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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, 1998 Commission File No. 0-11521
SYSTEMS & COMPUTER TECHNOLOGY CORPORATION
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(Exact name of registrant as specified in its charter)
Delaware 23-1701520
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(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
4 Country View Road
Malvern, Pennsylvania 19355
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(Address of principal executive offices)
Registrant's telephone number, including area code: (610) 647-5930
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
5% Convertible Subordinated Debentures Due 2004
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
State the aggregate market value of the voting stock held by non-affiliates of
the registrant. The aggregate market value shall be computed by reference to the
price at which the stock was sold, or the average bid and asked prices of such
stock, as of a specified date within 60 days prior to the date of filing.
$616,857,921 at December 15, 1998
Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practicable date.
36,287,840 shares at December 15, 1998
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 26, 1999 is incorporated by reference to the extent provided in Part
III, Items 10-13.
TABLE OF CONTENTS
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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 13
PART II
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Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters 14
Item 6. Selected Financial Data 14
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operation 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 44
PART III
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Item 10. Directors and Executive Officers of the Registrant 45
Item 11. Executive Compensation 45
Item 12. Security Ownership of Certain Beneficial Owners and
Management 45
Item 13. Certain Relationships and Related Transactions 45
PART IV
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Item 14. Exhibits, Financial Statement Schedules and Reports on
Form 8-K 46
PART I
ITEM 1. BUSINESS.
Systems & Computer Technology Corporation ("SCT" or the "Company"),
incorporated in Delaware in 1968, develops, licenses, and supports a suite of
client/server, enterprise software and provides a range of information
technology services, including outsourcing, systems implementation, systems
integration and maintenance and enhancements. The Company's primary markets are
higher education, manufacturing and distribution, utilities and local
government.
The Company's software and services allow clients to enhance their
ability to compete through improved quality of information. The Company's focus
on four vertical markets enables it to develop and utilize a base of industry
expertise to deliver products and services which address specific client
requirements. By offering a continuum of information technology solutions
ranging from application software to large-scale outsourcing contracts, the
Company makes available technology and management tools to enable clients to
manage information resources efficiently and cost-effectively.
BANNER(R) and SCT(R) are registered trademarks of the Company,
ADAGE(TM), Fygir(TM), BANNERQuest(TM), Banner2000(TM), Plus2000(TM), SCT
Aspire(TM), and BANNER Object:Access(TM) are trademarks of the Company and
SinglePoint Solutions(sm), CourtConnect(sm), and OnSite(sm) are service marks
of the Company. All other trade names referenced herein are the service marks,
trademarks or registered trademarks of their respective companies or
organizations.
Markets
In fiscal year 1998, approximately 40% of the Company's revenues was
derived from the higher education market, approximately 19% was derived from the
local government market, approximately 21% was derived from the utility market,
and approximately 17% was derived from the manufacturing/distribution market.
The principal markets for the Company's offerings are in the United States. In
fiscal year 1998, the Company's foreign operations represented approximately 3%
of revenues and the Company's export sales represented approximately 5% of
revenues.
Higher Education
The Company provides information technology services and application
software to higher education institutions. SCT has developed substantial
functional knowledge and technical expertise about the information technology
requirements of higher education institutions.
SCT targets the 2,200 English speaking institutions of higher education
with enrollments greater than 2,000 students for its software and services. Many
of these targeted customers are currently using computer systems which are
likely prospects for replacement, as they are less cost effective and require a
higher level of maintenance than systems that the Company provides. The Company
serves this market with its Banner2000, Plus2000, SCT Aspire and Web
administrative software and SCT's services. Approximately 300 of these
institutions are potential candidates for SCT's OnSite services.
Local Government
The Company serves its target market of approximately 1,000 local
government entities primarily with its BANNER Courts application software
product, AS400 administrative systems, and SCT's services. Local governments,
which are conservative in their decisions regarding capital expenditures and
long-term contracts, are influenced by the acceptance by other local governments
of a particular company's product or service.
Utilities
The Company provides administrative application software and services
to the utility market. SCT's target market includes approximately 1,000 water,
gas and electric utilities. The Company believes that deregulation of the
utility market is driving significant investment in information technology and
customer services. Clients range from mid-size municipalities to investor-owned
utilities serving millions of customers.
Manufacturing and Distribution
SCT markets a suite of supply chain management software solutions for
process manufacturers and distributors. This suite includes the ADAGE software,
which is a supply chain execution system (also known as an enterprise resource
planning, or ERP, system), and the Fygir software, which is a supply chain
planning software solution that addresses advanced planning and advanced
scheduling (APS). SCT also markets services to the process manufacturing
industry. In September 1998, the Company acquired all of the issued and
outstanding stock of Fygir Logistic Information Systems, B.V. The Company
believes that ERP and APS systems are being increasingly adopted by
manufacturers in order to better manage their supply chains. SCT targets the
approximately 8,400 process manufacturers and distributors which have over $100
million in annual revenue.
Services and Products
The Company's revenues are derived from several sources: outsourcing
services, software licenses, software services, and maintenance and
enhancements.
2
Outsourcing Services
The Company provides OnSite services, which are comprised of a range of
information technology outsourcing services including end-user computing
solutions, network management, applications outsourcing, and business process
outsourcing. These services are designed to assume total or partial control and
responsibility of clients' information resources, generally on a long-term
basis. The Company provides management, staffing and support with skilled
information systems personnel and industry specialists who are knowledgeable in
both computer-based technologies and the functional aspects of clients'
activities.
SCT personnel located at a client's site become an integral part of the
client's operations, working with managers and users at all levels as a focal
point for information systems activity. SCT site personnel also draw upon SCT's
staff of specialists to address special issues and projects. SCT can manage,
staff and support most aspects of a client's information systems and operations,
including data center management and operations, disaster recovery, short-term
and long-range planning, user liaison and functional consulting, technical
support services, application and systems software support, office automation,
microcomputer maintenance, systems integration, and telecommunications services
and network integration.
Contracts for OnSite services may be either on a fixed price or time
and materials basis, and generally cover an initial period of three to ten
years. Fixed price contracts require the Company to perform specified services
for a fixed payment, generally subject to annual adjustments to reflect
inflationary cost increases. The Company negotiates the fee to be charged based
on its estimate of the total expenses to be incurred in providing the services.
In the event the Company's costs to perform an OnSite services contract become
greater than originally anticipated, the Company's profit on that contract would
be reduced; and in an extreme case, the Company could suffer a loss. As many
government and quasi government clients are restricted from incurring binding
commitments which extend beyond their current annual budgets or appropriations,
contracts often include a "fiscal funding" provision which provides for the
reduction or termination of services commensurate with reductions in a client's
allocated funding. The Company has not been impacted materially by early
terminations or reductions in service from the use of fiscal funding provisions.
The Company also offers its SinglePoint Solutions to assist utilities
and energy companies in serving the newly deregulated utility market. By
combining software applications, information technology outsourcing and
operations management, a utility or energy service company can access SCT's
customer management application software products while SCT operates the
client's back office functions.
Software Licenses
The Company develops and licenses application software to each of its
served vertical markets. The component applications of the BANNER product line
are developed for a client/server, Oracle relational database environment. The
ADAGE software, introduced to the process and hybrid manufacturing and
distribution market in 1995, is an object based, supply chain execution/ERP
system which combines client/server technology with multi-site functionality
using a number of relational database platforms including Oracle and Microsoft
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SQL Server. The Fygir software is an object based, APS system which uses
client/server technology and operates with a number of ERP relational database
platforms. The following are the Company's key application software products:
Banner2000 and Plus2000. Banner2000 is SCT's net-centric software for
administrative computing in higher education. 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
imaging and self service on the world wide web. In addition, Banner2000 offers
systems to assist with common administrative functions, including human
resources and financial management. Plus2000 offers a suite of web enabled
administrative applications to traditional mainframe and minicomputer-based
institutions.
BANNER Web Applications. SCT's Web applications address client
requirements for decentralized routine processing and inquiry while maintaining
centralized control of information and access. These applications are currently
available for the higher education market under the product names Web for
Students, Web for Employees, Web for Alumni, and Web for Faculty & Advisors.
Students can check the availability of courses, build a schedule and register on
line; apply for financial aid; apply for admissions, and determine admission
status. Information about their grades, schedules and transcripts is available
and they can query the system about their account balances and addresses.
SCT Aspire. SCT Aspire is a web-enabled distance learning product that
addresses the administrative aspects of education in the non-traditional
classroom. This distributed learning tool provides online registration, course
delivery, advising, and skills assessment independent of time and place.
BANNER for Utilities. SCT provides a suite of BANNER software
applications to gas, electric, water, waste water, refuse and other utilities.
This software is web-enabled and rule-based, can be quickly adapted for changes
in business strategy and provides utilities with customer management, marketing,
and supply chain management tools to support their changing needs and
competitive requirements. BANNER CMS assists utilities in providing customer
service, responding to customer inquiries, supporting new service offerings,
generating accurate and timely billing, and managing back office resources. The
Company introduced several new products during fiscal 1998, including BANNER
Customer Target+ for utility marketing programs; BANNER Customer Elink for
deregulated consumption and supply contract management; and BANNER Customer Web
Access for customer self-inquiry and administration.
BANNER for Government. In fiscal 1998, SCT continued to concentrate on
the changing conditions in the courts arena. SCT enhanced its BANNER Courts Case
Management product which helps streamline complex court processing including
docket management and scheduling. In addition, in fiscal 1998 the Company
introduced BANNER CourtConnect, which provides real-time internet access to
court data.
4
ADAGE and FYGIR. SCT offers its supply chain management solutions,
ADAGE supply chain execution/ERP software and Fygir supply chain planning/APS
software, to the process industries. ADAGE consists of objects configured around
industry-specific business and supply chain processes. ADAGE enables users to
integrate enterprise functions such as planning, production execution,
forecasting, procurement, formula and process management, inventory management,
customer service, customer order management, logistics, distribution, finance
and accounting. ADAGE is designed to meet the specific requirements of process
manufacturers including food and beverage, chemicals, metals, minerals, and
consumer packaged goods manufacturers on the Windows NT and UNIX platforms. The
FYGIR products suite consists of two constituent modules for Advanced Planning
and Advanced Scheduling. The FYGIR products enable users to improve their supply
chain management performance and make their manufacturing process more efficient
by applying mathematical techniques to optimize the supply chain. FYGIR is
designed to meet the specific requirements of process manufacturers including
food and beverage, chemicals, consumer packaged goods and pharmaceutical
manufacturers and runs on the Windows NT platform.
The Company currently has an agreement with Oracle Corporation allowing
the Company to sublicense a limited use ORACLE system, which enables a client to
use ORACLE with BANNER at a significantly lower cost than a full-use ORACLE
license. The agreement expires in July 2003. The Company's results of operations
could be adversely affected if ORACLE's market acceptance declined or its
customer base eroded.
Software Services
The Company provides a variety of professional support services,
including systems implementation, modification, training and support; consulting
services; and information systems planning and integration. When obtaining a
license to use SCT's application software, clients typically purchase specific
initial services, such as installation, training and other client support
activities. The Company also provides systems integration services for software
implementations that include training, data conversion, integration, and
customizations for client systems. These contracts are typically longer in term
than software support services and shorter in term than information technology
outsourcing services. The Company also markets separate service offerings which
support Year 2000 issues and disaster recovery services, allowing for scalable
contracts based upon client need.
Contracts for software services may be either on a fixed price or time
and materials basis. Fixed price contracts require the Company to perform
specified services for a fixed payment. The Company negotiates the fee to be
charged based on its estimate of the total expenses to be incurred in providing
the services. In the event the Company's costs to perform a software services
contract become greater than originally anticipated, the Company's profit on
that contract would be reduced; and in an extreme case, the Company could suffer
a loss.
5
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% of the license fee, and generally increases
each year by a specified percentage.
Product Development
Research and Development
SCT devotes substantial resources to product development in order to
address evolving clients' needs and provide new product offerings. The product
development staff is comprised of experts in various functional areas. Technical
experts include specialists in object technology, systems software, operating
systems, and relational databases. Product development expenditures, including
expenditures for software maintenance, for the fiscal years ended September 30,
1998, 1997, and 1996 were approximately $39,203,000, $25,941,000, and
$21,247,000, respectively. After capitalization approximately $31,188,000,
$18,434,000, and $14,811,000, respectively, of these amounts were charged to
operations as incurred. For the same fiscal years, amortization of capitalized
software costs (which are not included in the aforementioned amounts) amounted
to approximately $4,924,000, $2,850,000, and $1,458,000, respectively.
Development Strategies
In fiscal 1998 SCT's Object Technology Center was expanded and renamed
the Enterprise Solutions Development (ESD) group. This group will continue to
focus on developing high quality products that require less end user training
and reduce development and maintenance costs. In addition to research and
development efforts focused on technical innovation, the ESD group intends to
evaluate solutions that consider "best practices" for the markets served by the
Company. During fiscal 1998, the ESD continued development of SCT Workflow, a
business process framework that can underlie the Company's software solutions.
