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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 000-28430
SS&C TECHNOLOGIES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 06-1169696
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
80 LAMBERTON ROAD
WINDSOR, CT 06095
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES, INCLUDING ZIP CODE)
860-298-4500
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
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 [_]
Number of shares outstanding of the registrant's sole class of common
stock as of July 31, 2002:
Class Number of Shares Outstanding
----- ----------------------------
Common Stock, par value $0.01 per share 12,560,041
SS&C TECHNOLOGIES, INC.
INDEX
Page
Number
------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets at
June 30, 2002 and December 31, 2001 2
Consolidated Statements of Operations for the
three-month and six-month periods ended June 30, 2002
and 2001 3
Consolidated Statements of Cash Flows for the
six-month periods ended June 30, 2002 and 2001 4
Notes to Consolidated Financial Statements 5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9
Item 3. Quantitative and Qualitative Disclosures About Market
Risk 14
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders 15
Item 6. Exhibits and Reports on Form 8-K 16
SIGNATURE 17
EXHIBIT INDEX 18
This Quarterly Report on Form 10-Q may contain forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. For this
purpose, any statements contained herein that are not statements of historical
fact may be deemed to be forward-looking statements. Without limiting the
foregoing, the words "believes," "anticipates," "plans," "expects" and similar
expressions are intended to identify forward-looking statements. The important
factors discussed below under the caption "Certain Factors That May Affect
Future Operating Results," among others, could cause actual results to differ
materially from those indicated by forward-looking statements made herein and
presented elsewhere by management from time to time.
1
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SS&C TECHNOLOGIES, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands)
June 30,
2002 December 31,
(unaudited) 2001
----------- ------------
ASSETS
Current assets:
Cash and cash equivalents $ 13,249 $ 28,425
Investments in marketable securities 26,454 31,077
Accounts receivable, net of allowance for doubtful 10,205 8,944
accounts
Prepaid expenses and other current assets 1,124 1,459
Deferred income taxes 1,669 2,210
-------- --------
Total current assets 52,701 72,115
-------- --------
Property and equipment:
Leasehold improvements 3,269 3,225
Equipment, furniture, and fixtures 16,649 15,967
-------- --------
19,918 19,192
Less accumulated depreciation (13,203) (11,468)
-------- --------
Net property and equipment 6,715 7,724
-------- --------
Deferred income taxes 7,083 6,916
Intangible and other assets, net of accumulated amortization 3,458 2,024
-------- --------
Total assets $ 69,957 $ 88,779
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 883 $ 1,079
Income taxes payable 275 696
Accrued employee compensation and benefits 2,030 1,722
Other accrued expenses 1,790 3,055
Deferred maintenance and other revenue 13,590 9,279
-------- --------
Total current liabilities 18,568 15,831
-------- --------
Total liabilities 18,568 15,831
-------- --------
Stockholders' equity:
Common stock 166 163
Additional paid-in capital 90,966 89,674
Accumulated other comprehensive income (237) 186
Accumulated deficit (6,540) (9,072)
-------- --------
84,355 80,951
Less: Treasury shares (32,966) (8,003)
-------- --------
Total stockholders' equity 51,389 72,948
-------- --------
Total liabilities and stockholders' equity $ 69,957 $ 88,779
======== ========
See accompanying notes to Consolidated Financial Statements.
2
SS&C TECHNOLOGIES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(unaudited)
Three Months Ended Six Months Ended
------------------------- -------------------------
June 30, June 30, June 30, June 30,
2002 2001 2002 2001
-------- -------- -------- --------
Revenues:
Software licenses $ 4,172 $ 3,865 $ 7,377 $ 7,077
Maintenance 6,812 6,705 13,627 13,118
Professional services 1,575 2,482 3,515 4,481
Outsourcing 3,313 1,415 6,568 2,833
-------- -------- -------- --------
Total revenues 15,872 14,467 31,087 27,509
-------- -------- -------- --------
Cost of revenues:
Software licenses 305 188 628 368
Maintenance 1,394 1,800 2,824 3,615
Professional services 1,340 1,728 2,732 3,799
Outsourcing 2,193 1,339 4,345 2,771
-------- -------- -------- --------
Total cost of revenues 5,232 5,055 10,529 10,553
-------- -------- -------- --------
Gross profit 10,640 9,412 20,558 16,956
-------- -------- -------- --------
Operating expenses:
Selling and marketing 2,475 3,062 5,135 5,943
Research and development 3,104 2,864 5,965 6,037
General and administrative 1,945 2,839 3,937 5,368
Write-off of purchased in-process research and
development -- -- 1,744 --
-------- -------- -------- --------
Total operating expenses 7,524 8,765 16,781 17,348
-------- -------- -------- --------
Operating income (loss) 3,116 647 3,777 (392)
Interest income, net 399 687 841 1,408
Other income (expense), net (854) 581 (399) 1,815
-------- -------- -------- --------
Income before income taxes 2,661 1,915 4,219 2,831
Provision for income taxes 1,064 718 1,687 1,048
-------- -------- -------- --------
Net income $ 1,597 $ 1,197 $ 2,532 $ 1,783
======== ======== ======== ========
Basic earnings per share $ 0.13 $ 0.08 $ 0.19 $ 0.12
======== ======== ======== ========
Basic weighted average number of common shares
outstanding 12,654 15,049 13,279 15,077
======== ======== ======== ========
Diluted earnings per share $ 0.12 $ 0.08 $ 0.18 $ 0.12
======== ======== ======== ========
Diluted weighted average number of common and
common equivalent shares outstanding 13,507 15,108 13,979 15,136
======== ======== ======== ========
See accompanying notes to Consolidated Financial Statements.
