SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
Form 10-Q
(Mark One)
/X/ Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the quarterly period ended June 30, 2001 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.
32,954,449 Common shares, $.01 par value, as of August 3, 2001
Page 1 of 27 consecutively numbered pages
SYSTEMS & COMPUTER TECHNOLOGY CORPORATION AND SUBSIDIARIES
INDEX
PART I. UNAUDITED FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets -
June 30, 2001 and September 30, 2000
Condensed Consolidated Statements of Operations -
Three Months Ended June 30, 2001 and 2000
Condensed Consolidated Statements of Operations -
Nine Months Ended June 30, 2001 and 2000
Condensed Consolidated Statements of Cash Flows -
Nine Months Ended June 30, 2001 and 2000
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. Exhibits and Reports on Form 8-K
SIGNATURES
SYSTEMS & COMPUTER TECHNOLOGY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except per share amounts)
June 30, September 30,
2001 2000
(UNAUDITED) (NOTE)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $127,674 $ 49,155
Short-term investments, including
accrued interest of $0 and $206 20,889 16,787
Receivables, including $42,046
and $48,140 of earned revenues
in excess of billings, net of
allowance for doubtful accounts
of $4,280 and $4,534 101,500 111,908
Prepaid expenses and other receivables 4,741 18,598
-------- --------
TOTAL CURRENT ASSETS 254,804 196,448
PROPERTY AND EQUIPMENT--at cost, net
of accumulated depreciation 58,173 61,151
CAPITALIZED COMPUTER SOFTWARE COSTS,
net of accumulated amortization 14,380 18,080
COST IN EXCESS OF FAIR VALUE OF NET
ASSETS ACQUIRED, net of accumulated
amortization 13,107 14,218
OTHER ASSETS AND DEFERRED CHARGES 42,892 35,072
NET ASSETS OF DISCONTINUED OPERATIONS -- 36,692
-------- --------
TOTAL ASSETS $383,356 $361,661
======== ========
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)
June 30, September 30,
2001 2000
(UNAUDITED) (NOTE)
LIABILITIES & STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 7,890 $ 9,513
Current portion of long-term debt 2,955 712
Income taxes payable 4,042 1,793
Accrued expenses 54,250 39,240
Deferred revenue 23,129 29,415
-------- --------
TOTAL CURRENT LIABILITIES 92,266 80,673
LONG-TERM DEBT, less current portion 74,723 77,521
OTHER LONG-TERM LIABILITIES 1,160 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
37,519 and 37,264 shares 375 372
Capital in excess of par value 117,388 115,247
Retained earnings 123,430 111,879
Accumulated other comprehensive loss (504) (540)
-------- --------
240,689 226,958
Less
Held in treasury, 4,642 and 4,642 common
shares--at cost (24,982) (24,911)
Notes receivable from stockholders (500) (610)
-------- --------
215,207 201,437
-------- --------
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY $383,356 $361,661
======== ========
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
June 30,
2001 2000
Revenues:
Outsourcing services $ 15,424 $ 15,595
Software sales and commissions 14,745 20,851
Maintenance and enhancements 26,301 21,475
Software services 34,123 32,795
Interest and other income 1,092 1,011
-------- --------
91,685 91,727
Expenses:
Cost of outsourcing services 11,828 13,021
Cost of software sales, commissions,
maintenance and enhancements 22,967 17,432
Cost of software services 22,841 22,651
Selling, general and administrative 26,651 25,381
Restructuring charge 3,954 --
Interest expense 1,207 1,157
-------- --------
89,448 79,642
Income from continuing operations
before income taxes 2,237 12,085
Provision for income taxes 1,217 5,133
-------- --------
Income from continuing operations 1,020 6,952
Discontinued operations:
Income (loss) from discontinued operations,
adjusted for applicable provision (benefit)
for income taxes of ($195) and $2,861 (411) 4,346
Gain on sale of discontinued operations,
net of income taxes of $13,111 and $0 20,155 --
-------- --------
Income from discontinued operations 19,744 4,346
-------- --------
Net income $ 20,764 $ 11,298
======== ========
Income from continuing operations
per common share $ 0.03 $ 0.21
per share - assuming dilution $ 0.03 $ 0.21
Income from discontinued operations
per common share $ 0.60 $ 0.13
per share - assuming dilution $ 0.60 $ 0.13
Net income
per common share $ 0.63 $ 0.35
per share - assuming dilution $ 0.63 $ 0.33
Common shares and equivalents outstanding:
Average common shares 32,868 32,502
Average common shares - assuming dilution 33,042 33,857
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 Nine Months Ended
