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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the fiscal year ended April 30, 1998 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. [ ]
The aggregate market value of the voting stock held by non-affiliates
of the Registrant on July 22, 1998, was approximately $228,277,653. The market
value calculation was determined using the closing sale price of the
Registrant's common stock on July 22, 1998 ($10.125 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, 1998 were 22,545,941.
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 currently scheduled to be held on
September 15, 1998, are incorporated by reference
into Items 10, 11, and 12.
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SCB COMPUTER TECHNOLOGY, INC.
PART I
ITEM 1. BUSINESS
GENERAL
SCB Computer Technology, Inc. ("SCB" or the "Company") is a leading
provider of information technology (IT) management and technical services,
through six regional operations, four subsidiaries, and its corporate service
groups, to Fortune 500 companies, state and local governments and other large
organizations. The Company's services primarily consist of: (1) CONSULTING,
including evaluation, design, and re-engineering of computer systems,
management, quality assurance and technical directions for IT projects, network
planning and implementation, Year 2000 ("Y2K") compliance, and functional
expertise and training; (2) OUTSOURCING, including system development and
integration, maintenance, data center management, help desk and technical
services, remote processing, and computer hardware sales and leasing; (3)
PROFESSIONAL STAFFING, including providing skilled IT staff on an as-needed
basis; and (4) ENTERPRISE RESOURCE PLANNING (ERP), including planning and
evaluating, system analysis and administration, implementation and functional
support.
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.com.
ACQUISITIONS
The Company's revenues have increased significantly over the last five
fiscal years, from $28.6 million in fiscal 1994 to $109.5 million in fiscal
1998. Prior to the Company's initial public offering (the "IPO") in February
1996, a substantial majority of the Company's growth was attributable to
obtaining new IT clients and providing additional IT services to existing
clients. Since the IPO, in addition to continuing to expand its services, expand
existing client relationships, and add new clients, the Company has added
revenues through the combination with or acquisition of other businesses. Since
the IPO, the Company has engaged in the following significant business
combinations and acquisitions:
Delta Software. On September 26, 1996, the Company effected a
business combination with Delta Software Systems, Inc. ("Delta"), an
information technology and consulting company and custom software
programmer, pursuant to a merger of Delta with and into a wholly-owned
subsidiary of the Company. The transaction was accounted for as a
pooling of interests. As a result of the merger, all of the outstanding
capital stock of Delta was converted into an aggregate of 1,384,608
shares (adjusted to give effect to stock splits) of the Company's
common stock, par value $.01 per share (the "Common Stock").
Technology Management Resources. On February 28, 1997, the
Company acquired substantially all of the assets of Technology
Management Resources, Inc. ("TMRI"), an information technology
consulting company, in a transaction accounted for using the purchase
method of accounting. The negotiated purchase price for the assets
included the assumption of certain liabilities (primarily accounts
payable), $8,500,000 in cash, and up to $4,000,000 (payable in shares
of Common Stock) contingent on growth in the acquired business's
revenues and earnings in fiscal years ending April 30, 1998, 1999, and
2000. In December 1997, the Company paid TMRI's successor in interest
$1,200,000 in cash in full and final settlement of any additional
purchase price payments.
The Partners Group. Effective June 30, 1997, the Company
acquired all of the outstanding capital stock of Partners Resources,
Inc. ("PRI"), an information technology outsourcing company, and
Partners Capital Group ("PCG" and, collectively with PRI, "The Partners
Group"), a computer leasing company, in a
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transaction accounted for under the purchase method. The aggregate
purchase price for the capital stock of the affiliated entities was
$16,000,000 in cash. In addition, in May 1998 the former shareholders
of PRI received earnout consideration based on the net income of PRI
for the fiscal year ending December 31, 1997 in the form of 1,580,580
shares of the Common Stock and approximately $7.1 million in cash, net
of approximately $962,000 of the original escrow retained due to PCG's
failure to meet certain earnings goals as set forth in the acquisition
agreement.
Proven Technology. On May 1, 1998, the Company effected a
business combination with Proven Technology, Inc. ("Proven"), a system
integration services company, pursuant to a merger of Proven with and
into a wholly-owned subsidiary of the Company. The transaction was
accounted for as a pooling of interests. As a result of the merger, all
of the issued and outstanding capital stock of Proven was converted
into an aggregate of 543,722 shares of Common Stock, of which 54,372
are being held in escrow to secure potential indemnification claims.
SCB SERVICES
Consulting -- General
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. General IT 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;
- developing an Information Strategy Plan ("ISP") that
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 -- Year 2000
The Company's Y2K compliance consulting services combine comprehensive
inventory, assessment, planning, remediation, testing, and follow-up to assist
clients in managing the Year 2000 impact on their application software, system
software, and mainframe and desktop hardware, a substantial portion of which
services involve the use of Pro 2000(sm), the Company's proprietary suite of
services, and ProVision 2000(sm), the Company's proprietary software aiding in
"language specific" analysis of lines of code. The Company also uses third party
suppliers of software tools for
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conversions, particularly in the mainframe applications. The Company's fees for
these types of services range from hourly billings to payments per lines of
computer code reviewed.
In fiscal 1998, the Company derived less than 10% of its revenue from
Y2K consulting services. Although the Company is currently providing services on
a number of Year 2000 projects and continues to devote resources to the
provision of these services, the Company expects demand for such services to
decrease rapidly as the Y2K approaches and the implementation and testing of
many Year 2000 conversion projects are completed. Accordingly, the Company is
seeking to leverage its business relationships and knowledge of clients' IT
systems obtained in Y2K engagements into additional projects involving other
services not previously provided such clients by the Company, although there can
be no assurance of the Company's ability to successfully do so.
Consulting -- Telecommunications
Primarily through the Company's ProNetwork(SM), a systems monitoring
and management tool for voice and data communications networks, SCB provides a
comprehensive set of telecommunications and networking solutions for clients,
based on SCB's experience and expertise in the following areas:
- project management of large network-related projects;
- development and implementation of Disaster Recovery Solutions;
- network services (LAN/WAN, Design, Engineering);
- implementation of Project Pilots and Tests Beds for integrated
testing;
- training;
- help desk centers; and
- remote network monitoring and management.
Outsourcing
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. 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, both at the client's business site and at SCB sites, including
Emerging Technology Centers. Prior to The Partners Group acquisition in June
1997, SCB had not assumed asset ownership in connection with its outsourcing
services. Since such acquisition, outsourcing services have involved substantial
up-front expenditures to purchase IT systems equipment, hire personnel, and
operate systems on behalf of certain outsourcing clients.
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, when the Company has a well-defined understanding of the
services to be delivered or extensive knowledge of the client's business.
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Professional Staffing
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.
Enterprise Resource Planning
Enterprise Resource Planning ("ERP") is the process of integrating a
company's software packages into a comprehensive package or system designed to
eliminate inefficiencies caused by incompatible packages and systems. The
Company has recently initiated the provision of ERP services, which include
planning and evaluation, systems analysis and administration, recommendation of
software packages, and implementation and functional support in migrating to a
new system. This new line of services should allow the Company to capitalize on
developing complete enterprise system work with existing clients as well as
leading to additional revenue from new clients.
CLIENTS AND MARKETS
The Company currently performs services for approximately 200 clients.
SCB's clients represent a diverse group of governmental and quasi-governmental
(including public utilities) 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. The Company also performs
services for a number of Fortune 500 companies. Because of its diverse client
base, the Company believes that it is not dependent on any single client,
industry, or market.
For the fiscal year ended April 30, 1998, the Company's top five
clients (in terms of revenue to the Company) accounted for approximately 37% of
the Company's revenue, and no client accounted for more than 10% of the
Company's revenue.
Generally, SCB's contracts with its top ten clients are, in accordance
with industry practice, cancelable on short notice and without penalty (except
with respect to the Company's larger outsourcing contracts), 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 its services through senior management and a sales
staff of 30 persons. The Company currently has personnel located at sales
offices in 20 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
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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.
EMPLOYEES AND RECRUITING
The Company currently employs approximately 1,100 persons, consisting
of approximately 950 technicians, 30 salespersons, 50 recruiters, 6 executives,
and 64 other administrative personnel. The Company believes there is a
continuing shortage in the industry for computer professionals, especially
programmers and systems designers, and the Company competes for these persons
with in-house MIS departments and other computer services firms. In order to
attract and retain these highly sought employees, the Company has recently
expanded its equity-based awards programs, primarily in the form of options to
purchase Common Stock, that are offered to such employees. The Company has also
increased matching contributions to 401(k) participants' accounts.
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 (www.scb.com) 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 (including
Y2K and telecommunications) - IBM; SHL Systemhouse Inc., Andersen Consulting,
Computer Horizons Corporation, and EDS; (ii) outsourcing services - IBM, EDS,
Perot Systems Corporation, Computer Sciences Corporation, Computer Management
Sciences, Inc., and Andersen Consulting; (iii) professional staffing services -
Computer Task Group, Inc., Computer Horizons Corporation, Keane, Inc., and Metro
Information Services, Inc.; and (iv) ERP Services - Andersen Consulting, SAP
Corp., PricewaterhouseCoopers LLP, Deloitte & Touche LLP, Ernst & Young LLP,
and KPMG Peat Marwick LLP.
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.
POTENTIAL LIABILITY TO CLIENTS
Many of the Company's engagements, particularly with regard to Y2K
services, involve projects that are critical to the operations of its clients'
businesses and provide benefits that may be difficult to quantify. Any failure
in a client's system could result in a claim for substantial damages against the
Company, regardless of the Company's responsibility for such failure. The
Company attempts to limit contractually its liability for damages arising from
negligent acts, errors, mistakes, and omissions in rendering its IT services.
The Company also maintains general liability insurance coverage, including
coverage for errors or omissions, which covers Y2K compliance. Although the
Company believes
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that the insurance coverage is adequate in scope and amount, there can be no
assurance that such coverage will continue to be available on acceptable terms
or sufficient to cover one or more large claims. Furthermore, any litigation,
regardless of its outcome, could result in substantial costs to the Company,
diversion of management's attention from operations, and negative publicity, any
of which could adversely affect the Company's results of operations and
financial condition.
EXECUTIVE OFFICERS
The following is a list of the executive officers of the Company,
including all positions and offices held with the Company, as of April 30, 1998:
<TABLE>
<CAPTION>
NAME AGE POSITION AND TERM
- ----------------------------- --------- -----------------------------------------------------------
<S> <C> <C>
T. Scott Cobb 61 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. 51 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 51 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 19 years,
including as Chief Operating Officer from 1990 to 1996.
Gordon L. Bateman 49 Mr. Bateman joined the Company as a controller in 1984
and has served as Secretary since June 1996, and as
Executive Vice President of Finance and Administration
from December 1995 until May 1997, as Chief Financial
Officer from 1988 through April 1997, and as Chief
Administrative Officer since May 1997. Mr. Bateman was
also a Senior Vice President of the Company from 1987 to
December 1995.
Jeffrey S. Cobb 36 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.
</TABLE>
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<TABLE>
<CAPTION>
NAME AGE POSITION AND TERM
- ----------------------------- --------- -------------------------------------------------------------
<S> <C> <C>
Gary E. McCarter 49 Mr. McCarter has served as Chief Financial Officer since
May 1997. Mr. McCarter served as Senior Vice President,
Finance and Administration from November 1996 until April 1997.
Mr. McCarter served as a consultant employed by the Company
from October 1995 until November 1996. Prior to October 1995,
Mr. McCarter served as a consultant to the Company as the owner
of McCarter & Associates, a business consulting company, which
he operated from 1986 to 1992 and from 1993 to 1995. From 1992
to 1993, Mr. McCarter served as Vice President of Finance at
V.N.A. of Memphis, Inc., a home health care company.
</TABLE>
ITEM 2. PROPERTIES
The Company owns its corporate headquarters buildings (aggregating
approximately 13,200 square feet) and leases a building for its Emerging
Technology Center and Memphis Regional Office (approximately 14,000 square feet)
in Memphis, Tennessee under a long term lease expiring in May 2000 with a three
year renewal option. The Company has Emerging Technology Centers and Regional
Offices in Nashville, Tennessee (approximately 14,000 square feet) and Dallas,
Texas (approximately 6,000 square feet) and Regional Offices only in Atlanta,
Georgia (approximately 3,000 square feet), New York, New York (approximately
2,000 square feet), and Phoenix, Arizona (approximately 1,200 square feet). The
Company leases sales offices or has access to office facilities in Baltimore,
Maryland, Frankfort, Kentucky, Indianapolis, Indiana, Jackson, Mississippi,
Kansas City, Missouri, Little Rock, Arkansas, Long Island, New York, Montgomery,
Alabama, Phoenix, Arizona, Santa Fe, New Mexico, St. Louis, Missouri, and Omaha,
Nebraska.
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.
Subsequent subpoenas have been issued to the Company and certain of its officers
by the grand jury since May 1996 including several subpoenas issued as recently
as June 1998. The Company has not been formally identified as the subject or
target of the grand jury's investigation; however, in November 1997, T. Scott
Cobb, the Company's Chairman, Steve N. White, the Company's Executive Vice
President-Development, and their administrative assistant received letters
formally notifying them that they were targets of the investigation. The Company
believes that the grand jury's investigation relates to the Company's billing
practices under its consulting contract with the Tennessee Valley Authority
("TVA"), that was completed in February 1996, particularly the hourly billings
and expenses of Messrs. Cobb and White. Additionally, in July 1996, the
Securities and Exchange Commission (the "SEC") notified the Company that the SEC
is conducting an informal inquiry, which inquiry also appears to be focused on
the TVA billings and the impact thereof on the Company's financial statements.
The Company has not had any contact with the SEC in this regard since the
Company's response to the SEC's initial inquiry.
An internal investigation by the Special Committee of the Board of
Directors, which investigation was substantially completed in May 1996,
identified possible misbillings of expenses under the TVA contract, primarily
relating to mileage and per diem expenses submitted to TVA, and on May 31, 1996,
the Company remitted approximately $40,000 to the TVA relating to the possible
misbillings.
Due to the prospective and continuing 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 management, 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.
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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, 1998.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS
On February 14, 1996, the Company consummated the IPO of its Common
Stock at a price per share of $5.17. The Common Stock is traded on The Nasdaq
Stock Market's National Market (the "Nasdaq National Market") under the symbol
"SCBI." As of July 22, 1998, there were 126 shareholders of record and, based on
securities positions listings, approximately 2,500 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 for each quarter in the prior two fiscal years:
<TABLE>
<CAPTION>
1997 High Low
- ---------------------------- ------------ -----------
<S> <C> <C>
First Fiscal Quarter $ 9.88 $4.81
Second Fiscal Quarter $ 7.17 $5.58
Third Fiscal Quarter $ 6.75 $5.67
Fourth Fiscal Quarter $ 6.33 $5.33
1998
- ----------------------------
First Fiscal Quarter $ 8.88 $5.75
Second Fiscal Quarter $10.88 $7.92
Third Fiscal Quarter $10.00 $7.00
Fourth Fiscal Quarter $13.50 $8.25
</TABLE>
No cash dividends were declared or paid on the Common Stock during the
fiscal years ended April 30, 1997 or 1998. 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 on the
payment of dividends under state law and the Company's credit arrangements. 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 terms of a Loan Agreement relating to a credit facility (the
"Credit Facility"), by and between NationsBank of Tennessee, N.A.
("NationsBank"), the Company, and certain of its subsidiaries, limit the
Company's ability to pay cash dividends to 25% of the Company's net income per
fiscal year.
On July 23, 1997, the Board of Directors of the Company declared a
three-for-two stock split in the form of a 50% stock dividend, payable on
September 3, 1997 to shareholders of record on August 20, 1997. In addition, on
April 3, 1998, the Board of Directors of the Company declared a two-for-one
stock split in the form of a 100% stock dividend payable on April 27, 1998 to
shareholders of record on April 13, 1998. The information included herein has
been adjusted to reflect such stock splits.
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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,
----------------------------------------------------------
1998 1997 1996 1995 1994
-------- ------- --------- -------- --------
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Revenue ......................................... $109,472 $64,064 $ 56,024 $ 39,170 $ 28,565
Cost of services ................................ 75,634 46,586 39,508 27,027 20,543
-------- ------- -------- -------- --------
Gross profit .................................... 33,838 17,478 16,516 12,143 8,022
Selling, general and administrative expenses .... 18,975 10,117 13,345 9,642 7,969
-------- ------- -------- -------- --------
Income from operations .......................... 14,863 7,360 3,170 2,501 53
Other income (expense), net ..................... (2,362) 755 (27) (146) 84
-------- ------- -------- -------- --------
Income before income taxes and cumulative effect
of change in accounting principle ...... 12,501 8,116 3,143 2,355 137
Provision for income taxes ...................... 4,909 3,053 1,187 718 116
-------- ------- -------- -------- --------
Cumulative effect of change in method of
accounting for income taxes ............ -- -- -- -- (36)
-------- ------- -------- -------- --------
Net income (loss) ............................... $ 7,592 $ 5,063 $ 1,957 $ 1,637 $ (15)
======== ======= ======== ======== ========
Net income (loss) per share - basic* ............ $ .34 $ .23 $ .11 $ .09 --
======== ======= ======== ======== ========
Net income (loss) per share - diluted* .......... $ .33 $ .23 $ .11 $ .09 --
======== ======= ======== ======== ========
Pro forma adjustment for income taxes ........... 177 162 309 --
------- -------- -------- --------
Pro forma net income ............................ $ 4,886 $ 1,795 $ 1,328 $ (15)
======= ======== ======== ========
Pro forma net income per share - basic .......... $ .22 $ .10 $ .08 --
======= ======== ======== ========
Pro forma net income per share - diluted ........ $ .22 $ .10 $ .08 --
======= ======== ======== ========
Cash dividends declared per share ............... -- -- $ .0016 $ .0011
======= ======== ======== ========
Weighted average number of common shares - basic 22,464 22,432 18,556 17,546 17,546
======== ======= ======== ======== ========
Weighted average number of common shares assuming
conversion - diluted ................... 22,756 22,495 18,623 17,631 17,631
======== ======= ======== ======== ========
<CAPTION>
AS OF APRIL 30,
----------------------------------------------------------
1998 1997 1996 1995 1994
-------- ------- -------- ------- --------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital ................................. $ 17,007 $20,351 $ 24,643 $ 1,347 $ 1,189
Total assets .................................... 98,546 35,094 29,272 7,089 4,965
Long-term debt, less current portion ............ 24,100 -- -- 171 310
Total shareholders' equity ...................... 39,881 31,633 26,796 2,862 1,783
</TABLE>
- ---------------------------
* After retroactive adjustment for all stock dividends and stock splits
declared through April 30, 1998. The earnings per share amounts prior
to 1998 have been restated as required to comply with Statement of
Financial Accounting Standards (SFAS) No. 128, "Earnings Per Share."
