<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended April 30, 1996 Commission file number: 0-27694
SCB COMPUTER TECHNOLOGY, INC.
-----------------------------
(Exact name of Registrant as specified in its charter)
Tennessee 62-1201561
---------------------------- ---------------------------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
1365 West Brierbrook Road
Memphis, Tennessee 38138
----------------------------- ---------------------------
(Address of principal executive (Zip Code)
offices)
Registrant's telephone number, including area code: (901) 754-6577
----------------
Securities registered pursuant to Section 12(b) of the Act: None
--------
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $.01 PAR VALUE PER SHARE
---------------------------------------------------------------------
(Title of class)
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 if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
The aggregate market value of the voting stock held by non-affiliates
of the Registrant on July 22, 1996, was approximately $42,689,000. The market
value calculation was determined using the closing sale price of the
Registrant's common stock on July 22, 1996 ($17.00 per share), as reported on
The Nasdaq Stock Market's National Market.
Shares of common stock, $.01 par value per share, outstanding on July 22, 1996,
were 7,015,583.
DOCUMENTS INCORPORATED BY REFERENCE
Part of Form 10-K Documents from which portions are incorporated by reference
Part III Portions of the Registrant's Proxy Statement relating to
the Registrant's Annual Meeting of Shareholders to be held
on September 6, 1996, are incorporated by reference into
Items 10, 11, 12 and 13.
<PAGE> 2
SCB COMPUTER TECHNOLOGY, INC.
PART I
ITEM 1. BUSINESS
GENERAL
SCB Computer Technology, Inc. ("SCB" or the "Company") is an
information technology ("IT") services company providing management and
technical services primarily to state and local governments, public utilities,
Fortune 500 companies, and other large organizations. The Company's services
are delivered to clients operating information systems primarily in mainframe,
client/server, and other network environments in one or more of the following
three general categories: (i) consulting services, including advising clients
on the acquisition and strategic utilization of IT systems, planning and
designing new IT systems, and redesigning existing IT systems to increase their
efficiency; (ii) outsourcing services, including using IT professionals
employed and managed by SCB for network design and management, systems support
and maintenance, programming and application software development, and data
center management to utilize a client's IT resources more cost-effectively; and
(iii) professional staffing services, including providing skilled technical
employees on an as-needed basis under the direction of a client's management to
eliminate a client's need to recruit, hire, and train technical employees whose
skills may not be needed between projects.
SCB was founded as a partnership in 1976 and incorporated under the
laws of the State of Tennessee in 1984. The Company's principal executive
offices are located at 1365 West Brierbrook Road, Memphis, Tennessee 38138, and
its telephone number at that address is (901) 754-6577. The Company can also
be contacted at the following Internet address: http://www.scb-inc.com.
SCB SERVICES
Consulting Services
The objective of SCB's consulting services engagements is to use
proven techniques to assist clients in evaluating and redesigning IT operations
to achieve improvements in IT cost, quality, and efficiency. SCB consultants
frequently employ state-of-the-art information engineering methodologies and
processes to assist clients in migrating from centralized, mainframe systems to
open, client/server and other network architectures. Consulting services
typically are designed to evaluate all phases of clients' projects, from
front-end needs assessment surveys to detailed design and implementation of
appropriate systems, and include:
- performing an IT "wellness" test on a client's existing IT
systems to determine whether the overall management
information systems ("MIS") function is performing to optimum
management and technical specifications;
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- developing an Information Strategy Plan ("ISP") which
identifies a client's strategic organizational objectives,
recommends an IT infrastructure, either firm-wide or by
business unit, and establishes a time-line and prioritizes
tasks for accomplishing the ISP;
- forecasting a client's expected returns (or cost savings) on a
particular technology investment;
- creating IT project specifications that can be submitted for
bids; and
- designing and implementing hardware, networks, operating
systems, and database infrastructures as well as integrating
software applications with these infrastructures.
SCB's consulting services are delivered by professionals who are
specialists in providing complete systems development lifecycle consulting and
who have extensive experience working with relational database, networking,
client/server, and related technologies. SCB consultants also have the
business acumen necessary to understand clients' IT systems' support needs.
SCB consulting service contracts are typically for short periods of
time and specify the discrete tasks to be performed. SCB's consulting services
fees are negotiated on a case-by-case basis, depend on the size of the project
and the skills required, and range from billing at hourly rates to fixed-price
engagements.
Consulting services accounted for approximately 17.0% of the
Company's total revenue for the fiscal year ended April 30, 1996.
Outsourcing Services
The Company believes that the outsourcing of information systems
management and operations is growing rapidly primarily because outsourcing
often allows large organizations to add expertise and improve end-user service
in their IT operations at a reduced cost. Because of the emerging hardware and
software technologies and the demands by end-users for more memory, speed, and
flexibility, many large organizations have been forced to deploy selectively
their IT assets and personnel. Many of the Company's clients have elected to
focus their internal staffs on the emerging technologies and therefore have
engaged the Company to maintain and enhance their legacy systems in connection
with the development and operation of newer systems. SCB believes these
developments will increase the need to outsource IT services.
The Company's outsourcing services are designed to support a wide
range of legacy and client/server systems and include network design and
management, systems support and maintenance, programming and application
software development, client/server and other network maintenance, data center
management, client staff training, and help desk services. Most of SCB's
outsourcing services are provided at the client's business site. Under the
general direction of the client, SCB assumes full and ongoing management and
technical responsibility for the installation or operation of a client's
systems on a long-term basis.
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SCB has not assumed asset ownership in connection with its outsourcing
services, although it may do so in the future. Such future outsourcing
services may involve substantial up-front expenditures to purchase IT systems
equipment, hire personnel, and operate systems on behalf of the client.
Outsourcing contracts tend to be for longer terms and tend to
produce more revenue per contract than consulting services or professional
staffing services contracts. Outsourcing services contracts are expressed in
terms of fixed prices for defined services or hourly rates. In general, the
Company determines its prices based on the salaries and overhead costs of
professionals assigned to a project plus a margin designed to cover other
expenses and provide a profit. The Company also provides outsourcing services
on a fixed-price basis to some clients, including Nashville Electric Service
("NES"), when the Company has a well-defined understanding of the services to
be delivered or extensive knowledge of the client's business.
Outsourcing services revenue accounted for approximately 19.8% of
the Company's total revenue for the fiscal year ended April 30, 1996.
Professional Staffing Services
The Company provides the services of highly skilled professional IT
personnel at a client's facilities on an as-needed basis. These services are
provided primarily to clients who desire the flexibility to supplement internal
staff with people having particular skill sets or to eliminate the need to
recruit, hire, and train technical employees whose skills may not be needed
between projects. The Company's objectives in providing professional staffing
services include developing an understanding of the client's business and IT
systems needs and positioning the Company to provide consulting and outsourcing
services if the need arises. Professional staffing services engagements range
from short-term discrete projects to long-term extended support arrangements.
Professional staffing services are billed on an hourly basis at an
average rate of $43.74 per hour, with the specific hourly rate ranging from $30
to $125 based on the services provided and the educational background and skill
level of the person providing the particular service.
Professional staffing services revenue accounted for approximately
63.2% of the Company's total revenue for the fiscal year ended April 30, 1996.
CLIENTS AND MARKETS
The Company currently performs services for approximately 55
clients. SCB's clients are located primarily in the southeastern United States
and represent a diverse group of public entities and private industries. Most
of the Company's clients are large organizations for which the Company delivers
services to a number of business units or agencies. SCB's state government
clients include the Commonwealth of Kentucky, the State of Tennessee, and
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the Arkansas Department of Human Services. SCB's public utility clients
include, among others, the Tennessee Valley Authority ("TVA"), NES, and Memphis
Light, Gas & Water ("MLG&W"). The Company also performs services for a number
of Fortune 500 companies, including Eastman Chemical Company, Federal Express
Corporation, and International Paper Company. Because of its diverse client
base, the Company believes that it is not dependent on any single industry or
market.
For the fiscal year ended April 30, 1996, the Company's top five
clients (in terms of revenue to the Company) accounted for approximately 66% of
the Company's total revenue, and five clients each accounted for more than 10%
of the Company's total revenue. These clients and the percentages of total
revenue attributable to such clients were as follows: Commonwealth of Kentucky
- - 17.5%; TVA - 13.7%; Federal Express Corporation - 12.8%; Eastman Chemical
Company - 11.0%; and NES - 10.5%.
