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, 2002 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.
33,432,091 Common shares, $.01 par value, as of August 5, 2002
Page 1 of 28 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, 2002 and September 30, 2001
Condensed Consolidated Statements of Operations -
Three Months Ended June 30, 2002 and 2001
Condensed Consolidated Statements of Operations -
Nine Months Ended June 30, 2002 and 2001
Condensed Consolidated Statements of Cash Flows -
Nine Months Ended June 30, 2002 and 2001
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
2
SYSTEMS & COMPUTER TECHNOLOGY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except per share amounts)
June 30, September 30,
2002 2001
(UNAUDITED) (NOTE)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 33,142 $101,475
Short-term investments, including
accrued interest of $776 and $327 82,732 62,854
Receivables, including $39,477
and $25,779 of earned revenues
in excess of billings, net of
allowance for doubtful accounts
of $5,194 and $5,528 79,604 65,541
Prepaid expenses and other receivables 35,993 17,108
-------- --------
TOTAL CURRENT ASSETS 231,471 246,978
PROPERTY AND EQUIPMENT--at cost, net
of accumulated depreciation 27,440 31,295
CAPITALIZED COMPUTER SOFTWARE COSTS,
net of accumulated amortization 5,057 7,045
GOODWILL, net of accumulated amortization 28,535 2,340
INTANGIBLE ASSETS, net of accumulated
amortization 9,080 1,219
OTHER ASSETS AND DEFERRED CHARGES 19,703 28,892
NET ASSETS OF DISCONTINUED OPERATIONS 31,772 49,622
-------- --------
TOTAL ASSETS $353,058 $367,391
======== ========
Note: The condensed consolidated balance sheet at September 30, 2001, has
been derived from the audited financial statements at that date.
See notes to condensed consolidated financial statements.
3
SYSTEMS & COMPUTER TECHNOLOGY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (continued)
(in thousands, except per share amounts)
June 30, September 30,
2002 2001
(UNAUDITED) (NOTE)
LIABILITIES & STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 6,257 $ 6,748
Current portion of long-term debt 2,260 2,771
Income taxes payable 598 7,697
Accrued expenses 36,476 34,650
Deferred revenue 12,784 15,657
-------- --------
TOTAL CURRENT LIABILITIES 58,375 67,523
LONG-TERM DEBT, less current portion 74,723 74,723
OTHER LONG-TERM LIABILITIES 2,911 3,748
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
38,021 and 37,634 shares 380 376
Capital in excess of par value 125,136 120,040
Retained earnings 116,592 126,697
Accumulated other comprehensive loss (516) (340)
-------- --------
241,592 246,773
Less
Held in treasury, 4,597 and 4,630 common
shares--at cost (24,543) (24,876)
Notes receivable from stockholders -- (500)
-------- --------
217,049 221,397
-------- --------
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY $353,058 $367,391
======== ========
Note: The condensed consolidated balance sheet at September 30, 2001, has
been derived from the audited financial statements at that date.
See notes to condensed consolidated financial statements.
4
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,
2002 2001
Revenues:
Outsourcing services $ 8,172 $ 10,049
Software sales and commissions 10,871 11,922
Maintenance and enhancements 20,190 19,860
Software services 21,658 16,708
Interest and other income 517 1,092
-------- --------
61,408 59,631
Expenses:
Cost of outsourcing services 6,836 7,520
Cost of software sales, commissions,
maintenance and enhancements 13,350 13,828
Cost of software services 17,598 13,134
Selling, general and administrative 16,767 13,823
Asset impairment charge 5,425 --
Retirement and restructuring charges -- 2,485
Interest expense 1,064 1,048
-------- --------
61,040 51,838
Income from continuing operations
before income taxes 368 7,793
Provision for income taxes 527 3,358
-------- --------
Income (loss) from continuing operations (159) 4,435
Discontinued operations:
Loss from discontinued operations,
adjusted for applicable benefit
for income taxes of $616 and $2,336 (265) (3,826)
Gain (loss) on sale of discontinued
operations, net of income tax
provision (benefit) of ($9) and $13,111 (15) 20,155
-------- --------
Income (loss) from discontinued operations (280) 16,329
-------- --------
Net income (loss) $ (439) $ 20,764
======== ========
Income (loss) from continuing operations:
per common share ($0.00) $0.13
per share -- assuming dilution ($0.00) $0.13
Income (loss) from discontinued operations:
per common share ($0.01) $0.50
per share -- assuming dilution ($0.01) $0.49
Net income (loss):
per common share ($0.01) $0.63
per share -- assuming dilution ($0.01) $0.63
Common shares and equivalents outstanding:
Average common shares 33,323 32,868
Average common shares -- assuming dilution 33,323 33,042
See notes to condensed consolidated financial statements.
5
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,
2002 2001
Revenues:
Outsourcing services $ 24,875 $ 30,077
Software sales and commissions 23,840 22,492
Maintenance and enhancements 61,171 53,375
Software services 57,789 46,282
Interest and other income 3,231 3,665
-------- --------
170,906 155,891
Expenses:
Cost of outsourcing services 19,788 23,125
Cost of software sales, commissions,
maintenance and enhancements 39,947 35,556
Cost of software services 47,435 36,618
Selling, general and administrative 45,939 42,888
Asset impairment charge 5,425 7,831
Retirement and restructuring charges 4,874 2,485
Interest expense 3,157 3,151
-------- --------
166,565 151,654
Income from continuing operations
before income taxes 4,341 4,237
Provision for income taxes 2,096 1,941
-------- --------
Income from continuing operations 2,245 2,296
Discontinued operations:
Loss from discontinued operations,
adjusted for applicable benefit
for income taxes of $1,845 and $6,457 (5,293) (10,900)
Gain (loss) on sale of discontinued
operations, net of income tax provision
(benefit) of ($3,455) and $13,111 (7,057) 20,155
-------- --------
Income (loss) from discontinued operations (12,350) 9,255
-------- --------
Net income (loss) $(10,105) $ 11,551
======== ========
Income from continuing operations:
per common share $0.07 $0.07
per share -- assuming dilution $0.07 $0.07
Income (loss) from discontinued operations:
per common share ($0.37) $0.28
per share -- assuming dilution ($0.37) $0.28
Net income (loss):
per common share ($0.30) $0.35
per share -- assuming dilution ($0.30) $0.35
Common shares and equivalents outstanding:
Average common shares 33,173 32,803
Average common shares -- assuming dilution 33,639 33,240
See notes to condensed consolidated financial statements.
