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, 1999
or
/ / Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from _______ to _______.
0-11521
(Commission File Number)
SYSTEMS & COMPUTER TECHNOLOGY CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 23-1701520
(State or other jurisdiction (I.R.S. Employer
of incorporation) Identification No.)
Great Valley Corporate Center
4 Country View Road
Malvern, Pennsylvania 19355
(Address of principal executive offices)
Registrant's telephone number, including area code: (610)647-5930
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes /X/ No / /
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
32,227,540 Common shares, $.01 par value, as of February 4, 2000
Page 1 of 19 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, 1999 and September 30, 1999
Condensed Consolidated Statements of Operations -
Three Months Ended December 31, 1999 and 1998
Condensed Consolidated Statements of Cash Flows -
Three Months Ended December 31, 1999 and 1998
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
<PAGE>
SYSTEMS & COMPUTER TECHNOLOGY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except per share amounts)
December 31, September 30,
1999 1999
(UNAUDITED) (NOTE)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 11,275 $ 27,030
Short-term investments, including
accrued interest of $46 and $2 7,541 4,078
Receivables, including $64,516
and $75,567 of earned revenues
in excess of billings, net of
allowance for doubtful accounts
of $6,419 and $5,841 147,140 148,967
Prepaid expenses and other receivables 26,916 23,030
-------- --------
TOTAL CURRENT ASSETS 192,872 203,105
PROPERTY AND EQUIPMENT--at cost, net
of accumulated depreciation 66,957 69,049
CAPITALIZED COMPUTER SOFTWARE COSTS,
net of accumulated amortization 22,252 22,097
COST IN EXCESS OF FAIR VALUE OF NET
ASSETS ACQUIRED, net of accumulated
amortization 17,317 17,772
OTHER ASSETS AND DEFERRED CHARGES 19,316 23,029
-------- --------
TOTAL ASSETS $318,714 $335,052
======== ========
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SYSTEMS & COMPUTER TECHNOLOGY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except per share amounts)
December 31, September 30,
1999 1999
(UNAUDITED) (NOTE)
LIABILITIES & STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 7,620 $ 14,002
Current portion of long-term debt 4,397 652
Income taxes payable 799 2,137
Accrued expenses 29,752 36,412
Deferred revenue 15,642 15,341
-------- --------
TOTAL CURRENT LIABILITIES 58,210 68,544
LONG-TERM DEBT, less current portion 78,061 78,232
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
36,841 and 36,734 shares 368 367
Capital in excess of par value 110,890 110,230
Retained earnings 97,044 103,251
Accumulated other comprehensive loss (338) (51)
-------- --------
207,964 213,797
Less
Held in treasury, 4,642 common
shares--at cost (24,911) (24,911)
Notes receivable from stockholders (610) (610)
-------- --------
182,443 188,276
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $318,714 $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.
<PAGE>
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,
1999 1998
Revenues:
Outsourcing services $ 32,142 $ 33,512
Software sales 4,926 21,469
Maintenance and enhancements 21,320 17,785
Software services 37,986 36,430
Other, primarily interest 305 573
-------- -------
96,679 109,769
Expenses:
Cost of outsourcing services 25,994 26,595
Cost of software sales and
maintenance and enhancements 19,849 20,140
Cost of software services 28,206 28,039
Selling, general and administrative 27,785 26,406
Equity in losses of affiliates 2,541 --
Restructuring charges 1,000 --
Interest expense 1,156 1,145
-------- -------
106,531 102,325
Income (loss) before income taxes (9,852) 7,444
Provision (benefit) for income taxes (3,645) 2,978
-------- -------
Net income (loss) $(6,207) 4,466
======== =======
Net income (loss) per common share $(0.19) $ 0.14
Net income (loss) per share - assuming dilution $(0.19) $ 0.13
Common shares and equivalents outstanding:
Average common shares 32,137 33,024
Average common shares - assuming dilution 32,137 34,616
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,
1999 1998
OPERATING ACTIVITIES
Net income $ (6,207) $ 4,466
Adjustments to reconcile net income to
net cash (used in) operating activities:
Depreciation and amortization 6,528 6,005
Equity in losses of affiliate 2,541 --
Changes in operating assets and liabilities:
Decrease (increase) in receivables 1,008 (11,173)
(Increase) in other current assets (3,886) (5,715)
(Decrease) in accounts payable (6,382) (4,496)
(Decrease) increase in income
taxes payable (1,338) 156
(Decrease) in accrued expenses (6,660) (3,543)
Increase in deferred revenue 301 1,977
Other, net 540 (110)
--------- --------
NET CASH (USED IN) OPERATING ACTIVITIES (13,555) (12,433)
INVESTING ACTIVITIES
Purchase of property and equipment (1,512) (8,114)
Capitalized computer software costs (1,433) (1,973)
Purchase of investments available for sale (4,179) --
Proceeds from sale or maturity of
investments available for sale 754 19,161
Investment in Campus Pipeline, Inc. -- (2,800)
--------- ---------
NET CASH (USED IN) PROVIDED BY
INVESTING ACTIVITIES (6,370) 6,274
FINANCING ACTIVITIES
Repayment of borrowings (10,026) (7,697)
Proceeds from borrowings, net of
issuance costs 13,600 16,892
Repurchase of Company stock -- (10,343)
Proceeds from exercise of stock options 596 299
--------- ---------
NET CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES 4,170 (849)
(DECREASE)IN CASH & CASH EQUIVALENTS (15,755) (7,008)
CASH & CASH EQUIVALENTS-BEGINNING OF PERIOD 27,030 18,942
--------- ---------
CASH & CASH EQUIVALENTS-END OF PERIOD $ 11,275 $ 11,934
========= =========
See notes to condensed consolidated financial statements.
