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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended September 30, 2002 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
- ------------------------------- ---------------------------------
(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
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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. [X]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act) Yes X No
----- -----
State the aggregate market value of the voting and non-voting common equity held
by non-affiliates computed by reference to the price at which the common equity
was last sold, or the average bid and asked price of such common equity, as of
the last business day of the registrant's most recently completed second fiscal
quarter.
$427,123,896
Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practicable date.
33,570,917 shares at December 18, 2002
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 21, 2003 is incorporated by reference to the extent provided in Part
III, Items 10-13.
TABLE OF CONTENTS
Page
Item Number and Caption Number
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PART I
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Item 1. Business 1
Item 2. Properties 11
Item 3. Legal Proceedings 12
Item 4. Submission of Matters to a Vote of Security Holders 12
PART II
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Item 5. Market for Registrant's Common Equity and Related Stockholder Matters 13
Item 6. Selected Financial Data 14
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 15
Item 7A Quantitative and Qualitative Disclosures About Market Risk 26
Item 8. Financial Statements and Supplementary Data 27
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure 49
PART III
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Item 10. Directors and Executive Officers of the Registrant 50
Item 11. Executive Compensation 50
Item 12. Security Ownership of Certain Beneficial Owners and Management 50
Item 13. Certain Relationships and Related Transactions 51
Item 14. Controls and Procedures 51
PART IV
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Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K 52
PART I
ITEM 1. BUSINESS.
Systems & Computer Technology Corporation ("SCT" or the "Company"),
incorporated in Delaware in 1968, provides enterprise-wide e-education solutions
that include software applications, technology and services that support an
institution of higher education's administration, research and teaching
requirements. SCT works collaboratively with clients and other companies to
provide an e-Education Infrastructure that enables institutions of higher
education to serve their constituents through a unified digital campus. SCT's
e-Education Infrastructure for higher education is a strategic framework for
leveraging an institution of higher education's technology, systems and services
for greater operational effectiveness in teaching, learning, research and
administration.
In this regard, the Company develops, licenses, and supports a variety
of enterprise software and technologies; 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 focus on one market enables it to develop and utilize a
base of industry expertise to deliver products and services that reflect a
thorough understanding of client requirements and industry best practices.
As of September 30, 2002, the Company also served the energy and
utilities market. However, as of June 30, 2002, the Company declared the Global
Energy and Utilities Solutions ("EUS") business a discontinued operation. The
Company has not sold the EUS business, but is continuing in its efforts to sell
the business.
For a portion of fiscal 2002, the Company also served the process
manufacturing and distribution market. As of March 31, 2002, the Company
declared the Global Manufacturing & Distributions Solutions ("MDS") business a
discontinued operation. On May 31, 2002, the Company consummated the sale of the
MDS business to Agilisys International Limited pursuant to an agreement dated
April 10, 2002.
In January 2002, the Company acquired USA Education, Inc.'s (commonly
known as Sallie Mae) student information systems business in the form of the
Exeter Student Suite and Perkins/Campus Loan Manager product lines and related
resources. In February 2002, the Company acquired Applied Business Technologies,
Inc. ("ABT") and its PowerCAMPUS solution, related resources and customer base.
In October 2002, the Company acquired Campus Pipeline, Inc. and its Campus
Pipeline and Luminis solutions, related resources and customer base. The Company
had been a major stockholder of Campus Pipeline, holding approximately 59% of
its outstanding common stock, which was approximately 43% of the voting interest
in Campus Pipeline's outstanding equity due to outstanding convertible fully
voting, preferred shares.
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Banner(R), SCT(R) and the Circle P logo(R) are registered trademarks,
SCT OnSite(R) is a registered service mark and Plus(TM), Campus Pipeline(TM) and
Luminis(TM) are trademarks of the Company used in its continuing operations.
BillGen(R) and EnerLink(R) are registered trademarks, SCT Synchro(TM) is a
trademark and SinglePoint Solutions(SM) is a service mark of the Company used in
its discontinued operations. All other trade names referenced herein are the
service marks, trademarks or registered trademarks or service marks of their
respective companies or organizations.
The Company's Internet web site is http://www.sct.com. A copy of this
Form 10-K will be available on the Company's web site as soon as reasonably
practicable after the electronic filing of this report with the Securities and
Exchange Commission.
Markets
Having sold the MDS business and declared the EUS business as a
discontinued operation, SCT has moved strategically to focus solely on the
higher education market. As a result, all of the Company's revenues from
continuing operations are now derived from the higher education market. The
principal market for the Company's offerings are in the United States. In fiscal
year 2002, the Company's foreign operations represented approximately 3% of
revenues and the Company's export sales represented approximately 6% of
revenues.
The Company has broadened its reach into the higher education market by
offering a wider array of products and services designed around the needs of
specific segments and institution types. SCT's software expertise has expanded
in critical areas of higher education technology, including administrative
systems (SCT's traditional strength); academic solutions; portal, self-service
and community solutions; content management and workflow solutions; information
access; enterprise integration solutions; and professional services. SCT has
developed substantial functional knowledge and technical expertise about the
information technology requirements of higher education institutions.
SCT targets the more than 3,000 North American English-speaking
institutions of higher education, and is also pursuing global higher education
markets in Europe, Latin America, Asia Pacific, and the Middle East. The
Company's primary enterprise software product lines include the SCT Banner, SCT
PowerCAMPUS, SCT Matrix, SCT Campus Pipeline, SCT Luminis and SCT Plus
solutions. With an expanded strategic alliance program, SCT teams with third
parties to market and deliver additional higher education-focused solutions,
such as integrated course management (WebCT), academic portfolios and
institutional assessment (Nuventive), and e-Procurement (Higher Markets), among
others. SCT also teams with companies like Oracle, Microsoft, Sun Microsystems
and Documentum to bring their leading technologies to the higher education
market in a way that is integrated with other key infrastructure components.
Services and Products
The Company's revenues are derived from several sources: Software
licenses, software services, maintenance and enhancements, and outsourcing
services.
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Software Licenses
The Company develops and licenses application software and core
technologies for the higher education market, and resells certain third-party
solutions. The following are the Company's primary software solutions:
Banner. The Company's Banner software product line is SCT's leading
software solution for administrative computing in higher education and serves a
wide variety of institution types and enrollments. The component applications of
the Banner product line are developed for an Oracle environment. It is available
in both Internet-deployed and client/server 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
systems assist with common administrative functions, including human
resources, financial management and alumni development.
PowerCampus. The PowerCAMPUS software product line is designed for
public and private institutions of higher education with relatively low student
enrollments. The component applications of the PowerCAMPUS product line are
developed for the Microsoft environment. The PowerCAMPUS products are available
in both Internet-deployed and client/server technologies. The software enables
institutions to process student information, maintain student records and
process admissions, registration, billing and advancement using simple
workflows. The complementary IQ Web products provide self-service on the World
Wide Web to non-administrative end users such as students and faculty. These
products support student and alumni administrative functions as well as provide
faculty with access to on-line grading and web-based course management. The
PowerCAMPUS suite integrates with third party products from Microsoft to provide
clients with Financial and Human Resource processing and from College Board to
provide Financial Aid Processing. The PocketRecruiter software product, an
add-on product for the PowerCAMPUS application, is a mobile solution designed to
provide admissions officers with access to recruiting information via a hand
held Pocket PC.
Campus Pipeline and Luminis. Through the Campus Pipeline and Luminis
products, the Company provides core technologies for the e-Education
Infrastructure with portal, platform, integration, and content management
technologies designed specifically for higher education. Based on open
standards, these technologies can be integrated with an institution's systems to
connect information, resources, and constituents. The Campus Pipeline product is
an Internet-native, web-deployed enterprise solution that integrates disparate
systems and provides centralized and customized web access to an institution's
information, services and constituent communities. The Luminis product line is
also an Internet-native, web-deployed solution which enables institutions to
create comprehensive online environments for unifying administrative services,
campus news, online learning, and other services within their higher education
communities. The Luminis Platform solution consists of standards-based tools and
applications for system administration, communication, portals, data and user
management. The Luminis Content Management suite consists of software to create
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and manage the information and resources provided on an institution's internal
and external web sites. The Luminis Integration suite consists of software and
services that integrate an institution's disparate systems, applications and
databases to create a digital campus that is open, interoperable and built for
extensibility. Both the Campus Pipeline and Luminis products run on Windows NT
and Sun Solaris servers with an Internet client browser and support the
Microsoft SQL Server and Oracle databases. The Luminis Integration capabilities
also support Informix, Sybase and DB2 databases.
Matrix. The Company's SCT Matrix software product line is designed for
more complex public and private institutions of higher education. The component
applications of the SCT Matrix product line are developed for the Microsoft
environment. The SCT Matrix software product line is an Internet-native,
web-deployed suite of student management applications. These applications are
designed for larger, more complex institutions that require a high degree of
flexibility and adaptability in their administrative solutions. The software
enables institutions to process student information, maintain student records,
manage recruiting and admissions, and process registration, billing and
financial aid, all using an integrated rules engine and pervasive communication
and relationship management capabilities. Visual user interfaces are provided
for both administrative end users and non-administrative self-service users such
as students, faculty, and advisors.
Plus. The Plus software is a suite of Web-enabled administrative
applications which operate within traditional mainframe and minicomputer-based
institutions. As part of these offerings, SCT provides Web applications to
address client requirements for decentralized routine processing and inquiry
while maintaining centralized control of information and access. These
applications allow students to 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.
WebCT, Inc. SCT currently has an agreement with WebCT, Inc. ("WebCT")
to market on an exclusive basis through June 15, 2003 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. 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.
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 the ORACLE database system with the Banner software 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.
4
Software Services
The Company provides a range of professional support services,
including project management, systems implementation, modification, training and
support; consulting services; and information technology assessment, planning,
integration and management services. 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. The Company also offers project-based consulting and technical
services, thereby allowing for scalable contracts based upon client need. All
these software services are primarily provided in connection with the license of
the Company's software products by the client.
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 fixed price 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 21% of the license fee, and generally
increases each year by a specified percentage.
Outsourcing Services
The Company provides OnSite information technology services in the
areas of networking and connectivity, applications, systems, risk mitigation,
distance learning and security, help desk and data center operations. These
services are designed to assume total or partial control of clients' information
technology resources, and are generally provided on a long-term basis. The
Company also provides IT assessment services, planning services and on-site or
remote staff and staff management services, using skilled information technology
personnel knowledgeable in the latest computer-based technologies and the
functional processes within higher education.
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. The
Company's on-site personnel routinely draw upon specialists to address specific
technical issues and projects. The Company can assess, plan, staff and manage
any aspect of a client's information technology system and all or part of its
day-to-day operations.
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
5
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 could result in the Company incurring a loss.
The Company also offers IT services through its Selective Sourcing
suite of services. The goal of the Company's Selective Sourcing offering is to
work with higher education institutions and their technology management teams to
assist and/or manage portions of the institution's information technology
department on a short or long term basis, usually with the institution retaining
control of the overall management of its information technology department. The
Company provides Selective Sourcing services both at the client's site and
remotely. Selective Sourcing services are provided in the following areas:
networking and connectivity, applications, systems, risk mitigation, distance
learning and security, help desk and data center operations.
The Company has made a determination to focus its efforts on servicing
its existing outsourcing client base and obtaining renewals from these clients
as opposed to aggressively seeking new outsourcing clients. As a result, the
Company does not anticipate future growth in its outsourcing business.
Fiscal Funding Clauses. As many quasi government clients (such as certain
state-funded higher education institutions) are restricted from incurring
binding commitments which extend beyond their current annual budgets or
appropriations, contracts often include a "fiscal funding" provision which
provides for the reduction or termination of services or termination of
maintenance commensurate with reductions in a client's allocated funding. To
date, the Company has not been impacted materially by early terminations or
reductions in service from the use of fiscal funding provisions.
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,
2002, 2001 and 2000 were approximately $28,320,000, $29,614,000, and
$22,963,000, respectively. All of the product development expenditures for
fiscal years 2002 and 2001 were charged to operations, and after capitalization,
approximately $22,308,000 of the capital expenditures for fiscal 2000 was
charged to operations. For the same fiscal years, amortization of capitalized
software costs (which are not included in the aforementioned amounts) amounted
to approximately $2,618,000, $2,819,000 and $3,230,000, respectively.
6
Development Strategies
The Company, in consultation with a variety of college and university
advisors, expects to continue to enhance certain of its existing products to
include object oriented, native internet technologies, such as XML, open
enterprise application integration, and Web Services. These technologies would
expand the Company's higher education solutions to move beyond transaction
management systems and further support the e-education infrastructure to help
unify the access to information in a digital campus across a variety of local
and remote constituencies, including teaching, learning, research and
administration.
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.
Sales and Marketing
The Company attracts clients primarily through its own sales force of
approximately 105 direct salespersons and support staff, comprised of sales
managers, regional salespersons, sales support personnel, industry specialists
and functional and technical specialists, who are engaged primarily in selling
software licenses and related services. SCT also attracts clients through
referrals from existing clients and active participation in industry conferences
and trade shows. Systems & Computer Technology Limited, headquartered in High
Wycombe, England, operates as the Company's sales operations in Europe, Africa
and the Middle East. 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.
Competition
SCT has able competitors, which differ depending upon the
characteristics of the customer including its size, geographic location, and
computing environment. Many established competitors have greater marketing,
technical and financial resources than the Company, and there can be no
assurance that SCT will be able to continue to compete successfully with
existing or new competitors.
The Company competes with other providers of packaged application
software and technologies, as well as companies or in-house staffs offering to
develop custom software. The Company's principal competitors are PeopleSoft,
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Datatel, Oracle, SAP, and Jenzabar. Competitive factors include
price/performance, technology, functionality, portability, software support, and
the level of market acceptance of the competitor's products.
In the outsourcing services business, the Company's primary competitor
is Collegis. The Company occasionally competes with several large providers of
services, including International Business Machines Corporation ("IBM") and
Electronic Data Systems Corporation ("EDS"). In the software services business,
the Company competes with several large providers of systems integration
services, including IBM, EDS, Unisys, Accenture, BearingPoint, DeloitteTouche
and Cambridge Technology Partners, 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.
Backlog
At September 30, 2002 the Company's revenue backlog was approximately
$519 million, as compared to approximately $366 million at September 30, 2001.
Backlog arises from a firm commitment between a customer and the Company with
regard to the delivery of services in future periods, regardless of whether the
contract is fixed price or time and materials. A firm commitment to provide
services would result when the Company has entered into a contract with its
customer to provide services, the Company has contractually stated the estimated
hours and/or total cost of such services based on contractually agreed upon
labor rates or a negotiated fee, and the Company is committed to providing
these services and the customer is committed to proceeding with these services
until either party terminates the contract (with the right to collect those
funds for the work provided to date). If the client utilizes more or less of the
contracted backlog hours in a time and materials contract, additions or
reductions in backlog would occur.
Backlog generally includes OnSite services contracts and services
agreements, including enhancements, maintenance, and support services. Of the
$519 million in backlog at September 30, 2002, approximately 40% is expected to
be recognized in fiscal 2003, with the remainder extending through December
2011. Approximately 80% of the $519 million applies to software related services
and the remaining 20% relates to OnSite services. In connection with OnSite
services contracts, these amounts include any guaranteed minimum price increases
provided in the contracts. Backlog is not necessarily indicative of actual
revenues for any succeeding period.
SCT is unable to predict the impact, if any, on its future revenues
that may result from reductions in the budgets of customers. Any such reductions
could impact new contracts as well as existing contracts. Certain clients 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
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consistent with funding. The backlog at September 30, 2002 includes
approximately $39 million of OnSite services contracts with fiscal funding
clauses.
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, 2002, the Company employed approximately 1,600
employees in its continuing operations, of which approximately 800 are resident
in Malvern, Pennsylvania, with the remainder resident primarily at the Company's
various offices and client sites. None of the Company's employees are subject to
collective bargaining agreements, except for approximately 20 employees at one
client site. The Company considers its relationship with its employees to be
satisfactory. An additional 425 employees are employed by the Company's
discontinued EUS business.
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 D. Chamberlain 58 President and Chief Executive Officer;
Director
Eric Haskell 56 Executive Vice President, Finance and
Administration, Treasurer, and Chief
Financial Officer; Director
Richard A. Blumenthal 54 Executive Vice President, General Counsel
and Secretary
Robert L. Moul 38 President, Field Operations
Roy J. Zatcoff 47 Executive Vice President, Product and
Marketing Operations
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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 D. Chamberlain has served as a director of the Company since
July 1989. He has served as President and Chief Executive Officer since January
2002, and prior thereto, as Chief Operating Officer from November 2001 to
January 2002, as President, Global Operations from July 1999 to November 2001,
President of the SCT Software Group from January 1995 to July 1999, and
President of the Education Systems business from October 1986 to January 1995.
