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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 December 31, 1998 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.
32,953,254 Common shares, $.01 par value, as of February 10, 1999
Page 1 of 18 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 -
December 31, 1998 and September 30, 1998
Condensed Consolidated Statements of Operations -
Three Months Ended December 31, 1998 and 1997
Condensed Consolidated Statements of Cash Flows -
Three Months Ended December 31, 1998 and 1997
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)
December 31, September 30,
1998 1998
(UNAUDITED) (NOTE)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 11,934 $ 18,942
Short-term investments, including
accrued interest of $642 and $1,199 39,386 59,364
Receivables, including $65,370
and $66,158 of earned revenues
in excess of billings, net of
allowance for doubtful accounts
of $3,919 and $4,033 141,292 130,457
Prepaid expenses and other receivables 19,576 13,861
-------- --------
TOTAL CURRENT ASSETS 212,188 222,624
PROPERTY AND EQUIPMENT--net of
accumulated depreciation 60,944 55,862
CAPITALIZED COMPUTER SOFTWARE COSTS,
net of accumulated amortization 19,085 18,257
COST IN EXCESS OF FAIR VALUE OF NET
ASSETS ACQUIRED, net of accumulated
amortization 17,487 17,763
OTHER ASSETS AND DEFERRED CHARGES 20,840 18,448
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TOTAL ASSETS $330,544 $332,954
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SYSTEMS & COMPUTER TECHNOLOGY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except per share amounts)
December 31, September 30,
1998 1998
(UNAUDITED) (NOTE)
LIABILITIES & STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 13,224 $ 17,720
Current portion of long-term debt 10,310 1,100
Income taxes payable 1,600 1,444
Accrued expenses 30,116 33,659
Deferred revenue 19,661 17,684
-------- --------
TOTAL CURRENT LIABILITIES 74,911 71,607
LONG-TERM DEBT, less current portion 78,415 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
36,317 and 36,275 shares 363 363
Capital in excess of par value 102,349 102,176
Retained earnings 88,418 83,952
-------- --------
191,130 186,491
Less
Held in treasury,3,382 and 2,302
common shares--at cost (13,302) (2,959)
Notes receivable from stockholders (610) (610)
-------- --------
177,218 182,922
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $330,544 $332,954
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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.
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SYSTEMS & COMPUTER TECHNOLOGY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(in thousands, except per share amounts)
For the Three Months Ended
December 31,
1998 1997
Revenues:
Outsourcing services $33,512 $28,145
Software sales 21,469 21,851
Maintenance and enhancements 17,785 14,346
Software services 36,430 21,059
Other, primarily interest 573 1,880
------- -------
109,769 87,281
Expenses:
Cost of outsourcing services 26,919 22,906
Cost of software sales and
maintenance and enhancements 20,140 14,881
Cost of software services 28,215 15,902
Selling, general and administrative 25,906 21,846
Interest expense 1,145 820
------- -------
102,325 76,355
Income before income taxes 7,444 10,926
Provision for income taxes 2,978 4,481
------- -------
Net Income $ 4,466 $ 6,445
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Net income per common share $ 0.14 $ 0.19
Net income per share - assuming dilution $ 0.13 $ 0.18
Common shares and equivalents outstanding:
Average common shares 33,024 33,098
Average common shares - assuming dilution 34,616 35,904
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 Three Months Ended
December 31,
1998 1997
OPERATING ACTIVITIES
Net income $ 4,466 $ 6,445
Adjustments to reconcile net income to
net cash (used in) provided by operating
activities:
Depreciation and amortization 6,005 3,638
Changes in operating assets and
liabilities:
(Increase) in receivables (11,173) (4,660)
(Increase) in other current assets (5,715) (584)
(Decrease) in accounts payable (4,496) (2,859)
(Decrease) increase in other accrued
expenses and liabilities (3,543) 1,375
Increase (decrease) in deferred revenue 1,977 (2,196)
Other, net 46 168
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NET CASH (USED IN) PROVIDED BY
OPERATING ACTIVITIES (12,433) 1,327
INVESTING ACTIVITIES
Purchase of property and equipment (8,114) (1,913)
Capitalized computer software costs (1,973) (1,553)
Purchase of investments
available-for-sale - (69,412)
Proceeds from sale and maturity of
investments available-for-sale 19,161 -
Purchase of investment in Campus Pipeline, Inc. (2,800) -
-------- --------
NET CASH PROVIDED BY (USED IN) INVESTING
ACTIVITIES 6,274 (72,878)
FINANCING ACTIVITIES
Principal payments on short-term debt (7,697) (1,250)
Proceeds from borrowings, net of
issuance costs 16,892 72,681
Purchase of treasury stock (10,343) -
Proceeds from exercise of stock options 299 2,055
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NET CASH (USED IN) PROVIDED BY
FINANCING ACTIVITIES (849) 73,486
(DECREASE) INCREASE IN CASH & CASH EQUIVALENTS (7,008) 1,935
CASH & CASH EQUIVALENTS-BEGINNING OF PERIOD 18,942 29,809
-------- --------
CASH & CASH EQUIVALENTS-END OF PERIOD $11,934 $31,744
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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-month period ended December 31, 1998 are not necessarily indicative of the
results that may be expected for the year ending September 30, 1999.
