Back to GetFilings.com
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended September 30, 1996 Commission File No. 0-11521
SYSTEMS & COMPUTER TECHNOLOGY CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 23-1701520
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
4 Country View Road
Malvern, Pennsylvania 19355
(Address of principal executive offices)
Registrant's telephone number, including area code: (610) 647-5930
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
6 1/4% Convertible Subordinated Debentures Due 2003
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 by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. [ ]
State the aggregate market value of the voting stock held by non-affiliates of
the registrant. The aggregate market value shall be computed by reference to
the price at which the stock was sold, or the average bid and asked prices of
such stock, as of a specified date within 60 days prior to the date of filing.
$227,594,109 at December 19, 1996
Indicate the number of shares outstanding of each of the registrant's classes
of common stock, as of the latest practicable date.
14,120,787 shares at December 19, 1996
DOCUMENTS INCORPORATED BY REFERENCE
Registrant's Definitive Proxy Statement to be delivered to shareholders in
connection with the Annual Meeting of Shareholders scheduled to be held on
February 28, 1997 is incorporated by reference to the extent provided in Part
III, Items 10-13.
TABLE OF CONTENTS
Page
Item Number and Caption Number
PART I
Item 1. Business
Item 2. Properties
Item 3. Legal Proceedings
Item 4. Submission of Matters to a Vote of Security Holders
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters
Item 6. Selected Financial Data
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operation
Item 8. Financial Statements and Supplementary Data
Item 9. Changes in and Disagreements With Accountants on
Accounting and Financial Disclosure
PART III
Item 10. Directors and Executive Officers of the Registrant
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners
and Management
Item 13. Certain Relationships and Related Transactions
PART IV
Item 14. Exhibits, Financial Statement Schedules and
Reports on Form 8-K
PART I
ITEM 1. BUSINESS.
Systems & Computer Technology Corporation ("SCT" or the "Company"),
incorporated in Delaware in 1968, provides information technology services and
administrative application software in the higher education, local government,
utilities, and manufacturing/distribution markets.
The Company's software and services allow clients to improve the quality
and reliability of support services and reduce or contain costs. The Company
focuses on specific vertical markets enabling it to understand more fully
client requirements and to provide solutions which directly address their
needs. In addition, by providing both information technology services and
administrative application software, the Company makes available to its
clients the technology and the management tools necessary to manage
information resources efficiently and cost-effectively.
BANNER(R) and SCT(R) are registered trademarks of the Company and
BANNERQuest(TM), BANNER2000(TM), BANNER Object: Access(TM), IA-Plus(TM) and
ADAGE(TM) are trademarks of the Company. All other trade names referenced
herein are the service marks, trademarks or registered trademarks of their
respective companies or organizations.
Markets
In fiscal year 1996, approximately 52% of the Company's revenues was
derived from the higher education market, approximately 25% was derived from
the local government market, approximately 18% was derived from the utility
market, and approximately 5% was derived from the manufacturing/distribution
market. The Company's foreign operations represented approximately 8% of the
Company's fiscal year 1996 revenues.
Higher Education
The Company provides information technology services and application
software to higher education institutions. SCT has extensive functional and
technical expertise in the information technology needs of the higher
education market and regularly develops new products to serve this
marketplace.
There are approximately 2,200 U.S. institutions of higher education with
enrollments greater than 2,000 students. These institutions, of which
approximately 1,400 are public and 800 are private, represent the Company's
primary educational target market. Many of these targeted customers are
currently using computer systems which are likely prospects for replacement,
as they are less cost effective and require a higher level of maintenance than
systems that the Company provides. The Company also targets institutions of
this nature in Canada, Mexico, Australia and other areas of the world. The
Company serves this market with a comprehensive set of its BANNER and IA-Plus
application software products and SCT's OnSite services. Approximately 500 of
these institutions are potential candidates for SCT's OnSite services.
Local Government
The information technology services and application software markets for
local government jurisdictions are highly fragmented, with many competitors,
including in-house computing departments of local governments, custom software
programmers and packaged application software companies. Local governments,
which are conservative in their decisions regarding capital expenditures and
long-term contracts, are influenced by the acceptance by other local
governments of a particular company's product or service. The Company serves
its target market - approximately 1,000 local government entities - with a
comprehensive set of its BANNER application software products and SCT's OnSite
services.
Utilities
The Company provides administrative application software, and services
to the utility market. SCT's target market includes approximately 1,000
water, gas and electric utilities. Many of these target customers currently
use custom-designed or internally-developed software running on proprietary
systems which are likely prospects for replacement.
Manufacturing/Distribution
The Company entered the Enterprise Resource Planning ("ERP") market
through its June 1995 acquisition of Adage Systems International, Inc. The
Company serves this market, which has proved to be receptive to client/server
technology, with its newly developed ADAGE product. This market essentially
consists of two components: discrete (such as metals, industrial equipment,
electronics, automotive, defense, aerospace) and process (such as chemicals,
food and beverage, petroleum, pharmaceutical, pulp and paper). SCT targets
the approximately 8,400 businesses in the process manufacturing and
distribution industries with over $100 million in annual revenues.
Services and Products
The Company's revenues are derived from several sources: OnSite services,
software licenses, software services, and maintenance and enhancements.
OnSite Services
SCT provides OnSite services, a variety of information technology
services designed to assume total or partial control and responsibility of its
clients' information resources, generally on a long-term basis. SCT provides
management, staffing and support with skilled information systems personnel
and industry specialists who are knowledgeable in both computer-based
technologies and the functional aspects of its client's activities. SCT
personnel located at a client's site become an integral part of the client's
operations, working with managers and users at all levels as a focal point for
information systems activity. SCT site personnel also draw upon SCT's staff of
specialists to address special issues and projects. SCT can manage, staff and
support most aspects of a client's information systems and operations,
including data center management and operations, disaster recovery, short-term
and long-range planning, user liaison and functional consulting, technical
support services, application and systems software support, office automation,
microcomputer maintenance, systems integration, and telecommunications
services and network integration.
Contracts for OnSite services may be either on a fixed price or time and
materials basis, and generally cover an initial period of five to ten years.
Fixed price contracts require the Company to perform specified services for a
fixed payment, generally subject to annual adjustments to reflect inflationary
cost increases. The Company negotiates the fee to be charged based on its
estimate of the total expenses to be incurred in providing the services. In
the event the Company's costs to perform an OnSite services contract become
greater than originally anticipated, the Company's profit on that contract
would be reduced; and in an extreme case, the Company could suffer a loss. As
many clients are restricted from incurring binding commitments which extend
beyond their current annual budgets or appropriations, contracts often include
a "fiscal funding" provision which provides for the reduction or termination
of services commensurate with reductions in a client's allocated funding. The
Company has not been impacted materially by early terminations or reductions
in service from the use of fiscal funding provisions.
Software Licenses
The Company develops and licenses standardized administrative application
software designed to serve the specialized needs of its higher education,
local government, utility, and manufacturing/distribution markets.
BANNER. BANNER is a comprehensive series of administrative software
systems, combining object-based approaches, rule-based architecture, hardware
flexibility, fourth generation language and ORACLE, the relational database
management system of Oracle Corporation. BANNER operates on a variety of
hardware platforms and supports true client/server computing on PCs and
Macintoshes and also supports host terminals simultaneously. Rule-based
architecture permits clients to adapt the software more easily to their
particular business requirements with less programming modifications.
The Company offers a multitude of BANNER systems to the higher education
market, including Student, Financial Aid, Finance, Human Resources,
Alumni/Development and Strategic Enrollment Management systems, EDI.Smart
electronic imaging and document management/delivery software, and information
access solutions such as voice response, kiosk gateway, and BANNERQuest. In
fiscal 1996 SCT introduced BANNER Web for Students, which enables students to
access and update as appropriate their personal information through a familiar
medium, the World Wide Web. Students can check the availability of courses,
build a schedule and register on line; apply for financial aid; apply for
admissions, and determine admission status. Information about their grades,
schedules and transcripts is available and they can query the system about
their account balances and addresses. In fiscal 1996 SCT also introduced
BANNER Object: Access. Coupled with application-independent business logic,
object-based approaches underlie BANNER Object: Access, which groups
ODBC-compliant information into functional categories to make reporting and
other access, regardless of presentation service or access strategy, fast and
consistent.
The Company offers a multitude of BANNER systems to the government
market, including Finance, Human Resources, Courts Case Management, Real
Property Tax, Personal Property Tax, Occupational Tax & License, Records
Indexing and Cash Receipts systems, and information access solutions such as
BANNER Object: Access and BANNERQuest. In fiscal 1996 SCT began delivering
remote access capability for its BANNER Records Indexing system, allowing
remote access functionality through the World Wide Web so that pre-approved
title companies, attorneys and others can perform title searches from a
convenient location. BANNER systems which the Company offers to the utility
market include Customer Information, Finance, Human Resources, Electronic Work
Queue, Customer Contact and Inventory Management, Procurement, and Fuels
Management systems.
The Company currently has an agreement with Oracle Corporation allowing
the Company to sublicense a limited use ORACLE system, which enables a client
to use ORACLE with BANNER at a significantly lower cost than a full-use ORACLE
license. The agreement expires in February 1999. The Company's results of
operations would be adversely affected if ORACLE's market acceptance declined
or its customer base eroded.
IA-Plus. Like BANNER, IA-Plus is a comprehensive series of application
software systems designed to meet the administrative computing needs of the
higher education market. The IA-Plus systems operate on large-scale IBM and
DEC computers using proprietary operating systems and were modified in fiscal
1996 to operate as well on downsized versions of this type of equipment, such
as the IBM RS 6000 and DEC AXP platforms.
The IA-Plus Series of application software consists of five
administrative application software systems geared for the higher education
market. The voice response and kiosk gateway information access solutions are
also available with IA-Plus. On the IBM mainframe platform, IA-Plus can
utilize DB2 and DB2/6000, IBM's relational database software products. During
fiscal 1996, the Company introduced a graphical user interface to IA-Plus
using Powerbuilder (VISAGE: Plus), and World Wide Web access for IA-Plus.
ADAGE. ADAGE is a newly developed object-based, graphical Enterprise
Resource Planning ("ERP") system which combines multi-site functionality with
client/server technology. The ADAGE product employs a business process-based
approach that focuses on configuring objects and business rules as process
flows - rather than traditional software menus - to support key business
processes across the supply chains. ADAGE is designed to enable large
multi-site manufacturers to integrate critical business functions across
business units, providing greater visibility and control over operations as
well as enhanced planning and decision support. The flexibility of the system
is achieved through the use of state-of-the-art tools that enable the user to
build job-specific workflows which can include desktop integration and other
productivity enhancing features that enable a user to manage its business more
proactively. ADAGE supports multiple relational databases and the UNIX and
Windows NT operating systems.
Software Services
The Company provides support services to its licensees, including
implementation, modification, user training, and consulting services. When
obtaining a license to use SCT's application software, clients typically
purchase specified initial services, such as installation, training and other
client support activities. The Company also provides systems integration
services in connection with the implementation of the Company's application
software to large utilities. These services provide clients with the
opportunity to unite diverse technical components to more effectively and
efficiently solve their business problems through the application of
technology, customized software development and networks.
