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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended September 30, 2000 Commission File No. 0-11521
SYSTEMS & COMPUTER TECHNOLOGY CORPORATION
(Exact name of registrant as specified in its charter)
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Delaware 23-1701520
(State or other jurisdiction of incorporation or organization) (IRS Employer Identification No.)
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4 Country View Road
Malvern, Pennsylvania 19355
(Address of principal executive offices)
Registrant's telephone number, including area code: (610) 647-5930
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
5% Convertible Subordinated Debentures Due 2004
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 ______
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ X ]
State the aggregate market value of the voting stock held by non-affiliates of
the registrant. The aggregate market value shall be computed by reference to the
price at which the stock was sold, or the average bid and asked prices of such
stock, as of a specified date within 60 days prior to the date of filing.
$379,773,687 at December 4, 2000
Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practicable date.
32,773,687 shares at December 4, 2000
DOCUMENTS INCORPORATED BY REFERENCE
Registrant's Definitive Proxy Statement to be delivered to shareholders in
connection with the Annual Meeting of Shareholders scheduled to be held on
February 23, 2001 is incorporated by reference to the extent provided in Part
III, Items 10-13.
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TABLE OF CONTENTS
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Page
Item Number and Caption Number
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PART I
Item 1. Business
Item 2. Properties
Item 3. Legal Proceedings
Item 4. Submission of Matters to a Vote of Security Holders
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
Item 6. Selected Financial Data
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Item 8. Financial Statements and Supplementary Data
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure
PART III
Item 10. Directors and Executive Officers of the Registrant
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners and Management
Item 13. Certain Relationships and Related Transactions
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
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PART I
ITEM 1. BUSINESS.
Systems & Computer Technology Corporation ("SCT" or the "Company"),
incorporated in Delaware in 1968, develops, licenses, and supports enterprise
software and provides a range of information technology services, including
outsourcing, systems implementation, systems integration and maintenance and
enhancements. The Company's primary markets are higher education; process
manufacturing and distribution; energy and utilities; and state and local
government.
The Company's software and services allow clients to enhance their
ability to compete through improved quality of information. The Company's focus
on four vertical markets enables it to develop and utilize a base of industry
expertise to deliver products and services that address specific client
requirements. By offering a continuum of information technology solutions
ranging from application software to large-scale outsourcing contracts, the
Company makes available technology and management tools to enable clients to
manage information resources efficiently and cost-effectively.
Banner(R), SCT(R), BillGen(R) and EnerLink(R) are registered trademarks
of the Company, and Adage(TM), Fygir(TM), Plus(TM) and SCT Synchro(TM) are
trademarks of the Company. SCT OnSite(R) is a registered service mark and
SinglePoint SolutionsSM is a service mark of the Company. All other trade names
referenced herein are the service marks, trademarks or registered trademarks of
their respective companies or organizations.
Markets
In fiscal year 2000, approximately 44% of the Company's revenues were
derived from the higher education market; approximately 20% were derived from
the state and local government market; approximately 21% were derived from the
energy and utilities market; and approximately 15% were derived from the process
manufacturing and distribution market. The principal markets for the Company's
offerings are in the United States. In fiscal year 2000, the Company's foreign
operations represented approximately 5% of revenues and the Company's export
sales represented approximately 4% of revenues.
Higher Education
The Company provides information technology services and application
software to higher education institutions. SCT has developed substantial
functional knowledge and technical expertise about the information technology
requirements of higher education institutions.
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SCT primarily targets the approximately 2,000 North American
English-speaking institutions of higher education with enrollments greater than
2,000 students for its software and services (of which approximately 300 are
potential candidates for SCT's outsourcing services), and licenses its
application software products to higher education institutions in other
geographic areas, primarily in Europe, Australia and South America. The Company
serves these markets with its Banner, Plus, Plus/IDMS and Web administrative
software offerings; with the products of certain third parties, including the
Campus Pipeline Web platform and portal software product, which the Company
markets on behalf of Campus Pipeline, Inc., and the WebCT e-learning tools and
e-learning hub, which the Company markets on behalf of WebCT, Inc.; and with
SCT's service offerings.
State and Local Government
The Company serves its primary target market of approximately 1,000
US-based government entities primarily with its SCT services offerings; with the
SCT Courts application software suite, including the recently-acquired JUROR
jury management system; with the Netgov electronic government solution, which
the Company markets on behalf of Netgov.com; with CourtLink eFile management
middleware, which the Company markets on behalf of CourtLink Corporation; and
the Company's AS400 administrative systems.
The information technology services and application software markets
for state and local government jurisdictions are highly fragmented, with many
competitors, including in-house computing departments of governments, custom
software programmers, large and small outsourcing and technical service
providers as well as packaged application software companies. State and local
governments, which tend to be conservative in their decisions regarding capital
expenditures and long-term contracts, are influenced by the acceptance by other
governments of a particular company's product or service.
Energy and Utilities
The Company provides administrative and supply chain application
software and services to the energy and utilities market. SCT's target market
includes approximately 1,000 US-based water, gas, and electric utilities. The
Company believes that deregulation of the utility market is driving significant
investment in information technology and customer services. Clients include
municipalities, investor-owned utilities, and energy services companies.
Process Manufacturing and Distribution
SCT offers its iProcess.sct end-to-end e-business solution to process
manufacturers and distributors in industries such as food and beverage,
chemicals, pharmaceuticals and consumer packaged goods. The advantages of the
iProcess.sct solution are its fundamental process industry capabilities and the
tight integration of its components: SCT Internet Business Suite, Fygir Supply
Chain Planning Suite, and Adage ERP Supply Chain Execution Suite. The SCT
Internet Business Suite is designed specifically for the Web using technologies
such as Java, Dynamic HTML and XML to help process manufacturers and
distributors use the Internet to strengthen supply chain relationships and open
new channels of distribution. The SCT Fygir Supply Chain Planning Suite provides
Web-enabled, collaborative demand planning; supply chain network optimization;
strategic network design and analysis; and tactical supply chain optimization.
The SCT Adage ERP Supply Chain Execution Suite is the transactional backbone for
the iProcess.sct solution and provides functionality including manufacturing,
sales, procurement, financials, accounting and business intelligence. The
iProcess.sct components are designed to be used together or in a best-of-breed
scenario where they are implemented in conjunction with other solutions such as
SAP R/3.
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Fiscal 2000 marked the release of the Company's iOrder.sct offering,
the first component of the SCT Internet Business Suite. iOrder.sct enables
process industry manufacturers and distributors to deploy a complete
business-to-business, self-service, e-commerce solution and supports a range of
self-service transactions across the order-to-cash business process.
SCT also markets services to the process manufacturing industry. SCT
targets the approximately 8,000 process manufacturers and distributors that have
over $100 million in annual revenue.
Services and Products
The Company's revenues are derived from several sources: Outsourcing
services, software licenses, software services, and maintenance and
enhancements.
Outsourcing Services
The Company provides OnSite services, which are comprised of a range of
information technology outsourcing services including end-user computing
solutions, network management, applications outsourcing, computer operations
management, and business process outsourcing. These services are designed to
assume total or partial control and responsibility of clients' information
resources, generally on a long-term basis. The Company provides management,
staffing and support with skilled information systems personnel and industry
specialists who are knowledgeable in both computer-based technologies and the
functional aspects of clients' activities.
SCT personnel located at a client's site become an integral part of the
client's operations, working with managers and users at all levels as a focal
point for information systems activity. SCT site personnel also draw upon SCT's
staff of specialists to address special issues and projects. SCT can manage,
staff and support most aspects of a client's information systems and operations,
including data center management and operations, disaster recovery, short-term
and long-range planning, user liaison and functional consulting, technical
support services, application and systems software support, office automation,
microcomputer maintenance, systems integration, and telecommunications services
and network integration.
Contracts for outsourcing services may be either on a fixed price or
time and materials basis, and generally cover an initial period of three to
seven years. Fixed-price contracts require the Company to perform specified
services for a fixed payment, generally subject to annual adjustments to reflect
inflationary cost increases. The Company negotiates the fee to be charged based
on its estimate of the total expenses to be incurred in providing the services.
In the event the Company's costs to perform an outsourcing services contract
become greater than originally anticipated, the Company's profit on that
contract would be reduced; and in limited cases, the Company could suffer a
loss. As many government and quasi government clients are restricted from
incurring binding commitments which extend beyond their current annual budgets
or appropriations, contracts often include a "fiscal funding" provision which
provides for the reduction or termination of services commensurate with
reductions in a client's allocated funding. The Company has not been impacted
materially by early terminations or reductions in service from the use of fiscal
funding provisions.
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The Company also offers its SinglePoint Solutions to assist utilities
and energy companies in serving the newly deregulated utility market. By
combining software applications, information technology outsourcing and
operations management, a utility or energy service company can access SCT's
customer management application software products to assist it in operating its
business.
Software Licenses
The Company develops and licenses application software to each of its
served vertical markets. The component applications of the Banner product line
are developed for an Oracle relational database environment. The Adage ERP
Supply Chain Execution Suite is an object based, supply chain execution/ERP
system which provides multi-site functionality using a number of relational
database platforms including Oracle and Microsoft SQL Server. The Fygir software
is an object based, APS system which uses client/server technology and operates
with a number of ERP relational database platforms. The following are the
Company's key application software products:
Banner is SCT's leading software solution for administrative computing
in higher education. It is available in both client/server and Internet-native
technologies. This suite of software applications is built with a business
process orientation and a business enterprise focus. The software enables
institutions to process student information including financial aid, student
records, admissions, and registration in a centralized or distributed
information environment using workflow, imaging and self service on the World
Wide Web. In addition, Banner offers systems to assist with common
administrative functions, including human resources, financial management, and
alumni development. Plus offers a similar suite of Web-enabled administrative
applications, but which operate within traditional mainframe and
minicomputer-based institutions.
Banner and Plus Web Applications. SCT's Web applications address client
requirements for decentralized routine processing and inquiry while maintaining
centralized control of information and access. These applications are currently
available for the higher education market under the product names Web for
Students, Web for Employees, Web for Executives, Web for Alumni, and Web for
Faculty & Advisors. Students can check the availability of courses, build a
schedule, and register on line; apply for financial aid; apply for admissions;
and determine admission status. Information about their grades, schedules, and
transcripts is available and they can query the system about their account
balances.
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Campus Pipeline. Campus Pipeline is an Internet Web platform and portal
product that allows higher education users, including students, prospective
students, faculty, and staff to access the Internet from a customized home page
that integrates with SCT's Web-based application products. During a limited
introductory period, institutions can elect to obtain a license under a
fee-waived basis, in exchange for which the institution agrees to allow
commercial providers of goods and services to advertise their offerings on the
user's home page, or on a fee-paid basis under which no or limited advertising
is permitted. The Campus Pipeline product is owned by Campus Pipeline, Inc., an
entity in which SCT has an investment as a shareholder, and is marketed by the
Company under the terms of an agreement with Campus Pipeline.
WebCT. In June 2000, SCT entered into an agreement with WebCT, Inc.
("WebCT") to market, on an exclusive basis for a period of three (3) years, that
company's WebCT(TM) e-learning tools and e-learning hub to the SCT higher
education client base. WebCT is a leading provider of Web-based course tools,
community, content, and commerce to the higher education marketplace. As part of
the transaction, SCT sold its rights to SCT Learning Suite, the Company's
learning management tools, to WebCT, and invested $10 million in WebCT. In
exchange, the Company received an equity interest in WebCT of less than 10%,
with the right to increase its ownership interest if the Company attains certain
WebCT product performance-based sales objectives. SCT and WebCT are providing
data messaging software that provides real-time integration between SCT
administrative systems and the WebCT learning management application. SCT
anticipates that its existing SCT Learning Suite customers will migrate to the
WebCT learning platform.
Banner for Energy and Utilities. SCT provides a suite of Banner
software applications to gas, electric, water, waste water, refuse, and other
utilities. This software is Web-enabled and rule-based, can be quickly adapted
for changes in business strategy, and provides energy companies and utilities
with customer management, marketing, and supply chain management tools to
support their changing needs and competitive requirements. SCT Banner CMS
assists energy companies and utilities in providing customer service, responding
to customer inquiries, supporting new service offerings, generating accurate and
timely billing, and managing resources. The Company also offers SCT Banner
Customer Target+ for energy and utility marketing programs; SCT Banner Customer
eLink for deregulated consumption and supply contract management; and SCT Banner
Customer Web Access for customer self-inquiry and administration.
In August 2000, SCT acquired the EnerLink business unit from Science
Applications International Corporation. EnerLink is a complex billing and rates
management software developer for the energy and utilities market. The
SCT/EnerLink solution enables SCT to provide increased charge-handling and
billing capabilities for electric and gas utilities. Built for flexibility,
SCT/EnerLink supports real-time energy pricing and meter-data acquisition, and
enables gas and electric providers to bring innovative rate offerings to market
quickly. The solution meets industry-standard protocols for interval data
recorders and supports billing of virtually any rate. The SCT/EnerLink suite
includes three applications: BillGen(R) (a back-office billing engine), EnerLink
CS(TM) (a decision-support and marketing tool), and EnerLink.net(TM) (a
customer-access interface for energy-use analysis). The solution interfaces to
SCT Banner, SCT Synchro, or a client's legacy billing system.
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SCT Synchro for Energy and Utilities. In fiscal 2000, the Company
completed the development of SCT Synchro, a Web-enabled n-tiered customer
management and fulfillment suite based upon the Microsoft component
architecture. This architecture supports a Web-browser-based desktop client and
the NT/SQL Server operating and database systems, which are becoming standards
for key energy and utility market segments both in the United States and abroad.
SCT Courts. During fiscal 2000, the Company continued to enhance its
Courts case management product, which helps streamline complex court processing
by automating functions such as docketing and scheduling. In addition, the
Company sold its eFile Management middleware to CourtLink Corporation
("CourtLink"), an electronic courts filing product and services provider, for
cash and a small equity investment in CourtLink, and entered into a strategic
alliance with CourtLink to market the product in connection with the Company's
courts software and services offerings. The eFile Management middleware
complements CourtLink's e-filing and access solution for the government market
by integrating e-filing and Web access with a court's case and document
management applications.
During fiscal 2000, the Company also entered into a strategic marketing
agreement with Netgov.com, an electronic government leader, to market Netgov's
electronic government solution with the Company's products and services. In
exchange, the Company will receive cash and a small equity interest in Netgov.
The Netgov electronic government solution components in conjunction with the
Company's products and solution services create a comprehensive electronic
government offering.
In November 2000, the Company acquired Omni-Tech Systems Ltd., the
developer of JUROR for Windows, a leading jury management software solution for
the justice market, for $3.3 million in the form of cash and a note payable.
JUROR for Windows is a comprehensive jury management solution that was developed
using Sybase's PowerBuilder Enterprise series object-oriented development tool
and is an open client/server system. It presides over all aspects of jury
management from the creation of pools of eligible jurors to the calculation of
jury payroll, and helps to streamline the jury management process and free court
staff from repetitive manual and paper-based tasks. The Company plans to
integrate the JUROR product with the Company's case and financial management
system so that the products share key case, scheduling and disposition
information. The acquisition and the integration of the Company's software
products should strengthen SCT's position as a single-source provider of digital
justice solutions.
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iProcess.sct. As part of its iProcess.sct suite, SCT offers its supply
chain management solutions, Adage supply chain execution/ERP software and Fygir
supply chain planning/APS software, to the process industries. Adage consists of
objects configured around industry-specific business and supply chain processes.
