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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K/A NO. 2
(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.)
3800 FOREST HILL - IRENE ROAD
MEMPHIS, TENNESSEE 38125
(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
PART OF FORM 10-K
DOCUMENTS INCORPORATED INTO WHICH INCORPORATED
---------------------- -----------------------
Certain portions of the Proxy Statement for the
1999 Annual Meeting of Shareholders Part III - Items 10-12
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EXPLANATORY NOTE
RESTATEMENT OF CONSOLIDATED FINANCIAL STATEMENTS
On July 3, 2000, the Company announced that it would restate its
consolidated financial statements for the years ended April 30, 1999 and 1998,
and for each quarter in the nine-month period ended January 31, 2000. The
Company's restated consolidated financial statements for these periods contain
adjustments that fall into three categories. The first category of adjustments
arises from the internal investigation conducted by the audit committee of the
Company's board of directors into the concerns raised by five employees on March
27, 2000, regarding the Company's accounting treatment of certain matters. The
findings of the audit committee's investigation indicate that, with respect to
fiscal 1999 and 1998, the Company did not properly (1) accrue bonuses paid to
two employees, (2) record revenue from the sale of a partial interest in a
computer equipment lease, (3) account for an outsourcing contract assumed as
part of an acquisition, and (4) record revenue from two sales of residual
interests in computer equipment lease schedules. The second category of
adjustments is the result of the Company's internal review of financial
information relating to various matters, including items that were similar to
those investigated by the audit committee. The third category of adjustments
consists of adjustments that were initially identified during the audits of the
Company's consolidated financial statements for the years ended April 30, 1999
and 1998, but which the Company elected not to record in those periods on the
basis of immateriality. The Company subsequently decided to record these
adjustments. For further information regarding the background of all the
adjustments, see Note 2 of the Notes to Consolidated Financial Statements
included in Item 8 of this amendment.
The adjustments contained in the Company's restated consolidated
financial statements decrease the Company's previously reported net income by
$3.4 million and $1.5 million for the years ended April 30, 1999 and 1998,
respectively. The adjustments increase the Company's previously reported net
income by $0.2 million, $0.1 million, and $0.4 million for the quarters ended
July 31, 1999, October 31, 1999, and January 31, 2000, respectively. The
adjustments decrease the Company's previously reported total assets by $0.9
million as of April 30, 1999, and increase its previously reported total assets
by $1.4 million as of April 30,1998. For additional information concerning the
impact of the adjustments on the Company's financial results, see the Company's
selected restated consolidated financial information, "Management's Discussion
and Analysis of Financial Condition and Results of Operations," and the
Company's restated consolidated financial statements in Items 6, 7 and 8,
respectively, of this amendment.
Management believes that it has made all the adjustments considered
necessary as a result of the audit committee's investigation. Management further
believes that the Company's consolidated financial statements for the years
ended April 30, 1999 and 1998, as restated, include all adjustments necessary
for a fair presentation of the Company's financial position and results of
operations for such periods.
NASDAQ TRADING SUSPENSION, DELISTING NOTICE, AND APPEAL
On April 14, 2000, The Nasdaq Stock Market ("Nasdaq") suspended trading
in the Company's common stock following the Company's issuance of a press
release earlier that day. The press release announced the audit committee's
internal investigation into the accounting issues raised by the Company's
employees, the resignation of Ernst & Young LLP as the Company's independent
auditor, and the anticipated restatement of the Company's consolidated financial
statements for the years ended April 30, 1998 and 1999, and for each quarter in
the nine-month period ended January 31, 2000. Nasdaq suspended trading in the
Company's common stock indefinitely pending its receipt and review of certain
information relating to the Company. The Company subsequently responded to
Nasdaq's information request.
On May 26, 2000, Nasdaq notified the Company that its staff had
determined to delist the Company's common stock from the Nasdaq National Market
effective as of the close of business on June 6, 2000. In accordance with
Nasdaq's procedures and rules, the Company appealed the Nasdaq staff's delisting
determination to a Nasdaq Listing Qualifications Panel. The delisting of the
Company's
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common stock will be stayed pending the issuance of a decision by the Nasdaq
panel which is expected later this month.
SHAREHOLDER LITIGATION
In April and May 2000, six shareholders of the Company filed separate
purported class action lawsuits in the United States District Court for the
Western District of Tennessee against the Company and certain of its directors
and officers. In addition to the Company, each lawsuit names Ben C. Bryant, Jr.,
Gary E. McCarter, T. Scott Cobb, and Michael J. Boling as individual defendants,
while one lawsuit also names Jeffrey S. Cobb as an individual defendant. In each
case, the plaintiff seeks certification of a plaintiff class consisting of all
persons who purchased or otherwise acquired the Company's common stock within a
specified prior period, other than the Company's directors and officers and
related persons and entities. The suits, which are substantially the same,
generally allege that the defendants violated federal securities laws by making
false and misleading statements regarding the Company's financial results, which
artificially inflated the market price of the Company's common stock and caused
the plaintiffs and other class members to purchase the Company's common stock at
such inflated prices. The suits seek unspecified monetary damages. On June 1,
2000, the court ordered the consolidation of each lawsuit into a single matter
designated as the In re SCB Computer Technology Securities Litigation and ruled
on certain other procedural matters. The Company is reviewing the consolidated
lawsuit and intends to respond to it in a timely manner. As of the date hereof,
the Company is unable to predict the outcome of the litigation and its ultimate
effect, if any, on the Company's consolidated financial condition and results of
operations.
MANAGEMENT CHANGES
On May 5, 2000, Ben C. Bryant, Jr., resigned as Chief Executive Officer
and President of the Company, and T. Scott Cobb, a former director and executive
officer of the Company, was appointed Chief Executive Officer. On July 12, 2000,
Mr. Bryant also resigned as Chairman of the Board of the Company effective as of
September 1, 2000, whereupon he will retire from full-time employment with the
Company but will continue to serve as a director and consultant to the Company.
ADDITIONAL INFORMATION
Except for the information set forth in Items 6, 7, 8 and 14(a), no
other information included in the Company's Annual Report of Form 10-K, as
previously amended, on file with the Securities and Exchange Commission (the
"Commission") is amended by this amendment. For additional information regarding
the restatement of the Company's consolidated financial statements, see the
Company's Current Reports on Form 8-K filed with the Commission on April 14,
2000, and July 3, 2000. For further information concerning the shareholder
litigation described above, see the Company's Current Report on Form 8-K filed
with the Commission on April 21, 2000.
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PART II
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth selected restated consolidated financial
information of the Company for the periods and as of the dates indicated. The
restated consolidated financial data are derived from the restated consolidated
financial statements of the Company. The selected financial information should
be read in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the Company's restated consolidated
financial statements, including the notes thereto, in Items 7 and 8,
respectively, of this amendment.
