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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED APRIL 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _________ TO ________
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 No.)
1365 WEST BRIERBROOK ROAD
MEMPHIS, TENNESSEE 38138
(Address of principal executive 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
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
At July 23, 1999, there were 24,711,965 outstanding shares of common stock.
At such date, the aggregate market value of the shares of common stock held by
non-affiliates of the registrant, based on the closing sale price of $5.375 per
share as reported on the Nasdaq Stock Market, was approximately $79,950,324.
DOCUMENTS INCORPORATED BY REFERENCE
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PART OF FORM 10-K
DOCUMENTS INCORPORATED INTO WHICH INCORPORATED
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Certain portions of the 1999 Annual Report to Shareholders Part II - Items 6, 7 and 8
Part IV - Item 14(a)(1)
Certain portions of the Proxy Statement for the 1999 Annual
Meeting of Shareholders Part III - Items 10-12
</TABLE>
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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 to
commercial enterprises, including a number of Fortune 500 companies, and to
state and local governments. The Company's services primarily consist of (1)
CONSULTING, which entails 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, which involves system
development and integration, maintenance, data center management, help desk and
technical services, remote processing, and computer hardware sales and leasing;
(3) PROFESSIONAL STAFFING, which includes providing skilled IT staff on an
as-needed basis; and (4) ENTERPRISE RESOURCE PLANNING ("ERP"), which consists of
planning and evaluating, system analysis and administration, implementation and
functional support.
SCB was founded as a partnership in 1976 and was 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 also can be
contacted at the following Internet address:
http://www.scb.com.
ACQUISITIONS
The Company's revenues have increased significantly over the last six
fiscal years, from $28.6 million in fiscal 1994 to $156.7 million in fiscal
1999. 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 adding 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 IT 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.
TECHNOLOGY MANAGEMENT RESOURCES. On February 28, 1997, the Company
acquired substantially all of the assets of Technology Management Resources,
Inc. ("TMRI"), an IT consulting company, in a transaction accounted for using
the purchase method. The purchase price for the assets consisted of $8.5 million
in cash, the assumption of certain liabilities (primarily accounts payable), and
up to $4 million payable in shares of the Company's common stock contingent on
growth in the acquired business' revenues and earnings in the fiscal years
ending April 30, 1998, 1999 and 2000. In December 1997, the Company paid TMRI's
successor $1.2 million in cash in full and final settlement of any additional
purchase price payments.
THE PARTNERS GROUP. On June 30, 1997, the Company acquired all of the
outstanding capital stock of Partners Resources, Inc. ("PRI"), an IT outsourcing
company, and Partners Capital Group, Inc. ("PCG" and collectively with PRI, the
"Partners Group"), a computer leasing company, in a transaction accounted for
under the purchase method. The aggregate purchase price for the capital stock of
the Partners Group was $16 million 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 Company's common stock and approximately $7.1 million in cash, net
of approximately
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$962,000 of the original escrow retained due to PCG's failure to meet certain
earnings goals 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 outstanding capital stock of
Proven was converted into an aggregate of 543,722 shares of the Company's common
stock, of which 54,372 shares are being held in escrow to secure potential
indemnification claims.
GLOBAL SERVICES. On May 20, 1999, the Company acquired substantially all
of the assets of Global Services, Inc., a computer hardware re-seller, in a
transaction accounted for using the purchase method. The purchase price of the
assets included $6.6 million in cash and the assumption of certain liabilities
(primarily accounts payable).
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. These services 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 optimal 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 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.
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CONSULTING - Y2K COMPLIANCE
The Company's Y2K compliance consulting services combine comprehensive
inventory, assessment, planning, remediation, testing, and follow-up to assist
clients in managing the impact of the Y2K computer problem on their application
software, system software, and mainframe and desktop hardware. A substantial
portion of these services involve the use of Pro 2000SM, the Company's
proprietary suite of services, and ProVision 2000SM, 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 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 1999, the Company derived approximately 10% of its revenue from
Y2K consulting services. Although the Company is currently providing services on
a number of Y2K projects and continues to devote resources to the provision of
these services, the Company expects demand for such services to decrease rapidly
as Y2K approaches and the implementation and testing of many Y2K 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 to 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 and engineering);
- - implementation of project pilots and tests beds for integrated testing;
- - training;
- - staffing of 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 selectively deploy
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 that 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
our Emerging Technology Centers. Prior to the Partners Group acquisition in
1997, SCB had not assumed asset ownership in connection with its outsourcing
services. Since such acquisition, outsourcing services have involved
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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 or professional staffing contracts.
Outsourcing 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.
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 engagements range from
short-term discrete projects to long-term 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 over 250 clients. SCB's
clients represent a diverse group of governmental and commercial enterprises.
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.
In fiscal 1999, the Company's top five clients - in terms of revenue to
the Company - accounted for approximately 35% 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 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 contracts, specifically allow the client to engage other
vendors for the projects covered by the contract.
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MARKETING AND SALES
The Company markets its services through senior management and a sales
staff of 40 persons. The Company currently has personnel located at sales
offices in 25 cities. Relationships with SCB's larger clients and key government
personnel are maintained and fostered by at least one of the Company's executive
officers. The Company believes that its senior management's hands-on involvement
with major clients is a significant competitive advantage.
Account managers market SCB's services and serve as the primary contacts
in maintaining client relationships. Accordingly, account managers learn the
basic aspects of a client's business in order to identify opportunities for
providing additional IT services to the client. Account managers are paid a
salary plus commissions based on the revenues associated with client
relationships under their supervision. In general, account managers are not IT
technicians. They are, however, supported by SCB technical personnel in their
marketing and sales efforts.
EMPLOYEES AND RECRUITING
The Company currently employs approximately 1,400 persons, consisting of
approximately 1,210 technicians, 40 salespersons, 50 recruiters, 5 executives,
and 95 other administrative personnel. The Company believes that there is a
continuing shortage in the industry for computer professionals, especially
programmers and systems designers. The Company competes for these persons with
in-house MIS departments and other computer services firms. 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 also has 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 that its principal competitors, categorized
according to the services performed, are as follows: (1) consulting, including
Y2K compliance and telecommunications - IBM, SHL Systemhouse Inc., Andersen
Consulting, Computer Horizons Corporation, and EDS; (2) outsourcing - IBM, EDS,
Perot Systems Corporation, Computer Sciences Corporation, Computer Management
Sciences, Inc., and Andersen Consulting; (3) professional staffing - Computer
Task Group, Inc., Computer Horizons Corporation, Keane, Inc., and Metro
Information Services, Inc.; and (4) 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 (1) responsiveness to clients' needs and speed in
delivering IT solutions; (2) effectiveness of delivered solutions as measured
through cost reductions and improvements in price/performance ratios; (3) output
per employee as reflected in utilization rates; (4) quality of service; (5)
price; and (6) 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 engagements,
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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
compliance, 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 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 table below sets forth information with respect to the business
experience of the Company's executive officers during at least the past five
years.
<TABLE>
<CAPTION>
NAME AGE POSITION AND TERM
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T. Scott Cobb 62 Mr. Cobb is a founder of the Company and has been Chairman of the Board
since its formation in 1984. He also was President of the Company from 1984
to 1996. Mr. Cobb was a partner in Seltmann, Cobb & Bryant, the Company's
predecessor, from its formation in 1976 to 1984. Mr. Cobb is the father of
Jeffrey S. Cobb.
Ben C. Bryant, Jr. 52 Mr. Bryant is a founder of the Company and has been Vice Chairman of the
Board, Chief Executive Officer, and Treasurer since 1984. He also has been
President of the Company since 1996. Mr. Bryant was a partner in Seltmann,
Cobb & Bryant, the Company's predecessor, from its formation in 1976 to 1984.
Jeffrey S. Cobb 37 Mr. Cobb has been Chief Operating Officer of the Company since 1995. His
prior positions with the Company include Senior Vice President of Operations
and Administration from 1992 to 1995, Director of Projects from 1990 to 1992,
and Director of Recruiting from 1989 to 1990. He is the son of T. Scott Cobb.
Gary E. McCarter 50 Mr. McCarter has been Chief Financial Officer of the Company since 1997. He
was Senior Vice President of Finance and Administration of the Company from
1996 to 1997 and was a consultant to the Company from 1995 to 1996. Mr.
McCarter was 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. He was Vice President of Finance at V.N.A. of Memphis,
Inc., a home health care company, from 1992 to 1993.
Gordon L. Bateman 50 Mr. Bateman has been Chief Administrative Officer of the Company since 1997
and its Secretary since 1996. His prior positions with the Company include
Executive Vice President of Finance and
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<TABLE>
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Administration from 1995 to 1997, Chief Financial Officer from 1988 to 1997,
and Senior Vice President from 1987 to 1995. He joined the Company in 1984.
</TABLE>
FORWARD-LOOKING STATEMENTS
Certain matters discussed in this Annual Report on Form 10-K, including
the exhibits hereto, may constitute forward-looking statements within the
meaning of the federal securities laws. Forward-looking statements are those
that express management's view of future performance and trends, and usually are
preceded with "expects", "anticipates", "believes", "hopes", "estimates",
"plans" or similar phrasing. Forward-looking statements include statements
regarding projected operating revenues and costs, liquidity, capital
expenditures, and availability of capital resources as well as Y2K readiness and
potential exposure. Such statements are based on management's beliefs,
assumptions and expectations, which in turn are based on information currently
available to management. Information contained in these forward-looking
statements is inherently uncertain, and the Company's actual performance and
results may differ materially due to a number of factors, most of which are
beyond the Company's ability to predict or 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 its clients in
connection with the provision of IT services, particularly Y2K compliance
consulting; the Company's ability to finance, sustain and manage growth; the
Company's ability to integrate acquired businesses; competition; and general
economic conditions. The Company undertakes no obligation to publicly release
any revision to any forward-looking statement contained herein to reflect events
or circumstances occurring after the date hereof or to reflect the occurrence of
unanticipated events.
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 lease expiring in May 2000. In June 1999, the
company entered into a 10-year lease with a 5-year renewal option on a 50,000
square feet building in the Memphis Technology Corridor area. This building will
allow the Company to merge its Memphis corporate, regional and subsidiary
operations under one roof, reduce its office space cost on a square foot basis,
and allow for future growth. Some portion of the building will be subleased
until it is needed by the Company. The Company intends to sell its owned
corporate facilities.
The Company has Emerging Technology Centers and regional offices in
Nashville, Tennessee (approximately 17,000 square feet) and Dallas, Texas
(approximately 7,500 square feet) and regional offices only in Atlanta, Georgia
(approximately 3,000 square feet), Long Island, New York (approximately 3,500
square feet), and Phoenix, Arizona (approximately 1,200 square feet). The
Company leases sales offices or has access to office facilities in Montgomery,
Alabama; Phoenix, Arizona; Little Rock, Arkansas; Denver, Colorado; Jacksonville
and Orlando, Florida; Indianapolis, Indiana; Frankfort, Kentucky; Baton Rouge
and New Orleans, Louisiana; Jackson, Mississippi; Kansas City and St. Louis,
Missouri; Omaha, Nebraska; Santa Fe, New Mexico; Raleigh, North Carolina; and
Austin, Texas.
ITEM 3. LEGAL PROCEEDINGS
In September 1998, the Company reached a tentative agreement with the
United States Attorney for the Western District of Tennessee and the Tennessee
Valley Authority (the "TVA") to settle on a civil basis all claims against the
Company related to the Company's billing practices under its consulting contract
with the TVA. The Company agreed to pay $1,000,000 to the United States
government and $600,000 to the TVA in settlement of all claims against the
Company. The Company provided for an accrual of $1,900,000 in anticipation of
the settlement. The final agreement was executed on May 5, 1999. In connection
with the settlement, a former officer of the Company plead guilty to a single
felony count of submitting a false claim of less than $10,000. Pursuant to the
resignation of such officer from the Company, SCB recorded severance expense of
$800,000 in the fiscal quarter ended October 31, 1998, with non-compete payments
to the former
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officer aggregating $980,000 being amortized ratably over three years. The
$1,900,000 settlement charge and the $800,000 severance charge are reflected
separately on the consolidated statement of income under the caption "TVA
settlement and severance payments".
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders during the fiscal
quarter ended April 30, 1999.
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PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON STOCK AND RELATED SHAREHOLDER MATTERS
The Company's common stock is listed on the Nasdaq Stock Market and is
traded under the ticker symbol "SCBI". There were approximately 3,000 holders of
common stock as of July 23, 1999.
The following table sets forth the high and low sales prices per share of
common stock during each quarterly period of fiscal 1999 and 1998 as reported by
the Nasdaq Stock Market:
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1999 High Low
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Fourth Fiscal Quarter $ 9.50 $4.56
Third Fiscal Quarter 10.13 7.00
Second Fiscal Quarter 10.25 6.00
First Fiscal Quarter 12.75 9.31
</TABLE>
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1998
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Fourth Fiscal Quarter $13.50 $8.25
Third Fiscal Quarter 10.00 7.00
Second Fiscal Quarter 10.88 7.92
First Fiscal Quarter 8.88 5.75
</TABLE>
The Company did not pay any cash dividends on the common stock during
fiscal 1999 and 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
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 any earnings to
finance the operation and expansion of the Company's business.
On September 3, 1997, the Company effected a three-for-two split of the
common stock that was paid in the form of a 50% stock dividend. On April 27,
1998, the Company effected a two-for-one split of the common stock that was paid
in the form of a 100% stock dividend. The information included herein has been
adjusted to reflect such stock splits.
ITEM 6. SELECTED FINANCIAL DATA
The information under the caption "Selected Consolidated Financial Data"
on page 25 of the Company's 1999 Annual Report to Shareholders (the "Annual
Report to Shareholders") is incorporated herein by reference in response to this
item.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The information under the caption "Management's Discussion and Analysis
of Financial Condition and Results of Operations" on pages 26-31 of the Annual
Report to Shareholders is incorporated herein by reference in response to this
item.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements and accompanying notes thereto on
pages 32-59 of the Annual Report to Shareholders are incorporated herein by
reference in response to this item.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
The information under the caption "Item 1 - Election of Directors" in the
Company's Proxy Statement for its 1999 Annual Meeting of Shareholders (the
"Proxy Statement") and under the caption "Business - Executive Officers" on page
7 of this Annual Report on Form 10-K is incorporated herein by reference in
response to this item.
ITEM 11. EXECUTIVE COMPENSATION
The information under the captions "How are directors compensated?" and
"Executive Officer Compensation" in the Proxy Statement is incorporated herein
by reference in response to this item.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information under the caption "Stock Ownership" in the Proxy
Statement is incorporated herein by reference in response to this item.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) (1) Financial Statements
The financial statements required by this item are contained in
the Annual Report to Shareholders on pages 32-59, which information is
incorporated herein by reference in response to this item.
(2) Financial Statement Schedules
Not applicable.
(3) Exhibits
The exhibits listed in the Exhibit Index below are filed as part
of this Annual Report on Form 10-K or are incorporated herein by reference.
(b) Reports on Form 8-K
The Company did not file a Current Report on Form 8-K during the fiscal
quarter ended April 30, 1998.
11
<PAGE> 12
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.
SCB COMPUTER TECHNOLOGY, INC.
By: /s/ Ben C. Bryant, Jr.
--------------------------------------
Ben C. Bryant, Jr.
President and Chief Executive Officer
Date: July 28, 1999
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
<S> <C> <C>
/s/ T. Scott Cobb Chairman of the Board July 28, 1999
- ----------------------------------
T. Scott Cobb
/s/ Ben C. Bryant, Jr. Vice Chairman of the Board, July 28, 1999
- ---------------------------------- Chief Executive Officer,
Ben C. Bryant, Jr. President and Treasurer
(principal executive officer)
/s/ Gary E. McCarter Chief Financial Officer (principal July 28, 1999
- ---------------------------------- financial and accounting officer)
Gary E. McCarter
/s/ James E. Harwood Director July 28, 1999
- ---------------------------------
James E. Harwood
/s/ Joseph W. McLeary Director July 28, 1999
- -----------------------------------
Joseph W. McLeary
</TABLE>
12
<PAGE> 13
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
2.1 Agreement and Plan of Merger dated as of September 26, 1996,
among the Company, Delta Acquisition, Inc., Delta Software
Systems, Inc., and the shareholders of Delta Software Systems,
Inc., including form of Indemnity and Escrow Agreement
(incorporated herein by reference to Exhibit 2 to the
Company's Current Report on Form 8-K dated October 8, 1996).
Schedules and other exhibits have been omitted from this
filing. The Company will furnish, as supplementary
information, copies of the omitted materials to the Securities
and Exchange Commission (the "SEC") upon request.
2.2 Asset Purchase Agreement dated February 28, 1997, among the
Company, TMR Acquisition, Inc., Technology Management
Resources, Inc., and the shareholders of Technology Management
Resources, Inc. (incorporated herein by reference to Exhibit
2.2 to the Company's Registration Statement on Form S-3
(Registration No. 333-22869)). Schedules and other exhibits
have been omitted from this filing. The Company will furnish,
as supplementary information, copies of the omitted materials
to the SEC upon request.
