SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
Form 10-Q
(Mark One)
/X/ Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the quarterly period ended March 31, 2002 or
/ / Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from _______ to _______.
0-11521
(Commission File Number)
SYSTEMS & COMPUTER TECHNOLOGY CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 23-1701520
(State or other jurisdiction (I.R.S. Employer
of incorporation) Identification No.)
Great Valley Corporate Center
4 Country View Road
Malvern, Pennsylvania 19355
(Address of principal executive offices)
Registrant's telephone number, including area code: (610) 647-5930
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes /X/ No / /
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
33,264,505 Common shares, $.01 par value, as of May 06, 2002
Page 1 of 29 consecutively numbered pages
SYSTEMS & COMPUTER TECHNOLOGY CORPORATION AND SUBSIDIARIES
INDEX
PART I. UNAUDITED FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets -
March 31, 2002 and September 30, 2001
Condensed Consolidated Statements of Operations -
Three Months Ended March 31, 2002 and 2001
Condensed Consolidated Statements of Operations -
Six Months Ended March 31, 2002 and 2001
Condensed Consolidated Statements of Cash Flows -
Six Months Ended March 31, 2002 and 2001
Notes to Condensed Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures
About Market Risk
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Item 4. Submission of Matters to a Vote of Security Holders
Item 6. Exhibits and Reports on Form 8-K
SIGNATURES
SYSTEMS & COMPUTER TECHNOLOGY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except per share amounts)
March 31, September 30,
2002 2001
(UNAUDITED) (NOTE)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 22,066 $101,475
Short-term investments, including
accrued interest of $933 and $352 88,674 62,854
Receivables, including $37,432
and $23,023 of earned revenues
in excess of billings, net of
allowance for doubtful accounts
of $4,301 and $3,179 88,412 80,914
Prepaid expenses and other receivables 32,935 18,101
-------- --------
TOTAL CURRENT ASSETS 232,087 263,344
PROPERTY AND EQUIPMENT--at cost, net
of accumulated depreciation 45,357 49,559
CAPITALIZED COMPUTER SOFTWARE COSTS,
net of accumulated amortization 10,211 12,399
GOODWILL, net of accumulated amortization 29,732 2,869
INTANGIBLE ASSETS, net of accumulated
amortization 11,693 3,756
OTHER ASSETS AND DEFERRED CHARGES 28,706 29,095
NET ASSETS OF DISCONTINUED OPERATIONS 16,274 17,917
-------- --------
TOTAL ASSETS $374,060 $378,939
======== ========
Note: The condensed consolidated balance sheet at September 30, 2001, has
been derived from the audited financial statements at that date.
See notes to condensed consolidated financial statements.
SYSTEMS & COMPUTER TECHNOLOGY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (continued)
(in thousands, except per share amounts)
March 31, September 30,
2002 2001
(UNAUDITED) (NOTE)
LIABILITIES & STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 4,335 $ 8,070
Current portion of long-term debt 2,390 2,771
Income taxes payable 617 7,697
Accrued expenses 54,979 39,274
Deferred revenue 21,101 21,259
-------- --------
TOTAL CURRENT LIABILITIES 83,422 79,071
LONG-TERM DEBT, less current portion 74,723 74,723
OTHER LONG-TERM LIABILITIES 3,201 3,748
STOCKHOLDERS' EQUITY
Preferred stock, par value $.10 per
share--authorized 3,000 shares,
none issued -- --
Common stock, par value $.01 per share--
authorized 100,000 shares, issued
37,779 and 37,634 shares 378 376
Capital in excess of par value 121,025 120,040
Retained earnings 117,031 126,697
Accumulated other comprehensive loss (557) (340)
-------- --------
237,877 246,773
Less
Held in treasury, 4,607 and 4,630 common
shares--at cost (24,663) (24,876)
Notes receivable from stockholders (500) (500)
-------- --------
212,714 221,397
-------- --------
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY $374,060 $378,939
======== ========
Note: The condensed consolidated balance sheet at September 30, 2001, has
been derived from the audited financial statements at that date.
See notes to condensed consolidated financial statements.
SYSTEMS & COMPUTER TECHNOLOGY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(in thousands, except per share amounts)
For the Three Months Ended
March 31,
2002 2001
Revenues:
Outsourcing services $ 11,462 $ 14,066
Software sales and commissions 8,998 5,308
Maintenance and enhancements 25,394 21,002
Software services 30,666 29,464
Interest and other income 1,217 1,264
-------- --------
77,737 71,104
Expenses:
Cost of outsourcing services 8,475 11,373
Cost of software sales, commissions,
maintenance and enhancements 18,882 16,802
Cost of software services 23,518 20,575
Selling, general and administrative 19,303 21,463
Retirement and restructuring charges 7,574 --
Asset impairment charge -- 7,831
Interest expense 1,047 1,048
-------- --------
78,799 79,092
Loss from continuing operations
before income taxes (1,062) (7,988)
Provision (benefit) for income taxes 544 (3,222)
--------- ---------
Loss from continuing operations (1,606) (4,766)
Discontinued operations:
Loss from discontinued operations,
adjusted for applicable benefit
for income taxes of $579 and $3,588 (1,580) (6,510)
Loss on sale of discontinued operations,
net of income taxes of $3,446 and $0 (7,042) --
--------- ---------
Loss from discontinued operations (8,622) (6,510)
--------- ---------
Net loss $(10,228) $(11,276)
========= =========
Loss from continuing operations:
per common share ($0.05) ($0.15)
per share -- assuming dilution ($0.05) ($0.15)
Loss from discontinued operations:
per common share ($0.26) ($0.20)
per share -- assuming dilution ($0.26) ($0.20)
Net loss:
per common share ($0.31) ($0.34)
per share -- assuming dilution ($0.31) ($0.34)
Common shares and equivalents outstanding:
Average common shares 33,126 32,811
Average common shares -- assuming dilution 33,126 32,811
See notes to condensed consolidated financial statements.
SYSTEMS & COMPUTER TECHNOLOGY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(in thousands, except per share amounts)
For the Six Months Ended
March 31,
2002 2001
Revenues:
Outsourcing services $ 23,868 $ 28,413
Software sales and commissions 16,479 17,436
Maintenance and enhancements 47,957 40,618
Software services 57,213 57,649
Interest and other income 2,714 2,573
-------- --------
148,231 146,689
Expenses:
Cost of outsourcing services 17,829 22,502
Cost of software sales, commissions,
maintenance and enhancements 33,861 31,906
Cost of software services 44,444 41,015
Selling, general and administrative 39,398 42,611
Retirement and restructuring charges 7,574 --
Asset impairment charge -- 7,831
Interest expense 2,093 2,103
-------- --------
145,199 147,968
Income (loss) from continuing operations
before income taxes 3,032 (1,279)
Provision (benefit) for income taxes 2,182 (644)
--------- ---------
Income (loss) from continuing operations 850 (635)
Discontinued operations:
Loss from discontinued operations,
adjusted for applicable benefit
for income taxes of $1,842 and $4,894 (3,474) (8,578)
Loss on sale of discontinued operations,
net of income taxes of $3,446 and $0 (7,042) --
--------- ---------
Loss from discontinued operations (10,516) (8,578)
--------- ---------
Net loss $ (9,666) $ (9,213)
========= =========
Income (loss) from continuing operations:
per common share $0.03 ($0.02)
per share -- assuming dilution $0.03 ($0.02)
Loss from discontinued operations:
per common share ($0.32) ($0.26)
per share -- assuming dilution ($0.31) ($0.26)
Net loss:
per common share ($0.29) ($0.28)
per share -- assuming dilution ($0.29) ($0.28)
Common shares and equivalents outstanding:
Average common shares 33,101 32,771
Average common shares -- assuming dilution 33,463 32,771
See notes to condensed consolidated financial statements.