Adage enables users to integrate enterprise functions such as planning,
production execution, forecasting, procurement, formula and process management,
inventory management, customer service, customer order management, logistics,
distribution, finance and accounting. Adage is designed to meet the specific
requirements of process manufacturers including food and beverage, chemicals,
metals, minerals, and consumer packaged goods manufacturers on the Windows NT
and UNIX platforms. The Fygir products suite consists of Advanced Planning,
Advanced Scheduling and Demand Planning functionality. The Fygir products enable
users to improve their supply chain management performance and make their
manufacturing process more efficient by applying mathematical techniques to
optimize the supply chain. Fygir is designed to meet the specific requirements
of process manufacturers including food and beverage, chemicals, consumer
packaged goods and pharmaceutical manufacturers and runs on the Windows NT
platform.
Oracle. The Company currently has an agreement with Oracle Corporation
allowing the Company to sublicense a limited use Oracle system, which enables a
client to use Oracle with Banner at a significantly lower cost than a full-use
Oracle license. The agreement expires in July 2003. The Company's results of
operations could be adversely affected if Oracle's market acceptance declined or
its customer base eroded.
Software Services
The Company provides a range of professional support services,
including systems implementation, modification, training and support; consulting
services; and information systems planning and integration. When obtaining a
license to use SCT's application software, clients typically purchase a variety
of software support services, such as installation, training and other client
support activities. The Company also provides data conversion, customization and
systems integration services. Contracts for these services are typically longer
in term than those for software support services and shorter in term than those
for information technology outsourcing services. The Company also markets
separate service offerings covering areas such as consultative assistance and
disaster recovery services, thereby allowing for scalable contracts based upon
client need.
Contracts for software services may be either on a fixed price or time
and materials basis. Fixed-price contracts require the Company to perform
specified services for a fixed payment. The Company negotiates the fee to be
charged based on its estimate of the total expenses to be incurred in providing
the services. In the event the Company's costs to perform a software services
contract become greater than originally anticipated, the Company's profit on
that contract would be reduced; and in limited cases, the Company could suffer a
loss.
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Maintenance and Enhancements
In addition to a license of the Company's application software, clients
typically enter into a maintenance agreement with the Company, usually for terms
ranging from one to seven years, which entitles the client to telephone support,
regulatory updates and functional and technical enhancements. The annual
maintenance fee generally is 15% to 20% of the license fee, and generally
increases each year by a specified percentage.
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Product Development
Research and Development
SCT devotes substantial resources to product development in order to
address evolving clients' needs and provide new product offerings. The product
development staff is comprised of experts in various functional areas. Technical
experts include specialists in object technology, the Internet, operating
systems, and relational databases. Product development expenditures, including
expenditures for software maintenance, for the fiscal years ended September 30,
2000, 1999 and 1998 were approximately $52,362,000, $53,961,000 and $39,203,000,
respectively. After capitalization approximately $48,496,000, $44,913,000 and
$31,188,000, respectively, of these amounts were charged to operations as
incurred. For the same fiscal years, amortization of capitalized software costs
(which are not included in the aforementioned amounts) amounted to approximately
$6,146,000, $5,208,000 and $4,924,000, respectively.
Development Strategies
For the higher education market, the Company, in consultation with a
group of college and university advisors, has begun development of an object
oriented, Web-based system that will expand the Company's higher education
solutions to move beyond a transaction management system and into an interaction
management system designed to help clients leverage relationships with their key
constituents. This offering, which is to be comprised of a new information
system, and a knowledge system that could also be offered in conjunction with
Banner, is being developed using industry standards such as CORBA and J2EE
Enterprise Java Beans and will use a distributed component architecture and
industry standard databases such as Oracle, IBM DB2, and Microsoft SQL Server.
For the manufacturing/distribution market, the Company is developing an
Internet Business Suite, which is a business-to-business eCommerce solution that
links with back end ERP and supply chain applications. The Company's
i.wireless.sct offering will allow certain iProcess.sct functionality to operate
on personal digital assistant ("PDA") technology. The Company is enhancing the
iProcess.sct suite to enable Internet-based procurement, fulfillment,
replenishment, and customer relationship management capability. The Company is
also continuing development on its Fygir Demand Planning product, a demand
forecasting solution which will extend and complement its current Fygir products
and will support Web-based forecast analysis, a key element of supply chain
planning.
For the energy and utilities market, in November 2000, the Company
released SCT Synchro, a Web-enabled n-tiered customer management and fulfillment
suite based upon the Microsoft component architecture. This architecture
supports a Web browser based desktop client and the NT/SQL Server operating and
data base systems which are becoming standards for key utility market segments
both in the United States and abroad. The Company is developing an Internet
business offering, known as iConverge.sct, focused on the deregulated utility
marketplace. The iConverge.sct suite will include eDash, a management-focused
offering; eCSR, to be used primarily by a utility's customer service
representatives; and eEnroll, providing functionality aimed at the procurement
and retention of customers in a deregulated environment.
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For the state and local government market, SCT continues development
work on its eTraffic.sct offering. Integrated with the SCT Courts product suite,
eTraffic.sct will enable individuals to pay traffic fines by telephone, through
integrated voice response capability, or through the Internet. The Company is
also developing Public Attorney, a complementary offering to the SCT Courts
product series that will enable public defenders and prosecuting attorneys to
manage caseloads on an interactive basis.
General
The Company's ability to sustain growth depends in part on the timely
development or acquisition of successful new products and improvements to
existing products. However, software development is a complex and creative
process that can be difficult to accurately schedule and predict.
Sales and Marketing
The Company attracts clients primarily through the following means: its
own sales force of approximately 200 direct salespersons and support staff, of
which approximately 170 are engaged primarily in selling software licenses and
related services; approximately 10 are dedicated primarily to selling the
Company's SCT OnSite, systems integration, and certain professional services;
and approximately 20 serve to support both sales groups; referrals from existing
clients and others; and active participation in industry conferences, trade
shows and seminars within its markets. SCT International, headquartered in
London, England, operates as an international extension of the four industry
market units. In the higher education, energy/utilities and process
manufacturing and distribution markets, the Company utilizes distributors in
certain international markets. The Company also engages in cooperative marketing
efforts with other hardware and software suppliers, and advertises in trade
journals and publications.
The sales cycle for the Company's software and services typically
ranges from six to 24 months and involves product demonstrations and site
visits. Contracts are often offered by means of a public bidding procedure,
certain of which require the Company to appear at public hearings.
Although the Company's market units have separate sales organizations,
each focuses on cross selling opportunities to market the products and services
of the other. Each sales group is comprised of regional salespersons, industry
specialists and corporate and client based technical specialists.
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Competition
In each of its markets, SCT has able competitors, which differ
depending upon the characteristics of the customer including its size,
geographic location, and computing environment. Many established competitors
have greater marketing, technical and financial resources than the Company, and
there can be no assurance that SCT will be able to continue to compete
successfully with existing or new competitors.
In the outsourcing services business, the Company competes with several
large providers of services, including International Business Machines
Corporation ("IBM"), Electronic Data Systems Corporation ("EDS"), and Affiliated
Computer Services, Inc., as well as smaller providers, such as Collegis, Inc. in
the education market. In the software services business, the Company competes
with several large providers of systems integration services, including IBM,
EDS, Unisys, Andersen Consulting, Cambridge Technology Partners and the
so-called Big Five accounting firms, as well as smaller providers of software
consulting services. The Company also competes with in-house information
management and resource development staffs at potential customer sites.
Competitive factors in these businesses include the technical expertise of
on-site and support personnel, functional and industry-specific expertise,
availability and quality of hardware and software support, experience,
reputation and price.
In the application software business, the Company competes with other
providers of packaged application software and companies offering to develop
custom software. Competition also varies by vertical market. Within the higher
education market, the Company's principal competitors are Datatel, PeopleSoft,
Oracle, SAP, and Jenzebar.com. The local government and utility markets are
highly fragmented and competition varies significantly within these markets
depending upon the customers' computing platforms. Competitors in the local
government market include Unisys Corporation, IBM, Progressive Solutions, Inc.,
Crawford Consulting, and Justice Systems Inc. Competitors in the
energy/utilities market include SAP, Severn Trent, ORCOM, SPL, IBM and Andersen
Consulting. The manufacturing/distribution market is highly competitive and
competitors include SAP, PeopleSoft, Invensys, Oracle, J.D. Edwards, Ross, QAD
Systems, I2, Manugistics, and Logility. Competitive factors in all the software
markets served by the Company include price/performance, technology,
functionality, portability, software support, and the level of market acceptance
of the competitor's products.
Backlog
At September 30, 2000, the revenues expected to be received by SCT
under outsourcing services contracts, which are based on proposed budgeted
amounts in those contracts, and under software license and services agreements,
including systems integration, enhancements, maintenance, support services, and
software implementation, modification and training, amount to approximately $791
million, as compared to approximately $682 million at September 30, 1999, and
extend through December 31, 2008. Of the $791 million, approximately $307
million is expected to be recognized in fiscal 2001. Approximately $356 million
of the $791 million applies to outsourcing services contracts. These amounts
include, in connection with outsourcing services contracts, any guaranteed
minimum price increases provided in the contracts.
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SCT is unable to predict the impact, if any, on its future revenues
that may result from reductions in the budgets of customers in its targeted
markets. Any such reductions could impact new contracts as well as existing
contracts. Certain educational institutions and government jurisdictions cannot
contractually commit beyond the fiscal year for which their budgets have been
approved. For this reason, their contracts with SCT usually contain a "fiscal
funding" clause which provides that if there is a reduction in the computing
services budget, the level of SCT services will be reduced accordingly, or
terminated in certain circumstances. If there is a substantial reduction in the
budget, SCT may, at its option, terminate the contract or reduce service levels
consistent with funding. The backlog at September 30, 2000 includes
approximately $226 million of outsourcing services contracts with fiscal funding
clauses.
Backlog is not necessarily indicative of actual revenues for any
succeeding period.
Proprietary Software Protection
SCT's software is proprietary and SCT relies primarily upon copyright,
trade secret laws and internal non-disclosure safeguards generally incorporated
in its software license agreements to protect its software. There can be no
assurance that such protection will be effective. In addition, other holders of
patents and copyrights may assert claims of infringement with respect to the
Company's products. To date, SCT is not aware of any material breach in the
security of its products or any claims of infringement asserted against it.
Employees
As of September 30, 2000, the Company employed approximately 3,400
employees, of which approximately 1,000 are resident in Malvern, Pennsylvania,
with the remainder resident primarily at the Company's various offices and
client sites. None of the Company's employees are subject to collective
bargaining agreements, except for approximately 20 employees at one client site.
The Company considers its relationship with its employees to be satisfactory.
When the Company receives a new OnSite services contract, it generally
recruits most of the existing employees of the client's data processing
department to become SCT employees. However, the Company also supplies some
senior level personnel from its own group of trained specialists, which requires
the Company to identify employees willing to relocate to the client's area.
12
<PAGE>
Executive Officers of SCT
The Executive Officers of SCT are as follows:
<TABLE>
<CAPTION>
Position and Office
Name Age Currently Held
--------------------------- --- -----------------------------------
<S> <C> <C>
Michael J. Emmi 58 Chairman of the Board, President and Chief Executive Officer;
Director
Michael D. Chamberlain 56 President, Global Operations; Director
Eric Haskell 54 Senior Vice President, Finance & Administration, Treasurer, and
Chief Financial Officer
Richard A. Blumenthal 52 Senior Vice President, General Counsel and Secretary
Mark A. Cochran 43 Senior Vice President, Human Resources & Organizational Strategy
Jerry A. Smith 41 Senior Vice President and Chief Technology Officer
Frank C. Tait 42 Senior Vice President, Global Marketing Solutions
</TABLE>
Officers are appointed by the Board of Directors, typically at its
first meeting after the annual meeting of shareholders for such terms as the
Board of Directors shall determine or until their successors have been elected
and have qualified.
Business Experience During the Past Five Years of Each Executive Officer
Michael J. Emmi has served as Chairman of the Board, President and
Chief Executive Officer of the Company since May 1985. He is also a director of
CompuCom Systems, Inc., Safeguard Scientifics, Inc. and CDI Corporation.
Michael D. Chamberlain has served as a director of the Company since
July 1989. He has served as President, Global Operations since July 1999 and,
prior to that appointment, had been President of the SCT Software Group since
May 1994.
13
<PAGE>
Eric Haskell has served as Senior Vice President, Finance &
Administration, Treasurer and Chief Financial Officer of the Company since July
1990, and prior thereto, as Vice President, Finance & Administration, Treasurer
and Chief Financial Officer since March 1989. He is a director of ESPS, Inc.
Richard A. Blumenthal has served as Senior Vice President, General
Counsel and Secretary of the Company since July 1990, and prior thereto, as Vice
President, General Counsel and Secretary since July 1987. He has been General
Counsel of the Company since December 1985.
Mark A. Cochran has served as Senior Vice President, Human Resources &
Organizational Strategy since November 1998. Prior thereto, he served as Vice
President, Human Resources & Organizational Strategy from September 1997 and has
held the following positions in the Company's former Technology Management
Division: Vice President, East Region from August 1996 to September 1997; Vice
President, Atlantic Region from May 1995 to August 1996; and General Manager,
West Coast North Region from January 1995 to May 1995.
Jerry A. Smith has served as Senior Vice President and Chief Technology
Officer since August 1999. Prior thereto, he was Chief Technology Officer of
Lingafranca, d/b/a Semaphore Corporation, a global consulting and training firm,
from January 1997 to September 1999; President of Marketplace Technologies,
Inc., a software development and design firm, from January 1996 to January 1997;
and Senior Technologist of Xerox Corporation from August 1994 to January 1996.
Frank C. Tait has served as Senior Vice President, Global Marketing
Solutions since December 1999. He was Vice President, Marketing for the
Company's Education market unit from May 1994 to December 1999; and prior
thereto, served in a variety of product management, software development and
consulting positions for the Company since 1982.
ITEM 2. PROPERTIES.
SCT occupies four adjacent buildings and a portion of a fifth building
in the Great Valley Corporate Center in Malvern, Pennsylvania. The Company's
corporate headquarters in Malvern, Pennsylvania is located in one of the five
buildings referenced above in an approximately 47,000 square-foot facility owned
by the Company. Of the remaining four adjacent office buildings, the Company
owns an approximately 56,200 square-foot facility, used by its education market
unit, leases an approximately 48,900 square-foot facility, used for general
corporate operations, under a lease which expires in August 2005, leases an
approximately 70,000 square-foot facility, used by its process manufacturing and
distribution market unit, under a lease which expires in November 2008 and
leases 10,050 square feet of an approximately 95,000 square foot facility that
is used for general corporate operations.
14
<PAGE>
In October 1998 the Company entered into a ten-year lease for an
approximately 73,900 square foot office building, used for its general corporate
operations, in Frazer, Pennsylvania, which is near its Malvern campus.
The Company owns and occupies an approximately 45,000 square-foot
facility in Rochester, New York that is used by its education market unit. In
Lexington, Kentucky, the Company leases an approximately 55,400 square foot
facility, used by its government market unit, under a lease which expires in
March 2004. In Columbia, South Carolina, the Company owns and occupies both an
office facility containing approximately 60,000 square-feet and another
containing approximately 80,000 square feet, and has various leases for an
aggregate of approximately 27,700 square feet which expire on various dates
through September 2002, all of which are used by the Company's energy and
utilities market unit. In December 1998, the Company purchased an additional
nine acres in Columbia, South Carolina to allow for future growth. SCT leases
offices in various cities throughout the United States including an
approximately 37,000 square foot facility in San Diego, California, which
expires in December 2002; and also leases office space, used by the various
market units, in Atlanta, Georgia; London, England; Manchester, England; Sophia,
France; and Rijswijk, the Netherlands.