Eric Haskell has served as Executive Vice President, Finance and
Administration, Treasurer and Chief Financial Officer of the Company since
October 2002, and prior thereto, as Senior Vice President, Finance and
Administration, Treasurer and Chief Financial Officer from July 1990 to October
2002 and Vice President, Finance and Administration, Treasurer and Chief
Financial Officer from March 1989 to July 1990. He has served as a director of
the Company since January 2002.
Richard A. Blumenthal has served as Executive Vice President, General
Counsel and Secretary of the Company since October 2002, and prior thereto, as
Senior Vice President, General Counsel and Secretary of the Company from July
1990 to October 2002 and Vice President, General Counsel and Secretary from July
1987 to July 1990. He has been General Counsel of the Company since December
1985.
Robert L. Moul has served as President, Field Operations of the Company
since October 2002, and prior thereto, as President of the Education Systems
business from April 2001 to October 2002 and Vice President, IT Services from
September 2000 to April 2001. Prior thereto, since 1981 he served in various
positions with Electronic Data Systems, a global information technology services
company, including Executive Director, Government for EDS Australia from January
2000 to September 2000, Deputy Managing Director and Director of Operations for
EDS Hong Kong and China from November 1997 to January 2000 and ICI global
account executive from June 1996 to November 1997.
Roy. J. Zatcoff has served as Executive Vice President, Product and
Marketing Operations of the Company since October 2002, and prior thereto, as
President of the Company's Manufacturing and Distribution Systems business from
January 1998 to May 2002, when that business was sold, performed special
projects for the President and Chief Executive Officer of the Company from May
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2002 to October 2002, and served as President of the Education Systems business
from January 1995 to January 1998 and as Vice President, Product Development of
the Education Systems business from May 1986 to January 1995.
ITEM 2. PROPERTIES.
SCT occupies three adjacent buildings and a portion of a fourth
building in the Great Valley Corporate Center in Malvern, Pennsylvania. The
Company's corporate headquarters in Malvern, Pennsylvania is located in one of
the four buildings referenced above in an approximately 47,000 square-foot
facility owned by the Company. Of the remaining three adjacent office buildings,
the Company owns an approximately 56,200 square-foot facility, leases an
approximately 70,000 square-foot facility under a lease which expires in
November 2008 and leases a 48,900 square foot facility under a lease which
expires in August 2005, of which approximately 26,500 square feet is sublet. 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 and
restructuring, the Company is actively attempting to sublease it and has accrued
a reserve for the anticipated net loss associated therewith.
As a result of the Campus Pipeline acquisition, the Company now leases
the following facilities in Salt Lake City, Utah: approximately 50,600 square
feet of space under a lease which expires in February 2012, of which
approximately 24,000 is available for sublease; 44,000 square feet of space
under a lease which expires in August 2004, all of which is available for
sublease; and approximately 8,000 square feet of space which is available for
sublease.
The Company also owns and occupies an approximately 45,000 square-foot
facility in Rochester, New York and leases offices in certain cities throughout
the United States including San Diego, California; Dallas, Texas; Herndon,
Virginia; Cambridge, Massachusetts; Toronto, Ontario (Canada); Melbourne, FL;
Pittsford, NY; High Wycombe, England; and Cheshire, England.
The Company also leases two facilities in Bangalore, India comprising
an aggregate of approximately 27,000 square feet which is used as a software
development center.
SCT believes that its facilities are adequate for its present business
needs.
In Columbia, South Carolina, the Company owns and occupies two
facilities, one of which contains approximately 60,000 square-feet and the other
of which contains approximately 80,000 square feet, which are used by the
Company's EUS discontinued business. In December 1998 the Company purchased an
additional nine acres in Columbia, South Carolina for the EUS discontinued
business.
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ITEM 3. LEGAL PROCEEDINGS.
The Company is involved in various 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
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER 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, 2002 HIGH LOW
---- ---
1st quarter 13.00 8.65
2nd quarter 13.69 8.61
3rd quarter 15.96 12.20
4th quarter 13.36 5.78
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
The approximate number of stockholders of record of SCT's Common Stock as of
September 30, 2002, was 833.
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.
13
ITEM 6. SELECTED FINANCIAL DATA.
(in thousands except per share amounts)
Year Ended September 30,
2002 (a) 2001 (b) 2000 (c) 1999 (d) 1998
-------- -------- -------- -------- ----
Revenues $ 237,538 $ 208,283 $ 196,414 $ 212,644 $ 184,254
Income from continuing operations before income taxes 13,075 10,606 11,929 40,579 41,524
Provision for income taxes 5,590 4,219 5,097 15,891 16,646
Income from continuing operations 7,485 6,387 6,832 24,688 24,878
Income (loss) from discontinued operations, net of income taxes (16,560) 8,431 1,796 (5,389) (3,504)
Net income (loss) (9,075) 14,818 8,628 19,299 21,374
Income from continuing operations
per common share 0.23 0.19 0.21 0.76 0.74
per common share -- assuming dilution 0.22 0.19 0.20 0.74 0.69
Income (loss) from discontinued operations
per common share (0.50) 0.26 0.06 (0.17) (0.10)
per common share -- assuming dilution (0.49) 0.25 0.05 (0.16) (0.10)
Net income (loss)
per common share (0.27) 0.45 0.27 0.59 0.64
per common share -- assuming dilution (0.27) 0.45 0.26 0.58 0.59
Common shares and equivalents outstanding:
average common shares 33,240 32,842 32,391 32,494 33,532
average common shares -- assuming dilution 33,608 33,278 33,624 33,531 36,035
Working capital $ 178,067 $ 178,757 $ 96,440 $ 72,046 $ 95,531
Net assets of discontinued operations 31,805 56,487 112,346 130,211 118,202
Total assets 366,647 366,507 339,502 309,954 304,558
Long-term debt 74,723 74,723 74,750 75,115 75,495
Stockholders' equity 218,571 221,397 201,437 188,276 182,922
(a)Includes a pretax retirement and restructuring charge of $4,874 and a pretax
asset impairment charge of $5,425. Results without these charges would have
been income from continuing operations of $13,900, or $0.41 per share --
assuming dilution. Includes the results of the USA Education, Inc.'s student
information systems business and Applied Business Technologies, Inc., each
acquired in the second quarter of fiscal year 2002. Refer to Item 7,
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS, of this Form 10-K, for discussion of material impacts of these
acquisitions on the results of operations.
(b)Includes a pretax retirement and restructuring charge of $2,485 and a pretax
asset impairment charge of $7,831. Results without these charges would have
been income from continuing operations of $12,661, or $0.38 per share --
assuming dilution.
(c)Includes a pretax retirement and restructuring charge of $1,000 and equity in
losses of affiliates before taxes of $4,761. Results without these charges
would have been income from continuing operations of $10,394, or $0.31 per
share -- assuming dilution.
(d)Includes equity in losses of affiliates before taxes of $3,161. Results
without these charges would have been income from continuing operations of
$26,642, or $0.79 per share -- assuming dilution.
14
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 market is higher education. The Company's focus on one
vertical market enables it to develop and utilize a base of industry expertise
to deliver products and services that address specific client requirements.
As of September 30, 2002, the Company also served the energy and utilities
market. As of the end of the third quarter of fiscal year 2002, the Company
declared the Global Energy and Utilities Solutions ("EUS") business a
discontinued business. The Company has not sold the EUS business, but is
continuing in its efforts to sell the business and expects to recognize a gain
on the sale. The results of operations for all periods have been restated to
reflect the EUS business's results as discontinued operations.
For a portion of fiscal year 2002, the Company also served the process
manufacturing and distribution market. As of the end of the second quarter of
fiscal year 2002, the Company declared the Global Manufacturing & Distributions
Solutions ("MDS") business a discontinued business. On May 31, 2002, the Company
consummated the sale of the MDS business to Agilisys International Limited
pursuant to an agreement dated April 10, 2002. The results of operations for all
periods have been restated to reflect the MDS business's results as discontinued
operations.
Prior to June 29, 2001, the Company also served the government market. On June
29, 2001, the Company sold its Global Government Solutions ("GGS") business to
Affiliated Computer Services, Inc. The results of operations for all periods
have been restated to reflect the GGS business's results as discontinued
operations.
In the second quarter of fiscal year 2002, the Company acquired USA Education,
Inc.'s (commonly known as "Sallie Mae") student information systems business in
the form of the Exeter Student Suite and Perkins/Campus Loan Manager product
lines and related resources. Also, in the second quarter of fiscal year 2002,
the Company acquired Applied Business Technologies, Inc. ("ABT") and its
PowerCAMPUS solution, related resources and customer base.
Effective October 23, 2002, the Company acquired Campus Pipeline, Inc., pursuant
to a Merger Agreement dated September 30, 2002, for $36.4 million cash and the
assumption by the Company of certain employee bonus and severance obligations
totaling $5.2 million (the "Merger Consideration"). Campus Pipeline was a
privately held corporation that provided digital and information systems
products and services to colleges and universities. In accordance with the
Merger Agreement, $3.5 million of the Merger Consideration will be held in
escrow until December 31, 2003 to secure certain indemnification obligations of
the former stockholders of Campus Pipeline in favor of the Company in case of
certain breaches of the Merger Agreement by Campus Pipeline. Pursuant to the
Merger Agreement and Campus Pipeline's Certificate of Incorporation, holders of
common stock of Campus Pipeline were not entitled to receive any portion of the
Merger Consideration. The total amount of funds used to pay the Merger
Consideration was obtained from the working capital of the Company.
Immediately prior to the consummation of the acquisition, three of the nine
members of the board of directors of Campus Pipeline were also directors and
affiliates of the Company, two of whom were also executive officers of the
Company. Additionally, the Company was a major stockholder of Campus Pipeline,
holding approximately 59% of Campus Pipeline's outstanding common stock, which
was approximately 43% of the voting interest in Campus Pipeline's outstanding
equity due to outstanding convertible fully voting, preferred equity. In
addition, certain executive officers and other employees owned common stock of
Campus Pipeline. As the Company and executive officers and employees of the
Company held only common stock of Campus Pipeline, they were not entitled to
receive any portion of the Merger Consideration. Additionally, prior to the
acquisition the Company had a business relationship with Campus Pipeline, as
certain of Campus Pipeline's products and services were offered to customers
through contracts entered into between the Company and those customers.
15
The acquisition is anticipated to allow the Company to provide core technologies
for the e-Education Infrastructure with portal, platform, integration, and
content management technologies designed specifically for higher education.
Based on open standards, Campus Pipeline technologies can be integrated with an
institution's choice of systems and applications, enabling an institution to
connect information, resources, and constituents. The Company plans to continue
to support and develop these products, which should enable customers to choose
and integrate their choice of homegrown systems and applications including those
from other software providers.
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.
When obtaining a license to use the Company's application software, clients
typically purchase a variety of software support services, including systems
implementation, modification, training, and other client support activities. The
Company also provides consulting and information systems planning and
integration 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 discussion on operating results excludes the results of the EUS,
MDS, and GGS businesses as they have been reclassified as discontinued
operations in all periods presented.
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 from
Year Ended September 30, Prior Year
-------------------------------- ------------------
2002 2001 2000 2002 2001
---- ---- ---- ---- ----
Revenues
Outsourcing services 14% 18% 21% (13)% (7)%
Software sales and commissions 15% 15% 15% 20% 6%
Maintenance and enhancements 35% 34% 32% 16% 13%
Software services 34% 30% 31% 29% 3%
Interest and other income 2% 3% 1% (23)% 124%
---------------------------- ----------------------
Total 100% 100% 100% 14% 6%
============================ ======================
Expenses
Cost of services, software sales,
commissions, and maintenance
and enhancements 61% 61% 61% 14% 5%
Selling, general and administrative 28% 27% 28% 16% 5%
Retirement and restructuring charges 2% 1% 1% 96% 149%
Asset impairment charge 2% 4% -- (31)% --
Equity in losses of affiliates -- -- 2% -- (100)%
Interest expense 2% 2% 2% -- (3)%
Income from continuing operations
before income taxes 5% 5% 6% 23% (11)%
============================ ======================
16
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,
2002 2001 2000
---- ---- ----
Gross Profit
Outsourcing services 22% 21% 22%
Software sales and maintenance
and enhancements 54% 54% 56%
Software services 22% 21% 21%
---------------------------
Total 38% 38% 38%
===========================
Revenues:
o Outsourcing services revenue decreased 13% in fiscal year 2002 and 7% in
fiscal year 2001 compared with the prior-year periods. These decreases are
the result of the Company's decision to focus its efforts on servicing its
existing outsourcing client base and obtaining renewals from these clients
as opposed to aggressively seeking new outsourcing clients. As a result, the
Company does not anticipate future growth in its outsourcing business.
Contract renewal rates, as a percentage of annual revenue from contracts
available for renewal, for the fiscal years 2002, 2001, and 2000 were 89%,
64%, and 100%, 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.
o Software sales and commissions revenue increased 20% compared to the
prior-year period due to increases in traditional Banner license fees;
third-party license fees; and the results of the ABT acquisition, which
provided approximately 66% of the increase. Most of the increase over the
fiscal year 2001 period occurred in the Company's fourth quarter of fiscal
year 2002, which has typically been the Company's strongest quarter for
license fee revenues. Software sales and commissions increased 6% in fiscal
year 2001 compared to fiscal year 2000 primarily as a result of commission
revenue of $2.7 million in shares of WebCT earned in the third quarter of
fiscal year 2001. 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. The Company has not recorded any
additional revenue, and does not anticipate that it will record any
additional revenue of any significance, as a result of this agreement.
o The 16% and 13% increases in maintenance and enhancements revenue in fiscal
years 2002 and 2001, respectively, were the result of the growing installed
base of clients in all of the Company's product lines and annual escalators
on existing contracts. Maintenance and enhancements revenue from the second
quarter fiscal year 2002 acquisitions of ABT and the Sallie Mae business
provided 19% of the increase. The Company continues to experience a high
annual renewal rate on existing maintenance contracts, although there can be
no assurance that this will continue.
o Software services revenue increased 29% in fiscal year 2002 compared with
the prior-year period. The increase is primarily the result of (i) increased
implementation and integration services provided to the Company's
traditional Banner clients and (ii) new services business as a result of the
ABT and Sallie Mae acquisitions in the second quarter of fiscal year 2002.
Software services revenue remained relatively flat in fiscal year 2001, with
only a 3% increase over fiscal year 2000. The increase occurred primarily in
the fourth quarter of fiscal year 2001 as a result of increased
implementation and integration services provided to the Company's
traditional clients.
o In November 2001, the FASB issued an announcement on the topic of "Income
Statement Characterization of Reimbursements Received for Out-of-Pocket
Expenses Incurred" (the "Announcement"). The Announcement requires companies
to characterize reimbursements received for out-of-pocket expenses incurred
as revenue in the statement of operations. The Announcement is to be applied
in financial reporting periods beginning after December 15, 2001, and
comparative financial statements for prior periods are to be reclassified to
comply with the guidance in this Announcement. The Company adopted the
Announcement in the second quarter of 2002. The Announcement did not have a
significant impact on gross margin and had no effect on net income, but did
increase software services revenue and cost of software services by $6.5,
$6.5, and $6.8 million in fiscal years 2002, 2001, and 2000, respectively.
o The decrease in interest and other income in fiscal year 2002 compared with
fiscal year 2001 is primarily the result of only a half-year of amortization
of the WebCT noncompete agreement, the balance of which was reduced to zero
during fiscal year 2002, and decreased interest income earned on the
Company's cash and short-term investments balances. The increase in interest
and other income in fiscal year 2001 compared with fiscal year 2000 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.
17
Gross Profit: The total gross profit as a percentage of total revenue (excluding
interest and other income) remained essentially flat for the fiscal year 2002
period compared with the fiscal year 2001 period. The software sales,
commissions, maintenance, and enhancements gross profit percentage may decrease
in fiscal year 2003 as the Company invests in new and re-architected products to
generate future revenue growth.
Gross profit as a percentage of revenue was 38% for fiscal years 2001 and 2000;
however, the components of the gross profit percentage changed slightly from
fiscal year 2000 to fiscal year 2001. The software sales, commissions,
maintenance, and enhancements gross profit percentage decreased from 56% in
fiscal year 2000 to 54% in fiscal year 2001 primarily as a result of increased
noncapitalizable research and development expenses during the fiscal year 2001
period related to a new product initiative. The software services and
outsourcing services gross profit percentages remained relatively consistent
over the fiscal 2001 period compared with fiscal 2000.