Contracts for software services may be either on a fixed price or time
and materials basis. Fixed price contracts require the Company to perform
specified services for a fixed payment. The Company negotiates the fee to be
charged based on its estimate of the total expenses to be incurred in
providing the services. In the event the Company's costs to perform a software
services contract become greater than originally anticipated, the Company's
profit on that contract would be reduced; and in an extreme case, the Company
could suffer a loss.
Maintenance and Enhancements
In addition to a license of the Company's application software, clients
typically enter into a maintenance agreement with the Company, usually for
terms ranging from one to seven years, which entitles the client to service
and support, regulatory updates and functional and technical enhancements.
The annual maintenance fee generally ranges from 12% to 15% of the license
fee, and generally increases each year by a specified percentage.
Product Development
SCT devotes substantial resources to product development in order to
address evolving client's needs and provide new product offerings. The product
development staff is comprised of experts in various functional areas.
Technical experts include specialists in object technology, systems software,
operating systems, and relational databases. Product development
expenditures, including expenditures for software maintenance, for the fiscal
years ended September 30, 1994, 1995 and 1996 were approximately $8.8 million,
$12.9 million, and $21.2 million, respectively. After capitalization
approximately $7.4 million, $9.5 million, and $14.8 million, respectively, of
these amounts were charged to operations as incurred. For the same fiscal
years, amortization of capitalized software costs amounted to approximately
$889,000, $871,000, and $1,458,000, respectively.
SCT recently established the SCT Object Technology Center (the "OTC") to
focus on the development of innovative approaches to delivering high quality
products that require less end user training and reduce development and
maintenance costs. In addition to research and development efforts focused on
technical innovation, the OTC intends to evaluate solutions that consider "best
practices" for the markets served by the Company. Through the OTC, SCT intends
to continue to investigate and deploy object methodology, standards and tools
and to monitor software industry standards in order to refine Company solution
architectures.
Several divisions of the Company have already developed and introduced
object-oriented technologies. Object technology and object based approaches
have enabled SCT to configure the ADAGE product around the core business
processes of key vertical industries. BANNER Object: Access allows
standardized business logic for administrative applications in the higher
education and government markets, is the technology basis for SCT's BANNER Web
products and the Strategic Enrollment Management product, and is expected to
be used more extensively in BANNER2000. The BANNER Records Indexing product
uses object technology to allow remote access functionality through the World
Wide Web so that pre-approved title companies, attorneys and others can
perform title searches from a convenient location.
SCT currently has several projects in the development stage. BANNER2000
will be designed as a net-centric, object-based, client/server, enterprise
wide solution for institutions of higher education using business processes
and workflow and an enhanced graphical presentation service. BANNER2000 will
incorporate object based approaches for Web-enabled processes, enabling
institutions to decentralize updating and inquiry yet maintain centralized
control of information and access. Banner2000 will support a full range of
higher education business processes, such as Forecast to Enroll through
Matriculate to Educate, Plan to Fund and Manage the Enterprise. Using SCT's
Banner Object: Access, Banner2000 will use the concepts of reusability so that
development time and maintenance costs are reduced while consistency, quality
and flexibility are increased, resulting in a lower cost of ownership for SCT
clients. The Company expects to deliver the initial release of BANNER2000 in
late fiscal 1997.
BANNER Web for Faculty & Advisors, BANNER Web for Employees, IA Plus Web
for Faculty & Advisors and IA Plus Web for Employees are all expected to be
released during fiscal 1997, complementing the BANNER Web for Students and IA
Plus Web for Students products released during fiscal 1996. Using a Web
browser on a desktop computer for an internet, intranet, or extranet
application, colleges and universities can give secure information access to
their constituents -- students, faculty, and staff. Faculty can manage course
information and advise students, easing the burden on the registrar's office.
Applicants can post for positions and employees can view career and pay
history, enroll in benefits and update personal data without making demands on
staff for routine inquiries.
The Company is also investing in the development of a commercial distance
learning product to address the administrative aspects of education in the
non-traditional classroom.
For the manufacturing/distribution market, the Company is developing
enhancements to its existing ADAGE software. For the government market, the
Company is developing extensions to the Courts Case Management System.
Currently under development for the utilities market are new BANNER
applications for Work Management and accrual-based Finance, as well as
enhanced versions of the Inventory Management, Procurement and Fuels
Management systems.
The Company's ability to sustain growth depends in part on the timely
development or acquisition of successful new products and improvements to
existing products. However, software development is a complex and creative
process that can be difficult to accurately schedule and predict.
Sales and Marketing
The Company attracts clients primarily through the following means: its
own sales force of approximately 77 direct salespersons and support staff, of
which approximately 62 are engaged in selling software licenses and related
services and approximately 15 are engaged in selling the Companys OnSite
services; referrals from existing clients and others; and active participation
in industry conferences, trade shows and seminars within its markets. In the
higher education and manufacturing and distribution markets, the Company
utilizes distributors in certain international markets. The Company also
engages in cooperative marketing efforts with other hardware and software
suppliers, and advertises in trade journals and publications.
The sales cycle for the Company's software and services typically ranges
from six to 24 months and involves product demonstrations and site visits.
Contracts are often offered by means of a public bidding procedure, certain of
which require the Company to appear at public hearings.
Although the Company's divisions have separate sales organizations, each
focuses on cross selling opportunities to market the products and services of
the other. Each sales group is comprised of regional salespersons, industry
specialists and corporate and client based technical specialists.
Competition
In each of its markets, SCT has able competitors, which differ depending
upon the characteristics of the customer including its size, geographic
location, and computing environment. Many established competitors have
greater marketing, technical and financial resources than the Company, and
there can be no assurance that SCT will be able to continue to compete
successfully with existing or new competitors.
In the OnSite services business, the Company competes with several large
providers of services, including International Business Machines Corporation
("IBM"), Electronic Data Systems Corporation ("EDS"), and Business Records
Corporation. In the software services business, the Company competes with
several large providers of systems integration services, including IBM, EDS,
Andersen Consulting, and the Big Six accounting firms, as well as smaller
providers of software consulting services. The Company also competes with
in-house information management and resource development staffs at potential
customer sites. Competitive factors in these businesses include the technical
expertise of on-site and support personnel, functional and industry-specific
expertise, availability and quality of hardware and software support,
experience, reputation and price.
In the application software business, the Company competes with other
providers of packaged application software and companies offering to develop
custom software. Competition also varies by vertical market. Within the
higher education market, the Company's principal competitors are PeopleSoft,
Inc. and Datatel. Other competitors include Oracle Corporation and Buzzeo,
Inc. The local government and utility markets are highly fragmented and
competition varies significantly within these markets depending upon the
customers' computing platforms. Competitors in the local government market
include PeopleSoft, Oracle, Bitech Software, Inc., KPMG, The Computer Center,
Inc. and Ross Systems, Inc. in Finance and Human Resources, Aquidneck
Management Associates, Inc. and Progressive Solutions, Inc. in Courts,
Perceptics Corporation and Eagle Computer Systems, Inc. in Records Indexing,
and Eagle and Cole Layer Trumble in Property Tax. Competitors in the
utilities market include Severn Trent, ORCOM, IBM and Andersen Consulting.
The manufacturing/distribution market is highly competitive and competitors
include SAP, PeopleSoft, Baan, Datalogix International, Inc., Marcam Corp,
Oracle, Systems Software Associates, Ross and qad Systems. Competitive
factors in all the software markets served by the Company include
price/performance, technology, functionality, portability, software support,
and the level of market acceptance of the competitor's products.
Backlog
At September 30, 1996, the revenues expected to be received by SCT under
OnSite services contracts, which are based on proposed budgeted amounts in
those contracts, and under software license and services agreements, including
systems integration, enhancements, maintenance, support services, and software
implementation, modification and training, amount to approximately $413
million as compared to approximately $375 million at September 30, 1995 and
extend through June 30, 2005. Of the $413 million, approximately $125 million
is expected to be recognized in fiscal 1997. Approximately $271 million of
the $413 million applies to OnSite services contracts. These figures include,
in connection with OnSite services contracts, any guaranteed minimum price
increases provided in the contracts.
SCT is unable to predict the impact, if any, on its future revenues that
may result from reductions in the budgets of educational institutions and
government jurisdictions. Any such reductions could impact new contracts as
well as existing contracts. Certain educational institutions and government
jurisdictions cannot contractually commit beyond the fiscal year for which
their budgets have been approved. For this reason, their contracts with SCT
usually contain a "fiscal funding" clause which provides that if there is a
reduction in the computing services budget, the level of SCT services will be
reduced accordingly, or terminated in certain circumstances. If there is a
substantial reduction in the budget, SCT may, at its option, terminate the
contract or reduce service levels consistent with funding. The backlog at
September 30, 1996 includes approximately $160 million of OnSite services
contracts with fiscal funding clauses.
Backlog is not necessarily indicative of actual revenues for any
succeeding period.
Proprietary Software Protection
SCT's software is proprietary and SCT relies primarily upon copyright,
trade secret laws and internal non-disclosure safeguards generally
incorporated in its software license agreements to protect its software.
There can be no assurance that such protection will be effective. In
addition, other holders of patents and copyrights may assert claims of
infringement with respect to the Company's products. To date, SCT is not aware
of any material breach in the security of its products or any claims of
infringement asserted against it.
Employees
As of September 30, 1996, the Company employed approximately 2,200
employees, of which approximately 570 are resident in Malvern, Pennsylvania,
with the remainder resident primarily at the Company's various offices and
client sites. None of the Company's employees are subject to collective
bargaining agreements, except for approximately 10 employees at one client
site. The Company considers its relationship with its employees to be
satisfactory.
When the Company receives a new OnSite services contract, it generally
recruits most of the existing employees of the client's data processing
department to become SCT employees. However, the Company also supplies some
senior level personnel from its own group of trained specialists, which
requires the Company to identify employees willing to relocate to the client's
area.
Executive Officers of SCT
The Executive Officers of SCT are as follows:
Position and Office
Name Age Currently Held
- ---------------------- ------ ------------------------------------------
Michael J. Emmi 54 Chairman of the Board, President and
Chief Executive Officer; Director
Michael D. Chamberlain 52 Senior Vice President; President, SCT
Software Group; Director
Eric Haskell 50 Senior Vice President, Finance and
Administration, Treasurer, and Chief
Financial Officer
Richard A. Blumenthal 48 Senior Vice President, General
Counsel and Secretary
Susan R. Sheridan 43 Senior Vice President, Corporate
Marketing and Organizational Strategy
Officers are appointed by the Board of Directors, typically at its first
meeting after the annual meeting of shareholders for such terms as the Board
of Directors shall determine or until their successors have been elected and
have qualified.
Business Experience During the Past Five Years of Each Officer
Michael J. Emmi has served as Chairman of the Board, President and Chief
Executive Officer of the Company since May 1985. Prior thereto, he held
various senior management positions with General Electric Information Services
Company, a unit of General Electric Company. He is also a director of
National Media Corporation and CompuCom Systems, Inc.
Michael D. Chamberlain has served as a director of the Company since July
1989. He has served as Senior Vice President of the Company since July 1990,
and prior thereto, as Vice President since September 1986. He has been
President of the SCT Software Group since May, 1994 and prior thereto served
as President of the Software and Technology Services Division, the Company's
higher education software division.