For the higher education market, the Company is developing Web for
Executives, and continues to enhance its Banner2000, Plus2000 and SCT Aspire
products. For the manufacturing/distribution market, the Company is developing
enhancements to its existing ADAGE and Fygir software. Currently under
development for the utilities market is a new BANNER application for Work
Management that will focus on transmission and distribution management. During
fiscal 1998, the Company entered into a development contract with The West
Group, a leading provider of information to the U.S. legal market, pursuant to
which the parties will jointly develop electronic filing capabilities for the
Banner Courts system using the WestFile electronic court document filing
service.
6
Campus Pipeline
In December, 1998 the Company purchased $2.5 million of the common
stock of Campus Pipeline Inc. ("CP Common Stock"), representing 20% of the
outstanding CP Common Stock. The Company also has options pursuant to which the
Company may purchase up to an additional $5.05 million of CP Common Stock. If
the Company exercises all its options, the Company will hold approximately 60%
of the outstanding CP Common Stock, dependent upon certain dilutive factors such
as the exercise of employee stock options and issuance of additional CP Common
Stock. The Company will have the right, under certain circumstances, to vote a
majority of the outstanding shares of CP Common Stock, to designate directors to
serve on Campus Pipeline's board of directors, and to have certain other rights
relating to CP Common Stock.
Campus Pipeline is developing a "home base" for college students,
faculty and administration that combines the elements of an Internet portal and
an intranet that conveniently integrates existing campus applications. SCT and
Campus Pipeline intend to develop an offering to the higher education market,
combining SCT's existing administrative software applications, which include key
information like course scheduling, registration, student records and the
ability to interact with professors, other students and course materials, with
the browser-based components of Campus Pipeline's product under development,
including collaboration and communications tools, personalized content, and
electronic commerce capability.
SCT also contemplates that it will be in a position to supply
universities with systems integration services to link the Campus Pipeline
product under development with current SCT applications software in the higher
education market and with other sources of content. SCT and Campus Pipeline
intend to seek alliances with other online information sources that provide
specialized, complementary content and services for the higher education market.
Development of the Campus Pipeline product is not complete. SCT's
ability to capitalize on this intended offering depends on a number of factors,
including the ability of Campus Pipeline to timely and cost-effectively complete
development of the product and the ability of the parties to integrate it with
the SCT software applications, the ability to obtain sponsors, and market
acceptance of the offering once it is completed.
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 the following means: its
own sales force of approximately 154 direct salespersons and support staff, of
which approximately 125 are engaged in selling software licenses and related
services and approximately 29 are engaged in selling the Company's OnSite,
systems integration, and certain professional services; referrals from existing
7
clients and others; and active participation in industry conferences, trade
shows and seminars within its markets. In the higher education, utilities and
manufacturing and distribution markets, the Company utilizes distributors in
certain international markets. The Company also engages in cooperative marketing
efforts with other hardware and software suppliers, and advertises in trade
journals and publications.
The sales cycle for the Company's software and services typically
ranges from six to 24 months and involves product demonstrations and site
visits. Contracts are often offered by means of a public bidding procedure,
certain of which require the Company to appear at public hearings.
Although the Company's divisions have separate sales organizations,
each focuses on cross selling opportunities to market the products and services
of the other. Each sales group is comprised of regional salespersons, industry
specialists and corporate and client based technical specialists.
Competition
In each of its markets, SCT has able competitors, which differ
depending upon the characteristics of the customer including its size,
geographic location, and computing environment. Many established competitors
have greater marketing, technical and financial resources than the Company, and
there can be no assurance that SCT will be able to continue to compete
successfully with existing or new competitors.
In the outsourcing services business, the Company competes with several
large providers of services, including International Business Machines
Corporation ("IBM") and Electronic Data Systems Corporation ("EDS"), as well as
smaller providers such as Business Records Corporation in the government market.
In the software services business, the Company competes with several large
providers of systems integration services, including IBM, EDS, Unisys, Andersen
Consulting, Cambridge Technology Partners and the so-called Big Five accounting
firms, as well as smaller providers of software consulting services. The Company
also competes with in-house information management and resource development
staffs at potential customer sites. Competitive factors in these businesses
include the technical expertise of on-site and support personnel, functional and
industry-specific expertise, availability and quality of hardware and software
support, experience, reputation and price.
In the application software business, the Company competes with other
providers of packaged application software and companies offering to develop
custom software. Competition also varies by vertical market. Within the higher
education market, the Company's principal competitors are PeopleSoft and
Datatel. The local government and utility markets are highly fragmented and
competition varies significantly within these markets depending upon the
customers' computing platforms. Competitors in the local government market
include Unisys, IBM, Progressive Solutions, Inc., Crawford Consulting, and
Justice Systems Inc. Competitors in the utilities market include SAP, Severn
8
Trent, ORCOM, SPL, IBM and Andersen Consulting. The manufacturing/distribution
market is highly competitive and competitors include SAP, PeopleSoft, Baan,
Marcam, Oracle, J.D. Edwards, Systems Software Associates, Ross, QAD Systems,
I2, Manugistics, Logility, and Numetrix. Competitive factors in all the software
markets served by the Company include price/performance, technology,
functionality, portability, software support, and the level of market acceptance
of the competitor's products.
Backlog
At September 30, 1998, the revenues expected to be received by SCT
under outsourcing services contracts, which are based on proposed budgeted
amounts in those contracts, and under software license and services agreements,
including systems integration, enhancements, maintenance, support services, and
software implementation, modification and training, amount to approximately $758
million as compared to approximately $638 million at September 30, 1997 and
extend through December 2008. Of the $758 million, approximately $300 million is
expected to be recognized in fiscal 1999. Approximately $431 million of the $758
million applies to OnSite services contracts. These figures include, in
connection with OnSite services contracts, any guaranteed minimum price
increases provided in the contracts.
SCT is unable to predict the impact, if any, on its future revenues
that may result from reductions in the budgets of customers in its targeted
markets. Any such reductions could impact new contracts as well as existing
contracts. Certain educational institutions and government jurisdictions cannot
contractually commit beyond the fiscal year for which their budgets have been
approved. For this reason, their contracts with SCT usually contain a "fiscal
funding" clause which provides that if there is a reduction in the computing
services budget, the level of SCT services will be reduced accordingly, or
terminated in certain circumstances. If there is a substantial reduction in the
budget, SCT may, at its option, terminate the contract or reduce service levels
consistent with funding. The backlog at September 30, 1998 includes
approximately $213 million of OnSite services contracts with fiscal funding
clauses.
Backlog is not necessarily indicative of actual revenues for any
succeeding period.
Proprietary Software Protection
SCT's software is proprietary and SCT relies primarily upon copyright,
trade secret laws and internal non-disclosure safeguards generally incorporated
in its software license agreements to protect its software. There can be no
assurance that such protection will be effective. In addition, other holders of
patents and copyrights may assert claims of infringement with respect to the
Company's products. To date, SCT is not aware of any material breach in the
security of its products or any claims of infringement asserted against it.
Employees
As of September 30, 1998, the Company employed approximately 3,400
employees, of which approximately 845 are resident in Malvern, Pennsylvania,
with the remainder resident primarily at the Company's various offices and
9
client sites. None of the Company's employees are subject to collective
bargaining agreements, except for approximately 13 employees at one client site.
The Company considers its relationship with its employees to be satisfactory.
When the Company receives a new OnSite services contract, it generally
recruits most of the existing employees of the client's data processing
department to become SCT employees. However, the Company also supplies some
senior level personnel from its own group of trained specialists, which requires
the Company to identify employees willing to relocate to the client's area.
Executive Officers of SCT
The Executive Officers of SCT are as follows:
Position and Office
Name Age Currently Held
----- --- --------------
Michael J. Emmi 56 Chairman of the Board, President and Chief Executive Officer;
Director
Michael D. Chamberlain 54 Senior Vice President; President, SCT Software Group; Director
Eric Haskell 52 Senior Vice President, Finance and Administration, Treasurer, and
Chief Financial Officer
Richard A. Blumenthal 50 Senior Vice President, General Counsel and Secretary
Mark A. Cochran 41 Senior Vice President, Human Resources and Organizational Strategy
Dennis J. Crane 48 Senior Vice President, Corporate Marketing and Strategy
Officers are appointed by the Board of Directors, typically at its
first meeting after the annual meeting of shareholders for such terms as the
Board of Directors shall determine or until their successors have been elected
and have qualified.
Business Experience During the Past Five Years of Each Officer
Michael J. Emmi has served as Chairman of the Board, President and
Chief Executive Officer of the Company since May 1985.
10
Michael D. Chamberlain has served as a director of the Company since
July 1989. He has served as Senior Vice President of the Company since July
1990, and prior thereto, as Vice President since September 1986. He has been
President of the SCT Software Group since May, 1994 and prior thereto served as
President of the Software and Technology Services Division, the Company's higher
education software division.
Eric Haskell has served as Senior Vice President, Finance and
Administration, Treasurer and Chief Financial Officer of the Company since July
1990, and prior thereto, as Vice President, Finance and Administration,
Treasurer and Chief Financial Officer since March 1989.
Richard A. Blumenthal has served as Senior Vice President, General
Counsel and Secretary of the Company since July 1990, and prior thereto, as Vice
President, General Counsel and Secretary since July 1987. He has been General
Counsel of the Company since December 1985.
Mark A. Cochran has served as Senior Vice President, Human Resources
and Organizational Strategy since November 1998. Prior thereto, he served as
Vice President, Human Resources and Organizational Strategy from September 1997
and has held the following positions in the Company's Technology Management
Division: Vice President, East Region from August 1996 to September 1997; Vice
President, Atlantic Region from May 1995 to August 1996; and General Manager,
West Coast North Region from January 1995 to May 1995. Prior to joining the
Company, he was National Director, Biomedical Computer Systems for the American
Red Cross from January 1991 to January 1995.
Dennis J. Crane has served as Senior Vice President, Corporate
Marketing and Strategy since October 1, 1998. Prior thereto, he was President of
Crane Consulting, a strategy and management consulting firm with an emphasis on
electronic commerce, new product introduction and change leadership, from
September 1997 to September 1998; Senior Vice President & General Manager,
Corporate and International Markets, of Bell and Howell from January 1996 to
August 1997; President and Chief Executive Officer of ANS Communications, Inc.,
an internetworking and data security company which was acquired by America
OnLine, from June 1995 to December 1995; President, GE Healthcare Information
Management, a health care procurement, electronic commerce and business process
outsourcing venture, from September 1994 to June 1995; and prior thereto, Vice
President and General Manager, Electronic Commerce Services, General Electric
Information Services Company.
ITEM 2. PROPERTIES.
SCT occupies four adjacent buildings and a portion of a fifth building
in the Great Valley Corporate Center in Malvern, Pennsylvania. The Company's
corporate offices are located in an approximately 47,000 square-foot facility
owned by the Company, which also includes employees of other divisions of the
Company. The Company also owns an approximately 56,200 square-foot facility,
leases an approximately 48,900 square-foot facility under a lease which expires
in August 2005, and leases an approximately 70,000 square-foot facility under a
lease which expires in November 2008.
11
In October 1998 the Company entered into a ten year lease for an
approximately 73,900 square foot office building in Frazer, Pennsylvania, which
is near its Malvern campus.
The Company owns and occupies an approximately 45,000 square-foot
facility in Rochester, New York. In Lexington, Kentucky, the Company leases an
approximately 55,400 square foot facility, 32,600 square feet of which expires
in March 1999 and 22,800 square feet of which expires in March 2004. In
Columbia, South Carolina, the Company owns and occupies an approximately 60,000
square-foot facility, has various leases for an aggregate of approximately
27,700 square feet which expire on various dates through September 2002, owns
4.8 acres of land on which it has begun construction on a proposed 80,000 square
foot facility, and in December 1998 purchased an additional nine acres to allow
for future growth. SCT leases offices in various cities throughout the United
States including an approximately 37,000 square foot facility in San Diego,
California which expires in December 2002 and also leases office space in
London, England, Manchester, England, Sophia, France and Rijswijk, the
Netherlands.
SCT believes that its facilities are adequate for its present business
needs.
ITEM 3. LEGAL PROCEEDINGS.
On October 4, 1995, John J. Wallace filed a purported class action
lawsuit in the United States District Court for the Eastern District of
Pennsylvania against the Company; Michael J. Emmi, Chairman of the Board,
President and Chief Executive Officer of the Company; Michael D. Chamberlain,
Senior Vice President and a director of the Company; and Eric Haskell, Senior
Vice President, Finance & Administration, Treasurer, and Chief Financial Officer
of the Company. The plaintiff filed an amended complaint on November 28, 1995
and a second amended complaint on February 3, 1997. The class period alleged is
from June 5, 1995 through October 2, 1995. The second amended complaint sought
damages in unspecified amounts as well as equitable relief.
