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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
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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, 2001 Commission File No. 0-11521
SYSTEMS & COMPUTER TECHNOLOGY CORPORATION
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(Exact name of registrant as specified in its charter)
Delaware 23-1701520
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(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
4 Country View Road
Malvern, Pennsylvania 19355
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(Address of principal executive offices)
Registrant's telephone number, including area code: (610) 647-5930
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
5% Convertible Subordinated Debentures Due 2004
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes [X] No [ ]
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.
$362,548,603 at December 7, 2001
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date.
33,081,084 shares at December 7, 2001
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 22, 2002 is incorporated by reference to the extent provided in Part
III, Items 10-13.
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TABLE OF CONTENTS
Item Number Page
and Caption Number
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PART I
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Item 1. Business ..................................................................................... 1
Item 2. Properties ................................................................................... 8
Item 3. Legal Proceedings ............................................................................ 9
Item 4. Submission of Matters to a Vote of Security Holders .......................................... 9
PART II
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Item 5. Market for Registrant's Common Equity and Related Stockholder Matters ........................ 10
Item 6. Selected Financial Data ...................................................................... 11
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations ........ 12
Item 7A. Quantitative and Qualitative Disclosures About Market Risk ................................... 23
Item 8. Financial Statements and Supplementary Data .................................................. 24
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure ......... 44
PART III
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Item 10. Directors and Executive Officers of the Registrant ........................................... 45
Item 11. Executive Compensation ....................................................................... 45
Item 12. Security Ownership of Certain Beneficial Owners and Management ............................... 45
Item 13. Certain Relationships and Related Transactions ............................................... 45
PART IV
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Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K .............................. 45
PART I
ITEM 1. BUSINESS.
Systems & Computer Technology Corporation ("SCT" or the "Company"),
incorporated in Delaware in 1968, develops, licenses, and supports enterprise
software and provides a range of information technology services, including
outsourcing, systems implementation, systems integration and maintenance and
enhancements. The Company's primary markets are higher education; process
manufacturing and distribution; and energy and utilities.
The Company's software and services allow clients to enhance their ability
to compete through improved quality of information. The Company's focus on
three vertical markets enables it to develop and utilize a base of industry
expertise to deliver products and services that address specific client
requirements. By offering a continuum of information technology solutions
ranging from application software to large-scale outsourcing contracts, the
Company makes available technology and management tools to enable clients to
manage information resources efficiently and cost-effectively.
Banner(R), SCT(R), BillGen(R) and EnerLink(R) are registered trademarks of
the Company, and ADAGE(TM), Fygir(TM), Plus(TM), SCT Synchro(TM) and
iProcess.sct(TM) are trademarks of the Company. SCT OnSite(R) is a registered
service mark and SinglePoint Solutions(SM) is a service mark of the Company. All
other trade names referenced herein are the service marks, trademarks or
registered trademarks or service marks of their respective companies or
organizations.
Markets
In fiscal year 2001, approximately 58% of the Company's revenues were
derived from the higher education market; approximately 26% were derived from
the energy and utilities market; and approximately 16% were derived from the
process manufacturing and distribution market. The principal markets for the
Company's offerings are in the United States. In fiscal year 2001, the
Company's foreign operations represented approximately 9% of revenues and the
Company's export sales represented approximately 6% of revenues. For segment
and foreign operations data for the last three years, please refer to Note J
of the Notes to Consolidated Financial Statements in Item 8, FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA.
Higher Education
The Company provides information technology services and application
software to higher education institutions. SCT has developed substantial
functional knowledge and technical expertise about the information technology
requirements of higher education institutions.
SCT primarily targets the approximately 2,000 North American English-
speaking institutions of higher education with enrollments greater than 2,000
students for its software and services (of which approximately 300 are
potential candidates for SCT's outsourcing services), and licenses its
application software products to higher education institutions in other
geographic areas, primarily in Europe and Latin America. The Company serves
these markets with its Banner, Plus, Plus/IDMS and Web administrative software
offerings; with the products of certain third parties, including the Campus
Pipeline Web Platform, which the Company markets on behalf of Campus Pipeline,
Inc., and the WebCT Course Tools and Services, which the Company markets on
behalf of WebCT, Inc.
Energy and Utilities
The Company provides customer management and supply chain application
software and services to the energy and utilities market. SCT's target market
includes approximately 1,000 US-based water, gas, and electric utilities.
Clients include municipalities, investor-owned utilities, and energy services
companies.
Process Manufacturing and Distribution
SCT offers its iProcess.sct end-to-end e-business solution and related
services to process manufacturers and distributors in industries such as food
and beverage, chemicals, pharmaceuticals and consumer packaged goods. SCT
targets approximately 14,000 process manufacturers and distributors worldwide.
iProcess.sct is designed to streamline manufacturing and enable winning
commerce networks in process manufacturing and distribution.
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The advantages of the iProcess.sct solution are its fundamental process
industry capabilities and the tight integration of its components: the
Internet Business Suite, Supply Chain Execution Suite, Supply Chain Planning
and Optimization Suite and Relationship Network Management. The Relationship
Network Management component is expected to be released during fiscal year
2002.
State and Local Government
Prior to June 29, 2001, the Company also served the state and local
government market. On June 29, 2001, the Company consummated the sale of its
Global Government Solutions business (GGS) to Affiliated Computer Services,
Inc. ("ACS") pursuant to a Stock Purchase Agreement dated June 23, 2001, as
amended. The business of GGS was conducted through two of the Company's wholly
owned subsidiaries, SCT Government Systems, Inc. ("SCT Government"), a
Delaware corporation, and Omni-Tech Systems, LTD. ("Omni-Tech"), a company
organized and existing under the laws of the Province of British Columbia,
Canada. ACS Enterprise Solutions, Inc., and ACS-Alberta, Inc., each a wholly-
owned subsidiary of ACS, and ACS purchased all of the issued and outstanding
capital stock of SCT Government and Omni-Tech for $85 million in cash, subject
to adjustment in certain circumstances. Based on a formula contained in the
purchase agreement, the purchase price reduction could be as much as
approximately $40 million, although the Company does not believe that any
material reduction will occur. In connection with the Stock Purchase
Agreement, the Company entered into a non-competition agreement and agreed to
a four year covenant not to engage in any business which, subject to certain
exceptions, (i) develops, licenses, modifies, supports or maintains software
for use directly or indirectly by or for governments which perform the same or
substantially the same functions as the software being developed, licensed,
modified, supported or maintained by GGS; or (ii) provides outsourcing
services directly or indirectly to governments of the same or substantially
the same type as provided by GGS. In light of the sale of GGS, the results of
operations for all periods have been restated to reflect the government
business's results as discontinued operations. The discussion on operating
results contained within this document excludes the results of the
discontinued government business.
Services and Products
The Company's revenues are derived from several sources: Outsourcing
services, software licenses, software services, and maintenance and
enhancements.
Outsourcing Services
The Company provides OnSite services, which are comprised of a range of
information technology outsourcing services including end-user computing
solutions, network management, applications outsourcing, computer operations
management, and business process outsourcing. These services are designed to
assume total or partial control and responsibility of clients' information
resources, generally on a long-term basis. The Company provides management,
staffing and support with skilled information systems personnel and industry
specialists who are knowledgeable in both computer-based technologies and the
functional aspects of clients' activities.
SCT personnel located at a client's site become an integral part of the
client's operations, working with managers and users at all levels as a focal
point for information systems activity. SCT site personnel also draw upon
SCT's staff of specialists to address special issues and projects. SCT can
manage, staff and support most aspects of a client's information systems and
operations, including data center management and operations, disaster
recovery, short-term and long-range planning, user liaison and functional
consulting, technical support services, application and systems software
support, office automation, microcomputer maintenance, systems integration,
and telecommunications services and network integration.
Contracts for OnSite services may be either on a fixed price or time and
materials basis, and generally cover an initial period of three to seven
years. Fixed price contracts require the Company to perform specified services
for a fixed payment, generally subject to annual adjustments to reflect
inflationary cost increases. The Company negotiates the fee to be charged
based on its estimate of the total expenses to be incurred in providing the
services. In the event the Company's costs to perform an OnSite services
contract become greater than originally anticipated, the Company's profit on
that contract would be reduced; and in limited cases, the Company could suffer
a loss. As many quasi government clients (such as certain state-funded higher
education clients and municipal utilities) are restricted from incurring
binding commitments which extend beyond their current annual
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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.
In the higher education market, the Company offers an additional style of
outsourcing services through a program called Selective Sourcing. The goal of
Selective Sourcing is to work with higher education institutions to assist
and/or manage a portion of the institution's information technology department
on a short or long term basis, with the institution retaining control of its
information technology department. SCT provides Selective Sourcing services
both at the client's site and remotely. Selective Sourcing services are
provided in the following nine disciplines: Applications, Business Management,
Database, e-Services, Help Desk, Networking & Connectivity, Risk Mitigation,
Systems and IT Strategic Planning.
The Company also offers its SinglePoint Solutions through certified,
licensed providers to assist utilities and energy companies in serving the
deregulated utility market. By combining software applications, information
technology outsourcing and operations management, a utility or energy service
company can access SCT's customer management application software products to
assist it in operating its business.
Software Licenses
The Company develops and licenses application software to each of its served
vertical markets. The component applications of the Banner product line are
developed for an Oracle relational database environment. The iProcess.sct
Supply Chain Execution Suite is an object based, supply chain execution/ERP
system that provides multi-site functionality using a number of relational
database platforms including Oracle and Microsoft SQL Server. The iProcess.sct
Supply Chain Planning and Optimization Suite is a series of object based
planning, scheduling and other optimization tools that use Microsoft, JAVA,
and other technologies, and operate with a number of ERP applications. The
following are the Company's key application software products:
Banner is SCT's leading software solution for administrative computing in
higher education. It is available in both client/server and Internet-native
technologies. This suite of software applications is built with a business
process orientation and a business enterprise focus. The software enables
institutions to process student information including financial aid, student
records, admissions, and registration in a centralized or distributed
information environment using workflow, imaging and self service on the World
Wide Web. In addition, Banner offers systems to assist with common
administrative functions, including human resources, financial management and
alumni development. Plus, another software solution for the higher education
market, offers a similar suite of Web-enabled administrative applications, but
which operate within traditional mainframe and minicomputer-based
institutions.
Banner and Plus Web Applications. SCT's Web applications address client
requirements for decentralized routine processing and inquiry while
maintaining centralized control of information and access. These applications
are currently available for the higher education market under the product
names Web for Students, Web for Employees, Web for Executives, Web for Alumni,
and Web for Faculty & Advisors. Students can check the availability of
courses, build a schedule, and register on line; apply for financial aid;
apply for admissions and determine admission status. Information about student
grades, schedules, and transcripts is available and students can query the
system about their account balances.
Campus Pipeline, Inc. SCT currently has an agreement with Campus Pipeline,
Inc. ("Campus Pipeline") to market the Campus Pipeline products. Campus
Pipeline delivers web-integration enterprise software and services for higher
education constituents through two product families: the Campus Pipeline Web
Platform and the Campus Pipeline Luminis Integration Suite. Through these
products, schools can create comprehensive online environments for unifying
administrative services, campus news, online learning, and other services
within their higher education communities. SCT has certified that the Campus
Pipeline Web Platform integrates with the SCT Banner and Plus Web-based
applications to provide schools with real-time, event-based updates between
systems. The Campus Pipeline Web Platform can be licensed either from SCT or
Campus Pipeline under a traditional license fee model. Campus Pipeline offers
implementation and training services for its product families. SCT is a
shareholder in Campus Pipeline. For facts concerning SCT's investment in
Campus Pipeline, please refer to the information under the heading Long-Term
Investments in Item 7, MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.
3
WebCT, Inc. SCT currently has an agreement with WebCT, Inc. ("WebCT") to
market, on an exclusive basis for a period of three (3) years (beginning in
June 2000), the WebCT e-learning solutions to the SCT higher education client
base. WebCT is a leading provider of e-Learning solutions for higher education
whose mission is to help institutions deliver on their commitment to
educational excellence with enterprise-wide learning management solutions
which integrate pedagogical tools with existing campus infrastructure. Under
the agreement, SCT obtained an equity interest in WebCT of less than 10%, with
the right to increase its ownership interest if the Company attains certain
WebCT product performance-based sales objectives. During 2001, SCT met its
initial performance-based sales objectives and increased its ownership
interest in WebCT in accordance with a formula set forth in the governing
agreement. For facts concerning SCT's investment in WebCT, please refer to the
information under the heading Long-Term Investments in Item 7, MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. SCT
and WebCT have developed a unique solution that provides real-time, two-way
integration between SCT administrative systems and the WebCT Campus Edition
using the IMS Enterprise Specification.
Banner for Energy and Utilities. SCT provides a suite of Banner software
applications to gas, electric, water, waste water, refuse, and other
utilities. This software is Web-enabled and rule-based, can be quickly adapted
for changes in business strategy, and provides energy companies and utilities
with customer management, marketing, and supply chain management tools to
support their changing needs and competitive requirements. SCT Banner CMS
assists energy companies and utilities in providing customer service,
responding to customer inquiries, supporting new service offerings, generating
accurate and timely billing, and managing resources. The Company also offers
SCT Banner Customer Target+ for energy and utility marketing programs; SCT
Banner FMS for fuel supply contract management; and the SCT Banner Customer
Web Access for customer self-inquiry and administration.
SCT/EnerLink Solution. The SCT/EnerLink solution is complex billing and
rates management software for the energy and utilities market which enables
SCT to provide increased charge-handling and billing capabilities for electric
and gas utilities. Built for flexibility, the SCT/EnerLink solution supports
real-time energy pricing and meter-data acquisition, and enables gas and
electric providers to bring innovative rate offerings to market quickly. The
solution meets industry-standard protocols for interval data recorders and
supports billing of virtually any rate. The SCT/EnerLink suite includes three
applications: BillGen(R) (a back-office billing engine), EnerLink CS(TM) (a
decision-support and marketing tool), and EnerLink.net(TM) (a customer-access
interface for energy-use analysis). The solution interfaces to SCT Banner, SCT
Synchro, or a client's legacy billing system.
SCT Synchro for Energy and Utilities. SCT Synchro is a Web-enabled n-tiered
customer management and fulfillment suite based upon the Microsoft component
architecture. This architecture supports a Web-browser-based desktop client
and the Windows 2000/SQL Server 2000 operating and database systems, which are
becoming standards for key energy and utility market segments both in the
United States and abroad.
iProcess.sct. SCT offers its iProcess.sct solution, consisting of the
Internet Business Suite, Supply Chain Execution Suite, Supply Chain Planning
and Optimization Suite, and the Relationship Network Management component, to
the process manufacturing industries. The Company anticipates that it will
release the Relationship Network Management component during fiscal 2002.
The Internet Business Suite serves extended electronic trading communities.
Customer Portal, the first process-focused sell-side Internet commerce
application, is a web-based self-service application that enables extended
collaboration and electronic commerce. SCT's Internet Commerce solutions
deploy seamlessly over the Internet, employing leading e-technologies such as
Java, dynamic HTML and XML. Additional components include Internet Customer
Assistance and wireless access to Customer Portal.
Supply Chain Execution (SCE) consists of objects configured around industry-
specific business and supply chain processes. SCE enables users to integrate
enterprise functions such as planning, production execution, forecasting,
procurement, formula and process management, inventory management, customer
service, customer order management, logistics, distribution, finance and
accounting. SCE is designed for process manufacturers, including food and
beverage, chemicals, pharmaceuticals and consumer packaged goods
manufacturers, running on the Windows NT, UNIX, Oracle and SQL Server
platforms.
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The Supply Chain Planning and Optimization (SCP&O) components include
Advanced Planning, Advanced Scheduling and Demand Planning functionality.
SCP&O enables users to improve their supply chain management performance and
make their manufacturing process more efficient by applying mathematical
techniques to optimize the supply chain. SCP&O is designed for process
manufacturers, including food and beverage, chemicals, pharmaceutical and
consumer packaged goods manufacturers, and runs on the Windows NT platform.
Relationship Network Management, which is expected to be released during
fiscal 2002, provides for the next critical business performance improvement
step for process manufacturers, since it is no longer enough to simply model
and optimize the flow of materials through static supply networks. Brokers,
third party logistics providers, agents, exchanges and even service
professionals such as doctors and pharmacists are playing increasingly
important roles in the delivery and presentation of products to the
marketplace. The aggregate of all of these individuals and businesses, those
that physically manufacture, convert or handle the product (the supply chain),
and also those which provide market efficiency through sales, marketing,
information or other services (the relationship network), comprise the
commerce network. In this new economy, and in the industries SCT serves,
businesses can no longer assume one-directional flow of materials or
information, or one-to-many sales or procurement models. In commerce networks,
customers can also be suppliers, and relationships with channel service
providers such as exchanges, brokers or agents can no longer be handled
outside of the mainstream operating environment.
Oracle. The Company currently has an agreement with Oracle Corporation
allowing the Company to sublicense a limited use ORACLE system, which enables
a client to use ORACLE with Banner at a significantly lower cost than a full-
use ORACLE license. The agreement expires in July 2003. The Company's results
of operations could be adversely affected if ORACLE's market acceptance
declined or its customer base eroded.
Software Services
The Company provides a range of professional support services, including
systems implementation, modification, training and support; consulting
services; and information systems planning and integration. When obtaining a
license to use SCT's application software, clients typically purchase a
variety of software support services, such as installation, training and other
client support activities. The Company also provides data conversion,
customization and systems integration services. Contracts for these services
are typically longer in term than those for software support services and
shorter in term than those for information technology outsourcing services.
The Company also markets separate service offerings covering areas such as
consultative assistance and disaster recovery services, thereby allowing for
scalable contracts based upon client need.
Contracts for software services may be either on a fixed price or time and
materials basis. Fixed price contracts require the Company to perform
specified services for a fixed payment. The Company negotiates the fee to be
charged based on its estimate of the total expenses to be incurred in
providing the services. In the event the Company's costs to perform a software
services contract become greater than originally anticipated, the Company's
profit on that contract would be reduced; and in certain limited instances,
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 telephone
support, regulatory updates and functional and technical enhancements. The
annual maintenance fee generally is 15% to 20% of the license fee, and
generally increases each year by a specified percentage.
Product Development
Research and Development
SCT devotes substantial resources to product development in order to address
evolving clients' needs and provide new product offerings. The product
development staff is comprised of experts in various functional areas.