SCT believes that its facilities are adequate for its present business
needs.
ITEM 3. LEGAL PROCEEDINGS.
For information regarding litigation brought against the Company by
Unisys Corporation in connection with the Company's position as a subcontractor
to Unisys in providing certain software and related services for Broward County,
Florida, please refer to Item 7, Management's Discussion and Analysis of
Financial Condition and Results of Operations under the heading Subsequent
Event/Contingency.
The Company is also involved in other legal proceedings and litigation
arising in the ordinary course of business. In the opinion of management, the
outcome of such proceedings and litigation currently pending will not materially
affect the Company's consolidated financial statements.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
15
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
SCT's Common Stock is traded on the Nasdaq Stock Market under the symbol
"SCTC". The following table sets forth its high and low sale prices on the
Nasdaq Stock Market for the specified quarter.
Year ended September 30, 2000 HIGH LOW
1st quarter 19 1/4 10
2nd quarter 28 3/8 12 1/2
3rd quarter 24 5/8 14 3/4
4th quarter 20 1/2 16 5/8
Year ended September 30, 1999 HIGH LOW
1st quarter 22 8 1/2
2nd quarter 14 3/4 7 13/16
3rd quarter 18 9 1/4
4th quarter 19 1/2 12 1/4
The approximate number of stockholders of record of SCT's Common Stock as of
September 30, 2000, was 450.
SCT has not paid any dividends for more than the last two fiscal years. The
Company's revolving credit agreement prohibits the Company from declaring or
paying any dividends other than stock dividends.
ITEM 6. SELECTED FINANCIAL DATA.
<TABLE>
<CAPTION>
(in thousands, except per share amounts) Year Ended September 30,
----------------------------------------------------------------------------
2000* 1999 1998** 1997 1996
----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenues $435,980 $466,211 $403,668 $290,046 $215,258
Income before income taxes 15,437 35,416 38,232 38,617 16,003
Provision for income taxes 6,809 16,117 16,858 15,726 6,884
Net income 8,628 19,299 21,374 22,891 9,119
Net income per common share 0.27 0.59 0.64 0.76 0.32
Net income per share - assuming dilution 0.26 0.58 0.59 0.69 0.31
Common shares outstanding 32,391 32,494 33,532 29,996 28,140
Common shares outstanding - assuming dilution 33,624 33,531 36,035 34,124 33,090
Working capital $143,364 $134,561 $151,017 $ 83,217 $ 67,389
Total assets 368,123 335,052 332,954 209,704 163,259
Long-term debt 77,521 78,232 78,425 2,549 31,590
Stockholders' equity 201,437 188,276 182,922 150,425 96,796
</TABLE>
* Includes a pretax gain on the sale of assets of $5,988 and a pretax charge
of $5,759 related to litigation.
** Includes a pretax charge of $16,063 for purchased research and development.
Results without the charge for purchased research and development would
have been net income of $31,815 and net income per share - assuming
dilution of $0.88.
16
<PAGE>
ITEM 7. 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. For specific policies and breakdowns, refer to the
consolidated financial statements and disclosures. This Management's Discussion
and Analysis of Financial Condition and Results of Operations contains
descriptions of the Company's expectations regarding future trends affecting its
business. These forward-looking statements and other forward-looking statements
made elsewhere in this document are made in reliance upon the safe harbor
provisions of the Private Securities Litigation Reform Act of 1995.
Overview
--------------------------------------------------------------------------------
Systems & Computer Technology Corporation (the "Company") develops, licenses,
and supports a suite of enterprise software; offers a series of related services
including systems implementation, systems integration, and maintenance and
enhancements; and provides a range of information technology outsourcing
services. The Company's markets are higher education, government, process
manufacturing and distribution, and energy and utilities. The Company's focus on
four vertical markets enables it to develop and utilize a base of industry
expertise to deliver products and services that address specific client
requirements.
The Company licenses software under license agreements and provides support
services including training, installation, consulting, and maintenance and
enhancements. Maintenance and enhancement agreements provide for telephone
support and error correction for current versions of licensed systems, as well
as regulatory updates and functional and technical enhancements to licensed
systems if and when they become generally available.
The Company derives services revenues from a variety of professional services,
which include information systems planning, implementation, integration, and
customization services for client systems. These services contracts are
typically longer in term than software support services and shorter in term than
information technology outsourcing services.
The Company provides information technology outsourcing services, which are
comprised of a range of information technology areas including end-user
computing solutions, network management, applications outsourcing, and
business-process outsourcing. These services are designed to assume total or
partial control and responsibility for clients' information resources, generally
on a long-term basis. The Company provides management, staffing, and support
with skilled information systems personnel and industry specialists who are
knowledgeable in both computer-based technologies and the functional aspects of
clients' activities.
17
<PAGE>
Results of Operations
--------------------------------------------------------------------------------
The following table sets forth: (i) income statement items as a percentage of
total revenue and (ii) the percentage change for each item from the prior-year
comparative period.
<TABLE>
<CAPTION>
% of Total Revenue % Change
Year Ended September 30, from Prior Year
------------------------------- -------------------
2000 1999 1998 2000 1999
<S> <C> <C> <C> <C> <C>
Revenues
Outsourcing
services 29% 29% 31% (7)% 8%
Software sales 14% 17% 24% (20)% (19)%
Maintenance & enhancements 21% 17% 16% 16% 25%
Software services 34% 37% 28% (15)% 54%
Other 2% - 1% 433% (69)%
--- --- --- --- ---
Total 100% 100% 100% (6)% 15%
Expenses
Cost of services, software sales,
and maintenance & enhancements 66% 67% 63% (8)% 23%
Selling, general, and administrative 28% 23% 23% 10% 20%
Equity in losses of affiliates 1% 1% - 51% -
Charge for purchased research & development - - 4% - -
Interest expense 1% 1% 1% (1)% 16%
--- --- --- --- ---
Income before
income taxes 4% 8% 9% (56)% (7)%
</TABLE>
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 income).
The Company does not separately present the cost of maintenance and enhancements
revenue because it is impracticable to separate such cost from the cost of
software sales.
<TABLE>
<CAPTION>
Year Ended September 30,
--------------------------------------
2000 1999 1998
---- ---- ----
<S> <C> <C> <C>
Gross Profit
Outsourcing services 16% 21% 19%
Software sales and maintenance
& enhancements 48% 46% 57%
Software services 31% 30% 27%
-- -- --
Total 33% 33% 36%
</TABLE>
18
<PAGE>
Revenues: Outsourcing services revenue decreased in fiscal year 2000 by 7%
compared with the prior year. This decrease is primarily the result of the
termination of a contract at the end of fiscal year 1999, decreased
non-recurring services provided under other contracts in fiscal year 2000
compared with fiscal year 1999, and the termination of a contract at the end of
the third quarter of fiscal year 2000. The 8% increase in outsourcing services
revenue in fiscal year 1999 is primarily the result of (i) increases in
outsourcing services provided to a number of significant clients and (ii)
full-period effects of contracts signed throughout fiscal year 1998. Contract
renewal rates, as a percentage of annual revenue from contracts available for
renewal, for the fiscal years 2000, 1999, and 1998 were 93%, 64%, and 82%,
respectively. Contracts available for renewal in a particular period include
contracts with expiration dates within the period, as well as contracts renewed
during the period that have expiration dates in a later period.
Software sales decreased 20% in fiscal year 2000 compared to fiscal year 1999.
This is due to (i) significantly decreased licenses in each of the Company's
markets in the first quarter of fiscal year 2000, (ii) decreased licenses in the
education market in the second and third quarters, and (iii) decreased licenses
in the energy and utilities and process manufacturing and distribution markets
in the fourth quarter. Software sales decreased 19% in the year ended September
30, 1999, compared to the prior year period due primarily to decreased licenses
in the energy and utilities and the process manufacturing and distribution
markets. Also contributing to the decrease was a decrease in licenses in the
domestic higher education marketplace. The decreases in fiscal year 1999 were
partially offset by increased licenses in the international utilities and
education markets.
The 16% and 25% increases in maintenance and enhancements revenue in fiscal
years 2000 and 1999, 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 markets,
although there can be no assurance that this will continue.
Software services revenue decreased 15% in fiscal year 2000 compared to the
prior-year period. This decrease is primarily the result of decreased
implementation and integration services performed in the process manufacturing
and distribution market as well as 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. Software services revenue increased 54%
in fiscal year 1999 compared to the prior-year period, primarily as a result of
increases in implementation and integration services in the energy and
utilities, higher education, and process manufacturing and distribution markets.
The increase in interest and other income in fiscal year 2000 is primarily
attributable to the $6.0 million pretax gain on the sale of the Company's eFile
Management middleware in the third quarter of fiscal year 2000. Future revenues
should not be materially adversely impacted by this divestiture because the
divestiture is immaterial to the Company's total operations. The decrease in
interest and other income in fiscal year 1999 is primarily attributable to
decreased interest income earned on the Company's cash and short-term
investments balances. Cash and short-term investments balances decreased in
fiscal year 1999, primarily as a result of the acquisition of Fygir Logistic
Information Systems, B.V. (Fygir), in September 1998 and the purchase of $22.0
million in treasury stock in the first six months of fiscal year 1999.
19
<PAGE>
Gross Profit: Gross profit as a percentage of revenues was 33% for fiscal years
2000 and 1999; however, the components of the gross profit percentage changed
from fiscal year 1999 to fiscal year 2000. The gross profit percentage for
software sales and maintenance and enhancements increased slightly in fiscal
year 2000 as a result of (i) increased license fees in the government market and
(ii) decreased costs in the energy and utilities and process manufacturing and
distribution markets. The software services gross profit percentage also
improved slightly for the year ended September 30, 2000, compared with the
prior-year period, primarily as a result of improved efficiencies in the first
and second quarters of fiscal year 2000. The outsourcing services gross profit
percentage decreased, primarily as a result of (i) decreased revenues in fiscal
year 2000, compared with the prior-year period, without a corresponding
reduction in overhead expenses, and (ii) several adjustments related to certain
contract provisions recorded in the second quarter of fiscal year 2000.
Gross profit decreased as a percentage of total revenue (excluding other
revenue) from 36% for fiscal year 1998 to 33% for fiscal year 1999. The total
gross profit percentage decreased primarily because of a decrease in the
software sales and maintenance and enhancements gross profit, which makes up the
greatest percentage of the Company's total gross profit. This decrease was
primarily the result of increases in noncapitalized product-development
expenditures combined with decreased software licenses, primarily in the process
manufacturing and distribution and energy and utilities markets and, to a lesser
extent, in the higher education market. The decrease in the software sales and
maintenance and enhancements gross profit was partially offset by an increase in
the gross profit of outsourcing services as a result of cost savings in fiscal
year 1999, and an increase in the software services gross profit due to improved
productivity and increased implementation and integration services performed
during fiscal year 1999 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 profit margin.
Acquisitions and Divestitures: The Company made a number of acquisitions and
investments in fiscal year 2000 that position it strategically for the future.
20
<PAGE>
In August 2000, the Company acquired the EnerLink business unit, a complex
billing and rates management software developer for the energy and utilities
marketplace, from Science Applications International Corporation for
consideration of $2.9 million cash. Under the terms of the purchase agreement,
the Company could pay additional cash consideration of $8.0 million over the
next four years, contingent upon revenue derived from the license or other sale
of the EnerLink software over that period. The Company recorded costs in excess
of the fair value of net assets acquired of $0.3 million related to the
acquisition. This acquisition gives the Company increased charge-handling and
billing capabilities, including interval data collections and calculations,
which support real-time energy pricing and meter-data acquisition.
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. The Company acquired the SCT Learning Suite tools in the August
1999 acquisition of RSMART Learning Systems Corporation. In the quarter ended
June 30, 2000, the Company recorded a gain of $0.4 million related to this sale.
This gain was reduced to zero as the Company agreed to make concessions to
former SCT Learning Suite clients in the fourth quarter of fiscal year 2000. As
part of the transaction, the Company signed a three-year noncompete agreement in
exchange for stock of WebCT valued at $3.5 million. The related liability will
be amortized over the period of the agreement. The Company made an additional
$10.0 million investment in preferred stock of WebCT. The total $16.0 million
equity investment represents an approximately 6.1% interest in WebCT at
September 30, 2000. The Company could earn additional equity in WebCT in the
future through performance-based compensation. This compensation depends on
delivery of commitments from schools choosing WebCT as their primary supported
enterprise-wide course-tools platform.
In April 2000, the Company acquired the assets of a division of Pinnacle
Software Corporation for consideration of $2.4 million, of which $2.0 million is
payable in October 2000. 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. It also
includes Pinnacle's reporting-solutions product, which enhances the
financial-reporting and report-distribution capabilities of universities using
some of the Company's administrative applications.
In a transaction with CourtLink in April 2000, the Company sold its eFile
Management middleware for $4.0 million and a small equity investment valued at
$2.5 million in the newly formed CourtLink. The Company recorded a pretax gain
related to this sale of $6.0 million in other income.
In May 1999, the Company acquired Advanced Planning Systems, Inc., which offers
a demand-planning product to the process manufacturing and distribution market,
for total consideration of $2.2 million, comprised of 104,000 shares of Company
stock valued at $1.6 million and $0.7 million cash. The Company recorded
goodwill of $1.0 million related to the acquisition.
21
<PAGE>
In September 1998, the Company acquired all of the outstanding stock of Fygir
Logistic Information Systems, B.V. Fygir is a leading provider of supply chain
planning software to the process manufacturing and distribution market. The
total cost of the acquisition was $35.4 million. In conjunction with the
acquisition, which was accounted for as a purchase, the Company recorded a
charge to operations of $16.1 million for in-process research and development at
the time of the acquisition. Included in this amount were the fair values of
Fygir products under development that had not reached technological feasibility
at the time of the acquisition.
The in-process technology acquired in the Fygir acquisition consisted of
multiple significant research and development projects, most of which the
Company continues to develop. The Company believes that these projects, which
can be separated into three categories -- Significant New Features, New
Technology, and Tightly Integrated -- will all contribute to future generations
of the Company's software. At the time of the Fygir acquisition, the Company
assigned a value of $16.1 million to the Fygir in-process technology with the
assistance of an independent valuation.
Significant New Features projects represent significant improvements to existing
core technology acquired that could result in price and sales increases. New
Technology projects are associated with the design of the next-generation Fygir
products. Tightly Integrated projects involve integrating Fygir-developed
technology with the Company's technology. The Company estimates that the
Significant New Features, New Technology, and Tightly Integrated projects were,
in the aggregate, approximately 70%, 50%, and 60% complete, respectively, on the
date of acquisition.
At the time of the Fygir valuation, the Company made projections regarding
future revenues and investment for the Fygir solution. Fiscal year 2000 and 1999
sales were lower than initial projections and research and development
expenditures were lower than originally anticipated. Although the development
costs have been and will continue to be less than originally anticipated, the
development effort remains on schedule and the projects should be completed when
originally anticipated. The anticipated remaining development-project expenses
are approximately $5.1 million.
The principal aim of the efforts required to develop the acquired in-process
technology into commercially viable products is to complete all planning,
designing, and testing activities necessary to establish that the product or
service can be produced to meet its design requirements, including functions,
features, and technical-performance requirements. Future developments in the
supply chain management industry, changes in other product and service
offerings, or other developments may cause the Company to alter or abandon these
plans.