Generally, SCB's contracts with its top ten clients are, in
accordance with industry practice, cancelable on short notice and without
penalty, provide for monthly payment of fees, and establish other basic terms,
such as the hourly billing rates for each type of SCB professional who performs
work pursuant to the contract. Some contracts specifically define the services
to be performed pursuant to the contract, while other contracts, particularly
professional staffing services contracts, merely establish the basic parameters
of the work (i.e., the system to be evaluated, designed, or maintained) and
require that additional work orders be submitted for services to be performed.
SCB is the exclusive service provider under certain contracts, while other
contracts, particularly professional staffing services contracts, specifically
allow the client to engage other vendors for the projects covered by the
agreement.
MARKETING AND SALES
The Company markets it services through senior management and a
sales staff of 17 persons. The Company currently has personnel located at
sales offices in 17 cities. Relationships with SCB's larger clients and key
government personnel are maintained and fostered by at least one of the
Company's executive officers. The Company believes that its senior
management's hands-on involvement with major clients is a significant
competitive advantage.
Account managers market SCB's services and serve as the primary
contacts in maintaining client relationships. Accordingly, account managers
learn the basic aspects of a client's business in order to identify
opportunities for providing additional IT services to the client. Account
managers are paid a salary plus commissions based on the revenues associated
with client relationships under their supervision. In general, account
managers are not IT technicians. They are, however, supported by SCB technical
personnel in their marketing and sales efforts.
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EMPLOYEES AND RECRUITING
The Company currently employs approximately 625 persons, consisting
of approximately 560 technicians, 17 salespersons, 21 recruiters, 8 executives,
and 19 other administrative personnel. The Company believes there is a
continuing shortage of computer professionals, especially programmers and
systems designers. The Company competes for these persons with in-house MIS
departments and other computer services firms.
In general, the Company seeks to hire professionals who have
substantial experience either with an in-house MIS department or another IT
services firm. SCB recruits worldwide by soliciting resumes generated by
advertisements in trade journals and major city newspapers. Employee referrals
are another major source of recruiting leads and the Company awards bonuses to
employees whose referrals lead to the hiring of a new IT professional. In
addition, the Company's Web Site on the Internet is used for recruiting. Most
of the Company's recruiters have technical or IT sales backgrounds and
understand the skill sets needed for the project for which they are recruiting.
COMPETITION
The Company believes its principal competitors, categorized
according to the services performed, are as follows: (i) consulting services -
SHL Systemhouse Inc., Stone & Webster, Inc., Andersen Consulting, and EDS; (ii)
outsourcing services - ISSC, EDS, Perot Systems Corporation, Computer Sciences
Corporation, Computer Management Sciences, Inc., and Andersen Consulting; and
(iii) professional staffing services - Computer Task Group, Inc., ISSC,
Computer Horizons Corporation, Keane, Inc., and Metro Information Services,
Inc.
The Company believes that the principal competitive factors in the
IT services industry are (i) responsiveness to clients' needs and speed in
delivering IT solutions; (ii) effectiveness of delivered solutions as measured
through cost reductions and improvements in price/performance ratios; (iii)
output per employee, as reflected in utilization rates; (iv) quality of
service; (v) price; and (vi) technical expertise. SCB believes that its
ability to estimate costs accurately, particularly for existing clients, and
its lower labor costs, which are a function, in part, of higher than industry
average utilization rates, cause it to be a lower cost provider than many of
its competitors, which is especially critical in a competitive bid environment.
The Company also believes its reputation for delivering services at the agreed
price without requesting or requiring additional client funds distinguishes SCB
from its competitors.
The Company also competes for the hiring and retention of
management and other professional personnel. See "-- Employees and
Recruiting." In connection with professional staffing services engagements,
particularly in situations where the Company is one of a number of approved
vendors, the Company competes to provide services based on the relative
qualifications of SCB personnel.
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EXECUTIVE OFFICERS
The following is a list of the executive officers of the Company,
including all positions and offices held with the Company:
<TABLE>
<CAPTION>
Name Age Position and Term
- ---- --- -----------------
<S> <C> <C>
T. Scott Cobb 58 Mr. Cobb is a founder of the Company and has served as Chairman of
the Board since 1984. From 1984 until June 1996, Mr. Cobb also
served as President of the Company. Mr. Cobb was a partner in
Seltmann, Cobb & Bryant, the Company's predecessor, from its
formation in 1976. Mr. Cobb is the father of Jeffrey S. Cobb.
Ben C. Bryant, Jr. 49 Mr. Bryant is a founder of the Company and has served as Chief
Executive Officer, Treasurer, and Vice Chairman of the Board of the
Company since 1984. Mr. Bryant has also served as President of the
Company since June 1996. Mr. Bryant was a partner in Seltmann, Cobb
& Bryant, the Company's predecessor, from its formation in 1976.
Steve N. White 48 Mr. White has served as Executive Vice President of Development since
June 1996 and as a Director since December 1995. Mr. White has also
served in varying capacities for the Company for more than 15 years,
including as Chief Operating Officer from 1990 to 1996.
Gordon L. Bateman 47 Mr. Bateman joined the Company as a controller in 1984 and has served
as Secretary since June 1996, as Executive Vice President of Finance
and Administration since December 1995, and as Chief Financial
Officer since 1988. Mr. Bateman was also a Senior Vice President of
the Company from 1987 to December 1995.
</TABLE>
7
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<TABLE>
<CAPTION>
Name Age Position and Term
- ---- --- -----------------
<S> <C> <C>
Jeffrey S. Cobb 34 Mr. Cobb has served as Executive Vice President of Operations since
December 1995. Mr. Cobb previously served as Senior Vice President
of Operations and Administration from 1992 to December 1995, Director
of Projects from 1990 to 1992, and Director of Recruiting from 1989
to 1990. Mr. Cobb is the son of T. Scott Cobb.
Gary Ellis 47 Mr. Ellis has served as Senior Vice President of Outsourcing since
1990. Mr. Ellis was a Project Manager from 1987 to 1990, and held
the position of Senior Technical Specialist from 1983 to 1987.
Steven H. Smith 41 Mr. Smith has served as Senior Vice President of Marketing since
1992. Prior to such time, he served as Vice President of Marketing
from 1989 to 1992 and as account manager from 1986 to 1991.
</TABLE>
ITEM 2. PROPERTIES
The Company owns its corporate headquarters buildings
(aggregating approximately 13,200 square feet) in Memphis, Tennessee. The
Company leases sales offices or has access to office facilities in Atlanta,
Georgia; Baltimore, Maryland; Charlotte, North Carolina; Dallas, Texas;
Frankfort, Kentucky; Indianapolis, Indiana; Jackson, Mississippi; Kansas City,
Missouri; Little Rock, Arkansas; Long Island, New York; Montgomery, Alabama;
Nashville, Tennessee; Phoenix, Arizona; Raleigh, North Carolina; Santa Fe, New
Mexico; and St. Louis, Missouri. The Nashville location is approximately 1,400
square feet. The other offices tend to be smaller than the Nashville office
and are used primarily for sales and marketing purposes.
ITEM 3. LEGAL PROCEEDINGS
In May 1996, the Company was issued a subpoena by the Federal
Grand Jury of the United States District Court for the Western District of
Tennessee. A subsequent subpoena was issued to the Company by the grand jury
in June 1996. The Company has not been identified as the subject or target of
the grand jury's investigation. The Company currently believes that the grand
jury's investigation relates to the Company's billing practices under its
consulting contract with the TVA, particularly the hourly billings and expenses
of T. Scott Cobb, the Company's Chairman, and Steve N. White, the Company's
Executive Vice President-Development. The subpoenas apparently relate to an
audit of the Company's TVA billings being conducted by the Office of the
Inspector General. Additionally, on July 3, 1996, the Securities and Exchange
Commission (the "SEC") notified the Company that the
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SEC is conducting an informal inquiry, which inquiry appears to be focused on
the TVA billings and the impact thereof on the Company's financial statements.
An internal investigation by the Special Committee of the Board
of Directors, comprised of two non-employee directors, has identified possible
misbillings of expenses under the TVA contract, primarily relating to mileage
and per diem expenses submitted to TVA. On May 31, 1996, the Company remitted
$39,759.32 to the TVA relating to the possible misbillings.