3
SS&C TECHNOLOGIES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
Six Months Ended
--------------------------
June 30, June 30,
2002 2001
-------- --------
Cash flow from operating activities:
Net income $ 2,532 $ 1,783
-------- --------
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 2,147 1,811
Net realized losses (gains) on equity investments 368 (1,800)
Loss (gain) on sale of property and equipment 1 (3)
Deferred income taxes 373 1,052
Purchased in-process research and development 1,744 --
Provision for doubtful accounts 245 385
Changes in operating assets and liabilities:
Accounts receivable (1,092) 1,377
Prepaid expenses and other assets 237 (32)
Taxes receivable -- (245)
Accounts payable (243) 580
Accrued expenses (1,013) (888)
Taxes payable (419) --
Deferred maintenance and other revenues 4,178 1,270
-------- --------
Total adjustments 6,526 3,507
-------- --------
Net cash provided by operating activities 9,058 5,290
-------- --------
Cash flow from investing activities:
Additions to property and equipment (329) (1,093)
Proceeds from sale of property and equipment 3 51
Cash paid for business acquisitions, net (3,943) --
Additions to capitalized software and other intangibles -- (87)
Purchases of marketable securities (5,526) (20,118)
Sales of marketable securities 9,109 21,711
-------- --------
Net cash provided by (used in) investing activities (686) 464
-------- --------
Cash flow from financing activities:
Repayment of debt (146) (91)
Issuance of common stock 120 188
Exercise of options 1,166 --
Purchase of common stock for treasury (24,963) (791)
-------- --------
Net cash used in financing activities (23,823) (694)
-------- --------
Effect of exchange rate changes on cash 275 (254)
-------- --------
Net increase (decrease) in cash and cash equivalents (15,176) 4,806
Cash and cash equivalents, beginning of period 28,425 20,690
-------- --------
Cash and cash equivalents, end of period $ 13,249 $ 25,496
======== ========
See accompanying notes to Consolidated Financial Statements.
4
SS&C TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(unaudited)
1. Basis of Presentation
In the opinion of the Company, the accompanying unaudited consolidated financial
statements contain all adjustments (consisting of only normal recurring
adjustments, except as noted in the notes to the consolidated financial
statements) necessary to present fairly its financial position as of June 30,
2002 and its results of operations for the three months and six months ended
June 30, 2002 and 2001. These statements do not include all of the information
and footnotes required by generally accepted accounting principles for annual
financial statements. The financial statements contained herein should be read
in conjunction with the consolidated financial statements and footnotes as of
and for the year ended December 31, 2001 which were included in the Company's
Annual Report on Form 10-K filed with the Securities and Exchange Commission.
The December 31, 2001 consolidated balance sheet data were derived from audited
financial statements, but do not include all disclosures required by generally
accepted accounting principles for annual financial statements. The results of
operations for the three months and six months ended June 30, 2002 are not
necessarily indicative of the expected results for the full year.
2. Recent Accounting Policies
On January 1, 2002, the Company adopted Statement of Financial Accounting
Standards No. 142, "Goodwill and Other Intangible Assets" ("SFAS No. 142"). SFAS
No. 142 requires that goodwill and intangible assets with indefinite useful
lives no longer be amortized, but instead be tested for impairment at least
annually. The Company has completed the impairment test for goodwill and has
determined that no impairment exists. Pro forma net income and net income per
share for the three months and six months ended June 30, 2001, adjusted to
eliminate historical amortization of goodwill and related tax effects, are as
follows (in thousands except per share data):
Three Months Six Months
Ended Ended
June 30, 2001 June 30, 2001
Reported net income $ 1,197 $ 1,783
Add: goodwill amortization, net of tax 10 21
--------- ---------
Pro forma net income $ 1,207 $ 1,804
========= =========
Reported net income per share:
Basic $ 0.08 $ 0.12
Diluted $ 0.08 $ 0.12
Pro forma earnings per share:
Basic $ 0.08 $ 0.12
Diluted $ 0.08 $ 0.12
In addition, effective January 1, 2002, the Company adopted Emerging Issues Task
Force Issue No. 01-14, "Income Statement Characterization of Reimbursements
Received for 'Out of Pocket' Expenses Incurred" ("Issue No. 01-14") which
requires that customer reimbursements received for direct costs paid to third
parties and related expenses be characterized as revenue. Comparative financial
statements for prior periods have been reclassified to provide consistent
presentation. For the three months ended June 30, 2002 and 2001, the Company has
presented customer reimbursement revenue and expenses of $112,000 and $188,000,
respectively, within professional services in accordance with Issue No. 01-14.
Customer reimbursements represent direct costs incurred during the course of
services that are reimbursed to the Company by its customers. For the six months
ended June 30, 2002 and 2001, the Company has presented customer reimbursement
revenue and expenses of $249,000 and $401,000, respectively. The adoption of
Issue No. 01-14 did not impact the Company's financial position, operating
income or net income.
5
3. Basic and Diluted Earnings Per Share
Earnings per share is calculated in accordance with Statement of Financial
Accounting Standards No. 128, "Earnings Per Share". Basic earnings per share
includes no dilution and is computed by dividing income available to the
Company's common stockholders by the weighted average number of common shares
outstanding for the period. Diluted earnings per share is computed by dividing
net income by the weighted average number of common and common equivalent shares
outstanding during the period. Common equivalent shares are comprised of stock
options using the treasury stock method. Common equivalent shares are excluded
from the computations of diluted earnings per share if the effect of including
such common equivalent shares is antidilutive. Outstanding options to purchase
0.9 million and 2.6 million shares at June 30, 2002 and 2001, respectively, were
not included in the computations of diluted earnings per share for those
quarters because the effect of including such options would be antidilutive.
