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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

     At February 28, 2003, there were 24,461,424 shares of common stock outstanding.

SCB COMPUTER TECHNOLOGY, INC.

QUARTERLY REPORT ON FORM 10-Q

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 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; 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 the Remtech Services, Inc. business just acquired; the Company’s increased leveraged position as a result of the Remtech Services, Inc. acquisition; the potential effects of competition; the potential outcome of litigation and investigations involving the Company; 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.

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.

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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.

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SCB COMPUTER TECHNOLOGY, INC.

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

See accompanying notes to condensed consolidated financial statements.

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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 January 31, 2003, and the results of operations and cash flows for the three and nine-month periods ended January 31, 2003 and January 31, 2002. Operating results for the period ended January 31, 2003, are not necessarily indicative of the results that may be expected for the fiscal year ending April 30, 2003. 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, 2002, filed with the Securities and Exchange Commission.

     As discussed further in Note 9., the Company acquired all the outstanding common stock of Remtech Services, Inc. on February 6, 2003.

2.

RECLASSIFICATIONS

     Certain account reclassifications have been made to the financial statements for fiscal 2002 to conform to the presentation for fiscal 2003.

3.

EARNINGS PER SHARE

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

4.

LONG-TERM DEBT

     The Company has a five-year, $27.5 million credit facility with a financial institution that consists of a $17.5 million revolving loan (the “revolving loan”) and a $10.0 million term loan (the “primary term loan”). The credit facility is secured by substantially all the Company’s assets and contains various financial and other covenants to which the Company is subject. The Company was in compliance with these loan covenants at January 31, 2003. The Company also has a three-year, $4.0 million term loan with another financial institution (the “secondary term loan”).

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     The interest rate on borrowings under the revolving loan is prime plus a margin of 1.0%. At January 31, 2003, the effective annual interest rate under the revolving loan was 5.25%. At January 31, 2003, $1.4 million was outstanding on the revolving loan. The amount available for borrowing under the revolving loan is limited to 85% of billed accounts receivable plus 70% of unbilled accounts receivable. At January 31, 2003, $5.6 million was available for borrowing under the revolving loan.

     The interest rate on borrowings under the primary term loan is prime plus a margin of 2.25%. At January 31, 2003, the effective annual interest rate under the primary term loan was 6.5%. The Company is amortizing the primary term loan at the rate of $350,000 of principal plus accrued interest per month. At January 31, 2003, $1.8 million was outstanding under the primary term loan.

     The interest rate on borrowings under the secondary term loan is prime plus a margin of 2.0%. At January 31, 2003, the effective annual interest rate under the secondary term loan was 6.25%. The Company is amortizing the secondary term loan at the rate of $70,000 of principal plus accrued interest per month. At January 31, 2003, $1.8 million was outstanding under the secondary term loan.

     At January 31, 2003, the Company had $36,021 outstanding under a promissory note that bears interest at 11.0% and is due in fiscal 2004. The loan is secured by computer software.

     As discussed in Note 9., the Company’s debt increased by approximately $12.5 million on February 6, 2003 due to the Company’s purchase of all the outstanding stock of Remtech Services, Inc.

5.

SEGMENT INFORMATION

     Beginning with the second quarter of fiscal 2001, the Company operated within two business segments as a result of certain strategic business decisions made by management. The two business segments are (1) core operations, which consist of IT outsourcing, consulting, and professional staffing services, and (2) non-core operations, which consist of specialized policy consulting, computer hardware and specialty software sales, enterprise resource planning, and computer equipment leasing. Accordingly, the Company is presenting the following summarized financial information concerning the Company’s operating segments at January 31, 2003 and 2002, and for each of the fiscal quarters and nine month periods then ended (in thousands):

(a)

Since all non-core operations have been divested as of April 1, 2002, the Company did not have any non-core operations during the first nine months of fiscal 2003.

