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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 March 31, 2003
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 Twelve 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
--- ---
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes No X
--- ---
As of May 14, 2003, 10,764,891 shares of the registrant's common stock (par
value $.01) were outstanding, excluding treasury shares.
SUPERIOR CONSULTANT HOLDINGS CORPORATION AND SUBSIDIARIES
QUARTER ENDED MARCH 31, 2003
INDEX
PAGE NO.
--------
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of March 31, 2003 and
December 31, 2002 (unaudited) 3
Consolidated Statements of Operations for the three
months ended March 31, 2003 and 2002 (unaudited) 4
Consolidated Statements of Cash Flows for the three
months ended March 31, 2003 and 2002 (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 Disclosures About
Market Risk 16
Item 4. Controls and Procedures 16
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 16
SIGNATURES 17
CERTIFICATIONS 18
Page 2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SUPERIOR CONSULTANT HOLDINGS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)
MARCH 31, DECEMBER 31,
2003 2002
--------- ------------
ASSETS
Current assets
Cash and cash equivalents $ 13,643 $ 14,575
Accounts receivable, net 14,352 11,959
Accrued interest receivable and prepaid expenses 3,485 3,139
Refundable income taxes 164 238
-------- --------
Total current assets 31,644 29,911
Property and equipment, net 17,335 12,737
Real estate held for sale - 991
Other long-term assets 17 17
-------- --------
Total Assets $ 48,996 $ 43,656
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Notes payable to bank $ 3,100 $ 2,925
Current portion of long-term obligations 1,988 455
Accounts payable 8,462 7,449
Accrued liabilities, deferred bonuses and compensation 4,237 2,842
Deferred revenue 2,394 2,194
-------- --------
Total current liabilities 20,181 15,865
Long-term obligations 3,049 938
Other long-term liabilities 1,486 1,686
Commitments and contingencies (Note 9) - -
Stockholders' equity
Preferred stock; authorized, 1,000,000 shares of $.01 par value;
no shares issued as of March 31, 2003 and December 31, 2002 - -
Common stock; authorized, 30,000,000 shares of $.01 par value; issued,
11,116,991 shares as of March 31, 2003 and December 31, 2002 111 111
Additional paid-in capital 116,154 116,154
Stockholders' notes receivable (1,221) (1,221)
Treasury stock - at cost, 352,100 shares as of March 31, 2003
and December 31, 2002 (3,270) (3,270)
Accumulated deficit (87,494) (86,607)
-------- --------
Total stockholders' equity 24,280 25,167
-------- --------
Total Liabilities and Stockholders' Equity $ 48,996 $ 43,656
======== ========
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 MARCH 31,
-------------------------------
2003 2002
------- -------
Revenue
Revenue before reimbursements (net revenue) $ 21,891 $ 21,257
Out-of-pocket reimbursements 1,851 1,820
-------- --------
Total revenue 23,742 23,077
Operating costs and expenses
Cost of services before reimbursements
(net cost of services) 15,884 14,190
Out-of-pocket reimbursements 1,851 1,820
-------- --------
Total cost of services 17,735 16,010
Selling, general and administrative expenses 6,815 8,467
-------- --------
Total operating costs and expenses 24,550 24,477
-------- --------
Loss from operations (808) (1,400)
Other income (expense), net (79) 72
-------- --------
Loss before income tax benefit (887) (1,328)
Income tax benefit - (2,301)
-------- --------
Net earnings (loss) $ (887) $ 973
======== ========
Net earnings (loss) per share
Basic $ (0.08) $ 0.09
======== ========
Diluted $ (0.08) $ 0.08
======== ========
Weighted average number of common shares outstanding
Basic 10,765 10,733
======== ========
Diluted 10,765 11,513
======== ========
See notes to consolidated financial statements.
Page 4
SUPERIOR CONSULTANT HOLDINGS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
THREE MONTHS ENDED MARCH 31,
-------------------------------
2003 2002
------- -------
Cash flows from operating activities:
Net earnings (loss) $ (887) $ 973
Adjustments to reconcile net earnings (loss) to net cash
used in operating activities:
Depreciation and amortization of property and equipment 1,081 1,054
Bad debt expense - 47
Other - (50)
Changes in operating assets and liabilities:
Accounts receivable (2,393) (927)
Accrued interest receivable and prepaid expenses (346) 935
Refundable income taxes 74 (2,288)
Accounts payable 1,013 (1,465)
Accrued liabilities, deferred bonuses and compensation 1,395 1,146
Deferred revenue 200 92
Other long-term liabilities (200) -
-------- --------
Net cash used in operating activities (63) (483)
Cash flows from investing activities:
Purchase of property and equipment (1,683) (384)
Proceeds from sale of real estate 991 -
-------- --------
Net cash used in investing activities (692) (384)
Cash flows from financing activities:
Proceeds from line of credit 175 -
Payments on long-term obligations (352) -
Exercise of stock options - 56
-------- --------
Net cash provided by (used in) financing activities (177) 56
-------- --------
Net decrease in cash and cash equivalents (932) (811)
Cash and cash equivalents, beginning of period 14,575 16,902
-------- --------
Cash and cash equivalents, end of period $ 13,643 $ 16,091
======== ========
Supplemental disclosure of cash flow information -- cash paid for interest $ 175 $ 48
Non-Cash Transaction -- purchase of property and equipment
financed by long-term obligations $ 3,996 $ -
See notes to consolidated financial statements.
