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, 2000
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.
32,612,164 Common shares, $.01 par value, as of August 2, 2000
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, 2000 and September 30, 1999
Condensed Consolidated Statements of Operations -
Three Months Ended June 30, 2000 and 1999
Condensed Consolidated Statements of Operations -
Nine Months Ended June 30, 2000 and 1999
Condensed Consolidated Statements of Cash Flows -
Nine Months Ended June 30, 2000 and 1999
Notes to Condensed Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures
About Market Risk
PART II. OTHER INFORMATION
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,
2000 1999
(UNAUDITED) (NOTE)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 27,170 $ 27,030
Short-term investments, including
accrued interest of $61 and $2 13,417 4,078
Receivables, including $75,418
and $75,567 of earned revenues
in excess of billings, net of
allowance for doubtful accounts
of $5,154 and $5,841 152,233 148,967
Prepaid expenses and other receivables 27,206 23,030
-------- --------
TOTAL CURRENT ASSETS 220,026 203,105
PROPERTY AND EQUIPMENT--at cost, net
of accumulated depreciation 63,234 69,049
CAPITALIZED COMPUTER SOFTWARE COSTS,
net of accumulated amortization 20,255 22,097
COST IN EXCESS OF FAIR VALUE OF NET
ASSETS ACQUIRED, net of accumulated
amortization 15,890 17,772
OTHER ASSETS AND DEFERRED CHARGES 33,775 23,029
-------- --------
TOTAL ASSETS $353,180 $335,052
======== ========
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SYSTEMS & COMPUTER TECHNOLOGY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except per share amounts)
June 30, September 30,
2000 1999
(UNAUDITED) (NOTE)
LIABILITIES & STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 8,506 $ 14,002
Current portion of long-term debt 697 652
Income taxes payable 1,717 2,137
Accrued expenses 37,506 36,412
Deferred revenue 24,530 15,341
-------- --------
TOTAL CURRENT LIABILITIES 72,956 68,544
LONG-TERM DEBT, less current portion 77,704 78,232
OTHER LONG-TERM LIABILITIES 2,320 --
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
37,177 and 36,734 shares 372 367
Capital in excess of par value 113,847 110,230
Retained earnings 111,961 103,251
Accumulated other comprehensive loss (459) (51)
-------- --------
225,721 213,797
Less
Held in treasury, 4,642 common
shares--at cost (24,911) (24,911)
Notes receivable from stockholders (610) (610)
-------- --------
200,200 188,276
-------- --------
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY $353,180 $335,052
======== ========
Note: The condensed consolidated balance sheet at September 30, 1999 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
June 30,
2000 1999
Revenues:
Outsourcing services $ 30,939 $ 34,022
Software sales 23,583 19,774
Maintenance and enhancements 23,420 19,905
Software services 34,927 46,413
Interest and other income 7,072 131
-------- --------
119,941 120,245
Expenses:
Cost of outsourcing services 26,206 27,365
Cost of software sales and
maintenance and enhancements 19,442 21,275
Cost of software services 24,630 30,914
Selling, general and administrative 29,214 26,784
Equity in losses of affiliates -- 853
Interest expense 1,157 1,168
-------- --------
100,649 108,359
Income before income taxes 19,292 11,886
Provision for income taxes 7,994 5,444
-------- --------
Net income $ 11,298 $ 6,442
======== ========
Net income per common share $ 0.35 $ 0.20
Net income per share - assuming dilution $ 0.32 $ 0.20
Common shares and equivalents outstanding:
Average common shares 32,502 31,853
Average common shares - assuming dilution 36,691 35,626
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 Nine Months Ended
June 30,
2000 1999
Revenues:
Outsourcing services $ 96,390 $101,898
Software sales 47,806 58,335
Maintenance and enhancements 68,421 58,718
Software services 110,617 126,702
Interest and other income 7,656 1,439
-------- --------
330,890 347,092
Expenses:
Cost of outsourcing services 81,192 80,723
Cost of software sales and
maintenance and enhancements 62,103 63,489
Cost of software services 77,002 89,615