22
<PAGE>
Investment in Campus Pipeline, Inc.: Throughout fiscal year 1999, the Company
made a series of investments in Campus Pipeline, Inc. As of September 30, 2000,
the Company 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 accounts 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 will not record
any future earnings until the cumulative, unrecorded losses are offset.
Subsequent Event / Contingency: The Company has been involved in litigation
relating to a software implementation in Broward County, Florida. The Company
believed that it had meritorious defenses and the probability of an unfavorable
outcome against the Company was unlikely. However, on October 31, 2000, an
adverse decision was rendered against the Company in this matter. The Company's
claim for approximately $3.1 million -- which was included in the Company's
accounts receivable balances -- for software licensed, services rendered, and
expenses incurred was denied. In addition, the Company was ordered to pay
damages in the amount of approximately $3.2 million plus prejudgment interest.
The Company intends to appeal the decision and believes that insurance proceeds
may be available to cover a portion of the damages awarded against it. As a
result of the court's decision and the inability to predict the possibility of
overturning the judgment on appeal, the Company has recorded a pretax charge of
$5.8 million for damages and other costs associated with the action in the
fourth quarter of fiscal year 2000. This amount is included in selling, general,
and administrative expense. In the opinion of management, this amount plus
amounts previously accrued should be adequate to cover the ultimate loss
resulting from this matter in the event that the appellate court affirms the
lower court's decision.
The Company is involved in other legal proceedings and litigation arising in the
ordinary course of business. In the opinion of management, the outcome of such
proceedings and litigation currently pending will not materially affect the
Company's consolidated financial statements.
Income Taxes: The effective tax rate in the fiscal year 2000 provision is
greater than the federal statutory rate principally due to the effects of state
income taxes and of not recording a tax benefit for losses related to the
Company's foreign operations. Increased research and development expenditures in
fiscal year 2000 and the reinstatement of the research and development tax
credit retroactive to July 1, 1999, resulted in an increased research and
development tax credit in fiscal year 2000. The effective tax rate in the fiscal
year 1999 provision is greater than the federal statutory rate principally due
to the effects of state income taxes and of not recording a tax benefit for
losses related to the Company's foreign operations, net of the research and
development tax credit for a portion of the 1999 fiscal year.
23
<PAGE>
At September 30, 2000, the Company had $33.5 million of net operating loss
carryforwards in various states and $11.7 million of net operating loss
carryforwards in foreign jurisdictions. The state carryforwards expire in
various periods ending on or before September 30, 2014. The foreign tax losses
can be indefinitely carried forward. At September 30, 2000 and 1999, the Company
had valuation allowances of $5.2 million and $3.7 million, respectively, related
to the deferred tax assets associated with the state and foreign carryforwards.
The deferred tax asset, net of valuation allowances recorded by the Company, is
$0.8 million and $2.7 million as of September 30, 2000 and 1999, respectively.
Cyclical Nature of Business: Certain nonseasonal factors have resulted in
quarterly fluctuations in operating results, including variability of software
license fee revenues, seasonal patterns of capital spending by clients, the
timing and receipt of orders, competition, pricing, new product introductions by
the Company or its competitors, levels of market acceptance for new products,
and general economic and political conditions. While the Company has
historically generated a greater portion of license fees and total revenue in
the last two fiscal quarters, the non-seasonal factors cited above may have a
greater effect than seasonality on the Company's results of operations.
Liquidity, Capital Resources, and Financial Position
--------------------------------------------------------------------------------
The Company's cash and cash equivalents balance was $49.2 million and $27.0
million as of September 30, 2000 and 1999, respectively. The short-term
investments balance increased to $16.8 million at September 30, 2000, from $4.1
million at September 30, 1999.
Cash provided by operating activities was $54.8 million for fiscal year 2000,
compared with $20.2 million for fiscal year 1999. Operating cash flows increased
primarily as the result of decreases in accounts receivable balances and
increases in deferred revenue. The decrease in accounts receivable is the result
of decreased revenues compared with the prior-year period and the Company's
increased attention to cash collections. The increase in deferred revenue is
primarily the result of new maintenance contracts with prepayment terms signed
during the year. The Company anticipates using the cash balance to fund future
growth through various means, including strategic alliances and acquisitions,
sales-force growth, and development of additional service offerings.
During the quarter ended December 31, 1999, the Company implemented a
restructuring plan, which included the termination of employees and
discontinuation of noncritical programs. The restructuring was considered
necessary in light of significantly decreased license fees in the quarter. The
Company accrued $1 million related to severance and termination benefits based
on a termination plan developed by management, in consultation with the Board of
Directors, in December 1999. As of September 30, 2000, $81,000 of this accrual
remains. In January 2000, the Company terminated approximately 100 employees
engaged in marketing, administrative, special-programs, and development
functions. These employees represent 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.
24
<PAGE>
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, the Company
performs services and incurs expenses more quickly than during the later part of
the contract. Billings usually remain constant during the term of the contract.
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, the Company performs services but cannot bill for them before
attaining a milestone. Revenue is usually recognized as work is performed,
resulting in an excess of revenues over billings. The Company's Consolidated
Balance Sheet reflects this excess as unbilled accounts receivable. As an
outsourcing services contract proceeds, the Company performs services and incurs
expenses at a lesser rate. This results in billings that exceed revenue
recognized, which causes a decrease in the unbilled accounts receivable.
Likewise, the achievement of a milestone in a systems integration services
contract causes a decrease in the unbilled accounts receivable. In both cases,
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 the Company has shipped product and
recognized revenue, but has not billed amounts due to the contractual payment
terms. The Company usually bills these unbilled balances within one year.
The Company's working capital at September 30, 2000, was $143.4 million and at
September 30, 1999, was $134.6 million.
Cash used in investing activities was $36.4 million for fiscal year 2000,
compared with cash provided by investing activities of $9.6 million in fiscal
year 1999. The primary uses of cash in fiscal year 2000 were the purchase of
short-term and long-term investments and subsidiary assets, the purchase of
property and equipment, and software capitalization. The sale and maturity of
available-for-sale investments provided cash during fiscal year 1999. The
Company used this cash to fit-up and remodel a new office building at its
Malvern, PA, campus and to construct a new building adjacent to its existing
building in Columbia, SC.
The $3.7 million in cash provided by financing activities for fiscal year 2000
consists primarily of proceeds from the exercises of stock options. During
fiscal year 1999, the primary use of cash was the repurchase of Company stock.
The Company owns common and preferred stock of various privately held companies
carried at $18.5 million and classified as long-term assets. The fair values of
these investments are not readily determinable; therefore, they are carried at
cost. The cost basis would be reduced and earnings would be charged if there
were an impairment that was found to be other than temporary at a balance-sheet
date. The Company does not believe that there has been any decline in the value
of these investments as of September 30, 2000.
25
<PAGE>
The Company has a $30 million senior revolving credit facility available for
general corporate purposes. The credit facility agreement expires in June 2002
and includes optional annual renewals. There were no borrowings outstanding at
September 30, 2000 or 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.
In October 1998, the Company's Board of Directors authorized the repurchase of
up to 3 million of its common shares. The Company repurchased 2.3 million of its
common shares for $22.0 million. The Company's senior revolving credit agreement
covenants were amended in October 1998 to allow the Company to repurchase
capital stock not to exceed $35 million and 3 million shares before April 15,
1999. The Company is unable to repurchase additional shares of common stock
without another amendment to its credit agreement.
The Company believes that its cash and cash equivalents, cash provided by
operations, short-term investments, and borrowing arrangements should satisfy
its financing needs for the foreseeable future.
The Company has $74.8 million of convertible debentures bearing interest at 5%
and maturing on October 15, 2004, that were issued in October 1997. If these
debentures were converted, 2.8 million additional shares would be added to
common shares outstanding. These debentures were antidilutive for fiscal years
2000, 1999, and 1998 and therefore are not included in the denominators for net
income per share - assuming dilution. The weighted-average shares used in the
income per share and income per share - assuming dilution calculations for
fiscal year 1999 decreased compared with fiscal year 1998 as a result of the
Company's repurchase of 2.3 million of its common shares in the first half of
fiscal year 1999.
Financial Risk Management: The Company invests its cash in a variety of
financial instruments, including state and municipal securities, corporate debt
securities, and money market instruments. These investments are denominated in
U.S. dollars. Investments in both fixed-rate and floating-rate interest-earning
instruments carry a degree of interest-rate risk. Fixed-rate securities may have
their fair market value adversely impacted due to a rise in interest rates,
while floating-rate securities may produce less income than expected if interest
rates fall. Historically, the Company's investment income has not been material
to the Company's financial results, and the Company does not expect that changes
in interest rates will have a material impact on the results of operations. See
Note B to the financial statements for additional information with respect to
the investment portfolio.
The Company also has issued fixed-rate debt, which is convertible to Company
stock at a predetermined conversion price. Convertible debt has characteristics
that give rise to both interest-rate risk and market risk because the fair value
of the convertible security is affected by both the current interest-rate
environment and the price of the underlying Company stock. For the years ended
September 30, 2000 and 1999, the Company's convertible debt, on an if-converted
basis, was not dilutive and, as a result, had no impact on the Company's net
income per share - assuming dilution. In future periods, the debt may be
converted, or the if-converted method may be dilutive and net income per share -
assuming dilution would be reduced. See Note G to the financial statements for
additional information with respect to the Company's long-term debt.
26
<PAGE>
Although the Company conducts business internationally, most of its contracts
are denominated in the U.S. dollar. The Company's primary international
subsidiary's functional currency is the British pound. Foreign currency exposure
is limited because most financial assets and liabilities denominated in the
foreign currency are short-term.
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 from software
transactions. In 1998, it issued two amendments to SOP 97-2: 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." 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 the Company's fiscal year 2000, the Staff of the Securities and Exchange
Commission issued Staff Accounting Bulletin (SAB) 101, "Revenue Recognition."
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 basis for
certain transactions, such as sales on the Internet. In addition, the SAB
provides guidance on the disclosures that 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 Company is currently evaluating the impact of SAB 101, but
at this time does not expect its adoption to have a significant impact on
results of operations.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" (SFAS 133), as amended, which is required to be adopted
in fiscal years beginning after June 15, 2000, without significant effect.
Because the Company does not currently use derivatives, management does not
expect the adoption of SFAS 133 to have a significant impact on its results of
operations or the financial position of the Company.
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 adopted the
Interpretation on July 1, 2000, without significant effect. The Interpretation
clarifies certain issues that arose in the application of APB Opinion No. 25,
"Accounting for Stock Issued to Employees."
27
<PAGE>
Factors That May Affect Future Results and Market Price of Stock: The
forward-looking statements discussed herein and elsewhere -- 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, owing to a number of factors. Software sales revenues in any quarter
depend on the execution of license agreements and the 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 is typically signed in the last month of each quarter; 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 and total revenue in the last two
fiscal quarters, although there is no assurance that this will continue.
Because a significant part of the Company's business results from software
licensing, it is characterized by a high degree of operating leverage. The
Company bases its expense levels, in significant part, on its expectations of
future revenues. Therefore, these expense levels are 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 profitability 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. This would likely have an adverse
effect on the price of the Company's common stock.
The success of the Company's business depends upon certain key management,
sales, and technical personnel. In addition, the Company believes that to
succeed in the future, it must continue to attract, retain, and motivate
talented and qualified management, sales, and technical personnel. Competition
for such personnel in the information technology industry is intense; demand for
such employees has, to date, exceeded supply. The Company sometimes has
difficulty locating qualified candidates. 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 key personnel or the inability to
attract and retain qualified employees in the future could have a material
adverse effect on the Company's business, results of operations, and/or
financial condition.
28
<PAGE>
The application software industry is characterized by intense competition, rapid
technological advances, changes in client 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. This necessitates
continued investment in research and development and sales and marketing. There
can be no assurance that new industry standards or changing technology will not
render the Company's products obsolete or non-competitive, that the Company will
be able to develop and market new products successfully, or that the Company's
markets will accept its new product offerings. Furthermore, software programs as
complex as those the Company offers may contain undetected errors or bugs when
they are first introduced or as new versions are released. Despite Company and
third-party testing, there can be no assurance that errors will not be found in
new product offerings. Such errors can cause unanticipated costs and delays in
market acceptance of these products. In addition, new distribution methods, such
as the Internet and other electronic channels, have removed many of the barriers
to entry that small and startup software companies used to face. Therefore, the
Company expects competition to increase in its markets.
The Company has invested in and strengthened its strategic alliance with Campus
Pipeline, Inc. The Company has enhanced the integration of its higher education
information systems with the Campus Pipeline product to provide 24-hour access
to campus and Internet resources and allow students to enroll, register for
classes, view grades, request transcripts and loan status, obtain reading lists,
buy books, access e-mail, and participate in interactive chat sessions. While
some of these features have been included in a product released by Campus
Pipeline, other features are scheduled for future releases.
During fiscal year 2000, the Company made an investment in WebCT and entered
into a strategic alliance with WebCT to exclusively market the WebCT e-learning
tools and e-learning hub to the Company's higher education client base. The
alliance builds upon the Company's existing relationship with Campus Pipeline,
Inc., and the Company's self-service Web for Students and Web for Faculty
products to offer a unified, online, connected e-learning solution. This
integrated solution will enable clients to access information systems, learning
tools, online services, campus communication, and community resources through a
single point of access. The Company intends to provide the real-time,
bidirectional exchange of data between the Company's student information system
and the WebCT course environment, eliminating manual synchronization of like
information.
During fiscal year 2000, the Company sold its eFile Management middleware to
CourtLink, an e-filing leader, for cash and a small equity investment in
CourtLink. The Company also entered into a strategic alliance with CourtLink to
market the product in connection with the Company's products. The middleware
complements CourtLink's e-filing and access solution for the government market
by integrating e-filing and Web access with a court's case- and
document-management applications. Through this alliance, the Company and
CourtLink bring together the essential components of electronic filing, creating
a comprehensive e-filing solution. The Company also entered into a strategic
marketing agreement with Netgov.com, an electronic government leader, to market
its electronic government solution in connection with the Company's products and
services in exchange for cash and a small equity investment in Netgov.com. The
Netgov.com electronic government solution components, in conjunction with the
Company's products and solution services, create a comprehensive electronic
government offering. Through this alliance, the Company and Netgov.com bring
together the necessary components of integrated e-government, creating a
solution that benefits both governments and their constituents.
29
<PAGE>
The success of these investments and strategic alliances depends upon: (i) the
ability of the Company and its alliance partners to meet development and
implementation schedules for products and to enhance the products over time,
(ii) the market acceptance of the products, and (iii) the Company's ability to
integrate the alliance partners' products with the Company's products
cost-effectively and on a timely basis.
Certain of the Company's contracts are subject to "fiscal funding" clauses,
which entitle the client, in the event of budgetary constraints, to reduce the
level of services to be provided by the Company, with a corresponding reduction
in the fee the client must pay. In certain circumstances, the client may
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 that represent 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 during the period in
which the Company learns of facts requiring those revisions.
The impact on the Company of emerging areas such as the Internet, online
services, and electronic commerce is uncertain. There can be no assurance that
the Company will be able to provide a product that will satisfy new client
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 the Company chooses 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 Company-proprietary information. 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.