CONSOLIDATED INCOME STATEMENT DATA FOR YEARS ENDED APRIL 30,
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
1999 1998 1997 1996 1995
--------- --------- ------- -------- --------
(AS RESTATED) (AS RESTATED)
<S> <C> <C> <C> <C> <C>
Revenue $ 152,016 $ 105,722 $64,064 $ 56,024 $ 39,170
Cost of services 108,978 74,201 46,586 39,508 27,027
--------- --------- ------- -------- --------
Gross profit 43,038 31,521 17,478 16,516 12,143
Selling, general and administrative
expenses 37,641 20,520 10,345 13,345 9,642
--------- --------- ------- -------- --------
Income from operations 5,397 11,001 7,133 3,171 2,501
Other income (expenses), net (3,455) (1,012) 983 (27) (146)
--------- --------- ------- -------- --------
Income before income taxes 1,942 9,989 8,116 3,144 2,355
Provision for income taxes 869 3,904 3,053 1,187 718
--------- --------- ------- -------- --------
Net income $ 1,073 $ 6,085 $ 5,063 $ 1,957 $ 1,637
========= ========= ======= ======== ========
Net income per share - basic $ 0.04 $ 0.27 $ 0.23 $ 0.11 $ 0.09
========= ========= ======= ======== ========
Net income per share - diluted $ 0.04 $ 0.27 $ 0.23 $ 0.11 $ 0.09
========= ========= ======= ======== ========
Net income $ 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 of common
shares - basic 24,683 22,464 22,432 18,556 17,546
========= ========= ======= ======== ========
Weighted average number of common
shares assuming conversion - diluted 24,921 22,756 22,495 18,623 17,631
========= ========= ======= ======== ========
</TABLE>
CONSOLIDATED BALANCE SHEET DATA AS OF APRIL 30,
(THOUSANDS)
<TABLE>
<CAPTION>
1999 1998 1997 1996 1995
--------- --------- ------- -------- --------
(AS RESTATED) (AS RESTATED)
<S> <C> <C> <C> <C> <C>
Working capital $ 16,016 $ 19,064 $20,351 $ 24,643 $ 1,347
Total assets 145,914 99,939 35,094 29,272 7,089
Long-term debt, less current portion 33,755 22,782 -- -- 171
Total shareholders' equity 54,554 38,374 31,633 26,796 2,862
</TABLE>
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESTATEMENT OF CONSOLIDATED FINANCIAL STATEMENTS
On July 3, 2000, the Company announced that it would restate its
consolidated financial statements for the years ended April 30, 1999 and 1998,
and for each quarter in the nine-month period ended January 31, 2000. The
Company's restated consolidated financial statements for these periods contain
adjustments that fall into three categories. The first category of adjustments
arises from the internal investigation conducted by the audit committee of the
Company's board of directors into the concerns raised by five employees on March
27, 2000, regarding the Company's accounting treatment of certain matters. The
findings of the audit committee's investigation indicate that, with respect to
fiscal 1999 and 1998, the Company did not properly (1) accrue bonuses paid to
two employees, (2) record revenue from the sale of a partial interest in a
computer equipment lease, (3) account for an outsourcing contract assumed as
part of an acquisition, and (4) record revenue from two sales of residual
interests in computer equipment lease schedules. The second category of
adjustments is the result of the Company's internal review of financial
information relating to various matters, including items that were similar to
those investigated by the audit committee. The third category of adjustments
consists of adjustments that were initially identified during the audits of the
Company's consolidated financial statements for the years ended April 30, 1999
and 1998, but which the Company elected not to record in those periods on the
basis of immateriality. The Company subsequently decided to record these
adjustments. For further information regarding the background of all the
adjustments, see Note 2 of the Notes to Consolidated Financial Statements
included in Item 8 of this amendment.
The adjustments contained in the Company's restated consolidated
financial statements decrease the Company's previously reported net income by
$3.4 million and $1.5 million for the years ended April 30, 1999 and 1998,
respectively. The adjustments increase the Company's previously reported net
income by $0.2 million, $0.1 million, and $0.4 million for the quarters ended
July 31, 1999, October 31, 1999, and January 31, 2000, respectively. The
adjustments decrease the Company's previously reported total assets by $0.9
million as of April 30, 1999, and increase its previously reported total assets
by $1.4 million as of April 30,1998. For additional information concerning the
impact of the adjustments on the Company's financial results, see the Company's
selected restated consolidated financial information, "Management's Discussion
and Analysis of Financial Condition and Results of Operations," and the
Company's restated consolidated financial statements in Items 6, 7 and 8,
respectively, of this amendment.
Management believes that it has made all the adjustments considered
necessary as a result of the audit committee's investigation. Management further
believes that the Company's consolidated financial statements for the years
ended April 30, 1999 and 1998, as restated, include all adjustments necessary
for a fair presentation of the Company's financial position and results of
operations for such periods.
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 $152.0 million in fiscal 1999 is a
function of three principal factors: (1) an increase in the volume of services
provided (as measured by aggregate hours billed); (2) a shift in the mix of
services provided from lower rate professional staffing services to higher rate
consulting and outsourcing services; and (3) 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
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local governments, Fortune 500 companies, and other large organizations. For the
fiscal years ended April 30, 1999, 1998, and 1997, approximately 42%, 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 36%, 35%, 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 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. ("TMR"), an information technology consulting company. In June
1997, the Company acquired all of the outstanding stock of Partners Resources,
Inc. and Partners Capital Group (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 TMR 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 prior to the
acquisition date.
RESULTS OF OPERATIONS
COMPARISON OF FISCAL 1999 TO FISCAL 1998
Revenue increased from $105.7 million in fiscal 1998 to $152.0 million in
fiscal 1999, an increase of 43.8%. 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
$13.7 million in sales at the Partners Group.
Gross profit increased from $31.5 million in fiscal 1998 to $43.0 million
in fiscal 1999, an increase of 36.5%. This increase was attributable to an
increase in revenue. Gross profit margin decreased from 29.8% to 28.3% during
the period. Cost of services consists of all costs directly attributable to the
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Company's personnel assigned to various client engagements, 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 1.2%; see Note 18
of Notes to Consolidated Financial Statements.
Selling, general and administrative expenses increased from $20.5 million
in fiscal 1998 to $31.0 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 severance payments and a $4.0 million
write-down for the impairment of certain data center equipment (see Notes 17 and
18, respectively, of Notes to Consolidated Financial Statements). As a
percentage of revenues, selling, general and administrative expenses increased
from 19.4% in fiscal 1998 to 20.4% in fiscal 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 fiscal 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 $105.7 million in
fiscal 1998, an increase of 64.9%. 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
$23.0 million in sales resulting from the acquisition of the Partners Group.
Gross profit increased from $17.5 million in fiscal 1997 to $31.5 million
in fiscal 1998, an increase of 80.0%. This increase was attributable primarily
to an increase in revenue. Gross profit margin increased from 27.3% to 29.8%
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 $20.5 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 fiscal 1997 to 19.4% in fiscal 1998.
Interest income decreased from $938,000 in fiscal 1997 to $347,000 in
fiscal 1998, primarily as a result of the decrease in cash used to acquire the
Partners Group. Interest expense increased to $1.4 million in fiscal 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 $10.9 million, $0.4 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 non-cash
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 $22.7 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.
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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 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 substantially all the assets 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.
Since April 30, 1999, the Company has modified the loan agreement for its
credit facility on four separate occasions. The four modifications have amended
certain financial covenants (primarily those setting limits on the maximum
funded-debt-to-EBITDA ratio, maximum annual capital expenditures, and maximum
annual lease commitments) contained in the loan agreement, and have delayed the
$1,250,000 per quarter reduction in the aggregate outstanding balance. The last
modification to the loan agreement extends the maturity of the credit facility
to December 15, 2000. At June 30, 2000, the Company had approximately $2.0
million of available cash and $2.0 million available for future borrowing under
its credit facility.
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
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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, 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.
