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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 September 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 November 13, 2002, 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 SEPTEMBER 30, 2002
INDEX
PAGE NO.
--------
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of September 30, 2002
and December 31, 2001 (unaudited) 3
Consolidated Statements of Operations for the three
and nine months ended September 30, 2002 and
2001 (unaudited) 4
Consolidated Statements of Cash Flows for the nine
months ended September 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 18
Item 4. Controls and Procedures 18
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders 18
Item 6. Exhibits and Reports on Form 8-K 18
SIGNATURES 19
CERTIFICATIONS 20
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)
SEPTEMBER 30, DECEMBER 31,
2002 2001
------------- ------------
ASSETS
Current assets
Cash and cash equivalents $ 16,249 $ 16,902
Accounts receivable, net 14,543 14,164
Accrued interest receivable and prepaid expenses 3,455 3,644
Refundable income taxes 313 706
------------- ------------
Total current assets 34,560 35,416
Property and equipment, net 13,353 14,071
Goodwill, net 8,223 8,223
Other long-term assets, net 700 897
------------- ------------
Total Assets $ 56,836 $ 58,607
============= ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Notes payable to bank $ 2,925 $ 2,925
Accounts payable 7,505 8,565
Accrued liabilities, deferred bonuses and compensation 3,797 2,752
Deferred revenue 2,387 2,141
------------- ------------
Total current liabilities 16,614 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 September 30, 2002 and
December 31, 2001 -- --
Common stock; authorized, 30,000,000 shares of $.01 par value;
issued and outstanding, 11,116,991 shares as of September 30, 2002
and 11,080,042 shares as of December 31, 2001 111 111
Additional paid-in capital 116,154 116,062
Stockholders' notes receivable (1,536) (1,536)
Treasury stock at cost, 352,100 shares as of September 30, 2002
and December 31, 2001 (3,270) (3,270)
Accumulated deficit (71,237) (69,143)
------------- ------------
Total stockholders' equity 40,222 42,224
------------- ------------
Total Liabilities and Stockholders' Equity $ 56,836 $ 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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------ ------------------------
2002 2001 2002 2001
-------- -------- -------- --------
Revenue
Revenue before reimbursements (net revenue) $ 20,826 $ 21,308 $ 64,104 $ 65,201
Out-of-pocket reimbursements 2,179 2,282 6,278 8,410
-------- -------- -------- --------
Total revenue 23,005 23,590 70,382 73,611
Operating costs and expenses
Cost of services before reimbursements
(net cost of services) 14,992 13,649 43,808 43,168
Out-of-pocket reimbursements 2,179 2,282 6,278 8,410
-------- -------- -------- --------
Total cost of services 17,171 15,931 50,086 51,578
Selling, general and administrative expenses 8,007 9,615 24,870 31,343
Restructuring charges, net -- 216 -- 385
-------- -------- -------- --------
Total operating costs and expenses 25,178 25,762 74,956 83,306
-------- -------- -------- --------
Loss from operations (2,173) (2,172) (4,574) (9,695)
Other income, net 50 129 179 356
-------- -------- -------- --------
Loss before income tax benefit (2,123) (2,043) (4,395) (9,339)
Income tax benefit -- -- (2,301) --
-------- -------- -------- --------
Net loss $ (2,123) $ (2,043) $ (2,094) $ (9,339)
======== ======== ======== ========
Net loss per share
Basic $ (0.20) $ (0.19) $ (0.19) $ (0.85)
======== ======== ======== ========
Diluted $ (0.20) $ (0.19) $ (0.19) $ (0.85)
======== ======== ======== ========
Weighted average number of common shares outstanding
Basic 10,758 10,977 10,747 10,986
======== ======== ======== ========
Diluted 10,758 10,977 10,747 10,986
======== ======== ======== ========
See notes to consolidated financial statements.