(b)

The non-core operations consist of the Enterprise Resource Planning, Delta Software and Partners Capital Group business units that were disposed of on June 20, 2001, February 28, 2002, and April 1, 2002, respectively.

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     The following sets forth the assets and liabilities of the non-core operations (in thousands):

     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 consist of goodwill and fixed assets. Corporate services, consisting of general and administrative services, are provided to the segments from a centralized location. In addition, substantially all the sales and recruiting workforce are contained in the core operations segment.

6.

STOCK REPURCHASE PROGRAM

     On September 10, 2002, the Company’s board of directors approved a stock repurchase program that authorizes the Company to repurchase up to $3.0 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 Company may discontinue the stock repurchase program at any time.

     During the three and nine month periods ended January 31, 2003, the Company purchased 44,900 and 553,900 shares of its common stock for a combined cost of $33,344 and $373,464, respectively. The cost of the shares purchased was recorded as treasury stock, which reduces the amount of total shareholders’ equity.

7.

RELATED-PARTY TRANSACTIONS

     On July 16, 2001, the Company agreed to lend up to $192,000 to T. Scott Cobb, the President and Chief Executive Officer and a director of the Company (the “first loan”). The proceeds of the first loan were to be used by Mr. Cobb to repay his personal indebtedness to a commercial bank. The first loan bears interest at prime and originally had a maturity date of April 30, 2002. On January 18, 2002, the Company and Mr. Cobb modified the first loan by increasing the maximum available principal amount to $313,755 and extending the maturity date to August 31, 2002, subject to the requirement that Mr. Cobb prepay the first loan in certain circumstances. On August 28, 2002, the Company extended the maturity date of the first loan for two months to October 31, 2002, in order to provide Mr. Cobb with sufficient time to repay the first loan in its entirety. On October 31, 2002, Mr. Cobb repaid $300,000 of the principal balance on the first loan to the Company. At October 31, 2002, the outstanding principal balance of the first loan was $11,480 and the interest accrued thereunder was $13,739. On November 6, 2002, Mr. Cobb repaid in full the principal and accrued interest on the first loan.

     On February 15, 2002, the Company agreed to lend an additional $500,000 to Mr. Cobb (the “second loan”). The second loan incurred interest at prime, had a maturity date of January 31, 2003, and was secured by a pledge by Mr. Cobb to the Company of 1,503,691 shares of the Company’s common stock owned by Mr. Cobb. The proceeds of the second loan were to be used by Mr. Cobb to repay his personal indebtedness to a commercial bank. On June 14, 2002, Mr. Cobb repaid the $500,000 principal balance of the second loan to the Company. At October 31, 2002, the interest accrued under the second loan was $7,851. On November 6, 2002, Mr. Cobb repaid in full the accrued interest on the second loan.

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     In the third quarter and first nine months of fiscal 2003, the Company paid IT Resources Solutions.net, Inc. (“ITRS”), a minority owned business, $18,000 and $55,500, respectively, for marketing and management services in the northeastern United States, $6,000 and $20,100, respectively, 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 $3,068 and $25,156, respectively, for contract labor used on the Company’s projects. Kenneth J. Cobb, the son of T. Scott Cobb, is a shareholder of ITRS.

8.

LEGAL PROCEEDINGS

     On August 30, 2002, the Company settled an administrative proceeding brought by the Securities and Exchange Commission (the “SEC”) following an investigation that arose after the Company restated its financial results for periods in its 1998-2000 fiscal years. The SEC investigation was focused on the accounting policies of two Arizona-based companies that the Company acquired in 1997. Following the acquisition, these subsidiaries were operated as a stand-alone division within the Company and had an accounting operation that was separate from that of the rest of the Company. The SEC concluded from its investigation that these subsidiaries improperly accounted for certain transactions, and that their flawed financial results were incorporated into the Company’s consolidated financial statements, thereby rendering the Company’s reported financial results inaccurate. As a result, the SEC found that the Company committed civil violations of the reporting, books and records, and internal controls requirements of the federal securities laws and ordered the Company to cease and desist from any future violations. The Company neither admitted nor denied the SEC’s findings. The SEC did not make a finding of fraud on the Company’s part, and no monetary penalty or other sanction was imposed against the Company beyond the cease-and-desist order. In reaching the settlement, the SEC took into account the Company’s prompt remedial actions and its cooperation in the investigation. The matter is now completely resolved as to the Company.