NOTE B--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 December 31, 1998,
the Company has classified all securities as available-for-sale. The
available-for-sale portfolio is comprised of highly liquid investments available
for current operations and general corporate purposes and, accordingly, is
classified as short-term investments. Available-for-sale securities are stated
at fair value.
Short-term investments at December 31, 1998 are comprised of:
State and municipal securities $30,216
Corporate debt securities 9,170
-------
$39,386
The contractual maturities of short-term investments held at December 31, 1998
are:
Due in one year or less $24,454
Due after one year or more 14,932
-------
$39,386
NOTE C--COMMON STOCK SPLIT
On April 16, 1998, the Company's Board of Directors authorized a two-for-one
stock split effected in the form of a 100% stock dividend distributed on May 15,
1998 to stockholders of record on May 1, 1998. Stockholders' equity has been
restated to give retroactive recognition to the stock split for all periods
presented by reclassifying from capital in excess of par value to common stock
the par value of the additional shares arising from the split. In addition, all
references in the financial statements and Management's Discussion and Analysis
of Operations and Financial Condition to number of shares and per share amounts
have been restated.
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NOTE D--TREASURY STOCK PURCHASE
In October 1998, the Company's Board of Directors authorized the purchase of up
to 3 million of its common shares. The shares may be purchased from time to time
in the open market or negotiated transactions and the timing of purchases will
be based on a variety of factors including stock price, cash requirements, and
market and economic factors. During the quarter ended December 31, 1998, the
Company repurchased 1.1 million of its common shares for $10.3 million. During
February 1999, the Company repurchased an additional 185 thousand of its common
shares for $1.7 million.
NOTE E--Campus Pipeline Investment
On December 4, 1998, the Company entered into an agreement in which it, at its
option, could purchase up to $7.6 million of the common stock of Campus
Pipeline, Inc. (the "Stock"). As of December 31, 1998, the Company had purchased
a 20% equity interest in Campus Pipeline, Inc. for $2.8 million, which amount
includes investment related expenditures of $300 thousand, and which was
recorded under the equity method of accounting for investments. If the Company
exercises all its options, the Company will hold approximately 60% of the
outstanding common stock of Campus Pipeline, Inc. Campus Pipeline, Inc. incurred
immaterial net losses during the quarter ended December 31, 1998.
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
December 31,
1998 1997
Numerator:
Net income available to common
stockholders, used for net income
per common share $4,466 $6,445
Effect of dilutive securities:
6 1/4% convertible debentures - -
------ ------
Net income available to common
stockholders after assumed
conversions $4,466 $6,445
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Denominator:
Denominator for net income per common
share -- weighted average shares 33,024 33,098
Effect of dilutive securities:
Employee stock options 1,592 2,806
6 1/4% convertible debentures - -
------ ------
Dilutive potential common shares 1,592 2,806
Denominator for net income per
share -- assuming dilution 34,616 35,904
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Net income per common share $0.14 $0.19
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Net income per share - assuming
dilution $0.13 $0.18
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NOTE G--Product Development
Product development expenditures, including software maintenance expenditures,
for the three months ended December 31, 1998 and 1997, were approximately $13.0
million and $8.3 million, respectively. After capitalization these amounts were
approximately $11.0 million and $6.7 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 $1.1 million and
$1.2 million, respectively.
