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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

     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.

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SCB COMPUTER TECHNOLOGY, INC.

QUARTERLY REPORT ON FORM 10-Q

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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.

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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 (unaudited).

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SCB COMPUTER TECHNOLOGY, INC.

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

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

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SCB COMPUTER TECHNOLOGY, INC.

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

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

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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 (unaudited).

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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 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):

3.     STOCK-BASED COMPENSATION

The Company grants stock options for a fixed number of shares to employees and directors with an exercise price equal to the fair value of the shares at the date of grant. The Company accounts for stock option grants in accordance with Accounting Principles Board (“APB”) Opinion No. 25, Accounting for Stock Issued to Employees, and accordingly recognizes no compensation expense for the stock option grants. In accordance with SFAS No. 123, Accounting for Stock-Based Compensation, a valuation using the fair-value-based accounting method has been made for stock options and accordingly pro forma net income and earnings per share are shown below For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options’ vesting period. The fair value for the options was estimated at the date of grant using a Black-Scholes option pricing model with the following weighted average assumptions for fiscal 2003 and 2002, respectively: risk-free interest rates of 4.50 percent and 5.00 percent; no dividend yield, volatility factors of the expected market price of the Company’s common stock of .866 and .959 and a weighted average expected life of the option of five years. The Company’s pro forma information follows (in thousands, except earnings per share):

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4.     ACQUISITION

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 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.

The acquired business provides information technology support services primarily to the federal government, which was one of the primary reasons for the acquisition. As part of this acquisition, 253 employees joined SCB. Approximately $5.5 million of the purchase consideration has been preliminarily allocated to goodwill, based upon the excess of the purchase price over the $8.2 million estimated fair value of net tangible assets and the $2.9 million assigned to identifiable intangible assets acquired. The Company is amortizing these intangible assets over a period of three to nine years. NSR contributed revenue of $4.1 million for the period from September 1, 2003 to October 31, 2003. The following condensed balance sheet discloses the amount assigned to each major assets and liabilities of NSR at the acquisition date (in thousands):

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Pro Forma Information (unaudited)

The following unaudited pro forma combined condensed statements of operations set forth the consolidated results of operations of the Company for the three months and six months ended October 31, 2003 and 2002 as if the above-mentioned acquisition and the Remtech Services, Inc. acquisition both had occurred on May 1, 2002. This unaudited pro forma information does not purport to be indicative of the actual results that would actually have occurred if the combinations had been in effect for the years ended October 31 (in thousands):

5.     INTANGIBLE ASSETS

Intangible assets resulted from the Company’s acquisitions of Remtech Services, Inc. (“RSI”) during the year ended April 30, 2003 and NSR during the quarter ended October 31, 2003. The intangible assets identified during the Company’s valuation of RSI and NSR net assets at the dates of acquisition include purchased customer contracts and non-compete agreements. These intangible assets are being amortized over 3 to 9 years with 6.8 years being the weighted average amortization period. No residual value has been assigned to these identifiable intangible assets. Amortization expense was $391,000 and $681,000 for the three-month and six-month periods ended October 31, 2003, respectively. Amortization expense for all of the Company’s intangible assets from the RSI acquisition is deductible for Federal income tax purposes using the straight-line method over a fifteen-year amortization period. Amortization expense for the Company’s intangible assets from the NSR acquisition is not deductible for Federal income tax purposes. Intangible assets consisted of the following at October 31, 2003 (in thousands):

6.     LONG-TERM DEBT

At the beginning of the second fiscal quarter of 2004, the Company had a $27.5 million credit facility (the “Credit Facility”) that consisted of a $17.5 million revolving loan and a $10.0 million term loan with one financial institution. The Credit Facility was secured by substantially all the Company’s assets and contained various financial and other covenants. Additionally, the Company had a $7.3 million term loan (“Term Loan D”) with a

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second financial institution and a three-year, $4.0 million term loan (“Term Loan C”) with a third financial institution.

