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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
Form 10-Q
(Mark One)
/X/ Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the quarterly period ended December 31, 2002 or
/ / Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from _______ to _______.
0-11521
(Commission File Number)
SYSTEMS & COMPUTER TECHNOLOGY CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 23-1701520
(State or other jurisdiction (I.R.S. Employer
of incorporation) Identification No.)
Great Valley Corporate Center
4 Country View Road
Malvern, Pennsylvania 19355
(Address of principal executive offices)
Registrant's telephone number, including area code: (610) 647-5930
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes /X/ No / /
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes /X/ No / /
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
33,617,000 Common shares, $.01 par value, as of February 11, 2003
Page 1 of 33 consecutively numbered pages
SYSTEMS & COMPUTER TECHNOLOGY CORPORATION AND SUBSIDIARIES
INDEX
PART I. UNAUDITED FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets -
December 31, 2002 and September 30, 2002
Condensed Consolidated Statements of Operations -
Three Months Ended December 31, 2002 and 2001
Condensed Consolidated Statements of Cash Flows -
Three Months Ended December 31, 2002 and 2001
Notes to Condensed Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures
About Market Risk
Item 4. Controls and Procedures
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Item 6. Exhibits and Reports on Form 8-K
SIGNATURES
2
SYSTEMS & COMPUTER TECHNOLOGY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except per share amounts)
December 31, September 30,
2002 2002
(UNAUDITED) (NOTE)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 39,199 $ 72,820
Short-term investments, including
accrued interest of $159 and $701 18,146 60,754
Receivables, including $47,017 and
$41,446 of earned revenues in
excess of billings, net of allowance
for doubtful accounts of $4,994 and
$4,789 84,393 77,824
Prepaid income taxes 16,574 20,353
Prepaid expenses and other assets 17,282 16,757
----------- -----------
TOTAL CURRENT ASSETS 175,594 248,508
PROPERTY AND EQUIPMENT--at cost, net
of accumulated depreciation 28,569 27,265
CAPITALIZED COMPUTER SOFTWARE COSTS,
net of accumulated amortization 3,879 4,427
GOODWILL 45,467 28,784
INTANGIBLE ASSETS, net of accumulated
amortization 20,726 10,689
OTHER ASSETS AND DEFERRED CHARGES 24,183 15,169
NET ASSETS OF DISCONTINUED OPERATIONS 28,495 31,805
----------- -----------
TOTAL ASSETS $ 326,913 $ 366,647
=========== ===========
Note: The condensed consolidated balance sheet at September 30, 2002, has
been derived from the audited financial statements at that date.
See notes to condensed consolidated financial statements.
3
SYSTEMS & COMPUTER TECHNOLOGY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (continued)
(in thousands, except per share amounts)
December 31, September 30,
2002 2002
(UNAUDITED) (NOTE)
LIABILITIES & STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 4,919 $ 6,402
Income taxes payable 1,180 1,096
Accrued expenses 39,142 37,995
Deferred revenue 23,989 24,948
----------- -----------
TOTAL CURRENT LIABILITIES 69,230 70,441
LONG-TERM DEBT, less current portion 33,790 74,723
OTHER LONG-TERM LIABILITIES 2,912 2,912
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
38,138 and 38,029 381 380
Capital in excess of par value 126,021 125,586
Retained earnings 119,841 117,622
Accumulated other comprehensive loss (939) (583)
----------- -----------
245,304 243,005
Less
Held in treasury, 4,567 and 4,582 common
share--at cost (24,323) (24,434)
----------- -----------
220,981 218,571
----------- -----------
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY $ 326,913 $ 366,647
=========== ===========
Note: The condensed consolidated balance sheet at September 30, 2002, has
been derived from the audited financial statements at that date.
See notes to condensed consolidated financial statements.