<PAGE>
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 (except for the fiscal year 2000 restructuring charge,
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, 1999.
Operating results for the three-month period ended December 31, 1999 are not
necessarily indicative of the results that may be expected for the year
ending September 30, 2000.
NOTE B--RECLASSIFICATION
Certain prior-year information has been reclassified to conform with the
December 31, 1999 classification.
NOTE C--CASH AND SHORT-TERM INVESTMENTS
Cash Equivalents: Cash equivalents are short-term, highly liquid investments
with a maturity of three months or less at the date of purchase.
Short-Term Investments: Short-term investments consist of corporate debt
securities. Management determines the appropriate classification of debt
securities at the time of purchase. At December 31, 1999, the Company has
classified all securities as available for sale. The available-for-sale
portfolio, stated at fair value, is comprised of highly liquid investments
available for current operations and general corporate purposes and,
accordingly, is classified as short-term investments.
All securities held as available for sale at December 31, 1999 and September
30, 1999 have contractual maturities of less than one year.
NOTE D--INVESTMENT IN CAMPUS PIPELINE, INC.
Throughout fiscal year 1999, the Company made a series of investments in
Campus Pipeline, Inc., and, as of December 31, 1999, held an approximately
56% interest in the common stock of this affiliate, with a carrying amount of
$2.2 million. The Company has determined that its control of Campus Pipeline
is temporary as there are convertible preferred shares outstanding that, if
converted, would lower the Company's interest to approximately 46%.
Therefore the Company has accounted for its investment using the equity
method of accounting. The Company's proportionate share of the affiliate's
losses for the three months ended December 31, 1999 was $2.5 million.
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NOTE E--EARNINGS PER SHARE
(in thousands, except per share amounts)
A reconciliation of the numerators and the denominators of net income (loss)
per common share and net income (loss) per share - assuming dilution follows:
For the Three Months Ended
December 31,
1999 1998
Numerator:
Net income (loss) available to common
stockholders, used for net income
(loss) per common share $(6,207) $ 4,466
Effect of dilutive securities: -- --
Net income (loss) available to common
stockholders after assumed conversions $(6,207) $ 4,466
======= =======
Denominator:
Denominator for net income (loss) per
common share-weighted average shares 32,137 33,024
Effect of dilutive securities:
Employee stock options -- 1,592
------- -------
-- 1,592
Denominator for net income (loss)
per share - assuming dilution 32,137 34,616
======= =======
Net income (loss) per common share $(0.19) $0.14
====== =====
Net income (loss) per share - assuming dilution $(0.19) $0.13
====== =====
Potentially dilutive securities with an anti-dilutive effect (convertible
debt in 1999 and 1998 and stock options in 1999) are not included in the
above calculation.
NOTE F--PRODUCT DEVELOPMENT
Product development expenditures, including software maintenance
expenditures, for the three months ended December 31, 1999 and 1998, were
approximately $14.1 million and $13.1 million, respectively. After
capitalization, these amounts were approximately $12.7 million and $11.1
million, respectively, and were charged to operations as incurred. For the
same periods, amortization of capitalized software costs (not included in
expenditures above) amounted to $1.3 million and $1.1 million, respectively.
<PAGE>
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
income is not included in the segment disclosures below.