Due to the preliminary and prospective nature of the
government's investigation, it is not possible presently to predict with any
certainty when the investigation will be completed, its ultimate outcome, or
the effect thereof on the Company's financial condition or results of
operations. The Company currently believes, however, that the ultimate outcome
of the government's investigation will not have a long-term material adverse
effect on the Company's management, financial condition, or results of
operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SHAREHOLDERS
No matters were submitted to a vote of the shareholders during
the fourth quarter ended April 30, 1996.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS
On February 14, 1996, the Company consummated an initial public
offering of its Common Stock (the "Offering") at a price per share of $15.50.
The Company's Common Stock is traded on The Nasdaq Stock Market's National
Market (the "Nasdaq National Market") under the symbol "SCBI." As of July 22,
1996, there were 47 shareholders of record and approximately 1,500 beneficial
owners of the Common Stock.
The following table sets forth for the period indicated, the
high and low closing sales prices of the Company's Common Stock as reported by
the Nasdaq National Market:
<TABLE>
<CAPTION>
High Low
------ ------
<S> <C> <C>
Fourth Quarter 1996
(from February 14, 1996) . . . . . . . . . . . . . $26.50 $15.50
</TABLE>
The Company declared cash dividends of $.0054 per share of
Common Stock for the fiscal year ended April 30, 1995. No cash dividends were
declared or paid on the Common Stock during the fiscal year ended April 30,
1996. The payment of cash dividends in the future will be at the Board of
Directors' discretion and will depend on the Company's earnings, financial
condition, capital needs, and other factors deemed pertinent by the Company's
Board of Directors, including the limitations, if any, on the payment of
dividends
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under state law and any then-existing credit agreement. It is the current
intention of the Board of Directors not to pay cash dividends and to retain
earnings, if any, to finance the operations and expansion of the Company's
business. The Company's revolving credit facility currently restricts the
payment of cash dividends to not more than 25% of the Company's net profits in
a fiscal year.
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ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA (IN THOUSANDS EXCEPT PER
SHARE AND SHARE DATA)
<TABLE>
<CAPTION>
Fiscal Year Ended April 30,
-----------------------------------------------------------------
1992 1993 1994 1995 1996
------- ------- ------- ------- --------
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Revenue . . . . . . . . . . . . . . . . . $ 19,778 $ 21,830 $ 23,910 $ 33,354 $ 48,710
Cost of services . . . . . . . . . . . 15,027 16,430 17,290 23,699 34,799
---------- --------- --------- --------- ---------
Gross profit . . . . . . . . . . . . . . 4,751 5,400 6,620 9,655 13,911
Compensation - key executives . . . . . . 2,040 2,641 3,131 4,170 3,765
Other selling, general and administrative
expenses . . . . . . . . . . . . . . . 2,347 2,402 3,130 3,785 7,508
---------- --------- --------- --------- ---------
Income from operations . . . . . . . . . 364 357 359 1,700 2,638
Other income (expense), net . . . . . (78) (11) (110) (159) 29
---------- --------- --------- --------- ---------
Income before income taxes and
extraordinary item and cumulative
effect of change in accounting 286 346 249 1,541 2,667
principle . . . . . . . . . . . . . .
Provision for income taxes . . . . . . . 116 143 114 717 1,165
Cumulative effect of change in method
of accounting for income taxes . . . . -- -- (36) -- --
---------- --------- --------- --------- ---------
Net income . . . . . . . . . . . . . . . $ 170 $ 203 $ 99 $ 824 $ 1,502
========= ========= ========= ========= =========
Net income per share . . . . . . . . . . $ .03 $ .04 $ .02(1) $ .15 $ .26
========= ========= ========= ========= =========
Cash dividends declared per share . . . . $ .0018 $ .0036 $ .0036 $ .0054 --
========= ========= ========= ========= =========
Weighted average number of common and
common equivalent shares outstanding . .
5,433,843 5,433,843 5,433,843 5,433,843 5,760,807
========= ========= ========= ========= =========
</TABLE>
<TABLE>
<CAPTION>
AS OF APRIL 30,
----------------------------------------------------------------
1992 1993 1994 1995 1996
-------- -------- -------- --------- ---------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital $ 507 $ 646 $ 437 $ 618 $23,588
Total assets 2,894 3,274 4,163 5,883 27,799
Long-term debt, less current portion 229 157 310 171 --
Total shareholders' equity 969 1,153 1,232 2,027 25,669
</TABLE>
- ------------------
(1) Includes an adjustment of $(.01) per share for the cumulative effect of an
accounting change.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
The Company derives substantially all of its revenue from providing IT
consulting, outsourcing, and professional staffing services. The increase in
revenue from $19.8 million in fiscal 1992 to $48.7 million in fiscal 1996 is a
function of two principal factors: (i) an increase in the volume of services
provided (as measured by aggregate hours billed), and (ii) a shift in the mix
of services provided from lower rate professional staffing services to higher
rate consulting and outsourcing services. In general, revenue is recognized by
the Company as services are performed. The Company's third fiscal quarter
(ending January 31), in which the number of holidays and employee vacation days
reduces the Company's employee billable hours, generally reflects lower revenue
and profitability in comparison to the other three fiscal quarters.
The Company has historically derived a significant portion of its
revenue from a relatively limited number of clients. The Company currently
performs services for approximately 55 clients, consisting of state and local
governments, public utilities, Fortune 500 companies, and other large
organizations located primarily in the southeastern United States. For the
fiscal years ended April 30, 1994, 1995, and 1996, the Company's top five
clients (in terms of revenue to the Company) accounted for approximately 71%,
73%, and 66%, respectively. From time to time the Company has substantial
accounts receivable from its top five clients, but the Company has not
experienced any significant payment problems from these clients. A material
decrease in services provided to any of the largest clients of the Company
could have a material adverse impact on the Company's operating results.
The Company's strategy has been to sustain growth in professional
staffing revenue while simultaneously increasing the percentage of revenue
contributed by consulting and outsourcing services. The relative growth in
revenue attributable to the three service areas is illustrated in the following
table:
<TABLE>
<CAPTION>
For the Fiscal Years Ended April 30,
-------------------------------------------------------------------
1994 1995 1996
--------------- ----------------- ----------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Consulting Services . . . . . . . $ 1,298 5.4% $ 5,862 17.5% $ 8,285 17.0%
Outsourcing Services . . . . . . 5,209 21.8 5,225 15.7 9,661 19.8
Professional Staffing Services . 17,403 72.8 22,267 66.8 30,764 63.2
------- ----- ------- ----- ------- -----
Total . . . . . . . . . $23,910 100.0% $33,354 100.0% $48,710 100.0%
======= ===== ======= ===== ======= =====
</TABLE>
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Generally, the Company charges its clients higher hourly rates for
consulting and outsourcing services than for professional staffing services.
The Company's marketing strategy emphasizes cross-selling all of its services
to existing and potential clients. In addition to expanding existing client
relationships, the Company has made a strategic determination to seek more
high-value, premium-billing business, concentrating particularly on increasing
its consulting, client/server, and other network engagements. The following
table reflects this trend.
<TABLE>
<CAPTION>
For the Fiscal Years Ended April 30,
------------------------------------------------
1994 1995 1996
------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C>
Average Billable Personnel . . . . . . 307 375 498
Revenue Per Billable Employee . . . . . $77,882 $88,946 $97,811
Average Employee Billable Hours . . . . 1,899 1,921 1,922
Average Hourly Rate . . . . . . . . . . $ 41.01 $ 46.30 $ 50.89
Gross Profit Margin . . . . . . . . . . 27.7% 28.9% 28.6%
</TABLE>
The Company's revenue is currently derived from three major groups of
clients: state and local governments, public utilities, and large corporations.
The revenue by client group is illustrated in the following table:
<TABLE>
<CAPTION>
For the Fiscal Years Ended April 30,
-------------------------------------------------------------------
1994 1995 1996
-------------------- -------------------- -----------------
<S> <C> <C> <C> <C> <C> <C>
(Dollars in Thousands)
Government . . . . . . . . . . $ 9,943 41.6% $14,157 42.5% $18,609 38.2%
Utilities . . . . . . . . . . . 6,381 26.7 9,520 28.5 12,451 25.6
Commercial organizations . . . 7,586 31.7 9,677 29.0 17,650 36.2
------- ----- ------- ----- ------- -----
Total $23,910 100.0% $33,354 100.0% $48,710 100.0%
======= ===== ======= ===== ======= =====
</TABLE>
In May 1996, the Company was issued a subpoena by the Federal Grand
Jury of the United States District Court for the Western District of Tennessee.
