SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
Form 10-Q
(Mark One)
/X/ Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the quarterly period ended June 30, 1999
or
/ / Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from _______ to _______ .
0-11521
(Commission File Number)
SYSTEMS & COMPUTER TECHNOLOGY CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 23-1701520
(State or other jurisdiction (I.R.S. Employer
of incorporation) Identification No.)
Great Valley Corporate Center
4 Country View Road
Malvern, Pennsylvania 19355
(Address of principal executive offices)
Registrant's telephone number, including area code: (610) 647-5930
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 / /
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
31,906,301 Common shares, $.01 par value, as of August 11, 1999
Page 1 of 22 consecutively numbered pages
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SYSTEMS & COMPUTER TECHNOLOGY CORPORATION AND SUBSIDIARIES
INDEX
PART I. UNAUDITED FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets -
June 30, 1999 and September 30, 1998
Condensed Consolidated Statements of Operations -
Three Months Ended June 30, 1999 and 1998
Condensed Consolidated Statements of Operations -
Nine Months Ended June 30, 1999 and 1998
Condensed Consolidated Statements of Cash Flows -
Nine Months Ended June 30, 1999 and 1998
Notes to Condensed Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of
Operations and Financial Condition
Item 3. Quantitative and Qualitative Disclosures
About Market Risk
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Item 6. Exhibits and Reports on Form 8-K
SIGNATURES
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SYSTEMS & COMPUTER TECHNOLOGY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except per share amounts)
June 30, September 30,
1999 1998
(UNAUDITED) (NOTE)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 5,187 $ 18,942
Short-term investments, including
accrued interest of $69 and $1,199 2,125 59,364
Receivables, including $80,399
and $66,158 of earned revenues
in excess of billings, net of
allowance for doubtful accounts
of $4,757 and $4,033 156,192 130,457
Prepaid expenses and other receivables 25,823 13,861
-------- --------
TOTAL CURRENT ASSETS 189,327 222,624
PROPERTY AND EQUIPMENT--at cost, net
of accumulated depreciation 68,782 55,862
CAPITALIZED COMPUTER SOFTWARE COSTS,
net of accumulated amortization 20,771 18,257
COST IN EXCESS OF FAIR VALUE OF NET
ASSETS ACQUIRED, net of accumulated
amortization 21,310 17,763
OTHER ASSETS AND DEFERRED CHARGES 17,522 18,448
-------- --------
TOTAL ASSETS $317,712 $332,954
======== ========
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SYSTEMS & COMPUTER TECHNOLOGY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except per share amounts)
June 30, September 30,
1999 1998
(UNAUDITED) (NOTE)
LIABILITIES & STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 13,066 $ 17,720
Current portion of long-term debt 637 1,100
Income taxes payable 1,460 1,444
Accrued expenses 35,243 33,659
Deferred revenue 11,132 17,684
-------- --------
TOTAL CURRENT LIABILITIES 61,538 71,607
LONG-TERM DEBT, less current portion 78,106 78,425
STOCKHOLDERS' EQUITY
Preferred stock, par value $.10 per
share--authorized 3,000 shares,
none issued -- --
Common stock, par value $.01 per share--
authorized 100,000 shares, issued
36,509 and 36,275 shares 365 363
Capital in excess of par value 104,192 102,176
Retained earnings 99,032 83,952
-------- --------
203,589 186,491
Less
Held in treasury, 4,642 and 2,302
common shares--at cost (24,911) (2,959)
Notes receivable from stockholders (610) (610)
-------- --------
178,068 182,922
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $317,712 $332,954
======== ========
Note: The condensed consolidated balance sheet at September 30, 1998 has
been derived from the audited financial statements at that date.
See notes to condensed consolidated financial statements.
<PAGE>
SYSTEMS & COMPUTER TECHNOLOGY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(in thousands, except per share amounts)
For the Three Months Ended
June 30,
1999 1998
Revenues:
Outsourcing services $ 34,022 $32,846
Software sales 19,774 25,353
Maintenance and enhancements 19,905 16,011
Software services 46,413 29,692
Other, primarily interest 131 1,138
-------- -------
120,245 105,040
Expenses:
Cost of outsourcing services 27,365 26,977
Cost of software sales and
maintenance and enhancements 21,275 18,033
Cost of software services 30,914 21,210
Selling, general and administrative 27,637 21,772
Interest expense 1,168 1,057
-------- -------
108,359 89,049
Income before income taxes 11,886 15,991
Provision for income taxes 5,444 6,554
-------- -------
Net income $ 6,442 $ 9,437
======== =======
Net income per common share $ 0.20 $ 0.28
Net income per share - assuming dilution $ 0.20 $ 0.26
Common shares and equivalents outstanding:
Average common shares 31,853 33,718
Average common shares - assuming dilution 35,626 39,185
See notes to condensed consolidated financial statements.
