SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
Form 10-Q
(Mark One)
/X/ Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the quarterly period ended December 31, 2000 or
/ / Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from _______ to _______.
0-11521
(Commission File Number)
SYSTEMS & COMPUTER TECHNOLOGY CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 23-1701520
(State or other jurisdiction (I.R.S. Employer
of incorporation) Identification No.)
Great Valley Corporate Center
4 Country View Road
Malvern, Pennsylvania 19355
(Address of principal executive offices)
Registrant's telephone number, including area code: (610) 647-5930
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes /X/ No / /
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
32,782,675 Common shares, $.01 par value, as of February 05, 2001
Page 1 of 21 consecutively numbered pages
SYSTEMS & COMPUTER TECHNOLOGY CORPORATION AND SUBSIDIARIES
INDEX
PART I. UNAUDITED FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets -
December 31, 2000 and September 30, 2000
Condensed Consolidated Statements of Operations -
Three Months Ended December 31, 2000 and 1999
Condensed Consolidated Statements of Cash Flows -
Three Months Ended December 31, 2000 and 1999
Notes to Condensed Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures
About Market Risk
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Item 6. Reports on Form 8-K
SIGNATURES
SYSTEMS & COMPUTER TECHNOLOGY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except per share amounts)
December 31, September 30,
2000 2000
(UNAUDITED) (NOTE)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 52,785 $ 49,161
Short-term investments, including
accrued interest of $95 and $206 8,655 16,787
Receivables, including $65,213
and $64,075 of earned revenues
in excess of billings, net of
allowance for doubtful accounts
of $5,892 and $5,677 144,850 138,965
Prepaid expenses and other receivables 24,281 25,586
-------- --------
TOTAL CURRENT ASSETS 230,571 230,499
PROPERTY AND EQUIPMENT--at cost, net
of accumulated depreciation 61,502 63,335
CAPITALIZED COMPUTER SOFTWARE COSTS,
net of accumulated amortization 18,088 19,310
COST IN EXCESS OF FAIR VALUE OF NET
ASSETS ACQUIRED, net of accumulated
amortization 15,286 15,738
OTHER ASSETS AND DEFERRED CHARGES 41,013 39,241
-------- --------
TOTAL ASSETS $366,460 $368,123
======== ========
Note: The condensed consolidated balance sheet at September 30, 2000 has
been derived from the audited financial statements at that date.
See notes to condensed consolidated financial statements.
SYSTEMS & COMPUTER TECHNOLOGY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (continued)
(in thousands, except per share amounts)
December 31, September 30,
2000 2000
(UNAUDITED) (NOTE)
LIABILITIES & STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 8,389 $ 10,639
Current portion of long-term debt 1,227 712
Income taxes payable 1,793 1,793
Accrued expenses 37,337 41,105
Deferred revenue 33,959 32,886
-------- --------
TOTAL CURRENT LIABILITIES 82,705 87,135
LONG-TERM DEBT, less current portion 77,306 77,521
OTHER LONG-TERM LIABILITIES 1,740 2,030
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
37,436 and 37,264 shares 374 372
Capital in excess of par value 116,461 115,247
Retained earnings 113,880 111,879
Accumulated other comprehensive loss (447) (540)
-------- --------
230,268 226,958
Less
Held in treasury, 4,653 and 4,642 common
shares--at cost (25,059) (24,911)
Notes receivable from stockholders (500) (610)
-------- --------
204,709 201,437
-------- --------
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY $366,460 $368,123
======== ========
Note: The condensed consolidated balance sheet at September 30, 2000 has
been derived from the audited financial statements at that date.
See notes to condensed consolidated financial statements.