June 30,
2001 2000
Revenues:
Outsourcing services $ 46,399 $ 49,426
Software sales and commissions 36,929 40,083
Maintenance and enhancements 72,399 63,031
Software services 99,809 102,809
Interest and other income 3,665 1,511
-------- --------
259,201 256,860
Expenses:
Cost of outsourcing services 36,263 40,178
Cost of software sales, commissions,
maintenance and enhancements 63,780 56,093
Cost of software services 68,179 70,591
Selling, general and administrative 84,411 74,974
Restructuring charge 3,954 1,000
Asset impairment charges 7,831 --
Equity in losses of affiliates -- 4,761
Interest expense 3,628 3,449
-------- --------
268,046 251,046
Income (loss) from continuing operations
before income taxes (8,845) 5,814
Provision (benefit) for income taxes (3,096) 2,989
-------- --------
Income (loss) from continuing operations (5,749) 2,825
Discontinued operations:
Income (loss) from discontinued operations,
adjusted for applicable provision (benefit)
for income taxes of ($1,420) and $3,875 (2,855) 5,885
Gain on sale of discontinued operations,
net of income taxes of $13,111 and $0 20,155 --
-------- --------
Income from discontinued operations 17,300 5,885
-------- --------
Net income $ 11,551 $ 8,710
======== ========
Income (loss) from continuing operations
per common share $(0.18) $ 0.09
per share - assuming dilution $(0.18) $ 0.08
Income from discontinued operations
per common share $ 0.53 $ 0.18
per share - assuming dilution $ 0.53 $ 0.18
Net income
per common share $ 0.35 $ 0.27
per share - assuming dilution $ 0.35 $ 0.26
Common shares and equivalents outstanding:
Average common shares 32,803 32,320
Average common shares - assuming dilution 32,803 33,577
See notes to condensed consolidated financial statements.
SYSTEMS & COMPUTER TECHNOLOGY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(in thousands)
For the Nine Months Ended
June 30,
2001 2000
OPERATING ACTIVITIES
Net income $ 11,551 $ 8,710
Adjustments to reconcile net income to net
cash provided by operating activities:
Asset impairment charge 7,831 --
Equity in losses of affiliate -- 4,761
Gain on sale of assets -- (6,430)
Gain on sale of discontinued operations (20,155) --
WebCT commission income (2,700) --
Depreciation and amortization 21,073 20,271
Provision for doubtful accounts 2,677 2,027
Deferred tax benefit (15,423) 477
Changes in operating assets and liabilities:
(Increase) decrease in receivables 3,313 (5,238)
(Increase) decrease in prepaid expenses
and other receivables 6,280 (2,176)
Increase in accounts payable (49) (5,496)
Decrease in other accrued
expenses (416) (998)
Increase (decrease) in deferred revenue (8,550) 7,929
Other, net 2,070 (1,235)
-------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES 7,502 22,602
INVESTING ACTIVITIES
Purchase of property and equipment (7,750) (4,888)
Capitalized computer software costs (754) (3,098)
Purchase of investments available for sale (31,453) (13,752)
Proceeds from sale or maturity of
investments available for sale 27,503 4,506
Proceeds from sale of discontinued operations 85,000 --
Purchase of subsidiary, net of cash acquired (3,009) (300)
Purchase of long-term investments -- (10,000)
Proceeds from sale of assets -- 2,000
-------- --------
NET CASH PROVIDED BY (USED IN)
INVESTING ACTIVITIES 69,537 (25,532)
FINANCING ACTIVITIES
Repayment of borrowings (528) (17,283)
Proceeds from borrowings, net of issuance costs -- 16,800
Repurchase of Company stock (71) --
Decrease in notes receivable from stockholders 110 --
Proceeds from exercise of stock options 1,969 3,553
-------- --------
NET CASH PROVIDED BY FINANCING ACTIVITIES 1,480 3,070
INCREASE IN CASH & CASH EQUIVALENTS 78,519 140
CASH & CASH EQUIVALENTS-BEGINNING OF PERIOD 49,155 27,030
-------- --------
CASH & CASH EQUIVALENTS-END OF PERIOD $127,674 $ 27,170
======== ========
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, the fiscal year 2001 asset impairment charge,
the fiscal year 2001 restructuring charge, 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. On June 29, 2001, the Company
completed the sale of its Global Government Systems (GGS) business. The GGS
business is accounted for as a discontinued operation, and accordingly, amounts
in the consolidated balance sheets and statements of operations and related
notes for all periods presented have been restated to reflect discontinued
operations accounting. Operating results for the three and nine-month periods
ended June 30, 2001, are not necessarily indicative of the results that may be
expected for the year ending September 30, 2001.