4
SYSTEMS & COMPUTER TECHNOLOGY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(in thousands, except per share amounts)
For the Three Months Ended
December 31,
2002 2001
Revenues:
Software sales and commissions $ 10,994 $ 6,056
Maintenance and enhancements 22,033 18,964
Software services 19,727 16,099
Outsourcing services 8,276 8,353
Interest and other income 1,945 1,497
----------- -----------
62,975 50,969
----------- -----------
Expenses:
Cost of software sales, commissions,
maintenance and enhancements 16,512 11,442
Cost of software services 17,653 13,904
Cost of outsourcing services 6,104 6,666
Selling, general and administrative 18,865 14,656
Interest expense 504 1,046
----------- -----------
59,638 47,714
----------- -----------
Income from continuing operations
before income taxes 3,337 3,255
Provision for income taxes 1,335 1,361
----------- -----------
Income from continuing operations 2,002 1,894
Discontinued operations
Income (loss) from discontinued operations,
adjusted for applicable provision (benefit)
for income taxes of $144 and ($986) 217 (1,332)
----------- -----------
Income (loss) from discontinued operations 217 (1,332)
----------- -----------
Net income $ 2,219 $ 562
----------- -----------
Income from continuing operations
per common share $ 0.06 $ 0.06
per share -- assuming dilution $ 0.06 $ 0.06
Income (loss) from discontinued operations
per common share $ 0.01 $ (0.04)
per share -- assuming dilution $ 0.01 $ (0.04)
Net income
per common share $ 0.07 $ 0.02
per share -- assuming dilution $ 0.07 $ 0.02
Common shares and equivalents outstanding
average common shares 33,531 33,068
average common shares -- assuming dilution 33,606 33,471
See notes to condensed consolidated financial statements.
5
SYSTEMS & COMPUTER TECHNOLOGY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(in thousands)
For the Three Months Ended
December 31,
2002 2001
Operating Activities
Net income $ 2,219 $ 562
Adjustment to reconcile net income to net
cash used in operating activities
Gain on bond repurchase (1,350) --
Depreciation and amortization 3,772 5,306
Changes in operating assets and liabilities:
(Increase) decrease in receivables (3,131) 6,686
(Increase) decrease in prepaid income taxes 3,779 (8,154)
Increase in other current assets (797) (1,516)
Decrease in accounts payable (1,483) (3,521)
Increase (decrease) in income taxes payable 84 (6,716)
Decrease in accrued expenses (9,745) (5,348)
Increase (decrease) in deferred revenue (3,523) 2,842
Decrease in other operating assets
and deferred charges 1,357 426
Decrease in net assets of discontinued operations 3,310 --
--------- ---------
NET CASH USED IN OPERATING ACTIVITIES (5,508) (9,433)
Investing Activities
Purchase of property & equipment (1,639) (1,161)
Capitalized computer software costs -- (278)
Purchase of investments available for sale (5,854) (57,099)
Proceeds from the sale or maturity of investments
available for sale 47,779 21,835
Purchase of subsidiary assets, net of cash acquired (27,032) (527)
--------- ---------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 13,254 (37,230)
Financing Activities
Repayment of borrowings (41,911) (188)
Issuance of Company stock 111 105
Proceeds from exercise of stock options 433 504
--------- ---------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES (41,367) 421
DECREASE IN CASH & CASH EQUIVALENTS (33,621) (46,242)
CASH & CASH EQUIVALENTS AT BEGINNING OF PERIOD 72,820 101,475
--------- ---------
CASH & CASH EQUIVALENTS AT END OF PERIOD $ 39,199 $ 55,233
========= =========
See notes to condensed consolidated financial statements.
6
SYSTEMS & COMPUTER TECHNOLOGY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE A--BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 1O-Q and Rule 10-01 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
only of normal recurring accruals) considered necessary for a fair presentation
have been included. For further information, refer to the consolidated financial
statements and footnotes thereto included in the Company's Annual Report on Form
10-K for the year ended September 30, 2002. During the quarter ended June 30,
2002, the Company announced the discontinuation of the Global Energy and
Utilities Solutions ("EUS") business. The EUS business is accounted for as a
discontinued operation, and accordingly, amounts in the condensed consolidated
balance sheets and condensed consolidated statements of operations and related
notes for all periods presented reflect discontinued operations accounting. Also
during the quarter ended June 30, 2002, the Company completed the sale of the
Global Manufacturing & Distribution Solutions ("MDS") business. The fiscal year
2002 condensed consolidated statement of operations reflects the MDS business as
a discontinued operation. Operating results for the three-month period ended
December 31, 2002, are not necessarily indicative of the results that may be
expected for the year ending September 30, 2003.
The statement of cash flows for the three-month period ending December 31, 2002
shows the EUS business as a discontinued operation. The statement of cash flows
for the prior year period is based on historical information and has not been
restated to present the MDS and EUS businesses as discontinued operations.
NOTE B--ACCOUNTING FOR 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"). No stock-based employee compensation cost is reflected in
net income, as all options granted under the option plans had an exercise price
equal to the market value of the underlying common stock on the date of grant.
The following table illustrates the effect on net income and earnings per share
as if the Company had applied the fair value recognition provisions of Statement
of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation," to stock-based employee compensation (in thousands, except per
share amounts).