NOTE H--New Accounting Standards
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 month periods
ended December 31, 1998 and 1997.
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, although the Company has not fully
assessed the impact of SFAS 131 on its financial disclosures.
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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 Months Ended
December 31,
1998 1997
Revenues:
Outsourcing services 31% 32% 19%
Software sales 20% 25% -2%
Maintenance and enhancements 16% 16% 24%
Software services 32% 25% 73%
Other, primarily interest 1% 2% -70%
--- ---
Total 100% 100% 26%
Expenses:
Cost of services, sales and
maintenance and enhancements 68% 61% 40%
Selling, general and administrative 24% 25% 19%
Interest expense 1% 1% 40%
Income before income taxes 7% 13% -32%
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 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 Ended
December 31,
1998 1997
---- ----
Gross Profit:
Outsourcing services 20% 19%
Software sales and maintenance and
enhancements 49% 59%
Software services 23% 24%
--- ---
Total 31% 37%
Revenues
The 19% growth in outsourcing services revenue in the three month period ended
December 31, 1998 compared with the prior year period is primarily the result of
(1) increases in outsourcing services provided to certain existing significant
clients and (2) contracts signed after the first quarter of fiscal year 1998.
Software sales decreased 2% in the first quarter of fiscal year 1999 compared to
the first quarter of fiscal year 1998 due primarily to decreased licenses of
BANNER Customer Information System (CIS) software to the domestic utility
market, BANNER software to the higher education market and ADAGE ERP software to
the manufacturing market. These decreases were offset by increased licenses of
BANNER Courts software to the local government market and increased licenses of
BANNER Customer Information System (CIS) software to the international utility
market. Strong international sales in the utility market offset decreased sales
of BANNER Customer Information System (CIS) software domestically.
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The 24% increase in maintenance and enhancements revenue in the first quarter of
fiscal year 1999 is a 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 73% in the first quarter of fiscal year 1999
compared to the first quarter of fiscal year 1998 as the result of increases in
implementation and integration services in the manufacturing, utility, and
higher education markets. Also adding to the increase in services revenue is the
continued growth in consulting services provided to companies outside of our
existing customer base.
The decrease in other revenue in the first quarter of fiscal year 1999 is
attributable to decreased interest revenue and to a one-time $695 thousand gain
on the sale of an inactive product line in the first quarter of fiscal year
1998. The decrease in cash and short-term investments, the source of interest
revenue, results primarily from the acquisition of Fygir Logistic Information
Systems, B.V. (Fygir) in September 1998.
Gross Profit
Gross profit decreased as a percentage of total revenue (excluding other
revenue) from 37% in the first quarter of fiscal year 1998 to 31% for the first
quarter of fiscal year 1999. The total gross profit percentage decreased
primarily because of a decrease in the software sales and maintenance and
enhancements gross profit which makes up the greatest percentage of the
Company's total gross profit. This decrease was primarily the result of an
increase in non-capitalized product development expenditures, primarily in the
manufacturing, utility, and higher education businesses, at a greater rate than
the revenue increases. The decreases in the software sales and maintenance and
enhancements gross profit were partially offset by increases in the gross
profits in the government and international businesses attributable to increased
software licenses. Although the education and international business had
increased services margins, overall services margins decreased as a result of
cost overruns and reduced margins on significant systems integration contracts
in the government and utilities markets and increased use of third party
consultants in the utility and manufacturing service businesses. 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.
LIQUIDITY, CAPITAL RESOURCES, AND FINANCIAL POSITION
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.
Cash used in operating activities was $12.4 million for the first quarter of
fiscal year 1999 compared with cash provided by operating activities of $1.3
million for the first quarter of fiscal year 1998. Income before depreciation
and amortization had no significant increase when compared to the prior year
period. Cash provided by operations was off-set in the first quarter of fiscal
year 1999 by increases in accounts receivable balances and other current assets.