Eric Haskell has served as Senior Vice President, Finance and
Administration, Treasurer and Chief Financial Officer of the Company since
July 1990, and prior thereto, as Vice President, Finance and Administration,
Treasurer and Chief Financial Officer since March 1989.
Richard A. Blumenthal has served as Senior Vice President, General
Counsel and Secretary of the Company since July 1990, and prior thereto, as
Vice President, General Counsel and Secretary since July 1987. He has been
General Counsel of the Company since December 1985.
Susan R. Sheridan has served as Senior Vice President, Corporate
Marketing and Organizational Strategy since September 1996. Prior thereto,
she served as Vice President, Human Resources and Organizational Strategy
since May, 1994 and in various marketing positions in the Software and
Technology Services Division, the Company's higher education software division,
since May, 1984, including Vice President, Marketing for that division since
July 1990.
ITEM 2. PROPERTIES.
SCT occupies three adjacent buildings in the Great Valley Corporate
Center in Malvern, Pennsylvania. The Company's corporate offices are located
in an approximately 47,000 square-foot facility owned by the Company, which
also includes employees of other divisions of the Company. The Company also
owns an approximately 56,200 square-foot facility and leases an approximately
48,900 square-foot facility under a lease which expires on August 15, 2005.
The Company owns and occupies an approximately 45,000 square-foot
facility in Rochester, New York. The Company leases an approximately 28,600
square-foot facility in Lexington, Kentucky under a lease which expires on
March 31, 1999. The Company owns an approximately 60,000 square-foot facility
in Columbia, South Carolina, of which about 40,000 square feet is occupied and
fitted. SCT leases sales offices in Irvine, California, San Diego,
California, Reston, Virginia, and Dallas, Texas and also leases office space
in Basingstoke, England and Manchester, England.
SCT believes that its facilities are adequate for its present business
needs.
ITEM 3. LEGAL PROCEEDINGS.
On October 4, 1995, John J. Wallace filed a purported class action
lawsuit in the United States District Court for the Eastern District of
Pennsylvania against the Company, Michael J. Emmi, Chairman of the Board,
President and Chief Executive Officer of the Company, Michael D. Chamberlain,
Senior Vice President and a director of the Company and Eric Haskell, Senior
Vice President, Finance and Administration, Treasurer and Chief Financial
Officer of the Company. The plaintiff filed an amended complaint on November
28, 1995. The amended complaint alleges that the defendants violated sections
10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5
promulgated thereunder by making misstatements and omissions regarding the
Company's financial performance in the second half of fiscal year 1995. The
class period alleged is from June 5, 1995 through October 2, 1995. The
amended complaint seeks damages in unspecified amounts as well as equitable
relief.
In April 1996, the Companys Motion to Dismiss the Amended Complaint was
granted in part and denied in part.
Management believes the claims remaining in the amended complaint are
without merit and intends to contest the remaining allegations vigorously.
While management, based on its investigation to date, believes that resolution
of this action will not have a materially adverse effect on the Company's
consolidated financial position, the ultimate outcome of this matter cannot be
presently determined.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS.
SCT's Common Stock is traded on The Nasdaq Stock Market under the symbol
"SCTC." The following table sets forth the high and low sale prices on The
Nasdaq Stock Market for the specified quarter.
Period
Year ended September 30, 1996
High Low
-----------------------------
1st Quarter 27 16 7/8
2nd Quarter 20 1/4 13 1/2
3rd Quarter 18 1/4 10 3/4
4th Quarter 15 3/4 11 1/2
Year ended September 30, 1995
High Low
-----------------------------
1st Quarter 21 16 3/4
2nd Quarter 21 1/4 15 7/8
3rd Quarter 21 5/8 15 3/4
4th Quarter 29 5/8 19 5/8
The approximate number of stockholders of record of SCT's Common Stock as of
September 30, 1996 was 539.
SCT has not paid any dividends for more than the last three fiscal years. The
Company's revolving credit agreement prohibits the Company from declaring or
paying any dividends other than stock dividends.
ITEM 6. SELECTED FINANCIAL DATA.
Selected Financial Data
(dollars in thousands, except per share amounts)
Year Ended September 30,
--------------------------------------------------------
1996 1995* 1994** 1993 1992*
--------------------------------------------------------
Revenues $215,258 $176,148 $148,214 $120,168 $90,883
Income (Loss) Before Income Taxes
and Extraordinary Credit 16,003 10,316 17,794 11,223 (1,647)
--------------------------------------------------------
Provision for Income Taxes 6,884 7,258 6,148 4,511 803
--------------------------------------------------------
Income (Loss) Before Extraordinary Credit 9,119 3,058 11,646 6,712 (2,450)
--------------------------------------------------------
Extraordinary Credit: Net Operating
Loss Carryforwards -- -- -- 2,901 180
--------------------------------------------------------
Net Income (Loss) 9,119 3,058 11,646 9,613 (2,270)
--------------------------------------------------------
Primary Income (Loss) per Share
Before Extraordinary Credit 0.62 0.22 0.86 0.53 (0.21)
--------------------------------------------------------
Fully Diluted Income per Share
Before Extraordinary Credit 0.61 0.21 0.83 0.51 --
--------------------------------------------------------
Primary Net Income (Loss) per Share 0.62 0.22 0.86 0.75 (0.19)
--------------------------------------------------------
Fully Diluted Net Income per Share 0.61 0.21 0.83 0.74 --
--------------------------------------------------------
Primary Average Equivalent Shares Outstanding 14,696 14,030 13,517 12,780 11,848
--------------------------------------------------------
Fully Diluted Average Equivalent Shares
Outstanding 16,781 14,399 15,818 13,196 --
--------------------------------------------------------
Working Capital 67,389 63,555 59,239 50,432 20,159
--------------------------------------------------------
Total Assets 163,259 150,983 128,809 110,082 72,487
--------------------------------------------------------
Long-Term Debt 31,590 31,790 34,500 34,500 12,610
--------------------------------------------------------
Stockholders' Equity 96,796 85,565 65,481 51,282 40,674
--------------------------------------------------------
*Includes charges of $8,700 and $7,693 for purchased research and development in the years ended
September 30, 1995 and 1992, respectively.
Results without the charge for purchased research and development would have been:
1995 1992
-------------------
Income before extraordinary credit $11,758 $3,628
Fully diluted income per share
before extraordinary credit $0.80 $0.29
**Effective October 1, 1993, the Company adopted FAS 109,"Accounting for Income Taxes," with an
immaterial cumulative effect.
Prior to 1994, the benefits of net operating loss and tax credit carryforwards were
classified as extraordinary credits.
ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATION.
Management's Discussion and Analysis
The purpose of this section is to give interpretive guidance to the
reader of the financial statements. For specific policies and breakdowns,
refer to the consolidated financial statements and disclosures.
Overview
Systems & Computer Technology Corporation (the Company) provides
administrative client/server application software and computing management
services. The Company's client/server software applications enable higher
education institutions, local government jurisdictions, public and private
utilities, and manufacturing and distribution enterprises to better manage
their administrative functions such as student registration, accounting and
finance, customer services, and production scheduling. Maintenance and
enhancement contracts allow customers access to customer support services and
user group meetings as well as software enhancements. Services revenues are
derived from a variety of professional support services, which include systems
implementation and support, consulting and education services, and information
systems planning and integration. Strategic acquisitions in recent years have
added to the Company's revenues and growth opportunities.
Results of Operations
The following table sets forth: (a) income statement items as a
percentage of total revenues and (b) for revenues, the percentage change for
each item from the prior year.
% of Total Revenues % Change from
Prior Year
Year Ended September 30,
-------------------------------------------
1996 1995 1994 1996 1995
-------------------------------------------
Revenues:
OnSite services 39% 38% 43% 26% 5%
Software sales 22% 23% 24% 16% 17%
Maintenance and
enhancements 20% 20% 20% 20% 16%
Software services 19% 18% 12% 31% 74%
Interest and other
revenue 0% 1% 1% (67)% 67%
Total 100% 100% 100% 22% 19%
Expenses:
Cost of services, sales,
and maintenance
and enhancements 67% 63% 62%
Selling, general and
administrative 25% 25% 24%
Charge for purchased
research and
development 0% 5% 0%
Interest expense 1% 2% 2%
Income before
income taxes 7% 6% 12%
-------------------------------------------
The following table sets forth the gross profit for each of the following
revenue categories as a percentage of revenue for each such category and the
total gross profit as a percentage of total revenue (excluding interest and
other revenue). The Company does not separately present the cost of
maintenance and enhancements revenue as it is impracticable to separate such
cost from the cost of software sales.
Year Ended September 30,
------------------------
1996 1995 1994
------------------------
Gross Profit:
OnSite services 19% 22% 22%
Software sales and
maintenance and
enhancements 57% 56% 58%
Software services 12% 19% 20%
------------------------
Total 33% 36% 38%
------------------------
Revenues: Growth in OnSite services revenues is impacted by large
contract signings. The 26% and 5% increases in OnSite services revenues in the
years ended September 30, 1996 and 1995, respectively, are the result of
several new agreements, including a five-year agreement with Continental
Cablevision, Inc., which commenced in January 1995 and was expanded with
contract add-ons, and an agreement with the City of Indianapolis/Marion
County, which commenced in December 1995. The agreement with the City of
Indianapolis (the City) will provide annual revenues of up to $11.5 million
for up to seven years from the start of the contract. The City has the option
to cancel the agreement after three years from the start of the contract. In
the event of such a contract cancellation, the City will be obligated to pay a
termination fee such that the Company will incur no loss. Contract renewal
rates, as a percentage of annual revenue from contracts available for renewal,
for the fiscal years 1996, 1995, and 1994, were 88%, 97%, and 89%,
respectively. Contracts available for renewal in a particular period include
contracts with expiration dates within the period, as well as contracts
renewed during that period which have expiration dates in a later period.
Software sales increased 16% in fiscal year 1996 compared with fiscal
year 1995 due primarily to increased licenses of ADAGE Enterprise Resource
Planning (ERP) software. ADAGE is developed by the manufacturing and
distribution business of SCT. Additionally, licenses of BANNER to the
utilities and local government markets increased in fiscal year 1996 compared
with the prior year. The 17% increase in software sales in fiscal year 1995 is
attributable to increases in licenses of BANNER to the global higher education
and utilities markets.
The 20% and 16% increases in maintenance and enhancements revenues in
fiscal years 1996 and 1995 are the result of continued high annual renewal
rates and the growing installed base of clients, primarily in the higher
education market.
Software services revenue has increased 31% in fiscal year 1996 compared
with fiscal year 1995 primarily as the result of increases in BANNER
implementation and support services to the higher education market and
implementations of the ADAGE ERP software. Also adding to the increase in
software services revenue is the continued growth of systems integration
services provided to the international utilities market. The 74% increase in
software services revenue in fiscal year 1995 compared with the prior period
is due primarily to growth of systems integration services provided to the
international utilities market.
Gross Profit: Gross profit decreased as a percentage of total revenue
(excluding interest and other revenue) from 36% to 33% for fiscal year 1996.