Selling, General and Administrative Expenses: Selling, general and
administrative expenses increased in fiscal year 2002 compared with fiscal year
2001 as a result of (i) investments the Company has made in its sales and
marketing organizations, (ii) increased sales commissions as a result of sales
commissions paid at the beginning of large services contracts in which revenue
is recognized as work is performed and increased revenue, particularly in the
fourth quarter of fiscal year 2002, and (iii) additional costs related to the
ABT and Sallie Mae business acquisitions in the second quarter of fiscal year
2002. Selling, general and administrative expenses increased in the first six
months of fiscal year 2001 compared with the prior-year period primarily as a
result of the addition of sales personnel and selling expenses in an effort to
increase sales. Selling, general and administrative costs were flat in the
second half of fiscal year 2001. The Company realized that the increase in sales
was slower than anticipated for fiscal year 2001, implemented restructuring
actions and began to experience cost savings in the third quarter of fiscal year
2001.
Retirement, Restructuring, and Asset Impairment Charges: In the second quarter
of fiscal year 2002, the Company recognized retirement and restructuring charges
of $4.9 million. The charge was comprised of $3.5 million for the retirement
compensation package of the Company's former President, Chief Executive Officer,
and Chairman of the Board of Directors and $1.4 million related to actions to
reduce the workforce, discontinue non-critical programs, and consolidate certain
facilities. At September 30, 2002, $1.1 million of the $4.9 million accrual
remains.
During the third quarter of fiscal year 2001, the Company implemented a
restructuring plan that included the termination of employees, management
changes, consolidation of certain facilities, and discontinuation of
non-critical programs. The Company accrued $2.0 million related to severance and
termination benefits and $0.4 million of other costs based on a termination plan
developed by management in consultation with the Board of Directors. As of
September 30, 2002, none of this accrual remains.
In the second quarter of fiscal year 2001 and the third quarter of fiscal year
2002, the Company reduced the carrying value of its long-term investment in
WebCT as a result of impairments that were deemed other than temporary. The
Company recognized an asset impairment charge of $7.8 million in fiscal year
2001. During the third quarter of fiscal year 2002, the Company recorded an
asset impairment charge of $5.4 million and wrote off the noncompete agreement,
which had a carrying value of $1.5 million, further reducing the carrying value
of the investment in WebCT to $4.0 million, Future earnings would be reduced and
earnings would be charged if there was an additional impairment that was found
to be other than temporary at a future balance sheet date.
Discontinued Operations: On May 31, 2002, the Company consummated the sale of
its Global Manufacturing & Distribution Solutions ("MDS") business to Agilisys
International Limited ("Agilisys"), pursuant to an Asset Purchase Agreement
dated April 10, 2002. As of the end of the second quarter of fiscal year 2002,
the Company had declared MDS a discontinued business; the results of MDS have
been reported separately as discontinued operations in the prior year
consolidated balance sheet, consolidated statements of operations, and related
footnotes. The Company agreed to sell substantially all of the assets of MDS for
$13.2 million in cash, subject to adjustment in certain circumstances. Due to
such adjustments, which principally related to the collection of receivables by
the Company, the net proceeds to the Company were $10.5 million. The Company
could receive up to an additional $3.0 million based upon the achievement by
Agilisys of specified revenue targets over the three-year period subsequent to
the sale. The Company recorded a loss of $7.3 million on the sale, net of a $3.5
million tax benefit. For business segment reporting, MDS was previously reported
as a separate segment.
18
During the third quarter of fiscal year 2002, the Company declared the Global
Energy and Utilities Solutions ("EUS") business as discontinued and announced
that it had signed a letter of intent for the sale of the EUS business. The
letter of intent and negotiations with the party who signed the letter of intent
were terminated in the fourth quarter of fiscal year 2002. However, the Company
is continuing in its efforts to sell the EUS business and the EUS business is
treated as a discontinued operation in the consolidated balance sheets,
consolidated statements of operations and related footnotes. The Company expects
to recognize a gain on the sale of the EUS business. For business segment
reporting, EUS was previously reported as a separate segment.
The EUS business has a purchase commitment with Enlogix CIS L.P. to purchase
development expertise in the form of labor hours, which the business is
utilizing in its development efforts. The purchase commitment extends through
December 22, 2005. During the remainder of the term of the commitment, the
business will purchase approximately $3.7 million of labor hours at agreed upon
labor rates, which approximate the Company's fully costed labor rates.
In the third quarter of fiscal year 2001, the Company completed the sale of its
Global Government Solutions ("GGS") business. 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. The Company provided an
additional $3.5 million reserve for real-estate-related costs as of September
30, 2002, as a result of its inability to sublet an idle facility to the extent
previously anticipated. As of September 30, 2002, $6.7 million, which is
primarily included in accrued expenses, remained accrued for the completion of
these actions.
Income Taxes: Income from continuing operations before income taxes was $13.1
million for the year ended September 30, 2002, compared with $10.6 million in
fiscal year 2001. The provision for income taxes was $5.6 million in the current
period compared to $4.2 million in the prior-year period. The effective tax rate
on income from continuing operations in the fiscal year 2002 provision exceeds
the statutory rate principally due to the effects of state income and local
taxes and non-deductible expenses, somewhat offset by the research and
development tax credit.
Loss from discontinued operations before income taxes was $22.2 million for the
year ended September 30, 2002, compared with income from discontinued operations
before taxes of $15.0 million in the fiscal year 2001 period. The benefit for
income taxes was $5.6 million in the current period compared to a provision of
$6.6 million in the prior-year period. The effective tax rate on the loss from
discontinued operations in the fiscal year 2002 benefit is different from the
statutory rate principally due to not recording a tax benefit for losses related
to the Company's foreign operations.
Contingency: The Company had been involved in litigation relating to a software
implementation in Broward County, Florida. The Company believed that it had
meritorious defenses and the probability of an unfavorable outcome against the
Company was unlikely. However, on October 31, 2000, an adverse decision was
rendered against the Company in this litigation. The Company's claim for
approximately $3.1 million -- which was included in the Company's accounts
receivable balances -- for software licensed, services rendered, and expenses
incurred was denied. In addition, the Company was ordered to pay damages. In
January 2002, the Company paid $2.5 million and the judgment was satisfied of
record. While this contract was originated within the Global Government
Solutions business, which was sold on June 29, 2001, the right to appeal and the
impact of the related outcome were retained by the Company.
As of September 30, 2002, the Company was involved in litigation relating to two
software implementations. The claimants asserted that the Company did not
perform under the contracts. The Company had filed counter suits seeking to
recover unpaid accounts receivable. The Company recorded an accrual in the
amount of $0.7 million against the possibility of unfavorable judgments.
Subsequent to the end of fiscal year 2002, and in order to avoid the expense and
disruption of protracted litigation, the Company and the claimants reached
agreement to settle the lawsuits. Terms of the settlements were confidential,
but the amount paid, net of insurance proceeds approximates the amount accrued.
While these contracts originated within the MDS business, which has been sold,
the right to appeal and the impact of the related outcome were retained by the
Company.
In connection with the sale of assets or a business, the Company typically
agrees to indemnify the purchaser for breaches of representations and warranties
made by the Company in the agreeement. If indemnity claims are made against the
Company, the proceeds received by the Company for the sale may be subject to
adjustment. In the opinion of management, any indemnity obligations of the
Company which may result would not materially affect the Company's consolidated
financial statements.
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.
Cyclical Nature of Business: Certain factors have resulted in quarterly
fluctuations in operating results, including variability of software license fee
revenues, seasonal patterns of capital spending by clients, the timing and
receipt of orders, competition, pricing, new product introductions by the
Company or its competitors, levels of market acceptance for new products, and
general economic and political conditions. While the Company has historically
generated a greater portion of license fees 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.
19
Liquidity, Capital Resources, and Financial Position
The following discussion of cash flow activity is based upon historical
information and the statements of cash flows for the fiscal years 2002, 2001,
and 2000 do not present the MDS and EUS businesses as discontinued operations
and the fiscal years 2001 and 2000 do not present the Global Government
Solutions business, which was sold on June 29, 2001, as a discontinued
operation.
The Company's cash and short-term investments balance was $133.6 million and
$164.3 million as of September 30, 2002 and 2001, respectively. The cash
balances decreased as a result of cash used in operations and investing
activities discussed below. The Company anticipates using its cash and
short-term investments balance to fund future growth through various means,
including strategic alliances and acquisitions and development of additional
service offerings. As discussed in Note Q of the Notes to Consolidated Financial
Statements, the Company used cash to repurchase convertible subordinated
debentures and acquire Campus Pipeline, Inc. in October 2002.
Cash provided by operating activities was $1.6 million in fiscal year 2002
compared with cash provided of $25.0 million for the prior-year period. The
primary uses of cash in the fiscal year 2002 period were increased prepaid
income taxes and increased accounts receivable. The Company made estimated
income tax payments throughout the fiscal year 2002 period based on the total
fiscal year 2002 estimated income, which exceeded actual income. The increases
in accounts receivable at September 30, 2002, compared to September 30, 2001,
are primarily the result of increased revenues and the timing of billings on
software licenses. The Company is working to implement actions directed at
improving payment terms and reducing days sales outstanding. Cash expenditures
in fiscal year 2002 related to retirement and restructuring charges (which are
included in operating activities) were approximately $2.8 million, and are
expected to be approximately $0.7 million in fiscal year 2003 and $0.4 million
in total for all subsequent years, principally for severance and facility costs.
Cash provided by operating activities was $25.0 million for fiscal year 2001,
compared with $55.1 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.
The Company's working capital at September 30, 2002, was $178.1 million and at
September 30, 2001, was $178.8 million.
Cash used in investing activities was $31.3 million for fiscal year 2002
compared with cash provided of $25.4 million for fiscal year 2001. In the second
quarter of fiscal year 2002, cash of $33.0 million was used in the purchase of
Sallie Mae's student information systems business and Applied Business
Technologies, Inc. ("ABT"). The Sallie Mae acquired business achieved
predetermined criteria during fiscal year 2002, and the Company made an
additional cash payment of $2.5 million, net of cash acquired, at September 30,
2002. Additional cash payments of up to $5.3 million could be required for the
Sallie Mae acquired business over the next four years, contingent upon the
revenue derived from the license or other sale of the purchased product lines
over that period. Additionally, cash was used in the purchase of investments
using the available cash balances from September 30, 2001. Purchases of property
and equipment were curtailed in fiscal year 2002 as a result of continuing cost
containment measures. Cash of $10.5 million was provided by the sale of the MDS
business on May 31, 2002. The proceeds from the sale of the GGS business were
reduced by a $3.0 million payment to ACS in the fourth quarter of fiscal year
2002 related to settlement of claims made by ACS. The primary source of cash
from investing activities in fiscal year 2001 was the sale of the GGS business.
The $1.0 million and $2.0 million in cash provided by financing activities for
fiscal years 2002 and 2001, respectively, consists primarily of proceeds from
the exercises of stock options. The cash provided by the exercise of stock
options was reduced by the repayment of long-term debt of $2.8 million and $0.7
million in the 2002 and 2001 periods, respectively.
The Company has a $30 million senior revolving credit facility available for
general corporate purposes. The credit facility agreement expires in June 2004
and includes optional annual renewals. There were no borrowings outstanding at
September 30, 2002 or 2001. As long as there are borrowings outstanding, and as
a condition precedent to new borrowings, the Company must comply with certain
covenants established in the agreement. Under the covenants, the Company is
required to maintain certain financial ratios and other financial conditions.
The Company has complied with all covenants and conditions at September 30,
2002. 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.
20
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, 2002, the Company had no
letters of credit outstanding and $30 million available under the revolving
credit facility. The Company pays a commitment fee of 5/16% on the unused
portion of the revolving credit facility.
The Company has convertible debentures outstanding, which bear interest at 5%
and mature on October 15, 2004. In October 2000, $27,000 of the convertible
subordinated debentures were converted into approximately 1,000 shares of common
stock of the Company. The remaining balance of convertible debentures at
September 30, 2002, is $74.7 million. If these remaining debentures outstanding
were converted, 2.8 million additional shares would be added to common shares
outstanding. These debentures were antidilutive for the fiscal year 2002, 2001,
and 2000 periods and therefore are not included in the denominators for income
(loss) from continuing operations per share - assuming dilution, income (loss)
from discontinued operations per share - assuming dilution, or net income (loss)
per share - assuming dilution for these periods.
As described in Notes I and L of the Notes to Consolidated Financial Statements,
at September 30, 2002, the Company had certain contractual cash obligations,
excluding the EUS discontinued operations, which are due as follows (in
thousands):
Payments Due by Period
Total 1 Year or Less 1 - 3 Years 3 - 5 Years After 5 Years
----- -------------- ----------- ----------- -------------
Long-term convertible debt (a) $ 74,723 $ -- $ 74,723 $ -- $ --
Operating leases 27,815 5,437 9,268 8,245 4,865
Third-party purchase commitments (b) 3,400 3,400 -- -- --
-----------------------------------------------------------------------------
$ 105,938 $ 8,837 $ 83,991 $ 8,245 $ 4,865
=============================================================================
(a) In several transactions in October 2002, the Company repurchased $40.9
million face value of the $74.7 million 5% convertible subordinated debentures
due October 15, 2004. The Company repurchased the convertible debentures at
prices ranging from $94 to $96, plus accrued interest. The transaction included
$39.2 million principal and interest of $0.9 million for a total payment of
$40.1 million including fees. The Company will record a gain of $1.3 million in
the first quarter of fiscal year 2003 related to these transactions.
(b) The third-party commitment at September 30, 2002 is with Campus Pipeline,
Inc. As more fully described in Note Q of the Notes to Consolidated Financial
Statements, the Company acquired Campus Pipeline on October 23, 2002 for $36.4
million and the assumption of certain employee bonus and severance obligations
of $5.2 million.
At September 30, 2002, the Company had performance bonds outstanding that could
require the Company's performance or cash payment in the event of demands by
third parties. The expiration periods of the performance bonds are: less than
one year, $0.9 million and one year through three years, $11.3 million.
The Company has guaranteed the obligations under a lease agreement assigned by
the Company. Such guarantee is effective through the end of the lease term,
which is March 2013. If the current leaseholder fails to meet its payment
obligations under the assigned lease, the Company would be responsible for
payments up to a maximum of $2.6 million. Based on experience with these
arrangements, the Company believes that any obligations that may arise will not
be material. Should the Company be required to make any payments under the
guarantee, it would then seek recourse from the current leaseholder.
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 of the Notes to Consolidated 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, 2002, 2001, and 2000, 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 I of the Notes to
Consolidated Financial Statements for additional information with respect to the
Company's long-term debt.
21
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.
Pending Accounting Standards: In October 2001, the FASB issued Statement of
Financial Accounting Standards No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets" ("SFAS 144"). SFAS 144, which replaces SFAS 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of," requires long-lived assets to be measured at the lower of
carrying amount or fair value less the cost to sell. SFAS 144 also broadens
disposal transactions reporting related to discontinued operations. SFAS 144 is
effective for financial statements issued for fiscal years beginning after
December 15, 2001. The adoption of this statement is not expected to have a
significant impact on the Company's results of operations.
In April 2002, the FASB issued Statement of Financial Accounting Standards No.
145, "Rescission of FASB Statements No. 4, 44, and 62, Amendment of FASB
Statement No. 13, and Technical Corrections" ("SFAS 145"). SFAS 145 required
that gains and losses on extinguishments of debt be classified as income or loss
from continuing operations rather than as extraordinary items as previously
required under Statement No. 4. The provisions of SFAS 145 related to the
rescission of Statement No. 4 are effective for fiscal years beginning after May
15, 2002, so the Company will adopt SFAS 145 at the beginning of fiscal year
2003. As a result, the gain on the repurchase of debt in the first quarter of
fiscal year 2003, as discussed in Note Q - Subsequent Events of the Notes to
Consolidated Financial Statements, will not be treated as an extraordinary item.
In July 2002, the FASB issued Statement of Financial Accounting Standards No.
146, "Accounting for Costs Associated with Exit or Disposal Activities" ("SFAS
146"), which is effective for exit or disposal activities that are initiated
after December 31, 2002. The Company will adopt SFAS 146 during fiscal year
2003. SFAS 146 nullifies Emerging Issues Task Force Issue No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a Restructuring)," and requires
that a liability for costs associated with an exit or disposal activity be
recognized as incurred. The impact of SFAS 146 will be dependent upon decisions
made by the Company in the future.
Critical Accounting Policies: The Company's discussion and analysis of its
financial condition and results of operations are based upon the Company's
consolidated financial statements, which have been prepared in accordance with
accounting principles generally accepted in the United States. The preparation
of these financial statements requires the Company to make estimates and
judgments that affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. The Company bases its estimates on historical experience and
on various other assumptions that are believed to be reasonable under the
circumstances, the results of which form the basis for making judgments about
the carrying values of assets and liabilities that are not readily apparent from
other sources. Actual results may differ from these estimates under different
assumptions or conditions.