2.3 Settlement Agreement and Release dated as of December 30,
1997, 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 herein by
reference to Exhibit 2 to the Company's Quarterly Report on
Form 10-Q for the fiscal quarter ended January 31, 1998).
2.4 Stock Purchase Agreement dated as of June 30, 1997, among the
Company and the shareholders of Partners Capital Group, Inc.
(incorporated herein by reference to Exhibit 2.1 to the
Company's Current Report on Form 8-K dated July 24, 1997).
Schedules and other exhibits have been omitted from this
filing. The Company will furnish, as supplementary
information, copies of the omitted materials to the SEC upon
request.
2.5 Stock Purchase Agreement dated as of June 30, 1997, among the
Company and the shareholders of Partners Resources, Inc.
(incorporated herein by reference to Exhibit 2.2 to the
Company's Current Report on Form 8-K dated July 24, 1997).
Schedules and other exhibits have been omitted from this
filing. The Company will furnish, as supplementary
information, copies of the omitted materials to the SEC upon
request.
2.6 Asset Purchase Agreement dated as of May 1, 1999, among the
Company, Partners Resources, Inc., Global Services, Inc., and
the shareholders of Global Services, Inc. Schedules and other
exhibits have been omitted from this filing. The Company will
furnish, as supplementary information, copies of the omitted
materials to the SEC upon request.
3.1 Amended and Restated Charter of the Company (incorporated
herein by reference to Exhibit 3.1 to the Company's
Registration Statement on Form S-1 (Registration No.
33-80707)).
3.2 Articles of Amendment to the Amended and Restated Charter of
the Company dated November 3, 1998 (incorporated herein by
reference to Exhibit 4.2 to the Company's Registration
Statement on Form S-8 (Registration No. 333-68343)).
3.3 Amended and Restated Bylaws of the Company (incorporated
herein by reference to Exhibit 3.2 to the Company's
Registration Statement on Form S-1 (Registration No.
33-80707)).
4.1 Specimen of common stock certificate (incorporated herein by
reference to Exhibit 4.1 to the Company's Registration
Statement on Form S-1 (Registration No. 33-80707)).
13
<PAGE> 14
4.2 Article 7 of the Amended and Restated Charter of the Company,
as amended (included in Exhibits 3.1 and 3.2 hereto).
10.1 SCB Computer Technology, Inc. 1995 Stock Incentive Plan
(incorporated herein by reference to Exhibit 10.2 to the
Company's Registration Statement on Form S-1 (Registration No.
33-80707)).
10.2 SCB Computer Technology, Inc. 1997 Stock Incentive Plan
(incorporated herein by reference to Appendix A to the
Company's definitive Proxy Statement dated September 25,
1998).
10.3 Employment Agreement dated as of November 1, 1998, between the
Company and T. Scott Cobb (incorporated herein by reference to
Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q
for the fiscal quarter ended January 31, 1999).
10.4 Employment Agreement dated as of November 1, 1998, between the
Company and Ben C. Bryant, Jr. (incorporated herein by
reference to Exhibit 10.1 to the Company's Quarterly Report on
Form 10-Q for the fiscal quarter ended January 31, 1999).
10.5 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, including the form of
promissory note (incorporated herein by reference to Amendment
No. 1 to the Company's Annual Report on Form 10-K/A for the
fiscal year ended April 30, 1998), as amended by (1) First
Modification to Second Amended and Restated Loan Agreement
dated as of September 15, 1998, among the parties thereto, (2)
Second Modification to Second Amended and Restated Loan
Agreement dated as of May 20, 1999, among the parties thereto,
and (3) Third Modification to Second Amended and Restated Loan
Agreement dated as of June 21, 1999, among the parties
thereto.
11 Computation of Earnings Per Share (included in Note 14 of the
Notes to Consolidated Financial Statements contained in the
Company's 1999 Annual Report to Shareholders filed as Exhibit
13 hereto).
13 SCB Computer Technology, Inc. 1999 Annual Report to
Shareholders.
21 Subsidiaries of the Company (incorporated herein by reference
to the Company's Annual Report on Form 10-K for the fiscal
year ended April 30, 1998).
23 Consent of Ernst & Young LLP.
27 Financial Data Schedule - Fiscal Year Ended April 30, 1999.
14
<PAGE> 1
Exhibit 2.6
ASSET PURCHASE AGREEMENT
BY AND AMONG
SCB COMPUTER TECHNOLOGY, INC.,
PARTNERS RESOURCES, INC.,
GLOBAL SERVICES, INC.
AND
THE SHAREHOLDERS OF
GLOBAL SERVICES, INC.
DATED AS OF MAY 1, 1999
<PAGE> 2
ASSET PURCHASE AGREEMENT
This ASSET PURCHASE AGREEMENT (the "Agreement"), is dated to be effective
as of May 1, 1999 by and among SCB Computer Technology, Inc. ("SCB"), Partners
Resources, Inc., an Arizona corporation and wholly owned subsidiary of SCB
("Buyer"), Global Services, Inc., a Colorado corporation (the "Seller"), and all
of the shareholders of the Seller, as identified on the signature pages hereto
(individually, a "Shareholder," and, collectively, the "Shareholders").
WHEREAS, the Shareholders own all of the issued and outstanding shares of
capital stock of the Seller; and
WHEREAS, the Shareholders desire to cause Seller to sell to SCB, and SCB
desires to purchase from Seller, substantially all of the assets of Seller on
the terms and conditions set forth herein;
NOW, THEREFORE, in consideration of the foregoing, and of the
representations, warranties, covenants, and agreements contained herein, the
parties hereto hereby agree as follows:
ARTICLE 1.
TRANSFER OF ASSETS AND PURCHASE PRICE
1.1 Purchase and Sale of Assets. On the terms and subject to the
conditions set forth herein, Seller agrees to sell, convey, transfer, and assign
and deliver to Buyer, and Buyer agrees to purchase, receive, assume, and accept,
good and marketable title to the assets used or useful to the business of
Seller, whether tangible or intangible, real, personal, or mixed, including,
without limitation, leases and leasehold improvements, contract rights,
trademarks, service marks, trade names (including the right to the use of
Seller's corporate name) and associated goodwill; cash and cash equivalents;
inventory; receivables (including accounts receivable, loans receivable, and
advances) and records related thereto; equipment, furniture, and fixtures;
customer lists; sales data; supplies; computer systems (both hardware and
software); licenses and permits; stock in subsidiaries; patents and copyrights;
and know how (such assets being collectively referred to herein as the
"Transferred Assets"). Without limiting the generality of the foregoing, it is
agreed that the Transferred Assets will include, without limitation, all of the
assets listed on Exhibit A hereto.
1.2 Assumption of Liabilities. Except for the accounts payable set forth
on Exhibit B hereto and Buyer's pro rata portion of any personal property taxes
for calendar year 1999, neither SCB nor Buyer will in any event assume or be
responsible for any liabilities, liens, claims,
<PAGE> 3
obligations, or encumbrances of the Seller or the Shareholders, contingent or
otherwise, and the Transferred Assets shall be sold and conveyed to Buyer free
and clear of all liabilities, liens, claims, obligations, and encumbrances.
Without limiting the generality of the foregoing, in no event will SCB or Buyer
assume or be responsible for:
(a) any income, sales, property, franchise, use, or other tax of
Seller or any Shareholder arising out of or resulting from the sale of the
Transferred Assets pursuant hereto or any transaction of Seller or any
Shareholder prior to or subsequent to the execution of this Agreement;
(b) any liability, obligation, or cost resulting from any claim or
lawsuit or other proceeding relating to the Transferred Assets or naming
Seller, or any successors thereof, or the Shareholders as a party arising
out of events, transactions, or circumstances occurring or existing prior
to Closing (as defined herein);
(c) any claim against SCB, Buyer, or Seller, which claim is based,
in whole or in part, upon the failure of Seller, SCB, or Buyer to comply
with laws applicable to bulk transfers; or
(d) any accrued vacation or sick leave, any employee benefit, or any
other employee cost of Seller.
1.3 Purchase Price. Subject to adjustment as set forth in this Agreement,
the aggregate consideration (the "Purchase Price") for the Transferred Assets
payable by SCB to Seller will consist of an aggregate amount of $6,647,513 in
cash (the "Cash Consideration"), $6,147,513 of which will be payable to Seller
by wire transfer of immediately available funds at Closing (as hereinafter
defined), and $500,000 (the "Escrow Amount") of which will be deposited on or
prior to the Closing in an escrow account to be maintained with SunTrust Bank
Nashville, N.A., as escrow agent (the "Escrow Agent"), which Escrow Amount shall
be held for one year following the effective date hereof in connection with
potential indemnification claims under Article 5 hereof and pursuant to the
terms of an Indemnity and Escrow Agreement (the "Escrow Agreement")
substantially in the form of Exhibit C attached hereto.
1.4 Allocation of Consideration.
(a) The Purchase Price will be allocated among the Transferred
Assets as set forth on Exhibit D. The parties hereto agree to cooperate in
preparing and filing IRS Form 8594 reflecting the allocation set forth on
Exhibit D and acknowledge and agree that such allocation was determined by
arm's length negotiations and that none of them will take a
2
<PAGE> 4
position on any income tax return, before any governmental agency charged
with the collection of any income tax, or in any judicial proceeding, that
is inconsistent with such allocation.
1.5 The Closing.
(a) Time and Place. Subject to the terms and conditions of this
Agreement, the Closing under this Agreement (the "Closing") will take
place with the delivery of executed documents by all parties at the
offices of Bass, Berry & Sims PLC, 2700 First American Center, Nashville,
Tennessee, to be effective as of 12:01 a.m. on May 1, 1999, or at such
other time, date, or place as SCB, Buyer, Seller, and the Shareholders may
agree. The date on which the Closing occurs is referred to herein as the
"Closing Date."
(b) Parties' Obligations at Closing.
(i) At the Closing, SCB and Buyer will deliver to Seller:
(A) $6,147,513 in cash by wire transfer of immediately
available funds pursuant to instructions delivered by Seller
to SCB prior to Closing, together with a copy of the Escrow
Agreement duly executed by SCB and the Escrow Agent and
evidence, reasonably satisfactory to Seller, that the Escrow
Amount has been duly delivered to the Escrow Agent;
(B) a copy of the resolutions of the Boards of Directors
of SCB and Buyer, certified by their respective corporate
secretaries, authorizing the execution, delivery, and
performance of this Agreement and the other documents
referenced herein and the consummation of the transactions
contemplated hereby;
(C) employment agreements (the "Employment Agreements"),
substantially in the form of Exhibit E hereto, among SCB,
Buyer, and each of Stephen K. McEvoy and Gary K. Hill, duly
executed by SCB and Buyer;
(D) the Bill of Sale, Assignment and Assumption
Agreement relating to the Transferred Assets and the Assumed
Liabilities, duly executed by Buyer, substantially in the form
of Exhibit F hereto;
(E) such other certificates and documents as Seller or
its counsel may reasonably request.
3
<PAGE> 5
(ii) At Closing, Seller and the Shareholders will deliver to
SCB and Buyer:
(A) the Bill of Sale, Assignment and Assumption
Agreement relating to the Transferred Assets, duly executed by
the Seller, substantially in the form of Exhibit F hereto;
(B) such other instruments of conveyance, assignment,
and transfer, in form and substance satisfactory to SCB's
counsel, as shall be effective to vest in Buyer good and
marketable title to the Transferred Assets, duly executed by
the Seller;
(C) Employment Agreements, duly executed by Stephen K.
McEvoy and Gary K. Hill;
(D) a copy of the resolutions of the Board of Directors
and Shareholders of Seller, certified by the Seller's
corporate secretary, authorizing the execution, delivery, and
performance of this Agreement and the other documents
referenced herein and the consummation of the transactions
contemplated hereby;
(E) an opinion of McGloin, Davenport, Severson and Snow,
legal counsel to Seller and the Shareholders, substantially in
the form of Exhibit G hereto;
(F) any required consent or approval of a creditor,
contract party, or public or governmental authority to the
transactions contemplated hereby;
(G) the Escrow Agreement, duly executed by Seller; and
(H) such other certificates or documents as SCB, Buyer,
or their counsel may reasonably request.
4
<PAGE> 6
ARTICLE 2.
REPRESENTATIONS AND WARRANTIES OF
SELLER AND THE SHAREHOLDERS
Except as set forth in the disclosure letter delivered prior to the
execution hereof to SCB (the "Seller Disclosure Letter"), Seller and the
Shareholders, jointly and severally, represent and warrant to SCB and Buyer as
follows:
2.1 Assets. Seller is the lawful owner of the Transferred Assets free and
clear of all liens, claims, charges, restrictions, security interests, pledges,
or encumbrances of any kind, and Seller has the full right, power, authority,
and capacity to sell and transfer the Transferred Assets owned by the Seller. By
virtue of the transfer of the Transferred Assets to Buyer, Buyer will obtain
full title to the Transferred Assets free and clear of all liens, claims,
charges, restrictions, security interests, pledges, and encumbrances of any
kind.
(a) Tangible Assets. Exhibit A hereto contains an accurate and
complete description of all material fixed and other tangible assets
owned, leased, or used by the Seller, including, without limitation,
improvements to leased property and real property, plants and structures
located thereon, equipment located therein, vehicles, and all personal
property relating to Seller and its business and properties. All such
plants, structures, machinery, and equipment are in good working condition
and repair, normal wear and tear excepted, and are adequate for the uses
for which they are intended. All such plants, structures, machinery, and
equipment conform in all respects to applicable health, sanitation, fire,
environmental (including air and water pollution laws and regulations),
safety, labor, zoning, and building laws and ordinances; and Seller has
not received any notification within the last five years of any violation
of any applicable ordinance or regulation of building, zoning, or other
law, in respect of its plants, structures, properties, or operations. None
of such real property is currently the subject of any eminent domain,
condemnation, or similar proceeding and, to the best of the Seller's
knowledge, no such proceeding is threatened. Seller is now in possession
of each parcel of such real property, there is no adverse claim against
such real property and there are no pending or, to Seller's knowledge,
threatened proceedings that might interfere with Buyer's quiet enjoyment
of such real property.
(b) Material Contracts. Exhibit A also contains a complete and
accurate list of all contracts and agreements for the performance of
services or the purchase or leasing of property by Seller of an amount or
value in excess of $10,000 ("Material Contracts"). Each of the Material
Contracts is in full force and effect and is valid and enforceable in
accordance
5
<PAGE> 7
with its terms, and Seller and each other person that has or had any
obligation under a Material Contract is in full compliance with all
applicable terms and requirements thereof. No event has occurred or
circumstance exists that (with or without notice or lapse of time) may
contravene, conflict with, or result in a violation or breach of, or give
any person the right to declare a default or exercise any remedy under, or
to accelerate the maturity or performance of, or to cancel, terminate, or
modify, any Material Contract. There are no renegotiations of, attempts to
renegotiate, or outstanding rights to renegotiate any amounts paid or
payable under any Material Contract with any person.
(c) Intangible Assets. Exhibit A also contains an accurate and
complete description of all intangible assets owned or used by Sellers,
including without limitation, copyrights, patents, tradenames, trademarks,
and servicemarks (collectively, the "Intangible Assets"). Seller has sole,
full, and clear title to the Intangible Assets for the goods and services
for which such Intangible Assets are used and all registrations thereof
are valid and subsisting and are in full force and effect. Seller has the
sole, full, and clear title to each copyright in the Intangible Assets and
all the registrations thereof are valid and subsisting and are in full
force and effect. Seller (either itself or through its licensees) has
placed and will continue to place appropriate notice of copyright on all
copies embodying such copyrighted works which are publicly distributed,
and Seller will not (and will not permit any licensee thereof to) do any
act or knowingly omit to do any act whereby any copyright may become
invalidated or dedicated to the public domain.
2.2 Existence; Good Standing; Corporate Power and Authority. Seller is a
corporation duly organized, validly existing, and in good standing under the
laws of the State of Colorado. Seller is not qualified to do business as a
foreign corporation and neither the character of the properties owned or leased
by it or the transaction of its business makes such qualification necessary.
Seller has all requisite corporate power and authority to own, operate, and
lease its properties and to carry on its business as now conducted.
2.3 Authorization, Validity, and Effect of Agreements. Seller and the
Shareholders have full power and authority to execute and deliver this Agreement
and all agreements and documents contemplated hereby. This Agreement and the
transactions contemplated hereby have been approved by Seller's Board of
Directors and shareholders and the consummation by Seller of the transactions
contemplated hereby has been duly authorized by all requisite corporate action.
This Agreement constitutes, and all agreements and documents contemplated hereby
(when executed and delivered pursuant hereto) will constitute, the valid and
legally binding obligations of Seller and the Shareholders, enforceable in
accordance with their respective terms.