Three months ended December 31, 1999
All
GES GGS M&DS EUC Other Total
Outsourcing services $10,938 $15,241 $ 1,597 $ 3,530 $ 836 $32,142
Software sales and
maintenance and
enhancements 17,573 2,340 2,967 3,366 -- 26,246
Software services 13,031 2,531 9,348 12,787 289 37,986
------- ------- ------- ------- ------- -------
External revenues 41,542 20,112 13,912 19,683 1,125 96,374
Intersegment revenues 346 3 6 -- (355) --
Segment profit (loss) 1,037 (683) (4,195) (3,239) (2,772) (9,852)
Three months ended December 31, 1998
All
GES GGS M&DS EUC Other Total
Outsourcing services $10,081 $15,428 $ 1,844 $ 4,129 $2,030 $ 33,512
Software sales and
maintenance and
enhancements 20,607 4,057 7,679 6,805 106 39,254
Software services 10,691 1,909 9,686 12,091 2,053 36,430
------- ------- ------- ------- ------- -------
External revenues 41,379 21,394 19,209 23,025 4,189 109,196
Intersegment revenues 55 50 10 553 (668) --
Segment profit (loss) 8,640 785 182 (1,019) (1,144) 7,444
NOTE H--COMPREHENSIVE INCOME
(in thousands)
Total comprehensive income (loss) is comprised of:
Three Months
Ended
December 31,
1999 1998
Net income (loss) $(6,207) $4,466
Other comprehensive loss (287) (79)
-------- -------
Total Comprehensive Income (Loss) $(6,494) $4,387
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.
<PAGE>
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 Months Ended
December 31,
1999 1998
Revenues:
Outsourcing services 33% 30% (4%)
Software sales 5% 20% (77%)
Maintenance and enhancements 22% 16% 20%
Software services 39% 33% 4%
Other, primarily interest 1% 1% (47%)
----- ----- -----
Total 100% 100% (12%)
Expenses:
Cost of services, software sales
and maintenance and enhancements 76% 68% (1%)
Selling, general and administrative 29% 24% 5%
Equity in losses of affiliates 3% -- --
Restructuring charges 1% -- --
Interest expense 1% 1% 1%
Income (loss) before income taxes (10%) 7% (232%)
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,
1999 1998
Gross Profit:
Outsourcing services 19% 21%
Software sales and maintenance
and enhancements 24% 49%
Software services 26% 23%
--- ---
Total 23% 32%
Revenues:
The 4% decrease in outsourcing services revenue in the first quarter of
fiscal year 2000 compared with the first quarter of fiscal year 1999 is
primarily the result of the termination of a contract and the reduction of
non-recurring services provided under two other contracts in the first
quarter of fiscal year 2000.
Software sales decreased 77% in the first quarter of fiscal year 2000
compared to the prior-year period due to significantly decreased licenses in
each of the Company's markets. The Company believes this decrease is
primarily the result of a temporary year 2000 slowdown in enterprise
application software licensing.
The 20% increase in maintenance and enhancements revenue in the first three
months of fiscal year 2000 was 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 increased 4% in the first quarter of fiscal year
2000 compared to the prior-year period primarily as the result of increases
in implementation and integration services in the Company's reportable
segments. These increases were offset somewhat by decreases, compared to the
prior-year period, in year 2000 services provided to other markets.
Gross Profit:
Gross profit decreased as a percentage of total revenue (excluding other
revenue) from 32% for the first quarter of fiscal year 1999 to 23% for the
first quarter of fiscal year 2000. The total gross profit percentage
decreased primarily because of a decrease in software sales during the
quarter, without a commensurate decrease in fixed expenses. This decrease
was the result of significantly decreased software licenses in all of the
Company's markets, primarily, the Company believes, as a result of a
temporary year 2000 slowdown in enterprise application software licensing.
The software sales and maintenance and enhancements cost levels are based in
part on the Company's expectations. These costs were not reduced enough
during the first quarter of fiscal year 2000 to sustain the prior-year
quarter gross profit levels. The outsourcing services margin decreased
slightly as a result of decreased revenues in the first quarter of fiscal
year 2000 compared with the prior-year period. These decreases were
partially offset by an increase in the software services gross profit as a
result of improved efficiencies primarily in the energy and utilities and
process manufacturing and distribution markets. The Company is continuing to
focus on software services in each of its markets. Since services 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 gross margin.
Investment in Campus Pipeline, Inc.:
Throughout fiscal year 1999, the Company made a series of investments in
Campus Pipeline, Inc., and, as of December 31, 1999, held an approximately
56% interest in the common stock of this affiliate, with a carrying amount of
$2.2 million. The Company has determined that its control of Campus Pipeline
is temporary as there are convertible preferred shares outstanding that, if
converted, would lower the Company's interest to approximately 46%.
Therefore the Company has accounted for its investment using the equity
method of accounting. The Company's proportionate share of the affiliate's
losses for the three months ended December 31, 1999 was $2.5 million. The
Company expects that its investment will be reduced to zero in fiscal year
2000 as the Company continues to record its proportionate share of losses of
the affiliate.