10
<PAGE> 11
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. To date, the
Company has derived less than 5% of its revenue from providing ERP services and
less than 10% of its revenue from leasing activity. The increase in revenue from
$28.6 million in fiscal 1994 to $109.5 million in fiscal 1998 is a function of
three principal factors: (i) an increase in the volume of services provided (as
measured by aggregate hours billed), (ii) a shift in the mix of services
provided from lower rate professional staffing services to higher rate
consulting and outsourcing services, and (iii) additional revenues attributable
to acquired operations. In general, the Company recognizes revenue 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 200 clients, consisting of state and local
governments, public utilities, Fortune 500 companies, and other large
organizations. For the fiscal years ended April 30, 1998, 1997, and 1996,
approximately 39%, 48%, and 55%, respectively, of the Company's revenue was
attributable to governmental and quasi-governmental entities (such as public
utilities), with the balance attributable to commercial enterprises.
For the fiscal years ended April 30, 1998, 1997, and 1996, the
Company's top five clients (in terms of revenue to the Company) accounted for
approximately 37%, 49%, and 57% of the Company's revenue, 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 an 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. 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, as evidenced by the Company's recent commitment to
expanding its ERP and telecommunications consulting service offerings.
The Company's growth in fiscal 1998 and 1997 has been significantly
affected by acquisition activity. In September 1996, the Company effected a
business combination with Delta, an information technology consulting company
and custom software programmer. In February 1997, the Company acquired
substantially all of the assets of TMRI, an information technology consulting
company. In June 1997, the Company acquired all of the outstanding stock of The
Partners Group, information technology outsourcing and computer leasing
companies. See "Item 1. Business -- Acquisitions." The Delta merger was
accounted for as a pooling of interests and the Company's historical financial
statements and management's discussion thereof have been restated to include the
financial position and results of operations for Delta for periods prior to the
merger. The TMRI transaction was accounted for as a purchase, and goodwill of
approximately $9.4 million is being amortized ratably over a thirty year period.
The Partners Group transaction was also accounted for as a purchase and goodwill
of approximately $37 million, including the earnout payment made after the end
of fiscal 1998, is being amortized ratably over a thirty year period.
Prior to the Delta merger, Delta had elected "S" Corporation status for
federal income tax purposes. As a result of the merger, Delta's S Corporation
status was terminated. Accordingly, certain pro forma information is presented
11
<PAGE> 12
in the Company's Consolidated Statements of Income as if Delta had been a "C"
Corporation for tax purposes during the periods presented.
RESULTS OF OPERATIONS
Comparison of Fiscal 1998 to Fiscal 1997
Revenue increased from $64.1 million in fiscal 1997 to $109.5 million
in fiscal 1998, an increase of 70.9%. This increase was primarily attributable
to the expansion of the Company's client base, an increase in consulting and
professional staffing services provided to existing clients, and an increase of
$26.7 million in sales resulting from the acquisition of The Partners Group.
Gross profit increased from $17.5 million in fiscal 1997 to $33.8
million in fiscal 1998, an increase of 93.6%. This increase was attributable
primarily to an increase in revenue. Gross profit margin increased from 27.3% to
30.9% 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. The increase in the gross
profit margin was primary attributable to a continued shift to higher margin
consulting and outsourcing work.
Selling, general and administrative expenses increased from $10.1
million in fiscal 1997 to $19.0 million in fiscal 1998, primarily due to The
Partners Group acquisition and increased staffing relating to the Regional
Offices. As a percentage of total revenues, selling, general, and administrative
expenses increased from 15.8% in 1997 to 17.3% in 1998.
Interest income decreased from $938,000 in fiscal 1997 to $347,000 in
fiscal 1998, primarily as a result of the decrease in cash used to acquire The
Partners Group. Interest expense increased to $2.0 million in 1998 primarily as
a result of an increase in borrowings used to finance the acquisition of The
Partners Group.
Comparison of Fiscal 1997 to Fiscal 1996
Revenue increased from $56.0 million in fiscal 1996 to $64.1 million in
fiscal 1997, an increase of 14%. This increase was primary attributable to the
expansion of the Company's client base, an increase in consulting and
professional staffing services provided to existing clients, and an increase in
equipment and software sales resulting from the Delta acquisition.
Gross profit increased from $16.5 million to $17.5 million, an increase
of 6%. This increase was attributable primary to an increase in revenue. Gross
profit margin decreased from 29.5% to 27.3% during the period.
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 IPO in February 1996,
Messrs. Cobb and Bryant entered into employment agreements which reduced their
salaries to $600,000 per year. The employment agreements were amended effective
as of July 1, 1996 to reduce each executive's salary to $300,000 per year. 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 $3.8 million in 1996 (which included bonuses of
$1.4 million) to $700,000 in 1997.
Selling, general and administrative expenses decreased from $13.3
million in 1996 to $10.1 million in 1997. Selling, general and administrative
expenses for 1996 included a $1.2 million stock bonus granted to certain
management personnel. The decrease in 1997 relating to the 1996 stock bonus was
offset by the expansion of the Company's sales and recruiting efforts and the
continuing development of training programs for these departments. As a
percentage of total revenue, selling, general, and administrative expenses
decreased from 23.8% in 1996 to 15.8% in 1997.
12
<PAGE> 13
Interest income increased from $199,000 in fiscal 1996 to $938,000 in
fiscal 1997, primarily as a result of the investment of the IPO proceeds.
Comparison of Fiscal 1996 to Fiscal 1995
Revenue increased from $39.2 million in fiscal 1995 to $56.0 million in
fiscal 1996, an increase of 43.0%. This increase was primarily attributable to
increased services provided under two outsourcing services contracts, and
significant increases in professional staffing services provided to four of
SCB's existing clients.
Gross profit increased from $12.1 million to $16.5 million, an increase
of 36.0%. This increase was attributable primarily to an increase in revenue.
Gross profit margin decreased from 31.0% to 29.5% during the period.
Selling, general and administrative expenses increased from $9.6
million in 1995 to $13.3 million in 1996, an increase of 38.4%. This increase
was primarily 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, selling, general, and
administrative expenses decreased from 24.6% in 1995 to 23.8% in 1996.
LIQUIDITY AND CAPITAL RESOURCES
Operating cash flow has historically been the Company's primary source
of liquidity. The Company's net cash provided by operating activities was
approximately $2.9 million, $1.9 million, and $0.7 million for fiscal 1998,
1997, and 1996, respectively. The increase in cash flow in 1998 was primarily
attributable to increased profits.
The Company completed its IPO 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 primarily to repay $1.5 million in bank debt, to fund the acquisitions of
TMRI and, in part, The Partners Group, and for working capital purposes. Pending
such uses, the proceeds were invested in highly liquid investments, including
securities purchased under agreements to resell.
As a result of the Company's recent acquisitions, borrowings have
become a more significant source of liquidity. The Company's current revolving
Credit Facility provides for borrowing of up to $30 million. The Credit Facility
bears interest at LIBOR plus a spread over LIBOR, which varies based on certain
financial ratios. The Company's significant subsidiaries are co-borrowers under
the Credit Facility. All borrowings under the Credit Facility mature on October
1, 2000. At April 30, 1998, borrowings under the Credit Facility bore interest
at an aggregate rate of 7.16%. At July 28, 1998, the Company had approximately
$5.0 million available for borrowing under the Credit Facility. The Company is
currently in discussions with its lender to expand the Credit Facility to allow
additional borrowings of up to $13.5 million, which borrowings would be secured
by equipment purchased in connection with outstanding contracts.
The Company's working capital decreased from $24.6 million at April 30,
1996 to $20.5 million at April 30, 1997, primarily as a result of the
acquisition of the assets of TMRI for $8.5 million in cash, which was funded
through cash on hand. The Company's working capital decreased from $20.5 million
at April 30, 1997 to $17.0 million at April 30, 1998, primarily as a result of
the acquisition of The Partners Group for $16 million in cash (including
approximately $10.0 million from borrowings under the Credit Facility). In May
1998, the Company paid approximately $7.1 million to the former shareholders of
PRI as additional consideration, which amount was funded from borrowings under
the Credit Facility.
The Company's historical capital expenditures have related primarily to
the acquisition of office buildings used as the Company's corporate
headquarters. With the acquisition of The Partners Group and the upfront
purchases of equipment relating to their outsourcing contracts, the Company
expects its capital expenditures to increase over prior periods. In fiscal 1998,
the Company had approximately $8,959,000 in capital expenditures, the
substantial majority of which were related to the purchase of equipment by The
Partners Group, with additional capital expenditures for
13
<PAGE> 14
completion of the Memphis Emerging Technology Center and leasehold improvements
related to an Emerging Technology Center in Nashville, Tennessee. The Company's
only current material capital commitment relates to the purchases of equipment
in connection with an outsourcing contract. The Company also intends to complete
Emerging Technology Centers in Dallas, Texas and Atlanta, Georgia, the costs of
which are expected to be funded by cash from operations.
As a result of the acquisition of PCG, the Company now has leasing
operations. The significant balance sheet captions related to the PCG leasing of
data processing equipment are:
Direct Financing Leases. Leases meeting the criteria for capitalization
in accordance with Statement of Financial Accounting Standards Number
13 are classified as direct financing leases. For direct financing
leases, the sum of the minimum lease payments and the unguaranteed
residual value is recorded as the gross investment in the lease. The
difference between the gross investment and the cost of the leased
property is recorded as unearned income. Income is recognized over the
life of the lease using the interest method.
Operating Leases. Leases not meeting the criteria for capitalization
are classified as operating leases. For operating leases, lease
payments are recognized as rental revenue on a straight-line basis over
the life of the lease. Depreciation expense on equipment under
operating leases is recorded over the lease term. The amount subject to
depreciation is the total cost of the leased asset less the expected
gross residual value at the end of the lease.
Notes Payable Non-Recourse. To purchase assets leased under direct
financing and operating leases, the Company obtains non-recourse
financing, which is secured by the assigned lease payments and the
underlying leased property. The lender receives payments directly from
the lessee.
The Company believes that cash flows from operations and borrowings
under the Credit Facility will be sufficient to fund the Company's operating
needs for at least the next twelve months. Other than the acquisitions described
herein, the Company has no present acquisition agreements or arrangements. The
Company may need to incur additional indebtedness or issue equity securities
(including Common Stock), however, to fund future acquisitions.
YEAR 2000
In fiscal 1998, the Company derived less than 10% of its revenue from
Y2K consulting services. Many of the Company's engagements, particularly with
regard to Y2K services, involve projects that are critical to the operations of
its clients' businesses and provide benefits that may be difficult to quantify.
Any failure in a client's system could result in a claim for substantial damages
against the Company, regardless of the Company's responsibility for such
failure. See "Item 1. Business -- Potential Liability to Clients." Furthermore,
any litigation, regardless of its outcome, could result in substantial costs to
the Company, diversion of management's attention from operations, and negative
publicity, any of which could adversely affect the Company's results of
operations and financial condition.
Because SCB's business includes the assessment of clients' Year 2000
problems and the recommendation and implementation of solutions to such
problems, SCB has long been aware of the potential adverse effects on a company
if its systems are not Year 2000 complaint. SCB has also made an assessment of
its computer systems and applications and believes such systems are Year 2000
complaint. Accordingly, SCB does not expect to incur significant costs in order
to remedy Year 2000 problems of its own systems, if any, and does not believe
that Year 2000 problems associated with its own systems will have a material
adverse effect on SCB's business, operations, or financial condition.
FORWARD LOOKING STATEMENTS
This Annual Report on Form 10-K may be deemed to contain certain
forward-looking statements regarding the anticipated financial and operating
results of the Company. The Company undertakes no obligation to publicly release
any revisions to any forward-looking statements contained herein to reflect
events or circumstances occurring
14
<PAGE> 15
after the date hereof or to reflect the occurrence of unanticipated events.
Information contained in these forward-looking statements is inherently
uncertain and actual performance and results may differ materially due to many
important factors, many of which are beyond the Company's control, including the
Company's dependence on key clients; the Company's dependence on the
availability, recruitment, and retention of qualified IT employees; the
Company's dependence on key management personnel; the Company's potential
liability to clients in connection with the provision of IT services,
particularly Year 2000 services; the Company's ability to finance, sustain, and
manage growth; the Company's ability to integrate acquired businesses; the
timing and ultimate outcome of the governmental investigations of the Company
and certain members of its management; competition; general economic conditions;
and the like.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
<TABLE>
<CAPTION>
PAGE OF
FORM 10-K
---------
<S> <C>
Report of Independent Auditors.................................................. 16
Consolidated Balance Sheets as of April 30, 1998 and 1997....................... 17
Consolidated Statements of Income for each of the three years in the period
ended April 30, 1998................................................... 18
Consolidated Statements of Shareholders' Equity for each of the three years in
the period ended April 30, 1998........................................ 19
Consolidated Statements of Cash Flows for each of the three years in the
period ended April 30, 1998............................................ 20
Notes to Consolidated Financial Statements...................................... 21
</TABLE>
15
<PAGE> 16
REPORT OF INDEPENDENT AUDITORS
Board of Directors
SCB Computer Technology, Inc.
We have audited the accompanying consolidated balance sheets of SCB Computer
Technology, Inc. and subsidiaries as of April 30, 1998 and 1997, and the related
consolidated statements of income, shareholders' equity, and cash flows for each
of the three years in the period ended April 30, 1998. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these 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 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 financial statements referred to above present fairly, in
all material respects, the consolidated financial position of SCB Computer
Technology, Inc. and subsidiaries at April 30, 1998 and 1997, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended April 30, 1998, in conformity with generally
accepted accounting principles.
/s/ Ernst & Young LLP
Memphis, Tennessee
June 16, 1998
16
<PAGE> 17
SCB COMPUTER TECHNOLOGY, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
APRIL 30,
--------------------------------
1998 1997
------------- ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents:
Cash ..................................................................... $ 2,983,372 $ 947,083
Securities purchased under agreement to resell ........................... -- 787,704
Marketable securities .................................................... -- 10,080,000
------------ ------------
Total cash and cash equivalents .......................................... 2,983,372 11,814,787
Accounts receivable:
Trade, net of allowance for doubtful accounts of $73,891 in 1998
and $19,861 in 1997 .................................................... 25,362,352 11,326,517
Related parties .......................................................... 99,553 12,018
Other .................................................................... -- 8,402
------------ ------------
25,461,905 11,346,937
Prepaid expenses ......................................................... 2,632,076 307,287
Inventory ................................................................ 439,182 28,182
Deferred federal and state income tax .................................... 335,663 231,663
------------ ------------
Total current assets ..................................................... 31,852,198 23,728,856
Equipment under operating leases, net of accumulated
depreciation of $450,396 .............................................. 5,266,429 --
Fixed assets:
Buildings ................................................................ 1,348,293 1,348,293
Furniture, fixtures, and equipment ....................................... 15,221,841 1,813,920
Accumulated depreciation ................................................. (3,629,636) (838,888)
------------ ------------
12,940,498 2,323,325
Land ..................................................................... 209,912 444,670
------------ ------------
13,150,410 2,767,995
Other assets:
Investment in direct financing leases .................................... 17,109,698 --
Goodwill, net of accumulated amortization of $824,844 .................... 26,115,672 8,150,782
Other .................................................................... 5,051,939 446,741
------------ ------------
48,277,309 8,597,523
------------ ------------
Total assets ............................................................. $ 98,546,346 $ 35,094,374
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable-trade ................................................... $ 3,614,622 $ 1,072,451
Accrued and withheld payroll taxes, insurance, and payroll deductions .... 662,622 299,859
Accrued vacation ......................................................... 924,296 660,763
Deferred revenue ......................................................... 1,036,902 --
Other accrued expenses ................................................... 1,730,862 1,007,102
Current portion of notes payable, long term debt and capital
lease obligation ....................................................... 5,495,245 --
Accrued federal and state income taxes ................................... 1,380,801 149,941
------------ ------------
Total current liabilities ................................................ 14,845,350 3,190,116
Notes payable - revolving term loan ...................................... 19,643,667 --
Notes payable - non-recourse ............................................. 18,072,026 --
Long-term debt ........................................................... 3,138,455 --
Capital lease obligation ................................................. 1,317,527 --
Deferred federal and state income taxes .................................. 1,648,220 270,761
------------ ------------
Total liabilities ........................................................ 58,665,245 3,460,877
SHAREHOLDERS' EQUITY:
Preferred stock, no par value-authorized 1,000,000 shares, none issued ... -- --
Common stock-50,000,000 shares of $.01 par value authorized and 22,529,965
shares issued and outstanding at April 30, 1998 and 7,478,044 shares
issued and outstanding at April 30, 1997 .............................. 225,300 74,780
Additional paid-in capital ............................................... 24,504,619 23,849,583
Retained earnings ........................................................ 15,151,182 7,709,134
------------ ------------
Total shareholders' equity ............................................... 39,881,101 31,633,497
------------ ------------
Total liabilities and shareholders' equity ............................... $ 98,546,346 $ 35,094,374
============ ============
See accompanying notes.