<PAGE>
SYSTEMS & COMPUTER TECHNOLOGY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(in thousands, except per share amounts)
For the Nine Months Ended
June 30,
1999 1998
Revenues:
Outsourcing services $101,898 $ 91,112
Software sales 58,335 69,653
Maintenance and enhancements 58,718 46,669
Software services 126,702 76,658
Other, primarily interest 1,439 4,313
-------- --------
347,092 288,405
Expenses:
Cost of outsourcing services 80,723 74,447
Cost of software sales and
maintenance and enhancements 63,489 50,743
Cost of software services 89,615 55,335
Selling, general and administrative 82,827 65,709
Interest expense 3,523 2,932
-------- --------
320,177 249,166
Income before income taxes 26,915 39,239
Provision for income taxes 11,835 16,056
-------- --------
Net income $ 15,080 $ 23,183
======== ========
Net income per common share $ 0.46 $ 0.69
Net income per share - assuming dilution $ 0.45 $ 0.64
Common shares and equivalents outstanding:
Average common shares 32,461 33,388
Average common shares - assuming dilution 33,511 38,627
See notes to condensed consolidated financial statements.
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SYSTEMS & COMPUTER TECHNOLOGY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(in thousands)
For the Nine Months Ended
June 30,
1999 1998
OPERATING ACTIVITIES
Net income $ 15,080 $ 23,183
Adjustments to reconcile net income to
net cash (used in) provided by
operating activities:
Depreciation and amortization 19,035 12,259
Provision for doubtful accounts 1,296 1,788
Changes in operating assets and liabilities:
(Increase) in receivables (27,033) (34,235)
Decrease (increase) in interest
receivable 1,130 (1,266)
(Increase) in other current assets (11,959) (3,605)
(Decrease) in accounts payable (4,815) (678)
(Decrease) increase in other accrued
expenses and liabilities 1,373 3,241
(Decrease) in deferred revenue (6,641) (3,862)
Other, net (1,339) (239)
--------- --------
NET CASH (USED IN) OPERATING ACTIVITIES (13,873) (3,414)
INVESTING ACTIVITIES
Purchase of property and equipment (22,452) (13,190)
Capitalized computer software costs (6,598) (5,917)
Purchase of investments available for sale (461) (147,978)
Proceeds from sale or maturity of
investments available for sale 56,398 72,799
Purchase of subsidiary, net of cash acquired (602) --
Purchase of investment in Campus
Pipeline, Inc. (4,029) --
--------- ---------
NET CASH PROVIDED BY (USED IN)
INVESTING ACTIVITIES 22,256 (94,286)
FINANCING ACTIVITIES
Principal payments on short-term debt (56,480) (1,225)
Proceeds from borrowings, net of
issuance costs 55,692 74,182
Repurchase of Company stock (21,952) --
Proceeds from exercise of stock options 602 6,266
--------- ---------
NET CASH (USED IN) PROVIDED BY
FINANCING ACTIVITIES (22,138) 79,223
(DECREASE) IN CASH & CASH EQUIVALENTS (13,755) (18,477)
CASH & CASH EQUIVALENTS-BEGINNING OF PERIOD 18,942 29,809
--------- ---------
CASH & CASH EQUIVALENTS-END OF PERIOD $ 5,187 $ 11,332
========= =========
SUPPLEMENTAL INFORMATION
NONCASH INVESTING AND FINANCING ACTIVITIES:
Purchase of subsidiary assets-noncash portion $ 1,573 --
See notes to condensed consolidated financial statements.
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SYSTEMS & COMPUTER TECHNOLOGY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE A--INTERIM FINANCIAL STATEMENTS
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles
for interim financial information and with the instructions to Form 1O-Q and
Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management,
all adjustments (consisting only of normal recurring accruals) considered
necessary for a fair presentation have been included. 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 year
ended September 30, 1998. Operating results for the three and nine-month
periods ended June 30, 1999 are not necessarily indicative of the results
that may be expected for the year ending September 30, 1999.
NOTE B--RECLASSIFICATION
Certain quarterly information has been reclassified to confirm with
June 30, 1999 classification.
NOTE C--CASH AND SHORT-TERM INVESTMENTS
(in thousands)
Cash Equivalents: Cash and equivalents are defined as highly liquid
investments with a maturity of three months or less at the date of purchase.
Short-Term Investments: Short-term investments consist of state and municipal
securities and corporate debt securities. Management determines the
appropriate classification of debt securities at the time of purchase. At
June 30, 1999, the Company has classified all securities as available for
sale. The available-for-sale portfolio, stated at fair value, is comprised of
highly liquid investments available for current operations and general
corporate purposes and, accordingly, is classified as short-term investments.
Short-term investments are comprised of:
June 30, 1999 Sept. 30, 1998
State and municipal securities $ 1,866 $33,602
Corporate debt securities 259 25,762
------- -------
$ 2,125 $59,364
The contractual maturities of short-term investments held are:
June 30, 19999 Sept. 30, 1998
Due in one year or less $ 2,056 $36,589
Due after one year or more -- 21,576
------- -------
$ 2,056 $58,165
NOTE D--CAMPUS PIPELINE INVESTMENT
On December 4, 1998, the Company entered into an agreement in which it, at
its option, could purchase up to $7.55 million of the common stock of Campus
Pipeline, Inc. As of June 30, 1999, the Company had purchased a 30% equity
interest in Campus Pipeline for $4.05 million, which amount includes
investment related expenditures of $.3 million, and which was recorded under
the equity method of accounting for investments. The Company's proportionate
share of Campus Pipeline's losses were immaterial to the Company's results of
operations. Additionally during June 1999 the Company made loans to Campus
Pipeline totaling $1.75 million, classified as current assets at June 30,
1999. In July 1999, the Company made additional loans to Campus Pipeline
totaling $.75 million. During August 1999, the loans were converted to
consideration paid in connection with the above referenced share purchase
agreement and the Company made additional payments of $1.30 million bringing
its total investment to approximately 60% before the purchase of Series A
Preferred shares by certain other investors.