Page 5
SUPERIOR CONSULTANT HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
MARCH 31, 2003
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
in the United States of America for complete financial statements. In our
opinion, all adjustments (consisting of normal recurring accruals and estimated
provisions for bonus and profit-sharing arrangements) considered necessary for a
fair presentation have been included. Operating results for the three month
period ended March 31, 2003, are not necessarily indicative of the results that
may be expected for the year ended December 31, 2003.
These financial statements should be read in conjunction with our
audited consolidated financial statements and notes thereto included in our 2002
annual report on Form 10-K filed by us with the Securities and Exchange
Commission on March 31, 2003.
Certain reclassifications were made to the 2002 consolidated financial
statements to conform to the three months ended March 31, 2003 presentation.
NOTE 2 - STOCK-BASED COMPENSATION
We apply the intrinsic value method under Accounting Principles Board
("APB") Opinion No. 25, "Accounting for Stock Issued to Employees" and its
related interpretations, for options granted to employees and Board members. No
compensation expense is recognized because we award options at the fair market
value of the underlying common stock on the date of grant. For options and
warrants to non-employees, we apply Statement of Financial Accounting Standards
No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"), and
accordingly, recognize expense using a fair market value method.
The following table illustrates the effect on net earnings (loss) and
net earnings (loss) per share if we had applied the fair value recognition
provisions of SFAS 123, as amended by Statement of Financial Accounting
Standards No. 148, "Accounting for Stock-Based Compensation -- Transition and
Disclosure -- an amendment of FASB Statement No. 123" ("SFAS 148") to options
issued to employees and Board members (in thousands, except per share amounts):
THREE MONTHS ENDED MARCH 31,
-------------------------------
2003 2002
------- -------
Net earnings (loss), as reported $ (887) $ 973
Deduct: Total stock-based employee compensation expense
determined under the fair value-based method for awards
granted, modified or settled, net of related tax effects (1,153) (1,223)
------- -------
Pro forma net loss $(2,040) $ (250)
======= =======
Net earnings (loss) per share
Basic - as reported $ (0.08) $ 0.09
======= =======
Basic - pro forma $ (0.19) $ (0.02)
======= =======
Diluted - as reported $ (0.08) $ 0.08
======= =======
Diluted - pro forma $ (0.19) $ (0.02)
======= =======
Page 6
NOTE 2 - STOCK-BASED COMPENSATION (CONTINUED)
The fair value of these stock options was estimated at the date of
grant using the Black-Scholes option-pricing model with the following
weighted-average assumptions:
THREE MONTHS ENDED MARCH 31,
-------------------------------
2003 2002
---- ----
Risk free interest rate 2.36% 3.16%
Dividend yield 0% 0%
Volatility factor .82 .88
Expected option term life in years 5.0 5.0
NOTE 3 - NET EARNINGS (LOSS) PER SHARE
We account for Earnings (Loss) Per Share under the rules of Statement
of Financial Accounting Standards No. 128, "Earnings Per Share." Our 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 three
months ended March 31, 2002, includes approximately 780,000 common share
equivalents. Options and warrants to purchase approximately 3,632,000 and
2,145,000 shares of common stock with a weighted average exercise price of
$13.42 and $20.87 were outstanding at March 31, 2003 and 2002, 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 4 - SEGMENT FINANCIAL INFORMATION
We are organized into the two business segments of consulting and
outsourcing. The consulting segment provides information technology, as well as
strategic and operations management consulting and 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. We evaluate segment performance and allocate
resources based on gross profit. Intrasegment services are provided at cost.
Page 7
NOTE 4 - SEGMENT FINANCIAL INFORMATION (CONTINUED)
The following is a summary of certain financial information by segment,
for the three months ended March 31, 2003 and 2002 (in thousands). Due to the
nature of our business, a majority of the reimbursable out-of-pocket expenses
are incurred on consulting engagements.
THREE MONTHS ENDED
MARCH 31,
--------------------------
2003 2002
------- -------
Revenue
Consulting
Revenue before reimbursements (net revenue) $13,991 $13,479
Out-of-pocket reimbursements 1,773 1,669
------- -------
Total consulting revenue 15,764 15,148
Outsourcing
Revenue before reimbursements (net revenue) 7,900 7,778
Out-of-pocket reimbursements 78 151
------- -------
Total outsourcing revenue 7,978 7,929
------- -------
Consolidated revenue $23,742 $23,077
======= =======
Gross Profit and Statement of Operations Reconciliation
Consulting $ 5,510 $5,202
Outsourcing 497 1,865
------- -------
Consolidated gross profit 6,007 7,067
Unallocated
Selling, general and administrative expenses 6,815 8,467
Other (income) expense, net 79 (72)
------- -------
Subtotal 6,894 8,395
------- -------
Consolidated loss before income tax benefit $ (887) $(1,328)
======= =======
Our reportable segments are business units that offer and provide
different services through different means. Our 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.