The decreased gross profit in OnSite services is the result of lower margins
on new contract signings compared with older contracts. The decreases in
software services gross profit were primarily the result of the increased cost
of services required to satisfy certain contract obligations relating to the
BANNER Customer Information System (CIS) product in the utility business, as
well as increased expenditures associated with the manufacturing and
distribution business acquired in June 1995. The Company is increasing its
focus on software services, including software installation and systems
integration services in each of its markets, which have historically resulted
in a decreased profit margin when compared to a revenue mix with a higher
percentage of license fees.
The decrease in total gross profit as a percentage of total revenue
(excluding interest and other revenue) from 38% in fiscal year 1994 to 36% in
fiscal year 1995 resulted from a change in revenue mix. The percentage of
software services revenues to the international utilities market increased
relative to license fees during the period.
The decrease in interest and other revenue in fiscal year 1996 is
primarily attributable to a decreased short-term investment portfolio compared
with the prior year.
Contract Loss Provision: In the quarter ended March 31, 1996, the Company
recorded a contract loss provision of $1.2 million to reflect the cost of
satisfying certain obligations relating to the BANNER Customer Information
System product for U.S. utilities. The aforementioned charge was principally
for one U.S. client to cover the estimated cost of remaining obligations in
excess of unrecognized revenue. As of September 30, 1996, $400,000 of the
reserve is remaining. Management believes that this reserve is adequate to
cover remaining obligations.
Adage Acquisition: In June 1995, the Company acquired Adage Systems
International, Inc. (Adage) for consideration of one million shares of common
stock valued at approximately $10.9 million. Adage offered a newly developed
enterprise resource planning system to multinational users in the
manufacturing and distribution industries. In conjunction with the
acquisition, the Company incurred a charge of $8.7 million for in-process
research and development. Included in this amount were the fair values of
Adage products under development that had not reached technological
feasibility at the time of the acquisition. These products were incorporated
into the June 1996 ADAGE 2.3 ERP software release which had been under
development since September 1995. ADAGE is a graphical ERP solution with a
special emphasis on the process manufacturing and distribution industries. The
software employs a business-process-based approach that focuses on configuring
objects and business rules as process flows to support key business processes
across the supply chain.
Income Taxes: The provision for income taxes for the year ended September
30, 1996 reflects valuation allowances provided with respect to tax loss
carryforwards in various state and international jurisdictions and the
relative impact of non-deductible expenses, offset by the impact of the
reinstatement of the research and development tax credit which had expired
June 30, 1995.
The fiscal year 1995 provision for income taxes does not reflect the
customary relationship between income and tax expense principally due to the
write-off of purchased research and development, which is not deductible for
tax purposes. The fiscal year 1995 effective tax rate would have been 38%
without the write-off of purchased research and development. The rate was
further affected by the expiration of the research and development tax credit
as of June 30, 1995. The purchased research and development write-off had an
impact on both the state effective tax rate and the relationship between
income and the effect of the research and development tax credit.
Foreign Operations: The functional currency is the local currency of the
Company's operating foreign subsidiary. Foreign operations represented
approximately 8% of the Company's consolidated 1996 revenue. The net assets of
the international subsidiary are approximately $7.2 million at September 30,
1996. The Company does not believe its foreign currency exposure is
significant and analyzes the desirability of hedging the exposure on an
ongoing basis.
Seasonality: Certain factors have resulted in quarterly fluctuations in
operating results, including variability of software license fee revenues,
seasonal patterns of capital spending by clients, the timing and receipt of
orders, competition, pricing, new product introductions by the Company or its
competitors, levels of market acceptance for new products, and general
economic and political conditions. While the Company has historically
generated a greater portion of license fees in total revenue in the last two
fiscal quarters, the non-seasonal factors cited above may have a greater
effect than seasonality on the Company's results of operations.
Liquidity, Capital Resources, and Financial Position
The Company's cash and short-term investments balance was $12.3 million
and $15.3 million at September 30, 1996 and 1995, respectively. The short-term
investment portfolio is classified as available-for-sale.
The available cash and short-term investments balances are derived from
continuing operations. Cash provided by operating activities was $14.6 million
for fiscal year 1996 compared with $2.1 million for fiscal year 1995. The
increase in cash provided by operations reflects the increase in net income
for fiscal year 1996 compared with the prior-year period. In addition,
September 30, 1996 accounts receivable balances increased by a smaller
percentage than prior year-to-year increases. This reflects the Company's
increased attention to cash collections and improved payment terms. The
increase in accounts receivable at September 30, 1996 is due to increases in
revenues and the timing of billings on the Company's services contracts and
software licenses.
The Company provides OnSite services and software-related services,
including systems implementation and integration services. Contract fees from
OnSite services are typically based on multiyear contracts ranging from five
to 10 years and provide a recurring revenue stream throughout the term of the
contract. Software services contracts generally have shorter terms than OnSite
services contracts, and billings are often milestone based. During the
beginning of a typical OnSite services contract, services are performed and
expenses are incurred by the Company at a greater rate than in the later part
of the contract. Billings usually remain constant during the term of the
contract and, in some cases, when a contract term is extended, the billing
period is also extended over the new life of the contract. Revenue is usually
recognized as work is performed. The resulting excess of revenues over
billings is reflected on the Company's Consolidated Balance Sheet as unbilled
accounts receivable. As an OnSite services contract proceeds, services are
performed and expenses are incurred at a lesser rate, resulting in billings
exceeding revenue recognized, which causes a decrease in the unbilled accounts
receivable, as will the achievement of a milestone in a software services
contract.
The Company's working capital at September 30, 1996 was $67.4 million and
was $63.6 million at September 30, 1995.
Cash used in investing activities was $4.1 million for fiscal year 1996
compared with $9.9 million for fiscal year 1995. The $5.8 million reduction in
the use of cash during fiscal year 1996 was primarily the result of decreases
in capital expenditures on new business infrastructure and new facility
improvements and a reduction of short-term investments in fiscal year 1996.
The primary use of cash during the 1996 period was the capitalization of newly
developed software, the majority of which related to ADAGE ERP software. In
fiscal year 1997, the Company expects the software capitalization rate to
return to a rate more consistent with prior year rates.
The Company's financing activities during fiscal year 1996 consisted
primarily of the borrowing and repayment of the Company's senior revolving
credit facility.
The Company has outstanding $31.3 million of convertible subordinated
debentures bearing interest at 6 1/4% and maturing on September 1, 2003. The
debentures are convertible into common stock of the Company any time prior to
redemption or maturity at a conversion price of $15 per share. The debentures
are redeemable at any time after September 10, 1996 at prices decreasing from
104.2% of the principal amount at September 1, 1996, to par on September 1,
2002.
The Company has a $20 million senior revolving credit facility, available
for general corporate purposes, which expires in June 1998 with optional
annual extensions. At September 30, 1996, there were no borrowings
outstanding. As long as borrowings are outstanding and as a condition
precedent to new borrowings, the Company must comply with certain covenants,
and the Company is prohibited from paying any dividends other than stock
dividends. See Note F to Consolidated Financial Statements.
The Company believes that its cash and cash equivalents, cash provided by
operations, and borrowing arrangements should satisfy its needs for the
foreseeable future.
Primary common shares and equivalents used in the income per share
calculation increased as a result of employee stock option exercises during
the years ending September 30, 1996 and 1995 and, for 1995, by shares issued
for the Adage acquisition. Equivalent shares used in the fully diluted income
per share calculation increased for 1996 primarily as a result of the
inclusion of the increased number of shares that would be outstanding assuming
the conversion of the 6 1/4% convertible subordinated debentures. Fully diluted
equivalent shares decreased for the year ending September 30, 1995 versus 1994
as a result of the anti-dilutive effect of the aforementioned debentures
for 1995.
Contingencies: A purported class action complaint was filed against the
Company and certain of its officers and directors on October 4, 1995. The
plaintiff filed an amended complaint on November 28, 1995. The amended
complaint alleges violations of certain disclosure and related provisions of
the Federal Securities Laws. The amended complaint seeks damages in
unspecified amounts as well as equitable relief. In April 1996 the Company's
motion to dismiss the amended complaint was granted in part and denied in
part. Management believes the claims remaining in the amended complaint are
without merit and intends to contest the remaining allegations vigorously.
While management, based on its investigation to date, believes that resolution
of this action will not have a materially adverse effect on the Company's
consolidated financial position, the ultimate outcome of this matter cannot
presently be determined.
New Accounting Standards: In March 1995, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to Be Disposed Of" (FAS 121). The statement requires impairment losses to be
recorded on long-lived assets used in operations when indicators of impairment
are present and the undiscounted cash flows estimated to be generated by those
assets are less than the assets' carrying amount. FAS 121 also addresses the
accounting for long-lived assets that are expected to be sold or discarded.
The Company will adopt FAS 121 in fiscal year 1997 and, based on current
circumstances, does not believe the effect of adoption will be material.
In October 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-
Based Compensation" (FAS 123), which the Company will adopt in fiscal year
1997. The statement requires that companies with stock-based compensation
plans either recognize compensation expense based on new fair value accounting
methods or continue to apply the provisions of Accounting Principles Board
Opinion 25, "Accounting for Stock Issued to Employees" (APB 25) and disclose
pro forma net income and earnings per share assuming the fair value method had
been applied. The Company anticipates continuing to account for stock-based
compensation under the provisions of APB 25, and, as a result, FAS 123 will
not impact its operating results or financial position.
Miscellaneous: The matters discussed herein and elsewhere that are
forward-looking statements are based on current management expectations that
involve risks and uncertainties which could cause actual results to differ
materially from those anticipated. Potential risks and uncertainties that
could affect the Company's future operating results include, without
limitation, the effect of publicity on demand for the Company's products and
services, general economic conditions, continued market acceptance of the
Company's products and services, the timing of the receipt of software
licenses, the timing of services contracts and renewals, the timing and
complexity of large transactions, continued competitive and pricing pressures
in the marketplace, the Company's ability to develop and market new and
updated products and enhancements cost effectively and on a timely basis, and
the Company's ability to complete fixed-price contracts profitably. The
Company is investing in the development of new products and in improvements to
existing products; however, software development is a complex and creative
process that can be difficult to accurately schedule and predict.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Consolidated Balance Sheets
(dollars in thousands, except per share amounts)
September 30,
--------------------
Assets 1996 1995
--------------------
Current Assets
Cash and short-term investments $ 12,303 $ 15,312
Receivables, including $55,146 and $49,602 of
earned revenues in excess of billings, net of
allowance for doubtful accounts of $1,590 and $1,003 77,161 70,270
Prepaid expenses and other receivables 10,208 9,994
--------------------
Total Current Assets 99,672 95,576
Property and Equipment--at cost, net of accumulated
depreciation 35,222 30,135
Capitalized Computer Software Costs, net of
accumulated amortization of $7,563 and $6,105 10,510 5,532
Cost in Excess of Fair Value of Net Assets Acquired,
net of accumulated amortization of $2,337 and $1,741 8,740 8,754
Other Assets and Deferred Charges 9,115 10,986
--------------------
Total Assets $163,259 $150,983
====================
Liabilities and Stockholders' Equity
Current Liabilities
Accounts payable $ 6,674 $ 5,234
Current portion of long-term debt 200 100
Income taxes payable 398 167
Accrued expenses 12,358 12,065
Deferred revenue 12,653 14,455
--------------------
Total Current Liabilities 32,283 32,021
--------------------
Long-Term Debt, net of current portion 31,590 31,790
Deferred Taxes and other Long-Term Liabilities 2,590 1,607
--------------------
Total Liabilities 66,463 65,418
--------------------
Stockholders' Equity
Preferred stock, par value $.10 per share--authorized
3,000,000 shares, none issued
Common stock, par value $.01 per share--authorized
24,000,000 shares, issued 15,244,865
and 15,159,804 shares 152 152
Capital in excess of par value 60,526 58,442
Retained earnings 39,687 30,568
--------------------
100,365 89,162
Less:
Held in treasury, 1,150,941 common shares--at cost (2,959) (2,959)
Unearned compensation and notes
receivable from stockholders (610) (638)
--------------------
96,796 85,565
--------------------
Total Liabilities and Stockholders' Equity $163,259 $150,983
====================
See notes to consolidated financial statements.