The Company believes the following critical accounting policies require
significant judgments and estimates in the preparation of its consolidated
financial statements.
Revenue Recognition: Contract fees from outsourcing services are typically based
on multi-year contracts ranging from three to five years in length, and provide
a recurring revenue stream throughout the term of the contract. During the first
several years of a typical outsourcing services contract, the Company performs
services and incurs expenses at a greater rate than in the later years of the
contract. Since billings usually remain constant during the term of the
contract, and revenue is recognized as work is performed, revenues usually
exceed billings in the early years of the contract. The resulting excess is
reflected as unbilled accounts receivable; such amounts were approximately $3
million at September 30, 2002. In some cases when a contract term is extended,
the billing period is also extended over the new life of the contract. As a
contract proceeds, services are performed, and expenses are incurred at a
diminishing rate, resulting in billings exceeding revenue recognized, which
causes a decrease in the unbilled accounts receivable balance. 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. Many of the Company's outsourcing
services contracts include contractual termination provisions, which provide for
payment of a fee to the Company in the event a client terminates a contract
early. The aggregate termination fees under these contracts were approximately
$5 million at September 30, 2002.
Software services are generally provided under time and materials contracts and
revenue is recognized as the services are provided. In some circumstances,
services are provided under fixed-price arrangements in which revenue is
recognized on the proportional-performance method, which relies on estimates of
total expected contract revenues and costs. Since accounting for these contracts
depends on estimates, which are assessed continually during the term of these
contracts, recognized revenues and profit are subject to revisions as the
contract progresses to completion. Revisions in estimates of costs to complete
are reflected in operations in the period in which facts requiring those
revisions become known. In certain software services contracts, the Company
performs services but cannot immediately bill for them. Revenue is usually
recognized as work is performed, resulting in an excess of revenues over
billings in such periods. The resulting excess is reflected as unbilled accounts
receivable; such amounts were approximately $9 million at September 30, 2002.
Billings in these software services contracts cause a decrease in the unbilled
accounts receivable, although additional unbilled accounts receivable will
continue to be recorded based on the terms of the contracts.
22
The Company licenses software under license agreements and provides services
including training, installation, consulting, and maintenance and enhancements.
License fee revenues are recognized when a license agreement has been signed,
the software product has been shipped, the fees are fixed and determinable,
collection is considered probable, and no significant vendor obligations remain.
In certain license arrangements, the Company ships the product and recognizes
revenue, but has not billed the complete contract amount due to contractual
payment terms, resulting in an excess of revenues over billings in such periods.
The resulting excess is reflected as unbilled accounts receivable; such amounts
were approximately $12 million at September 30, 2002.
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. Maintenance
and enhancement agreements are billed annually and often billed in arrears,
resulting in revenues in excess of billings as revenue is recognized ratably
over the contract term. The resulting excess is reflected as unbilled accounts
receivable; such amounts were approximately $17 million at September 30, 2002.
For client arrangements that include license fees and implementation and other
professional services, the portion of the fees related to software licenses is
generally recognized in the current period, while the portion of the fees
related to implementation and other professional services is recognized as such
services are performed.
The Company allocates revenue to each component of the contract based on
objective evidence of its fair value, which is specific to the Company, or, for
products not being sold separately, the price established by management. Because
licensing of the software is not dependent on the professional services portions
of the contract, the software revenue is recognized upon delivery. The remainder
of the contract revenue is recorded as earned as software services revenue.
Restructuring: During fiscal years 2002 and 2001, the Company recorded
significant reserves in connection with restructuring programs. These reserves
include estimates pertaining to employee separation costs, assumptions regarding
idle facilities and sublease terms, and the settlements of contractual
obligations resulting from these actions. Although the Company does not
anticipate significant changes, the actual costs may differ from these
estimates.
Long-Term Investments: The Company has made investments for strategic business
purposes in the common and preferred stock of WebCT, a privately held Internet
company. The fair value of this investment, which is classified as a long-term
asset, is not readily determinable; therefore, it is carried at cost adjusted
for other-than-temporary impairments. The Company recorded asset impairment
charges of $5.4 million and $7.8 million in the third quarter of fiscal year
2002 and the second quarter of fiscal year 2001, respectively. On a quarterly
basis, the Company reviews the underlying operating performance, cash flow
forecasts, private equity transactions, and stock prices and equity values of
publicly traded competitors of this privately held company in assessing
impairment. Future earnings would be reduced and earnings would be charged if
there was an additional impairment that was found to be other than temporary at
a future balance sheet date. The Company's future results of operations could be
materially affected by a future writedown in the carrying amount of this
investment to recognize an impairment loss due to an other than temporary
decline in the value of the investment.
Business Combinations: The Company's business acquisitions typically result in
goodwill and other intangible assets, which affect the amount of future period
amortization expense and possible impairment expense that the Company will
incur. The determination of the value of such intangible assets requires
estimates and assumptions that affect the consolidated financial statements. The
Company assigns intangible assets useful lives, which are reassessed on an
ongoing basis, ranging from two to 10 years, based on estimates, assumptions,
and third-party valuations.
Goodwill and Intangible Assets: The Company evaluates goodwill and other
intangibles for potential impairment on an annual basis unless circumstances
indicate the need for impairment testing between the annual tests. The judgments
regarding the existence of impairment indicators are based on legal factors,
market conditions, and operational performance of the Company. In assessing the
recoverability of the Company's goodwill and other intangibles, the Company
would make valuation assumptions to determine the fair value of the respective
assets. If these estimates or their related assumptions change in the future,
the Company may be required to record impairment charges which could have a
material adverse impact on the Company's financial condition and results of
operations.
23
Deferred Taxes: The Company records a valuation allowance to reduce its deferred
tax assets to the amount that is more likely than not to be realized. While the
Company has considered future taxable income and ongoing prudent and feasible
tax planning strategies in assessing the need for the valuation allowance, in
the event the Company were to determine that it would be able to realize its
deferred tax assets in the future in excess of its net recorded amount, an
adjustment to the deferred tax asset would increase income in the period such
determination was made. Likewise, should the Company determine that it would not
be able to realize all or part of its net deferred tax asset in the future, an
adjustment to the deferred tax asset would be charged to income in the period
such determination was made.
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 on a quarterly or annual
basis in the future. It is, therefore, possible that in one or more future
quarters, the Company's operating results will be below expectations. This would
likely have an adverse effect on the price of the Company's common stock.
The success of the Company's business depends upon certain key management,
sales, and technical personnel. In addition, the Company believes that to
succeed in the future, it must continue to attract, retain, and motivate
talented and qualified management, sales, and technical personnel. Competition
for such personnel in the information technology industry is intense. The
Company sometimes has difficulty locating qualified candidates. There can be no
assurance that the Company will be able to retain its key employees or that it
will be able to continue to attract, assimilate, and retain other skilled
management, sales, and technical personnel. The loss of certain key personnel or
the inability to attract and retain qualified employees in the future could have
a material adverse effect on the Company's business, results of operations,
and/or financial condition.
The application software industry is characterized by intense competition, rapid
technological advances, changes in client requirements, product introductions,
and evolving industry standards. The Company believes that its future success
will depend on its ability to compete successfully, and to continue to develop
and market new products and enhancements cost-effectively. This necessitates
continued investment in research and development and sales and marketing. There
can be no assurance that new industry standards or changing technology will not
render the Company's products obsolete or non-competitive, that the Company will
be able to develop and market new products successfully, or that the Company's
market 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,
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
market.
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.
24
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 market in which the Company competes may put pressure
on the Company to reduce prices on certain products, particularly where certain
vendors offer deep discounts in an effort to recapture or gain market share or
to sell other software products, hardware products, or services. The bundling of
software products for promotional purposes or as a long-term pricing strategy or
guarantees of product implementations by certain of the Company's competitors
could have the effect over time of significantly reducing the prices that the
Company can charge for its products. Any such price reductions and resulting
lower license revenues could have a material adverse effect on the Company's
business, results of operations, financial condition, or cash flows.
The Company uses a common industry practice to forecast sales and trends in its
business. The Company's sales personnel monitor the status of prospective sales,
such as the date when they estimate that a customer will make a purchase
decision and the potential dollar amount of the sale. The Company regularly
aggregates these estimates to generate a sales pipeline. The Company compares
the pipeline at various points in time to look for trends in its business. While
this pipeline analysis may provide the Company with some guidance in business
planning and budgeting, these pipeline estimates are necessarily speculative and
may not consistently correlate to revenues in a particular quarter or over a
longer period of time. A variation in the conversion of the pipeline into
contracts or in the pipeline itself could cause the Company to improperly plan
or budget and thereby adversely affect its business or results of operations.
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 client base. The alliance builds upon
the Company's 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 enables clients
to access information systems, learning tools, online services, campus
communication, and community resources through a single point of access. The
Company provides the real-time, bi-directional exchange of data between the
Company's student information system and the WebCT course environment,
eliminating manual synchronization of like information. The continued success of
this investment and strategic alliance depends upon: (i) the ability of the
Company and WebCT 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 WebCT products with the
Company's products cost-effectively and on a timely basis, and (iv) the ability
of WebCT 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 contracts, the Company's
results of operations would be adversely affected.
Certain of the Company's outsourcing and software services contracts may be
terminated by the client for convenience. If clients that represent a
substantial portion of the Company's revenues terminate for convenience, the
Company's future results of operations would be adversely affected.
The Company provides software-related services, including systems implementation
and integration services. Services are provided under time and materials
contracts, in which case revenue is recognized as the services are provided, and
under fixed-price arrangements, in which case revenue is recognized on the
percentage-of-completion method. Revisions in estimates of costs to complete are
reflected in operations during the period in which the Company learns of facts
requiring those revisions.
The impact on the Company of areas such as the Internet, online services, and
electronic commerce is uncertain. There can be no assurance that the Company
will be able to provide a product that will satisfy new client demands in these
areas. In addition, standards for network protocols and other industry standards
for the Internet are evolving rapidly. There can be no assurance that standards
the Company chooses will position its products to compete effectively for
business opportunities as they arise on the Internet and in other emerging
areas.
25
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.
In the second quarter of fiscal year 2002, the Company acquired the Sallie Mae
student information systems business and Applied Business Technologies, Inc. and
in October 2002, subsequent to the end of fiscal year 2002, the Company acquired
Campus Pipeline, Inc. These acquisitions were entered into in order to increase
the Company's opportunities in the higher education market. The success of these
acquisitions depends upon: (i) the Company's ability to integrate the acquired
products and operations with the Company's products and operations
cost-effectively and on a timely basis, (ii) the Company's ability to complete
development of and enhance the products acquired efficiently and cost
effectively, and (iii) the market acceptance of the products and technologies
acquired and the services related thereto. If these acquisitions are not
successful, acquired intangibles might become impaired and the Company may be
required to record impairment charges that could have a material adverse impact
on the Company's financial condition and results of operations.
On May 31, 2002, the Company consummated the sale of its process manufacturing
business to Agilisys International Limited. The Company agreed to sell
substantially all of the assets of the MDS business for $13.2 million in cash,
subject to adjustment in certain circumstances. Due to such adjustments, which
principally related to the collection of receivables by the Company, the net
proceeds received by the Company were $10.5 million. The Company could receive
up to an additional $3.0 million based upon the achievement by Agilisys of
specified revenue targets over the three-year period subsequent to the sale.
The Company previously announced that it had signed a letter of intent for the
sale of the Global Energy and Utilities Solutions ("EUS") business. The letter
of intent and negotiations with the party who signed the letter of intent have
terminated. The Company is continuing in its efforts to sell the EUS business
and the business is treated as a discontinued operation in the consolidated
statements of operations. The Company expects to recognize a gain on the sale of
the EUS business. The success of the Company's efforts to sell the EUS business
depends on the Company's ability to attract potential buyers, negotiate a price
acceptable to the Company, and agree on terms of sale.
Other factors that could affect the Company's future operating results include
the effect of publicity on demand for the Company's products and services;
general economic and political conditions; the success of the Company's new
business model; the success of the Company's long-term strategy; continued
market acceptance of the Company's products and services; the timing of services
contracts and renewals; continued competitive and pricing pressures in the
marketplace; new product introductions by the Company's competitors; the
Company's ability to complete fixed-price contracts profitably; the Company's
ability to sell the EUS business at a profit; 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.
26
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Consolidated Balance Sheets
(in thousands, except per share amounts) September 30,
---------------------------------
2002 2001
---------------------------------
Assets
Current Assets
Cash and short-term investments $ 133,574 $ 164,329
Receivables, including $41,446 and $25,779
of earned revenues in excess of billings,
net of allowance for doubtful accounts of
$4,789 and $5,528 77,824 65,541
Prepaid income taxes 20,353 543
Prepaid expenses and other assets 16,757 14,983
---------------------------------
Total Current Assets 248,508 245,396
Property and Equipment -- at cost, net of
accumulated depreciation 27,265 31,295
Capitalized Computer Software Costs,
net of accumulated amortization 4,427 7,045
Goodwill 28,784 2,340
Intangible Assets, net of accumulated amortization 10,689 1,219
Other Assets and Deferred Charges 15,169 22,725
Net Assets of Discontinued Operations 31,805 56,487
---------------------------------
Total Assets $ 366,647 $ 366,507
=================================
Liabilities and Stockholders' Equity
Current Liabilities
Accounts payable $ 6,402 $ 6,748
Current portion of long-term debt -- 2,771
Income taxes payable 1,096 7,697
Accrued expenses 37,995 33,766
Deferred revenue 24,948 15,657
---------------------------------
Total Current Liabilities 70,441 66,639
Long-Term Debt, less current portion 74,723 74,723
Other Long-Term Liabilities 2,912 3,748
---------------------------------
Total Liabilities 148,076 145,110
---------------------------------
Stockholders' Equity
Preferred stock, par value $.10 per share -- authorized
3,000 shares, none issued -- --
Common stock, par value $.01 per share -- authorized
100,000 shares, issued 38,029 and 37,634 380 376
Capital in excess of par value 125,586 120,040
Retained earnings 117,622 126,697
Accumulated other comprehensive loss (583) (340)
---------------------------------
243,005 246,773
Less
Held in treasury, 4,582 and 4,630 common shares -- at cost (24,434) (24,876)
Notes receivable from stockholders -- (500)
---------------------------------
218,571 221,397
---------------------------------
Total Liabilities and Stockholders' Equity $ 366,647 $ 366,507
=================================
See notes to consolidated financial statements.
27
Consolidated Statements of Operations
(in thousands, except per share amounts) Year Ended September 30,
------------------------------------------
2002 2001 2000
------------------------------------------
Revenues
Outsourcing services $ 33,268 $ 38,422 $ 41,145
Software sales and commissions 36,259 30,196 28,471
Maintenance and enhancements 82,265 71,145 63,008
Software services 81,765 63,330 61,474
Interest and other income 3,981 5,190 2,316
------------------------------------------
237,538 208,283 196,414
------------------------------------------
Expenses
Cost of outsourcing services 25,961 30,181 32,080
Cost of software sales, commissions,
maintenance and enhancements 53,990 46,235 39,820
Cost of software services 64,123 49,998 48,440
Selling, general and administrative 65,887 56,746 54,038
Retirement and restructuring charge 4,874 2,485 1,000
Asset impairment charge 5,425 7,831 --
Equity in losses of affiliates -- -- 4,761
Interest expense 4,203 4,201 4,346
------------------------------------------
224,463 197,677 184,485
------------------------------------------
Income from continuing operations before income taxes 13,075 10,606 11,929
Provision for income taxes 5,590 4,219 5,097
------------------------------------------
Income from continuing operations 7,485 6,387 6,832
Discontinued operations
Income (loss) from discontinued operations, adjusted for applicable
provision (benefit) for income taxes of $(967), $(6,558), and $1,712 (6,939) (11,724) 1,796
Gain (loss) on sale of discontinued operations, net of
income tax provision (benefit) of $(4,651), $13,111, and $0 (9,621) 20,155 --
------------------------------------------
Income (loss) from discontinued operations (16,560) 8,431 1,796
------------------------------------------
Net income (loss) $ (9,075) $ 14,818 $ 8,628
==========================================
Income from continuing operations
per common share $ 0.23 $ 0.19 $ 0.21
per share -- assuming dilution $ 0.22 $ 0.19 $ 0.20
Income (loss) from discontinued operations
per common share $ (0.50) $ 0.26 $ 0.06
per share -- assuming dilution $ (0.49) $ 0.25 $ 0.05
Net income (loss)
per common share $ (0.27) $ 0.45 $ 0.27
per share -- assuming dilution $ (0.27) $ 0.45 $ 0.26
Common shares and equivalents outstanding
average common shares 33,240 32,842 32,391
average common shares -- assuming dilution 33,608 33,278 33,624
See notes to consolidated financial statements.