NOTE B--CASH AND SHORT-TERM INVESTMENTS
Cash equivalents are short-term, highly liquid investments with a maturity of
three months or less at the date of purchase.
Short-term investments consist of corporate debt securities. Management
determines the appropriate classification of the debt securities at the time of
purchase. At June 30, 2001 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.
The contractual maturities of short-term investments held as of June 30, 2001
are (in thousands):
Due in one year or less $ 16,693
Due after one year through four years 4,196
-------
$ 20,889
NOTE C--LONG-TERM INVESTMENTS
The Company made investments for strategic business purposes of $16.0 million in
the common and preferred stock of WebCT, a privately-held Internet company. The
fair value of this investment, which is classified as a long-term asset, is not
readily determinable; therefore, it is carried at cost adjusted for an other
than temporary impairment discussed below. The Company regularly reviews the
underlying operating performance, cash flow forecasts, and recent private equity
transactions of this privately-held company in assessing impairment. In the
second quarter of fiscal year 2001, the Company recorded asset impairment
charges of $7.8 million related to this investment. In the third quarter of
fiscal year 2001, the Company earned $2.7 million in shares of WebCT. The
Company earned these shares as a result of a joint marketing agreement with
WebCT pursuant to which schools with cumulative enrollments totaling one million
students licensed a product jointly
developed by the Company and WebCT. Shares of WebCT will continue to be earned
as additional schools license this product now that this threshold has been met.
At June 30, 2001, the Company owns approximately 10% of the voting shares of
WebCT. At June 30, 2001, the aggregate investment in WebCT is $10.9 million, and
is included in other assets and deferred charges in the consolidated balance
sheet.
Throughout fiscal year 1999, the Company made a series of investments in Campus
Pipeline, Inc. As of June 30, 2001 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
On June 29, 2001, the Company completed the sale of its GGS business to
Affiliated Computer Services, Inc., realizing cash proceeds of $85 million,
subject to adjustment in certain circumstances and the payment of taxes. Based
on a formula contained in the purchase agreement, the purchase price reduction
could be as much as approximately $40 million, although the Company does not
believe that any material reduction will occur. As a result of the disposition,
the Company will be able to further reduce and consolidate certain corporate
functions, and provided a reserve of $12.8 million for severance and real estate
related costs associated with such actions. This reserve is included in accrued
expenses. After this provision, the sale resulted in a pretax gain of $33.3
million, which net of $13.1 million of income taxes, produced a gain on sale of
discontinued operations of $20.2 million. The results of GGS have been reported
separately as discontinued operations in the consolidated statements of
operations. Prior year consolidated financial statements have been restated to
present GGS as a discontinued operation. For business segment reporting
purposes, GGS data was previously reported as a separate segment. Revenues from
the GGS business were $22.5 million and $28.2 million for the three-month
periods ending June 30, 2001 and 2000, respectively. GGS revenues for the
nine-month periods ending June 30, 2001 and 2000 were $65.7 million and $74.0
million, respectively. The net assets of discontinued operations at September
30, 2000 were $36.7 million (net assets of the discontinued operation were $38.9
million at the date of the sale) comprised of the following:
Accounts receivable $27,058
Prepaid expenses and other receivables 6,994
Property and equipment 2,184
Capitalized computer software costs 1,230
Cost in excess of fair value of net assets acquired 1,520
Other assets and deferred charges 4,169
Current liabilities (6,463)
Net Assets of Discontinued Operations $36,692
NOTE E--RESTRUCTURING CHARGES
During the quarter ended June 30, 2001, the Company implemented a restructuring
plan, which included the termination of employees, management changes,
consolidation of certain facilities, and discontinuation of non-critical
programs. The restructuring was carried out in an effort to improve the
Company's performance. The Company accrued $3.5 million during the quarter ended
June 30, 2001, related to severance and termination benefits and $0.4 million of
other costs based on a termination plan developed by
management in consultation with the Board of Directors. In May and June 2001,
the Company terminated approximately 150 employees engaged primarily in
marketing, administrative, special programs and development functions.
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 primarily in marketing, administrative,
special-programs, and development functions.