Technical experts include specialists in object technology, the Internet,
operating systems, and relational databases. Product development expenditures,
including expenditures for software maintenance, for the fiscal years ended
September 30, 2001, 2000 and 1999 were approximately $50,454,000, $48,051,000,
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and $49,921,000, respectively. After capitalization approximately $49,611,000,
$44,508,000 and $41,780,000, respectively, of these amounts were charged to
operations as incurred. For the same fiscal years, amortization of capitalized
software costs (which are not included in the aforementioned amounts) amounted
to approximately $5,554,000, $5,522,000 and $4,556,000, respectively.
Development Strategies
For the higher education market, the Company, in consultation with a group
of college and university advisors, is continuing development of an object
oriented, Web-based system that will expand the Company's higher education
solutions to move beyond a transaction management system and into an
interaction management system designed to help clients leverage relationships
with their key constituents. This offering, which is to be comprised of a new
information system, and a knowledge system that could also be offered in
conjunction with Banner, is being developed using industry standards such as
J2EE Enterprise Java Beans and XML and will use a distributed component
architecture and industry standard databases such as Oracle, IBM DB2, and
Microsoft SQL Server.
For the manufacturing/distribution market, the Company is expanding its
iProcess.sct integration platform capabilities with major new releases, and
anticipates releasing the Relationship Network Management component, an
innovative solution, during fiscal 2002. The new releases would provide for
"integration openness" and facilitate more efficient, effective and
competitive integration of iProcess.sct solution components within "best of
breed" solution environments. These releases also are planned to include many
new functional enhancements -- for example "commodity pricing". The Company
also anticipates releasing Collaborative Replenishment and Collaborative
Advanced Planning products during fiscal 2002, two new Supply Chain Planning
and Optimization components that would round out the iProcess.sct
collaborative planning, forecasting and replenishment solution capability.
For the energy and utilities market, in October 2001, the Company released
Banner Advantage, a Web-enabled version of our Banner suite. This architecture
supports a Web browser based desktop client as well as client server
presentation from a single source.
General
The Company's ability to sustain growth depends in part on the timely
development or acquisition of successful new products and improvements to
existing products. However, software development is a complex and creative
process that can be difficult to accurately schedule and predict. As a result,
new products, when and if available, will be released at the sole discretion
of the Company.
Sales and Marketing
The Company attracts clients primarily through its own sales force of
approximately 184 direct salespersons and support staff, who are engaged
primarily in selling software licenses and related services, as well as
selling the Company's SCT OnSite, systems integration, and certain other
professional services. SCT also attracts clients through referrals from
existing clients and active participation in industry conferences and trade
shows within the SCT markets. SCT International, headquartered in
Buckinghamshire, England, operates as an international extension of the three
industry market units. 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.
The Company's market units have separate sales organizations, each of which
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
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greater marketing, technical and financial resources than the Company, and
there can be no assurance that SCT will be able to continue to compete
successfully with existing or new competitors.
In the outsourcing services business, the Company competes with several
large providers of services, including International Business Machines
Corporation ("IBM"), Electronic Data Systems Corporation ("EDS"), and
Affiliated Computer Services, Inc., as well as smaller providers, such as
Collegis, Inc. in the education market. In the software services business, the
Company competes with several large providers of systems integration services,
including IBM, EDS, Unisys, Accenture, Cambridge Technology Partners and
certain of the so-called Big Five accounting firms, as well as smaller
providers of software consulting services. The Company also competes with in-
house information management and resource development staffs at potential
customer sites. Competitive factors in these businesses include the technical
expertise of on-site and support personnel, functional and industry-specific
expertise, availability and quality of hardware and software support,
experience, reputation and price.
In the application software business, the Company competes with other
providers of packaged application software and companies offering to develop
custom software. Competition also varies by vertical market. Within the higher
education market, the Company's principal competitors are Datatel, PeopleSoft,
Oracle, SAP, and Jenzabar. Competitors in the energy/utilities market include
SAP, PeopleSoft, Peace, Severn Trent and Union Fenosa. The manufacturing/
distribution market is highly competitive and competitors include SAP,
PeopleSoft, Invensys, Oracle, J.D. Edwards, Ross, QAD Systems, I2,
Manugistics, Logility and Aspentech. 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, 2001, the revenues expected to be received by SCT under
outsourcing services contracts, which are based on proposed budgeted amounts
in those contracts, and under software license and services agreements,
including systems integration, enhancements, maintenance, support services,
and software implementation, modification and training, amount to
approximately $495 million, as compared to approximately $566 million at
September 30, 2000 and extend through December 31, 2006. Of the $495 million,
approximately $297 million is expected to be recognized in fiscal 2002.
Approximately $94 million of the $495 million applies to OnSite services
contracts. These amounts 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 customers in its targeted markets.
Any such reductions could impact new contracts as well as existing contracts.
Certain clients in the education and energy/utilities market 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, 2001 includes
approximately $27 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, 2001, the Company employed approximately 2,370
employees, of which approximately 850 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
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bargaining agreements, except for approximately 20 employees at one client
site. The Company considers its relationship with its employees to be
satisfactory.
When the Company receives a new OnSite services contract, it generally
recruits most of the existing employees of the client's data processing
department to become SCT employees. However, the Company also supplies some
senior level personnel from its own group of trained specialists, which
requires the Company to identify employees willing to relocate to the client's
area.
Executive Officers of SCT
The Executive Officers of SCT are as follows:
Position and Office
Name Age Currently Held
- ---- --- --------------
Michael J. Emmi 59 Chairman of the Board, President and Chief Executive
Officer; Director
Michael D. Chamberlain 57 Chief Operating Officer; Director
Eric Haskell 55 Senior Vice President, Finance and Administration,
Treasurer, and Chief Financial Officer
Richard A. Blumenthal 53 Senior Vice President, General Counsel and Secretary
Deirdre F. Wielgus 42 Senior Vice President, Organizational Strategy
Jerry A. Smith 42 Senior Vice President and Chief Technology Office
Officers are appointed by the Board of Directors, typically at its first
meeting after the annual meeting of shareholders for such terms as the Board
of Directors shall determine or until their successors have been elected and
have qualified.
Business Experience During the Past Five Years of Each Executive Officer
Michael J. Emmi has served as Chairman of the Board, President and Chief
Executive Officer of the Company since May 1985. He is also a director of
CompuCom Systems, Inc., Safeguard Scientifics, Inc. and CDI Corporation.
Michael D. Chamberlain has served as a director of the Company since July
1989. He has served as Chief Operating Officer since November 2001, and prior
thereto, as President, Global Operations from July 1999 to November 2001,
President of the SCT Software Group from May 1994 to July 1999, and President
of the Educational Systems business from October 1986 to July 1999.
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. He is a director of
ESPS, Inc.
Richard A. Blumenthal has served as Senior Vice President, General Counsel
and Secretary of the Company since July 1990, and prior thereto, as Vice
President, General Counsel and Secretary since July 1987. He has been General
Counsel of the Company since December 1985.
Deirdre F. Wielgus has served as Senior Vice President, Organizational
Strategy since January 2001. Prior thereto, she served as Corporate Vice
President of Cross-Industry Services from July 1999, and has held the
following positions in the Company's former Technology Management Division:
Vice President, Research Institutions and Vice President, Best Practices from
May 1996 to July 1999.
Jerry A. Smith has served as Senior Vice President and Chief Technology
Officer since August 1999. Prior thereto, he was Chief Technology Officer of
Lingafranca, d/b/a Semaphore Corporation, a global consulting and training
firm, from January 1997 to September 1999; and President of Marketplace
Technologies, Inc., a software development and design firm, from January 1996
to January 1997.
ITEM 2. PROPERTIES.
SCT occupies four adjacent buildings and a portion of a fifth building in
the Great Valley Corporate Center in Malvern, Pennsylvania. The Company's
corporate headquarters in Malvern, Pennsylvania is located in one of
8
the five buildings referenced above in an approximately 47,000 square-foot
facility owned by the Company. Of the remaining four adjacent office
buildings, the Company owns an approximately 56,200 square-foot facility used
by its higher education market unit, leases an approximately 48,900 square-
foot facility used by its process manufacturing and distribution market unit
under a lease which expires in August 2005, leases an approximately 70,000
square-foot facility used for general corporate operations under a lease which
expires in November 2008, and leases 10,050 square feet of an approximately
95,000 square foot facility that is used by its higher education market unit.
The Company also leases an approximately 73,900 square-foot facility in
Frazer, Pennsylvania, near its Malvern campus, under a lease which expires in
February 2009. Although the Frazer facility is unused due to personnel
consolidation, the Company is actively attempting to sublease it and, during
fiscal 2001, accrued a reserve for the anticipated net loss associated
therewith.
The Company owns and occupies an approximately 45,000 square-foot facility
in Rochester, New York that is used by its education market unit. In Columbia,
South Carolina, the Company owns and occupies both an office facility
containing approximately 60,000 square-feet and another containing
approximately 80,000 square feet, and leases an aggregate of approximately
22,000 square feet which expires in September 2002, substantially all of which
are used or sublet by the Company's energy and utilities market unit. In
December 1998 the Company purchased an additional nine acres in Columbia,
South Carolina.
SCT leases offices for use by various market units in certain cities
throughout the United States including San Diego, California; Atlanta,
Georgia; Phoenix, Arizona; Dallas, Texas; Herndon, Virginia; Toronto, Ontario
(Canada); Portland, Oregon; Melbourne, FL; Pittsford, NY; High Wycombe,
England; Cheshire, England; Paris, France; Sophia, France; Nuernberg, Germany;
Leuvan, Belgium; and Rijswijk, the Netherlands.
SCT believes that its facilities are adequate for its present business
needs.
ITEM 3. LEGAL PROCEEDINGS.
For information regarding the litigation brought against the Company by
Unisys Corporation in connection with the Company's position as a
subcontractor to Unisys in providing certain software and related services for
Broward County, Florida, please refer to the information under the heading
Contingency in Item 7, MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.
The Company is also involved in other legal proceedings and litigation
arising in the ordinary course of business. In the opinion of management, the
outcome of such proceedings and litigation currently pending will not
materially affect the Company's consolidated financial statements.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable
9
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
SCT's Common Stock is traded on the Nasdaq Stock Market under the symbol
"SCTC". The following table sets forth its high and low sale prices on the
Nasdaq Stock Market for the specified quarter.
Period
Year ended September 30, 2001
----------------------------- HIGH LOW
----- -----
1st quarter.................................................. 17.44 10.25
2nd quarter.................................................. 13.75 8.00
3rd quarter.................................................. 9.60 5.75
4th quarter.................................................. 14.19 7.77
Year ended September 30, 2000
----------------------------- HIGH LOW
----- -----
1st quarter.................................................. 19.25 10.00
2nd quarter.................................................. 28.38 12.50
3rd quarter.................................................. 24.63 14.75
4th quarter.................................................. 20.50 16.63
The approximate number of stockholders of record of SCT's Common Stock as of
September 30, 2001, was 418.
SCT has not paid any dividends for more than the last two fiscal years. The
Company's revolving credit agreement prohibits the Company from declaring or
paying any dividends other than stock dividends.
10
ITEM 6. SELECTED FINANCIAL DATA.
Year Ended September 30, 2001(a) 2000(b) 1999(c) 1998(d) 1997
-------- -------- -------- -------- --------
(in thousands, except per share amounts)
Revenues................................................................. $344,965 $340,042 $376,896 $327,358 $227,133
Income (loss) from continuing operations before income taxes............. (3,401) 10,792 33,687 31,190 33,194
Provision (benefit) for income taxes..................................... (919) 4,900 15,301 13,770 13,098
Income (loss) from continuing operations................................. (2,482) 5,892 18,386 17,420 20,096
Income from discontinued operations, net of
income taxes........................................................... 17,300 2,736 913 3,954 2,795
Net income............................................................... 14,818 8,628 19,299 21,374 22,891
Income (loss) from continuing operations:
per common share........................................................ (0.08) 0.18 0.57 0.52 0.67
per common share -- assuming dilution................................... (0.08) 0.18 0.55 0.48 0.59
Income from discontinued operations:
per common share........................................................ 0.53 0.08 0.03 0.12 0.09
per common share -- assuming dilution................................... 0.53 0.08 0.03 0.11 0.08
Net income:
per common share........................................................ 0.45 0.27 0.59 0.64 0.76
per common share -- assuming dilution................................... 0.45 0.26 0.58 0.59 0.69
Common shares and equivalents outstanding: average common shares......... 32,842 32,391 32,494 33,532 29,996
average common shares -- assuming dilution.............................. 32,842 33,624 33,531 36,035 34,124
Working capital.......................................................... $183,998 $113,275 $106,227 $130,266 $ 66,964
Net assets of discontinued operations.................................... -- 36,692 36,147 29,421 23,765
Total assets............................................................. 387,841 364,161 329,406 326,718 202,064
Long-term debt........................................................... 74,723 77,521 78,232 78,425 2,549
Stockholders' equity..................................................... 221,397 201,437 188,276 182,922 150,425
- ---------------
(a) Includes a pretax restructuring charge of $5,134 and a pretax asset
impairment charge of $7,831. Results without these charges would have been
net income of $22,774 and net income per share -- assuming dilution of
$0.69.
(b) Includes a pretax restructuring charge of $1,000 and equity in losses of
affiliates before taxes of $4,761. Results without these charges would have
been net income of $12,085 and net income per share -- assuming dilution of
$0.36.
(c) Includes equity in losses of affiliates before taxes of $3,161. Results
without these charges would have been net income of $21,196 and net income
per share -- assuming dilution of $0.63.
(d) Includes a pretax charge of $16,063 for purchased research and development.
Results without the charge for purchased research and development would
have been net income of $31,815 and net income per share -- assuming
dilution of $0.88.
11
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
The purpose of this section is to give interpretive guidance to the reader
of the financial statements. For specific policies and breakdowns, refer to
the consolidated financial statements and disclosures. This Management's
Discussion and Analysis of Financial Condition and Results of Operations
contains descriptions of the Company's expectations regarding future trends
affecting its business. These forward-looking statements and other forward-
looking statements made elsewhere in this document are made in reliance upon
the safe harbor provisions of the Private Securities Litigation Reform Act of
1995.
Overview
Systems & Computer Technology Corporation (the "Company") develops,
licenses, and supports a suite of enterprise software; offers a series of
related services including systems implementation, systems integration, and
maintenance and enhancements; and provides a range of information technology
outsourcing services. The Company's markets are higher education, process
manufacturing and distribution, and energy and utilities. The Company's focus
on three vertical markets enables it to develop and utilize a base of industry
expertise to deliver products and services that address specific client
requirements.
Prior to June 29, 2001, the Company also served the government market. On
June 29, 2001, the Company sold its Global Government Solutions business (GGS)
to Affiliated Computer Services, Inc. Therefore, the results of operations for
all periods have been restated to reflect the government business's results as
discontinued operations. The discussion on operating results contained in this
section excludes the results of the discontinued government business.
The Company licenses software under license agreements and provides support
services including training, installation, consulting, and maintenance and
enhancements. Maintenance and enhancement agreements provide for telephone
support and error correction for current versions of licensed systems, as well
as regulatory updates and functional and technical enhancements to licensed
systems if and when they become generally available.
The Company derives services revenues from a variety of professional
services, which include information systems planning, implementation,
integration, and customization services for client systems. These services
contracts are typically longer in term than software support services and
shorter in term than information technology outsourcing services.
The Company provides information technology outsourcing services in a
variety of areas, including end-user computing solutions, network management,
applications outsourcing, and business-process outsourcing. These services are
designed to assume total or partial control and responsibility for clients'
information resources, generally on a long-term basis. The Company provides
management, staffing, and support with skilled information systems personnel
and industry specialists who are knowledgeable in both computer-based
technologies and the functional aspects of clients' activities.
Results of Operations
The following table sets forth: (i) income statement items as a percentage
of total revenue and (ii) the percentage change for each item from the prior-
year comparative period.
% of Total Revenue % Change
Year Ended from
September 30, Prior Year
------------------- -----------
2001 2000 1999 2001 2000
---- ---- ---- ---- ----
Revenues
Outsourcing services......................................................................... 17% 19% 18% (7)% (6)
Software sales and commissions............................................................... 15% 16% 19% (5)% (25)
Maintenance and enhancements................................................................. 28% 25% 20% 15% 12%
Software services............................................................................ 38% 40% 43% (3)% (16)
Interest and other income.................................................................... 2% -- -- 127% 83%
---- ---- ---- --- ---
Total........................................................................................ 100% 100% 100% 1% (10)
==== ==== ==== === ===
12
% of Total Revenue % Change
Year Ended from
September 30, Prior Year
------------------- -----------
2001 2000 1999 2001 2000
---- ---- ---- ---- ----
Expenses
Cost of services, software sales, commissions, maintenance and enhancements.................. 64% 64% 64% 2% (10)
Selling, general and administrative.......................................................... 32% 30% 25% 8% 7%
Restructuring charge......................................................................... 2% -- -- 413% --
Asset impairment charge...................................................................... 2% -- -- -- --
Equity in losses of affiliates .............................................................. -- 2% 1% (100)% 51%
Interest expense............................................................................. 1% 1% 1% 3% (1)
Income (loss) from continuing operations before income taxes................................. (1)% 3% 9% (132)% (68)
== === === ==== ===
The following table sets forth the gross profit for each revenue category as
a percentage of revenue for each such category, and the total gross profit as
a percentage of total revenue (excluding interest and other income). The
Company does not separately present the cost of maintenance and enhancements
revenue because it is impracticable to separate such cost from the cost of
software sales.