SYSTEMS & COMPUTER TECHNOLOGY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(in thousands, except per share amounts)
For the Three Months Ended
December 31,
2000 1999
Revenues:
Outsourcing services $ 30,698 $ 32,142
Software sales 16,129 4,926
Maintenance and enhancements 24,439 21,320
Software services 34,142 37,986
Interest and other income 1,619 305
-------- --------
107,027 96,679
Expenses:
Cost of outsourcing services 25,119 25,994
Cost of software sales and
maintenance and enhancements 20,998 19,849
Cost of software services 24,717 28,206
Selling, general and administrative 31,643 27,785
Equity in losses of affiliates -- 2,541
Restructuring charges -- 1,000
Interest expense 1,214 1,156
-------- --------
103,691 106,531
Income (loss) before income taxes 3,336 (9,852)
Provision (benefit) for income taxes 1,335 (3,645)
-------- --------
Net income (loss) $ 2,001 $ (6,207)
======== ========
Net income (loss) per common share $ 0.06 $(0.19)
Net income (loss) per share - assuming dilution $ 0.06 $(0.19)
Common shares and equivalents outstanding:
Average common shares 32,729 32,137
Average common shares - assuming dilution 33,366 32,137
See notes to condensed consolidated financial statements.
SYSTEMS & COMPUTER TECHNOLOGY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(in thousands)
For the Three Months Ended
December 31,
2000 1999
OPERATING ACTIVITIES
Net income (loss) $ 2,001 $ (6,207)
Adjustments to reconcile net income (loss) to
net cash (used in) operating activities:
Depreciation and amortization 6,779 6,528
Equity in losses of affiliate -- 2,541
Changes in operating assets and liabilities:
(Increase) decrease in receivables (6,037) 1,008
Decrease (increase) in other current
assets principally prepaid expenses 1,390 (3,886)
Decrease in accounts payable (2,250) (6,382)
Decrease in income taxes payable -- (1,338)
Decrease in accrued expenses (3,818) (6,660)
Other, net 1,408 841
--------- ---------
NET CASH (USED IN) OPERATING ACTIVITIES (527) (13,555)
INVESTING ACTIVITIES
Purchase of property and equipment (1,658) (1,512)
Capitalized computer software costs (288) (1,433)
Purchase of investments available for sale (4,442) (4,179)
Proceeds from sale or maturity of
investments available for sale 12,506 754
Purchase of subsidiary assets,
net of cash acquired (2,800) --
--------- ---------
NET CASH PROVIDED BY (USED IN)
INVESTING ACTIVITIES 3,318 (6,370)
FINANCING ACTIVITIES
Repayment of borrowings (172) (10,026)
Proceeds from borrowings, net of
issuance costs -- 13,600
Repurchase of Company stock (148) --
Decrease in notes receivable from stockholders 110 --
Proceeds from exercise of stock options 1,043 596
--------- ---------
NET CASH PROVIDED BY FINANCING ACTIVITIES 833 4,170
INCREASE (DECREASE) IN CASH & CASH EQUIVALENTS 3,624 (15,755)
CASH & CASH EQUIVALENTS-BEGINNING OF PERIOD 49,161 27,030
--------- ---------
CASH & CASH EQUIVALENTS-END OF PERIOD $ 52,785 $ 11,275
========= =========
SUPPLEMENTAL INFORMATION
Noncash investing and financing activities:
Purchase of subsidiary - noncash portion $ 500 --
Conversion of subordinated debentures into
common stock 27 --
See notes to condensed consolidated financial statements.
SYSTEMS & COMPUTER TECHNOLOGY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE A--INTERIM FINANCIAL STATEMENTS
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 1O-Q and Rule 10-01 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
only of normal recurring accruals and the fiscal year 2000 restructuring charge)
considered necessary for a fair presentation have been included. For further
information, refer to the consolidated financial statements and footnotes
thereto included in the Company's Annual Report on Form 10-K for the year ended
September 30, 2000. Operating results for the three-month period ended December
31, 2000, are not necessarily indicative of the results that may be expected for
the year ending September 30, 2001.
NOTE B--CASH AND INVESTMENTS
Cash equivalents are short-term, highly liquid investments with a maturity of
three months or less at the date of purchase.