NOTE F--EARNINGS PER SHARE
(in thousands, except per share amounts)
A reconciliation of the numerators and the denominators of earnings per common
share and per share - assuming dilution follows:
For the Three Months For the Nine Months
Ended June 30, Ended June 30,
2001 2000 2001 2000
Numerator:
Income (loss) from continuing
operations available to
common stockholders, $ 1,020 $ 6,952 $ (5,749) $ 2,825
Discontinued operations:
Income (loss) from discontinued
operations, net of income
taxes (411) 4,346 (2,855) 5,885
Gain on sale of discontinued
operations, net of income
taxes 20,155 -- 20,155 --
------ ------ ------ ------
Income from discontinued
operations 19,744 4,346 17,300 5,885
Net income available
to common stockholders after
assumed conversions $20,764 $11,298 $11,551 $ 8,710
======= ======= ======= =======
Denominator:
Weighted average common shares 32,868 32,502 32,803 32,320
Effect of dilutive securities:
Employee stock options 174 1,355 -- 1,257
------- ------- ------- -------
Weighted average common shares
-- assuming dilution 33,042 33,857 32,803 33,577
======= ======= ======= =======
Income (loss) from continuing operations
per common share $ 0.03 $ 0.21 $(0.18) $ 0.09
per share - assuming dilution $ 0.03 $ 0.21 $(0.18) $ 0.08
Income from discontinued operations
per common share $ 0.60 $ 0.13 $ 0.53 $ 0.18
per share - assuming dilution $ 0.60 $ 0.13 $ 0.53 $ 0.18
Net income
per common share $ 0.63 $ 0.35 $ 0.35 $ 0.27
per share - assuming dilution $ 0.63 $ 0.33 $ 0.35 $ 0.26
Potentially dilutive securities with an anti-dilutive effect (stock options in
the fiscal year 2001 nine-month period and convertible debt in all periods
presented) are not included in the above calculation.
NOTE G--PRODUCT DEVELOPMENT
Product development expenditures, including software maintenance expenditures,
for the nine months ended June 30, 2001 and 2000, were approximately $39.5
million and $36.5 million, respectively. After capitalization, these amounts
were approximately $38.9 million and $33.7 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 $4.3
million and $3.9 million, respectively.
NOTE H--BUSINESS SEGMENTS
(in thousands)
After the sale of GGS, the Company has three reportable segments: Global
Education Solutions (GES); 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, substantially all of the asset impairment
charge in fiscal year 2001, and the restructuring charges in fiscal year 2001
and 2000. Interest and other income is not included in the revenue disclosures
below. Certain prior year information has been reclassified to conform with the
current-year presentation.
Three months ended June 30, 2001
All
GES M&DS EUC Other Total
Outsourcing services $ 10,049 $ 1,281 $ 4,094 $ -- $ 15,424
Software sales and
commissions, and
maintenance and
enhancements 31,782 4,210 5,054 -- 41,046
Software services 14,840 7,607 11,676 -- 34,123
------- ------- ------- ------- -------
External revenues 56,671 13,098 20,824 -- 90,593
Intersegment revenues 316 1 -- (317) --
Segment profit (loss) 12,219 (2,820) (913) (6,249) 2,237
Three months ended June 30, 2000
All
GES M&DS EUC Other Total
Outsourcing services $ 9,849 $ 2,077 $ 3,669 $ -- $ 15,595
Software sales and
commissions, and
maintenance and
enhancements 23,105 10,424 8,797 -- 42,326
Software services 13,937 6,142 12,716 -- 32,795
------- ------- ------- ------- -------
External revenues 46,891 18,643 25,182 -- 90,716
Intersegment revenues 278 6 -- (284) --
Segment profit (loss) 8,715 1,765 4,597 (2,992) 12,085
Nine months ended June 30, 2001
All
GES M&DS EUC Other Total
Outsourcing services $ 30,077 $ 3,843 $12,479 $ -- $ 46,399
Software sales and
commissions, and
maintenance and
enhancements 75,867 14,438 19,023 -- 109,328
Software services 41,217 20,873 37,719 -- 99,809
------- ------- ------- ------- -------
External revenues 147,161 39,154 69,221 -- 255,536
Intersegment revenues 959 25 -- (984) --
Segment profit (loss) 21,703 (11,662) 1,063 (19,949) (8,845)
Nine months ended June 30, 2000
All
GES M&DS EUC Other Total
Outsourcing services $ 31,056 $ 7,387 $10,983 $ -- $ 49,426
Software sales and
commissions, and
maintenance and
enhancements 64,446 20,755 17,913 -- 103,114
Software services 41,547 22,499 38,763 -- 102,809
------- ------- ------- ------- -------
External revenues 137,049 50,641 67,659 -- 255,349
Intersegment revenues 870 18 -- (888) --
Segment profit (loss) 19,231 (2,710) 4,077 (14,784) 5,814
NOTE I--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 J--COMPREHENSIVE INCOME
(in thousands)
Three Months Nine Months
Ended June 30, Ended June 30,
2001 2000 2001 2000
Net income $20,764 $11,298 $11,551 $8,710
Other comprehensive income (loss) (13) 28 36 (408)
-------- ------- --------- ------
Total Comprehensive Income $20,751 $11,326 $11,587 $8,302
Other comprehensive income relates primarily to currency translation adjustments
related to foreign subsidiaries whose functional currencies are their local
currencies.