28
Consolidated Statements of Cash Flows
(in thousands, except per share amounts) Year Ended September 30,
-----------------------------------------------
2002 2001 2000
-----------------------------------------------
Operating Activities
Net income (loss) $ (9,075) $ 14,818 $ 8,628
Adjustment to reconcile net income (loss) to net cash provided
by operating activities
(Gain) loss on sale of discontinued operations 14,272 (33,266) --
Asset impairment charge 5,425 7,831 --
WebCT commission income -- (2,700) --
Equity in losses of affiliate -- -- 4,761
Gain on sale of product line -- -- (5,988)
Depreciation and amortization 20,540 27,754 27,760
Provision for doubtful accounts 2,127 5,129 3,111
Deferred tax provision (benefit) 2,547 (11,529) (5,375)
Noncash charges related to retirement and restructuring charges 1,525 604 --
Noncash charges related to discontinued operations 1,645 3,150 --
Loss on disposal of property and equipment 595 1,022 336
Income tax benefit from exercise of nonqualified stock options 345 2,077 628
Changes in operating assets and liabilities:
(Increase) decrease in receivables (7,065) 8,407 7,134
(Increase) decrease in prepaid income taxes (19,810) 8,421 (2,617)
(Increase) decrease in other current assets 675 (14,800) 2,064
Increase (decrease) in accounts payable (2,330) 1,249 (3,363)
Increase (decrease) in income taxes payable (6,601) 19,015 2,085
Increase (decrease) in accrued expenses (8,194) (13,090) 1,493
Increase (decrease) in other long-term liabilities (117) 2,878 --
Increase (decrease) in deferred revenue 4,230 (5,832) 15,522
(Increase) decrease in other operating assets and deferred charges 881 3,834 (1,050)
-----------------------------------------------
Net Cash Provided by Operating Activities 1, 615 24,972 55,129
-----------------------------------------------
Investing Activities
Purchase of property and equipment (5,646) (9,910) (9,308)
Proceeds from the sale of property and equipment 1,450 -- --
Capitalized computer software costs (751) (962) (3,866)
Purchase of investments available for sale (88,902) (97,920) (18,947)
Proceeds from the sale or maturity of investments available for sale 91,124 52,172 6,606
Purchase of businesses, net of cash acquired (36,019) (3,009) (3,189)
Purchase of long-term investments -- -- (10,043)
Proceeds from sale of discontinued operations 7,476 85,000 --
Proceeds from sale of assets -- -- 2,000
-----------------------------------------------
Net Cash Provided By (Used In) Investing Activities (31,268) 25,371 (36,747)
-----------------------------------------------
Financing Activities
Repayment of borrowings (2,771) (712) (17,451)
Proceeds from borrowings, net of issuance costs -- -- 16,800
Issuance of Company stock 442 35 --
Decrease in notes receivables from stockholders 500 110 --
Proceeds from exercise of stock options 2,827 2,544 4,394
-----------------------------------------------
Net Cash Provided By Financing Activities 998 1,977 3,743
-----------------------------------------------
Increase (decrease) in cash & cash equivalents (28,655) 52,320 22,125
-----------------------------------------------
Cash and cash equivalents at beginning of year 101,475 49,155 27,030
-----------------------------------------------
Cash and cash equivalents at end of year $ 72,820 $ 101,475 $ 49,155
===============================================
Supplemental Information
Noncash investing and financing activities:
Noncash changes in capital in excess of par value, primarily
extension of stock options $ 2,356 $ -- $ --
Purchase of businesses -- noncash portion -- 500 2,117
Conversion of subordinated debentures to common stock -- 27 --
Purchase of long-term investments -- noncash portion -- -- 5,980
Proceeds from sale of product line -- noncash portion -- -- 4,520
See notes to consolidated financial statements.
29
Consolidated Statements of Stockholders' Equity
(in thousands) Accumulated
Common Capital in Other
Stock Excess Retained Comprehensive Treasury
Par Value of Par Value Earnings Income (Loss) Stock
--------- ------------ -------- ------------- -----
Balance at September 30, 1999 $367 $110,230 $103,251 $ (51) $(24,911)
Stock issued under stock option plans,
including tax benefits, 529 shares 5 5,017 - - -
Comprehensive income
Other comprehensive loss - - - (489) -
Net income, year ended September 30, 2000 - - 8,628 - -
Total comprehensive income - - - - -
Balance at September 30, 2000 372 115,247 111,879 (540) (24,911)
---------------------------------------------------------------------------
Stock issued under stock option plans,
including tax benefits, 369 shares 4 4,766 - - -
Stock issued on bond conversion, 1 shares - 27 - - -
Stock issued under ESPP, 23 shares - - - - 183
Collections on notes receivable from shareholders - - - - (148)
Comprehensive income
Other comprehensive income - - - 200 -
Net income, year ended September 30, 2001 - - 14,818 - -
Total comprehensive income - - - - -
Balance at September 30, 2001 376 120,040 126,697 (340) (24,876)
---------------------------------------------------------------------------
Stock issued under stock option plans,
including tax benefits, 395 shares 4 5,546 - - -
Stock issued under ESPP, 48 shares - - - - 442
Collections on notes receivable from shareholders - - - - -
Comprehensive loss
Other comprehensive loss - - - (243) -
Net loss, year ended September 30, 2002 - - (9,075) - -
Total comprehensive loss - - - - -
Balance at September 30, 2002 $380 $125,586 $117,622 $ (583) $(24,434)
===========================================================================
Notes
Receivable Total
from Stockholders'
Stockholders Equity
------------ ------
Balance at September 30, 1999 $(610) $188,276
Stock issued under stock option plans,
including tax benefits, 529 shares - 5,022
Comprehensive income
Other comprehensive loss - (489)
Net income, year ended September 30, 2000 - 8,628
---------
Total comprehensive income - 8,139
---------
Balance at September 30, 2000 (610) 201,437
----------------------------------
Stock issued under stock option plans,
including tax benefits, 369 shares - 4,770
Stock issued on bond conversion, 1 shares - 27
Stock issued under ESPP, 23 shares - 183
Collections on notes receivable from shareholders 110 (38)
Comprehensive income
Other comprehensive income - 200
Net income, year ended September 30, 2001 - 14,818
---------
Total comprehensive income - 15,018
---------
Balance at September 30, 2001 (500) 221,397
----------------------------------
Stock issued under stock option plans,
including tax benefits, 395 shares - 5,550
Stock issued under ESPP, 48 shares - 442
Collections on notes receivable from shareholders 500 500
Comprehensive loss
Other comprehensive loss - (243)
Net loss, year ended September 30, 2002 - (9,075)
---------
Total comprehensive loss - (9,318)
---------
Balance at September 30, 2002 $ - $218,571
==================================
See notes to consolidated financial statements.
30
Notes to Consolidated Financial Statements
Note A -- Significant Accounting Policies
- -----------------------------------------
Basis of Presentation: During the quarter ended June 30, 2002, the Company
completed the sale of the Global Manufacturing & Distribution Solutions ("MDS")
business and announced the discontinuation of the Global Energy and Utilities
Solutions ("EUS") business. During the quarter ended June 30, 2001, the Company
completed the sale of its Global Government Systems ("GGS") business. The MDS,
EUS, and GGS businesses are accounted for as discontinued operations, and,
accordingly, amounts in the consolidated balance sheets and statements of
operations and related notes for all periods presented have been restated to
reflect discontinued-operations accounting.
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
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
market is higher education. The Company's focus on one vertical market enables
it to develop and utilize a base of industry expertise to deliver products and
services that address specific client requirements.
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,
2002, resulting from outsourcing services contracts are expected to be billed
within the normal 12-month business cycle, although additional unbilled
receivables are expected to be generated as the contracts continue. 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.
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.
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. In certain license arrangements, the
Company ships the product and recognizes revenue, but has not billed the
complete contract amount due to contractual payment terms, resulting in an
excess of revenues over billings in such periods. The resulting excess is
reflected as unbilled receivables. The Company's policy is to charge interest on
or discount unbilled services receivables not expected to be billed within one
year, which were approximately $0.8 and $0.4 million at September 30, 2002 and
2001, respectively. The Company classifies such receivables as current assets
consistent with its business cycle.
31
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.
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. Maintenance
and enhancement agreements are billed annually and often billed in arrears,
resulting in revenues in excess of billings as revenue is recognized ratably
over the contract term.
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 proportional-performance method, which relies
on estimates of total expected contract revenues and costs. Since accounting for
these contracts depends on estimates, which are assessed continually during the
term of these contracts, recognized revenues and profit are subject to revisions
as the contract progresses to completion. Revisions in estimates of costs to
complete are reflected in operations in the period in which facts requiring
those revisions become known. In certain software services contracts, the
Company performs services but cannot immediately bill for them. Revenue is
usually recognized as work is performed, resulting in an excess of revenues over
billings in such periods. The resulting excess is reflected as unbilled accounts
receivable. Billings in these software services contracts cause a decrease in
the unbilled accounts receivable, although additional unbilled accounts
receivable will continue to be recorded based on the terms of the contracts.
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 I) are estimated using quoted market values.
Property and Equipment: 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.
Long-Lived Assets: Through September 30, 2001, goodwill and other intangible
assets were amortized using the straight-line method over lives ranging from
five to 20 years. Effective October 1, 2001, the Company adopted Statement of
Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets"
("SFAS 142"), which resulted in discontinuing the amortization of goodwill.
Under SFAS 142, goodwill will instead be carried at its book value as of October
1, 2001, and any future impairment of goodwill will be recognized as an
operating expense in the period of impairment. However, under the terms of SFAS
142, identifiable intangibles with identifiable lives will continue to be
amortized for periods ranging from two to 10 years (See Note G).
The Company evaluates goodwill and other intangibles for potential impairment on
an annual basis unless circumstances indicate the need for impairment testing
between the annual tests. The judgments regarding the existence of impairment
indicators are based on legal factors, market conditions, and operational
performance of the Company. In assessing the recoverability of the Company's
goodwill and other intangibles, the Company would make valuation assumptions to
determine the fair value of the respective assets.
32
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.
Business Segments: As a result of the discontinuation of the Global Energy and
Utilities Solutions business at the end of third quarter of fiscal year 2002 and
the sales of the Global Manufacturing & Distribution Solutions business on May
31, 2002, and Global Government Systems on June 29, 2001, the Company currently
has one reportable segment: Global Education Solutions. The accompanying
financial statements and related notes, exclusive of discontinued operations,
reflect the operations of the Global Education Solutions business.
The following table presents revenues by country based on location of the
customer and property by country based on location of the asset (in thousands):
---------------------------------- ---------------------------------- ----------------------------------
2002 2001 2000
---------------------------------- ---------------------------------- ----------------------------------
Long-Lived Long-Lived Long-Lived
Revenues Assets Revenues Assets Revenues Assets
-------- ------ -------- ------ -------- ------
United States $ 211,238 $ 85,789 $ 184,071 $ 63,344 $ 177,825 $ 71,060
Other Countries 22,319 545 19,022 1,280 16,273 1,084
---------------------------------- ---------------------------------- ----------------------------------
Total $ 233,557 $ 86,334 $ 203,093 $ 64,624 $ 194,098 $ 72,144
================================== ================================== ==================================
Income Per Share: Net income per common share excludes the dilutive effect of
both stock options and convertible debentures. Net income per share - assuming
dilution includes the dilutive effect of both stock 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 (in thousands, except per share amounts):
Year Ended September 30, 2002 2001 2000
- ------------------------ ---- ---- ----
Numerator
Income from continuing operations
available to common stockholders $7,485 $6,387 $6,832
Discontinued operations:
Income (loss) from discontinued operations,
net of income taxes (6,939) (11,724) 1,796
Gain (loss) on sale of discontinued operations,
net of income taxes (9,621) 20,155 --
--------- --------- ---------
Income (loss) from discontinued operations (16,560) 8,431 1,796
Net income (loss) available to common
stockholders after assumed conversions $(9,075) $14,818 $8,628
===================================================
Denominator
Weighted average common shares 33,240 32,842 32,391
Effect of dilutive securities:
Employee stock options 368 436 1,233
--------- --------- ---------
Weighted average common shares
assuming dilution 33,608 33,278 33,624
===================================================
Income from continuing operations
per common share $0.23 $0.19 $0.21
per share -- assuming dilution $0.22 $0.19 $0.20
Income (loss) from discontinued operations
per common share $(0.50) $0.26 $0.06
per share -- assuming dilution $(0.49) $0.25 $0.05
Net income (loss)
per common share $(0.27) $0.45 $0.27
per share -- assuming dilution $(0.27) $0.45 $0.26
33
The Company has $74.7 million of convertible debentures bearing interest at 5%
and maturing on October 15, 2004, that were issued in October 1997. If these
debentures were converted, 2.8 million additional shares would be added to
common shares outstanding. These debentures were antidilutive for fiscal years
2002, 2001, and 2000 and therefore are not included in the above denominators
for income from continuing operations per share - assuming dilution, income
(loss) from discontinued operations per share - assuming dilution, or net income
per share - assuming dilution.
As more fully described in Note Q - Subsequent Events, the Company repurchased
$40.9 million face value of the $74.7 million debentures. If these debentures
were repurchased before September 30, 2002, the 2.8 million potentially dilutive
shares discussed above would have been reduced by up to 1.6 million shares.
Stock-based Compensation: The Company accounts for employee stock-based
compensation in accordance with Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB 25"). In March 2000, the
Financial Accounting Standards Board issued Interpretation No. 44, "Accounting
for Certain Transactions Involving Stock Compensation (an Interpretation of APB
Opinion No. 25)," ("FIN 44"), which became effective July 1, 2000. The adoption
of the provisions of FIN 44 did not have a material impact on the Company's
consolidated financial position or results of operation. As required under
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation," the Company provides pro forma disclosure of net income and
earnings per share (See Note J).
Accumulated Other Comprehensive Income: Accumulated other comprehensive income
(loss) as of September 30, 2002, 2001, and 2000 is as follows (in thousands):
Foreign Currency Unrealized Gain (Loss)
Translation Adjustments on Marketable Securities Total
Balance at September 30, 1999 $ (48) $ (3) $ (51)
Current-period change (488) (1) (489)
----------------------- ----------------------- ----------------------
Balance at September 30, 2000 (536) (4) (540)
Current-period change 10 190 200
----------------------- ----------------------- ----------------------
Balance at September 30, 2001 (526) 186 (340)
Current-period change (402) 159 (243)
----------------------- ----------------------- ----------------------
Balance at September 30, 2002 $ (928) $ 345 $ (583)
==================================================================================
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.
Pending Accounting Standards: In October 2001, the FASB issued Statement of
Financial Accounting Standards No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets" ("SFAS 144"). SFAS 144, which replaces SFAS 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of," requires long-lived assets to be measured at the lower of
carrying amount or fair value less the cost to sell. SFAS 144 also broadens
disposal transactions reporting related to discontinued operations. SFAS 144 is
effective for financial statements issued for fiscal years beginning after
December 15, 2001. The adoption of this statement is not expected to have a
significant impact on the Company's results of operations.
In April 2002, the FASB issued Statement of Financial Accounting Standards No.
145, "Rescission of FASB Statements No. 4, 44, and 62, Amendment of FASB
Statement No. 13, and Technical Corrections" ("SFAS 145"). SFAS 145 required
that gains and losses on extinguishments of debt be classified as income or loss
from continuing operations rather than as extraordinary items as previously
required under Statement No. 4. The provisions of SFAS 145 related to the
rescission of Statement No. 4 are effective for fiscal years beginning after May
15, 2002, so the Company will adopt SFAS 145 at the beginning of fiscal year
2003. As a result, the gain on the repurchase of debt in the first quarter of
fiscal year 2003, as discussed in Note Q - Subsequent Events, will not be
treated as an extraordinary item.
34
In July 2002, the FASB issued Statement of Financial Accounting Standards No.
146, "Accounting for Costs Associated with Exit or Disposal Activities" ("SFAS
146"), which is effective for exit or disposal activities that are initiated
after December 31, 2002. The Company will adopt SFAS 146 during fiscal year
2003. SFAS 146 nullifies Emerging Issues Task Force Issue No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a Restructuring)," and requires
that a liability for costs associated with an exit or disposal activity be
recognized as incurred. The impact of SFAS 146 will be dependent upon decisions
made by the Company in the future.
Reclassifications: Certain prior-year information has been reclassified to
conform with the current-year presentation.
Note B -- Cash and Investments
- ------------------------------
Short-term investments consist of corporate and municipal debt securities.
Management determines the appropriate classification of the securities at the
time of purchase. At September 30, 2002 and 2001, 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 a current asset.
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
2002 and 2001.