Selling, general and administrative 85,809 81,622
Equity in losses of affiliates 4,761 1,205
Restructuring charges 1,000 --
Interest expense 3,449 3,523
-------- --------
315,316 320,177
Income before income taxes 15,574 26,915
Provision for income taxes 6,864 11,835
-------- --------
Net income $ 8,710 $ 15,080
======== ========
Net income per common share $ 0.27 $ 0.46
Net income per share - assuming dilution $ 0.26 $ 0.45
Common shares and equivalents outstanding:
Average common shares 32,320 32,461
Average common shares - assuming dilution 33,577 33,511
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,
2000 1999
OPERATING ACTIVITIES
Net income (loss) $ 8,710 $ 15,080
Adjustments to reconcile net income (loss)
to net cash provided by (used in)
operating activities:
Depreciation and amortization 20,271 19,035
Provision for doubtful accounts 2,027 1,296
Equity in losses of affiliate 4,761 1,205
Gain on sale of assets (6,430) --
Changes in operating assets and liabilities:
Increase in receivables (5,238) (27,033)
(Increase) decrease in interest receivable (59) 1,130
Increase in other current assets (2,176) (11,959)
Decrease in accounts payable (5,496) (4,815)
(Decrease) increase in other accrued
expenses and liabilities (998) 1,373
Increase (decrease) in deferred revenue 7,929 (6,641)
Other, net (699) (1,339)
--------- ---------
NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES 22,602 (12,668)
INVESTING ACTIVITIES
Purchase of property and equipment (4,888) (22,452)
Capitalized computer software costs (3,098) (6,598)
Purchase of investments available for sale (13,752) (461)
Proceeds from sale or maturity of
investments available for sale 4,506 56,398
Purchase of subsidiary assets,
net of cash acquired (300) (602)
Purchase of long-term investments (10,000) --
Proceeds from sale of assets 2,000 --
Investment in Campus Pipeline, Inc. -- (5,234)
--------- ---------
NET CASH (USED IN) PROVIDED BY
INVESTING ACTIVITIES (25,532) 21,051
FINANCING ACTIVITIES
Repayment of borrowings (17,283) (56,480)
Proceeds from borrowings, net of
issuance costs 16,800 55,692
Repurchase of Company stock -- (21,952)
Proceeds from exercise of stock options 3,553 602
--------- ---------
NET CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES 3,070 (22,138)
INCREASE (DECREASE) IN CASH & CASH EQUIVALENTS 140 (13,755)
CASH & CASH EQUIVALENTS-BEGINNING OF PERIOD 27,030 18,942
--------- ---------
CASH & CASH EQUIVALENTS-END OF PERIOD $ 27,170 $ 5,187
========= =========
See notes to condensed consolidated financial statements.
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 and the fiscal
year 2000 restructuring charge) 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, 1999. Operating results
for the three and nine-month periods ended June 30, 2000 are not necessarily
indicative of the results that may be expected for the year ending
September 30, 2000.
NOTE B--CASH AND INVESTMENTS
Cash equivalents are short-term, highly liquid investments with a maturity of
three months or less at the date of purchase.
Short-term investments consist of corporate debt securities. Management
determines the appropriate classification of the debt securities at the time
of purchase. At June 30, 2000, the portfolio of debt securities has been
classified as available for sale and, as a result, is stated at fair value.
The available-for-sale portfolio is comprised of highly liquid investments
available for current operations and general corporate purposes and,
accordingly, is classified as current assets.
Short-term investments held as available for sale at June 30, 2000 and
September 30, 1999 have contractual maturities of less than one year.
The Company owns common and preferred stock of various privately held
companies valued at $18.5 million and classified as long-term assets. The
fair values of these investments are not readily determinable and therefore
are carried at cost. The cost basis would be reduced and earnings would be
charged if there was an impairment which was found to be other-than-temporary
at a balance sheet date.
NOTE C--INVESTMENT IN CAMPUS PIPELINE, INC.