Income available to stockholders is the same for basic and diluted earnings per
share. A reconciliation of the shares outstanding is as follows (in thousands):
Three Months Ended Six Months Ended
June 30, June 30, June 30, June 30,
2002 2001 2002 2001
------ ------ ------ ------
Basic weighted average shares outstanding 12,654 15,049 13,279 15,077
Weighted average common stock equivalents -- options 853 59 700 59
------ ------ ------ ------
Diluted weighted average shares outstanding 13,507 15,108 13,979 15,136
====== ====== ====== ======
4. Comprehensive Income
Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income" requires that items defined as comprehensive income, such as foreign
currency translation adjustments and unrealized gains (losses) on marketable
securities, be separately classified in the financial statements and that the
accumulated balance of other comprehensive income be reported separately from
retained earnings and additional paid-in capital in the equity section of the
balance sheet.
The following table sets forth the components of comprehensive income
(in thousands):
Three Months Ended Six Months Ended
June 30, June 30, June 30, June 30,
2002 2001 2002 2001
------- ------- ------- -------
Net income $ 1,597 $ 1,197 $ 2,532 $ 1,783
Foreign currency translation gains 301 (55) 250 (264)
(losses)
Unrealized gains (losses) on 147 (23) (673) (1,244)
marketable securities
------- ------- ------- -------
Total comprehensive income $ 2,045 $ 1,119 $ 2,109 $ 275
======= ======= ======= =======
5. Stock Repurchase Program
On May 22, 2002, the Company's Board of Directors authorized the continued
repurchase of shares of the Company's common stock up to an additional
expenditure of $10 million. The Company initiated the repurchase program on May
23, 2000, pursuant to which it repurchased 1.2 million shares for $6.5 million
and continued the plan on May 24, 2001, pursuant to which it repurchased 2.9
million shares for $26.4 million. As of June 30, 2002, under the repurchase
programs, the Company had repurchased 4.1 million shares for approximately $33
million.
6. Acquisitions
On January 15, 2002, the Company acquired the assets and business of Real-Time
USA, Inc. ("Real-Time"), a solution provider of sell-side fixed income
applications. Real-Time delivers a comprehensive suite of front-, mid-, and
back-office applications via Application Service Provider ("ASP") or license, to
commercial banks and broker-dealers throughout the United States. The
consideration for the deal was $4.0 million in cash and the assumption of
certain liabilities by the Company, with a potential earn-out payment by the
Company of up to $1.17 million in cash if certain 2002 Real-Time revenue targets
are achieved. A summary of the allocation of the purchase price is as follows
(in thousands):
6
Current assets, net of cash acquired $ 357
Fair value of equipment, furniture and fixtures 321
Current liabilities (159)
Long term liabilities (63)
Acquired in-process research and development 1,744
Acquired completed technology 1,743
------
$3,943
======
The acquisition was accounted for as a purchase and, accordingly, the net assets
and results from operations of Real-Time have been included in the consolidated
financial statements of the Company from January 1, 2002. The purchase price was
allocated to tangible and intangible assets, liabilities, and in-process
research and development ("IPR&D") based on their fair value on the date of the
acquisition. The fair value assigned to intangible assets acquired was based on
an independent appraisal. The fair value of acquired completed technology of
$1.7 million was determined based on the future cash flows method. The acquired
completed technology will be amortized on a straight-line basis over four years,
the estimated life of the product.
The Company recorded a one time write-off of $1.7 million in the period ended
March 31, 2002 related to the value of IPR&D acquired as part of the purchase of
Real-Time that had not yet reached technological feasibility and had no
alternative future use. Accordingly, these costs were expensed upon acquisition.
At the acquisition date, Real-Time was developing Lightning, a full-service ASP
bond accounting solution designed specifically for large regional banks. The
allocation of $1.7 million to IPR&D represents the estimated fair value related
to this incomplete project based on risk-adjusted cash flows adjusted to reflect
the contribution of core technology. The net cash flows were then discounted
utilizing a weighted average cost of capital of 26%. This discount rate takes
into consideration the inherent uncertainties surrounding the successful
development of the in-process research and development, the profitability levels
of such technology and the potential for other competing technological advances
which could potentially impact the estimates. The Lighting project was estimated
to be 62% completed at the date of the acquisition. The project is expected to
be completed in the second half of 2002.
The unaudited pro forma condensed consolidated results of operations presented
below for the three- and six-month periods ended June 30, 2002 and 2001 assumes
that the Real-Time acquisition occurred at the beginning of 2001. The unaudited
pro forma condensed consolidated results of operations for the six months ended
June 30, 2002 excludes the $1.7 million write-off of purchased IPR&D in the
first quarter of the same year (in thousands, except per share data):
Three Months Ended Six Months Ended
June 30, June 30, June 30, June 30,
2002 2001 2002 2001
-------- -------- -------- --------
Total revenues $ 15,872 $ 15,416 $ 31,087 $ 29,486
Operating income (loss) 3,116 648 3,777 (389)
Net income 1,597 1,199 3,578 1,787
Basic earnings per share $ 0.13 $ 0.08 $ 0.27 $ 0.12
Diluted earnings per share $ 0.12 $ 0.08 $ 0.26 $ 0.12
7. Reclassifications
Certain amounts in the Company's 2001 consolidated financial statements have
been reclassified to be comparable with the 2002 presentation. These
reclassifications have had no effect on the Company's net income, working
capital or net equity.
8. Commitments and Contingencies
From time to time, the Company is subject to legal proceedings and claims that
arise in the normal course of its business. The Company is not a party to any
other litigation that management believes could have a material effect on the
Company or its business.