Short-term investments consist of corporate debt securities. Management
determines the appropriate classification of the debt securities at the time of
purchase. At December 31, 2000, the portfolio of debt securities has been
classified as available for sale and, as a result, is stated at fair value. The
available-for-sale portfolio is comprised of highly liquid investments available
for current operations and general corporate purposes and, accordingly, is
classified as current assets.
Short-term investments held as available for sale at December 31, 2000 and
September 30, 2000, have contractual maturities of less than one year.
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 there has been any decline in the value of
these investments as of December 31, 2000.
NOTE C--INVESTMENT IN CAMPUS PIPELINE, INC.
Throughout fiscal year 1999, the Company made a series of investments in Campus
Pipeline, Inc. As of December 31, 2000, the Company held an approximately 57%
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 42%. Therefore, the Company accounts
for its investment using the equity method of accounting. 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--ACQUISITIONS AND DISPOSITIONS
In November 2000, the Company acquired Omni-Tech Systems, Ltd., the developer of
JUROR for Windows, a jury management software solution for the justice market,
for consideration of $3.3 million, in the form of cash and a note payable. JUROR
for Windows is a comprehensive jury management solution that 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.
NOTE E--EARNINGS PER SHARE
(in thousands, except per share amounts)
A reconciliation of the numerators and the denominators of net income (loss) per
common share and net income (loss) per share - assuming dilution follows:
For the Three Months Ended
December 31,
2000 1999
Numerator:
Net income (loss) available to common
stockholders, used for net income
(loss) per common share $ 2,001 $(6,207)
Effect of dilutive securities: -- --
Net income (loss) available to common
stockholders after assumed conversions $ 2,001 $(6,207)
======= =======
Denominator:
Denominator for net income (loss) per
common share-weighted average shares 32,729 32,137
Effect of dilutive securities:
Employee stock options 637 --
------- -------
637 --
Denominator for net income (loss)
per share - assuming dilution 33,366 32,137
======= =======
Net income (loss) per common share $ 0.06 $(0.19)
====== ======
Net income (loss) per share - assuming dilution $ 0.06 $(0.19)
====== ======
Potentially dilutive securities with an anti-dilutive effect (convertible debt
in 2000 and 1999 and stock options in 1999) are not included in the above
calculation.
NOTE F--PRODUCT DEVELOPMENT
Product development expenditures, including software maintenance expenditures,
for the three months ended December 31, 2000 and 1999, were approximately $13.4
million and $15.1 million, respectively. After capitalization, these amounts
were approximately $13.1 million and $13.7 million, respectively, and were
charged to operations as incurred. For the same periods, amortization of
capitalized software costs (not included in expenditures above) amounted to $1.5
million and $1.3 million, respectively.
NOTE G--BUSINESS SEGMENTS
(in thousands)
The Company has four reportable segments: Global Education Solutions (GES);
Global Government Solutions (GGS); Global Manufacturing & Distribution Solutions
(M&DS) and Global Energy, Utilities & Communications Solutions (EUC). Summarized
financial information concerning the Company's reportable segments is shown in
the following table. The "All Other" column includes corporate-related items,
elimination of inter-segment transactions, amortization of intangible assets
purchased in business acquisitions, and results of nonreportable segments whose
products and services serve different markets than those the reportable segments
serve. Interest and other income is not included in the revenue disclosures
below.