NOTE 5 - INCOME TAXES
The income tax benefit for the three months ended March 31, 2003, does
not reflect the federal statutory tax rate, primarily due to the provision of a
valuation allowance for deferred tax assets as a result of the uncertainty
regarding their realization. As of March 31, 2003, we have net operating loss
carryforwards for federal income tax purposes of approximately $55.0 million,
the last of which will expire in 2023 if not utilized.
NOTE 6 - LINE OF CREDIT
Subsequent to March 31, 2003, we reached an agreement for a new line of
credit allowing for borrowings of up to $8.0 million, based on qualifying
accounts receivable and other operating metrics. Based on the eligibility
provisions and accounts receivable at March 31, 2003, we would have been able to
borrow $5.0 million. The line of credit will bear interest at the prime rate
less 0.25% and will be collateralized by accounts receivable, any deposits held
by the bank, equipment and other personalty. There are no compensating balance
requirements. The loan agreement contains financial covenants, including working
capital and ratios concerning liquidity and debt coverage. The prior line of
credit matured on April 15, 2003. Borrowings on that line, which amounted to
approximately $3.1 million and bore interest at the greater of the prime rate or
1% plus the Federal funds effective rate, were repaid in April 2003. In
addition, we have letters of credit of approximately $1.6 million issued by a
bank, secured by bank deposits.
Page 8
NOTE 7 - LONG-TERM OBLIGATIONS
We entered into an unsecured financing arrangement for $8.5 million for
software and professional fees related to the implementation of a new healthcare
application platform for an existing outsourcing client. The agreement provides
for sixty monthly payments in the amount of $170,046, including interest at an
annual rate of 7.35%, commencing on February 1, 2003. As of March 31, 2003, we
have capitalized approximately $4.6 million related to software we have received
through that date. The liability associated with the capitalized software is
$3.6 million as of March 31, 2003. We currently anticipate the project should be
completed during the third quarter of 2004 and we will continue to capitalize
the remaining software and professional fees throughout the project as those
costs are incurred. The principal portion of the obligation matures as follows:
$1.1 million throughout the remainder of 2003, $1.6 million during 2004, $1.7
million during 2005, $1.8 million during 2006, $1.9 million during 2007 and $0.2
million during 2008. We have also capitalized approximately $47,000 of interest
related to the project. For consolidated financial statement presentation, we
have also included amounts relating to capital lease financing arrangements in
long-term obligations.
NOTE 8 - RESTRUCTURINGS
In connection with our restructuring activities, we recorded
restructuring charges of approximately $3.3 million during the year ended
December 31, 2002. Refer to our audited consolidated financial statements and
notes thereto for the year ended December 31, 2002, for further details on
the components of these charges.
A summary of the activity of the restructuring-related liabilities,
included in accounts payable and other long-term liabilities, is as follows (in
thousands):
LIABILITIES AS OF 2003 2003 2003 CHANGE LIABILITIES AS OF
JANUARY 1, 2003 ADDITIONS PAYMENTS IN ESTIMATE MARCH 31, 2003
----------------- --------- -------- ----------- -----------------
Severance $ 239 $ - $(239) $ - $ -
Future lease obligations 2,820 - (296) - 2,524
------- --- ----- --- -------
Total $ 3,059 $ - $(535) $ - $ 2,524
======= === ===== === =======
The obligation is payable as follows: $838,000 throughout the remainder
of 2003, $798,000 during 2004, $466,000 during 2005, $239,000 during 2006 and
$183,000 during 2007.
NOTE 9 - CONTINGENCIES
We are involved in various legal proceedings, including business and
employment matters of a nature considered normal to our operations. We accrue
for amounts related to these legal matters if it is probable that a liability
has been incurred and an amount is reasonably estimable. In our opinion,
although the outcome of any legal proceeding cannot be predicted with certainty,
our ultimate liability in connection with our current legal proceedings will not
have a material adverse effect on our financial position or results of
operations.
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, but not limited
to: "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 and events
which we are unable to accurately predict or over which we have no control. Such
factors include, but are not limited to: the award or loss of significant client
assignments, timing of contracts, recruiting and new business solicitation
efforts, the healthcare market's acceptance of and demand for our offerings,
demands upon and consumption of our cash and cash equivalent resources or
changes in our access to working capital, regulatory changes and other factors
affecting the financial constraints on our 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.
Additional information regarding these risk factors and others, and additional
information concerning us are included in our reports on file with the
Securities and Exchange Commission.
We conduct our business in two segments through our 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. We offer 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.
