revenue 7,963 7,596 15,892 14,288
-------- -------- -------- --------
Consolidated revenue $ 24,300 $ 24,997 $ 47,377 $ 50,021
======== ======== ======== ========
Gross Profit and Statement of Operations Reconciliation:
Consulting $ 5,893 $ 5,632 $ 11,095 $ 10,885
Outsourcing 1,502 2,262 3,367 3,489
-------- -------- -------- --------
Consolidated gross profit 7,395 7,894 14,462 14,374
Unallocated:
Selling, general and administrative expenses 8,396 10,825 16,863 21,728
Restructuring charges, net -- 169 -- 169
Other income, net (57) (235) (129) (227)
-------- -------- -------- --------
Subtotal 8,339 10,759 16,734 21,670
-------- -------- -------- --------
Consolidated loss before income tax benefit $ (944) $ (2,865) $ (2,272) $ (7,296)
======== ======== ======== ========
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, sales and marketing,
legal, senior management and other selling, general and administrative ("SG&A")
functions are combined into the unallocated SG&A expenses.
Page 7
NOTE 5 - INCOME TAXES
During the six months ended June 30, 2002, the Company recorded a $2.3
million tax benefit as the result of a March 2002 change in federal tax law,
which allowed the Company to carryback a portion of its 2001 loss for an
additional three years. Due to the recording of the one-time benefit for the new
tax legislation during the first quarter of 2002, the income tax benefit for the
three and six months ended June 30, 2002, does not reflect the federal statutory
tax rate. As of June 30, 2002, the Company has net operating loss carryforwards
for federal income tax purposes of approximately $45.3 million, the last of
which will expire in 2022 if not utilized.
NOTE 6 - LINE OF CREDIT
The Company has a line of credit with a bank allowing for borrowings of
up to $8.0 million, based on qualifying accounts receivable. Based on the
eligibility provisions in the loan agreement, the Company could have borrowed
approximately $6.5 million on the line of credit as of June 30, 2002;
approximately $2.9 million was outstanding. Borrowings under the line mature in
September 2002. Borrowings bear interest at the greater of the prime rate or 1%
plus the Federal funds effective rate. The interest rate at June 30, 2002, was
4.75%. The line is collateralized by accounts receivable and any deposits held
by the bank. There are no compensating balance requirements. The loan agreement
contains covenants, including financial ratios concerning liquidity, working
capital and operating results. The Company was in compliance with all financial
covenants as of June 30, 2002. In addition, the Company has letters of credit
of approximately $1.5 million issued by a bank, secured by bank deposits.
NOTE 7 - RESTRUCTURING CHARGES
In connection with the restructuring plan initiated during 2000, the
Company recorded restructuring charges of approximately $3.1 million during the
year ended December 31, 2001. Refer to the Company's audited consolidated
financial statements and notes thereto for the year ended December 31, 2001, for
further details on the components of these charges.
A summary of the activity of the restructuring-related liabilities
included in accounts payable, which consists of an accrual for future lease
obligations, is as follows (in thousands):
Accrual as of December 31, 2001 $ 2,231
Cash payments (420)
--------
Accrual as of June 30, 2002 $ 1,811
=========
The obligation is payable as follows: $420,000 during the remainder of
2002, $865,000 during 2003, $294,000 during 2004, $205,000 during 2005 and
$27,000 during 2006.
NOTE 8 - CONTINGENCIES
The Company is involved in various legal proceedings, including
business and employment matters of a nature considered normal to its operations.
The Company accrues for amounts related to these legal matters if it is probable
that a liability has been incurred and an amount is reasonably estimable. In the
opinion of the Company, although the outcome of any legal proceeding cannot be
predicted with certainty, the ultimate liability of the Company in connection
with its legal proceedings will not have a material adverse effect on the
Company's financial position, but could be material to the results of operations
in any one accounting period.
Page 8
NOTE 9 - RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In November 2001, the Financial Accounting Standards Board issued Staff
Announcement Topic No. D-103, "Income Statement Characterization of
Reimbursements Received for Out-of-Pocket Expenses Incurred," which states that
reimbursements received for out-of-pocket expenses should be characterized as
revenue in the income statement. The application of Staff Announcement Topic No.