For the three months ended
December 31,
2002 2001
-------------------------------
Net income, as reported $ 2,219 $ 562
Less: stock-based employee compensation
expense determined under fair value method,
Net of related tax effects (571) (478)
------------------------------
Pro forma net income $ 1,648 $ 84
==============================
7
Earnings per share:
per common share, as reported $ 0.07 $ 0.02
per common share, pro forma $ 0.05 $ 0.00
per share--assuming dilution, as reported $ 0.07 $ 0.02
per share--assuming dilution, pro forma $ 0.05 $ 0.00
NOTE C--CASH AND SHORT-TERM INVESTMENTS
Cash equivalents are short-term, highly liquid investments with maturities of
three months or less at the date of purchase.
Short-term investments consist of corporate and municipal debt securities.
Management determines the appropriate classification of the securities at the
time of purchase. At December 31, 2002, the portfolio of securities has been
classified as available for sale. These securities are carried at fair value,
based on quoted market values, with the unrealized gains and losses, net of
income taxes, reported as a component of accumulated other comprehensive loss.
The available-for-sale portfolio is comprised of highly liquid investments
available for current operations and general corporate purposes and,
accordingly, is classified as a current asset.
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 on sales of available-for-sale securities were approximately $0.3 million
for the three months ended December 31, 2002.
Short-term investments at December 31, 2002, are comprised of (in thousands):
State and municipal securities $ 7,323
Corporate securities 10,823
---------
$ 18,146
=========
The contractual maturities of short-term investments held as of December 31,
2002, are (in thousands):
Due in one year or less $ 14,592
Due after one year through four years 3,554
---------
$ 18,146
=========
NOTE D--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 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.
During fiscal years 2001 and 2002, the Company recorded asset impairment charges
totaling $13.2 million and wrote-off the non-compete agreement with WebCT, which
had a carrying value of $1.5 million, reducing the carrying value of the
investment in WebCT to $4.0 million, which is included in other assets and
deferred charges in the condensed consolidated balance sheet. At December 31,
2002, the Company owns approximately 11% of the voting shares of WebCT.
8
NOTE E--RETIREMENT AND RESTRUCTURING CHARGES
In the second quarter of fiscal year 2002, Michael J. Emmi, former President,
Chief Executive Officer, and Chairman of the Board of Directors retired from the
Company. 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. During the first
quarter of fiscal year 2003, the Company made payments of $0.03 million related
to these charges and at December 31, 2002, $0.6 million of the accrual remains,
which the Company believes is adequate to cover remaining obligations.
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 that quarter, the Company recorded a charge of $1.4 million
related to severance payments and disposition of assets. During the first
quarter of fiscal year 2003, the Company made payments of $0.1 million related
to these charges and at December 31, 2002, $0.3 million of the accrual remains,
which the Company believes is adequate to cover remaining obligations.
NOTE F--ACQUISITIONS
Effective October 23, 2002, the Company acquired Campus Pipeline, Inc. 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.
The allocation of the Campus Pipeline purchase price is as follows (in
thousands):
Total cost of Campus Pipeline acquisition $ 36,391
Employee bonus and severance obligations 5,191
Accrued acquisition costs 6,993
---------
48,575
Net tangible assets acquired 11,598
Customer relationships 6,000
Purchased software 3,000
Trade names and trademarks 2,000
Deferred taxes 9,295
---------
31,893
Total goodwill $ 16,682
9
The Company recorded goodwill of $16.7 million related to the acquisition, none
of which is deductible for tax purposes. Goodwill includes $7.0 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 $6.0 million of customer relationships, $3.0 million of purchased
software and $2.0 million of trade names and trademarks. Intangible assets
acquired have a weighted-average amortization period of eight years.
Additionally the Company recorded a deferred tax asset of $9.3 million primarily
to reflect the future benefit of net operating losses of Campus Pipeline. The
acquired net operating losses will be used to offset the Company's future
taxable income and expire in various periods ending on or before September 30,
2022. The completion of this transaction provides the Company with 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.
Concurrent with the acquisition of Campus Pipeline, the Company began a detailed
evaluation of Campus Pipeline's operations, resulting in a plan to terminate
approximately 35 redundant employees and vacate space in a leased facility. The
Company provided a reserve of $2.7 million, included in the $7.0 million accrued
acquisition costs discussed above, for these actions and anticipates making
payments for severance through the third quarter of fiscal year 2003 and for the
leased facility through fiscal year 2004. Additionally the Company assumed
certain employee bonus and severance obligations totaling $5.2 million and
anticipates making payments on these obligations through fiscal year 2003. At
December 31, 2002, approximately $6 million of these accruals remain.
