SCB COMPUTER TECHNOLOGY INC - 10-Q Quarterly Report

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q


þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
		FOR THE QUARTERLY PERIOD ENDED OCTOBER 31, 2003

OR

o		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, 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 December 9, 2003, there were 25,302,454 shares of common stock outstanding.

TABLE OF CONTENTS


CAUTIONARY NOTE ABOUT FORWARD-LOOKING STATEMENTS
PART I – FINANCIAL INFORMATION
	Item 1. Financial Statements
	Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
	Item 3. Quantitative and Qualitative Disclosures about Market Risks
	Item 4. Controls and Procedures
PART II – OTHER INFORMATION
	Item 1. Legal Proceedings
	Item 4. Submission of Matters to a Vote of Security Holders
	Item 6. Exhibits and Reports on Form 8-K
SIGNATURES
EXHIBIT INDEX
Ex-31.1 Section 302 Certification of the CEO
Ex-31.2 Section 302 Certification of the CFO
Ex-32.1 Section 906 Certification of the CEO
Ex-32.2 Section 906 Certification of the CFO

SCB COMPUTER TECHNOLOGY, INC.

QUARTERLY REPORT ON FORM 10-Q

TABLE OF CONTENTS


		Page

Cautionary Note About Forward-Looking Statements			1
Part I – Financial Information
	Item 1. Financial Statements		2
	Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		13
	Item 3. Quantitative and Qualitative Disclosures About Market Risks		21
	Item 4. Controls and Procedures		21
Part II – Other Information
	Item 1. Legal Proceedings		22
	Item 4. Submission of Matters to a Vote of Security Holders		22
	Item 6. Exhibits and Reports on Form 8-K		22
Signatures			24
Exhibit Index		EI-1

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; potential deterioration in the condition of the U.S. economy and the IT services industry; and the receipt of regulatory and shareholder approvals required for the proposed merger with CIBER, Inc., as well as the timing of the anticipated completion and possible conditions of the planned merger and their consequences.

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.

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

SCB COMPUTER TECHNOLOGY, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)


					October 31, 2003			April 30, 2003

					(unaudited)
				ASSETS
Current assets:
	Cash and cash equivalents				$	1,008		$	1,112
	Accounts receivable, net of allowance of $372 and $160, respectively					23,061			15,969
	Refundable income taxes					77			574
	Deferred income taxes					2,320			2,028
	Prepaid expenses and other current assets					1,778			1,590

		Total current assets				28,244			21,273
Fixed assets:
	Furniture, fixtures and equipment					36,630			37,059
	Accumulated depreciation					(26,553	)		(25,248	)

		Net				10,077			11,811
Goodwill						10,554			5,150
Other intangible assets, net of accumulated amortization of $968 and $290, respectively						6,882			4,700
Deferred income taxes – long-term						8,831			8,991
Other long-term assets						1,031			1,310

	Total assets				$	65,619		$	53,235

				LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
	Accounts payable				$	1,507		$	2,161
	Accrued expenses					8,727			7,364
	Current portion of long-term debt					7,959			5,907
	Deferred revenue					1,031			1,296

			Total current liabilities			19,224			16,728
	Long-term debt					24,071			15,975
	Accrued loss on interest rate swap					20			—

			Total liabilities			43,315			32,703
	Commitments and contingencies
Shareholders equity:
	Common stock, $0.01 par, 100,000 shares authorized; 26,002 and 25,025 issued; 700 Treasury shares					260			250
	Treasury stock, at cost					(487	)		(487	)
	Additional paid-in capital					42,500			40,807
	Retained earnings (deficit)					(19,957	)		(20,038	)
	Accumulated other comprehensive loss					(12	)		—

			Total shareholders’ equity			22,304			20,532

		Total liabilities and shareholders’ equity			$	65,619		$	53,235

See accompanying notes to condensed consolidated financial statements (unaudited).

SCB COMPUTER TECHNOLOGY, INC.