6
SYSTEMS & COMPUTER TECHNOLOGY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(in thousands)
For the Nine Months Ended
June 30,
2002 2001
OPERATING ACTIVITIES
Net income (loss) $(10,105) $ 11,551
Adjustments to reconcile net income (loss)
to net cash provided by (used in)
operating activities:
Asset impairment charge 5,425 7,831
Loss (gain) on sale of discontinued
operations 7,057 (20,155)
WebCT commission income -- (2,700)
Depreciation and amortization 16,010 21,073
Provision for doubtful accounts 1,813 2,677
Deferred tax benefit (1,504) (15,423)
Changes in operating assets and liabilities:
(Increase) decrease in receivables (7,708) 3,313
(Increase) decrease in other current
assets, principally prepaid expenses (16,486) 6,280
Decrease in accounts payable (2,373) (49)
Increase (decrease) in income taxes
payable (7,099) 2,249
Decrease in accrued expenses (6,592) (416)
Decrease in deferred revenue (9,320) (8,550)
(Increase) decrease in other operating
assets and deferred charges 3,476 (179)
-------- --------
NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES (27,406) 7,502
INVESTING ACTIVITIES
Purchase of property and equipment (787) (7,750)
Capitalized computer software costs (770) (754)
Purchase of investments available for sale (85,232) (31,453)
Proceeds from sale or maturity of
investments available for sale 65,771 27,503
Proceeds from sale of discontinued operations 10,476 85,000
Purchase of businesses, net of cash acquired (33,499) (3,009)
-------- --------
NET CASH PROVIDED BY (USED IN)
INVESTING ACTIVITIES (44,041) 69,537
FINANCING ACTIVITIES
Repayment of borrowings (511) (528)
Issuance (repurchase) of Company stock 333 (71)
Decrease in notes receivable from stockholders 500 110
Proceeds from exercise of stock options 2,792 1,969
-------- --------
NET CASH PROVIDED BY FINANCING ACTIVITIES 3,114 1,480
INCREASE (DECREASE) IN CASH & CASH EQUIVALENTS (68,333) 78,519
CASH & CASH EQUIVALENTS--BEGINNING OF PERIOD 101,475 49,155
-------- --------
CASH & CASH EQUIVALENTS--END OF PERIOD $ 33,142 $127,674
======== ========
SUPPLEMENTAL INFORMATION Noncash investing and financing activities:
Purchase of businesses -- noncash portion $ -- $ 500
Conversion of subordinated debentures into
common stock -- 27
See notes to condensed consolidated financial statements.
7
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, except for the retirement and restructuring
charges and the asset impairment charges in fiscal years 2002 and 2001)
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, 2001. During the quarter ended June 30, 2002, the Company
completed the sale of the Global Manufacturing & Distribution Solutions (MDS)
business and announced the discontinuation of the Global Energy and Utilities
Solutions (EUS) business. The MDS and EUS businesses are accounted for as
discontinued operations, 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, 2002, are not
necessarily indicative of the results that may be expected for the year ending
September 30, 2002.
Prior year information has been reclassified to reflect certain reimbursed
out-of-pocket expenses as revenue and expense.
NOTE B--CASH AND SHORT-TERM INVESTMENTS
(in thousands)
Cash equivalents are short-term, highly liquid investments with maturities of
three months or less at the date of purchase.
Short-term investments consist of corporate and municipal debt securities.
Management determines the appropriate classification of the securities at the
time of purchase. At June 30, 2002, the portfolio of securities has been
classified as available for sale. These securities are carried at fair value,
based on quoted market values, with the unrealized gains and losses, net of
income taxes, reported as a component of accumulated other comprehensive loss.
The available-for-sale portfolio is comprised of highly liquid investments
available for current operations and general corporate purposes and,
accordingly, is classified as a current asset.
Short-term investments at June 30, 2002, are comprised of:
State and municipal securities $ 36,440
Corporate securities 46,292
---------
$ 82,732
The contractual maturities of short-term investments held as of June 30, 2002,
are:
Due in one year or less $ 36,950
Due after one year through four years 45,782
---------
$ 82,732
8
NOTE C--LONG-TERM INVESTMENTS
The Company has made investments for strategic business purposes 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 other-than-temporary
impairments discussed below. On a quarterly basis, the Company reviews the
underlying operating performance, cash flow forecasts, private equity
transactions, and stock prices and equity values of publicly traded competitors
of this privately held company in assessing impairment. During the third quarter
of fiscal year 2002, the Company recorded asset impairment charges of $5.4
million against its aggregate investment, further reducing the carrying value of
the investment in WebCT to $4.0 million, which is included in other assets and
deferred charges in the consolidated balance sheet. At June 30, 2002, the
Company owns approximately 11% of the voting shares of WebCT.
The Company made a series of investments in Campus Pipeline, Inc. As of June 30,
2002, 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--MANAGEMENT CHANGES AND RESTRUCTURING CHARGES
In the second quarter of fiscal year 2002, Michael J. Emmi, President, Chief
Executive Officer, and Chairman of the Board of Directors retired from the
Company. Michael D. Chamberlain, who has served the Company in various executive
capacities since 1986, most recently as Chief Operating Officer, and a member of
the Board of Directors since 1989, was elected President and Chief Executive
Officer. Allen R. Freedman, a member of the Company's Board of Directors since
1982, was elected non-executive Chairman of the Board. Mr. Freedman was Chairman
and Chief Executive Officer of Fortis, Inc., a multi-billion dollar financial
services company, prior to his retirement in July 2000.
In connection with Mr. Emmi's retirement, he received a compensation package
including a reduction of indebtednesses, the continuation of Mr. Emmi's life and
health insurance and other fringe benefits for periods ranging from two to five
years, as well as an assignment to Mr. Emmi of life insurance policies covering
Mr. Emmi, and the immediate vesting of certain rights under other compensation
plans. All Company stock options held by Mr. Emmi became vested and were amended
to permit Mr. Emmi to exercise them by the earlier of their original expiration
date or two years from the date of his resignation. The Company recorded a
charge of approximately $3.5 million related to the above actions in the second
quarter of fiscal year 2002. At June 30, 2002, $0.7 million of the accrual
remains. The Company may pay an additional amount to Mr. Emmi if certain
strategic corporate objectives established by the Board before Mr. Emmi's
termination are achieved on or before December 31, 2002.
