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 March 31, 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.
32,496,914 Common shares, $.01 par value, as of May 3, 2000
Page 1 of 20 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 -
March 31, 2000 and September 30, 1999
Condensed Consolidated Statements of Operations -
Three Months Ended March 31, 2000 and 1999
Condensed Consolidated Statements of Operations -
Six Months Ended March 31, 2000 and 1999
Condensed Consolidated Statements of Cash Flows -
Six Months Ended March 31, 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 4. Submission of Matters to a Vote of Security Holders
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)
March 31, September 30,
2000 1999
(UNAUDITED) (NOTE)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 25,938 $ 27,030
Short-term investments, including
accrued interest of $127 and $2 4,331 4,078
Receivables, including $72,637
and $75,567 of earned revenues
in excess of billings, net of
allowance for doubtful accounts
of $6,403 and $5,841 151,036 148,967
Prepaid expenses and other receivables 30,235 23,030
-------- --------
TOTAL CURRENT ASSETS 211,540 203,105
PROPERTY AND EQUIPMENT--at cost, net
of accumulated depreciation 64,892 69,049
CAPITALIZED COMPUTER SOFTWARE COSTS,
net of accumulated amortization 21,767 22,097
COST IN EXCESS OF FAIR VALUE OF NET
ASSETS ACQUIRED, net of accumulated
amortization 16,861 17,772
OTHER ASSETS AND DEFERRED CHARGES 14,868 23,029
-------- --------
TOTAL ASSETS $329,928 $335,052
======== ========
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SYSTEMS & COMPUTER TECHNOLOGY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except per share amounts)
March 31, September 30,
2000 1999
(UNAUDITED) (NOTE)
LIABILITIES & STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 9,455 $ 14,002
Current portion of long-term debt 681 652
Income taxes payable 596 2,137
Accrued expenses 36,671 36,412
Deferred revenue 16,400 15,341
-------- --------
TOTAL CURRENT LIABILITIES 63,803 68,544
LONG-TERM DEBT, less current portion 77,885 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
37,094 and 36,734 shares 371 367
Capital in excess of par value 113,214 110,230
Retained earnings 100,663 103,251
Accumulated other comprehensive loss (487) (51)
-------- --------
213,761 213,797
Less
Held in treasury, 4,642 common
shares--at cost (24,911) (24,911)
Notes receivable from stockholders (610) (610)
-------- --------
188,240 188,276
-------- --------
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY $329,928 $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
March 31,
2000 1999
Revenues:
Outsourcing services $ 33,309 $ 34,364
Software sales 19,297 17,092
Maintenance and enhancements 23,681 21,028
Software services 37,704 43,859
Other, primarily interest 279 735
-------- -------
114,270 117,078
Expenses:
Cost of outsourcing services 28,992 26,763
Cost of software sales and
maintenance and enhancements 22,812 22,074
Cost of software services 24,166 30,662
Selling, general and administrative 28,810 28,432
Equity in losses of affiliates 2,220 352
Interest expense 1,136 1,210
-------- -------
108,136 109,493
Income before income taxes 6,134 7,585
Provision for income taxes 2,515 3,413
-------- -------
Net income $ 3,619 4,172
======== =======
Net income per common share $ 0.11 $ 0.13
Net income per share - assuming dilution $ 0.11 $ 0.13
Common shares and equivalents outstanding:
Average common shares 32,324 32,291
Average common shares - assuming dilution 33,847 32,921
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 Six Months Ended
March 31,
2000 1999
Revenues:
Outsourcing services $ 65,451 $ 67,876
Software sales 24,223 38,561
Maintenance and enhancements 45,001 38,813
Software services 75,690 80,289
Other, primarily interest 584 1,308
-------- -------
210,949 226,847
Expenses:
Cost of outsourcing services 54,986 53,358
Cost of software sales and
maintenance and enhancements 42,661 42,214
Cost of software services 52,372 58,701
Selling, general and administrative 56,595 54,838
Equity in losses of affiliates 4,761 352
Restructuring charges 1,000 --
Interest expense 2,292 2,355
-------- -------
214,667 211,818
Income (loss) before income taxes (3,718) 15,029
Provision (benefit) for income taxes (1,130) 6,391
-------- -------
Net income (loss) $(2,588) 8,638
======== =======
Net income (loss) per common share $(0.08) $ 0.26
Net income (loss) per share - assuming dilution $(0.08) $ 0.26
Common shares and equivalents outstanding:
Average common shares 32,230 32,661
Average common shares - assuming dilution 32,230 33,767
See notes to condensed consolidated financial statements.