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 Credit Facility and Term Loan D. The Senior Credit Facility consists of a $17.5 million revolving loan (the “Senior Revolving Loan”), a $5.6 million term loan (“Term Loan A”) and a $6.9 million term loan (“Term Loan B”). The Senior Credit Facility is secured by substantially all the Company’s assets and contains various financial and other covenants including a minimum fixed charge ratio, a minimum asset coverage ratio and a funded debt to EBITDA ratio. The Company was in compliance with these loan covenants at October 31, 2003.

The Company enters into derivative instruments to hedge variable interest payments on certain debt instruments utilizing interest-rate swaps to convert the variable payments into fixed payments. On the date on which the derivative contract is executed, the Company designated the derivatives a cash flow hedges. Changes in derivative fair value that are designated as cash flow hedges are deferred and recorded as a component of accumulated other comprehensive income until the hedged transactions occur and are recognized in earnings. The ineffective portion of a hedging derivative’s change in fair value is immediately recognized in earnings. The Company formally documents all relationships between hedging instruments and hedged items, as well as its risk management objectives and strategies for undertaking various hedge transactions. The Company assesses, both at the inception of the hedge and on an on-going basis, whether the derivatives that are used in hedging transactions are highly effective in offsetting changes in cash flows of hedged items.

The Company uses derivative financial instruments to reduce the impact of changes in interest rates on its earnings and cash flow. The Company enters into derivative financial contracts based on analysis of specific and known economic exposures and by policy prohibits holding or issuing derivative financial instruments for trading or speculative purposes. The Company is a party to two interest rate swaps as discussed below on Term Loan A and Term Loan B.

The interest rate on borrowings under the Senior Revolving Loan is LIBOR plus a margin of 2.5%. At October 31, 2003, the effective annual interest rate under the Revolving Loan was 3.62%. At October 31, 2003, approximately $4.1 million was available for borrowing under the Senior Revolving Loan.

The interest rate on borrowings under Term Loan A is LIBOR plus a margin of 2.5%. The Company entered into an interest-rate swap to reduce the impact of changes in interest rates on Term Loan A. Under the terms of the interest-rate swap the Company receives interest payments based on LIBOR plus a margin of 2.5% on a notional amount equal to the balance of Term Loan A and pays interest at an effective annual fixed rate of 4.31%. Term Loan A requires principal payments of $700,000 plus accrued interest per quarter.

The interest rate on borrowings under Term Loan B is LIBOR plus a margin of 2.5%. The Company entered into an interest-rate swap to reduce the impact of changes in interest rates on Term Loan B. Under the terms of the interest-rate swap the Company receives interest payments based on LIBOR plus a margin of 2.5% on a notional amount equal to the balance of Term Loan B and pays interest at an effective annual fixed rate of 4.76%. Term Loan B requires principal payments of $181,579 plus accrued interest monthly.

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

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Future maturities related to long-term debt as of October 31, 2003 are as follows (in thousands):

7.     SEGMENT INFORMATION

Beginning in the first quarter of fiscal 2004, the Company began operating 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 the three months and six months ended October 31, 2003 and 2002 (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. Corporate services, consisting of general and administrative services, are provided to the segments from a centralized location. In addition, substantially all of the sales and recruiting workforce are included in the Corporate income from operations.

8.     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 six-month period ended October 31, 2003. As of October 31, 2003, the Company has 699,800 shares of its common stock held as treasury shares.

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9.     RELATED-PARTY TRANSACTIONS

In the second quarter and first six months of fiscal 2004, the Company paid IT Resources Solutions.net, Inc. (“ITRS”), a minority owned business, $18,000 and $36,000, respectively, for marketing and management services in the northeastern United States, $0 and $4,109, 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 $6,504 and $9,676, respectively, for contract labor used on the Company’s projects. Kenneth J. Cobb, the son of T. Scott Cobb, is a shareholder of ITRS.