We are 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 by taking on responsibility for managing
and operating all or part of the client's IT functions. We deploy specialized
resources to deliver higher quality IT functionality at lower cost and help
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 in our
processing center, 24/7/365 network monitoring and help desk in our network
control center, 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 and solutions, and application support to a
broad cross-section of healthcare industry participants and information systems
vendors. The consulting segment also provides tools, strategies and solutions
designed to improve patient safety, enhance financial performance, and promote
secure and private Health Insurance Portability and Accountability Act ("HIPAA")
compliant transactions.
In recent years, we have expanded our outsourcing and solution sales
capabilities. As healthcare and other sectors implement web-based technologies
and applications, we 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 web-based applications and/or the systems integration platforms
and other technologies in which we have invested; increased competition in the
outsourcing business from larger and better capitalized competitors who may also
enjoy better name recognition and other competitive advantages; failure by us to
develop and offer new services and solutions demanded by the market; failure of
our services and solutions to generate sufficient demand in the market;
potential government regulation of the Internet; slowness of traditional
healthcare clients to adopt new technologies; and increased competition for
consultant talent, increasing our cost of providing services.
We derive substantially all of our revenue from fees for professional
services. We establish 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 contracts, fixed-fee projects and
Page 10
pre-packaged solution sales are billed by deliverable or on a periodic basis,
typically monthly. Revenue on these contracts is generally recognized ratably
over the life of the contract or based on progress toward project milestones. As
of March 31, 2003, we have six significant contracts to provide healthcare IT
outsourcing services. We also provide 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.
There can be no assurance that we will be able to achieve profit
margins on existing and new contracts, which are consistent with our historical
levels of profitability. In addition, profit margins on outsourcing and support
contracts are generally lower than other traditional consulting engagements. On
occasion, we may collect payment prior to providing services. These payments are
recorded as deferred revenue and reflected as a liability on our consolidated
balance sheet. Increased use of fixed-fee contracts subjects us to increased
risks, including cost overruns. Moreover, we incur significant expense in the
process of seeking, developing and negotiating large fixed-fee contracts, such
as outsourcing contracts. In addition, the implementation of certain outsourcing
contracts requires significant initial investment by us in the hiring of
personnel and the acquisition of equipment to perform the contract. Such
expenses are expected to be recovered over the life of the agreement. Some of
our agreements call for penalties, or allow for early termination in the event
we fail to meet certain service levels. If we fail to meet required performance
standards in our outsourcing, or other engagements, we could incur contractual
penalties, or the agreements could terminate before we are able to recover the
investments we made in the pursuit and initiation of the engagement. In either
event, we could suffer adverse financial consequences, as well as damage to our
reputation in the industry, which could adversely and materially affect our
business, financial condition, results of operations and the price of our common
stock.
We seek to increase revenue through various means, including an
increased emphasis on outsourcing contracts, an increase in the value and
duration of projects for existing and new clients, as well as continued
additions to our recurring revenue base. In addition, we seek to increase
revenue by expanding our range of specialty services with a focus on
opportunities arising from the demand for clinical quality and patient safety,
financial improvement, digital communications, system security and privacy
expertise. We manage our client development efforts through our internal Client
Partner Organizations ("CPO") having specific geographic responsibility and
focus. Within a geography, our CPO members develop relationships and pursue
opportunities with strategic clients, maintain relationships with various
stakeholders (buyers, suppliers and advisors) and develop other business
opportunities. Our success in increasing our revenue will be dependent upon,
among other factors, the recovery of the marketplace, timely sales, the type,
range and quality of our services and solutions, competitive prices, growth and
improvement in proposal acceptance rates in outsourcing and consulting, and
successful competition in the marketplace. Many of the entities with whom we
compete have greater name recognition, financial resources, larger customer
bases and greater technical and sales and marketing resources, which may impact
our ability to compete against them successfully. In addition, our revenues have
and can be impacted by unforeseen disruptions in transportation, communications
or other infrastructure components. Should we be unsuccessful in increasing or
sustaining our revenue, for these or for other reasons, we may fail to meet the
public market's expectations of our financial performance and operating results,
which could have a material adverse effect on our common stock price.
Our most significant expense is cost of services, which consists
primarily of consultant compensation expense and operating costs associated with
our full outsourcing contracts.
Historically, consultant compensation expense has grown faster than
consultant billing rates. We have 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, we have sought to
address compensation expense pressures through increased use of stock options as
an overall part of our compensation package. These efforts have been hampered in
the past by the impact of our stock price and could be affected in the future
depending upon market conditions. The market in which we compete for our
talented and highly skilled consultant work force is highly competitive. Many of
the entities with whom we compete for employees have greater financial and other
resources than us, and may be able to offer more attractive compensation
packages to candidates than we can, including salary, benefits, stock and stock
options. Our ability to successfully operate our business and compete in our
market is dependent upon our ability to recruit and retain skilled and motivated
sales, management, administrative and technical personnel. If we are unable to
recruit and retain consultants to perform new and existing client engagements,
our reputation in the industry and our ability to generate revenue will both
suffer, which could have a material adverse effect on our business, financial
condition and on the price of our common stock. Moreover, our consultants are
often key to our client relationships. Loss of key consultants could impair
client relationships and adversely affect our ability to gain recurring
engagements, which could adversely affect our financial condition.