D-103 does not have an impact on current or previously reported net earnings
(loss) or earnings (loss) per share. The three and six months ended June 30,
2001, statements of operations included herein have been conformed to the
provisions of this new pronouncement.
Effective January 1, 2002, the Company adopted the provisions of
Statement of Financial Accounting Standards No. 142, "Goodwill and Other
Intangible Assets" ("SFAS 142"), issued by the Financial Accounting Standards
Board. SFAS 142 addresses how intangible assets that are acquired should be
accounted for upon acquisition. SFAS 142 specifies that goodwill is not subject
to amortization, but is subject to impairment assessment at least annually.
During the three months ended June 30, 2002, the Company completed its
transitional goodwill impairment testing, and has concluded that no impairment
of goodwill existed as of January 1, 2002. The Company intends to conduct its
annual goodwill impairment testing during the fourth quarter of each year.
As of January 1, 2002, the Company has recorded goodwill of
approximately $22.8 million and accumulated amortization of approximately $14.6
million. Effective January 1, 2002, the Company, in accordance with SFAS 142,
ceased the amortization of goodwill. The following table shows on a comparative
basis (in thousands, except per share data) what net earnings (loss) and net
earnings (loss) per share would have been exclusive of amortization expense
(including any related tax effects):
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
----------------------------- ----------------------------
2002 2001 2002 2001
------------ ------------ ---------- ----------
Reported net earnings (loss) $ (944) $ (2,865) $ 29 $ (7,296)
Add: goodwill amortization -- 188 -- 375
--------- --------- --------- ---------
Adjusted net earnings (loss) $ (944) $ (2,677) $ 29 $ (6,921)
========= ========= ========= =========
Basic net earnings (loss) per share:
Reported net earnings (loss) per share $ (0.09) $ (0.26) $ 0.00 $ (0.66)
Add: goodwill amortization -- 0.02 -- 0.03
--------- --------- --------- ---------
Adjusted net earnings (loss) per share $ (0.09) $ (0.24) $ 0.00 $ (0.63)
========= ========= ========= =========
Diluted net earnings (loss) per share:
Reported net earnings (loss) per share $ (0.09) $ (0.26) $ 0.00 $ (0.66)
Add: goodwill amortization -- 0.02 -- 0.03
--------- --------- --------- ---------
Adjusted net earnings (loss) per share $ (0.09) $ (0.24) $ 0.00 $ (0.63)
========= ========= ========= =========
Page 9
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," "should," "conditioned
upon" 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: significant client
assignments, timing of contracts, recruiting and new business solicitation
efforts, the healthcare market's acceptance of and demand for the Company's
offerings, regulatory changes and other factors affecting the financial
constraints on the Company's clients, economic factors specific to healthcare,
general economic conditions, unforeseen disruptions in transportation,
communications or other infrastructure components, acquisitions under
consideration and the ability to integrate acquisitions on a timely basis. 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 two segments through its primary
operating subsidiary, Superior Consultant Company, Inc. ("Superior"). Superior
is a nationally deployed, integrated technology services company that provides
Digital Business Transformation(TM) services to the healthcare industry,
connecting online technologies to business processes that have traditionally
been conducted offline. The Company offers business process and information
technology ("IT") outsourcing, management and IT consulting services and
solutions to healthcare organizations, including health plans and technology
providers, with special emphasis on hospital systems and integrated delivery
networks.
The Company is organized into the two business segments of outsourcing
and consulting. The outsourcing segment helps healthcare providers simplify
their management agendas, improve their return on information systems investment
and strengthen their technology management. The Company deploys specialized
resources to deliver higher quality at lower cost and helps clients avoid or
reduce certain capital expenses. 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 business process management, IT
management, IT planning and budgeting, applications support, applications
implementation, IT operations, data center consolidation, 24/7/365 network
monitoring and help desk, financial management and risk sharing, facility
management, application unification, application outsourcing and interim
management. The consulting segment provides information technology, as well as
strategic and operations management consulting, solutions, and application
support to a broad cross-section of healthcare industry participants and
information systems vendors. The consulting segment also provides the tools,
strategies and solutions necessary to improve patient safety, enhance financial
performance, and ensure secure and private Health Insurance Portability and
Accountability Act ("HIPAA") compliant transactions.