Also, during the quarter ended March 31, 2002, the Company implemented a plan
for restructuring, which included the termination of employees, management
changes, discontinuation of non-critical programs and the disposition of related
assets. During the quarter, the Company recorded a charge of $1.3 million
related to severance payments and disposition of assets. At June 30, 2002, $0.4
million of the accrual remains. In January 2002, the Company terminated
approximately 40 employees engaged primarily in development, special-programs,
and sales functions.
9
During the third quarter of fiscal year 2001, the Company implemented
restructuring actions that were considered necessary to improve the Company's
performance. The restructuring plan included the termination of employees,
management changes, consolidation of certain facilities, and discontinuation of
non-critical programs. During the quarter ended June 30, 2001, the Company
accrued $2.0 million 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. As of June 30, 2002, $0.2 million of
this accrual remains. In May and June 2001, the Company terminated approximately
80 employees engaged primarily in marketing, administrative, special-programs,
and development functions.
NOTE E--ACQUISITIONS
Effective January 10, 2002, the Company acquired USA Education, Inc.'s (commonly
known as Sallie Mae) student information systems business (the business) for the
higher education market. Under the terms of the agreement, the Company acquired
Sallie Mae's Exeter Student Suite and Perkins/Campus Loan Management product
lines and related resources based in Cambridge, MA for approximately $15.5
million cash. If the business achieves certain predetermined criteria during the
remainder of fiscal year 2002, the Company will make an additional cash payment
of up to $2.0 million at September 30, 2002. This payment will be classified as
intangible assets on the Company's balance sheet. In addition, the Company could
make further cash payments of up to $5.3 million over the next four years,
contingent upon the revenue derived from the license or other sale of the
purchased product lines over that period. These payments will be treated as
additional consideration and will likely increase the amount recorded as
goodwill. The Company recorded goodwill of $11.5 million related to the
acquisition, all of which is deductible for tax purposes. Included in goodwill
is $1.3 million of costs, including professional fees and other costs directly
related to the acquisition. Some of these additional acquisition costs are
estimates that may change and could cause an adjustment to goodwill. Intangible
assets acquired included $3.4 million of purchased software and $0.8 million of
other intangibles. The weighted-average amortization period is 6.0 years, 5.0
years for purchased software and 10.0 years for other intangibles. The Company
purchased the business to increase its market opportunities in the higher
education market. The product lines purchased include an Oracle-based set of
solutions and technology, certain components of which are expected to be
integrated into the Company's higher education product lines. The purchased
product lines also include a Microsoft-based solution that is under development
and when completed, will allow clients a technology choice.
In February 2002, the Company acquired the capital stock of Applied Business
Technologies, Inc. (ABT) for $16.8 million cash. The products acquired include
ABT's PowerCAMPUS, IQ.Web and PocketCAMPUS Mobile applications, as well as
related resources in Newtown Square, PA and their customer base. The Company
recorded goodwill of $14.7 million related to the acquisition, of which $4.5
million is deductible for tax purposes. Included in goodwill is $0.5 million of
costs, including professional fees and other costs directly related to the
acquisition. Some of these additional acquisition costs are estimates that may
change and could cause an adjustment to goodwill. Intangible assets acquired
included $2.8 million of purchased software and $1.8 million of other
intangibles. The weighted-average amortization period is 6.1 years, 5.0 years
for purchased software and 9.5 years for other intangibles. The completion of
this transaction provides the Company with an expanded market share in small to
mid-sized institutions (enrollment under 2,500). It also allows the Company to
expand its current technology offerings in higher education to institutions that
have a preference for Microsoft, which provides a technology that is both
affordable and easy to manage.
10
NOTE F--DIVESTITURES
(in thousands)
The Company previously announced that it had signed a letter of intent for the
sale of the Global Energy and Utilities Solutions (EUS) business. The letter of
intent and negotiations with the party who signed the letter of intent have
terminated. The Company is continuing in its efforts to sell the EUS business
and the EUS business is treated as a discontinued operation in the consolidated
statements of operations. The Company expects to recognize a gain on the sale of
the EUS business. The prior year consolidated statements of operations and
balance sheet have been restated to present EUS as a discontinued operation. For
business segment reporting, EUS was previously reported as a separate segment.
Revenues from the EUS business were $19,613 and $21,664 for the three-month
periods ending June 30, 2002 and 2001, respectively. EUS revenues for the
nine-month periods ending June 30, 2002 and 2001 were $58,346 and $72,092,
respectively. The net assets of discontinued operations at September 30, 2001,
were $29,676. Net assets of the discontinued operation were $31,772 as of June
30, 2002, comprised of the following:
Accounts receivable $ 14,955
Prepaid expenses and other receivables 2,258
Property and equipment 15,781
Capitalized computer software costs 4,065
Goodwill 1,056
Intangible assets 2,051
Other & deferred charges 1,506
Current liabilities (9,900)
Net Assets of Discontinued Operations $31,772
On May 31, 2002, the Company consummated the sale of its Global Manufacturing &
Distribution Solutions (MDS) business to Agilisys International Limited, a
company organized under the laws of the Cayman Islands, pursuant to an Asset
Purchase Agreement dated April 10, 2002. As of the end of the second quarter of
fiscal year 2002, the Company had declared MDS a discontinued business; the
results of MDS have been reported separately as discontinued operations in the
consolidated statements of operations. The prior year consolidated statements of
operations and balance sheet have been restated to present MDS as a discontinued
operation. For business segment reporting, MDS was previously reported as a
separate segment. The Company agreed to sell substantially all of the assets of
MDS for $13,200 in cash, subject to adjustment in certain circumstances. Due to
such adjustments, which principally related to the collection of receivables by
the Company, the net proceeds received by the Company were $10,476. The proceeds
are subject to further adjustment based upon the preparation of a closing date
balance sheet. The Company could receive up to an additional $3,000 based upon
the new company achieving specified revenue targets over the next three years.