Throughout fiscal year 1999, the Company made a series of investments in
Campus Pipeline, Inc., and, as of June 30, 2000, held an approximately 56%
interest in the common stock of this affiliate, with a carrying amount of
zero. The Company has determined that it does not control Campus Pipeline
because there are fully voting convertible preferred shares outstanding that
lower the Company's voting interest to approximately 41%. Therefore, the
Company has accounted for its investment using the equity method of
accounting. During the first six months of fiscal year 2000, the Company
recorded its proportionate share, $4.8 million, of the affiliate's losses up
to the point that its investment was reduced to zero. The Company will not
record any additional future losses of Campus Pipeline and any future
earnings will not be recorded until the cumulative unrecorded losses are
offset.
NOTE D--ACQUISITIONS AND DISPOSITIONS
In April 2000, the Company acquired the assets of a division of Pinnacle
Software Corporation for consideration of $2.4 million, of which $2 million
is payable in October, 2000, contingent upon certain performance measures.
The acquired business includes an established workforce of 16 employees who
have provided maintenance and enhancement services to some of the Company's
higher education clients over the past 10 years, and includes Pinnacle's
reporting solutions product that enhances the financial reporting and report
distribution capabilities of universities using some of the Company's
administrative applications.
In a transaction with JusticeLink/CourtLink in April 2000 the Company sold
its eFile Management middleware for $4.0 million and an equity investment in
the newly formed JusticeLink/CourtLink valued at $2.5 million. The Company
recorded a pre-tax gain related to this sale of $6.0 million in other income
during the quarter.
In June 2000, the Company sold its SCT Learning Suite distance learning
course creation tools to WebCT, Inc., in return for common stock of WebCT
valued at $2.5 million resulting in a pre-tax gain of $0.4 million, recorded
as other income. As part of the transaction, the Company signed a noncompete
agreement valued at $3.5 million. The Company also made an additional $10
million investment in preferred stock of WebCT. The total $16 million equity
investment represents an 8.6% interest in WebCT. In addition, the Company
could earn additional equity in WebCT in the future through performance-based
compensation dependent on delivery of commitments from schools choosing WebCT
as their primary supported enterprise-wide course tools platform.
NOTE E--EARNINGS PER SHARE
(in thousands, except per share amounts)
A reconciliation of the numerators and the denominators of net income per
common share and net income per share - assuming dilution follows:
For the Three Months For the Nine Months
Ended June 30, Ended June 30,
2000 1999 2000 1999
Numerator:
Net income available to
common stockholders,
used for net income
per common share $11,298 $ 6,442 $ 8,710 $15,080
Effect of dilutive securities: 598 554 -- --
Net income available to
common stockholders after
assumed conversions $11,896 $ 6,996 $ 8,710 $15,080
======= ======= ======= =======
Denominator:
Denominator for net income
per common share -
weighted average shares 32,502 31,853 32,320 32,461
Effect of dilutive securities:
Employee stock options 1,355 939 1,257 1,050
5% convertible debentures 2,834 2,834 -- --
------- ------- ------- -------
Dilutive potential common shares 4,189 3,773 1,257 1,050
Denominator for net income
per share - assuming
dilution 36,691 35,626 33,577 33,511
======= ======= ======= =======
Net income per common share $0.35 $0.20 $0.27 $0.46
===== ===== ===== =====
Net income per share -
assuming dilution $0.32 $0.20 $0.26 $0.45
===== ===== ===== =====
Potentially dilutive securities with an anti-dilutive effect (convertible
debt the nine-month periods) are not included in the above calculations.
NOTE F--PRODUCT DEVELOPMENT
Product development expenditures, including software maintenance
expenditures, for the nine months ended June 30, 2000 and 1999, were
approximately $39.2 million and $40.5 million, respectively. After
capitalization, these amounts were approximately $36.1 million and $33.9
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 $4.4 million and $4.1 million, respectively.
NOTE G--BUSINESS SEGMENTS
(in thousands)
The Company has four reportable segments: Global Education Solutions (GES);
Global Government Solutions (GGS); Global Manufacturing & Distribution
Solutions (M&DS); and Global Energy, Utilities & Communications Solutions
(EUC). Summarized financial information concerning the Company's reportable
segments is shown in the following table. The "All Other" column includes
corporate related items, elimination of inter-segment transactions,
intangibles and related amortization of assets purchased in business
acquisitions, and results of non-reportable segments whose products and
services serve different markets than the reportable segments. Interest and
other income is not included in the revenue disclosures below.