In recent years, the Company has expanded its outsourcing, e-commerce,
solution sales and systems integration capabilities. As healthcare and other
sectors implement Internet and web-based technologies and applications, the
Company may incur risks related to participation in such opportunities, 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 and other technologies in
which the Company has invested; increased competition in the outsourcing
business from larger and more well capitalized competitors; the e-commerce
and/or systems integration markets moving in directions not foreseen by the
Company and adverse to the positioning and investments undertaken by the
Company; potential government regulation of the Internet; slowness of
traditional healthcare clients to adopt new technologies and increased
competition for consultant talent, increasing the Company's cost of providing
services.
The Company derives substantially all of its revenue 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 for time and materials engagements 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. Outsourcing engagements, fixed-fee
projects and pre-packaged solution sales are billed by deliverable or on a
periodic basis, generally monthly. Revenue on these contracts is generally
recognized ratably over the life of the contract or on a
Page 10
percentage of completion basis. Increased use of fixed-fee contracts subjects
the Company to increased risks, including cost overruns. As of June 30, 2002,
the Company has six significant contracts to provide healthcare IT outsourcing
services. In addition, the Company provides help desk and call center support,
which are typically billable on a per seat per month basis; and managed trust
(digital security) services, which are generally billed annually and recognized
ratably over the life of the contract. 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. As the
Company has begun to incorporate proprietary software tools and/or
applications into its client offerings, it recognizes revenue from license fees
and annual support and maintenance fees. The Company generally recognizes
license fees upon the shipment of the tools or applications. The support and
maintenance fees will generally be recognized ratably over the support or
maintenance term. There can be no assurance that the Company will be able to
achieve profit margins on existing and new contracts, which are consistent with
its historical levels of profitability. In addition, profit margins on
outsourcing and support contracts are generally lower than other traditional
consulting engagements. On occasion, the Company may collect payment prior to
providing services. These payments are recorded as deferred revenue and
reflected as a liability on the Company's consolidated balance sheet.
The Company seeks to increase revenue through various means, including
an increased emphasis on outsourcing engagements, an increase in the value and
duration of projects for existing and new clients, as well as continued
additions to its recurring revenue base. In addition, the Company seeks to
increase revenue by expanding its range of specialty services with a focus on
opportunities arising from the demand for clinical quality and patient safety,
digital communications, system security and HIPAA expertise. The Company manages
its client development efforts through its internal Client Partner Organizations
("CPO") having specific geographic responsibility and focus. Within a geography,
the Company's CPO members develop relationships and pursue opportunities with
strategic clients, maintain relationships with various stakeholders (buyers,
suppliers and advisors) and develop other business opportunities. The Company's
success in increasing its revenue will be dependent upon, among other factors,
the continuing recovery of the marketplace, timely sales, competitive rates and
continued growth and improvement in proposal acceptance rates in outsourcing and
consulting. In addition, the Company's revenues have and can be impacted by any
unforeseen disruptions in transportation, communications or other infrastructure
components. Should the Company be unsuccessful in increasing its revenue, the
Company may fail to meet the public market's expectations of its financial
performance and operating results, which could have a material adverse effect on
its common stock price.
The Company's most significant expense is cost of services, which
consists primarily of consultant compensation expense and operating costs
associated with its full outsourcing contracts. Historically, 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 revenue. The
Company has sought to address the consultant compensation 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 in
the past by the impact of the Company's stock price and could be affected in the
future depending upon market conditions.
The Company's cost of services as a percentage of revenue is also
impacted by how efficiently the Company utilizes its consultant resources and
delivers its consulting and outsourcing services and solutions. The Company
attempts to optimize efficient deployment of its consultants through initial
engagement planning and by continuously monitoring project requirements,
timetables, and service and solution deliveries. The number of consultants
assigned to a project will vary according to the type, size, complexity,
duration and demands of the project. Project terminations, completions and
scheduling delays have and can result in periods when the Company experiences
lower gross margins.