NOTE E-ACQUISITIONS
In May 1999, the Company acquired Advanced Planning Solutions Inc., which
offers a demand planning product to the manufacturing market, for
consideration of $2.2 million. The purchase price was comprised of
approximately $1.6 million of the Company's stock and $.6 million cash. The
Company recorded goodwill of $1.0 million related to the acquisition. The
proforma effect of this acquisition on operations is immaterial.
In August 1999, the Company acquired RSMART Learning Systems Corp. The
Company intends to embed RSMART functions into its SCT Aspire distributed
learning software and integrate this functionality with other higher
education applications. The purchase price was paid with approximately
174,000 shares of the Company's stock. The proforma effect of this
acquisition on operations is immaterial.
NOTE F--EARNINGS PER SHARE
(in thousands, except per share amounts)
A reconciliation of the numerators and the denominators of the net income
per common share and net income per share - assuming dilution calculations
follow:
For the Three Months Ended
June 30,
1999 1998
Numerator:
Net income available to common
stockholders, used for net
income per common share $ 6,442 $ 9,437
Effect of dilutive securities:
5% convertible debentures 554 603
------- -------
554 603
Net income available to common
stockholders after assumed
conversions $ 6,996 $10,040
======= =======
Denominator:
Denominator for net income per common
share-weighted average shares 31,853 33,718
Effect of dilutive securities:
Employee stock options 939 2,633
5% convertible debentures 2,834 2,834
------- -------
3,773 5,467
Denominator for net income per
share - assuming dilution 35,626 39,185
======= =======
Net income per common share $0.20 $0.28
===== =====
Net income per share - assuming dilution $0.20 $0.26
===== =====
For the Nine Months Ended
June 30,
1999 1998
Numerator:
Net income available to common
stockholders, used for net
income per common share $15,080 $23,183
Effect of dilutive securities:
5% convertible debentures -- 1,667
------- -------
-- 1,667
Net income available to common
stockholders after assumed
conversions $15,080 $24,850
======= =======
Denominator:
Denominator for net income per common
share-weighted average shares 32,461 33,388
Effect of dilutive securities:
Employee stock options 1,050 2,640
5% convertible debentures -- 2,599
------- -------
1,050 5,239
Denominator for net income per
share - assuming dilution 33,511 38,627
======= =======
Net income per common share $0.46 $0.69
===== =====
Net income per share - assuming dilution $0.45 $0.64
===== =====
NOTE G--PRODUCT DEVELOPMENT
Product development expenditures, including software maintenance
expenditures, for the nine months ended June 30, 1999 and 1998, were
approximately $40.3 million and $28.0 million, respectively. After
capitalization these amounts were approximately $33.8 million and
$22.1 million, respectively, and were charged to operations as incurred.
For the same periods, amortization of capitalized software costs (not
included in expenditures above) amounted to $4.1 million and $4.1 million,
respectively.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF OPERATIONS AND FINANCIAL CONDITION
The purpose of this section is to give interpretive guidance to the reader
of the financial statements.
RESULTS OF OPERATIONS
The following table sets forth: (a) income statement items as a
percentage of total revenues and (b) the percentage change for each item
from the prior year comparative period.
% of Total Revenues % Change from
Prior Year
Three Mos. Nine Mos. Three Mos. Nine Mos.
Ended Ended Ended Ended
June 30, June 30, June 30 June 30
1999 1998 1999 1998
Revenues:
Outsourcing services 28% 32% 29% 32% 4% 12%
Software sales 16% 24% 17% 24% (22%) (16%)
Maintenance and enhancements 17% 15% 17% 16% 24% 26%
Software services 39% 28% 37% 27% 56% 65%
Interest and other revenue -- 1% -- 1% (89%) (67%)
---- ---- ---- ----
Total 100% 100% 100% 100% 14% 20%
Expenses:
Cost of services, sales and
maintenance and enhancements 66% 63% 67% 63% 20% 30%
Selling, general and
administrative 23% 21% 24% 23% 27% 26%
Interest expense 1% 1% 1% 1% 11% 20%
Income before income taxes 10% 15% 8% 14% (26%) (31%)
The following table sets forth the gross profit for each of the following
revenue categories as a percentage of revenue for each such category and the
total gross profit as a percentage of total revenue (excluding interest and
other revenue). The Company does not separately present the cost of
maintenance and enhancements revenue as it is impracticable to separate such
cost from the cost of software sales.