NOTE K--NEW ACCOUNTING STANDARDS
In June 2001, the Financial Accounting Standards Board issued Statements of
Financial Accounting Standards No. 141, "Business Combinations" and No. 142,
"Goodwill and Other Intangible Assets" effective for fiscal years beginning
after December 15, 2001. Under the new rules, goodwill will no longer be
amortized but will be subject to annual impairment tests in accordance with the
Statements. Other intangible assets will continue to be amortized over their
useful lives.
The Company will adopt the new rules on accounting for goodwill beginning in the
first quarter of fiscal year 2002. Application of the nonamortization provisions
of the Statements is expected to result in an increase in pre-tax income of
approximately $1.7 million per year subject to any impairment charges that may
occur. During fiscal year 2002, the Company will perform the first of the
required impairment tests of goodwill and indefinite lived intangible assets as
of October 1, 2001 and has not yet determined what the effect of these tests
will be on the earnings and financial position of the Company.
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 adopted the provisions of SAB 101 during the fourth quarter of fiscal
year 2001.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.
The purpose of this section is to give interpretive guidance to the reader of
the financial statements.
RESULTS OF OPERATIONS
The following table sets forth: (i) income statement items as a percentage of
total revenues and (ii) the percentage change for each item from the prior-year
comparative period.
% of Total Revenues % Change from
Prior Year
Three Mos. Nine Mos. Three Mos. Nine Mos.
Ended Ended Ended Ended
June 30, June 30, June 30 June 30
2001 2000 2001 2000
Revenues:
Outsourcing services 17% 17% 18% 19% (1%) (6%)
Software sales and commissions 16% 23% 14% 16% (29%) (8%)
Maintenance and enhancements 29% 23% 28% 24% 22% 15%
Software services 37% 36% 39% 40% 4% (3%)
Other 1% 1% 1% 1% 8% 143%
---- ---- ---- ----
Total 100% 100% 100% 100% -- 1%
Expenses:
Cost of services, software sales,
commissions, maintenance
and enhancements 63% 58% 65% 65% 9% 1%
Selling, general and
administrative 29% 28% 33% 29% 5% 13%
Asset impairment charge -- -- 3% -- -- --
Equity in losses of affiliates -- -- -- 2% -- (100%)
Restructuring charges 4% -- 1% 1% -- 295%
Interest expense 1% 1% 1% 1% 4% 5%
Income (loss) from continuing
operations before income
taxes 3% 13% (3%) 2% (81%) (252%)
The following table sets forth the gross profit for each of the following
revenue categories as a percentage of revenue for each such category and the
total gross profit as a percentage of total revenue (excluding interest and
other income). The Company does not separately present the cost of maintenance
and enhancements revenue as it is impracticable to separate such cost from the
cost of software sales.
Three Months Nine Months
Ended Ended
June 30, June 30,
2001 2000 2001 2000
Gross Profit:
Outsourcing services 23% 17% 22% 19%
Software sales, commissions,
maintenance and enhancements 44% 59% 42% 46%
Software services 33% 31% 32% 31%
--- --- --- ---
Total 36% 41% 34% 35%
Revenues:
Outsourcing services revenue decreased 6% in the first nine months of fiscal
year 2001 compared with the prior-year period. This decrease is primarily the
result of (i) significant pass-through revenue related to expenses recorded for
a client in the process manufacturing and distribution market in the second
quarter of fiscal year 2000 and (ii) the termination of several small contracts
in the higher education market and decreased services provided under several
other contracts in the fiscal year 2001 periods. These decreases are partially
offset by increases resulting from a fourth quarter 2000 agreement with the
Chicago Department of Water. As a result of a termination of an outsourcing
agreement at the end of the third quarter of fiscal year 2001, it is expected
that revenues will decrease and remain at the reduced level until new contracts
are obtained.