9.

SUBSEQUENT EVENTS

     On February 4, 2003, the Company, Remtech Services, Inc. (“Remtech”), and the shareholders of Remtech, (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 Remtech. On February 6, 2003 (the “Closing Date”), the sale was completed. On the Closing Date, the Company acquired all of the outstanding stock of Remtech from the Shareholders. Pursuant to the Agreement, the Company paid cash in the amount of $10,737,500 and issued an unsecured, subordinated promissory note in the amount of $1,800,000 (the “Note”) to the Shareholders in consideration of the sale of all the outstanding shares of common stock of Remtech (the “Shares”). The purchase price was determined by arms’ length negotiation between the parties, taking into account the historical operating results and existing customer relationships of Remtech’s business. The Company obtained financing for part of the cash consideration paid pursuant to the Agreement by (a) a term loan of approximately $7,700,000 and (b) borrowing approximately $3,000,000 under the Company’s existing revolving loan. The Company funded the balance of the cash consideration from working capital. The borrowing base under the existing revolving loan was increased by approximately $3.7 million by virtue of adding Remtech’s accounts receivable to the Company’s borrowing base.

     On February 10, 2003, the Company issued a press release announcing it has entered into a non-binding letter of intent to acquire another government information technology professional services company. The acquisition is subject to completion of due diligence, negotiation of a definitive agreement, and obtaining board approval.

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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

     The Company is a leading provider of information technology (“IT”) management and technical services to state and local governments and commercial enterprises. The Company’s services consist of (1) consulting, which entails the evaluation, design and re-engineering of computer systems, system development and integration, management, quality assurance and technical directions for IT projects, network planning and implementation, and functional expertise and training; (2) outsourcing, which involves systems maintenance, data center management, help desk and technical services; and (3) professional staffing, which includes providing skilled IT staff on an as-needed basis.

     The Company’s performance in the first nine months of fiscal 2003 reflects the dramatic change in its strategic direction that occurred in fiscal 2001. The Company’s growth from fiscal 1997 through fiscal 2000 was driven largely through acquisitions, diversification, and attempts at cross-selling services. In fiscal 2001, the Company began to focus its operational, capital, and management resources on its core competencies of providing IT consulting, outsourcing, and professional staffing services (the “core operations”). In the third quarter and the first nine months of fiscal 2003, the Company’s revenue from core operations, on which the Company’s management intends to focus its future efforts, was $19.1 million and $62.5 million, respectively. Professional staffing, outsourcing, and consulting accounted for 72%, 16%, and 12%, respectively, and 74%, 11% and 15%, respectively, of the Company’s revenue from core operations in the third quarter and first nine months of fiscal 2003.

     After the end of the third quarter of fiscal 2003, the Company acquired all of the outstanding stock of Remtech and announced that it had entered into a non-binding letter of intent to acquire another government information technology professional services company. The acquisition of Remtech and the proposed additional acquisition are discussed in the Liquidity section below. These acquisitions will enable the Company to increase its outsourcing and consulting business and to broaden its customer base to include agencies of the federal government.

     Beginning in fiscal 2001 and continuing through fiscal 2002, the Company disposed of several under-performing 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”). The Company sold its Technology Management Resources, Proven Technology, and Global Services business units in fiscal 2001 and its Enterprise Resource Planning, Delta Software, and Partners Capital Group business units in fiscal 2002. The Company completed the sale of Partners Capital Group, its last non-core operation, on April 1, 2002, and thus had no revenue from non-core operations in the first nine months of fiscal 2003.