Three Months Nine Months
Ended Ended
June 30, June 30,
1999 1998 1999 1998
Gross Profit:
Outsourcing services 20% 18% 21% 18%
Software sales and maintenance
and enhancements 46% 56% 46% 56%
Software services 33% 29% 29% 28%
--- --- --- ---
Total 34% 36% 32% 37%
<PAGE>
Revenues
The 4% and 12% increases in outsourcing services revenue in the third quarter
and first nine months of fiscal year 1999 are primarily the result of (1)
increases in outsourcing services provided to a number of existing
significant clients and (2) full period effects of contracts signed
throughout fiscal year 1998.
Software sales decreased 22% in the third quarter of fiscal year 1999
compared to the third quarter of fiscal year 1998 due primarily to decreased
licenses of Banner Courts software to the local government market. Software
sales decreased 16% in the first nine months of fiscal year 1999 due
primarily to decreased licenses of Banner Customer Information System
software in the domestic utility market, Banner software to the higher
education market, and ADAGE Enterprise Resource Planning software to the
manufacturing market in the first two quarters of fiscal year 1999. The
decreases in the first nine months of fiscal year 1999 were offset by
increased licenses of Banner CIS software to the international utility
market.
The 24% and 26% increases in maintenance and enhancements revenue in the
third quarter and first nine months of fiscal year 1999, respectively, were
the result of the growing installed base of clients in the higher education,
manufacturing & distribution, and utility marketplaces. The Company continues
to experience a high annual renewal rate on existing maintenance contracts in
these marketplaces.
Software services revenue increased 56% and 65% in the third quarter and
first nine months of fiscal year 1999 compared to the prior year periods
primarily as the result of increases in implementation and integration
services in the utility, higher education, and manufacturing markets.
The decrease in other revenue in the third quarter and first nine months of
fiscal year 1999 is attributable primarily to decreased interest revenue.
The decrease in cash and short-term investments, the source of interest
revenue, results primarily from cash used in the acquisition of Fygir
Logistic Information Systems, B.V. (Fygir) in September 1998 and the purchase
of $22 million in treasury stock in the first six months of fiscal year 1999.
Gross Profit
Gross profit decreased as a percentage of total revenue (excluding other
revenue) from 36% in the third quarter of fiscal year 1998 to 34% for the
third quarter of fiscal year 1999 and from 37% to 32% for the nine month
periods ending June 30, 1998 and 1999, respectively. The total gross profit
percentages decreased primarily because of decreases in the software sales
and maintenance and enhancements gross profit, which makes up the greatest
percentage of the Company's total gross profit. These decreases were
primarily the result of increases in non-capitalized product development
expenditures and decreased software licenses, primarily in the manufacturing
and utility businesses, and in the third quarter, in the government business.
The decreases in the software sales and maintenance and enhancements gross
profits were partially offset by increases in the gross profits of
outsourcing services as a result of cost savings in fiscal year 1999, and an
increase in the software services gross profit as a result of improved
productivity and increased implementation and integration services performed
during the third quarter and first nine months of fiscal year 1999 in the
utility, higher education, and manufacturing markets. The Company is
continuing to focus on installation and systems integration services in each
of its markets. Since service margins have historically been lower than the
margins derived from software sales and maintenance and enhancements, an
increase in services revenue as a percentage of total revenue historically
has resulted in a lower overall profit margin.
Income Taxes
The fiscal year 1999 provision for income taxes is approximately 3% higher
than the Company's prior year rate of 40%. The 1999 provision does not
include a tax benefit for losses on the Company's foreign operations. If
foreign operations become profitable during the last quarter of fiscal year
1999, this may result in a reduced tax rate.
LIQUIDITY, CAPITAL RESOURCES, AND FINANCIAL POSITION
Cash used in operating activities was $13.9 million for the first nine months
of fiscal year 1999 compared with $3.4 million for the first nine months of
fiscal year 1998. Operating cash flows have decreased as the result of
decreases in income before depreciation and amortization in the nine-month
period ending June 30, 1999 and increases in accounts receivable and other
current assets balances. The increases in accounts receivable balances at
June 30, 1999 compared to September 30, 1998 are primarily the result of
increased revenues, slow collections on some large outsourcing contracts, and
the timing of billings on software licenses. The increase in other current
assets is primarily the result of increases in prepaid tax balances.
The Company provides outsourcing services and software-related services,
including systems implementation and integration services. Contract fees from
outsourcing services are typically based on multi-year contracts ranging from
three to 10 years in length, and provide a recurring revenue stream
throughout the term of the contract. Software services contracts, including
systems implementation and integration services, usually have shorter terms
than outsourcing services contracts, and billings are sometimes milestone
based. During the beginning of a typical outsourcing services contract,
services are performed and expenses are incurred by the Company at a greater
rate than in the later part of the contract. Billings usually remain constant
during the term of the contract and, in some cases, when a contract term is
extended, the billing period is also extended over the new life of the
contract. In certain systems integration contracts, services are performed by
the Company but cannot be billed until a milestone is attained. Revenue is
usually recognized as work is performed. The resulting excess of revenues
over billings is reflected on the Company's Consolidated Balance Sheet as
unbilled accounts receivable. As an outsourcing services contract proceeds,
services are performed and expenses are incurred at a lesser rate, resulting
in billings exceeding revenue recognized, which causes a decrease in the
unbilled accounts receivable, as will the achievement of a milestone in a
systems integration services contract. The remaining unbilled accounts
receivable balance is comprised of software sales for which product has been
shipped and revenue has been recognized but amounts have not been billed due
to the contractual payment terms established. These unbilled balances are
generally billed within one year.