Three months ended June 30, 2000
All
GES GGS M&DS EUC Other Total
Outsourcing services $ 9,849 $14,678 $ 2,077 $ 3,669 $ 666 $30,939
Software sales and
maintenance and
enhancements 23,105 4,677 10,424 8,797 -- 47,003
Software services 13,937 2,132 6,142 12,652 64 34,927
------- ------- ------- ------- ------- -------
External revenues 46,891 21,487 18,643 25,118 730 112,869
Intersegment revenues 278 12 6 -- (296) --
Segment profit (loss)(a) 7,299 6,161 1,206 3,843 783 19,292
Three months ended June 30, 1999
All
GES GGS M&DS EUC Other Total
Outsourcing services $10,577 $15,330 $ 1,675 $ 4,357 $2,083 $ 34,022
Software sales and
maintenance and
enhancements 24,161 1,951 6,042 7,494 31 39,679
Software services 13,317 2,884 11,623 13,600 4,989 46,413
------- ------- ------- ------- ------- -------
External revenues 48,055 20,165 19,340 25,451 7,103 120,114
Intersegment revenues 234 74 12 728 (1,048) --
Segment profit (loss) 11,325 (796) 78 831 448 11,886
Nine months ended June 30, 2000
All
GES GGS M&DS EUC Other Total
Outsourcing services $ 31,032 $44,788 $ 7,387 $10,984 $2,199 $96,390
Software sales and
maintenance and
enhancements 64,446 13,113 20,755 17,913 -- 116,227
Software services 41,258 7,808 22,499 38,548 504 110,617
------- ------- ------- ------- ------- -------
External revenues 136,736 65,709 50,641 67,445 2,703 323,234
Intersegment revenues 870 36 18 -- (924) --
Segment profit (loss)(a) 14,351 7,458 (4,230) 2,054 (4,059) 15,574
Nine months ended June 30, 1999
All
GES GGS M&DS EUC Other Total
Outsourcing services $ 30,939 $46,094 $ 5,445 $13,081 $ 6,339 $101,898
Software sales and
maintenance and
enhancements 71,548 9,027 17,607 18,744 127 117,053
Software services 36,121 7,730 32,995 39,982 9,874 126,702
------- ------- ------- ------- ------- -------
External revenues 138,608 62,851 56,047 71,807 16,340 345,653
Intersegment revenues 453 153 30 2,027 (2,663) --
Segment profit (loss) 32,637 883 (1,996) (2,367) (2,242) 26,915
(a) The GGS three and nine-month periods include a pre-tax gain of $6.0
million related to the eFile Management middleware sale. The All Other three
and nine-month periods include a pre-tax gain of $0.4 million related to the
sale of the SCT Learning Suite tools.
NOTE H--COMPREHENSIVE INCOME
(in thousands)
Total comprehensive income is comprised of:
Three Months Nine Months
Ended Ended
June 30, June 30,
2000 1999 2000 1999
Net income $11,298 $6,442 $8,710 $15,080
Other comprehensive income (loss) 28 (50) (408) (109)
-------- -------- -------- --------
Total Comprehensive Income $11,326 $6,392 $8,302 $14,971
Other comprehensive income (loss) relates primarily to currency translation
adjustments related to foreign subsidiaries whose functional currencies are
their local currencies.
NOTE I--NEW ACCOUNTING STANDARDS
In October 1997, the American Institute of Certified Public Accountants
issued Statement of Position (SOP) 97-2, "Software Revenue Recognition,"
which provides guidance on recognizing revenue on software transactions.
SOP 98-4, "Deferral of Certain Provisions of SOP 97-2" and SOP 98-9,
"Modification of SOP 97-2, Software Revenue Recognition, with Respect to
Certain Transactions," were issued in 1998 as amendments to SOP 97-2. SOP
97-2 and SOP 98-4 were effective for the Company's fiscal year beginning
October 1, 1998 and SOP 98-9 was effective for the fiscal year beginning
October 1, 1999. Based on the Company's interpretation of the requirements
of SOP 97-2, as amended, the adoption of this statement has not had and is
not expected to have a significant impact on the Company's results of
operations. However, the accounting profession continues to review certain
provisions of SOP 97-2, as amended, with the objective of providing
additional guidance on implementing its provisions.