SYSTEMS & COMPUTER TECHNOLOGY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(in thousands)
For the Six Months Ended
March 31,
2002 2001
OPERATING ACTIVITIES
Net loss $ (9,666) $ (9,213)
Adjustments to reconcile net loss to net
cash provided by (used in) operating
activities:
Asset impairment charge -- 11,585
Depreciation and amortization 10,871 13,902
Provision for doubtful accounts 1,135 1,401
Deferred tax benefit (1,504) (3,780)
Changes in operating assets and liabilities:
(Increase) decrease in receivables (1,834) 11,240
Increase in other current assets,
principally prepaid expenses (14,688) (8,273)
Increase (decrease) in accounts payable (4,705) 311
Decrease in income taxes payable (7,080) (1,684)
Increase (decrease) in accrued expenses 11,087 (441)
Increase (decrease) in deferred revenue (4,955) 348
(Increase) decrease in other operating
assets and deferred charges 982 (561)
--------- ---------
NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES (20,357) 14,835
INVESTING ACTIVITIES
Purchase of property and equipment (289) (4,695)
Capitalized computer software costs (563) (471)
Purchase of investments available for sale (69,844) (9,100)
Proceeds from sale or maturity of
investments available for sale 44,250 15,907
Purchase of businesses, net of cash acquired (33,402) (3,004)
--------- ---------
NET CASH USED IN INVESTING ACTIVITIES (59,848) (1,363)
FINANCING ACTIVITIES
Repayment of borrowings (381) (348)
Issuance (repurchase) of Company stock 213 (148)
Decrease in notes receivable from stockholders -- 110
Proceeds from exercise of stock options 964 1,942
--------- ---------
NET CASH PROVIDED BY FINANCING ACTIVITIES 796 1,556
INCREASE (DECREASE) IN CASH & CASH EQUIVALENTS (79,409) 15,028
CASH & CASH EQUIVALENTS--BEGINNING OF PERIOD 101,475 49,155
--------- ---------
CASH & CASH EQUIVALENTS--END OF PERIOD $ 22,066 $ 64,183
========= =========
SUPPLEMENTAL INFORMATION
Noncash investing and financing activities:
Purchase of businesses -- noncash portion $ -- $ 500
Conversion of subordinated debentures into
common stock -- 27
See notes to condensed consolidated financial statements.
SYSTEMS & COMPUTER TECHNOLOGY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE A--INTERIM FINANCIAL STATEMENTS
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 1O-Q and Rule 10-01 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
only of normal recurring accruals, except for the fiscal year 2002 retirement
and restructuring charges and the fiscal year 2001 asset impairment charge)
considered necessary for a fair presentation have been included. For further
information, refer to the consolidated financial statements and footnotes
thereto included in the Company's Annual Report on Form 10-K for the year ended
September 30, 2001. Operating results for the three and six-month periods ended
March 31, 2002, are not necessarily indicative of the results that may be
expected for the year ending September 30, 2002.
Certain prior year information has been reclassified to conform with the current
year presentation.
NOTE B--CASH AND SHORT-TERM INVESTMENTS
(in thousands)
Cash equivalents are short-term, highly liquid investments with maturities of
three months or less at the date of purchase.
Short-term investments consist of corporate and municipal debt securities.
Management determines the appropriate classification of the securities at the
time of purchase. At March 31, 2002, the portfolio of securities has been
classified as available for sale. These securities are carried at fair value,
based on quoted market values, with the unrealized gains and losses, net of
income taxes, reported as a component of accumulated other comprehensive loss.
The available-for-sale portfolio is comprised of highly liquid investments
available for current operations and general corporate purposes and,
accordingly, is classified as a current asset.
Short-term investments at March 31, 2002, are comprised of:
State and municipal securities $ 34,012
Corporate securities 54,662
--------
$ 88,674
The contractual maturities of short-term investments held as of March 31, 2002,
are:
Due in one year or less $ 45,124
Due after one year through four years 43,550
--------
$ 88,674
NOTE C--LONG-TERM INVESTMENTS
The Company has made investments for strategic business purposes of $16.0
million in the common and preferred stock of WebCT, a privately held Internet
company. The fair value of this investment, which is classified as a long-term
asset, is not readily determinable; therefore, it is carried at cost adjusted
for an other-than-temporary impairment discussed below. The Company regularly
reviews the underlying operating performance, cash flow forecasts, and recent
private equity transactions of this privately held company in assessing
impairment. In the second quarter of fiscal year 2001, the Company recorded
asset impairment charges of $7.8 million related to this investment. In the
third quarter of fiscal year 2001, the Company earned $2.7 million in shares of
WebCT. The Company earned these shares as a result of a joint marketing
agreement with WebCT pursuant to which schools with cumulative enrollments
totaling one million students licensed a product jointly developed by the
Company and WebCT. Commissions in the form of shares of WebCT will continue to
be earned as additional schools license this product now that this threshold has
been met. At March 31, 2002, the Company owns approximately 11% of the voting
shares of WebCT. At March 31, 2002, the aggregate investment in WebCT is $10.9
million, and is included in other assets and deferred charges in the
consolidated balance sheet.
Throughout fiscal year 1999, the Company made a series of investments in Campus
Pipeline, Inc. As of March 31, 2002, the Company held an approximately 57%
interest in the common stock of this affiliate, with a carrying amount of zero.
The Company has determined that it does not control Campus Pipeline because
there are fully voting convertible preferred shares outstanding that lower the
Company's voting interest to approximately 42%. Therefore, the Company accounts
for its investment using the equity method of accounting. The Company will not
record any additional future losses of Campus Pipeline and will not record any
future earnings until the cumulative, unrecorded losses are offset.
NOTE D--MANAGEMENT CHANGES AND RESTRUCTURING CHARGES
In the second quarter of fiscal year 2002, Michael J. Emmi, President, Chief
Executive Officer, and Chairman of the Board of Directors retired from the
Company. Michael D. Chamberlain, who has served the Company in various executive
capacities since 1986, most recently as Chief Operating Officer, and a member of
the Board of Directors since 1989, was elected President and Chief Executive
Officer. Allen R. Freedman, a member of the Company's Board of Directors since
1982, was elected non-executive Chairman of the Board. Mr. Freedman was Chairman
and Chief Executive Officer of Fortis, Inc., a multi-billion dollar financial
services company, prior to his retirement in July 2000.
In connection with Mr. Emmi's retirement, he received a compensation package
including a reduction of indebtednesses, the continuation of Mr. Emmi's life and
health insurance and other fringe benefits for periods ranging from two to five
years, as well as an assignment, to Mr. Emmi, of life insurance policies
covering Mr. Emmi, and the immediate vesting of certain rights under other
compensation plans. All Company stock options held by Mr. Emmi became vested and
were amended to permit Mr. Emmi to exercise them by the earlier of their
original expiration date or two years from the date of his resignation. The
Company recorded a charge of approximately $3.5 million related to the above
actions in the second quarter of fiscal year 2002. At March 31, 2002, $1.5
million of the accrual remains. The Company may pay an additional amount to Mr.
Emmi if certain strategic corporate objectives established by the Board before
Mr. Emmi's termination are achieved on or before December 31, 2002.
Also, during the quarter ended March 31, 2002, the Company implemented a third
plan for restructuring since the second quarter of the previous year. This plan
included the termination of employees, management changes, discontinuation of
non-critical programs and the disposition of related assets. During the quarter,
the Company recorded a charge of $4.1 million related to severance payments and
disposition of assets. At March 31, 2002, $2.6 million of the accrual remains.