(PAGE)
SYSTEMS & COMPUTER TECHNOLOGY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(in thousands)
For the Six Months Ended
March 31,
2000 1999
OPERATING ACTIVITIES
Net income (loss) $ (2,588) $ 8,638
Adjustments to reconcile net income (loss)
to net cash provided by (used in)
operating activities:
Depreciation and amortization 13,369 12,636
Provision for doubtful accounts 1,307 778
Equity in losses of affiliate 4,761 352
Changes in operating assets and liabilities:
Increase in receivables (3,376) (17,351)
Increase in other current assets (7,205) (11,824)
Decrease in accounts payable (4,547) (2,403)
Decrease in income taxes payable (1,541) (680)
Increase (decrease) in deferred revenue 1,059 (1,317)
Other, net 800 (1,404)
--------- --------
NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES 2,039 (12,575)
INVESTING ACTIVITIES
Purchase of property and equipment (3,028) (17,367)
Capitalized computer software costs (2,557) (4,550)
Purchase of investments available for sale (4,254) (402)
Proceeds from sale or maturity of
investments available for sale 4,106 43,715
Investment in Campus Pipeline, Inc. -- (2,831)
--------- ---------
NET CASH (USED IN) PROVIDED BY
INVESTING ACTIVITIES (5,733) 18,565
FINANCING ACTIVITIES
Repayment of borrowings (17,118) (32,699)
Proceeds from borrowings, net of
issuance costs 16,800 33,992
Repurchase of Company stock -- (21,952)
Proceeds from exercise of stock options 2,920 475
--------- ---------
NET CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES 2,602 (20,184)
DECREASE IN CASH & CASH EQUIVALENTS (1,092) (14,194)
CASH & CASH EQUIVALENTS-BEGINNING OF PERIOD 27,030 18,942
--------- ---------
CASH & CASH EQUIVALENTS-END OF PERIOD $ 25,938 $ 4,748
========= =========
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 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 six-month periods ended March 31, 2000
are not necessarily indicative of the results that may be expected for the
year ending September 30, 2000.
NOTE B--RECLASSIFICATION
Certain quarterly information has been reclassified to conform with the
March 31, 2000 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 March 31, 2000, 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 March 31, 2000 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 March 31, 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. The Company's proportionate share of the affiliate's losses for
the six months ended March 31, 2000 was $4.8 million.
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 For the Six Months
Ended March 31, Ended March 31,
2000 1999 2000 1999
Numerator:
Net income (loss) available to
common stockholders, used
for net income (loss) per
common share $3,619 $4,172 $(2,588) $8,638
Effect of dilutive securities: -- -- -- --
Net income (loss) available
to common stockholders after
assumed conversions $3,619 $4,172 $(2,588) $8,638
====== ====== ======= ======
Denominator:
Denominator for net income
(loss) per common share-
weighted average shares 32,324 32,291 32,230 32,661
Effect of dilutive securities:
Employee stock options 1,523 630 -- 1,106
------- ------- ------- -------
Denominator for net income
(loss) per share - assuming
dilution 33,847 32,921 32,230 33,767
======= ======= ======= =======
Net income (loss) per common share $0.11 $0.13 $(0.08) $0.26
===== ===== ====== =====
Net income (loss) per share -
assuming dilution $0.11 $0.13 $(0.08) $0.26
===== ===== ====== =====
Potentially dilutive securities with an anti-dilutive effect (convertible
debt in all periods presented above and stock options in the six-month period
of fiscal year 2000) are not included in the above calculations.
NOTE F--PRODUCT DEVELOPMENT
Product development expenditures, including software maintenance
expenditures, for the six months ended March 31, 2000 and 1999, were
approximately $27.6 million and $26.9 million, respectively. After
capitalization, these amounts were approximately $25.0 million and $22.3
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 $2.9 million and $2.8 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
income is not included in the segment disclosures below.