8
<PAGE> 10
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Auditors............................................................. 10
Consolidated Balance Sheets as of April 30, 1999 (As Restated) and 1998 (As Restated)...... 11
Consolidated Statements of Income for the Years ended April 30, 1999 (As Restated),
1998 (As Restated), and 1997............................................................ 13
Consolidated Statements of Shareholders' Equity for the Years ended April 30, 1999
(As Restated), 1998 (As Restated), and 1997............................................ 14
Consolidated Statements of Cash Flows for the Years ended April 30, 1999 (As Restated),
1998 (As Restated), and 1997........................................................... 15
Notes to Consolidated Financial Statements................................................. 17
</TABLE>
9
<PAGE> 11
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 its subsidiaries as of April 30, 1999 and 1998 (as
restated), 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 (1999 and 1998 as restated). 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 its subsidiaries as of April 30, 1999 and 1998 (as
restated), and the consolidated results of their operations and their cash flows
for each of the three years in the period ended April 30, 1999 (1999 and 1998 as
restated), in conformity with generally accepted accounting principles.
The consolidated financial statements for 1999 and 1998 have been restated as
discussed in Note 2.
/s/ Ernst & Young LLP
Memphis, Tennessee
June 30, 2000
10
<PAGE> 12
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
APRIL 30,
--------------------------
1999 1998
------------ -----------
(AS RESTATED) (AS RESTATED)
<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
$579,175 in 1999 and $322,891 in 1998 33,948,406 24,844,988
Related parties 166,491 99,553
------------ -----------
34,114,897 24,944,541
Prepaid expenses 2,463,721 2,632,076
Inventory 280,356 294,182
Receivable for income taxes 2,393,520 683,940
Deferred federal and state income tax 4,812,722 2,250,237
------------ -----------
Total current assets 49,383,475 33,788,348
Equipment under operating leases, net of
accumulated depreciation of $4,104,044
in 1999 and $450,396 in 1998 5,983,135 4,209,480
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 16,854,185 20,336,685
Goodwill, net of accumulated amortization of
$2,445,226 in 1999 and $824,844 in 1998 44,920,437 25,950,879
Other 4,292,769 2,503,162
------------ -----------
66,067,391 48,790,726
------------ -----------
Total assets $145,913,862 $99,938,964
============ ===========
</TABLE>
Continued on next page.
11
<PAGE> 13
CONSOLIDATED BALANCE SHEETS - CONTINUED
LIABILITIES AND SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
APRIL 30,
--------------------------
1999 1998
------------ -----------
(AS RESTATED) (AS RESTATED)
<S> <C> <C>
Current liabilities:
Accounts payable - trade $ 6,845,308 $ 3,614,622
Accrued TVA settlement cost 1,658,516 --
Accrued and withheld payroll taxes,
insurance, and payroll deductions 3,123,412 635,630
Accrued vacation 1,530,575 1,009,909
Deferred revenue 1,244,623 1,036,902
Other accrued expenses 3,657,112 1,551,070
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 33,366,931 14,724,179
Notes payable - non-recourse 17,830,281 19,498,399
Long-term debt 33,754,628 22,782,122
Other long-term liability 972,353 --
Capital lease obligation 738,193 1,317,527
Deferred federal and state income taxes 4,697,943 3,242,295
------------ -----------
Total liabilities 91,360,329 61,564,522
Shareholders' equity:
Preferred stock, no par value - authorized 1,000,000
shares, none issued -- --
Common stock, $.01 par value - 100,000,000 shares
authorized; 24,710,749 shares issued and outstanding
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 14,926,206 13,644,523
------------ -----------
Total shareholders' equity 54,553,533 38,374,442
------------ -----------
Total liabilities and shareholders' equity $145,913,862 $99,938,964
============ ===========
</TABLE>
See accompanying notes.
12
<PAGE> 14
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED APRIL 30,
---------------------------------------------
1999 1998 1997
------------- ------------- -----------
(AS RESTATED) (AS RESTATED)
<S> <C> <C> <C>
Revenue $ 152,015,861 $ 105,721,978 $64,063,576
Cost of services 107,178,352 74,201,238 46,585,959
Provision for contract losses 1,800,000 -- --
------------- ------------- -----------
Gross profit 43,037,509 31,520,740 17,477,617
Selling, general and administrative expenses 30,990,998 20,519,319 10,345,277
TVA settlement and severance payments 2,700,000 -- --
Impairment of assets 3,950,000 -- --
------------- ------------- -----------
Income from operations 5,396,511 11,001,421 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 1,942,228 9,989,528 8,115,728
Income tax expense:
Current 1,975,758 4,071,633 2,895,063
Deferred (benefit) (1,106,837) (167,562) 157,627
------------- ------------- -----------
Total income tax expense 868,921 3,904,071 3,052,690
------------- ------------- -----------
Net Income $ 1,073,307 $ 6,085,457 $ 5,063,038
============= ============= ===========
Net Income per share - basic $ 0.04 $ 0.27 $ 0.23
============= ============= ===========
Net Income per share - diluted $ 0.04 $ 0.27 $ 0.23
============= ============= ===========
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 $ 0.22
===========
Pro forma net income per share - diluted $ 0.22
===========
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.
13
<PAGE> 15
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
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 Delta 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 Delta
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 (as restated) -- -- -- 6,085,457 6,085,457
----------- --------- ------------ ------------ ------------
Balance at April 30, 1998
(as restated) 22,529,965 225,300 24,504,619 13,644,523 38,374,442
Restatement for pooling
of interest 543,724 5,437 (5,437) 208,376 208,376
----------- --------- ------------ ------------ ------------
Restated balance at
April 30, 1998 (as
restated) 23,073,689 230,737 24,499,182 13,852,899 38,582,818
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 (as restated) -- -- -- 1,073,307 1,073,307
----------- --------- ------------ ------------ ------------
Balance at April 30, 1999
(as restated) 24,710,749 $ 247,107 $ 39,380,220 $ 14,926,206 $ 54,553,533
=========== ========= ============ ============ ============
</TABLE>
See accompanying notes.
14
<PAGE> 16
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED APRIL 30,
--------------------------------------------
1999 1998 1997
------------ ------------ ------------
(AS RESTATED) (AS RESTATED)
<S> <C> <C> <C>
Operating Activities:
Net income $ 1,073,307 $ 6,085,457 $ 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 256,284 279,000 4,680
Depreciation included in cost of services 4,483,930 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 (1,106,837) (167,562) 157,627
(Increase) decrease in:
Accounts receivable:
Trade (9,151,326) (11,082,960) (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 13,826 531,940 (28,182)
Receivable for income taxes (1,305,425) (683,940) --
Other assets (2,006,456) (2,378,717) (427,792)
Net investment in direct financing
lease activity 3,236,731 5,180,467 --
Goodwill -- 164,793 --
Increase (decrease) in:
Accounts payable - trade 3,230,686 (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 520,666 349,146 83,295
Deferred revenue 207,721 (356,589) --
Other accrued expenses 1,206,042 (350,673) (175,731)
Accrued and withheld payroll taxes,
insurance and accrued payroll
deductions 2,487,782 391,979 27,954
------------ ------------ ------------
Total adjustments 9,828,088 (5,693,220) (3,132,172)
------------ ------------ ------------
Net cash provided by operating activities 10,901,395 392,237 1,930,866
</TABLE>
Continued on next page.
15
<PAGE> 17
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
<TABLE>
<CAPTION>
YEAR ENDED APRIL 30,
--------------------------------------------
1999 1998 1997
------------ ------------ ------------
(AS RESTATED) (AS RESTATED)
<S> <C> <C> <C>
Investing Activities:
Purchases of fixed assets (22,715,138) (7,902,507) (792,187)
Proceeds from lease disposals 1,245,323 2,996,664 800
Purchase of 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 --
Other long-term liability 72,353 -- --
------------ ------------ ------------
Net cash used by investing activities (27,562,745) (22,638,970) (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 (5,668,118) (11,724,619) --
Payment of dividends -- -- (240,000)
Other -- -- (45)
------------ ------------ ------------
Net cash provided (used) by
financing activities 18,996,237 13,415,318 (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.