A subsequent subpoena was issued to the Company by the grand jury in June 1996.
The Company has not been identified as a subject or target of the grand jury's
investigation. The Company believes that the grand jury's investigation
relates primarily to the Company's billing practices under its consulting
contract with the TVA. An internal investigation by the Special Committee of
the Company's Board of Directors, comprised of two non-employee directors,
has identified possible misbillings of expenses under the TVA contract,
primarily as they relate to mileage and per diem expenses submitted to the
TVA, and
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on May 31, 1996, the Company remitted $39,759.32 to the TVA relating to the
possible misbillings. The Company expects to incur a charge of approximately
$275,000 to $325,000 in professional fees in the first quarter of fiscal 1997,
primarily relating to legal and accounting fees incurred by the Company in
connection with the government's investigation and the Company's internal
review of this matter. Due to the preliminary and prospective nature of the
government's investigation, it is not possible presently to predict with any
certainty when the investigation will be completed, its ultimate outcome, or
the effect thereof on the Company. The Company currently believes, however,
that the ultimate outcome of the government's investigation will not have a
long-term material adverse effect on the Company's management, financial
condition, or results of operations. See "Item 3. Legal Proceedings."
RESULTS OF OPERATIONS
Comparison of Fiscal 1996 to Fiscal 1995
Revenue increased from $33.4 million in fiscal 1995 to $48.7 million
in fiscal 1996, an increase of 46%. This increase was primarily attributable to
increased services provided under two outsourcing services contracts, which
accounted for approximately 42% of the increase in revenue, and significant
increases in professional staffing services provided to four of SCB's existing
clients, which accounted for approximately one-half of the increase in revenue.
Average billable personnel increased from 375 for fiscal 1995 to 498 for fiscal
1996. The average hourly rate per billable employee increased from $46.30 for
fiscal 1995 to $50.89 for fiscal 1996, primarily because of an increase in the
provision of higher-rate consulting services.
Gross profit increased from $9.7 million to $13.9 million, an increase
of 44%. This increase was attributable primarily to an increase in revenue.
Gross profit margin decreased from 28.9% to 28.6% during the period. Cost of
services consists of all costs directly attributable to SCB personnel assigned
to various client engagements, including salaries, benefits, training, travel,
and relocation.
Historically, a significant portion of the Company's operating expenses
has been attributable to the compensation of two key executives: T. Scott Cobb
and Ben C. Bryant, Jr. In connection with the Company's initial public
offering in February 1996, Messrs. Cobb and Bryant entered into employment
agreements which reduced their salaries to $600,000 per year. The employment
agreements were recently amended to reduce each executive's salary to $300,000
per year, to be effective as of July 1, 1996. The employment agreements, as
amended, also provide for bonuses of $100,000 or $200,000 per year to each of
Messrs. Cobb and Bryant in the event the Company exceeds 110% or 125%,
respectively, of pre-tax earnings targets established by the Board of Directors
at the beginning of each fiscal year. Compensation for key executives decreased
from $4.2 million in 1995 to $3.8 million in 1996, which included bonuses of
$1.3 million in 1995 and $1.4 million in 1996.
Other selling, general, and administrative expenses increased from
$3.8 million in 1995 to $7.5 million in 1996, an increase of approximately 97%.
This increase was primarily
14
<PAGE> 15
attributable to a $1.2 million stock bonus granted to certain management
personnel in October 1995 as well as the expansion of the Company's sales and
recruiting efforts and the development of training programs for these
departments. As a percentage of total revenue, other selling, general, and
administrative expenses increased from 11.3% in 1995 to 15.4% in 1996.
Comparison of Fiscal 1995 to Fiscal 1994
Revenue increased from $23.9 million in fiscal 1994 to $33.4 million
in fiscal 1995, an increase of approximately 39.5%. This increase was primarily
attributable to a contract for consulting services that began in May 1994,
which accounted for approximately 39% of the increase in revenue, and
significant increases in professional staffing services provided to two of
SCB's existing clients, which accounted for approximately 60% of the increase
in revenue. Average billable personnel increased from 307 for fiscal 1994 to
375 for fiscal 1995. The average hourly rate per billable employee also
increased from $41.01 for fiscal 1994 to $46.30 for fiscal 1995, primarily due
to additional, higher-margin consulting revenue.
Gross profit increased from $6.6 million to $9.7 million, an increase
of approximately 45.9%. This increase was attributable primarily to an
increase in revenue. Gross profit margin increased from 27.7% to 28.9% as a
result of an increase in higher-margin consulting and outsourcing services
revenue as a percentage of total revenue.
Compensation for key executives increased from $3.1 million in 1994 to
$4.2 million in 1995, which included bonuses of $550,000 in 1994 and $1.3
million in 1995.
Other selling, general, and administrative expenses increased from
$3.1 million in 1994 to $3.8 million in 1995, an increase of approximately
20.9%. This increase was primarily attributable to the Company's heightened
commitment to expanding its sales and recruiting efforts as well as developing
training programs for these departments. As a percentage of total revenue,
other selling, general, and administrative expenses decreased from 13.1% in
fiscal 1994 to 11.3% in fiscal 1995, as relatively fixed general and
administrative costs were spread over a larger revenue base.
In fiscal 1994, the Company recognized a $36,000 charge to reflect the
cumulative effect of adopting Statement of Financial Accounting Standards No.
109, Accounting for Income Taxes. See Note 1 of Notes to the Company's
Consolidated Financial Statements.
Comparison of Fiscal 1994 to Fiscal 1993
Revenue increased from $21.8 million in fiscal 1993 to $23.9 million
in fiscal 1994, an increase of approximately 9.5%. This increase was primarily
attributable to an increase in the aggregate services provided as well as an
increase in the average hourly rates from $39.76 to $41.01.
15
<PAGE> 16
Gross profit increased from $5.4 million in 1993 to $6.7 million in
1994, an increase of approximately 22.6%. This increase was attributable
primarily to an increase in revenue. Gross profit margin increased from 24.7%
to 27.7% as a result of an increase in higher-margin consulting and outsourcing
services revenue as a percentage of total revenue.
Compensation for key executives increased from $2.6 million in 1993 to
$3.1 million in 1994, including bonuses of $650,000 in 1993 and $550,000 in
1994.
Other selling, general, and administrative expenses increased from
$2.4 million in 1993 to $3.1 million in 1994, an increase of approximately
30.3%. This increase was primarily the result of additions to administrative
and sales staff.
LIQUIDITY AND CAPITAL RESOURCES
Operating cash flow has historically been the Company's primary source
of liquidity. The Company's net cash provided (used) by operating activities
was approximately $(335,000), $743,000, and $481,000 for fiscal 1994, 1995,
and 1996, respectively. The negative cash flow in fiscal 1994 was primarily
attributable to accounts receivable that were collected subsequent to year-end.
The Company has supplemented operating cash flows from time to time
with borrowings under its revolving credit facility (the "Revolver"). The
Revolver provides for borrowings of up to $1.5 million and bears interest at
the lender's prime rate (8.25% at April 30, 1996). Amounts outstanding under
the Revolver are payable on August 1 of each year and are secured by accounts
receivable. At April 30, 1996, there were no amounts outstanding under the
Revolver.
The Company completed its initial public offering in February 1996.
The net proceeds to the Company in the offering were $20.8 million, after
deduction of underwriting commissions and other offering expenses. The
proceeds from the offering were used to repay the $1.5 million outstanding
under the Revolver and for working capital purposes. Substantially all of the
balance of the proceeds were invested in highly liquid investments, including
securities purchased under agreements to resell.
The Company's working capital increased from $437,000 in fiscal 1994
to $618,000 in fiscal 1995, primarily because of retained earnings. The
Company's working capital increased from $618,000 in fiscal 1995 to $23,588,000
in fiscal 1996, primarily as a result of the initial public offering.
The Company's historical capital expenditures relate primarily to the
acquisition of office buildings used as the Company's corporate headquarters.
