-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, IEramUwcCsc5bYmDAjOPQpSdXvy6zuKVDNQYhfncqo+553lgH6YMZKBv79/8V5/3 1chYzyI80Cut2eZHwXEUYw== 0000707606-98-000002.txt : 19980218 0000707606-98-000002.hdr.sgml : 19980218 ACCESSION NUMBER: 0000707606-98-000002 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980217 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: SYSTEMS & COMPUTER TECHNOLOGY CORP CENTRAL INDEX KEY: 0000707606 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-COMPUTER PROGRAMMING, DATA PROCESSING, ETC. [7370] IRS NUMBER: 231701520 STATE OF INCORPORATION: DE FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-11521 FILM NUMBER: 98540653 BUSINESS ADDRESS: STREET 1: GREAT VALLEY CORPORATE CTR STREET 2: 4 COUNTRY VIEW RD CITY: MALVERN STATE: PA ZIP: 19355 BUSINESS PHONE: 6106475930 MAIL ADDRESS: STREET 1: GREAT VALLEY CORP CTR STREET 2: 4 COUNTRY VIEW RD CITY: MALVERN STATE: PA ZIP: 19355 10-Q 1 SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 Form 10-Q (Mark One) /X/ Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the quarterly period ended December 31, 1997 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. 16,663,358 Common shares, $.01 par value, as of February 4, 1998 Page 1 of 18 consecutively numbered pages SYSTEMS & COMPUTER TECHNOLOGY CORPORATION AND SUBSIDIARIES INDEX PART I, UNAUDITED FINANCIAL INFORMATION Item 1. Financial Statements Condensed Consolidated Balance Sheets - December 31, 1997 and September 30, 1997 Condensed Consolidated Statements of Operations - Three Months Ended December 31, 1997 and 1996 Condensed Consolidated Statements of Cash Flows - Three Months Ended December 31, 1997 and 1996 Notes to Condensed Consolidated Financial Statements Item 2. Management's Discussion and Analysis of Operations and Financial Condition PART II, OTHER INFORMATION Item 1. Legal Proceedings 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) December 31, September 30, 1997 1997 (UNAUDITED) (NOTE) ASSETS CURRENT ASSETS Cash and cash equivalents $ 31,744 $ 29,809 Short-term investments, including accrued interest of $854 69,952 -- Receivables, including $56,029 and $59,311 of earned revenues in excess of billings, net of allowance for doubtful accounts of $4,760 and $4,098 104,114 100,543 Prepaid expenses and other receivables 9,057 8,473 -------- -------- TOTAL CURRENT ASSETS 214,867 138,825 PROPERTY AND EQUIPMENT--net of accumulated depreciation 40,918 40,710 CAPITALIZED COMPUTER SOFTWARE COSTS, net of accumulated amortization 15,564 15,167 COST IN EXCESS OF FAIR VALUE OF NET ASSETS ACQUIRED, net of accumulated amortization 7,894 8,121 OTHER ASSETS AND DEFERRED CHARGES 9,213 6,881 -------- -------- TOTAL ASSETS $288,456 $209,704 ======== ======== SYSTEMS & COMPUTER TECHNOLOGY CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (in thousands, except per share amounts) December 31, September 30, 1997 1997 (UNAUDITED) (NOTE) LIABILITIES & STOCKHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable $ 7,164 $ 10,023 Current portion of long-term debt 730 1,225 Income taxes payable 4,957 5,000 Accrued expenses 24,024 22,649 Deferred revenue 14,529 16,711 -------- -------- TOTAL CURRENT LIABILITIES 51,404 55,608 LONG-TERM DEBT, net of current portion 76,912 2,549 DEFERRED TAXES AND OTHER LONG-TERM LIABILITIES 1,231 1,122 STOCKHOLDERS' EQUITY Preferred stock, par value $.10 per share--authorized 3,000 shares, none issued Common stock, par value $.01 per share-- authorized 24,000 shares, issued 17,770 and 17,573 shares 178 176 Capital in excess of par value 93,277 91,240 Retained earnings 69,023 62,578 -------- -------- 162,478 153,994 Less Held in treasury, 1,151 common shares--at cost (2,959) (2,959) Notes receivable from stockholders (610) (610) -------- -------- 158,909 150,425 -------- -------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $288,456 $209,704 ======== ======== Note: The condensed consolidated balance sheet at September 30, 1997 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 December 31, 1997 1996 Revenues: OnSite services $27,600 $21,529 Software sales 21,851 14,730 Maintenance and enhancements 14,346 12,011 Software services 21,604 12,135 Interest and other revenue 1,880 127 ------- ------- 87,281 60,532 Expenses: Cost of OnSite services 22,724 17,665 Cost of software sales and maintenance and enhancements 12,705 10,376 Cost of software services 17,204 10,071 Selling, general and administrative 22,902 15,834 Interest expense 820 583 ------- ------- 76,355 54,529 Income before income taxes 10,926 6,003 Provision for income taxes 4,481 2,461 ------- ------- Net Income $ 6,445 $ 3,542 ======= ======= Per common share: Net income Earnings per common share $ 0.39 $ 0.25 Earnings per share assuming dilution $ 0.36 $ 0.23 Common