Page 11
Our operating costs associated with the full outsourcing contracts have
and will continue to increase as additional clients are serviced. Additionally,
as we continue to migrate additional clients to the processing center, we expect
to incur incremental normative costs, which will be offset with savings over
time as additional clients are added and we are able to leverage our investment.
These costs consist primarily of, but are not limited to: equipment lease costs,
depreciation, telecommunication and facility related expenditures. We expect to
recover our investment in our processing and network management centers through
the performance of multiple outsourcing contracts and network management
(NetLinc) contracts utilizing processing center resources. If we are
unsuccessful in winning sufficient new outsourcing and NetLinc contracts, or if
the terms of outsourcing or NetLinc contracts are not sufficiently favorable to
us, or if any of the existing outsourcing or NetLinc contracts were to be
terminated early for any reason, our ability to recover our processing center
investments would be impaired, which could have a material adverse effect on our
financial condition. In addition, we will be performing data processing and
other client information systems functions through our processing centers. Any
failure by us to successfully perform our processing center functions could
adversely affect our clients' operations, which could result in contractual
performance penalties to us, early termination of one or more contracts,
potential legal liabilities and damage to our reputation in the industry, any or
all of which could have a material adverse effect on our financial condition,
results of operations and the price of our common stock.
Our net cost of services as a percentage of net revenue is primarily
driven by how efficiently we utilize our consultant resources and deliver our
consulting and outsourcing services and solutions. We attempt to optimize
efficient deployment of our 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, and incremental costs
associated with the full outsourcing contracts have and can continue to cause us
to experience lower gross margins.
In recent years the healthcare industry has experienced a slow-down in
consulting expenditures as fiscal constraints imposed by federal, state and
commercial/private payers, and lingering Y2K transition effects combined forces
to dampen overall industry demand for new IT service consulting projects. These
forces have continued to hamper demand for certain of our services in 2003.
Furthermore, changes in federal, state and commercial/private payer
reimbursement may continue to adversely affect the financial stability and
viability of our clients and may impact their ability to contract for and pay
for professional services such as those offered by us. We record 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 our 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, as well as state budget
deficits and increased defense spending in connection with U.S. war and
peace-keeping activities which could adversely affect our clients' revenues and
cause them to defer or cancel projects that would create demand for our
services. In addition, our consultants often perform services at the client's
site, away from their own city or state of residence. We are, therefore, highly
dependent upon effective air travel for the performance of a majority of our
client engagements. If, as a result of terrorist attacks, conflicts in the
Middle East and other unsettling world events, air travel becomes increasingly
costly, time consuming, limited or unreliable, or should our employees become
reluctant to travel, it could harm our ability to timely and cost effectively
perform our client engagements, which could have a material adverse effect on
our financial condition and results of operations.
In addition, our establishment of new 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 services and market offering solution sales, longer outsourcing
sales cycles, uneven deployment of resources and failure to secure large
engagements can also result in quarterly variability of our net cost of services
as a percentage of net revenue. Our consultants are generally employed on a
full-time basis and therefore we will, in the short run, incur substantially all
of our employee-related costs even during periods of low utilization, as the
majority of employment costs of these personnel are fixed. In addition, we have
and may from time to time discontinue service offerings that have not been
successful in the market. Exiting a service offering can result in lower
margins, as there may not be immediate opportunities for the reassignment of
personnel, or there may be costs associated with the separation of personnel
from us. In addition, as we have responded to the diminishing demand for certain
of our consulting services by contracting operations and reducing costs, we have
and may again incur costs associated with business contractions, and may also
lose the ability to recover investments made in personnel, equipment, office
space and other assets associated with the service lines that are reduced or
eliminated. In the event that office space is closed by us, there can be no
assurance that we will be able to sublease that space, or that sublease rents
will offset our obligations under our prime lease(s). In addition, there can be
no assurance that existing sublessees under our
Page 12
leases will not default in their rent or other obligations. Default by our
sublessees, or an inability by us to sublease excess office space could have an
adverse effect on our financial condition.
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.
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. We will continue to use net revenue
(revenue before out-of-pocket reimbursements) and net cost of services (cost of
services before out-of-pocket reimbursements) to compute percentage and margin
calculations, as well as for purposes of comparing the results of operations for
the three months ended March 31, 2003, to the three months ended March 31, 2002.
We believe excluding out-of-pocket reimbursements, although a non-GAAP financial
measure, provides investors a better comparison from period to period by
removing the impact of fluctuations in out-of-pocket reimbursements that do not
reflect on operating performance.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of consolidated financial statements and related
disclosures in conformity with accounting principles generally accepted in the
United States of America, requires us to make judgments, assumptions and
estimates that affect the amounts reported in our consolidated financial
statements and the accompanying notes to consolidated financial statements. Our
estimates are based on prior experience, current business and market conditions,
as well as various other assumptions we believe are necessary to form a basis
for making judgments related to the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the
consolidated financial statements and the reported amounts of revenue and
expenses during the reporting period. Significant judgments, assumptions and
estimates made by us include, but are not limited to: the allowance for doubtful
accounts and restructuring charges. Actual results could differ from these
estimates. The following critical accounting policies reflect our more
significant judgments, assumptions and estimates used in the preparation of the
consolidated financial statements. Refer to our audited consolidated financial
statements and notes thereto for the year ended December 31, 2002, for
information regarding our significant accounting policies.