In fiscal 1996, the Company purchased a parcel of land contiguous to its
corporate headquarters for approximately $230,000 and an automated recruiting
system for approximately $150,000. The Company intends to use approximately
$5.0 million of the net proceeds from the initial public offering for other
capital expenditures including construction projects and furnishing branch
offices. The Company anticipates using an additional $2.5 million of such net
proceeds for specifically identified business purposes, including the addition
of marketing staff, the licensing of software, and training with respect
thereto. The Company currently intends to use the balance of the net proceeds
for other general corporate purposes, including acquisitions.
16
<PAGE> 17
The Company believes that cash flows from operations and the net
proceeds from the initial public offering, will be sufficient to fund the
Company's operating needs for at least the next twelve months. Although the
Company has no present acquisition agreements or arrangements, the Company may
in the future make strategic acquisitions. Depending on the terms of such an
acquisition, the Company may need to incur additional indebtedness or issue
equity securities (including Common Stock).
<TABLE>
<CAPTION>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA PAGE OF
FORM 10-K
---------
<S> <C>
Report of Independent Auditors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Consolidated Balance Sheets as of April 30, 1995 and 1996 . . . . . . . . . . . . . . . . . . . . . 19
Consolidated Statements of Income for each of the three years in the period ended
April 30, 1996 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Consolidated Statements of Shareholders' Equity for each of the three years in the period ended
April 30, 1996 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Consolidated Statements of Cash Flows for each of the three years in the period ended April 30,
1996 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
</TABLE>
17
<PAGE> 18
Report of Independent Auditors
Board of Directors
SCB Computer Technology, Inc.
We have audited the accompanying consolidated balance sheets of SCB Computer
Technology, Inc. as of April 30, 1995 and 1996, and the related consolidated
statements of income, shareholders' equity, and cash flows for each of the
three years in the period ended April 30, 1996. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of SCB
Computer Technology, Inc. at April 30, 1995 and 1996, and the consolidated
results of its operations and its cash flows for each of the three years in the
period ended April 30, 1996, in conformity with generally accepted accounting
principles.
As discussed in Note 1, during the year ended April 30, 1994 the Company
changed its method of accounting for income taxes.
/s/ Ernst & Young LLP
Memphis, Tennessee
June 20, 1996,
except for the second
paragraph of Note 11,
as to which the date
is July 3, 1996
18
<PAGE> 19
SCB Computer Technology, Inc.
Consolidated Balance Sheets
<TABLE>
<CAPTION>
APRIL 30
1995 1996
-----------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents:
Cash $ 203,641 $ 1,848,443
Securities purchased under agreement to resell - 10,000,000
Merrill Lynch Institutional Fund - 7,410,270
-----------------------
Total cash and cash equivalents 203,641 19,258,713
Accounts receivable:
Trade 3,798,733 6,201,969
Related parties 11,845 5,699
Prepaid expenses 86,618 27,791
Deferred federal and state income tax 175,595 201,290
-----------------------
Total current assets 4,276,432 25,695,462
Fixed assets:
Buildings 1,348,293 1,348,293
Furniture, fixtures, and equipment 306,170 636,452
Accumulated depreciation (262,417) (333,464)
-----------------------
1,392,046 1,651,281
Land 209,912 443,301
-----------------------
1,601,958 2,094,582
Other 4,473 8,491
Total assets $5,882,863 $27,798,535
=======================
</TABLE>
19
<PAGE> 20
<TABLE>
<CAPTION>
APRIL 30
1995 1996
-----------------------
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable -- trade $ 652,732 $ 656,915
Notes payable 1,459,899 -
Accrued and withheld payroll taxes,
insurance, and payroll deductions 168,500 202,904
Accrued vacation 413,091 530,067
Other accrued expenses 925,558 593,961
Accrued federal and state income taxes 38,948 123,207
-----------------------
Total current liabilities 3,658,728 2,107,054
Long-term liabilities:
Notes payable 170,952 -
Deferred federal and state income taxes 26,000 22,800
-----------------------
196,952 22,800
-----------------------
Total liabilities 3,855,680 2,129,854
SHAREHOLDERS' EQUITY:
Preferred stock, no par value --
authorized 1,000,000 shares, none issued - -
Common stock -- 20,000,000 shares of $.01
par value authorized and 5,387,129 shares
issued and outstanding at April 30, 1995
and 7,015,583 shares issued and
outstanding at April 30, 1996 53,871 70,155
Additional paid-in capital 393,156 22,516,279
Retained earnings 1,580,156 3,082,247
-----------------------
Total shareholders' equity 2,027,183 25,668,681
-----------------------
Total liabilities and shareholders' equity $5,882,863 $27,798,535
=======================
</TABLE>
See accompanying notes.
20
<PAGE> 21
SCB Computer Technology, Inc.
Consolidated Statements of Income
<TABLE>
<CAPTION>
YEAR ENDED APRIL 30
1994 1995 1996
-------------------------------------
<S> <C> <C> <C>
Revenue $23,909,942 $33,354,659 $48,710,092
Cost of services 17,290,144 23,699,036 34,798,688
-------------------------------------
Gross profit 6,619,798 9,655,623 13,911,404
Compensation -- key executives 3,130,740 4,170,000 3,764,840
Other selling, general and administrative expenses 3,129,911 3,785,043 7,508,308
-------------------------------------
Total operating expenses 6,260,651 7,955,043 11,273,148
-------------------------------------
Income from operations 359,147 1,700,580 2,638,256
Other income (expenses):
Interest income 14,918 25,587 193,226
Interest expense (70,338) (113,338) (68,285)
Other, net (54,686) (72,012) (95,958)
-------------------------------------
Total other income (expenses) (110,106) (159,763) 28,983
-------------------------------------
Income before income taxes and cumulative effect
of change in accounting principle 249,041 1,540,817 2,667,239
Income tax expense:
Current 175,916 749,906 1,194,043
Deferred (benefit) (61,573) (33,302) (28,895)
-------------------------------------
Total income tax expense 114,343 716,604 1,165,148
-------------------------------------
Income before cumulative effect of change in
accounting principle 134,698 824,213 1,502,091
Cumulative effect of change in method of
accounting for income taxes (35,874) - -
-------------------------------------
Net income $ 98,824 $824,213 $1,502,091
=====================================
Earnings per share:
Income before cumulative effect of change in .
accounting principle .03 15 .26
Cumulative effect of change (.01) - -
-------------------------------------
Net income per share $.02 $.15 $.26
=====================================
Weighted average number of common and common
equivalent shares outstanding 5,433,843 5,433,843 5,760,807
=====================================
</TABLE>
See accompanying notes.
21
<PAGE> 22
SCB Computer Technology, Inc.
Statements of Shareholders' Equity
<TABLE>
<CAPTION>
NUMBER ADDITIONAL
OF COMMON PAID-IN RETAINED SHAREHOLDERS'
SHARES STOCK CAPITAL EARNINGS EQUITY
-----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at May 1, 1993 5,387,129 $ 53,871 $ 393,156 $ 705,563 $ 1,152,590
Cash dividends declared
($.0036 per share) (19,377) (19,377)
Net income 98,824 98,824
----------------------------------------------------------------------------
Balance at April 30, 1994 5,387,129 53,871 393,156 785,010 1,232,037
Cash dividends declared
($.0054 per share) (29,067) (29,067)
Net income 824,213 824,213
----------------------------------------------------------------------------
Balance at April 30, 1995 5,387,129 53,871 393,156 1,580,156 2,027,183
Issuance of Common Stock
in connection with
employees' Stock Grants 125,948 1,259 1,226,734 1,227,993
Issuance of Common Stock
in connection with
Initial Public Offering 1,495,000 14,950 20,801,464 20,816,414
Issuance of Common Stock
in cancellation of stock
appreciation right 7,506 75 94,925 95,000
Net income 1,502,091 1,502,091
----------------------------------------------------------------------------
Balance at April 30, 1996 7,015,583 $ 70,155 $22,516,279 $ 3,082,247 $ 25,668,681
============================================================================
</TABLE>
See accompanying notes.
22
<PAGE> 23
SCB Computer Technology, Inc.