</TABLE>
17
<PAGE> 18
SCB COMPUTER TECHNOLOGY, INC.
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED APRIL 30,
--------------------------------------------
1998 1997 1996
------------- ------------ ------------
<S> <C> <C> <C>
Revenue ......................................... $ 109,471,727 $ 64,063,576 $ 56,023,871
Cost of services ................................ 75,634,218 46,585,959 39,508,422
------------- ------------ ------------
Gross profit .................................... 33,837,509 17,477,617 16,515,449
Selling, general and administrative expenses .... 18,975,986 10,117,297 13,345,063
------------- ------------ ------------
Income from operations ......................... 14,861,523 7,360,320 3,170,386
Other income (expenses):
Interest income .............................. 346,727 938,172 199,476
Interest expense ............................. (1,951,635) -- (69,304)
Other, net ................................... (755,989) (182,764) (157,100)
------------- ------------ ------------
Total other income (expenses) ................... (2,360,897) 755,408 (26,928)
------------- ------------ ------------
Income before income taxes ...................... 12,500,626 8,115,728 3,143,458
Income tax expense:
Current ...................................... 4,755,573 2,895,063 1,215,434
Deferred (benefit) ........................... 152,937 157,627 (28,895)
------------- ------------ ------------
Total income tax expense ........................ 4,908,510 3,052,690 1,186,539
------------- ------------ ------------
Net income ...................................... $ 7,592,116 $ 5,063,038 $ 1,956,919
============= ============ ============
Net income per share - basic* ................... $ .34 $ .23 $ .11
============= ============ ============
Net income per share - diluted* ................. $ .33 $ .23 $ .11
============= ============ ============
Net income ...................................... $ 5,063,038 $ 1,956,919
Pro forma adjustment for income taxes ........... 177,000 162,000
------------ ------------
Pro forma net income ............................ $ 4,886,038 $ 1,794,919
============ ============
Pro forma net income per share - basic* ......... $ .22 $ .10
============ ============
Pro forma net income per share - diluted * ...... $ .22 $ .10
============ ============
Weighted average number of common shares - basic 22,464,000 22,432,000 18,556,000
============= ============ ============
Weighted average number of common shares assuming
conversion - diluted ......................... 22,756,000 22,495,000 18,623,000
============= ============ ============
</TABLE>
- -----------
*The earnings per share amounts prior to 1998 have been restated as required to
comply with Statement of Financial Accounting Standards No. 128, "Earnings Per
Share," and for all years give retroactive recognition to all stock dividends
and stock splits.
See accompanying notes.
18
<PAGE> 19
SCB COMPUTER TECHNOLOGY, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
NUMBER Additional Total
OF Paid-In Shareholders'
SHARES Common Stock Capital Retained Earnings Equity
---------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at May 1, 1995 ........................ 5,848,665 $ 58,487 $ 1,712,131 $ 929,222 $ 2,699,840
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 .................................... -- -- -- 1,956,919 1,956,919
------------------------------------------------------------------------
Balance at April 30, 1996 ..................... 7,477,119 74,771 23,835,254 2,886,141 26,796,166
Pre-merger dividends to former DSS owners ..... -- -- -- (240,000) (240,000)
Other ......................................... -- -- -- (45) (45)
Issuance of Common Stock in connection with the
exercise of employee stock options ......... 925 9 14,329 -- 14,338
Net Income .................................... -- -- -- 5,063,038 5,063,038
------------------------------------------------------------------------
Balance at April 30, 1997 ..................... 7,478,044 74,780 23,849,583 7,709,134 31,633,497
Stock split (3 for 2) ......................... 3,742,002 37,420 -- (37,420) --
Stock split (2 for 1) ......................... 11,264,648 112,648 -- (112,648) --
Shares retired upon settlement of DSS escrow .. (7,754) (78) (95,800) -- (95,878)
Issuance of Common Stock in connection with the
exercise of employee stock options ......... 53,025 530 750,836 -- 751,366
Net income .................................... -- -- -- 7,592,116 7,592,116
------------------------------------------------------------------------
Balance at April 30, 1998 ..................... 22,529,965 $ 225,300 $ 24,504,619 $ 15,151,182 $ 39,881,101
========================================================================
</TABLE>
See accompanying notes.
19
<PAGE> 20
SCB COMPUTER TECHNOLOGY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOW
<TABLE>
<CAPTION>
YEAR ENDED APRIL 30,
---------------------------------------------
1998 1997 1996
---------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income .............................................. $ 7,592,116 $ 5,063,038 $ 1,956,919
Adjustments to reconcile net income to net cash provided
by operating activities:
Gain on lease disposals ................................. (628,514) (500) --
Provision for bad debts ................................. 30,000 4,680 --
Depreciation ............................................ 3,241,144 255,643 146,272
Amortization ............................................ 756,344 72,032 --
Deferred income taxes ................................... 152,937 157,627 (28,895)
Stock grant ............................................. -- -- 1,227,993
Issuance of common stock ................................ -- -- 95,000
(Increase) decrease in:
Accounts receivable:
Trade ................................................... (11,351,324) (3,100,208) (2,609,794)
Related parties ......................................... 338,008 6,958 14,048
Other ................................................... 8,402 (8,402) --
Prepaid expenses ........................................ (1,996,798) (279,496) 64,827
Inventory ............................................... 386,940 (28,182) --
Other assets ............................................ (4,927,494) (427,792) 4,546
Net investment in direct financing lease activity ....... 8,407,454 -- --
Deferred revenue ........................................ (356,589) -- --
Increase (decrease) in:
Accounts payable-trade .................................. (519,550) 253,216 (7,932)
Accrued federal and state income taxes .................. 1,230,860 26,734 103,421
Accrued vacation ........................................ 263,533 83,295 116,976
Other accrued expenses .................................. (114,673) (175,731) (399,932)
Accrued and withheld payroll taxes, insurance and accrued
payroll deductions ................................... 362,763 27,954 55,156
--------------------------------------------
Total adjustments ....................................... (4,716,557) (3,132,172) (1,218,314)
--------------------------------------------
Net cash provided by operating activities ............... 2,875,559 1,930,866 738,605
INVESTING ACTIVITIES
Purchases of fixed assets ............................... (8,959,456) (792,187) (687,727)
Proceeds from lease disposals ........................... 2,996,664 800 --
Purchase of The Partners Group .......................... (16,806,411) -- --
Purchase of Technology Management Resources, Inc. ....... (1,200,000) (8,500,000) --
Proceeds from land sale ................................. 273,284 -- --
--------------------------------------------
Net cash used by investing activities ................... (23,695,919) (9,291,387) (687,727)
FINANCING ACTIVITIES
Revolving term loan ..................................... 25,000,000 -- --
Payments on revolving term loan ......................... (5,356,333) -- --
Proceeds from initial public offering ................... -- -- 20,816,414
Net borrowings (repayments) under line of credit ........ -- -- (1,469,899)
Borrowings on long-term debt ............................ 3,079,729 -- --
Payments on long-term debt .............................. (1,419,802) -- (170,952)
Options exercised ....................................... 751,366 14,338 --
Repayment of capital lease obligations .................. (315,205) -- --
Proceeds from non-recourse debt ......................... 3,400,182 -- --
Payment on non-recourse debt ............................ (13,150,992) -- --
Payment of dividends .................................... -- (240,000) (29,067)
Other ................................................... -- (45) --
--------------------------------------------
Net cash provided (used) by financing activities ........ 11,988,945 (225,707) 19,146,496
--------------------------------------------
Net increase (decrease) in cash and cash equivalents .... (8,831,415) (7,586,228) 19,197,374
Cash and cash equivalents at beginning of period ........ 11,814,787 19,401,015 203,641
--------------------------------------------
Cash and cash equivalents at end of period .............. $ 2,983,372 $ 11,814,787 $ 19,401,015
============================================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Interest paid ........................................... $ 1,953,130 $ -- $ 69,305
Income taxes paid ....................................... 3,791,000 2,805,293 1,124,849
</TABLE>
See accompanying notes.
20
<PAGE> 21
SCB COMPUTER TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APRIL 30, 1998
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of SCB
Computer Technology, Inc. and its wholly owned subsidiaries. All significant
intercompany transactions have been eliminated in consolidation.
GENERAL
SCB Computer Technology, Inc. (the "Company" or "SCB") was incorporated on May
11, 1984 in the State of Tennessee. The Company is an information technology
company which primarily provides management and technical services primarily to
state and local governments, public utilities, Fortune 500 companies, and other
large organizations.
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:
<TABLE>
<S> <C>
Furniture, fixtures and equipment 5-10 years
Autos 3-6 years
Buildings 31-39 years
</TABLE>
GOODWILL
Goodwill represents the excess of the cost of businesses acquired using the
purchase method of accounting over the fair value of the net identifiable assets
at the date of acquisition and is being amortized using the straight line method
over 30 years.
The Company continually monitors events and changes in circumstances that could
indicate the carrying amount of goodwill may not be recoverable. When events or
changes in circumstances are present that indicate the carrying amount of
goodwill may not be recoverable, the Company assesses the recoverability of
goodwill by determining whether the carrying value of such intangible assets
will be recovered through undiscounted expected future cash flows after related
interest charges. Should the Company determine that the carrying values of
specific intangible assets are not recoverable, the Company would record a
charge to reduce the carrying value of such assets to their fair values.
REVENUE RECOGNITION
The Company recognizes revenues as professional services are performed. The
Company records deferred revenue for payments received from certain customers on
service contracts prior to the performance of services required under the
service contract.
21
<PAGE> 22
SCB COMPUTER TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APRIL 30, 1998
DIRECT FINANCING LEASES
Leases meeting the criteria for capitalization in accordance with SFAS No.13 are
classified as direct financing leases. For direct financing leases, the sum of
the minimum lease payments and the unguaranteed residual value is recorded as
the gross investment in the lease. The difference between the gross investment
and the cost of the leased property is recorded as unearned income. Income is
recognized over the life of the lease using the interest method.
OPERATING LEASES
Leases not meeting the criteria for capitalization are classified as operating
leases. For operating leases, lease payments are recognized as rental revenue on
a straight-line basis over the life of the lease. Depreciation expense on
equipment under operating leases is recorded over the lease term. The amount
subject to depreciation is the total cost of the leased asset less the expected
gross residual value at the end of the lease.
RESIDUAL INTEREST IN REMARKETED LEASE TRANSACTIONS
In certain instances, the Company will act as a lease intermediary, or will sell
the ownership rights of a lease. Typically, in connection with such
transactions, the Company retains a percentage interest in the residual value at
the end of the lease. These residual interests are recorded at the present value
of the Company's portion of the estimated gross residual value at the end of the
lease.
INDIRECT LEASING COSTS
Indirect costs incurred in connection with leasing transactions, such as
commissions and certain salaries, are capitalized and amortized over the lease
period.
DETERMINATION OF GROSS RESIDUAL INTERESTS
The unguaranteed gross residual interests of equipment on direct financing
leases, operating leases, and remarketed lease transactions are determined by
assessing the technical and economic life of the equipment in relation to the
length of the lease. The estimated gross residual interests are periodically
reassessed to account for potential fluctuations in residual values.
Reassessment procedures include independent appraisals, evaluation of new
technological developments, and comparison of remaining estimated residual
interests with residual values of leases which terminated during the current
period.
INCOME TAXES
The Company accounts for income taxes using the liability method. Under the
liability method, 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.
PRO FORMA PROVISION FOR INCOME TAXES
During fiscal year 1997, the Company acquired Delta Software Systems, Inc.
("DSS") in a merger transaction accounted for as a pooling-of-interests. Prior
to the merger, DSS had elected "S" Corporation status for income tax purposes.
As a result of the merger, DSS terminated its "S" Corporation election. Pro
forma provision for income taxes presents the combined pro forma tax expense of
DSS as if it had been a "C" Corporation during the periods presented prior to
acquisition date. There is no impact in the current year.
22
<PAGE> 23
SCB COMPUTER TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APRIL 30, 1998
STOCK BASED COMPENSATION
The Company grants stock options for a fixed number of shares to employees and
directors 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.
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 related to trade
receivables. 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.
RECLASSIFICATION
Certain account reclassifications have been made to the 1997 and 1996 financial
statements to conform with the 1998 presentation, none of which are material.
NET INCOME PER SHARE
In 1997, the Financial Accounting Standards Board (FASB) issued SFAS No. 128,
"Earnings Per Share," which replaced the calculation of primary and fully
diluted earnings per share with basic and diluted earnings per share. Unlike
primary earnings per share, basic earnings per share exclude any dilutive
effects of options, warrants and convertible securities. Diluted earnings per
share are very similar to previously reported fully diluted earnings per share.
All earnings per share amounts for all periods prior to 1998 have been presented
restated to conform to the SFAS No. 128 requirements. In addition, all share and
per share amounts have been retroactively restated for stock dividends and
splits declared on April 2, 1998 and July 24, 1997.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying value of cash and cash equivalents, accounts receivable, accounts
payable, accrued expenses and debt approximates fair values of these instruments
at April 30, 1998 and 1997.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the FASB issued SFAS No. 131, "Disclosures About Segments of an
Enterprise and Related Information," which established standards for the way
that public business enterprises report information about operating segments in
annual financial statements and requires that those enterprises report selected
information about operating segments in interim financial reports. It also
establishes standards for related disclosures about products and services,
geographic area and major customers. SFAS No. 131 is effective for financial
statements for fiscal years beginning after December 15, 1997, and therefore the
Company will adopt the new requirements retroactively in fiscal 1999. Management
has not completed its review of the statement, but does not anticipate that its
adoption will have a significant effect on the Company's annual and interim
reporting.
23
<PAGE> 24
SCB COMPUTER TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APRIL 30, 1998
2. BUSINESS COMBINATIONS
Effective June 30, 1997, the Company acquired all the outstanding capital stock
of Partners Resources, Inc. ("PRI"); an information technology outsourcing
company and Partners Capital Group ("PCG"); a computer leasing company, which
were accounted for using the purchase method of accounting. The cash
consideration paid for these entities was $16,000,000 of which $1,600,000 was
held in escrow for certain contingencies in accordance with the acquisition
agreement. The operating results of PRI and PCG are included in the Company's
consolidated statements of operations since July 1, 1997. The pro forma impact
of the acquisition of PRI and PCG as if the transaction had occurred on May 1,
1996 is as follows (in thousands, except per share data):
<TABLE>
<CAPTION>
YEAR ENDED
PRO FORMA APRIL 30, 1997
-------------------------------------------------------------- -----------------
<S> <C>
Revenue $94,359
Net income, including pro forma adjustment for income taxes $ 3,293
Net income per share, including pro forma adjustment for
income taxes - basic and diluted* $ .15
</TABLE>
---------------
*The net income per share above has been restated as required to comply
with Statement of Financial Accounting Standards No. 128, "Earnings Per
Share," and to give retroactive recognition to all stock dividends and
stock splits.
During May 1998, the Company paid $7,127,437 and issued 1,580,582 additional
shares of its common stock to the former shareholders of PRI as additional
purchase price of $21,382,312. This was equal to 14 times PRI's net income for
the calendar year ended December 31, 1997 calculated in accordance with the
contingent purchase price provisions of the acquisition agreement. The Company
received $962,154 of the original $1,600,000 escrow as PCG failed to meet its
earnings benchmark as defined in the acquisition agreement. These transactions
will result in additional goodwill that will be amortized over the remaining
useful life.
In February 1997, the Company acquired substantially all of the assets of
Technology Management Resources, Inc. ("TMRI"), a company in substantially the
same business as the Company, which was accounted for using the purchase method
of accounting. The consideration initially paid by the Company related to this
acquisition was $8,500,000 of which $500,000 was held in escrow for certain
contingencies in accordance with the acquisition agreement. The initial purchase
price of $8,500,000 has been allocated to the assets acquired and liabilities
assumed based on their estimated fair value as of the date of acquisition. SCB
initially agreed to issue the former TMRI shareholders up to $4,000,000 in SCB
Common Stock as additional purchase price contingent upon growth in the acquired
business's revenues and earnings for the fiscal years ending April 30, 1998,
1999, and 2000. Effective December 30, 1997, SCB agreed to pay the former TMRI
shareholders $1,200,000 in cash in full and final settlement of any additional
purchase price payments which has been accounted for as additional goodwill.
Also effective as of December 30, 1997, SCB released the $500,000 escrow amount
that was being held to satisfy potential indemnification obligations and
terminated the
24
<PAGE> 25
SCB COMPUTER TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APRIL 30, 1998
employment of one of the former shareholders. The operating results of TMRI are
included in the Company's consolidated statements of operations since March 1,
1997. The pro forma impact of the TMRI acquisition as if the transaction had
occurred on May 1, 1996 is as follows (in thousands, except per share data):
<TABLE>
<CAPTION>
YEAR ENDED
PRO FORMA APRIL 30, 1997
----------------------------------------------------------- --------------
<S> <C>
Revenue $67,694
Net income, including pro forma
adjustment for income taxes $ 5,578
Net income per share, including pro forma adjustment for
income taxes - basic and diluted* $ .25
</TABLE>
--------------
*The net income per share above has been restated as required to comply
with Statement of Financial Accounting Standards No. 128, "Earnings Per
Share," and to give retroactive recognition to all stock dividends and
stock splits.