     The Company’s fiscal year extends from May 1 through the following April 30. The Company generally recognizes revenue as services are performed.

Results of Operations

     Comparison of Third Quarter of Fiscal 2003 to Third Quarter of Fiscal 2002

     Revenue and Income from Operations. The Company’s operations in the third quarter of fiscal 2003 consisted only of core operations, as all non-core operations had been disposed of by April 1, 2002. Overall revenue decreased 22% to $19.1 million in the third quarter of fiscal 2003 from $24.6 million in the third quarter of fiscal 2002. Overall income from operations decreased 7% to $0.8 million in the third quarter of fiscal 2003 from $0.9 million in the third quarter of fiscal 2002.

     Revenue from core operations decreased 18% to $19.1 million in the third quarter of fiscal 2003 from $23.4 million in the third quarter of fiscal 2002. Professional staffing revenue decreased $2.4 million for the quarter due primarily to a 21% decrease in average billable headcount caused by reductions in spending on information technology projects by the Company’s existing and potential customers. Revenue from consulting and outsourcing

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declined $1.0 million and $0.8 million for the quarter, respectively, due mainly to fewer consulting projects. Income from core operations decreased 26% to $2.6 million in the third quarter of fiscal 2003 from $3.5 million in the third quarter of fiscal 2002.

     Revenue from non-core operations decreased to zero in the third quarter of fiscal 2003 from $1.3 million in the third quarter of fiscal 2002. The revenue from non-core operations in the third quarter of fiscal 2002 consisted of $0.1 million from the Delta Software business unit, which was sold on February 28, 2002 and $1.2 million from the Partners Capital Group business unit, which was sold on April 1, 2002. Since April 1, 2002, the Company has had no non-core operations and thus no revenue or income attributable thereto.

     Corporate Expenses. Corporate expenses decreased 36% to $1.8 million in the third quarter of fiscal 2003 from $2.8 million in the third quarter of fiscal 2002. The decrease in corporate expenses was due in part to the recognition of a $250,000 collection of an insurance claim for legal fees previously expensed by the Company, management’s cost-reduction efforts, which primarily focused on salaries and travel-related expenses, and reduced professional fees for the SEC investigation. The decrease in corporate expenses was 27% excluding the $250,000 insurance claim.

     Interest Expense. Net interest expense decreased 49% to $0.2 million in the third quarter of fiscal 2003 from $0.4 million in the third quarter of fiscal 2002 due primarily to the reduction in the Company’s bank debt and a decline in interest rates.

     Tax Rate. The effective tax rate for the third quarters of fiscal 2003 and 2002 was 39.5%.

     Comparison of First Nine Months of Fiscal 2003 to First Nine Months of Fiscal 2002

     Revenue and Income from Operations. The Company’s operations in the first nine months of fiscal 2003 consisted only of core operations, as all non-core operations had been disposed of by April 1, 2002. Overall revenue decreased 23% to $62.5 million in the first nine months of fiscal 2003 from $81.0 million in the first nine months of fiscal 2002. Overall income from operations decreased 20% to $2.8 million in the first nine months of fiscal 2003 from $3.5 million in the first nine months of fiscal 2002.

     Revenue from core operations decreased 17% to $62.5 million in the first nine months of fiscal 2003 from $75.7 million in the first nine months of fiscal 2002. Professional staffing revenue decreased $8.0 million for the first nine months due primarily to a 18% decrease in average billable headcount caused by reductions in spending on information technology projects by the Company’s existing and potential customers and a three-day work stoppage on the State of Tennessee project resulting from a temporary shutdown of non-essential government services due to state budgetary constraints, which were partially offset by a 1.4% increase in average billing rate. Revenue from consulting and outsourcing declined $3.5 million and $1.4 million for the first nine months, respectively, due primarily to fewer consulting projects. Income from core operations decreased 25% to $8.8 million in the first nine months of fiscal 2003 from $11.7 million in the first nine months of fiscal 2002.