Cash provided by investing activities was $22.3 million for the first nine
months of fiscal year 1999 compared with cash used in investing activities
of $94.3 million for the first nine months of fiscal year 1998. Proceeds from
fiscal year 1999 sales and maturities of available-for-sale investments of
$56.4 million were reinvested in fixed assets, as described in the following
paragraph. During the first nine months of fiscal year 1998 the Company's
primary use of cash for investing activities was the purchase of available-
for-sale investments from the proceeds of the bond offering during the first
quarter of fiscal year 1998.
Property and equipment expenditures increased as the result of fit-up and
remodeling costs for a new office building in the Company's Malvern campus
and building construction costs for a new building adjacent to the Company's
existing building in Columbia, SC. The Company signed a long-term lease
agreement in October 1998 for a new office building near its Malvern campus.
The Company began to incur fit-up and remodeling costs in the first quarter
of fiscal year 1999 and rent payments began in the second quarter of fiscal
year 1999.
Cash used in financing activities was $22.1 million for the first nine months
of fiscal year 1999. Net proceeds from borrowings were offset by principal
payments on short-term debt and consist primarily of activity in the
Company's revolving credit facility. The primary use of cash in financing
activities was the purchase of $22.0 million in treasury stock in the first
nine months of fiscal year 1999. During the first nine months of fiscal year
1998, cash provided by financing activities of $79.2 was primarily the result
of the net proceeds of the bond offering of $73.3 million.
In October 1997, the Company issued $65 million of convertible subordinated
debentures bearing interest at 5% and maturing on October 15, 2004. In
November 1997, pursuant to an underwriters' option, the Company issued an
additional $9.75 million of convertible debentures. The debentures are
convertible into common stock of the Company at any time prior to redemption
or maturity at a conversion price of $26.375 per share, subject to change as
defined in the Trust Indenture. The debentures are redeemable at any time
after October 15, 2000 at prices decreasing from 102.5% of the principal
amount to par on October 15, 2003.
The Company has a $30 million senior revolving credit facility available for
general corporate purposes. The credit facility agreement expires in June
2001 with optional annual renewals. There were no borrowings outstanding as
of June 30, 1999 or September 30, 1998. As long as borrowings are
outstanding, and as a condition precedent to new borrowings, the Company must
comply with certain covenants established in the agreement. Under the
covenants, the Company is required to maintain certain financial ratios and
other financial conditions. The covenants allow the Company to pay non-stock
dividends, repurchase capital stock, make distributions of assets to
shareholders (as long as the aggregate amount does not exceed $5 million in
any fiscal year) and pay stock dividends. In October 1998, the agreement
covenants were amended to allow the Company to repurchase capital stock not
to exceed $35 million and 3 million shares before April 15, 1999.
The Company believes that its cash and cash equivalents, short-term
investments, and borrowing arrangements should satisfy its financing needs
for the foreseeable future.
In October 1998, the Company's Board of Directors authorized the purchase of
up to 3 million of its common shares. During the six months ended
March 31, 1999, the Company repurchased 2.3 million of its common shares for
$22 million.
On December 4, 1998, the Company entered into an agreement in which it, at
its option, could purchase up to $7.55 million of the common stock of Campus
Pipeline, Inc. As of June 30, 1999, the Company had purchased a 30% equity
interest in Campus Pipeline for $4.05 million, which amount includes
investment related expenditures of $.3 million, and which was recorded under
the equity method of accounting for investments. The Company's proportionate
share of Campus Pipeline's losses were immaterial to the Company's results of
operations. Additionally during June 1999 the Company made loans to Campus
Pipeline totaling $1.75 million, classified as current assets at June 30,
1999. In July 1999, the Company made additional loans to Campus Pipeline
totaling $.75 million. During August 1999, the loans were converted to
consideration paid in connection with the above referenced share purchase
agreement and the Company made additional payments of $1.30 million bringing
its total investment to approximately 60% before the purchase of Series A
Preferred shares by certain other investors.
In May 1999, the Company acquired Advanced Planning Solutions Inc., which
offers a demand planning product to the manufacturing market, for
consideration of $2.2 million. The purchase price was comprised of
approximately $1.6 million of the Company's stock and $.6 million cash. The
Company recorded goodwill of $1.0 million related to the acquisition. The
proforma effect of this acquisition on operations is immaterial.
In August 1999, the Company acquired RSMART Learning Systems Corp. The
Company intends to embed RSMART functions into its SCT Aspire distributed
learning software and integrate this functionality with other higher
education applications. The purchase price was paid with approximately
174,000 shares of the Company's stock. The proforma effect of this
acquisition on operations is immaterial.
