<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/ A NO. 1
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JANUARY 31, 2000
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 NO. 0-27694
SCB COMPUTER TECHNOLOGY, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
TENNESSEE 62-1201561
(STATE OR OTHER JURISDICTION OF (I.R.S.EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
3800 FOREST HILL - IRENE ROAD
MEMPHIS, TENNESSEE 38125
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
901-754-6577
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
NOT APPLICABLE
(FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR,
IF CHANGED SINCE LAST REPORT)
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 o
As of March 8, 2000, there were 25,044,924 outstanding shares of the
registrant's common stock.
<PAGE> 2
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 2000,
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, (4) record revenue from two sales of residual interests in computer
equipment lease schedules, and (5) correct a contractual billing error. 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 in fiscal 2000. For further information regarding the
background of all the adjustments, see Note B of the Notes to Restated Condensed
Consolidated Financial Statements included in Item 1 of Part I 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. The adjustments decrease the Company's previously reported total
assets by $2.2 million as of July 31, 1999, $2.4 million as of October 31, 1999,
and $2.4 million as of January 31, 2000. For additional information concerning
the impact of the adjustments on the Company's financial results, see the
Company's unaudited restated condensed consolidated financial statements and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" in Items 1 and 2, respectively, of Part I 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, and for each quarter in the nine-month period ended January
31, 2000, 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 common stock
will be stayed pending the issuance of a decision by the Nasdaq panel which is
expected later this month.
<PAGE> 3
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 1 and 2 of Part I and Item 6 of
Part II, no other information included in the Company's Quarterly Report of Form
10-Q 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 Annual
Report on Form 10-K/A No. 2 filed with the Commission on July 20, 2000, and 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.
2
<PAGE> 4
SCB COMPUTER TECHNOLOGY, INC.
RESTATED CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
January 31, April 30,
2000 1999
------------- -------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ..................... $ 1,497,382 $ 5,318,259
Accounts receivable ........................... 30,188,156 34,114,897
Other current assets .......................... 12,194,930 9,950,319
------------- -------------
Total current assets ....................... 43,880,468 49,383,475
Investment in direct financing leases ......... 12,993,238 16,854,185
Equipment under operating leases (net) ........ 8,107,067 5,983,135
Fixed assets:
Buildings ..................................... 992,427 1,348,293
Furniture, fixtures and equipment ............. 34,166,781 29,675,296
Accumulated depreciation ...................... (11,990,027) (6,753,640)
------------- -------------
23,169,181 24,269,949
Land .......................................... 209,912 209,912
------------- -------------
23,379,093 24,479,861
Goodwill (net) ................................... 46,991,287 44,920,437
Other ............................................ 2,049,767 4,292,769
------------- -------------
Total assets ............................. $ 137,400,920 $ 145,913,862
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable-trade ........................ $ 3,925,697 $ 6,845,308
Accrued expenses .............................. 6,949,531 9,969,615
Notes payable ................................. 11,974,289 0
Current portion of long term debt ............. 10,790,000 15,307,385
Current portion - nonrecourse debt ............ 808,035 0
Deferred revenue .............................. 1,313,775 1,244,623
------------- -------------
Total current liabilities ................ 35,761,327 33,366,931
Long term debt ................................... 27,422,219 33,754,628
Notes payable-nonrecourse ........................ 15,479,501 17,830,281
Other long term liabilities ...................... 3,852,966 6,408,489
Shareholders' equity ............................. 54,884,907 54,553,533
------------- -------------
Total liabilities and shareholders' equity $ 137,400,920 $ 145,913,862
============= =============
</TABLE>
See accompanying notes.
3
<PAGE> 5
SCB COMPUTER TECHNOLOGY, INC.