Accounts Receivable Valuation. Virtually all of our accounts receivable
are due from companies in the healthcare industry. Credit is extended based on
evaluation of a customer's financial condition and, generally, collateral is not
required. Accounts receivable are due within 30 days and are stated at amounts
due from customers net of an allowance for doubtful accounts. We determined our
allowance by considering a number of factors, including the length of time trade
accounts receivable are past due, our previous loss history, the customer's
current ability to pay its obligation to us, and the condition of the general
economy and the industry as a whole. We write-off accounts receivable when they
become uncollectible, and payments subsequently received on such receivables are
credited to the allowance for doubtful accounts. We typically have not assessed
interest on past due accounts.
Restructuring Charges. Prior to 2003, we accrued for restructuring
charges when we were specifically able to identify actions that needed to be
taken in response to a change in our strategic plan, product demand, increased
costs or other business factors. Effective January 1, 2003, we adopted the
provisions of Statement of Financial Accounting Standards No. 146, "Accounting
for Costs Associated with Exit or Disposal Activities." This statement requires
entities to recognize costs associated with exit or disposal activities when
liabilities are incurred rather than when the entity commits to an exit or
disposal plan. We routinely evaluate the prior restructuring accruals and make
any necessary adjustments to reflect any changes in the costs of the
restructuring activities. Estimates are based on anticipated costs to exit such
activities and are subject to change.
As of March 31, 2003, the restructuring-related accrual amounted to
approximately $2.5 million, which represents the present value of future
operating lease obligations for facilities no longer used by us, but not sublet
or sublet at amounts less than our obligation. Our restructuring accrual may be
adjusted in the future, based on our actual success in subleasing compared to
our estimate.
Our key accounting estimates and policies are reviewed with our
auditors and the Audit Committee of our Board of Directors.
Page 13
THREE MONTHS ENDED MARCH 31, 2003 COMPARED TO THREE MONTHS ENDED MARCH 31, 2002
Net Revenue.
Consulting. Net revenue in this segment increased by $0.5 million or
3.8%, to $14.0 million for the three months ended March 31, 2003, as compared to
$13.5 million for the three months ended March 31, 2002. The revenue increase
was primarily due to the increased demand for this segment's services.
Outsourcing. Net revenue in this segment increased by $0.1 million, or
1.6%, to $7.9 million for the three months ended March 31, 2003, as compared to
$7.8 million for the three months ended March 31, 2002.
Net Cost of Services.
Consulting. Net cost of services in this segment increased by $0.2
million, or 2.5%, to $8.5 million for the three months ended March 31, 2003, as
compared to $8.3 million for the three months ended March 31, 2002. Net cost of
services as a percentage of net revenue for this segment decreased to 60.6% for
the three months ended March 31, 2003, as compared to 61.4% for the three months
ended March 31, 2002.
Outsourcing. Net cost of services in this segment increased by $1.5
million, or 25.2%, to $7.4 million for the three months ended March 31, 2003, as
compared to $5.9 million for the three months ended March 31, 2002. The increase
was primarily due to the costs incurred as the result of the signing of two new
outsourcing contracts subsequent to March 31, 2002, as well as the increased
costs associated with the opening of our new processing center. Net cost of
services as a percentage of net revenue for this segment increased to 93.7% for
the three months ended March 31, 2003, as compared to 76.0% for the three months
ended March 31, 2002. The increase was primarily attributable to the initial
costs associated with the signing of two new outsourcing contracts subsequent to
March 31, 2002, as well as the costs associated with the opening of our new
processing center.
Selling, general and administrative expenses. Selling, general and
administrative expenses decreased by $1.7 million, or 19.5%, to $6.8 million for
the three months ended March 31, 2003, as compared to $8.5 million for the three
months ended March 31, 2002. The decrease was primarily attributable to
reductions in: personnel and related costs, depreciation, technology, facility
and non-billable travel and entertainment expenditures. Selling, general and
administrative expenses as a percentage of net revenue decreased to 31.1% for
the three months ended March 31, 2003, as compared to 39.8% for the three months
ended March 31, 2002. The decrease was primarily attributable to increased
operating efficiencies as a result of our disciplined cost controls.
Other income and expense. Other expense was $79,000 for the three
months ended March 31, 2003, as compared to other income of $72,000 for the
three months ended March 31, 2002. The change was primarily the result of the
increased interest expense incurred on our long-term obligations, as well as the
reduced interest earned on our short-term investments during the three months
ended March 31, 2003.