The increases in accounts receivable balances at December 31, 1998 compared to
September 30, 1998 are primarily the result of slow collections on some large
outsourcing contracts. 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
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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 services contracts, payments are milestone based. In these
particular systems integration contracts, services are performed by the Company
but cannot be billed until the 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 payment terms
established. These unbilled balances are generally billed within one year.
Cash provided by investing activities was $6.3 million for the first quarter of
fiscal year 1999 compared with cash used in investing activities of $72.9
million for the first quarter of fiscal year 1998. Proceeds from sales and
maturities of investments available-for-sale of $19.2 million were slightly
offset by the purchase of an investment in Campus Pipeline, Inc. for $2.8
million in the first quarter of fiscal year 1999. The Company's primary use of
cash for investing purposes in the first quarter of fiscal year 1999 was for the
purchase of fixed assets, as described in the following paragraph. During the
first quarter of fiscal year 1998 the Company's primary use of cash for
investing activities was the purchase of investments available-for-sale 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 construction and fit-up of the new
Columbia building are expected to continue until sometime in the third quarter
of fiscal year 1999. 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 will begin in the second quarter of fiscal year 1999.
Cash used in financing activities was $850 thousand for the first three months
of fiscal year 1999. Net proceeds of $16.9 million from borrowings from the
senior revolving credit facility were offset by the purchase of $10.3 million in
treasury stock in the first quarter of fiscal year 1999. During the first
quarter of fiscal year 1998 cash provided by financing activities was primarily
the result of the net proceeds of the bond offering of $73.3 million.
The Company has a $30 million senior revolving credit facility available for
general corporate purposes. The credit facility agreement expires in June 2000
with optional annual renewals. Borrowings outstanding under the credit facility
were $9.7 million at December 31, 1998. There were no borrowings outstanding as
of 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
allowed 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 to 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, cash provided by
operations, short-term investments, and borrowing arrangements should satisfy
its financing needs for the foreseeable future.
On April 16, 1998, the Company's Board of Directors authorized a two-for-one
stock split effected in the form of a 100% stock dividend distributed on May 15,
1998 to stockholders of record on May 1, 1998. Stockholders' equity has been
restated to give retroactive recognition to the stock split for all periods
presented by reclassifying from capital in excess of par value to common stock
the par value of the additional shares arising from the split. In addition, all
references in the financial statements and Management's Discussion and Analysis
of Operations and Financial Condition to number of shares and per share amounts
have been restated.
In October 1998, the Company's Board of Directors authorized the purchase of up
to 3 million of its common shares. The shares may be purchased from time to time
in the open market or negotiated transactions and the timing of purchases will
be based on a variety of factors including stock price, cash requirements, and
market and economic factors. During October 1998, the Company purchased
approximately 1.1 million shares for $10.3 million. During February 1999, the
Company purchased an additional 185 thousand shares for $1.7 million.
<PAGE>
On December 4, 1998, the Company entered into an agreement in which it, at its
option, could purchase up to $7.6 million of the common stock of Campus
Pipeline, Inc. (the "Stock"). As of December 31, 1998, the Company had purchased
a 20% equity interest in Campus Pipeline, Inc. for $2.8 million, which amount
includes investment related expenditures of $300 thousand. If the Company
exercises all its options, the Company will hold approximately 60% of the
outstanding common stock of Campus Pipeline, Inc.
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 month periods
ended December 31, 1998 and 1997.
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, although the Company has not fully
assessed the impact of SFAS 131 on its financial disclosures.
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.
<PAGE>
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 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 evaluating their
existing systems and must decide whether to repair or replace those systems
which have year 2000 issues. While the Company believes that such evaluations
have favorably impacted demand for its software products and services in the
last two fiscal years, such demand is likely to diminish 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 may slow down computer software purchases as they
devote more time to preparing the testing of their systems for year 2000
readiness, versus 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.