During fiscal year 2000, the Securities and Exchange Commission issued Staff
Accounting Bulletin 101, "Revenue Recognition" (SAB 101). The SAB provides
examples of how the staff applies the criteria to specific fact patterns such
as bill-and-hold transactions, up-front fees when the seller has significant
continuing involvement, long-term service transactions, refundable membership
fees, retail layaway sales, and contingent rental income. The SAB also
addresses whether revenue should be presented on a gross or net (e.g., a
commission) basis for certain transactions, such as sales on the Internet.
In addition, the SAB provides guidance on the disclosures registrants should
make about their revenue recognition policies and the impact of events and
trends on revenue. The Company is required to adopt the provisions of SAB
101 by the fourth quarter of fiscal year 2001. The adoption of SAB 101 is
not expected to have a significant impact on the Company's results of
operations.
In March 2000, the Financial Accounting Standards Board issued FASB
Interpretation No. 44, "Accounting for Certain Transactions involving Stock
Compensation, an interpretation of APB Opinion No. 25." The company is
required to adopt the Interpretation on July 1, 2000. The Interpretation
clarifies guidance for certain issues that arose in the application of APB
Opinion No. 25, "Accounting for Stock Issued to Employees." The adoption of
Interpretation 44 is not expected to have a significant impact on the
Company's results of operations.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.
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: (i) income statement items as a
percentage of total revenues and (ii) 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
2000 1999 2000 1999
Revenues:
Outsourcing services 26% 28% 29% 29% (9%) (5%)
Software sales 20% 16% 15% 17% 19% (18%)
Maintenance and enhancements 19% 17% 21% 17% 18% 17%
Software services 29% 39% 33% 37% (25%) (13%)
Other 6% -- 2% -- 5299% 432%
---- ---- ---- ----
Total 100% 100% 100% 100% -- (5%)
Expenses:
Cost of services, sales and
maintenance and enhancements 59% 66% 67% 67% (12%) (6%)
Selling, general and
administrative 24% 22% 26% 24% 9% 5%
Equity in losses of affiliates -- 1% 1% -- (100%) 295%
Restructuring charges -- -- -- -- -- --
Interest expense 1% 1% 1% 1% (1%) (2%)
Income (loss) before
income taxes 16% 10% 5% 8% 62% (42%)
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 income). 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,
2000 1999 2000 1999
Gross Profit:
Outsourcing services 15% 20% 16% 21%
Software sales and maintenance
and enhancements 59% 46% 47% 46%
Software services 30% 33% 30% 29%
--- --- --- ---
Total 38% 34% 32% 32%
Revenues:
The 9% and 5% decreases in outsourcing services revenue in the third quarter
and first nine months of fiscal year 2000, respectively, compared with the
prior year periods, are primarily the result of the termination of a contract
and decreased non-recurring services provided under other contracts in the
fiscal year 2000 periods compared with the fiscal year 1999 periods.
Software sales increased 19% in the third quarter of fiscal year 2000 due to
increases in the process manufacturing and distribution, energy and
utilities, and government markets. These increases were offset by decreases
in the higher education market.
Software sales decreased 18% in the first nine months of fiscal year 2000
compared to the prior-year period due to the significantly decreased licenses
in each of the Company's markets in the first quarter of fiscal year 2000, as
well as, the decreases in licenses in the education market in the second and
third quarters. The Company believes the first quarter decrease was
primarily the result of a year 2000 slowdown in enterprise application
software licensing.
The 18% and 17% increases in maintenance and enhancements revenue in the
third quarter and first nine months of fiscal year 2000, respectively, were
the result of the growing installed base of clients in all of the Company's
markets. The Company continues to experience a high annual renewal rate on
existing maintenance contracts in these marketplaces, although there can be
no assurances that this will continue.