In September 1996, the Company acquired DSS, a company in substantially the same
business as the Company. The acquisition was accounted for using the
pooling-of-interests method of accounting. The Company exchanged 1,384,608
shares of its common stock for all the outstanding stock of DSS. In November
1997, 7,754 common shares were returned to the Company and retired in settlement
of indemnification claims under the original merger agreement. In accordance
with the pooling-of-interests method of accounting, no adjustment has been made
to the historical carrying amount of assets and liabilities of DSS. The
accompanying consolidated financial statements have been restated to include the
financial position and operating results of DSS for all periods prior to the
merger.
3. ACCOUNTS RECEIVABLE-TRADE
Accounts receivable-trade includes unbilled receivables of $9,916,821 and
$499,636 under contracts to purchase services as of April 30, 1998 and 1997,
respectively. Such amounts are billable upon completion of performance
milestones. Substantially all of the unbilled amounts are expected to be
collected within one year.
4. NET INVESTMENT IN DIRECT FINANCING LEASES
The components of the net investment in direct financing leases are as follows:
<TABLE>
<CAPTION>
APRIL 30,
1998
-----------
<S> <C>
Minimum lease payments receivable $15,469,381
Unguaranteed residual values of leased equipment 3,809,905
Indirect leasing costs 181,418
Unearned income (2,351,006)
-----------
Net investment in direct financing leases $17,109,698
===========
</TABLE>
25
<PAGE> 26
SCB COMPUTER TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APRIL 30, 1998
The following is a summary by year of the future minimum lease payments
receivable from direct financing leases:
<TABLE>
<CAPTION>
YEAR ENDING APRIL 30,
----------------------------------------
<S> <C>
1999 $ 8,415,505
2000 4,639,506
2001 2,051,720
2002 343,864
2003 18,786
----------------
Total minimum future lease payments receivable $ 15,469,381
================
</TABLE>
The minimum lease payments receivable for all direct financing leases are
assigned to lenders as security for non-recourse debt.
5. RENTALS UNDER OPERATING LEASES
The following is a summary by year of the minimum future rentals on
non-cancelable operating leases as of April 30, 1998.
<TABLE>
<CAPTION>
YEAR ENDING APRIL 30,
----------------------------------------
<S> <C>
1999 $ 2,999,320
2000 1,376,389
2001 498,839
----------------
Total minimum future rentals $ 4,874,548
================
</TABLE>
All of the above future rentals have been assigned to lenders in connection with
the repayment of non-recourse debt.
26
<PAGE> 27
SCB COMPUTER TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APRIL 30, 1998
6. NON-RECOURSE DEBT
At April 30, 1998 the non-recourse debt balances were $13,760,157 and $4,311,869
for direct financing leases and operating leases, respectively. The substantial
portion of proceeds from the issuance of non-recourse debt was used to purchase
assets leased under direct financing and operating leases. The assigned lease
payments and the underlying leased property secure the non-recourse financing,
which bears interest at rates ranging from 7.1% to 11.6%. The lenders receive
lease payments directly from the lessees.
The following is a summary of the future maturities of non-recourse debt:
<TABLE>
<CAPTION>
YEAR ENDING Debt Relating to Direct Debt Relating to
APRIL 30, Financing Leases Operating Leases Total
- -------------- ----------------------- ----------------- ----------
<S> <C> <C> <C>
1999 $ 5,988,326 $ 2,802,369 $ 8,790,695
2000 5,225,689 1,251,695 6,477,384
2001 2,448,386 229,836 2,678,222
2002 97,756 13,596 111,352
2003 -- 13,596 13,596
Thereafter -- 777 777
----------- ----------- -----------
$13,760,157 $ 4,311,869 $18,072,026
=========== =========== ===========
</TABLE>
7. LONG-TERM DEBT AND CREDIT FACILITIES
Long-term debt consisted of the following at April 30, 1998 and 1997:
<TABLE>
<CAPTION>
APRIL 30,
----------------------------
1998 1997
----------------------------
<S> <C> <C>
Credit facilities $ 22,048,912 $ --
Long-term debt 5,738,455 --
Capital lease 1,807,527 --
----------------------------
29,594,894 --
Less current portion* 5,495,245 --
----------------------------
$ 24,099,649 $ --
============================
</TABLE>
*Includes short-term lines of credit maturing in one year or less.
The Company has three credit facilities with State Bank under which the Company
may borrow up to $2,405,244. The facilities have maturity dates ranging from
June 30, 1998 to October 1, 1998, at which time they are renewable. The lines
bear interest at rates ranging from 9.25% to 9.55%, and are primarily secured by
computer equipment. The full credit amount of $2,405,244 was outstanding at
April 30, 1998.
The Company has a revolving credit facility with NationsBank, which is secured
by the assets of the various subsidiaries. The maximum amount available under
this facility is $30,000,000, which bears interest at LIBOR plus an additional
margin ranging from 0.75% to 1.5%, based on the funded debt to EBITDA ratio (an
aggregate rate of 7.16% at April 30, 1998). The line of credit matures on
October 1, 2000, and is renewable at that time. The outstanding balance on the
credit facility at April 30, 1998 was $19,643,667.
27
<PAGE> 28
SCB COMPUTER TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APRIL 30, 1998
The Company has several term notes with various lending institutions, which bear
interest ranging from 8.44% to 9.55%. The notes have varying maturity dates,
ranging from November 15, 1999 to August 31, 2001. The notes are secured
primarily by computer equipment, as the majority of the notes were obtained for
the purchase of such equipment.
The Company has a capital lease for computer equipment used on various
outsourcing engagements. The capital lease is secured by this equipment, and
bears interest at 8.44%. The lease expires on June 30, 2001.
Future maturities related to long-term debt and capital leases are as follows:
<TABLE>
<CAPTION>
LONG-TERM Capital
YEAR ENDING APRIL 30, DEBT Leases
------------------------------------------------------------------
<S> <C> <C>
1999 $2,600,000 $ 490,000
2000 2,256,833 532,921
2001 778,952 579,683
2002 102,670 204,923
---------- ----------
$5,738,455 $1,807,527
========== ==========
</TABLE>
8. 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. Contributions are made
at the discretion of the Board of Directors. The Company did not contribute to
the plan for the years ended April 30, 1998, 1997 and 1996, but paid
administrative expenses associated with the plan of $21,960, $6,660, 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 $144,330, $93,413, and $32,916 for the years ended
April 30, 1998, 1997 and 1996, respectively.
9. 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. During 1997, the employment agreements were
amended to reduce the amount of base salary to $300,000 each. No bonuses were
paid to the two majority shareholders during fiscal 1998 or 1997.
10. LEASES
Total rent expense for the years ended April 30, 1998, 1997, and 1996 was
$1,015,572, $258,348, and $364,763, respectively. The Company leases certain
office facilities and vehicles under terms of non-cancelable operating lease
agreements, which expire at various dates.
28
<PAGE> 29
SCB COMPUTER TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APRIL 30, 1998
Total future annual lease requirements are as follows:
<TABLE>
<S> <C>
1999 $1,241,124
2000 950,436
2001 811,984
2002 733,585
2003 733,585
----------
$4,470,714
==========
</TABLE>
11. SIGNIFICANT CUSTOMERS
The Company earns a significant portion of its revenue from its largest five
customers. Revenues earned from its top five customers totaled 37%, 49%, and 57%
for the years ended April 30, 1998, 1997 and 1996, respectively.
At April 30, 1998 and 1997 accounts receivable from these significant customers
were $8,658,419 and $3,232,070, respectively.
12. FEDERAL AND STATE INCOME TAXES
Significant components of the provision for income taxes are as follows:
<TABLE>
<CAPTION>
YEAR ENDED APRIL 30,
----------------------------------------------
1998 1997 1996
----------------------------------------------
<S> <C> <C> <C>
Federal:
Current $3,878,708 $2,439,146 $ 1,026,164
Deferred 133,330 141,035 (24,500)
----------------------------------------------
4,012,038 2,580,181 1,001,664
State:
Current 876,865 455,917 189,270
Deferred 19,607 16,592 (4,395)
-----------------------------------------------
896,472 472,509 184,875
-----------------------------------------------
Total $ 4,908,510 $3,052,690 $ 1,186,539
===============================================
</TABLE>
Deferred tax liabilities and assets are comprised of the following:
<TABLE>
<CAPTION>
APRIL 30,
-------------------------------
1998 1997
-------------------------------
<S> <C> <C>
Deferred tax liability:
Leasing activities $ 1,188,262 $ --
Deductible goodwill 339,880 --
Other 120,078 270,761
-------------------------------
Total deferred tax liability 1,648,220 270,761
Deferred tax assets:
Vacation expense 335,663 231,663
-------------------------------
Total deferred tax assets 335,663 231,663
-------------------------------
Net deferred tax assets (liabilities) $ (1,312,557) $ (39,098)
===============================
</TABLE>
29
<PAGE> 30
SCB COMPUTER TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APRIL 30, 1998
The reconciliation of income tax computed at the U.S. federal statutory tax
rates to income tax expense is:
<TABLE>
<CAPTION>
YEARS ENDED APRIL 30,
------------------------------------------------------------------------
1998 1997 1996
---- ---- ----
AMOUNT Percent Amount Percent Amount Percent
------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Tax at U.S. statutory rates $4,250,213 34.0% $ 2,759,348 34.0% $ 1,068,776 34.0%
State income taxes net of federal
tax benefit 591,672 4.7 311,856 3.8 122,018 3.9
Non-taxable income of company
acquired in pooling -- -- -- -- (180,963) 5.8
Other-net 66,625 0.6 (18,514) (0.2) 176,708 5.6
-------------------------------------------------------------------
$4,908,510 39.3% $ 3,052,690 37.6% $ 1,186,539 37.7%
===================================================================
</TABLE>
Partners Capital Group, a subsidiary of the Company, has a federal income tax
loss carryforward for tax return purposes in excess of $2.9 million that was
created primarily from leasing activities. These loss carryforwards expire in
various amounts through 2011.
13. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per
share (In thousands, except per share amounts):
<TABLE>
<CAPTION>
YEAR ENDED APRIL 30,
----------------------------------------
1998 1997 1996
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Numerator:
Net income $ 7,592 $ 5,063 $ 1,957
======= ======= =======
Pro forma adjustment for income taxes -- 177 162
------- ------- -------
Pro forma net income -- 4,886 1,795
======= ======= =======
- ---------------------------------------------------------------------------------------------------
Denominator:
Denominator for basic earnings per share -
weighted average shares 22,464 22,432 18,556
Effect of dilutive securities:
Employee stock options 292 63 67
- ---------------------------------------------------------------------------------------------------
Denominator for diluted earnings per share - adjusted
weighted average and assumed conversions 22,756 22,495 18,623
- ---------------------------------------------------------------------------------------------------
Basic earnings per share* $ 0.34 $ 0.23 $ 0.11
Basic pro forma earnings per share* -- $ 0.22 $ 0.10
- ---------------------------------------------------------------------------------------------------
Diluted earnings per share* $ 0.33 $ 0.23 $ 0.11
Diluted pro forma earnings per share* -- $ 0.22 $ 0.10
- ---------------------------------------------------------------------------------------------------
</TABLE>
*The earnings per share amounts prior to 1998 have been restated to comply
with SFAS No. 128, "Earnings per Share," and for all years give retroactive
recognition to all stock splits.
14. STOCK INCENTIVE PLANS
The Stock Incentive Plans provide 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. The options generally become
exercisable within four years from the date of grant and expire ten years from
the date of grant. Under the Plans, 3,000,000 shares of common stock have been
reserved for distribution. The Plans also provide for grants of stock
30
<PAGE> 31
SCB COMPUTER TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APRIL 30, 1998
appreciation rights and restricted stock. The following amounts reflect the
effect of all stock dividends and splits declared through April 30, 1998:
<TABLE>
<CAPTION>
FISCAL YEAR 1998 FISCAL YEAR 1997
-------------------------------------------------------------
WEIGHTED WEIGHTED
AVERAGE EXERCISE AVERAGE EXERCISE
OPTIONS PRICE OPTIONS PRICE
--------------------------------------------------------------
<S> <C> <C> <C> <C>
Outstanding May 1 1,093,050 $5.41 597,600 $5.17
Granted 1,172,075 $8.50 559,500 $5.63
Exercised (112,330) $6.75 (2,775) $5.17
Cancelled (137,612) $7.35 (61,275) $5.33
- ------------------------------------------------------------------------------------------------------
Outstanding April 30 2,015,183 $7.01 1,093,050 $5.41
========= =========
- ------------------------------------------------------------------------------------------------------
Exercisable at year end 874,983 $6.69 366,375 $5.41
1998 1997
---- ----
Weighted average fair value of options
granted during the year $4.25 $2.86
</TABLE>
Exercise prices for options outstanding as of April 30, 1998, ranged from $5.17
to $13.25. The weighted average remaining contractual life of those options is
approximately eight years.
The Company has elected to follow Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issues to Employees" (APB No. 25) and related
interpretations in accounting for its employee stock options because, as
discussed below, the alternative fair value accounting provided for under FASB
Statement No. 123, "Accounting for Stock-based Compensation," requires use of
option valuation models that were not developed for use in valuing employee
stock options. Under APB No. 25, because the exercise price of the Company's
employee stock options equals the market price of the underlying stock on the
date of grant, no compensation expense is recognized.
Pro forma information regarding net income and earnings per share is required by
Statement 123, and has been determined as if the Company had accounted for its
employee stock options under the fair value method of that Statement. The fair
value for these options was estimated at the date of grant using a Black-Scholes
option pricing model with the following weighted average assumptions for 1998
and 1997, respectively: risk-free interest rate of 6.04 percent and 6.56
percent; no dividend yield; volatility factors of the expected market price of
the Company's common stock of .487; and a weighted average expected life of the
option of five years.
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options that have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's stock options have characteristics significantly different from
those of traded options, and because changes in the subjective input assumptions
can materially affect the fair value estimate, in management's opinion, the
existing models do not necessarily provide a reliable single measure of the fair
value of its employee stock options.
31
<PAGE> 32
SCB COMPUTER TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APRIL 30, 1998
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period. The company's pro
forma information follows:
<TABLE>
<CAPTION>
1998 1997 1996
-----------------------------------------------------
<S> <C> <C> <C>
Pro forma net income:
As reported-including pro forma for
income taxes in 1997 and 1996 $ 7,592,116 $ 4,886,038 $ 1,794,919
Pro forma-for SFAS No 123 $ 4,971,136 $ 4,341,195 $ 1,734,941
Pro forma earnings per share:
As reported-including pro forma for
income taxes in 1997 and 1996 - basic* $ .34 $ .22 $ .10
As reported-including pro forma for
income taxes in 1997 and 1996 - $ .33 $ .22 $ .10
diluted*
Pro forma-for SFAS No 123 - basic* $ .22 $ .19 $ .09
Pro forma-for SFAS No 123 - diluted* $ .22 $ .19 $ .09
</TABLE>
*The net income per share above has been restated as required to comply
with Statement of Financial Accounting Standards No. 128, "Earnings Per
Share," and to give retroactive recognition to all stock dividends and
stock splits.
15. 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. Subsequent
subpoenas have been issued to the Company and certain of its officers by the
grand jury since May 1996 including several subpoenas issued as recently as June
1998. The Company has not been formally identified as the subject or target of
the grand jury's investigation; however, in November 1997, T. Scott Cobb, the
Company's Chairman, Steve N. White, the Company's Executive Vice
President-Development, and their administrative assistant received letters
formally notifying them that they were targets of the investigation. The Company
believes that the grand jury's investigation relates to the Company's billing
practices under its consulting contract with the Tennessee Valley Authority
("TVA"), that was completed in February 1996, particularly the hourly billings
and expenses of Messrs. Cobb and White. Additionally, in July 1996, the
Securities and Exchange Commission (the "SEC") notified the Company that the SEC
is conducting an informal inquiry, which inquiry also appears to be focused on
the TVA billings and the impact thereof on the Company's financial statements.
The Company has not had any contact with the SEC in this regard since the
Company's response to the SEC's initial inquiry.
An internal investigation by the Special Committee of the Board of Directors,
which investigation was substantially completed in May 1996, identified possible
misbillings of expenses under the TVA contract, primarily relating to mileage
and per diem expenses submitted to TVA, and on May 31, 1996, the Company
remitted approximately $40,000 to the TVA relating to the possible misbillings.
Due to the prospective and continuing 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 management, 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.
16. SUBSEQUENT EVENT
In May 1998, the Company combined with Proven Technology, Inc., ("PTI"), a
company in substantially the same business as the Company. The combination was
accounted for using the pooling-of-interests method of accounting. The
32
<PAGE> 33
SCB COMPUTER TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APRIL 30, 1998
Company exchanged 543,724 shares of its common stock for all the outstanding
stock of PTI. The acquisition agreement requires 54,372 shares of the Company's
stock to be held in escrow for certain contingencies.
17. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
JULY 31, OCTOBER 31, JANUARY 31, APRIL 30,
QUARTER ENDED: 1997 1997 1998 1998
-------------------------------------------------------
<S> <C> <C> <C> <C>
Revenue $21,333,202 $28,054,205 $28,275,210 $31,809,110
Cost of services 14,853,966 19,356,691 19,680,310 21,743,251
--------------------------------------------------------
Gross profit 6,479,236 8,697,514 8,594,900 10,065,859
Selling, general and administrative expenses 3,515,277 4,858,558 5,081,051 5,521,100
--------------------------------------------------------
Income from operations 2,963,959 3,838,956 3,513,849 4,544,759
Other expenses 37,118 552,657 785,713 985,409
--------------------------------------------------------
Income before taxes 2,926,841 3,286,299 2,728,136 3,559,350
Income tax expense 1,138,400 1,267,664 1,189,046 1,313,400
--------------------------------------------------------
Net income $ 1,788,441 $ 2,018,635 $ 1,539,090 $ 2,245,950
========================================================
Net income per share - basic* $ 0.08 $ 0.09 $ 0.07 $ 0.10
========================================================
Net income per share - diluted* $ 0.08 $ 0.09 $ 0.07 $ 0.10
========================================================
Weighted average (basic) 22,440,666 22,459,676 22,472,494 22,484,627
========================================================
Adjusted weighted average shares and assumed
conversion (diluted) 22,634,148 22,734,298 22,744,304 22,911,445
========================================================
<CAPTION>
JULY 31, OCTOBER 31, JANUARY 31, APRIL 30,
QUARTER ENDED: 1996 1996 1997 1997
--------------------------------------------------------
<S> <C> <C> <C> <C>
Revenue $15,581,317 $15,583,536 $15,491,395 $17,474,680
Cost of services 11,062,541 11,242,601 11,560,839 12,787,330
--------------------------------------------------------
Gross profit 4,518,776 4,340,935 3,930,556 4,687,350
Selling, general and administrative expenses 2,771,179 2,441,789 2,270,514 2,633,815
--------------------------------------------------------
Income from operations 1,747,597 1,899,146 1,660,042 2,053,535
Other income 214,886 239,664 230,600 70,258
--------------------------------------------------------
Income before taxes 1,962,483 2,138,810 1,890,642 2,123,793
Income tax expense 684,905 804,000 725,700 838,085
--------------------------------------------------------
Net income $ 1,277,578 $ 1,334,810 $ 1,164,942 $ 1,285,708
========================================================
Net income per share - basic* $ 0.06 $ 0.06 $ 0.05 $ 0.06
========================================================
Net income per share - diluted* $ 0.06 $ 0.06 $ 0.05 $ 0.06
========================================================
Net income $ 1,277,578 $ 1,334,810 $ 1,164,942 $ 1,285,708
Pro forma tax expense adjustment 113,000 64,000 -- --
--------------------------------------------------------
Pro forma net income $ 1,164,578 $ 1,270,810 $ 1,164,942 $ 1,285,708
========================================================
Pro forma net income per share:*
Basic $ 0.06 $ 0.06 $ 0.05 $ 0.06
========================================================
Diluted $ 0.06 $ 0.06 $ 0.05 $ 0.06
========================================================
Weighted average (basic) 22,431,357 22,431,357 22,431,357 22,432,746
========================================================
Adjusted weighted average shares and assumed
conversion (diluted) 22,431,357 22,502,766 22,484,346 22,477,737
========================================================
</TABLE>
*The earnings per share amounts prior to 1998 have been restated as required to
comply with Statement of Financial Accounting Standards No. 128, "Earnings Per
Share," and for all periods give retroactive recognition to all stock dividends
and stock splits.
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 currently scheduled to be held on September 15, 1998 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 currently scheduled to be held on September 15, 1998 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 currently scheduled to be held on September 15, 1998 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
Not applicable.
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.
3. Exhibits:
(a) See Exhibit Index following signatures.
(b) The Company filed no Current Reports on Form 8-K
during the fiscal quarter ended April 30, 1998.
34
<PAGE> 35
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 29, 1998.
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 29, 1998
T. Scott Cobb
/s/ Ben C. Bryant, Jr.
- ------------------------------- Chief Executive Officer, President, and July 29, 1998
Ben C. Bryant, Jr. Vice Chairman of the Board of
Directors (Principal Executive Officer)
/s/ Steve N. White
- ------------------------------- Director July 29, 1998
Steve N. White
/s/ Gary E. McCarter
- ------------------------------- Chief Financial Officer (Principal July 29, 1998
Gary E. McCarter Financial and Accounting Officer)
/s/ James E. Harwood
- ------------------------------- Director July 28, 1998
James E. Harwood
/s/ Joseph W. McLeary
- ------------------------------- Director July 29, 1998
Joseph W. McLeary
</TABLE>
35
<PAGE> 36
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number DESCRIPTION
------ -----------
<S> <C>
2.1 Agreement and Plan of Merger by and among SCB Computer
Technology, Inc., Delta Software Systems, Inc., Delta Acquisition,
Inc., and the shareholders of Delta Software Systems, Inc., dated as
of September 20, 1996, including Form of Indemnity and Escrow
Agreement (incorporated by reference to Exhibit 2 of the Company's
Current Report on Form 8-K, dated October 8, 1996). (Schedules
and other exhibits have been omitted from this filing. The Registrant
will furnish, as supplementary information, copies of the omitted
materials to the Securities and Exchange Commission upon request.)
2.2 Asset Purchase Agreement, dated February 28, 1997, by and among
SCB Computer Technology, Inc., TMR Acquisition, Inc.,
Technology Management Resources, Inc., and the shareholders of
Technology Management Resources, Inc. (incorporated by reference
to Exhibit 2.2 of the Company's Registration Statement on Form S-3
(Registration No. 333-22869)). (Schedules and other exhibits have
been omitted from this filing. The Registrant will furnish, as
supplementary information, copies of the omitted materials to the
Securities and Exchange Commission upon request.)
2.3 Settlement Agreement and Release, dated as of December 30, 1997,
by and among the Company, Technology Management Resources,
Inc., a wholly-owned subsidiary of the Company, Marino Holdings,
Inc. (formerly Technology Management Resources, Inc.), Thomas
R. Marshall, and Thomas V. Ruffino (incorporated by reference to
Exhibit 2 to the Quarterly Report on Form 10-Q for the quarterly
period ended January 31, 1998).
2.4 Stock Purchase Agreement by and among the Company and the
shareholders of Partners Capital Group, dated as of June 30, 1997
(incorporated by reference to Exhibit 2.1 of the Company's Current
Report on Form 8-K, dated July 24, 1997). (Schedules and other
exhibits are omitted from this filing. The Company will furnish, as
supplementary information, copies of the omitted materials to the
Securities and Exchange Commission upon request).
2.5 Stock Purchase Agreement by and among the Company and the
shareholders of Partners Resources, Inc., dated as of June 30, 1997
(incorporated by reference to Exhibit 2.2 of the Company's Current
Report on Form 8-K, dated July 24, 1997). (Schedules and other
exhibits are omitted from this filing. The Company will furnish, as
supplementary information, copies of the omitted materials to the
Securities and Exchange Commission upon request).
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)).
</TABLE>
36
<PAGE> 37
<TABLE>
<S> <C>
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)).
4.3 Articles of Amendment to the Amended and Restated Charter of the
Company (incorporated herein by reference to Exhibit 4.2 to
Registration Statement on Form S-8 (Registration No. 333-36971)).
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 1997 Stock Incentive Plan (incorporated by reference to
Appendix I to the Company's definitive proxy statement
relating to the Annual Meeting of Shareholders held on
September 23, 1997).
10.4 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)).
10.5 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)).
10.6 Second Amended and Restated Loan Agreement dated as of
March 12, 1998 among NationsBank of Tennessee, N.A., the
Company, and certain of its subsidiaries and form of promissory
note.
21 Subsidiaries of the Registrant.
23 Consent of Ernst & Young LLP
27 Financial Data Schedule (for SEC use only).
</TABLE>
37
<PAGE> 1
Exhibit 10.6
NATIONSBANK OF TENNESSEE, N.A.
SECOND AMENDED AND RESTATED LOAN AGREEMENT
This Second Amended and Restated Loan Agreement (the "Agreement") dated
as of July____, 1998, by and between NATIONSBANK OF TENNESSEE, N.A., a national
banking association ("Bank"), and SCB COMPUTER TECHNOLOGY, INC., a Tennessee
corporation, DELTA SOFTWARE SYSTEMS, INC., a Tennessee corporation, TMR
ACQUISITION, INC., a Tennessee corporation, PARTNERS CAPITAL GROUP, INC., a
California Corporation, and PARTNERS RESOURCES, INC., an Arizona Corporation
(collectively "Borrower").
RECITALS:
A. Borrower has heretofore obtained a revolving term loan facility
(the "Revolving Loan") in the principal amount of Thirty Million and No/100
Dollars ($30,000,000.00), the terms and conditions of which were set forth in
that certain Amended and Restated Loan Agreement dated March 12, 1998
(hereinafter as heretofore or hereafter Amended, Modified or Restated referred
to as the "Loan Agreement").
B. Borrower has asked Bank for a term loan in the amount of
Thirteen Million Five Hundred Thousand and No/100 Dollars ($13,500,000.00).
C. One of the conditions of the Loans, as hereinafter defined,
from Bank to Borrower is the execution of this Agreement setting forth the terms
and conditions of the Loans, and amending and restating the Loan Agreement.
NOW THEREFORE, in consideration of the Loan described below and the
mutual covenants and agreements contained herein, and intending to be legally
bound hereby, Bank and Borrower agree as follows:
1. DEFINITIONS AND REFERENCE TERMS. In addition to any other terms
defined herein, the following terms shall have the meaning set forth with
respect thereto:
A. ACCOUNT DEBTOR: Account Debtor means any Person (as herein
defined) which is now or hereafter obligated or indebted to Borrower on any
Account Receivable.
B. ACCOUNTS RECEIVABLE: Accounts Receivable means all amounts owed
to Borrower on account of sales, leases or rentals of goods or services rendered
in the ordinary course of trade or business to or on behalf of any Person (as
herein defined) which is now or hereafter obligated or indebted to Borrower (i)
which arise from goods theretofore sold and delivered or services or rentals
theretofore rendered or made, as the case may be, to an Account Debtor (as
herein defined); (ii) with respect to which no setoffs, counterclaims or
defenses are claimed by the Account Debtor; (iii) which constitute the binding
obligation of an Account Debtor which Bank deems, in the exercise of its
reasonable business judgment, to be solvent, to be financially able to pay its
debts and obligations as they become due and to be paying
<PAGE> 2
its debts and obligations as they become due; (iv) which, in the case of "dated
invoices" which specify a due date for the payment thereof, do not remain unpaid
more than ninety (90) days after the end of the month in which such due date
falls, and in the case of all other invoices, do not remain unpaid more than
ninety (90) days after the date of such invoice; (v) with respect to which the
Account Debtor is not an officer, director, agent or employee of Borrower (vi)
which do not arise from a "sale on approval," "sale or return," "guaranteed
sale" or "consignment"; and (viii) which are unencumbered or pledged as
collateral for any other indebtedness of Borrower.
C. BORROWER: SCB Computer Technology, Inc., a Tennessee
corporation, Delta Software Systems, Inc., a Tennessee Corporation, TMR
Acquisition, Inc., Partners Capital Group, Inc., a California corporation, and
Partners Resources, Inc., an Arizona corporation, collectively.
D. BORROWER'S ADDRESS:
1365 Brierbrook Road
Germantown, Tennessee 38138
E. COLLATERAL: Collateral means any and all collateral now or
hereafter pledged as collateral security for the Loans
F. CURRENT LIABILITIES: Current Liabilities means the aggregate
amount of all current liabilities as determined in accordance with GAAP, but in
any event shall include all liabilities except those having a maturity date
which is more than one year from the date as of which such computation is being
made.
G. EBITDA: EBITDA means, without duplication for any period, the
following, each calculated for the trailing twelve (12) months of such period:
(a) Net Income; plus (b) any provision for (or minus any benefit from) income or
franchise taxes included in the determination of Net Income; plus (c) interest
expense (excluding that which is associated with any lease expense whereby the
contract is assigned to a non-recourse lender) deducted in the determination of
Net Income (excluding that which is associated with any lease expense whereby
the contract is assigned to a non-recourse lender); plus (d) amortization and
depreciation (excluding that which is associated with any lease expense whereby
the contract is assigned to a non-recourse lender) deducted in the determination
of Net Income (excluding that which is associated with any lease expense whereby
the contract is assigned to a non-recourse lender); plus (e) losses from (or
minus gains from) non-cash items (excluding sales, expenses or losses related to
current assets) included in the determination of Net Income; minus (f) after tax
extraordinary gains (or plus after tax extraordinary losses) (in each case as
defined under GAAP) included in the determination of Net Income.
H. FIRST AMENDMENT: First Amendment means that certain "First
Amendment to the Outsourcing Agreement by and between Partners Resources, Inc.,
and Honeywell Inc." dated as of April 1, 1998.
- 2 -
<PAGE> 3
I . FUNDED DEBT: Funded Debt means the total indebtedness
outstanding under all recourse notes payable of Borrower, plus funded or
unfunded letters of credit issued pursuant to Borrower's application therefor,
plus capital leases of Borrower.
J. HAZARDOUS MATERIALS: Hazardous Materials include all materials
defined as hazardous materials or substances under any local, state or federal
environmental laws, rules or regulations, and petroleum, petroleum products, oil
and asbestos.
K. LOANS: The Revolving Loan and the Term Loan and any subsequent
loan which states that it is subject to this Agreement.
L. LOAN DOCUMENTS: Loan Documents means this Agreement and any and
all promissory notes executed by Borrower in favor of Bank and all other
documents, instruments, guarantees, certificates and agreements executed and/or
delivered by Borrower, any guarantor or third party in connection with the Loan.
M. NET INCOME: Net Income means for any period, the net income (or
loss) of Borrower and its Subsidiaries after provision for or benefit from
income and franchise taxes determined in accordance with GAAP, but excluding:
(i) the income (or loss) of any Person (other than a Subsidiary) in which
Borrower has an ownership interest unless received by Borrower in a cash
distribution; and (ii) the income (or loss) of any Person accrued prior to the
date it is merged into or consolidated with Borrower.
N. OUTSOURCING AGREEMENT: Outsourcing Agreement means that certain
agreement dated as of September 29, 1995, between Partners and Honeywell, Inc.,
as thereafter amended or modified including, without limitation, by the First
Amendment, and by various statements of work and amendments thereto.
O. PARTNERS: Partners means Partners Resources, Inc., an Arizona
corporation.
P. PERSON: Person means any individual, partnership, corporation,
trust, unincorporated organization, lender liability company, association, joint
venture or other legally recognized entity having the capacity to contract in
its own name.
Q. REVOLVING LOAN: The revolving term loan facility as described
in Section 2 hereof.
R. REVOLVING NOTE: The promissory note evidencing the Revolving
Loan.
S. SECURITY AGREEMENT: Security Agreement means that certain
Security Agreement executed by Partners, dated July ___, 1998.
- 3 -
<PAGE> 4
T. SUBSIDIARIES: Subsidiaries means those corporations now or
hereafter owned by SCB Computer Technology, Inc., including at the present time,
those identified on Exhibit "A" attached hereto, as such list may be amended or
restated from time to time.
U. TERM LOAN: The Term Loan as described in Section 2 hereof.
V. NET WORTH. Net Worth means the amount by which total assets
exceed total liabilities in accordance with GAAP.
W. NOTES: The Revolving Note and the Term Note.
X. ACCOUNTING TERMS. All accounting terms not specifically
defined or specified herein shall have the meanings generally attributed to such
terms under generally accepted accounting principles ("GAAP"), as in effect from
time to time, consistently applied, with respect to the financial statements
referenced in Section 3.H. hereof.
2. LOANS.
A. REVOLVING LOAN. Bank hereby agrees to make one or more loans to
Borrower in the aggregate principal face amount of Thirty Million and No/100
Dollars ($30,000,000.00). The obligation to repay the Revolving Loan is
evidenced by an amended and restated promissory note dated March 12, 1998 (the
promissory note together with any and all renewals, extensions or rearrangements
thereof being hereafter collectively referred to as the "Revolving Note") having
a maturity date, repayment terms and interest rate as set forth in the Revolving
Note.
(i) REVOLVING TERM LOAN FEATURE. The Revolving Loan shall
consist of a revolving term loan facility under which Borrower may from time to
time, borrow, repay and re-borrow funds. The Loan shall be repaid as set forth
in the Revolving Note with a maturity date of October 1, 2000, at which time the
entire outstanding principal balance, plus all accrued and unpaid interest,
shall be due and payable in full. Interest shall be paid monthly as more fully
provided in the Revolving Note.
(ii) STRUCTURING FEE. Borrower has paid a structuring fee of
Thirty-Five Thousand and No/100 Dollars ($35,000.00) at the closing of the
Revolving Loan.
(iii) UNUSED CREDIT FEE. Borrower will pay on April 1, 1998,
and on the same day of each month thereafter for the period from and including
the date the Revolving Loan was established to and including the maturity date
of the Revolving Loan, an unused credit fee at a rate per annum equal to (i)
.20%, (if the Funded Debt/EBITDA ratio is less than 1.0 to 1.0), (ii) .25% (if
such ratio is equal to or less than 1.50 to 1.0), or (iii) .30% (if such ratio
is greater than 1.5 to 1.0), times the average daily unused portion of the
Revolving Loan during the preceding month. Borrower may at any time upon written
notice to Bank permanently reduce the amount of the Revolving Loan at which time
the obligation of Borrower to pay such unused credit fee shall thereupon
correspondingly be reduced.