The following table discloses the pro forma effect of the Campus Pipeline
acquisition as if it had occurred on October 1, 2002 and October 1, 2001, the
beginning of the three month periods ending on December 31, 2002 and 2001,
respectively. The information included in the pro forma disclosures is unaudited
and is based on historical information and includes adjustments having a
continuing impact on the consolidated company as a result of using the purchase
method of accounting for the acquisition. The adjustments are based on the most
recent information available and certain management judgments. Pro forma results
of operations are not necessarily indicative of the results of operations that
would have occurred had the acquisition been made on the date above or the
results which may occur in the future.
Three Months
Ended December 31,
2002 2001
---- ----
(in thousands)
Revenue $63,402 $52,064
Income from continuing operations 952 (2,393)
Net income 1,169 (3,725)
Net income per share - assuming dilution $0.03 $(0.11)
10
NOTE G--DIVESTITURES
During the third quarter of fiscal year 2002, the Company declared the Global
Energy and Utilities Solutions ("EUS") business as discontinued. On February 12,
2003, the Company signed a definitive agreement to sell the EUS business to
Indus International, Inc. for $39 million, subject to adjustment based on the
working capital of the business at closing, which is expected to be before March
31, 2003. The EUS business is treated as a discontinued operation in the
consolidated balance sheet, consolidated statement of operations, consolidated
statement of cash flows, and related footnotes. The Company expects to recognize
a gain on the sale of the EUS business. The prior year consolidated statement of
operations has been restated to present EUS as a discontinued operation. For
business segment reporting, EUS was previously reported as a separate segment.
Revenues from the EUS business were $14.9 and $19.5 million for the three-month
periods ending December 31, 2002 and 2001, respectively. The net assets of
discontinued operations at September 30, 2002, were $31.8 million. Net assets of
the discontinued operation were $28.5 million as of December 31, 2002, comprised
of the following (in thousands):
Accounts receivable $ 11,187
Prepaid expenses and other receivables 820
Property and equipment 15,323
Capitalized computer software costs 3,285
Goodwill 1,056
Intangible assets 1,727
Deferred taxes and other assets 3,880
Current liabilities (8,783)
-----------
Net Assets of Discontinued Operations $ 28,495
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 $3.5 million of labor hours at agreed upon
labor rates, which approximate the Company's fully costed labor rates.
NOTE H--EARNINGS PER SHARE
A reconciliation of the numerators and the denominators of earnings per common
share and per share -- assuming dilution follows (in thousands, except per share
amounts):
For the three months ended
December 31,
2002 2001
---- ----
Numerator:
Income from continuing operations
available to common stockholders $2,002 $ 1,894
Discontinued operations:
Income (loss) from discontinued
operations net of income taxes 217 (1,332)
------ -------
Net income available to common
stockholders $2,219 $ 562
============================
11
Denominator:
Weighted average common shares 33,531 33,068
Effect of dilutive securities:
Employee stock options 75 403
------ ------
Weighted average common shares
assuming dilution 33,606 33,471
============================
Income from continuing operations
Per common share $0.06 $0.06
Per share -- assuming dilution $0.06 $0.06
Income (loss) from discontinued operations
Per common share $0.01 ($0.04)
Per share -- assuming dilution $0.01 ($0.04)
Net income
Per common share $0.07 $0.02
Per share -- assuming dilution $0.07 $0.02
Potentially dilutive securities with an anti-dilutive effect (convertible debt
in both periods presented) are not included in the above calculation.
NOTE I--PRODUCT DEVELOPMENT
Product development expenditures, including software maintenance expenditures,
for the three months ended December 31, 2002 and 2001, were approximately $8.0
and $6.5 million, respectively, all of which were charged to operations as
incurred. For the same periods, amortization of capitalized software costs (not
included in expenditures above) amounted to $0.5 and $0.7 million, respectively.
NOTE J--BUSINESS SEGMENTS
As a result of the discontinuation of the Global Energy and Utilities Solutions
business at the end of third quarter of fiscal year 2002 and the sale of the
Global Manufacturing & Distribution Solutions business on May 31, 2002, the
Company currently has one reportable segment: Global Education Solutions
("GES"). The financial statements presented above, exclusive of discontinued
operations, reflect the operations of the Global Education Solutions business.