The Company recorded a pretax loss of $10,512 on the sale, which net of a $3,455
tax benefit produced a net loss of $7,057. Revenues from the MDS business were
$4,485 and $13,098 for the two-month period ending May 31, 2002 and the
three-month period ending June 30, 2001, respectively. MDS revenues for the
eight-month period ending May 31, 2002 and the nine-month period ending June 30,
2001 were $22,126 and $39,154, respectively. The loss from discontinued
operations, net of taxes, for the year-to-date 2002 and 2001 periods were $4,385
and $8,182, respectively. The net assets of discontinued operations at September
30, 2001, were $19,946.
11
NOTE G--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,
2002 2001 2002 2001
Numerator:
Income (loss) from continuing
operations available to
common stockholders $ (159) $ 4,435 $ 2,245 $ 2,296
Discontinued operations:
Income (loss) from discontinued
operations, net of income taxes (280) 16,329 (12,350) 9,255
------ ------ ------- ------
Net income (loss) available
to common stockholders $ (439) $20,764 $(10,105) $11,551
======== ======== ======== ========
Denominator:
Weighted average common shares 33,323 32,868 33,173 32,803
Effect of dilutive securities:
Employee stock options -- 174 466 437
------- ------- ------- -------
Weighted average common shares
-- assuming dilution 33,323 33,042 33,639 33,240
======= ======= ======= =======
Income (loss) from continuing
operations
per common share ($0.00) $0.13 $0.07 $0.07
per share -- assuming dilution ($0.00) $0.13 $0.07 $0.07
Income (loss) from discontinued
operations
per common share ($0.01) $0.50 ($0.37) $0.28
per share -- assuming dilution ($0.01) $0.49 ($0.37) $0.28
Net income (loss)
per common share ($0.01) $0.63 ($0.30) $0.35
per share -- assuming dilution ($0.01) $0.63 ($0.30) $0.35
Potentially dilutive securities with an anti-dilutive effect (stock options in
the fiscal year 2002 three-month period and convertible debt in all periods
presented) are not included in the above calculation.
12
NOTE H--PRODUCT DEVELOPMENT
Product development expenditures, including software maintenance expenditures,
for the nine months ended June 30, 2002 and 2001, were approximately $20.8
million and $18.8 million, respectively, all of which were charged to operations
as incurred. For the same periods, amortization of capitalized software costs
(not included in expenditures above) amounted to $2.0 million and $2.1 million,
respectively.
NOTE I--BUSINESS SEGMENTS
As a result of the discontinuation of the Global Energy and Utilities Solutions
business at the end of third quarter of fiscal year 2002 and the sale of the
Global Manufacturing & Distribution Solutions business on May 31, 2002, the
Company currently has one reportable segment: Global Education Solutions (GES).
The financial statements presented above, exclusive of discontinued operations,
reflect the operations of the Global Education Solutions business.
NOTE J--COMPREHENSIVE INCOME
(in thousands)
Three Months Nine Months
Ended June 30, Ended June 30,
2002 2001 2002 2001
Net income (loss) ($439) $20,764 ($10,105) $11,551
Foreign currency translation
adjustment 334 31 191 24
Unrealized gain (loss) on
marketable securities (293) (44) (367) 12
-------- -------- ------- -------
Other comprehensive income (loss) 41 (13) (176) 36
-------- -------- ------- -------
Total Comprehensive Income (Loss) ($398) $20,751 ($10,281) $11,587
NOTE K--GOODWILL AND INTANGIBLE ASSETS
(in thousands, except per share amounts)
Effective October 1, 2001, the Company adopted Statement of Financial Accounting
Standards No. 142, "Goodwill and Other Intangible Assets," which resulted in
discontinuing the amortization of goodwill. Under the Statement, goodwill will
instead be carried at its book value as of October 1, 2001, and any future
impairment of goodwill will be recognized as an operating expense in the period
of impairment. However, under the terms of the Statement, identifiable
intangibles with identifiable lives will continue to be amortized.
The Company's goodwill was $28,535 and $2,340 at June 30, 2002, and September
30, 2001, respectively. The increase in goodwill at June 30, 2002, is primarily
the result of the Sallie Mae and ABT acquisitions (see Note E). The Company did
not recognize an impairment loss as a result of its transitional impairment test
of existing goodwill. The Company will be required to test the value of its
goodwill at least annually. The following table sets forth the Company's
amortized and unamortized intangible assets at the periods indicated:
13
June 30, 2002 September 30, 2001
Gross Gross
Carrying Accumulated Carrying Accumulated
Amount Amortization Amount Amortization
Amortized intangible assets:
Purchased software 10,462 (4,382) 4,284 (4,064)
Covenants-not-to-compete 6,065 (5,512) 6,000 (5,000)
Customer relationships 1,652 (69) -- --
-------- --------- -------- ---------
$ 18,179 $ (9,963) $ 10,284 $ (9,064)
Unamortized intangible assets:
Trademarks 865 --
-------- --------
$ 865 $ --
Estimated amortization expense for amortized intangible assets for the next five
fiscal years ending September 30, are as follows:
Fiscal Year
2002 $ 1,289
2003 1,840
2004 1,413
2005 1,401
2006 1,401
thereafter 1,772
-------
Total $ 9,116
Amortization expense on intangible assets was $899 and $610 for the nine months
ended June 30, 2002 and 2001, respectively.
The following table discloses the effect on net income and earnings per share of
excluding amortization expense related to goodwill, which was recognized in the
three and nine months ended June 30, 2001, as if such goodwill had been
recognized in accordance with SFAS 142.
For the Three Months For the Nine Months
Ended June 30, Ended June 30,
2002 2001 2002 2001
Reported net income (loss) ($439) $20,764 ($10,105) $11,551
Plus: goodwill amortization,
net of taxes -- 33 -- 99
------- ------- ------- -------
Adjusted net income (loss) ($439) $20,797 ($10,105) $11,650
Per common share:
Net income (loss) ($0.01) $0.63 ($0.30) $0.35
Goodwill amortization -- $0.00 -- $0.00
------ ----- ------ -----
Adjusted net income (loss) ($0.01) $0.63 ($0.30) $0.35
Per share -- assuming dilution:
Net income (loss) ($0.01) $0.63 ($0.30) $0.35
Goodwill amortization -- $0.00 -- $0.00
------ ----- ------ -----
Adjusted net income (loss) ($0.01) $0.63 ($0.30) $0.35
14
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. The following discussion excludes the results of the
Global Energy and Utilities Solutions (EUS), Global Manufacturing & Distribution
Solutions (MDS), and Global Government Solutions (GGS) businesses as they have
been reclassified as discontinued operations in the fiscal year 2002 and 2001
periods.