RESTATED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED ENDED
JANUARY 31, JANUARY 31,
---------------------------- ----------------------------
2000 1999 2000 1999
------------ ------------ ------------ -------------
<S> <C> <C> <C> <C>
Revenue ................................. $ 37,156,545 $ 36,742,437 $124,441,074 $ 110,264,006
Cost of services ........................ 30,337,519 26,450,547 91,234,919 78,901,928
Increase in provision for contract losses 848,751 -- 848,751 --
------------ ------------ ------------ -------------
Gross profit ............................ 5,970,275 10,291,890 32,357,404 31,362,078
Selling, general and administrative
expenses ............................. 10,945,197 7,464,260 29,054,683 19,556,255
TVA settlement and severance payments ... -- -- -- 2,700,000
------------ ------------ ------------ -------------
Income (loss) from operations ........... (4,974,922) 2,827,630 3,302,721 9,105,823
Interest expense, net ................... 1,020,601 601,138 2,886,821 1,739,229
Other income (expense) .................. 147,117 (440,265) 180,929 (1,067,404)
------------ ------------ ------------ -------------
Income (loss) before income taxes ....... (5,848,406) 1,786,227 596,829 6,299,190
Income tax expense (benefit) ............ (2,306,921) 639,743 274,065 2,766,005
------------ ------------ ------------ -------------
Net income (loss) ....................... $ (3,541,485) $ 1,146,484 $ 322,764 $ 3,533,185
============ ============ ============ =============
Net income (loss) per share - basic ..... $ (0.14) $ 0.05 $ 0.01 $ 0.14
============ ============ ============ =============
Net income (loss) per share - diluted ... $ (0.14) $ 0.05 $ 0.01 $ 0.14
============ ============ ============ =============
Weighted average number of common
shares - basic ....................... 24,711,924 24,683,382 24,711,807 24,672,397
============ ============ ============ =============
Weighted average number of common
shares - diluted ..................... 24,711,924 24,918,710 24,711,807 24,953,534
============ ============ ============ =============
</TABLE>
See accompanying notes.
4
<PAGE> 6
SCB COMPUTER TECHNOLOGY, INC.
RESTATED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
JANUARY 31,
2000 1999
------------ ------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income (loss) .................................. $ 322,764 $ 3,533,185
Adjustments to reconcile net income to
net cash provided by operating activities:
Provision for bad debts ............................ (249,000) 210,000
Depreciation included in cost of services .......... 3,845,580 3,180,043
Depreciation included in SG&A ...................... 1,232,576 725,563
Amortization and other ............................. 1,781,991 1,175,385
Deferred income taxes .............................. (1,250,256) (79,797)
Changes in operating assets and liabilities:
Accounts receivable ............................. 4,175,741 (9,551,055)
Other assets and liabilities .................... 2,302,938 (4,099,448)
Net investment in direct financing lease activity 3,860,947 4,031,579
Accounts payable ................................ (2,919,611) (170,284)
Accrued expenses and other ...................... (3,631,005) 2,825,666
Accrued TVA settlement .......................... (1,658,516) 1,719,077
------------ ------------
Net cash provided by operating activities .......... 7,814,149 3,499,914
------------ ------------
INVESTING ACTIVITIES
Purchases of fixed assets .......................... (6,851,320) (17,440,516)
Additional purchase price of subsidiaries .......... -- (6,334,886)
Acquisition of business ............................ (4,013,549) --
------------ ------------
Net cash used in investing activities .............. (10,864,869) (23,775,402)
------------ ------------
FINANCING ACTIVITIES
Borrowings on long-term debt ....................... -- 17,500,000
Payments on long-term debt ......................... (3,184,604) (3,925,027)
Proceeds of non-recourse debt ...................... 2,945,000 3,000,000
Payments on non-recourse debt ...................... (4,487,745) (5,213,043)
Net borrowings (repayments) under line of credit ... (2,644,032) 8,016,333
Options exercised .................................. -- 394,341
Short-term loan .................................... 7,000,000 --
Other .............................................. (398,776) (405,645)
------------ ------------
Net cash provided by (used in) financing activities (770,157) 19,366,959
------------ ------------
Net decrease in cash .................................. (3,820,877) (908,529)
Cash at beginning of period ........................... 5,318,259 2,983,372
------------ ------------
Cash at end of period ................................. $ 1,497,382 $ 2,074,843
============ ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
Interest paid ...................................... $ 5,104,893 $ 3,457,535
Income taxes paid .................................. $ 1,673,918 $ 3,318,485
</TABLE>
See accompanying notes.
5
<PAGE> 7
SCB COMPUTER TECHNOLOGY, INC.
NOTES TO RESTATED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JANUARY 31, 2000
NOTE A - BASIS OF PRESENTATION
The accompanying unaudited restated condensed consolidated financial statements
of SCB Computer Technology, Inc. (the "Company") have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q and Article 10 of Regulation
S-X. Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements. In the opinion of management, the accompanying condensed
consolidated financial statements contain all adjustments (which consist of
normal recurring adjustments, with the exception of those adjustments described
in Notes B and E) considered necessary for the fair presentation of the
financial position of the Company as of January 31, 2000, and the results of
operations and cash flows for the three and nine month periods ended January 31,
2000 and January 31, 1999. Operating results for the periods ended January 31,
2000, are not necessarily indicative of the results that may be expected for the
fiscal year ending April 30, 2000. For further information, refer to the
consolidated financial statements and footnotes thereto included in the
Company's Annual Report on Form 10-K/A No. 2 for the fiscal year ended April 30,
1999, filed with the Securities and Exchange Commission.