NOTE K--COMPREHENSIVE INCOME
(in thousands)
Three Months Ended
December 31,
2002 2001
---- ----
Net income $2,219 $562
Foreign currency translation adjustment (92) (86)
Unrealized gain (loss) on marketable
securities (264) 79
----------------------------
Other comprehensive loss (356) (7)
----------------------------
Total Comprehensive Income $1,863 $555
============================
12
NOTE L--GOODWILL AND INTANGIBLE ASSETS
Effective October 1, 2001, the Company adopted Statement of Financial Accounting
Standards No. 142, "Goodwill and Other Intangible Assets," which resulted in
discontinuing the amortization of goodwill. Under the Statement, goodwill is
instead carried at its book value as of October 1, 2001, and any future
impairment of goodwill will be recognized as an operating expense in the period
of impairment. However, under the terms of the Statement, identifiable
intangibles with identifiable lives will continue to be amortized.
The Company's goodwill was $45.5 and $28.8 million at December 31, 2002, and
September 30, 2002, respectively. The increase in goodwill at December 31, 2002,
is the result of the Campus Pipeline acquisition (see Note F). 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):
December 31, 2002 September 30, 2002
Gross Carrying Accumulated Gross Carrying Accumulated
Amount Amortization Amount Amortization
------ ------------ ------ ------------
Amortized intangible assets
Purchased software 15,462 (5,144) 12,462 (4,558)
Covenants-not-to-compete 6,065 (5,862) 6,065 (5,687)
Customer relationships 7,652 (265) 1,652 (110)
Trade names and trademarks 2,000 (47) -- --
--------------------------------- ----------------------------------
31,179 (11,318) 20,179 (10,355)
================================= ==================================
Unamortized intangible assets
Trade names and trademarks 865 865
--------- ------------
865 865
========= ============
Estimated amortization expense for amortized intangible assets for the next five
fiscal years ending September 30, are as follows (in thousands):
Fiscal Year
2003 $ 3,741
2004 3,413
2005 3,401
2006 3,401
2007 2,350
thereafter 4,518
-------
Total $20,824
Amortization expense on intangible assets was $1.0 and $0.2 million for the
three months ended December 31, 2002 and 2001, respectively.
NOTE M--BOND REPURCHASE
In several transactions during the first quarter of fiscal year 2003, 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
recorded a gain of $1.3 million, included in interest and other income, in the
first quarter of fiscal year 2003 related to these transactions. The gain was
13
classified as interest and other income as a result of the Company's adoption of
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"), at the beginning of fiscal year 2003. SFAS 145
requires 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.
14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The purpose of this section is to give interpretive guidance to the reader of
the financial statements. The following discussion excludes the results of the
Global Energy and Utilities Solutions ("EUS") and Global Manufacturing &
Distribution Solutions ("MDS") businesses as they were classified as
discontinued operations in fiscal year 2002.
RESULTS OF OPERATIONS
The following table sets forth: (i) income statement items as a percentage of
total revenues and (ii) the percentage change for each item from the prior-year
comparative period.
% of Total Revenue
Three Months Ended % Change from
December 31, Prior Year
2002 2001 2002
---- ---- ----
Revenues
Software sales and commissions 18% 12% 82%
Maintenance and enhancements 35% 37% 16%
Software services 31% 32% 23%
Outsourcing services 13% 16% (1)%
Interest and other income 3% 3% 30%
--------------------- -------------
Total 100% 100% 24%
===================== =============
Expenses
Cost of software sales, commissions,
services, and maintenance
and enhancements 64% 63% 26%
Selling, general and administrative 30% 29% 29%
Interest expense 1% 2% (52)%
Income from continuing operations
before income taxes 5% 6% 3%
===================== =============
The following table sets forth the gross profit for each of the following
revenue categories as a percentage of revenue for each such category and the
total gross profit as a percentage of total revenue (excluding interest and
other income). The Company does not separately present the cost of maintenance
and enhancements revenue as it is impracticable to separate such cost from the
cost of software sales.
Three Months Ended
December 31,
2002 2001
---- ----
Gross Profit
Software sales and maintenance
and enhancements 50% 54%
Software services 11% 14%
Outsourcing services 26% 20%
------------------
Total 34% 35%
==================
15
Revenues:
- ---------
o Software sales and commissions revenue increased 82% compared to the
prior-year period due to increases in traditional Banner license fees and
the results of the first quarter fiscal year 2003 Campus Pipeline, Inc. and
second quarter fiscal year 2002 Applied Business Technologies, Inc. ("ABT")
acquisitions, which provided approximately 37% and 20%, respectively, of
the increase.
o The 16% increase in maintenance and enhancements revenue in the first three
months of fiscal year 2003 was 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
and the first quarter fiscal year 2003 acquisition of Campus Pipeline
provided 51% 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 23% in the first three months of fiscal
year 2003 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 and the Campus Pipeline acquisition in the
first quarter of fiscal year 2003.
o Outsourcing services revenue decreased 1% in the first quarter of fiscal
year 2003 compared with the prior-year period. This decrease is primarily
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.
o The increase in interest and other income in the first quarter of fiscal
year 2003 compared with the prior year period is the result of the $1.3
million gain on the repurchase of $40.9 million face value of the Company's
$74.7 million, 5% convertible subordinated debentures due October 15, 2004.