30
<PAGE>
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.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Information required by this Item is contained on page 26 of Item 7 of
this Form 10-K under the heading Financial Risk Management.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Consolidated Balance Sheets
<TABLE>
<CAPTION>
(in thousands, except per share amounts) September 30,
-------------------------------
2000 1999
--------- ----------
<S> <C> <C>
Assets
Current Assets
Cash and short-term investments $ 65,948 $ 31,108
Receivables, including $64,075 and $75,567 of earned revenues in excess
of billings, net of allowance for doubtful accounts of $5,677 and $5,841 138,965 148,967
Prepaid expenses and other receivables 25,586 23,030
--------- ---------
Total Current Assets 230,499 203,105
Property and Equipment - at cost, net of accumulated depreciation 63,335 69,049
Capitalized Computer Software Costs, net of accumulated amortization
of $26,691 and $20,545 19,310 22,097
Cost in Excess of Fair Value of Net Assets Acquired, net of accumulated
amortization of $7,094 and $5,301 15,738 17,772
Other Assets and Deferred Charges 39,241 23,029
--------- ---------
Total Assets $ 368,123 $ 335,052
--------- ---------
Liabilities and Stockholders' Equity
Current Liabilities
Accounts payable $ 10,639 $ 14,002
Current portion of long-term debt 712 652
Income taxes payable 1,793 2,137
Accrued expenses 41,105 36,412
Deferred revenue 32,886 15,341
--------- ---------
Total Current Liabilities 87,135 68,544
--------- ---------
Long-Term Debt, net of current portion 77,521 78,232
Other Long-Term Liabilities 2,030 --
--------- ---------
Total Liabilities 166,686 146,776
--------- ---------
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
37,264 and 36,734 shares 372 367
Capital in excess of par value 115,247 110,230
Retained earnings 111,879 103,251
Accumulated other comprehensive loss (540) (51)
--------- ---------
226,958 213,797
Less
Held in treasury at cost, 4,642 common shares (24,911) (24,911)
Notes receivable from stockholders (610) (610)
--------- ---------
201,437 188,276
--------- ---------
Total Liabilities and Stockholders' Equity $ 368,123 $ 335,052
--------- ---------
</TABLE>
See notes to consolidated financial statements.
31
<PAGE>
Consolidated Statement of Operations
<TABLE>
<CAPTION>
(in thousands, except per share amounts) Year Ended September 30,
----------------------------------------------
2000 1999 1998
-------- -------- --------
<S> <C> <C> <C>
Revenues
Outsourcing services $126,233 $135,062 $125,554
Software sales 62,839 78,840 97,844
Maintenance & enhancements 92,228 79,395 63,297
Software services 145,869 171,261 111,559
Interest and other income 8,811 1,653 5,414
-------- -------- --------
435,980 466,211 403,668
-------- -------- --------
Expenses
Cost of outsourcing services 105,823 107,069 101,656
Cost of software sales and maintenance & enhancements 81,412 84,833 69,792
Cost of software services 100,961 119,904 81,488
Selling, general, and administrative 121,974 111,192 92,449
Equity in losses of affiliates 4,761 3,161 --
Restructuring charges 1,000 -- --
Charge for purchased research and development -- -- 16,063
Interest expense 4,612 4,636 3,988
-------- -------- --------
420,543 430,795 365,436
-------- -------- --------
Income before income taxes 15,437 35,416 38,232
Provision for income taxes 6,809 16,117 16,858
-------- -------- --------
Net income $ 8,628 $ 19,299 $ 21,374
-------- -------- --------
Net income per common share $ 0.27 $ 0.59 $ 0.64
Net income per share - assuming dilution $ 0.26 $ 0.58 $ 0.59
Common shares and equivalents outstanding
Average common shares 32,391 32,494 33,532
Average common shares - assuming dilution 33,624 33,531 36,035
</TABLE>
See notes to consolidated financial statements.
32
<PAGE>
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
(in thousands) Year Ended September 30,
---------------------------------------------
2000 1999 1998
--------- --------- ---------
<S> <C> <C> <C>
Operating Activities
Net income $ 8,628 $ 19,299 $ 21,374
Adjustments to reconcile net income to net cash
provided by operating activities:
Charge for purchased research and development -- -- 16,063
Depreciation and amortization 27,760 26,064 16,927
Provision for doubtful accounts 3,111 3,294 2,483
Equity in losses of affiliate 4,761 3,161 --
Gain on sale of assets (5,988) -- --
Deferred tax benefit (2,875) (181) (4,586)
Income tax benefit from exercise of nonqualified stock options 628 3,239 4,631
Changes in operating assets and liabilities:
Decrease (increase) in receivables 7,134 (21,806) (31,303)
(Increase) decrease in interest receivable (204) 1,197 (1,199)
Increase in other current assets, principally prepaid expenses (553) (9,164) (4,856)
(Decrease) increase in accounts payable (3,363) (3,879) 7,396
(Decrease) increase in income taxes payable (415) 740 (3,578)
Increase in accrued expenses 1,493 2,387 7,171
Increase (decrease) in deferred revenue 15,522 (2,432) 742
Increase in other operating assets and deferred charges (840) (1,700) (2,758)
--------- --------- ---------
Net Cash Provided by Operating Activities 54,799 20,219 28,507
--------- --------- ---------
Investing Activities
Purchase of property and equipment (8,972) (26,773) (23,602)
Capitalized computer software costs (3,866) (9,048) (8,015)
Purchase of investments available for sale (18,947) (9,324) (156,689)
Proceeds from the sale or maturity of investments
available for sale 6,606 63,431 99,206
Purchase of subsidiary assets, net of cash acquired (3,189) (842) (30,219)
Purchase of long-term investments (10,043) (7,879) --
Proceeds from sale of assets 2,000 -- --
--------- --------- ---------
Net Cash (Used in) Provided by Investing Activities (36,411) 9,565 (119,319)
--------- --------- ---------
Financing Activities
Repayment of long-term debt and credit facility (17,451) (57,552) (15,225)
Proceeds from borrowings, net of issuance costs 16,800 56,907 88,548
Repurchase of Company stock -- (21,952) --
Proceeds from exercise of stock options 4,394 901 6,622
--------- --------- ---------
Net Cash Provided by (Used in) Financing Activities 3,743 (21,696) 79,945
--------- --------- ---------
Increase (Decrease) in Cash and Cash Equivalents 22,131 8,088 (10,867)
--------- --------- ---------
Cash and Cash Equivalents at Beginning of Year 27,030 18,942 29,809
--------- --------- ---------
Cash and Cash Equivalents at End of Year $ 49,161 $ 27,030 $ 18,942
--------- --------- ---------
Supplemental Information
Noncash investing and financing activities
Purchase of subsidiary assets - noncash portion $ 2,117 $ 3,792 --
Purchase of long-term investments - noncash portion 5,980 -- --
Proceeds from sale of assets - noncash portion 4,520 -- --
</TABLE>
See notes to consolidated financial statements.
33
<PAGE>
Consolidated Statements of Stockholders' Equity
<TABLE>
<CAPTION>
(in thousands)
Accumlated Notes Total
Common Capital in Other Receivable Stock-
Stock Excess Retained Comprehensive Treasury from holders'
Par Value of Par Value Earnings Income (Loss) Stock Stockholders Equity
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at September 30, 1997 $352 $ 91,060 $ 62,578 $ 4 $ (2,959) $(610) $150,425
Stock issued under stock option plans, including tax
benefits, 1,129 shares 11 11,242 - - - - 11,253
Comprehensive income
Foreign currency translation adjustment - - - (162) - - (162)
Unrealized gain on marketable securities - - - 32 - - 32
Net income, year ended September 30, 1998 - - 21,374 - - - 21,374
--------
Total comprehensive income - - - - - - 21,244
---- -------- -------- ---- ------- ----- --------
Balance at September 30, 1998 363 102,302 83,952 (126) (2,959) (610) 182,922
Stock issued under stock option plans, including
tax benefits, 181 shares 2 4,138 - - - - 4,140
Issuance of stock for acquisitions, 278 shares 2 3,790 - - - - 3,792
Purchase of treasury stock, 2,340 shares - - - - (21,952) - (21,952)
Comprehensive income
Foreign currency translation adjustment - - - 110 - - 110
Unrealized loss on marketable securities - - - (35) - - (35)
Net income, year ended September 30, 1999 - - 19,299 - - - 19,299
--------
Total comprehensive income - - - - - - 19,374
---- -------- -------- ---- ------- ----- --------
Balance at September 30, 1999 367 110,230 103,251 (51) (24,911) (610) 188,276
---- -------- -------- ---- ------- ----- --------
Stock issued under stock option plans, including
tax benefits, 529 shares 5 5,017 - - - - 5,022
Comprehensive income
Foreign currency translation adjustment - - - (488) - - (488)
Unrealized loss on marketable securities - - - (1) - - (1)
Net income, year ended September 30, 2000 - - 8,628 - - - 8,628
--------
Total comprehensive income - - - - - - 8,139
---- -------- -------- ---- ------- ----- --------
Balance at September 30, 2000 $372 $115,247 $111,879 $(540) $(24,911) $(610) $201,437
---- -------- -------- ---- ------- ----- --------
</TABLE>
See notes to consolidated financial statements.
34
<PAGE>
Notes to Consolidated Financial Statements
(in thousands, except per share amounts)
Note A -- Significant Accounting Policies
--------------------------------------------------------------------------------
Consolidation Policy: The accompanying consolidated financial statements include
the accounts of Systems & Computer Technology Corporation and its subsidiaries
(the "Company"). Intercompany items have been eliminated in consolidation.
Nature of Operations: The Company develops, licenses, and supports a suite of
client/server, enterprise software and provides a range of information
technology outsourcing services. In addition, the Company offers a series of
related software services including systems implementation, systems integration,
and maintenance and enhancements. The Company's markets are higher education,
process manufacturing and distribution, energy and utilities, and government.
Risks and Uncertainties: The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Changes in the status of certain facts or
circumstances could result in material changes to the estimates used in
preparation of the financial statements, and actual results could differ from
the estimates and assumptions used. Credit risk with respect to trade accounts
receivable is generally diversified due to the large number of entities
comprising the Company's client base. The Company establishes an allowance for
doubtful accounts based upon factors surrounding the credit risk of specific
clients, historical trends, and other information.
Revenue Recognition: During the first several years of a typical outsourcing
services contract, the Company performs services and incurs expenses at a
greater rate than in the later years of the contract. Since billings usually
remain constant during the term of the contract, and revenue is recognized as
work is performed, revenues usually exceed billings in the early years of the
contract. The resulting excess is reflected on the Company's Consolidated
Balance Sheet as unbilled accounts receivable. As a contract proceeds, services
are performed and expenses are incurred at a diminishing rate, resulting in
billings exceeding revenue recognized, which causes a decrease in the unbilled
accounts receivable balance. Ninety-six percent of the unbilled receivables at
September 30, 2000, resulting from outsourcing services contracts will be billed
within the normal 12-month business cycle, although additional unbilled
receivables will continue to build, based on the terms of the contracts. These
contracts require estimates of periodic revenue earned and costs to be incurred
to deliver products or services and are subject to revision as work progresses.
Revisions in the estimates are reflected in operations in the period in which
facts requiring those revisions become known.
Certain contracts provide for reimbursement of expenses, which are classified as
a reduction of operating expenses in the accompanying financial statements.
Certain of the Company's outsourcing services contracts are subject to "fiscal
funding" clauses, which entitle the client, in the event of budgetary
constraints, to reduce the level of services to be provided by the Company, with
a corresponding reduction in the fee the client must pay. In certain
circumstances, the client may terminate the services altogether. Revenues are
recognized under such contracts only when the Company considers the likelihood
of cancellation to be remote.
The Company licenses software under license agreements and provides services
including training, installation, consulting, and maintenance and enhancements.
Maintenance and enhancement agreements provide for telephone support and error
correction for current versions of licensed systems, as well as regulatory
updates and functional and technical enhancements to licensed systems if and
when they become generally available. Fees for maintenance and enhancements
agreements are recognized ratably over the term of the agreements. License fee
revenues are recognized when a license agreement has been signed, the software
product has been shipped, the fees are fixed and determinable, collection is
considered probable, and no significant vendor obligations remain. For client
license agreements that meet these recognition criteria, the portion of the fees
related to software licenses is generally recognized in the current period,
while the portion of the fees related to implementation and other professional
services is recognized as such services are performed. The Company does not
separately present the cost of maintenance and enhancements revenues because it
is impracticable to separate such cost from the cost of software sales. The
Company's policy is to charge interest on or discount unbilled software and
services receivables not expected to be billed within one year, which were
approximately $1,446 and $1,355 at September 30, 2000 and 1999, respectively.
The Company classifies such receivables as current assets consistent with its
business cycle.
35
<PAGE>
The Company has "bundled" contracts, which combine either outsourcing services
or other software services with software licenses. The Company allocates revenue
to each component of the contract based on objective evidence of its fair value,
which is specific to the Company, or, for products not being sold separately,
the price established by management. Because licensing of the software is not
dependent on continuation of the outsourcing services or other software services
portions of the contract, the software revenue is recognized upon delivery. The
remainder of the contract revenue is recorded as earned in the Company's
Consolidated Statement of Operations as outsourcing-services or
software-services revenue.
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.
Cash Equivalents: Cash equivalents are defined as short-term, highly liquid
investments with a maturity of three months or less at the date of purchase.
Short-Term Investments: In accordance with SFAS 115, management determines the
appropriate classification of debt securities at the time of purchase.
Available-for-sale securities are stated at fair value.
Fair Value of Financial Instruments: The following methods and assumptions were
used to estimate the fair values of each class of financial instruments.
The fair values of cash, accounts receivable, and accounts payable approximate
their carrying amounts due to their immediate or short-term periods to maturity.
The fair values of short-term investments (as disclosed in Note B) and long-term
debt (as disclosed in Note G) are estimated using quoted market values.
Long-Lived Assets: Equipment is depreciated over its estimated useful life, for
periods ranging from three to 10 years, using the straight-line method.
Buildings and related improvements are depreciated using the straight-line
method, for periods up to 30 years.
Cost in excess of fair value of net assets acquired is associated with the
companies acquired, and is amortized over periods ranging from 10 to 20 years
using the straight-line method. The Company periodically reviews for impairment
the carrying value of the costs in excess of net assets acquired. The Company
will record an impairment in its operating results if the carrying value exceeds
the future undiscounted cash flows of the related assets.
Capitalized Computer Software Costs: The Company capitalizes direct and certain
qualifying indirect costs associated with development of software for resale.
Amortization of such capitalized costs is the greater of the amount computed
using (i) the ratio that current gross revenues for a product bear to the total
of current and anticipated future gross revenues of that product or (ii) the
straight-line method over the remaining estimated economic life of the product,
including the period being reported on. Amortization begins when the product is
available for general release to customers.
36
<PAGE>
Common Stock Split: On April 16, 1998, the Company's Board of Directors
authorized a two-for-one stock split effected in the form of a 100% stock
dividend distributed on May 15, 1998, to shareholders of record on May 1, 1998.
Stockholders' equity has been restated to give retroactive recognition to the
stock split for all periods presented by reclassifying, from capital in excess
of par value to common stock, the par value of the additional shares arising
from the split. In addition, all references in the financial statements to
number of shares and per-share amounts have been restated.