In recent years the healthcare industry has experienced a slow-down in
consulting expenditures as fiscal constraints imposed by factors such as the
Balanced Budget Act of 1997, changes in the private reimbursement environment
and lingering Y2K transition effects combined forces to dampen overall industry
demand for new IT service consulting projects. These forces continued to hamper
demand for the Company's services during the first half of 2002. Furthermore,
the Balanced Budget Act of 1997 and other forces such as private reimbursement
changes may continue to adversely affect the financial stability of the
Company's clients and may impact their ability to pay for professional services
rendered. The Company records a provision for estimated uncollectible amounts
based on prior collection experience.
During 2001, the events of September 11 and resulting disruptions in
air travel adversely affected the Company's business. In addition, the aftermath
of September 11, including increased federal spending on defense and homeland
security, could adversely affect the federal and state governments' spending on
Medicare, Medicaid and other healthcare initiatives, which could adversely
affect the Company's clients' revenues and cause them to defer or cancel
projects that would create demand for
Page 11
the Company's services. Further, potential increases to the cost of and time
consumed by travel could have a material adverse affect on the Company's
business.
In addition, the Company's establishment of new Competency Centers,
services and market offerings and hiring of consultants in peak hiring periods
have and can from time to time adversely affect margins. Also, seasonal factors,
such as vacation days, holidays and total business days in a quarter have and
can affect margins. Variations in market offering solution sales, longer
outsourcing sales cycles, deployment of resources and failure to secure large
engagements can also result in quarterly variability of the Company's cost of
services as a percentage of revenue. 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, technology, sales
and marketing, facilities, administration, outside professional fees and
depreciation. During 2001, selling, general and administrative expenses also
included amortization of goodwill. However, on January 1, 2002, the Company
adopted the provisions of SFAS 142, which specifies that goodwill is no longer
subject to amortization, but is subject to impairment assessment at least
annually. During the three months ended June 30, 2002, the Company completed its
transitional goodwill impairment testing, and concluded that no impairment of
goodwill existed as of January 1, 2002. The Company intends to conduct its
annual goodwill impairment testing during the fourth quarter of each year.
The Company considers its accounting policy relating to the
restructuring accrual to be critical. As of June 30, 2002, the accrual amounted
to approximately $1.8 million, which represents the present value of future
operating lease obligations for facilities no longer used by the Company, but
not sublet or sublet at amounts less than the Company's obligation. If the
Company is successful in subletting additional space in the future, this accrual
may be reduced.
In November 2001, the Financial Accounting Standards Board issued Staff
Announcement Topic No. D-103, "Income Statement Characterization of
Reimbursements Received for Out-of-Pocket Expenses Incurred," which states that
reimbursements received for out-of-pocket expenses should be characterized as
revenue in the income statement. The application of Staff Announcement Topic No.
D-103 does not have an impact on current or previously reported net earnings
(loss) or earnings (loss) per share. The Company will continue to use net
revenue (revenue excluding out-of-pocket reimbursements) and net cost of
services (cost of services excluding out-of-pocket reimbursements) to compute
percentage and margin calculations, as well as for purposes of comparing the
results of operations for the three and six months ended June 30, 2002, to the
three and six months ended June 30, 2001, respectively.
Page 12
THREE MONTHS ENDED JUNE 30, 2002 COMPARED TO THREE MONTHS ENDED JUNE 30, 2001
Net Revenue.
Consulting. Net revenue in this segment decreased by $0.8
million, or 5.0%, to $14.2 million for the three months ended June 30,
2002, as compared to $15.0 million for the three months ended June 30,
2001. The revenue decrease was primarily due to a decline in demand for
this segment's services.
Outsourcing. Net revenue in this segment increased by $0.7
million, or 9.2%, to $7.8 million for the three months ended June 30,
2002, as compared to $7.1 million for the three months ended June 30,
2001. The revenue increase was primarily the result of the signing of
new outsourcing agreements subsequent to June 30, 2001.
Net Cost of Services.