6
<PAGE> 8
2.4 Capitalization. The 1,000 shares of common stock, no par value, of
Seller (the "Seller Shares") are owned beneficially and of record by the
Shareholders as set forth on the Seller Disclosure Letter. Seller does not have
any outstanding capital stock, bonds, debentures, notes, or other obligations
the holders of which have the right to vote (or which are convertible into or
exercisable for securities having the right to vote) with the Shareholders on
any matter. All issued and outstanding Seller Shares are duly authorized,
validly issued, fully paid, nonassessable, and free of preemptive rights. None
of the outstanding Seller Shares are subject to any voting trust agreement,
lien, encumbrance, security interest, restriction, or claim.
2.5 Other Interests. Seller does not own, directly or indirectly, nor has
any obligation to acquire any interest or investment in any corporation,
partnership, joint venture, business, trust, or other entity.
2.6 No Violation. Neither the execution and delivery by Sellers of this
Agreement nor the consummation by Seller and the Shareholders of the
transactions contemplated hereby in accordance with the terms hereof, will: (i)
conflict with or result in a breach of any provisions of the articles of
incorporation or bylaws of Seller; (ii) conflict with, result in a breach of any
provision of or the modification or termination of, constitute a default under,
or result in the creation or imposition of any lien, security interest, charge,
or encumbrance upon any of the assets of Seller or any Shareholder pursuant to
any commitment, lease, contract, or other material agreement or instrument to
which Seller or any Shareholder is a party (including any Material Contract); or
(iii) violate or result in a change in any rights or obligations under any
governmental permit or license or any order, arbitration award, judgment, writ,
injunction, decree, statute, rule, or regulation applicable to Seller or any
Shareholder.
2.7 Regulatory Consents. No consent, approval, order, or authorization of,
or registration, declaration, or filing with, any governmental entity, is
required by or with respect to Seller or any Shareholder in connection with the
execution and delivery of this Agreement by Seller or any Shareholder, or the
consummation by Seller or any Shareholder of the transactions contemplated
hereby, which has not been made or obtained.
2.8 Financial Statements. Prior to the date hereof, the Seller has
delivered to SCB true and complete copies of (a) the unaudited financial
statements of Seller as of and for the year ended December 31, 1998; and (b) the
unaudited financial statements of Seller as of and for the period ended April
30, 1999. The historical balance sheets provided to SCB by Seller (including the
related notes and schedules) fairly present the financial position of Seller as
of their respective dates and the historical statements of income, stockholders'
equity, and cash flows provided to SCB by Seller (including any related notes
and schedules) fairly present the results of operations, stockholders' equity,
and cash flows of Seller for the periods set forth therein, in each case in
accordance with
7
<PAGE> 9
generally accepted accounting principles consistently applied, except as may be
noted therein. All financial statements provided by Seller to SCB have been
prepared from the books and records of Seller, which accurately and fairly
reflect the transactions and the acquisitions and dispositions of the assets of
Seller. As of the Closing Date, Seller did not have any liabilities, contingent
or otherwise, whether due or to become due, known or unknown, other than as
indicated on the balance sheet dated December 31, 1998, except for current
liabilities incurred in the ordinary course of business since such date.
2.9 No Material Adverse Changes. Since December 31, 1998, there has not
been (i) any material adverse change in the financial condition, results of
operations, business, assets, prospects or liabilities (contingent or otherwise,
whether due or to become due, known or unknown) of the Seller; (ii) any dividend
declared or paid or distribution made on the capital stock of Seller, or any
capital stock thereof redeemed or repurchased; (iii) any incurrence by Seller of
long term debt for borrowed money; (iv) any increases in salary, bonus, or other
compensation to any officers, employees, or agents of Seller; (v) any pending or
threatened labor disputes or other labor problems against or potentially
affecting Seller; or (vi) any other transaction entered into by Seller, except
in the ordinary course of business and consistent with past practice.
2.10 Tax Matters.
(a) For purposes of this Agreement, (i) "Tax" means any federal,
state, local, or foreign income, gross receipts, license, payroll,
employment, excise, severance, stamp, occupation, premium, windfall
profits, environmental (including taxes under Section 59A of the Internal
Revenue Code of 1986, as amended (the "Code")), customs duties, capital
stock, franchise, profits, withholding, social security (or similar),
unemployment, disability, real property, personal property, sales, use,
transfer, registration, value added, alternative or add-on minimum,
estimated, or other tax of any kind whatsoever, including any interest,
penalty, or addition thereto, whether disputed or not, and (ii) "Tax
Return" means any return, report, information return, or other document
(including any related or supporting information) filed or required to be
filed with any taxing authority in connection with its determination,
assessment, collection, administration, or imposition of any Tax.
(b) Seller has duly and timely filed all Tax Returns required to be
filed by it and has duly and timely paid all Taxes and other charges
(whether or not shown on any Tax Return) due or claimed to be due from it
by federal, foreign, state, or local taxing authorities or has set up an
adequate reserve for all Taxes payable by Seller. True and correct copies
of all Tax Returns relating to federal taxes and sales taxes for the
period from organization through December 31, 1998 have been heretofore
delivered to SCB. The accruals and reserves for Taxes contained in the
financial statements and carried on the books of Seller
8
<PAGE> 10
are adequate to cover all Tax liabilities. Since December 31, 1998, Seller
has not incurred any Tax liabilities other than in the ordinary course of
business. There are no Tax liens upon any properties or assets of Seller
(whether real, personal, or mixed, tangible or intangible), and there are
no pending or, to the Shareholders' knowledge, threatened audits or
examinations relating to, or claims asserted for, Taxes or assessments
against Seller, and the Shareholders are aware of no substantial basis for
any such claims. Seller has not granted or been requested to grant any
extension of the limitation period applicable to any claim for Taxes or
assessments with respect to Taxes. Seller is not a party to any Tax
allocation or sharing agreement. Seller has no liability for the Taxes of
any Affiliated Group under Treasury Regulation 1.1502-6 (or any similar
provision of state, local, or foreign law). Seller has withheld and paid
all Taxes required to have been withheld and paid in connection with
amounts paid or owing to any employee, independent contractor, creditor,
or shareholder.
(c) The Seller Disclosure Letter lists each jurisdiction in which
each Seller files tax returns for each period or portion thereof ending on
or before the Closing Date. Except as set forth in the Seller Disclosure
Letter, there is no reason outstanding against Seller by any taxing
authority in a jurisdiction where Seller does not file Tax Returns that it
is or may be subject to taxation by that jurisdiction.
(d) All material elections with respect to Taxes affecting Seller as
of the date hereof are set forth in the Seller Disclosure Letter.
(e) All joint venturers, partnerships, or other arrangements or
contracts to which Seller is a party and that could be treated as a
partnership for federal income tax purposes are set forth in the Seller
Disclosure Letter.
(f) Seller (i) has not filed a consent pursuant to Section 341(f) of
the Code or agreed to have Section 341(f)(2) apply to any disposition of a
subsection (f) asset (as such term is defined in Section 341(f) of the
Code) owned by Seller; (ii) has not agreed, or is not required, to make
any adjustment under Section 481(a) of the Code by reason of a change in
accounting method or otherwise that will affect the liability of Seller
for Taxes; (iii) has not made an election, or is not required, to treat
any asset of Seller as owned by another person pursuant to the provisions
of former Section 168(f)(8) of the Code or as tax-exempt bond financed
property or tax-exempt use property within the meaning of Section 168 of
the Code; and (iv) has not made any of the foregoing elections or is
required to apply any of the foregoing rules under any comparable state or
local tax provision.
9
<PAGE> 11
2.11 Employees and Fringe Benefit Plans.
(a) The Seller Disclosure Letter sets forth the names, ages, and
titles of all members of the Board of Directors and officers of Seller and
all employees of Seller, and the annual rate of compensation (including
bonuses) being paid to each such officer and employee as of the most
recent practicable date.
(b) The Seller Disclosure Letter lists each employment, bonus,
deferred compensation, pension, stock option, stock appreciation right,
profit-sharing, or retirement plan, arrangement, or practice, each
medical, vacation, retiree medical, severance pay plan, and each other
agreement or fringe benefit plan, arrangement, or practice, of Seller,
whether legally binding or not, that affects one or more of Seller's
employees, including all "employee benefit plans" as defined by Section
3(3) of the Employee Retirement Income Security Act of 1974, as amended
("ERISA") (collectively, the "Plans"). Seller does not have, sponsor, or
participate in any Plan that is subject to Title IV of ERISA or the
minimum funding standards of Section 412 of the Code.
(c) For each Plan that is an "employee benefit plan" under Section
3(3) of ERISA, Seller has delivered to SCB correct and complete copies of
the plan documents and summary plan descriptions, the most recent
determination letter received from the Internal Revenue Service, the most
recent Form 5500 Annual Report, and all related trust agreements,
insurance contracts, and funding agreements that implement each such Plan.
(d) Seller does not have any commitment, whether formal or informal
and whether legally binding or not, (i) to create any additional Plan;
(ii) to modify or change any Plan; or (iii) to maintain for any period of
time any Plan. The Seller Disclosure Letter contains an accurate and
complete description of the funding policies (and commitments, if any)
with respect to each existing Plan.
(e) Seller has no unfunded past service liability in respect of any
of its Plans; neither Seller nor any Plan nor any trustee, administrator,
fiduciary, or sponsor of any Plan has engaged in any prohibited
transaction as defined in Section 406 of ERISA or Section 4975 of the Code
for which there is no statutory exemption in Section 408 of ERISA or
Section 4975 of the Code; all filings, reports, and descriptions as to
such Plans (including Form 5500 Annual Reports, summary plan descriptions,
and summary annual reports) required to have been made or distributed to
participants, the Internal Revenue Service, the United States Department
of Labor, and other governmental agencies have been made in a timely
manner; there is no litigation, disputed claim, governmental proceeding,
or investigation pending or threatened with respect to any of the Plans,
the related trusts, or any
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fiduciary, trustee, administrator, or sponsor of the Plans; the Plans have
been established, maintained, and administered in all respects in
accordance with their governing documents and applicable provisions of
ERISA and the Code and Treasury Regulations promulgated thereunder; and
each Plan that is intended to be a qualified plan under Section 401(a) of
the Code has received a favorable determination letter from the Internal
Revenue Service with respect to the current terms of the Plan.
(f) Seller has complied in all respects with all applicable federal,
state, and local laws, rules, and regulations relating to employees'
employment and employment relationships, including, without limitation,
wage related laws, anti-discrimination laws, employee safety laws, and
COBRA (defined herein to mean the requirements of Code Section 4980B,
Proposed Treasury Regulation Section 1.162-26 and Part 6 of Subtitle B of
Title I of ERISA).
(g) The consummation of the transactions contemplated by this
Agreement will not (i) result in the payment or series of payments by
Seller to any employee or other person of an "excess parachute payment"
within the meaning of Section 280G of the Code; (ii) entitle any employee
or former employee of Seller to severance pay, unemployment compensation,
or any other payment; or (iii) accelerate the time of payment or vesting
of any stock option, stock appreciation right, deferred compensation, or
other employee benefits under any Plan (including vacation and sick pay).
(h) None of the Plans that are "welfare benefit plans," within the
meaning of Section 3(1) of ERISA, provide for continuing benefits or
coverage after termination or retirement from employment, except for COBRA
rights under a "group health plan" as defined in Code Section 4980B(g) and
ERISA Section 607.
(i) Neither Seller nor any member in a "controlled group" with
Seller (as defined in ERISA) has ever contributed to, participated in, or
withdrawn from a multi-employer plan as defined in Section 4001(a)(3) of
Title IV of ERISA, and Seller has not incurred and does not owe any
liability as a result of any partial or complete withdrawal by any
employer from such a multi-employer plan as described under Section 4201,
4203, or 4205 of ERISA.
2.12 Accounts Receivable. All accounts receivable of Seller reflected on
the accounting records of Seller as of the date hereof (collectively, the
"Accounts Receivable") represent or will represent valid obligations arising
from sales actually made or services actually performed in the ordinary course
of business. The Accounts Receivable are current and collectible, net of the
respective reserves shown on the accounting records of Seller as of the date
hereof (which reserves are adequate and calculated consistent with past practice
and will not represent a greater percentage
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of the Accounts Receivable as of the date hereof than the reserve reflected in
the balance sheet dated December 31, 1998, and will not represent a material
adverse change in the composition of such Accounts Receivable in terms of
aging). Subject to such reserves, each of the Accounts Receivable either has
been or will be collected in full, without any set-off, within one hundred and
twenty (120) days after the day on which it first becomes due and payable. There
is no contest, claim, or right of set-off with any maker of an Account
Receivable relating to the amount or validity of such Account Receivable.
2.13 Lawful Operations. Seller has been and currently is conducting its
business, and each of the premises leased or owned by Seller have been and now
are being used and operated, in compliance with all statutes, regulations,
orders, covenants, restrictions, and plans of federal, state, regional, county,
or municipal authorities, agencies, or boards applicable to the same.
2.14 Litigation. There is no suit, action, or proceeding pending or, to
the knowledge of any of the Shareholders or Seller, threatened against or
affecting Seller or the Transferred Assets. Seller is not subject to any
currently existing order, writ, injunction, or decree relating to its
operations.
2.15 Corporate Records; Other Information. The minute books of Seller,
copies of which have been provided to SCB, reflect all meetings of the boards of
directors, committees of the boards of directors, and the shareholders thereof.
All documents and other written information as to existing facts relating to
Seller and its assets and liabilities which have been provided to SCB in
connection with this Agreement are true, correct, and complete in all material
respects except to the extent that any such documents or other written
information was later specifically supplemented or corrected prior to the date
of this Agreement with additional documents or written information that were
provided to SCB.
2.16 Hazardous Substances.
(a) Seller has not authorized nor conducted nor has knowledge of the
generation, transportation, storage, presence, use, treatment, disposal,
release, or handling of (in an amount or of a type that has been or must be
reported to any governmental agency, violates any Environmental Law (as defined
below), or has required or could require remediation expenditures) any hazardous
substance, asbestos, radon, polychlorinated biphenyls ("PCBs"), petroleum
product, or waste (including crude oil or any fraction thereof), natural gas,
liquefied gas, synthetic gas or other material defined, regulated, controlled,
or potentially subject to any remediation requirement under any environmental
law (collectively, "Hazardous Materials"), on, in, or under any real property
owned, leased, or by any means controlled by them;
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(b) Seller is in compliance with all federal, state, and local laws,
ordinances, rules, regulations, and other governmental requirements relating to
pollution, control of chemicals, management of waste, discharges of materials
into the environment, health, safety, natural resources, and the environment
(collectively, "Environmental Laws");
(c) Seller has been, and is in compliance with, all licenses,
permits, registrations, and government authorizations necessary to operate under
all applicable Environmental Laws;
(d) Seller has not received any written or oral notice from any
governmental entity or any other person and there is no pending or, to Seller's
or any Shareholder's knowledge, threatened claim, litigation or any
administrative agency proceeding that: alleges a violation of any Environmental
Law by Seller; alleges Seller is a liable party or a potentially responsible
party under the Comprehensive Environmental Response, Compensation and Liability
Act, 42 U.S.C. Section 9601, et seq., or any state superfund law; has resulted
in or could result in the attachment of an environmental lien on any real
property owned, leased, or controlled by Seller; or alleges the occurrence of
contamination of any of such real property, damage to natural resources,
property damage, or personal injury based on its activities or the activities of
Seller's predecessors or third parties (whether at the real property or
elsewhere) involving Hazardous Materials, whether arising under the
Environmental Laws, common law principles, or other legal standards.
2.17 Certain Business Practices and Regulations. Neither Seller, nor to
any of the Shareholder's knowledge, any of its executive officers, directors, or
employees, has (i) made or agreed to make any contribution, payment, or gift to
any customer, supplier, landlord, political candidate, governmental official,
employee, or agent where either the contribution, payment, or gift or the
purpose thereof was illegal under any law or regulation; (ii) established or
maintained any unrecorded fund or asset for any purpose or made any false
entries on its respective books and records for any reason; (iii) made or agreed
to make any contribution, or reimbursed any political gift or contribution made
by any other person, to any candidate for federal, state, or local public office
in violation of any law or regulation; or (iv) submitted any claim for services
rendered or reimbursement for expenses to any person where the services were not
actually rendered or the expenses were not actually incurred.
2.18 No Brokers. Seller has not entered into any contract, arrangement, or
understanding with any person or firm that may result in the obligation of
Seller, any Shareholder, SCB, or Buyer pay any finder's fees, brokerage or
agent's commissions, or other like payments in connection with the negotiations
leading to this Agreement or the consummation of the transactions contemplated
hereby.
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2.19 Consents and Approvals. Seller has obtained all consents, approvals,
authorizations, or orders of third parties, including governmental authorities,
necessary for the authorization, execution, and performance of this Agreement,
which consents, approvals, authorizations, and orders are listed on the Sellers
Disclosure Schedule.