On October 1, 1998, the Company adopted Statement of Position 97-2, "Software
Revenue Recognition" (SOP 97-2). In December 1998, AcSEC issued Statement of
Position SOP 98-9, Modification of SOP 97-2, Software Revenue Recognition,
with Respect to Certain Transactions (SOP 98-9). SOP 97-2 introduces a
framework whereby revenue would be recognized for each element in a software
licensing arrangement when certain criteria are met. SOP 97-2 requires
license fees to be allocated to the separate elements of multiple element
arrangements based on "vendor-specific objective evidence of fair value" and
provides guidance on postcontract customer support arrangements. SOP 98-9,
which is effective for fiscal years beginning after March 15, 1999, requires
recognition of revenue on undelivered elements of a contract using the
residual method, as defined in SOP 98-9. The adoption of SOP 97-2 did not,
and the adoption of SOP 98-9 is not expected to, have a significant impact on
the results of operations.
In June 1997, Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income" (SFAS 130), was effective for all fiscal years
beginning after December 15, 1997. Comprehensive income includes changes in
the balances of items that are reported directly in a separate component of
stockholders' equity on the Consolidated Balance Sheets. There is not a
significant difference between total comprehensive income and net income for
the three and nine-month periods ended June 30, 1999 and 1998.
Statement of Financial Accounting Standards No. 131, "Disclosures about
Segments of an Enterprise and Related Information" (SFAS 131), was issued in
June 1997. SFAS 131 requires that a public business enterprise report
financial and descriptive information about its reportable operating
segments. Generally, financial information is required to be reported on the
basis used internally for evaluating segment performance and resource
allocation. SFAS 131 is effective for fiscal years beginning after December
31, 1997 however disclosure is not required in interim financial statements
in the initial year of adoption. Accordingly, the Company will make the
required disclosures for the fiscal year ending September 30, 1999.
Contingencies
On October 4, 1995, John J. Wallace filed a purported class action lawsuit
in the United States District Court for the Eastern District of Pennsylvania
against the Company; Michael J. Emmi, Chairman of the Board, President and
Chief Executive Officer of the Company; Michael D. Chamberlain, Senior Vice
President and a director of the Company; and Eric Haskell, Senior Vice
President, Finance & Administration, Treasurer, and Chief Financial Officer
of the Company. The plaintiff filed an amended complaint on November 28,
1995, and a second amended complaint on February 3, 1997. The class period
alleged is from June 5, 1995 through October 2, 1995. The second amended
complaint sought damages in unspecified amounts as well as equitable relief.
In April 1996, the Company's Motion to Dismiss the amended complaint was
granted in part and denied in part. In September 1997, the Company's Motion
to Dismiss the second amended complaint was granted in part and denied in
part, and plaintiff was permitted to pursue a claim that defendants violated
section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5
promulgated thereunder to the extent that it alleges a failure to make
certain disclosures in the Company's Form 10-Q for the third quarter of
fiscal 1995. On December 3, 1997, the Court approved a Stipulation of
Dismissal and Entry of Final Judgment filed by the parties pursuant to which
all remaining claims were dismissed with prejudice and the Court entered a
final judgment in favor of the Company as to all remaining claims in the
action. On December 30, 1997, the plaintiff filed a notice of appeal with
respect to those claims which were dismissed pursuant to the Company's
Motions to Dismiss. On October 28, 1998, the Company and counsel for the
plaintiff reached an agreement in principle to settle the matter for
$750,000. A settlement class must be determined by the United States
District Court for the Eastern District of Pennsylvania and the overall
settlement must be approved by the Court.
Factors that may affect future results and market price of stock
The matters discussed herein and elsewhere that are forward-looking
statements, including statements concerning the Company's or management's
forecasts, intentions, beliefs, expectations, or predictions for the future,
are based on current management expectations that involve risks and
uncertainties that could cause actual results to differ materially from those
anticipated. The following discussion highlights some, but not all of the
risks and uncertainties which may have a material adverse effect on the
Company's business, financial condition, and/or results of operations.
The Company's revenues and operating results can vary substantially from
quarter to quarter based on a number of factors. Software sales revenues in
any quarter are dependent on the execution of license agreements and shipment
of product. The execution of license agreements is difficult to predict for a
variety of reasons including the following: a significant portion of the
Company's license agreements are typically signed in the last month of each
quarter; the duration of the Company's sales cycle is relatively long; the
size of transactions can vary widely; client projects may be postponed or
canceled due to changes in the client's management, budgetary constraints, or
strategic priorities; and clients often exhibit a seasonal pattern of capital
spending. The Company has historically generated a greater portion of license
fees in total revenue in the last two fiscal quarters, although there is no
assurance that this will continue.
Also, as the year 2000 approaches, many potential clients are focusing their
efforts on remediating existing systems or implementing new systems to solve
year 2000 issues. While the Company believes that such evaluations have
favorably impacted demand for its software products and services in fiscal
years 1997 and 1998, such demand has diminished as the year 2000 approaches
since services to remediate year 2000 issues must be completed in a timely
manner and lead times required to complete systems implementations preclude
system replacement as a timely solution to the year 2000 issue as the
millennium nears. Given the lack of precedent for an issue of this magnitude,
the Company's ability to accurately forecast the impact of the year 2000
issue on quarter to quarter revenue achievement is limited. Additionally, as
the year 2000 approaches, customers have been slowing down computer software
purchases as they devote more time to preparing the testing of their systems
for year 2000 readiness, rather than evaluating and implementing new systems.