In April 1996, the Company's Motion to Dismiss the amended complaint
was granted in part and denied in part. In September 1997, the Company's Motion
to Dismiss the second amended complaint was granted in part and denied in part,
and plaintiff was permitted to pursue a claim that defendants violated section
10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated
thereunder to the extent that it alleges a failure to make certain disclosures
in the Company's Form 10-Q for the third quarter of fiscal 1995. On December 3,
1997, the Court approved a Stipulation of Dismissal and Entry of Final Judgment
filed by the parties pursuant to which all remaining claims were dismissed with
prejudice and the Court entered a final judgment in favor of the Company as to
all remaining claims in the action. On December 30, 1997, the plaintiff filed a
notice of appeal with respect to those claims which were dismissed pursuant to
the Company's Motions to Dismiss. On October 28, 1998, the Company and counsel
for the plaintiff reached an agreement in principle to settle the matter for
$750,000. A settlement class must be determined by the United States District
Court for the Eastern District of Pennsylvania and the overall settlement must
be approved by the Court.
12
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
13
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
SCT's Common Stock is traded on the Nasdaq Stock Market under the symbol "SCTC".
The following table sets forth its high and low sale prices (after giving effect
to the stock split in May, 1998) on the Nasdaq Stock Market for the specified
quarter.
Period
Year ended September 30, 1998 HIGH LOW
1st quarter 26 1/4 16 3/4
2nd quarter 25 1/2 17 1/4
3rd quarter 29 20 3/8
4th quarter 30 7/8 11 1/2
Year ended September 30, 1997 HIGH LOW
1st quarter 8 3/8 6 1/4
2nd quarter 11 1/4 7 7/8
3rd quarter 13 13/16 9 11/16
4th quarter 22 5/8 13 1/4
The approximate number of stockholders of record of SCT's Common Stock as of
September 30, 1998 was 477.
SCT has not paid any dividends for more than the last two fiscal years. The
Company's revolving credit agreement limits the amount of non-stock dividends
that may be paid.
ITEM 6. SELECTED FINANCIAL DATA.
(in thousands except per share amounts) Year Ended September 30 1998* 1997 1996 1995** 1994
Revenues $403,668 $290,046 $215,258 $176,148 $148,214
Income before income taxes 38,232 38,617 16,003 10,316 17,794
Provision for income taxes 16,858 15,726 6,884 7,258 6,148
Net income 21,374 22,891 9,119 3,058 11,646
Net income per common share 0.64 0.76 0.32 0.12 0.47
Net income per share -- assuming dilution 0.59 0.69 0.31 0.10 0.43
Common shares outstanding 33,532 29,996 28,140 26,148 24,656
Common shares outstanding -- assuming dilution 36,035 34,124 33,090 30,102 30,444
Working capital 151,017 83,217 67,389 63,555 59,239
Total assets 332,954 209,704 163,259 150,983 128,809
Long-term debt 78,425 2,549 31,590 31,790 34,500
Stockholders' equity 182,922 150,425 96,796 85,565 65,481
* Includes a pre-tax charge of $16,063 for purchased research and development
in the year ended September 30, 1998. Results without the charge for
purchased research and development would have resulted in net income of
$31,815 and net income per share -- assuming dilution of $0.88.
** Includes a pre-tax charge of $8,700 for purchased research and development in
the year ended September 30, 1995. Results without the charge for purchased
research and development would have resulted in net income of $11,758 and net
income per share -- assuming dilution of $0.42.
14
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION.
The purpose of this section is to give interpretive guidance to the reader of
the financial statements. For specific accounting policies and financial
statement detail, refer to the consolidated financial statements and footnotes.
Overview
Systems & Computer Technology Corporation (the "Company") develops, licenses,
and supports a suite of client/server, enterprise software and provides a range
of information technology outsourcing services. In addition, the Company offers
a series of related software services including systems implementation, systems
integration, and maintenance and enhancements. The Company's markets are higher
education, manufacturing & distribution, utilities, and government. The
Company's focus on these four vertical markets enables it to develop and utilize
a base of industry expertise to deliver products and services that address
specific client requirements.
The Company derives software services revenues from a variety of professional
support services, which include systems implementation, modification, training,
and support; consulting services; and information systems planning and
integration. Maintenance and enhancements contracts allow customers access to
telephone support services, regulatory updates, and functional and technical
enhancements.
The Company provides systems integration services for software implementations
that include training, data conversion, integration, and customizations for
client systems. These contracts are typically longer in term than software
support services and shorter in term than information technology outsourcing
services.
The Company provides outsourcing services, which are comprised of a range of
information technology areas including end-user computing solutions, network
management, applications outsourcing, and business process outsourcing. These
services are designed to assume total or partial control of 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.
15
Results of Operations
The following table sets forth: (a) income statement items as a percentage of
total revenues and (b) the percentage change for each item from the prior-year
comparative period.
% of Total Revenues % Change from
Year Ended September 30, Prior Year
------------------------------ ---------------------
1998 1997 1996 1998 1997
Revenues
Outsourcing services 31.1% 33.7% 39.1% 28.5% 16.0 %
Software sales 24.2% 26.5% 21.8% 27.2% 64.4 %
Maintenance and
enhancements 15.7% 18.0% 19.5% 21.5% 24.0 %
Software services 27.6% 21.6% 19.3% 77.9% 50.9 %
Other, primarily
interest 1.4% 0.2% 0.3% 776.1% (10.3)%
----- ----- ----- ------ -------
Total 100% 100% 100% 39.2% 34.7 %
===== ===== ===== ====== =======
Expenses
Cost of services, sales,
and maintenance and
enhancements 62.1% 61.4% 66.4% 40.8% 24.6 %
Selling, general, and
administrative 23.4% 24.9% 25.1% 31.1% 33.6 %
Charge for purchased
research and
development 4.0% - - - -
Interest expense 1.0% 0.4% 1.1% 226.9% (48.1)%
Income before
income taxes 9.5% 13.3% 7.4% (1.0)% 141.3 %
===== ===== ===== ====== =======
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 other revenue).
The Company does not separately present the cost of maintenance and enhancements
revenue as it is impracticable to separate such cost from the cost of software
sales.
1998 1997 1996
---- ---- ----
Gross Profit
Outsourcing services 19.6% 18.5% 19.4%
Software sales and
maintenance and
enhancements 57.1% 63.7% 56.6%
Software services 27.6% 17.6% 12.0%
----- ----- -----
Total 37.0% 38.4% 33.4%
===== ===== =====
16
Revenues: Growth in outsourcing services revenue largely results from
significant contract signings. The 28.5% increase in outsourcing services
revenue in the year ended September 30, 1998 is primarily the result of (1)
increases in outsourcing services provided to significant clients and (2) fiscal
year 1998 contract signings. The 16.0% increase in outsourcing services revenue
in the year ended September 30, 1997 was primarily the result of (1) increases
in outsourcing services provided to two clients and (2) new contract signings
during fiscal year 1997. Contract renewal rates, as a percentage of annual
revenue from contracts available for renewal, for the fiscal years 1998, 1997,
and 1996 were 82%, 71%, and 88%, 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 which have expiration
dates in a later period.
Software sales increased 27.2% in the year ended September 30, 1998 compared to
the prior-year period due primarily to increased licenses of Banner Customer
Information System (CIS) software to the utility market and increased Banner
software licenses to the higher education market. The Company experienced a
slight increase in license fee revenue in fiscal year 1998 versus fiscal year
1997 in its ADAGE enterprise resource planning (ERP) software. Software sales
increased 64.4% in fiscal year 1997 compared with fiscal year 1996 due primarily
to increased licenses of ADAGE ERP software to the manufacturing market,
increased Banner software licenses to the higher education market, and increased
licenses of Banner Customer Information System (CIS) software to the utility
market.
The 21.5% and 24.0% increases in maintenance and enhancements revenue in fiscal
years 1998 and 1997, respectively, were the result of the growing installed base
of clients in the higher education, manufacturing & distribution, and utility
marketplaces. Additionally, the Company continues to experience a high annual
renewal rate on existing maintenance contracts in these marketplaces. These
increases were partially offset by reduced revenues in the government market as
the result of the sale of a product line on which the Company was no longer
selling licenses but was providing maintenance services through fiscal year
1997.
Software services revenue increased 77.9% in fiscal year 1998 compared to fiscal
year 1997 as the result of increases in implementation and integration services
in the manufacturing, utility, and higher education markets. These increases
were offset by decreases, compared to the prior-year period, in services
provided to the international utility market. Software services revenue
increased 50.9% in fiscal year 1997, compared with fiscal year 1996, primarily
as the result of increases in ADAGE ERP implementations and support services to
the manufacturing market and implementations and integration services in the
utility and the higher education markets.
The increase in other revenue for the year ended September 30, 1998 is
attributable to increased interest revenue from the increased cash and
short-term investments balance resulting from the debt issuance in October 1997
and to a one-time $695 thousand gain on the sale of an inactive product line in
the first quarter of fiscal year 1998.
Gross Profit: Gross profit decreased as a percentage of total revenue (excluding
other revenue) from 38.4% to 37.0% for fiscal year 1998 as compared with fiscal
year 1997. The total gross profit percentage decreased primarily because of a
decrease in the software sales and maintenance and enhancements gross profit,
which makes up the greatest percentage of the Company's total gross profit. This
decrease was primarily the result of an increase in non-capitalized product
development expenditures, principally in the manufacturing business, at a
greater rate than the revenue increase. The outsourcing services gross profit
17
increased from 18.5% in fiscal year 1997 to 19.6% in fiscal year 1998 as a
result of higher margins on new contract signings compared with older contracts.
The software services margin increased primarily as a result of increased
profitability in the utility and manufacturing businesses' services although
margins continued to be impacted by unprofitable international operations. The
Company is continuing to focus on installation and systems integration services
in each of its markets. Since service margins have historically been lower than
the margins derived from software sales and maintenance and enhancements, an
increase in services revenue as a percentage of total revenue historically has
resulted in a lower overall profit margin.
Gross profit increased as a percentage of total revenue (excluding other
revenue) from 33.4% to 38.4% for fiscal year 1997 as compared with fiscal year
1996. The increase in the software sales and maintenance and enhancements gross
profit was primarily the result of significant growth in license fee revenue.
The software services margin increased primarily as a result of increases in the
utility and manufacturing businesses' gross margin. Additionally, in fiscal year
1996, the software services costs reflected increased expenditures in the
utility business, including a second quarter contract loss provision of $1.25
million to reflect the cost of satisfying certain obligations relating to the
Banner CIS product. These obligations were satisfied during fiscal year 1997.
The increases in software services' gross profit for the year were offset by
decreases in the international utility gross profit, where additional costs were
incurred in the third and fourth quarters as a result of contract delays and
cost overruns.
Fygir Acquisition: In September 1998, the Company acquired all of the
outstanding stock of Fygir Logistic Information Systems, B.V. (Fygir). Fygir is
a leading provider of supply chain planning software. The total cost of the
acquisition was $35.1 million, of which $2.3 million is held in escrow. Provided
the Company does not have any claim to the amount escrowed, the Company will
release any amounts remaining in the escrow to the seller on September 2, 1999.
In conjunction with the acquisition, which was accounted for as a purchase, the
Company incurred a charge of $16.1 million for in-process research and
development. Included in this amount were the fair values of Fygir products
under development that had not reached technological feasibility at the time of
the acquisition.
The in-process technology acquired in the Fygir acquisition consisted of
multiple significant research and development projects, most of which the
Company intends to continue to develop. The Company believes that these
projects, which can be separated into three separate categories -- Significant
New Features, New Technology, and Tightly Integrated -- will all contribute to
future generations of the Company's software. At the time of the Fygir
acquisition, the Company assigned a value of $16.1 million to the Fygir
in-process technology with the assistance of an independent valuation. The
valuation considered the Securities and Exchange Commission's views on
in-process research and development as set forth in its September 15, 1998
letter to the American Institute of Certified Public Accountants.
Significant New Features projects represent significant improvements to existing
core technology acquired that could result in price and sales increases. New
Technology projects are associated with the design of next generation Fygir
products. Tightly Integrated projects are related to integrating Fygir-developed
technology with the Company's technology.
The Company estimates that the Significant New Features, New Technology, and
Tightly Integrated projects were in the aggregate approximately 70%, 50%, and
60% complete, respectively, as of the date of acquisition. At the time of the
18
Fygir valuation, the anticipated remaining development project expenses were
approximately $22.0 million. These costs are estimated to be incurred in fiscal
years 1999 through 2002.
The nature of the efforts required to develop the acquired in-process technology
into commercially viable products principally relates to the completion of all
planning, designing, and testing activities that are necessary to establish that
the product or service can be produced to meet its design requirements,
including functions, features, and technical performance requirements. The
Company currently expects that the acquired in-process technology will be
successfully developed, but there can be no assurance that commercial viability
of these products will be achieved. Furthermore, future developments in the
supply chain management industry, changes in other product and service
offerings, or other developments may cause the Company to alter or abandon these
plans.
Income Taxes: The fiscal year 1998 provision for income taxes does not reflect
the customary relationship between income and tax expense principally due to
state income taxes and the research and development tax credit. The research and
development tax credit expired in June 1998. As a result, the fiscal year 1998
provision reflects the benefit of the credit for only the first nine months of
the fiscal year. The research and development tax credit was extended in October
1998, but is scheduled to expire in June 1999. The provision for income taxes
for the year ended September 30, 1997 reflects the benefit of the research and
development tax credit, which was in effect for the entire fiscal year. The
provision for the year ended September 30, 1996 reflects the impact of valuation
allowances provided with respect to tax loss carryforwards in various state and
foreign jurisdictions and the relative impact of non-deductible expenses.