Year Ended
September 30,
-------------------
2001 2000 1999
---- ---- ----
Gross Profit
Outsourcing services........................................................................................ 21% 20% 24%
Software sales, commissions, maintenance and enhancements................................................... 45% 47% 47%
Software services........................................................................................... 30% 32% 32%
-- -- --
Total...................................................................................................... 35% 36% 36%
== == ==
Revenues: Outsourcing services revenue decreased 7% in fiscal year 2001
compared with the prior-year period. This decrease is primarily the result of
(i) significant pass-through revenue related to expenditures recorded for a
client in the process manufacturing and distribution market in the second
quarter of fiscal year 2000 and (ii) the termination of a contract in the
higher education market and decreased services provided under several other
contracts in the fiscal year 2001 periods. These decreases are partially
offset by increases resulting from an agreement signed in the fourth quarter
of fiscal year 2000. The 6% decrease in outsourcing services revenue in fiscal
year 2000 is primarily the result of a reduction in non-recurring services
provided under several small contracts in fiscal year 2000 compared with
fiscal year 1999. Contract renewal rates, as a percentage of annual revenue
from contracts available for renewal, for the fiscal years 2001, 2000, and
1999 were 70%, 93%, and 64%, respectively. Contracts available for renewal in
a particular period include contracts with expiration dates within the period,
as well as contracts renewed during the period that have expiration dates in a
later period. As a result of the termination of an outsourcing agreement at
the end of the third quarter of fiscal year 2001 -- the only outsourcing
agreement which did not renew in fiscal year 2001 -- it is expected that
revenues will decrease from those levels experienced prior to the termination
of this agreement and remain at the reduced level unless new contracts are
obtained.
Software sales and commissions decreased 5% in fiscal year 2001 compared to
the prior-year period due primarily to decreased licenses in the Company's
process manufacturing and distribution market. The Company believes these
decreases are primarily the result of delays in the client decision-making
process due to the general economic environment, which has been particularly
felt in the technology sector. These revenue decreases are partially offset by
revenue increases in the higher education market. Higher education revenues
include $2.7 million in shares of WebCT earned in the third quarter of fiscal
year 2001 by licensing to schools with cumulative enrollments totaling one
million students. Commissions, in the form of shares of WebCT, will continue
to be earned as additional schools license this product because the threshold
has been met. Software sales and commissions decreased 25% in fiscal year 2000
compared to fiscal year 1999. This is due to (i) significantly decreased
licenses in each of the Company's markets in the first quarter of fiscal year
2000, (ii) decreased licenses in the education market in the second and third
quarters, and (iii) decreased licenses in the energy and utilities and process
manufacturing and distribution markets in the fourth quarter.
13
The 15% and 12% increases in maintenance and enhancements revenue in fiscal
years 2001 and 2000, respectively, were the result of the growing installed
base of clients in all of the Company's markets. The Company continues to
experience a high annual renewal rate on existing maintenance contracts in
these marketplaces, although there can be no assurance that this will
continue.
Software services revenue decreased 3% in fiscal year 2001 compared to the
prior-year period. This decrease is primarily the result of decreased
implementation and integration services performed in the process manufacturing
and distribution market in the first quarter of fiscal year 2001 and in the
energy and utilities market in the third and fourth quarters of fiscal year
2001. These decreases were primarily the result of a decline in license fees,
which generate service orders. These decreases were partially offset by
increases in the higher education business in the third and fourth quarters of
fiscal year 2001. Software services revenue decreased 16% in fiscal year 2000
compared to the prior-year period. This decrease is primarily the result of
decreased implementation and integration services performed in the process
manufacturing and distribution market as well as decreased Year 2000 services
provided to other markets. The implementation and integration services
decreases were primarily the result of decreased licenses at the end of fiscal
year 1999 and in the first quarter of fiscal year 2000.
The increase in interest and other income in fiscal year 2001 is primarily
attributable to interest income earned on the Company's increased cash and
short-term investments balances and a full year of amortization of the WebCT
noncompete agreement signed in the Company's third quarter of fiscal year
2000.
Gross Profit: Gross profit decreased as a percentage of total revenue
(excluding interest and other income) from 36% for fiscal year 2000 to 35% for
fiscal year 2001. The total gross profit percentage decreased because of
decreases in the software sales, commissions, maintenance, and enhancements
gross profit percentage and the software services gross profit percentage. The
software sales, commissions, maintenance, and enhancements gross profit
percentage decrease is primarily the result of decreased software sales during
the fiscal year 2001 period, partially offset by the WebCT commissions revenue
earned during fiscal year 2001, and an increase in certain costs. The Company
incurred increased noncapitalizable research and development expenses during
the fiscal year 2001 period primarily in the higher education business related
to a new product initiative. Software services margins decreased primarily as
a result of reduced services revenues primarily in the energy and utilities
business. The Company anticipates reduced services revenue in the energy and
utilities market in fiscal year 2002 and implemented a restructuring plan
during fiscal year 2001 in an attempt to improve future performance. These
decreases were partially offset by increases in the outsourcing services gross
profit percentage primarily as a result of the new agreement signed at the end
of fiscal year 2000, new work on existing contracts, and the elimination of
the negative impact of the second quarter fiscal year 2000 pass-through
revenue discussed above.
Gross profit as a percentage of revenues was 36% for fiscal years 2000 and
1999; however, the components of the gross profit percentage changed from
fiscal year 1999 to fiscal year 2000. The gross profit percentage for software
sales, commissions, maintenance, and enhancements increased slightly in fiscal
year 2000 as a result of decreased costs in the energy and utilities and
process manufacturing and distribution markets. The software services gross
profit percentage also improved slightly for the year ended September 30,
2000, compared with the prior-year period, primarily as a result of improved
efficiencies in the first and second quarters of fiscal year 2000. The
outsourcing services gross profit percentage decreased primarily as result of
(i) decreased revenues in fiscal year 2000, compared with the prior-year
period, without a corresponding reduction in overhead expenses, and (ii)
several adjustments related to certain contract provisions recorded in the
second quarter of fiscal year 2000.
Selling, General and Administrative Expenses: Selling, general and
administrative expenses increased in the first six months of fiscal year 2001
and in fiscal year 2000 compared with the prior-year periods primarily as a
result of the addition of sales personnel and selling expenses primarily in
the process manufacturing and distribution and higher education markets in an
effort to increase sales. Fiscal year 2000 costs also increased compared with
fiscal year 1999 costs as a result of increased professional and legal
expenses. Selling, general and administrative costs were flat in the second
half of fiscal year 2001 as the Company realized that the increase in sales
was slower than anticipated and that restructuring actions were necessary.
Restructuring Charges: During the second quarter of fiscal year 2001, the
Company decided that restructuring actions were necessary to improve the
Company's performance. The restructuring plan included the termination of
employees, management changes, consolidation of certain facilities, and
discontinuation of non-
14
critical programs. During the quarter ended June 30, 2001, the Company accrued
$3.5 million related to severance and termination benefits and $0.4 million of
other costs based on a termination plan developed by management in
consultation with the Board of Directors. As of September 30, 2001, $1.1
million of this accrual remains. In May and June 2001, the Company terminated
approximately 150 employees engaged primarily in marketing, administrative,
special-programs, and development functions. The Company experienced some
savings in the third quarter of fiscal year 2001 and began to experience full
cost savings related to the restructuring in the fourth quarter of fiscal year
2001.
The Company continued to evaluate its business prospects and forecasts
during the fourth quarter of fiscal year 2001. As a result of its evaluation,
the Company implemented another restructuring plan, which included the
discontinuation of non-critical programs, termination of employees, and
consolidation of certain facilities primarily in the energy and utilities
business. The restructuring was carried out in an effort to improve the
Company's performance. During the quarter, the Company accrued $0.5 million
related to severance and termination benefits and $0.6 million of other costs
based on a termination plan developed by management in consultation with the
Board of Directors. As of September 30, 2001, $0.8 million of this accrual
remains. In August 2001, the Company terminated approximately 40 employees
engaged primarily in marketing, administrative, special-programs, and
development functions. The Company experienced some savings in the fourth
quarter of fiscal year 2001 and expects to experience full cost savings
related to the restructuring in fiscal year 2002. The aggregate savings
anticipated from the fiscal year 2001 restructuring plans is approximately 7%
of total expenses incurred by continuing operations on an annual basis. The
Company will continue to evaluate the need for additional program or staff
reductions in fiscal year 2002.
During the quarter ended December 31, 1999, the Company implemented a
restructuring plan, which included the termination of employees and
discontinuation of non-critical programs. The restructuring was considered
necessary in light of significantly decreased license fees in the quarter. The
Company accrued $1 million related to severance and termination benefits based
on a termination plan developed by management in consultation with the Board
of Directors in December 1999. In January 2000, the Company terminated
approximately 100 employees engaged primarily in marketing, administrative,
special-programs, and development functions. The Company began to experience
full cost savings related to the restructuring in the second quarter of fiscal
year 2000.
Contingency: The Company has been involved in litigation relating to a
software implementation in Broward County, Florida. The Company believed that
it had meritorious defenses and the probability of an unfavorable outcome
against the Company was unlikely. However, on October 31, 2000, an adverse
decision was rendered against the Company in this litigation. The Company's
claim for approximately $3.1 million -- which was included in the Company's
accounts receivable balances -- for software licensed, services rendered, and
expenses incurred was denied. In addition, as adjusted based upon post-trial
motions and appeals, the Company was ordered to pay damages in the amount of
approximately $2.0 million plus prejudgment interest on a portion of that
amount. The Company recorded a pretax charge of $5.8 million for damages and
other costs associated with the action in the fourth quarter of fiscal year
2000. This amount is included in the fiscal year 2000 results of discontinued
operations. While this contract was originated within GGS, which has been
sold, the right to appeal and the impact of the related outcome were retained
by the Company.
The Company is also involved in other legal proceedings and litigation
arising in the ordinary course of business. In the opinion of management, the
outcome of such proceedings and litigation currently pending will not
materially affect the Company's consolidated financial statements.
Income Taxes: The effective tax rate on the loss from continuing operations
in the fiscal year 2001 provision is less than the federal statutory rate
principally due to not recording a tax benefit for losses related to the
Company's foreign operations, the effects of state income taxes, and the
effects of non-deductible expenses. These items are partially offset by the
effects of the research and development tax credit. The effective tax rate on
income from continuing operations in the fiscal year 2000 provision is greater
than the federal statutory rate principally due to the effects of state income
taxes and of not recording a tax benefit for certain losses related to the
Company's foreign operations. Increased research and development expenditures
in fiscal year 2000 and the reinstatement of the research and development tax
credit retroactive to July 1, 1999, resulted in an increased research and
development tax credit in fiscal year 2000.
15
At September 30, 2001, the Company had $47.9 million of net operating loss
carryforwards in various states and $17.1 million of net operating loss
carryforwards in foreign jurisdictions. The state carryforwards expire in
various periods ending on or before September 30, 2016. The foreign tax losses
can be indefinitely carried forward. At September 30, 2001 and 2000, the
Company had valuation allowances of $6.2 million and $2.7 million,
respectively, related to the deferred tax assets associated with the state and
foreign carryforwards. Although realization is not assured, management
believes it is more likely than not that all remaining deferred tax assets
will be realized either through carryback availability or the generation of
sufficient future taxable income.
Acquisitions and Divestitures: On June 29, 2001, the Company completed the
sale of GGS to Affiliated Computer Services, Inc., (ACS), realizing cash
proceeds of $85 million. These proceeds will be reduced by the payment of
taxes and may be subject to adjustment in certain circumstances. Based on a
formula contained in the purchase agreement, the purchase price reduction
could be as much as approximately $40 million, although the Company does not
believe that any material reduction will occur. In addition, the Company made
certain representations and warranties to ACS under the purchase agreement,
which could also result in adjustments to the proceeds received. If a purchase
price adjustment should result, or if the Company is found to have breached
any of the representations and warranties contained in the purchase agreement,
the Company may have to return cash proceeds and the Company's financial
results could be adversely affected. As a result of the disposition, the
Company identified opportunities to further reduce and consolidate certain
corporate functions, and provided a reserve of $12.8 million for severance and
real estate related costs associated with such actions. As of September 30,
2001, $10.6 million, which is primarily included in accrued expenses, remained
accrued for the completion of these actions and the settlement of the
previously accrued Broward County litigation discussed above. After this
reserve provision, the sale resulted in a pretax gain of $33.3 million ($20.2
million after taxes). The results of GGS have been reported separately as
discontinued operations in the consolidated statements of operations. Prior-
year consolidated balance sheets and statements of operations have been
restated to present GGS as a discontinued operation. For business segment
reporting purposes, GGS data were previously reported as a separate segment.
In August 2000, the Company acquired the EnerLink business unit, a complex
billing and rates management software developer for the energy and utilities
marketplace, from Science Applications International Corporation for
consideration of $2.9 million. Under the terms of the purchase agreement, the
Company could pay an additional $8.0 million over the next four years,
contingent upon the revenue derived from the license or other sale of the
EnerLink software over that period. The Company was not required to make an
additional payment under these terms in fiscal year 2001; however, the Company
could be required to make additional payments over the next three years. Any
future payments would result in an adjustment to the purchase price. The
Company recorded costs in excess of the fair value of net assets acquired of
$0.5 million related to the acquisition. This acquisition gives the Company
increased charge-handling and billing capabilities, including interval data
collections and calculations, which support real-time energy pricing and
meter-data acquisition.
In June 2000, the Company sold its SCT Learning Suite distance-learning
course-creation tools to WebCT, Inc., in return for common stock of WebCT
valued at $2.5 million. The Company acquired the SCT Learning Suite tools in
the August 1999 acquisition of RSMART Learning Systems Corporation. In the
quarter ended June 30, 2000, the Company recorded a gain of $0.4 million
related to this sale. This gain was reduced to zero as the Company agreed to
make concessions to former SCT Learning Suite clients in the fourth quarter of
fiscal year 2000. As part of the transaction, the Company signed a three-year
noncompete agreement in exchange for stock of WebCT valued at $3.5 million.
The related liability is being amortized over the period of the agreement. The
Company also made an additional $10.0 million investment in preferred stock of
WebCT. As noted above, the Company has the ability to earn additional equity
in WebCT in the future through performance-based compensation. This
compensation depends on delivery of commitments from schools choosing WebCT as
their primary supported enterprise-wide course-tools platform. As discussed
below, in the second quarter of fiscal year 2001, the Company recorded asset
impairment charges of $7.8 million related to this investment.
In April 2000, the Company acquired the assets of a division of Pinnacle
Software Corporation for consideration of $2.4 million. The acquired business
included an established workforce of 16 employees who have provided
maintenance and enhancement services to some of the Company's higher education
clients over the prior 10 years. It also included Pinnacle's reporting-
solutions product, which enhances the financial-reporting and report-
distribution capabilities of universities using some of the Company's
administrative applications.
16
In May 1999, the Company acquired Advanced Planning Systems, Inc., which
offered a demand-planning product to the process manufacturing and
distribution market, for total consideration of $2.2 million, comprised of
104,000 shares of Company stock valued at $1.6 million and $0.7 million cash.
The Company recorded goodwill of $1.0 million related to the acquisition.
Cyclical Nature of Business: Certain nonseasonal factors have resulted in
quarterly fluctuations in operating results, including variability of software
license fee revenues, seasonal patterns of capital spending by clients, the
timing and receipt of orders, competition, pricing, new product introductions
by the Company or its competitors, levels of market acceptance for new
products, and general economic and political conditions. While the Company has
historically generated a greater portion of license fees and total revenue in
the last two fiscal quarters, the nonseasonal factors cited above may have a
greater effect than seasonality on the Company's results of operations.
Liquidity, Capital Resources, and Financial Position
The following discussion of cash flow activity is based upon historical
information, as the statements of cash flows do not present the GGS business
as a discontinued operation.
The Company's cash and short-term investments balance was $164.3 million and
$65.9 million as of September 30, 2001 and 2000, respectively. The cash
balances increased primarily as a result of cash proceeds from the sale of the
Company's GGS business. The Company expects to make cash payments for taxes
and for the satisfaction of accruals established at the time of the sale. The
Company anticipates using the remaining cash balance to fund future growth
through various means, including strategic alliances and acquisitions, sales-
force growth, and development of additional service offerings.
Cash provided by operating activities was $20.8 million for fiscal year
2001, compared with $54.8 million for the prior-year period. The primary
sources of cash in the fiscal year 2001 period were (i) increased income
before asset impairment charges and depreciation and amortization, (ii)
decreased accounts receivable primarily the result of the Company's increased
attention to cash collections, and (iii) increased income taxes payable. These
sources of cash were offset by (i) decreased accrued expenses, excluding the
impact of the GGS sale, (ii) decreased deferred revenue, and (iii) increased
other current assets, primarily current deferred taxes. Deferred revenue
decreased primarily as a result of prepayment on a maintenance contract in the
energy and utilities business in fiscal year 2000; such prepayment did not
recur in fiscal year 2001.
Cash provided by operating activities was $54.8 million for fiscal year
2000. Operating cash flows increased in fiscal year 2000 primarily as the
result of decreases in accounts receivable balances and increases in deferred
revenue. The decrease in accounts receivable is the result of decreased
revenues compared with the prior-year period and the Company's increased
attention to cash collections. The increase in deferred revenue is primarily
the result of new maintenance contracts with prepayment terms signed during
the year.
The Company provides outsourcing services and software-related services,
including systems implementation and integration services. Contract fees from
outsourcing services are typically based on multi-year contracts ranging from
three to seven years in length, and provide a recurring revenue stream
throughout the term of the contract. Software services contracts, including
systems implementation and integration services, usually have shorter terms
than outsourcing services contracts, and billings are sometimes milestone-
based. During the beginning of a typical outsourcing services contract, the
Company performs services and incurs expenses more quickly than during the
later part of the contract. Billings usually remain constant during the term
of the contract. In some cases when a contract term is extended, the billing
period is also extended over the new life of the contract. In certain software
services contracts, the Company performs services but cannot immediately bill
for them. Revenue is usually recognized as work is performed, resulting in an
excess of revenues over billings in such periods. The Company's Consolidated
Balance Sheet reflects this excess as unbilled accounts receivable. As an
outsourcing services contract proceeds, the Company performs services and
incurs expenses at a lesser rate. This results in billings that exceed revenue
recognized in such periods, which causes a decrease in the unbilled accounts
receivable. Likewise, billings in a software services contract causes a
decrease in the unbilled accounts receivable. In both cases, additional
unbilled accounts receivable will continue to be recorded based on the terms
of the contracts. The remaining unbilled accounts receivable balance is
comprised of software sales for which the
17
Company has shipped product and recognized revenue, but has not billed amounts
due to the contractual payment terms. The Company usually bills these unbilled
balances within one year.
The Company's working capital at September 30, 2001, was $184.0 million and
at September 30, 2000, was $113.3 million.