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


		Three Months					Six Months
		Ended					Ended
		October 31,					October 31,

		2003			2002		2003		2002

Revenue		$	31,812		$	21,548	$	60,394	$	43,344
Cost of services			24,405			16,102		45,852		32,461

	Gross profit		7,407			5,446		14,542		10,883
Selling, general and administrative expenses			6,499			4,177		11,717		8,902

	Income from operations		908			1,269		2,825		1,981
Net interest expense			406			261		827		549
Other income			50			32		121		145
Loss on extinguishment of debt			1,985			—		1,985		—

Income (loss) before income taxes			(1,433	)		1,040		134		1,577
Income tax expense (benefit)			(566	)		411		53		623

Net income (loss)		$	(867	)	$	629	$	81	$	954

Net income (loss) per share — basic		$	(0.03	)	$	0.03	$	0.00	$	0.04

Net income (loss) per share — diluted		$	(0.03	)	$	0.03	$	0.00	$	0.04

Weighted average number of common shares — basic			25,074			24,741		24,753		24,845

Weighted average number of common shares — diluted			25,074			24,979		25,593		25,118

See accompanying notes to condensed consolidated financial statements (unaudited).

SCB COMPUTER TECHNOLOGY, INC.

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(in thousands, unaudited)


															Accumulated
									Additional			Retained			Other			Total
		Number of		Common		Treasury			Paid-In			Earnings			Comprehensive			Shareholders’
		Shares		Stock		Shares			Capital			(Deficit)			Loss			Equity

Balance at April 30, 2003			25,025	$	250	$	(487	)	$	40,807		$	(20,038	)	$	—		$	20,532

	Issuance of common stock in connection with the acquisition of NSR		882		9		—			1,691			—			—			1,700
	Issuance of common stock in connection with the exercise of employee stock options		8		—		—			3			—			—			3
	Issuance of common stock in connection with the exercise of warrants		87		1		—			(1	)		—			—			—
	Loss on interest rate swap, net of taxes		—		—		—			—			—			(12	)		(12	)
	Net income for the six months ended October 31, 2003		—		—		—			—			81			—			81

Balance at October 31, 2003			26,002	$	260	$	(487	)	$	42,500		$	(19,957	)	$	(12	)	$	22,304

See accompanying notes to condensed consolidated financial statements (unaudited).

SCB COMPUTER TECHNOLOGY, INC.

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


			Six Months Ended October 31,

			2003			2002

Operating Activities
	Net income		$	81		$	954
Adjustments to reconcile net income to net cash provided by operating activities:
	Provision (recovery) for bad debts			38			(439	)
	Depreciation and amortization			2,686			2,570
	Deferred income taxes			5			623
	Extinguishment of debt, net of cash prepayment penalty of $746			1,239			—
	Changes in operating assets and liabilities:
		Accounts receivable		(740	)		2,717
		Refundable income taxes		505			751
		Prepaid expenses and other assets		805			947
		Accounts payable		(818	)		(465	)
		Accrued expenses and other liabilities		(716	)		(1,190	)

Net cash provided by operating activities				3,085			6,468

Investing Activities
	Purchases of businesses, net of $937 cash acquired			(13,145	)		—
	Purchases of fixed assets			(192	)		(164	)

	Net cash used in investing activities			(13,337	)		(164	)

Financing Activities
	Borrowings on long-term debt			31,306			14
	Purchases of common stock for treasury			—			(340	)
	Payments on long-term debt			(21,297	)		(3,202	)
	Net borrowings (repayments) under revolving loan			139			(2,346	)

	Net cash provided by (used in) financing activities			10,148			(5,874	)

Net increase (decrease) in cash and cash equivalents				(104	)		430
Cash and cash equivalents at beginning of period				1,112			354

Cash and cash equivalents at end of period			$	1,008		$	784

Supplemental Disclosures of Cash Flow
	Interest paid		$	476		$	591
	Income taxes paid		$	71		$	45

Supplemental Disclosures of Non-cash Investing and Financing Activities
	Common stock issued in NSR acquisition		$	1,700		$	—
	Notes payable issued in NSR acquisition		$	5,100		$	—

See accompanying notes to condensed consolidated financial statements (unaudited).

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 October 31, 2003, and the results of operations and cash flows for the three-month and six-month periods ended October 31, 2003 and October 31, 2002. Operating results for the period ended October 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):


	Three Months					Six Months
	Ended					Ended
	October 31,					October 31,

	2003			2002		2003		2002

Net income (loss)	$	(867	)	$	629	$	81	$	954

Denominator for basic earnings per share — weighted average shares		25,074			24,741		24,753		24,845

Effect of dilutive securities-stock options and warrants		—			238		840		273

Denominator for diluted earnings per share — adjusted weighted average shares and assumed conversions		25,074			24,979		25,593		25,118

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