This increase was offset by decreased interest income earned on the
Company's decreased cash and short-term investments balances.
Gross Profit:
- -------------
Total gross profit decreased as a percentage of total revenue (excluding
interest and other income) from 35% for the first quarter of fiscal year 2002 to
34% for the first quarter of fiscal year 2003. The software sales, commissions,
maintenance, and enhancements gross profit percentage decreased primarily as a
result of the separate development efforts related to the ABT and Sallie Mae
products acquired in fiscal year 2002 and the Campus Pipeline products acquired
in the first quarter of fiscal year 2003. The software services margin decreased
in the three-month period ending December 31, 2002, compared with the prior-year
period as a result of decreased utilization. The services utilization decrease
is primarily the result of a disparity between client requirements of the
Company's growing backlog of services contracts and the Company's available
resources. The Company is developing methods to better analyze services backlog
and anticipates improved services margins over the year. The outsourcing
services margin increased in the fiscal year 2003 period primarily as a result
of contract renewals and increased utilization of outsourcing professionals.
16
Selling, General and Administrative Expenses:
- ---------------------------------------------
Selling, general and administrative expenses increased in fiscal year 2003
compared with fiscal year 2002 as a result of (i) amortization and employee
costs related to the ABT and Sallie Mae business acquisitions in the second
quarter of fiscal year 2002 and the Campus Pipeline acquisition in the first
quarter of fiscal year 2003, (ii) investments the Company has made in its sales
and marketing organizations, and (iii) increased sales commissions as a result
of increased revenues.
Discontinued Operations:
- ------------------------
During fiscal year 2002, the Company declared the Global Energy and Utilities
Solutions ("EUS") and the Global Manufacturing & Distribution Solutions ("MDS")
businesses as discontinued. The MDS business was sold on May 31, 2002, and, as a
result, the fiscal year 2003 income from discontinued operations includes only
the results of the EUS business. The fiscal year 2002 loss from discontinued
operations includes the results of the EUS and the MDS businesses, which, net of
taxes were $0.6 million and ($1.9) million, respectively.
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.
Liquidity, Capital Resources, and Financial Position
The Statement of Cash Flows for the three-month period ending December 31, 2002
shows the EUS business as a discontinued operation. The Statement of Cash Flows
for the prior year period is based on historical information and has not been
restated to present the MDS and EUS businesses as discontinued operations.
The Company's cash and short-term investments balance was $57.3 million as of
December 31, 2002 and $133.6 million as of September 30, 2002. The cash balances
decreased primarily as a result of the acquisition of Campus Pipeline and the
repurchase of the Company's convertible subordinated debentures in the quarter
ending December 31, 2002. The Company anticipates using its cash and short-term
investments balance to fund future growth through various means, including
strategic alliances and acquisitions.
Cash used in operating activities was $5.5 million in the first quarter of
fiscal year 2003 compared with $9.4 million used in the prior-year period. The
primary uses of cash in the fiscal year 2003 period were decreased accrued
expenses, decreased deferred revenue, and increased accounts receivable offset
by decreased prepaid income taxes and net assets of discontinued operations. The
decrease in accrued expenses is primarily the result of employee bonus and other
payments, interest paid on the Company's convertible debentures, and payments
related to the Company's legal matters discussed below. The increases in
accounts receivable at December 31, 2002 compared to September 30, 2002, are
primarily the result of the timing of billings on software licenses and a
seasonal decline in collections in December. The Company is working to implement
17
actions directed at improving payment terms and reducing days sales outstanding.
Prepaid income taxes decreased as a result of a refund received in the first
quarter of fiscal year 2003 and net assets of discontinued operations decreased
primarily as a result of collections on accounts receivable of the discontinued
business. Cash expenditures for the first three months of fiscal year 2003
related to retirement and restructuring charges (which are included in operating
activities) were approximately $0.2 million, and are expected to be
approximately $0.5 million for the remainder of fiscal year 2003 and $0.4
million in total for all subsequent years, principally for severance costs.
Cash provided by investing activities was $13.3 million for the first quarter of
fiscal year 2003 compared with cash used of $37.2 million for the fiscal year
2002 period. Net cash of $41.9 million was provided by the sale or maturity of
investments available for sale offset by $27.0 million used for the purchase of
Campus Pipeline in October 2002.