Consolidated Statements of Operations
(dollars in thousands, except per share amounts)
Year Ended September 30,
---------------------------------
Revenues 1996 1995 1994
---------------------------------
OnSite services $ 84,183 $ 66,904 $ 63,979
Software sales 46,821 40,376 34,540
Maintenance and enhancements 42,013 35,145 30,270
Software services 41,552 31,631 18,172
Interest and other revenue 689 2,092 1,253
---------------------------------
215,258 176,148 148,214
---------------------------------
Expenses
Cost of OnSite services 67,852 51,927 50,095
Cost of software sales and maintenance
and enhancements 38,546 31,681 27,055
Cost of software services 36,586 27,082 14,606
Selling, general and administrative 53,921 43,746 36,144
Charge for purchased research and development 0 8,700 0
Interest expense 2,350 2,696 2,520
---------------------------------
199,255 165,832 130,420
---------------------------------
Income before income taxes 16,003 10,316 17,794
Provision for income taxes 6,884 7,258 6,148
---------------------------------
Net income $ 9,119 $ 3,058 11,646
=================================
Per common share:
Net income
Primary $ 0.62 $ 0.22 $ 0.86
Fully diluted $ 0.61 $ 0.21 $ 0.83
Common shares and equivalents
outstanding:
Primary 14,696,274 14,029,700 13,517,146
Fully diluted 16,781,274 14,399,182 15,817,862
===================================
See notes to consolidated financial statements.
Consolidated Statements of Cash Flows
(dollars in thousands)
Year Ended September 30,
--------------------------------
1996 1995 1994
--------------------------------
Operating Activities
Net income $ 9,119 $ 3,058 $11,646
Adjustments to reconcile net income to net cash
provided by operating activities:
Charge for purchased research and development 0 8,700 0
Depreciation and amortization 10,961 8,942 7,376
Provision for doubtful accounts 1,212 508 570
Deferred tax provision 740 1,073 (161)
Changes in operating assets and liabilities:
(Increase) in receivables (8,103) (17,887) (13,095)
Decrease (increase) in other current assets,
principally prepaid expenses 1,557 (4,409) 205
Increase in accounts payable 1,440 1,407 646
Increase (decrease) in income taxes payable 231 (820) 1,941
Increase in accrued expenses 470 1,750 1,772
(Decrease) increase in deferred revenue (1,560) (129) 1,170
Changes in other operating assets and deferred charges (1,454) (130) (1,865)
--------------------------------
Net cash provided by operating activities 14,613 2,063 10,205
--------------------------------
Investing Activities
Purchase of property and equipment (10,404) (13,683) (9,167)
Capitalized computer software costs (6,436) (3,384) (1,447)
Proceeds from the sale or maturity of
investments available-for-sale 13,504 20,829 0
Purchase of investments available-for-sale 0 (11,687) 0
(Increase) in short-term investments 0 0 (22,852)
(Increase) in notes receivable from stockholders 0 (610) 0
Purchase of subsidiary assets, net of cash acquired (789) (1,374) 0
--------------------------------
Net cash (used in) investing activities (4,125) (9,909) (33,466)
--------------------------------
Financing Activities
Principal payments on long-term debt (12,700) (305) 0
Proceeds from long-term debt 12,600 0 0
Proceeds from exercise of stock options 313 2,068 1,424
--------------------------------
Net cash provided by financing activities 213 1,763 1,424
--------------------------------
Increase (decrease) in cash and cash equivalents 10,701 (6,083) (21,837)
--------------------------------
Cash and cash equivalents at beginning of year 1,602 7,685 29,522
--------------------------------
Cash and cash equivalents at end of year $12,303 $ 1,602 $ 7,685
================================
Supplemental Information
Noncash investing and financing activities:
Conversion of subordinated debentures for common stock $ 0 $ 3,225 $ 0
Purchase of subsidiary assets--noncash portion $ 0 $11,949 $ 0
See notes to consolidated financial statements.
Consolidated Statements of Stockholders' Equity
(dollars in thousands)
Unearned
Compensation
and Notes Total
Common Stock Capital in Excess Retained Treasury Receivable from Stockholders'
Par Value of Par Value Earnings Stock Stockholders Equity
----------------------------------------------------------------------------------------
Balance at September 30, 1993 $133 $38,447 $15,864 $(2,959) $(203) $51,282
----------------------------------------------------------------------------------------
Stock issued under stock option plans,
including tax benefits, 294,588 shares 3 2,422 2,425
----------------------------------------------------------------------------------------
Stock exchanged under restricted stock
purchase plans, (1,187) shares 0
----------------------------------------------------------------------------------------
Earned restricted stock compensation 128 128
----------------------------------------------------------------------------------------
Net income, year ended September 30, 1994 11,646 11,646
----------------------------------------------------------------------------------------
Balance at September 30, 1994 136 40,869 27,510 (2,959) (75) 65,481
========================================================================================
Stock issued under stock option plans,
including tax benefits, 363,569 shares 4 3,482 3,486
----------------------------------------------------------------------------------------
Earned restricted stock compensation 47 47
----------------------------------------------------------------------------------------
Issuance of stock for acquisition,
1,000,000 shares 10 10,868 10,878
----------------------------------------------------------------------------------------
Conversion of 6 1/4% convertible
subordinated debentures, 215,000 shares 2 3,223 3,225
----------------------------------------------------------------------------------------
Notes receivable from stockholders (610) (610)
----------------------------------------------------------------------------------------
Net income, year ended September 30, 1995 3,058 3,058
----------------------------------------------------------------------------------------
Balance at September 30, 1995 152 58,442 30,568 (2,959) (638) 85,565
========================================================================================
Stock issued under stock option plans,
including tax benefits, 65,332 shares 1,960 1,960
----------------------------------------------------------------------------------------
Issuance of stock due to warrants
exercised, 28,350 shares 124 124
----------------------------------------------------------------------------------------
Earned restricted stock compensation 28 28
----------------------------------------------------------------------------------------
Net income, year ended September 30, 1996 9,119 9,119
----------------------------------------------------------------------------------------
Balance at September 30, 1996 $152 $60,526 $39,687 $(2,959) $(610) $96,796
========================================================================================
See notes to consolidated financial statements.
Notes to Consolidated Financial Statements
(dollars in thousands, except per share amounts)
Note A -- Significant Accounting Policies
Consolidation Policy: The accompanying consolidated financial statements
include the accounts of Systems & Computer Technology Corporation and its
subsidiaries. Intercompany items have been eliminated in consolidation.
Nature of Operations: The Company provides computing management services
and administrative client/server application software in the higher education,
local government, utilities, and manufacturing/distribution markets. In fiscal
year 1996, approximately 52% of the Company's revenues was derived from the
higher education market, approximately 25% was derived from the local
government market, approximately 18% from the utility market, and
approximately 5% was derived from the manufacturing/distribution market. The
principal markets for the Company's offerings are in the U.S. In fiscal year
1996, the Company's foreign operations represented approximately 8% of
revenues.
Risks and Uncertainties: The preparation of financial statements in
conformity with generally accepted accounting principles requires management
to make estimates and assumptions that affect the amounts reported in the
financial statements and accompanying notes. Changes in the status of certain
facts or circumstances could result in material changes to the estimates used
in preparation of the financial statements and actual results could differ
from the estimates and assumptions used.
Credit risk with respect to trade accounts receivable is generally
diversified due to the large number of entities comprising the Company's
customer base. The Company establishes an allowance for doubtful accounts
based upon factors surrounding the credit risk of specific customers,
historical trends, and other information.
Revenue Recognition: During the first several years of a typical OnSite
services contract, services are performed and expenses are incurred by the
Company at a greater rate than in the later years of the contract. Since
billings usually remain constant during the term of the contract, and revenue
is recognized as work is performed, revenues usually exceed billings in the
early years of the contract. The resulting excess is reflected on the
Company's Consolidated Balance Sheets as unbilled accounts receivable. As a
contract proceeds, services are performed and expenses are incurred at a
diminishing rate, resulting in billings exceeding revenue recognized, which
causes a decrease in the unbilled accounts receivable balance. Ninety-nine
percent of these unbilled receivables at September 30, 1996 will be billed
within the normal twelve month business cycle, although additional unbilled
receivables will continue to build based on the terms of the contracts. These
contracts require estimates of periodic revenue earned and costs to be
incurred to deliver products or services and are subject to revision as work
progresses. Revisions in the estimates are reflected in operations in the
period in which facts requiring those revisions become known. Certain
contracts provide for reimbursement of expenses, which are classified as a
reduction of operating expenses in the accompanying financial statements.
Certain of the Company's OnSite services contracts are subject to "fiscal
funding" clauses which provide that, in the event of budgetary constraints,
the client is entitled to reduce the level of services to be provided by the
Company with a corresponding reduction in the fee to be paid by the client or,
in certain circumstances, to terminate the services altogether. Revenues are
recognized under such contracts only when the likelihood of cancellation is
considered by the Company to be remote.
The Company recognizes revenue upon delivery of software and receipt of a
signed contractual obligation and substantial payment by the customer within
normal trade terms, if no significant vendor obligations remain. Maintenance
and enhancement agreements provide for telephone support and error correction
for current versions of licensed systems, as well as additions or
modifications to licensed systems if and when they become generally available.
Fees for maintenance and enhancements agreements are recognized ratably over
the term of the agreement. The Company's policy is to charge interest on or
discount unbilled receivables not expected to be billed within one year, which
were approximately $1,000 and $1,541 at September 30, 1996 and 1995,
respectively. The Company classifies such receivables as current assets
consistent with its business cycle. The Company does not separately present
the cost of maintenance and enhancements revenues because it is impracticable
to separate such cost from the cost of software sales.
The Company has "bundled" contracts which include both OnSite management
services and software licenses. Because licensing of the software is not
dependent on continuation of the OnSite management services portion of the
contract, the software revenue is recognized upon delivery. The remainder of
the contract revenue is recorded consistent with other OnSite management
services contracts.
The Company provides software-related services, including systems
implementation and integration services. Services are generally provided under
time and materials contracts and revenue is recognized as the services are
provided. In some circumstances, services are provided under fixed price
arrangements in which revenue is recognized on the percentage of completion
method. Revisions in estimates of costs to complete are reflected in
operations in the period in which facts requiring those revisions become
known.