2.20 Year 2000. All information systems, equipment and software used by
the Seller complies with necessary requirements to function properly and
efficiently before, during and after the year 2000, or between the years 1999
and 2000, taking into account all leap years, and further, that when used in
combination with, or interfacing with, other information systems and software,
shall accurately accept, release and exchange date data. All reprogramming,
remediation and other corrective action, including all testing of such systems,
equipment and software will be completed by September 1, 1999, and the cost
thereof, as well as the cost of the consequences of failure to become year 2000
compliant, to the Seller will not result in a Seller Material Adverse Effect.
2.21 Insurance. All policies and binders of insurance for professional
liability, directors and officers, fire, liability, workers' compensation, and
other customary matters held by or on behalf of Seller ("Insurance Policies")
are described in the Seller Disclosure Letter and have been made available to
SCB. The Insurance Policies are in full force and effect. Seller is not in
default with respect to any material provision contained in any Insurance
Policy. Seller has not failed to give any notice of any claim under any
Insurance Policy in due and timely fashion, nor has any coverage for current
claims been denied.
2.22 Full Disclosure. All of the information provided by the Seller and
Shareholders and their representatives herein or in the Seller Disclosure Letter
is true, correct, and complete in all material respects, and no representation,
warranty, or statement made by the Seller or the Shareholders in or pursuant to
this Agreement or the Seller Disclosure Letter contains any untrue statement of
a material fact or omits or will omit to state any material fact necessary to
make such representation, warranty, or statement not misleading.
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ARTICLE 3.
REPRESENTATIONS AND WARRANTIES OF SCB AND BUYER
SCB and Buyer, jointly and severally, represent, and warrant to the Seller
and Shareholders as follows:
3.1 Existence; Good Standing; Corporate Authority. SCB is duly
incorporated, validly existing, and in good standing under the laws of the State
of Tennessee. Buyer is duly incorporated, validly existing, and in good standing
under the laws of the State of Arizona. SCB is duly licensed or qualified to do
business as a foreign corporation and is in good standing under the laws of any
other state of the United States in which the character of the properties owned
or leased by it therein or in which the transaction of its business makes such
qualification necessary, except where the failure to be so qualified would not
have a material adverse effect on the business, results of operations, or
financial condition of SCB (an "SCB Material Adverse Effect"). SCB has all
requisite corporate power and authority to own, operate, and lease its
properties and carry on its business as now conducted.
3.2 Authorization, Validity, and Effect of Agreements. SCB and Buyer have
the requisite corporate power and authority to execute and deliver this
Agreement and all agreements and documents contemplated hereby. The consummation
by SCB and Buyer of the transactions contemplated hereby has been duly
authorized by all requisite corporate action. This Agreement constitutes, and
all agreements and documents contemplated hereby (when executed and delivered
pursuant hereto) will constitute, the valid and legally binding obligations of
SCB and Buyer, enforceable in accordance with their respective terms.
3.3 No Violation. Neither the execution and delivery by SCB or Buyer of
this Agreement, nor the consummation by SCB of the transactions contemplated
hereby in accordance with the terms hereof, will: (i) conflict with or result in
a breach of any provisions of the charter or bylaws of SCB or Buyer; (ii)
conflict with, result in a breach of any provision of or the modification or
termination of, constitute a default under, or result in the creation or
imposition of any lien, security interest, charge, or encumbrance upon any of
the assets of SCB or Buyer pursuant to any material commitment, lease, contract,
or other material agreement or instrument to which SCB or Buyer is a party; or
(iii) violate or result in a change in any rights or obligations, under any
governmental permit or license or any order, arbitration award, judgment, writ,
injunction, decree, statute, rule, or regulation applicable to SCB or Buyer.
3.4 No Brokers. Neither SCB nor Buyer has entered into any contract,
arrangement, or understanding with any person or firm that may result in the
obligation of SCB, Buyer, Seller, or the
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Shareholders to pay any finder's fees, brokerage or agent's commissions, or
other like payments in connection with the negotiations leading to this
Agreement or the consummation of the transactions contemplated hereby.
ARTICLE 4.
COVENANTS
4.1 Change in Name; Use of Name. Within five (5) business days after the
Closing Date, the Shareholders shall deliver to SCB all such executed documents
as may be required to change Seller's name to other names bearing no similarity
to "Global Services, Inc." including, but not limited to, name change documents
in form suitable for filing with the Secretary of State of Colorado, and an
appropriate name change notice for each state where Seller is qualified to do
business. The Shareholders hereby appoint SCB as their attorney-in-fact to file
all such documents on or after the Closing Date. From and after the Closing
Date, the Shareholders will sign such consents and take such other actions as
SCB or Buyer shall reasonably request in order to permit SCB and Buyer to use
the name "Global Services, Inc." and any variations thereof. From and after the
Closing Date, neither Seller nor the Shareholders will use the name "Global
Services, Inc." or any names similar thereto or variants thereof.
4.2 Further Assurances. SCB and Buyer, from time to time after the Closing
and at the Shareholders' reasonable request, and Seller and the Shareholders
from time to time after the Closing and at SCB's reasonable request, will
execute, acknowledge, and deliver to Seller, the Shareholders, Buyer, or SCB, as
the case may be, such other instruments of conveyance and transfer and will take
such other actions and execute and deliver such other documents, certifications,
and further assurances as Seller, the Shareholders, Buyer, or SCB, as the case
may be, may reasonably require in order to better enable the other party to
complete, perform, or discharge any of the liabilities or obligations assumed
hereunder. Each of the parties hereto will cooperate with the other and execute
and deliver to the other parties hereto such other instruments and documents and
take such other actions as may be reasonably requested from time to time by any
other party hereto as necessary to carry out, evidence, and confirm the intended
purposes of this Agreement.
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ARTICLE 5.
SURVIVAL OF REPRESENTATIONS AND
WARRANTIES; INDEMNIFICATION
5.1 Survival of Representations and Warranties. The representations and
warranties of the parties contained in Articles 2 and 3 of this Agreement shall
survive for a period of one year from the effective date hereof.
5.2 Indemnification by Seller and the Shareholders. Subject to the
provisions of this Article 5 and the Escrow Agreement, Seller and the
Shareholders, jointly and severally, in accordance with the Escrow Agreement,
agree to indemnify and hold harmless SCB and Buyer, and each officer, director,
employee, or other agent thereof and their respective estates (each being an
"SCB Indemnified Party"), from and against any and all claims, losses, damages,
liabilities, and expenses (including without limitation, settlement costs and
any legal or other fees or expenses for investigating or defending any actions
or threatened actions) reasonably incurred by such SCB Indemnified Party in
connection with each and all of the following:
(a) any misrepresentation or breach of any warranty made by Seller
or the Shareholders in this Agreement;
(b) the nonfulfillment or breach of any covenant, agreement, or
obligation of Seller or the Shareholders contained in or contemplated by
this Agreement;
(c) any misrepresentation or breach of any warranty contained in any
statement, certificate, or other document furnished by Seller or the
Shareholders pursuant to this Agreement or in connection with the
transaction contemplated by this Agreement; and
(d) any attempt (whether or not successful) by any person to cause
or require such SCB Indemnified Party to pay or discharge any debt,
obligation, liability, or commitment, the existence of which would entitle
such SCB Indemnified Party to indemnification pursuant to clauses (a)
through (c) of this Section 5.2 or would constitute a breach of any such
representation, warranty, or agreement under this Agreement.
5.3. Indemnification Procedure. Subject to the provisions of the Escrow
Agreement, if in effect, an SCB Indemnified Party shall promptly notify the
Seller and Shareholders of any claim, demand, action, or proceeding for which
indemnification will be sought under Section 5.2 of this Agreement, and, if such
claim, demand, action, or proceeding is a third party claim, demand, action, or
proceeding, the Seller and the Shareholders will have the right at their expense
to assume the
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defense thereof using counsel reasonably acceptable to the SCB Indemnified
Party. The SCB Indemnified Party shall have the right to participate, at its own
expense, with respect to any such third party claim, demand, action, or
proceeding. In connection with any such third party claim, demand, action, or
proceeding, SCB, Buyer, Seller and the Shareholders shall cooperate with each
other and provide each other with access to relevant books and records in their
possession. No such third party claim, demand, action, or proceeding shall be
settled without the prior written consent of the SCB Indemnified Party. If a
firm written offer is made to settle any such third party claim, demand, action,
or proceeding and the Seller and Shareholders propose to accept such settlement,
and the SCB Indemnified Party refuses to consent to such settlement, then: (i)
the Seller and Shareholders shall be excused from, and the SCB Indemnified Party
shall be solely responsible for, all further defense of such third party claim,
demand, action, or proceeding; and (ii) the maximum liability of the Seller and
Shareholders relating to such third party claim, demand, action, or proceeding
shall be the amount of the proposed settlement if the amount thereafter
recovered from the SCB Indemnified Party on such third party claim, demand,
action, or proceeding is greater than the amount of the proposed settlement.
ARTICLE 6.
GENERAL PROVISIONS
6.1 Assignment of Seller's Contracts. Nothing in this Agreement shall be
deemed to constitute an assignment or attempt to assign any contract or other
agreement to which Seller is a party if the attempted assignment thereof without
the consent of the other party to such contract or agreement would constitute a
breach thereof or affect in any way the rights of Seller thereunder. If after
Seller has used its best efforts to obtain a consent of any such other party to
such contract or agreement, such consent shall not be obtained or an attempted
assignment thereof would be ineffective and would affect the rights of Seller
thereunder, Seller will cooperate with Buyer in any reasonable arrangement
designed to provide for Buyer the benefits under any such contract or agreement,
including the enforcement, for the benefit of the Buyer, of any and all rights
of Seller or Buyer against such other party thereto arising out of the breach or
cancellation thereof by such other party or otherwise.
6.2 Notices. Any notice required to be given hereunder shall be sufficient
if in writing, by courier service (with proof of service), hand delivery or
certified or registered mail (return receipt requested and first-class postage
prepaid), addressed as follows:
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If to SCB or Buyer: If to Seller or the Shareholders:
Ben C. Bryant, Jr. Global Services, Inc.
President and Chief 8049 Bellflower Court
Executive Officer Niwot, Colorado 80503
SCB Computer Technology, Inc.
1365 West Brierbrook Road
Memphis, Tennessee 38138
with a copy to: with a copy to:
Jennifer H. Noonan Ronald J. Snow
Bass, Berry & Sims PLC McGloin, Davenport, Severson and Snow
2700 First American Center 1600 Stout Street, Suite 1600
Nashville, Tennessee 38238 Denver, Colorado 80202-3103
or to such other address as any party shall specify by written notice so given,
and such notice shall be deemed to have been delivered as of the date so
personally delivered or mailed.
6.3 Assignment; Binding Effect; Benefit. Neither this Agreement nor any of
the rights, interests, or obligations hereunder shall be assigned by any of the
parties hereto (whether by operation of law or otherwise) without the prior
written consent of the other parties. This Agreement shall be binding upon and
shall inure to the benefit of the parties hereto and their respective successors
and assigns.
6.4 Entire Agreement. This Agreement, the Exhibits, the Seller Disclosure
Letter, and any documents delivered by the parties in connection herewith
constitute the entire agreement among the parties with respect to the subject
matter hereof and supersede all prior and contemporaneous agreements and
understandings among the parties with respect thereto. No addition to or
modification of any provision of this Agreement shall be binding upon any party
hereto unless made in writing and signed by all parties hereto.
6.5 Amendment. This Agreement may be amended by the parties hereto, by
action taken by their respective Boards of Directors, if applicable. This
Agreement may not be amended except by an instrument in writing signed on behalf
of each of the parties hereto.
6.6 Governing Law. The validity of this Agreement, the construction of its
terms and the determination of the rights and duties of the parties hereto shall
be governed by and construed in
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accordance with the laws of the State of Tennessee applicable to contracts made
and to be performed wholly within such state.
6.7 Counterparts. This Agreement may be executed by the parties hereto in
separate counterparts, each of which when so executed and delivered shall be an
original, but all such counterparts shall together constitute one and the same
instrument. Each counterpart may consist of a number of copies hereof each
signed by less than all, but together signed by all of the parties hereto. Each
separate signature page may be transmitted by facsimile or expedited delivery
service for assembly as an integrated document or otherwise as the parties may
agree. Any signature pages sent by facsimile shall be followed by overnight
delivery within two (2) business days.
6.8 Waivers. Except as provided in this Agreement, no action taken
pursuant to this Agreement, including, without limitation, any investigation by
or on behalf of any party, shall be deemed to constitute a waiver by the party
taking such action of compliance with any representations, warranties,
covenants, or agreements contained in this Agreement. The waiver by any party
hereto of a breach of any provision hereunder shall not operate or be construed
as a waiver of any prior or subsequent breach of the same or any other provision
hereunder.
6.9 Incorporation of Exhibits. The Seller Disclosure Letter and the
Exhibits attached hereto and referred to herein are hereby incorporated herein
and made a part hereof for all purposes as if fully set forth herein.
6.10 Severability. Any term or provision of this Agreement that is invalid
or unenforceable in any jurisdiction shall, as to that jurisdiction, be
ineffective to the extent of such invalidity or unenforceability without
rendering invalid or unenforceable the remaining terms and provisions of this
Agreement or affecting the validity or enforceability of any of the terms or
provisions of this Agreement in any other jurisdiction. If any provision of this
Agreement is so broad as to be unenforceable, the provision shall be interpreted
to be only so broad as is enforceable.
6.11 Expenses. Each party to this Agreement shall bear its own expenses in
connection with the transactions contemplated hereby.
6.12 Enforcement of Agreement. The parties hereto agree that irreparable
damage would occur in the event that any of the provisions of this Agreement was
not performed in accordance with its specific terms or was otherwise breached.
It is accordingly agreed that the parties shall be entitled to an injunction or
injunctions to prevent breaches of this Agreement and to enforce specifically
the terms and provisions hereof in any court of competent jurisdiction, this
being in addition to any other remedy to which they are entitled by contract, at
law, or in equity.
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IN WITNESS WHEREOF, the parties have executed this Agreement and caused
the same to be duly delivered on their behalf on the day and year first written
above.
SCB COMPUTER TECHNOLOGY, INC.
By:
Title:
PARTNERS RESOURCES, INC.
By:
Title:
GLOBAL SERVICES, INC.
By:
Title:
THE SHAREHOLDERS:
Kenneth L. Spencer
Stephen K. McEvoy
Gary K. Hill
Harlan L. Leavitt
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Exhibit 10.5
NATIONSBANK OF TENNESSEE, N.A.
FIRST MODIFICATION OF SECOND AMENDED AND RESTATED LOAN AGREEMENT
THIS FIRST MODIFICATION OF SECOND AMENDED AND RESTATED LOAN AGREEMENT
("First Modification") made and entered into as of the 15th day of September,
1998, by and among 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 previously obtained from Bank a revolving term loan
facility (the "Revolving Loan") in the principal amount of $30,000,000.
B. The terms and conditions of the Revolving Loan are set forth in
that certain Second Amended and Restated Loan Agreement dated July 31, 1998,
(hereinafter as hereafter modified or amended collectively referred to as the
"Agreement").
C. Borrower has asked Bank, and Bank has agreed, to make certain
modifications to the Agreement as hereinafter set forth.
NOW, THEREFORE, in consideration of the Revolving Loan from Bank to
Borrower and the mutual covenants and agreements contained herein, and
intending to be legally bound hereby, Bank and Borrower agree as follows:
1. Section 5.A. of the Agreement is hereby deleted in its entirety
and substituted in its place thereof shall be the following:
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 exceeding in the aggregate a number which is equal to
twenty-five percent (25%) of the Net Income from such four quarter
period. Expenditures for computer equipment which Borrower then leases
to a third party under a true or capital lease shall be excluded from
capital expenditures but shall be subject to the restriction on
computer equipment expenditures contained in Section 5.B. below.
2. Section 5.B. of the Agreement is hereby deleted in its entirety
and substituted in place thereof shall be the following:
<PAGE> 2
B. COMPUTER EQUIPMENT EXPENDITURES. Make expenditures for the acquisition
of computer equipment which Borrower then leases to a third party under a true
lease or capital lease 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. Expenditures for computer
equipment which Borrower than leases shall be expenditures for the acquisition
of computer equipment only to the extent of the residual value of the lease. The
residual value of the lease shall be defined as the cost of the computer
equipment less the proceeds received by the Borrower from a substantially
simultaneous non-recourse loan relating to the computer equipment and the lease
thereof. If any non-recourse loan results in proceeds which exceed the cost of
the related computer equipment, such excess proceeds shall not reduce the amount
of expenditures for the acquisition of computer equipment.
3..Section 5.F. of the Agreement is deleted in its entirety and
substituted in place thereof shall be the following:
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
October 15, 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.