In January and March 2002, the Company terminated approximately 110 employees
engaged primarily in development, special-programs and sales functions, 70 of
whom were part of the Company's international utilities operations.
During the third quarter of fiscal year 2001, the Company implemented
restructuring actions that were necessary to improve the Company's performance.
The restructuring plan included the termination of employees, management
changes, consolidation of certain facilities, and discontinuation of
non-critical programs. During the quarter ended June 30, 2001, the Company
accrued $3.5 million related to severance and termination benefits and $0.4
million of other costs based on a termination plan developed by management in
consultation with the Board of Directors. As of March 31, 2002, $0.6 million of
this accrual remains. In May and June 2001, the Company terminated approximately
150 employees engaged primarily in marketing, administrative, special-programs,
and development functions.
The Company continued to evaluate its business prospects and forecasts during
the fourth quarter of fiscal year 2001. As a result of its evaluation, the
Company implemented another restructuring plan, which included the
discontinuation of non-critical programs, termination of employees, and
consolidation of certain facilities primarily in the energy and utilities
business. The restructuring was carried out in an effort to improve the
Company's performance. During the fourth quarter of fiscal year 2001, the
Company accrued $0.5 million related to severance and termination benefits and
$0.6 million of other costs based on a termination plan developed by management
in consultation with the Board of Directors. As of March 31, 2002, $0.1 million
of this accrual remains. In August 2001, the Company terminated approximately 40
employees engaged primarily in marketing, administrative, special-programs, and
development functions.
NOTE E--ACQUISITIONS
Effective January 10, 2002, the Company acquired USA Education, Inc.'s (commonly
known as Sallie Mae) student information systems business (the business) for the
higher education market. Under the terms of the agreement, the Company acquired
Sallie Mae's Exeter Student Suite and Perkins/Campus Loan Management product
lines and related resources based in Cambridge, MA for approximately $15.5
million cash. If the business achieves certain predetermined criteria during the
remainder of fiscal year 2002, the Company will make an additional cash payment
of up to $2.0 million at September 30, 2002. In addition, the Company could make
further cash payments of up to $5.3 million over the next four years, contingent
upon the revenue derived from the license or other sale of the purchased product
lines over that period. Future payments made in connection with this acquisition
will be treated as additional consideration and will likely increase the amount
recorded as goodwill. The Company recorded goodwill of $11.5 million related to
the acquisition, all of which is deductible for tax purposes. Included in
goodwill is $1.3 million of costs, including professional fees and other costs
directly related to the acquisition. Some of these additional acquisition costs
are estimates that may change and could cause an adjustment to goodwill.
Intangible assets acquired included $3.4 million of purchased software and $0.8
million of other intangibles. The weighted-average amortization period is 6.0
years, 5.0 years for purchased software and 10.0 years for other intangibles.
These assets have been allocated to the Global Education Solutions reporting
segment for purposes of annual impairment testing under SFAS 142 (see Note K).
The Company purchased the business to increase its market opportunities in the
higher education market. The product lines purchased include an Oracle-based set
of solutions and technology, the components of which are expected to be
integrated into the Company's higher education product lines. The purchased
product lines also include a Microsoft-based solution that is under development
and when completed, will allow clients a technology choice.
In February 2002, the Company acquired the capital stock of Applied Business
Technologies, Inc. (ABT) for $16.8 million cash. The products acquired include
ABT's PowerCAMPUS, IQ.Web and PocketCAMPUS Mobile applications, as well as
related resources in Newtown Square, PA and their customer base. The Company
recorded goodwill of $14.8 million related to the acquisition, of which $4.5
million is deductible for tax purposes. Included in goodwill is $0.5 million of
costs, including professional fees and other costs directly related to the
acquisition. Some of these additional acquisition costs are estimates that may
change and could cause an adjustment to goodwill. Intangible assets acquired
included $2.7 million of purchased software and $1.8 million of other
intangibles. The weighted-average amortization period is 6.1 years, 5.0 years
for purchased software and 9.5 years for other intangibles. These assets have
been allocated to the Global Education Solutions reporting segment for purposes
of annual impairment testing under SFAS 142 (see Note K). The completion of this
transaction provides the Company with an expanded market share in small to
mid-sized institutions (enrollment under 2,500). It also allows the Company to
expand its current technology offerings in higher education to institutions that
have a preference for Microsoft, which provides a technology that is both
affordable and easy to manage.
NOTE F--DIVESTITURE
(in thousands)
As of the end of the second quarter of fiscal year 2002, the Company declared
the Global Manufacturing & Distribution Solutions (MDS) a discontinued business;
the results of MDS have been reported separately as discontinued operations in
the consolidated statements of operations. The prior year consolidated
statements of operations and balance sheet have been restated to present MDS as
a discontinued operation. For business segment reporting, MDS was previously
reported as a separate segment. Effective April 10, 2002, the Company signed a
definitive agreement to sell the MDS business to High Process Technology, Inc.,
a newly formed portfolio company of Golden Gate Capital and Parallax Capital
Partners for $13,200 in cash, subject to adjustment based on the net book value
of the assets at closing, which is expected to be on or about May 31, 2002. The
Company could receive up to an additional $3,000 based upon the new company
achieving specified revenue targets over the next three years. The consummation
of the transaction is subject to certain closing conditions and required
approvals. The Company recorded a pretax loss of $10,488 on the sale, which net
of a $3,446 tax benefit produced a net loss of $7,042. Revenues from the MDS
business were $9,449 and $12,753 for the three-month periods ending March 31,
2002 and 2001, respectively. MDS revenues for the six-month periods ending March
31, 2002 and 2001 were $17,641 million and $26,056 million, respectively. The
net assets of discontinued operations at September 30, 2001, were $17,917. Net
assets of the discontinued operation were $16,274 million as of March 31, 2002,
comprised of the following:
Accounts receivable $ 6,020
Prepaid expenses and other receivables 828
Property and equipment 2,281
Capitalized computer software costs 1,201
Goodwill 9,821
Intangible assets 3,682
Current liabilities (7,559)
Net Assets of Discontinued Operations $16,274
NOTE G--EARNINGS PER SHARE
(in thousands, except per share amounts)
A reconciliation of the numerators and the denominators of earnings per common
share and per share -- assuming dilution follows:
For the Three Months For the Six Months
Ended March 31, Ended March 31,
2002 2001 2002 2001
Numerator:
Income (loss) from continuing
operations available to
common stockholders ($ 1,606) ($ 4,766) $ 850 ($ 635)
Discontinued operations:
Loss from discontinued operations,
net of income taxes (8,622) (6,510) (10,516) (8,578)
------- ------- ------- -------
Net loss available
to common stockholders ($10,228) ($11,276) ($ 9,666) ($ 9,213)
======= ======= ======= =======
Denominator:
Weighted average common shares 33,126 32,811 33,101 32,771
Effect of dilutive securities:
Employee stock options -- -- 362 --
------- ------- ------- -------
Weighted average common shares
-- assuming dilution 33,126 32,811 33,463 32,771
======= ======= ======= =======
Income (loss) from continuing operations
per common share ($0.05) ($0.15) $0.03 ($0.02)
per share -- assuming dilution ($0.05) ($0.15) $0.03 ($0.02)
Loss from discontinued operations
per common share ($0.26) ($0.20) ($0.32) ($0.26)
per share -- assuming dilution ($0.26) ($0.20) ($0.31) ($0.26)
Net loss
per common share ($0.31) ($0.34) ($0.29) ($0.28)
per share -- assuming dilution ($0.31) ($0.34) ($0.29) ($0.28)
Potentially dilutive securities with an anti-dilutive effect (stock options in
the fiscal year 2002 periods and the fiscal year 2001 six-month period and
convertible debt in all periods presented) are not included in the above
calculation.