Property and Equipment: Equipment is depreciated over its estimated
useful life, for periods ranging from three to 10 years, using the straight-
line method. Buildings and related improvements are depreciated using the
straight-line method, for periods not to exceed 30 years.
Capitalized Computer Software Costs: The Company capitalizes direct costs
associated with development of software for resale. Amortization of such
capitalized costs is the greater of the amount computed using (a) the ratio
that current gross revenues for a product bear to the total of current and
anticipated future gross revenues of that product or (b) the straight-line
method over the remaining estimated economic life of the product including the
period being reported on. Amortization begins when the product is available
for general release to customers.
Income per Share: Primary income per share is computed using the weighted
average number of common shares outstanding, plus, to the extent dilutive,
common stock equivalents. Fully diluted income per share is based on an
increased number of shares that would be outstanding assuming the exercise of
stock options when the Company's stock price at the end of the period is
higher than the average stock price within the respective period, plus to the
extent dilutive, the increased number of shares that would be outstanding,
assuming conversion of the 6 1/4% convertible subordinated debentures. Net
income used in the calculation of fully diluted income per share is adjusted
for interest expense (net of tax) on the convertible subordinated debentures.
The fully diluted income per share calculation for the year ended September
30, 1995 did not include the anti-dilutive effect of the convertible
subordinated debentures.
Cost in Excess of Fair Value of Net Assets Acquired: This amount is
associated with companies acquired. It is amortized over periods ranging
between 15 and 20 years using the straight-line method. The Company
periodically reviews the cost in excess of fair value of net assets acquired
to assess recoverability by comparing the carrying value to the undiscounted
future cash flows of the related assets. An impairment would be recognized in
operating results if a permanent diminution in value were to occur.
Covenants-Not-To-Compete: These amounts are amortized using the straight-
line method over 60 months, their contractual lives, from their respective
acquisition dates.
Foreign Currency Translation: The local currency of the Company's
operating foreign subsidiary has been determined to be its functional
currency. Assets and liabilities of the foreign subsidiary are translated into
U.S. dollars at current exchange rates and resulting translation adjustments
are included as a separate component of stockholders' equity. Revenue and
expense accounts of these operations are translated at average exchange rates
prevailing during the year. Transaction gains and losses, which were not
material, are included in the results of operations of the period in which
they occur. As of September 30, 1996, the currency translation adjustment was
immaterial to the Company's consolidated financial statements.
New Accounting Standards: In March 1995, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to Be Disposed Of" (FAS 121). The statement requires impairment losses to be
recorded on long-lived assets used in operations when indicators of impairment
are present and the undiscounted cash flows estimated to be generated by those
assets are less than the assets' carrying amount. FAS 121 also addresses the
accounting for long-lived assets that are expected to be sold or discarded.
The Company will adopt FAS 121 in fiscal year 1997 and, based on current
circumstances, does not believe the effect of adoption will be material.
In October 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-
Based Compensation" (FAS 123), which the Company will adopt in fiscal year
1997. The statement requires that companies with stock-based compensation
plans either recognize compensation expense based on new fair value accounting
methods or continue to apply the provisions of Accounting Principles Board
Opinion 25, "Accounting for Stock Issued to Employees" (APB 25) and disclose
pro forma net income and earnings per share assuming the fair value method had
been applied. The Company anticipates continuing to account for stock-based
compensation under the provisions of APB 25, and, as a result, FAS 123 will
not impact its operating results or financial position.
Reclassifications: Certain prior-year information has been reclassified
to conform with the 1996 presentation.
Note B -- Cash and Short-Term Investments
Cash Equivalents: Cash equivalents are defined as short-term, highly
liquid investments with a maturity of three months or less at the date of
purchase.
Short-Term Investments: Effective October 1, 1994, the Company adopted
the provisions of Statement of Financial Accounting Standards No. 115,
"Accounting for Certain Investments in Debt and Equity Securities" (FAS 115).
In accordance with the provisions of FAS 115, the Company classifies
marketable equity securities and debt securities as available-for-sale. The
effect of adoption was immaterial.
In 1995, securities held as available-for-sale consisted of certificates
of deposit, repurchase agreements, commercial paper, U.S. Treasury securities,
municipal securities, collateralized mortgage obligations, and corporate
obligations. The available-for-sale securities were highly liquid investments
available for current operations and, accordingly, were classified as short-
term investments. Available-for-sale securities were stated at approximate
market value.
September 30,
--------------------------
1996 1995
--------------------------
Cash and cash equivalents $12,303 $1,602
Short-term investments, including
accrued interest of $230 -- 13,710
--------------------------
Cash and short-term investments $12,303 $15,312
==========================
During the fiscal years ended September 30, 1996 and 1995, the gross
realized gains on sales of available-for-sale securities totaled $47 and $86,
respectively, and gross realized losses on sales totaled $35 and $52,
respectively.
Note C -- Acquisitions
In June 1995, the Company acquired Adage Systems International, Inc.
(Adage), including all existing Adage software, technology, and operations for
consideration of one million shares of common stock valued at approximately
$10.9 million. At the time of the acquisition, these shares were not
registered and could not be sold immediately; as a result, the valuation
reflected a discount from the fair market value of the underlying shares.
Adage offers a newly developed enterprise resource planning system to
multinational users in the manufacturing and distribution industries. Under
the terms of the purchase agreement, the Company may be required to pay
additional consideration in either additional shares (up to 1.5 million
shares) of common stock or a combination of additional shares of common stock
and cash, in the event that the market price of the common stock approximately
five years after the closing is lower than a base price. The base price may
not be lower than $15 or higher than $50, and will be determined pursuant to a
formula tied to the pretax profits of Adage during the five-year period
commencing October 1, 1995. Certain future payments would result in an
adjustment to the purchase price. On October 17, 1996, the Company repurchased
and subsequently retired 184,000 shares for a price of $2.8 million. As a
result, the number of shares subject to the terms of the additional
consideration calculation has been reduced. In conjunction with the
acquisition, which was accounted for as a purchase, the Company recorded a
charge to operations of $8.7 million for in-process research and development
at the time of the acquisition. In addition, the Company charged approximately
$2.0 million to the cost of the acquisition for incremental costs including
professional fees and other costs directly related to the acquisition. The
cost in excess of fair value of net assets acquired is being amortized over 15
years. The purchase price was allocated as follows:
Purchased software $ 2,800
Purchased research and development(a) 8,700
Cost in excess of fair value of assets acquired 3,018
Deferred taxes (1,039)
Net liabilities assumed (596)
--------
Total purchase price $ 12,883
========
(a) Purchased research and development, charged to expense at date of
purchase, represents the estimated fair value of specifically identified
projects under development which did not meet the applicable accounting
criteria for capitalization.
In December 1994, the Company acquired the IntelliSource Software Group,
a division of the privately held Management Analysis Company. IntelliSource
Software Group products serve the utility market. The Company will pay a
purchase price of $1.2 million in increments over a four-year period. Under
the terms of the purchase agreement, the Company may be required to make
additional payments contingent upon the performance of the IntelliSource
Software Group over a five-year period.
The pro forma effect of these acquisitions on operations
is immaterial.
Note D -- Property and Equipment
September 30,
-------------------
1996 1995
-------------------
Land $ 1,316 $ 1,316
Building 14,968 14,656
Computer equipment and software 20,030 14,714
Other equipment, furniture,
fixtures and building
improvements 20,896 16,314
-------------------
57,210 47,000
Less accumulated depreciation 21,988 16,865
-------------------
$35,222 $30,135
===================
Depreciation expense for the years ended September 30, 1996, 1995 and
1994 was $5,317, $3,832 and $2,656, respectively.
Note E -- Other Assets and Deferred Charges
September 30,
-------------------
1996 1995
-------------------
Deferred costs and sales
commissions related to OnSite
services contracts in progress(a)(b) $2,788 $2,284
Purchased software(b)(c) 2,918 4,421
Deferred debt issuance expenses(b)(d) 1,011 1,162
Covenants-not-to-compete(b) 779 1,721
Other 1,619 1,398
-------------------
$9,115 $10,986
===================
(a)-Being amortized over the remaining term of the OnSite services contract.
(b)-Shown net of accumulated amortization.
(c)-Includes software received as part of business acquisitions.
(d)-Being amortized over the term of the related debt.
Note F -- Long-Term Debt
September 30,
-------------------
1996 1995
-------------------
6 1/4% convertible subordinated
debentures, due 2003 $31,275 $31,275
Promissory note 515 615
--------------------
Total long-term debt 31,790 31,890
Less current portion 200 100
--------------------
Long-term debt,
net of current portion $31,590 $31,790
====================
In September 1993, the Company issued $34.5 million of convertible
subordinated debentures bearing interest at 6 1/4% and maturing on September 1,
2003. The debentures are convertible into common stock of the Company at any
time prior to redemption or maturity at a conversion price of $15 per share,
subject to change as defined in the Trust Indenture. During the fiscal year
ended September 30, 1995, $3,225 of the convertible subordinated debentures
were converted into 215,000 shares of common stock of the Company. The
debentures are redeemable at any time after September 10, 1996 at prices
decreasing from 104.2% of the principal amount at September 1, 1996, to par on
September 1, 2002. The fair value of the convertible subordinated debentures
at September 30, 1996 was approximately $31,600.
The Company has a $20,000 senior revolving credit agreement which
terminates in June, 1998 with optional annual renewals. There were no
borrowings outstanding at September 30, 1996 or 1995. During the fiscal year
ended September 30, 1996, the Company made $12,600 in borrowings. The interest
rate under the agreement is based on one of three formulae -- one tied to the
prime rate of the lender, one at a rate offered by the bank and another tied
to the London Interbank Offered Rate (LIBOR). The weighted average interest
rate on borrowings outstanding during 1996 was 5.99%. Initially, there was a
3/8% commitment fee on the unused funds that are available for borrowing under
the agreement. This rate was reduced to 5/16% in June 1995. The Company has
the right to permanently terminate the unused portion of the revolving
commitment. As long as there are borrowings outstanding, and as a condition
precedent to new borrowings, the Company must comply with certain covenants
established in the agreement. Under the covenants, the Company is required to
maintain certain financial ratios and other financial conditions. In addition,
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 signed a promissory note on December 7, 1994 in connection
with the acquisition of the IntelliSource Software Group, with an original
face amount of $800. The note payments commenced on the first anniversary date
and continue on each of the following three anniversaries until the note is
paid in full. Interest is accreted over the life of the note.
Interest paid on the convertible subordinated debentures and the
revolving credit agreement during the years ended September 30, 1996, 1995,
and 1994 was $2,183, $2,093, and $2,235, respectively.
Note G -- Benefit Plans
Stock Option Plans: The Company has stock option plans for the benefit of
its key employees and non-employee directors that provide for the grant of
options to purchase the Company's common stock at not less than the fair
market value on the date of the grant.
The Company's 1994 Long-Term Incentive Plan provides for the issuance of
stock options, stock appreciation rights, restricted stock, and other long-
term performance awards. At September 30, 1996, only stock options have been
issued pursuant to the plan.