In 1999, the Company recorded a tax benefit of $2.3 million on the $9.3 million
litigation settlement costs. In 2002, the Internal Revenue Service ("IRS")
notified the Company of a purported federal income tax deficiency related to the
Company's 1999 deduction for the litigation settlement costs. Payments totaling
$6.8 million made pursuant to the settlement were deducted by the Company on its
1997, 1998 and 1999 income tax returns. The Company believes the
7
deductions were justified and intends to contest the proposed adjustment. The
Company has made no provision in its financial statements relating to the
proposed adjustment. If the IRS does not allow these deductions, the resulting
tax liability could have a material adverse effect on the Company's results of
operations and cash flows in the period reported.
9. International Sales and Geography Information
The Company manages its business primarily on a geographic basis. The Company
attributes net sales to a particular country based upon the location of the
customer. The Company's geographic segments consist of the Americas, Europe and
others. The Americas segment consists of both North and South America. The
European segment includes European countries as well as the Middle East and
Africa. Other segments include Asia Pacific and Japan.
Revenues by geography were (in thousands):
(unaudited) (unaudited)
Three Months Ended Six Months Ended
June 30, June 30, June 30, June 30,
2002 2001 2002 2001
------- ------- ------- -------
Americas $13,573 $12,624 $27,313 $22,987
Europe 1,378 1,163 2,401 2,863
Other 921 492 1,373 1,258
------- ------- ------- -------
$15,872 $14,279 $31,087 $27,108
======= ======= ======= =======
8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
CRITICAL ACCOUNTING POLICIES
The Company's significant accounting policies are summarized in Note 2 to its
consolidated financial statements. However, certain of the Company's accounting
policies require the application of significant judgment by its management, and
such judgments are reflected in the amounts reported in its consolidated
financial statements. In applying these policies, the Company's management uses
its judgment to determine the appropriate assumptions to be used in the
determination of estimates. Those estimates are based on the Company's
historical experience, terms of existing contracts, its observation of trends in
the industry, information provided by its clients, and information available
from other outside sources, as appropriate. Actual results may differ
significantly from the estimates contained in the Company's consolidated
financial statements. The Company's significant accounting policies include:
Revenue Recognition. The Company's revenues consist primarily of software
license revenues, maintenance revenues, and professional and outsourcing
services revenues.
The Company applies the provisions of Statement of Position No. 97-2, "Software
Revenue Recognition" ("SOP 97-2") to all software transactions. The Company
recognizes revenues from the sale of software licenses when persuasive evidence
of an arrangement exists, the product has been delivered, the fee is fixed and
determinable, and collection of the resulting receivable is reasonably assured.
SOP 97-2 requires that revenues recognized from software transactions be
allocated to each element of the transaction based on the relative fair values
of the elements, such as software products, specific upgrades, enhancements,
post-contract client support, installation, or training. The Company defers
revenues from the transaction fee equivalent to the fair value of the
undelivered elements. The determination of fair value of an element is based
upon vendor-specific objective evidence. The Company occasionally enters into
software license agreements requiring significant customization. The Company
accounts for these agreements on the percentage-of-completion basis and must
estimate the costs to complete the agreement utilizing an estimate of
development man-hours remaining. Due to uncertainties inherent in the estimation
process, it is at least reasonably possible that completion costs may be
revised. Such revisions are recognized in the period in which the revisions are
determined. Material differences may result in the amount and timing of the
Company's revenues for any period if management made different judgments or
utilized different estimates.
The Company recognizes revenues for maintenance services ratably over the
contract term. The Company's consulting, training, and outsourcing services are
generally billed based on hourly rates, and the Company generally recognizes
revenues over the period during which the applicable services are performed.
Allowance for Doubtful Accounts. The preparation of financial statements
requires the Company's management to make estimates relating to the
collectibility of its accounts receivable. Management establishes the allowance
for doubtful accounts based on historical bad debt experience. In addition,
management analyzes customer accounts, client concentrations, client
credit-worthiness, current economic trends, and changes in the Company's client
payment terms when evaluating the adequacy of the allowance for doubtful
accounts. Such estimates require significant judgment on the part of the
Company's management.
Income Taxes. The carrying value of the Company's net deferred tax assets
assumes that the Company will be able to generate sufficient future taxable
income in certain tax jurisdictions, based on estimates and assumptions. If
these estimates and related assumptions change in the future, the Company may be
required to record additional valuation allowances against its deferred tax
assets resulting in additional income tax expense in the Company's consolidated
statement of operations. Management evaluates whether deferred tax assets are
realizable quarterly and assesses whether there is a need for additional
valuation allowances quarterly. Such estimates require significant judgment on
the part of the Company's management. In addition, management evaluates the need
to provide additional tax provisions for adjustments proposed by taxing
authorities.
Marketable Securities. The Company classifies its entire investment portfolio,
consisting of debt securities issued by federal government agencies, debt
securities issued by state and local governments of the United States, debt
securities issued by corporations and equities, as available for sale
securities. The cost basis, using the specific identification method,
approximates fair market value and an unrealized gain or loss is recognized in
stockholder's equity. SFAS 115, "Accounting for Certain Investments in Debt and
Equity Securities", and Securities and Exchange Commission Staff Accounting
Bulletin (SAB) 59, "Accounting for Noncurrent Marketable Equity Securities",
provide guidance on
9
determining when an investment is other than temporarily impaired. In making
this judgment, management evaluates, among other factors, the duration and
extent to which the fair value of the investment is less than its cost, the
financial health of and the business outlook for the investee, including factors
in the industry and financing cash flows.
RESULTS OF OPERATIONS
Revenues
The Company's revenues are derived from software licenses, related maintenance
and professional services and outsourcing services. Revenues for the three
months ended June 30, 2002 were $15.9 million, representing an increase of 10%
from $14.5 million in the same period in 2001. The increase of $1.4 million for
the three months ended June 30, 2002 was primarily due to the acquisitions of
Real-Time and Digital Visions and an increase in SS&C Direct outsourcing
revenues, partially offset by a decrease in professional services revenues.