Software services revenue decreased 25% and 13% in the third quarter and
first nine months of fiscal year 2000, respectively, compared to the prior-
year periods primarily as the result of decreased implementation and
integration services performed in the process manufacturing and distribution
and energy and utilities markets and decreased year 2000 services provided to
other markets. The implementation and integration services decreases were
primarily the result of decreased licenses at the end of fiscal year 1999 and
in the first quarter of fiscal year 2000.
The increases in interest and other revenue in the third quarter of fiscal
year 2000 are attributable to the pre-tax gains on the sale of the Company's
eFile Management middleware and SCT Learning Suite products totaling $6.4
million.
Gross Profit:
Gross profit increased as a percentage of total revenue (excluding interest
and other income) from 34% for the third quarter of fiscal year 1999 to 38%
for the third quarter of fiscal year 2000. The total gross profit percentage
increased primarily because of increases in the software sales and
maintenance and enhancements gross profit, which makes up the greatest
portion of the Company's gross profit. The increase is the result of
increased license fee and maintenance and enhancements revenues during the
quarter and continued cost controls implemented in the first quarter. This
increase was partially offset by decreases in the software services' and
outsourcing services' gross profits. The software services' and outsourcing
services' gross profits decreased primarily as a result of decreased revenues
without a commensurate decrease in fixed expenses. The outsourcing services'
gross profit was further reduced by a cost overrun on one contract during the
quarter.
Although the gross profit as a percentage of revenues was 32% for the nine
months ended June 30, 2000 and 1999, the components of the gross profit
changed from fiscal year 1999 to fiscal year 2000. The gross profit for
software sales increased slightly as a result of increased license fees in
the third quarter of fiscal year 2000. The software services' gross profit
also improved slightly for the nine months ended June 30, 2000 compared with
the nine months ended June 30, 1999 primarily as a result of improved
efficiencies in the first and second quarters of fiscal year 2000. The
outsourcing services' gross profit decreased primarily as result of decreased
revenues in fiscal year 2000 compared with the prior-year period and several
adjustments recorded in the second quarter of fiscal year 2000 related to
certain contract provisions.
LIQUIDITY, CAPITAL RESOURCES, AND FINANCIAL POSITION
The Company's cash and short-term investments balance was $40.6 million and
$31.1 million at June 30, 2000 and September 30, 1999, respectively. Cash
provided by operating activities was $22.6 million for the first nine months
of fiscal year 2000 compared with cash used of $12.7 million for the first
nine months of fiscal year 1999. Operating cash flows increased in fiscal
year 2000 primarily as a result of (1) increases in accounts receivable and
other current assets, primarily current tax assets, that were smaller in the
fiscal year 2000 nine-month period compared with the fiscal year 1999 nine-
month period and (2) increases in deferred revenue. The smaller increases in
accounts receivable and current tax assets were the result of decreased
revenues and net income. The increase in deferred revenue was primarily the
result of a pre-payment on maintenance services by a client in the energy and
utilities market.
During the quarter ended December 31, 1999, the Company implemented a
restructuring plan, which included the termination of employees and
discontinuation of non-critical programs. The restructuring was considered
necessary in light of significantly decreased license fees in the first
quarter. During the quarter ended December 31, 1999, the Company accrued $1
million, of which $157,000 remains at June 30, 2000, related to severance and
termination benefits based on a termination plan developed by management in
consultation with the Board of Directors in December 1999. In January 2000,
the Company terminated approximately 100 employees engaged in marketing,
administrative, special programs and development functions, representing all
the terminations contemplated by the plan. The Company began to experience
cost savings related to the restructuring in the second quarter of fiscal
year 2000.
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 software services 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, although additional unbilled accounts
receivable will continue to build based on the terms of the contracts. 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 used in investing activities was $25.5 million for the first nine months
of fiscal year 2000 compared with cash provided by investing activities of
$21.1 million in fiscal year 1999. The primary uses of cash in the nine
months ended June 30, 2000 were the purchase of short-term and long-term
investments, the purchase of property and equipment, and software
capitalization. Purchases of property and equipment and software
capitalization have been curtailed in fiscal year 2000. Fiscal year 2000
total property and equipment purchases are expected to remain below fiscal
year 1999 levels. In the first nine months of fiscal year 1999 cash was
provided by the sale and maturity of available-for-sale investments and used
for the fit-up and remodeling of a new office building in the Company's
Malvern campus and construction of a new building adjacent to the Company's
existing building in Columbia, SC.