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
YEAR ENDED APRIL 30
1994 1995 1996
--------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $ 98,824 $ 824,213 $1,502,091
Adjustments to reconcile net income to net cash
provided (used) by operating activities:
Depreciation 53,903 72,462 89,978
Deferred income taxes (61,573) (33,302) (28,895)
Stock grant - - 1,227,993
Issuance of common stock - - 95,000
Cumulative effect of change in accounting principle 35,874 - -
(Increase) decrease in:
Accounts receivable:
Trade (688,176) (1,036,399) (2,403,236)
Related parties (45,895) 34,050 6,146
Prepaid expenses (2,258) (55,920) 58,827
Other assets (7,733) 5,336 (4,018)
Increase (decrease) in:
Accounts payable--trade (50,225) 521,836 4,183
Accrued federal and state income taxes (101,327) 29,063 84,259
Accrued vacation (49,925) 81,945 116,976
Other accrued expenses (123,271) 719,645 (302,530)
Accrued and withheld payroll taxes, insurance, and
payroll deductions 507,285 (419,438) 34,404
--------------------------------------------
Total adjustments (433,471) (80,722) (1,020,913)
--------------------------------------------
Net cash provided (used) by operating activities (334,647) 743,491 481,178
INVESTING ACTIVITIES
Purchases of fixed assets (502,645) (564,259) (582,602)
FINANCING ACTIVITIES
Proceeds from initial public offering - - 20,816,414
Net borrowings (repayments) under line of credit 300,000 175,000 (1,459,899)
Borrowings on long-term debt 362,015 325,000 -
Payments on long-term debt (130,427) (529,500) (170,952)
Payment of dividends (19,364) (19,377) (29,067)
--------------------------------------------
Net cash (used) provided by financing activities 512,224 (48,877) 19,156,496
--------------------------------------------
Net increase (decrease) in cash and cash equivalents (325,068) 130,355 19,055,072
Cash at beginning of period 398,354 73,286 203,641
--------------------------------------------
Cash at end of period $ 73,286 $ 203,641 $19,258,713
============================================
Supplemental disclosures of cash flow information:
Interest paid $ 94,338 $ 128,724 $ 68,285
Income taxes paid 275,889 690,588 1,103,127
</TABLE>
See accompanying notes.
23
<PAGE> 24
SCB Computer Technology, Inc.
Notes to Consolidated Financial Statements
April 30, 1996
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of SCB
Computer Technology, Inc. and its subsidiary. All significant intercompany
transactions have been eliminated in consolidation.
GENERAL
SCB Computer Technology, Inc. (the Company) was incorporated on May 11, 1984 in
the State of Tennessee. The Company is an information technology company which
provides management and technical services primarily to state and local
governments, public utilities, Fortune 500 companies, and other large
organizations, primarily located in the Southeastern United States.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with a maturity of three
months or less when purchased to be cash equivalents.
The Company enters into purchases of securities under agreements to resell.
The amounts advanced under these agreements represent overnight loans and are
reflected as a cash equivalent in the consolidated balance sheets. Securities
purchased under agreement to resell are held in safekeeping in the Company's
name. Should the market value of the underlying securities decrease below the
amount recorded, the counterparty, a large national banking institution, is
required to place an equivalent amount of additional securities in safekeeping
in the name of the Company.
FIXED ASSETS
All fixed assets are carried at cost. Depreciation is computed using the
straight-line basis over the useful lives of the various fixed assets. The
estimated useful lives for computing depreciation on fixed assets are as
follows:
Furniture, fixtures and equipment 5-10 years
Autos 3-6 years
Building 31-39 years
24
<PAGE> 25
SCB Computer Technology, Inc.
Notes to Consolidated Financial Statements (continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
REVENUE RECOGNITION
The Company recognizes revenues as professional services are performed.
INCOME TAXES
Effective May 1, 1993, the Company adopted Statement of Financial Accounting
Standards No. 109 (FAS 109), Accounting for Income Taxes. The cumulative
effect of change in accounting principle was included in determining net income
for the year ended April 30, 1994. Under FAS 109, deferred tax assets and
liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax basis. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in the period that includes the enactment
date.
Prior to 1994, the Company accounted for income taxes under the deferred
method.
STOCK BASED COMPENSATION
The Company grants stock options for a fixed number of shares to employees with
an exercise price equal to the fair value of the shares at the date of grant.
The Company accounts for stock option grants in accordance with APB Opinion No.
25, Accounting for Stock Issued to Employees, and, accordingly, recognizes no
compensation expense for the stock option grants.
In October 1995, the FASB issued Statement of Financial Accounting Standards
No. 123, Accounting for Stock-based Compensation, which provides an alternative
to APB Opinion No. 25 in accounting for stock-based compensation issued to
employees. The statement allows for a fair value based method of accounting
for employee stock options and similar equity instruments. However, for
companies that continue to account for stock-based compensation arrangements
under Opinion No. 25, FAS No. 123 requires disclosure of the pro forma effect
on net income and earnings per share of its fair value based accounting for
those arrangements. These disclosure requirements are effective for fiscal
years beginning after December 15, 1995. The Company expects to continue to
account for stock options under APB Opinion No. 25.
25
<PAGE> 26
SCB Computer Technology, Inc.
Notes to Consolidated Financial Statements (continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
CONCENTRATION OF CREDIT RISK
Financial instruments which potentially expose the Company to concentrations of
credit risk consist primarily of trade accounts receivable and securities
purchased under agreement to resell. The Company continually evaluates the
credit worthiness of its customers' financial positions and monitors accounts
on a periodic basis, but typically does not require collateral. The Company has
not experienced significant losses related to receivables from individual
customers or groups of customers in a particular industry or geographic area.
Credit losses have been immaterial and have consistently been within
management's expectations.
USE OF ESTIMATES
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
NET INCOME PER SHARE
Net income per common and common equivalent share is based on the
weighted-average number of common and common equivalent shares outstanding
during 1994, 1995 and 1996. The incremental shares attributable to cheap stock
have been included.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying value of cash and cash equivalents, accounts receivable, accounts
payable, accrued expenses and notes payable approximates fair values of these
instruments at April 30, 1995 and 1996.
26
<PAGE> 27
SCB Computer Technology, Inc.
Notes to Consolidated Financial Statements (continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
ACCOUNTING PRONOUNCEMENTS
In March 1995, the FASB issued Statement No. 121, Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, which
requires impairment losses to be recorded on long-lived assets used in
operations when indicators of impairment are present and the undiscounted cash
flows estimated to be generated by those assets are less than the carrying
amount of those assets. Statement 121 also addresses the accounting for
long-lived assets that are expected to be disposed of. The Company's initial
assessment is that, based on current circumstances, the adoption of Statement
121 will not have a material impact on its consolidated financial position or
results of operations.
2. ACCOUNTS RECEIVABLE -- TRADE
Accounts receivable -- trade includes unbilled receivables of $172,074 and
$50,322 as of April 30, 1995 and 1996, respectively.
3. NOTES PAYABLE
The following is a schedule of notes payable:
<TABLE>
<CAPTION>
APRIL 30
1995 1996
-----------------
<S> <C> <C>
Mortgage payable -- bank, principal and interest
due monthly secured by land and building,
guaranteed by shareholders, bearing an interest
rate of 6.5% per annum (paid in full in September
1995) $ 239,910 -
Other 15,941 -
Revolving credit facility (9.5% at April 30, 1995) 1,375,000 -
-----------------
1,630,851 -
Less current maturities 1,459,899 -
-----------------
Long-term $ 170,952 -
=================
</TABLE>
27
<PAGE> 28
SCB Computer Technology, Inc.
Notes to Consolidated Financial Statements (continued)
3. NOTES PAYABLE (CONTINUED)
The Company has a revolving bank line of credit (the Revolver) secured by
accounts receivable. It is renewable by the bank on August 1 each year. The
maximum amount available under the Revolver was $1,500,000 at April 30, 1995
and 1996. The weighted average interest rate for the year ended April 30, 1996
was 8.25%. The Revolver restricts the payment of cash dividends to not more
than 25% of the Company's net profits in a fiscal year and contains various
covenants, including a working capital ratio, a debt-to-equity ratio and
tangible net worth requirements.
4. EMPLOYEE BENEFIT PLANS
The Company has a profit sharing plan with an employee stock ownership plan
(ESOP) provision for full-time employees age 21 and over. The Company did not
contribute to the plan for the years ended April 30, 1994, 1995 and 1996, but
paid administrative expenses associated with the plan of $6,379, $5,655 and
$5,980 in such years.