NOTE H--PRODUCT DEVELOPMENT
Product development expenditures, including software maintenance expenditures,
for the six months ended March 31, 2002 and 2001, were approximately $18.1
million and $21.0 million, respectively. After capitalization, these amounts
were approximately $18.1 million and $20.6 million, respectively, and were
charged to operations as incurred. For the same periods, amortization of
capitalized software costs (not included in expenditures above) amounted to $2.2
million and $2.1 million, respectively.
NOTE I--BUSINESS SEGMENTS
(in thousands)
As a result of the discontinuation of the Global Manufacturing & Distribution
Solutions business at the end of the second quarter of fiscal year 2002, the
Company has two reportable segments: Global Education Solutions (GES) and Global
Energy and Utilities Solutions (EUS). Summarized financial information
concerning the Company's reportable segments is shown in the following table.
The "All Other" column includes corporate-related items, elimination of
inter-segment transactions, amortization of intangible assets purchased in
business acquisitions, the retirement and restructuring charges in fiscal year
2002, and the asset impairment charge in fiscal year 2001. Interest and other
income is not included in the revenue disclosures below.
Three months ended March 31, 2002
All
GES EUS Other Total
Outsourcing services $ 8,350 $ 3,112 $ -- $ 11,462
Software sales and
commissions, and
maintenance and
enhancements 28,930 5,462 -- 34,392
Software services 20,032 10,634 -- 30,666
------- ------- ------- -------
External revenues 57,312 19,208 -- 76,520
Intersegment revenues -- 17 (17) --
Segment profit (loss) 6,839 759 (8,660) (1,062)
Three months ended March 31, 2001
All
GES EUS Other Total
Outsourcing services $ 9,846 $ 4,220 $ -- $ 14,066
Software sales and
commissions, and
maintenance and
enhancements 21,911 4,399 -- 26,310
Software services 15,489 13,975 -- 29,464
------- ------- ------- -------
External revenues 47,246 22,594 -- 69,840
Intersegment revenues 311 -- (311) --
Segment profit (loss) 4,338 (1,444) (10,882) (7,988)
Six months ended March 31, 2002
All
GES EUS Other Total
Outsourcing services $ 16,703 $ 7,165 $ -- $ 23,868
Software sales and
commissions, and
maintenance and
enhancements 53,950 10,486 -- 64,436
Software services 36,131 21,082 -- 57,213
------- ------- ------- -------
External revenues 106,784 38,733 -- 145,517
Intersegment revenues -- 35 (35) --
Segment profit (loss) 12,042 1,504 (10,514) 3,032
Six months ended March 31, 2001
All
GES EUS Other Total
Outsourcing services $ 20,028 $ 8,385 $ -- $ 28,413
Software sales and
commissions, and
maintenance and
enhancements 44,085 13,969 -- 58,054
Software services 29,575 28,074 -- 57,649
------- ------- ------- -------
External revenues 93,688 50,428 -- 144,116
Intersegment revenues 643 -- (643) --
Segment profit (loss) 9,484 1,976 (12,739) (1,279)
NOTE J--COMPREHENSIVE INCOME
(in thousands)
Three Months Six Months
Ended March 31, Ended March 31,
2002 2001 2002 2001
Net loss ($10,228) ($11,276) ($9,666) ($9,213)
Other comprehensive income (loss) (210) (44) (217) 49
-------- -------- ------- -------
Total Comprehensive Loss ($10,438) ($11,320) ($9,883) ($9,164)
Other comprehensive income (loss) relates primarily to currency translation
adjustments related to foreign subsidiaries whose functional currencies are
their local currencies.
NOTE K--GOODWILL AND INTANGIBLE ASSETS
(in thousands, except per share amounts)
Effective October 1, 2001, the Company adopted Statement of Financial Accounting
Standards No. 142, "Goodwill and Other Intangible Assets," which resulted in
discontinuing the amortization of goodwill. Under the Statement, goodwill will
instead be carried at its book value as of October 1, 2001, and any future
impairment of goodwill will be recognized as either a change in accounting
principle (with respect to the transitional impairment test conducted within six
months of adoption) or as an operating expense in the period of impairment.
However, under the terms of the Statement, identifiable intangibles with
identifiable lives will continue to be amortized.
The Company's goodwill was $29,732 and $2,869 at March 31, 2002, and September
30, 2001, respectively. The increase in goodwill at March 31, 2002, is primarily
the result of the Sallie Mae and ABT acquisitions (see Note E). The Company did
not recognize an impairment loss as a result of its transitional impairment test
of existing goodwill. The Company will be required to test the value of its
goodwill at least annually.
The following table sets forth the Company's amortized and unamortized
intangible assets at the periods indicated:
March 31, 2002 September 30, 2001
Gross Gross
Carrying Accumulated Carrying Accumulated
Amount Amortization Amount Amortization
Amortized intangible assets:
Purchased software 14,449 (5,988) 8,277 (5,521)
Covenants-not-to-compete 7,123 (6,407) 7,071 (6,071)
Customer relationships 1,684 (28) -- --
-------- --------- -------- ---------
$ 23,256 $ (12,423) $ 15,348 $ (11,592)
Unamortized intangible assets:
Trademarks 860 --
-------- --------
$ 860 $ --
Estimated amortization expense for amortized intangible assets for the next five
fiscal years ending September 30, are as follows:
Fiscal Year
2002 $ 2,416
2003 2,483
2004 2,061
2005 1,997
2006 1,402
thereafter 1,305
-------
Total $11,664
Amortization expense on intangible assets was $831 and $730 for the six months
ended March 31, 2002 and 2001, respectively. In addition, the fiscal year 2001
period included $110, net of taxes, related to the amortization of goodwill.
The following table discloses the effect on net income and earnings per share of
excluding amortization expense related to goodwill, which was recognized in the
three and six months ended March 31, 2001, as if such goodwill had been
recognized in accordance with SFAS 142.
For the Three Months For the Six Months
Ended March 31, Ended March 31,
2002 2001 2002 2001
Reported net loss ($10,228) ($11,276) ($ 9,666) ($ 9,213)
Plus: goodwill amortization,
net of taxes -- 55 -- 110
------- ------- ------- -------
Adjusted net loss ($10,228) ($11,221) ($ 9,666) ($ 9,103)
Per common share:
Net loss ($0.31) ($0.34) ($0.29) ($0.28)
Goodwill amortization -- -- -- --
------ ----- ------ -----
Adjusted net loss ($0.31) ($0.34) ($0.29) ($0.28)
Per share -- assuming dilution:
Net loss ($0.31) ($0.34) ($0.29) ($0.28)
Goodwill amortization -- -- -- --
------ ----- ------ -----
Adjusted net loss ($0.31) ($0.34) ($0.29) ($0.28)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.
The purpose of this section is to give interpretive guidance to the reader of
the financial statements. The following discussion excludes the results of the
Global Manufacturing & Distribution Solutions (MDS) and Global Government
Solutions (GGS) businesses as they have been reclassified as discontinued
operations in the fiscal year 2002 and 2001 periods.
RESULTS OF OPERATIONS
The following table sets forth: (i) income statement items as a percentage of
total revenues and (ii) the percentage change for each item from the prior-year
comparative period.
% of Total Revenues % Change from
Prior Year
Three Mos. Six Mos. Three Mos. Six Mos.