Revenues for the six months ended June 30, 2002 were $31.1 million, an increase
of 13% from $27.5 million in the same period in 2001. The increase of $3.6
million for the six months ended June 30, 2002 was primarily due to the
acquisitions of Real-Time and Digital Visions, an increase in maintenance
revenues and an increase in SS&C Direct outsourcing revenues partially offset by
a decrease in professional services revenues.
Software Licenses. Software license revenues for the three and six months ended
June 30, 2002 were $4.2 million and $7.4 million, respectively, representing
increases of 8% and 4% from the $3.9 million and $7.1 million, respectively, for
the comparable periods in 2001. The increase in license revenues for the three
months ended June 30, 2002 was due primarily to the acquisition of Real-Time and
higher sales of LMS and Antares, partially offset by lower sales of Total
Return, CAMRA, and PTS. The increase in license revenues for the six months
ended June 30, 2002 was due primarily to the acquisition of Real-Time and higher
sales of LMS, partially offset by lower sales of Total Return, PTS, CAMRA, and
AdvisorWare.
Maintenance. Maintenance revenues for the three months ended June 30, 2002 were
$6.8 million, representing an increase of 2% over the $6.7 million for the same
period in 2001. Maintenance revenues for the six months ended June 30, 2002 were
$13.6 million, representing an increase of 4% over the $13.1 million for the
same period in 2001. The increases for the three- and six-month periods ended
June 30, 2002 were mainly attributable to higher maintenance renewal rates and
higher average maintenance fees, partially offset by discontinued products.
Professional Services. Professional services revenues for the three and six
months ended June 30, 2002 were $1.6 million and $3.5 million, respectively,
representing decreases of 37% and 22% from the $2.5 million and $4.5 million,
respectively, in the comparable periods in 2001. Professional service revenues
were impacted by lower services associated with new license sales and lower
demand for services from existing clients.
Outsourcing Services. Outsourcing services revenues for the three months ended
June 30, 2002 were $3.3 million, representing an increase of 134% over the $1.4
million in the comparable period of the prior year. Outsourcing revenues for the
six months ended June 30, 2002 were $6.6 million, representing an increase of
132% over the $2.8 million in the comparable period in 2001. The increases for
the three- and six-month periods ended June 30, 2002 were due to the
acquisitions of Real-Time and Digital Visions and increased demand for the SS&C
Direct services.
Cost of Revenues
Total cost of revenues for the three months ended June 30, 2002 were $5.2
million, a 4% increase from the comparable period in 2001. Total cost of
revenues for the six months ended June 30, 2002 were $10.5 million, unchanged
from the comparable period in 2001. The gross margin increased to 67% in the
three months ended June 30, 2002 from 65% in the comparable period in 2001. For
the six months ended June 30, 2002, the gross margin increased to 66% from 62%
in the comparable period in 2001. This gross margin increase in both the three-
and six-month periods was primarily due to an increase in the outsourcing
services revenue margins and lower costs as a result of the restructuring action
taken by the Company in the fourth quarter of 2001.
Cost of Software Licenses. Cost of software license revenues relates primarily
to royalties, the costs of product media, packaging and documentation and the
amortization of completed technology. The cost of software licenses increased
63% from $188,000 in the three-month period ended June 30, 2001 to $305,000 for
the same period in 2002, representing 5% and 7% of license revenues in each of
those quarters, respectively. Cost of software licenses in the six-month periods
ended
10
June 30, 2001 and 2002 were $368,000 and $628,000, respectively, and represented
5% and 9% of license revenues in each of those periods, respectively. The
increase in costs for both the three and six-month periods ended June 30, 2002
were mainly due to the increase in amortization of completed technology
associated with the Real-Time and Digital Visions acquisitions.
Cost of Maintenance. Cost of maintenance revenues primarily consists of
technical customer support and the engineering costs associated with product and
regulatory updates. The cost of maintenance decreased from $1.8 million in the
three months ended June 30, 2001 to $1.4 million in the three months ended June
30, 2002. The cost of maintenance decreased from $3.6 million in the six months
ended June 30, 2001 to $2.8 million in the six months ended June 30, 2002. The
decreased costs for both the three- and six-month periods ended June 30, 2002
were primarily due to lower costs due to improved operating efficiencies.
Cost of Professional Services. Cost of professional services revenues primarily
consists of the cost of personnel utilized to provide implementation, conversion
and training services to the Company's software licensees, as well as custom
programming, system integration and actuarial consulting services. The cost of
professional service revenues decreased 22% from $1.7 million in the three
months ended June 30, 2001 to $1.3 million for the same period in 2002,
representing 70% and 85% of professional service revenues in each of those
quarters, respectively. Cost of professional services revenues in the six-month
periods ended June 30, 2001 and 2002 were $3.8 million and $2.7 million,
respectively, and represented 85% and 78% of professional services revenues in
each of those periods, respectively. The Company has significantly reduced its
professional consulting organization due to the decrease in demand for the
Company's implementation services.
Cost of Outsourcing. Cost of outsourcing revenues primarily consists of the cost
of personnel utilized in servicing the Company's outsourcing clients. The cost
of outsourcing revenues increased 64% from $1.3 million in the three months
ended June 30, 2001 to $2.2 million for the same period in 2002, representing
95% and 66% of outsourcing revenues in each of those quarters, respectively.