Long-Term Investments: The Company made investments for strategic business
purposes of $16.0 million in the common and preferred stock of WebCT, a
privately held Internet company. The fair value of this investment, which is
classified as a long-term asset, is not readily determinable; therefore, it is
carried at cost adjusted for an other-than-temporary impairment discussed
below. The Company regularly reviews the underlying operating performance,
cash flow forecasts, and recent private equity transactions of this privately
held company in assessing impairment. In the second quarter of fiscal year
2001, the Company recorded asset impairment charges of $7.8 million related to
this investment. In the third quarter of fiscal year 2001, the Company earned
$2.7 million in shares of WebCT. The Company earned these shares as a result
of a joint marketing agreement with WebCT pursuant to which schools with
cumulative enrollments totaling one million students licensed a product
jointly developed by the Company and WebCT. Shares of WebCT will continue to
be earned as additional schools license this product now that this threshold
has been met. At September 30, 2001, the Company owns approximately 11% of the
voting shares of WebCT. At September 30, 2001, the aggregate investment in
WebCT is $10.8 million, and is included in other assets and deferred charges
in the consolidated balance sheet.
Throughout fiscal year 1999, the Company made a series of investments in
Campus Pipeline, Inc. As of September 30, 2001, the Company held an
approximately 57% interest in the common stock of this affiliate, with a
carrying amount of zero. The Company has determined that it does not control
Campus Pipeline because there are fully voting convertible preferred shares
outstanding that lower the Company's voting interest to approximately 42%.
Therefore, the Company accounts for its investment using the equity method of
accounting. The Company will not record any additional future losses of Campus
Pipeline and will not record any future earnings until the cumulative,
unrecorded losses are offset.
Cash provided by investing activities was $29.5 million for fiscal year
2001, compared with cash used of $36.4 million in fiscal year 2000. In fiscal
year 2001, cash was primarily provided by the sale of the GGS business offset
by cash used in the purchase of investments, property and equipment, and
subsidiary assets. The primary uses of cash in the fiscal year 2000 period
were the purchase of short-term and long-term investments and property and
equipment, and the capitalization of software development costs.
The $2.0 million and $3.7 million in cash provided by financing activities
for fiscal years 2001 and 2000, respectively, consists primarily of proceeds
from the exercises of stock options.
The Company has a $30 million senior revolving credit facility available for
general corporate purposes. The credit facility agreement expires in June 2003
and includes optional annual renewals. There were no borrowings outstanding at
September 30, 2001 or 2000. As long as there are borrowings outstanding, and
as a condition precedent to new borrowings, the Company must comply with
certain covenants established in the agreement. Under the covenants, the
Company is required to maintain certain financial ratios and other financial
conditions. The Company may not pay dividends (other than dividends payable in
common stock) or acquire any of its capital stock outstanding without a
written waiver from its lender.
The credit agreement provides for the issuance of letters of credit. The
amount available for borrowing under the revolving credit facility is reduced
by the total outstanding letters of credit. At September 30, 2001, the Company
had $0.6 million of letters of credit outstanding and $29.4 million available
under the revolving credit facility. The Company pays a commitment fee of 5/
16% on the unused portion of the revolving credit facility.
In October 1998, the Company's Board of Directors authorized the repurchase
of up to 3 million of its common shares. The Company repurchased 2.3 million
of its common shares for $22.0 million in fiscal year 1999. The Company's
senior revolving credit agreement covenants were amended in October 1998 to
allow the Company to repurchase capital stock not to exceed $35 million and 3
million shares before April 15, 1999. The Company is currently unable to
repurchase additional shares of common stock without another amendment to its
credit agreement.
18
The Company has convertible debentures outstanding, which bear interest at
5% and mature on October 15, 2004. In October 2000, $27,000 of the convertible
subordinated debentures were converted into approximately 1,000 shares of
common stock of the Company. The remaining balance of convertible debentures
at September 30, 2001, is $74.7 million. If these remaining debentures
outstanding were converted, 2.8 million additional shares would be added to
common shares outstanding. These debentures were antidilutive for fiscal years
2001, 2000, and 1999 and therefore are not included in the above denominators
for income (loss) from continuing operations per share -- assuming dilution,
income from discontinued operations per share -- assuming dilution, or net
income per share -- assuming dilution for these periods.
The Company believes that its cash and cash equivalents, short-term
investments, cash provided by operations, and borrowing arrangements should
satisfy its financing needs for the foreseeable future.
Financial Risk Management: The Company invests its cash in a variety of
financial instruments, including state and municipal securities, corporate
debt securities, and money market instruments. These investments are
denominated in U.S. dollars. Investments in both fixed-rate and floating-rate
interest-earning instruments carry a degree of interest-rate risk. Fixed-rate
securities may have their fair market value adversely impacted due to a rise
in interest rates, while floating-rate securities may produce less income than
expected if interest rates fall. Historically, the Company's investment income
has not been material to the Company's financial results, and the Company does
not expect that changes in interest rates will have a material impact on the
results of operations. See Note B to the financial statements for additional
information with respect to the investment portfolio.
The Company also has issued fixed-rate debt, which is convertible to Company
stock at a predetermined conversion price. Convertible debt has
characteristics that give rise to both interest-rate risk and market risk
because the fair value of the convertible security is affected by both the
current interest-rate environment and the price of the underlying Company
stock. For the years ended September 30, 2001, 2000, and 1999, the Company's
convertible debt, on an if-converted basis, was not dilutive and, as a result,
had no impact on the Company's net income per share -- assuming dilution. In
future periods, the debt may be converted, or the if-converted method may be
dilutive and net income per share -- assuming dilution would be reduced. See
Note G to the financial statements for additional information with respect to
the Company's long-term debt.
Although the Company conducts business internationally, most of its
contracts are denominated in U.S. dollars. The Company's primary international
subsidiary's functional currency is the British pound. Foreign currency
exposure is limited because most financial assets and liabilities denominated
in the foreign currency are short term.
New Accounting Standards: In June 2001, the Financial Accounting Standards
Board approved the issuance of Statements of Financial Accounting Standards
No. 141, "Business Combinations," and No. 142, "Goodwill and Other Intangible
Assets," effective for fiscal years beginning after December 15, 2001. Under
the new rules, goodwill and indefinite lived intangible assets will no longer
be amortized but will be subject to annual impairment tests. Other intangible
assets will continue to be amortized over their useful lives.
The Company will adopt the new rules on accounting for goodwill beginning in
the first quarter of fiscal year 2002. Application of the nonamortization
provisions is expected to result in an increase in pre-tax income of
approximately $1.7 million per year subject to any impairment charges that may
occur. During fiscal year 2002, the Company will perform the first of the
required impairment tests of goodwill as of October 1, 2001, and has not yet
determined what the effect of these tests will be on the earnings and
financial position of the Company.
During the Company's fiscal year 2000, the Staff of the Securities and
Exchange Commission issued Staff Accounting Bulletin (SAB) 101, "Revenue
Recognition." The SAB provides examples of how the Staff applies the revenue
recognition criteria to specific fact patterns, such as bill-and-hold
transactions, up-front fees when the seller has significant continuing
involvement, long-term service transactions, refundable membership fees,
retail layaway sales, and contingent rental income. The SAB also addresses
whether revenue should be presented on a gross or net basis for certain
transactions, such as sales on the Internet. In addition, the SAB provides
guidance on the disclosures that registrants should make about their revenue-
recognition policies and the impact of events and trends on revenue. The
Company adopted the provisions of SAB 101 in the fourth quarter of fiscal year
2001. The adoption did not have a significant impact on reported results of
operations.
19
In March 2000, the Financial Accounting Standards Board issued FASB
Interpretation No. 44, "Accounting for Certain Transactions involving Stock
Compensation, an interpretation of APB Opinion No. 25." The Company adopted
the Interpretation on July 1, 2000, without significant effect. The
Interpretation clarifies certain issues that arise in the application of APB
Opinion No. 25, "Accounting for Stock Issued to Employees."
In October 1997, the American Institute of Certified Public Accountants
issued Statement of Position (SOP) 97-2, "Software Revenue Recognition," which
provides guidance on recognizing revenue from software transactions. In 1998,
it issued two amendments to SOP 97-2: SOP 98-4, "Deferral of Certain
Provisions of SOP 97-2," and SOP 98-9, "Modification of SOP 97-2, Software
Revenue Recognition, with Respect to Certain Transactions." SOP 97-2 and SOP
98-4 were effective for the Company's fiscal year beginning October 1, 1998,
and SOP 98-9 was effective for the fiscal year beginning October 1, 1999.
Based on the Company's interpretation of the requirements of SOP 97-2, as
amended, the adoption of this statement has not had and is not expected to
have a significant impact on the Company's results of operations. However, the
accounting profession continues to review certain provisions of SOP 97-2, as
amended, with the objective of providing additional guidance on implementing
its provisions.
Factors That May Affect Future Results and Market Price of Stock: The
forward-looking statements discussed herein and elsewhere -- including
statements concerning the Company's or management's forecasts, estimates,
intentions, beliefs, anticipations, plans, expectations, or predictions for
the future -- are based on current management expectations that involve risks
and uncertainties that could cause actual results to differ materially from
those anticipated. The following discussion highlights some, but not all, of
the risks and uncertainties that may have a material adverse effect on the
Company's business, results of operations, and/or financial condition.
The Company's revenues and operating results can vary substantially from
quarter to quarter, owing to a number of factors. Software sales revenues in
any quarter depend on the execution of license agreements and the shipment of
product. The execution of license agreements is difficult to predict for a
variety of reasons, including the following: a significant portion of the
Company's license agreements is typically signed in the last month of each
quarter; the Company's sales cycle is relatively long; the size of
transactions can vary widely; client projects may be postponed or cancelled
due to changes in the client's management, budgetary constraints, strategic
priorities, or economic uncertainty; and clients often exhibit a seasonal
pattern of capital spending. The Company has historically generated a greater
portion of license fees and total revenue in the last two fiscal quarters,
although there is no assurance that this will continue.
Because a significant part of the Company's business results from software
licensing, it is characterized by a high degree of operating leverage. The
Company bases its expense levels, in significant part, on its expectations of
future revenues. Therefore, these expense levels are relatively fixed in the
short term. If software licensing revenues do not meet expectations, net
income is likely to be disproportionately adversely affected. There can be no
assurance that the Company will be able to increase profitability or return to
its historical level of profitability on a quarterly or annual basis in the
future. It is, therefore, possible that in one or more future quarters, the
Company's operating results will be below expectations. This would likely have
an adverse effect on the price of the Company's common stock.
The success of the Company's business depends upon certain key management,
sales, and technical personnel. In addition, the Company believes that to
succeed in the future, it must continue to attract, retain, and motivate
talented and qualified management, sales, and technical personnel. Competition
for such personnel in the information technology industry is intense. The
Company sometimes has difficulty locating qualified candidates. There can be
no assurance that the Company will be able to retain its key employees or that
it will be able to continue to attract, assimilate, and retain other skilled
management, sales, and technical personnel. The loss of certain key personnel
or the inability to attract and retain qualified employees in the future could
have a material adverse effect on the Company's business, results of
operations, and/or financial condition.
The application software industry is characterized by intense competition,
rapid technological advances, changes in client requirements, product
introductions, and evolving industry standards. The Company believes that its
future success will depend on its ability to compete successfully, and to
continue to develop and market new products and enhancements cost-effectively.
This necessitates continued investment in research and development and sales
and marketing. There can be no assurance that new industry standards or
changing
20
technology will not render the Company's products obsolete or non-competitive,
that the Company will be able to develop and market new products successfully,
or that the Company's markets will accept its new product offerings.
Furthermore, software programs as complex as those the Company offers may
contain undetected errors or bugs when they are first introduced or as new
versions are released. Despite Company and third-party testing, there can be
no assurance that errors will not be found in new product offerings. Such
errors can cause unanticipated costs and delays in market acceptance of these
products and could have a material adverse effect on the Company's business,
financial condition, or cash flows. In addition, new distribution methods,
such as the Internet and other electronic channels, have removed many of the
barriers to entry that small and start-up software companies faced in the
past. Therefore, the Company expects competition to increase in its markets.
If the Company were to experience delays in the commercialization and
introduction of new or enhanced products, if customers were to experience
significant problems with the implementation and installation of products, or
if customers were dissatisfied with product functionality or performance, this
could have a material adverse effect on the Company's business, results of
operations, financial condition, or cash flows.
There can be no assurance that the Company's new products will achieve
significant market acceptance or will generate significant revenue. Additional
products that the Company plans to directly or indirectly market in the future
are in various stages of development.
Intense competition in the various markets in which the Company competes may
put pressure on the Company to reduce prices on certain products, particularly
in the markets where certain vendors offer deep discounts in an effort to
recapture or gain market share or to sell other software or hardware products.
The bundling of software products for promotional purposes or as a long-term
pricing strategy or guarantees of product implementations by certain of the
Company's competitors could have the effect over time of significantly
reducing the prices that the Company can charge for its products.
Additionally, while new distribution methods, such as application service
providers, may provide new markets for the Company's products, these new
methods could also reduce the price paid for the Company's products or
adversely affect other sales of its products. Any such price reductions and
resulting lower license revenues could have a material adverse effect on the
Company's business, results of operations, financial condition, or cash flows.
The Company uses a common industry practice to forecast sales and trends in
its business. The Company's sales personnel monitor the status of prospective
sales, such as the date when they estimate that a customer will make a
purchase decision and the potential dollar amount of the sale. The Company
regularly aggregates these estimates to generate a sales pipeline. The Company
compares the pipeline at various points in time to look for trends in its
business. While this pipeline analysis may provide the Company with some
guidance in business planning and budgeting, these pipeline estimates are
necessarily speculative and may not consistently correlate to revenues in a
particular quarter or over a longer period of time. A variation in the
conversion of the pipeline into contracts or in the pipeline itself could
cause the Company to improperly plan or budget and thereby adversely affect
its business or results of operations. In particular, a slowdown in the
economy may cause purchasing decisions to be delayed, reduced in amount, or
cancelled, which will therefore reduce the overall license pipeline conversion
rates in a particular period of time.
Building upon its original investment, the Company continues to strengthen
its strategic alliance with Campus Pipeline, Inc. The Company has enhanced the
integration of its higher education information systems with the Campus
Pipeline product to provide 24-hour access to campus and Internet resources
and allow students to enroll, register for classes, view grades, request
transcripts and loan status, obtain reading lists, buy books, access e-mail,
and participate in interactive chat sessions. While some of these features
have been included in a product released by Campus Pipeline, other features
are scheduled for future releases.
During fiscal year 2000, the Company made an investment in WebCT and entered
into a strategic alliance with WebCT to exclusively market the WebCT e-
learning tools and e-learning hub to the Company's higher education client
base. The alliance builds upon the Company's existing relationship with Campus
Pipeline, Inc., and the Company's self-service Web for Students and Web for
Faculty products to offer a unified, on-line, connected e-learning solution.
This integrated solution will enable clients to access information systems,
learning tools, online services, campus communication, and community resources
through a single point of access. The Company intends to provide the real-
time, bi-directional exchange of data between the Company's student
information system and the WebCT course environment, eliminating manual
synchronization of like information.
21
The success of these investments and strategic alliances depends upon: (i)
the ability of the Company and its alliance partners to meet development and
implementation schedules for products and to enhance the products over time,
(ii) the market acceptance of the products, (iii) the Company's ability to
integrate the alliance partners' products with the Company's products cost-
effectively and on a timely basis, and (iv) the ability of the Company's
alliance partners to achieve their financial goals.
Certain of the Company's contracts are subject to "fiscal funding" clauses,
which entitle the client, in the event of budgetary constraints, to reduce the
level of services to be provided by the Company, with a corresponding
reduction in the fee the client must pay. In certain circumstances, the client
may terminate the services altogether. While the Company has not been impacted
materially by early terminations or reductions in service from the use of
fiscal funding provisions in the past, there can be no assurance that such
provisions will not give rise to early terminations or reductions of service
in the future. If clients that represent a substantial portion of the
Company's revenues were to invoke the fiscal funding provisions of their
outsourcing services contracts, the Company's results of operations would be
adversely affected.
Certain of the Company's outsourcing contracts may be terminated by the
client for convenience. If clients that represent a substantial portion of the
Company's revenues terminate for convenience, the Company's future results of
operations would be adversely affected.
The Company provides software-related services, including systems
implementation and integration services. Services are provided under time and
materials contracts, in which case revenue is recognized as the services are
provided, and under fixed-price arrangements, in which case revenue is
recognized on the percentage-of-completion method. Revisions in estimates of
costs to complete are reflected in operations during the period in which the
Company learns of facts requiring those revisions.
The impact on the Company of areas such as the Internet, online services,
and electronic commerce is uncertain. There can be no assurance that the
Company will be able to provide a product that will satisfy new client demands
in these areas. In addition, standards for network protocols and other
industry standards for the Internet are evolving rapidly. There can be no
assurance that standards the Company chooses will position its products to
compete effectively for business opportunities as they arise on the Internet
and in other emerging areas.
The Company relies on a combination of copyright, trademark, trade secrets,
confidentiality procedures, and contractual procedures to protect its
intellectual property rights. Despite the Company's efforts to protect its
intellectual property rights, it may be possible for unauthorized third
parties to copy certain portions of the Company's products, or to reverse
engineer or obtain and use technology or other Company-proprietary
information. There can also be no assurances that the Company's intellectual
property rights would survive a legal challenge to their validity or provide
significant protection to the Company. In addition, the laws of certain
countries do not protect the Company's proprietary rights to the same extent
as do the laws of the United States. Accordingly, there can be no assurance
that the Company will be able to protect its proprietary technology against
unauthorized third-party copying or use, which could adversely affect the
Company's competitive position.
On June 29, 2001, the Company sold its Global Government Solutions business
to Affiliated Computer Services, Inc., ("ACS") for $85 million in cash. These
proceeds may be subject to adjustment in certain circumstances. Based on a
formula contained in the purchase agreement, the purchase price reduction
could be as much as approximately $40 million, although the Company does not
believe that any material reduction will occur. In addition, the Company made
certain representations and warranties to ACS under the purchase agreement,
which could also result in adjustments to the proceeds received. If a purchase
price adjustment should result, or if the Company is found to have breached
any of the representations and warranties contained in the purchase agreement,
the Company may have to return cash proceeds and the Company's financial
results could be adversely affected.