As of September 30, 1996 and 1995, respectively, options for 1,768,067
and 1,304,177 shares were exercisable. Outstanding options as of September
30,1996 are exercisable at an average price of $11.26 per share and expire on
various dates through the year 2005. There were 1,229,358 and 1,299,196 shares
of common stock reserved for future grants under the stock option plans at
September 30, 1996 and 1995, respectively.
Transactions under the previously stated option plans follow:
September 30,
------------------
1996 1995
------------------
Options outstanding,
beginning of year 2,596 2,599
Granted 160 530
Exercised (65) (364)
Canceled or Expired (91) (169)
------------------
Options outstanding,
end of year 2,600 2,596
==================
Options were exercised in 1996 and 1995 at price ranges between
$2.63 - $16.38.
Employee Stock Ownership Plan: The Company has a noncontributory Employee
Stock Ownership Plan (ESOP) covering eligible employees. The ESOP provides for
the Employee Stock Ownership Trust (ESOT) to distribute shares of the
Company's common stock as retirement and/or other benefits to the
participants. The Company discontinued its contributions to the ESOT
subsequent to the 1986 plan year. In accordance with the terms of the ESOP,
the total amounts then allocated to the accounts of the participants
immediately vested. As of September 30, 1996 there were 1,039,229 shares held
by the ESOT.
Restricted Stock Plans: The Company had an Employees' Restricted Stock
Purchase Plan, which has been terminated, pursuant to which shares of the
Company's common stock were sold to key employees at 40% of the fair market
value of unrestricted shares on the date of sale. The shares are restricted,
and may not be sold, transferred, or assigned other than by an exchange with
the Company for a number of shares of common stock not so restricted, to be
determined by a formula. The formula reduces the number of unrestricted shares
to be exchanged to give effect to the 60% reduction from fair market value of
shares not so restricted. Certain of the shares sold are subject to the
Company's option to repurchase a fixed percentage of the shares during a
specified period at the employee's purchase price plus 10% a year from the
date of purchase in the event of certain terminations of employment. As of
September 30, 1996, there were 81,002 restricted shares sold but not exchanged
for unrestricted shares.
The Company has a 1985 Restricted Stock Incentive Plan, which expired on
June 30, 1995. Under the plan, shares were awarded to key persons and are
restricted with the effect that, for the term of the restrictions, the
recipient may not sell, assign, transfer, or otherwise hypothecate any of the
shares. Restricted stock awards under the 1985 plan vested to the recipients
over a number of years, in equal annual installments as determined by the
Compensation Committee of the Board of Directors, and were recorded at the
fair market value of the shares on the date of the award as unearned
compensation. The unearned compensation was charged to operations ratably over
the vesting period. Under the plan, 605,000 shares were issued. At September
30, 1996 substantially all shares were vested.
Savings Plan: The Company also provides a defined contribution 401(k)
plan to substantially all its U.S. employees whereby the Company may make
matching contributions equal to a percentage of the contribution made by
participants. One half of the Company's contributions are used to buy shares
of the Company's common stock. Expenses under this plan for the years ended
September 30, 1996, 1995, and 1994 were $1,835, $1,432, and $1,061,
respectively.
Note H -- Income Taxes
The components of the provision for income taxes are
as follows:
Year ended September 30,
------------------------------
1996 1995 1994
------------------------------
Current:
State $1,957 $1,974 $1,628
Federal 4,592 4,059 4,075
Foreign (405) 152 346
------------------------------
Total current 6,144 6,185 6,049
Deferred 740 1,073 99
------------------------------
$6,884 $7,258 $6,148
==============================
A reconciliation of the provision for income taxes to the federal
statutory rate follows:
Year ended September 30,
------------------------------
1996 1995 1994
------------------------------
Expected federal tax rate 35.0% 35.0% 35.0%
Adjustments due to:
Effect of state income tax,
net of federal benefit 6.1% 12.4% 6.0%
Purchased research and
development -- 29.5% --
Change in valuation allowance 2.2% -- (2.2)%
Research and development
tax credit (2.3)% (7.3)% (4.7)%
Other 2.0% 0.8% 0.4%
------------------------------
43.0% 70.4% 34.5%
==============================
The fiscal year 1995 provision for income taxes does not reflect the
customary relationship between income and tax expense principally due to the
write-off of purchased research and development, which is not deductible for
income tax purposes. The effective tax rate would have been 38% without the
write-off of purchased research and development. The rate was further affected
by the expiration of the research and development tax credit as of June 30,
1995. The purchased research and development write-off has an impact on both
the state effective tax rate and the relationship between income and the
effect of the research and development tax credit.
The reversal of the valuation allowance in 1994 relates primarily to
utilization of research and development and minimum tax credits generated in
prior years. As of September 30, 1996, the Company has a valuation allowance
with respect to tax loss carryforwards in various state and international
jurisdictions of $1,048. The tax loss carryforwards expire at various periods
ending September 30, 2011.
Income taxes paid during fiscal years ended September 30, 1996, 1995, and
1994 were $6,029, $9,921, and $3,903, respectively.
The Company accounts for income taxes under the liability method as
prescribed by Statement of Financial Accounting Standards No. 109, which it
adopted on October 1, 1993. The cumulative effect of adoption was immaterial.
The liability method provides that deferred tax assets and liabilities are
recorded based on the difference between such tax basis of assets and
liabilities and their carrying amounts for financial reporting purposes.
The tax effects of the temporary differences that give rise to the
significant portions of the deferred tax assets and liabilities as of
September 30, 1996 and 1995 are as follows:
September 30,
-------------------
1996 1995
-------------------
Deferred Tax Assets:
Purchased research
and development
(1992 acquisition) $2,163 $2,365
Accrued expenses and reserves 1,573 1,001
Tax loss carryforwards,
net of valuation allowance 417 --
Other 4 46
-------------------
Total deferred tax asset 4,157 3,412
Deferred Tax Liabilities:
Depreciation and amortization (948) (1,216)
Software capitalization, net (4,146) (2,176)
Prepaids and other accelerated
expenses (1,400) (1,215)
Purchased software (10) (412)
-------------------
Total deferred tax liability (6,504) (5,019)
-------------------
Net deferred tax liability ($2,347) ($1,607)
===================
Note I -- Product Development, Commitments and Other Items
Product development expenditures, including software maintenance
expenditures, for the years ended September 30, 1996, 1995, and 1994, were
approximately $21,247, $12,856, and $8,834, respectively. After capitalization
(Note A) these amounts were approximately $14,811, $9,472, and $7,387,
respectively, and were charged to operations as incurred. For the same years,
amortization of capitalized software costs amounted to $1,458, $871, and $889,
respectively.
Rent expense for the years ended September 30, 1996, 1995, and 1994 was
$2,909, $2,043, and $1,995, respectively. Aggregate rentals payable under
significant non-cancelable lease agreements with initial terms of one year or
more at September 30, 1996, are as follows:
------------------------------
Fiscal year Amount
------------------------------
1997 $2,045
1998 1,973
1999 1,630
2000 1,285
2001 941
thereafter 1,919
------
$9,793
------------------------------
Note J -- Legal Matters
On October 4, 1995, John J. Wallace filed a purported class action
lawsuit in the United States District Court for the Eastern District of
Pennsylvania against the Company; Michael J. Emmi, Chairman of the Board,
President and Chief Executive Officer of the Company; Michael D. Chamberlain,
Senior Vice President and a director of the Company; and Eric Haskell, Senior
Vice President, Finance and Administration, Treasurer, and Chief Financial
Officer of the Company. The plaintiff filed an amended complaint on November
28, 1995. The amended complaint alleges that the defendants violated sections
10 (b) and 20 (a) of the Securities Exchange Act of 1934 and Rule 10b-5
promulgated thereunder by making misstatements and omissions regarding the
Company's financial performance in the second half of fiscal year 1995. The
class period alleged is from June 5, 1995 through October 2, 1995. The amended
complaint seeks damages in unspecified amounts as well as equitable relief.
In April 1996, the Company's Motion to Dismiss the Amended Complaint was
granted in part and denied in part. Management believes the claims remaining
in the amended complaint are without merit and intends to contest the
remaining allegations vigorously. While management, based on its investigation
to date, believes that resolution of this action will not have a materially
adverse effect on the Company's consolidated financial position, the ultimate
outcome of this matter cannot be presently determined.
Note K -- Quarterly Results of Operations (Unaudited)
The following is a summary of the quarterly results of operations for the
years ended September 30, 1996 and 1995:
Three Months Ended
December 31, March 31, June 30, September 30,
-------------------------------------------------------------------------------------------
1995 1994 1996* 1995 1996 1995** 1996*** 1995
-------------------------------------------------------------------------------------------
Revenues $47,819 $39,199 $52,756 $43,191 $56,316 $46,705 $58,367 $47,053
-------------------------------------------------------------------------------------------
Gross profit 16,540 14,630 15,673 15,025 18,809 17,219 20,128 16,492
-------------------------------------------------------------------------------------------
Income (loss) before
income taxes 3,873 4,606 1,366 5,188 5,109 (2,188) 5,655 2,710
-------------------------------------------------------------------------------------------
Provision for income taxes 1,610 1,635 600 1,939 2,197 2,475 2,477 1,209
-------------------------------------------------------------------------------------------
Net income (loss) $ 2,263 $ 2,971 $ 766 $ 3,249 $ 2,912 $(4,663) $ 3,178 $ 1,501
-------------------------------------------------------------------------------------------
Primary net income
(loss) per share $ 0.15 $ 0.22 $ 0.05 $ 0.24 $ 0.19 $ (0.35) $ 0.22 $ 0.11
Fully diluted net income
(loss) per share $ 0.15 $ 0.21 $ 0.05 $ 0.23 $ 0.19 $ (0.35) $ 0.21 $ 0.10
-------------------------------------------------------------------------------------------
*Includes a charge of $1,250 for a contract loss provision.
**Includes a charge of $8,700 for purchased research and development.
***Includes a change in estimate primarily to reduce accrued employee benefits by $750.
Certain quarterly information has been reclassifed to conform to the September 30, 1996 classification.
Report of Independent Auditors
The Board of Directors and Stockholders
Systems & Computer Technology Corporation
We have audited the accompanying consolidated balance sheets of Systems &
Computer Technology Corporation as of September 30, 1996 and 1995, and the
related consolidated statements of operations, stockholders' equity, and cash
flows for each of the three years in the period ended September 30, 1996. Our
audits also included the financial statement schedule listed in the Index at
Item 14(a). These financial statements and schedule are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Systems & Computer Technology Corporation at September 30, 1996 and 1995, and
the consolidated results of its operations and its cash flows for each of the
three years in the period ended September 30, 1996, in conformity with
generally accepted accounting principles. Also, in our opinion, the related
financial statement schedule, when considered in relation to the basic
financial statements taken as a whole, presents fairly in all material
respects the information set forth therein.
/s/ Ernst & Young LLP
Philadelphia, Pennsylvania
October 28, 1996
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not Applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Information required under this Item is contained in the Registrant's
Definitive Proxy Statement to be delivered to shareholders in connection with
the Annual Meeting of Shareholders scheduled to be held on February 28, 1997
and is incorporated herein by reference. Also, see the information under the
heading Executive Officers of SCT appearing in Part I hereof.