Page 4
SUPERIOR CONSULTANT HOLDINGS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------
2002 2001
-------- --------
Cash flows from operating activities:
Net loss $ (2,094) $ (9,339)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation and amortization of property and equipment 3,273 3,108
Goodwill amortization -- 562
Bad debt expense -- 346
Restructuring charge - write-off of leasehold improvements -- 305
Other (50) 37
Changes in operating assets and liabilities:
Accounts receivable (379) 1,600
Accrued interest receivable and prepaid expenses 189 817
Refundable income taxes 420 5,211
Accounts payable (1,060) (2,262)
Accrued liabilities, deferred bonuses and compensation 1,045 680
Deferred revenue 246 (923)
-------- --------
Net cash provided by operating activities 1,590 142
Cash flows from investing activities:
Purchase of property and equipment (2,358) (1,544)
Change in other long-term assets -- (610)
-------- --------
Net cash used in investing activities (2,358) (2,154)
Cash flows from financing activities:
Repayment of line of credit -- (2,200)
Principal payments on stockholders' notes receivable -- 9
Exercise of stock options 115 --
-------- --------
Net cash provided by (used in) financing activities 115 (2,191)
-------- --------
Net decrease in cash and cash equivalents (653) (4,203)
Cash and cash equivalents, beginning of period 16,902 20,825
-------- --------
Cash and cash equivalents, end of period $ 16,249 $ 16,622
======== ========
Supplemental disclosure of cash flow information - cash paid for interest $ 96 $ 239
Non-Cash Transactions:
Unrealized loss on investment, net of deferred income taxes $ -- $ (55)
Repurchase of common stock (settlement date October 2001) -- 1,000
See notes to consolidated financial statements.
Page 5
SUPERIOR CONSULTANT HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
SEPTEMBER 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
in the United States of America for complete financial statements. In the
opinion of management, all adjustments (consisting of normal recurring accruals
and estimated provisions for bonus and profit-sharing arrangements) considered
necessary for a fair presentation have been included. Operating results for the
three and nine month periods ended September 30, 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 nine months ended September
30, 2001, unaudited consolidated financial statements to conform to the nine
months ended September 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 and diluted net loss per share amounts have been computed by
dividing net loss by the weighted average number of common shares outstanding
during the period.
Options and warrants to purchase approximately 3,420,000 and 3,399,000
shares of common stock with a weighted average exercise price of $14.17 and
$14.13 were outstanding at September 30, 2002 and 2001, respectively, but were
excluded from the computation of diluted net loss per share because to do so
would have been antidilutive for the periods presented.
NOTE 3 - COMPREHENSIVE INCOME (LOSS)
Comprehensive loss, which is included as a component of stockholders'
equity, includes unrealized 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 loss is
summarized as follows (in thousands):
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ -----------------
2002 2001 2002 2001
------- ------- ------- -------
Net loss $(2,123) $(2,043) $(2,094) $(9,339)
Other comprehensive loss, net of tax:
Unrealized holding losses on securities
arising during the period -- (73) -- (55)
------- ------- ------- -------
Other comprehensive loss, net of tax -- (73) -- (55)
------- ------- ------- -------
Total comprehensive loss $(2,123) $(2,116) $(2,094) $(9,394)
======= ======= ======= =======
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 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. The Company deploys specialized resources to
deliver higher quality information technology functionality 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
nine months ended September 30, 2002 and 2001 is as follows (in thousands):
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------- --------------------
2002 2001 2002 2001
-------- -------- -------- --------
Revenue:
Consulting:
Revenue before reimbursements (net revenue) $ 13,412 $ 13,341 $ 41,088 $ 44,004
Out-of-pocket reimbursements 2,040 1,883 5,849 6,953
-------- -------- -------- --------
Total consulting revenue 15,452 15,224 46,937 50,957
Outsourcing:
Revenue before reimbursements (net revenue) 7,414 7,967 23,016 21,197
Out-of-pocket reimbursements 139 399 429 1,457
-------- -------- -------- --------
Total outsourcing revenue 7,553 8,366 23,445 22,654
-------- -------- -------- --------
Consolidated revenue $ 23,005 $ 23,590 $ 70,382 $ 73,611
======== ======== ======== ========
Gross Profit and Statement of Operations Reconciliation:
Consulting $ 4,990 $ 5,406 $ 16,085 $ 16,291
Outsourcing 844 2,253 4,211 5,742
-------- -------- -------- --------
Consolidated gross profit 5,834 7,659 20,296 22,033
Unallocated:
Selling, general and administrative expenses 8,007 9,615 24,870 31,343
Restructuring charges, net -- 216 -- 385
Other income, net (50) (129) (179) (356)
-------- -------- -------- --------
Subtotal 7,957 9,702 24,691 31,372
-------- -------- -------- --------
Consolidated loss before income tax benefit $ (2,123) $ (2,043) $ (4,395) $ (9,339)
======== ======== ======== ========
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 nine months ended September 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 nine months ended September 30, 2002, does not reflect the federal
statutory tax rate. As of September 30, 2002, the Company has net operating loss
carryforwards for federal income tax purposes of approximately $47.4 million,
the last of which will expire in 2022 if not utilized.