<PAGE>
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 hardware
and software systems may not function or may give incorrect results during the
periods surrounding the year 2000. The year 2000 issue is faced by every company
which relies on computer systems. In order to address this issue, such hardware
and software systems must be upgraded or replaced in order to correctly process
dates beginning in 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 early 1999 and plans to
continue testing through calendar 1999. The Company is assessing its internal
non-IT systems and expects to complete needed modifications to these systems by
early 1999 and plans to complete testing by mid 1999. Also, the Company has
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 customers 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 to most of these products, and has made the updates available to
customers in 1998. The Company expects to complete the few remaining minor
product updates in approximately March 1999. Some of the Company's customers are
using product versions that the Company will not support for year 2000 issues;
the Company is encouraging these customers 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 has been completed in 1998 with the remainder of
the client remediation effort planned throughout 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 will 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 or are expected to be
material to the Company's financial position.
<PAGE>
The Company believes that necessary modifications to its products will be made
on a timely basis. However, there can be no guarantee that one or more of the
Company's current products do not contain year 2000 date issues that may result
in material costs to the Company. Additionally, where the Company is evaluating
year 2000 issues for client outsourcing and services contracts, 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. It is possible that any such delays or increased costs could have a
material adverse impact on the Company's operations and financial results by,
for example, impacting the Company's ability to deliver products or services to
its customers. 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. 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,
corruption of data contained in the Company's internal IT systems, and failure
of infrastructure services provided by government agencies and other third
parties (electricity, banking services, phone service, water systems, internet
services, etc.). The Company is in the process of contingency planning for high
risk areas and expects to complete this effort by mid calendar year 1999.
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 10.1 - Amendment One to the Systems & Computer Technology Corporation
1994 Non-Employee Director Stock Option Plan
Exhibit 27 - Financial Data Schedule
Item 6 (b). Reports on Form 8-K
The registrant filed a current report on Form 8-K dated October 7, 1998. Under
Item 5, the registrant reported that its Board of Directors authorized a
purchase of up to 3,000,000 of its common shares. The shares may be purchased
from time to time in the open market or in negotiated transactions.
<PAGE>
SYSTEMS & COMPUTER TECHNOLOGY CORPORATION AND SUBSIDIARIES
SIGNATURE
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: 2/16/98 /s/ Eric Haskell
------------------------------------------
Eric Haskell
Senior Vice President, Finance and Administration,
Treasurer and Chief Financial Officer
<PAGE>
AMENDMENT ONE TO THE
SYSTEMS & COMPUTER TECHNOLOGY CORPORATION
1994
NON-EMPLOYEE DIRECTOR STOCK
OPTION PLAN
WHEREAS, Systems & Computer Technology Corporation (the "Company")
established the Systems & Computer Technology Corporation 1994 Non-Employee
Director Stock Option Plan (the "Plan"), for the benefit of certain non-employee
directors; and
WHEREAS, pursuant to Section 16 of the Plan, the Board of Directors of
the Company (the "Board") has the authority to amend the Plan; and
WHEREAS, the Board has determined that the Plan shall be amended in the
manner set forth herein;
NOW, THEREFORE, be it hereby
RESOLVED, that the Plan is amended as follows, effective January 1,
1999:
I. Section 1 of the Plan is Amended by the deletion of the next to
last sentence of the section, relating to being a "formula" plan.
II. Section 2 of the Plan is amended by the deletion of subsection (h)
thereof, relating to the definition of "Disinterested Person".
III. Section 2 of the Plan is amended by the deletion of subsection
(r), relating to the definition of "Outside Director," and by its replacement
with the following:
"Outside Director" shall mean a "Non-Employee Director" within the
meaning of Rule 16b-3 promulgated under Section 16 of the Exchange Act (or any
successor Rule).
IV. Section 2 of the Plan is amended by the addition of the following
new definition, and is relettered accordingly:
"Award Date" shall mean the date Amendment One to this Plan is approved
by the affirmative vote of the holders of a majority of the shares
<PAGE>
of Common Stock present in person or represented by proxy, and entitled
to vote on the Plan, at a meeting of stockholders.
V. As a result of a 2-for-1 stock split of the Common Stock effected
on May 15, 1998, the aggregate number of shares which may be awarded and sold
under the Plan is hereby increased two-fold from 250,000 to 500,000. Section 4
of the Plan shall be modified accordingly.