4. Borrower will pay Bank a structuring fee of Twenty Thousand and No/100
Dollars ($20,000.00) upon the execution of this First Modification.
5. 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 A 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
2
<PAGE> 3
"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
MEMPHIS, TENNESSEE, 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 AFFORDED TO IT BY 12 U.S.C.
SECTION 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.
6. NOTICE OF FINAL AGREEMENT. This Agreement embodies the entire agreement
and understanding between the parties with respect to modifications of documents
3
<PAGE> 4
provided for herein and supersedes all prior conflicting or inconsistent
agreements, consents and understandings relating to such subject matter.
4
<PAGE> 5
IN WITNESS WHEREOF, the parties have executed this First Modification of
Second Amended and Restated Loan Agreement as of the date first above written.
BORROWER: BANK:
SCB COMPUTER TECHNOLOGY, INC. NATIONSBANK OF TENNESSEE, N.A.
By: /s/ Gary E. McCarter By:
------------------------------- -------------------------------
Name: Gary E. McCarter Name:
----------------------------- -----------------------------
Title: Chief Financial Officer Title:
---------------------------- ----------------------------
Attest: /s/ Gordon Bateman
---------------------------
Name: Gordon Bateman
-----------------------------
Title: Secretary
----------------------------
DELTA SOFTWARE SYSTEMS, INC.
By: /s/ Gary E. McCarter
-------------------------------
Name: Gary E. McCarter
-----------------------------
Title: Chief Financial Officer
----------------------------
Attest: /s/ Gordon Bateman
---------------------------
Name: Gordon Bateman
-----------------------------
Title: Secretary
----------------------------
5
<PAGE> 6
TMR ACQUISITION, INC.
BY: /s/ Gary E. McCarter
-------------------------------
Name: Gary E. McCarter
-----------------------------
Title: Chief Financial Officer
----------------------------
Attest: /s/ Gordon Bateman
---------------------------
Name: Gordon Bateman
-----------------------------
Title: Secretary
----------------------------
PARTNERS CAPITAL GROUP, INC.
BY: /s/ Gary E. McCarter
-------------------------------
Name: Gary E. McCarter
-----------------------------
Title: Chief Financial Officer
----------------------------
Attest: /s/ Gordon Bateman
---------------------------
Name: Gordon Bateman
-----------------------------
Title: Secretary
----------------------------
6
<PAGE> 7
PARTNERS RESOURCES, INC.
BY: /s/ Gary E. McCarter
-------------------------------
Name: Gary E. McCarter
-----------------------------
Title: Chief Financial Officer
----------------------------
Attest: /s/ Gordon Bateman
---------------------------
Name: Gordon Bateman
-----------------------------
Title: Secretary
----------------------------
7
<PAGE> 8
NATIONSBANK OF TENNESSEE, N.A.
SECOND MODIFICATION OF SECOND AMENDED
AND RESTATED LOAN AGREEMENT
THIS SECOND MODIFICATION OF SECOND AMENDED AND RESTATED LOAN AGREEMENT
("Second Modification") made and entered into as of the 20th day of May, 1999,
by and among NATIONSBANK, N.A., a national banking association ("Bank"), and
SCB COMPUTER TECHNOLOGY, INC., a Tennessee corporation, DELTA SOFTWARE SYSTEMS,
INC., a Tennessee corporation, TECHNOLOGY MANAGEMENT RESOURCES, INC. f/k/a 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 previously obtained from Bank a revolving term loan
facility (the "Revolving Loan") in the principal amount of $30,000,000 and a
term loan facility (the "Term Loan") in the principal amount of $15,000,000.
B. The terms and conditions of the Revolving Loan and the Term Loan
are set forth in that certain Second Amended and Restated Loan Agreement dated
July 31, 1998, as modified by that certain First Modification of Second Amended
and Restated Loan Agreement dated September 15, 1998 (hereinafter modified or
amended collectively referred to as the "Agreement").
C. Borrower has asked Bank for a short-term loan in the principal
amount of $7,000,000 and Bank is willing to make such short-term loan to
Borrower.
D. Borrower has asked Bank, and Bank has agreed, to make certain
modifications to the Agreement as hereinafter set forth.
NOW, THEREFORE, in consideration of the premises and the mutual covenants
and agreements contained herein, and intending to be legally bound hereby, Bank
and Borrower agree as follows:
1. Section 1.K. of the Agreement is hereby deleted in its entirety and
substituted in place thereof shall be the following:
K. LOANS: The Revolving Loan, the Term Loan and the Short-Term Loan
and any subsequent loan which states that it is subject to this Agreement.
<PAGE> 9
2. Section 1.X. of the Agreement is hereby deleted in its entirety and
substituted in place thereof shall be the following:
X. NOTES: The Revolving Note, the Term Note and the Short-Term Note.
3. Section 1 of the Agreement is hereby amended to add the following
terms:
Z. SHORT-TERM LOAN: The Short-Term Loan as described in Section 2
hereof.
AA. SHORT-TERM NOTE: The promissory note evidencing the Short-Term
Loan.
4. Section 2 of the Agreement is hereby amended to add the following
paragraphs:
C. SHORT-TERM LOAN. Bank hereby agrees to make a short-term loan to
Borrower in the principal amount of Seven Million and no/100 Dollars
($7,000,000.00). The obligation to repay the Short-Term Loan is evidenced by a
promissory note dated May 20, 1999, (the promissory note together with any and
all renewals, extensions or rearrangements thereof being hereafter collectively
referred to as the "Short-Term Note") having a maturity date, repayment terms
and interest rate as set forth in the Short-Term Note.
(i) PURPOSE. The Short-Term Loan shall be used by Borrower for
general corporate purposes.
(ii) COLLATERAL. The Short-Term Loan shall be secured by the
Collateral described in the Security Agreement.
5. Section 4.A.i. is deleted in its entirety and substituted in place
thereof shall be 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 July 31, 1999, maintain
a ratio of Funded Debt to EBITDA of 2.50 to 1.0 or less; and on July
31, 1999, and thereafter maintain a ratio of Funded Debt to EBITDA of
2.00 to 1.0 or less.
6. 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
2
<PAGE> 10
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 AN 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
MEMPHIS, TENNESSEE, 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 AFFORDED TO IT BY
12 U.S.C. SECTION .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.
3
<PAGE> 11
7. NOTICE OF FINAL AGREEMENT. This Agreement embodies the entire
agreement and understanding between the parties with respect to modifications
of documents provided for herein and supersedes all prior conflicting or
inconsistent agreements, consents and understandings relating to such subject
matter.
[INTENTIONALLY LEFT BLANK]
4
<PAGE> 12
IN WITNESS WHEREOF, the parties have executed this Second Modification of
Second Amended and Restated Loan Agreement as of the date first above written.
BORROWER: BANK:
SCB COMPUTER TECHNOLOGY, INC. NATIONSBANK, N.A.
By: /s/ Gary E. McCarter By: /s/ Michael R. Grick
--------------------------------- ------------------------------
Name: Gary E. McCarter Name: Michael R. Grick
------------------------------ ----------------------------
Title: Chief Financial Officer Title: Vice President
----------------------------- ---------------------------
By: /s/ Gordon Bateman
---------------------------------
Name: Gordon Bateman
------------------------------
Title: Chief Administrative Officer
-----------------------------
DELTA SOFTWARE SYSTEMS, INC.
By: /s/ Gary E. McCarter
---------------------------------
Name: Gary E. McCarter
------------------------------
Title: Chief Administrative Officer
-----------------------------
5
<PAGE> 13
TECHNOLOGY MANAGEMENT RESOURCS, INC.
f/k/a TMR ACQUISITION, INC.
By: /s/ Gary E. McCarter
---------------------------------
Name: Gary E. McCarter
------------------------------
Title: Chief Financial Officer
-----------------------------
By: /s/ Gordon Bateman
---------------------------------
Name: Gordon Bateman
------------------------------
Title: Chief Administrative Officer
-----------------------------
PARTNERS CAPITAL GROUP, INC.
By: /s/ Gary E. McCarter
---------------------------------
Name: Gary E. McCarter
------------------------------
Title: Chief Financial Officer
-----------------------------
By: /s/ Gordon Bateman
---------------------------------
Name: Gordon Bateman
------------------------------
Title: Chief Administrative Officer
-----------------------------
6
<PAGE> 14
PARTNERS RESOURCES, INC.
By: /s/ Gary E. McCarter
---------------------------------
Name: Gary E. McCarter
------------------------------
Title: Chief Financial Officer
-----------------------------
DELTA SOFTWARE SYSTEMS, INC.
By: /s/ Gordon Bateman
---------------------------------
Name: Gordon Bateman
------------------------------
Title: Chief Administrative Officer
-----------------------------
7
<PAGE> 15
SHORT-TERM LOAN
PROMISSORY NOTE
May 20, 1999 $7,000,000.00 Maturity Date: June 21, 1999
Bank: Borrower:
NationsBank, N.A. SCB Computer Technology, Inc.
6060 Poplar Avenue Delta Software Systems, Inc.
Memphis, TN 38119 Technology Management Resources, Inc. f/k/a
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 Seven Million and No/100 Dollars ($7,000,000.00) in
immediately available funds as set forth in that certain Second Amended and
Restated Loan Agreement dated July 31, 1998, as later modified by that certain
First Modification of Second Amended and Restated Loan Agreement dated September
15, 1998, and by that certain Second Modification of Second Amended and
Restated Loan Agreement of even date herewith (collectively 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 Six and
42/100ths percent (6.42%).
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. PAYMENT SCHEDULE. All principal and interest thereon shall be due and
payable on June 21, 1999. 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.
1
<PAGE> 16
4. WAIVERS, CONSENTS AND COVENANTS. Borrower, any indorse 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 of other proceeding, in such amount as may be determined
reasonable by any arbitrator or court, whichever is applicable.
5. PREPAYMENTS. Prepayments may be made in whole or in part at any time without
penalty.
6. 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.
7. 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 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 of forfeiture of, or the issuance
of any writ of possession, garnishment or attachment, or any turnover order for
any property of any Obligor.
8. 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.
2
<PAGE> 17
9. 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.
10. 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.
11. 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.
12. 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.
13. 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.
14. 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)
3
<PAGE> 18
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.
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.
<TABLE>
<S> <C>
SCB COMPUTER TECHNOLOGY, INC. DELTA SOFTWARE SYSTEMS, INC.
By: /s/ Gary E. McCarter By: /s/ Gary E. McCarter
-------------------------------- -------------------------------
Name: Gary E. McCarter Name: Gary E. McCarter
----------------------------- ------------------------
Title: Chief Financial Officer Title: Chief Financial Officer
---------------------------- -----------------------
By: /s/ Gordon Bateman By: /s/ Gordon Bateman
-------------------------------- --------------------------------
Name: Gordon Bateman By: Gordon Bateman
----------------------------- --------------------------
Title: Chief Administrative Officer Title: Chief Administrative Officer
---------------------------- ----------------------------
TECHNOLOGY MANAGEMENT RESOURCES, INC. f/k/a
TMR ACQUISITION, INC. PARTNERS CAPITAL GROUP, INC.
By: /s/ Gary E. McCarter By: /s/ Gary E. McCarter
-------------------------------- --------------------------------
Name: Gary E. McCarter Name: Gary E. McCarter
----------------------------- ------------------------
Title: Chief Financial Officer Title: Chief Financial Officer
---------------------------- -----------------------
By: /s/ Gordon Bateman By: /s/ Gordon Bateman
-------------------------------- --------------------------------
Name: Gordon Bateman By: Gordon Bateman
----------------------------- --------------------------
Title: Chief Administrative Officer Title: Chief Administrative Officer
---------------------------- ----------------------------
PARTNERS RESOURCES, INC.
By: /s/ Gary E. McCarter
--------------------------------
Name: Gary E. McCarter
-----------------------------
Title: Chief Financial Officer
----------------------------
By: /s/ Gordon Bateman
--------------------------------
Name: Gordon Bateman
-----------------------------
</TABLE>
4
<PAGE> 19
NATIONSBANK, N.A.
THIRD MODIFICATION OF SECOND AMENDED
AND RESTATED LOAN AGREEMENT
THIS THIRD MODIFICATION OF SECOND AMENDED AND RESTATED LOAN AGREEMENT
("Section Modification") made and entered into as of the 21st day of June, 1999,
by and among NATIONSBANK, N.A., a national banking association ("Bank"), and SCB
COMPUTER TECHNOLOGY, INC., a Tennessee corporation, DELTA SOFTWARE SYSTEMS,
INC., a Tennessee corporation, TECHNOLOGY MANAGEMENT RESOURCES, INC. f/k/a 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 previously obtained from Bank a revolving term loan
facility (the "Revolving Loan") in the principal amount of $30,000,000 and a
term loan facility (the "Term Loan") in the principal amount of $15,000,000 and
a short-term loan (the "Short-Term Loan") in the principal amount of $7,000,000.
B. The terms and conditions of the Revolving Loan and the Term Loan are set
forth in that certain Second Amended and Restated Loan Agreement dated July 31,
1998, as modified by that certain First Modification of Second Amended and
Restated Loan Agreement dated September 15, 1998, and by that certain Second
Modification of Second Amended and Restated Loan Agreement dated May 20, 1999
(hereinafter as hereafter modified or amended collectively referred to as the
"Agreement").
C. Borrower has asked Bank for an additional short-term loan in the
principal amount of $7,000,000 the proceeds of which will be used to repay the
Short-Term Loan and Bank is willing to make such additional short-term loan to
Borrower pursuant to the terms and conditions hereinafter set forth.
NOW, THEREFORE, in consideration of the premises and the mutual covenants
and agreements contained herein, and intending to be legally bound hereby, Bank
and Borrower agree as follows:
1. Section 1.K. of the Agreement is hereby deleted in its entirety and
substituted in place thereof shall be the following:
K. LOANS: The Revolving Loan, the Term Loan, the Short-Term Loan and
the Replacement Short-Term Loan and any subsequent loan which states that
it is subject to this Agreement.
<PAGE> 20
2. Section 1.X. of the Agreement is hereby deleted in its
entirety and substituted in place thereof shall be the following:
X. Notes: The Revolving Note, the Term Note, the Short-
Term Note and the Replacement Short-Term Note.
3. Section 1 of the Agreement is hereby amended to add the
following terms:
BB. REPLACEMENT SHORT-TERM LOAN. The Replacement Short-
Term Loan as described in Section 2 hereof.
CC. REPLACEMENT SHORT-TERM LOAN. The promissory note
evidencing the Replacement Short-Term Loan.
4. Section 2 of the Agreement is hereby amended to add the
following paragraphs:
C. REPLACEMENT SHORT-TERM LOAN. Bank hereby agrees to
make a short-term loan to Borrower in the principal amount of Seven Million and
no/100 Dollars ($7,000,000.00). The obligation to repay the Replacement
Short-Term Loan is evidenced by a promissory note dated June 21, 1999, (the
promissory note together with any and all renewals, extensions or
rearrangements thereof being hereafter collectively referred to as the
"Replacement Short-Term Note") having a maturity date, repayment terms and
interest rate as set forth in the Replacement Short-Term Note.
(i) PURPOSE. The Replacement Short-Term Loan shall be
used by Borrower to repay the Short-Term Loan.
(ii) COLLATERAL. The Replacement Short-Term Loan
shall be secured by the Collateral described in the Security Agreement.
(iii) EXTENSION FEE. Borrower will pay an extension
fee of Fifty-Two Thousand Five Hundred and no/100 ($52,500.00) on the
maturity date of the Replacement Short-Term Note; provided, however,
this fee shall be waived should Borrower repay the Replacement Short-
Term Note through an extension of credit arranged or provided by Bank.
5. 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
2
<PAGE> 21
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
MEMPHIS, TENNESSEE, 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 AFFORDED TO IT BY 12 U.S.C.
SECTION 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.
3
<PAGE> 22
6. NOTICE OF FINAL AGREEMENT. This Agreement embodies the entire
agreement and understanding between the parties with respect to modifications of
documents provided for herein and supersedes all prior conflicting or
inconsistent agreements, consents and understandings relating to such subject
matter.
IN WITNESS WHEREOF, the parties have executed this Third Modification of
Second Amended and Restated Loan Agreement as of the date first above written.
BORROWER: BANK:
SCB COMPUTER TECHNOLOGY, INC. NATIONSBANK, N.A.
By: /s/ Gary E. McCarter By:
------------------------------- -------------------------
Name: Gary E. McCarter Name:
----------------------------- -----------------------
Title: Chief Financial Officer Title:
---------------------------- ----------------------
By: /s/ Gordon Bateman
-------------------------------
Name: Gordon Bateman
-----------------------------
Title: Chief Administrative Officer
----------------------------
DELTA SOFTWARE SYSTEMS, INC.