(in thousands) September 30,
2002 2001
Cash and cash equivalents $72,820 $101,475
Short-term investments, including accrued
interest of $701 and $327 (amortized cost
of $60,206 and $62,584), respectively 60,754 62,854
----------------------
Cash and short-term investments $133,574 $164,329
======================
The contractual maturities of short-term investments held at September 30, 2002,
are (in thousands):
Weighted Average
Amortized Contractual
Fair Value Cost Interest Rate
Less than 1 year $5,827 $5,752 3.1%
1 - 3 years 53,959 53,440 3.8%
Greater than 3 years 968 1,014 6.6%
----------------------
Total $60,754 $60,206
======================
In June 2000, the Company sold its SCT Learning Suite distance-learning
course-creation tools to WebCT, Inc., a privately held Internet company, in
return for common stock of WebCT valued at $2.5 million at the time of the sale.
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 common stock of WebCT valued at $3.5 million at the time of the sale. The
Company made an additional $10.0 million investment in preferred stock of WebCT.
The Company has the ability to earn additional equity in WebCT in the future
through performance-based compensation pursuant to a joint marketing agreement.
This compensation depends on delivery of commitments from schools choosing WebCT
as their primary supported enterprise-wide course-tools platform.
35
The fair value of the investment in WebCT, which is classified as a long-term
asset, is not readily determinable; therefore, it is carried at cost adjusted
for other-than-temporary impairments discussed below. On a quarterly basis, the
Company reviews the underlying operating performance, cash flow forecasts,
private equity transactions, and stock prices and equity values of publicly
traded competitors of this privately held company in assessing impairment. 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 the 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 can continue to be earned as
additional schools license this product now that this threshold has been met.
During the third quarter of fiscal year 2002, the Company recorded asset
impairment charges of $5.4 million and wrote-off the noncompete agreement, which
had a carrying value of $1.5 million, further reducing the carrying value of the
investment in WebCT to $4.0 million, which is included in other assets and
deferred charges in the consolidated balance sheet. At September 30, 2002, the
Company owns approximately 11% of the voting shares of WebCT.
The Company made a series of investments in Campus Pipeline, Inc. As of
September 30, 2002, the Company held an approximately 59% interest in the common
stock of this affiliate, with a carrying amount of zero. The Company determined
that it did not control Campus Pipeline because there were fully voting
convertible preferred shares outstanding that lowered the Company's voting
interest to approximately 43%. Therefore, the Company accounted for its
investment using the equity method of accounting. The Company's portion of
Campus Pipeline losses recognized in fiscal years 2000 and 1999 is $7.9 million.
On October 23, 2002, the Company acquired all of the outstanding shares of
Campus Pipeline, Inc. for cash pursuant to an agreement dated September 30,
2002. (See Note Q.)
Note C -- Acquisitions
- ----------------------
Effective January 10, 2002, the Company acquired USA Education, Inc.'s (commonly
known as "Sallie Mae") student information systems business (the "business").
Under the terms of the agreement, the Company acquired Sallie Mae's Exeter
Student Suite and Perkins/Campus Loan Management product lines and related
resources based in Cambridge, MA for approximately $19.6 million cash. This
amount included a contingent payment made on September 30, 2002, of $4.1 million
for cash of $1.6 million and additional tangible and intangible assets. The
Company could make further cash payments of up to $5.3 million over the next
four years, contingent upon the revenue derived from the license or other sale
of the purchased product lines over that period. If any subsequent payments are
made, they will be treated as additional consideration and will increase the
amount recorded as goodwill. The Company recorded goodwill of $11.8 million
related to the acquisition, all of which is deductible for tax purposes.
Included in goodwill is $1.4 million of costs, including professional fees and
other costs directly related to the acquisition. Some of these additional
acquisition costs are estimates that may change and could cause an adjustment to
goodwill. Intangible assets acquired included $5.4 million of purchased software
and $0.8 million of other intangibles. The weighted-average amortization period
is 6 years, 5 years for purchased software and 10 years for other intangibles.
The Company purchased the business to increase its market opportunities in the
larger school market. The product lines purchased include an Oracle-based set of
solutions and technology, certain components of which are expected to be
integrated into the Company's product lines, and a Microsoft-based solution that
will allow clients a technology choice.
In February 2002, the Company acquired the capital stock of Applied Business
Technologies, Inc. ("ABT") for $16.7 million cash. As a result, the Company
acquired ABT's PowerCAMPUS, IQ.Web and PocketCAMPUS Mobile applications, related
resources in Newtown Square, PA, and ABT's customer base. The Company recorded
goodwill of $14.7 million related to the acquisition, of which $4.5 million is
deductible for tax purposes. Included in goodwill is $0.5 million of costs,
including professional fees and other costs directly related to the acquisition.
Intangible assets acquired included $2.8 million of purchased software and $1.8
million of other intangibles. The weighted-average amortization period is 6
years, 5 years for purchased software and 10 years for other intangibles. The
completion of this transaction provides the Company with an expanded market
share in small to mid-sized institutions (enrollment under 2,500). It also
allows the Company to expand its current technology offerings to institutions
that have a preference for Microsoft, which provides a technology that is both
affordable and easy to manage.
In August 2000, the Company acquired the assets of the EnerLink business unit
from Science Applications International Corporation for cash consideration of
$3.4 million, $0.5 million of which was paid in fiscal year 2002. These assets
were allocated to the Global Energy and Utilities Solutions business, which is
classified as a discontinued operation at September 30, 2002.
36
The EnerLink business unit was 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 $8.0
million over the four years following the acquisition date 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 years 2002 or 2001; however, the Company could be required
to make additional payments over the next two years. The Company recorded costs
in excess of fair value of net assets acquired of $0.5 million related to the
acquisition. This acquisition gave the EUS business increased charge-handling
and billing capabilities, including interval data collections and calculations,
which support real-time energy pricing and meter-data acquisition.
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 had 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.
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.
Note D -- Divestitures
- ----------------------
During the third quarter of fiscal year 2002, the Company declared the Global
Energy and Utilities Solutions ("EUS") business as discontinued and announced
that it had signed a letter of intent for the sale of the EUS business. The
letter of intent and negotiations with the party who signed the letter of intent
were terminated in the fourth quarter of fiscal year 2002, however, the Company
is continuing in its efforts to sell the EUS business and the EUS business is
treated as a discontinued operation in the consolidated balance sheets,
consolidated statements of operations and related footnotes. The Company expects
to recognize a gain on the sale of the EUS business. For business segment
reporting, EUS was previously reported as a separate segment. Revenues from the
EUS business were $74.2, $87.7, and $88.3 million for the years ending September
30, 2002, 2001, and 2000 respectively. The income (loss) from discontinued
operations, net of taxes, for the years ending September 30, 2002, 2001, and
2000 was $(2.5), $(1.1) and $4.1 million, respectively. The net assets of
discontinued operations at September 30, 2001, were $27.8 million. Net assets of
the discontinued operation were $31.8 million as of September 30, 2002,
comprised of the following (in thousands):
Accounts receivable $ 15,850
Prepaid expenses and other receivables 864
Property and equipment 15,486
Capitalized computer software costs 3,661
Goodwill 1,056
Intangible assets 1,889
Deferred taxes and other assets 3,887
Current liabilities (10,888)
------------
Net Assets of Discontinued Operations $ 31,805
============
The EUS business has a purchase commitment with Enlogix CIS L.P. to purchase
development expertise in the form of labor hours, which the business is
utilizing in its development efforts. The purchase commitment extends through
December 22, 2005. During the remainder of the term of the commitment, the
business will purchase approximately $3.7 million of labor hours at agreed upon
labor rates, which approximate the Company's fully costed labor rates.
On May 31, 2002, the Company consummated the sale of its Global Manufacturing &
Distribution Solutions ("MDS") business to Agilisys International Limited
("Agilisys"), a company organized under the laws of the Cayman Islands, pursuant
to an Asset Purchase Agreement dated April 10, 2002. As of the end of the second
quarter of fiscal year 2002, the Company had declared MDS a discontinued
business; the results of MDS have been reported separately as discontinued
operations in the prior year balance sheet, consolidated statements of
operations, and related footnotes. For business segment reporting, MDS was
37
previously reported as a separate segment. The Company agreed to sell
substantially all of the assets of MDS for $13.2 million in cash, subject to
adjustment in certain circumstances. Due to such adjustments, which principally
related to the collection of receivables by the Company, the net proceeds
received by the Company were $10.5 million. The Company could receive up to an
additional $3.0 million based upon the achievement by Agilisys of specified
revenue targets over the three-year period subsequent to the sale. The Company
recorded a loss of $7.3 million on the sale, net of a $3.5 million tax benefit.
MDS revenues for the eight-month period ending May 31, 2002 and the years ending
September 30, 2001 and 2000 were $22.1, $55.5, and $62.1 million, respectively.
The loss from discontinued operations, net of taxes, for the 2002 eight-month
period and the years ending September 30, 2001 and 2000 was $4.4, $7.8, and $5.0
million, respectively. The net assets of discontinued operations at September
30, 2001, were $28.7 million (net assets of the discontinued operation were
$15.8 million at the date of the sale) comprised of the following (in
thousands):
Accounts receivable $9,293
Prepaid expenses and other receivables 861
Property and equipment 2,856
Capitalized computer software costs 970
Goodwill 9,821
Intangible assets 4,545
Deferred tax asset 9,637
Current liabilities (9,284)
-----------
Net Assets of Discontinued Operations $ 28,699
===========
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 $85.0 million. These proceeds were reduced by a $3.0
million payment to ACS in the fourth quarter of fiscal year 2002, which was
provided for at September 30, 2001, related to settlement of claims made by ACS.
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. The Company provided an additional $3.5 million reserve for
real-estate-related costs as of September 30, 2002. As of September 30, 2002,
$6.7 million, which is primarily included in accrued expenses, remained accrued
for the completion of these actions. After this provision, the sale resulted in
a pretax gain of $29.8 million, which net of $12.0 million of income taxes,
resulted in a gain on sale of discontinued operations of $17.8 million. The
results of GGS have been reported separately as discontinued operations in the
consolidated statements of operations. Prior-year consolidated balance sheets
and statements of operations have been restated to present GGS as a discontinued
operation. For business segment reporting purposes, GGS data were previously
reported as a separate segment. Revenues from the GGS business were $65.7 and
$95.9 million for the years ending September 30, 2001 and 2000, respectively.
The income (loss) from discontinued operations, net of taxes, for the years
ending September 30, 2001 and 2000 was $(2.8) and $2.7 million, respectively.
Included in the GGS loss for the fiscal year 2001 period was a pretax asset
impairment charge of $1.8 million.
Note E -- Property and Equipment
- --------------------------------
(in thousands) September 30,
-----------------------------
2002 2001
-----------------------------
Land $ 998 $ 998
Building and building improvements 16,810 16,497
Computer equipment and software 32,807 29,871
Other equipment, furniture,
fixtures, and leasehold
improvements 27,757 27,679
-----------------------------
78,372 75,045
Less accumulated depreciation 51,107 43,750
-----------------------------
$27,265 $31,295
=============================
Depreciation expense for the years ended September 30, 2002, 2001, and 2000 was
$8.8, $9.3, and $8.8 million, respectively.
38
Note F -- Other Assets and Deferred Charges
- -------------------------------------------
(in thousands) September 30,
----------------------------
2002 2001
----------------------------
Deferred tax assets $ 6,938 $ 5,132
Long-term investments 3,975 10,850
Long-term receivables 1,985 3,722
Deferred debt issuance expenses (a) (b) 711 1,060
Deferred costs and sales
commissions related to outsourcing
services contracts in progress (a) (c) 755 650
Other 805 1,311
----------------------------
$ 15,169 $ 22,725
============================
(a) Shown net of accumulated amortization.
(b) Amortized over the term of the related debt.
(c) Amortized over the remaining term of the outsourcing service contract.
Note G -- Goodwill and Intangible Assets
- ----------------------------------------
Effective October 1, 2001, the Company adopted Statement of Financial Accounting
Standards No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142"), which
resulted in discontinuing the amortization of goodwill. Under SFAS 142, goodwill
will instead be carried at its book value as of October 1, 2001, and any future
impairment of goodwill will be recognized as an operating expense in the period
of impairment. However, under the terms of SFAS 142, identifiable intangibles
with identifiable lives will continue to be amortized.
The Company's goodwill was $28.8 and $2.3 million at September 30, 2002 and
2001, respectively. The increase in goodwill at September 30, 2002, is the
result of the Sallie Mae and ABT acquisitions (see Note C). The Company did not
recognize an impairment loss as a result of its transitional impairment test of
existing goodwill. The Company will be required to test the value of its
goodwill at least annually.
The following table sets forth the Company's amortized and unamortized
intangible assets at the periods indicated (in thousands):
September 30, 2002 September 30, 2001
Gross Carrying Accumulated Gross Carrying Accumulated
Amount Amortization Amount Amortization
------ ------------ ------ ------------
Amortized intangible assets
Purchased software $ 12,462 $ (4,558) $ 4,284 $ (4,065)
Covenants-not-to-compete 6,065 (5,687) 6,000 (5,000)
Customer relationships 1,652 (110) -- --
------------------------------- -----------------------------
$ 20,179 $ (10,355) $ 10,284 $ (9,065)
=============================== =============================
Unamortized intangible assets
Trademarks $ 865 $ --
------------- -----------
$ 865 $ --
============= ===========
39
Estimated amortization expense for amortized intangible assets for the next five
fiscal years ending September 30, are as follows (in thousands):
Fiscal year
2003 $ 2,239
2004 1,813
2005 1,801
2006 1,801
2007 1,455
Thereafter 715
-------
Total $ 9,824
=======
Amortization expense on intangible assets was $1.3, $0.8, and $0.6 million for
the years ended September 30, 2002, 2001, and 2000, respectively.
The following table discloses the effect on net income and earnings per share of
excluding amortization expense related to goodwill, which was recognized in the
years ended September 30, 2001 and 2000 as if such goodwill had been recognized
in accordance with SFAS 142 (in thousands, except per share amounts).
Year Ended September 30,
2002 2001 2000
Reported net income $ (9,075) $ 14,818 $ 8,628
Plus: Goodwill amortization, net of taxes -- 131 172
-------------------------------------------------------------
Adjusted net income $ (9,075) $ 14,949 $ 8,800
=============================================================
Per common share:
Net income $ (0.27) $ 0.45 $ 0.27
Goodwill amortization $ 0.00 $ 0.00 $ 0.00
-------------------------------------------------------------
Adjusted net income $ (0.27) $ 0.46 $ 0.27
=============================================================
Per share -- assuming dilution:
Net income $ (0.27) $ 0.45 $ 0.26
Goodwill amortization $ 0.00 $ 0.00 $ 0.00
-------------------------------------------------------------
Adjusted net income $ (0.27) $ 0.45 $ 0.26
=============================================================
Note H -- Accrued Expenses
- --------------------------
(in thousands) September 30,
-----------------------------
2002 2001
-----------------------------
Accrued costs related to
discontinued operations $ 7,532 $ 5,372
Accrued employee compensation 7,485 4,510
Accrued payroll withholdings 4,740 7,736
Accrued third party licenses 3,226 3,738
Other 15,012 12,410
-----------------------------
Total accrued expenses $37,995 $33,766
=============================
40
Note I -- Long-Term Debt
- ------------------------
(in thousands) September 30,
-----------------------------
2002 2001
-----------------------------
5% convertible subordinated
debentures, due October 15, 2004 $74,723 $74,723
Financing agreement -- 2,771
-----------------------------
Total Long-Term Debt 74,723 77,494
Less current portion -- 2,771
-----------------------------
Long-Term Debt, net of current portion $74,723 $74,723
=============================
In 1997, the Company issued $74.7 million of convertible subordinated debentures
bearing interest at 5% and maturing on October 15, 2004. The debentures are
convertible into common stock of the Company at any time prior to redemption or
maturity at a conversion price of $26.375 per share, subject to change as
defined in the Trust Indenture. The debentures are redeemable at any time after
October 15, 2000, at prices from 102.5% of par decreasing to par on October 15,
2003. The fair value, based on quoted market values, of the convertible
subordinated debentures at September 30, 2002, was $63.5 million. The Company
has 2.8 million shares reserved for issuance related to these debentures. In
October 2000, $27 thousand of the convertible subordinated debentures were
converted into approximately one thousand shares of common stock of the Company.
In several transactions in October 2002, the Company repurchased $40.9 million
face value of the debentures. See Note Q.
The Company has a $30 million senior revolving credit agreement, which
terminates in June 2004 with optional annual renewals. There were no borrowings
outstanding at September 30, 2002 or 2001. 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
has complied with all covenants and conditions at September 30, 2002. 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.
In August 1997, the Company entered into a $4.3 million financing agreement in
connection with an outsourcing services contract. The balance of the agreement
was paid off at June 30, 2002. At September 30, 2002, the Company had no
remaining obligations in regard to this agreement.