Ended Ended Ended Ended
March 31, March 31, March 31 March 31
2002 2001 2002 2001
Revenues:
Outsourcing services 15% 20% 16% 19% (19%) (16%)
Software sales and commissions 11% 7% 11% 12% 70% (5%)
Maintenance and enhancements 33% 30% 32% 28% 21% 18%
Software services 39% 41% 39% 39% 4% (1%)
Interest and other income 2% 2% 2% 2% (4%) 5%
---- ---- ---- ----
Total 100% 100% 100% 100% 9% 1%
Expenses:
Cost of services, software sales,
commissions, and maintenance
enhancements 65% 69% 65% 65% 4% 1%
Selling, general and
administrative 25% 30% 27% 29% (10%) (8%)
Retirement and restructuring
charges 10% -- 5% -- -- --
Asset impairment charge -- 11% -- 5% (100%) (100%)
Interest expense 1% 1% 1% 1% -- --
Income (loss) from continuing
operations before income taxes (1%) (11%) 2% -- (87%) (337%)
The following table sets forth the gross profit for each of the following
revenue categories as a percentage of revenue for each such category and the
total gross profit as a percentage of total revenue (excluding interest and
other income). The Company does not separately present the cost of maintenance
and enhancements revenue as it is impracticable to separate such cost from the
cost of software sales.
Three Months Six Months
Ended March 31, Ended March 31,
2002 2001 2002 2001
Gross Profit:
Outsourcing services 26% 19% 25% 21%
Software sales and maintenance
and enhancements 45% 36% 47% 45%
Software services 23% 30% 22% 29%
--- --- --- ---
Total 34% 30% 34% 34%
Revenues:
Outsourcing services revenue decreased 19% and 16% in the second quarter and
first six months of fiscal year 2002 compared with the prior-year periods. These
decreases are primarily the result of the completion of contracts in the third
quarter of fiscal year 2001.
Software sales and commissions increased 70% in the second quarter of fiscal
year 2002 compared to the prior-year period due to increased licenses in both
the Company's higher education and energy and utilities markets. In the first
six months of fiscal year 2002, software sales and commissions revenue decreased
5% compared to the prior-year period due to decreased licenses in the Company's
energy and utilities market in the first quarter of fiscal year 2002. The
Company believes this decrease was primarily the result of caution in the
general business climate, which has been particularly felt in the technology
sector, as well as concerns over deregulation in the energy and utilities
market.
The 21% and 18% increases in maintenance and enhancements revenue in the second
quarter and first six months of fiscal year 2002 were the result of the growing
installed base of clients in the Company's higher education market. The Company
continues to experience a high annual renewal rate on existing maintenance
contracts in this market, although there can be no assurances that this will
continue.
Software services revenue increased 4% in the second quarter of fiscal year 2002
compared with the second quarter of fiscal year 2001. The increase is primarily
the result of increased implementation and integration services performed in the
higher education market partially offset by decreases in the energy and
utilities market.
Software services revenue decreased 1% in the first six months of fiscal year
2002 compared with the prior year period. The decrease is primarily the result
of decreased implementation and integration services performed in the energy and
utilities market partially offset by increases in the higher education market.
These decreases were primarily the result of reduced license fees in periods
before the fiscal year 2002 periods, which generate service orders.
Gross Profit:
Gross profit increased as a percentage of total revenue (excluding interest and
other income) from 30% for the second quarter of fiscal year 2001 to 34% for the
second quarter of fiscal year 2002. For the six-month periods ending March 31,
2002 and 2001, gross profit as a percentage of revenue was 34%; however, the
components of the gross profit percentage changed from the fiscal year 2001
period to the 2002 period. In the three and six-month periods, the software
sales, commissions, maintenance, and enhancements gross profit percentage
increased primarily as a result of increased software sales and maintenance and
enhancement revenue during the fiscal year 2002 period. These increases were
partially offset by increased development costs on new products. The outsourcing
services gross profit percentage increased primarily as a result of the
completion of lower margin contracts in fiscal year 2001, fiscal year 2001 cost
reductions, and improved utilization on existing contracts. These increases were
partially offset by decreases in the software services margins in the three and
six-month periods ending March 31, 2002 compared to the prior year periods.
Software services margins decreased primarily as a result of decreased
utilization in the energy and utilities market. The Company anticipates
continuing reduced services revenue in the energy and utilities market in fiscal
year 2002 and implemented a restructuring plan during fiscal year 2001 in an
attempt to improve future performance.
Selling, General and Administrative Expenses:
Selling, general and administrative expenses decreased 10% and 8% in the second
quarter and first six months of fiscal year 2002 compared with the prior-year
periods primarily as a result of decreased marketing and administrative costs
due to the restructuring plans implemented in fiscal year 2001.
Retirement, Restructuring, and Asset Impairment Charges:
In the second quarter of fiscal year 2002, the Company recognized retirement and
restructuring charges of $7.6 million. The charge was comprised of $3.5 million
for the retirement compensation package of the Company's former President, Chief
Executive Officer, and Chairman of the Board of Directors and $4.1 million
related to actions to reduce the workforce, discontinue non-critical programs,
and consolidate certain facilities. At March 31, 2002, $4.1 million of the $7.6
million accrual remains. In January and March 2002, the Company terminated
approximately 110 employees engaged primarily in development, special-programs
and sales functions, 70 of whom were part of the Company's international
utilities operations.
In the second quarter of fiscal year 2001, the Company reduced the cost basis of
a long-term investment in WebCT as a result of an impairment that was deemed
other than temporary. As a result, the Company recognized an asset impairment
charge of $7.8 million related to its investment in WebCT. Future earnings could
also be reduced and earnings charged if there were an additional impairment that
was found to be other than temporary at a future balance sheet date.
Income (loss) from continuing operations before income taxes was $3.0 million
for the six months ended March 31, 2002, compared to a loss of $1.3 million last
year. The provision for income taxes was $2.2 million in the current period
compared to a benefit of $0.6 million in the year-ago period. The effective tax
rate on income from continuing operations in the fiscal year 2002 provision does
not reflect the customary relationship between income before income taxes and
tax expense principally due to not recording a tax benefit for losses related to
the Company's foreign operations, the effects of state income taxes, and the
effects of non-deductible expenses.
Discontinued Operations:
As of the end of the second quarter of fiscal year 2002, the Company declared
MDS a discontinued business; the results of MDS have been reported separately as
discontinued operations in the consolidated statements of operations. Effective
April 10, 2002, the Company signed a definitive agreement to sell the MDS
business to High Process Technology, Inc., a newly formed portfolio company of
Golden Gate Capital and Parallax Capital Partners for $13.2 million in cash,
subject to adjustment based on the net book value of the assets at closing which
is expected to be on or about May 31, 2002. The Company could receive up to an
additional $3 million based upon the new company achieving specified revenue
targets over the next three years. The consummation of the transaction is
subject to certain closing conditions and required approvals. The Company
recorded a pretax loss of $10.5 million on the sale, which net of a $3.5 million
tax benefit produced a net loss of $7.0 million. The prior year consolidated
statements of operations and balance sheet have been restated to present MDS as
a discontinued operation. For business segment reporting, MDS was previously
reported as a separate segment.
LIQUIDITY, CAPITAL RESOURCES, AND FINANCIAL POSITION
The following discussion of cash flow activity is based upon historical
information as the statement of cash flows for the fiscal year 2002 period does
not present the MDS business as a discontinued operation and the fiscal year
2001 period does not present the Global Government Solutions business, which was
sold on June 29, 2001, as a discontinued operation.
The Company's cash and short-term investments balance was $110.7 million and
$164.3 million as of March 31, 2002, and September 30, 2001, respectively. The
cash balances decreased as a result of cash used in operations and investing
activities discussed below.