Cash provided by financing activities of $3.1 million for the first nine
months of fiscal year 2000 consists primarily of proceeds from the exercises
of stock options. During the fiscal year 1999 period, the primary use of
cash was the repurchase of Company stock.
The Company has a $30 million senior revolving credit facility available for
general corporate purposes. The credit facility agreement expires in June
2002 with optional annual renewals. There were no borrowings outstanding at
June 30, 2000 or September 30, 1999. 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 Company may not pay dividends (other than dividends payable
in common stock) or acquire any of its capital stock outstanding without a
written waiver from its lender.
The Company believes that its cash and cash equivalents, short-term
investments, and borrowing arrangements should satisfy its financing needs
for the foreseeable future.
Acquisitions and Dispositions:
In April 2000, the Company acquired the assets of a division of Pinnacle
Software Corporation for consideration of $2.4 million, of which $2 million
is payable in October, 2000, contingent upon certain performance measures.
The acquired business includes an established workforce of 16 employees who
have provided maintenance and enhancement services to some of the Company's
higher education clients over the past 10 years, and includes Pinnacle's
reporting solutions product that enhances the financial reporting and report
distribution capabilities of universities using some of the Company's
administrative applications.
In a transaction with JusticeLink/CourtLink in April 2000 the Company sold
its eFile Management middleware for $4.0 million and an equity investment in
the newly formed JusticeLink/CourtLink valued at $2.5 million. The Company
recorded a pre-tax gain related to this sale of $6.0 million in other income
during the quarter.
In June 2000, the Company sold its SCT Learning Suite distance learning
course creation tools to WebCT, Inc., in return for common stock of WebCT
valued at $2.5 million resulting in a pre-tax gain of $0.4 million, recorded
as other income. As part of the transaction, the Company signed a noncompete
agreement valued at $3.5 million. The Company also made an additional $10
million investment in preferred stock of WebCT. The total $16 million equity
investment represents an 8.6% interest in WebCT. In addition, the Company
could earn additional equity in WebCT in the future through performance-based
compensation dependent on delivery of commitments from schools choosing WebCT
as their primary supported enterprise-wide course tools platform.
Investment in Campus Pipeline, Inc.:
Throughout fiscal year 1999, the Company made a series of investments in
Campus Pipeline, Inc., and, as of June 30, 2000, held an approximately 56%
interest in the common stock of this affiliate, with a carrying amount of
zero. The Company has determined that it does not control Campus Pipeline
because there are fully voting convertible preferred shares outstanding that
lower the Company's voting interest to approximately 41%. Therefore the
Company has accounted for its investment using the equity method of
accounting. During the first six months of fiscal year 2000, the Company
recorded its proportionate share, $4.8 million, of the affiliate's losses up
to the point that its investment was reduced to zero. The Company will not
record any additional future losses of Campus Pipeline and any future
earnings will not be recorded until the cumulative unrecorded losses are
offset.
New Accounting Standards:
In October 1997, the American Institute of Certified Public Accountants
issued Statement of Position (SOP) 97-2, "Software Revenue Recognition,"
which provides guidance on recognizing revenue on software transactions.
SOP 98-4, "Deferral of Certain Provisions of SOP 97-2" and SOP 98-9,
"Modification of SOP 97-2, Software Revenue Recognition, with Respect to
Certain transactions," were issued in 1998 as amendments to SOP 97-2.
SOP 97-2 and SOP 98-4 were effective for the Company's fiscal year beginning
October 1, 1998 and SOP 98-9 was effective for the fiscal year beginning
October 1, 1999. Based on the Company's interpretation of the requirements
of SOP 97-2, as amended, the adoption of this statement has not had and is
not expected to have a significant impact on the Company's results of
operations. However, the accounting profession continues to review certain
provisions of SOP 97-2, as amended, with the objective of providing
additional guidance on implementing its provisions. Depending upon the
outcome of these reviews and the issuance of implementation guidelines and
interpretations, the Company may be required to change its revenue
recognition policies and business practices, and such changes could have an
adverse effect on the Company's business, results of operations, and/or
financial condition.