Three months ended December 31, 2000
All
GES GGS M&DS EUC Other Total
Outsourcing services $10,182 $14,563 $ 1,281 $ 4,165 $ 507 $30,698
Software sales and
maintenance and
enhancements 22,174 2,721 6,103 9,570 -- 40,568
Software services 12,411 2,783 5,919 13,029 -- 34,142
------- ------- ------- ------- ------- -------
External revenues 44,767 20,067 13,303 26,764 507 105,408
Intersegment revenues 332 11 3 -- (346) --
Segment profit (loss) 3,801 (932) (3,857) 2,617 1,707 3,336
Three months ended December 31, 1999
All
GES GGS M&DS EUC Other Total
Outsourcing services $10,938 $15,241 $ 1,597 $ 3,530 $ 836 $32,142
Software sales and
maintenance and
enhancements 17,573 2,340 2,967 3,366 -- 26,246
Software services 13,031 2,531 9,348 12,787 289 37,986
------- ------- ------- ------- ------- -------
External revenues 41,542 20,112 13,912 19,683 1,125 96,374
Intersegment revenues 346 3 6 -- (355) --
Segment profit (loss) 1,037 (683) (4,195) (3,239) (2,772) (9,852)
NOTE H--LONG-TERM DEBT
The Company has $74.75 million of convertible subordinated debentures bearing
interest at 5% and maturing on October 15, 2004. 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 par decreasing to par on October 15, 2003. In
October 2000, $27,000 of the convertible subordinated debentures were converted
into approximately 1,000 shares of common stock of the Company.
NOTE I--COMPREHENSIVE INCOME
(in thousands)
Total comprehensive income is comprised of:
Three Months
Ended
December 31,
2000 1999
Net income (loss) $2,001 $(6,207)
Other comprehensive income (loss) 93 (287)
-------- --------
Total Comprehensive Income (Loss) $2,094 $(6,494)
Other comprehensive income (loss) relates primarily to currency translation
adjustments related to foreign subsidiaries whose functional currencies are
their local currencies.
NOTE J--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
reported results of operations.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.
The purpose of this section is to give interpretive guidance to the reader of
the financial statements.
RESULTS OF OPERATIONS
The following table sets forth: (i) income statement items as a percentage of
total revenues and (ii) the percentage change for each item from the prior-year
comparative period.
% of Total Revenues % Change from
Prior Year
Three Months Ended
December 31,
2000 1999
Revenues:
Outsourcing services 29% 33% (4%)
Software sales 15% 5% 227%
Maintenance and enhancements 23% 22% 15%
Software services 32% 39% (10%)
Interest and other income 1% 1% 431%
----- ----- -----
Total 100% 100% 11%
Expenses:
Cost of services, software sales
and maintenance and enhancements 66% 76% (4%)
Selling, general and administrative 30% 29% 14%
Equity in losses of affiliates -- 3% --
Restructuring charges -- 1% --
Interest expense 1% 1% 5%
Income (loss) before income taxes 3% (10%) (134%)
The following table sets forth the gross profit for each of the following
revenue categories as a percentage of revenue for each such category and the
total gross profit as a percentage of total revenue (excluding interest and
other income). The Company does not separately present the cost of maintenance
and enhancements revenue as it is impracticable to separate such cost from the
cost of software sales.
Three Months
Ended
December 31,
2000 1999
Gross Profit:
Outsourcing services 18% 19%
Software sales and maintenance
and enhancements 48% 24%
Software services 28% 26%
--- ---
Total 33% 23%
Revenues:
Outsourcing services revenue decreased in the first quarter of fiscal year 2001
by 4% compared with the prior-year period. This decrease is primarily the result
of the termination of several small contracts in the government and higher
education markets and decreased services provided under several other contracts
in the fiscal year 2001 period. During the fiscal year 2001 quarter, the Company
signed an agreement with the City of Memphis, Tennessee, which could extend for
seven and one-half years, to provide the City with a range of outsourcing and
telecommunication services. If the City utilizes the expected amount of
services, the contract would be for approximately $50 million. The City may
terminate the agreement for convenience at any time on six months notice.
Software sales increased 227% in the first quarter of fiscal year 2001 compared
to the prior-year period due to significant increases in all of the Company's
markets, except the government market. The Company believes that the results for
the first quarter of fiscal year 2000 were unusually low because of the year
2000 slowdown in enterprise application software licensing.
The 15% increase in maintenance and enhancements revenue in the first quarter of
fiscal year 2001 was the result of the growing installed base of clients in all
of the Company's markets. The Company continues to experience a high annual
renewal rate on existing maintenance contracts in these marketplaces, although
there can be no assurances that this will continue.