16
<PAGE> 18
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 counter-party, 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.
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>
ESTIMATED USEFUL
LIFE (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
17
<PAGE> 19
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.
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
18
<PAGE> 20
or settled. The effect on deferred tax assets and liabilities of a change in tax
rates is recognized in the period that includes the enactment date.
PRO FORMA PROVISION FOR INCOME TAXES
During fiscal year 1997, the Company acquired Delta Software Services, Inc.
("Delta") in a merger transaction accounted for as a pooling-of-interests. Prior
to the merger, Delta had elected "S" corporation status for income tax purposes.
As a result of the merger, Delta terminated its "S" corporation election. Pro
forma provision for income taxes presents the combined pro forma tax expense of
Delta as if it had been a "C" corporation during the periods presented prior to
the 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 19.
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.
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 (as restated)
and 1997 financial statements to conform with the 1999 (as restated)
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.
19
<PAGE> 21
2. RESTATED FINANCIAL STATEMENTS
The Company's restated consolidated financial statements for the fiscal
years ended April 30, 1999 and 1998, contain adjustments that fall into three
categories. The first category of adjustments arises from the internal
investigation conducted by the audit committee of the Company's board of
directors into the concerns raised by five employees on March 27, 2000,
regarding the Company's accounting treatment of certain matters. The findings of
the audit committee's investigation indicate that, with respect to fiscal 1999
and 1998, the Company did not properly (1) accrue bonuses paid to two employees,
(2) record revenue from the sale of a partial interest in a computer equipment
lease, (3) account for an outsourcing contract assumed as part of an
acquisition, and (4) record revenue from two sales of residual interests in
computer equipment lease schedules. The second category of adjustments is the
result of the Company's internal review of financial information relating to
various matters, including items that were similar to those investigated by the
audit committee. The third category of adjustments consists of adjustments that
were initially identified during the audits of the Company's consolidated
financial statements for the fiscal years ended April 30, 1999 and 1998, but
which the Company elected not to record in those periods on the basis of
immateriality. The Company subsequently decided to record these adjustments.
Management believes that it has made all the adjustments considered
necessary as a result of the audit committee's investigation. Management further
believes that the Company's consolidated financial statements for the years
ended April 30, 1999 and 1998, as restated, include all adjustments necessary
for a fair presentation of the Company's financial position and results of
operations for such periods.
Summarized in the tables below is the aggregate pre-tax impact of the
adjustments contained in the Company's restated financial statements for fiscal
1999 and 1998. The adjustments are grouped according to the types of
transactions involved or accounting entries affected.
<TABLE>
<CAPTION>
YEAR ENDED APRIL 30, 1999
------------------------------------------------------
DIRECT SG&A PRETAX
DESCRIPTION REVENUE EXPENSE EXPENSE INCOME
----------- ----------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
Client services agreement $ 592,260 $ 815,674 $ --
Other accrued expenses -- -- 380,000
Residual interest in remarketed
leases (2,766,451) -- --
Direct financing leases (709,718) (80,142) --
Revenue recognition (200,011) -- --
Other accrued expenses -- -- 872,134
Other (1,495,452) (1,473,520) --
Prior unrecorded audit adjustments (75,000) 276,000 165,500
----------- ----------- ----------
(Decrease) increase $(4,654,372) $ (461,988) $1,417,634 $(5,610,018)
=========== =========== ========== ===========
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED APRIL 30, 1998
------------------------------------------------------
DIRECT SG&A PRETAX
DESCRIPTION REVENUE EXPENSE EXPENSE INCOME
----------- ----------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
Client services agreement $(3,174,812) $(1,432,980) $ --
Direct financing leases (246,573) -- --
Revenue recognition (133,364) -- --
Other accrued expenses -- -- 114,829
Other (60,000) -- --
Prior unrecorded audit adjustments (135,000) -- 79,500
----------- ----------- ----------
(Decrease) increase $(3,749,749) $(1,432,980) $ 194,329 $(2,511,098)
=========== =========== ========== ===========
</TABLE>
20
<PAGE> 22
ADJUSTMENTS RESULTING FROM AUDIT COMMITTEE'S INVESTIGATION
The Company is restating its consolidated financial statements for fiscal
1999 and 1998 as a result of the internal investigation conducted by the audit
committee of the Company's board of directors into the concerns raised by five
employees regarding the Company's accounting treatment of certain matters. The
specific matters for which adjustments have been made are described below.
CLIENT SERVICES AGREEMENT. Effective June 30, 1997, the Company acquired
all the outstanding capital stock of PRI. As part of the acquisition, the
Company assumed a five-year outsourcing contract with a customer (the "original
contract") that was scheduled to conclude on September 30, 2000. Effective April
1, 1998, the Company and the customer modified the original contract (the
"modified contract") which included a five-year extension of its term.
The original contract was historically accounted for by PRI as a services
agreement. Subsequent to the acquisition of PRI, the Company continued this
accounting treatment of the original contract. Upon entering into the modified
contract, the Company also accounted for it as a services agreement.
Additionally, in accounting for the modification of the original contract, the
Company recognized revenue of $2,482,277 in the fourth quarter of fiscal 1998 as
(1) compensation for an excess capacity provision in the original contract and
(2) compensation for replacing the computer equipment and related software
specified in the original contract. At the same time, the Company recognized
expense of $578,500 to write-off the software specified in the original
contract.
The Company has determined that the accounting for the original contract
and the modified contract was in error. Upon further analysis of the original
contact, the Company has determined that it contained two elements: (1) a
services agreement; and (2) in accordance with SFAS No. 13, Accounting for
Leases, a direct financing lease for the assets acquired at the time of
execution of the original contract. A further analysis of the modified contract
also has led the Company to determine that it included two elements: (1) a
service agreement; and (2) an operating lease for the equipment that was
purchased by the Company to replace the equipment under the original contract.
Furthermore, the Company has determined that the revenue of $2,482,277 and the
related write-off of software of $578,500 recorded in the fourth quarter of
fiscal 1998 was prematurely recognized and has been reversed. Accordingly, the
Company has determined that the accounting for the original contract in fiscal
1998 and the accounting for the modified contract in fiscal 1999 should be
changed. The original contract is accounted for as a services agreement and a
direct financing lease in fiscal 1998, and the modified contract is accounted
for as a services agreement and an operating lease in fiscal 1999.
The following table shows the pre-tax impact of these adjustments in fiscal
1999 and 1998:
<TABLE>
<CAPTION>
1999 1998
---------- -----------
<S> <C> <C>
Revenue originally recorded $6,781,488 $ 5,176,847
Revenue as restated 7,373,748 2,002,035
---------- -----------
Revenue (decrease) increase $ 592,260 $(3,174,812)
========== ===========
Depreciation expense originally recorded $2,019,728 $ 1,432,980
Depreciation expense as restated 2,835,402 --
---------- -----------
Depreciation expense (decrease) increase $ 815,674 $(1,432,980)
========== ===========
</TABLE>
OTHER ACCRUED EXPENSES. The Company paid $380,000 to two employees in the
first quarter of fiscal 2000. The Company accounted for the payments in fiscal
2000 by (1) capitalizing the net payments to the employees as a cost of
obtaining a new outsourcing contract which would be amortized over the term of
the contract, and (2) expensing the related payroll tax component. The Company
has determined that the payments should be accounted for as bonuses paid with
respect to the employees' performance during fiscal 1999. Accordingly, the
Company has recorded an expense relating to the employee bonuses in fiscal 1999
and reversed the accounting for such payments in fiscal 2000.