Cost of outsourcing in the six-month periods ended June 30, 2001 and 2002 was
$2.8 million and $4.3 million, respectively, representing 98% and 66% of
outsourcing revenues in each of those periods, respectively. The increase in
costs for both the three- and six-month periods ended June 30, 2002 was
primarily due to the acquisitions of Real-Time and Digital Visions. The decrease
in costs of outsourcing as a percentage of outsourcing revenues was due
primarily to improved operating efficiencies and the higher margins associated
with the revenues from the Real-Time and Digital Visions acquisitions.
Operating Expenses
Total operating expenses decreased 14% from $8.8 million in the three months
ended June 30, 2001 to $7.5 million in the three months ended June 30, 2002,
representing 61% and 47% of total revenues in those periods, respectively. Total
operating expenses decreased 3% from $17.3 million in the six months ended June
30, 2001 to $16.8 million in the six months ended June 30, 2002, representing
63% and 54% of total revenues in those periods, respectively. Included in the
six-month 2002 costs is a $1.7 million write-off of purchased in-process
research and development associated with the Company's acquisition of Real-Time
in the first quarter. Excluding the IPR&D, total operating costs decreased from
$17.3 million in the six months ended June 30, 2001 to $15.0 million in the six
months ended June 30, 2002, representing 63% and 48% of total revenues in those
periods, respectively. The decrease in operating expenses was due primarily to
the cost reduction steps that the Company has undertaken to align its personnel
and operating expenses with revenues.
Selling and Marketing. Selling and marketing expenses primarily consist of the
cost of personnel associated with the selling and marketing of the Company's
products, including salaries, commissions, and travel and entertainment. Such
expenses also include the cost of branch sales offices, advertising, trade
shows, marketing and promotional materials. These expenses decreased 19% from
$3.1 million in the three months ended June 30, 2001 to $2.5 million in the
three months ended June 30, 2002, representing 21% and 16%, respectively, of
total revenues for those periods. These expenses decreased 14% from $5.9 million
in the six months ended June 30, 2001 to $5.1 million in the same period in
2002, representing 22% and 17%, respectively, of total revenues for those
periods. The decreases for the three- and six-month periods ended June 30, 2002
were mainly due to lower personnel-related costs associated with the reduction
in the number of sales and marketing personnel, and lower marketing and
promotional costs offset by increased costs as a result of the acquisitions of
Real-Time and Digital Visions.
Research and Development. Research and development expenses consist primarily of
personnel costs attributable to the development of new software products and the
enhancement of existing products. Research and development expenses increased 8%
from $2.9 million in the three months ended June 30, 2001 to $3.1 million in the
three months ended June 30, 2002, representing 20% of total revenues for both
periods. The increased expenses were mainly as a result of the
11
acquisitions of Real-Time and Digital Visions. Research and development expenses
remained unchanged at $6.0 million for the six month ended June 30, 2002 and the
comparable period in 2001 and represented 19% and 22%, respectively, of total
revenue for those periods. Lower personnel-related costs resulting from improved
operational efficiencies were offset by increased costs due to the acquisitions
of Real-Time and Digital Visions.
General and Administrative. General and administrative expenses are composed
primarily of costs related to management, accounting, information technology,
human resources and administration and associated overhead costs, as well as
fees for professional services. General and administrative expenses decreased
32% from $2.8 million in the three months ended June 30, 2001 to $1.9 million in
the three months ended June 30, 2002, representing 20% and 12%, respectively, of
total revenues for those periods. The decrease was primarily due to lower
personnel related costs, communication costs and professional fees. These
expenses also decreased 27% from $5.4 million in the six months ended June 30,
2001 to $3.9 million in the same period in 2002, representing 20% and 13%,
respectively, of total revenues for those periods. The year to date dollar
decrease was mainly attributable to lower personnel related costs, communication
costs, professional fees, and bad debt expense.
Write-off of Purchased In-Process Research and Development. On January 15, 2002,
the Company acquired Real-Time. The acquisition was accounted for as a purchase
and, accordingly, the purchase price was allocated among tangible and intangible
assets, liabilities, and in-process research and development based on their fair
values on this the date of the acquisition. The acquired IPR&D had not yet
reached technological feasibility and had no alternative future use and
accordingly $1.7 million was expensed on the date of the acquisition.
Interest and Other Income (Expense), Net. Interest and other income (expense),
net consists primarily of interest income and other non-operational income and
expenses. Interest income, net was $399,000 for the three months ended June 30,
2002 compared to $687,000 in the same period in 2001. Interest income, net
decreased 40% from $1.4 million in the six months ended June 30, 2001 to $0.8
million in the same period in 2002. The decreases in interest income for both
the three- and six-month periods ended June 30, 2002 are due to lower market
interest rates on investments and lower cash and marketable securities positions
due to the Company's stock repurchase plan during the past year, and the cash
paid for the acquisitions of Real-Time and Digital Visions. Included in other
expense, net for the three months ended June 30, 2002 was a non-operational
$854,000 impairment charge associated with the decline in the market value of
WorldCom bonds held in the Company's investment portfolio. Included in other
expense, net for the six months ended June 30, 2002 was the WorldCom bond
impairment of $854,000 and a non-operational gain of $486,000 on the sale of an
equity investment. Other income, net for the three- and six-months ended June
30, 2001 included a non-operational gain on sale of equity investment of
$580,000 and $1.8 million, respectively.
Provision for Income Taxes. The Company had effective tax rates of 40% and 37%
in the six-month periods ended June 30, 2002 and 2001, respectively. The higher
tax rate in 2002 is primarily due to lower tax credits in the period.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash, cash equivalents and marketable securities at June 30, 2002
were $39.7 million, which is a decrease of $19.8 million from the $59.5 million
at December 31, 2001. The dollar decrease was mainly due to the stock repurchase
program and the cash paid for the acquisition of Real-Time.