Income Per Share: Statement of Financial Accounting Standards No. 128, "Earnings
Per Share" (SFAS 128), requires that net income per common share exclude the
dilutive effect of both stock options and convertible debentures, and that net
income per share - assuming dilution must include the dilutive effect of both
stock options and convertible debentures even if the dilutive effect is
immaterial. A reconciliation of the numerators and the denominators of net
income per common share and net income per share - assuming dilution follows:
Year Ended September 30, 2000 1999 1998
------------------------ ------- ------- -------
Numerator
Net income available to common
stockholders, used for net income
per common share $ 8,628 $19,299 $21,374
Effect of dilutive securities - - -
------- ------- -------
Net income available to common
stockholders after assumed
conversions $ 8,628 $19,299 $21,374
------- ------- -------
Denominator
Denominator for net income per
common share - weighted-average
shares 32,391 32,494 33,532
Effect of dilutive securities
Employee stock options 1,233 1,037 2,503
------- ------- -------
Dilutive potential common shares 1,233 1,037 2,503
Denominator for net income per
share - assuming dilution 33,624 33,531 36,035
------- ------- -------
Net income per common share $ 0.27 $ 0.59 $ 0.64
Net income per share - assuming
dilution $ 0.26 $ 0.58 $ 0.59
The Company has $74,750 of convertible debentures bearing interest at 5% and
maturing on October 15, 2004, that were issued in October 1997. If these
debentures were converted, 2,834 additional shares would be added to common
shares outstanding. These debentures were antidilutive for fiscal years 2000,
1999, and 1998 and therefore are not included in the above denominators for net
income per share - assuming dilution.
Covenants-Not-To-Compete: These amounts are amortized using the straight-line
method over two to five years (their contractual lives) from their respective
acquisition dates.
Foreign Currency Translation: The local currencies are the functional currencies
of the Company's foreign subsidiaries. Assets and liabilities of the foreign
subsidiaries are translated into U.S. dollars at current exchange rates, and
resulting translation adjustments are included in, and are the major components
of, accumulated other comprehensive loss. Revenue and expense accounts of these
operations are translated at average exchange rates prevailing during the year.
Transaction gains and losses, which were not material, are included in the
results of operations of the period in which they occur.
37
<PAGE>
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 from software
transactions. In 1998, it issued two amendments to SOP 97-2: 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." 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 the Company's fiscal year 2000, the Staff of the Securities and Exchange
Commission issued Staff Accounting Bulletin (SAB) 101, "Revenue Recognition."
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 basis for
certain transactions, such as sales on the Internet. In addition, the SAB
provides guidance on the disclosures that 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 Company is currently evaluating the impact of SAB 101, but
at this time does not expect its adoption to have a significant impact on
results of operations.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" (SFAS 133), as amended, which is required to be adopted
in fiscal years beginning after June 15, 2000. Because the Company does not
currently use derivatives, management does not expect the adoption of SFAS 133
to have a significant impact on its results of operations or the financial
position of the Company.
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 adopted the
Interpretation on July 1, 2000, without significant effect. The Interpretation
clarifies certain issues that arose in the application of APB Opinion No. 25,
"Accounting for Stock Issued to Employees."
Reclassifications: Certain prior-year information has been reclassified to
conform with the current-year presentation.
38
<PAGE>
Note B -- Cash and Investments
--------------------------------------------------------------------------------
Short-term investments consist of corporate debt securities. Management
determines the appropriate classification of the debt securities at the time of
purchase. At September 30, 2000 and 1999, the portfolio of debt securities was
classified as available for sale. These securities are carried at fair value,
with the unrealized gains and losses, net of income taxes, reported as a
component of accumulated other comprehensive loss. 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.
The amortized cost of debt securities is adjusted for amortization of premiums
and accretion of discounts to maturity. Such amortization and accretion, as well
as realized gains and losses, are included in Interest and Other Income. For the
purpose of determining gross realized gains and losses, the cost of securities
sold is based on the specific identification method. Gross realized gains and
losses on sales of available-for-sale securities were immaterial in fiscal years
2000 and 1999.
All securities held as available for sale at September 30, 2000, have
contractual maturities of less than one year and have a weighted-average
contractual interest rate of 7.1%.
September 30, 2000 1999
------------- ------- -------
Cash and cash equivalents $49,161 $27,030
Short-term investments, including
accrued interest of $206 and
$2 (amortized cost of $16,787
and $4,078), respectively 16,787 4,078
---------------------
Cash and short-term investments $65,948 $31,108
---------------------
The Company owns common and preferred stock of various privately held companies.
This stock is carried at $18,500 and classified as long-term assets. The fair
values of these investments are not readily determinable; therefore, they are
carried at cost. The cost basis would be reduced and earnings would be charged
if there were an impairment that was found to be other than temporary at a
balance-sheet date. The Company does not believe that there has been any decline
in the value of these investments as of September 30, 2000.
Note C -- Acquisitions and Divestitures
--------------------------------------------------------------------------------
In August 2000, the Company acquired the EnerLink business unit from Science
Applications International Corporation for cash consideration of $2,882. The
EnerLink business unit is a complex billing and rates management software
developer for the energy and utilites marketplace. Under the terms of the
purchase agreement, the Company could pay additional cash consideration of
$8,000 over the next four years, contingent upon the revenue derived from the
license or other sale of the EnerLink software over that period. The Company
recorded costs in excess of fair value of net assets acquired of $304 related to
the acquisition. This acquisition gives the Company increased charge-handling
and billing capabilities, including interval data collections and calculations,
which support real-time energy pricing and meter-data acquisition.
39
<PAGE>
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 $2,500. The Company acquired the SCT Learning Suite tools in the August 1999
acquisition of RSMART Learning Systems Corporation. In the quarter ended June
30, 2000, the Company recorded a gain of $442 related to this sale. This gain
was reduced to zero as the Company agreed to make concessions to former SCT
Learning Suite clients in the fourth quarter of fiscal year 2000. As part of the
transaction, the Company signed a three-year noncompete agreement in exchange
for stock of WebCT valued at $3,480. The related liability will be amortized
over the period of the agreement. The Company made an additional $10,000
investment in preferred stock of WebCT. The total $15,980 equity investment
represents an approximately 6.1% interest in WebCT at September 30, 2000. The
Company could earn additional equity in WebCT in the future through
performance-based compensation. This compensation depends on delivery of
commitments from schools choosing WebCT as their primary supported
enterprise-wide course-tools platform.
In April 2000, the Company acquired the assets of a division of Pinnacle
Software Corporation for consideration of $2,417, of which $2,000 is payable in
October 2000. 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. It also includes
Pinnacle's reporting-solutions product, which enhances the financial-reporting
and report-distribution capabilities of universities using some of the Company's
administrative applications.
In a transaction with CourtLink in April 2000, the Company sold its eFile
Management middleware for $4,000 and an equity investment valued at $2,520 in
the newly formed CourtLink. The Company recorded a pretax gain related to this
sale of $5,988 in other income.
In May 1999, the Company acquired Advanced Planning Systems, Inc., which offers
a demand-planning product to the process manufacturing and distribution market,
for total consideration of $2,226, comprised of $653 cash and 104 shares of
common stock valued at $1,573. The Company recorded goodwill of $1,016 related
to the acquisition.
In September 1998, the Company acquired all of the outstanding stock of Fygir
Logistic Information Systems, B.V. Fygir is a leading provider of supply chain
planning software to the process manufacturing and distribution market. The
total cost of the acquisition was $35,374. In conjunction with the acquisition,
which was accounted for as a purchase, the Company recorded a charge to
operations of $16,063 for in-process research and development at the time of the
acquisition. Included in this amount were the fair values of Fygir products
under development that had not reached technological feasibility at the time of
the acquisition. In addition, the Company charged $874 to the cost of the
acquisition for incremental costs, including professional fees and other costs
directly related to the acquisition. The cost in excess of fair value of net
assets acquired is being amortized over 10 years. The purchase price was
allocated as follows:
Net tangible assets acquired $ 1,272
Purchased software, including core technology 7,445
Purchased research and development(a) 16,063
Cost in excess of fair value of assets acquired 10,594
-------
Total purchase price $35,374
-------
(a) Purchased research and development, charged to expense at date of purchase,
represents the estimated fair value of specifically identified projects under
development that did not meet the applicable accounting criteria for
capitalization.
40
<PAGE>
The results of operations of these acquired entities are included in the
consolidated financial statements from the date of the respective entities'
acquisitions. The pro forma effect of these acquisitions on operations is
immaterial.
Throughout fiscal year 1999, the Company made a series of investments in Campus
Pipeline, Inc. As of September 30, 2000, the Company 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 accounts
for its investment using the equity method of accounting. During the first six
months of fiscal year 2000, the Company recorded its proportionate share,
$4,761, 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 will not record any future earnings until the cumulative,
unrecorded losses are offset.
Note D -- Property and Equipment
--------------------------------------------------------------------------------
September 30, 2000 1999
------------- ------- -------
Land $ 2,019 $ 2,019
Building and building improvements 28,809 28,209
Computer equipment and software 49,457 44,263
Other equipment, furniture, fixtures,
and leasehold improvements 40,283 37,564
------- -------
120,568 112,055
Less accumulated depreciation 57,233 43,006
------- -------
$63,335 $69,049
------- -------
Depreciation expense for the years ended September 30, 2000, 1999, and 1998, was
$14,922, $13,589, and $8,303, respectively.
Note E -- Other Assets and Deferred Charges
--------------------------------------------------------------------------------
September 30, 2000 1999
------------- ------ -------
Deferred costs and sales commissions related to
outsourcing services contracts in progress (a)(b) $ 3,241 $ 5,136
Purchased software(b)(c) 9,627 9,585
Long-term investments 18,500 4,718
Deferred debt issuance expenses(b)(d) 1,408 1,756
Deferred tax asset 3,180 305
Other 3,285 1,529
------- -------
$39,241 $23,029
------- -------
(a) Amortized over the remaining term of the outsourcing service contract.
(b) Shown net of accumulated amortization.
(c) Includes software acquired as part of business acquisitions.
(d) Amortized over the term of the related debt.
Note F -- Accrued Expenses
--------------------------------------------------------------------------------
September 30, 2000 1999
------------- ------- -------
Accrued employee compensation $ 8,158 $ 7,295
Accrued payroll withholdings 5,721 5,002
Other 27,226 24,115
------- -------
Total accrued expenses $41,105 $36,412
------- -------
Note G -- Long-Term Debt
--------------------------------------------------------------------------------
September 30, 2000 1999
------------- ------- -------
5% convertible subordinated debentures,
due October 15, 2004 $74,750 $74,750
Financing agreement 3,483 4,134
------- -------
Total Long-Term Debt 78,233 78,884
Less current portion 712 652
------- -------
Long-Term Debt, net of current portion $77,521 $78,232
------- -------
Aggregate annual maturities of long-term debt by fiscal year are as follows:
$712 in 2001, $2,771 in 2002, $0 in 2003 and 2004, and $74,750 in 2005.
41
<PAGE>
In October 1997, the Company issued $65,000 of convertible subordinated
debentures bearing interest at 5% and maturing on October 15, 2004. In November
1997, pursuant to an underwriters' option, the Company issued an additional
$9,750 of convertible debentures. The debentures are convertible into common
stock of the Company at any time prior to redemption or maturity at a conversion
price of $26.375 per share, subject to change as defined in the Trust Indenture.
The debentures are redeemable at any time after October 15, 2000, at prices from
102.5% of the par decreasing to par on October 15, 2003. The fair value of the
convertible subordinated debentures at September 30, 2000, was $63,537. The
Company has 2,834 shares reserved for issuance related to these debentures.
The Company has a $30,000 senior revolving credit agreement, which terminates in
June 2002 with optional annual renewals. There were no borrowings outstanding at
September 30, 2000 or 1999. During the fiscal year ended September 30, 2000, the
Company borrowed and repaid $16,800 under the agreement. The interest rate under
the agreement is based on one of three formulae: one tied to the prime rate of
the lender, one at a rate offered by the bank, and another tied to the London
Inter-bank Offered Rate (LIBOR). The weighted-average interest rate on
borrowings outstanding during 2000 was 6.05%. The commitment fee on the unused
funds available for borrowing under the agreement is 5/16%. The Company has the
right to permanently terminate the unused portion of the revolving commitment.
As long as there are borrowings outstanding, and as a condition precedent to new
borrowings, the Company must comply with certain covenants. 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.
In August 1997, the Company entered into a $4,275 financing agreement in
connection with an outsourcing services contract. At September 30, 2000, the
Company had $3,483 drawn on the agreement.
Interest paid on the convertible subordinated debentures and the revolving
credit agreement during the years ended September 30, 2000, 1999, and 1998, was
$3,895, $4,001, and $1,893, respectively.
Note H -- Benefit Plans
--------------------------------------------------------------------------------
Stock Option Plans: The Company has stock option plans for the benefit of its
key employees and nonemployee directors that provide for the grant of options to
purchase the Company's common stock at an exercise price per share equal to the
closing price of the Company's common stock on the grant date.
The Company's 1994 Long-Term Incentive Plan provides for the issuance of stock
options, stock appreciation rights, restricted stock, and other long-term
performance awards. At September 30, 2000, only stock options have been issued
pursuant to the plan.
There were 336 shares of common stock reserved for future grants under the stock
option plans at September 30, 2000. The outstanding stock options expire on
various dates through 2010. Options granted to employees generally have 10-year
terms and vest and become fully exercisable at the end of three years of
continued employment. There are 1,490 options granted to senior management that
have 10-year terms and vest and become exercisable in five years from the date
of grant and have accelerated vesting if certain performance conditions are met.
At September 30, 2000, 1,195 of these options were exercisable. There are 858
options granted to senior management that have 10-year terms and vest and become
exercisable in three years from the date of grant and have accelerated vesting
if certain performance conditions are met. At September 30, 2000, 262 of these
options were exercisable. In addition, 260 options granted to nonemployee
directors, of which 160 are exercisable at September 30, 2000, have 10-year
terms and vest and become exercisable ratably over five years.
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" (SFAS 123), requires that companies with stock-based compensation
plans either recognize compensation expense based on fair-value accounting
methods or continue to apply the provisions of Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees" (APB 25). If a
Company chooses to continue to apply the provisions of APB 25, it must disclose
pro forma net income and earnings per share assuming that the fair-value method
had been applied. The Company has elected to follow APB 25 and related
interpretations in accounting for its employee stock options and make the pro
forma disclosures required by SFAS 123.
42
<PAGE>
The following pro forma amounts were determined as if the Company had accounted
for its stock options using the fair value method as described in that
statement:
Year Ended September 30, 2000 1999 1998
----------------------- ------ ------- -------
As Reported
Net income $8,628 $19,299 $21,374
Net income per common share 0.27 0.59 0.64
Net income per share - assuming
dilution 0.26 0.58 0.59
Pro Forma
Net income $4,160 $15,901 $18,938
Net income per common share 0.13 0.49 0.56
Net income per share - assuming
dilution 0.12 0.47 0.53
The fair value of stock options granted was estimated at the date of grant using
a Black-Scholes option-pricing model with the following weighted-average
assumptions for 2000, 1999, and 1998, respectively: risk-free interest rates of
6.1%, 4.9%, and 5.7%; dividend yields of 0%; volatility factors of the expected
market price of the Company's common stock of 59.5%, 53.1%, and 50.8%; and a
weighted-average expected life of the option of four years.