21
<PAGE> 23
RESIDUAL INTERESTS IN REMARKETED LEASES. In the first quarter of fiscal
2000, the Company acquired substantially all the assets of Global Services, Inc.
("Global"), a company engaged in the business of reselling used computer
equipment for a price of $6,647,000 in cash. In two other transactions
consummated at substantially the same time, the Company sold the residual
interests in four computer equipment lease schedules, with a book value of
$1,063,000, to Quest Residual Services LLC ("Quest"), a newly formed equipment
leasing company, for a total price of $3,650,000 in cash. The Company recorded
revenue of $1,650,000 in the third quarter of fiscal 1999 resulting from the
sale of residual interests in two of the computer equipment lease schedules to
Quest. The Company recorded revenue of $936,451, net of book value of
$1,063,000, in the fourth quarter of fiscal 1999 resulting from the sale of
residual interests in the other two computer equipment lease schedules to Quest.
Upon further review of these transactions, the Company has determined that (1)
the documents for the sales of residual lease interests to Quest were dated as
of specific dates in the third and fourth quarters of fiscal 1999 (i.e., January
27, 1999, and April 26, 1999, respectively), (2) such sale documents were
executed by the parties in the first quarter of fiscal 2000 (i.e., May 1999),
(3) the Company received the cash payments for the residual lease interests from
Quest in the first quarter of fiscal 2000 (i.e., June 1999), and (4) both Global
and Quest had the same beneficial owners, who held the same ownership
percentages in each entity, at the times of the Company's transactions with
them. Accordingly, the Company has recorded the two sales of residual lease
interests to Quest as part of the asset acquisition from Global that occurred in
the first quarter of fiscal 2000. See Note 21.
The Company sold a 15% interest in certain leased computer equipment for
$100,000 in the fourth quarter of fiscal 1999, but erroneously recognized
revenue of $208,000 from the transaction as if it had sold 100% of the
equipment. Upon further review of this transaction, the Company has determined
that it should be accounted for as the sale of only a 15% interest in the
equipment. Accordingly, the Company has reduced the revenue recognized from the
transaction by 85% in the fourth quarter of fiscal 1999.
The following table sets forth the pre-tax impact of these adjustments in
fiscal 1999:
<TABLE>
<CAPTION>
1999
-----------
<S> <C>
Revenue from sales of residual lease interests $(2,586,451)
Revenue from sale of partial lease interest (180,000)
-----------
$(2,766,451)
===========
</TABLE>
ADJUSTMENTS RESULTING FROM THE COMPANY'S INTERNAL REVIEW OF FINANCIAL
INFORMATION
In connection with the restatement of its consolidated financial statements
for fiscal 1999 and 1998, the Company undertook an internal review of financial
information relating to various matters, including items that were similar to
those investigated by the audit committee. This internal review resulted in
further adjustments being made to the Company's restated consolidated financial
statements. The specific matters for which adjustments have been made are
described below.
DIRECT FINANCING LEASES. The Company leases computer equipment to several
customers. The Company has determined that it erroneously recorded revenue from
the amendment, extension or termination of certain leases in fiscal 1999 and
1998. Accordingly, the Company has reversed or deferred the recognition of
revenue from these lease changes in these periods. The following table shows the
pre-tax impact of these adjustments in fiscal 1999 and 1998:
<TABLE>
<CAPTION>
1999 1998
--------- ---------
<S> <C> <C>
Revenue decrease $(709,718) $(246,573)
Direct costs decrease $ (80,142) $ --
</TABLE>
REVENUE RECOGNITION. The Company has numerous contracts with customers. The
Company has determined that adjustments should be made to the revenue recognized
under three contracts in fiscal 1999 and 1998. These adjustments relate to (1)
the calculation of revenue under a fixed-price consulting contract, (2) the
period in which an unbilled account receivable was recorded, and (3) the
recording of a
22
<PAGE> 24
termination fee on a contract prior to finalization of the termination
agreement. These adjustments reduce revenue by $200,011 and $133,364 in fiscal
1999 and 1998, respectively.
SALE OF LEASED EQUIPMENT. The Company sold certain computer equipment in a
series of transactions with two parties for a total of $930,000 in fiscal 1998.
The Company recognized revenue of $589,998 and $300,000 in the second and third
quarters, respectively, of fiscal 1998. The Company has determined that the
earnings process for these transactions was not complete until the fourth
quarter of fiscal 1998, and that the transactions should be accounted for as a
single sale of equipment occurring in the fourth quarter of fiscal 1998.
Accordingly, corresponding adjustments have been made in the revenue recognized
in the second, third and fourth quarters of fiscal 1998.
OTHER ACCRUED EXPENSES. The Company has identified underaccruals of expense
related to health insurance claims, employee benefits, legal fees and
subcontractor costs. The resulting adjustments increase accrued expenses by
$872,134 and $114,829 in fiscal 1999 and 1998, respectively.
OTHER. The Company increased the value of certain acquired inventory by
$60,000 in the first quarter of fiscal 1998 and subsequently wrote off such
amount in the fourth quarter of fiscal 1999. The Company has determined that
these inventory adjustments should be reversed. The Company recognized revenue
of $81,932 in the fourth quarter of fiscal 1999 related to a lease payment on a
direct financing lease that had been assigned to a lender. The Company has
determined that this revenue should be reversed. The Company reclassified
$1,413,520 from revenue to direct expense to correct the misclassification by a
division of the Company of certain reimbursed expenses.
PRIOR UNRECORDED AUDIT ADJUSTMENTS
In connection with the restatement of its consolidated financial statements
for fiscal 1999 and 1998, the Company has decided to record adjustments that
were identified during the audits of the Company's consolidated financial
statements for fiscal 1999 and 1998, but which the Company elected not to record
in those periods on the basis of immateriality. The following table shows the
pre-tax impact on income of these adjustments in fiscal 1999 and 1998:
<TABLE>
<CAPTION>
1999 1998
--------- ---------
<S> <C> <C>
Revenue $ (75,000) $(135,000)
Direct costs 276,000 --
SG&A expense 165,500 79,500
</TABLE>
3. BUSINESS COMBINATIONS
Effective June 30, 1997, the Company acquired all the outstanding capital
stock of Partners Resources, Inc. ("PRI"), an information technology outsourcing
company, and Partners Capital Group ("PCG"), a computer leasing company, which
were accounted for using the purchase method of accounting. The cash
consideration paid for these entities was $16,000,000, of which $1,600,000 was
held in escrow for certain contingencies in accordance with the acquisition
agreement. The operating results of PRI and PCG are included in the Company's
consolidated statements of operations since July 1, 1997. The 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>
PRO FORMA YEAR ENDED APRIL 30, 1997
-----------------------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C>
Revenue $94,359
Net income, including pro forma adjustment for income taxes 3,293
Net income per share, including pro forma adjustment for
income taxes - basic and diluted 0.15
</TABLE>
23
<PAGE> 25
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' 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>
PRO FORMA YEAR ENDED APRIL 30, 1997
-----------------------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<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>
In September 1996, the Company acquired Delta Software Services, Inc.
("Delta"), 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 Delta. 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 Delta. The accompanying consolidated financial statements have
been restated to include the financial position and operating results of Delta
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.
4. ACCOUNTS RECEIVABLE -- TRADE
Accounts receivable - trade includes unbilled receivables of $13,813,099
and $7,258,180 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.