Since a significant part of the Company's business results from software
licensing, the Company's business is characterized by a high degree of
operating leverage. The Company's expense levels are based, in significant
part, on the Company's expectations as to future revenues and are therefore
relatively fixed in the short term. If software licensing revenues do not
meet expectations, net income is likely to be disproportionately adversely
affected. There can be no assurance that the Company will be able to increase
or even maintain its current level of profitability on a quarterly or annual
basis in the future. It is therefore possible that in one or more future
quarters the Company's operating results will be below expectations. In such
event, the price of the Company's common stock would likely be adversely
affected.
The success of the Company's business is dependent upon certain key
management, sales, and technical personnel. In addition, the Company believes
that to succeed in the future it will be required to continue to attract,
retain, and motivate additional talented and qualified management, sales, and
technical personnel. Competition for hiring such personnel in the information
technology industry is intense and demand for such employees has, to date,
exceeded supply. The Company from time to time experiences difficulty in
locating candidates with appropriate qualifications. There can be no
assurance that the Company will be able to retain its key employees or that
it will be able to continue to attract, assimilate, and retain other skilled
management, sales, and technical personnel. The loss of certain of its
existing key personnel or the inability to attract and retain additional
qualified employees in the future could have a material adverse effect on the
Company's business, operating results, and financial condition.
The application software industry is characterized by intense competition,
rapid technological advances, changes in customer requirements, product
introductions, and evolving industry standards. The Company believes that its
future success will depend on its ability to compete successfully and to
continue to develop and market new products and enhancements cost-
effectively, which will necessitate continued investment in research and
development and sales and marketing. There can be no assurance that the
Company's existing products will not be rendered obsolete or non-competitive
by new industry standards or changing technology, that the Company will be
able to develop and market new products successfully, or that the Company's
new product offerings will be accepted by its markets. Furthermore, programs
as complex as those offered by the Company may contain undetected errors or
bugs when they are first introduced or as new versions are released. There
can be no assurance that, despite testing by the Company and by third-party
test sites, errors will not be found in new product offerings, with the
possible result of unanticipated costs and delays in market acceptance of
these products.
Certain of the Company's contracts are subject to fiscal funding clauses,
which provide that in the event of budgetary constraints, the client is
entitled to reduce the level of services to be provided by the Company with
a corresponding reduction in the fee to be paid by the client, or in certain
circumstances, to terminate the services altogether. While the Company has
not been impacted materially by early terminations or reductions in service
from the use of fiscal funding provisions in the past, there can be no
assurance that such provisions will not give rise to early terminations or
reductions of service in the future. If clients of the Company representing
a substantial portion of the Company's revenues were to invoke the fiscal
funding provisions of their outsourcing services contracts, the Company's
results of operations could be adversely affected.
The Company provides software-related services, including systems
implementation and integration services. Services are generally provided
under time and materials contracts and revenue is recognized as the services
are provided. In some circumstances, services are provided under fixed price
arrangements in which revenue is recognized on the percentage-of-completion
method. Revisions in estimates of costs to complete are reflected in
operations in the period in which facts requiring those revisions become
known.
Other factors that could affect the Company's future operating results
include the effect of publicity on demand for the Company's products and
services; general economic and political conditions; continued market
acceptance of the Company's products and services; the timing of services
contracts and renewals; continued competitive and pricing pressures in the
marketplace; new product introductions by the Company's competitors; and the
Company's ability to complete fixed-price contracts profitably.
Year 2000
In the past, many information technology systems were designed with two-digit
year codes that did not recognize century fields. As a result, these
technology systems may not function or may give incorrect results during the
periods surrounding the year 2000. The Company has a company-wide year 2000
team to identify and resolve year 2000 issues associated with the Company's
internal information technology (IT) systems, internal non-IT systems,
material third party relationships, and the products and services sold by the
Company. The Company's year 2000 readiness program includes: corporate
awareness, adoption of year 2000 standards, inventory, assessment,
remediation, validation testing, and contingency planning.
The Company has identified its main internal IT systems and expects to
complete remediation of needed year 2000 related modifications by September
1999 and plans to continue testing through the remainder of calendar 1999.
The Company has completed the assessment of its internal non-IT systems and
has also completed its evaluation of third party relationships for year 2000
issues.
The Company has designed the most current versions of its products to be year
2000 ready. The Company is communicating with its clients regarding the
status of the Company's products relating to year 2000. For products that
were identified as needing updates to address year 2000 issues, the Company
has completed the updates of these products, and has made the updates
available to clients in 1998 and 1999. Some of the Company's clients
are using product versions that the Company will not support for year 2000
issues; the Company is encouraging these clients to migrate to current
product versions that are year 2000 ready. Also, in certain client
outsourcing and services contracts, the Company is evaluating year 2000
issues for its clients' computing environments and implementing year 2000
related remediations. Some of this client remediation effort was completed in
1998 with the remainder of the client remediation effort planned throughout
1999.
The Company is developing contingency plans to deal with issues that may
arise in 1999 and 2000. The focus of this effort is to identify high risk
areas associated with mission critical functions and then to develop
appropriate contingency plans. The areas of planning include: expected
increases in client upgrade and support activities, problems caused by client
delays in implementing Company or third-party upgrades, possible disruptions
in the Company's external support systems and internal systems, employee
matters, and test exercises of contingency plan elements. The Company
expects to complete its year 2000 contingency plans by September 1999.