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 Nine Three Mos. Nine Mos.
Mos. Ended Mos. Ended Ended Ended
June 30, June 30, June 30 June 30
2002 2001 2002 2001
Revenues:
Outsourcing services 13% 17% 14% 19% (19%) (17%)
Software sales and commissions 18% 20% 14% 15% (9%) 6%
Maintenance and enhancements 33% 33% 36% 34% 2% 15%
Software services 35% 28% 34% 30% 30% 25%
Interest and other income 1% 2% 2% 2% (53%) (12%)
---- ---- ---- ----
Total 100% 100% 100% 100% 3% 10%
Expenses:
Cost of services, software sales,
commissions, and maintenance
and enhancements 61% 58% 63% 61% 10% 12%
Selling, general and
administrative 27% 23% 27% 27% 21% 7%
Asset impairment charge 9% -- 3% 5% -- (31%)
Retirement and restructuring
charges -- 4% 3% 2% (100%) 96%
Interest expense 2% 2% 2% 2% 2% --
Income from continuing
operations before income taxes 1% 13% 2% 3% (95%) 2%
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 June 30, Ended June 30,
2002 2001 2002 2001
Gross Profit:
Outsourcing services 16% 25% 20% 23%
Software sales and maintenance
and enhancements 57% 56% 53% 53%
Software services 19% 21% 18% 21%
--- --- --- ---
Total 38% 41% 36% 37%
15
Revenues:
Outsourcing services revenue decreased 19% and 17% in the third quarter and
first nine months of fiscal year 2002 compared with the prior-year periods.
These decreases are primarily the result of the completion of contracts at the
end of the third quarter of fiscal year 2001 and the completion of a contract at
the end of the second quarter of fiscal year 2002.
Software sales and commissions decreased 9% in the third quarter of fiscal year
2002 compared to the prior-year period. The decrease is the result of third
quarter fiscal year 2001 commission revenue of $2.7 million in shares of WebCT,
earned by licensing to schools with cumulative enrollments totaling one million
students; the third quarter of fiscal year 2002 had no such commissions. This
decrease is offset by license fee increases from the ABT acquisition in the
February 2002. In the first nine months of fiscal year 2002, software sales and
commissions revenue increased 6% compared to the prior-year period due to
increases in traditional license fees and the results of the ABT acquisition.
The 15% increase in maintenance and enhancements revenue in the first nine
months of fiscal year 2002 compared with the prior year period was the result of
the Company's growing installed base of clients. The Company continues to
experience a high annual renewal rate on existing maintenance contracts in this
market, although there can be no assurances that this will continue. Revenues
from the Company's users' group meeting are included in maintenance and
enhancement revenue in the period in which the meeting is held. The users' group
meeting was held in the second quarter of fiscal year 2002 and in the third
quarter of fiscal year 2001. The change in the timing of the users' group
meeting resulted in a lower increase in the maintenance and enhancement revenue
in the third quarter of fiscal year 2002 compared with the prior year period.
Software services revenue increased 30% and 25% in the third quarter and first
nine months of fiscal year 2002 compared with the prior-year periods. The
increases are primarily the result of (i) increased implementation and
integration services provided to the Company's traditional clients and (ii) new
services business as a result of the ABT and Sallie Mae acquisitions in the
second quarter of fiscal year 2002.
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 2001 to 38% for the
third quarter of fiscal year 2002. For the nine-month periods ending June 30,
gross profit as a percentage of revenue decreased from 37% in 2001 to 36% in
2002. In the three and nine-month periods, the outsourcing services gross profit
percentage decreased primarily as a result of (i) the completion of contracts
with higher than average margins at the end of the third quarter of fiscal year
2001 and (ii) additional costs provided for potential issues on a contract that
was completed at the end of the second quarter of fiscal year 2002. These
decreases were partially offset by contract renewals and additional business on
existing contracts. The software sales, commissions, maintenance, and
enhancements gross profit percentage remained relatively consistent over the
three and nine-month periods of fiscal 2002 compared with fiscal 2001. The
software services margins decreased in the three and nine-month periods ending
June 30, 2002, compared with the prior-year periods primarily as a result of an
accrual recorded in the third quarter for a decline in profitability of a
contract and lower margins on software services in connection with the Company's
new businesses acquired in the second quarter 2002.
Selling, General and Administrative Expenses:
Selling, general and administrative expenses increased 21% and 7% in the third
quarter and first nine months of fiscal year 2002 compared with the prior-year
periods primarily as a result of increased sales commissions on professional
services contracts signed during the third quarter of fiscal year 2002.
16
Retirement, Restructuring, and Asset Impairment Charges:
In the second quarter of fiscal year 2002, the Company recognized retirement and
restructuring charges of $4.8 million. The charge was comprised of $3.5 million
for the retirement compensation package of the Company's former President, Chief
Executive Officer, and Chairman of the Board of Directors and $1.3 million
related to actions to reduce the workforce, discontinue non-critical programs,
and consolidate certain facilities. At June 30, 2002, $1.1 million of the $4.8
million accrual remains.
In the third quarter of fiscal year 2002 and the second quarter of fiscal year
2001, the Company reduced the carrying value of its long-term investment in
WebCT as a result of impairments that were deemed other than temporary. The
Company recognized an asset impairment charge of $5.4 million in fiscal year
2002 and $7.8 million in fiscal year 2001, reducing the carrying value of the
investment in WebCT to $4.0 million. Future earnings would 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.
Income from continuing operations before income taxes was $4.3 million for the
nine months ended June 30, 2002, compared with $4.2 million in the fiscal year
2001 period. The provision for income taxes was $2.1 million in the current
period compared to $1.9 million in the year-ago period. The effective tax rate
on income from continuing operations in the fiscal year 2002 provision does not
reflect the customary relationship between income before income taxes and tax
expense principally due to the effects of state income and local taxes and the
limitations of the research and development tax credit.
Loss from discontinued operations before income taxes was $7.1 million for the
nine months ended June 30, 2002, compared with $17.4 million in the fiscal year
2001 period. The benefit for income taxes was $1.8 million in the current period
compared to $6.5 million in the prior-year period. The effective tax rate on the
loss from discontinued operations in the fiscal year 2002 benefit does not
reflect the customary relationship between the loss from discontinued operations
and tax benefit principally due to not recording a tax benefit for losses
related to the Company's foreign operations.