By: /s/ Gary E. McCarter
-------------------------------
Name: Gary E. McCarter
-----------------------------
Title: Chief Financial Officer
----------------------------
By: /s/ Gordon Bateman
-------------------------------
Name: Gordon Bateman
-----------------------------
Title: Chief Administrative Officer
----------------------------
4
<PAGE> 23
TECHNOLOGY MANAGEMENT RESOURCES, INC.
f/k/a TMR ACQUISITION, INC.
By: /s/ Gary E. McCarter
-------------------------------
Name: Gary E. McCarter
-----------------------------
Title: Chief Financial Officer
----------------------------
By: /s/ Gordon Bateman
-------------------------------
Name: Gordon Bateman
-----------------------------
Title: Chief Administrative Officer
----------------------------
PARTNERS CAPITAL GROUP, INC.
By: /s/ Gary E. McCarter
-------------------------------
Name: Gary E. McCarter
-----------------------------
Title: Chief Financial Officer
----------------------------
By: /s/ Gordon Bateman
-------------------------------
Name: Gordon Bateman
-----------------------------
Title: Chief Administrative Officer
----------------------------
5
<PAGE> 24
PARTNERS RESOURCES, INC.
By: /s/ Gary E. McCarter
-------------------------------
Name: Gary E. McCarter
-----------------------------
Title: Chief Financial Officer
----------------------------
By: /s/ Gordon Bateman
-------------------------------
Name: Gordon Bateman
-----------------------------
Title: Chief Administrative Officer
----------------------------
6
<PAGE> 1
EXHIBIT 13
[financial information]
SELECTED CONSOLIDATED FINANCIAL DATA
<TABLE>
<CAPTION>
FISCAL YEAR ENDED APRIL 30,
- ------------------------------------------------------------------------------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA) 1999 1998 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Revenue $ 156,670 $ 109,472 $ 64,064 $ 56,024 $ 39,170
Cost of services 109,440 75,634 46,586 39,508 27,027
Gross profit 47,230 33,838 17,478 16,516 12,143
Selling, general and
administrative expenses 36,224 20,325 10,345 13,345 9,642
Income from operations 11,006 13,513 7,133 3,171 2,501
Other income (expenses), net (3,454) (1,012) 983 (27) (146)
Income before income taxes 7,552 12,501 8,116 3,144 2,355
Provision for income taxes 3,113 4,909 3,053 1,187 718
Net income $ 4,439 $ 7,592 $ 5,063 $ 1,957 $ 1,637
Net income per share - basic $ 0.18 $ 0.34 $ 0.23 $ 0.11 $ 0.09
Net income per share - diluted $ 0.18 $ 0.33 $ 0.23 $ 0.11 $ 0.09
Net income $ 4,439 $ 7,592 $ 5,063 $ 1,957 $ 1,637
Pro forma adjustment for income taxes -- -- 177 162 309
Pro forma net income -- -- $ 4,886 $ 1,795 $ 1,328
Pro forma net income per share - basic -- -- $ 0.22 $ 0.10 $ 0.08
Pro forma net income per share - diluted -- -- $ 0.22 $ 0.10 $ 0.08
Cash dividends declared per share -- -- -- -- $ 0.0016
Weighted average number 24,683 22,464 22,432 18,556 17,546
of common shares - basic
Weighted average number of common
shares assuming conversion - diluted 24,921 22,756 22,495 18,623 17,631
- ------------------------------------------------------------------------------------------------------------
AS OF APRIL 30,
- ------------------------------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------
BALANCE SHEET DATA:
Working capital $ 18,074 $ 17,007 $ 20,351 $ 24,643 $ 1,347
Total assets 146,847 98,546 35,094 29,272 7,089
Long-term debt, less current portion 33,755 22,782 -- -- 171
Total shareholders' equity $ 59,426 $ 39,881 $ 31,633 $ 26,796 $ 2,862
</TABLE>
25 SCB COMPUTER TECHNOLOGY
<PAGE> 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW The Company derives substantially all of its revenue from providing IT
consulting, outsourcing, and professional staffing services. The increase in
revenue from $39.2 million in fiscal 1995 to $156.7 million in fiscal 1999 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 fiscal 1999, the Company derived more than 6% of its
revenue from providing enterprise resource planning services and less than 6% of
its revenue from leasing activity. The change in revenue mix is due to increased
emphasis on selling enterprise resource planning solutions. 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 over 250 clients, consisting of state and local governments, Fortune 500
companies, and other large organizations. For the fiscal years ended April 30,
1999, 1998, and 1997, approximately 41%, 39%, and 48%, 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, 1999, 1998, and 1997, the
Company's top five clients (in terms of revenue to the Company) accounted for
approximately 35%, 37%, and 49% 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
enterprise resource
26 SCB COMPUTER TECHNOLOGY
<PAGE> 3
planning and telecommunications consulting services offerings.
The Company's growth in fiscal 1999, 1998, and 1997 has been significantly
affected by acquisition activity. In September 1996, the Company effected a
business combination with Delta Software Systems, Inc. ("Delta"), an information
technology company and custom software programmer. In February 1997, the Company
acquired substantially all of the assets of Technology Management Resources,
Inc. ("TMRI"), an information technology consulting company. In June 1997, the
Company acquired all of the outstanding stock of Partners Resources, Inc. and
Partners Capital Group, Inc. (collectively "The Partners Group"), information
technology outsourcing and computer leasing companies. In May 1998, the Company
effected a business combination with Proven Technology, Inc. ("PTI"), a company
in substantially the same business as the Company. 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 $38 million, including the earnout payment made after the end
of fiscal 1998, is being amortized ratably over a thirty year period. The PTI
combination was accounted for using the pooling of interests method of
accounting. The Company exchanged 543,724 shares of its common stock for all the
outstanding stock of PTI, of which 54,372 shares are being held in escrow to
secure potential indemnification claims. Because of its size, the transaction
does not require restatement of prior financial results.
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 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 1999 TO FISCAL 1998
Revenue increased from $109.5 million in fiscal 1998 to $156.7 million in fiscal
1999, an increase of 43.1%. 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
$14.6 million in sales at The Partners Group.
Gross profit increased from $33.8 million in fiscal 1998 to $47.2 million in
fiscal 1999, an increase of 39.6%. This increase was attributable to an increase
in revenue. Gross profit margin decreased from 30.9% to 30.1% during the period.
Cost of services consists of all costs directly attributable to the Company's
personnel assigned to various client en-
27 SCB COMPUTER TECHNOLOGY
<PAGE> 4
gagements, including salaries, benefits, training, travel, and relocation. The
decrease in the gross profit margin was primarily attributable to a charge for a
provision for contract losses of $1.8 million which effectively reduced gross
profit 1.1% (See Note 17 in the audited financial statements).
Selling, general and administrative expenses increased from $20.3 million in
fiscal 1998 to $29.6 million in fiscal 1999, primarily due to the growth in
revenue. The company also recorded non-recurring charges for the provision of
$2.7 million for the TVA settlement and the severance payments and a $4.0
million write-down for the impairment of certain data center equipment (See Note
16 and 17, respectively, in the audited financial statements). As a percentage
of revenues, selling, general and administrative expenses increased from 18.6%
in 1998 to 18.9% in 1999.
Interest income decreased from $347,000 in fiscal 1998 to $159,000 in fiscal
1999, primarily as a result of the decrease in cash available for investment.
Interest expense increased from $1.4 million in fiscal 1998 to $3.5 million in
1999 primarily as a result of an increase in borrowings used to finance a
portion of the acquisition of The Partners Group and the financing of equipment
associated with new outsourcing contracts.
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 the
Company's personnel assigned to various client engagements, including salaries,
benefits, training, travel, and relocation. The increase in the gross profit
margin was primarily attributable to a continued shift to higher margin
consulting and outsourcing work.
Selling, general and administrative expenses increased from $10.3 million in
fiscal 1997 to $20.3 million in fiscal 1998, primarily due to The Partners Group
acquisition and increased staffing relating to the regional offices. As a
percentage of revenue, selling, general, and administrative expenses increased
from 16.1% in 1997 to 18.6% 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
28 SCB COMPUTER TECHNOLOGY
<PAGE> 5
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.
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 $8.6 million, $2.9 million, and $1.9
million for fiscal 1999, 1998, and 1997, respectively. The increase in cash flow
in fiscal 1999 was primarily attributable to the profitability of the Company
before noncash charges.
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 up-front purchases of
equipment relating to their outsourcing contracts, the Company expects its
capital expenditures to increase over prior periods. In fiscal 1999, the Company
had approximately $20.1 million in capital expenditures, the substantial
majority of which were related to purchases of equipment associated with new
outsourcing contracts and equipment to complete Emerging Technology Centers in
Memphis, Nashville, Dallas and Phoenix.
At April 30, 1999, the Company had approximately $5.3 million of available cash
and $1.1 million available for future borrowing under its credit facility.
Primarily as a result of the Company's recent acquisitions, borrowings have
become a more significant source of liquidity. The Company believes that its
cash flows from operations and borrowings under its credit facility will be
sufficient to meet the Company's needs for at least the next twelve months.
The Company and its significant subsidiaries have a credit facility with a
commercial bank. The credit facility, which was amended on July 31, 1998, is
comprised of a revolving line of credit and a term loan. The revolving line of
credit initially provided for borrowings of up to $30 million, but was reduced
to $27.5 million on May 1, 1999, and will continue to reduce by $1.25 million
quarterly until it matures on October 1, 2000. The Company uses the borrowings
under the revolving line of credit for general corporate purposes, including
acquisitions. At April 30, 1999, there was $13,681,912 outstanding under the
term loan. The repayment schedule for the term loan initially required monthly
principal and interest payments of $130,248 through January 15, 1999, at which
time the monthly principal and interest payments increased to $353,845. The term
loan matures on July 15, 2002. The Company used the term loan to fund the
purchase of certain equipment utilized in an outsourcing engagement. Borrowings
under the credit facility bear interest at a rate equal to LIBOR plus a spread,
which varies based on certain financial ratios. At April 30, 1999, borrowings
under the credit facility bore interest at the rate of 6.43% per year. The
Company is negotiating with its lender to
29 SCB COMPUTER TECHNOLOGY
<PAGE> 6
increase the amount available for borrowing under the credit facility.
In May 1999, the Company used a short-term loan of $7 million from this
commercial bank to fund the acquisition of Global Services, Inc. This term loan
matures on September 17, 1999, and the outstanding principal bears interest at a
rate based on LIBOR. The rate is currently about 6.50% per year.
The Company also has a $5 million line of credit with a bank, which bears
interest at a rate of prime less 0.55% (7.2% at April 30, 1999) and is due upon
demand. At April 30, 1999, $4,974,288 was outstanding under this line of credit.
YEAR 2000 In fiscal 1999, the Company derived about 10% of its revenue from Year
2000 ("Y2K") consulting services and anticipates that such percentage will
decrease in fiscal 2000. 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. 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 the Company's business includes the assessment of clients' Y2K problems
and the recommendation and implementation of solutions to such problems, the
Company has long been aware of the potential adverse effects on a company if its
systems are not Y2K compliant. The Company has also made an assessment of its
computer systems and applications. This assessment indicated that some minor
adjustments needed to be performed in order to get the operating systems,
software and hardware ready for Y2K. Therefore the cost for Y2K remediation has
not been material. All required procedures of which the Company is presently
aware have been completed. The Company's suppliers have also verified that all
computers, software, telephones, alarms, battery backups, and generators that
have been purchased by the Company are now Y2K compliant after loading any
required fixes. Based on this internal assessment and these external
verifications, the Company believes that its computer systems are ready for Y2K
in all material respects and that problems related to Y2K with its computer
systems will pose minimal, if any, risk of business disruption.
The Company believes that the Y2K problem as it relates to the Company's
computer systems will not have a material adverse effect on its business,
results of operations, or financial condition. Nevertheless, the Company depends
on numerous independent external providers of goods and services. These external
businesses include electricity,
30 SCB COMPUTER TECHNOLOGY
<PAGE> 7
telephone service and other utilities as well as financial institutions. The
Company does not control these external businesses and cannot ensure that they
and their goods and services will be ready for Y2K. The most reasonably likely
worst case Y2K scenario for the Company would be for the Company to lose
electricity, communications or banking services. The Company has battery backups
and generators in place for loss of electricity. The Company is seeking to
verify the readiness of external businesses (such as telephone companies and
banking institutions); however, if they were to experience a Y2K problem,
particularly a critical one, the resulting business disruption could have a
material adverse effect on the Company's business, results of operations and
financial condition.
NEW 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 interim financial reports. It also
establishes standards for related disclosures about products and services,
geographic areas, and major customers. The Company adopted the new requirements
for the year ended April 30, 1999. In the Company's report for the first quarter
ending July 31, 1999 and in subsequent quarters, it will present the interim
disclosures for both fiscal 2000 and comparative fiscal 1999 interim
information.
FORWARD LOOKING STATEMENTS This annual report may be deemed to contain certain
forward-looking statements within the meaning of the federal securities laws.
Forward-looking statements are those that express management's view of future
performance and trends, and usually are preceded with "expects", "anticipates",
"believes", "hopes", "estimates", "plans" or similar phrasing. Forward-looking
statements include statements regarding projected operating revenues and costs,
liquidity, capital expenditures, and availability of capital resources as well
as Y2K readiness and potential exposure. Such statements are based on
management's beliefs, assumptions and expectations, which in turn are based on
information currently available to management. Information contained in these
forward-looking statements is inherently uncertain, and the Company's actual
performance and results may differ materially due to a number of factors, most
of which are beyond the Company's ability to predict or 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 its clients in connection with the provision of IT services,
particularly Y2K services; the Company's ability to finance, sustain, and manage
growth; the Company's ability to integrate acquired businesses; competition; and
general economic conditions. The Company undertakes no obligation to publicly
release any revision to any forward-looking statement contained herein to
reflect events or circumstances occurring after the date hereof or to reflect
the occurrence of unanticipated events.
31 SCB COMPUTER TECHNOLOGY
<PAGE> 8
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS
APRIL 30,
- ----------------------------------------------------------------------------------------
ASSETS 1999 1998
- ----------------------------------------------------------------------------------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 5,318,259 $ 2,983,372
ACCOUNTS RECEIVABLE:
Trade, net of allowance for doubtful accounts of
$120,175 in 1999 and $73,891 in 1998 38,390,232 25,362,352
Related parties 166,491 99,553
--------------------------------
38,556,723 25,461,905
Prepaid expenses 2,463,721 2,632,076
Inventory 330,356 439,182
Receivable for income taxes 404,155 --
Deferred federal and state income tax 2,830,274 335,663
--------------------------------
Total Current Assets 49,903,488 31,852,198
EQUIPMENT UNDER OPERATING LEASES, NET OF
ACCUMULATED DEPRECIATION OF
$3,725,697 IN 1999 AND $450,396 IN 1998 4,826,291 5,266,429
--------------------------------
FIXED ASSETS:
Buildings 1,348,293 1,348,293
Furniture, fixtures, and equipment 29,675,296 15,221,841
Accumulated depreciation (6,753,640) (3,629,636)
--------------------------------
24,269,949 12,940,498
Land 209,912 209,912
--------------------------------
24,479,861 13,150,410
--------------------------------
OTHER ASSETS:
Investment in Direct Financing Leases 16,229,954 17,109,698
Goodwill, net of accumulated amortization of
$2,445,226 in 1999 and $824,844 in 1998 45,085,230 26,115,672
Other 6,322,010 5,051,939
--------------------------------
67,637,194 48,277,309
--------------------------------
TOTAL ASSETS $ 146,846,834 $ 98,546,346
================================
</TABLE>
32 SCB COMPUTER TECHNOLOGY
<PAGE> 9
<TABLE>
<CAPTION>
APRIL 30,
- ----------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY 1999 1998
- ----------------------------------------------------------------------------------------
CURRENT LIABILITIES:
<S> <C> <C>
Accounts payable-trade $ 6,763,376 $ 3,614,622
Accrued TVA Settlement Cost 1,658,516 -
Accrued and withheld payroll taxes,
insurance, and payroll deductions 2,371,844 606,414
Accrued vacation 1,238,508 924,296
Deferred revenue 1,244,623 1,036,902
Other accrued expenses 3,244,784 1,787,070
Lines of credit 4,974,288 2,405,245
Current portion of long term debt 9,796,227 2,600,000
Current portion of capital lease obligation 536,870 490,000
Accrued federal and state income taxes - 1,380,801
------------------------------
Total Current Liabilities 31,829,036 14,845,350
------------------------------
Notes payable - non-recourse 16,224,198 18,072,026
Long-term debt 33,754,628 22,782,122
Other long-term liability 900,000 -
Capital lease obligation 738,193 1,317,527
Deferred federal and state income taxes 3,974,576 1,648,220
------------------------------
Total Liabilities 87,420,631 58,665,245
------------------------------
SHAREHOLDERS' EQUITY:
Preferred stock, no par value-authorized 1,000,000
shares, none issued - -
Common stock-100,000,000 shares of $.01 par value
authorized and 24,710,749 shares issued and out-
standing at April 30, 1999 and 22,529,965 shares
issued and out standing at April 30, 1998 247,107 225,300
Additional paid-in capital 39,380,220 24,504,619
Retained earnings 19,798,876 15,151,182
------------------------------
Total Shareholders' Equity 59,426,203 39,881,101
------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $146,846,834 $98,546,346
=============================
</TABLE>
See accompanying notes.