At September 30, 1998, the Company has $21.7 million tax loss carryforwards in
various states and $9.9 million of net operating loss carryforwards in foreign
jurisdictions. The state loss carryforwards expire in various periods ending
September 30, 2013. The foreign tax losses have indefinite carryforwards. At
September 30, 1998, the Company has recorded tax credits and loss carryforwards,
net of valuation allowance, of $2.6 million related primarily to the expected
benefit of foreign tax loss carryforwards. The Company's foreign subsidiaries
must generate approximately $6.3 million in pre-tax earnings in order to realize
the related net deferred tax asset. The Company recently restructured its
international business to emphasize sales and distribution of its products in
addition to product development. Management believes that it is more likely than
not that this international restructuring will generate sufficient future
taxable income to realize the Company's net deferred tax assets.
The Company's application for a change in accounting method previously filed
with the Internal Revenue Service was accepted. This method change will result
in a reclassification from current income taxes payable to deferred income taxes
of approximately $4.2 million over the next two years.
Foreign Operations: The local currency is the functional currency of the
Company's foreign operations.Foreign operations represented approximately 3% of
the Company's consolidated 1998 revenue. The Company does not believe its
foreign currency exposure is significant and analyzes the desirability of
hedging the exposure on an ongoing basis.
Cyclical Nature of Business: Certain non-seasonal 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,
19
impending year 2000 issues, and general economic and political conditions. While
the Company has historically generated a greater portion of license fees in
total revenue in the last two fiscal quarters, the non-seasonal factors cited
above may have a greater effect than seasonality on the Company's results of
operations.
Liquidity, Capital Resources, and Financial Position
In October 1997, the Company issued $65 million of convertible subordinated
debentures bearing interest at 5% and maturing on October 15, 2004. In November
1997, pursuant to an underwriters' option, the Company issued an additional
$9.75 million of convertible debentures. 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 decreasing from 102.5% of the principal amount to par on October 15,
2003.
The Company's cash and cash equivalents balance was $18.9 million and $29.8
million at September 30, 1998 and 1997, respectively. The short-term investments
balance increased to $59.4 million at September 30, 1998 as a result of the
first quarter debenture offering.
Despite an increase in income before depreciation and amortization, and
purchased research and development, operating cash flows decreased by $5 million
to $28.5 million as a result of the growth in the outsourcing services business.
Typically, the start of an outsourcing services contract results in increased
cash outflows related to deferred costs and sales commissions, and client
equipment purchases.
The Company provides outsourcing services and software-related services,
including systems implementation and integration services. Contract fees from
outsourcing services are typically based on multi-year contracts ranging from
three to 10 years in length, and provide a recurring revenue stream throughout
the term of the contract. Software services contracts, including systems
implementation and integration services, usually have shorter terms than
outsourcing services contracts, and billings are sometimes milestone based.
During the beginning of a typical outsourcing services contract, services are
performed and expenses are incurred by the Company at a greater rate than in the
later part of the contract. Billings usually remain constant during the term of
the contract and, in some cases, when a contract term is extended, the billing
period is also extended over the new life of the contract. In certain systems
integration services contracts, payments are milestone based. In these
particular systems integration contracts, services are performed by the Company
but cannot be billed until the milestone is attained. Revenue is usually
recognized as work is performed. The resulting excess of revenues over billings
is reflected on the Company's Consolidated Balance Sheet as unbilled accounts
receivable. These unbilled accounts receivable balances have decreased as a
percentage of revenue from approximately 24% to 19% from fiscal year 1997 to
fiscal year 1998. As an outsourcing services contract proceeds, services are
performed and expenses are incurred at a lesser rate, resulting in billings
exceeding revenue recognized, which causes a decrease in the unbilled accounts
receivable, as will the achievement of a milestone in a systems integration
services contract. The remaining unbilled accounts receivable balance is
comprised of software sales for which product has been shipped and revenue has
been recognized but amounts have not been billed due to the payment terms
established. These unbilled balances are generally billed within one year.
The Company's working capital at September 30, 1998 was $151 million and was
$83.2 million at September 30, 1997.
20
Cash used in investing activities was $119.3 million for fiscal year 1998
compared with $19.3 million for fiscal year 1997. The Company's primary use of
cash for investing activities was the purchase of available-for-sale investments
from the proceeds of the bond offering during the first quarter of fiscal year
1998 and the aforementioned cash acquisition of Fygir. Additionally, property
and equipment expenditures increased as the result of (1) fit-up and remodeling
costs in the third and fourth quarters of fiscal year 1998 for a new office
building in the Company's Malvern campus and (2) the July 1998 purchase of land
and subsequent building construction costs for a new building adjacent to the
Company's existing building in Columbia, SC. The construction and fit-up of the
new Columbia building are expected to continue until sometime in the third
quarter of fiscal year 1999. In October 1998, the Company signed a ten-year
lease agreement for space near its Malvern campus. The Company will begin to
incur fit-up and remodeling costs in the first quarter of fiscal year 1999 with
rent payments anticipated to begin in the second quarter of fiscal year 1999.
Cash provided by financing activities was $79.9 million for fiscal year 1998
primarily as the result of the net proceeds of the bond offering of $72.1
million. Additionally, cash was provided by the exercise of stock options by the
Company's employees.
On April 9, 1997, the Company called for redemption its outstanding 6 1/4%
convertible subordinated debentures due September 1, 2003. The redemption date
was May 9, 1997. During fiscal year 1997, 4.2 million shares were issued related
to the conversion of all but $55 thousand of the remaining convertible
subordinated debentures. Had these converted shares been outstanding for the
full year ended September 30, 1997, net income per common share for the year
ended September 30, 1997 would have decreased by $.04 to $.72.
The Company has a $30 million senior revolving credit facility available
for general corporate purposes. The credit facility agreement expires in June
2000 with optional annual renewals. There were no borrowings outstanding under
the credit facility at September 30, 1998 or 1997. As long as borrowings are
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. During fiscal year 1998, the covenants allowed the Company to pay
non-stock dividends, repurchase capital stock, make distributions of assets to
shareholders (as long as the aggregate amount does not exceed $5 million in any
fiscal year) and pay stock dividends. In October 1998, the agreement covenants
were amended to allow the Company to repurchase capital stock not to exceed $35
million and 3 million shares before April 15, 1999.
The Company believes that its cash and cash equivalents, cash provided by
operations, short-term investments, and borrowing arrangements should satisfy
its financing needs for the foreseeable future.
On April 16, 1998, the Company's Board of Directors authorized a two-for-one
stock split effected in the form of a 100% stock dividend distributed on May 15,
1998 to stockholders of record on May 1, 1998. Stockholders' equity has been
restated to give retroactive recognition to the stock split for all periods
presented by reclassifying from capital in excess of par value to common stock
the par value of the additional shares arising from the split. In addition, all
references in the financial statements and Management's Discussion and Analysis
of Operations and Financial Condition to number of shares and per share amounts
have been restated.
Statement of Financial Accounting Standards No. 128, "Earnings Per Share" (SFAS
128), was effective for periods ending after December 15, 1997. As a result the
21
Company changed the method used to compute earnings per share and restated all
prior periods presented. Under the new requirements, net income per common share
excludes the dilutive effect of both stock options and convertible debentures,
and net income per share -- assuming dilution must include the dilutive effect
of both stock options and convertible debentures even if the dilutive effect is
immaterial.
In October 1998, the Company's Board of Directors authorized the purchase of up
to 3 million of its common shares. The shares may be purchased from time to time
in the open market or negotiated transactions and the timing of purchases will
be based on a variety of factors including stock price, cash requirements, and
market and economic factors. During October 1998, the Company purchased
approximately 1.1 million shares for $10.3 million.
The Company entered into an agreement dated as of December 4, 1998 in which it
agreed to purchase up to $7.6 million of the common stock of Campus Pipeline,
Inc. (the "Stock"). As of December 9, 1998, the Company had purchased $2.5
million of the Stock and received a 20% equity interest in Campus Pipeline, Inc.
If the Company exercises all its options, the Company will hold approximately
60% of the outstanding common stock of Campus Pipeline, Inc.
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 rise in interest rates, while
floating rate securities may produce less income than expected if interest rates
fall. At September 30, 1998, a majority of the Company's investments were in
fixed rate instruments. Historically, the Company's investment income has not
been material to the Company's financial results, and the Company does not
expect that changes in interest rates will have a material impact on the results
of operations. See Note B to the financial statements, included in Item 8 of
this Form 10-K, 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 pre-determined 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 year ended
September 30, 1998, 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 F to the financial statements, included in
Item 8 of this Form 10-K, for additional information with respect to the
Company's long-term debt.
Contingencies: On October 4, 1995, John J. Wallace filed a purported
class action lawsuit in the United States District Court for the Eastern
District of Pennsylvania against the Company; Michael J. Emmi, Chairman of the
Board, President and Chief Executive Officer of the Company; Michael D.
Chamberlain, Senior Vice President and a director of the Company; and Eric
Haskell, Senior Vice President, Finance & Administration, Treasurer, and Chief
Financial Officer of the Company. The plaintiff filed an amended complaint on
November 28, 1995, and a second amended complaint on February 3, 1997. The class
period alleged is from June 5, 1995 through October 2, 1995. The second amended
complaint sought damages in unspecified amounts as well as equitable relief.
22
In April 1996, the Company's Motion to Dismiss the amended complaint was granted
in part and denied in part. In September 1997, the Company's Motion to Dismiss
the second amended complaint was granted in part and denied in part, and
plaintiff was permitted to pursue a claim that defendants violated section 10(b)
of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder to
the extent that it alleges a failure to make certain disclosures in the
Company's Form 10-Q for the third quarter of fiscal 1995. On December 3, 1997,
the Court approved a Stipulation of Dismissal and Entry of Final Judgment filed
by the parties pursuant to which all remaining claims were dismissed with
prejudice and the Court entered a final judgment in favor of the Company as to
all remaining claims in the action. On December 30, 1997, the plaintiff filed a
notice of appeal with respect to those claims which were dismissed pursuant to
the Company's Motions to Dismiss. On October 28, 1998, the Company and counsel
for the plaintiff reached an agreement in principle to settle the matter for
$750,000. A settlement class must be determined by the United States District
Court for the Eastern District of Pennsylvania and the overall settlement must
be approved by the Court.
New Accounting Standards: Statement of Position 97-2, "Software Revenue
Recognition" (SOP 97-2), was issued in December 1997 and is effective for all
fiscal years beginning after December 15, 1997. Statement of Position 98-4,
"Deferral of Certain Provisions of SOP 97-2" (SOP 98-4), was issued in April
1998 and defers for one year (i.e., until fiscal years beginning after December
15, 1998) the application of certain provisions of SOP 97-2. SOP 97-2 introduces
a new framework whereby revenue would be recognized for each element in a
software licensing arrangement when certain criteria are met. SOP 97-2 requires
license fees to be allocated to the separate elements of multiple element
arrangements based on "vendor-specific objective evidence of fair value" and
provides guidance on postcontract customer support arrangements. SOP 98-4 defers
the application of the provisions of SOP 97-2 which define what is considered
vendor-specific objective evidence of the fair value of the various elements in
a multiple-element arrangement. The Company currently does not believe this new
accounting guidance will have a significant impact on its results of operations,
but continues to evaluate implementation guidance on this subject as it is
published.
In June 1997, Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income" (SFAS 130), was issued. Under SFAS 130, all items that
meet the definition of comprehensive income will be reported in a financial
statement for the period in which they are recognized. Comprehensive income will
include changes in the balances of items that are reported directly in a
separate component of stockholders' equity on the Consolidated Balance Sheets.
The Company will make the disclosures required by SFAS 130 in the first quarter
of 1999. The adoption of SFAS 130 will have no impact on the Company's net
income or stockholders' equity.
Statement of Financial Accounting Standards No. 131, "Disclosures about Segments
of an Enterprise and Related Information" (SFAS 131), was issued in June 1997.
SFAS 131 requires that a public business enterprise report financial and
descriptive information about its reportable operating segments. Generally,
financial information is required to be reported on the basis used internally
for evaluating segment performance and resource allocation. SFAS 131 is
effective for fiscal years beginning after December 31, 1997, however,
disclosure is not required in interim financial statements in the initial year
of adoption. Accordingly, the Company will make the required disclosures for the
fiscal year ending September 30, 1999, although the Company has not fully
assessed the impact of SFAS 131 on its financial disclosures.
23
Factors That May Affect Future Results and Market Price of Stock: The matters
discussed herein and elsewhere that are forward-looking statements, including
statements concerning the Company's or management's intentions, beliefs,
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 which may have a
material adverse effect on the Company's business, financial condition, and/or
results of operations.
The Company's revenues and operating results can vary substantially from quarter
to quarter based on a number of factors. Software sales revenues in any quarter
are dependent on the execution of license agreements and 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 are typically signed in the last month of each quarter; the duration
of the Company's sales cycle is relatively long; the size of transactions can
vary widely; client projects may be postponed or canceled due to changes in the
client's management, budgetary constraints, or strategic priorities; and clients
often exhibit a seasonal pattern of capital spending. The Company has
historically generated a greater portion of license fees in total revenue in the
last two fiscal quarters, although there is no assurance that this will
continue.