10.     LITIGATION AND LEGAL PROCEEDINGS

On October 13, 2003, the Company filed suit in state court in Frankfort, Kentucky against the Commonwealth of Kentucky and three vendors, Cook Systems International, Inc., Ajilon LLC d/b/a Ajilon Consulting, and Adecco USA d/b/a Adecco Technical, seeking review of service agreements awarded to these vendors by the Commonwealth of Kentucky for the state’s information technology systems designs and development services. Subsequently, the complaint was amended to include three additional vendors, Pomeroy IT Solutions, Inc., Keane, Inc., and EER Systems, Inc., which were also awarded service agreements under the bid solicitation for information technology systems designs and development services.

On December 9, 2003, a purported class action lawsuit was filed against the Company in the United States District Court for the Western District of Tennessee. The complaint alleges that the Company violated certain provisions of the Federal Labor Standards Act (FLSA) by failing to pay certain salaried computer professionals on a salary basis. The plaintiffs allege the Company failed to pay these employees the wages to which they were entitled under the FLSA and seeks monetary damages, injunctive relief and cost of litigation, including attorney fees. The Company intends to vigorously defend itself against the allegations.

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.

11.     PROPOSED AGREEMENT AND PLAN OF MERGER

On October 24, 2003, the Company entered into a definitive agreement to be acquired by CIBER, Inc. of Greenwood Village, Colorado. Under the terms of the definitive agreement, a CIBER subsidiary would merge into SCB in exchange for consideration with an aggregate value of $2.15 for each share of SCB common stock. Pursuant to the definitive agreement, $1.08 of the merger consideration will be paid in cash and $1.07 in equivalent value in common stock in CIBER, unless CIBER elects to pay a greater percentage of the merger consideration in cash. SCB would become a wholly owned subsidiary of CIBER. The boards of directors of SCB and CIBER have each approved the transaction. The offer is subject to SCB shareholders approval. SCB expects to issue a proxy statement to its shareholders seeking approval of the transaction in a special meeting expected to be held during the first calendar quarter of 2004. The arrangement with CIBER includes lockup agreements with shareholders representing approximately 20 percent of SCB shares. A vote by the shareholders of CIBER is not required for consummation of this transaction. If the SCB shareholders approve the merger, consummation of the transaction should occur shortly thereafter.

12.     NEW ACCOUNTING PRONOUNCEMENTS

In June 2001, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting standards (“SFAS”) No. 143, “Accounting for Asset Retirement Obligations” effective for fiscal years beginning after June 15, 2002. SFAS 143 requires that a liability for an asset retirement obligation be recognized in the period in which it is incurred if a reasonable estimate of fair value can be made. The adoption of SFAS 143 in the first quarter of fiscal 2004 did not have a material effect on it’s the Company’s financial position or results of operations.

In April 2002, the FASB issued SFAS No. 145, “Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections.” SFAS 145 rescinds SFAS 4, “Reporting Gains and Losses from Extinguishment of Debt,” which required all gains and losses from extinguishment of debt to be aggregated and, if material, classified as an extraordinary item, net of the related income tax effect. As a result, the criteria in Accounting Principles Board Opinion No. 30 will now be used to classify those gains and losses. SFAS 145 amends SFAS No. 13, “Accounting for Leases,” to require that certain lease modifications that have economic effects similar to sales-leaseback transactions be accounted for in the same manner as sale-leaseback transactions. The provisions of SFAS 145 became effective during the Company’s first quarter of 2004. Accordingly, the loss on extinguishment of debt recorded by the Company in the second quarter of fiscal 2004 was not classified as extraordinary.

In April 2003, the FASB issued SFAS No. 149, “Amendment of Statement 133 on Derivative Instruments and Hedging Activities” that amends and clarifies accounting for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities under Statement 133. With certain exceptions, SFAS 149 is effective for contracts entered into or modified after June 30, 2003, and for hedging relationships designed after June 30, 2003. The adoption of this statement has not had a material effect on the Company’s financial position or results of operations.