Interest paid during the years ended September 30, 2002, 2001, and 2000, was
$3.9, $3.8, and $4.0 million, respectively.
Note J -- 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, 2002, only stock options have been issued
pursuant to the plan.
There were 1,805,000 shares of common stock reserved for future grants under the
stock option plans at September 30, 2002. The outstanding stock options expire
on various dates through 2012. 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 940,000 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, 2002, all of these options were exercisable. There are
728,000 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,
2002, 681,000 of these options were exercisable. In addition, 330,000 options
granted to nonemployee directors, of which 192,000 are exercisable at September
30, 2002, have 10-year terms and vest and become exercisable ratably over five
years.
41
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 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 (in thousands, except per share
amounts):
Year Ended September 30,
--------------------------------------------------------
2002 2001 2000
--------------------------------------------------------
Net income, as reported $ (9,075) $ 14,818 $ 8,628
Less: stock-based employee compensation
expense determined under fair value method,
net of related tax effects (1,892) (3,434) (4,468)
--------------------------------------------------------
Pro forma net income $ (10,967) $ 11,384 $ 4,160
========================================================
Earnings per share:
per common share, as reported $ (0.27) $ 0.45 $ 0.27
per common share, pro forma $ (0.33) $ 0.35 $ 0.13
per share--assuming dilution, as reported $ (0.27) $ 0.45 $ 0.26
per share--assuming dilution, pro forma $ (0.33) $ 0.34 $ 0.12
The pro forma amount in the above table removes the impact of options
outstanding at September 30, 2002 held by employees of the MDS business, which
was sold on May 31, 2002. The Company extended the term of the options held by
employees of the MDS business at the time of the sale beyond the contractual
term, as a result, the Company recognized compensation expense of $0.7 million
in fiscal year 2002 reported net income.
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 2002, 2001, and 2000, respectively: risk-free interest rates of
3.4%, 4.8%, and 6.1%, dividend yields of 0%; volatility factors of the expected
market price of the Company's common stock of 67.6%, 61.8%, and 59.5%, and a
weighted-average expected life of the option of four years.
42
Following is a summary of the Company's stock option activity and related
information for the years ended September 30 (in thousands, except per share
amounts):
2002 2001 2000
Weighted- Weighted- Weighted-
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
-------------------------------------------------------------------------
Outstanding
at beginning of year 5,580 $13.77 5,506 $14.00 5,235 $12.73
Granted 682 12.19 877 10.94 1,208 18.09
Exercised (395) 7.16 (369) 6.88 (529) 8.30
Cancelled (712) 16.27 (434) 16.56 (408) 17.22
-------------------------------------------------------------------------
Outstanding
at end of year 5,155 $13.70 5,580 $13.79 5,506 $14.00
=========================================================================
Options exercisable at year end 4,082 $14.08 3,949 $13.68 3,295 $11.14
Weighted-average fair value of
options granted during the year $ 6.62 $ 5.61 $ 9.30
The following table summarizes information about stock options outstanding and
exercisable at September 30, 2002 (in thousands, except per share amounts):
---------------------------Outstanding--------------------------|-------------Exercisable------------
Weighted- |
Average Weighted- | Weighted-
Remaining Average | Average
Contractual Exercise | Exercise
Range of Exercise Prices Shares Life (yrs.) Price | Shares Price
$ 3.81 - $ 9.69 1,842 2.27 $8.75 | 1,738 $8.76
9.88 - 15.00 1,721 6.55 12.33 | 815 12.50
15.19 - 28.53 1,592 4.30 20.91 | 1,529 20.98
- -----------------------------------------------------------------------------------------------|------------------------------------
$ 3.81 - $28.53 5,155 4.33 $13.70 | 4,082 $14.08
===============================================================================================|====================================
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 500,000 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 years 2002 and 2001, the Company sold 48,000 and 23,000
shares, respectively, 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,
2002, there were 1,668,000 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, 2002 and 2001, there
were 160,000 restricted shares sold but not exchanged for unrestricted shares.
43
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, 2002, 2001, and 2000, were $2.0, $1.2, and $2.6
million, respectively.
Note K -- Income Taxes
- ----------------------
Income (loss) from continuing operations before income taxes consists of the
following (in thousands):
Year Ended September 30,
-----------------------------------------
2002 2001 2000
-----------------------------------------
U.S. operations $12,247 $11,786 $10,084
International operations 828 (1,180) 1,845
-----------------------------------------
$13,075 $10,606 $11,929
=========================================
The components of the provision for income taxes on income from continuing
operations are as follows (in thousands):
Year Ended September 30,
---------------------------------------
Current: 2002 2001 2000
---------------------------------------
Federal $ 4,236 $ 13,326 $ 4,492
State 2,340 3,150 2,732
International 176 91 133
---------------------------------------
Total Current 6,752 16,567 7,357
Deferred
(benefit)/expense (1,162) (12,348) (2,260)
(primarily federal)
---------------------------------------
$5,590 $4,219 $5,097
=======================================
A reconciliation of the provision for income taxes on income from continuing
operations to the federal statutory rate follows:
Year Ended September 30,
-------------------------------
2002 2001 2000
-------------------------------
Expected federal tax rate 35.0% 35.0% 35.0%
Adjustments due to:
Effect of state and local taxes 11.1% 9.0% 12.7%
Research and development tax credit (8.2)% (7.0)% (7.3)%
Other - primarily non-deductible expenses 4.9% 2.8% 2.3%
-------------------------------
42.8% 39.8% 42.7%
===============================
Income taxes paid during fiscal years ended September 30, 2002, 2001, and 2000,
were $24.0, $13.2, and $10.0 million, respectively.
44
The tax effects of the temporary differences that give rise to the significant
portions of the deferred tax assets and liabilities of continuing operations are
as follows (in thousands):
September 30,
2002 2001
Deferred Tax Assets
Purchased research and development $ 949 $ 978
Accrued expenses and reserves 6,864 7,960
Tax credits and loss carryforwards, net of
valuation allowance 248 248
Purchased software 616 624
Investment impairments and losses in equity
investments 6,469 5,348
-------------------------
Total Deferred Tax Assets 15,146 15,158
Deferred Tax Liabilities
Depreciation and amortization (731) (388)
Unbilled accounts receivable (1,872) (1,723)
Software capitalization (1,746) (2,779)
Prepaids and other accelerated expenses -- (633)
-------------------------
Total Deferred Tax Liabilities (4,349) (5,523)
-------------------------
Net Deferred Tax Asset $ 10,797 $ 9,635
=========================
Note L -- Product Development, Commitments, and Other Items
- -----------------------------------------------------------
Product development expenditures, including software maintenance expenditures,
for the years ended September 30, 2002, 2001, and 2000, were approximately
$28.3, $29.6, and $23.0 million, respectively. In fiscal years 2002 and 2001, no
amounts were capitalized and approximately $28.3 and $29.6 million,
respectively, were charged to operations as incurred. In fiscal year 2000,
approximately $0.7 million was capitalized and the remaining $22.3 million was
charged to operations as incurred. For fiscal years 2002, 2001, and 2000,
amortization of capitalized software costs (not included in expenditures above)
amounted to $2.6, $2.8, and $3.2 million, respectively.
Rent expense for the years ended September 30, 2002, 2001, and 2000, was $5.6,
$5.8, and $5.5 million, respectively. The Company leases office space under
noncancellable lease agreements. These leases expire through 2009 and most
contain renewal options. Aggregate rentals payable under significant
noncancellable lease agreements with initial terms of one year or more as of
September 30, 2002, are as follows (in thousands):
=================================
Fiscal year Amount
---------------------------------
2003 $ 5,437
2004 4,693
2005 4,575
2006 4,193
2007 4,052
Thereafter 4,865
--------
$ 27,815
=================================
The Company has guaranteed the obligations under a lease agreement assigned by
the Company. Such guarantee is effective through the end of the lease term,
which is March 2013. If the current leaseholder fails to meet its payment
obligations under the assigned lease, the Company would be responsible for
payments up to a maximum of $2.6 million. Based on experience with these
arrangements, the Company believes that any obligations that may arise will not
be material. Should the Company be required to make any payments under the
guarantee, it would then seek recourse from the current leaseholder.
45
Note M -- Retirement and Restructuring Charges
- ----------------------------------------------
In the second quarter of fiscal year 2002, Michael J. Emmi, President, Chief
Executive Officer, and Chairman of the Board of Directors retired from the
Company. Michael D. Chamberlain, who has served the Company in various executive
capacities since 1986, most recently as Chief Operating Officer, and a member of
the Board of Directors since 1989, was elected President and Chief Executive
Officer. Allen R. Freedman, a member of the Company's Board of Directors since
1982, was elected non-executive Chairman of the Board. Mr. Freedman was Chairman
and Chief Executive Officer of Fortis, Inc., a multi-billion dollar financial
services company, prior to his retirement in July 2000.
In connection with his retirement, Mr. Emmi received a compensation package
including a reduction of indebtednesses of $0.07 million, the continuation of
his life and health insurance and other fringe benefits for periods ranging from
two to five years, as well as an assignment to him of life insurance policies
covering him, and the immediate vesting of certain rights under other
compensation plans. All Company stock options held by Mr. Emmi became vested and
were amended to permit Mr. Emmi to exercise them by the earlier of their
original expiration date or two years from the date of his resignation. The
Company recorded a charge of approximately $3.5 million related to the above
actions in the second quarter of fiscal year 2002. At September 30, 2002, $0.7
million of the accrual remains.
Also, during the quarter ended March 31, 2002, the Company implemented a plan
for restructuring, which included the termination of employees, management
changes, discontinuation of non-critical programs and the disposition of related
assets. During the quarter, the Company recorded a charge of $1.4 million
related to severance payments and disposition of assets. At September 30, 2002,
$0.4 million of the accrual remains. In January 2002, the Company terminated
approximately 40 employees engaged primarily in development, special-programs,
and sales functions.
During the third quarter of fiscal year 2001, the Company implemented
restructuring actions that were considered necessary to improve the Company's
performance. The restructuring plan included the termination of employees,
management changes, consolidation of certain facilities, and discontinuation of
non-critical programs. During the quarter ended June 30, 2001, the Company
accrued $2.0 million related to severance and termination benefits and $0.4
million of other costs based on a termination plan developed by management in
consultation with the Board of Directors. As of September 30, 2002, none of this
accrual remains. In May and June 2001, the Company terminated approximately 80
employees engaged primarily in marketing, administrative, special-programs, and
development functions.
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 $1.0 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. As of September 30, 2002, none of this accrual
remains. In January 2000, the Company terminated approximately 100 employees
engaged primarily in marketing, administrative, special-programs, and
development functions.
(in thousands) Employee Costs Other Total
-------------- ----- -----
Provision for restructuring charges $ 2,081 $ 404 $ 2,485
Cash payments (1,360) -- (1,360)
Non-cash items (200) (404) (604)
----------------------------------------------------------
Balance as of September 30, 2001 521 -- 521
----------------------------------------------------------
Provision for retirement and restructuring charges 4,874 -- 4,874
Cash payments (2,769) -- (2,769)
Non-cash items (1,525) -- (1,525)
----------------------------------------------------------
Balance as of September 30, 2002 $ 1,101 $ -- $ 1,101
==========================================================
Note N -- Related Party Transactions
- ------------------------------------
At September 30, 2002, the Company has ownerships interests in Campus Pipeline,
Inc. (See Note B) with whom the Company also conducts business. In October 2002,
the Company acquired Campus Pipeline for $36.4 million and the assumption of
certain employee bonus and severance obligations of $5.2 million. During fiscal
year 2002, the Company had an agreement with Campus Pipeline pursuant to which
the Company purchased software license and services inventory credits from
Campus Pipeline. The inventory credits are $1.6 million at September 30, 2002
and are classified as prepaid expenses on the consolidated balance sheet. At
September 30, 2002, the Company had a commitment to purchase an additional $3.4
million of software license and services inventory credits from Campus Pipeline.
The Company earned commission revenue of $1.5 million with Campus Pipeline
during fiscal year 2002 and incurred expenses of $2.4 million.
46
At September 30, 2002, the Company has an ownership interest in and a joint
marketing agreement with WebCT. Under the joint marketing agreement in fiscal
year 2002, the Company earned commissions of $0.5 million. Additionally the
Company can earn commissions in the form of shares of WebCT as schools license a
product jointly developed by the Company and WebCT. The Company has a net
payable to WebCT of $1.3 million at September 30, 2002.
The Company has loans and advances outstanding to non-officer employees totaling
$1.1 and $0.7 million at September 30, 2002 and 2001, respectively.
Note O -- Quarterly Results of Operations (Unaudited)
The following is a summary of the quarterly results of operations for the years
ended September 30, 2002 and 2001 (in thousands, except per share amounts):
Three Months Ended
December 31, March 31, June 30, September 30,
2001 2000 2002 (a) 2001 (b) 2002 (c) 2001 (d) 2002 (e) 2001 (f)
---- ---- -------- -------- -------- -------- -------- --------
Revenues $ 50,969 $ 47,751 $ 58,529 $ 48,509 $ 61,408 $ 59,631 $ 66,632 $52,392
- -----------------------------------------------------------------------------------------------------------------------------------
Gross profits 17,460 17,028 19,938 15,842 23,107 24,057 28,978 19,752
- -----------------------------------------------------------------------------------------------------------------------------------
Income (loss) from continuing operations
before income taxes 3,255 3,039 718 (6,595) 368 7,793 8,734 6,369
- -----------------------------------------------------------------------------------------------------------------------------------
Provision (benefit) for income taxes 1,361 1,272 208 (2,689) 527 3,358 3,494 2,278
- -----------------------------------------------------------------------------------------------------------------------------------
Income (loss) from continuing operations 1,894 1,767 510 (3,906) (159) 4,435 5,240 4,091
- -----------------------------------------------------------------------------------------------------------------------------------
Income (loss) from discontinued operations (1,332) 296 (10,738) (7,370) (280) 16,329 (4,210) (824)
- -----------------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 562 $ 2,063 $(10,228) $(11,276) $ (439) $ 20,764 $ 1,030 $ 3,267
- -----------------------------------------------------------------------------------------------------------------------------------
Income (loss) from continuing operations
per common share $ 0.06 $ 0.05 $ 0.02 $ (0.12) $ - $ 0.13 $ 0.16 $ 0.12
- -----------------------------------------------------------------------------------------------------------------------------------
Income (loss) from continuing operations
per share - assuming dilution $ 0.06 $ 0.05 $ 0.02 $ (0.12) $ - $ 0.13 $ 0.16 $ 0.12
- -----------------------------------------------------------------------------------------------------------------------------------
Income (loss) from discontinued operations
per common share $ (0.04) $ 0.01 $ (0.32) (0.22) $ (0.01) $ 0.50 $ (0.13) $ (0.03)
- -----------------------------------------------------------------------------------------------------------------------------------
Income (loss) from discontinued operations
per share - assuming dilution $ (0.04) $ 0.01 $ (0.32) $ (0.22) $ (0.01) $ 0.49 $ (0.13) $ (0.02)
- -----------------------------------------------------------------------------------------------------------------------------------
Net income (loss) per common share $ 0.02 $ 0.06 $ (0.31) $ (0.34) $ (0.01) $ 0.63 $ 0.03 $ 0.10
- -----------------------------------------------------------------------------------------------------------------------------------
Net income (loss) per share - assuming dilution $ 0.02 $ 0.06 $ (0.31) $ (0.34) $ (0.01) $ 0.63 $ 0.03 $ 0.10
- -----------------------------------------------------------------------------------------------------------------------------------
(a) Income (loss) from continuing operations includes a pretax restructuring
charge of $4,874 (Note M) and income (loss) from discontinued operations
includes a pretax loss on the sale of the MDS business of $10,772 (Note D).
(b) Income (loss) from continuing operations includes a pretax asset impairment
charge of $7,831 (Note B).
(c) Income (loss) from continuing operations includes a pretax asset impairment
charge of $5,425 (Note B).
(d) Income (loss) from continuing operations includes a pretax restructuring
charge of $2,485 (Note M) and income (loss) from discontinued operations
includes a pretax gain on the sale of the GGS business of $29,766 (Note D).
(e) Income (loss) from discontinued operations includes a $3,500 provision for
real-estate-related costs (Note D).
(f) Income (loss) from continuing operations includes a change in estimate of
$1,383 primarily to reduce accrued employee costs and reduce a contract
accrual.