Also, as the year 2000 approaches, many potential clients are evaluating their
existing systems and must decide whether to repair or replace those systems
which have year 2000 issues. While the Company believes that such evaluations
have favorably impacted demand for its software products and services in the
last two fiscal years, such demand is likely to diminish as the year 2000
approaches since services to remediate year 2000 issues must be completed in a
timely manner and lead times required to complete systems implementations
preclude system replacement as a timely solution to the year 2000 issue as the
millennium nears. Given the lack of precedent for an issue of this magnitude,
the Company's ability to accurately forecast the impact of the year 2000 issue
on quarter to quarter revenue achievement is limited.
Since a significant part of the Company's business results from software
licensing, the Company's business is characterized by a high degree of operating
leverage. The Company's expense levels are based, in significant part, on the
Company's expectations as to future revenues and are therefore 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 or even maintain its current
level of profitability on a quarterly or annual basis in the future. It is
therefore possible that in one or more future quarters the Company's operating
results will be below expectations. In such event, the price of the Company's
common stock would likely be adversely affected.
24
The success of the Company's business is dependent upon certain key management,
sales, and technical personnel. In addition, the Company believes that to
succeed in the future it will be required to continue to attract, retain, and
motivate additional talented and qualified management, sales, and technical
personnel. Competition for hiring such personnel in the information technology
industry is intense and demand for such employees has, to date, exceeded supply.
The Company from time to time experiences difficulty in locating candidates with
appropriate qualifications. 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 of its existing key personnel or the inability to attract
and retain additional qualified employees in the future could have a material
adverse effect on the Company's business, operating results, and financial
condition.
The application software industry is characterized by intense competition, rapid
technological advances, changes in customer 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, which will
necessitate continued investment in research and development and sales and
marketing. There can be no assurance that the Company's existing products will
not be rendered obsolete or non-competitive by new industry standards or
changing technology, that the Company will be able to develop and market new
products successfully, or that the Company's new product offerings will be
accepted by its markets. Furthermore, programs as complex as those offered by
the Company may contain undetected errors or bugs when they are first introduced
or as new versions are released. There can be no assurance that, despite testing
by the Company and by third-party test sites, errors will not be found in new
product offerings, with the possible result of unanticipated costs and delays in
market acceptance of these products.
Certain of the Company's contracts are subject to fiscal funding clauses, which
provide that in the event of budgetary constraints, the client is entitled to
reduce the level of services to be provided by the Company with a corresponding
reduction in the fee to be paid by the client, or in certain circumstances, to
terminate the services altogether. 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 of the Company representing a substantial portion of the Company's
revenues were to invoke the fiscal funding provisions of their outsourcing
services contracts, the Company's results of operations could be adversely
affected.
The Company provides software-related services, including systems implementation
and integration services. Services are generally provided under time and
materials contracts and revenue is recognized as the services are provided. In
some circumstances, services are provided under fixed price arrangements in
which revenue is recognized on the percentage-of-completion method. Revisions in
estimates of costs to complete are reflected in operations in the period in
which facts requiring those revisions become known.
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; 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; and the Company's ability to
complete fixed-price contracts profitably.
Year 2000: In the past, many information technology systems were designed with
two-digit year codes that did not recognize century fields. As a result, these
hardware and software systems may not function or may give incorrect results
during the periods surrounding the year 2000. The year 2000 issue is faced by
every company which relies on computer systems. In order to address this issue,
such hardware and software systems must be upgraded or replaced in order to
correctly process dates beginning in the year 2000.
25
The Company has a company-wide year 2000 team to identify and resolve year 2000
issues associated with the Company's internal information technology (IT)
systems, internal non-IT systems, material third party relationships, and the
products and services sold by the Company. The Company's year 2000 readiness
program includes: corporate awareness, adoption of year 2000 standards,
inventory, assessment, remediation, validation testing, and contingency
planning.
The Company has identified its main internal IT systems and expects
to complete remediation and testing of needed year 2000 related modifications by
early 1999. The Company is assessing its internal non-IT systems and expects to
complete needed modifications to these systems by early 1999. Also, because of
the interdependence of IT systems, the Company is evaluating material third
party relationships for year 2000 issues and expects to complete this effort by
early 1999.
The Company has designed the most current versions of its products to
be year 2000 ready. The Company is communicating with its customers the status
of the Company's products relating to year 2000. For products that were
identified as needing updates to address year 2000 issues, the Company has
completed the updates to most of these products, and has made the updates
available to the customers in 1998. The Company will complete the few remaining
minor product updates prior to March 1999. Some of the Company's customers are
using product versions that the Company will not support for year 2000 issues;
the Company is encouraging these customers to migrate to current product
versions that are year 2000 ready. Also, in certain client outsourcing and
services contracts, the Company is evaluating year 2000 issues for its clients'
computing environments and implementing year 2000 related remediations. Some of
this client remediation effort has been completed in 1998 with the remainder of
the client remediation effort planned throughout 1999.
The Company has funded its year 2000 program from operating cash flows and has
not separately accounted for these costs in the past. The Company will incur
additional amounts related to the year 2000 program for administrative personnel
to manage the project and for technical support for its products, services, and
internal IT systems. The Company believes that the vast majority of these costs
are not incremental to the Company but represent a reallocation of existing
resources and does not believe that these costs have been or are expected to be
material to the Company's financial position.
The Company believes that necessary modifications to its products will be made
on a timely basis. However, there can be no guarantee that one or more of the
Company's current products do not contain year 2000 date issues that may result
in material costs to the Company. Additionally, where the Company is evaluating
year 2000 issues for client outsourcing and services contracts, there can be no
assurances that all year 2000 issues will be identified and remediated and it is
possible that the Company may experience increased expenses in addressing these
issues. It is possible that any such delays or increased costs could have a
material adverse impact on the Company's operations and financial results by,
for example, impacting the Company's ability to deliver products or services to
its customers. Some commentators have stated that a significant amount of
litigation will arise out of year 2000 compliance issues. Because of the
unprecedented nature of such litigation, it is uncertain whether or to what
extent the Company may be affected by it. The most reasonably likely worst case
scenarios would include: issues originating from clients who do not migrate to
current product releases or who experience other year 2000 related problems,
corruption of data contained in the Company's internal IT systems, and failure
of infrastructure services provided by government agencies and other third
parties (electricity, banking services, phone service, water systems, internet
services, etc.). The Company is in the process of contingency planning for high
risk areas and should complete this effort in early 1999.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Information required by this Item is contained on page 22 of Item 7 of
this Form 10-K under the heading Financial Risk Management.
26
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Consolidated Balance Sheets
(in thousands except per share amounts) September 30 1998 1997
- ------------------------------------------------------------------------------------------
Assets
Current Assets
Cash and short-term investments $ 78,306 $ 29,809
Receivables, including $66,158 and $59,311 of
earned revenues in excess of billings, net of
allowance for doubtful accounts of $4,033 and $4,098 130,457 100,543
Prepaid expenses and other receivables 13,861 8,473
-------- --------
Total Current Assets 222,624 138,825
Property and Equipment -- at cost, net of accumulated depreciation 55,862 40,710
Capitalized Computer Software Costs, net of accumulated
amortization of $15,337 and $10,413 18,257 15,167
Cost in Excess of Fair Value of Net Assets Acquired, net of
accumulated amortization of $3,522 and $2,957 17,763 8,121
Other Assets and Deferred Charges 18,448 6,881
-------- --------
Total Assets $332,954 $209,704
======== ========
Liabilities and Stockholders' Equity
Current Liabilities
Accounts payable $ 17,720 $ 10,023
Current portion of long-term debt 1,100 1,225
Income taxes payable 1,444 5,000
Accrued expenses 33,659 22,649
Deferred revenue 17,684 16,711
-------- --------
Total Current Liabilities 71,607 55,608
Long-Term Debt, net of current portion 78,425 2,549
Deferred Taxes and Other Long-Term Liabilities - 1,122
-------- --------
Total Liabilities 150,032 59,279
-------- --------
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 36,275 and 35,146 shares 363 352
Capital in excess of par value 102,176 91,064
Retained earnings 83,952 62,578
-------- --------
186,491 153,994
Less:
Held in treasury, 2,302 common shares-- at cost (2,959) (2,959)
Notes receivable from stockholders (610) (610)
-------- --------
182,922 150,425
-------- --------
Total Liabilities and Stockholders' Equity $332,954 $209,704
======== ========
See notes to consolidated financial statements.
27
Consolidated Statements of Operations
(in thousands except per share amounts) Year Ended September 30 1998 1997 1996
- --------------------------------------------------------------------------------------------------
Revenues
Outsourcing services $125,554 $ 97,677 $ 84,183
Software sales 97,844 76,948 46,821
Maintenance and enhancements 63,297 52,109 42,013
Software services 111,559 62,694 41,552
Other, primarily interest 5,414 618 689
-------- -------- --------
403,668 290,046 215,258
-------- -------- --------
Expenses
Cost of outsourcing services 101,010 79,650 67,852
Cost of software sales and maintenance
and enhancements 69,131 46,879 38,546
Cost of software services 80,760 51,627 36,586
Selling, general, and administrative 94,484 72,053 53,921
Charge for purchased research and development 16,063 - -
Interest expense 3,988 1,220 2,350
-------- -------- --------
365,436 251,429 199,255
-------- -------- --------
Income before income taxes 38,232 38,617 16,003
Provision for income taxes 16,858 15,726 6,884
-------- -------- --------
Net income $21,374 $22,891 $9,119
======== ======== ========
Net income per common share $0.64 $0.76 $0.32
Net income per share -- assuming dilution $0.59 $0.69 $0.31
Common shares and equivalents outstanding:
Average common shares 33,532 29,996 28,140
Average common shares -- assuming dilution 36,035 34,124 33,090
======== ======== ========
See notes to consolidated financial statements.
28
Consolidated Statements of Cash Flows
(in thousands except per share amounts) Year Ended September 30 1998 1997 1996
- ---------------------------------------------------------------------------------------------------------
Operating Activities
Net income $ 21,374 $22,891 $ 9,119
Adjustments to reconcile net income to net cash provided
by operating activities:
Charge for purchased research and development 16,063 - -
Depreciation and amortization 16,927 12,808 10,961
Provision for doubtful accounts 2,483 4,136 1,212
Deferred tax (benefit) provision (4,586) (1,051) 740
Changes in operating assets and liabilities:
(Increase) in receivables (31,303) (27,518) (8,103)
(Increase) in interest receivable (1,199) - -
(Increase) decrease in other current assets,
principally prepaid expenses (4,856) 1,735 1,557
Increase in accounts payable 7,396 3,349 1,440
Increase in income taxes payable 1,053 4,809 231
Increase in accrued expenses 7,171 10,291 470
Increase (decrease) in deferred revenue 742 3,711 (1,560)
Changes in other operating assets and deferred charges (2,758) (1,690) (1,454)
-------- ------- --------
Net Cash Provided by Operating Activities 28,507 33,471 14,613
-------- ------- --------
Investing Activities
Purchase of property and equipment (23,602) (11,837) (10,404)
Capitalized computer software costs (8,015) (7,507) (6,436)
Proceeds from the sale or maturity of investments available for sale 99,206 - 13,504
Purchase of investments available for sale (156,689) - -
Purchase of subsidiary, net of cash acquired (30,219) - (789)
-------- ------- --------
Net Cash (Used in) Investing Activities (119,319) (19,344) (4,125)
-------- ------- --------
Financing Activities
Principal payments on long-term debt (15,225) (7,955) (12,700)
Proceeds from long-term debt, net of issuance costs 88,548 9,659 12,600
Repurchase and retirement of Company stock - (1,367) -
Proceeds from exercise of stock options 6,622 3,042 313
-------- ------- --------
Net Cash Provided by Financing Activities 79,945 3,379 213
-------- ------- --------
(Decrease) Increase in Cash and Cash Equivalents (10,867) 17,506 10,701
-------- ------- --------
Cash and Cash Equivalents at Beginning of Year 29,809 12,303 1,602
-------- ------- --------
Cash and Cash Equivalents at End of Year $ 18,942 $29,809 $ 12,303
======== ======= ========
Supplemental Information
Noncash investing and financing activities:
Conversion of subordinated debentures into common stock $ - $31,220 $ -
See notes to consolidated financial statements.