shares and equivalents outstanding Common shares 16,549 13,953 Common shares - assuming dilution 17,952 16,625 See notes to condensed consolidated financial statements. SYSTEMS & COMPUTER TECHNOLOGY CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (in thousands) For the Three Months Ended December 31, 1997 1996 OPERATING ACTIVITIES Net income $ 6,445 $ 3,542 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 3,638 3,119 Changes in operating assets and liabilities: (Increase) in receivables (4,660) (6,916) (Increase) decrease in other current assets (584) 1,712 (Decrease) in accounts payable (2,859) (2,177) Increase in other accrued expenses and liabilities 1,375 1,318 (Decrease) in deferred revenue (2,196) (904) Other, net 168 630 -------- -------- NET CASH PROVIDED BY OPERATING ACTIVITIES 1,327 324 INVESTING ACTIVITIES Purchase of property and equipment (1,913) (1,700) Capitalized computer software costs (1,553) (1,509) Purchase of investments available-for-sale (69,412) -- -------- -------- NET CASH (USED IN) INVESTING ACTIVITIES (72,878) (3,209) FINANCING ACTIVITIES Principal payments on short-term debt (1,250) (160) Proceeds from borrowings, net of issuance costs 72,681 -- Repurchase and retirement of Company stock -- (1,271) Proceeds from exercise of stock options 2,055 87 -------- -------- NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 73,486 (1,344) INCREASE(DECREASE) IN CASH & CASH EQUIVALENTS 1,935 (4,229) CASH & CASH EQUIVALENTS-BEGINNING OF PERIOD 29,809 12,303 -------- -------- CASH & CASH EQUIVALENTS-END OF PERIOD $31,744 $ 8,074 ======== ======== See notes to condensed consolidated financial statements. SYSTEMS & COMPUTER TECHNOLOGY CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (in thousands, except per share amounts) December 31, 1997 The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 1O-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting only of normal recurring accruals) considered necessary for a fair presentation have been included. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company's Annual Report on Form 10-K for the year ended September 30, 1997. Operating results for the three-month period ended December 31, 1997 are not necessarily indicative of the results that may be expected for the year ending September 30, 1998. NOTE B--CASH AND SHORT-TERM INVESTMENTS Cash Equivalents: Cash and equivalents are defined as highly liquid investments with a maturity of three months or less at the date of purchase. Short-Term Investments: Short-term investments consist of commercial paper, municipal debt securities, and corporate obligations. Management determines the appropriate classification of debt securities at the time of purchase. At December 31, 1997, the Company has classified all securities as available-for-sale. The available-for-sale portfolio is comprised of highly liquid investments available for current operations and general corporate purposes and, accordingly, is classified as short-term investments. Available-for-sale securities are stated at fair value. Short-term investments at December 31, 1997 are comprised of: State and municipal securities $23,465 Corporate securities 45,633 ------- $69,098 The contractual maturities of short-term investments held at December 31, 1997 are: Due in one year or less $56,445 Due after one year through three years 12,653 ------- $69,098 During the quarter ended December 31, 1997, there were no gross realized gains or losses on sales of available-for-sale securities. NOTE C--LONG-TERM DEBT On October 22, 1997, the Company issued $65,000 of convertible subordinated debentures bearing interest at 5% and maturing on October 15, 2004. On November 6, 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 $52.75 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. NOTE D--EARNINGS PER SHARE The Company adopted Statement of Financial Accounting Standards No. 128, "Earnings Per Share" (SFAS 128), for the three-month period ended December 31, 1997. As a result the Company changed the method used to compute earnings per share and restated the prior period presented. Under the new requirements, basic earnings per share excludes the dilutive effect of stock options and diluted earnings per share must include the dilutive effect of stock options even if the dilutive effect is immaterial. A reconciliation of the numerators and the denominators of the basic and diluted per share calculations follow: For the three months ended December 31, 1997 1996 Numerator: Net Income available to common stockholders, used for basic earnings per share $6,445 $3,542 Effect of dilutive securities: 6 1/4% convertible debentures -- 311 ------ ------ Net income available to common stockholders after assumed conversions $6,445 $3,853 