NOTE 6 - LINE OF CREDIT
Subsequent to September 30, 2002, the Company has negotiated and
reached an agreement in principle for a new line of credit allowing for
borrowings of up to $8.0 million, based on qualifying accounts receivable. Based
on the eligibility provisions and accounts receivable at September 30, 2002, the
Company would have been able to borrow $7.4 million under this proposed
facility. The line of credit will bear interest at the prime rate minus 0.25%
and will be 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 prior line of credit matured on September 30,
2002. Borrowings on that line, which amounted to approximately $2.9 million and
bore interest at the greater of the prime rate or 1% plus the Federal funds
effective rate, were repaid in October 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 (630)
-------
Accrual as of September 30, 2002 $ 1,601
=======
The obligation is payable as follows: $210,000 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 nine months ended September
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 loss and net loss per share
would have been exclusive of amortization expense (including any related tax
effects):
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------- -------------------------------
2002 2001 2002 2001
---------- --------- --------- ---------
Reported net loss $ (2,123) $ (2,043) $ (2,094) $ (9,339)
Add: goodwill amortization -- 187 -- 562
---------- --------- --------- ---------
Adjusted net loss $ (2,123) $ (1,856) $ (2,094) $ (8,777)
========== ======== ======== =========
Basic net loss per share:
Reported net loss per share $ (0.20) $ (0.19) $ (0.19) $ (0.85)
Add: goodwill amortization -- 0.02 -- 0.05
---------- --------- --------- ---------
Adjusted net loss per share $ (0.20) $ (0.17) $ (0.19) $ (0.80)
========== ======== ======== =========
Diluted net loss per share:
Reported net loss per share $ (0.20) $ (0.19) $ (0.19) $ (0.85)
Add: goodwill amortization -- 0.02 -- 0.05
---------- --------- --------- ---------
Adjusted net loss per share $ (0.20) $ (0.17) $ (0.19) $ (0.80)
========== ======== ======== =========
In June 2002, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 146, "Accounting for Costs Associated with
Exit or Disposal Activities" ("SFAS 146"). SFAS 146 addresses financial
accounting and reporting for costs associated with exit or disposal activities
and supercedes Emerging Issues Task Force ("EITF") Issue No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a Restructuring)." SFAS 146
requires that a liability for a cost associated with an exit or disposal
activity be recognized when the liability is incurred, as opposed to being
recognized at the date an entity commits to an exit or disposal plan under EITF
94-3. SFAS 146 also establishes fair value as the objective for initial
measurement of liabilities related to exit or disposal activities. This standard
is effective for exit or disposal activities that are initiated after December
31, 2002, with early application encouraged. The Company anticipates the
adoption of SFAS 146 will not have a material effect on its consolidated
financial statements.
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 the Company is unable to accurately predict or over which the Company has
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 the
Company's offerings, demands upon and consumption of the Company's cash and cash
equivalent resources or changes in the Company's access to working capital,
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. Additional information regarding these
risk factors and others, and additional information concerning the Company 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 by taking on responsibility for
managing and operating all or part of the client's IT functions. The Company
deploys specialized resources to deliver higher quality IT functionality 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 and
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 who may also enjoy
better name recognition and other competitive advantages; 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; failure of
the Company to develop and offer new services and solutions demanded by the
market; failure of the Company's 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 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
Page 10
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 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
on a percentage of completion basis. As of September 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. Increased use of
fixed-fee contracts subjects the Company to increased risks, including cost
overruns. Moreover, the Company incurs 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 the Company in the hiring
of personnel and the acquisition of equipment to perform the contract. Such
expenses must be recovered over the life of the agreement. Some of the Company's
agreements call for penalties, or allow for early termination in the event it
fails to meet certain service levels. If the Company fails to meet required
performance standards in its outsourcing, or other engagements, it could incur
contractual penalties, or the agreements could terminate before the Company is
able to recover the investments it made in the pursuit and initiation of the
engagement. In either event, the Company could suffer adverse financial
consequences, as well as damage to its reputation in the industry, which could
adversely and materially affect its business, financial condition, results of
operations and the price of its common stock.