Other factors that could affect the Company's future operating results
include the effect of publicity on demand for the Company's products and
services; general economic and political conditions; the events of September
11, 2001; continued market acceptance of the Company's products and services;
the timing of services contracts and renewals; continued competitive and
pricing pressures in the marketplace; new product introductions by the
Company's competitors; the Company's ability to complete fixed-price contracts
profitably;
22
and the Company's ability to generate capital gains sufficient to offset the
capital losses that are expected to be realized upon the disposition of the
investments held by the Company for which the carrying value has been reduced
for financial reporting purposes.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Information required by this Item is under the heading Financial Risk
Management of Item 7, MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS, of this Form 10-K.
23
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Consolidated Balance Sheets
(in thousands, except per share amounts) September 30, 2001 2000
- --------------------------------------------------------------------------------
Assets
Current Assets
Cash and short-term investments ........................ $164,329 $ 65,942
Receivables, including $26,026 and $48,140 of earned
revenues in excess of
billings, net of allowance for doubtful accounts of
$5,802 and $4,534..................................... 88,680 111,908
Prepaid expenses and other assets ...................... 18,962 18,598
-------- --------
Total Current Assets .................................... 271,971 196,448
Property and Equipment -- at cost, net of accumulated
depreciation.......................................... 52,415 61,151
Capitalized Computer Software Costs, net of accumulated
amortization of $29,269 and $23,715................... 13,369 18,080
Cost in Excess of Fair Value of Net Assets Acquired, net
of accumulated amortization of $7,110 and $5,444...... 12,690 14,218
Other Assets and Deferred Charges ....................... 37,396 37,572
Net Assets of Discontinued Operations ................... -- 36,692
-------- --------
Total Assets ............................................ $387,841 $364,161
======== ========
Liabilities and Stockholders' Equity
Current Liabilities
Accounts payable ....................................... $ 9,188 $ 9,513
Current portion of long-term debt ...................... 2,771 712
Income taxes payable ................................... 7,697 4,293
Accrued expenses ....................................... 42,180 39,240
Deferred revenue ....................................... 26,137 29,415
-------- --------
Total Current Liabilities ............................... 87,973 83,173
-------- --------
Long-Term Debt, net of current portion .................. 74,723 77,521
Other Long-Term Liabilities ............................. 3,748 2,030
-------- --------
Total Liabilities ....................................... 166,444 162,724
-------- --------
Stockholders' Equity
Preferred stock, par value $.10 per share -- authorized
3,000 shares, none issued............................. -- --
Common stock, par value $.01 per share -- authorized
100,000 shares, issued 37,634 and 37,264 shares....... 376 372
Capital in excess of par value ......................... 120,040 115,247
Retained earnings ...................................... 126,697 111,879
Accumulated other comprehensive loss ................... (340) (540)
-------- --------
246,773 226,958
Less
Held in treasury at cost, 4,630 and 4,642 common shares (24,876) (24,911)
Notes receivable from stockholders ..................... (500) (610)
-------- --------
221,397 201,437
-------- --------
Total Liabilities and Stockholders' Equity .............. $387,841 $364,161
======== ========
See notes to consolidated financial statements.
24
Consolidated Statements of Operations
(in thousands, except per share amounts) Year Ended September 30, 2001 2000 1999
- -----------------------------------------------------------------------------------------------------------------------------------
Revenues
Outsourcing services........................................................................... $ 60,160 $ 64,377 $ 68,356
Software sales and commissions................................................................. 51,087 53,706 71,748
Maintenance and enhancements................................................................... 97,533 84,636 75,286
Software services.............................................................................. 130,894 134,987 160,230
Interest and other income...................................................................... 5,291 2,336 1,276
-------- -------- --------
344,965 340,042 376,896
-------- -------- --------
Expenses
Cost of outsourcing services................................................................... 47,646 51,728 52,173
Cost of software sales, commissions, maintenance and enhancements.............................. 81,991 73,503 78,617
Cost of software services...................................................................... 91,106 92,041 109,700
Selling, general and administrative............................................................ 109,916 101,605 94,922
Restructuring charge........................................................................... 5,134 1,000 --
Asset impairment charge........................................................................ 7,831 -- --
Equity in losses of affiliates................................................................. -- 4,761 3,161
Interest expense............................................................................... 4,742 4,612 4,636
-------- -------- --------
348,366 329,250 343,209
-------- -------- --------
Income (loss) from continuing operations before income taxes.................................... (3,401) 10,792 33,687
Provision (benefit) for income taxes............................................................ (919) 4,900 15,301
-------- -------- --------
Income (loss) from continuing operations........................................................ (2,482) 5,892 18,386
Discontinued operations
Income (loss) from discontinued operations, adjusted for applicable provision (benefit) for
income taxes of ($1,420), $1,909 and $816.................................................... (2,855) 2,736 913
Gain on sale of discontinued operations, net of income taxes of $13,111, $0 and $0............. 20,155 -- --
-------- -------- --------
Income from discontinued operations............................................................. 17,300 2,736 913
-------- -------- --------
Net income...................................................................................... $ 14,818 $ 8,628 $ 19,299
======== ======== ========
Income (loss) from continuing operations
per common share............................................................................... $ (0.08) $ 0.18 $ 0.57
per share -- assuming dilution................................................................. $ (0.08) $ 0.18 $ 0.55
Income from discontinued operations
per common share............................................................................... $ 0.53 $ 0.08 $ 0.03
per share -- assuming dilution................................................................. $ 0.53 $ 0.08 $ 0.03
Net income
per common share............................................................................... $ 0.45 $ 0.27 $ 0.59
per share -- assuming dilution................................................................. $ 0.45 $ 0.26 $ 0.58
Common shares and equivalents outstanding
average common shares.......................................................................... 32,842 32,391 32,494
average common shares -- assuming dilution..................................................... 32,842 33,624 33,531
See notes to consolidated financial statements.
25
Consolidated Statements of Cash Flows
(in thousands) Year Ended September 30, 2001 2000 1999
- -----------------------------------------------------------------------------------------------------------------------------------
Operating Activities
Net income...................................................................................... $ 14,818 $ 8,628 $ 19,299
Adjustments to reconcile net income to net cash provided by operating
activities:
Gain on sale of discontinued operations........................................................ (33,266) -- --
Asset impairment charge........................................................................ 7,831 -- --
WebCT commission income........................................................................ (2,700) -- --
Equity in losses of affiliate.................................................................. -- 4,761 3,161
Gain on sale of assets......................................................................... -- (5,988) --
Depreciation and amortization ................................................................. 27,754 27,760 26,064
Provision for doubtful accounts................................................................ 5,129 3,111 3,294
Deferred tax benefit .......................................................................... (11,529) (5,375) (181)
Income tax benefit from exercise of nonqualified stock options................................. 2,077 628 3,239
Changes in operating assets and liabilities:
(Increase) decrease in receivables........................................................... 8,407 7,134 (21,806)
(Increase) decrease in interest receivable................................................... (121) (204) 1,197
Increase in other current assets............................................................. (6,379) (553) (9,164)
Increase (decrease) in accounts payable...................................................... 1,249 (3,363) (3,879)
Increase (decrease) in income taxes payable.................................................. 19,015 2,085 740
Increase (decrease) in accrued expenses ..................................................... (12,486) 1,493 2,387
Increase in other long-term liabilities...................................................... 2,878 -- --
Increase (decrease) in deferred revenue...................................................... (5,832) 15,522 (2,432)
(Increase) decrease in other operating assets and deferred charges........................... 3,955 (846) (1,700)
-------- -------- --------
Net Cash Provided by Operating Activities....................................................... 20,800 54,793 20,219
-------- -------- --------
Investing Activities
Purchase of property and equipment.............................................................. (5,738) (8,972) (26,773)
Capitalized computer software costs............................................................. (962) (3,866) (9,048)
Purchase of investments available for sale...................................................... (97,920) (18,947) (9,324)
Proceeds from the sale or maturity of investments available for sale............................ 52,172 6,606 63,431
Purchase of subsidiary assets, net of cash acquired............................................. (3,009) (3,189) (842)
Purchase of long-term investments............................................................... -- (10,043) (7,879)
Proceeds from sale of discontinued operations................................................... 85,000 -- --
Proceeds from sale of assets.................................................................... -- 2,000 --
-------- -------- --------
Net Cash Provided by (Used in) Investing Activities............................................. 29,543 (36,411) 9,565
-------- -------- --------
Financing Activities
Repayment of long-term debt and credit facility ................................................ (712) (17,451) (57,552)
Proceeds from borrowings, net of issuance costs................................................. -- 16,800 56,907
(Repurchase) issuance of Company stock, net..................................................... 35 -- (21,952)
Decrease in notes receivable from stockholders.................................................. 110 -- --
Proceeds from exercise of stock options......................................................... 2,544 4,394 901
-------- -------- --------
Net Cash Provided by (Used in) Financing Activities............................................. 1,977 3,743 (21,696)
-------- -------- --------
Increase in Cash and Cash Equivalents........................................................... 52,320 22,125 8,088
-------- -------- --------
Cash and Cash Equivalents at Beginning of Year.................................................. 49,155 27,030 18,942
-------- -------- --------
Cash and Cash Equivalents at End of Year........................................................ $101,475 $ 49,155 $ 27,030
======== ======== ========
Supplemental Information
Noncash investing and financing activities
Purchase of subsidiary assets -- noncash portion............................................. $ 500 $ 2,117 $ 3,792
Conversion of subordinated debentures to common stock........................................ 27 -- --
Purchase of long-term investments -- noncash portion......................................... -- 5,980 --
Proceeds from sale of assets -- noncash portion.............................................. -- 4,520 --
See notes to consolidated financial statements.
26
Consolidated Statements of Stockholders' Equity
Accumulated Notes Total
Common Capital in Other Receivable Stock-
Stock Excess Retained Comprehensive Treasury from holders'
(in thousands) Par Value of Par Value Earnings Income (Loss) Stock Stockholders Equity
- -------------- --------- ------------ -------- ------------- -------- ------------ --------
Balance at September 30, 1998 $363 $102,302 $ 83,952 $(126) $ (2,959) $(610) $182,922
Stock issued under stock option
plans, including tax benefits,
181 shares........................ 2 4,138 -- -- -- -- 4,140
Issuance of stock for acquisitions,
278 shares........................ 2 3,790 -- -- -- -- 3,792
Purchase of treasury stock,
2,340 shares...................... -- -- -- -- (21,952) (21,952)
Comprehensive income
Foreign currency
translation adjustment.......... -- -- -- 110 -- -- 110
Unrealized loss on
marketable securities........... -- -- -- (35) -- -- (35)
Net income, year ended
September 30, 1999.............. -- -- 19,299 -- -- -- 19,299
--------
Total comprehensive income.......... -- -- -- -- -- -- 19,374
--------
Balance at September 30, 1999 367 110,230 103,251 (51) (24,911) (610) 188,276
---- -------- -------- ----- -------- ----- --------
Stock issued under stock option
plans, including tax benefits,
529 shares........................ 5 5,017 -- -- -- -- 5,022
Comprehensive income
Foreign currency
translation adjustment.......... -- -- -- (488) -- -- (488)
Unrealized loss on
marketable securities........... -- -- -- (1) -- -- (1)
Net income, year ended
September 30, 2000.............. -- -- 8,628 -- -- -- 8,628
--------
Total comprehensive income.......... 8,139
--------
Balance at September 30, 2000 372 115,247 111,879 (540) (24,911) (610) 201,437
---- -------- -------- ----- -------- ----- --------
Stock issued under stock option
plans, including tax benefits,
369 shares........................ 4 4,766 -- -- -- -- 4,770
Stock issued on bond conversion,
1 shares.......................... -- 27 -- -- -- -- 27
Other stock issued, net, 12 shares.. -- -- -- -- 35 -- 35
Collections on notes receivable from
stockholders...................... -- -- -- -- -- 110 110
Comprehensive income
Foreign currency
translation adjustment.......... -- -- -- 10 -- -- 10
Unrealized gain on
marketable securities........... -- -- -- 190 -- -- 190
Net income, year ended
September 30, 2001.............. -- -- 14,818 -- -- -- 14,818
--------
Total comprehensive income.......... -- -- -- -- -- -- 15,018
--------
Balance at September 30, 2001 $376 $120,040 $126,697 $(340) $(24,876) $(500) $221,397
---- -------- -------- ----- -------- ----- --------
See notes to consolidated financial statements.
27
Notes to Consolidated Financial Statements
(in thousands, except per share amounts)
Note A -- Significant Accounting Policies
Basis of Presentation: On June 29, 2001, the Company completed the sale of
its Global Government Systems (GGS) business. The GGS business is accounted
for as a discontinued operation, and, accordingly, amounts in the consolidated
balance sheets and statements of operations and related notes for all periods
presented have been restated to reflect discontinued-operations accounting.
Consolidation Policy: The accompanying consolidated financial statements
include the accounts of Systems & Computer Technology Corporation and its
subsidiaries (the "Company"). Intercompany items have been eliminated in
consolidation.
Nature of Operations: The Company develops, licenses, and supports a suite
of client/server, enterprise software and provides a range of information
technology outsourcing services. In addition, the Company offers a series of
related software services including systems implementation, systems
integration, and maintenance and enhancements. The Company's markets are
higher education, process manufacturing and distribution, and energy and
utilities.
Risks and Uncertainties: The preparation of financial statements in
conformity with generally accepted accounting principles requires management
to make estimates and assumptions that affect the amounts reported in the
financial statements and accompanying notes. Changes in the status of certain
facts or circumstances could result in material changes to the estimates used
in preparation of the financial statements and actual results could differ
from the estimates and assumptions used. Credit risk with respect to trade
accounts receivable is generally diversified due to the large number of
entities comprising the Company's client base. The Company establishes an
allowance for doubtful accounts based upon factors surrounding the credit risk
of specific clients, historical trends, and other information.
Revenue Recognition: During the first several years of a typical
outsourcing services contract, the Company performs services and incurs
expenses at a greater rate than in the later years of the contract. Since
billings usually remain constant during the term of the contract, and revenue
is recognized as work is performed, revenues usually exceed billings in the
early years of the contract. The resulting excess is reflected on the
Company's Consolidated Balance Sheet as unbilled accounts receivable. As a
contract proceeds, services are performed, and expenses are incurred at a
diminishing rate, resulting in billings exceeding revenue recognized, which
causes a decrease in the unbilled accounts receivable balance. All of the
unbilled receivables at September 30, 2001, resulting from outsourcing
services contracts will be billed within the normal 12-month business cycle,
although additional unbilled receivables will continue to build based on the
terms of the contracts. These contracts require estimates of periodic revenue
earned and costs to be incurred to deliver products or services and are
subject to revision as work progresses. Revisions in the estimates are
reflected in operations in the period in which facts requiring those revisions
become known.
Certain of the Company's outsourcing services contracts are subject to
"fiscal funding" clauses, which entitle the client, in the event of budgetary
constraints, to reduce the level of services to be provided by the Company,
with a corresponding reduction in the fee the client must pay. In certain
circumstances, the client may terminate the services altogether. Revenues are
recognized under such contracts only when the Company considers the likelihood
of cancellation to be remote.
The Company licenses software under license agreements and provides services
including training, installation, consulting, and maintenance and
enhancements. Maintenance and enhancement agreements provide for telephone
support and error correction for current versions of licensed systems, as well
as regulatory updates and functional and technical enhancements to licensed
systems if and when they become generally available. Fees for maintenance and
enhancements agreements are recognized ratably over the term of the
agreements. License fee revenues are recognized when a license agreement has
been signed, the software product has been shipped, the fees are fixed and
determinable, collection is considered probable, and no significant vendor
obligations remain.
28
Notes to Consolidated Financial Statements
(in thousands, except per share amounts) -- (Continued)
Note A -- Significant Accounting Policies -- (Continued)
For client arrangements that include license fees and implementation and
other professional services, the portion of the fees related to software
licenses is generally recognized in the current period, while the portion of
the fees related to implementation and other professional services is
recognized as such services are performed. The Company does not separately
present the cost of maintenance and enhancements revenues because it is
impracticable to separate such cost from the cost of software sales. The
Company's policy is to charge interest on or discount unbilled software and
services receivables not expected to be billed within one year, which were
approximately $442 and $1,446 at September 30, 2001 and 2000, respectively.
The Company classifies such receivables as current assets consistent with its
business cycle.
The Company allocates revenue to each component of the contract based on
objective evidence of its fair value, which is specific to the Company, or,
for products not being sold separately, the price established by management.
Because licensing of the software is not dependent on the professional
services portions of the contract, the software revenue is recognized upon
delivery. The remainder of the contract revenue is recorded as earned in the
Company's Consolidated Statement of Operations as software services revenue.
The Company provides software-related services, including systems
implementation and integration services. Services are generally provided under
time and materials contracts and revenue is recognized as the services are
provided. In some circumstances, services are provided under fixed-price
arrangements in which revenue is recognized on the percentage-of-completion
method. Revisions in estimates of costs to complete are reflected in
operations in the period in which facts requiring those revisions become
known.
Cash Equivalents: Cash equivalents are defined as short-term, highly liquid
investments with a maturity of three months or less at the date of purchase.
Short-Term Investments: In accordance with SFAS 115, management determines
the appropriate classification of debt securities at the time of purchase.
Available-for-sale securities are stated at fair value.
Fair Value of Financial Instruments: The following methods and assumptions
were used to estimate the fair values of each class of financial instruments.
The fair values of cash, accounts receivable, and accounts payable
approximate their carrying amounts due to their immediate or short-term
periods to maturity.
The fair values of short-term investments (as disclosed in Note B) and long-
term debt (as disclosed in Note G) are estimated using quoted market values.
Long-Lived Assets: Property and equipment are recorded at cost. Equipment
is depreciated over its estimated useful life, for periods ranging from three
to 10 years, using the straight-line method. Buildings and related
improvements are depreciated using the straight-line method, for periods up to
30 years.
Cost in excess of fair value of net assets acquired is associated with the
companies acquired, and is amortized over periods ranging from 10 to 20 years
using the straight-line method. The Company periodically reviews for
impairment the carrying value of the costs in excess of net assets acquired.
The Company will record an impairment in its operating results if the carrying
value exceeds the future undiscounted cash flows of the related assets.
Capitalized Computer Software Costs: The Company capitalizes direct and
certain qualifying indirect costs associated with development of software for
resale. Amortization of such capitalized costs is the greater of the amount
computed using (i) the ratio that current gross revenues for a product bear to
the total of current and anticipated future gross revenues of that product or
(ii) the straight-line method over the remaining estimated economic life of
the product, including the period being reported on. Amortization begins when
the product is available for general release to customers.