The Company has funded its year 2000 program from operating cash flows and
has not separately accounted for these costs in the past. The Company has and
will continue to incur additional amounts related to the year 2000 program
for administrative personnel to manage the project and for technical support
for its products, services, and internal IT systems. The Company believes
that the vast majority of these costs are not incremental to the Company but
represent a reallocation of existing resources and does not believe that
these costs have been material to the Company's financial position.
The Company believes that it has taken adequate actions in planning for the
period surrounding the year 2000, however, there are no assurances that the
Company will not experience serious unanticipated negative consequences that
could be caused by: (i) undetected date issues in the Company's products,
(ii) services provided by the Company in evaluating year 2000 issues for
client outsourcing and services contracts, (iii) difficulties with internal
IT systems, and (iv) failures or disruptions of external support systems.
There can be no assurances that all year 2000 issues will be identified and
remediated and it is possible that the Company may experience increased
expenses in addressing these issues. The most reasonably likely worst case
scenarios would include: issues originating from clients who do not migrate
to current product releases or who experience other year 2000 related
problems, and issues originating from services provided by the Company in
evaluating year 2000 issues for client outsourcing and services contracts.
It is possible that any such issue could have a material adverse impact on
the Company's operations and financial results. Some commentators have stated
that a significant amount of litigation will arise out of year 2000
compliance issues. Because of the unprecedented nature of such litigation, it
is uncertain whether or to what extent the Company may be affected by it.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no material changes in quantitative or qualitative
disclosures for fiscal year 1999. Reference is made to Item 7A in the Annual
Report on Form 10-K for the year ended September 30, 1998.
<PAGE>
SYSTEMS & COMPUTER TECHNOLOGY CORPORATION AND SUBSIDIARIES
PART II
Item 1. Legal Proceedings
On October 4, 1995, John J. Wallace filed a purported class action lawsuit
in the United States District Court for the Eastern District of Pennsylvania
against the Company; Michael J. Emmi, Chairman of the Board, President and
Chief Executive Officer of the Company; Michael D. Chamberlain, Senior Vice
President and a director of the Company; and Eric Haskell, Senior Vice
President, Finance & Administration, Treasurer, and Chief Financial Officer
of the Company. The plaintiff filed an amended complaint on November 28,
1995, and a second amended complaint on February 3, 1997. The class period
alleged is from June 5, 1995 through October 2, 1995. The second amended
complaint sought damages in unspecified amounts as well as equitable relief.
In April 1996, the Company's Motion to Dismiss the amended complaint was
granted in part and denied in part. In September 1997, the Company's Motion
to Dismiss the second amended complaint was granted in part and denied in
part, and plaintiff was permitted to pursue a claim that defendants violated
section 10(b)of the Securities Exchange Act of 1934 and Rule 10b-5
promulgated thereunder to the extent that it alleges a failure to make
certain disclosures in the Company's Form 10-Q for the third quarter of
fiscal 1995. On December 3, 1997, the Court approved a Stipulation of
Dismissal and Entry of Final Judgment filed by the parties pursuant to which
all remaining claims were dismissed with prejudice and the Court entered a
final judgment in favor of the Company as to all remaining claims in the
action. On December 30, 1997, the plaintiff filed a notice of appeal with
respect to those claims which were dismissed pursuant to the Company's
Motions to Dismiss. On October 28, 1998, the Company and counsel for the
plaintiff reached an agreement in principle to settle the matter for
$750,000. A settlement class must be determined by the United States District
Court for the Eastern District of Pennsylvania and the overall settlement
must be approved by the Court.
Item 6 (a). Exhibits
Exhibit 27 - Financial Data Schedule
Item 6 (b). Reports on Form 8-K
On April 15, 1999, the registrant filed a current report on Form 8-K dated
March 18, 1999. Under Item 5, the registrant reported that its Board of
Directors adopted a Stockholder Rights Plan, providing that one Right shall
be attached to each share of Common Stock of the Company. The Rights were
distributed on April 16, 1999 to Shareholders of record on April 9, 1999.
Each Right entitles the registered holder to purchase from the Company a unit
(a "Unit") consisting of one one-hundredth of a share of Series A Preferred
Stock, with a par value of $.10 per share, at a purchase price of $100 per
Unit, subject to adjustment. The Rights expire at the close of business on
April 13, 2009, unless earlier redeemed by the Company.
<PAGE>
SYSTEMS & COMPUTER TECHNOLOGY CORPORATION AND SUBSIDIARIES
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.
SYSTEMS & COMPUTER TECHNOLOGY CORPORATION
(Registrant)
Date: 08/13/99 /s/ Eric Haskell
________________________________
Eric Haskell
Senior Vice President, Finance and Administration,
Treasurer and Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 5
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The schedule contains summary financial information extracted from the
June 30, 1999 financial statements and is qualified in its entirety
by reference to such financial statements.
</LEGEND>
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<FISCAL-YEAR-END> SEP-30-1999
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0
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<COMMON> 365,000
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