29
Consolidated Statements of Stockholders' Equity
Unearned
Compensation
and Notes
Common Capital Receivable Total
Stock in Excess of Retained Treasury from Stockholders'
(in thousands) Par Value Par Value Earnings Stock Stockholders Equity
- ---------------------------------------------------------------------------------------------------------------------------------
Balance at September 30, 1995 $ 304 $ 58,290 $30,568 $(2,959) $(638) $ 85,565
Stock issued under stock option plans,
including tax benefits, 130 shares 1,960 1,960
Issuance of stock due to warrants exercised, 56 shares 124 124
Earned restricted stock compensation 28 28
Net income, year ended September 30, 1996 9,119 9,119
Balance at September 30, 1996 304 60,374 39,687 (2,959) (610) 96,796
------- -------- ------- ------- ----- --------
Stock issued under stock option plans,
including tax benefits, 870 shares 10 3,239 3,249
Stock repurchase and retirement, 368 shares (4) (2,863) (2,867)
Conversion of 6 1/4% convertible
subordinated debentures, 4,162 shares 42 30,314 30,356
Net income, year ended September 30, 1997 22,891 22,891
Balance at September 30, 1997 352 91,064 62,578 (2,959) (610) 150,425
------- -------- ------- ------- ----- --------
Stock issued under stock option plans,
including tax benefits, 1,129 shares 11 11,112 11,123
Net income, year ended September 30, 1998 21,374 21,374
Balance at September 30, 1998 $ 363 $102,176 $83,952 $(2,959) $(610) $182,922
======= ======== ======= ======== ====== ========
See notes to consolidated financial statements.
30
Notes to Consolidated Financial Statements
(in thousands except per share amounts)
Note A -- Significant Accounting Policies
Consolidation Policy: The accompanying consolidated financial statements include
the accounts of Systems & Computer Technology Corporation and its subsidiaries.
Intercompany items have been eliminated in consolidation.
Nature of Operations: Systems & Computer Technology Corporation (the "Company")
develops, licenses, and supports a suite of client/server, enterprise software
and provides a range of information technology outsourcing services. In
addition, the Company offers a series of related software services including
systems implementation, systems integration, and maintenance and enhancements.
The Company's markets are higher education, manufacturing & distribution,
utilities, and government. In fiscal year 1998, approximately 40% of the
Company's revenue was derived from the higher education market, approximately
17% was derived from the manufacturing & distribution market, approximately 21%
from the utility market, and approximately 19% from the local government market.
The principal markets for the Company's offerings are in the United States. In
fiscal year 1998, the Company's foreign operations represented approximately 3%
of revenues and the Company's export sales represented 5% of revenues.
Risks and Uncertainties: The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Changes in the status of certain facts or
circumstances could result in material changes to the estimates used in
preparation of the financial statements and actual results could differ from the
estimates and assumptions used.
Credit risk with respect to trade accounts receivable is generally diversified
due to the large number of entities comprising the Company's customer base. The
Company establishes an allowance for doubtful accounts based upon factors
surrounding the credit risk of specific customers, historical trends, and other
information.
Revenue Recognition: During the first several years of a typical OnSite services
contract, services are performed and expenses are incurred by the Company at a
greater rate than in the later years of the contract. Since billings usually
remain constant during the term of the contract, and revenue is recognized as
work is performed, revenues usually exceed billings in the early years of the
contract. The resulting excess is reflected on the Company's Consolidated
Balance Sheets as unbilled accounts receivable. As a contract proceeds, services
are performed and expenses are incurred at a diminishing rate, resulting in
billings exceeding revenue recognized, which causes a decrease in the unbilled
accounts receivable balance. All of the unbilled receivables at September 30,
1998 resulting from OnSite services contracts will be billed within the normal
twelve-month business cycle, although additional unbilled receivables will
continue to build based on the terms of the contracts. These contracts require
estimates of periodic revenue earned and costs to be incurred to deliver
products or services and are subject to revision as work progresses. Revisions
in the estimates are reflected in operations in the period in which facts
requiring those revisions become known.
Certain contracts provide for reimbursement of expenses, which are classified as
a reduction of operating expenses in the accompanying financial statements.
31
Certain of the Company's OnSite services contracts are subject to "fiscal
funding" clauses, which provide that, in the event of budgetary constraints, the
client is entitled to reduce the level of services to be provided by the Company
with a corresponding reduction in the fee to be paid by the client or, in
certain circumstances, to terminate the services altogether. Revenues are
recognized under such contracts only when the likelihood of cancellation is
considered by the Company to be remote.
The Company recognizes revenue upon delivery of software and receipt of a signed
contractual obligation, and substantial payment due from the customer within
normal trade terms, if no significant vendor obligations remain. Maintenance and
enhancement agreements provide for telephone support and error correction for
current versions of licensed systems, as well as 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 agreement. The Company's policy is to
charge interest on or discount unbilled software and services receivables not
expected to be billed within one year, which were approximately $585 and $1,375
at September 30, 1998 and 1997, respectively. The Company classifies such
receivables as current assets consistent with its business cycle. The Company
does not separately present the cost of maintenance and enhancements revenues
because it is impracticable to separate such cost from the cost of software
sales.
The Company has "bundled" contracts which include both OnSite management
services or other software services and software licenses. Because licensing of
the software is not dependent on continuation of the OnSite management services
or other software services portions of the contract, the software revenue is
recognized upon delivery. The remainder of the contract revenue is recorded in
the Company's consolidated statement of operations as outsourcing services or
software services revenue.
The Company provides software-related services, including systems implementation
and integration services. Services are generally provided under time and
materials contracts and revenue is recognized as the services are provided. In
some circumstances, services are provided under fixed-price arrangements in
which revenue is recognized on the percentage-of-completion method. Revisions in
estimates of costs to complete are reflected in operations in the period in
which facts requiring those revisions become known.
Cash Equivalents: Cash equivalents are defined as short-term, highly liquid
investments with a maturity of three months or less at the date of purchase.
Short-Term Investments: In accordance with SFAS 115, management determines the
appropriate classification of debt securities at the time of purchase.
Available-for-sale securities are stated at fair value.
Long-Lived Assets: 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.
32
Cost in excess of fair value of net assets acquired is associated with the
companies acquired, and is amortized over periods ranging from 10 to 20 years
using the straight-line method. The Company periodically reviews for impairment
the carrying value of the costs in excess of net assets acquired. The Company
will record an impairment in its operating results if the carrying value exceeds
the future undiscounted cash flows of the related assets.
Capitalized Computer Software Costs: The Company capitalizes direct costs
associated with development of software for resale. Amortization of such
capitalized costs is the greater of the amount computed using (a) the ratio that
current gross revenues for a product bear to the total of current and
anticipated future gross revenues of that product or (b) the straight-line
method over the remaining estimated economic life of the product including the
period being reported on. Amortization begins when the product is available for
general release to customers.
Common Stock Split: On April 16, 1998, the Company's Board of Directors
authorized a two-for-one stock split effected in the form of a 100% stock
dividend distributed on May 15, 1998 to stockholders of record on May 1, 1998.
Stockholders' equity has been restated to give retroactive recognition to the
stock split for all periods presented by reclassifying from capital in excess of
par value to common stock the par value of the additional shares arising from
the split. In addition, all references in the financial statements to number of
shares and per share amounts have been restated.
Income Per Share: Statement of Financial Accounting Standards No. 128, "Earnings
Per Share" (SFAS 128), was effective for periods ending after December 15, 1997.
As a result, the Company changed the method used to compute income per share and
restated all prior periods presented. Under the new requirements, net income per
common share excludes the dilutive effect of both stock options and convertible
debentures and net income per share -- assuming dilution is based on 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 the net income per common share and net income per share --
assuming dilution calculations follow:
1998 1997 1996
------- ------- -------
Numerator
Net income available to
common stockholders,
used for net income per
common share $21,374 $22,891 $ 9,119
Effect of dilutive securities:
6 1/4% convertible debentures -- 515 1,200
------- ------- -------
Net income available to
common stockholders
after assumed conversions $21,374 $23,406 $10,319
======= ======= =======
Denominator
Denominator for net income
per common share--
weighted average shares 33,532 29,996 28,140
Effect of dilutive securities:
Employee stock options 2,503 1,826 1,822
6 1/4% convertible debentures -- 2,302 3,128
------- ------- -------
Dilutive potential common shares 2,503 4,128 4,950
------- ------- -------
Denominator for net income per
share--assuming dilution 36,035 34,124 33,090
======= ======= ======
Net income per common share $ 0.64 $ 0.76 $ 0.32
Net income per share--
assuming dilution $ 0.59 $ 0.69 $ 0.31
33
The Company has $74,750 of convertible debentures that, if converted, will add
approximately 2,800 additional shares to common shares outstanding. These
debentures were antidilutive for fiscal year 1998 and therefore are not included
in the above denominator for net income per share -- assuming dilution.
Covenants-Not-To-Compete: These amounts are amortized using the straight-line
method over 60 months, their contractual lives, from their respective
acquisition dates.
Foreign Currency Translation: The local currency is the functional currency of
the Company's foreign subsidiary. Assets and liabilities of the foreign
subsidiary are translated into U.S. dollars at current exchange rates and
resulting translation adjustments are included as a separate component of
stockholders' equity. Revenue and expense accounts of these operations are
translated at average exchange rates prevailing during the year. Transaction
gains and losses, which were not material, are included in the results of
operations of the period in which they occur. As of September 30, 1998, the
currency translation adjustment was immaterial to the Company's consolidated
financial statements.
New Accounting Standards: Statement of Position 97-2, "Software Revenue
Recognition" (SOP 97-2), was issued in December 1997 and is effective for all
fiscal years beginning after December 15, 1997. Statement of Position 98-4,
"Deferral of Certain Provisions of SOP 97-2" (SOP 98-4), was issued in April
1998 and defers for one year (i.e., until fiscal years beginning after December
15, 1998) the application of certain provisions of SOP 97-2. SOP 97-2 introduces
a new framework whereby revenue would be recognized for each element in a
software licensing arrangement when certain criteria are met. SOP 97-2 requires
license fees to be allocated to the separate elements of multiple element
arrangements based on "vendor-specific objective evidence of fair value" and
provides guidance on postcontract customer support arrangements. SOP 98-4 defers
the application of the provisions of SOP 97-2 which define what is considered
vendor-specific objective evidence of the fair value of the various elements in
a multiple-element arrangement. The Company currently does not believe this new
accounting guidance will have a significant impact on its results of operations,
but continues to evaluate implementation guidance on this subject as it is
published.
In June 1997, Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income" (SFAS 130), was issued. Under SFAS 130 all items that meet
the definition of comprehensive income will be reported in a financial statement
for the period in which they are recognized. Comprehensive income will include
changes in the balances of items that are reported directly in a separate
component of stockholders' equity on the Consolidated Balance Sheets. The
Company will make the disclosures required by SFAS 130 in the first quarter of
1999. The adoption of SFAS 130 will have no impact on the Company's net income
or stockholders' equity.
34
Statement of Financial Accounting Standards No. 131, "Disclosures about Segments
of an Enterprise and Related Information" (SFAS 131), was issued in June 1997.
SFAS 131 requires that a public business enterprise report financial and
descriptive information about its reportable operating segments. Generally,
financial information is required to be reported on the basis used internally
for evaluating segment performance and resource allocation. SFAS 131 is
effective for fiscal years beginning after December 31, 1997, however,
disclosure is not required in interim financial statements in the initial year
of adoption. Accordingly, the Company will make the required disclosures for the
fiscal year ending September 30, 1999, although the Company has not fully
assessed the impact of SFAS 131 on its financial disclosures.
Reclassifications: Certain prior year information has been reclassified to
conform with current year presentation.
Note B -- Cash and Short-Term Investments
In 1998, securities held as available-for-sale consisted of state and municipal
securities and corporate debt securities. At September 30, 1998, the Company has
classified all securities as available for sale. The available-for-sale
portfolio, stated at fair value, is comprised of highly liquid investments
available for current operations and general corporate purposes and,
accordingly, is classified as short-term investments.
September 30 1998 1997
------- -------
Cash and cash equivalents $18,942 $29,809
Short-term investments, including
accrued interest of $1,199 (amortized
cost of $59,314) 59,364 --
------- -------
Cash and short-term investments $78,306 $29,809
======= =======
Short-term investments at September 30 1998 1997
------- -------
State and municipal securities $33,602 $ --
Corporate debt securities 25,762 --
------- -------
$59,364 $ --
======= =======
The contractual maturities of short-term
investments held at September 30, 1998
Weighted
Average
Par Contractual
Value Interest Rate Fair Value
------- ------------- ----------
Less than 1 year $36,552 5.37% $36,589
1-2 years 11,235 5.29% 11,446
2-3 years 7,015 5.88% 7,150
3-4 years 2,000 6.40% 2,040
>4 years 931 5.80% 940
------- -------
$57,733 $58,165
======= =======
During the year ended September 30, 1998, gross realized gains on sales of
available-for-sale securities totaled $56.
35
Note C -- Acquisitions
In September 1998, the Company acquired all of the outstanding stock of Fygir
Logistic Information Systems, B.V. (Fygir). Fygir is a leading provider of
supply chain planning software. The total cost of the acquisition was $35,147,
of which $2,250 is held in escrow. Provided the Company does not have any claim
to the amount escrowed, the Company will release any amounts remaining in the
escrow to the seller on September 2, 1999. In conjunction with the acquisition,
which was accounted for as a purchase, the Company recorded a charge to
operations of $16,063 for in-process research and development at the time of the
acquisition. Included in this amount were the fair values of Fygir products
under development that had not reached technological feasibility at the time of
the acquisition. In addition, the Company charged $647 to the cost of the
acquisition for incremental costs including professional fees and other costs
directly related to the acquisition. The cost in excess of fair value of net
assets acquired is being amortized over 10 years. The purchase price was
allocated as follows:
Net tangible assets acquired $ 1,272
Purchased software, including core technology 7,445
Purchased research and development (a) 16,063
Cost in excess of fair value of assets acquired 10,367
-------
Total purchase price $35,147
=======
(a) Purchased research and development, charged to expense at date of purchase,
represents the estimated fair value of specifically identified projects under
development which did not meet the applicable accounting criteria for
capitalization.