33 SCB COMPUTER TECHNOLOGY
<PAGE> 10
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED APRIL 30,
- ----------------------------------------------------------------------------------------------------
1999 1998 1997
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenue $ 156,670,233 $ 109,471,727 $ 64,063,576
Cost of Services 107,640,340 75,634,218 46,585,959
Provision for contract losses 1,800,000 -- --
---------------------------------------------------
Gross Profit 47,229,893 33,837,509 17,477,617
---------------------------------------------------
Selling, general and administrative expenses 29,573,364 20,324,990 10,345,277
TVA settlement and severance payments 2,700,000 -- --
Impairment of assets 3,950,000 -- --
---------------------------------------------------
Income from operations 11,006,529 13,512,519 7,132,340
OTHER INCOME (EXPENSES):
Interest income 159,484 346,727 938,172
Interest expense (3,494,112) (1,358,620) --
Other, net (119,655) -- 45,216
---------------------------------------------------
Total other income (expenses) (3,454,283) (1,011,893) 983,388
---------------------------------------------------
Income before income taxes 7,552,246 12,500,626 8,115,728
---------------------------------------------------
INCOME TAX EXPENSE:
Current 3,281,183 4,755,573 2,895,063
Deferred (benefit) (168,255) 152,937 157,627
---------------------------------------------------
Total income tax expense 3,112,928 4,908,510 3,052,690
---------------------------------------------------
Net Income $ 4,439,318 $ 7,592,116 $ 5,063,038
===================================================
Net Income per share - basic $ .18 $ .34 $ .23
===================================================
Net Income per share - diluted $ .18 $ .33 $ .23
===================================================
Net Income $ 5,063,038
Pro forma adjustment for income taxes 177,000
Pro forma net income $ 4,886,038
=============
Pro forma net income per share - basic $ .22
=============
Pro forma net income per share -
diluted $ .22
=============
Weighted average number of common
shares - basic 24,683,000 22,464,000 22,432,000
===================================================
Weighted average number of common
shares assuming conversion - diluted 24,921,000 22,756,000 22,495,000
===================================================
</TABLE>
See accompanying notes.
34 SCB COMPUTER TECHNOLOGY
<PAGE> 11
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
- ---------------------------------------------------------------------------------------------------------------
NUMBER ADDITIONAL TOTAL
OF COMMON PAID-IN RETAINED SHAREHOLDERS'
SHARES STOCK CAPITAL EARNINGS EQUITY
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at May 1, 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
Restatement for pooling
of interest 543,724 5,437 (5,437) 208,376 208,376
------------------------------------------------------------------------------
Restated balance
at April 30, 1998 23,073,689 230,737 24,499,182 15,359,558 40,089,477
Tax benefit of stock
options exercised -- -- 183,391 -- 183,391
Issuance of common
stock as additional
purchase price for
Partners acquisition 1,580,582 15,806 14,239,168 -- 14,254,974
Issuance of Common
Stock in connection
with the exercise of
employee stock options 56,478 564 458,479 -- 459,043
Net income -- -- -- 4,439,318 4,439,318
------------------------------------------------------------------------------
Balance at April 30, 1999 24,710,749 $ 247,107 $ 39,380,220 $ 19,798,876 $ 59,426,203
==============================================================================
</TABLE>
See accompanying notes.
35 SCB COMPUTER TECHNOLOGY
<PAGE> 12
CONSOLIDATED STATEMENTS OF CASH FLOW
<TABLE>
<CAPTION>
YEAR ENDED APRIL 30,
- ------------------------------------------------------------------------------------------------
1999 1998 1997
- ------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
<S> <C> <C> <C>
Net income $ 4,439,318 $ 7,592,116 $ 5,063,038
Adjustments to reconcile net income to
net cash provided by operating activities:
Impairment of assets 3,950,000 -- --
Provision for contract losses 1,800,000 -- --
Gain on lease disposals (994,391) (628,514) (500)
Provision for bad debts 46,284 30,000 4,680
Depreciation included in cost of services 4,105,583 2,648,483 --
Depreciation included in selling, general
and administrative expenses 1,172,939 592,661 255,643
Amortization 1,620,382 756,344 72,032
Deferred income taxes (168,255) 152,937 157,627
(Increase) decrease in:
Accounts receivable:
Trade (12,865,788) (11,351,324) (3,100,208)
Related parties (66,938) 338,008 6,958
Other -- 8,402 (8,402)
Prepaid expenses 168,355 (1,996,798) (279,496)
Inventory 108,826 386,940 (28,182)
Other assets (1,486,920) (4,927,494) (427,792)
Net investment in direct financing
lease activity 633,975 8,407,454 --
Increase (decrease) in:
Accounts payable - trade 3,148,754 (519,550) 253,216
Accrued federal and state income taxes (1,554,399) 1,230,860 26,734
Accrued TVA settlement 1,658,516 -- --
Accrued vacation 314,212 263,533 83,295
Deferred revenue 207,721 (356,589) --
Other accrued expenses 557,714 (114,673) (175,731)
Accrued and withheld payroll taxes,
insurance and accrued payroll
deductions 1,765,430 362,763 27,954
---------------------------------------------
Total adjustments 4,122,000 (4,716,557) (3,132,172)
---------------------------------------------
Net cash provided by operating activities 8,561,318 2,875,559 1,930,866
---------------------------------------------
</TABLE>
36 SCB COMPUTER TECHNOLOGY
<PAGE> 13
<TABLE>
<CAPTION>
YEAR ENDED APRIL 30,
- ------------------------------------------------------------------------------------------------
1999 1998 1997
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
INVESTING ACTIVITIES
Purchases of fixed assets (20,122,998) (8,959,456) (792,187)
Proceeds from lease disposals 1,245,323 2,996,664 800
Purchase of The Partners Group (6,165,283) (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 (25,042,958) (23,695,919) (9,291,387)
- -----------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Borrowings on long-term debt 27,926,092 25,674,484 --
Payments on long-term debt (9,757,359) (6,776,135) --
Net borrowings (repayments) under line
of credit 2,569,043 2,405,245 --
Options exercised 459,043 751,366 14,338
Repayment of capital lease obligations (532,464) (315,205) --
Proceeds from non-recourse debt 4,000,000 3,400,182 --
Payment on non-recourse debt (5,847,828) (13,150,992) --
Payment of dividends -- -- (240,000)
Other -- -- (45)
Net cash provided (used) by --------------------------------------------
financing activities 18,816,527 11,988,945 (225,707)
Net increase (decrease) in --------------------------------------------
cash and cash equivalents 2,334,887 (8,831,415) (7,586,228)
Cash and cash equivalents at
beginning of period 2,983,372 11,814,787 19,401,015
--------------------------------------------
Cash and cash equivalents at end of period $ 5,318,259 $ 2,983,372 $ 11,814,787
==============================================
SUPPLEMENTAL DISCLOSURES OF
CASH FLOW INFORMATION:
Interest paid $ 3,613,167 $ 1,953,130 $ --
Income taxes paid 4,500,009 3,791,000 2,805,293
</TABLE>
See accompanying notes.
37 SCB COMPUTER TECHNOLOGY
<PAGE> 14
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APRIL 30, 1999
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.
EARNINGS PER SHARE Basic and diluted earnings per share is calculated in
accordance with FASB Statement No. 128, Earnings Per Share. All earnings per
share amounts for all periods have been presented, and where appropriate,
restated to conform to the requirements of Statement 128.
38 SCB COMPUTER TECHNOLOGY
<PAGE> 15
FIXED ASSETS All fixed assets are carried at cost. Depreciation, which includes
the amortization of assets recorded under capital leases, 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>
<CAPTION>
YEARS
--------------------------------------------------------------------
<S> <C>
Furniture, fixtures and equipment 5-10
Autos 3-6
Buildings 31-39
</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. Estimated losses are recorded when
identified.
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.
39 SCB COMPUTER TECHNOLOGY
<PAGE> 16
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
leased property. 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.
40 SCB COMPUTER TECHNOLOGY
<PAGE> 17
PRO FORMA PROVISION FOR INCOME TAXES During fiscal year 1997, the Company
acquired Delta Software Services, 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.
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.
SEGMENT REPORTING In fiscal 1999, the Company adopted SFAS No. 131, "Disclosures
about Segments of an Enterprise and Related Information". SFAS No. 131
establishes 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 issued to shareholders. It also establishes standards
for related disclosures about products and services, geographic areas, and major
customers. The adoption of SFAS No. 131 did not affect the results of operations
or financial position of the Company, but did affect the disclosure of segment
information as the Company was not required to make such disclosures under
previous guidance. See Note 18.
CONCENTRATIONS OF CREDIT RISK Financial instruments which potentially expose the
Company to concentrations of credit risk consist primarily of trade accounts
receivable. 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.
41 SCB COMPUTER TECHNOLOGY
<PAGE> 18
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 1998
and 1997 financial statements to conform with the 1999 presentation, none of
which are material.
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, 1999 and 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, Inc. (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 unaudited pro forma impact of
the acquisition of PRI and PCG as if the transaction had occurred on May 1, 1996
is as follows:
<TABLE>
<CAPTION>
YEAR ENDED APRIL 30, 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA)
- --------------------------------------------------------------------------------
<S> <C>
PRO FORMA
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 $ 0.15
</TABLE>
42 SCB COMPUTER TECHNOLOGY
<PAGE> 19
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
resulted in additional goodwill that is being expensed over the remaining 30
year amortization period.
In February 1997, the Company acquired substantially all of the assets of
Technology Management Resources, Inc. ("TMR"), 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 TMR 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 TMR
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 employment of one of the former shareholders. The operating
results of TMR are included in the Company's consolidated statements of
operations since March 1, 1997. The unaudited pro forma impact of the TMR
acquisition as if the transaction had occurred on May 1, 1996 is as follows:
<TABLE>
<CAPTION>
YEAR ENDED APRIL 30, 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA)
- --------------------------------------------------------------------------------------
PRO FORMA
- --------------------------------------------------------------------------------------
<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 $ 0.25
</TABLE>
43 SCB COMPUTER TECHNOLOGY
<PAGE> 20
In September 1996, the Company acquired Delta Software Services, Inc. ("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, common shares of 7,754 were returned to the Company and
retired in settlement of an escrow agreement 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.
In May 1998, the Company effected a business combination 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 Company exchanged 543,724 shares of its common stock for all the
outstanding stock of PTI of which 54,372 shares are being held in escrow to
secure potential indemnification claims. Because of its size, the transaction
does not require restatement of prior financial results.
3. ACCOUNTS RECEIVABLE -- TRADE
Accounts receivable-trade includes unbilled receivables of $16,042,715 and
$9,916,821 under contracts to purchase services as of April 30, 1999 and 1998,
respectively. Such amounts are billable upon completion of performance
milestones. Substantially all of the unbilled receivables 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,
1999 1998
---- ----
<S> <C> <C>
Minimum lease payments receivable $14,906,541 $15,469,381
Unguaranteed residual values of leased equipment 3,696,281 3,809,905
Indirect leasing costs 161,581 181,418
Unearned income (2,534,449) (2,351,006)
----------- -----------
Net investment in direct financing leases $16,229,954 $17,109,698
=========== ===========
</TABLE>
SCB Computer Technology 44
<PAGE> 21
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>
2000 $ 6,574,115
2001 4,618,224
2002 1,973,743
2003 1,524,593
2004 215,866
-----------
Total minimum future lease payments receivable $14,906,541
===========
</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
noncancellable operating leases as of April 30, 1999.
<TABLE>
<CAPTION>
YEAR ENDING APRIL 30,
- ---------------------
<S> <C>
2000 $1,578,204
2001 960,375
2002 694,891
2003 159,477
2004 25,648
----------
Total minimum future rentals $3,418,595
==========
</TABLE>
All of the above future rentals have been assigned to lenders in connection with
the repayment of non-recourse debt.
SCB Computer Technology 45
<PAGE> 22
6. NON-RECOURSE DEBT
At April 30, 1999 the non-recourse debt balances were $13,255,517 and $2,968,681
for direct financing leases and operating leases, respectively. 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. Substantially all of the
proceeds from the issuance of non-recourse debt was used to purchase assets
leased under direct financing and operating leases. The non-recourse financing,
which bears interest at rates ranging from 6.4% to 11.6%, is secured by the
assigned lease payments and the underlying leased property. 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>
2000 $5,685,524 $1,184,976 $6,870,500
2001 4,164,526 828,884 4,993,410
2002 1,753,127 694,039 2,447,166
2003 1,439,407 222,895 1,662,302
2004 212,933 37,887 250,820
----------- ---------- -----------
$13,255,517 $2,968,681 $16,224,198
=========== ========== ===========
</TABLE>
7. DEBT
The Company has a $5,000,000 line of credit with a bank which bears interest at
a rate of prime less 0.55% (7.2% at April 30, 1999) and is due upon demand. At
April 30, 1999, $4,974,288 was outstanding under this line of credit which is
unsecured.
Long-term debt consisted of the following at April 30, 1999 and 1998:
<TABLE>
<CAPTION>
APRIL 30,
1999 1998
---- ----
<S> <C> <C>
Credit Facility and Term Loan $ 41,337,912 $ 19,643,667
Term notes 2,212,943 5,738,455
43,550,855 25,382,122
Less current portion 9,796,227 2,600,000
$ 33,754,628 $ 22,782,122
</TABLE>
46 SCB COMPUTER TECHNOLOGY
<PAGE> 23
Under the Second Amended and Restated Loan Agreement (the Loan Agreement), dated
July 31, 1998, the Company has a $30,000,000 revolving credit facility (the
Facility) and a $15,000,000 term loan (the Term Loan) with a bank which is
secured by a portion of the Company's equity interest in various subsidiaries.
The Facility and Term Loan bear interest at LIBOR plus an additional margin
depending on the funded debt to EBITDA ratio (6.43% and 7.16% at April 30, 1999
and 1998, respectively).
Pursuant to the Loan Agreement, the aggregate outstanding balance allowed under
the Facility is reduced $1,250,000 quarterly commencing in February 1999 through
August 2000. The Facility expires and matures in October 2000, and is renewable
at that time. At April 30, 1999 and 1998, $27,656,000 and $19,643,667,
respectively, were outstanding under the Facility.
The Term Loan is payable in monthly installments of $130,248 commencing August
1998 through December 1998, then monthly installments of $353,845 commencing
January 1999 through July 2002 with a final payment of all unpaid principal and
interest due in July 2002. At April 30, 1999, there was $13,681,912 outstanding
under the Term Loan.
The Loan Agreement contains various covenants, including a maximum leverage
ratio and restrictions on capital expenditures and leasing obligations.
The Company has several term notes with various lending institutions which bear
interest at rates ranging from 8.5% to 9.55%. These notes have varying maturity
dates ranging from August 2000 to October 2000. The notes are secured primarily
by computer equipment, as the majority of the notes were obtained for the
purchase of such equipment.
Future maturities related to long-term debt are as follows:
<TABLE>
<CAPTION>
YEAR ENDING APRIL 30, LONG TERM DEBT
- --------------------- --------------
<S> <C>
2000 $9,796,227
2001 27,124,890
2002 4,050,157
2003 2,579,581
-----------
$43,550,855
===========
</TABLE>
47 SCB COMPUTER TECHNOLOGY
<PAGE> 24
8. CAPITAL LEASE
The Company has a capital lease for computer equipment used on various
outsourcing engagements which requires payments of principal and interest of
$624,000 in fiscal 2000, $624,000 in fiscal 2001 and $208,000 in fiscal 2002,
with $180,937 of these payments representing interest. The present value of the
minimum lease payments at April 30, 1999 and 1998 was $1,275,063 and $1,807,527,
respectively. At April 30, 1999, the current portion of the present value of
minimum lease payments is $536,870. The capital lease is secured by the
equipment leased which is included in furniture, fixtures and equipment in the
consolidated balance sheets at April 30, 1999 and 1998 in the amount of
$2,114,199 with accumulated depreciation of $924,962 and $396,412, respectively.
9. 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, 1999, 1998 and 1997, but paid
administrative expenses associated with the plan of $21,510, $21,960, and $6,660
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 thirty days by
April 30. Contributions by the Company are at the discretion of the Board of
Directors. Contributions were $538,758, $144,330, and $93,413 for the years
ended April 30, 1999, 1998 and 1997, respectively.
10. EMPLOYMENT AGREEMENTS
Effective November 1, 1998, the Company entered into employment agreements with
its Chairman and Vice Chairman for a term of three years expiring October 31,
2001. These agreements provide for a base salary of $425,000 each for the
initial year, $600,000 each for the second year, and $700,000 each for the third
year. Additionally, the Company granted options to each to purchase 35,211
shares of common stock.