Denominator: Denominator for earnings per common Stockholder-weighted average shares 16,549 13,953 ====== ====== Effect of dilutive securities: Employee stock options 1,403 587 6 1/4% convertible debentures 2,085 ------ ------ Dilutive potential common shares 1,403 2,672 Denominator for earnings per share, assuming dilution 17,952 16,625 ====== ====== Earnings per common share $0.39 $0.25 ===== ===== Earnings per share - assuming dilution $0.36 $0.23 ===== ===== NOTE E--OTHER Product development expenditures, including software maintenance expenditures, for the three months ended December 31, 1997 and 1996, were approximately $8,291 and $5,847, respectively. After capitalization these amounts were approximately $6,738 and $4,338, respectively, and were charged to operations as incurred. For the same periods, amortization of capitalized software costs amounted to $1,157 and $658, respectively. MANAGEMENT'S DISCUSSION AND ANALYSIS OF OPERATIONS AND FINANCIAL CONDITION The purpose of this section is to give interpretive guidance to the reader of the financial statements. RESULTS OF OPERATIONS The following table sets forth: (a) certain income statement items as a percentage of total revenues and (b) for revenues, the percentage change for each item from the prior year comparative period. % of Total Revenues % Change from Prior Year Three Months Ended December 31, 1997 1996 Revenues: OnSite services 32% 36% 28% Software sales 25% 24% 48% Maintenance and enhancements 16% 20% 19% Software services 25% 20% 78% Interest and other revenue 2% 0% 1380% ----- ----- ----- Total 100% 100% 44% Expenses: Cost of services, sales and maintenance and enhancements 60% 63% 38% Selling, general and administrative 26% 26% 45% Interest expense 1% 1% 41% Income before income taxes 13% 10% 82% 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 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 and services. Three Months Ended December 31, 1997 1996 Gross Profit: OnSite services 18% 18% Software sales and maintenance and enhancements 65% 61% Software services 20% 17% ---- ---- Total 38% 37% Revenues Growth in OnSite services revenue largely results from significant contract signings. The 28% increase in OnSite services revenue in the three month period ended December 31, 1997 compared with the prior year period was primarily the result of (1) contracts signed after the first quarter of fiscal year 1997 including Agrilink Foods and the City of Anaheim, (2) increases in outsourcing services provided to the City of Indianapolis and, (3) first quarter fiscal year 1998 contract signings with Texas Southern University and Nashville Electric Service. Software sales increased 48% in the first quarter of fiscal year 1998 compared to the first quarter of fiscal year 1997 due primarily to increased BANNER software licenses to the higher education market and increased licenses of ADAGE Enterprise Resource Planning (ERP) software to the manufacturing market. The 19% increase in maintenance and enhancements revenue in the first quarter of fiscal year 1998 is the result of the growing installed base of clients in the higher education marketplace. In addition, the Company continues to experience a high annual renewal rate on existing maintenance contracts. Software services revenue increased 78% in the first quarter of fiscal year 1998 compared to the first quarter of fiscal year 1997 as the result of increases in ADAGE ERP implementation and support services to the manufacturing market and implementation and integration services in the 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. The increase in interest and other revenue in the first quarter of fiscal year 1998 is attributable to increased interest revenue resulting from the increased cash and short-term investments balance at December 31, 1997 and to a $695,000 gain on the sale of an inactive product line. Gross Profit Gross profit increased as a percentage of total revenue (excluding interest and other revenue) from 37% in the first quarter of fiscal year 1997 to 38% for the first quarter of fiscal year 1998. The increase in the software sales and maintenance and enhancements gross profit was primarily the result of growth in license fee revenue in the higher education market. This growth was partially offset by a decrease in the gross profit margin in the manufacturing market where the license fee mix included more third party licenses resulting in lower profit margin in the first quarter of fiscal year 1998 than in 1997. The software services margin increased primarily as a result of increases in the utility and manufacturing businesses' gross margin. The increases in software services' gross profit for the year were partially offset by decreases in the international utility