The pro forma effect of this acquisition on operations is immaterial.
Note D -- Property and Equipment
September 30 1998 1997
------- -------
Land $ 1,596 $ 1,377
Building and building improvements 23,091 20,092
Computer equipment and software 35,784 27,209
Other equipment, furniture,
fixtures, and leasehold improvements 28,909 20,099
------- -------
89,380 68,777
Less accumulated depreciation 33,518 28,067
------- -------
$55,862 $40,710
======= =======
Depreciation expense for the years ended September 30, 1998, 1997, and 1996 was
$8,303, $6,349, and $5,317, respectively.
36
Note E -- Other Assets and Deferred Charges
September 30 1998 1997
------- ------
Deferred costs and sales
commissions related to OnSite
services contracts in progress (a) (b) $ 5,180 $3,528
Purchased software (b) (c) 8,398 1,725
Deferred debt issuance expenses (b) (d) 2,105 -
Deferred tax asset 1,540 -
Other 1,225 1,628
------- ------
$18,448 $6,881
======= ======
(a) Amortized over the remaining term of the OnSite service contract.
(b) Shown net of accumulated amortization.
(c) Includes software acquired as part of business acquisitions.
(d) Amortized over the term of the related debt.
Note F -- Long-Term Debt
September 30 1998 1997
------- ------
5% convertible subordinated
debentures, due 2004 $74,750 $ -
Financing agreement 4,030 1,799
Other 745 1,975
------- ------
Total long-term debt 79,525 3,774
Less current portion 1,100 1,225
------- ------
Long-term debt, net of current portion $78,425 $2,549
======= ======
Aggregate annual maturities of long-term debt are as follows: 1999 - $1,100;
2000 - $549; 2001 - $600; 2002 - $2,526; and thereafter - $74,750.
In October 1997, the Company issued $65,000 of convertible subordinated
debentures bearing interest at 5% and maturing on October 15, 2004. In November
1997, pursuant to an underwriters' option, the Company issued an additional
$9,750 of convertible debentures. 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 the par decreasing to par on October 15, 2003. The fair value of the
convertible subordinated debentures at September 30, 1998 was approximately
$61,295. The Company has 2,834 shares reserved for issuance related to these
debentures.
37
The Company has a $30,000 senior revolving credit agreement, which terminates in
June 2000 with optional annual renewals. There were no borrowings outstanding at
September 30, 1998 or 1997. During the fiscal year ended September 30, 1998, the
Company borrowed $14,000 under the agreement. The interest rate under the
agreement is based on one of three formulae -- one tied to the prime rate of the
lender, one at a rate offered by the bank, and another tied to the London
Inter-Bank Offered Rate (LIBOR). The weighted average interest rate on
borrowings outstanding during 1998 was 6.36%. 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. During fiscal year 1998, the covenants allowed the Company to pay
non-stock dividends, to repurchase capital stock, to make distributions of
assets to stockholders as long as the aggregate amount does not exceed $5,000 in
any fiscal year, and to pay stock dividends. In October 1998, the agreement
covenants were amended to allow the Company to repurchase capital stock not to
exceed $35,000 and 3,000 shares before April 15, 1999.
In August 1997, the Company entered into a $4,275 financing agreement in
connection with an OnSite services contract. At September 30, 1998, the Company
had $4,030 drawn on the agreement. The agreement provides for the Company to use
the balance in predetermined increments by December 1998, at which time the
outstanding amount will be paid down in 60 equal monthly installments.
In September 1993, the Company issued $34,500 of convertible subordinated
debentures bearing interest at 6 1/4% and maturing on September 1, 2003. The
debentures were convertible into common stock of the Company at any time prior
to redemption or maturity at a conversion price of $15 per share. On April 9,
1997, the Company announced that it called for redemption all of its outstanding
6 1/4% convertible subordinated debentures. The redemption date was May 9, 1997.
During fiscal year 1997, 4,162 shares were issued related to the conversion of
all but $55 of the remaining convertible subordinated debentures. Had the 4,162
converted shares been outstanding for the full year ended September 30, 1997,
net income per common share would have decreased by $.04 to $.72. The Company
redeemed bonds not converted with a principal, accrued interest, and premium
amount of $58.
Interest paid during the years ended September 30, 1998, 1997, and 1996 was
$1,893, $904, and $2,183, respectively.
38
Note G -- Benefit Plans
Stock Option Plans: The Company has stock option plans for the benefit of its
key employees and non-employee directors that provide for the grant of options
to purchase the Company's common stock at 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 the Company's Annual Meeting of Shareholders on February
24, 1998, an amendment to the Plan was approved increasing the number of shares
of common stock reserved for issuance by 2,000. At September 30, 1998, only
stock options have been issued pursuant to the plan.
There were 1,985 shares of common stock reserved for future grants under the
stock option plans at September 30, 1998. The outstanding stock options expire
on various dates through 2008. Options granted to employees generally have
10-year terms and vest and become fully exercisable at the end of three years of
continued employment. There are 1,580 options granted to senior management that
have six-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, 1998, 910 of these options were exercisable. There are 563
options granted to senior management in 1998 that have ten-year terms and vest
and become exercisable when certain performance conditions are met. At September
30, 1998, none of these options was exercisable. In addition, 180 options
granted to non-employee directors, of which 96 are exercisable at September 30,
1998, have six-year terms and vest and become fully exercisable in five years.
In October 1995, the Financial Accounting Standards Board issued FASB Statement
No. 123, "Accounting for Stock-Based Compensation" (SFAS 123). This statement
requires that companies with stock-based compensation plans either recognize
compensation expense based on new fair value accounting methods or continue to
apply the provisions of Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees" (APB 25), and disclose pro forma net income and
earnings per share assuming the fair value method had been applied. The Company
has elected to follow APB 25 and related interpretations in accounting for its
employee stock options and make the pro forma disclosures required by SFAS 123.
The following pro forma amounts were determined as if the Company had accounted
for its stock options using the fair value method as described in that
statement:
Year Ended September 30 1998 1997
------- -------
As Reported:
Net income $21,374 $22,891
Net income per common share $ 0.64 $0.76
Net income per share-- assuming dilution $ 0.59 $0.69
Pro Forma:
Net income $18,938 $22,462
Net income per common share $ 0.56 $0.75
Net income per share-- assuming dilution $ 0.53 $0.67
Because the method of accounting under SFAS 123 has not been applied to options
granted prior to October 1, 1995, the resulting pro forma compensation cost may
not be representative of that to be expected in future years.
39
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 1998 and 1997, respectively: risk-free interest rates of 5.7%
and 6.0%; dividend yield of 0%; volatility factors of the expected market price
of the Company's common stock of 50.8% and 47.1%; and a weighted-average
expected life of the options of four years.
A summary of the Company's stock option activity and related information for the
years ended September 30 follows:
1998 1997 1996
Weighted- Weighted- Weighted-
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------ --------- ------ --------- ------ ---------
Outstanding
at beginning of year 4,582 $7.58 5,200 $6.91 5,192 $6.74
Granted 1,341 22.58 548 7.32 320 8.56
Exercised (1,129) 5.88 (870) 3.51 (130) 2.30
Canceled (159) 11.78 (296) 7.99 (182) 9.07
------ ------ ----- ----- ----- -----
Outstanding
at end of year 4,635 $12.18 4,582 $7.57 5,200 $6.91
====== ====== ===== ===== ===== =====
Options exercisable
at year end 2,319 $7.64 1,940 $5.19 2,441 $3.95
====== ====== ===== ===== ===== =====
Weighted-average fair
value of options
granted during the year $10.27 $3.20 $3.60
The following table summarizes information about stock options outstanding and
exercisable at September 30, 1998:
Outstanding Exercisable
Weighted- ----------- -----------
Average Weighted- Weighted-
Remaining Average Average
Range of Contractual Exercise Exercise
Exercise Prices Shares Life (yrs.) Price Shares Price
--------------- ------ ----------- ------------ ------ ---------
$ 1.47 - $ 9.31 1,607 4.83 $ 5.95 1,091 $ 5.14
9.53 - 10.00 1,555 4.64 9.78 1,176 9.72
10.13 - 28.53 1,473 8.80 21.52 52 12.85
--------------- ----- ---- ------ ----- ------
$ 1.47 - $28.53 4,635 6.03 $12.18 2,319 $ 7.64
=============== ===== ==== ====== ===== ======
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, 1998
there were 2,026 shares held by the ESOT.
40
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, 1998, there were 160
restricted shares sold but not exchanged for unrestricted shares.
Savings Plan: The Company also provides a defined contribution 401(k) plan to
substantially all its U.S. employees, whereby the Company may make matching
contributions equal to a percentage of the contribution made by participants.
One half of the Company's contributions are used to buy shares of the Company's
common stock. Expenses under this plan for the years ended September 30, 1998,
1997, and 1996 were $3,342, $2,253, and $1,835, respectively.
Note H -- Income Taxes
The components of the provision for income taxes are as follows:
Year Ended September 30 1998 1997 1996
------- ------- -------
Current:
Federal $16,128 $13,090 $4,592
State 5,316 3,687 1,957
Foreign - - (405)
------- ------- ------
Total Current 21,444 16,777 6,144
Deferred (4,586) (1,051) 740
------- ------- ------
$16,858 $15,726 $6,884
======= ======= ======
A reconciliation of the provision for income taxes to the federal statutory rate
follows:
Year Ended September 30 1998 1997 1996
------- ------- -------
Expected federal tax rate 35.0 % 35.0 % 35.0 %
Adjustments due to:
Effect of state income tax 9.5 % 7.4 % 6.1 %
Foreign net operating loss not benefited 1.1 % - 2.2 %
Research and development tax credit (2.7)% (3.1)% (2.3)%
Other 1.2 % 1.4 % 2.0 %
------- ------- -------
44.1 % 40.7 % 43.0 %
======= ======= =======
The fiscal year 1998 provision for income taxes does not reflect the customary
relationship between income and tax expense principally due to the write-off of
purchased research and development, which is not deductible for state income tax
purposes. The rate was further affected by the expiration of the research and
development tax credit as of June 30, 1998. Subsequent to fiscal year end, the
research and development tax credit was retroactively reinstated.
At September 30, 1998, the Company has $21,679 tax loss carryforwards in various
states and $9,867 of net operating loss carryforwards in foreign jurisdictions.
The state tax loss carryforwards expire in various periods ending September 30,
2013. The foreign tax losses have indefinite carryforwards. At September 30,
1998 and 1997, the Company has a valuation allowance of $1,985 and $1,258,
respectively, with respect to the deferred tax assets related to the state and
foreign carryforwards.
Income taxes paid during fiscal years ended September 30, 1998, 1997, and 1996
were $15,716, $6,500, and $6,029, respectively.
The tax effects of the temporary differences that give rise to the significant
portions of the deferred tax assets and liabilities as of September 30, 1998 and
1997 are as follows:
41
September 30 1998 1997
------ -------
Deferred Tax Assets:
Purchased research and development $7,364 $ 1,960
Accrued expenses and reserves 3,808 2,941
Tax credits & loss carryforwards, net of valuation
allowance 2,630 1,826
Purchased software 521 393
------ -------
Total Deferred Tax Assets 14,323 7,120
------ -------
Deferred Tax Liabilities:
Depreciation and amortization (1,238) (1,820)
Unbilled accounts receivable (2,651) -
Software capitalization (6,354) (5,983)
Prepaids and other accelerated expenses (2,540) (629)
------ -------
Total Deferred Tax Liabilities (12,783) (8,432)
------ -------
Net Deferred Tax Asset (Liability) $1,540 $(1,312)
====== =======
Note I -- Product Development, Commitments, and Other Items
Product development expenditures, including software maintenance expenditures,
for the years ended September 30, 1998, 1997, and 1996, were approximately
$39,203, $25,941, and $21,247, respectively. After capitalization (Note A) these
amounts were approximately $31,188, $18,434, and $14,811, respectively, and were
charged to operations as incurred. For the same years, amortization of
capitalized software costs (not included in expenditures above) amounted to
$4,924, $2,850, and $1,458, respectively.
Rent expense for the years ended September 30, 1998, 1997, and 1996 was $4,211,
$3,425, and $2,909, respectively. Aggregate rentals payable under significant
non-cancelable lease agreements with initial terms of one year or more at
September 30, 1998, are as follows:
Fiscal year Amount
- ----------- -------
1999 $ 4,041
2000 3,607
2001 3,210
2002 2,995
2003 2,094
Thereafter 5,713
-------
$21,660
=======
Under the terms of the purchase agreement with Adage Systems International, Inc.