- 4 -
<PAGE> 5
(iv) PURPOSE. The Revolving Loan shall be available to
Borrower for general corporate purposes (including, without limitation,
additional acquisitions made in accordance with the terms hereof).
B. TERM LOAN. Bank hereby agrees to make a term loan to Borrower
in the principal face amount of Thirteen Million Five Hundred Thousand and
No/100 Dollars ($13,500,000.00). The obligation to repay the Term Loan is
evidenced by a promissory note dated July ___, 1998 (the promissory note
together with any and all renewals, extensions or rearrangements thereof being
hereafter collectively referred to as the "Term Note") having a maturity date,
repayment terms and interest rate as set forth in the Term Note.
(i) STRUCTURING FEE. Borrower will pay a structuring fee of
One Hundred One Thousand Two Hundred Fifty and No/100 Dollars ($101,250.00).
(ii) PURPOSE. The Term Loan shall be used by Borrower to
acquire the "Equipment Upgrade" and the "DS Equipment," as defined in the First
Amendment, the terms and conditions of which are incorporated herein by
reference, and for other purposes acceptable to Bank. .
(iii) COLLATERAL. The Term Loan shall be secured by the
Collateral described in the Security Agreement including, without limitation,
the Equipment Upgrade and the DS Equipment, both terms as defined in the First
Amendment.
3. REPRESENTATIONS AND WARRANTIES. Borrower hereby represents and
warrants to Bank as follows:
A. GOOD STANDING. Each of the Persons composing Borrower is a
corporation, duly organized, validly existing and in good standing under the
laws of the state of its formation and has the power and authority to own its
property and to carry on its business as currently conducted.
B. AUTHORITY AND COMPLIANCE. Borrower has full power and authority
to execute and deliver the Loan Documents and to incur and perform the
obligations provided for therein, all of which have been duly authorized by all
proper and necessary action of the appropriate governing body of Borrower. No
consent or approval of any public authority or other third party is required as
a condition to the validity of any Loan Document, and each Person composing
Borrower is in material compliance with all laws and regulatory requirements to
which each is subject.
C. BINDING AGREEMENT. This Agreement and the other Loan Documents
executed by Borrower constitute valid and legally binding obligations of
Borrower, enforceable in accordance with their terms.
D. LITIGATION. There is no material proceeding involving Borrower
pending or, to the knowledge of Borrower, threatened before any court or
governmental authority, agency or arbitration
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<PAGE> 6
authority, except as disclosed to Bank in writing and acknowledged by Bank prior
to the date of this Agreement.
E. NO CONFLICTING AGREEMENTS. There is no charter, bylaw, stock
provision, partnership agreement or other document pertaining to the
organization, power or authority of Borrower and no provision of any existing
material agreement, mortgage, indenture or contract binding on Borrower or
affecting its property, which would conflict with or in any way prevent the
execution, delivery or carrying out of the terms of this Agreement and the other
Loan Documents.
F. OWNERSHIP OF ASSETS. Borrower has good title to its assets, and
its assets are free and clear of liens, except limited liens involving
non-recourse lease related loans, and except for those granted to Bank and as
disclosed to Bank in writing prior to the date of this Agreement.
G. TAXES. All taxes and assessments due and payable by Borrower
have been paid or are being contested in good faith by appropriate proceedings
and Borrower has filed all tax returns which they are required to file.
H. FINANCIAL STATEMENTS. The financial statements of Borrower
heretofore delivered to Bank have been prepared in accordance with GAAP applied
on a consistent basis throughout the period involved and fairly present
Borrower's financial condition as of the date or dates thereof, and there has
been no material adverse change in Borrower's financial condition or operations
since October 31, 1997. All factual information furnished by Borrower to Bank in
connection with this Agreement and the other Loan Documents is and will be
accurate and complete in all material respects on the date as of which such
information is delivered to Bank and is not and will not be incomplete by the
omission of any material fact necessary to make such information not misleading.
I. PLACE OF BUSINESS. Borrower's chief executive office is
located at
1365 Brierbrook Road
Germantown, Tennessee 38138
J. ENVIRONMENTAL. The conduct of Borrower's business operations
and the condition of Borrower's properties does not and will not violate any
federal laws, rules or ordinances for environmental protection, regulations of
the Environmental Protection Agency, any applicable local or state law, rule,
regulation or rule of common law or any judicial interpretation thereof relating
primarily to the environment or Hazardous Materials.
K. CONTINUATION OF REPRESENTATIONS AND WARRANTIES. All
representations and warranties made under this Agreement shall be deemed to be
made at and as of the date hereof and at and as of the date of any advance under
the Revolving Loan.
L. SUBSIDIARIES. Other than as shown on Exhibit "A," there are no
other Subsidiaries.
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<PAGE> 7
M. PRINCIPAL PLACE OF BUSINESS. Partners maintains its principal
place of business in Arizona, and will not move from its present location
without notifying Bank in advance at least thirty (30) days prior to such date.
N. NO DEFAULT UNDER OTHER AGREEMENTS. There are no defaults known
to Borrower under any agreement to which the Borrower is a party including,
without limitation, the Outsourcing Agreement and any license agreements to
which the Borrower is a party. Borrower has provided Bank with a complete copy
of the Outsourcing Agreement, the First Amendment and all statements of work and
amendments thereto.
4. AFFIRMATIVE COVENANTS. Until full payment and performance of all
obligations of Borrower under the Loan Documents, Borrower will, on a
consolidated basis unless Bank consents otherwise in writing (and without
limiting any requirement of any other Loan Document):
A. FINANCIAL CONDITION. Maintain at all times Borrower's financial
condition as follows and determined in accordance with GAAP applied on a
consistent basis throughout the period involved except to the extent modified by
the following:
i. Maintain a ratio of Funded Debt to EBITDA of 2.75 to 1.0
or less; and on October 31, 1998, and thereafter until April 30, 1999, maintain
a ratio of Funded Debt to EBITDA of 2.50 to 1.0 or less; and on April 30, 1999,
and thereafter maintain a ratio of Funded Debt to EBITDA of 2.00 to 1.0 or less.
ii. Maintain a ratio of Funded Debt to Net Worth of 1.0 to
1.0 or less.
iii. Maintain a ratio of cash plus Accounts Receivable plus
unencumbered fixed assets (net of depreciation) such as buildings, furniture,
fixtures and equipment, and land (such sum as shown on the most recent financial
statements provided to Bank from time to time or derived from other information
made available to Bank, from which Bank may determine the sum using its
reasonable discretion as to what items should be included) to trade accounts
payable (as determined in accordance with GAAP and as such sum is shown on the
most recent financial statements provided to Bank from time to time or derived
from other information made available to Bank, from which Bank may determine the
sum using its reasonable discretion as to what items should be included) plus
unsecured Funded Debt of 1.0 to 1.0 or greater.
B. FINANCIAL STATEMENTS AND OTHER INFORMATION. Maintain a system
of accounting satisfactory to Bank and in accordance with GAAP applied on a
consistent basis throughout the period involved, permit Bank's officers or
authorized representatives to visit and inspect Borrower's books of account and
other records at such reasonable times and as often as Bank may desire, and pay
the reasonable fees and disbursements of any accountants or other agents of Bank
selected by Bank for the foregoing purposes. Unless written notice of another
location is given to Bank, Borrower's books and records will be located at
Borrower's chief executive office set forth above. All financial statements
called for below
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<PAGE> 8
shall be prepared in form and content acceptable to Bank and by independent
certified public accountants acceptable to Bank.
In addition, Borrower will:
i. Furnish to Bank audited financial statements of Borrower
for each fiscal year of Borrower, within one hundred twenty (120) days after the
close of each such fiscal year, prepared by a public accounting firm acceptable
to Bank.
ii. Furnish to Bank financial statements prepared by
Borrower (including a balance sheet and profit and loss statement) of Borrower,
for each quarter of each fiscal year of Borrower, within forty five (45) days
after the close of each such period, such financial statements to be certified
by the president, vice president or chief financial officer of Borrower.
iii. Furnish to Bank a compliance certificate for (and
executed by an authorized representative of) Borrower in the form of Exhibit "B"
attached hereto, concurrently with and dated as of the date of delivery of each
of the financial statements as required in paragraphs i and ii above, and at
such other times as Bank may request, containing (a) a certification that the
financial statements of even date are true and correct and that Borrower is not
in default under the terms of this Agreement, and (b) computations and
conclusions, in such detail as Bank may request, with respect to compliance with
this Agreement, and the other Loan Documents, including computations of all
quantitative covenants.
iv. Furnish to Bank promptly such additional information,
reports and statements respecting the business operations and financial
condition of Borrower and its Subsidiaries, respectively, from time to time, as
Bank may reasonably request.
C. INSURANCE. Maintain insurance with responsible insurance
companies on such of its properties, in such amounts and against such risks as
is customarily maintained by similar businesses operating in the same vicinity,
specifically to include fire and extended coverage insurance covering all
assets, business interruption insurance, workers compensation insurance and
liability insurance, all to be with such companies and in such amounts as are
satisfactory to Bank and providing for at least thirty (30) days prior notice to
Bank of any cancellation thereof. Satisfactory evidence of such insurance will
be supplied to Bank prior to funding under the Loan(s) and thirty (30) days
prior to each policy renewal.
D. EXISTENCE AND COMPLIANCE. Maintain its, as well as that of its
Subsidiaries, existence, good standing and qualification to do business, where
failure to do so would have a material adverse effect on Borrower or its
Subsidiaries, and comply with all laws, regulations and governmental
requirements including, without limitation, applicable environmental laws or to
any of its or their property, business operations and transactions.
E. ADVERSE CONDITIONS OR EVENTS. Promptly advise Bank in writing
of (i) any condition, event or act which comes to its attention that would or
might materially adversely affect
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<PAGE> 9
Borrower's or any Subsidiary's financial condition or operations or Bank's
rights under the Loan Documents, (ii) any material litigation filed by or
against Borrower or any Subsidiary, (iii) any event that has occurred that would
constitute an event of default under any Loan Documents and (iv) any uninsured
or partially uninsured loss through fire, theft, liability or property damage in
excess of an aggregate of Five Hundred Thousand and No/100 Dollars
($500,000.00).
F. TAXES AND OTHER OBLIGATIONS. Pay all of its taxes, assessments
and other obligations, including, but not limited to taxes, costs or other
expenses arising out of this transaction, as the same become due and payable,
except to the extent the same are being contested in good faith by appropriate
proceedings in a diligent manner.
G. MAINTENANCE. Maintain all of its tangible property in good
condition and repair and make all necessary replacements thereof, and preserve
and maintain all licenses, trademarks, privileges, permits, franchises,
certificates and the like necessary for the operation of its business.
H. ENVIRONMENTAL. Immediately advise Bank in writing of (i) any
and all enforcement, cleanup, remedial, removal, or other governmental or
regulatory actions instituted, completed or threatened pursuant to any
applicable federal, state, or local laws, ordinances or regulations relating to
any Hazardous Materials affecting Borrower's or any Subsidiary's business
operations; and (ii) all claims made or threatened by any third party against
Borrower or any Subsidiary relating to damages, contribution, cost recovery,
compensation, loss or injury resulting from any Hazardous Materials. Borrower
shall immediately notify Bank of any remedial action taken by Borrower with
respect to Borrower's business operations. Borrower will not use or permit any
other party to use any Hazardous Materials at any of Borrower's places of
business or at any other property owned by Borrower except such materials as are
incidental to Borrower's normal course of business, maintenance and repairs and
which are handled in compliance with all applicable environmental laws. Borrower
agrees to permit Bank, its agents, contractors and employees to enter and
inspect any of Borrower's places of business or any other property of Borrower
at any reasonable times upon three (3) days prior notice for the purposes of
conducting an environmental investigation and audit (including taking physical
samples) to insure that Borrower is complying with this covenant and Borrower
shall reimburse Bank on demand for the costs of any such environmental
investigation and audit. Borrower shall provide Bank, its agents, contractors,
employees and representatives with access to and copies of any and all data and
documents relating to or dealing with any Hazardous Materials used, generated,
manufactured, stored or disposed of by Borrower's business operations within
five (5) days of the request therefore.
I. ACQUISITIONS. In the event Borrower acquires any other
Subsidiary, such Subsidiary shall sign an unlimited guaranty of the indebtedness
and obligations of Borrower to Bank, such guaranty to be in form and substance
prepared by and acceptable to Bank. In addition, Borrower shall pledge to Bank
all of the common stock to secure the Loan, in form and substance, and with such
supporting documents, as are acceptable to Bank.
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<PAGE> 10
J. OTHER DOCUMENTS. Provide to Bank such other documents as Bank
may reasonably require including, without limitation, release documents
releasing any and all liens possessed by any Person other than Bank encumbering
any of the Collateral, and an intercreditor agreement with any other Person
claiming any lien on any of Borrower's property agreeing not to assert a lien
against, or interfere with Bank's enforcement of its liens against, any of the
Collateral
5. NEGATIVE COVENANTS. Until full payment and performance of all
obligations of Borrower under the Loan Documents, Borrower will not, without the
prior written consent of Bank (and without limiting any requirement of any other
Loan Documents):
A. CAPITAL EXPENDITURES. Other than in connection with the
purchase of the Equipment Upgrade, as defined in the First Amendment, make
capital expenditures during any four quarter period on a trailing four quarter
basis (including capitalized leases) exceeding in the aggregate a number which
is equal to twenty-five percent (25%) of the Net Income from such four quarter
period.
B. LEASE RESIDUAL EXPENDITURES. Incur new obligations from
investment in the residual values of leases of real or personal property during
any four quarter period on a trailing four quarter basis exceeding in the
aggregate a number which is equal to twenty-five percent (25%) of the Net Income
from such four quarter period.
C. LEASE EXPENDITURES. Incur new obligations for the lease or hire
of real or personal property requiring payments in any fiscal year in excess of
an aggregate of Five Hundred Thousand and No/100 Dollars ($500,000.00).
D. TRANSFER OF ASSETS OR CONTROL. Sell, lease, assign or otherwise
dispose of or transfer any assets, except in the normal course of its business,
or change control or ownership of more than thirty-five percent (35%) of any
Person composing Borrower. For purposes of this covenant, a change in control or
ownership means (i) when any Person or two or more Persons acting in concert
shall have acquired beneficial ownership, directly or indirectly, of the capital
stock of Borrower or any Person composing Borrower (or other securities
convertible into such capital stock) representing thirty-five percent (35%) or
more of the combined voting power of all capital stock of Borrower or any such
Person composing Borrower; or (ii) during any period of up to twenty-four (24)
consecutive months, commencing after the date hereof, individuals who at the
beginning of such twenty-four (24) month period were directors of Borrower or
any such Person composing Borrower cease to constitute a majority of the board
of directors thereof and such event is a result (directly or indirectly) of the
acquisition of five percent (5%) or more of the combined voting power of the
capital stock by a Person or Persons who did not own at least five percent (5%)
or more of the combined voting power of the capital stock as of the date hereof.
As used herein, "beneficial ownership" shall have the meaning provided in Rule
13d-3 of the Securities and Exchange Commission under the Securities and
Exchange Act of 1934.
E. LIENS. Grant, suffer or permit any contractual or
noncontractual lien on or security interest in its assets (including, without
limitation, on any of the Collateral and on any of Borrower's
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<PAGE> 11
intellectual property), except in favor of Bank and except for limited liens
involving non-recourse lease related loans, or fail to promptly pay when due all
lawful claims, whether for labor, materials or otherwise.
F. EXTENSIONS OF CREDIT. Other than loans to Subsidiaries, make or
permit any Subsidiary to make, loans or advances in excess of One Million and
No/100 Dollars ($1,000,000.00) in the aggregate outstanding at any time prior to
August 30, 1998, at which time the maximum aggregate amount outstanding at any
time shall be reduced to Five Hundred Thousand and No/100 Dollars ($500,000.00),
or make any capital contribution to, or participate as a partner or joint
venturer with any Person, except for extensions of credit to employees in the
normal course of Borrower's business, and except for the purchase of direct
obligations of the United States or any agency thereof with maturities of less
than one year, or obligations of Bank or any subsidiary thereof. Any aggregate
amount of such loans made by Borrower in excess of Five Hundred Thousand and
No/100 Dollars ($500,000.00) must be personally guaranteed by Ben C. Bryant,
Jr., and T. Scott Cobb.
G. BORROWINGS. Create, incur, assume or become liable in any
manner for any indebtedness (for borrowed money, deferred payment for the
purchase of assets, lease payments, as surety or guarantor for the debt for
another, or otherwise) other than to Bank, except for normal trade debts
incurred in the ordinary course of Borrower's business, non-recourse
indebtedness, and except for existing indebtedness disclosed to Bank in writing
and acknowledged by Bank prior to the date of this Agreement.
H. DIVIDENDS AND DISTRIBUTIONS. Make any distribution (other than
dividends payable in capital stock of Borrower) on any shares of any class of
its capital stock or apply any of its property or assets to the purchase,
redemption or other retirement of any shares of any class of capital stock of
Borrower exceeding in the aggregate a sum which is equal to twenty-five percent
(25%) of net profit per fiscal year.
I. CHARACTER OF BUSINESS. Change the general character of business
as conducted at the date hereof, or engage in any type of business not
reasonably related to its business as presently conducted.
J. MANAGEMENT CHANGE. Make any substantial change in its present
executive or management personnel.