In May 2003 the FASB issued SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity,” that improves the accounting for certain financial instruments that, under previous guidance, issuers could account for as equity. SFAS 150 requires that three instruments be classified as liabilities in the statement of financial position. The Statement is effective for financial instruments entered into or modified after May 31, 2003, and otherwise effective at the beginning of the first interim period beginning after June 15, 2003, except for mandatory redeemable financial instruments of nonpublic entities. The Statement is to be implemented by reporting the cumulative effect of a change in accounting principle for financial instruments created before the issuance of the date of the Statement and still existing at the beginning of the interim period of adoption. Restatement is not permitted. On November 7, 2003, the FASB deferred the classification and measurement provisions of FASB No. 150 as they apply to certain mandatory redeemable non-controlling interests. This deferral is expected to remain in effect while these provisions are further evaluated by the FASB. The adoption of this statement is not expected to have a material effect on the Company’s financial position or results of operations.

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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

     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 1, 2003 and its second acquisition under the plan of National Systems & Research Co. (“NSR”) which closed on August 29, 2003 and was funded on September 4, 2003.

     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 and first six months of fiscal 2004 and 2003, the Company’s revenue from professional staffing, outsourcing, and consulting accounted for the following percentages of total revenue:

     The Company’s strategy of expanding its business in the government consulting sector into Federal contracting has produced both benefits and risks to the Company. Management believes that the success of the strategy is demonstrated by increased shareholder value and further definition of the Company as a market leader in the area of government information technology consulting and solutions. This has produced a much greater concentration of the business of the Company in the government consulting sector, and has increased the Company’s reliance on contracts cancelable on short notice with federal, state and local government customers which are subject to budgetary restraints. Because a portion of this strategy utilized acquisitions, the Company’s long term debt level under its credit facility has increased from $5,031,000 as of January 31, 2003, prior to the RSI acquisition, to $24,071,000 as of October 31, 2003. Management is aggressively managing each of these areas. As an example, a senior member of Company Management is assigned to each large customer of the Company in order to give personal attention to management of the relationship. Management believes that its aggressive management of these and other risks will enable the Company to realize the full value attainable from its government contracting strategy.

     During the second quarter and first six months of fiscal 2004, the Company performed IT services for customers in three distinct markets as discussed above: state and local governments, agencies of the U.S. Federal government

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and commercial enterprises. In the first quarter and first six months of fiscal 2004 and 2003, the Company’s revenue from these three markets accounted for the following percentages of total revenue:

     The Company believes that it is a leading provider of IT services to state and local governments in the U.S. and this strong presence in that market creates a competitive advantage and market differentiator for the Company.

     The Company’s fiscal year extends from May 1 through the following April 30. The Company’s third fiscal quarter ending January 31, in which the number of holidays and vacation days reduces employees’ billable hours, generally produces lower revenue and profitability in comparison to the other three fiscal quarters. The Company generally recognizes revenue as services are performed.

     On October 24, 2003, the Company entered into a definitive agreement to be acquired by CIBER, Inc. of Greenwood Village, Colorado. Under the terms of the definitive agreement, a CIBER subsidiary would merge into SCB in exchange for consideration with an aggregate value of $2.15 per SCB share of common stock. Pursuant to the definitive agreement, $1.08 of the merger consideration will be paid in cash and $1.07 in equivalent value in common stock in CIBER, unless CIBER elects to pay a greater percentage of the merger consideration in cash. SCB would become a wholly owned subsidiary of CIBER. The boards of directors of SCB and CIBER have each approved the transaction. The offer is subject to SCB shareholders’ approval. SCB expects to issue a proxy statement to its shareholders seeking approval of the transaction in a special meeting expected to be held during the first calendar quarter of 2004. The arrangement with CIBER includes lockup agreements with shareholders representing approximately 20 percent of SCB shares. A vote by the shareholders of CIBER is not required for consummation of this transaction. If the SCB shareholders approve the merger, consummation of the transaction should occur shortly thereafter.