The Company also provides a qualified 401(k) profit sharing plan for full-time
employees age 21 or over, and who have been with the Company for ninety days by
April 30. Contributions by the Company are at the discretion of the Board of
Directors. Contributions were not made by the Company for the years ended April
30, 1994, 1995 and 1996.
5. EMPLOYMENT AGREEMENTS
Effective upon consummation of the initial public offering in February 1996,
the Company entered into employment agreements with the two majority
shareholders for a term of three years expiring April 30, 1999. These
agreements provide for a base salary of $600,000 each for the initial year and
increases 10% on May 1, 1997 and May 1, 1998. In the event the Company exceeds
110% to 125% of projected pre-tax earnings targeted by the Board of Directors,
bonuses of up to $200,000 each per year would be earned. Subsequent to year
end, each of the employment agreements was amended to reduce the amount of base
salary to $300,000 per year.
28
<PAGE> 29
SCB Computer Technology, Inc.
Notes to Consolidated Financial Statements (continued)
6. LEASES
Total rent expense for the years ended April 30, 1994, 1995 and 1996 was
$229,654, $226,051 and $290,800, respectively. Total future annual lease
requirements are as follows:
1997 $95,891
1998 87,654
1999 55,466
7. SIGNIFICANT CUSTOMERS
The Company earns a significant portion of its revenue from its top five
customers. Revenues earned from its top five customers (each representing
greater than 10% of revenues) totaled 71%, 73% and 66% for the years ended
April 30, 1994, 1995 and 1996, respectively.
At April 30, 1995 and 1996 accounts receivable from these significant customers
were $2,547,806 and $3,495,477, respectively.
8. FEDERAL AND STATE INCOME TAXES
Significant components of the provision for income taxes are as follows:
<TABLE>
<CAPTION>
YEAR ENDED APRIL 30
1994 1995 1996
------------------------------
<S> <C> <C> <C>
Federal:
Current $140,469 $624,483 $1,004,773
Deferred (51,851) (28,044) (24,500)
------------------------------
88,618 596,439 980,273
State:
Current 35,447 125,423 189,270
Deferred (9,722) (5,258) (4,395)
------------------------------
25,725 120,165 184,875
------------------------------
Total $114,343 $716,604 $1,165,148
==============================
</TABLE>
29
<PAGE> 30
SCB Computer Technology, Inc.
Notes to Consolidated Financial Statements (continued)
8. FEDERAL AND STATE INCOME TAXES (CONTINUED)
Deferred tax liabilities and assets are comprised of the following:
<TABLE>
<CAPTION>
APRIL 30
1995 1996
----------------------
<S> <C> <C>
Deferred tax liability:
Depreciation expense $ 26,000 $ 22,800
----------------------
Total deferred tax liability 26,000 22,800
Deferred tax assets:
Vacation expense 156,975 201,290
Other 18,620
----------------------
Total deferred tax assets 175,595 201,290
----------------------
Net deferred tax assets $149,595 $178,490
======================
</TABLE>
The reconciliation of income tax computed at the U.S. federal statutory tax
rates to income tax expense is:
<TABLE>
YEARS ENDED APRIL 30
1994 1995 1996
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
--------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Tax at U.S. statutory rates $ 84,674 34.0% $523,878 34.0% $ 906,779 34.0%
State income taxes net of
federal tax benefit 16,979 6.8 79,309 5.1 122,018 4.6
Other -- net 12,690 5.1 113,417 7.2 136,351 5.1
--------------------------------------------------------------
$114,343 45.9% $716,604 46.3% $1,165,148 43.7%
==============================================================
</TABLE>
30
<PAGE> 31
SCB Computer Technology, Inc.
Notes to Consolidated Financial Statements (continued)
9. CHANGE IN CAPITALIZATION
On December 21, 1995, the Company's charter was revised to modify the Company's
capital structure. The authorized shares of common stock were increased from
1,000,000 to 20,000,000. Additionally, 1,000,000 shares of preferred stock were
authorized for future issuance. No terms or preferences have been established
for the preferred stock. In connection with this change, the Company approved a
5.56-for-1 common stock split to effect the change in capitalization. A total
of 4,418,220 additional shares of common stock were issued in connection with
the stock split and $44,182 was reclassified from retained earnings to common
stock. All share and per share amounts have been retroactively restated to
reflect the stock split and change in capitalization.
During February 1996, the Company completed its initial public offering issuing
1,495,000 shares of common stock with net proceeds received of $20,816,414.
10. 1995 STOCK INCENTIVE PLAN
The 1995 Stock Incentive Plan provides for the granting of incentive
stock options or non-qualified options to employees and to the Company's
non-employee directors to purchase shares of the Company's common stock. Under
the Plan, 600,000 shares of common stock have been reserved for distribution.
The Plan also provides for grants of stock appreciation rights and restricted
stock. At April 30, 1996 there were 199,300 options outstanding at an option
price of $15.50. There were no options exercisable at April 30, 1996.
11. CONTINGENCIES
In May 1996, the Company was issued a subpoena by the Federal Grand Jury of the
United States District Court for the Western District of Tennessee. A
subsequent subpoena was issued to the Company by the grand jury in June 1996.
The Company has not been identified as the subject or target of the grand
jury's investigation. The Company currently believes that the grand jury's
investigation relates to the Company's billing practices under its consulting
contract with the TVA, particularly the hourly billings and expenses of T.
Scott Cobb, the Company's Chairman and Steve N. White, the Company's Executive
Vice President-Development. The subpoenas apparently relate to an audit of the
Company's TVA billings being conducted by the Office of the Inspector General.
31
<PAGE> 32
SCB Computer Technology, Inc.
Notes to Consolidated Financial Statements (continued)
11. CONTINGENCIES (CONTINUED)
Additionally, on July 3, 1996, the Securities and Exchange Commission notified
the Company that the SEC is conducting an informal inquiry, which inquiry
appears to be focused on the TVA billings and the impact thereof on the
Company's financial statements.
An internal investigation by the Special Committee of the Board of Directors,
comprised of two non-employee directors, has identified possible misbillings of
expenses under the TVA contract, primarily relating to mileage and per diem
expenses submitted to TVA. On May 31, 1996, the Company remitted $39,759 to
the TVA relating to the possible misbillings.
Due to the preliminary and prospective nature of the government's
investigation, it is not possible presently to predict with any certainty when
the investigation will be completed, its ultimate outcome, or the effect
thereof on the Company's financial condition or results of operations.
32
<PAGE> 33
SCB Computer Technology, Inc.
Notes to Consolidated Financial Statements (continued)
12. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
JULY 31, OCTOBER 31, JANUARY 31, APRIL 30,
1995 1995 1996 1996
---------------------------------------------------------------
<S> <C> <C> <C> <C>
QUARTER ENDED:
Revenue $10,713,047 $ 12,361,672 $ 12,651,122 $ 12,984,251
Cost of services 7,533,782 8,764,814 9,355,580 9,144,512
Gross profit 3,179,265 3,596,858 3,295,542 3,839,739
Selling, general and
administrative expenses 2,519,260 4,039,345 2,404,215 2,310,328
Income (loss) from operations 660,005 (442,487) 891,327 1,529,411
Other income (expense) (43,157) (41,231) (48,443) 161,814
Income (loss) before taxes 616,848 (483,718) 842,884 1,691,225
Income tax expense (benefit) 266,170 (207,849) 341,845 764,982
Net income (loss) $ 350,678 $ (275,869) $ 501,039 $ 926,243
===============================================================
Earnings (loss) per share $ 0.06 $ (0.05) $ 0.09 $ 0.16
===============================================================
<CAPTION>
JULY 31, OCTOBER 31, JANUARY 31, APRIL 30,
1995 1995 1996 1996
---------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenue $ 7,060,984 $ 8,530,941 $ 8,506,899 $ 9,255,835
Cost of services 5,150,679 5,970,360 6,303,069 6,274,928
Gross profit 1,910,305 2,560,581 2,203,830 2,980,907
Selling, general and
administrative expenses 1,786,084 1,902,881 1,966,577 2,299,501
Income from operations 124,221 657,700 237,253 681,406
Other (expense) (40,388) (43,781) (48,763) (26,831)
Income before taxes 83,833 613,919 188,490 654,575
Income tax expense 37,012 271,048 134,928 273,616
Net income $ 46,821 $ 342,871 $ 53,562 $ 380,959
===============================================================
Earnings per share $ 0.01 $ 0.06 $ 0.01 $ 0.07
===============================================================
</TABLE>
33
<PAGE> 34
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The Proxy Statement issued in connection with the Annual Meeting of
Shareholders to be held on September 6, 1996 contains under the caption
"Proposal One: Election of Directors" information required by Item 10 of Form
10-K and is incorporated herein by reference. Pursuant to General Instruction
G(3), certain information concerning executive officers of the Company is
included in Part I (Item 1.) of this Form 10-K under the caption
"Business-Executive Officers."