NOTE B - RESTATED FINANCIAL STATEMENTS
The Company's restated consolidated financial statements for the fiscal years
ended April 30, 1999 and 1998, and for each quarter in the nine-month period
ended January 31, 2000, 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 2000, 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, (4)
record revenue from two sales of residual interests in computer equipment lease
schedules, and (5) correct a contractual billing error. 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 in fiscal 2000.
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, and for each quarter in the nine-month period ended January
31, 2000, 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 unaudited
6
<PAGE> 8
restated condensed consolidated results of operations for each of the first
three quarters in fiscal 2000 and 1999 and the six-month and nine-month periods
then ended. The adjustments are grouped according to the types of transactions
involved or accounting entries affected.
<TABLE>
<CAPTION>
2000
-------------------------------------------------------------------
QUARTER QUARTER SIX MONTHS QUARTER NINE MONTHS
ENDED ENDED ENDED ENDED ENDED
JULY 31, OCTOBER 31, OCTOBER 31, JANUARY 31, JANUARY 31,
1999 1999 1999 2000 2000
--------- --------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Revenue:
Client services agreement $ 202,806 $ 202,806 $ 405,612 $ 202,806 $ 608,418
Direct financing leases.. 110,623 102,703 213,326 94,432 307,758
Revenue recognition ..... (613,691) 206,995 (406,696) -- (406,696)
--------- --------- ----------- ----------- -----------
(Decrease) increase ..... $(300,262) $ 512,504 $ 212,242 $ 297,238 $ 509,480
========= ========= =========== =========== ===========
Direct Expense:
Client service agreement $ 101,329 $ 34,917 $ 136,246 $ 34,917 $ 171,163
Direct financing leases.. (10,413) (10,413) (20,826) (10,413) (31,239)
Revenue recognition ..... (211,713) -- (211,713) -- (211,713)
Other ................... 114,225 172,659 286,884 58,868 345,752
Prior unrecorded audit
adjustments ..... (226,000) -- (226,000) -- (226,000)
--------- --------- ----------- ----------- -----------
(Decrease) increase ..... $(232,572) $ 197,163 $ (35,409) $ 83,372 $ 47,963
========= ========= =========== =========== ===========
SG&A Expense:
Residual interest in
remarketed leases.. $ 143,954 $ 143,954 $ 287,908 $ 143,953 $ 431,861
Revenue recognition ..... (60,292) (101,718) (162,010) (263,968) (425,978)
Other ................... -- 128,000 128,000 (249,000) (121,000)
Other accrued expenses .. (155,567) (15,567) (171,134) (15,567) (186,701)
Other accrued expenses .. (323,328) -- (323,328) -- (323,328)
Prior unrecorded audit
adjustments ..... 16,625 16,625 33,250 (89,250) (56,000)
--------- --------- ----------- ----------- -----------
(Decrease) increase ... $(378,608) $ 171,294 $ (207,314) $ (473,832) $ (681,146)
========= ========= =========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
1999
-------------------------------------------------------------------
QUARTER QUARTER SIX MONTHS QUARTER NINE MONTHS
ENDED ENDED ENDED ENDED ENDED
JULY 31, OCTOBER 31, OCTOBER 31, JANUARY 31, JANUARY 31,
1998 1998 1998 1999 1999
--------- --------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Revenue:
Client services agreement $ 32,367 $ 173,691 $ 206,058 $ 183,396 $ 389,454
Residual interest in
remarketed leases.. -- -- -- (1,650,000) (1,650,000)
Direct financing leases.. (650,563) (299,719) (950,282) 123,568 (826,714)
Revenue recognition ..... (171,117) 370,846 199,729 (216,138) (16,409)
Other ................... (230,613) (397,558) (628,171) (317,839) (946,010)
Prior unrecorded audit
adjustments ..... 135,000 (210,000) (75,000) -- (75,000)
--------- --------- ----------- ----------- -----------
(Decrease) increase ..... $(884,926) $(362,740) $(1,247,666) $(1,877,013) $(3,124,679)
========= ========= =========== =========== ===========
Direct Expense:
Client service agreement $ 113,215 $ 234,153 $ 347,368 $ 234,153 $ 581,521
Direct financing leases.. 17,493 8,191 25,684 (10,413) 15,271
Other.................... (230,613) (397,558) (628,171) (317,839) (946,010)
--------- --------- ----------- ----------- -----------
(Decrease) increase ..... $ (99,905) $(155,214) $ (255,119) $ (94,099) $ (349,218)
========= ========= =========== =========== ===========
SG&A Expense:
Other accrued expenses .. $ 22,398 $ 51,614 $ 74,012 $ 51,613 $ 125,625
Prior unrecorded audit
adjustments ..... 16,625 16,625 33,250 16,625 49,875
--------- --------- ----------- ----------- -----------
(Decrease) increase ..... $ 39,023 $ 68,239 $ 107,262 $ 68,238 $ 175,500
========= ========= =========== =========== ===========
</TABLE>
7
<PAGE> 9
ADJUSTMENTS RESULTING FROM AUDIT COMMITTEE'S INVESTIGATION
The Company restated its consolidated financial statements for fiscal 2000, 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 2000 and 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 2000 and 1999.