     Revenue from non-core operations decreased to zero in the first nine months of fiscal 2003 from $5.3 million in the first nine months of fiscal 2002. The revenue from non-core operations in the first nine months of fiscal 2002 consisted of $1.7 million from the Enterprise Resource Planning business unit, which was sold on June 20, 2001; $0.1 million from the Delta Software business unit, which was sold on February 28, 2002; and $3.5 million from the Partners Capital Group business unit, which was sold on April 1, 2002. Since April 1, 2002, the Company has had no non-core operations and thus no revenue or income attributable thereto.

     Corporate Expenses. Corporate expenses decreased 28% to $6.0 million in the first nine months of fiscal 2003 from $8.4 million in the first nine months of fiscal 2002. The decrease in corporate expenses was due in part to the recognition of a $250,000 insurance claim for legal fees previously expensed by the Company, a $361,000 recovery of a previously written off bad debt, management’s cost-reduction efforts, which primarily focused on salaries and travel-related expenses, and reduced professional fees for the SEC investigation. The decrease in corporate expenses was 21% excluding the $250,000 recognition of an insurance claim receivable for legal fees expensed by the Company and the $361,000 bad debt recovery.

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     Interest Expense. Net interest expense decreased 49% to $0.8 million in the first nine months of fiscal 2003 from $1.5 million in the first nine months of fiscal 2002 due primarily to the reduction in the Company’s bank debt and a decline in interest rates.

     Tax Rate. The effective tax rate for first nine months of fiscal 2003 and 2002 was 39.5%.

Reliance Upon Government Contracting and Significant Customers

     During the third quarter and the first nine months of fiscal year 2003, the Company performed IT services for customers in two distinct markets: state and local governments, and commercial enterprises. In the first nine months of fiscal 2003 and 2002, approximately 63% and 62%, respectively, of the Company’s revenue was attributable to state and local governments, with the balance being attributable to commercial enterprises. The Company is a leading provider of IT services to state and local governments in the United States of America.

     While the Company currently provides IT services for over 150 clients, it earns a significant portion of its revenue from relatively few customers. The Company’s top five revenue-generating customers in the first nine months of fiscal 2003 accounted for 55% of its revenue, an increase from 54% in the first nine months of fiscal 2002. In the first nine months of fiscal 2003, the following customers accounted for 10% or more of the Company’s revenue: State of Tennessee (18%), State of Kentucky (15%), and Honeywell International Inc. (12%). One customer, Honeywell International Inc., accounted for 81% of the Company’s revenue from outsourcing operations, a decrease from 82% of outsourcing revenue in the first nine months of fiscal 2002. The foregoing concentrations expose the Company to a greater degree of risk of loss than would be the case with greater diversification. Although the Company from time to time has substantial accounts receivable from its top five clients, the Company has not experienced any significant payment problems from these clients. The Company believes that its length of tenure with and historical renewal rates for its contracts with these top five customers help to reduce the Company’s risk of reliance upon significant customers. A material decrease in the services provided to any of the largest clients, however, would have an adverse impact on the Company’s financial condition and results of operations.

Liquidity and Capital Resources

     Debt. During the first nine months of fiscal 2003, the Company reduced its debt 65% to $5.0 million at January 31, 2003 from $14.6 million at April 30, 2002. The debt reduction reflects the Company’s ongoing repayment of its funded debt.

     The Company has a five-year, $27.5 million credit facility with a financial institution that consists of a $17.5 million revolving loan (the “revolving loan”) and a $10.0 million term loan (the “primary term loan”). 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 January 31, 2003. The Company also has a three-year, $4.0 million term loan with another financial institution (the “secondary term loan”).

     The interest rate on borrowings under the revolving loan is prime plus a margin of 1.0%. At January 31, 2003, the effective annual interest rate under the revolving loan was 5.25%. At January 31, 2003, $1.4 million was outstanding on the revolving loan. The amount available for borrowing under the revolving loan is limited to 85% of billed accounts receivable plus 70% of unbilled accounts receivable. At January 31, 2003, $5.6 million was available for borrowing under the revolving loan.