Page 14
LIQUIDITY AND CAPITAL RESOURCES
In connection with our restructuring activities, we recorded
restructuring charges of approximately $3.3 million during the year ended
December 31, 2002. These charges consisted primarily of costs associated with
the termination of a business alliance, which included the accelerated expense
associated with a certain lease obligation and the write-off of leasehold
improvements and capitalized software development costs. The restructuring
charges also included severance costs related to our organizational
restructuring and the write-off of property and equipment, partially offset by a
reduction to the 2001 accrual for restructuring costs. Refer to our audited
consolidated financial statements and notes thereto for the year ended December
31, 2002, for further details on the components of the restructuring charges.
During the three months ended March 31, 2003, we had cash outflows associated
with these restructuring charges of approximately $535,000, of which
approximately $296,000 related to the accelerated expense associated with
certain lease obligations and approximately $239,000 related to severance costs,
which were accrued for as of December 31, 2002. The current accrued liability
for additional cash outflows, related to the accelerated expense associated with
certain lease obligations, is approximately $2.5 million and will be payable as
follows: $838,000 throughout the remainder of 2003, $798,000 during 2004,
$466,000 during 2005, $239,000 during 2006 and $183,000 during 2007.
We entered into an unsecured financing arrangement for $8.5 million
for software and professional fees related to the implementation of a new
healthcare application platform for an existing outsourcing client. The
agreement provides for sixty monthly payments in the amount of $170,046,
including interest at an annual rate of 7.35%, commencing on February 1, 2003.
As of March 31, 2003, we have capitalized approximately $4.6 million related to
software we have received through that date. The liability associated with the
capitalized software is $3.6 million as of March 31, 2003. We currently
anticipate the project should be completed during the third quarter of 2004
and we will continue to capitalize the remaining software and professional fees
throughout the project as those costs are incurred. The principal portion of
the obligation matures as follows: $1.1 million throughout the remainder of
2003, $1.6 million during 2004, $1.7 million during 2005, $1.8 million during
2006, $1.9 million during 2007 and $0.2 million during 2008. We have also
capitalized approximately $47,000 of interest related to the project. For
consolidated financial statement presentation, we have also included amounts
relating to capital lease financing arrangements in long-term obligations.
Our primary capital needs have been, and will be, to fund our
outsourcing and solution sales initiatives, as well as our capital expenditures.
We believe after giving effect to the restructuring plan, and assuming
appropriate cost control initiatives and revenue consistent with recent levels,
that our current cash and cash equivalents, cash generated from operations, plus
available credit under our current and/or anticipated credit agreements with our
lenders, will be sufficient to finance our working capital and capital
expenditure requirements for at least the next twelve months. The nature, amount
and timing of our long-term capital needs can be affected by a number of
factors. For example, our strategic plan includes a heightened focus on the
development of our outsourcing business and the winning of large contracts.
Implementation of a new outsourcing contract has and can involve the need for
capital investment by us, including the hiring of new personnel and the
acquisition of a client's IT assets, including hardware and software. An
additional element of our outsourcing business strategy includes offering data
center consolidation to our clients, which has and will continue to require
investment by us in data or processing center facilities. The timing, number and
scale of potential future outsourcing contracts can impact our need for capital
resources. In addition, our future long-term capital needs will be affected by
the nature and timing of our 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 our offerings to meet success in the market, and our
inability to adjust our operating expenses to an appropriate level commensurate
with operating revenues, can also affect our need for capital resources. For all
of these reasons, the other factors discussed elsewhere in this report and those
risk factors identified in our reports on file with the Securities and Exchange
Commission, our ability to project long-term revenue levels and capital needs is
subject to substantial uncertainty.
If our available funds and cash generated from operations are
insufficient to satisfy our long-term liquidity requirements, and if we do not
obtain the expected credit agreements, or if an event of default occurs under
our current and/or anticipated credit agreements with our lenders and we are
required to repay all outstanding indebtedness under the credit agreements, we
may need to seek additional sources of funding, such as selling additional
equity or debt securities or obtaining additional lines of credit. We could
also, in such event, face the need to delay or reduce the development of
services or the pursuit of contracts that would require significant investment
to complete. We could also face the need to reduce staffing levels and related
expenses or potentially to liquidate or mortgage selected assets.
If we decide that it is in our best interest to raise cash to
strengthen our balance sheet, broaden our investor base, increase the liquidity
of our pool of publicly traded stock or for any other reason, we may decide to
issue equity or debt, notwithstanding that our currently available funds are
sufficient to meet our anticipated needs for working capital and capital
expenditures through the next twelve months. We may decide to enter into such a
transaction to raise cash even if all of our current funding sources remain
available to us. If we issue additional securities to raise funds, those
securities may have rights, preferences, or privileges senior to those of our
common stock and our shareholders may experience dilution. We cannot be certain
that additional financing will be available to us on favorable terms when
required, or at all. Our inability to obtain additional financing when needed
Page 15
could impair our ability to develop products and services for the market; to
enter into or implement new outsourcing contracts; to implement our business
strategies; and may otherwise materially and adversely affect our financial
condition.