Following is a summary of the Company's stock-option activity and related
information for the years ended September 30:
<TABLE>
<CAPTION>
2000 1999 1998
Weighted- Weighted- Weighted-
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------ --------- ------ --------- ------ --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year 5,235 $12.73 4,635 $12.18 4,582 $ 7.57
Granted 1,208 18.09 946 14.60 1,341 22.58
Exercised (529) 8.30 (181) 5.01 (1,129) 5.88
Cancelled (408) 17.22 (165) 17.83 (159) 11.78
----- ------ ----- ------ ------ ------
Outstanding at end of year 5,506 $14.00 5,235 $12.73 4,635 $12.18
----- ------ ----- ------ ------ ------
Options exercisable at year-end 3,295 $11.14 2,769 $ 9.68 2,319 $ 7.64
----- ------ ----- ------ ------ ------
Weighted-average fair value of
options granted during the year $9.30 $ 6.75 $10.27
</TABLE>
The following table summarizes information about stock options outstanding and
exercisable at September 30, 2000:
<TABLE>
<CAPTION>
Outstanding Exercisable
------------------------------------- -----------------------
Weighted-
Average Weighted- Weighted-
Remaining Average Average
Contractual Exercise Exercise
Range of Exercise Prices Shares Life (yrs.) Price Shares Price
------------------------ --------- ---------- ------- -------- --------
<S> <C> <C> <C> <C> <C>
$ 1.47 - $ 9.69 2,296 3.73 $ 8.02 2,170 $ 8.02
9.88 - 21.88 2,326 7.73 16.29 783 14.60
22.88 - 28.53 884 8.09 23.54 342 22.95
------ ------ ----- ---- ------ ----- ------
$ 1.47 - $28.53 5,506 6.12 $14.00 3,295 $11.14
------ ------ ----- ---- ------ ----- ------
</TABLE>
43
<PAGE>
Employee Stock Ownership Plan: The Company has a noncontributory Employee Stock
Ownership Plan (ESOP) covering eligible employees. The ESOP provides for the
Employee Stock Ownership Trust (ESOT) to distribute shares of the Company's
common stock as retirement and/or other benefits to the participants. The
Company discontinued its contributions to the ESOT subsequent to the 1986 plan
year. In accordance with the terms of the ESOP, the total amounts then allocated
to the accounts of the participants immediately vested. As of September 30,
2000, there were 1,829 shares held by the ESOT.
Restricted Stock Plans: The Company had an Employees' Restricted Stock Purchase
Plan, which has been terminated, pursuant to which shares of the Company's
common stock were sold to key employees at 40% of the fair market value of
unrestricted shares on the date of sale. The shares are restricted, and may not
be sold, transferred, or assigned other than by an exchange with the Company for
a number of shares of common stock not so restricted, to be determined by a
formula. The formula reduces the number of unrestricted shares to be exchanged
to give effect to the 60% reduction from fair market value of shares not so
restricted. Certain of the shares sold are subject to the Company's option to
repurchase a fixed percentage of the shares during a specified period at the
employee's purchase price plus 10% a year from the date of purchase in the event
of certain terminations of employment. As of September 30, 2000, there were 160
restricted shares sold but not exchanged for unrestricted shares.
Savings Plan: The Company also provides a defined contribution 401(k) plan to
substantially all its U.S. employees, whereby the Company may make matching
contributions equal to a percentage of the contribution made by participants.
One half of the Company's contributions are used to buy shares of the Company's
common stock. Expenses under this plan for the years ended September 30, 2000,
1999, and 1998, were $4,400, $4,279, and $3,342, respectively.
Note I -- Income Taxes
--------------------------------------------------------------------------------
Income (loss) before income taxes consists of the following:
Year Ended September 30, 2000 1999 1998
------------------------ ------- ------- -------
U.S. operations $17,710 $41,344 $44,387
International operations (2,273) (5,928) (6,155)
------- ------- -------
$15,437 $35,416 $38,232
------- ------- -------
The components of the provision for income taxes are as follows:
Year Ended September 30, 2000 1999 1998
------------------------ ----- ------ ------
Current:
Federal $5,521 $11,533 $16,128
State 4,049 4,765 5,316
International 114 - -
------ ------- -------
Total Current 9,684 16,298 21,444
Deferred benefit (primarily federal) (2,875) (181) (4,586)
------ ------- -------
$6,809 $16,117 $16,858
------ ------- -------
44
<PAGE>
A reconciliation of the provision for income taxes to the federal statutory rate
follows:
Year Ended September 30, 2000 1999 1998
------------------------ ----- ----- -----
Expected federal tax rate 35.0% 35.0% 35.0%
Adjustments due to:
Effect of state income tax 13.3% 7.3% 9.5%
Foreign net operating loss
not benefited 6.2% 4.9% 1.1%
Research & development tax credit (13.6)% (4.3)% (2.7)%
Other 3.2% 2.6% 1.2%
---- ---- ----
44.1% 45.5% 44.1%
---- ---- ----
The effective tax rate in the fiscal year 2000 provision is greater than the
federal statutory rate principally due to the effects of state income taxes and
of not recording a tax benefit for losses related to the Company's foreign
operations. Increased research and development expenditures in fiscal year 2000
and the reinstatement of the research and development tax credit in fiscal year
2000 retroactive to July 1, 1999, resulted in an increased research and
development tax credit.
The effective tax rate in the fiscal year 1999 provision is greater than the
federal statutory rate principally due to the effects of state income taxes and
of not recording a tax benefit for losses related to the Company's foreign
operations, net of the research and development tax credit available to the
Company.
The effective tax rate in the fiscal year 1998 provision is greater than the
federal statutory rate principally due to the effects of state income taxes and
of the write-off of purchased research and development, which is not deductible
for state income tax purposes, net of the research and development tax credit
available to the Company.
At September 30, 2000, the Company had $33,506 of net operating loss
carryforwards in various states and $11,674 of net operating loss carryforwards
in foreign jurisdictions. The state carryforwards expire in various periods
ending on or before September 30, 2014. The foreign tax losses can be
indefinitely carried forward. At September 30, 2000 and 1999, the Company had
valuation allowances of $5,233 and $3,700, respectively, related to the deferred
tax assets associated with the state and foreign carryforwards.
Income taxes paid during fiscal years ended September 30, 2000, 1999, and 1998,
were $10,022, $15,060, and $15,716, respectively.
The tax effects of the temporary differences that give rise to the significant
portions of the deferred tax assets and liabilities are as follows:
September 30, 2000 1999
------------- ------- -------
Deferred Tax Assets
Purchased research & development $ 6,194 $ 6,772
Accrued expenses and reserves 6,387 4,570
Tax credits and loss carryforwards,
net of valuation allowance 812 2,695
Purchased software 755 688
Equity in losses of Campus Pipeline, Inc. 2,775 1,264
------- -------
Total Deferred Tax Assets 16,923 15,989
Deferred Tax Liabilities
Depreciation and amortization (53) (1,720)
Unbilled accounts receivable (4,740) (3,601)
Software capitalization (7,617) (7,928)
Prepaids and other accelerated expenses (1,333) (2,435)
------- -------
Total Deferred Tax Liabilities (13,743) (15,684)
------- -------
Net Deferred Tax Assets $ 3,180 $ 305
------- -------
45
<PAGE>
Note J -- Business Segments
--------------------------------------------------------------------------------
The following information is presented in accordance with Statement of Financial
Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and
Related Information" (SFAS 131). SFAS 131 establishes standards for reporting
information about operating segments in annual financial statements and requires
selected information about operating segments in interim financial reports
issued to stockholders. It also established standards for related disclosures
about products and services and geographic areas. Operating segments are defined
as components of an enterprise about which separate financial information is
available that is evaluated regularly by the chief operating decision maker, or
decision-making group, in deciding how to allocate resources and in assessing
performance. The Company's chief operating decision maker is the chief executive
officer of the Company.
The Company's reportable segments are strategic business units that offer
different products and services. They are managed separately because each
business develops and markets industry-specific products and services. The
Company restructured its business segments as of July 1, 1999, and has presented
the fiscal year 1998 segment profit and loss information to conform to its
revised segment reporting. Segment asset information for fiscal year 1998 is not
readily available on this basis and has not been presented in the revised
format.
The Company has four reportable segments: Global Education Solutions; Global
Government Solutions; Global Manufacturing & Distribution Solutions; and Global
Energy, Utilities & Communications Solutions. The Global Education Solutions
segment provides information technology services and application software to
higher education institutions. The Company targets English-speaking institutions
of higher education with enrollments greater than two thousand students for its
software and services. Global Government Solutions provides local-government
entities with administrative application software and services. Global
Manufacturing & Distribution Solutions provides a suite of supply chain
management software solutions and services to process manufacturers and
distributors. The Company targets process manufacturers and distributors that
have over $100,000 in annual revenue. Global Energy, Utilities & Communications
Solutions provides administrative application software and services to the
utility market. The Company's target market includes water, gas, and electric
utilities that range from mid-size municipalities to investor-owned utilities
serving millions of customers.
46
<PAGE>
The Company evaluates performance and allocates resources based on profit or
loss from operations before income taxes, interest income, and interest expense.
The accounting policies of the segments are the same as those described in the
summary of significant accounting policies. The measurement of segment profit
and loss includes revenues and expenses incurred by the Company's foreign
subsidiaries; however, the assets and liabilities of the foreign subsidiaries
are not included in the segments' assets. Foreign assets are included in the
"All Other" column. Intersegment sales and transfers are primarily recorded at
cost plus a markup that approximates current market prices.
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 intersegment transactions -- including the elimination of
intercompany net assets between corporate and the reportable segments of
$219,537 and $197,167 as of September 30, 2000 and 1999, respectively --
intangibles and related amortization of assets purchased in business
acquisitions, and results of nonreportable segments whose products and services
serve different markets than those the reportable segments serve. Interest
income is not included in the following segment disclosures.
<TABLE>
<CAPTION>
Global
Global Energy,
Manufacturing Utilities &
Global Global & Communi-
Education Government Distribution cations
Solutions Solutions Solutions Solutions All Other Total
--------- ---------- ------------- ------------ ------------ ---------
<S> <C> <C> <C> <C> <C> <C>
Year Ended September 30, 2000
-----------------------------
Outsourcing services revenue $ 41,124 $ 59,076 $ 8,555 $ 14,677 $ 2,801 $ 126,233
Software sales and maintenance &
enhancements revenue 91,479 16,725 24,866 21,997 -- 155,067
Software services revenue 54,179 10,882 28,697 51,606 505 145,869
--------- --------- --------- -------- ------- ---------
Revenues from external customers 186,782 86,683 62,118 88,280 3,306 427,169
Intersegment revenues 1,166 48 31 -- (1,245) --
Segment profit (loss)* 23,072 180 (7,858) 2,195 (2,152) 15,437
Amortization of capitalized software 3,230 624 1,652 640 -- 6,146
Research & development expenditures 20,997 4,311 11,834 13,254 1,966 52,362
Segment assets 311,118 36,238 18,695 44,427 (42,355) 368,123
Year Ended September 30, 1999
-----------------------------
Outsourcing services revenue $ 41,646 $ 61,540 $ 7,181 $ 17,238 $ 7,457 $ 135,062
Software sales and maintenance &
enhancements revenue 97,455 11,201 22,843 26,608 128 158,235
Software services revenue 50,101 11,031 44,485 52,616 13,028 171,261
--------- --------- --------- -------- ------- ---------
Revenues from external customers 189,202 83,772 74,509 96,462 20,613 464,558
Intersegment revenues 1,381 253 356 2,027 (4,017) --
Segment profit (loss)* 44,843 171 (2,492) (1,013) (6,093) 35,416
Amortization of capitalized software 1,884 652 1,814 858 -- 5,208
Research & development expenditures 20,718 4,040 10,588 14,628 3,987 53,961
Segment assets 283,389 38,657 29,103 50,656 (66,753) 335,052
Year Ended September 30, 1998
-----------------------------
Outsourcing services revenue $ 38,121 $ 54,913 $ 6,814 $ 13,431 $12,275 $ 125,554
Software sales and maintenance &
enhancements revenue 90,693 12,437 23,976 34,035 -- 161,141
Software services revenue 32,813 8,185 31,559 35,401 3,601 111,559
--------- --------- --------- -------- ------- ---------
Revenues from external customers 161,627 75,535 62,349 82,867 15,876 398,254
Intersegment revenues 250 974 210 2,421 (3,855) --
Segment profit (loss)** 43,826 6,581 (16,916) 5,289 (548) 38,232
Amortization of capitalized software 1,272 468 1,652 1,532 -- 4,924
Research & development expenditures 17,061 4,403 7,087 7,982 2,670 39,203
</TABLE>
---------------
* The "All Other" column includes $4,761 and $3,161 losses from investment
in affiliate accounted for under the equity method of accounting for fiscal
years 2000 and 1999, respectively. The "Global Government Solutions" column
includes a pretax charge of $5,759 related to litigation for fiscal year
2000.
** The "Global Manufacturing & Distribution Solutions" column includes a
pretax charge of $16,063 for purchased research and development in the year
ended September 30, 1998. Results without the charge for purchased research
and development would have been a segment loss of $853.
47
<PAGE>
The following table presents revenues by country based on location of the
customer, and property by country based on location of the asset.
<TABLE>
<CAPTION>
September 30, 2000 1999 1998
------------- --------------------------- ------------------------ -------------------------
Long-Lived Long-Lived Long-Lived
Revenues Assets Revenues Assets Revenues Assets
-------- ---------- --------- ----------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
United States $387,937 $117,008 $416,153 $111,045 $365,610 $ 90,404
Other Countries 39,232 20,616 48,405 20,902 32,644 19,926
-------- -------- -------- -------- -------- --------
Total $427,169 $137,624 $464,558 $131,947 $398,254 $110,330
-------- -------- -------- -------- -------- --------
</TABLE>
Note K -- Product Development, Commitments, and Other Items
--------------------------------------------------------------------------------
Product development expenditures, including software maintenance expenditures,
for the years ended September 30, 2000, 1999, and 1998, were approximately
$52,362, $53,961, and $39,203, respectively. After capitalization (Note A) these
amounts were approximately $48,496, $44,913, and $31,188, respectively, and were
charged to operations as incurred. For the same years, amortization of
capitalized software costs (not included in expenditures above) amounted to
$6,146, $5,208, and $4,924, respectively.
Rent expense for the years ended September 30, 2000, 1999, and 1998, was $9,762,
$7,410, and $4,211, respectively. Aggregate rentals payable under significant
noncancellable lease agreements with initial terms of one year or more at
September 30, 2000, are as follows:
Fiscal year Amount
----------- -------
2001 $ 7,361
2002 6,999
2003 5,913
2004 4,699
2005 3,923
Thereafter 12,621
-------
$41,516
-------
During the quarter ended December 31, 1999, the Company implemented a
restructuring plan, which included the termination of employees and
discontinuation of noncritical programs. The restructuring was considered
necessary in light of significantly decreased license fees in the quarter. The
Company accrued $1,000 related to severance and termination benefits based on a
termination plan developed by management, in consultation with the Board of
Directors, in December 1999. As of September 30, 2000, $81 of this accrual
remained. In January 2000, the Company terminated approximately 100 employees
engaged in marketing, administrative, special-programs, and development
functions. These employees represent 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.
Under the terms of the purchase agreement with Adage Systems International, Inc.
(Adage), the Company would be required to pay additional consideration in either
additional shares (up to 3,000 shares) of common stock or a combination of
additional shares of common stock and cash, in the event that the market price
of the common stock approximately five years after the closing was lower than
the base price. This provision to the purchase agreement expired in fiscal year
2000. The Company was not required to pay additional consideration.
In October 1998, the Company's Board of Directors authorized the repurchase of
up to 3,000 of its common shares. During the year ended September 30, 1999, the
Company repurchased 2,340 of its common shares for $21,952. The Company's senior
revolving credit agreement covenants were amended in October 1998 to allow the
Company to repurchase capital stock not to exceed $35,000 and 3,000 shares
before April 15, 1999. The Company is unable to repurchase additional shares of
common stock without another amendment to its credit agreement.