The Company seeks 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 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 recovery of the marketplace, timely sales, the type, range and quality of
its services and solutions, competitive rates, growth and improvement in
proposal acceptance rates in outsourcing and consulting, and successful
competition in the marketplace. Many of the entities with whom the Company
competes have greater financial resources, larger customer bases and greater
technical and sales and marketing resources, which may impact its ability to
compete against them successfully. In addition, the Company's revenues have and
can be impacted by unforeseen disruptions in transportation, communications or
other infrastructure components. The Company has experienced weaker than
anticipated revenue in recent quarters, particularly in the consulting segment.
This trend could continue if fiscal conservatism in healthcare organizations
leads to continued unpredictability in the market for consulting services.
Should the Company be unsuccessful in increasing or sustaining its revenue, for
these or for other reasons, 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 market in which the Company competes for its talented and highly
skilled consultant
Page 11
work force is highly competitive. Many of the entities with whom the Company
competes for employees have greater financial and other resources than the
Company, and may be able to offer more attractive compensation packages to
candidates than the Company can, including salary, benefits, stock and stock
options. The Company's ability to successfully operate its business and compete
in its markets is dependent upon its ability to recruit and retain skilled and
motivated sales, management, administrative and technical personnel. If the
Company is unable to recruit and retain consultants to perform new and existing
client engagements, its reputation in the industry and its ability to generate
revenue will both suffer, which could have a material adverse effect on its
business, financial condition and on the price of its common stock. Moreover,
the Company's consultants are often key to its client relationships. Loss of key
consultants could impair client relationships and adversely affect the Company's
ability to gain recurring engagements, which could adversely affect its
financial condition.
The Company's operating costs associated with the full outsourcing
contracts have and will continue to increase as additional clients are serviced.
Additionally, as the processing center becomes fully operational, the Company
expects to incur incremental normative costs, which will be offset with savings
over time as additional clients are migrated to the processing center and the
Company is able to leverage its investment. These costs consist primarily of,
but are not limited to: depreciation, telecommunication and facility related
expenditures, as well as equipment lease costs. The Company expects to recover
its investment in its processing and network management centers through the
performance of multiple outsourcing contracts and network management (NetLinc)
contracts utilizing processing center resources. If the Company is unsuccessful
in winning sufficient new outsourcing and NetLinc contracts, or if the terms of
outsourcing or NetLinc contracts are not sufficiently favorable to the Company,
or if any of the existing outsourcing or NetLinc contracts were to be terminated
early for any reason, the Company's ability to recover its processing center
investments would be impaired, which could have a material adverse effect on the
Company's financial condition. In addition, the Company will be performing data
processing and other client information systems functions through its processing
centers, which are critical to the clients' operations. Any failure of the
Company to successfully perform its processing center functions could adversely
affect its clients' operations, which could result in contractual performance
penalties to the Company, early termination of one or more contracts, potential
legal liabilities and damage to the Company's reputation in the industry, any or
all of which could have a material adverse effect on the Company's financial
condition, results of operations and the price of its common stock.
The Company's cost of services as a percentage of revenue is primarily
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, and incremental costs associated with the full outsourcing
contracts have and can continue to cause the Company to experience 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 have continued to
hamper demand for the Company's services in 2002. Furthermore, the Balanced
Budget Act of 1997 and other forces such as private reimbursement changes may
continue to adversely affect the financial stability and viability of the
Company's clients and may impact their ability to contract for and pay for
professional services such as those offered by the Company. 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 the Company's services. In addition, the
Company's consultants often perform services at the client's site, away from
their own city or state of residence. The Company is therefore highly dependent
upon effective air travel for the performance of a majority of its client
engagements. If, as a result of the September 11, 2001, terrorist attacks or
otherwise, air travel becomes increasingly costly, time consuming, limited or
unreliable, or should the Company's employees become reluctant to travel, it
could harm the Company's ability to timely and cost effectively perform its
client engagements, which could have a material adverse effect on its financial
condition and results of operations.
In addition, the Company's 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
Page 12
have and can affect margins. Variations in 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 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. In addition, the Company has and may from time to time
discontinue lines of business that have not been successful in the market.