Consulting. Net cost of services in this segment decreased by
$1.1 million, or 10.9%, to $8.3 million for the three months ended June
30, 2002, as compared to $9.4 million for the three months ended June
30, 2001. The decrease was due primarily to lower consultant
compensation expenses as a result of the reduction in consultant
headcount in this segment. Net cost of services as a percentage of net
revenue for this segment decreased to 58.5% for the three months ended
June 30, 2002, as compared to 62.3% for the three months ended June 30,
2001. The decrease was attributable to lower consultant headcount in
this segment.
Outsourcing. Net cost of services in this segment increased by
$1.5 million, or 28.9%, to $6.3 million for the three months ended June
30, 2002, as compared to $4.8 million for the three months ended June
30, 2001. The increase was primarily due to costs related to new
engagements. Net cost of services as a percentage of net revenue for
this segment increased to 80.8% for the three months ended June 30,
2002, as compared to 68.4% for the three months ended June 30, 2001.
The increase is primarily attributable to the initial costs associated
with the signing of the new full outsourcing engagements.
Selling, general and administrative expenses. Selling, general
and administrative expenses decreased by $2.4 million, or 22.4%, to
$8.4 million for the three months ended June 30, 2002, as compared to
$10.8 million for the three months ended June 30, 2001. The decrease
was primarily attributable to reductions in: personnel and related
costs, facility, technology, marketing and communication expenditures,
goodwill amortization and charges related to the accounts receivable
allowance, litigation and claims, as well as efficiencies achieved in
continuing education programs. Selling, general and administrative
expenses as a percentage of net revenue decreased to 38.1% for the
three months ended June 30, 2002, as compared to 48.9% for the three
months ended June 30, 2001. The decrease is primarily attributable to
increased operating efficiencies as a result of the Company's
disciplined cost controls.
Other income and expense. Other income was $57,000 for the
three months ended June 30, 2002, as compared to $235,000 for the three
months ended June 30, 2001. The decrease was primarily the result of
the reduced interest earned on the Company's short-term investments
during the three months ended June 30, 2002.
Page 13
SIX MONTHS ENDED JUNE 30, 2002 COMPARED TO SIX MONTHS ENDED JUNE 30, 2001
Net Revenue.
Consulting. Net revenue in this segment decreased by $3.0
million, or 9.7%, to $27.7 million for the six months ended June 30,
2002, as compared to $30.7 million for the six months ended June 30,
2001. The revenue decrease was primarily due to a decline in demand for
this segment's services.
Outsourcing. Net revenue in this segment increased by $2.4
million, or 17.9%, to $15.6 million for the six months ended June 30,
2002, as compared to $13.2 million for the six months ended June 30,
2001. The revenue increase was primarily the result of the signing of
new outsourcing agreements subsequent to June 30, 2001.
Net Cost of Services.
Consulting. Net cost of services in this segment decreased by
$3.2 million, or 16.2%, to $16.6 million for the six months ended June
30, 2002, as compared to $19.8 million for the six months ended June
30, 2001. The decrease was due primarily to lower consultant
compensation expenses as a result of the reduction in consultant
headcount in this segment. Net cost of services as a percentage of net
revenue for this segment decreased to 59.9% for the six months ended
June 30, 2002, as compared to 64.5% for the six months ended June 30,
2001. The decrease was attributable to lower consultant headcount in
this segment.
Outsourcing. Net cost of services in this segment increased by
$2.5 million, or 25.6%, to $12.2 million for the six months ended June
30, 2002, as compared to $9.7 million for the six months ended June 30,
2001. The increase was primarily due to costs related to new
engagements. Net cost of services as a percentage of net revenue for
this segment increased to 78.4% for the six months ended June 30, 2002,
as compared to 73.6% for the six months ended June 30, 2001. The
increase is primarily attributable to the initial costs associated with
the signing of the new full outsourcing engagements.
Selling, general and administrative expenses. Selling, general
and administrative expenses decreased by $4.8 million, or 22.4%, to
$16.9 million for the six months ended June 30, 2002, as compared to
$21.7 million for the six months ended June 30, 2001. The decrease was
primarily attributable to reductions in: personnel and related costs,
facility, marketing, technology and communication expenditures,
goodwill amortization and charges related to litigation and claims, as
well as efficiencies achieved in continuing education programs.