Results of Operations

     Comparison of Second Quarter of Fiscal 2004 to Second Quarter of Fiscal 2003

REVENUE AND INCOME FROM OPERATIONS. The Company’s revenue increased 47.6% to $31.8 million in the second quarter of fiscal 2004 from $21.5 million in the second quarter of fiscal 2003. The Company’s revenue in the second quarter of fiscal 2004 was increased $14.9 million from the second quarter of fiscal 2003 due to the acquisitions of RSI and NSR. Absent the acquisitions of RSI and NSR, revenue decreased $4.6 million due to the general decline in the information technology market, employees hired by clients, increased competition for state and local government proposals, and a slight shift in commercial customers outsourcing services to offshore companies.

During the quarter ended October 31, 2003, the Company was notified that it was not awarded a renewal of its State of Kentucky contract. That contract accounted for revenue of $3.1 million and operating income of approximately $0.6 million during the quarter ended October 31, 2003. The Company anticipated the State of Kentucky contract to add approximately $3.0 million in revenue and approximately $0.6 million in operating income during both the third and fourth fiscal quarters of 2004. Additionally, the State of Tennessee has hired 21 of the Company’s billable consultants to become State of Tennessee employees during the quarter ended October 31, 2003.

Excluding the employees that were added as a result of the RSI and NSR acquisitions, the Company’s average billable headcount decreased 24.3% to 455 from 601 in the second quarter of fiscal 2004 and 2003, respectively. The RSI acquisition added 587 billable employees and the NSR acquisition added 253 billable employees. The Company’s average hourly billing rate for the operations, excluding RSI and NSR, increased 1.4% to $61.91 in fiscal 2004 from $61.07 in fiscal 2003.

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The Company’s gross margin decreased from 25.2% for the second quarter of fiscal 2003 to 23.2% for the second quarter of fiscal 2004 due mainly to the addition of RSI and NSR. Excluding these acquired companies gross profit increased to 26.3% during the second quarter of 2004 from 25.3% during the second quarter of fiscal 2003.

The Company’s income from operations decreased from 5.8% of revenue in the second quarter of fiscal 2003 to 2.9% of revenue in the second quarter of fiscal 2004 due to the acquisition of RSI and NSR.

CORPORATE EXPENSES. The Company’s corporate expenses increased 21.4% to $2.1 million in the second quarter of fiscal 2004 from $1.7 million in the second quarter of fiscal 2003 mainly due to a $361,000 recovery of a previously written off bad debt in the second quarter of fiscal 2003. Excluding this recovery last year, corporate expenses were consistent with the prior year.

NET INTEREST EXPENSE. The Company’s net interest expense increased 55.5% to $0.4 million in the second quarter of fiscal 2004 from $0.3 million in the second quarter of fiscal 2003 due primarily to the debt incurred in connection with the acquisitions of RSI and NSR partially offset by a decline in interest rates on the Company’s Senior Credit Facility.

LOSS ON EXTINGUISHMENT OF DEBT. On August 29, 2003, the Company refinanced its credit facility with one financial institution with another credit facility with lower interest costs with a different financial institution. In connection with this transaction, the Company incurred a loss on extinguishment of debt of $1,985,000 which included a $746,000 prepayment penalty and $1,239,000 in expense related to unamortized debt issuance costs.

TAX RATE. The Company’s effective tax rate for the second quarter of fiscal 2004 and 2003 was 39.5%.