REVENUE RECOGNITION. The Company inadvertently recognized an extra month's
revenue, net of related expenses, under a contract with a customer in the first
quarter of fiscal 2000. After becoming aware of the billing error, the Company
recorded additional costs relating to the contract in the second and third
quarters of fiscal 2000. The Company has determined that the billing error
should be reversed in the first quarter of fiscal 2000. Accordingly, the
Company has reduced the revenue recognized in the first quarter of fiscal 2000
and has reversed the expense accruals in the second and third quarters of
fiscal 2000.
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.
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
8
<PAGE> 10
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.
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.
ADJUSTMENTS RESULTING FROM THE COMPANY'S INTERNAL REVIEW OF FINANCIAL
INFORMATION
In connection with the restatement of its consolidated financial statements for
fiscal 2000, 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 2000, 1999
and 1998. Accordingly, the Company has reversed or deferred the recognition of
revenue from these lease changes in these periods.
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 2000, 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 termination fee on a contract prior to finalization of the
termination agreement.
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.
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
revenue to direct expense to correct the misclassification by a division of the
Company of certain reimbursed expenses.
9
<PAGE> 11
PRIOR UNRECORDED AUDIT ADJUSTMENTS
In connection with the restatement of its consolidated financial statements for
fiscal 2000, 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.
NOTE C - EARNINGS PER SHARE
The following is a reconciliation of the numerators and denominators used to
calculate net income (loss) per share in the condensed consolidated statements
of operations:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
JANUARY 31, JANUARY 31,
-------------------------- -------------------------
2000 1999 2000 1999
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net income (loss) ................... $(3,541,485) $ 1,146,484 $ 322,764 $ 3,533,185
=========== =========== =========== ===========
Denominator for basic earnings per
share - weighted average shares .. 24,711,924 24,683,382 24,711,807 24,672,397
=========== =========== =========== ===========
Assumed exercise of stock options ... -- 235,328 -- 281,137
----------- ----------- ----------- -----------
Denominator for diluted earnings per
share - adjusted weighted average
shares and assumed conversions ... 24,711,924 24,918,710 24,711,807 24,953,534
=========== =========== =========== ===========
Net income (loss) per share - basic.. $ (0.14) $ 0.05 $ 0.01 $ 0.14
=========== =========== =========== ===========
Net income (loss) per share - diluted $ (0.14) $ 0.05 $ 0.01 $ 0.14
=========== =========== =========== ===========
</TABLE>
NOTE D - 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.
10
<PAGE> 12
Summarized financial information concerning the operating segments in which the
Company operated at January 31, 2000 and 1999, and for each of the three and
nine month periods then ended is shown in the following table:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
JANUARY 31, JANUARY 31,
--------------------- ----------------------
OPERATING SEGMENTS (IN THOUSANDS) 2000 1999 2000 1999
-------- --------- --------- ---------
<S> <C> <C> <C> <C>
Revenues:
Professional Services ........... $ 25,458 $ 27,127 $ 84,204 $ 80,514
Enterprise Solutions ............ 11,699 9,615 40,237 29,750
-------- --------- --------- ---------
$ 37,157 $ 36,742 $ 124,441 $ 110,264
======== ========= ========= =========
Income (loss) from operations:(a)
Professional Services ........... $ 950 $ 4,212 $ 9,102 $ 10,844
Enterprise Solutions ............ (1,643) 1,165 2,476 3,255
-------- --------- --------- ---------
(693) 5,377 11,578 14,099
Corporate ....................... (4,282) (2,549) (8,275) (2,293)
-------- --------- --------- ---------
$ (4,975) $ 2,828 $ 3,303 $ 11,806
======== ========= ========= =========
</TABLE>
(a) The income from operations for the nine months ended January 31, 1999
excludes both the nonrecurring charge related to the settlement of the
TVA matter ($1,900,000) and the one-time severance expense ($800,000)
paid to a former officer of the company.