24
<PAGE> 26
5. NET INVESTMENT IN DIRECT FINANCING LEASES
The components of the net investment in direct financing leases are as
follows:
<TABLE>
<CAPTION>
AS OF APRIL 30,
------------------------------
1999 1998
------------ ------------
<S> <C> <C>
Minimum lease payments receivable $ 15,912,574 $ 19,648,681
Unguaranteed residual values of leased equipment 4,260,804 3,809,905
Indirect leasing costs 161,581 181,418
Unearned income (3,480,774) (3,303,319)
------------ ------------
Net investment in direct financing leases $ 16,854,185 $ 20,336,685
============ ============
</TABLE>
The following is a summary by year of the future minimum lease payments
receivable from direct financing leases:
<TABLE>
<CAPTION>
MINIMUM LEASE
YEAR ENDING APRIL 30, PAYMENTS RECEIVABLE
--------------------- -------------------
<S> <C>
2000 $ 7,177,735
2001 5,020,637
2002 1,973,743
2003 1,524,593
2004 215,866
-----------
$15,912,574
===========
</TABLE>
The minimum lease payments receivable for all direct financing leases are
assigned to lenders as security for non-recourse debt.
6. RENTALS UNDER OPERATING LEASES
The following is a summary by year of the minimum future rentals on
non-cancelable operating leases as of April 30, 1999:
<TABLE>
<CAPTION>
YEAR ENDING APRIL 30, MINIMUM RENTALS
--------------------- ---------------
<S> <C>
2000 $ 4,617,264
2001 3,811,130
2002 3,282,019
2003 2,746,605
2004 241,242
-----------
$14,698,260
===========
</TABLE>
All of the above future rentals have been assigned to lenders in connection
with the repayment of non-recourse debt.
7. NON-RECOURSE DEBT
At April 30, 1999, the non-recourse debt balances were $14,186,516 and
$3,643,765 for direct financing leases and operating leases, respectively. At
April 30, 1998, the non-recourse debt balances were $15,186,530 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:
25
<PAGE> 27
<TABLE>
<CAPTION>
DEBT RELATING DEBT
YEAR ENDING TO DIRECT RELATING TO
APRIL 30, FINANCING LEASES OPERATING LEASES TOTAL
--------- ---------------- ---------------- -----
<S> <C> <C> <C>
2000 $ 6,227,356 $ 1,602,359 $ 7,829,715
2001 4,553,693 1,086,585 5,640,278
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
----------- ----------- -----------
$14,186,516 $ 3,643,765 $17,830,281
=========== =========== ===========
</TABLE>
8. 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>
Under the Second Amended and Restated Loan Agreement dated July 31, 1998,
as modified (the "Loan Agreement"), the Company has a $30,000,000 revolving
credit facility (the "Credit 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 Credit 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 Credit Facility is reduced $1,250,000 quarterly commencing in February
1999 through August 2000. The Credit 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 Credit 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.
26
<PAGE> 28
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>
9. 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. The cost and accumulated
depreciation of the computer equipment reflected in the consolidated balance
sheet at April 30, 1999, were $379,522 and $166,011, respectively. The cost and
accumulated depreciation of the computer equipment reflected in the consolidated
balance sheet at April 30, 1998, were $2,114,199 and $396,412, respectively. The
decrease in the cost of the equipment from April 30, 1998, to April 30, 1999, is
the result of a write-down of this equipment in connection with an impairment
loss. See Note 18.
10. EMPLOYEE BENEFIT PLANS
The Company has a profit-sharing plan with an employee stock ownership plan
(the "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 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.
11. 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.
12. 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 non-cancelable operating lease
agreements which expire at various dates. Total future annual lease requirements
are as follows:
27
<PAGE> 29
<TABLE>
<CAPTION>
YEAR ENDING APRIL 30, LEASE REQUIREMENTS
--------------------- ------------------
<S> <C>
2000 $1,722,086
2001 1,534,182
2002 1,371,658
2003 1,325,988
2004 502,500
Thereafter 3,015,300
----------
$9,471,714
==========
</TABLE>
13. SIGNIFICANT CUSTOMERS
The Company earns a significant portion of its revenue from its top five
customers. Revenues earned from its top five customers totaled 36%, 35%, 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
$13,770,582 and $6,042,778, respectively.
14. 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 $ 1,667,268 $ 3,301,222 $2,439,146
Deferred (957,684) (139,094) 141,035
----------- ----------- ----------
709,584 3,162,128 2,580,181
----------- ----------- ----------
State:
Current 308,490 770,411 455,917
Deferred (149,153) (28,468) 16,592
----------- ----------- ----------
159,337 741,943 472,509
----------- ----------- ----------
Total $ 868,921 $ 3,904,071 $3,052,690
=========== =========== ==========
</TABLE>
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 $2,927,189 $ 2,782,337
Deductible goodwill 932,349 339,880
Other 838,405 120,078
---------- -----------
Total deferred tax liabilities 4,697,943 3,242,295
---------- -----------
Deferred tax assets:
Unusual charges (see Note 18) 2,282,699 --
Vacation expense 663,546 369,052
Net operating loss carryforward 1,685,367 1,784,075
Other 181,110 97,110
---------- -----------
Total deferred tax assets 4,812,722 2,250,237
---------- -----------
Net deferred tax assets (liabilities) $ 114,779 $ (992,058)
========== ===========
</TABLE>
28
<PAGE> 30
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 $660,358 34.0% $3,396,440 34.0% $ 2,759,348 34.0%
State income taxes, net of
federal tax benefit 105,162 5.4 489,682 4.9 311,856 3.8
Other, net 103,401 5.3 17,949 0.2 (18,514) (0.2)
-------- ---- ---------- ---- ----------- ----
$868,921 44.7% $3,904,071 39.1% $ 3,052,690 37.6%
======== ==== ========== ==== =========== ====
</TABLE>
PCG has a federal income tax loss carryforward for tax return purposes of
$4.2 million that was created primarily from leasing activities. The loss
carryforward expires in various amounts through 2011.
15. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted
earnings per share:
<TABLE>
<CAPTION>
YEAR ENDED APRIL 30,
-----------------------------------
1999 1998 1997
------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C>
NUMERATOR:
Net income $ 1,073 $ 6,085 $ 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 $ 0.04 $ 0.27 $ 0.23
Basic pro forma earnings per share $ -- $ -- $ 0.22
Diluted earnings per share $ 0.04 $ 0.27 $ 0.23
Diluted pro forma earnings per share $ -- $ -- $ 0.22
</TABLE>
16. 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 current 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:
29
<PAGE> 31
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
APRIL 30, 1999 APRIL 30, 1998 APRIL 30, 1997
--------------------- --------------------- ---------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
--------- ------ --------- ------ --------- ------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at 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 at 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 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, and related interpretations in
accounting for its employee stock options because, as discussed below, the
alternative fair value accounting provided for under FASB Statement No. 123,
Accounting for Stock-based Compensation, requires use of option valuation models
that were not developed for use in valuing employee stock options. Under APB No.
25, because the exercise price of the Company's employee stock options equals
the market price of the underlying stock on the date of grant, no compensation
expense is recognized.
Pro forma information regarding net income and earnings per share is
required by FASB Statement No. 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:
30
<PAGE> 32
<TABLE>
<CAPTION>
1999 1998 1997
------------- ------------- -------------
<S> <C> <C> <C>
Pro forma net income:
As restated - (including pro forma for
income taxes in 1997) $ 1,073,307 $ 6,085,457 $ 4,886,038
Pro forma - for SFAS No. 123 $ 286,128 $ 3,464,477 $ 4,341,195
Pro forma earnings per share:
As reported - (including pro forma for
income taxes in 1997) - basic $ .04 $ .27 $ .22
As reported - (including pro forma for
income taxes in 1997) - diluted $ .04 $ .27 $ .22
Pro forma - for SFAS No. 123 - basic $ .01 $ .15 $ .19
Pro forma - for SFAS No. 123 - diluted $ .01 $ .15 $ .19
</TABLE>
17. 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 (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 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 for an accrual of
$1,900,000 for the anticipated settlement and related costs. 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 officer (aggregating $980,000)
being amortized ratably over three years.