At March 31, 2003, we had cash and cash equivalents of $13.6 million
and working capital of $11.5 million, as compared with cash and cash equivalents
of $14.6 million and working capital of $14.0 million at December 31, 2002.
Subsequent to March 31, 2003, we reached an agreement for a new line of
credit allowing for borrowings of up to $8.0 million, based on qualifying
accounts receivable and other operating metrics. Based on the eligibility
provisions and accounts receivable at March 31, 2003, we would have been able to
borrow $5.0 million. The line of credit will bear interest at the prime rate
less 0.25% and will be collateralized by accounts receivable, any deposits held
by the bank, equipment and other personalty. The prior line of credit matured on
April 15, 2003. Borrowings on that line, which amounted to approximately $3.1
million and bore interest at the greater of the prime rate or 1% plus the
Federal funds effective rate, were repaid in April 2003. In addition, the
Company has letters of credit of approximately $1.6 million issued by a bank,
secured by bank deposits.
Our net cash used in operations decreased to $63,000 for the three
months ended March 31, 2003, compared with $483,000 for the three months ended
March 31, 2002. The decrease in net cash used in operations was primarily due to
the increase in accounts payable and decrease in refundable income tax
receivables during the three months ended March 31, 2003, as compared to the
three months ended March 31, 2002, partially offset by the increase in the net
loss, accounts receivable and prepaid expenses during the three months ended
March 31, 2003, as compared to March 31, 2002.
Net cash of $692,000 used in investing activities during the three
months ended March 31, 2003, consists of additions to property, equipment and
software, which primarily relate to the new full outsourcing contracts,
partially offset by the proceeds received from the sale of real estate.
Net cash of $177,000 used in financing activities during the three
months ended March 31, 2003, was the result of payments on our long-term
obligations, partially offset by proceeds received on our line of credit.
We do not believe that inflation has had a material effect on the
results of our operations.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to interest rate change market risk in connection with
our credit facility with our 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
our interest expense.
ITEM 4. CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
Within the 90-day period prior to the filing date of this report, our
management, under the supervision of our Chief Executive Officer and Chief
Financial Officer, carried out an evaluation of the effectiveness of the design
and operation of our disclosure controls and procedures pursuant to Rules 13a-14
and 15d-14 under the Securities Exchange Act of 1934 (the "Exchange Act"), as
amended. Based upon their evaluation, our Chief Executive Officer and Chief
Financial Officer concluded that our disclosure controls and procedures are
effective in alerting them timely to material information required to be
included in our Exchange Act filings. There have not been any significant
changes in our internal controls or in other factors that could significantly
affect these controls subsequent to the date of the evaluation.
CHANGES IN INTERNAL CONTROLS
There were no significant changes in our internal controls or any other
factors that could significantly affect these controls subsequent to the date of
the evaluation referred to above.
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
NONE
(b) Form 8-K
On April 25, 2003, we furnished a Current Report on Form 8-K under Item
7, "Financial Statements and Exhibits" and Item 9, "Information
Provided Under Item 12 (Results of Operations and Financial
Condition)," attaching our April 24, 2003, press release announcing our
financial results for the fiscal quarter ended March 31, 2003.
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: May 15, 2003 /s/ Richard D. Helppie, Jr.
_____________________________________________
Richard D. Helppie, Jr.
Chief Executive Officer
(Principal Executive Officer)
Date: May 15, 2003 /s/ Richard R. Sorensen
_____________________________________________
Richard R. Sorensen
Chief Financial Officer
(Principal Financial and Accounting Officer)
Page 17
CERTIFICATIONS
CERTIFICATION PURSUANT TO RULE 13A-14 OR 15D-14 OF THE SECURITIES
EXCHANGE ACT OF 1934, AS ADOPTED PURSUANT TO SECTION 302
OF THE SARBANES-OXLEY ACT OF 2002
I, Richard D. Helppie, Jr., Chief Executive Officer of Superior Consultant
Holdings Corporation, certify that:
1) I have reviewed this quarterly report on Form 10-Q of Superior
Consultant Holdings Corporation;
2) Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3) Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4) The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5) The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6) The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: May 15, 2003 /s/ Richard D. Helppie, Jr.
___________________________
Richard D. Helppie, Jr.
Chief Executive Officer
Page 18
CERTIFICATION PURSUANT TO RULE 13A-14 OR 15D-14 OF THE SECURITIES
EXCHANGE ACT OF 1934, AS ADOPTED PURSUANT TO SECTION 302
OF THE SARBANES-OXLEY ACT OF 2002
I, Richard R. Sorensen, Chief Financial Officer of Superior Consultant Holdings
Corporation, certify that:
1) I have reviewed this quarterly report on Form 10-Q of Superior
Consultant Holdings Corporation;
2) Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3) Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4) The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5) The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6) The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: May 15, 2003 /s/ Richard R. Sorensen
_________________________________
Richard R. Sorensen
Chief Financial Officer
Page 19