Back to GetFilings.com

Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Form 10-Q

Commission File No. 0-27694

SCB COMPUTER TECHNOLOGY, INC.

3800 Forest Hill-Irene Road, Suite 100
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 þ    No o

     Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes o    No þ

     At September 3, 2003, there were 25,294,954 shares of common stock outstanding.

Table of Contents

SCB COMPUTER TECHNOLOGY, INC.

QUARTERLY REPORT ON FORM 10-Q

TABLE OF CONTENTS

Table of Contents

CAUTIONARY NOTE ABOUT FORWARD-LOOKING STATEMENTS

     This report contains forward-looking statements. All statements made in this report, other than statements of historical fact, are forward-looking statements. They usually include, without limitation, the words “believes”, “anticipates”, “expects”, “estimates”, “projects”, “intends”, “plans”, “hopes”, “future” and words of similar phrasing and meaning. Forward-looking statements reflect management’s current assumptions, beliefs, and expectations and express management’s views of future performance and trends.

     Forward-looking statements are subject to a number of risks and uncertainties, including those discussed below, that could cause actual results to differ materially from historical or anticipated results. These factors include, but are not limited to, the potential for the Company’s business relationships with its significant customers to change or deteriorate; the potential early termination of the Company’s IT service contracts without penalty; the potential for the Company’s customers to reduce their IT services outsourcing for various reasons, including federal and state budgetary constraints; the Company’s potential liability to its customers in connection with the provision of IT services; the Company’s potential inability to attract, develop and retain qualified IT employees; the potential for customers to hire the Company’s employees; potential changes in the utilization and productivity rates of the Company’s IT employees; the Company’s dependence on key management personnel; the types and mix of IT services that the Company performs during any particular period; potential changes in the Company’s gross profit due to a variety of factors, including increased wage and benefit costs that are not offset by billed rate increases; the Company’s potential inability to finance, sustain and manage growth; the Company’s potential inability to develop or acquire additional IT service offerings; the Company’s potential inability to effectively identify, integrate and manage acquired businesses, including Remtech Services, Inc. and National Systems & Research Co.; the Company’s increased leveraged position as a result of the Remtech Services, Inc. and National Systems & Research Co. acquisitions; the potential effects of competition; the potential outcome of possible litigation involving the Company; the potential effects of governmental audits of direct and indirect costs for the Company’s U.S. Federal government contracts; the Company’s decision to focus on its core competencies of IT outsourcing, consulting and professional staffing; and potential deterioration in the condition of the U.S. economy and the IT services industry.

     The Company disclaims any intent and undertakes no obligation to publicly release any revision to or update of any forward-looking statement contained in this report to reflect events occurring or circumstances existing after the date hereof or otherwise.

Table of Contents

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

SCB COMPUTER TECHNOLOGY, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)

See accompanying notes to condensed consolidated financial statements.

2

Table of Contents

SCB COMPUTER TECHNOLOGY, INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except for earnings per share)
(unaudited)

See accompanying notes to condensed consolidated financial statements.

3

Table of Contents

SCB COMPUTER TECHNOLOGY, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)

See accompanying notes to condensed consolidated financial statements.

4

Table of Contents

SCB COMPUTER TECHNOLOGY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

1.

BASIS OF PRESENTATION

The accompanying unaudited condensed consolidated financial statements of SCB Computer Technology, Inc. (the “Company”) have been prepared in accordance with accounting principles generally accepted in the United States of America 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 accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, the accompanying condensed consolidated financial statements contain all adjustments (which consist of normal recurring adjustments) considered necessary for the fair presentation of the financial position of the Company as of July 31, 2003, and the results of operations and cash flows for the three-month periods ended July 31, 2003 and July 31, 2002. Operating results for the period ended July 31, 2003, are not necessarily indicative of the results that may be expected for the fiscal year ending April 30, 2004. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company’s annual report on Form 10-K for the fiscal year ended April 30, 2003, filed with the Securities and Exchange Commission.

2.

EARNINGS PER SHARE

The following table sets forth the computation of basic and diluted earnings per share (in thousands, except net income per share):

3.