Income Per Share: Net income per common share excludes the dilutive effect
of both stock options and convertible debentures, and net income per share --
assuming dilution includes the dilutive effect of both stock
29
Notes to Consolidated Financial Statements
(in thousands, except per share amounts) -- (Continued)
Note A -- Significant Accounting Policies -- (Continued)
options and convertible debentures even if the dilutive effect is immaterial.
A reconciliation of the numerators and the denominators of net income per
common share and net income per share -- assuming dilution follows:
Year Ended September 30, 2001 2000 1999
- ----------------------- -------- ------- -------
Numerator
Income (loss) from continuing operations available to common stockholders......................... ($2,482) $ 5,892 $18,386
Discontinued operations:
Income (loss) from discontinued operations, net of income taxes.................................. (2,855) 2,736 913
Gain on sale of discontinued operations, net of income taxes..................................... 20,155 -- --
-------- ------- -------
Income from discontinued operations............................................................... 17,300 2,736 913
-------- ------- -------
Net income available to common stockholders....................................................... $ 14,818 $ 8,628 $19,299
======== ======= =======
Denominator
Weighted average common shares.................................................................... 32,842 32,391 32,494
Effect of dilutive securities:
Employee stock options........................................................................... -- 1,233 1,037
-------- ------- -------
Weighted average common shares assuming dilution.................................................. 32,842 33,624 33,531
======== ======= =======
Income (loss) from continuing operations
per common share................................................................................. $ (0.08) $ 0.18 $ 0.57
per share -- assuming dilution................................................................... $ (0.08) $ 0.18 $ 0.55
Income from discontinued operations
per common share................................................................................. $ 0.53 $ 0.08 $ 0.03
per share -- assuming dilution................................................................... $ 0.53 $ 0.08 $ 0.03
Net income
per common share................................................................................. $ 0.45 $ 0.27 $ 0.59
per share -- assuming dilution................................................................... $ 0.45 $ 0.26 $ 0.58
The Company has $74,723 of convertible debentures bearing interest at 5% and
maturing on October 15, 2004, that were issued in October 1997. If these
debentures were converted, 2,833 additional shares would be added to common
shares outstanding. These debentures were antidilutive for fiscal years 2001,
2000, and 1999 and therefore are not included in the above denominators for
income (loss) from continuing operations per share -- assuming dilution, income
from discontinued operations per share -- assuming dilution, or net income per
share -- assuming dilution.
Covenants-Not-To-Compete: These amounts are amortized using the straight-
line method over two to five years (their contractual lives) from their
respective acquisition dates.
Foreign Currency Translation: The local currencies are the functional
currencies of the Company's foreign subsidiaries. Assets and liabilities of
the foreign subsidiaries are translated into U.S. dollars at current exchange
rates and resulting translation adjustments are included in, and are the major
components of, accumulated other comprehensive loss. Revenue and expense
accounts of these operations are translated at average exchange rates
prevailing during the year. Transaction gains and losses, which were not
material, are included in the results of operations of the period in which
they occur.
New Accounting Standards: In June 2001, the Financial Accounting Standards
Board approved the issuance of Statements of Financial Accounting Standards
No. 141, "Business Combinations," and No. 142, "Goodwill and Other Intangible
Assets," effective for fiscal years beginning after December 15, 2001. Under
the new rules, goodwill and indefinite lived intangible assets will no longer
be amortized but will be subject to annual impairment tests. Other intangible
assets will continue to be amortized over their useful lives.
30
Notes to Consolidated Financial Statements
(in thousands, except per share amounts) -- (Continued)
Note A -- Significant Accounting Policies -- (Continued)
The Company will adopt the new rules on accounting for goodwill beginning in
the first quarter of fiscal year 2002. Application of the nonamortization
provisions is expected to result in an increase in pre-tax income of
approximately $1,700 per year subject to any impairment charges that may
occur. During fiscal year 2002, the Company will perform the first of the
required impairment tests of goodwill as of October 1, 2001, and has not yet
determined what the effect of these tests will be on the earnings and
financial position of the Company.
During the Company's fiscal year 2000, the Staff of the Securities and
Exchange Commission issued Staff Accounting Bulletin (SAB) 101, "Revenue
Recognition." The SAB provides examples of how the Staff applies the revenue
recognition criteria to specific fact patterns, such as bill-and-hold
transactions, up-front fees when the seller has significant continuing
involvement, long-term service transactions, refundable membership fees,
retail layaway sales, and contingent rental income. The SAB also addresses
whether revenue should be presented on a gross or net basis for certain
transactions, such as sales on the Internet. In addition, the SAB provides
guidance on the disclosures that registrants should make about their revenue-
recognition policies and the impact of events and trends on revenue. The
Company adopted the provisions of SAB 101 during the fourth quarter of fiscal
year 2001. The adoption did not have a significant impact on reported results
of operations.
In March 2000, the Financial Accounting Standards Board issued FASB
Interpretation No. 44, "Accounting for Certain Transactions involving Stock
Compensation, an interpretation of APB Opinion No. 25." The Company adopted
the Interpretation on July 1, 2000, without significant effect. The
Interpretation clarifies certain issues that arise in the application of APB
Opinion No. 25, "Accounting for Stock Issued to Employees."
In October 1997, the American Institute of Certified Public Accountants
issued Statement of Position (SOP) 97-2, "Software Revenue Recognition," which
provides guidance on recognizing revenue from software transactions. In 1998,
it issued two amendments to SOP 97-2: SOP 98-4, "Deferral of Certain
Provisions of SOP 97-2," and SOP 98-9, "Modification of SOP 97-2, Software
Revenue Recognition, with Respect to Certain Transactions." SOP 97-2 and SOP
98-4 were effective for the Company's fiscal year beginning October 1, 1998,
and SOP 98-9 was effective for the fiscal year beginning October 1, 1999.
Based on the Company's interpretation of the requirements of SOP 97-2, as
amended, the adoption of this statement has not had and is not expected to
have a significant impact on the Company's results of operations. However, the
accounting profession continues to review certain provisions of SOP 97-2, as
amended, with the objective of providing additional guidance on implementing
its provisions.
Note B -- Cash and Investments
Short-term investments consist of corporate debt securities. Management
determines the appropriate classification of investments at the time of
purchase. At September 30, 2001 and 2000, the portfolio of securities was
classified as available for sale. These securities are carried at fair value,
based on quoted market values, with the unrealized gains and losses, net of
income taxes, reported as a component of accumulated other comprehensive loss.
The available-for-sale portfolio is comprised of highly liquid investments
available for current operations and general corporate purposes and,
accordingly, is classified as current assets.
The amortized cost of debt securities is adjusted for amortization of
premiums and accretion of discounts to maturity. Such amortization and
accretion, as well as realized gains and losses, are included in Interest and
Other Income. For the purpose of determining gross realized gains and losses,
the cost of securities sold is based on the specific identification method.
Gross realized gains and losses on sales of available-for-sale securities were
immaterial in fiscal years 2001 and 2000.
September 30, 2001 2000
- ------------- -------- -------
Cash and cash equivalents ................................ $101,475 $49,155
Short-term investments, including accrued interest of
$327 and $206 (amortized cost of $62,584 and $16,791),
respectively............................................ 62,854 16,787
-------- -------
Cash and short-term investments .......................... $164,329 $65,942
======== =======
31
Notes to Consolidated Financial Statements
(in thousands, except per share amounts) -- (Continued)
Note B -- Cash and Investments -- (Continued)
The contractual maturities of short-term investments held at September 30,
2001, are:
Weighted
Average
Amortized Contractual
Fair Value Cost Interest Rate
---------- --------- -------------
Less than 1 year........................................................................ $37,184 $37,312 4.5%
1 - 3 years............................................................................. 25,343 25,272 4.6%
------- -------
Total................................................................................... $62,527 $62,584
======= =======
The Company has made investments for strategic business purposes of $15,980
in the common and preferred stock of WebCT, a privately held Internet company.
The fair value of this investment, which is classified as a long-term asset,
is not readily determinable; therefore, it is carried at cost adjusted for an
other-than-temporary impairment discussed below. The Company regularly reviews
the underlying operating performance, cash flow forecasts, and recent private
equity transactions of this privately held company in assessing impairment. In
the second quarter of fiscal year 2001, the Company recorded asset impairment
charges of $7,831 related to this investment. In the third quarter of fiscal
year 2001, the Company earned $2,700 in shares of WebCT. The Company earned
these shares as a result of a joint marketing agreement with WebCT pursuant to
which schools with cumulative enrollments totaling one million students
licensed a product jointly developed by the Company and WebCT. Commissions in
the form of shares of WebCT will continue to be earned as additional schools
license this product now that this threshold has been met. At September 30,
2001, the Company owned approximately 11% of the voting shares of WebCT. At
September 30, 2001, the aggregate investment in WebCT is $10,849, and is
included in other assets and deferred charges in the consolidated balance
sheet.
Throughout fiscal year 1999, the Company made a series of investments in
Campus Pipeline, Inc. As of September 30, 2001, the Company held an
approximately 57% interest in the common stock of this affiliate, with a
carrying amount of zero. The Company has determined that it does not control
Campus Pipeline because there are fully voting convertible preferred shares
outstanding that lower the Company's voting interest to approximately 42%.
Therefore, the Company accounts for its investment using the equity method of
accounting. The Company will not record any additional future losses of Campus
Pipeline and will not record any future earnings until the cumulative,
unrecorded losses are offset.
Note C -- Acquisitions / Divestitures
On June 29, 2001, the Company completed the sale of its Global Government
Solutions (GGS) business to Affiliated Computer Services, Inc., (ACS),
realizing cash proceeds of $85,000, subject to adjustment in certain
circumstances and the payment of taxes. Based on a formula contained in the
purchase agreement, the purchase price reduction could be as much as
approximately $40,000, although the Company does not believe that any material
reduction will occur. As a result of the disposition, the Company identified
opportunities to further reduce and consolidate certain corporate functions,
and provided a reserve of $12,763 for severance and real-estate-related costs
associated with such actions. As of September 30, 2001, $10,614, which is
primarily included in accrued expenses, remained accrued for the completion of
these actions and the settlement of the previously accrued Broward County
litigation discussed in Note M. After this provision, the sale resulted in a
pretax gain of $33,266, which net of $13,111 of income taxes, resulted in a
gain on sale of discontinued operations of $20,155. The results of GGS have
been reported separately as discontinued operations in the consolidated
statements of operations. Prior-year consolidated balance sheets and
statements of operations have been restated to present GGS as a discontinued
operation. For business segment reporting purposes, GGS data were previously
reported as a separate segment. Revenues from the GGS business were $65,741,
$95,938, and $89,315 for the years ending September 30, 2001, 2000, and 1999,
respectively. There was no GGS revenue after the date of sale through
September 30, 2001. GGS pre-tax income (loss) for the 12-month periods ending
September 30, 2001, 2000, and 1999 was $(4,275), $4,645, and $1,729,
respectively. Included in GGS pre-tax (loss) for the fiscal year 2001
32
Notes to Consolidated Financial Statements
(in thousands, except per share amounts) -- (Continued)
Note C -- Acquisitions / Divestitures -- (Continued)
period was an asset impairment charge of $1,814. The net assets of
discontinued operations at September 30, 2000, were $36,692 (net assets of the
discontinued operation were $38,954 at the date of the sale) comprised of the
following:
Accounts receivable .............................................. $27,058
Prepaid expenses and other receivables ........................... 6,994
Property and equipment ........................................... 2,184
Capitalized computer software costs .............................. 1,230
Cost in excess of fair value of net assets acquired .............. 1,520
Other assets and deferred charges ................................ 4,169
Current liabilities .............................................. (6,463)
-------
Net Assets of Discontinued Operations.......................... $36,692
=======
In August 2000, the Company acquired the EnerLink business unit from Science
Applications International Corporation for cash consideration of $2,882. The
EnerLink business unit is a complex billing and rates management software
developer for the energy and utilities marketplace. Under the terms of the
purchase agreement, the Company could pay additional cash consideration of
$8,000 over the next four years contingent upon the revenue derived from the
license or other sale of the EnerLink software over that period. The Company
was not required to make an additional payment under these terms in fiscal
year 2001; however, the Company could be required to make additional payments
over the next three years. Any future payments would result in an adjustment
to the purchase price. The Company recorded costs in excess of fair value of
net assets acquired of $513 related to the acquisition. This acquisition gives
the Company increased charge-handling and billing capabilities, including
interval data collections and calculations, which support real-time energy
pricing and meter-data acquisition.
In June 2000, the Company sold its SCT Learning Suite distance-learning
course-creation tools to WebCT, Inc., in return for common stock of WebCT
valued at $2,500. The Company acquired the SCT Learning Suite tools in the
August 1999 acquisition of RSMART Learning Systems Corporation. In the quarter
ended June 30, 2000, the Company recorded a gain of $442 related to this sale.
This gain was reduced to zero as the Company agreed to make concessions to
former SCT Learning Suite clients in the fourth quarter of fiscal year 2000.
As part of the transaction, the Company signed a three-year noncompete
agreement in exchange for stock of WebCT valued at $3,480. The related
liability is being amortized over the period of the agreement. The Company
made an additional $10,000 investment in preferred stock of WebCT. The Company
has the ability to earn additional equity in WebCT in the future through
performance-based compensation. This compensation depends on delivery of
commitments from schools choosing WebCT as their primary supported enterprise-
wide course-tools platform.
In April 2000, the Company acquired the assets of a division of Pinnacle
Software Corporation for consideration of $2,417. The acquired business
included an established workforce of 16 employees who have provided
maintenance and enhancement services to some of the Company's higher education
clients over the prior 10 years. It also included Pinnacle's reporting-
solutions product, which enhances the financial-reporting and report-
distribution capabilities of universities using some of the Company's
administrative applications.
In May 1999, the Company acquired Advanced Planning Systems, Inc., which
offered a demand-planning product to the process manufacturing and
distribution market, for total consideration of $2,226, comprised of 104
shares of Company stock valued at $1,573 and $653 cash. The Company recorded
goodwill of $1,016 related to the acquisition.
The results of operations of these acquired entities are included in the
consolidated financial statements from the date of the respective entities'
acquisitions. The pro forma effect of these acquisitions on operations is
immaterial.
33
Notes to Consolidated Financial Statements
(in thousands, except per share amounts) -- (Continued)
Note D -- Property and Equipment
September 30, 2001 2000
- ------------- -------- --------
Land .................................................... $ 2,019 $ 2,019
Building and building improvements ...................... 29,717 28,809
Computer equipment and software ......................... 45,742 45,047
Other equipment, furniture, fixtures, and leasehold
improvements........................................... 37,236 38,934
-------- --------
114,714 114,809
Less accumulated depreciation ........................... 62,299 53,658
-------- --------
$ 52,415 $ 61,151
======== ========
Depreciation expense for the years ended September 30, 2001, 2000, and 1999
was $14,010, $14,089, and $12,857, respectively.
Note E -- Other Assets and Deferred Charges
September 30, 2001 2000
- ------------- -------- --------
Deferred tax assets ..................................... $ 11,299 $ 5,680
Long-term investments ................................... 10,850 15,979
Purchased software (b) (c) .............................. 7,301 9,627
Long-term receivables ................................... 3,722 10
Deferred debt issuance expenses (b) (d) ................. 1,060 1,408
Deferred costs and sales commissions related to
outsourcing services contracts in
progress (a) (b)....................................... 853 1,592
Other ................................................... 2,311 3,276
-------- --------
$ 37,396 $ 37,572
======== ========
- ---------------
(a) Amortized over the remaining term of the outsourcing service contract.
(b) Shown net of accumulated amortization.
(c) Includes software acquired as part of business acquisitions.
(d) Amortized over the term of the related debt.
Note F -- Accrued Expenses
September 30, 2001 2000
- ------------- -------- --------
Accrued costs related to discontinued operations ........ $ 7,736 $ 0
Accrued employee compensation ........................... 7,035 8,014
Accrued payroll withholdings ............................ 5,414 5,721
Other ................................................... 21,995 25,505
-------- --------
Total accrued expenses .................................. $ 42,180 $ 39,240
======== ========
Note G -- Long-Term Debt
September 30, 2001 2000
- ------------- -------- --------
5% convertible subordinated debentures, due October 15,
2004................................................... $ 74,723 $ 74,750
Financing agreement ..................................... 2,771 3,483
-------- --------
Total Long-Term Debt .................................... 77,494 78,233
Less current portion .................................... 2,771 712
-------- --------
Long-Term Debt, net of current portion .................. $ 74,723 $ 77,521
======== ========
34
Notes to Consolidated Financial Statements
(in thousands, except per share amounts) -- (Continued)
Note G -- Long-Term Debt -- (Continued)
Aggregate annual maturities of long-term debt by fiscal year are as follows:
$2,771 in 2002, $0 in 2003 and 2004, and $74,723 in 2005.
In 1997, the Company issued $74,750 of convertible subordinated debentures
bearing interest at 5% and maturing on October 15, 2004. The debentures are
convertible into common stock of the Company at any time prior to redemption
or maturity at a conversion price of $26.375 per share, subject to change as
defined in the Trust Indenture. The debentures are redeemable at any time
after October 15, 2000, at prices from 102.5% of par decreasing to par on
October 15, 2003. The fair value, based on quoted market values, of the
convertible subordinated debentures at September 30, 2001, was $63,515. The
Company has 2,833 shares reserved for issuance related to these debentures. In
October 2000, $27 of the convertible subordinated debentures were converted
into approximately 1 shares of common stock of the Company.
The Company has a $30,000 senior revolving credit agreement, which
terminates in June 2003 with optional annual renewals. There were no
borrowings outstanding at September 30, 2001 or 2000. During the fiscal year
ended September 30, 2000, the Company borrowed and repaid $16,800 under the
agreement. The interest rate under the agreement is based on one of three
formulae: one tied to the prime rate of the lender, one at a rate offered by
the bank, and another tied to the London Inter-Bank Offered Rate (LIBOR). The
commitment fee on the unused funds available for borrowing under the agreement
is 5/16%. The Company has the right to permanently terminate the unused
portion of the revolving commitment. As long as there are borrowings
outstanding, and as a condition precedent to new borrowings, the Company must
comply with certain covenants. Under the covenants, the Company is required to
maintain certain financial ratios and other financial conditions. The Company
may not pay dividends (other than dividends payable in common stock) or
acquire any of its capital stock outstanding without a written waiver from its
lender.