(Adage), the Company may be required to pay additional consideration in either
additional shares (up to 3,000 shares) of common stock or a combination of
additional shares of common stock and cash, in the event that the market price
of the common stock approximately five years after the closing is lower than the
base price. The base price may not be lower than $7.50 or higher than $25, and
will be determined pursuant to a formula tied to the pre-tax profits of Adage
during the five-year period commencing October 1,1995. Certain future payments
would result in an adjustment to the purchase price.
During October 1998, the Company repurchased approximately 1,100 of its common
shares for $10,300 based on the Board of Directors' authorization to purchase up
to 3,000 of its common shares.
42
Note J -- Legal Matters
On October 4, 1995, John J. Wallace filed a purported class action lawsuit in
the United States District Court for the Eastern District of Pennsylvania
against the Company; Michael J. Emmi, Chairman of the Board, President and Chief
Executive Officer of the Company; Michael D. Chamberlain, Senior Vice President
and a director of the Company; and Eric Haskell, Senior Vice President, Finance
& Administration, Treasurer, and Chief Financial Officer of the Company. The
plaintiff filed an amended complaint on November 28, 1995 and a second amended
complaint on February 3, 1997. The class period alleged is from June 5, 1995
through October 2, 1995. The second amended complaint sought damages in
unspecified amounts as well as equitable relief.
In April 1996, the Company's Motion to Dismiss the amended complaint was granted
in part and denied in part. In September 1997, the Company's Motion to Dismiss
the second amended complaint was granted in part and denied in part, and
plaintiff was permitted to pursue a claim that defendants violated section 10(b)
of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder to
the extent that it alleges a failure to make certain disclosures in the
Company's Form 10-Q for the third quarter of fiscal 1995. On December 3, 1997,
the Court approved a Stipulation of Dismissal and Entry of Final Judgment filed
by the parties pursuant to which all remaining claims were dismissed with
prejudice and the Court entered a final judgment in favor of the Company as to
all remaining claims in the action. On December 30, 1997, the plaintiff filed a
notice of appeal with respect to those claims which were dismissed pursuant to
the Company's Motions to Dismiss. On October 28, 1998, the Company and counsel
for the plaintiff reached an agreement in principle to settle the matter for
$750,000. A settlement class must be determined by the United States District
Court for the Eastern District of Pennsylvania and the overall settlement must
be approved by the Court.
Note K -- Quarterly Results of Operations (Unaudited)
The following is a summary of the quarterly results of operations for the fiscal
years ended September 30, 1998 and 1997:
December 31 March 31 June 30 September 30
----------- --------- ------- ------------
Three Months Ended 1997 1996 1998 1997 1998 1997 *1998 1997
- ------------------ ------- ------- ------- ------- -------- ------- -------- -------
Revenues $87,281 $60,532 $96,084 $67,385 $105,040 $75,094 $115,263 $87,035
Gross profits 32,768 22,293 34,173 24,787 39,717 29,122 41,751 35,070
Income (loss) before income taxes 10,926 6,003 12,322 7,743 15,991 10,675 (1,007) 14,196
Provision for income taxes 4,481 2,461 5,021 3,175 6,554 4,270 802 5,820
Net income (loss) $ 6,445 $ 3,542 $ 7,301 $ 4,568 $9,437 $ 6,405 $ (1,809) $ 8,376
Net income (loss) per common share ** $ 0.19 $ 0.13 $ 0.22 $ 0.16 $ 0.28 $ 0.21 $ (0.05) $ 0.26
Net income (loss) per
share--assuming dilution ** $ 0.18 $ 0.12 $ 0.20 $ 0.14 $ 0.26 $ 0.19 $ (0.05) $ 0.24
* Includes a pre-tax charge of $16,063 for purchased research and development.
** The 1997 income per share amounts have been restated to reflect the adoption
of SFAS 128, "Earnings per Share."
Certain quarterly information has been reclassified to conform to the September
30, 1998 classification.
43
Report of Independent Auditors
The Board of Directors and Stockholders
Systems & Computer Technology Corporation
We have audited the accompanying consolidated balance sheets of Systems &
Computer Technology Corporation as of September 30, 1998 and 1997, and the
related consolidated statements of operations, stockholders' equity, and cash
flows for each of the three years in the period ended September 30, 1998. Our
audits also included the financial statement schedule listed in the Index at
Item 14(a). These financial statements and schedule are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Systems &
Computer Technology Corporation at September 30, 1998 and 1997, and the
consolidated results of its operations and its cash flows for each of the three
years in the period ended September 30, 1998, in conformity with generally
accepted accounting principles. Also, in our opinion, the related financial
statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
/s/ Ernst & Young LLP
Philadelphia, Pennsylvania
October 23, 1998,
except for Note J, as to which the date is October 28, 1998
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not Applicable.
44
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Information required under this Item is contained in the Registrant's
Definitive Proxy Statement to be delivered to shareholders in connection with
the Annual Meeting of Shareholders scheduled to be held on February 26, 1999 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 26, 1999 and
is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Information required under this Item is contained in the Registrant's
Definitive Proxy Statement to be delivered to shareholders in connection with
the Annual Meeting of Shareholders scheduled to be held on February 26, 1999 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 26, 1999 and
is incorporated herein by reference.
45
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) Financial Statements, Financial Statement Schedule and Exhibits.
(1) The following consolidated financial statements of the Registrant
and its subsidiaries are included herein:
Consolidated Balance Sheets--September 30, 1998 and 1997
Consolidated Statements of Operations--Years Ended September 30,
1998, 1997, and 1996
Consolidated Statements of Cash Flows--Years Ended September 30,
1998, 1997, and 1996
Consolidated Statements of Stockholders' Equity--Years Ended
September 30, 1998, 1997, and 1996
Notes to Consolidated Financial Statements
(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.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
SYSTEMS & COMPUTER TECHNOLOGY CORPORATION AND SUBSIDIARIES
For the Three Years in the Period Ended September 30, 1998
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
----------- --------------- ------------------------------- ------------ --------------
Additions
-------------------------------
Charged to Charged to
Balance at Costs and Other Accounts Deductions Balance at
Description Beginning of Period Expenses -Describe -Describe End of Period
----------- ------------------- ---------- -------------- ----------- -------------
For the year ended September 30, 1998
Reserves and allowances deducted from
other assets and deferred charges:
Reserves for non-interest bearing
loans to employees
Short-term $ 56,000 $ 56,000
Long-term - -
Allowance for doubtful accounts 4,098,000 $2,483,000 $2,548,000(1) 4,033,000
---------- ---------- -------- ---------- ----------
Total $4,154,000 $2,483,000 $2,548,000 $4,089,000
For the year ended September 30, 1997:
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 1,590,000 $4,136,000 $1,628,000(1) 4,098,000
---------- ---------- -------- ---------- ----------
Total $1,646,000 $4,136,000 $1,628,000 $4,154,000
For the year ended September 30, 1996:
Reserves and allowances deducted from
other assets and deferred charges:
Reserves for non-interest bearing
loans to employees
Short-term $ 87,000 $ 36,000 $ 67,000(1) $ 56,000
Long-term - -
Allowance for doubtful accounts 1,003,000 1,212,000 625,000(1) 1,590,000
---------- ---------- -------- ---------- ----------
Total $1,090,000 $1,248,000 $ 692,000 $1,646,000
- ----------
(1) Uncollectible accounts written-off during the year
46
(3) Exhibits (not included in the copies of the Form 10-K sent to
stockholders).
No. Exhibit
--- -------
2.1 Agreement and Plan of Merger and Reorganization by
and among the Registrant, SCT Acquisition
Corporation, Adage Systems International, Inc. and
Gerald F. O'Connell and David Phelan (Exhibit A to
the Registrant's Form 8-K dated May 12, 1995) (1)
[Attached to the Agreement and Plan of Merger and
Reorganization were disclosure schedules generally
relating to the business acquired thereunder and
documents executed in connection with such Agreement.
Copies of such schedules and documents will be
furnished to the Commission upon request.]
2.2 Stock Purchase Agreement dated as of September 1,
1998 among SCT Holdings Corporation, Fygir Logistic
Information Systems BV, Meunier BV, L.A.D. Holding
BV, Egon de Waart Resource Management BV, Cyberfocus
BV, Dupoirier Holding BV, Pieter Leijten and Jurriaan
van der Lingen (Exhibit 2.1 to the Registrant's Form
8-K dated September 1, 1998) (1)
2.3 Assignment and Assumption Agreement dated as of
September 1, 1998 between SCT Holdings Corporation
and Systems & Computer Technology International B.V.
(Exhibit 2.2 to the Registrant's Form 8-K dated
September 1, 1998)(1)
3.1 Certificate of Amendment and Restated Certificate of
Incorporation (Exhibit 3 to Registrant's Form 10-Q
for the quarterly period ended March 31, 1998) (1)
3.2 Bylaws (Exhibit 3.2 to the Registrant's Registration
Statement on Form S-3 filed with the Securities and
Exchange Commission on September 1, 1993) (1)
4 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)
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)
- ---------------
(1) Incorporated by reference
47
10.3 Subsidiary Guaranty Agreement dated as of June 20,
1994 entered into by SCT Utility Systems, Inc. in
favor of Mellon Bank. (Identical Subsidiary
Guaranties, except as to the identity of the
guarantor, were entered into by SCT Public Sector,
Inc., SCT Financial Corporation, SCT International
Limited, SCT Software & Technology Services, Inc.,
and SCT Property, Inc.) (Exhibit 10.5 to the
Registrant's Form 10-K for the fiscal year ended
September 30, 1994)(1)
10.4 Extension Agreement dated June 20, 1996 among Systems
& Computer Technology Corporation, SCT Software &
Resource Management Corporation and Mellon Bank, N.A.
(Exhibit 10.12 to the Registrant's Form 10-K for the
fiscal year ended September 30, 1996) (1)
10.5 Amendment and Modification to Credit Agreement dated
as of April 8, 1997 among Systems & Computer
Technology Corporation and SCT Software & Resource
Management Corporation as Borrowers and Mellon Bank,
N.A. (Exhibit 10.1 to the Registrant's Form 10-Q for
the quarter ended June 30, 1997)(1)
10.6 Second Amendment and Modification to Credit Agreement
dated as of April 8, 1997 among Systems & Computer
Technology Corporation and SCT Software & Resource
Management Corporation as Borrowers and Mellon Bank,
N.A. (Exhibit 10.2 to the Registrant's Form 10-Q for
the quarter ended June 30, 1997) (1)
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.(2)
10.9 Fifth Amendment and Modification to Credit Agreement
dated as of October 16, 1998 among Systems & Computer
Technology Corporation and SCT Software & Resource
Management Corporation as Borrowers and Mellon Bank,
N.A. (2)
10.10 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)
- ------------------------
(1) Incorporated by reference
(2) Filed with this Annual Report on Form 10-K
(3) Compensatory Plan, Contract or Arrangement
48
10.11 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)
21 Subsidiaries of the Registrant (2)
23 Consent of Ernst & Young LLP (2)
27 Restated Financial Data Schedule (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.
The registrant filed a current report on Form 8-K dated September 1,
1998. Under Item 2, the registrant reported that a subsidiary of the registrant
had purchased all of the outstanding stock of Fygir Logistic Information Systems
B.V. ("Fygir") for $34.5 million. Fygir, headquartered in the Netherlands,
offers advance planning and scheduling software products to the process
industry.
- ------------------------
(1) Incorporated by reference
(2) Filed with this Annual Report on Form 10-K
(3) Compensatory Plan, Contract or Arrangement
49
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
SYSTEMS & COMPUTER TECHNOLOGY CORPORATION
(Registrant)
By: /s/ Michael J. Emmi
-------------------------------------------
Michael J. Emmi, Chairman of the Board
President and Chief Executive Officer
Date: December 21, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature Title Date
- --------------------------- ------------------------------ --------------------
/s/ Michael J. Emmi Chairman of the Board December 21, 1998
- --------------------------- President and Chief
Michael J. Emmi Executive Officer; Director
(Principal Executive Officer)
/s/ Michael D. Chamberlain Director December 21, 1998
- -----------------------------
Michael D. Chamberlain
/s/ Allen R. Freedman Director December 21, 1998
- ---------------------------
Allen R. Freedman
/s/ Thomas I. Unterberg Director December 21, 1998
- ---------------------------
Thomas I. Unterberg
/s/ Gabriel A. Battista Director December 21, 1998
- ---------------------------
Gabriel A. Battista
/s/ Eric Haskell Senior Vice President, Finance December 21, 1998
- -------------------------- and Administration, Treasurer
Eric Haskell and Chief Financial Officer
(Principal Financial and
Accounting Officer)
SYSTEMS & COMPUTER TECHNOLOGY CORPORATION
Index of Exhibits Filed Herewith
Exhibit No. Exhibit Page
- -------------- ------- ----
10.8 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. 1
10.9 Fifth Amendment and Modification to Credit Agreement dated as
of October 16, 1998 among Systems & Computer Technology
Corporation and SCT Software & Resource Management Corporation
as Borrowers and Mellon Bank, N.A. 5
21 Subsidiaries of the Registrant 9
23 Consent of Ernst & Young LLP 10
27 Restated Financial Data Schedule 11