Software sales and commissions decreased 29% and 8% in the third quarter and
first nine months of fiscal year 2001, respectively, compared to the prior-year
periods due to decreased licenses in the Company's process manufacturing and
distribution and energy and utilities markets. The Company believes these
decreases are primarily the result of caution in the general business climate,
which has been particularly felt in the technology sector. These decreases are
partially offset by increases in the higher education market. The third quarter
fiscal year 2001 higher education revenues include $2.7 million in shares of
WebCT, earned by licensing to schools with cumulative enrollments totaling one
million students. Shares of WebCT will continue to be earned as additional
schools license this product because the threshold has been met.
The 22% and 15% increases in maintenance and enhancements revenue in the third
quarter and first nine months of fiscal year 2001, respectively, were the result
of the growing installed base of clients in all of the Company's markets and in
the third quarter of fiscal year 2001, $3.0 million from the incremental fees
paid to attend the Company's users group meeting. The Company continues to
experience a high annual renewal rate on existing maintenance contracts in these
marketplaces, although there can be no assurances that this will continue.
Software services revenue increased 4% in the third quarter of fiscal year 2001
compared with the third quarter of fiscal year 2000. The increase is primarily
the result of increases in the manufacturing and distribution and higher
education markets partially offset by decreases in the energy and utilities
market. Software services revenue decreased 3% in the first nine months of
fiscal year 2001 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 in the first six months of fiscal
year 2001 and in the third quarter of fiscal year 2001 in the energy and
utilities market. These decreases were primarily the result of a decline in
license fees which generate service orders.
The increase in interest and other income in the first nine months of fiscal
year 2001 is primarily attributable to interest income earned on the Company's
increased cash and short-term investments balances and the amortization of the
WebCT noncompete agreement signed in the Company's third quarter of fiscal year
2000.
Gross Profit:
Gross profit decreased as a percentage of total revenue (excluding interest and
other income) from 41% for the third quarter of fiscal year 2000 to 36% for the
third quarter of fiscal year 2001 and from 35% for the first nine months of
fiscal year 2000 to 34% for the same period of fiscal year 2001. The total gross
profit percentage decreased because of a decrease in the
software sales, commissions, maintenance and enhancements gross profit
percentage. This decrease is primarily the result of decreased software sales
during the fiscal year 2001 periods, partially offset by the WebCT commissions
revenue during the third quarter of fiscal year 2001, and an increase in certain
costs. The Company incurred increased development expenses during the fiscal
year 2001 periods primarily in the higher education business related to a new
product initiative. The decrease in the software sales, commissions, maintenance
and enhancement margin was partially offset by increases in the software
services and outsourcing services margins. The software services gross margin
increased in the fiscal year 2001 periods compared with the prior-year periods
as a result of increased utilization primarily in the process manufacturing and
distribution market. The outsourcing services margin increased primarily as a
result of the new Chicago Department of Water agreement signed at the end of
fiscal year 2000, new work on existing contracts, and for the nine-month period,
the impact of the second quarter fiscal year 2000 pass through revenue discussed
above.
Selling, General and Administrative Expenses:
Selling, general and administrative expenses increased in the third quarter and
first nine months of fiscal year 2001 compared with the prior year periods
primarily as a result of (i) the addition of sales personnel and selling
expenses primarily in the process manufacturing and distribution and higher
education markets, in an effort to increase sales volume and (ii) severance
costs, of approximately $0.5 million, incurred in the second quarter of fiscal
year 2001.
Restructuring Charges:
During the quarter ended June 30, 2001, the Company implemented a restructuring
plan, which included the termination of employees, management changes,
consolidation of certain facilities, and discontinuation of non-critical
programs. The restructuring, which is expected to reduce operating costs by
about 5% on an annual basis, was carried out in an effort to improve the
Company's performance. The Company accrued $3.5 million during the quarter ended
June 30, 2001, related to severance and termination benefits and $0.4 million of
other costs based on a termination plan developed by management in consultation
with the Board of Directors. In May and June 2001, the Company terminated
approximately 150 employees engaged primarily in marketing, administrative,
special programs and development functions. The Company has experienced some
savings in the third quarter of fiscal year 2001 and expects to experience full
cost savings related to the restructuring in the fourth quarter of fiscal year
2001. The Company is evaluating the need for additional program and staff
reductions in the fourth quarter of fiscal 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 primarily 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.