     Comparison of the First Six Months of Fiscal 2004 to the First Six Months of Fiscal 2003

REVENUE AND INCOME FROM OPERATIONS. The Company’s revenue increased 39.3% to $60.4 million in the first six months of fiscal 2004 from $43.3 million in the first six months of fiscal 2003. The Company’s revenue in the first six months of fiscal 2004 was increased $24.8 million from the first six months of fiscal 2003 due to the acquisitions of RSI and NSR. Absent the acquisitions of RSI and NSR, revenue decreased $18.0 million due to the general decline in the information technology market, employees hired by clients, increased competition for state and local government proposals, and a slight shift in commercial customers outsourcing services to offshore companies.

During the quarter ended October 31, 2003, the Company was notified that it was not awarded a renewal of its State of Kentucky contract. That contract accounted for revenue of $6.4 million and operating income of $1.5 million during the six months ended October 31, 2003. The Company anticipated the State of Kentucky contract to add approximately $3.0 million in revenue and approximately $0.6 million in operating income during both the third and fourth fiscal quarters of 2004, respectively. Additionally, the State of Tennessee has hired 31 of the Company’s billable consultants to become State of Tennessee employees during the six months ended October 31, 2003.

Excluding the employees that were added as a result of the RSI and NSR acquisitions, the Company’s average billable headcount decreased 23.8% to 477 from 626 in the first six months of fiscal 2004 and 2003, respectively. The RSI acquisition added 587 billable employees and the NSR acquisition added 253 billable employees. The Company’s average hourly billing rate for the operations, excluding RSI and NSR, decreased 0.4% to $61.37 in fiscal 2004 from $61.65 in fiscal 2003.

The Company’s gross margin decreased from 25.1% for the first six months of fiscal 2003 to 24.1% for the first six months of fiscal 2004 due mainly to the addition of RSI and NSR. Excluding these acquired companies gross profit increased to 27.2% during the first six months of 2004 from 25.1% during the first six months of fiscal 2003.

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The Company’s income from operations increased from 4.6% of revenue in the first six months of fiscal 2003 to 4.7% of revenue in the first six months of fiscal 2004.

CORPORATE EXPENSES. The Company’s corporate expenses increased 4.1% to $4.4 million in the first six months of fiscal 2004 from $4.2 million in the first six months of fiscal 2003 due to a $361,000 recovery of a previously written off bad debt in the second quarter of fiscal 2003. Excluding this recovery last year, corporate expenses decreased 4.1% from the prior year.

NET INTEREST EXPENSE. The Company’s net interest expense increased 50.6% to $0.8 million in the first six months of fiscal 2004 from $0.6 million in the first six months of fiscal 2003 due primarily to the debt incurred in connection with the acquisitions of RSI and NSR partially offset by a decline in interest rates on the Company’s Senior Credit Facility.

LOSS ON EXTINGUISHMENT OF DEBT. On August 29, 2003, the Company refinanced its credit facility with one financial institution with another credit facility with lower interest costs with a different financial institution. In connection with this transaction, the Company incurred a loss on extinguishment of debt of $1,985,000 which included a $746,000 prepayment penalty and $1,239,000 in expense related to unamortized debt issuance costs.

TAX RATE. The Company’s effective tax rate for the first six months of fiscal 2004 and 2003 was 39.5%.

Reliance Upon Government Contracting and Significant Customers

The Company earns a significant portion of its revenue from relatively few customers. In the first quarter of fiscal 2004 and 2003, the Company’s five largest revenue-generating customers accounted for 39% and 57% of its revenue, respectively. The decrease from fiscal 2003 to fiscal 2004 was mainly as a result of the increased revenue from the acquisition of RSI. In the second quarter and first six months of fiscal 2004, the following customer accounted for 10% or more of the Company’s revenue: State of Kentucky (10%). During the quarter ended October 31, 2003, the Company was notified that it was not awarded a renewal of its State of Kentucky contract as discussed above. That contract accounted for revenue of $3.1 million and $6.4 million and operating income of $0.6 million and $1.5 million during the quarter and six months ended October 31, 2003, respectively. The Company anticipated the State of Kentucky contract to add approximately $3.0 million in revenue and approximately $0.6 million in operating income during both the third and fourth fiscal quarters of 2004, respectively. Additionally, the State of Tennessee has hired 21 and 31 of the Company’s billable consultants to become State of Tennessee employees during the quarter and six months ended October 31, 2003, respectively.