During fiscal year 2000, the Securities and Exchange Commission issued Staff
Accounting Bulletin 101, "Revenue Recognition" (SAB 101). The SAB provides
examples of how the staff applies the criteria to specific fact patterns such
as bill-and-hold transactions, up-front fees when the seller has significant
continuing involvement, long-term service transactions, refundable membership
fees, retail layaway sales, and contingent rental income. The SAB also
addresses whether revenue should be presented on a gross or net (e.g., a
commission) basis for certain transactions, such as sales on the Internet.
In addition, the SAB provides guidance on the disclosures registrants should
make about their revenue recognition policies and the impact of events and
trends on revenue. The Company is required to adopt the provisions of SAB
101 by the fourth quarter of fiscal year 2001. The adoption of SAB 101 is
not expected to have a significant impact on the Company's results of
operations.
In March 2000, the Financial Accounting Standards Board issued FASB
Interpretation No. 44, "Accounting for Certain Transactions involving Stock
Compensation, an interpretation of APB Opinion No. 25." The company is
required to adopt the Interpretation on July 1, 2000. The Interpretation
clarifies guidance for certain issues that arose in the application of APB
Opinion No. 25, "Accounting for Stock Issued to Employees." The adoption of
Interpretation 44 is not expected to have a significant impact on the
Company's results of operations.
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, estimates, intentions, beliefs, anticipations, plans,
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 that
may have a material adverse effect on the Company's business, results of
operations, and/or financial condition.
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
cancelled 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.
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 return to its historical 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 necessary 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, results of operations, and/or 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. In addition, new distribution methods, like electronic
channels and opportunities presented by the Internet and electronic commerce,
have removed many of the barriers to entry historically faced by small and
start-up companies in the software industry. The Company expects to face
increasing competition in the various markets in which it competes.
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.
The impact on the Company of emerging areas such as the Internet, on-line
services, and electronic commerce is uncertain. There can be no assurance
that the Company will be able to provide a product offering that will satisfy
new customer demands in these areas. In addition, standards for network
protocols, and other industry standards for the Internet are evolving
rapidly. There can be no assurance that standards chosen by the Company will
position its products to compete effectively for business opportunities as
they arise on the Internet and in other emerging areas.
The Company relies on a combination of copyright, trademark, trade secrets,
confidentiality procedures, and contractual procedures to protect its
intellectual property rights. Despite the Company's efforts to protect its
intellectual property rights, it may be possible for unauthorized third
parties to copy certain portions of the Company's products or to reverse
engineer or obtain and use technology or other information that the Company
regards as proprietary. There can also be no assurances that the Company's
intellectual property rights would survive a legal challenge to their
validity or provide significant protection to the Company. In addition, the
laws of certain countries do not protect the Company's proprietary rights to
the same extent as do the laws of the United States. Accordingly, there can
be no assurance that the Company will be able to protect its proprietary
technology against unauthorized third-party copying or use, which could
adversely affect the Company's competitive position.
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; the
Company's ability to complete fixed-price contracts profitably; market
acceptance of the Campus Pipeline and WebCT products; the ability of Campus
Pipeline and WebCT to meet development and implementation schedules and
enhance their products over time; and the Company's ability to integrate the
Campus Pipeline and WebCT products with the Company's products cost-
effectively and on a timely basis.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
There have been no material changes in quantitative or qualitative
disclosures for fiscal year 2000. Reference is made to Item 7A in the Annual
Report on Form 10-K for the year ended September 30, 1999.
<PAGE>
SYSTEMS & COMPUTER TECHNOLOGY CORPORATION AND SUBSIDIARIES
PART II
Item 6 (a). Exhibits
Exhibit 27 - Financial Data Schedule
Item 6 (b). Reports on Form 8-K
The registrant did not file any current reports on Form 8-K during the three
months ended June 30, 2000
<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: 08/11/00 /s/ Eric Haskell
________________________________
Eric Haskell
Senior Vice President, Finance & Administration,
Treasurer, and Chief Financial Officer