Selling, general and administrative expenses as a percentage of net
revenue decreased to 39.0% for the six months ended June 30, 2002, as
compared to 49.5% for the six months ended June 30, 2001. The decrease
is primarily attributable to increased operating efficiencies as a
result of the Company's disciplined cost controls.
Other income and expense. Other income was $129,000 for the
six months ended June 30, 2002, as compared to $227,000 for the six
months ended June 30, 2001. The decrease was primarily the result of
the reduced interest earned on the Company's short-term investments
during the six months ended June 30, 2002, as well as the decrease in
interest expense during the six months ended June 30, 2002, due to the
partial repayment of the line of credit during the six months ended
June 30, 2001.
Page 14
LIQUIDITY AND CAPITAL RESOURCES
In connection with the restructuring plan initiated during 2000, the
Company recorded restructuring charges of approximately $3.1 million during the
year ended December 31, 2001. These charges primarily related to the accelerated
expense associated with certain lease obligations, the write-off of property and
equipment and leasehold improvements, and severance costs related to the
Company's continued organizational restructuring, partially offset by a
reduction to the 2000 accrual for restructuring costs. Refer to the Company's
audited consolidated financial statements and notes thereto for the year ended
December 31, 2001, for further details on the components of these charges.
During the three and six months ended June 30, 2002, the Company had cash
outflows of approximately $210,000 and $420,000, respectively, related to the
accelerated expense associated with certain lease obligations, which were
accrued for as of December 31, 2001. The current accrued liability for
additional cash outflows, related to the accelerated expense associated with
certain lease obligations, is approximately $1.8 million and will be payable as
follows: $420,000 throughout the remainder of 2002, $865,000 during 2003,
$294,000 during 2004, $205,000 during 2005 and $27,000 during 2006.
The Company's primary capital needs have been, and will be, to fund its
outsourcing and solution sales initiatives, as well as its capital expenditures.
The Company believes after giving effect to the restructuring plan and assuming
revenue consistent with current levels, that its current cash and cash
equivalents, 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. The
nature, amount and timing of the Company's long-term capital needs can be
affected by a number of factors. For example, the Company's strategic plan
includes a heightened focus on the development of the Company's outsourcing
business and the winning of large engagements. Implementation of a new
outsourcing engagement can involve the need for capital investment by the
Company, including the hiring of new personnel and the acquisition of a client's
IT assets, including hardware and software. An additional element of the
Company's outsourcing business strategy includes offering data center
consolidation to its clients, which has and will continue to require investment
by the Company in data center facilities. The timing, number and scale of
potential future outsourcing engagements can impact the Company's need for
capital resources. In addition, the Company's future long-term capital needs
will be affected by the timing of the Company's market and service offerings, in
addition to outsourcing, and the degree and timing of success enjoyed by such
offerings in the market. A failure of the Company's offerings to meet success in
the market, and the Company's ability to adjust its operating expenses to an
appropriate level commensurate with operating revenues, can also affect the
Company's need for capital resources. For all of these reasons and those risk
factors identified in the Company's reports on file with the Securities and
Exchange Commission, the Company's ability to project long-term revenue levels
and capital needs is subject to substantial uncertainty. If the Company's
available funds and cash generated from operations are insufficient to satisfy
its long-term liquidity requirements, or if an event of default occurs under its
credit agreement with its lenders and the Company is required to repay all
outstanding indebtedness under the credit agreement, the Company may need to
seek additional sources of funding, such as selling additional equity or debt
securities or obtaining additional lines of credit. The Company could also, in
such event, face the need to delay or reduce the development of services or the
pursuit of engagements that would require significant investment to complete.