Exiting a line of business 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 the Company. In addition, as
the Company has responded to the diminishing demand for certain of its
consulting services by contracting operations and reducing costs, the Company
has 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 the Company, there
can be no assurance that the Company will be able to sublease that space, or
that sublease rents will offset the Company's obligations under its prime
lease(s). In addition, there can be no assurance that existing sublessees under
the Company's leases will not default in their rent or other obligations.
Default by the Company's sublessees, or an inability of the Company to sublease
excess office space could have a material adverse effect on the Company's
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. 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.
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 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 and nine months ended September 30, 2002, to the three
and nine months ended September 30, 2001, respectively.
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 management to make judgments, assumptions and
estimates that affect the amounts reported in the Company's consolidated
financial statements and the accompanying notes to consolidated financial
statements. The Company's estimates are based on prior experience, current
business and market conditions, as well as various other assumptions it believes
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 management affect, but
are not limited to: the accounting for revenue recognition, goodwill and
intangible asset impairment and restructuring charges. Actual results could
differ from these estimates. The following critical accounting policies reflect
the Company's more significant judgments, assumptions and estimates used in the
preparation of the consolidated financial statements. Refer to the Company's
audited consolidated financial statements and notes thereto for the year ended
December 31, 2001, for information regarding the Company's significant
accounting policies.
Revenue Recognition. The Company recognizes revenue on time and
materials engagements as the services are provided. For outsourcing contracts,
fixed-fee projects and pre-packaged solution sales, the Company generally
recognizes revenue ratably over the life of the contract or on a percentage of
completion basis. The Company recognizes revenue from its Digital Business
Transformation(TM) partnerships, managed trust (digital security) services and
support and maintenance agreements ratably over the life of the contract.
Revenue from license fees is generally recognized upon the shipment of tools or
applications. Deferred revenue represents collections made in advance of
services being performed.
Goodwill and Intangible Asset Impairment. The Company is subject to
goodwill impairment assessment at least annually in accordance with the
provisions of SFAS 142. During the three months
Page 13
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, which may result in an impairment
charge.
Restructuring Charges. The Company accrues for restructuring charges
when it is specifically able to identify actions that need to be taken in
response to a change in its strategic plan, product demand, increased costs or
other business factors. The Company routinely evaluates the prior restructuring
accruals and makes 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 September 30, 2002, the restructuring-related accrual amounted to
approximately $1.6 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.
The Company's key accounting estimates and policies are reviewed with
its auditors and the Audit Committee of its Board of Directors.
Page 14
THREE MONTHS ENDED SEPTEMBER 30, 2002 COMPARED TO THREE MONTHS ENDED
SEPTEMBER 30, 2001
Net Revenue.
Consulting. Net revenue in this segment increased by $0.1
million or 0.5%, to $13.4 million for the three months ended September
30, 2002, as compared to $13.3 million for the three months ended
September 30, 2001.
Outsourcing. Net revenue in this segment decreased by $0.6
million, or 6.9%, to $7.4 million for the three months ended September
30, 2002, as compared to $8.0 million for the three months ended
September 30, 2001. The revenue decrease was primarily due to certain
non-multi-year contracts ending subsequent to September 30, 2001 and
not being replaced.
Net Cost of Services.
Consulting. Net cost of services in this segment increased by
$0.5 million, or 6.1%, to $8.4 million for the three months ended
September 30, 2002, as compared to $7.9 million for the three months
ended September 30, 2001. The increase was due primarily to an increase
in non-reimbursable project expenses related to newly signed
engagements. Net cost of services as a percentage of net revenue for
this segment increased to 62.8% for the three months ended September
30, 2002, as compared to 59.5% for the three months ended September 30,
2001. The increase was primarily due to an increase in non-reimbursable
project expenses associated with newly signed engagements.
Outsourcing. Net cost of services in this segment increased by
$0.9 million, or 15.0%, to $6.6 million for the three months ended
September 30, 2002, as compared to $5.7 million for the three months
ended September 30, 2001. The increase was primarily due to costs
related to new contracts. Net cost of services as a percentage of net
revenue for this segment increased to 88.6% for the three months ended
September 30, 2002, as compared to 71.7% for the three months ended
September 30, 2001. The increase was primarily attributable to the
initial costs associated with the signing of the new full outsourcing
contracts.