Cash used in operating activities was $20.4 million for the first six months of
fiscal year 2002, compared with cash provided of $14.8 million for the
prior-year period. The primary uses of cash in the fiscal year 2002 period were
increased other current assets, primarily prepaid income taxes, decreased
accounts and income taxes payable, and decreased deferred revenue. These uses
were partially offset by increased accrued expenses related primarily to the
retirement and restructuring charges and loss accrual for the sale of the
discontinued manufacturing business. Cash expenditures for the first six months
of fiscal year 2002 related to retirement and restructuring charges (which are
included in operating activities) were approximately $3.6 million, and are
expected to be approximately $2.5 million for the remainder of fiscal year 2002
and $1.6 million in total for all subsequent years, principally for severance
and facility costs.
Cash used in investing activities was $59.8 million for the first six months of
fiscal year 2002 compared with $1.4 million for the fiscal year 2001 six-month
period. In the fiscal year 2002 period, cash of $32.9 million was used in the
purchase of Sallie Mae's student information systems business and Applied
Business Technologies, Inc. in January and February 2002. If the Sallie Mae
acquired business achieves certain predetermined criteria during the remainder
of fiscal year 2002, the Company will make an additional cash payment of up to
$2.0 million at September 30, 2002. Additional cash payments of up to $5.3
million could be required of the Company over the next four years, contingent
upon the revenue derived from the license or other sale of the purchased product
lines over that period. Additionally, cash was used in the purchase of
investments using the available cash balances from September 30, 2001. Purchases
of property and equipment have been curtailed in fiscal year 2002 as a result of
continuing cost containment measures. Fiscal year 2002 total property and
equipment purchases are expected to remain below fiscal year 2001 levels.
The primary source of cash in the six months ended March 31, 2001, was the sale
and maturity of available-for-sale investments. Other cash uses included $0.5
million contingent consideration paid with respect to the August 2000 EnerLink
acquisition in the fiscal year 2002 period. In the fiscal year 2001 period,
other uses of cash included $2.8 million for the purchase of Omni-Tech Systems,
Ltd. assets, which were subsequently sold in the June 2001 Global Government
Solutions business sale.
The $0.8 million and $1.6 million in cash provided by financing activities for
the first six months of fiscal year 2002 and 2001, respectively, consists
primarily of proceeds from the exercises of stock options.
The Company has a $30 million senior revolving credit facility available for
general corporate purposes. The credit facility agreement expires in June 2003
and includes optional annual renewals. There were no borrowings outstanding at
March 31, 2002, or September 30, 2001. As long as there are borrowings
outstanding, and as a condition precedent to new borrowings, the Company must
comply with certain covenants established in the agreement. Under the covenants,
the Company is required to maintain certain financial ratios and other financial
conditions. The Company may not pay dividends (other than dividends payable in
common stock) or acquire any of its capital stock outstanding without a written
waiver from its lender.
The credit agreement provides for the issuance of letters of credit. The amount
available for borrowing under the revolving credit facility is reduced by the
total outstanding letters of credit. At March 31, 2002, the Company had $0.5
million of letters of credit outstanding and $29.5 million available under the
revolving credit facility. The Company pays a commitment fee of 5/16% on the
unused portion of the revolving credit facility.
The Company has convertible debentures outstanding, which bear interest at 5%
and mature on October 15, 2004. In October 2000, $27,000 of the convertible
subordinated debentures were converted into approximately 1,000 shares of common
stock of the Company. The remaining balance of convertible debentures at March
31, 2002, is $74.7 million. If these remaining debentures outstanding were
converted, 2.8 million additional shares would be added to common shares
outstanding. These debentures were antidilutive for the fiscal year 2002 and
2001 periods and therefore are not included in the denominators for income
(loss) from continuing operations per share -- assuming dilution, loss from
discontinued operations per share -- assuming dilution, or net loss per share --
assuming dilution for these periods.
The Company believes that its cash and cash equivalents, short-term investments,
and borrowing arrangements should satisfy its financing needs for the
foreseeable future.
Contingency:
The Company from time to time is involved in legal proceedings and litigation
arising in the ordinary course of business. In the opinion of management, the
outcome of such proceedings and litigation currently pending will not materially
affect the Company's consolidated financial statements.
Critical Accounting Policies:
The Company's discussion and analysis of its financial condition and results of
operations are based upon the Company's consolidated financial statements, which
have been prepared in accordance with accounting principles generally accepted
in the United States. The preparation of these financial statements requires the
Company to make estimates and judgments that affect the reported amounts of
assets and liabilities and the disclosure of contingent assets and liabilities
at the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. The Company bases its estimates on
historical experience and on various other assumptions that are believed to be
reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying values of assets and liabilities that are
not readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions.
The Company believes the following critical accounting policies affect its more
significant judgments and estimates used in the preparation of its consolidated
financial statements.
Revenue recognition:
Contract fees from outsourcing services are typically based on multi-year
contracts ranging from three to five years in length, and provide a recurring
revenue stream throughout the term of the contract. During the first several
years of a typical outsourcing services contract, the Company performs services
and incurs expenses at a greater rate than in the later years of the contract.
Since billings usually remain constant during the term of the contract, and
revenue is recognized as work is performed, revenues usually exceed billings in
the early years of the contract. The resulting excess is reflected as unbilled
accounts receivable. In some cases when a contract term is extended, the billing
period is also extended over the new life of the contract. As a contract
proceeds, services are performed, and expenses are incurred at a diminishing
rate, resulting in billings exceeding revenue recognized, which causes a
decrease in the unbilled accounts receivable balance, although additional
unbilled accounts receivable will continue to be recorded 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.
Software services are generally provided under time and materials contracts and
revenue is recognized as the services are provided. In some circumstances,
services are provided under fixed-price arrangements in which revenue is
recognized on the 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. In certain software services contracts,
the Company performs services but cannot immediately bill for them. Revenue is
usually recognized as work is performed, resulting in an excess of revenues over
billings in such periods. The resulting excess is reflected as unbilled accounts
receivable. Billings in these software services contracts cause a decrease in
the unbilled accounts receivable, although, additional unbilled accounts
receivable will continue to be recorded based on the terms of the contracts.
The Company licenses software under license agreements and provides services
including training, installation, consulting, and maintenance and enhancements.
Maintenance and enhancement agreements provide for telephone support and error
correction for current versions of licensed systems, as well as regulatory
updates and functional and technical enhancements to licensed systems if and
when they become generally available. Fees for maintenance and enhancements
agreements are recognized ratably over the term of the agreements. License fee
revenues are recognized when a license agreement has been signed, the software
product has been shipped, the fees are fixed and determinable, collection is
considered probable, and no significant vendor obligations remain. In certain
license arrangements, the Company ships the product and recognizes revenue, but
has not billed the complete contract amount due to contractual payment terms,
resulting in an excess of revenues over billings in such periods. The resulting
excess is reflected as unbilled accounts receivable. The Company usually bills
these unbilled balances within one year.
For client arrangements that include license fees and implementation and other
professional services, the portion of the fees related to software licenses is
generally recognized in the current period, while the portion of the fees
related to implementation and other professional services is recognized as such
services are performed.
The Company allocates revenue to each component of the contract based on
objective evidence of its fair value, which is specific to the Company, or, for
products not being sold separately, the price established by management. Because
licensing of the software is not dependent on the professional services portions
of the contract, the software revenue is recognized upon delivery. The remainder
of the contract revenue is recorded as earned as software services revenue.
Restructuring:
During fiscal years 2002 and 2001, the Company recorded significant reserves in
connection with restructuring programs. These reserves include estimates
pertaining to employee separation costs, assumptions regarding idle facilities
and sublease terms, and the settlements of contractual obligations resulting
from these actions. Although the Company does not anticipate significant
changes, the actual costs may differ from these estimates.