INTANGIBLE ASSETS

Intangible assets resulted from the Company’s acquisition of Remtech Services, Inc. (“RSI”) during the year ended April 30, 2003. The intangible assets identified during the Company’s valuation of RSI’s assets at the date of acquisition include purchased customer contracts and non-compete agreements. These intangible assets are being amortized over 3 to 6 years with 5.9 years being the weighted average amortization period. No residual value has been assigned to these identifiable intangible assets. Amortization expense was $290,000 for the quarter ended July 31, 2003. Amortization expense for all of the Company’s intangible assets including goodwill is deductible for

5

Table of Contents

Federal income tax purposes using the straight-line method over a fifteen-year amortization period. Intangible assets consisted of the following at July 31, 2003 (in thousands):

4.

LONG-TERM DEBT

The Company has a $27.5 million credit facility (the “Credit Facility”) that consists of a $17.5 million revolving loan (the “Revolving Loan”) and a $10.0 million term loan (“Term Loan A”). Additionally, the Company has a three-year, $4.0 million term loan (“Term Loan B”) with another financial institution. The Credit Facility is secured by substantially all the Company’s assets and contains various financial and other covenants. The Company was in compliance with these loan covenants at July 31, 2003.

The interest rate on borrowings under the Revolving Loan is prime plus a margin of 1.0%. At July 31, 2003, the effective annual interest rate under the Revolving Loan was 5.0%. The amount available for borrowing under the Revolving Loan is limited to 85% of billed accounts receivable plus 70% of unbilled accounts receivable. At July 31, 2003, approximately $4.8 million was available for borrowing under the Revolving Loan. The interest rate on borrowings under Term Loan B is prime plus a margin of 2.0%. At July 31, 2003, the effective annual interest rate under the Term Loan B was 6.0%. The Company is amortizing Term Loan B at the rate of $70,000 of principal plus accrued interest per month.

On February 6, 2003, the Company amended the Credit Facility to allow for an additional $7,700,000 term loan (“Term Loan C”) to be used to finance part of the purchase price of the RSI acquisition. The interest rate on borrowings under Term Loan C is prime plus a margin of 2.25%. At July 31, 2003, the effective annual interest rate under Term Loan C was 6.25%. The Company is amortizing Term Loan C at the rate of $192,500 of principal plus accrued interest per month for forty months.

In April 2003, the Company purchased approximately $7.3 million of computer equipment to be used on one of its outsourcing projects. The vendor financed this equipment until the Company finalized its long-term financing with a financial institution. On June 15, 2003, the Company entered into a forty-month term loan (“Term Loan D”) and used the proceeds to pay the computer equipment vendor. The vendor liability was reflected as a note payable in the Company’s April 30, 2003 financial statements. Term Loan D bears interest at a fixed rate of 4.625% and is secured by the computer equipment purchased with the proceeds of the loan.

6

Table of Contents

Long-term debt consisted of the following at July 31, 2003 (in thousands):

As discussed in Note 9, the Company’s debt increased by approximately $13,000,000 on September 3, 2003 due to the Company’s purchase of all the outstanding stock of National Systems & Research Co. Also, as discussed in Note 9, on August 29, 2003, the Company obtained a new senior credit facility, the proceeds of which were used to refinance the existing Credit Facility, Term Loans C and D, and to finance the cash portion of the acquisition of NSR.

5.

SEGMENT INFORMATION

During the first quarter of fiscal 2004, the Company operated within three business segments, State and Local Government, Federal Government and Commercial, as defined by its customer markets. The Company is presenting the following summarized financial information concerning the Company’s operating segments for each of the fiscal quarters ended July 31, 2003 and 2002 (in thousands):

The accounting policies of the reportable segment are the same as those described in the summary of significant accounting policies. There are no inter-segment sales. Long-term assets consist of goodwill and fixed assets. Corporate services, consisting of general and administrative services, are provided to the segment from a centralized location. In addition, substantially all the sales and recruiting workforce are contained in the core operations segment.

6.

STOCK REPURCHASE PROGRAM

The Company’s board of directors approved a stock repurchase program that authorizes the Company to repurchase up to $2.0 million of common stock. The stock repurchase program authorizes the Company to repurchase shares of its common stock from time to time in the open market and through privately negotiated transactions. The Company will base its decisions to repurchase shares on the prevailing market conditions, the availability of cash to fund the repurchases, and other relevant factors. All repurchases will be conducted in accordance with applicable laws, rules and regulations and the limitations imposed under the Company’s credit facility. Repurchased shares of common stock will be added to the Company’s treasury shares and will be available for future corporate uses. The cost of the shares purchased is recorded as treasury stock, which reduces the amount of total shareholders’ equity. The Company may discontinue the stock repurchase program at any time. The Company did not purchase any shares of its common stock during the three-month period ended July 31, 2003. As of July 31, 2003, the Company has 699,800 shares of its common stock held as treasury shares.