Discontinued Operations:
On May 31, 2002, the Company consummated the sale of its Global Manufacturing &
Distribution Solutions (MDS) business to Agilisys International Limited,
pursuant to an Asset Purchase Agreement dated April 10, 2002. As of the end of
the second quarter of fiscal year 2002, the Company had declared MDS a
discontinued business; the results of MDS have been reported separately as
discontinued operations in the consolidated statements of operations. The
Company agreed to sell substantially all of the assets of MDS for $13.2 million
in cash, subject to adjustment in certain circumstances. Due to such
adjustments, which principally related to the collection of receivables by the
Company, the net proceeds of the Company were $10.5 million. The proceeds are
subject to further adjustment based upon the preparation of a closing date
balance sheet. This adjustment is not expected to be material. The Company could
receive up to an additional $3.0 million based upon the new company achieving
specified revenue targets over the next three years. The Company recorded a
pretax loss of $10.5 million on the sale, which net of a $3.4 million tax
benefit produced a net loss of $7.1 million. The prior year consolidated
statements of operations and balance sheet have been restated to present MDS as
a discontinued operation. For business segment reporting, MDS was previously
reported as a separate segment.
17
The Company previously announced that it had signed a letter of intent for the
sale of the Global Energy and Utilities Solutions (EUS) business. The letter of
intent and negotiations with the party who signed the letter of intent have
terminated. The Company is continuing in its efforts to sell the EUS business
and the EUS business is treated as a discontinued operation in the consolidated
statements of operations. The Company expects to recognize a gain on the sale of
the EUS business. The prior year consolidated statements of operations and
balance sheet have been restated to present EUS as a discontinued operation. For
business segment reporting, EUS was previously reported as a separate segment.
The EUS business has a purchase commitment with Enlogix CIS L.P. to purchase
development expertise in the form of labor hours, which the business is
utilizing in its development efforts. The purchase commitment extends through
December 22, 2005. During the remainder of the term of the commitment, the
business will purchase approximately $4 million of labor hours at agreed upon
labor rates, which approximate the Company's labor rates.
LIQUIDITY, CAPITAL RESOURCES, AND FINANCIAL POSITION
The following discussion of cash flow activity is based upon historical
information and the statement of cash flows for the fiscal year 2002 period does
not present the MDS and EUS businesses as discontinued operations and the fiscal
year 2001 period does not present the Global Government Solutions business,
which was sold on June 29, 2001, as a discontinued operation.
The Company's cash and short-term investments balance was $115.9 million and
$164.3 million as of June 30, 2002, and September 30, 2001, respectively. The
cash balances decreased as a result of cash used in operations and investing
activities discussed below. The Company anticipates using its cash and
short-term investments balance to fund future growth through various means,
including strategic alliances and acquisitions, and development of additional
service offerings.
Cash used in operating activities was $27.4 million for the first nine months of
fiscal year 2002, compared with cash provided of $7.5 million for the prior-year
period. The primary uses of cash in the fiscal year 2002 period were increased
other current assets, primarily prepaid income taxes, and increased accounts
receivable. The Company made estimated income tax payments throughout the fiscal
year 2002 period based on the total fiscal year 2002 estimated income, which has
exceeded actual income to date. The increases in accounts receivable at June 30,
2002, compared to September 30, 2001, are primarily the result of increased
revenues and the timing of billings on software licenses. Cash expenditures for
the first nine months of fiscal year 2002 related to retirement and
restructuring charges (which are included in operating activities) were
approximately $5.2 million, and are expected to be approximately $0.1 million
for the remainder of fiscal year 2002 and $1.2 million in total for all
subsequent years, principally for severance and facility costs.
Cash used in investing activities was $44.0 million for the first nine months of
fiscal year 2002 compared with cash provided of $69.5 million for the fiscal
year 2001 nine-month period. In the fiscal year 2002 period, cash of $33.0
million was used in the purchase of Sallie Mae's student information systems
business and Applied Business Technologies, Inc. in January and February 2002.
If the Sallie Mae acquired business achieves certain predetermined criteria
during the remainder of fiscal year 2002, the Company will make an additional
cash payment of up to $2.0 million at September 30, 2002. Additional cash
payments of up to $5.3 million could be required of the Company over the next
four years, contingent upon the revenue derived from the license or other sale
of the purchased product lines over that period. Additionally, cash was used in
the purchase of investments using the available cash balances from September 30,
2001. Purchases of property and equipment have been curtailed in fiscal year
2002 as a result of continuing cost containment measures. Fiscal year 2002 total
property and equipment purchases are expected to remain below fiscal year 2001
levels. Cash of $10.5 million was provided by the sale of the MDS business on
May 31, 2002. The primary source of cash in the nine months ended June 30, 2001,
was the sale of the GGS business.
18
The $3.1 million and $1.4 million in cash provided by financing activities for
the first nine months of fiscal year 2002 and 2001, 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 2004
and includes optional annual renewals. There were no borrowings outstanding at
June 30, 2002, or September 30, 2001. As long as there are borrowings
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 credit agreement provides for the issuance of letters of credit. The amount
available for borrowing under the revolving credit facility is reduced by the
total outstanding letters of credit. At June 30, 2002, the Company had $0.6
million of letters of credit outstanding and $29.4 million available under the
revolving credit facility. The Company pays a commitment fee of 5/16% on the
unused portion of the revolving credit facility.
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, 2002, is $74.7 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 2002 and
2001 periods and therefore are not included in the denominators for income
(loss) from continuing operations per share -- assuming dilution, income (loss)
from discontinued operations per share -- assuming dilution, or net income
(loss) per share -- assuming dilution for these periods.
The Company believes that its cash and cash equivalents, short-term investments,
and borrowing arrangements should satisfy its financing needs for the
foreseeable future.
Contingency:
The Company from time to time is involved in 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.
19
Critical Accounting Policies:
The Company's discussion and analysis of its financial condition and results of
operations are based upon the Company's consolidated financial statements, which
have been prepared in accordance with accounting principles generally accepted
in the United States. The preparation of these financial statements requires the
Company to make estimates and judgments that affect the reported amounts of
assets and liabilities and the disclosure of contingent assets and liabilities
at the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. The Company bases its estimates on
historical experience and on various other assumptions that are believed to be
reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying values of assets and liabilities that are
not readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions.