Long-Term Investments:
The Company has made investments for strategic business purposes in the common
and preferred stock of a privately held Internet company. The fair value of this
investment, which is classified as a long-term asset, is not readily
determinable; therefore, it is carried at cost adjusted for an
other-than-temporary impairment. The Company regularly reviews the underlying
operating performance, cash flow forecasts, and recent private equity
transactions of this privately held company in assessing impairment. Future
earnings would be reduced and earnings would be charged if there was an
additional impairment that was found to be other than temporary at a future
balance sheet date. The Company's future results of operations could be
materially affected by a future write down in the carrying amount of this
investment to recognize an impairment loss due to an other than temporary
decline in the value of the investment.
The Company made a series of investments in Campus Pipeline, Inc., which have a
carrying amount of zero. The Company has determined that it does not control
Campus Pipeline, therefore, the Company accounts for its investment using the
equity method of accounting. The Company will not record any additional future
losses of Campus Pipeline and will not record any future earnings until the
cumulative, unrecorded losses are offset.
Goodwill and Intangible Assets:
The Company evaluates goodwill and other intangibles for potential impairment on
an annual basis unless circumstances indicate the need for impairment testing
between the annual tests. The judgments regarding the existence of impairment
indicators are based on legal factors, market conditions, and operational
performance of the Company's reporting segments. In assessing the recoverability
of the Company's goodwill and other intangibles, the Company must make valuation
assumptions to determine the fair value of the respective assets. If these
estimates or their related assumptions change in the future, the Company may be
required to record impairment charges which could have a material adverse impact
on the Company's financial condition and results of operations.
Deferred Taxes:
The Company records a valuation allowance to reduce its deferred tax assets to
the amount that is more likely than not to be realized. While the Company has
considered future taxable income and ongoing prudent and feasible tax planning
strategies in assessing the need for the valuation allowance, in the event the
Company were to determine that it would be able to realize its deferred tax
assets in the future in excess of its net recorded amount, an adjustment to the
deferred tax asset would increase income in the period such determination was
made. Likewise, should the Company determine that it would not be able to
realize all or part of its net deferred tax asset in the future, an adjustment
to the deferred tax asset would be charged to income in the period such
determination was made.
Divestiture:
The Company has accrued for the estimated loss on the sale of the MDS business
and the net losses through the anticipated close date of the sale transaction.
The Company estimated future results of operations of the MDS business and the
expected close date in determining the required reserve. It is possible that the
actual results could differ from these related estimates due to uncertain market
conditions and/or a possible change in the anticipated close date.
Factors That May Affect Future Results and Market Price of Stock:
The forward-looking statements discussed herein and elsewhere -- including
statements concerning the Company's or management's forecasts, estimates,
intentions, beliefs, anticipations, plans, expectations, or predictions for the
future -- are based on current management expectations that involve risks and
uncertainties that could cause actual results to differ materially from those
anticipated. The following discussion highlights some, but not all, of the risks
and uncertainties that may have a material adverse effect on the Company's
business, results of operations, and/or financial condition.
The Company's revenues and operating results can vary substantially from quarter
to quarter, owing to a number of factors. Software sales revenues in any quarter
depend on the execution of license agreements and the shipment of product. The
execution of license agreements is difficult to predict for a variety of
reasons, including the following: a significant portion of the Company's license
agreements is typically signed in the last month of each quarter; the Company's
sales cycle is relatively long; the size of transactions can vary widely; client
projects may be postponed or cancelled due to changes in the client's
management, budgetary constraints, strategic priorities, or economic
uncertainty; and clients often exhibit a seasonal pattern of capital spending.
The Company has historically generated a greater portion of license fees and
total revenue in the last two fiscal quarters, although there is no assurance
that this will continue.
Because a significant part of the Company's business results from software
licensing, it is characterized by a high degree of operating leverage. The
Company bases its expense levels, in significant part, on its expectations of
future revenues. Therefore, these expense levels are relatively fixed in the
short term. If software licensing revenues do not meet expectations, net income
is likely to be disproportionately adversely affected. There can be no assurance
that the Company will be able to increase profitability or return to its
historical level of profitability on a quarterly or annual basis in the future.
It is, therefore, possible that in one or more future quarters, the Company's
operating results will be below expectations. This would likely have an adverse
effect on the price of the Company's common stock.
The success of the Company's business depends upon certain key management,
sales, and technical personnel. In addition, the Company believes that to
succeed in the future, it must continue to attract, retain, and motivate
talented and qualified management, sales, and technical personnel. Competition
for such personnel in the information technology industry is intense. The
Company sometimes has difficulty locating qualified candidates. There can be no
assurance that the Company will be able to retain its key employees or that it
will be able to continue to attract, assimilate, and retain other skilled
management, sales, and technical personnel. The loss of certain key personnel or
the inability to attract and retain qualified employees in the future could have
a material adverse effect on the Company's business, results of operations,
and/or financial condition.
The application software industry is characterized by intense competition, rapid
technological advances, changes in client requirements, product introductions,
and evolving industry standards. The Company believes that its future success
will depend on its ability to compete successfully, and to continue to develop
and market new products and enhancements cost-effectively. This necessitates
continued investment in research and development and sales and marketing. There
can be no assurance that new industry standards or changing technology will not
render the Company's products obsolete or non-competitive, that the Company will
be able to develop and market new products successfully, or that the Company's
markets will accept its new product offerings. Furthermore, software programs as
complex as those the Company offers may contain undetected errors or bugs when
they are first introduced or as new versions are released. Despite Company and
third-party testing, there can be no assurance that errors will not be found in
new product offerings. Such errors can cause unanticipated costs and delays in
market acceptance of these products and could have a material adverse effect on
the Company's business, financial condition, or cash flows. In addition, new
distribution methods, such as the Internet and other electronic channels, have
removed many of the barriers to entry that small and start-up software companies
faced in the past. Therefore, the Company expects competition to increase in its
markets.
If the Company were to experience delays in the commercialization and
introduction of new or enhanced products, if customers were to experience
significant problems with the implementation and installation of products, or if
customers were dissatisfied with product functionality or performance, this
could have a material adverse effect on the Company's business, results of
operations, financial condition, or cash flows.
There can be no assurance that the Company's new products will achieve
significant market acceptance or will generate significant revenue. Additional
products that the Company plans to directly or indirectly market in the future
are in various stages of development.
Intense competition in the various markets in which the Company competes may put
pressure on the Company to reduce prices on certain products, particularly in
the markets where certain vendors offer deep discounts in an effort to recapture
or gain market share or to sell other software or hardware products. The
bundling of software products for promotional purposes or as a long-term pricing
strategy or guarantees of product implementations by certain of the Company's
competitors could have the effect over time of significantly reducing the prices
that the Company can charge for its products. Any such price reductions and
resulting lower license revenues could have a material adverse effect on the
Company's business, results of operations, financial condition, or cash flows.
The Company uses a common industry practice to forecast sales and trends in its
business. The Company's sales personnel monitor the status of prospective sales,
such as the date when they estimate that a customer will make a purchase
decision and the potential dollar amount of the sale. The Company regularly
aggregates these estimates to generate a sales pipeline. The Company compares
the pipeline at various points in time to look for trends in its business. While
this pipeline analysis may provide the Company with some guidance in business
planning and budgeting, these pipeline estimates are necessarily speculative and
may not consistently correlate to revenues in a particular quarter or over a
longer period of time. A variation in the conversion of the pipeline into
contracts or in the pipeline itself could cause the Company to improperly plan
or budget and thereby adversely affect its business or results of operations. In
particular, a slowdown in the economy may cause purchasing decisions to be
delayed, reduced in amount, or cancelled, which will therefore reduce the
overall license pipeline conversion rates in a particular period of time.
Building upon its original investment, the Company continues to strengthen its
strategic alliance with Campus Pipeline, Inc. The Company has enhanced the
integration of its higher education information systems with the Campus Pipeline
product to provide 24-hour access to campus and Internet resources and allow
students to enroll, register for classes, view grades, request transcripts and
loan status, obtain reading lists, buy books, access e-mail, and participate in
interactive chat sessions. While some of these features have been included in a
product released by Campus Pipeline, other features are scheduled for future
releases.