The $41.4 million in cash used in financing activities was primarily the
repayment of $40.9 million of the Company's 5% convertible subordinated
debentures due October 15, 2004.
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
December 31, 2002 or September 30, 2002. 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
December 31, 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.
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 December 31, 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 several transactions in the first quarter of
fiscal year 2003, the Company repurchased $40.9 million face value of the $74.7
million debentures. 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 recorded a gain of $1.3 million, included in
interest and other income, in the first quarter of fiscal year 2003 related to
these transactions. If the remaining debentures outstanding were converted, 1.3
million additional shares would be added to common shares outstanding at
December 31, 2002. The debentures were antidilutive for the fiscal year 2003 and
2002 periods and therefore are not included in the 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 for these periods.
At December 31, 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, $0.2 million and one year through three years, $11.2 million.
18
At December 31, 2002, the Company has purchase commitments with third party
software providers totaling approximately $1.9 million. The commitments are for
the purchase of license fee and related maintenance or services inventories from
the third-party provider for use or sale to the Company's clients and extend
through October 2005.
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 $2.5 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.
Contingency:
- ------------
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 fiscal year 2002 in the amount of $0.7
million against the possibility of unfavorable judgments. In the first quarter
of fiscal year 2003, 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 anticipated 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.
The Company believes that its cash and cash equivalents, short-term investments,
and borrowing arrangements should satisfy its financing needs for the
foreseeable 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: 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
19
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 $11 million at December 31, 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 $22 million at December 31, 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 $12 million at December 31, 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.
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.
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
20
accounts receivable; such amounts were approximately $2 million at December 31,
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 $8 million at December 31, 2002.
Long-Term Investments: The Company has made investments for strategic business
purposes in the common and preferred stock of WebCT, a privately held Internet
company. The fair value of this investment, which is classified as a long-term
asset, is not readily determinable; therefore, it is carried at cost adjusted
for other-than-temporary impairments. The Company recorded asset impairment
charges of $5.4 million and $7.8 million in the third quarter of fiscal year
2002 and the second quarter of fiscal year 2001, respectively. On a quarterly
basis, the Company reviews the underlying operating performance, cash flow
forecasts, private equity transactions, and stock prices and equity values of
publicly traded competitors of this privately held company in assessing
impairment. Future earnings would be reduced and earnings would be charged if
there was an additional impairment that was found to be other than temporary at
a future balance sheet date. The Company's future results of operations could be
materially affected by a future write-down in the carrying amount of this
investment to recognize an impairment loss due to an other than temporary
decline in the value of the investment.
Goodwill and Intangible Assets: 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.
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.
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
21
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, financial condition, and cash flows.
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.
A significant part of the Company's business also results from the provision of
services by the Company to clients who license the Company's software. The
Company realizes lower margins on services revenues than on license revenues.
The Company bases its expense levels in the services area on various factors,
including the Company's expectation of future license sales and its expectation
of when clients who have licensed the Company's software will actually implement
the software. If software license revenues do not meet expectations, or if
clients delay implementation of software licensed, the Company's business,
results of operations, financial condition, and cash flows would be adversely
affected.
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
22
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,
financial condition, and cash flows.
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, results of operations, financial condition, and 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, and cash flows.
There can be no assurance that the Company's new products will achieve
significant market acceptance or will generate significant revenue. Additional
products that the Company plans to directly or indirectly market in the future
are in various stages of development.
Intense competition in the 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, and 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
23
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 Campus Pipeline and Luminus solutions and the Company's Banner
Student Self-Service and Banner Faculty and Advisor Self-Service 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
business, results of operations, financial condition, and cash flows 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 business, results of operations, financial condition, and cash
flows 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
proportional performance 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
24
the Company chooses will position its products to compete effectively for
business opportunities as they arise on the Internet and in other emerging
areas.
The Company relies on a combination of copyright, trademark, trade secrets,
confidentiality procedures, and contractual procedures to protect its
intellectual property rights. Despite the Company's efforts to protect its
intellectual property rights, it may be possible for unauthorized third parties
to copy certain portions of the Company's products, or to reverse engineer or
obtain and use technology or other Company-proprietary information. There can
also be no assurances that the Company's intellectual property rights would
survive a legal challenge to their validity or provide significant protection to
the Company. In addition, the laws of certain countries do not protect the
Company's proprietary rights to the same extent as do the laws of the United
States. Accordingly, there can be no assurance that the Company will be able to
protect its proprietary technology against unauthorized third-party copying or
use, which could adversely affect the Company's competitive position.
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, 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 business, financial condition,
cash flows, and results of operations.