LIQUIDITY, CAPITAL RESOURCES, AND FINANCIAL POSITION
The Company's cash and short-term investments balance was $18.8 million and
$31.1 million at December 31, 1999 and September 30, 1999, respectively.
Cash used in operating activities was $13.6 million for the first quarter of
fiscal year 2000 compared with $12.4 million for the first quarter of fiscal
year 1999. Operating cash flows decreased in the first quarter of fiscal
year 2000 primarily as the result of the loss recorded for the quarter and
decreases in accounts payable and accrued expenses. The decreases in
accounts payable and accrued expenses result from decreased personnel and
other administrative expenses during the quarter due to cost containment
measures.
During the quarter ended December 31, 1999, the Company implemented a
restructuring plan, which includes 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. The Company accrued $1 million during the quarter ended December
31, 1999 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 expects to begin 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 systems integration contracts, services are
performed by the Company but cannot be billed until a milestone is attained.
Revenue is usually recognized as work is performed. The resulting excess of
revenues over billings is reflected on the Company's Consolidated Balance
Sheet as unbilled accounts receivable. As an outsourcing services contract
proceeds, services are performed and expenses are incurred at a lesser rate,
resulting in billings exceeding revenue recognized, which causes a decrease
in the unbilled accounts receivable, as will the achievement of a milestone
in a systems integration services contract, 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 $6.4 million for the first quarter of
fiscal year 2000 compared with cash provided by investing activities of $6.3
million in fiscal year 1999. The primary use of cash in the three months
ended December 31, 1999 was the purchase of investments available for sale.
Purchases of property and equipment were significantly curtailed in the first
quarter of fiscal year 2000. The Company expects to increase capital
spending in the second or third quarter of fiscal year 2000 if results of
operations improve, however, fiscal year 2000 total property and equipment
purchases will most likely remain below fiscal year 1999 levels. In the
first quarter of fiscal year 1999 cash was provided by the sale and maturity
of available-for-sale investments and used in 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 $4.2 million for the first quarter
of fiscal year 2000 consists primarily of a net amount of $3.7 million
borrowed on the Company's revolving credit facility. During the first
quarter of fiscal year 1999 borrowings on the revolving credit facility were
offset by 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
2001 with optional annual renewals. Borrowings outstanding under the credit
facility were $3.7 million at December 31, 1999. There were no borrowings
outstanding at 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.
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.
Year 2000:
This section is a year 2000 readiness disclosure pursuant to the Year 2000
Information and Disclosure Act of 1998.
As described in Form 10-K for the year ended September 30, 1999, the Company
had developed plans to address possible year 2000 exposures related to the
Company's internal information technology (IT) systems, internal non-IT
systems, material third-party relationships, and the software products and
technology services sold by the Company. Since entering the year 2000, the
Company has not experienced any significant disruptions to its business nor
is it aware of any significant year 2000 related disruptions impacting its
customers or third party relationships. The Company will continue to monitor
its critical systems and its software products over the next several months.
The Company funded its year 2000 program from operating cash flows and did
not separately account for these costs in the past. The Company believes
that the vast majority of these costs, which were largely incurred in prior
fiscal years, were not incremental to the Company, but represented a
reallocation of exiting resources and does not believe that these costs have
been material to the Company's financial position.
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.
Over the past several years, many potential clients focused their efforts on
remediating existing systems or implementing new systems to solve year 2000
issues. While the Company believes that such evaluations favorably impacted
demand for its software products and services in fiscal years 1997 and 1998,
such demand diminished in fiscal year 1999 since services to remediate year
2000 issues had to be completed in a timely manner and lead times required to
complete systems implementations precluded system replacement as a timely
solution to the year 2000. This was especially apparent in the first quarter
of fiscal year 2000. 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 for fiscal year
2000 is limited. Customers slowed down computer software purchases in the
first quarter of fiscal year 2000 as they devoted more time to preparing the
testing of their systems for year 2000 readiness, rather than evaluating and
implementing new systems. It is difficult to predict if and when customer
software purchases will return to historical levels.
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; and the
Company's ability to complete fixed-price contracts profitably.
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
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 December 31, 1999.
<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: 02/11/00 /s/ Eric Haskell
________________________________
Eric Haskell
Senior Vice President, Finance & Administration,
Treasurer and Chief Financial Officer
<TABLE> <S> <C>
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<LEGEND>
The schedule contains summary financial information extracted from the
December 31, 1999 financial statements and is qualified in its entirety
by reference to such financial statements.
</LEGEND>
<CIK> 0000707606
<NAME> SYSTEMS & COMPUTER TECHNOLOGY CORPORATION
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