The Company believes the following critical accounting policies affect its more
significant judgments and estimates used in the preparation of its consolidated
financial statements.
Revenue recognition:
Contract fees from outsourcing services are typically based on multi-year
contracts ranging from three to five years in length, and provide a recurring
revenue stream throughout the term of the contract. During the first several
years of a typical outsourcing services contract, the Company performs services
and incurs expenses at a greater rate than in the later years of the contract.
Since billings usually remain constant during the term of the contract, and
revenue is recognized as work is performed, revenues usually exceed billings in
the early years of the contract. The resulting excess is reflected as unbilled
accounts receivable. In some cases when a contract term is extended, the billing
period is also extended over the new life of the contract. As a contract
proceeds, services are performed, and expenses are incurred at a diminishing
rate, resulting in billings exceeding revenue recognized, which causes a
decrease in the unbilled accounts receivable balance, although additional
unbilled accounts receivable will continue to be recorded based on the terms of
the contracts. These contracts require estimates of periodic revenue earned and
costs to be incurred to deliver products or services and are subject to revision
as work progresses. Revisions in the estimates are reflected in operations in
the period in which facts requiring those revisions become known.
Software services are generally provided under time and materials contracts and
revenue is recognized as the services are provided. In some circumstances,
services are provided under fixed-price arrangements in which revenue is
recognized on the percentage-of-completion method. Revisions in estimates of
costs to complete are reflected in operations in the period in which facts
requiring those revisions become known. In certain software services contracts,
the Company performs services but cannot immediately bill for them. Revenue is
usually recognized as work is performed, resulting in an excess of revenues over
billings in such periods. The resulting excess is reflected as unbilled accounts
receivable. Billings in these software services contracts cause a decrease in
the unbilled accounts receivable, although additional unbilled accounts
receivable will continue to be recorded based on the terms of the contracts.
The Company licenses software under license agreements and provides services
including training, installation, consulting, and maintenance and enhancements.
Maintenance and enhancement agreements provide for telephone support and error
correction for current versions of licensed systems, as well as regulatory
updates and functional and technical enhancements to licensed systems if and
when they become generally available. Fees for maintenance and enhancements
agreements are recognized ratably over the term of the agreements. License fee
revenues are recognized when a license agreement has been signed, the software
product has been shipped, the fees are fixed and determinable, collection is
considered probable, and no significant vendor obligations remain. In certain
license arrangements, the Company ships the product and recognizes revenue, but
has not billed the complete contract amount due to contractual payment terms,
resulting in an excess of revenues over billings in such periods. The resulting
excess is reflected as unbilled accounts receivable. The Company usually bills
these unbilled balances within one year.
20
For client arrangements that include license fees and implementation and other
professional services, the portion of the fees related to software licenses is
generally recognized in the current period, while the portion of the fees
related to implementation and other professional services is recognized as such
services are performed.
The Company allocates revenue to each component of the contract based on
objective evidence of its fair value, which is specific to the Company, or, for
products not being sold separately, the price established by management. Because
licensing of the software is not dependent on the professional services portions
of the contract, the software revenue is recognized upon delivery. The remainder
of the contract revenue is recorded as earned as software services revenue.
Restructuring:
During fiscal years 2002 and 2001, the Company recorded significant reserves in
connection with restructuring programs. These reserves include estimates
pertaining to employee separation costs, assumptions regarding idle facilities
and sublease terms, and the settlements of contractual obligations resulting
from these actions. Although the Company does not anticipate significant
changes, the actual costs may differ from these estimates.
Long-Term Investments:
The Company has made investments for strategic business purposes 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 other-than-temporary
impairments. The Company recorded asset impairment charges of $5.4 million and
$7.8 million in the third quarter of fiscal year 2002 and the second quarter of
fiscal year 2001, respectively. On a quarterly basis, the Company reviews the
underlying operating performance, cash flow forecasts, private equity
transactions, and stock prices and equity values of publicly traded competitors
of this privately held company in assessing impairment. Future earnings would 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 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; however, the Company has not recorded any additional
revenue as a result of this agreement.
The Company made a series of investments in Campus Pipeline, Inc., which have a
carrying amount of zero. As a result of fully voting convertible preferred
shares outstanding, the Company has determined that it does not control Campus
Pipeline. Therefore, the Company accounts for its investment using the equity
method of accounting. The convertible preferred shares have liquidation
preferences, which would make realization by the Company at today's market
values unlikely. Additionally, 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.
21
Goodwill and Intangible Assets:
The Company evaluates goodwill and other intangibles for potential impairment on
an annual basis unless circumstances indicate the need for impairment testing
between the annual tests. The judgments regarding the existence of impairment
indicators are based on legal factors, market conditions, and operational
performance of the Company's reporting segments. In assessing the recoverability
of the Company's goodwill and other intangibles, the Company must make valuation
assumptions to determine the fair value of the respective assets. If these
estimates or their related assumptions change in the future, the Company may be
required to record impairment charges which could have a material adverse impact
on the Company's financial condition and results of operations.
Deferred Taxes:
The Company records a valuation allowance to reduce its deferred tax assets to
the amount that is more likely than not to be realized. While the Company has
considered future taxable income and ongoing prudent and feasible tax planning
strategies in assessing the need for the valuation allowance, in the event the
Company were to determine that it would be able to realize its deferred tax
assets in the future in excess of its net recorded amount, an adjustment to the
deferred tax asset would increase income in the period such determination was
made. Likewise, should the Company determine that it would not be able to
realize all or part of its net deferred tax asset in the future, an adjustment
to the deferred tax asset would be charged to income in the period such
determination was made.
Divestiture:
The Company previously announced that it had signed a letter of intent for the
sale of the Global Energy and Utilities Solutions (EUS) business. The letter of
intent and negotiations with the party who signed the letter of intent have
terminated. The Company is continuing in its efforts to sell the EUS business
and the EUS business is treated as a discontinued operation in the consolidated
statements of operations. The Company expects to recognize a gain on the sale of
the EUS business. The success of the Company's efforts to sell the EUS business
depends on the Company's ability to attract potential buyers, negotiate a price
acceptable to the Company, and agree on terms of the sale.