     The interest rate on borrowings under the primary term loan is prime plus a margin of 2.25%. At January 31, 2003, the effective annual interest rate under the primary term loan was 6.5%. The Company is amortizing the primary term loan at the rate of $350,000 of principal plus accrued interest per month. At January 31, 2003, $1.8 million was outstanding under the primary term loan.

     The interest rate on borrowings under the secondary term loan is prime plus a margin of 2.0%. At January 31, 2003, the effective annual interest rate under the secondary term loan was 6.25%. The Company is amortizing the secondary term loan at the rate of $70,000 of principal plus accrued interest per month. At January 31, 2003, $1.8 million was outstanding under the secondary term loan.

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     At January 31, 2003, the Company had $36,021 outstanding under a promissory note that bears interest at 11.0% and is due in fiscal 2004. The loan is secured by computer software.

     As discussed under “Acquisitions”, the Company’s debt increased by approximately $12.5 million on February 6, 2003 due to the Company’s purchase of all the outstanding stock of Remtech Services, Inc.

     Capital Expenditures. The Company’s capital expenditures in the first nine months of fiscal 2003 primarily relate to computer equipment purchases for use by the Company’s professionals and on outsourcing projects. Capital expenditures increased 56% to $288,000 in the first nine months of fiscal 2003 from $185,000 in the first nine months of fiscal 2002. The Company does not expect to incur substantial capital expenditures in the remainder of fiscal 2003 except to the extent required for new or revised outsourcing engagements. The Company is currently negotiating the extension of an outsourcing contract, which could result in a significant capital expenditure of $7-11 million during the remainder of fiscal 2003. The Company believes that this potential capital expenditure will be financed through equipment leasing arrangements.

     Dispositions of Non-Core Operations. The Company began disposing of its non-core operations in fiscal 2001 and completed the process in fiscal 2002. The sales of non-core business units that occurred in fiscal 2002 are described below.

     On June 20, 2001, the Company sold substantially all the assets of its Enterprise Resource Planning business unit for $9.1 million in cash plus the assumption of certain related liabilities. The Company used $8.5 million of the sale proceeds to reduce its debt and $0.6 million for working capital and to pay expenses related to the transaction.

     On February 28, 2002, the Company sold substantially all the assets of its Delta Software business unit, which was engaged in specialty software sales, for the assumption of certain related liabilities.

     On April 1, 2002, the Company sold certain assets relating to its Partners Capital Group business unit, which was engaged in computer equipment leasing, for $60,000 in cash plus the assumption of certain related liabilities, including $4.6 million of non-recourse debt.

     Acquisitions. On February 4, 2003, the Company, Remtech Services, Inc. (“Remtech”), and the shareholders of Remtech, (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 Remtech. On February 6, 2003 (the “Closing Date”), the sale was completed. On the Closing Date, the Company acquired all of the outstanding stock of Remtech from the Shareholders. Pursuant to the Agreement, the Company paid cash in the amount of $10,737,500 and issued an unsecured, subordinated promissory note in the amount of $1,800,000 (the “Note”) to the Shareholders in consideration of the sale of all the outstanding shares of common stock of Remtech (the “Shares”). The purchase price was determined by arms’ length negotiation between the parties, taking into account the historical operating results and existing customer relationships of Remtech’s business. The Company obtained financing for part of the cash consideration paid pursuant to the Agreement by (a) a term loan of approximately $7,700,000 and (b) borrowing approximately $3,000,000 under the Company’s existing revolving loan. The Company funded the balance of the cash consideration from working capital. The borrowing base under the existing revolving loan was increased by approximately $3.7 million by virtue of adding Remtech’s accounts receivable to the Company’s borrowing base.

     On February 10, 2003, the Company issued a press release announcing it has entered into a non-binding letter of intent to acquire another government information technology professional services company. The acquisition is subject to completion of due diligence, negotiation of a definitive agreement, and obtaining board approval.