Selling, general and administrative expenses. Selling, general
and administrative expenses decreased by $1.6 million, or 16.7%, to
$8.0 million for the three months ended September 30, 2002, as compared
to $9.6 million for the three months ended September 30, 2001. The
decrease was primarily attributable to reductions in: personnel and
related costs, facility, technology and communication expenditures,
goodwill amortization and charges related to the accounts receivable
allowance, as well as efficiencies achieved in continuing education
programs. Selling, general and administrative expenses as a percentage
of net revenue decreased to 38.4% for the three months ended September
30, 2002, as compared to 45.1% for the three months ended September 30,
2001. The decrease was primarily attributable to increased operating
efficiencies as a result of the Company's disciplined cost controls.
Other income and expense. Other income was $50,000 for the
three months ended September 30, 2002, as compared to $129,000 for the
three months ended September 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 September 30, 2002.
Page 15
NINE MONTHS ENDED SEPTEMBER 30, 2002 COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30, 2001
Net Revenue.
Consulting. Net revenue in this segment decreased by $2.9
million, or 6.6%, to $41.1 million for the nine months ended September
30, 2002, as compared to $44.0 million for the nine months ended
September 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 $1.8
million, or 8.6%, to $23.0 million for the nine months ended September
30, 2002, as compared to $21.2 million for the nine months ended
September 30, 2001. The revenue increase was primarily the result of
the signing of new outsourcing agreements subsequent to September 30,
2001.
Net Cost of Services.
Consulting. Net cost of services in this segment decreased by
$2.7 million, or 9.8%, to $25.0 million for the nine months ended
September 30, 2002, as compared to $27.7 million for the nine months
ended September 30, 2001. The decrease was due primarily to reductions
in personnel and related costs in this segment, partially offset by an
increase in non-reimbursable project expenses related to newly signed
engagements. Net cost of services as a percentage of net revenue for
this segment decreased to 60.9% for the nine months ended September 30,
2002, as compared to 63.0% for the nine months ended September 30,
2001. The decrease was primarily attributable to lower consultant
headcount in this segment.
Outsourcing. Net cost of services in this segment increased by
$3.3 million, or 21.7%, to $18.8 million for the nine months ended
September 30, 2002, as compared to $15.5 million for the nine months
ended September 30, 2001. The increase was primarily due to costs
related to new contracts. Net cost of services as a percentage of net
revenue for this segment increased to 81.7% for the nine months ended
September 30, 2002, as compared to 72.9% for the nine months ended
September 30, 2001. The increase was primarily attributable to the
initial costs associated with the signing of the new full outsourcing
contracts.
Selling, general and administrative expenses. Selling, general
and administrative expenses decreased by $6.5 million, or 20.7%, to
$24.9 million for the nine months ended September 30, 2002, as compared
to $31.3 million for the nine months ended September 30, 2001. The
decrease was primarily attributable to reductions in: personnel and
related costs, facility, technology, communication and marketing
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
38.8% for the nine months ended September 30, 2002, as compared to
48.1% for the nine months ended September 30, 2001. The decrease was
primarily attributable to increased operating efficiencies as a result
of the Company's disciplined cost controls.
Other income and expense. Other income was $179,000 for the
nine months ended September 30, 2002, as compared to $356,000 for the
nine months ended September 30, 2001. The decrease was primarily the
result of the reduced interest earned on the Company's short-term
investments during the nine months ended September 30, 2002, as well as
the decrease in interest expense during the nine months ended September
30, 2002, due to the partial repayment of the line of credit during the
nine months ended September 30, 2001.
Page 16
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 nine months ended September 30, 2002, the Company had cash
outflows of approximately $210,000 and $630,000, 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 $1.6 million and will be payable as
follows: $210,000 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
appropriate cost control initiatives and revenue consistent with recent levels,
that its current cash and cash equivalents, cash generated from operations, plus
available credit under its expected 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 contracts. Implementation of a new
outsourcing contract has and 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 or processing center facilities. The timing, number and
scale of potential future outsourcing contracts 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 inability 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, and if the Company
does not obtain the expected credit agreement, or if an event of default occurs
under its anticipated 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 contracts 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 or
mortgage 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 financial condition.
At September 30, 2002, the Company had cash and cash equivalents of
$16.2 million and working capital of $17.9 million, as compared with cash and
cash equivalents of $16.9 million and working capital of $19.0 million at
December 31, 2001.