Software services revenue decreased 10% in the first quarter of fiscal year 2001
compared to the prior-year period primarily as the result of decreased
implementation and integration services performed in the process manufacturing
and distribution market. These decreases were primarily the result of (i)
decreased licenses during fiscal year 2000, and (ii) a change in the sales mix
in the process manufacturing and distribution market toward a greater percentage
of supply chain sales. The supply chain sales generally require less services
than the ERP sales. The implementation of the supply chain product generally
requires less effort than an ERP implementation.
The increase in interest and other income in the first quarter of fiscal year
2001 is primarily attributable to interest income earned on the Company's
increased cash and short-term investments balances, the amortization of the
WebCT noncompete agreement signed in the Company's third quarter of fiscal year
2000, and income from the Company's marketing agreement with Netgov.
Gross Profit:
Gross profit increased as a percentage of total revenue (excluding interest and
other income) from 23% for the first quarter of fiscal year 2000 to 33% for the
first quarter of fiscal year 2001. The total gross profit percentage increased
primarily because of increases in the software sales and maintenance and
enhancements gross profit, which makes up the greatest portion of the Company's
gross profit. The increase is the result of increased license fee and
maintenance and enhancements revenues during the quarter. The software services
gross margin also improved slightly in the first quarter of fiscal year 2001
compared with the prior-year period. This increase was the result of improved
efficiencies in the higher education, energy and utilities, and government
markets offset by decreased productivity in the process manufacturing and
distribution market. These increases were partially offset by decreases in the
outsourcing services' gross profit, which decreased primarily as a result of
decreased revenues without a commensurate decrease in fixed expenses.
Selling, General and Administrative Expenses:
Selling, general and administrative expenses increased in the first quarter of
fiscal year 2001 compared with the prior year period primarily as a result of
the addition of sales personnel and increased sales commissions and marketing
expenses primarily in the process manufacturing and distribution, higher
education and energy and utilities markets.
Acquisitions and Dispositions:
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 consideration of $3.3 million in the form of cash and a note
payable. JUROR for Windows is a comprehensive jury management solution that
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 has begun 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.
Investment in Campus Pipeline, Inc.:
Throughout fiscal year 1999, the Company made a series of investments in Campus
Pipeline, Inc. As of December 31, 2000, the Company held an approximately 57%
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 42%. Therefore, the Company accounts
for its investment using the equity method of accounting. 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.
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 on a portion of
that amount. On post-trial motions, the amount of the judgment was reduced by
approximately $0.6 million. The Company has appealed 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
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. 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 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.
LIQUIDITY, CAPITAL RESOURCES, AND FINANCIAL POSITION
The Company's cash and cash equivalents balance was $52.8 million and $49.2
million as of December 31, 2000, and September 30, 2000, respectively. The
short-term investments balance decreased to $8.7 million at December 31, 2000,
from $16.8 million at September 30, 2000, as a result of operating cash needs
discussed below.
Cash used in operating activities was $0.5 million for the first quarter of
fiscal year 2001, compared with $13.6 million for the prior-year period. The
primary uses of cash in the fiscal year 2001 period were increased accounts
receivable and decreased accounts payable and accrued expenses offset by
increases in income before depreciation and amortization. The increases in
accounts receivable are due to increases in revenue and the timing of billings
as well as slower collections in the first quarter of fiscal year 2001. Accounts
payable and accrued expenses decreased primarily due to the timing of payments
in the first quarter of fiscal year 2001.
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. In January 2000, the Company terminated
approximately 100 employees engaged in marketing, administrative,
special-programs, and development functions. The Company began to experience
cost savings related to the restructuring in the second quarter of fiscal year
2000.
The Company provides outsourcing services and software-related services,
including systems implementation and integration services. Contract fees from
outsourcing services are typically based on multi-year contracts ranging from
three to 10 years in length, and provide a recurring revenue stream throughout
the term of the contract. Software services contracts, including systems
implementation and integration services, usually have shorter terms than
outsourcing services contracts, and billings are sometimes milestone-based.