K. NEGATIVE PLEDGE LIMITATION. Enter into any agreement with any
person other than Bank pursuant hereto which prohibits or limits the ability of
Borrower or any Subsidiary to create, incur, assume or suffer to exist any lien
upon any of the assets, rights, revenues or property, whether real, personal or
mixed, whether tangible or intangible, and whether now owned or hereafter
acquired.
L. ACQUISITIONS OR MERGERS. Acquire or enter into any merger or
consolidation, or purchase or otherwise acquire, or permit any Subsidiary to
purchase or otherwise acquire, any capital stock, assets, obligations, or other
securities of, or otherwise invest in or acquire any interest in any entity,
except in regards to any acquisition that (i) has positive EBITDA during the
last two (2) fiscal years, (ii) where
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<PAGE> 12
the total consideration paid by Borrower in regards to such transaction is 100%
stock, and (iii) the total consideration is less than six (6) times the
acquisition EBITDA, provided, however, in no event may Borrower enter into any
acquisition if the results of such acquisition on a proforma basis would cause a
default hereunder.
M. LOCATION OF EQUIPMENT. Move the Equipment Upgrade or the DS
Equipment from Honeywell's premises as identified to Bank without Bank's prior
written consent.
N. OUTSOURCING AGREEMENT. Amend or modify the Outsourcing
Agreement (as heretofore amended by the First Amendment) without Bank's prior
written consent.
6. DEFAULT. Borrower shall be in default under this Agreement and under
each of the other Loan Documents if any of the following should occur:
A. It shall default in the payment of any amounts due and owing
under the Loan within fifteen (15) days of the date when due or;
B. It should fail to timely and properly observe, keep or perform
any term, covenant, agreement or condition herein or in any other Loan Document
or in any other loan agreement, promissory note, security agreement, deed of
trust, deed to secure debt, mortgage, assignment or other contract securing or
evidencing payment of any indebtedness of Borrower to Bank or any affiliate or
subsidiary of NationsBank Corporation; or
C. There should occur any material adverse change in Borrower's
financial condition or business affairs from that shown on Borrower's most
recent financial statements provided to Bank, including, without limitation, any
legal proceedings commenced against Borrower or any of its officers which Bank
determines in its sole discretion could have a material adverse effect on
Borrower's financial condition or business affairs, provided, however, that Bank
agrees not to exercise its right to declare a default as a result of any such
material adverse change until forty five (45) days after written notice from
Bank to Borrower that Bank deems a material adverse change to have occurred..
7. REMEDIES UPON DEFAULT. If any of the foregoing defaults shall occur,
Bank shall have all rights, powers and remedies available under each of the Loan
Documents as well as all rights and remedies available at law or in equity.
8. NOTICES. All notices, requests or demands which any party is
required or may desire to give to any other party under any provision of this
Agreement must be in writing delivered to the other party at the following
address:
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<PAGE> 13
Borrower:
SCB Computer Technology, Inc.
1365 Brierbrook Road
Germantown, Tennessee 38138
Attn: Gary McCarter
Fax. No. 901/624-9448
with a copy to:
Bass, Berry, & Sims PLC
2700 First America Center
Nashville, Tennessee 37238-2700
Attn: Gentry Barden
Fax No. 615/742-6298
Bank:
NationsBank of Tennessee, N.A.
6060 Poplar Avenue, Suite 400
Memphis, Tennessee 38119
Attention: Michael R. Frick
Fax No. 901/433-8062
or to such other address as any party may designate by written notice to the
other party. Each such notice, request and demand shall be deemed given or made
as follows:
A. If sent by mail, upon the earlier of the date of receipt or
five (5) days after deposit in the U.S. Mail, first class postage prepaid;
B. If sent by any other means , upon delivery.
9. COSTS, EXPENSES AND ATTORNEYS' FEES. Borrower shall pay to Bank
immediately upon demand the full amount of all costs and expenses, including
reasonable attorneys' fees (to include outside counsel fees and all allocated
costs of Bank's in-house counsel if permitted by applicable law), incurred by
Bank in connection with (a) negotiation and preparation of this Agreement and
each of the Loan Documents, and (b) all other costs and attorneys' fees incurred
by Bank for which Borrower is obligated to reimburse Bank in accordance with the
Terms of the Loan Documents.
10. MISCELLANEOUS. Borrower and Bank further covenant and agree as
follows, without limiting any requirement of any other Loan Document:
A. CUMULATIVE RIGHTS AND NO WAIVER. Each and every right granted
to Bank under any Loan Document, or allowed it by law or equity shall be
cumulative of each other and may be exercised
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<PAGE> 14
in addition to any and all other rights of Bank, and no delay in exercising any
right shall operate as a waiver thereof, nor shall any single or partial
exercise by Bank of any right preclude any other or future exercise thereof or
the exercise of any other right. Borrower expressly waives any presentment,
demand, protest or other notice of any kind, including but not limited to notice
of intent to accelerate and notice of acceleration. No notice to or demand on
Borrower in any case shall, of itself, entitle Borrower to any other or future
notice or demand in similar or other circumstances.
B. APPLICABLE LAW. This Agreement and the rights and obligations
of the parties hereunder shall be governed by and interpreted in accordance with
the laws of the state of Tennessee and applicable United States federal law.
C. AMENDMENT. No modification, consent, amendment or waiver of any
provision of this Agreement, nor consent to any departure by Borrower therefrom,
shall be effective unless the same shall be in writing and signed by an officer
of Bank, and then shall be effective only in the specified instance and for the
purpose for which given. This Agreement is binding upon Borrower, its successors
and assigns, and inures to the benefit of Bank, its successors and assigns;
however, no assignment or other transfer of Borrower's rights or obligations
hereunder shall be made or be effective without Bank's prior written consent,
nor shall it relieve Borrower of any obligations hereunder. There is no third
party beneficiary of this Agreement.
D. DOCUMENTS. All documents, certificates and other items required
under this Agreement to be executed and/or delivered to Bank shall be in form
and content satisfactory to Bank and its counsel.
E. PARTIAL INVALIDITY. The unenforceability or invalidity of any
provision of this Agreement shall not affect the enforceability or validity of
any other provision herein and the invalidity or unenforceability of any
provision of any Loan Document to any person or circumstance shall not affect
the enforceability or validity of such provision as it may apply to other
persons or circumstances.
F. INDEMNIFICATION. Notwithstanding anything to the contrary
contained in Section 10(G), except for gross negligence or willful misconduct,
Borrower shall indemnify, defend and hold Bank and its successors and assigns
harmless from and against any and all claims, demands, suits, losses, damages,
assessments, fines, penalties, costs or other expenses (including reasonable
attorneys' fees and court costs) arising from or in any way related to any of
the transactions contemplated hereby, including but not limited to actual or
threatened damage to the environment, agency costs of investigation, personal
injury or death, or property damage, due to a release or alleged release of
Hazardous Materials, arising from Borrower's business operations, any other
property owned by Borrower or in the surface or ground water arising from
Borrower's business operations, or gaseous emissions arising from Borrower's
business operations or any other condition existing or arising from Borrower's
business operations resulting from the use or existence of Hazardous Materials,
whether such claim proves to be true or false. Borrower further agrees that its
indemnity obligations shall include, but are not limited to, liability for
damages resulting from the personal injury or death of an employee of Borrower,
regardless of whether Borrower
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<PAGE> 15
has paid the employee under the workmen' s compensation laws of any state or
other similar federal or state legislation for the protection of employees. The
term "property damage" as used in this paragraph includes, but is not limited
to, damage to any real or personal property of Borrower, Bank, and of any third
parties. Borrower's obligations under this paragraph shall survive the repayment
of the Loan and any deed in lieu of foreclosure or foreclosure of any Deed to
Secure Debt, Deed of Trust, Security Agreement or Mortgage securing the Loan.
G. SURVIVABILITY. All covenants, agreements, representations and
warranties made herein or in the other Loan Documents shall survive the making
of the Loan and shall continue in full force and effect so long as the Loan is
outstanding or the obligation of Bank to make any advances under the Loan shall
not have expired.
11. ARBITRATION. ANY CONTROVERSY OR CLAIM BETWEEN OR AMONG THE PARTIES
HERETO INCLUDING BUT NOT LIMITED TO THOSE ARISING OUT OF OR RELATING TO THIS,
INSTRUMENT, AGREEMENT OR DOCUMENT OR ANY RELATED INSTRUMENTS, AGREEMENTS OR
DOCUMENTS, INCLUDING ANY CLAIM BASED ON OR ARISING FROM AN ALLEGED TORT, SHALL
BE DETERMINED BY BINDING ARBITRATION IN ACCORDANCE WITH THE FEDERAL ARBITRATION
ACT (OR IF NOT APPLICABLE, THE APPLICABLE STATE LAW), THE RULES OF PRACTICE AND
PROCEDURE FOR THE ARBITRATION OF COMMERCIAL DISPUTES OF J.A.M.S./ENDISPUTE OR
ANY SUCCESSOR THEREOF ("J.A.M.S."), AND THE "SPECIAL RULES" SET FORTH BELOW. IN
THE EVENT OF ANY INCONSISTENCY, THE SPECIAL RULES SHALL CONTROL. JUDGMENT UPON
ANY ARBITRATION AWARD MAY BE ENTERED IN ANY COURT HAVING JURISDICTION. ANY PARTY
TO THIS AGREEMENT MAY BRING AN ACTION, INCLUDING A SUMMARY OR EXPEDITED
PROCEEDING, TO COMPEL ARBITRATION OF ANY CONTROVERSY OR CLAIM TO WHICH THIS
AGREEMENT APPLIES IN ANY COURT HAVING JURISDICTION OVER SUCH ACTION.
A. SPECIAL RULES. THE ARBITRATION SHALL BE CONDUCTED IN THE CITY
OF THE BORROWER'S DOMICILE AT TIME OF THE EXECUTION OF THIS INSTRUMENT,
AGREEMENT OR DOCUMENT AND ADMINISTERED BY J.A.M.S. WHO WILL APPOINT AN
ARBITRATOR; IF J.A.M.S. IS UNABLE OR LEGALLY PRECLUDED FROM ADMINISTERING THE
ARBITRATION, THEN THE AMERICAN ARBITRATION ASSOCIATION WILL SERVE. ALL
ARBITRATION HEARINGS WILL BE COMMENCED WITHIN 90 DAYS OF THE DEMAND FOR
ARBITRATION; FURTHER, THE ARBITRATOR SHALL ONLY, UPON A SHOWING OF CAUSE, BE
PERMITTED TO EXTEND THE COMMENCEMENT OF SUCH HEARING FOR UP TO AN ADDITIONAL 60
DAYS.
B. RESERVATION OF RIGHTS. NOTHING IN THIS ARBITRATION PROVISION
SHALL BE DEEMED TO (I) LIMIT THE APPLICABILITY OF ANY OTHERWISE APPLICABLE
STATUTES OF LIMITATION OR REPOSE AND ANY WAIVERS CONTAINED IN THIS ARBITRATION
PROVISION; OR (II) BE A WAIVER BY THE BANK OF THE PROTECTION
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<PAGE> 16
AFFORDED TO IT BY 12 U.S.C. ss. 91 OR ANY SUBSTANTIALLY EQUIVALENT STATE LAW;
OR (III) LIMIT THE RIGHT OF THE BANK HERETO (A) TO EXERCISE SELF HELP REMEDIES
SUCH AS (BUT NOT LIMITED TO) SETOFF, OR (B) TO FORECLOSE AGAINST ANY REAL OR
PERSONAL PROPERTY COLLATERAL, OR (C) TO OBTAIN FROM A COURT PROVISIONAL OR
ANCILLARY REMEDIES SUCH AS (BUT NOT LIMITED TO) INJUNCTIVE RELIEF, WRIT OF
POSSESSION OR THE APPOINTMENT OF A RECEIVER. THE BANK MAY EXERCISE SUCH SELF
HELP RIGHTS, FORECLOSE UPON SUCH PROPERTY, OR OBTAIN SUCH PROVISIONAL OR
ANCILLARY REMEDIES BEFORE, DURING OR AFTER THE PENDENCY OF ANY ARBITRATION
PROCEEDING BROUGHT PURSUANT TO THIS INSTRUMENT, AGREEMENT OR DOCUMENT. NEITHER
THIS EXERCISE OF SELF HELP REMEDIES NOR THE INSTITUTION OR MAINTENANCE OF AN
ACTION FOR FORECLOSURE OR PROVISIONAL OR ANCILLARY REMEDIES SHALL CONSTITUTE A
WAIVER OF THE RIGHT OF ANY PARTY, INCLUDING THE CLAIMANT IN ANY SUCH ACTION, TO
ARBITRATE THE MERITS OF THE CONTROVERSY OR CLAIM OCCASIONING RESORT TO SUCH
REMEDIES.
12. NO ORAL AGREEMENT. THIS WRITTEN LOAN AGREEMENT AND THE OTHER LOAN
DOCUMENTS REPRESENT THE FINAL AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE
CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS
OF THE PARTIES.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed under seal by their duly authorized representatives as of the date
first above written.
- 16 -
<PAGE> 17
BORROWER: BANK:
SCB COMPUTER TECHNOLOGY, INC. NATIONSBANK OF TENNESSEE, N.A.
By: By:
-------------------------------- ---------------------------------
Name: Name:
------------------------------ -------------------------------
Title: Title:
----------------------------- ------------------------------
Attest:
----------------------------
Name:
------------------------------
Title:
-----------------------------
DELTA SOFTWARE SYSTEMS, INC.
By:
--------------------------------
Name:
------------------------------
Title:
-----------------------------
Attest:
----------------------------
Name:
------------------------------
Title:
-----------------------------
- 17 -
<PAGE> 18
TMR ACQUISITION, INC.
By:
--------------------------------
Name:
------------------------------
Title:
-----------------------------
Attest:
----------------------------
Name:
------------------------------
Title:
-----------------------------
PARTNERS CAPITAL GROUP, INC.
By:
--------------------------------
Name:
------------------------------
Title:
-----------------------------
Attest:
----------------------------
Name:
------------------------------
Title:
-----------------------------
- 18 -
<PAGE> 19
PARTNERS RESOURCES, INC.
By:
--------------------------------
Name:
------------------------------
Title:
-----------------------------
Attest:
----------------------------
Name:
------------------------------
Title:
-----------------------------
- 19 -
<PAGE> 20
EXHIBIT "A"
SUBSIDIARIES
SCB Software Services, Inc.
- 20 -
<PAGE> 21
EXHIBIT "B"
COMPLIANCE CERTIFICATE
- 21 -
<PAGE> 22
NationsBank of Tennessee, N.A.
TERM LOAN
PROMISSORY NOTE
July 12, 1998 $13,500,000.00 Maturity Date: July 1, 2002
Bank: Borrower:
NationsBank of Tennessee, N.A. SCB Computer Technology, Inc.
6060 Poplar Avenue Delta Software Systems, Inc.
Memphis, TN 38119 TMR Acquisition, Inc.
Partners Capital Group, Inc.
Partners Resources, Inc.
1365 Brierbrook Road
Germantown, TN 38138
FOR VALUE RECEIVED, the undersigned Borrower unconditionally (and jointly and
severally, if more than one) promises to pay to the order of Bank, its
successors and assigns, without set off, at its offices indicated at the
beginning of this Note, or at such other place as may be designated by Bank, the
principal amount of Thirteen Million Five Hundred Thousand and No/100 Dollars
($13,500,000.00) in immediately available funds as set forth in that certain
Amended and Restated Loan Agreement of even date herewith (the "Loan
Agreement"), together with interest computed daily on the outstanding principal
balance hereunder, at an annual interest rate, and in accordance with the
payment schedule, indicated below.
1. RATE. The unpaid principal balance of this Note from day to day outstanding
which is not past due shall bear interest at a rate per annum equal to the
lesser of (i) the Maximum Rate (hereinafter defined) or (ii) the Stated Rate
(hereinafter defined) fixed for periods of one (1) month each and computed on
the Annual Basis (hereinafter defined).
(a) The term "Stated Rate" means the LIBOR Funding Rate plus the Applicable
Margin (as hereinafter set forth).
(b) The term "LIBOR Funding Rate" means the thirty (30) day rate of
interest set by Bank as the LIBOR Funding Rate as of and at any time during the
second Business Day immediately preceding the first day of such Interest Period,
for a term comparable to such Interest Period, as adjusted from time to time in
Bank's sole discretion for then applicable reserve requirements, deposit
insurance assessment rates and other regulatory costs.
(c) The term "Business Day" shall mean a day on which Bank is open for
business and dealing in deposits in Memphis, Tennessee.
(d) The term "Interest Period" shall mean, with respect to any LIBOR
Borrowing (hereinafter defined), a period from the 15th of each month in which
the LIBOR Funding Rate shall become effective as to such LIBOR Borrowing to the
14th of the following month, subject however to the following:
(i) if any Interest Period would otherwise end on a day which is not a
Business Day, the LIBOR Funding Rate shall be determined the immediately
preceding business day; and
(ii) no Interest Period shall extend beyond the final maturity date.
(e) The term "Applicable Margin" means the percentage added to the LIBOR
Funding Rate and shall be a function of the Funded Debt/EBITDA ratio as follows:
Funded Debt/EBITDA LIBOR Applicable Margin
------------------ -----------------------
1
<PAGE> 23
(i) <1.00 x 0.75%
(ii) = or <1.50 x 1.00%
(iii) >1.50 x 1.50%
(f) The term "LIBOR Borrowing" as used herein means a separate and distinct
portion of the indebtedness evidenced by the Note bearing interest at a LIBOR
Funding Rate.