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 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 Company had backlog at October 31, 2003 of approximately $323 million from contracts extending over the next nine years, in comparison to approximately $16 million at October 31, 2002. Because the Company’s clients can cancel or reduce the scope of their engagements on short notice, the Company does not believe that backlog is a reliable indication of future business. The Companies backlog significantly increased due to the acquisitions of RSI and NSR. The backlog set forth above excludes any contracts and open work orders the Company has for its Professional Staffing business (which represents approximately 40% of revenue).

Liquidity and Capital Resources

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DEBT. At the outset of the second fiscal quarter of 2004, the Company had a $27.5 million credit facility (the “Credit Facility”) that consisted of a $17.5 million revolving loan, a $10.0 million term loan and a $7.7 million term loan with one financial institution. The Credit Facility was secured by substantially all the Company’s assets and contained various financial and other covenants. Additionally, the Company had a $7.3 million term loan (“Term Loan D”) with a second financial institution and a three-year, $4.0 million term loan (“Term Loan C”) with a third financial institution.

On August 29, 2003, the Company obtained a new senior credit facility (the “Senior Credit Facility”) syndicated through Bank of America, the proceeds of which were used to refinance the Credit Facility and Term Loan D. The Senior Credit Facility consists of a $17.5 million revolving loan which express during November 2005 (the “Senior Revolving Loan”), a $5.6 million term loan (“Term Loan A”) and a $6.9 million term loan (“Term Loan B”). The Senior Credit Facility is secured by substantially all the Company’s assets and contained various financial and other covenants. The Company was in compliance with these loan covenants at October 31, 2003.

The interest rate on borrowings under the Revolving Loan is LIBOR plus a margin of 2.5%. At October 31, 2003, the effective annual interest rate under the Revolving Loan was 3.62%. The amount available for borrowing under the Revolving Loan is limited to 70% of eligible assets as defined in the loan agreement. At October 31, 2003, approximately $4.1 million was available for borrowing under the Revolving Loan.

The interest rate on borrowings under Term Loan A is LIBOR plus a margin of 2.5%. The Company entered into an interest-rate swap to reduce the impact of changes in interest rates on Term Loan A. Under the terms of the interest-rate swap the Company receives interest payments based on LIBOR plus a margin of 2.5% on a notional amount equal to the balance of Term Loan A and pays interest at an effective annual fixed rate of 4.31%. Term Loan A requires principal payments of $700,000 plus accrued interest per quarter.

The interest rate on borrowings under Term Loan B is LIBOR plus a margin of 2.5%. The Company entered into an interest-rate swap to reduce the impact of changes in interest rates on Term Loan B. Under the terms of the interest-rate swap the Company receives interest payments based on LIBOR plus a margin of 2.5% on a notional amount equal to the balance of Term Loan B and pays interest at an effective annual fixed rate of 4.76%. Term Loan B requires principal payments of $181,579 plus accrued interest monthly.

On July 3, 2003, outstanding warrants to purchase 220,000 shares of common stock at an exercise price of $1.00 were exercised in a non-cash transaction. The Company issued 87,230 shares of its common stock in exchange for the warrants to purchase 220,000 shares of common stock. On August 29, 2003, in connection with the Company’s new Senior Credit Facility the Company amended warrants to purchase 250,000 shares of common stock previously granted to one of the participating lenders in the Senior Credit Facility by extending the expiration date of these warrants from January 1, 2004 to January 2007. At October 31, 2003, the Company has outstanding warrants to purchase the aforementioned 250,000 shares of common stock and 160,000 shares at an exercise price of $0.68, which expire on July 23, 2007.

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