Three months ended March 31, 2000
All
GES GGS M&DS EUC Other Total
Outsourcing services $10,245 $14,869 $ 3,713 $ 3,785 $ 697 $33,309
Software sales and
maintenance and
enhancements 23,768 6,096 7,364 5,750 -- 42,978
Software services 14,290 3,145 7,009 13,109 151 37,704
------- ------- ------- ------- ------- -------
External revenues 48,303 24,110 18,086 22,644 848 113,991
Intersegment revenues 246 21 6 -- (273) --
Segment profit (loss) 6,425 2,841 (1,394) 1,098 (2,836) 6,134
Three months ended March 31, 1999
All
GES GGS M&DS EUC Other Total
Outsourcing services $10,281 $15,336 $ 1,926 $ 4,595 $2,226 $ 34,364
Software sales and
maintenance and
enhancements 26,780 3,019 3,886 4,445 (10) 38,120
Software services 12,113 2,937 11,686 14,291 2,832 43,859
------- ------- ------- ------- ------- -------
External revenues 49,174 21,292 17,498 23,331 5,048 116,343
Intersegment revenues 164 29 8 746 (947) --
Segment profit (loss) 12,672 894 (2,256) (2,179) (1,546) 7,585
Six months ended March 31, 2000
All
GES GGS M&DS EUC Other Total
Outsourcing services $21,183 $30,110 $ 5,310 $ 7,315 $1,533 $65,451
Software sales and
maintenance and
enhancements 41,341 8,436 10,331 9,116 -- 69,224
Software services 27,321 5,676 16,357 25,896 440 75,690
------- ------- ------- ------- ------- -------
External revenues 89,845 44,222 31,998 42,327 1,973 210,365
Intersegment revenues 592 24 12 -- (628) --
Segment profit (loss) 7,462 2,158 (5,589) (2,141) (5,608) (3,718)
Six months ended March 31, 1999
All
GES GGS M&DS EUC Other Total
Outsourcing services $20,362 $30,764 $ 3,770 $ 8,724 $4,256 $ 67,876
Software sales and
maintenance and
enhancements 47,387 7,076 11,565 11,250 96 77,374
Software services 22,804 4,846 21,372 26,382 4,885 80,289
------- ------- ------- ------- ------- -------
External revenues 90,553 42,686 36,707 46,356 9,237 225,539
Intersegment revenues 219 79 18 1,299 (1,615) --
Segment profit (loss) 21,312 1,679 (2,074) (3,198) (2,690) 15,029
NOTE H--COMPREHENSIVE INCOME
(in thousands)
Total comprehensive income (loss) is comprised of:
Three Months Six Months
Ended Ended
March 31, March 31,
2000 1999 2000 1999
Net income (loss) $3,619 $4,172 $(2,588) $8,638
Other comprehensive income (loss) (149) 20 (436) (59)
-------- ------- -------- -------
Total Comprehensive Income (Loss) $3,470 $4,192 $(3,024) $8,579
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.
(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 Mos. Six Mos. Three Mos. Six Mos.
Ended Ended Ended Ended
March 31, March 31, March 31 March 31
2000 1999 2000 1999
Revenues:
Outsourcing services 29% 29% 31% 30% (4%) (4%)
Software sales 17% 14% 12% 17% 13% (37%)
Maintenance and enhancements 21% 18% 21% 17% 13% 16%
Software services 33% 38% 36% 35% (14%) (6%)
Other -- 1% -- 1% (62%) (55%)
---- ---- ---- ----
Total 100% 100% 100% 100% (2%) (7%)
Expenses:
Cost of services, sales and
maintenance and enhancements 67% 68% 71% 68% (4%) (3%)
Selling, general and
administrative 25% 24% 27% 24% 1% 3%
Equity in losses of affiliates 2% -- 2% -- 531% 1253%
Restructuring charges -- -- 1% -- -- --
Interest expense 1% 1% 1% 1% (6%) (3%)
Income (loss) before
income taxes 5% 7% (2%) 7% (19%) (125%)
The following table sets forth the gross profit for each of the following
revenue categories as a percentage of revenue for each such category and the
total gross profit as a percentage of total revenue (excluding interest and
other revenue). The Company does not separately present the cost of
maintenance and enhancements revenue as it is impracticable to separate such
cost from the cost of software sales.
Three Months Six Months
Ended Ended
March 31, March 31,
2000 1999 2000 1999
Gross Profit:
Outsourcing services 13% 22% 16% 21%
Software sales and maintenance
and enhancements 47% 42% 38% 45%
Software services 36% 30% 31% 27%
--- --- --- ---
Total 33% 32% 29% 32%
Revenues:
The 4% decrease in outsourcing services revenue in the second quarter and
first six months of fiscal year 2000, compared with the comparable prior year
periods, is primarily the result of the termination of a contract and
decreased non-recurring services provided under two other contracts in the
fiscal year 2000 periods compared with the fiscal year 1999 periods. These
decreases were partially offset by significant pass-through revenue related
to expenses recorded for a client in the process manufacturing and
distribution market in the second quarter of fiscal year 2000. The Company
does not expect this level of pass-through expense to continue in future
quarters.
Software sales increased 13% in the second 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,
when compared to the prior year period, in the higher education market, which
the Company believes was primarily the result of the release.
Software sales decreased 37% in the first six 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.
The Company believes the first quarter decrease was primarily the result of a
year 2000 slowdown in enterprise application software licensing.