Long-Term Investments:
The Company made investments for strategic business purposes of $16.0 million in
the common and preferred stock of WebCT, a privately-held Internet company. The
fair value of this investment, which is classified as a long-term asset, is not
readily determinable; therefore, it is carried at cost adjusted for an other
than temporary impairment discussed below. The Company
regularly reviews the underlying operating performance, cash flow forecasts, and
recent private equity transactions of this privately-held company in assessing
impairment. In fiscal 2001, the cost basis was reduced and earnings were charged
as a result of an impairment that was other than temporary. Future earnings
would also be reduced and earnings would be charged if there was an additional
impairment that was found to be other than temporary at a future balance sheet
date. The Company's future results of operations could be materially affected by
a future write down in the carrying amount of this investment to recognize an
impairment loss due to an other than temporary decline in the value of the
investment. In the second quarter of fiscal year 2001, the Company recorded an
asset impairment charge of $7.8 million related to its investment in WebCT. The
Company believes that the impairment in this investment is the result of changes
in the business model of WebCT. The Company believes this change will result in
lower future earnings achieved by WebCT than those projected when the Company
invested.
In the third quarter of fiscal year 2001, the carrying value of the Company's
investment in WebCT increased by $2.7 million. The increase is due to the
previously described receipt of WebCT shares. At June 30, 2001, the aggregate
investment in WebCT is $10.9 million, included in other assets and deferred
charges in the consolidated balance sheet. As of June 30, 2001, the Company owns
10% of the voting shares of WebCT.
Throughout fiscal year 1999, the Company made a series of investments in Campus
Pipeline, Inc. As of June 30, 2001 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.
Acquisitions and Dispositions:
On June 29, 2001, the Company completed the sale of its Global Government
Solutions business (GGS) to Affiliated Computer Services, Inc., realizing cash
proceeds of $85 million, subject to adjustment in certain circumstances and the
payment of taxes. Based on a formula contained in the purchase agreement, the
purchase price reduction could be as much as approximately $40 million, although
the Company does not believe that any material reduction will occur. In
addition, the Company made certain representations and warranties to ACS under
the Purchase Agreement, which could also result in adjustments to the proceeds
received. If a purchase price adjustment should result, or if the Company is
found to have breached any of the representations and warranties contained in
the Purchase Agreement, the Company may have to return cash proceeds and the
Company's financial results could be adversely affected. As a result of the
disposition, the Company will be able to further reduce and consolidate certain
corporate functions, and provided a reserve of $12.8 million for severance and
real estate related costs associated with such actions. This reserve is included
in accrued expenses. After this provision, the sale resulted in a pretax gain of
$33.3 million, which net of $13.1 million of income taxes, produced a gain on
sale of discontinued operations of $20.2 million. The results of GGS have been
reported separately as discontinued operations in the consolidated statements of
operations. Prior year consolidated balance sheets and statements of operations
have been restated to present GGS as a discontinued operation. For business
segment reporting purposes, GGS data was previously reported as a separate
segment.
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 litigation. 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. While this contract was
originated within GGS, which has been sold, the right to appeal and the impact
of the related outcome were retained by the Company.
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 following discussion of cash flow activity is based upon historical
information as the statements of cash flows do not present the GGS business as a
discontinued operation.
The Company's cash and short-term investments balance was $148.6 million and
$65.9 million as of June 30, 2001, and September 30, 2000, respectively. The
cash balances increased primarily as a result of cash proceeds from the sale of
the Company's GGS business. The Company expects to make cash payments for taxes
and for the satisfaction of accruals established at the time of the sale. The
use of the remainder of the proceeds is undetermined at this time.
Cash provided by operating activities was $7.5 million for the first nine months
of fiscal year 2001, compared with $22.6 million for the prior-year period. The
primary sources of cash in the fiscal year 2001 period were decreased accounts
receivable and prepaid expenses and other receivables. These were offset by
decreased deferred revenue. Prepaid expenses and other receivables decreased
primarily as a result of decreased prepaid taxes. Deferred revenue decreased
primarily as a result of prepayment on a maintenance contract in the energy and
utilities business in 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 in such periods. 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 in such periods, which causes a decrease in the unbilled accounts
receivable. Likewise, billings related to the achievement of a milestone in a
software services contract causes a decrease in the unbilled accounts
receivable. In both cases, additional unbilled accounts receivable will continue
to be recorded 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 $69.5 million for the first nine
months of fiscal year 2001 compared with cash used of $25.5 million for the
fiscal year 2000 nine-month period. In the fiscal year 2001 period, cash was
primarily provided by the sale of the GGS business offset by cash used in the
purchase of investments, property and equipment, and subsidiary assets. The
primary use of cash in the nine months ended June 30, 2000 was the purchase of
short-term and long-term investments, property and equipment and the
capitalization of software development costs.
The $1.5 million and $3.1 million in cash provided by financing activities for
the first nine months of fiscal year 2001 and 2000, respectively consists
primarily of proceeds from the exercises of stock options.