The term "Maximum Rate" as used in this Note means the maximum nonusurious rate
of interest per annum permitted by whichever of applicable United States federal
law or the law of the state of Tennessee permits the higher interest rate,
including to the extent permitted by applicable law, any amendments thereof
hereafter or any new law hereafter coming into effect to the extent a higher
Maximum Rate is permitted thereby. The Maximum Rate shall be applied by taking
into account all amounts characterized by applicable law as interest on the debt
evidenced by this Note, so that the aggregate of all interest does not exceed
the maximum nonusurious amount permitted by applicable law.
Notwithstanding any provision of this Note, Bank does not intend to charge and
Borrower shall not be required to pay any amount of interest or other charges in
excess of the Maximum Rate; if any higher rate ceiling is lawful, then that
higher rate ceiling shall apply. Any payment in excess of such Maximum Rate
shall be refunded to Borrower or credited against principal, at the option of
Bank.
2. ANNUAL BASIS OR ACCRUAL METHOD. "Annual Basis" means computation of interest
at the Rate set forth above using a 365/360 day method (a daily amount of
interest is computed for a hypothetical year of 360 days; that amount is
multiplied by the actual number of days for which any principal is outstanding
hereunder).
3. RATE CHANGE DATE. The Stated Rate will change on the 15th of each month.
4. PAYMENT SCHEDULE. All payments received hereunder shall be applied first to
the payment of any expense or charges payable hereunder or under any other loan
documents executed in connection with this Note, then to interest due and
payable, with the balance applied to principal, or in such other order as Bank
shall determine at its option.
Principal and interest shall be paid in consecutive equal installments of
$130,348.31, payable monthly, commencing on August 15, 1998, and continuing on
the same day of each successive month thereafter, to and including December 15,
1998, then, principal and interest shall be paid in consecutive equal
installments of $353,844.87, payable monthly, commencing on January 15, 1999,
and continuing on the same day of each successive month thereafter, with a final
payment of all unpaid principal and interest due thereon on July 15, 2002. If,
on any payment date, accrued interest exceeds the applicable installment amount
set forth above, Borrower will also pay such excess as and when billed.
5. WAIVERS, CONSENTS AND COVENANTS. Borrower, any indorser or guarantor hereof,
or any other party hereto (individually an "Obligor" and collectively
"Obligors") and each of them jointly and severally: (a) waive presentment,
demand, protest, notice of demand, notice of intent to accelerate, notice of
acceleration of maturity, notice of protest, notice of nonpayment, notice of
dishonor, and any other notice required to be given under the law to any Obligor
in connection with the delivery, acceptance, performance, default or enforcement
of this Note, any indorsement or guaranty of this Note, or any other documents
executed in connection with this Note or any other note or other loan documents
now or hereafter executed in connection with any obligation of Borrower to Bank
(the "Loan Documents"); (b) consent to all delays, extensions, renewals or, in
the case of any guarantor, other modifications of this Note or the Loan
Documents, or waivers of any term hereof or of the Loan Documents, or release or
discharge by Bank of any of Obligors, or release, substitution or exchange of
any security for the payment hereof, or the failure to act on the part of Bank,
or any indulgence shown by Bank (without notice to or further assent from any of
Obligors), and agree that no such action, failure to act or failure to exercise
any right or remedy by Bank shall in any way affect or impair the obligations of
any Obligors or be construed as a waiver by Bank of, or otherwise affect, any of
Bank's rights under this Note, under any indorsement or guaranty of this Note or
under any of the Loan Documents; and (c) agree to pay, on demand, all costs and
expenses of collection or defense of this Note or of any indorsement or guaranty
hereof and/or the enforcement or defense of Bank's rights with respect to, or
the administration, supervision, preservation, or protection of, or realization
upon, any property securing payment hereof, including, without limitation,
reasonable attorney's fees, including fees related to any suit, mediation or
arbitration proceeding, out of court payment agreement, trial, appeal,
bankruptcy proceedings or other proceeding, in such amount as may be determined
reasonable by any arbitrator or court, whichever is applicable.
2
<PAGE> 24
6. PREPAYMENTS. Prepayments may be made in whole or in part at any time. All
prepayments shall be applied in the inverse order of maturity.
7. DELINQUENCY CHARGE. To the extent permitted by law, a delinquency charge may
be imposed in an amount not to exceed four percent (4%) of any payment that is
more than fifteen (15) days late.
8. EVENTS OF DEFAULT. The following are events of default hereunder: (a) the
failure to pay or perform any obligation, liability or indebtedness of any
Obligor to Bank, or to any affiliate or subsidiary of NationsBank Corporation,
whether under this Note, the Loan Agreement, or any of the other Loan Documents,
within fifteen (15) days of the date when due (whether upon demand, at maturity
or by acceleration); (b) the failure to pay or perform any other material
obligation, liability or indebtedness of any Obligor to any other party; (c) the
commencement of a proceeding against any Obligor for dissolution or liquidation,
the voluntary or involuntary termination or dissolution of any Obligor or the
merger or consolidation of any Obligor with or into another entity; (d) the
insolvency of, the business failure of, the appointment of a custodian, trustee,
liquidator or receiver for or for any of the property of, the assignment for the
benefit of creditors by, or the filing of a petition under bankruptcy,
insolvency or debtor's relief law or the filing of a petition for any adjustment
of indebtedness, composition or extension by or against any Obligor; (e) the
determination by Bank that any representation or warranty made to Bank by any
Obligor in any Loan Documents or otherwise is or was, when it was made, untrue
or materially misleading; (f) the failure of any Obligor to timely deliver such
financial statements, including tax returns, other statements of condition or
other information, as Bank shall request from time to time; or (g) the seizure
or forfeiture of, or the issuance of any writ of possession, garnishment or
attachment, or any turnover order for any property of any Obligor.
9. REMEDIES UPON DEFAULT. Whenever there is a default under this Note (a) the
entire balance outstanding hereunder and all other obligations of any Obligor to
Bank (however acquired or evidenced) shall, at the option of Bank, become
immediately due and payable and any obligation of Bank to permit further
borrowing under this Note shall immediately cease and terminate, and/or (b) to
the extent permitted by law, the Rate of interest on the unpaid principal shall
be increased at Bank's discretion up to the Maximum Rate, or if none, 25% per
annum (the "Default Rate"). The provisions herein for a Default Rate shall not
be deemed to extend the time for any payment hereunder or to constitute a "grace
period" giving Obligors a right to cure any default. At Bank's option, any
accrued and unpaid interest, fees or charges may, for purposes of computing and
accruing interest on a daily basis after the due date of the Note or any
installment thereof, be deemed to be a part of the principal balance, and
interest shall accrue on a daily compounded basis after such date at the Default
Rate provided in this Note until the entire outstanding balance of principal and
interest is paid in full. Upon a default under this Note, Bank is hereby
authorized at any time, at its option and without notice or demand, to set off
and charge against any deposit accounts of any Obligor, (as well as any money,
instruments, securities, documents, chattel paper, credits, claims, demands,
income and any other property, rights and interests of any Obligor), which at
any time shall come into the possession or custody or under the control of Bank
or any of its agents, affiliates or correspondents, any and all obligations due
hereunder. Additionally, Bank shall have all rights and remedies available under
each of the Loan Documents, as well as all rights and remedies available at law
or in equity.
10. NON-WAIVER. The failure at any time of Bank to exercise any of its options
or any other rights hereunder shall not constitute a waiver thereof, nor shall
it be a bar to the exercise of any of its options or rights at a later date. All
rights and remedies of Bank shall be cumulative and may be pursued singly,
successively or together, at the option of Bank. The acceptance by Bank of any
partial payment shall not constitute a waiver of any default or of any of Bank's
rights under this Note. No waiver of any of its rights hereunder, and no
modification or amendment of this Note, shall be deemed to be made by Bank
unless the same shall be in writing, duly signed on behalf of Bank; each such
waiver shall apply only with respect to the specific instance involved, and
shall in no way impair the rights of Bank or the obligations of Obligors to Bank
in any other respect at any other time.
11. APPLICABLE LAW, VENUE AND JURISDICTION. This Note and the rights and
obligations of Borrower and Bank shall be governed by and interpreted in
accordance with the law of the State of Tennessee. In any litigation in
connection with or to enforce this Note or any indorsement or guaranty of this
Note or any Loan Documents, Obligors, and each of them, irrevocably consent to
and confer personal jurisdiction on the courts of the State of Tennessee or the
United States located within the State of Tennessee and expressly waive any
objections as to venue in any such courts. Nothing contained herein shall,
however, prevent Bank from bringing any action or exercising any rights within
any other state or jurisdiction or from obtaining personal jurisdiction by any
other means available under applicable law.
3
<PAGE> 25
12. PARTIAL INVALIDITY. The unenforceability or invalidity of any provision of
this Note shall not affect the enforceability or validity of any other provision
herein and the invalidity or unenforceability of any provision of this Note or
of the Loan Documents to any person or circumstance shall not affect the
enforceability or validity of such provision as it may apply to other persons or
circumstances.
13. BINDING EFFECT. This Note shall be binding upon and inure to the benefit of
Borrower, Obligors and Bank and their respective successors, assigns, heirs and
personal representatives, provided, however, that no obligations of Borrower or
Obligors hereunder can be assigned without prior written consent of Bank.
14. CONTROLLING DOCUMENT. To the extent that this Note conflicts with or is in
any way incompatible with any other document related specifically to the loan
evidenced by this Note, this Note shall control over any other such document,
and if this Note does not address an issue, then each other such document shall
control to the extent that it deals most specifically with an issue.
15. ARBITRATION. ANY CONTROVERSY OR CLAIM BETWEEN OR AMONG THE PARTIES HERETO
INCLUDING BUT NOT LIMITED TO THOSE ARISING OUT OF OR RELATING TO THIS
INSTRUMENT, AGREEMENT OR DOCUMENT OR ANY RELATED INSTRUMENTS, AGREEMENTS OR
DOCUMENTS, INCLUDING ANY CLAIM BASED ON OR ARISING FROM AN ALLEGED TORT, SHALL
BE DETERMINED BY BINDING ARBITRATION IN ACCORDANCE WITH THE FEDERAL ARBITRATION
ACT (OR IF NOT APPLICABLE, THE APPLICABLE STATE LAW), THE RULES OF PRACTICE AND
PROCEDURE FOR THE ARBITRATION OF COMMERCIAL DISPUTES OF J.A.M.S./ENDISPUTE OR
ANY SUCCESSOR THEREOF ("J.A.M.S."), AND THE "SPECIAL RULES" SET FORTH BELOW. IN
THE EVENT OF ANY INCONSISTENCY, THE SPECIAL RULES SHALL CONTROL. JUDGMENT UPON
ANY ARBITRATION AWARD MAY BE ENTERED IN ANY COURT HAVING JURISDICTION. ANY PARTY
TO THIS INSTRUMENT, AGREEMENT OR DOCUMENT MAY BRING AN ACTION, INCLUDING A
SUMMARY OR EXPEDITED PROCEEDING, TO COMPEL ARBITRATION OF ANY CONTROVERSY OR
CLAIM TO WHICH THIS AGREEMENT APPLIES IN ANY COURT HAVING JURISDICTION OVER SUCH
ACTION.
A. SPECIAL RULES. THE ARBITRATION SHALL BE CONDUCTED IN THE COUNTY OF ANY
BORROWER'S DOMICILE AT THE TIME OF THE EXECUTION OF THIS INSTRUMENT, AGREEMENT
OR DOCUMENT AND ADMINISTERED BY J.A.M.S. WHO WILL APPOINT AN ARBITRATOR; IF
J.A.M.S. IS UNABLE OR LEGALLY PRECLUDED FROM ADMINISTERING THE ARBITRATION, THEN
THE AMERICAN ARBITRATION ASSOCIATION WILL SERVE. ALL ARBITRATION HEARINGS WILL
BE COMMENCED WITHIN 90 DAYS OF THE DEMAND FOR ARBITRATION; FURTHER, THE
ARBITRATOR SHALL ONLY, UPON A SHOWING OF CAUSE, BE PERMITTED TO EXTEND THE
COMMENCEMENT OF SUCH HEARING FOR UP TO AN ADDITIONAL 60 DAYS.
B. RESERVATION OF RIGHTS. NOTHING IN THIS ARBITRATION PROVISION SHALL BE
DEEMED TO (I) LIMIT THE APPLICABILITY OF ANY OTHERWISE APPLICABLE STATUTES OF
LIMITATION OR REPOSE AND ANY WAIVERS CONTAINED IN THIS INSTRUMENT, AGREEMENT OR
DOCUMENT; OR (II) BE A WAIVER BY BANK OF THE PROTECTION AFFORDED TO IT BY 12
U.S.C. SEC. 91 OR ANY SUBSTANTIALLY EQUIVALENT STATE LAW; OR (III) LIMIT THE
RIGHT OF BANK HERETO (A) TO EXERCISE SELF HELP REMEDIES SUCH AS (BUT NOT LIMITED
TO) SETOFF, OR (B) TO FORECLOSE AGAINST ANY REAL OR PERSONAL PROPERTY
COLLATERAL, OR (C) TO OBTAIN FROM A COURT PROVISIONAL OR ANCILLARY REMEDIES SUCH
AS (BUT NOT LIMITED TO) INJUNCTIVE RELIEF, WRIT OF POSSESSION OR THE APPOINTMENT
OF A RECEIVER. BANK MAY EXERCISE SUCH SELF HELP RIGHTS, FORECLOSE UPON SUCH
PROPERTY, OR OBTAIN SUCH PROVISIONAL OR ANCILLARY REMEDIES BEFORE, DURING OR
AFTER THE PENDENCY OF ANY ARBITRATION PROCEEDING BROUGHT PURSUANT TO THIS
INSTRUMENT, AGREEMENT OR DOCUMENT. NEITHER THIS EXERCISE OF SELF HELP REMEDIES
NOR THE INSTITUTION OR MAINTENANCE OF AN ACTION FOR FORECLOSURE OR PROVISIONAL
OR ANCILLARY REMEDIES SHALL CONSTITUTE A WAIVER OF THE RIGHT OF ANY PARTY,
INCLUDING THE CLAIMANT IN ANY SUCH ACTION, TO ARBITRATE THE MERITS OF THE
CONTROVERSY OR CLAIM OCCASIONING RESORT TO SUCH REMEDIES.
4
<PAGE> 26
BORROWER REPRESENTS TO BANK THAT THE PROCEEDS OF THIS LOAN ARE TO BE USED
PRIMARILY FOR BUSINESS, COMMERCIAL OR AGRICULTURAL PURPOSES. BORROWER
ACKNOWLEDGES HAVING READ AND UNDERSTOOD, AND AGREES TO BE BOUND BY, ALL TERMS
AND CONDITIONS OF THIS NOTE.
NOTICE OF FINAL AGREEMENT. THIS WRITTEN PROMISSORY NOTE REPRESENTS THE FINAL
AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF
PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES.
THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES.
SCB COMPUTER TECHNOLOGY, INC.
By:
-----------------------------------
Name:
---------------------------------
Title:
--------------------------------
--------------------------------------
Attest
5
<PAGE> 27
DELTA SOFTWARE SYSTEMS, INC.
By:
-----------------------------------
Name:
---------------------------------
Title:
--------------------------------
--------------------------------------
Attest
TMR ACQUISITION, INC.
By:
-----------------------------------
Name:
---------------------------------
Title:
--------------------------------
--------------------------------------
Attest
6
<PAGE> 28
PARTNERS CAPITAL GROUP, INC.
By:
-----------------------------------
Name:
---------------------------------
Title:
--------------------------------
--------------------------------------
Attest
PARTNERS RESOURCES, INC.
By:
-----------------------------------
Name:
---------------------------------
Title:
--------------------------------
--------------------------------------
Attest
7
<PAGE> 1
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
SCB Software Services, Inc., a Tennessee corporation
Delta Software Systems, Inc., a Tennessee corporation
Technology Management Resources, Inc., a Tennessee corporation
Proven Technology, Inc., a Tennessee corporation
Partners Resources, Inc., an Arizona corporation
Partners Capital Group, a California corporation
SCB Computer Technology of Alabama, Inc., an Alabama corporation
<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 and in the Registration Statement (Form S-8 No. 333-36971)
pertaining to the SCB Computer Technology, Inc. 1997 Stock Incentive Plan of our
report dated June 16, 1998, 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, 1998.
/s/ Ernst & Young LLP
Memphis, Tennessee
July 24, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> APR-30-1998
<PERIOD-START> MAY-01-1997
<PERIOD-END> APR-30-1998
<CASH> 2,983,372
<SECURITIES> 0
<RECEIVABLES> 25,362,352
<ALLOWANCES> 73,891
<INVENTORY> 439,182
<CURRENT-ASSETS> 31,852,198
<PP&E> 16,780,046
<DEPRECIATION> 3,629,636
<TOTAL-ASSETS> 98,546,346
<CURRENT-LIABILITIES> 14,845,350
<BONDS> 0
0
0
<COMMON> 225,300
<OTHER-SE> 39,655,801
<TOTAL-LIABILITY-AND-EQUITY> 98,546,346
<SALES> 109,471,727
<TOTAL-REVENUES> 109,471,727
<CGS> 75,634,218
<TOTAL-COSTS> 75,634,218
<OTHER-EXPENSES> 755,989
<LOSS-PROVISION> 30,000
<INTEREST-EXPENSE> 1,951,635
<INCOME-PRETAX> 12,500,626
<INCOME-TAX> 4,908,510
<INCOME-CONTINUING> 7,592,116
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,592,116
<EPS-PRIMARY> .34
<EPS-DILUTED> .33
</TABLE>