Subsequent to September 30, 2002, the Company has negotiated and
reached an agreement in principle for a new line of credit allowing for
borrowings of up to $8.0 million, based on qualifying accounts receivable. Based
on the eligibility provisions and accounts receivable at September 30, 2002, the
Company would have been able to borrow $7.4 million under this proposed
facility. The line of credit will bear interest at the prime rate minus 0.25%
and will be collateralized by accounts receivable and any deposits held by the
bank. The prior line of credit matured
Page 17
on September 30, 2002. Borrowings on that line, which amounted to approximately
$2.9 million and bore interest at the greater of the prime rate or 1% plus the
Federal funds effective rate, were repaid in October 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 $1.6 million for the nine months
ended September 30, 2002, as compared to net cash provided by operations of
$142,000 for the nine months ended September 30, 2001. The increase in net cash
provided by operations was primarily due to the reduction in the net loss during
2002, as compared to 2001, partially offset by a decrease in income taxes
refunds received during 2002 compared to 2001.
Net cash of $2.4 million used in investing activities during the nine
months ended September 30, 2002, consists of additions to property, equipment
and software, which primarily relate to the new full outsourcing contracts.
Net cash of $115,000 provided by financing activities during the nine
months ended September 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 will be exposed to interest rate market risk in connection
with its proposed 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.
ITEM 4. CONTROLS AND PROCEDURES
Within the 90 days prior to the date of this report, the Company
carried out an evaluation, under the supervision and with the participation of
the Company's management, including the Company's Chief Executive Officer and
Chief Financial Officer, of the effectiveness of the Company's disclosure
controls and procedures pursuant to Rules 13a-14 and 15d-14 under the Securities
Exchange Act of 1934, as amended. Based upon that evaluation, the Chief
Executive Officer and Chief Financial Officer concluded that the Company's
disclosure controls and procedures are effective as of the date hereof to alert
them to material information relating to the Company required to be included in
the Company's periodic Securities and Exchange Commission filings.
There have been no significant changes in the Company's internal
controls or in other factors which could significantly affect internal controls
subsequent to the date the Company carried out its evaluation.
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, at which the 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
10.1 Restated Promissory Note, dated as of July 25, 2002, issued by
George S. Huntzinger to Superior Consultant Holdings
Corporation.
10.2 Restated Promissory Note, dated as of July 25, 2002, issued by
Ronald V. Aprahamian to Superior Consultant Holdings
Corporation.
10.3 Amendment to Pledge Agreement, dated as of July 25, 2002,
between Superior Consultant Holdings Corporation and George S.
Huntzinger.
10.4 Amendment to Pledge Agreement, dated as of July 25, 2002,
between Superior Consultant Holdings Corporation and Ronald V.
Aprahamian.
(b) Form 8-K
On August 14, 2002, the Company filed a Current Report on Form 8-K
under Item 7, "Financial Statements and Exhibits" and Item 9,
"Regulation FD Disclosure," attaching certification correspondence
addressed to the Securities and Exchange Commission.
Page 18
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Superior Consultant Holdings Corporation
Date: November 14, 2002 /s/ Richard D. Helppie, Jr.
-------------------------------------------
Richard D. Helppie, Jr.
Chief Executive Officer
(Principal Executive Officer)
Date: November 14, 2002 /s/ Richard R. Sorensen
-------------------------------------------
Richard R. Sorensen
Chief Financial Officer
(Principal Financial and Accounting Officer)
Page 19
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: November 14, 2002 /s/ Richard D. Helppie, Jr.
-----------------------------
Richard D. Helppie, Jr.
Chief Executive Officer
Page 20
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: November 14, 2002 /s/ Richard R. Sorensen
----------------------------
Richard R. Sorensen
Chief Financial Officer
Page 21
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
10.1 Restated Promissory Note, dated as of July 25, 2002, issued by
George S. Huntzinger to Superior Consultant Holdings
Corporation.
10.2 Restated Promissory Note, dated as of July 25, 2002, issued by
Ronald V. Aprahamian to Superior Consultant Holdings
Corporation.
10.3 Amendment to Pledge Agreement, dated as of July 25, 2002,
between Superior Consultant Holdings Corporation and
George S. Huntzinger.
10.4 Amendment to Pledge Agreement, dated as of July 25, 2002,
between Superior Consultant Holdings Corporation and
Ronald V. Aprahamian.