gross profit, where additional costs were incurred in the first quarter of fiscal year 1998 resulting from contract delays and cost overruns. The Company is continuing to focus on installation and systems integration services in each of its markets. These services have historically resulted in a decreased profit margin when compared to a revenue mix with a higher percentage of license fees. LIQUIDITY, CAPITAL RESOURCES, AND FINANCIAL POSITION On October 22, 1997, the Company issued $65 million of convertible subordinated debentures bearing interest at 5% and maturing on October 15, 2004. On November 6, 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 $52.75 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 $31.7 million and $29.8 million at December 31, 1997 and September 30, 1997, respectively; and the short-term investments balance increased to $70.0 million at December 31, 1997 as a result of the first quarter 1998 debenture offering. Cash provided by operating activities was $1.3 million for the first quarter of fiscal year 1998 compared with $324,000 for the first quarter of fiscal year 1997. The increase in cash provided by operations for 1998 reflects the increase in net income for the first quarter of fiscal year 1998 and correspondingly smaller increases in accounts receivable for the first quarter of 1998. Cash provided by operations was off-set in the first quarter of 1998 by increases in other current assets and decreased deferred revenue balances. The increases in accounts receivable at December 31, 1997 compared to September 30, 1997 balances are due to increases in revenues and the timing of billings on the Company's software services contracts and software licenses. The decrease in deferred revenue at December 31, 1997 compared with September 30, 1997 is the result of annual scheduled billings on software maintenance contracts that increase the deferred revenue balance in the fourth quarter and are recognized as revenue over the period of service. The Company provides OnSite services and software-related services, including systems implementation and integration services. Contract fees from OnSite services are typically based on multi-year contracts ranging from five to 10 years 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 OnSite services contracts, and billings are sometimes milestone based. During the beginning of a typical 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. 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. As a 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 software services contract. Cash used in investing activities was $72.9 million for the first quarter of fiscal year 1998 compared with $3.2 million for the first quarter of fiscal year 1997. The Company's primary use of cash for investing activities was the purchase of investments available-for-sale of $70.9 million from the proceeds of the bond offering during the quarter. The Company signed a long-term lease agreement in May 1997 for a new office building at its Malvern campus. The Company will begin to incur fit-up and remodeling costs in the second quarter of fiscal year 1998 with rent payments beginning shortly thereafter. Fiscal year 1998 total product development expenditures are expected to increase in proportion to growth in revenues. Cash provided by financing activities increased $74.8 million from September 30, 1997 to December 31, 1997. The increase is primarily the result of the proceeds from the bond offering of $75.8 million. Additionally, cash was provided by the exercise of stock options by the Company's employees. The Company has a $30 million senior revolving credit facility available for general corporate purposes. The credit facility agreement expires in June 1999 with optional annual renewals. 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. The covenants allow the Company to pay non-stock dividends, repurchase capital stock, and make distributions of assets to shareholders as long as the aggregate amount does not exceed $5 million in any fiscal year. There were no borrowings outstanding at December 31, 1997. The Company believes that its cash and cash equivalents, short-term investments, and borrowing arrangements together with net cash provided by operations should satisfy its financing needs for the foreseeable future. The Company adopted Statement of Financial Accounting Standards No. 128, "Earnings Per Share" (SFAS 128), in the three-month period ended December 31, 1997. As a result the Company changed the method used to compute earnings per share and restated the prior period presented. Under the new requirements, basic earnings per share excludes the dilutive effect of stock options and diluted earnings per share must include the dilutive effect of stock options even if the dilutive effect is immaterial. Basic common shares increased in the first quarter of fiscal year 1998 compared to the first quarter of fiscal year 1997 as a result of shares issued pursuant to the May 1997 redemption of $27.3 million principal amount of convertible subordinated debentures, and employee stock option exercises during the twelve-month period ending December 31, 1997. Shares used in the diluted income per share calculation increased in 1997 versus 1996 primarily as a result of an increased dilutive effect of stock options related to the Company's rising stock price. 