During the beginning of a typical outsourcing services contract, 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.
Cash provided by investing activities was $3.3 million for the first quarter of
fiscal year 2001 compared with cash used in investing activities of $6.4 million
for the first quarter of fiscal year 2000. In the first quarter of fiscal year
2001 cash was primarily provided by the sale and maturity of available-for-sale
investments and used in the purchase of investments and subsidiary assets. The
primary use of cash in the three months ended December 31, 1999 was the purchase
of investments available for sale.
The $0.8 million in cash provided by financing activities for the first quarter
of fiscal year 2001 consists primarily of proceeds from the exercises of stock
options. During the fiscal year 2000 period, the primary source of cash was
borrowings on the Company's revolving credit facility.
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. Although there has been a downturn in the dot-com market and there is an
increased risk that these privately held companies will not achieve their
valuations, the Company does not believe that there has been a permanent decline
in the valuations of these companies as of December 31, 2000. If the Company
determines that there is permanent decline in value, the cost basis of these
investments would be reduced and earnings would be charged.
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
December 31, 2000, or September 30, 2000. As long as borrowings are outstanding,
and as a condition precedent to new borrowings, the Company must comply with
certain covenants established in the agreement. Under the covenants, the Company
is required to maintain certain financial ratios and other financial conditions.
The Company may not pay dividends (other than dividends payable in common stock)
or acquire any of its capital stock outstanding without a written waiver from
its lender.
The Company has convertible debentures outstanding, which bear interest at 5%
and mature on October 15, 2004. In October 2000, $27,000 of the convertible
subordinated debentures were converted into approximately 1,000 shares of common
stock of the Company. The remaining balance of convertible debentures at
December 31, 2000, is $74.75 million. If these remaining debentures outstanding
were converted, 2.8 million additional shares would be added to common shares
outstanding. These debentures were antidilutive for the fiscal year 2001 and
2000 periods and therefore are not included in the denominators for net income
per share - assuming dilution.
The Company believes that its cash and cash equivalents, short-term investments,
and borrowing arrangements should satisfy its financing needs for the
foreseeable future.
New Accounting Standards:
In October 1997, the American Institute of Certified Public Accountants issued
Statement of Position (SOP) 97-2, "Software Revenue Recognition," which provides
guidance on recognizing revenue 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
reported results of operations.
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.
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 start-up software companies faced in the past.
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 email, 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, on-line, 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,
bi-directional 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. The Netgov 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 bring together the necessary components of
integrated e-government, creating a solution that benefits both governments and
their constituents.
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 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.
Other factors that could affect the Company's future operating results include
the effect of publicity on demand for the Company's products and services;
general economic and political conditions; continued market acceptance of the
Company's products and services; the timing of services contracts and renewals;
continued competitive and pricing pressures in the marketplace; new product
introductions by the Company's competitors; and the Company's ability to
complete fixed-price contracts profitably.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
There have been no material changes in quantitative or qualitative disclosures
for fiscal year 2001. Reference is made to Item 7A in the Annual Report on Form
10-K for the year ended September 30, 2000.
SYSTEMS & COMPUTER TECHNOLOGY CORPORATION AND SUBSIDIARIES
PART II
Item 1. Legal Proceedings
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 on a portion of
that amount. On post-trial motions, the amount of the judgment was reduced by
approximately $0.6 million. The Company has appealed 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
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. 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 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 6 (b). Reports on Form 8-K
The registrant did not file any current reports on Form 8-K during the three
months ended December 31, 2000
SYSTEMS & COMPUTER TECHNOLOGY CORPORATION AND SUBSIDIARIES
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SYSTEMS & COMPUTER TECHNOLOGY CORPORATION
(Registrant)
Date: 02/13/01 /s/ Eric Haskell
--------------------------------
Eric Haskell
Senior Vice President, Finance & Administration,
Treasurer, and Chief Financial Officer