The credit agreement provides for the issuance of letters of credit. The
amount available for borrowing under the revolving credit facility is reduced
by the total outstanding letters of credit. At September 30, 2001, the Company
had $561 of letters of credit outstanding and $29,439 available for borrowing
under the revolving credit facility.
In August 1997, the Company entered into a $4,275 financing agreement in
connection with an outsourcing services contract. At September 30, 2001, the
Company owed $2,771 on the agreement.
Interest paid on the convertible subordinated debentures and the revolving
credit agreement during the years ended September 30, 2001, 2000, and 1999,
was $3,831, $3,895, and $4,001, respectively.
Note H -- Benefit Plans
Stock Option Plans: The Company has stock option plans for the benefit of
its key employees and nonemployee directors that provide for the grant of
options to purchase the Company's common stock at an exercise price per share
equal to the closing price of the Company's common stock on the grant date.
The Company's 1994 Long-Term Incentive Plan provides for the issuance of
stock options, stock appreciation rights, restricted stock, and other long-
term performance awards. At September 30, 2001, only stock options have been
issued pursuant to the plan.
There were 1,865 shares of common stock reserved for future grants under the
stock option plans at September 30, 2001. The outstanding stock options expire
on various dates through 2011. Options granted to employees generally have 10-
year terms and vest and become fully exercisable at the end of three years of
continued employment. There are 1,280 options granted to senior management
that have 10-year terms and vest and become exercisable in five years from the
date of grant and have accelerated vesting if certain performance conditions
are met. At September 30, 2001, 1,045 of these options were exercisable. There
are 918 options granted to senior management that have 10-year terms and vest
and become exercisable in three years from the date of grant and have
accelerated vesting if certain performance conditions are met. At September
30, 2001, 660
35
Notes to Consolidated Financial Statements
(in thousands, except per share amounts) -- (Continued)
Note H -- Benefit Plans -- (Continued)
of these options were exercisable. In addition, 260 options granted to
nonemployee directors, of which 188 are exercisable at September 30, 2001,
have 10-year terms and vest and become exercisable ratably over five years.
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-
Based Compensation" (SFAS 123), requires that companies with stock-based
compensation plans either recognize compensation expense based on fair value
accounting methods or continue to apply the provisions of Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees"
(APB 25). If a company chooses to continue to apply the provisions of APB 25,
it must disclose pro forma net income and earnings per share assuming that the
fair-value method had been applied. The Company has elected to follow APB 25
and related interpretations in accounting for its employee stock options and
make the pro forma disclosures required by SFAS 123. The following pro forma
amounts were determined as if the Company had accounted for its stock options
using the fair value method as described in that statement:
Year Ended September 30, 2001 2000 1999
- ------------------------ ------- ------ -------
As Reported
Net income......................................................................................... $14,818 $8,628 $19,299
Net income per common share........................................................................ 0.45 0.27 0.59
Net income per share -- assuming dilution.......................................................... 0.45 0.26 0.58
Pro Forma
Net income......................................................................................... $11,384 $4,160 $15,901
Net income per common share........................................................................ 0.35 0.13 0.49
Net income per share -- assuming dilution.......................................................... 0.35 0.12 0.47
The fair value of stock options granted was estimated at the date of grant
using the Black-Scholes option-pricing model with the following weighted-
average assumptions for 2001, 2000, and 1999, respectively: risk-free interest
rates of 4.8%, 6.1%, and 4.9%, dividend yields of 0%; volatility factors of
the expected market price of the Company's common stock of 61.8%, 59.5%, and
53.1%, and a weighted-average expected life of the option of four years.
Following is a summary of the Company's stock option activity and related
information for the years ended September 30:
2001 2000 1999
------------------ ------------------ ------------------
Weighted- Weighted- Weighted-
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------ --------- ------ --------- ------ ---------
Outstanding at beginning of year ................................ 5,506 $14.00 5,235 $12.73 4,635 $12.18
Granted ......................................................... 877 10.94 1,208 18.09 946 14.60
Exercised ....................................................... (369) 6.88 (529) 8.30 (181) 5.01
Cancelled ....................................................... (434) 16.56 (408) 17.22 (165) 17.83
----- ------ ----- ------ ----- ------
Outstanding at end of year ...................................... 5,580 $13.79 5,506 $14.00 5,235 $12.73
===== ====== ===== ====== ===== ======
Options exercisable at year end ................................. 3,949 $13.68 3,295 $11.14 2,769 $ 9.68
Weighted-average fair value of
options granted during the year................................ $5.61 $ 9.30 $ 6.75
36
Notes to Consolidated Financial Statements
(in thousands, except per share amounts) -- (Continued)
Note H -- Benefit Plans -- (Continued)
The following table summarizes information about stock options outstanding
and exercisable at September 30, 2001:
Outstanding Exercisable
--------------------------------- ------------------
Weighted-
Average Weighted- Weighted-
Remaining Average Average
Range of Contractual Exercise Exercise
Exercise Prices Shares Life (yrs.) Price Shares Price
--------------- ------ ----------- --------- ------ ---------
$ 3.56 - $ 9.69 2,173 3.15 $ 8.35 1,984 $ 8.37
9.88 - 16.50 1,926 7.28 13.36 782 14.01
16.69 - 28.53 1,481 6.68 22.35 1,183 22.35
--------------- ----- ---- ------ ----- ------
$ 3.56 - $28.53 5,580 5.51 $13.79 3,949 $13.68
=============== ===== ==== ====== ===== ======
Employee Stock Purchase Plan: During fiscal year 2001, the Company's
shareholders approved the Employee Stock Purchase Plan, which provides for the
purchase of up to 500 shares of the Company's common stock. Employees may
authorize the Company to withhold up to 10% of their compensation during any
offering period, subject to certain limitations. The purchase price per share
is 85% of the fair market value on the last business day of each monthly
offering period. In fiscal year 2001, the Company sold 23 shares under this
plan.
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, 2001, there were 1,784 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, 2001 and 2000, there were 160 restricted shares sold but not
exchanged for unrestricted shares.
Savings Plan: The Company also provides a defined contribution 401(k) plan
to substantially all its U.S. employees, whereby the Company may make matching
contributions equal to a percentage of the contribution made by participants.
One half of the Company's contributions are used to buy shares of the
Company's common stock. Expenses, net of the effect of forfeitures, under this
plan for the years ended September 30, 2001, 2000, and 1999, were $2,238,
$3,729, and $3,127, respectively.
Note I -- Income Taxes
Income (loss) from continuing operations before income taxes consists of the
following:
Year Ended September 30, 2001 2000 1999
- ----------------------- ------- ------- -------
U.S. operations.................................................................................... $ (935) $13,065 $39,615
International operations........................................................................... (2,466) (2,273) (5,928)
------- ------- -------
$(3,401) $10,792 $33,687
======= ======= =======
37
Notes to Consolidated Financial Statements
(in thousands, except per share amounts) -- (Continued)
Note I -- Income Taxes -- (Continued)
The components of the provision for income taxes on income (loss) from
continuing operations are as follows:
Year Ended September 30, 2001 2000 1999
- ------------------------ -------- ------- -------
Current:
Federal.......................................................................................... $ 5,685 $ 8,598 $10,299
State............................................................................................ 3,528 4,020 3,819
International.................................................................................... 105 114 --
-------- ------- -------
Total Current..................................................................................... 9,318 12,732 14,118
Deferred (benefit) expense (primarily federal).................................................... (10,237) (7,832) 1,183
-------- ------- -------
$ (919) $ 4,900 $15,301
======== ======= =======
A reconciliation of the provision for income taxes on continuing operations
to the federal statutory rate follows:
Year Ended September 30, 2001 2000 1999
- ------------------------ ----- ----- ----
Expected federal tax rate................................................................................. (35.0)% 35.0% 35.0%
Adjustments due to:
Effect of state income tax............................................................................... 21.3% 17.8% 8.1%
Foreign net operating loss not benefited................................................................. 32.9% 9.0% 1.0%
Research and development tax credit...................................................................... (69.2)% (19.4)% (3.8)
Other, primarily non-deductible expenses................................................................. 23.0% 3.0% 5.1%
----- ----- ----
(27.0)% 45.4% 45.4%
===== ===== ====
At September 30, 2001, the Company had $47,872 of net operating loss
carryforwards in various states and $17,073 of net operating loss
carryforwards in foreign jurisdictions. The state carryforwards expire in
various periods ending on or before September 30, 2016. The foreign tax losses
can be indefinitely carried forward. At September 30, 2001 and 2000, the
Company had valuation allowances of $6,200 and $2,733, respectively, related
to the deferred tax assets associated with the state and foreign
carryforwards. Although realization is not assured, management believes it is
more likely than not that all remaining deferred tax assets will be realized
either through carryback availability or the generation of sufficient future
taxable income.
Income taxes paid during fiscal years ended September 30, 2001, 2000, and
1999, were $13,217, $10,022, and $15,060, respectively.
The tax effects of the temporary differences that give rise to the
significant portions of the deferred tax assets and liabilities are as
follows:
September 30, 2001 2000
- ------------- ------- --------
Deferred Tax Assets
Purchased research and development ...................... $ 6,194 $ 6,194
Accrued expenses and reserves ........................... 9,127 6,387
Tax credits and loss carryforwards, net of valuation
allowance............................................... 3,298 3,312
Purchased software ...................................... 941 755
Investment impairments and losses in equity investments . 5,348 2,775
------- --------
Total Deferred Tax Assets ................................ 24,908 19,423
Deferred Tax Liabilities
Depreciation and amortization ........................... (119) (53)
Unbilled accounts receivable ............................ (1,726) (4,740)
Software capitalization ................................. (5,274) (7,617)
Prepaids and other accelerated expenses ................. (750) (1,333)
------- --------
Total Deferred Tax Liabilities ........................... (7,869) (13,743)
------- --------
Net Deferred Tax Asset ................................... $17,039 $ 5,680
======= ========
38
Notes to Consolidated Financial Statements
(in thousands, except per share amounts) -- (Continued)
Note J -- Business Segments
The following information is presented in accordance with Statement of
Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information" (SFAS 131). SFAS 131 establishes standards
for reporting information about operating segments in annual financial
statements and requires selected information about operating segments in
interim financial reports issued to stockholders. It also establishes
standards for related disclosures about products and services and geographic
areas. Operating segments are defined as components of an enterprise about
which separate financial information is available that is evaluated regularly
by the chief operating decision maker, or decision-making group, in deciding
how to allocate resources and in assessing performance. The Company's chief
operating decision maker is the chief executive officer of the Company. The
Company's reportable segments are strategic business units that offer
different products and services. They are managed separately because each
business develops and markets industry-specific products and services.
After the sale of Global Government Solutions, the Company has three
reportable segments: Global Education Solutions; Global Manufacturing &
Distribution Solutions; and Global Energy, Utilities & Communications
Solutions. The Global Education Solutions segment provides information
technology services and application software to higher education institutions.
The Company's clients have historically been English-speaking institutions of
higher education with enrollments greater than two thousand students for its
software and services. Global Manufacturing & Distribution Solutions provides
a suite of supply chain management software solutions and services to process
manufacturers and distributors. The Company targets process manufacturers and
distributors that have over $100,000 in annual revenue. Global Energy,
Utilities & Communications Solutions provides administrative application
software and services to the utility market. The Company's target market
includes water, gas, and electric utilities that range from mid-size
municipalities to investor-owned utilities serving millions of customers.
The Company evaluates performance and allocates resources based on profit or
loss from operations before income taxes, interest income, and interest
expense. The accounting policies of the segments are the same as those
described in the summary of significant accounting policies. The measurement
of segment profit and loss includes revenues and expenses incurred by the
Company's foreign subsidiaries; however, the assets and liabilities of the
foreign subsidiaries are not included in the segments' assets. Foreign assets
are included in the "All Other" column. Intersegment sales and transfers are
primarily recorded at cost plus a markup that approximates current market
prices.
Summarized financial information concerning the Company's reportable
segments is shown in the following table. The "All Other" column includes
corporate-related items; elimination of inter-segment transactions, including
the elimination of intercompany net assets between corporate and the
reportable segments of $252,549 and $219,537 as of September 30, 2001 and
2000, respectively; intangibles and related amortization of assets purchased
in business acquisitions; and results of nonreportable segments whose products
and services serve markets different from those that the reportable segments
serve. The fiscal year 2001 asset impairment charge, the fiscal year 2001 and
2000 restructuring charges, and the fiscal year 2000 and 1999 equity in losses
of affiliates are included in the "All Other" segment profit (loss). Interest
income is not included in the following revenue disclosures.
39
Notes to Consolidated Financial Statements
(in thousands, except per share amounts) -- (Continued)
Note J -- Business Segments -- (Continued)
Global
Global Energy,
Global Manufacturing Utilities &
Education & Distribution Communications
Solutions Solutions Solutions All Other Total
--------- -------------- -------------- --------- --------
Year Ended September 30, 2001
Outsourcing services revenue............................... $ 38,422 $ 5,189 $16,549 -- $ 60,160
Software sales and commissions and maintenance and
enhancements revenue..................................... 101,341 23,050 24,229 -- 148,620
Software services revenue.................................. 56,829 27,176 46,889 -- 130,894
-------- -------- ------- -------- --------
Revenues from external customers........................... 196,592 55,415 87,667 -- 339,674
Intersegment revenues...................................... 959 25 -- (984) --
Segment profit (loss)...................................... 29,202 (10,653) 343 (22,293) (3,401)
Amortization of capitalized software....................... 2,819 1,333 1,402 -- 5,554
Research & development expenditures........................ 23,263 11,015 15,370 806 50,454
Segment assets............................................. 344,371 15,178 38,332 (10,040) 387,841
Year Ended September 30, 2000
Outsourcing services revenue............................... $ 41,124 $ 8,555 $14,677 $ 21 $ 64,377
Software sales and commissions and maintenance and
enhancements revenue..................................... 91,479 24,866 21,997 -- 138,342
Software services revenue.................................. 54,179 28,697 51,606 505 134,987
-------- -------- ------- -------- --------
Revenues from external customers........................... 186,782 62,118 88,280 526 337,706
Intersegment revenues...................................... 1,166 31 -- (1,197) --
Segment profit (loss) *.................................... 29,905 (5,993) 4,851 (17,971) 10,792
Amortization of capitalized software....................... 3,230 1,652 640 -- 5,522
Research & development expenditures........................ 20,997 11,834 13,254 1,966 48,051
Segment assets............................................. 311,118 18,695 44,427 (10,079) 364,161
Year Ended September 30, 1999
Outsourcing services revenue............................... $ 41,646 $ 7,181 $17,238 $ 2,291 $ 68,356
Software sales and commissions and maintenance and
enhancements revenue..................................... 97,455 22,843 26,608 128 147,034
Software services revenue.................................. 50,101 44,485 52,616 13,028 160,230
-------- -------- ------- -------- --------
Revenues from external customers........................... 189,202 74,509 96,462 15,447 375,620
Intersegment revenues...................................... 1,381 356 2,027 (3,764) --
Segment profit (loss) *.................................... 41,997 (2,492) (1,013) (4,805) 33,687
Amortization of capitalized software....................... 1,884 1,814 858 -- 4,556
Research & development expenditures........................ 20,718 10,588 14,628 3,987 49,921
Segment assets............................................. 283,389 29,103 50,656 (33,742) 329,406
- ---------------
* The "All Other" column includes $4,761 and $3,161 losses from investment in
affiliate accounted for under the equity method of accounting for fiscal
years 2000 and 1999, respectively.
40
Notes to Consolidated Financial Statements
(in thousands, except per share amounts) -- (Continued)
Note J -- Business Segments -- (Continued)
The following table presents revenues by country based on location of the
customer, and property by country based on location of the asset.
September 30,
-----------------------------------------------------------------------
2001 2000 1999
--------------------- --------------------- ---------------------
Long-Lived Long-Lived Long-Lived
Revenues Assets Revenues Assets Revenues Assets
-------- ---------- -------- ---------- -------- ----------
United States .......................................... $288,366 $102,157 $300,355 $115,244 $328,321 $105,696
Other Countries ........................................ 51,308 13,713 37,351 15,777 47,299 18,438
-------- -------- -------- -------- -------- --------
Total .................................................. $339,674 $115,870 $337,706 $131,021 $375,620 $124,134
======== ======== ======== ======== ======== ========
Note K -- Product Development, Commitments, and Other Items
Product development expenditures, including software maintenance
expenditures, for the years ended September 30, 2001, 2000, and 1999, were
approximately $50,454, $48,051, and $49,921, respectively. After
capitalization (Note A) these amounts were approximately $49,611, $44,508, and
$41,780, respectively, and were charged to operations as incurred. For the
same years, amortization of capitalized software costs (not included in
expenditures above) amounted to $5,554, $5,522, and $4,556, respectively.
Rent expense for the years ended September 30, 2001, 2000, and 1999, was
$8,285, $8,807, and $6,658, respectively. Aggregate rentals payable under
significant noncancellable lease agreements with initial terms of one year or
more as of September 30, 2001, are as follows:
Fiscal year
----------- Amount
-------
2002................................................................. $ 7,302
2003................................................................. 6,124
2004................................................................. 5,196
2005................................................................. 4,688
2006................................................................. 4,332
Thereafter........................................................... 9,443
-------
$37,085
=======
During the second quarter of fiscal year 2001, the Company decided that
restructuring actions were necessary to improve the Company's performance. The
restructuring plan included the termination of employees, management changes,
consolidation of certain facilities, and discontinuation of non-critical
programs. During the quarter ended June 30, 2001, the Company accrued $3,511
related to severance and termination benefits and $404 of other costs based on
a termination plan developed by management in consultation with the Board of
Directors. As of September 30, 2001, $1,128 of this accrual remains. In May
and June 2001, the Company terminated approximately 150 employees engaged
primarily in marketing, administrative, special-programs, and development
functions.
The Company continued to evaluate its business prospects and forecasts
during the fourth quarter of fiscal year 2001. As a result of its evaluation,
the Company implemented another restructuring plan, which included the
discontinuation of non-critical programs, termination of employees, and
consolidation of certain facilities primarily in the energy and utilities
business. The restructuring was carried out in an effort to improve the
Company's performance. During the quarter, the Company accrued $544 related to
severance and termination benefits and $636 of other costs based on a
termination plan developed by management in consultation with the Board of
Directors. As of September 30, 2001, $770 of this accrual remains. In August
2001, the Company terminated approximately 40 employees engaged primarily in
marketing, administrative, special-programs, and development functions.