47
Note P -- Contingency
- ---------------------
The Company had been involved in litigation relating to a software
implementation in Broward County, Florida. The Company believed that it had
meritorious defenses and the probability of an unfavorable outcome against the
Company was unlikely. However, on October 31, 2000, an adverse decision was
rendered against the Company in this litigation. The Company's claim for
approximately $3.1 million -- which was included in the Company's accounts
receivable balances -- for software licensed, services rendered, and expenses
incurred was denied. In addition, the Company was ordered to pay damages. In
January 2002, the Company paid $2.5 million and the judgment was satisfied of
record. While this contract was originated within the Global Government
Solutions business, which was sold on June 29, 2001, the right to appeal and the
impact of the related outcome were retained by the Company.
As of September 30, 2002, the Company was involved in litigation relating to two
software implementations. The claimants asserted that the Company did not
perform under the contracts. The Company had filed counter suits seeking to
recover unpaid accounts receivable. The Company recorded an accrual in the
amount of $0.7 million against the possibility of unfavorable judgments.
Subsequent to the end of fiscal year 2002, and in order to avoid the expense and
disruption of protracted litigation, the Company and the claimants reached
agreement to settle the lawsuits. Terms of the settlements were confidential,
but the amount paid, net of insurance proceeds approximates the amount accrued.
While these contracts originated within the MDS business, which has been sold,
the right to appeal and the impact of the related outcome were retained by the
Company.
In connection with the sale of assets or a business, the Company typically
agrees to indemnify the purchaser for breaches of representations and warranties
made by the Company in the agreement. If indemnity claims are made against the
Company, the proceeds received by the Company for the sale may be subject to
adjustment. In the opinion of management, any indemnity obligations of the
Company which may result would not materially affect the Company's consolidated
financial statements.
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.
Note Q -- Subsequent Events
- ---------------------------
In several transactions in October 2002, the Company repurchased $40.9 million
face value of the $74.7 million, 5% convertible subordinated debentures due
October 15, 2004. The Company repurchased the convertible debentures at prices
ranging from $94 to $96, plus accrued interest. The transaction included $39.2
million principal and interest of $0.9 million for a total payment of $40.1
million including fees. The Company will record a gain of $1.3 million in the
first quarter of fiscal year 2003 related to these transactions.
Effective October 23, 2002, the Company acquired Campus Pipeline, Inc., pursuant
to a Merger Agreement dated September 30, 2002, for $36.4 million cash and the
assumption by the Company of certain employee bonus and severance obligations
totaling $5.2 million (the "Merger Consideration"). Campus Pipeline was a
privately held corporation that provided digital and information systems
products and services to colleges and universities. In accordance with the
Merger Agreement, $3.5 million of the Merger Consideration will be held in
escrow until December 31, 2003 to secure certain indemnification obligations of
the former stockholders of Campus Pipeline in favor of the Company in case of
certain breaches of the Merger Agreement by Campus Pipeline. Pursuant to the
Merger Agreement and Campus Pipeline's Certificate of Incorporation, holders of
common stock of Campus Pipeline were not entitled to receive any portion of the
Merger Consideration. The total amount of funds used to pay the Merger
Consideration was obtained from the working capital of the Company.
Immediately prior to the consummation of the acquisition, three of the nine
members of the board of directors of Campus Pipeline were also directors and
affiliates of the Company, two of whom were also executive officers of the
Company. Additionally, the Company was a major stockholder of Campus Pipeline,
holding approximately 59% of Campus Pipeline's outstanding common stock, which
was approximately 43% of the voting interest in Campus Pipeline's outstanding
equity due to outstanding convertible fully voting, preferred equity. In
addition, certain executive officers and other employees owned common stock of
Campus Pipeline. As the Company and executive officers and employees of the
Company held only common stock of Campus Pipeline, they were not entitled to
receive any portion of the Merger Consideration. Additionally, the Company has a
business relationship with Campus Pipeline, as certain of Campus Pipeline's
services are offered to customers through contracts entered into between the
Company and those customers.
48
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, 2002 and 2001, and the
related consolidated statements of operations, cash flows, and stockholders'
equity for each of the three years in the period ended September 30, 2002. 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, 2002 and 2001, and the consolidated
results of its operations and its cash flows for each of the three years in the
period ended September 30, 2002, 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, 2002
ITEMS 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not Applicable.
49
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 21, 2003 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 21, 2003 and
is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table summarizes information about the Company's equity
compensation plans as of September 30, 2002. All outstanding awards relate to
the Company's common stock. For additional information about the Company's
equity compensation plans, see note J of Notes to Consolidated Financial
Statements under Item 8.
Plan category Number of securities Weighted-average Number of securities
to be issued upon exercise price of remaining available for
exercise of outstanding options, future issuance under
outstanding options, warrants and rights equity compensation
warrants and rights plans (excluding
securities reflected in
column (a))
(a) (b) (c)
Equity compensation
plans approved by
security holders 5,155,000 $13.70 1,805,000
Equity compensation
plans not approved by
security holders -0- -0- -0-
--------- ------ ---------
Total 5,155,000 $13.70 1,805,000
--------- ------ ---------
50
The other 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 21, 2003 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 21, 2003 and
is incorporated herein by reference.
ITEM 14. CONTROLS AND PROCEDURES.
The Company carried out an evaluation, under the supervision and with
the participation of the Company's Disclosure Committee and the Company's
management, including the Chief Executive Officer and the Chief Financial
Officer, of the effectiveness of the design and operation of the Company's
disclosure controls and procedures (as defined in Rules 13a-14(c) and 15d-14(c)
under the Securities Exchange Act of 1934, as amended (the "Exchange Act")) as
of a date within 90 days prior to the date of filing this Annual Report on Form
10-K (the "Evaluation Date"). Based on that evaluation, the Chief Executive
Officer and the Chief Financial Officer concluded that, as of Evaluation Date,
the disclosure controls and procedures of the Company are effective to ensure
that information required to be disclosed by the Company in its Exchange Act
reports is recorded, processed, summarized and reported within the applicable
time periods. Since the Evaluation Date, there have been no significant changes
to the Company's internal controls or, to the Company's knowledge, in other
factors that could significantly affect these controls, including any corrective
actions with regard to significant deficiencies and material weaknesses.
51
PART IV
ITEM 15. 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, 2002 and 2001
Consolidated Statements of Operations--Years Ended September
30, 2002, 2001 and 2000
Consolidated Statements of Cash Flows--Years Ended September
30, 2002, 2001 and 2000
Consolidated Statements of Stockholders' Equity--Years Ended
September 30, 2002, 2001 and 2000
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).
52
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
SYSTEMS & COMPUTER TECHNOLOGY CORPORATION AND SUBSIDIARIES
For the Three Years in the Period Ended September 30, 2002
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
- --------------------------------------------------------------------------------------------------------------------------------
Additions
----------------------------
Balance at Charged to Charged to
Description Beginning Costs and Other Accounts Deductions Balance at
of Period Expenses -Describe -Describe End of Period
- --------------------------------------------------------------------------------------------------------------------------------
For the year ended September 30, 2002
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 5,528,000 $ 839,000 $155,000 (1) $1,733,000 (2) 4,789,000
----------- ---------- -------- ---------- -----------
Total $ 5,584,000 $ 839,000 $155,000 $1,733,000 $ 4,845,000
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 1,375,000 $4,531,000 $ 378,000 (2) 5,528,000
----------- ---------- -------- ---------- -----------
Total $ 1,431,000 $4,531,000 $ - $ 378,000 $ 5,584,000
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 808,000 $1,133,000 $ 566,000 (2) 1,375,000
----------- ---------- -------- ---------- -----------
Total $ 864,000 $1,133,000 $ - $ 566,000 $ 1,431,000
(1) Allowance added through acquisition
(2) Uncollectible accounts written-off during the year
53
No. Exhibit
--- -------
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)
- --------------------
(1) Incorporated by reference
54
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)
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)
- --------------------
(1) Incorporated by reference
55
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. (Exhibit 10.13 to
Registrant's Form 10-K for the fiscal year ended September 30,
2001) (1)
10.14 Ninth Amendment and Modification to Credit Agreement dated as
of February 19, 2002 among Systems & Computer Technology
Corporation and SCT Software & Resource Management Corporation
as Borrowers and Mellon Bank, N.A. (Exhibit 10.1 to
Registrant's Form 10-Q for the quarterly period ended March
31, 2002) (1)
10.15 Tenth Amendment and Modification to Credit Agreement dated as
of May 30, 2002 among Systems & Computer Technology
Corporation and SCT Software & Resource Management Corporation
as Borrowers and Mellon Bank, N.A. (Exhibit 10.1 to
Registrant's Form 10-Q for the quarterly period ended June 30,
2002) (1)
10.16 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)
10.17 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)
10.18 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)
- --------------------
(1) Incorporated by reference
(3) Compensatory plan, contract or arrangement
56
10.19 Retirement Agreement dated as of January, 2, 2002 by and
between Michael J. Emmi and Systems & Computer Technology
Corporation (2,3)
10.20 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)
10.21 Form of Executive Severance Agreement dated as of June 1, 2001
by and between the Registrant and certain executive officers
of the Registrant (Exhibit 10.2 to the Registrant's Form 10-Q
for the quarterly period ended March 31, 2002) (1,3)
10.22 Form of Transaction Bonus Agreement dated as of June 1, 2001
by and between the Registrant and certain executive officers
of the Registrant (Exhibit 10.2 to the Registrant's Form 10-Q
for the quarterly period ended June 30, 2002) (1,3)
10.23 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)
10.24 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)
10.25 Asset Purchase Agreement dated as of April 10, 2002, by and
between Systems & Computer Technology Corporation and High
Process Technology, Inc. (Exhibit 2.1 to Registrant's Form 8-K
dated May 31, 2002) (1)
- --------------------
(1) Incorporated by reference
(2) Filed with this Annual Report on Form 10-K
(3) Compensatory plan, contract or arrangement
57
10.26 Amendment No. 1 to Asset Purchase Agreement dated May 31,
2002, by and between Systems & Computer Technology Corporation
and Agilisys International Limited. (Exhibit 2.2 to
Registrant's Form 8-K dated May 31, 2002) (1)
10.27 Royalty Agreement dated as of May 31, 2002, by and between
Systems & Computer Technology Corporation and Agilisys, Inc
(Exhibit 2.3 to Registrant's Form 8-K dated May 31, 2002) (1)
10.28 Agreement and Plan of Merger dated September 30, 2002 by and
among Systems & Computer Technology Corporation, Campus
Pipeline, Inc. and CPI Acquisition Company, Inc (Exhibit 2.5
to Registrant's Form 8-K dated October 23, 2002) (1)
10.29 Escrow Agreement dated October 23, 2002 by and among Systems &
Computer Technology Corporation, Tyler Thatcher, as
Stockholder Representative and J.P. Morgan, Trust Company,
National Association (Exhibit 2.6 to Registrant's Form 8-K
dated October 23, 2002) (1)
10.30 Agreement and Plan of Merger dated January 29, 2002 by and
among SCT Software and Resource Management Corporation, ABT
Acquisition Corp., Applied Business Technologies, Inc. and the
security holders of Applied Business Technologies, Inc. (2)
10.31 Asset and Stock Purchase Agreement dated January 10, 2002 by
and among Sallie Mae, Inc., Exeter Educational Management
Systems, Inc., Sallie Mae Solutions (India) Private, Ltd. and
Systems & Computer Technology Corporation (2)
10.32 Amendment No. 1 dated September 30, 2002 to Asset and Stock
Purchase Agreement by and among Sallie Mae, Inc., Exeter
Educational Management Systems, Inc., Sallie Mae Solutions
(India) Private, Ltd. and Systems & Computer Technology
Corporation (2)
21 Subsidiaries of the Registrant (2)
23 Consent of Ernst & Young LLP. (2)
99.1 Certification of Chief Executive Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes Oxley Act of 2002. (2)
- --------------------
(1) Incorporated by reference
(2) Filed with this Annual Report on Form 10-K
58
99.2 Certification of Chief Financial Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes Oxley Act of 2002. (2)
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.
No Reports on Form 8-K were filed during the period from July 1, 2002
through September 30, 2002. On November 5, 2002, the Company filed a Current
Report on Form 8-K dated October 23, 2002 disclosing the acquisition by the
Company of Campus Pipeline, Inc. The Company will file the required financial
statements and pro forma financial information of the business acquired by
amendment to that report within 60 days of the filing of that report.
- --------------------
(2) Filed with this Annual Report on Form 10-K
59
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 D. Chamberlain
-------------------------------------------------------------
Michael D. Chamberlain, President and Chief Executive Officer
Date: December 23, 2002
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 D. Chamberlain President and Chief December 23, 2002
- -------------------------- Executive Officer; Director
Michael D. Chamberlain (Principal Executive Officer)
/s/ Allen R. Freedman Director December 23, 2002
- --------------------------
Allen R. Freedman
/s/ Thomas I. Unterberg Director December 23, 2002
- --------------------------
Thomas I. Unterberg
/s/ Gabriel A. Battista Director December 23, 2002
- --------------------------
Gabriel A. Battista
/s/ Robert M. Gavin, Jr. Director December 23, 2002
- --------------------------
Robert M. Gavin, Jr.
/s/ Eric Haskell Executive Vice President, Finance December 23, 2002
- -------------------------- and Administration, Treasurer
Eric Haskell and Chief Financial Officer; Director
(Principal Financial and
Accounting Officer)
60
CERTIFICATIONS
CEO CERTIFICATION
I, Michael D. Chamberlain, certify that:
1. I have reviewed this annual report on Form 10-K of Systems & Computer
Technology Corporation (the "Company");
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
Company as of, and for, the periods presented in this annual report;
4. The Company's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the Company and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the Company, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this annual report is being
prepared;
b) evaluated the effectiveness of the Company's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The Company's other certifying officers and I have disclosed, based on our
most recent evaluation, to the Company's auditors and the audit committee of the
Company's board of directors:
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the Company's ability to record,
process, summarize and report financial data and have identified for the
Company's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the Company's internal controls;
and
61
6. The Company's other certifying officers and I have indicated in this
annual report whether there were significant changes in internal controls or in
other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: December 23, 2002
/s/ Michael D. Chamberlain
- -------------------------------------------------------------
Michael D. Chamberlain, President and Chief Executive Officer
CFO CERTIFICATION
I, Eric Haskell, certify that:
1. I have reviewed this annual report on Form 10-K of Systems & Computer
Technology Corporation (the "Company");
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
Company as of, and for, the periods presented in this annual report;
4. The Company's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the Company and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the Company, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this annual report is being
prepared;
b) evaluated the effectiveness of the Company's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
62
5. The Company's other certifying officers and I have disclosed, based on our
most recent evaluation, to the Company's auditors and the audit committee of the
Company's board of directors:
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the Company's ability to record,
process, summarize and report financial data and have identified for the
Company's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the Company's internal controls;
and
6. The Company's other certifying officers and I have indicated in this
annual report whether there were significant changes in internal controls or in
other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: December 23, 2002
/s/ Eric Haskell
- -----------------------------------------------------
Eric Haskell, Executive Vice President, Finance and
Administration, Treasurer and Chief Financial Officer
63
SYSTEMS & COMPUTER TECHNOLOGY CORPORATION
Index of Exhibits Filed Herewith
Exhibit No. Exhibit
----------- -------
10.19 Retirement Agreement dated as of January, 2, 2002
by and between Michael J. Emmi and Systems &
Computer Technology Corporation
10.30 Agreement and Plan of Merger dated January 29,
2002 by and among SCT Software and Resource
Management Corporation, ABT Acquisition Corp.,
Applied Business Technologies, Inc. and the
security holders of Applied Business
Technologies, Inc. (The Schedules and Exhibits
to the Agreement and Plan of Merger (the contents
of which are described in the Agreement and Plan of
Merger) are not being filed as Exhibits to this
Annual Report on Form 10-K. The Company agrees to
furnish supplementally a copy of any such Schedules
and Exhibits to the Securities and Exchange Commission
upon request).
10.31 Asset and Stock Purchase Agreement dated January
10, 2002 by and among Sallie Mae, Inc., Exeter
Educational Management Systems, Inc., Sallie Mae
Solutions (India) Private, Ltd. and Systems &
Computer Technology Corporation. (The Schedules and
Exhibits to the Purchase Agreement (the contents
of which are described in the Purchase Agreement)
are not being filed as Exhibits to this
Annual Report on Form 10-K. The Company agrees to
furnish supplementally a copy of any such Schedules
and Exhibits to the Securities and Exchange Commission
upon request).
10.32 Amendment No. 1 dated September 30, 2002 to Asset
and Stock Purchase Agreement by and among Sallie
Mae, Inc., Exeter Educational Management Systems,
Inc., Sallie Mae Solutions (India) Private, Ltd.
and Systems & Computer Technology Corporation
21 Subsidiaries of the Registrant
23 Consent of Ernst & Young LLP
99.1 Certification of Chief Executive Officer pursuant
to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes Oxley Act of 2002
99.2 Certification of Chief Financial Officer pursuant
to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes Oxley Act of 2002