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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

Form 10-Q

Commission File No. 0-27694
_______________

SCB COMPUTER TECHNOLOGY, INC.
(Exact Name of Registrant as Specified in its Charter)

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 [x] No [  ]

     At September 3, 2002, there were 24,985,324 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 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; 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.

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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.

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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.

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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 July 31, 2002, and the results of operations and cash flows for the three-month periods ended July 31, 2002 and July 31, 2001. Operating results for the period ended July 31, 2002, 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.

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.  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. The Company was in compliance with these loan covenants at July 31, 2002. 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 originally was prime plus a margin of 1.25%. At July 31, 2002, the effective annual interest rate under the revolving loan was 6.0%. Effective August 1, 2002, the interest rate margin on the revolving loan was reduced to 1.0%, with the effect that as of such date the effective annual interest rate under the revolving loan decreased to 5.75%. At July 31, 2002, $3.5 million was outstanding on the revolving loan. The amount available for borrowing under the revolving loan is limited to 85% of billed accounts

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receivable plus 70% of unbilled accounts receivable. At July 31, 2002, $2.2 million was available for borrowing under the revolving loan.

     The interest rate on borrowings under the primary term loan originally was prime plus a margin of 2.75%. At July 31, 2002, the effective annual interest rate under the primary term loan was 7.5%. Effective August 1, 2002, the interest rate margin on the primary term loan was reduced to 2.25%, with the effect that as of such date the effective annual interest rate under the primary term loan decreased to 7.0%. The Company is amortizing the primary term loan at the rate of $350,000 of principal plus accrued interest per month. At July 31, 2002, $4.8 million was outstanding on the primary term loan.

     The interest rate on borrowings under the secondary term loan is prime plus a margin of 2.0%. At July 31, 2002, the effective annual interest rate under the secondary term loan was 6.75%. The Company is amortizing the secondary term loan at the rate of $70,000 of principal plus accrued interest per month. At July 31, 2002, $2.2 million was outstanding on the secondary term loan.

     At July 31, 2002, the Company had $65,116 outstanding under a promissory note that bears interest at 11.0% and is due in fiscal 2004. The loan is secured by computer software.

4.  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 July 31, 2002 and 2001, and for each of the fiscal quarters then ended (in thousands):

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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.

5.  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 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. The proceeds of the first loan were to be used by Mr. Cobb to repay his personal indebtedness to a commercial bank. At July 31, 2002, the outstanding principal balance of the first loan was $311,480 and the interest accrued thereunder was $8,684. 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 February 15, 2002, the Company agreed to lend an additional $500,000 to Mr. Cobb (the “second loan”). The second loan bears 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 July 31, 2002, the interest accrued under the second loan was $9,125.

     In the first quarter of fiscal 2003, the Company paid IT Resources Solutions.net, Inc. (“ITRS”), a company owned by Kenneth J. Cobb, the son of T. Scott Cobb, $19,500 for marketing management services in the northeastern United States, $7,260 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 $14,528 for contract labor used on the Company’s projects.

6.  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

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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.

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     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, management, quality assurance and technical directions for IT projects, network planning and implementation, and functional expertise and training; (2) outsourcing, which involves system development and integration, 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 quarter 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 information technology (“IT”) consulting, outsourcing, and professional staffing services (the “core operations”). In the first quarter of fiscal 2003, the Company’s revenue from core operations, on which the Company’s management intends to focus its future efforts, was $21.8 million. Professional staffing, outsourcing, and consulting accounted for 75%, 15%, and 10%, respectively, of the Company’s revenue from core operations in the first quarter of fiscal 2003.

     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 quarter 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 First Quarter of Fiscal 2003 to First Quarter of Fiscal 2002

     Revenue and Income from Operations. The Company’s operations in the first 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 24% to $21.8 million in the first quarter of fiscal 2003 from $28.6 million in the first quarter of fiscal 2002. Overall income from operations decreased 41% to $0.7 million in the first quarter of fiscal 2003 from $1.2 million in the first quarter of fiscal 2002.

     Revenue from core operations decreased 15% to $21.8 million in the first quarter of fiscal 2003 from $25.8 million in the first quarter of fiscal 2002. Professional staffing revenue decreased $2.5 million for the quarter due primarily to a 15% decrease in average billable headcount 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 3% increase in average billing rate. Revenue from consulting and outsourcing declined $0.9 million and $0.5 million for the quarter, respectively. Income from core operations decreased 20% to $3.2 mi