Net cash provided by operating activities was $9.1 million for the six months
ended June 30, 2002. Cash provided by operating activities was primarily due to
earnings adjusted for non-cash items and an increase in deferred maintenance and
other revenues. These items were partially offset by an increase in accounts
receivable and decrease in accrued expenses.
Investing activities used net cash of $686,000 for the six months ended June 30,
2002. Cash used in investing activities was primarily due to $3.9 million cash
paid for the acquisition of Real-Time offset by the $3.6 million net sale of
marketable securities.
Financing activities used net cash of $23.8 million. Cash used in financing
activities was primarily due to the stock repurchase plan, which was partially
offset by proceeds from the exercise of employee options. The Company
repurchased 2.6 million shares of common stock for treasury in the six-month
period ended June 30, 2002 for a total cost of $25.0 million.
The Company believes that its current cash balances and net cash provided by
operating activities will be sufficient to meet its working capital and capital
expenditure requirements for at least the next 12 months.
12
CERTAIN FACTORS THAT MAY AFFECT FUTURE OPERATING RESULTS
FLUCTUATIONS IN QUARTERLY PERFORMANCE. Historically, the Company's revenues and
operating results have fluctuated substantially from quarter to quarter. The
Company's quarterly operating results may continue to fluctuate due to a number
of factors, including: the timing, size and nature of the Company's individual
license transactions; the timing of the introduction and the market acceptance
of new products or product enhancements by the Company or its competitors; the
relative proportions of revenues derived from license fees, maintenance,
consulting, and other recurring revenues and professional services; changes in
the Company's operating expenses; changes in the Company's personnel; and
fluctuations in economic and financial market conditions. The timing, size, and
nature of individual license transactions are important factors in the Company's
quarterly operating results. Many such license transactions involve large dollar
amounts, and the sales cycles for these transactions are often lengthy and
unpredictable. There can be no assurance that the Company will be successful in
closing large license transactions on a timely basis or at all.
DEPENDENCE ON THE FINANCIAL SERVICES INDUSTRY. The Company's clients include a
range of organizations in the financial services industry. The success of these
clients is intrinsically linked to the health of the financial markets. In
addition, because of the capital expenditures required in connection with an
investment in the Company's products, the Company believes that demand for its
products could be disproportionately affected by fluctuations, disruptions,
instability, or downturns in the financial markets, which may cause clients and
potential clients to exit the industry or delay, cancel, or reduce any planned
expenditures for investment management systems and software products. Any
resulting decline in demand for the Company's products could have a material
adverse effect on the Company's business, financial condition, and results of
operations.
BUSINESS MODEL CHANGE. The Company continues to modify its business model from
one based on license fees derived from licensing proprietary software to one
based on both licensing its software and charging transaction fees for the use
of SS&C outsourcing services. Due to this change in the business model, the
Company's revenues will increasingly depend on its ability to grow the number
and volume of users of the Company's outsourcing services. The number of users
and the volume of their activity are largely outside of the Company's control.
Accordingly, the Company's past operating results may not be a meaningful
indicator of its future performance.
PRODUCT CONCENTRATION. To date, substantially all of the Company's revenues have
been attributable to the licensing of its CAMRA, AdvisorWare, SKYLINE, and LMS
software and the provision of maintenance and consulting services in support of
such software. The Company expects that the revenue from these software products
will continue to account for a significant portion of its revenues for the
foreseeable future. As a result, factors adversely affecting the pricing of or
demand for such products and services, such as competition or technological
change, could have a material adverse effect on the Company's business,
financial condition and results of operations.
COMPETITION. The market for financial service software is competitive, rapidly
evolving and highly sensitive to new product introductions and marketing efforts
by industry participants. Although the Company believes that none of its
competitors currently competes against the Company in all of the markets served
by the Company, there can be no assurance that such competitors will not compete
against the Company in the future in additional markets. In addition, many of
the Company's current and potential future competitors have significantly
greater financial, technical and marketing resources, greater name recognition,
and higher revenues than the Company.
RAPID TECHNOLOGICAL CHANGE. The market for the Company's products and services
is characterized by rapidly changing technology, evolving industry standards and
new product introductions. The Company's future success will depend in part upon
its ability to enhance its existing products and services and to develop and
introduce new products and services to meet changing client needs. The process
of developing software products such as those offered by the Company is
extremely complex and is expected to become increasingly complex and expensive
in the future due to the introduction of new platforms and technologies. There
can be no assurance that the Company will successfully complete the development
of new products in a timely fashion or that the Company's current or future
products will satisfy the needs of the financial markets.
INTEGRATION OF OPERATIONS. The Company's success is dependent in part on its
ability to complete the integration of the operations of recently acquired
businesses, including Real-Time and Digital Visions, in an efficient and
effective manner. Successful integration in a rapidly changing financial
services industry may be more difficult to accomplish than in other industries.
The combination of these acquired businesses will require, among other things,
integration of product offerings and coordination of sales and marketing and
research and development efforts. There can be no assurance that such
13
integration will be accomplished smoothly or successfully. The difficulties of
such integration may be increased by the necessity of coordinating
geographically separated organizations. The integration of certain operations
will require the dedication of management resources that may temporarily
distract attention from the day-to-day business of the Company. The inability of
management to successfully integrate the operations of acquired companies could
have a material adverse effect on the Company's business, financial condition,
and results of operations of the Company.
DEPENDENCE ON PROPRIETARY TECHNOLOGY. The Company's success and ability to
compete depends in part upon its ability to protect its proprietary technology.
The Company relies on a combination of trade secret, copyright, and trademark
law, nondisclosure agreements and technical measures to protect its proprietary
technology. There can be no assurance that the steps taken by the Company to
protect its proprietary technology will be adequate to prevent misappropriation
or independent third-party development of such technology.