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 and 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. Management believes the appeal is without merit and intends to contest vigorously the appeal. While management, based on its investigation to date, believes that resolution of this action will not have a materially adverse effect on the Company's consolidated financial position, the ultimate outcome of this matter cannot be presently determined. 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 these 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 are favorably impacting demand for its software products and services, such demand is subject to change 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 could be adversely affected. 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 software 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 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 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. Many currently installed software products are not able to distinguish 21st century dates from 20th century dates. As a result, computer software used by many organizations may need to be upgraded to comply with Year 2000 requirements. Significant uncertainty exists in the information technology industry concerning the potential effects associated with the Year 2000 problem. The Company offers software products that are designed to be Year 2000 compliant. However, some of the Company's clients are running product versions that are not Year 2000 compliant. The Company has been encouraging such customers to migrate to current product versions. It is possible that the Company may experience increased expenses in addressing migration issues for such customers. In addition, there can be no assurances that the Company's software products do not contain errors or defects associated with Year 2000 date functions that may result in material costs to the Company. 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 Company's internal business information systems are being evaluated for Year 2000 compliance. Although the Company is not aware of any material operational issues or costs associated with preparing its internal systems for the Year 2000, there can be no assurances that the Company will not experience serious unanticipated negative consequences and/or material costs caused by undetected errors or defects in the technology used in its internal systems. 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 OnSite 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. SYSTEMS & COMPUTER TECHNOLOGY CORPORATION AND SUBSIDIARIES PART II Item 1. 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 and 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. Management believes the appeal is without merit and intends to vigorously contest the appeal. While management, based on its investigation to date, believes that resolution of this action will not have a materially adverse effect on the Company's consolidated financial position, the ultimate outcome of this matter cannot be presently determined. Item 6(a). Exhibits Exhibit 27 -- Financial Data Schedule Item 6(b). Reports on Form 8-K The registrant did not file any current reports on Form 8-K during the three months ended December 31, 1997. SYSTEMS & COMPUTER TECHNOLOGY CORPORATION AND SUBSIDIARIES SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. SYSTEMS & COMPUTER TECHNOLOGY CORPORATION (Registrant) Date: 02/17/98 /s/ ________________________________ Eric Haskell Senior Vice President, Finance and Administration, Treasurer and Chief Financial Officer EX-27 2
5 The schedule contains summary financial information extracted from the December 31, 1997 financial statements and is qualified in its entirety by reference to such financial statements. 3-MOS SEP-30-1998 DEC-31-1997 31,744,000 69,952,000 108,874,000 4,760,000 0 214,867,000 70,053,000 29,135,000 288,456,000 51,404,000 76,912,000 0 0 178,000 158,731,000 288,456,000 85,401,000 87,281,000 52,633,000 75,535,000 0 0 820,000 10,926,000 4,481,000 6,445,000 0 0 0 6,445,000 0.39 0.36
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