On May 31, 2002, the Company consummated the sale of its process manufacturing
software business to Agilisys International Limited. The Company agreed to sell
substantially all of the assets of the process manufacturing software 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.
On February 12, 2003, the Company signed a definitive agreement to sell the
Global Energy and Utilities Solutions ("EUS") business to Indus International,
Inc. for $39 million, subject to adjustment based on the working capital of the
business at closing, which is expected to be before March 31, 2003. The Company
expects to recognize a gain on the sale of the EUS business. The consummation of
the transaction is subject to the receipt by the purchaser of necessary
financing and certain closing conditions and required approvals.
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
25
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 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no material changes in quantitative or qualitative disclosures
for fiscal year 2003. Reference is made to Item 7A in the Annual Report on Form
10-K for the year ended September 30, 2002.
ITEM 4. 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 Quarterly Report on
Form 10-Q (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.
26
SYSTEMS & COMPUTER TECHNOLOGY CORPORATION AND SUBSIDIARIES
PART II
Item 1. Legal Proceedings
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 that may result would not materially affect the Company's consolidated
financial statements.
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 fiscal year 2002 in the amount of $0.7
million against the possibility of unfavorable judgments. In the first quarter
of fiscal year 2003, 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 anticipated 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.
The Company from time to time is involved in legal proceedings and litigation
arising in the ordinary course of business. In the opinion of management, the
outcome of such proceedings and litigation currently pending will not materially
affect the Company's consolidated financial statements.
Item 6 (a). Exhibits
Exhibit 10.1 Eleventh Amendment and Modification to Credit Agreement dated
as of October 18, 2002, among Systems & Computer Technology
Corporation and SCT Software & Resource Management Corporation
as Borrowers and Citizens Bank of Pennsylvania, successor to
Mellon Bank, N.A.
Exhibit 10.2 Subsidiary Guaranty Agreement dated as of October 18, 2002,
between Campus Pipeline, Inc. as Guarantor and Citizens Bank of
Pennsylvania, successor to Mellon Bank, N.A.
Exhibit 10.3 Explanation and Waiver of Rights Regarding Confession of
Judgment (Surety) dated as of October 23, 2002, between Campus
Pipeline, Inc. as Obligor and Citizens Bank of Pennsylvania,
successor to Mellon Bank, N.A.
Exhibit 99.1 Certification of Chief Executive Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes Oxley Act of 2002.
Exhibit 99.2 Certification of Chief Financial Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes Oxley Act of 2002.
27
Item 6 (b). Reports on Form 8-K
On November 5, 2002, the Company filed a Current Report on Form 8-K announcing
that on October 23, 2002 (the "Effective Time"), CPI Acquisition Company, Inc.,
a Delaware corporation ("Acquisition Sub"), merged with and into Campus
Pipeline, Inc., a Delaware corporation ("Campus Pipeline"), pursuant to an
Agreement and Plan of Merger (the "Merger Agreement") dated September 30, 2002,
by and among Systems & Computer Technology Corporation, a Delaware corporation
(the "Company"), Campus Pipeline and Acquisition Sub (the "Merger"). Pursuant to
the Merger Agreement, Campus Pipeline was to be the surviving company in the
Merger, and at the Effective Time, became a wholly-owned subsidiary of the
Company.
28
SYSTEMS & COMPUTER TECHNOLOGY CORPORATION AND SUBSIDIARIES
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SYSTEMS & COMPUTER TECHNOLOGY CORPORATION
(Registrant)
Date: 02/14/03 /s/ Eric Haskell
________________________________
Eric Haskell
Executive Vice President, Finance & Administration,
Treasurer, and Chief Financial Officer
29
CERTIFICATIONS
CEO CERTIFICATION
I, Michael D. Chamberlain, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Systems & Computer
Technology Corporation (the "Company");
2. Based on my knowledge, this quarterly 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 quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly 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 quarterly 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 quarterly 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
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly 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
6. The Company's other certifying officers and I have indicated in this
quarterly 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.
30
Date: February 14, 2003
/s/ Michael D. Chamberlain
_______________________________________
Michael D. Chamberlain, President and Chief
Executive Officer
31
CFO CERTIFICATION
I, Eric Haskell, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Systems & Computer
Technology Corporation (the "Company");
2. Based on my knowledge, this quarterly 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 quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly 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 quarterly 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 quarterly 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
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly 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
6. The Company's other certifying officers and I have indicated in this
quarterly 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.
32
Date: February 14, 2003
/s/ Eric Haskell
_________________________________________
Eric Haskell, Executive Vice President, Finance
& Administration, Treasurer and Chief Financial
Officer
33