During fiscal year 2000, the Company made an investment in WebCT and entered
into a strategic alliance with WebCT to exclusively market the WebCT e-learning
tools and e-learning hub to the Company's higher education client base. The
alliance builds upon the Company's existing relationship with Campus Pipeline,
Inc., and the Company's self-service Web for Students and Web for Faculty
products to offer a unified, on-line, connected e-learning solution. This
integrated solution will enable clients to access information systems, learning
tools, online services, campus communication, and community resources through a
single point of access. The Company intends to provide the real-time,
bi-directional exchange of data between the Company's student information system
and the WebCT course environment, eliminating manual synchronization of like
information.
The success of these investments and strategic alliances depends upon: (i) the
ability of the Company and its alliance members to meet development and
implementation schedules for products and to enhance the products over time,
(ii) the market acceptance of the products, (iii) the Company's ability to
integrate the alliance members' products with the Company's products
cost-effectively and on a timely basis, and (iv) the ability of the Company's
alliance members to achieve their financial goals.
Certain of the Company's contracts are subject to "fiscal funding" clauses,
which entitle the client, in the event of budgetary constraints, to reduce the
level of services to be provided by the Company, with a corresponding reduction
in the fee the client must pay. In certain circumstances, the client may
terminate the services altogether. While the Company has not been impacted
materially by early terminations or reductions in service from the use of fiscal
funding provisions in the past, there can be no assurance that such provisions
will not give rise to early terminations or reductions of service in the future.
If clients that represent a substantial portion of the Company's revenues were
to invoke the fiscal funding provisions of their contracts, the Company's
results of operations would be adversely affected.
Certain of the Company's outsourcing contracts may be terminated by the client
for convenience. If clients that represent a substantial portion of the
Company's revenues terminate for convenience, the Company's future results of
operations would be adversely affected.
The Company provides software-related services, including systems implementation
and integration services. Services are provided under time and materials
contracts, in which case revenue is recognized as the services are provided, and
under fixed-price arrangements, in which case revenue is recognized on the
percentage-of-completion method. Revisions in estimates of costs to complete are
reflected in operations during the period in which the Company learns of facts
requiring those revisions.
The impact on the Company of areas such as the Internet, online services, and
electronic commerce is uncertain. There can be no assurance that the Company
will be able to provide a product that will satisfy new client demands in these
areas. In addition, standards for network protocols and other industry standards
for the Internet are evolving rapidly. There can be no assurance that standards
the Company chooses will position its products to compete effectively for
business opportunities as they arise on the Internet and in other emerging
areas.
The Company relies on a combination of copyright, trademark, trade secrets,
confidentiality procedures, and contractual procedures to protect its
intellectual property rights. Despite the Company's efforts to protect its
intellectual property rights, it may be possible for unauthorized third parties
to copy certain portions of the Company's products, or to reverse engineer or
obtain and use technology or other Company-proprietary information. There can
also be no assurances that the Company's intellectual property rights would
survive a legal challenge to their validity or provide significant protection to
the Company. In addition, the laws of certain countries do not protect the
Company's proprietary rights to the same extent as do the laws of the United
States. Accordingly, there can be no assurance that the Company will be able to
protect its proprietary technology against unauthorized third-party copying or
use, which could adversely affect the Company's competitive position.
On June 29, 2001, the Company sold its Global Government Solutions business to
Affiliated Computer Services, Inc., ("ACS") for $85 million in cash. These
proceeds may be subject to adjustment in certain circumstances. In addition, the
Company made certain representations and warranties to ACS under the purchase
agreement, which could also result in adjustments to the proceeds received. If
the Company is found to have breached any of the representations and warranties
contained in the purchase agreement, the Company may have to return cash
proceeds and the Company's financial results could be adversely affected.
In the second quarter of fiscal year 2002, the Company acquired the Sallie Mae
student information systems business and Applied Business Technologies, Inc.
("ABT"). These acquisitions were entered into to increase the Company's
opportunities in the higher education market. The success of these acquisitions
depends upon: (i) the Company's ability to integrate the acquired products and
operations with the Company's products and operations cost-effectively and on a
timely basis, (ii) the Company's ability to complete development of and enhance
the products acquired efficiently and cost effectively, and (iii) the market
acceptance of the products.
In the second quarter of fiscal year 2002, the Company signed a definitive
agreement to sell the process manufacturing business to High Process Technology,
Inc., a newly formed portfolio company of Golden Gate Capital and Parallax
Capital Partners for $13.2 million in cash, subject to adjustment based on the
net book value of the assets at closing. The Company could receive up to an
additional $3 million based upon the new company achieving specified revenue
targets over the next three years. The consummation of the transaction is
subject to certain closing conditions and required approvals. The success of
this pending sale depends on the ability of the Company and the acquirers of the
business to satisfy the closing conditions and obtain the necessary approvals to
consummate the sale of the process manufacturing business.
Other factors that could affect the Company's future operating results include
the effect of publicity on demand for the Company's products and services;
general economic and political conditions; the success of the Company' new
business model; the success of the Company's long-term strategy; continued
market acceptance of the Company's products and services; the timing of services
contracts and renewals; continued competitive and pricing pressures in the
marketplace; new product introductions by the Company's competitors; the
Company's ability to complete fixed-price contracts profitably; and the
Company's ability to generate capital gains sufficient to offset the capital
losses that are expected to be realized upon the disposition of the investments
held by the Company for which the carrying value has been reduced for financial
reporting purposes.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
There have been no material changes in quantitative or qualitative disclosures
for fiscal year 2002. Reference is made to Item 7A in the Annual Report on Form
10-K for the year ended September 30, 2001.
SYSTEMS & COMPUTER TECHNOLOGY CORPORATION AND SUBSIDIARIES
PART II
Item 1. Legal Proceedings
The Company from time to time is involved in legal proceedings and litigation
arising in the ordinary course of business. In the opinion of management, the
outcome of such proceedings and litigation currently pending will not materially
affect the Company's consolidated financial statements.
Item 4. Submission of Matters to a Vote of Security Holders
At the Company's Annual Meeting of Shareholders held on February 22, 2002, Allen
R. Freedman was reelected as a director of the Company and Eric Haskell was
elected as a director of the Company, each for a term expiring at the Company's
2005 Annual Meeting of Shareholders. There were 26,013,354 votes cast in favor
of the election of Mr. Freedman and 787,018 votes were withheld, and there were
24,279,404 votes cast in favor of the election of Mr. Haskell and 2,520,968
votes were withheld.
Item 6 (a). Exhibits
Exhibit 10.1 Ninth Amendment and Modification to Credit Agreement dated as of
February 19, 2002, among Systems & Computer Technology
Corporation and SCT Software & Resource Management Corporation
as Borrowers and Citizens Bank of Pennsylvania, successor to
Mellon Bank, N.A.
Exhibit 10.2 Form of Executive Severance Agreement.
Item 6 (b). Reports on Form 8-K
The Company filed a Current Report on Form 8-K on January 11, 2002, to announce
the January 3, 2002, retirement of Michael J. Emmi as Chairman of the Board,
President, and Chief Executive Officer of the Company.
SYSTEMS & COMPUTER TECHNOLOGY CORPORATION AND SUBSIDIARIES
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SYSTEMS & COMPUTER TECHNOLOGY CORPORATION
(Registrant)
Date: 05/14/02 /s/ Eric Haskell
--------------------------------
Eric Haskell
Senior Vice President, Finance & Administration,
Treasurer, and Chief Financial Officer