SCB COMPUTER TECHNOLOGY 48
<PAGE> 25
11. LEASES
Total rent expense for the years ended April 30, 1999, 1998 and 1997 was
$1,559,211, $1,015,572, and $258,348, respectively. The Company leases certain
office facilities and vehicles under terms of noncancelable operating lease
agreements which expire at various dates.
Total future annual lease requirements are as follows:
<TABLE>
<S> <C>
2000 $1,722,086
2001 1,534,182
2002 1,371,658
2003 1,325,938
2004 502,500
Thereafter $3,015,300
----------
$9,471,714
==========
</TABLE>
12. SIGNIFICANT CUSTOMERS
The Company earns a significant portion of its revenue from its top five
customers. Revenues earned from its top five customers totaled 35%, 37%, and 49%
for the years ended April 30, 1999, 1998 and 1997, respectively.
At April 30, 1999 and 1998 accounts receivable from these significant customers
were $15,676,198 and $8,658,419, respectively.
13. FEDERAL AND STATE INCOME TAXES
Significant components of the provision for income taxes are as follows:
<TABLE>
<CAPTION>
YEAR ENDED APRIL 30,
--------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
FEDERAL:
Current $ 2,768,248 $ 3,878,708 $ 2,439,146
Deferred (159,889) 133,330 141,035
----------- ----------- -----------
2,608,359 4,012,038 2,580,181
----------- ----------- -----------
STATE:
Current 512,935 876,865 455,917
Deferred (8,366) 19,607 16,592
----------- ----------- -----------
504,569 896,472 472,509
----------- ----------- -----------
TOTAL $ 3,112,928 $ 4,908,510 $ 3,052,690
=========== =========== ===========
</TABLE>
49 SCB COMPUTER TECHNOLOGY
<PAGE> 26
Deferred tax liabilities and assets are comprised of the following:
<TABLE>
<CAPTION>
YEAR ENDED APRIL 30,
1999 1998
---- ----
<S> <C> <C>
DEFERRED TAX LIABILITIES:
Leasing activities $ 2,678,189 $ 1,188,262
Deductible Goodwill 932,349 339,880
Other 364,038 120,078
----------- -----------
Total deferred tax liabilities 3,974,576 1,648,220
----------- -----------
DEFERRED TAX ASSETS:
Unusual charges (See Note 17) 2,282,699 --
Vacation expense 547,575 335,663
Total deferred tax assets 2,830,274 335,663
----------- -----------
NET DEFERRED TAX LIABILITIES $(1,144,302) $(1,312,557)
=========== ===========
</TABLE>
The reconciliation of income tax computed at the U.S. federal statutory tax
rates to income tax expense is:
<TABLE>
<CAPTION>
YEAR ENDED APRIL 30,
--------------------
1999 1998 1997
---- ---- ----
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
------ ------- ------ ------- ------ -------
<S> <C> <C> <C> <C> <C> <C>
Tax at U.S. statutory rates $ 2,567,764 34.0% $ 4,250,213 34.0% $ 2,759,348 34.0%
State income taxes net of
federal tax benefit 322,695 4.3 591,672 4.7 311,856 3.8
Other-net 222,469 2.9 66,625 0.6 (18,514) (0.2)
----------- ---- ----------- ---- ----------- ----
$ 3,112,928 41.2% $ 4,908,510 39.3% $ 3,052,690 37.6%
=========== ==== =========== ==== =========== ====
</TABLE>
Partners Capital Group, Inc., a subsidiary of the Company, has a federal income
tax loss carryforward for tax return purposes in excess of $1.2 million that was
created primarily from leasing activities. These loss carryforwards expire in
various amounts through 2011.
50 SCB COMPUTER TECHNOLOGY
<PAGE> 27
14. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per
share:
<TABLE>
<CAPTION>
YEAR ENDED APRIL 30,
--------------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 1999 1998 1997
- ---------------------------------------- ---- ---- ----
<S> <C> <C> <C>
NUMERATOR:
Net income $ 4,439 $ 7,592 $ 5,063
Pro forma adjustment for income taxes - - 177
------- ------- -------
Pro forma net income - - 4,886
------- ------- -------
DENOMINATOR:
Denominator for basic earnings per share
- weighted average shares 24,683 22,464 22,432
Effect of dilutive securities:
Employee stock options 238 292 63
Denominator for diluted earnings
per share - adjusted weighted average
and assumed conversions 24,921 22,756 22,495
------- ------- -------
Basic earnings per share $ 0.18 $ 0.34 $ 0.23
Basic pro forma earnings per share $ - $ - $ 0.22
------- ------- -------
Diluted earnings per share $ 0.18 $ 0.33 $ 0.23
Diluted pro forma earnings per share $ - $ - $ 0.22
======= ======= =======
</TABLE>
51 SCB COMPUTER TECHNOLOGY
<PAGE> 28
15. 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 one to four years from the date of grant and expire ten years
from the date of grant. Under the Plan, 3,000,000 shares of common stock have
been reserved for distribution. The Plan also provides for grants of stock
appreciation rights and restricted stock. The following amounts reflect the
effect of all stock dividends and splits declared through April 30, 1999:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED 1999 FISCAL YEAR ENDED 1998 FISCAL YEAR ENDED 1997
------------------------ ----------------------- ------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
------- ----- ------- ----- ------- -----
<S> <C> <C> <C> <C> <C> <C>
Outstanding May 1 2,015,183 $7.01 1,093,050 $5.41 597,600 $5.17
Granted 388,922 $6.74 1,172,075 $8.50 559,500 $5.63
Exercised (56,478) $7.26 (112,330) $6.75 (2,775) $5.17
Canceled (224,532) $7.24 (137,612) $7.35 (61,275) $5.33
--------- ----- ------- ----- ------- -----
Outstanding April 30 2,123,095 $6.93 2,015,183 $7.01 1,093,050 $5.41
--------- ----- ------- ----- ------- -----
Exercisable at year end 1,480,498 $7.04 874,983 $6.69 366,375 $5.41
Weighted average fair
value of options
granted during the year $3.22 $4.25 $2.86
========= ===== ========= ===== ======= =====
</TABLE>
Exercise prices for options outstanding as of April 30, 1999, ranged from $4.94
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.
52 SCB COMPUTER TECHNOLOGY
<PAGE> 29
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 1999, 1998 and 1997, respectively: risk-free interest rate of
5.01 percent, 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 which 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.
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>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Pro forma net income:
As reported - (including pro forma
for income taxes in 1997) $4,439,318 $7,592,116 $4,886,038
Pro forma-for SFAS No 123 $3,652,139 $4,971,136 $4,341,195
Pro forma earnings per share:
As reported - (including pro forma for
income taxes in 1997) - basic $.18 $.34 $.22
As reported - (including pro forma for
income taxes in 1997) - diluted $.18 $.33 $.22
Pro forma-for SFAS No 123 - basic $.15 $.22 $.19
Pro forma-for SFAS No 123 - diluted $.15 $.22 $.19
========== ========== ==========
</TABLE>
53 SCB COMPUTER TECHNOLOGY
<PAGE> 30
16. TVA SETTLEMENT
In the fiscal quarter ended October 31, 1998, the Company reached a tentative
agreement with the United States Attorney for the Western District of Tennessee
and the Tennessee Valley Authority (TVA) to settle on a civil basis all claims
against the Company related to the Company's billing practices under its
consulting contract with the TVA. The Company has agreed to pay $1,000,000 to
the United States government and $600,000 to the TVA in settlement of all claims
against the Company. The Company provided an accrual of $1,900,000 for the
anticipated settlement and related costs. The Final Agreement was executed May
5, 1999.
In connection with the settlement, a former officer of the Company plead guilty
to a single felony count of submitting a false claim of less than $10,000.
Pursuant to the resignation of such officer from the Company, SCB recorded
severance expense of $800,000 in the fiscal quarter ended October 31, 1998, with
non-compete payments to the former officer (aggregating $980,000) being
amortized ratably over three years.
The $1,900,000 settlement charge and the $800,000 severance charge are reflected
separately on the consolidated statement of income under the caption "TVA
settlement and severance payments."
17. UNUSUAL CHARGES
During the fourth fiscal quarter of 1999, the Company completed an evaluation of
its operations related to a data center and determined that its best course of
action would be to close the facility. The data center had historically
generated revenues through data processing services for customers using legacy
systems. However, due to changes in the industry conditions and significant
increases in the pricing of software licenses used in conjunction with legacy
systems, it became obvious that the data center would continually generate
operating losses in the future without significant capital improvements.
Consequently, the Company recorded a non-cash charge of $1,800,000 for contract
loss reserves which management believes are sufficient to cover estimated losses
on the wind-down of its remaining contractual obligations related to the data
center.
Additionally, the Company identified a non-cash impairment of the long-term
assets related to the data center as the projected future cash flows of the data
center were less
54 SCB COMPUTER TECHNOLOGY
<PAGE> 31
than the carrying value of the assets. These assets which primarily consist of
computer equipment were written down to their fair value based on the salvage
value of the assets. As a result, an impairment loss of $3,950,0000 was also
recorded in the fourth fiscal quarter of 1999.
These charges are based on estimates and, therefore, are subject to various
risks and uncertainties related to the Company's ability to secure agreements
with third parties and relinquish the assets. As a result, the Company believes
it is reasonably possible that these estimates may be revised in the near-term.
However, the impacts of such revisions, if any, are not expected to be material.
18. SEGMENT INFORMATION
The Company operates in two industry segments -- Professional Services and
Enterprise Solutions.
The revenue components of the Professional Services segment consist primarily
of: (1) IT Consulting, including evaluation, design and reengineering of
computer systems, management, quality assurance and technical direction for IT
projects, as well as functional expertise and training and (2) Professional
Staffing, which involves providing skilled IT staff on an as-needed basis.
The revenue components of the Enterprise Solutions segment consist primarily of:
(1) Outsourcing, including system development and integration, maintenance, data
center management, help desk and technical services, remote processing, computer
hardware sales and leasing; (2) Enterprise Resource Planning (ERP) services,
which include planning and evaluation, systems analysis and administration,
implementation and functional support; and (3) E-Services, which include
Enterprise Management Services, Internet application development and design and
implementation of communication networks.
55 SCB COMPUTER TECHNOLOGY
<PAGE> 32
Summarized financial information concerning the operating segments in which the
Company operated at April 30, 1999, 1998 and 1997 and for each of the years then
ended is shown in the following tables:
<TABLE>
<CAPTION>
OPERATING SEGMENTS (IN THOUSANDS) 1999 1998 1997 (b)
- ------------------ -------------- ---- ---- --------
<S> <C> <C> <C>
REVENUES:
Professional Services $110,060 $ 78,399 $ 64,064
Enterprise Solutions 46,610 31,073 --
-------- -------- --------
$156,670 $109,472 $ 64,064
======== ======== ========
INCOME FROM OPERATIONS: (A)
Professional Services $ 13,040 $ 9,324 $ 7,360
Enterprise Solutions 6,416 4,188 --
-------- -------- --------
$19,456 $ 13,512 $ 7,360
======== ======== ========
TOTAL ASSETS:
Professional Services $ 44,603 $ 34,761 $ 35,094
Enterprise Solutions 101,820 63,785 --
-------- -------- --------
$146,423 $ 98,546 $ 35,094
======== ======== ========
EXPENDITURES FOR LONG-LIVED ASSETS:
Professional Services $ 2,438 $ 2,429 $ 10,226
Enterprise Solutions 37,741 24,042 --
$ 40,179 $ 26,471 $ 10,226
======== ======== ========
DEPRECIATION AND AMORTIZATION:
Professional Services $ 1,488 $ 564 $ 328
Enterprise Solutions 5,411 3,433 --
-------- -------- --------
$ 6,899 $ 3,997 $ 328
======== ======== ========
</TABLE>
(a) 1999 income from operations excludes the nonrecurring charges of $1,800,000
contract loss reserves and $3,950,000 for an impairment of long-lived
assets (See Note 17) as well as a $2,700,000 nonrecurring charge related to
the TVA settlement (See Note 16).
(b) The Company operated in only one segment in 1997 as the operations that
comprise Enterprise Solutions were acquired in 1998.
56 SCB COMPUTER TECHNOLOGY
<PAGE> 33
The accounting policies of the reportable segments are the same as those
described in the summary of significant accounting policies. There are no
intersegment sales. Long-term assets is made up of goodwill and property, plant
and equipment. Corporate services, consisting of general and administrative
services are provided to the segments from a centralized location. Such costs
are allocated to the segments based on revenue, headcount, and resources
dedicated to a particular segment. In addition, substantially all of the sales
and recruiting workforce is contained in the Professional Services segment.
Costs associated with the sales and recruiting workforce are allocated to the
Enterprise Solutions segment based generally on forecasted revenues.
19. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
JULY 31, OCTOBER 31, JANUARY 31, APRIL 30,
QUARTER ENDED: 1998 1998 1999 1999
- -------------- ---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenue $ 35,488,610 $ 39,280,625 $ 38,619,450 $ 43,281,548
Cost of services 24,042,414 26,945,679 26,544,646 30,107,601
Provision for contract
losses - - - 1,800,000
---------- ---------- ---------- ----------
Gross profit 11,446,196 12,334,946 12,074,804 11,373,947
Selling, general and
administrative expenses 6,826,357 7,133,003 7,396,022 8,217,982
TVA Settlement and
severance payments 1,900,000 800,000 - -
Impairment of assets - - - 3,950,000
Income from operations 2,719,839 4,401,943 4,678,782 (794,035)
Other expenses 626,572 882,437 1,041,403 903,871
---------- ---------- ---------- ----------
Income (loss) before taxes 2,093,267 3,519,506 3,637,379 (1,697,906)
Income (loss) tax expense 1,197,000 1,368,886 1,380,204 (833,162)
---------- ---------- ---------- ----------
Net income (loss) $ 896,267 $ 2,150,620 $ 2,257,175 $ (864,744)
Net income (loss)
per share - basic $ 0.04 $ 0.09 $ 0.09 $ (0.04)
========== ========== ========== ==========
Net income (loss)
per share - diluted $ 0.04 $ 0.09 $ 0.09 $ (0.04)
========== ========== ========== ==========
Weighted average (basic) 24,665,318 24,671,661 24,683,382 24,709,965
========== ========== ========== ==========
Adjusted weighted average
shares and assumed
conversion (diluted) 25,114,168 24,844,604 24,918,710 24,709,965
========== ========== ========== ==========
</TABLE>
57 SCB COMPUTER TECHNOLOGY
<PAGE> 34
<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 3,700,596 5,176,168 5,416,518 6,031,708
---------- ---------- ---------- ----------
Income from operations 2,778,640 3,521,346 3,178,382 4,034,151
Other income/(expense) 148,201 (235,047) (450,246) (474,801)
---------- ---------- ---------- ----------
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
========== ========== ========== ==========
</TABLE>
58 SCB COMPUTER TECHNOLOGY
<PAGE> 35
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, 1999 and 1998, and the related
consolidated statements of income, shareholders' equity, and cash flows for each
of the three years in the period ended April 30, 1999. 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, 1999 and 1998, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended April 30, 1999, in conformity with generally
accepted accounting principles.
Memphis, Tennessee
June 17, 1999
59 SCB COMPUTER TECHNOLOGY
<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 Statements (Form S-8 No.
333-36971 and Form S-8 No. 333-6843) pertaining to the SCB Computer Technology,
Inc. 1997 Stock Incentive Plan of our report dated June 17, 1999, 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, 1999.
/s/ Ernst & Young LLP
Memphis, Tennessee
July 23, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> APR-30-1999
<PERIOD-START> MAY-01-1998
<PERIOD-END> APR-30-1999
<EXCHANGE-RATE> 1
<CASH> 5,318,259
<SECURITIES> 0
<RECEIVABLES> 38,510,407
<ALLOWANCES> 120,175
<INVENTORY> 330,366
<CURRENT-ASSETS> 49,903,488
<PP&E> 39,785,489
<DEPRECIATION> 10,479,337
<TOTAL-ASSETS> 146,846,834
<CURRENT-LIABILITIES> 31,829,036
<BONDS> 0
0
0
<COMMON> 247,107
<OTHER-SE> 59,179,096
<TOTAL-LIABILITY-AND-EQUITY> 146,846,834
<SALES> 156,670,233
<TOTAL-REVENUES> 156,670,233
<CGS> 107,640,340
<TOTAL-COSTS> 109,440,340
<OTHER-EXPENSES> 39,829
<LOSS-PROVISION> 1,800,000
<INTEREST-EXPENSE> 3,494,112
<INCOME-PRETAX> 7,552,246
<INCOME-TAX> 3,112,928
<INCOME-CONTINUING> 4,439,318
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,439,318
<EPS-BASIC> .18
<EPS-DILUTED> .18
</TABLE>