The Company could also face the need to reduce staffing levels and related
expenses or potentially to liquidate selected assets. If the Company's
management decides that it is in the Company's best interest to raise cash to
strengthen the Company's balance sheet, broaden its investor base, increase
liquidity of its pool of publicly traded stock or for any other reason, the
Company may decide to issue equity or debt, notwithstanding that its currently
available funds are sufficient to meet its anticipated needs for working capital
and capital expenditures through the next twelve months. The Company may decide
to enter into such a transaction to raise cash even if all of its current
funding sources remain available to the Company. If the Company issues
additional securities to raise funds, those securities may have rights,
preferences, or privileges senior to those of its common stock and its
shareholders may experience dilution. The Company cannot be certain that
additional financing will be available to the Company on favorable terms when
required, or at all. The inability of the Company to obtain additional financing
when needed could impair the Company's ability to develop products and services
for the market; to implement its business strategies; and may otherwise
materially and adversely affect the Company's business.
At June 30, 2002, the Company had cash and cash equivalents of $16.3
million and working capital of $19.5 million, as compared with cash and cash
equivalents of $16.9 million and working capital of $19.0 million at December
31, 2001.
As of June 30, 2002, the Company had a line of credit arrangement at
Comerica Bank N. A. allowing for borrowings of up to $8.0 million, based on
qualifying accounts receivable. Based on the eligibility provisions in the loan
agreement, the Company could have borrowed approximately $6.5 million on the
line of credit as of June 30, 2002; approximately $2.9 million was outstanding.
Borrowings under the line mature in September 2002. Borrowings bear interest at
the greater of the prime rate or 1% plus the Federal funds effective
Page 15
rate. The interest rate at June 30, 2002, was 4.75%. The line is collateralized
by accounts receivable and any deposits held by the bank. The Company was in
compliance with all financial covenants as of June 30, 2002. In addition, the
Company has letters of credit of approximately $1.5 million issued by a bank,
secured by bank deposits.
Net cash provided by operations was $1.1 million for the six months
ended June 30, 2002, as compared to net cash used in operations of $0.9 million
for the six months ended June 30, 2001. The increase in net cash provided by
operations was primarily due to the reduction in the net operating loss during
the six months ended June 30, 2002, as compared to the six months ended June 30,
2001, partially offset by the decrease in refundable income taxes received
during the six months ended June 30, 2002.
Net cash of $1.7 million used in investing activities during the six
months ended June 30, 2002, consists of additions to property, equipment and
software, which primarily relate to the new full outsourcing engagements.
Net cash of $69,000 provided by financing activities during the six
months ended June 30, 2002, was the result of exercises of stock options.
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 is exposed to interest rate change market risk in
connection with its credit facility with its bank. The interest rate on this
facility is tied to the bank's prime rate, and changes in the variable rate will
have an impact on the Company's interest expense.
PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On July 25, 2002, the Company held its annual meeting of stockholders.
Stockholders of the Company voted in favor of the election of Ronald V.
Aprahamian, Richard D. Helppie, Jr. and Richard P. Saslow to the Company's Board
of Directors. Messrs. Aprahamian, Helppie and Saslow were each elected to serve
a three-year term expiring at the Company's 2005 Annual Meeting. In the election
of Mr. Aprahamian, 10,802,715 votes were cast in favor and 0 votes were cast
against or withheld. In addition, there were 47,085 abstentions and 0 broker
non-voters. In the election of Mr. Helppie, 10,802,815 votes were cast in favor
and 0 votes were cast against or withheld. In addition, there were 46,985
abstentions and 0 broker non-voters. In the election of Mr. Saslow, 10,788,815
votes were cast in favor and 0 votes were cast against or withheld. In addition,
there were 60,985 abstentions and 0 broker non-voters. The remaining directors
whose terms continue until 2003 include Douglas S. Peters, Satish K. Tyagi and
Charles O. Bracken. The remaining directors whose terms continue until 2004
include Reginald M. Ballantyne III, Kenneth S. George and John L. Silverman.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
NONE
(b) Form 8-K
NONE
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Page 16
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, 2002 /s/ Richard D. Helppie, Jr.
- --------------------- -------------------------------------------
Richard D. Helppie, Jr.
Chief Executive Officer
(Principal Executive Officer)
Date: August 14, 2002 /s/ Richard R. Sorensen
- --------------------- -------------------------------------------
Richard R. Sorensen
Chief Financial Officer
(Principal Financial and Accounting Officer)
Page 17