41
Notes to Consolidated Financial Statements
(in thousands, except per share amounts) -- (Continued)
Note K -- Product Development, Commitments, and Other Items -- (Continued)
During the quarter ended December 31, 1999, the Company implemented a
restructuring plan, which included the termination of employees and
discontinuation of noncritical programs. The restructuring was considered
necessary in light of significantly decreased license fees in the quarter. The
Company accrued $1,000 related to severance and termination benefits based on
a termination plan developed by management in consultation with the Board of
Directors in December 1999. In January 2000, the Company terminated
approximately 100 employees engaged primarily in marketing, administrative,
special-programs, and development functions.
In October 1998, the Company's Board of Directors authorized the repurchase
of up to 3,000 of its common shares. During the year ended September 30, 1999,
the Company repurchased 2,340 of its common shares for $21,952 in fiscal year
1999. The Company's senior revolving credit agreement covenants were amended
in October 1998 to allow the Company to repurchase capital stock not to exceed
$35,000 and 3,000 shares before April 15, 1999. The Company is currently
unable to repurchase additional shares of common stock without another
amendment to its credit agreement.
Note L -- Quarterly Results of Operations (Unaudited)
The following is a summary of the quarterly results of operations for the
years ended September 30, 2001 and 2000:
Three Months Ended
---------------------------------------------------------------------------------
December 31, March 31, June 30, September 30,
----------------- ------------------ ----------------- -----------------
2000 1999 2001 2000 2001 2000 2001* 2000**
------- ------- -------- ------- ------- ------- ------- -------
Revenues ..................................... $86,143 $75,717 $ 81,373 $89,416 $91,685 $91,727 $85,764 $83,182
Gross profits ................................ 31,082 19,398 23,275 31,477 32,957 37,612 31,617 31,947
Income (loss) from continuing operations
before income taxes......................... 2,857 (9,400) (13,939) 3,129 2,237 12,085 5,444 4,978
Provision (benefit) for income taxes ......... 1,112 (3,465) (5,425) 1,321 1,217 5,133 2,177 1,911
Income (loss) from continuing operations ..... 1,745 (5,935) (8,514) 1,808 1,020 6,952 3,267 3,067
Income (loss) from discontinued operations ... 318 (272) (2,762) 1,811 19,744 4,346 -- (3,149)
Net income (loss) ............................ $ 2,063 $(6,207) $(11,276) $ 3,619 $20,764 $11,298 $ 3,267 $ (82)
Income (loss) from continuing operations per
common share................................ $ 0.05 $ (0.18) $ (0.26) $ 0.06 $ 0.03 $ 0.21 $ 0.10 $ 0.09
Income (loss) from continuing operations per
share -- assuming dilution.................. $ 0.05 $ (0.18) $ (0.26) $ 0.05 $ 0.03 $ 0.21 $ 0.10 $ 0.09
Income (loss) from discontinued operations
per common share............................ $ 0.01 $ (0.01) $ (0.08) $ 0.06 $ 0.60 $ 0.13 $ -- $ (0.10)
Income (loss) from discontinued operations
per share -- assuming dilution.............. $ 0.01 $ (0.01) $ (0.08) $ 0.05 $ 0.60 $ 0.13 $ -- $ (0.09)
Net income (loss) per common share ........... $ 0.06 $ (0.19) $ (0.34) $ 0.11 $ 0.63 $ 0.35 $ 0.10 $ --
Net income (loss) per share -- assuming
dilution.................................... $ 0.06 $ (0.19) $ (0.34) $ 0.11 $ 0.63 $ 0.33 $ 0.10 $ --
- ---------------
* Income (loss) from continuing operations includes a pretax restructuring
charge of $1,180 (Note K) and a change in estimate of $1,383 primarily to
reduce accrued employee costs and reduce a contract accrual.
** Income (loss) from discontinued operations includes a pretax charge of
$5,759 related to litigation (Note M) and income (loss) from continuing
operations includes a change in estimate primarily to reduce accrued
employee costs by $1,369.
42
Notes to Consolidated Financial Statements
(in thousands, except per share amounts) -- (Continued)
Note M -- Contingency
The Company has been involved in litigation relating to a software
implementation in Broward County, Florida. The Company believed that it had
meritorious defenses and the probability of an unfavorable outcome against the
Company was unlikely. However, on October 31, 2000, an adverse decision was
rendered against the Company in this litigation. The Company's claim for
approximately $3,100 -- which was included in the Company's accounts
receivable balances -- for software licensed, services rendered, and expenses
incurred was denied. In addition, as adjusted based upon post-trial motions
and appeals, the Company was ordered to pay damages in the amount of
approximately $2,000 plus prejudgment interest on a portion of that amount.
The Company recorded a pretax charge of $5,759 for damages and other costs
associated with the action in the fourth quarter of fiscal year 2000. While
this contract was originated within GGS, which has been sold, the right to
appeal and the impact of the related outcome were retained by the Company.
The Company is also involved in other legal proceedings and litigation
arising in the ordinary course of business. In the opinion of management, the
outcome of such proceedings and litigation currently pending will not
materially affect the Company's consolidated financial statements.
43
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, 2001 and 2000, and the
related consolidated statements of operations, cash flows, and stockholders'
equity for each of the three years in the period ended September 30, 2001. Our
audits also included the financial statement schedule listed in the Index at
Item 14(a). These financial statements and schedule are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements and schedule based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Systems &
Computer Technology Corporation at September 30, 2001 and 2000, and the
consolidated results of its operations and its cash flows for each of the
three years in the period ended September 30, 2001, in conformity with
accounting principles generally accepted in the United States. Also, in our
opinion, the related financial statement schedule, when considered in relation
to the basic financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.
/s/ Ernst & Young LLP
Philadelphia, Pennsylvania
October 23, 2001
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not Applicable.
44
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 22, 2002
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 22, 2002
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 22, 2002
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 22, 2002
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, 2001 and 2000
Consolidated Statements of Operations--Years Ended September 30, 2001, 2000,
and 1999
Consolidated Statements of Cash Flows--Years Ended September 30, 2001, 2000,
and 1999
Consolidated Statements of Stockholders' Equity--Years Ended September 30,
2001, 2000, and 1999
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).
45
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
SYSTEMS & COMPUTER TECHNOLOGY CORPORATION AND SUBSIDIARIES
For the Three Years in the Period Ended September 30, 2001
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
- ---------------------------------------------------------------------------------------------------------------------------------
Additions
---------------------------
Charged to Charged to
Balance at Costs and Other Accounts Deductions Balance at
Description Beginning of Period Expenses -Describe -Describe End of Period
- -----------------------------------------------------------------------------------------------------------------------------------
For the year ended September 30, 2001
Reserves and allowances deducted from other
assets and deferred charges:
Reserves for non-interest bearing
loans to employees
Short-term $ 56,000 $ 56,000
Long-term -- --
Allowance for doubtful accounts 4,534,000 $4,995,000 $3,727,000(1) 5,802,000
---------- ---------- --- ---------- ----------
Total $4,590,000 $4,995,000 $-- $3,727,000 $5,858,000
For the year ended September 30, 2000
Reserves and allowances deducted from other
assets and deferred charges:
Reserves for non-interest bearing
loans to employees
Short-term $ 56,000 $ 56,000
Long-term -- --
Allowance for doubtful accounts 5,035,000 $2,704,000 $3,205,000(1) 4,534,000
---------- ---------- --- ---------- ----------
Total $5,091,000 $2,704,000 $-- $3,205,000 $4,590,000
For the year ended September 30, 1999
Reserves and allowances deducted from other
assets and deferred charges:
Reserves for non-interest bearing
loans to employees
Short-term $ 56,000 $ 56,000
Long-term -- --
Allowance for doubtful accounts 3,472,000 $3,044,000 $1,481,000(1) 5,035,000
---------- ---------- --- ---------- ----------
Total $3,528,000 $3,044,000 $-- $1,481,000 $5,091,000
(1) Uncollectible accounts written-off during the year
46
No. Exhibit
2.1 Stock Purchase Agreement dated June 23, 2001 by and among Systems &
Computer Technology Corporation, SCT Technologies (Canada), Inc.,
SCT Financial Corporation, SCT Property, Inc., SCT Government
Systems, Inc., Omni-Tech Systems, LTD., Affiliated Computer
Services, Inc., ACS Enterprise Solutions, Inc. and ACS-Alberta, Inc.
(Exhibit 2.1 to Registrant's Form 8-K dated June 29, 2001) (1)
2.2 Amendment No. 1 to Stock Purchase Agreement dated June 29, 2001 by
and among Systems & Computer Technology Corporation, SCT
Technologies (Canada), Inc., SCT Financial Corporation, SCT
Property, Inc., SCT Government Systems, Inc., Omni-Tech Systems,
LTD., Affiliated Computer Services, Inc., ACS Enterprise Solutions,
Inc. and ACS-Alberta, Inc. (Exhibit 2.2 to Registrant's Form 8-K
dated June 29, 2001) (1)
3.1 Certificate of Amendment and Restated Certificate of Incorporation
(Exhibit 3 to Registrant's Form 10-Q for the quarterly period ended
March 31, 1998) (1)
3.2 Bylaws (Exhibit 3.2 to the Registrant's Registration Statement on
Form S-3 filed with the Securities and Exchange Commission on
September 1, 1993) (1)
3.3 Amendment to Bylaws adopted March 18, 1999 (Exhibit 3.3 to
Registrant's Form 10-Q for the quarterly period ended March 31,
1999) (1)
4.1 Form of Indenture under which the Registrant's 5% Convertible
Subordinated Debentures due 2004 are issued (Exhibit 4 to the
Registrant's Registration Statement on Form S-3 filed with the
Securities and Exchange Commission on October 9, 1997) (1)
4.2 Rights Agreement, dated as of April 13, 1999, between Systems &
Computer Technology Corporation and ChaseMellon Shareholder Services
L.L.C., including Terms of Series A Participating Preferred Stock,
which is attached as Exhibit A and Form of Right Certificate, which
is attached as Exhibit B to the Rights Agreement (Exhibit 4.1 to the
Registrant's Form 8-K dated March 18, 1999) (1)
10.1 Oracle Alliance Agreement dated as of May 31, 1998 between Oracle
Corporation and the Registrant (Exhibit 10 to the Registrant's Form
10-Q for the quarterly period ended June 30, 1998) (1)
10.2 Credit Agreement dated as of June 20, 1994 among the Registrant and
SCT Software & Resource Management Corporation as Borrowers and
Mellon Bank (Exhibit 10.4 to the Registrant's Form 10-K for the
fiscal year ended September 30, 1994) (1)
10.3 Subsidiary Guaranty Agreement dated as of June 20, 1994 entered into
by SCT Utility Systems, Inc. in favor of Mellon Bank. (Identical
Subsidiary Guaranties, except as to the identity of the guarantor,
were entered into by SCT Public Sector, Inc., SCT Financial
Corporation, SCT International Limited, SCT Software & Technology
Services, Inc., and SCT Property, Inc.) (Exhibit 10.5 to the
Registrant's Form 10-K for the fiscal year ended September 30, 1994)
(1)
10.4 Extension Agreement dated June 20, 1996 among Systems & Computer
Technology Corporation, SCT Software & Resource Management
Corporation and Mellon Bank, N.A. (Exhibit 10.12 to the Registrant's
Form 10-K for the fiscal year ended September 30, 1996) (1)
10.5 Amendment and Modification to Credit Agreement dated as of April 8,
1997 among Systems & Computer Technology Corporation and SCT
Software & Resource Management Corporation as Borrowers and Mellon
Bank, N.A. (Exhibit 10.1 to the Registrant's Form 10-Q for the
quarter ended June 30, 1997) (1)
10.6 Second Amendment and Modification to Credit Agreement dated as of
April 8, 1997 among Systems & Computer Technology Corporation and
SCT Software & Resource Management Corporation as Borrowers and
Mellon Bank, N.A. (Exhibit 10.2 to the Registrant's Form 10-Q for
the quarter ended June 30, 1997) (1)
_______________
(1) Incorporated by reference
47
10.7 Third Amendment and Modification to Credit Agreement dated as of
June 4, 1997 among Systems & Computer Technology Corporation and SCT
Software & Resource Management Corporation as Borrowers and Mellon
Bank, N.A. (Exhibit 10.3 to the Registrant's Form 10-Q for the
quarter ended June 30, 1997) (1)
10.8 Fourth Amendment and Modification to Credit Agreement dated as of
May 6, 1998 among Systems & Computer Technology Corporation and SCT
Software & Resource Management Corporation as Borrowers and Mellon
Bank, N.A. (Exhibit 10.8 to the Registrant's Form 10-K for the
fiscal year ended September 30, 1998) (1)
10.9 Fifth Amendment and Modification to Credit Agreement dated as of
October 9, 1998 among Systems & Computer Technology Corporation and
SCT Software & Resource Management Corporation as Borrowers and
Mellon Bank, N.A. (Exhibit 10.9 to the Registrant's Form 10-K for
the fiscal year ended September 30, 1998) (1)
10.10 Letter Amendment to Credit Agreement dated as of August 30, 1999
among Systems & Computer Technology Corporation and SCT Software &
Resource Management Corporation as Borrowers and Mellon Bank, N.A.
(Exhibit 10.10 to the Registrant's Form 10-K for the fiscal year
ended September 30, 1999) (1)
10.11 Sixth Amendment and Modification to Credit Agreement dated as of
July 7, 2000 among Systems & Computer Technology Corporation and SCT
Software & Resource Management Corporation as Borrowers and Mellon
Bank, N.A. (Exhibit 10.11 to the Registrant's Form 10-K for the
fiscal year ended September 30, 2000) (1)
10.12 Seventh Amendment and Modification to Credit Agreement dated as of
September 7, 2000 among Systems & Computer Technology Corporation
and SCT Software & Resource Management Corporation as Borrowers and
Mellon Bank, N.A. (Exhibit 10.12 to the Registrant's Form 10-K for
the fiscal year ended September 30, 2000) (1)
10.13 Eighth Amendment and Modification to Credit Agreement dated as of
June 20, 2001 among Systems & Computer Technology Corporation and
SCT Software & Resource Management Corporation as Borrowers and
Mellon Bank, N.A. (2)
10.14 Systems & Computer Technology Corporation 1994 Long-Term Incentive
Plan, as amended through November 18, 1997 (Exhibit 10 to
Registrant's Form 10-Q for the quarterly period ended March 31,
1998) (1,3)
10.15 Systems & Computer Technology Corporation 1994 Non-Employee Director
Stock Option Plan (Exhibit 4.4 to the Registrant's Registration
Statement on Form S-8 filed with the Securities and Exchange
Commission on June 30, 1995) (1,3)
10.15 Amendment One to the Systems & Computer Technology Corporation 1994
Non-Employee Director Stock Option Plan (Exhibit 10.1 to the
Registrant's Form 10-Q for the quarterly period ended December 31,
1998) (1,3)
10.16 Form of Severance Agreement dated as of April 21, 1999 by and
between the Registrant and certain executive officers and management
of the Registrant (Exhibit 10.14 to the Registrant's Form 10-K for
the fiscal year ended September 30, 1999) (1,3)
21 Subsidiaries of the Registrant. (2)
23 Consent of Ernst & Young LLP. (2)
_______________
(1) Incorporated by reference
(2) Filed with this Annual Report on Form 10-K
(3) Compensatory plan, contract or arrangement
48
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.
On July 16, 2001, the registrant filed a current report on Form 8-K
announcing that on June 29, 2001, pursuant to a Stock Purchase Agreement dated
June 23, 2001, as amended (the "Purchase Agreement"), the Company consummated
the sale of its Global Government Solutions business (the "Business") to
Affiliated Computer Services, Inc. ("ACS") for $85 million in cash, subject to
adjustment in certain circumstances. Based on a formula contained in the
Purchase Agreement, the purchase price reduction could be as much as
approximately $40 million, although the Company does not believe that any
material reduction will occur. The aggregate amount of consideration was
determined following negotiations between the Company and ACS. In connection
with the Purchase Agreement, the Company entered into a non-competition
agreement and agreed to a four year covenant not to engage in any business
which, subject to certain exceptions, (i) develops, licenses, modifies,
supports or maintains software for use directly or indirectly by or for
governments which performs the same or substantially the same functions as the
software being developed, licensed, modified, supported or maintained by the
Business or (ii) provides outsourcing services directly or indirectly to
governments of the same or substantially the same type as provided by the
Business. In addition, the Company entered into a transition services
agreement providing ACS with the use of certain of the Company's information
systems and employee services for a period of time following the closing at
agreed upon rates. The Company also provided the requisite pro forma financial
information.
49
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned thereunto duly authorized.
SYSTEMS & COMPUTER TECHNOLOGY CORPORATION
(Registrant)
By: /s/ Michael J. Emmi
-------------------------------------------
Michael J. Emmi, Chairman of the Board
President and Chief Executive Officer
Date: December 21, 2001
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, President and Chief December 21, 2001
- -------------------------------------------- Executive Officer; Director (Principal
Michael J. Emmi Executive Officer)
/s/ Michael D. Chamberlain Director December 21, 2001
- --------------------------------------------
Michael D. Chamberlain
/s/ Allen R. Freedman Director December 21, 2001
- --------------------------------------------
Allen R. Freedman
/s/ Thomas I. Unterberg Director December 21, 2001
- --------------------------------------------
Thomas I. Unterberg
/s/ Gabriel A. Battista Director December 21, 2001
- --------------------------------------------
Gabriel A. Battista
/s/ Eric Haskell Senior Vice President, Finance and December 21, 2001
------------------------------------------- Administration, Treasurer and Chief
Eric Haskell Financial Officer (Principal Financial
and Accounting Officer)
SYSTEMS & COMPUTER TECHNOLOGY CORPORATION
Index of Exhibits Filed Herewith
Exhibit
No. Exhibit Page
- ------- ------- ----
10.13 Eighth Amendment and Modification to Credit Agreement dated as
of June 20, 2001 among Systems & Computer Technology
Corporation and SCT Software & Resource Management Corporation
as Borrowers and Mellon Bank, N.A.
21 Subsidiaries of the Registrant
23 Consent of Ernst & Young LLP