48
<PAGE>
Note L -- Quarterly Results of Operations (Unaudited)
--------------------------------------------------------------------------------
The following is a summary of the quarterly results of operations for the years
ended September 30, 2000 and 1999:
<TABLE>
<CAPTION>
Three Months Ended
--------------------------------------------------------------------------------------------------
December 31, March 31, June 30, September 30,
-------------------- ---------------------- -------------------- -------------------
1999 1998 2000 1999 2000* 1999 2000** 1999
------- -------- -------- -------- -------- -------- --------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues $96,679 $109,769 $114,270 $117,078 $119,941 $120,245 $105,090 $119,119
Gross profits 22,325 34,422 38,021 36,844 42,591 40,560 36,036 40,926
Income (loss)
before income taxes (9,852) 7,444 6,134 7,585 19,292 11,886 (137) 8,501
Provision for income
taxes (3,645) 2,978 2,515 3,413 7,994 5,444 (55) 4,282
Net income (loss) $(6,207) $ 4,466 $ 3,619 $ 4,172 $ 11,298 $ 6,442 $ (82) $ 4,219
Net income (loss)
per common share $(0.19) $ 0.14 $ 0.11 $ 0.13 $ 0.35 $ 0.20 $ 0.00 $ 0.13
Net income (loss) per
share - assuming
dilution $(0.19) $0.13 $ 0.11 $ 0.13 $ 0.32 $ 0.20 $ 0.00 $ 0.13
</TABLE>
-------------
* All amounts presented except gross profits reflect the effect of a gain from
the sale of assets of $5,988.
** Includes a pretax charge of $5,759 related to litigation (Note M) and a
change in estimate primarily to reduce accrued employee costs by $1,369.
Certain quarterly information has been reclassified to conform to the
September 30, 2000, classification.
Note M -- Subsequent Events/Contingency
--------------------------------------------------------------------------------
The Company has been involved in litigation relating to a software
implementation in Broward County, Florida. The Company believed that it had
meritorious defenses and the probability of an unfavorable outcome against the
Company was unlikely. However, on October 31, 2000, an adverse decision was
rendered against the Company in this matter. The Company's claim for
approximately $3,100 -- which was included in the Company's accounts receivable
balances -- for software licensed, services rendered, and expenses incurred was
denied. In addition, the Company was ordered to pay damages in the amount of
approximately $3,200 plus prejudgment interest. The Company intends to appeal
the decision and believes that insurance proceeds may be availiable to cover a
portion of the damages awarded against it. As a result of the court's decision
and the inability to predict the possibility of overturning the judgment on
appeal, the Company has recorded a pretax charge of $5,759 for damages and other
costs associated with the action in the fourth quarter of fiscal year 2000. This
amount is included in selling, general, and administrative expense. In the
opinion of management, this amount plus amounts previously accrued should be
adequate to cover the ultimate loss resulting from this matter if the appellate
court affirms the lower court's decision.
The Company is also involved in other legal proceedings and litigation arising
in the ordinary course of business. In the opinion of management, the outcome of
such proceedings and ligitagion currently pending will not materially affect the
Company's consolidated financial statements.
49
<PAGE>
Report of Independent Auditors
The Board of Directors and Stockholders
Systems & Computer Technology Corporation
We have audited the accompanying consolidated balance sheets of Systems &
Computer Technology Corporation as of September 30, 2000 and 1999, and the
related consolidated statements of operations, cash flows, and stockholders'
equity for each of the three years in the period ended September 30, 2000. Our
audits also included the financial statement schedule listed in the Index at
Item 14(a). These financial statements and schedule are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements and schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Systems & Computer
Technology Corporation at September 30, 2000 and 1999, and the consolidated
results of its operations and its cash flows for each of the three years in the
period ended September 30, 2000, in conformity with accounting principles
generally accepted in the United States. Also, in our opinion, the related
financial statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
/s/ Ernst & Young LLP
Philadelphia, Pennsylvania
October 23, 2000, except for Note M, as to which the date is October 31, 2000
50
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not Applicable.
51
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Information required under this Item is contained in the Registrant's
Definitive Proxy Statement to be delivered to shareholders in connection with
the Annual Meeting of Shareholders scheduled to be held on February 23, 2001 and
is incorporated herein by reference. Also, see the information under the heading
"Executive Officers of SCT" appearing in Part I hereof.
ITEM 11. EXECUTIVE COMPENSATION.
Information required under this Item is contained in the Registrant's
Definitive Proxy Statement to be delivered to shareholders in connection with
the Annual Meeting of Shareholders scheduled to be held on February 23, 2001 and
is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Information required under this Item is contained in the Registrant's
Definitive Proxy Statement to be delivered to shareholders in connection with
the Annual Meeting of Shareholders scheduled to be held on February 23, 2001 and
is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Information required under this Item is contained in the Registrant's
Definitive Proxy Statement to be delivered to shareholders in connection with
the Annual Meeting of Shareholders scheduled to be held on February 23, 2001 and
is incorporated herein by reference.
52
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) Financial Statements, Financial Statement Schedule and Exhibits.
(1) The following consolidated financial statements of the Registrant
and its subsidiaries are included herein:
Consolidated Balance Sheets--September 30, 2000 and 1999
Consolidated Statements of Operations--Years Ended September 30,
2000, 1999, and 1998
Consolidated Statements of Cash Flows--Years Ended September 30,
2000, 1999, and 1998
Consolidated Statements of Stockholders' Equity--Years Ended
September 30, 2000, 1999, and 1998
Notes to Consolidated Financial Statements
Report of Ernst & Young LLP, Independent Auditors
(2) The following consolidated financial statement schedule of the
Registrant and its subsidiaries is included herein:
Schedule II--Valuation and Qualifying Accounts
All other schedules for which provision is made in the applicable
accounting regulation of the Securities and Exchange Commission are
not required under the related instructions or are inapplicable
and, therefore, have been omitted.
(3) Exhibits (not included in the copies of the Form 10-K sent to
stockholders).
53
<PAGE>
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
SYSTEMS & COMPUTER TECHNOLOGY CORPORATION AND SUBSIDIARIES
For the Three Years in the Period Ended September 30, 2000
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
------------------------------------------------------------------------------------------------------------------------------------
Additions
-----------------------------
Charged to Charged to
Balance at Costs and Other Accounts Deductions Balance at
Description Beginning of Period Expenses -Describe -Describe End of Period
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
For the year ended September 30, 2000
Reserves and allowances deducted from
other assets and deferred charges:
Reserves for non-interest bearing
loans to employees
Short-term $ 56,000 $ 56,000
Long-term - -
Allowance for doubtful accounts 5,841,000 $3,111,000 $3,275,000 (1) 5,677,000
---------- ---------- --------- ---------- ----------
Total $5,897,000 $3,111,000 $ - $3,275,000 $5,733,000
For the year ended September 30, 1999
Reserves and allowances deducted from
other assets and deferred charges:
Reserves for non-interest bearing
loans to employees
Short-term $ 56,000 $ 56,000
Long-term - -
Allowance for doubtful accounts 4,033,000 $3,294,000 $1,486,000 (1) 5,841,000
---------- ---------- --------- ---------- ----------
Total $4,089,000 $3,294,000 $ - $1,486,000 $5,897,000
For the year ended September 30, 1998
Reserves and allowances deducted from
other assets and deferred charges:
Reserves for non-interest bearing
loans to employees
Short-term $ 56,000 $ 56,000
Long-term - -
Allowance for doubtful accounts 4,098,000 $2,483,000 $2,548,000 (1) 4,033,000
---------- ---------- --------- ---------- ----------
Total $4,154,000 $2,483,000 $ - $2,548,000 $4,089,000
</TABLE>
(1) Uncollectible accounts written-off during the year
54
<PAGE>
No. Exhibit
--- -------
3.1 Certificate of Amendment and Restated Certificate of Incorporation
(Exhibit 3 to Registrant's Form 10-Q for the quarterly period ended
March 31, 1998)(1)
3.2 Bylaws (Exhibit 3.2 to the Registrant's Registration Statement on Form
S-3 filed with the Securities and Exchange Commission on September 1,
1993)(1)
3.3 Amendment to Bylaws adopted March 18, 1999 (Exhibit 3.3 to Registrant's
Form 10-Q for the quarterly period ended March 31, 1999)(1)
4.1 Form of Indenture under which the Registrant's 5% Convertible
Subordinated Debentures due 2004 are issued (Exhibit 4 to the
Registrant's Registration Statement on Form S-3 filed with the
Securities and Exchange Commission on October 9, 1997)(1)
4.2 Rights Agreement, dated as of April 13, 1999, between Systems &
Computer Technology Corporation and ChaseMellon Shareholder Services
L.L.C., including Terms of Series A Participating Preferred Stock,
which is attached as Exhibit A and Form of Right Certificate, which is
attached as Exhibit B to the Rights Agreement (Exhibit 4.1 to the
Registrant's Form 8-K dated March 18, 1999)(1)
10.1 Oracle Alliance Agreement dated as of May 31, 1998 between Oracle
Corporation and the Registrant (Exhibit 10 to the Registrant's Form
10-Q for the quarterly period ended June 30, 1998)(1)
10.2 Credit Agreement dated as of June 20, 1994 among the Registrant and SCT
Software & Resource Management Corporation as Borrowers and Mellon Bank
(Exhibit 10.4 to the Registrant's Form 10-K for the fiscal year ended
September 30, 1994)(1)
10.3 Subsidiary Guaranty Agreement dated as of June 20, 1994 entered into by
SCT Utility Systems, Inc. in favor of Mellon Bank. (Identical
Subsidiary Guaranties, except as to the identity of the guarantor, were
entered into by SCT Public Sector, Inc., SCT Financial Corporation, SCT
International Limited, SCT Software & Technology Services, Inc., and
SCT Property, Inc.) (Exhibit 10.5 to the Registrant's Form 10-K for the
fiscal year ended September 30, 1994)(1)
----------------
(1) Incorporated by reference
55
<PAGE>
10.4 Extension Agreement dated June 20, 1996 among Systems & Computer
Technology Corporation, SCT Software & Resource Management Corporation
and Mellon Bank, N.A. (Exhibit 10.12 to the Registrant's Form 10-K for
the fiscal year ended September 30, 1996)(1)
10.5 Amendment and Modification to Credit Agreement dated as of April 8,
1997 among Systems & Computer Technology Corporation and SCT Software &
Resource Management Corporation as Borrowers and Mellon Bank, N.A.
(Exhibit 10.1 to the Registrant's Form 10-Q for the quarter ended June
30, 1997)(1)
10.6 Second Amendment and Modification to Credit Agreement dated as of April
8, 1997 among Systems & Computer Technology Corporation and SCT
Software & Resource Management Corporation as Borrowers and Mellon
Bank, N.A. (Exhibit 10.2 to the Registrant's Form 10-Q for the quarter
ended June 30, 1997)(1)
10.7 Third Amendment and Modification to Credit Agreement dated as of June
4, 1997 among Systems & Computer Technology Corporation and SCT
Software & Resource Management Corporation as Borrowers and Mellon
Bank, N.A. (Exhibit 10.3 to the Registrant's Form 10-Q for the quarter
ended June 30, 1997)(1)
10.8 Fourth Amendment and Modification to Credit Agreement dated as of May
6, 1998 among Systems & Computer Technology Corporation and SCT
Software & Resource Management Corporation as Borrowers and Mellon
Bank, N.A. (Exhibit 10.8 to the Registrant's Form 10-K for the fiscal
year ended September 30, 1998)(1)
10.9 Fifth Amendment and Modification to Credit Agreement dated as of
October 16, 1998 among Systems & Computer Technology Corporation and
SCT Software & Resource Management Corporation as Borrowers and Mellon
Bank, N.A. (Exhibit 10.9 to the Registrant's Form 10-K for the fiscal
year ended September 30, 1998)(1)
10.10 Letter Amendment to Credit Agreement dated as of August 30, 1999 among
Systems & Computer Technology Corporation and SCT Software & Resource
Management Corporation as Borrowers and Mellon Bank, N.A. (Exhibit
10.10 to the Registrant's Form 10-K for the fiscal year ended September
30, 1999)(1)
56
<PAGE>
10.11 Sixth Amendment and Modification to Credit Agreement dated as of July
7, 2000 among Systems & Computer Technology Corporation and SCT
Software & Resource Management Corporation as Borrowers and Mellon
Bank, N.A.(2)
10.12 Seventh Amendment and Modification to Credit Agreement dated as of
September 13, 2000 among Systems & Computer Technology Corporation and
SCT Software & Resource Management Corporation as Borrowers and Mellon
Bank, N.A.(2)
10.13 Systems & Computer Technology Corporation 1994 Long-Term Incentive
Plan, as amended through November 18, 1997 (Exhibit 10 to Registrant's
Form 10-Q for the quarterly period ended March 31, 1998)(1,3)
10.14 Systems & Computer Technology Corporation 1994 Non-Employee Director
Stock Option Plan (Exhibit 4.4 to the Registrant's Registration
Statement on Form S-8 filed with the Securities and Exchange Commission
on June 30, 1995)(1,3)
10.15 Amendment One to the Systems & Computer Technology Corporation 1994
Non-Employee Director Stock Option Plan (Exhibit 10.1 to the
Registrant's Form 10-Q for the quarterly period ended December 31,
1998)(1,3)
10.16 Form of Severance Agreement dated as of April 21, 1999 by and between
the Registrant and certain executive officers and management of the
Registrant (Exhibit 10.14 to the Registrant's Form 10-K for the fiscal
year ended September 30, 1999)(1,3)
21 Subsidiaries of the Registrant.(2)
23 Consent of Ernst & Young LLP.(2)
27 Financial Data Schedule.(2)
SCT will furnish to any stockholder upon written request, any exhibit
listed in the accompanying Index to Exhibits upon payment by such stockholder to
SCT of SCT's reasonable expenses in furnishing such exhibit.
------------------
(2) Filed with this Annual Report on Form 10-K
(3) Compensatory plan, contract or arrangement
(b) Reports on Form 8-K.
The registrant did not file any current reports on Form 8-K during the
period from July 1, 2000 through September 30, 2000.
57
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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)
By: /s/ Michael J. Emmi
---------------------------------------
Michael J. Emmi, Chairman of the Board,
President and Chief Executive Officer
Date: December 21, 2000
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
------------------------------------ --------------------------- ---------------------------
<S> <C> <C>
/s/ Michael J. Emmi Chairman of the Board, December 21, 2000
------------------------------------ President and Chief
Michael J. Emmi Executive Officer; Director
(Principal Executive Officer)
/s/ Michael D. Chamberlain Director December 21, 2000
------------------------------------
Michael D. Chamberlain
/s/ Allen R. Freedman Director December 21, 2000
------------------------------------
Allen R. Freedman
/s/ Thomas I. Unterberg Director December 21, 2000
------------------------------------
Thomas I. Unterberg
/s/ Gabriel A. Battista Director December 21, 2000
------------------------------------
Gabriel A. Battista
/s/ Eric Haskell Senior Vice President, Finance December 21, 2000
------------------------------------ & Administration, Treasurer
Eric Haskell and Chief Financial Officer
(Principal Financial and
Accounting Officer)
</TABLE>
58
<PAGE>
SYSTEMS & COMPUTER TECHNOLOGY CORPORATION
Index of Exhibits Filed Herewith
Exhibit No. Exhibit Page
----------- ------- ----
10.11 Sixth Amendment and Modification to Credit
Agreement dated as of July 7, 2000 among Systems &
Computer Technology Corporation and SCT Software &
Resource Management Corporation as Borrowers and
Mellon Bank, N.A.
10.12 Seventh Amendment and Modification to Credit
Agreement dated as of September 13, 2000 among
Systems & Computer Technology Corporation and SCT
Software & Resource Management Corporation as
Borrowers and Mellon Bank, N.A.
21 Subsidiaries of the Registrant
23 Consent of Ernst & Young LLP
27 Financial Data Schedule
59