     Working Capital. At January 31, 2003, the Company had working capital of $5.0 million (including $45,000 in cash and cash equivalents), an 11% decrease from $5.6 million at April 30, 2002. The decrease in working capital is attributable primarily to the Company’s use of available cash to reduce the outstanding balance of the revolving loan.

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     The Company generated net cash from operating activities of $9.9 million in the first nine months of fiscal 2003, a 40% increase from $7.1 million in the first nine months of fiscal 2002. The increase in net cash provided by operating activities was mainly attributable to an increase in payments received for accounts receivable and income tax refunds, as well as a decrease in cash due to a pay down of accrued expenses.

     Stock Repurchase Program. On September 10, 2002, the Company’s board of directors approved a stock repurchase program that authorizes the Company to repurchase up to $3.0 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 Company may discontinue the stock repurchase program at any time.

     Under its loan agreement, the Company can repurchase shares with a total cost up to 50% of the prior quarter’s “excess cash flow” as defined in the loan agreement, provided that the Company’s excess availability under the loan agreement exceeds $4.0 million after the repurchase.

     During the three and nine month periods ended January 31, 2003, the Company purchased 44,900 and 553,900 shares of its common stock, respectively, for a combined cost of $33,400 and $373,464, respectively. The cost of the shares purchased was recorded as treasury stock, which reduces the amount of total shareholders’ equity.

     Future Liquidity Requirements. Although it is difficult to predict the Company’s future liquidity requirements, the Company believes that its current cash and cash equivalents, anticipated cash flows from operations, and available borrowings under its credit facility will be sufficient for the foreseeable future to fund the Company’s working capital requirements and operations, make required payments of principal and interest on its debt, and permit anticipated capital expenditures.

     As discussed under “Stock Repurchase Program,” the Company will potentially repurchase shares of its common stock from time to time in the open market and through privately negotiated transactions based on the prevailing market conditions, the availability of cash to fund the repurchases, and other relevant factors. At the beginning of each quarter, based upon the prior quarter’s financial performance, the Company will assess its ability to repurchase shares. Based upon current information, the Company cannot repurchase more than $214,000 in common stock during the fourth quarter ended April 30, 2003.

     As discussed under “Capital Expenditures,” the Company is currently negotiating an extension to an outsourcing contract, which could result in a significant capital expenditure of $6-8 million during the remainder of fiscal 2003. The Company believes that this potential capital expenditure will be financed through equipment leasing arrangements.

     As discussed under “Acquisitions”, since the end of the third quarter the Company has acquired Remtech and has entered into a non-binding letter of intent to acquire another government information technology professional services company. The Company financed the acquisition of Remtech through borrowings under the Company’s existing credit facility. If the proposed additional acquisition is consummated, the Company intends to finance the acquisition through its existing credit facility.

Significant Accounting Policies

     The following accounting policies could have the most significant impact on the Company’s operations from period to period.

     Revenue Recognition. The Company recognizes revenue as professional services are performed. The Company is compensated for its services on either a time and materials, fixed fee per month, or fixed fee per project basis.

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     Generally, the Company’s contracts with its top ten clients, in accordance with industry practice, are cancelable on short notice and without penalty (except with respect to the Company’s larger outsourcing contracts), provide for the monthly payment of fees, and establish other basic terms such as the hourly billing rates for each type of Company professional who performs work pursuant to the contract. Some contracts specifically define the services to be performed pursuant to the contract, while other contracts, particularly professional staffing contracts, merely establish the basic parameters of the work (i.e., the system to be evaluated, designed or maintained) and require that additional work orders be submitted for services to be performed. The Company is the exclusive service provider under certain contracts, while other contracts, particularly professional staffing contracts, specifically allow the client to engage other vendors for the projects covered by the contract.

     The majority of the Company’s revenue is billed on a time and materials basis. Some time and materials contracts contain a cap on the number of hours to be worked, in which case the hours are monitored to help prevent exceeding the cap.