ITEM 11. EXECUTIVE COMPENSATION
The Proxy Statement issued in connection with the Annual Meeting of
Shareholders to be held on September 6, 1996 contains under the caption
"Executive Compensation" information required by Item 11 of Form 10-K and is
incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The Proxy Statement issued in connection with the Annual Meeting of
Shareholders to be held on September 6, 1996 contains under the caption
"Security Ownership of Certain Beneficial Owners and Management" information
required by Item 12 of Form 10-K and is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Proxy Statement issued in connection with the Annual Meeting of
Shareholders to be held on September 6, 1996 contains under the caption
"Certain Relationships and Related Transactions" information required by Item
13 of Form 10-K and is incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM
8-K
(a) 1. Financial Statements: See Item 8.
2. Financial Statement Schedules: Not applicable.
34
<PAGE> 35
3. Exhibits:
(a) See Exhibit Index following signatures.
(b) During the fiscal quarter ended April 30, 1996, the Company
filed no reports on Form 8-K.
35
<PAGE> 36
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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, in Memphis, Tennessee, on
July 26, 1996.
SCB COMPUTER TECHNOLOGY, INC.
By: /s/ Ben C. Bryant, Jr.
-------------------------------
Ben C. Bryant, Jr., President
and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons in the capacities and on the
dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ T. Scott Cobb Chairman of the Board of Directors July 26, 1996
-----------------------------------
T. Scott Cobb
/s/ Ben C. Bryant, Jr. Chief Executive Officer, President, and July 26, 1996
---------------------------------- Vice Chairman of the Board of Directors,
Ben C. Bryant, Jr. (Principal Executive Officer)
/s/ Steve N. White Director July 26, 1996
-----------------------------------
Steve N. White
/s/ Gordon L. Bateman Chief Financial Officer (Principal July 26, 1996
-------------------------------- Financial and Accounting Officer)
Gordon L. Bateman
/s/ James E. Harwood Director July 26, 1996
--------------------------------
James E. Harwood
/s/ Joseph W. McLeary Director July 26, 1996
-------------------------------
Joseph W. McLeary
</TABLE>
36
<PAGE> 37
Exhibit Index
<TABLE>
<CAPTION>
Exhibit
Number Description
------ -----------
<S> <C>
3.1 Amended and Restated Charter of Registrant (incorporated by
reference to Exhibit 3.1 to the Registration Statement on
Form S-1 (Registration No. 33-80707)).
3.2 Amended and Restated Bylaws of Registrant (incorporated by
reference to Exhibit 3.2 to the Registration Statement on
Form S-1 (Registration No. 33-80707)).
4.1 Specimen Common Stock certificate (incorporated by reference
to Exhibit 4.1 to the Registration Statement on Form S-1
(Registration No. 33-80707)).
4.2 Article 7 of the Registrant's Amended and Restated Charter
(included in Exhibit 3.1) (incorporated by reference to
Exhibit 4.2 to the Registration Statement on Form S-1
(Registration No. 33-80707)).
10.1 Employee Stock Ownership Plan and Trust (incorporated by
reference to Exhibit 10.1 to the Registration Statement on
Form S-1 (Registration No. 33-80707)).
10.2 1995 Stock Incentive Plan (incorporated by reference to
Exhibit 10.2 to the Registration Statement on Form S-1
(Registration No. 33-80707)).
10.3 Form of Employment Agreements between the Company and each of
Messrs. T. Scott Cobb and Ben C. Bryant, Jr. (incorporated by
reference to Exhibit 10.3 to the Registration Statement on
Form S-1 (Registration No. 33-80707)).
10.4 Professional Services Agreement, dated as of December 1,
1990, by and between the Company and the Metropolitan
Government of Nashville and Davidson County, acting by and
through the Electric Power Board of said Government
(including Amendment) (incorporated by reference to
Exhibit 10.4 to the Registration Statement on Form S-1
(Registration No. 33-80707)).
11 Statement re computation of per share earnings.
23 Consent of Ernst & Young LLP.
27 Financial Data Schedule (for SEC use only)
</TABLE>
37
<PAGE> 1
EXHIBIT 11
STATEMENT RE: COMPUTATION OF PER-SHARE EARNINGS
<TABLE>
<CAPTION>
YEAR ENDED APRIL 30
------------------------------------------------------------
1994 1995 1996
------------- -------------- --------------
<S> <C> <C> <C>
Primary
Average shares outstanding 5,387,129 5,387,129 5,723,955
Net effect of dilutive stock grants based
on the treasury stock method 46,714 46,714 36,852
---------- ---------- ----------
Net
Total 5,433,843 5,433,843 5,760,807
========== ========== ==========
Income before cumulative effect of change in method $ 134,698 $ 824,213 $1,502,091
Cumulative effect of change in method (35,874) - -
---------- ---------- ----------
Net income $ 98,824 $ 824,213 $1,502,091
========== ========== ==========
Earnings per share:
Income before cumulative effect of change $ 0.03 $ 0.15 $ 0.26
in method per share
Cumulative effect of change in method
per share ($0.01) - -
---------- ---------- ---------
Net income per share $ 0.02 $ 0.15 $ 0.26
========== ========== =========
Fully Diluted
Average shares outstanding 5,387,129 5,387,129 5,723,955
Net effect of dilutive stock grants based 46,714 46,714 36,852
on the treasury stock method ---------- ---------- ----------
Total 5,433,843 5,433,843 5,760,807
========== ========== ==========
Income before cumulative effect of change $ 134,698 $ 824,213 $1,502,091
in method
Cumulative effect of change in method (35,874) - -
Net income $ 98,824 $ 824,213 $1,502,091
========== ========== ==========
Earnings per share:
Income before cumulative effect of change $ 0.03 $ 0.15 $ 0.26
in method per share
Cumulative effect of change in method
per share ($0.01) - -
---------- ---------- ----------
Net income per share $ 0.02 $ 0.15 $ 0.26
========== ========== ==========
</TABLE>
<PAGE> 1
EXHIBIT 23
SCB COMPUTER TECHNOLOGY, INC.
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement
(Form S-8 No. 333-1590) pertaining to the SCB Computer Technology, Inc. 1995
Stock Incentive Plan of our report dated June 20, 1996 (except for the second
paragraph of Note 11, as to which the date is July 3, 1996), with respect to
the consolidated financial statements of SCB Computer Technology, Inc. included
in the Annual Report Form 10-K for the year ended April 30, 1996.
/s/ Ernst & Young LLP
Memphis, Tennessee
July 25, 1996
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> APR-30-1996
<PERIOD-START> MAY-01-1995
<PERIOD-END> APR-30-1996
<EXCHANGE-RATE> 1
<CASH> 19,258,713
<SECURITIES> 0
<RECEIVABLES> 6,201,969
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 25,695,462
<PP&E> 2,428,046
<DEPRECIATION> 333,464
<TOTAL-ASSETS> 27,798,535
<CURRENT-LIABILITIES> 2,107,054
<BONDS> 0
0
0
<COMMON> 70,155
<OTHER-SE> 25,598,526
<TOTAL-LIABILITY-AND-EQUITY> 27,798,535
<SALES> 48,710,092
<TOTAL-REVENUES> 48,710,092
<CGS> 34,798,688
<TOTAL-COSTS> 34,798,688
<OTHER-EXPENSES> 95,958
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 68,285
<INCOME-PRETAX> 2,667,239
<INCOME-TAX> 1,165,148
<INCOME-CONTINUING> 1,502,091
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,502,091
<EPS-PRIMARY> .26
<EPS-DILUTED> .26
</TABLE>