PRODUCT DEFECTS AND PRODUCT LIABILITY. The Company's software products are
highly complex and sophisticated and could contain design defects or software
errors that are difficult to detect and correct. Errors, bugs or viruses may
result in loss of or delay in market acceptance of the Company's software
products or loss of client data. Although the Company has not experienced
material adverse effects resulting from any software defects or errors, there
can be no assurance that, despite testing by the Company and its clients, errors
will not be found in new products, which errors could result in a delay in or an
inability to achieve market acceptance and thus could have a material adverse
effect upon the Company's business, financial condition, and results of
operations.
KEY PERSONNEL. The Company's success is dependent in part upon its ability to
attract, train and retain highly skilled technical, managerial, and sales
personnel. The loss of services of one or more of the Company's key employees
could have a material adverse effect on the Company's business, financial
condition and results of operations. Competition for the hiring of such
personnel in the software industry is intense. Locating candidates with the
appropriate qualifications, particularly in the desired geographic location, is
difficult. Although the Company expects to continue to attract and retain
sufficient numbers of highly skilled employees for the foreseeable future, there
can be no assurance that the Company will be able to do so.
RISKS ASSOCIATED WITH INTERNATIONAL OPERATIONS. The Company has risks associated
with its foreign operations. An increase in the value of the U.S. dollar
relative to foreign currencies could make the Company's products more expensive
and, therefore, potentially less competitive in those foreign markets. A portion
of the Company's international sales is denominated in foreign currency, and the
Company occasionally hedges some of the risk associated with foreign exchange
fluctuations. Although the Company believes its foreign currency exchange rate
risk is minimal, significant fluctuations in the value of foreign currencies
could have a material adverse effect on the earnings of the Company. In
addition, the Company's international business may be subject to a variety of
other risks, including difficulties in obtaining U.S. export licenses,
potentially longer payment cycles, increased costs associated with maintaining
international marketing efforts, the introduction of non-tariff barriers and
higher duty rates, and difficulties in enforcement of third-party contractual
obligations and intellectual property rights. There can be no assurance that
such factors will not have a material adverse effect on the Company's business,
financial condition, or results of operations.
Because of these and other factors, past financial performance should not be
considered an indication of future performance. The Company's quarterly
operating results may vary significantly, depending on factors such as the
timing, size, and nature of licensing transactions and new product introductions
by the Company or its competitors. Investors should not use historical trends to
anticipate future results and should be aware that the trading price of the
Company's common stock may be subject to wide fluctuations in response to
quarterly variations in operating results and other factors, including those
discussed above.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to interest rate and securities price risks. These risks
are not hedged and fluctuations could impact the Company's results of operations
and financial position. Fixed income securities are subject to interest rate
risk. In order to minimize interest rate risk, the Company's portfolio is
diversified and consists primarily of investment grade securities, primarily
U.S. government and federal agency obligations, tax-exempt municipal obligations
and corporate obligations. The Company from time to time also holds equity
securities in its portfolio. These equity securities are subject to market price
risks.
14
The Company invoices customers primarily in U.S. dollars and in local currency
in those countries in which the Company has branch and subsidiary operations.
The Company is exposed to foreign exchange rate fluctuations from the time
customers are invoiced in local currency until collection occurs. Through June
30, 2002, foreign currency fluctuations have not had a material effect on the
Company's financial position or results of operation, and therefore the Company
believes that its potential foreign currency exchange rate exposure is not
material.
The foregoing risk management discussion and the effect thereof are
forward-looking statements. Actual results in the future may differ materially
from these projected results due to actual developments in global financial
markets. The analytical methods used by the Company to assess and minimize risk
discussed above should not be considered projections of future events or losses.
PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the 2002 annual meeting of stockholders of the Company (the "Annual Meeting")
held on May 22, 2002, the following matters were acted upon by the stockholders
of the Company:
1. The election of Patrick J. McDonnell, William C. Stone, and James L. Sullivan
as Class III directors for the ensuing three years; and
2. The ratification of the appointment of PricewaterhouseCoopers LLP as the
independent public accountants of the Company for the current fiscal year.
The number of shares of common stock present or represented by proxy and
entitled to vote at the Annual Meeting was 12,543,086. The other directors of
the Company, whose terms of office as directors continued after the Annual
Meeting, are Jonathan M. Schofield, Albert L. Lord, Joseph H. Fisher, and David
W. Clark, Jr. The results of the voting on each of the matters presented to
stockholders at the Annual Meeting are set forth below:
Votes Votes Broker
Matter Votes For Withheld Against Abstentions Non-Votes
---------- -------- ------- ----------- ---------
Election of Directors:
Patrick J. McDonnell 12,496,193 46,893 N/A N/A none
William C. Stone 11,927,942 615,144 N/A N/A none
James L. Sullivan 12,496,193 46,893 N/A N/A none
Ratification of PricewaterhouseCoopers LLP 12,498,723 N/A 12,994 31,369 none
15
ITEM 6. EXHIBIT AND REPORTS OF FORM 8-K
a. The exhibit listed in the Exhibit Index immediately preceding such exhibit is
filed as part or is included in this Report.
b. There were no reports filed on Form 8-K in the quarter ended June 30, 2002.
16
SIGNATURE
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.
SS&C TECHNOLOGIES, INC.
Date: August 13, 2002 By: /s/ Patrick J. Pedonti
Vice President and Chief
Financial Officer
(Principal Financial and Accounting Officer)
17
EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION
- -------------- -----------
10.1 1996 DIRECTOR STOCK OPTION PLAN, AS AMENDED
99.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION
1350, AS ADOPTED PURSUANT TO SECTION 906 OF
THE SARBANES-OXLEY ACT OF 2002.
18