     Currently, less than 10% of the Company’s revenue is performed on a fixed fee per project basis. In instances where the Company accepts an engagement on a fixed fee per project basis, the Company records revenue on a percentage of completion basis. The Company’s agreement with the client calls for the billing of fees at specified increments not directly related to the timing of costs incurred. 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.

     Income Taxes. The Company accounts for income taxes using the liability method. Under the liability method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the period that includes the enactment date. Deferred tax assets are reduced by a valuation allowance if, based on the weight of available evidence, management determines that it is more likely than not that some portion or all of the deferred tax assets will not be realized. The deferred tax asset valuation allowance is based primarily on management’s calculations of estimated probable future taxable income over the next several years. Management considers income taxes to be one of the Company’s significant accounting policies because of the large amount of the deferred tax asset relative to the consolidated balance sheet of the Company and because of the estimates and judgment required in predicting probable future taxable income.

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Item 3.   Quantitative and Qualitative Disclosures about Market Risks

     The Company’s primary market risks include fluctuations in interest rates and variability in interest rate spread relationships (i.e., prime or LIBOR spreads). Substantially all of the Company’s $5.0 million in outstanding debt at January 31, 2003, relates to credit facilities with commercial lending institutions. Interest on the outstanding balances is charged based on variable rates related to the prime rate. The rates are incremented for margins in the form of fluctuations in interest rates. The effect of a hypothetical one percentage point increase across all maturities of variable rate debt would result in a decrease of $50,000 in pre-tax net income assuming no further changes in the amount of borrowings subject to variable rate interest from the amounts outstanding at January 31, 2003. The Company does not trade in derivative financial instruments.

Item 4.   Controls and Procedures

     Within the 90 days prior to the date of the filing of this report, the Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures, as defined in Exchange Act Rules 13a-14(c) and 15d-14(c). Based upon that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures are effective in enabling the Company to record, process, summarize and report information required to be disclosed in the Company’s periodic filings with the Securities and Exchange Commission within the required time period. There have been no significant changes in the Company’s internal controls or in other factors that could significantly affect internal controls subsequent to the date the Company carried out its evaluation.

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PART II – OTHER INFORMATION

Item 1.   Legal Proceedings

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

Item 6.   Exhibits and Reports on Form 8-K

     (a)   Exhibits

     The exhibits listed in the Exhibit Index following the signature page hereof are filed as part of this report or are incorporated herein by reference.

     (b)   Reports on Form 8-K

No report on Form 8-K was filed by the Company during the fiscal quarter ended January 31, 2003.

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SIGNATURES

     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.

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CERTIFICATIONS

Certification
pursuant to and in connection with the
Quarterly Reports on Form 10Q
to be filed under Sections 13 and 15(d) of the Securities Exchange Act of 1934, as amended

I, T. Scott Cobb, President and Chief Executive Officer, certify that:

     1.    I have reviewed this quarterly report on Form 10-Q of SCB Computer Technology, Inc.;

     2.    Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

     3.    Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

     4.    The registrant’s other certifying officers and I are responsible for reestablishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

a)      designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

b)      evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and

c)      presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

     5.    The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):

a)      all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

b)      any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

     6.    The registrant’s other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

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Certification
pursuant to and in connection with the
Quarterly Reports on Form 10Q
to be filed under Sections 13 and 15(d) of the Securities Exchange Act of 1934, as amended

I, Michael J. Boling, Executive Vice President, Chief Financial Officer, and Treasurer certify that:

     1.     I have reviewed this quarterly report on Form 10-Q of SCB Computer Technology, Inc.;

     2.     Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

     3.     Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

     4.     The registrant’s other certifying officers and I are responsible for reestablishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

a)      designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

b)      evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and

c)      presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

     5.     The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):

a)      all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

b)      any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

     6.     The registrant’s other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

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EXHIBIT INDEX

E1-1