The $1,900,000 settlement charge and the $800,000 severance charge are
reflected on the consolidated statement of income under the caption "TVA
settlement and severance payments."
18. 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 nonrecurring 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 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.
31
<PAGE> 33
19. 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) information technology ("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.
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 1999 1998 1997(B)
------------------ -------- -------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Revenue:
Professional Services $110,060 $ 78,399 $64,064
Enterprise Solutions 41,956 27,323 --
-------- -------- -------
$152,016 $105,722 $64,064
======== ======== =======
Income from operations: (a)
Professional Services $ 12,260 $ 8,923 $ 7,132
Enterprise Solutions 1,586 2,078 --
-------- -------- -------
$ 13,846 $ 11,001 $ 7,132
======== ======== =======
Total assets:
Professional Services $ 45,168 $ 35,737 $35,094
Enterprise Solutions 100,746 64,202 --
-------- -------- -------
$145,914 $ 99,939 $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 5,789 3,433 --
-------- -------- -------
$ 7,277 $ 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 18) as well as a $2,700,000 nonrecurring charge related to
the TVA settlement (see Note 17).
(b) The Company operated in only one segment in 1997 as the operations that
comprise enterprise solutions were acquired in 1998.
The accounting policies of the reportable segments are the same as those
described in the summary of significant accounting policies. There are no
inter-segment 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.
32
<PAGE> 34
20. UNAUDITED RESTATED CONSOLIDATED RESULTS OF OPERATIONS BY QUARTER
The Company's unaudited restated consolidated results of operations for
each quarter in fiscal 1999 and 1998 are set forth in the tables below.
<TABLE>
<CAPTION>
QUARTER ENDED
------------------------------------------------------------
JULY 31, OCTOBER 31, JANUARY 31, APRIL 30,
1998 1998 1999 1999
----------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
Revenue $34,603,684 $38,917,885 $36,742,437 $ 41,751,855
Cost of services 23,942,509 26,790,465 26,450,547 29,994,831
Provision for contract losses -- -- -- 1,800,000
----------- ----------- ----------- ------------
Gross profit 10,661,175 12,127,420 10,291,890 9,957,024
Selling, general and administrative
expenses 6,865,380 7,201,242 7,464,260 9,460,116
TVA settlement and severance payments 1,900,000 800,000 -- --
Impairment of assets -- -- -- 3,950,000
----------- ----------- ----------- ------------
Income (loss) from operations 1,895,795 4,126,178 2,827,630 (3,453,092)
Other expenses 626,572 882,437 1,041,403 903,871
----------- ----------- ----------- ------------
Income (loss) before taxes 1,269,223 3,243,741 1,786,227 (4,356,963)
Income tax expense (benefit) 867,382 1,258,580 639,743 (1,896,784)
----------- ----------- ----------- ------------
Net income (loss) $ 401,841 $ 1,985,161 $ 1,146,484 $ (2,460,179)
=========== =========== =========== ============
Net income (loss) per share - basic $ 0.02 $ 0.08 $ 0.05 $ (0.10)
=========== =========== =========== ============
Net income (loss) per share - diluted $ 0.02 $ 0.08 $ 0.05 $ (0.10)
=========== =========== =========== ============
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>
<TABLE>
<CAPTION>
QUARTER ENDED
------------------------------------------------------------
JULY 31, OCTOBER 31, JANUARY 31, APRIL 30,
1997 1997 1998 1998
----------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
Revenue $21,206,229 $27,260,303 $27,389,047 $ 29,866,399
Cost of services 14,768,518 19,100,347 19,423,966 20,908,407
----------- ----------- ----------- ------------
Gross profit 6,437,711 8,159,956 7,965,081 8,957,992
Selling, general and administrative
expenses 3,738,625 5,214,196 5,454,546 6,111,952
----------- ----------- ----------- ------------
Income (loss) from operations 2,699,086 2,945,760 2,510,535 2,846,040
Other income (expenses) 148,201 (235,047) (450,246) (474,801)
----------- ----------- ----------- ------------
Income (loss) before taxes 2,847,287 2,710,713 2,060,289 2,371,239
Income tax expense (benefit) 1,106,578 1,037,430 921,907 838,156
----------- ----------- ----------- ------------
Net income (loss) $ 1,740,709 $ 1,673,283 $ 1,138,382 $ 1,533,083
=========== =========== =========== ============
Net income (loss) per share - basic $ 0.08 $ 0.07 $ 0.05 $ 0.07
=========== =========== =========== ============
Net income (loss) per share - diluted $ 0.08 $ 0.07 $ 0.05 $ 0.07
=========== =========== =========== ============
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>
33
<PAGE> 35
Summarized in the tables below is the aggregate pre-tax impact of the
adjustments contained in the Company's unaudited restated consolidated results
of operations for each quarter in fiscal 1999 and 1998. The adjustments are
grouped according to the types of transactions involved or accounting entries
affected. See Note 2 for further information regarding the adjustments.
<TABLE>
<CAPTION>
1999
-------------------------------------------------------------------
QUARTER QUARTER QUARTER QUARTER YEAR
ENDED ENDED ENDED ENDED ENDED
JULY 31, OCTOBER 31, JANUARY 31, APRIL 30, APRIL 30,
1998 1998 1999 1999 1999
--------- --------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Revenue:
Client services agreement $ 32,367 $ 173,691 $ 183,396 $ 202,806 $ 592,260
Residual interest in
remarketed leases -- -- (1,650,000) (1,116,451) (2,766,451)
Direct financing leases (650,563) (299,719) 123,568 116,996 (709,718)
Revenue recognition (171,117) 370,846 (216,138) (183,602) (200,011)
Other (230,613) (397,558) (317,839) (549,442) (1,495,452)
Prior unrecorded audit
adjustments 135,000 (210,000) -- -- (75,000)
--------- --------- ----------- ----------- -----------
(Decrease) increase $(884,926) $(362,740) $(1,877,013) $(1,529,693) $(4,654,372)
========= ========= =========== =========== ===========
Direct Expense:
Client service agreement $ 113,215 $ 234,153 $ 234,153 $ 234,153 $ 815,674
Direct financing leases 17,493 8,191 (10,413) (95,413) (80,142)
Other (230,613) (397,558) (317,839) (527,510) (1,473,520)
Prior unrecorded audit
adjustments -- -- -- 276,000 276,000
--------- --------- ----------- ----------- -----------
(Decrease) increase $ (99,905) $(155,214) $ (94,099) $ (112,770) $ (461,988)
========= ========= =========== =========== ===========
SG&A Expense:
Other accrued expenses $ -- $ -- $ -- $ 380,000 $ 380,000
Other accrued expenses 22,398 51,614 51,613 746,509 872,134
Prior unrecorded audit
adjustments 16,625 16,625 16,625 115,625 165,500
--------- --------- ----------- ----------- -----------
(Decrease) increase $ 39,023 $ 68,239 $ 68,238 $ 1,242,134 $ 1,417,634
========= ========= =========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
1998
-------------------------------------------------------------------
QUARTER QUARTER QUARTER QUARTER YEAR
ENDED ENDED ENDED ENDED ENDED
JULY 31, OCTOBER 31, JANUARY 31, APRIL 30, APRIL 30,
1997 1997 1998 1998 1998
--------- --------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Revenue:
Client services agreement $ (66,973) $(203,914) $ (208,486) $(2,695,439) $(3,174,812)
Direct financing leases -- -- (273,648) 27,075 (246,573)
Revenue recognition -- (589,988) (404,029) 860,653 (133,364)
Other (60,000) -- -- -- (60,000)
Prior unrecorded audit
adjustments -- -- -- (135,000) (135,000)
--------- --------- ----------- ----------- -----------
(Decrease) increase $(126,973) $(793,902) $ (886,163) $(1,942,711) $(3,749,749)
========= ========= =========== =========== ===========
Direct Expense:
Client service agreement $ (85,448) $(256,344) $ (256,344) $ (834,844) $(1,432,980)
========= ========= =========== =========== ===========
(Decrease) increase $ (85,448) $(256,344) $ (256,344) $ (834,844) $(1,432,980)
========= ========= =========== =========== ===========
SG&A Expense:
Other accrued expenses 21,404 21,403 21,403 50,619 114,829
Prior unrecorded audit
adjustments 16,625 16,625 16,625 29,625 79,500
--------- --------- ----------- ----------- -----------
(Decrease) increase $ 38,029 $ 38,028 $ 38,028 $ 80,244 $ 194,329
========= ========= =========== =========== ===========
</TABLE>
21. SUBSEQUENT EVENTS
In May 1999, the Company acquired substantially all the assets of Global
Services, Inc. ("Global"), a company engaged in the business of reselling used
computer equipment for a price of $6,647,000 in cash. In two other transactions
consummated at substantially the same time, the Company sold the residual
interests in four computer equipment lease schedules, with a book value of
$1,063,000, to Quest Residual Services LLC ("Quest"), a newly formed equipment
leasing company, for a total price of $3,650,000 in cash. Upon further review of
these transactions, the Company has determined that both
34
<PAGE> 36
Global and Quest had the same beneficial owners, who held the same ownership
percentages in each entity, at the times of the Company's transactions with
them. The Company has decided to record all three transactions as a single
transaction and to net the proceeds received from Quest for the sale of the
residual interests against the purchase price paid to Global for its assets.