7

Table of Contents

7.

RELATED-PARTY TRANSACTIONS

In the first quarter of fiscal 2004, the Company paid IT Resources Solutions.net, Inc. (“ITRS”), a minority owned business, $12,000 for marketing and management services in the northeastern United States, $4,000 for the lease of an office to house an SCB sales account representative and storage facilities which SCB uses to store furniture and miscellaneous office items from a closed SCB office in New York, and $3,172 for contract labor used on the Company’s projects. Kenneth J. Cobb, the son of T. Scott Cobb, is a shareholder of ITRS.

8.

LITIGATION AND LEGAL PROCEEDINGS

The Company from time to time is subject to various claims and lawsuits arising out of its operations in the ordinary course of business. Management believes that the disposition of such claims and lawsuits will not have a material adverse effect on the Company’s financial condition or results of operations.

9.

SUBSEQUENT EVENTS

On May 28, 2003, the Company, National Systems & Research Co. (“NSR”), and the shareholders of NSR, (the “Shareholders”), entered into a Stock Purchase Agreement (the “Agreement”) pursuant to which the Company agreed to purchase and the Shareholders agreed to sell 100% of the outstanding common stock of NSR subject to the resolution of certain contingencies. On August 29, 2003, all of the closing contingencies were resolved, and the Agreement was finalized and funded on September 4, 2003. Pursuant to the Agreement, the Company paid cash in the amount of $8,850,000, issued unsecured, subordinated promissory notes in the amount of $5,100,000 (the “Notes”) to the Shareholders and issued the shares of the Company’s common stock valued at $1,700,000 to the Shareholders in consideration of the sale of all the outstanding shares of common stock of NSR (the “Shares”). At closing the Shareholders purchased approximately $950,000 of NSR’s assets from the Company. The purchase price was determined by arms’ length negotiation between the parties, taking into account the historical operating results and existing customer relationships of NSR’s business.

On August 29, 2003, the Company obtained a new senior credit facility (the “Senior Credit Facility”) with another financial institution, the proceeds of which were used to refinance the existing Credit Facility, Term Loans C and D, and to partially finance the cash consideration for the acquisition of NSR. The remainder of the cash consideration was funded by acquired cash of approximately $1,000,000 and sales proceeds of NSR assets of approximately $950,000.

8

Table of Contents

Item 2.    Management’s Discussion and Analysis of Financial Condition and Results of Operations

     The following information should be read in conjunction with the Company’s condensed consolidated financial statements, including the notes thereto, in this report.

Overview

     In fiscal 2001, management re-evaluated the Company’s strategic direction and concluded that while the acquisition and diversification strategy followed by the Company since fiscal 1997 had grown revenues at a robust rate, the Company’s net income had declined over the same period. Accordingly, management changed the Company’s business development strategy to focus on its historical core competencies of providing IT consulting, outsourcing, and professional staffing services (the “core operations”). A portion of that change in strategic direction included focusing on the Company’s strengths with government customers and adding agencies of the U.S. Federal government as customers. As a result of the change in strategic direction, beginning in fiscal 2001 and continuing through fiscal 2002, the Company disposed of several underperforming business units. These non-core business units were engaged in specialized policy consulting, computer hardware and specialty software sales, enterprise resource planning, and computer equipment leasing (the “non-core operations”). All of the Company’s non-core operations were disposed as of April 1, 2002. Beginning in fiscal 2003, the Company implemented a strategic acquisition plan focused on growing its core operations through acquiring companies with heavy concentrations in the government market, primarily the U.S. Federal government market. The Company completed its first acquisition under its plan with the purchase of Remtech Services, Inc. (“RSI”) on February 6, 2003. On May 28, 2003, the Company entered into a definitive agreement to acquire a second company, National Systems & Research Co. (“NSR”). This acquisition closed on August 29, 2003 and was funded on September 4, 2003, subsequent to the end of the first fiscal quarter.

     The Company provides information technology (“IT”) professional services to its customers. These IT professional services are designed based upon the specific needs and requirements of the customer. Accordingly, the Company offers its customers a wide range of IT professional services that typically are designed to evaluate all phases of customers’ projects, from front-end needs assessment surveys to detailed design and implementation of appropriate systems. The Company delivers these IT services through three forms of projects: a) Consulting, b) Outsourcing/Facilities Management, and c) Professional Staffing. In the first quarter of fiscal 2004 and 2003, the C