VI. Section 5 of the Plan is amended in its entirety and replaced with
the following:
Section 5. Participation; Awards.
(a) Non-Discretionary Awards. On the Award Date, Outside Directors
Thomas I. Unterberg and Allen R. Freedman shall each be Awarded an Option to
purchase 40,000 Shares, provided that they are Outside Directors on such date.
The per Share exercise price of each Option awarded under this subsection shall
be equal to the Fair Market Value on the date of grant.
(b) Discretionary Awards. The Board may grant Options under this
subsection 5(b) to Outside Directors at such times and in such amounts (subject
to the aggregate number of Shares remaining in the Pool) as the Board may
determine. However, no Outside Director will be eligible to receive an Option
under this subsection (b) until the date immediately after the fifth anniversary
date of the most recent Award granted to such Outside Director under the Plan.
The per share exercise price of each Option awarded under this Section 5(b)
shall be equal to the Fair Market Value on the date of grant.
<PAGE>
(c) Term. No Option may be Awarded under the Plan at any time after the
tenth (10th) anniversary of the Award Date.
VII. Section 7(a) of the Plan is amended by the addition of the
following:
Section 7. Exercise of Options.
(a) Exercisability. Each Option granted to Messrs. Unterberg and
Freedman under paragraph 5(a) may be exercised, on a cumulative basis, for
one-fifth of the number of Shares underlying the Option on each of the first
five anniversaries of the date the Option is Awarded. Each Option granted under
subsection 5(b) may be exercised on the terms determined by the Board at or
after the date of grant. No Option may be exercised at any time after the
earlier of (i) the date it has terminated pursuant to Section 9 of the Plan and
(ii) the tenth (10th) anniversary of the date of its Award. Accodingly, the term
in which any Option granted prior to the effective date of Amendment One to the
Plan may be exercised is hereby extended from the fifth (5th) anniversary of the
date of its Award under the tenth (10th) anniversary of the date of its Award.
VIII. Section 16 of the Plan is amended and restated so as to read in
full as follows:
SECTION 16. Amendment of the Plan. The Board may from time to time
suspend, terminate or discontinue the Plan or revise or amend it.
IX. Section 25 of the Plan is amended, by replacing the words "fifth
(5th) anniversary of the Initial Award Date" with "tenth (10th) anniversary of
the Award Date."
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
The schedule contains summary financial information extracted from the December
31, 1998 and 1997 financial statements and is qualified in its entirety by
reference to such financial statements.
</LEGEND>
<CIK> 0000707606
<NAME> SYSTEMS & COMPUTER TECHNOLOGY CORPORATION
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 3-MOS
<FISCAL-YEAR-END> SEP-30-1999 SEP-30-1998
<PERIOD-END> DEC-31-1998 DEC-31-1997
<CASH> 11,934,000 31,744,000
<SECURITIES> 39,386,000 69,952,000
<RECEIVABLES> 145,211,000 108,874,000
<ALLOWANCES> 3,919,000 4,760,000
<INVENTORY> 0 0
<CURRENT-ASSETS> 212,188,000 214,867,000
<PP&E> 97,379,000 70,053,000
<DEPRECIATION> 36,435,000 29,135,000
<TOTAL-ASSETS> 330,544,000 288,456,000
<CURRENT-LIABILITIES> 74,911,000 51,404,000
<BONDS> 78,415,000 76,912,000
0 0
0 0
<COMMON> 363,000 356,000
<OTHER-SE> 176,855,000 158,553,000
<TOTAL-LIABILITY-AND-EQUITY> 330,544,000 288,456,000
<SALES> 109,196,000 85,401,000
<TOTAL-REVENUES> 109,769,000 87,281,000
<CGS> 75,274,000 53,689,000
<TOTAL-COSTS> 101,180,000 75,535,000
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 1,145,000 820,000
<INCOME-PRETAX> 7,444,000 10,926,000
<INCOME-TAX> 2,978,000 4,481,000
<INCOME-CONTINUING> 4,466,000 6,445,000
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
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<NET-INCOME> 4,466,000 6,445,000
<EPS-PRIMARY> 0 0
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