The 13% and 16% increases in maintenance and enhancements revenue in the
second quarter and first six 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 14% and 6% in the second quarter and
first six months of fiscal year 2000, respectively, compared to the prior-
year periods primarily as the result of decreased implementation and
integration services in the energy and utilities and process manufacturing
and distribution markets. These decreases were primarily the result of
decreased licenses in the first quarter of fiscal year 2000. Additionally
there were decreases, compared to the prior-year period, in year 2000
services provided to other markets.
Gross Profit:
Gross profit increased as a percentage of total revenue (excluding other
revenue) from 32% for the second quarter of fiscal year 1999 to 33% for the
second 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
percentage of the Company's gross profit. The increase is the result of
increased license fee revenues during the quarter and continued cost controls
implemented in the first quarter. Additionally the software services gross
profit increased as a result of improved efficiencies primarily in the energy
and utilities market. These increases were partially offset by a decrease in
the outsourcing services gross profit as a result of decreased revenues in
the second quarter of fiscal year 2000 compared with the prior-year period
and several adjustments related to certain contract provisions. The Company
believes that the outsourcing margins should improve over the remainder of
the fiscal year.
Gross profit decreased as a percentage of total revenue (excluding other
revenue) from 32% for the first six months of fiscal year 1999 to 29% for the
first six months of fiscal year 2000. The total gross profit percentage
decreased primarily because of a decrease in software sales during the first
quarter of fiscal year 2000, without a commensurate decrease in fixed
expenses. This decrease was the result of significantly decreased software
licenses in most 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 gross profit levels. The outsourcing services gross profit
decreased as a result of decreased revenues in fiscal year 2000 compared with
the prior-year period and several adjustments recorded in the second quarter
related to certain contract provisions. 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 market.
Investment in Campus Pipeline, Inc.
Throughout fiscal year 1999, the Company made a series of investments in
Campus Pipeline, Inc., and, as of March 31, 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. The Company's proportionate share of the affiliate's losses for
the six months ended March 31, 2000 was $4.8 million.
LIQUIDITY, CAPITAL RESOURCES, AND FINANCIAL POSITION
The Company's cash and short-term investments balance was $30.3 million and
$31.1 million at March 31, 2000 and September 30, 1999, respectively. Cash
provided by operating activities was $2.0 million for the first six months of
fiscal year 2000 compared with cash used of $12.6 million for the first six
months of fiscal year 1999. Operating cash flows increased in fiscal year
2000 primarily because increases in accounts receivable and other current
assets, primarily current tax assets, were smaller in the fiscal year 2000
six-month period compared with the fiscal year 1999 six-month period. These
smaller increases in accounts receivable and current tax assets were the
result of decreased revenues and net income.
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 $327,000 remains at March 31, 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 has
begun 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 $5.7 million for the first six months
of fiscal year 2000 compared with cash provided by investing activities of
$18.6 million in fiscal year 1999. The primary uses of cash in the six
months ended March 31, 2000 were the purchase of property and equipment and
software capitalization. However, purchases of property and equipment and
software capitalization have been significantly curtailed in fiscal year
2000. The Company expects to increase capital spending in the third or
fourth quarter of fiscal year 2000 if results of operations continue to
improve. However, fiscal year 2000 total property and equipment purchases
will most likely remain below fiscal year 1999 levels. In the first six
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 $2.6 million for the first six
months of fiscal year 2000 consists primarily of proceeds from the exercises
of stock options. During the first quarter of fiscal year 1999, 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
2001 with optional annual renewals. There were no borrowings outstanding at
March 31, 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.
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
8-4, "Deferral of Certain Provisions of SOP 97-2" and SOP 98-9, "Modification
f 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.
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; the
Company's ability to complete fixed-price contracts profitably; market
acceptance of the Campus Pipeline product; the ability of Campus Pipeline to
meet development and implementation schedules and enhance its product over
time; and the Company's ability to integrate the Campus Pipeline product 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 4. Submission of Matters to a Vote of Security Holders
At the Company's Annual Meeting of Shareholders held on February 25, 2000,
Gabriel A. Battista was reelected as a director of the Company for a term
expiring at the Company's 2003 Annual Meeting of Shareholders. There were
26,525,756 votes cast in favor of the election of Mr. Battista and 234,643
votes withheld from his election.
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 March 31, 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: 05/12/00 /s/ Eric Haskell
________________________________
Eric Haskell
Senior Vice President, Finance & Administration,
Treasurer, and Chief Financial Officer
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The schedule contains summary financial information extracted from the
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<NAME> SYSTEMS & COMPUTER TECHNOLOGY CORPORATION
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