ITEM 11. EXECUTIVE COMPENSATION.
Information required under this Item is contained in the Registrant's
Definitive Proxy Statement to be delivered to shareholders in connection with
the Annual Meeting of Shareholders scheduled to be held on February 28, 1997
and is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Information required under this Item is contained in the Registrant's
Definitive Proxy Statement to be delivered to shareholders in connection with
the Annual Meeting of Shareholders scheduled to be held on February 28, 1997
and is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Information required under this Item is contained in the Registrant's
Definitive Proxy Statement to be delivered to shareholders in connection with
the Annual Meeting of Shareholders scheduled to be held on February 28, 1997
and is incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) Financial Statements, Financial Statement Schedule and Exhibits.
(1) The following consolidated financial statements of the Registrant
and its subsidiaries are included herein:
Consolidated Balance Sheets--September 30, 1996 and 1995
Consolidated Statements of Operations--Years Ended September 30,
1996, 1995, and 1994
Consolidated Statements of Stockholders Equity--Years Ended
September 30, 1996, 1995, and 1994
Consolidated Statements of Cash Flows--Years Ended September 30,
1996, 1995, and 1994
Notes to Consolidated Financial Statements
Report of Ernst & Young LLP, Independent Auditors
(2) The following consolidated financial statement schedule of the
Registrant and its subsidiaries is included herein:
Schedule II--Valuation and Qualifying Accounts
All other schedules for which provision is made in the applicable
accounting regulation of the Securities and Exchange Commission are not
required under the related instructions or are inapplicable and,
therefore, have been omitted.
(3) Exhibits (not included in the copies of the Form 10-K sent to
stockholders).
No. Exhibit
2 Agreement and Plan of Merger and Reorganization by and among the
Registrant, SCT Acquisition Corporation, Adage Systems
International, Inc. and Gerald F. O'Connell and David Phelan (Exhibit
A to the Registrants Form 8-K dated May 12, 1995) (1) [Attached to
the Agreement and Plan of Merger and Reorganization were disclosure
schedules generally relating to the business acquired thereunder and
documents executed in connection with such Agreement. Copies of
such schedules and documents will be furnished to the Commission
upon request.]
3.1 Restated Certificate of Incorporation (Exhibit 3.1 to the
Registrants Registration Statement on Form S-3 filed with the
Securities and Exchange Commission on September 1, 1993) (1)
3.2 Bylaws (Exhibit 3.2 to the Registrant's Registration Statement on
Form S-3 filed with the Securities and Exchange Commission on
September 1, 1993) (1)
4 Form of Indenture under which the Registrant's 6 1/4% Convertible
Subordinated Debentures due 2003 are issued (Exhibit 4.1 to the
Registrants Registration Statement on Form S-3 filed with the
Securities and Exchange Commission on September 1, 1993) (1)
10.1 Warrant Agreement executed by the Registrant and Ralph A. Lousteau
(Exhibit 10.10 to the Registrant's Registration Statement on Form S-3
filed with the Securities and Exchange Commission on September 1,
1993) (1)
10.2 VAR Agreement dated as of September 1, 1991 between Oracle
Corporation and the Registrant (the "Oracle VAR Agreement"), together
with Amendments One, Two and Three thereto (Exhibit 10.12 to the
Registrant's Registration Statement on Form S-3 filed with the
Securities and Exchange Commission on September 1, 1993) (1)
10.3 Credit Agreement dated as of June 20, 1994 among the Registrant and
SCT Software & Resource Management Corporation as Borrowers and
Mellon Bank (Exhibit 10.4 to the Registrants Form 10-K for the
fiscal year ended September 30, 1994) (1)
10.4 Subsidiary Guaranty Agreement dated as of June 20, 1994 entered into
by SCT Utility Systems, Inc. in favor of Mellon Bank. (Identical
Subsidiary Guaranties, except as to the identity of the guarantor,
were entered into by SCT Public Sector, Inc., SCT Financial
Corporation, SCT International Limited, SCT Software & Technology
Services, Inc., and SCT Property, Inc.) (Exhibit 10.5 to the
Registrants Form 10-K for the fiscal year ended September 30, 1994)
(1)
10.5 Systems & Computer Technology Corporation 1994 Long-Term Incentive
Plan (Exhibit 4.3 to the Registrant's Registration Statement on Form
S-8 filed with the Securities and Exchange Commission on June 30,
1995) (1) (2)
10.6 Systems & Computer Technology Corporation 1994 Non-Employee Director
Stock Option Plan (Exhibit 4.4 to the Registrant's Registration
Statement on Form S-8 filed with the Securities and Exchange
Commission on June 30, 1995) (1) (2)
10.7 Agreement of Purchase and Sale dated August 9, 1994 between
Provident Mutual Life Insurance Company of Philadelphia and the
Registrant (Exhibit 10.6 to the Registrant's Form 10-K for the fiscal
year ended September 30, 1994) (1)
10.8 Employment Agreement dated June 1, 1995 between the Registrant and
Gerald F. O'Connell (Exhibit 10.8 to the Registrant's Form 10-K for
the fiscal year ended September 30, 1995) (1) (2)
10.9 Employment Agreement dated June 1, 1995 between the Registrant and
David Phelan (Exhibit 10.9 to the Registrant's Form 10-K for the
fiscal year ended September 30, 1995) (1) (2)
10.10 Agreement of Lease by and between Liberty Property Limited
Partnership and Systems & Computer Technology Corporation for
premises located at One Country View Road, Malvern, PA (Exhibit
10.10 to the Registrant's Form 10-K for the fiscal year ended
September 30, 1995) (1)
10.11 Lease between International Business Machines Corporation and SCT
Public Sector, Inc. for premises located at 1733 Harrodsburg Road,
Lexington, KY (Exhibit 10.11 to the Registrants Form 10-K for the
fiscal year ended September 30, 1995) (1)
10.12 Extension Agreement dated June 20, 1996 among Systems & Computer
Technology Corporation, SCT Software & Resource Management
Corporation and Mellon Bank, N.A. (3)
10.13 Amendement Four to the Oracle VAR Agreement (3)
10.14 Amendement Five to the Oracle VAR Agreement (3)
10.15 Amendement Six to the Oracle VAR Agreement (3)
10.16 Amendement Seven to the Oracle VAR Agreement (3)
10.17 Amendement Eight to the Oracle VAR Agreement (3)
10.18 Amendement Nine to the Oracle VAR Agreement (3)
10.19 Amendement Ten to the Oracle VAR Agreement (3)
10.20 Amendement Eleven to the Oracle VAR Agreement (3)
10.21 Amendement Twelve to the Oracle VAR Agreement (3)
11 Statement re: Computation of Per Share Earnings (3)
21 Subsidiaries of the Registrant (3)
23 Consent of Independent Auditors (3)
27 Financial Data Schedule (3)
- -----------------------------
(1) Incorporated by reference
(2) Compensatory Plan, Contract or Arrangement
(3) Filed with this Annual Report on Form 10-K
SCT will furnish to any stockholder upon written request, any exhibit listed
in the accompanying Index to Exhibits upon payment by such stockholder to SCT
of SCT's reasonable expenses in furnishing such exhibit.
(b) Reports on Form 8-K.
None.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
SYSTEMS & COMPUTER TECHNOLOGY CORPORATION AND SUBSIDIARIES
For the Three Years in the Period Ended September 30, 1996
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
- ------------------------------------------------------------------------------------------------------------------------------------
Additions
----------------------------
Charged to Charged to
Description Balance at Costs and Other Accounts Deductions Balance at
Beginning of Period Expenses -Describe -Describe End of Period
- ------------------------------------------------------------------------------------------------------------------------------------
For the year ended September 30, 1996:
Reserves and allowances deducted from
other assets and deferred charges:
Reserves for non-interest bearing
loans to employees
Short-term $ 87,000 $ 36,000 $ 67,000 (1) $ 56,000
Long-term 0 0
Allowance for doubtful accounts 1,003,000 1,212,000 625,000 (1) 1,590,000
__________ __________ _________ ________ __________
Total $1,090,000 $1,248,000 $692,000 $1,646,000
For the year ended September 30, 1995:
Reserves and allowances deducted from
other assets and deferred charges:
Reserves for non-interest bearing
loans to employees
Short-term $ 109,000 $ 22,000 (1) $ 87,000
Long-term 0 0
Allowance for doubtful accounts 1,228,000 $508,000 733,000 (1) 1,003,000
__________ __________ _________ ________ __________
Total $1,337,000 $508,000 $755,000 $1,090,000
For the year ended September 30, 1994:
Reserves and allowances deducted from
other assets and deferred charges:
Reserves for non-interest bearing
loans to employees
Short-term $ 153,000 $ 11,000 $ 55,000 (1) $ 109,000
Long-term 8,000 8,000 (1) 0
Allowance for doubtful accounts 1,321,000 559,000 652,000 (1) 1,228,000
__________ __________ _________ ________ __________
Total $1,482,000 $570,000 $715,000 $1,337,000
(1) Uncollectible accounts written-off during the year
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned thereunto duly authorized.
SYSTEMS & COMPUTER TECHNOLOGY CORPORATION
(Registrant)
By: /s/ Michael J. Emmi
--------------------------------------
Michael J. Emmi, Chairman of the Board
President and Chief Executive Officer
Date: December 19, 1996
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature Title Date
- ------------------------- ------------------------------- -----------------
/s/ Michael J. Emmi Chairman of the Board December 19, 1996
- ------------------- President and Chief
Michael J. Emmi Executive Officer; Director
(Principal Executive Officer)
/s/ Michael D. Chamberlain Director December 19, 1996
- --------------------------
Michael D. Chamberlain
/s/ Allen R. Freedman Director December 19, 1996
- ---------------------
Allen R. Freedman
/s/ Thomas I. Unterberg Director December 19, 1996
- -----------------------
Thomas I. Unterberg
/s/ Gabriel A. Battista Director December 19, 1996
- -----------------------
Gabriel A. Battista
/s/ Eric Haskell Senior Vice President, Finance December 19, 1996
- --------------------- and Administration, Treasurer
Eric Haskell and Chief Financial Officer
(Principal Financial and
Accounting Officer)
SYSTEMS & COMPUTER TECHNOLOGY CORPORATION
Index of Exhibits Filed Herewith
Exhibit No. Exhibit Page
- ----------- ------------------------------------------------------ -------
10.12 Extension Agreement dated June 20, 1996 among Systems
& Computer Technology Corporation, SCT Software &
Resource Management Corporation and Mellon Bank, N.A.
10.13 Amendement Four to the Oracle VAR Agreement
10.14 Amendement Five to the Oracle VAR Agreement
10.15 Amendement Six to the Oracle VAR Agreement
10.16 Amendement Seven to the Oracle VAR Agreement
10.17 Amendement Eight to the Oracle VAR Agreement
10.18 Amendement Nine to the Oracle VAR Agreement
10.19 Amendement Ten to the Oracle VAR Agreement
10.20 Amendement Eleven to the Oracle VAR Agreement
10.21 Amendement Twelve to the Oracle VAR Agreement
11 Statement re: Computation of Per Share Earnings
21 Subsidiaries of the Registrant
23 Consent of Independent Auditors
27 Financial Data Schedule