Effective March 1, 2000, the Company acquired substantially all the assets
of RAO Consulting Incorporated ("Rao"), an ERP consulting company which has an
affiliation with a consulting practice in India. The purchase price of
approximately $1,500,000 consisted of $300,000 in cash, a $300,000 promissory
note (which was placed in escrow), and 333,000 shares of the Company's common
stock delivered at the closing. The purchase price also includes a potential
earnout payment of 2-3 times the EBITDA for the Rao business in fiscal 2001 in
the event that such EDITDA exceeds $150,000 in that period.
The Company sold substantially all the assets of TMR for a price of
$9,600,000 in cash. The Company retained approximately $1,500,000 in working
capital of TMR which was not included in the transaction. Of the proceeds from
the sale, the Company used $8,000,000 to repay a $7,000,000 short-term loan
obtained for the Global acquisition and $1,000,000 to permanently reduce the
outstanding balance under the Credit Facility.
22. DEBT ISSUES
Since April 30, 1999, the Company and a bank have modified the Loan
Agreement on four separate occasions. The four modifications have amended
certain financial covenants (primarily those setting limits on the maximum
funded-debt-to-EBITDA ratio, maximum annual capital expenditures, and maximum
annual lease commitments) contained in the Loan Agreement, and have delayed the
$1,250,000 per quarter reduction in the aggregate outstanding balance. The last
modification to the Loan Agreement extends the maturity of the Credit Facility
to December 15, 2000.
23. MANAGEMENT'S PLANS
The Company lost approximately $3,541,000 (as restated) in the third
quarter of fiscal 2000. The Company's net income for the first three quarters of
fiscal 2000 is approximately $323,000 (as restated). In addition, the Company
has announced that it anticipates a net loss in the range of $5,200,000 to
$6,900,000 for all of fiscal 2000.
In May 2000, the Company appointed a new chief executive officer and
requested that he develop a plan to return the Company to profitability. That
plan was presented to the Company's board of directors in June 2000.
As discussed in Note 3, over a 21-month period beginning in September
1996, the Company completed four acquisitions in an effort to expand
geographically and to obtain more diversity in its service offerings. In
addition, to accelerate the Company's growth potential, the Company began in
July 1998 building a larger regional infrastructure. The new CEO's plan is to
focus the Company on its core business competency.
As discussed in Note 21, the Company reduced its long-term debt by
$8,000,000 in May 2000. The Company also intends to use the proceeds from the
$1,000,000 escrow fund established in the TMR sale to repay debt when it is
released. In addition, the Company expects proceeds from income tax refunds of
approximately $5,500,000 to be used to repay debt. The Company also is
evaluating other non-core assets for potential divestiture.
The Company expects that the changes made in operations, combined with a
substantial reduction in debt, will yield the financial performance to achieve
positive cash flows and to extend its debt by greater than one year when the
debt matures on December 15, 2000.
35
<PAGE> 37
24. CONTINGENT LIABILITIES
In April and May 2000, six shareholders of the Company filed separate
purported class action lawsuits in the United States District Court for the
Western District of Tennessee against the Company and certain of its directors
and officers. In each case, the plaintiff seeks certification of a plaintiff
class consisting of all persons who purchased or otherwise acquired the
Company's common stock within a specified prior period, other than the Company's
directors and officers and related persons and entities. The suits, which are
substantially the same, generally allege that the defendants violated federal
securities laws by making false and misleading statements regarding the
Company's financial results, which artificially inflated the market price of the
Company's common stock and caused the plaintiffs and other class members to
purchase the Company's common stock at such inflated prices. The suits seek
unspecified monetary damages. On June 1, 2000, the court ordered the
consolidation of each lawsuit into a single matter designated as the In re SCB
Computer Technology Securities Litigation and ruled on certain other procedural
matters. The Company is reviewing the consolidated lawsuit and intends to
respond to it in a timely manner. As of the date hereof, the Company is unable
to predict the outcome of the litigation and its ultimate effect, if any, on the
Company's consolidated financial condition and results of operations.
36
<PAGE> 38
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) (1) Financial Statements
See the Index to Consolidated Financial Statements included in
Item 8 of this amendment for a list of the financial statements filed as part
of this amendment.
(3) Exhibits
The exhibits listed in the Exhibit Index below are filed as
part of this amendment.
37
<PAGE> 39
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: Michael J. Boling
----------------------------------------
Michael J. Boling
Chief Financial Officer
Date: July 20, 2000
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>
Ben C. Bryant, Jr. Chairman of the Board July 20, 2000
--------------------------------
Ben C. Bryant, Jr.
T. Scott Cobb Chief Executive Officer July 20, 2000
--------------------------------
T. Scott Cobb
Michael J. Boling Executive Vice President - July 20, 2000
-------------------------------- Finance, Chief Financial Officer,
Michael J. Boling and Treasurer (principal financial
and accounting officer)
Jack R. Blair Director July 20, 2000
--------------------------------
Jack R. Blair
George E. Cates Director July 20, 2000
--------------------------------
George E. Cates
James E. Harwood Director July 20, 2000
--------------------------------
James E. Harwood
Robert G. McEniry Director July 20, 2000
--------------------------------
Robert G. McEniry
</TABLE>
38
<PAGE> 40
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description of Exhibit
------- ----------------------
<S> <C>
23 Consent of Ernst & Young LLP.
27.1 Restated Financial Data Schedule -- Fiscal Year Ended
April 30, 1999
27.2 Restated Financial Data Schedule -- Fiscal Year Ended
April 30, 1998
</TABLE>