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, strategic priorities, or economic
uncertainty; 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.
22
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.
23
Intense competition in the markets in which the Company competes may put
pressure on the Company to reduce prices on certain products, particularly where
certain vendors offer deep discounts in an effort to recapture or gain market
share or to sell other software products, hardware products, or services. 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. 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 e-mail, and participate in
interactive chat sessions. While some of these features have been included in a
product released by Campus Pipeline, other features are scheduled for future
releases.
During fiscal year 2000, the Company made an investment in WebCT and entered
into a strategic alliance with WebCT to exclusively market the WebCT e-learning
tools and e-learning hub to the Company's higher education client base. The
alliance builds upon the Company's existing relationship with Campus Pipeline,
Inc., and the Company's self-service Web for Students and Web for Faculty
products to offer a unified, 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 members 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 members' products with the Company's products
cost-effectively and on a timely basis, and (iv) the ability of the Company's
alliance members to achieve their financial goals.
24
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 contracts, the Company's
results of operations would be adversely affected.
Certain of the Company's outsourcing and software services 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 would be adversely affected.
The Company provides software-related services, including systems implementation
and integration services. Services are provided under time and materials
contracts, in which case revenue is recognized as the services are provided, and
under fixed-price arrangements, in which case 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.
On June 29, 2001, the Company sold its Global Government Solutions business to
Affiliated Computer Services, Inc., ("ACS") for $85 million in cash. The Company
made certain representations and warranties to ACS under the purchase agreement,
which could result in adjustments to the proceeds received. 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.
25
In the second quarter of fiscal year 2002, the Company acquired the Sallie Mae
student information systems business and Applied Business Technologies, Inc.
("ABT"). These acquisitions were entered into to increase the Company's
opportunities in the higher education market. The success of these acquisitions
depends upon: (i) the Company's ability to integrate the acquired products and
operations with the Company's products and operations cost-effectively and on a
timely basis, (ii) the Company's ability to complete development of and enhance
the products acquired efficiently and cost effectively, and (iii) the market
acceptance of the products.
On May 31, 2002, the Company consummated the sale of its process manufacturing
business to Agilisys International Limited, a company organized under the laws
of the Cayman Islands pursuant to an Asset Purchase Agreement dated April 10,
2002. The Company agreed to sell substantially all of the assets of MDS for
$13.2 million in cash, subject to adjustment in certain circumstances. Due to
such adjustments, which principally related to the collection of receivables by
the Company, the net proceeds received by the Company were $10.5 million. The
proceeds are subject to further adjustment based upon the preparation of a
closing date balance sheet. This adjustment is not expected to be material. The
Company could receive up to an additional $3.0 million based upon the new
company achieving specified revenue targets over the next three years.
The Company previously announced that it had signed a letter of intent for the
sale of the Global Energy and Utilities Solutions (EUS) business. The letter of
intent and negotiations with the party who signed the letter of intent have
terminated. The Company is continuing in its efforts to sell the EUS business
and the EUS business is treated as a discontinued operation in the consolidated
statements of operations. The Company expects to recognize a gain on the sale of
the EUS business. The success of the Company's efforts to sell the EUS business
depends on the Company's ability to attract potential buyers, negotiate a price
acceptable to the Company, and agree on terms of sale.
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; the success of the Company' new
business model; the success of the Company's long-term strategy; 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 2002. Reference is made to Item 7A in the Annual Report on Form
10-K for the year ended September 30, 2001.
26
SYSTEMS & COMPUTER TECHNOLOGY CORPORATION AND SUBSIDIARIES
PART II
Item 1. Legal Proceedings
The Company from time to time is involved in 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 (a). Exhibits
Exhibit 10.1 Tenth Amendment and Modification to Credit Agreement
dated as of May 31, 2002, among Systems & Computer
Technology Corporation and SCT Software & Resource
Management Corporation as Borrowers and Citizens Bank
of Pennsylvania, successor to Mellon Bank, N.A.
Exhibit 10.2 Form of Transaction Bonus Agreement.
Exhibit 99.1 Certification of Chief Executive Officer pursuant to
18 U.S.C. Section 1350, as adopted pursuant to Section
906 of the Sarbanes Oxley Act of 2002.
Exhibit 99.2 Certification of Chief Financial Officer pursuant to
18 U.S.C. Section 1350, as adopted pursuant to Section
906 of the Sarbanes Oxley Act of 2002.
Item 6 (b). Reports on Form 8-K
On June 6, 2002, the Company filed a Current Report on Form 8-K announcing that
on May 31, 2002, pursuant to an Asset Purchase Agreement dated April 10, 2002,
as amended, (the "Purchase Agreement") the Company consummated the sale of its
Global Manufacturing & Distribution Solutions business (the "Business") to
Agilisys International Limited (the "Purchaser") and its affiliated companies.
The Company agreed to sell substantially all of the assets of the business for
$13.2 million in cash, subject to adjustment in certain circumstances. Due to
such adjustments, which principally related to the collection of receivables by
the Company, the net proceeds received by the Company were $10.5 million. The
proceeds are subject to further adjustment based upon the preparation of a
closing date balance sheet. Pursuant to the Royalty Agreement entered into by
the Company and the Purchaser in connection with the sale of the business, the
Company may receive up to an additional $3.0 million based upon the Business
achieving certain specified net sales targets for each of the three years
following the execution of the Purchase Agreement. The aggregate amount of
consideration was determined by arms-length negotiations between the Company and
Purchaser. In connection with the Purchase Agreement, the Company entered into a
Non-Competition Agreement with the Purchaser and agreed not to engage, for a
period of four years following the execution of the Non-Competition Agreement,
in any business which, subject to certain exceptions, competes with the
Business. Pursuant to the Non-Competition Agreement, for a period of two years
following the execution of the Non-Competition Agreement, neither the Company
nor the Purchaser, nor any of their respective affiliates, may induce or attempt
to induce any employee of the other party to leave the employ of the other party
or hire or solicit employment from the employees of the other party.
Additionally, the Company has agreed, subject to certain exceptions, to withhold
from disclosure any non-public information regarding the Business.
27
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: 08/14/02 /s/ Eric Haskell
--------------------------------
Eric Haskell
Senior Vice President, Finance & Administration,
Treasurer, and Chief Financial Officer
28