NOTE E - UNUSUAL CHARGES
During the fourth fiscal quarter of 1999, the Company completed an evaluation of
its operations related to a data center and determined that its best course of
action would be to close the facility. The data center had historically
generated revenues through data processing services for customers using legacy
systems. However, due to changes in the industry conditions and significant
increases in the pricing of software licenses used in conjunction with legacy
systems, it became obvious that the data center would continually generate
operating losses in the future without significant capital improvements.
Consequently, the Company recorded a non-cash charge of $1,800,000 for contract
loss reserves which management believed were 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 $3,950,000 was also recorded in the fourth fiscal quarter of 1999.
The Company has continuously re-evaluated the remaining cost to wind-down its
obligations related to the data center. Due to the settlement of two employment
agreements and an unanticipated licensing fee payment, the Company has recorded
an additional charge of $848,751 for contract loss reserves, during the third
fiscal quarter of 2000, which management believes is sufficient to cover
estimated losses through April 30, 2000. Subsequent to April 30, 2000, the
Company will have no remaining contractual obligations relating to the data
center.
NOTE F - SUBSEQUENT EVENT
On March 3, 2000, the Company acquired substantially all of the assets of RAO
Consulting, Incorporated, a company in substantially the same business as the
Company, which will be accounted for during the fourth fiscal quarter of 2000,
using the purchase method of accounting. The consideration initially paid by the
Company for this acquisition was approximately $1.4 million which consisted of
cash, common stock of the Company and a note payable to the former owner.
Additional consideration of up to $900,000 could be paid within one year
contingent upon certain earnings targets.
11
<PAGE> 13
ITEM 2. 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 2000,
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, (4) record revenue from two sales of residual interests in computer
equipment lease schedules, and (5) correct a contractual billing error. 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 in fiscal 2000. For further information regarding the
background of all the adjustments, see Note B of the Notes to Restated Condensed
Consolidated Financial Statements included in Item 1 of Part I 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. The adjustments decrease the Company's previously reported total
assets by $2.2 million as of July 31, 1999, $2.4 million as of October 31, 1999,
and $2.4 million as of January 31, 2000. For additional information concerning
the impact of the adjustments on the Company's financial results, see the
Company's unaudited restated condensed consolidated financial statements and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" in Items 1 and 2, respectively, of Part I 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, and for each quarter in the nine-month period ended January
31, 2000, as restated, include all adjustments necessary for a fair presentation
of the Company's financial position and results of operations for such periods.
RESULTS OF OPERATIONS
Revenue increased from $36.7 million for the quarter ended January 31, 1999, to
$37.2 million for the quarter ended January 31, 2000, an increase of
approximately 1.4%. Revenue increased from $110.2 million for the first nine
months of fiscal 1999 to $124.4 million for the comparable period for fiscal
2000, an increase of approximately 12.9% attributable primarily to the expansion
of the Company's client base and increases in enterprise solution services.
Gross profit decreased from $10.3 million for the third quarter of fiscal 1999
to $6.0 million for the third quarter of fiscal 2000, a decrease of
approximately 41.7%. Gross profit increased from $31.4 million for the first
nine months of fiscal 1999 to $32.4 million for the comparable period for fiscal
2000, an increase of approximately 3.2%. Gross profit margin for the quarter
decreased from 28% to 16.1%, and gross profit margin for the comparable nine
month periods decreased from 28.4% to 26%, due primarily to lower utilization.
12
<PAGE> 14
Selling, general and administrative expenses increased from $7.5 million in the
third quarter of fiscal 1999 to $10.9 million in third quarter of fiscal 2000,
an increase of 45.3%. Selling, general and administrative expenses increased
from $19.6 million for the first nine months of fiscal 1999 to $29.1 million for
the comparable period for fiscal 2000, an increase of approximately 48.5%. As a
percent of revenue, selling, general and administrative expenses increased from
20.3% in the third quarter of fiscal 1999 to 29.5% for the third quarter of
fiscal 2000, and increased from 17.7% to 23.3% for the comparable nine month
periods then ended. The increase in selling, general and administrative expense
is the result of an increase in staffing from the Company's planned enhancement
of the infrastructure in the regional business units, the start-up costs
associated with the e-solutions product line and approximately $2.0 million in
charges that were recorded during the third fiscal quarter of 2000. These
charges recorded as selling, general and administrative expense included the
write-off of software no longer in use, severance and other employee-related
costs and an increase in the allowances for direct financing lease losses and
doubtful accounts.