The Company has a $30 million senior revolving credit facility available for
general corporate purposes. The credit facility agreement expires in June 2003
and includes optional annual renewals. There were no borrowings outstanding at
June 30, 2001, 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 June
30, 2001, 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,
cash provided by operations, and borrowing arrangements should satisfy its
financing needs for the foreseeable future.
New Accounting Standards:
In June 2001, the Financial Accounting Standards Board issued Statements of
Financial Accounting Standards No. 141, "Business Combinations" and No. 142,
"Goodwill and Other Intangible Assets" effective for fiscal years beginning
after December 15, 2001. Under the new rules, goodwill will no longer be
amortized but will be subject to annual impairment tests in accordance with the
Statements. Other intangible assets will continue to be amortized over their
useful lives.
The Company will adopt the new rules on accounting for goodwill beginning in the
first quarter of fiscal year 2002. Application of the nonamortization provisions
of the Statements is expected to result in an increase in pre-tax income of
approximately $1.7 million per year subject to any impairment charges that may
occur. During fiscal year 2002, the Company will perform the first of the
required impairment tests of goodwill and indefinite lived intangible assets as
of October 1, 2001 and has not yet determined what the effect of these tests
will be on the earnings and financial position of the Company.
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 adopted the provisions of SAB 101 in the fourth quarter of fiscal year
2001. The adoption did not 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. 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 and could have a material adverse effect on
the Company's business, financial condition or cash flows. 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.
If the Company were to experience delays in the commercialization and
introduction of new or enhanced products, if customers were to experience
significant problems with the implementation and installation of products, or if
customers were dissatisfied with product functionality or performance, this
could have a material adverse effect on the Company's business, results of
operations, financial condition, or cash flows.
There can be no assurance that the Company's new products will achieve
significant market acceptance or will generate significant revenue. Additional
products that the Company plans to directly or indirectly market in the future
are in various stages of development.
Intense competition in the various markets in which the Company competes may put
pressure on the Company to reduce prices on certain products, particularly in
the markets where certain vendors offer deep discounts in an effort to recapture
or gain market share or to sell other software or hardware products. The
bundling of software products for promotional purposes or as a long-term pricing
strategy or guarantees of product implementations by certain of the Company's
competitors could have the effect over time of significantly reducing the prices
that the Company can charge for its products. Additionally, while the
distribution of applications through application service providers may provide a
new market for the Company's products, these new distribution methods could also
reduce the price paid for the Company's products or adversely affect other sales
of its products. Any such price reductions and resulting lower license revenues
could have a material adverse effect on the Company's business, results of
operations, financial condition, or cash flows.
The Company uses a common industry practice to forecast sales and trends in its
business. The Company's sales personnel monitor the status of prospective sales,
such as the date when they estimate that a customer will make a purchase
decision and the potential dollar amount of the sale. The Company regularly
aggregates these estimates to generate a sales pipeline. The Company compares
the pipeline at various points in time to look for trends in its business. While
this pipeline analysis may provide the Company with some guidance in business
planning and budgeting, these pipeline estimates are necessarily speculative and
may not consistently correlate to revenues in a particular quarter or over a
longer period of time. A variation in the conversion of the pipeline into
contracts or in the pipeline itself could cause the Company to improperly plan
or budget and thereby adversely affect its business or results of operations. In
particular, a slowdown in the economy may cause purchasing decisions to be
delayed, reduced in amount or cancelled which will therefore reduce the overall
license pipeline conversion rates in a particular period of time.
Building upon its original investment, the Company continues to strengthen 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.
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, (iii) the Company's ability to
integrate the alliance partners' products with the Company's products
cost-effectively and on a timely basis, and (iv) the ability of the Company's
alliance partners to achieve their financial goals.
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.
Certain of the Company's outsourcing contracts may be terminated by the client
for convenience. If clients that represent a substantial portion of the
Company's revenues terminate for convenience, the Company's future 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; the Company's ability to complete
fixed-price contracts profitably; and the Company's ability to generate capital
gains sufficient to offset the capital losses that are expected to be realized
upon the disposition of the investments held by the Company for which the
carrying value has been reduced for financial reporting purposes.
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 litigation. 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 Company filed Current Reports on Form 8-K on June 28, 2001 and July 16,
2001, in connection with the Company's sale of its Global Government Solutions
business.
SYSTEMS & COMPUTER TECHNOLOGY CORPORATION AND SUBSIDIARIES
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SYSTEMS & COMPUTER TECHNOLOGY CORPORATION
(Registrant)
Date: 08/13/01 /s/ Eric Haskell
--------------------------------
Eric Haskell
Senior Vice President, Finance & Administration,
Treasurer, and Chief Financial Officer