In the first quarter of fiscal 1999, the Company provided for an accrual of
$1,900,000, which is reflected separately on the income statement, in connection
with the settlement of the TVA billing matter as discussed herein. In connection
with the resignation of an officer of the Company, a one-time severance expense
of approximately $800,000 was recorded in the fiscal quarter ended October 31,
1998, with non-compete payments to such former officer (aggregating $980,000)
being amortized ratably over future periods.
Net interest expense increased from $0.6 million in the third quarter of fiscal
1999 to $1.0 million in the third quarter of fiscal 2000. Net interest expense
also increased from $1.7 million for the first nine months of fiscal 1999 to
$2.9 million for the comparable period for fiscal 2000. The increase was
primarily attributable to higher debt levels from acquisitions and higher
interest rates.
Management is currently evaluating the previously announced slowing in our rate
of growth (due to the completion of the Y2K efforts) on the Company's operations
and infrastructure and anticipates implementing the necessary changes identified
during this evaluation. The evaluation is focusing on balancing the cost
structure with the current revenue stream. At this time management does not
anticipate that the costs associated with this implementation will extend beyond
April 30, 2000, however, there could be some strategies that would require a one
time charge in costs associated with canceling certain employment contracts to
reflect the changes implemented.
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 $7.8 million and $3.5 million for the first nine months of fiscal
2000 and 1999, respectively. The increase in cash flow was primarily
attributable to improved collections on accounts receivable.
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 the first nine months of
fiscal 2000, the Company had approximately $6.9 million in capital expenditures,
the substantial majority of which were related to purchases of equipment
associated with new outsourcing contracts, equipment to complete the Emerging
Technology Center in Phoenix, and leasehold improvements made to the new
corporate headquarters facility.
At January 31, 2000, the Company had approximately $1.5 million of available
cash and $0.1 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.
13
<PAGE> 15
The Company and its significant subsidiaries have a credit facility with a
commercial bank. The credit facility 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 has been reduced to $26.3 million, $26.1 of which is
outstanding, and will mature on October 1, 2000. The Company uses the borrowings
under the revolving line of credit for general corporate purposes, including
acquisitions. At January 31, 2000, there was $11.5 million outstanding under the
term loan. The repayment schedule for the term loan requires monthly principal
and interest payments of $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 that varies based on certain financial ratios. At January 31, 2000,
borrowings under the credit facility bore interest at the rate of 7.28% per
year.
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 was retired in May 2000.
The Company also has a $5 million line of credit with a bank, which bears
interest at a rate of prime less 0.55% (7.95% at January 31, 2000) and is due
upon demand. At January 31, 2000, $4,974,289 was outstanding under this line of
credit which is secured by various computer equipment.
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.
OTHER MATTERS
The Company has completed its efforts to minimize the risk of Year 2000 ("Y2K")
related problems. The "Y2K issue" is typically the result of software being
written using two digits rather than four to define the applicable year. As
discussed in the Company's Quarterly Report on Form 10-Q for the quarter ended
October 31, 1999, the Company assessed the readiness of its computer systems and
applications and has completed any necessary adjustments that were identified.
Total expenditures for Y2K remediation have not been material. Since January 1,
2000, the Company is not aware of any customers or suppliers experiencing any
significant equipment or systems problems related to the rollover to the year
2000. Accordingly, the Company does not believe that any problems related to the
Y2K issue will have a material adverse impact on the Company's business, results
of operations or financial condition.
14
<PAGE> 16
FORWARD-LOOKING STATEMENTS
This quarterly 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.
15
<PAGE> 17
PART II
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) Exhibits
The exhibits listed in the Exhibit Index below are filed as part
of this amendment.
16
<PAGE> 18
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SCB COMPUTER TECHNOLOGY, INC.
Date: July 25, 2000 By: /s/ Michael J. Boling
----------------------------------------
Michael J. Boling
Chief Financial Officer
17
<PAGE> 19
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------ ----------------------
27.1 Financial Data Schedule - For The Nine-Month Period January 31, 2000
(As Restated)
27.2 Financial Data Schedule - For The Nine-Month Period January 31, 1999
(As Restated)
